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THE FUTURE OF COMMUNISIS
A CASE STUDY ‐ 2 | P a g e
CASE STUDY – THE FUTURE OF COMMUNISIS • Jenniner Allen • Aurora Costea • Philip Gregory • Eva Kleinert • David Owusu
3 | P a g e
Table of Contents CASE STUDY – THE FUTURE OF COMMUNISIS
3
Introduction
6
Executive Summary
7
External Analysis
8
Industry stakeholders and structure Environmental analysis
12
Strategic Partnerships
14
Print Industry Value Chain Table
15
Bargaining power in the market
16
Bargaining power of buyers
17
Bargaining power of suppliers
18
Threats
18
Competitors
19
Survival and success factors of the industry
21
Internal Analysis of Communisis PLC
22
Communisis established business activity
22
Corporate Strategy
23
Acquisition of Absolute Intuistic
24
Services and their relatedness
26
Diversification and Risks
27
Communsis Business Segments and their place in the Industry Life Cycle
28
Communisis Value Chain
29
Technology Management
29
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8
Relationship Management
30
Process Management
30
Knowledge Management
31
Financial Analysis Communisis Financial Performance Overview 2008
32
Figure 13: Key Stats & Ratios
32
Detailed Financial Analysis
33
Profit
33
Turnover
34
Gross Profit Ratio
35
Return on Capital Employed (ROCE)
36
Stock Turnover
37
Debt Collection
38
Creditor Payment
38
Turnover per Employee
39
Cross‐Selling
40
Communisis Marketplace Positioning
40
Strategic Options
42
Identification of Strategic Issues
43
Prioritisation of Strategic Issues
44
RACES analysis
45
Recommended Strategic Options
46
Option 1: Expand inhouse media and marketing capabilities
46
Option 2: Invest in new technology and process management
47
Option 3: Explore merger and acquisition opportunities
48
Summary
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32
50
Introduction This report is about the future of Communisis. It focuses on three main issues:
•
The External Analysis which covers the impact of external factors on the UK the Print Industry, the Industry structure and the Industry value chain.
•
The Internal Analysis of Communisis
•
Three strategic options that could be implemented subsequent to a successful takeover.
Communisis is one of the top ten Print companies in the UK. The printing industry makes up 21% of the total turnover of the UK’s printing, publishing, pulp, paper, and paper products industry. It is divided into two sectors: that of the technology media and the paper media which represents the traditional printing industry. The industry is currently in a period of consolidation and has seen a marked contraction in traditional printing due to technological developments and competition from emerging economies.
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Executive Summary Communisis plc is a United‐Kingdom based company engaged in the manufacturing of printed products for direct marketing, forms, stationary, an critical transactional products and the provision of print sourcing services. This report will analyse the external environment within which Communisis operates, i.e. the Print Industry, and also analyse the internal environment of the company structure and performance. Following these analyses Group E recommend three strategic options for the future development of the Communisis business. These are: 1. Expand in‐house media and marketing capabilities. 2. Invest in new technology and process management. 3. Explore merger and acquisition opportunities.
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External Analysis
Internal Analysis
Strategic Options
External Analysis The manufacture of pulp, paper and paper products; publishing and printing is UK's fifth largest manufacturing industry. The print, packaging and graphics communications industry made up 21% of the total industry turnover in 20071. The chart below illustrates the size of different components of the industry. UK Printing,publishing,pulp,paper and paper products industry size
Reproduction Media Printing 1% 21%
Manufacture of pulp, paper and paper products 18%
Publishing 60%
Manufacture of pulp, paper and paper products Publishing
Printing
Reproduction Media
Figure 1 UK Printing, publishing, pulp, paper, and paper products industry size 2007
Industry stakeholders and structure In 2006 the UK print industry employed 153,000 people in 11,000 companies, which are spread throughout the UK. The sector is dominated by small and micro companies which focus mainly on the domestic market. The vast majority of companies in the industry (75%) employ less than 10 people and account for 20% of industry turnover. In contrast 0.5% of companies in the industry employ more than 250 people accounting for 25% of the 2006 industry turnover, illustrated below2. 1
http://www.statistics.gov.uk/abi/subsection_de.asp [ accessed 07/03/09] http://www.britishprint.com/page.asp?node=297&sec=Essential_facts_on_the_UK_printing_industry [accessed 07/03/09]
2
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Companies with less than 10 employees
Companies with 10 ‐ 25 employees
Companies with more than 250 employees
Figure 2: The distribution of employees in the print industry. The structure of the industry reflects the diversity of its products and fragmented nature of its markets. Due to fragmentation within the sector there is a lack of a common and shared vision in the industry as at least 75% of the industry is made up of small companies. These companies also tend to specialise in one area, which has led to low levels of consolidation in the industry. However, mergers and acquisition have become common between some larger companies as they seek to strengthen their position in the industry. Printed Products are standardised products which can be produced with machinery available to anyone, regardless of location. Therefore printers have to be innovative in order to sell more than just a commodity. The UK print industry serves all sections of the economy ranging from central and local government to financial services institutions, retailers, distribution, travel and tourism and manufacturing industries.
