Cirque Du Soleil
a) Background and Motivation The Cirque du Soleil, the arguably most famous circus in the world, has been founded in 1984, in Quebec, Canada. The two initiators of this company, Guy Laliberte and Daniel Gauthier, have always seen circus with a modern eye. Effectively, their power of creativity and their visionary ideas have been the key ingredients to make this circus a global empire. The comparative advantage which makes the Cirque du Soleil so unassailable is its creative inspiration and the perfection of its shows.
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The particularity of the business model of Cirque du Soleil is to create demand all around the world on the circus market. The strength of this circus is to develop shows which are different than the ordinary; for example by eliminating some elements that we find in other circuses such as animal shows or clowns. However, their secret of success is their ability of creating year after year shows convincing people to come many times, creating music and fun while always retaining a magical perceptioni.
Thus, a direct competitor does not really exist. It is what we call a Blue Ocean Strategy: “Create Uncontested Market Space and Make Competition Irrelevant”ii. The point is to expend the service around the world, ignoring territorial boundaries in order to increase the share they can take in the global market and in the meantime to decrease the costs. The shows are exclusive. Therefore the price of an average ticket is more expensive than in a traditional circus. As every company, the main motivation is to create revenues for the firm.
The first idea that the circus had, was to differentiate into two kinds of shows: Tours and the residencies. In 1992, The Cirque du Soleil signed the first partnership with the Mirage hotel in Las Vegas, for a resident show called Nouvelle Experience. After a year of success, they created a subsequent show, known under the name of Mystere. This event would be the start of a long collaboration. Effectively, since 1992, Las Vegas Hotels count now more than seven shows. Besides, the circus had the opportunity to host a new resident show in Disneyworld Resort in Orlando, Florida.
After ten years of negotiation, the two parties have agreed on the conditions of the partnership and thus presented to the spectators the La Nouba show in December 1998. The circus would invest only on the artistry whereas the Hotel or the Resort would invest in the infrastructure for the show. Hence, on one side the host would attract more customers because of the show in his place and the Cirque du Soleil would ultimately reduce its cost through the collaboration. The strategy of Cirque du Soleil is to always guard the decisive authority in terms of creativity, even in a partnership.
Moreover, the collaboration permits to create specific merchandising for the resident place as well. Merchandising is an excellent way to increase the benefit and to create brand awareness. The longevity of the strategy of Cirque du Soleil is to focus its efforts on the creative concept of each show, its core business, whether in tours or in resident shows. b) Application of Theoretical Perspectives There are two conditions to fulfill in order to determine if a hold up problem could appear: a relationship-specific investment and an incomplete contract.
First condition: The Cirque du Soleil’s business model requires that the potential partner invest about 150M for the theater construction and show equipment and about 15 millions for the production of the show while the Cirque invests only 15 million for the production. As the theater is mainly built for the Cirque’s show and couldn’t stand for any other shows without transformations, it means that it is a Relationship-Specific Investments and thus the first condition for a potential hold-up is fulfilled. What about the incomplete contract condition?
We have two different kinds of contracts in the case. On the one hand, we have the contract with Disney. It took 10 years to the Cirque and Disney to sign their first deal. They spent much time arguing about potential issues and foresee most of the possible contingencies. At the end, we assume that they almost signed a “complete contract” which should avoid any kind of hold-up. On the other hand, we have the contract with MGM. It took about one yeariii for MGM and the Cirque to agree on the terms of a contract for a residential show.
Here, the time was clearly too short to get close to perfect foresight, description and communication in the contract which means that the contract was incomplete. At the end, both conditions for a hold-up were fulfilled with MGM: Relationship-Specific Investment and incomplete contract. While Cirque du Soleil always insisted on having the creative force for all productions, MGM Mirage and Disney had very high initial relationship-specific investments by building huge theaters. However, neither company feared opportunism nor has there been an attempt to vertically integrate Cirque into either company.
Now that we have seen that a hold-up was possible with the Cirque’s partner, let’s see if we might have such problems within the company (internal hold-up). Actually, it’s possible that the employees hold-up the firm: When they decide to produce a new show, the Cirque has to invest in order to train the artists and once they are trained, they could ask for a higher salary. We could also argue that the Cirque could hold up the employee because once he is trained, his knowledge is very specific to only one show and cannot be used by any other circus. At the end, we see that the employee needs the Cirque as much as the Cirque needs the employee.
They are very complementary and the both investments will have less value separately. The risk of an internal hold up is low from both the employees and the Cirque. One can notice with great astonishment that so far no sign of opportunism has occurred between Cirque du Soleil and its main collaborators MGM Mirage and Disney. The reason why both, MGM and Disney, committed themselves to invest in such a risky endeavor, was rather simple and of a psychological nature. It was the sheer trust and confidence they had in Guy Laliberte and his team of innovative minds.
