BUS800-021 Ricoh Canada Appendix

Prepared by: Rylan Harvey,

For: Prof. Timothy Pervin

Date: November 23rd, 2016

Introduction 

Ricoh Canada Incorporated (RCI), along with Canon, Xerox, Hewlett Packard and Lexmark are the largest copy & imaging corporations within the North America’s digital imaging industry (5.2). This industry has reached a point of maturity within the traditional market of paper printing services, however recent developments have created new opportunities for Ricoh Canada, specifically in the cloud based (SaaS, BaaS), solution consulting, IT hardware, remote monitoring and deployment services sectors (7). Ricoh Canada is known for its strong customer service, the reputation of it brand, as well as the various multi function products, which they offer the market (11). From a strategic perspective, the greatest issue Ricoh is encountering is a major change in the behavior of consumers in the market towards online, technologically advanced services (8). Ricoh has experienced a minimal YoY (year over year) change in revenue, however they have also experienced a decrease in their net profit margin (12.7). Considering these decreasing margins, it is Ricoh’s relatively strong financial position that is allowing them to continue operations (12.1,12.2). For Ricoh to improve their decreasing profit margins, they must implement cost cutting measures or potentially foster new revenue opportunities that can generate increased profits (10.2,4.2). The purpose of this report is to provide opportunities and recommendations regarding how Ricoh can improve within the North American market, and is based on a detailed analysis of the internal, external and financial situation within the North American copy/print industry.

Analysis 

The current strategy of Ricoh Canada can be itemized into two key concepts: 1) To increase gross and net profit margins and 2) Protection of the corporate brand they have developed over the years (9.1). Historically, Ricoh has been successful in implementing this strategy, but must ensure to stay ahead of the curve compared to its competition to remain competitive within the copy/print industry. From a financial perspective, Ricoh’s strength comes from its strong presence within the multifunction product segment, as well as their strong positive cash flows, which would support Ricoh in the event of a price war amongst competitors in the industry (6.1,12.1). Another key advantage comes from Ricoh’s strong reputation for customer service, where they are rated highly within the market in which they operate (1.3). An example of this strong rating comes from their NPS (Net Promoter Score) of 80%(12.5), which is a direct representation of Ricoh’s attractive customer service reputation amongst its customers. Retail customers are satisfied with Ricoh’s customer service and companies are likely to recommend Ricoh’s services to other businesses. A fundamental factor contributing to Ricoh’s strong brand reputation comes from the strength of the workers they employ, and all these competitive advantages serve to increase the end-user experience and promote their market share and reputation within the industry (11). Within the LDS (Legal Document Services, break/fix hardware market, and management services, Ricoh’s market share is 30%, 23% and 25% (12.5c). Ricoh’s executive management team is aware that the AG (annual growth) within these operating segments is incredibly low in comparison to online services; therefore, they are developing ways to enter new markets (9.2,11.2). Within the external environment that Ricoh operates, there are major shifts in technology as well as intense competition between industry players (1.4,3.5) and this has pushed Ricoh’s executive management team to revaluate their existing business model to

1

maintain their competitive advantage. Other key players, such as Hewlett Packard or Xerox who are already established in providing total managed services solutions can potentially capture market share from both Ricoh’s consumers, as well as those of the other players within the market. Currently, Ricoh has little market share within the total managed services segment, although this segment is anticipated to experience growth in the double-digit range (9.3,12.5c). To ensure Ricoh can retain market share and hold a strong market position, Ricoh’ executive management team must focus on business lines that are experiencing the highest rates of growth (1.4,9.3). Ricoh must focus on offering new products with unique proprietary functions, as well as maintain their strong customer satisfaction rating to maintain their position relative to their competitors (11.2,11.4).

 

Alternatives

 As mentioned above, the major issue facing RCI is a declining profit margin due to their outdated business model that focuses traditional paper services. There are two strategies to increase RCI’s profits: 1) Increase revenue or 2) reduce costs. The following alternatives will highlight the potential strategies that management can use to combat declining profits.

As described by the information above, the most significant issue facing Ricoh Canada is a decline in margins (specifically profit margins) because of their antiquated business model, which has a primary focus on traditional break/fix and paper services. There are two key strategies to improve Ricoh Canada’s profit margins: 1) Increase revenue from operations or 2) reduce expenses. The subsequent alternatives will underline the possible business strategies that Ricoh’s management team can utilize to counter declining profit margins.

 

Alternative 1): Growth through acquisitions (M&A)  

Pros Cons

1) Additional revenue streams 1) The targets products may not be compatible with Ricoh's existing products

2) Access to skilled and experienced management & employees

2) An increase in debt required to fund acquisitions (12.6)

3) Acquisition of a target with exclusive technology 3) Potential internal contrasts because of differences in corporate cultures

4) Benefits because of synergies 4) The costs of corporate restructuring can be high

2

(Alternative 1, Pros & Cons)

 

Ricoh Canada can improve their revenues through acquisition of an appealing target company, which could provide a natural synergy for Ricoh Canada. Numerous players within the industry (Ricoh Canada included) have already utilized a growth focused acquisition strategy, as described within the case information (7,8.4). Ricoh Canada’s management team should search for a target that is currently competing in the TMS (total managed services) market. If Ricoh Canada can gain new revenue streams within this business unit, they should be successful in increasing their net profit margin (12.7).

