Harlequin Enterprises 1979: Strategic issues and diversification alternatives

Harlequin has a number of strengths on which it trades. The first is that the company has perfected its standardized product, delivering a set number of titles at a specific size and price point every month. As a result, the company has cultivated a loyal readership and can more or less count on revenue stability even if growth were to stop. The company's in-house writers and editors are a source of sustainable competitive advantage. In addition, the company's in-house sales force in Canada has proved to be a success. Business knowledge is another strength -- Harlequin knows its audience very well and believes that this can translate into other products, such as movies. Among the company's weaknesses is its inability to transcend its narrow business. Harlequin's multiple attempts at diversification have all ended in failure. The company's sales staff in the U.S. is underperforming, and despite Harlequin's emphasis on standardization there is a high degree of reliance on the editors, who operate without a standardized process. Their skills are not necessarily replicable.

There are a lot of opportunities for Harlequin in 1979. The company feels that if it can reach Canada-level saturation in the United States, this will make a significant difference to the top and bottom lines. There remain opportunities for expansion into international markets. The company has moved into western and northern Europe, but the rest of the world has a tremendous appetite as well. Translating into Spanish, for example, would open up an ideal market of several hundred million people in the non-Communist world. The company also feels that it has opportunities in other publishing ventures and in movie-making, although the evidence thus far suggests that these opportunities are not as great as Harlequin management would like them to be. Even within romance novels, there is an opportunity to market to pre-teens, with a line of books that is more suited to that demographic.

Competition from other publishers is among the more significant threats, but few of them have been able to replicate Harlequin's success in romance novels. The company is concerned about the potential response of Simon & Schuster if it drops them as their U.S. rep, but there is opportunity cost in lost sales if they do not make this move. In addition, if Harlequin fails to take advantage of changes in the social environment, it might lose readers.

Five Forces

Harlequin has strong power over suppliers. The company provides steady work for its regular writers, and its volume is highly attractive to paper suppliers, for example. The high degree of vertical integration means that external suppliers do not affect Harlequin's business much. Buyers have significant power, largely because there are no switching costs, and the product is discretionary. Harlequin has a captive audience, but is not fully free to set its prices, and it could lose consumers if its value proposition starts to dip.

The threat of substitution is high. This comes from competing book lines from other publishers, from television, from movies and any other form of entertainment geared to the target audience. Ultimately, Harlequin is entertainment, so the payment for and consumption of Harlequin books comes from the time and money its customers have dedicated to entertainment and recreation. The threat of new entrants is moderate. The industry has low capital barriers to entry, but the learning curve is steep, as the litany of failed attempts to compete with Harlequin illustrates. The intensity of rivalry is high, as the numerous attempts to compete and the expected response of S&S attest to.

VRIO

A lot of Harlequin's success can be explained by understanding what it does. The company provides value, specifically entertainment and escape into fantasy. This holds a lot of value for people, and the type of escape that Harlequin sells appeals to its female demographic. While Harlequin's product should not be a rarity in the market, the poor quality of competing efforts says otherwise -- romance as good as Harlequin apparently is rare. In addition, Harlequin is not easily imitated. Firms trying to compete with Harlequin would need to invest considerable sums to do so, and probably would need to hire some people away from Harlequin as well, at considerable expense. The firm is very organized, and it is this organization that allows it to extract value from this opportunity. Harlequin is vertically integrated, and this allows it to be cohesive in its activities. The high degree of congruence between its activities and its objectives is essential to its success.

Alternatives

Harlequin has a number of alternatives on a few different fronts. It must decide whether to set up its own U.S. sales force or retain Simon & Schuster's force. It must decide if it wants to pursue movies or not. Lastly, Harlequin must make decisions about its publishing initiatives. None of them look like they are going anywhere -- is it time to divest or should the company seek other options for those properties?

Recommendations and Justification

It is recommended that Harlequin set up its own U.S. sales force. The U.S. market is too large to have an underperforming sales force whose motivations are split between Harlequin and other products. There may be a negative response from S&S, but Harlequin can double its U.S. sales with its own sales force, and that is worth millions of dollars per year.