Though Disney’s diversification could be justified by the stagnated revenue of its core business (theme park and studio entertainment), and by the pressure from its competitors to move into new areas such as sports team management, Internet, e-commerce, media networks, etc, Disney has diversified too far in its non-core business areas as an entertainment company. Below we use the better-off test to evaluate its diversification strategies:

Diversification into core business related areas – Supported • The lucrative diversifications of Disney include purchasing theater in Times Square, debuting in Broadway show and opening Disney stores. All of these not only strengthened Disney’s image to the repeating tourists/audiences, but also played as a marketing strategy to attract more new tourists/audiences to the Disney world. From a better-off test perspective, such diversifications increased the total willingness-to-pay advantages for Disney.

Diversification into sports team, Internet, media networks, e-commerce, etc. – Not Supported • The acquisition of ESPN, hockey team and Anaheim Angels baseball team seemed to be reckless and deviating from Disney’s core competence. Running these peripheral businesses needed totally different set of expertise and experience, which considerably weakened Disney’s cost effectiveness. Additionally, there is no cross-selling benefit established - many customers didn’t even know Disney is one of the owners of Anaheim Angels baseball team or ESPN channel.

• Similarly, the nightclub (Pleasure Island) and the sports center opened by Disney had no relevance to its core competence either. It only diluted the Disney brand and adversely increased the threats of substitutes. • In recent years, Disney also made efforts to vertically integrate the e-commerce business by launching Disney.com and Go network portal. As a result, the business model was not so beneficial and Go network portal was already shut down. It meant Disney should be more prudent on expansion to e-business since Disney does not have much experiences on it. Cooperating with the online business conglomerates may be a trendier and more strategic move in Disney’s overall business models. •

The idea that creating Touchstone and purchasing Miramax studios might largely dilute Disney’s brand and its focus on family, especially children audience. From the above analysis, the negative impact of Disney’s diversification into sports team, Internet, media networks, e-commerce has outweighed its benefits, and resulted in the low ROA/ROE in recent years. They do not satisfy the better-off test. In conclusion, we recommend Disney focus on its core business (film, animation, theme park, etc.) and horizontally diversify into business areas closely associated with its core business to realize economics of scope and cross-selling benefits. In terms of vertical diversification, Disney should be cautious as it does not have sufficient experiences and a leading position to enter into those business areas. Disney should only consider that when clear benefits over costs are warranted. 

By CPA Guru 2 years ago . Marked as helpful (643). Marked as unhelpful (499)