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Case Analysis provide an 750 to 1,500 word narrative analysis in APA format that discusses the following: Describe the difference between value extracti

Case Analysis provide an 750 to 1,500 word narrative analysis in APA format that discusses the following:

Describe the difference between value extracti

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Case Analysis provide an 750 to 1,500 word narrative analysis in APA format that discusses the following:

Describe the difference between value extraction and value innovation, and the role they played in Marvel’s history. Under what circumstances would you implement these strategies? Where they successful at Marvel?
Describe the concept of ERRC and how it was implemented at Marvel? Was it successful? How would you modify its implementation?
What role does culture play in a company like Marvel?
What should the strategic road map look like for the future? IN1182

The Marvel Way:

Restoring a Blue Ocean

08/2016-6205

This case was written by Michael Olenick, Institute Executive Fellow at the INSEAD Blue Ocean Strategy Institute,
under the supervision of W. Chan Kim and Renée Mauborgne, Professors at INSEAD. It is intended to be used as a
basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
cases.insead.edu.

Copyright © 2016 INSEAD

COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN
ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

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After Iron Man smashes his way to victory the credits roll. For those who linger the movie
unexpectedly starts again and Tony Stark arrives home to find a stranger wearing a leather
jacket and an eye patch in his living room.

“You think you’re the only superhero in the world?” asks the man. “Mr. Stark, you’ve
become part of a bigger universe. You just don’t know it yet.”

“Who the hell are you?” asks Iron Man Stark.

“Nick Fury,” answers the man. “Director of S.H.I.E.L.D.”

“Huh?” shrugs Stark.

“I’m here to talk to you about the Avenger initiative.”

This roundabout announcement – that Marvel intended to recreate their epic Avengers
storyline in a future series of Marvel-produced movies – was arguably more exciting to
Marvel fans and investors than the blockbuster movie itself. “Seeing Sam Jackson with the
eye patch telling [Iron Man actor Robert Downey Jr.] about the Avengers initiative made the
hairs on my arms rise,” wrote a Marvel fan on Reddit. Marvel investors should have been
equally intrigued by the roundabout announcement of a major strategic pivot.

Marvel, which struggled to make payroll just a decade earlier, went on to unlock a blue ocean
of moviemaking that has yielded more revenue and profit than any film franchise in history.

Marvel’s Early Years

Founded in 1939 by Martin Goodman, Marvel1 has seen a cast of heroes, villains, and events
that rival anything found in their comic books. Goodman produced pulp fiction, magazines,
and comic books and his strategy was straightforward: create many titles then, “If you get a
title that catches on … add a few more; you’re in for a nice profit.”2 Goodman’s motive was
purely financial, but over the next few decades, his company would go on to create over 8,000
characters in what became arguably an American version of Homer’s The Odyssey and The
Iliad.

During the 1940s, the comic book industry thrived, filling the entertainment space now
saturated by children’s television programming, games, websites, smartphones, and all other
manner of media. Besides the iconic Captain America – created for WWII – most Marvel
titles of this era were thin knockoffs of the more popular DC Comics, home to Superman,
Batman, and Wonder Woman.

Except for a short time after the war,3 business boomed until, in 1954, squirrel-faced
psychiatrist Dr Frederic Wertham testified to the Senate Subcommittee on Juvenile

1 In the early years the business that would come to be named Marvel had many names and corporate shells.
For clarity we refer to these collectively as Marvel.

2 Howe, Sean (2013-10-01). Marvel Comics: The Untold Story (p. 10). HarperCollins. Kindle Edition.
3 In 1949, during the post-WWII recession, economics forced Marvel editor Stan Lee to layoff virtually the

entire comic book staff. Many were rehired when the business rebounded. D
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Delinquency that comic books were linked to teenage pregnancy and homosexuality. “I think
Hitler was a beginner compared to the comic-book industry!” testified Wertham to the US
Senate during a two-day hearing.4 Comic book sales plummeted5 and the industry created a
self-censorship organization, the Comics Code Authority.

