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Analysis of the Economics of the Firms: Six Flags
The problem of leisure has become one of the primary issues in the developed countries of the West, especially, after the sharp increase of industrial production and a clear separation of business and non-business hours. Consequently, the way the free time was used had a direct effect on the productivity of the workers. However, the entertainment industry started developing rapidly, offering yearly new products and services and becoming an indispensable part of the peoples lives. Its importance dictates the need for understanding the economy of the enterprises involved in his field of activity, considering their positive influence on the development of the related areas and regions, which contributes to the relevance of the problem. Therefore, the following work focuses on the comprehensive analysis of the economics in the organization engaged in the entertainment industry, namely Six Flags Entertainment Corporation.
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Nature of Product/Service
The primary products offered by Six Flags include the admissions, i.e. the ticket to the theme park that allows the visitors to use a wide array of goods and services provided on-site. The latter include the rides, attractions, food, beverages, souvenirs, etc. Additionally, Six Flags holds the exclusive long-term licenses that ensure the right to use several DC Comics and Warner Bros. characters, including Bugs Bunny, Batman, and Superman for the marketing purposes, as well as the provision of the enhanced entertainment experience (Six Flags, 2014).
The role of technology is significant in the process of the products and services provision listed above. For example, after the companys bankruptcy in 2010, the investments in this sphere increased significantly, improving the development and modernization of the companys products. Currently, the rides offered by Six Flags utilize such solutions as virtual reality (Levitt, 2014), proving high reliance of the technology.
The life cycle of the products and services offered by Six Flags varies due to the diversity of the latter. For example, the attractions, namely the newly built rides, attain their popularity at a moderate manner and retain it in the long-term perspective, which implies that their periods of growth and maturity are relatively long. On the other hand, the thematic goods (e.g. souvenirs) have a shorter life cycle, usually being in demand for a single season. In other words, they demonstrate rapid growth, short-term maturity, and fast decline (Okumus, Altinay, & Chathoth, 2010).
The services provided by Six Flags cannot be considered as essential due to the fact that their price elasticity should be high. However, the actual situation is quite different. For example, the price of a general admission (i.e. adult fee) has increased by almost 100% since 2002, rising from $36 to $71.99 (Clave, 2007; Six Flags, 2014). The same can be stated about all the other types of products offered by Six Flags. However, the demand for these goods has remained stable (e.g. the attendance always exceeds 24 million visitors per year), which means that the price elasticity is low (Six Flags, 2014). Consequently, it is possible to assume that the people perceive entertainment as an important part of their lives.
Finally, in the case of goods offered by Six Flags, the range of substitutes is wide and depends on the personal preferences of the consumers. For example, these may include carnivals, movies, concerts, and sports games, i.e. anything that offers entertainment to the customers. On the other hand, the complementary products include food and beverages sold in the parks, as well as the souvenirs and parking services for the visitors that travel by cars (Okumus et al., 2010).
In the case of Six Flags, the consumer behavior is relatively easy to forecast primarily due to its seasonal nature. In particular, the demand for the products and services offered by the company reaches its peak during the period between Memorial Day and Labor Day, i.e. during the vacations, while this trend being observed on the constant basis (Six Flags, 2014). At the same time, the preferences of the customers are constantly evolving, being affected by the technological progress, the new trends in the entertainment industry, and many other factors. For example, the success of The Dark Knight movie series by Christopher Nolan has increased the interest in the Batman franchise. Consequently, Six Flags had to introduce the respective rides, attractions, and complementing products in order to meet the needs of the visitors and ensure the high level of admission (Six Flags, 2014). It is possible to expect the similar changes occurring to the other franchises used by the organization. At the same time, due to the fact that none of the goods offered by the firm can be perceived as perfect substitutes or complements, its indifference curves will not be mutually parallel or collinear (Boyes & Melvin, 2013).
It is worth noting that the seasonality of operations has a significant effect on the dynamics of supply and demand curves of the company. For example, considering the fact that approximately 80% of attendance and, therefore, revenues of its theme parks occur during the second and third quarters of the year (Six Flags, 2014), it is possible to state that the demand reaches its peak during these months. Consequently, the respective curve shifts to the right. In order to achieve the maximum profitability, the enterprise has to increase the amount of goods and services it offers, which leads to the similar shift of the supply curve. During the rest seasons of the year, the situation is opposite, with the demand curve shifting to the left, being followed by the supply (Boyes & Melvin, 2013).
