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Applied Project
A Review of the Canadian Printing Industry
Rael D. Fisher
APRJ-699
AP Coordinator: Dr. Teresa Rose
January-7-2013
15,763 Words Fisher 2
Table of Contents
Introduction ...... 3 Purpose ...... 3 Statement of the Problem ...... 4 The Sub-Problems ...... 4 The Prediction ...... 4 The Delimitations and Limitations ...... 5 The Definition of the Key Terms ...... 5 The Assumptions ...... 6 The Significance of the Study ...... 6 Review of the Related Literature ...... 7 Industry Analysis ...... 7 Scenario Planning Methodologies ...... 9 Methodology ...... 12 Research Site - Canadian Printing Industry Overview ...... 12 Research Design ...... 14 Results ...... 15 Industry Analysis - Application of PEST Methodology ...... 15 Industry Analysis - Application of Porter’s 5 Forces Methodology ...... 27 Scenario Planning Analysis ...... 36 Industry SWOT Analysis ...... 41 Conclusion ...... 43 Strategic Recommendations ...... 45 References ...... 47 Appendices – Supporting Data ...... 52 Appendix A – Shipments by Region (2011) ...... 52 Appendix B – Printing Establishments ...... 53 Appendix C – Printing Exports ...... 54 Appendix D – Employment by Type (2001-2010) ...... 55 Appendix E – Sales by Product Type (2006-2013) ...... 56 Appendix F – Sales by Production Process (2006-2013) ...... 57 Appendix G – PEST Analysis Model ...... 58 Appendix H – Key Technological Advancements ...... 59 Appendix I – Porter’s Five Forces Model ...... 60 Appendix J – Canada’s Top Printers ...... 61 Appendix K – Employment by Size and Category (2011) ...... 62 Appendix L – Canadian Printing Industry SWOT ...... 63 Fisher 3
Introduction
Purpose
According to the Canadian Printing Industries Association (CPIA, 2012), the Canadian printing industry is the nation’s oldest information technology-based manufacturing platform, accounting for about 8% of all manufacturing output. CPIA also notes that in 2011 the industry included 6,724 locations across the country.
Unfortunately, the industry has been in a significant state of economic decline for many years. Total manufacturing revenue has dropped from $CDN 11.7 B in 2001, to 9.2 B in 2010, an average decline of 2.7% a year (Industry Canada, 2012).
It seems likely that this trend is permanent, with the industry continuing to be impacted by multiple environmental forces, the advent of digital technology arguably being the most disruptive of all. Despite the overall decline, many organizations operating within this industry are thriving, while others have failed, or are heading in that direction. As is often the case in markets typified by a high degree of change, sustainability in this segment is highly contingent on developing and executing the right strategy.
With the foregoing in mind, the purpose of this research effort has been to complete an in-depth industry analysis to fully understand the dynamics which underscore the current market position, and to leverage that research along with informed opinion to develop possible future state scenarios and supporting business strategies. From an academic perspective, this research study primarily fits into the Strategic Management domain, but also incorporates information from other academic areas such as Economics, Statistics, Marketing, and Information Technology.
This research paper will begin with a review of academic literature relevant to the analysis of the Canadian printing industry. Then, based upon appropriate identified academic models, a methodology to review the industry will be selected, and a review process will be outlined. The industry review will provide insight to historical trends, and future possible outcomes using appropriate analytical tools. The main findings of this paper will be summarized in a concluding section, followed by the presentation of strategic options for consideration of companies operating within this key segment of the Canadian industrial market. Fisher 4
Statement of the Problem
The focus of this research study is to comprehensively determine the historical impact of digital technology on the Canadian printing industry (the “industry”) to better understand the future direction and trends of this segment. Arguably, the advent of digital technology has been, and will continue to be, the single most disruptive environmental factor impacting the nature and attractiveness of this segment. While much has been written on this subject, the available data seems to be fragmented, and does not provide a comprehensive view of the subject. The researcher will first analyze the industry in general to determine past and current trends. The researcher will then determine the key uncertainties facing the industry, and will develop several future state scenarios based on those uncertainties. Considering the most likely scenario, the researcher will then provide recommended strategies to best drive sustainability in the industry.
The Sub-Problems
To ultimately answer the overarching research question regarding future industry trends and direction, this study will strive to answer several key sub-problems. For a start, there’s a need to develop an overall industry analysis using one or more well established academic models. Then, key trends affecting the industry must be identified, along with key uncertainties facing companies in the industry. With the key uncertainties in mind, several future state scenarios will then be created that provide possible ways in which the industry will continue to evolve in the upcoming 3-5 year period. An appropriate scenario evaluation matrix will then need to be developed to determine which scenarios are more or less likely to occur. Lastly, based on the most likely case scenario, a series of recommendations must be provided to possibly assist printing organizations with future strategic direction, considering the need to remain relevant in the market, and to develop or maintain a sustainable financial model.
The Prediction
The researcher expects to obtain data supporting a determination that the past and current key industry trends, especially in relation to overall industry economics, structure, and the impact of digital technology, can reasonably be expected to have a similar and further impact on the industry in the future.
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The Delimitations and Limitations
This research project is delimitated to the Canadian printing industry, as is further defined below. The overall industry analysis will attempt to encompass all industry sub-segments. However, due to available data and time, certain aspects of the research will either be limited to, or will exclude specific industry sub-segments, as will be further detailed in the data collection and analysis associated with each sub- problem. The impact of globalization on the Printing Industry, and more specifically on the Canadian market, is generally beyond the scope of this study, although a high level review of the domestic trade balance will likely be incorporated in the study. Lastly, this study is focussed on the industry in general, and will avoid reference to, or review of, any specific organization within this segment.
The Definition of the Key Terms
Canadian Printing Industry:
The core group of for-profit organizations using printing machinery to produce paper and electronic documents for consumption by public and private sector organizations, and also individual consumers, as classified by Industry Canada under the Manufacturing Segment NAICS 323 - Printing and Related Support Activities. For the purposes of this study, the scope excludes certain related industry segments such as paper manufacturing (NAICS 3222), publishing (5111), graphic design (54143), business service centres (56143), and packaging/labelling services (561910).
Industry Sub-Segments:
Includes the following specific sub-segments of the Canadian printing industry:
• Business Forms • Transactional Documents • Books • Consumer Goods Packaging • Marketing and Promotional Documents • Direct Mail • Indoor and Outdoor Advertising
Digital Technology:
Refers to printing technology used in a commercial capacity (versus desktop printers) capable of producing a document output from the input of a digital file (versus hardcopy input). Also refers to the computer and networking technology capable of enabling distribution of digital content for consumer access and use.
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The Assumptions
• In cases where data is not specifically delimitated to the Canadian printing industry, it’s assumed that available data delimitated to the American or North American Printing Industry can be reasonably extrapolated to be representative of trends within the Canadian printing industry.
• It’s assumed that the underlying environmental, sociological, and technological factors will continue to enable the printing industry to function. For example, it’s assumed that the Paper and Pulp industry will continue to supply all the paper that the printing industry can consume, as such research into the sustainability of the Paper and Pulp industry is out of scope for this project. Similarly, it’s assumed that workers will continue to seek employment in the Printing Industry, and therefore research into the availability of labour is beyond the scope of this project. Lastly, its assumed that required technology will continue to be freely available to the overall Printing Industry, without undue restrictions on its use, including the availability of supporting elements such as electricity, water, etc.
• It’s assumed that currently available communications channels like the Internet are maintained or expanded.
• It’s assumed that domestic and global society continues to function without significant change or disruption due to natural disasters, war, disease, etc.
The Significance of the Study
As will be demonstrated in this research project, the industry continues to be challenged by numerous environmental factors. Future sustainability for any company operating within this segment is contingent on understanding the market dynamics, and being able to align short and long term business strategies to evolving customer needs. This research project will attempt to provide a comprehensive view of the industry position, provide logical and informed analysis relating to future trends, and provide a series of recommendations that organizations operating within the industry will find helpful as they continue to evolve. As such, this study conducted by an industry insider is expected to make an important contribution to the data currently available to the industry.
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Review of the Related Literature
The end goal of this research project is to recommend business strategies for sustainable growth in the Canadian printing industry. According to David (2003, p.4), the strategic management process requires an understanding of competitors, markets, suppliers, customers, and other stakeholders. As such, the starting point of this project must therefore be to understand the industry and its environment. This literature review is therefore initially focussed on academic literature related to the various models that can be used to complete an industry analysis, with the goal to select one or more models that can then be used to complete the industry analysis as noted in the first sub-problem. The literature review then focuses on available scenario planning methodologies which will later be used in developing future state outlooks of the Canadian printing industry.
Industry Analysis
Given the wide range of external factors which can impact an industry and the organizations within, some sort of system or framework is needed to enable the analysis process (Grant, 2010). Some of the models most typically used for this purpose include the Strength, Weakness, Opportunity and Threat analysis (SWOT), Porters’ Five Forces model, and the Political, Economic, Social, and Technical model (PEST).
The SWOT model is amongst the most commonly used strategic management tools, and seeks to align an organization’s strengths and weaknesses with the opportunities and threats in its external environment (Recklies, 2005). Many organizations like the Perrigo Company (2010) have used the traditional four quadrant TOWS matrix to list the various environmental factors. The Strength and Weakness aspect of the model is strictly an internally focussed review, leaving the Opportunities and Threats aspects to guide the external review. Given the limited scope of its external focus, the SWOT model is likely best used in conjunction with, and following completion of, a more robust external analysis tool, such as either the PEST or Five Forces models.
The PEST model seems to be well suited to analysis of the overall market, especially in more complex situations. According to CIPD (2010), it’s a “useful tool for understanding the ‘big picture’ of the environment in which an organisation is operating.” However, beyond developing a list of PEST factors, deeper analysis is needed to determine how they apply to a specific company or industry. For example, it’s important to determine the nature and pace of change within the PEST factors, and also to what level they apply within the industry or organization (Gillespie, 2007). Further, while PEST is a useful tool in assessing the external environment, it does not lead to strategy development on its own since it does not include an internal analysis. As such, the PEST results must be combined with other factors, such as the organisation itself, competitors, and the industry in which it is working.
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Grant argues that the starting point for an industry analysis is to determine what drives profitability in an industry (2010). While profitability is closely related to the degree of competitiveness in an industry, Porter proposed that the competitive forces impacting industry and organizational profitability extends beyond established rivals, and needs to include customers, suppliers, potential entrants, and substitute products (Porter, 2008). As an outcome, Porter’s Five Forces Model is now a widely used strategic development tool (David (2003, p.98).
In reviewing Porter’s Five Forces Model, David claims that competition amongst rival firms is the most powerful of the five forces (2003, p. 100). Grant concurs with this position, and goes on to note six specific factors that impact the level of competition between rivals; concentration, diversity, product differentiation, capacity, exit barriers, and cost conditions (2010). Clearly, to complete a detailed industry analysis, the market structure relative to the direct competitive landscape must be well understood.
Furthermore, and directly relevant to this research project, competition from new entrants and substitute products can have a significant impact on industry structure and profitability, and therefore need to be closely examined. According to Porter, the threat of entry depends on the height of entry barriers, with low barriers forcing incumbents to hold down prices or boost investment to deter new competitors (2008). For example, in the printing industry the lower cost of newer digital technology versus legacy analog equipment has dramatically lowered the cost of entry.
Substitute products, which perform basically the same functions as the established product, can limit an industry’s profit and growth potential (Porter, 2008). According to Grant, electronic commerce as a substitute technology is having a devastating effect on many industries (2010). This is certainly true of the printing industry, as electronic communications solutions delivered through the internet are having a significant impact on industry profitability and structure.
The other key factors Porter identified include Buyer, Consumer and Supplier bargaining power, which in both cases rests on the ability of one party to refuse to conduct business with another party (Grant, 2010). In conducting a detailed industry analysis, it’s clearly important to examine the structure and relationships of these stakeholders to determine their current and future impact on industry profitability and structure.
Porter claims that understanding the forces shaping industry competition is the starting point for strategy development (2008). In this sense, the Five Forces Analysis can be viewed as a precursor to the SWOT model, providing the in-depth external analysis required to ultimately develop internal business strategies.
