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to be able to both find information about target markets and be able to create new titles.
The initial benefit to publishing firms is that consumers are willing to pay high prices for
magazines that are based on their special interests. In the food retailing industry a similar
shift has occurred from supermarkets vying to supply branded basic good at low price
produced by the large manufacturers, to quality-based competition whereby firms sell
products that consumers want. If food manufacturers do not supply these products the
supermarkets have used their own brands to develop, procure and supply new products.
This section reviews these changes before the next section examines how publishing and
grocery retail firms innovate and supply new products.


The Magazine Publishing Industry

Before the adoption of digital technologies, competitive advantage in the food retailing
and magazine sectors was held largely by the firms engaged in production and manufac-
ture. Manufacturing firms could produce generally undifferentiated products at large
scale and gain an advantage over competitors with the ability to offer lower prices. The
change in the competitive process away from this paradigm within the magazine
publishing industry is well illustrated by the change in industrial logic that has governed



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140 Mowatt


the fate of the UK™s dominant firm in the sector. IPC Magazines was formed by the
agglomeration of several publishing and printing firms by the Mirror Newspaper group
in 1958 and later acquired by the publishing company Reed International in 1970. The
driving force behind the creation of IPC and its acquisition by Reed was economics of
production ” economies of bulk buying of paper, the benefits of concentration allowing
predatory pricing and the ownership of high-speed printing presses as decisive strategic
assets (Price Commission, 1978; Mowatt, 2002). The nature of the product also was
favourable to vertical integration. A paper-based magazine had to be laid out mechani-
cally; a laboriously labour-intensive process where the product had to move physically
from copy editors to the printing press and the distribution system to reach consumers
(Bannard, 1990; Reed, 1997). Revenues at IPC were derived jointly from copy sales and
through advertising sales. Copy sales were at a low cover price to deter competitors (and
IPC was subject to Price Commission investigations concerning predatory pricing in the
late 1970s) and large print runs kept costs down. Advertising was at a premium. As an
example of this the largest magazine segment in 1977 (20%) was women™s interest and IPC
controlled 79% of this market with four titles. Even though IPC published 70 titles in total,
52% of its revenue was derived from these four titles alone, and 59% of that revenue was
from advertising (Price Commission, 1978; BRAD data). With the widespread introduc-
tion of computers into editorial offices in the mid-1980s magazines could be created as
“soft copies,” and design, layout and composition became “virtual” rather than craft-
based activities (Mowatt, 2002). The activity of printing therefore was stripped of these
value-adding tasks, and became a residual function in the magazine publishing industry.
By the 1990s our survey indicated that all printing was outsourced to external printing
firms (Cox, Mowatt and Young, 2003). Desk Top Publishing systems (DTP) therefore
removed much of the basis for vertical integration in the industry, although the rigid
system of labour union control initially made it difficult for publishing firms to reorganise
in response to technological change.
The change in technology not only changed the industrial logic of the dominance of few
producers in publishing, but allowed both small firms and individuals to create their own
“magazines” based on their special interests ” at least on their own computers. Vertical
disintegration and the dissolution of union power that had hampered the introduction
of early digital technologies (Royal Commission on the Press, 1962) in the printing
industry provided a channel for low-cost printing which potential publishers could
access in order to join the industry. The early and mid-1980s witnessed an explosion of
small publishing companies in the UK, such as Dennis and Future Publishing, whose
founders initially saw opportunities for magazines catering for new market niches, often
starting out as one-man operations working from a home office. The growing computing
and gaming industry was one such area where many small publishers saw the chance to
launch new titles into markets that the dominant printing firms were still too inflexible to
enter quickly. Table 1 shows that although IPC has been able to retain its enduring
position as top company in the women™s weekly market (White, 1970), its total market
share has been eroded from 79% in 1977 to 32% in 2002 by the entry of other low-cost
producer firms in the weekly market (Mintel, 2002a; 2002b).
The monthly market, and new magazine segments established in the mid-1990s such as
the men™s lifestyle market, are contested by a much broader range of specialist publishers
who are able to compete with larger companies head to head based on their ability to