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All these sectors are stakeholders in the UK Printing Industry along with the general population whose interests are represented throughout all sectors including environmental agencies and other NGOs. The UK, as in the rest of the EU, has seen an upward trend in imports of printed matter in the last 10 years. The graph below compares the rise of imports from China into the different EU countries.3
Figure 3 Imports of printed matter in selected European countries 1995‐2006.
3
http://www.egin.nl/downloads/Annual_2008/Presentations/Printing%20Industry%20China[ accessed 07/03/09]
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This trend will continue to have an adverse effect on the UK printing industry as it struggles to compete in the international marketplace on price and labour costs whilst still complying with stringent EU Legislation compared with non‐EU competitors. •
The EU directives that the industry must comply with among others relate to the emissions of VOCs (volatile organic compounds) which have been identified as a major pollutant. VOC emissions are dealt with by several directives: o
A global industry framework Directive, IPPC (Integrated Pollution Prevention and Control), 1996.
o
A specific Directive for solvent using sectors, the SED (Solvent Emissions Directive), 1999.
o
NEC, a Directive addressed to Member States, setting maximum National Emissions Ceilings attributed according to the size of national industries, 20004
4
http://www.intergraf.eu/Content/ContentFolders/PressReleases/Europa_Pres_MsKlose.pdf
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Environmental analysis The UK Print industry is undergoing a period of consolidation due to declining demand, overcapacity in the local economy and stiff competition from emerging economies such as China, India and Eastern Europe. Technological advances in digital printing are diminishing the role of traditional printing. Together with the prevailing economic downturn, which has left many companies experiencing cash flow problems due to lack of credit from the banks, this has led to a contraction of the industry. Outsourcing services such as preprint and typesetting to emerging economies has contributed to further job losses in the UK as companies seek to maximise their profits by taking advantage of lower labour costs abroad. A combination of these factors has seen the numbers of employees in the industry fall by 20% and the number of companies reduced by 15% in the past five years5. These tough trading conditions have led to several mergers and acquisitions in the past 5 years. The table below demonstrates Merger and Acquisitions activity in the Print Industry in the past 5 years6:
5
http://www.britishprint.com/page.asp?node=297&sec=Essential_facts_on_the_UK_printing_industry [accessed 07/03/09] 6 http://www.printweek.com/news [accessed 15/03/09]
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Year
Merger & Acquisition Company names
November 2008
Communisis and Absolute Intuistic
August 2008
Coutts Retail Communications (CRC) and Bluetouch
April 2008
Antalis Visual Communications and McNaughton Printall
February 2007
Kelvin Graphics and Print Group
November 2006
Donnelley and Banta
October 2005
WH Anderton & Sons and Doric Board & Packaging
December 2004
Schawk and Winnets and Seven Worldwide
July 2003
Astron and Hays Business Process Outsourcing.
Figure 4: Mergers and Acquisitions in the Print Industry over the past 5 years.
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Strategic Partnerships The UK print industry and its industry representatives have joined forces to improve the industry’s productivity and competitiveness. Increased productivity and more efficient processes will help the industry to compete for business within the EU and globally. The diagram7 below demonstrates the role each party has to play in order to achieve this objective.
Figure 5: Print Industry Strategic Partnerships Vision in Print is responsible for productivity and competitiveness, Proskills is the sector skills council responsible for training and BPIF is the umbrella trade organisation. This collaboration could help retain skills in the industry and goes some way to meeting government objectives of increasing the number of Apprenticeships available. Attempts are also being made to create jobs by retraining people in the industry to take up technologically skilled jobs. 7
http://www.britishprint.com/page.asp?node=315&sec=Three_Pillars [accessed 07/03/09}
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The UK print industry is addressing these issues by investing in digital print technology. This provides the capability to make last minute changes to print runs. Service providers are able to work round the clock printing several orders at once reducing wastage and increasing efficiency.
Print Industry Value Chain Table The Industry is divided into two sectors: 1. The paper media which represents the traditional print industry. 2. Technology media which is becoming increasingly important as new printing technologies are developed.
Communisis is moving more of its business away from the traditional printing sector into the technology media sector as a service provider.
Communisis’ place in the Print Industry 8
Figure 6: Print Industry Value Chain
8
http://www.ecmsa.org/downloads/ValueChain2006Flyer.pdf
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Bargaining power in the market Figure 7: Print Industry Structure
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Bargaining power of buyers •
Buyers come from different market sectors (financial and insurance services, retail, government, telecommunications and utilities).
•
Depending on what their requirements are, most of the buyers in the print industry have a variety of organisations to choose from. This means as long as several printers offer the required product the buyer’s bargaining power is high. Printers are limited in how high they can set prices and may be forced to incur high costs to meet customers demand.
