Competitive Strategies in Creative Industries PDF

**[Competitive strategies in creative industries:]** **Simone Autera** **Attendance 75%** There are a lot of activities and papers, you can find it on bb. **Lesson 1:** Business Corporate Operations Selected issues in Freedom is participation\--\>Gaber\--\>Rousseau We are human being, soci...

**[Competitive strategies in creative industries:]** **Simone Autera** **Attendance 75%** There are a lot of activities and papers, you can find it on bb. **Lesson 1:** Business Corporate Operations Selected issues in Freedom is participation\--\>Gaber\--\>Rousseau We are human being, social being, and if we don't have part in the discussion, decisions were made by others. You are free as long as you participate. What is strategy about? From Anna Karenina by Tolstoy published for the first time in 1877.Why are we using this expression? because we are interested in the meaning of particularly happy that has a meaning for strategy. Strategy is about devising decisions up ways for the from in a given context to become **particularly happy**. What particularly happy might mean in business? -successful, what is a major of success in the business? -profits, is a key word. **Profitability** is something to do to be happy not particularly happy. Because profitability is a necessary condition for the objective of strategy but is not a sufficient one. Also have a good reputation and being capable of services our customers duty is important is not enough. Being particularly happy means something else, you want to be profitable but it's about the profitability in comparison with the average profitability of its **competitors\--\>industries.** Competitive implies always be better than others. What is the strategic way for being particularly happy? The objective is to come up with decision that let its company in a given company reach a **competitive advantage.** Higher profitability then the average of our competitors. In. order to understand what something lead, we usually refer to thermology: advantage, in antic French advantagè. Which means to be ahead, and you can't be ahead of nothing in order to be ahead or behind. You need a term of comparison. Competitive advantage implies that your comparison is your competition. Competitive advantage in microeconomics has another name is **Asymmetry**, is important for who want to be profitable and make money. There are different asymmetries of: -information -time -space -relational There is an entire branch of strategy with the name of competitive intelligence. The objective of a competitive intelligence units in a company is to study competition (this is right but not enough) to reduce asymmetric when it is for us a disadvantage and increase asymmetry in our advantage. Why? because in presence of a perfect market there is no value, you need **imperfection** because is imperfection that creates value, because is scarcity of information, of space, of recourses, of time, of relations that create the possibility for you to monetize on the scarce recourse. Because if everything in equally distributed there is no possibility catch a value that is higher than the average. Basically, a competitive intelligence unit leeks information on the market in order to success to competitor that they go to discover something that was secret but in reality, is meant to mislead that. Competitive unit is the unit that understand before there is an actual event that append that competitor re going to make a partnership in India, thus unit designed a new form the PR the public relation office in order to make it looks like they are going to India but instead they go to Argentina. You want to increase asymmetry. **EMI** was an independent company before we were born, it is in the Universal music group now, a major. EMI goes with name of Electric and musical industry, founded in 1931 in London and in the 60'-70'-80' was particularly saucerful and famous as a music label because people like Beatles, Queen etc. They had the possibility to come up in 1971 with an invention that was the biggest invention in medical diagnosis that is CAT(TAC)=Computerized axial tomography. An invention that makes possible to cross section of the human body building up, scheduling they were tridimensional, and they were capable to not only to captured bons but also other density part of the human body., such as organs, such as brain. In favor of EMI there were two asymmetries: -information, they invented it, they know how it is like. -time, the famous first mover advantage, they got it first. EMI was based in UK, that also now days before Thatcher privatization of health system was characterized by a health system where systema re direct clients of CAT technology and there aren't enough resources. Different from the US where the system is completely different, hospital is driven by investments in new technology. The problem is that EMI is not operating the US. There is a space asymmetry in comparison to anybody else that would like to access the market they contribute. We invented it but we are not operating in the right place, the markets size of UK is not enough. There is a market need and a market aside which is relevant USA, but we are not there, there is another company General Electric That already worked with hospitals. The problem in fact is that you need to training medical practician on how to use it and you can only train people you have relation with, and EMI didn't serve that market before, General Electric did. Around 80' Ima went out of market. What is this story telling us? That asymmetry makes the difference in where you can capture or not capture value plus the concept of asymmetry or competitive advantage is a **dynamic** one, ones you have reach it you are not ok you need to sustain it. We wonder what can make a form outperform, the positive divergent, is competition, the competitive arena. What is key in the concept of competitive advantage: profitability and industry. We want to access the average profitability of the industry we compete in, and we want to achieve a higher profitability than the average. This implies the first thing to understand is what is our industry. What is an **industry**? Is a group of forms that offers close substitutes, this mean equally relevant alternative for the clients. (Es. apple and orange juice, they are different, but they are both energizing, smooth etc.). What happens to substitutes, if price of a substitute increases the demand of the other increase. So, the problem about the definition of the boundary, of the industry we compete in is the definition of what are the substitutes, what are the closest substitutes that we have to consider in order to say we are in the same industry. Usually, the rule is the **technology of production and distribution**. Es. The book industry is an industry that produce and distribute books, but this is true only if my clients want to read a book because if they want to buy a gift for their mother, what is my competitor? Flowers and if your budget are high also perfumes, wine experience. The television industry is called that day because the technology of distribution implied a square box but then arrive Netflix and say the competitor of Rai is not Canale 5 the competitor is sleep because basically anything can compete against your consumer needs. The industry boundaries are also defined by the market's needs. Profitability: there is a very complex formula for it. **Revenue-Costs(C)**, we are interested in increasing profitability of our company and increasing it in comparison with the industry. **Revenue= Price(P)\*Quantity(Q) demanded** Quantity demanded is **WTP** is the desire that exists in the market for the product you produce. Whenever you talk about profitability we talk about three variables: -Price -Costs -WTP The problem is to balance these three. We have to understand how something that has happened, dishappened or happen in the future have an impact on these three. What are the characteristics, the conditions, the variables of the competitive arena and what is these condition impact on profitability (so cost and WTP)? A model that we work on is the **five forces** model of 1969: it's important to capture different dimensions that are called forced that have an impact on the average profitability of an industry. Not all the industries are equal in terms of the potencies profitability that can be generated. Airline industry:" there is only one to become. A billionaire in airline industry and I is to become a trillionaire" because is an unattractive industry indeed there are there all the States. There is a horizontal dimension that tells us about the forces that have an impact on profitability on the bases of the bargain power, the negotiation power, the relative power of the player along the value chain. What is the relative power that your buyer has? And what is the relative power of your suppliers? **Buyer\--\>**those who buy products **Suppliers\--\>**those who provide you the input factors in order to come up with a product you sell. Vertical dimensions, menace from the external environment. These forces are **substitutions**, equally relevant solution for your customers to solve their needs and wannabe competitors, **new entrance**, those company that may get into your industry and became a competitor. The fifth force of the model is the **overall rival** in the industry, right now without considering those that want to enter in but the present, the actual competitors, how fears are they? Telecommunication: they compete but at the end they agree and there is maximum five players in the industry and when we think that there are more than that the others are part of these. What is the objective of strategy? Is to prepare and conduct and analyze of the external environment, the industry we operate into in order to understand across these 5 dimensions what is the impact that they have on profitability (on WTP, price and Costs). Supplier bargain power, we need to decide when we conduct an industry analysis are two things: -**valence** of the force, is that force supplier bargain power**: high, medium or low** -what is the **impact** on profitability? **Positive or negative** If there is a force that has a positive impact on profitability what happened to costs? They decrease WTP increases and price increases. If the impact is negative costs increases, price decreases and WTP decreases. Each single force has an impact on at least one of these variables. If the supplier bargain power is high what happen to profitability? It's a negative impact because costs increase. What happens if the fret substitution is high? The profitability will decrease because it decreases the WTP and as a reaction it will decrease the prices. Strategy has also to understand the organization, to watch into the organization. We need to complement two analyses: **the internal and the external** one. Strategy is an integrate set on choses that position the form in his competitive arena, industry, in order to generate higher than average profitability. **Lesson 2:** When it comes to formulated strategy, it is about to combine two complementary analysis the external, the external environment named the industry of reference, the arena of competition, and the internal, inside the company in order to understand the company and get in the position of catch competitive advantage. Competitive advantage is about asymmetry and be ahead of somebody else so, we need to clearly know which are the terms of comparison, the competitive arena, the industry and the average of industry, the average of profitability. Our mission is to find ways to ensure that in the long run we get a higher profitability then the average profitability of our industry. **SoundCloud case study:** We are in 2014, and we are wondering if SoundCloud, our company, need continue as a launch/a lab for emerging artists or change direction towards the growing industry of mainstream of demand streaming. One of the reasons to continue as an emerging artist lab is that the industry we are considering is saturated, there are already bigger player like Spotify, so it is difficult to enter in that market, there is no action space for us. The problem is that where we are right now is on stuck, there are some issues that we should face. There are legal issues especially when it comes to the fact that over the 80% of our catalogue is represented by samples, remixes that lead to the problem of the misusing copyright material. Our characteristics is that one so nobody will use us if we change and for our user is difficult to switch to the mainstream streaming. Soundcloud is under the standard of the industry we are considering. Brand awareness and reputation that we should keep and there are problems, labels, legal problems and a huge problem are money, we can pivo to mainstream industry, we can continue for emerging artists, but the problem is that we don't do any money, we are in complete loss. We need to make money. So, the **real question is what's the best decision in order to star making money?