From Guest Blogger Michael Olenick
The idea that higher value and lower cost are incompatible is taken as an assumption. Better things cost more, right?
Sometimes that’s true, but not always. Blue Ocean Strategy theorizes the relationship can be broken, that higher value can be delivered at lower cost. This concept is called the cost/value trade-off.
Let’s use an obvious example:
All those covered-up buttons add cost; each must be engineered to do something, tested, manufactured, distributed, and explained to consumers (who have no interest in them). The extra cost adds unnecessary complexity. Let’s check out Apple’s TV remote instead:
Now a larger example, the turnaround of an entire company and creation of a new movie studio.
Marvel, the beloved comic book/movie/TV/game/toy company went from bankrupt and deeply in debt to a $4.2 billion buyout, in just over a decade, by breaking the cost/value trade-off. Marvel movies earn considerably more than movies from other studios yet cost considerably less to make.
A brief history. Marvel’s success as a business reads like a plot from one of their movies, with superheroes and supervillains of business. The company was founded in 1939. They did OK as one of five unremarkable comic book companies for decades until German psychologist Dr. Frederic Wertham testified to the US Senate, in televised hearings in 1954, that comic books cause homosexuality and teenage pregnancy. Never mind that common sense dictates this is ridiculous (homosexuality and teenage pregnancy?!) – or that Wertham released a sensational book a day before his Senate testimony – his arrow hit the target. There were Nazi-style comic book burnings.
By the time comic book hysteria subsided, the five comic publishers had been reduced to two, Detective Comics (DC) and Marvel.
Not content to rest on the strength of their characters, DC purchased Marvel’s distribution channel and allowed only a small number of books to be published each month. It is in this context, from 1960 to 1964, that Marvel issued a mandate to their then middle-aged employees, editor-in-chief Stanley (“Stan Lee”) Lieber, lead cartoonist Jack Kirby, and the slightly younger Steve Ditko, to make new characters or find new jobs. Over about four years they created virtually every Marvel character we now know.
Marvel thrived until the 1980’s when raider Ronald Perelman purchased the company, leveraged it by issuing a lot of bonds (that he largely pocketed the proceeds of), and extracted as much value as possible. By 1996 about two-thirds of the staff were gone, about half the comic book stores were out of business, there was a fan boycott, and a comic book collectible pricing bubble burst. In December 1996 Perelman’s Marvel filed for bankruptcy, hoping to reorganize their way back to profitability.
Ron “Ronnie” Perelman
As if one corporate raider weren’t enough, Carl Icahn had purchased the bonds and decided on a hostile takeover. Icahn did briefly gain control of the business, but it was Isaac “Ike” Perlmutter, who owned a toy company, Toy Biz, that had an exclusive deal with Marvel who prevailed. Perlmutter had a history of buying bankrupt companies and fixing them. After a 17-month hotly contested bankruptcy Perlmutter gained control of Marvel, thanks to a $250 million high-interest loan.
Perlmutter, as Chairman of the Board, hired turnaround specialist Peter Cuneo as CEO. He knew the normal (oftentimes ineffective) cost-cutting that turnaround artists embrace would not work. It seldom works anyway and, at Marvel, there was nothing left to cut.
Instead, Cuneo created an atmosphere where creativity and risk-taking could thrive. Cuneo inked deals with Sony to make Spider-Man movies and with Fox for X-Men movies. Eventually, Perlmutter hired Hollywood insider David Maisel to build Marvel’s own movie studio. After their first movie, Iron Man, Maisel sold a debt-free Marvel to Disney for $4.2 billion ($4.5 billion by the time the deal closed), barely a decade after the company emerged from bankruptcy.
In reviewing the idea that Marvel movies are different one person said “seriously – all those superhero movies are the same.” They’re not. Marvel produced movies, featuring Marvel characters, gross about double the amount of Marvel movies produced by other studios, which in turn gross about double the amount of non-Marvel characters. The X-Men movies, Marvel characters licensed to Fox, did considerably better than Superman movies, owned by DC Comics. Iron Man and the rest – Marvel characters in films produced by Marvel itself – earn even more.
Since Marvel movies gross about 2-4 times more than non-Marvel superhero movies, don't they cost more to make? No, they cost less. About 30 percent less. They have more value and cost less to produce, breaking the value/cost trade-off.
OK, answer people still not ready to accept the idea. That’s because Marvel produced movies are their best characters whereas the others are boring and stale, right? Remember that Marvel licensed Spider-Man to Sony and the X-Men to Fox; they were left with largely unknown characters. Iron Man, Thor, Ant-Man, Black Panther ... the only character anybody outside comic book nerdom knew was Hulk, and their first and only standalone Hulk movie is also their lowest grossing Marvel produced movie out of the 20 released so far.
Why do Marvel movies resonate more than other superhero movies? Like the simpler remote control, the lower cost movies are better. Instead of high priced stars there are top-quality largely unknown actors. Rather than flashy backstories there’s a couple of good actors discussing a story in a cave, allowing the audience's imagination to fill in the place of expensive CGI scenes. Instead of a dozen cars chasing the protagonists from a remote military base there’s two cars, because the budget supported only two cars exactly like a poorly financed military outpost would.
“Our strategy from the beginning was that our characters were the heroes of the films and we did not want to hire any highly paid actors or actresses,” said Cuneo. “We thought the heroes, the stars, were the characters and there were many fine actors who could play these roles and we did not need expensive talent. Obviously, we hired talented people. We had very talented directors and producers, which are very important. If you were a highly paid actor and wanted to be in our films then you had to take less than normal compensation.”
Marvel characters are people first, superheroes second. Often reluctantly transformed from one to the other. They have angst about the bad guys and often resent their superpowers. These are dramas with superheroes, rather than superheroes trying to shoehorn effects into a plot.
Marvel’s Blue Ocean movie studio broke the cost/value trade-off to become the most profitable movie franchise in history.
Read more about Marvel’s Blue Ocean movie studio here, at Harvard Business Review: The Marvel Way: Restoring a Blue Ocean.
About Michael Olenick
Michael is an experienced product and business developer who has used Blue Ocean Strategy to create businesses that have added substantive value. Michael works with startups, established firms, consulting companies and government entities. He is a senior research fellow at INSEAD and a long-time certified Blue Ocean Strategy consultant.
Michael can be found on LinkedIn: www.linkedin.com/in/michaelolenick
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