Marvel’s First Blue Ocean

Before Wertham there were five major comic book publishers. By the time comic book
hysteria subsided only two were left, Marvel and DC Comics.6 Vying to compete by
controlling retail shelf space, DC purchased Marvel’s distribution arm and limited the number
of books that Marvel could distribute each month. Marketing low-cost me-too knockoffs
targeted towards children would not sustain the business in this environment: Marvel needed
to attract noncustomers.

Marvel’s as-is strategy – delivering little original work and me-too knockoffs – no longer
worked. Faced with red ocean competition that threatened to shutter the comic book division
Marvel adopted a new strategy: original content aimed at an older demographic, college
students. From 1961 to 1965 Marvel Editor-in-Chief Stan Lee, along with comic book legends
Jack Kirby, and Steve Ditko, delivered a multi-year burst of creativity creating a new blue
ocean.7 Rather than copying DC’s traditional macho crime fighters many Marvel characters
start as ordinary people and are transformed, oftentimes by accident, into reluctant
superheroes.

In 1961 Marvel introduced four ordinary people mutated by cosmic rays into superheroes, the
Fantastic Four. After the Fantastic Four came The Incredible Hulk, a quiet scientist who
morphs into a ferocious green monster when angered. Thor, a God who visits earth as a
superhero, was introduced soon after. Ant-Man, the reformed thief who changes size, came
next. In June 1962, Steve Ditko introduced the world to a teenager, bitten by an irradiated
spider, who develops spider-like abilities, Spider Man. Next came an alcoholic womanizing
military contractor with a bad heart who builds a high-tech metal suit to fight bad guys, Iron
Man.

Not long after this burst of creative output Lee and his team decided to bundle their
superheroes into a group called The Avengers. At the same time they created another group of
entirely different characters, ordinary people endowed with extraordinary powers and
distrusted by the unenhanced they lived amongst, The X-Men.8

4 Wertham released his book, Seduction of the Innocent – which argued comic books were tied to juvenile
delinquency – days before the Senate hearing.

5 In 1956 Lee again had to fire his entire staff.
6 EC Comics produced, depending upon one’s vantage point, either the edgiest or most inappropriate comics

and refused to submit their work to the censor. EC closed as a comic book publisher but went on to reinvent
the business, publishing Mad Magazine, since magazines were not subject to censorship.

7 Lee served as editor-in-chief and lead storywriter.
8 Countless other characters would be introduced during this period, including The Human Torch, Dr

Strange, Thor enemy/brother Loki: Lee’s prolific team created literally thousands of different personalities.
Eventually they would re-introduce the only 1930s Marvel superhero into the modern fold, Captain D
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“We were trying to reach a slightly older, more sophisticated group,” Lee wrote.9 Stan Lee
also created a new writing method, The Marvel Method, where he outlined stories, sent them
for drawing, then filled in the story bubbles later.

Lee’s focus on noncustomer college students opened a blue ocean where Marvel thrived.
“Marvel Comics are the first comic books in history in which a post-adolescent escapist can
get involved, for Marvel Comics are the first comic books to evoke, even metaphorically, the
Real World,” wrote the Village Voice in April, 1965.10

By the end of 1965 Marvel circulated 35 million comic books per year and inspired 500 fan
letters per day.11 By 1967 Marvel sold six million comic books per month, just behind DC’s
seven million despite that Marvel’s distribution channel, which was owned by DC, restricted
the number of issues they could offer.

Into the Red

In a typical comic book plot all goes well until it doesn’t, then mayhem erupts.

In June 1968, Goodman sold Marvel to conglomerate Cadence Industries12 for $15 million
($102.1 million, inflation adjusted to 2015). Cadence owned a print distribution arm but knew
nothing about publishing.13 Not long after the acquisition, Cadence hired Sheldon Feinberg,
the former CFO of Revlon, as CEO, the first of many awful managers. “Pit your executives
against each other, make them fight each other, and then, somehow they should do better. And
try to humiliate your subordinates,” is how a Feinberg associate described his management
style.14 Legendary cartoonist Jack Kirby soon quit, signing a three-year contract with DC
Comics. The X-Men and Silver Surfer series were cancelled.15

Blue Ocean Strategy requires the alignment of value, profit, and people. Marvel’s comic
books from this era were generally considered high quality but, internally, the lack of fair
process damaged and demotivated the people, which led to potential profits being left
unrealized. Untapped profits and poor management are like blood in the water, attracting
sharks, and Marvel was soon swimming face to face with some of the bloodiest predators in
the business world.

