The Transformation of the Music Industry Supply Chain: A Major Label Perspective - Essay Example

The Transformation of the Music Industry Supply Chain: A Major Label Perspective. 1.1 Introduction 1.2 Supply-Chain and the Music Industry 1.2.1 Warner Music Group 1.2.2 Sony Music 1.2.3 PolyGram N.V. 1.2.4 MCA 1.2.5BMG 1.3 Previous situation (Porters five forces framework) 1.4 The situation now (Porters Five forces Framework) 1.5 Conclusion and Recommendation Bibliography 1.1 Introduction Developments such as Information Technology (IT) have had profound impacts on the way companies do business. Of late, companies have had to rethink the way their activities are coordinated from production to the final consumers. These shifts in company’s actions have not been initiated by technology alone. The theory of investment, changes in consumer preferences, taste and fashion have had a profound impact in shaping company’s strategy. Supply chain management (SCM) has been considered as the most popular operations strategy to help companies sail through these challenges and for improving organisational competitiveness in the twenty-first century1. In the 1990s, agile manufacturing (AM) gained momentum and received due attention from both researchers and practitioners as SCM gradually attract interest. Both AM and SCM appear to differ in philosophical emphasis, but each complements the other in objectives for improving organisational competitiveness.Supply Chain Management (SCM) activities are related to problem-solving, information sharing, and cost reduction initiatives. The influences of individual-level antecedents on post-adoption utilisation of a specialised IT within an SCM context were examined by Bradley (1999). Bradley, (1999) found out that 92% of the people he questioned in1999, were planning to implement one or more supply chain initiatives. Supply chain plans to integrate key business activities through improved relationships at all levels of the supply chains. In short, SCM has become a necessity for any firm seeking to solidify its position in the marketplace2. An effective supply chain includes a variety of firms, ranging from those that process raw materials to those engaged in wholesaling and retailing. It also includes organisations engaged in transportation, warehousing, information processing, and materials handling3. 1.2 Supply-Chain and the Music Industry Supply chain is a competitive management technique employed within the last two decades to ensure the effective flow of resources, information, services within and organisation network. Today, organisations have adopted it as a strategic competitive weapon as they continue to seek competitive advantage. This quest by organisation explained the recent influx of research into SCM. Hines, P. & Rich, N. (2005) postulated that SCM has become a converging ground for various disciplines and integrate key business activities through improved relationships at all levels of the supply chains (Internal operations, upstream supplier, networks and downstream distribution channels4. In figure 1.0 below, I try to look at key players in the music industry and some of their labels. This table has been adapted from http://www.soc.duke.edu . 1.2.1 Warner Music Group Being the largest in the industry, it has total assets of over $16.7 billion. The company started in the 20s following an attempt to control music. It owns the Warner music group with publisher, Warner/Chappel Music Publishing. It merger with EMI Ltd. in 2000 took it to the dominant market position. 1.2.2 Sony Music With the main publisher Sony music publishing and Columbia records, to complement its hardware operations, the management of Sony created a software manufacturing and distribution system. Sony music is a key player in the music indusrty 1.2.3 PolyGram N.V. The company has a Dutch origin and is 75% own by Phillips. The position of the company today resulted from a series of merger and acquisition which included MGM Records, Phonogram, Island Records Group, A&M Records, R&B powerhouse Motown in 1993, and finally a 50% interest in Def Jam Records in 1994. The company is also a key player in the music and entertainment industry. 1.2.4 MCA The company began in New York in 1924 as a talent agency. In 1959, it acquired Universal Studios film facilities and moved into publishing. The recording sector began by purchasing labels such as U.S. Decca, Coral, and Kapp in 1962. The company was purchased by the Japanese Matshushita Electric Industrial Company it in 1990, but Seagramn Company, Ltd. of Canada owned 80% of Matsushita. 