Business Environment of Reed Elsevier

The following report details the findings of our research carried out on the business environment of Reed Elsevier PLC. We have incorporated strategy analysis tools such as SWOT, Porters 5 Forces Framework and Financial Analysis to aid us in analyzing all the relevant internal and external factors that play important roles in shaping Reed Elsevier’s business environment.

1.1 Introduction

Reed Elsevier is a leading provider of professional research information to organizations around the world. It publishes journals, books and databases and manages exhibitions and events. Its well-known titles such as New Scientist and The Lancet – appear both in print and online. Reed Elsevier has a worldwide customer base working in many fields, including science, research and the law, as well as in public and academic libraries and commercial organizations. This includes around 11 million scientists who access information direct from Reed Elsevier’s ScienceDirect database, which is the world’s largest online library of full-text research papers.

Reed Elsevier was formed in 1993 when the businesses of the British Publisher Reed International and the Dutch publisher Elsevier NV merged. The company now operates in more than 200 locations worldwide with annual revenues for 2010 being £6 billon. To enable the business to focus on specific customer needs, the company has five divisions. They are Elsevier, LexisNexis Risk Solutions, LexisNexis Legal & Professional, Reed Exhibitions and Reed Business Information.

1.1.1 Elsevier

Elsevier is the world’s leading provider of scientific and medical information and serves scientists, health professionals and students worldwide. It annually produces over 200,000 new research articles in over 1,100 journals every year, with ScienceDirect, its flagship electronic solution accessed by over 11 million users. Elsevier’s contribution to the total revenue of Reed Elsevier for the year 2010 amounts to 34% while it is accountable for 46% of the group’s total operating profit as shown in the pie charts below.

1.1.2 LexisNexis Risk Solutions

LexisNexis Risk Solutions provides data and analytics to enable its customers to evaluate and manage risks associated with transactions and improve performance. It is also a leading provider of work flow solutions that combine proprietary, public and third party information, analytics and advanced technology. These solutions assist customers in evaluation, predicting and managing risk and improving operational effectiveness, predominantly in the US. Its contribution to total revenue is 15% while it accounts for 23% of the groups operating profit during the last financial year.

1.1.3 LexisNexis Legal & Professional

This division is charged with providing content and information solutions for the legal and other corporate markets with a customer base in over 100 countries. LexisNexis Legal & Professional provides resources and services that inform decisions and increase productivity within organizations. For the year ended 31 December 2010, this division contributed 28% towards the group’s revenue while its contribution towards operating profit was 15%.

1.1.4 Reed Exhibitions

Reed exhibitions contributed 11% and 10% towards group revenue and operating profit respectively during the year 2010 and was responsible for the staging of over 460 events in 36 countries which brought together over seven million active participants worldwide in 2010.

1.1.5 Reed Business Information

Reed Business Information provides business information, online data and marketing solutions. Through industry critical data services, lead generation tools, over 200 community and job sites and more than 200 premier business magazines, Reed Business Information provides valued information to professionals and an effective channel for advertisers. It was responsible for 12% of group revenue in 2010 and 6% of the groups operating profit.

1.1.6 Reed Elsevier’s Revenue and Operating Profit Break-up

Given below is the break-up of the revenue and operating profit for the most recent completed period.

(Source: Reed Elsevier Annual Report 2010)

2.0 SWOT Analysis

2.1 Strengths

Large Multi-national Presence

Reed Elsevier is a well-known very large organization with operations in many countries with a significant market share in all the markets that it operates in. Its enviable position can be sustained by increasing demand for its professional information services. Their ability to deliver authoritative content with the highest quality through their market leading brands have created a strong identity for themselves among their consumers.

Stable Revenue Streams

A significant amount of top line revenue is generated by Elsevier which relies on revenue from subscriptions from its large consumer base. This recurring revenue stream along with the stable revenue streams generated by the other divisions place Reed Elsevier in good stead in terms of large revenues year after year as evident in the revenue growth throughout the years.

Operational Efficiency

Reed Elsevier’s focus on operational efficiency throughout the years have enabled it to maintain a healthy operating margin as well as permit the investment funding of new products. Its quality in profits is always underpinned by a very strong cash inflow generation.

Effective Recruitment

Reed Elsevier ensures that the most talented personnel are recruited into the organization which has been evident over the years with the group’s ability to continually meet and exceed customer expectations.

2.2 Weaknesses

Customer Acceptance of Products

Reed Elsevier’s business is always dependent on its continued acceptance by its customers for the products and services and put the value for them on the acceptance of its products. Therefore it is very important Reed Elsevier remains a dynamic organization that can meet the increasingly varied needs of its diverse customer base.

Supply chain dependency

The organizational and operational structure of Reed Elsevier have increased the groups dependency on outsourced and off-shore functions. If there is a failure of a third party responsible for certain important activities then it could have an adverse impact on the performance and reputation of Reed Elsevier as an entity.

Data Security

The business maintains its databases and its online information including its personal information, which could be adversely affected if there is a breach in the security or if there is at any given time a lack of compliance with the regulatory requirements with regard to the protection of sensitive private data.

Acquisitions

The business often requires reshaping and strengthening of the portfolio. If Reed Elsevier is unable to generate the benefits associated with take-overs and acquisitions within and acceptable period of time such as revenue growth and increased market share, these acquisitions could adversely affect the company’s financial condition and its reputation.

2.3 Opportunities

Environmental content

There is an increase in demand for environmental information and Reed Elsevier could capitalize on this further as it is a rising business area. According to the company reports, they have produced 74 % more papers related to the environment in 2009 compared to 2005.

Cost Saving

Reed and Elsevier have set targets with regard to their energy saving and efficiency. This could help the company in their cost saving. Reducing costs will enable the company to increase spending on its research and development as well as improve their bottom line which is in a recovery phase after the effects of the 2008 recession.

