Marketing Strategy

Zucamor S.A.

Global Competition in Argentina

Ahmed Riaz Kiyani

Ahmed Ibrar

Enum Naseer

Mariam Asif

Muhammad Uzair

Sufiyan Tariq

Sultan Yousaf

Haris Noman

MBA II (Section A)

Marketing Strategy

Q1. Describe the evolution of Zucamor and its business strategy, particularly after

the opening of the Argentine economy in 1992-93?

Zucamor S.A. formerly known as Inversora Ranelagh S.A. (2007) was a vertically integrated

corrugated box manufacturer. It was founded in 1951 by a group of four friends namely Dante

Zucchini, Bautista, Marceliano Campo and Luis Morra. The primary operations of the company

dealt with the production of various grades of paper and corrugated cardboard packages for a

variety of products which included food and beverages. The company also had extensive export

operations and exported corrugated boxes to neighboring countries such as Chile, Uruguay and

Bolivia. Zucamor primarily operated this business with the help of contractors and sub

contractors.

Argentina was considered an upper-middle income country primarily engaged in the production

of primary products and agricultural commodities. Manufactured goods were usually brought in

from foreign countries at high costs. However after the arrival of Juan Domingo Peron as

president in 1989 an era of free market economy was re-created which dealt with three pronged

reform program namely, state reform, revival of market economy and promotion of investment

and trade liberalization. Moreover Argentina had suffered soaring inflation from 1980s to early

1990s; fortunately inflation was controlled to 3.9% in 1994.

The emergence of a new political and economic climate in Argentina coincided with the change

in leadership and management at Zucamor. The company’s new managing director Gustavo

Herrero took charge in 1992 and his foremost decision was to involve the owners of the business

into the business operations by persuading them to accept line responsibilities. Herrero

streamlined numerous business practices in line with the new regulatory and economic

environment such as elimination of ‘outside the books’ payments. Moreover in order to enhance

productivity and plant utilization ‘Management Bonus system’ was initiated whereby managers

and workers were provided bonuses and incentives linked to productivity gains. This system

resulted in improving the productivity of the company. In lieu of the tough economic scenario in

terms of rising competition, Herrero and the company’s management was convinced that the way

ahead for Zucamor was to seek business partnership with a global player.

Marketing Strategy

Union Camp was actively seeking for a partnership in Argentina. Zucamor approached Union

Camp and the deal was eventually closed on August 22, 1994. Union Camp was a leading

manufacturer of paper, packaging, chemicals and wood products. The company ranked among

the top 200 US industrial companies. Union Camp had been a leading exporter of Kraft

linerboard to the world markets and had a strategy to expand its corrugated box manufacturing

investments. Union Camp’s arrival in Argentina was based upon the premise of relatively stable

Argentine economy especially during the 90s era. It was basically a systematic market entry

process based upon seeking new markets for its products and vertical integration in order to

generate higher returns and induce growth.

The business level strategy of a company highlights how a business competes within its industry.

A major concern in a business level strategy is the achievement of a sustainable competitive

advantage over ones competitors, thus signifying distinctive competencies of a company in line

with the needs and wants of its target customers.

Zucamor’s business level strategy highlighted a limited scope because the company only catered

to the industrial segment which comprised of 80% of the market. Zucamor considered the

agricultural segment too risky to cater to its needs as compared to its competitor Cartocor which

served the broadest markets including industrial and agricultural segments. Zucamor commanded

a 12% market share in box sales. Zucamor’s fundamental goal was to improve the profitability of

its operations which had deteriorated in recent years. According to Herrero “Profitability is the

goal and with this goal in mind, the company is working closely with customers to analyze their

packaging needs and reduce costs.”(1) In terms of resource allocation Zucamor’s vertically

integrated operations allowed the company to produce various grades of paper along with the

production of corrugated boxes and packaging. However these two operations, paper making and

box making, were characterized by different scale economies. A paper making plant was capital

intensive while box making on the other hand was labor intensive. Coming towards competitive

advantage after the liberalization of the Argentine economy Zucamor had to face fierce

competition from many local box manufacturers. These small box manufacturers were able to

import virgin fibre kraft linerboard from Brazil and US at roughly the same price as Zucamor’s

recycled liner. Compared to recycled paper, virgin paper had longer fibre length and therefore

displayed higher strength for an equivalent gauge of liner. This produced a great challenge for

