Strategy and non-technological innovation

Assignment for part-time MBA Competitive Strategies, week 6

October 4, 2012

This paper describes the consequences of a non-technical innovation for the strategy of a firm that operates in cultural industry. The example chosen is that of the company Stage Entertainment. In the first part of this paper we will provide a brief history of Stage Entertainment, single out two non-technological innovations and discuss how these innovations have affected the strategic behavious of Stage Entertainment. In the second part we will discuss both the horizontal and vertical processes Stage Entertainment is involved in and argue why one of these should be considered more important to Stage Entertainment’s overall sustainable competitive advantage.
Stage Entertainment is the brainchild of the Dutch creative entrepreneur Joop van den Ende (born 1942). Stage Entertainment is the result of a merger of several other entertainment companies owned and run by Van den Ende and was incorporated in 1999. It has seen rapid international expansion and is now active in 9 countries, employing 4000 people. The turnover is €600 million (Nispen, M. van, Jaekele S. and Charrington, J, 2009).
Van den Ende describes the strategy of Stage Entertainment as a strategy consisting of three elements (Nispen et al 2009):
1. Venues: programming and managing a network of venues across Europe (i.e. theatres)
2. Productions: presenting a wide range of existing, leading international content. These productions are owned by other parties, but produced for a specific country by Stage Entertainment (e.g. the theatrical distribution rights of ‘My Fair Lady’ are owned by Paramount Pictures and CBS).
3. Creative development: creating and developing original new musicals. Stage Entertainment also develops and owns new theatrical works, such as the Dutch musical ‘Ciske de Rat’.

The non-technological innovations of Stage Entertainment that we will discuss in this paper have been selected due to their conformity to the following definition of innovation. ‘An innovation is something new which is presented in such a way that the value will be determined by the selectors.’ (Wijnberg, 2004, p.1416). The key elements in this definition are ‘something new’, ‘value’ and ‘determined by the selectors’. ‘Something new’ in the context of this paper means that the ‘something’ was not there before, is actually introduced in a market and an attempt to be commercially successful (Wijnberg, 2004). The concept of ‘value’ ties in with ‘commercially successful’. However, in order to have value, the value must also be determined. According to Wijnberg (2004), the process of determination must take place in a context of a particular set of consumer preferences: a selection system. Wijnberg argues that in industries dealing with creative goods, the competitive process is governed by a selection system comprising of the combined selection systems of peer selection and expert selection. In the case of Stage Entertainment we have identified the peer selectors being ‘other producers’. Several musical have won awards, which can be regarded as determining value through an expert selection process. We consider jurors, journalists and critics in this case as the experts of the expert selection system. The third selection system that applies is the traditional type: the audience being the selectors, Stage Entertainment is the selected. The audience determines the value by buying tickets.
The first non-technological innovation of Stage Entertainment is combining the three elements mentioned above: 1) venues 2) production and 3) creative development. As far as our limited research has shown, no other musical producers in The Netherlands, Germany, Spain, Russia, Italy and France have combined these elements. In combining these elements Stage Entertainment controls a larger part of the value system (Mol, Wijnberg and Carroll, 2005). The benefits of doing so are that Stage Entertainment will be able to capture more value and decrease the risk of value chain envy (Mol et al. 2005). Furthermore it could be argued that due to the complex nature of the product, a theatrical good such as a musical, and the specific knowledge required to create and produce musicals internal coordination are success factors (Grant, 1996).
This first innovation can be broken down into two elements. First there is the combination of producing existing shows. By combining the production of musical shows owned by other parties with the development with own, original shows Stage Entertainment diversifies its risks of not having (enough) theatre ‘hits’ to satisfy customer demand. By combining these shows with the venue it manages, Stage Entertainment can offer the customer a memorable experience for which there is a high ‘willingness-to-pay’ (Brandenburger and Stuart, 1996) or in other words, an important opportunity costs for consumers (Dempster, 2006). The importance to make the visit to a musical show a memorable experience is important in order to control the nobody knows (Caves, 2003) risk of consumer demand (Dempster, 2006). The venue can have some influence on audience composition (Dempster, 2006), one of the three key determinants of consumer demand. Also, the shows can be tailored to suit the venues.
The second non-technological innovation by Stage Entertainment is the selection of the main character in for a new production, e.g. for the musical ‘Tarzan’. In 2006, for the first time in Dutch television history, auditions for the part of the character ‘Tarzan’ were held during a series of television shows. One of the professional jurors was Joop van den Ende. During the last episode the television audience could also cast a vote. By getting involved in a televised audition show Stage Entertainment organized free media coverage, a second key determinant of consumer demand (Dempster, 2006). Since the participants in the talent scouting television show were non-professionals, it can be expected that there will be asymmetrical information (Caves, 2003) between artist and Stage Entertainment, putting the artist in a position where he will likely not be able to capture more value then he adds to the value system (Mol et al. 2005). Furthermore, the contract between Stage Entertainment and the winner of the talent scouting will probably have the property of art for art’s sake (Caves, 2003). This will also help Stage Entertainment to capture a larger part than ‘1’ in the value chain (Mol et al. 2005).
What the exact influence of these innovations is on the strategic behaviour of Stage Entertainment must be studied in further research. The mere fact that Stage Entertainment has 30 venues and 4000 employees suggest that a positive feedback loop of increasing returns may be applicable to Stage Entertainment: ‘Increasing returns are the tendency for that which is ahead to get further ahead…’ (Arthur, 2000, p.100). From a Resource-based-view perspective the knowledge to create and produce musicals, have the artist network and control the venues to perform are resources that constitute ex-post limits to competition (Peteraf, 1993).
If we refer to the abovementioned definition of innovation, from our (very) limited research we can conclude that the two innovations discussed in this paper to some extend cover the key elements of the definition: ‘something new’ (the combination of the three elements), ‘value’ (awards and turnover) and ‘determined by the selectors’ (awards and the decision of the audience to buy tickets).

