Theory of Business (TOB), Business strategy and more – A case study

Bertelsmann AG is the largest media and entertainment group in Europe and the second largest in the world to U.S. based Time Warner, Inc. Bertelsmann has operations in over 40 countries, primarily in North America and Europe. Bertelsmann’s Theory of Business is to provide information, entertainment and media services to inspire people’s daily lives, make a valuable contribution to society, lead target markets and achieve returns that promote growth, provide working conditions that are equitable and motivating for their employees and commitment to the continuity and progress of the company (Thielen G., 2007). Bertelsmann is structured as a highly decentralized organization consisting of six divisions focusing on a unique feature of the complete media spectrum.  Starting as a publisher of hymnbooks, the company has experienced significant growth since its’ genesis over 170 years ago, primarily through acquisitions. To build upon their core competency of publishing, in 1998 one of their largest and most significant acquisitions, Random House, Inc. was made for $1.4 billion.

Random House Inc, is the world’s largest English-language book publisher. The acquisition by Bertelsmann brought together the imprints of the former Random House, Inc. with those of previously acquired publishing houses including Bantam, Doubleday and Dell. The flagship imprint of Random House Inc., Random House, was founded in 1925. Like Bertelsmann, Random House executed a significant number of acquisitions as a primary growth strategy. Random House has emerged as the only general interest book publisher publishing books in various languages notably English, Spanish, German and Japanese with over 1 million copies sold every day (ReferenceForBusiness.com). Focusing on its vision of continuing to be the global leader in the publishing domain, Random House must execute strategies that allow it to overcome constraints in the form of competition, technology advances, market consolidation, and innovative product offerings. Random House’s long term growth strategy should continue to leverage a proven model of acquisitions.

With 55% of the market share split amongst hundreds of small, independent publishers the trend for further consolidation through acquisition of publishers is necessary to avoid a potential emerging competitor (RandomHouse, Inc.). Risks regarding this strategy include the potential dilution of market share by a sudden merge process and disruption to the existing company culture, causing resistance. At a broader level, Bertelsmann should consider the consolidation of the Random House, Direct Group and BMG divisions for a more robust offering in the digital world, leveraging the competencies of each, consistent with the recent acquisition of Time, Inc.’s Bookspan book club. A joint venture with Borders should be considered to exploit upstream selling and revenue sharing opportunities, similar to the Barnes and Noble merger with Sterling Publishing.  Random House should continue to emphasize double digit profit margin targets to mitigate increased costs, specifically large author advances, higher volume discounts by retailers, reduced demand for books overall and high return rates (Anand B.N. et al., 2004). Profit growth will become increasingly important as the value chain continues to constrict and as weak economic cycles present themselves. Random House should strengthen relationships with Discounters as an important link in the value chain for exploiting an emerging sales channel. A deliberate strategic (Mintzberg, H. et al., 1985) mix of ‘back-listing’ should be developed and executed to rejuvenate revenue form previously published Best Sellers. From a geographic footprint perspective, Random House should strengthen its’ presence in recently entered markets, including Asia, South America and EMEA to get a more balanced revenue stream and avoid economic vulnerabilities in any one market. Currently, North America represents 75% of Random House revenue.

In the future, Random House will need to continue to innovate as a key strategy to keep pace with advanced technologies. Today, people have less time to read books in a traditional setting. Random House must look for alternative, innovative ways to deliver its’ content in an interesting and non-intrusive manner. An initiative which would give Random House a competitive advantage would be to partner with content providers to provide customers with an opportunity to read their vast offering of publications ‘on the run’ through a mobile service offering utilizing ICUE. A ‘push’ method could be used via an SMS message to generate interest and stimulate a purchase. Personalizing the Publisher’s online ‘store’ beyond basic search engine capability to include audio and video streaming with customer service representatives to enhance the customer experience would be a great way to preserve existing revenue. Self publishing is currently experimental with mixed results. Random House should enhance its business model to attract and secure business with this emerging self-publishing community in the form of offering brand recognition for a nominal fee. All of the technical innovations undertaken by the company will possess some level of risk. The biggest risk is acceptance and rate of adoption by the public.

