Along with his brothers, Ramsay Walker ‘inherited’ Walker Books (Walkers) from his father. Neither Ramsay nor his brothers had worked full-time in the business. He has spent the last few months becoming familiar with the business. Exhibit 1 highlights Walker and Company’s organizational structure. Ramsay held meetings with the senior staff as well as studying the state of the industry, in general. Ramsay knew the industry was undergoing change: larger publishing houses getting larger through acquisitions and dominating the market; the rapid impact of technology through developments like e-readers; and the financial difficulties confronting some of the major retailers such as Borders2.
Moreover, the size of the United States market seems to have stalled with total US sales estimated at $23.9b in 2009 compared to $24.3b in 2008; while over the last seven years the industry had experienced a compound annual growth rate of 1.1%3. As a result of his investigations Ramsay developed the corporate strategy and operational plans as follows: 1. The need for a new overall corporate strategy to drive the business combined with a small number of key financial targets
2. The need to develop a number of targeted business strategies to facilitate the execution of the corporate strategy
3. A better planning and budgeting system to facilitate financial analysis of alternate action plans, that when developed, will serve as a management accounting control and evaluation tool. Each of these is briefly outlined below:
1. Corporate Strategy and Key Financial Targets
Ramsay was clear, that as a niche operator in the book industry, the focus had to be on differentiation. He knew Walkers lacked the economies of scale of the larger publishing houses. High quality books supported by strong marketing and sales support would be paramount. Ramsay decided to set the following financial targets:
a. Achieve Free Cash Flow numbers of $250 000 next year, and $500 000 and $1m in the subsequent two years. He hoped this might be achieved through improvement in net income and better working capital management.
b. Return on assets (ROAs) of 10%. He based this on the idea that the larger publishing houses seemed to be generating ROAs of 12-15%.
2. Targeted Business Strategies
This strategy of differentiation would be executed through:
a. Publishing fewer books in fewer segments with a view to [re] directing more resources to the Children’s Book segment. Figure 1 contains some summary data and Appendix 1 contains more detailed income statement data relating to all book segments. Ramsey has already decided that Walkers would stop publishing the Western’s Book category. b. Building better relationships with key authors
c. Build better relationships with suppliers and other key participants in the industry value1
This case is based on the case study Walker and Company: Profit Plan Decisions published in Simons 2000. In February 2011, Borders was reported to be in preparation for filing for bankruptcy protection under Chapter 11 (The Wall Street Journal supplement, The Australian 14 February). This would impact the Australian stores as well as the Angus and Robertson group.
MAB Lecture Illustration: Walker Books Profit Planning Exercise chain.
d. Strong, targeted marketing campaigns particularly around key titles e. Where applicable, embrace the technology, particularly with respect to distribution and the development of e-readers.
3. Profit Planning and Budgeting
Ramsey believed that Walkers needed a much better planning system to help guide strategy implementation, assess the viability of alternate courses of action and feed the annual budget. He was happy with his financial targets. Now he needed a plan to get there. Dropping the Westerns segment was the first move in this regard. He felt this might free up some editorial capacity which could be better used elsewhere (on average each editor is able to manager 11.5 new releases annually) and assist with not carrying unnecessary inventory which would ease working capital considerations. Ramsey also recognized the relationship between fixed and variable costs as all COGS and one third of operating expenses were variable. He knew that dropping the Westerns segment would mean that the remaining fixed expenses would have to be re-allocated to other lines or reduced.
Moreover, Ramsey had decided there would be a greater focus on Children’s books. He decided this for a number of reasons. First, Children’s Books represented around 40% of the total revenue (see Appendix 1) for the company. Second, focusing on Children’s Books would complement the need to remain a niche participant in the industry. Third, Ramsey felt that Children’s Books might be less affected by the e-reader technologies, at least in the short-term. The current research showed that most e-reader purchasers were thirty-five and above.
Still, Ramsey wondered:
1. What mix of categories should he pursue within the Children’s Book segment?
2. Should any categories be dropped? How many? Which ones?
3. Given a decision on mix, how many new titles of each should be pursued annually, and do we have the editorial resources to manage this?
4. What impact will these decisions have on the financials? Can we meet out financial targets? What costs are avoided by dropping or reducing some Children’s categories?