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Paper: Vertical integration in the supply chain of international movie industry [004-0370] Name of the conference: Seventeenth Annual Conference of POMS, Boston, MA, April 28 – May

1, 2006 Authors: Prof. Deive G Rodrigues – Master's degree student of Business Administration at EAESP/FGV-SP –

dgr@gvmail.br Prof. Aldo F. Bastos – Master's degree student of Business Administration at EAESP/FGV-SP –

afbastos@gvmail.br Prof. João Mario Csillag – Professor of Business Administration at EAESP/FGV-SP –

csillag@fgvsp.br

Vertical integration in the supply chain of

international movie industry Abstract This paper analyses the vertical integration of the film industry, the most profitable and crescent creative industry in the world in the last decades. The performance (gross/budget) of film distributors was correlated with their level of independence using global data since the 90’s and the main control of the firms. Statistical testes were made to verify if there are evidences of a better performance of the distributors more vertically integrated. The study of creative industries is still a big gap in Operations Area and in the world are still few studies analyzing vertical integration in this kind of business. And if a quantitative analysis were considered, this number is still minor. This study represents a first attempt to compare vertical integration and performance of the film industry. The quantitative and statistical analyses were also a distinctive point in this paper. Track – Supply Chain Management Keywords Vertical Integration Creative Industries Movie Industry Performance Measurement

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1. Introduction

The project of productive operations network, according to Slack, Chambers and Johnston

(2002), at its most strategical level, projects the shape and network configuration in which the

organization is part of. Mostly, this decision will result in how this organization will compete in the

market in terms of performance objectives. To the authors, the project must consider the perspective of

the entire network to help the company understand the most effective way to compete, identify

meaningful relations between stages and focus a long term perspective.

The strategical decision to make or buy comes associated with this project, that is, what are the

potential competitive advantages of expanding the property of the organization in chain or supply

network. On the other hand, the decision of buying either all or a part of essential services may also be

beneficial.

The aim of this article is to analyze the vertical integration as a factor to increase the

competitive advantage inside a creative industry – the world movie industry.

This sector was chosen because the selling of culture, entertainment, and experiences has

increased quickly in the last century and it tends to continue rising in the future. In 1996, “cultural

products”, such as movies, music, TV, magazines, software, and books were the most exported

products in the USA, overcoming for the first time the other traditional areas, such as automotive,

weapons, aerospatial, and agriculture.

This new industry grew three times faster than the other economic areas as a whole from 1977-

1996, exporting a total of US$ 60.180 millions in 1996. The world selling of cultural products grew

from US$ 95.340 millions to US$ 387.927 millions from 1980 to 1998 – an average growth of 12.7%

per year (Nielsen, 2004).

Moreover, the sector has a big diversity of cases of both integration and independent

distributors which makes it a rich study source in the Operations area.

This work is based on the conceptual model of the figure 1, which shows the proposed

development of constructs of this work. In this picture it is indicated the constructs that have theoretical

subsidies and the propositions made in this work that constitute the part (i) of literature revision

(decisions to make or buy, vertical integration). Besides the conceptual model this work contains (ii)

explanations about the study; (iii) methodology; (iv) results; and (v) conclusions.

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Increase in the Increase in the performance by performance by

vertical vertical integrationintegration

Film industry (4)

Vantages (3)

Creative industries

(4)

Vertical integration (3)

Gap in the theoryExisting theory

To make or to buy

decision (2)

Question(1): the number indicates the chapter that studies the constructLegend:

Existing relation Proposal relation

Disadvantages (3)

Performance of film industry x

vantages of vertical integration

Figure 1 – Constructs conceptual model. Font: Built by authors.

2. Economy of transactional costs: the decision to make or to buy

The vertical integration in a supply chain, according to Slack and Lewis (2001), may be defined

as the degree and extension of property of a network that an organization has concerning the network it

is part of. At an strategical meaning, it evolves the analysis, through organization, of the convenience

of acquiring suppliers and/or clients. Concerning products or individual services, it means the operation

is deciding whether to produce a specific individual component or to buy it from a suppliers, as an

alternative.

Chandler (1977) points out that vertical integration has been the main power for the development

of high productivity and managerial sophistication of north-American industry.