In November 1986, Cadence sold Marvel to New World Entertainment, an entertainment
conglomerate whose executives did not know the difference between Superman, owned by
DC Comics, and Marvel’s Spider-Man. New World’s fortunes quickly foundered – Marvel

America, and also recreate Daredevil, the blind lawyer whose heightened other senses give him
superpower-like abilities.

9 Howe, Sean (2013-10-01). Marvel Comics: The Untold Story (p. 38). HarperCollins. Kindle Edition.
10 Kempton, Sally. “Marvel Comics Are the First.” Village Voice 1 Apr. 1965.
11 Howe, Sean (2013-10-01). Marvel Comics: The Untold Story (p. 63). HarperCollins. Kindle Edition.
12 Cadence was then called Perfect Film & Chemical Corporation but changed the name later. For clarity we

use the name Cadence throughout.
13 Cadence also owned a vitamin division, which is where Spider-Man vitamins were developed, an early

crossover product.
14 Howe, Sean (2013-10-01). Marvel Comics: The Untold Story (p. 104). HarperCollins. Kindle Edition.
15 Both were later revived and went on to perform well.D
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was their only profitable business – and they turned to Wall Street for help. Their investment
bankers decided to sell Marvel.

“Trouble with the comic business,” said then Marvel Editor-in-Chief Jim Shooter, “is that it
seems that every time things look like they’re going to look good, then the owners of the
company end up selling it. And it falls into the hands of the philistines and you’ve got to start
all over again.”16

In November, 198817 investment bank Drexel Burnham Lambert auctioned Marvel to
corporate raider, and long-time Drexel client, Ronald O. Perelman for $82.5 million ($165.3
million adjusted for inflation to 2015).18 Perelman, a multi-billionaire, used $10 million of his
own money to finance the acquisition and borrowed the rest.19 Like most Drexel-connected
raiders Perelman believed strongly in value extraction rather than value innovation. Raiders
typically purchase companies using high-priced “junk” debt, build the businesses through
high-yield20 debt-fueled acquisitions, and finally flip the business, oftentimes carved up into
pieces.

Perelman immediately and repeatedly raised comic book prices. During this time collectors
were bidding the price of sports trading cards into a frothy bubble, where single sports cards
could sell for hundreds of thousands of dollars. These collectors also fueled sales of new
trading cards, as they sought to purchase the cards when released, betting they would increase
in value over time. Perelman decided to copy the trading card strategy and build his own
bubble in comic books. To fuel speculation Marvel introduced many versions of every comic
book – each with a different cover – encouraging collectors to purchase more volumes.

Perelman’s bubble strategy initially worked to raise revenues, and he sold 40 percent of
Marvel to the public in July 1991, raising $70 million. Buoyed by strong sales – value
extraction managers oftentimes produce short-term returns at long-term expense – the stock
soared. Perelman used $30 million from the IPO to buy down a portion of the debt he used to
acquire the business and paid another $40 million to himself as a “special dividend.”
Perelman then borrowed approximately $600 million to spend on acquisitions and sold
another $700 million in junk bonds, eventually pocketing a total of about $300 million from
the bond sales personally.21

Besides raising prices and encouraging speculators, Perelman also consolidated all
distribution from twelve distributors to one, Hero’s World Distribution, which Marvel owned.
Perelman’s goal was to effectively sell comic books directly to retailers, capturing revenue
paid to distributors. This single-source distribution system wreaked havoc on comic
bookstores, their primary retailer, and the number of comic bookstores quickly fell from 9,400

16 Thomas, Michael. “Jim Shooter Interview: Part I.” Comic Book Resources. CBR News, Oct. 6, 2000.
17 The sale closed January, 1989.
18 Perelman had a byzantine array of holding companies the most well-known being MacAndrews & Forbes.

