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Yale SCHOOL of MANAGEMENT

Christopher Kirkman

Strategy Analysis of The Walt Disney Company


Introduction
In a 1988 consumer research study, magic, was ranked as defining attribute of Disney, as a
company, by 34% of the studys participants. Clearly Disney means more to its customers than
simply amusement parks, movies, television shows, clubs, or books. The whole of Disney is far
greater than the sum of its parts. The magic of Disney is the seamless synergies of its wildly
diverse businesses. Its products are more Disney than they are products. For its youngest
customers (who are being born every minute)1, there are no substitutes. Throughout its history,
Disney has, with minor exceptions, shown the true value to shareholders created by synergies
from thoughtful diversification.
Diversification
Synergy is an overused word in the promotion of various corporate strategies. However, Disney
distinguishes itself by its fundamental understanding and usage of this concept throughout its
diversification efforts. Throughout its history, Disney has embraced a clear and concise
corporate strategy that has contributed to its prolonged success, and ultimately has created value.
Walt Disneys famous quote is that It all started with a mouse. In retrospect, it might be easy
to assume that Disneys success is based on some inherent competitive advantage, but Disney
shows his understanding that this is not the case, and his importance to the corporate culture,
through his distinct and personal leadership, is indicated by his employees mantra of what
would Walt do? Ingrained in Disneys corporate culture is the understanding that while Disney
has unique and magical products, the magic isnt the products themselves, but instead in the
way in which they interrelate and complement each other.
Disney began diversifying very early. In 1928, Disneys first cartoon was released. In 1929, one
year later, Disney licensed a pencil tablet. By 1932, the Mickey Mouse Club (MMC), a crucial
vehicle for selling Disneys products, and tying them into a cohesive whole, had over 1 million
members. During the war, Disney produced training and educational films. In 1949, the
company diversified into music. Disney did not overlook the invention of television as well.
Walt Disney said It is obvious that televisionwill make a tremendous impact on the world of
entertainment and motion pictures. Walt Disneys early and intuitive understanding of the
interrelation of new industries to each other clearly leads to his crowning achievement:
Disneyland. While the synergies between other traditional forms of media might be obvious,
prior to Disneyland, amusement parks, while popular at points, were out of vogue and did not
have the theme appeal they have today:
As the 1950's dawned, television, urban decay, desegregation, and suburban growth
began to take a heavy toll on the aging, urban amusement park. The industry was again
in distress as the public turned elsewhere for entertainment. What was needed was a new
concept and that new concept was Disneyland. When Disneyland first opened in 1955,
many people were skeptical that an amusement park without any of the traditional
attractions would succeed. But Disneyland was different. Instead of a midway,
Disneyland offered five distinct themed areas, providing "guests" with the fantasy of
travel to different lands and times. Disneyland was an immediate success, and as a result,
the theme park era was born.2

The Walt Disney Company: A Corporate Strategy. Michael Porter, 1988.

National Amusement Park Historical Association, Amusement Park Industry History, 1999.

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Yale SCHOOL of MANAGEMENT

Christopher Kirkman

Walt Disneys crowning achievement was not the invention of Mickey Mouse, but instead
creating of a mechanism for creating synergies between businesses. Porter proposes three tests
to determine if diversification truly creates shareholder value. Disneyland is a striking example
of how Disneys strategy reflects Porters philosophy of the attributes present in successful
diversification efforts:
1) The attractiveness test: the amusement park industry, at this period of history, is
fragmented and destitute. The entry barriers are high, due to substantial fixed costs.
Suppliers have very little power, being desperate for business after the recent decline in
traditional amusement parks. Buyers (customers) are unorganized, and while there are
many forms of entertainment available, nothing exists matching the theme park
concept.
2) The cost-of-entry test: This is perhaps the weakest component of the Disneyland effort.
It had very high fixed costs, and rested heavily upon quelling the publics skepticism.
However, Disney approached this with the correct expectation that its fixed costs would
be lower than its expected profits.
3) The better-off test: Disneys diversification efforts, more than anything else, propagated
the magic of Disney. Television advertised the movies, which advertised the hardgoods, which advertised the television shows. Disneyland proved to be the perfect
vehicle to capitalize on the advertising potential of these types of media.
More than just being a provision mechanism for advertising for Disneys other products and
services, Disneyland was a land of pure advertising for Disney magic. In fact, its nickname is
The Magic Kingdom. Walt Disney created a work wherein instead of paying to advertise
Disneys products, he could actually charge people to be exposed to advertisements. Disneyland
was the first theme park, which comes naturally from Walt Disneys understanding of the
concept of the theme that is the synergy between diverse businesses.
Continued diversification consistent with Walt Disneys early actions leads to continued success
and the creation of shareholder value. In most cases, Disney shows itself to be a corporation
acutely aware of the importance of appropriate diversification and the true nature of synergy.
Control
A very important lesson for the company, which contributed heavily to their later success, was
their loss of an early popular character, Oswald, the Lucky Rabbit. Not only did Disney retain
control of all of its characters after this incident, but exhibited a strong pattern of controlling
behavior of all types across a wide swath of industries. Disney eventually controlled all
operations inside Disneyland, which had very strict employee rules and regulations. In addition,
Disney lobbied to have control of the facilities that supplied Disneyland, normally a civic
responsibility. Walt Disney Productions made a concerted effort to buy back all of the parks
equity as soon as possible. The company brought back its agreement with RKO to distribute
films in-house when it was financially capable. Disneys continued movie success came from
the companys philosophy that money was no substitute for imagination.3 It maintained strict
cost controls in an industry where costs overruns were common, and rather than pay star wages,
developed its own in-house stars. In fact, animation is the perfect vehicle for a company wishing
to have tight controls, as the anonymity of a star animator prevents Disney from experiencing
supplier power issues.
More than anything else, Disneys tight operational controls create shareholder value. This core
competency passes Porters three appropriateness tests for skill transference. For Disneys
industry, as stated above, this sort of control is unique to the industry, which is certainly a
3

The Walt Disney Company: Corporate Strategy. Michael Porter, 1988.

