Case-9-12 KIPP Houston Public Schools – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Book Guide

This Document Contains Cases 9 to 12 Case 9: KIPP Houston Public Schools INTRODUCTION The Knowledge is Power Program (KIPP) Houston Public School case provides an exciting opportunity to apply strategic management principles to an innovative, non-profit educational organization. At the time of the case, new regional superintendent Sehba Ali is seeking solutions to several major challenges. By using a situation analysis approach to solve these issues, she will be better able to understand and integrate the factors relevant to making sound strategic decisions. This case introduces the Houston, Texas charter schools by describing their high expectations, novel educational techniques, and honorable mission to serve underprivileged students. From storied beginnings, the successful school system grew nationally with the help of philanthropic donations before restructuring regionally to facilitate continued expansion. The case describes general environment segment and competitive industry conditions, highlighting market needs, regulatory constraints, and key elements of school funding. Detailed information about the organization’s internal operations, resources, structure, and strategic concerns are also furnished. The extensive material provided on KIPP Houston’s external and internal environments enables a comprehensive examination of the pressures confronting Ali. The purpose of this case analysis is to develop an integrated and coordinated set of commitments and actions which will exploit the organization's core competencies, strengthen its competitive advantage, address areas of weakness, and enable KIPP Houston to set and achieve realistic growth objectives. Whether they are caused by growth, restructuring, or other factors, KIPP Houston schools are experiencing some problem areas which Ali needs to address if the region is to reach its targeted expansion levels. Summarize the organizational strengths and core competencies which distinguish KIPP Houston from its competitors. Does the new regional structure advance or interfere with the goals of the organization? What are the weaknesses of KIPP Houston’s internal operations? Compare the organization’s performance to the achievements of its competitors. What steps have been taken to manage its problem areas? Describe the factors in the external environment which affect the charter organization’s ability to meet its objectives. Discuss KIPP Houston’s current expansion goals. Describe and consider Ali’s strategic posture on the major issues facing KIPP Houston. Based on your analysis, do you agree with her judgment? What additional recommendations can you make to guide the organization’s strategy and actions? ANALYSIS Summarize the organizational strengths and core competencies which distinguish KIPP Houston from its competitors. Does the new regional structure advance or interfere with the goals of the organization? KIPP Houston is a network of branded charter schools in the metro area. With innovative, energetic, motivational teaching techniques, it is an educational trailblazer in high-minority, low-income, crime-prone neighborhoods. KIPP’s new model for public education is based on the principles of unwavering expectations, voluntary commitment, increased classroom time and teacher availability, autonomous school leadership, and intense focus on high student performance. The success of this formula depends upon achieving high levels of accountability and commitment to academic excellence, strengthening relationships between the school and the student’s family, maximizing the effectiveness of instruction, and eliminating bureaucratic obstacles to performance. Shortly after its founding, KIPP’s students demonstrated immediate improvements on objective, standardized tests. In addition, the charter schools’ creative efforts swiftly quadrupled the rate at which its graduating students attended college. The table below compares college graduation rates in high and low income neighborhoods and measures KIPP’s results against the national college graduation average. KIPP’s achievements are remarkable in a marketplace where the likelihood of graduating from high school (let alone moving on to college) is only 47%. But the organization’s leaders are dissatisfied with merely exceeding the national average. They relentlessly strive to better college attendance rates achieved in the country’s wealthiest neighborhoods. College Rates Impoverished neighborhoods 18% Prosperous neighborhoods 77% KIPP early results 33% National results 30% The KIPP organization began as a middle school and expanded as each grade moved up. Eventually, elementary schools were added to the mix. 85% of KIPP Houston students are from low income families. The table at the top of the next page summarizes the total number of students now being served in the region according to grade level. Currently, 34% of the regions students are in middle school (or Grades 5 to 8). 52.5% of the region’s students are younger (in classes below Grade 5.) This includes 14.5% who are in pre-kindergarten classes, which is even greater than the percentage of students who are in the region’s high schools. Performance by grade level is not provided in the case, but we can assume that each grade level tests competitively. Class # Students School Total School Percent Pre-Kindergarten 1,247 1,247 14.5% Kindergarten 891 3,261 38.0% Grade 1 845 Grade 2 696 Grade 3 537 Grade 4 292 Grade 5 719 2,917 34.0% Grade 6 775 Grade 7 755 Grade 8 668 Grade 9 461 1,159 13.5% Grade 10 367 Grade 11 206 Grade 12 125 8,584 8,584 100.0% The freedom to teach as each school sees fit is the cornerstone of the KIPP educational model. An independent school in the KIPP Houston system has a matrix organization which looks like the figure below. Approximately 85-100 students take each subject in each grade level. Subject and grade level chairs all report to a school principal who has wide discretion over the school’s budget, and staff selection, assignments, and professional development. In 2005, the national KIPP Foundation stepped in and introduced a regional structure to manage school growth. The figure on the following page illustrates the additional organizational layers added between the school principal and the national foundation. (Houston details are highlighted and in parentheses.) Sehba Ali is one of 31 regional superintendents throughout the U.S. She believes that KIPP Houston’s niche in the national organization is leadership development, whereas other regions specialize in areas like technology and curriculum alignment. Each KIPP school is launched with a principal who has been trained by the KIPP Foundation. Before the regional organization grouped schools into geographic areas, each site was autonomously governed by its own Board of Directors. Top-down management from the Foundation to the school level does not take away from school leader control of resource allocation (so long as the school is meeting performance expectations). New linkages of feeder schools to guide students from Kindergarten through Grade 12 should have a positive effect on achievement results. And resources for college prep (such as college application counseling) that can be pooled and strengthened should reduce the total costs of providing these services while furthering KIPP’s goals to increase educational advancement beyond high school. The new structure does, however, threaten to engender bureaucratic hindrances which are charged with reducing the effectiveness of most public school systems. It introduces administration costs that do not directly benefit student instruction. And it is unclear at this point if the changes will have any effect on teacher satisfaction or actual school results. What are the weaknesses of KIPP Houston’s internal operations? Compare the organization’s performance to the achievements of its competitors. What steps have been taken to manage its problem areas? It is not uncommon to experience growing pains or reduced clarity as an organization stretches beyond its original footprint. KIPP Houston’s staffing, budget, and quality issues are likely to continue or intensify with ongoing expansion of programs and facilities. Each of these problem areas is discussed in the following sections. Staffing Finding new teachers and leaders has been a challenge for KIPP since it opened its second school in New York City. The challenge continues as KIPP Houston seeks to expand aggressively throughout the metro area. The organization has the following recruitment advantages and disadvantages in the local region. Pro Con The charter school’s high standards and expectations appeal to optimistic young teachers who are creative, energized, and inspired by its social mission. The intense work load and long hours take a toll on KIPP teachers and leaders, leading to early burn-out and lower job satisfaction. Extensive and ongoing professional development is afforded the schools’ teachers and staff; and leadership opportunities abound. Resources are considered limited; and organizational communication is deemed ineffective by many of the schools’ staff members. Most teachers have an enormous degree of freedom, unmatched in other educational settings. Most teachers will not recommend KIPP as an employer to their friends and associates. KIPP staff members enjoy a meaningful sense of value and have a high level of commitment to the school’s mission and to meeting high expectation levels. The commitment felt by many KIPP staff members is limited to a short time frame. Less than half have plans to stay beyond a 3-year horizon. Not only is the talent needed at the charter schools hard to find, it is also hard to keep. The table below compares KIPP’s retention rates to those seen in competitor school systems, and comments follow on the next page. KIPP Houston’s teachers have an average of 3.8 years of experience, compared to an average of 11.6 years statewide. KIPP YES HISD National Charters 2011 - 2012 58% 68% 83% 78% Comments - Over a longer time frame, KIPP has a 72% retention rate. - A young staff keeps the energy of the schools high and keeps the ideas fresh. - Heavy investments are made in KIPP’s teachers, and losing them after just 3 years magnifies the high costs of training associated with the program. - Exceeded KIPP’s in the past year, but not as high as KIPP’s over the long-term. - Significantly higher than the charter schools, but at what cost? - Public schools have lower performance rates, tend to be more complacent, and generally fail to produce new teaching techniques that benefit students or increase levels of effectiveness. - Houston’s charter schools fall short of the retention rates experienced by charter schools nationally. An estimated 1,675 new employees will be required to meet expected staffing needs for the growing region over the next 5 years. Using Exhibit 6 in the case to project new and replacement hiring plans, staffing requirements are designated in the table below. Replacement hiring averages 78% over the entire timeframe, making an already difficulty task seem unachievable with such a handicap. Projected Hiring Needs - Next 5 Years 2014 2015 2016 2017 2018 Totals New 100 70 60 65 70 365 Replacement 250 250 260 270 280 1,310 Total 350 320 320 335 350 1,675 New % 29% 22% 19% 19% 20% 22% Replacement % 71% 78% 81% 81% 80% 78% 100% 100% 100% 100% 100% 100% Currently, KIPP Houston’s primary recruitment tool has been to heavily rely on Teach for America graduates and corps members to supply nearly a third of its staffing needs. Houston transfers, alternative certification, and new college graduates make up the remaining profile of recruits to fill open and new positions. Leaders have been using a pulse survey administered twice a year to discover and monitor sources of job satisfaction. Budget Unlike public schools, KIPP Houston receives no state revenue for operational expenses, which approaches $1,000 for each student in the region. All schools have budget constraints, but charter schools have to be more creative with their facility strategy; and bond issues incur interest expenses that drain resources from budgets in future years. For the 2012-2013 school year, debt service is budgeted at 7.9% of total expenses, or $7.1 million (refer to Exhibit 5 in the case). Note that the budget shortfall for the upcoming year is $8.8 million. Interestingly, the percentage of expenditures per pupil spent by KIPP on facilities and debt service are over 10% less than Houston’s public school system (HISD); but, YES Prep has been able to keep its related facility costs to less than .5% of expenses per student. (Refer to Exhibit 4 in the case.) KIPP schools have a heightened focus on instructional time, and teacher salaries are its greatest expense (42.3%). Yet, KIPP Houston’s dollars per student for instruction are lower than both YES and HISD