E-299 Competitive Strategy Disney Case Writeup

Why has Disney been successful for so long?

The Walt Disney Company is a classic example of a firm that, over the years, has
continued to make the right strategic decisions about a) the resources and capabilities it
should develop, and b) how best to utilize these resources and capabilities in response
to the competitive and market situation. The company demonstrates a number of typical
characteristics of long-term sustainability. These include:

Heterogeneity
From the very beginning, Disney pursued a strategy that mirrored Walt Disney’s
philosophy of providing timeless and wholesome entertainment for the entire family. This
unique positioning in the entertainment business continues to differentiate Disney from
its competitors, who have chosen to focus on specific segments (children, youths, or
adults) of the market. Another factor that sets Disney apart is its “growing from within”
strategy for expanding its markets. This has enabled the company to maintain its strong
culture and identity – after all these years, Disney is still ‘Disney’ and not a conglomerate
of many loosely integrated entities. Finally, the company has maintained and nurtured
Walt Disney’s obsession with continuous innovation. As a result, while Disney continues
to reinforce its ‘family fun’ image, it also promotes the idea that ‘Disney always has
something new and exciting to offer.’

Inimitability
Walt Disney learned (the hard way) early in his career the importance of
copyrights and legal protections. Today, the copyright protection on Mickey Mouse and
other characters is arguably Disney’s most valuable asset. There are other factors that
prevent new entrants and other incumbents from simply imitating Disney. The Walt
Disney Company has a formidable reputation and one of the strongest brand names in
the world. Additionally, Disney has leveraged its early mover position by purchasing
prime locations in Hollywood and Florida, thus gaining superior access to customers.
Finally, the legacy of Walt Disney’s leadership, preserved admirably by Michael Eisner,
coupled with a corporate strategy that emphasizes employee relations, has maintained a
strong culture within the company.

Imperfect Mobility and Cospecialization

The strong legal protections for Disney prevent competitors from copying or
imitating the wildly successful Disney characters. Additionally, over the years, the
company has exploited the synergies between its various businesses to develop a

Page 1 of 8 Abhay Rajaram

E-299 Competitive Strategy Disney Case Writeup

cohesive strategy in which the ‘whole product’ is much greater that the sum of its parts.
This makes it virtually impossible for a competitor to make good use of any isolated
Disney asset that it might gain access to. While competitors may be able to lure away
some of Disney’s employees, it will be very difficult for them to duplicate the vibrant
Disney culture.

Foresight
Walt Disney was the first person to identify the market for family entertainment.
Also, Disney realized very early on that a key differentiator would be the ability to
‘control’ the various factors that might affect the company business. The large real estate
purchases in Florida were a direct result of this foresight. Finally, Disney clearly
understood that the entertainment industry is driven by creativity, and therefore
structured the company such that it fostered creativity without external pressures from
unions and stockholders.

How does Disney create value across its various businesses?

This figure shows the interactions between the businesses in which Disney operates:
Figure 1: Synergies across Disney’s Businesses

Publishing Hotels/Resorts Cruise Lines

Movies

Brand Creation
Theme Parks
(Imagineering)

TV/Radio

Home Video Sports

Consumer Products

Page 2 of 8 Abhay Rajaram

E-299 Competitive Strategy Disney Case Writeup

Disney has created a marketplace in which a number of inter-dependent and cross-

promoting businesses feed into each other, thus creating a ‘virtuous circle’ across the
value chain. The driving force behind this idea was Disney’s obsession with retaining
control of the complete user experience. However, over the years, Disney has refined
this single-minded focus into an integrated strategy – extracting maximum value from a
group of related businesses by exploiting the inherent synergies between them.

Thus, there are two primary factors that enable Disney to create value across its
businesses:
- Disney achieves economies of scope and a strong competitive advantage by
having a strong presence in virtually every business associated with the
‘entertainment’ industry.
- These businesses act as strong complementors for each other, thus generating
the ‘tornado effect’ and growing the business as a whole.

For example, a successful Disney movie enhances the Disney brand and increases
customer awareness and loyalty for Disney’s characters (such as Mickey Mouse). This,
in turn, drives the demand for home videos and TV broadcasts of the movie. Disney’s
publishing business benefits from these activities as consumer demand increases for
books and magazines with Disney’s successful brand ambassadors. It is interesting to
note that an increase in the sales of books on Winnie the Pooh whets the consumer’s
appetite and, effectively, increases the demand for the next movie featuring that
character! It is also important to note that while Disney benefits from the increased
demand fuelled by these cross-promoting businesses, the company also achieves its
goal of ‘controlling’ the environment by owning these businesses.

Quite clearly, there are similar synergies in play across all of Disney’s businesses –
Theme parks promoting movies, movies promoting theme parks, theme parks increasing
the demand for hotels and resorts, movies and resorts promoting the cruise lines, sports
teams and events driving the demand for TV and radio stations, all branding activities
increasing the sales of consumer products, which in turn generate the demand for
company stores.

