Rocky Mountain Fiberboard Case

ROCKY MOUNTAIN FIBERBOARD

Rocky Mountain Fiberboard (RMF) was established in March 1999 and is engaged in the production of particleboard out of bluegrass straw. It is a joint venture between BGI (Bluegrass Growers Inc. and a Northwestern American Indian tribe. The primary purpose of establishing Rocky Mountain Fiberboard was to find a solution to unused straw residue since the state of Washington placed a ban on field burning in 1996. Another objective for creating this organization was the tribe's desire to expand into other diversified projects.

At this point in time, RMF is in deep financial difficulties. The financial statements for the year ending 2001 indicate a loss of $1.9 million on sales of $1.7 million and over $4.5 million in debt and payables of over $800,000. Its internal cash flow situation is negative putting excessive financial pressure on the owners and indicating a dire need for RMF to take major strategic actions in order to turn the company around. The company faces many strategic issues:

Ð'* RMF product quality is extremely low. Over the years RMF has been using outdated manufacturing equipment which offer less flexibility and are less automated than the existing models being used by competitors. RMF does not have adequate capital to upgrade this equipment. As a result, it has huge inventories of salvaged/downgraded straw. Low quality of straw has also had a negative impact on RMF's customer retention ability.

Ð'* Due to lack of funds RMF has been unable to adequately develop its storage facilities resulting in high wastage of purchased straw.

Ð'* Initially RMF had decided that it would price its product low and then gradually increase the price once it had established itself in the strawboard product market. However, throughout its three years of operation, RMF faced pricing issues since it was unable to increase its prices due to a drop in market prices for particleboard.

Ð'* Poor quality and low production capacity significantly affected RMF's ability to retain its customers as well as attract new customers resulting in a steady decline in sales.

Ð'* RMF also faced significant marketing and operation problems. Due to financial problems, it had to lay off a large majority of its employees and was in fact operating without a marketing manager. Keeping in view its product problems, low customer base and low customer loyalty, the absence of a strong marketing force further contributed to RMF's declining performance.

Ð'* All the above mentioned issues together contributed to RMF's existing financial crisis with an annual net loss of $2 million; equity losses of $600,000 and long-term debt of $4.6 million.

Under the current scenario, the General Manager Luke Waterman was evaluating three options. The first option was to find new customers and resolve the quality issues with the existing product line. The second option was to partner with Quickstart Building Systems, a company which manufactured wall panels. RMF was keen on partnering with Quickstart and to supply strawboard for its wall panels. The merger would help RMF resolve its financial difficulties and would also help the company gain access to new customers. The third option was to file for Chapter 11 bankruptcy.

As for the first option, the company would only be able to find new customers with a strong marketing effort. Keeping in mind the fact that at present RMF does not even have a Marketing Manager, it appears to be highly unlikely that RMF would be able to design a strong marketing campaign let alone implement one. It lacks funds as well as human resource to carry out a significant product upheaval campaign. Attracting customers would also require educating them about the benefits of strawboard and its significant advantages over particleboard. However, once again this strategy would require individuals with strong marketing skills and a high level of marketing expertise and product knowledge. At this point in time RMF neither has these marketing skills nor can it afford to develop them in a short period of time.

The second option of partnering with Quickstart Building Systems is the most feasible option for RMF. Quickstart itself is looking for a partner to acquire its current production line and RMF would benefit from such a partnership and would be able to find a way out of its current financial crisis as well as gain access to Quickstart's target customers. Moreover, RMF would also be able to use new and improved manufacturing equipment through this merger as well as have the ability to improve the quality of its strawboard and be in a position to price it better.

The third option should only be used as a last resort. In case the merger doesn't work out and there are technical issues or problems with the planned partnership, the company would have no option but to file for bankruptcy. In any case, it does not seem feasible for RMF to improve product quality, pay off its long term debt, pick up its sales, attract new customers and retain old ones all at the same time simply because it does not have the skills and the funds. Option 1 is therefore seems impossible. Option 2 is the best choice and if that fails filing for bankruptcy seems to be the only possible solution for RMF.

A. ROCKY MOUNTAIN FIBERBOARD INDUSTRY INFORMATION

Rocky Mountain Fiberboard is part of the strawboard industry which constitutes less than 0.5% of the total wood and agrifiber-based products produced in the United States.

INDUSTRY'S DOMINANT ECONOMIC FEATURES

Ð'* The strawboard industry is relatively a small part of the wood and agrifiber based product industry.

Ð'* The strawboard market is primarily undeveloped.

Ð'* The industry is characterized by prices generally negotiated for individual sales or contracts.

Ð'* Leading industry players include Isoboard Enterprises, Primeboard Inc. and Prairie Forest Products in the strawboard category and Georgia-Pacific and Louisiana-Pacific in the particleboard category.

COMPETITIVE ANALYSIS SUMMARY Ð'- THE 5 FORCES MODEL

Rivalry among competing sellers in the industry

Ð'* The industry is relatively small and undeveloped therefore there is no significant rivalry among the key sellers.

Ð'* Competitiveness is primarily based on mill efficiency and availability of resources