The Environmental Threats and Other Financial Aspects of the Euro Disney Operations - Research Paper Example

Abstract Man’s existence is plagued with risks and uncertainties. From the time he set forth on earth, he has encountered accidents and calamities that can be categorized as man-made and natural calamities. Many of these accidents are outcomes of discoveries, inventions and innovations. But an almost equal number can be said as natural accidents or catastrophes. We have always been adventurous in our existence, and thus our activities are filled with risks. These risks can lead us to peril and harm if they are not anticipated. Risks should be pinpointed before we venture into new activities. One of the countermeasures can be a good and well-thought plan. Experience can help in the process of planning for new projects. Biblical history relates our ancestors took risks to attain their goals. Instinct of self-preservation drove them to survive those risks which had threatened extinction. They avoided dangerous areas and situations. They made tools and learned to invent new things, no matter how crude. Changes and innovations continue to give risks. Technological inventions provide areas for possible risk encounter, for example the industrial revolution characterized by major events which introduced a lot of changes in the workplace and organizations. Modern capitalism emerged after a transition period over several centuries, during which the conditions needed for a capitalistic market society were created. Among these conditions were formalized private ownership of the means of production, profit orientation, and the mechanisms of a market economy. 1. INTRODUCTION Risks became multiplied during the industrial revolution. This is because machines and new equipment were applied to production. More hazards and risks were acquired as more and more labourers were required in the workplace. With the emergence of the internet and information technology, risks include business system problems, fraud, and privacy issues, which can all interrupt the day-to-day operations of a business. Now fear has turned against vandalism and electronic larceny committed by hackers. Meanwhile, the media are full of news about the perils of human-made and natural hazards. New discoveries such as the nuclear power plant provided more risks and danger as safety in the workplace was not assured. Examples are the accidents that occurred at the Three Mile Island facility in Pennsylvania in 1979 and at Chernobyl in Ukraine in 1987. Globalization has shifted paradigms for organizations which are now more focused on financial risks. The recent global economic downturn has brought in a lot of changes in the organizational set up of global businesses. Managers are more careful to take risks because of the numerous recessions that have taken place in a span of just a few years. The recession in the early 1990s brought the Third World countries in Asia to succumb to the financial debacle. In 2000, some Wall Street companies had to close shop, declare bankruptcy, downsize, or merge, while others had to ask government aid. These are caused by risks organizations failed to anticipate. The impact of risk has increased in terms of financial losses. This is not only a consequence of the increased number of risks we are confronted with; the severity and frequency of disasters has increased as well. As more and more people live close together, business has become more capital intensive, and our infrastructure is more vulnerable. Globalization has caused organizations to increased growth of capital investment in infrastructure, manufacturing capacity, and private ownership of real estate and other goods. Risk management involves supervision and management of an establishment which can have equipment, structures, and processes that need to be closely monitored in the course of production or operation (Gallati, 2003, p. 5) The term risk could mean deviating from the normal course of a particular structure, activity or establishment, as the case maybe, which means it is probable that something could happen and this is within a range, which is from 0 to 100 percent probability. In other words, it could happen but it’s not a hundred percent certainty. Vaughan (1997, p. 8, cited in Brewer & Huque, 2004, p. 78) states: “Risk constitutes a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.” Businesses face risks everyday in the course or their operations. These risks can range from economic downturn and adverse market conditions to losses arising from natural calamities or man-made accidents, or as a result of corrupt practices of employees and managers of companies. Each contingency may generate financial losses that undermine businesses in achieving what must, no matter what other objectives are pursued, be regarded as the primary objective – namely maximizing profits. (Brewer & Huque, 2004, p. 78) Definitions Terms such as peril, hazard, danger, and jeopardy are used interchangeably with each other and with the term risk. When we say there is risk, there is likelihood that something could happen to produce a loss – there is a possibility that the owner or manager could acquire a loss of the resources out of a peril. A peril creates the potential for loss. Perils