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PONSSE

STRATEGIC REPORT 28/03/2017

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Executive Summary This report aims to identify and critically evaluate Ponsse’s international strategy. My analysis is based on the assumption that companies execute business operations to increase their profitability and their profit growth. I also assume that pressure on costs reduction calls for standardization strategy while pressure on local responsiveness requires localization strategy. These two forces shape companies’ international strategies. Based on these primary assumptions, this reports aims to analyze Ponsse’s strategy to deliver high quality products and services abroad. The conclusion of this analysis is that Ponsse’s strategy matches its environment constraints. Thanks to its strong organizational architecture and customer-focused manufacturing system, the company is able to deal with large differences between its domestic and foreign markets. However, on the long run, its sophisticated production system could result in an inability to meet the increasing demand on the forest machine market.

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Company profile The forest machine industry There are two methods for mechanized wood harvesting: tree-length (TL) and cut-to-length (CTL) methods. CTL machines are more efficient, cost-effective and environment-friendly but they are significantly more expensive (Bell, Shelman, 2007). Ponsse manufactures and sells CTL machines only. Ponsse’s business operations Ponsse is a Finnish multinational enterprise which develops and manufactures CTL forest machines based on customer needs since 1970 (Ponsse, 2010). Ponsse’s activity is divided into three related business operations:

1- Machines manufacture Ponsse manufactures CTL forest machines such as harvesters, forwarders, harvester heads, cranes and loaders. Ponsse also manufactures attachments to forest machines enhancing their usability.

2- Information systems development The company develops all the information systems to assist logging operators.

3- Services Ponsse provides high quality services such as delivery, maintenance care, technical support and training. Ponsse’s international presence The parent company is based in Finland. Ponsse’s sales and service network operates in 40 countries with 10 wholly owned subsidiaries and 26 dealers in Sweden, Russia, Germany, France, North and Latin America. Foreign operations represent more than 75% of Ponsse’s net sales (Ponsse, 2016). The machine manufacturing and the information system development are operated in Finland, while the distribution and services are operated abroad by the company’s strong network of dealers and subsidiaries.

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(Ponsse, 2013)

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Ponsse’s strategy Increasing profitability There are three levers to increase profitability: costs reduction, perceived customer value improvement and price increase. Ponsse’s strategy heavily focuses on the perceived customer value. Its business operations aim at increasing the products quality, building the brand equity and creating value-added services.

1- Research and development

Ponsse invests heavily in R&D to innovate its products. It invested more than 67 million (EUR) in R&D since 2010 (Ponsee, 2016). Ponsse’s product quality is certified: In 2015, its Scorpion harvester won the Best award in the Red Dot design competition for high-quality and innovative product (Ponsse, 2015).

2- Customer-specific manufacturing

Ponsse’s manufacturing process is based on a Make To Order (MTO) manufacturing system. Ponsse produces each machine after an order is made and adapts it to each customer’s specific requirements (De Souza, 2010).

3- High standard services

Ponsse puts valuable efforts in the maintenance, on-site delivery and formation services to increase its perceived customer value. For instance, it established the Ponsse Academy in 2005 to provide training to its staff as well as to its customers (Ponsse, 2015). Organizational Architecture To support the delivery of high quality products, Ponsse developed a specific organizational structure divided into three layers.

1- Centralized organization

The organization is strongly centralized around the parent company in Finland. Ponsse manufactures every machine in one factory and develops its information systems in one center, both located in Finland. Ponsse carries its R&D operations in its factory and all the components are produced in-house. To keep tight control over the supply chain, 80% of its suppliers are Finnish (Ponsse, 2016).

Ponsse’s centralized architecture guarantees efficient communication and cooperation between its product development and production teams to optimize the quality of Ponsse’s products.

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2- Wholly owned and specialized subsidiaries

Ponsse owns 10 subsidiaries abroad which are only responsible for sales and maintenance. Machines are manufactured in Finland, shipped to subsidiaries and assembled on site. Therefore, subsidiaries focus only on services which increases the service quality (De Souza, 2010). Ponsse’s subsidiaries are wholly owned by the Ponsse Group. Subsequently, the company keeps tight control over the subsidiaries’ operations. Ponsse develops its subsidiaries on a greenfield basis to design them so that they match the company’s quality standards.