Page 3 of 8 Abhay Rajaram

E-299 Competitive Strategy Disney Case Writeup

What specific things did Michael Eisner do from 1984 to 1987 to rejuvenate
Disney?

Among the first things Michael Eisner did was reorganize Disney’s management
and corporate structure in order to invigorate the company. He changed the company’s
corporate name to reflect the ideology of Disney being a unified company across various
businesses and functional disciplines. He reduced the number of reporting business
units in order to improve cross-divisional communications. Most importantly, Eisner,
himself a Disney ‘outsider’, injected fresh thinking into a sluggish organization by going
outside the company to fill several key management positions. At the same time, Eisner
successfully committed himself and the company to the legacy of Walt Disney. As part of
the corporate reorganization, Eisner also created a corporate marketing group to
coordinate marketing activities across the company.

The new management strongly believed that “money is no substitute for

imagination.” Accordingly, the company implemented cost ceilings on movie budgets in
order to enforce a policy of fiscal responsibility across the company. However, these
strict financial rules did not come at the expense of creativity. Eisner restored the R&D
budget of the Imagineering group in order to encourage new ideas and innovations. This
strategy of “managing creativity” achieved a balance between the creative and financial
forces of the company. The financial results of this policy are evident –Income grew from
just 6.25% of sales in 1984 to 15.5% of sales in 1987. The improvement is even more
significant in the Film and TV business. In 1984, income was less than 1% of sales. By
1987, it was nearly 15% of sales.

Eisner and the top management at Disney stepped into a troubled situation in the
film business in 1984. However, they instituted sweeping changes in this business in
order to get it back on track. The company set a new goal to release 15 to 18 new films
per year. Additionally, Disney reduced the movie reissuing cycle from 7 years to 5 years.
The company also refocused its efforts on identifying good scripts and pursuing budding
talents in the industry. The company managed the underlying risks by creating limited
partnerships in which partners shared the financial costs of producing movies. These
activities transformed Disney’s film business and re-established Disney as a strong force
in this industry. Revenues from films grew from $165 million in 1983 to $876 million in
1987. Disney’s market share in the industry grew from a meager 4% in 1984 to a strong
14% in 1987.

Page 4 of 8 Abhay Rajaram

E-299 Competitive Strategy Disney Case Writeup

Based on a sell-through pricing strategy for home videos, Disney aggressively

grew its Home Video market from $42 million (5.5% of the market) in 1984 to $213
million (close to 10% market share) in 1987. While the company did not achieve
significant successes in the network television market, it did enter the rapidly growing
cable TV business. Disney inaugurated its cable channel in 1983. By 1987, it had close
to 4 million subscribers. As part of its strategy to grow its businesses related to the
television industry, Disney acquired an independent TV station in 1987 for a price that
was well below market value.

Up until 1984, Disney’s consumer products business, while highly profitable, was
relatively stagnant. To rejuvenate sales in this division, Eisner laid an emphasis on
international initiatives and corporate activities such as joint promotions with retailers,
restaurateurs and other business partners. Anticipating an increased demand as a result
of the renewed focus on consumer products, Disney launched the Disney Stores in
1987. This was a highly successful venture, with sales volumes per square foot 3-5
times the national average. As a result of these activities, sales of consumer products
grew steadily from $110 million in 1984 to $167 million in 1987.

After many years of growth, attendance at Disney’s theme parks witnessed a

decline in 1984. Eisner put in place a number of new initiatives to build attendance at the
parks as well as increase repeat visits from customers. These included a national
advertising campaign and keeping the parks open on Mondays. Eisner also identified
‘after-dark attractions’ as a huge untapped market and introduced plans to develop new
entertainment areas for adult guests. Most significantly, Disney continued to invest in
innovative new rides in its theme parks. This enabled the company to increase its ticket
prices at the parks without adversely affecting attendance. Theme park attendance grew
from approximately 30 million in 1984 to almost 40 million in 1987. Disney also
announced its most ambitious project until then – Euro Disney.

Eisner’s efforts to rejuvenate Disney were extremely successful, as is evident

from the company’s financial results. Revenues grew from $1.6 billion in 1984 to $2.9
billion in 1987, while net income grew both in terms of absolute numbers and as a
percentage of total revenues.

Page 5 of 8 Abhay Rajaram

E-299 Competitive Strategy Disney Case Writeup

What was the most important thing Eisner did during that time period? Why is it
the most important?

There are a number of key strategic decisions that Eisner made between 1984
and 1987. Recommitting the company to Walt Disney’s vision and legacy went a long
way to improve employee morale and outline a broad strategy for the company.
Enforcing a policy of fiscal responsibility was the primary driver of better operational
efficiencies.

However, the most important decision Eisner made was to correctly identify
creativity as Disney’s most valuable asset and renew the company’s investment in the
Imagineering group. As Figure 1 on Page 2 shows, the innovations and ideas of the
Imagineering group are the driving force behind all of Disney’s activities. Walt Disney
himself said once “It all started with a mouse!” – The foundation of the Walt Disney
Company has always been its innovations in developing characters that endear
themselves to people of all ages.

