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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 matrix

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.

For other parts of this series, please check Music Recording Company Case Study

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STEP Analysis

The STEP analysis of the Colorado Creative Music aims at analyzing macro-environmental factors of the music business the company is engaged into. These factors fall into political, economical, social and technological groups (Pearce, Robinson, 2000).

Political factors affecting music business in whole and CCM in particular: strong political stability in the United States; regulatory and legal issues concerning music business including copyright laws for copyright protection of both music writing and recording, copyright-related legislation touching upon the issue of virtual internet promotion and distribution, such as The Audio Home Recording Act (1992), No Electronic Theft (NET) Act (1997), “The Digital Performance Right in Sound Recordings Act (DPRSRA) 1995, The Digital Millennium Copyright Act, “Pending legislation: Music Online Competition Act and the Consumer Broadband and Digital Television Protection Act (CBDTPA)” and others. Environmental regulations and employment requirement do not affect business CCM is engaged into. As for the tax policy, in 2000, from total income of $216,614.05 the company had to pay $4,744,97 of taxes, which is not high rate and amounts to nearly 2 percent from the total income. In whole, it should be noticed that political factors are favorable for music recording industry and for CCM particularly.

Economic factors include indexes in the macro economy that can affect music recording industry. Here also, macroeconomic factors, such as economic growth, interest rates and inflation rate are favorable for CCM. Thus, the U.S economy kept growing steadily since 1995. CPI falls down in 1997, 1998. Unemployment rate decreased gradually from 1995 to 2000.

Social factors, covering demographical and cultural aspects of the environment external to music recording industry are rate of population growth, age distribution and carrier attitudes. The population growth in the United States is steady and age distribution also favors the music recording industry. It should be noted that for music industry in whole, teenagers and 20-years-olds are primary customer segment, but CCM aims at attracting people of 40-60 age range. Thus, the considerable share of American population fits this target market.

Technological advancements in music recording, promotion and distribution have several effects on the recording industry. One aspect of the issue is that musicians are no longer dependent on major recording labels to create or distribute their products. (Viljoen & Dann, 2000) The MP3 software alternative to the CD becomes more popular since 1998. In the space traditional audio can fit 12 to 15 audio tracks; MP3 software can store approximately 150 music tracks. “The move towards MP3 as the new format to replace CD just as the CD replaced vinyl albums have been accelerated by the rush of new portable MP3 players on the market - some for less than conventional Sony Discmans.” (Viljoen & Dann 2000, p. 173). On the other hand, new digital technologies which appeared in late 20 century not only facilitate the process of music recording, but make it considerably cheaper, providing the possibility for multiple firms with limited resources to enter the market. Thus, if in 1980s, professional recording studio with all recording equipment, working on vinyl or tape carriers, cost several million dollars and therefore was a domain of 5 or 6 major recording companies, in 2000, assembling professional recording studio could be carried out at cost of only $5,000. All the equipment and hardware, due to the global advancements in technology, are much more affordable for an average artist or businessman.

SWOT Analysis

Strengths

* Cost advantages with new technology arising from the digital revolution. Not only assembly of studio with all necessary equipment and hardware is cheaper, but duplication of CDs, storage and shipping are less expensive as well. Low cost of production, duplication (duplication of 500 CDs ranges from $1.90 to $3.63, duplication of 2000 CDs costs about one dollar per CD), shipping and storage makes the final product less expensive and more affordable for the customers, thus widening the range and scope of the target market.

* Positioning of CCM in a distinctive market niche. CCM is microlabel recording company which specializes on classic and traditional instrumental music.

* Growing customer base and customer loyalty within target group. Customer base growth due to expansion of product lines (4 already, each year 2 new product lines emerge), and geographical coverage of listeners.

* Good customer service shown through the direct contact between Darren and his fans.

Weaknesses

* No clear strategic vision: CCM needs a long term vision which includes all areas of the business, from marketing and management to distribution and human resources. At the moment the company faces a dilemma of further strategic development, which will be focused on either enhancing or developing the recording company or more active promotion and distribution of the products through the possibilities of other companies (the company is currently regarded by its management as potential object of acquisition or investment)

* Competitive disadvantages: CCM are not able to enter the retail market due to its current level of sales. Competitors such as major labels have advantage because they have major market power and influence. Such firms can specify when their music should be played on radio and negotiate large contracts with distributors and retail outlets, hence giving themselves broader appeal.

* Limited channels of distribution: at present moment the company heavily relies on such distribution sources as direct sales, which include sales at the gig, shopping mall distribution and sales in the back end (800 number order, website order processing and mail orders). These channels are major sources of profit for the company. Nevertheless, to expand its consumer base, the company needs to acquire formal distribution channels, such as sales through traditional music distribution networks and others.

