Date: Tue, 12 May 1998 17:07:42 -0500 
Subject: Crouser Report #189; May 10, 1998,
To: martin@lata.net

Crouser Report OnLine Copyright 1998 Thomas P.
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Crouser Report #189; May 10, 1998
Positive Doom and Gloom
Transmitted from Charleston, West Virginia


INDEX: In This Issue I receive a timely* message from
Rob regarding our Doom and Gloom discussion of the
last couple of weeks. He also forwards the comments
of William L. Davis, Chairman  CEO of R.R. Donnelley
 Sons Company, when he spoke The Web Offset
Association's 46th Annual Conference in Toronto on
May 4, 1998. I think it is so thought provoking that
I devote this entire message to it. All this in this
heading to New Jersey edition of the Crouser Report
Online.


* Timely . . . as I reported last week, my computer
and I have been going through some fits. I'm now back
to some 70% and, well, I don't have everything
straightened out quite yet. Hope to be there by this
weekend. Thanks for your patience and sorry for the
slower response to your inquiries.


Tom - I have been a quiet reader of your articles and
now book and newsletter since I was in high school
Mid to late 80's. I have worked in the family print
shop since I was 5 years old the year it started. I
was 16 before I decided that the printing business
was for me. Since then I have set about learning all
I can about the technical and business management
sides of printing. All with the hopes of someday
running the family business or starting one of my own
or both.

I earned a B.S. in printing management from RIT and
left home, moving to Wisconsin to work for
Quad/Graphics, Inc. I worked for 2 other supply
companies before landing at Quad. Currently I am an
estimator for publications, catalogs and newspaper
inserts.

One of the things that I have been introduced to at
Quad is the concept of business strategy. Focus,
Focus, Focus because Hocus Pocus doesn't work. Do
what you are good at, and figure out how to become
great at it. Get a strong balance sheet, and use THAT
money to grow your company, while maintaining your
strong balance sheet. Your words ring true every time
I read them. In the article below, the presenter
mentions his companies' financial ratings. The
financial performance of the average small printer
$2MM in sales would earn them a C+ rating I think.

I know small printers have different financial goals
than big manufacturing oriented printers - but none
of the ones I know ever use their financial
statements to make decisions. They always look at
their checking account, and if they have money in it
they buy stuff, if they are running short, they lay
people off. How many times have you seen that?

Anyway, I really just wanted to write to you and say
thank you for being such a calm, persistent,
respectable voice in our industry. I know your views
come from education and well rounded experience and
not from the latest Tom Peters book or article. Your
newsletter is always basis for discussion with my
parents My mother more so than my father.  

Mom has a Masters degree and Dad never graduated high
school, but they are both highly intelligent and
hardworking, honest business people. Thankfully still
in love after 30 years of marriage and 18 years in
business together. The succession planning is just
getting started. Crouser  Associates 
will be called upon in the next few years to help
answer some questions.

I also wanted to share this in case you missed it. It
is the text of a speech given by the new CEO of R.R.
Donnelley and Sons last week. The whole printing
industry is changing rapidly. as are almost all
industries this decade I think small printers need
to be patient with technology, the suppliers of major
equipment are just starting to take notice of out
little corner of the industry. 

Look at what
Heidelberg and MAN Roland have to offer the small
printer! This decade small printers have to decide
what they want to be. There is an awesome opportunity
to be a one-stop provider for other small businesses
or be a highly-focused, high volume provider of
limited services to larger businesses. Either way
there is no excuse for small printers not to be
rolling in cash right now. I wish we as a group of
printers would just run our darn businesses, instead
of worrying about how big of a press to buy next. 


I think his 7 Ground Truths have merit for smaller
printers as well. Take this for what it is worth, a
very thought provoking message from a well respected
outsider. Sincerely, Rob


Hey, Rob! Thanks for the very kind words and thank
you for forwarding the following info to us. This is
something all of us in our industry need to hear.
Again, thanks.  

"I will be taking you up on that tour offer this summer." 
Remarks of William L. Davis Chairman  CEO, RR Donnelley Sons Company to the Web Offset
Association's 46th Annual Conference.

GROUND TRUTH...

