IMAX: Larger Than Life Case

Analysis

By: Vikas Patel

Strategic Management: 04-75-498 Section 2
Instructor: Tony Mao
Date: December 12, 2013

Table of Contents
Problem Identification...............................................................Page 1
External Analysis - PESTEL.....................................................Page 1
Industry Definition....................................................................Page 1
Key Success Factors..................................................................Page 2
Industry Life Cycle...................................................................Page 2
Industry Structure - Porter's Five Forces Model...................... Page 2
Competitor Analysis.................................................................Page 3
Key Drivers of Industry Profitability........................................Page 3
Implications of Industry Analysis To IMAX...........................Page 3
Market Analysis.......................................................................Page 3
VRINE Analysis......................................................................Page 3/4/5
Value Chain Analysis..............................................................Page 5
Financial Analysis...................................................................Page 5/6
Alternatives..............................................................................Page 6
Decision Criteria......................................................................Page 6/7
Recommendation.....................................................................Page 7
Implementation........................................................................Page 7
Contingency Plan.....................................................................Page 7
Appendix One - Financial Analysis.........................................Page 8
Appendix Two - Decision Matrix............................................Page 9

Problem Identification: In the case IMAX: Larger than Life, co-CEO; Richard Gelfond and
Bradley Wechsler have to tackle a survival issue. IMAX's growth and profitability are limited in
a niche market, which as a result has led to an increase in debt. Some questions that they will
have to solve are: would there company, IMAX, thrive as a niche player that made large format
films and systems, and would increasing the number of Hollywood movies released in IMAX
format save the firm or dilute the IMAX brand? Furthermore, if the aforementioned questions are
not addressed effectively, would Mr. Gelfond and Mr. Wechsler consider selling IMAX to a
larger studio such as Sony, Disney, or Time Warner? In addition, it is imperative for IMAX to
determine whether or not they will follow their existing business model in the niche market.
External Analysis
PESTEL
Political: Within the entertainment industry, politicians had concerns about the violence and sex
in movies and consequently had tried to organize and lobby political action to regulate the
industry. Politicians were trying to control the levels of violence, sex and vulgar language found
in popular media.
Economic: The external economic environment was highly dependent on consumers. If
consumers had high economic status, then this would benefit the entertainment industry as
consumers would watch more movies. In addition, the fluctuation of ticket prices had a direct
impact on how much consumers were willing to pay to watch a movie and consequently this was
a driver of sales for the industry.
Sociocultural: Age, lifestyles, and beliefs have a direct impact on the genres of movies
consumers prefer and consequently the revenues these movies bring in. The entertainment
industry, specifically film industry, have different target audiences they wish to reach through
their movies and as a result have to bring in movies that will attract this target audience to
generate profits.
Technological: Film technology is constantly evolving as newer and efficient methods of
projecting movies become available. Moreover, display technology is advancing in terms of
growth as can be seen through the recent increase in Research and Development costs to produce
more realistic images. As a result, companies have to constantly update their technology to
remain competitive.
Environmental: The environmental framework does not have a significant impact on the
entertainment, and more specifically film industry.
Legal: From a legal perspective, the entertainment and more specifically film industry is
impacted by piracy issues. Piracy has continued to grow as technology advances, causing a
negative impact on the industry. The industry has lost approximately $3 billion dollars annually
because of piracy.
Industry Analysis
Industry Definition: The overall industry IMAX is situated in is the entertainment industry,
with IMAX specifically being a member of the film industry.