•
If buyers are unsatisfied, they can cancel contracts and switch to a competitor with relatively low switching costs; e.g. TPF Group lost its primary source print management contract when Sky Broadcasting decided to set up an in‐house print management team9
•
The buyer power tends to be more evident in a recession. Buyers can use their power as they become increasingly cost‐conscious and better informed.
•
Bargaining power enables buyers to push their requirements through. E.g. as more and more customers have environmental representatives on their boards, buyers can demand eco‐ friendly standards from their printing suppliers.
•
Printers are in a weak negotiation position due to overcapacity in the printing industry and a historical lack of cooperation between printers.
9
Printing World, Aug 2008, p48.
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Bargaining power of suppliers •
Suppliers for the highly fragmented print industry come from different sectors. As the print industry produces physical goods there are several suppliers: machinery (digital and litho), paper, ink, logistic and transport, software and printing subcontractors.
•
Switching costs may vary. As the costs to change a logistics company may be relatively small, changing a main software supplier could be costly.
•
The bargaining power of suppliers in the fragmented printing industry varies. There are goods where a few big suppliers have high bargaining power and can dictate terms; e.g. many printers face a small group of large suppliers for paper machinery. Whereas other suppliers e.g. printing subcontractors from abroad compete for contracts which leave them with less bargaining power.
Threats
Threat of substitutes •
Threat of new entrants
The print industry is not a mature market. • As long as attractive profit margins can be made, There is customer demand for new and
new entrants will try to enter the market. With new
above all cheaper products and services.
entrants competition would intensify and profits
New technological developments have to be
could fall. It is important to note that not all parts of
integrated in the existing product range.
the print industry are able to achieve high profit margins. There is a mixture of high in low margins to be found.
•
Substitutes for the print industry are online • For new entrants digital printing offers an services and online banking. Increasingly
opportunity where profit can be made from orders in
journals, magazines and newspapers are
smaller volumes as the cost per sheet is almost
produced and read online. E‐books are
identical.
already widely available (e.g. Sony’s eReader & Amazon Kindle) and new technologies make these products and services more user‐ friendly.
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Competitors •
The
industry
is
a
fragmented
industry
with
strategic
competition.
The market structure is an oligopoly where companies are interdependent; what one company does to win market share will affect its rivals. •
The entry and exit of the market can be difficult. Start‐up and exit costs may be considerably high, especially when newcomers want to take on large established firms.
•
The degree of product differentiation is high; i.e. Communisis and its competitors actually compete by offering differentiated products. Under the label of print management Communisis and competitors such as Williams Lea and RR Donnelley offer services which are more differentiated than what the traditional printer could provide e.g. single point of contact for customers for jobs sourced to multiple suppliers.
•
Competition for the British print industry comes also from abroad where companies are sending print orders abroad, e.g. to China and India and Eastern Europe where material and labour costs are lower.
•
There is fierce competition in the print market. Established and new companies try to control different market segments. Communisis pursues the plan to control a middle segment of the market between the market leaders completing mega‐deals and small competitors taking the lowest price approach10.
The following figures illustrates how Communisis fits into the print industry. Figure 8a below shows the top 20 print management companies in the UK. Figure 8b highlights the difference in the services offered by the top 4 companies.
10
Steve Vaughan, CEO Communisis, Interim Report 2008, p6.
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Print Management Companies – Turnover £m11
700 600
500
400
300 200
100
0
Figure 8a: Top 20 companies in Print Management Company Williams Lea RR Donnelly Global
Communisis
Xerox Global Services
Logistics
Procure‐ ment No No Yes Yes Distrib. Supplier system To others Yes Yes Warehouse in Leicester/ Supplier Newcastle To others
No
Yes
Design and Development Yes Yes consultants
Production
Marketing
Service
Yes Yes Billings etc
Yes Yes
Yes Yes
Yes Consultancy Services and Bespoke products Yes
Yes Billing, cheques etc
Yes Known Brand in printing
Yes
Yes
Yes Care/ Loyalty scheme s Yes
12
Figure 8b: Top 4 competitors in printing management
11
Ranked by turnover (£m). Figures are from 2008 and taken from information provided by the companies themselves andPrintWeek Top 500 and accounts filed at Companies House. PrintWeek 22, January 2009. 12 Ranking from PrintWeek 22, January 2009. League Table, Top 500 Print Management. 20 | P a g e
Survival and success factors of the industry •
The print industry produces commodities. Product volume is an important survival factor.
•
Customer relationships are a main survival factor. Close relationships with customers and the capability to meet their needs better than competitors may yield success.
•
Compliance with EU regulations and “green” credentials are two further survival factors set by government and customers.
•
The print industry relies on the awareness that customers are becoming increasingly environmentally conscious. In order to survive in the industry companies have to show a product range that is both non‐polluting and environmentally acceptable.
•
A crucial survival factor in the print industry is technological competence. Without the know‐how of key technologies a printing company cannot survive in the market.
•
A further success factor is the ability to control the technological standard for the digital applications the industry uses. Competition in the printing industry is also based upon research and development and the ability to innovate faster then competition.