It is my privilege today to speak before a group of
experienced, knowledgeable leaders of the printing
industry after only a year's personal experience. 
I'm expected to bring some valuable insight some
food for thought into their lives.

To all of you I apologize in advance for my lack of
knowledge of our industry. My comments are founded on
32 years of previous experience in other industries
and early observations about printing.

I do have some impressions, and I'm happy to share
them with you. As an organizing principle, let me
borrow a concept known as Ground Truth. I got it
from a guy who got it from the Army, where Ground
Truth means: reality as seen by the troops on the
ground.

Not what we think is going to happen ... not what
ought to happen ... not what seems to happen in
computer simulations in sterile laboratories ... but
what does happen when real soldiers meet actual
resistance on specific terrain.

I have spent my first year in this business looking
for Ground Truths. In fact, I've been looking for a
particular kind of Ground Truth - the kind that would
tell me why there has been a gap between promise
and performance at R.R. Donnelley, and, I think, in
the printing industry as a whole.

You see, I came from an environment where that was
not accepted - [Emerson Electric] a company with a
long and enviable record of excellent results for
shareholders and customers alike. And we accomplished
it in mature businesses with a wide variety of
technological challenges and substitution issues.

That's the kind of background the R.R. Donnelley
Board was looking for when they first started talking
to me. They weren't looking for someone to develop a
blockbuster product ... or take the company in a
dramatic new direction.

They showed me a four-page job description that
essentially said, Take what we've been doing since
the 19th Century and make it work in the 21st. Well,
what we've been doing since the 19th Century is
putting ink on paper. And what's the definition of
make it work? It's not the whole answer, but
**earn your cost of capital** is a good place to
start.

A few weeks ago, Business Week came out with their
annual report card on the SP 500 companies. They
rate performance on several measures over a three
year and one year timeframe. They gave R.R. Donnelley
three F's, four D's and a C. They ranked us number
433 out of 500. And we're the market leader. We also
outperform other publicly traded printers on the key
margin and asset return metrics.

So we've got some work to do here - us and the
industry at large.

We can't just start firing randomly into the night.
We need to understand the Ground Truths of this
business. There are a lot of them. I'm going to talk
about seven...

Ground Truth #1: Ink-on-paper is not dead; in fact,
there is plenty of life left. Ground Truth #2: Our
customers need help. Ground Truth #3: There are too
many printers. Ground Truth #4: Printing is a
manufacturing business. Ground Truth #5: We are a
decade behind in manufacturing best practices. Ground
Truth #6: We need more industry standards. Ground
Truth #7: No one is addressing the total supply
chain.

Now let me talk about each one. Starting at the
beginning: there is plenty of life left in ink-on-
paper.

When I found out this was a 140-billion-dollar market
in the U.S. alone, I felt like someone had just moved
the walls back 100 feet in every direction. I'm used
to playing in markets that are 30 billion dollars, 40
billion dollars, with double digit operating margins
and strong competitors.

Yes, we share a very large market, and it's our
choice what we do with it. We can circle the wagons
and defend what we have, and it would take a long
time for 140 billion dollars to go away. Or we can be
aggressive and find ways to grow the market even as
new media make inroads into our revenue streams.

I'm here to tell you: As the market leader, R.R.
Donnelley will be aggressive. We will seek profitable
new growth. That means two things:

A We must improve our product - more flexibility,
shorter lead-times, better targeting capabilities -
and we'll design these improvements in partnership
with our great customers.

And B... We must make our product more cost
competitive - and we'll make that happen through
efforts with our great supplier-partners. Our
customers are going to keep adding marketing costs to
make their printed work sell better against other
technological options. And we're just being naive if
we think they can get by on today's print cost
levels. They can't.

If we do those two things, we will breathe new life
into ink-on-paper. My experience is that there is
plenty of money to be made in a mature, slow-growth,
market - as long as your management systems and
priorities are geared to reality. You get into
trouble when you take your expansive ways and means
into a market that is not expanding.

We have seen that in this industry, but you won't see
it anymore from R.R. Donnelley. What you'll see is a
company totally focused on meeting the needs of our
core customers.

Which leads to Ground Truth #2: Our customers need
help.

