The Walt Disney Company Analysis

Table of Content

The Walt Disney Company is the world largest media conglomerate in terms of revenue. In year 2012, Disney generates USD 43 billion revenues, with profits of USD 10 billion. Disney operates in diversified entertainment and broadcasting industry, broken down into 5 business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive. Disney major competitors in the media industry are News Corp and Times Warner. Time Warner and News Corp mainly involve in broadcasting, publishing and entertainment industries.

Within the last twenty years, Disney has grown from a film making company to a media conglomerate, through several acquisitions, the major was acquisition of Pixar in 2005. The revenue has increased massively from $7. 5billion, 1992 to $43 billion in 2012, nearly 5 times increase. Disney has been a successful firm compared to its major competitor. News Corp generated revenue of $34 billion for 2012 while Times Warner has revenue of $29billion in 2011 (2012 financial statement not yet released), both fall short of Disney $43 billion revenue. On 11th February 2013, return on capital employed for Disney is 35. %, while for News Corp is 30. 16% and Times Warner 46. 4%. The market capitalisation for Disney on the same date is $99 billion, Times Warner $48 billion and News Corp $23 billion. Based on the return on capital employed, market capitalisation and revenue generated, it can be concluded that Disney has been relatively successful compared to its major competitors. Five Forces of Strategy (Porter) Competitors Porter suggested five forces that can shape the industry competition. Analysis of the five forces enables a company to react better to the threats and opportunities lying in that particular industry.

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The first force that will be discussed is the most common one, which is the rivalry with competitors. Disney main competitors are Times Warner and News Corp, who are also media conglomerate. They are roughly equal in size and power, with Disney appeared as the industry leader. Within mass media industry, the industry growth in US is saturated but there is enormous growth potential in Latin America and Asia. These three companies had invested and profited from countries outside US. As huge amount of assets are devoted to the business, the exit barriers for the industry are high.

Thus the companies in that industry are committed to their business. Less price competition occurs between Disney and its competitors as the industry involved is a service based industry, thus customers willingness to pay is much higher. In the broadcasting industry, as Disney is targeting the same customer segments as its competitors, which are family households, this leads to zero-sum competition. One firms gain is another firm loss. Mass media industry in general is still a profitable industry, as this service industry improves customers value thus can support higher prices.

Threat of new entrants The threat of new entrants to compete with Disney is low. Being the market leader made it possible for Disney to achieve economies of scale. Over the nine decades since the company existed, huge amount of resources are invested in market and research, finance and advertising. The company has gained experience of curve that new entrants are lacking. Disney has an extensive knowledge of their customers and knows how to serve them in the best way. The brand recognition and loyalty that Disney developed with its customers are hard for entrants to compete.

Disney’s diversification into broadcasting, theme parks, and retail industries higher the barriers to entry the industry. Without huge amount of capital, it is hard to compete with the market leader. For example, USD$320million has been invested to in Hong Kong Disneyland. Hong Kong government holds a 57 percent in the Hong Kong Disneyland while Disney holds the rest of 43 percent. Disney was able to leverage the position as a global brand and market leader to negotiate a favourable deal with the local government. Bargaining power of customers

The buying power of customers is high in the entertainment and broadcasting industry. There are concentrated options and the switching cost is low. Customers can switch easily to other options when the price and quality offered is not favourable to them. For example, customers are not willing to pay more than USD33 for the administration fee for the theme parks in US. Customers may even avoid visiting parks and resorts when the economy is in recession. Disney is depending on large number of customers to watch the films, buy the toys and visit the theme parks to increase their revenues.

One approach that Disney has taken to reduce this threat is the diversification from film making into broadcasting, which allows Disney to promote their products extensively. The huge advertising expenditure enables Disney to build a huge pool of loyal customers that contribute significantly to the profit pool. Bargaining power of suppliers The supplying power of Disney suppliers is not threatening. Disney not only produces the films, but also maintains the value chain by promoting, marketing and distributing them all by itself.