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Impacts of the Digital Economy 141


Table 1. Magazine publishers™ market shares of women™s and men™s interest market,
2000 (Mintel, 2002a; 2002b)

Women's weekly Women's monthly Men's monthly
Publisher
Market share (%) Market share (%) Market share (%)
IPC Media 32 26 19
Bauer 24
Northern & Shell 17
Hello! 12
EMAP Elan 3 24 32
DC Thomson 7
National Magazines 5 34 3
The Lady 1
Conde Nast 7 6
Attic Futura 6
Dennis Publishing 15
Rodale Press 9
Cabal Communications 7
Others 3 10
Total 100 100 100


respond to consumer needs. IPC and EMAP as dominant producers were able in the late
1990s to reorganise around consumer market groups and to recognise the potential for
reorganisation afforded by technology. The following section on innovation networks
examines this process. The shift to digital composition also had one further significant
impact on the magazine industry. Coupled with regulatory changes governing foreign
ownership of the media, large-scale, low-cost producers of magazines could not only use
existing competencies to enter the weekly market, but do so internationally. Large-scale
European publishers such as Bauer were able to enter the UK market. The market
therefore split between monthly magazines targeted at narrow markets and weekly
magazines where low production cost and cover prices was still a key feature.
The ability of magazine publishing firms to become consumer-driven has been demon-
strated by the increase in the number of magazine titles, from 2,000 consumer titles in the
mid-1990s to over 3,000 titles in 2002. The UK is now arguably the leading player in the
global magazine industry, easily outstripping countries such as the USA, Germany and
France in terms of number of titles sold per million population (Pira International, 2002:
Figures 8.12 and 9.2). The dual ability of existing firms such as IPC to restructure to
consumer responsive media firms engaged in innovating new titles for the monthly high
value-added market along with the entry of many niche publishers has fueled this growth.
In 2001 IPC, now IPC Media, was bought by the multinational media conglomerate AOL-
Time-Warner. The reason for this acquisition was not based on the economics of
production, but was justified in terms of the ownership of knowledge. Cross-media
content sharing was seen as the key to competitive advantage. Titles, and increasingly
services, could be supplied across different media formats charged at premium prices to
narrowly targeted consumer segments. Whilst the logic of this approach has yet to be
established as a viable business model across a media conglomerate, the advantage of



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142 Mowatt


a flexible publishing firm to use knowledge as a key strategic asset can be examined in
the innovation section.


The Food Retailing Industry

The rise of powerful retailers such as the supermarkets in the UK and Wal-Mart in the
US has demonstrated how effectively firms close to consumers can use their control of
information management systems to not only gain advantage over competitors but to
also exert pressure on manufacturers with monopoly power. Competition authorities are
beginning to recognise that they need not only to concentrate on the power of
manufacturers but that retailers™ buying power can be significant in the modern age
(Graham and Steele, 1997). Both Wal-Mart and British retailers have ruthlessly exploited
their supply-chain management and category management systems in order to drive
down supplier costs and decrease the costs of warehousing and prices paid to branded
and own-label suppliers (Fernie and Sparks, 1998). The UK Competition authority
recently delivered its verdict on the activities of the leading British supermarkets
(Competition Commission, 2002). Concentrating on the use of buyer power the report
presented evidence of supplier relationships with great differences in power between
retailers and suppliers, but also gave contrary evidence of very close trust-based
relationships between small suppliers and retailers. From the market power perspective,
this proved problematic for the conclusive findings of the report, but can be explained
by the shift to consumer-driven innovation networks. The ability to gain effective control
of the supply chain has been decisive for retailers to not only challenge the dominance
of branded manufacturers and squeeze supplier revenues, but to also respond more
effectively to consumers. Information systems enable network hubs ” the retailers in
this case ” to identify the value-adding activities in the value-chain, and the ability to
use complex networks allows them to control these activities directly without ownership.
The value-adding activities are those that drive innovation: consumer knowledge,
controlled closely by the retailer, and the ability to create new batch-driven products
quickly, offered by small suppliers. Where consumer responsiveness and flexibility are
important, trust and cooperation rather than price-based relations will be central. The
next section elaborates on this process, and the later section on innovation examines
trust within the innovation process.
British supermarkets built their capacity to both source and supply novel products in
three stages. First, their control of the supply-chain allowed British supermarkets to build
up a detailed picture of suppliers operations and cost structures. Although retailers
controlled distribution only from secondary consolidation points, the information
management systems they employed enabled retailers to effectively control the entire
supply-chain. Manufacturers and independent logistics companies have been manoeu-
vred into acting as agents in the supply-chain, picking up deliveries from small suppliers
to feed into the retailers™ distribution system. Second, the move in the late 1990s to
replenishment-based logistics and to strategic inventory management in the early 2000s
gave retailers the ability to supply retail stores with small deliveries ” a few items per
store for short-shelf-life products. Third, this ability to control the supply chain from
small suppliers to batch deliveries enabled many suppliers too small to find independent



