Strategic Management 2007-2008
Group Project Objective: To apply concepts and tools of
strategic analysis covered during the course to the analysis of a
firm
Title: A strategic analysis of the British music group EMI.
Group Members Katie Welsh0564116 Lauren Leslie0567543 Asta
Young-Smith0566397 Cindy Law0561762 Course Co-ordinator: Monia
Mtar
Submission date: 12th of March 2008 Word count: 4035
1
Table of Contents Introduction
..............................................................................................
3 Overview of the Music
Industry..............................................................
3 The Market
Structure...............................................................................
4 Part 1. Appraisal of the Industry
Environment...................................... 4 Overview of Key
Trends..................................................................
4 Review of the Broad
Environment................................................... 6
Porters Five Forces
Analysis.............................................................
6 The Structural Determinants of the Five Forces of
Competition...... 7 Assessing the Industrys overall
attractiveness................................. 8 Part 2.
Identification of the Firms Current
Strategy.............................. 9 The Steps EMI is taking to
achieve its Strategic Objectives............. 10 Part 3. Evaluation
of EMIs Financial Performance................................ 11
Part 4. Appraisal of EMIs Internal Resources and
Capabilities............ 13
Recommendations.........................................................................................
15
Appendix........................................................................................................
16 Identifying Key Success
Factors..........................................................16
EMI Group Resources and
Capabilities................................................17
Financial
Tables....................................................................................20
Competitor Analysis: Warner
Label......................................................22 The
Key Issues Facing
EMI...................................................................23
Bibliography......................................................................................................24
2
IntroductionThe purpose of this report is to conduct a strategic
analysis on the British music group, EMI. For this the broad
environment will be appraised to identify the major trends
impacting the industry and the factors affecting its structure.
Following this EMIs current strategy will be identified and its
financial performance evaluated. In order to highlight EMIs
strengths and weaknesses the firms key resources and capabilities
will be appraised. The effectiveness of the firms current strategy
will then be assessed to determine whether this strategy is
exploiting strengths in terms of resources and capabilities.
Recommendations will be offered to enhance the companys strategy
with suggestions made for possible organizational change.
Overview of the Music IndustryFor this analysis it is important
to understand the concept of the music industrys content and
structure. The Standard Industrial Classification (SIC) offers a
description of the music industry as involving businesses and
organisations that record, produce, publish, distribute and market
recorded music. 1 In addition to these, four main stakeholders
characterise the music industrythe artist, the consumers, the music
agents and the distributors. However, in seeking to define the
industry it is acknowledged that no one definition can capture its
diverse nature in terms of () musical activity and commerce.2 In
commercial terms the global music industry is a multi billion
dollar segment of the media industries (Kozul- Wright, Z &
Stanbury, L, 1998, pp14) and has reached a stage of maturity in its
lifecycle. However with the rise of the digital era, it is
undergoing significant transformation. With a core business sector
comprising the record companies and music publishers, the global
music industry transcends national boundaries and pervades
virtually every culture and every society. (Dolfsma, 2008)3
1
This definition corresponds to the International standard
industrial classification as appears on
http://www.helium.com/tm/404168/music-industry-history-music cited
8/2/08 2 Available http://woc.ec.pt.fuk.getfile.do?tipo=2eid=410
cited on 8/2/08 3 Article entitled How will the music industry
weather the globalization storm? Available from:
http://www.firstmonday.org/issues/issue5_5/dolfsma cited 4/2/08
3
The Market StructureFour large music companies Sony BMG,
Universal, EMI and Warner- dominate the industry and in 2005 they
accounted for 71.7% of the worlds recorded music.4 Having the
financial, legal and technological muscle5 has enabled this big
four to influence and control the industry to their advantage. For
this reason the music industry has been described as an
Oligopolistic market structure with monopolistic tendencies where
by this small group has dominated production, distribution,
marketing and market share.6 However over the years the nature of
the music industry has significantly changed, with greater
decentralisation and fragmentation (George, 2007)7 the dominance of
the major companies has declined.8
Part 1.
Appraisal of the Industry Environment
In appraising the industry environment, two components should be
considered, the broad and the competitive environments. In the past
ten years the traditional recorded music model has faced increasing
pressure as a result of emerging environmental trends.
Overview of Key TrendsThe digital revolution has had a huge
impact on the global music industry. The advancement of information
and communication technology is driving change and is dramatically
affecting the industrys business model and structure. This new
technology has lead to innovations in both the production and
distribution of music and with this has come greater opportunity to
create, enjoy and consume music. (Kozul-Wright and Stanbury, 1998,
pp17) One predominant development has been the convergence of
mobile and portable music devices (I-Phone) which has greatly
expanded on-the-go music consumption.
