Bertelsmann and the World Music Industry

BMGE operates in a competitive environment with big players. There has been a significant amount of changes faced by the company. It is vital for BMGE to understand the environment so that it can ‘fit’ the strategy according to the organisation position within the environment.

1a. Opportunities

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* There are scope of opportunities to invest in Latin America, France Italy and Asia markets

* Single exchange in Europe after 1999, allowing easier trade for firms as one single currency.

* Major opportunities exist for BMGE to become distributors purely of music, rather than circular pieces of plastic; if the Internet and digital broadcasting systems can be managed to their advantage. This would have many advantages in reducing the fixed cost of producing records, and could lead to a great broadening in the type of music available.

* Sophisticated development linked to video are now more feasible, especially as DVD is introduced and more interactive technology becomes available for home use. This moves the product away from plain music to a multimedia experience.

Threats

* The growth of internet as an entertainment and communication means in conjunction with the development of related software to distribute and play music in digital form represent a major threat to the current structure of the music industry and to BMGE.

* Some independent record labels are beginning to use Internet to distribute their product digitally.

* Smaller brands are not going to need record companies because they will just sell their stuff directly over the Internet. They have nothing to worry about.

* The introduction of a new channel enabled new on line companies to enter the music retailing market.

* Main competitors are major players. The major companies controlling the music industry are Sony, Warner Music, EMI and PolyGram.

* The introduction of a new channel enabled new on line companies to enter the music retailing market.

* Piracy and the potential explosion of illegal copying from the Internet and other broadcast systems is the plainest and most immediate threat to BMGE. If legitimate sales decline, then profits will no longer be there for developing new artists and existing artist’s incomes will decline.

1b. The key success factors for companies in the industry

Success factors may be defined as the things that have to be done well if the companies in the industry are to be successful. The success factors are necessary to assure that the most important indicators will be in focus. The following can be used in the music industry as key success factors:

* Segmentation and promotional skills; the ability to create markets

* Competitive strategy, industry positions and geographic location e.g. Japan is located at the centre of the Asia pacific region.

* Marketing research skills to identify new marketing needs

* R;D skills to invent new products

* Distribution skills

* Environmental factors: GDP, political factors, economic development, inflation

* Pricing skills to ensure the right margins

* Negotiation ability

* Innovating is a vital factor for success

2. Strengths

* Name recognition

* Innovation-it has access to the latest technology.

* Organisational structure which responds to local needs.

* Strong cultures where managers have the ability to make strategic decisions.

* BMGE is at the forefront of technological development

* BMGE is big enough to pursue further mergers and act as a strong player within the industry.

* Joint ventures with local record companies have allowed Bertelsmann to establish a presence in a large number of markets around the world and build up a more regional repertoire.

* BMGE has a good distribution network. BMGE’s world wide coverage and interest in CD manufacturing plants had enabled it to sign distribution and manufacturing agreements with other record companies particularly with MCA.

Weaknesses

* The BMGE’s core activities lie in other industries. This makes the company rather fragile business entity, where long term planning is difficult and profit projection is very subjective.

* BMGE is the smallest of the major international music companies by market share.

* The major weakness is it’s reliance on big hits. In years where there are no new brands or artists, nor a big selling album, sales tend to drift and profitability is hit badly. Even major companies can quickly suffer without a major new product.

3. Objectives

Objectives are specific result an organisation seeks to achieve in pursuing it’s basic mission. Objectives need to be established at the corporate, divisional and departmental levels if an organisation is structured in that manner. A divisional objective for BMGE could be to achieve a 10% annual increase in revenues.

Objectives are important in strategic planning because they provide direction and purpose. They establish priorities, reduce uncertainty, minimise conflicts, are used to allocate resources and to design jobs. For example a division should know up front what the objectives or expectation is for the quarter or year.

* To grow global market share

* Strengthen BMGE’s world-wide marketing capabilities

* Provide unparalleled levels of customer and employees satisfaction

* To establish commitment to the company or business by involving as participants those persons with most knowledge, experience and foresight in relation to the business environment and markets in which the company or the business is likely to operate in the future for example executives directors who have day to day accountability for improving results.

Objectives

Suggestions

* Establishing new business with the market leaders.

* Keeping pace with the market leaders.

* Analysis of customer strategic needs, customer culture and mode of response.

* Sales growth with market leaders, gaining new key customers.

Strategies are made from an organisation’s underlying mission, external opportunities/threats, internal strengths/weakness and objectives. An organisation need to use it’s strengths to take advantage of the opportunities and improve upon weakness and avoid threats.

The major player existing within the music industry are identified as follows:

* Sony

* Warner Music

* EMI

* PolyGram.

These major players have aimed to influence the balance of forces by adopting strategies involving an offensive approach. Companies will no longer be able to have “one strategy fits all” philosophy. To adopt suitable strategies, companies are now becoming more conscious of the changing environment, and hence, will become ” more proactive and scan their external environment for both threats and opportunities” (EMJ, April 1997)

In order to grow, Bertelmanns AG needs to develop alliance with Internet companies such as Yahoo or Netscape. BMGE can join forces with smaller firms to formulate joint ventures or strategic alliances, and make quick investments. The aims of such strategy is to gain “win win” situation where the small firms receive capital for R&D. Whilst BMGE, will benefit from new product developments, technology and the smaller firms management and entreprenship knowledge. This strategy has become more flexible alternative to mergers.

In order for BMGE to remain competitive, they have formed several key alliance in recent years, particularly in area of technology.

BMGE can also focus its strategy on “forming alliance to maximise capability in all parts of the business.”

Vertical integration.

Adopting such strategy will allow BMGE to build stronger distribution network and get closer to the customers, and become more service-oriented.

Many firms have adopted this strategy to cope with environment changes, because it has led to economies of scales, by reducing costs in administration, marketing and sales together with R&D but at the same time synergies are gained from such arrangements where knowledge and skills can be shared, leading to greater innovation. Greater global presence maybe another benefit from vertical integration.

Horizontal integration

BMGE can expand the organisation’s activities into other geographic locations, product or service lines. It can try to increase profits by gaining larger economies of scale. The company can obtain and grow by new technology through merger or acquisition with software companies.