Case Study: Disney’s Diversification Strategy

The story of Disney is that of a company founded in 1923 by the Disney brothers, Walt and Roy. In the beginning, the company was referred to as the Disney Brothers Cartoon Studio and later incorporated as Walt Disney Productions in 1929. Walt Disney Productions made its mark for many years in the animation industry before venturing into television and live-action film production. Something else also happened before Walt had the breakthrough with Mickey Mouse. Before Mickey, there was Oswald, the Lucky Rabbit. But because he didn’t own the copyright, Walt lost the rights to Oswald, a bitter lesson that was to shape his company positively in the future. That experience thought him very early the value of intellectual property and Disney has used that knowledge to tighten controls over its properties as well as build defense against entrants and competing incumbents. The characters at Disney are well protected and the brand created out of them are so strong that they deter competitors from ever trying to imitate.

Disney's Diversification Strategy

Disney World, a family books lodging months in advance at a hotel inside the park. It does so because it knows that the hotel has the best location, is highly demanded, and will provide good hospitality. Being lodged inside the park, the family eats at Disney-owned restaurants and perhaps buys Disney merchandise. All the while the family willing pays prices that are higher than would be charged by comparable hotels, restaurants, and theme parks. It does so happily because it considers the experience a good value.

But wait, there’s more. Consider what makes Disney World the world’s number one destination resort in the first place. It is fueled by the positive experience generated by other Disney productions – most likely the lovable characters of the Disney family. While in the park, children clamor to meet the Disney characters scattered throughout the park. This memorable and emotional experience further fuels demand for home videos, books, television broadcasts, or retail purchases. And the kids (and often parents) can’t wait for the next trip to Disney World, completing the cycle. This complex but carefully orchestrated web of complementary businesses is the ‘Magic of Disney’. It’s what drives major advertisers such as Delta Airlines and Coca-Cola to pay for the right to feature Disney World in their own promotions.

Disney and Diversification

Disney’s diversification didn’t start today. In 1928, its first cartoon was released. One year later, it licensed a pencil tablet, then the Mickey Mouse Club (MMC) was formed as a vehicle for selling Disney’s products under one roof. Within a short time, the membership of the club grew to 1million members. In 1949, the company diversified into music was was even said to have produced training and educational films during the war. Diversification produces synergy. Diversification strengthens the existing business and the entire new business created. Diversification can be related or unrelated. It is related if the activities of the businesses complement those of the firm’s present business in a way that increases or adds to the competitive advantage. In order words, related diversification leads to strategic fit which itself creates opportunities. Opportunities to;

  • Transfer technological know-how (that are competitively valuable) from one business to another.
  • Lower cost by combining the performance of common value chain activities
  • Leverage or exploit use of a well known brand
  • Get valuable resource strength and capabilities across business

But if the businesses being diversified into have no competitive and valuable value chain that fits with the the value chain of the present business(es), then the diversification is said to be unrelated as there is no strategic fit.

Walt Disney understood the interrelation of new industries to each other right from the beginning, something that continues to be the source of competitive advantage to the company till today. Encapsulated in the ‘Magic of Disney’, the story goes thus.

Family take a trip to Disney, book into a hotel (owned by Disney) inside the park. While in the park, the family eats at Disney-owned restaurants, buy Disney merchandise. It doesn’t matter that they are paying higher for accommodation and meals compared to other hotels. Children meet the Disney characters everywhere in the park which leaves a long lasting emotional experience. The children and their parents end up buying videos, books, TV broadcast which they take home with them. All of these make them look forward to another visit to the Disney and the circle continues. The integration of these complementary businesses is the ‘Magic of Disney’.

Ever since, Disney has expanded its operations to cover theatre, radio, publishing, online media etc. Until the early 1980’s Disney focused on the family creating entertainment for the home and the family. As a result, they were clearly differentiated in the market from their competitors. All of that was to change around 1984 when Michael Eisner took over as CEO. Like Walt Disney, Eisner was an innovative and intuitive leader and his era marked a turning point for the company that was hemorrhaging for cash and that soon became the target of takeover by several companies.