Finally, it is possible to make a market forecast for the core product offered by Six Flags, i.e. the tickets. First, the growing popularity of superhero franchises as well as the fact that the organization is the holder of licenses allowing the use of the certain DC Comics characters makes it possible to expect an increase in demand for these products. Additionally, there is a stable growth of attendance over the last years (from 24 to 26 million visitors) and the attitude of the consumers towards the entertainment industry as the indispensable part of their lives (Six Flags, 2014). All these factors ensure creation of the favorable conditions for the company. Therefore, one may assume that the demand for its primary product will be growing in the future despite the presence of the other major players in the given industry.
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Production/Supply Process and Costs
The input (factors of production) of Six Flags consists of the following components, such as the general (labor, land, and capital) and specific ones. The latter include the raw materials (steel and other components of the attractions, tertiary processed food, etc.) and the finished products (beverages, thematic goods, souvenirs, etc.). However, it is worth noting that the company does not conduct the construction of the new rides on the constant basis, primarily focusing on the maintenance of the existing objects. Consequently, its production curve will be determined by the goods produced on-site. On the other hand, the cost curve of the enterprise is affected by the recent increase in ticket prices as well as the expenditures. For example, the expenses of its theme parks have demonstrated the stable growth over the last three years (from $594,047 thousand to $625,880 thousand) against the background of the increasing revenue and EBITDA margin (Six Flags, 2014). Moreover, the curve is pointed downwards. It should be noted that the company does not disclose its transaction costs. However, considering its dependence on the external suppliers that provide it with a wide array of materials as well as the reliance on the banking operations, they are rather significant.
The marginal analysis of the company has revealed that while producing and offering the additional units of the products, it has contributed to an increase of its EBITDA margin. For example, during the period between the years 2010 and 2013, it has grown from 33.1% to 40% (Six Flags, 2014). In other words, the given organization benefits from the increased production, thus being able to expand its activity. The above-stated facts can be supported by the financial data of Six Flags, namely the information related to the companys revenue. For example, during the period between the years 2010 and 2013, the enterprise has increased the amount of visitors to 26 million people, which has resulted in the positive shift of its supply and revenues (up to $1,109,930 thousand) as well as improved EBITDA margin (up to $484,050 thousand). All these factors have contributed to the growth of its stock price by almost 300%, which amounts from $13.6 to $36.82 (Six Flags, 2014).
Structure of Industry/Market
The entertainment industry of the U.S., namely its branch that involves the theme parks, is characterized by a significant level of competition as well as the presence of the insufficient number of the major players in the market. Apart from Six Flags, these include The Walt Disney Company, Cedar Fair, Anheuser-Busch Companies, Inc., and General Electric, where the first one dominates the industry, accounting for around 55% of the overall annual attendance (Gennawey, 2015). Consequently, it is possible to perceive this fact as the oligopoly, which provides the significant entry barriers, low risk of the new competitors emergence, and the development of non-price competition as the primary means of receiving the profit. On the other hand, the probability of monopolistic competition is insignificant due to the lack of its corresponding properties as a large number of independent companies and buyers as well as low barriers (Boyes & Melvin, 2013).
The rivalry in the industry can be estimated through the evaluation of its concentration, namely through the use of the CR4 test. In general, it provides the determination of a concentration ratio that is derived from the sales of the major players. Currently, their total revenue amounts to $6.01 billion, while the total profits of the industry reach $11.5 billion (Gennawey, 2015). By dividing these figures, it is possible to calculate the CR4 indicator, which equals 52.3%. Moreover, taking into account the fact that it is lower than 60% (reduced rivalry), one can assume that, currently, the industry is relatively neutral (Martin, 2010), which implies that the players do not make considerable attempts to exclude the other competitors.
Finally, the market cannot be described through the use of such oligopoly models as Cournots duopoly or cartel arrangement, due to which the game theory is the most viable choice. In this case, the game consists of the following components: players, strategies they can use, and payoffs, which they may receive. In the given model, all of the companies mentioned above are the players while the revenues are their payoffs. Thus, there are the following models that may determine possible behavior of the firms. In the first case, one of them chooses admission quantity as the primary focus while the others try to attract the consumers through pricing competition. This scenario can be used to analyze the industry during the price-sensitive periods, i.e. during the low-attendance months. Another model is based on the case when a single company focuses on the price while the others prioritize quantity and facts, which are useful in studying the pricing dynamics of the first entity (the leader) over the market demand.
