BIG SKY, INC.: THE MAGASCO PAPER MILL (A) Big …...BIG SKY, INC.: THE MAGASCO PAPER MILL (A) Big Sky, Inc. Big Sky was an integrated forest-products company headquartered in the Northwest

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This case was prepared by F. B. Brake, Jr., under the supervision of Alexander B. Horniman, Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 1991 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 1/07.

BIG SKY, INC.:

THE MAGASCO PAPER MILL (A) Big Sky, Inc.

Big Sky was an integrated forest-products company headquartered in the Northwest with operations throughout the United States and Canada. Founded when two well-established lumber companies merged operations, Big Sky was a young organization by industry standards. The company manufactured and distributed paper and paper products, office products, and building products, and owned and managed timberland to support its operations. In 1990, Big Sky reported sales of $4.5 billion and earnings of $275 million. Paper and paper products accounted for $2.5 billion in sales and represented 70 percent of the company’s operating income and 55 percent of its revenue. Office and building products accounted for the balance.

During fiscal year 1990, Big Sky invested a company record of $750 million in the expansion, modernization, and improvement of its plants and facilities. The majority of these improvements were made at the company’s paper-manufacturing facilities. Most of these operations were located in the Pacific Northwest, the Southeast, and the Northeast. Because papermaking requires vast amounts of lumber, the majority of Big Sky’s paper mills were located in rural timberlands. Big Sky manufactured a broad range of products, including uncoated white paper for printing and general business use, newsprint and uncoated ground wood paper for the manufacture of such products as paperback books, coated paper for magazines and catalogues, containerboard used in the construction of corrugated containers, and market pulp that was sold to other manufacturers.

Paper operations at Big Sky were divided into two primary groups: P-Three and Plain Paper. The P-Three Division produced the three primary paper products—newsprint for publishing, linerboard for packaging, and marketable pulp. The Plain Paper Division produced all other products, including business forms, envelopes, and carbonless and copier papers.

This document is authorized for use only in EMBA Corporate Strategy May - July 2016 by Professor Jack Goodwin, Melbourne Business School from April 2016 to August 2016.

-2- UV0634 The Paper Industry

The practice of papermaking dates back to at least the third millennium B.C. when the Egyptians first recorded their activities on pounded papyrus stalks. Although not as ancient as papyrus, the basic process of changing wood chips into pulp and then drying and pressing the pulp into paper sheets has not changed much over the last several hundred years. By 1990, however, papermaking had evolved into a highly capital-intensive and technology-driven industry. As a result of the introduction of modern information systems and computer-aided manufacturing, papermaking was an increasingly efficient and sophisticated process.

Because of the nature of the extensive plant and equipment required to operate a modern paper mill, the cost structure of papermaking was heavily weighted toward fixed costs. In 1990 a single paper machine capable of producing 500 tons of paper a day was estimated to cost in excess of $500 million. The raw-material cost of timber and labor costs—the two primary variable costs—traditionally received little attention.

Historically, the papermaking industry had close ties to the lumber industry. In fact, many companies such as Big Sky were direct descendants of lumber companies. Because of the paper industry’s dependence on timber as a raw material, most paper companies were vertically integrated and owned or closely affiliated with timber operations in order to reduce their exposure to commodity price fluctuations. Culturally, the paper industry shared the Paul Bunyan mystique of the timber industry. Papermakers, like lumberjacks, were often characterized as “macho” and “tough, rugged individualists.” Because of the manual nature of the work, both industries were known for their high incidence of injury. The Occupational Safety and Health Act (OSHA), passed by Congress in the 1960s, cited the forest-products industry (including the papermaking industry) along with more celebrated industries such as meat-packing, as the focus of their early efforts to reduce work-related injuries and deaths.

Large organized labor groups such as the United Paper Workers International represented much of the industry’s work force. At some mills, workers in different industry trade groups represented workers in various functional areas—the machinists, who were responsible for performing the maintenance function, or the paper-machine operators. Over the years, these groups negotiated lucrative contracts for their members. In addition to wages that were comparable to those paid in the steel industry, the industry trade representatives negotiated for a number of concessions that were commonly found in the timber industry. For example, lumber companies and the saw mills they owned typically operated on a 40-hour workweek, closing on weekends and holidays. Because these operations were so labor intensive, this was considered an acceptable practice. Many union representatives at paper mills successfully negotiated similar “cold shutdowns” at their locations. Because of the high fixed costs associated with running a paper mill, however, this practice was extremely costly to the paper companies. One mill manager estimated that a cold shutdown for a three-day holiday weekend cost his mill almost $6 million.