** What is the revenue model of Soundcloud vs Mainstream music industry. We are in 2007 in Sweden and the founder of Soundcloud identify a market gap in the industry of digital platform for all the obeys and they create a market place in order to artists, creators such as DJ, video bloggers, musicians to match the interests of their fandom, or a new fandom or listeners that are interested in searching for, discovering, providing feedback to their favorite music creator. There is only one single revenue stream, the one that SoundCloud gets paid for the upgrade on the artists side if they want to upload more than 3 hours of content. \--\>this is why the revenue model doesn't work. Then we have the distribution industry, we are in ten years ago, but it seems like a century ago and we have two main business model: one is for **free model** and the other is for **pay model.** For both model the value chain is the same: we have a creator/artist/composer/performer that makes music with the help of some players witch work such as first as producer and then as distributer\--\>labels The work is to put the effort, financial, distribution, channel ways to help artist to reach the market and to be in contact with the demand of products. **IPRs** is for Intellectual propriety right, what is exchanged in the value chain, a don't pay for a song, I do pay for it because there is only one person that wrote and perform it. Because of owning the exclusivity of those rights, it needs to be remunerated for that. Exchanged into artists, labels, and between labels and the exhibition industry. On the other side we have the multisided market, in the for free model, implies multiple demand that go matched: The radio, Spotify in free version imply the matching between those are looking for music, fans and adverting. So, the revenue model is like a get paid for advertising in order to impress listeners whit their communication messages. So, two different models. There are some labels that are stronger than others: The big 3 **Universal, Sony and Warner** that are the 80% percent of the global market. Let s came back to the decision:\ We have to understand that the way we are is kind of stuck, but we don't know how is the industry we are considering entering. We have to understand if it is unattractive or not. The objective of this external analysis is analyzed, asses, monitor, consider the condition that within an industry have an impact on the average profitability that can captured by the industry participant. If it is an attractive industry, we can find a way to compete here and have success but if is unattractive we can find a way to make it more attractiveness with some adjustment or we can know from the start that maybe is not interesting as we thought. We need to combine the analysis of the attractiveness of the industry we are considering entering and the analysis of the internal characteristics of the company. Now we analyze the attractiveness: We use 5 force model by Porter: We have an horizontal axis that goes considering the bargaining power of player along the value chain. i.e. suppliers and customers, buyers. We had the vertical axis which consider the frack from the environment that is external to the industry i.e. those were considering entering (SoundCloud) and subsists. What is the actual competition level? Competition among existing players. We want to understand how each force has an impact on the average potential profitability or the industry we are considering entering. We need to monitor valence of each single force whether it is high medium or low and we need to assess the impact of profitability whether it is positive or negative, increase potentially or value gets eroded. Considering valence is the customer concentrated vast majority of the quantity purchased or consumed in the industry in the hand of few customers or many , is it a concentrating market or is fragmented one? We want to make an analysis on the mainstream on demand industry that is big industry are considering entering. There are as many customers as potential musical listeners. Multisided market: Listeners and advertiser, potentially any other type of my access equals the possibility of advertising their own marketing campaign. Let\'s speak for a moment listeners as a customers are all equal? No. They get segmented by maybe with a value is referring to his purchasing power. They get to use the platforms in different in terms of frequency probably in terms of their music appetite. There are some users which are more fluid this using it so digital fluency. Last criteria is how much you tolerate advertising. They are sub segmented themselves under the following criteria right here and this segmentation implies that they are not equal in wiliness to pay, the maximum price a customer is actually willing for pay for a product. So different willingness today implies that we have two models for paying and not. Price sensibility= price elasticity %change in the quantity of a product over the % of change in the price of the product. \%. change Q \-\-\-\-\--\_\-\-\-\-- \%. Change P 5000 subscribers, an increase of the 15% price following this increase of this team percent of this price ,250 stop their subscriptions stop the service. I see movies only 5% of subscribers get away, so it's inelastic. 250/5000b=5%/15%= 0.33, below 1 What is price sensibility depending on? Availability of competitors. If I can have it for free maybe my willingness to pay for it, it\'s not that high. So, there are other options in economics substitution. So, what does price sensitivity depends on? yes on the need but they are substitutes so willingness to pay is highly related to substitutes. We have the worldwide interactive music industry streaming market in between 2011 and 2014, and these are the relative figures in terms of number of users and in terms of sales revenue. For pay and free model in terms of revenues have been calculating for the last year the a r p u average revenue per user which is 40 dollars for the for pay version and five dollars for the for free. What is the consideration? It\'s convenient to convert for free user on for pay subscriber. How many free users we need to make the value of a single for a pay user? eight I do two things: increase scale, the number of free users how do you increase scale usually I mean how do you increase the demand of a product usually the easiest way yeah you must money to convince people to buy plus you decrease the price. Plus I want to convert them so I want to convert as many subscribers as many free users on to subscribers I can what should I offer them to convince to subscribe? offline listening, the mobile listening, find a personalization in the service quality audio all these added services \--\>we have costs, we need to invest money so costs increase, this is the paradox. In the short term both solutions imply that your profitability goes down. Other questions about the customers is it easy or is it difficult to switch to other offerings? are the offerings differentiated? differentiation implies costs. Advertising pays a little because what is the type of attention we have when it comes to advertising? advertising is a jarring structure. So, what is it the audio advertising that pays the most? The one that is done by the speaker in a podcast, it\'s a host read other why? because in that very case the content you\'re interested in which is the podcast which is hosted by a podcaster that eventually you have attention bears the exact same voice of the person which is speaking to you. Is basically an endorsed type of advertising by a person you estimate intellectually. (YouTube the video stops why? because they want you to watch the video not just to listen to the video.) What is the bargaining power of suppliers? is there supplier concentration? What are suppliers what\'s the name of suppliers in the industry? Artists, labels. When it comes to suppliers there are two types of suppliers, suppliers that are independent artists which are not tied related to a label which finances the work and labels \--\>that there well it is pretty much concentrated the supply side why because over the 80% of the catalog in the music world is owned by three players three suppliers 80% of the volume sold to the streaming services. So, on one side we have a very heavy fragmented supply side independent artists that one by one count zero the respect of buying in the power on the other side we have labels that are represented by hundreds of different labels of different size but 80% of the catalog which can be sold to the license to the streaming service is owned by three. Are there substitutes for suppliers' products? No substitution because music is represented by exclusive properties which are intellectual property rights which are fragmented across a very small number of players. What is then we are commenting the bargaining power of suppliers: can streaming services go to contract with a particular label? yes but I have 30% less. or can label succeed without contracting to a particular service? Yes Is there an incentive for record labels i.e. suppliers to contract with a streaming service exclusively? No, because there is only one job which is to recruit the investment they may be able to produce the music by their artists plus make profit \--\> so maximizing sales \--\>anywhere in the world So the more distributors are the better it is so no sense to exclusively sign with a specific service. So what is it the balance of suppliers? high and what\'s the impact of the profitability? negative \--\> cost increase Substitutes: Are there any substitutes to on demand streaming? other ways of enjoying the music and when it comes to digital services, we say equally relevant alternative which are nevertheless delivering another type of service product so for example non-interactive streaming for example pandora\--\> what is non-interactive streaming that basically you click on the first song or the first track and they propose you the last. And pirated music. When we consider substitute performance and the price. A lower performance of the substitutes is compensated by the price. (All services at a certain point gets to be priced equally.) what is the balance of substitution in this industry? High what is the impact? negative lower price and lower WTP. New entrants: We have to consider rather barriers rather obstacles rather conditions that might hinder the entry of new players within the industry. Is the market growing or mature? it was a growing market. Do customers have high switching costs? bias is it difficult to switch from a service to another? No, it's easy. If there is plenty of capital in the venture capital market which might found new enterprises is the threat of new entrants high or low? High So, the balance of whose force is high What the impact on profitability positive or negative? and most specifically what is that gets impacted? Prices go down because more competitors are there, I need to capture market share. Costs increase because it increases power of suppliers. So, profitability is impacted in all three levels. How many players are in the business at the moment? back in time there were about six players who are daily independent players i.e. huge corporations which have different businesses that got into the industry as well such as Microsoft and google. Plus can the service be highly differentiated? Yes, you can invest in what building capacity i.e. computing capacity data capacity in the different services such as live by listening in further personalization of the service including your library of cataloging content. So you can differentiate the service in order to make