For clarity these businesses are collectively referred to as Perelman himself.
19 Inflation adjusted to 2015 Marvel was sold for $165.3 million with Perelman’s investment amount to $20

million.
20 High-yield low-rated or unrated corporate debt is informally referred to as “junk bonds.”
21 Perelman retained the proceeds from the bond sales. Judge Roderick McKelvie, presiding judge in Marvel’s

bankruptcy case, would eventually rule this was legal because it was disclosed.D
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Copyright © INSEAD 5

to 4,500.22 Perelman’s Marvel also decided to branch into trading cards and purchased three
companies, sports card makers Fleer and SkyBox, as well as Italian sticker company Panini.23
Finally, Marvel acquired 46 percent of toymaker Toy Biz in exchange for an exclusive
royalty-free license to produce and sell Marvel characters.

High prices, fewer distributors, lower quality, underperforming acquisitions, and a predictable
burst in the comic book collecting bubble destroyed sales. In January, 1996, Marvel fired 275
people then followed-up in November by firing another 115, one third of its workforce. On
December 27, 1996 Marvel filed for bankruptcy: Marvel’s red ocean strategy had run its
course.

For nineteen months, various groups fought for the business. Perelman, legendary corporate
raider Carl Icahn24, Marvel’s banks, Marvel bondholders25, Marvel subsidiary Toy Biz, and a
few other parties wanted Marvel. Perelman offered creditors $365 million, leaving Perelman
owning about 80 percent of Marvel, with the public, bondholders, and bankers owning the
other 20 percent.26 Icahn, who briefly took control of the business27, offered creditors similar
terms with a different management team. Toy Biz majority owners Isaac Perlmutter and Avi
Arad offered $231.8 million cash, 40 percent of restructured Marvel, the Italian sticker
company, and a strategy to return the company to profitability. Creditors voted to accept the
Toy Biz offer even though the cash was $100 million less, due to Perlmutter and Arad’s
strategy and vision.28 Even when battling billionaires a solid strategic vision can prevail over
cash.29

Perlmutter and Arad – low on cash but high on chutzpah with their strategic vision – prevailed
over the battling billionaires. Perelman told the New York Times if he had to rank his

22 Comic book stores receive discounts from distributors based on the total number of books they order from
any publisher. Forcing comic book stores to split their orders between Hero’s World and their regular
distributors, lowered their volume, subsequently lowering their discount and their already slim profits.

23 Perelman’s Marvel acquired trading card maker Fleer for $286 million in July 1992, Hero’s World
Distribution for $7 million in 1994, trading card maker SkyBox International for $150 million in March
1995 and later, also in 1995, Italian sticker company Panini for $158 million.

24 Icahn and Perelman are arguably the two most well-known corporate raiders of their time. They were both
prominent attendees at Drexel’s Predators Ball, an annual conference of junk bond luminaries.

25 Icahn purchased distressed Marvel bonds so fought for control both on his own and as the lead bondholder.
26 All parties also offered creditors the Italian stocker company Panini, which was performing reasonably well

internationally.
27 Perelman pledged Marvel’s stock as collateral for the bonds and, once he defaulted on bond payments,

bondholders successfully acquired the stock and control of Marvel. However, in December, 1997 – one
year into bankruptcy – the bankruptcy court ousted Icahn in favor of a court-appointed receiver.

28 Creditors were owed about $700 million. They were paid $230 million in cash, given the sticker company
which sold for another $120 million, and received 40 percent of the new Marvel.

