The Walt Disney Company: Its Diversification Strategy in 2012 Xavier Lila (MGM 3800) KEY ISSUES Availability of alternatives and substitutes intensifies competition in Walt Disney media network division. Customers have a variety of choices on media entertainment: DVD, Internet and video games. Rapidly changing technologies: Walt Disney is required to stay on the front foot and the company has to either develop or acquire new technologies for better customer satisfaction and competitive advantage.
Unpopular parks and resorts: Walt Disney has to embark on advertisements as well as install costly attractions in less favorable destinations such as Disney California Adventure so as to lure more customers. Losses incurred in interactive media: Acquisition of Playroom to feature as the gaming hardware and software arm of interactive media proved futile with heavy competition from established gaming consoles. Costly acquisitions in unproven foreign markets: India, China, Russia and Turkey offer expansion opportunities, but require billions of dollars in a high-risk investment.
ANALYSIS The Media Nervous division at Walt Disney is the highest revenue earner and also the division that faces the highest level of competition in the media industry. Competition is intensified by the fact that media network sells a preference to a customer and not an actual tangible commodity. A customer’s preference might be influenced by multiple factors such as genre of content that is aired, time of day and moods. Customers also have a variety of substitute choices for entertainment and can opt to play video games, watch a movie on DVD or browse the internet.
As a result Disney is affected by diminishing advertisement revenues that directly impact finances. Disney counters alternate and substitute competition in an aggressive approach that involves acquisition and adoption of new technologies. Information Technology is a huge component in facilitating competitive advantage at Walt Disney. Robert Alger, the CEO reveals an aggressive acquisition policy that buys Intellectual Property that is either underused or under-exploited. While the policy has proved fruitful in the acquisition of Paxar and Marvel, it has the downside of high-risk acquisitions.
The acquisition of gaming company Playroom is presented as a valid example. The company aggressively qua aired Playroom in efforts to exploit the already saturated and highly competitive games and console industry. Playroom would offer product development in online games for social websites thereby creating a gateway for a powerful renowned brand in Walt Disney. The approach resulted in annual operating losses averaging $300 million from 2009 to 2012. The company has continued to hugely invest in information technology so as to better reach customers as well as carter for customer needs using the internet.
The latest technological investment in media networks offers Walt Disney a mobile phone application that allows subscribed users to watch content at anytime, anywhere on their smart phones. The approach might rove to be a success similar to Paxar or Marvel, or might prove to a costly venture that annually operates in loses similar to Playroom. Walt Disney assumes an aggressive acquisition policy that is consistently high risk. While the media networks are Walt Disney s highest earner, the company’s identity is embedded in its Parks and Resorts.
As a result Disney has heavily invested in its themed parks and resorts. However, there are multiple issues that reflect on Walt Disney strategic planning. The opening of Disney California Adventure was to ease the congestion at Disney World which had exulted in counter-productivity as Customers rejected Disney World due to congestion. Disney California Adventure proved to be a costly investment as customers complained that it lacked night time appeal and would instead go back to Disney World further compounding the issue of congestion.
Disney California Adventure failed to serve its purpose in easing congestion; rather it became a point of comparison and represented lower expectations. Walt Disney proceeded to improve the situation through further heavy investments in attraction additions – World of color water for $75 million and 200 million worth of race tracks in car lands, both of which are located in Disney California Adventure. The costly additions to rectify a previous failed plan indicate that there are multiple strategic planning issues at Walt Disney.
The financial books indicate that Walt Disney has continued to be profitable and realized incremental every year for the past 3 years (2009 ; 2011). The financial progress experienced at Walt Disney is attributed to the capable and exemplary management leadership of the CEO Robert Alger. Since his appointment at the helm Walt Disney has acquired Paxar and Marvel, and the many has increased global activity with Disney cacheable showing in over 100 countries compared to the 9 countries when Alger took over.
However, there are various issues in lager’s management style. Since taking over the company had exponentially expanded in its operations globally. Reeve uses have increased from $35. 5 billion in 2007 to $40. 9 billion in 201 1; however, this increase in revenue is significantly accounted for by successful movie productions of The Avengers grossing $1. 3 billion and the pirates of the Caribbean, Disney’s most successful movie. lager’s global exploits are yet to legalize significant profit returns.
Despite accessing over 75% of China viewers and showing in an additional 91 countries, Walt Disney under Alger has struggled to show a directly proportional growth of acquired viewers and markets to earned revenues. Alger has admittedly stated to strategic issues in the acquisition of Disney Shanghai which the company has invested 43% of the $4. 5 billion venture. This raises multiple issues of concern with the simultaneously costly investments that Disney has undertaken in India, China, Russia, and Turkey, bearing that the investments are high risks to political and economic factors.
