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Disney and Diversification:

Disneys diversification didnt start today. In 1928, its first cartoon was released. One year later,
it licensed a pencil tablet, and then the Mickey Mouse Club (MMC) was formed as a vehicle for
selling Disneys products under one roof. Within a short time, the membership of the club grew
to 1million members. In 1949, the company diversified into music was even said to have
produced training and educational films during the war. Diversification produces synergy.
Diversification strengthens the existing business and the entire new business created. According
to Strickland et al (2010), Diversification can be related or unrelated. It is related if the activities
of the businesses complement those of the firms present business in a way that increases or adds
to the competitive advantage. In order words, related diversification leads to strategic fit which it
creates opportunities. Opportunities to
a) Transfer technological know-how (that are competitively valuable) from one business to
another.
b) Lower cost by combining the performance of common value chain activities
c) Leverage or exploit use of a well known brand
d) Get valuable resource strength and capabilities across business
But if the businesses being diversified into have no competitive and valuable value chain that fits
with the value chain of the present business (es), then the diversification is said to be unrelated as
there is no strategic fit.
Walt Disney understood the interrelation of new industries to each other right from the
beginning, something that continues to be the source of competitive advantage to the company
till today. Encapsulated in the Magic of Disney, the story goes thus.
Family takes a trip to Disney, book into a hotel (owned by Disney) inside the park.
While in the park, the family eats at Disney-owned restaurants, buy Disney merchandise. It
doesnt matter that they are paying higher for accommodation and meals compared to other
hotels.
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Children meet the Disney characters everywhere in the park which leaves a long lasting
emotional experience. The children and their parents end up buying videos, books; TV broadcast
which they take home with them. All of these make them look forward to another visit to the
Disney and the circle continues. The integration of these complementary businesses is the
Magic of Disney.
Ever since, Disney has expanded its operations to cover theatre, radio, publishing, online media
etc. Until the early 1980s Disney focused on the family creating entertainment for the home and
the family. As a result, they were clearly differentiated in the market from their competitors. All
of that was to change around 1984 when Michael Eisner took over as CEO. Like Walt Disney,
Eisner was an innovative and intuitive leader and his era marked a turning point for the company
that was hemorrhaging for cash and that soon became the target of takeover by several
companies.
Eisners goal was to evolve a company that would grow by 20% a year. To achieve this, Eisner
followed these three principles which include keeping its cost down so it doesnt erode its profit,
operate the core business in a profitable manner and find new businesses that could integrate
with Disney and guarantee an annual growth rate of 20% for the company (1). To achieve a 20%
growth rate, the business had to diversify, exploring synergies in new industries, and overseas
expansion. Overseas expansion is inevitable when the local domestic market has reached a near
saturation point.
Some of the early businesses Einser was to add to Disneys portfolio include the Disney Store,
Euro Disneyland and the purchase of KHJ-TV, Disneys first broadcasting outlet. Also, the
company established a major television presence and increased the number of films released
from 2 in 1984 to 15-18 yearly (1)
Disneys expansion and diversification efforts was driven purely by the need to attain an
economy of scope that will give it the desired market dominance as well as the economies of
scale to bring down its cost of business. It pursued this strategy throughout the 90 using a
combination of diversification into areas that were a natural extension of their current business as
well as such other areas where they had less synergy but obviously had found potential
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opportunities. Both of these led to the birth of Disney Cruises, Pleasure Island and the
incorporation of theme park management into its business model.
Despite the huge successes recorded, it was questionable whether the diversification into some
market or acquisition strategies pursued with some companies such as ABC actually enhanced
the shareholders value. The presumption is that when two companies who are leaders in slightly
different fields combine, both would be better off by the synergy created between two of them.
But Disney and ABC are both leaders in providing entertainment and both with extensive
networks in creativity and production (2). When firms cannot leverage on their strengths
following an alliance, then they stand the risk of diluting their brand to a point where they will
not be able to make the profits necessary to return good value to their shareholders (2)
Today Disney has grown beyond the traditional amusement parks, movies, television shows,
clubs, or books business. Its stable of businesses include Disney Cruise Line, Resort Properties,
Radio Broadcasting, Musical Recordings and sale of animation art, Anaheim Mighty Ducks
NHL franchise, Interactive software and internet site, etc. Whether these businesses are related or
unrelated to Disneys core business is not an issue as long as it produces synergy that strengthens
Disneys position in the market and creates value for its shareholders. Throughout its history,
Disney has, with minor exceptions, shown the true value to shareholders created by synergies
from thoughtful diversification. The companys corporate strategy identifies the fact that while
Disney may have some magical products (its core products); its strength is not in the products
themselves, but instead in the way in which they interrelate and complement each other.
Disneys diversification efforts further increased the magic of Disney. Television advertised the
movies, which advertised the hard-goods and which advertised the television shows. So instead
of paying to advertise Disneys products, people were charged to be exposed to advertisement.
When you consider its portfolio of businesses, it will be right to say that Disney has pursued a
combination of related and unrelated diversification. Take for instance Resort properties. Thats
real estate. But Disney has used this to make its customer live out the Disney experience right on
Disneys properties as opposed to going to a third party environment to watch Disney Movies or
lodged in a different hotel and visiting Disney park.
The Result:
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Is the diversification strategy working for Disney? The simple answer is that the numbers are
there as proof. Since the coming of Eisner, revenues grew from $1.6 billion in 1984 to
$2.9billion in 1987 largely as the result of the pursuit of diversification as a strategy for growth.
One of Eisners greatest achievements was how he placed creativity as Disneys most valuable
asset and supported this as a leader to get the best out of his core innovation team
Closing:
Walt Disney Company strategy of diversification has helped grow its business in overseas
market. Between 1988 and 1996 revenues grew from $3.4 billion
To over $12 billion with the most growth coming from films and its consumer products. Not all
overseas expansion was successful. For example, the Euro Disney had a lot of challenges and
could not live up to expectations as a result of several cultural issues faced by the company.
Disney is now active in the hotel and resort businesses, the Vacation Club business (a natural
extension of the hotel business), the cruise business and sports etc.
For a company that relies heavily on its strong culture, Disney must manage its growth and
acquisitions carefully without losing sight of the single most important factor that has brought
the company where it is the strong synergies and symbiotic relationship between its various
businesses