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The Walt Disney Company-a case study

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The Walt Disney Company-a case study

The Walt Disney Company was funded in 1922, and has became a world leader in family entertainment. Today, the company is operating on a multinational level, and has over 58,000 employees world wide, and over 189,000 share holders. What are the factors that contributed to the company's successes and failures on its way towards becoming the World's largest family entertaining company? I would like to answer the stated question by analyzing the following four factors;

  • (1) Disney's industry in relation to Porter's Five-Forces Model,
  • (2) the strengths and the weaknesses and the opportunities and the threats that the company is facing (a SWOT analysis),
  • (3) the corporate-level strategy and finally, financial trend for the years 1989 through 1991.

    In addition, I would like to deliberate on the strategic changes and tactical changes that are needed to be made at the Walt Disney Company.

    Porter's-Five-Forces Model focuses on the external environment that the company has to be able to cope with. The first force to be discussed is the threat of new entrants. Since the Disney company has been able to find a very distinctive niche in the industry, the entrance barriers are relatively high. The company has been able to grow over a long period of time, and has developed from within the departments of Research and development, marketing, and finance. By relying on past experience, company officials know to a large extent what the target customer wants. As Disney pretty much dominates the family entertainment market, it will be very difficult for such a new organization to develop brand recognition/identification, and product differentiation. Disney has focused of market diversification for years and the company covers a wide array of products and services. Being a market leader has made it possible for the company to practice effective economies of scale in production. For example, over 500,000 copies of the Videocassette "Pinocchio" was sold in only two months, and has 20-30 million visitors to its theme parks every year. In addition, extremely large amounts of capital investment is required for new entrants into the industry. The capital requirements are extremely high. For instance, Disney spent USD3.6 billion in its European theme park (Euro Disneyland). Only very large companies can meet such large capital requirement. Lastly, the government policy towards the industry appears to be very favorable. The French government invested USD 1.2 billion (40%) in Euro Disneyland, provided public transportation facilities, provided a large tax relief (from 18.6% to 7%) on the cost of goods sold.

    The bargaining power of customers is high in the service and in the entertainment industry. Since a large number of customers are needed to make Disney's operations run smoothly, the customers have certain powers. For instance, if the price on a particular home video is too high, customers may be reluctant to spending the money needed to purchase the product. Another example is the entrance fee charged at Disney's theme parks. It is stated in the case that the maximum amount of money that customers are willing to pay is USD 33. Furthermore, the entertainment industry does not save the buyer money. Instead it is designed in a way that it will make the buyer spend more. A majority of Disney's product mix focuses on intangible returns on the buyer's money. The case that some customers may not realize that they are getting such a return may increase the bargaining power of the customers.

    The bargaining power of suppliers is moderate. As the Disney company is operating in a highly differentiated and unique industry with high switching costs associated with operations, the suppliers are dominated by a few companies and is most probably very concentrated. However, Disney is a unique and important customer of many of the suppliers. Furthermore, the size of the company may certainly be a great advantage. By being able to order large volumes of unique products from unique suppliers, will create a dependency relationship in the industry.

    The threat of substitute products or services is moderate to low. Obviously, other cartoon figures, theme parks, and movies can penetrate the market in which Disney is operating in, but I do not believe that this is representing a significant threat. The Disney company has already placed price ceilings on many of its product lines, and should be able to compete with new competitors. However, the threat alone of new entrants into the market requires Disney to hedge against such risk by concurrently upgrading products and services.

    Jockeying among current contestants does not play a very important role in Disney's external operational environment. It is true that the company's exit barriers are extremely high (who would buy a huge theme/amusement park?). Furthermore, capacity is augmented in extremely large investments. However, there are no close direct competitors to Disney's operations. Competitors such as "Lonely Tunes" retail stores do not appear to commit themselves to expensive advertising campaigns to obtain market shares. Moreover, Disney's products are highly differentiated. The switching costs are therefore quite significant.

    A multinational corporation such as the Disney Company faces internal weaknesses and strengths, which can to a certain extent be controlled. The external forces such as opportunity and threats are more difficult to control, and Disney has to adopt and take advantage to those forces. I would like to start-up focusing on the internal capabilities of the company.

    Disney's main strength is in its resources, experience in the business, its low-cost strategy. Furthermore, the company clearly has developed a very strong and well known "brand-name" over many years. The company has also been able to diversify its operations and products to hedge against decreasing sales in product lines. In recent years it has diverted into Home Video, Film, merchandise, Radio broadcasting, Net-work television and in theme parks. It has also effectively globally diversified its operations from USA to Japan and Europe. The main strengths in internal resources refer to human resources and financial stability. Employees in the Disney studies appears to be extremely innovative and in recent years they have produced several box-office productions. A company without new ideas is doomed in today's competitive business environment. The low-cost-corporate-strategy is a benefit for the company. The company can control costs, and still produce quality goods and services. Financial risks have been minimized by sharing initial investment costs with a maximum number of outside participants.

