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IMAX: LARGER THAN LIFE

A CASE STUDY ANALYSIS

Strategy (BUSI42115)
Dr Min Liu
Durham University
Durham 12 January, 2015

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EXTERNAL ANALYSIS
PESTEL
The analysis starts with PESTEL, the examination of IMAX’ macro-environment to
discover recent and future developments’ potential impact on IMAX’ business landscape.
Due to technological development such as cheaper home theatre systems and an arising
variety of distribution channels through the Internet, watching movies at home in high
quality becomes easier, more flexible and more affordable. Accompanied by this is the
threat of potential digital piracy, which has the potential to harm the film industry badly.
Hence, legal factors such as the Copyright Act of 1976, can have an impact whether to
restrict this trend or not. However, as the film industry is becoming more globalised,
contents of films in terms of religious context, violence and sexual aspects need to be
depicted carefully and consciously. Globalisation also causes an increasing audience for
films from parts of the world other than typical countries such as India. Trends also show
that there is an increasing demand for educational entertainment. Nevertheless, the
economy can have an adverse impact on theatre attendance.

FIVE FORCES
The second framework that will be used to examine the external environment on the
industry level is Porter’s Five Forces model. Operating in the entertainment technology
sector, Motion Picture and Video Tape Production and distribution (referred to as Industry
1) and Photographic Equipment and Supplies (referred to as Industry 2) are identified as
IMAX’ core industries based on revenue.
Rivals within Industry 1 are big production studios such as Warner Brothers, which
produce films in traditional size. Also, there is one firm involved in all aspects of large
format films, Iwerks, which, however, has another specialisation. As the number of those
large market players is limited, the industry is concentrated. Products mainly just differ in
terms of genres. This is why especially within same genres the competition is very high.
Generally, switching costs and brand loyalty are presumably very low. These aspects
increase rivalry. Since most of the studios are owned by diversified firms, which compete
in multiple industries (e.g. Sony owning Columbia Pictures), they are strategically less
dependent on the film business. Furthermore, the industry is growing due to globalisation.
Both of these facts decrease rivalry. Therefore, the overall degree of rivalry is moderate to
high.

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Generally, the film business is very risky as only 60 per cent of the movies recoup their
investment. For example, there are very high marketing budgets necessary, which
requires capital investments. Additionally, as already mentioned the industry is very
concentrated and large studios may have access to comprehensive distribution channels.
Presumably, most of them have a lot of experience within the film business. These
aspects lower the threat of entrants. However, switching costs and brand loyalty are very
low, and new technology provides cheaper filming supplies and, hence, enables cheaper
production of films. This may attract new independent firms. Thus, the overall threat of
entrance is medium.
Film studios are highly dependent on big cinema chains to purchase and show their films,
as they otherwise may make large losses. As there are a few big theatre chains ruling the
market, the buyer concentration is very high. Additionally, the switching costs between
different film studios appear to be very low and there are an increasing number of small
independent firms producing movies. This gives cinemas a higher choice. These factors
give buyers high negotiation power. However, the threat of backward integration seems
low, as theatre chains are unlikely to overtake the production of films. Additionally,
cinemas are dependent on studios’ products, especially films with famous directors and
actors who may attract a large audience. Also, recent developments have shown that film
studios have increasing opportunities of distribution channels such as streaming service
or DVD. Thus, the buyer power is moderate.
Many people are involved in the production and distribution of films, which makes the
supplier market less concentrated. Usually (except for stars), they are not highly paid. If
they gather in unions, they have high negotiating power. As famous talents are able to
draw huge attention to a film, this group is powerful as well and can negotiate even higher
pays. However, these talents are hired on a project-by project basis, which makes the
switching costs very low and decreases supplier power. Substitute inputs reducing this
power to a certain extent may also be animated films, which do not require actors.
Nevertheless, supplier power is high.
The force of substitutes, as opposed to the others, will be viewed from the cinema’s
perspective itself. All leisure activities such as live plays and sport events may be
substitutes to them. Additionally, other distribution channels such as pay-per-view are
becoming increasingly popular, which is demonstrated by the fact that 85 per cent of a
film’s revenue come from home viewing. Also, there are no switching costs among those
substitutes. Therefore, the threat of substitutes is very high.

