February 2010, rev June 2010

New Leaf Paper: Paper with a past, and a future1

New Leaf Paper co-founder and chief executive Jeff Mendelsohn concluded his comments at the Skoll World Forum with a direct message: I founded New Leaf Paper in 1998 as an idea: That through business we could transform a major industry that is one of the most polluting industries in the world. So from day one the mission statement is to inspire through our success a fundamental shift towards the sustainability in the paper industry. (2010) NEW LEAF PAPER ORIGINS, VISION, AND PRAGMATICS New Leaf Paper appeared in 1998. The animating vision: A sustainable paper industry, what some skeptics initially called pulp fiction. New Leaf put forward a bold vision in a venerable but environmentally-costly industry. Mendelsohn recognizes the reasons why incumbent industry leaders with low margins, a commoditized international market, and huge capital investment in the status quo, [paper companies] resisted efforts to integrate sustainable principles into their business practices.1 Ten years on, New Leaf Paper is recognized as a leader in the development and distribution of environmentally superior printing and office papersrecognized for eco-preferable papers designed specifically to meet the needs of today's printers and consumers seeking to use premium papers with the lowest environmental impact without sacrificing cost and quality. 2 Most of the New Leaf papers have very high recycled content and are Forest Stewardship Council (FSC) certified and Ancient Forest Friendly. In addition, all are manufactured with electricity that is offset by Green-e certified renewable energy. New Leaf Paper is a national supplier with employees in six U.S. locations. "We're much larger than any other environmental paper company, and we have a much larger range of papers," says Mendelsohn, "and therefore a much greater responsibility to our customers and to the environment." New Leaf practices socially responsible business, including sustainable company operations, energy conservation, and being a people-friendly workplace.3 "Our philosophy has stayed the same," Mendelsohn says. "We believe that how we do business is as important as what we do. We chose saving forests, but we could have chosen energy conservation, organic food, or other green business."

Dr Marc Ventresca and Dr Meng Zhao prepared this case to encourage debate and discussion on issues of technology and innovation strategy, ecosystem innovation, and ethical enterprise. We acknowledge research support from the Pears Foundation (London UK) in partnership with Skoll Centre for Social Entrepreneurship, University of Oxford. Special thanks go to Jeff Mendelsohn and the New Leaf Paper team and to Pamela Hartigan. Research colleagues and others contributed unique value: Grace Augustine, Paul Carlile, Matt Grimes, Tim Hallett, Frank Hajek, Carol Leonard, Afua Osei, Rafael Ramirez, Frederica Strickland, and Louise Ventresca. 1
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New Leaf Paper puts vision at the core of a distinctive approach to business that embeds its social and environmental values into every product line and every business relationship. Our goal is not to dominate the paper industry. It is to change it in basic ways from consumer expectations through to mill design and the technologies for producing paper [I] envision a day when people would have to pay a premium to buy paper made from trees instead of from recycled paper. 4 When that day comes, Mendelsohn expects to be at the forefront of the industry, with sales "most likely in the hundreds of millions, if not more.'' Right now, however, New Leaf is a gnat in a business ruled by elephants...5

THE GLOBAL PULP AND PAPER INDUSTRY The contemporary pulp and paper industry is a global industry. Very large firms dominate the industry primarily from North America (United States, Canada), northern Europe(Finland, Sweden) and East Asia (such as Japan). Australasia and Latin America also have significant pulp and paper industries. Both India and China are expected to [lead] in the industry's growth over the next few years.6 Total sales of the PwC Top 100 firm were $357 billion in 2008, up from $333 billion in 2007, with the increase due mainly to the appreciation of the Euro against the US dollar. The 20 largest companies account for over 55% total salesin recent years.7 See Exhibits 1 and 2 for recent industry trend data on production, turnover, concentration, and other basic data. 8 The industry supply chains reach from the acacia forests of Indonesia and forests across Scandinavia and Russia to the fast-growing Eucalyptus farms in Latin America and China; to multinational producers of the chemicals and bleaches used in standard manufacturing processes, to the machine tool manufacturers that provide precision cutting, binding, and packing machinery and to the mega-mills in North America, China, and elsewhere that transform pulp into paper; and to wholesale distributors around the world, bulk purchasing for large public agencies and retail operations like Office Depot and the myriad industrial and consumer uses of paper. Industry inertia and change The industry began to change in consequential ways in the 1990s. The modern period of the global industry is marked by key restructuring led by unprecedented mergers and acquisitions. The Finnish firm Enso (founded 1872; annual sales 4.9 bn; 19,900 employees) and the Swedish firm Stora (founded 1288; annual sales 5.1 bn; 20,400 employees) announced their intention to merge in June 1998. This was the first large-scale cross-border merger in the paper and pulp industry and for many observers, it was an unthinkable union. On the one hand, these Finnish and Swedish paper companies had traditionally been arch-rivals. On the other, Stora, owned by the Wallenberg family, and the state-owned Enso appeared to be a strange match. After lively public and regulatory debate, the merger won the support of the Finnish parliament, which was necessary due to the states holding in Enso. The EU Commission approved the merger in November 1998.The merger was a pioneering case, followed by a wave of cross-border mergers and acquisitions between the leading Finnish, Swedish, and American corporations in 19982000. 9
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Many of the large firm paper producers, responding to tougher environmental laws and the threat of litigation, are changing basic practices in manufacturing. But current practices and supply chains often shape the capabilities of firms in these processes of transformation. [The result is worth noting]: The transformation of a manufacturing process that was once a blight onwater and air into abackdrop to the ecological landscape. "[In the 1970s] the rivers ran black and fish kills were a common event," said John Ruston, a paper industry specialist at the Environmental Defense Fund. Most mills have ended most pollution that can be seen or smelled and have cut unseen but environmentally damaging waste by 80 to 90 percent. Regulations were the prompt for corporate action at first, but more recently some companies have made environmental performance a competitive tool. "The best companies have found a way to integrate the environment in their investment decision making," Mr. Ruston said. "They have found ways to use less water, less energy and still increase production, which is a competitive advantage."10 Fast forward to 2005-2010: Insider executives and experts, along with industry commentators now regularly acknowledge that the industry needs to explore new ways of doing business in addition to the fundamentals of reducing costs and expanding markets. 11 Issues, topics, and controversies at the annual Pricewaterhouse Coopers Global Forest and Paper Industry Conference track these developments. In the 2007 plenary session, When Worlds Collide, panelists recounted the shifting balance of world trade in forest and paper industry. The traditional US and European market dominance is being eroded by the increasing capacity and demand of emerging countries, along with the impacts of globalization, the imbalance in employment practices, increasing commodity prices, inflation and exchange rates. Stora Ensos Hannu Ryppnen explained how customer and stockholder demand for action on climate change is driving change in the forest and paper industry. Mr. Ryppnen described the concept of the bio-refinery that optimizes all the components of the tree for multiple uses.12 Panelists at the 2009 PWC-sponsored industry conference agreed that the opportunity exists to revitalise the forest industry and its competitiveness by making use of technology and abundant forest resources for the production of forest and paper products and other bioproducts in an environmentally conscious manner, thus enhancing sustainable economic development. Panelists called for new technology and the advent of new industry entrants to help existing producers weather the financial storm. They identified competitiveness policy issues including bioenergy mandates, climate change, increasing energy supply, tax policies, green procurement for wood and paper products, and recycling.13