    Corporations always have internal weaknesses. Disney's main weaknesses are the following; A very large work force, frequent change in top-management, and high overhead expenses. In 1991, the company has 58,000 employees. This fact represent possible communications problems, and a high bureaucracy level within the corporation. By diversifying into more businesses and niches, the company's work force will grow even larger, and the organizational structure has to be able to support an expansion of the work-force. The fact that the company very frequently changes its corporate officers makes the corporate structure even more complicated. There are many positive things that accompany changes, but change is also associated with resistance, and large expenses.

    Large overhead costs are usually direct effects of a large work-force and a large number of fixed assets. For instance, ticket prices should not be able to exceed USD 33 for entrance to Walt Disneyworld. Customers are not prepared to spend more money than that. Therefore, we can conclude that overhead costs should be closely monitored to match the price that customers are willing to pay for the goods and services offered.

    External opportunities should be recognized, analyzed, and responded to in a very early stage. The Disney company is facing several external opportunities, however, presently I believe that the external threats facing the company are out-numbering the opportunities. Opportunities includes the following; Positive government attitudes towards its operations, Barriers of entry are significant, and the entertainment industry itself.

    Legal and legislative forces are usually identified as being negative external factors to a company. Ironically, in Disney's case, the French government contributed greatly in the Euro Disneyworld project. The French government invested over USD 1.2 billion in the project, built communication facilities, and gave Disney tax relief's on cost of goods sold accounts. In addition, since the barriers of entry into the highly specialized industry in which Disney is operating, competition will find it difficult to penetrate the company's highly diversified product/service mix. Furthermore, large initial capital investments are required to enter the industry.

    Major threats to the Disney company include the following; Over saturated markets, politics and economic aspects from a global perspective, and foreign competition. As the supply of services and products in the entertainment industry is starting to saturate the markets, competition will be more intense, and only the most powerful companies will be able to survive. I believe that Disney has leveraged this risk to a certain extent as it has diversified and globalized its operations, but still, the company is in the service/entertainment business. Some of its operations, such as the Network-television division may not be able to handle the pressure from the Cable-giants such as Turner Broadcasting Systems (TBS).

    World politics and the state of the global economies are related to the market capacity. In 1991, the sales revenue of Disney decreased due to a decrease in travel caused by the Persian Gulf War. Furthermore, economic depression could make it too expensive for people to utilize the services and the products offered. Once again, I have to point out that the company has hedged itself to the macroeconomics forces, as it has diversified its business worldwide. If there is a depression in Europe, Euro Disneyland may operate on a loss, meanwhile, the operations in Japan would be able to cover-up the losses by boosting operating revenues. It is known that economic depressions very seldom strikes the whole world economy at once.

    Competition is always a threat to a company. Even though that the entrance barriers are relatively high in the niche in which the company is operating in, the threat of new competition cannot be excluded. The movie business and the Network-television departments are extremely risky. In those two areas of operation, Disney is the intruder, and there are several very powerful rivals. A less significant threat comes from new cartoon characters. New cartoon figures appears every-day in television shows, and in movie theaters overseas. Will "Mickey and the Gang" be able to beat the war of the limited market shares internationally and domestically? Only the future generation cartoon lovers can answer that question, but tendencies in the market should be very carefully monitored.

    Disney's corporate level strategy is based on a horizontal and decentralized and informal management approach. Ideas are born from within the departments and are worked-up throughout the relatively low hierarchy, where the final decisions are made. The management focuses on group creativity and in team-work. For instance, the most creative employees usually met every Sunday in the purpose of coming-up with new ideas and new business concepts/strategies. The Sunday meetings are referred to as "Gong Shows", where all participants have to come-up with a unique idea. As seen in this example, a large emphasis is placed on employee participation, especially on the most talented employees. Furthermore, the company is frequently refreshing its top management with new executives. "Top-flight" managers from the entertainment and the financial business bring with them new ideas and concepts which can be applied in the Disney Company. There is however a significant increase in expense attached to luring the very best to join the company. This increase in expense is directly related to special perk-packages, higher bonuses and escalated salaries that are offered to the top-executives.

    Another interesting approach is the emphasis that is placed on expansion of the business. Again the corporate policy is to grow slowly and not to "impress anyone". It is important for the company to meet demand with an adequate supply of goods and/or services. This can be accomplished by effective distribution channels and effective marketing. This leads us to another corporate policy, efficiency and restraint. Recent trend towards rapid increase in costs in the movie industry have a direct effect on the profitability of the company. By cutting back on the costs involved in making and marketing Disney films, less expensive and more profitable movies can be produced. Efficiency, enforced by tight budgets and expected high returns, have surely made it possible for Disney to produce less expensive movies than its competitors.