3- Distribution network

Along with its organizational structure, Ponsse increased its distribution force with a network of 26 independent dealers. Ponsse sells its machines through two distribution channels: its own subsidiaries and independent dealers. Ponsse’s organizational structure was developed to allow high flexibility and reliability in the production of machines, so that it can encounter larger differences between countries. The centralized architecture reduces expenses and waste of time by facilitating communication and cooperation increasing consequently efficiency and flexibility to meet the customers’ requirements. Inherent pressures on Ponsse’s strategy

Moderate pressure on costs Ponsse’s focus on perceived customer value to increase its profitability is enabled by a low pressure on costs resulting from factors inherent to its activity:

• CTL machines are capital goods used to cut trees which may be directly sold without further transformation. Therefore, machine purchases are generally part of long-term investments.

• Ponsse’s machine great quality guarantees long-term reliability, better productivity and higher benefits for contractors. Therefore, although Ponsse’s machines prices are about 10% more expensive than competitors’ products (Bell, Shellman, 2007), they are less expensive on the long run.

• The market has been constantly growing so the offer is meeting a high and growing demand. Therefore, prices are not to be decreased to attract customers.

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Pressure for local responsiveness The forest machine industry is subject to high local responsiveness. Forests are spread out in different climates and they are made up of different types of trees which differ in size, density and weight. Very often forests are under extreme climates, such as very low temperatures in Siberia, which damage machines in different ways.

Localization strategy The moderate pressure on costs and the high level of local responsiveness urged Ponsse to adopt a very localized strategy. Ponsse’s business and organizational structure gives it high flexibility to adapt its products to its customers’ needs. Each machine is customer-specific and produced on order. Ponsse’s current manufacturing and organizational strategy resulted from an evolution

throughout time because of international requirements as I show in the following section.

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Example - Ponsse in Brazil What has been Ponsse’s approach to deliver high quality machines and services in Brazil?

Machines Production to meet local requirements Ponsse inaugurated its Brazilian subsidiary in 2005. Originally, Ponsse set up a factory in Brazil to produce the harvesters locally which did not last long. In 2008, urged by the economic crisis and the need of costs reduction, Ponsse relocalized its harvester production in Finland to benefit from the expertise of its domestic staff and allow its Brazilian subsidiary to specialize in the sales and maintenance services.

High quality services The Brazilian subsidiary runs customer services on a 24/7 basis. Ponsse’s distribution strategy focuses on a few large customers, to ensure close relationship and leave flexibility for adjustments of services. To enhance the service quality, Ponsse established the same year training programmes for its staff as well as for its customers. Three independent distributors support the distribution network to cover all the Brazilian territory. (Ponsse 2009, 18).

Results In 2009, Ponsse was one of the leading suppliers of rubber-wheeled harvesters and forwarders in the four most important region’s harvesting countries: Brazil, Chile, Uruguay and Argentina (Ponsse 2009, 17).

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Ponsse’s environment In this section, I analyze the features inherent to the market that Ponsse operates in. Then, I identify the key factors influencing its ability to carry its strategy abroad. The market Ponsse specializes in the production of CTL machines. The CTL machine market is small but growing. About 20% of the world's total wood harvesters use the CTL method, but the share has been constantly growing as it represented 16.2% in 2007 (Bell, Shelman, 2007). Globally, in 2015, the world demand for forestry equipment was expected to gain 4.5% per year until 2019, which would consequently increase the demand for CTL machines (Freedonia, 2015).

