Industry sector

The assignment asked me to select an industry sector and to analyse it, its key features, its structure and, by studying the market through famous economical models, I was supposed to give a specifical strategy able to compete and succeed in it. This is why I think that the first thing asked and needed is to start this study by choosing an industrial sector with which you have some familiarity or at least a general knowledge.

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The sector I am going to analyse in this report is the Radio Industry in Italy. This is mainly for two reasons. The first is, as I said before, that I wanted to develop my studies in a market I know quite well. At the moment in fact I am working in an advertising agency that has sole license for advertising spaces in a big local television channel and in three important radio stations. Working in the marketing offices of the company, I deal every day with market studies, performances reports, marketing plans, in order to give to our clients the best proposal of investment, in line with their needs, such as the targets they want to reach, the areas they want to cover, the money they want to spend and so on.

The second reason why I chose the radio market is that I personally think a study of this nature could be interesting also for the person is going to read it. We often listen radio, but not everyone knows what stays beyond it. It is quite different from markets such as those of consumer goods, or insurances, etc., but the basic logic is the same: being competitive and successful, having something different from others so that you can gain a big market share. The radio industry itself can be considered a service industry, by which all the agents inside it tries to reach their costumer and entertain them, to inform them and sometimes also to interact with them.

A precision has to be made at this point: by saying “radio” you can consider it as an industry of services composed by many companies that are the radios themselves. Or you can consider the aspect of advertising in the radio, and in this case the agents of the market would be those components that work and develop in making advertising, that is to say advertising agencies or sometimes the radios themselves. The aspect I am going to analyse is the first one. The Radio Industry in Italy

After a period of few interest both of the advertising investors and of the public, especially if compared to the television field, at the end of the nineties the radio registered a new centrality, as mean of information and entertainment and as advertising market. The numbers of the total audience reported in Italy in the year 2002 report a steady improving, confirming the trend of the last years, exception made in 1999 when it was registered a slow flexion.

The audience during the day has a tendency that is complementary to the television one: a radio listener prefers morning hours, while later there is a decrease during rush hours, an upturn during the afternoon and again a flexion in night hours. In opposition with the television market, that has substantially a duopolistic asset, the radio market is characterized by the presence of many small companies, with an average of $ 5.000.000 in sales, and each one does not exceed the 20% of the total audience.

Furthermore, while in the television field there is a strict competition between the public stations and private channels in all the different hours, in the radio landscape fidelization and the exclusivity of friability prevail. Although researches of the year 2000 confirm the superiority in terms of audience of “RadioUnoRai”, the other public channels that reach a generic target offering a schedule mainly spoken, with information and culture, are every year losing audience, especially if compared to national private radios.

This trend is getting also stronger since these private radios that offer mainly a musical program, are now able to reach those listeners that are looking also for an informative program, in particular during morning hours, when “RadioDue” used to be the first.  For the first time this year, the second public radio station, “RadioDue”, has lost the second position in the morning-audience parade, being replaced by “Radio Dimensione Suono”, a private station.Speaking of radio in terms of advertising industry, since the middle years of the nineties, the growth rate of the adv. investments in 2000 has been the highest one among the classical mass marketing media.

In year 2000 it has been registered a share of 6% of communication investments in the radio. This is a definitive sign of the becoming of the radio from a secondary mean of publicity (after press and TV), to an independent mean for a complete advertising campaign, able also to be the only media used. Among the different factors of this improvement, some can be found in the features of the radio itself, as the territorial rootedness, that led many advertising actors of international interest to invest also in local radios. The tendency of investments in local channels registered in 2000 a growth of the 10,9%, while nationally of the 18,5%.

Porter’s Five Forces Model

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. 1. Rivalry Analysing the industry concentration in the radio sector we see that there is a very high Concentration Rate. There are many “players” in the field that want to reach the same goals. A larger number of firms increases rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if these firms have similar market share, leading to a struggle for market leadership. This is why, as I will say later, the preferred competitive strategy in the radio industry is focusing.

Another important aspect that increases rivalry are the Low switching costs. Listeners (customers) can freely switch from one radio channel to another, so there is a greater struggle to capture customers. 2. Threat Of Substitutes In Porter’s model, substitute products refer to products in other industries. The competition engendered by a threat of substitute comes from products outside the industry. As you will understand, the major substitute to the radio is Television, a media able to entertain sometimes more than the radio. Performances of TV are generally much higher, but in the latest year we registered an improvement in terms of comparison between the two medias. People is coming back to old habits and likes always more listening to radio. It allows imagination, creativity and is more practical.

While the threat of substitutes typically impacts an industry through price competition, there can be other concerns in assessing the threat of substitutes. Considering the substitutability of different types of Radio transmission: local station transmission to home radio antennas via the airways versus transmission via cable, satellite, and Internet. The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment. Except in remote areas it is unlikely that digital radio could compete with traditional radio without the greater diversity of entertainment that it affords the customer.

3. Buyer Power The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony – a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In a field where there are many buyers, that are the listeners, we can argue that they are not powerful. The market is set and designed on the base of the buyers’ tastes and habits, but it is directed and influenced mainly by the companies themselves.

4. Supplier Power A producing industry requires raw materials, labour, components, and other supplies. This requirement leads to buyer – supplier relationships between the industry and the firms that provide it the raw materials used to create products or in this case services. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry’s profits.

Suppliers of the radio industry are for example all the technicians, those that give support for the transmission and reception of the audio, but also those who give music itself, so the artists and record companies. In the case of technicians, they represent not powerful suppliers, since there are many other competitive suppliers. Artists and record companies, on the other hand, are very powerful, they make the price and decide the terms of supplying. 5. Potential Entries Considered that the radio market nowadays is kind of saturated, even if barriers to entry are not so hard, there is not a real threat of new entries. In the case there will be a new development of the market in the future, due to new technologies, then potential entries will be many.