The results of Eisner’s decision are apparent – for example, the increase in the
number of movies released by Disney from 1984 to 1987 is a direct result of the
renewed drive towards encouraging creative efforts. Not only did this significantly
improve the company’s financial results, it also sent out a signal to employees,
customers, and investors that Disney was back on track.

Evaluate Disney’s growth strategy over the past decade.

Over the last decade, the Walt Disney Company has continued to build on the
foundations it set in place between 1984 and 1987, focusing particularly on overseas
expansion and increasingly diverse ventures. Revenues have grown from $3.4 billion in
1988 to over $12 billion in 1996. The most dramatic growth has come from films and
consumer products.

The Euro Disney venture ran into a number of hurdles and did not live up to
expectations. The company faced many cultural issues with this venture. However, the
international expansion was a step in the right direction, and is sure to provide Disney
with valuable lessons for the future (Disneyland Tokyo, for example). Disney has also
taken up a significant amount of risk by venturing into new theme parks that do not
completely adhere to Walt Disney’s ‘wholesome family fun’ philosophy. The boast of the

Page 6 of 8 Abhay Rajaram

E-299 Competitive Strategy Disney Case Writeup

sun never setting on a Disney theme park seemed somewhat misplaced, especially for a
company that has traditionally promoted itself only through its successful brand
ambassadors – Mickey Mouse and his lovable bunch of friends.

Disney expanded its hotel and resort businesses aggressively. The company
managed to maintain utilization rates of 80% and more – well above industry averages.
The decision to introduce moderately priced hotels was a key factor in enabling Disney
to segment its customer base and extract maximum value. The Vacation Club business,
a natural extension to the hotel business, has achieved moderate success over the last
decade. After Disney’s contract with Premier Cruise Lines expired, the company entered
the cruise business as well. All of these businesses successfully exploited the synergies
between theme parks and customer requirements for places to stay.

Disney’s entry into sports marked the next step in the company’s tireless effort to
enter markets in which it believed its entry would increase the total value of the markets.
Disney identified that sports (sporting complexes, sports teams, sports on television)
represented a market where it could benefit because of the inherent cross-dependencies
between sports events, hotel stays, TV broadcasting, and merchandising.

Disney continued its good cost-control efforts in the film industry, as a result of
which the company’s profit margins remained well over the industry norms. The effects
of reinvesting in Imagineering paid rich dividends over the last decade. Disney earned
record revenues as well as critical acclaim for the animated movies it released.
Additionally, Disney expanded its market beyond the primary ‘family entertainment’
market by launching the Buena Vista label and acquiring Miramax.

As the company grew aggressively in the home video market, it ran the risk of
cannibalizing itself at the box office. In hindsight, Disney could have put some measures
in place to ensure that it captured maximum market share without putting itself at risk as
a result of its own vertical integration initiatives.

Disney’s acquisition of ABC in 1996 was an excellent move. This venture offered
extensive synergies – Disney now had a vast new domestic and international channel
through which it could distribute its various entertainment products.

While the intention behind the venture into Broadway shows is understandable,
the wisdom of the move is questionable. Firstly, Broadway shows are extremely risky.

Page 7 of 8 Abhay Rajaram

E-299 Competitive Strategy Disney Case Writeup

But more importantly, there are only limited interdependencies between Broadway
productions and Disney’s core businesses.

Disney has enjoyed tremendous success in the consumer products business

over the last decade. In spite of the failure of the “Mouse in the Kitchen” venture, Disney
should continue testing new ideas and concepts. The financial impact of the failed
venture was negligible. The concept was well worth the risk. Disney has also
successfully exploited its standing in the industry with highly successful corporate
alliances.

Disney’s planned entry into software and multimedia has been a step in the right
direction. This new medium represents a challenge to all the players in the market, and
offers the Disney Imagineers the opportunity to wow the world with their innovations.
However, the company has not executed according to its plan, and is facing delays. In
any case, this is a market that Disney simply cannot ignore, and the company’s strategy
to aggressively target this emerging market is spot on.

On the whole, Michael Eisner has made the right strategic decisions by carefully
developing alliances and growing his business from within while continuing to exercise
fiscal responsibility. His words, “Putting money everywhere is a way of admitting you
don’t know what you are doing”, appear to signal that he understands the pitfalls of
racing towards a consolidation war with competitors. However, like any rapidly growing
company, Disney faces significant risks as it continues to execute on its 20% annual
growth strategy. For a company that relies heavily on its strong culture, Disney must
manage its growth and acquisitions carefully. The company must invest heavily on
training activities for its employees. Most importantly, in its quest to expand the scope of
its operations, Disney must not lose sight of the single most important factor that has
brought the company where it is – the strong synergies and symbiotic relationship
between its various businesses.

Page 8 of 8 Abhay Rajaram