Strategy project positioning the DR ensembles 2001 - 2006

 

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A strategy report on how to position the DR Ensembles - a five year plan - 2001 - 2006

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copenhagen business school strategy project positioning dr ensembles 2001 ­ 2006 part i industry analysis part ii company analysis part iii issues analysis part iv implementation bent-erik rasmussen december 2000 mba programme class 1999/2000

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tudy carefully when daylight falls the movements of the stars the part of the day and the points of the compass learn also to recognise clearly how much the sea calms or swells because this is great knowledge and essential to all who want to travel and trade make yourself sharp with figures this is essential for merchants translation from a nordic 13th-century text called king s mirror the viking s guide to good business

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content overview executive summary introduction i i industry analysis 1 1 industry overview 1 2 the concert industry 5 3 business system 10 4 key success factors 11 5 the strategic situation 11 6 competitor company profiles 14 7 industry analysis conclusions 16 ii company analysis 17 1 company overview 17 2 financial analysis 17 3 production output analysis 24 4 economic value generated by production output 25 5 functional analysis 26 6 value chain and productivity measurement 26 7 conclusions 28 iii issues analysis 29 1 framework for the strategic choice 29 2 issue #1 the concert market 2005-2006 31 3 issue #2 incremental change vs corporate strategy 33 4 conclusion strategic recommendation 39 iv implementation 40 list of figures and tables references appendices

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content executive summary introduction i 1 background i 2 the concert market expands i 3 non-profit industries ii 4 definitions of work method report form and limits iii i industry analysis 1 1 industry overview 1 1.1 the media industry trends 1 1.2 danish culture industry sectors 2 1.3 radio tv 3 1.4 the recording industry 3 1.5 copyright organisations 4 2 the concert industry 5 2.1 industry definition 5 2.2 product 6 2.3 market 6 2.4 supply market 7 2.5 customer market 8 2.6 market shares 9 3 business system 10 3.1industry chart ­ the music business network 10 4 the key success factors 11 4.1the strategic star s forces and the surroundings 11 5 the strategic situation 11 5.1 new entrants 11 5.2 threat of substitutes 12 5.3 competitive rivalry 12 5.4 the artistic profile and generic strategies in the concert industry 12 5.5 repertoire profiles 13 5.5 conductors and the soloists 13 6 competitor company profiles 14 6.1 basic analysis 14 6.2 financial analysis 14 6.3 strategic strength 15

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7 industry analysis conclusions 16 7.1 industry analysis conclusions 16 7.2 main conclusions 16 ii company analysis 17 1 company overview 17 2 financial analysis 17 2.1 dr budget 2000-2006 18 2.2 financial reporting ­ for non profit organisations 18 2.3 rog and risk ­ profit measuring in non-profit organisation 18 2.4 the dre financial performance 19 2.4.1 the sbus 21 2.4.2 the danish national symphony orchestra 21 2.4.3 the danish national radio concert orchestra 22 2.4.4 the danish national radio choir 23 2.4.5 the danish national radio big band 23 2.4.6 the music production group 24 3 production output analysis 24 4 economic value generated by production output 25 5 functional analysis 26 6 value chain and productivity measurement 26 6.1 productivity 27 7 conclusions 28 iii issues analysis 29 1 framework for the strategic choice 29 1.1 conclusions of industry analysis external factors 29 1.2 conclusions of company analysis internal factors 29 1.3 swot analysis 30 1.4 strategic issues 31 2 issue #1 the concert market 2005-2006 31 2.1 seat volume expansion 32 2.2 activity expansion 32 3 issue #2 incremental change vs corporate strategy 33 3.1 option #4 35 3.2 strategic implication of option #4 37 3.5 1 organisational issues 37 3.5.2 strategic financial planning 38 3.5.2 marketing issues 39

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4 conclusion strategic recommendation 39 iv implementation 40 1 decision process 40 2 milestone plan 41 list of figures and tables references appendices 1 industry overview 2 the music industry 3 the media industry structure sizes and trends 4 radio and tv in denmark 5 the recording industry structure 6 copyright organisation structure 7 the concert industry i competitive structure and product definition 8 the concert industry ii market development local regional and global view 9 the concert industry iii the business and industry system 10 the concert industry iv company profile analysis 11 the concert industry v strategic evaluations 12 financial analysis i dr budget 2000-2006 13 financial analysis ii dr ensembles financial development 1997-2000 14 the pavarotti effect two lessons learned 15 new location for dr ensembles new marketing issues 16 organisational charts 17 calculations of option #1-4