by at least 11%. On the other hand, its administrative costs are over 13% higher per pupil than at public schools and almost 5 points higher than at YES schools. In the school budget for the fiscal year ending June 30, 2013, general administration represents 7.7% of total planned expenses. This $7 million equates to approximately $330,000 per school. (And this is expected to increase as Ali prepares to fill an additional 40 new administration positions over the next 5 years to support growth in the region.) $9.6 million spent for school leadership in the region represents 10.6% of the upcoming budget, or approximately $460,000 per school. (Refer to Exhibits 4 and 5 in the case.) KIPP Houston relies heavily on fundraising to provide financial support for its facilities, training, and educational programs. Debt bonds and frugality also play a role in overcoming funding discrepancies. Quality Perhaps the most surprising challenge facing KIPP Houston is the organization’s poor middle and high school accountability ratings when compared to other local charter schools. See the following figures. Texas Education Agency Rating KIPP YES Harmony Exemplary & Recognized 60% 100% 92% Acceptable 30% 8% Unacceptable 10% What it refers to as “lapses in quality” are a serious problem for the KIPP brand. If not achieving superior educational results as measured by the state of Texas (which has the lowest “proficiency” standards in the nation), the organization will struggle to attract philanthropic donations, to compete with public school systems as they replicate best practices and respond to competitive pressures, and to fulfill a valuable leadership role in the KIPP organization nationally. Quality control issues force Ali and other KIPP Houston leaders to consider the trade-off between campus autonomy and top-down management. It is tempting to recommend intervention at underperforming schools. However, such action threatens KIPP’s trademark creativity and innovation; and qualified school teachers and leaders should be capable of identifying and adopting effective practices without the need for top-down directives. Describe the factors in the external environment which affect the charter organization’s ability to meet its objectives. Discuss KIPP Houston’s current expansion goals. Conditions in the external environment with the potential to impact the growth and success of KIPP Houston include the following: Political/Legal – State regulations dictate policies related to staffing certification, learning and graduation standards, special education programs, funding, and operations. They define the areas where charter schools have flexibility to function differently than public school systems. It has already been established that no state revenue is provided for operational expenses, which puts KIPP at a financial disadvantage. On the contrary, the ability to hire and teach in innovative ways provides the organization with exciting opportunities to provide superior educational experiences. Economic – Fiscal pressures at all levels have reduced educational spending, which increases the challenge of meeting school budgets each year. Philanthropic sources of income for KIPP are not likely to be replaced as a critical source for school funding any time in the near term. In fact, they may grow in importance. Demographic – Poverty and ethnic levels in Houston neighborhoods influence demand for KIPP schools and programs. High percentages of single parent households and working parents who are unavailable to support their children’s educational needs at home also affect decisions and results of the organization. Sociocultural – The Houston area has seen a 29% rise in gang participation and gang influence in just the last two years. This is particularly harmful to students during middle school years. Technological – IT advancements provide many opportunities for KIPP to support teacher efforts and to enhance educational results (perhaps with fewer dollars). Competitive – In response to KIPP’s success, the Houston region has seen new entrants in the market (such as Harmony) and reactive initiatives from the public school system to improve performance. In both cases, KIPP’s competitive edge is threatened. The organization is aware of competitor resources and strategies; but as an alternative to Houston’s public school district, if KIPP fails to produce results that exceed performance in neighboring schools, there is no market for the charter school. KIPP Turbo is KIPP Houston’s revised growth plan to establish 29 new schools in the metro area (for a total of 50) in roughly 20 years (by 2033). This is an adjustment to the original plan which called for 42 KIPP schools in Houston by 2017. It represents the addition of one to two new schools each year, which seems realistic. However, a lot can change in a market over 20 years, and it is difficult to predict the educational landscape over such a long time horizon. As the list of external factors above suggests, there are many forces which determine needs and demand levels in the market. External factors are, by their nature, beyond control of the organization. So it is best to be prepared for any market or conditional shifts that would suggest the need for a change in strategic direction. Currently, there are 21 KIPP schools in the metro area of Houston; and applications exceed admittances each year. For KIPP’s growth objective to be relevant, it needs to be perceived to be achievable and actually be achievable. It needs to reflect the known needs of the market within a shorter time frame, such as 5-10 years. And it needs to be based upon an understanding of the number of students in the market who are not receiving a quality education. If the public school district and competitor charter schools fill the market gap, the need for growth in the Houston market will no longer exist. If the percentage of students classified as low income begins to go down, this is another indication that a key demographic of KIPP’s market has less of a need for its services. Given the multitude of environmental forces which can impact poverty levels, it is difficult to even speculate how large (or small) this group will be by 2033. STRATEGY Describe and consider Ali’s strategic posture on the major issues facing KIPP Houston. Based on your analysis, do you agree with her judgment? What additional recommendations can you make to guide the organization’s strategy and actions? On strategic issues discussed in the case, Ali’s positions are summarized and discussed below. Ali’s experience, training, and history of solid results are specific to and aligned with KIPP philosophies and expectations. Consequently, there should be a strong inclination to defer to her judgment on strategic issues. With that said, the analysis also supports her stated positions. Innovation and Leadership The Power to Lead Pillar enables an entrepreneurial and creative spirit in KIPP schools and produces forward-thinking and inventive practices. It follows that promoting replication is likely to reduce internal innovation. One of Ali’s responsibilities as strategic leader of the region is to sustain the effectiveness of the organization’s culture or “brand”. Strengthening and exploiting KIPP’s entrepreneurial mind-set involves an emphasis on autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness. Autonomous strategic behavior is a bottom-up process drawing from the organization’s pool of knowledge and resources. New knowledge must be continuously diffused throughout the firm to effectively stimulate innovation. This is particularly important as technologies and market conditions can rapidly change. Consequently, cooperative efforts should be encouraged to share and inspire ideas with other regions and to reduce the disadvantages of disparate developments being pursued at multiple schools across the country. In fact, because the charter schools serve a market where organizational missions are for the social good, alliances with “competitor” schools can also produce results which benefit the entire region without taking away from the KIPP’s individual pursuits. Ali’s management approach in this situation should focus on removing organizational constraints, promoting self-directed behavior, supporting new ideas and experimentation, and striving to continually outperform the market to put KIPP into a leadership position as new processes are discovered. Capitalizing on KIPP’s core competencies, it will enable KIPP Houston to be at the forefront of educational excellence, to attract high caliber talent, and to raise donation funds needed to offset budget limitations. Curriculum Alignment Common Core standards are strongly correlated with KIPP objectives to prepare students to succeed in college. Integration with Texas learning standards and curriculum alignment should be a priority for the region. Curriculums are dictated by the State Board of Education for each subject in each grade level for Texas schools. Employing curriculum experts who are able to structure content for widespread use does not take away from teacher autonomy and inventive instructional practices. If aligned with state requirements, having curriculums available can actually increase the amount of time and energy teachers can put into delivering effective and motivational instruction. Competitor YES has demonstrated success with a strong focus on curriculum and achieves extremely high quality ratings from the Texas Education Agency. Curriculum development support opens up more time for student interface and professional development and maintains focus on performance results. It may also serve to increase job satisfaction and reduce burnout which contributes to KIPP’s high attrition rate. Teachers who prefer to tweak or develop their own curriculums should be free to do so as long as results are consistent with the organization’s goals. Integrating Common Core (national) standards with TEKS also has the potential to increase organizational effectiveness, to improve student proficiency for post-secondary schooling outside of the state, and to streamline curriculum decisions to facilitate faster growth. Human Capital Emphasis on recruitment and development of exceptional teachers is the key to maintaining KIPP’s high performance levels and establishing the region as a model of leadership within the national organization. Acquiring top quality teachers is essential to KIPP’s strategy; and developing their knowledge and skills requires continuous investment. Emphasizing the qualification of educators ensures that the right individuals are in place to meet expectations autonomously and assures that KIPP Houston stands out amongst its peers. When human capital investments are successful, the potential to leverage the organization’s expanding knowledge base exists. According to the case, quality teachers are available in the Houston market. For KIPP, it is a matter of finding and keeping the best talent available. Efforts to strengthen the innovation/leadership brand will improve KIPP’s ability to recruit teachers with qualities that fit the culture and will help the organization achieve desired results. With its heavy reliance on Teach for America to supply a continuous stream of qualified new teachers, it is essential for KIPP to maintain social capital, define mutually beneficial programs, and pursue goal alignment between the two organizations. In addition to formalizing or clarifying a cooperative partnership with TFA, KIPP Houston should deepen its staffing relationships with other regions. Not everyone wants to lead; but Houston’s pathways to leadership should draw those who do into the region. To reciprocate, Houston can supply other regions with experienced individuals seeking teaching opportunities in new environments. Managing career paths throughout KIPP’s national organization recognizes the sunk training costs and lost knowledge associated with employees who leave the organization after just a few years. To maximize investments made in training and development and to reduce the burden of finding new talent, Ali is also entailed to increase retention rates and lengthen the commitment period for its current staff. It is not uncommon to lose employees who redirect their careers after a few years in their first job. To keep them for a longer timeframe, it appears that Ali will need to reduce burnout, work overload, and non-productive hours, while seeking to increase job satisfaction. These factors seem to contribute to the high turnover in the Houston region; but she may need more information to define specific measures to accomplish these goals. Even a minor improvement to retention can have a major impact on resource management. If attrition can be reduced by just 10%, 34 fewer new employees will need to be recruited each year (refer to projected hiring needs in the table on page 6). This does not suggest, however, that she should adjust expectations or the