It was an educational process for all of us to research and develop the paper Mark presented just before the break. The learning process continued to the very end. One of the last contributions that we got, which you will read in chapter one, fit the work we’d been doing like a glove, introduced us to some new ways to think about change, by envisioning how enterprises respond to the “surprise”: protecting against it, preparing for it, and preparing the surprise itself.
Thinking about change this way made me realize that in my publishing lifetime in the US, there was one particular example of “preparing the surprise”, where one company introduced a new way to do business that changed the entire industry, that stands out above all others.
It occurred in the early 1970s, approximately 1972, when Ingram first employed the microcfiche reader to provide better service to their bookstore customers.
Because of the sheer size of the this country, wholesalers had a business for years filling reorders for the fastest-moving books. Before the Ingram microfiche changed the industry, wholesalers usually didn’t really try to stock much breadth of titles beyond those fast-moving books. And consequently, the business climate between bookstores and wholesalers was characterized by mutual frustration and disappointment.
Wholesalers would find that they had in stock and could therefore make money on only 30% or so of what they received orders for. And bookstores, in those pre-digital days might have to wait a week or more to find out which 70% of the order they weren’t going to get. This was normal. This was the landscape everybody lived in.
Harry Hoffman was at that time the new president of Ingram Book Company, a little and, frankly, insignificant wholesaler in Nashville, Tennessee. Hoffman had once worked for the electronic hardware manufacturer Bell & Howell, and one day a former colleague of Hoffman’s stopped by at Ingram to discuss new applications for the microfiche reader, a clunky slide projector kind of machine that Bell & Howell believed had untapped potential with commercial applications. The value of the microfiche reader was that it permitted a huge amount of information to be stored on a very small piece of film.
Hoffman made the connection that this machine, if stores would use it, would permit Ingram to tell customers what was actually in stock on a weekly basis. So it would permit stores to select from what was really likely to be available when they placed orders, adding efficiency at both ends of the chain that should more than repay the investment in the machines.
As the business model actually evolved, the stores paid a nominal rental for the machine, which covered the hardware cost. And the publishers were charged a small fee for having their titles appear on the microfiche, which permitted Ingram to make a profit on the production and distribution of the weekly microfiche updates.
Michael Zibart, who was Ingram’s buyer at that time, remembers the ABA convention when they first showed the reader to booksellers. He told me that they did a mailing before ABA and got about 100 responses, which was a lot. Then every person at the convention that saw it said they wanted it. Ingram knew immediately they had a winner.
Ingram’s innovation propelled them into the top ranks of America’s trade wholesalers. For years now, they have been pre-eminent. Ingram continued to innovate with service improvements, becoming the key driver to push EDI use in the US book trade and becoming the first to exchange inventory status and order information online. Although many smart things have been done by Ingram since the microfiche, they have been building since the early 1970s on the edge they gained when they became the first book wholesaler to offer timely information to their customers about what books were actually available.
There were dozens, if not hundreds, of wholesalers in America bigger in the trade market than Ingram was in 1970. There were none by 1980 and there are none today. That was their payoff for preparing the surprise.
Anybody who runs a successful business is more than mildly curious about what their most direct competitors do, think, and know. They don’t want a surprise prepared for them. They don’t want to be one of Ingram’s many competitors left behind by a good idea. Indeed, that is part of the reason many of you are here today, making sure that nobody is picking up a surprise to prepare for you.
Now, I don’t want to ruin your morning, but in this speech, we will consider three hypothetical, but immediately executable, surprises that could be sprung on you as early as this afternoon. The technology and market conditions are in place to permit any of them. Although we will consider each of these as though they had just happened, to our knowledge they haven’t happened…
Yet!
But you could well get a joint visit from your editorial director and your sales director at any time to tell you that your top competitor has gone to an entirely new system to bring books to the bookstore marketplace, eliminating the time-honored bundle of seasonal lists, seasonal catalogs, and seasonal sales conferences. Apparently, an internal analysis at this competitor had put the cost of executing the entire cycle of seasonal preparation in the millions, and this aroused enough interest so that all the sales processes were reconsidered and, ultimately, reengineered into a continuous, rather than a cyclical, process of bringing product to market.
