Pearson Company Strategic Management - Case Study Example

Individual Strategic Management Report

Executive Summary

Education publishing company, Pearson, is an organisation that has not performed as successfully as they had planned over the past three years. Pearson is primarily involved in educational publishing, software development, as well as the provision of student training systems. The company also produces mobile learning items that help enhance academic outcomes for young people, as well as disadvantaged children. Moreover, Pearson produces resources geared towards staff development, in addition, to support for service users in a vast array of sectors. The organisation could take several strategic actions to reverse the loss-making trend observed in 2016 and boost annual revenues. One such strategic action could entail implementing measures aimed at cutting costs. Pearson could cut costs by reducing the number of employees stationed in the different offices around the globe and minimising overhead costs associated with miscellaneous expenditure.

In addition, the organisation could cut on costs by minimising direct, as well as indirect costs. Direct costs in this instance include costs associated with inventory control, as well as the cost of raw materials while indirect costs include the costs associated with marketing activities, as well as staff training programs. Another key strategic action that could help Pearson attain its short and long-term goals includes the development of novel products. An expansion in product portfolio would not only allow the organisation to negate its loss-making trend but also increase its revenues. The third strategic action that Pearson should consider is the establishment of new customers, as well as markets. This action is critical to exploring previously unexplored markets and thus increasing the organisation’s profitability potential. Four, the organisation should also implement drastic changes in its product pricing policy to incorporate aspects such as an umbrella product price increase, in addition to price discounts for loyal clients. This will help the organisation shore up profit margins while boosting revenue growth.

Strategic Audit of Pearson’s Financial and Business Performance

A strategic audit of Pearson’s financial and business performance demonstrates that the organisation did not attain their performance targets in the years 2015 through to 2017. In 2015, an education publisher, Pearson, recorded sales of 4.468 billion pounds, a headline decrease from the previous year in which the organisation registered revenue sales of 4.54 billion pounds (Financial Overview, 2015). Pearson’s total operating profits for 2015 amounted to 723 million pounds, a year on year increase of 1 million pounds (Financial Overview, 2015). In 2015, adjustments on the revenue model, acquisitions, as well as disposals resulted in a 129 million pounds’ reduction in net sales, as well as a 9 million pounds reduction in net operating profits (Financial overview 2015). In 2016, Pearson registered headline sales amounting to £4.552 billion, a year on year increase of £84 million from the previous year (Pearson Annual Report and Accounts, 2016). It is worth noting, however, that sales revenues for the year 2016 were buoyed by a weaker sterling pound in the international currency market (Pearson Annual Report and Accounts, 2016).

Excluding the positive effect of a weaker sterling pound, sales registered a year on year decline of 9% from the previous year. In addition, operating profit after adjustments declined by 21% owing to decreased revenues (Pearson Annual Report and Accounts, 2016). This was mainly caused by weak demand for courseware in the United States higher education system and weakness in US K-12 courseware, as well as assessment (Pearson Annual Report and Accounts, 2016). Disposals caused a £63 million reduction in sales and a £2 million decline in operating profits after adjustments ((Pearson Annual Report and Accounts, 2016). This decline in performance and failure on the part of Pearson inevitably resulted in a drop in Pearson’s stock prices. In 2016, Person’s shares experienced a significant downturn owing to drastically falling sales (Sweney, 2016). Economists attribute the dismal performance on Pearson’s decision to sell off the Financial Times in 2015, in addition to its decision to dispose 50% of its holdings on the Economist, in a bid to focus on the publishing business (Sweney, 2016). In the first half of 2017, sales revenues registered a marginal rise from those registered in the previous year but failed to match initial expectations (Press Release 2017). CER growth was 0% year on year while the underlying growth was 1% year on year from 2017 (Press Release, 2017). Overall, Pearson failed to meet performance expectations over the course of the past 3 years.

An Analysis of Proposed Strategic Actions

The strategic actions as outlined in the executive summary may be explained and justified from a variety of perspectives. The first strategic action that Pearson ought to implement entails cutting direct, as well as indirect costs. Indirect costs such as those associated with staff training ameliorate as staff members gain experience. Namu, Kaimba, Muriithi, and Nikari (2014) assert that experienced staff help minimise the costs linked to the execution of a given task while cutting down on management levels minimises overhead costs within corporations. High rates of staff turnover also lead to increased labour costs on the part of the organisation (Namu et al., 2014). As such, Pearson should consider instituting measures that increase the job satisfaction of its employees to minimise staff turnover rates.