culture of accountability. Some recommended measures include: Find ways to improve communication to address employee perceptions of low leadership and school/department communication. Pursue curriculum alignment and support from the central office to provide some relief from heavy workloads. Provide as many tools as are available to increase performance results, reduce pressure, and enhance teacher effectiveness. To promote the use of Better Lesson and other blended learning tools, find out what teachers and schools need in order to take advantage of these resources. Assess if long hours directly correlate with higher performance achievements. If not, burnout is for naught. If they are, provide assistance. Increase awareness and recognition for overachievers to heighten sense of accomplishment and satisfaction levels. Investigate to determine if anything in particular during the past year is causing attrition to rise. Establish whether the increased loss of employees is a trend or an anomaly. Further scrutinize and uncover the sources of low job satisfaction so that they can be methodically addressed. Consider the use of teacher assistants which can serve as an internal training program (providing a teacher pool) in addition to reducing the negative effects of workload/stress. (KIPP does have some room to competitively increase instructional expenses, but should offset the increases by lowering administrative dollars.) Examine after-hours professional programs at the central office. Is attendance sufficient? Is it a realistic approach, given the hours teachers are putting in just to do their jobs? Are there other ways to maximize the value and impact of professional development opportunities? Closely identify and evaluate the source of quality failures in some KIPP Houston schools. Work with, but do not hesitate to replace underperformers. Performance failure is not acceptable, but the school’s approach should not be changed to accommodate poor results. Market Position KIPP satisfies a niche in the market which cannot be imitated or substituted by competitors. When executed properly, its educational formula delivers uncontested value to the communities it serves. KIPP is differentiated by the organization’s intense focus on college aspirations for all of its students. Its innovation, creativity, and autonomy are credited with multiplying college attendance rates. Any other goals and initiatives are just distractors from this primary target. Ali’s predominant mission is to determine how Houston schools and the region can be more effective at achieving KIPP’s lofty aims to match or exceed the rate of college attendance seen in prosperous neighborhoods. She may first want to consider if the organization has experienced some “mission creep”. Whereas KIPP began the important work of its early years by serving middle school age groups and progressing up through high school, now more than 52% of its current student population is younger than Grade 5. Surprisingly, 25% of the region’s students are in Kindergarten and Pre-Kindergarten. Clearly, resources expended to provide education for these early years takes away from KIPP’s original focus on vulnerable middle school grades and high school preparation years, which are highly linked with college pathways. The question is whether KIPP’s elementary feeder scores (compared with other schools scores in the region) justify the resources committed to education in these early years. If other schools can specialize or improve performance at these grade levels, perhaps KIPP can narrow its focus to Grade 5 and older for better effect. To minimize outside threats and identify substantial opportunities, Ali should continually scan the environment for radical innovations, particularly for significant technological breakthroughs which can dramatically change the learning environment or competitive conditions. She might also consider outreach to enhance parent relationships and support. Tools and resources to fill deficits in the home as well as parental development programs can serve to expedite progress toward organizational goals. Final Comments Along these lines, it is also important to consider which activities performed within the region do or do not positively impact performance levels. For instance, much is discussed about the administration functions at KIPP. At nearly 8% of the budget and higher than other regional school systems, Ali should consider whether the organization’s new hierarchy and growing central office costs contribute to results. If not, efforts need to be made to control the growing bureaucracy. The important thing is to keep alignment or central support efforts from reducing innovation and from channeling limited resources away from programs and initiatives which do help the organization to maintain its Five Pillars and to achieve its goals. And she must be vigilant to prevent the new organizational structure and strategic decisions from interfering with KIPP’s competitive advantages and brand. KIPP College Results Budget New Staff Case 10: Luck Companies: Igniting Human Potential INTRODUCTION This case is about a family-owned corporation from the perspective of its latest CEO, Charles Luck, IV. It provides an overview of the strategic management processes instituted under his direction, emphasizing the formulation and implementation of value-based leadership initiatives he used to ignite the potential of his workforce and to impact the lives of Luck Companies’ various stakeholder groups. The case opens with an introduction to Mr. Charles Luck, IV, the conditions in the construction aggregate industry, and the status of his 800-employee company in early 2015. It provides an industry overview and in-depth history and shaping of the four strategic business units that comprise Luck Companies. Charles Luck, IV’s tenure is presented with a heavy focus on the evolution of his value-based leadership system. Following the Value Journey from the inception of the company’s values and initial vision, the key steps to achieve the vision, and the prescribed outcomes, the case progresses through three phases of Luck Companies’ long term planning process, the development of a strategic leadership team, and an unprecedented workforce reduction based on core ideology rather than seniority. As Luck Companies executes the final five-year strategy to achieve Vision 2020, it strives to deepen the company’s impact on lives locally and globally and to achieve the most aspirational expansion goals in the company’s history. The case is ideal for demonstrating corporate-level strategy on a small scale, multidivisional organizational structures, and strategic leadership concepts. The following prompts are suggested to guide a review and discussion of these principles. Characterize the type and level of diversification strategy employed by Luck Companies. Discuss the commonalities and differences of the company’s various divisions. Compare the different forms of the multidivisional structure for corporate-level strategies. Explain which form is most suited to meet the needs of Luck Companies. Evaluate Charles Luck’s ability to fulfill the strategic leadership responsibilities required of his position. Provide clear examples to support your assessment. Critique his handling of the unexpected events that occurred during the second phase of the company’s Value Journey. Describe Luck’s current five-year growth strategy and objectives. What tools and resources are in place to help the company to achieve its aggressive goals? What are the likely challenges the company will face in executing this strategy? ANALYSIS Characterize the type and level of diversification strategy employed by Luck Companies. Discuss the commonalities and differences of the company’s various divisions. Luck Companies operates four separate strategic business units (SBU’s), each distinctly different in nature and managed under distinctly different brand identities. Luck Stone – Luck Companies’ largest business unit operates fifteen crushed stone plants, four distribution yards, and one sand/gravel operation. Located in Virginia and North Carolina (or the mid-Atlantic region of the United States), Luck Stone competes in a highly-fragmented industry. Success in the aggregate industry is directly correlated with the growth and economic stability of the construction industry (both private and public segments); and the ability to acquire desirable locations is a vital competitive advantage. Luck Stone is the most profitable division within the corporation, contributing 80% of total enterprise net sales. It uses a differentiation strategy based on superior customer service and logistical excellence in an industry which sees more cost-leadership strategies amongst major competitors. Luck Stone has long been known as an industry leader in technology and innovation, using in-house engineering resources to build automated production systems and other value-added processes. Luck Stone Center – Considered a unique enterprise when the company opened its first retail showroom for architectural stone, the division now manages six Architectural Stone Centers, and the builder model is slated for expansion into all target markets. Luck Stone Center also uses a differentiation strategy, sourcing stone internationally and introducing new product offerings through product innovations. Facing increased levels of competition from other contractor stone yards and big-box retailers, the company continues to pursue innovation opportunities to further differentiate and to sustain profitability. In 2007, it rebranded to an up-scale, design-oriented business aimed at attracting affluent homeowners with savvy offerings. As success in this retail sector is 82% correlated with new housing starts, the housing crisis in 2008 significantly impacted Luck Stone Center sales. As the industry recovers, the company has again rebranded, refocusing on middle- to higher-end consumers and adding manufactured products into its product mix. Luck Development Partners – This division was formed to realize the development and revenue potential of Luck Companies’ land holdings. The real estate development industry is highly dependent on property locations and proximity to population hubs. Because of its relationship with the Luck Stone division, Luck Development Partners operates in the same mid-Atlantic region. The division uses innovative real estate practices to expand potential for long-range sustainable land use, and it strives to create unique settings which incorporate and highlight natural, historical, and environmental elements into its project designs. HAR-TRU – Luck Companies entered the tennis court surfacing and accessories business by acquiring the industry’s two largest domestic companies, the HAR-TRU brand name, and the manufacturing assets of the original surface material provider associated with some of the finest tennis courts in the world. Now holding an 85-90% market share for U.S. clay tennis courts, the division’s primary competition comes from builders of non-traditional clay substitutes. The smallest of Luck Companies’ divisions, HAR-TRU contributes just 6% of total enterprise net sales. In 2013, the company acquired and integrated Century Sports, adding tennis court equipment to its offerings and enabling HAR-TRU to promote “turn-key” tennis court installations. The company initially established a diversified portfolio to lessen the impact of the cyclical and mature construction industry. Luck Companies’ corporate-level strategy is a dominant-business diversification strategy, because 80% of its total revenues are generated in a single SBU. As history illustrates, dependence on the health of the construction industry remains a powerful determinant of financial performance. Even with a low level of diversification, the corporate strategy offers opportunities for value creation and for sharing knowledge and resources across divisions -- especially regarding the transference of core leadership competencies. Compare the different forms of the multidivisional structure for corporate-level strategies. Explain which form is most suited to meet the needs of Luck Companies. Product diversification increases the information processing, coordination, and control complexities of the firm, as it enters new lines of business. Effective management therefore requires an organizational structure that supports the implementation of distinct SBU strategies and enables corporate leaders to oversee various divisions. A multidivisional structure (M-form) for corporate-level strategies can be devised in three possible ways, including: Cooperative Form – facilitates interdivisional cooperation and the sharing of SBU competencies through horizontal integration to develop economies of scope SBU Form – is appropriate when few linkages exist between one business unit and another Competitive Form – does not promote the sharing of common corporate strengths or utilize integrating devices, but enables independent operations which actually compete for corporate resources and capital allocations The most suitable structure for Luck Companies is the SBU Form of the multidivisional structure, using a moderate level of integration mechanisms, a mixture of strategic and financial controls, and compensation linkages to both corporate and divisional performance goals. Evaluate Charles Luck’s ability to fulfill the strategic leadership responsibilities required of his position. Provide clear examples to support your assessment. Critique his handling of the unexpected events that occurred during the second phase of the company’s Value Journey. Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary. The capacities to cope with change, attract human capital, manage intellectual capital, and foster internal innovation are crucial leadership skills in today’s complex business environments. Effective strategic leadership responsibilities or actions entail: Determining strategic direction Managing the firm’s resource portfolio exploiting and maintaining core competencies developing human and social capital Sustaining an effective organizational culture Emphasizing ethical practices Establishing balanced organizational controls Evidence suggests that Charles Luck’s performance in each of these categories has been strong. Luck began his leadership journey by accumulating extensive experience in all levels of the business, building managerial skills and important relationships along the way. He developed a solid understanding of the importance of having sound and innovative business strategies and the role that values and culture play in executing them. And as he grew the business, he adopted several new management practices. Luck shared the company’s financial results with the entire organization for the first time, teaching and enabling field employees to produce in terms of growth and profits. He instituted a decentralized management structure to move decision making closer to the customer. Associate duties and responsibilities were changed to help them navigate the growing complexity of sales opportunities. He established the company’s first five-year strategy, using a planning process to enable each division to meet the unique needs of its marketplace and tying specific strategies, brands, and business plans for each division into a coherent whole. To respond to the needs of the rapidly growing business, Luck developed an entirely new management team. And he realigned the firm’s infrastructure to drive future growth. Under his guidance, the firm set new profit and volume records every year from 1995 to 2006, tripling sales, associates, and profitability. But with record sales and rapid growth, the company soon began to “lose its way”. Decisions were no longer aligning with the firm’s traditional values. With the “We Care” people- and integrity-oriented culture at threat and the executive leadership group not working together effectively, Luck developed a value-based leadership philosophy that would dramatically transform the company. It was based upon integrity, commitment, leadership, and creativity; and, it defined behaviors to ensure that actions were taken to support a stronger values-driven culture. Significant steps were taken to embed the new vision throughout the company, to establish accountability, to ignite the potential of associates, and to make the vision operational. Additional actions to institutionalize the value-based leadership system included: Performance evaluations built around values and behaviors Director of Values and dedicated associates appointed $1-2 million per year in resources injected to support the program Personnel changed to keep employees aligned with the vision Actions were driven by senior leaders, and the company began to see behaviors shift in alignment with company values after about 3 years. Luck was focused on positively impacting the lives of the company’s customers, associates, suppliers, and community. Intending to drive best-in-class financial performance and organization-wide values alignment, the following additions were made to the organizational structure. Chief Growth Officer – through which each business unit would report directly – added to drive differentiated growth and financial results across the entire organization Chief Leadership Officer – responsible for overall strategic and tactical support to gain, develop, and retain high performing talent – accountable for bringing the leadership model to life Chief Family Officer – to develop the leadership skills and competency levels of family members for succession planning and job fulfillment purposes – and to handle family investment and estate planning business While Charles ranks high across the spectrum of responsibilities for strategic leaders, he may have lacked in preparedness for unexpected events. Despite Luck’s phenomenal visionary leadership of the company, several unexpected events (of a somewhat serious nature) occurred which presented obstacles in the achievement of organizational objectives during the company’s second phase of its Value Journey. First, the U.S. economy fell into a deep recession. Eroding demand hit all aspects of the stone industry. At the time, there was no relief in sight. Luck Companies’ financials “fell to pieces”, and revenue could no longer support the size of the company’s workforce. After taking expense reduction steps, putting a freeze on hiring, delaying equipment purchases, and cutting non-essential spending, he still had to reduce the workforce by over 10%, for the first time in the company’s history (although he used core values, not seniority, to determine the dismissals). Ultimately, the firm was not diversified enough to weather the economic storm that hit the stone industry. Second, the company decided to fire its aggregate division president. Although he had an excellent record of performance, it was determined that this member of the top management team was not aligned with the organization’s values. Details of this assessment are not provided in the case, but the action demonstrates the firm’s commitment to upholding strategic controls to be equally important to the achievement of financial performance targets. Finally, at the height of these events, Charles fell seriously ill. His temporary absence put a hold on the final leadership initiative steps, but he returned even more determined to achieve his lofty mission (albeit with a shorter timeframe, fewer associates and resources, and in markets experiencing a recession). By 2011, he had instituted behavioral alignment within his leadership model. He had both heightened the purpose of his mission and shortened the time span by 5 years. In addition, he established a Core Ideology and Beliefs statement and a Values-Based Leadership Value Proposition to guide the company in moving forward. Evidence supports that Luck and his management team were effective in their response to unanticipated challenges which confronted the company during the second phase of its Value Journey. It was due to the strength of its value-driven leadership capabilities and Charles Luck’s strategic leadership abilities that the company was able to regain traction and to overcome the unfortunate events of that period. STRATEGY Describe Luck’s current five-year growth strategy and objectives. What tools and resources are in place to help the company to achieve its aggressive goals? What are the likely challenges the company will face in executing this strategy? Luck Companies’ current five-year strategic objectives are four-pronged and aimed at securing healthy financial performance, optimized leadership, business excellence, and $450 million in sales by 2020. Some of the strengths the company will be able to draw from include: a value-driven culture to drive outcomes and performance an engaged workforce, aligned with the values and needs of the organization the Inner Will organization and resources in place to pursue value-based leadership initiatives within and beyond the borders of the firm excess capacity and resources to support expansion organizational structure and leadership to support growth (this includes a Chief Growth Officer and Corporate Development Team) strong financial position to fund growth initiatives untapped potential from investments made in equipment, processes, and human resources To support and pursue Vision 2020, each business unit has a defined set of goals and a strategic plan formulated with the company’s high-level objectives in mind. As the case states, the organization is “poised for tremendous growth over the next five years”. Most likely, the company’s greatest challenge will be in its ability to realize $450 million in revenue by 2020. Luck plans to increase sales by $210 million in the next five years primarily through the Luck Stone division. In other words, the sales of aggregate must increase dramatically. One new source of income, engineered soils, is an exciting and innovative product, made more promising by the friendly regulatory environment and the opportunity to use existing resources that currently burden valuable real estate. However, it is an emerging market that has not yet established a reliable pattern of sales and is unlikely to contribute a large share of the sales growth being pursued. Luck Stone can also generate new income by utilizing excess operational capacity; but even at maximum aggregate production levels, internal growth has limitations. It follows that a large share of Luck Companies’ projected growth will need to come from planned horizontal acquisitions of select regional small- to medium-sized family-owned businesses competing in the aggregate industry. Here, it is valuable to run some hypothetical numbers to assess if the company’s five-year growth objective is realistic. As the case does not provide all of the statistics needed, some assumptions are required for this analysis. Assume: 25% excess capacity exists in Luck Stone’s operations the other three Luck Companies divisions can fully double their sales through internal measures the sales of potential acquired firms are in the range of $30-$50 million Using these suppositions, the table below presents a possible breakdown of sources of growth for Luck Companies. Projected Sales (in millions) Target Sales 450 Current Sales Luck Stone (80%) 192 Current Sales Other Divisions (20%) 48 Current Sales - Total 240 Sales Growth Target 210 Potential Sources of Growth: Luck Stones Excess Capacity (estimated 25%) 48 Internal Growth at Other Divisions (estimated double) 48 Acquisitions (balance to target) 114 210 Average Acquisition Sales (estimated $30 to $50 million) 40 Required Number of Acquisitions 3 In the company’s favor, Luck Stone has recent acquisition experience in its 2013 purchase of Century Sports. In addition, the company has laid the groundwork for an aggressive acquisition strategy by extensively reviewing and networking with 600 independent aggregate producers from Virginia to Texas. Because it targets firms with similar characteristics (culture, values, human resources, etc.), the company can also anticipate ease of integration and higher performance. While the outlook for Luck Companies is very positive, there are many concerns that can be raised about its strategic approach. These include: The company has limited alliance management experience. The Century Sports purchase was not a horizontal acquisition. The mechanics of integrating two companies following an acquisition can be quite difficult. The market for aggregate in Virginia has not yet returned to the lofty levels of 2006, and the strategy is heavily dependent on growth in its aggregate division. It is uncertain that all acquisition costs can be internally funded, and the company’s record of managing debt is uncertain. The time it takes to do due diligence once a target is selected can delay the purchase and integration of new firms. Management resources to oversee the acquisition and integration process can be extensive. Disruption to operations of an acquired firm can occur during the acquisition and integration processes, which may impact the company’s ability to maximize performance. It is uncertain that current operations can deliver expected levels of growth through expanded offerings and breadth. The company’s varied history of managed growth, rapid growth, and then retrenchment may not parlay into such an aggressive growth strategy. Vision 2020 introduces significant change to the company, which can in itself be disruptive and interfere with ongoing performance. Unforeseen complications often reduce expected synergies and the achievement of integration objectives in acquisitions. To overcome some of the potential difficulties associated with an acquisition strategy and to increase its likelihood of success, Luck Companies should seek complementary assets, markets, and products in its acquisition