PROFILING EXISTING MARKETS: THE ILLINOIS SECONDARY SOLID WOOD PRODUCTS INDUSTRY.

JOHN E. PHELPS [+]

ABSTRACT

A strong economy has renewed interest among primary wood producers in Illinois to increase their visibility with the state's secondary forest products industries. A marketing survey was conducted in the spring and summer of 1998 to: 1) determine

the origin of wood used by the Illinois secondary solid wood products industry; 2) gauge how frequently environmental concerns are expressed by customers served; and 3) assess plans for expansion by these Illinois firms. A stratified sample of small, medium, and large companies was randomly selected. Out of an initial mailing of 380 units, 133 completed, usable questionnaires were received for an effective response rate of 39.12 percent. Thirty-seven firms that did not respond to the initial or follow-up mailings were contacted by phone to address non-response bias. The results of this study provide a profile of the Illinois secondary solid wood products industry. More than 62 percent of these firms sell direct-to-customer and more than 38 percent make all sales in I llinois. Yet, only 7 percent are sure that their raw material comes from Illinois. In addition, more than 65 percent of these firms say Illinois wood use is hampered by chronic problems that stem from lack of availability or lack of a supplier. These findings will be used to develop new marketing partnerships and strategies for primary wood products industries in the state.

The Illinois secondary solid wood products industry consists of a diverse group of firms that manufacture consumer products including cabinets, furniture, millwork, and specialty items. These firms customarily have used wood (either in lumber form or in parts) from a variety of sources, most commonly determined by price and availability as opposed to origin [5]. When surveyed in 1983, it was estimated that 1,750 firms used more than 559 million board feet of lumber, two-thirds of that lumber being hardwoods. However, only half of the hardwood lumber was purchased from within Illinois [5].

Anecdotal evidence suggests that in-state secondary manufacturing firms are still unaware that Illinois hardwoods are not only readily available, but comparable in quality to wood purchased from other states. An improvement in source awareness on the part of secondary manufacturers can lead to potential partnerships with timber producers, buyers, and sawmills in Illinois.

Successful partnering relationships in business marketing develop when independent firms share compatible goals, strive for mutual benefit, and acknowledge a high level of interdependence [16]. Disconnected linkages between producers, suppliers, and manufacturers, however, characterize forest products industries in Illinois. Primary producers and suppliers must become familiar with the present business practices of secondary manufacturers before Illinois, or any state with similar resource structure, can restore linkages and foster synergistic relationships in its forest products industries.

This article reports the results of a study designed to profile the Illinois secondary solid wood products industry and to characterize these firms in terms of knowledge of raw material origin, "green" consumer inquiries, and plans for expansion. This study is part of a larger outreach effort by the Illinois Council on Forestry Development to help the state's primary wood products industries locate new market opportunities and develop appropriate marketing partnerships and strategies [5].

LITERATURE REVIEW

A strong economy has renewed interest among primary wood producers in Illinois to increase their visibility with the state's secondary forest products industries. To secure market competitiveness as well as visibility, primary wood producers need to form cooperative relationships with secondary manufacturers and their suppliers (16). The marketing literature supports the contention that multiple partnership formation (e.g., with customers, suppliers, distributors, and other associated firms) is central to achieving a competitive market advantage [6,12,16,19].

Before this potential for partnerships can be realized, however, a better understanding of existing markets must be developed. In a study of the Louisiana secondary solid wood products industry, Vlosky et al. [17] identified existing consumer market trends, raw material availability and applicability, target market identification, recruitment and retention strategies, and sources of competitive advantage as issues that must be researched and understood prior to expansion and development. In 1995, the Louisiana secondary wood products industry lagged behind the primary industry in total sales [17]. A reversed situation was reported in Illinois where in 1996 value-added by manufacture was $1,010.3 million in the secondary wood-using industry and $574.4 million for lumber and miscellaneous primary wood products [14].

A previous study of the nationally ranked furniture manufacturing industry in Mississippi found that the relative availability of wood-based raw materials from in-state sources had contributed greatly to the industry's success [2]. In a nationwide study, Vlosky [15] found that secondary hardwood manufacturers rated product availability the most important reason for out-of-state raw material purchases. The second and third rated reasons were better prices and product quality. If Illinois secondary wood products firms are indeed buying raw materials out-of-state, opportunities exist to capture additional value added to the state's hardwood resources by actively improving distribution channels.

