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GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATIONAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAM

MASTER THESIS

Comparison of global movie and video game industries' competitive strategies on different stages of the value chain

Student

Mikhail Chizhov

Research Advisor

Arkadiy Vershebeniuk,

Visiting instructor

Moscow 2018

Content

• Introduction
• 1. Theoretical aspects of competitive strategies on diferent stages of the value chain
• 1.1 Existing research on competitive strategies
• 1.2 Existing research on competitive drivers
• 1.3 Existing research on the value chain
• 1.4 Existing research on the global movie industry's competitive strategies on different stages of the value chain
• 1.5 Existing research on the video game industry's competitive strategies on different stages of the value chain
• 1.6 Comparison of global movies and video game industries' competitive strategies on different stages of the value chain
• 2. Empyrical findings: case study research
• 2.1 Research methodology and cases description
• 2.2 Practical implementation of global movie and video game industries' competitive strategies on different stages of the value chain
• 3. Results and applicability
• 3.1 Research findings
• 3.2 Limitations and further research on the topic
• Conclusion
• References
• Appendices

Introduction

The entertainment is one of the most prominent sectors of the global economy. But being so wide and meaning so many different things to many people it requires more precise borders to be marked. Such borders are designated through the classification of entertainment activities into various industry segments. According to Vogel (2010), industry segments are the enterprises and organizations of significant size that have similar technological structures for producing or supplying goods, services, and sources of income that are substitutable (Vogel, 2010, p. XX). Global movie and video game industries as part of this segmentation have established themselves as signi?cant contributors to the global entertainment economy.

The movie industry appeals to the large group of researchers because of several reasons. First, because of its economic importance. The industry is one of the notable segments of the entertainment market; it has high cultural power and relevance all over the world. According to the Motion Picture Association of America report, Global box office of the movie industry has reached $38,6 billion in 2016 (MPAA, 2016). Second, the data for the industry is highly accessible and covers the whole value chain. Box office statistics are published every week and provide information on individual products and markets. Such accessibility of evidence-based resources makes the motion picture industry very conducive for further studies. Finally, the analysis on the movie industry may help to establish a parallel with other entertainment industries and figure out whether they rely on the same mechanisms.

The video game industry, on contrary, is still not investigated on enough sufficient scale, especially compared with the movies. Video game professionals are usually forced to rely on scientifically unproven business practices. However, the industry already makes a valuable contribution for the global entertainment economy. In the last 30 years, it has developed from a small niche market that was predominately focused on children and teenagers to a mainstream media. In 2017 console video games generated $33,5 billion revenues with additional $24,8 billion acquired by the PC games segment (Newzoo, 2017). Therefore, both movie and video game industries are conspicuously comparable in terms of their size.

Despite the importance of the case, limited scholarly research has addressed the processes of competition and competitive strategies in context of video games and their comparison with the global movie industry. Based on these notions, we can formulate the object, the subject, and the main goal of the current master thesis:

Object - Competitive strategies on different levels of the value chain.

Subject - Competitive strategies in the global movie and video game industries.

Main goal - to analyze and compare competitive strategies on different stages of the value chain between the industries.

The theoretical base of the master thesis was established upon the articles found in well-known journals. For example, European Business Review, Harvard Business Review, Journal of Interactive Marketing, Marketing Science, Strategic Management Journal, etc. Significant attention was payed to the papers of such scholars as C. Campbell-Hunt; G. De Prato et al.; J. Eliashberg, A. Elberse, and M. Leenders; A. Marchand; C. Moul and M. Shugan; R. Normann and R. Ramirez; M. Porter; H.L. Salavou; H. Vogel; G. Walker; D. Williams. The empirical study was conducted on basis of major companies' cases in the examined industries and performance of their movie and video game titles. The case study research allows us to reach notable outcomes in comparison of strategies between the two industries and draw credible conclusions. All the observed companies operate on the global market.

The master thesis includes three chapters. The chosen structure helps to understand the concept of competitive strategies on different stages of the value chain and draw up a comparison between the industries.

1. Theoretical aspects of competitive strategies on diferent stages of the value chain

1.1 Existing research on competitive strategies

movie video game strategie

Until 1980, strategies were considered to be of two types: corporate and functional. Corporate strategies were related to the long-run processes and determined the companies' long-term goals, while functional strategies were related to the short-run activities and focused on independent business functions: finance, production, marketing, and sales (Salavou, 2015). In 1980 the book Competitive strategy by Michael Porter was published. It introduced the third strategy type - generic competitive strategies (or business-level strategies). This type of strategies determined the actions of firms on an intermediate level. It revealed the ways of how the firm can achieve above average performance and build a sustainable competitive advantage (Porter, 1985).