 

Alternative 2): A reduction of expenses within conventional markets

Pros Cons

1) Higher profit margins can be attractive to potential investors (who expect a return on their capital through dividends & share price appreciation)

1) Dissatisfaction/backlash of employees due to decreasing wages

2) A decreasing in sales and G&A expenses will generate higher margins for Ricoh Canada

2) Potential legal disputes through laying off portions of the workforce

3) Ricoh Canada's management team will have increased capital to fuel investment decisions/opportunities

3) Consumers and potential investors may see a correlation between expense reduction and a decrease in Ricoh Canada's brand value

(Alternative 2, Pros & Cons)

Ricoh Canada could potentially improve their profit margins through an internally developed plan designed to reduce expenses. At the time of this report, the most significant expenses for Ricoh Canada are sales expenses, general & administration expenses (G&A) and operating expenses. With a major shift within the copy/imaging space towards online services, G&A in turn should decrease because of the decreasing requirement for physical products (1.4). Furthermore, Ricoh Canada can reduce salary expenses through a reduction of their current marketing and sales budgets. Digital marketing services (such as online marketing, search engine optimization, pay per click and email marketing) require significantly less capital in comparison to traditional marketing, allowing management to reduce the number of employees within the marketing department of the company. This reduction in personnel would have a direct impact in reducing the sales expenses Ricoh Canada is incurring to generate revenue. Ricoh Canada must be vigilant to ensure that these expense reductions do not have any detrimental effects on the company brand, should they decide to implement such measures. A rapid expense reduction (especially measures such as layoffs) without enough prior planning/due diligence could have a major reputational impact to Ricoh’s brand so they must formulate a strategic plan to cut costs, which will in turn increase profits (6.1).

 Alternative 3): Addition of Premium/Discount features to expand customer

3

base and incentivize existing customers

Pros Cons

1) Increase in volume of Ricoh Canada's cloud services1) Decrease in short-term profits from premium/discount features

2) Potential to increase Ricoh Canada's customer loyalty because of positive sentiment towards these discounts/incentives

2) Hidden fees, or complicated procedures to cancel trials that have ended could negatively affect customer satisfaction

3) Potential for Ricoh Canada to capture customers from competitors who do not offer such incentives

3) Has the potential to create a price war amongst competitors in defense of their own client base/market share

(Alternative 3, Pros and Cons)

The “Premium/Discount” alternative would aim to improve profitability by providing incentives to Ricoh’s current customers, as well as other potential customers within the copy/imaging marketplace. For an example of a discount feature, an existing customer of Ricoh Canada could be offered access to their cloud based, or IT/PS services at a discount for a period (such as 3-6 months). This can provide Ricoh Canada the opportunity to expand revenue streams via existing customers who do not currently utilize all of Ricoh’s services, and would also serve to promote brand loyalty. The customer would generate a significant savings, gain exposure to a product or service that is new to them, and Ricoh Canada’s brand image could benefit, as this would be viewed as a kind gesture towards loyal customers. An example of a premium feature could be Ricoh Canada offering its customers a free subscription to its Cloud services (for a period such as 3-6 months). This would be beneficial to the customer, who will be exposed to a new product at no up-front cost, and Ricoh will benefit from an increase in its brand reputation as well. However, information via research would be required to determine the retention ratio of the discount/incentives, and it would obviously only be implemented if there was a positive effect on profit margins because of conversion from trial to fulltime customers.

 

 

Recommendation 

Ultimately, all 3 alternatives suggested can improve Ricoh Canada’s profits within the copy/imaging and document management market. Personally, I believe that the most ideal selection would be 1), to acquire an attractive company. There are numerous reasons for this selection compared to the others. Firstly, industry competitors such as Hewlett Packard and Canon have a history of acquiring other companies for growth opportunities, as the costs of acquiring a company can often be less than the cost of developing new products and services internally (when considering research and development, time required and resources that must be dedicated to doing so). This is also compounded by the fact that Ricoh currently has no research or development department within the company (10.1,10.3,13). Also, from analysis of their financial statements, Ricoh Canada has a relatively strong financial position (12.1,12.2), meaning they can leverage their current capital structure to raise debt to fund an acquisition.