4
As appears
http://www.businessweek.com/globalbiz/content/jun2007/gb200770611_930387.htm
cited 8/2/08 5 As appears
http://www.oligopolywatch.com/2003/06/28.html cited 8/2/08 6
Available from http://en.wikipedia.org/wiki/Market_form cited on
7/2/08 7 Available from
http:www.abc.net.au/news/opinion/items/200704/51896190.htm cited
8/2/08 8 Available from:
http:www.ecommercetimes.com/story/A-Broken-Record-Global-music-Biz-losing-waron-piracy-61365.html
cited 3/2/08
4
Online distribution of music has boomed in recent years with the
internet becoming the most important medium for music promotion and
distribution. With this click and mortar e-tailers are
outperforming brick and mortar retailers, shifting patterns of
music consumption from the physical to the virtual. With this
revolution traditional music- consumption is being eroded,
diminishing the sale of physical CDs. With consumers growing
preference for single tracks over albums, online, single track
downloads are rocketing, proving to be the most popular worldwide
music format in 2007.9 Driving this change is a combination of
factors. The growth in mp3 downloads and P2P (peer-topeer) software
has provided the interface for uploading and downloading with
ease.10These innovations have enabled consumers to file share and
download music online. This shifting consumption trend has lead to
less demand for the physical product and consequently stores have
cut CD shelf space for other forms of consumer entertainment
products. Another aspect driving this change is the growing number
of people burning music on to discs and by implication diminishing
the physical purchase of music. With such developments has come the
growth of a new music consumer generation- Gen D (digital and
download consumer generation) who are driving consumption change.
With the growth of digital technologies and online information
consumers experience greater convenience, choice and lower costs
and consequently have become more powerful influencing price and
music formats. As a result record companies are no longer in a
dominant position of control. Digital technologies are also
affecting the industrys structure causing a re-shuffle of the value
chain. This has changed the role for many key players whereby
distributors can now sell online avoiding high fixed costs of
physical stores. Record companies are experiencing a role change
whereby they are potentially being usurped from the market, and so
lowering their perceived value. Artists are now able to sell
directly to consumers via the internet taking a more active role in
the industrys value chain. The implication of this is that some
artists are by- passing the record companies in favour of setting
up their own independent companies, leveraging the internet as a
tool for communication, distribution and marketing. As such the
future role of the traditional
9
Sourced from IFPI Digital music Report, 2008 Available from:
http://www.ifpi.org/content/libary/DMR2008.pdf cited 8/2/08 10
Sourced from: Assessing the effects of p2p music sharing on the
recorded industry Available from:
http://www.helium.com/tm/691163/sharing-program-which-enables cited
5/2/08
5
record company looks increasingly uncertain where artists and
consumers constitute() the only essential components of the
dissemination of music.11 Whilst technology has brought many
opportunities, it has however simultaneously led to a massive
increase in piracy. The ease of access and consumption of music
online has diminished the perceived value of the industry. It is
estimated that for every one, legitimate track sold, twenty are
downloaded illegally. 12 With this mass-availability of illegal and
un-paid for music, the industry experienced an overall market
decline in 2007.13 This constitutes a major threat to the
legitimate music industry in terms of lost revenues. In 2007 record
companies in the US made projected losses from illegal downloading
of approximately $4 billion14 furthermore the artists themselves
missed out on royalties.
Review of the Broad EnvironmentIt is evident that the music
industry is undergoing a significant transformation and with this
comes emerging opportunities to reinvigorate growth and
profitability. However, these opportunities bring substantial
challenges disrupting the status quo of the music industry. To be
successful companies must continually monitor their environment,
exploit emerging opportunities and re-think their traditional
business model. Through diversification strategies the big four are
expanding into music- merchandise, sponsorships and concerts as a
way to overcome the decline in record sale revenues.