The issue of vertical integration has been widely approached and discussed. However, for a

deeper analysis, it is necessary to bring up a few concepts of Transactional Costs Economy (TCE).

Coase (1937) introduced his theoretical approach on New Institutional Economy (NIE),

considered one of the most important contributions for posterior studies. The main concepts of TCE

have evolved from it, recognizing the existence of costs in the business economical environment.

Furubotn & Richter (1991) propose that transactional costs are necessary to the functioning of

economical and social mechanisms. They are not originated directly from the production, but appear

when agents relate among each other and problems with co-ordination of actions arise.

According to Zylberterstajn (1995) the basic assumption of TCE is that there are costs in the

usage of a price system as well as in the conduction of intra-firm contracts. Therefore, for the

functioning of economic system, not only are the contracts carried out via market important, but also

those centrally co-ordenated by firms.

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For Barney (1999), the approach of Transactional Costs Economy is capable to specify the

conditions under which firms should manage an economic transaction inside their organizational limits,

as well as the conditions under which this transaction should be made by a third part.

Vertical integration analyzed concerning the focus of the decision of to buy or to make, according

to Fine (1999), goes through the important decision of whether capabilities should be developed and

kept in the company’s scope or they could be safely handled by a third part, that is, which capabilities

are to be made and which are to be bought, analyzing which are essential or outlying.

In this aspect, Padillo and Diaby (1999) have established a methodology of multiple-criteria

decision to analyze several strategical, operational, and financial implications of the decision of to buy

or to make. In their research, they have shown that it is possible to use a multidimensional approach in

the solution of the problem “buy or make”, regarding aims like maximizing the performance of

competitive strategy, maximizing managerial performance, minimizing risks, and maximizing financial

performance.

Taking into consideration that in this study of case the “making” means the movie producer

company must be responsible for the distribution of its products, whereas the “buying” means this

distribution will be made by companies that are not part of its conglomerate, an analogy can be made

with Higgins’s (1955) list of reasons for a company to make or buy:

“Reasons to Make:

• Study of cases show making is cheaper than buying;

• Making is related to the know-how, own equipment and tradition;

• Idle capability is available to absorb new orders;

• Object of study is uncommon or complex; direct supervision required;

• Making represents your control over changes, inventories, and deliveries;

• Difficulty in transporting the material;

• The project of the material or its processing is confidential;

• It is not advisable to rely on one source of supplies only.

Reasons to Buy:

• Study of cases show that buying is cheaper than making;

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• Space, equipment, time, and ability are not available for the required operations;

• Due to the small amount or needs of funds, the investment to “make” is not attractive;

• Material demand is seasonal, cyclical or it’s associated with risks;

• Needs for special techniques and equipments lead logically to buying. Your supplier will help

you produce a better quality product.

• If you believe it is best for the executives to focus on their specialties;

• If you want to control your own operation;

• When the relationship customer-supplier is favored with buying the goods.”

There are other important factors when it comes to deciding whether to make or to buy, besides

the issue of costs. Dale and Cunningham (1983) point out a few cases in which projected economies

were considered by some executives insufficient to make a risky decision of buying. Some

considerations such as the guarantee of a continued supply, potential conflicts in industrial relations,

systems unable to run the policy of buying, minimum amount of purchase from supplier, structure of

supplier market and problems of a single supply in a volatile market have influenciated the decision.

According to Fine and Whitney (1995) the option of the buying policy requires that the

administration of the third part process represents a central competence of the organization. They also

point out that a third part process creates two kinds of dependences, one with a smaller risk when

dependency occurs by capability, and another one, with bigger risk, when dependency occurs by

knowledge.

Finally, Anderson Jr. and Parker (2002) point out that companies that adopt third-part policies

with the aim to obtain cost economies at a short term may increase them in at a long term. Another

topic discussed by authors is that some companies keep a part of material production at home to know

the cost structures of their suppliers and increase their bargain power over them, or even use external

suppliers to increase discipline in their internal units.