A contemporary strategy for forming potential partnerships with customers involves support for forest products environmental certification programs. At present, only a small percentage of secondary solid wood product manufacturers nationwide are involved in the purchase or manufacture of certified wood products [9]. Niche markets for certified wood products have emerged, however, and continue to demonstrate great potential for growth [7,9].

METHODS

SAMPLE DESIGN

A questionnaire was mailed to 380 Illinois secondary solid wood products manufacturing firms in the spring and summer of 1998. Two follow-up mailings were conducted, as outlined by Salant and Dillman [11]. Secondary firms were characterized by the remanufacture of chips, lumber, veneer, plywood, and their by-products (as opposed to pulp and paper) into semi-finished and finished products [18]. Mailing addresses were obtained from an interactive manufacturers directory database on CD-ROM developed by American Business Directories [1], which allowed for sorting on the basis of size, state, and Standard Industrial Classification (SIC) code [8]. The sample frame consisted of the 2,196 Illinois firms identified in the directory by the following SIC codes: 2426 (hardwood dimension and flooring mills), 2431 (millwork), 2434 (wood kitchen cabinets), 2511 (wood household furniture, except upholstered), 2512 (wood household furniture, upholstered), and 2521 (wood office furniture).

As small firms represented 90 percent of the sample frame, a proportional stratified sample of small (1 to 49 employees), medium (50 to 99 employees), and large ([greater than or equal to] 100 employees) companies was randomly selected from each of the three strata. Of the 380 surveys mailed (to the attention of the general manager or CEO), 40 were undeliverable or no longer in business, which reduced the sample to 340. A total of 133 completed, usable questionnaires were returned for an adjusted response rate of 39.12 percent.

ESTIMATING NONRESPONSE BIAS

Nonresponse bias is a potential problem introduced by the low response rate often encountered in mail marketing surveys [9,15]. To estimate how nonrespondents differed from respondents, an additional follow-up survey was conducted by phone [10]. Thirty-seven firms, which had not responded to the initial or follow-up mailings, were randomly selected and contacted. Six firms indicated that wood was no longer the primary raw material in their manufacturing process, 21 cited lack of time as their reason for nonparticipation, 2 indicated they routinely refused to participate in surveys, 1 could not be contacted, and 7 agreed to be interviewed over the phone.

An estimate of nonresponse bias is provided by the following equation:

B=[W.sub.2] ([y.sub.1] - [y.sub.2])

where:

[W.sub.2] = the fraction of nonrespondents

[y.sub.1] = an estimate of the population mean for respondents, which comes from the mail sample of respondents

[y.sub.2] = an estimate of the population mean for nonrespondents, which comes from the telephone follow-up sample of nonrespondents [10]

Mean and modal responses from the telephone follow-up group (n = 7) were compared to those of the mail-back respondents (n = 133) for five test variables. If any difference between groups was detected, its significance was determined by the nonparametric Mann-Whitney U test for test variables with at least an ordinal scale (3). A p-value [less than or equal to] 0.05 indicated that the difference between respondents and nonrespondents was significant for the test variable.

DATA ANALYSIS

All data were entered and analyzed on a desktop computer utilizing the SPSS for MS-Windows, Release 8.0 statistical software package [13]. Univariate frequencies were used to calculate distributions of responses. Bivariate contingency table analysis and the Chi-square test statistic (p [less than or equal to]0.05) were used to analyze relationships between "green" consumer inquiries and a firm's interest in certification programs and to evaluate the relationship between firm size and reported plans for expansion [3].

RESULTS

INDUSTRY PROFILE

The Illinois secondary solid wood products industry uses both hardwood and softwood raw material with 36 percent of respondents (n = 133) using hardwoods only, 1 percent using softwoods only, and 63 percent using both. Over 72 percent of responding firms use a mix of processed wood inputs (e.g., dimension lumber, fully machined parts); an additional 20 percent purchase rough lumber. Figure 1 shows the various channels used to distribute the finished secondary products manufactured in Illinois. The majority of firms (62%) sold direct-to-customers with 38 percent making all their sales within Illinois. Eleven percent of Illinois secondary firms made up to 10 percent of their sales in international markets.

