Many printers will agree that making a profit in the printing business has become an increasingly difficult task. PIA’s annual ratio studies show that profit margins of U.S. commercial printing companies averaged 3.0% -3.4% of sales throughout much of the 1990’s, and the studies for this decade show little change in that pattern. Profit difficulties are by no means limited to the printing industry. In their 1997 book, The Profit Zone, Adrian J. Slywotzky and David J. Morrison observe that a wide range of industries now contain a multitude of “no-profit zones” that are increasing in both size and number. No-profit zones are economic “black holes” – both investment dollars and, often, extensive human and organizational capital go in, but profit never comes back out. No-profit zones are “areas” within an industry where one or more of the five basic forces of competition are exceptionally strong. They can be associated with a particular portion of an industry’s value chain, a particular type of customer, or a particular type of product.

A printer operating in a no-profit zone usually experiences one version of a “Red Queen effect.” The Red Queen is a character in Lewis Carroll’s classic, Through the Looking Glass. In the story, the Red Queen takes Alice on a run through a forest. Alice and the Queen run very fast, but they never seem to leave the place they started. When Alice asks the Queen why they never seem to get anywhere, the Queen explains, “It takes all the running you can do to stay in the same place.”

This is the final installment in a series of articles that is examining the role that effective business strategy plays in improving the financial performance of printing companies. The first article explained why improvements in operating efficiency alone are not usually sufficient to produce long-term improvement in profitability and why effective strategy is necessary to achieve superior financial performance. The second article described the basic forces that govern the economic characteristics of competition in the printing industry and dictate the average profitability of the industry. This article will outline a framework for crafting business strategies that will enable printing company owners and managers to avoid the no-profit zones that dot the printing industry landscape.

While the specific content of business strategy will obviously vary from business to business, any complete and coherent strategy must address four fundamental issues – customer selection, scope of operations, profit model, and methods of differentiation. Collectively, these four central elements of strategy define and describe a company’s business model or business design. They essentially explain how a business works (or will work) and how and why that business will earn an acceptable profit. In the challenging environment facing printers today, printing businesses must be designed for profitability. A printing company’s business model or business design is the company’s “recipe” for financial success, and the four core elements of strategy constitute the essential ingredients in that recipe. The paragraphs that follow will describe these four fundamental elements of business strategy and discuss some of the issues that printing company owners and managers should consider as they develop each strategic element.

Customer Selection
The customer selection element of business strategy poses the basic issue: What kinds of customers will the business seek to serve? The collective bargaining power of an industry’s customers is one of the five basic forces of competition that determine the average profitability of the industry. As we observed in our last article, however, most industries, including the printing industry, sell to a variety of customers, and not all buyers possess the same bargaining power. This difference in bargaining power is one of the factors that makes customer selection a core strategic decision. The strategic attractiveness of a customer or a customer group is governed by five criteria:

1. Alignment of Customer Needs and Printer Capabilities – This criteria refers to the degree of “fit” that exists between the particular purchasing needs of a customer or customer group and the capabilities or strengths possessed by a specific printing company. Obviously, the better the fit, the more attractive the customer or customer group will tend to be. When profiling the purchasing needs of a customer or customer group, printers must identify and consider all the factors that enter into or influence each buyer’s print purchasing decisions.

2. Growth Potential – The significance of this factor is fairly obvious. Other things being equal, rapidly growing customers or customer groups will tend to be more attractive than those that are growing more slowly.

3. Structural Bargaining Power – In general, customers with significant bargaining power are less attractive than those with little bargaining power. In our last article, we discussed some of the circumstances that would place a customer or customer group in a strong bargaining position. For example, a buyer or buyer group will possess significant structural bargaining power if it purchases a substantial portion of a printer’s total sales, if it can acquire substantially equivalent products and services from a number of printers, if it faces few, if any, switching costs in moving from one printer to another, or if it is capable of threatening backward integration in a credible way.

4. Price Sensitivity – Some customers that possess significant structural bargaining power do not use that power on a regular or diligent basis to drive down a seller’s prices. These buyers tend to make more attractive customers because they are less price sensitive. Several factors can cause a customer to be less sensitive to price. For example, if a defective or inadequate product or service will cause a buyer to incur a substantial penalty (either in additional costs or in lost revenues), that customer will tend not to focus on price, but instead will be much more concerned about quality and dependability.

5. Cost of Servicing – Servicing costs include all costs that a printer incurs (or will incur) in order to do business with a particular customer or type of customer. These expenses include not only direct production costs, but also indirect costs such as selling expenses, estimating expenses, and CSR expenses. A customer who appears to be attractive based on the other criteria may become unattractive when servicing costs are considered. When using this approach to customer selection, printers should remember that few, if any, customers or prospective customers will score equally high on all of these criteria. In other words, most customers and prospective customers will present a mixture of “attractive” and “unattractive” characteristics. Therefore, the ultimate customer selection decision usually involves a weighing and balancing process that seeks to identify the customers and prospective customers who are most attractive overall.

Scope of Operations
Scope of operations refers to the range of activities performed or conducted by a printer. Developing a complete description of a printing company’s scope of operations involves answering four basic questions:

1. What specific products and services will the company attempt to sell?

2. What functions must be performed in order to produce and deliver the products and services that the company plans to sell?

3. Which of the necessary functions will the company perform in-house, and which ones will be outsourced in some fashion?

4. How will any planned outsourcing be structured?

Profit Model
The third critical element of a printing company’s business strategy is its profit model. Simply put, a printing company’s profit model is a description of how the company will capture as profit a portion of the value that it creates for its customers. But a profit model is more than a laundry list of products and services that a printer hopes to sell at a profit. A well-designed profit model describes in specific terms how the printing company will add value to its targeted customers, and it explains why those customers will recognize (and be willing to pay for) the value created by the printer.

Methods of Differentiation
The fourth core element of a printing company’s business strategy relates to differentiation. In the first article in this series, we observed that, in order for a printing company to outperform the industry average (in long-term profitability), it must create or establish a difference between itself and its competitors that the company can preserve. This difference is known as a sustainable competitive advantage.

Differentiation is one of the most powerful tools in a printing company’s arsenal for creating a sustainable competitive advantage and for protecting the company’s profit margins from the constant downward pressure exerted by the five basic forces of competition. Differentiation lessens the intensity of competition with industry rivals, it helps reduce the bargaining power of customers, and it tends to deter new entrants into the industry. For all of these reasons, no printing company’s strategy can be considered complete unless methods for differentiating the company from its competitors are clearly articulated.

The framework for crafting business strategy outlined in this article is intended to provide printing company owners and managers with a starting point for the strategy development process. In using this framework, printers should keep three general principles in mind:

1. A printing company’s business model or business design (and, therefore, the four core elements of its business strategy) must match customer priorities in order for the company to succeed. This means that, above all else, strategy development must be a “customer-centric” process.

2. The four core elements of strategy are interdependent. Each affects and, in turn, is affected by, the others. For example, the customer selection decision will influence both the scope of operations that must be adopted and the profit model that the company can employ. For this reason, the strategic choices made in each of the four critical areas must be consistent and mutually reinforcing.

3. Customer priorities and other industry conditions are certain to change. Therefore, printing company owners and managers must be prepared to redesign their businesses and modify their strategies when market conditions dictate.

Crafting effective business strategy is not an easy job, but it is a critical one. In today’s competitive marketplace, printing companies must be designed to produce acceptable profits, and strategy is the “blueprint” for that design.