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The media industry- A General overview -
Dr. Johannes HummelJuly, 8th, 2002
General OverviewJuly, 8th 2002
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Agenda
1. The Media Industry
2. Media-Markets
3. Media-Companies
4. Strategies in the Media Sector
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General OverviewJuly, 8th 2002
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Agenda
1. The Media Industry
2. Media-Markets
3. Media-Companies
4. Strategies in the Media Sector
General OverviewJuly, 8th 2002
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Media companies are intermediaries betweenartists/authors and recipients
RecipientDistributionPackaging ofthe Product
TechnicalProduction
Production &Aggregation ofContent
Placement ofAdvertisement
ObtainingInformation & Content
Acquisition ofAdvertisement
• Purchase of Text Contribution• Purchase of Film Contributions• Obtain Advertisements
• Production of Text Contributions• Production of Film Contributions• Use of Advertisements
• Choice of Products & Components• Editorial Handling
• Print• Allocation of Infrastructure & Development Capitalization
• Sales• Development• Portal• Allocation of Terminal Equipment
The general Value Chain of Media Companies
Artist/Authors
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The Media Industry today is more and morediverse...
information entertainment
text
pictures
audio
videoTelevision
Radio
Movies
R e c o r d e d M u s i c
S c i e n t i f i c J o u r n a l s
Consumer
Magazineseducation
General OverviewJuly, 8th 2002Seite 6
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I n d i v i d u a l s
Non-Profit Organizations
Corporate Publishers
Internet Companies
FilmPrintersRadio
TV Music
Agencies ServicesOther Media Companies
Publishers
Source: Diebold (1999)
... increasingly hard to define...
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... and more and more concentrated
Six World-Players are dominating the industry• Walt Disney
• News Corporation
• Viacom
• AOL-Time Warner
• Vivendi Universal
• Bertelsmann
Industry Rationale is driving concentration processes:Building scale both in distribution and content to getsynergies and cross-pollination of brands
Top 20 mediacompanies get50% of global
ads
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Media products are different to otherproducts
Law Mediabusiness
Society
They have impact on society and are therefore especiallycontrolled by law
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Legal framework of traditional media: Theexample of Germany
• Copyright: Protection of intellectual propertyTranslation, synchronization also generate their own rights!New technologies – pirate copiesè Threat to the music industryè Black market for software
• Media freedom: article 5 para. 1 of the German Constitutionguarantees- freedom of opinion and information- press, radio and film freedom, no censoring
• Limits to media freedom (art. 5 para. 2 of German Constitution):Protection of personal dignity, youth protection, personality rights, theright to one’s own image, corporate rights reputation, name), checksagainst concentration
• Media supervision / cartel supervision
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The media Sector is usually intrinsicallyprofitable
• EBIT of the best companies in every sector is usually between 10 - 30%
• The Cash Return on Invested Capital is in average around 8% (ex-goodwill) and 30% before goodwill.
• The reason for this is often a mixture of low Capital employed but alsointrinsically high profitability
• The high profitability is determined through enormous economies of scalein the content-based business, where marginal costs of production arelow and delivery costs are decreasing in the web.
• This is why “content-based media companies should generate outstandingreturns over the longer term” (Deutsche Bank. 3/2001)
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What makes Media Business profitable?
1. BrandabilityA products group’s brandability is the degree to which it is capable ofgenerating name recognition and trust, and the degree to which that canbe built up through advertising. Brandability provides the potential forscale economies
2. InertiaCustomer inertia (“lock-in”), exists when the change of a customer for agood or service from one supplier to another creates switching costs.Inertia allows the customer to be overcharged.
Source: Deutsche Bank 3/2001
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What makes Media Business profitable? (2)
3. Suitability as an advertising conduitThis means the suitability of a particular media category as an advertisingconduit. Those media systems which deliver a target audience (mass orspecific) through content provision facilitate effective advertising orproduct promotion. But not all media categories can be used foradvertising (academic journals).
