This is the third in a series related to the threat of substitutes based on from research in the structural panels industry. Part I introduced the sector and core themes, and Part II described the power of effective cost controls as a barrier to substitutes.

Lesson Two: Competitive Cost Positions Rely on Investments in Technology

Technological obsolescence undermines the sustainability of a low-cost strategy. Both the development of substitutes and protection from substitution in commodity businesses rely on investments in technology and processes. Generally, we lower costs through improved efficiency or scale, or through lowering energy, labor, or wood costs.

Again, the history of structural panels provides examples. Consider the introduction of non-veneer panels such as waferboard and oriented strand board (OSB). A precursor to OSB, waferboard bonds layers of rectangular wood flakes in random patterns, which simplified manufacturing and lowered raw material costs. [Wood chips for waferboard cost less than grade logs for plywood.]

However, waferboard itself succumbed to its cousin, losing market share to the structurally superior OSB, which “orients” the wood chips in layers at 90 degrees to each other. In a simplified summary, waferboard competed with plywood on price, and then OSB competed with waferboard on performance.

Technology also provides threatened products with recourse. While the non-veneer panels enjoyed cost advantages of up to 30% in the 1970s (Sinclair 1992), plywood developed its own technologies in the 1980s that reduced production costs. The plywood industry in North America continued to lose market share, but stabilized its position around 2009 following the Recession, holding production levels as log prices remain low on a historic and real basis.

From a forestry perspective, the story of substitution features tradeoffs. Persistent improvements in manufacturing technology effectively lower the per-unit value of trees destined for commodity forest products. However, the resulting increases in efficiency also reinforce strategic barriers against non-wood substitutes and imported competitors.

In addition, we can tell a growth story when considering the ability of forest products to substitute for others. Renewable paper bags versus ocean-polluting plastic bags. Wood pellets versus coal. CLT and mass timber versus energy-intensive steel or concrete. Substitution cuts both ways, and the forest industry has tremendous points of leverage with respect to dealing with the threat of substitutes from outside of the industry.