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In addition to wage and benefit concessions, unions were very successful in negotiating for restrictive work practices that specifically defined individual work practices and job assignments. Restrictive work practices often precluded qualified personnel from performing tasks at different locations within the mill or on different mill machinery, regardless of the employee’s ability to perform the job. Management was often unable to deploy its work force efficiently as a result of these limiting practices. Mill managers regularly compensated for the inflexible nature of their labor agreements by hiring additional employees. Management tolerated many of the restrictive work practices and spiraling wage costs because the industry traditionally considered wage costs to be just a fraction of the total manufacturing cost.

Throughout much of the 1970s, demand exceeded supply in the industry, and papermakers were reluctant to close their mills over strikes for wage concessions they knew they would not have to absorb. A company executive addressing an industry gathering explained this logic:

From the mid-60s to the mid-70s, we found it much easier to simply let union representatives dictate conditions to us without offering much resistance, perhaps believing—or hoping—that things would correct themselves . . . . Often we were fairly certain that many of the conditions demanded—whether they related to work practices or wage and benefit rates—were not in the best interests of our operations or our employees long term, but it was simply easier, less hassle, to acquiesce to union demands and then simply pass on increased costs to the customer. We had a business environment that allowed us to do that.

By the late 1970s, however, the situation clearly got out of control. “We found ourselves in a

fight for the very lives of our companies—and the jobs of our employees,” said another executive. The industry faced increasingly stiff competition from foreign manufacturers, particularly from Scandinavia and South America. Most foreign manufacturers had substantially lower labor costs than U.S. papermakers and received assistance from their home governments in the form of subsidies and import restrictions.

Because demand for domestically manufactured paper products historically exceeded supply, most U.S. manufacturers traditionally operated at, or near, capacity. Many consumers accepted virtually any product shipped from the mill, so most manufacturers adopted a manufacturing philosophy based on quantity as opposed to quality. As a direct result of encroaching foreign competition, however, capacity throughout the United States was on the rise. For the first time in recent memory, supply exceeded demand. At the same time, foreign manufacturers were also introducing higher-quality products. Consequently, domestic consumers were increasingly demanding higher quality from U.S. manufacturers. As a result of increased industry capacity and the relatively low rate of annual inflation during the early 1970s, however, manufacturers could not pass along cost increases associated with the quality programs they needed to initiate in order to remain competitive. Industry profitability thus declined throughout the late 1970s.


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In order to increase efficiency and productivity, in the late 1970s and early 1980s, many companies attempted to introduce new, more relaxed work practices when bargaining with unions. As one industry executive stated, “We needed to be substituting more flexible work practices for antiquated work rules that, over the years, had virtually immobilized many of our operations in a web of inefficiency and lowered productivity.” Many industry observers were convinced that fierce foreign competition, increasing customer demands, rising labor costs, and restrictive labor practices would force many mills out of business.

In response to dwindling profits, more and more companies were willing to operate mills during strikes, a practice long avoided by the industry. In some extreme cases, when striking employees refused to return to work, they were replaced. Despite these apparent hard-ball tactics, most experts agreed that concessions would be required of everyone; something serious had to be done. In response to critics who claimed that the paper companies were just trying to drive out the unions, one industry veteran offered the following response:

None of these tactics were meant to bust the union, as some would suggest. Rather, they demonstrated our increased willingness to maintain commitments to our customers and to the communities who depend on the successful operation of our facilities.

The Magasco Mill

The Magasco Mill, a member of Big Sky’s Alpine Division, was located in an area known as Texarkana, where the borders of Texas, Arkansas, and Louisiana converge. Because of the proximity of vast pine groves and a temperate climate that accommodated accelerated tree-growing cycles, it was ideal for papermaking. Opened in the early 1970s, Magasco was one of the first mills actually built by Big Sky; most of the company’s other papermaking operations were acquired through mergers and acquisitions. Magasco was equipped with the latest technological innovations, including three cutting-edge paper machines capable of producing in excess of 1,500 tons of newsprint and linerboard each day.