4

Through acquisition a firm within the TMS (total managed services) or cloud space, Ricoh Canada will both time and money that would have been required to develop such services. To be successful, Ricoh’s management team must be selective in choosing a target company that will seamless integrate their software capabilities with Ricoh’s current hardware, to create a unique synergy/proprietary product (11.2). If Ricoh Canada were to select this alternative, they will effectively improve their revenue streams and by doing so enter markets yielding extremely attractive growth rates without creating any significant additional risk to their current operations. Furthermore, alternative 1) is advantageous when compared to alternative 2) since although expense reduction can improve profit margins in the short-term, it is not a viable long-term strategy for company growth. Finally, the “premium/discount” incentives provided by alternative 3) is a great opportunity to potentially attract new customers, while also providing a chance to upsell existing customers. The most significant factor in my decision of alternative 1) over alternative 3) is because alternative 3) has the potential to create price wars within the industry between Ricoh and their key competitors. Also, research and data would need to be acquired to anticipate the conversion rate of customers from trial to fulltime customers to assess the viability of the “premium/discount” incentives. Thus, it is my professional opinion that if Ricoh Canada selects alternative 1), they will affectively address their issue of declining margins while improving their competitive advantage and overall value proposition.

APPENDIX

→ External Analysis

1. PESTEL Analysis (1.1) Political Factors:

Government intervention in the form of legislation, taxes, duty or trade tariffs on imported products could create economic uncertainty for companies in the copying/imaging industryImplications: In the event of new measures implemented by government, companies in the imaging industry would face new risks to revenue erosion, increased supply costs and other risks which are hard to quality

(1.2) Economic Factors:o Fluctuations in exchange rates cause variations in profit margins across various

operating regionso This can create uneven revenue streams from regions where companies do not have

effective currency (FX) hedges in place.Implications: Due to the generally unpredictable nature of currency exchange rates, even with a company’s best efforts they can still be exposed to such currency (FX) risks. This can create arbitrage opportunities for buyers of products in foreign currencies, but also create a downside for companies who may purchase goods or receive revenue in foreign currencies as well.

(1.3) Sociocultural Factors: o Consumers placing a high emphasis on customer service quality/experience when

assessing a providero Consumers in the industry are looking for a provider who can unify services in a

company at a reasonable cost.

5

o Knowledgeable customer facing employees, and a pleasurable experience rate highly amongst customers surveyed Implications: To remain competitive, companies must change the way consumers shop within their stores. They must create an experience that makes customers feel as though they are the only person who matters and gives them a taste of luxury that will keep them coming back for more. This is requiring the industry to place as much emphasis on the allure of the buying experience as they do on the innovation of the goods they sell. Companies must create an image for consumers that communicates ownership of their products grants them membership to an elite circle of individuals and access to all the benefits that accompany it.

In our constantly changing society, companies must change the way they interact with their consumers; from the products, they sell to the services they provide. They must create a unique experience that makes customers feel valued, and gives them a reason to return. This has caused a shift in the industry towards software service solutions, in collusion with innovation of new imaging/printing products. Companies must prove to consumers that they are not only able to provide the printing devices they need, but also the bespoke, customized turnkey solutions which can assist a company’s workflow and productivity.

(1.4) Technological Factors: o Rapid growth in the use of digital documentation and the adoption of cloud

based servicesImplications: In the next 5 years, the use of paper documents will become nearly extinct; replaced by digital documents and document sharing/storage systems. Furthermore, companies are demanding software allowing them to better share information across an organization in areas such as document management, process management and communications management. As well, business is shifting towards cloud services, and as volume on the cloud increases, cloud services can achieve economies of scale and flexibility in the marketplace.

(1.5) Environmental Factors:o Environmental concerns are changing the nature of the imaging/copying

business.Implications: With the major global shift towards environmentally sustainable expectations from major corporations, companies in the market must be cognisant to remain aware of their environmental footprint from the suppliers they utilize, to the products they create. Toxic chemicals utilized in the production of machines must be disposed of properly, and several companies have faced major fines for negligence in this area. Also, with the shift towards “paper free zones”, the traditional printer business model is changing, creating a need for companies in the space to adapt through electronic innovation.

(1.6) Legal Factors:o Safe and secure storage of information as well as patents and copyrighting of

internal technologyImplications: With the rise of digital documents and cloud computing, as well as the many recent public instances of large scale hacking of customer information at major corporations such as Sony and Yahoo, there has never been a greater need for the safe

6

and secure storage of information as the legal ramifications of negligence on this topic are enormous. Also, with the rapid rise in technological developments within the industry, the need for strong patents and copyrighting to protect internal assets (and the capital invested to develop these assets) and intellectual properties is significant.