3. Vertical Integration: strategy and performance

The analysis of productive chains of movies and entertainment industry in general is not easily

found in books or in published academic articles. However, the concepts associated to administration of

supply chain, vertical integration and strategical decisions of whether to make or to buy can be applied

to this kind of industry.

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Chopra & Meindl (2003) affirm that a supply chain include all links either direct or indirectly

involved in attending to a customer’s order, including functions inside and outside the company that

enable the value chain to elaborate products and provide services to their customers.

Lambert et al. (1998) say that a key factor to analyze a supply chain is to understand explicitly its

configuration. Herewith, the organization network must be planned and established to describe which

are the performing organizations, their links, members or stages. Authors still characterize the links of a

supply chain as primary and support.

Primary links are all the organizations that perform operational activities or administration in the

business process necessary to produce something to a specific client or market. As for support links,

they are all the organizations that only offer resources, knowledge, utilities, or assets to primary links.

There are several manners for companies to manage their operations in a supply chain, depending

on the commercial complexity associated to creation and delivery of goods and services, the sources of

raw material and the demanding level of final consumers (Lamming et al ,2000). These issues may be

important director of the extension level of property of a company in a chain or supply network.

According to Simchi-Levi, Kaminsky and Simchi-Levi (2003), if we properly use the

information along the supply network, we can reduce the cost of the system. However, this is easier to

be done in a centralized system, or co-ordenated by a stage of the supply network, than in a

decentralized system.

In this context, we can consider the issue of vertical integration as a strategical decision, since it

may strongly affect and direct the performance of this company in the market where it works. To Hayes

and Wheelwright (1984), the strategy of vertical integration of a company is defined in terms of

direction of expansion, the necessary amplitude of the process and the resulting balance between

vertically integrated stages.

Harrigan (1984) has developed a model to evaluate the components and implications that

compose the strategy of vertical integration. This model points out that any strategy of vertical

integration must consider the amplitude of responsibility of the integrated activities, the number of

stages of the integrated activities, the level of internal transferences of each vertical connection, and

finally, the type of property used to control the vertical relationship.

Buzzell (1983) has listed some important factors that must also be considered in the evaluation of

strategies of vertical integration: pay attention to necessary high investments, consider alternatives to

properties, avoid partial integration, be careful with the analysis of the scale of requirements, and

finally, be skeptical to the appeals that vertical integration reduces the costs of raw materials.

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Mpoyi (2003) has also evaluated the strategical aspects of vertical integration through a research,

in which 27% of the analyzed companies have shown recent movements in the opposite direction, that

is, the vertical non integration. The article still points out vertical non integration as the most recent

corporate strategy to improve operational performance of the analyzed companies.

Maybe the most important issue to be evaluated in the analysis of vertical integration is if it really

brings any profits to companies’ performances.

D’aveni and Ravenscraft (1994) found evidences that vertical integration results in economies

even when the effects of the industry and scale and scope economy are controlled:

• Business lines vertically integrated obtained economies in general and administrative

expenses, besides expenses with sales, publicity, research and development, but on the other

hand, they showed bigger production costs and profitability slightly superior than the other

non integrated business lines, for the same industrial sector.

• High production costs were related to vertical integration (initial part), suggesting a certain

isolation to market pressure and lack of incentive to costs reduction.

• Vertical integration was related to costs of smaller transactions.

This way, the authors found effect evidences of the efficiency of vertical integration, as well as

of associated burocratic costs.

Vertical integration may increase production costs and administrative expenses for several

reasons. According to Chandler (1962) and Rumelt (1974) production costs are also increased by the

excessive purchase of actives that increase fixed costs, leading to a potential increase of the capability

and reduction of profitability.

Harrigan (1984) summarized in Table 1 some of the main advantages and disadvantages of

vertical integration.

Table 1 – advantages and disadvantages of vertical integration Advantages Disadvantages

1. Internal benefits 2. Internal costs Integration reduces costs through the elimination of tasks, reduces duplicated activities and cuts costs (dependent of technology)

Need of co-ordenation to administer costs due to vertical integration

Improvement of co-ordenation of activities and reduces inventory and other expenses

Need of excessive capability to balance minimum uneven efficiency of maps (dependent of technology)

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Advantages Disadvantages Avoid tasks which require time, such as emission of price lists, communication details and contracts.

