case analysis/ essay

Levi's at Wal-Mart?

DARDEN叁 UVA-M-0711 BUSINESS PUBLISHING Rev. Oct. 12, 2010

UNIVERSITY: 矿VIRGINIA

LEVI'S AT WAL-MART?

Introduction

In early 2002, Phil Marineau, CEO of Levi Strauss & Co., was thinking about whether he should direct his company to sell its product in the world's largest retail store, Wal-Mart. Levi Strauss had posted a decrease in sales for the past five years, and Marineau was eager to stem the decline. Since joining the company in 1999, Marineau had embarked on an aggressive plan to tum the company around by implementing new business strategies that included shuttering 16 North American manufacturing plants and moving the production to cheaper offshore sources. In the marketing area, Marineau had worked to revive the brand image by launching a series of new advertisements and product placements to broaden the appeal beyond the 15-to-19-year-old segment.

Marineau and his management team sensed that the Levi's brand was being challenged at all points along the spectrum. The high-end segment was dominated by trendy brands such as Tommy Hilfiger, Calvin Klein, Ralph Lauren Polo, and Diesel. In the middle segment, Levi Strauss competed with vertically integrated retailers such as the Gap, American Eagle Outfitters, and Abercrombie & Fitch. Meanwhile, retailers such as Wal-Mart, Target, JCPenney, and Sears had built their own private-label brands, offering comparable designs at significantly reduced prices. With Levi's selling in several chain and department stores, the company often found itself being used as a loss leader , with Levi's heavily discounted to the end consumer. Now Marineau and his management team had to decide whether to sell Levi's in Wal-Mart and, if so, what approach to use.

The company had maintained a 10-year relationship with Wal-Mart during the 1980s and 1990s by selling them a value brand called Britannia. Wal-Mart stopped dealing with Levi Strauss in 1994, however, after a dispute in Canada, when Levi Strauss executives refused to maintain a supply of Levi's Orange Tab jeans in Wal-Mart's newly purchased Canadian stores (previously Woolco stores).'With sales of Britannia dropping drastically thereafter, Levi Strauss sold the Britannia brand to a competitor, VF Corporation, in the mid- l 990s.

1 Louis Trager, "Wal-Mart, Levi's in Battle Over Jeans," Los Angeles Daily News, September 9, 1994, B2.

This case was prepared by Jordan Mitchell under the supervision of Paul W. Farris, Landmark Communications Professor of Business Administration, and Ervin Shames, Instructor. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order cop比s, send an e-mail to sales(aldardebusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. 0

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As of early 2002, Levi Strauss was considering rekindling the Wal-Mart relationship by offering it a new value brand. Marineau and his management team had one central question: How should the brand be developed to preserve sales with existing customers in other channels? "There are 50 million pairs of jeans sold in discount stores," Marineau said, "and we are in the business of making pants. We would be crazy not to be looking at other Levi's brands that could be sold in those channels."2

Apparel and Jeans Market in the United States

Approximately 569 million pairs of all types of jeans were sold in the United States in 2001, throughout all consumer segments, which represented an increase of 2.7% over 2000.3 Total jeans sales were estimated to be $1 1. 7 billion4 out of a total apparel market of $166 billion. The apparel market had been steadily growing since 1998, but experienced its first decline in 2001, dropping 5.7% in dollars from the prior year.5 As an expert tracking the apparel industry stated, "2002 will be a very interesting year for the apparel industry and will see a slow road to recovery. Certain categories and consumer segments are expected to see slight increases, while most categories are expected to remain flat or decline in dollar sales."6 Exhibit 1 shows the market size of the entire apparel market and the breakdown of apparel sales by retail channel.

Within the apparel market, several categories of pants existed with casual pants, dress pants, and jeans being the largest. During the late 1990s,jean sales had leveled off as consumers' tastes shifted to khaki, cargo, and other types of techno-fabric pants. By 2001, however, denim sales were rising as consumers migrated back to jeans. They were attracted by several innovations in fabric and in style. The jeans market was expected to grow by 2% to 3% in 2002.

The average price for a pair of jeans hovered around the $20 mark for both men and women, with over 40% being sold (either as original or marked-down price) below $20.7 The average price of jeans had dropped over the previous 10 years due to the proliferation of off- pricing and private-label brands. One study by Cotton Incorporated showed that none of the top- 19 brands of jeans in both the women's and men's segments was able to increase its brand premium when compared to the average price of j eans in an eight-year period. In the men's jeans segment, 11 of the 19 brands lost their premiums, and in the women's segment, 14 of the 19 brands lost their premiums over the market's average.8 The same study suggested the following to avoid losing price premiums:

2 Sarah Butler, "Levi's Rules Out Red Tab Sales to Value Sector," Drapers Record, March 30, 2002, 3. VF Corporation annual report, 2001. VF Corporation annual report, 2003.

5 "Reports 2001 U.S. Apparel Industry Down for First Time in Three Years," April 29, 2002, http://www.fashionworld.com (accessed March 3, 2005).

6 "Reports 2001 U.S. Apparel Industry Down for First Time in Three Years." 7 Scott Malone, "Retail Revolution—Levi's Considers Selling to Wal-Mart as Sales Slump," Women 's Wear

Daily, January 17, 2002, I. 8 "Does Branding Combat Price Deflation?" Cotton Incorporated, Winter 2003, http://www.cottoninc.com

rrextileConsumerffextileConsumerVolume31/?Pg=2 (accessed February 2, 2010).

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One [solution] is for a brand to resist diluting its premium through discounting or marketing in too many different retail channels. Once consumers see a brand offered simultaneously at different channels, such as department stores and mass merchants, the ability to maintain a positive brand premium may be fatally compromised. A better strategy is to introduce a different brand name, perhaps affiliated with the original brand, but with enough independent brand identity so that consumers and retailers can differentiate products. Without differentiation, apparel products will compete largely on the basis of price. Another strategy for preserving brand premium focuses on emphasizing the non-price attributes of the brand. Attributes such as packaging, labeling, and customer service can enhance a brand image without compromising the brand's retail price.9

The largest and fastest-growing retail channel for jeans and apparel was the mass merchants channel made up of Wal-Mart, Target, Kmart, and several other smaller retailers. In January 2002, Kmart filed for bankruptcy protection after a soft holiday season and intense competition left it in a precarious financial situation.10 An industry analyst talked about the increasingly blurred lines separating the channels:

Retailers will be challenged in 2002 with the need to distinguish themselves from one another. With the melding of channels, department, chain, specialty, and mass merchant, retailers are looking for more of the same with similar merchandise. This allows the consumer to be able to switch channels for apparel shopping and seek the value experience, and fmd fashion value at lower prices. Department and specialty stores will really need to work hard to make themselves what they once were: special and different.11

Jeans Consumers

Jeans were garments worn in a variety of settings—by people as diverse as manual laborers and models on the haute couture catwalks in London, Paris, and Milan. Denim jeans were considered truly egalitarian. As one academic wrote, "Jeans have the ability to conceal class distinction. When a person wears blue jeans—be it President Bill Clinton or a truck driver—the viewer is nebulous about the beholder's status."12

Styles varied as much as settings. Jeans were inextricably linked with music, given that certain styles of jeans were often part of a group's costume—tight black jeans were an essential wardrobe item for Goth dressers, no-nonsense straight-leg blue j eans were worn by country and western musicians, and oversized, baggy styles were adopted by hip-hop artists. In younger age

9 "Does Branding Combat Price Deflation?" 10 "VF Corp. sees no material impact from Kmart," Reuters, January 22, 2002. 11 "Reports 2001 U.S. Apparel Industry Down for First Time in Three Years," April 29, 2002. 12 C. Magocsi, "The Gentrification of Blue Jeans," University of Toronto, http://www.chass.utoronto.ca

加story/material_culture/cynth/index.html (accessed February 2, 2010).

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groups such as 15- to-19-year-olds, it was normal to own between five and eig?t pairs of jeans of a variety of brands. Men and women over 35 had between three and five pairs of two to three brands卫 In general, men and women over 35 spent half as much on jeans each year as members of the 15-to-19-year-old group. The over-35 group purchased fewer pairs per year, and they spent less on these purchases. The 15-to-19-year-old set purchased the more expensive brand names, while consumers over 35 preferred inexpensive brands and the availability oflarger sizes and private labels.

Levi Strauss & Co. History

Levi Strauss was born in Buttenheim, Bavaria (modem-day Germany), in 1829, and moved to the United States in the 1847. After initially teaming up with his two half-brothers to run a dry goods business in New York, he relocated to San Francisco and started his own dry goods business in 1853. Nineteen years later, Strauss received a letter from Jacob Davis proposing that the two of them apply for a patent on a new invention: riveted denim pants. On May 20, 1873, the two men received U.S. patent no. 139,121 for men's riveted work pants and immediately started producing what were at that time called "waist overalls." They soon realized that they were filling an important niche with their sturdy, durable garment. By around 1890, "lot number 501" was being used to designate the copper-riveted overalls later known as jeans.

After the death of Levi Strauss in 1902, family members continued to run the business and developed Koveralls, one-piece play suits for children, in 1912, and Freedom-Alls, one-piece work suits for women. Around this time, the company established a relationship with Cone Mills to supply denim for key products—a relationship that still existed in 2002.

During the Great Depression of the 1930s, Levi Strauss avoided layoffs by giving workers shorter workweeks or assigning nonmanufacturing activities such as maintenance and improvement of the facilities to employees. Near the end of the decade, Levi 's jeans were popularized by actor John Wayne's appearance in the movie Stagecoach—the jeans were a vital component of his wardrobe—and they became a common sight at dude ranches throughout the country. In the 1940s, Levi Strauss & Co. took the leadership position on social issues by being one of the first companies in the United States to promote integrated factories, with individuals from several cultures working side by side. The company also advertised in a number of languages to reach the burgeoning immigrant market within the United States.

Levi's took another marketing turn in the 1950s, when teenagers became the central focus in advertising for the brand. With movies such as The Wild One, featuring Marlon Brando in Levi's 501 jeans, the brand became associated with the rebellious "Beat Generation," the precursor of the 1960s countercultural revolution. Levi's jeans were becoming branded with the key attributes of rebellion and originality. (The "Right for School" campaign, however, drew responses to the contrary.) When Marilyn Monroe appeared in Levi's jeans in a photo shoot, the brand became sexier and appealing an alternative to skirts and other types of pants for women.

13 "Does Branding Combat Price Deflation?"

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The company worked to expand the Levi's brand by moving into product lines such as Lighter Blues, Denim Family, and Casuals, the latter of which was adapted to meet the style of the 1960s with polyester blends and greater color variety.

Levi's expanded into international markets in the 1950s. In 1969, the brand received further recognition through a famous photograph of the jeans being worn at the legendary Woodstock music festival. The company set up a European division in 1965 and during the next decade expanded throughout the world and into Asia, with Japan becoming the fi订st Asian affiliate in 1971.

The company's ability to create relevant and "cool" products for the teenage set as well as its progressive working conditions—such as being the fi江st to offer benefits to the unmarried partners of their employees and one of the first companies to offer support to AIDS victims— made Levi Strauss a heralded and well-respected Fortune 500 enterprise.

By the 1980s, the company had several diverse interests ranging from dress-suit production to owning part of a hat manufacturer. In 1984, the company went through a major refocusing when it shed many of its noncore subsidiaries and based its marketing efforts on its star product—501 Levi' s. The timing was ideal—the company rode the wave of Bruce Springsteen's multiplatinum album "Born in the USA," the cover of which showed Springsteen' s backside clad in a trusty pair of 501s. The refocusing effort led by Strauss descendent Robert Haas put the company back on track as a profitable and focused organization.

Seeing an opportunity to open up a new segment in the pants market, the company launched Dockers pants in 1986, as a casual alternative to dress pants and jeans. The success of Dockers was unabated. From its launch in 1986 to 2002, when Dockers introduced a line of pants for women, the overall brand grew to over $1 billion in annual sales卫 The company decided to offer styles for the discerning young consumer and launched its Silvertab jeans in 1988. By 1996, Levi Strauss was at the top of its game~ it had built a truly global brand with efforts such as "Clayman," the company's fi江st global commercial, and its iconic 501 jeans continued to grow. The company had become the world's largest apparel manufacturer, with sales reaching a record $7.1 billion. Exhibit 2 shows a sample of Levi Strauss & Co.'s historical advertising 1.tnages.

Levi Strauss & Co.: 1997 to 2002

Coming off a record year of sales in 1996, the company's sales began to decline from $7.1 billion and net income of $465 million in 1996, to $5.1 billion and net income of $5 million in 1999. By the close of the 2001 fiscal year, the company's sales had eroded further to $4.3 billion. During the same period, Levi Strauss restored net income to $151 million. The company was carrying debt of $2 billion, with some of the notes being graded as one category

14 Levi Strauss annual report, 2002.

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away from junk status as of early 2002.15 Exhibit 3 shows financial highlights from 1997 through 2001.

Levi's brand market share in men's and women's jeans fell from 18.7% in 1997 to 12.1 % in early 2002.16 In the men's jeans market, the company's mainstay category, the brand held 48% market share in 1990, but had decreased to approximately 20% by 2002.17

Levi Strauss's decline was attributed to several factors, such as increased competition in both the high- and low-end segments of the market. On the high end, image-conscious consumers were reaching for designer brands such as Tommy Hilfiger, Ralph Lauren Polo, and Calvin Klein. Other smaller premium brands such as Miss Sixty, Diesel, and Guess were all gaining momentum by offering fashion-foiward designs, finishes, fabrics, and fits. On the opposite end of the spectrum, major retailers such as JCPenney, Sears, Wal-Mart, Target, and Kmart were all realizing major market-share gains offering private-label jeans at under $20 apa江．

Competing head-to-head in the same price category with Levi's jeans were vertical retailers such as the Gap, American Eagle Outfitters, Abercrombie & Fitch, J. Crew, and Eddie Bauer. These vertically integrated specialty stores controlled all aspects of product design, store design, and store operation. The Gap even had an in-house advertising department. These chains were credited with offering a consistent image across all formats and having the advantage of placing products directly in the stores instead of having to sell to independently owned retailers.

