SEPTEMBER 20, 2013
INDUSTRY STUDY
ARNOLD, CHANDLER, NAVEEN E.V., PEASE, PLOUFFE
MBA 605
Team Lexmark
Lexmark & the Business Solutions Industry: A Five Forces Analysis
Contents:
Introduction to Lexmark, Five Forces Analysis
Internal Rivalry
Entry into the Market
Substitutes & Complements
Power of Suppliers
Power of Buyers
Conclusion
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Introduction
In this study, our team has endeavored to summarize our research into the printing
and business solutions industry of Lexmark, a global leader in document management and
business solutions that is headquartered in Lexington, Kentucky. Since 1991, Lexmark has
founded its reputation on the development and manufacturing of a variety of printing
products. However, its latest transitionary phase began in August of 2012, when it ceased
production of its inkjet printer lines and sold the technology to Japan-based Funai Electric
Company. Since then, Lexmark has attempted to transition its concentration, focusing on
commercial printing services and business solution technologies in specific industries.
These recent changes in direction have shaped the beginning of the rebranding process for
Lexmark, repositioning the company for growth in a new market.
Five Forces Analysis
For the purpose of evaluating Lexmark’s industry, we will assess its transitionary
phase and apply the lessons and implications of the company’s current changes to its new
market frontiers using business strategy mastermind Michael Porter’s “Five Forces” model.
In Porter’s words, “defending against the competitive forces and shaping them in a
company’s favor are crucial to strategy”i and few companies are in more dire need of
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Team Lexmark
understanding the drivers behind its industry than a company like Lexmark, which is
attempting to redefine its business while maintaining clients in a growing new field rife with
potential and uncertainty. Accordingly, this study will assess Lexmark’s industry on five
variables: Internal Rivalry, Barriers to Entry, Substitutes & Complements, Supplier Power,
and Buyer Power.
Among the questions we will seek to answer are those pertaining to Lexmark’s
competitors in the broader printing industry and the new competitors it faces in the business
solutions industry. We will also discuss the advantages and externalities affecting Lexmark’s
market share potentials in its transition and what the company can do to reposition itself.
And lastly, we will consider the many factors involved in the decision-making process for
buyers and sellers in Lexmark’s target market.
Internal Rivalry
Porter’s first force, internal rivalry, can be defined as “the jockeying for share by firms
within a market”ii (pg. 329). Understanding this rivalry necessitates first evaluating the
market in which Lexmark operates and is looking to expand. As mentioned, the company
has long depended upon its hardware offerings, with particular emphasis on its laser jet and
inkjet printers, the latter of which are in the process of being phased out almost entirely.
Lexmark’s competitors in printer hardware include such global brands as Dell, HewlettPackard, Canon, and many others. Some of these companies also compete with Lexmark in
the professional industry market that it has chosen, which is why the company has shifted
its focus to efficiency solutions—an emerging market that is largely under-defined and in
which its true competitors are less recognizable.
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Team Lexmark
One driver of Lexmark’s emphasis on industry-based services, ranging from
education to government to finance, is that it would face heavy competition in a traditional
consumer market. Hewlett-Packard provides an illuminating example. In a recent five forces
analysis of HP, the author outlined HP’s movement to dominate the consumer market for
printers because of a proposed decline in the long-term markets for HP’s computers.
“Smartphones and the exploding number of ‘apps’ available for them provide much of the
functionality of a PC in a small, portable package. Cloud computing and data storage reduce
the need for desktop power. Tablet devices and electronic readers erode the market for
laptops”iii. If HP’s movement to dominate what remains of the consumer printer industry is
truly proving successful, it is all the more reason for a company like Lexmark to pursue a
market share elsewhere.
One variable to consider in terms of rivalry is whether the industry is stagnant or
declining since “firms cannot easily expand their own output without stealing from
competitors”iv (pg. 330). One way that Lexmark is looking to prosper on its new trajectory
is by isolating “pain points” for its large corporate clients—many of which may also be using
the services of Lexmark’s rivals—and using the solution process for these pain points as a
means of achieving “stickiness”. Stickiness is a concept through which Lexmark maintains
its clientele and increases value for its customers by making it cost-effective for them to
implement Lexmark products and services and cost-prohibitive to switch to a competitor.