The vertical competitive process that Stage Entertainment is involved in is the production of musicals, concerts, shows, shows on ice and events. In this this paper we will focus on musical shows, e.g. ‘My Fair Lady’, ‘Tarzan’ or ‘Ciske de Rat’.
We have derived a basic value system of a musical show from Mol et al. (2005), Depster (2006) and Caves (2003). The basic value systems is as follows:

Playwrights → producers/directors/actors → venues → advertising → consumers.

Between the parties involved with each element a ‘tug of war’ (Mol et al, 2005) for capturing a larger part of the value can be expected to go on. However, since the strategy of Stage Entertainment is to control or own a relatively large part of the value system, the main ‘tug of war’ will likely go on upstream in the value chain: between playwrights (or the parties that hold the right to a show, e.g. Paramount Pictures / CBS) and Stage Entertainment. The question that must be answered by Stage Entertainment is how much they are willing to pay Paramount Pictures / CBS to produce e.g. ‘My Fair Lady’. This example makes it clear how beneficial it can be to produce original work. In that case, Stage Entertainment is able to capture the highest value possible. A down side to producing original works may be that advertising costs for an unknown, new original musical will likely be higher than for an established musical ‘hit’.

The horizontal competitive process that Stage Entertainment is involved in concerns competing with other musical production firms. It can be expected that in established musical markets, such as the London’s West End or New York’s Broadway, there may be fierce competition for the audience. Broadway currently offers 24 shows according to the Internet Broadway Database (IBDB). London’s West End currently offers 37 shows according to the London Theatre guide. In the whole of the Netherlands a total of 13 musical shows are currently offered (www.musicalfriends.nl).
According to Dempster (2006) risks involving creative industry entrepreneurship are nearly impossible to predict. Caves used the catch phrase nobody knows to describe the fundamental uncertainty that is part of the production of a creative good (Caves, 2003). Entrepreneurship (Jacobson, 1992) is therefore en essential property for Stage Entertainment, engaging in horizontal competitive processes.

A case can be made that both vertical and horizontal competitive processes are important to Stage Entertainment’s overall sustainable competitive advantage. A compelling argument argue which competitive process should be considered more important cannot be given and could be the subject of further research. Within the limitations of this paper we can conclude the following.
In musical markets where there is no less an established musical tradition (The Netherlands, Germany, Spain, Russia, Italy and France) the emphasis on ‘winning’ in the vertical competition process may prove to be the most important overall sustainable advantage. In doing so Stage Entertainment will capture more value than it creates in the value system. For example, other parties such as musical actors in the value system in these countries will be in a disadvantaged position due to asymmetric information and the attitude of the actors towards their work - art for art’s sake - (Caves 2003).
In established musical markets (Broadway, West End), Stage Entertainment will likely endure tough competition in the theatres. The public has many musicals to choose from. The selection system will most likely be of the traditional type (Wijnberg, 2004), where the consumers are the selectors and Stage Entertainment is a producer selected. To remain competitive in these markets ‘winning’ in the horizontal competitive process will likely be more important to Stage Entertainment’s overall sustainable advantage.

References
Caves, R.E. (2003) Contracts Between Art and Commerce, Journal of Economic Perspectives, 17(2): 73-83

Dempster, A (2006) Managing Uncertainties in the Creative Industries: Lessons from Jerry Springer The Opera, Creativity and Innovation Management, 15 (3): 224-233.

Jacobson, Robert (1992), The “Austrian” School of Strategy, Academy of Management Review, 17(4): 782-807

Mol, J.M. and Wijnberg, N.M. (2005) Value Chain Envy: Explaining New Entry and Vertical Integration In Popular Music, Journal of Management Studies, 42, (2): 251-276.

Nispen, M. van, Jaekele S. and Charrington, J. (2009) Stage Entertainment corporate brochure

Peteraf, Margaret A. (1993), ‘The Cornerstones of Competitive Advantage: A Resource-based View’, Strategic Management Journal, 14: 179-191.

Wijnberg, N.M. (2004) Innovation and Organization: Value and Competition in Selection Systems, Organization Studies, 25 (8): 1469-1490.

www.musicals.nl/wicked-nieuws-nieuwsberichten-wicked-miss-saigon-next-to-normal-en-de-musical-droomvlucht-grote-winnaars-musicalworld-awards.asp

www.ibdb.com

www.londontheatre.co.uk/londontheatre/whatson/musicals.htm

www.musicalfriends.nl/musicals