They may not say it exactly like that. In fact, it
usually sounds like they're telling us how to run our
business instead of asking for help. But the reality
is that in an increasingly competitive world, all
good companies are recognizing that they need to work
very closely with important customers and with
important vendors.

And our customers are clearly sending us those
signals. Their need is urgent, because they find
themselves as the establishment in two revolutions
at once: A technological revolution...and a consumer
revolution.

On the technological front, they are confronted with
the question of what to do with the Internet? In most
cases, they are looking for ways to leverage their
print content into the unknowns of electronic
commerce. At the same time, they're defending
themselves against new rivals who use the Internet to
compete in nontraditional ways.

On the other front, the revolution is over, and the
consumer has won. In one industry after another, it
is now the age of the consumer. They get what they
want, and what they want is selection, quality, and
price. Add it all up and what does it mean to our
customers? It means they are...

Paying to get their feet wet in e-commerce...

Paying to defend themselves against e-commerce start-
ups...

Paying to feed the consumer hunger for newer, better
products...

Paying to meet quality expectations...

Failing to hold any kind of price increase...

And dealing with major disruptions in the
distribution channels and retailers which get their
printed product to the end consumer.

They need help.

They'll take it in the form of relevancy, which
translates into shorter cycle times.

They'll take it in the form of targeting, which
translates into more personalized products and
mailings.

They'll take it in the form of niche products, which
translates into shorter press runs. **This is the
small printers golden opportunity**

They'll take it in the form of brand extensions,
which translates into effective content management.

Finally, they'll take it - they'll demand it - in the
form of lower costs, which translates into step-
change productivity and logistics improvements.

In fact, it has made an impression on me that we are
such a large part of our customers' cost structures.

As they respond to pricing pressures ... which they
must address in their cost structures ... it leads
them right to our front door. And that's what's
happening.

If we want to have customers ... we must reduce the
total delivered cost of ink on paper.

But before I get to that, let's talk about who we
are.

We ... are one of the most fragmented industries
I've been associated with.

That's why my Ground Truth #3 is: There are too many
printers.

There are a lot more printers than banks, and look
what's happening to that industry. Fifteen years ago,
there were 16,000 banks in the United States. Today
there are 9,000 ... but not for long.

Meanwhile, we have more than 50,000 printers. I
couldn't say how many printers our markets really can
support. But I know it's less than 50,000 ... and I
suspect the printing consolidation story is still in
chapter one of a very long book.

I'm not saying printing is the same as financial
services, but some of the dynamics are the same. I'm
talking about Over capacity and Technological
Change.

Consider this statement from The Wall Street Journal
on the merger of NationsBank and BankAmerica:

The backdrop is simply that the U.S. has a capacity
glut in financial services.

If you remove financial services and replace it
with printing, what's the difference? On the one
hand, a lot. We're talking about two totally
different types of business. But on the other hand,
there's one big similarity, as printing also has a
lot of over capacity - a lot of idle press time.

Here's another quote:

Providers of financial services faced heavy spending
because of the cost of staying technologically
abreast. Merging can ease such spending burdens.

Again, what's the difference if you substitute
Printers instead of Providers of financial
services? No difference at all.

Consolidation is coming. Our customers are doing it.
Our suppliers are doing it.

It is a natural byproduct of over capacity. And it is
a normal result of increases in digital technology,
which always favors more scale rather than less.
Therefore, I believe we are headed for an industry
comprised of fewer players, all of whom are a lot
more buttoned-down than any of us are today.

The winners will be those who understand Ground Truth
#4: Printing is a manufacturing business.

Not everybody understands that today. Business Week
doesn't.

In that report card issue I was just talking about,
where do you think they put R.R. Donnelley?

In the Service Industries category. With advertising
agencies ... engineering consultants ... oil
recyclers ... and garbage collectors.

But when I look for our people, I find them in
plants.

When I look for our capital assets, I find them in
plants.

When I look at what we do, I find us bringing in raw
materials and converting them into finished products.

I call that a manufacturing business. However, we
have this legacy, even among ourselves, of being a
graphic art. That can no longer be. We have to be a
graphic science.

We have to make our product using defined ...
standardized ... repeatable .. manufacturing
processes. In this game, manufacturing discipline
will win ... and the craftsman who must leave his
thumbprint on every page will lose.