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Impacts of the Digital Economy 143


distribution into the industry™s value-system, and often as own-brand contractors. In
this way the total number of firms engaged in the value-creating chain in the grocery
sector has dramatically increased.
Supermarkets increasingly try to supply novel products to consumers based on customer
desires. Retailers can supply these products to stores in a customer responsive fashion
due to their mastery of the supply-chain. Information about consumer needs is obtained
through a variety of channels: by analysing consumer information captured with loyalty
cards at point of sale, with data mining and strategic ordering systems in dedicated data
warehouses, with qualitative information as to consumer requirements gathered from
customer feedback and focus groups, from Internet order histories, observing changing
social trends (such as shifts in restaurant trends), and by consulting experts from past
moving consumer areas such as those represented by “celebrity” chefs. Whilst increas-
ing buyer power and category management techniques allows supermarket to offer
cheaply produced own-label low cost versions of branded goods ” sometimes manu-
factured by the branded producers themselves ” knowledge of customer trends is also
allowing them to out-compete manufacturers in high-value-added market segments by
using innovation networks to create and produce their distinct own-brand products ”
although they neither own nor operate the production process.
The process of creating new magazine titles and novel own-brand products is the subject
of the section on innovation networks. A key feature of these products however is that
they are designed from the outset as short-life products and this attribute is the subject
of the following section.




From Life-Cycle to Life-Span Products
The use of digital technology in publishing has removed many of the entry barriers to
the industry. Competition in the high-value segments (i.e., monthly magazines) is
therefore about addressing consumer needs ” and consumer needs often change in line
with current fashions, trends and new technologies”rather than printing costs. Maga-
zine publishers and small independent entrants are able to use their detailed knowledge
of “lifestyle” areas to offer specialist magazines. Consumer-driven innovation is not
however about identifying one key product ” a “killer app” ” that will enable the
producer to gain a competitive edge through an efficient scale of production to support
low costs and moderate margins. Rather it is about the ability to manage a continuous
process of development and innovation based on supplying products for changing
consumer needs. The magazine publishers who identify fans of TV series such as “Buffy
the Vampire Slayer” or a new computer gaming platform such as the X-Box do not expect
that magazines targeted at these audiences will have more than a limited life-span. In the
same way competition between the vertical networks supporting retailer™s own-brands
is enacted though the constant supply of products. Innovation for life-span goods is
about managing constant innovation.