29 Perlmutter and Arad’s vision was reinforced by a well-timed stroke of luck. On July 2, 1997, in the midst of
the bankruptcy battle, Sony released The Men in Black, a movie based on a Marvel comic book that had
been in production for years. Two prior Marvel character movies, Howard the Duck and The Punisher, both
bombed. The Men in Black earned $589.4 million ($869.6 million adjusting for inflation to 2015), the
second highest grossing film in 1997, suggesting the economic viability of movies based on Marvel’s
characters.D
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Copyright © INSEAD 6

successes Marvel would not be included. Icahn said “I have framed articles of every deal I’ve
ever done. In all honesty, this is one frame I’m considering taking down.”30

On October 1, 1998, with approval of the court and creditors, Toy Biz, Inc. used $250 million
in high-yield debt (junk bonds) to acquire the assets of the former Marvel and renamed itself
Marvel Enterprises.31 Perlmutter’s Marvel now faced the daunting task of resuscitating the
struggling business and executing their strategy.

Evaluating Post-Bankruptcy Marvel

After bankruptcy, in late 1998, Marvel had five high-level businesses:

1. Comic books. Marvel’s flagship comic book business produced direct revenue and
vast intangible assets: intellectual property, decades of characters, storylines, brand,
customer goodwill, and an institutional knowledge about how to weave their IP into
great stories. Marvel estimated the intangibles of their comic book business to be
worth $127.7 million.

2. Trading Cards. Marvel had two trading card companies, SkyBox and Fleer, which had
been combined under Perelman. A third business, Panini – an Italian company that
made trading-card like stickers – was ceded to Marvel’s bankers to end the
bankruptcy. Trading cards required guaranteed steep royalties to sports leagues, lacked
company-owned intellectual property, and sales were driven by collectors who tended
to buy based more on speculation than any real interest in the cards. Marvel did not
break out revenue or profitability for the trading card business separately from the toy
business in 1998.

3. Toys. Toys were a low-margin business but Marvel did well; most 1990s-era Marvel
revenue came from the toy group. Movies based on Marvel characters brought
incremental toy revenue that was expected to increase as Marvel inked more movie
deals. Marvel leveraged their unique character’s intellectual property to build high
quality toys.

4. Character Licensing. Marvel always licensed characters. Licensing deals were
optimal: with an investment of little more than drafting a contract Marvel need do
nothing but open envelopes and cash checks for high margin revenue. In 1998 Marvel
received $4.9 million in licensing fees for $4.5 million in gross profit but estimated the
licensing business to be worth $401.1 million.

5. Marvel Studios. Marvel had a handful of people in Hollywood licensing Marvel
characters to motion picture studios for films. This team, referred to as Marvel
Studios, was not a real movie studio: they did not independently make movies and had
no intention of doing so. Their goal was to drive sales of licensed goods by increasing
demand for Marvel characters through films.

30 Bryant, Adam. “Pow! The Punches That Left Marvel Reeling.” The New York Times 24 May 1998.
31 The bonds carried interest of 12 percent and required monthly payments so the capital costs Marvel $30

million annually in interest alone.D
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Management Stabilizes the Business

The post-bankruptcy late 1990s was a dire time for Marvel. Comic book sales were slipping
20 percent year-over-year and licensing deals dried up because licensees were concerned
about long-term contracts with a company that might cease to exist. Cash became so tight that
Marvel almost failed to make payroll. One Spider-Man comic from this era describes a
“criminal businessman” who advises the publisher of Spider-Man’s employer, The Bugle
newspaper, to take the paper public. “I’d never take the Bugle public … because I know that
its long-term integrity would suffer under corporate connivers like you, who dream up
ridiculous little schemes which only produce short-term goals!” Spider-Man’s alter ego, Peter
Parker, along with 100 other comic book characters, are then laid off.32

