Wednesday, November 20, 2013

Siren Song



In the land of arts management, we’ve been considering the nonprofit performing arts landscape with regards to recent mergers and collaborations among, shall we say, ailing arts organizations. Most notably among these is the Washington National Opera, which, on the brink of bankruptcy, “merged” with the Kennedy Center for the Performing Arts in 2011. While merger-acquisition strategy is mentioned only briefly in “Types of Strategy: Which Fits Your Business?” the increase in artistic “affiliations” as of late (see also: Virginia Repertory Theatre, Dance Alloy/Kelly-Strayhorn) calls into question which strategy fits these ventures, and perhaps more critically, which strategic “sirens” they should guard against so as not to “fail big.”

Consider first which of the four basic business strategies presented in “Types of Strategy…” are pursued by nonprofit performing arts organizations. Certainly not low-cost leadership. If the expected value chart comparing customer willingness to pay to the cost of providing the service were to be drawn, the cost line in nearly all cases would be well above the willingness to pay line. Given the very premise of the nonprofit sector, that the services provided generate public value that may or may not align with their earned economic value, the goal will not be to maximize profits through low-cost leadership (though great attention is needed to the financial strategies of these organizations). And because of the specialized niche the nonprofit performing arts occupy, a network effect strategy is likewise irrelevant. The value of the product (a performance), per say, does not increase as more products are sold (other than in the basic economic sense of supply and demand). Unlike a technological good like Ebay or the telephone, this winner-take-all strategy doesn’t hold for the value created by a live artistic performance.

What does apply, and the strategies most commonly seen in the nonprofit performing arts sector, are the strategies of differentiation and customer relationship. The essence of artistic performance is a highly differentiated qualitative experience. This qualitative differentiation is so essential to the success of nonprofit performing arts organizations that at times the strategy can seem as much as a hindrance as a help. When the strategic position of an organization depends so highly on an intangible, non-quantifiable experience, how can its attainment be demonstrated? What makes the ballet’s performance exceptional or the theatre’s cutting edge? And when all players in the field are relying on such highly qualitative differentiation, at what point does that differentiation begin to diminish itself? If every nonprofit performing arts organization in town is offering a superlative artistic experience, the very differentiation on which success hinges becomes homogenous, and thereby (perhaps) ineffective.

While the above suggest rebranding efforts might be in order, the other strategy adopted by nonprofit performing arts organizations is that of customer relationships. As CRM systems have worked their way to the nonprofit sector in terms of both price and functionality, systematic efforts to build customer loyalty have rippled through the performing arts industry. In addition to the considerable time and expense poured into personal customer relations, particularly between an organization and its donors, nonprofit performing arts organizations increasingly are relying on methods to customize patron experiences, including flexible ticket exchange policies, performance recommendations, and personalized communications. Personal service representatives are assigned to subscribers to facilitate both a personal and convenient performance experience. And ongoing benefits, not only to subscribers but to repeat ticket buyers across many frequency levels and point prices, further strengthen these customer relationship strategies.

So knowing that differentiation and customer relationships are the current strategies employed by nonprofit performing arts, what appealing strategies might these organizations be weary of as mergers, partnerships, and other forms of collaboration are contemplated? Among the nonprofit performing arts, staying the course is perhaps the most prolific. Despite market changes—from online entertainment delivery systems to fluctuations in disposable income—continuing on with the same strategy as a decade (or more) prior is surely the first to scrutinize. But the potential culture and systems clashes between organizations, particularly those of different sizes, is another stumbling block to examine when considering potential synergistic strategies. The Kennedy Center, for example, is widely considered to be one of the most bureaucratic, hierarchical organizations among the nonprofit performing arts. How did its organizational culture mesh with that of the Washington National Opera? If the turnover rate of former Opera employees that transitioned over is an indication, not particularly well. As time progresses, will the identity of the Opera (technically an affiliate of the Kennedy Center) endure, or, as is many mergers, will the dominant culture prevail? (In line with the questions that Carroll and Mui encourage every company to ask, I would bet on it.) Especially when looking at potential synergies across artistic disciplines, nonprofit performing arts organizations should be especially cognizant of this mirage. While opera and orchestra, for instance, both involve musicians and conductors, they operate according to starkly different business models. What looks complementary to the untrained eye is anything but, and will require careful integration should collaboration be chosen.

The precarious financial situation of many nonprofit performing arts organizations is another warning. Faulty financial engineering, while (hopefully) not fraudulent may obscure the depth of debts and other financially dubious situations. In the case of the Washington National Opera, the Kennedy Center did its vetting and made as a condition of acquisition that the Opera had to pay off all its debts in advance of the official merger date.

The pairing of strategies to use and strategies to scrutinize provide a preliminary roadmap for the nonprofit performing arts industry as it contemplates how to navigate its changing waters. Mergers among organizations may well continue, but as they do, Carroll and Mui’s “Seven Ways to Fail Big” will need to be carefully considered…so that the nonprofit performing arts don’t.

Sources:

Bauknecht, Sara. “Dance Alloy, Kelley-Strayhorn Explore Possible Merger.” Pittsburgh Post-Gazette, May 25, 2011.

Carroll, Paul B. and Chunka Mui. “Seven Ways to Fail Big,” Harvard Business Review, September 2008;
Keefe-Feldman, Mike. “From Merger, Virginia Repertory Theatre Is Born.” Nonprofit Quarterly, May 23, 2012.

Midgette, Anne. “Kennedy Center to Take Over Washington National Opera,” The Washington Post, January 20, 2011.

“Types of Strategy: Which Fits Your Business?” Harvard Business School, 2006.         

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