This is full excerpt of the Final Paper I and my partner Gonzalo Portellano submitted as part of our final exam at IE Business School. I am posting this as the recommendations correspond with the topic of this blog and it also could help students that solve the HBS case “The National Geographic Society”. Maybe somebody from the NG will be bored at work and read this… Btw. we got an “A”
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Dear Mr. Fahley,
The National Geographic Society, after 121 years of existence, is facing great challenges that will define its future for the present century. In an exponential fashion during the last years, the media industry has evolved in a way that forces National Geographic (NG) to redefine its business model not only to keep its competiveness but to adapt and to survive to the new environment.
The following roadmap identifies the existing problems and major risks for the Organization, their impact, solutions and guidelines to drive the profound change that NG must face:
1) Definition of the problem
2) Company analysis and problems encountered
3) Recommendations
4) Financial Impact
5) Alternative Solutions
6) Risks & Countermeasures
7) Implementation Plan
1) Definition of the Problem. External and Internal Causes. Impact on NG
We have identified these problems according to its external or internal origin, accordingly establishing their consequences:
External factors and market trends in the Media Industry
As more and more the world turns paperless, overall sales of printed magazines, books and newspapers are going down. Tablets and smart phones, more and more improved and affordable have dramatically contributed to speed up this process.
The process in which TV and Internet are converging is changing the power structure of content producers, distributors and broadcasting companies. The potential customer base is now broader due to an increasing number of information channels.
With more and more channels available to communicate, more contents and free or very affordable access to them, loyalty has decreased dramatically. This has led to a tougher competition in the media industry to attract customers offering a wide range of free contents and features.
Internal factors that need to be addressed
While continuity and low risk may have been a valid driver during decades, deriving in slow decision making processes, this philosophy should be eliminated to allow the change. The current structure leads to inefficiencies and duplication of activities through harmful internal competition, missing business opportunities.
Overlapped activities and misaligned price strategy are affecting the brand credibility and diluting the name and recognition of NG. Besides, the Organization lacks an effective information system, impeding employees to collaborate across business units and accentuating the silo perception.
NGS is aware of the need for change, but it is lacking a clear strategy to face these changes, and the shift to a customer oriented approach is a fact that have been envisioned but not shaped.
2) Company analysis and problems encountered
We are using McKinsey’s 7S framework enriched by overview of strategic resources to provide and integral analysis of the NG organization:
Strategy: NG shifted from being a national US magazine promoting American topics to a global ecologically concerned magazine with 34 international editions. NG is a diversified corporation spanning publishing, media production, and travel industry. It’s revenue stream include magazine, books, and educational material publishing, TV content creation, travel agency, educational games development, branded merchandize. NG is funding and organizing scientific research and exploration that later popularize in the magazine and books. NG is aware of the current trends in media convergence and plans to adapt by creating new content delivery channels (internet, social networks) which NG calls e-commerce.
Skills: NG has one of the world’s best nature and travel photographers resulting in world class photography skills. NG products posses the capability to inspire and evoke customer’s imagination, which is one of the main reasons they continue to buy the NG products. NG is able to generate unique contents hardly matched by competitors.
Shared Values: NG staff is proud on NG rich history of popularizing science. Working at NG is rather a mission than just work. The mission is educating the world promoting ecological awareness.
Structure: NG combines non-profit and for profit activities in separate business units. The Mission Program unit is partially funded by donations and profits of revenue generating business units. Business units function as isolated silos of information and competencies limiting cross company synergies. An organizational structure divided per products promotes product orientation where products compete among each other for customers. On top of that, separated P&L for product groups creates unhealthy competition for resources and ideas.
Staff: NG staff is loyal due to a sense of belonging and identification with the NG’s mission and heritage. However, they criticize poor conflict resolution, unclear marketing strategy and silos in the organization.
Systems: NG governance processes allows duplication initiatives, which leads to internal competition and inconsistent brand presentation. Moreover, activities and programs do overlap e.g. seven different loyalty programs.
Style: The organization culture is process and consensus driven rather than results driven. Risk aversion prevails as failures are punished while successes are not always rewarded.
