Disney Case Study
In July 1923, Walt Disney and his brother Roy started their film business but they got their first real break in 1928. Walt produced Steamboat Willie, the first cartoon with sound and also introduced a new star Mickey Mouse. In the decades it followed, Walt became an extraordinary filmmaker, a motion picture innovator and pioneer. The name “Walt Disney” became universally known as the symbol of the finest family entertainment.
The business activities of the company are in four segments: (1) theme parks, (2) films, (3) consumer products and (4) real estate development. The theme parks segment caused Disney not to grow. Disney’s attendance growth had been low or zero over the preceding decade, though as recently as 1978 the entertainment and recreation segment had shown a pretax return on assets of 15. 7 percent. With 25 major theme parks in competition for an aging population, demand thoroughly saturated and park attendance grew no more than 5% per year, which was one third the rate of 1970s.
The Walt Disney Company’s objective is to be one of the world’s leading producers and providers of entertainment and information, using its portfolio of brands to differentiate its content, services and consumer products. The company’s primary financial goals are to maximize earnings and cash flow, and to allocate capital profitability toward growth initiatives that will drive long-term shareholder value. The Walt Disney Company is the world’s largest media and entertainment conglomerate with assets encompassing media networks, theme parks and resorts, consumer products and real estate development.
The Walt Disney Company’s film library is consisted of 25 full length animated features in color, 123 full lengths live action features, 8 true life adventure films and over 500 short films. The film Snow White was proved to be an enduring source of cash. Annual revenue for Snow White is as under (in millions). Year| Revenue| 1937| $10. 00| 1944| 4. 0| 1952| 5. 0| 1958| 6. 5| 1965| 13. 0| 1967| 23. 0| 1983| 28. 5| Theme parks and resorts include the operations of the Walt Disney World Resort in Florida, Disneyland Park, the Disneyland Hotel and the Disneyland Pacific Hotel in California.
Consumer products segment includes its animated characters, literary properties, songs and music to manufacturers, publishers and retailers. In 1978, this segment gave a pretax return on assets of 179 percent. Real estate includes Arvida Corporation, acquired on June 6, 1984. Arvida controlled the development of 17,334 acres of land in Florida, Georgia and California. In 1983, Ron Miller became the CEO. After just a month, Miller gave up his post to Ray Watson (a close friend and his right hand man in the company).
These constant changes in leadership led to a steep fall in the company’s share price. The share price fell sharply from $84 in 1983 to $45 in 1984. The lowered share price and the lack of stability in the top management resulted in a number of corporate houses attempting to take over Disney in the early-1980s. Saul Steinberg started making serious bids to acquire Disney stock. By April 1984 he had acquired 6. 3% of the stock and announced his intention to acquire 25 percent of the company before long. Recognizing the threat, Disney management started making defensive moves.
It announced its decision to buy back shares at a premium. Roy and Gold played a very important role at this stage and helped muster shareholder support to prevent Disney from being taken over. They enlisted the support of the Bass family, who were the largest shareholders in Disney, to regain a majority. Steinberg finally agreed to re-sell his stock to the company at a premium of $32 million and an additional $28 million for his expenses. All this added to the huge debt of the company. By the mid-1980s, what was needed was a change in leadership to bring about a turnaround.
Corporate level strategy: Disney’s corporate level strategy is based on a horizontal, decentralized and informal management approach. Ideas are born from within the departments and are worked up throughout the relatively low hierarchy, where the final decision is made. Another interesting approach is the emphasis on expansion of the business. Again the corporate policy is to grow slowly and not to impress anyone. Recent trend towards rapid increase in costs in the movie industry have a direct effect on the profitability of the company.
By cutting on costs involved in making and marketing Disney films, less expensive and more profitable movies can be produced. In addition, the corporate strategy is clearly focusing on diversifying its product and service mix has created an umbrella effect. Thus risk has been minimized. If one product line fails, other product line will cover up for its losses. The leverage ratio of total debt to total assets is 0. 80 in 1977-1980 and after that it decreased to 0. 59 in 1983. A total debt to total assets ratio higher than 50% is usually considered to be safe in stable industries.