* CCM is short in financial resources to pursue new opportunities. Profits are thin, meaning new opportunities may be unobtainable and long term improvements may not be afforded due to initial costs. To conclude a contract with major labels, which would provide the company with the access to traditional product distribution, the firm needs to sale at least 15,000 copies of its products per year. From the other hand, high sales numbers are impossible to obtain without good traditional distribution channels.

* CCM is losing ground to larger firms because of limited exposure. CCM at present does not reach global or national audience like independents and major labels. CCM needs to broaden its reach and widen its customer base.

Opportunities

* Serving additional customer groups by expanding co-operation with other artists and enlarging the Acoustictherapy and other product lines with new marketing strategies.

* Internet through expanding e-commerce and releasing MP3s.

* Expanding sales nation wide.

* Acquiring channels of traditional distribution to reach wider customer base exposure

* Developing new technologies to cope with the driving forces of the industry.

* Releasing compilations with other artists has proven popular. One strategy could be to assembly the songs (such as Accoustictherapy) at the studio, and sell the completed disks at a discounted rate back to the performing artists in their hometowns. This method would cover the costs up front and give the players a financial incentive to push the product.

* Pushing sales into non-traditional areas such as weddings, shopping center music etc.

Threats

* High number of new entrants and growth of other smaller labels due to the digital revolution. In addition, major labels or independent labels could decide to enter into CCM’s domestic markets and try to drive the smaller labels out of the market.

* Lose sales to substitute products like mp3s or internet downloads

* Vulnerability to industry’s driving forces because of CCM’s weak position in its industry, taking into consideration the fact that the company occupies microlabel segment of the market and is profitable primarily due to the low costs of digital recording.

Five Forces Model of Competition

Michael Porter’s model of competition (Porter, 1980), if applied to music recoding industry, comprises the following components: Rivalry among sellers of recorded music (competition for better market position and competitive advantage); artists and other suppliers of music to producers or sellers of recorded music; distributors, retailers and individual customers of the music; competitive pressure coming from substitutes of recorded music towards winning customers; and threat of new entrants to the industry of recorded music.

Perhaps, the strongest competitive force belongs to such factor as Rivalry among producers and sellers of music products. The music recording industry has 4 clearly identifiable segments: major recording studios, independent labels, microlabels and vanity labels.

Major, or first-tier, companies have large quantities of artists under contracts, reaching the number of 100, specialize on multiple types of music - rock, country, jazz, classical, traditional and other, and have formal and reliable national and international channels of distribution. The examples of such companies are Columbia, Sony Music, EMI, GMG, Warner Brothers, Atlantic Records and some others. As the mater of fact, such companies are not numerous and their recording equipment is rather expensive, amounting to no less that couple million dollars, since these studios record music with analogue and not digital equipment, thus receiving three-dimensional, saturated, rich sound, instead of correct but plain digital sound.

Independent labels have 10-100 artists under contract, focus on recording of one or two major music styles and have either national or most often regional distribution channels. Examples of independents are: Higher Octave, Metal Blade Records, Rhino Records, WAR, Windhan Hill, Soundings of the Planet. Such companies are more numerous than first-rank companies and can use analogue equipment as well as digital. Generally, independent labels strive to grow into major ones, but for that they need to invest large amount of money into amelioration of their equipment.

Microlabels have less then 10 artists under contract and are tightly focused on definite style of music. They are characterized by small staff and manager performing as the leading artist of the studio. Microlabels have rarely formal distribution system and heavily rely on direct sales to fans and wholesale to clubs and specialty retailers. On American market, microlabels are presented with Etherian, Evol Egg Nart, Cuneiform Records, CCM and a large number of others. Generally, such companies survive competition due to low cost of digital recording.

Vanity labels are the fourth, the last and the most specialized segment of the music recording industry. They are founded by independent artists for recording and selling their products. Examples of vanity labels are Bob Culbertson, Watson and Company, Lao Tizer, Esteban Ramirez and many others. (Darren & Winn , 2003). At present, CCM is the microlabel that strives to convert into independent label.

In the first place, the competition among rivals is carried out on the basis of popularity of the performer and songs recorded by their companies. Recording studios intensively compete to attract popular of promising artists to sign contracts with them. If the songs or artists are highly popular, price is secondary factor which may influence the competition. However, if the artist is lesser-known or songs recorded are not very popular, price does play role as the competition and strategy factor. In the distribution process of the rivals, the particular importance is attached to getting access to traditional channels of music distribution, such as retail musical stores, major chain record stores, independent record stores and Internet distributors such as Amazon.com. These means are very important for selling CDs of the artists apart from direct sales on their performances. Also, another factor that greatly influences CD sales is advertising of songs and radio promotion and transmission.

