Student No: 20307640 Strategic Management – BUSI 4013 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 2020/21 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 1. Introduction Football is a fascinating industry that has transformed itself into a global success story (Szymanski, 2012). Football’s global trade is valued at £150billion and the English Premier League has a collective revenue of £1billion (Szymanski, 2012). Recently, various leagues and worldwide events such as the World Cup, European Cup, English Premier League, Italian Serie A, and Spanish La Liga have all played their part in the growth of the football industry. Manchester United (United) is one of those football clubs that has gained respect from its competitors and acquired a great number of fans, both locally and globally. United has established itself as a world leader in the sporting arena with a global fan following of 1.1 billion (Manchester United, 2020) combined with its commercial and football strategies. But United faces a few challenges which include: their debt management, resulting from Glazer’s takeover of the club; and expanding their presence in the global market (Manchester united, 2020; Investopedia, 2020). In this report, the business strategies and performance of the club from 1992 to 2020 will be evaluated by applying several strategic models to examine how United’s core capabilities drove it to be an industry success. The report will also analyse the strong fan base of United and the market opportunities. Lastly, this report outlines two key recommendations for United to sustain itself financially by expanding its presence in China. STUDENT NO: 20307640 1 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 2. Context: Product and Market Analyses 2.1. Product Type Fundamentally, football is an event that allows us to watch fast-paced competitive sport for 90 minutes about fifty times a year, which brings a sense of excitement, identity, and passion (Bridgewater, 2014). Bridgewater (2014) outlines that football promotes an atmosphere of belonging and a sense of unity, for its followers, to satisfy a desire and provides an emotive benefit. Thus, football utilizes emotional characteristics to provide customer value, and football clubs globally have utilized this emotional trait to increase their revenue streams through by-products such as broadcasting rights, sponsorship income, retail merchandising, and matchday income (Deloitte, 2020). 2.2. Drivers of the market The football market sees continuous growth in value for television broadcasting rights, United saw an increase of 20% for 2019 from broadcasting revenue (Deloitte, 2020). This saw United pocket €711.5m revenue in 2019, which was an increase of 7% from 2018 (Deloitte, 2020). Sponsorship deals are the next source of revenue for United, with the club bagging a deal with Adidas for training and playing kits for 10 years, worth £750m (Manchester United, 2020; Wilson, 2014). Additionally, Covid-19 has severely impacted matchday revenues as no spectators were allowed in the stadium (Manchester United, 2020). Currently, the UK’s football market has become saturated as the whole industry has become very competitive, resulting in lower profits (Moore, 2011). In contrast, on the other side of the globe, China has developed its footballing industry with the help of the public and private sector, it is showing tremendous growth initiatives and high interest in the game (Sliwowski, 2017; Maxxelli, 2019). The modern football market is very competitive. Szymanski (2012) expresses that success in football performance directly corelates to its profits. To maintain a high level of performance STUDENT NO: 20307640 2 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? a football club needs to invest, which has a significant impact on its profits. So, Szymanski (2012) states that it's rare in the football market to achieve the best football performance and attain high profits. United’s men’s first team currently competes in English and European competitions, and United’s financial success is mainly driven by their performance (Manchester United, 2020). These sports competitions provide United with commercial value underpinning its finances through various income streams. United is competing in the market for its reputation and global brand value by distributing its broadcasting rights, matchday and commercial income, and retail merchandising to gain financial security (Manchester united, 2020; Deloitte, 2020). However, United has acquired a significant amount of debt, currently at more than £1 billion, from the club’s takeover by the Glazer family in 2005 (Manchester united, 2020; Investopedia, 2020). STUDENT NO: 20307640 3 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 3. Evaluation of United’s company strategy A firms’ strategy shows the vision to compete within an industry by defining which products should the firm undertake, the process to compete, the target audience, and the economic gain (Porter and Competitive Strategy, 1998; Alfred Dupont Chandler, 2003). 3.1. Evaluation using Hambrick and Fredrickson's Strategy Diamond Arenas, vehicles, staging, differentiators, and economic logic are the five elements of strategy (Hambrick and Fredrickson, 2001). To analyse United’s company strategy, we will use Hambrick and Fredrickson's strategy diamond by analysing the product's strategy, target market, and economic benefit. Figure 1: Analyses of United’s Hambrick and Fredrickson’s Strategy Diamond Figure 1 shows Hambrick and Fredrickson’s strategy analyses which will be unpacked below. STUDENT NO: 20307640 4 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 3.1.1.Arenas: Firstly, United’s arenas are in European football performance, growth in retail merchandise, targeting global football fan base, and producing a strong financial performance to reduce debt (Investopedia, 2020; Manchester United, 2020). 