Companies with little organization of integrated activities don’t enjoy the synergies that compensate high costs.

3. Competitive benefits 4. Competitive risks Avoid delay in entry of data, services and in markets.

Out-of-date processes may be perpetuated

Improve technological and market intelligence. Create mobility (or exit) obstacles Create opportunities to create product differentiation (increases joined value)

Connect the company to adjacent businesses)

Bigger control of company’s economic environment

Lose access to suppliers and distributors’ information

Create credibility to new products Synergies created through vertical integration may be overestimated or exaggerated

Synergies can be created to co-ordenate vertical activities

Managers’ integration was made before verifying the best way to do it

Source: Harrigan (1984)

Before these several aspects, according to Slack and Lewis (2001), most justifications to

vertical integration may be unfolded into four categories:

• Assure reliable supply of its raw materials and services;

• Enable cost reduction;

• Help improve the quality of products and services;

• Help knowing other activities in supply network.

In terms of performance aims defined by Slack, Chambers and Johnston (2002), vertical

integration benefits are complex, being able to affect, positively, the quality of products, speed of

product delivery, reliability of supply, flexibility of development of products and services, and, mainly,

the cost.

Montenegro (1995) points out that transactions which have efficient execution and are strongly

dependent on investments in specific human funds, will tend to be those co-ordinated by companies.

Similarly, Grant (1991) points out that the co-ordination of activities by companies can contribute to

the development of resources and abilities of organization, which are important elements to sustain a

competitive advantage.

Finally, according to Sorenson (2003), vertically integrated organizations, in stable

environment, are less benefit from the learning of “making” than companies that buy their components

from external suppliers. On the other hand, vertical integration protects the firm from external

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environment, establishing the conditions in which the firm must be adapted to. According to the author,

integrated companies learn slowly, but the knowledge they acquire maintains their value for a long

period.

The issue of vertical integration has been widely approached in several studies. Particularly

when it’s evaluated concerning the impact it may cause in companies’ performances. Harrigan (1984),

just like several other authors, have compiled some of the main advantages and disadvantages related to

the strategy of vertical integration, both concerning internal benefit aspects (especially costs) and

strategical and competitive aspects. Montenegro (1995) studied the aspects of human capital and

knowledge, related to vertical integration strategy.

However, it was not found studies that related the issue of vertical integration with competitive

advantages, especially those represented by Slack and Lewis’s (2001) aims of performance: quality,

speed, reliability, flexibility, and cost or even related to the performance of vertical integration in

chains of creative industries.

4. The movie industry

For historical reasons, the United States are the dominant force in the entertainment industry, and,

particularly among these, the movie industry. Nowadays, American movies are shown in over 150

countries. This complex productive chain is globally represented by Motion Picture Association.

The sector is marked by the existence of great conglomerates responsible for several links of this

chain. The greatest groups of the world are Columbia, Disney, Fox, MGM, Sony, Universal and

Warner. Inside these multinationals there are several companies, including the ones responsible for the

making of costumes, equipment rental, distribution, among others, but to give a better explanation in

this paper, they will be described only by the names above mentioned (Columbia, 2005; Disney, 2005;

Fox, 2005; MGM, 2005; Sony, 2005; Universal; 2005; Warner; 2005)

Movies are essentially projects that are similar to a new line of products or a new restaurant.

However, they have a unique quality: they are expensive commodities. And, unlike other commodities,

their main features cannot be describes or measured. Besides, each moment studios need to select

projects from a series of proposals, and the motto it’s usually the presence of a great movie star or

special effects not yet used. In this context, we can name Jurassic Park, Volcano, Twister, Titanic,

among others. (Ravid, 1999)

The movie making process is somewhat peculiar and depends a lot on the creativity and

sensibility of those who are involved in the development of the project. It varies from a simple kind of

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movie, in which only one actor is responsible for the whole action (e.g. Cast Away) to movies in which

actors are part of, because they were attracted by the great quality of the movie or its cast (e.g. Ocean’s

Eleven)

There are few studies that document the critical factors of success for the movie industry, but

those that do it usually relate the creation of “stars” and other demonstrations of acknowledgment (such

as magazine covers) to the result of a successful movie and that is why the annual awarding ceremonies

by the Academy (the Academy Awards) are so important and disputed. (Ravid, 1999)

The frontiers of this industry are not that clear. Nowadays, the majority of big movie studios

(especially American ones) are part of great conglomerates linked to several other industries. In this

context, joint ventures, alliances, and acquisitions had a meaningful increase in the last decade. In the

same way, technology has become a critical factor concerning administration of supply chain, since the

fragmentation of distribution channels associated with the Internet have created a deep impact over

these industries.