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Internal Analysis of Communisis PLC Communisis established business activity The group's principal activity is manufacturing printed products for direct marketing, forms, stationery and critical transactional products such as statements and cheques and the provision of print sourcing services13. The group operates through 4 business segments: Business Segments
Direct Mail and Business Forms • provides mailings for promotional material, legal and governmental, product launch, membership statement, e‐mailing, integrated and high security printing.
Printing Sources • provides sourcing, procuring, producing, storing and distributing key print requirements.
Turnover Profits 2008 2008 (2007) (2007)
Margins 2008 High margin due to (2007) disposal of Bath forms
£m
£m
91.8
5.5
(115.7)
(3.5)
6% (3%)
96.7 (107.4)
1.3 (0.9)
1%
business and strong growth in digital print
Low margin impacted by the loss of Sainsbury and HBOS contracts. Customers from this segment buy higher margin services from other segments
20% increase due to using
Transactional print • produces invoices, statements, bills, payslips, statutory notifications, account reminders, letters, purchase orders, marketing and support literature, cheque payments, data mailings, chequebooks, credit books, cheque mailers, encoded vouchers and clearing documents.
57.3
13.3
(55.1)
(11.1)
suitable facilities and the new contract with Co‐ operative group not available Previous lower margin
Technology and Services
11.9
5.1
43%
• include consulting to improve the marketing process, and tools to deliver increased efficiency and effectiveness to our customers’ marketing campaigns.
(4.0)
(4.0)
(32%)
13
http://wrightreports.ecnext.com/coms2/reportdesc_PRICE_C826C5610
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assignments have not recurred. Further growth is foreseen from the acquisition of Ai
Corporate Strategy At the end of February 2007, Communisis changed their print management strategy with the appointment of Steve Vaughan as the CEO, who announced that the group would focus on developing high‐margin value added services. The overall strategy of the Board is to concentrate on improvements in customer communication, centred on the marketing processes and exit the most commoditised part of manufacturing print. In so doing, it allows the Board to concentrate investment on those parts of the Company that are growing and fit best with the strategy. To achieve this aim a new corporate strategy was introduced in 3 stages:
January 2007
July 2007
July 2008
Communisis started in stage 1 by focusing on improving their ‘Customer & Service’ area through building customer loyalty and developing long‐term relationships. This also included stabilising the cash flow within the business. In Stage 2 Communisis focused on ‘Cross Sell & Value’ by selling more services from their portfolio to the same customers. Through this strategy, the organisation will gain value from making higher margins from the higher profit services while keeping the high‐volume low‐profit‐margin services.
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In Stage 3 Communisis are moving towards offering an Integrated Portfolio of services.
Acquisition of Absolute Intuistic In December 2008, Communisis acquired a data services business, Absolute Intuistic Limited (“Absolute Intuistic” or “Ai”) to improve the technology available to grow the business and to facilitate the offer of an integrated portfolio of services. Ai is a new entrant in the market, delivering robust and effective direct marketing solutions to over 100 clients in both B2B and B2C market place across a variety of different vertical sectors. They have big contracts already in place such as Barclays, HSBC, The Co‐Operative, RBS, Centrica, P&G, Tesco, Post Office, DEFRA and COI. Although the acquisition deal had a value of £12.4m14, according to 2008 Preliminary Annual Report, Communisis paid £4.5m cash in 2008. A deferred cash consideration of up to a further £8m is payable early in 2011, based on financial performance over the period from 1 September 2008 to 31 August 2010.15 Further investments in technology were made during 2008 of £1.5m in digital print and £2.3m in software applications for document compositions which resulted in operating margin in 2008 improving to 5.8% (2007: 3.6%).15 These investments also contribute towards stage 3 of the corporate strategy to offer an integrated portfolio of services. In June 2008 Communisis sold its business forms operation in Bath for £12.8m paid in 2 instalments (£8.2m paid on completion and the remainder payable in further instalments to 1st July 2012), which fitted least with the strategic focus on value‐added communications. The Bath Business Forms business had recorded a decline in profits over the last 5 years.16
14
http://www.aidataintelligence.com/default.asp?docId=12552 15 http://www.communisis.com/assets/x/50345 16 http://www.communisis.com/assets/x/50313
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In October 2008, Communisis began a joint venture with competitor Williams Lea working together on a contract with HBOS17. Williams Lea is a global business process outsourcing (BPO) company that manages digital information for internal and external audiences. This joint venture will combine expertise in digital printing and it will be an opportunity to learn from each other because their services are complementary. However, Lloyds TSB has acquired now HBOS and it is unsure if the newly formed Lloyds Banking Group will honour the HBOS contract with Communisis and Williams Lee.18 This new strategy has shifted the centre of gravity of the value chain towards the use of consulting, technology and service‐based propositions.
