 |
|
| themanager.org | Search |
The following report was written as an assignment in the authors MBA-course for the subject Managing
Resources –
Accounting. It was subject to a word limit, so that no deeper investigation was
possible.
Managing
Resources - Accounting Assignment
How far do you think the assumptions made in 1 and 2[1] overlooked some key cultural differences in the market in Europe and areas where Disney had had previous experience?
By Oliver Recklies
Table
of content
2 Disney’s assumptions for planning
the Euro Disney project
2.1 Key drivers to estimate demand
2.2 Disney’s interpretation of the
market structure
3 The influence of cultural factors on
planning the Euro Disney project
3.1 Disney’s provision for cultural
issues in Europe
3.2 The European’s perception of Euro
Disney from a cultural view
3.3 Impact of the expectation gap for cultural issues at Euro Disney
3.3.1 The gap between Disney’s provision and the European
perception
3.3.2 Impact on the revenues of the project
1 Introduction
When the International Offer of Shares for
the Euro Disneyland S.C.A. (in the following called Euro Disney) was published
in October 1989 the plans for this new enterprise of the Walt Disney group were
ambiguous. The financial plans projected profits right from the first year of
operation. For the following years the development should be even more
impressive.
Just a short time after the opening of the
park in April 1992 reality proved to be not so magic. Euro Disney was much
criticised, slipped into heavy losses and nearly went bankrupt. From a
hindsight there were many reasons for this. Too high investments – leading to
high depreciation and interests – contributed as well as the wrong assessment
of the market structure and the expected demand – which lead to a too high
price level.
The scope of this assignment is to explore
the influence of cultural issues on the performance of Euro Disney in its first
years. I will show that the neglected and cultural overlooked differences
between Disney’s traditional markets and Europe contributed to their problems.
2 Disney’s assumptions for planning the Euro Disney project
2.1 Key drivers to estimate demand
When the Walt Disney group started to plan
for Euro Disney, first of all they built on their experience with their
existing theme parks. Disney was able to draw on decades of successful activity
in the industry of theme parks. Thus they had lots of data available about
guest attendance figures, spending patterns and guest behaviour.
In addition, Disney could refer to their
experience with the Japanese theme park. This was opened in 1983 and turned out
to be a tremendous success. Management concluded that they had the appropriate
know-how to adjust the very American Disney concept to other cultures.
An other factor was the careful selection
of the location for the European park. Marne-la-Vallée was chosen for its
central location in Europe, its proximity to the Paris region, which is densely
populated and a popular tourist destination, and for its excellent
accessibility by motorway, by rail and by air. Thus Euro Disney was looking at
a huge market.
Other influencing factors were the prices
at Euro Disney, the prices of substitutes and the economic conditions in the
target area as well as their expected change.
2.2 Disney’s interpretation of the market structure
The Walt Disney group saw its European
venture as a monopolist in its market segment (high quality theme parks and
other family and adult orientated entertainment for large parts of Europe). Evidence
for this is the repeated use of words like “unique”, “high quality” etc. in the
offer of shares.
In literature a monopolistic market
structure is described by a sole supplier with no rivals and high barriers to
entry. In the result the monopolist has the power to determine the price and
can act as a price maker.[2]
The Walt Disney group was convinced that
the special features and characteristics of a “Disney world” would give the
European park enough differentiation from all competitive or substitute
attractions. Euro Disney was seen as a sole supplier in a market with lots of
customers. Thus they adopted a monopolistic pricing strategy[3].
Prices for Euro Disney were set at a higher level than all other European theme
parks and even at the Disney theme parks in the USA.
In fact, a view at the existing theme parks
in Europe in the early 1990 reveals that these parks were all smaller than Euro
Disney and were less known throughout the continent than the world famous
Disney brand. The barriers to establish an other really Disney-like theme park
of that size and quality were enormous. Influencing factors were the high
capital outlay required, Disney’s experience in the construction and the
management of such parks and the high customer awareness because of a Disney
brand.
3 The influence of cultural factors on planning the Euro Disney project
3.1 Disney’s provision for cultural issues in Europe
Disney was aware that there were some
cultural differences to take into account when developing a theme park in Europe.
General categories are patterns of holiday and leisure activities, the
influence of climate on these, cultural heritages, tastes, buying patterns,
working conditions, service mentality and others. From the information in the
offer of shares we can conclude that Disney took some provision for such
differences. Examples are:
Guest attendance was
expected to be higher in summer and during holidays
Features designed to
make attendance less dependent on the weather
More inter-connected
covered areas
extensive shelters,
sheltered queuing areas
More indoor
activities
Ticket and entrance
area at the ground floor of the Magic Kingdom Hotel
More emphasise on
themes drawn from European sources
Wider choice of food
and broader variety of restaurants
French as first
language, universal signs, multilingual staff, menus and handbooks[4]
Since market research had revealed that
European tourists are highly interested in seeing the western states when
visiting America, Euro Disney became the “most western” of all Disney theme
parks. The European roots of Disney Characters (Snow White, Peter Pan) were
stressed in design and architecture.[5]
Despite such provisions for European tastes
and expectations Euro Disney remained a very American and Disney-like
attraction. Examples are the strict taboo of alcoholic beverages and the
“Disney-Look” code of staff appearance with strict rules of grooming.