Strategic resources: NG brand awareness and typical yellow frame image is well positioned in customer minds as source of reliable information about the planet. The NG brand attributes help customers to identify with the brand and promote by word-of-mouth, which can be further leveraged at social networks. With 10.5 million original pictures, NG has one of the world’s largest databases, only surpassed by Shutterstock (15 million[i]). Pictures can be licensed for use in other magazines or accessed by NG community members as a membership benefit. 40 million readers around the globe position NG magazine as a top choice for readers with post-graduate education and top management positions, which represent an attractive community with potential for new revenue streams.
3) Recommendations
We have structured our recommendations based on the following pillars:
a. Brand and Core Values: Reformulation of the mission
Based upon the mission described in 2004 (“To inspire people to care about the planet”), we would like to propose its reformulation, linking it to what we believe are the pillars for a sustainable growth at NG: Planet => People => Profit => Prosperity => Peace
“A service oriented approach, and adapting to the 21st Century’s customer behavioral patterns, are key factors to position NG as the leader of the community that takes care of our Planet and Prosperity of its People.”
These premises should be included in the activities representing the NG brand. We have considered the following actions:
· Coherence with the mission, sponsoring or building strategic alliances with companies sharing common values.
· Education and value sharing, focusing philanthropic activities to broadcast its educational contents in developing areas.
· Increase the sense of Community beyond the present sphere of influence of NG.
· Walk the talk: Apart from being ecological organization, NG can use its brand reputation organizing forums in a systematic way e.g. TED Talks[ii].
b. Organizational Change
Current NG organizational structure is characterized by organizing around particular products with separate marketing and branding functions. We believe that current structure is not only entrenched in the traditional now declining business model, but also hindering the transition to the business model for the digital economy. Hence we propose radically changing the organization design to promote innovation, cooperation, and multi-channel interaction with customers.
Exhibit 1 depicts the new organizational design, which is centered on three types of customers. The ones who use NG free services, NG paying members, and those, who engage with NG in isolated transactions on pay per content mode. NG delivers the content and products to customers via four channels Print, TV, Web and Mobile platforms, and Retail Shops. The interaction in each of the channels follow both-ways while customers give feedback, comments, and also submit their own content like videos, pictures, blog posts, etc. The Sales & Channels business unit is in charge for the Channel Management, Prints Distribution, Ad Sales, and Licensing. In fact, it is the major revenue generating business unit within NG.
The Content Factory combines all content creation capabilities previously scattered around product units. Bringing Journalism, Audio & Video, Education, and Community Generated Content into one business unit, prevents duplication of activities and promotes re-using the content in various products and channels.
The Mission Programs is crucial differentiating part of the NG business model. For that reason we propose to concentrate it in separate business unit together with NG Travel.
We propose to create new business unit Marketing & Community Management that will cover all NG marketing activities across all products and channels. Marketing encompasses product management with dedicated product managers for each product, Community Management main goal of which is to develop NG customer community by not only managing the on-line platform, but also cooperating with product and channel managers to deliver coherent customer experience. Similarly, the Brand Manager will assure consistency and development of the NG brand across all channels and products.
Under Operations, the Media & Technology unit is the centralized successor of previous IT teams that will constantly look for emerging technologies that can leverage NG value offering. Also, the unit will provide IT support to all existing NG activities together with development of new tools for both internal and external customers.
The Production unit will be supporting the Content Factory with publishing specialists including pre-press and distributed printing through partners around the world. It will also cover all aspects of Audio & Video production that cannot be handled directly by the Content Factory like operating recording studios and performing advanced editing.
We are convinced that such a major organizational and culture change requires top-down coordination and support. Therefore, we propose to create functional position of E-Commerce Program Manager reporting directly to the CEO. The E-Commerce Program Manager will facilitate establishing the E-Commerce competencies in four areas of the NG organization Community Management, Interactive Products, Web & Mobile Channels, and Media & Technology projects. When the Program successfully finishes and the E-Commerce competency is deeply rooted in NG organizational capabilities, this position will be dissolved. She will be evaluated on the project performance metrics like alignment with scope, budget, and timing and on additional revenue and costs saving generated by transition to the E-Commerce business model. The proposal of new organization chart is contained in the Exhibit 3.
c. Embracing Internet and Social Platforms
On-line platforms
The future of the organization will depend on the ability of NG to make its own content and resources available for the largest number of people, generating traffic and becoming an opinion leader in the race for a sustainable planet. In our view, this scenario can be possible by creating and developing a social platform bringing together the scientific community, travelers and all people concerned and sensitive to the core values of NG.