include floods, fire, hail, and so forth. Peril is a common term to define a danger resulting from a natural phenomenon. (Gallati, 2003, p. 11) Hazards are conditions that increase the risks of a peril’s occurring. (Clardy, 2004, p. 126) A hazard is abstract because it is a condition the increases the likelihood of a loss out of the peril. Organizations concerned of their assets were the first to introduce corporate insurance management to reduce the degree of risks that results into losses in assets and income. The job has been given to risk managers. (Gallati, 2003, p. 11) Organizations have devised plans to counter risks. Departments have been formed and handled by risk managers. These managers need a special kind of skill to handle risk management. Risk management (RM) is the protection of all of a company’s assets, including people, property, productivity, and profits. Managing risks involves taking care of the safety and security of individuals or organizations. (Saied, 1990, p. 46) Risk management has evolved as a way of preserving income and assets for minor losses, to protect ourselves from danger and harm. In business, it is the job of management to protect the organization from more risks and further damage and losses. Risk managers have devised ways to do this by applying a scientific approach to deal with risk. This may require a step-by-step process. (Gallati, 2003, p. 11) The practice of risk management began in the early 1950s. The change in attitude and philosophy and the shift to the risk management philosophy had to await management science, with its emphasis on cost-benefit analysis, expected value and a scientific approach to decision making under uncertainty. The development from insurance management to risk management occurred over a period of time and paralleled the evolution of the academic discipline of risk management. Operations research seems to have originated during World War II, when scientists were engaged in solving logistical problems, developing methodologies for deciphering unknown codes, and assisting in other aspects of military operations. (Gallati, 2003, p. 12) Assessing insurance coverage remains an important part of the risk manager’s job, but it is only one element of the complex RM function. The risk manager first must be able to identify and assess potential risks from many diverse sources. Next, the risk manager must determine the loss exposure associated with the risk. Finally, the manager must select the proper risk-management method and implement that plan. The purpose of risk management is for customer concern (Turnbull, 1999), more earnings for the company (Cary, 2000; Cadbury, 1992) and a well-defined processing of products (Godfrey, 1996). Peter Bernstein (2000, cited in Holt, 2004, p. 253) describes risk management as the analysis possible harm and losses to the company’s income and assets using laws of probability (statistical measurement; regression to the mean; diversification) and utility theory (value judgements; opportunity cost assessments; games theory). There are four approaches to managing risk. These are: (1) terminate or avoid, (2) tolerate or assume, (3) transfer or shift to others, and (4) treat or prevent. In the case of the hotel service industry, a combination of all four approaches can be used depending on the situation. For example, if there are diving boards from its swimming pool, the hotel may eliminate such diving boards to avoid accidents. It may also cancel alcohol sales in its restaurants to avoid drank clients. However the risk may be eliminated but guests expect a certain level of service. Hotel operators tolerate or assume risks when they have no other choice or when the dollar amounts involved are small. The key to this tactic is not to assume a risk unknowingly. Say that a hotel employee assaults a guest. The hotel would have difficulty defending itself, if, for instance, the employee had a history of violent behavior but the hotel had not conducted a thorough background check. Although insurance remains the primary method of transferring risk, it is probably also the most expensive method in the long run, especially in view of the great increase in premiums. While many hotel companies have responded to increased premiums by increasing deductible levels, more and more companies are switching to self-insurance. Self-insurance can cut administrative costs, encourage better loss-control programs, permit lower contingency-loss reserves, and offer more flexibility and control in handling claims. A self-insurance program can also be applied to risks that cannot be commercially insured at acceptable rates. (Saied, 1990, p. 46) The primary means businesses use to manage risk are loss prevention and control. Losses due to theft may be reduced or even eliminated by employing a contingent of security guards supported with a sophisticated burglar alarm system. In some cases, a degree of loss is inevitable, so controlling loss becomes the most important consideration. Losses arising from a fire can be minimized by installing a sprinkler system even though some loss will be sustained, not least because of water damage caused by the sprinkler system itself. Obviously businesses want to operate in an environment as safe as possible and an