On this issue, I have been surprised by what I have
seen in our industry.

Which leads me to Ground Truth #5: We are a decade
behind what I have seen in other industries in
manufacturing best practices.

I've been in a lot of plants with all kinds of
requirements and various levels of sophistication.

I've been in foundries, forges, and motor winding
factories.

I've been inside finishing, stamping, assembly,
molding, and die casting operations and all kinds of
process plants.

I ran a process control business. Actually, the
largest process control device company in the world.

And I have not seen, in the printing industry, the
kind of manufacturing mindset I would expect to see
in 1998.

I have not seen a single-minded pursuit of
productivity that drives costs out ... leverages
assets ... enhances margins ... improves earnings.

I have not seen a systematic approach to improving
results. I have seen programs here and initiatives
there, but not a holistic view of the entire process.
I have not seen the application of manufacturing best
practices. I know... Web-offset is different. It's a
touchy process. Sure, the pH of the water changes all
the time, but that's the same water Anheuser-Busch
uses, and they find a way to control their processes.

I have not seen the adoption of Statistical Process
Control that you take for granted in other
manufacturing environments. I'm amazed at the amount
of time that the press is not actually running ...
and the amount of paper that we systematically waste
at both ends of the press line.

In other industries, I've seen people take six- and
twelve-hour make-ready times down to twelve minutes
or less. That kind of manufacturing mindset pays off.
I saw it turn a 117-million-dollar acquisition into a
1.5-billion-dollar asset in 13 years - yes, in a
mature industry!

The printing industry has good, solid, loyal,
committed people doing the best they know how to do.
This industry has invested in equipment upgrades and
new technologies. But we have not brought our
processes under control.

That goes hand-in-hand with Ground Truth #6 - We
need more industry standards.

It's been proven in one industry after another:
proprietary systems and architectures are not the way
to go. From what I've seen of the printing industry,
I think we should move faster toward true and
pervasive industry standards. A good example is the
cooperative work being done by the international
study-group known as CIP3.

That is Cooperation for the Integration of Prepress,
Press and Postpress.

As you probably know, CIP3 is a group of 33 companies
from around the world who are focused on reducing
make-ready times. The idea is to establish a common
data language to link all the production steps over
the complete printing process. R.R. Donnelley is part
of this study group, as are companies like Adobe,
Agfa, Creo, Heidelberg, Scitex, Toshiba, Xerox and
others.note: like Quad Graphics

Six weeks ago, this consortium released Version 3.0
of its Print Production Format data architecture
standard. Earlier versions provided a standard for
control capabilities that address ink, cutting,
register and color specifications. Version 3.0 adds
postpress controls for folding, collecting,
inserting, and binding.

In the past, R.R. Donnelley has done its share to
create proprietary architectures. But today we will
do everything we can to further the implementation of
industry standards.

We are guided by the Second Law of the Network
Economy - The Law of Plenitude. It holds that as the
number of nodes in a network increases
arithmetically, the value of the network increases
exponentially.

The common example is the fax machine. The first fax
machine was worth exactly nothing. The second fax
machine made the first one worth something, and each
additional fax machine adds value to all previous
ones.

The same thing is true with the data that must flow
from the content providers all the way through every
step of the supply chain.

Ground Truth #7 is a complement to the previous two.

If we catch up on best manufacturing practices, and
we go end-to-end with industry standards, then we
increase the opportunity to address waste within the
supply chain.

The battle against waste in the supply chain was
originated by Taiichi Ohno at Toyota. He started by
identifying seven kinds of waste:

Product defects... Overproduction of goods not
needed... Inventories of goods awaiting further
processing or consumption... Unnecessary
processing... Unnecessary movement of people...
Unnecessary transport of goods... And waiting on an
upstream activity.

That's a good enough list for us, too. I'm sure we
all have them within our own facilities.

But even bigger costs are hidden in the total supply
chain...as orders flow from initial request to
finished goods...and as products move from raw
material to ultimate consumption.

Supply chain issues are industry-wide issues. Other
industries have shown the way to deal with them. The
latest is the health-care industry, which in turn is
building on work done by the grocery industry.

Here are some of the reasons they chose the grocery
model:

Flat domestic markets... Low inventory turns...
Distributor and manufacturer consolidation...
Commodity view of products... Service pressure...

