R.R. Donnelley & Sons: The Digital Division

Case Analysis:    R.R. Donnelley & Sons: The Digital Division

Case Summary:

The HBR Case R.R. Donnelley & Sons: The Digital Division1 was written, in the year 2000 by Artemis March/Prof. David A. Garvin. At that time Printing Industry was dominated for about 100 years by huge machines, dubbed as “heavy iron”, which were typically were based on Offset press and Gravure press techniques. During that time-period (1990s), RR Donnelley (RRD) was the leader of $ 80 Billion Printing Industry with Revenues of about 4.9 Billions – 6 % of the market share.

R. R. Donnelley Company and Background:

• RRD was founded in 1864 printing catalogs for Montgomery Ward, by 95’ they were the largest commercial printer with 41,000 employees in 22 countries.
• RRD was privately held, Chicago based company for almost a century until they went public in 1956.
• RRD generated 71% of its revenues from Catalogs for Retailers (31%) and Magazines (18%), the Publishers of Books (13%), and Telephone Directories (12%).
• Software/Hardware (18%) was emergent customer segment with customers like Microsoft/IBM.

Other customers of RRD were Direct Mail (5%), and Financial (5%).

• Manufacturing & Sales were core functions - Printing machines, were essentially dedicated plants built for each contract.
• In 1995, RRD had 38 divisions, in 8 business groups, part of 3 sectors: Commercial Print, Networked Services, and Information Resources.

The relentless industry shifts and new technologies, led by rapid spread of office computing were game changer and printing industry was shifting towards desktop from the traditional printing making small alliances, market penetration and retail printing a more feasible solution. Desktop printing with as little investments as $200 K were threatening the foundation of the high fixed, low variable cost and long-term customer relationship business model.  In a rigid and overlapping structured organization, mainly led by profit and loss incentives, major changes threatened the incentives of an established and well-tested process. The case is set out for Rory Cowan, director of Information Resource Sector, who is leading the change process, and Barb Schetter VP and General Manager of Digital Division at RR Donnelley and Sons, how to bring in Organizational change to adopt to “industry shift and new technology” without threatening the company’s solid foundations and how to  initiate the shift in the organization’s vision and services towards sustainably positioning the company in the new realm of Printing Technology, which is changing drastically along with changing the mindset of established customer base.

To analyze the case R.R. Donnelley & Sons: The Digital Division1, our Group looked at historical performance of RR Donnelley (RRD) stock since 1980 (see Appendix 1) and observed that the in the period from 1995 -1998 RRD stock peaked at about $ 46 around June 1998 and, it was hovering around $ 40 in June 1995 when the digital shift was taking place in the Printing industry.

The theory on Growth Dilemma from lecture notes states: “Investors tend to discount into the

net present value [based on the formula Price of Stock, Po = Dividend(D)/(Rate of Return(R) – Growth Rate (g)), simply Po =D/(R-g) for constant growth rate (g) of dividend] of a company’s stock price the growth rate that they believe the company will continue to achieve. Worse still, there is a tendency to discount even growth from new, yet-to-be-established businesses; particularly if a company has a good track record for growth”.

The fact that    the stock price  of R. R.  Donnelley (RRD)  is hovering around $ 5.42 in  Sept 2018

 clearly indicates that Digital technology shift initiated by the executives at RR Donnelley did not

 go very well as the stock price of a company is a very good indicator of its future dividends and

 growth prospects.

Q1: How do the critical success factors for Donnelley’s traditional printing business compare with those for on-demand digital printing?  Try to highlight all the differences between Traditional vs. On-Demand Digital Printing business and briefly discuss their implications.

Critical Success Factors for Donnelley’s Traditional Printing:

• RRD strategy was to secure multiyear enabling contracts i.e. develop long term relationships with customers -70% of commercial printing business, ran 3-10year contracts worth tens of millions.
•  Key success factor at RRD was the fact that Printing machines, were essentially customized/dedicated plants built for each contract/customer and were $3.7 billion worth asset base for Donnelley, which could be divided in two main categories:

-  Offset/web (Used film & plates, cost effective for 25,000 to 500,000 runs), typical cost $12 million

             -  Gravure (Used etched copper drums, Cost effective for 500,000 plus) printing presses, cost more than $12 million.

• Resource allocation also followed opportunistic approach, according to Allen Cubell, director strategic planning for the Commercial Print Sector, “the emergent strategy was based on opportunities, as opposed to selecting the right opportunity based on a strategic assessment of alternatives”.
• The traditional electro-mechanical print technologies allowed some tailoring and customization using customized binding equipment, which printed 66,000 different versions of the farm journal.

Critical Success Factors for Donnelley’s On-demand Digital Printing: 

Imaging Technology had been quite stable since the development of offset/web printing in the 1960’s but major changes were underway, largely because of rapid spread of office computing. However, Digital Vision was a new business model with economic and technical validation.