Non-creative destruction: Stora Enso plans to reduce its personnel by 520 persons in Europe

Here’s a question: if you operate a business in a difficult market, what should you do?
Stora Enso thinks it should reduce its personnel to increase profitability.

Read that again.
How do companies manage to stay ahead of the curve? Yes, cost containment is one part of the equality. But to stay afloat, innovation is needed. Perhaps both process-innovation and product-innovation. Look at Lada – no innovation of either kind, and it fell way behind the curve. Not even the influx of Western capital (investment, innovation, get it?) could help. Or look at Microsoft – it had working processes and a market advantage for its software, but with the advent of smartphones and tablets a new, smaller product was needed. In the time Microsoft worked on Windows Phone, Android and Apple staked out significant claims for their operating systems.
Making paper is  very capital-intensive, but that doesn’t make labour less important. There are at least two reasons why Stora Enso’s decision is a stupid strategy (besides that it is a general strategy of Finnish forest companies by now).

  1. Labour is not simply a cost, as the CEOs of the Finnish paper companies seem to think – employees have intense knowledge about work processes and machinery. Instead of ignoring skills and knowledge, companies could acknowledge the incredible advantage they would have from updating machines instead of reducing the workforce.
  2. Labour is not nearly the biggest cost for the Finnish paper industry. Raw materials, energy and transport are much more significant.

Furthermore, a reduced labour force again increases the pressure on employees to do their duty. The Finnish paper industry does not have a very great record in terms of workers’ well-being, so increases in the workload do not sound like a great development. Even if individual workers may benefit in salary terms from a more diversified job, this is a meagre consolation if one’s health suffers as a result.

 

The markt for paper in Europe is in decline, and there is still over-capacity, which hinders profitability. But European over-capacity is to some extent the fault of the Finnish paper companies themselves, which used European aid to make new investments. These units have often both greater production capacities and newer technology, which makes them more valuable in accounting terms AND relative to competitors (see this post). The core problem for the Finnish paper companies is that the European market is in decline. Finland’s location (with resulting transport costs) and reduced value of raw materials (pine, spruce, birch relative to eucalyptus) do not amend this situation.

 

Reducing its personnel is destruction, not creative destruction which is the process by which the ‘old’ is replaced by the ‘new’. If Stora Enso is serious about improving profitability, it should come up with innovative products, investments which reduce the relative cost of Finnish raw materials for paper production and preferably in this way also increasing its energy self-sufficiency by using more biofuels for its energy needs. If Stora Enso has no such plans but instead continues to reduce its workforce, then it is clear that the company does not have a serious commitment to continue operations in Finland.

 

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