Newcomers from other areas have also started to invade the entertainment industries. For

example, Microsoft, Disney, Time/Warner, GE/NBC, TCI and News Corp. are involved in several joint

ventures, which were named by specialists American Keiretsu (Tourism Industry Association of

Canada).

This paper has the aim to review the condition of art in literature under the theme of supply chain

and movie industry and to analyze the supply chain of the main producers, trying to verify if their

integration brings a better performance.

5. Methodology

This paper wishes to validate:

Hypothesis 1: movie distributors more vertically integrated (are part of great conglomerates)

have better performances (gross/budget) than independent distributors

This study has been organized in two parts: qualitative and quantitative.

Due to the extension of supply chain of movies and their numerous and complex links, this study

focus on the analysis of producers and distributors. The qualitative analysis was constituted in the

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analysis of links and chain relations, with the aim to verify if there is any interference in this relations

with the performance of movie distributors.

The quantitative analysis was made by using data banks of movies released from 1999 until 2005

(Numbers, 2005; Box office guru, 2005). these banks had 2771 movies with statistics of release date,

showing information, budget, and profits in the USA and in the world, distributors, and others.

In this analysis, it was used a sample of 93 distributors and 900 movies, which are all the main

distributors and world releases, divided according to their vertical integration (participation on great

conglomerates or not) and to the profit obtained in the American and world market. The budget

considered in this study was the same for both profits. With this data, the performance was analyzed

(gross/budget) in the USA and in the world in both groups (more and less vertically integrated)

Table 2 shows the distributors taken into consideration on this study:

Table 2 – Distributors analysed in this study

NO VERTICAL INTEGRATION (are not part of a conglomerate)

WITH VERTICAL INTEGRATION

(part of a conglomerate) 8X Focus New Line Shooting Gallery 21st Century (FOX) Alliance Galaxy New Market Stratosphere Buena Vista (DISNEY) Artisan Giant Screen New Visions Studio Three Columbia (COLUMBIA) Artistic License Goldwyn New World Taurus Fox (FOX) Avenue Good Machine Norstar Televisa Cine Fox Searchlight (FOX) Cannon Gramercy October ThinkFilm MGM (MGM) CFP Hemdale Off White Tips MGM/UA (MGM) Cho Taussig IDP Orion Trimark Miramax (DISNEY) Cinecom IFC Films Orion Classics Triumph Paramount (PARAMOUNT) Cloud Tem Imax Polygram USA Films Paramount Classics (PARAMOUNT) Concorde Ind. Artists Providence UTV Sony (SONY) Corsair InterStar R.S. Ent. Vestron Sony Classics (SONY) Destination Lions Gate Rajshri WIP TriStar (COLUMBIA) Dimension Live RBC Radio Yash Raj Films UA (UNIVERSAL) DreamWorks MacGillivray Roadside /

Goldwyn Zeitgeist Universal (UNIVERSAL)

Emshell Magnolia Savoy Universal Focus (UNIVERSAL) Eros Media Partners Scotti Warner Bros. (WARNER) Film Foundry Millimeter SET Índia Warner Independent (WARNER) Fine Line Mulberry Square Seven Arts First National New Century SGE Source: organized by the authors

Unconsidering the movies with lack of information, the average and standard-deviation of these

samples were calculated.

