Strategy Formulation

The Walt Disney Company: The Entertainment King

GROUP- 5 Rahul Bafna – 04 MBA- DIV:A Vaibhav Gupta – 27 Akshay Johur – 33 Krishnan PS – 43 Akshaya – 50 Amogh Yadav – 63

Introduction-

It all started with a 17-year old boy’s dream to become an artist and his subsequent failure that resulted into what we can today easily term as one of the largest corporation on Earth.

Walt Elias Disney started his journey with Hollywood in 1923, where he founded Disney Brothers Studio along-with his older brother Roy Disney. However success did not come easy for the duo. “Oswald”- was a their first hit, the benefits of which however lasted short when they found out that the copyright of the series was now owned by a rival distributor who had hired away employees from Disney in order to shut competition.

However the Disney Brothers bounced back with modified version of Oswald- “Mickey Mouse”. Incorporating some new techniques like synchronized sound the new adaptation paid off and with the launch of Steamboat Willie Mickey became an international celebrity overnight.

The case goes on to describe the journey of The Walt Disney Company from its conception period till today and how the firm went through countless changes in size, structure, strategy, management and almost all the aspects under which a business operates. And is the case with every case, it ends with a big question mark- Does Disney need to change its strategy once again?

Case Analysis-

The case analysis has been done with emphasis on the previously used strategy by Disney; the current and existing strategy; and whether the company is in the need of any changes in its strategy. We have also made an attempt to link the approaches used by Disney with the 2 types of popular Strategic approaches- Structuralist Approach and Reconstructionlist Approach (popularly known as The Blue Ocean Strategy).

The study of the case and Disney’s strategy has been done in line with the different phases through which the organization has went through and accordingly the evaluation of the firm’s key strengths and weakness in its approaches have been discussed. The learnings from the case and its strategic analysis have been divided into 4 phases-

1927 – 1966: The Walt Disney Era 1967 – 1984: Roy O. Disney & Roy E. Disney 1984 – 1993: Michael Eisner 1994 – 2000: Michael Eisner: Rectification Measures

As mentioned earlier that there are basically 2 types of strategies practiced-

1. Structuralist Approach- Devising the strategy on the basis of the structure2. Reconstructionlist Approach- Devising the structure on the basis of the strategy

The success of both these strategies however depends on the development and alignment of the 3 propositions-

Value Proposition – To attract buyers; Profit Proposition – To enable the company to make money out of the value proposition; People Proposition – To motivate those working for the company to execute the strategy.

The ignorance of any of the three areas will ultimately cause an imbalance in the successful execution of the plans of the firm. The only distinguish factor between the 2 strategies is that in the Structuralist approach a firm has to align the 3 propositions through either Differentiation in its product/service or Low Cost of Operations; whereas in case of the Reconstructionlist approach the firm has to resort to Differentiation as well as Low Cost.

In the detailed assessment hereafter we shall see how Disney has made a choice between these 2 approaches and in some case has also used a combination of the approaches in line with the demand of the situation.

1927 – 1966: The Walt Disney Era

The initial stage for Disney was very much alike what every new venture has to go through- competition, financial crunch & getting a permanent workforce. However the company was lucky enough to get some early break-through ideas like Mickey Mouse which still remains the company’s most vital character till date. Disney won 6 academy awards for characters like Goofy and Donald Duck; and also released Snow White and the Seven Dwarfs which became the highest-grossing animated movie of all time.

The approach here can be said to be more of structuralist in nature when we see that the firm was adjusting its strategies as the entertainment market was developing. It was responding to the demands of the environment and that was the driving force for its success along with the differentiation factor in its inventions.

Prevailing Market Conditions- The entertainment market was in its development phase. Direct Competition. World War II affected the production.

Prevailing Company Structure & Subsequent Transition- Company was in its initial phase and was facing short-term cash problems. It was a flat and nonhierarchical organization. Creativity and quality were the driving forces for the success of the company. Company was scaling up and went public in 1940. World War II affected the production. 1966- Walt Disney dies.