2. Industry Economic Traits o Total value of the Canadian services market was worth US$24 billion in 2012o The size of the hardware/break and fix market was US$4.5-5B in 2012o 42% of the services market spending was made by medium-sized businesses in 2013

(2.1) Industry Growth Rateo Growth in 2012 for the hardware/break and fix market was 2%o By 2016, the printer/copier market is estimated to shrink by 3% annually, a trend that

will only accelerate from this point.o Growth in the services market was 7.4% year over year for medium-sized businesseso Clearly, the largest growth within the industry is coming from the services sector,

specifically Software as a service (SaaS), Backup as a service (BaaS), IT solution consulting, and IT services

Impact: First and foremost, the companies competing in the copy/printing services industry must be aware of changing consumer preferences towards digital documentation and cloud computing. As these segments grow consistently, there will be increased opportunities for growth and, in turn, profit. Secondly, companies who have access to capital to finance development should invest in the improvement of their technological service offerings to remain competitive in line with the other players in the market. Thirdly, with the rapid growth of online support and offerings, companies in the market must ensure they are placing a greater emphasis on e-commerce, through selling their business online and that they can support their products both in person and electronically. Participants in this market also must exploit online marketing to grow their respective businesses. Finally, with the rapid development of new technology in the marketplace, companies must ensure that they account for the time required to secure copyright patents as the expenses associated with research & development dictate the need to protect intellectual property.

3. Porter’s Five Forces of Competition o (3.1) Threat of New Entrants (LOW)

o Due to the barriers of entry of the business, the threat of new entrants into the printer/copy business is extremely low.

The capital expenditures required to create, design and development new printers and business technology solutions are incredibly high. Thus, it is nearly impossible for new entrants to have enough capital on hand to not only build a business (or new business line), but develop new products by investing in research and development (R&D), train technicians, invest in marketing to

7

build brand awareness. This makes it almost impossible to imagine a new company attempting to successfully enter the field.

The only threat of new entrants could come from other major global technology corporations who may decide to enter the market (IE Microsoft, Apple, Google, Samsung). While it is true that these players would come to the table with a high level of brand recognition, established relationships with suppliers, and a great deal of capital (or the ability to raise it), they would be lacking the skilled engineers and technicians with experience directly tailored to the printing/imaging field. Thus, it would take a great deal of capital and time to capture any type of market share, and even more so to generate a profit, creating a risk that nearly all firms would be unwilling to take making the threat of entry very low. The major corporations which employ the products and services of the current industry leaders would also be reluctant to switch to a new player with a limited track record and without a history of consistent high quality service.

o (3.2) Threat of Substitutes (HIGH)o Because of technological innovation, and due to the everchanging nature of the

industry the threat of new substitutes could potentially be high. This would be more relevant to Ricoh’s solutions business than the traditional printing device business.

Although established corporations who utilize the products and services of one of the major players in the printing/copying field would be reluctant to switch to due to associated costs, smaller and medium sized businesses do not face such large-scale obstacles in transition. With the rise of the tech-start-up industry, new innovations are coming to market all the time.

With the cutting-edge innovation from start-up companies (such as those in the silicone valley-San Francisco Bay Area), the risk of a new cutting edge substitution for technology based SaaS, BaaS or consulting solutions remains high. This is a going concern for all technology companies, but considering the unpredictable nature of technology start-ups, it can be hard to anticipate upcoming new substitutes in the market creating a high level of risk.

o (3.3) Buyer Power (MODERATE)o One of the difficult components of Ricoh’s business is the fact that it provides nearly

identical services as its main competitors Xerox, Canon and HP. Thus, customers have multiple options within the market for where to spend their money.

Although marketing tactics attempt to promote printing and imaging products as different and revolutionary, there is very little difference amongst the products offered by competitors in the field. This makes it maintain customers should they have a bad experience with one product, as they can easily switch to another competitor’s product and receive a very similar experience.

However, buyer switching costs must be considered, specifically when examining large corporate accounts, or specialized technological solutions. Once firms adopt a product (such as office printers, or document management

8

technology), they often become an enterprise wide standard. Thus, once major customers (corporations) have integrated products or solution services on a large scale, the costs of switching to a competitor can be extremely high. This limits the buyer power of customers once they have essentially “pulled the trigger”, as switching past this point can have extremely high costs, both from the actual monetary cost of switch, as well as the lost productivity in the interim while firms implement the change, train new employees on the new products or solutions and adapt these things to their specific business needs.

o (3.4) Supplier Power (MODERATE)o All of Ricoh’s suppliers are in Asia, a region that is saturated with manufacturer’s

who compete extensively for the business of major firms such as Ricoh creating limiting bargaining power in that respect. However, the engineers who develop the products and software utilized in Ricoh’s solutions line do

Because of the multiple options for selecting suppliers for the materials, components and labor for Ricoh’s products, there is limited bargaining power from Ricoh’s suppliers who source materials, provide labor to create products, etc.

The area where suppliers would hold substantial bargaining power would come in the software development, research & development spectrum. The offering of specialized technology solutions requires highly skilled software engineers with specific a specific skillset and level of expertise within the technological printing/imaging space. Similar individuals and skillsets would be needed for the research & development of new products. These individuals would hold advanced degrees that are in high demand so in turn have substantial bargaining power.