Porters Five Forces AnalysisTo compete effectively, companies
must be alert to the dynamics of their industry and markets.15
Using Porters five forces the competitive environment of the global
music industry can be analyzed.11
Sourced from: IFPI International music managers forum: creators
and consumers come first: Defining the music industry Available
from: http:www.IMMF.com/IMMFpositiononthefutureofmusic.pdf cited
4/2/08 12 Sourced from IFPI Digital music Report, 2008 Available
from: http://www.ifpi.org/content/libary/DMR2008.pdf cited 8/2/08
13 Sourced from IFPI Digital music Report, 2008 Available from:
http://www.ifpi.org/content/libary/DMR2008.pdf cited 8/2/08 14
Sourced from IFPI Digital music Report, 2008 Available from:
http://www.ifpi.org/content/libary/DMR2008.pdf cited 8/2/08 15
Available from:
http://university-essays.tipod.com/porters_5_forces_analysis.html
cited 5/2/08
6
The Structural Determinants of the Five Forces of Competition 1.
Competition from substitutes:Within the music industry the threat
of substitutes is extremely high. The internet has created an
emerging source of substitute competition in the form of digital
music and digital delivery. The availability of substitutes allows
consumers to make performance and price comparisons with the option
of switching to download music. The growth of both illicit and
subscription downloading is effectively leading to the direct
substitution of recorded music for digital alternatives. With
little cost or inconvenience consumers are switching, to digital
and online music services attracted by the value- added benefits of
greater convenience, diversity of choice and lower costs compared
with traditional formats. Currently the chance of being caught
downloading music illegally is low further encouraging the consumer
to switch to substitutes. As a result the profitability of the
record company is being threatened with the better value
alternatives.
2. Threat of entry:The threat from new entrants has increased
with the growth of the internet. Lower capital investment and
operational costs for online distribution has lowered the entry
barriers for new independent record companies. As a direct
consequence, new entrants compete on a more level playing field,
where size is no longer a determinant of success or failure within
the online market. With diversity of demands, new entrants have the
opportunity to achieve success through niche target marketing.
Furthermore with these evolutionary changes, traditional
distribution channels are less relied upon and new entrants can
compete through online distribution and marketing. However starting
up in the music industry still involves risks, where investing in a
new- artist may involve unrecoverable sunk costs. Representing a
new artist requires financial resources, experience and substantial
contact networks and with limited resources independents might find
it hard to break in to the industry. The major players have already
achieved a substantial competitive advantage with well established
contact networks, global reputations and long- term relationships
with artists. Their financial muscle and repertoire of artists
enables them to spread risk over their range of portfolio
projects.
3. Rivalry between established players:Internal rivalry and
competition within the industry is high and remains tightly
concentrated between Sony BMG, Universal, Warner and EMI. With the
increase of independent labels7
entering the industry competition has increased. Large and small
companies are now directly competing to attract artists and improve
market share in both the physical and online markets. Due to the
intense nature of this competition, decisions made by one company
can influence others. For the main companies this intense rivalry
means that their market share fluctuates through competition and
can no longer be guaranteed. With parallelism pricing decisions
(Grant, 2008, pp 76) CDs are priced at similar levels and as such
companies are looking to their artists as a means of
differentiation whilst attempting to offer the most creative
channels of music distribution.
4.
Bargaining power of buyers:
The emergence of the digital music market has increased the
strength of buyers bargaining power. Through online network
communities, consumers bargaining power is strengthened by the
abundance of online information. Consumers are now much more price
sensitive and are becoming an empowered force, directly influencing
how music is delivered and in what format. With the growing
perception that they offer nothing more than capital, record
companies are forced to react, reinventing their business models
accordingly.
5.
Bargaining power of suppliers:
The bargaining power of suppliers within the industry has
lowered .The artists can now choose to circumvent the suppliers by
either setting up their own label or promoting their music via the
internet. This has substantially increased artists control over
earnings and marketing.
Assessing the Industrys Overall AttractivenessIn terms of the
industrys attractiveness different perspectives have to be
considered. From the record companies stand point, the growing
threats posed by competition, substitutes and consumer power
combine to diminish the overall attractiveness of the traditional
music industry in terms of assured profitability. In contrast, from
the artists and consumers perspective the industrys attractiveness
has significantly increased. Consumers now benefit from greater
diversity of supply mediums and better pricing, whilst artists can
enjoy greater distribution opportunities and improved control of
promotions and revenues.
8
Whilst record companies are experiencing a challenging time
there still remains tremendous opportunities to make money and
profit. The growth potential within the industry is unquestionable
and with continual advancements of technology further opportunities
will emerge. Whilst the global market for music is practically
guaranteed, the question facing record companies is how to ensure a
profitable status within the rapidly developing digital
environment. To secure long term viability and maximize profit
potential record companies will need to develop a strong
competitive advantage. The key success factors16 outlined, offer a
foundation for future prosperity within the music industry.
Part 2.