THE PULP AND PAPER INDUSTRY VALUE CHAIN Papermaking involves three core activities: Fiber sourcing, manufacturing, and distribution. Value creating activities of firms (and industries) comprise an interdependent chain of activity from procuring raw materials and inputs, through the various incremental transformation that add additional value in sequence, through the direct contact with consumer markets, and then post-transaction services.14 The distinctions along the chain are industry- and firm-specific, but make it possible to evaluate relative costs and configurations of the activities in each segment of the chain. Defining and managing the value chain provides a way to identify efficiencies and also to explore opportunities to innovate the process.
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Fiber sourcing The cellulose and paper industry uses around one third of total global production of wood and this proportion is increasing. Two thirds of the fiber used to make paper comes from virgin wood fiber and the rest comes from recycled, waste, and other fibers. Between 5 and 10% of the derivatives of the cellulose are produced based on fibers that do not come from wood.15 Eucalyptus is today most widely used tree by the paper industry as raw material for the production of cellulose. Fast-growing eucalyptus trees have made Latin American pulp more competitive than northern hemisphere pulp. Eucalyptus is a relatively recent addition to the global pulp stock, challenging traditional sources of birch pulp from Scandinavia and Russia and overtaking indigenous forests in Asia and the Pacific. Glitnir analyst Olli Joutsimo said "The eucalyptus train took off 10 years ago, and European companies have been slow to get on board."16 The recent prominence of eucalyptus as the primary source of cellulose is controversial for many issues. These illustrate the challenges confronting sourcing of original wood fiber. For example, ArborGen, a subsidiary of International Paper and MeadWestvaco, has petitioned to plant over a quarter of a millioneucalyptus trees in test plots across seven southern U.S. states. This proposal has been met with considerable controversy, including a rare coordinated letter of concern from the largest and most respected North American environmental organizations. "If these invasive GE [genetically-engineered] eucalyptus are planted across the South on this large of a scale, it is highly likely that fertile seeds will escape into surrounding forests," said Dr. Neil Carman, a plant scientist with the Sierra Club. "This is a major problem since eucalyptus is already known for its invasiveness. Once they escape into the forests, there is no way to call them back."17 The transgenic features of these new forests pose additional controversy. Natural eucalyptus pulp has roughly equal proportions of cellulose to lignan. How to improve the yield of cellulose relative to lignan is a key research topic. Nippon Paper Industries' research, for example, aims at blocking genes that adjust various stages of lignin synthesis, and its output is a genetically modified eucalyptus that produces less lignin and more cellulose, thus yielding 5% more pulp. Mitsubishi Paper Mills has developed a recombinant eucalyptus that comprises 14-16% less lignin, expecting to yield 10% more pulp, while Oji Paper focuses on facilitating removal of lignin during the pulp-making process to cut manufacturing costs and also to reduce the amount of bleaching agents needed for pulp production. The geographic scope of the plantations is also a source of debate. Oji Paper --Japans largest paper manufacturer-- owns a total of 200,000 hectares of fast-growing plantations overseas, distributed in Papua New Guinea, New Zealand, Australia and Vietnam. In 2000, Japans paper industry had some 140,000 hectares of plantations in Japan itself, and some 280,000 hectares abroad. By 2010, the area overseas is expected to reach 430,000 hectares, much eventually composed of genetically modified eucalyptus plantations. 18 Recycled, waste, and other fibers comprise a large area for exploration in the industry. Recycled paper has also grown into a major industry segment, linked first to social movements, then to large incumbent firms in waste management, and now increasingly to new firms at the edges of these traditional industry boundaries. 19 The focus on recycled paper products speaks to changing consumer preferences, technology innovation and improvements, and growing public and regulatory attention to environmental sustainability. Demand for recycled paper in the US is estimated to exceed
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supply by 1.5 million tons of recycled pulp per year within 10 years. Donna Harman, President and CEO of the American Forestry &Paper Association, says that Recycling is one of Americas great environmental success stories and the paper industry is proud to have played a central role in the significant growth in paper recovery in recent years.20 UK paper buyers report that 67 per cent have targets or plans to increase the proportion of paper products using recycled content in the future -- due to improved technology which has made recycled paper more reliable for office machines.21 But few well-structured industry segments deal with the other alternatives to virgin fiber. Fewer still provide solutions to the legacy system technologies of the industry mega-mills that make such alternative fiber courses difficult or inefficient to use. Manufacturing22 The industrial origins of modern paper manufacturing date from the early 19th century industrial revolution, though the history of paper making tracks back to 1st century AD China. The earliest recognizable (water) mills were established in the 10th and 11th centuries when paper began to replace papyrus, wood, silk and parchment as the cheapest and most widespread writing substrate. Paper mills still follow the basic principle of 19th century industrial model -- to locate near the source fiber -- typically virgin wood, and near plentiful water needed for standard production technologies. The modern paper mill technology uses large amounts of energy, water, and wood pulp in a complex series of processes to produce paper products for diverse uses. The Fourdrinier Machine is the basis for most modern papermaking and milling, used with only minor variations in the process architecture since the first patents in 1801 and 1803. 23 The Fourdrinier accomplishes the transformation of a source of wood pulp into a final paper product. There are four main sections in the Fourdrinier process: Wet end, Press section, Dryer process, and Calendar section (or pressing/smoothing). See Exhibit 3. Modern paper machines are very large and can be 500 feet (~150 m) in length, produce a sheet 400 inches (~10 m) wide, and operate at speeds of more than 60 mph (100 km/h). Metso and Voith are the two main suppliers of paper milling machines.24 The dominant design of mills has changed little over this period, despite a steady steam of incremental process improvements. The design of the mills reinforces certain kinds of production processes and makes it necessary to use particular chemical treatments. The vast majority of paper produced today is made in such mega-mills. Distribution The wholesale and retail distribution of office paper and related supplies is itself focused industry segment in most of Europe and North America. The industry is concentrated: In the US, the 50 largest wholesalers account for about 70 percent of segment revenue about US$55 billions. Big chains like Office Depot, buy products directly from manufacturers, but also buy specialty items from other suppliers. Many wholesalers service different market segments. Specialty papers are available through retail stores, catalogues, and internet.25 Greening the value chain Each link in the industry value chain today is confronted by basic questions of environmental sustainability. The industry overall is regularly rated poorly with regard to environmental damage. Environmental critics, visionaries, and increasingly industry
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insiders concerned with sustainability point to environmental worries that span the value chain in traditional paper manufacturing. Incumbent firms in the paper industry recognize this and are adopting and adapting novel practices. But the origins of these practices are to be found in a smaller set of challenger firms. These issues include: 26 Biodiversity loss Replacement of natural or primary woods by tree plantations The insufficient use of waste paper and fibers that do not come from wood The domain of large scale mills that have a great political influence The continuous use of chlorine as a bleach Insufficient research on alternative, cleaner production technologies High levels of paper use which are not sustainable, especially in rich countries Systems of paper recollection and exports of paper impact the way of living of paper collectors in poor countries Excessive demand of transport in the commercial cycle of paper Subsidies that promote the use of wood fiber rather than alternative fibers. The question for many in and outside the industry continues to be, How to innovate in the face of multi-source inertia in the organization of the value chain? From the vantage point of standard strategy approaches, newcomer firms like New Leaf Paper that work in different ways are typically disadvantaged in the initial rounds of direct competition -- by virtue of their lack of access to viable positions in the market, or their ability to compete on the current terms in the industry, or by virtue of their lack of expertise or capacity to outperform incumbent technologies. But these deficits are also the source of innovative approaches to value creation.

