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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


1992
16,69
8

Total
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

1993
8
72

Hardcover
Growth %

3
27

Paperback
Growth %

1,19
9

Total
Growth %

1994

7
83
-10%
3
78
16%
1,16
1
-3%

1995

7
51
-4%
4
19
11%
1,17
1
1%

1996

7
59
1%
4
96
18%
1,25
5
7%

7
67
1%
5
16
4%
1,28
3
2%

Unit: Mil.
$
1997
78
9
3%
54
4
5%
1,33
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

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%

349,348

1,039,869
52%

936,080

51%
1,070,035

Western

689,168

128,632

335,300

65,089

51%

49%

353,868

63,543

48%

44%

36%

54%

65%

66%

Editorial

5%

3%

2%

6%

8%

4%

Marketing/sales overhead

4%

2%

2%

7%

2%

0%

Expenses % of sales

2,772,874

52%

Mystery

-direct
Cost of free copies
Art/production/gen'l edit.

10%

7%

10%

9%

16%

19%

2%

1%

1%

4%

2%

1%

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
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-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.

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