In many fields Disney simply adopted what
worked well in the American and the Japanese parks, which appealed to diverse
cultures as well. From a very general view this was a logic conclusion. The
concept of Disney was known all over the world as something very American. A
theme park that was obviously more European than American would have had the
risk to loose much of its Disney appeal.
3.2 The European’s perception of Euro Disney from a cultural view
Right from beginning of the planning
process Euro Disney was much criticised for “Americanising” Europe. Especially
the French are very proud of their history and their heritage. They see
themselves as “la grande nation” and even have laws to protect their language
against English words. It is no surprise that French intellectuals spoke about
“cultural imperialism” and thus provided bad publicity.
In the first two years of operation of Euro
Disney it turned out that management indeed had overlooked some important
cultural factors. These lacks led to disappointment for all parties and serious
financial problems for the venture. Examples for the problems that arose form the
misinterpretation of cultural differences are given in the appendix[6]:
Many visitors complained that the park
didn’t meet the U.S. standard, suffering from long lines, poor service and
operational glitches. Especially queuing is something most Europeans dislike.
General Disney rules like the serving of no alcohol or dress and grooming codes
for staff were seen as an insult to French and European culture. Euro Disney
faced the difficult task to please not only guests in different ages but also
from very different European cultures and mentalities.
3.3 Impact of the expectation gap for cultural issues at Euro Disney
3.3.1 The gap between Disney’s provision and the European perception
Despite Disney’s careful planning European
visitors didn’t perceive Euro Disney as the unique high quality attraction that
is worth the high prices. Disney’s provision for cultural differences were not
really appreciated. On the contrary, people felt they were not really cared
for, exposed to long waiting lines, overcrowded restaurants and überfordert
staff.
Disney had expected the same enthusiasm of
Europeans it experienced with tourists from the old continent in its American
parks. In reality guests were reluctant to pay the high admission fees and in
addition to spend even more money for food and merchandises. One reason might
be that the Europeans that attended the American Disney parks did this as part
of their holiday trip. Disneyland was some sort of “once in a life” experience
they didn’t want to miss. It was almost like visiting the Statue of liberty
when being in New York.
In Europe, however, Euro Disney was not
more than a short trip destination. People could go there or could postpone it.
In addition Euro Disney had to compete with all other attractions and tourist
regions that were suitable for a short family excursion. People could compare
it even with the American parks. Easy access to information on the internet and
a good exchange rate for the U.S. Dollar brought them much closer. Poor
publicity in the media also contributed to the declining appeal of Euro Disney.
3.3.2 Impact on the revenues of the project
When planning for the European theme park,
Disney assumed a monopolistic market situation and charged a price premium.
Evidence is that admission fees were set even higher than in the American
parks. Disney expected a relationship between supply and demand as follows:
Every supplier maximises his profit at the
quantity where his marginal costs (MC) are equal to the marginal revenue he
gets for the last sold unit (MR). The monopolist faces an downward sloping
demand curve (AR). The MR curve declines at twice the rate as the AR curve. For
him is MC=MR at the quantity qm (Point A). This quantity refers to
point B on the demand curve. Thus the monopolist can charge a price pm.
pm is above the price p0 the monopolist needs to cover
the average total costs (ATC) which already include a normal profit. The
difference between pm and p0 for the quantity qm
represents the supernormal profit the monopolist makes. The reason is that the
monopolist is the sole supplier. If other suppliers were there or could enter
the market they would offer the same product for a lower price thus facing a
higher demand. This movement along the demand curve would continue until the
quantity demanded at a certain price is equal to the quantity supplied at that
price (market equilibrium, point C).
As mentioned, Disney was expecting such a
situation where nothing but itself would influence price and quantity. Reality
revealed that two things happened:
Shift of demand curve
As mentioned in chapter 2.1. Disney
expected a certain position and shape of the demand curve, influenced by
several factors. The overlooked cultural problems as well as some other factors
made the expected demand curve “shift” to the real demand curve. This was a
shift to the left, representing a lower quantity demanded at the same price.
At the monopolistic price pm set
by Disney they hoped to get a demand of the quantity qe. In reality
the demand curve was positioned more left, thus at the price pm
Disney met a demand of only qr.
Other market structure
Disney had expected that its European theme
park was seen by the potential customers as a very unique attraction thus
making it a sole player in the market for high quality theme parks and
providing a monopolistic situation.