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executive summary the subject of this report is the classical and jazz music production area within denmark s radio dr ­ `the dr ensembles dre dre comprises a symphony orchestra 100 musicians a concert orchestra 42 musicians a choir 31 singers a big band 17 musicians a music production group and management producers technicians and administrative staff 65 employed in total 255 people it has a total turnover of 155 mio dkr ­ generates external income of aprox 28 mio dkr by producing over 200 concerts and this activity generates 1.600 hours of broadcast through dr channels the purpose of the analysis is to clarify the strategic possibilities and recommend strategic direction and actions for the coming 5 years 2001 2005 ­ a period which according to several indications will become crucial both for dr as a corporation and for dre as a business unit the board of denmark s radio has formed and decided a new corporate strategic plan that implies that all major corporate functions of dr will be reimplemented in a new centralised and relocated organisation housed in a new building complex including a new concert hall and music production centre this strategic move will require a very well planned implementation to succeed the move to the new location is scheduled to 2005 the report consists of four parts industry analysis company analysis issues analysis and implementation plan part i the industry analysis starts `from outside looking at the industry from a global viewpoint in order to trace important trends that directly or indirectly influence the rather narrow industry sector dre works in it also includes listing developments that influence dr because such influences certainly will be reflected on dre directly or in the long run the industry analysis concludes that the global media industry is converging into large and globally dominating corporations covering the complete value chain of music production and distribution internet distribution and music industry are central in this industry change the possibility of distributing digital music files instead of distributing physical cds is causing a dramatic change in the recording industry the industry reaction has been to fight for legal control of the distribution of music claiming that copying files is piracy and violating legal rights the napster site enabling free file exchange over the net has accelerated this development but at the same time the market for cds is not yet diminishing ­ as the industry claims it showed a selling growth of 6 in the first halt of 2000 which is a sign of growth and not a dramatic sign of a fading market in the broadcasting industry internet webcasting an increasing number of tv channels and commercial regional or national radio stations are challenging the former dominating public service broadcasting corporations ­ like dr especially radio feels this development becoming a real threat which results in a declining dr market share competition will force dr to reallocate resources this is assumed to cause internal budget cuts on all other areas.

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so dre is facing decreasing budgets which will call for internal strategic and structural considerations since music production with ensembles is burdened with high fixed costs and very little room for radical rationalisation the concert market in general is local as to customers but international as to artists and because of two new planned classical performance venues ­ the dr concert hall and the new opera house volume of classical live performances in the copenhagen area will increase in 2005 and 2006 however the classical live performance market is growing in general but the increase in supply will surpass this general growth and increase competition in the copenhagen area ­ if the market need does not grow faster than the present trend three players dominate the copenhagen concert market the royal theatre 62 market share tivoli 22 market share and dre 10 market share with tivoli dominating the summer season and the two others dominating the winter season part ii ­ the company analysis ­ focuses on the financial analysis of dr dre and its five sbus and a production output and productivity analysis the analysis shows dre as a productive and financially stabile and healthy organisation quality and productivity is high as to output and growing but a high cost level on artist expense results in relatively high costs per concert and per ticket compared to local competitors dre is generating added value and hidden values of costsaving music production are significant a formula for the added value elements is established and the total added value is calculated the different areas within dr ensembles have different cost structures indicating different possibilities for further growth in output growth potential as to output volume is identified in order to enable further growth the issue analysis is concentrated on two main issues identified through the industry analysis and the company analysis · · the impact of the increased competition in the copenhagen area by the increase of live performance of classical music in 2006 the effect of incremental change gradual cost cutting vs corporate strategy strategic use of the entire music production area as an active part of corporate strategy the increased seat volume is calculated the new dr concert house will increase seat volume with 32 in 2005 and the volume will increase further to 69 in 2006 when the new opera house is finished compared to an optimistic expectation of growth as to sale of tickets of 4 annually it is demonstrated that supply will surpass demand from 2006 to 2013 so the increase in competition on the copenhagen concert market can be foreseen based on the internal dr strategy of incremental cost cutting in order to focus development on new media four options for dre is evaluated the three options meeting the demand for cost cutting show value destruction in various ­ but all serious ­degrees the fourth option making the music production area a corporate strategy tool by forming the `dr music group comprising dre and radio rytmisk ­ will make the dr music area the biggest and most horizontal and vertical integrated music production area in northern europe it will be of significant european size and will secure growth in added dr value it is demonstrated that this corporate strategy at the same time will be able to support the profiling of the