important consideration must be the costs associated with different kinds of risks. Regardless of the kind of risk management strategy adopted, business managers must ensure that both fixed and recurrent costs balance positively against the potential losses associated with particular safety and security issues. However, when, for example, security issues are considered, the sharing of loss prevention and control responsibilities between private firms and public agencies give businesses an opportunity to reduce their direct costs. If there is a shortfall in the timely and effective provision of public security services then businesses face greater risk, which they must endeavour to reduce by using more sophisticated technology or by engaging additional security personnel, either as firm employees or on a contract basis from private security firms. Security risk management is one of many areas where business managers need to decide about resource commitments in the face of considerable uncertainties. An additional complication arises when businesses are located in an overseas jurisdiction. However, the published performance measures of public agencies can be a source of useful information to business firms when good governance principles underpin the work of the public sector in the host national country. Performance measures outlining service efforts, service accomplishments in the form of ‘outputs’ or ‘outcomes’ and cost-effectiveness indicators are valuable sources of information. (Brewer & Huque, 2004, p. 86) 2. EURO DISNEY Euro Disney is a $4.4 billion project that was officially opened in Marne-la-Vallée, twenty miles outside of Paris, on April 12, 1992. It was ajoint venture between the French government, private investors, and Walt Disney Corporation. Euro Disney Resort is an integral part of the entire theme park development. Euro Disney planned to control exclusively all the hotel operations as part of the entire park operations. The development of the six on-site themed resort hotels demonstrated Euro Disney’s great interest in hotel development and management, and Euro Disney’s desire not to share its theme park’s success with other hotel companies. Euro Disney Resort was formed as a subsidiary of Euro Disney to manage the lodging operations. The six resort hotels were designed to provide international visitors with a taste of American culture and natural wonders. The purpose of developing these themed hotels is to continue the excitement and fantasy when visitors leave the park to return to the hotel. (Yu, 1999, p. 24) 3. PESTEL analysis 3.1 Political factors Government policies in Europe are geared towards improving the service sector. This is favorable to the industry, which can be seen in the opening of Euro Disney and support of the French government towards this goal. Government policies provided a way for another renaissance in Europe. In the last 50 years, there has been a major evolution in European society from being manufacturing based to being predominantly service based. The reasons for this are: 1. As industrial societies become richer, they choose to spend a higher proportion of their incomes on buying services rather than physical goods. 2. It has so far proved very much harder to draw out additional productivity from primary and secondary industries. 3. As countries become wealthy, they are able to ‘export’ their profits in the form of investments in other countries. Evidently, a number of countries have invested in manufacturing in other developing countries. (Botten & McManus, 1999, p. 2) 3.2 Economic factors The service sector has come to dominate both UK and USA economies. The meaning of service – on what is service and how to provide it – has captured considerable attention. There is a general consensus of opinion that services are intangible and therefore invisible. European industrialized nations, such as Belgium, France, Italy, and the UK have reported higher employment figures in their respective service economies. (Botten & McManus, 1999, p. 1) 3.3 Social The social factors in the hospitality sector, in this case the Euro Disney, include a great influence of the entertainment industry on the European population. First and foremost, Walt Disney Company is an entertainment organization with its primary mission of providing entertainment and hospitality to the American public. This organization carried along with it an American culture, distinct from the diverse cultures of the Europeans. Walt Disney Company, which is an American firm with its own organizational culture, decided to branch out of the United States. At first, they were successful in Japan but this one in Europe put to the test the American owners. The Europeans have their own distinct and diverse culture; the company has to employ Europeans who have to be trained and adjust with the organizational culture. 3.4 Technological The popularity of the internet and information technology has provided tools for the service sector. Websites for the industry are proliferating, helping the tourism and hospitality sector to have a close interaction with clients and other stakeholders of the industry. 