In this “Freemium” social network (See Exhibit 4), NG content will be displayed, as well as content from other sources (users, scientific community, travelers) creating a much larger base of content, available for all the users of the platform, increasing traffic, creating network externalities and providing an additional value to the users.
The Free area with community-generated content and some content provided by NG is free with aim to generate traffic to the platform. Premium content from NG like access to articles, download hi-res photos and full-length videos can be accessed on pay per content basis. Additionally, an advertisement is another revenue stream to support the platform.
The Free level is the foothold for the Premium area that will generate revenue from the membership fees. Member’s choice how to consume the content (NG printed magazine, Web, Mobile, etc.) and possibility of interaction is the basis of the new concept of NG Membership. Also, NG Members have access to all the historic data base of the NG archives.
Off-line platforms
For NG magazine (Exhibit 5) we suggest considering upgrading to an exclusive high-end product:
Delivering a collection’s magazine with a high-end look and quality.
Magazine enhancing / augmented reality allowing readers access to dynamic additional content at the Web e.g. Esquire Magazine[iii].
Exclusive contents not available on-line to endow NGM with a uniqueness that will attract readers and NGS followers.
Higher price and margins for delivering exclusiveness.
In parallel, we suggest to consider creating a new editorial in line with NG’s philanthropic spirit, focused on a low-income segment in developing markets with room for the local community contents. Its characteristics would be:
· Content creation, edition, distribution and sale in developing countries
· Educational focus publishing books for schools at affordable price
· Use of recycled paper from local plants and ensuring fair trade policies for printing and distribution process
· Contribution of the local communities to the contents of the local edition magazine, completed with contents from NG
d. Enabling the Staff with Technical Skills and Fostering Initiatives to Achieve Result-Oriented Organization
The change is driven by employees well knowledgeable about the road map, technically competent, result-oriented and concerned about the mission. Our recommendations are based on:
Technical skills’ internal evaluation process: We suggest the formation of a team of experts in new technologies in charge for conducting test of employees’ technical skills, determining the bottom line of expertise required. We recommend ensuring that employees in New Media & Technology and Content Factory are “web savvy” esp. in blogging, social networks, email marketing, mobile applications.
Information technologies: The Marketing & Community business unit (see Exhibit 3) is suggested to provide a plan for a simple and scalable Enterprise Resource Planning Software, agreed by a commission including members of all business units and your personal supervision. This should result into more efficient internal communication and a faster decision making
Training: Rotational programs for selected employees should be implemented in order to acquire a global understanding of the organization, employees’ development and minimizing the traditional territorial behavior of the different business units.
Employee compensation: We propose changes in the variable salary structure: the weight of the individual performance should be higher than the Business Unit or company performance, fostering internal competition and instilling a result-oriented style.
Fostering initiative and entrepreneurial spirit: To foster initiative and the entrepreneurial spirit at NG, we propose that employees can choose a project of their own, aligned with the core values at NG, and dedicate up to 10% of the employee’s working hours to it.
4) Financial Impact
From the financial statement analysis, it is apparent that Catalog Sales & Licensing has highest gross margin amounting 21.92% at the end of 2009. Also, NG Magazine enjoys fair gross margin 18.82%. On top of that the gross margin keeps improving. Unfortunately, the remaining products have either negligible or negative gross margin. In total, NG reports gross margin 9.3%.