4. Other barriers to entryResult either from distribution economies or from the ownership ofscarce resources, e.g. broadcasting licenses, people
Source: Deutsche Bank 3/2001
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What makes Media Business profitable? (3)Profitibility Analysis for Media Sub-Sectors
EBIT Brand- Inertia Suitability Other Barr. TotalMargin (%) ability For Advert. to Entry Score
Print DivisionNewspapers: National 21 *** ** *** * 9 Regional 13 * * * * 4Magazines: Consumer 14 * *** * 5 B2B etc. 16 * * ** * 5Books: Consumer 10 * 1 Education 15 * * ** 4Legal/Accounting/Tax 25 *** *** *** 9Academic Journals 32 *** *** *** 9Directories 40 ** *** ** ** 9B2B Online Services 25 * *** * *** 8Recorded Music 15 ** ** 4
Broadcasting DivisionBroadcast TV 10-30 * *** *** 7Pay TV 30 * ** * *** 7Radio 10-20 * ** ** 5
Source:Company data, Deutsche Bank Source: Deutsche Bank 3/2001
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Major-Trends in the media industry
Trend 1: Convergence
è The multimedia integration of various content and channels (e.g.music from mobile phones) links formerly separate sectors(telecommunication, IT, media)
è new services, new sectors (MP3, lifeline, etc.)
è new corporate alliances (AOL-Time Warner, Vivendi-Universal)
Trend 2: Fragmentaion
è of consumption: special-interest offers with smaller number ofcopies, ranges and markets
è of processes: value-added chain braking down (authors publishingon their own via the Internet)
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Major-Trends in the media industry
3. Globalization
è Communication and financial markets (Online Trading, Communicationaround the globe / around the clock)
è Access to world markets and international customer base
è However: legal frameworks and technical standards not yet uniformlyregulated
Consequences for Companies
è Speed
è New start-up culture
è New dimensions of market evaluation
è Strategic alliances and M+A (Dino-strategy)
General OverviewJuly, 8th 2002
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Agenda
1. The Media Industry
2. Media-Markets
3. Media-Companies
4. Strategies in the Media Sector
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General OverviewJuly, 8th 2002
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Media companies have different markets,...
Media Markets
Printmarkets
Broadcast/MusicMarkets
Internet andMultimediaMarkets
Advertising Markets
Reader Markets
Buying Markets
Viewers/Auditors Markets
User Markets
Advertising Markets
Advertising Markets
Buying Markets
Buying Markets
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...which depend on each other
Tar
get
Gro
up
Mon
ey
MoneyContent
Content
Attention/Money ContentMarket
AdvertisingMarket
Media Companies
Recipient’sMarket
Amount of
ad. revenuesRecipient’s
success
Reven
ue
Leve
l of th
e
Advert
ising P
rices
BuyingSuccess
Structure ofContents
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Content is the lifeblood of traditional mediacompanies and internet-startups alike
• In the age of the Internet, the definition of content is unclear
• Content is „stuff“ that draws readers to magazines, viewers tochannels and visitors to websites
• Content can be produced from individuals as well as fromprofessional companies
•„New media“ can be described as content that is produced indigital format, with no analogue or hard copy antecedent, andthen digitally delivered
•„Old“ and „new“ media are merging in many cases into a singleentity (e.g. digital distribution of music and film)
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Germany is the third largest advertisingmarket – with further growth potential
143
30.4
19.6 15.49.8 7.4
USA Ger F IJ GB
Source: Zenith Media
0.55%
0.32 %
459 $
203 $
USA Ger USA Ger
Advertising marketshare of GNP (1997)
Advertising exp. PerTV household (1997)
Advertising expenditure 2000 in $ billions
Potential inGermany notexhausted
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Market share of advertising media in aninternational comparison in 2000
100%
18%
Source: Zenith Media
45%
24%40% 33%
22%36%
24%
23% 12%
15%
13%
23%
34%
33%41% 53%
39%
8 %19%
9%14% 12%10%
Newspapers Magazines TV Other (incl. Internet)
0%
($20 bill.) ($10 bill.) ($15 bill.) ($5 bill.) ($7 bill.) ($143 bill.)
Ger Fr GB Sp It USA
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Advertising is very close related to GDPgrowth
US Advertising growth versus GDP growth
Source: Deutsche Bank 2002
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The sensitivity of the media regardingadvertising is different - get the right mix!
