Analysis Of Imax Using Scp Model Management Essay
The rapidly changing PEST environment of business has become a daunting task for business managers who have to develop clear strategies of anticipating, managing and responding to this environmental dynamics. Business environment can be seen as all relevant physical and social factors outside an organization that are considered into decisions-making (Duncan 1972).
The importance of the external business environment therefore necessitated the evolvement of both qualitative and quantitative methods of coping with the external dynamics of the business since they affect decision-making in organizations.
This essay evaluates the effects of such dynamics on IMAX CORPORATION, and its strategic response to this trend.
Theoretical framework used in the case study
The analytical tools and techniques used in the case study are PEST analysis, SCP model and RBV model. These tools served as a guide to examine the external environment of IMAX both at the macro and industry level by given an insight into IMAX’s capabilities and innovation strategies.
Chapter 1.0 THE PEST FACTORS AFFECTING IMAX.
PEST analysis is one of the environmental scanning tools used in analysing the aggregate/sum total of all the environmental uncontrollable variables that affects the internal strategic choices of organization. Ward and Rivani (2005) stated that “PEST analysis assumes that specific external and internal circumstances that characterise the business environments are able to influence the organization capabilities and capacities to produce value”.
IMAX’S POLITICAL ENVIRONMENT.
The political environment of a business includes its legal, competition regulation, employment laws, international trade regulations, consumer protection and so on. IMAX operated in an environment that was legally favourable, supportive, protective and politically stable. Campbell (1997: p 315) stated that “The actions and policies of political institutions have a profound effect on the way in which businesses operates”. He further stated that “All businesses must act within legal and regulatory conditions which are set by the state in which the business is located”.
Notably IMAX invested 5% of its revenue totalling $12.6 million on R&D. 50 out of its 318 staff participated in this program.(Annual report 2007). This massive investment paid off as IMAX was able to develop new products and processes that re-shaped the industry. IMAX used the legal framework (patents) to its advantage in order to protect its intellectual property (e.g. 3D cameras, polarised glasses, large format films etc) and still has 7 still pending in court though it already own 46 patents. (Annual report 2007)
US film industry lost more than $3 billion annually to piracy according to Motion Picture Association of Association of America, but to combat this trend; the US congress offered copyright protection through Copyright Act of 1976 that was later amended in 1982. Violations of this act tantamount to felony and were subject to federal criminal charges (McBride and Orwall 2004: p.B1).
From the above explanation, it’s clear that the political environment in which a firm operates goes a long way to determine its long term survival.
IMAX’S ECONOMIC ENVIRONMENT.
The economic environment of every business comprises of sub elements like economic growth, monetary and fiscal policies, inflation and exchange rates etc.
The average household income of IMAX audience of whom majority are between the ages of 19 and 65 are $70000 with 33% of that group earning more than $100000. When this is compared to the overall theatre admissions for 2007 and the age group that watched IMAX movie, this translates to 38% of all theatre admissions. “IMAX needed to figure out a way to attract this demographic”. (Valenti 2002)
Economic instability as a result of the over building of capacities by theatre owners over the years had a great impact on IMAX operations. IMAX had earlier formed alliances with AMC, Cinemax and Regal entertainments by providing them multiplexes for their theatres. Due to this, IMAX incurred a debt of $200 million which affected the theatre industry in the late 90’s. (Olijnyk 2002, pp. 46-48)
Consequently IMAX had financial problems because its debtors could not meet their financial obligations. This unforeseen action made IMAX to cut $14million in overhead and layoff 200 employees and but back $90million of its debt. Exhibit 4, 5, and 6 provided in the case study proved that “debt became a great burden for IMAX” and it had to layoff staffs in other to cope with its present challenges. IMAX’s debt was downgraded Ba2 to B2 by Moody’s because of default by its customers.
Due to the interdependence of firms within an industry, an economic crisis will inherently have ripple effect on the whole industry. (e.g. 2008 bank crises)
IMAX’S SOCIAL-CULTURAL ENVIRONMENT
The socio-cultural environment of business contains sub elements like demography, labour/social groups, lifestyle, education, beliefs etc. Porter (1980) noted “Societal expectations reflect the impact on the company of such things as government policy, social concerns, evolving mores, and many others; these four factors must be considered before a business can develop a realistic and implementable set of goals and policies.”