Despite having doubts about the reception of the productions by the audience, both partners never questioned Lalibertes expertise and creativity. It was thus never a subject of discussion, whether Cirque du Soleil should participate in the production costs. These long lasting relationships were rooted on fundamental human attitudes, such as due diligence and honesty. Especially MGM Mirage and Cirque du Soleil shared a common open-book policy whereas each party had unlimited access to the balance sheets of the other. Certainly this approach is unusual, but in this particular case it formed a strong bond.
It appears as if gambling and cabaret shows are positively correlated. A hold-up would thus be dangerous for Cirques great reputation. Contemplating the relationship between MGM and Cirque from a Property Rights perspective, it appears as if both parties had a loose contract but remained independent from one another. Ex-ante, a clear distinction between the competences and properties was made. There was thus neither a backward nor forward integration. MGM financed the major part of the Show production, investing 100% of the theater construction and the show equipment.
The Production costs were divided equally, as well as the box-office revenues and the operating profits. All contracts were established in the same manner, without renegotiating after a while. Therefore there was no, what Ronald Coase would call, ex post “haggling costs”. To summarize, the main feature of the business models of Cirque and its partners is an open-book policy based upon trust and disclosure that evolved and prospered during yearlong relationships. Even though there is no complete contract, Cirque and its partners somehow managed to get close to this optimal state. c) Management Implications and Recommendations
As we said before, the model of relationships with MGM and Disney are very complementary and almost perfect for le Cirque du Soleil. Looking at exhibit 2, we can see that the annual revenues continuously increased since 1992. We can assume that it is highly related to the partnership model they have with MGM and Disney. Nevertheless, there are some scenarios which could occur whereas we will discuss two of them: a vertical integration and a totally different model with the example of the C2-MTL. – Vertical integration: In our case it would mean that the Cirque du Soleil should build its own theatre.
From a theoretical point of view, it would make sense because the assets of MGM and Disney and le Cirque are totally complementary (TCE): the Cirque needs their “built for the show theatre” to perform. Moreover, the human capital of the Cirque is essential in their activities (PRA). Thus, theoretically, the Cirque du Soleil should have its own assets. Still, this case is very particular and maybe theory can’t explain everything. First of all, either in Las Vegas or in Disneyland, the Cirque cannot just come and build a theatre. The special environment has a big role in the relationship with the partners of the Cirque du Soleil.
Moreover, investments are far too big for the Cirque. In table A on page 9, we find that the total amount invested by MGM is ten times higher than what the Cirque invests in the show. It’s not only a matter of choice – they can probably not invest this much money. – C2-MTLiv: The Cirque du Soleil is collaborating as a special creative partner with Sid Lee, Fast Company, and HSM to organize the C2-MTL in may 2012, « (…) a completely new kind of annual global conference, one that explores the relationship between commerce and creativity and its potential to redefine business. v It is an attempt to set foot in uncommon activities for the Cirque. The kind of specific investment in this partnership seems to be of the same nature as with MGM. The Cirque is the creative partner, which means they will organize all the shows in the event, they will be responsible for the visual identity of the C2-MTL but from a financial point of view, they will probably not have a lot of money to invest except the usual production costs. This kind of new partnership is interesting, but it surely won’t be as profitable as what they are doing with MGM and Disney.
For a circus, there is nothing better than to perform in as many shows as possible during the year, filling the theatre at 90-95% of their capacity. We really think that the Cirque du Soleil found the best model of relationship with MGM and Disney. We can use elements in the theory to explain it but in this case, we also have some soft factors. Le Cirque produces artistic shows, which means that the human capital and the know-how are crucial in our question. In that sense, they don’t have to fear hold-up problems, because what they put into the deal is not assets, but all their creativity, their image, their artistic talent.
You cannot replace the Cirque du Soleil, it is unique. Furthermore, culture and geographic aspects are also a big issue for Cirque. Since the article was written, we know that le Cirque has known some defeats in his attempt to expand around the world with resident shows (Macao, Dubai… ). The shows are well received in North America because culturally, the cirque is attached to Canada. But tourists going to Asia will probably not want to see a Canadian show; they would like something more typical from the region. Thus, we recommend that the Cirque maintains its excellent relations with MGM and Disney.
If it wants to extend around the world with resident shows, it has to find places with as much synergies as Las Vegas or Orlando, but it has to consider very seriously the cultural aspect of i Strategy Canvas : http://stratstars. pbworks. com/w/page/18598746/BO-BS-Analytical ii By W. Chan Kim and Renee Mauborgne, Business Model Inspiration : http://www. huffingtonpost. com/inder-sidhu/profiles-in-doing-both-ci_b_619491. html iii http://fr. wikipedia. org/wiki/Cirque_du_Soleil iv http://c2montreal. com/ v http://c2montreal. com/the-experience