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. While competitors may be able to lure away some of Disney’s employees. Finally. This makes it virtually impossible for a competitor to make good use of any isolated Disney asset that it might gain access to. 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. Foresight Walt Disney was the first person to identify the market for family entertainment. it will be very difficult for them to duplicate the vibrant Disney culture. The large real estate purchases in Florida were a direct result of this foresight. 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 .E-299 Competitive Strategy Disney Case Writeup cohesive strategy in which the ‘whole product’ is much greater that the sum of its parts. and therefore structured the company such that it fostered creativity without external pressures from unions and stockholders.

movies and resorts promoting the cruise lines. which in turn generate the demand for company stores. Thus. there are similar synergies in play across all of Disney’s businesses – Theme parks promoting movies. However. effectively. The driving force behind this idea was Disney’s obsession with retaining control of the complete user experience. It is interesting to note that an increase in the sales of books on Winnie the Pooh whets the consumer’s appetite and. thus generating the ‘tornado effect’ and growing the business as a whole. 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. in turn. These businesses act as strong complementors for each other. a successful Disney movie enhances the Disney brand and increases customer awareness and loyalty for Disney’s characters (such as Mickey Mouse). 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. all branding activities increasing the sales of consumer products. This. over the years. drives the demand for home videos and TV broadcasts of the movie. sports teams and events driving the demand for TV and radio stations. 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. theme parks increasing the demand for hotels and resorts. Quite clearly. thus creating a ‘virtuous circle’ across the value chain. movies promoting theme parks. For example. Disney’s publishing business benefits from these activities as consumer demand increases for books and magazines with Disney’s successful brand ambassadors.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. Page 3 of 8 Abhay Rajaram .

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

Eisner laid an emphasis on international initiatives and corporate activities such as joint promotions with retailers. Eisner put in place a number of new initiatives to build attendance at the parks as well as increase repeat visits from customers. As part of its strategy to grow its businesses related to the television industry. Most significantly. As a result of these activities. By 1987. restaurateurs and other business partners. This was a highly successful venture. Disney continued to invest in innovative new rides in its theme parks. while net income grew both in terms of absolute numbers and as a percentage of total revenues. Disney inaugurated its cable channel in 1983. This enabled the company to increase its ticket prices at the parks without adversely affecting attendance. Up until 1984.9 billion in 1987. After many years of growth. Page 5 of 8 Abhay Rajaram . Disney launched the Disney Stores in 1987. Disney aggressively grew its Home Video market from $42 million (5. Disney also announced its most ambitious project until then – Euro Disney. Disney acquired an independent TV station in 1987 for a price that was well below market value.6 billion in 1984 to $2. was relatively stagnant. These included a national advertising campaign and keeping the parks open on Mondays. while highly profitable.E-299 Competitive Strategy Disney Case Writeup Based on a sell-through pricing strategy for home videos. To rejuvenate sales in this division. it did enter the rapidly growing cable TV business.5% of the market) in 1984 to $213 million (close to 10% market share) in 1987. attendance at Disney’s theme parks witnessed a decline in 1984. While the company did not achieve significant successes in the network television market. Disney’s consumer products business. with sales volumes per square foot 3-5 times the national average. Theme park attendance grew from approximately 30 million in 1984 to almost 40 million in 1987. Revenues grew from $1. sales of consumer products grew steadily from $110 million in 1984 to $167 million in 1987. Eisner’s efforts to rejuvenate Disney were extremely successful. as is evident from the company’s financial results. it had close to 4 million subscribers. Eisner also identified ‘after-dark attractions’ as a huge untapped market and introduced plans to develop new entertainment areas for adult guests. Anticipating an increased demand as a result of the renewed focus on consumer products.

focusing particularly on overseas expansion and increasingly diverse ventures. 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 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 results of Eisner’s decision are apparent – for example. However. Enforcing a policy of fiscal responsibility was the primary driver of better operational efficiencies. 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. and is sure to provide Disney with valuable lessons for the future (Disneyland Tokyo. The most dramatic growth has come from films and consumer products. Not only did this significantly improve the company’s financial results. it also sent out a signal to employees. The company faced many cultural issues with this venture. customers. The boast of the Page 6 of 8 Abhay Rajaram . Revenues have grown from $3. for example). the innovations and ideas of the Imagineering group are the driving force behind all of Disney’s activities. the Walt Disney Company has continued to build on the foundations it set in place between 1984 and 1987. As Figure 1 on Page 2 shows.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 1987.4 billion in 1988 to over $12 billion in 1996. and investors that Disney was back on track. However. 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. The Euro Disney venture ran into a number of hurdles and did not live up to expectations. Evaluate Disney’s growth strategy over the past decade. the international expansion was a step in the right direction. Over the last decade. 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.

Disney continued its good cost-control efforts in the film industry. 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. After Disney’s contract with Premier Cruise Lines expired. a natural extension to the hotel business. Disney earned record revenues as well as critical acclaim for the animated movies it released. The decision to introduce moderately priced hotels was a key factor in enabling Disney to segment its customer base and extract maximum value. Disney expanded its market beyond the primary ‘family entertainment’ market by launching the Buena Vista label and acquiring Miramax. 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. In hindsight. As the company grew aggressively in the home video market. sports teams. Page 7 of 8 Abhay Rajaram . hotel stays. The effects of reinvesting in Imagineering paid rich dividends over the last decade. Disney expanded its hotel and resort businesses aggressively. the wisdom of the move is questionable. and merchandising. it ran the risk of cannibalizing itself at the box office. The Vacation Club business. The company managed to maintain utilization rates of 80% and more – well above industry averages. 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. sports on television) represented a market where it could benefit because of the inherent cross-dependencies between sports events. Disney’s acquisition of ABC in 1996 was an excellent move. TV broadcasting. Additionally. especially for a company that has traditionally promoted itself only through its successful brand ambassadors – Mickey Mouse and his lovable bunch of friends. Disney identified that sports (sporting complexes.E-299 Competitive Strategy Disney Case Writeup sun never setting on a Disney theme park seemed somewhat misplaced. 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. While the intention behind the venture into Broadway shows is understandable. as a result of which the company’s profit margins remained well over the industry norms. Broadway shows are extremely risky. has achieved moderate success over the last decade.

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

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