Few business leaders will dispute the proposition that the pace of change in the business world is more rapid today than ever before. During the past two decades or so, scores of business books and magazine articles have analyzed and dissected just about every conceivable aspect of the topic of change – anticipating change, managing change, leading change, and adapting to change, to name a few. The presence of change plays a significant role in the process of developing business strategy. Hockey great Wayne Gretzky was once asked what made him such a phenomenal player. Gretzky thought for a moment and then replied, "I skate to where the puck is going to be." The existence of change means that any business strategy crafted today will be played out in a market environment that may differ substantially from today’s. To create effective business strategy, therefore, a business owner or manager must anticipate how his or her industry will be likely to change and what the ramifications of those changes are likely to be.

This is the second of four columns that will discuss the evolutionary changes that are occurring in the printing industry and the strategies that printers can employ to respond to those changes. Last month’s column made the point that it is important for printers to distinguish between short-term, cyclical changes in industry performance, which call for tactical actions, and those changes that result from evolutionary shifts in the competitive structure of the industry, which demand strategic responses. This column will examine the concept of industry evolution and provide a few examples of the economic forces that are driving the evolution of the printing industry. The third and fourth columns will outline alternative strategies for dealing with the industry’s evolution.

The economic characteristics of competition in the printing industry are governed by five basic competitive forces – the rivalry among existing industry competitors, the threat of substitute products or services, the bargaining power of the industry’s customers, the bargaining power of suppliers to the industry, and the threat of new entrants. All five of these forces derive their strength from the underlying economic structure of the printing industry. One goal of a printing company’s competitive strategy is to establish a position in the industry where the company can minimize the negative effects of these forces or influence them in its favor. Therefore, in order to develop sound business strategies, printing company owners and managers must identify the key structural features of their industry that generate the power of the five basic competitive forces. (Note: For a more in-depth discussion of the five basic competitive forces, please refer to my June 2001 column titled, "Forces of Competition".)

Changes that occur in or around an industry are important strategically if they alter the economic structure of that industry. Such changes will typically cause the strength of one or more of the five basic competitive forces to increase or decrease, and this usually requires an adjustment in business strategy. Therefore, the most basic way to analyze industry evolution is to simply ask if there are any changes occurring that may affect any element of the industry’s structure. For example, one of the five basic competitive forces is the bargaining power of suppliers to an industry. Suppliers with significant bargaining power can threaten the profits of industry firms by increasing the prices that those firms must pay for equipment, raw materials and supplies. If a supplier is substantially larger than its customers, and, especially, if the supplier’s industry is more concentrated that the customer’s industry, this structural feature will tend to enhance the supplier’s bargaining power.

During the past few years, we have witnessed a significant amount of consolidation among suppliers to the printing industry. The most recent example of this consolidation is probably the acquisition of PrimeSource Corporation, Heartland Imaging, and Graphic Systems, Inc., by Fuji Photo Film USA. This acquisition resulted in the creation of one company (Enovation Graphic Systems) where three smaller competitive firms had previously existed. The consolidation of printing industry suppliers will tend to increase the bargaining power of those suppliers for the reasons outlined above. Whether these firms will exercise that bargaining power is, of course, a separate issue. But this is a very good example of the kind of evolutionary change that printing company owners and managers must closely monitor.

The approach to analyzing industry evolution just described can provide an excellent picture of an industry’s evolutionary trends and patterns, but it can be difficult to perform. It is not always easy to see clearly what changes are currently affecting industry structure, much less what changes might affect industry structure in the future. Fortunately, there is another approach to forecasting industry evolution that is easier to use.

In his landmark book, Competitive Strategy, Michael E. Porter contends that industries evolve because of the existence of forces that create incentives or pressures for change. Porter calls these forces evolutionary processes, and he argues that evolutionary processes occur in every industry in one form or another. All of Porter’s evolutionary processes are important from a strategic perspective because, either directly or indirectly, they cause the strength of one or more of the five basic competitive forces to increase or decrease. The evolutionary processes identified by Porter in Competitive Strategy are as follows:

- Long-run changes in industry growth;
- Changes in buyer segments served;
- Buyers’ learning;
- Reduction of uncertainty;
- Diffusion of proprietary knowledge;
- Accumulation of experience;
- Expansion (or contraction) in scale;
- Changes in input and currency costs;
- Product innovation;
- Marketing innovation;
- Process innovation;
- Structural changes in adjacent industries;
- Government policy changes; and
- Entries and exits.