In addition, the organisation could cut indirect costs by minimising its overall workforce to create a lean and highly efficient one. Cameron (1994) contends downsizing in the organisational context enhance competitiveness, efficiency, and productivity within the organisation and impacts on costs, as well as work processes. Pearson should, therefore, carry out downsizing in a manner that does not affect work processes within the organisation by undertaking the exercise in departments that have excess staff. In addition, Pearson could carry out the downsizing of staff concurrently with an upgrade on its ICT infrastructure in order to retain or enhance extant efficiency levels. Pearson’s strategic action aimed at cutting direct costs may also be implemented through a number of strategies geared towards minimising expenses linked to sourcing raw materials. First, Namu et al. (2014) contend that organisations may buy raw materials in huge quantities to take advantage of lower costs associated with purchasing the materials in bulk. Second, organisations could employ opportunity buying in the acquisition of raw materials. Opportunity buying, in this instance, would entail procuring raw materials when their prices are lowest in the market (Namu et al., 2014). It is thus evident that the aforementioned strategic action could help Pearson minimise direct costs linked to the acquisition of suppliers in the long run.

Pearson’s operational costs may be categorised into both controllable, as well as non-controllable costs. Oluwagbemiga, Olugbenga, and Zaccheaus (2014) assert that controllable costs are costs that can be influenced by a specific responsibility manager within an organisation. Controlling controllable costs entails undertaking responsibility accounting, which is, tracing the employee who bears direct responsibility for the incurrence of a given cost. In the case of Pearson, the organisation should carry out responsibility accounting in every department in its different branches across the globe. Non-controllable costs, on the other hand, are costs that are not attributable to a given employee but can only be managed at a hierarchy that is above that of the employee’s department (Oluwagbemiga et al., 2014). Pearson should strive to tame non-controllable costs by instructing higher-ranking managers to evaluate costs borne by lower departments.

The second strategic action that Pearson ought to take involves the development and management of novel products. According to Fong, Lo, and Ramayah (2014), the management of new products is a crucial organisational function that allows for the identification and quantification of opportunities, as well as challenges within the marketplace. In addition, the management of novel products focuses on the client’s wants, as well as needs, as opposed to the assets owned by the organisation (Fong et al., 2014). Consequently, product management allows the organisation to meet the preferences of their clients. As part of Pearson’s novel product development and management, the organisation should primarily focus on creating digital courseware and assessment products. Moreover, the company should seek to develop digital courseware that responds to the needs of their clients and satisfies their preference. This may be achieved by undertaking research on client preferences prior to the development of a new product. In a bid to boost sales revenue, Pearson should also prioritise product innovation and allot financial resources towards that end. Ali (2000) observes that in the face of growing business competition on a global scale, in addition to the rapid development of technology, organisations face mounting pressure to embrace innovation in order to retain their market position. Pearson’s failure to embrace and prioritise product innovation over the course of the last 3 years has compromised its market position and thus impacted on the organisation’s profitability. As such, the firm should include product innovation as a priority strategic action.

The postulations of economic theory dictate that an organisation’s capacity to gain an edge over peers determines its level of profitability (Görzig, Gornig, Werwatz, & Berlin 2008). Moreover, by offering novel products and services and consequently opening up novel markets, an organisation can attain quasi-monopolistic profits, provided competitors fail to gain market share (Görzig et al., 2008). Sajid, Al-bloush, Mohammed, Monsef and Sadeghi (2015) posit that product innovation, in addition to the development of new products plays a critical role in sustainability, as well as organisational growth. Additionally, product innovation helps promote brand image and enhance customer loyalty. With increased globalisation, Pearson could take advantage of novel product development to increase its presence in international markets. De Brentani, Kleinschmidt and Salomo (2010) note that the enhanced interdependence of global markets has altered competitive dynamics significantly, and as a consequence, organisational performance is evaluated on a global basis. It is thus evident that Pearson’s implementation of the aforementioned strategic action will allow the organisation to attain profitability and grow its sales revenues.