Any of those sound familiar?

When the health-care industry analyzed their supply
chain, they put a 23-billion-dollar price on it. They
then identified 11 billion of those dollars, or 48
percent, as Avoidable. They are now implementing
industry-wide initiatives to remove those avoidable
costs.

We must also, because printing is under attack by
emerging options ... and we can no longer afford
redundant costs that add no profit to any player, but
make it harder to defend our future.

So those are the seven Ground Truths:

Life left in ink-on-paper...
Customers who need help...
Too many printers...
A manufacturing business...
A decade behind in manufacturing best practices...
More industry standards...
And...No one addressing the total supply chain.

Maybe your list would be different. Maybe I don't yet
think like a printer. I, for instance, would never
have come up with The digital highway is paved with
ink on paper as the theme for this conference.

In my own company, the theme we've adopted is Focus
 Execute. That would be my preference for the
industry, as well.

Here's the difference:

The theme of this conference is a claim, a slogan. If
we believe it, our job is done. We have won. The
digital highway is paved with our product. Let's go
home. But we cannot take that for granted. We must
earn our rightful spot in the digital world by
providing new products and capabilities.

Focus  Execute, is a blueprint. A battle plan. A
prescription for what we must do in order to make our
product ... our time-tested, mainstream, proven
product ... the medium of choice under a whole new
set of circumstances.

And I'd rather be focusing on what we need to do to
get better and lower-cost ... than to be predicting
what the digital highway is going to look like.

I don't think I would be any better than Thomas
Watson at IBM when he said, in 1943, I think there
is a world market for maybe five computers ... or
Bill Gates in 1981 when he said, 640K ought to be
enough for anybody.

So I'll stick with Focus  Execute.

Focus on the core attributes of ink on paper.

Focus on the changing needs of our customers.

And execute better and better and better ... day-in
and day-out.

We haven't necessarily done that at R.R. Donnelley in
recent years. That's history. Here's what you can
expect from us going forward...

For those of you who provide the paper that runs
through our processes, it's a red flag for me when I
can find four months worth of paper stock ... bought
by one of our customers ... and stored in one of our
plants ... waiting to be used.

In my experience, that's not the way it's done. In
fact, I wonder why you don't have a paper mill with a
production line essentially assigned to a cluster of
our presses...

In one of our plants...

Making paper that is designed to run at optimal
speed...

With fewer and fewer web breaks...

And more and more efficient ink absorption...

For those specific presses...

And delivered just-in-time.

We're looking for partners to make that happen.

For those of you who sell us ink, it's a mystery why
we have traditionally just taken what you send...
Without measuring its performance in our processes...

And feeding those measurements back to you... Working
with you to make sure that such a core raw material
is optimized to our processes.

Today we are working with our ink partners to make
that happen.

For those of you who provide us with digital plates,
it's a problem that the economics around your
products are going the wrong way. If digital prepress
is going to become the real wave of the future, then
we need to see cost improvements typical with new
technologies. We need to begin to see the total value
that those of us sold on this concept were told to
expect.

--My personal observation is that the industry is
just coming out of a very slow early adopters phase,
and as more companies are making these new plates,
the competition will bring the price in line with
current conventional plates--

Earlier I suggested that our customers needed our
help - even if they didn't always admit it. Well, to
all our suppliers here, I am admitting that we need
your help and we must find ways to work better
together.

For everyone who has worked with Donnelley or around
us or in competition with us for the better part of
this decade, it is a fact that we have not been as
focused on ink-on-paper as we might have been.

I want to make this promise to you now: from this
point forward, you will see is a focused,
disciplined, follow-through, ink-on-paper R.R.
Donnelley.

We will do our part to help move the competitive bar
to a higher level. And as we all compete on this
higher plane, as an industry, we will provide all our
customers a better product at a better total cost.

And we'll put ink-on-paper in position to create a
new set of Ground Truths. The Ground Truths
of...Medium of Choice...And...Profitable Growth -
for our customers, for our industry, and for our
supplier-partners.


If that146;s not food for thought, I don146;t know what is.

Until next week, may all of your trails be happy
ones.

Tom and Pamela Crouser