Hit-Driven and unpredictable like other entertainment businesses, book

publishing had become largey hit-driven. A publishers 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 companys 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 childrens book line to reach the
companys 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 childrens book
format for the upcoming year. The decisions regarding product mix in childrens
book would have a major impact on the future economic performance of the
company. Walker published new childrens book each year in five different
formats :
-

Illustrated picture books

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 )
Ramseys 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 childrens 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 childrens book line. Ramseys 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 companys 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 childrens formats, and use
the decision to derive a 1998 profit plan for the entire childrens book line.

Requaired :
1. Complete ramsey walkers profit plan for the childrens 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.