HOW NEW LEAF PAPER FOCUSES ON SUSTAINABILITY The origins of the strategy Mendelsohn is an environmentalist at heart since a very young age. In college, he realized the potential for bringing that environmentalism together with a practical application. As he explains, "Facing the usual question of how one person can make a difference, I decided that the most effective way to bring about change was to target the business community. Instead of teaching or writing in the academic or not-for-profit communities, I decided the best thing was to form a mission-based company that would be a role model for other companies.27 The academic world seemed too insular and the nonprofit world seemed like beating on an elephant with a toothbrush. So Iconclu[ded] that there was a huge amount of power invested in corporations themselves, and why not be a different type of corporation. 28 Why paper? I wanted to take on one of the most polluting industries, says Mendelsohn. I love the wilderness and working on paper has an immediate impact. In the early 90s, some large paper companies offered recycled paper, but none made it the focus of their business. So in 1991 he started New York Recycled Papers, an environmentally-sound paper and printing company in New York City that sourced the
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most eco-friendly products available and the mills that produced them, in order to serve and to encourage a nascent market in green paper. Its very hard to break into the paper business. The relationships between manufacturers and distributors are pretty set. I made a sort of nave jump into the world of business. Providing both paper and printing service made sense at the start because customers were often apprehensive about the print quality of recycled paper. To win customers, we said, If you dont like it, you dont pay for it. Dont worry about the print quality, well take care of that. But the print business was not my goal and I didnt want to become the best environmental printer in the country. I wanted to focus on producing the best environmental paper. After seven years in New York, he moved the business to San Francisco, acquiring Dancing Tree (an Oakland, CA recycled paper company) and co-founder as well. New Leaf Paper was founded in June, 1998 with the goal of becoming the leading national source for environmentally responsible paper. I wanted to be here, and I felt it was the right place for the company. I felt it was the most progressive large city in the country.29