Identification of the firms current strategy
The British music group EMI is a specialised, private limited
company competing in the single industry sector of global music.
Based in London, EMI constitutes an international business,
operating in over fifty countries and licensing to a further
twenty.17 The companys product scope focuses on two main divisions:
EMI Music and EMI Publishing, which have built an extensive range
of music labels, recording artists and an impressive catalogue of
recorded music with over three million tracks. By vertically
integrating activities within the value chain, EMI has held its
competitive position alongside its main rivals Universal, Sony, BMG
and Warner. EMIs ongoing strategy is to deliver music to consumers
in any form, at any time and in any place.18 EMI has been facing
tough challenges in recent years with the increasing levels of
uncertainty within the global music industry attributable in main
to the digital revolution and the subsequent decline in CD sales.
As such the companys performance has deteriorated with pre- tax
losses of 263.6million 19 in 2007. In August 2007 the private
equity, investment company Terra Firma acquired EMI with the
intention of unlocking [the companys] hidden value20and reversing
its diminishing performance. As the existing business model at EMI
is believed to be unsustainable, change will involve the strategic
innovation of a new revolutionary structure for the group that will
improve every area16 17
Please see Appendix A Model for identifying the Key Success
Factors. As appears http://www.emigroup.com/default.htm cited
29/1/08. 18 As appears http://www.emigroup.com/default.htm cited
8/2/08 19 As appears on EMIs official website
http://www.emigroup.com cited 5/2/08 20 Available from:
http://www.terrafirma.com/about-terra-firma.html cited 5/2/08
9
of the business.21 The corporate strategy of EMI is therefore
focused on restructuring and reshaping internally to allow the
label to compete in the digital music industry. This will
completely change the functions within the firm in relation to
resource allocation, divestments and diversification. The business
strategy on the other hand will be directed towards gaining
competitive advantage on the basis of differentiation and also cost
reduction. First of all it is important to identify the main forces
that are driving change. 85% of what is put out does not make any
money while 30% of artists who get advances never produce an
album.22 Struggling to respond to the challenges posed by a digital
environment23 Loss of artists including Radiohead having negative
effects on EMIs reputation Recorded music division less profitable
and overstaffed Exceeded marketing budgets by about 60m a year and
wasted 25m a year on scrapping unsold CDs24 Changing needs of the
consumer, making artists less dependent on remaining with a large
record label.25
The steps EMI is taking to achieve its strategic objectivesEMI
will make changes to its business model over a six month period in
an attempt to combat these problems and achieve its strategic
objectives. The new strategy to turn EMI around will stress
tackling digital challenges, understanding the needs of the
consumer and the importance of keeping artists at the heart of what
we do.26 Additional incentives and better services will be offered
to artists as encouragement to stay with the label, as well as
promoting a relationship based on transparency and trust.27 Greater
emphasis will be put upon making existing artists more profitable.
This will be done by maximizing the opportunities associated with
digitalisation in relation to promotion, distribution and
increasing revenue by diversifying into new areas such21 22
EMI confirms thousands of job losses www.guardian.co.uk cited
18/2/08 EMI confirms thousands of job losses www.guardian.co.uk
cited 18/2/08 23 EMI confirms thousands of job losses
www.guardian.co.uk cited 18/2/08 24 EMI restructuring
www.paidcontent.org cited 10/2/08 25 Preview of Guy Hands EMI
strategy www.paidcontent.org cited 10/2/08 26 Preview of Guy Hands
EMI strategy www.paidcontent.org cited 10/2/0827
EMI confirms thousands of job losses www.guardian.co.uk cited
18/2/08
10
as merchandising, corporate sponsorship and touring. Although
signings will be limited, EMI will invest more money and resources
into its artists and repertoire function which will help discover
and develop new talent. The efficient use of social networking
sites will also make this process easier. EMI plans to direct its
marketing strategy towards digital sales and focusing on promoting
single tracks rather than concentrating on the production of full
albums. Wastage, inefficiency and unprofitability have become major
concerns for EMI, for this reason cost reduction is another key
part of the restructuring strategy. Guy Hands, the chairmen of EMI
since the Terra Firma takeover hopes to reduce costs by 200m a year
by cutting between 1500 and 2000 jobs worldwide28, mainly within
EMIs Music division. Staff and support functions will be made more
centralised whereby EMI will be split into two main divisions, one
handling the creative side of the business and one dealing with
back office.29 This will ensure greater control over more
simplified processes and waste will be reduced as there is less
chance of duplications occurring. The marketing budget will be
reduced which has created negativity amongst artists who believe
they will lose out and be trapped with the new, centralised format.
