This is the third of four columns that are discussing the evolution of the U.S. printing industry and the strategic options that printers have for responding to the ongoing evolutionary changes. In earlier columns, we drew a distinction between short-term, cyclical changes that affect the industry and structural changes that result from the evolution of the industry, and we used Michael E. Porter’s concept of "evolutionary processes" to provide a framework for analyzing and forecasting industry evolution. This column will discuss how printers are using diversification as a strategy for responding to the evolution of the industry and explain why diversification alone may not provide the improved financial performance that many printers are seeking. Next month’s column will explore what strategies, if any, are available to printers who choose not to diversify in any substantial way.

During the past few years, a rising number of graphic arts industry analysts, authors and consultants have repeatedly admonished printers to "reinvent" their businesses to meet the challenges of a rapidly changing graphic communications marketplace. The primary impetus for this advice was and is a distressing economic reality that became increasingly difficult to ignore as the 1990’s drew to a close. As we noted in last month’s column, the long-run growth rate of the U.S. printing industry began to slow in the late 1990’s. Industry studies now project that inflation-adjusted printing sales will grow more slowly than the overall U.S. economy, at least for the next several years. While there is widespread agreement that printers must make fundamental changes in their business strategies if they are to grow and prosper in the years ahead, leading industry experts have described the nature and substance of the necessary changes in different ways.

For example, The NAPL 2001-2002 State of the Industry Report published by the National Association for Printing Leadership (the "State of the Industry Report") devotes an entire chapter to the topic of diversification in the printing industry. The State of the Industry Report sees diversification as critical to the future prosperity of U.S. printing companies, noting that, "The most successful printing companies will both meet the formidable challenges of diversification and strengthen the core lithographic services that are still a critical part of the communications mix." The State of the Industry Report summarizes the need for change by quoting one of its survey respondents who said, "There are opportunities for printers who make the evolution into graphic communications solutions providers, but not for printers who think and act like traditional printers."

In his keynote address at the 2001 On Demand Conference, Charles A. Pesko, managing director of CAP Ventures, observed that printers must offer non-print services, as well as non-paper-based communications services, in order to keep their businesses growing. Pesko described the needed change in stark terms by stating, "You must make the decision – today – to diversify and deal with media other than print . . . Your customers are being forced to work in the worlds of both paper and electronic media. If you want to remain your customers’ strategic partner, so must you . . . If you elect not to make this transition to non-print products and services, I suggest you consider selling your business soon, while there is still an opportunity to do so."

In the December 2000 issue of Printing Impressions, columnist Thad McIlroy contended that the printing company of the future must be a "network publishing service provider." The term "network publishing" was coined by Adobe Systems to describe the ability to make visually rich, personalized content reliably available any time, anywhere, on any device. In McIlroy’s view, as business organizations adopt a network publishing approach to marketing communications, they will gravitate toward using a single service provider for their network publishing needs in order to reduce costs and insure consistency of marketing messages. If today’s printing companies want to participate in the marketing communications efforts of the future, McIlroy contends that they must develop or acquire the competencies needed to become network publishing service providers.

The common theme of these expert opinions is that printers must adapt to the evolution of the printing industry by diversifying the products and services they provide. Printers must, in other words, move beyond "ink on paper." And there is substantial evidence to indicate that owners and managers of U.S. printing companies are following this advice. In its State of the Industry Report, NAPL observed that many printers have already diversified, with 57.7% of surveyed printers providing art, design and creative services, 55.5% offering fulfillment services, and 45.0% providing mailing services. The State of the Industry Report also indicates that printers will continue to diversify at a rapid pace, with nearly half of surveyed printers planning to add a new service over the next two years, and over one-quarter of surveyed printers planning to add at least two services in that time period.

The motivation for all this diversification is, of course, increased revenue growth and improved profitability. By adding various non-print services, printers are seeking to capture a larger percentage of their customers’ graphic communications related spending. Printers also hope that customers will be willing to pay a price for these services that will produce higher profit margins than "ink on paper." But, the kind of diversification that printers are currently pursuing is not likely to produce the long-term economic benefits that printing company owners and managers desire. In order for a printing company to produce superior financial results on a long-term basis, 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. Many printers today are diversifying by adding the same or very similar non-print services, and, as that occurs, those services will become less effective as a means of differentiation. Moreover, as those services become more widely available, the basic economic law of supply and demand will operate to reduce the margins that printers can earn for providing those services.