After being criticized for not being up to date with the shop-within-shop concept, the company invested heavily in education to learn more about in-store merchandising. One outcome was more than a dozen stores owned and operated by Levi Strauss & Co. in high-profile locations such as New York City. The company had a total of 3,300 retail customers at more than 20,000 locations.

Observers felt that the Levi ' s brand was caught in the middle. Priced between $30 and $50 a pair, the jeans did not offer the same image or design as the high-end brands or the complete wardrobe selection of the vertically integrated retailers. Also, they did not offer the inexpensive alternatives found through private labels. To offer the lower price points, pundits suggested that the company eliminate its costly overhead of maintaining its North American- based production sources. In 1997, the company started closing its North American production facilities and further developed offshore sources of production with third parties in Asia, the Caribbean basin, and Latin America. 18 While it provided lower cost per unit, the company struggled to cover the costs of its restructuring charges for both manufacturing and non-

15 Levi Strauss annual report, 2002. 16 Lo山se Lee, "Why Levi's Still Look Faded," Business Week, July 22, 2002. 17 Ralph T. 灼ng Jr., "Infighting 沁ses, Productivity Falls, Employees Miss Piecework System," Wall Street

Journal, May 20, 1998. Note: The 2002 share derives from a case writer estimate. 18 The company had used offshore suppliers since the 1980s and had created a groundbreaking Supplier Code of

Conduct in 1991.

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manufacturing staff. From 1996, the company reduced headcount by 33%, moving from a worldwide total of over 25,000 employees to 16,700 by the end of the 2001 fiscal year.19

In 1999 Robert Haas stepped down from the CEO post, handing control over to the second nonfamily leader in the company's history—Phil Marineau. Marineau had over 25 years of experience in consumer packaged goods companies, working for 23 years and later holding the president and COO positions at Quaker Oats. There, he was credited with leading the global growth of Gatorade. Later, Marineau worked for a short time at Dean Foods and then moved to Pepsi-Cola North America for two years before being recruited to head Levi Strauss & Co.

Levi's Product Lines

In 2002, Levi's brand represented 74% of the company's worldwide sales and 65% of sales in the Americas, with the remaining 9% derived from the Dockers brand and other smaller offshoots四 The brand comprised several product lines for men and women (see Table 1).

Industry observers frequently talked about Levi's product lines being arranged in a pyramid, with fashion-forward designs such as Levi's Vintage Line, Levi's Red, and Levi's Premium at the top, followed in order by Levi's Engineered Jeans, Levi's Silvertab, and Levi's Red Tab. The product lines at the top of the pyramid were intended to create a halo effect on the overall brand, enhancing its image and fashion relevance. The company did not allow all its retailers access to higher-image brands. For examples JCPenney was not offered Levi's Vintage or Levi's Red, but was instead presented with the full range of Levi's Red Tab and Silvertab products. Each product line had a target consumer—the higher-end brands were aimed at trend- conscious buyers in the 15- to 24-year-old range, whereas the Levi' s Red Tab line had jeans suitable for more than 10 to 12 different body shapes and styles that included straight-leg, relaxed, baggy, boot cut, and slim. The company used the combination of fit, fabric , and finish as key differentiators for its target consumer and price point. Prices for Levi's Red Tab line had historically been double the price of the average jean. In the past five years, the average price paid at retail for Levi's jeans had been dropping, and was approximately 1.5 to 1.75 times the market average. 21

19 Levi Strauss annual report, 200 I . 20 Levi Strauss annual report, 2002. 21 C -ase wnter estimates.

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Table 1. Levi's product lines.22

Product line Description

Levi's Vintage Clothing Small group of premium tops and and Levi's Red bottoms that were based on key

heritage styles with premium fabncs.

Levi's Engineered Jeans Group of tops and bottoms that were engineered for special mobility

Levi's Premium Red Tab Variations of Levi's Red Tab products with changes to fabrics and finishes

Levi's Red Tab The core of the Levi's brand including Levi's Silvertab the classic 501 button-fly jean, as well

as a series of models from the 505 through 579, featuring shm, baggy, straight-leg, boot-cut and superlow fits. The line also included tops and jackets. Urban-inspired denim fits and techno- fabrics such as slick cotton and nylon- blends

Other Levi's products Included all other products such as additional tops, jackets, outwear and licensed products such as hats, bags, belts, socks, underwear, and footwear

Source: Created by case writer.

Distribution Channel

High-end specialty stores Independent shops

Specialty stores Independent shops Original Levi's stores

Specialty stores Independent shops Original Levi's stores

Department stores Chain stores Independent shops Original Levi's stores Department stores Chain stores Original Levi's stores

Department stores Chain stores Independent shops Original Levi's stores

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Retail Price Point

Bottoms: over $100

Bottoms: between $50 and $80

Bottoms: between $50 and $100

Bottoms: between $30 and $50 Bottoms: between $25 and $50

All price ranges depending on product category

Levi Strauss & Co. was constantly releasing new products that fell somewhere within the pyramid structure. For example, a r efreshed design of Levi' s 501 jeans was in process with a

release date p lanned for 2003. Also scheduled to h i t stores in 2003 was Levi's Type 1, a new

product line, which accentuated the trademark Arcuate23 stitching design.

Levi's new product releases had mixed results. For example, the release of Levi's

Engineered Jeans in 2000 was highly successful in Europe and Asia but failed to prove v iable in

the United States. The design direction for Levi's Engineered Jeans was to start from zero and

recreate a new jeans blueprint. The result of the new design was a reconstructed and re-

engineered jean that had a twisted and bent pant leg for greater mobility . Fashion commentators

believed that it was a breakthrough and soon many top-end brands such as G-Star and Diesel

began their own designs based loosely on the Levi's pattern for Engineered Jeans. Despite this

success with high-end brands, however , consumers of U.S. jeans did not adopt the innovation en

masse.

22 Compiled by case writer based on information at retail locations and Levi Strauss annual report, 2001 . 23 Arcuate was the name given by Levi Strauss to the Levi's trademarked "V-like" stitching on the back pockets

of a pair of Levi's jeans.

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Advertising and Promotion

The Levi's brand was rated as the number-one apparel brand for brand awareness and brand retention.24 U .S. advertising and marketing for the Levi's brand in 2002 was estimated at $139 million. This budget included outlays for television advertising, billboard, print, and other media events and sponsorships.25 By comparison, Nike, a company more than double the size of Levi Strauss & Co., invested $998.2 million (10.5% in revenues) in advertising in 2001, and $974.1 million (10.8% ofrevenues) in 2000.26

As part of an integrated marketing approach, the company frequently promoted music and theatrical productions in exchange for brand advertising at the venue as well as product placement on the artists. Sponsored artists included tours by Lauryn Hill, Massive Attack, Jamiroquai, Christina Aguilera, Mariah Carey, De La Soul, Ben Folds Five, and the White Stripes. It used star talent such as Christina Aguilera and Mariah Carey in coordination with the release of Levi's Superlow jeans. For 2002, the brand was planning to tie in product with the World Cup soccer event in Korea by sponsoring Korean soccer star Song Chong Gug.27 To augment traditional approaches, the Levi's brand also worked to get product placement on television shows, feature films, music videos, and on the pages of top fashion magazines.

Channels of Distribution

Jeans channels could be grouped into six main categories within the U.S. denim landscape:

1. Chain and department stores such as JCPenney, Macy's, Sears, May Department Stores Co., and Kohl's

2. Image department stores such as Bloomingdale's, Nordstrom, Neiman Marcus, and Saks International

3. Independent shops or "jeaneries"

4. Specialty stores such as the Gap, Old Navy, Abercrombie & Fitch, American Eagle Outfitters, and Original Levi's Stores (the only one of these to stock Levi's)

5. Mass merchants such as Wal-Mart, Target, and Kmart

6. Off-price channels such as Costco, Levi's Outlets, and TJ Maxx

24 Levi Strauss annual report, 2002. Note: Brand retention was defmed as the percentage of all past-12-month purchasers who planned on buying the brand in the future.

25 The 2001 annual report indicated approximately 7% of sales was spent on various media. This figure was derived by multiplying 7.4% times $4.1 billion in sales times 65% domestic sales times 74% of domestic sales for Levi's brand.

26 Nike, Inc., annual report, 2002. 27 Levi Strauss annual report, 200 I.

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The mass channel sold an estimated 31 % of all jeans in the United States.28 The breakdown of total jean sales and Levi's brand sales by channel is shown in Tables 2 and 3.

Table 2. Jean sales in the United States by channel (percent).

Mass 31 Specialty 二 23 Chain 18 Department stores 16 Other 12 Total 100

Data source: Levi Strauss annual report, 2001.

Table 3. Levi's brand sales in the United States by channel (percent).

Chain and department stores 58 Independent 8 Specialty 3

—-Image department stores 2 Mass 0 Other 29 Total 100

Data source: Levi Strauss annual report, 2001.

The Levi's brand was not present in the mass merchant channel in the United States. The single largest customer for Levi's brand sales was JCPenney, which accounted for over 10% of the company's overall sales.29 In 2002, along with JCPenney, the top 10 customers in alphabetical order were Costco, Casual Male Retail Group (formerly Designs, Inc.), Dillard's, Federated Department Stores (owners of Macy's and Bloomingdales), Goody's, JCPenney, Kohl's, May Department Stores Co., the Mervyn's unit of Target Corporation, and Sears.30

Competition

Given the fragmented nature of the fashion industry and the jeans market, the Levi's brand competed across a wide spectrum of brands. Competitors chose to either fight for market share based on price or sought consumers willing to pay a premium for image, design, fit, and finish. The frrst category was dominated by mass-market private labels from Wal-Mart, Target, Kmart, Sears, JCPenney, and Macy's. The second category was rife with examples from high-

28 Levi Strauss annual report, 200 I . 29 Levi Strauss annual report, 200 I . 30 Levi Strauss annual report, 200 I .

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end brands such as Ralph Lauren Polo, Calvin Klein, and Guess, through to fashion-forward styles such as Fubu, L.E.I., Mudd, and Diesel. One consistent competitor in the last 50 years had been Wrangler and Lee Jeans, both of which were owned by VF Corporation.

VF Corporation: Wrangler, Lee, and Rustler

VF Corporation, established in 1899, produced and marketed a large portfolio of brands including outdoor names such as JanSport, The North Face, and Eastpak as well as intimates labels such as Vanity Fair, Vassarette, and Bestform. VF's largest customer was Wal-Mart, which made up 15.1 % of VF's total sales in 2001 and 14.8% of VF's sales in 2000.31 Total advertising for all VF brands was $244 million (4.4% of sales) in 2001, $252 million (4.4% of sales) in 2000, and $258 million (4.6% of sales) in 1999.32

VF Corporation jeanswear brands included Riders, Chic, Britannia, and Rustler, and a number of product-line offshoots from the江 stable of Wrangler and Lee offerings. Riders, Chic, Britannia, and Rustler were sold in the mass channel at stores like Wal-Mart, Target, and Kmart and were typically priced between $9.99 and $19.99. All three of the brands were targeted largely at value-conscious mothers who made buying decisions for the rest of the family.

Wrangler jeans were also available at the mass-merchant channel with some product extensions being available at chain and department stores. Wrangler jeans retailed between $14.99 and $24.99, and were designed for durability, reliability, and fit. Wrangler imaging revolved around western-inspired themes and the spirit of the American cowboy. Its consumer base was mostly males ages 25 to 50 and appealed largely to men seeking comfortable jeans for work or pleasure activities.

Lee Jeans were largely a chain and department store brand, commanding price points between $29.99 and $49.99, depending on the style, cut, and finish. In promotions, Lee Jeans used a character called Buddy Lee, a miniature cowboy doll that had gained a cult following in the United States. Lee Jeans were targeted toward the 15-to-25 age group, although the company did offer the Lee brand to children. The brand image projected original fits with up-to-date variations on vintage offerings.

Designer and fashion-forward jeans

Hundreds of brands competed in the designer and fashion-forward denim market. While the majority of brands commanded small market share, each attempted to find a niche with its style. The larger designer labels such as Ralph Lauren Polo, Calvin Klein, and Tommy Hilfiger were supported by ready-to-wear collections shown regularl~in fashion havens such as New York, London, Paris, and Milan. All three brands had distinct Jean collections, which they sold at high-end and regular department stores. All three brands invested heavily in in-store displays at

31 VF Corporation annual report, 2003. 32 VF Corporation annual report, 1999 through 2001 (see Exhibit 13).

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department stores, refreshing the design and refurbishing every three years. The average price of jeans for these three labels was between $49.99 and $99.99.

Other brands such as Guess ($49.99 to $79.99) and Diesel ($69.99 to over $100) had built a strong image using provocative out-of-home advertising. Guess chose to sell at a combination of department, independent, and Guess stores. Diesel products were found at higher-end department stores, image-conscious independents, and a small worldwide network of corporate- owned locations in select urban centers. Guess chose to control all of its advertising efforts in- house and spent $17.5 million (2.6% of total revenues) in 2001, $29.7 million (3.8% of total revenues) in 2000, and $24.5 million (4.0% of total revenues) on advertising in 1999.33

A number of other brands such as LE.I. (Life Energy Intelligence), Mudd, FUBU, and Lucky all attempted to establish a niche in the jean marketplace whether it be with quirky designs or baggy fits that responded to America's rap idiom. These brands were located at a combination of department stores and independent shops at price points ranging from $39.99 to $89.99.