When plans for the Magasco Mill were originally announced, Big Sky said that it intended to

introduce state-of-the-art management practices at the new facility. The hope was that the de novo effort would enable managers to introduce new work practices free from the influence of established cultures found at facilities purchased by Big Sky. The company hoped Magasco would serve as a model for other company mills as well as for the rest of the industry.

While many other new mills in the South discouraged the formation of unions at their mills, Big Sky actually invited organized labor into the Magasco Mill. It anticipated that this action would foster a cooperative environment and reduce the possibility of future conflicts between labor and management.


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None of the approximately 500 skilled laborers, all of whom were represented by the Amalgamated Paperworkers Union (APU), or the 150 managers and engineers was required to use a time clock. Management perceived the absence of a time clock, a symbolic gesture, as a token of trust between management and labor. The concept of “multicraft” was also introduced to provide flexibility in the maintenance functions. Multicraft required each employee to be skilled in and perform multiple tasks rather than focusing on distinctly-defined job functions. At the time, these practices were considered revolutionary by industry standards.

Magasco, like most other papermaking operations at the time—in an environment where demand exceeded supply—was profitable even in the start-up years. The fact that the mill opened in the middle of a recession had little impact on its initial performance, but despite early financial success, little headway was made with management’s institution of what some observers considered the most progressive work practices in the industry. After five years of Magasco operation, it was clear that despite a contractual agreement between the APU and management, a functional craft distinction had evolved and the multicraft initiative had failed. Time clocks also appeared, at the APU’s request. The union claimed that without time clocks its members were not being equally compensated for overtime.

As was the case at many other mills, management found complying with labor’s demands to be easier than following through on its own initiatives. And despite hopes for a mutually cooperative work environment, an adversarial relationship between labor and management soon emerged at Magasco. The mill quickly developed a reputation within the industry as a labor-relations nightmare. This reputation partly stemmed from a much-publicized strike at Magasco in the early 1970s.

The primary catalyst for the strike was management’s reluctance to grant further concessions in the area of restrictive work practices. There was so much violence at the mill during the strike that a judge issued a permanent restraining order restricting picketing activities from anywhere within sight of the mill gate. As one employee said, “This place had a reputation in the industry as the Alamo.... It was a place you were sentenced to.” Another employee related an incident in which he was introduced to a group of executives from competing mills at an industry gathering, and when it was announced that he worked at Magasco, the group erupted in laughter.

In addition to continued labor strife, the Magasco Mill faced a number of other challenges during the late 1970s. As a company, Big Sky, like many other major corporations, adopted a corporate strategy of diversification during the 1960s. Before long, the company found itself managing operations ranging from South American cattle ranches to Caribbean cruise lines, in addition to its core businesses, the paper operations. Operations at Magasco were largely ignored by corporate staff throughout this period, as more attention and resources were directed toward the company’s other businesses.

As a result of the declining profitability of the paper industry (as well as a number of its diversified holdings), Big Sky experienced dire financial problems in the mid- to late 1970s. In an attempt to save the company from financial ruin, executives at corporate headquarters exerted


-6- UV0634 significant pressure on individual operating units. As a result, mill managers throughout the company were forced to surrender much of their autonomy.

Not surprisingly, Magasco experienced a tremendous amount of management turnover

during this time. Some Magasco veterans claimed that the only constant at the mill was the arrival of the union representatives who sat down at the bargaining table every three years to negotiate a new contract. As one longtime employee said, “There are a lot of management teams buried in this mill.” The high attrition rate in the managerial ranks at Magasco was widely known not to necessarily be linked to the quality of mill managers. “It was,” as one employee said, “as if they were facing insurmountable odds.”

Throughout the late 1970s and early 1980s, management attempted to introduce a number of new initiatives and mandates. The APU, however, was extremely reluctant to comply with any of the initiatives, because the union understood the short-lived nature of most of management’s proposals. Many employees shared the following story: As soon as a change would be made at the mill, a Big Sky corporate jet would fly over the plant carrying a representative from headquarters. It would land at the small municipal airport outside of town, and before the plane took off at the end of the day, the change would be reversed.