IMAX stopped the screening of one of its movies, Volcanoes of the Deep Sea in response to protest from some religious groups about the level of immorality and violence in the film. These socio-cultural and religious groups also lobbied political actions to regulate the industry by reducing the levels of violence, sex, and vulgar language found in popular media. (Dean 2005).
McClelland (1961) concluded that culture has an effect on business practices because people have different cultures, morals, values and ethical beliefs which Organizations as corporate citizens must respect in carrying out their business. This brings the concept of business ethics which according to De George (1987) is the interaction of ethics and business.
The demographic factor which is a sub of the lager socio-cultural environment also created a good opportunity for IMAX to expand its market share. The case revealed that, more than 20% of IMAX audience were school groups, 70% were between 19 years and 65 years this when compared to the data by the MPAA which reported ages 12-24 constitute 38% of theatre admissions, 25 years to 29 years represents 29% of the admission. The above data creates a potential market base for IMAX to expand its viewing audience. (Valenti. 2002)
Similarly the lifestyle of people is another social-cultural element that affects businesses, according to Valenti (2002), he observed that 50% of DVD viewers and almost 38% of VCR users were frequent movie goers and he concluded that “people who love movies are eager to watch them again in different environments”
The power wielded by trade union activities such as the Screen Artists Guild which evolved as a result of common interest (informal groups) of workers in the industry had a great effect on the industry in 2008 when they went on strike to negotiate wages.
IMAX’S TECHNOLOGICAL ENVIRONMENT
IMAX developed technologies that affected the structure of the industry and revolutionise the way films were being viewed. Technology is defined as “the sum of knowledge of the means and method of producing goods and services” (Bannock et al 2003). Similarly, Palmer and Hartley (2002) stated that “The business environment is at present moving through a dynamic and turbulent phase driven by technological change, globalization and increasingly competitive markets”.
IMAX was a niche leader in the deployment of new and innovative technologies which ultimately affected the industry, but the speed of technology transfer was high in the environment as developments of cheaper high definition camcorders, and proliferation of distribution cable channels and internets also created opportunities for new firm to enter the industry as they became formidable substitutes.
The potentials for piracy also increased in the industry just as technology increased, this necessitated the MPAA to seek legal protection (copyrights) to the effect of this trend on the industry.
Government granted IMAX funding for its R&D through the Ontario Technology Fund thereby indicating government support for the industry, this action suggests that the technological environment where IMAX operates was one of its driving forces for new ways of doing things. (Annual report 2007)
Conclusively, the technological environment of a firm through factors like rates of technological obsolesce, speed of technological transfer, new discoveries and development etc. has direct impact (either positive or negatively) on a firm’s strategic choice.
Analysis of IMAX using SCP Model.
Having examined the macro environment using PEST analysis, it’s imperative to analyse the immediate environment of IMAX in order to determine the level of attractiveness of the industry using SCP model. The level of attractiveness of an industry is highly dependent on the structure and the strategic behaviour (conduct) of the firms operating therein.
Cook (1995) viewed industry attractiveness as the presence or absence of threats exhibited by each of the industry forces”. He concluded that “The greater the threat posed by an industry force, the less attractive the industry becomes.”
STRUCTURE OF THE FILM INDUSTRY.
The total revenue for the film industry in 2009, 2008 and 2007 was $10.6b, $9.63b and $9.67b respectively while IMAX total revenue for the year 2007 was $112.27m comprising of $59.12m from IMAX system sales, $36.57 m from films and $16.58 million. The firms in this industry are few, highly interdependent, specialized and with high capital requirements thereby making the market strong oligopoly.