As your sales director reports these developments, she is concerned but not panicked. She notes that most of the business has indeed shifted to major accounts, which are sold monthly rather than seasonally anyway. For those accounts, at least, the impact of eliminating seasons is minimal. But she believes, at least at first blush, that eliminating seasons will cause confusion with reps and independent accounts.
Your editorial director expresses mixed feelings about the desirability your publishing house making such a change. Apparently the catalytic event that provoked your staff to investigate your competitor’s practices and learn exactly what they were doing was a book deal you just lost even though you were the high bidder by a substantial amount. Your competitor got the book by promising to publish the completed manuscript in 90 days while your organization said it would take at least nine months.
Editors in your shop had been hearing about this new no-seasons publishing system from friends at the competitor’s, but always couched in complaints. What “no more seasonal sales conferences” meant to these editors when they first heard about it was “no more access to the sales force” for title presentations.
Editor-to-editor, when your folks heard about this, they felt there was little to react to. Sales, after all, was not their job. And why bring a bad idea from outside up for discussion? All that could come of that, it seemed to them, was no good.
But then there was the news this morning that you hadn’t gotten the book you counted on, the agent explaining why, the editor from the competitor explaining that their in-house procedures now permitted them to publish as fast as they could get a book made, with what they felt was very little marketing downside. And although it was true that the competitor’s editor was not going to present this title to the old-style sales force gathering, there seemed to be very little concern about that, or at least it isn’t detectable through their gloating about taking the book away from you with their new lean and fast procedures.
This has become a proposition you must investigate and, at least, consider.
And this is what you might find out by doing a little more investigating about what your competitor is doing, how they’re doing it, and what made it happen.
Turns out somebody suddenly considered the implications of the fact that more than 75% of the business was being done through ten major accounts which were controlled from the home office. The portion the field sales reps were really responsible for was down to 20%, and sliding. None of the ten biggest accounts seemed to make much use of the seasonal catalog information which drove the sales conferences and what seemed like interminable rounds of meetings to prepare for the conferences and catalogs. And more and more, they found that the customized sales materials prepared for the major accounts were so much better and more up-to-date than catalogs that the field reps wanted to use them, even though circulating them to accounts visited over a span of months was very inefficient.
So your competitor got some consultants in to help them look at the situation and they did a really rigorous cost-benefit analysis. They started by asking this question: what is the point of the whole sales conference and seasonal list exercise?
They decided it was this: preparing themselves to get the advances they wanted from the book trade for their new titles. The consultants’ process had them contemplate a lot of other purported sales conference objectives, like using the conferences to figure out how to sell more backlist or to build a better team atmosphere. They ultimately admitted that they never used the sales conference much for backlist, anyway. And they decided the spirit building and company camaraderie benefits of the meeting did not justify the expense.
So the entire process got reengineered. Instead of two lists a year of 200 titles each, they are publishing a dozen or more lists a year of 25-35 titles each. A list gets a desktopped catalog, a little less elaborate than what was done before, usually of 8 pages. It turned out that even the discipline of a monthly list was constraining to the product flow; it made more sense to roll out titles as they were ready to go to market. Trying to achieve a monthly timing discipline threatened to introduce many of the same organizational problems that seasonal lists had presented.
The major accounts continue to demand their customized treatment, but the major account reps report that the new more frequent mini-catalogs are actually more useful than the old seasonal ones were. In fact, ring binders to hold the new mini-catalogs as they came out became very popular items among the buyers as soon as they were offered.
A simple system quickly evolved to serve the independent stores the reps called on: they just got presented everything the rep had in hand that he hadn’t presented previously, which was almost always more than one list.
On the marketing side, publicity outlets adjusted with varying degrees of instant cheerfulness to the new scheme of things, but of course all the extra conversation with these important connections raised the house’s profile. And it seems to be turning out that the more frequent catalogs, with digestible numbers of titles, is actually more effective than the old seasonal materials were in these channels.
