Exploring Strategy by Johnson, Whittington & Scholes

1 New Statesman, 5 September (1997).2 Ibid.3 Marketing, 4 December (1997), p. 3.

This case study was prepared by Professor Richard Whittington, University of Oxford. It is intended as a basis of class dis-cussion and not as an illustration of good or bad practice. © Richard Whittington 2007. Not to be reproduced or quoted with-out permission.

Case Study Ministry of Sound

Richard Whittington

The Ministry of Sound went from start-up to maturity in little over a decade. The case raises issuesconcerning both business strategy, particularly regarding sustainable competitive advantage andresources, and corporate strategy, particularly regarding diversification and internationalisation.There are also issues of ownership and organisation. In the end, the fundamental question is:what future for the Ministry?

In 1991, 28-year-old James Palumbo invested £225,000 (≈ 1340,000) of his own capital into a newdance club located in an old South London bus depot. As an old Etonian (the UK’s most elitist privateschool), a graduate of Oxford University and a former merchant banker, Palumbo was an unlikelyentrant into a dance culture that was still raw and far from respectable. He actually preferred clas-sical music. The club’s name, the Ministry of Sound, ironically recalled Palumbo’s father, a formerMinister in the Conservative government of the day. Yet within just 10 years, Palumbo built theMinistry of Sound into a music and media empire worth nearly £150m. Two years later, Palumbohad quit as chief executive and the Ministry of Sound was looking for a new strategic direction.

The Ministry of Sound’s start had been difficult. Dance music had its origins in ‘acid house’,itself with its roots in the futuristic, electronic music of the gay clubs of Chicago and New York. The new style had been picked up by British DJs in Ibiza, who combined it with the drug Ecstasy tocreate a new ‘blissed-out’ sound. Dance music arrived in the UK during 1988, the so-called ‘SecondSummer of Love’, strongly associated with recreational drugs. By the early 1990s, drug-dealing in itsmost ugly sense had become part of the dance culture. Palumbo recalled:

When I came into this business, with my bonuses and my nice City suits, I was completely naïve. Just ajoke. I found that every Friday and Saturday night my door was taking £30,000 and the security teamwas making £40,000 on Ecstasy. It happens everywhere in the UK leisure business. There are all thesefat bastards running chains of discos and bowling alleys, and none of them admits it. We went througha really traumatic time at the club.1

Palumbo changed his security team, bringing in security professionals from the North ofEngland with no links to the local drugs gangs. He even hired a psychoanalyst to cope with the gangland threats that followed his drugs crack-down:

If they say ‘we’re going to kill you’, you know what you’re up against. But the threats [from London’sEast End drugs gangs] are much more sinister. The word is fed back that if the business is cut off, theywill follow you home, go for your family, stab you or murder you.2

But Palumbo persisted in making his club a safer, cleaner environment. During the 1990s, hecampaigned nationally against the use of drugs in youth venues.

Thus the Ministry of Sound led in the transformation of club culture from an undergroundmovement associated with ‘acid house’ into a mainstream youth market activity. An illuminatedsign on Palumbo’s office wall read:

We are building a global entertainment business based on a strong aspirational brand respected for its creativity and its quality. The Ministry of Sound team will be more professional, hard-working andinnovative than any other on the planet.3

The Ministry established a distinctive logo and brand and invested heavily in club facilitiesand sound equipment. It was a leader in developing the new ‘super-clubs’, fronted by ‘super-DJs’earning six-figure sums for playing other people’s music. By 2001, over two and a half million club-bers had visited Ministry of Sound nightspots and that same year its first festival weekend attracted55,000 people at Knebworth.

The business developed in many directions during this period. A magazine aimed at clubbers,Ministry, was launched in the mid-1990s and achieved a readership of 300,000. The Ministry ofSound radio show was broadcast in London and Central Scotland, besides being syndicated in 38countries worldwide. The Ministry’s Relentless joint venture became the largest independentrecord label in the UK, with its Chill Out Sessions 1 and 2 reaching number one in the album chartsand its So Solid Crew reaching the top of the singles charts. Large supermarket chain Asda was distributing the Ministry’s albums to shoppers around the UK. The Ministry’s distinctive logo hadbecome the basis for a large merchandising business, mostly for clothing. By 2001, the Ministry’stouring division was hosting 300 events worldwide, including China and India, and had regular summer residencies in Ibiza, Ayia Napa and Benidorm. A Ministry of Sound super-club opened in Bangkok. By this point, the Ministry’s original nightclub only accounted for about 3 per cent of atotal turnover, reaching around £100m per annum.

