Movie Theatre Business: Porter’s Five Forces Analysis

Five Competitive Forces

The five competitive forces have been placed in two categories, that is, forces that encourage vertical competition and those that favor horizontal competition. Forces that play part in the vertical competition are the bargaining power of customers and the bargaining power of suppliers. On the other hand, the forces that favor horizontal competition include the threats posed by new entrants, those from established rivals, and those brought about by substitute products.

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Threats posed by new entrants are normally seen in the markets that are highly profitable and that have huge returns; this is because these types of markets are likely to attract new companies. When new companies join a highly profitable market, profits reaped by all the players in the industry will automatically decrease toward zero. Reduction in profits can only be avoided in a situation whereby the established firms in the industry deliberately block newcomers (Hitt, Ireland, & Hoskisson, 2011).

The second competitive force is the threat posed by substitute products; the existence of other products outside the sphere of renowned products is likely to increase the likelihood of customers using alternative products.

The substitute products in this case do not refer to similar products manufactured by a competitor, but to totally different ones that can replace those of a competitor. The third competitive force is the bargaining power of customers, which refers to the capacity of buyers to pressure the company and influence its pricing policies. The fourth force is the bargaining power of suppliers who may exacerbate the cost of unique raw materials, or completely refuse to cooperate with the company. The last competitive force is the threat posed by established rivals, which is normally seen in the form of advertising and innovation (Hitt, Ireland, & Hoskisson, 2011).

The level of competition that can be anticipated among industry rivals is the horizontal type. In thwarting threats from new competitors, companies may create barriers that prevent the entry of new players in the industry such as the use of patents and rights. Companies can prevent threats from substitute products by ensuring the prices of their commodities are favorable than those offered by their rivals. Companies can avert the last horizontal force of competition, which is the threat posed by established rivals, by engaging in aggressive advertisements and adopting innovations (Hitt, Ireland, & Hoskisson, 2011).

Advantages and Disadvantages of Each of the Top Four Competitors’ Situations and Strategic Approaches

The top four competitors’ situations and strategic approaches are the existence of barriers that prevent the entry of new members, economies of product difference, brand equity, and capital requirements. Barriers that prevent the entry of new members in a lucrative industry include rights and patents, among others. The advantages of using barriers to prevent the entry of new members in the industry include: the barrier gives the companies that are established in a particular line of business, the exclusive rights to reap supernormal profits (Angwin, Paroutis, & Mitson, 2009). In a situation where patents are used, companies can take legal action against competitors who try to gain entry into the industry without their consent.

Another advantage of these barriers is that companies with legal blockades can sell them to competitors for a profit, especially in the case of patents. One of the disadvantages of barriers as a strategy of preventing competition is that they only prevent the entry of new players for some time, but they do not protect the ideas or secrets behind the success of the company that tries to use them. Also, the cost a company may incur in erecting these barriers may sometimes outweigh the benefits reaped in a particular line of business (Angwin, Paroutis, & Mitson, 2009).

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The second competitors’ situation and strategy, is the economies of product differentiation, which is the act of making a company’s products different from those of its competitors, to become attractive to a certain market. The main advantage of the economies of product differentiation is that it enables companies to increase their profits through increased sales and pricing strategies. However, the main disadvantage of this method of dealing with competition is that it raises ethical concerns because it is based on customer’s ignorance; and in some situations, companies may just rebrand existing goods.

Brand equity as a strategic approach of dealing with competition refers to a situation whereby companies strive to make their products well-known and become brand names because such products sell more (Angwin, Paroutis, & Mitson, 2009). The main advantage of using brand equity as a strategic approach is that consumers may accept to pay more when the brand name of a product is known. However, the main shortcomings of this approach are negative equity created by media attention and the fact that the company’s sales can be adversely affected if these products are recalled by the company due to quality issues.

Finally, capital requirement as a method of averting completion refers to the amount of money a company needs to invest and sustain its operation in a certain industry. Established companies may lock out new companies out by ensuring the capital requirements to operate in a particular line of business remain extremely high (Angwin, Paroutis, & Mitson, 2009).

Financial Considerations that Affect the Profitability of Major Movie Theatre Businesses

One of the financial considerations that affect the profitability of movie theatre businesses is the cost of production of these movies. The cost of producing an average movie is currently projected to be well over one hundred million dollars; this signifies a growth of up to twenty-five percent in five years. A second consideration that affects profitability is marketing expenses that consume a third of the total amount spent on a movie. The main target audience of major movie theatres in America is the youth, who are of ages between twelve and twenty-four years; this target segment buys approximately forty percent of all the tickets that are sold (Benshoff, 2004).