With these information a hypothesis test was done with the following characteristics:

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Ho: µ1 = µ2, that is, the performance of distributors does not vary statistically, either they are or

not vertically integrated (related with any conglomerate)

H1: µ1 < µ2, that is, indicators vary statistically either they are or not vertically integrated

(related with any conglomerate)

The test is meaningful every time the statistic (Montgomery and Runger, 1997):

21

21

11nn

S

XXTo

p +

−= < 2; 21 −+− nntα , in which

2)1()1(

21

222

2112

−+−+−

=nn

SnSnS p

This test has been done twice, the first time only the American profit was considered, and the

second time, the world profit of productions.

Since the real averages and standard-deviations of all the movie universe are known, a test t will

be used in the values obtained in the samples, complemented by the following hypothesis: (Anderson,

2005)

The distribution of population follows a regular distribution, supported by the fact that the

sample is big enough for such consideration

Variables of relation between distributors and great conglomerates and performance of

distributors are independent.

The safety intervals tested will be 1%, 5% and 10%.

6. Results and Discussion

Figure 1 shows a generic chain of movie making. In the picture there is what is understood by

distributors, which is the object of this study. There are also the conglomerates, that can be understood

as great organizations that hold the production and several stages before the production, for example,

Disney studios.

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PublicCinemas

Sales

Production

Artists

Location

Vestments

Equipments

MarketingElectronic editoration

Scripts

DistributorsProduction steps Conglomerates ClientsDistributorsProduction steps Conglomerates Clients

Stunts

Figure 1 – movie making chain – Source: organized by authors

Note: This chain considers only the main stages of movie making, not taking into consideration support (or secondary) links that are also used, such as: electric power, catering services, accommodations, among others.

The stages are as follows:

Scripts: The creation of the story used in movies. It is usually done by independent authors.

Location: It is the location where the movies will be made. The most common locations

nowadays, due to an extremely competitive cost, are New Zealand and Canada.

Costumes: Creation of the clothes the actors will wear in the movies.

Electronic Editing: Both stages of scene development, using graphic computering, and the

movie editing.

Equipments: The equipments used both in shooting and editing the movie.

Artists: Both famous and new actors who worked in the movie.

Stunts: The actors that still are not acknowledged by the media.

Production: The making of the movie itself.

Sales: The activity of selling the movie to movie theaters. It also includes movie delivery.

Marketing: The activity of showing the movie to the public and to attract them into the movie

theaters.

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Qualitative Analysis

The results of the qualitative analysis are shown in Table 3.

Table 3 – qualitative analysis of the relations in the movie making chain.

Scrip

ts

Loca

tion

Cos

tum

es

Elet

roni

c Ed

iting

Equi

pmen

ts

Arti

sts

Stun

ts

Prod

uctio

n

Sale

s/M

arke

ting

Scripts (1) W-W Location (2) L-W (3) W-L Costumes (4) W-W Eletronic Editing (5) W-L (6) W-W (7) W-W / L-W Equipments (8) W-W (9) W-W Artists (10)W-L / W-W Stunts (11)W-W Production Sales/Marketing (12)W-W Source: organized by authors Note 1: in the above table, the relation L-W (Lose-win) or W-L (Win-Lose) mean that some lose while others become stronger, and W-W means Win-Win (when some become stronger the others are also stronger) These relations are numbered above and explained below:

1. Great offers of scripts in the growing market. Industry offers a partnership between good

scripts and productions.

2. Eletronic editing has been replacing big location in most movies.

3. Great amount of locations in the market, besides an increase in prices due to the demand of

movies.

4. Producers are making their own costumes, decreasing the production costs. The increasing

demand also helps the growth of the market.

5. With the increasing electronic editing, we can see several animation movies competing with

real actor movies, which open a market to this kind of movie.

6. With the increase of technology of electronic editing movies can have more audio-visual

resources, which makes it a movie differentiator factor. Besides, location costs can be decreased by

using electronic editing.

7. At the same time, new effects attract the audience, which makes it a more demanding

audience, and therefore, increases costs of future productions.

8. The increase of equipment offer decreases costs to buying new technologies.

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9. This increase decreases production costs.

10. When actors are acknowledged by the media, their salaries rise, and also does the production

costs. Therefore, good names mean good box office profits, but oligopoly of big conglomerates may

lead to an artistic decrease in quality.

11. Entertainment industry creates a dream world, which makes people wish to work in it, even

with low salaries. This “fantasy” feeling creates a great power of bargain for movie production.