Traditional approach

According to Porter's concept, researchers distinguish four competitive strategies (Figure 1): cost leadership, differentiation, focused cost leadership, and focused differentiation. The classification is based on terms of how firm chooses its competitive advantage (cost or uniqueness) and what competitive scope is to be selected (broad or narrow) (Hitt, Ireland, & Hoskisson, 2011).

Cost competitive advantage allows firm to perform its business activities more effectively in comparison with rivals and achieve low cost standings by these actions. Differentiation competitive advantage lets firm build skills and capacities through activities that gain additional value and, therefore, command higher prices for products and services (Porter, 1996, 1998). After analyzing the resources and capabilities, a firm should decide, whether it will form a competitive advantage in cost or uniqueness.

Competitive scope is additional dimension to determine competitive strategy type. There are two possible forms of it: the broad target and the narrow target. Firms that implement the broad target scope are seeking to adopt the competitive advantage within the whole industry and serve the widest possible range of customers. Those that are focused on the narrow target in their business activities tend to satisfy the needs of a limited customer group and pay low attention to wider audience of buyers (Porter, 1998).

		Competitive advantage
		Lower Cost	Differentiation
Competitive scope	Broad target	1. Cost Leadership	2. Differentiation
	Narrow target	3A. Cost Focus	3B. Differentiation Focus

Figure 1. Porter's competitive strategies. Adapted from Competitive advantage (p.12), by M. E. Porter, New York, NY: Free Press.

Cost leadership strategy

Cost leadership strategy focuses on transmission of a uniform goods to a regular consumer, while doing it at the lowest possible cost (Porter, 1980). Advancements in such activities as production and distribution techniques are crucial for the success in this type of strategy. The sources for cost leadership strategies are numerous and include such factors as economies of scale, vertical integration, technology development, organizational policies, etc. Firms that sustain cost leadership strategy become above-average performers in their industries by having the possibility to command lower prices (Porter, 1985).

Differentiation strategy

Differentiation strategy includes an array of activities for creation of goods and services that are perceived unique by consumers (Porter, 1980). On contrary to the cost leadership strategy, this one is focused on serving broad cross-section of customers and exploits their interests in products in so far as they differ from goods delivered by their competitors. Differentiation strategy tends to design non-standardized goods and services for customers that appreciate unique characteristics above lower cost (Cowan & Joward, 2009). An implementor of differentiation strategy can become an above-average performer if his price premium exceeds the additional costs for building the uniqueness advantage (Porter, 1985).

Focus strategies

When firm decides to serve a distinct competitive segment in the industry (or a particular customer group) to the exclusion of others, it leaves room for focused strategies implementation. Three business segments can be highlighted where focus strategies are possible to apply (Porter, 1980):

- A particular buyer group;

- Different segments of a product line;

- Different geographic markets.

Focus strategy firms can serve narrow industry segment more efficiently than their whole industry-oriented rivals. They can become successful when a segment of focus is so strongly specialized that it is not served at all or satisfied very poorly by broad industry-oriented competitors (Porter, 1998).

According to Porter's initial concept, only strategic purity can lead a company to success and above-average performance. Combining generic strategies will result a firm to become stuck-in-the-middle and will bring low performance results.

Interpretations of Porter's approach

Many other typologies were dedicated to firms' performance on the business level (Dess & Davis, 1984; Hofer & Schendel, 1978; Miles & Snow, 1978). Nevertheless, Porter's approach received the widest admission and acknowledgement. His idea of mutually exclusive strategies was supported by broad empirical evidence (Salavou, 2015).

Since it was difficult to understand what Porter's generic competitive strategies are like in practice, significant amount of interpretations of Porter's theory subsequently evolved. According to Campbell-Hunt (2000), there can be distinguished four dominant interpretations of Porter's original model.

The taxonomic interpretation

This interpretation treats Porter's concept as a hierarchical series of classifications. All the strategies inside this series can be determined to their positions depending on the specific strategic elements (Chrisman, Hofer, & Boulton, 1988). The taxonomic approach is influenced by classifications from biology studies and therefore, its strategic designs need to meet several requirements: all classifications should be internally homogeneous, mutually exclusive and collectively exhaustive (Chrisman et al., 1988; Rich, 1992). According to the taxonomic interpretation, strategic designs are organized in conformity with particular rules that classify them within the hierarchy (Doty & Glick, 1994). The classification order is shown in Figure 2.

Figure 2. The taxonomic interpretation of generic competitive strategies. Adapted from “What have we learned about generic competitive strategy?”, by C. Campbell-Hunt, 2000, Strategic Management Journal, 21(2), p. 130.

The taxonomic approach pays substantial attention to the mutual exclusion of strategic classes. The explanation to sharp distinction between cost and differentiation emphasis strategies is defined by the elements in their design that repel each other. Mixed strategies are admitted, but occur only rarely (Hannan & Freeman, 1989; Miller, 1981).