The mill’s problems during the late 1970s and early 1980s were not solely financial. Despite the presence of safety procedures—warning signs and posters located throughout the facility promoting safe work practices—the mill had a dismal safety record. Two people were killed at Magasco in industrial accidents in one year, and every year a number of others were disabled so badly they could not return to work. As one employee said, “It wasn’t a big deal for any number of people to be so severely injured that they never came back to the mill after being hurt on the job.” In addition to the tremendous pain and suffering incurred by the injured employee and their family, these accidents directly influenced the mill’s financial performance. Under state workman’s compensation regulations, Big Sky could be required to set aside as much as $300,000 immediately following an accident for future payment to a disabled employee. “Times, They Are a Changing”

Jock Duncan joined Big Sky as the director of human resources at Magasco a few months before the mill management was set to negotiate its three-year contract with the APU in the summer of 1983. Duncan came from the chemical industry, where he had nearly two decades of experience in human resources. Initially, he was surprised by the restrictive nature of the work practices in the paper industry. He quickly concluded that relations between management and union employees at Magasco were adversarial at best. “The work force here at the mill was much more compliant than those in the chemical or petroleum industries at that time,” Duncan later recalled.

Duncan was disturbed by the assumptions made by management and labor about the role hourly employees should play in the work place. He knew these assumptions were the result of years of behavioral observation and reinforcement. As illustrated in Exhibit 1, in a mutual


-7- UV0634 compliance organization such as Magasco, management, based on behavioral observations, assumed employees were antagonistic and apathetic. Systems and work technologies were eventually developed on the basis of these assumptions. This approach often resulted in fragmented work assignments and constant supervision by management. Employees, perceiving management as adversarial and distrustful because of the work practices instituted, often responded by exhibiting apathetic and antagonistic behavior, thereby reinforcing management’s original supposition.

Despite Big Sky’s original expectations, by the time of Duncan’s arrival, the Magasco Mill, along with most of the company’s other facilities, was characterized by poor labor relations and hazardous working conditions. The mill was also losing nearly $35 million a year. Magasco’s newsprint machines were operating at just over 80 percent capacity, and the linerboard machines were producing at just over 90 percent of total capacity. As a result of increased competition and increasing capacity, the market price of the mill’s paper fell at a rate of nine percent a year, while its total manufacturing cost per ton increased by nine percent. Duncan and the other senior members of the management team believed that the mill’s survival hinged on the successful introduction of some significant changes at the upcoming labor negotiations.

The distinct work assignments that developed over the years as a result of various management teams’ reluctance to aggravate the labor force put a choke hold on the mill’s ability to produce paper efficiently and affordably, particularly in the face of foreign competition. Management concluded that more flexible work practices had to be introduced. While recent labor agreements had clearly-defined step-by-step job descriptions and work assignments for the APU members at the mill, Duncan and the other managers proposed new language that provided management with greater discretion in defining and assigning work. Duncan knew from past negotiations that a change in wording from one contract to another of this magnitude was serious enough to instigate a walkout.

In order to facilitate the change to a more flexible work environment, management planned to introduce the team concept. This approach was a radical departure from the mill’s traditional work assignments and was reminiscent of the multicraft concept originally introduced at the mill nearly a decade earlier. In the team approach, the mill would be divided into three primary functional areas: the paper machines, the pulp mill, and the wood yard. Before, each area had between 10 and 15 individual jobs, but these jobs would be divided into three or four clusters or teams consisting of three to four jobs. Teams of employees would be assigned to a cluster, and each employee was to perform every job in the cluster on a rotating basis. This process broadened the skill base of employees and provided management with greater flexibility in developing work assignments.


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The rationale for introducing the team concept was described in the proposed contract as follows:

The team concept is designed to improve the efficiency and competitive position of the mill [by] providing for the flexible utilization of production and storeroom personnel. The elements of the team concept are considered essential to the survival of the mill.

Mill management was acutely aware of the sensitivity of the proposed changes but believed

that a crisis situation was happening and that without great change, the mill could go under. Duncan noted, “We knew we were introducing a tremendous amount of change, but it had to be done.”

In an attempt to alleviate some of the anxiety regarding the proposed changes, management assured the APU that no union jobs would be threatened as a result of the introduction of the team concept. In the preamble to the proposed labor agreement, management included the following statement: “No current employee will lose his employment or suffer a reduction in his wage rate due to the implementation of the team concept....” The Walkout

Unfortunately, it came as no surprise when the APU representatives recommended a walkout at the beginning of the talks. “Change requires loss,” said Duncan, a key figure in the negotiations, “and the union representatives realized that they were being asked to make sacrifices—sacrifices they felt they could not make.” While the union members walked out of the mill, management was determined to keep the mill up and running. For what might have been the first time in industry history, the salaried staff of a paper mill actually took over running the paper machines.

