EXTERNAL ENVIRONMENT-FIVE FORCES MODEL-INDUSTRY-“MOTION PICTURE PRODUCTION AND DISTRIBUTION”
THREAT OF NEW ENTRANTS – LOW
The development of new technologies as well as the proliferation of new distribution channels had created opportunities for new firms to enter the industry. However, entry into all aspects of the value chain simultaneously had been rare. Substantial capital investment and technical-know how was required to enter the industry. Moreover, existing companies benefit from brand image and economies of scale.
Piracy had created high barriers to entry. According to MPAA, the US film industry lost more than $3 billion annually. Due to this threat, new firms could not enter the industry quickly and intensify rivalry.
BUYER POWER – HIGH
Analysing the data that displays theatre revenues, existing theatre owners realized that ticket prices could not go up forever. Hence, they tried to generate revenue by screening more commercials before showing the feature film. Switching costs were low as the number of choices for buyers was high. If ticket prices kept on increasing, people would switch despite brand loyalty as there were too many firms within the industry.
The viewers were price sensitive and well educated, thereby increasing buyer power. As seen, concerns about violence and sex in movies had generated considerable efforts to organize and lobby political action to regulate the industry.
SUPPLIER POWER – MODERATE
The suppliers were concentrated compared to the buyers and products were undifferentiated leading to an increased supplier bargaining power. Some of these talents had formed unions to negotiate higher wages for their labour. The disruption of TV programming in 2008 was suggestive of the power such groups had on studios.
Although the top movie stars drew huge compensation, many others involved in the production, distribution and marketing of a film were neither well-known nor highly paid. Some firms had vertically integrated and some had discontinued operating in certain aspects of filmmaking, thereby lowering the supplier's bargaining power.
THREAT OF SUBSTITUTES – LOW
There were many alternative sources of entertainment for viewers such as live plays, sports events, TV programs, Internet etc. However, the average ticket price of movies was $6.88, the cheapest among all other substitutes.
Although, these substitutes may satisfy the same entertainment demand as those of theatre operations, the consumer switching costs were high. Thus, the substitutes did not pose a threat to the industry.
DEGREE OF RIVALRY – HIGH
The industry included firms such as Disney, MGM, Regal Entertainment, Lions Gate and Carmike. Media firms had sought to vertically integrate their operations by owning not only the production facilities but also distribution networks. Film production remained a risky business. Competition among movies within the same genre was so high that studios scheduled releases carefully to avoid direct competition.
The industry was currently in the maturity stage of the business lifecycle, the competition was on the rise and thus, differentiation strategy was required to generate profits. The industry was fragmented since no single company was leading the market share or influencing the industry's direction. High fixed costs, undifferentiated products and high exit barriers intensify the industry rivalry. (Wilkinson 2013)
According to A.Brandenburger and B.J.Nalebuff, DVD players needed film industry for supporting the hardware, and film organizations made films to be available on DVD format. (PRASAD 2015)
Hollywood movies had a short life span in the theatre circuit. People who usually bought DVDs had seen the movies in theatres already, therefore, the boom of secondary sources such as DVD sales and rentals were found to be a function of the movie's box office success. The complementors such as DVD recording, big-screen TVs, home theatre projection and sound systems were increasing. However, they were unlikely to vertically integrate to become direct competitors.
INTERNAL ENVIRONMENT-VRINE MODEL-INTANGIBLE RESOURCE-“FILM TECHNOLOGY HARDWARE”
Yes, it was the intangible valuable resource possessed by IMAX. The technology hardware was needed to project large format films to audiences, and helped the firm to meet market demand and protect the firm from market uncertainties. IMAX had obtained 46 patents for their technologies. They had also developed the skills, knowledge and capabilities to design and assemble the elements of its projector and camera systems, thus helping the firm to neutralise the threat of competitors and new entrants.
Yes, it was a rare resource as it was not widely possessed by most competitors and was costly and time-consuming to develop. IMAX films were printed on films that were 10 times larger than the 35 mm films that were used in traditional multiplexes. IMAX-designed projectors had special features: a higher shutter speed, rolling loop motion and vacuum to hold the film to the lens. These features of the IMAX projection system produced images that were brighter and sharper than those found in conventional movie theatres, thereby giving IMAX a temporary competitive advantage.