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dr brand by securing a very active music activity in the new media house if this recommendation is not followed there is danger that fragmentation within the production area combined with the concert surplus will make it difficult to establish the new dr media house as an attractive media centre option four is the only strategic choice that can ensure the new media house to be a success by creating top musical activities and attract audience to the new centre in copenhagen and the Øresund region an implementation plan defines the actions that must be taken to implement this strategic choice.

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introduction the subject of this report is the classical and jazz music production area within denmark s radio dr1 ­ `the dr ensembles the dr ensembles organisation comprises a symphony orchestra 100 musicians a concert orchestra 42 musicians a choir 31 singers a big band 17 musicians and management producers technicians and administrative staff 65 employed the purpose of this analysis is to clarify the strategic possibilities and recommend strategic direction and actions for the coming 5 years 2001 2005 ­ a period that according to several indications seems to become crucial both for dr as a corporation and for dr ensembles as a business unit therefor the general focus of the following report is to analyse the development in the media industry and the music industry in general with special focus on the concert industry in order to define the strategic position and the strategic possibilities for dr ensembles dr ensembles base area as to production and customers 2 the concert industry centred in copenhagen is especially analysed as to suppliers industry network customers and competitors 1 background the board of denmark s radio has formed and decided a new corporate strategic plan that implies that all major corporate functions of dr will be reimplemented in a new centralised and relocated organisation housed in a new building complex Ørestaden it has been decided that music production is such an important part of the dr activities that a new concert hall on a european quality level as to acoustical quality and architectural impact will be built as part of the new centre but the sheer moving of the complete concert and production activities present both logistic and strategic challenge because it implies building a completely new music-production activity centre including all production and audience facilities and it also implies attracting audience in new surroundings and create a continuos and very active music programme that will require a very well planned implementation to succeed the move to the new location is scheduled to 2005 2 the concert market expands strategically the building of the new concert hall will increase concert hall capacity considerably in copenhagen since it will have 600 more seats than the old hall which contains 1.080 seats ­ and it will still be there and at the same time a new opera house will be built 2006 and it has been announced that a coalition of investors will build a big mega-event hall containing 16.000 people and the city stadium has just invested in a moveable roof which makes it possible to arrange mega concerts all year 2001 denmark s radio dr is the established domestic brand name for the danish broadcasting corporation which is the official english corporate name the official name is generally not familiar to danish readers though and therefore the domestic name in the common translation `denmark s radio also used by the ebu and the abbreviation commonly used and the contemporary correct name dr has been chosen here the ensembles names include the term the danish national radio for marketing reasons national is in itself level-indicating and this term will occur as well 2 the concert audience will be referred to in general as the customers as a business term 1 i