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Porter’s model does appear to have a couple of key limitations. As noted earlier it does not support strategy development on its own, but can be used as a valuable input to that process when coupled with other available tools. Also related to strategy development, Porter’s model tends to project a common competitive view across an entire industry, whereas individual organizations within the industry may be more or less able to compete in that market as compared to the average organization. Again, this simply suggests the need to leverage a suite of tools to effectively analyze an industry, and develop a winning business strategy.
This section began with the premise that a framework to conduct an industry analysis is required to assess the numerous, complex external factors, and to eventually support the development of an organization’s business strategy. While this was not intended to be an exhaustive review of all possible tools, several common models were discussed, including the SWOT, PEST, and Five Forces systems.
As was noted, the SWOT model contains an internal component that is relevant to a specific organization, along with an external aspect relevant to the market in general. While the researcher believes that the SWOT model is a valuable strategic development tool, it will not be selected for use in the external market analysis due to its limited scope in that regard. However, the SWOT model will be leveraged later in this paper as a tool to analyze the printing industry’s ability to respond to the future state evolution towards the most likely identified scenario.
Both the PEST and Five Forces models can be used to complete an in-depth external analysis and both require linkage to additional systems like Scenario Planning methodologies and the SWOT model to turn findings into strategy. The PEST approach provides a higher-level review of the market, which is suitable as a starting point in the market analysis process. The Five Forces model drills down much deeper into the actual nature of the competitive forces impacting the industry, and therefore provides valuable, additional analysis. As such, both the PEST and Five Forces models will be used to complete the industry analysis.
Scenario Planning Methodologies
The scenario planning discipline was initially developed for the military by Herman Kahn as a means to plan for the potential impacts of a thermonuclear war. In the late 1960’s Pierre Wack adapted it for use by Royal Dutch/Shell, where it was soon proven to be an effective tool in dealing with the 1973 oil crisis (NetMBA, 2002-2010). Since then, scenario planning seems to be increasingly finding its way into mainstream business, political, and other applications.
According to the Economist (2008), scenario planning “is a structured way for organisations to think about the future.” Lawrence Wilkinson (2009) of the Global Business Network suggests that since its impossible to know how the future will unfold, “a good decision or strategy to adopt is one that plays out well across several possible futures,” or scenarios. As part of an extensive scenario planning study about the post-apartheid future of South Africa, Kahane (1991) further suggested that scenarios describe alternative pathways into the future, projecting a range of possible Fisher 10 outcomes, which enable people to consider the future in different ways. Börjesson (2007) stated that “scenario planning is a method for learning about the future by understanding the nature and impact of the most uncertain and important driving forces affecting our world.”
While these and other definitions of scenario planning differ slightly, its clear that scenario planning is a process that can be used to develop alternative future-state views, which can then be beneficially incorporated into an organization’s strategic planning process. Perhaps most importantly, the structured process required to develop scenarios can compensate for the common errors in strategic planning, those being overconfidence and tunnel vision (Schoemaker, 1995).
Beyond the obvious advantages related to the development of business strategies aligned with possible future scenarios, Schwartz (1991) also notes a benefit he calls “future memory” which, based on the work done to evaluate an organization’s response to potential future events, subsequently enables organizations to respond quickly and effectively to environmental changes as they occur.
As a starting point in the planning process, the identification of trends and uncertainties is required to enable the development of future scenarios (Schoemaker, 1995). Van der Heijden (1997) further defined uncertainties into three distinct categories; risks, structural uncertainties, and unknowables. He went on to note that the assessment of risks uses past experience to predict future outcomes, that structural uncertainties relate to possible future events with an unpredictable outcome, and that unknowables are quite simply events that cannot even be imagined at the present time. Clearly, the examination of risks and structural uncertainties must be a key part of the scenario planning process. Further, it’s helpful to be reminded that unknowables, while beyond definition or understanding at present, will almost surely and eventually impact the future state.
According to Kahane (1991), “there is no standard method of developing scenarios.” While that may be true, this review of literature on the topic found multiple, well defined methods available, many of which appear to share similar approaches and characteristics.
Schwartz (1991) suggested using an eight-step model which includes identification of a focal issue along with key internal and external forces, ranking the key forces based on importance for success and degree of uncertainty, development of scenarios based on the ranking of key forces, checking for plausibility and robustness of each scenario, and finally the development of leading indicators to alert the organization when a particular scenario actually begins to occur.
Shoemaker’s (1995) ten-step model is a little different, but similar in many ways. He suggests the following steps; define the scope, identify major stakeholders, identify basic trends, identify key uncertainties, construct initial scenarios, test for consistency and plausibility, develop learning scenarios for further study, identify research needs, develop quantitative models, and finally evolve towards decision scenarios which will become the basis for the development of business strategy. Fisher 11
The Internet Centre for Management and Business Administration Inc. (NetMBA, 2002-2010) suggests yet another similar model containing nine steps; define the planning scope and timeline, establish a current state departure point for each scenario, identify predetermined events which are highly certain to occur, identify the key uncertainties, apply a rating scale to determine which drivers are most important, consider a few possible values for each variable, analyze the interaction between the variables (possibly using a scenario matrix), transform the future state variables in fully articulated scenarios (stories), and lastly quantify the impact of each scenario and develop required strategies.
For the purpose of this research study, a combination of the above mentioned models will be utilized to develop future state scenarios of the Canadian printing industry. Given the restricted scope of this study, primary focus will be placed on identifying and ranking the risks and uncertainties, and then using them to develop potential scenarios. Afterwards, business strategies will be developed in consideration of the most likely future scenario.
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Methodology
Research Site - Canadian Printing Industry Overview
Canadian’s interact daily with output from the printing industry, much of it created and produced from within Canada. Typical printed applications include newspapers, books, magazines, financial reports, credit card and bank statements, posters, flyers, currency, stamps, and product brochures, just to name a few. As a brief overview of the industry, this section will provide a high level view of industry sales and establishments by geographic region, exports, employment, and a breakdown of sales by product type and by printing process.
In 2011, the industry generated Newfoundland and $8.4 billion in shipments (CPIA, British Columbia, 6% Labrador, 0% 2012). As the chart to the left Nova Scotia, 0% Alberta, 1% depicts (see Appendix A), about Prince Edward Island, 57% of all shipments are in Ontario, Saskatchewan, 1% 0% and about 25% are in Quebec. As New Brunswick, 0% Manitoba, 9% such, the majority of all output is found in Ontario and Quebec. Western Canada accounts for about 18% of the county’s total shipments, Quebec, 25% while Eastern Canada accounts for less than 1% of all shipments. Ontario, 57% According to Industry Canada (2012), there were 4,205 printing establishments in Canada in 2011 (see Appendix B). Of all establishments, 46% are in Ontario, 25% are in Quebec, 26% are in Western Canada, and less than 4% are in Eastern Canada. As such, there’s a notable correlation existing between the geographic profile of printing shipments and printing establishments. This pattern suggests that to a large degree printing establishments are geographically located to serve local markets, while shipments to distant regions also occur.
In 2011, export sales accounted for $918 million or 11% of Canada’s total industry shipments (Industry Canada, 2012, Appendix C). The vast majority of exports are to the United States, accounting for $706 million, or 77% of all exports. Historically, the value of Canada’s export market has been closely tied to fluctuations in currency exchange values, and freight costs, this will be explored further within this paper.
According the Industry Canada (2012), the Canadian printing industry employed 56,325 people working in establishments across the country in 2010 (see Appendix D). Of this, about 72% were employed in manufacturing roles, while the remaining 28% were employed in administrative functions. The profile of roles required within the industry, and the amount of total employment demanded by the industry, have changed dramatically over the years. This will be examined in much more detail later in this paper. Fisher 13
According to data available from Converters/label/wrapp er a study recently completed by Financial/legal 1% Greeting Cards 2% Public Works and Government 0% Services Canada (PWGSC, Mailing services Newspapers 2012, Appendix E), and as 2% 2% Packaging Other depicted in the chart to the left, 3% 7% in 2011 the general commercial Magazines and print segment was the largest periodicals 3% General commercial part of the industry, comprising In-plant 35% 35% of all sales. The quick print 3% Direct mail 3% segment followed at 15%, so in Trade Print total these 2 segments 4% comprised 50% of all sales. The Books Quick Print longer term trend within each 4% 15% segment will be examined in Specialty print more detail further within this 4% paper, related to the impact of Business Forms Signage 5% environmental, sociological and 6% technological changes.
It’s also illustrative to examine Loose-leaf Letterpress the breakdown of sales by Web-fed heatset manufacturing 1% 1% printing process (see Appendix 1% Thermographer Trade binding 0% F). As depicted in the chart on 1% Gravure the left, in 2011 approximately Flexographic 0% 1% Other 32% of sales came from 2% Screen printing traditional sheet-fed printing 2% processes, while another 25% Graphic finishing 3% came from toner-based digital processes (PWGSC, 2012). Web-fed non-heatset 3% Sheetfed Notably, sheet-fed printing 32% largely aligns with the general Digital (inkjet) 6% commercial segment noted above, while both sheet-fed and Prepress/premedia digital toner-based print services processes are prevalent within 7% the quick print segment. Once Inkjet wide/super wide format again, the longer term trend Digital (toner) 7% impacting each production 25% process will be examined in Non-print value-add 8% more detail further within this paper.
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Research Design
To complete this research project, multiple and diverse data will be required. Secondary data will be obtained primarily through searching the internet and available on-line databases. At this time, the researcher does not believe that primary data will be required, and therefore does not anticipate the need to complete an Ethics Application.
This research project is of a mixed design. Certain elements of data will be quantitative, for example information pertaining to industry sales, establishments, and employment. Other elements will be qualitative in nature, for example information pertaining to the many different social and technological trends impacting the industry. At this early stage, the researcher anticipates that the qualitative data is most likely to be used to support and explain the quantitative findings. An example of data sources includes Industry Canada (NAICS 323 - Printing and Related Support Activities), the Canadian Printing Industries Association (CPIA), Graphic Monthly, the Canadian Printing Industry Sector Counsel (CPISC), and various other industry reference sites and materials.
The researcher plans to begin the project with a PEST analysis of the overall industry. Through this initial analysis, the overall economic condition of the industry will be examined, along with the macro-level factors that are impacting the industry. Upon completion of this initial analysis, a more in-depth review will be completed using Porter’s Five Forces model as a framework.
Completion of the aforementioned industry review is expected to address sub- problems 1-3. A review of scenario planning tools and models as suggested by Shoemaker (2005) and others will be completed, and a suitable approach will be identified to develop the future state scenarios required by sub-problem 4. The researcher will then leverage the analysis completed, other available data, and his own extensive industry knowledge to address sub-problem 5, which the researcher expects to be a more qualitative and subjective process. Strategic planning tools such as the Strength-Weakness-Opportunity-Threat model (SWOT) will be leveraged in developing future state strategies. Fisher 15
Results
Industry Analysis - Application of PEST Methodology
This section examines selected, salient sections from a typical PEST analysis model as depicted in Appendix G (Riley. J., 2012) to examine the key external influences impacting companies operating within the Canadian printing industry today. The PEST model includes Political, Economic, Social, and Technical factors, each of which will be examined in further detail.
Political / Legal Factors
Environmental Regulation and Protection
The printing industry is highly regulated to control its environmental impact, as are key aspects of the industry’s supply chain, such as the Pulp and Paper industry. Regulatory control is primarily focussed on effective management, reduction and elimination of the use of volatile organic compounds (VOC’s) in the workplace. According to Environment Canada (2010), “the printing and publication industry is one of the principal stationary sources of VOC emissions from solvents in Canada” … accounting “for around 10% of total Canadian solvent VOC emissions.” VOC’s are primarily found in solvents, inks, and fountain solution used in the analog (versus digital) printing process. There are multiple alternatives available to meet government regulations, such as inks and chemicals with no or low VOC’s.
Furthermore, the sustainability concern related to the global paper supply, coupled with consumer choice and preference, has a significant impact on the printing industry. The demand for paper is growing and continues to threaten further degradation of the world’s old growth forests (Fisher, 2007). This concern manifests itself in a couple of key ways within the printing industry. For a start, there is ongoing demand for recycled paper and materials. However, “more than half of the world’s paper is still produced from virgin fibre” (Fisher, 2007). Secondly, to promote effective stewardship of the world’s forests, printing companies are under pressure to purchase materials that come from properly managed eco-systems. There are presently several organizations in Canada providing certification that paper originates from properly managed forests, including the Forest Stewardship Council of Canada (FSC), the Sustainable Forestry Initiative, and the Programme for the Endorsement of Forest Certification (PEFC).