3.1.2.Vehicles: United’s vehicles include improving its men’s first team performance by investing in the team and training facilities to gain more accolades, which drives brand popularity; continuous development of their retail merchandising by increasing their locations and product range (Manchester United, 2020). Additionally, to increase customer engagement by exploiting social and digital media by improving the reach of live broadcasting through their current Champions League and English Premier League broadcasters and its own MUTV, which is in 195 global markets; and growing and maintaining sponsors, as we saw United set up offices in Asia and North America to generate and attract global companies through its brand equity (Manchester United, 2020). Finally, to diversify its revenue streams by increasing revenue and operating margins by commercial growth through retail, merchandising, digital media to diversify their income and improve profits for reducing debt (Investopedia, 2020; Manchester United, 2020). 3.1.3.Differentiators: United differentiates itself by maintaining and promoting a strong football performance, through the global distribution of live broadcasting games which other clubs are unable to do, resulting in gaining one of the largest fan bases and a globally recognised legacy brand (Manchester United, 2020; Szymanski, 2012). United grows its retail merchandise income by targeting its large and loyal fanbase, licensing and innovating the retail products to create barriers in the market for imitation (Manchester United, 2020; Statista, 2020). United utilizes their vast global fan base through social and digital media, to gain extra revenue from retail, broadcasting, matchdays, and sponsorships, income STUDENT NO: 20307640 5 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? from these various channels helps United to diversify its revenue and improve its margin thus, strengthening its financial power in the market (Manchester United, 2020). 3.1.4.Staging: United improves their team performance by buying talented players and improving training and stadium facilities to attract high talents; United targets the global market through its established brand image, to gain sponsorship deals and grow its income stream, like the Adidas deal mentioned above (Manchester United, 2020). United updates its product portfolio yearly to maintain and attract fans, and they introduce product licenses to maintain its brand and reduce the threat of imitation (Manchester United, 2020). United attracts and enhances fan experiences to drive fan loyalty through its matchday fan events, stadium tours, and premium seating; additionally, United attracts and maintains fans through e-commerce platforms, social and digital media to drive brand popularity and improve retail and broadcasting revenue (Manchester United, 2020). 3.1.5.Economic Logic: United gains revenue from winning and participating in various sporting competitions, as we saw in them pocketing £77.5m by winning the Europa league in 2019 (Manchester United, 2020; Smith, 2017). United also gains revenue from retail channels; broadcasting rights; global sponsorships, by targeting its global fan base through social and digital media and strong brand image (Manchester United, 2020). United gains revenue from its matchday fans and hospitality experiences by utilizing its 75000 seated stadium (Manchester United, 2020). The strategy to gain financial revenue is required to reduce the club’s debts (Manchester united, 2020; Investopedia, 2020). Thus, we can see that United is focused on developing its brand to reduce its substantial debt and achieve financial stability. STUDENT NO: 20307640 6 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 4. Evaluation of United’s internal core capabilities Core capabilities are firms’ most significant resources, and it defines its uniqueness (Prahalad and Hamel, 1993). 4.1. Evaluation using VRIO and resource-capability model To analyse a United’s sustained competitive potential the VRIO four-question framework is used to evaluates its resources and capabilities, by questioning value, rarity, imitability, and organization of the firm’s resources and capabilities (Barney and Hesterly, 2006). Fans Manager & Staff Players Brand Media Partners Commercial Partners (Sponsors) Stadium & Training facilities E-commerce - Website & App Digital & Social Media presence Overseas market Young Player Development Buying of Players Sales & Marketing Financial Performace Retail Product dev Is it Is it Is it hard to Valuable? rare? imitate? Resources Y Y N N N N Y Y Y Y Y Y Y Y N Y N N Y Y Y Y N N Y Y N Y Y Y Capabilities Y Y Y Y N N Y Y N Y Y Y Y N N Are we organized to capture value? Competitive Implications Economic Implications Y Y Y Y Y Y Y Y Y Y Sustainable Parity Sustainable Sustainable Temp Advantage Parity Sustainable Parity Temp Advantage Sustainable Above Below Normal Above Normal Normal Above Normal Above Above Y Y Y Y Y Sustainable Parity Temp Advantage Temp Advantage Parity Above Below Above Above Normal Figure 2: VRIO analyses of United’s Resources & Capabilities Figure 2 shows VRIO analyses which will be unpacked below. United’s sustainable competitive resource is its 1.1b global fans, these fans are maintained and attracted by its digital and social