Case 1-3: Harlequin Enterprises: The Mira Decision

Firms in the same industry may have very different performances. It is due to their resources and capabilities. To generate a sustained competitive advantage, a company must have internal resources and capabilities that have specific characteristics as regards as Value, Rarity, Imitability and Organization. Resources can be financial, physical, human or organizational. As far as financial resources are concerned, Harlequin has been in business since 1964, so it must have a reliable source of money, either through bonds, equity or retained earnings. Physical resources include its ability to reach many international markets and its distribution channel. Human resources include knowledgeable editors, ensuring consistency to the product and talented authors with standardized contracts. Organizational resources refer to relationships with the firms external environment and to the formal and informal planning, controlling and coordinated systems that allow Harlequin to control its product quality throughout the value chain. These resources are valuable, because they allow the company to lower its costs and increase its revenue. Indeed, thanks to long term relationships with printers and well-established distribution channels, the firm can appropriate a larger share of profits than its direct competitors (e.g. the cost of printing a book is only $0.44 for Harlequin, against 0.88 for its competitors). They are also rare, since the brand equity developed with time, the clearly defined product line, the knowledge acquired through experience and the standing order distribution plan are not matched by competitors. They are also costly to imitate. First, creating such a strong image for ones product in order to challenge the reliability and consistency guaranteed by Harlequin, would require high marketing investments and entail high risks. Second, social complexity comes into play. The firms culture of evaluating the most important aspects in each book and the firms reputation among suppliers and customers cannot simply be bought. You need knowledge, talent, time and quality to achieve these results. New entrants may find it easier to implement Harlequins strategy with respect to incumbents, but building the right team and put up with the companys high reputation would be very costly. Incumbent firms have been following different strategies and it wouldnt be wise of them to completely change them to duplicate the market leaders strategy. Such valuable, rare and costly to imitate resources, combined with and adequate organization, allowed the company to generate a sustained competitive advantage and a competitive disadvantage for any firm trying to imitate it. The value chain, following McKinsey and Company model, involves six activities: technology development, product design, manufacturing, marketing, distribution and service. Harlequin doesnt have a specific technology, but it has a set of specific criteria to which books must comply, in order to ensure consistency and familiarity to customers. Product design is such as to make books both handy and easy to place in retailers, supermarkets and drugstores. Moreover it is highly recognizable by consumers being it standardized. Variety in products is not neglected, with up to 8 series types, from American romance to temptation. Manufacturing is subcontracted, but being a market leader, Harlequin can get very positive conditions for printing its books. Marketing switched from television to print media with time. Distribution is based on the standing order distribution, a predetermined configuration that increases cost effectiveness. Moreover Harlequins books can be found in supermarkets and retail stores, where people

pass a few times a week in their ordinary life, without the burden of looking for them in a bookstore. As far as service is concerned, the firm offers direct-to-reader book sales. The firm takes care of most of the value chain activities. It chooses books authors, provides them with guidelines on their stories, controls and approves the final work and requests a specific product design, length and price for books. It doesnt manufacture the good directly, but the costs to outsource it are highly convenient with respect to competition. Performing many activities along the value chain the company can appropriate more value and have higher revenues. Such a deeply-rooted and attentive pattern is difficult to imitate, just like it is costly and time-consuming to build a reputation for consistency and quality as this firm did. It is the same strategy adopted by McDonalds, under this point of view. The very value of the fast food chain to consumers is that, despite it might not being the best hamburger they can eat, they know it is going to be pretty much the same all over the world. Familiarity matters in the eyes of consumers. The single-title market differs greatly from the romance series fiction. Each book must be evaluated on its own, publishers are looking out for best-sellers (while Harlequins system would be ruined by them), contracts must be tailored on each author such as product design for each book. Promotional events are required to have a successful book, distribution occurs through bookstores and authors gain importance and bargaining power as they achieve readers support and appreciation. Basically the single-title business requires a different set of capabilities with respect to Harlequins ones. The reason why it was considered as a possible investment by the firm is that profits in this market are growing while they are stagnating in the series fiction market. However the very reason why Harlequin is a market leader in its sector is that he has a unique strategy with respect to its competitors and focuses on a different product with respect to the traditional publishers. It has performed so well that nowadays its name is immediately attached to romance series. As a consequence Harlequin should not enter the single-title market. First, trying to adapt its capabilities and resources to a completely new business model will require high investments in marketing, product design. It will also require new suppliers contracts and distribution channels. Money will inevitably come from the series business, cutting down on revenue that has already stopped growing. Second, the search for new authors will be time-consuming and require a change in organizational culture shifting from avoiding to encouraging best sellers. Third, single-title readers highly differ from the traditional target of Harlequin series( e. women in their 40s)so they may not appreciate the association of Harlequin with romance novels and mistrust its judgment on the actual value of books they sell. Fourth, in the single-title market the company will not have any sort of competitive advantage and will face a high threat of rivalry by incumbent firms. Last but not least, if the company were to become successful in the single-title business, it will do so by shifting away resources and attention from its core business and ending up losing its sustained competitive advantage. In conclusion, despite the recent increase in single-title readers and the potential high profits that firm could offer, entry is not desirable to Harlequin since it would compromise, if not destroy, its source of competitive advantage. In this case, being a leader in a mature business is more desirable than being a good competitor in a growing industry.