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International Trade Regulation
There are relatively few barriers to international trade within the printing industry. As a result, the effect of globalization, particularly the relocation of work to regions with lower labour costs, has had a dramatic impact on the Canadian printing industry. From 2003 to 2007 alone, the industry experienced a half billion dollar trade deficit - exports dropped from $1.79 billion to $1.43 billion, while imports of foreign printing services increased from $1.24 billion to $1.39 billion (CPISC, 2008). This negative trade pattern is driven by the foreign procurement of consumer goods including the associated packaging and documentation, not just the pure outsourcing of printing services.
On a more positive note, the North American Free Trade Agreement (NAFTA) enabled Canadian printers to ship goods into the US market without having to mark the materials as have been “Printed in Canada” (Country of Origin Markings, 2007). This removed a key barrier to trade, and likely supported growth in exports to the US market. In fact, in the decade following the implementation of NAFTA in 1994, Canada’s trade balance in printing services to the US increased by approximately $670 million, going from a deficit of about $132 million in 1994, to a surplus of around $538 million in 2004 (Industry Canada, 2012). During this same period, the Canada- US exchange rate remained largely favourable to export trade, going from an average of $CDN 0.73 in 1994, to an average of $CDN 0.78 in 2004 (Bank of Canada, 2012).
Consumer Protection
The printing industry is impacted by various consumer protection laws. For a start, the industry must comply with the Canadian Copyright Law which may govern the reproduction of printed materials such as books, newspapers, dictionaries, manuals, catalogues, magazines and pamphlets (Kerr, 2012). The copyright owner can grant or sell the rights to reproduce these types of documents. While the printer’s customer is normally responsible to obtain the required rights of reproduction, the printer must also take care in ensuring that the rights are in place. Since this is not always practical to do, most printers are careful to establish contractual terms with their clients that clearly obligate the client to obtain all required reproduction rights, and that provide indemnification to the printer for any liabilities that may arise from a breach of copyright law. In some cases, printers may also be involved in the retail sales process associated with copyright protected materials, such as a printer who operates a book store or provides an online ordering solution as an extension of the manufacturing process. In such cases, the printer may be obligated to collect royalties from the consumer and to submit those back to the intellectual property rights holder. For the vertically integrated printer, this process may present a challenge due to added complexity and work, but may also provide an opportunity to contribute additional value to the client.
Another important regulatory act impacting the Canadian printing industry is the Personal Information Protection and Electronic Documents Act (PIPEDA), as first established in 2000. The act’s purpose is “to govern the collection, use and Fisher 17 disclosure of personal information in a manner that recognizes the right of privacy of individuals with respect to their personal information and the need of organizations to collect, use or disclose personal information for purposes that a reasonable person would consider appropriate in the circumstances” (Department of Justice – PIPEDA, 2012). This act mostly impacts the segments of the printing industry associated with variable data printing, which most commonly includes direct mail and transactional documents such as invoices, statements, policies, etc. A printing company that inadvertently causes a breach of consumer privacy rights may be subject to remedies imposed by the Canadian Privacy Commissioner, direct costs to remedy the breach which may include consumer credit monitoring, and indirect costs such as the loss of a specific client or a more generalized loss of business resulting from a degradation of the printer’s brand, image and reputation in the market. As a result, printers engaged in the production of the types of documents noted above are increasingly being challenged to implement processes and technologies that can prevent privacy incidents.
The printed content displayed on all consumer packaged goods is subject to the Consumer Packaging and Labelling Act, as first established in 1985. The act is a criminal statute governed by the Canadian Competition Bureau, that controls the “packaging, labelling, sale, importation and advertising of pre-packaged and certain other products” with the intent to ensure that “consumer products bear accurate and meaningful labelling information to help consumers make informed purchasing decisions” (Competition Bureau of Canada, 2012). Similar to the impact of the Canadian Copyright Law noted above, printers must take reasonable steps to ensure they comply with the Consumer Packaging and Labelling Act, which typically follows a similar contractual path in terms of indemnity. However, compliance with this act leads to opportunities for printers, especially in consumer product segments typified by frequent legislative changes such as the food and tobacco industries, which in turn require frequent changes to packaged goods designs.
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Economic Factors
Economic Growth
As depicted below, over a 10 year period from 2001-2010 the Canadian printing industry experienced a cumulative aggregate growth rate (CAGR) of -2.6% per year, with the largest decline occurring from 2007 onwards (Industry Canada, 2012). During this same period, the Gross Margin declined at a slower pace of -1.2% CAGR per year. However, reflecting increased productivity in the period, Gross Margin as a ratio of sales increased by 1.4% per year CAGR from 26% in 2001 to 30% in 2010.
14.0 31.0% Canada Print Industry 12.0 30.0% 10.0 29.0% 28.0% 8.0 Sales (Billions) Billions 27.0% 6.0 Gross Margin 26.0% GM Ratio $CDN 4.0 25.0% 2.0 24.0% 0.0 23.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Statistics Canada, special tabulation, unpublished data, Annual Survey of Manufactures, 2001 to 2003; Annual Survey of Manufactures and Logging, 2004 to 2010.
Over the same 10 year period as depicted below, industry employment experienced a -4% CAGR, going from 81,374 employees in 2001 to 56,325 employees in 2010 (Industry Canada, 2012). Since employment declined faster than sales, productivity increased as noted above, with the average sales per employee increasing from $144k in 2001, to $163k in 2010.
180,000 Canada Print Industry 160,000 Employees 140,000 120,000 Sales / Employee 100,000 Wages / Employee 80,000 60,000 40,000 20,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Statistics Canada, special tabulation, unpublished data, Annual Survey of Manufactures, 2001 to 2003; Annual Survey of Manufactures and Logging, 2004 to 2010.
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The average wage per employee increased slightly over the same 10 year period at a 1.4% CAGR (Industry Canada, 2012). However, given that the Consumer Price Index had a 2.1% CAGR over the same period (Bank of Canada, 2012) it appears that employees who survived the job cuts experienced negative earnings growth, with the rate of inflation outpacing the rate of wage growth in the industry.
Of interest, the industry has continued to invest in new technology despite the sales decline. As depicted below, capital investment increased over the 10 year period, both in absolute terms, and also as a ratio of sales. As will be discussed further in this document, capital investment in certain new technologies has supported the staffing reductions and productivity improvements noted earlier in this section.
0.7 10.0% Canada Print Industry 0.6 8.0% 0.5 0.4 6.0% Billions
0.3 4.0%
$CDN 0.2 Capital Investment 2.0% 0.1 Ratio of Sales 0.0 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Statistics Canada, special tabulation, unpublished data, Annual Survey of Manufactures, 2001 to 2003; Annual Survey of Manufactures and Logging, 2004 to 2010.
Monetary Policy
The Bank of Canada works to keep inflation low and stable, leveraging its ability to set interest rates as a primary control vehicle. The foreign exchange rate is flexible, market-driven, and is impacted by domestic inflation along with current global events (Ragan, 2005).
This exchange rate fluctuation impacts the Canadian printing industry in two important, yet diametrically opposed ways, one being to encourage or restrict exports to the US market, and the second being to impact the price of raw materials imported from the US market. For example when the Canadian currency trades below the US, it encourages US firms to buy Canadian products, but also increases the cost of raw materials Canadian firms purchase from the US market.
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$1.80 $1.200 Canada Print Industry $1.60 $1.000
$1.40 $CDN
Billions
in
$1.20 $0.800 $1.00 $CDN
$0.600
in $0.80
Exports to US Exchange $0.60 $0.400 $0.40 CAN/US AVG FX Exports $0.200
$0.20 Foreign $0.00 $0.000 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: Statistics Canada on 01-Dec-2012 from http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag Bank of Canada on 25-Dec-2012 from http://www.bankofcanada.ca/rates/exchange/monthly-average-lookup/
As depicted above, the printing industry’s exports from Canada to the US market has steadily declined over the past years, in direct opposition to the average exchange rate trend for the same period. Arguably, this decline in exports exacerbated the domestic situation, contributing to the overall state of decline in the Canadian printing industry.
It’s also interesting to examine the US / Canada trade balance in the Pulp & Paper industry. As shown below over the same period of 2003-2011, the level of exports to the US market declined steadily as the exchange rate become increasingly less attractive to US trade. However, it’s notable that the level of paper imports into Canada from the US market remained relatively flat, or inelastic to the exchange rate trend. This is largely due to the fact that Canada has traditionally been able to meet much of its domestic demand internally within the country, importing only selected materials from elsewhere, although this trend is changing in more recent years due to the decline of the Canadian Pulp & Paper industry, and the rising supply from Asian markets.
$16.00 Canada Pulp & Paper Industry $1.200 $14.00 $1.000 $CDN $12.00 in
$0.800 $10.00 Exports to US Billions $8.00 $0.600 Imports from US $6.00 Exchange
$CDN CAN/US AVG FX $0.400
in $4.00 $0.200 $2.00 Foreign Trade $0.00 $0.000 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Industry Canada on Dec-25-2012 from http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag Bank of Canada on on Dec-25-2012 from http://www.bankofcanada.ca/rates/exchange/monthly-average-lookup/ Fisher 21
Social Factors
Demographics
The Canadian Printing Industries Sector Council has conducted extensive studies of the human resources-related issues facing the industry, and has noted that despite overall declining employment, the industry is struggling to find sufficient skilled workers (CPISC, 2008). They further noted that many companies rely on word-of- mouth to recruit new employees, which may be limiting recruitment from non- traditional labour force pools, such as immigrants, women and Aboriginals. That may partially explain the limited workforce diversity, with males comprising 64% of the workforce versus the Canadian average of 53%.
Of all employees, 25% are immigrants and 18% are visible minorities, both of which are slightly above national averages of 23% and 15% respectively. The sector counsel also noted that the workforce is aging in general, with half of the workforce over 45 years of age. This trend is reflective of the overall workforce demographics playing out in the Canadian market. As the Baby Boomers are starting to retire, it’s expected that by 2021 almost 25% of the Canadian labour force could be aged 55 or over (Curry & Torobin, 2011). As such, many employers in the printing industry now consider retirement to be a significant issue for their businesses (CPISC, 2008).
Attitudes
Consumer attitudes towards print are shaped by multiple environmental factors, including changing demographics, increased environmental concern, and privacy rights. Scarborough Research, a US based social research group, has conducted extensive studies into generational trends related to the use of printed and digital news media. The group they define as being Millennials, the 20% of American adults presently between 18-29 years of age, is “the first generation to come of age during the digital revolution, making them society’s prominent early adapters” (Scarborough Research, 2012). As illustrated below, Scarborough’s data demonstrates a clear trend away from traditional printed media, and towards online media formats.
80% Scarborough Research ‐ Millennials Study 70% 2001 60% 2011 50% 40% 30% 20% 10% 0% Daily Newspaper Cable TV Spend 20+ Hrs / Online Radio Internet News Internet Sports Readership Subscription Week Online Scores/Updates
Source: Scarborough Research, Millenials Study, on Dec-25-2012 from http://www.scarborough.com/fs248584273/Scarborough-Millennials-Complimentary-Study.pdf Fisher 22
Conversely, based on the results of a recent marketing survey in the UK (Fast.Map, 2012), it’s clear that traditional print still has an important role to play. When consumers were asked which forms of advertising they would miss most, about 50% pointed to printed ads for all products and services, whereas in comparison, about 33% said they would miss online ads, and only 10-20% said they would miss telemarketing and door-to-door sales calls.
Consumers are increasingly interested in making environmentally sustainable choices, which can result in a selection of products and services that have a lower carbon footprint than traditional choices. The printing industry has a poor environmental track record, largely driven by its use of paper with the associated impact on the world’s forests, water, VOC’s such as ink and solvents, and its high energy usage in the production process, not to mention the additional impact in the transportation of raw materials to printers, and finished goods to consumers. As a result, consumers are interested in certain lower carbon footprint options, such as the use of recycled paper in traditional print manufacturing, or substitute technologies such as electronic presentment, e-books, and online services. However, the adoption rate of these substitutes remains low in many cases, and appears to be primarily driven by economic opportunities versus solely by environmental factors.