In the weeks leading up to the contract negotiations, Duncan and the other members of the staff prepared for the logistical nightmare that would follow in the wake of a walkout. In order to keep the mill operating, Big Sky was prepared to keep the production facilities fully staffed. Big Sky set up a camp on the mill property, and salaried employees from throughout the company came in on commercial airlines as needed in order to meet the mill’s production schedule. One participant likened the experience to a military airlift.

In another break with tradition, management made every effort to keep all employees, including those on strike, as well as the community, abreast of the ongoing negotiation. In the past, Magasco left it up to the union to keep its members informed. This time, however, management wanted to ensure that everyone knew what was happening. In addition to establishing a hotline that any employee could call to get daily updates, mill management worked closely with the press to keep the community informed. As managers of the largest employer in the surrounding three-county area, Magasco Mill management also met regularly with community and business leaders to keep them up to date with the situation.


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About a month into the strike, when little progress was being made and both parties were deadlocked over the proposed changes in the contract, federal mediators who were overseeing the negotiations announced that the talks were at an impasse. Management developed a replacement strategy.

In accordance with its contingency plan, mill management began interviewing prospective applicants to replace the striking workers. Because the country was recovering from a recession, there was no shortage of qualified applicants from which to choose. Unemployed papermakers drove from as far away as Ohio and Maine to be processed. Throughout this time, tensions rose as some of the striking employees realized they might soon be replaced. Acts of violence and harassment, including instances of gunfire, were reported at several of the assessment centers Big Sky established around Magasco for the processing of applicants. Several incidents were captured on videotape. The situation became so charged and received so much attention that the site was visited by the FBI and the Bureau of Alcohol, Tobacco, and Firearms.

Despite these incidents, management was determined to keep the mill running and it continued to process applicants. Finally, Big Sky announced that it would implement all changes outlined in its proposed labor agreement during the first week of November, two months after the contract was originally proposed, and any striking employee who wished to return to work at that time would be welcomed; those who did not would be replaced.

The day before the changes went into effect, the office of the governor-elect contacted the mill. He had strong ties to labor and felt a moral obligation to lend his assistance—asking Big Sky to delay action for 24 hours while he personally attempted to resolve the situation. Big Sky agreed to postpone its initiative, but informed the governor-elect that it would not agree to any concessions and would institute the changes as outlined in its original proposal regardless of the outcome of his discussions. To the surprise of many observers, the governor-elect reached an accord with the union and informed Big Sky that the striking employees would come back to work with no conditions. They accepted the originally-proposed labor agreement, including the contested team concept.

Despite the governor-elect’s assurances, when Duncan and the rest of the negotiating team met with the APU representatives to ratify the contract, the APU suddenly demanded a condition. Specifically, the union asked for amnesty for the employees captured on videotape during the conflicts that erupted at the processing centers. The mill manager was furious with the APU’s lack of good faith. He was not going to begin bargaining at that point, and he informed the governor-elect that the union representatives did not follow through on his promise. The governor-elect responded with tremendous disappointment and told management to do what it had to do.

During the strike, a phone bank was established at the mill to inform applicants of Big Sky’s decision to hire them as replacements in the event an agreement between Big Sky and the APU could not be reached. After the meeting broke up in downtown Magasco, Duncan drove out to the mill to initiate the replacement process. When he arrived at the mill and gathered the team, he was informed that the union representatives changed their minds and would not request any concessions.


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The news hit Duncan like nothing he ever experienced. Now what would he and the mill manager do? Was it possible to really create a “new Magasco mill?” Was it possible to transform all the negative energy that was focused on the strike to building a totally different organization? These questions and what seemed like hundreds of other ideas flooded his mind. What was possible? How should the journey start?


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BIG SKY, INC.: THE MAGASCO PAPER MILL (A) Big …...BIG SKY, INC.: THE MAGASCO PAPER MILL (A) Big Sky, Inc. Big Sky was an integrated forest-products company headquartered in the Northwest