Key Success Factors: There are many requisite resources and capabilities that all companies
must possess in order to be successful. First and foremost, there is the need for substantial
working capital. Secondly, modern facilities would be a necessity to deliver the best film
experience to consumers. Lastly, advanced technology will be required before an actual company
like IMAX can make an entry into the industry.
Industry Life Cycle: The industry is currently in the mature stage. The industry is shaped by an
increase in economy standards as well as consumer income. Competition is on the rise and a
differentiation strategy is required to generate profits. Moreover, the overall industry has been in
running for a long duration now, which as a result has ensued price wars.
Industry Structure
Threat of New Entrants: The threat of new entrants in the entertainment, and more specifically
film industry, is low. Substantial working capital is required to enter the industry and to create
competitive advantage. Moreover, piracy has created high entry barriers for new entrants. Due to
the threat of piracy, companies are hesitant to enter the industry and as a result face limited
opportunities to create competitive advantage in the entertainment/film industry.
Degree of Rivalry: The degree of rivalry in the entertainment/film industry is high. One direct
competition to IMAX exists, in the large format film segment, and that is Iwerks. Although
Iwerks is a competitor of IMAX in the industry, Iwerks focuses more on ride simulation
packages, which is different from IMAX's focused strategy. In addition, from a more larger
perspective, some competition that existed in the entertainment industry was from firms such as
Disney/Pixar, MGM, Regal Entertainment, etc., which battled IMAX for animated, high-quality
kid's film.
Threat of Substitutes: The threat of substitutes in the entertainment/film industry is high. There
are many alternatives that exist for consumers, aside from the IMAX experience such as live
plays, sport events, TV programs, the Internet, etc. Moreover, the development of high-definition
DVD recording, big screen TVs and cheaper home theater projection and sound systems has
created a greater amount of substitutes available for consumers, who can enjoy a similar
experience from the comfort of their own home.
Buyer Power: The buyer power in the entertainment/film industry is high. This is because there
are many substitutes (other studios/theatres) available to buyers that they can switch to if one
studio doesn't offer the movie they want, however in doing so, they would sacrifice the
experience large format film companies offer.
Supplier Power: The supplier power in the entertainment/film industry is moderate. Writers of
the films, who are the main suppliers of the film industry, can only supply their scripts and
movies to studios such as IMAX. As a result, the film industry has a limited number of suppliers,
which consequently provides no substitutes for studios such as IMAX.
Overall, the industry structure suggests instability. High rivalry coupled with high buyer
power, increasing technology costs, and availability of substitutes prevents companies within the
industry from making a desired profit. As a result, IMAX will have to change its strategy in the
current industry to maintain a competitive advantage.

Competitor Analysis: The competition in the entertainment/film industry is high. The

entertainment, and more specifically film industry, is broken down into traditional format films
and large format film segments. In the film industry, competition among movies within the same
genre was so high that studios scheduled releases carefully to avoid direct competition.
Moreover, large format film companies faced competition from traditional format film
companies as traditional format film companies produced films that were targeted for children or
families, which large format film companies did not. In addition, within the large format film
segment, Iwerks was IMAX's main competitor, however the focus of Iwerks was to provide more
ride simulation packages, rather than films. All in all, the competition in the industry is very
strong, so differentiation is key.
Drivers of Industry Profitability: In order to be profitable within the industry and create
competitive advantage, it is important for industry incumbents to use the cost containment
approach. This means that companies must control their costs, whether it be through new
suppliers or new vendors, in order to generate a sustainable profit. In addition, industry
incumbents should implement superior marketing techniques such as marketing to the overall
market, rather than just the niche markets. This will increase brand image, increase the number
of consumers and consequently create additional profit.
Implications To IMAX: Despite the current trend of providing high quality educational films
with advanced technology or Hollywood films with advanced technology, IMAX is currently
successful at providing both. In the future, this will be very important for the companys survival.
However, as costs continue to rise, IMAX will have to find a way to better control its costs
without drastically reducing its offerings.
Market Analysis: In relation to IMAX, most of their market (more than 20%) was dependent on
school groups, which allowed them to have separate theaters from multiplexes, providing an
opportunity to display various types of films. Moreover, in relation to the U.S. market, in 2007,
603 movies were released and collected revenues of $9.6 billion. According to the MPAA, there
were 1.4 billion movie theater attendances in the U.S. in 2007. According to experts, release of
big budget franchise movies or sequels of popular movies attenuated the adverse impact of the
economy on theater attendance. Consequently, increasing the number of Hollywood films IMAX
offers could positively impact their profits, based on the statistics mentioned above. In terms of
the global market, movies were now entering this market as well. More than 5000 films were
released worldwide in 2007, with seven billion attendances and annual global box office
revenues estimated at $26.7 billion. Expanding IMAX to the global market could also be a
feasible option for IMAX to survive in the industry.
Internal Analysis
VRINE
Valuable
Technology: IMAX's technology is valuable in the sense that it possesses the top of the line
equipment needed to project large format films to audiences. In addition, IMAX has obtained 46
patents for their technologies enabling IMAX to have exclusive rights to their equipment.

