CCM Music Recording Company Case Study Part 3
Value chain analysis
The value chain analysis consists of the following components arranged in sequence: artists and repertoire development, recording, manufacturing, marketing, distribution and finally retail. Such chains as manufacture, recording and retail are very often outsourced, even by the Great Five (Warner Music group, EMI Recorded Music, Universal, BMG Entertainment and Sony Music Group).
A thorough analysis and review of CCM’s operations has been completed by reviewing the current and long-term problems in both the internal and external environments.
Artists and Repertoire Development: Recording companies put as much available money as possible into developing their groups and music, the musical repertoire and quality, to promote concerts and organize tours, to prepare the merchandising. CCM plans to expand its product line to include more musicians and albums and to expand the musical genre the company operates into.
Recording: Usually major labels have their own recording studios, though still outsourcing this link of the value chain is possible even by such premier companies as Columbia and EMI. Primary costs come from the equipment and mixing, which in the case of Colorado Creative Music were the cheapest quality equipment from all possible.
Manufacturing: Manufacturing a CD usually takes 10% of its cost. There are not too much CD manufacturers in the world, since the costs of the process make the market very limited with serious entry barriers. CCM’s manufacturing is not very costly process due to the technology employed, though the company didn’t manufacture actually CDs, it bought them from the relevant producers, and then just duplicated them.
Marketing: activities connected with marketing and advertisement traditionally account for 30% of total CD production costs. Marketing costs combine radio and television advertisement, printed catalogues and press releases, promotional tours and other events. Also, marketing costs include preparation of PR tours and music videos. CCM’s marketing events include: live performance, comprising malls, art festivals and concerts; Website, specifically website promotion and new programs to acquire and to learn; publicity consisting of airplay radio, TV, internet radio, live interviews on radio and TV, print press releases and reviews featuring listings of events; promotion – in store, contests, sponsoring, giveaway; and email marketing methods comprising monthly newsletters.
Distribution: The distribution phase accounts for about 40% of the total cost of the product. This process involves physical transportation and packaging of a CD from manufacturing place to distributors or direct retailers. Since there are few manufacturing facilities, delivery from these places to any corner of the world may be very costly. Moreover, as delivery is often needed within short terms, the distribution costs grow even higher. For CCM, the distribution may include direct sales on live performances, through 800 number order, through website or mail order catalogue. Indirect distribution channels applicable for the company can be traditional and untraditional. Traditional channels comprise chain music stores, chain book stores and independent music stores. Nontraditional methods include catalogs, retail chains, gift stores, independent bookstores, Christian chains and independents. Inclusion of indirect distribution methods into CCM’s distributional tactics is wise since it distincts the company from its competitors and aims at winning still untouched potential markets.
Retailing: the retailing operations are generally carried out by major labels and internet superstores like Amazon.com and CDnow. Until products of CCM become popular with particular public segment, the company cannot enjoy such retail service.
Strategic cost analysis
Strategic cost analysis aims at comparing the cost position of the firm relative to the key competitors activity by activity from purchase of raw materials until the price paid by the final customer. ( Hill & Jones , 1995) In this case, the analysis will be carried out in regards to CCM and the representatives of premier market segment such as Sony Music of EMI. In 2000, with the total income making up $216, 614.05, the primary source thereof was direct gig sales, accounting for $181, 451.92, that is more than 80 percent. Major companies derive their main income from traditional indirect distribution channels, such as retail music stores. Other major sources of CCM income comprise wholesale ($12,238.83), mail and phone orders ($11, 442.24), and website sales ($6,419.35).
Traditional distribution channels, along with other sales, make up only $1,758.79. This number is relevant for the microlabels but absolutely not characteristic to independents and major labels. The cost of goods sold makes up $22,034,33, therefore gross profit of the company in 2000 made up $194,579.72. This number is the higher of 1997-2000 period and such relatively low cost of production of goods (10%) is typical for the whole industry. As for expenses, 2000 was the first year when the company spent some amount (up to $500) for equipment rental. Until that moment, the company used its own equipment. Equipment rental and production outsourcing is a typical practice for major recording companies and though they posses a large amount of costly equipment, sometimes they pay considerable sums of money for rental of unique, exclusive and particular equipment for the needs of individual recording.