media presence, making this a temporary advantage as other clubs can imitate this presence by having a strong football performance (Manchester United, 2020; Kantar, 2019). United’s media and commercial partners, and its e-commerce helps the club to reach and maintain its fan base, but it’s not rare or imitable as other clubs have a similar system, making it a temporary advantaged resource (Manchester United, 2020; Szymanski, STUDENT NO: 20307640 7 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 2012). United’s possesses a sizeable overseas market, mainly in China who holds 40% of its fans, which is a sustainable advantaged resource. This drives its retail and broadcasting revenue targeting the vast fan base (Manchester United, 2020; Szymanski, 2012). Current talented players, stadium, management, and staff have given it a temporary advantage in the market; recently the club has managed to win a few trophies but hasn’t managed to gain consistent performance, as they changed four managers since the departure of their greatest manager, Sir Alex in 2013 (Dubas-Fisher, 2020; Manchester United, 2020). To attain sustained competitive football performance, United has begun recruiting young talented players and develop them to build a strong foundation and achieve sustained success, this development and recruitment provide United a sustainable advantaged capability as its very different from other club’s transfer policy, of buying developed players which is an expensive exercise (Manchester United, 2020; Jackson, 2020). United has developed massive retail sales and broadcasting rights sales to gain financial revenue, they attract more customers through marketing its strong brand image, but other clubs are doing the same making its sales and marketing a temporary advantage (Manchester United, 2020). However, United holds a massive debt on its books, which restricts them to buy talented players affecting its football performance which affects its financial performance (Manchester united, 2020; Investopedia, 2020). These incomes and huge debt added with revenue earned from football competition and matchday incomes provide United a temporary competitive advantage (Deloitte, 2020; Manchester United, 2020). United’s retail product development is on par with its competitors, with other clubs following a similar style to raise revenue thus, making it on parity capability (Deloitte, 2020; Manchester United, 2020). United’s brand forms its core component due to its huge and loyal fan base (Kantar, 2019), and more than 40% of these fans are based in China, this resource is difficult to be imitated STUDENT NO: 20307640 8 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? and the brand has a high value thus attracting high-value sponsors (Statista, 2020). This was evident as the club signed record-breaking deals with Chevrolet worth £357million, Adidas worth £750m, and many more (Jones and Deloitte, 2014; Manchester United, 2020; Wilson, 2014). Based on the VRIO analyses, the evaluation of United’s most important resource and capabilities are estimated below by the resource and capability model, in Figure 3. L Imp Rel Stg Resources Players Retail Channels & Product Strong finance Performance Brand Vast Fan base Capabilities Player Development Buying of Players Sales & Marketing Financial Performace Retail Product dev R1 7 R2 4 R3 9 R4 10 R5 8 8 5 6 10 9 C1 9 C2 8 C3 6 C4 10 C5 5 8 7 7 8 6 Figure 3: Resource and capability models of United’s core resources & capabilities This evaluation indicates that United has a strong resource in its football squad which drives its financial performance (Manchester United, 2020). The club’s financial performance is important to reduce the huge debt (Investopedia, 2020). However, the club utilizes its massive global fan base and sales of its retail products and broadcasting rights to gain financial stability. United’s brand drives its business performance globally, most importantly it has given United access to the Chinese market, in which more than 40% of its fans are present, this is most difficult to imitate, and can be utilized to gain financial stability (Manchester United, 2020; McMahon, 2018; Statista, 2020). STUDENT NO: 20307640 9 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 5. Attractiveness of United’s Competitive market in China Football is the most-watched sport in the world, and following its establishment in China, football culture has been changed relative to Chinese culture and society (Shivili, 2020; Maxxelli, 2019; Sliwowski, 2017). United has more than 40% of its fans in China, making it a key market for the club (Statista, 2020). The football market in China is growing, as we saw China invest €540m in its Chinese Super League (CSL) (World Football Summit, 2019). Porter’s five force’s framework examines the forces which model industry and uncovers its opportunity and threats (Porter, 2008). To examine the appeal of United in China Porter’s five-forces was used, and discuss it from the shareholder view below in Figure 4. Figure 4: Five-forces analyses for United’s China market 5.1. Bargaining Power of Buyer: United has 40% of its fans in China, but they can easily change their loyalty to other clubs if they surpass United’s performance, thus outlining a low-switching cost for the fans (Statista, 2020). These fans have lofty demands, as they desire the best at the lowest price so, a small and powerful fan base can have high bargaining power against the club (BBC, 2017). Thus, outlining that the bargaining power of the buyer is high for United. STUDENT NO: 20307640 10 