people off for your service rather than others so what does this imply from a profitable point of view if you invest and compete in differentiating your service\--\> higher costs and how are the costs for these type of firms i.e. for student services distributed between fixed cost and valuable cost? If I need to differentiate myself my investment implies that I have those its costs which are higher in the long time which implies that if fixed costs are higher I would like to recoup this cost and how will you recoup this cost? Sell it more, you try to amplify your market because you want to maximize the increment of your fixed cost on scale. But for increasing your customer base what you have to do a part of the reason that you are back to right to just say before and simultaneously you want to increase your market share you want to convince people to try out your product what do you do you lower the price. There is a problem though then if we consider the valuable cost i.e. how costs change according to the amount sold within this business, it is a complicate logic why because the valuable cost i.e. how much you have to pay the right order say for simplicity the record labels per street doesn\'t change on the basis of how many streams. You always have to pay about 70 percent of the value per stream so the more you sell the product and paradoxically it doesn\'t change anything to your marginal cost. Spotify always pays the 70 percent; these value the record labels doesn\'t diminish on the basis of how many streams the platform makes of that specific product. So you increase your fees cost because of investments but when it comes to the valuable cost i.e. the costs which are related to the production in this case the distribution of your product don\'t change proportionally are always about the 70 percent of the share. Is it the mainstream undemand streaming industry an attractive industry or not? is it an industry that enjoys conditions which favors profitability of which are against the average profitability generation? It is one of the worst industries ever in the world. Spotify with podcast company change their cost structure because they did not have two days each single day each single moment the 70 percent of the value to the right holders once you buy a podcast company those podcasts are yours, so you make investment but then that content you make people listen to is yours. The actual result was no way at all to enter such an industry, even though we needed to. So, if we do not enter the mainstream on demand streaming industry, nevertheless we should make some other decisions in order to improve our situation. So, we should continue as an after-emerging artist? yes, but how? We should do differently. model which sort of combines the two perspectives \--\>SWOT. a model which combines the appraisal of internal and external characteristics to the company in order to form the decision-making towards what can be done in the near future for improving the position, the sustainability, the profitability of the company. So, SWOT is a model which stands for strength, which consists of opportunity these are the derivative products of the external environment, external to the common-word characteristics. Some weaknesses, it is about the internal characteristics which can appraise to with an analysis of the inside of the project. The problem is that it is overused, abused, and there is a fact that it is usually made in such a way that it is ultimately used less pointless. It doesn\'t uniform any list of the main things. the strengths: it\'s a matter of a track record in terms of a positive track record in terms of relationship with artists and more specifically emerging and about being capable of building a community of enthusiastic listeners. So, definitely they say that there is a positive track record and present time for the company, and that is its positive segmented along the way in relationship with both the market serving creators and fans. Okay, we are working with such strengths with the attempt of informing decision making, i.e. we want this consideration to be actionable. We would like that out of the considerations we make, it comes sort of straightforward what can be right in terms of action to be taken. We make an analysis, but this analysis should be informative, should make us in the position, if I have an executive, that I read it, and options come in needed into my mind. So, I have a very good track record with artists and listeners. How can I translate it into an actionable strength? So, this translates into a high brand reputation for both the market, and what does this brand reputation bring? it has two potential results. Positive track records, brand reputation\--\>attract investments. The investments stand for, we have strengths that we can defend on the funding market in order to convince potential funders to give us the money that we want to invest in order to leverage on something opportunities. So, we have some of the conditions which are required in order to undertake the opportunities we consider. Plus, network effects. Basically, our high brand reputation is something which makes us more and more attractive to more and more listeners and artists. More and more artists get on our platform, more and more listeners are getting on our platform because I\'m likely to join the course of the increasing catalog that we have available. On the other hand, the increasing amount of listeners is making us particularly interesting as well more and more for established artists. So, established artists got interested as well on our platform. Plus, the track records that we got is presented by the fact that some of the artists, because recently signed by biggest record labels, such as the rapper Lloyd and so on, have been discovered for us on our platform. So, it looks like we are positioned with very high brand reputation in the market as a place to be for emerging artists. Where music enthusiasts need to go if they want to know what is emerging in the musical scenario. So, an increasing popularity among listeners over 180 new users per month lead to established musicians to take notice. Resulting in a P for far-fetched users and potentially to other players such as labels, advertisers, partners. The more relevant on the market you get, the more bargaining power you will have with respect to potential counterparts. High level of brand awareness reputation among emerging artists that consider the platform a great stage for audience discovery. As the result of the growing market success and attraction of established artists on the platform, the company has been capable of raising multiple rounds of funds and to see the table. The idea is to translate in potential support for investments. Plus, it has an extensive library of user generated content. Over the 80% of the content catalogue, it is presented by PJC. As the translate into, a value proposition to listeners willing to discover but as well for creators and DJs which are in search for a catalog of audio to sample and to release. What about weaknesses? The company seems not to be able to monetize this service enough. There is no real path to economic sustainability. Once artists could reach a relevant audience, they lamented low revenue ratio for the space. So, on the one side you don\'t monetize enough, plus it looks like you are with your pitfalls in the revenue model leading to the dissatisfaction of one of your markets which is artists. They lament not to get really related to their works, something that it happens on other services such as Spotify. Plus, the platform face problems when it comes to a differentiation potential in its user experience and in the user interface. This leads to a limited opportunity for branding and direct interaction of artists with their fans in line with the dissatisfaction of artists themselves. Competitors instead have been developing social environments for artists\' funding from funding directors. So, basically, they have the possibility to interact either with funds with funds or you as a funds player to give them a run. The major weakness is the vendor which is not capable of generating money and more specifically 40 million registered users. The reach of an average of 180 million people per month and 5% of registered users that pay for their funds. So, conversion rate is a razor thin. On the one side we have 180 million people per month, strength, possibly trapped records when it comes to people to grow back in time Spotify yet far less users. Out of those 180 million only 40 million as the login accounts are registered. And only 5% of the registered users actually have a paying account. So, what is the main weakness? The configuration of the platform interface wise as revenue otherwise as a non-existence path to economic sustainability. Leveraging your strength and looking at that from the external environment we can get in order to look for future jackets. What about the threats? Losers. So, paradoxically now the higher interest that established artists have on the platform there\'s really self and further interest by the regular labels. What establishes artists is the higher the presence of the label labels is there, the higher the chances the labels are going to claim legally for infringements of copyright, the legal record is for the platform. And what is the result of these scrutinizing eye of the label labels on the platform that some clouds have to first pay eventually. And before actually paying, ask to its interest to remove the infringement of those. The result is somehow using this favorable position in the eye of their core targets. Users generate user generated content on the basis of other people content. Two problems: They do not get paid so they might start asking to get paid labels. Second, they will ask to monitor for legal use of their intellectual property, the rights in user generated content. These might delude the image of some cloud as an anti-label system and lead to consequences of this dissatisfaction of portions of artists creators that might ultimately lead the label. So, the growing interest of labels imply on one side what we just commented and that of said lawsuits, potential lawsuits. On the other side, there is already the streaming of music which is copyrighted. Though it\'s not the highest part of the consumption of sound, but it already exists. And the problem is that if many neighbors look at sound clouds as a major value for their music listening, of course they start playing it well, but it should pay us exactly as Spotify and all the others are doing it. As a result, you get into the business, you should have decided not to enter streaming. What are the opportunities? The opportunity is that, first, emerging artists have not yet labels to protect and to nourish their dreams financially. Result, they are a market that is looking for a support, not in the form of labels, but in other ways. Plus, there is a huge discontent, dissatisfaction across artists in the way in which they got or don\'t get remunerated by the streaming services in large. So, artists are frustrated by the bargaining power of revenue labels which grab most of the value generated by their strings. Soundcloud can take advantage of this frustration towards the system, leveraging on its emerging artist\'s leaning position and investing on the solutions for the aid to develop their careers. For example, I help you get in contact with an audience on my platform. I provide you with analytics in order to give at least the right audience for your music. I\'m going to tell you about the performance of your music against different clusters of assets. Artists are frustrated not to get adequately remunerated by the mainstream streaming model. So, it\'s SoundCloud to develop new solutions where artists monetize their relationship with their funds. So, new artists feed us for pay that make it possible for artists to get paid directly by their funds. So, in terms of analysis of what we are getting wrong or right, weakness in this case, combined with what are the ways of change, current and ongoing industrial environment, threats, negative, positive side, opportunities. If we combine these views together, we ultimately can try to spot room for movement. We try to spot the areas that we might have as areas for a value trajectory in the future. And what