RR Donnelley Case Analysis

Date: March 8, 2015 To: Dr. Kalyan Singhal From: Gregory Steinbrenner RE: Analysis of R.R Donnelly & Sons: The Digital Division The Traditional Printing Business vs On-Demand Digital Printing R.R. Donnelley & Sons traditional printing business pricing varied depending on the number of pages in the print job. The prices per page decreased as the number of pages increased. The traditional print business consisted of high fixed costs and low variable costs. Offset presses cost approximately $12 million using film and plates with runs of 25,000 to 500,000. The gravure print was more expensive and used etched copper cylinders and would run 500,000 or more. The digital presses were more expensive and required skilled and dedicated operators. Donnelley felt that digital printing would need to develop and control four database systems to make their model work, adding extra costs. At the same time, Donnelley anticipated savings by eliminating inventory and warehousing costs. The cost per unit for print jobs with run lengths of 2,000 or less would be lower than the costs of the traditional offset print. Critical Challenges for Barbara Schetter and the Digital Division RR Donnelley & Sons had many challenges as they were trying to come to grips with a changing technological world where the print medium was moving toward digital printing on personal computers and with it the pricing, scales of economy, and old business strategy of print by the page. However, some executives had issues with selling the idea of digital print medium to internal divisions. Therefore, the Digital Division was faced with the challenge of moving the leadership from the old business model thinking into the new tech future. The biggest challenges the Digital Division faced were: it needed to grow twice as fast as the corporation, reach $100M in sales, and achieve above average ROA to get a long-term commitment form management. This put significant pressure on the managers associated with the Digital Division. In July 1994, Barbara Schetter was named VP of the new Digital Division. Prior to 1993, Barbara Schetter ran the Financial Services printing division. In 1993, Cowen asked her to join the Tech Center division. In April 1994, Barbara was named program manager “with the objective of creating a new digital color printing business.” It was during this time that Schetter began

making the case for a digital division to Cowen as a stand-alone business unit so they could get more resources. When Schetter was named VP, her responsibilities evolved. As program manager her responsibilities were to provide a framework for success by defining the scope, coordinating the team, controlling the projects finances and keeping the general program on track. As VP, her responsibilities moved to the success of the division by setting up and creating value. In addition, her relationships were now centered on all of her associates as resources, HR, senior leadership (SVP, CIO, and CEO), other divisional leadership as peers, and customers. Managing the Division allowed her to solidify resources into one place and be able to work with divisional heads, HR and Finance to have her own budget, headcount and control over how the resources were used. Schetter and Schneider and the Books Group One of the primary benefits Schetter and Schneider could use to persuade the Books Group to work with the Digital Division is that they have done extensive research on digital presses. The division has worked through many cost estimates across a variety of presses – 11 machines from three different manufacturers to be exact. The Digital Division also has some rough cost estimates of what different print runs would cost and can compare that information with what the run would cost using an offset process or a gravure process, though it’s unlikely a smaller run would be run using a gravure process. Without this information, the Books Group runs the risk of missing out on potential revenue, or even losing money, by underestimating costs, picking the wrong machine, or using the wrong print process. The Digital Division also has an excellent distribution network even though there is only one location because of the close proximity to FedEx in Memphis. The case does not specifically mention where the digital press used by the Books Group is located, nor does it detail where the new presses will be located if the Books group were to move forward with digital presses on a larger scale. No matter where these presses are located, they will likely be behind the curve, since the Digital Division already has a press running in a strategic location. The Digital Division also has the customer relationship management and supply chain management advantage over the Books group. There are four distinct parts to the Digital Division’s

process: data handling and warehousing, a transaction system, printing capabilities, and a royalty’s payment system. This should give the Digital Division a clear cost advantage over the Books Group. Customer retention would also be increased since customers will not have to go through the frustration of dealing with process improvement, like they would if the Books Group invested in their own digital processes. The Digital Division is also prepared to deal with customers who are looking for short, flexible, and/or customizable print runs Corporations making sales brochures or manuals would be examples of this. The Books Group could also generate increased revenue by reaching this customer segment. Further, the salesforce in the Books Group were probably not as familiar with the digital presses themselves, the processes they used to quickly and efficiently make smaller print runs, and perhaps the type of customer or project that could practically utilize a digital four color press. However, one issue that will need to be resolved prior to a partnership is that existing sales people in the Books Group want to keep their customers and opportunities, and don’t want sales people from other business units infringing on their sales. However, a simple solution would be to have the ISG and Digital sales people pursue accounts that are not in the Books Group and negotiate that existing sales people in the Books Group will get a special incentive for selling a digital job in addition to their normal incentives and commission. This will not only allow current sales people to increase their pay, but will allow the Books Group to pursue previously untouched prospects and increase their revenue stream. The Books Group management also have a personal stake in the success or failure of digital printing, especially since their incentives rely on profit and revenue maximization. There is no doubt that will be growing pains between the two business units because the Books Group will have to concede some of their business to the Digital Division. However, if Schetter and Schneider can demonstrate that there will be a cost savings and a revenue increase, the decision makers could be willing to consider the option, especially if it boost incentives for management. Schetter and Schneider are also very determined to make their new division a success, so they will be completely dedicated to sales excellence and cost control, which increase the likelihood that the Books group will benefit from the collaboration.