FIVE FORCES MODEL - The Center for Agroforestry at the University

48 Pages·2007·1.71 MB·English

Eastern Redcedar
Market Analysis

2005 Directory

University of Missouri Center for Agroforestry
University Of Missouri Center for Agroforestry
203 ABNR Building
Columbia, Missouri 65211

Eastern Redcedar
Market Analysis

2003 Directory

Michael A. Gold, Associate Professor
Larry D. Godsey, Research Economist
Mihaela M. Cernusca, Graduate Research Assistant

This document is also available on-line at www.centerforagroforestry.org

University of Missouri Center for Agroforestry
The University of Missouri Center for
Agroforestry (UMCA) is an
interdisciplinary research, teaching and
technology transfer program that draws on
the expertise of university faculty in
forestry, fisheries and wildlife,
entomology, plant pathology, agronomy,
animal science, agricultural economics,
rural sociology and horticulture. The center
coordinates Agroforestry activities for use
in Missouri and adjacent areas of the
Midwest. Its mission is to initiate,
coordinate and enhance Agroforestry
activities to meet the environmental, social

and economic needs of land management
within the state of Missouri, North America
and the temperate zone worldwide.

University of Missouri Center for Agroforestry
CONTENTS 2

Executive summary Page 3
Introduction Page 6
Eastern redcedar Page 6
Project description Page 7
Research methodology Page 8
Five Forces Model Page 9
Participants in the research Page 10
(cid:214) States surveyed Page 10
(cid:214) Value chain position in the eastern redcedar market Page 11
(cid:214) Years in business Page 11
(cid:214) Gross annual sales Page 12
Redcedar, commodity versus product Page 13
(cid:214) Redcedar products Page 14
(cid:214) Redcedar uses Page 15
(cid:214) Complete utilization Page 16
(cid:214) Volume Page 16
(cid:214) Adding value Page 18
Analysis of the forces that drive competition in the eastern redcedar market
(cid:214) Force 1: Barriers to entry (Threat of new entrants) Page 21
(cid:214) Force 2 and 3: The bargaining power of suppliers and buyers Page 24
(cid:190) Suppliers Page 24
(cid:190) Buyers Page 30
(cid:214) Force 4: Threat of substitute products or services Page 36
(cid:214) Force 5: Rivalry among existing firms Page 37
(cid:214) Additional market forces: Policy Page 39
Conclusions Page 40
Appendix Page 43
Mail survey
Phone survey
2003 Market directory

University of Missouri Center for Agroforestry
EXECUTIVE SUMMARY 3

The University of Missouri Center for We surveyed the value chain from raw material
Agroforestry conducted an analysis of the producers (private landowners, loggers and
eastern redcedar market. timber brokers) and primary manufacturers
(sawmills, shavings or mulch producers) to
Research objectives
secondary manufacturers (parts manufacturers,
The redcedar market research study has two novelty producers, essential oil producers),
major objectives. The first objective is to wholesalers and retail outlets. Along the value
develop a basic understanding of the eastern chain, most of the participants are involved in
redcedar market (who are the participants in the both supplying and buying eastern redcedar
market, what kind of products are currently products. Some of the companies are vertically
being marketed, what are the general trends for integrated being involved in two or more steps
supply and demand). The second objective is to in product conversion.
use Porter's Five Forces Model to analyze the
Redcedar products
competitive forces that coordinate and control
the market and to identify the resources and Companies surveyed buy a large variety of
relationships needed to be successful in the products ranging from standing timber to logs,
eastern redcedar market. The results of the posts, cants, lumber or by-products. The
research, together with an updated directory of products sold included logs, cants, lumber,
companies in the redcedar market, are designed fence posts, tongue and groove paneling,
to benefit those already in the market and others furniture, cedar-wood oil, novelties, mulch and
who are considering entry into redcedar shavings. A characteristic unique to redcedar
industry. is that every by-product and every fiber of the
tree can be marketed. Manufacturing by-
To achieve our objectives, we analyzed the
products that are not used as cants, fence posts
competitive forces that coordinate and control
or dimensional lumber can be used as flakes for
the market using Porter's Five Forces Model.
pressboard, mulch, shavings, cedar balls or can
Participants in the research be processed for extracting cedar-wood oil.
The residue after extraction can be used as
Through a mail survey, followed by more in
boiler fuel.
depth phone interviews, we surveyed eastern
redcedar businesses from 16 states,
predominantly primary manufacturers, ranging
from small operations with less than $10,000
per year gross annual sales to large firms with
gross annual sales over $16 million. Based on
all feedback, it is estimated that the US redcedar
market generates nearly $60 million per year in
gross sales and is growing.