Therefore, Ponsse has been benefiting from a demand growth that is likely to last for a couple of years. However, the company’s strategy to keep the production centralized and its emphasis on quality over quantity limit its production pace. Currently, it has a maximum manufacturing pace of 5 machines per day (Ponsse, 2016). On the long run, Ponsse’s approach could lead to an inability to meet the increasing demand level on the CTL machine market. Variables affecting Ponsse’s strategy Before expanding its strategy abroad, a company shall evaluate the differences between the targeted country and its own domestic market. The CAGE system provides a useful framework to measure cultural, administrative, geographic and economic differences. After it identifies the key variables, the company assesses whether it has the sufficient capacity to overcome the differences. As seen earlier, the core of Ponsse’s strategy lies on a couple of key features. In the following table, some of the factors that are the most likely to influence the key features of the company’s strategy are listed, as well as some suggested variables to measure these factors.

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Key features of Ponsse’s strategy

Influencing factors Suggested measuring

variables CAGE category

Customer-specific machines

Differences in customers requirements

Annual temperature average in wooded areas

Geographic

High quality services

Differences in labour force skill level

United Nations’ education index

Cultural

Customer relationship Differences in customer accessibility

World Bank transportation and trade related infrastructure index

Administrative/ Geographic

As seen earlier, Ponsse’s strategy is to deliver customer-specific machines supported by high quality services. Therefore, it is important to evaluate the differences in customer requirements and labour force skills. In the forest machine market, the customer demand depends on the climate, as extreme climates require specific machine features. The international expansion of the company’s strategy depends on the development of customer relationships.

Other relevant variables could be the legal restrictions on forest exploitation,

environmental activism intensity and other climate variables such as average

humidity and temperature variations.

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Case study - Ponsse in Brazil and Russia

I evaluated the differences between Ponsse’s domestic market with the Brazilian and the Russian market. I selected these two countries because Ponsse penetrated these markets approximately at the same time (2004 in Russia, 2005 in Brazil) with a slightly different strategy. As shown below, except for the transportation infrastructure level, the differences between the Finnish and the Russian markets are significantly smaller than between the Finnish and the Brazilian ones regarding the annual average temperatures and the education. To say it otherwise, the Finnish market is closer to the Russian one than to the Brazilian market.

Finland

Russia Brazil

Value Difference

with Finland Value

Difference with Finland

Average annual temperature in wooded areas*

6°C 9°C 50% 23°C 280%

UN education index (2005)

0.812 0.764 6% 0.614 24%

World Bank transportation and trade related infrastructure index (2007)

3.81 2.23 41% 2.75 28%

Differences with Finland in percentage

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Brazil and Russia have vast territories with large temperature variations throughout the country. I took the average annual temperature of the cities where Ponsse’s subsidiaries are established. Note that the UN education index is from the year 2005 and the World Bank transportation infrastructure index from 2007 which are the closest available data to the years of Ponsse’s entries in the Brazilian and Russian markets. Note that although Ponsse entered the Brazilian and Russian market more than 10 years ago, recent Ponsse annual reports do not indicate any significant change of its strategy that was not mentioned in this analysis.

Ponsse’s current structure Ponsse’s current structures in Brazil and Russia are similar: one on-site subsidiary supported by a network of dealers is responsible for distribution and maintenance services. However, its entry strategies to these markets differed slightly. When Ponsse established its subsidiary in Russia, it had been already exporting machines there through independent retail distributors (Ponsse, 2001, p7). On the other hand, Ponsse’s first entry in the Brazilian market was through the establishment of its subsidiary (De Souza).

Ponsse’s entry strategy The CAGE framework detailed above may help understand Ponsse’s entry strategy. Ponsse’s main objective is to deliver customer-specific products. In markets that are close to the Finnish market, such as the Russian market, Ponsse’s products require a lower level of adaptation. Therefore, its direct presence is less required than in more different markets such as the Brazilian one. Consequently, Ponsse could already enter the Russian market with dealers only until it establishes a subsidiary there. On the other hand, the company required a direct presence in Brazil to understand its potential customers’ requirements which are more different than its domestic demand. Ponsse’s flexible manufacturing system allowed it to cope with the large differences between the Brazilian and the domestic market.

One disadvantage of Ponsse’s entry in Brazil without prior retail network is that it could not test the market before the greenfield establishment of its subsidiary. Therefore, Ponsse’s approach in Brazil included a higher risk than in Russia.