The third strategic action that Pearson should implement entails the establishment of new customers, as well as the conquering of new markets. Claude‐gaudillat and Quélin (2006) assert that attempts to conquer new markets are a risky affair for most organisation s owing to the vast array of unknowns. Nonetheless, staying away from new markets can also cause an organisation to forego potential business opportunities (Claude‐gaudillat, & Quélin, 2006). As a result, Pearson should implement this strategic action with caution to avoid losing their investments in novel markets. This should entail undertaking comprehensive research on the levels of risk, as well as the most appropriate market entry strategy prior to venturing into new markets. Alternatively, the organisation could wait for existing risks, as well as uncertainties to weather down in a potential market prior to venturing into it. Claude‐gaudillat and Quélin (2006) posit that timing is an invaluable factor in the market entry for organisation s. Monferrer, Blesa, and Ripollés (2012) observe that venturing into new markets necessitates a significant allotment of strategic, financial, technical and managerial resources on the part of the organisation. As a result, organisation s have the prerogative to make strategic decisions in their selection of new markets and subsequent allotment of resources (Monferrer et al., 2012). In Pearson’s case, strategic decisions taken by the organisation should thus be guided by the amount of resources the management is in a position to commit.

The fourth strategic action that Pearson should implement entails instituting drastic changes in its product pricing policy. Sije and Oloko (2013) observe that pricing strategy is a crucial element in competitive strategy, as well as marketing, and organisational performance is contingent upon pricing strategy. In addition, an organisation’s pricing policy is critical to its success due to various reasons. First, price helps clients attach value to a given product and serves to influence brand selection between competing alternatives (Sije & Oloko, 2013). Second, pricing helps attract and capture demand. For Pearson, a revision of its pricing policy should take into account the capacity of set prices to attract and capture demand in order to enhance the organisation’s profitability. Sije and Oloko (2013) also note that pricing policy should be consistent with an organisation’s pricing objectives. Key examples of pricing objectives include sales maximisation, profit maximisation, as well as market share optimisation. Pearson’s current situation dictates that its pricing objectives should primarily revolve around profit maximisation in order to shore up the organisation’s share prices. De Toni, Milan, Saciloto, and Larentis (2017) assert that strategic pricing necessitates a more robust relationship between different organisational sectors and marketing. To enhance the financial and business performance of an organisation, its pricing policy ought to be determined by internal capacities, extant levels of competition as well as customer capabilities (De Toni et al., 2017). It is worth noting the formulation of pricing policy is a sophisticated and challenging process owing to the vast array of variables. In addition, international companies ordinarily set different prices for different regions. Pearson’s strategic action aimed at implementing drastic changes to its pricing policy should thus take into account the organisation’s business environment and customer capabilities among other factors.

Critical Reflection

Several critical lessons may be derived from this management report. One such lesson is that an organisation intent on retaining profitability and growing sales revenue should consider offering a wide range of products and services. Pearson’s profitability woes commenced in 2015 when the organisation decided to sell off a section of its enterprises such as the Financial Times and concentrate solely on education publishing. The Financial Times, as well as the Economist, constituted a significant source of revenue for the organisation and the decision of its managers to dispose of them was clearly ill-informed. Another key lesson that may be derived from the management report is that organisation s should exercise a higher degree of flexibility in responding to changing consumer needs and preferences in today’s highly competitive business environment. Organisation s should also adapt to key changes and trends in the global marketplace. Case in point is the current shift in the United States higher education system from conventional courseware towards digital forms of courseware and assessments. Pearson’s ability to respond to these novel trends in the marketplace is pivotal to the organisation’s future ability to retain top market position and ultimately attain profitability.

In addition, the organisation’s capacity to respond to changing customer needs and preferences is crucial to the success. The management report also demonstrates the role of strategic actions in negating loss-making trends and shoring up sales revenues. Strategic actions aimed at cutting costs, for instance, allow organisation s to not only minimise operational costs but also increase profit margins. As such, the critical lesson that may be derived from this strategic action is that initiatives such as downsizing and inventory control could be the first step in Pearson’s path to profitability and market dominance. Notably, any measures geared towards cost cutting should not impede the organisation’s operational efficiency. Another key lesson that may be accrued from the management report is that strategic actions involving the reconstitution of an organisation’s pricing policy are crucial to its financial and business performance. Ordinarily, the formulation of pricing strategy is a difficult and complex process owing to the vast array of variables that must be taken into consideration. Variables that impact on pricing policy decisions may include the pricing policies adopted by competitors, market share, customer needs, as well as client capabilities. In the case of Pearson, a key lesson is that a reformulation of its pricing policy should be predicated on variables unique to distinct regions.