INNOVATION AS STRATEGY AT NEW LEAF PAPER Strategy at the firm was emergent from the start, motivated by a strong mission and varied means. Mendelsohn notes: New Leaf did not have a lot of funding. In fact, we were self-funded for the first ten years. Scarcity forced us to look to our commitment to sustainability and how to innovate products without having a big R&D budget. I will say if we had raised money in early years we probably wouldnt be here. Because if you raise money you have to spend it, when you spend money you have to build overhead, and when you start building overhead before you know what you are doing, you get in trouble. The New Leaf Paper leadership set three priorities to establish the firm and forward the sustainability agenda: 1) Iterating product innovation, 2) Building new relationships, and 3) Inventing a new industry ecosystem 1. Iterating product innovation: From where we are to where we want to be New Leaf paper has introduced industry-leading product lines of recycled and alternative source fiber on a nearly annual basis since founding. See Exhibit 4: Products and product innovation. An estimated 85% of the worlds global paper use is made using virgin fiber, according to Mendelsohn. The deforestation caused by harvesting virgin fiber is devastating to the worlds natural resources, and results in wasted paper clogging up landfills. For example, on average, plain paper accounts for 40% landfill volume.30 New Leaf today has [35] different product lines, with [a standard] set carried in inventory and the balance in make-ready orders.31 Half the sales are mill direct (large volume orders shipped directly to printers) and the other half is aggregate orders (i.e., many small orders aggregated until quantity is sufficient to have the mill do a run). With a minimum order of
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$250, New Leaf can accommodate somewhat smaller buyers. But New Leaf also sells orders of $500K. "Our focus is to sell to mainstream America --Half of sales are to big companies, such as Hewlett Packard. That said, we also supply about 80% of the biggest, most respected environmental organizations, including NRDC, Environmental Defense, and the World Wildlife Fund."32 On the entrepreneurship front, we are 25 peopleSo everybody in New Leaf is an entrepreneur W e help empower people in other companies to be able to expand the way they do what they do. So in paper purchasing, not only is product commoditized, but also your purchasing has been evaluated on reducing costs and streamlining, etc. every year for 15 years. All of sudden the New Leaf Paper guy walks in and tries to tell you maybe spend 5% more for longer-term savings. So its a really interesting challenge. One of things weve been able to dochange the way the[se people] buy paperIf there is one thing that a company could do to improve the overall performance on the sustainability standard, what is it? Ill say the best answer Ive heard is that you build performance on sustainability into every employees job description and performance criteria. It is that simple. Products: Brokering available papers In the early days, New Leaf Paper explored best practices available in the industry to source the most environmentally-friendly paper and production processes then available. This involved considerable work and informal exploration to identify sources. Ever since the experiments at New York Recycled Papers in the early 1990s, he sourced the most ecofriendly paper stocks he could find from existing mill producers. Mendelsohn stresses that We are essentially a distributor, but most distributors simply sell standard mill brand product and mills normally do all the branding and marketing. New Leaf does all the branding, all the marketing, and all the specification of our products, as well as distribution. So we take on a lot. Making papers greener New Leaf develops mostly white papers, and creates product lines that look like any other paper.33 The difference is in the ingredients. There is a hierarchy of preferred fibers that New Leaf clearly articulates, based on environmental impact. See Exhibit 5. The stated goal is to create the most environmental paper possible for each type of end-use, based on a combination of attributes with focus on fiber sustainability: 1. High percentage post-consumer composition is top choice 2. Other de-inked fiber (pre-consumer) 3. Sustainably harvested virgin fiber (Forest Stewardship Council certified) 4. Agricultural residues 5. Sustainably grown alternate fibers (kenaf, hemp)34 Post-consumer waste is at the top of the list, followed by agricultural by-products, which include cereal straws and corn stalks that are otherwise burned or flooded from fields. Preconsumer waste is third on the list, including unsold magazines and mill scraps. Sustainably harvested virgin fiber is last, including Forest Stewardship Council (FSC)-certified wood and non-wood sources such as hemp and kenaf. "New Leaf is most committed to high postconsumer content because of the huge amount of paper in the waste stream," Mendelsohn explains. "We have some of the
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best FSC-certified papers out with high postconsumer levels and all the virgin portion is certified FSC. Some of the bigger companies that offer FSC-certified papers have minimal postconsumer content. We are also committed to paper made without chlorine or chlorine compounds."35 Co-develop products with customer-partners To compete with the scale economies of the paper manufacturers that use virgin fiber, New Leaf Paper from early on formed alliances with large companies like Old Navy Clothing, Nike, and Hewlett-Packard to ensure decent order volume for greener papers. New Leaf has also set up partnerships with paper mills, both to develop and manufacture its products. Building these new partnerships has cumulative benefits for New Leaf Paper mission, as well. Mendelsohn is keen to support the growth of a recycled paper industry. He notes the case of the Canadian Harry Potter print runs: At one point, we decided that book publishing would be a good market for us and for recycled paper, and that publishers would be responsiveIn two years, we've gone from zero to doing all 'Harry Potter' books in Canada--950,000 books.''36 Until recently, most books printed in Canada were printed on virgin paper using old growth timber. In June 2001, New Leaf launched a new book stock paper, EcoBook 100 (100% post-consumer, PCF). By December, 10 Canadian publishers were using EcoBook 100 and two printers were stocking it. By July 2002 the three largest book printers stocked EcoBook 100. In May 2003, the full 950,000 book run Order of the Phoenix was printed on EcoBook 100. And by July 2004, competitors had launched three competing products of similar green quality. There are not always near-term successes. And Mendelosohn points out that there are compromises along the way. It was very tough the first time I sold paper with 30% post consumer content. It felt awkward, because I thought, Its not 100%. Whats wrong here? But I realized that I could be a marginal company and get a tiny fraction of the business., or I could offer a broader product range and have a bigger impact. In certain product lines there[are].physical limitations to the amount of recycled content you can put in. [We ] do the best we can to be the most environmentally friendly. Thats my rule of thumb.