Yes, it was inimitable as the conversion to digital format required substantial upfront investment and technical knowledge. IMAX spent almost five percent of its sales revenue and about $12.6 million on R&D in the past three years. The MPX and DMR technology had been developed in-house, thus, it would be impossible for competitors to copy and the innovations could not be bought. Therefore, competitors could not acquire the technological resource quickly without facing a cost disadvantage.
Yes, it was non-substitutable as it was the only way for competitors to provide consumers with the large format film experience. Without developing that particular technology, they could not provide audiences with a similar experience. The competitors were not able to achieve the same benefit using any different combination of resources and capabilities.
Yes, the firm was organised to exploit the competitive potential of its resources and capabilities, and achieve high levels of performance consistently. They aimed to lower their operational costs of film production and distribution with the conversion to digital format and attract theatre chains to open new IMAX screens. The firm successfully developed 3D cameras and projection systems so that it could produce and distribute its movies in digital format, in order to exploit opportunities.
SUSTAINABLE COMPETITIVE ADVANTAGE
Sustainable competitive advantage cannot be created only by conducting business in high-opportunity and low threat environments, but by depending on unique resources and capabilities that a firm brings to competition in its environment. (Barney 1995)
Based on the VRINE analysis, IMAX's Film Technology Hardware offers sustainable competitive advantage. It helps the company embark on strategies that rivals cannot compete. This resource cannot be imitated or substituted, and thus, IMAX can achieve above normal profits for extended periods of time.
CURRENT STRATEGY DIAMOND OF IMAX
The organization was involved in 3 core areas; long-term theatre system lease and maintenance agreements, film production and distribution, and theatre operations. For the market segment, more than 20 percent of IMAX audiences were school groups. About 70 percent of IMAX viewers were between 19 and 65 years of age.
Regarding geographic areas, about 295 theatres showed IMAX movies in 40 countries, with almost 60 percent of the theatres in North America. Almost 50 percent of the theatres were located in museums, aquariums, zoos, and other institutions.
IMAX films were often produced by the firm or partially or fully financed by other parties. IMAX shared the ownership rights for a film, however, controlled the distribution rights.
By investing heavily in R&D, their strategy was supported by the development of two technological capabilities:
1. DMR for conversion of standard 35 mm film into large format, and
2. MPX for converting standard multiplexes to IMAX format systems.
IMAX had developed digital cameras and projectors that it planned to install in theatres starting in 2008 so that it could produce and distribute its movies in digital format. IMAX worked with MSM Design and developed a camera that weighed only 90 pounds, compared to the traditional IMAX 3D cameras that weighed 228 pounds. The sound systems were developed by Sonics Associates Inc., a subsidiary in which IMAX had 51 percent ownership.
To reach a wider audience, IMAX had engaged in alliances with commercial movie theatre owners. IMAX entered into partnerships with AMC and Regal Cinemas to screen IMAX films in multiplexes using its MPX technology.
IMAX films were printed on films that were 10 times larger than the 35mm films that were used in traditional multiplexes and were projected on screens that were 88 feet high and 120-feet-wide, or in domes that were 81 feet in diameter. IMAX projectors used 15,000-watt bulbs, whereas the regular 35mm projectors used 3,000-watts bulbs.
The firm differentiated itself not only by the production of large format films but also by its library of films and locations. IMAX films were often educational and entertaining and involved documentaries of natural and scientific wonders.
They also possessed a unique brand image by locating itself in prestigious venues such as the Smithsonian Institution, Liberty Science Centre etc.
Originated in 1967, the first IMAX film was premiered in 1970 at the Fuji Pavilion in Osaka, Japan. The IMAX movie library at the end of 2007 stood at 226 films.
Gelfond and Wechsler had bought IMAX along with Wasserstein Perella Partners from the original owners in 1994 for $80 million. The co-CEOs had the vision to target a new audience. Their mission was to expand their operations to incorporate commercial movies as well.
First, it had sought to expand beyond its institutional environment by opening IMAX theatres within multiplexes or converting existing multiplexes' screens to IMAX format. Second, it had launched Hollywood films in IMAX format.
The firm charged premium prices due to unmatchable services, and proprietary product features. Because of its larger size, printing, and distributing IMAX films were costlier. Strict quality control of components and end products had ensured an average service time of 99.9 percent. The projection systems were serviced every three months and the audio systems were serviced once a year.