is then the direction that the sound clouds can take according to the swot? So, 2018 and 2020, they have been expanding the suit, i.e. the array of services they had for creators, getting to different years so they got to be paid for different views of services according to the needs of creators, artists. They acquired a company because they had the possibility to do that. They had the creative meaning of the market to come up with investment in order to acquire the company in order to find or amplify its capabilities in data analytics and they then provided as a service to the artists. They reached 200 million tracks in their catalog and think that Spotify back in time had only 80 million tracks from over 20 familiar creators all around the globe. They partnered with Pandora on advertising that says to allow advertisers to reach a combined handling of the listeners. So, they had been looking for an in-revenue stream advertising that could subsidize what the tier of their funds, which was for free. 2021, they got further investments which made it possible to further diversify their offer. In the direction of providing services to a specific segment within the music industry. The one, they started from the past being strong in emerging artists. So, they carved for themselves a unique positioning away from the completely unattractive audience. Immagine che contiene testo, lavagna, calligrafia Il contenuto generato dall\'IA potrebbe non essere corretto. **Lesson 3:** Chart: brought the highest amount of revenues across time to the industry yet from the moment on they collapse. So, there is a decrease in the physical media and it is an increase in the digital media. More importantly, the takeaway is that guys, something happened and in almost ten years we have been losing between billion dollars. This is the point. This is the only thing that counts before getting to understand that we are recovering. The only thing that counts before getting to understand that we are recovering is what happened and why it happened. We have been losing 15 billion dollars in ten years. So, the very object of today\'s session is to understand what happened and why it happened that the music industry has moved from a pie chart, 22 billion, to a pie chart to a size easter, 7 billion in just ten years. This is a model which helps us, us sets, understand our profile, varies the conclusion very that can be generated and captured within the industry. The pie model helps us visualize map picture, what is the potential industry earnings within the industry, as it is taking the shape, the size of the area between two curves. The demand curve and costs of the resources that are necessary to produce a digital product in that very industry, i.e. cost of supply. The demand curve is by definition in negative loads, i.e. the higher prices the less quantity demanded. The cost of supply is with an enforcement keeping standard, zero loads. Of course, we know that costs may change according to the overall volume that can be produced. So, the demand curve and the cost curve of supply which can be sell as well the average opportunity cost curve. Why? Because it represents the lowest price alternative that exists for producing an industry product. So, the demand curve and average opportunity cost curve, the demand of supply can move, and the demand of supply can shift right or left. By moving each single curve, either demand or opportunity costs. By definition, the area contained within the two curves either grows, increases or shrinks. So, this implies that according to exogenous and endogenous factors in the industry, the potential in the industry earnings across time change. So far so good. The demand curve, as we know already, changes are e-demand in the diminishes or increases on the basis of factors such as social demographics, co-excessing power, and the existence of such a circle as the demand curve when it comes to cost, depends for example, the rate you made upon, so suppliers are giving power or they take the knowledge of revenue or square to maintain the product or distribute the product of the industry. We are in 2008, And we are in the automotive industry, so counterfactors. We have prices, euros in the vertical axis, and we said overall volume produced within that industry, i.e., one. So, in those years, what I mean is demand has this shape, d1. But there are some factors that change and have an effect on the industry, demand curve. These factors are population growth, especially developing countries. GV grows and leads to an average income which is higher in the past, implying potentially higher purchasing power. Moreover, what increases is infrastructure\'s because you need a car if you can drive it somewhere. Result, demand curve moves from d1 to d2. Demand potential increases. What happens to the average opportunity costs curve i.e. the curve of cost of supply of the music distribution industry, and what happens to the demand curve of the music distribution industry at the beginning of this present century? If the willingness to pay as we know for music decreases, accordingly the demand for music decreases, i.e. the demand curve shifted less. So, divide and shrink\--\>resulting in a smaller pie. So, there is a fact that in those years, today even more, we have never consumed as much music in the past as we do now. We have music everywhere, right now. And we have music everywhere because we find music everywhere, but because we have the chance to bring with us music in any place we go. Whatever music we like. Our parents did not have the chance to do that. Maybe we should pay attention to what we are considering, because my question is not the demand curve of the music record industry, i.e. the industry of record labels, i.e. those who are selling compact music. My question is, what about the curve of music distribution industry? i.e. an industry which is about distributing music to people. So, yes, it is possible that the willingness to pay for music of people with diseases, and simultaneously, people get to consume more and more music than they did in the past. Why the willingness to pay for music degrees, yet we started consuming more and more music than we used to do when we were paying for it. There are three alternatives? There are free alternatives plus The Internet and digitalization of content. So, it is a digital file. So, what happened to the curve of demand ? Because music is actually available in many different ways, other than the usual way of accessing it through CDs, i.e. through physical media. The demand increases, why? Because there is more opportunity to consume. What happens to the average opportunity cost curve of the music distribution industry? And so, the one side the cost for supply of the resources which are necessary to produce in this music, why? Because with digitalization, we do not need to produce any more physical copies, but by definition, on average, it costs less to develop multiple copies, not physical, but digital. Naturally, the marginal cost at each single additional copy is zero. But this is also that it is for labels. It is too credible. It\'s not just labels right now that produce in distributed music. It can be anything, depending on how it is by its own, or it can be that any of us distribute music online. Digitalization, internet. Music can be produced at far lower cost and can be distributed at zero cost. What happens? New technological innovations and standardization lowers the opportunity cost. Production, self-recording and mixing solutions, and distribution, dematerialization of music, digital advice and internet protocol. New technologies make it cheaper and more convenient to do the activities that industry needs to actually distribute music in the past. What happened to the demand curve? Increased possibility of music consumption through personalized playlists, peer-to-peer. So, the exchange on the internet of files that we were free to upload, free uploading, and free downloading, on the basis of the development of the amount of supply of these files. The new opportunity costs curve lowered down. The result is that you want to apply all the music distribution in the street. It got bigger. From big yellow to the red one. Then, if you are not accepted from the music record industry, the first question is if the pie of our industry, the potential in the story is increasing. Why ever we are losing 50 million dollars in tech? Because that\'s paradoxical, right? We are losing money where everything in the market is giving us that the potential then can be captured than the industry is increasing. They were unable to understand as much as they had done before. What is it that they did not understand and led them to lose so much money? what is it that they didn\'t ask themselves properly? They didn\'t get the needs of the consumer, listen while nonpaying for it. So, what happened is that the demand curve were flat. The average opportunity cost moved down. The pai, i.e. potential industry audience grew. Because on the supply side, costs decreased, giving the possibility for new entrants to get in the music distribution business, including users, i.e. customers. And the demand got the possibility to increase because new ways of purchasing and distribution of music made people to consume more and more music. If we look simply at the demand of the supply curve, the result is that there is a new out-growing demand from D1 to D2. But the problem is that the lower average opportunity costs made it far cheaper, possible, to supply music on the market. The result is that the reason that we have 24 hours per day or 7 days per week, supply out-grew demand. There were much more music available and easily accessible rather than the demand that was being applied in the demand growth. And the very simple market load implies that when supply inside the demand price goes down. But this is not what is going to begin with. We already know that we stop paying for music. But experience it. Maybe you didn\'t leave the change, but you already know that you don\'t pay that much for music. As it was used to be paid in the past. So, we know that something happened, internet, digitalization, new technologies, which made it possible to allow for a supply of music on the market that actually out-grew, out-pays demand so much that the average price of music fell down. The point is, the pie of the music distribution in the internet is the pie of the music distribution industry got bigger but record labels, did not capture the slice of the bigger pie. If potentially there is greater value, why do we use money? So, if we agree, as we agree because we got there together, we have the pie of the music distribution industry got bigger, which implies the potential value can be captured within the industry is higher than in the past. And if we know that the incumbents of the industry are not made to capture that value, actually lost money, the question is, who else then captured the value instead of that value? Who else did capture the new potential value in the music distribution industry rather than the incumbents of the industry? i.e. whose work was to produce and distribute the music we used to pay for. iPod, so what is special about them? it's a bundle of hardware and software\--\>iTunes \--\>online pay for track and synchronize them to your devise. On average, how much could we pay for a single track on iTunes? 