2. Building new (kinds of) relationships along the value chain The second priority was to build new relationships and redefine the existing value creation system. Recent New Leaf customers include Apple Computer, Gap and Old Navy, and Bank of America, as well as World Wildlife Fund, Patagonia, and the Natural Resources Defense Council. Mendelsohn says, We develop strong relationships with our customers. The more traditional kind of arms length sales relationship is more difficult because theres less information sharing.37 The Paper Mill Store.com has partnered with New Leaf Paper to offer a broad array of the companys eco-preferable papers. We are extremely excited to welcome our newest supplier, New Leaf Paper, to our family of suppliers, says Brian J. Cowie CEO. New Leaf is recognized as one of the most innovative and eco9

conscious paper suppliers in North America and is a perfect fit for our ongoing commitment to eco-preferable papers and sustainable business practices.38 Re-inventing traditional processes In building these working networks, they created not only new best practices but they reconfigured basic industry value propositions. This recognition of alternative networks available at each link in the value chain was the first step in making paper greener and also a more disruptive step: Re-imaging the traditional processes that were built into the architecture of the paper mills and the practices of incumbent firms. Over the years, New Leaf Paper built up partnerships with paper mills, both to develop and to manufacture its products. Mendelsohn brokered between customers and the mills in his first business. The product innovation in part involves the fiber source but also the manufacturing process. New Leaf Paper followed the product technology upstream. Now twelve green paper companies in the segment work directly with producer mills and customers. New Leaf Paper now routinely works with mill engineers to develop specifications for all the New Leaf papers. They also partner with paper mills to develop new papers, then sell diverse grades of paper with a past, and a future" for printing and writing.39 Mendelsohn observes that working closely with the mills has been interesting, and adynamic process: In the early 90s, paper companies were doing well and it was still an old boy network. It was pretty much impossible to talk to mills directly. They had no interest in rocking the boat with their established distribution. But perseverance paid off: Everything shifted in the late 90s due to the knowledge base and the legitimacy that wed established as a company. Plus there was a downturn in the paper industry. A broad-scope vision informs and purposes these collaborations: We have a vision of a mill that would be sustainable, a mill designed to use a high percentage of post-consumer waste, with clean chemistry, chlorine-free bleaching and virgin fiber that comes from sustainably managed forests.40 Our deep vision is trying to bring about the next generation of paper mills that are even greener than Danish partner Dalum Papir. In this iteration of design and technology of the manufacturing process, there are two issues, according to Mendelsohn. The main issue of making them greener is firstly using agricultural residuals or other alternative fibers, and secondly scale, that is the biggest challenge. The mills now are huge to be competitive Imagine a scenario where a mill served an area within a three hundred miles radius. All raw materials are sourced within the local area, all the markets are within the local area, all transportation of papers that was just very heavy and costly go away. That is where we want to take it ten, twenty years from now. 41