High Medium Low
Consumer Magazines Professional Magazines Books
Free TV Newspaper Pay-TV
Portals Public Radio Movie
Private Radio
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Widespread book and reading culture inGermany
7066
74
50 51
0
10
20
30
4050
60
70
80
Ger F GB Sp It
% of population reading at leastone Book per year
Other types ofreaders92%
Information-seeking readers8%
Other types ofreaders
80%
Information-seeking readers20%
1999
1996
Source: Buch AG, Bertelsmann Foundation, Lesebarometer
Number of information-seeking readers on the rise
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Acceptance of daily newspaper as mediumgreatest in GB and Germany
Percentage of population reading at least one daily newspaper
79
50
74
3842
58 Germany
France
Great Britain
Spain
Italy
USA
Source: Bertelsmann Foundation, Gruner+Jahr (G+J)
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Magazines
Percentage of population reading at least one popular magazine
96.5 95.286.5
55.2
71.4
85.4
GermanyFrance
Great Britain
Spain
Italy
USA
Source: Bertelsmann Foundation, Gruner+Jahr (G+J)
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First Signs of Substitution: Online users watchless TV
Source: ARD / ZDF- Online study 2000, based on no. of regular online users in Germany, 14 years and older
2 % more less 34 %
4 % more less 14 %
5 % more less 9 %
TV
Print media
Radio
General OverviewJuly, 8th 2002
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Agenda
1. The Media Industry
2. Media-Markets
3. Media-Companies
4. Strategies in the Media Sector
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General OverviewJuly, 8th 2002
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Tasks of the media company
2. Ethical responsibility / responsibility for effects of media- Define objective, profile, freedom of action and restrictions
- Design program and positioning / company's launch in society
- Responsibility for socio-political effects of its products
1. Business concept- Develop vision, product and marketing idea
- Define strategy and business plan, secures access to market
- Organize product development / looks for creative potential i.e., finds - motivates - guides creative staff
- Secure media competence in the value-adding process
- Ensure professionalism in editing, publishing, production, sales . . .
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The media business requires...
Vision / Idea
Product idea and raison d´etre
Productdevelopment
Creativity
Product and marketdevelopment /
positioning
Creative staff iscrucial to success
Management of creative personnel
Day-to-day adaptability
Preconditions arequality assurance/quality principle and professional
standards
Customer focus/Quality assurance
Social Responsibility
Sensitivitytoward society
...is influencial
...can manipulate
Principles of strategic management in media companies
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Vision: Media business always begins with anidea...
Gap in the market Vision
The IdeaExamples:
Simple Internet access (AOL)Weekly magazine (FOCUS)
Daily business newspaper (FTD)Sunday papers
Book club
Creativity/Product design
Market accessSkills
Product idea
Competition Target group
Financing
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Management of creative personnel is a basicprinciple...
1) Human resources work is the key task of mediacompanies
- e.g., Hubert Burda => Helmut Markwort
2) It must- find the best leaders,- provide them with objectives and the freedom to act,- make performance transparent and measurable.
3) Methods of recruitment - targeted scouting - developing young talents (recruiting/“incubators“)
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Creativity needs freedom and a special kindof Corporate Culture
4) Creative people need- Freedom- Targets- Competition- Mentors/Support- Participation (from information to stock options)- Supervision
5) A corporate culture must offer high-potential staff- an open/dialog-friendly atmosphere- an atmosphere that encourages creativity, innovation and thirst for action- a competitive atmosphere that fosters action and efficiency
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Customer focus is of high importance
- Understanding trends and social milieus is aprecondition for finding appropriate target groups andcreating a company profile
- Cultural sensitivity is crucial in international business
- Service orientation opens new markets(e.g., club idea, ebay, etc.)
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Quality assurance is crucial
Media companies should
- Define quality objectives
- Sustain them by assuming responsibilities and self-evaluation
- Develop and cultivate one's own media image,
- Work as a learning organization:- introduce self-regulating quality and evaluation circles (editorial staff conferences, program discussions, etc.)
- provide regular training and qualification programs (feedback, corporate university, knowledge management, etc.)
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Important element: Social responsibility
- Freedom of information and speech guaranteed by Art. 5, para.1 of German Constitution
- Restrictions on the freedom of speech (Art. 5, para. 2 – protection of minors, protection of personality, protection of personal honor, etc.)
