Case Interpretation of Disney’s Business Success

1. What accounted for Disney’s success in the 1980s?

Disney’s success in the 1980s can only be put in context after some attention is paid to the actions taken by Disney in earlier decades. The first action taken by the company that led to its eventual dominance of the entertainment industry has to be when Walt Disney emphasized, in the 1930s, the need to only license to the best companies. Similarly, the move to begin stocking the shelves of major retail chains, like Sears, upon theatrical release exponentially increased the amount of revenue taken in by both ventures. Finally, the move to re-release cartoons from its library on a limited basis has brought in tons of dollars for essentially no cost outside of a small marketing budget.

So when Mr. Eisner took charge in 1984, he was tasked with transforming what was already a fairly competent company, one that just happened to be going through a flat stage. Needless to say, the actions he took were highly productive. Eisner infused new blood into the company by recruiting successful businesspeople. Then he reemphasized the Disney culture at the corporate university.

With the employee base back on track, he started to pit creativity against finance in order to bring the best out of both sides of the company. As a check against these planned battles, he created positions to monitor the issues at hand. He was not afraid to risk the possibility of cannibalization if it could lead to synergy across business units. Eisner also placed a financial box around movie production to control costs.

Toward the close of the decade, Disney started to experiment with cross-promotion (as seen with the Roger Rabbit film). Around this time, there were also more divisions (Disney Development) and attractions (Captain EO) added to the company. So, in sum, there are numerous reasons why the company leapt ahead financially in under ten years.

2. What did Disney’s corporate office offer to its business units?

Above all else, Disney offered its business units an almost limitless supply of capital to undertake new ventures when there seemed to be a fit. All of the land, marketing properties, characters, and cash available to Disney employees made expansion into new arenas possible given a good business model. These same factors also led to top management’s permission to act on hot opportunities.

As you will see in my answer to question three, the synergistic mindset that Michael Eisner inculcated into his employees was an important step toward making each business unit that much more effective. Rather than repeat myself, I will touch on this issue now.

3. How did Disney achieve its cross-business unit synergy?

There were a couple of ways that Disney achieved cross-unit synergy. First, the company created a few key linking functions within the company that allowed all of the business units to save money and limit mistakes on what had been to date outsourced processes. The list of critical functions includes a finely-tuned company marketing department, a companywide calendar of events, a library committee, and an in-house media buyer.

Another idea that aided in this effort, while not new, was the institution of transfer pricing. Using this model, the company could keep track of services exchanged within the company: a necessity at a company the size of Disney.

Finally, Mr. Eisner offered those executives who were truly committed to synergy, bonuses for their efforts. Eventually, this strategy was even taken internationally. These moves obviously helped achieve the synergistic goal.

4. What accounted for Disney’s problems in the 1990s?

Going into the 1990s, Disney appeared to be on an unstoppable path to profit. But, as the business world has taught us time and time again, this isn’t always as easy to do. Most importantly, I think Disney was hurt by its own success. I would argue that it is impossible for a company to indefinitely keep up the pace after the first time it needs to restart itself (like it did in 1984).

Of course, there is more to the story than just this general notion. Disney also seemed to be spending entirely too much effort on line extensions in the 1990s. Normally, this is a cheaper, less risky way to increase revenue. But with Disney, the real money seems to be made when the company enters an entirely new arena (like cruise lines and timeshares). The company also found itself making too many movies and losing focus on how to make them not bomb. Even its animated films started to become more expensive thanks to the cost of doing business going up by a large amount.

Add to this, the fact that top management started to leave in the 1990s after Mr. Wells died; which, consequently, put too much on Eisner’s plate. Also, adding ABC might have been the move that really caused the stagnation more than anything else. They got big too fast (in one day), even for a company used to 20% growth and new departments constantly being added.

5. What should Disney do to sustain its growth in the 2000s?

Looking at the differences between the amazing results in the 1980s and the struggles of the 1990s, Disney has unintentionally created a useful road map for the 21st Century. As we have seen, Disney is at its best when it has a strong leader who focuses on maintaining the integrity of the creative product but who is cognizant of the financial implications of every decision. This person needs to have a powerful second-in-command who pushes for financial excellence. Other top executives, especially those who head the various departments within Disney, need to be given multiple forums that allow knowledge to be shared for mutual gains (and these people need to be compensated for placing this goal above all others).

The other half of the story involves the way the company grows in the future. We have seen that Disney is at its best when it creates entirely new marketplaces that it can compete in. But we have also seen that the company cannot maintain focus when it gets too big too fast. So, the company must be willing to spin off the weakest performing divisions any time it adds a new competency.

Of course, there are a million other things the company can do to continue growing and turning a profit, but the two elements listed above are paramount to success in the long term. Without them, Disney will revert back to the nearly uncontrollable expansion it saw in the 1990s.

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