Vertically integrated specialty-store brands

The Gap sprung up in 1969 in San Francisco and carried Levi's jeans until the company began focusing on building its own jeans brand in the late 1980s and early 1990s. The Gap offered a wide range of casual products with a penchant for offering fashion-relevant basics supplemented by seasonal changes in colors, fits, and fabrics. An average pair of Gap jeans cost between $35.99 and $59.99, although the Gap frequently discounted its seasonal line of goods every eight weeks as new products were released into the stores. The Gap controlled all aspects of product and store design as well as consumer communications, which in recent years had featured a mix of well-known and unknown individuals involved in either music or dance. Notable TV spots for the 2001 holiday season included musical stars such as Dwight Yoakum, Macy Gray, Sheryl Crow, Shaggy, and Alanis Morissette. The Gap's target audience was fairly broad, although industry observers generally felt that the store was targeted to individuals in their 20s. The Gap also owned and operated Old Navy, which offered lower price points aimed at teenagers. An average pair of jeans at Old Navy cost between $19.99 and $29.99.

Abercrombie & Fitch, American Eagle Outfitters, and J. Crew all competed for wardrobe dollars, offering a complete line of casual clothing for men, women, and children. They targeted consumers between 15 and 25 years of age, with each brand saluting the American classic styles frequently associated with campus and country club images. Prices points for a pair of jeans varied between $39.99 and $69.99.

Private-label brands

Private labels were developed by retailers to offer consumers a similar product to branded alternatives at 50% to 60% of the retail price. JCPenney had developed the Arizona brand, which

33 Guess Inc. annual report, 200 I .

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commanded about 7% of the men's jeans market, and Sears had a similar share of the market with their Canyon River Blues private label.

Mass merchants had realized tremendous growth in private-label sales. Wal-Mart ,with its Faded Glory and No Boundaries private labels, had gained nearly 6% of the overall jeans market, while Kmart retained approximately 5% of the overall market. Target had taken a different approach by licensing the Cherokee brand, which became its captive label. With Cherokee jeans, Target had posted yearly growth to command nearly 8% of the overall jeans market in units. All private-label offerings by mass merchants were priced below $20.

Wal-Mart

Founded in 1962 in Arkansas, Wal-Mart became the world's largest retailer. For the year ending January 31 , 2002, Wal-Mart posted revenues of $220 billion and net income of $6.7 billion.34 Exhibit 5 shows Wal-Mart's financials. It had over 2,700 U.S. outlets, split between its regular discount stores and supercenters that sold groceries and offered additional services. The company also operated another 500 discount outlets under the Sam's Club name and controlled nearly 1,200 outlets on international soil under names such as ASDA in the United Kingdom. Exhibit 6 indicates the growth of Wal-Mart' s discount stores and supercenters.

Wal-Mart's average store size ranged from 90,000 square feet to over 200,000 square feet for supercenters. The company's slogan was, "Everyday low prices," and it guaranteed maximum selection at the lowest prices. Wal-Mart carried a mix of both private-label and branded merchandise with private-label sales accounting for approximately 20% of overall sales (in contrast, Target's private-label sales represented 50%).35

34

Table 4. Wal-Mart sales categories (percent).

22 Grocery, candy, and tobacco 21 Hard goods 18 Soft goods/ domestics 9 Pharmaceuticals 9 Electronics 7 Sporting goods and toys 7 Health and beauty aids 3 Stationery 2 One-hour photo 1 Jewehy 1 Shoes

100 Total

Data source: Wal-Mart annual report, 2002.

Wal-Mart annual report, 2002. 35 Pankaj Ghemawat, Ken A. Mark, and Stephen P. Bradley, "Wal-Mart Stores in 2003," 9-704-430

(Cambridge, MA: Harvard Business School Publishing, 2004).

Business Policy and Strategic Management

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Apparel sales were included in soft goods/domestics and represented approximately $23 billion in sales, or 11 % of Wal-Mart's total revenues.36 It was estimated that Wal-Mart held 12.6% of the entire apparel market compared with the 3.6% held by rival Target.37 Wal-Mart's most successful apparel categories were in the ladies'plus sizes and men's work wear with both consumer sets typically being 35 to 60 years old. Unlike higher-end designer brands that did not come in large sizes, Wal-Mart offered a range of sizes in men's pants with waist sizes that went as large as 48 inches. The predominant positioning for the Wal-Mart private labels was a focus on offering the basics at everyday low prices. As one analyst commented, "The only thing Wal- Mart really develops is low prices."38 Another analyst explained that Wal-Mart used a low-risk strategy in its apparel division by playing down disposable fashion. "They can usually hold pricing at fairly stable and comfortable levels. They do some markdowns, but you won't see a whole category on sale," he said. 39

Some onlookers believed that Wal-Mart had substantial room in which to grow their apparel line and cited the retailer's attempt to develop one of its star brands, George, as well as other fashion-forward brands such as No Boundaries, Organize Your Life, and Mary-Kate & Ashley that were aimed at junior customers.40 As a Wal-Mart spokesperson said, "Over the past five years we've stepped up our efforts to focus on apparel, in terms of fashion and quality. George demonstrates that commitment. It offers high quality, great value and styling at everyday low prices."41

While looking to grow its own brands, Wal-Mart also purchased a specially designed assortment from work wear marketer Dickies, which developed a line specifically for Wal-Mart. Other branded apparel manufacturers such as VF Corporation sold Wal-Mart multiple lines, including the Wrangler, Riders, and Rustler brands. The president of VF Jeanswear, Mass Market, said:

The potential for Wal-Mart's apparel is endless. They already turn merchandise well, but the numbers of people who walk into stores and don't buy apparel or only buy a small percentage is huge. It comes back to what products they showcase and how they customize the assortment.42

Wal-Mart organized its offerings along the good, better, and best spectrum, with private labels filling the good position and national brands occupying the best spot. VF's Wrangler jeans were priced from $14.99 to $24.99, while Wal-Mart' s Faded Glory brand was priced regularly at

36 Debby Garbato Stankevich, "Expanding Upon a Basic Appeal: 汕cromarketing and Other Initiatives Are Likely to Drive Wal-Mart's Clothing Sales to New Heights," Retail Merchandiser, March 1, 2002: 34.

37 Emily Scardino, "Is Target's Wardrobe in Wal-Mart's Sights? The Mossimoization of Mass Catches On," Discount Store News, April 7, 2003, Sl.

38 Stankevich. 39 Stankevich. 40 Stankevich. 41 A. Scott Walton, "Low-Cost, High-Fashion," Cox News Service, November 25, 2002. 42 Stankevich.

Levi's at Wal-Mart?

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$10.77.43 In women's jeans, the main national brand was Riders jeans, which sold between $14.99 and $24.99; No Boundaries, Faded Glory, and White Stag carrying price tags between $9 and $20. Wal-Mart's No Boundaries brand offered greater variation in styles and coloring. The collection was largely based on prevailing fashions such as capri pants and low-rise jeans for girls, as well as carpenter pants and baggy fit for boys. Faded Glory offered customers a sturdy and relaxed basic jean. One fashion source even claimed that Faded Glory jeans were one of the most comfortable jeans in the U.S. market.44 Exhibit 7 shows a list of Wal-Mart's main brands by consumer category.

The central incident involving the weakening of the Levi Strauss & Co. and Wal-Mart relationship was the dispute over selling Levi's Orange Tab jeans (a line of products that was phased out in the United States but still existed in Canada) to Wal-Mart stores in 1994, when it purchased the Woolco chain in Canada. Levi's decision to not sell Orange Tab at Wal-Mart in Canada cost the U.S. business the entire Wal-Mart sales of the Britannia brand—approximately 1.2 million units, or $10 million in revenue, for the Levi's brand.45

The Question for Levi's: What to Do and How to Do It?

Levi Strauss & Co. management believed that its competitive advantage was based on the worldwide recognition of the Levi's brand name, its commitment to ethical conduct and social responsibility, and its focus on product innovation, quality, and value. Management thought that the Levi's brand was able to work across several channels of distribution because of its long- standing relationships with top retailers.46

To remain competitive, Phil Marineau realized the company needed to continue innovating fits, fmishes, fabrics, and other product features. The necessity of maintaining strong brand imaging and advertising was believed to help Levi's maintain the number-one position as the most recognized jeans brand in the world. To strengthen retail partnerships, Marineau had to provide products for retailers to reach their overall blended margin, while backing up all brand extensions with strong consumer messaging and the necessary investment to create an in-store experience complementary to the brand and the retail space.

In mid-January 2002, Marineau told the press:

One point where we don't sell is obviously the mass merchants: Wal-Mart, Kmart, Target. We'd be crazy not to be studying that and trying to understand what the opportunities are in the marketplace. We've talked to these people, we've tried to understand how they do business, what they do. We have studies

43 "Retail Industry Update," Credit Suisse F江st Boston, July 18, 2003, I. 44 "Cheap Jeans Beat Designer Once Again," http://www.fashionunited.eo.uk/news/archive/jeansl.htm

(accessed February 2, 2010). 45 Trager. 46 Levi Strauss annual report, 200 I.

Business Policy and Strategic Management

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going on about what their consumers want. But we have no announcement to make about any plans or any approach that we have fmalized or decided on. The first person we will tell ifwe do this is our current customers.47

Marineau was well aware of the P?tential reaction from customers. In its past, Levi's had upset existing customers on a few occas10ns when it made the decision to withdraw a product line or to sell to other customers. One such incident was in 1982, when Levi' s made the decision to sell to chain stores JC Penney and Sears, which caused a dearth of orders from department stores such as Macy' s.48 Eleven years later, Macy's began purchasing Levi' s jeans again.

The Decision

While some insiders were convinced that selling a brand to Wal-Mart was necessary, many executives within the company were divided on the subject. One article from an apparel industry magazine read:

According to sources, there are intense disagreements within Levi's as to whether the company should make a move toward the mass market. In particular, the executives who have worked to build the company's profile in the premium jeans market---on the strength of directional lines including Levi's Red Tab and Levi's Vintage Clothing, which carry triple-digit price tags—are said to be reluctant to see the brand sold in Wal-Mart.49

Marineau and his executive team needed to decide on whether—and if so, how—to sell to Wal-Mart. Levi's formidable competitor VF maintained the top spot among national competitors at Wal-Mart—Wrangler in men's jeans and Riders in women's jeans. One analyst said Levi Strauss & Co. was going to have "a tough time taking on the presence that Wrangler has in this niche."50 The other main pressure was explaining the rationale to existing customers.

47

An industry insider said:

[Selling to Wal-Mart] creates more pressure for the Kohl's and Penney 's of the world. What are they going to do—just roll over and play dead? [Some retailers may say] "You have mass distribution now, we can't make money on you, you're gone." [Levi Strauss & Co. has not] had one effective strategy yet. This one will prop up short-term earnings, but it's a bad long-term strategy.51

Scott Malone, "Retail Revolution—Levi's Considers Selling Wal-Mart as Sales Slump," Women's Wear Daily, January 17, 2002, I.

48 Malone. 49 Malone. 50 Thomas Cunningham, "Levi Strauss Rolls the Dice ... ," Daily News Record, November 4, 2002. 51 Cunningham.

Levi's at Wal-Mart?

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On the other hand, another analyst said, "The total volume of traditional department stores is so insufficient right now that if Levi Strauss was totally dependent on department stores, they would go out ofbusiness."52

Marineau wondered about how he could leverage the celebrated Levi's brand name while remaining competitive and not affecting consumers' propensity to purchase other Levi's product lines at higher price points. "Around the world," Marineau said, "we' re making sure we have the opportunity to sell at the right price point, from the $250 level to the $25 level. That' s a unique opportunity for the Levi's brand, and it's one we' ll continue to explore as we move forward." 53

52 Cunningham. 53 Malone.

Business Policy and Strategic Management

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Exhibit 1

LEVI'S AT WAL-MART?

Apparel M arket Information

U.S. Annual Apparel Dollar Sales (1998-2001)

1998 168

1999 173

3.0%

2000 176

1.7%

2001 166

-5.7%

2001 U.S. Apparel Sales by Market Segment (billions)

Total Apparel Men's Women's Boys' Girls' Infants'& Toddlers'

Dollar Volume % Chg 00/01 Dollar Share % 166 -5.9% 100.0%

51 -7.0% 30.7% 89.3 -6.7% 53.9%

7.3 -5.6% 4.4% 7.5 -4.1 % 4.5%

10.6 5.7% 6.4%

2001 U.S. Apparel Sales by Channel Distribution (billions)

Channel All Channels Department Stores National Chain Mass Merchants Specialty Stores All Other

Dollar Volume 2 % Chg 00/01 Dollar Share % 166 -5.9% 100.0%

32.7 -6.3% 19.7% 22.4 -10.2% 13.5% 34.9 -0.6% 21.0% 41.2 -6.4% 24.9% 34.5 -7.0% 20.8%

Data source: "Reports 2001 U.S. Apparel Industry Down for First Time in Three Years," April 29, 2002, http://www.npdfashionworld.com (accessed March 3, 2005).

UVA-M-0711

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Exhibit 2

LEVI'S AT WAL-MART?

Images of Levi's throughout the Ages

UVA-M-0711

t

•• 身,·······~ 等........ w ••• uvrrs鳍伊HS/Im,

主王幸圭幸宝宝兰 1J k叩妇片est'slacksand fashion _______ ,. 需

己志已于莘辛廷兰王之－

Levi's Ad: 1966 Levi's Sta-Prest Ad: 1970 Levi' s for Women: 1992

Source: Levi Strauss and Co. Used with permission. Levi

' s at Wa

l,M art?

Business Po licy and Strategic Management

-20-

Exhib it 3

LEVI'S AT WAL-MART?