Another increasingly apparent social trend is consumers’ desire to protect themselves from all sorts of intrusions into their private space. A recent survey by UC Berkeley School of Law found that 81% of Americans support a Do Not Mail (DNM) initiative, whereas only 17% opposed such a program (Hoofnagle, Urban & Li, 2012). The objection to receiving unsolicited mail was largely based on the consumers’ preference to safeguard against intrusions into their private and personal space.
Technological Factors
New Discoveries and Development
A discussion of modern day printing technology would be incomplete without a brief overview of the industry’s technological evolution, which is also presented in more detail in Appendix H. Movable type was invented in China around 1041, which was followed about four hundred years later in 1436 with Johannes Gutenberg’s invention of the first printing press (Bellis, 2012-1). Technology then continued to slowly evolve, leading to Richard Hoe’s invention of the rotary press in 1846, which could produce 8,000 sheets per hour, essentially enabling mass produced newspapers, and ushering in the modern production era (Bellis, 2012-2). The offset lithographic process first came into use around 1904, but it was not until 1947 when phototypesetting really become practical, which then spurned the widespread adoption of the lithographic process (Bellis, 2012-2).
Then, following the first 900 years or so of glacially slow evolutionary change, digital technology arrived. Computer technology was introduced into the industry in the early 1960’s. It was first implemented in the typesetting department before expanding into other areas, and rapidly made all preceding technology obsolete. The MAC computer was introduced into the industry in 1984, and quickly became the desktop publishing Fisher 23 standard. As a result of these computerized technologies, efficiency within the traditional pre-press department was significantly improved, leading to a dramatic staffing reduction across the industry. Further, the introduction of the MAC technology and associated software programs changed the nature of the work from that of a highly skilled technician using enormously expensive, propriety systems to that of a more generally skilled desktop publisher using open platform, less expensive and readily available technology that could even be found in some people’s homes. In fact, “much of what was formerly considered to be skill now seemed to reside in computers and software” Lewis, 1997).
While the pre-press functions were increasingly being impacted by digital technology, not much changed within the printing process itself until Xerox introduced the DocuTech Production Publisher in 1990, a device which for the first time could print documents on demand in large quantities at a reasonable unit cost. This in essence was the invention of what’s become ubiquitously known as POD, or Print on Demand technology. Since that time, high speed digital production devices have proliferated the industry, and have spawned a whole new sub-segment of the market that has prospered by leveraging this new digital technology to print documents where and when needed, at quantities as low as a single copy, and all at the expense of traditional lithographic printing processes.
Clearly, since first being introduced in 1960’s, the advent of digital technology has driven, and continues to drive the greatest evolution in the printing industry since the invention of moveable type itself. As is depicted below, sales in the Canadian printing industry from conventional print processes (lithography, screen, etc) has declined from 53% of total industry sales in 2006, to 45% in 2011, and is expected to be 39% in 2013. Concurrently, sales from digital printing processes (toner and inkjet) rose from 24% in 2006, to 32% in 2011, and to an expected 38% in 2013. In the years ahead, digital print’s market share is expected to continue to grow, largely at the expense of more conventional print processes. By 2020, the digital printer will be the dominant printing device while offset print will decline significantly after 2020 (Ugljesa, 2009).
100.0% % of Sales by Production Process Digital Print Total Non‐Digital Print Total 80.0%
60.0% 53.3% 45.1% 38.9% 40.0% 38.1% 20.0% 31.8% 23.8% 0.0% 2006 2011 2013
Source: State of the Canadian Printing Industry 2011. Publishing and Depository Services, Public Works and Government Services Canada. Dow nloaded from www.ic.gc.ca/printing-industry-2011 on December 1 2012.
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Impact of Changes in Information Technology
With the aforementioned evolution towards digital printing processes, the ability to handle digital files quickly became a prerequisite for success. Making matters worse for the printer, the proliferation of inexpensive desktop publishing equipment shifted the preparation of content from the printer, to the customer, or to the customer’s designer. This in turn created the need to move files from remote locations to the printing company. Initially, this was accomplished by courier companies delivering disks of all kinds, but was eventually replaced by telecommunications technology. This electronic delivery of files is one of the trends “that profoundly changed the printing industry” (Romano, 2004).
At present, approximately 10-15% of all print is produced within one day of receipt of files, but the demand for this same day service is expected to grow exponentially in the years ahead, reaching 20 % by 2015 (Cvorovic, 2009). This shift towards faster delivery times impacts many other trends in the industry, not the least of which has been the trend towards robust telecommunications systems required to quickly transfer increasingly larger graphics files. As such, most printing firms will continue to face escalating costs related to the maintenance of IT infrastructure.
Furthermore, firms providing variable data printing services are faced with another IT related challenge, that being data security, both internally and externally. For years it’s been commonplace to make use of various encryption tools to protect data being transferred to and from external sources. Now, with the heightened focus on consumer privacy, there is an ever-increasing demand for more stringent data security processes and tools, even within the printing organization itself. For example, printing companies handling high risk data such a banking information, social security numbers, etc, are routinely required to pass systems and process audits such as SSAE 16 (previously known as SAS70) which attests to the integrity and security of their systems. “SSAE 16 is an auditing statement that defines the professional standards used by a service auditor to assess the internal controls of service organizations, such as hosted data centres” (BLACKIRON Data, 2012).
To make matters even more complicated, those firms who are engaged in the handling of credit card information, such as service providers producing credit card statements either for printed output to be mailed or to provide content for web-based consumption, are increasingly required to be certified to the Payment Card Industry (PCI) standards. The PCI standard “was created to increase controls around cardholder data to reduce credit card fraud via its exposure” (BLACKIRON Data, 2012). Any printer handling large credit card transaction volumes is required to pass an annual external audit. To comply with this standard, all credit data must be encrypted at all times, even when at rest within the organization. Significant capital investment is required to achieve this, thus increasing the cost of entry for firms in this segment of the printing industry.
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Beyond telecommunications and data centre requirements, another area of significant IT focus in the printing industry has been internal workflow. Various types of Enterprise Resource Planning (ERP) systems have been implemented to manage the financial and administrational aspects of the business, with the smallest firms using simple inexpensive software packages, to the larger firms using complex, robust, and very costly systems such as SAP.
IT workflow tools have also been implemented throughout the manufacturing environment. According to the Economist (2012), “Everything in the factories of the future will be run by smarter software. Digitisation in manufacturing will have a disruptive effect every bit as big as in other industries that have gone digital.” This trend is already well underway in the printing industry, with shop floor systems commonly used to control the flow of jobs through the facility, and to capture scheduling and job status data in real time.
In recent years, Job Definition Format (JDF) enabled devices have become more commonplace in the industry. “JDF is designed to provide interconnectivity between different print media production and related systems” (Brunner, 2012). This data format originates from within the ERP, is passed down the line to manufacturing technology enabled to ingest the data, and typically provides specifications about the jobs to drive increased automation in the set-up and control processes in the equipment. Such automation first appeared in the pressroom, but has since made its way through to the finishing departments as well. As a result, most printers have achieved increased efficiency which has reduced labour requirements – this has been a key driver of reduced industry employment over the years. Most printers will need to consider further investments in such automation in the future to gain additional efficiency and to remain competitive.
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Impact of the Internet
The invention of the internet has dramatically changed the nature of almost all segments of the printing industry, in some ways enabling interactions between customers and printing companies, and in other ways providing an electronic substitute to a printed output, creating both challenges and opportunities for the printing industry. The web first became commercialized in 1995, with Netscape’s release of SSL (Secure Sockets Layer) encryption making it safer to conduct financial transactions online, and with the launch of two major online businesses that year, EBAY and Amazon (Chapman, 2009). Soon thereafter, this new communications technology began to impact the printing industry.
The internet is enabling e-commerce to take place between buyers and providers of printing services. Today, many printing companies provide a web-based tool to place orders, obtain order status, and to facilitate billing and reporting needs. “Exceptional client service begins with a quick and easy method to buy print products and services. E-commerce enables consumers to browse product catalogues, view pricing estimates, download design templates and finalize orders with just the click of the mouse,” (CPISC, 2009). According to Frank Romano (2004), “E-commerce is not just file transfer—it is the relationship between buyer and seller enabled by the Internet.”
Furthermore, many printers are leveraging the provision of internet services as a way to provide value-add to clients, and to augment declining sales in traditional print media (CPISC, 2009). For example, certain printers provide on-line content either complementing or replacing traditional print media, such as electronic presentment of banking and credit card statements, bills, and insurance policies, web hosting of marketing materials like magazines and catalogues, and online presentation of financial and shareholder data such as annual reports and regulatory filings.
In the aforementioned situations, printing companies have the ability to drive the provision of the web-based services model, thus developing a new revenue stream to augment the decline in traditionally printed media. However, in other cases traditional print media is under attack from electronic substitutes being driven by organizations outside of the print community, that challenge will be discussed in more detail in the following section.
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Industry Analysis - Application of Porter’s 5 Forces Methodology
This section provides an analysis of the nature of competition within the Canadian printing industry leveraging Porter’s Five Forces model to examine the various external forces impacting upon firms within the industry. The version of Porter’s model included in Appendix I was used to guide the following analysis.
Supplier Power
In assessing the power suppliers can exert on the industry, the key consideration is to determine their ability to increase prices. Traditionally, the largest cost driver for most printing companies is paper or other raw materials, the cost of which in Canada has dropped slightly from 44% of total industry sales in 2000 to 40% in 2010 (Industry Canada, 2012). Canada, much like the US, will continue to experience declining demand for paper in the years ahead, while Asian markets in particular will experience a significant increase in demand (Frandina, Rossi and Counts, 2008). Domestic overcapacity, coupled with increased supply of less expensive off-shore alternatives can be expected to limit the paper industry’s ability to significantly increase prices. The chart to the right depicts the latest price index for graphic paper in the North American market, clearly showing that regional paper prices have been relatively flat now for several years (RISI, 2012).
Traditionally, the second largest cost driver for printers is labour, the cost of which in Canada has remained relatively flat at 28% of total industry sales from 2000-2010 (Industry Canada, 2012). Given the aforementioned decline in industry employment, it’s clear that the supply of labour has generally exceeded demand in recent years. Furthermore, according to a recent industry labour study, and based on available US data, the Canadian Printing industry’s employment is expected to drop by another 22% from 2008 to 2018 (CPISC, 2008). This continued decline in demand can be generally expected to limit the risk of labour cost increases to printing companies. However, while fewer workers will be needed, there will be an increased demand for the specialized training and skills required to operate complex new technology, and to understand and leverage the benefits enabled by new IT systems and capabilities (CPISC, 2008). This heightened degree of specialization may lead to increased costs of labour supply in certain select areas, including the cost of training and development.
Another significant cost to the printing industry comes from new technology, and its associated ongoing service requirements. While these costs are generally unrestrained, in most technology supply categories there are many different suppliers available to choose from, thus creating sufficient competition to negate significant risk to printing companies in the foreseeable future.
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Based on the aforementioned analysis, supplier power is generally considered to be neutral or less. This conclusion is supported by the fact that there are generally many different supplier options available to printers, that the overall state of industry decline has diminished the demand for most supply items, that most suppliers provide a relatively non-differentiated product, and that in many cases printing companies can choose to change suppliers quickly, and with minimal expense.
Buyer Power
Inverse to the aforementioned analysis of suppliers, the key consideration of buyer power is to determine their ability to drive prices down. There have been a number of key changes in the buyer-supplier relationship that continue to exert significant negative price pressure on the industry.
For a start, and as partially discussed earlier, the advent of desktop publishing and telecommunications capabilities enabled customers to prepare graphic files upstream from the printing process, subsequently supplying printers with final files that are print ready. This approach has become commonplace in the commercial print segment, where creative agencies or internal customer-owned design departments typically handle the file creation process, and is also becoming more common in other printing segments, even in variable data printing where certain customers are making internal investments in file composition software, or are procuring composition services independent of print output. This separation of document creation from that of document output is increasingly relegating the traditional printing firm to the provision of a commodity product, that being the output of the supplied files. The result of this shift is twofold; printers are missing out on the provision of certain billable services, and perhaps more salient to this analysis of buyer power, it has enabled buyers to easily and readily change print suppliers.
