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July 2001
TABLE OF CONTENTS
Trade Manufacturers Strategies for a Changing Forms Industry
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TRADE MANUFACTURER STRATEGIES FOR A CHANGING FORMS INDUSTRY
By Ivars Sarkans
While the forms industry has evolved into a large, growing and dynamic channel of distribution, many manufacturers are experiencing difficulties due to over-capacity, intense price competition and declining demand for core conventional unit set and continuous products. Trade manufacturers are also facing the very difficult challenge of divergence between their forms plant capabilities and the strategic direction pursued by many distributors who are growing their sales of services combined with products other than conventional forms. From a distribution channel perspective, the industry is rapidly losing its distinct "forms" identity because traditional core products now constitute only slightly over 50% of total industry sales at retail value of products and services. At the same time, many forms trade manufacturers are still heavily dependent on traditional products and have had limited success in pursing the products and services that are driving the growth of distributor sales.
Technology and market forces have changed the forms industry environment, and the trade manufacturer strategies that were successful in the past are becoming less effective. A sizable number of forms industry participants are still using business models and operating concepts developed 25 or more years ago when surging demand for continuous forms at times strained available capacity. Under those conditions, manufacturers could attain high rates of growth and profitability with limited attention to marketing, product line management, diversification and differentiation from competitors. Trade manufacturers generally have retained their past strong product and production orientation and remain preoccupied with backlogs, productivity, cost controls, new equipment choices and plant capacity. This historical production orientation plus restricted contact with end users of forms makes it difficult for trade manufacturers to develop new strategies for coping with today's market changes, intense price competition and declining demand for conventional forms.
The forms industry of today has become a very challenging environment for manufacturers, with most conventional forms reduced to commodity status and more profits derived from distribution and services than products and manufacturing activities. Many trade manufacturers without specialized product or service capabilities have been relegated to a commodity supplier role, competing on price in a shrinking conventional forms market with excess equipment capacity. Large distributorships often have the buying leverage to dictate prices and severely constrain manufacturer profit opportunities. Manufacturers themselves have also contributed to rampant price competition by indiscriminate use of cost-based pricing.
An already weak trade manufacturer position is threatened further by the gradual migration of forms production from conventional plants with offset presses to a variety of facilities that can print fixed and variable information at the same time on a digital press or a production line combining conventional and digital print stations. Several large firms outside the forms industry are now producing high volumes of invoices, statements and checks using monochrome and color digital printers and blank paper. The steady stream of new digital color printer and press introductions suggests that the migration of forms will continue and gradually diminish the work available for conventional forms presses. All of the digital printer suppliers promote elimination of preprinted forms as one of the benefits of their equipment. At this time, only a few trade manufacturers have started to position their firms to follow the migration of forms and capture some of the document printing volume that corporations are outsourcing to suppliers with digital production, data management and other print-related service capabilities.
Trade manufacturers have to develop new business models and strategies to cope with the changes and conditions in the forms industry today and the growing divergence between distributor sales trends and forms trade manufacturer capabilities. The alternative is to merge, exit the industry or execute some other type of end-game strategy in conventional forms over the next five to ten years. Conventional forms still represent a large market, with over $7.0 billion manufactured by forms industry participants. If the forms produced by quick printers, commercial printers, in-plant printshops, document factories and digital printing specialists are added to this total, the market for forms and related services exceeds $ 10.0 billion at retail value. The forms market has several stable and profitable specialized product niches and most trade manufacturers should be able to obtain sufficient volume and profits in conventional forms and other printing suitable for forms presses to support a gradual business restructuring based on a new vision of their industry. Forms suppliers are in an excellent position to take advantage of the increasing overlap between forms and other printing specialties, such as labels, commercial printing, quick printing, data center printing and digital on-demand printing. This convergence of printing specialties is creating a large business document printing and processing industry with many new product and service growth segments that offer future opportunities for forms suppliers
Strategic Options
The strategic options available to trade manufacturers are constrained by the characteristics and established habits of indirect distribution in the forms industry. The relationship between distributors and manufacturers has always centered on products. Therefore, manufacturers dedicated exclusively or primarily to distributor sales have been product-bound in their strategic planning. Distributors, on the other hand, enjoy much greater flexibility in developing strategies that combine a wide range of business communications and promotional products with services tailored to specific market segments or customers. At the same time, many distributors are also extremely sensitive to manufacturer attempts to utilize alternate channels of distribution that would give the trade suppliers comparable product range and print-related service opportunities in the growth markets now pursued by distributors.
| Forms manufacturers that are actively working to position their businesses for future growth within and outside the forms industry as it exists today have been pursuing four general strategic directions: 1. Grow through acquisitions and consolidation within the forms industry. 2. Market niche or other specialist strategies in forms and related segments of the printing industry. 3. Diversification into products and services other than conventional forms or use of multiple channels of distribution. 4. Follow the migration of forms to digital printers and new types of document factories that combine the printing of graphics and variable information in a single operation. |
Individual trade manufacturer strategies within these general business development directions vary widely, and often involve a mix of the four most common directions. The forms industry also has a sizable number of trade manufacturers that appear to lack the ability or business will to chose a strategy for growth and commit the resources needed for successful execution. These manufacturers are in effect pursuing a stalemate strategy of no growth or gradual decline of the business, which can continue for several years as long as the business can maintain adequate cash flow. An unexpected weakness in the general economy or loss of a major customer can easily upset the stalemate position and threaten the manufacturers' viability. Trade manufacturers that find themselves in a stalemate position with no significant growth options should craft a clear end-game strategy to avoid an adverse end-game outcome imposed by external forces.
