TO:
Professor Vasu Ramanujam
FROM:
Tatsunori Sasaki
SUBJ:
Analysis of Walker and Company
DATE:
February 22, 2007
Before discussing the stated questions, I will analyze the strategic issues and strategy of Walker and Company by using frameworks from the course.
Balancing Organizational Tensions •
Growth - profit – control
For Walker and Company, profitability is a main issue. Manager’s eyes focus on profit. To achieve a goal of profit, they need to carefully consider growth and control at the same time. In this case, employees may give no attention to any aspects. Creating good books are likely to be a priority for people in a publishing company. The company has to develop a performance measurement and control system which creates strong attentions to profit and growth among the employees. •
Short-term versus long-term
Ramsey’s strategy seems short-term focus and lacks a long-term vision of the business. Even though the company has the long history and longstanding employees, it doesn’t mean that all people in the company are doing their job with a clear image of the future. Again, a person in a publishing company tends to care about his/her books and readers with a short-term view. The company needs to develop a way to communicate to the employees the long-term strategic goals of the business and what they should do now to achieve those goals.
•
Demands of different constituencies or stakeholders
There is a significant tension between the owners (Ramsey and his two brothers) and employees and customers. For the employees and customers, strong financial performance is not so important. The bankruptcy of a publishing company is not a big deal for customers of the company. The employees don’t necessarily have a strong passion to words like ROI, ROA, and gross margin. The company must translate those performance measures into applicable ways to the employees. •
Opportunity versus attention
For a small company like Walker and Company, management time and attention are extensively scare resources and need to be controlled cautiously. For example, George Gibson has a variety of tasks and should manage both editorial and sales and marketing parts as President. More focus on financials could derive his time and attention from editorial efforts. Given that editors probably have few experiences in business or management, to delegate some works in financials to the editors would not be a reasonable option for the company. Walker and Company has to develop a simple performance measurement and control system to save valuable but scarce resources of the business. •
Assumptions about human motivation and behavior
Walker and Company must consider basic assumptions about human nature described in our text book. Especially, people in a publishing company often have a strong commitment to their motivation. I used to work for a small publisher when I was an undergrad. Most of people worked at the company because of opportunities to achieve their goals to make great books. It was the time when the company was
growing. Then, the growth stopped. It was a very specialized publisher. Nevertheless, it tried to respond the situation by focusing on more specific areas and reducing the number of new titles. It couldn’t let employees see enough opportunities for the future. As a result, the company lost young, talented people. While this could happen in other industries, it has a strong impact on the publishing industry in which it is easier for people to move to other companies.
The 4Ps of Strategy •
Strategy as Perspective
Walker and Company must clarify its mission and vision first. If it develops strategies without a clear future direction, it will end up with being bought up or gone out of business soon like other companies in the same category. •
Strategy as Position
As described in the case, publishing is not an attractive industry: strong power of buyers and customers, many substitutes, low barriers to entrants, and high competition. Although there are enough suppliers, printing companies were beginning to select their customers extensively. Also, the businesses must pay careful attention to the quality of labor which is a critical factor of success in the market. Therefore, Walker and Company must thoughtfully examine value proposition and differentiation of the business to compete in the marketplace. Ramsey Walker hopes to lead the company to publish fewer titles in fewer segments. It could be the strategy of the business. However, positioning is unclear. •
Strategy as Plan
Based on the fewer titles in fewer segments strategy, Ramsey Walker set the goals: 10% ROA and free cash flow $500,000 in 1999 and $1 million by 2000. These goals needed to be communicated with employees as a profit plan. I will discuss about the profit plan later. •
Strategy as Pattern in Action
How Walker and Company can leverage emergent strategies is unsure. In the current structure, the possibility is likely to be dependent on the creativeness of top managements. Even though informal interactions among various groups could happen, I didn’t see a system to harness organizational learning in the company. With such a system, the company may take advantage of dialogues between sales reps and editors to develop a new strategy.
Profit Plan for Children’s Books I described the profit plan for children’s books in 1998 in Appendix 1. It was developed to achieve 50% of free cash flow target in 1999, i.e. $250,000. It is an ambitious plan. However, a great turn around in cash flow is necessary for the future of the business. Through the profit plan, the company must communicate with people a clear message about the strategy that the company will get healthy profit and cash flow and responsiveness to the market by focusing on fewer titles in fewer segments. Exhibit 1 and 2 shows the industry and publishing of children’s books are in moderate growths. By concentrating resources on high growth lines, the company will gain higher sales volume per title. A key assumption of this reasoning is a 20% growth of average sales amounts per new title. Illustrated picture books, photo essays, and black
and white illustrated books had growths of 15%, 18%, and 7% respectively from 1995. Focusing on illustrated books, the company should enhance the visibility of the products in the market. If it can do it, the growth target is possible to be made. Reducing operating expenses is another critical assumption of my analysis. Compared to large print and adult nonfiction lines in Exhibit 3, children’s book line has a higher expenses percentage of sales. Even though the fixed expenses from Western line would be re-allocated, the expenses in children’s line could be reduced by a similar level to other two productive lines. Inventory turnover of 2.7 is also critical. Given that accounts receivable could not be collected any faster and accounts payable could not be stretched any longer, reduction in working capital must be come from effective inventory management. Fortunately, there is enough room to be managed in inventories. Compared to other publishing companies presented in the case, the target is reachable. Exhibit 1
Total
Recent Trends in Publishing Industry: 1992 to 1997 1992 16,69 8
Growth %
1993 18,61 6 11%
1994 19,69 5 6%
1995 20,48 4 4%
Unit: Mil. $ 1996 21,36 3 4%
1997 22,64 8 6%
Source: U.S. Department of Commerce, U.S. Census Bureau, International Trade Administration (ITA).
