Strategic Analysis of HMV’s Operations

Advanced Strategic Management – 2nd Semester

Module Leader: Mgr. Agnieszka Dłutek

Maximilian Plura 46277

Table of Contents
1. Abstract......................................................................................................................3
2. Introduction...............................................................................................................3
3. Macroenvironmental analysis....................................................................................3
3.1. Political.................................................................................................................................4
3.2. Economical...........................................................................................................................5
3.3. Social.....................................................................................................................................6
3.4. Technological........................................................................................................................6
3.5. Ecological..............................................................................................................................7
3.6. Legal.....................................................................................................................................7
4. Industry Analysis.......................................................................................................7
4.1. Competitive Rivalry.......................................................................................................8
4.2. Buyer Power...................................................................................................................8
4.3. Supplier Power...............................................................................................................8
4.4. Threat of new Entry.......................................................................................................9
4.5. Threat of Substitution....................................................................................................9
5. Capabilities................................................................................................................9
6. SWOT Analysis........................................................................................................10
7. Recommendations....................................................................................................12
8. Conclusion...............................................................................................................14
9. References................................................................................................................15
10. Appendix..............................................................................................................16

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 1. Abstract
This study focuses on the current strategic situation of British music & film retailer, HMV in
the UK. Going from the past mistakes to the future, the report will explain how and why the
company is struggling. The report will finalize with conclusions and recommendations on the
possible choices for the company’s near future.

2. Introduction

HMV is a British music &film retailer operating in the industry for almost a hundred years.
With the expanse of streaming services and the digitalisation of the industry, HMV was put in
a difficult situation. With the company making less sales with every year they were forced to
go into administration in January 2013 but were then saved within a week’s time by Hilco
which bought of their debt and allowed the company a second chance. After almost 6 years
under Hilco leadership the company went into administration again, threatening the almost
100-year-old retailer to close its doors forever again. Yet again, within a month’s time, they
were saved, this time by Canadian company Sunrise Records which previously purchased
HMV stores in Canada (Monaghan and Butler 2019). With their third chance starting this
year, the question remains if the British retailer is able to co-exist in a market dominated by
the likes of Netflix and Spotify (Cellan-Jones 2019).

3. Macroenvironmental analysis

I am using PESTLE analysis to give a better understanding of the macro-environment in

which HMV is operating. The environment creates both opportunities and threats for
organisation Although the future can never be predicted perfectly, it is clearly important that
the managers of the case company try to analyse their environments as carefully as they can
in order to anticipate and - if possible – take advantage of such environmental changes.
Knowledge of how to perform and use this analysis would have possibly saved HMV a lot of
trouble when looking at their past and the way they anticipated environmental opportunities.

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 3.1. Political

Political impact for HMV's external environment and the record business is in the form of
activities towards piracy and unapproved access to music on the web. Where a few
government officials disregard the danger, some take action, and this impacts sales
colossally. In the UK the increase of VAT to 20% has led to the decrease of sales, pushing
some customers to illegally download both music and film. The problem of pirating is
common throughout the modern world and while some governments are trying to fight it, like
Germany or Denmark which have very high fines for doing so. Sadly, the British government
has not yet put out a working policy fighting modern piracy therefore leaving, not just HMV
but all music and film providers no matter if retail or online services like Netflix or Spotify,
in a situation where they lose customers.

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 3.2. Economical

The accessibility of free music online has changed the industry significantly making deals fall
and retailers to lower prices. The whole industry has experienced a collapse in sales of the
main rivals given by huge entertainment organisations and leisure companies which are
offering substitute merchandise, like, Apple Music. In any case, the interest in music exists
nevertheless, the market has gotten incredibly fierce for physical high street music and video
retailers who are still stuck with traditional store layouts and products. The unemployment
rate in the UK has been gradually decreasing meaning that more people have money to spend
which is a great possibility for companies like HMV, on the other hand people nowadays
prefer to search for products online to make a decision and then look for the cheapest
possibility to purchase or even download illegally (gov.uk 2019).