99 cents How much money did Apple retain out of 99 cents? We pay the artists\--\> 70% commissions to the bank\--\>0.22 Why Apple decided that actually if he was going to pay engineers, to pay all for the fees cost they have, they were okay in losing money with iTunes. Why they were okay in not being profitable with iTunes? So, it\'s okay to lose money on the software because they had only one objective. The objective was to sell pieces Phone. Usually when you sell things in bund, one of the most famous business models is that you sell at a relatively cheaper price the durable product and you make your margins on the disposable razor's blades, for example. Why they make the margins on the durable piece of metal, and they lose money on the disposable digital songs? But why was this negotiation going that way? They wanted to be on their side because they needed the record labels on their side because they could not sell the album without music available. Why they did pay so much share in the record labels? if they wanted music, who other than record labels they had to talk with? Suppliers bargaining power again. Suppliers bargaining power. If you want music from Warner, either you come to an agreement with Warner or Trowell, you don\'t have Warner Music. That\'s the fact that we discussed. So, if they wanted to convince labels to provide them with money, to provide them with music, of course they needed to forego their margins on their end. Why? Because they needed to come with an agreement with the monopolists of the product they were looking for, which were the intellectual property rights of the music that only Warner had. And this started to be very problematic. So, we were like, Spotify, because of course, once Spotify got in, they could not convince the record labels to take less money than they started doing with very, for ten years before. They gave us the 70%. So, if you want the 70% okay, otherwise how? We don\'t have our music. Suppliers bargaining power. Concentration of suppliers. So, we said they don\'t make money on the software, which is the disposable part, because the assets made available on the market through the software i.e. intellectual property rights are not under their control. What is it under their control? hardware, because they can monitor, operation-wise the supply chain of pieces of metal in order to do such a thing. On that, they could have control on the resources in order to make with very low cost something that we get to pay over a thousand euros today. It costs nothing. The marginality is astonishing. But they can control that value chain. They cannot control the music value chain. And they don\'t care about controlling the music value chain. Apple doesn\'t care anything about music. As they don\'t care anything about TV series, they just made Apple plus Why? Because this way, they increase the number of services which make us lean towards an Apple product, i.e. a device they sell, that is where they make money. So, who captures as lives of the new bigger pie? new solutions of bundled of hardware and software, i.e. new entrants in the market. What else? Who else does capture to value that got potentially generated in the distribution of music industry that the incumbents of the industry did not make to capture? Why do we need internet providers, because in order to access music the way you need it to, internet connection. So, what is the other name of the other partner in crime? The captured value in the music distribution industry instead of incumbents? Telecommunications. We are in 2003 and there is a core, a mother company with subsidiaries. This company is called Time Warner. That among many subsidiaries, companies underneath, you have one is called Warner Music, Record Label, and the other is called Warner Cable. Telecommunication company. While the labels, so the music distribution industry incumbents were starting to lose so much money, the main problem of their executives was how to defeat piracy. It was not how can\'t we stop losing money and start making it. How can we defeat piracy? Illegal by sharing, or do you have to be a platform? So, one solution that most of them came at was, we need to find a way to identify the users that made illegal downloads. And that was possible actually to be. It got demonstrated as well, yes, after into a court. Basically, it was enough that the internet providers monitored the trust, the data and music of their clients and understood which type of website at the time they were accessing to. So, what happens then, Warner Music In our same corporation we have a sister company that is the one whose goal is to sell internet connection to the houseways. We go there, we knock at the door, and we say guys please help us defeat piracy because this way we finally get back again for the music distribution. Do you think the executives from Warner Cable reply to them? No way, why? The 40% of the traffic the Warner Cable was sending was made in order for downloading music and video or peer-to-peer vipers. We would like to help, but if to help it implies to lose the 40% of our avenues, mind your business, and mind ours. And more importantly what was the problem of the telecommunication industry in those years where internet indeed they were selling starting taking all in the world. They were substituted by new services themselves. Back in those years there was something that was called Voice Over Internet Protocol, one of those famous back in time companies, Skype, that provided an opportunity that was not existing few years before and these opportunities to make calls without paying over the internet. Back in those years telecommunication companies were not making money through selling internet connection. Not that many people as today have the possibility to be every day on the phone. Smartphones were not existing. They were making their money, telecommunication companies, all the money by sending minutes of phone calls and of short text messages. If new subsidies come for free, such as Skype for the possibility of making calls for free of internet, and afterwards if solutions such as WhatsApp start existing, then you realize that they have no more products to sell. So, they needed to do for a new product to sell and that was the connection. So, in no way that we are going to help defeat piracy. Why? Because piracy right now in the moment, in the beginning of this century, is the only thing that keeps us afloat. New bundles of hardware and software, a new address in the distribution of music, telecommunication company, and finally a third player is illegal music\--\> Consumers, we didn\'t become richer because of the money that the music industry provided us, but we got to save money. Because we did not spend on music, we saved money. This is value captured by consumers. So, these three partners in crime got to capture the value of a bigger pie of an industry that got, for over a century, controlled by its incumbents, record gamers. So, the sudden start introducing money in the business that can control it for so long. What\'s the name of the six boards that we should consider when analyzing the impact on the average profitability of the industry? So new entrants, substitutes, bargaining power of customers, bargaining power of suppliers, overall competitive rivalry, and Compliments. The consumer derives higher value from the joint consumption of two compliments rather than the separate consumption of them. This is one possible definition. What are others definition of compliments? So, the value of one compliment depends on the availability of its compliment. third definition of compliments? If the price of one compliment decreases, they demand for its compliment increases. So, when they, after four years of being in the market, I put Steve Jobs\' a record on his desk, that was saying we have been selling so far 90 million I puts and the average number of tracks on I puts was 22 tracks. 22 tracks to be stored on something that you pay for \$100 more. But that\'s then me, the people were listening to music somewhere else rather than the items. So, if you are Steve Jobs and you have only a mission and the mission is to make money, and if you make money on selling the piece of metal, so your only mission is to sell more iPods, what do you do? Lower the price of music. But can you lower the price of music? Because suppliers record labels are too high by gaining power. So, what do you do? I don\'t care. Why? Because from this moment on, you can store on the iPod all the music you have from anywhere. Not the one you buy from iTunes. So, in order to sell pieces of metal iPods, there is something better than cheap music, 99 cents per single track. And that\'s something better is free music, zero priced music. The definition of compliment, the decrease of price of the compliment implies the increase of demand of its compliment. The cheaper the music, the higher the iPod\'s sold. So, what is the sixth, fourth that we should consider when analyzing the potential impacts on average profitability? Compliments. Why? Because compliments may have a positive impact on the willingness to pay of your product. What does it mean? If I have a new solution which is amazing, such as the iPod, or if I have the possibility to have a soul internet connection which makes it easier to access music, I want to consume more music. The availability of a compliment implies the increase of value of its compliment. But compliments might as well have a negative impact on prices. Why? A compliment is more valuable when the price of its compliment decreases. So, the ultimate lesson is beware of your compliments because they may create greater value, increase the size of the pie, but they can eat a slice of that cake. Automotive industry: we said proven exogenous violence to the industry, population, GDP, infrastructure, compliment, demand curve for cars, group, in those years of February 2012. So, there is a new demand curve from D1 to D2. What about costs? C1. If you want to increase your potential in the square next, why demand increases? What you try to do is to decrease the cost, i.e. to move your cost curve from C1 to C2. The way we move from the red pie to the blue pie. So, we have a new demand curve. So, you increase the potential, why? Because the way you get to meet a potential demand which has not the same power as the demand you could meet with a higher cost. So, we are in 2018-2012. What do you mean by 2008? Financial crisis. What is the actual result of the financial crisis? So, we have to make sure that the banks do not provide credit to no one. So, yes, I may want to be in the position of buying a car, but most people just buy a car with a 45k-30k cash on the spot. From those people that usually add these business done banks do not provide a loan in respect to that. Why? Because the market is a stock. So, the automotive industry, what does it do? Start issuing loans themselves. They enter a new business, financial services. So, financial services done by their own, i.e., providing credit to their clients. You are going to buy a car, you are choosing a car, you are customizing the car. Simultaneously, you are signing a loan that gives an interest rate to the car manufacturer. And actually, apart from BMW and Toyota, all car and luxury brands, all car manufacturers made their margins on financial services from then on rather than selling cars. So, what is the story here? That you have to pay attention to your complements and, differently from record laborers, you may end up appropriating the value generated by your complements rather than getting your value eroded by your complements. **Lesson 4:** Competitive advantage: There is competitive advantage (C.A) if WTP(A)-WTS(A)\>WTP(COMP)-WTS(COMP). WTP, we refer to market, customers and prices of products WTS, we refer to the cost of the input factors necessary to participate. We said, in order to achieve a better advantage, in order to inform decisions made in a proper, structured way, we should complement two different types of perspectives, internal analysis and external analysis. We majorly focus on market attractiveness, i.e. whether an industry presents an attractive profitability average, i.e. it presents conditions which have any impact on the average profitability that can be captured by the participants who are in the industry, which is high and interesting. We have been already developing some models, which are really called, \"Portraits by Forces +1\" with force of compliments, \"SWOT\" analysis model, and \"Potential Industry\" earnings model. The mission of today\'s session is to actually get analytical when it comes to the normal competitive advantage, and then, luckily, as we like it, to put things into practice. Whenever we talk about competitive advantage, we talk about specific convergence from the average profitability, within the company value, no reference, i.e. the industry of competitors. And what we want now to start understanding better is, what do we need, technical, analytical, when we refer to competitive advantage. So, we may say that the least competitive advantage is, willingness to pay for term A minus the willingness to sell for term A is greater than willingness to pay for competition minus willingness to sell for competition. So, there is a competitive advantage if, where