ANSWERS RELEASED! - DIAMOND MODEL (MICHAEL PORTER)

PLEASE NOTE : ANSWERS ARE ALREADY GIVEN. PLEASE CHECK WITH YOUR REPRESENTATIVES.
Entertainment Industry : Sustainable Comparative Advantage of Hollywood
- Relevant to P3 Business Analysis (ACCA)

“You jump, I’ll jump!” One of the most memorable romantic phrase ever used in moviedom. An unemployed young man characterized with zeal for survival plus zest for life saved a woman from an attempted suicide i.e. to jump into the deep watery grave from the infamous Titanic ship. The movie Titanic is the highest grossing box-office in American history collecting US$600,788,188 (see Table 1 below). Worldwide sales was a colossal US$1.8 billion.

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Warning: The following video has an especially addictive effect on ladies. Also, please do not imitate the stunts you see in the video at home.

Of course, there are many other memorable movies such as the Batman (speculated to surpass Titanic Box Office's record) , Spider-man, Shrek, Star Wars and big money spinners.

1
Titanic
Paramount Pictures
$600,788,188
2
Star Wars
20th Century Fox
$460,998,007
3
Shrek 2
DreamWorks SKG
$441,226,247
4
E.T. the Extra-Terrestrial
Universal Pictures
$435,110,554
5
Star Wars: Episode I - The Phantom Menace
Lucas Arts Pictures
$431,088,301
6
Pirates of the Caribbean: Dead Man's Chest
Buena Vista Pictures Distribution, Walt Disney Studios Motion Pictures
$423,315,812
7
The Dark Knight
Warner Bros. Pictures Distribution
$405,699,734
8
Spider-Man
Sony Pictures Releasing
$403,706,375
9
Star Wars: Episode III - Revenge of the Sith
20th Century Fox
$380,270,577
10
The Lord of the Rings: The Return of the King
New Line Cinema
$377,027,325

In USA, a free market economy, interestingly all the historic top box office hits are made in Hollywood. A city of about 500 acres but controls excess of 90% of world’s box office receipts for the English language movies.

Why Hollywood has become home for the filmed entertainment industry is explained by several factors.



PORTER’S DIAMOND - DETERMINANTS OF COMPETITIVENESS

CHANCE

GOVERNMENT


For Porter, the key question is why some firms in some nations achieve international success while others fail. He analyses why some industries tend to form clusters suh as Hollywood, Silicon Valley in USA. He concludes that nations do not compete between them, rather, it is the firms within a country than must be competitive. This is applied in the context of Hollywood’s movie making industry.

BASIC AND ADVANCE FACTOR CONDITIONS

Pic 01 : Awww... Shucks! So dark. I should have listened to mom and brought a better torch light.

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Factor conditions explain, in the first place, the movie industry was established in this District lying north-west of downtown Los Angeles, which is today synonymous with the motion-picture industry. At a time where most films were still shot outdoors Los Angeles presented many advantages. Southern California enjoys 320 sunny and/or clear days per year and allowed for year-round production. It has a wide range of topography within a 50-mile radius of Hollywood, including mountains, valleys, forests, lakes, islands, seacoast and desert. In the early 20th century, Los Angeles was a professional theatrical centre. Southern California was, and remains for the movie industry, a tax-friendly environment as well as a reservoir of cheap labour.

Hollywood employs 135,000 skilled workers and accounted for 60 percent of American production. And it had become the centre of the United States motion-picture industry with the Paramount Pictures; Universal Pictures,; Goldwyn Picture Corporation and the 20th Century-Fox.

(Sophisticated) DEMAND CONDITIONS
Domestic demand is a major explanatory factor of competitive advantage. With regard to filmed entertainment the size of demand, the role of language as a natural market and the qualitative aspects of demand are the essential components.

Size of domestic demand
The US domestic film market is large and saturated by Hollywood production. The number of theatrical admissions on the US domestic market was about 1.7 billion in 2007. Common languages constitute natural markets for "talky" filmed entertainment. English ranks only fourth, after Mandarin, Hindi and Spanish. Analyses the language natural market determined by the number of speakers, both native and total, weighted by the GNP per capita. English ranks first far above Japanese, German and French and represents about 40% of the filmed entertainment natural market. Interestingly, the costs of production seem correlated to the natural market. It is not surprising that US movies cost more to make since they are expected to generate more revenues thanks to the size of the English natural market.