It became evident very quickly that some books required the old-style lead times. Sometimes that led to a book being “listed” with a distant pub date compared to the companion titles on the same list. Sometimes the strategy was to hold off listing them until more of the behind-the-scenes marketing efforts, like book club sales or a first serial placement, had borne fruit.
Adjustment to the new system was not painless. Almost every rep needed help rethinking their coverage routes. It was evident quickly that it was necessary to take advantage of the shorter sales calls enabled by the new system to make more presentations each week. That in turn enabled additional swings through the territory, but required some real differentiation in how areas close to home were covered compared to areas farther away. It also led to more frequent visits to stores that were clustered with other stores as opposed to those geographically separate from all other competition.
Occasionally under this system, reps found themselves presenting to some accounts a title or two that had shipped last week, or even last month. That caused somewhat less unease than it might have because the examination of their old processes had already made it clear that this had always happened at the end of seasonal swings anyhow.
Part of the increased frequency of account visiting was enabled by the elimination of the sales conferences themselves. Although two-hour phone sessions became common to bring reps up to speed when a new list was issued, with that occurring once a month or more, whole weeks have been added to the selling calendar when Conferences, including planning and recovery, would have taken place.
Of course, the process of preparing each title to go to market continues, and it still requires a lot of meetings among editors, marketers, and sales people to get jackets, ad plans, the pitches for catalog copy, title info sheets, and to the retailers coordinated and honed. But the flexibility afforded by seasonless publishing apparently instilled a whole new sense of rationality into the process. No longer did a book have to wait months after it was ready to be brought to market and, just as important, no longer did missing a catalog deadline mean delaying a book for months.
Continuous experimentation with the techniques for introducing product to the sales force employed every conceivable tool: among them were telephone calls, conference and otherwise; the World Wide Web, and videotapes and audiotapes of editors. Teams of marketers and sales staff that once worked for hours preparing elaborate sales conference presentations redeployed themselves in different configurations to take information straight to the reps. A system to analyze from orders how successfully each rep was selling each book was apparently indispensable to help management target who know needed help with what.
Didn’t this all have to happen? How much longer can our industry employ product-to-market processes invented to cope with the travel and communication realities of 50 or 100 years ago?
The product-to-market processes could change in other ways as well. Here’s something else that could be waiting for you when you get back to the office.
This scenario also involves competitive news from your sales manager, but this time it is even more directly sales-oriented. Your top competitor has apparently installed a new system to manage inventory for bookstore and wholesaler customers though EDI without help from sales representatives. The first report you get suggests that the field sales force is being maintained to provide service and to do merchandising at the store level, but the reps seem to have nothing do with the orders anymore.
Your team had heard about this competitor’s program before, but hadn’t paid it too much attention. First of all, since your competitor offers a lower discount under this program than they had on their own published discount schedules, your folks were sure at first that they would fail in their attempt to sell it. Only when your reps started to feel the competitive heat and had retailers telling them how successful the program was did they go back to read the fine print about how the program worked.
Apparently some young mathematics-minded assistant had come into their sales department and was appalled by the level of returns of unsold books, which were not so different from yours. He was inspired to do a little arithmetic, and taught his managers a few key things.
First of all, it turns out that a bookstore’s profits are far more affected by turnover than by the margin yielded by discount. Seems like everybody knew that instinctively, but this young fellow managed to make the extent of it clear. It turns out that a store makes the additional profit on ONE extra turn of inventory that it would take SEVEN POINTS of additional discount to provide.
And then this young assistant showed how easy it was to drive up the turnover by managing the inventory flow on the bestsellers; giving the store 25 copies and 3 or 5 a week in response to actual sales was so much more profitable, for the store, than getting 150 in an initial order. Even if they sold the 150!
And, of course, metering the books in that way meant that the returns of 50 or 80 on the 150 never happened because there were never more than a dozen unsold copies in the store!