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144 Mowatt


The publishing industry questionnaire responses showed that consumer magazine
companies have extended their activities to exploit their knowledge of consumer markets
by supplying new titles and also other products and services. Television stations, shows
and radio programmes based on magazine brands (such as KaRang! TV for heavy metal
music fans), licensing for foreign distribution, Internet advertising, event sponsorship,
fairs, exhibitions and direct activity with consumers are all ways in which consumer
knowledge has been exploited (for a detailed review of the questionnaire results, see Cox,
Mowatt and Young, 2003). Consumer firms can get very close to consumers. In the
mountain biking segment for instance riders may meet the editors of mountain biking
magazines on public trails and also on trails actually sponsored and created by maga-
zines. One magazine in the segment, MBUK, has an extremely active Internet chat room
and forum with hundreds of discussion threads generated by mountain bikers per week.
The magazines editorial staff not only engages in the sport themselves, and observe
reader™s activities directly, but also interact through the Internet: for example, six MBUK
readers who had complained about the magazine online in a discussion were brought into
the magazine company to work for a week and this later became the basis for a story ”
and continued dialogue on the forum. It is the speed, quality and depth of this interaction
that characterises consumer-responsive firms in the digital age. This interaction allows
firms to explore new niche markets and service, for example launching a new magazine
to capture emerging trends in the sport and launch spin-off, single edition or special
edition titles.
In the supermarket the chilled ready-meals story in the UK provides a compelling example
of the transformation from producer to consumer-driven competition and the shift to life-
span products in the food retailing industry. Chilled ready-meals are the prime example
of retailers™ ability to differentiate quality own-brands, and are high value-added premium
convenience products, which have displayed consistent rapid growth from the 1990s to
date. They are ready-prepared, short-shelf-life, complete meals which are chilled, not
frozen, for freshness. Unlike frozen ready-meals, where four branded manufacturers still
control 50% of the market, 95% of the chilled market is controlled by supermarket own-
brands, supplied through innovation networks comprised largely of small firms (Cox and
Mowatt, 2004). The appeal of the sector lies not only in its convenience, but also as a
substitute for takeaway and restaurant meals, and retailers therefore need to be able to
offer their customers an expanding and changing range of high quality products in line
with fashionable eating trends. SuperCo offered a total of 141 different chilled ready-
meals in 2000, having introduced some 44 new products in 1999 alone. Retailers tend to
source the inputs for chilled ready-meals from a great number of suppliers (180 in 2000)
in order to respond quickly to new restaurant trends with new recipes, exploiting the
flexibility of small suppliers. The process of innovation is examined in the following
section.




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Impacts of the Digital Economy 145


Innovation Networks for Life-Span
Products

Publishing Firms

Publishing companies are able to use innovation networks to supply new titles and
services to customers willing to pay high prices for quality magazines. People with expert
knowledge of a special interest can take advantage of the low entry barriers in the
industry to originate their own magazine titles ” something that was possible before the
digital age but very rare (the launch of an independent high-value monthly in the early
1980s such as the Face was exceptional). It is more usual that actors with experience in
the publishing industry develop their network of expert contacts in order to create new
titles. For example, publishers within large production-orientated firms that were until
recently operating in the old paradigm had developed linkages with consumer experts
across several market areas, and within the firm and through their personal contacts in
the industry a network of technical and editorial people. Publishers and editors who
identified new opportunities often either left their company to form their own start-ups
or themselves launched a new title pilot to demonstrate the potential to the company. A
typical story from one publisher detailed how he and his editor on a style magazine
received a lot of feedback from readers concerning a feature on celebrity diets. The
publisher was able to put together an informal team comprised from his personal networks
to develop a spin-off title to cater to this market at this own personal initiative. In the last
few years large magazine publishers have begun to realize that they are repositories of
expert knowledge that can be used not only to publish existing magazines but to see their
activity as coordinators of networks that can be flexibly rearranged to generate new titles
quickly in response to consumer trends. For organisations this had meant re-forming
around consumer interest groups, and using an essentially project-based approach to
spin off new titles and products.
The small publishers formed in the first wave of digitization in the mid and late 1980s have
also grown on this principle ” using experts to inform the company about new
opportunities and to put together a project-based team to develop a new title. This
process relies on contributions from external actors (contract journalists and experts
commissioned for work) which has greatly increased the scope of the production system
coordinated but not internalized by firms. The digitization of publishing has occurred
simultaneously with the externalization not only of printing, but also of journalism and
copy-based tasks (Stanworth and Stanworth, 1988). For consumer-driven areas it is vital
that these informants, who may compose copy, send reports or be brought in as technical
advisors, journalists or editors, are authentically connected to consumer trends ” which
is one reason why a flexible external network rather than in-house journalists is a feature
of project-based networks. On publisher described how he worked with people on a
surfing magazine. The credibility of being informed by “real” surfers enabled the
magazine to appeal to readers. The publisher noticed that surfers were increasingly riding
mountain bikes after surfing, and snowboarding in winter ” at a time when these sports
were less well-known in the UK. He was able to develop new informants from these sports