With regard to the solutions industry, Lexmark CEO Paul Rooke has acknowledged
that its competitors in this market are not yet clearly defined, pinpointing Xerox and IMB as
possible contenders. Competition’s role as a driver in the business solutions industry cannot
be marginalized. As other software and hardware companies find their industries in similar
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Team Lexmark
decline, they may also seek out gains in nascent frontiers such as those which Lexmark is
exploring. Take Chicago-based printing giant RR Donnelley, which has recently been forced
to contend with the national decline in printed media, including newspapers and printed
books. Like Lexmark, it has also recently begun the acquisition of software firms that can
help it gain footing in emerging markets, including “an online self-publishing site, a financialdata firm and one with a technology that newspapers can license for an online-payment
system” v
Another important variable to consider is that competition could be beneficial to
Lexmark on a number of levelsvi.
Lexmark is positioning itself to benefit from the
technological innovations of its competitors, including IBM, which has helped pioneer the
sort of cloud computing that Lexmark is now attempting to utilize in many of its multipurpose printer/solutions devices. Furthermore, high-profile consumer companies like
Apple help to publicize internationally the sorts of new technology that a company like
Lexmark can focus on adapting to a corporate environment for its clients. Although the
company still faces software competition on a number of levels, especially as IBM and
Amazon vie for government domination of cloud servicesvii, there is still room for Lexmark
to carve out a niche in document solutions that integrate its hardware services with costsaving workflow efficiencies without coming into direct competition with tech juggernauts.
Entry into the Market
Also important in the five forces model are barriers to entry in the marketplace.
Although it has been acknowledged that the industry for business solutions is still in a
transitionary state, there nevertheless exist significant barriers to entry on a number of
practical levels. First of all, what exists of the international market for such services has
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Team Lexmark
already become dominated by those companies which have significant pre-existing bases in
key global industries, also known as “network externalities”viii (pg. 331). As mentioned,
Lexmark’s current emphasis is on creating “stickiness” by nurturing longstanding
relationships with its current partners and diagnosing pain points that can help the company
save money for its partners. This is the cornerstone of Lexmark’s “Customers for Life”
mantra and it is a significant advantage that companies like Lexmark and IBM exhibit over
new companies that would try to enter this market on a global corporate scale.
It is worth noting, however, that far fewer barriers exist in the related software
industries upon which Lexmark is dependent in adjusting its business model by integrating
new technologies with its hardware and service offerings. These software firms play crucial
roles in helping larger corporations find cost-effective ways to isolate its offerings in cloudcomputing, capture software, etc. and there has been a rush of similar acquisitions by
Lexmark’s primary competitors. Last year, Canon oversaw the acquisition of a Dutch firm
specializing in medical solutions to strengthen its hold of its share in medical imagingix. The
last few years have seen other leaders in the print/printing industry participating in a similar
blitz on software firms as they attempt to carve out niches in the broad, rich possibilities that
have spun off from the tech boom and innovations of the last decade.
Lexmark has followed suit, overseeing the acquisition of a variety of software firms
that help position the company at home and abroad, including Perceptive Software,
Saperion, Pallas Athena, and BDGB Enterprises, among others. These mergers have helped
Lexmark further penetrate the global market for business solutions and, as Mr. Rooke
explained during a recent visit, the acquisitions are almost definitely going to continue in the
short-run. This makes sense as there is still an abundance of small software companies
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Team Lexmark
emerging in key markets and Lexmark’s competitors are making similar decisions about
whether to flee the traditional printer market or try to forge new territory in softwaredependent industries that might have new uses for old technologies.
The final point to make about entry is that Lexmark already has preexisting access to
resources that can facilitate its adjustment period. A recent article from The Motley Fool
mentions that “some of the world's most successful businesses try to negate [the threat of
competition] by obsoleting their own products so someone else doesn't do it first”x.
Lexmark’s newest products synthesize the new with the old in an attempt to acknowledge
the decline of the modern printer while offering a satisfying, cost-saving, “next generation”
alternative to its clients in a move to maintain their business. As noted, the contest has
moved away from developing “the better printer”; it now seems to focus on creating those
devices which solve the most pain points and limit the most waste or inefficiencies.