17 http://www.printweek.com/business/news/858052/Communisis‐ties‐Williams‐Lea‐HBOS‐work/ 18 http://www.accountancyage.com/computing/news/2226389/lloyds‐tsb‐hbos‐merger‐lead
25 | P a g e
Services and their relatedness Services
Common market
Common Specialist Skills (design)
Market knowledge
Common Technology Specialist software
Data Specialist analysis printing databases hardware
Print and Document Management Services
√
√
√
√
Statement and Billing Outsourcing
√
√
√
Direct Mail Services
√
√
√
√
√
√
Business Forms Services
√
√
Cheques & Security Prints
√
√
Sourcing Solutions
√
√
Marketing Process Consultancy (New diversification)
√
√
√
√
√
Figure 9: Services offered by Communisis and their relatedness Communisis are seeking to increase the proportion of their business generated through high‐margin services. The extra services include non‐print offerings such as digital asset management and consultancy on subjects such as how best to use envelopes under Pricing in Proportion, response handling for direct mail campaigns, software consultancy and streamlining areas of the print and marketing process.
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Communisis is therefore running the established manufacturing print business in conjunction with the new marketing consultancy business aiming to get inside the customers firms and becoming indispensable, rather than aiming for big print contracts.
Diversification and Risks There are however risks associated with such a diversification of the business aims of Communisis. These are illustrated in the table below. Reduced Risk
Increased Risk
Cover multiple markets to share the risk
Marketing Skills not available
Identify a profitable area of the business
Not understanding the environment
Competition from specialised organisations
Takes time to build a portfolio of customers
Figure 10: Diversification and associated risks
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Communisis Business Segments and their place in the Industry Life Cycle Analysing each business segment of Communisis and where these segments are situated in their lifecycle can be seen in the figure below. Technology and Services Direct Mail and Business Forms
Transactional Print
Printing Sources
Figure 11: Communisis business segments & Life cycle Management efficiency can help to prolong the maturity stage of the life cycle. Communisis must consider and plan on how to keep the growth of the ‘Technology and Services’ segment and of the ‘Direct Mail and Business Forms’ segment and when they will reach the maturity phase of their lifecycle. Production in improvements, like just‐in‐time methods and lean manufacturing, can result in extra profits. Technology, automation, and linking suppliers and customers in a tight supply chain are also methods to improve efficiency.
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Communisis Value Chain Human Resources
Secondary Activities
Sales Customer Services Information Technology Research and Development Transport and Facility Online Campaign Management Print & Document Management
Online Campaign Management
Statement & Billing Outsourcing
Direct Mail Services
Business Forms Cheques
Security Print
Marketing Process Consultancy
Sourcing Solutions
Figure 12: The Communisis value chain Communisis examined the primary and secondary activities of their value chain in an attempt to add value to the organisation. The following high‐level activities have been changed to ensure future success of the company:
Technology Management 1. €1.5m agreement with Emtex Software for Production Intelligence Output Management Software. This includes the provision of an advanced form of Mail Optimization Solutions which when fully functional will create a fully automated document factory with zero tolerance of failure and also enable more highly targeted communications across multi‐ channel delivery that drive response and loyalty. 2. The Centre of Excellence opened in Liverpool with state‐of‐the‐art technology (over £17m invested). This was developed for the production of transactional documents including statements and bills using sophisticated software and hardware. At the heart of this new facility was the installation of the advanced form of Output Management Solutions software
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which not only allows centralised and automated workflow but essentially made a range of print re‐engineering possible. This also performed a key function within Communisis’ ‘greenprint’ strategy which has culminated in being short‐listed for an environmental award.
Relationship Management 1. Communisis acquired Absolute Intuistic (£12.6m) which enables the targeting, personalisation, customisation, optimisation, analysis and accumulation of direct mailing services. Ai and Communisis shared clients however, a range of added value technological capabilities such as its sophisticated e‐procurement solutions and its services including analysis of campaign effectiveness and credit checking made its acquisition inevitable because Communisis would be able to accurately pick and choose profitable and lowest credit risk customers. 2. Communisis realigned their key contract with Barclays Bank to focus on value added services. Primarily, this was not only a service improvement but also a cost saving exercise for Barclays. As part of the new agreement the installation of IQ (Instant Quoting) software from Communisis on desktops within Barclays enabled direct on‐line ordering and on the spot price checking for any specification and modification to the design of print jobs. Communisis would be able to charge market rates for its print related services.
Process Management 1. Online print quoting. This is a process that is unique to Communisis in the print industry and to a very large extent appears to have been modelled on the efficient process management of Toyota in the automobile industry. Communisis makes this functionality available to clients with whom it has multi‐million pound contracts such Defra and Barclays.
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2. Continuous process improvement has led to the following accreditations, APACS cheque printer accreditation scheme (standard 55), APACS bank giro certification, QMP royal quality assurance programme, CIPS standard excellence in purchasing policies and procedures.
Knowledge Management 1. Recruiting industry experts to key positions such as A. Blaxill from HP, implementation of account management systems and building relationships with large customers across many industry sectors. 2. Confirmed S. Vaughan as CEO with huge experience and strong track record in Outsourcing, major contracts and systems and technology.
