Kasus Walker & Company

7/21/2019 Kasus Walker & Company

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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

etremely di!cult to predict what would become a hit in advance" it was di!cult

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.

#ew Distribution $hannels %aradoically, while books were among the oldest

media formats, they had also become among the most successful new

businesses on the internet. Ama&on.com, listed as one of the top '( internet

sites of '))*, had opened up an e+ecient way for consumers to access an

enormous invetory of books. his new type of distribution channnel could not

only take market share from eisting channels, but might also epand the si&e of

the market to include those who previously could not nd or were not intersted in

books. ther important new channels included werehouse clubs and dicountstores.

%rot plan for the children book line

/amsey had already decided to stop publishing western novels. he line was a

distraction of company time for a relativaly small return with no upside potential

0see ehibit 1 2. /amsey had not yet gured out the impact of this decision on

the company’s prot going forward. He knew, however, that all $34 and one

tird of operating epenses were variable. He remaining ed epenses would

have to be re 5 allocated to other lines or reduced.

#ow 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 6ow and prot goals.

3eorge gibson 07*2 was president and publisher. 3eorge had worked for 18 years

in book publishing as a marketing and sales director, subsidiary rights directors,

and editor. 9hile george did not have etensive training in business or

management techni:ues, he was wonderfully creative and energetic.

ed rosenfeld 0872 was the chief nancialo!cer. ed had worked in the book

publishing industry for 1; years and had been at walker for '8 years , originallyas controller. ed focused on the day to day nancial and logistical operations of

company, including inventory management, setting prices and print runs,

managing accounts payable and receivables, shipping, fulllment, and related

personal. ed was garduate of #<U with a ma=or in accouning.

/amsey had to decide how many new titles to pablishing in each children’s book

format for the upcoming year. he decisions regarding product mi in children’s

book would have a ma=or impact on the future economic performance of the

company. 9alker published new children’s book each year in ve di+erent

formats >

- ?llustrated picture books



- %hoto essay 0 4tories illustrated with photos 2- @lack 9hite illustrated books- ?nformational nonction- Biction

After one year, titles became part of the blacklistbut continued to generate sales.

Binancial result for the year ended may C', ')) varied depending on the

format. 0 see ehibit C 2

/amsey’s goal for walker and company was to achive E8(((,((( in free cash

6ow in '))) and cumulative E' million by 1(((. At least 8(F of that would have

to come from the children’s book line. He belived that there were two ways of

achieving these cash 6ow goals" increase net income and G or reduce the amount

of working capital committed to the business. An emphasis on net income would

force more e!cient operations. However, achieving more e!cient operations

would re:uire di!cult personal decisions. ongstanding employees might have to

be let go. He also new that high net income levels 5 above about ;F - wereunrealistic because trade book publishing had never been a hight prot margin

business.

/amsey belived that working capital gains could be signicant. 4ome working

capital items like inventory had not been managed to maimi&e cash. 3ains

would be limited in account receivable, however, wich could not be collected any

faster, and accounts payable, which could not be strectched any longer.

/amsey also belived that the company should be able to earn '(F /A. he

large publishing companies 5 those with signicant economics of scale 5 were

earning '8F ehibit 7 presents comparative for other rms in the publishing

industry.

o prepare the prot plan for '));, remsey would have to decide eactly how

many titles to publish in each format and the e+ect of the decision on the prot

of the children’s book line. /amsey’s worksheet for a new product mi decision is

shown in ehibit 8. He knew that he would have to analy&e a number of nancial

measures. Annual sales growth , prot precent, unit sales, /A, and epenses.

Iach measure , however , possessed limitations >

Annual sales growth F > did not account for the protabilityof di+erentformats or the investment re:uired to generate the sales.

%rot F > did not show the nvestment re:uired or cash 6ow impact of

genereting the prot.

Avarage Unit 4ales > did not show the cost of generating the per title

avarages. Also, avarages cold be skewed by one very successful or

unsuccessful title.

/eturn 5 on 5 Asset > /A re:uaired accurate allocation of epenses and

assets wich at time could be di!cult. Assets consisted primarily of account

receivables. he inventory of books in the company’s ware house, and



unearned advances paid to authors. he biggest company asset was

inventory. Unearned advances were guaranteed payments made authors

whose books had not yet. >earned outJ the advances. 0 unearned

advances could be considered like prepaid epenses 2

/? > it was unclear ecatly what to include as KinvestmentJ. 9as it =ustauthors advances and the cost of production. r what it also K investmentJ

in sta+ and overhead. ne way to measure investment would include the

total cost of printing the book. %lus the guaranteed advance paid to the

author.

perating Ipenses > perating epenses were lagely ed or lumpy in

nature. At least '( -1( new tites would have to be cut in order to reduce

any of the lumpy epenses. Bor eample, the editorial sta+ head count

could not be reduced by =ust eliminating three or four titles. here had to

be a reduction. he di!cult challange would to be nd the right new title

output given the ed overhead base. ?nevitably, there would have to be

some epense reductions.

@efore 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 ve children’s formats, and use

the decision to derive a ')); prot plan for the entire children’s book line.

/e:uaired >

'. $omplete ramsey walker’s prot plan for the children’s book line 0 ehibit

8 2. 9hat are you working assumptions L which of these assumption are

critical to your anlysis L1. /eview the list nancial performance measures presented above. 9hat

measures or calculation should ramsey use to manage the business L how

should those measures be calculated LC. @ase 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.

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Kasus Walker & Company