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3. Inventing a new innovation ecosystem The third priority is reshaping the innovation ecosystem, a perpetual change machine for the paper industry. Mendelsohn is clear about the chicken & egg issue for the evolution of a sustainable paper industry: Paper mill designs now inhibit greener papers. The current economies work against substantial change. And it will take commitment from manufacturers, printers, and customers to generate a transformation. But this requires partnerships to generate a sustainable business paradigm.Paper decisions today determine mill design tomorrow. The New Leaf mission promotes an environmentally sustainable paper industry, and New Leaf strives to operate as a "higher standard" socially responsible business.42 New Leaf has focused on pushing forward product innovation and building new kinds of relationships in the industry around the sustainability issue.43 But basic transformation will take more. Certifying commitment and conscience through partnerships: New Leaf Paper EcoAudit New Leaf Paper provides customers on request an environmental benefits statement, a customized New Leaf Paper EcoAudit. The Eco-Audit describes the natural resources saved by using New Leaf papers versus virgin paper. Environmental benefits indicated by the EcoAudit involve savings in trees, water, energy, solid waste, and greenhouse gases. These benefits are calculated based on research done by the Environmental Defense Fund and other members of the Paper Task Force who studied the environmental impacts of the paper industry.44 They performed life-cycle analyses of post-consumer waste vs. virgin fiber, which revealed the tangible environmental benefits of using post-consumer recycled content instead of virgin content. The Eco Audit is supported by certification and designation systems that establish the highest environmental standards for the paper industry. See Exhibit 6 for a sample New Leaf EcoAudit certificate The EcoAudit is aimed to signal the customers leadership in social and environmental responsibility, in a way that is transparent and well-documented45. Many of our customers choose to include the New Leaf Paper Eco Audit in their printed materials to demonstrate leadership in sustainability through their paper choices.46 Redefining the corporation: The B Corporation movement The more basic change in the ecosystem is about cultivating both supply and demand sides of the market. For the demand side, New Leaf Paper tries to make green purchase a rewarding behavior through Eco Audit. For the supply side, it develops papers that are both green and best in quality. It aims to incorporate green papers into the mainstream consumption category through selling to large, stable customers as well as specialty consumers. New Leaf Paper also expands both supply and demand sides of the niche market through theorizing and legitimizing a new understanding of the corporationthe B-Corporation. The intent is for the IRS to create new legal business entity specific for ethical, sustainable, socially responsible businesses, where B stands for social Benefit, with unique tax benefits for accounting for societal externalities by writing clear duties to stakeholders into corporations' founding documents. This approach creates a legal obligation to stakeholders on a similar footing to corporate obligations to shareholders.47

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The B-Corp movement is building up a more formal market of socially responsible suppliers and consumers by seeking for a legal recognition. New Leaf Paper locates itself in a unique position by being the only paper company among early B-Corp participants. They are one of 81 founder B corporations. B Corporations differentiate their business from green- and cause-marketing campaigns. B Corporations contend that they address critical problems which hinder the creation of social and environmental impact through business. B Corporations differ from traditional responsible businesses because they: 1) Meet comprehensive and transparent social and environmental performance standards; 2) Institutionalize stakeholder interests; 3) Build collective voice through the power of a unifying brand. The vision shared by New Leaf Paper and others is to create a new sector of the economy. The aspiration is that B Corporations will be legally recognized by the states, tax preferred by the IRS, and valued by investors and consumers. And that in a generation, this marketplace of B Corporations will reach 5-7% of US GDPthe size of the U.S. non-profit sector today. We hope to participate in the creation of a business community committed to the highest standards of social and environmental responsibility. We have long waited for an organization to develop a transparent set of standards and processes around which such a business community can develop. We are excited about the potential for B Corporations to help drive the growth and success of this community. 47 LOOKING FORWARD

Addressing a packed lecture theatre at the Skoll World Forum, Mendelsohn said: New Leaf is a USD 25 millions company. Over 10 years, New Leaf has been first to market with market leading environmental papers more than other paper companies. Most of our competitors are billion dollar companies. We were able to do that because of our claim of sustainability.
He chronicled the logic of innovation and sustainability that informs New Leaf Paper strategy and decisions: We started with the positive vision. It ultimately drove down to sustainable design. It is not about product, it is about the mill, it is about the infrastructure that supports the mill, the clean chemistry, and low impact raw materials. There is the vision, the mission serves the vision, and the product serves the mission. What we were able to do is to help our customers link their purchases with this positive vision for the industry. What weve been able to do is to drive markets with the product innovation. So we launch a paper that is categorically better environmentally than what is out there, educate, and pull the market along. The ultimate goal is that the market will shift the environment and the [mil] design industry. New Leaf Paper in 2010 is the industry leader and most recognized brand for high-quality, environmentally superior printing, office and retail papers. Has New Leaf changed the industry? Mendelsohn, despite the obvious successes of the firm, directly says no. For example, despite the vast amount of paper that is recycled, 90 percent of printing and writing paper in the United States still has no recycled content whatsoever.48 The industry
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produced about 24.5 million tons of paper, using about 450 million trees. This year, according to Mendelsohn, New Leaf will sell about 35 million pounds of paper -- or 17,500 tons, about 0.07 percent of the industry total. But what New Leaf Paper has done is to routinely introduce alternatives all along the value chain that create the possibility for sustainable change, on terms the industry can reach. He provides a compelling example: Our initiatives in paper [quality] have been picked up by the large multinational firms. They can produce those grades and quality of paper at much lower cost than New Leaf because of their volume, in-house R&D, etc. But the point is, they have taken innovations pioneered by New Leaf, and made them commercially viable. Is our goal to dominate the industry? No. Rather it is to transform the industry, practice by practice, to realize a sustainable industry. New Leaf will have been successful not because we outperform the incumbent firms but because we have been able to generate innovations in basic industry practices. The issues facing New Leaf Paper are familiar to many growing enterprises. The solutions available to a firm focused on industry transformation, however, may require a rethink: - How to sustain growth and impact? How to preserve the distinctive ethics of enterprise that has grounded key decisions? Should New Leaf change its strategy? How to engage an industry that itself is starting to incorporate the lessons taught by New Leaf Paper and others? The standard mantras of growth and scale can only inform partly the kinds of decisions the New Leaf Paper team faces going forward. What is to be done?

