Michael Eisner, CEO
The purpose of this memo is to provide an outline of the case Walt Disney Company: The Entertainment King and the outline the alternatives that Disney has at its disposal. The best alternative for restoring ROE growth is to tap back into what made Disney great in the first place, which is creative ideas that are nurtured and brought to market.
The company has been suffering from a decline in ROE, which is currently below 10%. The rebound Disney experienced last year was almost entirely due to the success of Who Wants to be a Millionaire?, which has masked underlying weakness in the rest of our businesses. The company lost several key executives, creating a talent void. This in turn affected creative output, and the company began its slide at this point. The company’s rebound in 2000 was aided by strong performance from its theme parks, indicating that the strategy to cluster parks to create a destination was beginning to pay off in some of the newer locations.
The company is still struggling with movies, however. Since Katzenberg left, the company has not had as many significant hits, something that has hurt the profitability of the studio arm. In addition, the company is still working to improve synergies between its different divisions. There are opportunities remaining on the table, however, in overseas markets. This different horizontal diversification has been successful in the past, but there is evidence that it has reached the point of diminishing returns, for example with the decreased value of movie tie-ins.
The company’s success has always been about exceptional creativity, but also having the business sense to leverage that creativity. We still have the business sense, but it is apparent that Disney has lost that creative edge. Good, creative people come here to get the Disney name on their resume, then they move on to other companies, taking their training with them. That Disney is a factory for other people’s leaders is not an acceptable situation at all.
There are several options for strategy for the coming years at Disney. The first is to restore emphasis on creativity by loosening the fiscal controls a little bit. Just because Disney is headhunted does not mean that it needs to lose that talent. The bleeding of talent has cost Disney significantly, and the company’s lack of creativity is starting to become its Achilles heel.
The second option is to hold steady, a sign that the positive turn the company took last year is sustainable. The renewed strength in the theme parks may be indicative of a long-term trend, and perhaps the successes at ABC and ESPN can be channeled into better programming and further growth. There is risk with this option, however, in that the company has struggled in a number of key areas and needs to improve its synergies, and its film division needs to restore its luster.
The third option for Disney to re-establish its return on equity is to divest underperforming businesses. There are a few that come to mind, including the cruise ship venture and some underperforming properties. The company would generate quick cash flow, but would also improve ROE. Sometimes good businesses see a change in their environment that renders them less profitable, and the company needs to recognize that and divest some assets.
It is recommended that Disney focus on the first option. Losing key talent is beginning to hurt results, and this ongoing talent loss is not sustainable. Be it through improvements in selection, retention programs or in the working environment, Disney needs to make some changes in order to recapture momentum. Talent can be poached from other companies, the restrictions on spending can be lifted in order to allow creativity to flourish a bit more. These are risky strategies, but the company is suffocating, driving away good people and hurting the bottom line. Management needs to be less stifling, and less autocratic.
We should draw up a plan to remove some of the barriers to creativity. This should be undertaken in all divisions. If the barriers include key people, those people will need to loosen their grip on their parts of the organization. Whatever can be done to provide a more flexible, creative working environment should be done.
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