Functional Strategies of the IMAX Organization - Case Study Example

1.0 Executive Summary IMAX considers itself as the pioneer and leader in the large format and digital format films. In the early stage of its growth, the company was focused on creating educational entertainment films and leasing theater systems in prestigious institutional venues. Now, the company has positioned itself further by expanding their presence through building IMAX theaters. They have partnered themselves with large theater chains in order to develop their market presence. Also, the company has tapped the Hollywood films by converting box-office movies into IMAX format. This paper aims to analyze the current situation of IMAX and present alternative solutions to their problems. The paper involves Porter’s five forces analysis of the movie production and distribution industry. The second part enumerates and evaluates the corporate strategies of the company which are focused differentiation and growth. It has been examined that the strategies employed by the company were effective in achieving their objectives. It is the recommendation of this paper that the company prepares itself to for acquisition. The company cannot survive on its own in the film industry as they face the issues on debt and sustainability. 2.0 Introduction IMAX is an entertainment technology company that generates revenues from long-term theater system lease and maintenance agreements, film production and distribution, and theater operations. It is involved the different processes of large-format film business. The company has a movie library of 226 films that were either produced by IMAX or other independent filmmakers or studios. The company has generated total revenues close to $116 million by 2007. At the end of 2008, the market capitalization is $125 million with 295 theaters showing IMAX movies in 40 countries. (IMAX Corp, 2008) An industry analysis is completed in Section 2.1 where Porter’s five forces were employed. The analysis covers competition between industry rivals in the Motion Picture and Video Distribution market segment where IMAX generates its revenues and profit. The threat of new entrants is also scrutinized for the industry. Furthermore, the bargaining powers of suppliers as well as consumers are studied with regards to its effect on the company. The threats of substitutes are investigated which are considered as alternative and indirect competition of the business. Section 2.2 attempts an internal and external analysis of IMAX which is patterned on the SWOT analysis. 2.1 Environment Analysis 2.1.1 Political The growth and success of the movie industry is the availability of films for the theaters. Third party production companies are usually the one who create the film and market it. However, the films industries in different countries are heavily regulated with their own media regulatory boards that critics the film and assign its viewing rate. Films that are inappropriate for public viewing, depending on the violence, sex and language, are sometimes banned or rated with warnings that would deter the public. (The Culture, Media and Sports Committee, 2009) 2.1.2 Economic The macro-economic environment of most markets all over the world remains negative, thus, the global economies are significantly under a lot of challenges. With this market atmosphere, the consumers tend to behave in cutting unnecessary costs and spend less on movies. The movie industry especially on large format films depends on box-office revenues. Commercial movie exhibitors and theaters generate revenues from consumer attendance at their theaters, which depends on the willingness of consumers to spend their income. (IMAX Corp, 2009) 2.1.3 Social The movie industry affects the people in terms of the theme that each movie portrays. Good movies sometimes inspire people. However, the way a movie is portrayed on screen and off screen could create a social stigma for the viewers and consumers. It is the responsibility of the movie industry to censor itself in order to create an appealing film for the viewers. (The Culture, Media and Sports Committee, 2009) Although the movie distribution and theater segments had no control on the type of movies that producers make, the revenues that they generate are dependent on the number of attendance. A lowly rated movie would create financial losses both for the producers and the exhibitors because of low attendance. 2.1.4 Technological Theater entertainment is very competitive in terms of technological innovations. The introduction of digital 3D projection technology has transitioned the motion picture industry from film projection to digital projection. Commercial theaters have recently introduced their own large-scale auditoriums. Furthermore, the home entertainment industry competes with theater industry with respect to the introduction of alternatives such as home video, pay-per-view, DVD and the Internet. (IMAX Corp, 2009) 2.1.5 Environmental The movie theaters require large spaces for their auditoriums. Large spaces would mean bigger land area with corresponding bigger parking spaces. Construction of movie theaters would somehow destroy environmental lands in order for their conversion. As more and more people become aware of the problems in the environment, land conversion would require greater approval from the society and more