Evaluation of Strategies of News Corporation - Assignment Example

News Corporation: A Case Study of Strategic Management Question Evaluate News Corporation's strategies and how they have managed their strategic challenges and strategic changes within this. In your evaluation, you will need to consider the key factors of success in relation to the different strategic groups within media industry. Support your evaluation with relevant theory and academic models. News Corporation is the world's third largest media giant (after Time Warner and Disney). Owned partly by the family of international tycoon Rupert Murdoch, known universally for his shrewd business style, the public conglomerate now ranks 84th in the Fortune 500 list. In the 1920s, News Corporation started out as an Australia-based chain of newspapers. Its growth has been driven mainly by an aggressive acquisition strategy, with large stakes in the film, television, publishing, and several other industries. Today, the company operates and owns, among others, Twentieth Century Fox, Star TV, British Sky Broadcasting, DirecTV, and several joint ventures worldwide. In 2004, it reincorporated in the US. Corporate Strategy and Internationalisation Corporate strategy is used to set "the purpose of the organisation and the plans and actions to achieve that purpose" (qtd. in Lynch, 2006). It pertains to scope, which is always depicted along three dimensions: geography, product market, and value chain or vertical integration (Figure 1). Figure 1 - The Three Dimensions of Corporate Scope (Collis & Montgomery, 2005) For instance, which industries and markets are most suitable for the company Or, considering the various competing forces surrounding the firm, which direction would deliver the most value: diversification, vertical integration, mergers, or acquisitions Perhaps, it could be a combination of these approaches or a new business venture altogether. In the last century, industry has become increasingly internationalised, due to three main drivers of change: economic growth, fewer barriers to multinational expansion, and technological developments (Leontiades, 1987, 5). Once a company takes its operations beyond national borders, it grows not only in size but impact, making strategic decisions even more critical. Moreover, the meaning of strategy shifts as the corporate purpose is localised and translated at the business level. As the company operationalises its blueprint, it is faced with competitive pressures and so, to succeed, it must be able to match its strengths with the various opportunities available in the environment. At the same time, it must stay flexible and dynamic, since the market landscape is never static. In other words, business strategy deals with continuously building comparative advantage over its rivals (Grant, 2002, 23). The Rise of the Transnational Media Corporation Perhaps more than any other type of organisation, mass media companies have established worldwide operations of the widest scale, thus, giving rise to the "transnational media corporation" (TNMC). But as internationalisation spread, trends of privatisation and consolidation also arose - especially after the 1980s, when mergers, acquisitions, and strategic alliances were negotiated worldwide at an unprecedented pace - not just in mass media but also in finance, aviation, and other fronts. The massive realignment of industries intensified further when information and communication technologies (ICTs) were widely adopted by businesses and, later, entered the consumer mainstream. Besides News Corporation - one of the more iconic examples in the industry of an internationalised company - these TNMCs also include Time Warner, Walt Disney, Sony Inc., and Bertelsmann A.G. According to Gershon (1996, 6), these entities have engaged in the TNMC strategy for at least one of five reasons: proprietary assets and natural resources, foreign market penetration, production and distribution efficiencies, overcoming regulatory barriers to entry, and empire building. The Role of Leadership While Murdoch may have been motivated by a combination of the five reasons stated above, it was clear to observers that he was out primarily to build a global empire, earning him the honour of being one of the "Lords of the Global Village". Like other TNMC owners - an impressive roster that includes Michael Eisner (Walt Disney), Gerald Levin (Time Warner), and Ted Turner (CNN) - he has proven to be an accomplished entrepreneur, a risk taker that measures success "in terms of business gamesmanship and the art of deal making" (Gershon, 1996, 8). Gershon (1996, 526) stresses the critical importance of extraordinary leadership in media corporations. Strategy, according to him, must be firmly founded on "a sense of organizational identity" and it is the job of Management to "clarify and communicate" this identity to the entire organisation and the rest of its