MGMT 619 Capstone: Disney

Professor Fern

Spring 2009

Team: RedDragon

Lishuan Wu, May Chen, WeiLii Tan, Robin Salim, Jin Choi

“Disney” Case Write-up

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Section 1

Disney’s corporate strategy till 1994 was rooted on Walt Disney’s vision to “create universal

timeless family entertainment.” Disney’s synergistic and coherent strategies supported the

enterprise expansions and market growths during this period with stellar financial results as well

as the timeless brand image. The strategies and the successful effects can be described into four

categories (see Exhibit 1 for Disney’s strategic activities)

Control of quality and financials, vertical integration

“Oswald, the Lucky Rabbit” taught Disney the important lesson of total control and vertical

integration. Disney established its own distribution house, film studio, music label and so on to

better control quality content and costs. Synergies among business sectors with the same

corporate culture & value made the communication and production more efficient and effective.

Control of Brand Image

To better promote and differentiate itself from competitors, Disney used horizontal integration to

promote the same product to gain more customer interests. Disney’s Broadway shows were

produced to promote Disney’s brand and parades were used to attract people’s attention. Also,

licensing characters was not only about cash flow, but also to refresh them and keep the

characters live longer in customer’s mind. Therefore, it was important for Disney to be selective

and careful about its copyright and distribution in order to maintain its high brand equity and to

completely control the entertainment experiences.

Expand horizontally & geographically with synergies & leverage of resources & capabilities

To increase its presence and market awareness, Disney applied horizontal integration to expand

potential target segments with cross-promotions. In addition, more contents for adults were

produced to expand beyond the “family entertainment” base which offered animation, theme

parks, movies and many more that fit into the mainstream market. Geographic Expansion was

the next logical step once the United States market was saturated and Tokyo’s positive feedback

gave Disney the needed confidence and cash flow to implant the formula elsewhere.

Leadership and Creativity

Disney relied heavily on one key executive who had a great vision for the company to manage

the creativity of the company. Walt Disney created the animated film then led his theme park

vision to create a total entertainment for the whole family. Eisner envisioned the annual 20%

revenue growth by implanting leadership and creative market strategies to reach the goal.

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Section 2

Michael Eisner’s short term goal was to quickly improve Disney’s financial performance

by building strong brand equity, bringing back Disney’s corporate synergy, rebuilding

deteriorated business lines, maximizing profit business lines, and imposing tight cost control.

Eisner strongly believed in preserving corporate values inherited from Walt Disney. All

new employees, executives, managers were required to attend culture training program. Eisner

encouraged innovative ideas, but the business units had to deliver well-defined strategic and

financial objectives. To build synergy and improve operation efficiency among businesses,

Disney employed internal transfer pricing policies and introduced corporate marketing, in-house

media buying group, library committee, etc. to coordinate and allocate business resources.

Eisner recruited outside top executives to rebuild deteriorating TV and Movie business.

To appeal to broader audience, Disney expanded into mature audience market. This strategy

quickly turned movie division to be profitable and became the market leader. To maximize

theme park’s profitability, Disney updated and expanded attractions at the parks to attract more

visitors, and used attendance-building strategies as well as raising ticket prices to offset the

investment.

In the long-term basis, Eisner continued to grow Disney’s business in horizontal and

vertical dimensions, and expanded its presence worldwide which fruited into Euro Disney.

Theme park expansions led to real estate business like hotels and resorts to encourage longer

stays and attract major conferences. Furthermore, movie division created Hollywood Pictures

and acquired Miramax which led Disney into the mainstream movie industry. Eisner expanded

into other types of entertainment such as sports (NHL) and Broadway theater production. The

consumer product division opened “Disney Stores” and entered into book, magazine, record

publishing business, direct-mail and catalog marketing. Also, Disney formed Buena Vista

Home Video to sell videos directly to consumers.

Increase Net-Income from1984-1988

In Eisner’s first four years, he aggressively focused on increasing revenue stream, and

controlled cost tightly, which directly improved the bottom line. SG&A were maintained at flat

level even with the increasing revenues from 1984 to 1988. By expanding movie and TV market

to adults, revenues from these two divisions quickly improved. Eisner focused on moderately

budgeted movies to keep costs low by identifying good scripts from unknown writers and hiring

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well-known actors in career slumps and TV actors. Cross promotion of licensing and TV

syndication to re-use old materials were implemented to make quick profits.

Section 3

Since the company started in 1923, quality, creativity, entrepreneurship, and teamwork

have been the core of Disney’s corporate values. Walt E. Disney himself was known for his

commitment to excellence and hardworking management style. The corporate structure was very

flat and non-hierarchical where practically no one had a title. These values and corporate

structure helped Disney to achieve synergy across the company, introduce creative ideas and

control quality of the work. However, after Disney passed away in 1966, the corporate values

began to fade as the management team in film division struggled to come up with creative and

innovative ideas. Pre-1984 years, Disney also had been characterized as family controlled

company and as family-oriented entertainment provider.