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As complementors do not make this industry extra attractive, they won’t be considered in
this case. In terms of Industry 2 the case does not provide information.

INTERNAL ANALYSIS
VRINE
To analyse the internal environment on the company level, the VRINE model will be
utilised. Core resources and capabilities were identified as the following, of which three
will be examined:

1. Research and development capabilities (referred to as Resource 1)

2. Brand identity (referred to as Resource 2)
3. Distribution rights for large format films (referred to as Resource 3)
4. Location in prestigious venues

Resource 1 is valuable as it enables the company to provide the “IMAX experience”,

which produces brighter and sharper pictures, and images stretched up to peripheral
vision. It also contributes to improve current technology such as the conversion to digital
format and to develop new technology such as 3D formats and the conversion from
traditional format to IMAX format. Due to this, IMAX can develop very high quality and
differentiated products, which provides a competitive advantage in the film industry. That
makes the resource valuable. As there is only one other firm having similar capabilities,
which even specialises in a different field, IMAX is the only player having such extensive
capabilities in the large format film segment. Since there is a demand for this capability it
is scarce relative to demand and, hence, rare. Also, Resource 1 is not imitable to a certain
extent. As copying the technology may be very time consuming and requires high costs, it
is very unlikely that another firm would try to imitate it. Especially, considering the high
stage of technology IMAX has already developed and which a firm would be competing
with. Nevertheless, the resource is not completely non-substitutable. Even though it may
be very difficult to develop such technology, theatre system providers may find other ways
of competitive advantage such as low price. To exploit this resource, IMAX uses its brand
identity and prestigious venues to differentiate itself even more from competitors. IMAX
has marketing and sales staffs in their international bases, which enables the distribution
of the systems.

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Resource 2 is valuable as IMAX stands for educational and large format film experience
and hence helps create brand awareness and recognition value. It is rare as no other film
studio in the industry has such a specific brand image. It is almost not imitable as it took
IMAX a very long time to establish this brand image in combination with all its other
resources. This is why the brand image is, as almost all intangible resources, very difficult
to copy. However, other differentiators such as good marketing capabilities can substitute
it. IMAX is exploiting this resource as it uses it for producing films cheaper than other
studios that can’t take advantage of such an image and needs to hire an expensive talent
to create awareness.
Resource 3 is valuable as it is able to meet the market demand for large format films and
enables IMAX to distribute those to cinemas, which have the equivalent technology.
Moreover, the resource is rare as IMAX has the distribution rights to the largest number of
large format films. Theoretically, it is possible to imitate it. However, it may be very difficult
to do so as IMAX has already established itself within the large format film business. It
may have contracts with movie theatres. Also, it will require high capital investments to
either produce such large format films in comparable quality or to buy the distribution
rights for them. A substitute for these rights could be own-produced films. Nevertheless, it
is very unlikely to reach the number and fame of films IMAX has in its library. To exploit
this resource IMAX needs to be able to actually distribute those films. This is supported by
its established brand reputation and its theatre systems, which it also sells to those very
cinemas.

STRATEGY DIAMOND
Looking at the current strategy of IMAX the strategy diamond will be used to break down
its different elements.
IMAX competes within the entertainment technology industry operating within different
industry segments. It manufactures theatre systems (approximately 50 per cent of
revenue), and produces and distributes films (approximately 32 per cent of revenue).
IMAX sells its systems to movie theatres, which are also the only distribution channel as
opposed to many other studios, which use a variety of means to distribute their films such
as pay-per-view. IMAX serves mainly the geographic area of North America (60 per cent
of cinemas) but also expanded to Europe and Asia, adding up to the total of 295 cinemas
in 2007.