resources allocated for protecting the environment. (The Culture, Media and Sports Committee, 2009) 2.1.6 Legal The movie industry as well as the distribution segment depends on the intellectual proprietary knowledge especially on theater systems, digital and film technology. Most companies in the industry rely on a combination of copyright, trademark, patent, and other contractual provisions to protect its intellectual and proprietary rights. With the advent of the Internet and the proliferation of video piracy, the industry revenue may be affected badly and its competitiveness will be weakened. Furthermore, theater systems and other products of rival companies are patented, where the use is exclusive. Legal issues would arise when competition misappropriate a patented technology. (IMAX Corp, 2008) 2.2 Industry Analysis 2.2.1 Intensity of Industry Rivalry IMAX operates under the Motion Picture and Video Distribution market. Their competitors in the motion picture production and distribution include entertainment studios like Disney/Pixar, MGM, Lions Gate and Carmike; as well as theater chains like AMC and Regal Entertainment. The competition in the entertainment market is intense such that bigger corporations are acquiring smaller competition in order to diversify operations, exploit the market and expand their market share. More competitors in the industry cause lower differentiation between competitors which in turn create a large excess of industry capacity that would intensify competitive rivalry. The net effect of intense competition is lower profit potential. (Porter, 1980) Competition among movies is risky such that a small percentage of movies produced recovered its investment in theater releases. IMAX films that targets families and children competes with other films produced by Disney/Pixar. However, the only competition for large-format film segment is Iwerks which are involved in ride simulation packages and animation production. 2.2.2 Threat of New Entrants The large-format film industry is capital intensive on its services and products. As a new industry segment, it is research intensive on new developments and technologies. It is in this view that the potential threat for new entrants is low. The high costs of development and operation reduce the threats of new entrants. However, with the advent of new technologies, new competitors easily enter in the film industry especially in the mainstream format of 35mm films. The potential for new independent film producers would act as a direct constraint on the profit margin that IMAX can earn. (Porter, 1980) 2.2.3 Power of Substitutes The availability of substitutes is a major factor that can influence the customer’s willingness to pay a premium price for a product (Sadler, 2003). This means that the more substitute products are accessible to customers, the easier for them to switch. In the movie production and distribution, the customers of IMAX are the theater companies and the movie goers. However, as for movie goers, the availability of substitutes is high. The alternative sources of entertainment range from traditional theaters of 35mm format to DVDs, Internet, TV programs and even live plays or sport events. The onset of high definition big screen TVs and home theater systems presents as a big threat for IMAX and others in the film industry. In addition, the threats of piracy of films in the market are eating up revenues for the whole industry. 2.2.4 Bargaining Power of Buyers When customers can easily switch suppliers, there is a greater customer buying power (Sadler, 2003). As for theater companies, switching costs are high if they opt to change their theater formats. Existing theater companies that has partnered with IMAX converted their traditional theaters to IMAX format using MPX technology that the company has developed, installed and maintained in their multiplexes. These theaters are controlled by a long term lease which assures IMAX and theater owners with a long term alliance. Thus, the bargaining power of customers in the theater operation and distribution is low. As for the movie patrons, there is no switching cost because they are relatively free to choose their preferred movie formats. The availability of traditional film formats in different theaters and multiplexes provides greater choices and competitive pricing. The customers of IMAX are buyers who prefer the quality and experience that IMAX films offer. These buyers, who are considered part of the high income bracket, are only a small percentage of the market. The rest of the customers, especially 12-24 years old, watch feature films in traditional theaters. The opportunity loss in revenues is high because most buyers prefer other theaters. 2.2.5 Bargaining Power of Suppliers The major suppliers in the film industry are the people behind the production of films. This includes major movie stars, talents, writers, directors, producers and staffs. The establishment of trade unions gives rise to demands for higher wage for labor. When the union strikes, the industry is crippled. The power of these talents is high for an industry that is service oriented. 