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Exhibit 1: Overview of the global pulp and paper industry

Exhibit 2: Top 10 pulp and paper companies in 2008 (PWC, 2009) Rank
1 2 3 4 5 6 7 8

Company
International Paper Kimberly-Clark SCA Stora Enso UPM Oji Paper Nippon Unipac Smurfit Kappa

Country
United States United States Sweden Finland Finland Japan Japan Ireland

2008 Net Sales (US$M)

24,829 19,415 16,965 16,227 13,920 12,788 11,753 10,390

2008 Net Income (Loss) (US$M)

(1,282) 1,690 857 (991) (263) 114 55 (73)

Metsliitto

Finland UK/ Africa South

9,335

(313)

10

Mondi Group

9,466

(310)

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Exhibit 3: Paper Mill Technology

Press Section of Fourdrinier Papermaking Machine

International Paper Company mill (Kraft process), Sampit River, Georgetown, SC USA, 2006; when built, the largest paper mill in the world.

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Exhibit 4: New Leaf Paper Production Innovation New Leaf Paper has pioneered papers with increasingly higher proportions of recycled and alternative fibers and with bleaching process that avoids chlorine compounds. Most of New Leafs papers have very high recycled content and are Forest Stewardship Council (FSC) certified and Ancient Forest Friendly. All are manufactured with electricity that is offset by Green-e certified renewable energy.
New Leaf Reincarnation - 1998 First 100% recycled coated paper, 50% PCW and PCF New Leaf Everest - 1998 First bright white writing, text and cover made with 100% PCW and PCF New Leaf EcoMatte - 1999 - 2000 First FSC certified coated paper, 50% de-inked recycled New Leaf EcoBook 2000 - 2001 First trade book paper made with 100% PCW and PCF New Leaf Opaque - 2003 First white opaque made with 100% PCW and PCF New Leaf Primavera - 2004 First high-end gloss coated paper with 40% PCW and PCF New Leaf Sakura - 2006 First silk coated paper in the U.S. with 100% de-inked recycled and 50% PCW, PCF

What Makes a Paper Environmentally Responsible?

Fiber source is the primary factor in determining a papers environmental impact. New Leaf Paper maximizes post-consumer recycled content in all of its product lines. The vast majority of fiber for New Leaf Paper products comes from the following environmentally responsible sources: Post-consumer recycled waste (PCW) De-inked recycled (unsold publications and printer waste) Forest Stewardship Council (FSC) certified virgin fiber (sustainable forestry) The bleaching process used in manufacturing has direct impact on the level of toxic chemical emissions into rivers. The best bleaching process is one that avoids the use of chlorine compounds. Recycled paper bleached without chlorine compounds is called Processed Chlorine Free (PCF). Energy usage and other factors such as waste water treatment, water and energy efficiency, use of fluorescent brighteners, and overall mill design also influence environmental impact. All of New Leaf Paper products in inventory are manufactured with electricity that is offset with Green-e certified renewable energy certificates. They avoid the use of toxic fluorescent brighteners in most of the papers by limiting brightness levels to a maximum of 94. SOURCE: New Leaf Paper, Environmental leadership & sustainability 2008.

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Exhibit 5: New Leaf Products Features and Certifications

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Exhibit 6: Sample New Leaf EcoAudit certificate