The empiricist interpretation

This approach loosens the restraints of taxonomical interpretation; it is presented by broad series of research (Miller, 1992b; Miller & Friesen, 1986a, 1986b). The empiricist interpretation admits that a vast number of competitive strategic designs can be associated with a limited number of classes (Miller, 1981), but has several significant differences from taxonomic interpretation. First, it assumes that not all the strategies can be classified, but only a large portion can (Miller, 1986). Second, the allocation of each strategy is no longer determined by the exact rules, but can be partially accidental (Doty & Glick, 1994; Hambrick, 1984; Miller, 1981). Third, it does not assume that value and cost should be the main criteria in allocation of strategic types. Finally, it does not exclude the mixed-emphasis strategic design but allows all the strategies to come up from the empirical data (Campbell-Hunt, 2000).

The nominalist interpretation

This approach interprets Porter's generic strategies as ideal types and considers the initial scheme only as a general classification (Doty & Glick, 1994). Coherence between strategies in practice and these ideal types can be neither fully homogeneous, nor mutually exclusive (Rich, 1992). Unlike other interpretations, it does not necessary imply the strategic types to be all-inclusive and only seeks to describe the limited number of ideal classes (Campbell-Hunt, 2000). The nominalist interpretation is hierarchical as it pays attention to a limited quantity of parameters chosen to describe the ideal types. On basis of these types, other specific strategies are distinguished (Rich, 1992). As strict discrimination between the ideal types is usual for the nominalist approach, it means that mixed strategies occur only rarely (Doty & Glick, 1994).

The dimensional interpretation (hybrid strategies)

The fourth approach interprets cost, differentiation and scope as separate dimensions of an overall space that encloses all the existing strategic designs (Campbell-Hunt, 2000; Karnani, 1984; Miller & Dess, 1993). This approach does not divide strategies into classes, therefore, the problem of class congruity is not relevant. All the strategic designs are positioned equally towards cost, differentiation and scope dimensions. An emphasis on one of them does not exclude an implementation of the other (Miller & Dess, 1993; Parker & Helms, 1992).

For investigating this approach, researchers started studying firms that successfully pursued combined or so-called hybrid strategies (the combination or Porter's generic strategies). At first, researchers conflated hybrid strategies with stuck-in-the-middle strategies (Molina-Azorin, & Claver-Cortes, 2009; Pertusa-Ortega, Spanos, Zaraliz, & Lioukas, 2004). However, recent studies state that these strategic designs are different (Salavou, 2015). The first one emphasizes several pure strategies simultaneously, while the second lacks the emphasis on any of the competitive strategic designs. Stuck-in-the-middle strategies are often related to firms' unwillingness to make competitive choices (Pertusa-Ortega et al., 2009).

According to the dimensional approach, hybrid strategies can be multiple and diverse. On basis of Porter's (1980) model, Salavou (2015) distinguishes 16 types of hybrid strategies that have different emphasis on three generic strategic dimensions (Table 1). Strategic designs may vary from those that put emphasis on all dimensions simultaneously to the ones that implement only one dimension with two others sustained on low or average level.

There exists sufficient empirical evidence in research that hybrid strategies can lead to firm's success. Salavou (2015) examines 15 studies conducted after the year 2000 and shows that hybrid competitive strategies can lead to above average performance.

Table 1

Types of hybrid strategies based on Porter's generic dimensions
Strategy type	Low cost	Differentiation	Focus
Pure strategy type 1	High	Low	Low
Pure strategy type 2	Low	High	Low
Pure strategy type 3	Low	Low	High
Stuck-in-the-middle type	Average	Average	Average
No strategy type	Low	Low	Low
Hybrid strategy type 1	High	High	High
Hybrid strategy type 2	High	High	Low
Hybrid strategy type 3	High	Low	High
Hybrid strategy type 4	High	High	Average
Hybrid strategy type 5	High	Average	High
Hybrid strategy type 6	High	Average	Average
Hybrid strategy type 7	High	Low	Average
Hybrid strategy type 8	High	Average	Low
Hybrid strategy type 9	Average	High	High
Hybrid strategy type 10	Average	High	Low
Hybrid strategy type 11	Average	High	Average
Hybrid strategy type 12	Average	Average	High
Hybrid strategy type 13	Average	Low	High
Hybrid strategy type 14	Low	High	High
Hybrid strategy type 15	Low	High	Average
Hybrid strategy type 16	Low	Average	High

Note: adapted from “Competitive strategies and their shifts to the future”, by H. L. Salavou, 2015, European Business Review, 27(1) p. 89.

To summarize the above, researchers gathered the following arguments in support of position towards hybrid strategies (Claver-Cortes, Pertusa-Ortega, & Molina-Azorin, 2012; Pertusa-Ortega et al., 2009; Spanos, Zaraliz, & Lioukas, 2004):

- When a firm achieves strong positions in one strategy, it allows to improve the standings in other dimensions.

- Some organizational practices allow to enhance positions on several dimensions at once.

