The Walt Disney Company: Diversification Strategy in 2012
Definition of Problem and Consequences
In 2012, Walt Disney was undergoing numerous problems that threatened the attainment of management objectives. First, there was an increase in competition from rivals. The competition also elicited an upsurge in advertising expenses as Walt Disney aimed to promote its films better than those of competitors to generate more revenues. Moreover, DVD sales and income from rentals were reducing.
The consequences of not remedying the situation included increased losses occasioned by the high production costs and the costs of extensive advertising campaigns during the theatrical distribution of the film. An increase in competition would lead to lower film sales as consumers substituted Disney’s films with those of rivals, hence affecting revenues. The quick move to lower revenue-generating telecasts would also result in a decline in DVD sales and rentals, hence affecting companyrevenues.
Strategic Issue Facing the Firm
The strategic issues facing the firm include how to minimize advertising costs and increase home entertainment and other channel revenues.
Analysis of Causes
The causes of the problems for the Studio and Entertainment division included the rising cases of piracy, an increase in the number of substitutes, rising cost of production, censorship, and copy rights. The division operates in a very competitive industry where movies need intense marketing to generate revenues. Due to the high production costs and the cost of extensive industries, movies only make profits usually three to six months after a film’s theatrical release. The studio and entertainment division also has to fight for space on broadcast networks such as ABC, with these telecast fees reducing as the length of time from initial release increased. The decline in DVD sales and rentals had also had a profound impact on the industry as competitors moved to lower-revenue generating telecasts. In the industry, competitive pressures also arise from jockeying for better market position and competitive advantage.
Internally, the division saw a decline in revenues from both theatrical distribution and home entertainment. The diversification initiative, however, reduced the operating expenses, which enabled the division make substantial profits. The industry KSFs were technology related, with the acquisition of Pixar and Marvel providing much-needed IPs. These IPs were under-exploited, and with the expertise of the division’s team, they will be able to produce better quality films of a wide variety. For manufacture, the division needed to ensure that production costs were minimized. This would be done through the production of only a few films every year, and ensuring that maximum revenues are garnered from those films. For distribution, the DVD sales and rentals were declining due to the proliferated competition and the rising cases of piracy. In marketing, the cost of advertising was a major hurdle. Getting telecast licensing proved difficult especially with the upsurge in competition. In the skills and capacity related field, the company had the expertise, experience, and resources to produce quality movies. Walt Disney is one of the biggest producers, and their corporate strategy of quality maintenance has led them to acquire the best of talent. The division also has four studios that can produce the best films ranging from animations to love stories.
A SWOT analysis articulates the division’s major strengths as being the well established Walt Disney Studio and popular movie characters. The division also has competency in acquisition, with the acquisition of Pixar and Marvel already proving successful in terms of revenue and growth. The main weaknesses are the high production costs and large investments with high risk involved, such as the acquisition of Pixar and Marvel that had large capital outlays. The chief opportunities available to the division were a reduction in production costs and advertising expenses as well as an upsurge in revenue streams from DVD sales, rentals, and telecast licensing. Moreover, an expansion of movie production to new nations would reduce costs. Threats include stiff competition from universal studios and Time Warner, an upsurge in piracy, and the growth of online movie rentals.
There were numerous options at the disposal of management: the production of various films; differentiation; and IP acquisition. The acquisition strategy would utilize under-exploited IP or buying capabilities to reach consumers in new places and new ways. By acquiring rivals, Walt Disney would ensure that substitute films from competitors are low. Moreover, the under-exploited IP would be utilized in acquiring added capabilities, reaching customers in different film segments, and producing more films. For example, the acquisition of Pixar animations and Marvel Films that enhanced the resources and capabilities of the core animation business with the addition of new skills and characters. The acquisition of IP also enabled Disney to create high-quality films and consequently take advantage of the real growth globally in the consumption of American-based filmed entertainment. The strategy, however, has its drawbacks. Firstly, the acquisition of Pixar and Marvel left Disney cash-strapped, hence the lack of funding for the project. Secondly, acquiring some rivals would eliminate competition for the other rivals left in the market, consequently increasing competition in the long run.
The second strategy, producing more films, would enable Disney generate more sales. However, with the increasing production costs and extensive advertising needed to reach customers, the strategy would drain the company’s resources, resources it did not have. The problem is compounded by the fact that there is a reduction in DVD sales and rentals, hence reduced revenues, which would not cover the increased production costs.
In differentiation, Walt Disney focused on branded films. The focused differentiation puts Walt Disney above rivals on quality and overall experience, satisfies expectations on quality, experience, and services, and is present in many genres that focus on specific consumers. The strategy is arguably the best since it passes all the tests of a winning strategy. Firstly, it is a global expansion strategy that is focused on the end user. As such, it enables Disney provide quality services that boost customer loyalty. It also passes the performance test since it can generate high profits as well as ensuring growth into other markets. Also, the returns on investment in the branded movies are likely to be better than those of the overall industry.
Recommended Plan of Action
The company’s corporate strategy is focused on creating high-quality family content, international expansion, and exploiting technological innovations to make entertainment experiences more memorable. To achieve this, the company implemented the diversification strategy with the following objectives:
- Produce two animated films per year (One Disney, one Pixar)
- Produce two Marvel films per year
- Produce six to eight Disney brand love action films
- Focus on branded films
To realize these objectives, Walt Disney purposed to use the acquired IPsPixar, and Marvel, as a complement to the existing Disney studio. By focusing on producing only about ten films per year, Walt Disney will be able to concentrate on the core focus of high-quality provision. Moreover, the company will be able to advertise its films more, hence ensuring they generate increased revenues. The films that have been released to date have generatedthe most amounts of sales, increasing the studio entertainment division’s operating profits by 28 percent.