In 1984, Eisner took over Disney as an outsider but he quickly instilled the same

corporate values introduced by Walt Disney and simultaneously introduced frictions based on his

promise of maximizing shareholder’s return of 20%. The company structure became more

hierarchical as Eisner hired outside talents to run the Disney’s motion pictures and television

division, formed a strategic planning group, and introduced corporate marketing group. Eisner

put heavy focus on financial performance and at the same time emphasized on expansive and

innovative ideas, which created conflicts between financial and creative groups within the

company. Furthermore, Eisner broke the tradition of only providing family-oriented

entertainment and got Disney into mature audience market.

Section 4

The strategic logic of the acquisition of ABC was due to several reasons. First of all is

growth expansion. Disney wanted to grow its entertainment business, and be the #1

entertainment company. ABC had been the top rated network and built a global media network

channel. Acquiring ABC would give Disney access to viewers around the world.

At the time of the merger, Disney’s business portfolio consisted mostly of cash cows:

studios, theme park, consumer products (see Exhibit 2). Disney had significant market share and

revenues, but the markets served were experiencing low growth rates, with the exception of

internet content which Disney had a very small market share (see Exhibit 3).

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The media network business was, at that time, still a high growth business with a growth

rate of 20.6% (calculated from ABC’s revenue 5 years following the merger), and ABC at that

time was the market leader in that segment which would make it a star in the BCG matrix. Given

Eisner’s goal of achieving return on stockholder equity of more than 20%, ABC offered high

growth rate which fitted very well into Eisner’s plan.

Also, ABC’s acquisition complemented Disney’s corporate strategy of vertical

integration, giving more control over the value chain. Instead of relying on partnerships and

agreements with various distribution networks; Disney would own distribution network for

complete control over its contents, as well as consolidated resources and reduced cost of

operations. The acquisition also added to Disney’s horizontal integration as a content provider.

ABC had rights to content media different from Disney’s traditional studio business. One such

content category was sports, namely the ESPN sports channel, which was the most profitable

sports channel at that time, as well as content targeted towards the adult audience. This would

also enable cross-promotion between Disney’s content and ABC’s content.

Overall, the increased vertical and horizontal integration would open up possibilities for

synergy, which Michael Eisner had made a focal point of his management team. There were

several well-intentioned strategic reasons why the merger made sense both to ABC and Disney,

and they were aligned with Disney’s corporate strategies of fostering synergy, encouraging

creativity, controlling quality and improving financial performance.

Section 5

The core corporate strategies of Disney from pre-1995 years continued on through the

period 1995-2000: such as synergies across business units, cost control, distribution control,

geographic, vertical, and horizontal expansions, etc. After the acquisition of ABC, even though

ABC took Disney into other non-related markets, Disney actually maintained the same corporate

strategies in terms of expansions with synergies by controlling high quality contents, distribution,

and financial aspects of the business units. However, the acquisition of ABC brought new

challenges to Disney at the corporate level in dealing with the corporate strategies at much

bigger scales and broader diversities. Disney was already experienced with managing multi-

brands like Touchstone, Miramax, and Hyperion, but the association with ABC made the brand

equity more difficult to manage due to the incongruent approaches of diversified businesses.

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Furthermore, the inherent synergies that Disney valued in the previous years became obsolete,

thus Eisner had to put more efforts into making sure that “the outsiders” received the injection of

Disney’s core values and establishing performance metrics based on synergistic business growth.

Geographically, ABC, CineNova, and Internet added to the global delivery arms putting

Disney in good position for international and untapped regions growth. With the international

market offering Disney the biggest growth potential, the global access certainly puts Disney in

better position than before. Vertically, ABC added distribution channels with more TV and radio

network, Club Disney added retail stores at malls, and internet added services for consumers to

deal online. Disney’s long term corporate strategy of controlling the production and distribution

puts Disney as a corporate in stronger position than before. Horizontally, Disney expanded into

other types of entertainment like sports, cruise ships, and mature themed Broadway shows. With

wider horizontal expansion and diversification, Disney is in better position to cross-promote at a

bigger scale.

Overall, Disney’s acquisition of ABC and other expansions demonstrate good strategic

fits with additional resources and capabilities to grow and enter into new markets. However,

Disney’s financial performance has been deteriorating with ROE going from 12% in 1997 down

to 4% in 2000, whereas ROE numbers were in double digits for the years leading up to 1994.

One major area of difference is synergy being much weaker now with ABC acquisition diluting

the traditional force behind the synergistic values. So, it appears that Disney is struggling with

the execution of the core strategies. Disney’s success will attribute to how well the corporate

coordinates the synergies among business units to bring values to each BU in terms of sharing,

leveraging, cross-promoting the growth potentials. Disney’s corporate strategies for providing

leadership and creativity, as well as tight financial management, will need to continue as the

backbones of the company.

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Exhibit 1: Disney Strategy Activity Map till 1994

Image Resource: Disney.com

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Exhibit 2: BCG Matrix

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Exhibit 3: Growth rate for major Disney business units after merger of ABC

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