    In addition, the corporate strategy is clearly focusing on diversifying its products and services. Rapid expansion overseas, and an increase in the product and service mix has created an umbrella effect. Thus, risks have been minimized. If one product line fails, other product lines will cover-up for its losses.

    While examining a corporation it is important to analyze the internal financial capabilities and policies of an organization. By the use of a trend analysis, the economic health of the company can be determined and educated forecasts can be made concerning the financial future of the company. This trend analysis of the Disney Company is for the years 1989 through 1991. The following financial ratios will be used; profitability, liquidity, leverage and finally activity ratios. .

    Profitability ratios indicates how effectively the total firm is being managed. As indicated in graph #1, the return on sales has decreased over the years. However, the return is still acceptable, as the American industry average is approximately 5 percent (0.05). In 1991, the return on sales ratio was 0.07, or 7 percent. This can be compared to the 10 percent ratio which was achieved one year earlier (1990). Obviously, sales are not keeping-up with the net earnings of the corporation, and there is a significant decrease, but I do not think that a one-year fluctuation is anything to worry about. This decrease could be explained by temporary business problems, and external sources such as economic depression. Furthermore, the return on investment decreased from 0.10 in 1990 to 0.07 in 1991. That show us that the company should try to work on its efficiency and try to optimize the usage of assets.

    Another interesting ratio that can be used to determine the financial position of a company is liquidity. Liquidity ratios are used as indicators of a firm's ability to meet its short-term obligations. It is recommended that the current ratio should be a ratio of two to three. Disney may have a problem here as its current ratio was 1.12 in 1991, and 1.08 in 1990. I believe that ratio is too low, and perhaps a bit too risks. However, the company is making efficient use of its assets (the ratio is almost equal to one). It is a good sign that the ratio increased from 1990. Moreover, the quick ratio for 1991 was 1.01, which is very close to the typical level of 1.0 for American companies. This ratio was 0.98 in 1990.

    The company leverage ratio of total debt to total assets has increase from 0.57 in 1990 to 0.59 in 1991. This ratio show us that 59 percent of Disney's funds is provided by debt. A total debt-total assets ratio higher than 50 percent is usually considered to be safe only for firms in stable industries. Since the entertainment industry is moderately stable, we can conclude that Disney's total debt to total assets is slightly too high and because of financial risk, the ratio should be lowered to 50 percent or below.

    Activity ratios indicate how effectively a firm is using its resources. The company is facing a decrease in efficiency to 0.65 in 1991 from 0.73 in 1990. That is not very good, as one of the corporate strategies is to improve efficiency. Therefore, it may be interesting to determine what departments that are decreasing the over-all efficiency of Disney. The theme parks and resort division has the lowest efficiency of all the divisions. In 1991 the ratio was only 0.55, that can be compared to the ratios of the film entertainment division (1.38) and the consumer products division (2.06). Please refer to graph #1.

    Graph 1

    All of the departments except from the film division have faced decreases in efficiency of total assets. However, as the theme parks and resort division should be improved, as a result of its devastating low efficiency levels. By improving that particular division, Disney should be able to improve company activity ratios.

    Strategic changes and tactical changes that are needed in the Disney company have been mentioned throughout the paper. However, in this section, I would like to summarize some of the changes which I believe are necessary for keeping-up the profitability of the company.

    First, I would like to focus on organizational changes. The frequent changes of corporate officers should be stopped. It is true that a new leader not requited from within the organization will bring with him/her new ideas and concepts. But, such a person also bring a foreign corporate culture to Disney's organization. That fact may lead to communication, efficiency, and moral problems within the organization. By promoting from within, employees will know the new corporate officers, and understand the new rules of the game.

    Second, Disney's market diversification is excellent, but what is the point of licensing product ideas? I believe that it would be more profitable for the company to produce, sell and market consumer products itself rather than to a large extent relying on licensing, and percentages of revenues. For instance, the company did sacrifice too many profits while negotiating the Tokyo deal. Furthermore, there is a possibility that the company is loosing its original purpose of being if it continues to get into various market segments. Disney should always place a very specially emphasis on its theme park division and its film entertainment division. The company's original mission was to "nurture the imaginations of children around the world as well as to celebrate American values." I certainly believe that the company is drifting away from its original purpose of existence. Moreover, it could be very dangerous by entering into markets which are totally unrelated to the products/services that the customers directly associates with the Disney company.

    Finally, efficiency has to increase in the theme parks and resort division. The asset turnover ratios are far too low in this division in comparison to the other divisions. Furthermore, as the liquidity ratio appears to be a bit too low for the corporation, I would suggest the company to increase current asset requirements and keep current liabilities under strict control. Under no circumstances should the current liabilities be allowed to increase in a greater rate than the current assets.

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