The overall declining demand for print as outlined earlier has also tended to shift power to print buyers. Since printing companies are typically capital intensive businesses, they are not always able to perfectly adjust their production capacity downwards to meet lower market demand. Notwithstanding closures and downsizing, this inability to match supply and demand has generally left the industry in a perpetual state of excess capacity. In an attempt to maximize utilization of this excess capacity, many printers have been willing to accept jobs at minimal profit margins, leading to fierce competition at times, and generally shifting power towards buyers. Conversely, consolidation of firms through mergers and acquisitions has reduced the overall number of companies, and the size of larger firms appears to be increasing (CPISC, 2008). In certain cases, this trend may leave the buyer with less choice and possibly less power than before.
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In select vertical market segments, group purchasing organizations (GPO’s) have been formed to act on behalf of their members in the procurement of all kinds of required items. For example, HealthPRO is one of the largest GPO’s servicing the Canadian Healthcare market. They manage procurement for over 800 healthcare facilities, and claim to have “the most significant purchasing power ever assembled within Canada’s healthcare system” (HealthPRO, 2012). While these GPO’s have traditionally focussed on the supply chain related to pure commodity items, their purchasing model has also increasingly being extended into other types of supply chains, printing services included. By negotiating on behalf of multiple customers with all needs pooled into a single services offering, the buyer’s power is almost certain to be increased.
The advent of the internet as discussed earlier has also changed the buyer-supplier relationship, both in ways that are positive and negative to the printing industry. “About half of all printing is purchased by large companies, who increasingly want to automate the print-buying process” (CPISC, 2008), primarily through all kinds of e- commerce type tools. From a positive perspective, the degree of automation in the relationship management process has taken costs out of the business for printers, and made it viable to provide certain services at the required order quantities and pricing that the market now demands. On the other hand, the ever-increasing use of the internet by buyers as an electronic shopping tool has negatively impacted many printers, generally making it more difficult to provide value-add in the relationship, and normally driving price downwards. In this sense, the internet has also contributed to the commoditization of the printing industry.
Given the aforementioned analysis, buyer power is generally considered to be high. This conclusion is supported by the fact that there are typically many domestic and international supply chain options available to buyers, that there is typically not that much differentiation between competitors, and that the overall state of industry decline has left many printers desperate to fill up available capacity. Additionally, advancements in Information Technology and Telecommunications capabilities have provided buyers with a means to shop the market widely for the lowest price, select suppliers with ease, and move work around at their discretion, and all of this with minimal expense and time.
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Competitive Rivalry
As indicated earlier, there are over 6,400 printing establishments in the Canadian market, all of which are vying for an increasing share of a shrinking pie. On the surface this suggests a highly competitive market, which is generally true in a macro sense. However, it’s important to consider the overall market structure and degree of competition within relevant sub-segments of the market as well.
According to a recent survey (see charts below and Appendix J for more detail), while Canada’s printing market is comprised of many printing companies and establishments, much of the market share is concentrated with the largest organizations (Graphic Monthly, 2011). In fact, the top 10 companies account for 65% of industry sales, and employ half of all industry workers. Furthermore, the top 100 companies, comprising about 2% of the total number of companies in the market, account for 91% of industry sales, and employ 72% of all industry workers. It’s also interesting to note that 97% of all printing establishments employ 100 or fewer workers (see Appendix K - Industry Canada, 2012).
$1,600 Canadian Printing Industry $1,400 $1,200 Top 10 Printers ‐ 2010 Sales $1,000 $800 $600 Millions $400 $200 $0 $CDN
Source: http://www.graphicmonthly.ca/goldlist/goldlist2011.html Note: Includes all sales (domestic and international) for companies reporting in Canada, excludes domestic sales of foreign owned firms operating in Canada Fisher 31
According to Baumol, Blinder, and Scarth (1994, p.311), an oligopoly is the name given to a market structure wherein a few large firms are able to dominate the overall environment. They also point out that sellers within an oligopolistic market may exhibit varying degrees of product differentiation, in other words the level of differentiation is not a defining factor in this structure. “An oligopoly market structure arises when a small number of players control pricing and account for 70% to 80% of all sales in the market. Over time, the number of players shrinks to an equilibrium point” (Henry, 2012). This is exactly what is currently happening in the US printing market, where over 52,000 printing companies that existed in 1997 has shrunk to around 27,000 today, and are expected to drop further to around 15,000 firms by 2020. Given the similar retrenchment of the Canadian market, and given that around 2% of all firms now control 91% of industry sales, it’s reasonable to conclude that the Canadian printing industry most resembles an oligopolistic market structure.
As actors within an oligopolistic market, Canadian printing companies have to focus on price and marketing to compete, and they also have to worry about competitive activities (Baumol, Blinder, and Scarth, 1994, p.318). While certain oligopolistic markets enable leading firms to control price, this is not always true, and is generally not the case in the printing market. In fact, “competition among firms is becoming increasingly fierce” (CPISC, 2008). However, certain segments of the industry are less saturated and competitive than others, such as flexible packaging, security documents, industrial labels, etc. However, companies in sub-segments that may benefit from less domestic competition increasingly have to compete with US or other international suppliers, or with various kinds of substitute products, and are therefore also constrained with the amount of pricing control they can exert on the market.
Based on the aforementioned analysis, competitive rivalry is generally considered to be very high. This conclusion is supported by the fact that there are many competitors in the market competing on local, regional and national opportunities at all different levels, that globalization has opened the domestic market up to US and off-shore competitors. Furthermore, in most cases multiple suppliers can provide the quality and service required by the market, there’s often little differentiation between suppliers, and the industry operates in a general state of decline wherein buyers tend to have considerable power, as previously noted. Fisher 32
Threat of Substitution
The printing industry in general continues to be dramatically impacted by the advent of new products, services and solutions (collectively referred to as substitute products) that replace or augment traditionally printed applications. Practically no part of the industry is fully immune to the threat of substitute products, although in certain cases printing firms can lead the initiative to drive the change, purposefully obsolescing parts of their pre-existing business model, while simultaneously creating new sources of income in the process.
The advent of digital media, either as a driver of printed documents or electronically shared content, continues to be the single largest environmental factor shaping the printing industry today. For a start, digital printing has been growing exponentially in recent years, primarily as a substitute to the traditional offset printing process. In fact, from 2006-2012 digital print sales increased in Canada by 34%, while offset printing sales declined by 15% in the same period (Industry Canada, 2012). Furthermore, digital printing will continue to be the major growth area within the industry, with a forecast growth rate that’s almost double the overall gross domestic product growth rate for the country (CPISC, 2008).
Whether this substitution of digital print is viewed as a threat or not is contingent upon the organization’s viewpoint within the industry; traditional offset printers burdened with significant capital investments in offset technology may continue to view this trend as a threat, whereas newly formed digital printing organizations will clearly see it as an opportunity. While polarized viewpoints may exist, the more common position has become somewhat more balanced, with established printers working to lead the migration to digital technology along with the concurrent reshaping of their legacy platforms. As evidence of that shift, it’s notable that a recent survey of 105 Canadian printers found that 59% of those companies had made investments in digital print technology over the past 24 months, whereas only 16% of those same companies had invested in offset equipment (PWGSC, 2011). Additionally, the same survey found that from 2012-2014 43% of those 105 printers surveyed plan to make additional investments in digital technology, whereas over 92% of those printers have no immediate plans to invest in offset technology.
The other material impact of digital media is the substitution of electronically shared content in place of any kind of printed document. As discussed previously, the internet has become a key technology enabling the delivery of electronic content. In certain cases the internet’s threat of substitution is clear and is being realized. For example, in early 2008 Canadian Tire announced that after 80 years of production they would stop printing their iconic store catalogue, citing that consumers are spending a lot more time online, and “that's where they go to obtain the information they're looking for” (Scott, 2008). Another more recent example is the demise of the printed edition of Auto Trader Magazine, which stopped production in 2012 after 40 years in circulation. Auto Trader established an online version several years ago, which, according to the company, generates higher margins for advertising than the printed version (Ladurantaye, 2012-1). Fisher 33
In other cases, online content delivery provides an opportunity to complement traditional print services with value-added solutions. For example, a recent newspaper publications study found that increased “readership on newspaper websites continues to drive readership to printed editions and offset the general decline in print readership” (Ladurantaye, 2012-2). Another study recently completed by the Newspaper Audience Databank further illustrated how the paper and online media versions are coexisting. They found that “readers migrate between print and web editions of newspapers on a daily basis, however printed editions continue to be the most popular way to read a newspaper” (NADbank, 2012). Additionally, other examples of online content being used to complement printed documents includes e- books being created in tandem with printed books, websites optimizing access to catalogues, publications and brochures, and web advertising now working in conjunction with traditional advertising in magazines and journals (CPISC, 2008).
More recently though, beyond the impact of the internet itself, “the explosive US Book Market E‐Books growth of smart phones, e-readers, and tablets as delivery systems for digital Printed Books content has driven print volumes down in $6,000,000,000 many categories” (Henry, 2012). For $5,000,000,000 example, as depicted in the chart on the $4,000,000,000 right, e-book sales continue to grow at $3,000,000,000 the expense of traditionally printed $2,000,000,000 books. Forester Research predicts that e-book sales will reach $3 billion by $1,000,000,000 2015. As depicted on the right, this will $0 have a significant impact on printed 2008 2010 2015 books, unless somehow the total book market expands (Fields, 2012).
There are many other examples of substitute technology impacting traditional print production volumes, such as business forms migrating to online fillable forms, annual reports being posted online with limited production in a hard copy format, and the electronic presentment of bills, bank statements and insurance policy documents.
With all this in mind, it’s clear that the printing industry has been facing, and will continue to face, a significant threat from substitute technology. In fact, of all the forces impacting the market, this is considered to be the most significant one in terms of potential long term impact on the industry. This conclusion is supported by the fact that there are many types of substitutes available, and that new ones are still being developed. Additionally, in certain cases the substitutes can provide more value add at a lower cost, and buyers can readily migrate to these substitutes with minimal to no switching costs. In essence, the ever-increasing presence of these substitutes represents a significant sea change in the industry.
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Threat of New Entry
The ability of new firms to enter into the Canadian Printing market is primarily impacted by the degree of cost required to enter the market, with minimal regulatory constraint or other restriction to entry. However, the printing industry should not be viewed as a homogeneous market, mostly certainly as it relates to determining the cost of entry and the associated start-up capital requirements, which can vary wildly between industry sub-segments.
For a start, the cost of entry into traditional industry segments such as commercial print and web publications is significant, and therefore trends to discourage new entrants. Further, due to the generalized state of decline in traditional print applications, entry into those segments is unattractive, as well as being cost prohibitive.
Conversely, entry into the digital printing space is relatively affordable, and is also attractive due to the aforementioned growth trend. Furthermore, there are multiple technology providers servicing this segment, many of whom are willing to provide flexible equipment purchase and lease options, thereby generally making it relatively easy for viable organizations to acquire this technology. However, as was discussed earlier, a robust IT platform is required to support the establishment of a digital print platform. At the very least, digital printers must routinely be able to accept, store, and process large amounts of data in a secure environment. The associated costs can range from being relatively affordable to being significantly high, contingent upon the nature of the organization and the market it intends to serve.
Notably, the current trends towards Cloud Computing platforms and Software as a Service Provider (SAAS) models may help to keep start-up costs down for certain digital organizations. Additionally, digital printers who choose to service the transactional printing markets, such as those organizations producing bank and credit card statements and other highly sensitive documents, must meet a higher set of standards relative to security and privacy controls. The IT requirements enabling the provision of these variable data printing services can be extremely expensive, and most certainly provide a barrier to entry, at least into the top tier of this market segment.
As previously discussed, many printing companies are already making use of e- commerce solutions to facilitate and automate client interactions. In fact, being able to provide such a portal into the organization has become mandatory to enable growth in many parts of the industry. Whereas these systems have routinely been developed internally at significant cost, they are now readily available to purchase commercially, or to licence for use within a Service-As-A-Software (SAAS) type model, once again lowering the cost to entry. Contingent upon the sub-segment of the market an organization plans to service, and considering the associated unique customer needs, significant IT-related investments may be required to effectively compete, representing a notable barrier to entry.
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Since the Canadian print industry is considered to be an oligopoly, the threat of entry can be contrasted between that of organizations wanting to enter into the small-to- medium-enterprise (SME) market, and those who may aspire to compete with the existing oligarchs. Based on the aforementioned review, the threat of entry into the SME market can be considered to be low relative to more traditional applications and service offerings, and high relative to the growing digital printing segment. However, due to the high start-up costs required to compete with the existing oligarchs, the threat of entry into this top tier of the industry can be considered to be low to neutral.
