YOU NEED IT...

...even if you think you don't. There was a time in my career when I thought that innovation was a bad word. In fact, I knew a lot of other people who thought so, too. When I was manufacturing manager for a business division consisting of eight U.S. pulp mills, every year I had to face the grueling process of capital allocation. It was grueling, of course, because there was never enough money to meet all the mill requests. New gadgets here, new gadgets there-- everyone wanted something to make the operation run better.

At one dinner meeting with a major U.S. producer of process control equipment, we turned the discussion toward the need for less, not more, innovation from the supplier. "We want you to stop bringing in new products," we said. "We can't afford it." Our intention was to upgrade a machine's process control system and then sit on it for years. We certainly did not want any supplier suggesting to the mill that it needed anything new, at least not for years to come!

Admitting this in public may be embarrassing, but I bet we weren't the only industry managers to have those thoughts. In fact, if I may generalize, our reluctance to embrace new innovations from suppliers is almost a cultural descriptor of this industry. We move at a tremendously slow rate, take few risks, and equate innovation with large capital investments.

The reasons are understandable. If we make a mistake in adopting a new capital-intensive technology, it will be with us for years and may significantly cripple our future cash flow'not to mention our careers'as we fight operating and quality issues. It seems like we have a pretty good reason to avoid innovation... or do we?

We would have a good reason to stop innovating if everyone in the world with whom we compete for customers stopped as well. A totally stable world, or one that moved as slowly as we do, would be a great answer. It's not very likely, however! The world does change. Plastics replace paper. Steel replaces wood. Sub-tropical pulp replaces northern hardwood pulp. Electronics replace paper. New community values emerge. Economies of scale change.

Our little machine with its new process control system might have been economically sound when installed, but would soon be ill-equipped to compete against the changing demands of the marketplace. In recent years, as innovation has boomed all around us, we in the paper industry have changed very little. Yes, we are capital intensive. Yes, we take huge operating and personal risks if we move too fast. But I now believe we take even greater risks if we do not innovate.

IT'S NOT CLEAR...

...how to get it. Even if we all agreed to change as an industry, we would still need to figure out how to innovate with intelligence. In the best case, successful innovation is hard to come by. Even with the right people, the right environment, the right motivations and culture, it can still be elusive. Any of our CEOs would gladly fund innovation if it was clear how to do it and if it would obviously generate major solutions and opportunities of value for their company. But it does not work that way. Innovation is too fragile, too elusive, and certainly too unreliable.

Any research manager can provide a litany of requirements for innovation to occur. Any business manager can provide an equally compelling litany of reasons why funding truly innovative research is a waste of money. What is the compromise?

We generally end up agreeing to move forward on smaller, less risky projects where the costs and risks are low enough. In many cases, these small, low-risk projects produce low-value results'at least low in relation to the total costs involved in achieving them. The path forward, therefore, can result in an organization that excels at short-term service and support, but produces little to no value from major innovations.

In another part of my career, as a research manager, I looked to suppliers for the major process innovations and felt comfortable that the in-house work on process developments could be more incremental than revolutionary. (Of course, product work must always be innovative and proprietary to competitively serve the company's customers.) That dependence on suppliers always seemed to be the right answer, and our history supported that conclusion.

As we look to the future, should we continue to depend on suppliers for major process innovations? Well, yes and no. We need to look to the suppliers because they are the biggest source of process technology innovation in this industry. Our suppliers have the business need to introduce innovative products for the industry-- that is their livelihood. I have always believed that paper producers can't justify the investment in developing major process innovations. The costs of research and development can't be recouped on their machines alone or even through royalty arrangements. Neither approach has ever worked well. So, yes, we need to look to the suppliers for major process innovations. However, there is a little problem.

As president of the Institute of Paper Science and Technology (IPST), part of my current responsibility involves meeting frequently with member company senior leaders to understand current issues and directions. In recent meetings with suppliers, I hear a consistent message-- across the board, funding of major new innovation is drying up. One supplier told me that it has dramatically reduced its research portfolio, cutting it by more than 50%. Another has reduced the timeframe and risk of new projects to focus on smaller innovations it knows will succeed. Another is moving research dollars away from pulp and paper into other industry segments it serves. Another is hindered as suppliers of necessary equipment go bankrupt due to a lack of profit in the paper industry supply chain.

What is driving these changes? Our paper companies' need to compete by offering lower prices while meeting investor demands for improved returns has led to wrenching changes in the way mills purchase materials and services. In turn, this has led to significantly lower revenues for suppliers. As a result, our entire supply chain is shuddering. The impact on suppliers runs deep. One supplier told me that it is becoming increasingly difficult to get people to move into the paper segment of the business because there are better career opportunities serving other industrial segments.

So maybe we should not depend on suppliers for innovation-- at least, not as much as before.

But we really do need it. Let's face it: we use a pulping process developed in the 1860s when German scientists found that fibers could be more easily removed from wood chips that had been "cooked" in a solution of sodium hydroxide and sodium sulfide. What have we done to improve that process in the last 150 years? We scaled it up 1,000 times! Good gosh, we are just trying to remove a cellulosic fiber from a polymeric network. You want to bet there is a better way? I am sure there is. And if we found it, do you think we would need the capital-intensive recovery island found at the heart of every kraft mill? I doubt it. There are great opportunities to reduce the capital intensive nature of removing fibers from wood chips and putting them back together to create a communication surface or packaging material.