Various Strategies used by Disney- Licensed Mickey Mouse to overcome cash crunches. Started developing full-length films to tap the future market. Adopted the strategy of two films per year plus a large number of shorts. Special cartoons for government during World War. Started mixing live action with animation. Created Walt Disney Music Company. Cost savings by launching Buena Vista Distribution. An outdoor entertainment park, Disneyland was opened. Targeted not just the kids but also the adults. 1965- Plans to build Walt Disney World and EPCOT

1967 – 1984: Roy O. Disney & Roy E. Disney

After the expiry of Walt Disney, Roy Disney took over as the chairman but lived long enough only to observe the opening up of the Walt Disney World in 1971. Although the theme park became the top-grossing park in the world, other businesses under the empire were not doing that well. Even though Disneyland was expanding its operations in Japan and enjoying heavy success; its film output declined heavily and the company once again started facing financial problems.

The company was relying heavily on cutting costs, and this strategy in turn was affecting the industrial branches of the company in innumerable ways.

Although the company still followed the same strategy as earlier, the loss of the founder seemed to be just too much to handle for Disney. The situation had deteriorated to an extent where the company was on the verge of being acquired; and it would have been acquired had it not been for the oil tycoon Sid Bass who invested $365 Million and put Roy Disney back on the board of Directors who had earlier resigned from the company.

Prevailing Company Structure & Subsequent Transition- Roy O. Disney becomes the chairman. Walt Disney World was opened and it also has two on-site resort hotels. Tokyo Disneyland was announced. Film output was declining. Financial performance was deteriorating. Company was facing the situation where it can be sold but was helped by investment from Sid

Bass.

Various Strategies used by Disney- Opened in- house travel company. Started bringing live shows to major cities. The Tokyo Disneyland was owned by its Japanese partner but was made to look just like U.S.

park to retain the identity of Disneyland. Introduced a new label Touchstone, to target teen/adult market. Invested in a new cable venture, The Disney Channel.

1984 – 1993: Michael Eisner

Eisner, former president and COO of Paramount Pictures, took over as the chairman and CEO of Disney in 1984. For the first time, Disney was looking determined to maximizing its shareholders revenue by 20% per year. Though Eisner aspired to grow the company, the core values of Disney remained unchanged and untouched.

This was most probably the most important phase in the Disney Journey, where a number of changes were made through-out the organization and these changes actually began to affect the industry as a whole. The company went through various ups and downs in this period. This was the transition phase of Disney from its traditional Structuralist approach to the Reconstructionalist approach or the Blue Ocean Strategy where the strategy of the company began to impact the structure of the industry.

This stage saw some very massive expansions by Disney in various fields of Entertainment & almost all the industries that the company entered had reaped in profits for the firm. So the company was managing to employ its various resources, was saving on costs and providing innovative products and services to its ever growing customer-base.

In contrast to this the company also saw declining profit margins in the later half as well as a lot of tension within the organization. With high attrition rates the internal environment had taken a huge beating though the company was showing positive figures on paper.

Prevailing Market Conditions- Theme Parks-

o Maturity in US markets o Europe / Asia markets were booming

Sitcoms-o Move from Family – oriented Sitcoms & centered less on social issues o Focus on ‘acerbic takes on middle class’ & on single adults (e.g. Sienfeld)

Animation-o Beginning of Modern era of US animation referred to as the American Animation

renaissance o Beginning of Outsourcing – lesser cost of Production.

Major Competitors-o Pixar o Dreamworks

Prevailing Company Structure & Subsequent Transition- On the helm of Takeover New management Team Declining Profits Emphasis on creativity

Various Strategies used by Disney- Separated Creative and Financial forces to foster innovation. Instilled Disney’s culture in the Employees Network Syndication Fostering creative talent High risk taking – Venture capitalist approach Financial

o Corporate Sponsorshipso Co-ordinated negotiated inter-divisional transfer prices

Established Different functional verticalso Corporate Marketing Functiono Marketing calendaro Disney film libraryo In-house media buying group

Expanding into new businesseso ‘retail as entertainment’ concepto Entered into the Book, Magazines and record publishing segmento New channels of Distribution

Theme Park Strategieso Euro Disney – Very low cost of capital & higher profit marginso Compromised with the French Govt. & its employees.o Added attractions – Night life complex & Water based attractions.