- Social responsibility is secured by: - self-determined objectives
- ethical standards- media image- codes of conduct
- Decentralized organization/internal pluralism
- Publisher's (editor in chief's) principle
- Supervisory authorities (supervisory board, broadcasting board, press office)
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General OverviewJuly, 8th 2002
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Agenda
1. The Media Industry
2. Media-Markets
3. Media-Companies
4. Strategies in the Media Sector
General OverviewJuly, 8th 2002
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Strategy of a media company is driven by abusiness idea
Idea / Vision Business idea
Market potential analysis
• Resources required (skills,finances, rights)
Resources analysis
• Resources comparisonè external resources needs
• Analysis of value-adding chain
• Analysis of success factors
• External restrictions
• Food-chain analysis
Business concept and strategy• Business plan • Portfolio analysis
• Strategy options • Resources procurement plan
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Analysis of the value-adding chain reveals barriersto competition and demands on resources
1. Building the sector-specific value-adding chain
2. Identifying critical success factors of the value-adding chain
3. Defining core tasks in critical success factors
4. Resources management (creativity + leadership)
5. Market adaptability/adjustment
6. Publisher's patience vs. risk awareness
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It is always about understanding and managingspecific value chains
Exam
ple
mag
azin
e Information andreports by editorsand photographers
Putting a magazinetogether
(packaging)
Attracting advertising Billing foradvertising
Print, production
Marketing Distribution- Subscriptions- Wholesale
Book
publ
isher
s
Scouting for andrecruiting authors
Packaging(proofing andconception) Print, production Distribution
Marketing Sale
Recipient
Recipient
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Focus on critical success factors
• Differentiation– Product (content, quality)– Marketing
• Ensuring optimal access tocustomers
• Competitive price
Critical success factors
Focusing on critical successfactors and outsourcing
all other stages in the value-adding chain
Acquiringand
generatingcontent
Pooling,program-
ming;packaging
Marketing
Print,production
(Trade,broad-casting)
Capitalizing on audience/advertising
1 1 3
2
1 Differentiation of products
2 Important element in product financing
3 Generation/pull
4 Only if access to customers is a limiting factor
Critical success factorFactor important for success
Reasons why success is important:
Distribution
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Acquiring content: Core tasks and successfactorsAcquiring exploitation rights. No purchasing of products• Works by authors, artists, intellectuals and producers• Licenses to use works• Rights to events, e.g., soccer
Active involvement in product development by proofreaders, labelmanagers, etc. to ensure marketability Generating information products yourself, e.g., editors producingup-to-the-minute news
Success factors
• Scouting skills: Sniffing out "promising" talent• Managing relationships with creative artists through good contact,
contractual agreements and exclusive use rights• Acquisitive strength: Attractiveness to artists, and scale
effects through downcycling
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Programming/packaging as a success factor
Core tasks in program conceptionIdentifying an interesting target group and their demands of the program
Mixing different topics or program elements into a uniform and/or brandedpresence
Meeting the identified target group's demands in order to double value-addingeffect
Marketing the media products to the target groupSelling the advertising industry access to the target group
Success factors
• Understanding the demands and wishes of the target group• Sensing the right topics• Production skill
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Marketing/capitalizing on audience as asuccess factor
Core tasks in capitalizingon the audience
• Selling advertisers access to theaudience/Selling advertising slots
• Defined and attractive targetgroup
• Efficient sale of advertising
• Scatter losses/CPT
Success factors
• Winning over new customers forthe product (CPI/CPO*)
• Binding existing clients to theproduct
• Customer Segmentation/community-building
• Product's USP• Demands of target group• Marketing concept• Customer retention programs• Sales and distribution concept
Success factors
Core marketing tasks
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In addition to conducting a value chain analysis,external factors must also be taken into account• Social acceptance of new ideas
• Political system: legislation, regulation, state broadcasting agreement, deregulation of telecoms market, data protection
• Monopoly monitoring and definition of market by monopoliescommissions
• National income and available purchasing power (society'sprosperity)
• Industrial skill and strength (internationality, size)
• Consumer demand and interest profile
• Consumption habits, recipient behavior
• Safety measures, e.g., patents, licenses, intellectual property rights
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The success factors must be assessed relativeto the competition
Probability of success
Resourcesas conditionfor success
Content• Scouting• Management of
relationships• Acquisitive strength• Talent
Success factors
Program• Understanding the target
group/"feel"• Conceptual creativity• Production skill
Marketing• Product's USP• Target group work• Marketing concept• Sales/distribution
Capitalizing on audience• Importance of defined target
group to advertising clients• Efficient sale of advertising space• Reutilization
Relativeweighting offactors
Relativecompetitiveposition
Demands onresources
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Good ideas can be blocked by a lack ofresources
People with specificknowledge and/or skillsèTechnologyèAccess to content/rights
management
Drawn from interim businessplan, e.g.èFundingèInfrastructure
Need for resources
Own resources– Abilities– Technology– FinancesObtainable resources• Easily obtainable• Difficult to obtain e.g. venture capital, staff
Available resources
Resourcesbalance
Only those ideas for which resources are either available or relatively easy to obtain have a good chance of success
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A variety of income sources is the key tosuccess in the media industry
Mediacompanies
Rights Fees
Licenses
Mediaaccess
Mediause
Advertising
Othersubsidies, taxbreaks, etc.