L evi Strauss & Co. Financial Hig hlights

Nov30 Nov29 Nov28 1997 1998 1999

Statement of Income Data : Net Sales 6,861,482 5,958,635 5,139,458 Cost of goods sold 3,962,719 3,433,081 3,180,845 Gross profit 2,898,763 2,525,554 1,958,613

Marketing, general and administ「ativ1 2,045,938 1,834,058 1,629,845 Other operating (income) (26,769) (25,310) (24,387) Excess capacity/restructuring charge 386,792 250,658 497,683 Global Success Sharing Plan 114,833 90,564 (343,873)

Operating income 377,969 375,584 199,345 Interest expense 212,358 178,035 182,978 Other (income) expense, net (18,670) 34,849 7,868

Income before taxes 184,281 162,700 8,499 Income tax expense 46,070 60,198 3,144

Net income 138,211 102,502 5,355

Statement of cash flow: Cash flows from operating activities 573,890 223,769 (173,772) Cash flows from investing activities (76,895) (82,707) 62,357 Cash flows from financing activities (530,302) (194,489) 224,219

Balance Sheet Data: Cash and cash equivalents 144,484 84,565 192,816 Working capital 701,535 637,801 770,130 Total assets 4,012,314 3,867,757 3,670,014 Total debt 2,631 ,696 2,415,330 2,664,609 Stockholders'deficit (1,370,262) (1,313,747) (1,288,562)

Data source: Levi Strauss & Co. annual report, 2001.

UVA-M-0711

Nov26 Nov25 2000 2001

4,645,126 4,258,67• 2,690,170 2,461,191 1,954,956 1,797,471

1,481,718 1,355,88! (32,380) (33,421 (33,144) (4,281

538,762 479,29 234,098 230,77: (39,016) 8,831

343,680 239,68° 120,288 88,68!

223,392 151,00·

305,926 141,901 154,223 (17,231

(527,062) (139,891

117,058 102,83 555,062 651,251

3,205,728 2,983,481 2,126,430 1,958,43:

(1,098,573) (935,94

Explanation of Stockholders' Deficit from annual report: "The stockholders'deficit resulted from a 1996 transaction in which the company' s stockholders created new long-term governance arrangements, including a voting trust and stockholders'agreement. As a result, sh ares of stock of a former parent company, Levi Strauss Associates Inc., including shares held under several employee benefit and compensation plans, were converted into the right to receive cash. Th e funding for the cash payments in this transaction was provided in part by cash on hand and in part from proceeds of approximately $3.3 billion of borrowings under bank credit facilities. The company's ability to satisfy its obligations and to reduce its total debt depends on the company's future operating performance and on economic, fmancial, competitive, and other factors, many of which are b eyond the company's control."1

1 Levi Strauss annual report, 200 I.

Levi's at Wal-Mart?

-21-

Exhibit4

LEVI'S AT WAL-MART?

Pictures of Lev i 's Product L in es

UVA-M-0711

Levi's Superlow: 2002

Levi's Silvertab: 2002

Levi's Red Tab Cords: 2000

LEVI

·S ENGINEERED

JEANS

/Sf

Pllr

AUX YOLONT(S

l1J COR~

iA -

Levi's Engineered Jeans: 2002

Source: Levi Strauss and Co. Used with permission.

Business Policy and Strategic Management

-22-

Exhibit 5

LEVI'S AT WAL-MART?

Wal-Mart Financials (dollars in billions)

2000

Net Sales Net sales increase Domestic comparative store sales increase Other income net Cost of sales Operating, selling and general and admin expenses Interest costs:

Debt Capital Leases

Provision for income taxes Mino「ity interest and equity in unconsolidate subsidiam Cumulative effect of accounting change, net of tax Net income Per share of common stock:

Basic net income Diluted net income Dividends

Current Assets Inventories at replacement cost Less LIFO reserve Inventories at LIFO cost Net property, plant and equipment and capital leases Total assets Current liabilities Long-term debt Long-term obligations under capital leases Shareholders'equity

Current ratio Inventories/working capital Return on assets• Return on shareholde「s'equity••

Number of U.S. Wal-Mart stores Number of U.S. Supercentres Number of U.S. SAM'S CLUBS Number of U.S. Neighborhood Markets International Units Number of Associates Number of Shareholders of reco「d (as of Ma「ch 31)

165,013 20.0%

8.0% 1,796

129,664 27,040

756 266

3,338 (170) (198)

5,377

1.21 1.20 0.20

24,356 20,171

378 19,793 35,969 70,349 25,803 13,672 3,002

25,834

0.9 -13.7 9.5%

22.9%

1,801 721 463

7 1,004

1,140,000 307,000

2001

191 ,329 16.0% 5.0%

1,966 150,255 31,550

1,095 279

3,692 (129)

6,295

1.41 1.40 0.24

26,555 21 ,644

202 21,442 40,934 78,130 28,949 12,501 3,154

31 ,343

0.9 -9

8.7% 22.0%

1,736 888 475

19 1,071

1,244,000 317,000

* Net income before mino「ity interest, equity in unconsolidated subsidiaries and cumulative effect of accounting change/average assets

** Net income/average shareholders•'equity *** Calculated giving effect to the amount by which a lawsuit settlement exceeded

UVA-M-0711

200~

217,799 14.0o/c 6.0o/c

2,013 171,562 36,173

1,052 274

3,897 (183:

6,671

1.49 1.49 0.28

28,246 22,749

135 22,614 45,750 83,451 27,282 15,687 3,045

35,102

1 23.~

8.5o/c 20.1 o/c

1,647 1,066

500 31

1,170 1,383,000

324,000

established reserves. If this settlement were not considered, the return would have been 9.8% for 2000 Return on Assets.

Levi's at Wal-Mart?

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Exhibit 6

LEVI'S AT WAL-MART?

Wal-Mart Number of Doors

UVA-M-0711

STORE COUNT Year Ending January 31 Wal-Mart Discount Stores

Opened Closed Conversions Balance Forward

1997 1998 1999 2000 2001 2002

59 37 37 29 41 33

2 lll

2l

92 75 88 96

104 121

tal95602169013647 T o-1 尥 尥 凶 顶 口 顶

Wal-Mart Supercenters Opened Total

239 344 441 564 721 888

1,066

105 97

123 157 167 178

Source: Wal-Mart annual report, 2002.

Business Policy and Strategic Management

-24-

Exhib it 7

LEVI'S AT WAL-M ART?

Wal-Mart Jeans Selection in 2002 (retail price in dollars)

Wal-Mart's private label/ National brands captive brands available

Men No Boundaries $15- 20 Wrangler $15- 20

Faded Glory 9- 11 Rustler 9- 15

George 15- 20 Dickies 15- 25

Women White Stag 15- 20 Riders 15- 20

Faded Glory 9- 11

George 15- 25

Juniors No Boundaries 10-20 Jordache 15- 20

Girls Faded Glory 8- 11 mary-kate and 15- 25 ashley

No Boundaries 15- 20 Riders 15- 20

Boys Faded Glory 8- 11 Wrangler $15- 20

No Boundaries 15- 20

George $15- 25

Source: Created by case w巾er.

UVA-M -07 11

Walt Disney Co.: The Entertainment King

帘 HARVARD I sus1NEssiscHOOL 9-701-035

REV, JANU ARY 5, 2009

MICHAEL G. RUKSTAD

DAVID COLLIS

The Walt Disney Company: The Entertainment King

I only hope that we never lose sight of one thing—that it was all started by a mouse. - Walt Disney

The Walt Disney Company's rebirth under Michael Eisner was w idely considered to be one of the great turnaround stories of the late twentieth century. When Eisner arrived in 1984, Disney was languishing and had narrowly avoided takeover and dismemberment. By the end of 2000, however, revenues had climbed from $1.65 billion to $25 billion, while net earnings had risen from $0.1 billion to $1.2 billion (see Exhibit 1). During those 15 years, Disney generated a 27% annual total return to shareholders.1

Analysts gave Eisner much of the credit for Disney's resurrection. Described as "more hands on than Mother Teresa," Eisner had a reputation for toughness.2 "If you aren' t tough," he said, "you just don't get quality. If you're soft and fuzzy, like our characters, you become the skinny kid on the beach, and people in this business don't mind kicking sand in your face."3

Disney's later performance, however, had been well below Eisner's 20% growth target. Return on equity which had averaged 20% through the first 10 years of the Eisner era began dropping after the ABC merger in 1996 and fell below 10% in 1999. Analysts attributed the decline to heavy investment in n ew enterprises (such as cruise ships and a new Anaheim theme park) and the third-place performance of the ABC television network. W血e profits in 2000 had rebounded from a 28% d ecline in 1999, this increase was largely due to the turnaround at ABC, which itself stemmed from the success of a single show: Who Wants To Be a Millionaire. Analysts were starting to ask: Had the Disney magic begun to fade?

The Walt Disney Years, 1923-1966

At 16, the Missouri farm boy, Walter Elias Disney, falsified the age on his p assport so he could serve in the Red Cross during World War I. He returned at war's end, age 17, determined to be an artist. When his Kansas City-based cartoon business failed after only one year,4 Walt moved to Hollywood in 1923 w here he founded Disney Brothers Studio5 with his older brother Roy (see Exhibit 2). Walt was the creative force, while Roy handled the money . Quickly concluding that he would never be a great animator, Walt focused on overseeing the story work.6

A series of shorts starring "Oswald, the Lucky Rabbit" became Disney Brothers'first m ajor hit in 1927. But within a year, Walt was outmaneuvered by his distributor, which hired away most of

Professor Michael G. Rukstad, Professor David Collis of the Yale School of Management, and Research Associate Tyrrell Levine prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class 如cussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright ©2001, 2005, 2009 President and Fellows of Harvard College. To order copies or request per皿ssion to reproduce materials, call 1- 800-545-7685, write Harvard Business School Publis血g, Boston, MA 02163, or go to http:/ / www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any mea沁-€lectronic, mechanical, photocopying, recording, or otherwise-without the permission of Harvard Business School.

Business Policy and Strategic Management

701-035 The Walt Disney Company: The Entertainment King

Disney's animators in a bid to shut Disney out of the Oswald franchise.7 Walt initially thought he could continue making Oswald shorts with new animators and a new distributor, but after reading the fine print of his contract, he was devastated to learn that his distributor owned the copyright.

Desperate to create a new character, Walt modified Oswald's ears and made some additional minor changes to the rabbit's appearance. The result was Mickey Mouse. When Mickey failed to elic廿 much interest, Walt tried to attract a distributor by adding synchronized sound—something that had never been attempted in a cartoon砂 His gamble paid off handsomely with the release of Steamboat Willie in 1928.10 Overnight, Mickey Mouse became an international sensation known variously as "Topolino" (Italy), "Raton Mickey" (Spain), and "Musse Pigg" (Sweden). However, the company was still strapped for cash, so it licensed Mickey Mouse for the cover of a pencil tablet—the first of many such licensing agreements. Over time, as short-term cash problems subsided, Disney began to worry about brand equity and thus licensed its name only to "the best companies."11

The Disney brothers ran their company as a flat, nonhierarchical organization, in which everyone, including Walt, used their first names and no one had titles. "You don't have to have a title," said Walt. "If you're important to the company, you'll know 让卢 Although a taskmaster driven to achieve creativity and quality, Walt emphasized teamwork, communication, and cooperation. He pushed himself and his staff so hard that he suffered a nervous breakdown in 1931.13 However, many workers were fiercely committed to the company.

Despite winning six Academy Awards and successfully introducing new characters such as Goofy and Donald Duck, Walt realized that cartoon shorts could not sustain the studio indefinitely . The real money, he felt, lay in full-length feature films.14 In 1937, Disney released Snow White and the Seven Dwarfs, the world's first full-length, full-color animated feature and the highest-grossing animated movie of all time.15 In a move that would later become a Disney trademark, a few Snow White products stocked the shelves of Sears and Woolworth's the day of the release.

With the success of Snow White, the company set a goal of releasing two feature films per year, plus a large number of shorts. Next, the company scaled up. The employee base grew sevenfold, a new studio was built in Burbank, and the company went public in 1940 to finance the strategy.

Disney survived the lean years of World War II and the failure of costly films like Fantasia (1940) by producing training and educational cartoons for the government, such as How Disease Travels.16 Disney made no new full-length features during the war, but re-released Snow White for the first time in 1944, accounting for a substantial portion of that year's income.17 Subsequently, reissuing cartoon classics to new generations of children became an important source of profits for Disney.

After the war, the company was again in difficult financial straits. It would take several years to make the next full-length animated film18 (Cinderella, 1950), so Walt decided to generate some quick income by making movies such as Song of the South (1946) that mixed live action with animation.19 Further diversification included the creation of the Walt Disney Music Company to control Disney' s music copyrights and recruit top artists. In 1950, Disney's first TV special, One Hour in Wonderland, reached 20 million viewers at a time when there were only 10.5 million TV sets in the U.S.20

With the release of Treasure Island in 1950, Disney entered live-action movie production and, by 1965, was averaging three films per year. Most were live-action titles, such as the hits Old Yeller (1957), Swiss Family Robinson (1960), and Mary P叩pins (1964), but a few animated films like 101 Dalmatians (1961) were also made. To bolster the fihn business, Disney created Buena Vista Distribution in 1953, ending a 16-year-old distribution agreement with RKO. By eliminating distribution fees, Disney could save one-third of a film's gross revenues. And to further improve the bottom line, Disney avoided paying exorbitant salaries by developing the studio's own pool of talent.

2

Walt Disney Co.: The Entertainment King

The Walt Disney Company: The Entertainment King 701-035

Observed one writer: "Disney himself became the box office attraction—as a producer of a predictable family style and the father of a family of lovable animals."21

Disney expanded its television presence in 1954 with the ABC-produced television program 肋sneyland (followed the next year by the very popular Mickey Mouse Club, a show featuring pre-teen "Mouseketeers" as hosts). Walt hoped Disneyland would both generate financing and stimulate public interest in the huge outdoor entertainment park of the same name, which he had started designing two years earlier at WED Enterprises (WED being Walt's initials). This was kept separate from Disney Productions to provide an environment where Walt and his "Imagineers" could design and build the park free of pressure from film unions and stockholders.

