Organizational Outputs -- Nadler-Tushman Congruence Model Company

Organizational Outputs -- Nadler-Tushman Congruence Model

Company Summary: Nutrisystem, Inc.

A supplier of weight management products and services, Nutrisystem was founded in 1972 and has headquarters in Horsham, Pennsylvania. Nutrisystem customers reside primarily in North America, but pre-packages products are sold through the Internet, by telephone, on QVC television shopping network. The company manufactures four specific weight management programs, including: Nutrisystem Women, Nutrisystem Men, Nutrisystem Select, Nutrisystem D. program which is a low glycemic program for people with type 2 diabetes; Nutrisystem Silver; Nutrisystem Flex which is a 28-day program; and Nutrisystem J. Diet, which is a 14-day program that is sold in Japan. In addition to the pre-packaged food programs, the company offers online tools and counseling to support weight management.

Company Outputs: Nutrisystem Inc.

The company's value proposition is: Well-positioned brand in a large addressable market with a proven and effective weight loss system.

Organizational outputs. Nutrisystem employs an e-commerce business model, and has multiple revenue streams. Nutrisystem refers to the key indicators of their sales performance in these terms: New customer starts [subscriptions to the weight management programs; reactivation [renewed weight management subscriptions]; and length of stay [the company monitors customer satisfaction].

The company categorizes sales by direct channel and QVC distribution. For the years 2010, 2009, and 2008, direct channel sales represented 96%, 94%, and 93% of the revenue. Direct channel net sales were $490.8 million in 2010, down from $495.4 million in 2009, and $639.0 million in 2008. The decline in sales revenue in 2010 is attributed to a drop in reactivations of the weight management product lines, but it was partially offset by an increase in retail sales revenue. Revenue is generated not only from customer starts and reactivation of former customers, but also through customer order behavior, which includes the length of time customers stay on a program and the diet programs customers select and order.

QVC distribution of pre-packaged food resulted in 4% of the revenue in 2010, 6% of the revenue in 2009, and 6% of the revenue in 2008. QVC viewers purchase Nutrisystem products directly from QVC -- the infomercials do not direct viewers to the company's Website. Pricing is comparable for both the QVC distribution and the direct channel sales. Net sales of Nutrisystem products through QVC were $18.1 million in 2010, $28.5 million in 2009, and $41.6 million in 2008. The decrease in QVC sales is attributed to a reduced number of shows and less quality air time.

Stock dividend yield is currently about 4% -5%.

Divisional / group outputs.

The company abandoned its interests in ZeroWater in 2009, incurring an equity and impairment loss of $4.0 million and realizing a reduction in income tax payments of $5 million in 2009 for the entire $14.3 million tax base of the investment in ZeroWater. The company planned to sell the NuKitchen operations as it was no longer aligned with the core business, but a buyer could not be found. Consequently, the business was closed in September 30, 2010, and was treated as a discontinued business. Accordingly, the operating results were presented separately from the continuing operations for 2010. NuKitchen had revenues of $719 and pre-tax losses of $157 for the three months ended March 31, 2010.

The company's product offerings were expanded to include fresh-frozen foods which are shipped separately from the shelf-stable foods, and are a separate revenue stream. The addition of the NutriSystem D. is a relatively new program, as are the retail channel marketing and sales activities.

Individual outputs. Recent corporate awards include America's 200 Best Small Companies, Forbes 2009 and 2008, and 100 Fastest Growing Companies, Fortune 2008. Employees consider the commission per sale rate to be fair, but they also consider the health insurance to be expensive and there is very little time off -- it is not granted according to the employee agreements. Employees in sales and mid-management complain that training is of poor quality and insufficient, and that supervisors frequently do not have management experience. Call center staff appear to be the most disgruntled. Turnover rate of telephone sales and counseling staff is 4% to 5%.

The key individual outputs are classified primarily by the functional divisions: Sales, marketing, and administrative. Sales performance is the simplest to measure of the individual outputs; commissions are granted based on gross sales and increases in sales volume quarter over quarter. Sales revenue is divided into three categories: (a) New customer revenue is all revenue that falls within a quarter from customers joining and subscribing to a weight management plan during that quarter -- new customers are the main driver of revenue growth; (b) on-program revenue, as it is termed, is all the revenue from customers who joined and subscribed to a weight management plan in previous quarters yet are still within the first nine months of the subscription program for which they originally signed up; (c) reactivation revenue is all the revenue from customers for whom more than nine months have passed since their initial purchase of weight management products.

Marketing and advertising are a large portion of the cost of doing business. The e-commerce direct-to-consumer business model gives the company a measure of flexibility which permits them to adjust marketing spend according to customer demand. The instability of current economic conditions have certainly put this to the test. The company has worked extensively with marketing and advertising to "improve lifetime customer economics, length of stay, and overall customer satisfaction. This effort can be seen in the continuous redesign of the e-commerce Website and platform.

The company is being investigated for potential claims against the Board of Directors concerning possible breaches of fiduciary duty and other violations of law related to the compensation package for its CEO and other corporate executives -- expressly, the approval and awarding of excessive compensation to company executives. The firm carrying out the investigation is Ryan & Maniskas, LLP, a national shareholder litigation firm that protects the interests of institutional and individual investors in shareholder action in the courts.

Organizational Outputs Interaction

The interaction of the outputs at Nutrisystem Inc. from the three different levels of the organization, interact to generate medium performance of the overall organization. The company has not diversified beyond its core business of producing weight management products. The services provided to customers can barely be called that: Telephone counseling is poorly disguised product sales. Many customers have complained online about the poor quality of the pre-packaged food products.

The company has hired five well-qualified chefs to help upgrade the appeal, taste, and offerings of the food. This is a strong product and marketing move, but well overdue. The company should be able to increase product appeal to all of its target markets this way, just as airlines were able to improve the quality and appeal of their food -- once they began to sell it, rather than give it away with the purchase of a flight.