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Commentary & Analysis

Surviving the Perfect Storm

By Ed Crowley,

By WhatTheyThink Staff
Published: February 23, 2006

By Ed Crowley, Photizo Group February 23 , 2006 -- Firms within the imaging industry have released a string of disappointing earnings. From all appearances the industry is being rocked by the perfect storm. While the industry still benefits from a tremendous profit pool, the elements of this perfect storm is certainly making navigation more difficult. Caption: From CEO Executive Tim Peter's Presentation at the Lyra January 2006 Imaging Conference Increasing competitive pressure. While this industry has always been competitive, Dell's entry into the market has increased pricing pressure by taking away the traditional premiums for networking, duplex, warranty, and other features. At the same time Dell is offering a compelling value proposition which is 40-50 percent below HP (or even further below in the case of the firm's disruptive color laser -- the Dell 5100cn which offers color, a lower cost per page, and better performance than HP's comparable monochrome laser printer for almost 50% less). Brother and Samsung are stepping up their competitive responses as they attempt to hold on to their traditional strong position in the entry mono laser market segment. Samsung is also making an aggressive attempt to enter the color space. Konica Minolta and Okidata have continued to maintain very aggressive price positions in their bid to be the leading color vendors for small and medium business segments. Xerox, Lexmark, and HP are all battling for the enterprise space, with HP being more aggressive than ever before in their history in terms of taking down color laser prices and introducing new color laser models. Clearly, the level of competitive intensity is increasing. Customers are increasingly seeing the divide between color and mono, single function and multi-function as being irrelevant. Technology / Market shifts. No longer is it a world dominated by single function monochrome laser printers. Color laser and multifunction products are increasingly viewed as alternatives in the profitable workgroup printing space. The lines between copiers and printers have blurred (see my article in the OnDemandJournal from December of 2003). Vendors are struggling to identify where to invest their development dollars --should it be in new growth segments, or in defending their current positions in markets that may be stable or even shrinking. And most importantly, customers are increasingly seeing the divide between color and mono, single function and multi-function as being irrelevant. In their view, they are simply buying an imaging platform that has a specific set of capabilities which can address their specific business need. Change in the Business Model. The market for workgroup business printers has traditionally been a highly profitable, high margin business. Unlike the consumer printer market, which traditionally had a model of hardware losses supported by profitable supplies sales, the business market enjoyed profits from both hardware and supplies. The two highest growth segments (entry mono lasers and entry color lasers) are disrupting this model. Average end user prices are dropping dramatically, much faster than costs. As a result, margins are quickly moving into the negative zone. As a result, the business market model is beginning to resemble the consumer market model (although the saving grace is that business users still have much higher usage rates compared to home users -- and faster payback on hardware losses). So what should a manufacturer do to compete, and even thrive in this 'perfect storm'? Just like a sailboat caught in a major storm, the answer lies very much in maintaining a direction, in having a clear vision of where you want to go. One of the worst things you can do in a major storm is to 'loose steerage' and suddenly find yourself 'buffeted' by the storm with no control over your direction. One of the worst things you can do in a major storm is to 'loose steerage' and suddenly find yourself 'buffeted' by the storm with no control over your direction. To maintain direction, I argue that there are five primary areas that the printer firm's executives need to focus on: market understanding, focusing on where you can win, partnering to win, finding profitable customers, and having a vision. Clearly, each of these areas could be an article into itself, however, let's take a cursory glance at each factor: Understand the market and your respective strengths . This is true of not just the competitive environment, but also the entire value chain from manufacturing to customer. This is when a strong marketing intelligence capability is absolutely essential. To navigate the storm, you must have an acute sense of your surroundings and all of the factors which will impact your navigation through the storm. Focus on where you can win. Don't fight a war on multiple fronts. Leverage partnerships to fill out your product line and win in areas that are not core strengths. Focus on adjacencies to your core as opposed to unrelated business segments. Just because a market segment has high volume shipments, does not mean it fits with your channel, product, or customer competencies. Back to our storm analogy, in order to fight through the storm, you must know where your ship does well. Does she sail well running with the storm, or does she do better fighting into the waves? Which ever is the case, the key is to leverage her strengths to navigate out of the storm. Focus on adjacencies to your core as opposed to unrelated business segments. Partner to Win. In a storm, you look to other ships to give you information on weather conditions, hazards, and where the clear water is. In this storm, you need to partner with other vendors who offer complimentary products or channels outside of your core competency. Part of the reason for HP's long term success has been their successful partnership with Canon. In the past, the huge profitability of our industry has allowed firms to 'go it alone'. As the profit pool shrinks, going it alone will be increasingly difficult to do. Find the profitable customers. When hardware margins were positive, a printer vendor could sell to almost any user and the placement would be profitable. Now, with negative hardware margins, it is critical that vendors identify the customers who have high enough usage and who will buy enough cartridges to recover the hardware loss and achieve a profitable placement. Selling to enough 'hardware negative' customers who have low usage patterns can devastate a firm's business model. The huge profitability of our industry has allowed firms to 'go it alone'. As the profit pool shrinks, going it alone will be increasingly difficult to do. Almost every printer vendor has a usage model for their products based on hardware sales versus supply sales. These models can be misleading because a small proportion of very high usage customers can mask many low usage customers. When hardware margins were positive, knowing how many users were low volume users was not critical since each placement was at least breakeven. However, as hardware margins become negative, having a small proportion of high usage customers cannot make up for a large proportion of users with print volumes too low to recover the hardware loss. Vendors that do try to capture usage data directly from customers / users typically rely on a survey based model. User-based surveys of page volume / usage are notoriously inaccurate, since most users have absolutely no idea regarding how many pages they print. In fact, the tendency is to over-estimate usage. So in essence, the vendor community is basically flying blind, or using inaccurate data. This is the reason the Photizo Group has developed a syndicated tracking study to track printer usage utilizing a new, highly reliable methodology. By doing this, we are able to provide vendors with the data they need to target profitable market segments. User-based surveys of page volume / usage are notoriously inaccurate, since most users have absolutely no idea regarding how many pages they print. Most importantly, have a vision. The vision serves as a focal point to keep everyone working in a specific direction. Just like a sailboat in a storm, the deadliest thing to do is to simply 'drift' and loose steering. Once you are no longer 'steering' the boat, you are the mercy of the storm. The same is true for companies. One you have quit steering the boat, you are at the mercy of the storm. So focusing on operational effectiveness is not enough. Success and growth requires a vision of where the company is going, the ability to articulate this vision in a convincing manner, and the commitment to follow-through and make the hard choices required to sustain the vision. And most importantly, it means you must convince your 'crew' (the employees) that the vision will work and make sure they understand the vision so that they can work in unison to navigate through the storm. By focusing on the five factors, it is possible for firms to chart a course to clear water. Some firms will lose their way in the storm and be acquired or in some cases, even exit the business. However, for the firms that do survive, the printer market still represents one of the most profitable markets available. The question is whether your firm has what it takes to weather the storm and sail into clear water!

 

 

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