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Vertical Integration

The Future of the Graphic Communications Market

By Barbara Pellow

Manufacturers frequently use a term called vertical integration to describe their organizational structures. This is a form of business organization in which all stages of goods production, from the acquisition of raw materials to the retailing of the final product, are controlled by one company. A current example is the oil industry, in which a single firm commonly owns the oil wells, refines the oil, and sells gasoline at roadside stations. By grabbing more links of the value chain, organizations can reduce risk and increase control. They also raise their overall value as they increase the ownership of processes related to the delivery of their products and services.

As other major manufacturing sectors experience commoditization, increased competition, and a desire to improve profit margins, they turn to vertical integration as well. The reasons are simple—value migration, differentiation, and customer demand. The concept of vertical integration is becoming increasingly prevalent in the graphics communications industry today.

Value Migration
In many industries, particularly the manufacturing sector, the product has become a commodity. As a result, a considerable portion of added value has shifted away from actual manufacturing and the company’s emphasis has shifted to services. This trend is reinforced with the rise in technical complexity, which leads to exponential growth in the need for value-added services. A great example is the computer manufacturing industry. As the prices of computers were driven down, most major computer manufacturers expanded aggressively into value-added services such as consulting. IBM was the pioneer in building computers, but was soon emulated by the likes of Hitachi and Compaq. In 2002, IBM acquired the consulting arm of PricewaterhouseCoopers to augment its manufacturing business with services.

This is not unlike the graphic communications market. Faced with increased price pressure on printed materials, graphic communications service providers are expanding their services portfolios to participate in more of the overall value chain. Some are moving upstream to strategy, creative, and data services, while others are migrating downstream to kitting, mailing, and fulfillment.

A perfect example of a company that has strived to migrate to a value delivered model is SugarBush Media Solutions. 22 years ago, Mark Parent started a quick print shop called SugarBush Printing in Auburn Hills, MI. Over time, the business grew. The firm expanded its print capabilities and began establishing relationships with several local advertising agencies.

SugarBush was very focused on the agency market niche. From a strategy perspective, Parent saw that catering to a specific industry was a way of differentiating his business. After 9/11, Parent’s agency business started to decline. Smaller agencies were being absorbed by larger firms or going out of business. It was time to revamp the business plan at SugarBush. Parent concluded that his ultimate goal was to become a 1:1 marketer. He states, "Efficiency and rapid turnaround time weren’t enough—Everyone else could do that. Multi-channel integrated marketing solutions, where we controlled the entire value chain, were our future."

Mark developed a new business plan and spent two years rebuilding his operation. In January 2006, the company changed its name from SugarBush Printing to SugarBush Media Solutions. Today, visiting the company’s Web site brings no mention of printing equipment. The site states, "From initial concept and strategic development through program execution and ROI measurement, SugarBush Media Solutions delivers proven results which increase document effectiveness and/or decrease costs." While this vertically integrated strategy is delivering high returns for customers, SugarBush Media Solutions posted a 75 percent revenue increase in 2006, and 96 percent of that was from a media solutions sale.

Differentiation
The portion of value-added services by traditional production activities—core product design and manufacture—has declined, as have their margins. In many mature industries, including graphic communications, the product has reached levels of performance that already satisfy the requirements of the majority of customers. Further refinements of the technical/functional performance of mature products tend to confront severely diminishing returns. For example, the processing power of most PCs is already far in excess of the average user’s requirements and additional power is unlikely to yield distinction in consumers’ minds. To escape the commoditization of their core product or service, companies are trying to differentiate themselves from their competitors by supplementing print with sophisticated services.

Franklin, TN-based TAG is a family-owned business that started in 1999 through the acquisition of a small printer called S&W Printing. Co-founder Adam Bishop had an MBA in International Business and a much bigger vision. The name of the company was changed to The Advertising Design and Marketing (ADAM) Group in 2002 and then to TAG Marketing and Recruiting in 2006. Today, TAG is a marketing company with a full production facility—offset and digital. The company focuses its energies on developing marketing programs for recruiting in the healthcare market.

To meet the needs of this market, TAG established an organization comprised of former home care agency owners, administrators, graphic designers, and marketing specialists with more than 75 years of combined home care marketing experience. They created a series of automated marketing services designed to drive referrals as well as recruit healthcare workers for home care agencies. The ultimate benefit for the agency is improved sales productivity for new prospect activity as well as a reduced cost for recruiting employees.

While delivering strong results for clients, TAG has emerged as a $5 million-plus division of The ADAM Group. The company has differentiated itself as a provider in the healthcare recruiting market. Integrated marketing campaigns are its bread and butter and currently account for over 60 percent of new business growth.

Customer Demand
Many firms are compelled by their clients to offer a larger range of products. As clients concentrate on their own core competencies, they increasingly rely on their suppliers for integrated solutions. These clients no longer have the ability to specify solutions because in many instances the technology has become so complex that only specialists fully understand it.

With a wealth of advertising experience and a deep understanding of the automotive marketplace, Tier3 Advertising president Kevin Lash saw business potential for targeted automotive multi-channel marketing campaigns to help improve sales for local dealerships. Automotive dealers make a huge investment in marketing. New car dealers spent about $7.8 billion on advertising in 2006, with each dealership spending an average of nearly $365,000, according to the National Automobile Dealers Association (NADA). Ad expenditures per new vehicle were up two percent from 2005, averaging $590 in 2006. With the emergence of the Internet and the complexity of implementing multi-channel campaigns, dealers were looking for a solutions partner. The business objective of Tier3 Advertising was simple—to help automotive dealers sell more cars through turnkey marketing campaigns.

A little over two years ago, Kevin established Tier3 Advertising in Manchester, NH along with business partners Ted Jarvis, Brian Mikol, and Richard Pease. Two of the partners had strong advertising and promotional event bacgrounds, while the other two brought their strengths as a traditional commercial printer and mail house. This skill combination meant that the company could build a full-service offering to meet the needs of the target market.

According to Lash, "Automotive dealers want a turnkey approach. Based on our industry knowledge, we have developed a precise mix of high-impact automotive marketing campaigns that utilize targeted direct mail and integrate with customized Web landing pages to capture leads. We also provide saturation marketing flyers and newsletters, manage on-site staffed events, and provide telemarketing support. We basically offer strategic full service to our clients, including bundled campaign packages, custom creative development, Web services, and most importantly a clear understanding of ROI for the dealer’s marketing dollars." Most importantly, technology is not the core competence of the auto dealer. He doesn’t care about digital printing or variable data or multi-channel campaigns. He just cares about selling cars.

Vertical Integration: Interlinking Process and Technology
In today’s market, successful graphic communications service providers are changing business models. Firms like SugarBush, TAG, and Tier3 Advertising have become marketing services companies. They have developed business models that coordinate all facets of the marketing services value chain on behalf of their customer base. The value of vertical integration for graphic communications firms is clear.

First, manufacturing print is a commodity. Providing strategic marketing services is a true value-add that differentiates a firm. Vertical integration can occur through organic growth and acquisition of specific skills, mergers or acquisitions with other companies, or strategic partnerships. The key is that graphic communications service providers that deliver the entire value chain have created and can exploit marketing power.

Sep2007, Digital Output

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