3.5 Legal There is no perceived legal problem or hindrance on the hospitality sector. In the UK, the hospitality sector is being aided with laws and statutes that promote the service sector. In Europe, there is a boom in the hospitality sector and laws are favourable to further promoted this are of the economy. The legal aspect includes laws and other legislation that affect the hospitality sector, especially the relationship of Euro Disney with the French government. At first, there was no legal impediment because Euro Disney was a joint venture between the American firm and the French government, so that any legal problem was easily settled out. 4. MICRO ANALYSIS ON EURO DISNEY When Euro Disney opened, risks involved a weaker franc, weather problems, and war. Euro Disney is a joint venture between Walt Disney Co. (which owned 49% of the shares) and the French government to develop an enormous theme park and real estate complex on 4,800 acres of land near Paris. Euro Disney went public in Europe at the equivalent of $11.50 a share; it shot up to $21, then settled back recently to $18. (Kiplinger’s Personal Finance 1990 issue) Failure in the opening operations could be attributed to cultural differences between France and the United States. Then at the time the Park opened, Europe was in an economic recession; park visitors simply weren’t willing to spend money in the park. And third, the hotels Euro Disney had built and intended to sell were not attracting buyers. In an effort to keep Euro Disney operating, the Walt Disney Company, which had 49% ownership, invested $179 million. With the influx of capital, the park managed to stay open through March 1994. Meanwhile, beginning in January 1994, negotiations began between Euro Disney, its 60 creditor banks, the Walt Disney Company, and the French government, aimed at restructuring a debt of $3.6 billion. This was followed by “Challenge 1994” – a major overhaul of operations, in hopes of devising a new strategic approach to the park’s marketing campaign and employee staffing. (Brett, 2000, p. 101) Euro Disney carries with it American culture. It employs about 5,700 managerial and service personnel during its normal operation, with different nationalities as part of the work force. Market entry timing coincided with the economic recession in Europe, and many European visitors did not want to spend money on the expensive admission fees and resort accommodations. The initial development of Euro Disney encountered strong opposition from France’s media and many people who criticized the development as a threat to French culture. This caused an image problem for the theme park as the development was negatively perceived by many French people. Western business enterprises with overseas bases often confront social norms considerably at odds with anything they have experienced previously in their home country. As has been mentioned, there’s a new entrepreneurial renaissance in the twenty-first century, and this is being fuelled by advances in information technology and the internet. Environmental factors The environmental is affected because of the various establishments constructed by Euro Disney. Euro Disney has resorts, hotels, entertainment parks that can provide environmental risks if not properly managed. During the initial stage of constructions, various environmental hazards were seen as detrimental to the health and safety of the population. Such hazards included construction and demolition wastes that pose a threat to the environment. In the present set up, stricter measures have to be instituted to eliminate these hazards. Euro Disney was the result of studies and consultations within Walt Disney Company: executives believed they had to branch out to other cultures such as the European way. In Europe, Disney films were better patronized by Europeans. In short, Disney entertainment and merchandise were more at home and popular and could be a good business for the company. At first, they looked for possible sites, and those considered were Costa del Sol in Spain and Paris in France; the latter got the nod of most Disney executives, especially the Board. Business wise, Marne-la-VallZe is strategically located because of its proximity to two international airports – Orly and Roissy-Charles-de-Gaulle. The Euro Disney provided new jobs and contracts for local suppliers which resulted in a good treatment from the Europeans. It hired thousands of employees, laborers and entertainers. These employees would have to be distributed to the different entertainment areas and sectors, for example 6,000 employees for the Magic Kingdom, 5,200 in hotels and surrounding properties, and others in the reaction and support facilities. This was a big boast to the employment opportunities of the locality since the area was suffering from massive unemployment. Economic benefit therefore was one of the outcome of the opening of Euro Disney. During its opening, the people enjoyed the same satisfaction as those in the United States and Japan. Expectations were not met because the 11 million guests expected to grace the daily operations of the vast entertainment complex did not materialize, and so revenues were out of targets; meaning profits were so low. The losses that the company incurred were so big – at first $905 million in September, 1993, and grew to 6.04 billion French francs or 1.03 billion US dollars by December