E-299 Competitive Strategy

Why has Disney been successful for so long?

Disney Case Writeup

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

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Abhay Rajaram

Disney clearly understood that the entertainment industry is driven by creativity. Also.E-299 Competitive Strategy Disney Case Writeup cohesive strategy in which the ‘whole product’ is much greater that the sum of its parts. Finally. 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. and therefore structured the company such that it fostered creativity without external pressures from unions and stockholders. The large real estate purchases in Florida were a direct result of this foresight. While competitors may be able to lure away some of Disney’s employees. 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 (Imagineering) TV/Radio Theme Parks Home Video Sports Consumer Products Page 2 of 8 Abhay Rajaram . This makes it virtually impossible for a competitor to make good use of any isolated Disney asset that it might gain access to. 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 company also achieves its goal of ‘controlling’ the environment by owning these businesses. The driving force behind this idea was Disney’s obsession with retaining control of the complete user experience. For example. drives the demand for home videos and TV broadcasts of the movie. movies promoting theme parks. thus generating the ‘tornado effect’ and growing the business as a whole. effectively. Disney’s publishing business benefits from these activities as consumer demand increases for books and magazines with Disney’s successful brand ambassadors. Thus. Quite clearly. all branding activities increasing the sales of consumer products. theme parks increasing the demand for hotels and resorts. 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. a successful Disney movie enhances the Disney brand and increases customer awareness and loyalty for Disney’s characters (such as Mickey Mouse). It is interesting to note that an increase in the sales of books on Winnie the Pooh whets the consumer’s appetite and. over the years. there are similar synergies in play across all of Disney’s businesses – Theme parks promoting movies. 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. Page 3 of 8 Abhay Rajaram . movies and resorts promoting the cruise lines. in turn. which in turn generate the demand for company stores. 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. This. However. sports teams and events driving the demand for TV and radio stations. These businesses act as strong complementors for each other.E-299 Competitive Strategy Disney Case Writeup Disney has created a marketplace in which a number of inter-dependent and crosspromoting businesses feed into each other. thus creating a ‘virtuous circle’ across the value chain.

25% of sales in 1984 to 15. Revenues from films grew from $165 million in 1983 to $876 million in 1987. these strict financial rules did not come at the expense of creativity. The company managed the underlying risks by creating limited partnerships in which partners shared the financial costs of producing movies. In 1984. Eisner restored the R&D budget of the Imagineering group in order to encourage new ideas and innovations. the company implemented cost ceilings on movie budgets in order to enforce a policy of fiscal responsibility across the company. He reduced the number of reporting business units in order to improve cross-divisional communications. However. However. Eisner successfully committed himself and the company to the legacy of Walt Disney. Eisner and the top management at Disney stepped into a troubled situation in the film business in 1984. they instituted sweeping changes in this business in order to get it back on track. These activities transformed Disney’s film business and re-established Disney as a strong force in this industry. This strategy of “managing creativity” achieved a balance between the creative and financial forces of the company. Additionally. Most importantly. The company also refocused its efforts on identifying good scripts and pursuing budding talents in the industry. The financial results of this policy are evident –Income grew from just 6. injected fresh thinking into a sluggish organization by going outside the company to fill several key management positions. He changed the company’s corporate name to reflect the ideology of Disney being a unified company across various businesses and functional disciplines. Disney reduced the movie reissuing cycle from 7 years to 5 years. Eisner also created a corporate marketing group to coordinate marketing activities across the company. Disney’s market share in the industry grew from a meager 4% in 1984 to a strong 14% in 1987. income was less than 1% of sales.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. himself a Disney ‘outsider’. Page 4 of 8 Abhay Rajaram .” Accordingly. The improvement is even more significant in the Film and TV business. By 1987.5% of sales in 1987. At the same time. As part of the corporate reorganization. The company set a new goal to release 15 to 18 new films per year. it was nearly 15% of sales. Eisner. The new management strongly believed that “money is no substitute for imagination.

By 1987. it did enter the rapidly growing cable TV business. Eisner’s efforts to rejuvenate Disney were extremely successful. sales of consumer products grew steadily from $110 million in 1984 to $167 million in 1987. Disney aggressively grew its Home Video market from $42 million (5. As part of its strategy to grow its businesses related to the television industry. Disney inaugurated its cable channel in 1983. Most significantly. Revenues grew from $1. As a result of these activities. After many years of growth. with sales volumes per square foot 3-5 times the national average. while highly profitable. Page 5 of 8 Abhay Rajaram .5% of the market) in 1984 to $213 million (close to 10% market share) in 1987. Up until 1984. it had close to 4 million subscribers. Disney’s consumer products business. Theme park attendance grew from approximately 30 million in 1984 to almost 40 million in 1987. This was a highly successful venture. restaurateurs and other business partners.E-299 Competitive Strategy Disney Case Writeup Based on a sell-through pricing strategy for home videos. while net income grew both in terms of absolute numbers and as a percentage of total revenues. Eisner also identified ‘after-dark attractions’ as a huge untapped market and introduced plans to develop new entertainment areas for adult guests. Eisner laid an emphasis on international initiatives and corporate activities such as joint promotions with retailers. Disney also announced its most ambitious project until then – Euro Disney. Disney continued to invest in innovative new rides in its theme parks.6 billion in 1984 to $2. 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. Disney acquired an independent TV station in 1987 for a price that was well below market value. While the company did not achieve significant successes in the network television market. Anticipating an increased demand as a result of the renewed focus on consumer products. attendance at Disney’s theme parks witnessed a decline in 1984. This enabled the company to increase its ticket prices at the parks without adversely affecting attendance. Disney launched the Disney Stores in 1987. To rejuvenate sales in this division.9 billion in 1987. was relatively stagnant. as is evident from the company’s financial results.