Summary of the 5 Forces Review
The diagram to the right provides a graphical representation of Supplier Power Porter’s 5 Forces Review as 10 completed here for the Canadian 8 printing industry. Notably, there is 6 Threat of New 4 a very high threat of substitution, Buyer Power in fact, as discussed earlier, Entry 2 substitution has already had a 0 significant impact on the industry, and will continue to do so in the years ahead. Buyer power and competitive rivalry are also quite Threat of Competitive high, and unlikely to diminish Substitution Rivalry anytime soon. The threat of new entry is generally considered to be neutral, although as discussed it most likely is low in legacy sub-segments like offset printing, and high in growth markets like digital print. Lastly, supplier power is considered to be low, despite the market being characterized as an oligopoly.
This review of the 5 Forces impacting the Canadian printing industry generally tends to paint a picture of an industry that’s highly competitive, and not overly attractive. The general decline in demand for traditional printed products can be expected to continue, driven to a large degree by the impact of substitutes. This will continue to exert tremendous financial pressure on all industry actors, most likely leading to further industry consolidation, and a more polarized market of dominant oligarchs, and a further decline in the number of SME’s. However, as noted earlier, the printing industry is not homogenous. As such, organizations who continue to provide the innovative and creative leadership needed to evolve will still be able to grow and prosper.
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Scenario Planning Analysis
Based upon certain, key uncertainties facing the industry, this section provides an outline of several possible future scenarios for the Canadian printing industry, including an evaluation to determine which ones are more or less likely to occur. The scope of this section is limited to the presentation of a few scenarios, and is therefore not intended to represent an exhaustive list of all possible future options. The scope is also further limited by addressing the industry as a whole, with its current mix of companies and capabilities. However, in practise, firms operating within the various sub-segments could likely develop a greater degree of planning accuracy through a more detailed examination of their specific areas of expertise and focus.
Key Uncertainties
• Will the overall state of decline in the industry continue, slow down, or accelerate? • Will the offset printing sub-segment continue to decline, and at what point will it reach bottom? • Will digital print continue to expand at the current rate, and at what point will other substitute technologies begin to impact digitally printed applications? • Will printers be able to leverage the advent of substitute products to augment their traditional revenue model, or will this market need be satisfied external to the print industry?
The Boomerang Scenario
The argument can be made that the printing industry has reached bottom, and will rebound from its current position, embarking upon a sustainable growth trend. This path is contingent upon increased consumer demand for traditional hard copy printed items, which may be driven by a combination of several factors.
For a start, Canada’s population is aging. In 2011 the median age was 40 versus 26 in 1971. Seniors are now the fastest growing demographic, a trend that’s expected to continue for the next several decades due to a lower birth rate, an increase in life expectancy, and the aging of the Baby Boom generation (HRSDC, 2012). The aging population may increasingly return to traditional print as they will have more leisure time to consume information more completely, and at a slower pace. Also, they will place more demand upon traditionally document-intensive service providers, such as the healthcare industry.
Secondly, Canada’s population is growing, and becoming increasingly diverse. The population was 34.5 million in 2011, and is projected to reach 44 million by 2036, and 53 million by 2061 (Statistics Canada, 2010). Migration to Canada will be the leading driver of this growth, meaning that the growth may be somewhat directly correlated to print consumption, as the growth will be of an age group able to consume printed information. Furthermore, population growth through migration leads to more Fisher 37 diversity, which is likely to drive the need for more personalization and versioning in printed communications to effectively communicate with all consumer groups. Lastly, with the global financial retrenchment of 2008 behind us, and with greater stability in the US and other global markets, slow and sustainable economic growth can reasonably be expected in Canada over the years ahead. The Organization for Economic Cooperation and Development recently noted that “its composite leading indicator points to stabilizing growth in Canada, as well as in the United States and China” (CBC, 2012). Economic growth in general can be expected to have a positive impact on the printing industry, just as the opposite has been painfully true in recent years.
The impact of the Boomerang Scenario on the Canadian industry is generally expected to be positive. The downwards trend in the production of traditional offset printed applications will stabilize. This will be due to the bottoming out effect of the past years’ impact of available substitute technologies, and the positive anticipated impact of population growth, aging and diversification coupled with a stable and improving economy. Concurrently, the recent growth trend in digitally printed and electronically shared applications and that of other ancillary services is expected to continue well into the future. The summary of scenarios below includes a more detailed financial forecast for this possible scenario.
The Existent Scenario
The future of the printing industry could reasonably unfold as a continued evolution of the trends seen to be impacting the industry in recent years. In this sense, the industry has not yet reached bottom, and will continue to decline in a general sense for years to come. This argument is based on a number of factors.
For a start and as previously discussed, buyer power is high in the printing industry, with no sign of weakening any time soon. The volume decline in recent years has left many printers with excess capacity, which in turn has enabled buyers to obtain higher price concessions from suppliers than in previous times – this is likely to continue.
Secondly, the industry has faced a very significant impact over the past years from the advent of substitute products. This is likely to continue to drive traditional print volume down, given that existing substitutes have not yet been fully leveraged by all buyers, and given that new substitutes are yet likely to be developed and implemented. Digital print applications will continue to grow as a substitute of offset volume, but they themselves will begin to be impacted by electronic substitutes, greatly slowing down the overall growth in this area of the industry.
Lastly, and as noted in the first scenario, while the economy is expected to improve, and while population growth is anticipated, it will unlikely lead to any growth in printed applications. The reason for this is straight forward; the printing industry has been and continues to go through a material sea change, driven primarily by the global economic condition, and the invention of substitute technologies. Despite any change in macro-environmental factors that may suggest a lessoning of pressure to evolve away from traditional services, the change that has already taken place in buyer and Fisher 38 consumer culture is sure to endure. As such, there’s minimal opportunity for buy-side behaviour to regress to the previous model.
The impact of the Existent Scenario on the Canadian industry is generally expected to be negative. The downwards trend in the production of traditional offset printed applications will continue. The recent growth trend in digitally printed and electronically shared applications and that of other ancillary services is expected to continue, but not at a sufficient pace to shore up the overall industry.
The Transformational Scenario
It can be argued that the Canadian printing industry will continue to experience some decline in its more traditional applications, but that overall industry growth will be accomplished through adaptation and change.
For a start, the existing trend of decline in the offset printing sub-segment of the industry will continue at an increasingly slow rate in the years ahead. This is driven by the continued development in substitute technologies, especially in digital colour equipment. However, given that certain products are still best produced using offset technology, and that the applications that are easier to migrate to other technologies have and will continue to be targeted for transformation first, the rate of decline in this segment is certain to slow, and then to eventually stabilize.
Secondly, the existing growth trend in the digital print sub-segment of the industry can be expected to continue for years to come. This will likely be driven by the growth, aging and diversification of Canada’s population, along with the continued migration of traditionally printed applications to digital technology. However, this growth will eventually be offset by an increasing migration of digital print applications themselves to electronic content sharing systems.
Lastly, printers who are able to transform themselves into content management and distribution providers will be able to capture new sources of revenue through the growth of ancillary services. A recent survey of 105 Canadian printers has provided evidence that certain firms are contemplating a future trend towards non-print services. For example, 10% of the firms’ surveyed plan to invest in database management in the next 2 years, 17% will invest in mailing services, 10% plan to invest in the provision of logistics services, and 32% plan to invest in web-based e- commerce solutions (PWGSC, 2011). However, 39% of those surveyed still do not offer any ancillary services, possibly indicating that not all existing firms will be able to transform their businesses successfully in the years ahead.
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Summary and Analysis of Scenarios
The aforementioned scenarios provide several different views of how the next few years could unfold within the Canadian printing industry. The economic outcome of each scenario in terms of total anticipated annual sales for the industry is illustrated in the chart below. As noted, the Boomerang Scenario is expected to provide the highest sales of all options, while the Existent Scenario would provide the lowest level, and in fact represents a continued decline consistent with the recent trend. The Transformational Scenario coincidently lies between the other two possible future views, in terms of anticipated annual sales.
Canadian Printing Industry 2013‐2016 Planning Scenarios 12 11 11.2 10 9.4 Billions 9 Boomerang 8.6 8.1 8 Existent 8.4 $CDN 7 Transformational 6 2006 2011 2016
While any of these scenarios may actually occur, and while many others may also be possible, to enable the strategic planning process a single scenario that is most likely to occur must be selected. With that in mind, the following grid was developed to assist in the selection process.
SCENARIO SELECTION GRID Boomerang Existent Transformational
Offset Decline Stop Continued Slowed Key Requirements Digital Printing Growth Accelerated Slowed Continued Ancilliary Services Growth Continued Continued Accelerated
Chances that the market will Offset Decline 1 2 3 actually evolve in this way Digital Printing Growth 1 1 3 (Least Likely = 1, Most Likely = 3) Ancilliary Services Growth 3 3 2
Degree of internal control in Offset Decline 1 1 1 achieving the planned result Digital Printing Growth 2 2 2 (Low = 1, High = 3) Ancilliary Services Growth 3 3 3 Offset Decline 1 2 3 Total Score (Chances of Market Evolution Digital Printing Growth 2 2 6 x Degree of Control) Ancilliary Services Growth 9 9 6
GRAND TOTAL SCORE 12 13 15
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The scenario selection grid evaluated two key aspects of each key element of the future scenarios; the chances that the market would actually evolve in the manner suggested by the scenario, which is somewhat external to the company’s control, and the company’s ability to impact the achievement of the suggested results. For example, an individual company may have little ability to impact the market demand for offset printing, so has little ability to impact that aspect of the future scenario. However, individual firms can choose to develop and deploy new ancillary services, and therefore there is more overall industry control in achieving this element of any future scenario. In this manner, a higher score is given to elements of the scenario that are either more likely to occur in the market independent of any firm’s action, or more likely to occur when individual firms have a greater degree of control in driving the market in the envisioned direction.
As the aforementioned grid illustrates, and as is summarized in the diagram to the right, the Transformational Scenario resulted in the highest score, meaning it’s deemed to be the most likely one to occur. In contrast, the Boomerang Scenario had the lowest score, making it the least likely to occur, and the Existent Scenario fell somewhat in the middle. In practise, all scenarios are relatively closely scored, seemingly indicating that all are viable future views.
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Industry SWOT Analysis
Based on the aforementioned industry review, a detailed SWOT analysis has been completed to examine the market position of the average member of this industrial community using a standard SWOT model as depicted on the right, and as is further outlined in detail in Appendix L. While it’s notable that a SWOT analysis undertaken for SWOT Strengths Weaknesses individual firms operating within MATRIX this segment can be expected to yield somewhat more defined, relevant and useful data, the S-O W-O Opportunities researcher expects that this Strategies Strategies generalized industry SWOT is relatively applicable to most organizations in the industry at S-T W-T Threats this time. Strategies Strategies
The average Canadian printer derives certain key strengths from the macro environment, as it compares to other global regions. For example, Canadian printers enjoy a stable operating infrastructure in terms of transportation, energy availability, telecommunications services, and the natural environment. Canadian printers operate within a democratic society, with very minimal threat of war or social unrest. Operations take place within a sound legal framework that protects business, consumer and employee rights, and within an ethical culture that generally does not tolerate corruption. The Canadian economy is stable with a positive outlook, and the population is expected to grow, and increasingly become more diverse.
Despite the positive macro-environmental climate, there is no shortage of weaknesses impacting firms in this industry, most often linked in some way to their financial results. The industry has traditionally been highly capital intensive, which has become increasingly more salient with most companies operating below optimum capacity. Furthermore and in part tied to this capacity utilization gap, pricing pressure is generally very high, leading to lower contribution margins across the segment. Regardless of the dramatic downsizing that has taken place in recent years, and perhaps due in part to the high pace of change, many companies are struggling to deal with the impact of an aging workforce. Additionally, the overall economic pressure has made it challenging for most firms to develop and execute required succession plans.
Regardless of the challenges, there are many opportunities to develop a sustainable business model. For a start, and in light of the ongoing impact of substitutes, printers can play a lead role in developing and deploying a variety of electronic services that can complement their existing business platform. They can also choose to expand upstream of print into content creation and management, and downstream of print into various logistics and content distribution opportunities. Despite all downwards Fisher 42 pressure on traditional printing services, individual companies can still work to capture new market share, and to expand more fully into digital print opportunities. There’s also an opportunity and ongoing need to gain internal operating efficiency, and to drive costs down externally on the supply-side of the business.
