Management Project (I) Introduction

Our project aims to study the reasons for Neways purchasing of California Red in March, 2010. We use the strategic decision making model (SWOT Analysis), which we have already learnt in the Management course, to find out the rationale behind. We would also discuss the positive and negative impacts of purchase afterward, by studying the current news and the questionnaire conducted since starting of November this year, to understand more about the response from the public about the integration. Using the ethical decision making model and the findings of the questionnaire, we would suggest some measures to help improve the public image and development of Neway after integration. (II) Events in 2010: Integration led to royalty issue

In March, 2010, Neway issued a declaration, stating that on 1st March, 2010, an agreement had been attained between Neway and California Red. Accordingly, the brand name and whole business of California Red would all been taken over by Neway, who results in occupying 90% of the karaoke market share. Neways action led to shut down of several California Red branch stores and layoff of employees in California Red partially. Before integration, the two major competitors were trying to ask for recording companies to provide the sole right of exclusive mix for either Neway or California Red. Four recording companies, Universal Music Group, Sony BMG, EMI and Warner Music Company, had then declared not to support the integration as the suppliers after Neway becomes monopoly of the market. Steven Lo Kit Sing, An entrepreneur and the owner of BMA (An artist management company), decided to open a new karaoke firm, whose branch stores are in Causeway Bay and Tsim Sha Tsui, on 18th December, 2010, to confront Neway, current biggest market share owner. Steven was supported by those recording companies who are in poor relationship in Neway, which means big number of pop stars songs exclusive right would only be available in Stevens New shop. A potential competition is therefore foreseeable. Who is Neway?

Neway is a famous karaoke firm for entertainment, established in 1993. Before buying its main competitor, California Red, Neway got 22 branch stores in Hong Kong, while Neway and California Red were the two major oligopolies in this aspect of catering industry. According to what we have learnt, Neway is under great influence by its task environment, which included the services and prices set by its competitors (mainly California Red), and the relationship between Neway and the suppliers of songs, who are recording companies, namely EMI, Sony BMG, etc. Neway erected high brand loyalty for its target customers (teenagers) for these years so long. By offering comfortable and constantly new services such as mobile phone chargers and cable TV direct broadcasting, Neway had expanded its businesses in past few years and built certain popularity in the market.

(III)

The strategic management process of Neway

The strategy of Neway is to gain more markets shares and its strategic is to acquire California karaoke. Now, lets have a SWOT analysis to tell why Neway has the acquisition decision.

Internal Analysis Strength Originally, Hong Kong only has two karaoke companies to occupy the market. Its Oligopoly. After acquisition, Neway can gain 90 percent of karaoke market share in Hong Kong. The market shares will largely increase. Its difficult to enter this industry since its costly, also Neway enjoys more economic scale after acquisition. From our surveys result, about 88% of interviewers still support Neway. It shows Neway has the brand loyalty. Therefore, Neway monopolizes this industry. The acquisition helps Neway to acquire more unique resources. It can acquire top managers and skilled labors from California karaoke, which can improve the efficiency and future decision of Neway. Weakness Neway becomes monopolist. The price of singing karaoke will be monopolist price. Public will have a bad feeling to Neway and decrease its reputation. In order to reduce the cost of operating the business, it will lay off some employees.

Its will decrease loyalty and morale of employees. Also, the relationships between Neway and other four recording companies, they are UMG, Warnermusic, Goldlabel and Sonymusic are bad. Its because Neway refuse to pay the song royalty. After the acquisition, the relationship will be worse further. Its because the acquisition will encourage Neway keeping on refusal to pay royalty. The choice of song in Neway will decrease, customers may also decrease. External Analysis Opportunities In 2007, the government has enacted the Smoking (Public Health) Ordinance, karaoke establishments have been also designated no smoking area. The changes on political and legal forces led challenges to karaoke companies as many smoking customers had flowed away. The former California Red failed to deal with the challenges and thus its sales were affected. Last year, to compete with the main competitors Neway, the former California Red purchased the copyrights of the songs with very high price to get the exclusive distribution right from the recording company. This action harmed its financial health further. The outcome is that the financial health of the former California Red was severely harmed and weakened. Therefore, it chose to sell the business to others. Neway could take the opportunity to acquire California. Threat Some message from Grapevine indicated that there was a mysterious organization will invest in the Hong Kong karaoke market having a foreseeable future. The mysterious organization also realized the existence of the opportunity due to the failure of the former California Red. There might be a risk on Neway as new competitor might enter the market. Furthermore, the mysterious organization possibly took over the favorable opportunity of buying California Red. Therefore, this might threaten the task environment around Neway.