Your competitor had grown comfortable with a returns rate of around 25%, similar to yours. Their young math analyst had demonstrated that nearly 90% of their total returns were coming from the most heavily advanced new publications. With the new system, those have been cut so dramatically that the overall returns rate is nearly down to 10%.
After all the analysis and planning, your competitor got this new process in motion by making a deal to experiment with a few branches of a couple of their major national accounts and also a few enlightened independents. The offer was simple and straightforward: the publisher would manage its own inventory and restrict itself to the same inventory levels and guarantee the same discounts the stores had gotten before.
That made the challenge very simple. If the inventory levels and discounts were the same, the publisher would prove results by delivering higher sales.
The one concession the publisher offered as an enticement was to pay the freight for any returns. Another store extracted the concession that the average number of titles represented in inventory would not go down from what it had been under store control.
This return freight concession was suggested by the young mathematician himself, who was confident that returns would drop to levels that would make this offer very inexpensive. The number of titles concession was endorsed by him because he knew that the more frequent replenishment the publisher would offer would assure a wider title base. On both counts, he was right.
The program began with reports of sales at the store coming to the publisher by EDI. From the sales data, which the publisher could capture and react to as often as daily, he then writes his own orders up to the value of books that have been sold. In the beginning, the only way to create more shelf space than the budgetary allotment was to create returns.
It took a little discussion, but not much, for the publisher and the stores to agree on a more sophisticated scorecard. The stores were impressed to learn that a publisher could demonstrate the importance to a bookstore’s economics of the gross margin per inventory dollar invested. This is the multiplied result of margin times turnover. With a little digging through both of their files, they were able to agree on a target number for average gross margin: what they agreed it had been last year. Then they agreed that the new system had to improve what had transpired with the account doing the buying or the experiment would be called off.
It turned out beating the target of store performance was never difficult. When the publisher added some tools to employ regression analysis to the sales data before they calculated the next order to be placed, it became child’s play.
And those experiments led to the offer your sales staff became aware of. Your competitor streamlined their offering to say they’d manage the inventory through EDI for terms of 40% discount. What made that discount initially acceptable to their customers, although it was somewhat lower than the 43% stores had gotten in the past, was that the publisher would pay freight both ways. So the 40% discount, to the store, was a net figure without unpredictable deductions.
So your competitor is benefiting from lower sales costs, faster response to the market, higher margins, and vanishing returns.
I mean, you can’t beat it. When your competitor gets a major newsbreak on a book, they push additional copies right into the market. And they know what’s in the supply chain all the time.
Now, let’s relax for a moment and recall that this hasn’t actually happened yet. But, if it gets that far, the competitive advantage they’ve gained in the accounts in which you now fight for shelf space actually will become the least of your worries.
The hidden, but significant, barrier that prevents books from showing up in more locations is the requirement of a knowledgeable buyer. Books are hard for most merchants to handle. They have, historically, required specialists.
Any publisher that develops a real understanding of how books behave in the retail environment and automates systems to put the right books in place in response to sales data no longer NEEDS the buyer to deliver profitability to the retailer. And that can open outlets anywhere there is a critical mass of titles for any specialized audience and the potential to report sales through EDI.
But the surprise that is waiting for you could come from cyberspace.
It turns out that one of the editors that handles your line of gardening books started to poke around online last week to discover your chief competitor all over the Internet. So far you have discovered fifteen Web sites and a dozen mailing lists for niches of gardening interests and different levels of sophistication that seem to blend promotions for their books into information the market is seeking.
They’ve got sites for houseplants, vegetable gardens, bushes, hedges, and perennials. And they seem to be tied in to every greenhouse and seed purveyor site on the Net.
When you probe a little further, you find out that your competitor is now directly in touch with thousands of gardening book consumers by email, using lists they have been compiling for months as they built the extensive online presence your editor discovered in the past few days. They are enjoying the best of all worlds: selling copies direct at nearly full price while they drive many other potential customers to the stores, all with microscopic production and mailing costs.