Service: IMAX's service time of 99.9 percent for its equipment installed in theaters has provided
significant value to the corporation internally. Moreover, the fact that company personnel are
constantly servicing the systems in different time frames shows that IMAX has a reputation to
maintain, which is to provide the audience with the best large format film experience.
Brand: IMAX's brand image is very valuable in the sense that it is very unique. The brand
provides IMAX with value as it enables them to hire cheaper talent, which consequently
decreases their costs.
Rarity
Technology: The technology that IMAX offers is quite rare in the sense that no other competitor
in the industry has similar technology for large format film presentations. In addition, the 46
patents IMAX has for their technologies are quite rare.
Service: The service time that IMAX has is rare in the sense that it provided them with strict
quality control of components and end products as well as regular maintenance, something which
the competitors lacked.
Brand: The brand is rare as IMAX has established themselves as the large format film segment
leader in the industry. In addition, the brand is rare as it allows IMAX to hire cheaper talent,
something that competitors find hard to do.
Inimitability & Non-Substitutability
Technology: The technology that IMAX possesses is imitable, however large amounts of capital,
knowledge, and expertise are required. Moreover, the technology that IMAX has is nonsubstitutable, as it is the only way for competitors to provide consumers with the large format
film experience. In regards to the patents IMAX possesses they are imitable, as they can be
obtained by rivals, however they cannot be substituted for.
Service: The service time that IMAX has is easily imitable, as any competitor in the industry can
generate quick service time, assuming that they have strict quality control of components and
end products. The service time that IMAX possesses is currently non-substitutable, however in
the long run, it can easily be substituted for by competitors.
Brand: The brand that IMAX projects is easy to imitate and substitute, as competitors can easily
hire cheaper talent for their productions, however they would be sacrificing quality by doing so.
Exploitability
Technology: While IMAX has been able to use their patents and existing resources and
capabilities to offer the best in technology, as time progresses, new technology will be created,
causing IMAX to implement new technology, which they might not be knowledgeable about.
Service: IMAX has been successful in creating quick service time for its technologies, however
as time progresses and new technology is created, service time may decrease with less
knowledge that personnel may possess, consequently forcing IMAX to implement a new
strategy.