The park was a huge risk for the company, as Disney had taken out millions of dollars in bank loans to build it. But the bet paid off. The enormous success of Disneyland, which opened in 1955, was a product of both technically advanced attractions and Walt's commitment to excellence in all facets of park operation. His goal had been to build a park for the entire family, since he believed that traditional parks were "neither amusing nor clean, and offered nothing for Daddy心 Corporate sponsorship was exploited to minimize the cost of upgrading attractions and adding exhibits.23 To conserve capital, Disney also licensed the food and merchandising concessions. Once the park had generated sufficient revenue, the company bought back v江tually all operations within the park.24 Disneyland's success finally put the company on solid 加ancial footing.25

With Disneyland still in its infancy, Walt dreamed of starting another theme park. In 1965, he secretly purchased over 27,000 acres of land near Orlando, Florida on which he planned to build Walt Disney World and EPCOT—an "experimental prototype community of tomorrow." However, Walt was never able to see his dream come to fruition; he died just before Christmas 1966. "He touched a common chord in all humanity," said former President Dwight Eise咄ower. "We shall not soon see his like again."26

Walt Disney's philosophy was to create universal timeless family entertainment. A strong believer in the importance of family life, the company was always oriented to fostering an experience that fam认ies could enjoy together. As Walt Disney said, "You 're dead if you aim only for kids. Adults are only kids grown up, anyway."

The huge number of "firsts" that the company could claim were a tribute to the success of this philosophy, but Disney recognized that they were not without risk. "We cannot hit a home run with the bases loaded every time we go to the plate. We also know the only way we can ever get to first base is by constantly going to bat and continuing to swing."

Disney attempted to retain control over the complete entertainment experience. Cartoon characters, unlike actors, could be perfectly controlled to avoid any negative imagery. Disneyland had been constructed so that once inside, visitors could never see anything but Disneyland. According to Walt, "The one thing I learned from Disneyland [is] to control the environment. Without that we get blamed for 如ngs that someone else does. I feel a responsibility to the public that we must control this so-called world and take blame for what goes on."27

The Post-Walt Disney Years, 1967-1984

The realization of Walt Disney World and EPCOT consumed Roy 0. Disney, who succeeded his brother as chairman and lived just long enough to witness the opening of Walt Disney World in 1971. The theme park almost instantly became the top-grossing park in the world, pulling in $139 million from nearly 11 million visitors in its first year. Its two on-site resort hotels were the first hotels operated by Disney. To generate traffic in the park, Disney opened an in-house travel company to

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work with travel agencies, airlines, and tours. Disney also started bringing live shows, such as "Disney on Parade" and "Disney on Ice," to major cities all over the world.

The next major expansion was Tokyo Disneyland, announced in 1976. Although wholly owned by its Japanese partner, it was designed by WED Enterprises to look just like the U.S. parks. Disney received 10% of the gate receipts, 5% of other sales, and ongoing consulting fees.

Film output during the years of theme park construction declined substantially. Creativity in the film division seemed stifled. Rather than push new ideas, managers were often heard asking, "What would Walt have done?" The result was more sequels rather than new productions. To help stem the decline in its filin division in the late 1970s and early 1980s, Disney introduced a new label, Touchstone, to target the teen/adult market, where film-going remained strong.

From 1980 to 1983, the company's financial performance deteriorated. Disney was incurring heavy costs at the time in order to finish EPCOT, which opened in 1982. It was also investing in the development of a new cable venture, The Disney Channel, launched in 1983. Filin division performance remained erratic. As corporate earnings stagnated, Roy E. Disney (son of Roy 0. Disney) resigned from the board of directors in March 1984. In the following months, corporate raiders Saul Steinberg and Irwin Jacobs each made tender offers for Disney with the intention of selling off the separate assets. However, oil tycoon Sid Bass invested $365 million, rescuing the company, reinstating Roy E. Disney to the board, and ending all hostile takeover attempts.28

Eisner's Turnaround, 1984-1993

Eisner takes the helm Backed by the Bass group, Eisner, 42, was named Disney's chairman and chief executive officer, and Frank Wells was named president and chief operating officer in October 1984.29 Eisner, a former president and chief operating officer of Paramount Pictures, had been associated with such successful films and television shows as Raiders of the Lost Ark and Happy Days. Wells, a former entertainment lawyer and vice chairman of Warner Brothers, was known for his business acumen and operating management skills. Roy E. Disney was named vice chairman. Eisner subsequently recruited Paramount executives Jeffrey Katzenberg and Rich Frank to be chairman and president, respectively, of Disney's motion pictures and television division.

Eisner committed himself to maximizing shareholder wealth through an annual revenue growth target and return on stockholder equity exceeding 20%. His plan was to build the Disney brand while preserving the corporate values of quality, creativity, entrepreneurship, and teamwork. Concerns that the new managers would neither understand nor maintain Disney's culture faded rapidly. The history and culture of the company and the legacy of Walt Disney were inculcated in a three-day training program at Disney's corporate university. As part of the training, all new employees, including executives, were required to spend a day dressed as characters at the theme parks as a way to develop pride in the Disney tradition.

Eisner viewed "managing creativity" as Disney's most distinctive corporate skill. He deliberately fostered tension between creative and financial forces as each business aggressively developed its market position. On the one hand, he encouraged expansive and innovative ideas and was protective of creative efforts in the concept-generation phase of a project. On the other hand, businesses were expected to deliver against well-defined strategic and financial objectives. All businesses (see Exhibit 3), including individual 出ms and TV shows, were expected to have the potential for long-run profitability. Nevertheless, spending was readily approved if necessary to achieve creativity.

Revitalizing TV and movies One of the new management's top priorities was to rebuild Disney's TV and movie business. Disney had stopped producing shows for network television out of

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concern that it would reduce demand for the recently launched Disney Channel. But Eisner and Wells believed that a network show would help create demand by highlighting Disney's renewed commitment to quality programming. In early 1986, The Disney Sunday Movie premiered on ABC. According to Eisner, the show "helped to demonstrate that Disney could be inventive and contemporary. . . . It put us back on the map空 During this time, Disney produced the NBC hit sitcom Golden Girls and the syndicated non-network shows Siske/ & Ebert at the Movies and Live with R~ 炉s & Kathie Lee. Eisner also created a syndication operation to sell to independent TV stations some of the TV programming that Disney had accumulated over 30 years.

Disney's movie division was nearly as moribund when Eisner and Wells took over. Disney's share of box office had fallen to 4% in 1984, lowest among the major studios, and Eisner contended that not one of the live-action movies that Disney had in development seemed worth making. However, in Eisner's first week at Disney, an agent called him with the script to what would become Down and Out in Beverly Hills, Touchstone's first R-rated movie. While Disney had risked alienating its core audience with the film, no backlash materialized.

Beginning with that movie, 27 of Disney's next 33 movies were profitable, and six earned more than $50 million each, including Three Men and a Baby and Good Morning Vietnam. For the industry as a whole, an estimated 60% of all movies lost money. By 1988, Disney Studios'film division held a 19% share of the total U.S. box office, making it the market leader. "Nearly overnight," said Eisner, "Disney went from nerdy outcast to leader of the popular crowd."31 During this run, Disney began releasing 15 to 18 new films per year, up from two new releases in 1984. Releases under the Touchstone label were primarily comedies, with sex and violence kept to a minimum. Live-action releases under the Walt Disney label were designed for a contemporary audience but had to be wholesome and well plotted.

Katzenberg, who was known for h is ability to identify good scripts, for his grueling work ethic (scheduling staff meetings for 10 p.m.), and for his dogged pursuit of actors and directors for Disney projects, convinced some of Hollywood's best talent to sign multideal contracts with Disney. Under Katzenberg, Disney pursued strong scripts from less established writers and well-known actors in career slumps and TV actors rather than the highest-paid movie stars. The emphasis was on producing moderately budgeted films rather than big-budget, special effects-laden blockbusters. Management held movie budgets to certain target ranges that acted as a "financial box" within which the creative talent had to operate. Films were closely managed to ensure that they would come in on time and near their target budgets, which were set below the industry average.32

Disney's animation division was slower to tum around, in part because animated movies took so long to produce. Disney decided to expand its an订nation staff and to accelerate production by releasing a new animated feature every 12 to 18 months, instead of every 4 to 5 years. Disney also invested $30 m曲on in a computer animated production system (CAPS) that digitized the animation process, dramatically reducing the need for animators to draw each frame by hand. In 1988, Disney spent $45 million on Who Framed Roger Rabbit, a technically dazzling movie that combined animation w ith live action. The movie was uncharacteristically expensive for Disney, but the gamble paid off with the top earnings at the box office in 1988 ($220 million). Additional profits came from the merchandise, as the movie was Disney's first major effort at cross-promotion. By the time of the premiere, Disney had licensing agreements for over 500 Roger Rabbit products, ranging from jewelry to dolls to computer games. McDonald's and Coca-Cola also did promotional tie-ins.

Maximizing theme park profitability Unlike Disney's television and movie business, Disney's theme parks had remained popular and profitable after the deaths of Walt and Roy Disney. However, the new management team updated and expanded attractions at the parks. Disney spent tens of millions of dollars on new attractions such as "Captain EO" (1986) starring Michael Jackson.

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Investments in the parks were offset by attendance-building strategies designed to generate rapid revenue and profit growth (see Exhibit 4). These included for the first time national television ads, as well as special events, retail tie-ins, and media broadcast events. Disney also lifted restrictions on the numbers of visitors permitted into its parks, opened Disneyland on Mondays when it had previously been closed for maintenance, and raised ticket prices (see Exhibits 5 and 6). Despite the ticket hikes, market research showed that guests felt they received value for their money.

The Disney Development Company was established to develop Disney's unused acreage, primarily in Orlando, where only 15% of the 43 square miles had been exploited. It proceeded to aggressively expand its activities, which included a several-thousand-room hotel expansion at Disney World (and the company's first moderately priced hotel) and a $375 million convention center.

Coordination among businesses As the business units expanded after 1984, overlaps among them began to emerge. Promotional campaigns with corporate sponsors in one business needed to be coordinated with similar initiatives by other Disney businesses. It was also unclear how, for example, to allocate the minute of free advertising granted to Disney during The Disney Sunday Movie.

Like many diversified companies, Disney employed negotiated internal transfer prices for any activity performed by one division for another. Transfer prices were charged, for example, on the use of any Disney film library material by the various divisions. W血e Eisner and Wells encouraged division executives to resolve conflicts among themselves, they made it clear that they were available to arbitrate difficult issues. Senior management's position was that disputes should be settled quickly and decisively so that business unit management could get on with their jobs.

Nevertheless, in 1987, a corporate marketing function was installed to stimulate and coordinate companywide marketing activities. A marketing calendar was introduced listing the next six months of planned promotional activities by every U.S. division. A monthly meeting of 20 divisional marketing and promotion executives was initiated to discuss interdivisional issues. A library committee was set up that met quarterly to allocate the Disney film library among the theatrical, video, Disney Channel, and TV syndication groups. An in-house media buying group was also established to coordinate media buying for the entire company.

Management also jointly coordinated important events, such as Snow Wh亚s 50th anniversary in 1987 and Mickey's 60th birthday the following year. A meeting of all divisions generated novel ideas, coordinated schedules, and built commitment and excitement for the year's theme. Plans were then coordinated by the five-person corporate events department. "I think our biggest achievement to date," said Eisner in 1987, "has been bringing back to life an inherent Disney synergy that enables each part of our business to draw from, build upon, and bolster the others."33

Expanding into new businesses, regions, and audiences In the consumer products division, the Disney Stores (launched in 1987) pioneered the "retail-as-entertairunent" concept, generating sales per square foot at twice the average rate for retail. The stores were designed to evoke a sense of having stepped onto a Disney soundstage. W血e children were the target consumers, the stores' merchandise mix of toys and apparel also included high-end collectors'items for Disney's grown-up fans. The consumer products division also entered book, magazine, and record publishing. Hollywood Records, a pop music label, was founded in 1989 for less than $20 million, the cost of making a single Hollywood movie. In 1990, Disney established Disney Press, which published children's books, and in 1991, the company launched Hyperion Books, an adult publishing label that printed, among others, Ross Perot's biography. Disney also established new channels of distribution through direct-mail and catalog marketing.

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In its theme parks division, Disney's major project was Euro Disney, which opened in 1992 on 4,800 acres outside Paris. W血e Disney designed and developed the entire resort, it did not have majority ownership of the business. About 51 % of Euro Disney S.C.A. shares had been sold on several European exchanges, leaving Disney a 49% ownership stake. Infrastructure, attractive financing, and other incentives from the French government, as well as a heavily leveraged financial structure, kept Disney's initial investment cost to $200 million on the $4.4 billion park. In return for operating Euro Disney, the company received 10% from ticket sales and 5% from merchandise sales, regardless of whether or not the park turned a profit.

The company was adamant about maintaining its adherence to the Disney formula for family recreation, pointing to Tokyo Disneyland as evidence of the formula's universal appeal. Despite important cultural differences, Tokyo Disneyland had defied its critics and performed well, welcoming its 100 millionth guest in 1992. The French were more suspicious, warning of a potential "Cultural Chemobyl,"34 so Eisner enlisted a former professor of French literature to be Euro Disney president and oversee the park's development according to both Disney's specifications and French sensitivities. The project required compromise by the staff as well as the guests. French cast members were required to shave, for example,35 while Disney gave in on the issue of alcohol in the park, making wine available in its restaurants.

The company had set its attendance target at 11 million visitors in the first year. During the summer, attendance was above the projected rate, but the park suffered a downturn as colder weather set in. Although Disney officials publicly emphasized their satisfaction with Euro Disney, the project required considerable fine-tuning. The company slashed hotel and admission prices, laid off workers, and deferred its management fees for two years.