We projected NG financials until the end of 2013 in order to understand NG situation, should current trends continue assuming retaining 2009 gross margins. We believe that the decline in NG magazine sales of 21% from 2004 to 2009 was partially caused by the economic recession. Hence, we assume the decline to slow down to 2.2% per year. Additionally, we assumed slower growth in School Publishing, Documents Production, and Catalog Sales & Licensing as the market will become more saturated over time. In result, the overall gross margin will decrease from 9.3% to 8.86%. On the other hand, the Consolidated Operating Income will be $5.5m higher in 2013 in comparison with 2009 as the drop in the NG Magazine income will be replaced by the Catalog Sales & Licensing. Detailed calculation is in the Exhibit 6.
Apart from current trends analysis, we calculated financial benefits of finding new revenue streams from the on-line community platform and savings resulting from organizational transformation. The on-line platform revenue will come from cross sell of NG products and advertisement sales. We utilized the revenue per user model while we benchmarked the future NG on-line platform with per user revenue at Facebook and Twitter[iv]. The resulting user revenue $.80 per year is an average between Facebook and Twitter data. Then, the contribution is calculated using 9.3% gross margin on NG products in 2009. We also assume that the costs of the platform will not be higher than current non-consolidated NG on-line offerings, hence the revenues are incremental. The platform will generate $18m revenues and $1.68m of contribution in 2013. NPV in the course of five years amounts $6.04m at 15% discount rate.
The organization transformation will centralize many functions and remove duplication of activities. Resulting savings can be benchmarked with Shared Service Centers projects as they aim at similar goals. AT Kearney study[v] claims that such a project typically results in 17% cost savings. We used this figure to estimate savings from the Product Expenses and S&GA. The savings will be realized gradually starting with 30% in 2010 and finishing with reaching full savings potential of $67.6m in 2014. We estimated the cost of transformation to be 50% of the actual savings. The five year NPV at 15% discount rate amounts $153m. In 2013, the savings will contribute with $55.76m into NG profits. Detailed calculations for both incremental revenues and savings are in the Exhibit 7.
In conclusion, by implementing proposed savings and revenue generating initiatives, NG can improve the gross margin to 21.72% and triple the 2009 Net Operating Income. Projected financial statements after the implementation of proposed changes are in the Exhibit 8.
5) ALTERNATIVE SOLUTIONS
The proposed recommendation can be implemented also separately. However, the effect of the recommendations will be strongest when they are implemented together.
Alternative 1 – Implementing the on-line community platform without radically changing the organization structure will bring NPV of $6.04m in five years without major investments. On the other hand, there is risk that the platform will remain isolated initiative within NG product portfolio that won’t be able to deliver the synergies with the NG content from the various products. We see this alternative as a quick win approach without gaining sustainable competitive advantage.
Alternative 2 – Introducing only the organizational changes while gaining cost saving advantages from centralizing certain functions will result in NPV $152m in five years. Financial results of Alternative 1 seem almost negligible in comparison with this financial gain. Although, the savings and increased organizational capabilities will certainly “buy time”, the market trends will eventually lead to further decline in NG traditional business model.
In conclusion, we propose to implement both Alternatives at the same time as only integrated approach will yield sustainable results.
6) RISKS & COUNTERMEASURES
We foresee risks on the way of the changes implementation. Firstly, the there is a risk that the pace of changes will not be fast enough to cope with changing customer preferences and substitutes. To prevent that we propose to create great sense of urgency by the NG management in the whole organization with little tolerance for delays in the implementation of the changes. Secondly, potential resistance from the staff can hinder the changes. We believe that by radically changing the organizational structure, the staff will be forced to cope with the new situation at the workplace. At the same time, it will create momentum for the further changes in the business model. Thirdly, not being able to attract top talent in the e-commerce area can endanger successful launch of the on-line initiatives. Communicating externally in interviews and conferences about the changes NG undertakes, will create interest among e-commerce professional community. Additionally, targeted hiring of top e-commerce specialists from successful companies with the on-line business model will immediately bring required knowledge and talent to the organization.
7) IMPLEMENTATION PLAN
The full implementation comprising all the recommendation is estimated to take place within the next 33 months with a pre-implementation phase of 6 months. The detailed plan is in the Exhibit 9.