Qualitative aspects of domestic demand
Not only is the US domestic demand for filmed entertainment large but also the ethnic and cultural diversity of the United States is to a certain extent a good proxy of world demand. The needs of the domestic buyer anticipate those of other nations.

This means high correlations that movies that succeed in USA will succeed too in the international market.

RELATED AND SUPPORTING INDUSTRIES

Pic 02: Will you marry an ugly ogre? Please do because many people will pay a lot to witness our wedding.

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Another determinant of Hollywood competitive advantage lies with the presence, in the Los Angeles region, of supplier’s industries (studio rentals, editing, lighting, sound recording, film effects, market research, talent agencies, lawyers, writers...) and related industries (television, defence industries...) that are internationally competitive. More than a collection of a few large conglomerates, Hollywood indeed appears to be a network of independent and specialised suppliers. Members of the American Film Marketing Association (AFMA) created in 1980 by a group of 13 independent distributors, such as New Line and Miramax are now subsidiaries of majors, Warner and Disney respectively.

FIRM STRATEGY, STRUCTURE AND RIVALRY
Firm strategies are reinforced by the goals of the individuals. The industry with intensity of rivalry, forces each firm to increase productivity and innovation. Each finding its own niche or differentiated movie themes. For instance Disney Pictures are mainly PG rated for family-centric entertainment while DreamWorks may have had an argument that making movies and promoting sci-fi merchandise are different businesses.

ROLE OF CHANCE

Pic03: (Girl) Do you like spiders? (Boy) Wait here. I got a bug to catch.

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Chance also helped in building Hollywood’s competitive advantage. During the U.S. involvement in World War II, the Hollywood film industry co-operated closely with the government to support its war-aims information campaign. Following the declaration of war on Japan, the government created a Bureau of Motion Picture Affairs to co-ordinate the production of entertainment features with patriotic, morale-boosting themes and messages about the "American way of life," the nature of the enemy and the allies, civilian responsibility on the home front, and the fighting forces themselves. After, World War II the European cinema was entirely destroyed: the German UFI conglomerate dismantled, and the US could systematically flood Europe with the backlog of the war production.

ROLE OF GOVERNMENT
As argued by Porter, "it is tempting to make government the fifth determinant. Yet this is (...) not the most useful way to understand government’s role in international competition. Government’s real role in national competitive advantage is in influencing the four determinants" (factor conditions, demand conditions, firm strategy-structure-rivalry, supporting industries). After noting that "Government policy, in turn, can be influenced by the determinants", Porter mentioned that "successful policies work in those industries where underlying determinants of national advantage are present and where government reinforces them".The Hollywood-Washington link may be envisaged in this context. It makes sense for the US trade policy to actively support an industry whose strength is established by factor and demand conditions, firm strategies and the existence of supporting strategies.

Exam Tips : Please note that Porter’s Diamond model has all but destroyed the mercantilism theory and his work strongly influence governments’ policies. Such important development will not go unnoticed by P3 examiner Steve Skidmore. Try the following question to test if you fully grasp the concept. To do so, please refer to my lecture notes titled “Special Topic Set 2.2”.

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Pic 04: Told her to practice more ACCA questions and not to panic!

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Discursive Question (ACCA case study exam standard)

What initiatives can be taken if China as a nation wishes to develop its own Diamond Factors Model in the entertainment service industry? [10 marks]


SOURCES:
Yahoo! Movies, 2008, Top Box Office, http://movies.yahoo.com/mv/boxoffice/alltime/, Visited 8th August

Jeremy Kay, 2008, Can The Dark Knight sink Titanic?, http://www.guardian.co.uk/film/2008/aug/01/7, August 1st

Luc Véron, 2008, The Competitive Advantage of Hollywood Industry, http://www.ciaonet.org/wps/vel01/, Visited on 8th August

Youtube, 2008, http://www.youtube.com/watch?v=PtS45bh_INY&feature=related, Visited on 8th August

Michael E. Porter, 1990, The Competitive Advantage of Nations , The Free Press Publisher