For Disney case, it is too high, so because of financial risk the ratio should be lowered to 50% or below. Business level strategy: Entertainment and recreation segment generates most the income for Disney. Entertainment and Motion Pictures would be the best product mix for Disney. (Refer the table below for 1983 data) Segment| Revenue| Entertainment and recreation| $1,031,202| Theme park| $32,692| Motion Pictures| $165,458| Consumer products and others| $110,697| Disney should sell more to existing customers, expand market place, should give promotions and always track the business.
Greenmail is one of an array of strategies, ranging from changing corporate bylaws to acquiring debt that makes the corporation a less attractive target, used to deter raiders. It is an expensive alternative, as was illustrated when investor Saul Steinberg attempted to take over the Disney Corporation in 1984. Steinberg was known for his concerted efforts in the takeover field, having previously targeted Chemical Bank and Quaker State. In March 1984, his purchase of 6. 3 percent of Disney’s stock triggered concern at the corporation that a takeover was in progress.
Disney management quickly announced an approximately $390 million acquisition of its own that would make the company less attractive. After this maneuver failed, Disney’s directors ultimately bought Steinberg’s stock to stop the takeover. Steinberg earned a profit of about $60 million. Strengths: “I knew if this business was ever to get anywhere, if this business was ever to grow, it could never do it by having to answer to someone unsympathetic to its possibilities, by having to answer to someone with only one thought or interest, namely profits.
For my idea of how to make profits has differed greatly from those who generally control businesses such as ours. I have blind faith in the policy that quality, tempered with good judgment and showmanship, will win against all odds. ”—Walt Disney When the Walt Disney Company initially began, it was under the control of Walt himself. Throughout his reign, he developed a culture to create experiences and “magical moments” for all his “guests” this philosophy from the beginning has created a long-lasting brand name known for producing a quality product or experience.
This Disney culture has succeeded through tight control over how the brand and image is perceived. Disney has become one of the most recognized and renowned brand names throughout all industries. In addition to its well-known brand name, Disney has developed famous characters to add to its image (ex. Mickey, Minnie, Goofy, Donald, Pluto, etc. ). These characters have aided in Walt Disney’s ability to capitalize and have a definitive grasp upon their target consumers of children. However, Disney’s largest asset is their ability to stay diversified.
Disney is a well-established conglomerate firm with a solid domination within the theme park and entertainment industry. Disney already operates through four different business segments which include media networks, parks and resorts, studio entertainment, and consumer products. Disney’s monumental deal with Apple creating a partnership between Disney and iTunes should provide an excellent resource to further push the brand and provide a reputable channel to push product distribution.
Overall, Disney’s desire to strive for excellence, ability to adapt to change, and continuing to keep the consumers as the driving force behind the enterprise make Disney an empire within the media industry. Weaknesses: Being a conglomerate of this capacity, the Walt Disney Company holds exceptionally high sunk costs which could hinder Disney’s future financial abilities. In addition to sunk costs, there is the continual cost of updating all the parks, resorts, hotels, cruise ships, etc.
Disney’s brand of “quality” must be maintained nonetheless it continues to escalate the costs. Although merchandise aimed at the children segment is a huge market, such a public image can have a “kiddie-stigma” attached to the Disney brand name which could deter the young adult segment. Opportunities: Disney has many opportunities to continue the firm’s growth within the industry. Currently the markets are much more versatile to outsourcing and globalization. The Walt Disney Company is working towards this global localization through expansion into Europe and Asia.
Approximately twenty-five percent of Disney’s operating income comes from outside the United States and Canada, making continued growth internationally a major competitive advantage. Disney has invested tremendously in their Research and Development department, which projects progressive new attractions to pull in consumers. Disney’s ability to re-invent 5 and create limited edition products allows multiple opportunities for sales with new or improved merchandise. Threats: Disney has multiple threats that could negatively impact its profitability in the future.
Disney’s major threat comes from its competitors on national, regional, and global platforms. The high competition and growth of other industry giants pose multiple problems to Disney’s ability to sustain as a leader within the industry. With the recent acquisition threat by Steinberg, Disney’s hasty acquisitions could post low or unprofitable sales, resulting in not only a loss, but a negative impact for the conglomerate’s brand name. Another threat is Disney’s high pressure and demand in terms of sales, creativity, and innovation while maintaining its quality status.