3.0 Corporate Strategy 3.1.1 Focused Differentiation Strategy The corporate strategy of IMAX is called differentiation focus. The company seeks to differentiate its product in the targeted segment of large format films. By optimizing the corporate strategy for the large format films, the company seeks to achieve a competitive advantage in the target segment even if it does not have a competitive advantage in the whole industry (Porter, 1985). As a result, the strategy employed created a brand image for IMAX that produced a loyal customer base. The resources and capabilities of IMAX are focused on achieving the differentiation strategy. The company’s resources include individual assets such as capital equipment, employee skills, patents and brand name. In order to further differentiate their products, the resources are utilized in developing new technologies geared toward large formats as well as digital formats such as digital re-mastering (DMR) technology, MPX technology, and 3D movies. The technological capabilities developed by the organization’s research and development team create a competitive advantage for the company against its competition. The core competency of IMAX in producing and distributing high quality movies and providing first class theater experience to the movie goers supports the focus differentiation strategy of the organization. Thus, the company demands a premium price for their products without losing its loyal customers. 3.1.2 Growth Strategy In the early life of IMAX, the business strategy of the company was to position itself strategically in prestigious locations such as museums, science centers, and other institutional environment. Currently, the company expands their presence by opening IMAX theaters within multiplexes or converting traditional multiplexes screens into IMAX formats. The change in business strategy has created additional revenues for the company in terms of sales, lease and distribution. With the positive response of movie patrons to the high quality and unique experience of IMAX theaters, the theater chains have demanded for more IMAX theaters in their multiplexes. Additional IMAX theaters generated the targeted growth of the company’s number of theater locations in the US and around the major cities of the world. Another change of IMAX business strategy is converting Hollywood blockbuster movies into IMAX formats. Considering the technological capabilities of the company in digital re-mastering and large format conversion, the cost of conversion has decreased. Previously, IMAX has focused on educational entertainment films that cater to school groups, families and children. Now, they are tapping Hollywood films in order to generate more revenue and grow their market presence. Hollywood box-office films have a global audience and distribution that attracts different demographics of movie goers. With the new strategy, the company has increased its customers. As IMAX changes its business strategies, it creates a need for new capabilities. For example, the resource allocation in the marketing strategies of IMAX before is minimal. With the evolution of the IMAX brand, the company opted to allocate scarce resources on production and distribution. As the company gears for growth, it needs to market its product and its brand into a different segment. Thus, marketing capabilities of IMAX was increased. The results of the companies technological development has also become a contributor in the company’s new capabilities. With the need to reduce cost of converting traditional films into IMAX formats, the technological resources of the company were utilized in developing digital re-mastering techniques. In the end, the changes of the business strategies demands changes in the functional strategies of the IMAX organization. Each structure contributes to the success of the corporate strategy. 4.0 Recommended Strategy It is recommended that the company prepares itself to be acquired by a larger studio. The benefits of having a bigger company to feed additional capital to the company would help it achieve the sustainability and growth that it aspires. As the large company pays off its debt, the net income of the company would increase thus contributing additional income to the company. With the greater experience and bigger distribution channel that the large studio carries, IMAX films will be better produced and circulated. In order to prepare the company for acquisition, it is important to have executive leadership and communication. Change management must be started in the organization in order to prepare the company from adverse effects of integration with another company. Cultural compatibility between partners is very important in order to create a smooth integration. Companies involved in the integration with IMAX must create a frequent, two-way communication with employees and affected communities in order to air concerns and anxiety (Sadler, 2003). Success of the acquisition and integration depends on the key people that would lead the organization. The management must identify these key people and remove the people who are likely to block the process. 5.0 Bibliography IMAX Corp. (2008). Annual Report. Ontario, Canada: IMAX Corp. IMAX Corp. (2009). Annual Report. Ontario, Canada: IMAX Corp. Porter, M. (1985). Competitive Advantage. New York: The Free Press. Porter, M. (1980). Competitive Strategy. New York: The Free Press. Sadler, P. (2003). Strategic Management. Sterling VA: Kogan Page Limited. The Culture, Media and Sports Committee. (2009). The British Film Industry. London: House of Commons. Read More