And when you see a link to the biggest gardening book club on their site, it suddenly makes clear why your share of that club’s business has been going down. And when you see a home page for a photo source who used to be one of your most reliable suppliers until, recently, the relationship soured, that history begins to look a little bit different too. Seems like you’ve been missing a lot of opportunity for interaction with your market because the party has been on the Web, and you had no way to receive an invitation.
Of course, you have a gardening section within your company’s extensive Web site which has not been getting much attention or much traffic. A lot of money and effort was spent creating the Web site a few months ago; it tied up marketers and editors for some time figuring out which of the text and picture files to put up on the Web. Marketing the site and establishing links were the responsibility of the people managing the overall Web site. The subject-specific knowledge wasn’t really involved in the Web site creation. In fact, your gardening editors and marketers, particularly, indicated little interest in the Internet until Netscape was installed throughout your company’s email network.
That put your gardening editor on the Web which led to the discovery of your competitor’s efforts. And now it seems your gardening program has a lot of catching up to do.
I’m sure there are people in the room who see the three scenarios I’ve sketched out today as far-fetched; I have difficulty seeing them as anything other than inevitable. But before we conclude this morning, I want to have you consider two separate developments that present the biggest potential surprises of all, and which will change everything we do.
And, in this case, we know that that both are being prepared and a new future is coming at an accelerating rate of speed.
A little over a year ago, a bookseller from New England known to many of you named Ed Morrow, owner of the Northshire Bookstore and a past President of the American Booksellers Association, challenged me to think about what could replace the printed book. He had a notion he called the “personal book”. I call it a “book simulator”. We imagined hinged flat facing screens that would produce facing pages. Of course the screen would have to look as good as a printed page. And the book simulator would have to be lightweight.
We dreamed up a wish list for this gadget we imagined. Build in a dictionary. Permit the reader to change the type size. Make the simulators themselves in several different sizes, so you could have a little one to read on an airplane, a bigger one to read on the beach, a really big one for an art book.
Of course, the simulator would have to hold more than one book at a time; it would have to let the reader dog-ear pages and put post-it notes throughout the text. And of course you’d want the simulator to be able to pull in any book you wanted at any time from the Internet.
Let’s think about the economics of this for just a minute: no more printing, binding, returns, paper, out of stocks. The economics of the book simulator beat printed books in many ways.
Our conversation rapidly turned from thinking about “what if this technology is achievable?” to a discussion of what life will be like “when this technology is achieved”.
And when that day comes, the printed book becomes an item for the very rich or the very stubborn. The fully-articulated book simulator makes the book obsolete more quickly and far more thoroughly than the audio CD did the phonograph record. When the book simulator will arrive and be perfected become among the more important questions for us to ponder.
Just before the chat when he introduced this concept to me, Ed Morrow had discussed a version of the idea at an Association of American Publishers meeting where Alberto Vitale, CEO of Random House, had challenged him to predict when it would happen. When would these personal books, or book simulators, be developed and become the “norm” and make the printed book an elite item?
Ed said, and this was last year, 1995, when he said it: “2010.”
So we discussed what it would take to fulfill that prediction. This gadget must have a great screen. And the battery technology is critical too, and that has been the diciest aspect of the utility of notebook computers. And the heaviest. So, we agreed after an extensive conversation a year ago, 15 years more life for the printed book seemed a reasonable expectation.
Now, one year later, my company has a client in Silicon Valley called Virtual Press that plans to bring out a version of this idea in 1997. Prototypes may be in place at a major American university this September. That would leave about 14 years to perfect the gadget to meet the timetable Ed Morrow predicted a year ago. It didn’t take Walkmen or VCRs that long.
So we must recognize that we are now in a period of transition. The potential to shift away from printed books will be more obvious when publishers start selling enhanced electronic versions of current books on the Internet. As we will see in a moment, movement in that direction will accelerate in the next few months. The shift will get further impetus a year or two from now when the first book simulators hit the market.