Marketing Strategy

Zucamore as an internal survey revealed that about half of Zucamor’s customers bought on

quality and service. Therefore in order to handle this scenario the company managed to develop a

distinct competency. Zucamor’s distinct competency was its ability and commitment to handle

individual concerns of its customers in an effective yet efficient manner. This can be exemplified

through Zucamor’s relation with Avon. Moreover the company consistently focused upon

improving its quality for its customers, this is evident from the recent agreement of Zucamore

with Achilles’s Controlar as in 2010 Zucamor group signed a contract with Achilles’s Controlar

(a company geared towards improving procurement productivity) to manage and verify the legal

compliance of its contractors and subcontractors.(2) Zucamor achieved synergy through its

vertical integration which allowed the production of different grades of paper along with

corrugated boxes. Thus the company was able to utilize its own inputs for box manufacturing

thereby helping to reduce costs.

Q2. Trace the action that led to Zucamore’s association with U.S. paper giant Union

Camp.

In 1990 when the first generation of owners and founders of Zucamore retired a new

management team took their place. Each of the new generation owners had held significant

functional responsibilities in the company’s operations but they decided to remove themselves

from day to day operations and govern the company from their position on the board.

Considering these changes Gustavo Herrero was hired as the company’s new Managing Director.

Herrero was believed to be a strong-minded individual who didn’t hesitate to make tough

decisions. As controlling costs and increasing profitability was the primary concern of

Zucamore, Herrero seemed to be the most suitable option as the head of the company.

After his arrival Herrero made significant decisions to improve the company’s existing

operations. These decisions included:

Persuading the company’s owners to accept significant line responsibilities within the

company’s operations.

Elimination of ‘off the books’ payments in support of the government’s regularization

program.

Marketing Strategy

Initiation of ‘Management Bonus system’ in order to improve quality, productivity and plant

utilization.

These decisions played a vital role in the improvement of the company’s operations. However

the top management realized that in order to compete effectively in the newly liberalized market

environment the company must endeavor to become a world class manufacturer which would

involve seeking out partnerships with key global companies. Thus after the management

consensus Herrero contacted Union Camp with a proposal for an alliance. Union Camp was

primarily approached because it was rumored that the company was actively looking for a

partner in Argentina. Herrero also developed an association with the Union Camp’s chairman

Craig McClelland as both individuals had studied from Harvard Business School.

When Herrero approached Union Camp, the company had already signed a ‘letter of intent’ with

another local company so Zucamor also looked for an alternative arrangement and signed a

similar ‘letter of intent’ agreement with a South African paper company. However Union camp’s

agreement with the company started falling apart and Zucamor’s agreement with the South

African company also didn’t work out. So, Norm Nelson, Vice President of International

Operations in Union camp contacted Gustavo Herrero to discuss the partnership proposal once

again. In lieu of the offer made by Union Camp’s management, Marcelo Campo and Gustavo

Herrero visited three US paper companies which included Union Camp and two others. A series

of questions were asked and it became clear that Union Camp was the most viable company to

form an alliance. So finally Union Camp and Zucamore built a partnership where Union Camp

had a minority stake of 30% and Zucamor’s three local shareholding families retained 70% of

the equity.

Q3. What were some of the critical challenges faced by the company’s new

management?

After the retirement of the first generation owners, the next generation owners took over the

control of the company. The first decision which they took after coming was to remove

themselves from day to day operations and govern the company from their position on the board.

