Business strategy and

innovation in cultural
industries
Ekaterina Baskakova

September 22, 2023

1
Communications

• Don’t forget to send me an email with your background by

tomorrow (Saturday 24) if you want to be an attender

2
 Date Topic Readings

Course presentation
1 18/09 & Grant, chapter 1
Introduction to Business Strategy

2 22/09 Industry analysis Grant, chapter 3

3 25/09 Analysis of the firm Grant, chapter 5

4 29/09 Case study presentations
5 02/10 Firms in arts and culture Dubini, chapter 3
Organizational design and people
management
6 06/10 Dubini chapter 7
&
Case study presentations
7 09/10 Competitive advantage Grant, chapter 7
Benefits, needs and offer system
8 13/10 & Dubini, chapter 4
Business models in cultural industries

Industry evolution and strategic change

9 16/10 & Grant, chapter 8 and 9
Management of Innovation

10 20/10 Final presentations 3

 Class 2
Industry Analysis

4
What is strategy?

FIRM
INDUSTRY
• Goals and
values • customers
• Resources STRATEG • competitors
and Y • suppliers
competencies
• Organizational
structures

5
What is strategy?

FIRM
INDUSTRY
• Goals and
values • customers
• Resources STRATEG • competitors
and Y • suppliers
competencies
• Organizational
structures

6
Example: Nokia
• 1981 – acquired 51% stake in a Finnish telecommunication company
• 2008 – 40% worldwide market share (e.g., Samsung – 18%)
• 2010 – still 32% of the market share of cell phones; only 2% of smartphones
in US.
• Profit: € 8 million in 2007 € 3.3 million in 2009
• Firm’s stock: $ 39.57 in October 2007 $ 7.15 in April 2014
• Symbian operating system
• Jan-Apr 2011: Nokia sold 108,5 million handsets for $ 9.4 billion; Apple sold
18,6 million iPhones for $ 11,9 billion
• Asian Market!
• 2013: Nokia sold the business to Microsoft
• 2015: comeback merge with French company Alcatel-Lucent
• 2017: Nokia 6
7
Environmental factors

PEST analysis

P = Political factors

E = Economic factors

S = Social factors

T = Technological factors

8
Environmental factors: PEST analysis
Political factors:
x t e n t t o w h i ch
• Government policies Th e e r s are
m a k e
• Government term and change policy r v e ne in
in t e
li kely to
• Trading policies c o m m ercial
th e
• Local legislation, current and future n v ir o n m en t
e
• International legislation
• Regulatory bodies and processes
• Funding, grants and initiatives
• Lobbying and pressure groups
• Fiscal policy
• National incentives for enterprise
• Planning, permits, licensing
• Transparency and control of corruption
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• Government policy on supporting specific industries
Environmental factors: PEST analysis
ave
Economic factors h
Economic Factors the most obvious
• Local economy impact on the
erall
profitability and ov
• International economy
attractiveness of a
• Economic trends, inflation market or industry
• Corporate taxation
• Product taxation and duties
• Seasonality of economic cycles
• Market and trade cycles
• Channels of distributions and access to markets
• GDP, consumer purchasing power
• Interest and exchange rates 10
Environmental factors: PEST analysis

Social factors: t e w ork

s d ic t a
t re n d s,
• Demographics Social and attitude
p att erns te s and rticular
• Psychographics and lifestyle u m er ta s
h e pa
c o n s d t
r e n c e s, an m e of
• Consumer perception of brands, products prefe , a nd v o lu
y p e , fo r m
ro d u c t or
• Consumer purchasing behavior t f o rap
n d
d em a
.
• Ethical issues service
• Major world events
• Racial, ethnic, religious influences

11
Environmental factors: PEST analysis

Technological Factors
• New materials, machinery, software and business
process support e c h n o l o gical
T s ca n
t h r o u g h
• Innovations in electronic processes br ea k
ll the
ei t her s pe
• Innovations in mechanical processes e m is e o f some
d c reate
r ie s o r
• Innovation in product design indust
o r t u n i t ie s for
op p
• New distribution channels (e.g. internet retailing) new ones.
• Innovations in pricing (e.g. eBay auctions)
• Effect of technology on product design,
production, distribution, pricing and consumption

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From environmental analysis to
industry analysis

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The industry environment

• Create value for customer, understand your customer!

• Competitors, intensity of competition:

• Direct competitors

• New entrants

• Substitutes

• Suppliers

• Macro level factors: PEST how do they affect firm’s environemnt?

