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1. Discuss IMAX’s business level strategy to date and proposed changes. (10 points) Products differentiation
The large format movie system gives customers unique visual and audio movie watching experience that cannot be found in conventional movie theaters. IMAX is also differentiated by its library of films and locations. IMAX located itself in institutional environment and commercial multiplexes to target wider audiences include family, students, and tourists at different time during the day by screening its own movies and other studios’ movies. Speaking of the technologies, IMAX films printed on larger films, which require special designed camera, projector, and screen to display the IMAX features.
The company heavily invests financial and human resources in their R&D, because the technologies developed would lower the costs of producing and distributing films significantly. The newer service agreements and partnership with theater owners allow IMAX lower its capital requirements when new IMAX screens were opened in the traditional multiplexes. IMAX not only saves money on films making because they don’t have to pay a lots of money to the major stars as the Hollywood does, but also save money on the marketing.
IMAX increased the number of Hollywood movies in order to ride on the coat- tails of marketing campaigns launched by the studios.
The proposed expanding strategies will bring more audience to IMAX, and save more production and distribution costs. By opening new IMAX screen in commercial multiplexes will give customers easy access to IMAX movie, and allow IMAX gain more market share, and increase box ticket revenue.
Although the initial system installation and movie converting costs are big, over long term IMAX can achieve economies of scale by utilizing the IMAX system installed in traditional theaters.
2. Conduct an external analysis. (25 points)
a). PESTEL framework
Concerns about violence, sex, and vulgar language in movies had generated considerable efforts to organize and lobby political action to regulate the industry. There are some limit in terms on selection of movies.
Copyright law protects this industry suffering from piracy. Violations of copyright act were considered felonies and were subject to federal criminal charges and civil lawsuits. Patent law also protects the technologies heavily used in this industry.
The economy is fairly stable except the crisis that hit the industry in the late 1990s because of the overbuilding during that decade, the 911 crisis in the early 2000s and the economic recession in 2008. The economic crisis in 2001 and 2008 would reduce people’s disposable income therefore reduce the revenue of the industry.
IMAX is trendy. It does not matter that if people have seen movies in the traditional theater before, some of them would like to watch on IMAX screen again. Parents looking for activities combine education and entertainment would go to IMAX. More highly educated parents and overscheduled kids would like to go to places equipped with IMAX system. The college and university education are popularized which increases the majority of IMAX audiences.
New filming technology development are encouraged and supported by funds, associations and Oscar Award. But the development of high-definition DVD recording, big screen TVs and cheaper projection and sound system technology offers potential IMAX viewers’ alternative sources of entertainment. The internet, live play, TV programs and cables are also substituting technologies.
b). Porter’s Five Forces
IMAX operating in three industries: photographic equipment and supplies industry, motion and picture and video production and distribution industry. Barriers to entry This industry requires upfront investments to develop technologies, relationship with producer and access to the distribution channels. IMAX held 46 patents and has seven patents pending in the United States, in order to enter this industry, potential competitors must develop their substitute technologies, or take the risks of copying IMAX’s patented technologies, and both are very costly.
IMAX is achieving economies of scale, the more movies released in IMAX format, the more the IMAX system installed are utilized. IMAX is also updating their technologies and making improvement to lower the costs of operations, therefore the learning curve cost advantages act as a barrier to entry. The barrier to enter this industry is high.
Threats of substitutes
Live plays, sport events, TV programs (big screen TV, cable, and satellite), the internet, DVD, home theater projection and sound system are all alternatives of IMAX movie for consumers to entertain themselves in a different way. These substitutes also prevent IMAX from raising the ticket price. The threats of substitutes are high.
The suppliers are vendors who provide the critical elements involved in IMAX’s projectors and camera systems, film making talents (actors, post-production workers), other studios (Hollywood, Disney, SKG DreamWorks etc.), and movie distributers (theater chain). The suppliers’ power is low because by releasing movies in IMAX format and opening more IMAX screens will increase the box office revenue for all the parties involved. IMAX does not pay top stars to make movies. They pay the actors whose median salary is $17 per hour. IMAX has most its post-production work done by its wholly-owned subsidiary. IMAX purchases its equipment components from vendors with whom it maintained long-term relationships.
Buyers are people who are willing to pay for the IMAX movie tickets, and theater chain has IMAX systems installed in their theaters. IMAX doesn’t rely on certain type of buyers. The buyer range is very wide, and from different demographic. They are not likely to be price sensitive because the majority IMAX audience with average household income of more than $70000. The product offered by IMAX is much differentiated, and buyers cannot get the same watching experience anywhere else. Overall, the buyers’ power is low.