Several salient threats are also acting upon the industry today. While it was noted above that substitutes provide an excellent opportunity, there is also no doubt that they have been, and will continue to be, a very significant threat. Due in part to the presence of substitutes, along with other factors mentioned earlier in this document, overall declining demand continues to pose a significant risk to the industry. At present, the strong Canadian currency continues to limit exports to the US, while foreign competition continues to threaten domestic production. Buyer power is high, and may expand if the market trend continues. This will lead to increased industry rivalry, even though it’s already very high.
The SWOT model presented in Appendix L provides a number of suggested strategies to leverage strengths and to address weaknesses, so that printing companies can take advantage of opportunities and overcome threats. These potential strategies will be discussed in more detail following the concluding section of this paper.
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Conclusion
This research paper focussed on completing an analysis of the Canadian printing industry to determine the dynamics underscoring the current market position, and to support the development of possible future state scenarios and related business strategies. Understanding the historical impact of digital technology on the industry is the primary problem addressed by this research, although the identification of key trends, uncertainties and potential future-state scenarios was also required to support this research effort.
A review of relevant academic literature was conducted to identify suitable models to support the industry review. Through that process, it was determined that the PEST model would be a useful framework to assess the industry’s operating environment, followed by the use of Porter’s Five Forces model to assess the competitive nature of the segment. It was also determined that a scenario planning methodology similar to that described by Shoemaker would be useful in determining how the industry is most likely to evolve into the future. Lastly, it was determined that a traditional SWOT analysis would assist with the development of potential business strategies.
The PEST review painted a stark picture of an industrial market segment undergoing significant change as it increasingly evolves into a digitally enabled communications business model. Industry sales declined from $11.7 B in 2001 to $9.2 B in 2010. Correspondingly in that same period, employment dropped from 81,374 employees down to 56,325 employees. It was determined that the impact of digital technology was the single most significant factor driving this decline, most notably the impact of the internet which has provided online viewing of various content, and has also supported the electronic presentment of various documents to consumers. It was also noted that other consumer-based factors such as increasing environmental awareness and privacy concerns has caused a shift away from traditional printed content. The PEST review also explored the impact of digital printing technology on the industry, finding that digital print has been growing for years at the expense of traditional offset printing. In fact, whereas digital print was less than half of the offset volume in 2006, they are now very close to being equal, and beyond 2013 digital print will increasingly dominate the industry.
The Five Forces review determined that the threat of substitute products is the single greatest risk facing the industry today, while it’s also notable that buyer power and competitive rivalry are very high. It was also determined that the threat of new entrants to the market and supplier power is low, or relatively neutral. Of interest, it was discovered that the industry has increasingly been moving towards an oligopoly market structure, with 2% of the industry’s firms employing 72% of the industry’s workforce, and generating 91% of the segment’s sales. Coupled with the capital intensive nature of this segment, declining demand, and intense competition, the industry is likely to become increasingly more oligopolistic in the years ahead. This review concluded that the demand for traditional printed products will continue to decline, primarily due to the advent of substitutes, and that this will continue to exert significant pressure on all companies in this space.
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Based on the industry analysis, it was determined that there were several key uncertainties facing the segment. These included questioning if the historical decline would continue or change direction, not knowing if and when the offset printing decline would bottom out, uncertainty if the digital print growth trend would continue and at what pace, and questioning to what degree printers would be able to capitalize on the migration trend towards substitute products. By modelling these key uncertainties into reasonable future patterns, several future-state scenarios were developed. These scenarios were then evaluated using a Scenario Evaluation Grid that considered the likelihood of market evolution to actually occur as predicted, and the amount of control companies had to shape direction. It was determined that the Transformational Scenario is the one most likely to occur, meaning that the trend in offset decline will slow, the digital printing growth trend will continue, and that there will be an accelerated trend towards development of ancillary services to capture the opportunity presented primarily through substitute products.
The findings of this research effort most certainly support the stated prediction, that being that past industry trends can be reasonably expected to continue in the years ahead. With that in mind, and as a final consideration in this research effort, several strategies are presented on the following page that may be helpful to companies in the segment that are working to create a sustainable, profitable business.
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Strategic Recommendations
The following key recommendations are derived from the overall industry SWOT as presented in Appendix L. These suggestions are intended to serve the industry at large in a general sense, but are certainly not an exhaustive list of all possible options. Notably, more focussed options could clearly be developed by and for specific companies, in consideration of their unique situations within specific sub- segments of the market.
Dealing with Substitute Products
The impact of substitute products, especially digital technology, has already been identified as the most significant factor impacting the industry in both positive and negative ways. Since the trend towards substitutes shows no sign of abating, successful printers must embrace the opportunity to drive change in their legacy workflow, obsolescing traditional print whenever possible and appropriate, and developing new, higher margin sources of income along the way. To be more specific, the following recommendations for the implementation of substitute technology should be considered:
• Develop a formal substitute products strategy in partnership with key clients. Printers can leverage their solid client relationships, which is strength for most industry actors, to facilitate an open dialog about the future of each client’s communications program. Printers should not shy away from the discourse associated with driving print obsolesce, nor should clients feel compelled to embrace non-traditional services providers to achieve their communications objectives. • Printers should strive to leverage digital print technology to replace offset printing whenever possible. There will always be a role for offset print in the industry, but the volume in that area should be driven to lowest level possible, since only then will the industry be truly able to defend the continued existence of this aging technology model. • Leverage an internet-based services model to provide information electronically to consumers, at times to complement print, or otherwise to suppress print whenever it’s not required. • Leverage database management capabilities to make the provision of printed material more relevant, personalized, and targeted. In this manner, shift away from the mass market approach, to a more intimate conversation with each consumer. • This drive towards more personalized communications, whether in hard copy or through an electronic media, will require printers to improve their IT capabilities, and skill sets. The need to handle sensitive consumer data with the utmost privacy and integrity will become the standard that all printers will be judged upon.
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Expanding Ancillary Services
The further development of substitute products should form a key part of most company’s ancillary services models. Furthermore, the following are some additional strategic options to develop new sources of income to complement traditional print services:
• Upstream of the content distribution process, determine how to pay a larger role in helping clients to create and manage content. Expansionary options for traditional printers can include photography, creative design, copywriting, language translations, digital asset management, and database management services. • Determine how to provide expended downstream services including mailing management, kitting and fulfillment, warehousing, and logistics management. • Explore the provision of Business Process Outsourcing (BPO) services to complement the current business model, and to provide more value to existing and new clients.
Increasing Efficiency
While the aforementioned strategic recommendations will drive earnings growth through the addition of new, higher margin services, today’s printers also have an ongoing opportunity to improve the bottom line by becoming better at how they run the business. With that in mind, and based on this research effort, the following recommendations should be considered:
• Work to automate the client relationship where possible. This can be accomplished through the provision of a simple web store-front model, but can be enhanced by leveraging web-to-print solutions to stream the activity required in the workflow. The sales effort should be organized such that that time is spent strategically developing accounts, not tactically processing orders when a “substitute” can be used instead. • An internal automation review should be conducted on an ongoing or formal basis, especially as new technology continues to evolve. As was discovered in this research effort, JDF-enabled equipment is now available at all stages of the production lifecycle, providing numerous opportunities to more fully automate the work process. Additionally, robotics will play an increasingly important role in the traditional manufacturing platform of the future. • The relationship with suppliers should also be examined for opportunities to streamline and automate the process. • Also on the supply-side, printers should also determine if they can develop increased buyer power, perhaps through a more formalized procurement model, expansion of the supply chain domestically and internationally, or perhaps even through the development of a larger, consolidated purchasing model. Fisher 47
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Appendices – Supporting Data
Appendix A – Shipments by Region (2011)
2011 Manufacturing Revenue by Region ($CDN millions)
Region Revenue % of Total
British Columbia 537 6.39%
Alberta 109 1.30%
Saskatchewan 109 1.30%
Manitoba 781 9.30%
Ontario 4,752 56.58%
Quebec 2,086 24.84%
New Brunswick 16 0.19%
Prince Edward Island 2 0.02%
Nova Scotia 4 0.05%
Newfoundland and Labrador 3 0.04%
Total Canada 8,400 100%
Source: Canadian Printing Industries Association (CPIA) Fisher 53
Appendix B – Printing Establishments
Number of Establishments in Canada by Region: December 2011 Printing and Related Support Activities (NAICS 323)
Total % of Region Establishments Canada
Alberta 535 8.3% British Columbia 832 13.0% Manitoba 177 2.8% New Brunswick 70 1.1% Newfoundland and Labrador 42 0.7% Northwest Territories 1 0.0% Nova Scotia 98 1.5% Nunavut 1 0.0% Ontario 2,944 45.8% Prince Edward Island 14 0.2% Quebec 1,597 24.9% Saskatchewan 109 1.7% Yukon Territories 4 0.1% Total Canada 6,424 100%
Source: Statistics Canada, Canadian Business Patterns Database, December 2011. Fisher 54
Appendix C – Printing Exports
Canadian Total Exports - NAICS 323 - Printing and Related Support TOP 10 COUNTRIES - Latest 5 Years ($CDN millions) 2007 2008 2009 2010 2011 United States (US) 1,171 1,016 801 766 706 France (incl. Monaco, French Antilles) 26 29 24 31 38 New Zealand 14 14 9 15 18 Germany 1728182515 Mexico 22 13 6 6 10 United Kingdom (U.K.) 32 18 12 7 10 Guatemala 80008 Guinea 00106 Belgium 66655 Switzerland 44335 SUB-TOTAL 1,300 1,127 880 858 821 OTHERS 132 129 100 118 97 TOTAL (ALL COUNTRIES) 1,432 1,256 980 976 918
Source: Statistics Canada, 01-Dec-2012 Fisher 55
Appendix D – Employment by Type (2001-2010)
Employment by Type of Employee: 2001-2010* Printing and Related Support Activities (NAICS 323)
# Employees % of Total CAGR** % Change Type of Employee 2001 2010 2010 2001-2010 2009-2010 Production 67,003 40,688 72.20% -5.40% -6.20% Administration 14,371 15,637 27.80% 0.90% -6.80% Total 81,374 56,325 100% -4.00% -6.40%
*Prior to 2004, data covers incorporated establishments w ith employees, primarily engaged in manufacturing and w ith sales of manufactured goods equal or greater than $30,000.
**Compound Annual Grow th Rate
Source: Statistics Canada, special tabulation, unpublished data, Annual Survey of Manufactures, 2001 to 2003; Annual Survey of Manufactures and Logging, 2004 to 2010. Fisher 56
Appendix E – Sales by Product Type (2006-2013)
% of Sales by Product Type 2006 2011 2013
General commercial 38% 36% 34% Quick Print 14% 15% 16% Signage 6% 6% 6% Business Forms 6% 5% 4% Specialty print 3% 4% 4% Books 4%4%4% Trade Print 5% 4% 3% Direct mail 2% 3% 5% In-plant 3% 3% 3% Magazines and periodicals 4% 3% 3% Packaging 3%3%4% Mailing services 1% 2% 2% Newspapers 2% 2% 2% Financial/legal 1% 2% 2% Converters/label/wrapper 2% 1% 1% Greeting Cards 0%1%1% Sub-total 93% 93% 92% Other 8%7%8% Total 100% 100% 100%
Source: State of the Canadian Printing Industry 2011. Publishing and Depository Services, Public Works and Government Services Canada. Dow nloaded from www.ic.gc.ca/printing- industry-2011 on December 1 2012. Fisher 57
Appendix F – Sales by Production Process (2006-2013)
% of Sales by Production Process 2006 2011 2013
Sheetfed printing 43.5% 36.4% 31.8% Digital printing (toner-based) 16.4% 22.0% 25.4% Non-print ancillary value-added services 6.6% 7.3% 8.1% Inkjet wide and super wide format for production 5.3% 5.5% 6.9% Prepress/premedia services 4.5% 4.1% 6.9% Digital printing (inkjet high speed production) 2.1% 4.3% 5.8% Web-fed printing non-heatset 4.1% 4.2% 3.2% Graphic finishing 4.6% 3.8% 3.2% Screen printing 1.7% 1.7% 1.5% Flexographic 1.3% 1.2% 1.1% Trade binding 2.0% 2.4% 1.1% Web-fed printing heatset 1.9% 1.1% 0.9% Loose-leaf manufacturing 0.2% 0.2% 0.9% Letterpress 1.3% 0.9% 0.7% Thermographer 0.8% 0.5% 0.4% Gravure 0.1% Other 3.7% 4.3% 2.1% Total 100.0% 100.0% 100.0%
Source: State of the Canadian Printing Industry 2011. Publishing and Depository Services, Public Works and Government Services Canada. Dow nloaded from w w w .ic.gc.ca/printing-industry-2011 on December 1 2012.