stakeholders. Viewed in this manner, Murdoch has proven himself to be an astute and effective leader; indeed, his management style has been a primary driving force behind News Corporation, making it "the biggest and most global" of media companies (Compaine, 2000). The Pursuit of Comparative Advantage To achieve long-term growth, media companies can choose from various strategies. Lynch (2006, 472-3) attributed News Corporation's financial success to content creation, media convergence, digital satellite technology, globalisation, alliances and joint ventures, and vertical integration, through which it was able to revolutionise activities across its vast value chain. They also entailed the movement of billion of dollars in the form of foreign direct investment (FDI). In the 1980s, about US$1.3 trillion were invested by TNMCs in the acquisition of corporate assets. In vertical integration, a company seeks to increase its presence and power in the marketplace by taking ownership or control over the various steps in the production and distribution of its offerings ("Vertical Integration"). The degree of vertical integration is measured by "the ratio of a firm's value added to its sales revenue" (Grant, 2002, 393). Firms choose to do adopt vertical integration to reduce transaction costs and maximise returns, by being "more efficient and creative" through "combined synergies" between the different divisions and functions, from production down to distribution and commercialisation. It has been a particularly successful strategy for many TNMCs, especially because the different strategic areas in the media industry tend to be highly concentrated; typically, no more than the 50 to 100 largest companies command control over between 70 and 90 percent of the business. One example is the celebrated corporate merger between Time Inc. and Warner Communications in 1989, which consolidated under one roof the operations of New Line Cinema, Castle Rock Entertainment, CNN, and two major sports teams (Gershon, 1996, 11, 15). In an analysis of multichannel media firms - which is practically how all TNMCs operate today - Chan-Olmsted (2006) found that certain forms of vertical integration, to a certain degree, can neutralise the "supplier-buyer power struggle"; at a minimum, the media company is able to reduce dependence on its suppliers. The author forwarded that the adoption of vertical integration in the media business can cause a shift in industry dynamics "from competitive to cooperative". Certainly, this has been the case with News Corporation and several other TNMCs. The Case of News Corporation News Corporation pushed the envelope along all three dimensions of corporate scope. Far from its humble beginnings as a small newspaper chain in Australia, it crossed international borders and entered into new markets within the communication industry. Ultimately, however, the empire was built and made permanent through wide-scale vertical integration, in which it acquired several companies in the US and overseas, thus, gaining firm control over all the phases of its business operation. In 1986, the firm bought Twentieth Century Fox, barely a year after buying seven TV stations from Metromedia Inc. These investments, totalling about US$3.55 billion, established for the conglomerate the kind of production and distribution infrastructure that allowed it to overcome various entry barriers. For one, it made it easy for Fox Television Network to compete head-on with the other major US networks - ABC, CBS, and NBC - such that by the time it was launched in 1987, the station had more than 100 affiliates. In Fox Television - together with Murdoch's direct broadcast satellite (DBS) services, British Sky Broadcasting and Star Television - the films and TV programs of News Corporation had a ready, guaranteed, and not to mention global distribution channel. And then, by the following decade, the corporation went on to acquire TV Guide and other Triangle Publications magazines, which then helped push and promote Fox Network shows to viewers. Unsurprisingly, News Corporation's aggressive vertical integration strategy put serious pressure on the company's bottom line. After it purchased Fox Television Network and SkyChannel in the late 1980s, it was US$8.3 billion in debt. The loan was later restructured and, eventually, the company's stock value fell. Analysts quickly blamed Murdoch, criticising him for his overly ambitious tactics: "throughout his career, (Murdoch) has held to the single principle that he should maintain control of the companies that he purchasedhe would adopt a borrow-and-buy philosophy that would enable him to debt leverage his way to the top" (Gershon, 2006, 197). Today, about two decades after those debt-ridden years, News Corporation's fiscal position is quite healthy. The firm's revenue report for 2006-2007 is a clear testament to its success; notably, the income levels of its major