targets, seek to merge with firms that have low to moderate debt positions, sustain its internal emphasis on innovation and research development, and remain adaptable as changes in the company progress. Luck Companies is a high performance organization. And in the final assessment, its leadership team, structure, and strategies are solidly in place to drive the firm forward toward Vision 2020. Luck Sales Growth Analysis Case 11: Corporate Governance at Martha Stewart Living Omnimedia: Not “A Good Thing” INTRODUCTION This case focuses on the corporate governance aspect of Martha Stewart Living Omnimedia (MSO), a media empire founded by Martha Stewart. Stewart is a former model and devoted her career to domestic perfection and luxury. She is the brand icon of MSO; however, with new technology and the shift of consumer tastes and preferences, MSO’s business model is receiving serious threats from other competitors. After a review of the history of Martha Stewart Living Omnimedia, the case discusses its competition, the legal problem that Martha Stewart encountered, changing leadership within MSO, Martha Stewart’s questionable compensation, and the future of MSO. The case concludes with a discussion of MSO’s future at a crossroads. The case underscores the importance of corporate governance when conditions in the environment change. An analysis of the separation of ownership and managerial control, board of directors, and executive compensation will aid in evaluating the future of MSO. Some analysts suggest that MSO will lose its competitiveness once Martha Stewart leaves the company; others suggest that the MSO brand has lost its brand image by going into product lines such as cleaning fluids and dog poop bags. Also, a few analysts suggest that MSO is a potential takeover target. This case is ideal for demonstrating the importance of corporate governance. The following points are to guide a review and discussion of some important concepts. • Discuss MSO’s corporate governance. Has the company been able to separate the ownership and managerial control? • Evaluate the effectiveness of MSO’s board of directors. Have the directors been able to monitor and control the company? • Executive compensation is a method of governance mechanisms. Discuss Martha Stewart’s compensation and evaluate its effectiveness. • Is MSO in financial trouble? Discuss the possibility of the market for corporate control. Will MSO become a takeover target? ANALYSIS • Discuss MSO’s corporate governance. Has the company been able to separate the ownership and managerial control? Corporate governance is one of the most important topics in the business world today. Corporate governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations. In particular, managers or owners seek to influence corporate governance structure in order to benefit themselves. Even though most people would agree that the primary objective of a firm is to maximize the value of shareholders, it is unrealistic to think that all managers will act as the owners. However, it is also inefficient that all shareholders should participate in managerial decision making. Thus it is inevitable to establish a principal-agent relationship and confront agents’ bounded rationality and opportunism. Agency theory explains the relations between managers and owners in that there is a potential for conflicts when the interests of owners and those of managers deviate. MSO’s corporate governance structure is far from ideal. For most part of the MSO’s history, Martha Stewart was not only the chairman and CEO but also the controlling shareholder. She was able to name CEOs and appoint board of directors. For example, the following directors were identified/appointed by Martha Stewart. » Charlotte Beers: Former chairman of J. Walter Thompson Worldwide; previously chairman and CEO of Ogilvy & Mather and chairman emeritus of Ogilvy & Mather Worldwide Inc.; Under Secretary for Public Diplomacy and Public Affairs for the George W. Bush Administration from 2001 to 2003. Identified as a candidate for the board by Martha Stewart. » Rick Boyko: Managing director of the VCU Adcenter, a graduate advertising program at Virginia Commonwealth University; formerly co-president and chief creative officer of Ogilvy & Mather, New York. Identified as candidate for the board by Martha Stewart. » Frederic Fekkai: Founder of Fekkai, a luxury hair-care product company with seven hair salons in the United States; founder and brand architect for the Fekkai brand at Procter & Gamble, which purchased the company in 2008. Identified as a candidate for the board by Martha Stewart. » Michael Goldstein: Chairman of Toys “R” Us Children’s Fund Inc., a charitable foundation. Previously chairman of the board, vice chairman, and CEO of Toys “R” Us Inc. Identified as a candidate for the board by Martha Stewart. » Sharon L. Patrick: President and chief operating officer of MSO from 1997 to 2004; CEO from 2003 to 2004; previously president of The Sharon Patrick Company, a strategic consulting firm; president and chief operating officer of Rainbow Programming Holdings, a unit of Cablevision Systems Development, and a principal at McKinsey and Co. leading the media and entertainment practice. Because Martha Stewart was able to use her control as a founder, owner, and manager, the separation of ownership and managerial control is minimal. In many cases, when the company profits were suffering, Martha Stewart continued to receive outrageous compensations, even after serving her time in the prison. Using her own influence, Martha Stewart paid her daughter as much as $407,680 a year as a broadcast talent, Koppelman’s daughter as much as $350,675 a year, sister-in-law as a senior vice president for as much as $200,633 a year, her brother in-law as a property manager for as much as $146,000 a year, and her sister as a blogger for as much as $81,000 a year. In short, the corporate governance structure of MSO does not help the company. There is too much ownership influence in very negative ways. • Evaluate the effectiveness of MSO’s board of directors. Have the directors been able to monitor and control the company? The MSO’s board of directors has not been effective. At most companies, the board of directors provide oversight of strategic planning, in some cases by establishing a strategic planning committee to provide stability and continuity during leadership transitions. Under the corporate governance structure of MSO, the company’s bylaws require four committees: audit, compensation, finance, and nominating and corporate governance. The bylaws also make the board responsible for monitoring the “principal risk exposures” of the company, and assigned oversight to the audit committee. Directors received training on risk management during an orientation session. However, because Martha Stewart was not only the chairman and CEO but also the controlling shareholder, she was able to name Patrick chief operating officer and appoint her as a director. She also invited her old friend Charlotte Beers, former CEO of the ad giant Ogilvy & Mather, onto the board in the beginning of MSO’s history. By the 2000s, MSO was facing new competition and changing consumer preferences. Competitors such as Time Inc. and television diva Oprah Winfrey were taking over MSO’s market share in all fronts. Other low-cost competitors such as TheKnot.com were able to capture technology savvy and price conscious consumers. Martha Stewart imitators were starting lifestyle cable channels and programs. Other competitors such as Walmart and Target were taking market share from MSO’s merchandise sales. Meanwhile, Martha Stewart’s compensation continued to rise or remained out of line with MSO’s revenues. The table below shows Martha Stewart’s compensation. The board of directors was not able to effectively monitor the company and change the strategic direction. After Martha Stewart was sentenced to be put in the prison for insider trading, she did resign as the chairman and CEO of MSO. However, her influence was still strong. Even though Patrick tried to distance the company from Stewart and implemented different initiatives to save the company, Martha Stewart was advised by Koppelman to “take control of what you can control—your business.” Koppelman has helped other executives in trouble. As a result, Martha Stewart added Koppelman to the board of directors and reconstructed the board. Two weeks before Stewart reported to a minimums security federal prison camp in West Virginia to begin serving her five-month prison sentence, the newly reconstituted board renewed her employment contract through 2009. Her base salary was continued at $900,000, with a bonus of up to 150 percent of salary. Eventually, the tensions between Stewart and Patrick ran high and the board fired Patrick. As the example above demonstrated, MSO’s board of directors has not been effective because Stewart has too much influence over MSO. The directors are supposed to monitor the company to ensure a strong corporate governance system. However, Martha Stewart has been able to exercise her power to put her friend and ally on the board of directors. All of these contribute to a weak board and a weak corporate governance structure. • Executive compensation is a method of governance mechanisms. Discuss Martha Stewart’s compensation and evaluate its effectiveness. Executive compensation is one of the governance mechanisms that seek to align the interests of managers and owners through salaries, bonuses, and long-term incentives such as stock awards and options. However, in recent decades, executive compensation has been thought as excessive and out of line with performance. From the case, it is evident that Martha Stewart’s compensation is out of line with MSO’s performance. The table below shows Martha Stewart’s compensation and MSO’s total revenue from 2005 to 2012. As the table shows, the total revenue of MSO has no real relations with Martha Stewart’s compensation. In fact, from 2008 to 2009, total revenue dropped from 284.3 million dollars to 244.8 million dollars, but Martha Stewart’s compensation rose from 7 million dollars to 9.8 million dollars. There are many factors that can complicate executive compensation. They are: » Strategic decisions by top-level managers are complex, non-routine and affect the firm over an extended period, making it difficult to assess the current decision effectiveness » Other intervening variables affect the firm’s performance over time » Alignment of pay and performance: complicated board responsibility » The effectiveness of pay plans as a governance mechanism is suspect In order to evaluate the effectiveness of Martha Stewart’s compensation, one should know that: » Strategic decisions are complex: Martha Stewart’s compensation is not only based on MSO’s profits, but also on the use of her home and image. She is basically the face of the company. Thus, her compensation goes beyond how well the company is doing. » Other intervening variables: There are other factors why the company was not doing well. Martha Stewart’s compensation may not need to solely depend on the company’s performance. » Complicated board responsibility: Martha Stewart practically controls the board. She has put directors on the board and vice versa. Thus, MSO’s board is not an effective board in terms of evaluating Martha Stewart’s compensation. » The effectiveness of pay: Even when Martha Stewart received an outrageous amount of compensation, MSO did not do well. Therefore, the effectiveness of pay is still uncertain. Based on this analysis, Martha Stewart’s compensation is not an effective governance mechanism. STRATEGY • Is MSO in financial trouble? Discuss the possibility of the market for corporate control. Will MSO become a takeover target? From the financial statements in the case study, we can see the changes of MSO’s total revenue as below: It is very clear from the financial statements that MSO is in financial trouble. From 2008 to 2012, the total revenue has been decreasing every year. The market for corporate control is an external governance mechanism that is active when a firm’s internal governance mechanisms fail. As previously discussed, other corporate governance mechanisms such as board of directors and executive compensation have both failed to effectively monitor and govern MSO as an organization. The market for corporate control is composed of individuals and firms that buy ownership positions in or purchase all of potentially undervalued corporations typically for the purpose of forming new divisions in established companies or merging two previously separate firms. The market for corporate control typically becomes active only when internal controls have failed. Because the top managers are assumed to be responsible for the undervalued firm’s poor performance, they are usually replaced. An effective market for corporate control ensures that ineffective and/or opportunistic