(3.5) Industry Rivalry (HIGH)o There are currently 3 Tier I major multinational corporations (Xerox, Canon, HP) and

several other Tier II players (Konica Minolta, etc.)competitors competing in the marketplace

The imaging/copying industry is extremely competitive, especially considering the presence of large multinational corporations within the market.

Most companies in the spectrum compete in the business to business (B2B), also, most competitors other than Ricoh (Xerox, Canon, and HP) also compete in the business to consumer (B2C) space as well.

4. Driving Forces of the Industry (4.1) Consumers are placing a higher value on technological service solutions.

To continue to maintain their competitive advantage, firms competing in this industry must remain up to date on emerging customer needs within the professional IT services, SaaS, BaaS and IT consulting fields. With most growth in the industry coming from this segment, it is critical to remain ahead of the curve relative to the competition

(4.2) The major growth of cloud based services. With the major decrease in the cost of cloud based solutions, customers (specifically medium-sized businesses) are moving towards having their IT Infrastructure handled for

9

them. This creates a need for firms to maintain competitive with regards to price, since cloud based services are so similar customers will usually act on price.

(4.3) The rapidly decrease of traditional paper printing in exchange for electronic document storage. With the major shifts towards environmentally sustainable practices, the expectations for corporations to adhere to “green” standards have never been higher. Thus, many companies (which are customers of printing/imaging corporations) have been pushing for paper free office work environments. For example, it is not uncommon for many email signatures to now read “please consider the environment before printing this email”. Rapid growth in the digital document management has occurred and is continuing to expand, creating less need for printers and more needs for safe and secure storage of documents. While there will always be a need for paper documents (such as legal documents, pitch books, etc.), in the coming years the need for paper printing will significantly decrease, in turn leading to an increase in digital documentation.5. Group Maps (5.1) Relative comparison amongst Ricoh’s 4 key competitors

The Y-Axis is a representation of customer satisfaction, while the X-Axis is a representation of the scope of product lines offered.

(5.2) Here are the measurements of scope and scale for 4 of the large competitors within the copy/printing industry:

HP– Very strong brand and customer network for IT hardware, moving into services Canon– Leader in managed print and content services, focusing on rebuilding unit sales and

service infrastructure

10

Xerox – Recent entrant into the services market, long term player of traditional core unit sales, major Canadian player in healthcare and government

Ricoh – Currently has a limited share of the services market, large player as a traditional core printer device provider in Canada

Lexmark- Strong market share within the Laser, A4, A3, Color, Mono, Dealer and Direct Space. However, market share has been declining over the past 3 years

Implications: Hewlett-Packard (HP) has been extremely successful in capturing the greatest market share, while also providing the widest scope of products. They are the largest player in the market and have been successful at designing great products and services. Xerox is a corporation with many different applications or uses for its product lines so it will have ease in transitioning to new markets. Lexmark offers a limited selection of products based on information provided, although they do hold a significant (albeit declining) market share of 21% in the printer space. Canon is by far Ricoh’s closest competitor as they are both renown leaders within the managed print and content services, with Ricoh taking the slight upper hand in relation to market share. In consideration of the group map, the industry will move towards greater diversification within service lines, specifically due to the major growth in certain markets such as cloud based and IT/PS

6. Key Success Factors (industry) (6.1) Cost effectiveness - the ability to provide high quality, relevant printing/imaging

services at competitive prices (6.2) Information security & compliance - the ability to provide safe & secure storage

of digital documents and cloud based data, and maintain a proven track record of confidential customer information

(6.3) Environmental Sustainability - the ability to convince customers that products are created in line with environmental regulations, and that the corporation is “green” friendly in all its practices

(6.4) Strong access to industry research - the ability to gain insight into consumer preferences and behavior, to fuel the research & development of new products and services.

(6.5) Customer service focused approach - the ability to provide a high quality of customer service throughout the entire process, from sales to delivery and support.

7. Industry Life Cycle o The printing/imaging industry would currently be categorized in the growth phase of

the life cycle. This is because there are currently a decent number of important players who are fighting for market share in the current environment. M&A is common in the industry, with major acquisitions such as Ricoh’s acquisition of IKON, Canon’s acquisition of Oce, Xerox’s acquisition of Affiliated Computer Services (ACS), and HP’s acquisition of Electronic Data Systems (EDS). Also, companies in the industry are investing heavily in research & development of new technology, specifically in the cloud based (SaaS, BaaS), solution consulting, IT hardware, remote monitoring and deployment services sectors. The strategic implications of the growth phase are that companies must remain vigilant, be willing

11

to take risks and have enough cash (or financing capability) to remain cutting edge to remain competitive amongst their peers.

8. Company Outlook Based on Assessment of the Industry o (8.1) Impact of the Macro Forces

Although Ricoh has a significant market-share of 23% in the Canadian Break/Fix, 30% in Legal Document Services and 25% in the Management Services space, it is severely lacking in the document management (1%), IT/Professional Services (0%), and Cloud based SaaS and BaaS space (0%).