And that is where matters stood when I made a version of this speech in London three weeks ago today, but it has leaped forward since then. The Sunday before last at the ABA, OverDrive Technology in Cleveland announced the Virtual Book Aisle. This could actually be the device that pushes us toward the Virtual Press solution, by beginning the process by which which downloads become a common way to move books, in whole or in part.
Here’s how the Virtual Book Aisle works. It’s a Web site, at which the consumer can both search for titles and within titles, because the full texts are on the site. If the searches indicate something the consumer wants to buy, whole books or sections of them are for sale as downloads.
The beauty of this for publishers is that for an increment of less than 10 percent of their typesetting cost they can have an electronic book for any title for sale on the Internet. No packaging or inventory investment is necessary, although the option still exists to use the same master to create a shrink-wrapped product.
OverDrive accepted our advice to extend the benefits of the Virtual Book Aisle to booksellers as well. So bookstores with a Web site can build a link to the Virtual site, which permits OverDrive to pay a bounty to the store that referred the customer.
The many stores that heard about this at ABA were, of course, delighted. It was the first description of a download-selling future, which many accept is coming, that didn’t cut them out of the action. And perhaps many of them also see what we believe will be the most important immediate impact of the Virtual Book Aisle: generating sales of the books that customers find provide “hits” on their searches. Those sales, of course, are being bumped back to the referring stores themselves for those customers who want to buy the books online.
Publishers are likely to find that inserting the OverDrive codes is a useful practice to standardize, partly because an author could so easily do it without them. It would be cheapest and most efficient to put in the OverDrive codes in as part of the typesetting process and it would be best to have a publisher’s editorial staff help an author shape the initial electronic product. But it only requires a modest investment to insert the codes to the author’s word processing file, and making the editorial decisions for the electronic book is well within the capabilities of any author.
There are two other very powerful attractions to publishers of what OverDrive and the Virtual Book Aisle offer. Publication in this way provides an exploitation of the electronic rights and serves to keep the book perpetually available. It is a tool that could permit many publishers to protect rights, even under existing contracts, that would otherwise be in jeopardy.
How well will downloads sell? What books will sell them best? Will the public respond to the ability to buy bits of books? And will that stimulate sales of the complete books, in any form, or cannibalize them? Should the retail price of the electronic book be the same as the printed book? Should the publisher offer the electronic book at a discount to customers who buy the printed book? What happens to the concept of new editions in this world where one can effortlessly add an author’s postscript in response to a review or any other later development? How useful will exposure in the Virtual Book Aisle prove to be to influence sales of printed books at the bookstore on the corner?
We start getting answers to these questions very soon. The Virtual Book Aisle will open in the next 30 days with books from a variety of publishers, including Warner, McGraw-Hill, Simon & Schuster, HarperCollins, Little Brown, Prentice Hall, and John Wiley among the initial offerings.
The personal reader or book simulator is coming from Virtual Press sooner than Ed Morrow or I had ever thought possible. Other people are only a bit behind them: the MIT MediaLab has been working on this idea for a long time and is, according to Business Week, mere months from a prototype. With the Virtual Book Aisle, we’ll start learning very soon how succesfully well-crafted downloads for current and popular titles sell for use in PCs. OverDrive has constructed a model where the electronic book flows easily from the process of making the book and the customer flows logically from his existing retailer. This will in turn give the Virtual Press device an opportunity to come into a market that will perceive the need for it, as people who buy downloads and spend any time reading on today’s computer will surely do.
And though it may take the full 15 years, 14 now, that Ed Morrow predicted to get to the point that a printed book is an elite item, what has occurred since the prediction was made, even since the 1st of June, make it seem much more conservative than it was a year ago when he made it.
But the important thing, and we all need to absorb this surprise and get over it, is that book simulators and “no more paper” is where we’re going. It is the surprise that technology and utility make inevitable, and it is far along its earliest stages of preparation. Of course, knowing the end of this story in no way spoils the adventure of getting there; it just makes you smarter about making the choices that come up while the end is still many years in the future. And you can be sure that knowing the end won’t eliminate surprises either.