To business managers, ideas such as these sound like rat holes. Who would spend money pursuing these ideas? If I were a business manager today, I wouldn't either. Maybe something smaller...less risky... less expensive... more sure to provide a quicker return.

But then, how can we dramatically reduce our capital intensiveness enough to make us more attractive to Wall Street? How can we preferentially reduce our total manufacturing costs to globally compete with sub-tropical producers? How can we reduce our environmental impact to be a non-event in our communities? How can we insure the future competitiveness of our industry'through small, less-risky innovations? I doubt that, too.

To solve these major issues, we need major innovations now more than ever. However, our suppliers are reducing the innovative capabilities directed at this industry, and paper companies themselves are reducing their commitment to research. In the last three years, I can count almost $150 million in annual funding for paper research that has disappeared in the U.S. and Canada as companies close, merge, or just drop research funding. We need innovation more than ever, but our innovation engine is dying for some very logical reasons.

What should we do about this?

EVERYONE IS RESPONSIBLE...

...but no one is accountable. Every person and every company is responsible for the level of innovation in our industry; we all impact it directly or indirectly and determine the outcome. An analogy might be our general society. Everyone is responsible for obeying the laws of the community. Sure, we probably waver now and then, but we are all responsible. If we all didn't take that responsibility seriously, we could not achieve our desired end-state'a safe community.

I believe it must be the same for innovation in our industry. We must all take some responsibility to make sure that our sources of innovation survive and are effective, or we all lose. However, unlike our communities where the mayor is accountable for a law-abiding populace, we have no such accountable mayor. But that does not mean the system won't work.

There are things we can do. First, every company must recognize the business need for innovation and work to create a supportive environment. I don't mean that paper companies will ever need to innovate like Microsoft. But even if a company is not "good at" innovation, it must recognize that innovation is critical to business success and build appropriate business strategies to support it. Recent studies have clearly shown the business value derived from successful investment in innovation. There is no reason to believe the results for companies in this industry would be different'especially in the turbulent times ahead.

We must begin within our companies, because the culture in our companies sets the culture of our industry. Beyond that, we need to support industry efforts to improve performance through process technology innovation.

FIRST STEP

To begin with, every manager in this industry should endorse and support the six new technology strategies designed by the American Forest and Paper Association (AF&PA), which will help focus our industry efforts on areas of critical need (see box above). These six technology strategies lay out the targets for our innovation and show us where the value must be found.

Second, with the dismantling of our traditional sources of innovation, we need to enroll new public sources of innovation, beginning with the national laboratories and the university system. There are tremendous talents and capabilities available from these public resources, but we must learn how to attract them to our issues, and we must create systems to guide and fund them.

Third, we need to expand our definition of pre-competitive research to include searching for new wood or fiber-based materials of construction as well as all process research. New innovations from pre-competitive research lead to new product concepts for suppliers and producers alike, and create a basis for broader competition. I define pre-competitive research as work in areas that no single company is likely to take on by itself.

If we all could support these steps, we could create an innovation engine that would dramatically change the face of the forest products industry in the next decade. This would include the creation of well-funded government-industry-academia consortia focused on the major issues of our industry. The sources of innovation would change, but through major programs and consortia such as these, we would have an accountable entity for producing the innovations we need to survive against our natural competitors in the marketplace.

And best of all, we can do these things within the business manager's tolerance for risk and cost. By combining an individual company's financial support with that of a large number of other companies, and leveraging that through government funding, we have the power to pursue and achieve major change that benefits all players in the paper industry and creates the basis for a highly competitive, global industry. And the cost and risk to individual companies would be tolerable. This has never been done in this industry, but it has in other U.S. industries, such as the semiconductor and automotive industries.

With these steps, we can build a better innovation engine than we have ever had for major process innovations. We can create new core process technologies to ensure the future competitiveness of our industry. We can energize our people and create a culture of innovation and change. We can activate a clear strategy to meet our stockholders' needs. We can demonstrate our commitment to our industry and our communities. We can create a globally competitive industry. We can survive. And each of us plays a role in making it happen.

I have come a long way: From wanting to stop all innovation in order to benefit my company, to advocating an all-out effort to create it. At the root of this change is my recognition that we can't stop the world'we must go on. In this chaotic world we must go on to survive. But to go beyond surviving, to prosper, will take a strong commitment to major innovation from every individual in this great industry... we have no other choice.

I hope you will help. Whether that is by describing needs, supporting funding, creating ideas, giving innovators time for a mill trial, or just talking it up, you can make a difference. The future of our industry depends on it.

This article originally appeared in the April 2001 issue of PIMA's North American Papermaker magazine. Published here with the permission of PIMA.

   About the Author:

Jim Ferris is president of the Institute of Paper Science and Technology, Atlanta, Ga. He is a 30 year veteran of the pulp and paper industry.