Responding to the technology changes and developments in the area of e-commerce is of great strategic importance for Random House. There is extreme competition in digitizing content and presenting e-books for download due to the ubiquitous nature of Internet. This calls for completely automating the existing value stream to allow for selection and categorization of books, the conversion of hard copy artifacts to digital, mass storage and retrieval methods, improved presentation and highly secured transactions.  From an adoption perspective, the price of handheld electronic book reading devices is coming down, to deem this type of endeavor feasible form an end user perspective.  Continual enhancement of Random’s existing web presence, AtRandom.com, is vital and should be more tightly linked to the randomhouse.biz business portal. Refining and maintaining the multi-service business services portal is a top priority and efforts need to be taken to establish separate domains for each service to effectively control and monitor online traffic. The web services should be extensively reused to build web based ondemand printing services, where the consumer can search in the digitized book database and customize his pages for final printing.

Challenges attributed to realizing the technology strategy, in general, include balancing the appeal of online as well as hard copy books, controlling and managing reengineering efforts, arriving at a single service business model, mitigating security threats and privacy issues and substitution threats from competitors. Random House need to refine its current systems, preferably by outsourcing, to leverage its centralized database model to support efficient data categorization, storage and retrieval of content with capability to support bulk volumes of data in text, image and audio. The resulting architecture should be capable of linking various business services of the portal, support content fragmentation and online customer personalization services, and provide online renting and purchasing of e-books.

Overall, Random House’s strategic plan must consider building upon its market leader position through geographic expansion, mergers and acquisitions, redefining their position in the value chain to be more pervasive throughout, innovating technical and nontechnical products and services and leveraging technology advances to support more efficient content availability and delivery for the end consumer. Core focus areas to work on, as reflected in the above sections, are thus change and innovation, as well as process controls and management. Focus on business process improvement is essential considering the need to implement tactical plans to refine, integrate and continuously improve the ever growing and changing business model. Managing change and innovation will be critical for Random house to realize its strategy as the focus shifts to pondering new innovative ideas for remaining competitive, mainly, creative book ideas, author retention, and the shift towards web based commerce web services and enhanced customer experience.

To support innovation from an organizational perspective, virtual work environments should be considered to foster creativity from widely varied, dispersed cultures. Additional merging and acquiring will require effective organizational change management and process integration to avoid disruption to the existing business model and preserve functional independence. Random House should consider changing its current service offering and enhancing overall performance through pay-per-view and on-demand print services, SOA based web-services, digitized warehouses to support e-sales and e-distribution, web-based Publishing, and Educational and Library services. It is predicted that within the very near future, writers will outnumber readers (Dyszel B., 2005); therefore Random House must continue to reinvent itself since its traditional publishing roots will not be enough to sustain it, let alone grow.

References:

1. Mintzberg, H. and Waters, J. (1985). “Of Strategies, Deliberate and Emergent,” Strategic Management Journal, Vol. 6, 257-252

2. Thielen G. (2007, March 21). The Spirit to Create: Corporate Development and Strategy: Retrieved April 18, 2007, from http://www.bertelsmann.de/bertelsmann_corp/wms41/bm/file_uploads/Thielen_BPK_w eiss_englisch_Online_1.pdf

3. Williams C. (2007). Management: Innovation and Change (4th ed., ch. 7). Thomson South Western

4. IST WebCT Lecture. Process Improvement. Retrieved February 26, 2007 from http://istwebct6.syr.edu

5. ReferenceForBusiness.com company search. (n.d.). Bertelsmann AG – Company Profile. Retrieved April 16, 2007, from www.referenceforbusiness.com

6. RandomHouse, Inc. About Us. Retrieved April 16, 2007, from www.randomhouse.com/about/history

7. Anand B.N., Barnett K., Carpenter E. (2004, February 17). Random House: Harvard Business Review.

8. Random House offers first chapter of business book via SMS.(partnership with Team Paper: Bertlesmann’s Random House ICUE),1363-9900, March 8, 2007. Retrieved April 22, 2007, from http://www.telecomworldwire.com

9. Lichenburg J. (1998). Lurching Toward The Millenium: Is EDI the Answer, or Part of the Problem?.