As a mark of the Ministry’s success, in the summer of 2001 venture capitalist company 3iacquired approaching 20 per cent of the Ministry’s equity for £24m. Palumbo was quoted as saying: ‘With 3i’s support, we are now poised to spread the dance music gospel worldwide.’ In its ‘Rich List 2001’, The Sunday Times estimated Palumbo’s total fortune as £150m. A spokesman for 3i said:

We had obviously heard a lot about the Ministry and James [Palumbo] has had a lot of good press. Wewere impressed by how successful the brand has become and by how fast it has grown. . . . Ministryhas a phenomenal skill in helping new acts hit the big time. The more successful it became, the morepeople wanted to become associated with it. . . . When making an investment, you have to be totallycomfortable and confident that you are backing an A1 team. With James we found the perfect deal.James is the sort of person VCs [venture capitalists] can make money out of.4

The Ministry of Sound was aiming for a stock market listing within a couple of years.Then things started to go wrong. The dance music on which the Ministry was based was

going out of fashion. Dance music (including house, trance, techno, breaks and drum’n’bass music)saw its share of the UK singles market fall to 15.4 per cent in 2002, down from 34 per cent in 1991.Dance clubs were closing or downsizing, while live music audiences were growing. Malik Meer,Deputy Editor of New Musical Express, commented in early 2004:

The dance culture as a whole got lazy. It came to be perceived as one thing: this cheesy, superclub, larging-it lifestyle . . . Dance music came from an underground culture and was about being edgy andanti-establishment. At the height of superclub-dom, a club would be £25 to get in and be full of slightly-older people, glammed up and wearing crap labels. If you are young and want to be cool, you are notgoing to buy into that.5

For many aficionados, the last straw was when the Sugababes got crowned the ‘Best DanceAct’ of 2003.

At the end of 2002, Palumbo was obliged to close down his flagship magazine, Ministry. TheMinistry of Sound then worked with publishers Condé Nast to launch a new style magazine, Trash,which would be able to share expertise and economies of scale. Trash was closed after just oneissue. The recording joint venture Relentless went out of business, owing £3m. Bangkok’s Ministryof Sound closed after a change in local laws restricted late-night attractions. In February 2003,Palumbo quit as chief executive to become chairman of the company of which he was still thelargest shareholder. Rumours that he was forced to stand down by venture capitalist investor 3iwere dismissed.

2

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4 European Venture Capital Journal, September (2001), p. 1.5 Independent, 2 January (2004), p. 10.6 Financial Times, 30 April (2003), p. 13.

3

Ministry’s 36-year-old Marketing Director, Mark Rodol, took over as chief executive andlaunched a strategic review of the whole business. Rodol commented on Palumbo’s exit:

James is an entrepreneur – but what is going to make this business great is a focused, long-term brandstrategy. To his credit James has had the foresight to step aside and let the people who understand andbelieve this run the company. It’s about a difference in style.6

As to the strategic review, Rodol observed:

Over the years, we’ve pursued a number of opportunities that we shouldn’t have done. The intentionwe have over the next couple of months is to examine what the core of Ministry of Sound actually is.7

The Ministry of Sound was not, however, abandoning all initiatives. Rodol saw large potentialin continued merchandising in areas such as branded clothing, specialist holidays and consumer hi-fi products, with turnover targeted to reach £5m by 2006. On top of this, Ministry was starting tosell branded DJ equipment and offering branded mobile phone games. A Ministry PlayStation gameallowing gamers to mix their own dance music was being launched too. An advertising-supportedonline broadcast music channel was launched, with potential for streaming over mobile phones. Asa spokesman put it, ‘this will be just like MTV, only on the Web’.8 A new super-club was also openedin Taipei, Taiwan, in the second half of 2003 and Rodol declared an ambition to have a Ministry ofSound club in every big city in the world.

Rodol also reorganised the Ministry, leading to several management departures. As well asthe continuing record business and club activities, there would be three divisions: an internationalarm, encompassing radio, touring and record compilation; a brand division, focused on retail, productlicensing and the Ministry website; and a marketing division, aiming to form long-term relationshipswith brands such as Philips and Bacardi. Rodol denied that the reorganisation was motivated by simple cost considerations, and underlined its importance for moving the brand forward towardslong-term goals.

Central would be keeping the brand cool in the eyes of its customers. The Ministry of Soundwas perceived by many as having lost its ‘edginess’. Mark Rodol insisted:

That’s what we’re working on. It is possible to be big and cutting edge – there are big mass marketbrands like Nike and PlayStation that manage to retain an edge despite their size. That’s what weintend to do.9

Ministry of Sound

7 Financial Times, 28 February (2003), p. 22.8 New Media Age, 13 November (2003), p. 24.9 Financial Times, 30 April (2003), p. 13.