Reed Exhibitions

Reed Exhibition being a strong market leader in the events organizing industry serving many key industries such as energy sector, oil and gas etc have the potential to take over and acquire other companies much easier due to its relative size and strong financial position.

Job Opportunities

Reed Elsevier almost always have jobs to offer to a diverse age group with varied skills. This sets them apart from other potential employers and creates a good image for job seekers and in turn will help the company attract the best of the industry.

2.4 Threats

Climate change regulation and green tax

In some countries, Reed Elsevier expects their tax payments to increase. They are now being charged for carbon emissions in addition to other environmental related tax charges. They expect their first payment to materialize in 2012 and this could pose a reputational risk to the group as a whole.

Paper Production

As a mainly office based company, Reed Elsevier use a lot of paper and they operate in countries with strict paper laws. If there is an instance of the company using paper produced from illegal pulp, they stand the risk of violating the law and incurring fines and other negative financial costs.

Open access publications

Reed Elsevier has set relatively high prices for its journals and services. As a result, certain members of the scientific community have now stopped using Elsevier Journals which could prove to be a major problem in the coming years unless Elsevier takes constructive steps to adjust the pricing accordingly. The Public Library of Science is one such example of an open access publication.

3.0 Porters Five Forces Framework

The Threat of Rivalry

Reed Elsevier as an entity operates in a highly competitive market. Each of its divisions operate in markets where there are many competitors who may be of the same size or even bigger. As a result, the group has to constantly innovate and stay a step ahead of the rest. Taken into consideration the revenues reported for the past few years, it is evident that so far the group as a whole has been retaining its consumer base and each of the five divisions have been able to compete effectively in their respective markets.

The Threat of New Entry

The threat of new entrants varies for each of the five divisions but the respective divisions of Reed Elsevier will not be hugely affected by new entrants as they are fairly large organizations themselves. Their revenues place them in the top of the bracket in their respective markets and hence new entrants cannot compete at such a grand scale to pose too much of a threat to each of the divisions.

The Threat of Substitutes

The threat of substitutes will cause some concern to Reed Elsevier. As mentioned earlier, open access publications are threatening to eat into the revenues of Elsevier. Consumers of the respective industries that Reed Elsevier operates in will have choices open to them and it can be safe to assume that switching costs will not play a big role in dissuading consumers from switching to rivals. None of the divisions of Reed Elsevier enjoy monopoly status in their respective industries.

Buyer Power

Reed Elsevier caters to a wide variety of consumers and also operates in competitive markets. Consumers include private citizens to multi-national organizations and even encompass governments and government institutions. Due to the presence of these highly influential group of consumers, Reed Elsevier’s consumers do to a certain extent have the ability to exercise significant power on the group.

Supplier Power

Supplier power can be assumed to be not as powerful as buyer power. The range of suppliers is rather diverse however certain suppliers possess unique characteristics and will not be easily replaceable. But taking an overall view, Reed Elsevier’s size means that it can to a certain extent exercise greater power and control over its suppliers.

4.0 Financial Analysis

4.1 Revenue and Operating Profit

According to the published statements of the group, Reed Elsevier’s combined revenue has witnessed a steady increase through the years 2006 up till 2009 with a very marginal dip witnessed in 2010. The CEO of Reed Elsevier PLC, Erik Engstrom reasoned the marginal dip to the fact that their ‘portfolio was reshaped through disposal and closure, most notably in Reed Business Information’ and as a result there was no improvement on year on year turnover level. He further mentioned in his statement on the group annual report for 2010 that underlying growth saw an increase of 2% which reflected on the progress made during the year and stabilization of cyclical markets. However it is noteworthy to mention that despite a global economic recession which gripped the entire business world in 2008, Reed Elsevier posted top line revenue growth of 12% mainly due to professional information revenues ‘holding up really well’ as stated in the annual report of 2009. However operating profit felt the impact of the recession with a decline of 12.6% year on year which was due to a steep decline in customer marketing budgets.

Operating Profits have been mostly flat from the year 2006 up till 2008 with a rather notable decrease in 2009 as mentioned in the above paragraph. The year 2010 shows signs of a recovery with only a slight drop of 1%. This was attributed to increased spending on product development and sales & marketing particularly in the legal and professional business which was funded largely by cost actions across the businesses as mentioned in the annual report of 2010. A graphical illustration of the revenue and operating profit levels from the year 2005 till 2010 is provided below.

(Source: Company Annual Reports)

4.2 Profit Before Tax

As seen in the graph below, the PBT of Reed Elsevier has seen some marked fluctuations over the years 2006 up until 2010. There is an increase of 76.7% in the year on year comparison between 2009 and 2010 which reflects positively on the group’s efforts to return operations back to solid ground after the effects of the global recession which had resulted in a drop of 29.5% from 2008 to 2009.

(Source: Company Annual Reports)

4.3 Net Profit

The fluctuations in net profit achieved by Reed Elsevier are depicted below with a marked decline from 2007 to 2008 of 60% and an encouraging increase of 64.1% from 2009 to 2010.

4.4 Return on Capital Employed

The following graph depicts the ROCE of Reed Elsevier for the years 2006 till 2010. No drastic fluctuations have been noted. It is a cause for concern that the ROCE of 2010 shows only a 1.9% increase over the previous year’s relatively low figure of 10.4%

(Source: Company Annual Reports)

4.5 Earnings Per Share

The EPS of Reed Elsevier has witnessed a steady appreciation over the years 2006 till 2009 with a slight decline in 2010.

4.6 Brief Summary of Financial Data

The following is a summary of the important financial data used above summarized into a table form