Yale SCHOOL of MANAGEMENT
Christopher Kirkman
Strategy Analysis of The Walt Disney Company Introduction In a 1988 consumer research study, ‘magic’, was ranked as defining attribute of Disney, as a company, by 34% of the study’s participants. Clearly Disney means more to its customers than simply amusement parks, movies, television shows, clubs, or books. The whole of Disney is far greater than the sum of its parts. The magic of Disney is the seamless synergies of its wildly diverse businesses. Its products are more ‘Disney’ than they are products. For its youngest customers (who are being born every minute)1, there are no substitutes. Throughout its history, Disney has, with minor exceptions, shown the true value to shareholders created by synergies from thoughtful diversification. Diversification Synergy is an overused word in the promotion of various corporate strategies. However, Disney distinguishes itself by its fundamental understanding and usage of this concept throughout its diversification efforts. Throughout its history, Disney has embraced a clear and concise corporate strategy that has contributed to its prolonged success, and ultimately has created value. Walt Disney’s famous quote is that “It all started with a mouse.” In retrospect, it might be easy to assume that Disney’s success is based on some inherent competitive advantage, but Disney shows his understanding that this is not the case, and his importance to the corporate culture, through his distinct and personal leadership, is indicated by his employee’s mantra of “what would Walt do?” Ingrained in Disney’s corporate culture is the understanding that while Disney has unique and ‘magical’ products, the magic isn’t the products themselves, but instead in the way in which they interrelate and complement each other. Disney began diversifying very early. In 1928, Disney’s first cartoon was released. In 1929, one year later, Disney licensed a pencil tablet. By 1932, the Mickey Mouse Club (MMC), a crucial vehicle for selling Disney’s products, and tying them into a cohesive whole, had over 1 million members. During the war, Disney produced training and educational films. In 1949, the company diversified into music. Disney did not overlook the invention of television as well. Walt Disney said “It is obvious that television…will make a tremendous impact on the world of entertainment and motion pictures.” Walt Disney’s early and intuitive understanding of the interrelation of new industries to each other clearly leads to his crowning achievement: Disneyland. While the synergies between other traditional forms of media might be obvious, prior to Disneyland, amusement parks, while popular at points, were out of vogue and did not have the “theme” appeal they have today: As the 1950's dawned, television, urban decay, desegregation, and suburban growth began to take a heavy toll on the aging, urban amusement park. The industry was again in distress as the public turned elsewhere for entertainment. What was needed was a new concept and that new concept was Disneyland. When Disneyland first opened in 1955, many people were skeptical that an amusement park without any of the traditional attractions would succeed. But Disneyland was different. Instead of a midway, Disneyland offered five distinct themed areas, providing "guests" with the fantasy of travel to different lands and times. Disneyland was an immediate success, and as a result, the theme park era was born.2
1
The Walt Disney Company: A Corporate Strategy. Michael Porter, 1988.
2
National Amusement Park Historical Association, “Amusement Park Industry History”, 1999.
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Yale SCHOOL of MANAGEMENT
Christopher Kirkman
Walt Disney’s crowning achievement was not the invention of Mickey Mouse, but instead creating of a mechanism for creating synergies between businesses. Porter proposes three tests to determine if diversification truly creates shareholder value. Disneyland is a striking example of how Disney’s strategy reflects Porter’s philosophy of the attributes present in successful diversification efforts: 1) The attractiveness test: the amusement park industry, at this period of history, is fragmented and destitute. The entry barriers are high, due to substantial fixed costs. Suppliers have very little power, being desperate for business after the recent decline in traditional amusement parks. Buyers (customers) are unorganized, and while there are many forms of entertainment available, nothing exists matching the ‘theme’ park concept. 2) The cost-of-entry test: This is perhaps the weakest component of the Disneyland effort. It had very high fixed costs, and rested heavily upon quelling the public’s skepticism. However, Disney approached this with the correct expectation that its fixed costs would be lower than its expected profits. 3) The better-off test: Disney’s diversification efforts, more than anything else, propagated the ‘magic’ of Disney. Television advertised the movies, which advertised the hardgoods, which advertised the television shows. Disneyland proved to be the perfect vehicle to capitalize on the advertising potential of these types of media. More than just being a provision mechanism for advertising for Disney’s other products and services, Disneyland was a land of pure advertising for Disney ‘magic’. In fact, its nickname is ‘The Magic Kingdom.’ Walt Disney created a work wherein instead of paying to advertise Disney’s products, he could actually charge people to be exposed to advertisements. Disneyland was the first ‘theme’ park, which comes naturally from Walt Disney’s understanding of the concept of the theme that is the synergy between diverse businesses. Continued diversification consistent with Walt Disney’s early actions leads to continued success and the creation of shareholder value. In most cases, Disney shows itself to be a corporation acutely aware of the importance of appropriate diversification and the true nature of synergy. Control A very important lesson for the company, which contributed heavily to their later success, was their loss of an early popular character, “Oswald, the Lucky Rabbit.” Not only did Disney retain control of all of its characters after this incident, but exhibited a strong pattern of controlling behavior of all types across a wide swath of industries. Disney eventually controlled all operations inside Disneyland, which had very strict employee rules and regulations. In addition, Disney lobbied to have control of the facilities that supplied Disneyland, normally a civic responsibility. Walt Disney Productions made a concerted effort to buy back all of the park’s equity as soon as possible. The company brought back its agreement with RKO to distribute films in-house when it was financially capable. Disney’s continued movie success came from the company’s philosophy that “money was no substitute for imagination.”3 It maintained strict cost controls in an industry where costs overruns were common, and rather than pay star wages, developed its own in-house stars. In fact, animation is the perfect vehicle for a company wishing to have tight controls, as the anonymity of a ‘star’ animator prevents Disney from experiencing supplier power issues. More than anything else, Disney’s tight operational controls create shareholder value. This core competency passes Porter’s three appropriateness tests for skill transference. For Disney’s industry, as stated above, this sort of control is unique to the industry, which is certainly a 3
The Walt Disney Company: Corporate Strategy. Michael Porter, 1988.
