Diversification at the Walt Disney Company - Case Study Example

Lecturer Diversification at the Walt Disney Company Introduction Walt Disney Company was started by the Disney brothers, began as a studio producing cartoon series like the Donald Duck and the Mickey Mouse. The company is now a powerhouse in the entertainment sector and produces more programs in; films, music, merchandise, vacations, radio and televisions. After the Second World War, when film-making demand especially by the US government reduced, the Walt Disney Company expanded its operations into other related market segments due to the profitability factor; this explains the diversification approach which ensures success (Dobson and Richards 38). The company’s first encounter with diversification started the moment a businessman sought permission, from the Disney brothers, to use Mickey Mouse images in promoting drawing tablets. This encounter led to the establishment of the Mickey Mouse Club to spearhead the trading in products with animated characters of Walt Disney. Today, Disney Stores retails in stationery products, clothing, food and beverages, literary materials, home décor and clothing line. Common Resources and Capabilities Common resources and capabilities ensure that all activities of the Walt Disney Company are linked towards business strategy in two ways; one, resources and capabilities provide direction for business strategy; and two, resources and capability ensure profitability of the company. Disney’s capacity to earn greater profits depends on two major issues; attractiveness of the entertainment industry, and competitive advantage it has over competitors. The extended product scope of the Walt Disney Company has given it a competitive advantage over other players in the entertainment industry. Through studio entertainment branch; Disney produces and distributes animated movies and acquire rights to other entertainment content. Through the Media Network branch, it distributes media services to families; the Media Network entails; television stations, radio stations, publishing operations and cable networks (Dobson and Richards 83). Resources and capabilities of the Walt Disney Company provide direction because they are all geared to serving only one market segment, entertainment; the diversification program is meant to ensure customer satisfaction in the entertainment sector. Disney theme parks are an extension of its core business because the ideas and characters appearing in films provided basis for the fantasy environment. This created a circular relationship; where films promoted the theme parks and vice versa. The theme parks include; the Florida Walt Disney Resort, California Disneyland, and Disneyland Resorts in Paris, Hong Kong and Tokyo. The resources and capability also explain the unique nature of Disney’s operations and products. The Walt Disney Company planned and built businesses complex which all work towards achieving the family entertainment target; entertainment, recreation, hotel, hospitality and retail areas of Disney led to formation of Disney development Company. One of the most surprising, unique and innovative diversification developments was the building of a town known as Celebration near the Florida Disney Resort; and the current population of the town is approximately 11,000 people. Disney was instrumental in town planning, business premises design and housing planning and provision of basic facilities like schools, hospitals and shops. Michael Eisner, the CEO of Disney, was very keen in developing the town which represents the legacy and brand of Disney. Diversification Moves in terms of Relatedness The Walt Disney Company is composed of complex but complementary businesses; diversification is related if operations of businesses are in line with the company’s current or main business, in a manner that leads to increase in competitive advantage. Related diversification creates strategic fit which creates opportunities of; transferring superior technology from one business to another; lowering operation costs by combining performance of related activities; using an established brand; utilize effective capabilities or resource strength throughout the business (Charles and Schendel 13). The relatedness of Disney’s diversification moves can be understood best through considering “Magical Disney” concept; which explains factors that make Disney world a leading destination resort. Disney World succeeds because of the relatedness benefits generated by other Disney products. While in the destination resort, children get the opportunity of meeting Disney characters throughout the park; this experience increases demand for retail purchases, television broadcasts, videos, music and books. This “Magic of Disney” drives major marketers like Coca Cola to pay for permission to use Disney World images in their advertisements. Also to show interrelatedness in Disney World; families are able to book hotels inside the part in advance; on reaching the park, families are guide into their hotels; meals can be taken in restaurants owned by the Walt Disney Company, and merchandise with Disney images can also be purchased in the park. Families agree to pay relatively more for goods or services in the park, because the experience achieved is valuable. Walt Disney knew the importance of interrelatedness in the diversification process; this has led to the continuous competitiveness of the company. Ever since the company has increased