willingness to pay, as we know it, is the highest price customers would like to buy. When we say willingness to sell, it\'s about supply. The willingness to sell is the new cost that our suppliers accept to sell their resources to us at. So, when we talk about willingness to pay, we refer to market and we refer to customers and prices of the products sold. When we refer to willingness to sell, we refer to the supply side, i.e. to suppliers, and we refer to the cost of the input factors necessary to the participants of any industry to come up, package, and delivery on the market, the low cost. Let\'s figure it out as if we are focusing right now on the cost of supply, the willingness to sell of our suppliers, we should give it the lowest possible. So, the other side, we should make sure that customers are willing to pay more for our product than they do on average for our competitors. But first of all, these things usually do not go down. You either decrease the cost of supply or you make it to increase the willingness to pay all your customers by providing a premium service, a premium product that usually, generally spying on customers with higher production costs. Usually. We are wondering about a comparison with our competitors. We did comment what is required to achieve competitive advantage yet. If we apply the subtract to the willingness to sell, and the willingness to pay, we have the value we produce, so the value we produce must be higher than the value our competitors produce. Our profitability should be higher than the average profitability of competition. Basically, what we are referring to is the revenue minus cost. It is not enough to say that we want to increase willingness to pay above the average. So, by definition, making it to increase willingness to pay to our customers above the average is enough. Because by definition, they are like young women who are paid wise. Let\'s get back to the example of the physical set. We should reduce our suppliers\' willingness to sell. That basically is we should reduce our cost of supply. But if you reduce your cost of supply up to a point where nobody wants your product anymore, what happens? You have the lowest cost of supply in the entire industry. You fail because nobody wants your product. We could command the premium price by emulating our offer and our product in such a way that the willingness to pay you raises far above the average of the industry. The only problem is that we spend a lot of money on that. So much that the difference between the values and cost is actually reducing rather than implementing. So what is it missing? The difference between our willingness to pay and willingness to sell has to be higher than the difference of the average. And this is the formula. We want to decrease the cost of supply and, or why, incurring in a reduction of our willingness to pay, which is less than proportional. We cannot only consider the cost or the price. We always have to consider the two in fact. So, either we increase the willingness to pay our customers without incurring in the cost of supply which are proportional, or we decrease the cost of supply without sacrificing the willingness to pay our customers proportionately. So, whenever we talk about competitive advantages, we consider four dimensions. What I\'m about to do right now is an abstraction and I explain the reason why for that. So, we have **willingness to pay**, we have **actual price** to pay by customers. We have **the cost** we pay for the input factor in order to come up with a product that our customers would pay that price. And we have a **willingness to sell** by suppliers. I think the minimum cost of our suppliers provide the resources added. So, what is the value captured by the word? Revenue minus price minus unit cost of supply. Then there is a portion of value which is captured by consumers. Consumers are the days for a price which is 80. But they are willing to pay up to hundreds. Luckily enough, they found a convenient product which satisfied many forex. What is the difference between cost and willingness to sell? The value captured by our suppliers. Why? Because they sell the resources at 40. Yet the minimum price they are willing to sell the resources at is 20. What is the value they capture for themselves? 20. If we think competitive advantages are proficient, it implies that we are thinking about amplifying the wedge between prices and cost. So, our strategy\'s objective is to try to amplify the wedge between prices and cost above the average of competitors. If we just decrease our cost at 30, but the result is that we decrease our price at 50. First price, 80 minus first cost, 40. That was our profit. We decrease the cost of supply to 30. The difference between 50 and 30 is 20. So, we always add to monitor prices and costs. So, here it comes to proportionality condition that I was searching for when commenting what competitive advantages is about. WTP 100 \-\-\-\-\-\-\--P 80 The surplus is 20 (50) \-\-\-\-\-\-\--C 40. ( 30 other example) \-\-\-\-\-\-\--WTS 20 the value the capture for themselves is 20 So, what I was saying is about in abstraction. It\'s because the factor of reality we can try to confuse, to estimate the worst factor we do not know when it was to pay of our customers and WTS of our suppliers. The proxy we have is the actual cost we incurred and the input factor and the actual price, some portion of the market, some segments are willing to pay for it. So, this is why it is an abstraction which is a sort of an enforcement separating these four different variables. In the end, whenever we talk about possible ways to achieve competitive advantage, we talk about trying either to increase the willingness to pay for our products above the average willingness to pay for the products of the competition, case one, differentiation advantage. We get to differentiate our offer in order to command and bring in the price. That\'s why the premium price implied that we manage to increase the willingness to pay within the market for our products. There is somebody in the market as a side of the segment, at least, which is willing to pay for our products more than for products by competitors. B Willing us to pay, representing ultimately by the price that customers are paying for our products above the average, yet we didn\'t incur in a proportional increase of the cost of supply. So, the full red section of the column one is greater than the average competitive value. So this is when we increase the willingness to pay of our customers without incurring in a proportional increase of the cost of supply. Second option. We may try to work on the cost of supply, i.e. try to decrease the average willingness to sell, or you may say as well, try to decrease the cost of supply or the opportunity cost of supply. You\'re reading to define all these formulas and set exactly the same thing. Below the average of the industry, without sacrificing our customers\' willingness to pay, which in result is what we\'ve done by the price that we have for our products, proportional. So that even in column two, the full red section of the column, which is representing the value captured by the firm A, our firm, is greater than the value captured by the average competitor. That\'s what\'s called blue one. Now, first specific strategy is called a strategy of differentiation aimed at achieving an advantage to choose a good negotiation one. Second example, when you drive down costs without sacrificing willingness to pay for proportionality is below cost of advantage, i. e. advantage in which she is existing because of the capacity of the firm to intervene strategically or to eliminate the cost of buying. Yet, there is the possibility that apart from differentiation advantages, apart from no cost advantage, companies might achieve an advantage which is a **dual advantage**. They don\'t only make it to increase the willingness to pay of the customer for the product, but they even make it to decrease costs of supply. The advantage here is dual because the source of the advantage comes from intervention that are both on the willingness to pay and on the willingness to sell. How can strategies identify opportunity to either raise willingness to pay by more than cost or drive willingness to sell down, sacrificing willingness to pay to be sell as well as proportional because there is another way to tell what we are moving over and over again. The fact is that our question shouldn\'t be how or should be **where** can a strategy identify opportunities to get competitive advantage. And the simple answer is in the key, activities of the value shape of their populations. The actual monitoring of the value chain key activities and considering the supply side from the other side as well the impact of some decisions the supply side, my rival, customers willingness to pay both on fashion and hardware companies to see how that is implemented. We are going to watch where the possibilities, the opportunities for getting to work on possible interventions that lead to competitive advantage reside in the key activities of the value chain. Value chain is either consecutive steps as we know that it takes to get a product that\'s service from row to finish industry. More specifically when we want to look for opportunities to buy strategies for competitive advantage we get the value chain we catalog the key activities of the value chain performed by firms and we try to understand how each activity contributes to the relative either cost position, i.e. how much the company pays for the input factors the price of the supply or the relative when it is today i.e. how much the company is capable to command if they have a price under them. So, let\'s consider the airline. So, we should start by visualizing the industry i.e. we should identify the key activities performed by the airline area. So, the biggest activities can be thought as three main ones. In bound logistics anything which should be sourced and prepared in order for running. The ground activity are in operations which are run around and in flight operations activities which are run when the carrier is actually flying. So, we need to understand how each of these activities contributes to profitability and the project of the planning advantage is about working on the focus on cost position. So, profitability is about willingness to pay and willingness to sell. So, we can develop a jewel advantage but for sure we should start somewhere. So, we should be looking at where we can intervene in order to improve our population. So, my proposal is to look at the airline carrier industry in order to understand how we can intervene on the profitability that can be generated within that industry starting from one source of profitability which is the cost. So, we could have worked on the willingness to pay of customers whereas we worked in this case on cost position and willingness to sell on supply. How does it work? We said very first point we need to identify the activity, then for each activity cost categories. I.e. macro areas of cost that are incurred at in the different activities. For each cost category I.e. macro area of cost we identify cost drivers. \--\>Are the variables factors, dimensions that have the impact on the cost amount I.e. the factor that either decrease or increase costs. So, we identify the activities we then come to identify for each activity the macro area of cost of each cost category. For each cost category we identify the factors of the drivers that have an impact on the cost. And we try to understand what are the linkages across the different activities passing by cost categories in order to understand how interventional one might have an impact which is in the positive or negative and ultimately we make decisions that make it possible for the firm to intervene in order to decrease WTS. What are the cost categories? input factors, you should secure yourself in order to make sure you can run the business. -In bound logistic, everything that can be sourced and prepared to run the activity. Fuel, Aircraft, Airports fee, Maintenance, Crew and Pilots, Procurement. -The ground activities, operations that are rent on ground Marketing and Distribution, Website. Then we have customers services, we have to assist clients in ground operations. -In flight operation, operations that are run in flight