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Financial Analysis Communisis Financial Performance Overview 200819 Figure 13: Key Stats & Ratios Q4 (Dec '08)
Annual (2008)
Annual (TTM)
Net profit margin
3.67%
3.35%
3.35%
Operating margin
4.92%
5.58%
5.58%
EBITD margin
‐
8.08%
8.08%
Return on average assets
3.32%
3.54%
3.54%
Return on average equity
6.15%
6.56%
6.56%
Employees
1,916
‐
‐
19
http://www.google.com/finance?q=LON%3ACMS 32 | P a g e
In September 2008 the share price has started to fall, which could be attributed to the start of the credit crunch in the 3rd quarter of 2008.
Detailed Financial Analysis Profit
ProTit (before tax) 20000 10000 0 ‐10000 2002 2003 2004 2005 2006 2007 2008
£'000
‐20000 ‐30000 ‐40000 ‐50000
Communisis RR Donnelley Williams Lea
‐60000 ‐70000 ‐80000 ‐90000
Figure 14: Gross Profit Communisis has demonstrated a transformation from loss to profit over the past few years. It remains to be seen if this will continue into the future although it appears that the back to basics strategy of cash flow improvements appears to be working in terms of basic profit levels. However, caution must be exercised when analysing gross profit figures. Some of the profit for 2008 (£1.3m) can be attributed to the sale of Bath Business Forms business however this has been offset by an exceptional property provision (1.9m) related to lease guarantees of former group companies.
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Turnover
Turnover 400000 350000 300000 £'000
250000 Communisis
200000
RR Donnelley
150000
Williams Lea
100000 50000 0 2002 2003 2004 2005 2006 2007 2008
Figure 15: Turnover Communisis turnover has fallen in 2008. This is somewhat expected as the sale of the Bath Business Forms business has removed a high revenue generating business unit which so one would expect to see a drop in the turnover of the business at this point. As Communisis now focuses on business units that generate higher margins it is important that this is reflected in their results with increased profit levels achieved at a lower turnover.
34 | P a g e
Gross Profit Ratio
Gross ProTit Ratio 10.00% 5.00% 0.00% ‐5.00%
2002 2003 2004 2005 2006 2007 2008 Commuisis
‐10.00%
RR Donnelley
‐15.00%
Williams Lea
‐20.00% ‐25.00% ‐30.00%
Figure 16: Gross Profit Ratio The Gross Profit ratio compares gross profit with revenue. If margins are increasing but turnover decreasing we would expect to see the percentage in this ratio increase. Communisis has seen its gross profit ratio fluctuate over the past few years but it now increasing. The gross profit ratio has increased in 2008 but not extraordinarily so. With the acquisition of AI we can expect this ratio to continue to increase significantly. The fluctuations may be attributed to investment in digital print technology in 2006. When compared with RR Donnelley and Williams Lea it can be seen that Communisis is performing well as the gross profit ratio of their competitors is decreasing. This is indicative of a lack of innovation in their business to in order to increase profit margins rather than competing on price.
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Return on Capital Employed (ROCE)
ROCE 50 40 30 20 10
Communisis
0 ‐10
2002 2003 2004 2005 2006 2007 2008
‐20
RR Donnelley Williams Lea
‐30 ‐40 ‐50 ‐60
Figure 17: Return On Capital Employed This is a measure of how much profit was generated by the investment of the shareholder’s in the companies. ROCE indicates that Communisis’ cost of generating a profit has increased in 2008. Communisis have indentified a number of overhead savings which can be implemented to rectify this. In order to assess how efficient the businesses are operating we can assess their stock turnover, debt collection and credit control operations.
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Stock Turnover Stock Turnover 500 400 300
Communisis
200
RR Donnelley Williams Lea
100 0 2002 2003 2004 2005 2006 2007
Figure 18: Stock Turnover This is a measure of how quickly stock moves through the business. Communisis have increased their stock turnover from 15 days in 2002 to 26 days in 2007. This is a strong performance in comparison to Williams Lea and RR Donnelley whose stock turnover is 360 and 51 days respectively. Communisis would not have a large stock holding, as any print business would not. The nature of their product is such that it is unlikely to be held in stock waiting to be sold rather finished goods are produced once a customer has committed to purchase them. Stock will relate to printing supplies, e.g. paper and ink, rather than finished goods. When compared to a different industry, e.g. retailing, which relies on a large volume of stock required to trade the print industry is in a good position.
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Debt Collection Debtor Collection 90 80 70 60 50 40 30 20 10 0
Communisis RR Donnelley Williams Lea
2002 2003 2004 2005 2006 2007
Figure 19: Debtor collection Communisis appear to have their credit control operations under control and are managing to collect debts within 60 days. When compared with Williams Lea and RR Donnelley the collection of debts is within the norm.
Creditor Payment Creditors Payment 70 60 50 40
Communisis
30
RR Donnelley
20
Williams Lea
10 0 2002 2003 2004 2005 2006 2007
Figure 20: Creditor Payments
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The number of days taken to pay creditors by Communisis decreased from 57 days to 40 days. This reflects the ability of Communisis to pay debts from the cash within the business.
