1. To illustrate the importance of the assumptions embedded in a profit plan 2. To familiarise students with various sources of business information 3. To learn how to use a profit plan to test key business decisions
The case portrays a series of profit planning decisions in a family-owned publishing company. The case is written by and about the same individual, Ramsey Walker, a young, recent business school graduate. The case begins with a quick overview of Walker & Company's (Walker) history.
Case Theory and Background
Companies use profit plans for several reasons:
１．To translate the strategy of the business into a detailed plan to create value. This helps managers quantify trade-offs and provides a framework for analysis for a variety of strategic decisions. ２．To evaluate whether sufficient resources are available to implement the intended strategy. This highlights the importance of the cash flow for small companies. ３．To create a foundation to link economic goals with leading indicators of strategy implementation. ４．To enable benchmarking with competitors and identify areas for efficiency gains. ５．To aid in internal communication, coordination and education. An interactive profit planning process sets up a motivational contract with managers and increases their knowledge of the business.
There are three interrelated analyses that are required for profit planning: (a) the profit "wheel";
(b) the cash wheel; and
(c) return on equity (ROE) wheel.
All profit plans can change, as managers' assumptions about the future and understanding of cause and effect relationships change.
Sequence of Analysis
Part A. Complete a profit plan for the children's book line What assumptions are made and identify which of these is critical to your analysis? Part B. Based on your analysis, prepare an agenda of the top three action items that Ramsey should discuss with George Gibson and Ted Rosenfeld during their upcoming meeting.
Part A. Complete a profit plan for the children's book line What assumptions are made and which of these critical of these assumptions are critical to your analysis? Step 1: Competitive dynamics of the industry
The competitive environment
The first step to completing the profit plan is for the students to understand the competitive dynamics of the industry and the expected future trends that drive the children's book market. This analysis is necessary to strategically position Walker's product offerings. A search of information in the library and/or on the Internet will reveal that the children's book industry is a large market ($1.4 billion), accounting for 33% of all books purchased. The fiction and picture book segments comprise 46% of sales. Children's books are retailed through large department stores like Wal-Mart (18%), book clubs (19%), traditional bookstores, and increasingly through on-line sites like Amazon.com. The growth of the children's book market is driven by a number of factors. Despite modest growth in demographics (a forecast of 0.3% compound annual growth rate in children under 18 years), this will be made up for by larger increases in disposable income and education level, distribution channels (more retail stores and increased on-line sales), literacy programs, and increased purchasing power of library customers from government grants. The Book Industry Study Group predicts a 5.8% growth in revenue for the children's segment in 1998, as compared to Standard & Poor's prediction that overall trade sales (which include both adult and children's books) will increase 3% in 1998. The publishing industry has become very competitive. There are low barriers to entry into children's publishing. Although the ten largest children's publishers accounted for 63.6% of revenues in 1996, the remainder of the market share was widely distributed among smaller publishers (like Walker). The greatest challenge to Walker is the industry...