IMAXs Strategy - Case Study Example

? IMAX Case Analysis [Teacher [Insert Table of Contents IMAX 3 Introduction 3 About IMAX 3 Industry Map (Film Industry Value Chain) 5 Analysis of Environment: 7 Competitive Stance 10 Recommendations 11 IMAX Introduction The following write-up attempts to analyze the corporate strategy of IMAX in the context of its growth opportunities, competitive advantage and challenges, based upon the case study IMAX: LARGER THAN LIFE. The report will throw light on IMAX’s strategy and its fit with its business environment, products/services offering and the sustainability of its current strategic path. In order to study competitive and growth strategy of IMAX, an industry map analysis will be conducted, followed by competitive stance for IMAX in its core segments within the industry map. Finally, recommendations would be provided based on studying the above-mentioned parameters for IMAX. About IMAX Brought in 1994 by Richard Gelfond and Bradley Wechsler, IMAX Corporation is a large film format production and distributing public company. As of Dec. 2008, the market capitalization value of IMAX was $125 million. Products and Services Offered: IMAX both products and services in the niche large film format industry. 1. IMAX produced photography equipments and technology for large film format such as IMAX films, IMAX projection system, 3D cameras and projectors and digital cameras. 2. Production of movies that were specific to the IMAX large film format such as documentaries of natural and science wonders, conversion of Hollywood movies to IMAX format. 3. Distribution and Ownership rights of IMAX produced films in theatres. The products and services offered by IMAX are highly different than others due to its state-of-art technologies used in producing large film format that provides bigger screens and a better 3D experience. Markets Served: Initially, IMAX products were focused primarily on educational and adventure institutional markets such as museums, aquariums, theme parks etc. Since late 1990s, IMAX has been expanding to more mainstream entertainment markets showing Hollywood or 3D large film format entertainment movies. What makes these markets attractive is high spending power, disposable income, high interest in 3D (school children) and education based entertainment (parents) and high customer loyalties (ability to pay a premium price for a good visual experience). A surge in 3D screens has dramatically boosted the market shares for 3D titles in major European markets like the U.K. (where 3D pictures took 24% of the total B.O.) and Russia (20% of the total B.O.), France (16% of admissions) and Germany (17% of admissions) (Meza 2011). Primary Customers: IMAX key customers were young children and adults within the age groups of 12-24 years and 25-39 years old. Most of the customers came from an affluent background hence could afford the premium pricing of IMAX. Challenges for IMAX: There were a number of challenges that the management of IMAX faced going forward: 1. Reduction of gross margins by 12% from 2004 to 2007 indicating management inefficiencies and high operating costs (Forbes 2008). 2. Consistently declining sales and decrease in market cap value indicating losing revenues and lack of trust by investors. 3. High amounts of debt due to heavy asset nature of the business. 4. Niche market leading to limited audience and lower scope of growth than mainstream films such as Hollywood. Going forward the strategy for IMAX is to expand beyond its institutional environment and open IMAX theatres within multiplexes and to launch Hollywood films in IMAX format. Industry Map (Film Industry Value Chain) In order to fully understand IMAX’s strategy and recommendations for growth, we would the overall Industry map and value chain. The above diagram shows a simple version of the Film industry value chain. In the above ecosystem, IMAX is involved in Production, Exhibition and Distribution of films (specifically large film formats) and engaging in R&D and projection system supplies for theatres. Competition is very intense in production, exhibition and distribution of movies. Big studios such as Disney/Pixar, MGM, Regal Entertainment, Lions Gate, Carmike, Columbia Pictures and Warner Brothers. Most of the big studios have consolidated their value chains (US Dept. of Labor 2011). In order to fully comprehend the competitive advantage that IMAX possesses, it is important to answer three critical questions about the industry – 1. Are there any significant barriers to entry in this business? 2. Are there any cost advantages that IMAX can generate in this business? and 3. Does IMAX have any captive customers? Competitive Advantages of IMAX Barriers to Entry and Exit: Barriers to entry are high in the US theater industry, unless the new player targets a niche market that (which IMAX is serving) has not been welt served. Barriers to exit are high for theater chains because the design of multiplex cinemas does not tend itself easily to inexpensive conversion for other forms of business (Demers 2001). Cost Advantages: To increase demand, the IMAX Corporation developed a technology that allows standard 35 mm movies to be digitally converted into the giant IMAX 15/70 format (called DMR or Digital ReMastering technology) at a modest incremental cost. Conversion of a 35 mm live-action film into the IMAX format costs roughly $2-$3 million, that is much less than the earlier movie production budget of $100+ million (Silver & McDonnell 2007) hence lowering the switching costs. Captive Customers: Screens in IMAX theaters are as large as eight stories tall and one hundred or more feet wide. The IMAX system offers movie theaters the opportunity, at an affordable level of investment, to transform movies into events with guaranteed WOW impact when shown in IMAX format. This creates a sustainable competitive advantage by clearly differentiating the cinema from in-home product substitutes such as large screen television formats, with an in-theater experience that simply cannot be replicated as home entertainment. Analysis of Environment: The following factors describe the overall macro environment of IMAX and how it influences its