12. Just like any other chain, a good distribution assures a great reach for the product, and a

bigger audience. At the same time, good productions attract audience. This is a relationship of extreme

partnership. For a good capillarity, good funds are needed, and distributors that have more access to

funds and quality products should have a better performance than others.

Through the analysis of the above-mentioned relations and the comparison with previous studies,

we can notice that some topics are important for a good performance of a movie making chain:

Highly qualified professionals: the market already has a great amount of professionals

specialized in making movies, both actors and directors, and electronic editors. Therefore, it is

necessary that the movie company has access to highly qualified professional. This idea is enforced

when we notice the increasing demand of the audience, which results in the need for more elaborated

productions.

Big marketing capability: each time more and more entertainment creations come for a public

of different tastes and genders, including those that go straight into their home: video games, DVDs,

TV networks, both paid or public, among other. Therefore, movie companies must have intense

marketing campaigns to get the audience into the movie theaters.

Distribution capability: in a world ruled by Internet, access to productions is faster and faster,

and most of the times the movie is available in the internet even before its release in movie theaters.

This way, without a solid distribution structure, movie companies will not be able to compete with this

distribution.

High capability of debts: in several point of the SWOT analysis, and even in the above analysis,

costs are weak points, and therefore, movie companies with little capability of debts will face

difficulties to shoot their movies.

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Based on these facts, we can infer that it is necessary that movie producers and distributors are

connected to big corporations that can launch an intense marketing campaign for these productions and

that have a high capability of debts, which allows to maintain a solid distribution structure and also has

available skilled labor so that the production time is the smallest possible, which results bigger gross.

From these considerations, the parameters for the quantitative analysis of this research are

established, seeking to verify if distributors connected to big corporations (vertically integrated) results

in a performance (gross/budget) that is better than if they were independent.

Considering the steps described in the methodology, the quantitative analysis was done and it is

shown below, analyzing only American and world market. The American market was taken into

consideration because it is the most representative of them all.

In this analysis, it was used a sample of 93 distributors and 900 movies, which are all the main

distributors and world releases since 1989.

This sample was divided into distributors that are or aren’t part of great conglomerates and

budget obtained in both American and world market. The budget considered in this study was the same

for both profits.

Quantitative Analysis considering the results obtained only in the USA

Table 4 shows the results of this analysis:

Table 4 – results of quantitative analysis in the USA market

SAMPLE 1 (no vertical integration)

SAMPLE 2 (vertical

integration)

2 SAMPLES TOGETHER

THEORETICAL INFORMATION

Average 2,48 0,96 * Variance (σ2) 69,59 0,30 0,35 * Standard-deviation (σ) 8,34 0,54 0,59 * Size 199 492 * Degree of liberty 689 * Z (µ1 - µ2) 1,52 * Zc (1%), significance of 99% 1,53 **; *** Zc (5%), significance of 95% 1,16 **; **** Zc (10%), significance of 90% 0,98 **; **** Source: organized by the authors * = value calculated based on the samples ** = value of the critical region, calculated with the significance show and based on tables from Anderson (2005) *** = hypothesis not rejected **** = hypothesis rejected Note: in this test, the Z value calculated from the sample is compared with the critical region. If the Z value is higher than the critical value, so the Ho hypothesis must be rejected.

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With the data above mentioned we can notice that for 90 and 95% of the reliability degree the

value is within the critical region that leads to a rejection of Ho. That means that there are evidences

that the result obtained by distributors, integrated or not, results in a different performance in the USA

market.

As for 99% of the reliability degree Ho is not rejected, and therefore, evidences are not

established to connect the performance of distributors to the fact that they are or not related to great

conglomerates, considering the world market.

With theses tests we can consider that are statistical evidences that integrated movie film

distributors have better performance (gross/budget) than the non integrated distributors, considering 90

or 95% of significance.

Quantitative Analysis considering the results obtained in the world market

Table 5 shows the results of this analysis.