After the SWOT Analysis, Neway gets the opportunity immediately by acquiring California Red with higher price among the potential buyers. Nevertheless, it overcame the threat successfully. (IV) Positive impacts

Undoubtedly, taking a horizontal growth strategy on taking over the former rival California Red, Neway takes a great advantage for some extent. Synergy effect After the integration, a positive Synergy effect exists because a joint effect that is greater than the sum of the Karaoke companies operating alone. Bigger Market Share By taking over the former rival California Red, Neway favors itself from both customers and competitors in the task environment. Neway has a dominant status which almost 90% in the Karaoke Market now. With very little choice, the customers of the former California Red may go to Neway to fulfill their entertainment needs. Neway can develop customers brand loyalty more easily. There was an oligopoly competition in the Karaoke market, only few Karaoke companies in the market. As for now, having bigger market share, Neway becomes stronger, more competitive, and tends to become a monopoly in the Karaoke market. Due to a less competitive market, its great market share also become a barrier of others entry into the Karaoke and become one of the competitors. Economic of scales Neway takes advantages on the integration by reducing cost but enjoying bigger market share. For the Neway Structure, it is a mixed structure which is both functional and divisional structure. The functional tasks are centralized and the division manager that means the district managers is only responsible for daily task and directing non-managerial employees. Some of the branches of the former California Red are still running but under the brand name of Neway. Obviously, there are more workers works in Neway now. With

more branches, only the district manager and the non-managerial employees of the branches of the former California are needed. Without considering ethical implications, Neway enjoys reducing cost on eliminating positions that are duplicated like certain executives, the financial department, and the human resources department of the former California Red. It is more favorable for Neway undertakes horizontal integration but not other growth strategies. There are complete sets of Karaoke equipments, skilled employees etc. of the branches of the former California Red. Neway can just keep the branches run without paying further cost like searching location for new branches, training for new employees, acquisition for equipments etc. (V) Negative Impact of Integration: HR-related issues

Though Economics of Scales, which arises due to bigger scale of Neway would result in more efficient use of human resources. For example, two sets of functional departments, originally established in Neway and California Red respectively, are now combined together and lead to effective use of employees and more databases available for strategic use. However, several problems aroused, especially in the eye of ex-California Red staffs. Wastage of resources to accommodate structures of two firms It is time and resources consuming that, the methods of departmentalization, such as how to emerge two accounting departments with different customary practices are difficult. It thus relates to big human resources issues, namely, Employment planning on how much to employ and what to do for each employee; Re-constructing the Human Resources Inventory. Lower Staff Morale As Neway being as the buyer of California Reds business, the staffs of the latter one are also taken over by Neway. They are now becoming the new-comers of staffs of Neway, thus they need to work under the new environment with little sense of belonging. They would even feel being not respected by other staffs. Additionally, as the ex-workers of California Red were not informed earlier about the declaration of integration of these two companies, they faced great depression and pressure about their job, so they now are in low staff morale and staying with insecure feeling. This may lead to inefficiency of their work performance and even conflicts with Neway

staffs on diversified working styles or due to discrimination by Neway staffs. Too much employees: Layoff to avoid diseconomies of scale As the emergence of two firms would lead to great number of staffs in total, and some posts are potentially overlapped, which may result in diseconomies of scale. California Red after being taken over by Neway, 3 branch stores in Kowloon Bay, Tai Kok Tusi and Tsuen Wan shut down, and approximately 100 employees in those stores were being affected. They were told to choose whether to accept the job relocation under branches of Neway or to resign. It was told that, more California Red stores are possible to be shut down. What is more, 4 managerial staffs were being dismissed after integration. The large-scale transfer of personnel makes the ex-staffs of California Red feel disappointed and under great pressure. The shut down of the branches stores poses threats to them, and most likely they are the next ones being dismissed. Layoff results in harmful effects to the society, such as higher unemployment rate and criminal rate. (VI) Ethical decision making

(i) Utilitarian rule The acquisition affects the interest of stakeholders. First, it affects the interest of public. Its because the acquisition affect the choice of public. Since, Neway become monopoly, the price of singing karaoke is decided by Neway. Therefore, the public have no choice and being forced to pay higher price singing karaoke. The acquisition deprives the publics right to choose. To investor, the acquisition strengthens the structure and profitability of Neway, since it monopolizes the market shares. Investors can gain more profit. To employees, since Neway monopolizes the market, their bargaining power of salary will decrease. The acquisition will lay off employees since most of California red has been shut down. Three hundred employees in California red are fired that affect their livelihood. In the above mentioned, the acquisition only benefits to investor and harm to other stakeholders interest.