By taking most of the process in-house, the value chain created by Disney lowers the negotiating power of suppliers. One supplier segment that possesses certain bargaining power is the actors. Since the success of the movies depend hugely on actors’ performance, actors can command certain power. Also when making sequels of films, it is necessary to use the same actors. Disney is able to reduce this threat by signing multiple movies contract with the actors, thus minimize future bargaining power of actors. Threats of substitutes

The threat of substitute products or services to Disney is low. By keep releasing new films every year, Disney is able to attract the customers to the theme parks by having new characters and settings constantly. The risk of substitute for movies is low as Disney and Pixar produce high qualities films and sequels films that not only attracted new customers but also maintain loyal customers. The toys market for Disney is hard to replace by other competitors as long as the films remain attractive to the customers.

With the strong experiences and economies of scale Disney possess, Disney will constantly upgrade and improve the services and products to compete with any possible new challenges. Strategic Intent (Hamel & Prahalad) Disney vision is to become the world’s leader in producing and providing entertainment and information. The strategic intent for Disney is to become the global leader. In order to achieve this goal, Disney expands the scope of activities through acquisition. Disney tries to analyse the value chain where they can reduce the revenue flow to other companies.

This is done through acquisition or carries out in-house operations. Disney collaborated with Pixar in 1991 to market and distribute three computer-animated films, where Disney enjoys a 87 percent of the distribution proceeds. The first animated film is Toy Story, which was a huge success that generated $360 million in worldwide revenues. As Disney revenues were declining and Disney cannot compete with Pixar to produce attractive and high technology animations, one of the option is to eliminate competition. Disney spotted the huge potential in acquiring world most famous animation studio, and its talent, who includes Steve Jobs.

Jobs was able to bring technology edge and direction to Disney if Disney successfully acquire Pixar. In 2005, as Pixar was extremely successful by producing box-office smashing films, it was possible for Pixar to collaborate with other competitors, such as Twentieth Century Fox and Warners Brothers. It would be a catastrophe for Disney if that happened. In 2006, a deal was reached between Pixar and Disney, where Disney acquired Pixar for $7. 4 billion (4). Although the price paid was higher than the market suggested, it was a wise strategic move given the capabilities lie in Pixar.

As a result of the acquisition, Disney becomes the dominant player in the computer-animated film making industry. Having the strategic intent to become the global leader motivates Disney to diversify into broadcasting industries by acquiring American Broadcasting Company (ABC) in 1995 for $19 billion. As Disney was sitting on a huge cash pile, acquiring ABC can increase brand portfolio and diversify risk of Disney. The acquisition was done when there was deregulation where one company owning TV stations with 35% market share is allowed. Huge trend in consolidation in media industry occurred as a result.

The acquisition was a failure at first as Disney was too focused in integrating Disney channels under ABC, which hugely affected the efficiency of ABC. In 2000, Disney reduced cost to regain efficiencies and this led to increase in net margins of $1. 0 million. Apart from building a brand portfolio of cash-generating business and reducing financial risk, the main aim of the acquisition is that Disney spotted the value chain which they can profit from it. Owning a broadcasting company can help Disney to promote the Disney films extensively thereby gaining a competitive advantage.

Large economies of scale were achieved through the synergies in marketing, advertising and casting. By diversifying into broadcasting industry, Disney was able to reduce cost on the distribution spent to reach the audience. ABC also benefited from wider content for optimum prices. Through acquiring ABC, Disney built layers of advantage that allowed it to become the global leader. The competitive advantage in having successful computer-animation film maker, Pixar, and extensive distribution network reduced the threat posed by the competitors and subsequently allowed Disney to gain the status as global leader.

Strategic intent of Disney is further demonstrated through Parks and Resorts business segment. Understanding that the US market had reached the saturation point, Disney expanded operation internationally. In 1983, aware of the risk of entering new market, Disney made no investment in Japan Disneyland and profit from the royalties. Realizing that Disneyland is hugely popular in non-English speaking nation, Disney collaborated with French and Hong Kong government to set up the joint venture of Disneyland in Paris and Hong Kong, in 1992 and 2005 respectively.