Illinois secondary operations were generally found to be small. Reporting firms (n = 96) were responsible for a total of 3,022 full and 381 part-time employees in 1997. The mean number of full-time employees was 31, the median was 7 individuals. Only 6 percent of reporting firms had 100 or more full-time employees. Fifty-five percent of firms (n = 133) reported total 1997 yearly sales less than or equal to $1 million; 8 percent of firms reported total 1997 yearly sales greater than $10 million (Fig. 2).

Knowledge of raw material origin was found to be limited (Fig. 3). Approximately 53 percent of respondents (n = 133) were unaware of raw material origin. Of the 47 percent of Illinois secondary wood products firms that knew the source of their raw materials, only 7 percent stated the state of Illinois (Fig. 3). When this group (n = 73) was asked why they purchased raw materials from out-of-state, 65.8 percent cited "lack of availability" or "unaware of a supplier" for Illinois wood (Fig. 4). A combination of the pricing, availability, and supplier answers was cited by 9.6 percent, while an additional 9.6 percent wrote that Illinois wood was of lesser quality. Buying from a wholesale yard or other supplier who did not offer information on origin was cited by 6.8 percent.

RESPONDENT/NONRESPONDENT COMPARISON

No significant differences were found between respondents and nonrespondents on four of five test variables. As nonrespondents contacted would not divulge their yearly sales figures over the phone, nonresponse bias on the fifth test variable (yearly sales) could not be determined. Firms of the nonrespondent group that agreed to participate in the telephone follow-up did not differ from respondents in terms of plans for expansion or knowledge of raw material origin. Nonrespondents were more likely to: 1) rank pricing and buying from a wholesale yard as their most important reasons for not using Illinois woods; and 2) report fewer full-time employees. The Mann-Whitney U test, however, indicated that differences between the two groups were not significant (p [greater than] 0.05).

PLANS FOR EXPANSION

More than 50 percent of respondents (n = 133) indicated at least some plans for future expansion; less than 5 percent felt that downsizing was imminent (Fig. 5). Of those firms with no plans for expansion, 48 percent wrote that this decision was due to being satisfied with their present situation. A two-way contingency table analysis was conducted to evaluate whether the three size groups of Illinois secondary firms differed in terms of their reported plans for expansion. Firm size and plans for expansion were not found to be related (p [greater than] 0.05).

Respondents were asked to rank a list of potential obstacles to growth according to their perceived level of importance (Table 1). No one factor was deemed of primary importance by a majority of respondents. The general business climate, federal tax structure, workman's compensation rates, and state tax structure were each indicated to be of some importance to 40 percent or more of responding firms.

ENVIRONMENTAL CONCERNS

The questionnaire included four hypothetical questions that secondary wood products firms might be asked by customers: 1) Is this product made of Illinois wood?; 2) What is the environmental impact of this product?; 3) Where did wood come from for this product?; and 4) What is the impact of wood use on the environment? Respondents were asked to indicate on a 4-point scale (1 = never; 4 = very frequently) the frequency with which they heard these or similarly worded questions. The mean frequency ratings of the four questions are shown in Table 2.

Two-way contingency table analyses were conducted to evaluate whether firms who were asked the four questions by their customers were more likely to consider participating in an Illinois-centered certification initiative. Interest in program participation was measured by three nominal categories (yes, no, maybe). Nineteen percent of responding firms (n = 98) replied "yes," they would consider participating, while an additional 53 percent indicated that they might. Having been asked the first three questions by customers was not found to be related (p [greater than] 0.05) to a firm's interest in certification programs. However, the frequency of having been asked the question, "What is the impact of wood use on the environment?" was found to be related (Pearson [[chi].sup.2] = 19.35,p = 0.004, Cramer's V = 0.317) to a firm's interest in participating (Fig. 6) in an Illinois environmental certification program.