1.2.5 BMG Another very strategic player in the music industry is BMC. Originating from Germany, the company later moved to the United States and in 1986 the company bought RCA Victor from General Electric. Bertelsman owns its own, television and radio stations around the world, film production and distribution, magazine publishing, book publishing, and newspapers- over 200 entertainment and publishing entities throughout the world5. SCM has become a critical analytical tool to understand organisation boundary, spanning and function spanning endeavor. This is so because, SCM philosophy lies on the fact that waste reduction and enhanced supply chain performance come only when there is both intrafirm and interfirm functional integration, sharing, and cooperation. As such, firms within the supply chain must tear down the functional silos within its organisation and foster true coordination and integration of marketing, production, procurement, sales, and logistics6. However, depending on the organisation SCM can be managed in either integrated or disintegrated manner. Firms pursuing SCM look for ways to integrate their logistics, procurement, operations, and marketing functions with other supply chain. This is advantageous because, by making the organizational chain become part of another chain, materials, information, component parts, and finished product flow seamlessly from point of origin to final customer at low unit cost and at high levels of service7. SCM offers four primary benefits. It emphasizes the inter functional and interfirm nature of supplies and recognizes the need to ascertain the extent to which firms effectively work together and the extent to which functions are coordinated and integrated8. The music industry is one of the industries that has experienced technological impact and tends to be highly innovative. Today, the music industry has become a focal point of supply chain management policy9. Graham, (2006) went further to argue that in the last 50years the music establishment has seen their control and production consolidated. Because the structural formation of the music industry was being blurred by recent technological changes such as the introduction of the internet, the have been a paradigm shift in the supply chain dominance by major record company. 1.3 Previous situation (Porters five forces framework) Figure2 In the mid 90s, 62% of the music market was controlled by WEA, Sony, PolyGram, and BMG and within the label sector the then big six (including EMI) controlled 80%. The figure of independent label company has been growing in recent years and is gradually threatening the big five. The major record companies have resorted to merger, buy out and acquisition each time an independent label company makes good profit10. Small firms can enter and compete because it is too difficult to establish themselves to compete against the giants11. Competition was limited only within themselves, in the quest of control over country music. Before, competition in the music industry was centred within the big five with very low threats of potential entrants due to the huge capital requirements, logistics, personnel required for take off, economies of scale, monopoly of distributive channels, and consumer’s restrictions on choice of music. Buyers had a very high loyalty to brands and the major distribution channels (Direct mail, independent retailers, and major label branch distributors)12. The situation was further made favourable to the big fives, because supplier had a very low bargaining power with respect to these companies, and at the same time a high bargaining power with customers. Thus the major recording companies had the market in their hands. Thus these companies are increasing being aggressive as the need to vertically and horizontally integrate to gain market competitive strategy. Music CD Company Supply Chain Figure 3 adapted from www.soc.duke.edu * This supply chain applies for all Big Six companies. Before the coming of the internet, the music industry had a simple distributive chain with only distribution and recording clubs interacting with the general public customers. Customers had no freewill for choice of music as the big fives continue to exercise control over distribution channels and methods. However, today with the introduction of the internet, the big fives must have to rethink and shape the way to face these consumers. All attention now is being shifted o the internet13. 1.4 The situation now (Porters Five forces Framework) Looking at the present situation of the supply chain management function of the music industry, one will realised that the big fives are gradually loosing their grip of the market. Before, the big fives have strategically accommodated for these changes, widening and buying more distribution channels and buying more and more labels. But with the coming of the internet, things have had to change and a major challenge now facing the major companies is how face the internet. Most Researchers have argued that, supply partnerships and other sources of collaboration need a systemic, structured and time-based approach to the exploitation of competitive advantage14. The big fives, though have been quite responsive to technological changes were taken unaware by the introduction of the internet. Stevens, G. (1989), Porter, (1985) argued that, the long-term nature of supplier collaboration, and its role in sustaining competitive advantage in the consumer market, creates an ongoing