Turnover per Employee This is a measure of the revenue generated per employee and is indicative of the productivity levels within a business.
Turnover per Employee 250000 200000 150000
Communisis RR Donnelley
100000
Williams Lea
50000 0 2002 2003 2004 2005 2006 2007
Figure 21: Turnover per employee Communisis has the highest turnover per employee and is therefore performing well in comparison to RR Donnelley and Williams Lea.
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CrossSelling Communisis have identified that cross‐selling their value‐added services to their existing customer base as part of their 3‐part strategy. They have made some success as illustrated below going from 14 of their top 100 customers buying more than one service from Communisis in 2006 to 24 in 2007 and 32 in 2008.
No of Top 100 Customers using more than one service 35 30 25 20 15 10 5 0 2006
2007
2008
Figure 22: Communisis Cross Selling
Communisis Marketplace Positioning Communisis occupy a unique niche within the print industry where they are large enough to handle large contracts yet small enough to offer specialised and tailored services to their customers. All their business segments operate profitably and Communisis are well placed as market leaders in direct mail and Cheque printing. This is illustrated in the figure below:
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Direct Mail
Cheques
Sourcing
Market
Statements
Technology
& Bills
& Services
UK No 1
UK No 4
UK No 1
UK No2
n/a
£61.9m
£107.5m
£29.9m
£25.2m
£12.4m
5%
9%
95%
12%
n/a
Position
Turnover (2007)
Market Share
Figure 23: Communisis Business Segments and their Market position The offer of an integrated portfolio of products is a new area of business for Communisis and the acquisition of Absolute Intuistic will help to cement their place within this market. The move up value chain occurs as Communisis shift their focus from operating as a traditional printer to a multi‐ faceted organisation focused on high‐margin value‐added services. The economic climate is concerning for all businesses. Communisis have contracts with financial services institutions although many of these relationships are based on long‐term contracts and as the economy begins to grow marketing spend with these organisations will provide a large opportunity. To control costs in the meantime Communisis have maintained tight control on the operating costs within their business, instituting redundancies of 6% of the workforce in 2008 a business‐wide wage freeze for 2009.
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Strategic Options Having analysed the industrial environment in which Communisis operates and the business strategy and position of Communisis it is possible to begin the process of indentifying three strategic options. These three options represent the steps to implement subsequent to takeover in order to drive the business forward. A considered evaluation process has been conducted to reach the three options recommended. The first stage of the process was to identify a series of strategic issues that Communisis may need to address in the future. These issues were then prioritised according to the tangible difference and the significance of any improvement delivered subsequent to implementation. Once priority issues were identified a series of options to address the issues was produced and assessed according to the RACES criteria of resources required, acceptability to stakeholders, consistency with existing strategy, effectiveness in delivering aims and sustainability of any competitive advantage gained.
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Identification of Strategic Issues Group E have identified the following issues which Communisis face currently or in the near future in order to deliver their stated desire to move their business up the value chain: 1. Communisis have lost key contracts (e.g Sainsbury’s, HBOS) in the past, how can they develop customer loyalty whilst margins are being squeezed in a mature market? 2. Communisis has positioned itself in the middle of the print industry as both a print management and data solutions/marketing company, how can they capitalise on their competitive advantage? 3. How does the declining economic climate influence the print industry? 4. How does Communisis maximise productivity of their digital print technology investment? 5. Should Communisis continue to offer a broad range of services as they currently do or are there segments of their business they should dispose of and outsource the contracts? 6. Should Communisis continue to invest in software innovation and process streamlining? 7. Does Communisis have the capability to crossover into other industries, e.g. marketing and PR? 8. Should Communisis explore expanding their business segments to cover more of the industry value chain? 9. Should Communisis develop their business into 2 distinct subsidiaries in order to make winning new clients easier? For example, would a potential marketing customer enter into an agreement with a print company which also offers marketing services or rather a distinct marketing specialist.
