Walt Disney lesson for Sri Lanka

Given that the financial year is over, we see on a daily basis a highlight on record profits and bottom line growth but I seldom see a chairman commenting on aspects like brand value and the importance a brand plays in driving a sustainable business. Let me take a global example of a company that faced serious issues due to solely focusing on revenue and bottom line.

Disney magic

Walt Disney is the leading entertainment entity in the world that was started way back in 1923 with the Disney Brothers Studio in Hollywood, California. Today, it is a multibillion dollar empire with business in diverse areas such as theme parks (Disneyland) and resorts, media networks (ESPN and ABC networks), studio entertainment and consumer products.

If we look back at the tough times it faced in 1984, back then Disney was languishing and had narrowly avoided takeover. By the end of 2000, however, revenues had climbed from $ 1.65 billion to $ 25 billion under CEO Eisner, while net earnings had risen from $ 0.1 billion to $ 1.2 billion. During Eisner’s first 15 years, Disney generated 27% annual total return to shareholders.

Brand magic

The brand Walt Disney is about creating a fun and magical environment for families around the globe to unite in the ‘Happiest place on Earth’. The ‘magic kingdom’ created by Walt Disney commenced with the creation of the very well known Mickey Mouse, which helped make it one of the most powerful brands in the world. The company was ranked ninth in the Top 100 Global Brands ranking by the Businessweek magazine and Interbrand, whilst its ethos was making US families have fun together.

The problem

If we analyse the performance of Walt Disney as a company over the last five years, we see how the organisation has increased its sales value from $ 33 billion to a staggering $ 40 billion whilst profits rose from $ 7.8 billion to $ 9.9 billion which is a stellar performance, given that the US was in recession during this time period and was in fact one of the most difficult times in business.

However, if one analyses the brand value of Disney, it has been declining continuously from 2007 with the exception of just one year and finally in 2012, it crashed to an all time low of just $ 15 billion. If one analyses this thoroughly, what emerges is that it not only has declined in brand value but also in enterprise value (EV) which is the economic measure reflecting the whole business.  

The EV captures security-holders: Debt holders, preferred shareholders, minority interest and common equity holders, and this number has decreased gradually for the last five years and has finally settled down at just $ 49 billion from the earlier held value of a record $ 94 billion, which is a serious issue from a business perspective. The question is how did this happen?

The analysis

One of the reasons could be the diffusion of the imagery of the brand due to varied acquisitions. With the acquisition of the number of well established brands, Disney deviated from its original brand promise of kid-friendly, family-oriented fun and entertainment.  

Even though the acquisitions drove overall sales and profits, it eroded the brand’s clear positioning. The acquisitions included Miramax Films, Capital Cities/ABC (including ESPN), Baseball’s Anaheim Angels (renamed the LA Angels of Anaheim), Fox Family Network (now ABC Family), Saban Entertainment (owners of the ‘Power Rangers’ series), The Muppets (but not Sesame Street), Pixar, New Horizon Interactive (creators of Club Penguin, now called Disney Online Studios Canada), Marvel Entertainment, Playdom and the last being Lucasfilm.

According to the Haedrich (1993), brand image is different from corporate image. Brand image is the image of the products of the company, while the corporate image is the image of the company itself. Disney developed its corporate image among stakeholders by achieving continuous sales and profit growth but it has failed to maintain the brand image of Disney which was developed over more than a half a decade of its existence.

CEOs

Michael Eisner, former CEO of Walt Disney, is the one who initiated this business strategy and then the current CEO, Robert Iger, followed the same strategy, outpacing Eisner. Today, Disney’s business composition and the contribution towards the sales and profit from different business units has also changed considerably.

For example, media networks contribute 46% of sales out of group’s total sales and 66% of the group’s profits, while the importance of studio entertainment, parks and resorts and consumer products are decreasing gradually.

Deep-dive

If one does a deep dive into the reign of both CEOs who contributed to this turnaround at Disney, one would observe that both of them worked for media giant ABC and they held top positions at ABC before joining Disney. They were very experienced in the media segment of the business.

This orientation made them guide Disney towards media rather than focusing on the core business sectors on which Disney originally developed its brand name.

This is apparent given that the media segment generates better profit margins than other operations. This was proved through the fact that the sales contribution from media networks was 46% of total sales for 2012 and in the same year, the profit contribution by media networks was 66% of Disney’s total profit.

Real issue

Rather than securing and developing Disney’s brand equity, the management increased the corporate value of Walt Disney by acquiring more profitable businesses, mainly media organisations. The CEOs remuneration was also not based on the brand value and sustainability of the business but depended on the top and bottom lines which is why the company is struggling on the equity dimensions.

For instance, Robert Iger earned a total remuneration of US$ 51.7 million in 2010 for his financial achievements, though the brand value was recorded at its lowest in the same year.  The composition of the remuneration included a remuneration package that was ranked the third highest in the world.  

His salary was only $ 2 million which incidentally accounted for only 2% of total remuneration for the year and the rest was accounted for as bonuses. It included a cash bonus (43%), stock (28%) and options (17%), which is why the company was focusing on a quantitative roadmap even though brand value was being eroded on a yearly basis.

Implications for Sri Lanka

It’s important that all annual reports include the brand value of the organisation and its entities and how it has progressed.

 The chairman/CEO of the organisation must also be evaluated according to the brand value it has accrued during the financial year than just revenue growth and profits. The remuneration of the board must include ‘brand value building’ so that there is a balance between the short term performance and long term sustainability.

(The author is a board director in the public and private sector and is actively involved in the growth agenda of the country. The thoughts are strictly his personal thoughts and not the views of the organisations he serves in Sri Lanka or globally.)