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all these expansions will change the balance of the concert industry in copenhagen over the next five years and at the same time the newly built bridge to sweden presents new opportunities as to the customer market which will be reinforced by the national and regional plans to invest in an increased profiling and internationalisation of the new region Øresundsregionen 3 non-profit industries ­ an under-researched area a problem analysing this industry and the dr ensembles dre is that the dr ensembles is a non-profit organisation ­ as is dr and most other culture institutions and the non-profit area is a relatively under-researched business area literature is scarce and one of the main problems in general is that the financial indicators and analytical techniques used in classical financial analysis either are not available or if calculated are not valid for use as to point out structural problems setting financial goals and guide management in general general financial analysis techniques can be used though but when the bottom line is usually zero and the main income public funds ­ there is some `translation to be done just to get started the concert industry parallels to some extend the science industries in the sense that it contains both profitable and not profitable areas but the limit between the two areas ­ the profitable and the not profitable areas is not clear although the classical concert area ­ as the entire non-profit area ­ has not been the object of many economic and management-focused studies a handful of classic studies have provided important knowledge in 1966 william j baumol and william g bowen did a study on performing arts ­ the economic dilemma ­ a study of problems common to theatre opera music and dance based on a huge data material and using ordinary research-methods the baumol dilemma has become a classic reference in further studies of the economic mechanisms within the management of theatre opera music and dance constantly referred to by later authors as a reference baumol focuses on the income gap ­ which is the gap between earned income ticket sales and other external income ­ and the total cost of artistic production and his conclusion is crucial to everybody trying to manage these areas and their surroundings3 the technology of live performance leaves little room for labour-saving innovations since the end product is the labour of the performer while increases in money wages in an industry such as auto manufacturing are off-set either partly or in full by increases in productivity the corresponding increases in salaries in productivity the corresponding increases in salaries in the arts are directly translated into higher costs the more successful such industries are in keeping up the rate of increase in their productive efficiency the more will the cost of living arts rise relative to costs in general the conclusion is clear costs per performance should be expected to continue to rise more rapidly than the general price level source baumol and bowen performing arts ­ the economic dilemma a study of problems common to theatre opera music and dance 1966 p.390 3 ii

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many things have happened since 1966 but a more recent study by harold l vogel entertainment economics ­ a guide for financial analysis 1998 still concludes an increase in the number of performances or ticket and subscription prices will not ordinarily reduce operating deficits instead financial support from municipal and private sources is normally required to sustain these activities current trends suggest that the entertainment industries will in the aggregate continue to grow at faster than average rates and that they will continue in the process of integrating vertically and globally but no matter how large or widespread the corporate entities become entertainment industries will remain dependent on the vitality and creativity of individuals in this respect they will not have changed at all that we are not in the charity industry though is demonstrated by studies showing that investments in the arts are job multipliers 4 that generate jobs with a factor of 1,8 to 2,8 times the invested amount because of the employment aspect and employees spending5 the conclusion to be drawn from these studies ­ and from experience in general is that with the classical concert industry we have an income gap between ticket income and production costs covered by support ­ or investments from society private funds or culture organisations but that we also se a growing element of earned income financing the non-profit artistic activities this part of the artistic organisation ­ selling tickets and seeking sponsors functions on market conditions and as a reflection of all other deregulation and privatisation processes on a global basis it becomes a natural goal to increase this market oriented earned income in the artistic organisation ­ generally in order to improve production possibilities public funders might find it natural to increase earned income in order to reduce public funding which however causes a motivation problem this balance is a constant subject for discussion since it also includes the definition of the value of the produced artistic content versus market oriented entertainment effects 4 definitions of work method report form and limits for report the background research for this report has been worked out through four basic studies the industry analysis the company analysis the issue analysis and the implementation analysis and although the focus for the report is the music production area of denmark s radio6 dr ensembles it has been necessary to trace the impact of the external industry trends in the entire industry the report in general maintains this overall structure ­ again in order to gain clarity but still the aim has not been to provide a complete analysis of the total industry which actually comprises three industries as we shall see ­ that would pass the limits of this study but trends influencing the general market situation and the concert market in denmark in particular are covered 4 5 source myerscough the economic importance of the arts in britain 1988 p 104 source symposium on research and marketing for the arts 1990 iii

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the analysis areas 15 specific areas can be seen from the structure of the appendices but in order to maintain clarity the report only includes main results and conclusions the material in the appendices however together with the listed references enables the reader to get more background information by studying the material ­ graphs tables and models from which the conclusions have been drawn iv

