HBS 9-701-035

The Walt Disney Company: The Entertainment King

What Strategy should Disney Take to

Maintain High Return on Equity ?

Biz Pro 17th Junior Tim

Oct 26th, 2019
Agenda

1 Background Introduction 2

2 Studio Entertainment Strategy 6

3 Consumer Product Strategy 7

1

4 Conclusion 8

1
Sustainable competitive advantage leads to ROE exceeding 20% for a long time

Eisner’s Strategy Stock Performance

4000
Long-Run X Creativity
Profitability
3000
Revitalizing TV and movies

2000
Maximizing theme park profitability

1000
Coordination among businesses

0
Expanding into new businesses 1983 1985 1987 1989 1991 1993 1995 1997 1999

Index Disney Stock Index S&P 500

Source: Annual Report 2

Disney's core business is grounded in Studio (films), with a portfolio of
entertainment assets that are supported by and also reinforce the movies.

Promotion

IP
Theme Studio
IP
Media
Park Experience
 Channel

Promotion Promotion

IP Physical Goods

Channel

Consumer
Products

3
ROE and Net profit margin are highly correlated

ROE

Net Profit Margin X Total Asset Turnover X Leverage Factor

DuPont Analysis
6.0 30%

5.0 25%
20%
4.0
15%
3.0 Net Profit Margin
10% Asset Turnover
2.0 5% ROE
Financial Leverage
1.0 0%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Net profit margin is a key indicator to maintain ROE

Source: Company
Source: Annual Report
records 4
Operating margin drop in the Studio and Consumer Products division after 1994

• No further information about each division’s net income

• Found that the trend between operating margin and net profit margin are the same
• Use operating margin to analyze

Corporate Margin BU Operating Margin

30% 60%
25%
40%
20% Should focus on
Studio and Consumer
15% 20%
Product division
10%
0%
5%
-20%
0% 1983 1985 1987 1989 1991 1993 1995 1997 1999
19831985 1987198919911993199519971999
Theme Parks and Resorts Studio Entertainment (film)
Operating Margin Consumer Products Media Networks
Net Profit Margin

Source: Annual Report 5

Studio Entertainment Strategy
Dramatically changed filmmaking approach leads to unstable margin

Live-action Film Budget

1980s 1990s
60

• Past well-known actors in 55

52
career slumps • The highest-paid movie 45
Acotos
stars

In Million
• TV actors
30
30
• Strong scripts from less known
Feature • Expensive special effects 22
writers 15
Disney
Industry avg.
Type • Moderately budgeted films • Big-budget blockbusters 0
1994 1999

• Big-budget films’s financial risks are high

• Live-action films are hard to accumulate IP

Source: Disney Case 6

Consumer Product Strategy
Focus on overseas market and put emphasis on classic character merchandise

• the effectiveness of movie tie-ins is dropping

Current Situation
• toy sales with latest release movie are declining

Per capita spending levels on Disney merchandise

(% of U.S. level)

Europe overseas market looks attractive

Japan
USA
0 0.25 0.5 0.75 1

Targeting overseas market, build effective merchandise campaign to strengthen

established character to boost international sales.

Source: Disney case 7

Conclusion

Goal: Maintain high return on equity

Division Action Plan

Studio Change filmmaking approach

Entertainment Stop shooting star-driven movie

Consumer Target overseas market

Products Launch merchandise campaign focusing on legacy

8
Thanks for Listening