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146 Mowatt


Table 2: How publishing firms receive copy from external and contact staff

Method of Supply Two Years Ago Now
Physically (e.g., Film by post/couriers) 40 31
By EDI or Integrated Network Linkages 9 43
Electronically through the Internet 4 23
Only Electronically 4 26
Total Respondents 44 57



and put together magazine teams from his technical network to exploit these opportuni-
ties. These external experts and actors can be coordinated remotely by e-mail and
Internet-based communications technologies, something increasing apparent from the
response to our questionnaire (see Table 2), and again this flexibility allows a far faster
and wider contribution to firms. In the innovation networks employed by magazine
publishing firms the value-adding activities are those which provide quality to consum-
ers ” in terms of content (through expert contribution), layout and style. DTP allows
editorial teams complete control over these key design processes with only a small staff
per title. Supporting activities such as advertising sales can be centralized across
consumer groups, rather than tied to a changing array of specialist titles. A final story
illustrates the changing flexible nature of the magazine publishing firm: Roger (name
changed) worked for a large magazine house as editor to a specialist water sports title.
He left the company in 1994 and founded his own rival title using his trusted expert
contacts from both the sport and the publishing world. From this he established several
spin off titles, including one in the men™s interest sector ” competing head-to-head with
international firms such as EMAP and IPC. From one title in the mid-1990s, he has
established a portfolio of seven titles by 2002, having opened and closed four others.
His main activity is now looking for new niches ” those far from the related areas of
lifestyle and sport. His competitive advantage is speed in developing new titles, a low-
cost and low-risk process with current technology for specialist rather than weekly mass
market titles. The UK has a very established magazine distribution system, with multiple
magazine outlets such as WHSmith stocking a large number of tiles in each store (usually
with a list of over 2,000) so it has been relatively simple to gain access to consumer points
of sale (although retail pressures are beginning to change this). Roger™s comment was
that, “It is simple finding local experts to develop your copy once you have found a
market.”


Innovation in Food Retailing

In this section we examine the operation of SuperCo™s innovation network to understand
how life-span products are created through flexible innovation networks of firms in loose
strategic alliances. SuperCo™s innovation network evolved from its initial development
of own-label specifications through internal hygiene and later product development
departments for its own-brand goods (Fernie, 1997; Hughes and Merton, 1996; Senker,
1986, 1988). The consumer information which SuperCo collects is considered in conjunc-



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Impacts of the Digital Economy 147


tion with strategic alliance partners, whose activity is act in a co-ordinated way is
possible because of the retailer™s control of the supply-chain. SuperCo accepts that,
“Many new product ideas come from our suppliers and we work very closely with some
of the top chefs ¦ so we follow those consumer trends which are very fashionable.” In
this sector the relationships engaged in are best understood as inter-organisational
networks whereby manufacturers and packaging firms develop new products in conjunc-
tion with retailers. SuperCo claims to have “very long-term relationships” with some
suppliers and accepts that trust within long-term relationships is critical (Lane and
Bachmann, 1998), especially as SuperCo has no capital stake in suppliers and there are
few formal contracts between retailers and food suppliers in the chilled ready-meal sector.
Relations essentially take the form of a “gentleman™s agreement” and this is made
possible by the structure of the industry created by the innovation network itself.

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