The activity of Six Flags is regulated by the federal, state, and local governments. In the first case, the regulation is primarily focused on the prevention of the unfair competition as well as the achievement of various social goals, such as protecting the public health and environment. For example, The U.S. Food and Drug Administration takes all possible measures to ensure the high quality of food sold in the parks, while the Occupational Safety and Health Administration provides their employees with protection from hazards. Finally, the Environmental Protection Agency monitors the activity of Six Flags in order to prevent the pollution of the environment. Some of these roles are also performed by the state and local governmental entities, especially when it is necessary to establish the control over the water and sewer discharges, waste disposal, and air emissions. In addition, the activity of the firm is subject to the regulations that govern labor, safety, and land use that can be applied to the theme parks. Moreover, local and state authorities regulate restaurant operations in each park. Finally, the certain facilities maintained by Six Flags are subject to regulations that are related to the animal safety (Six Flags, 2014).
The industrial and monetary policies of the government, namely safety standards presented by the ASTM International and approved by the authorities, as well as the Federal Reserves use of expansionary operations on the open markets, have a considerable effect on the company. In the first case, there is a need for the adjustment of the technology, which results in the increased expenditures. In the second case, higher debt is generated in the private sector of the society, thus lowering the purchasing power of the visitors. In addition, the government executes the taxation policy. In the case of Six Flags, its income is subject to taxes (local and foreign), which reached $47,601 thousand in 2013 (Six Flags, 2014).
As it was mentioned before, the government assists Six Flags in order they achieve certain social goals, which has resulted in the development of several special programs by the company, with Six Flags Friends being the most significant. It encourages local involvement and supports the mission of non-profit organizations operating at the local level. At the same time, the firm does not receive subsidies from the authorities. Moreover, being involved in the entertainment industry, it is not subject to the governmental procurement (Six Flags, 2014).
It is worth noting that the company faces different challenges, which depend on its social environment. The most significant of them are the recessionary periods that have a considerable effect on the financial condition of the firm. For example, they may force the organization to reduce the amount of the workers or abandon certain projects due to the lack of funds. Moreover, the high degree of uncertainty impacts the discretionary income of the consumers and affects their confidence (Six Flags, 2014). As a result, people become less willing to spend their money on the entertainment.
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Currently, the foreign economic and monetary policies do not have a significant influence on the company as it operates within the United States. However, the expected expansion of the company to the UAE and, especially, to China may change the current situation. For example, due to the protectionist policy of the latter, it may be difficult for the firm to compete with the local enterprises as well as force it to perform transactions using the Chinese currency. On the other hand, the free economic zone in the UAE may allow reducing the expenditures associated with the establishment of the enterprise and taxation (Carlin & Soskice, 2015).
The most significant macroeconomic event that affected Six Flags was the recent increase in the minimum wage, which is paid to the seasonal workforce. Consequently, the company was forced to increase the salaries and benefit the expenses, which may have a negative effect on its profitability in the future. The microeconomic events include the restructuring of the firm after the bankruptcy of 2010 (Six Flags, 2014), which resulted in considerable changes in the business strategy and had the positive impact on its financial condition described above.
Currently, the globalization does not have a considerable effect on the organization due to its insignificant international presence. At the same time, each of the mentioned theme parks is relatively independent, which means that the competencies are redistributed to the local level, providing the development of new institutional forms and regionalization. At the same time, the global nature of the companys operations in the future potentially ensures the considerable impact of the economic unions. For example, its activity in Canada as well as the one in the UAE and China may be influenced by the trade blocs, such as the ASEAN China Free Trade Area. Given the fact that the U.S. is not the member of this alliance, its new parks may become subject to protectionist legislation adopted by the union (Okumus et al., 2010).
Finally, considering the current state of the economy and the situation in company it is possible to make the following forecast related to the business environment of the firm. First, the high degree of uncertainty may have a negative effect on the enterprise, considering the fact that it is currently recovering from bankruptcy. Moreover, the political confrontation between the eastern and western companies may cause significant difficulties and obstacles during its expansion to the UAE and China (Okumus et al., 2010). On the other hand, the organization recovers steadily (Six Flags, 2014), which means that the majority of the issues described above will be considered and addressed.