Brand: While IMAX has been able to create a strong brand image and keep costs low by hiring
cheaper talent, in the future, this may be difficult as IMAX implements new strategies and
continues to fight for growth opportunities and overall survival.
Based on the VRINE analysis, IMAX currently has a competitive advantage based on
technology, service, and their brand. However, as can be seen, these three resources and
capabilities can be imitated, substituted, and exploited by other studios if they choose to do so.
Therefore, although IMAX does have a competitive advantage, it is not sustainable. As a result,
IMAX will have to look to other resources and capabilities upon which they can build a
competitive advantage.
Value Chain
Marketing: Contrary to the traditional marketing strategy implemented by Hollywood, IMAX
did not market its films aggressively. IMAX did not have a sales force nor marketing staff at its
offices in Canada, the United States, Europe, Japan and China to market its theater systems. The
films were sold to theaters separately, which resulted in no national marketing or advertising.
Moreover, IMAX's alliances were helping in cross-promoting its movies and the increasing
number of Hollywood movies that were released in IMAX format allowed IMAX to ride on the
coat-tails of marketing campaigns launched by the studios.
Service: In relation to the primary activity, service, IMAX had developed the skills, knowledge,
and capabilities to design and assemble the critical elements involved in its projector and camera
systems, although most of the components were purchased from vendors. Moreover, strict
quality control of components and end products had enabled IMAX to maintain an average
service time of 99.9 percent for its equipment installed in theaters. In addition, company
personnel visited each theater for servicing the systems; the projection systems were serviced
every three months and the audio systems were serviced once a year.
Technology: In regards to technology, IMAX films were printed on films that were 10 times
larger than the 35 mm films that were used in traditional multiplexes and were projected on
screens that were eight stories high and 120-feet wide, or in domes that were 81 feet in diameter.
The films were projected to screens by IMAX-designed projectors that had special features such
as a higher shutter speed, rolling loop motion, and vacuum to hold the film to the lens. Moreover,
IMAX had developed 3D cameras and projection systems to produce realistic 3D images.
Human Resources Management: In relation to the human resources management aspect of
IMAX, they were not dependent on hiring any talent for their films due to their unique brand
image. This enabled IMAX to keep expenses at a minimal and gave them more of a manageable
budget to use, in order to deliver the best IMAX experience to audiences.
Currently, as can be seen, IMAX's value chain is rather successful. The companys
current mix of activities has allowed it to exploit market opportunities and build a solid
foundation. In the face of survival though, the company will have to make changes to some of its
value chain activities such as marketing to generate more profits.
Financial Analysis (See Appendix One): IMAX's net profit margin has been decreasing
considerably since 2005 to a current low of -23.26%. The decreasing margins show that IMAX is

facing trouble containing its costs and effectively turning revenue into actual profit. If the
company continues to face negative profit margins, there will be no cash to be reinvested in the
company and thus debt financing will become ever more prevalent. Return on assets has been
decreasing significantly since 2005 (except for a modest increase from 2004 to 2005). The last
two years have shown a negative return on assets. This means the company has been ineffective
in generating profit from its existing assets. Moreover, the return on equity has improved rapidly
from -24.24% in 2004 to an astounding 31.74% for 2007. This shows the company has
succeeded in using reinvested earnings to generate additional profit. Lastly, the two liquidity
ratios signal problems. The debt-to-equity ratio has been increasing significantly from 2005 to a
current ratio of -1.87. A ratio of -1.87 shows the company is highly leveraged and could face
potential future problems meeting debt and interest payments. In addition, the debt ratio, which
currently sits at 1.41, has been increasing as well since 2005. The ratio of 1.41 shows 141% of
assets have been financed by debt. If more and more assets are being financed by debt, problems
could occur if creditors take security over those assets. The above ratios show that while the
company can operate currently, it will not survive into the short-term future.
Alternatives: Given the challenges that IMAX faces, there are three alternatives for its survival:
1. IMAX could move away from educational entertainment.
2. IMAX could continue to improve the current IMAX system.
3. Sell IMAX to a larger studio through an acquisition.
The first alternative allows IMAX to explore new opportunities in order to grow and quite
possibly survive. By switching from educational entertainment to strictly Hollywood movies, it
generates more revenue as audiences are more interested in Hollywood entertainment, as
depicted by the high revenues for Hollywood films in Exhibit 11. The second alternative allows
IMAX to take advantage of their patents and high R&D costs by continuing to improve the
hardware and software they possess. The third alternative opens up the opportunity for IMAX to
be sold to a studio such as Disney/Pixar or Time-Warner, however IMAX would sacrifice
control.
Decision Criteria/Matrix (See Appendix Two): The above alternatives need to be weighed
against a set of decision criteria. The first criterion is what alternative provides the best survival
option? That is, what is the best option for IMAX to survive in the near future? The second
criterion is supplier relations? How will suppliers react to the alternative? The third criterion is
the end result. That is, which alternative will have the longest-lasting advantages? Lastly, the
fourth criterion is the ease of implementation.
The first alternative is to move away from the educational entertainment that IMAX offers and
explore into, strictly, the Hollywood entertainment aspect. In terms of survival, this alternative is
ranked third because it is a big risk to take, considering IMAX has been successful by providing
educational entertainment to audiences. In addition, you are entering a new segment of the
industry and consequently competing with a greater amount of rivals, which could have a
negative effect on IMAX's survival. In relation to suppliers, this alternative is ranked fourth as it
will take away the majority of business from writers of education related content. Next, in terms
of long-term benefits, this alternative is ranked second, as it could be a beneficial move for
IMAX, if properly implemented. Lastly, in terms of ease of implementation, this alternative is