The rivalry is low because IMAX was founded as the only company in the world that was involved in all aspects of large format films. IMAX doesn’t have direct competitor in this industry. Even though some of the moviegoer may choose the traditional theater instead of watching IMAX, most the IMAX audience are willing to pay extra $3 to $5 to experience the unique IMAX features and some of them already watched the same movie in the traditional theater before. Additionally, only IMAX movies have long lifespans in the theater circuit. In conclusion, I think this industry is attractive.
c). Key opportunities and threats
Opportunities: Large format film industry is emerging industry, and this industry is driven by technological innovations, changes in demand, and customer needs. IMAX can utilize the first-movers advantages. IMAX has the technological leadership, and also obtains the patent protections that enhance their performance. IMAX has the opportunities to tie up the strategically valuable resources, which are the relationships with independent filmmakers, and distribution channel such as theater chains, so that it can success in this industry Threats: IMAX is a relatively small firm compared to a rival studio, so they might be bought, and becomes a part of another company. IMAX is not able to maintain their brand image if so many Hollywood movies released in IMAX format.
3. VRIO (25 points)
Sustainable competitive advantage
Temporary competitive advantage
Relationships with other studios and theaters
Sustainable competitive advantage
The technologies allow IMAX display the large format film features on giant screen to attract customers. Because of the patent protection, it is rare and hard to copy. IMAX invested in their R&D, and received grants and award from third parties, so it is organized. By locating itself in institutional environment, IMAX creates a unique brand and attract different group of audience, so it is valuable. It is rare because not so many entertaining facilities opened in this environment. This strategy is not hard to imitate. It is organized because some of the IMAX films were educational and entertaining, and involved documentaries of natural and scientific wonders, so it valid to have IMAX in these locations. Convert other studios’ movies into IMAX format increase the IMAX ticket revenue, so it is valuable. The alliance with other filmmakers also saving IMAX’s marketing expenditure. It is not rare because the Hollywood movies also released on DVD, pay-per-view format.
People can also watch movies on TV and internet. It is not costly to imitate. It is organized because not all the Hollywood movies are released in IMAX format, it must be carefully chosen. The brand image is valuable because the large films features and unique watching experience are only associated with this brand name. It is rare because this product can only be provided by IMAX. It is hard to copy because this brand image is developed over long time, and IMAX has the first mover advantage. The company R&D and new services are supporting this brand image in terms of innovation and cost saving, so it is organized. The cash flow is not valuable because this company has negative net income for 2006 and 2007. The fact that IMAX’s debt has been downgraded is an indication that the company’s liquidity is questionable. It is organized because IMAX is trying to solve this problem by signing new service agreement, which would lower its operational capital requirements and help it pay off its debt.
More box office revenue is expected by converting more commercial movies into IMAX format. 4. Based on your analysis, would you recommend proceeding with and expanding the strategy to exhibit Hollywood movies? Should the firm retrench? (20 points) Pro: Hollywood movies are the most popular movies in the world, by releasing more Hollywood movies in IMAX format, more audience will be attracted by the combination of the movie and unique watching experience. This is the quickest way to make revenue in order to improve the company’s financial situation. This strategy also allows IMAX to take advantage of marketing campaigns launched by the studios therefore to save the marketing expenses. Because Hollywood movies has the most market shares, and this high demand will stimulate the theater owners to open more IMAX screens. It gives IMAX the opportunity to attract more viewers and expand the core audience. IMAX can make more revenue by signing more service agreements with traditional theaters, and make profits by maintaining the system and sharing ticket revenue.
If IMAX is releasing more Hollywood movies, share price is likely to go up, and create more value for shareholders. The more confident the stakeholders are, the easier for IMAX to raise capital to focus on technology R&D and further differentiate its products. The digital re-mastering technology reduced converting costs. Converting other studio’s movie is now making more profits and cost less. Con: Screening re-formatted movie is not as profitable as screening IMAX own movies, and makes IMAX take the risk of diluting its brand image. Releasing more Hollywood movies may let people question IMAX’s educational function. The violence and sex contents in Hollywood movie may drive parents and their children away. Screening more Hollywood movies will benefit IMAX. It increases the revenue and the number of audience; therefore I recommend proceeding with and expanding the strategy to exhibit Hollywood movies.
In long term, because IMAX has all these great technologies, and more stable financial supports, they should focus on developing its own movies. IMAX also should launch more marketing campaigns to promote its movies in order to maintain the brand image, and place more emphasis on its educational and entertaining functions. IMAX may develop some sub brands for example like, Smart Imax Kids, or Learning with Imax which only located at institutional environments and integrate with the ride simulation packages to target specific demographics. This action will strengthen IMAX brand image and make the young generations and potential Hollywood moviegoers like these brands and become real IMAX fans when they grow up.
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