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 3.3. Social

Nowadays the younger generations don’t prefer using DVD’s and CD’s anymore meaning
that the market for HMV is gradually getting smaller. The uprising of streaming services like
Netflix and Spotify have endangered the existence of classical retailers due to the extreme
ease of purchase and service which happens instantly without having to even leave the house.
The upside of the societal changes for HMV is the vinyl revival that has been growing since
2007 giving them more of a connoisseur status and making people willing to pay more for the
old timer music experience.

3.4. Technological

Technology is very important in today’s market environment. These days classical shops are
losing customers due to online purchases and subscription-based platforms providing better
and faster service. To battle this new phenomenon HMV should expand more into the digital
market offering not only physical products but digital versions as well.

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 3.5. Ecological

Ecological aspects don't influence HMV directly yet at the same time, however there are a
few sectors which may affect the organization, like social and environmental behaviour of the
organization that incorporates wellbeing and security, ecological management, community
affairs. Their online store has items that are distributed physically which will affect the
world's carbon footprint.

3.6. Legal

Recent improvements in the laws for illegal retail of music on the web and offline has given
the record retailers some relief as the law enforcement offices take hold of the matter yet at
the same time activities are constrained and there are numerous illegal dealers accessible
online offering illegal streaming services as well.

4. Industry Analysis
Using the Porter's 5 Forces model I want to bring a deeper explanation to the industry HMV
is operating in and to its level of competitiveness. Based on the actual situation of HMV
where they have over 100 stores in the UK, I will focus on this market alone. As for the
competition, which I will take into account, I chose traditional Brick-and-Mortar retailers as
well as online retailers and online businesses providing subscription-based services
(Monaghan and Butler 2019)
Porter’s 5 Forces of the UK music&film retail industry

Threat of new entry – low/medium

Due to physical retail being in
decline it does not seem like a
fruitful industry to enter.
Online music and film selling
becomes more popular opening the
market for new threats from this
direction

Competitive rivalry – medium/high Buyer power – high

The main rivals to HMV are other
Supplier power – low entertainment retailers as well
Huge record retailers who lead the common supermarkets since in the
market set their own guidelines last couple years they started selling
and costs and therefore, control the DVD’s as well making the market
cost of suppliers. more competitive and forcing
7 companies like HMV to cut their
prices
The modern technological
improvements and web revolution
which have brought the data age to
its most significant level, the
power that record retailers
accomplished already is now being
lost to shoppers at a colossal pace.
 Threat of substitutes – high
With new technological
advancements, music and film
have become more accessible than
ever due to streaming platforms
like Spotify or Netflix, giving
people other possibilities rather
than traditional retail.
Figure 1. Porter’s 5 Forces of the UK music&film retail industry.

4.1. Competitive Rivalry

The record sales have been recently suffering a serious decline. The market is largely
occupied with aggressive competitors who are engaged in a price cutting war. The main
rivals of HMV are other entertainment business which is largely expanding their businesses
in diverse directions such as Virgin Megastores, and other independent shops. The leisure
businesses and super markets are also HMV’s competitors which are driving consumers’ taste
to other directions especially in seasons like Christmas or winters, as recorded by HMV’s
marketing researches. Online music stores which are offering customers mp3 songs for free
are also causing HMV and other major record retailers to consider lowering their prices down
and enter into online selling and online stores and further enhance their e-marketing and
promotional activities.

4.2. Buyer Power

Bargaining power of buyers is high. The recent technological advancements and internet
revolution which have brought about the information age to its highest level, the power that
record retailers attained previously have now had to lose it to consumers at a tremendous
pace.

4.3. Supplier Power

There is low bargaining power of suppliers as large record retailers who lead the market set
their own standards and prices and thus, control the cost of suppliers.

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 4.4. Threat of new Entry

The whole record retail industry is changing and moving towards its online counterparts,
thus, it does not seem like a fruitful industry to enter considering the brick and mortar store
format which is largely becoming extinct. Online music selling presents a good opportunity
for music record retailers as the future holds growth in this area but not for the physical
brick and mortar store formats. There are fewer barriers to entry in this industry but having
a strong brand image and recognition like that of HMV and iTunes is an added advantage.

4.5. Threat of Substitution

With the advent of technology and internet new forms of entertainment in music are
gaining internet and attention of the consumers such as music in mp3 format available
online for free as opposed to CDs and DVDs which were previously hit sellers. Music is being
made available in more compact forms for the ease of the consumers and the retailers have
to make sure they continually improve their service offerings to fit the changing tastes of
the consumers.