Eisner’s goal was to evolve a company that would grow by 20% a year. To achieve this, Eisner followed these three principles which include keeping its cost down so it doesn’t erode its profit, operate the core business in a profitable manner and find new businesses that could integrate with Disney and guarantee an annual growth rate of 20% for the company. To achieve a 20% growth rate, the business had to diversify, exploring synergies in new industries, and overseas expansion. Overseas expansion is inevitable when the local domestic market has reached a near saturation point. Some of the early businesses Eisner was to add to Disney’s portfolio include the Disney Store, Euro Disneyland and the purchase of KHJ-TV, Disney’s first broadcasting outlet. Also, the company established a major television presence and increased the number of films released from 2 in 1984 to 15-18 yearly.

Disney’s expansion and diversification efforts was driven purely by the need to attain an economy of scope that will give it the desired market dominance as well as the economies of scale to bring down its cost of business. It pursued this strategy throughout the 90′ using a combination of diversification into areas that were a natural extension of their current business as well as such other areas where they had less synergy but obviously had found potential opportunities. Both of these led to the birth of Disney Cruises, Pleasure Island and the incorporation of theme park management into its business model.

Is the diversification strategy working for Disney? The simple answer is that the numbers are there as proof. Since the coming of Eisner, revenues grew from $1.6 billion in 1984 to $2.9billion in 1987 largely as the result of the pursuit of diversification as a strategy for growth. One of Eisner’s greatest achievement was how he placed creativity as Disney’s most valuable asset and supported this as a leader to get the best out of his core innovation team

Despite the huge successes recorded, it was questionable whether the diversification into some market or acquisition strategies pursued with some companies such as ABC actually enhanced the shareholders’ value. The presumption is that when two companies who are leaders in slightly different fields combine, both would be better off by the synergy created between two of them. But Disney and ABC are both leaders in providing entertainment and both with extensive networks in creativity and production. When firms cannot leverage on their strengths following an alliance, then they stand the risk of diluting their brand to a point where they will not be able to make the profits necessary to return good value to their shareholders.

Today Disney has grown beyond the traditional amusement parks, movies, television shows, clubs, or books business. Its stable of businesses include Disney Cruise Line, Resort Properties, Radio Broadcasting, Musical Recordings and sale of animation art, Anaheim Mighty Ducks NHL franchise, Interactive software and internet site, etc. Whether these businesses are related or unrelate to Disney’s core business is not an issue as long as it produces synergy that strengthens Disney’s position in the market and creates value for its shareholders. Throughout its history, Disney has, with minor exceptions, shown the true value to shareholders created by synergies from thoughtful diversification. The company’s corporate strategy identifies the fact that while Disney may have some ‘magical’ products (its core products), its strength is not in the products themselves, but instead in the way in which they interrelate and complement each other.

Disney’s diversification efforts further increased the ‘Magic of Disney’. Television advertised the movies, which advertised the hard-goods and which advertised the television shows. So instead of paying to advertise Disney’s products, people were charged to be exposed to advertisement.

When you consider its portfolio of businesses, it will be right to say that Disney has pursued a combination of related and unrelated diversification. Take for instance Resort properties. That’s real estate. But Disney has used this to to make its customer live out the Disney experience right on Disney’s properties as opposed to going to a third party environment to watch Disney Movies or lodged in a different hotel and visiting Disney park.

Walt Disney Company strategy of diversification has helped grow its business in overseas market. Between 1988 and 1996 revenues grew from $3.4 billion to over $12 billion with the most growth coming from films and its consumer products. Not all overseas expansion were successful. For example, the Euro Disney had a lot of challenges and could not live up to expectations as a result of several cultural issues faced by the company.

Disney is now active in the hotel and resort businesses, the Vacation Club business (a natural extension of the hotel business), the cruise business and sports etc.

For a company that relies heavily on its strong culture, Disney must manage its growth and acquisitions carefully without loosing sight of the single most important factor that has brought the company where it is – the strong synergies and symbiotic relationship between its various businesses.

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