DISCUSSION

Primary wood products industries in Illinois are interested in increasing their production capacity through expansion of existing markets. Arguably, convincing Illinois private forest landowners of a healthy market can lead to more landowner interest in proper forest management practices. In states like Illinois, where land ownership is dominated by small, private nonindustrial forest holdings, primary wood producers should promote expanded educational outreach about the relationship between stewardship and market potential.

The results of this survey characterize the Illinois secondary solid wood products industry as a market with untapped potential for using more of their own state's primary wood products. More than 50 percent of firms participating in the survey indicated at least some plans for future expansion. The mean volume of lumber use reported for 1997 was estimated at 753,000 board feet per firm, with a median value of 40,000 board feet. However, only 7 percent of respondents were sure that their raw material came from Illinois. More than 65 percent of firms reported that Illinois wood use was hampered by lack of availability or lack of a supplier. Long-standing distribution problems must be addressed before in-state primary wood products can capture a larger share of the Illinois secondary market (18).

New inputs, such as information about "green" consumer trends, also must become part of product positioning decisions. Illinois secondary wood products firms have begun to hear environmental concerns expressed by their customers. Related "green" inquiries still occur rather infrequently in Illinois (Table 2). A recent study to assess market potential for environmentally certified wood products in new homes built in metropolitan areas of the Midwest found that environmental concerns are still not a top priority among new home buyers (4). However, approximately 50 percent of study participants from Chicago did indicate that environmental certification of various building materials is important, with 36 percent of these home buyers indicating that they would have been willing to pay more for inclusion of certified lumber and wood products in their homes (4).

If national interest in environmental certification programs continues to pro-liferate (7,9), primary wood producers from Illinois and similar states will need to consider certification in order to differentiate their products in the marketplace. Innovative programs in which the timber on large numbers of small, nonindustrial private holdings is cooperatively managed and certified for sustainability will be necessary for Illinois forest products industries to take advantage of this opportunity.

The authors are, respectively, Assistant Professor and Professor and Chair, Dept. of Forestry, Southern Illinois Univ., Carbondale, IL 62901-4411. The authors wish to thank Darrell Rich, Rich Lumber Co., Beardstown, IL 62618, as well as Dava Shorb and Daniel Bray for their invaluable technical assistance. This paper was received for publication in June 1999. Reprint No. 9003.

(+.) Forest Products Society Member.

LITERATURE CITED

(1.) American Business Information. 1997. Business USA Database, 2nd ed. (CD-ROM). Desktop Marketing CD Div., American Business Information, Omaha, Neb.

(2.) Glaeser, M.A., S.H. Bullard, L. Doolittle, and P.H. Steele. 1992. Raw materials use by Mississippi furniture manufacturers, 1989. Res. Rept. 19. Mississippi Forest Prod. Utilization Lab., Mississippi State Univ., Miss.

(3.) Green, S.B., N.J. Salkind, and T.M. Akey. 1997. Using SPSS for Windows: Analyzing and Understanding Data. Prentice Hall, Upper Saddle River, N.J.

(4.) Gronroos, J.C.M. and J.L. Bowyer. 1999. Assessment of the market potential for environmentally certified wood products in new homes in Minneapolis/St. Paul and Chicago. Forest Prod. J. 49(6):28-34.

(5.) Illinois Council on Forestry Development. 1990. A long-range plan for Illinois forest resources, ICFD, Univ. of Illinois, Urbana, Ill.

(6.) Kalwani, M.U. and N. Narayandas. 1995. Long-term manufacturer-supplier relationships: Do they pay off for supplier firms? J. of Marketing 59:1-16.

(7.) Lyke, J. 1996. Forest product certification revisited: An update. J. of Forestry 94(10): 16-20.

(8.) Office of Management and Budget. 1988. Standard Industrial Classification Manual, 1987. Prentice Hall Information Services, Englewood Cliffs, N.J.

(9.) Ozanne, L.K. and R.P. Vlosky. 1997. Willingness to pay for environmentally certified wood products: A consumer perspective. Forest Prod. J. 47(6):39-48.

(10.) Pollock, K.H., C.M. Jones, and T.L. Brown. 1994. Angler survey methods and their application in fisheries management. Am. Fisheries Soc., Bethesda, Md.