its operations to include online media, radio, publishing, music and theatre. Up to early 1980s Walt Disney main focus was in creating family entertainment; this changed in 1984, when a new CEO was named (Michael Eisner). The new CEO was innovative and hence led to continuous growth and profitability of the company (Lynch 47). CEO Eisner ensured that; the company diversified to explore the synergies created with new industries, and expansion; synergies increased shareholders value; and firms leveraging on opportunities sand strength created in an alliance. Walt Disney Company acquisition of Marvel Entertainment Marvel Entertainment was acquired by Walt Disney Company in stock and cash, August 2009, at a cost of $4billion; Disney had the aim of improving its strategy of producing and distributing branded entertainment products to customers around the globe. Marvel Entertainment participated in the entertainment business for over 70 years; through its licensing, entertainment and publishing business segments. The acquisition of Marvel Entertainment added great value to the operations and profitability of Disney Company; this is because this exercise created a great business synergy between the two companies (MBC). Marvel’s unique characters like Captain America, Iron Man, Spider Man and Fantastic Four, and a global brand which is strong; combined effectively with, the creative skills and global entertainment properties of Disney; this ensured maximum creative value on Disney products. Acquisition of Marvel Entertainment by Disney has ensured a unique opportunity for value creation in products. Challenges Disney’s senior management face in Diversification Disney’s success depends on ability to efficiently and effectively create and distribute products; however it currently faces challenges, and will most likely experience other unique challenges in future. To begin with, the customers bargaining power is currently high in the entertainment sector. Large number of customers is required to ensure the smooth operation of the Walt Disney Company (Hit and Hoskisson 71). For example, if the price of a given product is high then few customers will purchase it. It has also been noted that the maximum amount customers are willing to use as entrance fees in Disney parks is quoted as $3. Many Disney products give customers’ intangible returns; this may lead customers to believe that they are getting returns, and hence their bargaining power can increase. The second challenge Disney managers face is managing a huge international workforce. There is also a high rate in changes of top management. For example, in 1991 the company had over 58,000 full time staffs. This high employee number leads to many bureaucratic levels in the company in the company subsidiaries worldwide (Gary 69). The process of diversifying into new businesses requires more employees hence the organizational structure is further strained and complicated, also frequent changes in top manager’s leads to inconsistencies in company policies and objectives. High employee population leads to communication problems and high communication expenses; for example installing new company wide communication system, and continuously reviewing it, is expensive. Another management challenge is dealing with current saturated global markets and increased foreign competition. In this information and communication technology age; there is a high supply of entertainment services worldwide (McDonald 286). For example in the television service sector; Disney expects stiff competition from cable giants like Turner Broadcasting Systems. Many investors are also building cheaper theme parks in the United States and also globally; plus world class destination hotels; for example the Hilton Group of Hotels. The internet is also dominating the distribution of entertainment content; through social networking sites like Facebook or Twitter; YouTube is also popularly used to stream video entertainment content. Conclusion The Walt Disney Company has gradually grown to reach a mega-entertainment status, in four major business branches; Media Networks, Studio Entertainment, Consumer Products and Parks and Resorts. Each segment entails well-connected and integrated businesses that operate in synergy to increase value of products and maximize global exposure market growth. The company relies on a strong organization culture; hence its diversification should not diminish the most important issue that has ensured its continuous success – strong synergy experienced between its several businesses. The diversification objective is majorly driven by one factor; maximizing cash flows and earnings, so as to ensure success of growth projects and long-term increase in shareholder value. Works Cited Charles W. Hofer and Schendel. DanStrategic Formulation: Analytical Concepts. St. Paul, MN: West, 2008. Print. Dobson, P., Starkey, K. & Richards, J, Strategic Management: Issues and Cases, Oxford: Blackwell Publishing, 2004. Print. Hit, M., Ireland and Hoskisson, R. Strategic Management, 6th Ed. Oxford: South-Western Educational Publishing, 2005. Print. Gary, S. The Dynamics of Diversification, Quebec: International Dynamic Conference-1998, pp. 4-6 Lynch, R. Corporate Strategy, 4th Ed. London: Prentice Hall, 2000. Print. MacDonald, Brady. What’s next for Marvel characters at Disney theme parks, Los Angeles Times, 2011. MBC. The Museum of Broadcast Communications, www.museum.tv [Accessed: 26 March 2006] Read More