For movie theatres to make good profits, they must comprehensively satisfy the needs of this dynamic audience; failure can lead to negative consequences. This is evident in the case of Iron Man produced by Paramount for one hundred and forty million dollars and had sales of three hundred and eighteen million dollars in the American box office. Speed Racer produced by Warner Bros for twenty million dollars and released a week later did not perform well at the box office and only made forty-four million dollars worth of sales (Benshoff, 2004).

The state of the economy has also been known to affect the profitability of major movie theatres by influencing rates of attendance. When the American economy performs poorly and inflation occurs, movie attendance goes up. This is because going to the movies becomes the most affordable recreational activity as opposed to others like going to a professional football game or visiting an amusement park. Another factor that has been cited to interfere with profitability in the movie industry is the existence of too many theatres (Benshoff, 2004).

Feasible Strategic Options for Participants in the American Movie Industry

One of the major factors that have affected the profitability of major movie theatre businesses is horizontal competition, which includes the threats posed by new entrants, those from established rivals, and those brought about by substitute products. Threats posed by new entrants are evident in the high number of movie theatres in America, a factor that has served to reduce the profitability of the entire industry.

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One of the feasible strategic options that can be used to reduce the number of newcomers in the industry is through the introduction of patents and rights (Benshoff, 2004). These patents and rights should be designed in such a way that it becomes relatively difficult for new players to join the industry, while at the same time making it easy for players who want to quit.

Another competitive force that reduces profitability in the movie industry is the threats that come from established players like Warner Bros. This is evident in the aggressive advertisement and counter techniques used by these movie theatre companies. For example, Warner Brothers released their movie production Speed Racer hardly a week after Paramount released its movie, Iron Man. Although Warner Bro’s movie was less successful based on the box office reviews when compared to Paramount’s movie, it is still thought to have interfered with the latter’s sales. A feasible strategic option for participants in the American movie industry would be to come up with agreements that regulate the release of movies by different production houses (Benshoff, 2004).

The threat posed by substitute products is also another factor that has interfered with the profitability of the American movie industry. The threat of substitute products is seen in the fact that some production houses may produce movies with similar themes with those of their rivals, which at times act as substitutes. For example, Speed Racer produced by Warner Bros may have been intended to be a substitute for Iron Man produced by Paramount (Benshoff, 2004).

Production of DVDs, especially those produced through piracy, may also act as substitutes because potential audiences may gain access to them before they are officially released; a factor that interferes with the direct revenue generated through ticket sales.

A feasible strategic option to this problem is reinforcing rights and patents that govern the American movie industry. The bargaining power of customers is also a competitive force that interferes with the profitability of the American movie industry. This is because the majority of movie audiences in America are youths between the ages of twelve and twenty-four years. This group is dynamic and a change in their movie viewing behavior significantly affects profit margins (Benshoff, 2004).

Recommendations

The recommendations I would make that are likely to improve the success of the movie industry in the future would touch on three main areas, that is the cost of production, cost of advertisement, and target audience. Currently, the cost of producing an average movie in America is extremely high reaching over one hundred million dollars. This significantly interferes with the profit margins, and for the industry to succeed in the future, ways of reducing production costs should be implemented.

Currently, the cost of advertisement is also extremely high consuming up to one-third of the entire cost of production. The cost of an advertisement can be reduced by regulating the overcrowding in the industry, which leads to cutthroat competition and reduced profits. The movie industry should also expand its target audience and stop relying on the youths whose unpredictable behavior significantly affects the profits generated by companies in this line of business.

References

Angwin, D., Paroutis, S., & Mitson, S. (2009). Connecting up strategy: Are senior strategy directors a missing link? California Management Review, 51(3), 74-94.

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Benshoff, H. M. (2004). Queer cinéma: The film reader. London: Routledge.

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2011). Strategic management: Competitiveness and globalization, concepts and cases: 2011 custom edition (9th ed.). Mason, OH: South-Western Cengage Learning.

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StudyCorgi. (2021, January 20). Movie Theatre Business: Porter’s Five Forces Analysis. Retrieved from https://studycorgi.com/movie-theatre-business-porters-five-forces-analysis/

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