Two major ways that media firms strategize their continuous accrual of sustainable competitive advantages is through the use of product and international, or dual, diversification initiatives (Jung & Chan-Olmsted, 2005).
In understanding how a dual diversification strategy can affect a media firm’s financial performance, quantifiable analyses of managerial efficiency, investors’ valuation assessment, and profitability (Jung & Chan-Olmsted, 2005) become important to continually manage.
The following research focuses on the use of a dual diversification strategy in media firms and financial performance as it relates to the fundamentals of corporate finance; a firm’s value maximization; and the use of low cost strategies to help achieve financial goals.
Managerial Efficiency and Corporate Finance
Managers have a responsibility to understand how their decisions affect the profits and losses of the organization (Berman & Knight, 2008).
Three major financial decisions that are made each day include resource allocation, choosing an appropriate financing mix, and using reinvestments or dividends (Wood, 2011).
Two major ways managerial efficiency can be tracked is through analyses of the balance sheet to examine the return on assets (ROA) and the income statement for the return on sales (ROS), or the net profit margin (Berman & Knight, 2008; Jung & Chan-Olmsted, 2005).
Corporate managers must be certain to shrewdly ascertain and implement strategies that effectively influence financial decisions that benefit a media company that pursues dual diversification strategies by deciding how investments should be pursued.
Product diversification exploits the advantages of procuring media stories that coincide with the internal and external development gaps concerning the firm that can be turned into financial opportunities.
One way this is done is through vertical integration strategies (Aaker, 2001) where stages of the supply chain, such as media distribution channels, are combined in an effort to generate more resources (Jung & Chan-Olmsted, 2005).
One recent example of this can be found in Disney’s acquisition of Maker Studios, a YouTube digital, online-video outlet (Spangler, 2014). Efficient management of resources can also create synergistic effects (Aaker, 2001) that create value for media companies with the additional revenue streams brought about through product differentiation (Jung & Chan-Olmsted, 2005).
This can include the development and promotion of media stories that have the potential to foster ancillaries that include books, music, movies, TV series, and games, to name a few.
Globalization diversification strategies that are nurtured by management have the potential to build the empire, increase economies of scale and market size, and create location advantages (Jung & Chan-Olmsted, 2005).
Furthermore, after the initial investment of internationalization, media firms can take advantage of lower cost of goods sold (COGS) and cost of services (COS) (Berman & Knight, 2008) to help improve return on investment (ROI) (Jung & Chan-Olmsted, 2005).
Most notably, this can be found in the proliferation of “runaway production,” (Johnson, 2014) where media companies turn to offshoring or offshore outsourcing as an operational strategy.
It can be argued that the foundational knowledge of corporate finance can assist in creating managerial efficiency that improves media firms’ “business gamesmanship and the art of deal making” (Jung & Chan-Olmsted, 2005, p. 186), which are arguably two essential elements for improving financial performance.
Value Maximization and Investors’ Assessment
Part of understanding a robust dual diversification strategy for growth includes knowledge of a media firm’s saturation point (Jung & Chan-Olmsted, 2005).
Empirical evidence shows that product diversification can adversely affect financial performance when media firms begin taking on too many products, especially if they are unrelated (Jung & Chan-Olmsted, 2005).
Similarly, understanding the hurdle rate (Berman & Knight, 2008) of a given firm can help protect against eroding profit margins and diminishing returns when implementing geographic diversification strategies (Jung & Chan-Olmsted, 2005).
One major decision indicator for investors is earnings per share (EPS) (Berman & Knight, 2008; Jung & Chan-Olmsted, 2005), which can become the impetus to balancing out the demands of shareholders for immediate returns with the benefits of long-term economic profit.
In an effort to balance these two performance goals, combinations of the best economic efficiencies for media companies should involve diversification commonalities that facilitate “sharing of common content or a common distribution infrastructure and expertise” (Jung & Chan-Olmsted, 2005, p. 196) and the use of low cost strategies (Aaker, 2001).
Low Cost Strategies and Profitability
Making use of the cash flow statements (Berman & Knight, 2008) of a media firm when using dual differentiation strategies helps decision makers to ascertain the company’s threshold for initial short-term deterioration of cash flow for more focused financial initiatives (Jung & Chan-Olmsted, 2005).
One way of determining operating cash flow is through the scrutiny of earnings before interest, taxes, depreciation, and amortization (EBITDA) and seeing how COGS and COS can be reduced (Berman & Knight, 2008; Jung & Chan-Olmsted, 2005), thus improving financial performance.
In the media industry, costs can also be lowered by taking advantage of a firm’s experience curve (Aaker, 2001), which has been posited to drop marginal costs and create a greater opportunity for the company to create economies of scale (Jung & Chan-Olmsted, 2005).
Cash flow, however, should not be confused with profit (Berman & Knight, 2008), indicating the need for considering several variables, measuring multiple facets of financial performance, and understanding how these affect a firm’s bottom line.
Related Versus Unrelated Diversification
Research suggests that dual diversification strategies work best for a firm’s financial performance when products and foreign markets are related or comparable to the firm’s original core competencies (Jung & Chan-Olmsted, 2005).
Although it may be easier for media conglomerates to seize these opportunities and absorb risk through cross-subsidization (Jung & Chan-Olmsted, 2005), smaller media firms can also embrace dual diversification strategies that improves their bottom line.
This can be done through strategic implementation of managerial efficiency tactics that improve investors’ valuation of the firm and create windows of opportunity for turning perceived gaps in efficiency into profitability for the short and long run.
Also, by determining a media firm’s threshold for dealing with external market forces and internal growth, implications for limiting expansion to increase operating cash flow and economic profit become inevitable.
This, in turn, will assist in finding the essential mix of allocating resources, determining financing, and disseminating dividends appropriate to a media firm’s current vision, strategy, and performance expectations.
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Aaker, D. A. (2001). Developing Business Strategies (6th ed.). New York, NY: John Wiley & Sons, Inc.
Berman, K. & Knight, J. (2008). Financial Intelligence For HR Professionals. Boston, MA: Harvard Business Press.
Johnson, T. (2014, Jan. 14). Report: L.A. production grew in 2013, but still not what it once was. Variety.com. Retrieved from http://variety.com/2014/biz/news/report-l-a-production-grew-in-2013-but-still-not-what-it-once-was-1201055923/
Jung, J., & Chan-Olmsted, S. M. (2005). Impacts of media conglomerates’ dual diversification on financial performance. Journal of Media Economics, 18(3), 183-202.
Spangler, T. (2014, March 24). Disney buys Maker Studios in deal worth at least $500 million. Variety.com. Retrieved from http://variety.com/2014/biz/news/disney-buys-maker-studios-in-deal-worth-at-least-500-million-1201145068/
Wood, N. (2011). Corporate finance [PowerPoint slides]. Retrieved from http://www.gems4.com/Business/finance/finance.htm