It should be noticed that professional fees of the company, that is the money paid to the staff, increase on a yearly basis, that means that the company each year conducts growingly active human resources policy, hiring more professionals, technicians, musicians and performers. This is a good index and such expenses (in 2000 they made up $29,719.26) should increase each year if the company wishes to grow in size and in prestige. Major labels employ tens or even hundreds of first-class technicians, sound producers and producers and pay them tens thousand dollars yearly. Besides, the major companies conclude contracts with famous artists with costs often exceeding several hundred thousand dollars. Another feature which should be mentioned in the analysis is low cost of advertising expenditures. In case of CCM it makes up $10,423, that is only 5% of total income. This figure shows unsatisfactory advertising and promotion campaign, since typically music recording labels account for larger percentage, at least 8-10%.
In a whole, the revenues and income structure is typical for microlabel companies with low expenses assigned for advertisement, distribution of their products and particularly professional fees. In major companies and independents, structure of expenses is different. The main accent is drawn to upgrade and maintenance of the equipment (major companies have very expensive equipment working on analogue basis which needs to be constantly maintained); professional fees, which are incredibly high due to popularity and prestige of performers and high professional level of the staff; advertising and promotion campaign and distribution channels. CCM approximates these proportions only with professional fees, which along with payroll make up about $45,000, the largest expense segment of the whole income statement.
Key competitive success factors
Key success factors are tangible measurements of the vision, mission and values of the organization on a yearly basis with the aim of attaining improvements for reaching ideal future vision (Gerry, Kevan, 1997).
The key success factors for Colorado Creative Music are values assessment, member satisfaction, financial viability, effective performance management system, customer satisfaction and recognition, development of technologies and enhancing the array of brand names. The music industry has a number of driving forces which are the determinants of success for such company as CCM. These forces, directly impacting CCM, include:
Tangible reduction of the cost of recording and duplicating music on the digital basis. Without this fact, the existence of CCM is very dubious.
Distribution and downloading music via virtual internet means. The affordability for people to comply and burn their own CD has the revolutionizing impact on the structure of distribution channels in the music industry and decreases the retail price of a single CD. Internet has become very effective, novel, affordable and today critically important tool for informal direct and indirect (through virtual bookstores) channel of distribution.
The relative easiness of making website, posting it on the web and conducting online sales of one’s music. Internet makes easier not only distribution of the music, but promotion thereof as well. Internet promotions of the website of some musical products, taking into consideration growing number of internet users, is by far one of the most effective advertising means.
Small-scale informal distribution of music is possible. Thus, the company possesses certain distribution channels even if it is deprived of the opportunity of access to traditional indirect channels.
All these factors altogether provided CCM with the opportunity to make music recording industry affordable and attractive for small studios.
At the present moment, to succeed, the company has to focus on developing these directions of activity such as production, distribution, and marketing, but to grow further and reach another level, to turn into independent label, the company has also to expand its repertoire, the number of musicians recorded, and work on the popularity of the artists whose works it records, promotes and distributes.
Competitive advantage over the rivals may be achieved through cost leadership policy, when the company lowers the price for its products and makes them cheaper than those of competitors, and differentiation strategy, which implies offering different from the rivals array of products or services. Also, there is focus strategy, but if the company strives to grow from microlabel to independent, it needs to expand its customer base and acquire new segment of market besides the one it already has.
Therefore, differentiation strategy is by far the most effective in gaining competitive advantage for CCM, though some elements of cost leadership, including lowering the price for music purchase in the Internet, or elaborating saturated pricing structure, is also possible. These two strategies are elements of competitive advantage based on the position of the firm, also called positional advantage. There is also another approach for gaining competitive success, called resource-based view, which stands for utilizing by the firm its resources and capabilities for gaining competitive advantage over the company’s rivals. In this viewpoint, CCM has to focus on such success factors as installed customer base, reputation of the firm and brand equity, which altogether form distinctive competencies enabling innovation, quality, efficiency and customer responsiveness.
BCG growth-share matrix deals with allocation of resources among the company’s business units. The business units which may be identified within CCM are recording department, promotion department, distribution department, finance and accounting, management and human resources department. Currently the company doesn’t have such functional units, since its staff is not numerous and Darren Skanson, top manager, performer and producer, simultaneously works as accountant, desktop publisher, database manager, newsletter editor, website designer, copywriter, leading artist and manager. But the company aims at growing from microlabel into independent recording studio and for that it will certainly need more staff and division of working directions among functional units. According to BCG matrix, almost all units of the company are dogs and question marks, since the market share the company occupies are rather small relative to its rivals, the company has acquired a distinct niche which has limited customer base. Such units as recording, finance and accounting and management may be defined as dog sectors, while promotion, distribution and human resources are question marks.