To recording companies, the acquisition empowers Neway. Therefore, even Neway strongly refuse to give the royalty to those four recording companies. It will about the business operation of those recording companies.

(ii)

Moral right rule

The acquisition leads Neway come into power. Therefore, Neway still refuse to pay royalty to the recording companies. It can show that Neway dont protect the fundamental right. The fundamental right is the copyright of the songs. Neway dont respect the copyright of the songs. Also, the acquisition deprives the right to choose, customers have no choice. Therefore they can sing karaoke in Neway only. (iii) Justice Rule In addition to refuse paying the royalty, Neway also infringes the copyright of some songs. This action is not only illegal, but also unfair to those recording companies. After the acquisition, the price of singing karaoke in Neway is increasing. Its because Neway becomes monopolist. Without competitors, Neway can increase its price arbitrarily. However, the services provided by Neway are unchanged. The services enjoyed are not better but need to pay in higher price. Therefore, its unfair to the customers. Before the acquisition, California red sold the cash coupon to the customers, however after the acquisition, Neway do not accept the cash coupon sold by California red. Thats not fair to customers since they cannot enjoys the services by paying the cash coupon. (iv) Practical rule We conducted a survey about the acquisition. About 81% of our interviews thought that the acquisition deprives their rights to choose. 12% of interviewers will not sing karaoke anymore. The results show that most of the interviewers do not accept the acquisition. The reason are the new price of singing karaoke is too high and the songs provided by Neway with little choice. Its because Neway do not pay the royalty. Therefore, only few of recording companies willing to provide the songs to it. Thats why most of the customers do not accept the acquisition.

However, 88% of public still willing go to Neway to sing karaoke. 35% of them think that they are interested in singing karaoke, since the market tends to be monopoly, they can go to Neway only. 29% of them do not have negative feeling to the acquisition. It shows that theres a few of teenagers to accept the acquisition decision. (VII) (i) Survey Introduction California karaoke. Our aim is to

The survey is about Neways acquisition to

interview the publics feedback about the acquisition. In this survey, our target is teenagers its because we think that teenagers go to singing karaoke are more than other age group, the age is from ten to thirty. Our survey conducted in internet through the facebook. Its free to anyone to participate in our survey. About 109 teenagers have participated in the survey. We have conducted the survey in internet in four days. We want to find out the results of whether the acquisition ethical of not, whether they keep on spending in Neway or not and if they go to the new karaoke company instead of Neway etc. (ii) Results of survey

109 persons completed filling in the questionnaire, in which 61% of interviewees are teenagers aged between 16-20, and 18% aged between 10-15. And 88% of interviewees stated that they visit karaoke stores for entertainment once per month or more. About 54% of interviewees stated that they had preferences about which karaoke stores to go (Neway or California Red) before integration. Reasons for having preferences primarily are reasonable price (25%) and sufficient songs (28%) and pop singers (14%) availability. After integration, 88% of interviewees would still choose to visit Neway, and reasons for that are acceptable increase in price (30%), personal interest to sing in karaoke (35%) and no hard-feeling about integration (29%). One important note in this questions finding: 8 interviewees chose Others and expressed their helpless attitude by saying that they would not have other options, but Neway only. For those who chose not to visit Neway anymore, they pointed out that the price is not acceptable (36%), less songs available (30%) and due to resentment toward integration (30%). Over 80% of interviewees agreed that, Neway buying California Red deprives the basic right of consumers to choose what to consume, and 85% of interviewees said they would visit the coming karaoke stores opened by

Steven Lo Kit Sing, to have a new option (39%), experience something new (27%), hope for a lower price in the future due to competition (26%), and to express their discontent about integration in action (7%). (iii) Analysis