In reality people assessed Euro Disney more
critically. The cultural problems mentioned above made it less appealing. So
people compared it with other theme parks, even with the American Disney parks
and with lots of other opportunities to spend money for leisure activities.
These things were perceived by the customers as close substitutes to Euro
Disney. This critical comparison itself can be seen as a cultural
characteristic of the Europeans.
It can be concluded that Disney’s mistake
concerning the market structure was not a wrong assessment of the structure of
its perceived market segment. However, their definition of the target market
was wrong. They are operating in the market of theme parks, short trip holiday
destinations and popular leisure attractions. In this market Disney is not the
sole supplier. It faces competition. This real market is an oligopoly
In an oligopoly the single supplier faces a
more price elastic demand curve since customers can switch to an other
supplier. With its monopolistic price pm Disney faced a lower demand
than expected (qmr). At this lower demand the average total costs
are higher (higher proportion of fixed costs) thus the supernormal profit is
smaller (difference between pm and p0r for quantity qmr).
4 Summary
We have seen that, despite careful
planning, Disney had overlooked some important cultural issues for its European
venture. There is a significant difference between Europeans visiting a Disney
park during their America trip and Europeans planning for a short-break-holiday
within Europe. The latter ones do not like to be over-Americanised. They do not
like queuing and paying a fortune for a Mickey-mouse souvenir. And – if they
are French – they want their glass of wine for their meals.
In that way, Euro Disney was not the unique
attraction everybody wanted to go to. It was less appealing so that the general
level of demand was lower than expected. In addition there was no such thing as
a market of very high quality theme parks. People allocated Euro Disney to the
market of theme parks, short break holiday destinations and other special
leisure activities. This market is oligopolistic. Here the single supplier
faces a more elastic demand, thus can not charge a monopolistic price premium.
In conclusion, Disney’s major mistake was
to misjudge how the Europeans would define the market it would operate in.
Europeans have an other attitude towards the American dream than the Americans
and the Japanese. This was the most important cultural difference that was not
taken for serious. The many other cultural problems were not the one and only
reason for the poor financial results of Euro Disney’s first years. But they
contributed to it and did damage to the reputation of the lucky shiny world of
Mickey Mouse.
2,262 words, without table of content,
references and appendices.
References
Burgoyne, Lyn “Walt Disney Companies Euro
Disneyland venture” (1995)
The Economist, Sept 26, 1992, pp 87, “The
not-so-magic kingdom”
Echikson, B (1992), “Disney’s rough ride in
France”, Fortune, March 23, 1992
Euro Disneyland S.C.A: International
Offer of Shares
Nellis, J G and Parker, D (1997), The
essence of business economics, Hempstead: Prentice Hall
Reekie, W. D., Allen, D. E., Crook, J. N. (1991),The economics of
modern business, Oxford: Blackwell Publishers
Sasseen, Jane (1993) “Disney’s jungle book.
(financial troubles of Euro Disney)”, International management, July-August
1993
Appendix
Cultural and operational problems at Euro Disney
The legality of
Disney’s ban of beards, moustaches, long hair, long nails and tattoos on
employees was questioned.
Disney’s advertising
has emphasised Disney’s image as an alluring bit of American rather tan explaining
to potential customers what they can actually do at the park.
The high admission
prices made visitors keen to take as many rides as possible instead of spending
money for food and merchandises
European seasonality
and vacation habits were assessed wrongly. Even the attendance patterns over
the days of week were mistaken. This resulted in problems with staff
allocation.
It was expected that
visitors would stay for several days to see the whole park. In fact most
Europeans saw Euro Disney as a one-day- or short-trip-destination.
Europeans didn’t like
long queuing at attractions which was no problem in America or Japan.
Prices at the
restaurants and for merchandise were criticises as too high.
Europeans expected
price differentiation, e.g. for off-season or evening hours.
Disney didn’t realise
that tour operators and travel agents play a much greater role in Europe than
in America. Also the importance of catering for groups was ignored.
Parking places for
buses were too small and there were not enough restrooms for bus-drivers.
The policy of serving
no alcohol was a violation of French eating habits.
Disney thought
Europeans would have only short breakfasts. In fact they required a full
sit-down breakfast.
Europeans are
accustomed to have their meals all at the same time. In addition they like to
sit down for their meals in a restaurant. Disney had planned for the American
behaviour of wandering around with the lunch in hand. This resulted in long
queues and in addition staffing for theses few peak hours was difficult.
There were numerous
labour disputes over long hours and poor pay. The relationship to workforce was
perceived as too American by staff.
On the other hand
staff members has problems to converse with guests and were unsure which
language to use.
Staff members lacked
the American service mentality. Service quality was not as good as in the
American parks.