strategy: PESTEL Analysis Political Factors: Political factors such as censorship to ban violence, sex and vulgar language in movies affect films production and distribution companies as it can provide barriers to project such films. Economical Factors: Economy in general has a profound effect on IMAX overall business environment. Firstly, the audiences are more price-sensitive in their spending during recession and hence affecting the revenues of filmmakers. There is also threat of losing market share to cheaper substitutes such as DVDs, home videos and cable. Secondly, since it is a capital-intensive industry, with heavy investments in production, R&D, marketing etc. macroeconomic factors are even more important for IMAX like companies. Sales of theatre admissions dropped by 20% in the first quarter of 2010 due to financial crisis of 2008 (Guardian UK 2011). Social Factors: Social factors such as holiday seasons and (un) employment affect sales of IMAX and other movies. Movie distributors tend to release their biggest hits in the beginning of the summer and during the Christmas holidays (Einav 2007). Technological Factors: Technology plays a big role in forming the right environment for IMAX since it is the backbone of its product and service differentiation. Not only does cutting edge technologies provide IMAX with a different product i.e. large film format and 3D projection systems but it is also a driver of operating costs for IMAX (Wall Street Journal 2006). Environmental Factors: Environmental factors have a limited direct impact on film production and distribution ecosystem. Legal Factors: Legal factors such as copyrights issues, piracy and royalties affect the sales of this business. If IMAX has to grow through producing Hollywood movies, they would have to share their revenues with the original producers of the movies (O'Brien 2008). The major U.S motion picture studios lost $6.1 billion in 2005 to piracy worldwide with 80% of those losses occurring outside US (MPA 2008). The Key success factors in this industry are investment capital, marketing and promotional strategies, film entertainment product (movie) and visual experience. Industry Life Cycle Movie & Video Production Industry is declining at an annualized rate of 1.4% during the five years to 2011, compared to annualized GDP growth of 0.9% (IBISWorld 2011). US are facing market saturation (3D) and steady consumer demand is occurring despite dips in discretionary spending. The use of digital technology is leading to lower production costs and the expansion of certain film genres. The key success factors of IMAX industry are Capital Investment or Funding, Technological advances, Movie quality and consumer spending. Competitive Stance This section discusses the competition for IMAX in different business segments. Porter’s Five Forces Barriers to Entry: The industry has high barriers to entry due to high capital investments required to produce a blockbuster movie, very high marketing budgets (30-50% cost of production and distribution of movies), relationships with distributors and theatres and generating economies of scale with mass production and distribution. Competition Rivalry: IMAX faces low competition in its core segment i.e. of large film formats (adventure and documentaries) the only competition being Iwerks that deals in simulation rides. However, in the production and distribution of Hollywood movies segment, IMAX would face tough resistance from big studios that would release the movies in normal format in regular theatres (New York Times 2008). IMAX lacks the “star power” that mainstream studios such as Columbia Pictures etc. have that can pull crowds to cinema halls. Bargaining Power of Suppliers: Suppliers for IMAX are vendors who sell them elements of projector and camera systems. Due to long term relationships and lack of competitors in large film format, the bargaining power of suppliers is low. Bargaining Power of Customers is high since the customers (viewers) can switch between regular view, 3D view or home theatre easily. Threat of Substitutes: IMAX has high threat of substitutes in the form of DVDs, pay-per-view, video-on-demand, cable, 3D home theatre etc. that are cheaper for customers. Recommendations The case study on IMAX explains that IMAX is at the crossroads of strategic decision-making, whether it should venture into Hollywood movies or not. Upon analyzing the data given in the case and trends and figures provided by other secondary resources, I believe that it is a good move for IMAX to venture into Hollywood movie production and distribution on large file format or 3D projection system. Since IMAX possesses competitive advantages of high barriers to entry, cost advantages with the use of new technologies and economies of scale and captive customers, venturing into a much broader and exposed movie business would be a better idea than focusing on niche segments such as nature and adventure documentaries. Bibliography Demers, D 2001, 'Media Concentration in the United States ', Center for Global Media Studies , Washington State University , Pullman. Einav, L 2007, 'Seasonality in the U.S. Motion Picture Industry ', The RAND Journal of Economics, vol 38, no. 1, pp. 127-145. Forbes 2008, IMAX Picture Not Bright Enough Yet, viewed 16 July 2011, . Guardian UK 2011, Hollywood's hope for a 3D revolution shows signs of falling flat, viewed 16 July 2011, . IBISWorld 2011, 'A bigger screen: New innovations will renew consumer interest and expand production ', Industry Report, IBISWorld. New York Times 2008, Paramount Ready to End Movie Sales To Showtime, viewed 16 July 2011, . Meza, E 2011, '3D SHAKER: CONTINENTAL DRIFT', Variety, 27 June 2011, pp. 5-6. MPA 2008, The Cost of Movie Piracy, viewed 11 July 2011, . O'Brien, JM 2008, Legal Issues in Film Production , viewed 16 July 2011, . Silver, J & McDonnell, J 2007, 'Are movie theaters doomed? Do exhibitors see the big picture as theaters lose their competitive advantage? ', Business Horizons, vol 50, pp. 491-501. US Dept. of Labor 2011, Motion Picture and Video Industries, viewed 16 July 2011, . Wall Street Journal 2006, Digital Replicas May Change Face of Films, viewed 16 July 2011, . Read More