IMAX competitors’ were Disney/Pixar, MGM, IWERKS and Regal Entertainment while the dominant firms in the industry are players like 20th Century Fox, Paramount Pictures and Warner Bros. The table below shows the market share and total revenue for 3 leading firms relative to IMAX:
NAME OF COMPANIES
TOTAL REVENUE $m (2009)
TOTAL REVENUE $m (2008)
TOTAL REVENUE $m (2007)
MARKET
SHARE
2009
(%)
MARKET SHARE
2008
(%)
MARKET SHARE
2007
(%)
PARAMOUNT PICTURES
1467
15770
14993
13.9
16.4
15.5
20TH CENTURY
1394
1014
1017
13.1
10.5
27.1
WARNER BROS
18225
17673
1417
19.8
18.4
14.7
IMAX
171
102
115
1.6
1.1
1.2
(Annual reports 2007-2009)
A 3 firm concentration ratio shows that 20th Century Fox, Warner Bros, and Paramount Pictures has concentration ratios of 46.9%, 45.3%, and 40.7% in 2009, 2008 and 2007 respectively. This shows the market dominance of this key players who are also engaged in mergers and alliances. All these factors increase the barriers to entry.
(See Appendix 1 for the calculation)
CONDUCT OF IMAX IN THE INDUSTRY
Porter (1980) stated that “Firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge,”
IMAX engaged both non pricing and pricing competitive strategies in response to the nature of the film industry (Oligopoly). Through non pricing strategies IMAX formed strategic alliances (Vertical integration: i.e. backward and forward) with AMC and Regal Cinemas to screen its films through its own MPX technology while other firms like Columbia Pictures became part of SONY, Warner Bros became a subsidiary of Time Warner, Iwerks merged with SimEx and Pixar/Miramax became part of Disney.
IMAX’s post production and distribution rights were done by firm either fully owned or partially owned by it, their staffs are also engaged in installation, training and maintenance.
Cook (1995) noted “All of these factors combined will affect your ability to compete,” furthermore he stated that “They will impact your ability to use your supplier relationship to establish competitive advantages with your customers.”
The massive investment by IMAX in R&D in 2007 enhanced their competitiveness and industry relevance through horizontal and vertical differentiation of their products and processes. These differentiation strategies created unique prices for IMAX films in the industry because it created new value for customers and new customer groups. Regal theatres (IMAX alliance) now charged $2.50-$5.00 more than their regular feature admission for IMAX films IMAX a price maker. (Puley, 2003)
The wall street journal (2000) and Institutional report (2002) reported that it now cost $22,500 to $ 45,000 to convert traditional films into IMAX format. Similarly, Marquadt (2002) added that it now cost $175,000 to retrofit a multiplex and another $500,000 to install the IMAX system. These reductions in cost (cost efficiency) of converting traditional movies to IMAX formats, was as a result of IMAX’s investment in R&D.
In conclusion, Duetsh (2002) stated that a “A firm can also posses strategic advantage if it can enhance its market share and long run profitability”
IMAX’S PERFORMANCE IN THE INDUSTRY.
The total revenue for the Film industry in 2009, 2008 and 2007 was $10.61b, $9.63b and $9.67b respectively while IMAX total revenue for same period was $171.21m, $102.72m and $111.66 respectively. IMAX’s total revenue increased alongside its market share from $115.65m in 2007 to $171.21 in 2009 as a result of the premium prices charged for IMAX movies. IMAX was able to command premium price as a result of the differentiation strategy it adopted. Its theatres also increased from 351 in 2008 to 430 in 2009 because rising demands for IMAX’s theatres by AMC studios and Regal Theatres.
IMAX’s Gross Profit Margin for 2007 was $41.16m which further reduced to $37.46m in 2008, while its earnings per share was $-0.67 and $-0.79 for the same period respectively. This is traceable to the effect of the global crises of 2007/2008. Being a luxury service, people had to cut that on going to theatre as a result of less disposable income.
IMAX made a loss of $16.85m in 2006 which increased to $26.94m in 2009, although it increased its R&D spending from $3.62m in 2006 to $5.79m in 2009. This investment paid off in 2009 has IMAX made a profit of $50.21m and was able to positively affect its earning per shares. (EPS)
In 2009 there was a significant increase in IMAX’s Gross profit margin to $89.66m from 2008 margin of $37.46m while its earnings per share was $-0.09. This was because of the increase in the number of movie goers and a gradual recovery from the global crises.