competitors are also on the rise (Bramhall, 2008). Company 2006 (US$ mil.) 2007 (US$ mil.) News Corporation 25,327.0 28,655.0 Time Warner 44,224.0 46,482.0 Disney 34,285.0 35,510.0 Table 1 - Revenues (in US$ millions), 2006 vs. 2007 (Hoovers.com) While Murdoch's management tactics and political style may not be too popular, he should be credited for the recovery and success of News Corporation, nevertheless. His vision has also brought the company to the new millennium, starting with the purchase of the Delphi Information Systems, followed by the E-Ventures alliance with Softbank. And then, in 2005 - rather belatedly, Murdoch himself admitted - the firm finally turned multimedia and jumped on the Internet bandwagon: it bought Intermix Media, Inc. for US$580 million and, with it, the popular social networking and online community site, MySpace.com. This move is expected to create a strong and permanent ripple effect throughout the content creation and publishing empire. As Murdoch put it, "We have the experience, the brands, the resources, and the know-how to get it done. We have unique content to differentiate ourselves in a world where news is becoming increasingly commoditized" (Scott-Joynt, 2005). Question 2: Debate whether companies outside this industry sector can draw any useful lessons from the strategies used in this, the media industry. Provide examples of strategic areas that might be of interest to other industries and any limitations of using such information. Adoption of vertical integration by media businesses has resulted in numerous success stories; this comes as no surprise since television, film, publishing, and the other sectors within the industry tend to be highly concentrated. In other industries, application of similar strategies has had differing results. In the automotive industry, for more than a century, companies have undertaken vertical integration to make production more efficient - even moving operations overseas to achieve better economies of scale, especially in thriving domestic markets. The concept is also adopted in research and development, assembly, marketing, and other functions. The Ford Motor Company is considered a forerunner of this strategy, which is characterized by its "hourglass structure" (Rubenstein, 2001, 56). That is, a large population of parts and materials makers supplies the needs of a few car manufacturers and then, the finished goods are shipped to multiple dealers. In this way, there is no need to control the production of parts; it is sufficient to have a certain level of power over the parts suppliers. In recent years, vehicle producers have been veering towards "vertical disintegration", whereby production of car parts - a traditional source of comparative advantage - is outsourced to private companies. In fact, Ford and General Motors have even divested some of their operations (Rubenstein, 2001, 57). This signifies a shift in industry dynamics, wherein the multinational auto makers no longer hold a tight grip over their suppliers. It also highlights the importance for manufacturers of vehicle brand management. In the airline industry - which like car manufacturing is highly capital-intensive - some form of integration tends to occur after government imposes a policy of deregulation. Some airline operators have adopted nuances of backward or upstream integration, by supplying their own component parts. General Electric (GE) Capital Aviation Services, for example, when purchasing new aircraft, specifically require GE engines (Bruner, 2004). There may be similar opportunities in the transport or logistics industries, in companies looking to reduce the current number of required interfaces and to streamline certain functions and services (Delfmann et al, 2005, 470). Vertical integration has also been applied extensively in the service sector. Case in point: the health care industry. Usually in the context of regionalisation and centralisation, providers decide to offer end-to-end services to patients to be able to build market share. And by doing so, health care providers are able to reduce costs, eliminate duplication, improve quality, and increase access. There have been instances, though, where private practitioners decline to refer patients to hospitals, viewing them as an "upstream competitor" (Brown, 1992, 67-69). Such cases point to poor planning and insufficient preparation for change management. Bibliography Baker, M. J. (2001). Marketing: Critical Perspectives on Business and Management. Taylor & Francis. Bramhall, J. (2008). News Corporation. Company Overview. [Accessed Nov. 15, 2008] http://www.hoovers.com/news-corp./--ID__41816--/free-co-factsheet.xhtml: Hoover's, Inc. Brown, M. (1992). Health Care Management: Strategy, Structure, and Process. Jones & Bartlett Publishers. Bruner, R. F. (2004). Applied Mergers and Acquisitions. John Wiley and Sons. 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