Substitutes and Complements
As expected in a software or hardware-based industry, threats from close substitutes
from competitors is an industry driver even in the expanding solutions market. According
to Michael Porter, “if an industry does not distance itself from substitutes through product
performance, marketing, or other means, it will suffer in profitability—and often growth
potential”xi (pg. 84). Lexmark’s current maneuver is to expand its investment in technology
associated with imaging and processing solutions, including laser jet printers, multifunction
devices, and software solutions. As mentioned, Lexmark has placed heavy emphasis on
combatting substitutes from competitors by developing “customers for life”.
Creating “stickiness” is how Lexmark hopes to buffer itself from the threat of
substitutes.
The company does not seem interested in directly challenging industry
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Team Lexmark
heavyweights like Apple or HP, but it is looking to insulate itself by improving the cost-saving
capabilities of its products and by creating complementary technologies and services that
make it difficult for its competitors to gain traction with Lexmark’s customers. In a recent
Harvard Business Review article, the key to creating “stickiness” with customers is defined as
“minimizing the number of information sources consumers must touch as they move
confidently towards a purchase; providing trustworthy sources of product information and
recommendations; and offering tools that allow consumers to weigh their options by
identifying the features that are most relevant to them”xii (pg. 111).
Lexmark has incorporated this philosophy into its client-relationship framework and
pricing structure by making the cost of its services dependent upon negotiation and savings
yielded for its customers by its products and solutions. In other words, the company has
worked to protect itself from price competition by developing close relationships and a
product network that generates sufficient savings to offset price differences between itself
and its primary rivals. Although it looked like Brother Industries might make a move into
Lexmark’s image capture and document solutions territory through a Kodak subsidiary
acquisition in April 2013, that plan fell throughxiii, leaving Lexmark—for the time being—
relatively isolated in its solutions niche.
The Power of Suppliers
For the most part, Lexmark's transitional strategy has enabled the firm to acquire
many upstream technology suppliers that would otherwise strain the ability of the firm to
operate at a profitable level or pose value to Lexmark’s rivals. As Lexmark absorbs the
information technology and software companies it has purchased for the production and
development of its products, Lexmark can more easily price its products and services in
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Team Lexmark
accord with maximized efficiency and profitability. The many suppliers that Lexmark
outsources for the production of its products include specific plastic, hardware, and
microchip manufacturing companies and electrical utility companies that supply Lexmark’s
international branch locations.
Lexmark utilizes a supplier diversity program to effectively employ eligible minority
suppliers for these services and products when possible. These suppliers are chosen based
on their proximity to shipping and manufacturing facilities around the world. Because the
utility suppliers have very little indirect power due to the many different customers utilizing
their products and services, they cannot easily target Lexmark as a firm to be exploited. The
minority plastic, hardware, and microchip manufacturing and processing plants outsourced
by Lexmark can be considered a source of direct power. Because of their relationshipspecific investments with Lexmark, many of these suppliers hold power over the firm by
determining the prices of these inputs. In reality, these third-party manufacturers are mostly
utilized under strict contractual agreements that outline specific costs that Lexmark will
incur for their products. Because of the large number of plastic and microchip producers in
their respective industries, these minority third-party suppliers must remain competitive to
keep these contracts with Lexmark.
The Power of Buyers
Buyer power in relation to Lexmark’s operations are very unique today when
compared to its recent past. Because Lexmark now focuses on selling its products to other
businesses instead of typical consumers, they have the flexibility to price their products
according to the value gained by the business or industry. This transactional process
involves many negotiations between the buyer and the Lexmark sales representative. In this
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Team Lexmark
process, Lexmark retains the majority of the pricing power and can discriminate against the
customer based on the value added by the product or solution. The buyers often have little
negotiating power due to the unique qualities of the solutions gained through the utilization
of Lexmark products. Because Lexmark designs its products to address “pain points” across
different industries, the value added by their product is not necessarily easily quantifiable
by the consumer.