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IMAX mainly uses internal development as a vehicle. It almost spent five per cent (2007)
of sales revenue on R&D and had 15 per cent of its employees involved in it. To secure
this advantage of technological progress, it uses patents. Also, IMAX secured other
stages of the film value chain through a post-production firm, which is a wholly owned
subsidiary. It also has 51 per cent ownership in a sound system firm. To secure constant
high quality of products, IMAX secures long-term contracts with its suppliers for
components of the systems. Furthermore, it uses partnerships with big theatre chains,
such as AMC. It also allies with other firms to promote its films through more channels, for
example a promotion on Showtime. Moreover, IMAX arranged that after selling its system,
the theatres still carry the name IMAX.
IMAX’ main differentiator is the unique experience. This is enabled due to its continuous
technological development, which also allowed IMAX to convert Hollywood films to IMAX’
format and converting traditional theatres to IMAX theatres. IMAX partly uses prestigious
venues such as museums and produces educational films to maintain its brand image. In
terms of the theatre system, it provides high quality service, and applies strict quality
control of component and end products.
IMAX expanded slowly in terms of the target group and geographical areas as it improved
its technology over a long period of time. It focused on a narrow end consumer group with
its educational films and then later on expanded it with converted Hollywood films. It also
moved from the focus on North America to countries other than the United States and
Canada.
Cinemas, which buy IMAX systems and show their movies, charge premium prices for
these large format films. IMAX benefits from this as it gets a share of the revenues from
the films it has distribution rights for. In film production, IMAX focuses mainly on
documentaries, which means that hiring expensive talents and stars isn’t necessary. This
drives production costs down as well. As technology is continuously developed such as
the IMAX digital format, IMAX is able to decrease production costs. As IMAX also converts
Hollywood films, it can also benefit from marketing campaigns launched by other studios.
Thus, the advantage is on both, revenue and cost side. IMAX or rather the cinemas
charge high prices, whilst IMAX reduces its costs by developing technology.

RECOMMENDATIONS
To sum up, due to the mainly moderate to high forces, the film production and distribution
industry seems rather unattractive. Trends such as improving technology accompanying

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an increasing threat of piracy, and the rising consumption of educational films seem to be
unstoppable and can be fended off (piracy) and taken advantage of (educational films) to
a certain extent by IMAX’ resources, which provide a sustained competitive advantage, as
those which were assessed are valuable and rare and almost not imitable and difficult to
substitute. Also, using these resources it will be able to compete against the degree of
rivalry and lower the supplier power to a certain extent. The threat of substitution can be
lowered to a certain degree. This can be enabled through the following:
To further expand its business and to generate growth the recommended strategy is the
business strategy and the recommended position is broad differentiation.
Therefore the following strategic approaches are recommended:
- Besides showing educational films during the day, IMAX should show more
converted Hollywood films in the evening to reach a larger audience (especially
the 12-24 old which have been proven to be an important audience) and
therefore increasing brand awareness in general
- Expand in North America to identified areas without IMAX
- Higher budgets for promoting its own films to reach higher box office sales

Following these recommendations, the strategic diamond will look as the following:
The arena will expand to places in North America, which have been identified of not
having an IMAX theatre. As vehicles alliances should be used. IMAX should try to engage
in long-term contracts with big film studios, to secure that upcoming famous Hollywood
movies will be converted continuously. Also, as described in the case, promotion can have
a big impact on box-office sales. This is why IMAX should engage in promoting its movies
on a large scale with higher budgets. Also, IMAX should continuously use its technological
capabilities to improve its systems further to decrease costs of film conversion and
production. In terms of differentiators, IMAX should stick to its brand image, but extent
those differentiators to a broader context with a second focus on large format Hollywood
films. The sequence of staging will still be slow. IMAX will observe the development how
effective the taken measures are. If they are successful it may want to expand this
programme to other geographical markets such as Asia. The economic logic will stay the
same, as it will try to further reduce production costs of films and converting them, and at
the same time charge premium prices.
In conclusion, IMAX will follow the initial strategy to allocate more IMAX theatres within
multiplexes and will increase the amount of converted Hollywood films. To secure that the

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brand image isn’t damaged, it will still put one main focus on producing educational films,
but promote them more. As results have shown, converted IMAX films can even be
successful when released simultaneously with the traditional format. This strategy will help
IMAX to grow and stay competitive in the future and fend off threats.

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