5. Capabilities
Using the VRIO analysis insight into a company’s competitive advantages can be gained.
Based on the analysis shown in table 2, it can be seen that despite the problems HMV is
facing they do have some competitive advantages which can be used in their favour.
Personally, I believe that in the company’s case, the brand itself is its most important
advantage. Due to the company’s long existence on High Street and also being the UK’s
prime music and video retailer for so many years the customers will always connect the
industry with the brand making it the go to retailer for most British citizens. This capability
works really well with the customer base due to them being interconnected with each other.
Another capability to keep in mind is the market proximity, since the downfalls of 2013 and
2018 the company was forced to shut down many of their international stores, which limited
their retail possibilities abroad but did also let them focus domestically, where they have
more control of the market with their recognisability and market share size (Monaghan and
Butler 2019).

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 VRIO analysis of HMV’s capabilities

Capabilitie Valuable Rare Inimitable Organization Competitive

s support implications
Renowned Yes Yes Yes Yes Sustained
brand competitive
advantage
Brick-and- Yes No No No Competitive
mortar parity
presence
Customer Yes Yes No No Temporary
base competitive
advantage
Market Yes Yes Yes Yes Sustained
proximity competitive
advantage
Table 1. VRIO analysis of HMV’s capabilities.

6. SWOT Analysis
Strengths
 HMV is a market leader in the music and record retail industry of UK. It has such a
strong brand positioning and recognition that it can easily compete with US’s iTunes
if it incorporates more ecommerce strategies into its operations.
 HMV has entered in to diversified portfolios and ventured into emerging and growing
geographic markets such as in Asia, US, Australia and other parts of Europe and other
entertainment and leisure markets such as fashion, cinema and books. This has
expanded its customer share.
 HMV has launched its website operations whereby online purchasing, gaming and
ticketing takes place allowing customers to shop with ease and enjoy doing so with
maximum contact with the company.
 HMV effectively relies on e-marketing strategies to interact with customers online via
email specifically. This promotional campaign has increased the click rate by 600
percent resulting in 765 per cent more transactions on the online store of HMV.

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  HMV’s acquisition of Mama Group has also enabled it to get a strong hold in the
entertainment industry in the UK as consequential to this the share price of HMV rose
tremendously.

Weaknesses
 The biggest dilemma facing HMV is to encourage customers to still purchase from its
brick and mortar stores. Customers are less convinced to do so as they find it easier,
better and cheaper to purchase the same music online (Billboard Biz, 2011).
 Sales went down 2.4 per cent in the last 12 months, though profits are being attainted,
which is a signal that there is a large audience still looking for entertainment which
can be addressed through the cinema and other forms of live entertainment and the
music selling can be shifted to online counterparts for enhanced profitability in future
(Guardian, 2010).

Opportunities
 Having opened up its website operations, book store and cinemas across London,
HMV is expecting a noticeably large increase in sales in the coming session in 2010.
Currently its sales total £8.1 million ($12.1 million) coupled with an operating loss of
£200,000 (-$300,000) after having taken over Mama Group. This shows clear signs of
growth for the company in future.
 Expanding into the niche market segment of health and fitness DVDs via the online
channel is also another viable opportunity.
 Technology has advanced at a tremendous level and rate and has created new
directions and opportunities for businesses through which they are revolutionizing
their performance, quality of services and customer relationships (Telegraph, 2010).
HMV has the opportunity to make its services more enhanced using internet by
offering downloadable TV and film selling online.
 Entering into the cinema industry has also its great advantages that are open to HMV.
The cinema industry is booming in UK and the numbers are off the charts. Based on
UK Film Council’s calculations, the cinema sales have risen from 3.5% to £850m,
which only indicate a great growth potential for HMV in this area (Guardian, 2010).