Marvel was starved for cash and saddled with $30 million in annual junk-bond interest
payments. In this context Perlmutter and his board of directors hired turnaround specialist
Peter Cuneo, who had worked with Perlmutter turning around Remington, as CEO. Cuneo
focused on Marvel’s core businesses, selling comic books and toys, and licensed the exclusive
movie rights to several of Marvel’s most popular characters.33 Cuneo and the board reasoned
that successful movies would spur sales of licensed goods, driving toy revenue. Additionally,
the early movie deals provided much-needed capital and helped prove the economic viability
of Marvel-based comic book movies. Sony purchased the rights to Spider-Man for $10
million plus 5 percent first-dollar royalties.34 Twentieth Century Fox acquired the rights to X-
Men, the Fantastic Four, and several lesser-known characters on less expensive terms.
Universal purchased the rights to make standalone Hulk movies. Marvel does not release
actual figures but industry analysts estimate Sony paid Marvel no more than $62 million in
royalties for Spider-Man, Spider-Man 2, and Spider-Man 3, which collectively grossed about
$2.5 billion. Fox is estimated to have paid Marvel $26 million total for X-Man royalties; the
films have collectively grossed approximately $2.3 billion. Blade, a deal struck during the
Perelman years, grossed $131 million; Marvel was paid $25,000.

Although the deals may not appear favorable in hindsight they served a strategic and tactical
purpose. Tactically they brought much-needed capital to Marvel in the form of up-front
payments and increased licensing royalties giving the company a breathing space to
eventually move in a more strategic direction. “The big kicker for us was the licensing around
the movies. That was more important to us than the actual amount of money we got from the
films. When we started Marvel Studios, with our own financing, we were then able to capture
all the profits that came from the movies ourselves and that was a gigantic change,” Cuneo
said. Strategically the deals proved the popularity of Marvel characters at the box office and
taught Marvel how to make movies so that, someday, Marvel could produce their own films.
“Sony did a great job on Spider-Man and Fox with the X-Men did a great job,” said Cuneo.
“Those are big and they make a lot of money from those franchises.”

32 Howe, Sean (2013-10-01). Marvel Comics: The Untold Story (p. 382). HarperCollins. Kindle Edition.
33 Some of these licenses have since reverted back to Marvel and some others, notably The Incredible Hulk,

are licensed back in exchange for film distribution rights.
34 Under a system informally called “Hollywood Accounting” movies never earn a profit so the provision for

royalties based on gross revenue to the studio is a victory.D
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In February, 1999, Marvel divested trading card businesses Skybox and Fleer for a combined
total of $26 million, a $410 million (94 percent) loss that would offset future earnings from
taxation.

The toy business accounted for the bulk of Marvel’s revenues but these were relatively low-
margin high risk revenues. In March 1999, Marvel exited the toy production and sales
business, selling exclusive rights to market Marvel characters, for five years, to their toy
manufacturer for a $5 million per year fee35, a 15 percent royalty, plus an additional 24.5
percent fee for Marvel to continue designing the toys.36 “When I came to the company we had
a full toy business doing everything: designing toys, finding a manufacturer, taking working
capital risk, selling to mass retailers, and so on,” said Cuneo. “That’s what I inherited. After
two years I felt we shouldn’t be in any business where we were taking capital risks: we had a
lot of cash flow problems. The industry in 2001 had a terrible year because Hasbro oversold
Star Wars toys into mass retailers around the world. Marvel lost $30 million that year on the
toy business and we couldn’t afford to lose anything. So the board agreed to license out the
business to one of our primary vendors. We transferred the risk of working capital to this guy
and we were just responsible for the selling. We were also able to sell off about $25 million in
inventory so we got an influx of cash from that.”

Besides stabilizing the business financially Cuneo moved to quickly heal the corporate
culture, building an environment where creativity could thrive. “If you as an organization
can’t handle a culture which rewards people with crazy ideas, of people who are difficult to
deal with, then you’re not going to be successful in a creative business,” said Cuneo. “You
want to create an atmosphere where those people feel good about where they’re at, and
prosper, and you’re able to cope with some of the idiosyncrasies that they might exhibit. But,
in the end, that’s where all the revenue growth is coming from. In a character-based business
you can’t discount the value of having great creative people work with you on a positive
basis. Instill the proper atmosphere, the proper rewards system, let them know that you
appreciate what they do.”

Marvel Steers Towards a Blue Ocean

Once management stabilized the business there was a sense that a major strategic initiative
was needed to boost the …

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