Furthermore, Alger dismisses the operating losses incurred by interactive media as sufficiently covered by other revenues generated by the media networks. While Alger makes a valid point, it does not negate the fact that a critical division in Walt Disney’s organizational structure has been operating losses in the millions of dollars for the past three years. SOOT STRENGTHS WEAKNESSES Diversification in strategic organization Exploitation of intellectual property across media networks Brand Recognition High quality content in media networks Cohesive organizational structure
Ability to adopt new technologies and Intellectual property Global alliances Acquisition strategies Licensing Media Networks Creativity High costs in market acquisition High operation costs Lack Of sufficient returns on investments in parks and resorts Interactive media operating on losses High risk investments Costly upgrades Simultaneous global expansions New parks lack appeal factor OPPORTUNITIES THREATS Growth of Marvel and Paxar International markets Further growth of media networks Better strategic planning Reducing operation costs Better evaluation of aggressive acquisition strategy
Better strategic plan for interactive media Better understanding of target market Extensive use of the internet as a medium for entertainment Strong competition in alternates and substitutes Changes in customers preferences and behaviors Rapidly changing technologies Operating losses from bad acquisitions Unstable global economy Demanding market on content and quality Heavy global investments #1 SOOT Analysis Walt Disney is a world leading brand and a major competitor and is strongly positioned in the entertainment market place. The company enjoys significant strengths in brand recognition and media networks.
The media networks division acquisition of marvel studios offered the company a competitive advantage while the company’s creativity ensured marvels studio’s success. The production of The Avengers highlights the success and strengths of Walt Disney as the movie grossed over $1. 3 billion in gross revenue. In 201 1 , the company was the largest licensor of merchandise products in the world indicating dominance in the licensing industry. While the company experienced successes in media networks division, multiple internal factors affected revenue earnings and highlighted the company s weaknesses.
Costly upgrades and high costs of operations indicated that the company lacked an effective strategic plan. Poor management decisions also reflected in the acquisition of Playroom, as the acquisition operated in losses for three consecutive years. External factors also affected the company, as strong competition from substitutes and alternatives resulted in additional operational costs as the company countered competition through adoption of new technologies and acquisition of companies and intellectual properties.
Changes in customer preferences and behavior also resulted in the adoption f the internet as a channel for entertainment and introduction of smart phone applications that offer on-the-go entertainment to customers. Walt Disney’s organizational strategies are reflected in strategic business units: Media Networks, Interactive Media, Parks and Resorts, Consumer products and Studio Entertainment. The company operates on a cohesive organization strategy and is able to remain profitable despite one of its divisions Interactive media operating on losses.
The organizational structure also allows for diversification of products and offers the opportunity of expansion n emerging global market. However, organizational strategies dictate for high risk investments in all strategic businesses units. Walt Disney adopts high risk investments in construction and renovation of its parks and resorts, in its aggressive acquisition strategies, in its efforts towards global expansions and in its strategies to obtain competitive advantage and accommodate consumer demands.
PORTER’S FIVE FORCES Intensity in competitive Rivalry (High) Competition is high in the entertainment industry, with multiple companies offering similar high quality, high content entertainment. Competition is specially high in media networks as companies compete for consumers’ attention. Competition in the console and online gaming market is also very high and Walt Disney Playroom has failed to be profitable. Threat of Us busiest (High) Rapidly changing technology ensures that customers have a variety of choices and availability of substitutes.
Customers can choose to play games on phones, watch DVD’s, play console video games, or listen to music at the expense of watching Walt Disney content. As a result, Walt Disney is turning to the internet as a source of entertainment for its customers. Threat of New Entrants (Medium) Entry levels might require significant investments, however advancements in technologies enable smaller companies to enter into the market and offer high quality content. However, small companies might be discouraged by lack of brand recognition and customer loyalty.
As a result the threat is medium as a new entrant might have the potential but lack economies of scale and appropriate strategies Bargaining Power of Suppliers (Low) Walt Disney’s aggressive acquisition policies have ensured a strong presence Of vertical integrations and horizontal integrations which negates the arraigning power of suppliers. Walt Disney acquires strategic companies that offer competitive advantage or possesses vital Intellectual Property that Walt Disney considers of value.
Bargaining Power of Buyers (High) Buyers have high bargaining power due to availability of substitutes and the fact that entertainment sells desire and preference compared to actual tangible commodities. Therefore, buyers have the opportunity of deciding on what to pay for a medium of entertainment given that a consumer can get entertainment elsewhere for lesser costs. Buyers also have a choice of parks and resorts that charge less. 2 Porter’s Five Forces Analysis Internal and external factors affecting the company contribute to the high threat of substitutes and high intensity in competitive rivalry.
Walt Disney strives to offer high quality, high Content entertainment to its consumers through innovation and creativity. However, the entertainment market is saturated with competition that offers similar services and products at comparable quality. Therefore, Walt Disney has to sustain competitive advantage through its acquisition strategies. The company acquired Paxar and Marvel so as to gain competitive advantage in movie and animation reduction. Despite acquisitions competition remains extremely high as entertainment companies adopt innovative technologies.
Buyers have a higher bargain power due to availability of substitutes and decisions that are based on preference. Walt Disney customers preferred Disney Land to Disney California Adventure despite the fact that Walt Disney had invested millions of dollars in attractions at Disney California Adventure. The organizations position in the market place lowers the bargaining power of suppliers as well as lowers the threat of new entrants into the industry. New entrants would quire large capital to compete with an established market leader such as Walt Disney.