Six Flags is primarily located in the U.S., while maintaining an amusement park outside the country, namely in Canada. There is no special focus on a particular location, with the parks being built in New York, Texas, New Jersey, California, etc. (Six Flags, 2014), which ensures the even distribution of the companys influence across the state. Given the nature of the services provided by the firm, as well as its dependence on the external suppliers, the optimal location of the given organization must contain a highly developed infrastructure (e.g. roads and transportation lines). Moreover, it there must be a high density of the population, and a diversified economy. Thus, an urban agglomeration is the best solution. At the same time, localization is not desirable due to the diversity of the products the organization proposes to its clientele (Okumus et al., 2010). In particular, the theme parks of the company are often placed in the industry clusters, with The Fort Worth metropolitan division in Texas being the most vivid example. It is a regional employment center that focuses on the recreation and food services. Consequently, the Six Flags Park located there has experienced considerable growth, with the cluster it belongs to expanding by 25% (FRB Dallas, 2016). At the same time, Six Flags does not participate in any business attraction programs, which may be due to its recovery from bankruptcy. The primary shifts in the location of the firm were associated with the sale of its parks in Belgium, Spain, Germany, and the Netherlands (Okumus et al., 2010), which reduced its global presence and provided the conditions for the concentration of efforts on the domestic market and lesser dispersion of the financial resources.
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Business and Pricing Strategies
The business and pricing strategy used by Six Flags in the conditions of oligopoly are focused on the reduction of discounts, sales of premium-priced passes and memberships, and the overall increase in prices. The main goal of such activity is to raise the overall admissions revenue, which is vital for the restoration of the organization after bankruptcy (Six Flags, 2014). At the same time, Six Flags does not use the strategy of predatory pricing (i.e. a significant reduction in prices aimed at excluding the competitors from the industry). The primary reasons for such a policy include the oligopolistic nature of the market and the insignificant role of the price competition. In particular, innovation is considered to be the best way of attracting the customers. All these factors make predatory pricing inefficient and even harmful for the company. The similar situation concerns price discrimination, which is possible only on the market of imperfect competition due to the presence of power over the prices at the monopoly (Carlin & Soskice, 2015).
Furthermore, the network externalities play an important role in the business strategy of the company, providing an increase in the value of the offered goods for the consumers (especially in the case of solo visits followed by the family trips). Finally, the new trends in the business and pricing strategies are primarily innovation-focused, being complemented by the rapid development of such entertainment technologies as virtual reality (Throgmorton & Throgmorton, 2015). However, the use of sophisticated technological solutions ensures increased prices for the tickets giving access to the rides that utilize them. For example, after the introduction of The New Revolution Virtual Reality Coaster (Throgmorton & Throgmorton, 2015), the admission fee has been raised to almost $72 (Six Flags, 2014).
Entrepreneurial Ability of Managers
was According to the facts mentioned before, innovation is the primary focus of the company after its restructuring. In particular, the managers of Six Flags have dedicated around 60% of the firms capital to this activity, which was dictated by the need to overcome the negative effects of bankruptcy (Levitt, 2014). However, creativity has become an indispensable part of the corporate culture in the given enterprise, where the employees have freedom to express and present their new ideas. Such situation ensures the use of democratic leadership and management style at Six Flags, where the members of the working teams are the core asset of the company. Moreover, their enthusiasm is supported through the establishment of a productive relationship between the leaders and subordinates that are based on the principles of democracy. In addition, the managerial staff of the firm is ready to take risks, supervising the creation of the new rides and attractions shortly after the companys bankruptcy (Six Flags, 2014). Finally, the role of sustainability is also important due to the fact that it provides an increased credibility of the firm for its consumers and contributes to its image as a socially responsible organization. As it was mentioned before, the managers cope with the environmental requirements presented by the government and ensure the efficient use of the resources (Six Flags, 2014).
Currently, Six Flags experiences a steady recovery from its bankruptcy that the firm faced in 2010 and resulted in the reduction of its global presence. However, the revised business strategy, the focus on the innovations, and the favorable location of its theme parks helped the organization to regain its position, increase its revenues and achieve the growth of its stock price. Moreover, the current market conditions, such as the neutral behavior of the competitors, provide the company with an opportunity to recover from bankruptcy without being forced to respond to the actions of the other players. Finally, the potential expansion of the company to such countries as the UAE and China provides new opportunities, specifically when one considers the amount of the financial resources and potential customers present in these areas. Consequently, it is possible to expect that Six Flags will retain its beneficial position and become one of the leaders in the global entertainment industry in the long-term perspective.
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