Some of EMIs 14,000 artists will be cut if they are unprofitable,
and pay advancements will be replaced with day rates or salaries
which better incorporate success and hard work. Although Guy Hands
lacks experience in the music industry he believes that by
extending and directing companys resources and capabilities in the
right direction will help him to achieve long due profits.
Part 3.
Evaluation of EMIs Financial Performance
Horizontal analysis and ratio analysis have been conducted in
order to evaluate EMIs financial performances in recent years.30
Gross profit ratios of the past five years have been stable for
EMI. We should however note that the horizontal analysis
benchmarking 2007 and 2006 shows that EMI has became less
profitable, level of ratio is only sustained because both profit
and costs have decreased proportionally. This is evident by the
decrease of EPS in the past year. Revenue and group profit have
fallen 15.79% and 39.92% respectively. The only profit that has
grown is share of profit from associates, which does not relate to
EMI operations.
28 29
EMI set to cut up to 2000 jobs www.bbc.co.uk cited 11/2/08 EMI
plans to tighten support and make cuts to tune of 2000 jobs
www.timesonline.co.uk cited 10/2/08 30 Please see appendix for
details of the analyses.
11
Net profit has decreased due to the fall of revenue as well.
Result from horizontal analysis shows that net profit has suffered
a 60.64 drop. This significant fall is caused by the relatively
high costs - operating profit has plummeted by 39.44% while cost of
sales, administration expenses have only reduced 13.05%, 12.30%
respectively, which are not proportional to the decline of profit.
Finance costs rose to 2.01%, mainly due to a high interest payment
of bank overdraft and loans. The negative basic and diluted
earnings per ordinary share imply that there has been a loss in
2007. Despite the undesired condition, ordinary dividends paid per
share in 2007 remained at the same level as 2006. This may comfort
long term investors slightly from the decline of profits. This is
potentially risky for EMI to have paid a total of 63.2 dividends in
2007. The large cash outflows could have serious adverse impact in
a relatively less profitable year. In comparison, one of EMIs
competitors Warner has more impressive gross profit ratios in the
past three years. Gross profit ratios are more impressive than EMIs
but achieved negative net profit in 2007 and 2005. The net losses
are mainly caused by the huge interest payment on overdraft and
loan. The gearing ratios show that debt funding of EMI is
relatively high comparing to Warner. The high proportion of debt
implies a large interest payment which led to unnecessarily low
profit. EMI may consider putting more weight into equity funding to
minimise interest payment, as Warner is. Gearing ratios of Warner
in the past year have been very stable at the level of 0.5:1,
meaning equity funding weights higher than debt funding, hence less
risky the financial side of the company is. Return of capital
employed has improved significantly in 2007, after the plummet in
2004. This is because both fixed assets and current assets have
decreased in 2007. Value of net assets have been brought down as a
result, and hence leading to a high ROCE ratio.
Warner, in comparison, has relatively low ROCE ratios for the
past three years. Value of assets is huge but profits were very low
for a company its size.
12
There are a few losses on different areas caused by unfavorable
currency movements, despite the fact that EMI has hedged against
exchange rate risks using financial derivatives. The inefficient
hedging strategies show that financial investment of the firm is
poorly managed. For further details on Warners strategy and
competitive positioning please refer to appendix.
Part 4.
Appraisal of EMIs Internal Resources and Capabilities 31
Having undertaken an analysis of EMIs resources and capabilities
(see appendix) the principal strengths and weaknesses of the
company have been identified. EMIs key strengths are: Intellectual
Property EMI possesses one of the strongest and most recognizable
brands in the entertainment industry and also has one of the most
important music catalogues and archives in the world, with the
artists that include The Beatles, David Bowie, Queen and many
others. EMI Music Publishing has a catalogue of over 3m track and
the worlds largest catalogue of musical arrangements with over 1m
copyrights owned, controlled or administered. It is imperative that
Global Sales team continue to ensure that this fantastic resource
is brought to the widest possible audience. Human Resources The
vast pool of artist and songwriters, who are found and nurtured by
the A&R, represents another key strength of the company. Guy
Moot, former EMI Music Publishing managing director commented,
Music and great songs remain the foundation on which everything is
built in this rapidly changing digital world.32 EMI Group is
dependent on identifying, signing and retaining talented artists
and songwriters whose music helps to generate great revenues.
Therefore, the company continues to invest a great deal of money in
discovering the very best musical talent from around the world.
Marketing Know-how.