University of Missouri Center for Agroforestry
4
Forces that drive competition in the eastern redcedar market
Threat of new entrants (Barriers to entry)
Our survey respondents identified the poor quality material will occur in the next
following barriers to entry in the redcedar 10 years
industry:
However, based on the information obtained
(cid:214) Capital requirements - 28% noted this as from US Forest Service, Forest Inventory and
a barrier, Analysis (FIA) data, there is abundant
(cid:214) Lack of knowledge and experience redcedar available in four states (Arkansas,
(20%), Tennessee, Kentucky, and Missouri). FIA
(cid:214) Access to inputs (16%), data indicates that the useable redcedar
(cid:214) Access to markets (16%), resource will slowly increase in quantity for
(cid:214) Labor intensity (12%), the next three decades.
(cid:214) Economies of scale (12%).
Survey results also indicate that demand for
The more difficult the barriers are to redcedar materials will remain the same or
overcome by those trying to enter the market, increase in the next 10 years. More
the better they protect the companies already specifically, demand for good quality cedar
in the market from potential new entrants. will increase, demand for average quality will
stay the same, and demand for poor quality
Bargaining power of suppliers and buyers
will decrease. This trend was expected as the
Characteristics of the value chain based on redcedar industry continues to upgrade its
survey results: standards to produce higher quality products.
(cid:214) Suppliers in the value chain are Based on survey results, minimal bargaining
relatively small companies in terms of annual power is exerted along the value chain.
sales Bargaining power on the supply side is felt at
the primary manufacturing level. From the
(cid:214) Some of the companies surveyed have
buyers' perspective, there seems to be little to
their suppliers deliver to them while other
no bargaining power. Out of the companies
companies find it necessary to travel more
surveyed, there doesn't appear to be any
than 150 miles to obtain their raw material
single buyer that purchases large volumes of
supply
redcedar material.
(cid:214) Transactions take place mostly on the

spot market
(cid:214) The largest segment of the buyers' chain
is represented by resellers
(cid:214) The majority of the companies surveyed
sell their products locally
Trends in supply and demand
Based on survey results, the supply of all
quality levels of redcedar materials is likely to
stay the same in the next 10 years. However, it
is possible that a shortage of good quality
redcedar material and an increase in

University of Missouri Center for Agroforestry
Their approach to competition is to keep
producing their products, focusing on quality
Threat of substitute products
and service.
Different uses of eastern redcedar have different
Governmental policies
potential substitutes. For example, western
The policies that were recognized by the
redcedar, redwood or treated lumber could be
survey respondents to have influence over the
used as substitutes for eastern redcedar in home
redcedar industry included:
construction or dimensional lumber. Mulch can
(cid:214) The EPA ban on CCA treated lumber
be obtained from different species of hard wood
(cid:214) The implementation of sustainable
and pine shavings. Rice hulls or saw dust can
forestry certification for suppliers to
also be used as pet bedding.
Lowe's and Home Depot
That said, because of its distinctive properties:
(cid:214) Management practices adopted by state
reddish/brown color, unique fragrance, natural
natural resource agencies determined to
rot resistance and insect repellent qualities all
eradicate redcedar
derived naturally, eastern redcedar is perceived
In practical terms, none of these policies were
to be in a niche by itself, with very few close
found to have a significant impact on the
substitutes.
redcedar marketplace.
Rivalry among existing firms
Next steps:
Based on the surveys, the level of rivalry in the
For the collective benefit of the redcedar
eastern redcedar market is perceived as non-
industry, it is suggested that industry
competitive to moderately competitive.
participants join their efforts to identify and
Survey feedback indicates that the number of
pursue actions to grow the overall market.
competitors will either stay the same or decrease
Actions to be taken in the near future might
in the next 10 years.
include:
Competitors are attracted to the eastern redcedar
(cid:214) Creation of a redcedar marketing board
market not only by the perceived profit and the
to increase awareness of market
independence that a private business offers but
opportunities.
also by the full utilization of redcedar material,
(cid:214) Developing an infrastructure by
availability of redcedar raw material, and the
working with federal/state agencies to
fact that redcedar is a growing niche market.
facilitate the flow of goods and
In response to new competitors that may enter information through the market.
the market, the majority of the companies (cid:214) Linking industry participants with
surveyed did not indicate that they had a special research institutions to develop new
strategy or reaction. market opportunities by exploring
alternative uses for eastern redcedar

wood, oil, and products.
(cid:214) Encourage private landowners to
manage redcedar stands and foresters to

learn more about how to manage it.