- Combined strategies (based on low cost and differentiation at the same time) are harder to imitate by competitors.

- Hybrid strategies don't have strict strategic specialization. Such specialization could be a threat if it doesn't cover certain product offerings and neglects crucial customers' needs.

- Mixed strategies are more malleable in adapting to customers' needs and changing situation on the market.

1.2 Existing research on competitive drivers

To understand the structural causes of the firm's cost, value and focus activities that improve its performance and define competitive strategy, researchers introduced the concept of strategic drivers. Porter (1985) divided these drivers into two major groups: cost drivers and drivers of uniqueness. Cost drivers determined the cost behavior of a particular activity, while drivers of uniqueness facilitated creation of new forms of differentiation and diagnosed how sustainable the existing differentiation is.

These factors, further called as activity drivers, were supported by activity-based view on competitive advantage in scientific research. In Pearce and Robinson (2005) words “drivers constitute the underlying source of competitive advantage and make competitive advantage operational” (p. 104). There are two methods how activity drivers can be used for value creation. The first one implies using them to enhance performance of selected activities. The second method involves the improvement of whole business activity set (Sheehan, 2007). Based on Porter (1985), G. Walker introduced in 2009 his extended and modified list of factors that increase firm's business-level productivity in comparison with competitors. The major activity drivers listed by Walker (2009) are defined in Table 2.

Table 2

Value and cost drivers of competitive strategy
Generic strategies		Drivers
Differentiation	Value oriented	Technology, Quality Delivery, Breadth of line, Service, Customization, Geography, Risk Assumption, Brand/Reputation, Network externalities, Environmental policies, Complements
Cost leadership	Cost oriented	Scale economies, Scope economies, The learning curve, Low input cost, Vertical integration, Organizational practices.

Note: adapted from Modern competitive strategy (p.62), by G. Walker, New York, NY: McGraw-Hill.

Besides value and cost drivers, Walker (2009) distinguished the additional group of drivers, the so-called isolating mechanisms. These are the factors that help firm to protect its resources and capabilities from competition and therefore, to defend its competitive advantage. The resource-based view on competitive advantage is supported by plenty of research (Barney, 1991; Day, 1994; Hooley, Greenley, Cadogan, & Fahy, 2002).

According to the resource-based view, competitive advantage can be built upon retaining and arranging the resources that exceed the ones owned by competitor firms (Barney, 1991). The rigidness of that advantage is based on the extent to which the resources are hard to copy by firm's rivals (Hooley et al., 2002), while usage of these resources is based on firm's capabilities. Capabilities are the skillsets and pool of knowledge that is achieved through organizational processes responsible for activities coordination and usage of firm's assets (Day, 1994). Based on resources and capabilities, several researchers (Besanko, 2007; Rumelt, 1984) introduced the term of isolating mechanisms - factors that protect firm's position and limit the possibility of competitive advantage to be duplicated or neutralized. The classification of isolating mechanisms based on Walker (2009) is defined in Table 3.

Table 3

Isolating mechanisms of competitive advantage
Increasing customer Retention	Search costs Transition costs Learning costs
Preventing imitation	Property rights Dedicated assets Casual ambiguity Sunk costs

Note: adapted from Modern competitive strategy (p.71), by G. Walker, New York, NY: McGraw-Hill.

To sustain the competitive advantage and defend its market positions a firm must relate its value and cost oriented drivers to the isolating mechanisms. Taking in account both groups of factors helps to build firm's competitive advantage based on business activities at the same time preventing rivals from their imitation and increasing customers' switching costs.

1.3 Existing research on the value chain

The value chain concept was introduced by Porter (1985) as a series of value creating activities. In later editions of the book, to address the development of views on competitive strategies more effectively, Porter assumed that each individual firm's value chain is “embedded in a larger stream of activities” (p. 34), that he called as the value system. The value chain concept significantly influenced the analysis of competitive advantage and competitive strategies by further research. Since Porter's original idea was introduced, literature proposed various value chain models. These models represent the rising complexity of firms' relationships - from linear sequence, linking suppliers, producers and customers, to an intertwined value chain.

Traditional approach

Porter's (1985) value chain was initially proposed as an instrument to analyze firm's competitive advantage. Based on the concept of value as “amount buyers are willing to pay for what a firm provides them”, Porter disassembled a firm into strategical stages of value creating activities in order to understand the behavior of sources for differentiation and cost advantage (p. 38). Porter's model of the value chain is displayed in Figure 3.

Figure 3. The generic value chain. Reprinted from Competitive advantage (p. 37), by M.E. Porter, 1985, New York, NY: Free Press

They value activities are divided by Porter (1985) on further types:

· primary activities (producing, selling and delivering product or service to the customer; providing services after sale);

· support activities (buttress the primary ones by providing procurement planning, technology development, and other firmwide functions).