Although Lexmark may face competition from companies such as HP and IBM,
Lexmark’s ability to focus on its client’s pain points allows it to seek gains in negotiating
power. Mostly, Lexmark does not suffer from buyer power in its business transactions as
long as their product remains unique and the benefit gained by the consumer is more than
the next best alternative. Companies like Nagoya, Japan-based Brother Industries may be
able to find leverage in those industries where they have preexisting footing—East Asia, for
instance, where a Japanese company is likely to have a greater base compared to Lexmark,
which has historically not found a lot of traction in East Asian markets—but Lexmark should
be able to benefit from its head start with its clients and ability to make price negotiations
and client-cost savings its bottom line.
Conclusions
What this analysis ultimately concludes is that Lexmark’s new industry in business
solutions is driven predominantly by international competition in related industries and the
firms from which Lexmark acquires the resources for its hardware production. Although
direct competition in business solutions is sparse for the time being, there are many highprofile competitors from the printer industry who are looking to branch out into fields where
Lexmark has varied interests, including Canon’s recent exploration of medical imaging and
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Team Lexmark
the contract war between IBM and Amazon last month for a multi-million-dollar bid to
improve the CIA’s cloud infrastructurexiv. For now, there exists enough space in the software
market for these companies to seek out their own niches and Lexmark has a variety of
important relationships combined with a great reputation, but one wonders how long
competitors like HP will continue to focus on the consumer market and allow Lexmark to
focus on being a corporate solutions provider. The future of this study begs the question: Is
Lexmark carving for itself a new market with room for global expansion and coexistence with
transitioning rivals or is Lexmark simply protecting its niche in a software firm arms race?
Porter, Michael. “The Five Competitive Forces That Shape Strategy” in Harvard Business Review. Vol. 86
Issue 1, p78-93. January 2008. (Appendix 1)
ii Besanko, David and David Dranove, Mark Shanley, and Scott Shaefer. The Economics of Strategy (Fifth
Edition) John Wiley & Sons, Inc. USA. 2010. (Appendix 2)
iii Randall, Richard. “The Whiteboard: Understand H-P investor concerns with the Five Forces model” in
Central Penn Business Journal. September 2nd, 2011. (Appendix 3)
iv Besanko, David and David Dranove, Mark Shanley, and Scott Shaefer.
v “Printers sink” from The Economist. The Economist Newspaper Limited. London. August 25, 2012.
http://www.economist.com/node/21560871 (Appendix 4)
vi Hoium, Travis. “The Forces Driving Business” from The Motley Fool (online resource). February 29, 2012.
http://www.fool.com/investing/general/2012/02/29/the-forces-driving-business.aspx (Appendix 5)
vii Censer, Marjorie. “Amazon Web Services, IBM Battle over High-Profile CIA Cloud Contract” from The
Washington Post (online). September 1st, 2013. http://articles.washingtonpost.com/2013-0901/business/41670836_1_amazon-web-services-cloud-computing-federal-agencies (Appendix 6)
viii Besanko, David and David Dranove, Mark Shanley, and Scott Shaefer.
ix “Canon Europe Acquires Dutch Medical Solutions Specialist Delft DI.” Press Release from Canon_Europe.
(Online) February 2012. London. http://www.canon-europe.com/About_Us/
Press_Centre/Press_Releases/Corporate_News/Canon_Europe_acquires_Dutch_medical_solutions.aspx
(Appendix 7)
x Hoium, Travis.
xi Porter, Michael.
xii Spenner, Patrick and Karen Freeman. “To Keep Your Customers, Keep it Simple” in Harvard Business
Review. Vol. 90 Issue 5, p108-114. May 2012. (Appendix 8)
xiii “Brother Misses on Kodak Deal” in The Japan Times (online source) May 1, 2013:
http://www.japantimes.co.jp/news/2013/05/01/business/brother-misses-on-kodak-deal/#.UjmqRz_pxuI
(Appendix 9)
xiv Greene, Jay. “Amazon alters strategy to win landmark CIA contract” in The Seattle Times (online resource)
August 25, 2013. http://seattletimes.com/html/businesstechnology/2021686332_amazoncontractxml.html
(Appendix 10)
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