Finally, due to the recent economic state, employee retention can pose a threat if employees are let go and work for competitors within the industry. SWOT (External Environment): Strength: * Strong financial background: First, Disney store has a very strong financial back up by Disney. It is very important for Disney Store to have market development and store improvement. * Exclusive for Disney’s products: Second, Disney Store is an exclusive agency for selling Disney’s products: Toys, clothing, stationary and gift items etc.
It provides many choices for the customers and satisfies their needs. Customers might think of Disney Store immediately when they want to buy Disney’s items. * Well-known brand: “Disney” is a well-known brand all over the world. The image of Disney is very healthy and positive. It is welcomed easily accepted by its target segments. Weaknesses: * Unchanged visual merchandising: One of the weaknesses is that the visual merchandising is not changed regularly; the window display is the same for many years. In this way, customers will feel boring because no stimulation and attraction for them. Stores are lack of theme decoration: Monotonous decoration in every Disney store fails to attract customers.
Because there is no excitement, customers tend to stay in the store for short time. * Passive staff’s attitude: Staff are seldom greet and farewell customers. Although they answer enquires from customers, few of them introduce products and new information to customers proactively. Therefore, they fail to identify customers’ needs. Opportunities * Solo Tour: The practice of Solo Tour has brought a significant economic benefit to retail industry in Hong Kong. more provinces will be listed on Solo Tour. It is estimated to generate 43 million of traffic flows and every visitor would spend around HK 5,600 in Hong Kong.
The benefit to Disney store is that more visitors will familiar with the Disney products and generate sales. Increasing awareness of Mainland people towards Disney stores in Hong Kong may be the opportunity for Disney to further develop the China Market. Threats * Competition with the Disney Store in the theme park: After the establishment of theme park, the competitive force of Disney store might not as large as the stores in the park.
Customers might prefer to buy souvenirs in the park rather than the outlets. * Decreasing birth rate: The trends of late marriage and family planning result in shrinking the market size of Disney store, and gradually lower the demand for Disney products. Free Cash Flow (For 1983) = Operating cash flow – capital expenditure = $337,356 – $291,202 = $46,154 Recommendations: Shareholder’s rights plan is one of the takeover defensive strategy which activates at the moment a potential acquirer announces its intentions.
Under this plan, Disney could have purchased additional company stocks at an attractively discounted price, making it far more difficult for Steinberg to take control. A staggered board of directors, in which groups of directors are elected at different times for multiyear teams, could have challenged the raider. Increasing debt as a defensive strategy has been deployed in the past. By increasing debt significantly, companies hope to deter raiders concerned about repayment after the acquisition. However, adding a large debt obligation to a company’s balance sheet can significantly erode stock prices.
Perhaps a better strategy for target shareholders is for the company to make an acquisition, preferably through stock swaps or a combination of stock and debt. This has the effect of diluting the raider’s ownership percentage and makes the takeover significantly more expensive. Ironically, a takeover defense that has been successful in the past, is to turn the tables on the acquirer and mount a bid to take over the raider. This requires resources and shareholder support, and it removes the possibility of activating the other defensive strategies.
This strategy, called the Pac-Man defense, after Bendix Corporation’s attempted to acquire Martin Marietta in 1982, very rarely benefits the shareholders. Martin Marietta defended itself by purchasing Bendix stock and sought a white knight in Allied Corporation. Extra Credit Question (Give Extra credit to lowest scored exam) What was the enabling factor of acquisition? Disney was an attractive target for Steinberg for a takeover because it was really worth more in pieces than as a whole operation and it appeared to be Steinberg’s intention to reap his profit by breaking up this operation and sell off the pieces.
Actually it is more complex. Moreover, in 1983, Ron Miller became the CEO. After just a month, Miller gave up his post to Ray Watson (a close friend and his right hand man in the company). These constant changes in leadership led to a steep fall in the company’s share price. The share price fell sharply from $84 in 1983 to $45 in 1984. The lowered share price and the lack of stability in the top management resulted in a number of corporate houses attempting to take over Disney in the early-1980s.