Free Strategic Management Essay: IMAX
Harberber and Rieple (2008) define strategy as a set of intentional or inadvertent set of actions through which an organization develops the required set of resources, efficiently target valuable customers, meet financial targets and competes effectively.These strategic decisions drive the long-term direction of the organization, the scope of its activities, help gain advantage over competitors, and address changes in the business environment.
The case of IMAX begins in 1994 when business partners Gelfond and Wechsler decided to purchase the organisation from its original owners and take the company public.
IMAX operates in a people oriented business, operating within the entertainment industry. Through the years the owners have made strategic efforts in the direction of reaching new audiences. These efforts, in addition to IMAX’s external environment, will be analysed and explored in the sections that follow. The result of this analysis will be the comparison of the firm’s strategy with the identified industry survival and success factors, in a bid to ascertain the relevant factors that would drive future growth.
2.IMAX’s business environment
A number of theorists, notably Michael Porter (1979) have developed several frameworks for understanding and analysing the effect that an organization’s external environment could have on its competitiveness and profitability. These frameworks identify the following as notable forces: Threat of new entrants; Threat of substitutes; Bargaining power of suppliers; Bargaining power of buyers; and Intensity of rivals. This model has updated by Haberber and Rieple (2008) to include Complementary forces, identifying industries that indirectly affect one another.
Applying these 6 forces to IMAX, it becomes evident that the greatest threat to new entrants is the high capital investment and technical know how required to enter into the equipment distribution, production and distribution industry. Also, with respect to distribution channels, IMAX has been able to establish partnerships with cinemas globally (Firn and Alpeyev, 2010; MarketWatch, 2010) to showcase its films. In addition IMAX has either partly or fully owns (e.g. David Keighley Productions) companies specialising in the pre and post-production aspects of its business. However, the proliferation of cheaper digital film production and 3D equipment technology may significantly reduce that threat in coming years.
In relation to substitutes to IMAX, the analysis focuses on possible alternatives such as: DVD’s, pay-per-view, video on demand, theme parks, sporting events, and other alternatives to movies. MPAA (2009) reveals that in 2009 theme parks were observed to be the largest substitute threat to the movie industry. The buyer propensity for such substitutes is said to be moderate in the fact that IMAX films are generally one-of-a-kind and cannot be easily reproduced, also the lower prices of movies have been considered as a major reason why it would always outsell theme parks and sporting events (Bangkok Post, 2010) IMAX’s in house equipment manufacturing, long term relationship with suppliers, use of firm owned technological resources, and number of patents, significantly reduces the bargaining power of suppliers.
With the advent of the recession and the volatile financial environment, customers are becoming increasingly sensitive to price changes. IMAX is not immune to this change. IMAX’s product differentiation allows it to be one of, if not the only, supplier of its particular products. However, the vertical integration practised by the industry’s major buyers, are gradually increasing their buyer power. IMAX’s major customers are developing their own large format and 3D technology (Georgiades, 2010), which may pose a significant threat to the future of IMAX if they decide to stop relying on its technology. It would also increase their bargaining power if they intend to renegotiate their existing contracts on the basis that they can now provide competitive quality on their large format and in house 3D formats.
The largest threat however is the nature of competitive rivalry. Movie production studios are releasing more movies in 3D format, which could pose a threat to IMAX’s inhouse collection of large format 3D documentaries (Georgiades, 2010a). Its buyers are vertically integrating to build their own large format screens, and it is possible for them to start selling it to competitors (Pacher, 2009). The success rate of movies in the market also makes it increasingly difficult to turn a significant profit on every movie featured in IMAX screens.
However, the industry is experiencing growth. Though it is increasingly becoming mature in US/Canada, Worldwide box office revenue has increased steadily in recent years (as seen in figure 1). Growth was experienced in all regions of the world, especially Asia Pacific and Latin America (MPAA, 2009). According to Georgiades (2010), the recent growth of the movie industry has been driven by the introduction of new technology, particularly large format screens and 3D, through which viewers can have a new immersive movie experience.
Figure 1: Worldwide Box Office ($ Billion). Source: MPAA (2009)
Pachner (2009) stated that the movie industry was increasingly becoming matured and declining, as a number of cinema attendants would prefer to wait for DVD releases, however this has changed with 3D technology. The recent success of the movie Avatar is a testament to the increased demand for new technologies such as CGI and 3D (Firn and Alpeyev, 2010). 3D viewings have also increased considerably within the past few years and now constitute 11% of total domestic box office within the US and Canada, thereby illustrating the explosive growth the industry is facing (MarketWatch, 2010)
Haberberg and Rieple (2008) in their description of the Industry Life Cycle model, state that an organization experiencing growth is usually tasked with potentially increasing competition, profitability, need to differentiate its products and market awareness. These are increasingly becoming evident in IMAX with reference to competitors, buyers and moviegoers.
Following the analysis of the business environment in which IMAX operates the following key factors for success have been identified:
1.Competitive advantage through product differentiation and specialisation (one-of-a-kind product)
2.Market leader through strategic alliances
3.Technological prowess (new technologies, patents, etc.)