At its other parks, Disney added attractions and stepped up expansion of its hotels and resorts to encourage longer stays and attract major conferences such that hotel occupancy rates at the resorts in Anaheim, Orlando, Tokyo, and Paris averaged well over 90% year-round.36 In addition to the creation of the nightlife complex Pleasure Island37 and a new water-based attraction, Typhoon Lagoon, Disney World grew with the construction of Splash Mountain and the expansion of the Disney-MGM Studios Theme Park. In California, Disneyland opened Toontown, a new section based on the Roger Rabbit movie. Between 1988 and 1994, the company spent over $1 billion on theme park expansion.

In movies, Disney began to release a series of highly profitable and critically successful animated features (see Exhibit 7). The Little Mermaid (1989) was followed by Beauty and the Beast (1991)—the first animated film ever nominated for a Best Picture Oscar—and by Aladdin (1992). In live action, having once felt the need to apologize publicly for the partial nudity in Splash (1984), Disney settled comfortably into the industry mainstream, releasing films like Pretty Woman through its Touchstone studio. Hollywood Pictures was then established in 1990 as the third studio under the Disney umbrella, and in 1993, the company acquired Miramax, an independent production studio making low-budget art films such as Pulp Fiction (1994). Disney increased its volume of movie output from 18 films a year in 1988—the most in Disney's history—to an ambitious 68 new films in 1994 (see Exhibit 8). However, between 1989 and 1994, fewer than half of the company's films grossed more than $20 million, and many earned less than half that amount.

As the home video industry grew, Buena Vista Home Video (BVHV) pioneered the "sell through" approach, marketing videos at low prices (under $30) for purchase by the consumer (instead of charging $75 and selling primarily to video rental stores). At 30 m诅ion copies, Aladdin in 1993 became the best-selling video of all血e (followed by Beauty and the Beast). BVHV achieved the same market leadership role overseas, with marketing and distribution in all major foreign markets.

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In 1992, Disney spent $50 million to acquire a National Hockey League expansion team based a few miles from Disneyland in Anaheim. Inspired by the box office popularity of a Disney movie, Eisner named the team The Mighty Ducks, the name of the team in the movie. Shortly thereafter came the sequel, D2: The C加mpions, featuring a soundtrack by Queen, produced by Disney's Hollywood Records label. The Mighty Ducks had a natural partner in Disney-owned KCAL-TV,38 following a trend among media companies toward purchasing sports teams as a source of programming. Nor did the Ducks'prospects end with traditional sports marketing, given the potential for other cross-marketing opportunities. In 1993, 80% of the money spent on NHL merchandise went for "Duckwear."39

Late in 1993, Disney unveiled its first Broadway-bound theater production一a stage version of Beauty and the Beast. The $10 million show was a hit on Broadway. Although notoriously risky, Disney quickly recouped its estimated $400,000-per-week operating costs. Eisner and Katzenberg were directly involved in the production's development—offering creative guidance, calling for rewrites, and restaging scenes.40 The following year, Disney made a $29 million deal to restore the New Amsterdam Theater on West 42nd Street in New York, giving a substantial boost to the city's beleaguered efforts to revive the district and giving Disney a home on Broadway. Eisner regarded theater as a long-term stand-alone business: "Our plans for the New Amsterdam Theater mark our expanding li commitment to ve enterta江订nent."41

Turmoil and Transition, 1994-1995

At the beginning of 1994, Disney's projects seemed to be progressing satisfactorily. Disney's newest animated feature, The Lion King, would break box office records by year's end. Film revenues and related merchandise sales for The Lion King would eventually total more than $2 billion, with net income reaching $700 million. At the same time, Euro Disney (renamed Disneyland Paris in 1994) was finally getting on track after a Saudi prince and a number of European banks worked out a deal with the company by midyear to refinance the park, which had lost over $1 billion since 1992. Yet, a series of upheavals would rock the foundations of the company during the course of 1994.

On April 4, 1994, Disney President Wells was killed in a helicopter crash in Nevada. The loss of Wells created a void within the company that could not immediately be filled. As one observer put it, "[Wells] was a practical Sancho Panza to Eisner's mercurial Quixote, a tough-as-nails negotiator and lawyer-cum-numbers guy who freed Eisner to do what he does best- think creatively about everything from movies to international theme parks."42 Eisner assumed the combined title of president and chairman while redistributing Wells's former responsibilities selectively among members of Disney's top management. Just weeks after Wells's death, Eisner, 52, underwent quadruple bypass heart surgery. Although Eisner barely let up following the surgery (running the company by phone wit血 days after the procedure), the jockeying to replace Wells gained momentum. At the center of this was Katzenberg.

Katzenberg openly aspired to build on his success as head of the film division by assuming Wells's position as Disney president. Within Disney, Katzenberg reportedly was seen as a highly effective studio operative but not a corporate strategist, where he was at odds with Eisner about Disney's direction on such issues as music business expansion and theme park development.43 After his bid for a corporate role was rebuffed by Eisner, Katzenberg left the company—the second step in dismantling the triumvirate widely considered to be responsible for Disney's resurgence after 1984. Katzenberg soon joined forces with d江ector/producer Steven Spielberg and David Geffen of Geffen Records to form the entertainment company Dreamworks. Shortly after Katzenberg's departure, a series of key executives either left the company or changed roles.

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Acquisition of ABC

In July 1995, Disney announced it was buying CapCities/ ABC to own a programming distribution channel.44 Without the input of investment bankers, Disney bought ABC for $19 billion in the second- largest acquisition in U.S. history. The acquisition made Disney the largest entertainment company in the U.S. and provided it with worldwide distribution outlets for its creative content. ABC included the ABC Television Network (distributing to 224 affiliated stations) and 10 television stations, the ABC Radio Networks (distributing to 3,400 radio outlets) and 21 radio stations, cable networks such as the sports channels ESPN and ESPN2, several newspapers, and over 100 periodicals.45 The deal also transformed Disney from a company with a 20% debt ratio to one with a 34% debt ratio ($12.5 billion) after the takeover.

The merger was likened to a marriage between King Kong and Godzilla. Barry Diller observed that while Disney and CapCities/ ABC were ideal partners, "the only negative [was] size. It's a big enterprise, and big enterprises are troublesome." Michael Ovitz, then chairman of talent firm Creative Artists Agency, said the merger gave Disney global access. But despite "synergy euphoria" in Hollywood and on Wall Street, some observers were skeptical about the merger due to the maturity of the network television business, the purchase price (22 funes its esfunated 1995 earnings), and the difficulties of creating synergy through vertical integration. Some suggested that synergy would be better "accomplished through nonexclusive strategic alliances between the companies."46

A year after the merger, there were press reports of a culture clash between executives at ABC and Disney. "Insiders say Disney's 皿cro-management has left many at ABC unh~ppy and anxious," wrote one Wall Street Journal reporter. "The congenial atmosphere that once dommated the network's top ranks is gone; in its place is the high-pressure culture of Disney, which often pits executives against each other."47 In addition, some ABC executives were uncomfortable with how ABC was being used to cross-promote Disney brands. ABC, for example, had aired a special on the making of the animated film, The Hunchback of Notre Dame, after the film opened to disappointing ticket sales.48 According to The Wall Street Journal, the initiative came from ABC executives.49 "The ABC people are a part of our team and they are interested in the well-being of the entire organization," said a Disney spokesman. "I think we'd have been faulted for not using that kind of synergy."50

ABC had also struck several deals with Disney rivals before the merger to develop programming. ABC and Dreamworks, for example, had agreed to finance jointly the cost of developing new TV shows. "We needed access to production talent," said one ABC executive of the deal.51 Disney felt that such arrangements were no longer economical after the merger because Disney had its own production studio, and therefore terminated such agreements.52

Disney Slumps to the End of the Century

After acquiring ABC, Disney's financial performance began to deteriorate, particularly in 1998 and 1999. "It's impossible to predict the day that growth will be back," said Eisner. "I think it's corning, but it's not corning tomorrow. We have not given up our goal of 20% annual growth."53 Disney's board of directors voted to cut Eisner's bonus from $9.9 million in 1997 to $5 million in 1998 and to $0 the following year. But growth returned in 2000---sooner than most analysts expected—on the strength of the company's broadcast and cable operations and its theme parks division.

ABC had been the top-rated network at the fune of the merger but had fallen to third place. However, ABC returned to the top in 2000, largely due to the success of the prime-time game show, Who Wants To Be a Millionaire, which was broadcast three funes a week and which raised the ratings of the shows airing immediately afterwards (see Exhibit 9). "Television networks have fixed costs," said one analyst. "So when the revenues begin to materialize, all that flows to the bottom line and

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that's great news for profits五 Furthermore, the cable operations were estimated, by 1999, to be worth more than the $19 billion Disney paid for the entire CapCities/ ABC acquisition.55 ESPN had become the most profitable TV network in the world, more profitable in absolute terms than the major broadcast networks. However, profitab血y was hurt by the rising cost of programming, especially sports. In 1998, ABC and ESPN paid $9 billion for the right to air NFL games through 2005.

In live-action films, Disney's approach to filmmaking had changed dramatically. Joe Roth, who replaced Katzenberg as head of Disney's live-action movies in 1994, began putting out big-budget, star-driven "event" movies such as Con Air (1997) and Armageddon (1998). "This is not a commodity business," said Roth. "The [movies] people will want to watch need to stand out空 He had also argued that the change was necessary because of the growing impact of international audiences, who were attracted to movies with big-name stars and with expensive special effects that transcended language barriers. In 1999, however, several costly box-office bombs led Roth to scale back budgets. When Roth had taken over in 1994, the average budget for a live-action Disney movie was $22 million (versus an industry average of $30 million).57 That figure had risen to $55 million by 1999 (and an industry average of $52 m且lion).58 The cost of producing artlmated films had also risen rapidly in recent years.59 Tarzan (1999) cost an estimated $170 m诅ion. These figures did not include marketing and distribution costs, which typically totaled over $50 million for a Disney animated film.60

Disney's home video division had been a major driver of growth during the 1990s, largely as a result of the decision to release its animated classics on video. By the end of the decade, however, revenues were dropping. Disney decided to make all but 10 of its animated films permanently available. The remaining 10—Disney's most popular artlmated titles—would follow the old rotation schedule. Only one would be on the shelves each year, and its release would be promoted by a companywide marketing campaign. Disney also expected the growing market for digital video discs (DVDs) to boost its home video division as consumers switched from VCRs to DVD players and repurchased the classic Disney titles on DVD.

Through 2000, Disney maintained its position as market leader in theme parks. The strategy in the theme park division was to tum all of its parks into destination resorts—places where tourists would spend more than one day. As of 2000, only Walt Disney World qualified. The average tourist spent three days at Walt Disney World but only one d ay at Disneyland, Disneyland Paris, and Tokyo Disneyland. The company believed that the key to turning a park into a destination resort was to build more than one park at a site. Walt Disney World, for example, included EPCOT, Disney-MGM Studios, and Disney's A响al Kingdom (each with separate admission gates). By 2002, Disney planned to open second parks at Disneyland (California Adventure in 2001), Tokyo Disneyland (DisneySea in 2001), and Disneyland Paris (Disney Studios in 2002). In November 1999, Disney announced that it was also forming a partnership with Hong Kong's goverrunent to build a new $3.6 billion theme park on an island six m让es west of central Hong Kong, scheduled to open in 2005.

Disney also made a major push onto the Internet, with uneven results. In 1996, Disney began selling its products online, but in 1997 it failed in its launch of a subscription service called the Daily Blast. In 1999, Disney merged its Internet assets with the search engine Infoseek.61 This entity operated Disney's Web sites (including Disney.com, ESPN.com, and ABCNews.com) and set up a portal called the GO Network (www.go.com), which was a gateway to the Web similar to Yahoo.62 W比le Disney had planned to compete with the major portals, traffic at Go.com lagged behind that of its rivals. In response, Disney shut down the Go.com portal in 2001, laying off 20% of its 2,000 Internet employees. Disney said it would focus on e-commerce and on providing news and entertainment content through its individual Web sites. "You can view this as a strategy change," said one Disney executive. " [Go.com] did not have a leadership position. On the other hand, we have been extremely successful with our commerce and content sites."63

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During the slump, Eisner concluded that Disney needed to pare back operations that had become bloated during the company's long run of success.64 In 1999, Disney began a cost-cutting plan that was projected to save $500 million a year starting in 2001. Eisner refocused attention on the leaner marketing of products, reduced film budgets and output, and tightened cost control in its TV production unit矩 He also conducted a major review of capital spending, with an eye toward eliminating businesses that could not show a healthy return. Club Disney, a chain of shopping mall play centers, was closed as a result, as were the ESPN Stores. Disney also began selling "non- strategic" assets such as Fairchild Publications, a magazine subsidiary acquired in the ABC deal.

Eisner's Strategic Challenges

Managing Synergies

Eisner believed that Disney's ability to leverage its brand and create value depended on corporate synergy. According to Eisner, the key to Disney's synergy was Disney Dimensions, a program held every few months for 25 senior executives from every business. As of 2000, over 300 people had been through the program, which Eisner described as a "synergy boot camp." Participants traveled to corporate headquarters in Burbank, Walt Disney World, and ABC in New York to learn about the company. They cleaned bathrooms, cut hedges, and played characters in the park. From 7 a.m. to 11 p.m. for eight days, participants were not allowed to handle their regular duties. Eisner explained:

Everyone starts off dreading it. But by the th江d day, they love it. By the end of the eighth day, they have totally bonded . . .. When they go back to their jobs, what happens is synergy, naturally. When you want the stores to promote Tarzan, instead of the head of animation for Tarzan calling me, and me calling the head of the Disney Stores, what happens is the head of Tarzan calls the head of the stores directly.

