Walt Disney and Corporate Strategy
Today in Strategy class we analyzed the Walt Disney Case where we discussed about its corporate scope and how Michael Eisner, the CEO between 1984 and 2005, turned around the company. The theme parks in Orlando, Paris and Tokyo, investments into R rated movies, little violence, less sex but more live-action based movies, and acquisition of movie distributors and TV channels. I did not know that ESPN belongs to Walt Disney until I read the case. So that is a story about corporate strategy and what should be the scope of corporate, when you should own business and when you should franchise, create joint ventures or just sign contracts.
Corporate strategy is a set of choices that a corporation makes to create value through configuration and coordination of its multi-market activities. Thus corporate strategy is different then competitive strategy.
While the corporate strategy pertains to the corporation as a whole, competitive strategy pertains only to business units. Therefore a corporate scope is sum of business units of a corporation which chooses to operate in different markets and segments.
So in order to evaluate corporate strategy one should ask this question, does the presence of the corporation in a given market improve the competitive advantage of other business units over and above what they could achieve on their own. If the answer is negative firm should exit the market, if the answer is positive the second question should be should we own it or should we simply sign a long-term contract with a firm operating in that specific market, or maybe enter into a joint venture or alliance.
So first application is horizontal diversification, which is simultaneous ownership of two or more units that utilize the similar set of tangible and intangible resources. The first better off test for this application is economies of scope test which says producing both of them costs less than producing them as two separate companies. That was the cost side, for the benefit side you should consider cross-selling benefits such as one-stop shop.
Second application is vertical integration which is simultaneous ownership of two or more units wherein the outputs of some units become inputs for other units. The application of better-off tests are relationship specific investments. Such investments arise when business units in a vertical relationship tailor their assets to exchanges with each other in order to reduce production costs or enhance the added value of their goods. But the main problem in this investment strategy is I will tailor my assets according to your needs, but what if you will not buy from me? Then I will simply be a take-over target for you if I can not sell the specific product someone else, and declare bankruptcy. Another condition could be downstream free riding. Think of two service companies, one has superior customer support where they they inform you for every detail of the products, but after you got those information, you buy from the low cost producer who has no customer information center and no marketing effort. Last condition which satisfies the better off test is the double marginalization which means when two firms in a vertical relationship posses superior market power instead of single players in the market.