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Diversification Strategy for The Walt Disney Company
Analysis of the case
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10/14/2016
Contents
Synopsis...........................................................................................................................................2
Case Facts........................................................................................................................................2
Analysis of Key Issues.....................................................................................................................3
Economic Impact of Recession on Disney..................................................................................3
Socio-Cultural Impact on Disney.................................................................................................3
Inorganic Growth of Disney........................................................................................................3
Acquisition of Lucas Films..........................................................................................................3
Innovation is the need of an hour.................................................................................................4
Recommendations............................................................................................................................4
Vertical Integration......................................................................................................................4
Going Global................................................................................................................................4
Distribution..................................................................................................................................4
Protection of Intellectual Property Rights....................................................................................5
Conclusion.......................................................................................................................................5
Synopsis
The Walt Disney Company is a leading American diversified multinational entertainment and
mass media conglomerate, headquartered in Burbank California. It was founded on October 16,
1923 as the Disney Brothers Studio, an animation company. Its business can be broken into five
segments that are Media Networks, Parks & Resorts, Studio Entertainment, Consumer Products
and the Disney Interactive Media Group (The Walt Disney Company, 2012). The company is
now headed by CEO Robert Iger and is one of the largest entertainment corporations in the world
with approximately 166,000 employees and annual revenues approaching the $45 billion mark
(Walt Disney). Media Networks makes up the largest part of the company financially.
Case Facts
Disney along with its subsidiaries is leading the diversified international family entertainment
and media enterprise. Gains are expected from its acquisition of Lucas Films – a studio well
known for its production of Star Wars – as the acquisition means that Disney has gained all
rights to the Star Wars characters. The company is also expanding its presence in China, with a
new theme park destination currently under construction. With the expansion of the Consumer
Direct Products, more consumers are getting concerned about their impact on the society as a
whole. However the global recession of 2008 has an adverse impact on Disney with overall DVD
sales going drastically down and other theme parks and destinations reported lower tourist
turnout resulting to deflated bottom line. The company is also facing a serious threat in its
Digital business, as lack of regulations around intellectual property rights is leading to
unauthorized pirated films to several other countries through torrent sites. However in spite of
challenges and threats Disney has been at the front runner of the entertainment and media
industry and registered a growth of over 32% increase in earnings per share in the first quarter of
2014. The company has a total value of $83 billion in assets and total value of $47 billion in
equity.
Analysis of Key Issues
Economic Impact of Recession on Disney
With Global Recession of 2008 impacting almost every industry in the market, the impact on
entertainment and media industry were quite complex. Entertainment is believed to be recession
proof as people pay less for vacations, meaning they spend more time at home watching movies
and television. This is evidenced by the fact that television sales grew by 26 percent in 2009
while spending in other industries declined. However, a shift in how people accessed media had
a significant impact on the industry. In 2008, Warner Brothers reported a steep decrease in DVD
sales while Hulu reported a 90 percent increase in free online streaming, signifying a disruptive
change that will force entertainment providers to rethink how they distribute products.
Socio-Cultural Impact on Disney
Disney’s organizational structure has historically been designed to stimulate creativity and
innovation. People are raising concerns on the content of the television shows and their impact
on the environment. There are various laws and regulations that exist to control the content
media broadcast to the children. This confines the categories of advertisements that company can
broadcast to the children and as Disney’s products are mainly targeted towards children, Disney
must acknowledge the laws and abide by them.
Inorganic Growth of Disney
Disney has grown inorganically by acquiring and integrating emerging competitors. Disney
bought Pixar in 2006, as it emerged as one of the highly profitable animation giants. Disney’s
ESPN acquired television rights to air the Wimbledon tennis tournament for 12 years, thus
replacing NBC which previously showed the annual event. However as more and more channels
are coming-up and competition gets more intense, it is going to drive the programming costs.
Acquisition of Lucas Films
Disney’s acquisition of Lucas Films in 2012 was an entire cash deal for $2.2 billion leading to
distribution of approximately 37.1 million shares. As the acquisition on such a cost led to
dilution of earnings per share, it is also not confirmed that the acquisition will reap long term
benefits.
Innovation is the need of an hour
One of the biggest challenges Disney is facing is to search for talent and creativity which can
inspire children and people in a manner Mickey Mouse did almost 8 decades back. New and
inspiring characters from Disney can only attract the attention of customers.
Recommendations
Vertical Integration
With competition getting bigger and bigger for Disney, one of the recommendations would be to
go for vertical integration. Disney must target to produce and distribute the services on its own,
without having a dependency on other companies. This will provide Disney, a strong hold on the
market as Disney would be able to control cost, quality and content. Also better collaboration
and co-ordination between up-stream and downstream will bring in more efficiency for Disney.
Going Global
Though Disney’s products and services are found across the globe, in different forms and factor,
we feel that there is a tremendous scope for Disney to expand in emerging markets (India, China,
Brazil, Latin America etc.), as the economic growth in these geographies has been incredible.
With this, Disney would have a very strong foothold as a global brand which will lay the
foundations for a long term growth of the company.
Distribution
As Disney keeps giving new characters and also produces new images or brand, it should focus
on the licensing and marketing of those characters through its diverse business outlets. Disney
must ensure that the presence of new characters is maintained across all the theme parks, movie
theaters, and business outlets so to maximize the impact of the new brand, image or character
which can then be monetized.
Protection of Intellectual Property Rights
With the advancement of internet speed, P2P sharing, mobile data transmission and device
incorporation, the continuous threat lingers on Disney related to unauthorized use of its
entertainment material. Disney should invest heavily on technology, to prevent the unauthorized
electronic distribution of its Intellectual Property Rights. Though initially this will impact the
bottom line of Disney, however the benefits reap in the long run will be substantial and will
shadow the investment cost.
SWOT Analysis
Strength Weakness
Very strong Diversification Parks and resorts are not accessible
Brand Loyalty leading to high operational costs
Globalization Interactive Media is overall
Responsiveness to market unprofitable
Size of Operations Company’s name is still associated
Well established divisions with one target audience – Children
Opportunities Threats
Diversification in Emerging Markets Changing landscape of competition and
Changes in technology leading to consumer behavior. Switch from
higher consumer presence physical to digital media
Acquisition of Marvel and Lucas Films Piracy of content and unauthorized
Penetration in Music Industry via distribution
Disney Music Channel Decrease of DVD Sales
Raising concerns over content of
advertisements
Maintaining Product Differentiation
Conclusion
After careful analysis of the case, we feel that even after aftermath of global recession of 2008
and acquisition of Lucas Films in 2012, which lead to dilution of EPS, company has been
resilient and has shown the stability and ability to prosper in any kind of environment. The
diversification and vertical integration Disney has done has resulted in a penetration across broad
spectrum of markets, which will continue to expand. Disney does not have one main competitor,
there different divisions has competitors, but there is no other firm in the industry that is
involved in so many different business industries, making it difficult to directly compare Disney
to its competitors that come from the different divisions of the company. Disney’s financial
prospects for the future look very good as they are continuing to expand, in terms of financials,
projects, and international exposure.