ranked second as IMAX has already started to project some Hollywood movies in their facilities,
enabling easy implementation due to the foundation already established.
The second alternative is to continue to improve the current IMAX system. In terms of survival,
this alternative is ranked second as IMAX has already established a successful foundation in the
industry, however with increasing debts, this could be a drawback to survive. In relation to
suppliers reactions, this alternative is ranked first as suppliers/writers would remain the sole
providers of educational and Hollywood films to IMAX. Next, in relation to long-term benefits,
this alternative is ranked third because, although IMAX is improving their quality of films and
service, they are not providing anything new and unique to audiences. Lastly, in terms of ease of
implementation, this alternative is ranked first as it is already implemented, but just requires a
few tweaks to generate greater profit and overall success.
The third alternative is to sell IMAX to a larger studio through an acquisition. In terms of
survival, this alternative is ranked third because although IMAX might survive by choosing this
alternative, they will be sacrificing the unique competitive advantage and brand image that they
have maintained in the industry for quite a while. In addition, an acquisition like such has not
been proven either. In terms of suppliers, this alternative is ranked third as IMAX might be sold
to a studio who already has established suppliers elsewhere, resulting in IMAX's suppliers being
of no use anymore. Next, in terms of long-term benefits, this alternative is ranked second as it
provides IMAX with an opportunity to explore new growth options in a new market. Lastly, in
terms of ease of implementation, this alternative is ranked third because this would require a lot
of time and resources, something which IMAX is limited to at the moment.
Recommendation: Based on the alternatives provided, the best solution for IMAX would be to
continue to improve the current IMAX system. As mentioned earlier, improving the current
system will enable IMAX to produce more quality film and entertainment for audiences, which
could be used to help the company survive. Moreover, IMAX should increase their scope of
advertising to attract more audiences to their theaters. By doing so, their R&D costs can be used
to full potential, since IMAX will be using their advanced technology to provide the IMAX
experience to audiences. Furthermore, by improving the system, IMAX will retain their healthy
and positive relationship with suppliers and writers in conjunction with providing audiences with
an experience (e.g. 3D experience) they cannot get from home.
Implementation Plan: In month one, IMAX management needs to sit down and determine their
strategies on how they will improve the current IMAX system and how much money they will
allocate for the increase in advertising. In month two, IMAX should combine all their strategic
options for improving the current IMAX system and come to a conclusion on which option
would be the most beneficial for the company's survival. In month three, IMAX should start
implementing the strategy they have chosen. IMAX should not implement many strategies at
once, but instead should focus on one strategy at a time. At the end of month six, when one
strategy has been established and implemented, IMAX should measure how successful it has
been and determine whether or not to further progress with more strategies to improve the
current IMAX system or to choose a different route overall in order to survive.
Contingency Plan: If improving the current IMAX system fails to bring about the desired
results, the company should consider moving away from educational entertainment. The timeline
of this plan would be similar to that of the above implementation plan. This approach would

allow IMAX to explore into a more firm and competitive segment of the industry, which is
Hollywood films.
Appendix One - Financial Analysis

Appendix Two - Decision Matrix

Alternative 1
Alternative 2
Alternative 3

Best Survival

Suppliers

3
2
3

4
1
3

Long-Term
Benefits
2
3
2

Implementation
2
1
3

Ratings are scaled from 1-4. 1 being the best option and 4 being the worst option.