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 5.2. Bargaining Power of Supplier: The football league in China (CSL) has placed a limit on foreign players and has also introduced a salary cap for foreign players (Price, 2020; Press, 2017). This is making it difficult for CSL clubs to attract talented world-class players. The salary cap has made the switching cost high for players, as they already have contracts with their current club. CSL aims to develop a strong local footballing foundation and build a very competitive league by developing China’s local players; CSL is attracting highly rated football coaches to build good teams so that China can become the next footballing superpower (Sliwowski, 2017). On the retail side, football clubs are normally supplied by several suppliers (Statista Research Department, 2019), but a dominant supplier can decrease the profits for United. Thus, making the bargaining power of supplier high for United. 5.3. Threat of New Entry: The Chinese football industry is keen to partner with big clubs across Europe, for growing their football pedigree and developing China’s football players (Sliwowski, 2017). CSL was rocked with a huge corruption scandal, China felt this was directly affecting their ability to produce high-quality footballers and the government created a strong political agenda to hunt down corruption in the league (Montague and FlorCruz, 2010). The global football retail market is huge, valued at $471b, this attracts new suppliers in the industry who are constantly looking to gain market share through a low-price strategy by reducing costs to provide optimum value to its customers (Statista Research Department, 2019; Bloom and Kotler, 2014). This can directly affect United’s retail market, as their competitors can get an edge if they can subscribe to a low-value deal. Thus, the threat of new entrants for United is high. 5.4. Threat of Substitutes: Basketball is the most popular sport in China, but football is swiftly growing in popularity, as it's becoming ingrained into China’s culture and society (Saiidi, 2018; Sliwowski, 2017). In terms of the sports retail industry, American basketball teams have a stronghold presence for their retail merchandising and marketing, but the recent trade war between the USA and China have led to Chinese suppliers and e-commerce to pull out of the market (Bain and Youyou Zhou, 2019). STUDENT NO: 20307640 11 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? Additionally, a huge amount of knock-off retail products is produced in China which can deter the retail market for United (Allison, 2019). Thus, the threat of substitutes is low in China, due to the growth in football popularity and the bad relations between China and the USA. 5.5. Competitive Rivalry: There is a strong presence of European clubs (Real Madrid, Inter Milan, AC Milan, FC Bayern) in China, which most of them have established through marketing events, and pre-season tours (Statista, 2020; Elsden and Westcombe, 2019). But the English Premier League (EPL) is the mostwatched and favoured league in China (BT Sport, 2020). Currently, the CPL is growing and has enough financial power to buy players from EPL (Sliwowski, 2017). Thus, the intense competitive rivalry can drive down prices of United’s presence and retail merchandise, and affect United’s longterm profits. STUDENT NO: 20307640 12 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 6. Recommendation and Conclusion Based on the above evaluation, it can be concluded by proposing the two recommendations based on modes of entry of joint ventures in an international market, to gain a new revenue stream for reducing debt. The recommendations will leverage United’s current strategy, it's core capabilities while exploiting its largest market, which is China. The strategic recommendations are: 6.1. Joint Venture – partnering with Chinese retail company To reduce the debt United should partner with a dedicated Chinese retail company, whose business relies on United, to manufacture and distribute its retail products for gaining revenue. United must partner its strong brand power with a local presence to build a larger fan base in China, lower costs by streamlining production through economies of scale, innovate new retail products to retain and attract customers, and new sales channels through the joint venture. Thus, limiting the bargaining power of buyer and supplier, and lowering the threat of new entrants and substitutes. 6.2. Joint Venture – partnering with a Chinese football club To reduce United’s debt and increase its global reach United should partner with a Chinese football club in the CSL. The growing demand for football in China plus United’s strong brand presence will be a perfect mix in this nation. Partnering with a Chinese football club and utilizing United’s vast existing fan base and strong brand value will enhance and grow the brand United. This will create a new revenue stream, plus expand its global reach, which could help to further develop into other continents of the world such as Africa, North and South America, Australasia. In the long run, player scouting & acquisitions will be easier and cheaper through this step. STUDENT NO: 20307640 13 HOW CAN MANCHESTER UNITED GAIN FINANCIAL STABILITY BY EXPANDING INTO CHINA? 6.3. Conclusion The rarity is present in football to gain both football performance and high profits, but for United to gain financial stability, the opportunity within the Chinese market has been analysed. This report highlights the strategy to enter China via a joint venture. 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