Case Analysis of The Walt Disney Company:

The Magic of Disney

Fall 2003

Sean Housley
Haas School of Business
University of California, Berkeley
MBA Candidate, Spring 2004
housley@mba.berkeley.edu

Abstract

Disney has led the entertainment industry for much of its storied 80-year history. What
exactly is the ‘Magic of Disney’? And how has Disney sustained the magic for so long? This
paper analyzes Disney’s historical competitive advantage, drawing emphasis on the remarkable
synergies Disney created across its various businesses. This paper then addresses the
contributions of CEO Michael Eisner, credited with restoring Disney to greatness in the mid-
eighties. Finally, this paper evaluates Disney’s growth strategy over the last decade.
Sustainable Success
Disney is an outstanding example of a company that has maintained its competitive
advantage by routinely making wise decisions about what resources and capabilities to acquire,
invest in, and develop. Further, Disney has exhibited an uncanny ability to successfully make
decisions about what to do with its resources and capabilities given its competitive
environment. These decisions constitute Disney’s strategy. And, while Disney’s strategic
decision-making record is not perfect, it is strikingly superior to most firms.1 As with enduring
market leaders in other industries, Disney’s sustainability is explained by elements of its
strategy that are heterogeneous, are inimitable, exhibit foresight, and include imperfectly
mobile and co-specialized elements.
Heterogeneity
Disney is different. No other entertainment company – perhaps no other company
period – evokes the feeling of wholesome family goodness that does Disney. Disney has taken
extreme care from its early roots under founder Walt Disney in 1928 to ensure that its image is
fun, imaginative, clean, and appeals to people of all ages. It places high priority on making
products predictable and safe. The control of image and attention to detail exists throughout
the company; from the theme parks, which are washed down each night; to the retail stores,
which bear twice the construction cost of the U.S. average; to the licensing of characters
themselves, which in some cases require approval from CEO Michael Eisner himself. Disney
bolsters this image by encouraging creativity and innovation among employees. It further
reinforces its unique culture by training employees at Disney University, by maintaining
company archives to preserve its history, and by promoting from within.
Inimitability
Walt Disney said, “It all started with a mouse.” Actually, preceding Mickey was
Oswald, the Lucky Rabbit. However, Walt Disney lost the rights to Oswald because he did not
own the copyright. What he gained instead was an early education in the value of intellectual
property. Since that time, Disney’s tight control over its properties have given it a strong
defense against entrants and competing incumbents. Fortified by these protected characters,
Disney has built a strong brand that further deters competitors’ efforts to imitate. Finally,

1
For example, Harvard Business School Case The Walt Disney Company (A): Corporate Strategy (Michael
Porter, 1988) cites industry estimates that only 20% of films in the 1980s were profitable. The case indicates that
Disney, on the other hand, produced profit on “nearly all” pictures produced from October 1984 to March 1988, at
the targeted production rate of 15-18 new films per year.
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Disney’s corporate culture, resting squarely upon Walt’s legacy and vision and bolstered by
Michael Eisner, adds to Disney’s inimitability.
Strategic Foresight
Despite early failure of his first cartoon business, Walt Disney had the vision and
confidence to pursue several previously untested ideas. In 1928, Disney released the world’s
first fully synchronized sound cartoon, “Steamboat Willie”. In 1937, Disney released the first
full-length, full-color animated feature, Snow White and the Seven Dwarfs. He had the
strategic foresight to remain true to wholesome family entertainment despite the temptations of
cheaper production (using live actors), a mistake the company temporarily fell into after Walt’s
death in 1966. He also correctly predicted that television would be an important medium, and
introduced the highly popular “Mickey Mouse Club” in 1955. Finally, Disney correctly bet big
on entering theme parks with Disneyland in 1955.
Imperfect Mobility and Co-specialization
Disney’s strong legal protection makes it nearly impossible for competitors to copy or
imitate Disney’s characters. In addition, the parts comprising the Disney whole would be of
less valuable to a poacher than they are to Disney. This is because, for Disney, the sum of the
parts is greater than the whole. In a word, synergy. Even if a competitor succeeded in hiring
away key talent, for example, the competitor would still lack the tradition, culture, and
complementary assets that make up Disney.
Synergy
Disney has mastered the art of the cross-sell. It has done so by leveraging its characters
and carefully controlling its image, driving toward a unified, highly valued customer
experience. An example best illustrates this. Consider a typical multi-day family trip to
Disney World. A family books lodging months in advance at a hotel inside the park. It does
so because it knows that the hotel has the best location, is highly demanded, and will provide
good hospitality. Being lodged inside the park, the family eats at Disney-owned restaurants
and perhaps buys Disney merchandise. All the while the family willing pays prices that are
higher than would be charged by comparable hotels, restaurants, and theme parks. It does so
happily because it considers the experience a good value.
But wait, there’s more. Consider what makes Disney World the world’s number one
destination resort in the first place. It is fueled by the positive experience generated by other