4.Value as an educational resource
3.Analysis of IMAX’s strategy
The most recognised resource of IMAX is its intellectual capital associated with the company’s technological superiority and patents. The technology used to shoot and produce an IMAX film is highly sophisticated and technical. Much of the technology used has been developed in-house and IMAX is seen as an expert in such advancements.Gelfond, in a statement regarding vertical integration by buyers explicitly boasts “It took a hundred million dollars in R&D to build the Imax brand and create the Imax experience… I think putting an ‘X’ in a name and building a big screen doesn’t recreate the Imax experience” (Georgiades, 2010)
IMAX’s core competencies also exist in its external and internal linkages with its suppliers and distributors. Good relationships exist between sales and procurement that lead to enhanced capabilities in new product development. IMAX’s is able to benefit heavily from its relationships with companies such as AMC and Regal. The company’s specialised capabilities in technology can also be seen as a core competency. According to Johnson et al (2008), sustainable competitive advantage is achieved by developing durable strategic capabilities that provide advantage over time.
IMAX’s major competencies, being the relevant and industry leading proprietary technology in large format screening, digital conversation and 3D screening are valuable and rare, and equally non substitutable. However, they can be imitated. Technological improvements have made it possible for theatre chains to install their own large format screens. It has also made it possible for producers and distributors with low cost to produce and edit movies. Though IMAX may claim to have built a brand and acquired patents over the years, consumers can easily opt to watch competitor’s formats for cheaper prices. These competitors would be happy to install this technology, as they are also not bound to revenue sharing agreements, thereby posing a reasonable threat (Georgiades, 2010).
The company’s foray into 3D technology, and conversion of Hollywood movies into large 3D format has severely eroded its previous niche market and focus differentiation generic strategy. Its increasing focus to retrofit theatres with relevant technology, instead of concentrating on its predominant edutainment strategy, could be an opportunity and a threat. This new found broad based product differentiation strategy (Ormanidhi and Stringa, 2009) would attract a new segment of moviegoers as seen in figure 2, but in the process it may lose its following of school children and edutainment focused individuals that have come to associate its brand with large format educating documentaries. By adopting this strategy, IMAX may also lose out on the new wave of educating and entertaining documentaries that parents are likely to invest in for their children’s intelligence. Joanna Pachner (2009) also argues that IMAX risks losing its brand image by changing its positioning and segmentation strategy.
Figure 2: Moviegoer demographic in US/Canada. Source: MPAA (2009)
However, a brief overview at its financial figures illustrate that IMAX has returned to profitability after 3 – 4 years of accrued losses, huge debts and negative cash flow balances. The company has also reduced its total liabilities from $325 million in 2008 to $202 million in 2009. Gross profit margin increased by 10 percentage points to 46.54%, while net profit margin was 3% from a negative in the past 2 years Over 40% of its revenue ($80 million plus) was derived from revenue sharing agreements and digital remastering services offered to theatres and studios (IMAX, 2009). These figures are testament to the effectiveness of its new product differentiation generic strategy, broad based segmentation of premium seeking moviegoers and re-positioning as an intermediate company that provider’s premium viewing experiences. Adopting both strategies, with a defined diversification, may result in the company being “stuck in the middle”, which according to Ormanidhi and Stringa (2008) would be counterproductive.
Figure 3: IMAX Revenue and Net Profit. Source: IMAX (2009)
4.Combining both factors
The analysis of the business environment, and that of IMAX’s core competencies and segmentation strategy illustrates that the company has found a niche for itself in an otherwise very competitive industry, and is increasingly leveraging its reputation, technical know how and intellectual capacity to take advantage of the growing demand for its products and services. Its resources are valuable, rare and cannot be substituted easily; therefore it has an advantage through product differentiation and specialisation. It has a widely known reputation for providing premium viewing and its large format 3D screens are sought after, it has acquired patents and invested in research over the years, thereby accumulated the required technological prowess to outshine competitors. The increasing number of cinemas it has built recently gives it a market leading position in strategic alliances, whilst its declining, yet substantial range of edutainment documentaries, still positions it as an educational resource.
However, increasing competition, technological proliferation and imitable resources pose the most significant threat to its sustainability within the industry. Its present value chain (Haberberg and Rieple, 2008) however poses as a significant advantage for IMAX. The company’s staff is knowledgeable and well trained about products, suppliers are controlled and have lower bargaining power, whilst financing, may be an issue of the past as the company gradually becomes profitable again and reduces debt. Its 3D technology is exactly what consumers want, these products are supplied individually worldwide, the existing brand, reputation and consumer acceptance of the product are great marketers, whilst the company has a effective after sales service, keeping systems running 99.9% of the time. These value chain factors make it possible for IMAX to pursue its product differentiation strategy at a low cost, and achieve widespread recognition and profitability.
In today’s competitive environment it is important for companies to identify their fit in an industry and capitalise on its competitive advantages. IMAX’s current resources are strategically positioned to achieve the key industrial success factors. It has been able to establish itself as a distinctive brand within the movie and entertainment industry. Through the strategies identified, it is suggested that IMAX can increase and grow its brand for many years to come, albeit with a recognition of threats to the company and its industry.
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