Their attempt to professionalize the company turned out not to be totally success. To deal with

the challenges the company was facing they hired Gustavo Herrero, 43 year old managing

Marketing Strategy

director of a woolen textile mill, as their chief executive. When the new management took over

the control of the company, sales were $36 million and there was also operating loss of about

$1.4 million. In this regard there was a strong need that the new management should come up

with corrective actions to improve the current situation. One of the major challenges which the

new management was facing was high inflation present in Argentina. Argentine inflation reached

a high of 4924% in 1989 then it dropped to 1344% in 1990 and then it fell to 3.9% in 1994.. The

irregular trend of inflation in Argentina was also a major concern for the new management.

Zucamor at that time used 100% recycled fiber as raw material for their product. This was

considered to be a competitive advantage which Zucamor was enjoying but with the introduction

of trade liberalization concept Zucamor was not able to differentiate itself from their competitors.

Because after trade liberalization many local box plants were able to import virgin fiber kraft

linerboard from paper rich Brazil and from the United States for about the same price as

Zucamor’s recycled liner. It was not only the price which was almost same, virgin paper had

longer fiber length and therefore displayed strength.

Another challenge was of reducing cost in order to make sufficient profits and to survive in the

industry. But the problem was this that the Customers of Zucamor were highly sensitive

regarding the price and especially the quality of the product. So if Zucamor tries to reduce cost of

production they have to compromise on quality which is one thing which the company cannot

afford.

Zucamor in this time became pretty careful in relationship building efforts with strategic

accounts. So Zucamor suggested to Avon that there is a significant scope for productivity

improvements in the packaging line. So in this regard Avon agreed to invest half a million

dollars to revamp the picking line. So this was crucial for Zucamor because they send one full

time supervisor and four operators to Avon which was paid by Zucamor. So this actually

increases the cost of Zucamor which was also a very big challenge for Zucamor.

Marketing Strategy

Q4. Explain the impact of globalization and market commoditization. Discuss actions

to put value back into the business.

Commoditization also commonly called as com modification is when company products are very

similar to that of its competitors and the consumers have a hard time differentiating the products

of various companies in the same industry. This happens through the processes by which goods

that have economic value and are distinguishable in terms of attributes end up becoming

undifferentiated goods called commodities. This concept gives rise to the practice of product

differentiation, where companies try hard to differentiate their products from the competitors.

The basic product remains the same but the features are changed.

Globalization in this case refers to the changes in economic structures and that led to the impact

on Zucamor. This includes the effect of increased competition by free economy policy by the

president. Zucamor faced intense competition and had to alter the strategy to retain existing

market position. The customer base that Zucamor had was different from competition and was

not catering to the agricultural base. The world has become a global village and therefore it is

extremely important for companies to go global if they want to survive and maximize the

shareholders earnings Herrero and the board of directors of Zucamor also realized that in order to

survive and grow in the newly liberalized market environment a partnership with global players

is a must. Therefore they decided to partner with the union camp. Many a times globalization

takes place because a company wants to benefit from resources that are available readily or

cheaply in other areas. It could be labor or raw material or technology etc. for example Jefferson

Smurfit acquired a small company which made paper and boxes with extremely poor equipment

but they had largest of clients which were very profitable.

To add value the company has to make some changes. When a raw material has no value added

and quality standards are set by law or the industry, there is still plenty of opportunity for

differentiation around availability, delivery, shipment quantities, payment terms, and all the other

services that accompany the core product. Zucamor can do three things to counter the effect of

commoditization that includes:

Marketing Strategy

1. Innovate. A new product that better meets consumer needs, even an upgrade of an existing

product, can one-up competitors and force them to invest in matching or exceeding the new

specifications.

2. Bundle. Selling a commoditized product with differentiated ancillary services (such as after-

sales service) can appeal to buyers willing to pay a premium for the convenience.

3. Segment. Mature markets are large markets that can be divided profitably into multiple

segments. Marketers can focus on providing applications expertise for less price-sensitive

customer segments for whom the product is still important.(3)

Marketing Strategy

References

1. http://www.risiinfo.com/db_area/archive/ppi_mag/1999/9908/ppi2.htm

2. http://www.achilles.com/en/Achilles-Chile/news/Zucamor-joined-Controlar-at-Achilles-Argentina/

3. http://hbswk.hbs.edu/item/5830.html