Risky Films – ventured into new segments of films Cross Promotional Marketing strategies through

o Corporate Tie ups o Retailo Expansion into other businesseso National Hockey League – Mighty Duckso Broadway-bound Theatre production

Commitment to live Entertainment

1994 – 2000: Michael Eisner: Rectification Measures

The year 1994 saw the demise of President Wells in a helicopter crash which created a void within the company that could not immediately be filled. The phase also saw the 2nd largest acquisition in the U.S history when Disney acquired ABC for $19 Billion without any financial borrowing. However soon there were rumors about cultural clashes taking place between the workforces of the two newly joint firms.

It seemed that though Disney had it’s strategies in place, it was not able to meet or adhere to all the 3 propositions of Value, Profit and People in alignment with its strategies.

Prevailing Market Conditions & Company Performance- Lion King’s “roaring” success Euro Disney –back on track Demise of the President Wells Katzenberg leaves Disney Merger with ABC

Impact of ABC Merger- Debt ratio – 20% to 34% Culture clash Change of ABC’s congenial atmosphere Growth declines and then stabilizes

Eisen’s Strategy- Entry into movies having big name stars and expensive special effects Excellent prediction of market for DVD’s Converting theme parks into destination resorts Foray into Internet and TV Cost cutting plan Maximizing corporate synergy Cross promotion Entry into Restaurants, Cruise ships, Educational retreats Merging of touchstone with ABC

Evolution of the Strategy at Disney-

Phase of Operations Key Strategies Adopted1927 – 1966 Cost Savings through Backward-

Integration Adjusting the Company Strategies

according to the market Taking Risks that paid off – Disneyland Going beyond the traditional market

segment- Including Adults

1967 – 1984 More emphasis on Cost-Cutting Venturing into different industries Transition of focus from Film Industry Going Live through shows in major

cities

1984 – 1993 Creativity & Innovation prove to be the main driving forces

Heavy expansion in various industries, particularly with respect to theme parks

Creating bridges between various departments and industrial branches of the company and urging them to compliment each other in their businesses.

1994 – 2000 Managing the Synergy effect More emphasis on creating a

sustainable brand awareness Bringing back the lost creativity back to

life Major initiatives to develop its

operations through the Internet and TV Focus on the International Market

Impact of External factors on Strategy (Post 1994)

Movie tie ins revenues decreasing Culture clash More focus on selling merchandise of core characters Gong show Encouraging conflict between top management High attrition rate One man show

Impact of Structure on Strategy

Signing of Hollywood’s best actors and directors Pursuing High quality Scripts from lesser known writers Reduction of time between releases Use of technology Increase in number of licenses to help recover costs Need for innovative attractions at the theme parks Special marketing function to handle company wide marketing activities. Exploration of untapped businesses, regions and audience. At Euro-Disneyland, making cultural allowances Purchase of NHL team Foray into DVD to have the first movers advantage and compensate the high costs

Impact of Strategy on Company Structure

Retails-as-entertainment concept at the Disney stores Venture into books, magazine, recording labels Tapping of the Home Video market by launching the video cassettes at affordable price. Broadway versions of their critically acclaimed movies Creation of synergy group to handle communication after the ABC merger Shared office space in international market Strategic Planning Unit – Gong Show to keep the innovations going

Overall SWOT Analysis of Disney’s Strategies over the years-

Strengths Eisner’s leadership Values of the company Disney’s Brand value—Mickey mouse

legacy Ability to venture into different areas

and make profits successfully-diversification

Global Standardization Target Audience- Everyone Constant Innovation Popular characters Consistent business for theme even at

premium prices Occupying the top spots in Theme Park

& Animated Films industry

Weaknesses Autocratic leadership Frequent change in top management High sunk cost Excessive Research & Development High Investment High Risk Factor Unprofitable/Hasty acquisition Cultural Imperialism Media Network Competition Too Large Organization Consistent business for theme even at

premium prices

Opportunities Merchandise GLOCAL-Global Localization: Think

global, Act Local Characters of national or regional appeal Cheaper alternatives to soft toys Disney Music Channel Disney School of Management/Training

Institute Move into different segments Market development in untapped

countries. Online Websites Develop more attractions for theme

park

Threats More money focused thus losing image a

s a fun company Facing fierce competition from

Paramount Parks, Universal Studios and Six Flags Theme Parks.

Maintain product differentiation. Searching, paying and retaining

innovative people. More of a one man show Competitors: National, Regional & Global Highly Demanding in terms of Sales,

Creativity and Innovation Too Large Organization