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i industry analysis 1 industry overview the industry analysis starts `from outside looking at the industry from a global viewpoint in order to trace important trends that directly or indirectly influence the rather narrow industry sector the dr ensembles dre work in it also includes listing developments that influence dr because such influences certainly will be reflected on dre directly or in the long run the music business is connected to and part of three industries the media industry the recording industry and the live performance industry up till recently these industries have developed independently but because of the internet development the media industry the recording danish industries industry and music are gradually becoming into one industry culture industry music industry radio tv and printed media recording industry internet live performance concerts music service industries 1.1 trends in the media industry the media industry is consolidating into very huge media giant companies by mergers and acquisitions e.g the aol merger with time warner and these few and very big corporations dominate the market to a very large extent the top six companies time warner walt disney bertelsmann news corp viacom and figure 1 music and culture industry sony cover half of the total market 48 market share ­ se exhibit 10 the areas they dominate are recordings distribution channels music rights printed media radio tv and lately they t h e la rgestmed ia compan ie s w o r ld europeandscand in a v ia byturnoverusdm ill are going into the internet industry all very important to the e gm ont sanoma -w s o y production distribution and deb o n n ie r velopment of music and the v iv endi music business area in a coml a g a rd é re plicated ownership structure berte ls mann and the trend in the mergers is newsco rp to combine strong digital disw a lt d is neycomp tributors e.g aol and strong t im ewarneraolt im ewarner content providers e.g time warner in order to cover the 0 5000 10000 15000 20000 25000 30000 35000 entire value chain.1 as shown in fig 2 exhibit 11 the scandinavian figure 2 global european and scandinavian media media companies are very small companies compared to the global top corporations news corp disney time warner and now aol time warner and since the internet gives access directly to the global consumer market these companies are becoming very strong competitors globally as well as locally the big media markets in europe defined by the biggest companies turnover are germany and 1 ministry of commerce and culture danmarks kreative potentiale-kultur og erhvervspolitisk redegørelse 2000 nov 2000 calls this the global wave of change p 7 1

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uk each with a total market of 18.000 mio us together they cover 3/4 of the european turnover france italy and scandinavia cover the last 25 together2 since the giant corporations dominate a very large portion of the copyrights of music in the world they have a dominating position this is evident in the musical area where performance decisions are totally controlled by the owners of performance and music rights the consolidation trend in the media industry forces national public service institutions like dr to act strategically in order to meet this growing global competition in order to get a picture of the importance of the global development it is illustrative to notice that already today we have over 20.000 streamed internet radios accessible from any computer in denmark3 e.g cnn produces danish news on the internet this situation forces dr to allocate substantial resources to the development within new media thus the general development in the media industry indirectly influences dre on the other hand the development seen with napster4 the very quickly upcoming internet site with free exchange of music files see exhibit 14 could also become a very convenient distribution opportunity for a music producing organisation like dre conclusion the development in the media industry represents a strong threat to dr but also big opportunities for global exposure and distribution of music recordings 1.2 danish culture industry the danish culture industry is among the fastest growing industries in denmark exhibit 3 and expo rt 4 in the period 1992-98 the tot u rn overthea tre tal growth rate was 29 relative a rc h ite c tu re to a general growth rate in the m u s ic private sector of 15 the culture industry s total turnover is r a d io /t v 4 of total private industry secbooks tors.5 0 5000 10000 15000 20000 25000 this might come as a surprise m io d k r since the culture is usually referred to as a `support area alfigure 3 turnover and export of danish culture industry though the danish government grants are substantial se exhibit 7 and slightly growing the size of the support 600 mio dkr compared to the entire culture industry turnover of 77.98 mio dkr is not very big and furthermore this support is directed to areas that generally do not have a direct commercial potential composers of serious music young writers and young artists in general but the understanding of the culture industry has to be differentiated the perception is that it is an area a very big commercial potential ex books printed media film production and rock music but some areas are not commercially generating profit the music industry figures show a rather stable government grant level since 1994 of 260 mio dkr and a total culture grant turnover of 6.414 mio dkr see exhibits 5 and 6 d a n is h c u ltu r e in d u s tr ie s 1 9 9 7 see exhibit 11 source internal dr media research see also exhibit 12 the recording industry and the internet industry ­ a fact sheet based on information in business week and time november 2000 4 source see calculation of the napster/bertelsmann deal source business week a new net powerhouse november 2000 ugebrevet mandag morgen oktober 2000 middelhof s vision time november 2000 5 source ministry of commerce and culture danmarks kreative potentiale-kultur og erhvervspolitisk redegørelse 2000 nov 2000 3 2 2

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