Porter's (1985) concept of the value chain describes firm's business activities from the initial creation of a product or service through production, marketing, sales and distribution to its final usage by consumers (Zamora, 2016).

Value network

Although Porter (1985) represented the value chain as a sequential process of primary activities, he admitted that these activities cannot be taken up independently; they create an interdependent value system. According to his notion, value activities are connected by linkages - the relationships that link the method for one value activity to be performed with the cost of conducting the performance of another (Porter, 1985).

Such complementarity of different activities inside the value chain brought the idea of a value network to the value chain studies. Value networks are based on junctions between firms that contribute to the flow of information and lead to improved service quality, innovations, price reductions and other improvements (De Reuver & Bouwman, 2012; Li & Whalley, 2002; Peppard & Rylander, 2006).

Figure 4. The interwoven value network and value chain. Reprinted from “Deconstruction of the telecommunication industry: from value chain to value networks”, by F. Li and J. Whalley, 2002, Telecommunication Policy, 26(9-10), p. 465.

Multiple entry points into the value network are available for firms. Therefore, various companies can enter the industry in different ways. The exit point where the interaction between a firm and its potential customer takes place also differs based on the activities model adopted within the value network (Li & Whalley, 2002). Deconstruction of the traditional value chain into the value network is conceptualized in Figure 4.

Business ecosystem

Like the value networks, business ecosystems do not adhere to a linear model of value creation (Clarysse, Wright, Bruneel, & Mahajan, 2014; Iansiti & Levien, 2004). In business ecosystems different firms act together in order to bring a product or service to a buyer with a maximized value. Because of this fact, the value chain transforms from a sequence of linear business activities into a combination of companies with numerous relations on a horizontal level (Moore, 1996). Members of these ecosystems deliver value to a customer as an interrelated structure rather than independent players, each of them contributing a specific part to the final product (Clarysse et al., 2014). Such business ecosystems consist of both collaborative and competitive relationships between players and create a “coopetition” structure (Moore, 1993). To summarize the above, business ecosystems have capabilities to create value that none of the firms could create separately from the others (Adner, 2006).

Value grid

Another approach that introduces growing complexity of relationships between interconnected firms is the value grid (Pil & Holweg, 2006; Solberg Soilen, Kovacevic & Jallouli, 2012). According to the grid perspective, value creation is multidirectional and allows companies to arrange their business activities along three dimensions: vertical, horizontal, and diagonal (Nucciarelli et al., 2017). Through the vertical dimension, firms explore nonlinear possibilities of the traditional value chain by looking beyond the adjacent levels upstream and downstream. Through the horizontal dimension companies explore possibilities of similar ties in parallel value chains. Through the diagonal dimension, companies look widely across value chains and tiers for opportunities to create value. After initial opportunities have been exploited, the potential landscape for expanding the value grid can be enlarged (Pil & Holweg, 2006).



Figure 5. Value grid dimensions. Reprinted from “From value chain to value grid”, by F. K. Pil and M. Holweg, 2006, MIT Sloan Management Review, 47(4), p. 74.

Value constellation. The value constellation approach implies value to be co-created by value chain stakeholders (such as customers). This process reconfigures roles and relations among the main actors within the chain (Corsaro, Ramos, Henneberg, & Naude', 2012; Normann & Ramirez, 1993; Prahalad & Ramaswamy, 2004). The reconfiguration mobilizes value creation by additional new players and generates new forms for it, therefore, creating complex value constellations.

According to the value constellation approach, the goal of business shifts from making or doing something valuable to customers into mobilizing them to create value on their own. Not companies but different offerings compete with one another for the customers, their time, money and attention. As product offerings become more various and intricated, the communications necessary to produce them also increase in their complexity. For an offering to become more attractive, it should involve all the actors (such as customers, suppliers and business partners) in new combinations and forms. Therefore, a major aim of competitive strategy is to reconfigure company's business activities and relationships (Normann & Ramirez, 1993).

1.4 Existing research on the global movie industry's competitive strategies on different stages of the value chain

Plenty of academic research has shown the importance of value chain concept for analyzing competition in the movie industry (Eliashberg, Elberse, & Leenders, 2006; Kung, 2008; Vogel, 2010; Vickery & Hawkins, 2008). According to Eliashberg et al. (2006), the value chain of theatrical motion picture industry can be divided into three main stages - production, distribution, and exhibition, that is followed by consumption of movies by the audience (Figure 6).

Global movie industry is considered as an oligopolistic market. Several major competitors based in Hollywood, United States, are often called the “majors” or “the big six”. They include Walt Disney Pictures, Warner Bros. Pictures, 20th Century Fox, Universal Pictures, Sony Pictures Entertainment and Paramount Pictures (Scott, 2004). Majors' business activities include financing, production and distribution of their own pictures as well as some pictures from smaller independent studios. These studios work directly for the majors and their products are appropriated on some level of readiness when success of the movie becomes apparent. The second group is called the “mini majors”. They include Lionsgate Films, STX Entertainment, Metro-Goldwyn-Mayer Pictures, The Weinstein Company, Open Road Films, Amblin Partners, CBS Films and Gaumont Film Company. Like the majors, they control production and distribution of their own but on a smaller level of scope (Vogel, 2010).