For CCM, rivalry is by far the most important competitive pressure source. The strong competition from rival producers and sellers of music can be explained by the fact that the performers of CCM are not known to the wide public in comparison with the artists of the first-tier and independent labels.

The competitive threat of new entry, is, to the opposite, by far the weakest competitive force, ranked between weak and moderate. Barriers for entry are not high for the new producers of recorded music, especially those targeting limited segment of the market and employing cheap digital technology of recording. CCM can serve the brightest example of such entry. Such cheap digital recording technology can be assembled nowadays for no more than $5,000. Still, expensive analogue technologies keep costing hundreds thousand or even millions. The technology employed by the firm automatically determines its resources and rank in the music recording industry. Besides cost of the equipment, the main subject of the competition for new entrants will be distinct market share and sales volume. Considerable sales volume, in its turn, depends on the ability of new entrants to attract famous, popular or widely known performers and singers whose songs are able to get to the top of the popularity charts. Given the fact that virtually all popular artists have already signed contracts with major recording studios, this is significant barrier for new entrants. Another important barrier is gaining considerable channel of distribution. Generally, large distribution centers and music CD retailers are interested in selling the music of famous performers and unwilling to accept the products of relatively unknown artists. For the CCM, the threat of new entry is not very strong, since the company targets rather narrow market segment. Though, if the new entrant uses the same recording technologies, distribution channels and targets the same niche in the market, the fact may become an issue of major importance.

Competition from substitute products can be considered moderate competitive force in the music industry. Such substitute products are be presented in the form of providing consumers with possibility to listen music with other that CD means such as radio, cable TV music channels, live concerts, local bars or night clubs with live performances or recorded music, and internet. Internet has become by far the most important and strong substitute to traditional buying CD, since music provided on the web is most often cheaper or completely free and is not much inferior in quality than .wma format of CDs. Therefore, for certain amount of people these means serve as effective substitutes, but for music fan, buying official CD is obligatory. In the case of Colorado Creative Music, people can enjoy the performance on live concerts of these artists and decide not to buy their CD. Therefore, from CCM’s viewpoint, this may be regarded as fairly significant competitive force.

The forces left are bargaining power of suppliers and bargaining power of buyers and collaborative buyer seller relations, which are both strong competitive force.

The first, bargaining power of suppliers depends on the popularity and reputation of artists. Those who are popular and whose recordings sell well, have strong bargaining power, they can chose among numerous recording studios. CCM specializes on recordings of infamous artists, and therefore it enjoys weak bargaining power, since artists involved with CCM do not have many alternatives for studio record and CD distribution.

Bargaining power of buyers and collaborative buyer-seller relations is very strong competitive force. The major distributors of recorded music supply CDs to the leading music stores and other retailers of music, these leading distributors stock about 40,000 copies of a CD and work on 60-90 working schedule retaining the privilege of full return of investments for the unsold copies. So called “one-stops” are distributors which provide products for the independent music stores in smaller quantities and very often with limited range of music types. Generally such distributors prefer to handle stock CDs of the very popular artists or at least well-known artists and often they are not interested in going into distribution of CDs of unknown performers. Therefore, CCM faces great difficulty in acquiring decent and formal distribution, especially in getting its products sold by such music stores as Sam Goody, Tower Records, Borders Books and Music, and Barnes and Noble.

Also, a great role in the distribution process is played by getting the music heard by people so that they would be more willing to buy the CDs. This includes playing the music on the radio stations, on TV music channels and including soundtracks into movies. Until the performers and artists of CCM become so famous that they are asked for in retail music stores, the company has little chances to receive considerable representation by major CD distributors. The manager of the company, Darren Skanson, has contacted some retailers on his own and found out that it is very time-consuming and onerous task to get his CDs distributed by retailers in his own local area. The people he hired to tackle the problem had little luck either. CCM has had some experience of selling the CDs through one-stop distributor, but it was not very successful due to high markup imposed by the distributor on the CDs of CCM. In the long run, Darren plans to make his product lines such as Darren Curtis Skanson, Music for Candles and other artists, popular enough to have their CD distributed through major music stores. But at the present moment, predominant part of CCM sales volume stems from direct sales such as sales at the gig, shopping mall distribution and internet, mail and telephone orders of the musicians’ CDs.

Anastasia Kurdina is a person of manifold gifts. Almost every her writing is followed by lavish testimonials from satisfied customers. Anastasia specializes in marketing, management, world cultures, and art. Anastasia is not an essay writer in a common sense. She is a Poet, an Analyst, an Artist, a Critic… Get to know her better now at Custom Research Assistance Try new custom-writing service online. Our job is to make your time spent the way you want

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