31 32
Please refer to appendix for the analysis of the resources and
capabilities. Article entitled EMI Music Publishing songwriters win
top honors at the 52nd Ivor Novello Awards Published on the 24th of
May 2007 on EMI Group website.
http://www.emigroup.com/Press/2007/press36.htm cited 7/3/08
13
Marketing know-how is another key capability which enables EMI
to put their music where their fans are. EMI Musics business
success relies on its marketing efforts nearly as much as the
musical talent it promotes. For that reason the group allocates a
great number of their resources towards marketing and promotion.
Key Weaknesses are:
Management System Management system is one of the weaknesses
that company is experiencing right now. Whilst the company has good
policies in place they are very often ignored by a number of
employees through the whole management system. However, Terra Firma
is planning a major restructuring of companys internal structure
which will hopefully lead to some great changes in the near
future.
Having identified resources and capabilities that are important
and where EMI is strong, the key task is to ensure that these
resources are deployed in their restructuring initiatives to the
greatest effect. One of key strengths of EMI is artist, so it is
important for the company to seek diversification advantage through
merchandising, corporate sponsorship and touring in order to
achieve the competitive advantage. EMIs current business strategy
identifies diversification as one of the key strategies. On the
other hand management systems that had been developed over a long
period of time have important implications for firms capacity for
change. Thats where EMIs management systems could benefit from
Terra Firmas experience in strategically transforming business and
driving operational change. However, both companies have to watch
for culture clashes, personality clashes between senior managers,
or incompatibility of management systems that could result in the
degradation or destruction.
14
RecommendationsThe following recommendations are provided in
light of the key issues facing the company.33 EMI Group revenue has
gone down 15.79% in the 2007 fiscal year and led it to low gross
profit, net profit and ROCE ratios, as well as undesirable EPS
figures. It is vital for EMI to offset the decline in CD sales and
adapt to the changes in the environment to remain being attractive
to investors and artists. With the growing power of the internet
and technologies, the top management may consider to put weight
into effective e-commerce marketing instead of continuing with
traditional expensive marketing methods. It is also essential to
understand that gaining market share in the digital music area
should be highly prioritized as the trend of the music industry is
clearly moving towards the technological side. Piracy has
nonetheless become a serious issue in the industry with the rapid
development of technology. It is highly advisable for EMI to
cooperate with its competitors to target piracy34. The possibility
of achieving a satisfactory result against piracy is high with
their dominant power in the industry. By bringing in game theory
logic, it would be more sensible to work with the rivals in this
scenario to protect revenues in the future. In addition to sales of
record music, there are many other income generating activities
such as concerts, merchandise and sponsorship. It is, of course,
important that EMI continue developing its key strengths whiles
adjusting its strategy to the changing environment. The quality of
music produced is the core of the business; EMI should definitely
try to keep successful artist as well as continuing to identify new
artists with potential to growth.
Appendix33 34
Please refer to Appendix for The Key Issues Facing EMI.
http://business.timesonline.co.uk/tol/business/industry_sectors/media/article2584565.ece
cited 9/3/0815
A Model for Identifying Key Success Factors(Adapted from Grant,
R. (2008) Contemporary Strategy Analysis, Blackwell Publishing, UK,
pp 90)
Prerequisites for success
What do the consumers want?
How does the firm survive competition?
Choice- in how music is consumed. Price- value for money.
Continually monitor the business environment to identify
emerging trends and their implications for the industry. Identify
and satisfy consumers changing demands and preferences. Innovate in
terms of product development and distribution channels. Provide
value-added benefits to consumers through online music services.
Differentiate services to provide value added benefits and emphasis
points of parity with competitors to achieve competitive
advantage.
Access- to music to suit their lifestyle. Convenience- ability
to purchase and consume music at their own leisure. Value added
online services and premium products.
Key Success Factors for the Global Music Industry Through
continual monitoring of the broad environment capitalize on
emerging business opportunities with flexibility and speed of
response. Concentrate on making the delivery of digital music a
core capability. Differentiate through a diverse range of quality
artists and songs. Make legal, online music more attractive to
consumers by offering premium quality products and value added
services. Expand business scope to find new revenue streams in the
form of merchandise, advertising, sponsorship and concerts.
Co-opetition with other record companies to enforce copyright
protection within the digital domain. Invest in advertising and
innovation of online music services.