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Yale SCHOOL of MANAGEMENT
Christopher Kirkman
competitive advantage. This is not a peripheral skill. Also, these controls appear to be beyond the ability of Disney’s competitors. Leadership As stressed above, Disney’s early success came from innovative leadership by Walt Disney. Michael Eisner took over in 1984 following a period of financial and image deterioration. Quickly, Eisner made this his own company, by changing the name from Walt Disney Productions to The Walt Disney Company, hiring his own new management, and outline his overall corporate objectives. One of the keys to Disney’s early success, similar to the successes of Southwest or Wal-Mart, was consistent leadership. Both employees and customers of Disney felt that Walt Disney embodied the company. Disney was suffering without a leader that typified the Disney spirit. Eisner, knowing that he faced stiff competition in any efforts to duplicate Walt Disney’s phenomenal success, knew that rather than try to run somebody else’s company, he would be more successful in creating his own. Specific Eisner initiative included: 1) The Disney Store 2) Euro Disneyland 3) Purchase of Disney’s first broadcasting outlet (KHJ-TV) 3) Establishing a major television presence 4) Significantly increasing number of films released, from 2 in 1984 to 15-18 yearly. In terms of these specific actions, clearly the most successful (with perfect hindsight) was Disney’s efforts in the film industry. Their strict cost controls, combined with well-chosen management, increased their market share from 3% to 14% in 1987. The Disney Store should not be overlooked however, as it provided an important vehicle for “bringing a slice of Disney magic [to] every community.”4 While these specific initiatives were very important for Disney’s success, perhaps the new CEO’s greatest contribution to Disney was his ability to focus the organization. His strategic vision was communicated through the apparently symbolic change of the name of the corporation. “Walt Disney Productions” signifies a company that is limited to producing something. If one was unfamiliar with the company (if this is possible), a false assumption regarding the scope of this organization might be made. “The Walt Disney Company” could be anything. Its scope is limitless. Eisner then creates three distinct business units, Studios, Consumer Products, and Attractions. These units allow Disney to better focus the synergies between its businesses, and retain the control that has proved to be of such importance to Disney’s continued success. Growth Over the Past Decade Over the past decade, Disneyland has faced the challenge of meeting Michael Eisner’s targeted 20% growth rate, a somewhat unrealistic number. The primary vehicles for this aggressive growth were diversification of existing businesses, exploring synergies in new industries, and overseas expansion. Overseas expansion is a logical goal for a corporation that has reached a near-saturation point in domestic markets. Clearly, there is a large degree of expansion potential, given the specific risks associated with a product hinging to such a great degree on a ‘magic’ that might be difficult to convey to another culture. Disney’s diversification efforts, however, are of greater interest and relevance to the topic at hand. Two particular diversification initiatives demand attention due to their broadness of scope: the CapCities/ABC Acquisition and Celebration, Disney’s planned community. Disney wished to gain ownership of a programming distribution channel, which appears to be naturally synergistic to their business. However, there are several subtleties to this particular industry that raise question as to its true value to the Disney organization. If Porter’s appropriateness test is applied to the CapCities/ABC acquisition, this initiative falls short in several ways. The network 4
Ibid.
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Yale SCHOOL of MANAGEMENT
Christopher Kirkman
television industry is not attractive. It is in decline, there are many substitutes, and it has wellestablished competitors. The cost for Disney to enter this business is far higher than any expected profits. It appears that Disney, in its desire to obtain a network, was willing to overpay. Most importantly, Disney will most likely not be better off owning this business. Disney currently has a television distribution channel, The Disney Channel (TDC). Although TDC is a cable station, cable saturation, along with other forms of multimedia, particularly the Internet, are rapidly taking over market share traditionally held by the major networks. In addition, because Disney cannot possibly be the sole content provider for CapCities/ABC, they will lose control over a major portion of their business. Because control is one of Disney’s core competencies, this has the potential to be very problematic. Disney also faces the significant hazard of having its ‘magic’ diluted by the inextricably non-Disney core value content that ABC provides as part of its role as a network television station. The acquisition of CapCities/ABC does not have the elements of a successful endeavor for Disney. Celebration, on the other hand, is a real estate project. Real estate is not traditionally considered to be in the realm of the entertainment industry. On the surface, this appears to be simply a portfolio diversification effort on the part of Disney’s management. However, Celebration is more than simply real estate. In fact, it could be considered the ultimate step towards the propagation of Disney ‘magic’ in our society. Instead of simply going to the movie, the store, or the theme park to have the Disney experience, Celebration gives the customer the opportunity to live it. Disney ‘magic’ becomes a lifestyle. Perfect synergies exist between Disney’s entertainment business and Celebration. Celebration’s residents are the ideal consumers of all of Disney’s products. Disney’s entertainment business in its entirety is an advertisement for Celebration. While real-estate industry diversification, in this context, would pass Porter’s attractiveness and cost-of-entry tests, it is truly the better-off test that would show the value of entry into the real estate market to Disney shareholder’s value. Conclusion Disney is an example of a company that understands proper diversification. Walt Disney’s intuitive comprehension of synergy, ‘magic’ in his lexicon, is the driving force behind the company’s continued success. While imperfect in the present day, Disney’s creative use of diversification ultimately has the potential of creating a vast amount of shareholder value through propagating this ‘magic’ throughout society in ways previously unimagined.
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