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Appendix G – PEST Analysis Model
Political / Legal Economic Social Technological
Environmental Economic growth Income distribution Government spending on regulation and (overall; by industry (change in distribution of research protection sector) disposable income; Taxation (corporate; Monetary policy Demographics (age Government and indust ry consumer) (interest rates) structure of the focus on technological population; gender; effort family size and composition; changing nature of occupations) International trade Government spending Labour / social mobility New discoveries and regulation (overall level; specific development spending priorities) Consumer protection Polic y towards Lifestyle changes (e.g. Speed of technology unemployment (minimum Home working, single transfer wage, unemployment households) benefits, grants) Employment law Taxation (impact on Attitudes to work and Rates of technological consumer disposable leisure obsolescence inc ome, incentives to invest in c apital equipment, corporation tax rates) Government organisation / Exchange rates (effects Education Energy use and costs attitude on demand by overseas customers; effect on cost of imported components)
Competition regulation Inflation (effect on costs Fashions and fads Changes in material and selling pric es) sciences Stage of the business Health & welfare Impact of changes in cycle (effect on short- Information technology term business performance) Economic "mood" - Living conditions (housing, Internet! consumer confidence amenities, pollution)
Source: Riley. J. (2012) PEST Analysis. Dow nloaded from http://w w w .tutor2u.net/business/strategy/PEST_analysis.htm on December 2 2012. *Items in BOLD are most relevant to the analysis of the Canadian Printing Industry and are covered w ithin this paper Fisher 59
Appendix H – Key Technological Advancements
1041 - Moveable type invented in China 1392 - Korea opens foundries producing bronze type 1436 - Johannes Gutenberg invents the first printing press 1800 - Iron printing presses invented 1846 - Cylinder press invented by Richard Hoe 1863 - Rotary web-fed letterpress invented by William Bullock 1865 - Web offset press can print on both sides of paper at once 1886 - Linotype composing machine invented by Ottmar Mergenthaler 1870 - Paper is now mass-manufactured from wood pulp 1892 - 4-color rotary press invented 1904 - Offset lithography becomes common 1907 - Commercial silk screening invented 1938 - Chester Carlson invents xerography 1947 - Phototypesetting made practical 1959 - Xerox produces the first automatic office copier, the 914 1960 - The first newspaper is published in America 1967 - First use of digital production processes and computers 1971 - Use of offset presses becomes common 1977 - Xerox announces the first laser printer 1984 - MAC computer introduced into printing industry 1991 - Iris Graphics introduces the first large format ink-jet photo printer 1990 - Xerox launches the DocuTech Production Publisher – first true POD device 1993 - Digital printing presses start being used
Sources: http://inventors.about.com/od/pstartinventions/a/printing_3.htm http://www.professionalreports.co.uk/the-history-of-typesetting/ http://www.ehow.com/about_5391381_history-digital-printing-press.html http://www.xerox.com/innovation/chester-carlson-xerography/enus.html http://www.wilhelm-research.com/ist/WIR_IST_2006_09_HW.pdf
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Appendix I – Porter’s Five Forces Model
Source: http://www.mindtools.com/pages/article/newTMC_08.htm Fisher 61
Appendix J – Canada’s Top Printers
2010 A nnual 2010 A nnual Rank Company Employees Rank Company Employees Sales ($CDN) Sales ($CDN) 1 Transcontinental Inc. 1,442,700,000 5,800 60 AIIM-Avant Imaging & Information Management Inc. 18,000,000 90 2 Cascades Boxboard Group (NORAMPAC) 1,275,000,000 5,000 61 Kromar Printing Ltd. 17,595,000 115 3 CCL Industries (Label) 955,100,000 5,000 62 All Stick Label Ltd. 17,415,000 81 4 Davis + Henderson 640,374,000 4,100 63 Tri-Co Printing 17,200,000 80 5 Winpak Ltd. 579,441,000 1,800 64 Thistle Printing Ltd. 17,098,000 68 6 The Data Group of Companies 332,000,000 1,800 65 Eclipse Imaging 17,000,000 90 7 St. Joseph Communications 248,000,000 1,500 66 Cober Printing Ltd. 16,830,000 110 8 Canadian Bank Note Company Ltd. 194,000,000 1,400 67 Pentagon Graphics Ltd. 16,125,000 75 9 Pollard Banknote Ltd. 163,448,000 1,100 68 Mitchell Press 16,065,000 105 10 Supremex Inc. 153,124,000 650 69 Groupe Lelys Inc. 16,000,000 70 11 Imprimerie Solisco Inc. 96,800,000 400 70 Astley Gilbert 15,300,000 100 12 Datamark Systems Group Inc. 96,750,000 450 71 Informco 15,300,000 100 13 JONES PACKAGING 90,945,000 423 72 Litho Mille-Iles 15,300,000 100 14 Cenveo MM&T Co. 76,000,000 270 73 Metropolitan Fine Printers Inc. 15,000,000 65 15 Boehmer Box 75,000,000 301 74 Unicom Graphics Ltd. 14,800,000 110 16 Friesens Corporation 71,000,000 585 75 Impression Paragraph 14,750,000 105 17 NEBS, a Deluxe Company 62,290,000 230 76 Cowan Imaging Group 14,581,508 106 18 The Printing House Ltd. 60,000,000 425 77 International Artcrafts 14,535,000 95 19 DOLLCO Integrated Print Solutions 50,000,000 260 78 Parker Pad & Printing Ltd. 14,500,000 55 20 Webcom Inc. 50,000,000 225 79 Imprimerie L’Empreinte Inc. 13,923,000 91 21 Ellis Packaging Ltd. 49,000,000 220 80 RP Graphics Group Ltd. 13,800,000 68 22 The Lowe-Martin Group 48,500,000 318 81 Ricter Web Printing Ltd. 13,222,000 90 23 GILMORE DOCULINK INTERNATIONAL 45,900,000 300 82 Rhino Print Solutions 12,750,000 70 24 ADVOCATE PRINTING 44,000,000 200 83 Apache Superior Printing 12,240,000 80 25 Central Web Offset Ltd. 44,000,000 200 84 Imprimerie Dumaine 12,240,000 80 26 Phipps Dickson Integria (PDI) Inc. 40,000,000 190 85 Supra Business Forms/Supratech 12,000,000 85 27 Teldon Media Group 38,800,000 220 86 Etiquettes Profecta Labels Inc. 12,000,000 80 28 Ling Québec Inc. 34,400,000 160 87 Senton Inc. 12,000,000 70 29 WEST STAR PRINTING 33,000,000 150 88 Pazazz 12,000,000 65 30 Groupe ECCO LTEE 32,250,000 150 89 Icon Digital Productions, Inc. 11,900,000 65 31 IMPRESSIONS ALLIANCE 9000 31,059,000 203 90 McLaren Press Graphics Ltd. 11,845,411 65 32 West Canadian Industries Group Ltd. 30,600,000 200 91 Coderre Packaging Inc. 11,825,000 55 33 Hemlock Printers Ltd. 30,000,000 160 92 Entire Imaging Solutions 11,475,000 75 34 Brant Screen Craft 30,000,000 120 93 National Printers 11,475,000 75 35 Deco Labels & Tags 30,000,000 110 94 Performance Printing 11,475,000 75 36 TI Group/SCL Imaging 29,650,000 141 95 J.F. Moore Communications 10,720,000 40 37 Vertis Communications 29,083,246 152 96 Multiforme Business Forms 10,710,000 70 38 J.B. Deschamps Inc. 28,305,000 185 97 Imprimerie Ste-Julie Inc. 10,500,000 85 39 Westkey Graphics 27,950,000 130 98 General Printers 10,100,000 59 40 FACTOR FORMS 26,775,000 175 99 BL Litho Inc. 10,000,000 55 41 Printworks Ltd. 26,695,000 142 100 Glenmore Printing Ltd. 10,000,000 50 42 Ironstone Media Corporation 26,250,000 100 ALL OTHER 823,429,207 15,525 43 Royal Envelope Ltd. 25,800,000 115 CANADA TOTAL 9,200,000,000 56,325 44 BERESFORD BOX 23,650,000 110 45 C.J. Graphics Inc. 23,200,000 98 Top 10 Printers 5,983,187,000 28,150 46 MP Photo Reproductions 22,950,000 150 Top 10 Printers % of Total Canada Market 65% 50% 47 Prodigy Graphics 22,000,000 100 48 PrintWest Communications 21,451,000 150 Top 100 Printers 8,376,570,793 40,800 49 Mi5 Digital Communications Inc. 20,000,000 75 Top 100 Printers % of Total Canada Market 91% 72% 50 Metro Label Group Inc. 19,890,000 130 51 Progress Packaging 19,350,000 90 Source: http://www.graphicmonthly.ca/goldlist/goldlist2011.html 52 Value Graphics 19,125,000 125 53 Premier Printing Ltd. 18,831,000 115 54 Packaging Technologies Inc. 18,500,000 70 55 Huron Web Printing & Graphics 18,480,000 84 56 McCallum Printing 18,439,628 100 57 Marquis Book Printing 18,400,000 135 58 Annan & Bird 18,360,000 120 59 Imprimerie Le Progres du Saguenay 18,360,000 120
Footnote:
The Graphic Monthly Gold List includes printing firms that report their earnings in Canada, but excludes foreign owned firms who operate in Canada, but report earnings elsewhere. As such, this list includes international sales for domestic firms, and excludes domestic sales for foreign firms. Therefore, this list does not provide a clear picture of Canada’s domestic printing scene, but on balance, it can be considered to be a fair representation of the market.
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Appendix K – Employment by Size and Category (2011)
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Appendix L – Canadian Printing Industry SWOT
Strenghts Weaknesses THE CANADIAN 1 Well established customer relationships 1 Capital intensive industry - requires scale PRINTING INDUSTRY 2 Stable infrastructure (utilities, security, etc) 2 Most companies operating below capacity 3 Operates within a sound legal enviroment 3 Tremendous pricing pressure is the norm 4 Canada's generally positive economic position 4 Many companies operate with low margins SWOT MATRIX 5 Good overall environmental model / approach 5 Aging employee population, need to re-invest 6 Relatively good supply of skilled labour 6 Consumers spread out over large geography "THE AVERAGE PRINTER" 7 Solid financial industry can enable investment 7 8 Advanced telecommunications capabilities 8 1 Develop e-services platform as complement 2 Continue to improve operating efficiency Take new services to existing customers Provide higher margin services w/ lower capital 1 1 3 Drive supply-side costs down (S1, S7, S8, O1, O5, O6, O7) investment (W1, W4, O1, O2, O5, O6, O7) 4 Expand market share in traditional services Leverage technology and skill to improve Aggressive pricing and sales model to fill up 2 2 5 Drive growth in digital printing services operating efficiency (S6, S7, O2) open capacity (W2, W4) 6 Expand upstream in process (content) Leverage existing relationships to gain market More structured and professional approch to 3 3 7 Expand downstream in process (logistics) share (S1, O4) dealing with suppliers (W4, O3) Opportunities 8 1 Substitute products continuing to erode sales 2 Declining market demand trend Take new services to existing customers Explore merger / consolidation to maximize cap. 1 1 3 Strong $CDN fx keeping a lid on exports (S1, S7, S8, T1, T2) utilization (W1, W2, W4, T1, T2, T6, T8) 4 Offshore suppliers expanding into Canada Address environmental concerns with track Strive for efficiency to become a low-cost 2 2 5 Buyer Power high, and unlikely to change record, added focus, and diversification (S5, T7) producer (W3, W4, T4, T5, T6)
Threats 6 Hard to attract investment capital in segment Leverage financial community to attract Leverage opportunity to bring in new employees 3 3 7 On the wrong side of environmental debate investment into higher margin services (S7, T6) to acquire new skills (W5, T1, T8) 8 High competitive rivally in industry