top managers are disciplined. Thus, the need for market for corporate control includes: » Address weak internal corporate governance » Correct suboptimal performance relative to competitors » Discipline ineffective or opportunistic managers Because MSO has a weak internal corporate governance mechanism, the need for external mechanisms becomes great. Therefore, it is very possible that MSO can become a potential takeover target. In that scenario, Martha Stewart will lose control of her company. However, given that MSO was built around Martha Stewart as a brand, it is almost impossible to exclude Martha Stewart in the company’s business operations. Based on the discussion and the analysis of the case, it will be best for MSO to conduct a leadership restructuring. Martha Stewart can continue to serve as the spokesperson and the brand image of the company, but she should not be involved in the day-to-day operations. In other words, Martha Stewart can be the face of the company, but not to run the company. If this does not happen, the market for corporate control may take over MSO. Martha Stewart Compensation Compensation and Revenue Total Revenues Case 12: The Movie Exhibition Industry: 2015 INTRODUCTION This case is an in-depth study of the motion picture exhibition industry which exposes the tenuous and uncertain outlook for movie theater owners. Changing value chain dynamics and operating variables that affect the profitability of exhibitors are discussed, with comparisons provided for the four major exhibitor circuits in the U.S. The impact of evolving digital technology, trends which influence consumer decisions (most notably, consumer viewing practices in the age of portable devices), and constraints within the studio-dominated business model are also reviewed in detail. The case then closes with a discussion of some of the initiatives taken by exhibitors to confront existing environmental challenges. The objective of this case is to thoroughly examine industry conditions and the performance of key industry participants in order to identify strategic measures which might improve the viability of major exhibitor operations. By profiling the external environment, the industry’s competitive forces, competitor circumstances and approaches, and the standard business revenue/cost structure, meaningful strategic alternatives can be proposed to aid movie theater owners in their struggle to remain profitable and to increase their likelihood for success. Review trends in the general environment that affect the movie exhibition business, and establish whether their effects are helpful or harmful to theater owners. Assess the five competitive forces at work in the industry environment. Identify the forces that threaten the profitability of prevailing movie circuits, and prescribe the level of competition that can be anticipated amongst industry rivals. Perform comparative situation and strategy analyses for the four companies with dominant market share. What are the advantages and disadvantages for each of the industry’s top competitors? Evaluate the revenue sources and major costs for movie exhibitors. Discuss how the income structure of their business impacts their financial results. Summarize your findings and the current situation for exhibitor circuits. Based on your analysis, what strategic actions do you propose for theater operators to increase the appeal of the theater setting to attract the audiences needed for improved performance under existing industry conditions? ANALYSIS Review trends in the general environment that affect the movie exhibition business, and establish whether their effects are helpful or harmful to theater owners. The forces existing in the general environment are beyond the control of companies competing in the film industry. Nevertheless, these external conditions can create opportunities and/or threats that will impact the performance and success of movie exhibition firms. Key trends in each of the general environmental segments that have the greatest potential impact on theater owners are outlined and discussed below. Wavering conditions in the domestic economic segment continue to heavily influence consumer buying behavior. Lingering effects of the Recession of 2007 to 2009, ongoing financial pressure on households, and speculation of another recession in 2015 all contribute to the uncertain economic environment in the United States. In the past, downturns in the economy led to a rise in theater receipts (in other words, created an opportunity for cinemas to grow ticket sales). However, due to aggressive hikes in ticket prices in recent years and dramatic increases in the number and availability of substitute products, movie theater owners cannot count on current economic conditions to drive growth in attendance. Americans spend a very large amount of time on entertainment, and movie viewing is a prevalent form of entertainment in the U.S. In particular, teens and young adults frequently seek entertainment options outside of the home for dating purposes. While these sociocultural conditions should be viewed with optimism, movies are more widely available to the public than ever. Consequently, with a profusion of substitute viewing options emerging, the long-term trend in per-capita admissions is negative. Studios focus on 12-24 year olds who are consistently the largest demographic group of movie goers. At just 18% of the U.S. population, this group purchases 30% of all tickets. (More narrowly, 10% of the population is “frequent” movie goers who attend more than one movie per month and are responsible for half of all ticket sales.) Domestic demographic trends are neutral for this core audience, as no growth (as a percentage of the total population) is expected in this age segment through 2035. However, movie theaters can benefit from a growing domestic population, which is expected to increase 19%, or 65.8 million, in the next 20 years. Potentially 9.9 million more core audience members are anticipated by 2035, which equates to an uptick in audience of 246 per existing screen. Perhaps more importantly, overall population growth suggests opportunities in other age groups. See the table on the next page. The greatest potential is seen in the 60+ age group, a segment of the population that is estimated to grow a whopping 53% over the next two decades. While this audience purchased only 13% of admission tickets and represented only 14% of the frequent movie goer category in 2014, 36% of new annual admissions and over 50% of the increase in attendees per existing screen are expected to come from the over age 60 population by the year 2035 (also refer to Exhibit 4 in the case). Demographic Group Population Change 2014-2035 (in millions) Population Change 2014-2035 (in percent) Per Screen Change 2014-2035 (in millions) Per Screen Change 2014-2035 (in percent) 2 to 11 yrs 6.8 16% 170 10% 12 to 17 yrs 5.3 21% 132 15% 18 to 24 yrs 4.6 15% 114 13% 25 to 39 yrs 8.9 14% 223 15% 40 to 49 yrs 6.8 16% 170 11% 50 to 59 yrs -0.1 0% -2 0% 60 yrs+ 33.6 53% 839 36% Total (mil.) 65.8 19% 1,646 14% In the technological segment, digital advancements have changed movie distribution methods substantially. In the U.S., exhibitors have converted 41,518 screens from film to digital projection and have invested in 3D capabilities for 37% of total existing screens. In addition, IMAX now operates 600 screens across the country. Conversion to digital production eliminated the costs associated with film print from the value chain, but this benefit essentially accrued to the studios. Theater owners, on the other hand, have incurred the investment costs associated with upgrading their projection operations and are anxious to realize acceptable returns from these investments. While 3D movie production initially provided an unexpected opportunity for cinemas to increase revenues, waning interest in 3D viewing raises doubts about the continued appeal and reliability of 3D movies for future revenues. In addition, technological advancements and dramatically reduced prices in retail electronic equipment have increased the availability, affordability, quality, and number of “in-home theaters”. Even without home screening rooms, 77% of U.S. households now have at least one HD television (which deliver very high quality visual images); and the average TV set in 2014 was 39 inches (up 7 inches in just four years). Coupled with trends in the use of portable devices and the threat of “Ultra” HD or 4K televisions hitting the market, these developments are having a transformational effect on movie (and media) viewing choices and are reducing the novelty of the exhibition theater setting. These conditions are threats that are likely to continue to have a significant negative impact on the profit potential of film exhibitors. Growth in the global market for paying movie viewers is 11%, which compares to a domestic growth rate of only 2%. Both ticket sales and dollar volume are rising rapidly in theaters outside of the U.S.; and over 71% of U.S. studio revenues are now generated from international sources. As family income and time for leisure activities rise in emerging markets, global conditions offer enormous growth opportunities for theater owners who are motivated and capable of expanding internationally. As a result, studios are internationalizing their content, opting for movies with less cross-cultural threat but high production budgets. If these internationalized productions do not appeal to the home market, such content decisions negatively impact movie attendance domestically. Assess the five competitive forces at work in the industry environment. Identify the forces that threaten the profitability of prevailing movie circuits, and prescribe the level of competition that can be anticipated amongst industry rivals. In the U.S., the movie exhibition industry is showing clear signs of maturity. 45.5% of domestic screens are operated by the leading four circuits. Heavy investments are required to keep up with disruptive technologies. And opportunities to differentiate and to maintain a sustainable competitive advantage are elusive. Unmistakably, participants in the industry face many powerful forces that undermine profitability. The strengths of the five major competitive forces in the movie exhibition industry are evaluated below to determine those with the potential to stimulate competitive rivalry and likely reduce profitability. Threat of New Entrants – Low New direct competitors are unlikely to enter the market because of industry consolidation and the overcapacity of existing screens. Typically these conditions would increase rivalry, but because major competitors are positioned in different geographic markets, direct competition is not overly intensified. However, electronics firms which have ignited the home theater and portable viewing movements might pose an entry threat if they somehow decide to venture into commercial settings. And the international market has many new entrants and competitors who may decide to explore the domestic market in search of ways to reap higher bargaining power over the suppliers (studios). For instance, in 2012 Chinese conglomerate Wanda acquired AMC to form the largest global exhibition company based on screen count. Supplier Power – Very High The strength of studio bargaining power is the leading cause of the industry’s low profitability. Exhibitors, and their financial well-being, are heavily dependent on studio policy decisions. Currently, over 81% of box office receipts are generated from the top 6 motion picture studios. These content providers completely control the release channel(s) of movie content throughout the industry. Motion picture studios control product licensing, DVD sales, digital sales, and distribution windows. Concentration paired with highly differentiated content gives studios considerable negotiating and pricing power. Increasingly managed as profit centers within large corporations, studios are under continual pressure to deliver results in an environment of rising film production costs, high marketing expenses, and unpredictable audience responses. Seeking ways to fortify their revenue streams and capitalize on marketing expenditures, studios are steering away from the traditional studio “windowing” system, experimenting with “simultaneous release” or bypassing the theatrical release entirely. Disintermediation practices and growing internet technologies threaten to eliminate exhibitors from the distribution model entirely. Additionally, studios are producing fewer films with larger budgets, internationalizing content (discussed above) to reduce production risks and appeal to growing global markets. Even though content suppliers maintain strong bargaining power, larger movie theater circuits do have some negotiating capacity that is not available to smaller operators when sourcing films, concessions, and national advertising. Evidence of this