Disney also had a synergy group, reporting directly to Eisner, with representatives in each business unit. The group's purpose was to "maximize synergy throughout the company . . . serve as a liaison to all areas, [and] keep all businesses informed of sigriificant and potentially synergistic company projects and marketing strategies."66 Divisions filed monthly operating reports in which they were expected to discuss new cross-divisional projects. Eisner was said to award larger bonuses to those who had been most committed to synergy. "This award system," said Dennis Hightower, a former Disney executive, "forced us to look left and right and to build bridges between divisions.''67 When business units clashed over production and marketing plans, Eisner stepped in to referee.

Synergy boosted revenues through cross-promotion. A prime example was Disney's leverage of its animated movie investments. Typically, in the year before a movie's release, creators from Disney animation made presentations to the heads of the consumer products, home video, and theme parks 皿ts. Participants then brainstormed on product options and reconvened monthly to update one another. Once divisions had their strategies in place, Disney approached its licensing partners, who paid a royalty for the privilege of marketing and selling the Disney brand. With the help of this cross- merchandising, Disney intended each new animated film to function as its own mini-industry. However, Disney claimed its primary focus remained entertainment, not licensing. "The film does come first," said a Disney spokesman. "Without the original product, the merchandise wouldn't come to anything."68 The theme parks also worked to increase merchandise sales. Several years after the parks in Japan and Europe had opened, consumer product sales had more than tripled in Japan and risen 10-fold in Europe.69

Synergy affected the scope of Disney's business geographically, horizontally, and vertically. Geographically, the company sought to generate greater international sales, especially in Europe and Japan. In 1999, Disney generated about 21 % of its revenue from abroad, while other global brands

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such as Coca-Cola and McDonald's had figures of 63% and 61 %, respectively.7°"If there's one single realm that can put our company back on the growth track, it is the overseas market," said Eisner.71 "If we can drive per capita spending levels on Disney merchan中se in Britain, France, Germany, Italy and Japan to 80% of the U.S. level, it would generate $2 billion a year in incremental annual revenue."72 In 1999, consumers in Europe spent 40% as much, per capita, on Disney products as those in the United States. In Japan, the figure was 80%.73 Disney planned to better integrate its overseas operations. In the past, each division had opened its own foreign office. Disney decided to consolidate its foreign offices under regional executives, including a CFO and brand manager. Part of the idea was to save money by renting shared office space and coordinating advertising, but the real focus was on creating more synergy through cross-promotion.

Horizontally, Disney sought to enter new types of entertainment. For example, it began developing new regional venues within the United States to make the Disney experience more accessible, including ESPN Zones -- sports restaurants with interactive sports attractions -- and DisneyQuests multistory facilities with a range of virtual and interactive attractions (such as elaborate video games) for both kids and adults. Similarly Disney expanded into cruise ships and educational retreats. The company packaged its cruises with visits to Disney World near its home port. Eisner said the company was unlikely to sell the ships even if they produced a low return on capital because they helped bring fam出es to Disney World. The Disney Institute, opened in 1996 at Walt Disney World, focused on fitness and "adventures in learning" rather than purely on entertairunent.74 It catered to adults and families with older children by offering courses such as 却imation, landscape design, and culinary arts.

Vertically, the company's major initiatives involved the Internet and TV. Disney saw the Internet as a possible distribution channel for its film library and its sports and news programming, among other content. "Our goal is to lead in this space because we know that soon it will be where entertainment in the home consolidates," said Eisner.75 In TV, ABC developed more of its own content—like a movie studio. Other studios began to wonder if ABC would still buy shows from them.76 Eisner contended that if he heard about an interesting show while walking Disney's hallways, he would urge ABC to run it. If "it ends up being ER, then that is strategic planning," he said.77

Synergy also affected Disney's costs. In August 1999, Eisner merged Touchstone Television into a division of ABC to save an estimated $50 million a year78 and increase cooperation. However, the restructuring involved moving a New York business to Los Angeles and, by some accounts, created a culture clash.79 Synergy drove lower costs in theme parks as well. "It would make no more sense to build a completely different theme park in each new locale than it would to completely change the Lion King stage play every time it opened in a new city," a company report said.80 With this rationale, the new Disney Studios Park next to Disneyland Paris included popular attractions from Disney- MGM Studios.

But synergy had its limits. For example, the effectiveness of movie tie-ins was dropping: "In the past decade, moviemakers have been able to wring ever-higher royalty rates from licensees of toys, clothing, and other goods. But the payoff has been shrinking. Mattel Inc. felt the pinch when several recent Disney pies .. . passed $100 million at the box office but did little for toy sales."81

In 1999, Disney decided to reduce the number of its licensed products by half, having reached a peak of over 4,000 in 1994. "This became far too many relationships to productively manage," said Eisner. "By having broader relationships with fewer licensees, we will be able to more effectively build new merchandise campaigns to strengthen such established characters as Winnie the Pooh."82 As part of this strategy, the company decided to place less emphasis on merchandise tied to Disney's latest film releases and more emphasis on products featuring its core characters. For example, Disney launched a national TV ad campaign in fall 2000 promoting a new line of Mickey Mouse clothing.

12

Walt Disney Co.: The Entertainment King

The Walt Disney Company: The Entertainment King 701-035

Managing the Brand

As Disney entered new businesses, it increasingly faced the prospect of damaging its brand. Perhaps the most publicized example was the controversy over the ABC show Ellen. Sparked by the 1997 disclosure that the title character of the show was a lesbian, the Southern Baptists, the country's largest Protestant church, organized a boycott of all Disney products because Disney had departed from "traditional family values." In addition, Catholic groups objected to the Miramax movie Priest (1994), which featured a gay cleric; animal rights activists protested Disney's treatment of animals at the Animal Kingdom theme park; and Arab-Americans decried what they felt were stereotypical portrayals in the movie Aladdin腔 Moreover, Disney's Hong Kong theme park had been delayed for two years because of Kundun (1997), a Disney movie about the Dalai Lama that the Chinese government found objectionable.

At the same time, some felt Disney was hamstrung by its wholesome image. The Disney Channel ranked a distant third in ratings for kids aged 2 to 11, behind Nickelodeon and Time-Warner's Cartoon Network. Both networks exploited Disney's emphasis on wholesome programming based on myths, history, and fairy tales by putting on more contemporary shows. "The Nickelodeon opportunity was to get inside the lives of today's kids," said Herb Scannell, Nickelodeon's president. "We've been contemporary. [Disney has] been traditional."84 The same was perhaps true in the consumer products 山vision. "Many of Disney's products were designed for a'kinder, simpler time'-the days before video games," said one analyst.85

Managing Creativity

Disney had hired Michael Ovitz but he left with a $100 million-plus severance package after 14 ineffective months on the job. Noone was hired to replace him as president in 1996. In his autobiography, Work in Progress, Eisner talked about the importance of finding a president with a strong background in finance, dispute mediation, and labor relations who could free Eisner to focus on broad company issues and the creative side of Disney's businesses. He believed ABC Group Chairman Robert Iger was such a person and promoted him to president and COO in January 2000

One of Eisner's traditional techniques for managing creativity was the "gong show," a weekly meeting in which Disney employees in each division would brainstorm for new ideas. However, the gong show had slowly fallen into disuse. Eisner explained:

The Little Mermaid came out of a gong show, and so did Pocahontas. Lots of ideas came out of those meetings, and people had a great 出ne. Gong shows still go on in the animation business, but they've sort of faded off in other parts of the company. That's part of ge出ngbig and successful. Suddenly, very, very important people don't want to put themselves into the position of getting "gonged." Not everybody likes having his or her idea dismissed.86

Disney had a strategic planning unit that was a financial check on Disney's various divisions. Put into place by Wells and former CFO Gary Wilson, the system encouraged conflict by pitting division managers against the strategic planning department. "You always have to fight your colleagues to show your worth," said one Disney executive.87 Eisner's "feeling is that [if] you put a lot of smart people in a room and listen to them duke it out ... the best idea will pop out," said another Disney executive.88 Strategic planners were assigned to each of Disney's business units and reported to the head of strategic planning, who reported to Eisner. Some insiders felt that too much conflict was built into Disney's culture. "My rule of thumb was, if you ever have a meeting with more than five other people, you're in big trouble," said one Disney executive who had recently had a project rejected.89

13

Business Policy and Strategic Management

701-035 The Walt Disney Company: The Entertainment King

Between 1994 and January 2000, approximately 75 high-level executives left the company的 Some observers wondered whether Disney was putting too much emphasis on controlling costs and thus driving away its creative talent. "It's not as fun a place as it used to be," said Ryan Harmon, a former Imagineer. "It's just money, money, money. The creative side doesn't rule anymore."91 Other Disney executives cited Disney's combative culture and Eisner's increasingly autocratic management style as reasons for leaving笠 Eisner countered that Disney's turnover was not unusual given the company's size and success. "Every headhunter head hunts Disney," he said. "Where would you go? You go to the companies that do very well. It may not be convenient, but it's a compliment. 吨3

Disney's Strategy for Growth: Smart or Dumbo?

When Eisner arrived at Disney, there were 28,000 employees. By 2000, the number had ballooned to 110,000, reflecting Disney's ever-growing number of businesses. Did Disney s出1 have a coherent strategy for its business mix? Did Eisner's 20% growth target still make sense, particularly when Disney faced ever-increasing competition across all its businesses (see Exhibit 10)?

Some observers worried that the company had simply become too large to accommodate Eisner's management style. "Can a [$25] billion enterprise, with its efforts flung throughout the world, be creatively run by a single person?" asked one executive at a rival studio. "It didn' t get to be that business with one creative head."94 Did Eisner—the man credited with Disney's rebirth—now need to change his approach to running his entertainment empire?

14

701-035 -15·

Exhibit 1 The Walt Disney Company Financial Data, 1983-2000 ($ millions)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996a 1997 1998 1999 2000

Revenues

Theme parks and

resorts

Studio Entertainment

(film}

Consumer P『oducts

Media Networks

Internet & Direct

Marketing

Total

Operating Income

Theme parks and

resorts

Studio Entertainment

(film}

Consumer Pioducts

Media Networks

Internet & Direct

Marketing

Total

Selling, General, &

Admin

Net Income

Total Assets

Ratios

Operating Margin (%}

ROA(%}

ROE (%f

Total DebVAssets

Stock Performance

Index Disney Stock

Index S&P 500

$1 ,031

510 61 11

。

1,307

$1 ,097

5

0

0

41 21

。

1,656

$1 ,258

030 22 3

1

。

1,701

。

214

26

93

2,381

100

100

$1 ,524

512

130

。

。

2,166

$1 ,834

670 76 8

1

。

2,877

$2,042

1,149

247

。

。

3,438

$2 ,595

1,588

411

。

。

4,594

$3,020

2,250

574

。

。

5,844

$2,794

2,594

724

。

02

1 1 6 皇

$3,307

520 18 10 '

,

3

1

。

7,504

$3,441

3 ,673

1,425

。

。

8,529

$3,464

3

80

99 77 '

,

41

。

10,055

$3,960

6,001

2,151

。

NA

12,11 2

$4,502

6,471

3,688

4 ,078

NA

18,739

$5,014

6,981

3 ,782

6 ,522

174

22,473

$5,532

6,586

3,165

7,433

260

22,976

$6,139

6,166

2,954

7,970

206

23,435

$6,803

5,994

2,622

9,615

368

25,402

190 186

。

242

255

。

345

。

528

。

777

。

885

。

1,229

。

1,425

。

1,095

。

1,435

。

1,724

。

1,966

60

98

2,739

131

151

50

174

2 ,897

218

186

404

66

247

3,121

394

231

549

70

445

3,806

471

215

565

96

522

5 ,109

563

252

785

120

703

6,657

1,165

325

889

139

824

8 ,022

906

300

547

161

637

9,429

960

353

644

148

817

10,862

1,447

399

747

164

300

11 ,751

1,460

428

684

162

1,110

12,826

1,545

416

861 990 1,136 1,288

370 3

5 1540 34560 220 57 170 39 1

186

134

。

257

187

。

313

223

。

318

230

。

508

283

。

622

355

。

856

426

。

1,074

511

。

NA

2,446

895

577

871

NA

3,033

-56

4,751

-94

4,015

-93

3,687

110

455

2,298

-402 b

4,081

184

1,380

14,606

309

1,214

36,626

1,079

893

1,699

367

1,966

37,776

749

810

1,757

282

1,850

41,378

1,479

154

600

1,580

244

1,300

43,679

1,620

350 b

920

45,017

14%

4%

7%

19%

11%

4%

9%

31%

17"/o

6%

15%

28%

21%

8%

17%

18%

25%

1芒lO

24%

15%

23%

10%

25%

9%

24%

11%

26%

13%

22%

10%

25%

20%

16%

7%

17%

23%

17%

8%

19%

20%

18%

2%

6%

20%

18%

9%

21%

23%

19%

9°/o

23%

2守l0

2,195

562

16%

3%

11%

34%

2 ,647

701

18%

5%

12%

29%

3,499

903

16%

4%

10%

30%

3,387

1,089

13%

3%

6%

27%

13%

2%

4%

22%

3,011

1,295

3 ,226

1,218

Source: Annu al reports.

3Reorganization in 1996.

b Approximately h a lf of SG&A was due to an inc rease in sales and marke ting in the Internet div ision.

cROE w as - 1.7% in 1940, 6.7% in 1945, 11.7% in 1950, 15.6% in 1955, -{i.2% in 1960, 21.5% in 1965, 10.0"/o in 1970, 10.0"/o in 1975, 12.6% in 1980.