EMI Group Resources and Capabilities
16
Resources: Emis funding relatively dependant on debt. Equity
funding is not as heavily weighted in comparison with competitor
Warner. It implies that Emi has made good use of resources by
maximizing investment with debt funding. This, however, is
potentially dangerous if a large proportion of debts is not handled
carefully. Intellectual Property EMI Group posses many copyrights
and trademarks. The major names of trademarks are: Angel,
Astralwerks, Blue Note, Capitol, Capitol Nashville, EMI, EMI
Classics, EMI CMG, EMI Televisa Music, Mute, Narada, Parlophone and
Virgin. EMI possesses one of the strongest and most recognisable
brands in the entertainment industry. Location EMI Music operates
through a network of offices throughout the world, most of which
are held through lease arrangements. In UK, EMI own and operate two
recording studios: Abbey Road and Olympic Studios. They also have
three geographic divisions: International, UK & Ireland and
North America All of manufacturing are outsourced. EMI carry out
their own physical distribution activities in a number of
territories: UK, Ireland, US, Hong Kong, Thailand and Singapore. In
the other territories EMI have entered into distribution
joint-venture arrangements with other music companies. In certain
areas distribution services are carried out by third parties EMI
Group has an experienced and talented management team with creative
and business minded executives at the international and also local
levels. There is also a very good team of digital talent who are
fully equipped to realise the full potential of EMIs music content
in a digital world. However, Artists and Repertoire (A&R) who
generates fresh, high quality, new music for EMIs rich catalogue
and also artists who create and perform the music are the key
resources of EMIs Group.
Manufacturing operations Distribution
Human Resources
Capabilities: Research &
The EMI Group constantly conducts R&D to develop new
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Development
products in the form of artist & repertoire (A&R) to
launch new artists. It also explores new product formats, such as
ringtones and subscriptions, and digital rights management to
protect their intellectual property. Company reinvests around 13%
of its turnover into R&D.
Corporate Functions Strategic Innovation. In April 2007 company
launched a new premium download product which provides music at a
higher sound quality and without the restrictions of digital rights
management (DRM) to consumers. EMI is a first major record label to
do this by enabling the interoperability of digital music between
services and devices. EMI continue to create innovative
partnerships with various digital platforms like Yahoo, Napster in
Germany, or New York Daily News where news readers are offered free
music downloads from EMIs music catalogue. Such innovative products
and partnerships help EMI to expose their talented artists to the
large new audience. Multidivisional coordination. Its done through
ICT, based on Microsoft Technologies. Very little known about how
well the Company manages to coordinate their divisions, however
this capability should be helping the management to coordinate
their divisions more efficiently. Financial control. In the past
financial management lacked strong orientation by sometimes
ignoring companys policies like authorizing 20.000 on unwanted
parties and gifts for artists and 200.000 annually on flowers and
fruit for EMIs offices.35 EMI Group is going through the
implementation of the restructuring initiatives, and the cash flow
generation of the business is expected to strengthen significantly
when the gains from the cost savings are fully realized. Marketing
Effective restructuring and cost cutting. Following a global
corporate restructuring, EMIs IT team with the help from Avanade
company, implemented cutting-edge web marketing infrastructure
which enables EMIs labels to focus their marketing efforts on
innovative business opportunities rather than data and hosting
management.36 The company also has global and international
marketing teams, who manage major frontline releases from priority
artists, while a global catalogue marketing function handles
catalogue campaigns across the world. Digital Distribution35
EMI continue to broaden their digital distribution channels
EMI faces tighter budget Financial Times, published 30-12-07,
http://www.ft.com/s/0/64d22020b6f8-11dc-aa38-0000779fd2ac.html
sited 1/3/08 36 Case Study: EMI Centralizes Online Marketing with
Microsoft.Net-Based Web Services.
http://www.avanade.com/customers/casestudy.aspx?id=39 Sited
3/3/08.
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and Sales
globally by entering into agreements with partners like Apple or
Amazon in U.S., who make EMI music available on their platforms.
EMI music repertoire is now available digitally in 70 countries.
Digital technology helps the company to approach consumer through
online and mobile channels, for example, the EMI Music distributed
the 30 Second To Mars video using the latest Web2.0 technology.