While Ricoh Canada produces high quality printing devices, with the increasing consumer demand for technological business solutions, they are firmly behind the other competitors in the industry

The company is up-to-date with IT infrastructure; however, it is struggling to utilize its resources such as a skilled IT and Professional Services Team to generate revenue and capture market share

o (8.2) Fit with the economic traits With its current presence in the key markets listed above (Break/Fix, LDS,

RMS), Ricoh has proven itself as a worthy player in the field. However, it is critical that Ricoh takes advantage of new technological developments within IT/Professional Services and Cloud services where they currently hold 0% market share. They are currently losing out on a huge amount of revenue in the IT/PS and cloud based services markets.

The corporation has successfully created an experienced IT and Professional Services team; however, they have failed to utilize this team to generate any revenue or capture any market share. The sales force is currently underperforming, and is failing to cross-sell IT solutions/cloud products as a value-add with the other products offered leading to an abysmal 0% market share in IT/PS and cloud services lines.

o (8.3) Ability to make above average profits Ricoh Canada is making healthy profits that are above average in its Key

(incl. DDLP)-36.10%, Major Accounts-26.90%, and Dealer Sales (up until 2012). They are also making above average profits in Rental -67.2%, Affiliate-85.10% and the limited IT/PS business that they do conduct-50.60%/57.20%

o (8.4) Company’s competitive advantages One of Ricoh’s competitive advantages are that they currently generate strong

profit margins amongst most of the client accounts they hold, indicating they are effective at maximizing revenue while limiting expenses.

Another competitive advantage come from the acquisition of IKON Office Solutions (IKON) by Ricoh Canada’s parent company, Ricoh Company Ltd. Being one of the largest providers of document management systems and services, Ricoh strengthened its sales and dealer network. Also, one of the other major competitors in the industry, Canon, relied heavily on IKON, so in

12

effect the acquisition was a major blow to Canon, one of Ricoh’s key competitors.

o (8.5) Current Position in the market Ricoh Canada’s current position in the market is quite split across the board.

On one end of things, they are strong players in several key segments mentioned above (Break/Fix, LDS, RMS) and are earning very strong profits amongst most accounts which they hold. On the other end, Ricoh is significantly behind its other competitors in the cloud services and IT/PS services space. Considering they have a highly skilled, professionally trained team dedicated to IT/PS, it is unacceptable for them to hold nearly 0% market share in these spaces. Should Ricoh Canada be able to capture market share in the cloud/IT/PS space using its current team, it could then utilize similar tactics of limiting expenses to generate strong profits in these markets as well. This would be a fundamental factor in the long-term success of the company, however this needs to happen as soon as possible because as time passes, Ricoh Canada’s competitors are moving further and further ahead making it significantly more difficult for Ricoh to catch up.

→ Internal Analysis-Company

9. Present Strategy o (9.1) Based on the information provided, Ricoh currently has 2 main strategies

Increasing profit margins and growing market share within the digital/document management services space

Protection of the company brand and corporate culture through continuing to provide the high-quality service Ricoh’s customers have come to expect from the corporation

o (9.2) Previously, Ricoh Canada had attempted to capitalize on its sales in the sectors where it held the greatest market share (break/fix, LDS, RMS). However, these markets have only experienced 1-2% annual growth in comparison to the IT/PS and Cloud based services sectors which have experienced annual growth of 5-40%.

o (9.3) Traditional printing products and related services are in decline and there is a major shift towards digital technology solutions. Ricoh should leverage its skilled technical team to focus on the development of such new emerging developments in the market.

Implications: Ricoh’s current strategy has been successful based on their focus on traditional printing products/software, however as identified in their financials, revenue is decreasing at a very slow rate and the company’s net profit margin is declining as well. The company has reached a point of stagnant growth, dictating a need for a new and fresh strategy to lead them going forward.

13

10. SWOT Analysis

Implications: (10.1) Upside (Strength vs. Opportunity)

Considering Ricoh’s strong cash flow positon, opportunities arise to invest into research & development of solutions services or acquire competitors to expand market share

(10.2) Confidence (Strengths vs. Threats) With Ricoh’s strong financial position, they are well positioned to handle the threat of a

slowing market, or potential currency rate (FX) fluctuations that could affect revenue streams or anticipated expenses. Also, considering Ricoh’s strong brand and highly competent workforce, they are well positioned to shift from the traditional printing business to new service based solutions

(10.3) Distraction (Weaknesses vs. Opportunities) Based on information provided in the case, Ricoh currently has no research &

development infrastructure (at least in North America), making it difficult to develop new products and services to bring to market. Also, should the executive management team continue to undergo such astronomical turnover (110%), Ricoh may find it challenging to carry through with company strategy, make decisions on potential M&A, or lead its workforce into new marketing channels such as B2C. Furthermore, should Ricoh’s profit margins continue to decline, the company will eventually face the possibility of constricted cash flows, making R&D and M&A even more difficult.(10.4) Danger (Weaknesses vs. Threats)