Amenities, including meals, extra services, video, movies, luggage allowing and then cabin crew. What\'s the difference between here and here that when it comes to inbound logistics you have to hire people and train them. When it comes to operations off ground and in fly it\'s about how many people may work in this business. This is a cost category. We need to do now the second step for each cost category. Identify what are the factors that might add an impact on cost category. So inbound logistics activity cost category fuel. What does that mean back on fuel cost? So exogenous conditions. Let\'s try to transform this correct cost driver into a driver we can think as something we can intervene. We might have **special procurement strategies**. Which add a direct impact on the cost we have specifically. Procurement strategies which are aimed at mitigating the risk of excessive fluctuation of the cost of fuel due to external factors. Then routes, organization, path to fly. One thousand kilometers to spend a certain amount of fuel get to fly. Ten thousand kilometers to get to certain distances and different amount of people. Aircrafts: -Type -Number Airports fee: -prominence of airport -traffic saturation of the airport The higher would be the fees for allowing you to run your operations. In there, the higher traffic saturation of safety in the airport, the higher would cost for a single carrier to run its operations there. The less traffic in the airport, the lower the fees to lower airlines to have their operations there Maintenance: -fleet ammonization -age of the fleet What about training the crew? It depends on the cost of training the crew. -work experience \- you train them technically. On our pilot for sure, or by definition even the crew, they should run in-flight operations in a specific aircraft. So what changes is the extent of diversity of the crew. Because the higher the diversity of the fleet, as many aircrafts, as many difference between them, you have to multiply the training, one training per aircraft. Now each cost driver for each category, what could be the interventions that we can make in order to try to decrease the cost of the team. So, the logic is we should start by considering how we can intervene on each cost driver without to decrease the cost in general. So the attempt to mediate the pleasure of price, might be done with specific procurement strategies. These procurement strategies get the name of **hedging,** you buy today at a certain price, and you make the promise to buy a certain quantity in the next 16 months, by locking in the price of today. So, the promise for buying at a certain volume of fuel today implies that you can knock the price of the fuel as today. So, even if the fuel in six months, because of, let\'s say, the Cold War, got higher than its cost, it\'s not something that affects you, because you\'re being, going through an hedging strategy, which implies that you knock the price down at the present moment. What about routing, organizing routes? Point to point and hub. Point to Point: each single destination is link directly without pass to the hub. Hub & Spoke: it implies that there is always a route for the hub. This is route organization, if you choose a point to point you can decrease distance between destination, so you can decrease the fuel. So, point to point is what most natural airlines use as a way to organize the routes of the price. Basically, it implies that there is not the same role, and whether it is Casablanca, Budapest, and London, a flight will always imply a route that passes by the airport. So, for London to roll, from Casablanca, from Casablanca to roll, from London, from Budapest to roll, from London to roll, from Budapest to Rome, to get to London. So, all the traffic passes through the airport. And then we have a point-to-point routing. And the point-to-point routing implies that London, Casablanca, and Budapest, London, Casablanca, Casablanca, from Budapest to roll, from Casablanca to Budapest, from London to Budapest, from London. Each single destination is linked directly, from point to point, without passing through enough. If you adopt a point-to-point routing, this implies that you can decrease distances across destinations. Increasing distances across destinations, it is possible for you to decrease the amount of fuel operated, i.e. to decrease the cost of the fuel. What about the weight of the airport? How do you intervene to reduce the weight in order to reduce the cost of the fuel? So, you make them pay is a consequence of the fact that you want to reduce your weight, i.e. you forbid a certain allowance of luggage. And you reduce the allowance of luggage because they are considering costs. So, weight implies that we can intervene, for example, that\'s the easiest, the luggage, the allowance. Okay, let\'s try now the luggage allowance to see what linkages might exist in other activities than in the airport. If you reduce the luggage allowance, what does this intervention with the attempt to reduce the cost driver weight with the result that we diminish the cost category fuel have as an impact somewhere else? So lower luggage allowance implies that there is a lower level of service which translates in what? In the possibility, that the cabin crew passes from the classic seats for not transit-friendly flights. For example, from London to Budapest, usually national airlines, like the one in the Czech Republic, and in Italy, could have had six cabin crew members, whereas the fact that you do not allow a certain luggage weight for free and the fact that you do not serve free meals but you only sell a single sandwich to the only two that would like to buy it during your flight would be less people working in flight apart from the two passengers. And so, they pass the cabin crew member\'s number from six to four. You pay two people less. So, luggage allowance implies that together with no free meals, we have less cabin crew members. So, we reduce cost when it comes to the cabin crew cost category. But this lower level of service we can intervene on, because the cost driver does have an impact on another cost category, which is somewhere else. Airports fees. Why? Because their fees are going to be lower on the basis of your time in management to the ground. The higher the time you spend on ground, the higher the fees you will be paid to the airports over. So, if we have no luggage allowance and if we have no meals, when it comes to luggage allowance, it implies that both the onboarding and off-boarding activity is shorter. So, time management wise, it is shorter. And when it comes to no meals, it implies that waste recollection is within the minimum, which implies that time management of the aircraft from landing to the subsequent new take-off is shorter, because you have less waste to recollect and that\'s a new aircraft ready for new customers. So, this is about the linkages across the different cost drivers across cost categories in different activities. As well, if you have no luggage allowance which reduces the weight of the aircraft, that in return implies a reduced fuel cost, implies not only that you can then reduce the cabin crew member by reducing the level of service, but at the same time making it possible to reduce the fees of the airport because you have a better time management in the air, but the fact that you reduce the luggage allowance implies that you have a lower level of service. Because checking your languages is far less than if you need to allow for free the languages on the flight. Moreover, when it comes to the routing point to point, it does have an impact on the cost of fuel because it diminishes the distance across destination, but it does have an impact as well on cabin crew costs for all flight operations, why? Because a cost category for cabin crew is not only how well you meet because of the language of the language you provide, but as well the allowance, i.e. expenses, provide it for overnight stay. How can you reduce the expenses for overnight stay, i.e. for the cabin crew member to sleep? Not at all far in a city different way than we live. So, make them finish their service when they are at home. I\'m going to be sleeping there, and no one will pay for my overnight stay, because I sleep in my place. So, routing does have an impact on cabin crew costs as well. So, when we talk about low cost here, right, it\'s because they have devised strategies in order to decrease their willingness to sell of suppliers, i.e. the cost of their different factors. It\'s not because we pay less for them than average So, low cost doesn\'t stand for low price for the customers but stands for the lower cost structure they have in comparison to the industry average. So, from this chart you see the top 25 films, these are the products, by box office, IE the revenues made on theatrical distribution, exhibition or technically IE on making these movies and making these films, in the United States and more specifically the top 25 box office films as a share of production costs, IE production budgets. Blumhouse in the United States market in between 2012 and 2015 counts for 13 out of those top 25. When we consider the worldwide box office and all the international exhibitions of movies for progress, we realize that the Blumhouse accounts for 10 out of 25. If we consider box office, per se, IE without considering box office as the share of production costs, we realize that Blumhouse is wiped out from the chart. So, the top 25 films are from those players that we are all aware of, such as Disney, Warner Bros., Fox, Disney, Sony, Lionsgate, Universal. So more or less the majors we met on the music industry with different names and different bosses and corps, but basically the same type of structure. So, the highest market share in the film industry was why it is retained by five complex works. And these are the studios. So, competitors, though for example if you look at the first three films, they perform profitability wise, even the proxy of the profitability level of the movie product. There is the so-called budget multiplier IE the box office over the production budget, as to say how many times does the production budget stay in the nearly 11th generated by the movie. And a value for the budget book player, which is in between four and five times. So, the production budget is really being forced like five times in the box office. So, the box office is forced five times on much cost in the film industry. And these are for the movies from the top performers, revenue wise, in the industry. If we consider, say, multiplier for a Blumhouse production, the budget movie buyer spends between 32 times and over 400 times. So, the reason why it is particularly interesting for us Blumhouse is because it is a company within the movie industry which proves to be wise, profitable and more specifically to have a competitive advantage, IE, to capture a level of profitability which is higher than the average industry. Again, in this very sample the profitability proxy is how many times is the production budget contained in the box office. When it comes to the actual profitability of the movie, we have the box office, the box office minus the share which uses about 50% of the box office which goes to the theaters. Then it is deducted the share of the distributor. So, let\'s say a certain person who simply finds would be 0,3 times this 0.45 of the box office and this is the fee of the distributor. So, we have the exhibitor, the theaters, the distributor, for example, Universal for the Blumhouse. Then we shoot the expenses in the marketing and then we have the gross revenues for producers. The gross revenues for producers minus the production budget leads to the next revenue which is actually the net profit. B.O. (box office) \-\-\-\-\-- :4-5 :32-4000 Production Budget How many time the production times contains the B.O. B.O.-(0.55\*B.O.) -(0.3\*0.45\*B.O.)