power was demonstrated when exhibitors threatened a boycott to reverse Universal’s planned 3-week release window for a major new film. While the circuits prevailed in this showdown, studios will continue to be drawn to revenues from premium VOD sales and alternative distribution channels, which cut into theater profitability. Major exhibitors in the industry need to use what power they do have to strengthen supplier relationships and to coordinate efforts in dealings with studios, perhaps through groups like the North American Theaters Association. Buyer Power – Moderate The industry's core customer audience is 12- to 24-year-olds, who purchased 30% of all movie tickets sold in 2014. The preferences and tastes of this age group can be erratic. The portion of this group who attends movies frequently (at least once a month) essentially drives industry profits. However, movie goers do not have cumulative bargaining power, and their demands do not result in significant price changes. In their favor, switching costs are low. It is easy for customers to change theaters if they have a poor experience. And as the quality or value of the theater experience declines, customers will continue to seek alternative movie viewing options, new forms of entertainment, or new outlets to escape daily pressures. To satisfy movie goers and achieve profitability, exhibitors must discover and offer a more attractive and sustainable value proposition, preferably for a broader target audience. Product Substitutes – High The availability of alternatives to movie theaters is another powerful force working against theater owner profitability. While the industry is seeing the allure of its value proposition and the theatrical experience diminish, product substitutes are rapidly expanding. Release dates for popular DVD’s and VOD are constantly shifting forward, and movie availability outside of the commercial theater is widespread. Advancements in the electronics industry are eroding the uniqueness of the theater experience and creating a variety of mobile movie/media viewing options, which are popular among the core demographic. Now affordable to more consumers, replicating the immersive experience of the theater at home has become commonplace. Equally important, alternative forms of entertainment are varied and numerous. In aggregate, these competitive forces threaten to have a direct, negative, and continued impact on the financial performance of theater operations. Intensity of Rivalry – Moderate Since the 1980s, declining ticket sales, rising operating costs, and the advent of megaplexes (large entertainment complexes with multiple screens) have led to theater closings (mostly single screen theaters) and consolidation in the industry. Even with fewer total competitors, the total number of screens (43,265) is at a historically high level. Now, four major theater companies, with just 24.3% of all cinemas, operate 45.5% of the industry’s existing screens. The typical exhibitor location has 7-12 screens, which improves labor and facility efficiencies and increases operator bargaining power. Excess screen capacity in the U.S. affects the level of industry competition. High costs associated with the development of megaplexes and with the conversion to digital projection create high strategic stakes and exit barriers for theater operators, further increasing the level of competitive rivalry amongst them. The pressure to compete can be great among smaller cinemas which have a high degree of market dependence, but these businesses tend to have fewer resources to make competitive moves. And despite the prevailing influences, most markets have just one theater option for patrons. Therefore, direct competition in distinct geographic locations is limited to dense areas where the public can choose between theater sites. Where customers do have a choice, it is difficult for participants in the industry to distinguish themselves from other competitors, secure strong customer loyalties, and reduce rivalry. Again, opportunities for differentiation are minimal. It is a fast-cycle market where imitation is rapid and inexpensive. Firms are not insulated from competitor efforts to attract customers, but they can quickly adopt successful strategies employed by rivals. Consequently, competition in these markets is based on the theater’s distance from home, conveniences (such as parking), and proximity to restaurants (all variables which cannot be readily changed without large capital allocations). Perform comparative situation and strategy analyses for the four companies with dominant market share. What are the advantages and disadvantages for each of the industry’s top competitors? An overview of the top four competitors' business situations and approaches provides valuable insight for industry participants seeking to improve performance. The following table presents a comparison of the market focus, facilities, pricing, costs, revenues, income, and margins for each of the four companies which dominate the market. A breakdown of international presence and the advantages and disadvantages for each circuit are also included. Regal (w/ United Artists and Edwards) AMC (w/ Lowes and Wanda) Cinemark (w/ Century) Carmike Market Focus Mid-size Urban Smaller Rural # of Locations 574 345 335 274 # of Screens 7,367 4,931 4,499 2,897 Ave. Screens/Site 12.8 14.3 13.4 10.6 Ave. Ticket Price $9.08 $9.43 $7.02 $7.23 Attend./Screen 30,038 N/A 38,661 21,414 Revenue/Screen $272,924 N/A $271,409 $154,900 continued Regal (w/ United Artists and Edwards) AMC (w/ Lowes and Wanda) Cinemark (w/ Century) Carmike Admissions (as % of Rev) 67% N/A 63% 62% Concessions (as % of Rev) 28% N/A 32% 33% Exh Costs (as % Adm Rev) 52% 53% 56% 55% Concession Costs (as % of Concession Revenue) 13% N/A 16% 12% Bldgs/Wages/Util/Other (as % of Total Revenue) 57% N/A 46% 55% Op. Inc. per Admission $1.39 N/A $2.87 $0.72 Net Profit Margin 3% N/A 7% -891% International Theaters 0 153 160 0 International Screens 0 1,344 1,177 0 Advantages • Most power to bargain with studios & other suppliers due to organizational size Quality theater setting assumed Highest revenue per screen and admissions as % revenue Largest domestic exhibitor Lowest exhibition costs as % revenue • Located in largest cities or population sites Leads industry in operation of multiplexes Focus on 3D, IMAX, and other premium viewing experiences International (Asian) scope through Wanda acquisition Expanding rapidly • No competition, 92% of markets Best price point International presence Highest operating income per admissions Greatest total assets Highest NP margin and operating income per admissions Completely digitalized Best utilization rate Strong financial performance Highest concessions as % revenue Markets have few entertainment options Good price point Lowest debt Disadvantages • Low profit margin Highest debt position High bldg./wage/ util/other costs No international presence Highest ticket prices Greater direct and indirect competition Capacity may exceed market size High exhibition costs High concession costs • Small market size (pop’ns < 100,000) Facility quality may be inferior Lowest utilization rate Low revenue per screen Net loss in 2014 Evaluate the revenue sources and major costs for movie exhibitors. Discuss how the income structure of their business impacts their financial results. A close look at the theater business model reveals that cinema managers have limited ability to impact revenues with existing tangible and intangible resources. In addition, restricted power or flexibility to control product, facility, and labor costs leaves operating margins near just 12% across the industry. These constraints severely limit financial control and profit potential for theater owners. The table below dissects the revenue structure and helps to identify earnings barriers faced by movie theater managers. Revenue Source Percentage of Total Revenues Margin Over Direct Costs Comments Ticket Sales 63% 0% Loss leadership on movies. Ticket revenues essentially cover commitment to studios and costs of operations, facilities, and debt. Concession Sales 30% 85% Largest source of exhibitor income. Highly influenced by attendance, but also pricing and supply costs. Prices at maximum. Caps on volume per patron. Advertising Sales 5% 100% Highly profitable. Has increased 100% in the past decade. Attractive source of income, but low audience tolerance. Movie theater profitability is severely hampered by this income structure, and when trends in both the general and industry environments are also considered, long-term viability is untenable. Because of the power imbalance with studios, increasing box office receipts provides virtually no additional income for theater owners, even though they represent the greatest source of revenue. In addition, consumer tolerance for higher ticket prices (which have risen 27% since 2005) is low despite that fact that they have risen less than the inflation rate. Even 3D movies, which temporarily yielded revenue growth, have seen fewer ticket sales each year since 2010. And although concession sales are the largest source of theater profits, they are also the basis for customer complaint. Tolerance for high prices has already reached its limit. Therefore, the likelihood of generating additional revenue through concession sales is small. Like the other revenue streams, opportunities to generate additional income from advertisements are also constrained. As another source of customer frustration, increasing screen advertisements is likely motivate more customers to seek alternative viewing options. On the cost side of the equation, the most significant factor for theater managers is the variable cost of film rental, which represents 36% of the operator’s total expenses. Another 29% of total expenses goes to fixed facility and utility costs. When combined with labor and other SG&A expenses, total fixed costs represent 60% of the operator’s total expenses (or an alarming 90% of box office revenues). Box office revenues cover only 66.1% of the exhibitor’s total operating expenses. In other words, exhibitors’ total expenses exceed their total box office revenues by over 50% (51.3%). (See calculations in the table on the next page, and reference Exhibit 10 in the case.) EXHIBITOR EXPENSES Per Screen % of Total Expenses % Box Office Revenues Fixed Facility $65,942 17% 25.6% Labor $39,565 10% 15.3% Utilities $48,358 12% 18.7% Other SG&A $79,131 20% 30.7% Total Fixed Costs $232,997 60% 90.3% Variable Film Rental $139,278 36% 54.0% Concession Supplies $17,898 5% 6.9% Total Variable Costs $157,177 40% 60.9% Total Expenses $390,174 100% 151.3% BOX OFFICE REVENUE $257,923 66% 100.0% STRATEGY Summarize your findings and the current situation for exhibitor circuits. Based on your analysis, what strategic actions do you propose for theater operators to increase the appeal of the theater setting to attract the audiences needed for improved performance under existing industry conditions? The situation overview pinpoints the many factors which are diminishing movie theater profitability. Today, cinemas are operating from a position of weakness. They are competing against substitute products, constrained by supplier power, managing an unprofitable business model, and facing long-term declines in admissions per capita. Conditions in the general environment are mostly harmful to domestic exhibitors. Global forces are changing the dynamics of the industry, and technological investment demands are high with elusive pay-offs. But some bright spots exist – particularly with demand for quality entertainment, demographic trends if studios look beyond today’s core audience, and opportunities to grow internationally. To find success, industry leaders must minimize pressures which are squeezing earnings from all directions and develop conditions which create superior value for which customers are willing to pay. Even though geographic market variations provide some incentive for establishing differentiation or cost leadership strategies, existing business conditions deem these standard business-level strategies unsuitable. Differentiation is unsustainable against competitor imitation. A low-cost strategy (1) has limited effectiveness because operators have already removed excessive costs from the value chain (2) is unappealing due to location dynamics (3) can have a negative effect on the customer's theater experience, and (4) passes low costs on to customers to attract business, which in turn reduces profit margins. A focus strategy might be effective if directed toward the core audience, but theaters need to expand their customer bases, and a focus strategy may distract them from finding opportunities outside of the target consumer group. Finally, an integrated strategy, combining any of these strategies, would be ineffective for the same reasons. Because participants in the industry cannot rely on standard business-level strategies