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Disney productions – most likely the lovable characters of the Disney family.2 While in the
park, children clamor to meet the Disney characters scattered throughout the park. This
memorable and emotional experience further fuels demand for home videos, books, television
broadcasts, or retail purchases. And the kids (and often parents) can’t wait for the next trip to
Disney World, completing the cycle. This complex but carefully orchestrated web of
complementary businesses is the ‘Magic of Disney’. It’s what drives major advertisers such as
Delta Airlines and Coca-Cola to pay for the right to feature Disney World in their own
promotions.
Michael Eisner
Following the deaths of Walt (1966) and Roy Disney (1971), the company strayed
somewhat from its roots and performance began to suffer. In October 1984, Michael Eisner
was named Disney’s chairman and CEO. He took several actions to rejuvenate the company.
First, Eisner recruited new management, changed the corporate structure, and changed the
company name. He then outlined the company’s overall corporate objectives, intended to re-
ignite a creative spark in the core businesses of theme parks, filmed entertainment, and
consumer products. He controlled movie budgets by imposing a “financial box” within which
the creative talent had to operate. He struck the right balance. As a result of improved cost
control and brilliant scripting, casting, and production3, Disney won at the box office. From
1984 to 1987, market share leapt from 4% to 14% and revenues increased from $245 million to
$876 million.
In addition, Katzenberg, under Eisner, took the bold step to increase film production to
15 to 18 new films per year, up from only 2 new releases in 1984. Eisner also expanded the
animation staff to support the release of a new animated feature every 12 to 18 months.
Furthermore, the cycle of reissuing animated classics to theaters was shortened from every
seven years to every five years. Film and TV income over the period improved from $2
million to $131 million.
Eisner also introduced an innovative and effective “sell-through” approach to Home
Video pricing, whereby classic animated titles would be released for sale for two years, then
withdrawn for five years. The strategy yielded retailer margins of 30-40 percent, much better
than the industry average of 20-30 percent. Accompanied by aggressive marketing campaigns,