Exhibit 2
Recent Trends in Children's Books: 1992 to 1997 1992
Hardcover Growth % Paperback Growth % Total Growth %
1993 8 72 3 27
1,19 9
7 83 -10% 3 78 16% 1,16 1 -3%
1994 7 51 -4% 4 19 11% 1,17 1 1%
1995 7 59 1% 4 96 18% 1,25 5 7%
Source: The Bowker Annual, redeveloped at http://www.underdown.org/oldtrend.htm
1996 7 67 1% 5 16 4% 1,28 3 2%
Unit: Mil. $ 1997 78 9 3% 54 4 5% 1,33 2 4%
Exhibit 3
Income Statement by Editorial Line for Year Ended May 31, 1997
Total
Large Print
Adult Nonfiction
Children's Books
Total sales (including sub rights income)
5,395,774
665,561
1,802,509
2,109,904
Total COGS
2,622,900
316,213
866,429
Gross margin % Gross profit
51% 2,772,874
52%
1,039,869 52%
689,168
128,632
335,300
65,089
51%
49%
51%
353,868
63,543
44%
36%
54%
65%
66%
Editorial
5%
3%
2%
6%
8%
4%
Marketing/sales overhead
4%
2%
2%
7%
2%
0%
10%
7%
10%
9%
16%
19%
2%
1%
1%
4%
2%
1%
-direct Cost of free copies Art/production/gen'l edit.
936,080
1,070,035
Western
48%
Expenses % of sales
349,348
Mystery
4%
4%
2%
3%
7%
9%
Ship/warehouse
10%
11%
9%
10%
11%
10%
General and administrative
13%
16%
9%
14%
20%
22%
($59,963)
450,659 ($96,791 )
84,931 ($21,388 )
Total expenses
2,616,145
Net profit (loss)
$156,729
Exhibit 4
294,056 $55,292
656,501 $279,579
1,129,998
Comparison of Digested Income Statements in 1997/1998 1997
1998
Total sales (including sub rights income)
2,109,904
2,292,500
Increase 9%
Total COGS
1,039,869
1,088,400
Increase 5%
Gross profit
1,070,035
1,204,100
Increase 13%
Total expenses
1,129,998
1,077,475
Decrease 5%
Net profit (loss)
($59,963)
126,625
Increase 311%
Performance Measures •
Annual Sales Growth %
Sales growth % itself lacks many essential factors of the business and so cannot be the single important performance measure. However, it must be considered seriously and well communicated with employees. The fewer titles in fewer segments strategy is meaningless unless they can keep selling a good numbers of books. There are many ways to use sales growth percentage. For example, the company can leverage it as a benchmark for planning. The company can use it for the decision about mix of
book categories. It can also set target sales amount of each book based on desired growth rate. •
Profit %
Healthy profit is essential for sustainability of the business. But, profit percentage can’t show the effectiveness of the strategy in this case. To measure the value of the strategic plan, the company needs to observe more specific measures to control the business. •
Average Unit Sales
As stated in the case, unit sales don’t show the cost. The company must manage the cost of books thoughtfully. In addition, the business should monitor sales of each title not average. It sends a strong message to the employees that each title must meet sales targets of the year. It also allows the company to respond to the market trends quickly. •
Return-on-Assets
Effective asset management is a critical success factor of the company. ROA could be a good performance measure for the company and top managements (George Gibson and Ted Rosenfeld). To earn high ROA, the company needs to take advantage of economies of scale by generating substantial growth because book publishing is not a high margin business. Efficient asset utilization and persistent growth are required of the company. •
ROI
Book publishing is not a capital intensive business. There is no significant relationship between investment and a success of a book. And so it is hard to make
people accountable for their decision and action related with investment. As presented in the case, what to include as investment is unclear. It might disguise actual impacts on the business. •
Operating Expenses
To capture enough amounts of net profits, the company must streamline the operation and reduce the expenses by a certain level.
Agenda •
How should Walker and Company develop simple, reader friendly financial reports for internal communication?
•
How should Walker and Company minimize the inventory level?
•
How should Walker and Company reduce operating expenses?
The success of the strategy depends on whether the company can make the plan day-today operations of publishing. People in the publishing company are usually too busy to pay attention to financial figures or simply have no interests to them. Updated information of performance measures should be communicated in various ways. The plan must be reinforced by written explanations about the strategy. Even though the number of new titles was reduced, the clarification could show a strong commitment to the growth which is essential to create exciting opportunities for employees. The key measures are as follows. •
ROA = Net Income / Average Total Assets
•
Free Cash Flow = Net Income +/- Change in Net Working Capital
•
Average Sales $ per Title
•
Expenses % of sales
•
Inventory Turnover = COGS / Average Inventory
ROA and free cash flow could be managed as annual goals. However, the other three measures should be monitored and communicated by monthly targets.