Exhibit 7: New Leaf Papers: The Right Paper, The Right Logo

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ENDNOTES

Mendelsohn 2008. In Profits with Purpose: New Leaf Paper, INC magazine Printing News, August 2009 3 Gretchen Brewer 2003. New Leaf Paper http://www.conservatree.com/paper/Choose/SourceProfiles/newleaf.shtml 4 Dan Fost, September 17, 2003. San Francisco Chronicle. http://www.sfgate.com/cgibin/article.cgi?f=/chronicle/archive/2003/09/17/BU GVK1O7JE1.DTL 5 Fost 2003 6 PricewaterhouseCoopers (PWC) 2009. Global Forest, Paper & Packaging Industry Survey 2009 Edition Survey of 2008 Results. 7 PWC 2009 8 Datamonitor, Paper and Packaging: Global Industry Guide, April 2009. 9 Eero Vaara, Janne Tienari and Juha Laurila. 2006. Pulp and Paper Fiction: On the Discursive Legitimation of Global Industrial Restructuring. Organization Studies. 10 The section draws directly from John Holusha, Pulp Mills Turn Over a New Leaf; Some Companies See Green as Just Good Business, New York Times March 9 1996. 11 Pricewaterhouse Coopers sponsors a key annual conclave of industry insiders: the Global Forest & Paper Industry Conference, referenced here as PWC Conference 2005, 20062009. 12 PWC 2007. 13 PWC 2009. 14 Modern strategy emphasizes two broad sources of competitive advantage, that is, the factors that make it possible for a firm to outperform current rivals. A prominent view argues that firms need to search for the optimal position in the competitive landscape, in practice, a combination of product portfolios and market segments. In contrast, the second approach locates the source of advantage, particularly advantages sustainable over time and in the face of changing competitive landscape, in the internal competencies of the firm. These competencies include both resources like skilled leadership, industry expertise, and technical and managerial skills, as well as distinctive configurations of capabilities. 15 Datamonitor, Paper and Packaging: Global Industry Guide, April 2009. 16 Sakari Suoninen, Paper industry faces rough road ahead. Reuters, August 15 2008. http://www.reuters.com/article/idUSLF48583920080815. 17 Jack Kaskey, International paper treads where Monsanto path to Frankenforests. Bloomber.net http://www.bloomberg.com/apps/news?pid=20601109&sid=aEHNB_XJRWGU, Aug 28 2009; also The Paper Planet, Eagle Ridge Paper: US and Canadian Conservationists Send a Message to the Marketplace and Under Pressure USDA Forced to Re-examine GE Eucalyptus Permitting in the Southern US. http://thepaperplanet.blogspot.com/, Feb 12 2010. 18 WRM's bulletin N 49, August 2001. http://www.wrm.org.uy/bulletin/49/Japan.html 19 Mike Lounsbury, Marc J Ventresca, and Paul Hirsch. 2003. Social movements, field frames and industry emergence: A cultural-political perspective on US recycling. Socio-Economic Review 1, 71-104. 20 AF&PA 2008. AF&PA Announces Increase in Paper Recovery, But Cautions about Economy's Future Impact. AF&PA News. 21 Sara Kimberley 2007. Paper Industry Body Seeks Agency to Combat Eco Fears. Quotes from Donna Harman and from Tim Bowler, head of UK Association for Paper Purchasing. 22 This section excerpts from Wikipedia on paper mills and the underlying industrial and academic references there. 23 Papermaking: The History and Technique of an Ancient Craft, by Dard Hunter, Dover Publications edition page 527; patent numbers given in Notes on page 611; http://todayinsci.com/F/Fourdrinier_Henry/FourdrinierPapermakingMachine.htm 24 Metso, Metso supplied SC paper machine line sets a new world speed record at Stora Enso Kvarnsveden April 2007. http://www.metsoautomation.com/News/newsdocuments.nsf/Web2NewsDoc/CAC7C79ED6B6E117C225 72A00048448C?OpenDocument&ch=ChMetsoPaperWebEng&id=CAC7C79ED6B6E117C22572A00048448 C&. 25 Hoovers: Industry overview: Office supply and paper distribution. http://www.hoovers.com/officesupply-and-paper-distribution/--ID__58--/free-ind-fr-profile-basic.xhtml 26 Datamonitor, Paper and Packaging: Global Industry Guide, April 2009. 27 Brewer 2003. http://www.conservatree.com/paper/Choose/SourceProfiles/newleaf.shtml 28 Michael C. Hatten 2009: http://www.sustainablenorthwest.org/stories/new-leaf-paper/ Home Stories of People, Place, and Prosperity New Leaf Paper 29 Hatten 2009
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Jeff Mendelsohn, quoted in Launch of new online ecoaudit calculator on PrintNews, http://www.printingnews.com/web/online/Products/New-Leaf-Paper-announced-the-launch-of-a-newOnline-Eco-Audit-Calculator/4$11771, Jan 27 2010. 31 Brewer 2003. http://www.conservatree.com/paper/Choose/SourceProfiles/newleaf.shtml 32 Brewer 2003. http://www.conservatree.com/paper/Choose/SourceProfiles/newleaf.shtml 33 Section on product features and development draws on Hatten 2009 and New Leaf website. 34 Brewer 2003. http://www.conservatree.com/paper/Choose/SourceProfiles/newleaf.shtml 35 Brewer 2003. http://www.conservatree.com/paper/Choose/SourceProfiles/newleaf.shtml 36 Fost 2003. Recycled Paper Company Challenging Industry Giants. 37 Hatton 2009. 38 The Paper Mill Store Partners with New Leaf to Expand its Offering of Eco-Preferable Papers, Posted online at PrintingNews: August 7th, 2009 09:58 AM GMT-05:00 39 Hatten 2009? Northwestern Sustainable 40 Fost 2003. 41 Mendelsohn quotes from MZ, edited by MV 42 Brewer 2003. http://www.conservatree.com/paper/Choose/SourceProfiles/newleaf.shtml 43 Mendelsohn 2008. In Profits with Purpose: New Leaf Paper, INC magazine 44 EDIT: In 1995, Environmental Defense Fund scientists gathered a group of senior paper buying executives from Timing, Prudential, Johnson&Johnson, XXX Records, McDonalds, brought them together for a three-year life cycle study of post consumer recycled fiber vs. virgin fiber, looking at water usage, energy usage, gas mission, etc. And it came up with some data that shows that using post consumer recycled paper was categorically better across the board. By 1997/8, they had this data they published it and they leave it on the Office of Federal Environmental Executive (OFEE.org) website. Actually in relative obscurity for a number of years, in 1998 when we found New Leaf we contacted the EDF scientists and gave them on all of our papers. They gave us formulas and we launched what we called XXX [?] based on that data in 1998. We were able to do this, that turns New Leaf into the kind of intel. side [?] for the sustainability in the paper industry, That was really one of the greatest strategic advantage of sustainability for our company that allows us to create a brand association [The Eco-audit] is all based on EDF research. It is referenceable, it is not our work, it is done by this reputable nonprofit group. 45 New Leaf Paper. 2008. The New Leaf Paper Eco Audit 46 New Leaf Paper 2009. http://www.newleafpaper.com/ecoaudit.html 47 Amelia Timbers, How B-Corps Put the Force of Law Behind CSR.; http://www.bcorporation.net/ 47New Leaf Paper statement on B-Corporation website. http://www.bcorporation.net/newleafpaper 48 Susan Kinsella, executive director of Conservatree, a San Francisco nonprofit that advocates for environmental paper. 49 Source for text and quotes: Pacific Community Ventures, http://www.pcvfund.com/032509.asp. March 25 2009.
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