APPENDIX
Exhibit 1 – External & Internal Analysis
Exhibit 2 – New Organizational Design
Exhibit 3 – Proposed Organization Structure
Exhibit 4 - NG on-line. Configuration of the NG social network
Exhibit 5 - NG off-line. Configuration of the NG Magazine and Green Edition.
Exhibit 6 – Revenue & Income as Projection of Current Trends
Exhibit 7 – Cost and Benefit Analysis of Proposed Recommendations
Exhibit 8 – Revenue & Income as Projection of Proposed Recommendations
Exhibit 9 – Implementation Plan 2010 – 2013
REFERENCES
MARKET TRENDS
Valerie A. Haugh, The Dawning of the “E” World –How Will the Paperless Society That Is Predicted to Come Affect Your Commercial Space & Your Business?, Gardner Carton & Douglas, November 1999 http://www.drinkerbiddle.com/files/Publication/8fb4f6bb-59d3-4e32-8ce4-f2770da8031c/Presentation/PublicationAttachment/de422b7c-ee1a-40c1-ac53-0fd4371867de/Dawning.pdf
Who killed the newspaper?, The Economist, August 2006, http://www.economist.com/node/7830218?story_id=7830218
Ramzy Baroud, Making room for a paperless world, Arab News, May 2010, http://arabnews.com/opinion/columns/article57545.ece
About ebooks and the future of printed media:
Joshua Benton, Takeaways for journalists from today’s Apple announcement: Better reporting tools and an ebook boom, Nieman Journalism Lab, March 2011, http://www.niemanlab.org/2011/03/takeaways-for-journalists-from-todays-apple-announcement-better-reporting-tools-and-an-ebook-boom/
Joe Pompeo, Are ebooks about to change everything in the long-form media world?, March 2011, http://news.yahoo.com/s/yblog_thecutline/20110323/ts_yblog_thecutline/are-ebooks-about-to-change-everything-in-the-long-form-media-world
American publishers association, http://www.publishers.org/
Nate Hoffelder, One in 4 Americans Read eBooks, eBooksNewser, April 2011, http://www.mediabistro.com/ebooknewser/one-in-4-americans-reads-ebooks_b9892
iPad Sales to More than Double Next Year, eMarketet, December 2010, http://www.emarketer.com/Article.aspx?R=1008098
required Technical skills for staff in digital publishing
Tech Skills Every New Graduate Should Possess, Domain.com, May 2010, http://www.domain.com/blog/domaincom/tech-skills-every-new-graduate-should-possess/
Technology Competencies for Library Staff, Oakland Library, Fall 1998, http://www.oaklandlibrary.org/techcomp.htm
DIGITAL BUSINESS MODELS
Freemium, Wikipedia, http://es.wikipedia.org/wiki/Freemium
How to bring interactivity to traditional media
Matthew Humphries, Esquire enhances magazine with augmented reality, Geek.com, November 2009 http://www.geek.com/articles/news/esquire-enhances-magazine-with-augmented-reality-20091110/
EXAMPLES OF Organizational change to be ready for 21st century
Organizational Transformation at the BBC, 2006, http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR231.htm
Russell Grossman, Pamela Smith, Humanizing cultural change at the BBC, Melcrum, 2006, http://www.melcrum.com/presentations/ukmca/presentations/07_Cultural_Change/grossman_and_smith.pdf
[i]Number of images at Shutterstock, http://www.shutterstock.com/?gclid=CIqOgbbkwqgCFYYTfAoda1BWrw
[ii] TED Talks, http://www.ted.com/talks
[iii] Augmented reality at Esquire, http://www.esquire.com/the-side/augmented-reality
[iv] Putting a Reasonable Price on Facebook and LinkedIn, WSJ, December 2009, http://online.wsj.com/article/SB10001424052748704146904574579543239159268.html,
Mark Raby ,Twitter on pace to reach...200 million users by 2011, TG Daily, November 2010, http://www.tgdaily.com/software-brief/52284-twitter-on-pace-to-reach200-million-users-by-2011
[v] Corporate Center and Shared Services, AT Kearney, 2011, http://www.atkearney.com/index.php/Our-expertise/corporate-center-and-shared-services.html
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