For better understanding of the global movie industry competitive strategies, we enlist major factors that can define competitive strategy along different stages of the value chain. For this purpose, we use the concept of drivers (or activity drivers) initially proposed by Porter (1985) and developed by Walker (2009). Classification of activity drivers is based on factors that contribute to raising product's value or lowering its cost and therefore, leading to certain advancement in firm's market positions. The second group of factors is based on resource-based isolating mechanisms from Walker's (2009) list. Isolating mechanisms are interrelated with resources and capabilities of the firm and help to defend its competitive advantage.

Figure 6. The value chain of the motion picture industry. Adapted from “The motion picture industry: critical issues in practice, current research and new research directions”, by J. Eliashberg, A. Elberse, & M. Leenders, 2006, Marketing Science, 25(6), p. 639.

Production

The production process can be dissected into several stages. Pre-production commonly begins with creation of a screenplay which is followed by signing a contract between a writer and a studio related producer. Next, a producer is involved in such activities as director, cast and crew recruitment, finding appurtenant shooting locations, acquiring the inventories, etc. After these activities carried out, the production phase takes place and the film is shot. Finally, post-production is being held, which includes editing and dubbing processes, design of visual effects, and sound recording. Before the initial release, certain age rating should be given to a movie according to country-specific rating system, such as MPAA film rating system in the United States (Eliashberg et al., 2006). During the production stage additional value can be achieved through such drivers as technology, quality and breadth of line.

“Technology” driver contributes to additional value by acquiring superior functionality and technological features in comparison to the ones owned by competitors. When a studio aligns its production processes with a high technological level, it gives sufficient control over the scene and storyline. Studio obtains high flexibility over such value creating activities as creation of visual effects, production design, sound editing and mixing, music production, etc. (Belson, 1996). All of the above-mentioned features generate additional value for consumers.

“Breadth of line” is another driver for gaining additional value. By implementing the breadth of line, a firm can satisfy variable needs of customers. Movie studios control this driver through multiple parameters: genre, age rating, star power, value added by director etc. (De Vany & Walls, 2002). On a firmwide level the breadth of line is achieved by acquisition or creation of business unit subsidiaries, specialized in production of specific genres (Eliashberg et. al., 2006). Some prime examples are The Walt Disney company acquisition of Pixar (specialized in computer animations) (Holson, 2006) and Marvel Studios (specialized in Marvel Comics inspired blockbusters) (Ingram, 2015). The functionality of the “breadth of line” driver in the movie industry is characterized by high nonrecurring fixed costs. Movie production requires large upfront investments that are impossible to recover or sell to somebody else. Therefore, the only option to decrease the average costs is by diversifying the movie portfolio and releasing a bunch of movies each year. Such strategy hedges the risk of each individual product, since movies with more promising performance receive higher marketing budgets or more favorable release date and exhibition capacities. Success of these highly promoted blockbusters reduces the negative costs for other less successful movies (Eliashberg et al., 2006).

“Quality” value driver represented by high investments in production and development is another method of achieving additional uniqueness. These expenditures are extremely important for the most promising projects financed by major studios (the so-called “blockbusters”), which receive the highest media attention and revenue (Eliashberg, 2005). Meanwhile, high production investments can also be viewed as an isolating mechanism that defends studio's market position via “sunk costs”. It represents the costs involved in production and development and therefore, not recoverable. High budget production creates substantial barriers for imitation by small independent studios. They cannot afford entering the million-dollar oriented blockbuster market, especially when the returns on production are uncertain. Therefore, sunk costs create a condition when competitors would hardly try to imitate firm's activities (Walker, 2009).

Distribution

This level of the value chain commonly includes publishing of the movie titles as well as distribution of physical copies to movie theaters and promotion activities on international markets where the picture is panned to be released. The major decisions on this level include such questions as when to release the movie, how many screens to use during the opening weekend, and which media sources to implement in the advertising campaign (Eliashberg et al., 2006).

One of the major value drivers during the distribution stage in the movie industry is “delivery” of a product to a customer within a chosen time period. The delivery strategy of movie studios is substantially affected by word-of-mouth effect. If word-of-mouth is expected to be mostly positive, a sequential release strategy can be used. Distribution first starts on markets that provide the highest earnings in a short span, and then a release spreads worldwide to other not so favorable markets with lower revenues. The idea lies in the fact that positive word-of-mouth usually disseminates internationally from successful markets and improves box office performance (Vogel, 2010).