Low profit margins combined with a low market share in the printer space, coupled with a slowdown in the market will have adverse impacts on Ricoh’s business model. Also, a lack of R&D infrastructure, combined with competitive advantage limited to their acquisition of IKON creates a potentially dangerous situation for the company

11. Competitive Strength Assessment

14

(11.1) Market share: In consideration of information provided within Exhibit 2 of the case, as of 2012,

Hewlett Packard holds the greatest market share at 37%, followed by Lexmark at 21%, and Xerox and Ricoh both with 10%

(11.2) New product offerings: Based on information provided in the case, Ricoh Canada is significant lagging its

competitors with respect to new product offerings. The case mentions Ricoh does offer some exiting products, and Exhibit 6 speaks to the capabilities of Ricoh’s IT/Professional services staff, however they have yet to monetize these new products & effectively put their skilled technical workforce to use. Ricoh’s competitors, specifically HP and Xerox have effectively integrated printing hardware and solutions software to offer consumers a new level of service, while also having both entered the cloud services space.

(11.3) Breadth of products: In consideration of information provided within Exhibit 3 of the case, as of 2012,

Hewlett Packard holds the greatest market share at 31%, followed by Ricoh at 25%, Canon at 16%, Konica Minolta at 8% and finally Sharp at 6%

(11.4) Customer satisfaction levels: In consideration of information provided within the case, Ricoh has a repeat

customer figures of 80%. This reinforces the thought that Ricoh’s customers are satisfied, with the only competitor yielding a higher rate of customer satisfaction being HP

Implications: Ricoh does not currently hold any major competitive advantage which gives them a leg up on the competition. The current strongest competitive advantages they hold are their strong financial position, and ownership of IKON. Based on market trends, it is essential that Ricoh develop a research & development facility and invest in developing new products within the IT/PS and cloud based solutions space, areas that are experiencing the greatest growth and profitability.

12. Financial Analysis

(12.1) Can the company pay its bills?

Liquidity 2010 2011 2012Cash and cash equivalents 26,363 33,358 14,472

(Figure 12.1)

Liquidity 2010 2011 2012 CAGR TrendNet Working Capital (Current

Assets-Current Liabilities) 100,654 103,161 120,220 6.10%Increasing

(Figure 12.2)

15

Based on the income statement, the company has increasing Net Working Capital (NWC) YoY indicating the company has enough capital to cover its short-term bills/liabilities. However, the company has $14.472M in Cash and cash equivalents on their balance sheet, which may not be enough to cover unanticipated expenses

(12.2) Does the company have the capacity to raise capital? (Figure 12.3)

Efficiency/Leverage 2010 2011 2012CAGR Trend

Return on Capital Employed (EBITDA/Shareholders' Equity)

19.84%

17.38%

15.28%

-8.34

%Decreasing

Debt/Equity63.78

%63.78

%59.65

%

-2.21

%Decreasing

(Figure 12.3)Based on the pro-forma analysis conducted, Ricoh’s return on capital employed is decreasing, indicating that they are not effectively utilizing equity in their business operations. This downward trend could be a sign of poor financial health which could make raising capital difficult. Ricoh also has a debt/equity ratio that is low and has been decreasing, giving them grounds to raise capital through the issuance of shares or fixed income securities (bonds) in the market. (12.3) Do the financials provide a competitive advantage? How?

Profitability 2010 2011 2012CAGR Trend

Return on Assets (EBITDA/Total Assets)12.11

%10.61

% 9.57%-

7.55%Decreasing

Return on Equity (EBITDA/Shareholders Equity & Retained Earnings

19.84%

17.38%

15.28%

-8.34%

Decreasing

(Figure 12.4)

Based on the metrics above, Ricoh has both a decreasing return on assets (ROA) and return on equity (ROE). This implies that the company is not efficiently utilizing the assets on its balance sheet or the equity available to generate profits, meaning Ricoh’s financials do not provide a competitive advantage. To gain a competitive advantage amongst its peers, Ricoh must find a way to turn the assets it owns and equity has available to generate revenue and therefore profit for the firm.

(12.4) What are the implications of the financials for future strategy and for the execution of the strategy?

Liquidity 2010 2011 2012CAGR Trend

Cash and cash equivalents26,36

333,35

814,47

2    Debt/Equity 64% 64% 60% -

2.21Decreasing

16

%(Figure 12.5)

Based on Ricoh’s Debt/Equity ratio of 60%, they have a strong ability to raise capital via issuing new shares or fixed income securities if they need to do so. This capital could be utilized to finance the development of a research and development (R&D) lab, or for further M&A to gain market share through acquiring a competitor.

(12.5) How does the company perform in comparison to its competitors?