In order to produce substantial improvements in revenue growth and profitability, a printer needs to move beyond mere diversification and become a true "solution provider." As the quotation from the State of the Industry Report cited earlier indicates, at least some printers have recognized the important role that solutions can play in enhancing growth and profitability. In fact, solutions are proving to be very lucrative for many companies, even as the growth and profitability of their core products and services have come under pressure. Perhaps no company better illustrates the benefits of solutions than IBM. A recent article appearing in The McKinsey Quarterly noted that 43% of IBM’s total revenues now come from the solutions-based businesses that the company developed over the last decade. The article goes on to observe that the stock market has rewarded this shift to solutions-based revenues generously, because investors see it as creating durable shareholder value that is build on hard-to-copy capabilities, little capital investment, and customization that resists commoditization. As a result of moving to solutions-oriented businesses, IBM improved its market value-to-book value ratio by 600% between 1990 and 1999.

To reap the benefits of offering solutions, a printer must understand precisely what a solution is, what attributes of a solution make it attractive in the marketplace, and what changes will be necessary in his or her own operations to successfully provide solutions. A solution is more than a collection of related products and services, and providing a solution requires more than simply offering a wide range of products and services. A true solution is a customized, integrated bundle of products and services that has been specifically designed to enable a particular customer to achieve a desired business outcome. This definition contains several important concepts. First, a real solution is specifically designed to produce a desired customer outcome, not just satisfy a specific customer need. The difference between a "desired outcome" and a "need" is difficult to define precisely, but the distinction is more than semantic. An outcome that is a good target for a solution will usually encompass a range of needs, and achieving that outcome will produce a significant and measurable economic benefit for the customer. For example, printing a customer’s product sheets fills a specific need. Providing that customer with a customized, Internet-enabled print procurement and marketing collateral management system that significantly reduces the customer’s overall cost of acquiring and managing printed materials is a solution that enables that customer to achieve a desirable business outcome.

The second important attribute of an attractive solution is that it is customized to meet the unique requirements of a specific customer. A real solution results when the solution provider and the customer engage in a collaborative process to define the customer’s desired outcome and to design the specific mix of products and services that will be deployed to produce that outcome. The third major attribute of an attractive solution is that it consists of a fully integrated bundle of products and services. Purchasing a solution, therefore, spares the customer from the need to deal with a multitude of suppliers and to integrate the products and services itself.

Printers who would become solution providers must be prepared to make significant changes in their business models. First, providing solutions will almost always require that a printer substantially expand the scope of his or her operations. Because solutions are designed around customer outcomes rather than specific customer needs, they will usually require skills and competencies that most traditional printing companies do not currently possess. While it is not necessary for a printer to have all of the required competencies "in-house," the printer who provides solutions takes on the responsibility for orchestrating the work of all those who are involved in delivering the solution. For many printers, this will require a new and higher level of working with other printers, perhaps even competitors.

Becoming a solution provider also may require that a printing company change its criteria for customer selection. Certain kinds of businesses will make better prospective purchasers of solutions than others. In some cases, the best customers for solutions may not be a printing company’s existing customers at all. In virtually all cases, becoming a solution provider will demand a new approach to selling. The individual in a company who can authorize the purchase of a solution will not be the company’s print buyer. Finally, printers who become solution providers must be prepared to assume far broader responsibilities than printers have traditionally assumed. When solutions are involved, success is ultimately measured by the customer’s improved business performance, and the solution provider often takes the responsibility for insuring that the improved performance actually occurs. In many cases, the best way to persuade a customer to pay a premium price for a solution is to offer a guarantee that the solution will produce the desired outcome. But providing such a guarantee requires the solution provider to assume risks that normally would be borne by the customer.

After reading the last two paragraphs, a printer might well ask, "Why would I want to become a solution provider?" But the benefits can be substantial. Providing a real solution to a customer dramatically strengthens a printer’s relationship with that customer. It almost always involves the printer directly in the customer’s internal business processes and allows the printer to impact those processes in a positive way. It also changes the character of the printer’s relationship with that customer, transforming it from a relationship that is primarily focused on a series of individual transactions (jobs) to a relationship that acquires the attributes of a strategic partnership.

Providing a true solution for a customer also dramatically improves the printer’s competitive position with that customer. It enables the printer to erect a "barrier of inconvenience" around that customer. When a printer and a customer work together to design an effective solution for that customer, their relationship immediately increases in complexity, and it becomes very inconvenient for that customer to change printers (or, more accurately, solution providers) and either give up the solution or start designing a new one from scratch. In economic terms, providing solutions to customers enables the printer to create "switching costs" that those customers would not normally face in a traditional relationship with a printer.

Lastly, providing solutions can enable a printer to earn a premium price for its products and services. Solution providers are able to earn a premium because they create new ways for products and services to work together to enhance the solution’s overall functionality beyond that of the next best alternative. Solution providers also earn higher margins because the value of the integrated whole (the solution) exceeds the value of the individual components of that solution.

Becoming a solution provider is not easy. But, this strategy can provide printers with an effective way to respond to the evolution of the printing industry.