Table 5 – results of the quantitative analysis in the world market

SAMPLE 1 (no vertical integration)

SAMPLE 2 (vertical

integration)

2 SAMPLES TOGETHER

THEORETICAL INFORMATION

Average 4,98 1,89 * Variance (σ2) 100,65 2,41 1,02 * Standard-deviation (σ) 10,03 1,55 1,01 * Size 101 239 * Degree of liberty 338 * Z (µ1 - µ2) 3,10 * Zc (1%), significance of 99% 2,60 **; *** Zc (5%), significance of 95% 1,98 **; **** Zc (10%), significance of 90% 1,66 **; **** Source: organized by the authors * = value calculated based on the samples ** = value of the critical region, calculated with the significance show and based on tables from Anderson (2005) *** = hypothesis not rejected **** = hypothesis rejected Note: in this test, the Z value calculated from the sample is compared with the critical region. If the Z value is higher than the critical value, so the Ho hypothesis must be rejected. In this case we can also verify that for all degrees of reliability the value is within the critical

region that leads to a rejection of Ho. That means that there are evidences that the result obtained by

distributors, integrated or not, results in a different performance in the world market.

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In other words, we can say that statistically the integrated movie film distributors have better

performance (gross/budget) than the non integrated distributors, considering 90, 95 or 99 % of

significance.

7. Discussion

Complementing the discussions already made to the results, we can notice that there is a big gap

in the chain analysis in all operations literature in Brazil and in the world, but mainly when it is about

so-called creative industries, such as television, movies, theater, among others.

This gap becomes even deeper when we see that in nowadays world these industries are already

overcoming traditional industries; therefore, an analysis of how effective the production process of

these “products” as well as its entire operation is a topic to be discussed in future researches.

It is important to notice that both qualitative and quantitative analysis complement each other in

the analysis of what is necessary to these industries that are part of great conglomerates so that they

have a differentiated success.

And to confirm it we can quote the great fusions in the entertainment industry, especially the

exciting fusions between the companies Time and Warner, which created a mega corporation but full of

controversies in their markets.

This study seeks to fill this gap bringing analysis to show that it is really necessary that producers

and distributors are linked to great corporations, so that they can offer certain stability to operations in

this kind of enterprise.

It is interesting to notice that the only exception is inside the USA when the demanding degree of

the analysis is raised to 99%. In this case we can notice that the so-called independent distributors and

those linked to great corporations have statistically the same performances.

However, this is probably because of the maturity of the American market and the fact that the

entire movie industry is based on the consumption cycle of the north-American population.

As a result of this study, it is evident that, in order to have a consistent movie making chain, it

must be linked to a great corporation and have a highly trained professional staff, an intense marketing

campaign, a distribution capability able to compete with the Internet and a high capability of debts.

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8. Conclusions

This paper has tried to contribute with the study of administration of operations in creative

industries relating performance (gross/budget) to vertical integration (if distributors are or not part of

great corporations).

Initial qualitative analysis has shown that, to be successful in this market, distributors must

have:

Highly skilled professional team able to deliver an unpublished product as fast as possible.

An intense marketing campaign that can draw people from their homes into movie theaters,

besides making movies more attractive than home entertainment (TV networks, DVDs, internet, video

games, etc.)

A distribution capability than can compete with the capillarity and speed of Internet. And also

with the selling of illegal copies of movies.

A high capability of debts to assure that they always have the best professionals, equipments, and

work conditions, to respond to the demanding public.

Qualitative results confirm this analysis, in which performance (gross/budget) of either vertically

integrated or non integrated distributors was analyzed.

The results of this study have shown that, except for the American market, considering a

meaningful degree of 99%, we can verify that there are evidences that results obtained from vertically

integrated distributors show different performances than those that are not vertically integrated, both in

the American and world market.

In short, we can say that vertically integrated distributors (linked to great corporations) have

better performances (gross/budget) than those that are not vertically integrated, both in the American

and world market.

Even with almost the entire amount of movies and distributors since 1989, this study has a few

restrictions:

We were not able to find data to verify the existence of any other important market in the world

(for example, Europe) that may have a different result, and, in the available data (e.g. Brazil)

differences are so big that added an oblique direction in this analysis.

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The budget of movies was closed, which means it was not possible to verify quantitively the

strength of links, because the composition of costs can’t be analyzed.

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