2.0 Analysis of IMAX’s current strategy using RBV
Barney (1991) stated that “Resources include assets, capabilities, processes, attributes, knowledge and know-how that are possessed by a firm, and that can be used to formulate and implement competitive strategies.” Similarly Morgan, J.T. and Meso, P. (1999) noted that resources can be a strategic asset if it is valuable (i.e. if it allows the firm to capitalize the opportunities in the market or to hinder competitive threats), if it is imperfectly imitable (i .e. if it can be sustained for long periods of time without competitors duplicating or acquiring it), if it is non-substitutable (i.e. if there are no strategic equivalents) and if the resource is rare (i.e. if it is owned by a very small number of firms in the industry).
Morgan. J. T and Meso.P (2008) stated that “Strategic asset as defined by the resource based view is one that is simultaneously valuable, rare, imperfectly imitable, and non-substitutable.” Michalisin (1999) suggested that strategic assets allow firms to exploit technology in ways other firms can’t.
Drawing from the above, IMAX’s resources are identified as tangible, intangible and human resources. [See table 1]
TANGIBLE
Financial, large format films, theatres, 3D cameras, 3D projectors, Dmx Film Converter, Electronic glasses.
INTANGIBLE
Patents, , brand, technology, copyrights, Goodwill
PEOPLE
Skilled workforce, After sales service officers, maintenance and training staff, Chief Executive Officer.
[Table 1: IMAX’s Identified Resources]
A resource in itself does not confer competitive advantage on organization unless combined and “mixed” in a way that builds capabilities/competences, similarly Hollensen (1988, p149) identified 2 sources of competitive advantage as resources and capabilities. In line with this, a functional classification of IMAX’s capabilities stemming from its resources is identified below:
IDENTIFYING ORGANIZATION CAPABALITIES: A FUNTIONAL CLASSIFICATION
FUNCTION
CAPABILITIES/COMPETENCES
CORPORATE MANAGEMENT
Strategic mission and objectives, Vertical/Horizontal integration, Strategic Planning, Patents, Brand Image, Initial Public Offering…….
RESEARCH AND DEVELOPMENT.
New product development, Efficiency, Process Innovation, Differentiation, Distortion free Sound ………….
SALES, MARKETING AND DISTRIBUTION
Distribution and Post production done by its own subsidiaries, opening of new theatres in Canada, china ………
DESIGN
Design of new products, Capacity Building……..
[Table Adapted from Grant 2010]
IMAX’S DIFFRENTAITON AND INNOVATION APPROACH.
Considering the capabilities of IMAX above, the European Commission proposed in its 1995 Green Paper on Innovation that “Innovation is the renewal and enlargement of the range of products and services and the associated markets; the establishment of new methods of production, supply and distribution; the introduction of changes in management, work organisation, and the working conditions and skills of the workforce.”
IMAX CORPORATION carved out a niche for itself in the film industry through continuous innovation and differentiation of its products and services by making them an integral part of the film industry.
Similarly (Schumpeter, 1975) opined that innovation is fundamental to continued business survival and in the early 30’s he defined five types of Innovation; (see OECD 1997, p 28)
1. Introduction of new products or a qualitative change in an existing product.
2. Development of new sources of supply for raw materials or other inputs
LEVELS
DIMENSIONS OF INNOVATION STRATEGIES ADOPTED BY IMAX CORPORATION
RADICAL
PRODUCT
PROCESS
STRATEGY
3D Cameras,3D Projection Systems,3DPolarised Glasses
Cheaper cost of retrofitting.
MPX Technology for converting traditional theatres to IMAX format, 3D Directional Sound Technology,
IMAX ‘s strategic innovation led to a shift in its overall business model by expanding them to testing new markets, creating new customer value and new customer groups, Management teams take on an entrepreneurial feel as they try new game plans for building competition advantage. The long-term success of an organization depends on this type of innovation the most.
SUBSTANTIAL
Lightweight 3D Cameras, Large format films.
IMAX projectors used 15000watt bulbs. (Traditional projectors used less than 4000),
New way of viewing movies through polarised glasses.