Walt Disney also has the advantage of product diversification, a strategy that many new entrants lack. Walt Disney’s aggressive acquisition strategy has enabled the company to implement horizontal integration and acquire competing companies so as to supplement one of its strategic business units. Walt Disney’s organizational strategies are dictated by the levels of competition and desire to retain competitive advantage. As a result Disney looks to acquire emerging technologies and companies that own unique intellectual properties.
UPDATE ON CASE STUDY Disney retains the five strategic business units and recorded an increase in revenues for Parks and Resorts by 10% at the end of fiscal year 2014. The company appointed a new COO, Tom Stags to manage the operations at the company. Stags is credited with profitability in Parks and Resorts an area that had strained to reach perceived potential (Huddles, 2015). In Disney’s laid of 700 employees in its Interactive Media division all of whom worked for Playroom.
Playroom continues to be unprofitable and continues to operate in losses thereby necessitating the need to layoff employees Burgess, 2014). Walt Disney continues in its aggressive acquisition strategy, Lucas films for $4 billion in 201 2 and Marker Studios for $500 million with potential performance contract that could increase the total to $950 million (Fixer, 2014). The $4. 5 billion Disney Shanghai resort is yet to be completed and completion dates have been pushed to 2016. CONCLUSIONS Walt Disney is a company that seeks to dominate in each of its distinctive strategic business units.
The entertainment industry is an extremely competitive industry that relies on innovations, creativity, content and advancements in technology. Walt Disney is limited in the levels of innovativeness in its media networks. As a result the company solely relies on an aggressive acquisition strategy. While the acquisition strategy has proven effective and profitable with the notable acquisitions of Marvel and Paxar, it also leaves the company vulnerable in acquisition of “fool’s gold”. Rapid changes in technology have also contributed to the added emphasis in Walt Disney’s acquisition strategy.
The acquisition of Playroom highlights the dangers of an aggressive acquisition; the company had been operational for here years before Disney decided to acquire the online gaming company. The company has operated in losses since it acquisition and impacted revenues as customer preferences shifted from backbone games to smart phone games. In an industry that is highly competitive Disney aims to make quick decisions on acquisition of new companies that own unique Intellectual Property.
The updated case study findings indicate that the aggressive acquisition strategy is a core principle at Walt Disney with the acquisition of Lucas Films; Disney buys a competitor and adds a subsidiary to its media networks. Walt Disney heavily relies on its diversification strategy so as to remain profitable and participate in an aggressive acquisition strategy. Diversification has allowed Disney to operate losses in its interactive media unit and still remain profitable as a company with media networks earning substantial profits to cover for losses experienced in other departments.
While diversification offers profitability it also results in high operating costs and market acquisition costs. Walt Disney lacks effective strategic planning in some of its diversified units, in an industry where consumers’ demands are a rarity, Walt Disney appears to anticipate consumer demands rather than inquire. Walt Disney portrays good decision making in building Disney California Adventure to ease the congestion at Disneyland and offer more variety in additional resorts. However, the company fails to consult with its customer base on their preferences and on new attractions at the new resort.
As a result Disney proceeded to build a resort that lacked in night appeal forcing customers to go back to Disneyland and leave Disney California Adventure. Disney reverts to more spending in excess of $275 million to add ore attractions that improve attendances. I think that Walt Disney perceives itself as a “too big to fail” as it extensively participates in high risk ventures. Walt Disney relies on its brand image to expand its businesses, but the company has adopted an aggressive expansion policy in abroad markets.
The company has decided to open theme parks and launch Disney media networks in China, Japan, India, Turkey and Russia. The approach might prove to be successes if the plans go according to plan, but might prove to be costly should the new ventures fail to return investments and operate on losses. Again, Disney relies on its diversification strategy and relies on it policy that should one of the expansions abroad fail, the other expansions in the rest of the countries abroad would cover the costs of the failed venture. Walt Disney should review its operations and access the high risks that accompany such Ventures.
RECOMMENDATIONS General recommendations Reduce the rate of acquisitions and concentrate on diversification of owned products Listen to customers before building parks and resorts that lack in appeal Company should concentrate on becoming a leader in technological innovations rather than an aggressive acquisition strategy. Review the role of interactive media and shutdown the strategic unit Reduce operational costs: Encourage better strategic plans Specific recommendations Adopt a gradual foreign market ace question strategy: The Company should refrain from simultaneous expansions in multiple markets.
Adopt a cautious acquisition strategy: Analyze and evaluate profitability and competition before acquisitions. The company should sell Playroom as soon as possible as it has never been a profitable venture and has operated on losses for past six ears. The company should invest on innovations: Should have an innovation department that looks to improve open source ideas LESSONS LEARNED learned that diversification is an important strategy that can assure a company of revenues and profits.
I learned that big companies and corporations might be better positioned to benefit through diversification of products and services due to financial capability compared to small companies. Also learned that an aggressive acquisition strategy has its benefits and disadvantages. Therefore, it is important to analyze the risk associated with an acquisition to ensure that losses suffered by a new acquisition do not adversely affect the revenues or bankrupt the company.