of the same year. To analyze the circumstances leading to the losses of Euro Disney, it can be said it was the fault to some of the leading personalities of the company. Management failed to adapt some risk management processes leading to those heavy losses. For example, Rober Fitspatrick, the American chairman of Euro Disney did not realize what he was doing in the daily operations of the park. He was caught unaware when in fact there was an ongoing recession; the environmental factor – the weather situation – was never taken into consideration. Management failed to analyze the situations in Florida and Europe; these two offered different scenarios in terms of environment, culture, and entire situation. Finally, a European, Frenchman Philippe Bourguignon, took over the management in 1993. Euro Disney then changed some of its first strategies in setting up Euro Disney including its entertainment parks, resorts and hotels. Problems in staffing, training, and issues in cultural differences, communication, and other matters were providing a challenge to the new management. In their examination of these problems, the management was quick to pinpoint several strategic and financial miscalculations. Expenses were incurred in building this state-of-the-art entertainment establishment without giving consideration to what would be the outcome when it came to profits and gains for the company. It was a near-financial collapse but management was quick to institute reforms. Moreover, during the construction process, last minute changes were instituted by Chief Executive Michael Eisner, increasing the over-all expenses. Additional expenses were also added for wood-burning fireplaces when it could have been avoided: these were lavish furniture. The staircases in the Discoveryland were removed adding a cost of $300,000 for the company. There were operational lapses that could have been avoided. Staffing in the park was not properly studied or planned. The choosing of a heavy turn-out of guests and customers was an error – they could have chosen Monday as a busy one and Friday a light day, but this was not the case. Even up to now the right staffing is not yet final, which really is a busy day for the park. Another problem concerned the French bus drivers who had a hard time with the parking spaces: the parking area was small for the buses and the drivers were complaining. The 50 rest rooms were not enough for the 2,000 drivers assigned to the park. The computer stations at the hotels also posed a problem. The time the guests would stay at the hotels should be noted. First the guests would enjoy the day at the park, arriving in the morning and stroll at the park the whole day. Later at night the guests would check in with the hotels and in the morning they would go back to the park. This situation provided a busy day and would surely need computer stations at the hotels because of the checking in and out of guests. (Aswathappa & Dash, 2008, p.107) 5. Conclusion The Walt Disney Company took so many risks in its Europe venture – the Euro Disney. This caused losses for the company in its first years of operation. However, it was able to recover after management pinpointed the risks involved in the early years of operation. The Euro Disneyland has a significant human resource which has to be studied and given more attention with the appropriate planning for training, recruitment, and learning for people involved in the entertainment industry. There is a wealth of information and knowledge in this study which can provide more literature on risk management. It has to be added to our data base of management lessons to further enhance the avoidance of perils and hazards. Management of risks will become not too hard for our risk managers. 6. Recommendations Risks are a part of implementing a major project such as the Euro Disney and other entertainment establishments and theme parks. The company Walt Disney should have instituted several stricter measures in its operations but, sad to say, it was not a well planned project. They took major risks in financial aspects that gave them big financial losses. The environment too took a beating because of the not so planned construction sites which generated a big amount of construction and demolition wastes (C&DW). A major study and survey should be conducted on these theme parks and entertainment establishments in order to minimize further damage to the environment. The company and the French government should work hand in hand for this research which will have to focus on the environmental threats and other financial aspects of the Euro Disney operations. References Aswathappa, K. & Dash, S., 2008. International human resource management. New Delhi, India: Tata McGraw-Hill Publishing Company Limited. Brett, J. M., 2000. Negotiating across cultures. San Francisco; Jossey-Bass; Mickey’s trip to trouble: Unsuccessful theme park could be closed (1994, February 14). Newsweek, p. 34. In Linda K. Stroh et al. Organizational Behavior: A Management Challenge. New Jersey: Lawrence Erlbaum Associates, Inc. Brewer, B. & Huque, A. S., 2004. 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The international hospitality business: management and operations. Binghamton, NY: The Haworth Press, Inc. Read More