Rightsmarket
State
Otherservices,
merchandising,etc.
Other datamining,
commis-sions, etc.
Adver-tising
marketRecipientmarkets
Transaction -
independent
Transaction
-dependent
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Strategic options for media companies
Specializing on onevalue-adding element Developing core skills
Focus strategy
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Network strategy
Cooperation betweengroups of companies
X,Inc.
A,Inc.
B,Inc.
C,Inc.
Strategicnetwork
Strategicalliance
Y,Inc.
Z,Inc.
Synergy managementto broaden range ofservices offered
Integration strategy
HorizontalintegrationèPortfolio
management
Vertical integrationè Earnings
Print Books Music
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Individual companies and corporations havedifferent assessment criteria
Individual company
• Is the business concept marketable?
• Can the initial funds carry thecompany until break-even?
• Is the business idea profitable inthe long term?
Stand-alone assessment
Corporation
• Does the business idea fit into thecorporation portfolio, i.e.,does itcreate synergy effects?
• What harm could be done toexisting business by a competitorimplementing the business idea?
Portfolio management
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Relevant assessment criteria in a corporateportfolio
High
Low
Marketgrowth Dogs
è Consider opt-out
Cash Cows
è Maximize viability
Relative market share(Alternative: Yield)
0 1 > 1
Questions
è Expand
Stars
è Polish
High
Low
Strategic fit
Opt-outdeals
è Consider opt-out
Family silver
è Sell
Yield
Expansion deals
è Increase yield
Crown jewels
è Tend
Low High
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Strategic fit: New business activities must fitinto the portfolio
Financial criteria
Yield– Capital needed to build up
business (initial funding)– Period before break-even– Risk/sensitivity analysis– Worst-case scenario– Milestones
Strategic criteria
Synergy effects for existing businessactivities– Strengthening and Supporting existing business activities
– Extra products– Extra countries– Extra customers
– Greater downcycling, e.g., film studio è video rental è pay- and free-TV– Cannibalizing on existing business
activities (è field must not be left to the competition)Fit of skills and strategy– New products, e.g. magazine publisher moving into TV Strategic targets, e.g., going online
and,not or!
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Strategy is the guideline for portfoliomanagement
1. Increasing the yield/growth of existing businessIncreasing profits by expanding business activity and/or reducingcostsStimulating growth of the market and your own business throughnew products, marketing, etc.
2. Diversifying into new business activitiesFuture company pillarsProfitable growth
3. Opting outPermanently low-yield businessStrategically non-relevant business
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Extending the life cycle of existing products isa permanent management task
Long-term yield must be maximized!
Time
Results
Extending the life cycle bycontinually adapting to newcustomer wishes
Timely re-investment in existingproducts
– Improvements
– New product additions orelements
0Typical life cycle of abusiness idea
Life cycle of a well-managed business idea
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Different life cycles demand differentstrategies and lead to different dynamics
Music
Video
MovieFilm Divisions EBITDA margins (%)
Studio Market Shares (%)