and because of their inability to increase margins by controlling revenue or cost variables, leaders will find it necessary to discover new and creative strategic measures to improve or sustain the profitability of ongoing operations. Exhibitors are pursuing a number of strategic initiatives aimed at increasing attendance, increasing the viewer’s willingness to pay, and lowering costs. Investments to enhance image quality and realism, to greatly expand screen size, and to upgrade sound systems, motion seat technology, and highly immersive experiences approaching 4-D are all efforts to create a theater experience which cannot be replicated in the home. But if previous patterns persist and technological innovation and eventual affordability follow, recouping investments before they are found in the home theater is unlikely. Alternative content has been successfully explored, and dozens of affiliate exhibitors are combatting studio power with an emerging distribution coalition (DCDC) to economically access a variety of new content options. Dynamic pricing models could provide exhibitors a way to earn the true value of their offerings, but up to this point, they have had limited impact. Reserved seating is an upgraded ticket offering that shows some promise, but is a short-term gimmick that is easily copied and (if effective) will eventually be a standardized practice. Small exhibitors are re-positioning as multi-entertainment venues, which has potential in communities with limited social entertainment alternatives. Other initiatives are related to expanding concession sales and advertising revenues. But they target an already heavily-tapped source of revenue that is also a source of consumer irritation. The completed analysis suggests that to enhance performance and improve the likelihood of future success, theater operators need to take measures to reduce the bargaining power of studios and to stimulate demand for established cinema complexes. It is a question of enhancing profits, increasing venue appeal, and taking steps to reduce uncertainty. Exhibitors must think in terms of efforts that will offset the high costs of existing facilities. The following recommendations offer feasible strategies for meeting these objectives. Suggestions range from smaller scale actions to larger scale cooperative strategies and facility re-design. Due to the failing business model, retaining patrons and growing profits may require such dramatic actions by exhibitors. Expand operations internationally. While domestic growth rates are faltering, both ticket sales and dollar volume are rising rapidly in foreign markets. With few other prospects for stimulating growth, expanding into international markets is the single best opportunity available to movie theater owners. And by taking advantage of rising attendance rates in other countries, they may be able to consolidate some power to offset supplier control in the industry. While two of the top four major circuits have entered international markets, the other two have yet to make this critical move. Engage studios in mutually-beneficial partnership arrangements. While delivery channels are emerging and evolving, studios are taking steps to recover lost DVD sales and to react to the success and power of VOD providers. Even though they still rely on exhibitors to deliver their product, their strategic decisions to accelerate and maximize returns often have negative consequences for theater owners. Exhibitor energies should seek to build stronger relationships with studios to identify opportunities for mutual success. Where studio actions are incompatible with (early DVD releases) or costly for (conversion to digital projection) theaters, arrangements must be closely managed to ensure viability for the exhibition stage of the motion picture industry. Cater to semi-frequent and frequent movie goers. To deliver the "experience" being sought by their core audience and to increase attendance of tentative patrons, theaters need to overcome the declining value proposition and initiate customer outreach efforts. This involves focusing on quality measures and deepening the richness and affiliation of customer relationships. The case material emphasizes that cost, home viewing options, theater interruptions or distractions, inconvenience, and screen advertising all impact the quality of the theater experience. Perceived quality can be enhanced through expanded service features, improved courtesy, consistency, and convenience, greater schedule flexibility (perhaps introducing immediate viewing options), and other subjective dimensions which impact the customer experience. These types of service improvements can heighten quality, create value, and stimulate demand. With today’s social media channels, exhibitors can interactively solicit and respond to feedback from potential patrons. These new tools can also be used to enrich relationships and target marketing to stimulate demand. Getting to know the senior market segment is especially important, and while social media tools might not engage this audience, it is imperative that exhibitors discover a way to expand relationships within this community. Seek alternative facility uses and content. The conversion of most theaters to digital projection creates great potential to find and offer alternative content. Alternative content can attract new audiences in novel ways, especially during off-peak time periods. The greatest advantage of this strategy is that it reduces theaters’ over-dependence on powerful studios – removing income restraints and protecting against failure to receive viable hit films. At the time of the case, exhibitors have begun to collectively seek alternative content through intermediary distributor services. The benefits of this option are emerging. Unique content ideas suggest innovative uses for established theater sites. Owners can identify and promote events which would be enhanced by the use of a commercial screen size and theatrical sound system. Suggestions include sporting events (like play-offs, NCAA tournaments, horse racing, or other such events), birthdays, "premiers", "previews" (negotiate for exclusive first releases), educational showings, school activities, or other celebratory events (such as reunions, couples’ wedding showers, or octogenarian guests of honor). With widespread personal video recording taking place, screening customized content for such events can be done with very little cost or effort. In fact, the exhibitor might be able to produce and deliver the content for a surcharge or fee. Theaters could restage classics or offer series marathons, turning them into social events, particularly during slow sales periods. Perhaps new forms of health treatment or therapeutic experiences could be designed with new immersive technologies for senior or specialty audiences (such as the use of massage seating, sound therapy, etc.) This strategy to promote a variety of new venue opportunities depends on the creative use of vacant space and the ability to attract new forms of entertainment that provide "escape" value to the audience. It also requires more creative and marketing-oriented management talent to implement at the local level and make connections with local communities. Perhaps most importantly, it offers an approach to attracting patrons outside of the limited core audience. While 12-24 year olds are active movie goers, expanding the target market to include middle-age patrons (which will represent 44% of the marketplace by 2035) and seniors (which will represent 26% of the marketplace by 2035) greatly broadens the potential viewing audience. Today’s core audience is tomorrow’s middle-age group, and today’s middle-age group is tomorrow’s senior population. In all cases, new forms of entertainment can be developed to attract these groups based on their unique needs. For instance, seniors may value comfort over low prices, an immersive nostalgic experience that reconstructs a poignant moment, or opportunities to stay connected at a time when they are at risk of becoming social isolated; or middle-age viewers may be looking for activities that can be enjoyed by family members of various ages. Expand entertainment value of offering. This option involves diversifying into other forms of entertainment and services or changing the format of the venue entirely. Partnering with commercial development, restaurant, or other entertainment groups is a potential way of expanding the service "menu" at theater facilities. This might involve ideas such as bringing in unique snacking options (such as ethnic foods or pop-up restaurants/kiosks of the ”mobile food truck” variety) or using lobby space to house cafes, mini-flight simulators, and other entertainment activities. Again, striving to cater to the preferences of seniors, daytime discounts, early-bird showings, or even boxed meals might be a draw for this crowd. This strategy reduces dependence on competitive factors related to location and parking convenience and offers complimentary entertainment services to attract patrons. However, any food service additions will have to be evaluated carefully because they are likely to cannibalize profitable concession sales. All new food offerings should be coupled with thoughtful pricing strategies that maximize margins per guest. One of the most promising new entertainment offerings is the use of interactive digital experiences (made possible by new digital technologies, immersive technologies, and social media capabilities) for purposes other than interactive advertising. The core theater audience is a media-driven, gaming generation. (In fact, the original “gamers” are now middle aged men.) Cooperative strategies with gaming companies could generate especially appealing prospects. Not only could they offer exciting new experiences for targeted electronic gamers to increase demand; but if successful, they would create competition for studios to book theater space (decreasing supplier power). In addition, integrating the social component introduces entirely new potential. Imagine “Yik Yak” inspired interactivity (available for a fee?) in any of the suggested settings where like-minded enthusiasts are gathered. Leaders who adopt this type of strategy should move quickly to gain first mover advantages and choose their partners wisely. Competitors can be expected to follow, and new entrants (such as gaming retailers or social media companies) may be motivated to set up their own interactive facilities. Struggling retailers of any type may also be drawn toward this type of offering to make use of excess or unprofitable store locations. Redesign facilities to develop smaller viewing venues. Another possibility is to restructure multiplexes to accommodate a variety of mini-theater designs. Smaller screen settings offer several advantages for theaters. The viewing atmosphere can be better controlled to reduce interruptions experienced in larger spaces. Privacy or intimacy needed for new content or event venues can also be created. These value propositions create room for raising ticket prices. And if designed at an ideal scale, theater rental may become practical and more affordable to many groups or individuals for private use. With this suggestion, viewing selections and flexibility can be increased – particularly with the growing availability of original digital content. Alliances with companies like Netflix, Comcast, Hulu, or other major content providers (even television and cable networks for marathon events of popular series, such as ‘Breaking Bad’ and ‘The Walking Dead’) would secure viewing material and, again, reduce dependence on studios. Tapping into the recent phenomenon of TV “binging”, theaters could offer marathon weekends of popular content for enthusiasts to view full seasons or series with a like-minded crowd. Mini-viewing settings might build upon the home theater concept, attempting to deliver an experience a notch above what can be realistically created in the home and possibly discovering a way to deliver a "wow" experience. Innovation and comfort can extend the life and novelty of this strategy. Leaders should keep in mind that other struggling entertainment retail businesses could execute this type of strategy; and this approach can also be imitated by competitors. In addition, managing more screening rooms would likely increase labor costs. Finally, moving quickly to achieve first-mover advantages and wise partner selection increases the potential value of this strategy. In summary, evolving strategies for exhibitors will emphasize international expansion, align with the needs and habits of older audiences, depend heavily on innovation, and carefully craft niche strategies for a variety of market segments to overcome the inadequacies of the current industry structure. Movie Exhibition Industry Target IS Ind IS Solution Manual Case for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838