5

University of Missouri Center for Agroforestry
INTRODUCTION 6

The University of Missouri Center for competitive forces that coordinate and control
Agroforestry’s redcedar market research study the market and to identify the resources and
has two major objectives. The first objective is relationships needed to be successful in the
to develop a basic understanding of the eastern eastern redcedar market. This information is
redcedar market (who are the participants in intended to assist companies in the market in
the market, what kind of products are currently the development of new strategies to improve
being marketed, what are the general trends for their business or assist individuals who are
supply and demand). The second objective is to considering entry into this industry.
use Porter's Five Forces Model to analyze the

EASTERN REDCEDAR

Eastern redcedar (Juniperus virginiana L.) is maintenance. It can also be used for almost
a member of the cypress family any kind of furniture, especially for cedar
(Cupressaceae) native to the forests of the chests and wardrobes and is commonly used
eastern and central United States. Because in closets. As wood utilization by-products,
this species tolerates extremes of drought, shavings are widely used for large and small
heat and cold, the natural range extends well animal pet bedding and redcedar mulch
out into the Great Plains. Eastern redcedar distinguishes itself by its appealing color,
thrives on thin limestone soils and will aroma, durability and insect deterring
successfully invade abused, overgrazed sites, properties1. From an environmental
abandoned pastures, and limestone rock standpoint, eastern redcedar is often used for
exposures. The species has proliferated over wildlife habitat and in agroforestry practices
the past 50 years due to land conversion, for shelterbelt and windbreak plantings.
overgrazing, land abandonment and fire
suppression. Many landowners have a
negative view of eastern redcedar, perceiving
it as an invasive weed species, often chained,
bulldozed and burned. As the resource has
spread and increased in age, its utilization
and value in an array of products has become
more widely recognized. The red, heartwood
of eastern redcedar logs contains secondary
metabolites or "oils" that possess the qualities
to resist and/or repel insects and decay. 1 Suszkiw, J. 2000 Termites go hungry on resistant trees
USDA ARS News & Information,
Eastern redcedar wood is used by builders
www.ars.usda.gov/is/pr/2000/001012.htm
and homeowners because of its durability, Meissner H.E. and Silverman J. 2001 effects of
beauty, fragrance, resistance to insect aromatic cedar mulch on the Argentine Ant and the
Odorous House ant (Hymenoptera: Formicidae), J.
infestation and decay, and ease of
Econ. Entomol. 94(6): 1526-1531

University of Missouri Center for Agroforestry
PROJECT DESCRIPTION 7

We surveyed the value chain, from raw material and determined the factors that influence
producers to wholesale and retail outlets (Fig.1) entry into the redcedar market, the
and determined who the eastern redcedar market characteristics of the value chain, the relative
participants are, the array of products that are power of the value chain participants,
currently being marketed and the supply and potential substitutes for eastern redcedar and
demand trends. To better understand the market, the level of rivalry in the market.
we analyzed the forces that drive competition

Private Landowners
Timber Buyers/Brokers (log
contractors, etc. )
Loggers
Primary Manufacturers (sawmills, shavings or mulch producers, etc.)
Secondary Manufacturers (lumber companies, parts manufacturers,
novelty producers, essential oil producers etc.)
Wholesalers/Distributors
Retailers (pet and farm supply, craft markets, home improvement stores
Internet sales, etc.)
Consumers (private individuals, building contractors, etc.)

Figure 1: Redcedar value chain participants

University of Missouri Center for Agroforestry
RESEARCH METHODOLOGY 8

To identify the forces within the redcedar Porter’s Five Forces Model2 was used to
market we developed a three-step research develop and analyze both the mail survey and
methodology. the phone survey.
In the first step we identified the market
participants using available secondary
information from the internet, Missouri
Department of Conservation data on the wood
products industry, knowledgeable university
colleagues, private forest consultants, and initial
contacts with businesses in the redcedar
industry. We developed a database of
companies participating in the redcedar market
listing basic identification information
(company name, contact person, address, phone,
fax, email and web site address), types of
products purchased and sold.

In the second step we developed a
questionnaire-based survey that was mailed to
the 187 companies identified. Fifty-eight
surveys were returned. Based on these surveys
we created a quantitative picture of the five
forces acting on the redcedar marketplace.
Analysis of the results from the mail survey
guided the development of a more qualitative
phone survey.

The third step in the research process was based
on a set of phone interviews administered to a
sample of the respondents that completed the
mail surveys and agreed to participate in the
follow up phone interview. Interviews were
conducted using a semi-structured questionnaire
with more open-ended questions. We conducted
25 interviews with managers and
owners/managers of small, medium and large
businesses in the redcedar market. With the
respondents’ permission, the interviews were
recorded, transcribed and analyzed by the
research team. Confidentiality was protected in 2 Porter M. 1980 Competitive Strategy: techniques for
analyzing industries and competitors. The Free Press,
all surveys.
New York

University of Missouri Center for Agroforestry