Financial Tables
19
EMI - Ratio Analysis2007 200634.8382% 12.0438% 0.8126 : 1
53.4343% 1.4129 : 1
200536.9312% 11.9879% 0.8097 : 1 59.6720% 1.3229 : 1
200433.7624% 11.7556% 0.8524 : 1 50.1206% 1.3661 : 1
200335.6419% 8.3181% 0.7887 : 1 107.6897% 1.4141 : 1
Gross Profit Net Profit Current Ratio ROCE Gearing
34.9301% 8.5926% 0.7796 : 1 94.9176% 1.1871 : 1
EMI - Horizontal Analysis Income StatementRevenue Group Profit
Share of Profit from Associates Operating Profit Finance Income
Finance Cost Total Net Finance Charges Net Profit before Taxation
Overseas UK Total Taxation Net Profit after Taxation2007 m 1751.5
150.5 1.8 152.3 63.0 (152.6) (89.6) 62.7 (23.8) 10.0 (13.8) 48.9
2006 m 2079.9 250.5 1.0 251.5 57.4 (149.6) (92.2) 159.3 (33.1) 5.0
(28.1) 131.2 Difference m (328.4) (100) 0.8 (99.2) 5.6 (3) 2.6
(96.6) 9.3 5.0 14.3 (82.3) Difference in % -15.79% -39.92% 80%
-39.44% 9.76% 2.01% -2.82% -60.64% 28.10% 100% -50.89% -62.73%
EMI - Horizontal Analysis (2)
20
Income Statement Extracts Cost of Sales Distribution Costs Gross
Profit Administration Expenses Other Operating Income, Net
2007 m (1069.8) (69.9) 611.8 (466.9) 5.6
2006 m (1230.4) (75.0) 774.5 (532.4) 8.4
Differenc e m 160.6 5.1 (52.7) 65.5 (2.8)
Differenc e In % -13.05% -6.8% -6.80% -12.30% -33.33%
EMI - EPSEarnings per Share 2007 (36.3)p (36.3)p 5.8p 5.8p 2006
10.9p 10.5p 16.2p 15.7p
Basic Earnings per Ordinary Share Diluted Earnings per Ordinary
Share Underlying Basic Earnings per Ordinary Share Underlying
Diluted Earnings per Ordinary Share
EMI - Dividend PaymentOrdinary Dividend 06/05 Final dividend
06/05 Interim dividend Total 2007 per share 6p 2p 8p 2006 per share
6p 2p 8p 2007 m 47.5 15.7 63.2 2006 m 47.2 15.7 62.9
Warner - Ratio Analysis2007Gross Profit Net Profit Current Ratio
ROCE Gearing 46.1448% -0.6204% 0.6350 : 1 7.9926% 0.5427 : 1
200648.1797% 1.7064% 0.7226 : 1 10.4006% 0.5449 : 1
200547.1730% -4.8258% 0.7105 : 1 3.0545% 0.5458 : 1
Competitor Analysis: Warner37Warners goals Drive shareholder
value and improve competitive positioning Warners competitive
advantage37
Information gathered available from: Warners Annual Report
2007
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Leading artists and songwriters Stable, highly diversified
revenue base Flexible cost structure with low capital expenditure
requirements Digital leadership Focus on innovative A&R Leader
in independent distribution
Warners strategy Attract, develop and retain established and
emerging recording artists and songwriters Maximize the value of
our music assets and capitalize on the growth areas of the music
industry
Focus on continued management of cost structure Capitalize on
digital distribution and emerging technologies Enhance physical
business by developing and optimizing Warners physical distribution
channel strategies and creating new physical formats Contain
digital piracy Goal is to maximize the likelihood of success for
new releases as well as stimulate the success of previous release.
Seek to maximize the value of each artist and release, and help
artists develop an image that maximizes appeal to consumers. Raise
profile of artists, through marketing approach that covers all
aspects of their interactions with music consumer (help artist
develop creatively in album release, setting strategic release
dates and choosing radio singles, creating concepts for videos that
are complementary to the artists work, coordinating promotion of
albums to radio and TV outlets etc.)
How Warner targets customers
Windowing of content, create product bundles. Pre-release
activities can be customized online. Facilitating TV and radio
coverage / live appearances for key artists Corporate, label and
artist websites provide additional marketing venues for our
artists
Careful coordination of marketing and promotion to create
greatest sales momentum
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The Key Issues Facing EMI Liquidity and gearing problems could
potentially lead to bankruptcy. Management problems- where policies
are in place but are not being implemented with great effect. Not
maximising the efficiency of each functional department, with
overlaps of responsibilities occurring. Inefficient cost control-
unnecessary spending to impress shareholders and artists. Low
revenue- as a result of declining CD sales. Artists by passing
record companies Lack of leadership- whilst management are highly
qualified and experienced within the music industry there appears a
lack of coherent direction. Traditional marketing methods no longer
as effective because of the rise of e-commerce marketing.
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