relationship and has no discrete point of adjournment. “Therefore, as uncertain markets continue to change, the competitive priorities of the supplier association will engender parallel shifts in focus”15. Hines, P. & Rich, N. (2005) contend that by reprioritizing the supplier performance, requirements will be embodied in each successive level of the supply chain which serves quickly to localize the demands of the consumer to the remotest levels of supply. Below I will present some factors responsible for a shift in the market in line with porters five forces framework and Graham, G (2006) recommendations Today, the introduction of the internet, as cost effective, faster, flexible distributive channels offers consumers with a variety of preferences and choice earlier restricted by the big fives monopoly and control of distribution channels. Thus their dominant position has been eliminated making threats to potential entrants very high, cost for new entrants very low due to decrease transaction and production cost. The number of consolidation and vertical integration masterminded by the big fives no longer serve it purpose, as there is no competitive advantage to ponder upon. Today, Artist have gain more control over their music and activities and the gate keeper role exercised before by these companies has been tampered with. With so many preferences and choices open to consumers, consumers now have high bargaining power. With these, Porter (1985) in his competitive framework argued that once more power is shifted to consumers and suppliers the company’s position becomes vulnerable, and it is through corporation that the company can forge ahead16. The Internet makes the process of distribution cheaper as more middlemen are eradicated. Retail stores could suffer. But, the music industry as a whole could suffer too as consumers refuses to pay higher prices for music they could otherwise obtain for next to nothing, Bluetooth, infrared mode transfer, freemusic download Thus the big five should not only focus on how to gain hold of the internet as a distributive channel; but how to turn this threat into an opportunity for more business. 1.5Conclusion and Recommendation Fjeldstad and Ketels (2006:123-125) identify the following from a case study of a Swedish Insurance firm Fo’’renade Liv identify a good number of other strategies that service and manufacturing firms scan adopt to achieve, maintain, sustain and developed competitive advantage within the strategic fit which include: Analyzing competitive advantage and not operational efficiency; Considering effects on the attractiveness of the network when assessing customer value; Emphasizing activities and choices that affect the composition of the customer set; Identifying potential markets with value configuration analysis; and Fjeldstad and Ketels (2006:123-125 assert that the totality of the service offering must be understood from the perspective of the customer. Ellram and Cooper, (1993) contended that, a true understanding of an organisations activities begins with an understanding of the role of different participants in its network. Stevens (1989) examined the process of organisational alignment and the development of the supply chain management capability needed to exploit competitive advantage. He referred to this as some sort of backward integration The aim of this paper was to analyse the music industry with respect to the supply chain. Priority was paid to key change drivers. In the course of the analysis there is considerable evidence that there have been a paradigm shift of the supply chain of the music industry. Using the supporting models with particular emphasis on globalisation, consumers, suppliers, economic and technological developments one will see that despite attention paid by the big fives to maintain their hold over the market the internet, has gradually change things. However, given the strategic capabilities, and core competencies of within the major players, one will not hesitate to say, the major companies activities are still significant. Bibliography Kee-hung, L., & Edwin Cheng, T.C. (2007)Responsive supply chain: A competitive strategy in a networked economy. Bradley P., (1999) “Managers look to supply chain to cut costs” Logistic Management and distribution report. Vol. 38No 1 January pp.21-2 Brewer, P.C., Speh, T.W (2000) Martha Cooper, Douglas Lambert, and Janus Pagh, (1997): "Supply Chain Management: More Than a New Name for Logistics," International Journal of Logistics Management, 8, No. 1 1-14. Fink, Michael. (1996) Inside the Music Industry, 2nd edition. New York: Schirmer Books, Stevens, G. (1989), "Integrating the supply chain", International Journal of Physical Distribution & Materials Management, Vol. 19 No. 8, pp. 3-8. Miles, R. and Snow, C. 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M. (2006). Competitive Advantage and the Value Network Configuration Making Decisions at a Swedish Life Insurance Company Long Range Planning Journal Vol. 39, pp. 109-131 www.lrpjournal.com. Read More