2
Walt was right. It really did all start with a mouse.
3
Credited to Jeffrey Katzenberg, who was hired by Eisner from Paramount in 1984.
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Disney nearly doubled its share of the videocassette market from 5.5% to 10% on revenue
growth of $42 million to $213 million from 1984 to 1987. In addition to video sales, Disney
strengthened its place in the home market by establishing a major presence in television. The
Disney Channel was launched in 1983 and profitably grew to be the fourth largest pay-channel,
with nearly four million subscribers, by 1987. In 1985, Disney successfully launched animated
children’s television cartoons and also had success with first-run cartoon syndications.
To rejuvenate Consumer Products, Eisner carefully managed licensing products ranging
from children’s records to educational materials and emphasized “strategic alliance”
promotions with major names like Sears and McDonalds. In 1987, Disney launched Disney
Stores. Despite twice the average construction costs, the stores generated profits on sales
volumes that were three to five times the U.S. average. In addition, Disney entered mail order
retailing with its 1985 catalog launch, which reached over eight million people. From 1984 to
1987, Consumer Products’ revenue grew from $110 million to $167 million, netting income
growth from $57 million to $97 million.
Finally, under Eisner, Disney aggressively grew its theme park business. Despite
spending $50 million in 1984 to refurbish Fantasyland and spending tens of millions to add
new attractions, theme park income grew from $186 million (revenue $1,097 million) to $549
million (revenue $1,834 million) during the period from 1984 to 1987. Disney achieved these
results by advertising nationally on television for the first time in 1985 and opening Disneyland
on Mondays, on which it was previously closed for maintenance. Disney also kept pace with
increasing demand by steadily pushing park ticket prices up to about twice the industry
average. And, despite removing restrictions on the number of visitors, the parks continued to
provide an exceptional visitor experience.
Overall, the period from 1984 to 1987 saw tremendous growth. Sales climbed from
$1.6 billion to $2.9 billion and income grew from $100 million to $450 million over the period.
Return on equity more than doubled, going from 9.3% to 21.3%.
Eisner’s most important contribution between 1984 and 1987 was to restore the
‘Magic’ to Disney. More concretely, by priming the pump with a disciplined emphasis on
creativity and innovation, Eisner was able to exploit the synergies generated by Disney’s
highly complementary businesses units. Exploiting these synergies was the mechanism by
which Eisner maximized shareholder wealth, while simultaneously reinforcing the other
corporate objectives that emphasized sustainability, image and brand.

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The Past Decade

Source: http://host.wallstreetcity.com/wsc2/Chart.html, 10/22/03

As observed in the above ten-year chart, Disney’s share performance has lagged the
S&P 500 market index over the past decade. One may also observe that the underperformance
has mainly occurred in the past five years. The 30-year graph below adds some helpful
context. From it, we gain a better appreciation for the challenge of sustaining 20 percent
growth per year over a long period of time. Disney has attempted to grow its core businesses
internationally while exploring new markets domestically such as sports, live Broadway
productions, cruise lines, real estate development, and radio and television broadcasting.
Disney has had mixed success in these areas.

Source: http://host.wallstreetcity.com/wsc2/Chart.html, 10/22/03

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 International expansion of theme parks was a logical growth option for Disney to
pursue, particularly following the company’s good experience with Tokyo Disneyland.
However, Euro Disney was disappointing. A behemoth American-style theme park simply did
not fit culturally in Paris.
Disney’s expansion into live Broadway shows also appeared to be a risk worth taking.
It is a natural application of their core competency: providing a high-quality entertainment
experience. In fact, Disney’s production of Beauty and the Beast was a Broadway hit.
Given Disney’s experience with hospitality, their cruise line and vacation club
expansion ideas also appeared promising. And, excepting the recent media snafu regarding
food-poisoned cruise passengers, these ventures have sailed smoothly.
Disney’s foray into sports, particularly the violent game of hockey, seems misplaced.
Despite strong advantages of a franchise owner having broadcasting ability and the ability to
promote merchandise, ownership of a hockey expansion team did not fit the image of the
company that fostered lovable cartoon characters. Thus, despite the success of the movie
promoting The Mighty Ducks, along with lucrative merchandising, the venture failed to
produce expected results. While the combination of media ownership and sports worked quite
well in other markets, the Disney empire is quite different than the Ted Turner empire.
Disney’s entry into residential real estate development also seems misplaced. It is
unclear how this complements or enhances their other businesses.
Finally, Disney’s acquisition of ABC seems sensible. And, Disney has successfully
used the national media outlet to return Sunday night Disney programming to a national
audience. The move also gives Disney sure footing in the Saturday morning cartoon space.
Overall, it appears to support the type of synergy for which Disney has come to be known. On
the other hand, Disney must carefully guard its image. Ownership of a more mainstream
media outlet introduces some risk to the squeaky-clean image that has served the company well
for the majority of its fabled eighty years.
Overall, it appears that Disney is struggling to maintain growth. It must be careful not
to lose focus and inadvertently compromise its magic.