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CASE: Taking Charge at Domtar: What It Takes for a Turnaround*
Domtar is the third largest producer of uncoated free sheet paper in North America. In the decade prior to 1996, Domtar had one of the worst financial records in the pulp and paper industry. At that time it was a bureaucratic and hierarchical organization with no clear goals. Half of its business 12was in “trouble areas.” Moreover, the company did not have the critical mass to compete with the larger names in the field. The balance sheet was in bad shape, and the company did not have investment-grade status on its long-term debt.
In July of 1996, Raymond Royer was named president and chief executive officer (CEO). This was quite a surprise because, although Royer had been successful at Bombardier, he had no knowledge of the pulp and paper industry. Many believed that to be successful at Domtar, you needed to know the industry.
Royer knew that to be effective in any competitive industry, an organization needed to have a strategic direction and specific goals. He decided to focus on two goals: return on investment and customer service. Royer told Domtar executives that to survive, they needed to participate in the consolidation of the industry and increase its critical mass. The goal was to become a preferred supplier. The competitive strategy had to focus on being innovative in product design, high in product quality, and unique in customer service. At the same time, however, it had to do everything to keep costs down.
When Royer took over at Domtar, he explained to the executive team that there were three pillars to the company: customers, shareholders, and ourselves. He noted that it is only “ourselves” who are able to have any impact on changing the company. He backed up his words with action by hiring the Kaizen guru from Bombardier. Kaizen, a process of getting employees involved by using their expertise in the development of new and more effective ways of doing things, had been very effective at Bombardier. Royer saw no reason why it would not be successful at Domtar. Royer also knew that for the new strategic direction and focus to be successful, everyone needed to both understand the changes being proposed and have the skills to achieve them. The success of any change process requires extensive training; therefore, training became a key part of Royer’s strategy for Domtar.
This last point reflects the belief that it is the employees’ competencies that make the difference. The Domtar Difference, as it is called, is reflected in the statement, “tapping the intelligence of the experts, our employees.” Employees must be motivated to become involved in developing new ways of doing things. Thus, Domtar needed to provide employees with incentives for change, new skills, and a different attitude toward work. The introduction of Kaizen was one tactic used to achieve these goals.
Training at Domtar went beyond the traditional job training necessary to do the job effectively and included training in customer service and Kaizen. This is reflected in Domtar’s mission, which is to
In this regard, a performance management system was put in place to provide a mechanism for employees to receive feedback about their effectiveness. This process laid the groundwork for successfully attaining such objectives as improving employee performance, communicating the Domtar values, clarifying individual roles, and fostering better communication between employees and managers. Tied to this were performance incentives that rewarded employees with opportunities to share in the profits of the company.
Has Royer been successful with his approach? First-quarter net earnings in 1998 were $17 million, compared with a net loss of $12 million for the same time period in 1997, his first year in office. In 2002, third-quarter earnings were $59 million and totaled $141 million for the year. That is not all. Recall his goal of return on equity for shareholders. Domtar has once again been included on the Dow Jones sustainability index. Domtar has been on this list since its inception in 1999 and is the only pulp and paper company in North America to be part of this index. To be on the list, a company must demonstrate an approach that “aims to create long-term shareholder value by embracing opportunities and managing risks that arise from economic, environmental, and social developments.” On the basis of this, it could be said that Royer has been successful. In 2003, Paperloop, the pulp and paper industry’s international research and information service, named Royer Global CEO of the year.
It was Royer’s sound management policies and shrewd joint ventures and acquisitions that helped Domtar become more competitive and return their long-term debt rating to investment grade. However, joint ventures and acquisitions bring additional challenges of integrating the new companies into the “Domtar way.” Again, this requires training.
For example, when Domtar purchased the Ashdown Mill in Arkansas, the management team met with employees to set the climate for change. The plan was that within 14 months, all mill employees would complete a two-day training program designed to help them understand the Domtar culture and how to service customers. A manager always started the oneday customer focus training, thus emphasizing the importance of the training. This manager returned again at lunch to answer any questions as the training proceeded. In addition, for supervisor training, each supervisor received skill training on how to effectively address employee issues. How successful has all this training been? Employee Randy Gerber says the training “allows us to realize that to be successful, we must share human values and integrate them into our daily activities.” The training shows that “the company is committed to the program.” Tammy Waters, a communications coordinator, said that the training impacted the mill in many ways and for Ashdown employees it has become a way of life.
The same process takes place in Domtar’s joint ventures. In northern Ontario, Domtar owns a 45 percent interest in a mill, with the Cree of James Bay owning the remaining 55 percent. Although Domtar has minority interest in the joint venture, training is an important part of its involvement. Skills training still takes place on site, but all management and teamwork training is done at Domtar’s headquarters in Montreal.
Royer’s ability to get employees to buy into this new way of doing business was necessary for the organization to succeed. Paperloop’s editorial director for news products, Will Mies, in describing why Royer was chosen for the award, indicated that they polled a large number of respected security analysts, investment officers, and portfolio managers as well as their own staff of editors, analysts, and economists to determine a worthy winner this year. Raymond Royer emerged a clear favorite, with voters citing, in particular, his talent for turnaround, outstanding financial management, and consistently excellent merger, acquisition, and consolidation moves as well as his ability to integrate acquired businesses through a management system that engages employees. Of course, that last part, “a management system that engages employees,” could be said to be the key without which most of the rest would not work very well. That requires training.
Swift, A. “Royer’s Domtar turnaround.” Financial Post (October 6 2003), FP3. Allen, B. 2003. The Domtar difference. www.pimaweb.org/conferences/june2003/BuddyAllen.pdf. Anonymous (January 2001) Partnership between Domtar and Cree First Nations brings results. www.diversityupdate.com. Richard Descarries, Manager, Corporate Communications and External Relations, Domtar, personal communication (2004).
Review the Domtar case from Chapter 1, and answer the following questions:
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