(11.) Salant, P. and D.A. Dillman. 1994. How to Conduct Your Own Survey. Wiley & Sons, Inc., New York.

(12.) Simpson, J.T. and B.M. Wren. 1997. Buyer-seller relationships in the wood products industry. J. of Business Res. 39:45-51.

(13.) SPSS, Inc. 1998. SPSS Base 8.0 User's Guide. SPSS, Inc., Chicago, Ill.

(14.) U.S. Bureau of Census, U.S. Dept. of Commerce. 1998. 1996 Annual Survey of Manufactures. M96(AS)-3, Geographic Area Statistics. U.S. Government Printing Office, Washington, D.C.

(15.) Vlosky, R.P. 1996. Characteristics of U. S. hardwood wood component manufacturers. Forest Prod. J. 46(5):37-43.

(16.) _____ and E.J. Wilson. 1997. Partnering and traditional relationships in business marketing: An introduction to the special issue. J. of Business Res. 39:1-4.

(17.) _____, N.P. Chance, and J. Doucet. 1997. The Louisiana solid wood products industry. Forest Prod. J. 47(7/8):29-34.

(18.) _____, _____, P.A. Monroe, D.W. Hughes, and L.B. Blalock. 1998. An integrated market-based methodology for value-added solid wood products sector economic development. Forest Prod. J. 48(1l/12):29-35.

(19.) Weitz, B.A. and S.D. Jap. 1995. Relationship marketing and distribution channels. J. of the Academy of Marketing Sci. 23:305-320.

                Distribution channels (% of 1997 sales) of
                     Illinois secondary wood products
                         manufacturers (n = 133).
Distribution Intermediaries  1%
Catalog only                 2%
Combination                 30%
Retail/Wholesalers           2%
Home Contractors             3%
Customer Direct             62%
                         Total yearly sales (% of
                         companies by 1997 dollar
                            amount category) of
                          Illinois secondary wood
                          products manufacturers
                                (n = 133).
[greater than] $10 Million               8%
[less than or equal to] $1 Million      55%
[greater than] $1 Million - $5 Million  25%
[greater than] $5 Million - $10 Million 12%
                     Percent of respondents (n = 133)
                      with knowledge of raw material
                 origin (CN = Canada; P-R = Pacific Rim).
Origin of raw materials Percent of respondents
IL                                7.2
IN                                4.1
MI                                1
MO                                2.1
PA                                2.1
VA                                1
WI                                6.2
Mix - Not IL                     20.6
CN                                2.1
P-R                               1
Don't Know                       52.6
                   Reasons raw materials were purchased
                           out-of-state (n = 73)
Color           1.4
Species         2.7
Price           4.1
Wholesale Yard  6.8
Quality         9.6
Combination     9.6
Availability   24.7
No Supplier    41.1
                  Plans for business expansion (n = 133)
Will Downsize   3.1
None           38.1
Distant Future 20.6
Near Future    38.1
                           Obstacles to business
                             expansion ranked
                         by perceived importance.
                         Percent of respondents Percent of respondents
                           indicating primary      indicating some
                               importance             importance
General business climate          21.1                   22.1
Federal tax structure             11.6                   29.5
Lack of markets                   10.5                   20.0
Workman's compensation
rates                              9.5                   37.9
Interest rates                     3.2                   27.4
State tax structure                2.1                   40.0
Utility rates                      1.1                   26.3
Unstable supply of raw
material                           1.1                   17.9
Lack of information                0.0                   14.7
                         Percent of respondents
                               indicating
                             not important
General business climate          56.8
Federal tax structure             58.9
Lack of markets                   69.5
Workman's compensation
rates                             52.6
Interest rates                    52.6
State tax structure               57.9
Utility rates                     72.6
Unstable supply of raw
material                          81.1
Lack of information               85.3
                   Responding firms' ratings of customer
                        inquiry frequency (n = 98).
Customer inquires to responding firms    Mean frequency rating [a]
Is this product made of Illinois wood?           1.16
What is the environmental impact of this
Product?                                         1.44
Where did the wood come from for this
product?                                         1.74
What is the impact of wood use on the
environment?                                     1.56
(a.)Based on a scale of 1 to 4: 1 = never;
4 = very frequently.