Increasing value through “brand/reputation” driver can be provided through marketing activities based on well-known cast, literary property (e.g., book, game, sequel, franchise) and director's reputation. Implementation of sequels as brand extensions is extremely popular in the movie industry. Eliashberg et al. (2006) state that sequels popularity usually outperforms the one of the original in the box-office and therefore, numerous sequels are released by studios from year to year. It comes out that an already known movie property tends to be more attractive for consumers and causes more enthusiasm by movie-going audiences. Another source of branding is achieved through recognizable actors and director's popularity. However, bearing in mind that majority of movie consumers are young adults unaware of director's reputation, star power of movie's cast becomes the leading factor of branding (Moul & Shugan, 2005). Many industries include different categories of products, such as design, color, style, features etc. It gives opportunities for branding to match different consumer preferences. Popular actors carry out the same activities when customers associate them with particular movie genres like action/adventure, drama, comedy etc. (Bergen, Dutta, & Shugan,1996)

The other part of movie's reputation is the buzz that is often generated by studios before and at the time of theatrical release. It consists of such elements as promotion and advertising activities in various media sources, word-of-mouth communication, etc. For creating additional buzz, opinion leaders can be engaged into a buzz-marketing campaign. These leaders are often provided with early access to the product (like invitations to a free movie preview), as they are assumed to arouse conducive word-of-mouth effect. In addition, special content that triggers widespread publicity of the movie can be added to a final product, such as specific graphic scenes or appearance of an actor with high star power (Eliashberg, 2005; Eliashberg et al., 2006).

Though, foreign distribution channels are external resources to a studio, they can be turned into “dedicated assets” by arranging partnerships with local distributor companies. For this purpose, studios often have sales agents or specialized departments who license their films to companies (individual distributors) in each territory. The set of activities on this stage includes transmitting a set of rights from studio to an overseas partner, drafting distribution agreements, delivering the physical and electronic materials of a movie to foreign distributor and, finally, collecting revenues according to the arranged agreement (Kampe, 2013).

Exhibition

Theatrical exhibition level of the value chain is comprised of relationships between studios, major theater chains and independent exhibitors. Vertical integration of major movie studios is limited on this level due to historical market changes. In 1948 the decision made by U.S. Department of Justice ("the Paramount decrees") prohibited major studios from owning theatres and holding exclusive rights to control the process of exhibition of their movies. However, in the 1980s the regulation was partially mitigated, and studios were allowed to have exhibition interests as long as their market share was not high (Eliashberg et al., 2006; Wasko, 2005). This option gave studios an opportunity to form partnerships with exhibition theater chains.

Although movie studios are normally absent from this level of the value chain, they are able to implement a “dedicated asset” isolating mechanism by absorbing the exhibition capacities of cinemas and thereby, preventing competitors from using them. Such relationships can be viewed from the perspective of external resources, preempted from usage by rivals via forming long-term partnerships. Key variables during negotiations are the total number of screens that exhibitor is ready to provide for a movie release, their geographical location, availability (or lack) of screens in cinemas at the time, the projected degree of success for the motion picture, and the extent of promotional assistance the distributor is willing to commit. The so-called “block-booking” (or selling motion pictures as a package) was prohibited by Paramount decrees; however, it is still taking place in the short-run. Studios may send intimidating signs to theater chains that unless they offer some space for less favorable pictures in their cinemas, they have risks not to receive lucrative terms for exhibiting studio's top blockbusters (Eliashberg et al., 2006; Wasko, 2005).

Consumption

Albeit traditional approach by Porter (1985) doesn't consider this stage as a level of value creation, we know that according to the value constellation model (Normann & Ramirez, 1993), firms can reconfigure roles and relationships among different value chain actors (including customers) and mobilize them into value creation process.

For the global movie industry this concept becomes especially important during the consumption stage after the movie was initially released. Value created through the “quality” driver is often generated on this level as it can only be measured by third-party suppliers, including critic evaluations and reviews. Three types of critic reviewers are identified in the movie industry studies. The first group consists of amateur reviewers that lack reputation and post their commentaries on various public websites. The second and the third groups are professional reviewers. One of them accepts no advertising payments because their fees are payed for a review itself. The other receives substantial financing from studios (Moul & Shugan, 2005). Granting support to this type of reviewers gives opportunity to increase quality perception of a movie by audiences.

Ordinary consumers can impact quality perception through the online word-of-mouth networks where they share assessments on various goods and services (Dellarocas, 2003). Internet access to consumer-created information is widely spread in the movie industry and makes it easy for moviegoers to find material about their movie of interest. Web sources with quality-related information on motion pictures include specialized databases (like Internet Movie Database) and critics' sites (like Rotten Tomatoes, Metacritic). Studios and other players across the value chain are coming to terms with a necessity to take in account word-of-mouth dynamics (Godes & Mayzlin, 2004).

