Disney Case Study

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Disney was at a node in the mid-80s that merited dramatic action. For years, Disney’s brand had been atrophying, it was pricing its products, generally, too low and the kingdom was filled with operating slack. Disney was suffering the malaise of loss of focus and/or lack of incentives. Many believe that Disney reflected the disease that many large companies suffer from. By breaking the company up into several companies – many believe it is easier for management to tighten the link between effort and outcomes using each businesses own equity.

But in the case of an entertainment empire, there is, in actuality, a tremendous amount of potential “synergy”. The reason is that while studios are a bad business, hit movies generate a lot of potential value in related businesses. So Sid Bass wanted to save the baby and the bath water. A more “process” way of thinking leads to the conclusion that Disney was just grossly under-managed. That is, Disney, many thought, was in dire need of process upgrades to invest in the mystique and exploit the potential synergies among the businesses.

- Processes for mining for ideas (free association, gong show, senior management brain storm along with the troops)

- Processes for producing quality products (find a formula, learn from the past, tracks cost/benefits).

- Processes for coordinating among divisions (planned interactions, rotating people around the company, obligating joint projects)

- Processes for distribution

- Processes for hiring the right people

- Processes for training those people

- Processes for improving the processes

Put a great idea into this machine and out would flow an unparalleled amount of revenues as the characters and content circulated though as many of the spokes of the Disney synergy temple that they fit into.

Below are some case discussion take away points from consideration of both Walt and Eisner’s leadership:

- FUNGIBLE PEOPLE: With great processes (as well as rethinking prices, for admission prices to the theme parks), management unlocked a lot of shareholder value. What is interesting, at first glance, is that both Walt and Eisner unlocked so much value without any transparency regarding the level and structure of compensation/rewards at the top – both rewarded and promoted in ways that looked pretty willy nilly. They both followed a top down command and control model (or the “benevolent dictator” model) – they doled out rewards as they felt inclined. While we can call Disney between the 1980’s and the end of the 1990’s a “process success”, it is also fair to point out that this business is idiosyncratic – employing artists means that being involved with the production of a great product is a reward in and of itself. A process for making the product great gives rise to good governance at the same time when employees derive direct value being part of a great product (working on the Lion King and watching its success is a form of equity). In other words, people will work for the satisfaction of being part of a great process, a great product, a great industry. However, not every business is a reward onto itself. Would this willy nilly reward structure work as well at a bank, for example? Generally, good processes/organizational structure and effective discernment are the key to keeping “fungible” talent engaged. Disney used the “work is the reward model” and good processes for work flow – but was not good at meritocratic management and skilled discernment.

- NONFUNGIBLE PEOPLE: Choosing projects/good taste could not be made into a process. As developed as Disney’s processes were, Disney was dependent on particular human capital – Walt, Katzenberg, Lasseter are 3 examples of people with stellar hit rates in the type of content that invests in Disney’s “it”. Without a few of these particular people on deck, Disney overall prospects wind down. In general, Disney can retain these people because of the high degree of co-specialization between the people and the assets of Disney – that said, Eisner and his board did not explicitly secure Disney’s relationship with critical idiosyncratic human inputs.

Eisner did not want to work more closely with Katzenberg and Katzenberg wanted more general management authority at the firm. What was thoroughly absent was a blueprint for how these competing wants and needs would be resolved. When this blueprint is absent, there is a lack of transparency that tends to give rise to the sense that “politics” drive key decisions as opposed to a governance structure that defends the interests of shareholders as well as other stakeholders such as employees, customers, etc.

In sum: Eisner (and his team) added significant value by establishing a process that executed great ideas and products through several and diverse mediums. Eisner also put in place processes to encourage, stimulate and galvanize creativity, including a strong and varied group of executives. Eisner’s team maintained a healthy tension in the group that led to prudent decisions and increased value for Disney. The combination of Eisner’s investments in physical and nonphysical firm infrastructure greatly complemented the productivity of the creative people at Disney. In fact, and often underestimated by the creative types for obvious reasons, the combination of Disney’s assets and people made for mutual dependency (i.e. imperfect mobility). At Disney, Katzenberg opined it was all him, and Eisner responded, “it’s the mouse, stupid!” While Katzenberg and Eisner were diametrically opposed in their understanding of what was driving the firm’s success in animation, Eisner and the board failed Disney by not putting in place adequate governance over how such disagreements would be settled. When Wells died, the balance of power in the executive leadership was disrupted. Eisner was then allowed to make some decisions based on his power without consideration for shareholders, employees and customers.

We want to be specific about what we mean by a good management structure (in the context of strategy). At a high level, good governance structure means that management limits its own latitude in the interest of the long run value of the firm and that human capital acts in the interest of shareholders.

We described firms as falling along a spectrum from low to high risk of product/process obsolescence.

- High obsolescence: These firms are often vulnerable to losing a lot of their