The Euro Disney venture ran into a number of hurdles and did not live up to expectations. However. 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. However.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. As Figure 1 on Page 2 shows. 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. 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. focusing particularly on overseas expansion and increasingly diverse ventures. and is sure to provide Disney with valuable lessons for the future (Disneyland Tokyo. for example). Evaluate Disney’s growth strategy over the past decade. the Walt Disney Company has continued to build on the foundations it set in place between 1984 and 1987. it also sent out a signal to employees.4 billion in 1988 to over $12 billion in 1996. The results of Eisner’s decision are apparent – for example. the international expansion was a step in the right direction. and investors that Disney was back on track. Revenues have grown from $3. Not only did this significantly improve the company’s financial results. The company faced many cultural issues with this venture. The boast of the Page 6 of 8 Abhay Rajaram . customers. the innovations and ideas of the Imagineering group are the driving force behind all of Disney’s activities. Over the last decade. The most dramatic growth has come from films and consumer products. 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 effects of reinvesting in Imagineering paid rich dividends over the last decade. Page 7 of 8 Abhay Rajaram . it ran the risk of cannibalizing itself at the box office. a natural extension to the hotel business. 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.E-299 Competitive Strategy Disney Case Writeup sun never setting on a Disney theme park seemed somewhat misplaced. TV broadcasting. The Vacation Club business. Additionally. sports on television) represented a market where it could benefit because of the inherent cross-dependencies between sports events. As the company grew aggressively in the home video market. the wisdom of the move is questionable. After Disney’s contract with Premier Cruise Lines expired. Disney expanded its hotel and resort businesses aggressively. Broadway shows are extremely risky. In hindsight. hotel stays. the company entered the cruise business as well. sports teams. Disney earned record revenues as well as critical acclaim for the animated movies it released. The company managed to maintain utilization rates of 80% and more – well above industry averages. as a result of which the company’s profit margins remained well over the industry norms. The decision to introduce moderately priced hotels was a key factor in enabling Disney to segment its customer base and extract maximum value. Disney continued its good cost-control efforts in the film industry. Disney expanded its market beyond the primary ‘family entertainment’ market by launching the Buena Vista label and acquiring Miramax. especially for a company that has traditionally promoted itself only through its successful brand ambassadors – Mickey Mouse and his lovable bunch of friends. Firstly. This venture offered extensive synergies – Disney now had a vast new domestic and international channel through which it could distribute its various entertainment products. Disney identified that sports (sporting complexes. While the intention behind the venture into Broadway shows is understandable. 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. All of these businesses successfully exploited the synergies between theme parks and customer requirements for places to stay. has achieved moderate success over the last decade. and merchandising.

This new medium represents a challenge to all the players in the market. Disney faces significant risks as it continues to execute on its 20% annual growth strategy. like any rapidly growing company. His words. in its quest to expand the scope of its operations. In spite of the failure of the “Mouse in the Kitchen” venture. However. there are only limited interdependencies between Broadway productions and Disney’s core businesses. and the company’s strategy to aggressively target this emerging market is spot on. and offers the Disney Imagineers the opportunity to wow the world with their innovations. On the whole. Most importantly. In any case. this is a market that Disney simply cannot ignore. The concept was well worth the risk. appear to signal that he understands the pitfalls of racing towards a consolidation war with competitors. Disney’s planned entry into software and multimedia has been a step in the right direction.E-299 Competitive Strategy Disney Case Writeup But more importantly. the company has not executed according to its plan. Disney must manage its growth and acquisitions carefully. The financial impact of the failed venture was negligible. Michael Eisner has made the right strategic decisions by carefully developing alliances and growing his business from within while continuing to exercise fiscal responsibility. 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. The company must invest heavily on training activities for its employees. Page 8 of 8 Abhay Rajaram . and is facing delays. Disney should continue testing new ideas and concepts. For a company that relies heavily on its strong culture. Disney has enjoyed tremendous success in the consumer products business over the last decade. “Putting money everywhere is a way of admitting you don’t know what you are doing”. Disney has also successfully exploited its standing in the industry with highly successful corporate alliances. However.