Despite the additional value that is achieved through critic evaluation, it is extremely difficult to influence the customer retention on this stage. The process is compounded by the fact that movies belong to the category of experience goods and it is impossible to measure their value without trying the final product (Walker, 2009). The only way to create a defendable market position is achieved via “transition costs” isolating mechanism through emphasizing movie's cast star-power and director's fame. They act as a signal of quality while reducing customer's concerns and uncertainties about the product (De Vany & Walls 1997).

Support activities

As we know from Porter's (1985) model of the value chain, value creation can be associated not only with specific primary activities of the firm but also uphold the entire chain. We already mentioned that these activities are related to the “support” type which reinforces the primary ones by providing procurement planning, technology development, and other firmwide functions. Several drivers associated with movie studios' infrastructure can be mentioned here.

“Vertical integration”. This driver contributes to lower costs by coordinating business activities along the entire chain from product production to its purchase by consumer. Regulating in-house processes between vertically integrated business units provides lower expenditures than involving third party firms in the process (Porter, 1985; Walker, 2009). According to this practice, vertically integrated major studios are usually involved in four main functions of the industry value chain: financing, production, advertising and distribution (Squire, 2004; Vogel, 2010).

“Geography”. This driver is based on achieving additional value through certain geographic scope of business activities in different geographical regions. Variety of locations contributes to better accessibility of products and services and therefore, provides additional value to a customer (Walker, 2009). For high budget movie production, it is especially important. Majors need to distribute their multi-million blockbusters worldwide in order to break even. This strategy increases additional value of a movie as a world class release and at the same time contributes to collecting additional box-office revenues worldwide. In this connection, modern movie industry represents an environment where major studios design their products not only to be popular on the domestic market but to achieve high success rate on the vast array of foreign markets (Weinberg, 2005).

“Complements”. This driver describes behavior of goods and services with positively correlated demand curves that enhance each other's performance (Walker, 2009). Broad spectrum of complement products is produced for the movie industry. They include home video, merchandising, video games, etc. While complements generate individual profits by themselves, they also attract attention towards the original motion picture. For instance, a video game can be launched between exhibition stage and home video release to remind costumers about the movie title and increase their awareness (Weinberg, 2005).

1.5 Existing research on the video game industry's competitive strategies on different stages of the value chain

Research studies show different approaches to define the value chain in the video game industry. Williams (2002) organizes the value chain according to linear approach and puts business activities into five successive stages: development, publishing, manufacturing, distribution, and retail. Jockel, Will, & Schwarzer (2008) incorporate an online distribution model into the value chain and examine its perspectives as a tool for generating value by consumers (so-called “prosumers”) that act as providers of additional content for the final product. De Prato et al. (2010) implement traditional linear value chain but put emphasis on complexities among actors. They state that there is no rigid conformity between the stages in the value chain and actors' business activities. For instance, video game publisher can carry out both development and distribution services. Finally, Marchand & Hennig-Thurau (2013) developed a conceptual framework of value creation, which identifies the main contributors to industry's business activities and describes how communication occurs between them. According to this framework, the combined existence of video game content and console platforms constitute a specificity of the industry's value chain model.

Figure 7. Five vertical stages of the video game industry. Adapted from “Structure and competition in the U.S. home video game industry”, by D. Williams, 2002, The International Journal of Media Management, 4, p. 46.

Much alike the movie industry, video gaming is an oligopolistic market. In addition, it is influenced by an indirect network effect that includes consumers, content developers and platform providers (Liu, 2010). A limited number of major players control the largest share of the market, but it is less concentrated than the movie industry. The close relations of hardware and software producers create an environment where the three leading hardware manufacturers (Microsoft, Sony and Nintendo) are also the top software publishers (Marchand & Hennig-Thurau, 2013).

For better understanding of the global video game industry competitive strategies, we enlist major factors that define competitive strategy along different stages of the value chain. As in the movie industry section, we will use the concept of activity drivers (Porter, 1985) and resource-based isolating mechanisms (Besanko, 2007; Rumelt, 1984) based on Walker's (2009) classification.

Development

Like the movie production, development of video games is characterized by extremely high fixed costs and low marginal costs to create the final product. Such necessity of early investments during the development process influences the power relations in the value chain. Publishers usually tend to become dominant actors in comparison with developers and have more negotiating power (De Prato, 2010). According to Williams (2002), about one-half to two-thirds of development occurs under the ownership of a publisher. Usually, publishers possess all the intellectual property and the rights for producing sequels or other franchise-based products (Williams, 2002).

The value of the produced games is largely based on the “technology” driver. Specialized technology providers contribute to developers' business activities in all the essential elements for creating video games: game engines, hosting, graphics software and animation, etc. (Gonzalez-Pinero, 2017). Such middleware provision plays a special role in video games development. In general, it includes graphic engines that form the basis for development and creation of video games. Hosting provider services are also gaining additional importance with the flourishing of online gaming. They provide conditions for processing the traffic generated by online games and store all the necessary data (Gonzalez-Pinero, 2017).

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