Development of a growth strategy that can sustain the business for a prolonged period of time should start with a business vision linked to an updated definition of the industry. A vision that is based on participation in the forms industry is very constraining, because that places a trade manufacturer in a mature and partially declining market for traditional products. Only a relatively small number of trade manufacturers are likely to survive past 2010 with such a definition of their industry. The forms industry itself is gradually losing its past distinct identity and becoming a specialty niche in a much larger printed business document industry. Many distributors have made the transition to this very large $30+ billion industry, even if they have not formally articulated this expansion of their business vision. Most trade manufacturers will have to follow their example to adapt successfully to the rapid technological and market changes reshaping today's forms industry.
In terms of a broad business vision, all forms suppliers can be considered participants in the business communications industry. This encompasses traditional paper-based and newer electronic communications products and services, and may be an appropriate vision for large forms suppliers. Most forms trade manufacturers will probably have to continue with a strong product and printing focus, concentrate on adding print-related services and carefully evaluate all distribution channel options. Therefore, a more modest vision of participating in the printed document segment of the business communications industry may be realistic. There are other ways for trade manufacturers to define a new industry vision that encompasses a wider range of products and services than forms. The main risk of a broad new industry definition is that it may lead to too many strategies without the resource focus needed for a successful transition to a strong and sustainable competitive position in a larger market.
Consolidator Strategy
This has been one of the popular options for trade manufacturers who want to retain a strong long-term focus on forms and commitment to indirect distribution. In conventional forms, acquisitions can be used to maintain economies of scale in declining product lines and gradually gain market share. This strategy usually requires a strong management, marketing and technical team to continuously consolidate acquisitions, rationalize capacity and expand market coverage. The market for conventional forms is still sufficiently large to support a consolidator strategy for the next 5 to 10 years. This strategy demands a steady stream of acquisitions to maintain the volume base needed for profitability. The pace of acquisitions can also be managed to grow a trade manufacturing business even as individual product lines decline.
Acquisitions to consolidate the forms industry can broaden manufacturers product lines and add profitable specialties. This strategy also allows development of specialized production operations or marketing programs that can lead to strong product or market niche positions. The forms industry has experienced a gradual overlap between the roles of trade manufacturers and distributors, and it is very possible that future consolidations will involve more combinations of distributorships and trade manufacturers. The gradual shift of value from products to services in forms and other types of printing favors the formation of distributor-manufacturer combinations that can be more effective in developing, marketing and implementing print-related service programs.
One of the main consolidator challenges is to find compatible acquisition candidates at prices that are realistic relative to profitability and the volume that a buyer can expect to retain. The forms industry has many examples of past potentially good acquisition candidates that deteriorated in value and desirability due to delays or unrealistic expectations by owners. There are also examples of unsuccessful consolidation attempts that encountered difficulties due to incompatibility of acquisitions or inability to integrate them in an effective marketing and manufacturing network. Acquisitions can easily lead to financial problems if the acquired volume and cash flow unexpectedly decline below the level need to realize an adequate return on investment or service debt. Successful consolidation appears to call for a delicate balance between integration of the acquired companies and retention of their individual strengths in product or market niches.
Specialist Strategy
The forms industry has a sizable number of niches where trade manufacturers have established strong specialist positions based on unique combinations of marketing, manufacturing and systems. Examples of these niches include very short runs, checks, self-seal mailers, printed products for the health care industry, document processing and others. There are comparable specialist opportunities in related segments of printing, including labels, commercial printing, direct mail and digital printing. In an intensely competitive industry such as printing, a specialist strategy tends to produce above-average profits and allows even relatively small companies to remain independent.
Specialists set themselves apart from the competition by clearly superior service, being able to price more aggressively due to a manufacturing cost advantage or by providing unique products or product features. A specialist position implies a narrow product line or market niche, and usually requires access to a large geographic market or large numbers of similar customers. Distributors provide this type of market reach. Specialists with standardized products, such as software-compatible forms, have been able to use the Internet as an additional sales and marketing tool. A specialist strategy can be applied to many segments of the printing industry, document processing and combinations of products and services. Specialists in the forms industry usually develop several key competencies that can be used as basis for diversification.
In very mature products such as forms, specialization alone may not be enough to support a strong competitive position. The most successful specialists in mature products tend to be "best of class" manufacturers that excel in maintaining low costs, developing efficient systems and marketing aggressively. Trade manufacturers who try to develop product specialties as a sideline to their general forms business tend to achieve only limited success. For example, many forms plants started specialized short run departments in the 1980's, but only the manufacturers or business units with complete dedication and focus on short runs have been able to achieve the volume growth and profitability characteristic of a specialist strategy. Some manufacturers have attempted to diversify by adding a direct mail or label press to a conventional forms plant, only to find that they cannot compete with established specialists in the product lines. General forms manufacturers can achieve a specialist position in selected products, but success frequently depends on the extent to which the specialty operations are treated as separate strategic business units with strong product management, volume drivers and customized systems.
The other strategic directions mentioned above, Diversification (#3) and Digital Document Factory (#4) will be discussed by Ivars Sarkans in the in the August issue of BPTR. Please be on the lookout for part two of this special report!
Ivars Sarkans is a noted industry consultant based on Los Angeles. He can be reached at isarkans@sarkans.com, or by calling 323-221-7791.
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