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Christopher Kirkman

competitive advantage. This is not a peripheral skill. Also, these controls appear to be beyond
the ability of Disneys competitors.
Leadership
As stressed above, Disneys early success came from innovative leadership by Walt Disney.
Michael Eisner took over in 1984 following a period of financial and image deterioration.
Quickly, Eisner made this his own company, by changing the name from Walt Disney
Productions to The Walt Disney Company, hiring his own new management, and outline his
overall corporate objectives. One of the keys to Disneys early success, similar to the successes
of Southwest or Wal-Mart, was consistent leadership. Both employees and customers of Disney
felt that Walt Disney embodied the company. Disney was suffering without a leader that typified
the Disney spirit. Eisner, knowing that he faced stiff competition in any efforts to duplicate Walt
Disneys phenomenal success, knew that rather than try to run somebody elses company, he
would be more successful in creating his own.
Specific Eisner initiative included: 1) The Disney Store 2) Euro Disneyland 3) Purchase of
Disneys first broadcasting outlet (KHJ-TV) 3) Establishing a major television presence 4)
Significantly increasing number of films released, from 2 in 1984 to 15-18 yearly. In terms of
these specific actions, clearly the most successful (with perfect hindsight) was Disneys efforts in
the film industry. Their strict cost controls, combined with well-chosen management, increased
their market share from 3% to 14% in 1987. The Disney Store should not be overlooked
however, as it provided an important vehicle for bringing a slice of Disney magic [to] every
community.4
While these specific initiatives were very important for Disneys success, perhaps the new
CEOs greatest contribution to Disney was his ability to focus the organization. His strategic
vision was communicated through the apparently symbolic change of the name of the
corporation. Walt Disney Productions signifies a company that is limited to producing
something. If one was unfamiliar with the company (if this is possible), a false assumption
regarding the scope of this organization might be made. The Walt Disney Company could be
anything. Its scope is limitless. Eisner then creates three distinct business units, Studios,
Consumer Products, and Attractions. These units allow Disney to better focus the synergies
between its businesses, and retain the control that has proved to be of such importance to
Disneys continued success.
Growth Over the Past Decade
Over the past decade, Disneyland has faced the challenge of meeting Michael Eisners targeted
20% growth rate, a somewhat unrealistic number. The primary vehicles for this aggressive
growth were diversification of existing businesses, exploring synergies in new industries, and
overseas expansion. Overseas expansion is a logical goal for a corporation that has reached a
near-saturation point in domestic markets. Clearly, there is a large degree of expansion potential,
given the specific risks associated with a product hinging to such a great degree on a magic that
might be difficult to convey to another culture. Disneys diversification efforts, however, are of
greater interest and relevance to the topic at hand.
Two particular diversification initiatives demand attention due to their broadness of scope: the
CapCities/ABC Acquisition and Celebration, Disneys planned community. Disney wished to
gain ownership of a programming distribution channel, which appears to be naturally synergistic
to their business. However, there are several subtleties to this particular industry that raise
question as to its true value to the Disney organization. If Porters appropriateness test is applied
to the CapCities/ABC acquisition, this initiative falls short in several ways. The network
4

Ibid.

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Yale SCHOOL of MANAGEMENT

Christopher Kirkman

television industry is not attractive. It is in decline, there are many substitutes, and it has wellestablished competitors. The cost for Disney to enter this business is far higher than any
expected profits. It appears that Disney, in its desire to obtain a network, was willing to overpay.
Most importantly, Disney will most likely not be better off owning this business. Disney
currently has a television distribution channel, The Disney Channel (TDC). Although TDC is a
cable station, cable saturation, along with other forms of multimedia, particularly the Internet,
are rapidly taking over market share traditionally held by the major networks. In addition,
because Disney cannot possibly be the sole content provider for CapCities/ABC, they will lose
control over a major portion of their business. Because control is one of Disneys core
competencies, this has the potential to be very problematic. Disney also faces the significant
hazard of having its magic diluted by the inextricably non-Disney core value content that ABC
provides as part of its role as a network television station. The acquisition of CapCities/ABC
does not have the elements of a successful endeavor for Disney.
Celebration, on the other hand, is a real estate project. Real estate is not traditionally considered
to be in the realm of the entertainment industry. On the surface, this appears to be simply a
portfolio diversification effort on the part of Disneys management. However, Celebration is
more than simply real estate. In fact, it could be considered the ultimate step towards the
propagation of Disney magic in our society. Instead of simply going to the movie, the store, or
the theme park to have the Disney experience, Celebration gives the customer the opportunity to
live it. Disney magic becomes a lifestyle. Perfect synergies exist between Disneys
entertainment business and Celebration. Celebrations residents are the ideal consumers of all of
Disneys products. Disneys entertainment business in its entirety is an advertisement for
Celebration. While real-estate industry diversification, in this context, would pass Porters
attractiveness and cost-of-entry tests, it is truly the better-off test that would show the value of
entry into the real estate market to Disney shareholders value.
Conclusion
Disney is an example of a company that understands proper diversification. Walt Disneys
intuitive comprehension of synergy, magic in his lexicon, is the driving force behind the
companys continued success. While imperfect in the present day, Disneys creative use of
diversification ultimately has the potential of creating a vast amount of shareholder value
through propagating this magic throughout society in ways previously unimagined.

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