IMAX is a well-known brand, and they didn't have to pay the same kind of talent that Hollywood had to pay. Also, IMAX had not marketed its films aggressively. The increasing number of Hollywood movies that were released in IMAX format allowed IMAX to ride on the coat-tails of marketing campaigns launched by the studios. The average revenue per IMAX theatre was $30,800, compared to the national average theatre revenues of $8,100, thereby proving the effectiveness of their strategy.
STRATEGIC RECOMMENDATIONS FOR IMAX
For product categories, IMAX should continue pursuing diversification strategy into profitable areas of theatre operations that is to expand into multiplexes with Hollywood movies, along with growing in Edutainment industry. If properly implemented, they will have access to powerful channels, receive outstanding revenues and defeat their rivals in the highly competitive industry. Lastly, by producing films, they can avoid the brand dilution associated with Hollywood films.
For the market segment, IMAX should attract the youth demographic. The 12-24-year-olds had the largest attendance for feature films in theatres in 2007 and represented 41 percent of frequent moviegoers.
Regarding the geographic areas, the firm should start exploring outside North America, such as Asia-Pacific region for expanding their global reach, as this region had the largest share of the global market.
IMAX should keep on making efforts to internally develop unique features and increase the quality of their film technology hardware and software. These developments will enable IMAX in providing audiences with an experience they cannot get within the home environment through DVDs, TV, or internet.
Moreover, IMAX should increase their scope of advertising to attract more audiences to theatres. By doing so, their R&D costs will also be used to full potential.
Although by forming such mergers and acquisitions with Disney/Pixar or Time-Warner, IMAX will benefit by an increased market share and be able to avoid bankruptcy, they will sacrifice the unique competitive advantage, specialized knowledge and brand image that they have sustained within the industry. Hence, IMAX should not sell itself to a larger studio.
The firm should continue to differentiate itself from the competitors by its size, style, and customization of large format films. By developing MPX and DMR technology, IMAX accumulated the required technological prowess to outshine competitors.
By increasing the number of Hollywood films, IMAX could positively impact their profits. IMAX should not lose its brand value as an educational resource. This will help them to remain competitive and make use of the Mozart Effect. Moreover, the educational documentaries were cheap to produce in comparison to Hollywood movies and had less vulgarity and violence.
IMAX should enter international markets with rational sequencing as they possess the resources and capabilities to do so. The fact that significant revenues for Hollywood movies came from outside the US, and movies from other regions were also finding an international audience, gives rise to new growth opportunities.
Internationalization of intangible assets leads to the untapped benefits of those assets being captured with actual FDI eventually, and usually the firm's reputation precedes its entry into a foreign market. (Lu & Beamish 2004)
In the short run, the firm can earn profits by exhibiting both Hollywood and Educational movies with sustainable competitive advantage.
In the long run, once the company acquires sufficient capital, they should reach outside the US and exhibit Hollywood films in IMAX format. They should also showcase movies from other regions in the US.
IMAX should continue charging premium prices due to proprietary product features and unmatchable services. IMAX needs to charge higher prices to recoup added costs of R&D, generate profit and gain market share.
The new revenue sharing agreements and digital format conversion were targeted for lowering IMAX's capital requirements and helping it pay off its debt. This will help them achieve low-cost advantages due to economies of scale. With premium prices and cost reductions, IMAX will be able to enjoy the best of both worlds.
IMAX will be able to achieve superior profitability; by charging higher average unit prices because of delivering greater value, and incurring lower average unit costs resulting from greater efficiency. (Porter 1996)
TESTING QUALITY OF THE STRATEGY-5 STEPS
Firstly, the company has found a niche for itself in a competitive industry. These strategic recommendations will help IMAX to exploit its technological resources and capabilities, and give an advantageous position by attaining cost efficiency relative to its competitors.
Secondly, the strategy fits industry condition as in the maturity stage, firms need to possess features that differentiate it from the competitors. IMAX is well aligned with the key success factors and is increasingly leveraging its reputation, technical knowledge and intellectual capacity.
Thirdly, the competitors cannot imitate the resource as capital, time and technical know-how is required to attain it. Differentiators are sustainable because IMAX has patented resources with a unique brand image.
Fourthly, all the elements of the strategy are aligned and consistent with the company's strategic position, and also with its values and mission of reaching out to newer audiences and maintaining their brand image by following differentiation strategy.
Lastly, IMAX possesses the proper implementation levers such as film technology hardware, software, and successful strategic alliances with commercial multiplexes for the company to increase profitability and market share.
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