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Summary Ponsse increases its profitability by focusing on perceived customer value. It develops innovative machines supported by high quality services. Its focus on quality is enabled by a moderate pressure on costs. The high pressure on local responsiveness requires localization strategy. Therefore, to expand its strategy abroad, Ponsse developed a centralized organization with wholly owned subsidiaries that are supported by a strong network of distributors, providing Ponsse a high flexibility to manufacture customer-specific machines.

Conclusion Ponsse’s strategy matches its environment. Ponsse is able to operate in markets that differ greatly from its domestic market such as in Brazil. Its organizational structure allows it to deal with high local responsiveness and large CAGE differences. However, due to its centralized architecture and quality-focused manufacturing system, as well as the geographic distance between the Finnish factory and its subsidiaries, substantial increase in the demand of CTL machines could result in an inability to meet the demand.

Recommendations

Ponsse should consider adapting its architecture to increase its manufacturing pace and meet a forecasted increase in sales without decreasing its product quality.

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References Bell, D. Shelman, M. 2007. Ponsee: From Finland to Global. Harvard Business School. De Souza, J. B. 2010. The Brazilian Market for Forestry Machines, Case Study: Ponsse Latin America Ltda. Thesis in Lahti University of Applied Sciences. Freedonia. 2015. World Forestry Equipment to 2019. [online]. Available from: http://www.reportsnreports.com/reports/402221-world-forestry-equipment-to-2019.html. [Accessed 27 March 2017]. Ponsse Annual reports, 2001, 2007, 2009, 2010, 2015, 2016. Ponsse. 2013. A Logger’s Best Friend. United Nations Development Programme. 2013. Human Development Report, Education Index. [online]. Available from: http://hdr.undp.org/en/content/education-index. [Accessed 27 March 2017]. World Bank. 2007. Logistics Perfomance Index. [online]. Available from: http://lpi.worldbank.org/international/global/2007?sort=asc&order=Infrastructure#datatable. [Accessed 27 March 2017]. World Weather Online. 2017. Monthly Climate Average. [online]. Available from:

https://www.worldweatheronline.com/gorelovo-weather-averages/tambovskaya-oblast/ru.aspx (Gorelovo, Russia) https://www.worldweatheronline.com/vierema-weather-averages/eastern-finland/fi.aspx (Vieremä Finland) https://www.worldweatheronline.com/sao-paulo-weather-averages/sao-paulo/br.aspx (São Paulo, Brazil)

[Accessed 27 March 2017]. Front picture from Ponsse: http://www.ins-news.com/en/100/879/2133/New-PONSSE-forest-machine-technology-in-Elmia-Wood-Focus-on-the-driver.htm

http://www.reportsnreports.com/reports/402221-world-forestry-equipment-to-2019.htmlhttp://hdr.undp.org/en/content/education-indexhttp://lpi.worldbank.org/international/global/2007?sort=asc&order=Infrastructure#datatablehttp://lpi.worldbank.org/international/global/2007?sort=asc&order=Infrastructure#datatablehttps://www.worldweatheronline.com/gorelovo-weather-averages/tambovskaya-oblast/ru.aspxhttps://www.worldweatheronline.com/gorelovo-weather-averages/tambovskaya-oblast/ru.aspxhttps://www.worldweatheronline.com/vierema-weather-averages/eastern-finland/fi.aspxhttps://www.worldweatheronline.com/vierema-weather-averages/eastern-finland/fi.aspxhttps://www.worldweatheronline.com/sao-paulo-weather-averages/sao-paulo/br.aspxhttps://www.worldweatheronline.com/sao-paulo-weather-averages/sao-paulo/br.aspxhttp://www.ins-news.com/en/100/879/2133/New-PONSSE-forest-machine-technology-in-Elmia-Wood-Focus-on-the-driver.htmhttp://www.ins-news.com/en/100/879/2133/New-PONSSE-forest-machine-technology-in-Elmia-Wood-Focus-on-the-driver.htm