Threats

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  There is cut throat competition for HMV from leisure companies, entertainment
companies and from supermarkets. Along with that the consumers’ preferences are
changing much too fast to get a grip on but the online orientation of customers is here
to stay for some good time which can be made use of effectively.
 Piracy and unauthorized selling of music online and offline is vastly destroying sales
of records for independent record retailers like HMV for which quite less action can
be seen.
 The entire UK record industry is currently facing a massive decline of sales and that is
partly because of consumers’ demand for free music and the massive spread of pirated
music industry which is growing day by day.

7. Recommendations
As for possibilities on how to turn the tide and put HMV back on top where it stayed for so
long, there are a few options that could be taken into account. Based on the Ansoff Matrix we
can determine in which corporate strategy directions each of the possible recommendations
direct.

Ansoff Matrix

Figure 2. Ansoff Matrix.

As for diversification there are 2 possibilities to pursue. The first one involving an idea that
was already developed by HMV years ago but never put to practice was to include e-books

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into the company’s portfolio allowing them to reach new targets as well as providing
additional service to the existing ones. Between the years of 1998 and 2011 Waterstone’s was
part of the HMV group and back then the first idea of implementing e-books emerged but
never came into practice due to the sale of Waterstone’s. With HMV emerging back on the
market from its second downfall they have the possibility of partnering up with their old ally.
Waterstone’s has been doing significantly well since they left HMV, with annual turnover
growing yearly (Wood 2019). Meaning that they would come into an alliance from a position
of strength while HMV looks quite weak after its recent shakedowns. The partnership deal
would require a financial investment based on Waterstone’s requirement but would allow the
bookstore to fly under the flagship name of HMV again allowing it to reap the benefits of the
brand name and loyal consumer base. This idea would also increase the company’s web
presence through higher usage of their online retail giving the option of interesting customers
in other products. This would be very important since the problems of HMV were directly
connected to their digital channels and online retail.

The second diversification possibility is much more difficult to implement since it would
require major reconstruction of the shop designs and the portfolio. The idea would be to use
the wave of vinyl revival which started in 2007, turning the shops into café-retailers.
Allowing people to have a drink or coffee at the in-shop bar while listening to their favourite
vinyl’s. This idea focuses mainly on the need of people to feel like connoisseurs. This a
feeling directly connected to the vinyl revival movement which has increased the vinyl sales
throughout the world since it’s begun (Kendall 2019). While this idea obviously is very
difficult to implement it would be suggested to start off with only one shop as a trial. In case
of the idea being a little too much out of HMV’s window the vinyl revival can be used as an
advantage also through special sales involving the classic plates.

As for the product development part of the matrix there exist the possibility of improving the
online retail through creating an e-library where purchased products of customers are saved
and ready for download on various devices. It is oriented around a cloud-based server where
all customer products are being save, both music & film, it gives HMV the opportunity to
reduce cost of products due to removing delivery charges as well as increasing the potential
customer base. The opportunity gives HMV the possibility to be competitive with streaming
services due to it being fully digital and not requiring anymore physical presence of produce.
Personally I believe that the cloud based system could be just the beginning of a new digital
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era for HMV, with enough time and thought put to it the cloud based system could slowly
become an app with access to purchased items, but the biggest goal would be to move from
downloadable to streaming allowing people access to their items without having to download
them previously. Nevertheless, no matter how far developed the idea becomes, if it’s
download or streaming based, it still allows HMV to compete with the biggest threats to their
market like Netflix or Spotify. Because if people are willing to pay a subscription, they will
also be willing to pay individually for each product they are actually interested in (Barnett
2019).

8. Conclusion
It is impossible to foresee what the future hold for HMV, whether the company will make use
of its third chance or not is yet to see. I believe that if the company takes a deep look into its
past and understands their mistake of underestimating the possibilities of online retail and
digital channels, they might use it to their advantage for the future. On a personal note, I think
that analysing what its digital competitors are doing and how they operate in this new
evolved market will allow them to compete amongst the best again. As for future
possibilities, the product development recommendation of investing more into the
digitalisation of HMV’s retail sounds the most profitable and strategically plausible, despite
the fact of moving more outside the traditional brick-and-mortar retail, it gives the best
solution of adapting to the new evolving market of the 21st century.

