Kasus Walker & Company

Hit-Driven and unpredictable like other entertainment businesses, book publishing had become largey hit-driven. A publisher’s economic fortunes rose and fell depending on revenue that each be generated. Unfortunatley, it was extremely difficult to predict what would become a hit in advance; it was difficult to repeat the success in the same way a second time. However, hits were necessary to break though the information and entertainment overload bombarding consumers. New Distribution Channels Paradoxically, while books were among the oldest media formats, they had also become among the most successful new businesses on the internet. Amazon.com, listed as one of the top 10 internet sites of 1996, had opened up an effecient way for consumers to access an enormous invetory of books. This new type of distribution channnel could not only take market share from existing channels, but might also expand the size of the market to include those who previously could not find or were not intersted in books. Other important new channels included werehouse clubs and dicount stores. Profit plan for the children book line Ramsey had already decided to stop publishing western novels. The line was a distraction of company time for a relativaly small return with no upside potential (see exhibit 2 ). Ramsey had not yet figured out the impact of this decision on the company’s profit going forward. He knew, however, that all COGS and one tird of operating expenses were variable. He remaining fixed expenses would have to be re – allocated to other lines or reduced. Now ramsey was on his way to sit down with george and ted rosendfeld. He wanted to discuss how to manage the children’s book line to reach the company’s cash flow and profit goals. George gibson (46) was president and publisher. George had worked for 25 years in book publishing as a marketing and sales director, subsidiary rights directors, and editor. While george did not have extensive training in business or management techniques, he was wonderfully creative and energetic. Ted rosenfeld (54) was the chief financialofficer. Ted had worked in the book publishing industry for 28 years and had been at walker for 15 years , originally as controller. Ted focused on the day to day financial and logistical operations of company, including inventory management, setting prices and print runs, managing accounts payable and receivables, shipping, fulfillment, and related personal. Ted was garduate of NYU with a major in accouning. Ramsey had to decide how many new titles to pablishing in each children’s book format for the upcoming year. The decisions regarding product mix in children’s book would have a major impact on the future economic performance of the company. Walker published new children’s book each year in five different formats : -

Illustrated picture books

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Photo essay ( Stories illustrated with photos ) Black & White illustrated books Informational nonfiction Fiction

After one year, titles became part of the blacklistbut continued to generate sales. Financial result for the year ended may 31, 1997 varied depending on the format. ( see exhibit 3 ) Ramsey’s goal for walker and company was to achive $5000,000 in free cash flow in 1999 and cumulative $1 million by 2000. At least 50% of that would have to come from the children’s book line. He belived that there were two ways of achieving these cash flow goals; increase net income and / or reduce the amount of working capital committed to the business. An emphasis on net income would force more efficient operations. However, achieving more efficient operations would require difficult personal decisions. Longstanding employees might have to be let go. He also new that high net income levels – above about 8% - were unrealistic because trade book publishing had never been a hight profit margin business. Ramsey belived that working capital gains could be significant. Some working capital items like inventory had not been managed to maximize cash. Gains would be limited in account receivable, however, wich could not be collected any faster, and accounts payable, which could not be strectched any longer. Ramsey also belived that the company should be able to earn 10% ROA. The large publishing companies – those with significant economics of scale – were earning 15% exhibit 4 presents comparative for other firms in the publishing industry. To prepare the profit plan for 1998, remsey would have to decide exactly how many titles to publish in each format and the effect of the decision on the profit of the children’s book line. Ramsey’s worksheet for a new product mix decision is shown in exhibit 5. He knew that he would have to analyze a number of financial measures. Annual sales growth , profit precent, unit sales, ROA, and expenses. Each measure , however , possessed limitations : Annual sales growth % : did not account for the profitabilityof different formats or the investment required to generate the sales. Profit % : did not show the nvestment required or cash flow impact of genereting the profit. Avarage Unit Sales : did not show the cost of generating the per title avarages. Also, avarages cold be skewed by one very successful or unsuccessful title. Return – on – Asset : ROA requaired accurate allocation of expenses and assets wich at time could be difficult. Assets consisted primarily of account receivables. The inventory of books in the company’s ware house, and

unearned advances paid to authors. The biggest company asset was inventory. Unearned advances were guaranteed payments made authors whose books had not yet. :earned out” the advances. ( unearned advances could be considered like prepaid expenses ) ROI : it was unclear excatly what to include as “investment”. Was it just authors advances and the cost of production. Or what it also “ investment” in staff and overhead. One way to measure investment would include the total cost of printing the book. Plus the guaranteed advance paid to the author. Operating Expenses : Operating expenses were lagely fixed or lumpy in nature. At least 10 -20 new tites would have to be cut in order to reduce any of the lumpy expenses. For example, the editorial staff head count could not be reduced by just eliminating three or four titles. There had to be a reduction. The difficult challange would to be find the right new title output given the fixed overhead base. Inevitably, there would have to be some expense reductions.

Before he want any further, ramsey knew that he would have to decide on the number of new titles to be issued in each of the five children’s formats, and use the decision to derive a 1998 profit plan for the entire children’s book line.

Requaired : 1. Complete ramsey walker’s profit plan for the children’s book line ( exhibit 5 ). What are you working assumptions ? which of these assumption are critical to your anlysis ? 2. Review the list financial performance measures presented above. What measures or calculation should ramsey use to manage the business ? how should those measures be calculated ? 3. Base on your analysis, prpare an agenda of the top three action items that ramsey should discuss with george gibson and ted rosendfeld during their upcoming meeting.