The case information provided does not provide any financial statements on Ricoh’s competitors, making it impossible to do any type of comparative analysis. Considering that, the company can be compared through information that is provided such as customer satisfaction, product function and percentage of market share in the areas Ricoh operates.

a. Customer satisfaction In examination of the Net Promoter Score (NPS) provided for Ricoh in the case,

which is a measure of customer satisfaction, Ricoh performs exceptionally well with 80% of their customers turning into repeat business. Also, as of Q3-2012 56.10% of Ricoh’s customers have expressed satisfaction with their products.

b. Product function With regards to product function, Ricoh’s offers the top two multi function

products within the marketplace meaning these products are popular amongst consumers looking for a “one stop shop” type of device.

c. Market share Ricoh holds significant market share amongst its competitors in the break and fix

(maintenance & support) at 23%, onsite and offsite management services at 25% and legal document services (LDS) at 30%. They are significantly trailing their competitors in market share for Managed Document Services (MDS)-Business Process Consulting, Ricoh Document Management (RDM), and most significantly in IT/PS and cloud based services where they hold 0% market share.

Implications: Based on the information provided, Ricoh is relatively good position within the market place. To further its growth and capture an increased share of the market, Ricoh must increase their market share in the IT/PS segments, as well as the cloud based services markets as they are experiencing the most rapid growth rates.

(12.6) What is increasing -revenue, debt, costs, etc? What is decreasing? What are the implications

Efficiency/Leverage 2010 2011 2012 CAGR Trend

Revenue 461,497.00477,313.0

0497,016.0

0 2.50%Increasing

Operating Expenses 126,665.00129,250.0

0131,420.0

0 1.24%Increasing

Short-term debt 71,651.00 85,486.00 85,276.00 5.97%Increasing

17

Long-term debt 17,960.00 21,428.00 24,223.0010.49

%Increasing

(Figure 12.6)

Throughout the years 2010-2012, revenues, expenses, short-term debt and long-term debt have all increased. Fortunately, revenues have been increasing at a higher rate with a CAGR of 2.50% vs Operating expenses with a CAGR of 1.24%. While this is a good indication of growth, the fact that Ricoh’s overall net profit has not been increasing at a stable rate indicates margin problems that are affecting profitability. The executive management team should push to improve Ricoh’s margins by reducing expenses.

Debt levels have also been increasing, but this is not a sign of poor financial health. With the acquisition of increases in inventories and property plant & equipment, it is likely Ricoh issues this debt to purchase these assets.

(12.7) Is the company in a healthy or unhealthy position? Implications?

% Change 2010 2011 2012CAGR Trend

Gross Profit Margin (Gross Profit/Revenue)

33.49%

33.17%

32.08%

-1.41

%Decreasing

Net Profit Margin (Net Income/Revenue) 6.04%

6.10%

5.64%

-2.24

%Decreasing

(Figure 12.7)

At the present, Ricoh is currently in neither a healthy nor unhealthy position. While there is nothing of significance on the financial statements to indicate, Ricoh being in any serious trouble now, the decreasing trends in gross profit and net profit margins are concerning and indicate that Ricoh is beginning to show signs of trouble and should focus on increasing their profit margin trends.

(12.8) Outstanding Trends?

  2010 2011 2012 CAGR TrendCurrent Assets - Total Liabilities

82,694.00

81,733.00

95,997.00 5.10%

Decreasing

Accounts Receivable / Revenue *(365) 77.22 78.60 66.80

-4.71%

Decreasing

(Figure 12.8)

Although Ricoh is in relatively good health, there are a few issues of concern. Firstly, as seen in figure 12.7, there margins are decreasing meaning they need to either increase the price they are charging for their goods and services or more likely cut costs. Secondly, with a surplus of 95,997 of current assets above total liabilities, Ricoh has more than enough assets on hand to service its debt obligations. Finally, the decrease in the accounts receivable days examined indicate Ricoh is increasing the time in which it gets paid by its customers, which is usually a good indication of strong customer relationships and overall health.

18

13. Issue Identification In conclusion, while Ricoh’s business is not performing especially badly, there are several issues that were identified. Firstly, consumer preferences in the industry are rapidly shifting towards digital and cloud based services, an area where Ricoh is significantly underperforming its competitors. Secondly, Ricoh has a dated business model with a focus on past performance rather than fostering future innovation. Thirdly, financially speaking, decreasing gross and net margins indicate there is a need to cut cost to increase profit, as well as the fact that Ricoh faces FX exposures on currency translation by not having any hedges in place. Finally, and most importantly, the lack of any formal, official research & development infrastructure or facility limits the ability of Ricoh to compete in the cloud services and IT/PS space where it holds no market share. The company speaks to the skills and expertise of its workforce, but these individuals to this point have failed to add value by generating new revenue in this newly expanding total managed services space.Prepared by: Rylan Harvey, AnalystDate: November 23rd 2016

XRylan HarveyAnalyst

19