-exchange marketing = Theater fee of distribution gross revenue of the products -production budget Net profit So, this would be our income profitability. In reality there would be at least five variables in the middle of the formula. The point is that the budget multiplier, i.e. how many times the cost of product sold is contained under revenues of that product, is a good process for our profitability. We are interested in Blumhouse because Blumhouse versus the average through industry, production budget wise is an astonishing example. The average United States production is 93 million budget without considering the biggest millions from the studios, otherwise the gas is 920 million budget. blumhouse average production budget is instead below five million dollars, which does this translate into? The fact that blue mouse looks like average and lower than average willingness to sell for its budget, i.e. it does have a lower average cost structure than its competitors. So specifically, what it looks like is that blue mouse has a higher profitability than the industry, as a profit budget multiplier, due to interventions by blumhouse into willingness to sell of input factors. Our focus is again on cost position. Looks like blumhouse has been capable of decreasing the low cost advantage. Our question is how they drive down costs without sacrificing willingness to pay proportionally? In our example we want to consider willingness to pay, the fact is that in our case it is exemplified as a very good portion of the movie market is interested in horror movies as the run of the mouse produces, and is willing to pay for a ticket price and theater so much that the budget multiplier is astonishing compared to, for example, the new light-gap address, which obviously draws in far more masses than the average blumhouse. So, the question is how was it possible for blue mouse to get a low cost advantage position, to understand what the route the blue mouse made in order to get there. And as you know, first point, identify the activity before identifying the cost categories, which cost category the cost driver, and then try to understand how we can intervene on those cost drivers in order to decrease the actual cost of the driver. So, what are the macro activities of the value chain of the movie industry? there are some phases, greater boxes one, development, production, distribution and exhibition, which are sequential. You have to package an idea, which comes from a director, from a screenwriter, or maybe which already exists from an existing IP. You derive the story from a book, for example, from a video game, development, so you set up certain decisions and ask the cost in order to come up with a creative package, which is meant to make producers be willing to invest production budget on the production of that idea. Technically speaking, between development and production, there is the green light phase. Then there is distribution. Distribution is about the effort, money-wise, to market and communicate the title and distribute it into the exhibition phase. What is the exhibition about? theaters, television, whatever television, the entertainment is in here. Crews or airplane carriers, any and contact point for the customers, where the actual is possible to be watched. As to make this mirror with the music industry, we have development and production, which may be linear or sorry, labeled. Then we have the majors, which are not only labels production-wise, but also distributors. So, for example, Universal Distribution as well as music, which is not produced by a label within Universal, for example, Carosello. And then you have Spotify as it is, as it is a biased pre-caster. We have some activities which are unsealery. We don\'t care right now but say it\'s financing marketing. What we know though is that when it comes to distribution in our case, the distribution is represented by the company name is Universal. Universal has specifically grown in this case, but why? Because they had a deal with them. Which lasts above the average of his type of deals, which usually is four or five years, here it lasts ten years long deal, four-smooth deal. What does the four-smooth deal imply? That in exchange of the fact that Universal has annually for the six years, and the overheads of Blumhouse, basically they provide them a host list, some chairs, some equipment, a secretary. In exchange of such, coverage by Blumhouse on the annual days of ten years long, any project Blumhouse applied to produce must be forced presented to Universal. Universal has a four-smooth to it, does. Which implies Universal is the distributor that has the possibility to say yes as first or no as first. If Universal says no, then other distributors may get presented the same project and may accept to distribute that product. If Universal says yes, Blumhouse is obliged to stay with Universal as exclusive distributor. Moreover, we know that the distribution logic by the four-smooth deal that Universal has to Blumhouse implies that if Universal says yes, again they greenlit the project presented by Blumhouse, they are going to provide Blumhouse with an anticipation of the production budget. So, Universal passed for the production budget and takes the amount of the production budget. It would agree the amount of production budget for the year. We know that if Blumhouse, in its production of the title Financed by Universal, goes over budget, those extra expenses outside the budget by Universal are paid by Blumhouse. So, the overdue is paid by Blumhouse. How does Blumhouse make money? Blumhouse keeps the 12.5% of the gross revenues. So, whenever you are signing a deal, always make sure whether they propose gross money or net money. They propose you net money; you will never escape that. What\'s the difference between gross money and box office? The difference is that when it comes to box office, it is the revenues made of selling tickets for people to watch it at the movie theater. That implies that these revenues save, however, the theater fee, they should be done, of course, because they need to pay the distribution fee. Then you have to pay the distribution fee with a fee, which is valued according to the specific type of agreement. In this case, the universal fee is 100 less, plus by 5. Then, with that fee, you have to deduct as well how much money it costs to the distributor to market your movie, the exhibition, the theaters, so to convince people about what to do. And then you finally have to gross. When you have to gross, then you have to deduct how much it costs you to produce the movie. So basically, Blumhouse makes money on the sales of the movie, while the single-farm is equal to its fee. Its portion is 12.5% of gross. Why? Not net, because we already know that actually it\'s Universal, that is its money. And you know why they get the 87.5% of the overall money which is left after the exhibition. Blue House is a specialized producer of horror movies. Those were the activities of the value chain in order to make us understand how does the real work between the distributor and the producer, and how money gets split along the value chain. But Blumhouse is in charge of all the two activities. Develop the concept of a movie, write in the screenplay, provide a package, I think the treatment, which helps Universal to understand whether they are interested or not in buying the movie and then distributing it. So, Blumhouse, development and production. When we talk about development, I say it\'s a really about fleshing out the story idea, writing the draft on the screen, and figuring out some initial financing of the movie, which is much more than you need to secure some elements of the movie. But now we have production, which is the activity we are interested in. Production is made of three sub-actions: pre-production, principle, and post-production. When we say pre-production, it implies everything which happens and should be set before shooting the actual movie. So, when we say pre-production, it\'s about learning the process and the execution of each single task that comes before principle photography, after the shooting. So, you lock the shooting\'s width, you secure the scheduling of the shooting, so usually you do not shoot from scene one to scene 100. So, you start with scene 50, and then you go to scene 35, and then you go to scene 1, 2, 3, and then you jump to scene 36. For different reasons, you finalize your budget, you hire the department head, those people which are in charge of different phases when production will begin, and all those you hire the director, you secure the key cast. So, the main actors and the team. You have to be sure that you have those cast before you start shooting them. And you clearly scout and pay for the locations where you are going to shoot. Here we have the principle photography, you shoot the movie. So, the actual production, this is usually what lasts the less in the three phases. In terms of phase. And basically, in the very case, it\'s all about the direct cost of the human core while you shoot the movie. More specifically, this works for any industry, we have about the line costs and below the line costs. When we refer to above the live, we refer to all those costs which you incur into, which then are fixed, before production starts. When you refer to below the live, it\'s about those costs that you incur on the running of production. And these are the only costs you can get interviewed on the way. They are called below the line because there is actually a line in the budget and there is even a live producer, which is called the way because then is the person over the dead body who should pass if you want to change something in the budget. The line producer is the contractor of the budget for any creative production. So, lastly, cost production is when you interest these over natural sanitation. So, these are all associated with syncopating anything and then, indeed, adding dubbing, music, special effects, sound effects, so on and so forth. So, our question is, we should analyze our Blumhouse, and we need to get to a cost position which makes it an above average profit firm in the business. How does it get there? **Lesson 5:** We are analyzing the case of the cirque du soleil, which will be the opportunity for us to develop two new tools in our strategy course. One is the tool of value curves in the attempt to innovate the value proposition within an industry. And the other is the blue ocean approach to competition. -Value curves\--\> innovation -Kim&Mauborgne \--\>Blue Ocean strategy in opposition with the red ocean strategy So, starting with the case study, part A, the soleil industry. My question for you, A, is how was back in the 80s when the cirque du soleil was able to get in with the soleil industry the attractiveness of that industry? Was it attractive, was it unattractive, and more importantly, why? In the attempt to increase your own willingness to pay, you incur in higher than commercialized costs of supply. The threat of substitution which is very high for the industry and the bargain power of the supply side, what does make the quality of the show? what is the bugging power? When we say supply, we refer to the suit liars in the service industry. So not supply to our suppliers, but our supply, how much do they cost? What is their bargaining power? High or low? high because they are difficult to be substituted, and they are hired show by show, they are low in numbers and their abilities are concentrated in a few of them, so they are highly demanded within the industry, thus pretty much costly. The bargaining power is very high. As it is high, on average the cost of animal acts, especially when it comes to transportation and when it comes to insurance costs. What about rivalry and what about threat of entry? I mean what about the level of competition among existing liars within the industry and what about the threat of entry of new players within the industry? So, if we conceive the circus industry as an industry of which we should assess attractiveness of, it would be better to distinguish between two different strategies. Big league and small league. When we refer to big league it\'s about the companies, sort of quasi monopoly, that as operations across the country which implies that it travels across the entire United States, when we refer to the small league, we refer to a very high number of players which are modern inside, which are family led and then try to avoid competing with each other by simply retaining exclusive of operation in a very specific territory. When we ask ourselves whether an industry is trying to work not, whether in league those more leagues are attractive industries, as we know or as we should know where they come, it\'s always a matter of trying to answer,