Less availability of songs inventory would become a significant weakness of Neway As our questionnaire reflects teenagers criteria of choosing which karaoke stores to visit is determined by availability songs and pop singers list (42% in total), this shows that a certain percentage of target customers are taking this into account and use it to determine where to go. The Royalty Issues, which is the opposition of 4 powerful recording companies, would lead to significant decrease in availability of Neways songs provision. 30% of those who chose not to visit Neway after integration pointed out that, the decreased songs inventory make them not intend to visit Neway anymore. With the new karaoke stores going to be opened by Steven, which processes the songs processed by the 4 companies, would then become the great threats of Neways business. Analyses of Will customers still sing karaoke in Neway? Results of survey: After the acquisition, 88% of teenagers still sing karaoke in Neway. It seems that its has the brand loyalty. Most of the teenagers reason is singing karaoke is their interest. Therefore, the acquisition doesnt affect them a lot. 30% teenagers thought that the price of singing karaoke in Neway is reasonable. 29% of teenagers have no negative feeling on acquisition. It seems that the acquisition do not affect them, they still sing karaoke in Neway. In Question 6, about 81% of interviewees thought that the acquisition deprives their right to choose in singing karaoke. We can analyze that Neway tends to be monopoly in the market, thats why they are forced to sing in Neway whos interested in singing karaoke and they dont focus on the price. Their first priory is interest. Therefore, even the increased in price, they dont care about it. From the result of question 6, most of the interviewees thought that the acquisition the right to choose. From all of the results, we can analyze that singing karaoke is not a necessaries, therefore, even the price increased in singing karaoke, teenagers dont not refuse

going to Neway. Also, the acquisition dont affect the livelihood of our interviewees, singing karaoke is a leisure place, it has many substitutes such as going to caf, watching movie etc, therefore, they dont have the negative feeling in Neway. Although Neway deprives their right to choose, there are still many people willing spending in there only to those really interested in singing karaoke. The survey results reflect that teenagers only worry about the place they can take a diversion but not the ethical problem. Customers focus on both price and service quality The most important criteria for customers to decide where to having karaoke is the sufficiency of songs and the price, subsequently, the quality of food and options of singers. As for now, Neway occupies above 90% share in the market, the price is higher but in another way, its songs and singers is insufficient. It is because the relationship between Neway and some of the recording company is worse, there is limited sufficiency of songs and singers in Neway. Hence, consisting on not buying the copyrights of songs at a reasonable price, Neway may lose some of its customers in long run. Other than the price and sufficiency of the songs, customers focus on food quality. Undoubtedly, customers desires more and more, with competition, Neway is threatened for not sufficiently fulfilling the desires of the customers now but others do. The new karaoke company will become the significant threat to Neway The result of the questionnaire shows that the majority of interviewers will visit the coming karaoke stores because of their curiosity and novelty, having new option, as well as lower price in market with less monopoly competition. Although Neway has successfully removed its threat on the former California Red being taken over by potential competitor, in long run, there are still incentives for investors to enter the karaoke market. Accordingly, the new karaoke company will become a very strong competitor which will significantly threaten Neway and take some part of the market share. Undoubtedly, customers desires more and more, with competition, Neway is threatened for not sufficiently fulfilling the desires of the customers now but others do.

(VIII) Recommendation Strengthen Neway itself and reducing threats As the analysis on the survey mentioned there is threats from the coming competitor. To be competitive, Neway need to manage marketing better and focus on pricing and product. For Pricing, Neway must to realized that customer want a lower price, so Neway should lower the price to prevent customer go to other karaoke. For the product itself, Neway has to improve its quality and diversity such. On its augmented product, food quality has to be improved; on its actual product, songs and singers have to be sufficient for customer to choose; on its core product, Neway has to make sure it make customers entertained and relax. For further recommendation on increase the options of its songs and singers, Neway should take the initiative to repair its relationship with suppliers (recording companies). Few months later, a new karaoke companies will be established and get supports of many recording companies having worse relationship with Neway. That means more sufficient songs and singers would be provided to customer in the new karaoke stores. Obviously, customers will go to the new one to have better service and thus Neways has to share a great part of market share with the new competitor. We know that the acquisition has been done. Therefore, we can just recommend some ways helping the decision being more ethical. First, Neway should care more about the interest of the stakeholders. Since the acquisition helps Neway gaining more market shares. It should not only go beyond making profits, to employees, Neway should provide the compensation and benefit to them such as financial subsidy and facilities. Also, it should provide the maintenance to employees such as giving them more job security. For example, signing the job contact with them. To the customers, Neway should increase the quality of services to balance the price increasing. It will be fairer to customers such as increasing the room services. Also, it can provide the discount to customers which can increase the acceptance of customers to Neway. It should accept the cash coupons since California red is owned by Neway. The cash coupons of California red should

equal to be sold by Neway. To recording companies, it should pay the reasonable amount of royalty to them. It should respect the copyright of the songs thats social responsibility. Its because it is a big company, its action will affect the public, especially teenagers. It will promote a bad model to public to them. If Neway behave ethically, its reputation will increase and more public will accept its acquisition. Not only beneficial to the public, but also Neway itself. Its because the trust will increase in the company that will motivate employees and perform better.