We can demonstrate the use of Porter’s evolutionary processes as a tool for analyzing the evolution of the printing industry by looking at the industry through the "lens" of one of these processes – long-run changes in industry growth. The most common and probably most widespread force that alters an industry’s competitive environment is a change in the long-run industry growth rate. In fact, we often use changes in an industry’s growth rate as the determining factor for placing an industry in a particular evolutionary stage. We say, for example, that an industry has reached "maturity" when its rate of growth begins a sustained slowdown. So, the operative question becomes: Is this process at work today in the U.S. printing industry? There is strong evidence to suggest that the answer to this question is "yes." Until recently, the growth of the U.S. printing industry tended to mirror the growth of the overall U.S. economy. Since the late 1990’s, however, real printing sales – that is, sales adjusted for inflation – have grown more slowly than real GDP, according to studies conducted or sponsored by Printing Industries of America and the National Association for Printing Leadership. These same studies indicate that the growth of real printing sales will continue to lag behind the growth of the overall economy for at least the next several years.

Porter identified five important external reasons why the long-run growth rate of an industry changes – demographic changes, trends in needs, change in the relative position of substitute products or services, changes in the position of complementary products or services, and penetration of the customer group. The growth slowdown currently underway in the U.S. printing industry can be largely attributed to two of these external factors. First, and most importantly, several Internet-enabled products and services have become attractive substitutes for printed material for several uses, and the relative attractiveness of these products and services seems to be increasing. For example, the use of e-mail for marketing purposes is now growing explosively. According to a recent report by eMarketer, Inc., spending on e-mail marketing reached $2.1 billion in 2001, a 110% increase over the $1.1 billion spent in 2000. And revenues produced by the e-mail marketing industry will grow from $910 million in 2001 to $3.5 billion in 2005, according to a recent study by the Winterberry Group. It is not mere coincidence that the growth of printing sales relative to the overall economy began to decline just as the use of the Internet exploded in the late 1990’s,

The long-run growth rate of an industry can also be altered by changes in the cost, quality, or availability of products or services that are complementary to (or are used in connection with) the industry’s products or services. Most printed materials have little value until they reach the hands of the people for whom they are ultimately intended. For printed materials, therefore, distribution services are an extremely important complementary service. In this country, the single most important distribution channel for printed material is the United States Postal Service. During 2001, the USPS increased postal rates twice and, as of January 1, 2002, another rate increase was pending. If the distribution costs of printed material continue to increase, as is likely, the overall costs of using printed material will also obviously increase, and this will cause printed material to become less attractive relative to substitute products or services that can perform the same function.

If the printing industry is experiencing a significant change in its long-run growth rate, the next important question becomes: How will a sustained slowdown in the industry’s growth rate affect the competitive structure of the printing industry? As an industry’s growth rate slows, the competitive rivalry among industry firms (one of the five basic forces of competition) tends to intensify. Rivalry becomes more intense because, in a rapidly growing industry, many companies can achieve acceptable growth rates simply by keeping pace with the growth of the industry. But for companies operating in a slow-growth industry, achieving an acceptable rate of growth usually requires taking market share from competitors. This causes competition in a mature industry to take on some of the characteristics of a "zero-sum" game – in order for one company to win, another must lose.

Porter’s approach to analyzing industry evolution through the use of evolutionary processes can enable printing company owners and managers to identify both the causes and effects of changes in and around the printing industry that require strategic responses. When using this approach, however, printers must keep two important considerations in mind. First, the analysis of industry evolution must be performed from the perspective of a specific, individual printing company. In an industry as diverse as the printing industry, the five basic competitive forces will not affect all printing companies or all industry segments in the same way. Likewise, the strength of any individual evolutionary process will likely vary from company to company and from industry segment to industry segment. Second, the analysis of industry evolution cannot be a one-time event. Because industry evolution is an ongoing phenomenon, printers must analyze that evolution periodically in order to keep business strategy in tune with current and emerging market realities. In our next column, we will examine one generic approach to competing in the printing industry of the early twenty-first century.