INCREMENTAL
IMAX films
DMR Technology used in converting traditional 35mm films to large format.(e.g. Harry Porter, Antz ),
Cheaper cost of conversion of HOLLYWOOD films to IMAX films3. Process innovation new to an industry
4. Opening of new market.
Drawing from the plethoras of definitions above, IMAX Corporation’s innovative dimensions are described in table below:
[Source: http://www.slideshare.net/nusantara99/innovation-strategy]
Similarly, Porter (1980) identified three sources of a firm’s competitive advantage as cost leadership, differentiation and focus strategies though he further argued that “A differentiator cannot ignore its cost position, because its premium prices will be nullified by a markedly inferior cost position but should aim at cost parity or proximity relative to its competitors, by reducing cost in all areas that do not affect differentiation” (1985, p. 14).
IMAX differentiated its product and services (horizontally and vertically). Differentiation occurs when consumers perceived that a product differs from its competition on any physical or non-physical characteristics. (Duetsh 2002: p.37). A testament to this was the creation of light weight 3D cameras, IMAX films, Multiplexes, Large Format Films etc.
IMAX also focused on cost leadership by reducing its cost of making a movie, it chose not to feature HOLLYWOOD stars in its movies, reduced the cost of converting movies to IMAX format, established an enduring relationship with its suppliers and reduced the cost of retrofitting traditional theatres. Porter (1985, p.13) noted that “a cost leader must achieve parity or proximity in the bases of differentiation relative to its competitors to be an above average performer, even though it relies on cost leadership for its competitive advantage” (1985, p.13).
In conclusion Porter (1985, p.11) stated that “Cost advantage and differentiation in turn stem from industry structure”
RECOMMENDATIONS FOR IMAX
Teece et al (1997) suggested that for a firm to achieve and sustain its capabilities, it must possess dynamic capabilities which he defined as “The firm’s ability to integrate, build and reconfigure internal and external competences to address the rapidly changing environment”. (p.156)
Zollo and winter (2002) identified sources of firm dynamic capabilities as its process/product R&D, Integration, etc. IMAX’s capabilities lies in its human resources, R&D, and intellectual properties as mentioned, and should strive to enshrine it into its organization structure in order to enhance its functional and technological skills. (Hamel 1998; Roberts, 1998) as cited in Darroch. J and McNaughton (2002:210) viewed innovation as a necessary ingredient firms simply wanting to remain or competitive or pursue long term advantages. IMAX should keep investing in R&D in order to develop new products and processes which will completely differentiate IMAX from its competitors.
Finally IMAX should avoid strategic drift in carrying out the above recommendations. Johnson (1992) stated that strategic drift occurs when “…………..that is gradually, perhaps imperceptibly, the strategy of the organization will become less and less in line with the environment in which the organization operates”
For a sustenance of these capabilities, it is therefore recommended for IMAX to sustain and improve these capabilities by ensuring that they are non-imitable and rare, which Cook (1995) stated that “All of these factors combined will affect your ability to compete,”
CHALLENGES FACED IN THE APPLICATION OF TOOLS AND TECNIQUES USED.
RBV MODEL
Though the RBV model has made important contributions to knowledge in strategic management, it has 2 basic assumptions (1) resources are distributed heterogeneously across firms (2) productive resources cannot be transferred from one firm to the other without cost. Furthermore, Barney (1991 cited Priem and Butler, 2001) argued that rare resources and value are necessary but not enough to attain competitive advantage neither enough for sustenance of competitive advantage. (Priem and Butler, 2001)
“The resource-based view of the firm is an important, emerging theory of firm heterogeneity. It is well grounded in indus-trial economics and has benefited in its development from a multiplicity of contributions by management writers. But like any developing body of knowledge, it is not short of confusion, ambiguity and both conceptual and empirical difficulties”. (http://www.amsreview.org/articles/fahy10-1999.pdf)
SCP MODEL
While widely applied in strategy formulation research, the SCP model has key weaknesses that limit its application. This includes (1) wrong level of analysis (2) the use of static analysis, and (3) a reliance on barriers to entry as the determinant of profitability. These limitation can be costly (in predictable ways) for both researchers and practitioners. ( McWilliams. A: Smart. L, 1993)
DIFFERENTIATION
Porter (1980, 1985 cited in Datta, 2009) has written that the basic premise of porter’s generic strategy is cost leadership and differentiation. However Mintzsberg (1988 cited in Datta, 2009) argued that Porter’s low cost strategy is actually differentiation strategy based on low price.