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Value creation

• Value creation: when the price customer is willing to pay exceeds

the costs for the firm

• Value is distributed between customer and producers

• Surplus of value = Customer surplus + producer surplus

• Customer surplus: the difference between the price they actually

pay and the maximum price they would have been willing to pay

• Producer surplus or economic rent: surplus received by producers

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Value creation example
Value Max price the
created customer is
willing to pay
10€

25 €
Cost
incurred
by the firm
(acceptabl
e price for
the firm)
15 €

16
Value creation example
Value Max price the
created customer is
willing to pay
10€ Actual
market
25 € price
Cost payed by
incurred the
by the firm customer
(acceptabl
e price for 20€
the firm)
15 €

17
Value creation example
Custome
r’s
surplus Value Max price the
5€
created customer is
Producer’ willing to pay
s surplus
5€ 10€ Actual
market
25 € price
Cost incurred by the payed by
firm (acceptable the
price for the firm) customer

20€
15 €

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Profitability of industries

19
Industry structures
Perfect
Oligopoly Monopoly
Competition

Concentration Many firms A few firms One firm

Entry and exit Significant

No barriers High barriers
barriers barriers

Homogeneous
Product Potential for product
product
differentiation differentiation
(commodity)

Information No impediments to Imperfect availability of

availability information flow information
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Niche markets

21
Porter’s 5 forces of competition
framework
Suppliers

Industry
Potential competitor Substitutes
entrants s

Buyers

22
Threat of substitutes

Suppliers
SUBSTITUTE
COMPETITION:
•Buyer propensity
Industry
Potential to substitute
competitor •Relative price and
entrants s
performance of
substitutes

Buyers

23
Threat of substitutes

24
Threat of substitutes

25
Threat of substitutes

26
Threat of entry

Suppliers
THREAT OF ENTRY:
• Capital requirements
• Scale economies
• Absolute cost
advantages Industry
• Product differentiation Substitutes
• Access to channels of competitors
distribution
• Governments and legal
barriers
• Retaliation by
established producers
Buyers

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Threat of entry: capital requirements

28
 Threat of entry: economies of scale
Units of
Fixed Variable Unitary
productio
costs costs costs
n
1 10 1 11,00
2 10 2 6,00
3 10 3 4,33
4 10 4 3,50
5 10 5 3,00
6 10 6 2,67
7 10 7 2,43
8 10 8 2,25
9 10 9 2,11
10 10 10 2,00

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Threat of entry: economies of scale

Able to sale: 1,000 Able to sale:

Cost per unit = $ 100,000
100 Cost per unit = $ 1

Price > $ 100 Price = $ 70

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Threat of entry: absolute cost
advantages

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Threat of entry: product differentiation

32
Threat of entry: distribution

33
Threat of entry: government and legal
barriers

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Threat of entry: retailation
Back in 2014, a report
revealed that more than 175 Uber
employees allegedly booked and
canceled thousands of rides with
Lyft, Uber’s top competitor in the
United States.
Uber’s employees would book those
rides, sending Lyft drivers on
pointless expeditions and trips.
Drivers would get frustrated, lose
income, and waste time and gas
money.
Some of those drivers may have
become dissatisfied with the
frequent cancellations and
switched to Uber. Similarly, a surge
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Porter’s 5 forces of competition
framework
Suppliers

INDUSTRY RIVALRY:
Potential • concentration
Substitutes
• diversity of competitors
entrants • product differentiation
• excess capacities and exit barriers
• cost conditions

Buyers
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Industry rivalry: concentration

37
Industry rivalry: diversity

38
Industry rivalry: product differentiation

39
Industry rivalry: exit barriers

• Excess capacity: when business produces less output that

it actually could because there is no demand

• Exit barriers:

 Prior investment
 Job protection
 Government agreements
 Emotional ties
40
 Industry rivalry: cost conditions
12

10

0
1 2 3 4 5 6 7 8 9 10

Fixed costs Variable costs Unitary costs

41
Porter’s 5 forces of competition
framework
Suppliers

Industry
Potential competitor Substitutes
entrants s

BUYER POWER
Price sensitivity Relative bargaining power
Cost of product relative to total • Size and concentration of
cost buyers relative to producers
Product differentiation • Buyers switching cost
Competition between buyers • Buyers’ information
42
Criticality of buyers’ product • Buyers’ ability to backward
Buyer power: price sensitivity

• Cost of product relative to total cost

43
 Buyer power: price sensitivity

• Quantity of purchased goods

44
Buyer power: price sensitivity

• Product differentiation

45
Buyer power: price sensitivity

• Intensity of competition between buyers

46
Buyer power: price sensitivity

• Criticallity of buyers’ product

47
Buyer power: relative bargaining power

• Size and number of buyers relative to suppliers

48
Buyer power: relative bargaining power

• Switching costs

49
Buyer power: relative bargaining power

• Buyers’ information

50
Buyer power: relative bargaining power

• Buyers’ ability of vertical integration

51
Porter’s 5 forces of competition
framework
SUPPLIER POWER:
 Buyers’ price
sensitivity
 Relative bargaining
power

Industry
Potential competitor Substitutes
entrants s

Buyers
52
Supplier/buyer

53
Porter’s 5 forces of competition
framework (or 6?)

Suppliers
Complement
s

Industry
Potential competitor Substitutes
entrants s

Buyers

54
Industry analysis

1) Identify the specific factors relevant to each of 5 forces.

2) Analyze the strength of each force. To what extent is it

shaping the industry’s attractiveness?

3) Estimate the overall strength of the comined 5 forces to

determine the general attractiveness of the industry.

55
Why do we analyze industry?

• To make sense of what we’re doing

• To improve what we’re doing, finding the “best” move
(the most efficient, most effective, most consistent)
• To forecast industry profitability, to make investment
decisions
• To alter industry structure: identify and control
“bottlenecks” within industries

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