Currently only 25% of Disney revenue comes from markets outside US, and there is more room for expansion in Asia Pacific and Latin America than developed countries. Spotting the enormous opportunity in China, Disney invested $3. 7 billion in Disneyland Shanghai which is predicted to open at the end of 2015 (6). Being able to constantly seek out for opportunities and respond to them contribute to Disney success in being the largest media conglomerate in the world. Profit pools (Gadiesh & Gilbert) Profit pools business strategy indicates that a company should focus only on the activities that will generate the most profits.

The most profitable business for Disney is from the Media Network, which contributes to 66 percent of the total group revenue in 2012. Media Network consists of broadcasting channels, such as ABC, ESPN and Disney Channels. Disney strategy in acquiring ABC proved to be successful as this channel contributes to the largest revenue for Disney. By acquiring ABC, Disney was able to take advantage of the extensive distribution network to promote Disney films. Disney increased the profits by saving on distribution cost from the middleman and also generates more sales from wider exposure of Disney films.

Broadcasting channels such as ESPN and ABC has generated huge profits for Disney especially in licensing in other countries. Disney still concentrated at the profit pool by investing $1. 0 billion in acquiring UTV and Seven TV in Russia in 2012. The second largest profit pool lies in parks and resorts. Foreseeing the huge potential growth of the Chinese market, Disney invested $3. 7 billion in Shanghai Disneyland with a 43% ownership. Licensing Disney characters has became the choke points of selling Disney related products, such as toys and apparels.

Manufacturers have to pay royalties to Disney for manufacturing Disney products. The strategic importance of licensing enables Disney to exploit the benefits from the distributors and manufacturers of consumer products. Today, Disney Consumer Products (DCP), the organisation responsible for licensing Disney brands and characters, is the world largest licensor. DCP generated $3. 3 billion revenue in 2012. Biology and Business (Beinhocker) Beinhocker (1999) suggested that companies should have several strategies to succeed in the evolving environment.

Disney strategies in becoming a global leader in producing entertainment and providing information align with Beinhocker’s notion. Disney practised the opposite of single-mindedness. Disney did not just pursue with its core business but also diverge into peripheral sectors within the relevant industries. The vertical acquisition that Disney made allowed Disney to benefit from the synergies and profit pools within that industry. From film making, Disney diversified into theme parks, broadcasting, licensing for consumer products, and online stores.

Disney possesses internal resources in terms of image rights of the characters of the films. Leveraging the capabilities allowed Disney to diversify into operating theme parks and selling consumer products. Having healthy profits and cash pile from the past twenty years enabled Disney to invest in the peripheral industry. The major success of Disney is mainly contributed by its diversification, where Disney owns some of the biggest name in the broadcasting industry namely ABC and ESPN. Adopting the notion of several strategies allows Disney to gain competitive advantage against its competitors.

Disney strategies align with the rule of evolutionary searches never sit still. Disney penetrates the online segment through online advertising and online retailing. As the internet has become more common to households, there is a threat that online TV might cannibalise the revenues of traditional TV channels. Thus Disney reacted by started online advertising, online games and online stores. Although online segment currently contributes the least to the company revenue, the rise of the internet suggests this sector is worth investing in order to prepare for uture opportunities and threats. Conclusion In conclusion, Disney has achieved the global leadership in mass media industry through diversification and acquisition. Through acquisition, Disney attracted the best resources and prevented the threat of being taking over by the others. Since the acquisition of Pixar, Disney and Pixar generated $4. 1 billion of box office revenues in only 5 years, compared to $3. 2 billion in over 9 years before the acquisition. That acquisition has created value for Disney, shown by an increase of stock price of $25 to $35 after a year of acquisition.

The acquisition of ABC added value to Disney as the revenue of Media Network increases by $4billion within 5 years of acquisition. The profit has doubled from $3billion to $6 billion. In short, Disney has pursued diversification strategy that concentrate on peripheral industries. Through strategic intent of achieving global leadership, Disney successfully outcompete its competitors. The success can be proved by Disney market capitalisation and highest revenue among its competitors.

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The Walt Disney Company Analysis. (2016, Nov 10). Retrieved from

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