Lexmark - Corrective Action at Last?

Implications: Lexmark results might stabilize or improve as a direct result of their limitation of exposure in the inkjet business.  Their laser-based offerings and vertical / application-based solutions for corporate clients are excellent and those results have been masked by the inkjet problems.  Still, it remains to be seen whether increased focus is the right strategy when competitors and customers are looking for more comprehensive offerings.

Analysis: Although the printer / MFP business altogether is still quite lucrative, the inkjet product area is not the most attractive area to occupy.  Entry-level products are sold at little or no margin, and manufacturers depend more or less totally on consumables to uphold the business model.  But many consumers do not print enough to fulfill those expectations, or the buy ink from alternative sources so that revenue and profits are diverted from the manufacturer.  Lexmark made the strategic decision to withdraw from the entry-level inkjet products for precisely this reason, but the real question is where to draw the line now?  To move upmarket with inkjet implies multiple risks:  decreasing acceptance due to running costs or (well documented) user prejudice for laser devices, increasing competition with entry level laser products (color lasers can now be found below $100), and limited functionality to support more sophisticated and complex user environments.

The most extreme option would be for Lexmark to withdraw from the inkjet business altogether, which would presumably improve financial results most dramatically.  This option is unlikely in the near future, so we can expect less focus on that product area as the best compromise strategy. 

This development is already underway, as the recent quarterly results showed a sharp decline in inkjet business.  The other major business area, selling laser-based products into corporate environments, will therefore be given more priority and will probably continue to grow and produce better overall results.  Lexmark has developed a great amount of technology and personal expertise in these areas (well beyond the much-publicized departure of one executive) and these can be developed and leveraged further in the future.

While this new focus is positive, an increasing number of clients in corporate settings may start to question the breadth of the Lexmark offering.  The existing product line and technology base are excellent, but nonetheless narrow.  Other companies like HP, Xerox and others (including my own) will be pitching a much wider range of products and services to match the widely varying needs of larger organizations.  The best vendor will offer a range of products from the desktop right up to centralized departmental print stations, and the Lexmark product line is weak or nonexistent, especially at the mid-range and high end of the printing spectrum. 

So the move away from inkjet is wise, but it does not solve the inherent problem for Lexmark, namely how to offer what high-value and high-volume costomers really need throughout those user organizations.  All other things being equal, the stock buyback will help investor value, but that manipulation does not change the nature of the business, and that is what really needs to be addressed in the future.