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Prioritisation of Strategic Issues The nine issues outlined above have been prioritised according to the following criteria: Strategic Option Survival factor Advantage under threat Time‐constrained issues Better resource management Speculative opportunities Spare capacity usage
1 ✔
2 ✔
3 ✔
4 ✔
5 ✔
6 ✔
7 ✔
8 ✔
9 ✔
Figure 24: Strategic Options for evaluation Therefore issues 1, 2, 3, 5, 6 and 8 are priorities for further consideration shown in the table below: Option No
Issue Addressed
1
1
Develop Customer Relationship Management
2
1
Offer loyalty incentives to customers
3
1
Offer flexible accommodation of services
4
2
Invest in advanced technology and process management
5
2
Build on existing knowledge management
6
2
Build on relationship management
7
3
8
3
9
5
10
5
11
6
12
6
13
8
14
8
Option Proposed
Explore Merger and Acquisition opportunities as they arise Renegotiate contracts with suppliers and financial agreements Yes ‐ sell print business and focus only on value added services to existing clients No ‐ keep print business, retain customers and opportunity to cross‐sell Invest in advanced technology and process management Invest in research and development Continue with marketing services and expand the business segment Develop partnerships with device and OEM manufacturers
Figure 25: Strategic options to address identified issues
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RACES analysis
Option No
Resources
Acceptability
Consistent
Effective
Sustainable
These strategic options were then subjected to a RACES analysis:
Total
1 2 3 4 5 6 7 8 9 10 11 12 13 14
4 4 4 3 4 4 4 5 5 3 3 1 3 1
4 3 4 4 4 4 4 3 3 2 4 3 4 2
4 3 3 5 4 4 5 4 4 3 5 1 4 1
3 2 2 5 3 3 5 4 4 1 5 4 5 3
2 1 2 3 2 2 3 1 1 2 3 3 3 1
17 13 15 20 17 17 21 17 17 11 20 12 19 8
Figure 26: A RACES analysis of the strategic options for Communisis
From the RACES analysis the strategic options with the highest score are 4, 7, 11 and 13. These are:
• • •
Invest in advanced technology and process management Explore Merger and Acquisition opportunities as they arise Continue with marketing services and expand the business segment
After consideration of their fit with the existing business strategy and feasibility these options have been carried forward to form our strategic recommendations.
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Recommended Strategic Options Option 1: Expand inhouse media and marketing capabilities As the print industry continues to mature there is an increasing polarisation where very big players chase very large deals with the few customers able to offer such contracts. At the other end of the spectrum many printers are using cost as their only tool pushing prices down. This is ultimately unstable and by adding value‐added services and offering a range of services Communisis position themselves well for the future. Further significant investment is required to cement this particularly in skilled, creative employees with marketing experience. By offering customers a complete marketing solution (incl. ad campaign design and management) Communisis can build and strengthen their current business platform. This would complemented the acquisition of Absolute Intuistic and the ability to profile & target clients customers. Being able to tailor a customers marketing solution from concept through to multi‐channel delivery targeted to the desired client places Communisis in a strong position within the marketplace combining print expertise with marketing and data analysis skills.
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Option 2: Invest in new technology and process management Innovation represents an opportunity to lead the market in digital print processes and the efficiency that these methods can achieve. Communisis are already Hewlett Packard's fastest growing digital print client. By continuing to invest in new techniques Communisis will be able to offer a greater range of products, with shorter lead times, produced with less wastage (incl. waste paper, energy, capacity) offering greater flexibility to their customers. Careful evaluation of the features and benefits of any investment must be tempered by the amount of investment required, payback time and opportunity cost.
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Option 3: Explore merger and acquisition opportunities The current economic climate is likely to prove very challenging for many businesses for some months to come. Inevitably this will present Communisis with further acquisition opportunities. Any acquisition must fulfil the following requirements:
•
Offers value to the business
•
Complementary to the strategy
•
Further differentiates Communisis from their competitors
Communisis are in a position where they now have some experience in this area and must take advantage of the opportunity to further consolidate their position as a marketing and print expert. An area where Communisis should focus their attention in terms of acquisition targets would be an online publishing company. Many publishers are beginning to branch out into offering their content in an online format. This has the potential to reduce the volume of content that is physically printed.
Issuu.com
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Issuu is an online publisher allowing personal users to upload their own publications for free or business users to upload their publications without the Issuu branding for a fee. This company represents the leading use of online publication technology allowing users to add multimedia content and internet links to their publications. To further integrate this business into the Communisis business would use the skills of the workforce of Issuu to develop the online capabilities of existing business functions. An initial step would be to offer Communisis customers a website design service that would be a complementary design to the marketing material published by Communisis. The database services offered by Absolute Intuistic and the Emtex desktop software from Communisis also present an opportunity that could be exploited by the knowledge of the staff of Issuu. Communisis would be able to move their desktop applications to an online facility which would mean that rather than installing software onto a customers computer the application would be present on the internet. An example of this is Google Documents which allow a user to create word processing, spreadsheet and presentation documents via their internet browser rather than a software package, e.g. Microsoft Office. This increased use of online technology would lead to an increase in costs for Communisis for the extra Internet bandwidth and hosting charges. An option to circumvent this would be to acquire an Internet Hosting provider such as Just Host (www.justhost.com). To summarise acquisition targets:
•
An online publishing company (e.g. Issuu)
•
A Web hosting company (e.g. Just Host)
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Summary In recommending the options above we have been careful to select options that are consistent with the current business strategy of Communisis yet offer further differentiation and competitive advantage from their competitors. The strategic options reflect the desire of the Directors to increase the value‐added technology services business segment. The strategic options address four of the initial strategic issues and are likely to move Communisis higher up the print industry value chain. Communisis is in a financial position to be able to develop the business in the way suggested and has funds available for acquisitions should the opportunities present themselves. The cost to the business of not implementing the strategic options is considerable. To preserve any competitive advantage derived from their market position Communisis need to continue to innovate and develop their services. As long as their customers know that Communisis are able to fulfil and exceed their print and marketing requirements Communisis will maintain their market leading position.
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