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 9. References
Adams, R. (2019) Retail In The UK [online] available from
<https://www.telegraph.co.uk/business/tips-for-the-future/future-of-retail/> [28
November 2019]
Ansoff Matrix - Overview, Strategies And Practical Examples (2019) available from
<https://corporatefinanceinstitute.com/resources/knowledge/strategy/ansoff-matrix/> [28
November 2019]
Barnett, E. (2019) 'Hmvdigital Is The Company's Last Chance To Keep CD-Buying
Customers '[online] available from
<https://www.telegraph.co.uk/technology/news/7912807/Hmvdigital-is-the-companys-
last-chance-to-keep-CD-buying-customers-.html> [28 November 2019]
Cellan-Jones, R. (2019) Did Streaming Cause HMV To Fail? [online] available from
<https://www.bbc.co.uk/news/technology-46703208> [28 November 2019]
Kendall, N. (2019) The Vinyl Revival Proves It: We Love A Bit Of Inconvenience | Nigel
Kendall [online] available from
<https://www.theguardian.com/commentisfree/2017/nov/29/vinyl-revival-
inconvenience-spotify-youtube> [28 November 2019]
Kobie, N. (2019) HMV's Failure Shows A Way Forward For The UK's Struggling High
Street[online] available from <https://www.wired.co.uk/article/hmv-closure-
administration> [28 November 2019]
Monaghan, A. and Butler, S. (2019) HMV Collapses Into Administration, Putting 2,200 Jobs
At Risk [online] available from
<https://www.theguardian.com/business/2018/dec/28/hmv-on-brink-second-collapse-
administration> [28 November 2019]
Montgomery, A. (2019) Where Did It Go Wrong For HMV? | Design Week [online] available
from <https://www.designweek.co.uk/issues/may-2012/where-did-it-go-wrong-for-
hmv/> [28 November 2019]
Music Retailer HMV Calls In Administrators (2019) available from
<https://www.bbc.co.uk/news/business-46699290> [28 November 2019]
Nicholson, K. (2019) Revealed: The Surprising Problem Which May Have Hampered
HMV’S Success In The Past [online] available from
<https://www.express.co.uk/finance/personalfinance/1189590/hmv-business-finance-
birmingham-surprising-problem-past-success-spt> [28 November 2019]
Retail Industry - Office For National Statistics (2019) available from
<https://www.ons.gov.uk/businessindustryandtrade/retailindustry> [28 November 2019]
Scott, J. (2018) HMV: The Rise And Fall Of A Music Icon [online] available from
<https://www.bbc.co.uk/news/uk-46700080> [28 November 2019]

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Sweney, M. (2019) UK Film Industry On A Roll As It Helps Keep Economy Growing [online]
available from <https://www.theguardian.com/film/2017/jul/26/uk-film-industry-
economy-ons-movie-tv-tax-breaks-pound> [28 November 2019]
Unemployment - Office For National Statistics (2019) available from
<https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment
> [28 November 2019]
Wood, Z. (2019) Waterstones' Annual Profits Jump 80% As Buyers Loom [online] available
from <https://www.theguardian.com/books/2018/jan/18/waterstones-annual-profits-
jump-80-percent-books-sale> [28 November 2019]

10. Appendix

Figure 1. Porter’s 5 Forces of the UK music&film retail industry. Adapted from:

Retail Industry - Office For National Statistics (2019) available from

<https://www.ons.gov.uk/businessindustryandtrade/retailindustry> [28 November 2019]
Sweney, M. (2019) UK Film Industry On A Roll As It Helps Keep Economy Growing [online]
available from <https://www.theguardian.com/film/2017/jul/26/uk-film-industry-
economy-ons-movie-tv-tax-breaks-pound> [28 November 2019]

Figure 2. Ansoff Matrix Adapted from:

Ansoff Matrix - Overview, Strategies And Practical Examples (2019) available from
<https://corporatefinanceinstitute.com/resources/knowledge/strategy/ansoff-matrix/> [28
November 2019]

Table 1. VRIO analysis of HMV’s capabilities. Adapted from:

Barnett, E. (2019) 'Hmvdigital Is The Company's Last Chance To Keep CD-Buying

Customers '[online] available from
<https://www.telegraph.co.uk/technology/news/7912807/Hmvdigital-is-the-companys-
last-chance-to-keep-CD-buying-customers-.html> [28 November 2019]

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