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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. Managers 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

Ramseys 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 doesnt 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 dont 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 couldnt 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 didnt 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 Childrens Books

I described the profit plan for childrens 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 childrens 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, childrens book line has a

higher expenses percentage of sales. Even though the fixed expenses from Western line

would be re-allocated, the expenses in childrens 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 Recent Trends in Publishing Industry: 1992 to 1997


Unit: Mil. $
1992 1993 1994 1995 1996 1997
16,69 18,61 19,69 20,48 21,36 22,64
Total 8 6 5 4 3 8
Growth % 11% 6% 4% 4% 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


Unit: Mil.
$
1992 1993 1994 1995 1996 1997
8 7 7 7 7 78
Hardcover 72 83 51 59 67 9
Growth % -10% -4% 1% 1% 3%
3 3 4 4 5 54
Paperback 27 78 19 96 16 4
Growth % 16% 11% 18% 4% 5%
1,19 1,16 1,17 1,25 1,28 1,33
Total 9 1 1 5 3 2
Growth % -3% 1% 7% 2% 4%
Source: The Bowker Annual, redeveloped at http://www.underdown.org/oldtrend.htm
Exhibit 3 Income Statement by Editorial Line for Year Ended May 31, 1997

Large Adult Children's


Total Print Nonfiction Books Mystery Western

Total sales (including sub rights income) 5,395,774 665,561 1,802,509 2,109,904 689,168 128,632

Total COGS 2,622,900 316,213 866,429 1,039,869 335,300 65,089


Gross margin % 51% 52% 52% 51% 51% 49%

Gross profit 2,772,874 349,348 936,080 1,070,035 353,868 63,543


Expenses % of sales 48% 44% 36% 54% 65% 66%
Editorial 5% 3% 2% 6% 8% 4%
Marketing/sales overhead 4% 2% 2% 7% 2% 0%
-direct 10% 7% 10% 9% 16% 19%
Cost of free copies 2% 1% 1% 4% 2% 1%
Art/production/gen'l edit. 4% 4% 2% 3% 7% 9%
Ship/warehouse 10% 11% 9% 10% 11% 10%
General and administrative 13% 16% 9% 14% 20% 22%

Total expenses 2,616,145 294,056 656,501 1,129,998 450,659 84,931


($96,791 ($21,388
Net profit (loss) $156,729 $55,292 $279,579 ($59,963) ) )

Exhibit 4 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

cant 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 dont 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-to-

day 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.

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