W a lt Di sne

y Co

.: T he Ente rt ainm

e n t King

701-035 -16-

Exhibit 2 Disney Tirneline and When Disney Entered New Businesses (exits are shaded)

Year

1923

1928

1929

1930

1933

1934

1937

1940

1949

1950

1952

1953

1954

1955

1966

1969

1971

1980

1982

1983

1984

1985

1986

1987

1989

1990

Event

Walt Disney Productions founded

Mickey Mouse introduced

Mickey Mouse pencil tablets licensed

Mickey Mouse comic st『ip, comic book, and doll licensed

First music record l icensed

Ingersoll makes Mickey Mouse watches

Le Journal de Mickey published in France

Snow White and the Seven Dwarfs debuts

Initial public stock offering

Disney studio moves to Burbank

Fantasia debuts (first stereo sound)

Seal Island (first true-l~e adventure short)

Walt Disney Music Co. formed

Treasure Island released

One Hour in Wonderland airs

WED Enterprises founded to design Disneyland

Buena Vista Distribution Co. formed

Disneyland TV show begins to air

Disneyland opens

Mickey Mouse Club TV show p『emiers

Walt Disney dies

Disney on Parade tours

Walt Disney World opens

Buena Vista Home Video division formed

EPCOT Center opens

Tokyo Disneyland opens

Disney Channel debuts

Michael Eisner and Frank Wells hired

Touchstone label created

Arvida Corp. acquired

Disney produces The Golden Girls for NBC

Disney begins to syndicate TV programs

First Disney Stores open

KCAL, a Los Angeles TV station, purchased

Arvida sold

Disney-MGM Studios Theme Pa『k opens

Pleasure Island nightlife complex opens

Hollywood Record label formed

Fi『st international Disney Store opens in London

Disney Press established

Mickey's Kitchens open

Film

Short cartoons

TV/Radio Theme Parks Consumer Products Other

Tablet licensing

Comic book, doll licensing

Record licensing

Watch licensing

International magazine

Comic strips

Feature cartoons

Record labe仁soundtracks

Live-action movies

Busines

s Policy

and

St rategic

Manag

e m e nt

TV specials-<:hildren

Film distribution

1V series-children

TV stations

Theme pa『k

Theme resort

Home video distribution

lnt'I theme park

Cable channel----l<ids

Movies一adults Real estate development

TV programming- adults

TV syndication

Real estate d印elopment

A『ena shows

Retail stores

Nightclubs

Record label-pop music

I nternational 『etail stores

Book publishin(rehildren

Fast food

701-035 -17-

Exhibit 2 (continued)

Year

1991

Film TV/Radio Consumer Products Other

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Source:

Event

Time share started: Vacation Club

Hyperion Books established

Euro Disney (later, Disneyland Paris) opens

Beauty and the Beast nominated for Best Picture

National Hockey League awards Disney a team

Mickey's Kitchens closed

Disney buys Miramax studios

Wells, president and COO, dies

Uon King debuts

Disney buys theater in Times Square

Disney's first Broadway show, Beauty and the Beast

Disney announces ABC deal

Company sets up Disney Interactive

Disney launches Disney.com Web site

Disney buys 25% of Anaheim Angels baseball team

Disney lnst~ute opens

Town of Celebration, FL, opens to residents

Disney opens Wide World of Sports at Disney World

Club Disney opens at shopping malls

ESPN Stores open

Disney buys Starwave, an Internet content provider

Disney starts Daily Blast, an online subscription service

Disney Magic cruise ship sets sail

Radio Disney, a radio network for children, debuts

Animal Kingdom, the fourth gate at Disney Wo『Id , opens

lnfoseek and Ultraseek acqui『ed

ESPN Zones opens

DisneyQuest opens

Disney and lnfoseek launch the GO Netwo『k portal

Club Disneys and ESPN Stores close

Aida debuts on Broadway

Disney buys 45% of Cine Nova in Europe

Disney sells Ultraseek

Disney shutters Go Network

TV and radio networks

Radio programming一 children

lnt'I cable channel

Theme Parks

T ime-shares

Independent films一 adults

Educational retreats

Sports complex

Indoor playparks

Cruise line

Book publishing-adults

Educational software and v ideo games

Sports-themed retail

J[!dooi playpaf!<li Soorts-themed retail

Hockey

Fast food

Theater operations

Broadway shows

Newspapers (four, as part of ABC deal)

Online shopping

Baseball

Planned community

Internet content provider

Internet subscription service

Newspapers

Internet search engine, corporate intranets

Sports-themed restaurants Regional interacllve entertainment facilities

Internet portal

Mature-themed Broadway shows ，．．．一

Corporate intranets

Internet portal

Compiled by casewriters.

W a lt Disney

Co

.: T he Entertainm

e nt King

Business Policy and Strategic Management

701-035 The Walt Disney Company: The Entertainment King

Exhibit 3 Disney 's Bus iness Lines in 2000

MEDIA Media Networks breaks down into two categories: Broadcasting and Cable Networks. Broadcasting NETWORKS includes the ABC Television Network, the company's ten television stations, the company's radio

stations and the ABC Radio N etwork and Radio Disney. Cable Networks consists of the ESPN-branded cable networks, The Disney Channel and the start-up cable operations, including Toon Disney and beginning in January 2000, SoapN et.

Broadcast ing - ABC Television N ctwork - TV Stations - ABC Radio Networks - Radio Stations

C able Networks & Internationa l - ESPN - Disney Channel - Toon Disney - SoapNet

STUDIO Studio Entertainment ;principally includes the company ' s feature animation and live-action ENTERTAINM ENT motion picture,home video, television and cable production, including syndication and pay TY,

stage play and music production and distribution businesses.

T heatrical Films Buena Vista Home Buena Vista Music Gr oup - Walt Disney Pictures E nterta inment

- Touchstone Pictures - Hollywood Records - Hollywood Pictures - Mammoth Records - Miramax - Lyric Records

Distribution Television Production - Buena Vista - Program Development - Buena Vista International - First-Run Animation

- Live-Action Syndication - Pay Televisions Services

Theatrical Productions

Televentu res

THEM E PARKS Theme Parks and Resorts reflects the company's theme park and resort activities except Disneyland AND RESORTS Paris, which is accounted for under the equity method and included in Corporate and Other Activities,

its sports team franchises and its DisneyQuest and ESPN Zone regional entertainment businesses

Walt Disney Attractions W alt'Disney - Disneyland Resort Imagineering - Walt Disney World Resort - Disney Vacation Club - Disney Cruise Line - Tokyo Disneyland

Anaheim Sports - Mighty Ducks of Anaheim - Anaheim Angels

Disney'Regional E ntertainmen t

- D isneyQuest - ESPN Zone

CONSUMER Consumer Products licenses the name "Walt Disney," as well as the company's characters, visual and PRODUCTS literary properties, to various consumer manufacturers, retailers, show promoters and publishers

throughout the world. The company also engages in direct retail distribution principally through The Disney Stores, and produces books and magazines for the general public in the United States and Europe . In add山on, the company produces audio and computer software products fo r the entertainment market, as well as film , video and computer software products for the educational marketplace

.. M ercb and1smg T he Disney Stor e Disney Walt Disney Licensing Publishing Art C lassics

Disney Inter active

INTER NET AND Internet and Direct Marketing represents the operations of Disney ' s online activities and DIRECT MARKET ING the Disney Catalog. After the fiscal year end, the Internet and Direct Marketing division

I I c~mbined with Inf~seek to become I趴sney' s Internet e~tity, GO.com. I Disney Online ESPN ABC GO.com GO.com GO Network

Internet G roup Internet Group Com merce International

Source: The W alt Disney Company, 1999 Fact Book, p. 4

Note: In January 2001, Disney closed the GO.com portal

18

Walt Disney Co.: The Entertainment King

The Walt D isney Company: The Entertainment King 701-035

Exhibit 4 Top 30 A musement Park s World w ide (attendance in millions)

1983 1991 1999 CAGR CAGR Rank Park and Location Attendance Attendance Attendance 1983-1991 1991-1999

1. Tokyo Disneylanda 10.2 15.8 17.5 5.6 1.3

2. Magic Kingdom, Walt Disney World, FL8 12.6 18.0 15.2 4.5 (2.1)

3. Disneyland, Anaheim, CAa 9.9 11.6 13.4 2.0 1.8

4. Disneyland Parisa N/0 N/0 12.5 N/0 N/0

5. EPCOT, Walt Disney World, Fla 10.1 14.4 10.1 4.5 (4.3)

6. Disney-MGM Studios, FL a N/0 6.8 8.7 N/0 3.1

7. Everland, Kyonggi-Do, South Korea N/A N/A 8.6 N/A N/A

8. Animal Kingdom, Walt Disney Worlda N/0 N/0 8.6 N/0 N/0

9. Universal Studios Florida, Orlando N/0 6.9 8.1 N/0 2.0

10. Blackpool (England) Pleasure Beach N/A N/A 6.9 N/A N/A

11 Lotte World, Seoul, South Korea N/0 4.5 6.1 N/0 3.9

12. Yokohama (Japan) Sea Paradise N/0 N/0 6.7 N/0 N/0

13. Universal Studios, Universal City, CA 3.6 4 .6 5.1 3.1 1.3

14. SeaWorld Florida, Orlando 3.0 3.9 4.7 3.3 2.4

15. Huis Ten Bosch, Sasebo, Japan N/0 N/0 4.0 N/0 N/0

16. Nagashima Spa Land, Kuwana, Japan N/0 N/0 4.0 N/0 N/0

17. Busch Gardens, Tampa Bay, FL 3.0 2.9 3 .9 (0.4) 3.8

18. Six Flags Great Adventure, Jackson, NJ 3.1 3.0 3.8 (0.4) 3.0

19. SeaWorld California, San Diego 2.9 3.8 3.6 3.4 (0.7)

19. Knoll 's Berry Farm, Bueno Park, CA 3.2 4.0 3.6 2.8 (1.3)

21. Universal's Islands of Adventure, Orlando N/0 N/0 3.4 N/0 N/0

22. Paramount's Kings Island, OH 2.6 2.9 3.3 1.4 1.6

23. Cedar Point , Sandusky, OH 2.4 3.0 3.3 2.8 1.2

23. Morey's Piers, Wildwood, NJ N/A N/A 3.3 N/A N/A

23 Ocean Park, Hong Kong N/A 2.5 3.3 N/A 3.5

26. Six Flags Magic Mountain, Valencia, CA 2.5 3.2 3.2 3.1 。

27. Suzuka (Japan) Circuit N/0 N/0 3.2 N/0 N/0

28. Tivoli Gardens, Copenhagen, Denmark 5.0 4.0 3.1 (2.8) (3.1)

28. Six Flags Great America, Gurnee, IL 2.3 2.6 3.1 1.5 2 .2

30. Santa Cruz Beach Boardwalk, CA 2.3 3.0 3.0 3.4 。

Source: Amusement Business, Los Angeles Times, Toronto Globe & Mail, The San Diego Union-Tribune, and The Wall S廿eet Journal.

NIA—Not available. N /0--Not yet open.

"Worldwide Disney theme park attendance grew at a CAGR of 5.7'l儿 from 1983 to 1991 and at a CAGR of 3.2% from 1991 to 1999 Attendance at Disney's Florida theme parks grew at a CAGR of 7.1% from 1983 to 1991 and at a CAGR of 10% from 1991 to 1999. Attendance at Walt Disney World and Disneyland grew at a CAGR of 4.8% between 1983 and 1987.

19

Business Policy and Strategic Management

701-035 The Walt Disney Company: The Entertainment King

Exhibit 5 Annu al Increase in Adult Ticket Prices(%)

30%

25% 一令- Disneyland

于Walt Disney World

20%

15%

10%

5%

0% 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: Walt Disney Co. and Amusement Business.

Note: Between 1983 and 1987, ticket price increases at the parks accounted for about $300 m业on of incremental revenue.

Exhibit 6 A ver age A dult A dmission Pr ices at Select U.S. Park s

CAGR CAGR Park and Location 1985 1990 1995 2000 1985-1990 1990-2000 Six Flags Great America, Gurnee, IL $14 $20 $26 $39 7.4 6.9 Six Flags New England, Agawam, MA 12 17 22 33 7.2 6.9 Cedar Point, Sandusky, OH 14 20 27 38 7.4 6.6 Paramount's Kings Island, Kings Island, OH 14 21 27 39 8.4 6.4 SeaWorld Florida, Orlando 15 25 36 46 10.8 6.3 Paramount's Carowinds, Charlotte, NC 13 19 26 35 7.9 6.3 Dorney Park, Allentown, PA 12 17 25 31 7.2 6.2 Knott's Berry Farm, Buena Park, CA 13 21 29 38 10.1 6.1 Paramount's Kings Dominion, Doswell, VA 14 20 28 36 7.4 6.1 Six Flags Over Texas, Arlington 14 20 28 36 7.4 6.1 Six Flags Magic Mountain, Valencia, CA 14 22 29 39 9.5 5.9 Busch Gardens, Williamsburg, VA 15 21 29 37 7.0 5.8 Six Flags Great Adventure, Jackson, NJ 15 23 31 40 8.9 5.7 Worlds of Fun, Kansas City, MO 13 19 25 32 7.9 5.4 Disneyland, Anaheim, CA 17 28 33 41 10.5 3.9 Walt Disney World, Lake Buena Vista, FL 20 33 39 46 10.5 3.4

Source: Compiled by casewriters from Amusement Business data and Los Angeles Times, Taronto Globe & Mail, San Diego Union- Tribune, and The Wall Street Journal.

Note: In 1983, adult one-day tickets for Disney World and Disneyland were $15 and $12, respectively.

20

701-035 -21-

Exhibit 7 Top-Grossing Animated Films of All Time

Rank Movie 1 Snow White 2 101 Dalmatians

3 The Jungle Book

4 Fantasia

5 The Lion King

6 Sleeping Beauty

7 Bambi

8 Pinocchio

9 Cinderella

1 O Lady and the Tramp

11 Aladdin

12 ToyStory2

13 Peter Pan

14 Toy Story

15 Who Framed Roger Rabbit?

16 A Bug's Life

17 Beauty and the Beast

18 Tarzan

19 Pocahontas

20 The Little Mermaid

21 Dinosaur

22 Mulan

23 Hunchback of Notre Dame

24 Hercules

25 The Prince of Egypt

26 The Rugrats Movie

27

28 29

30

Space Jam

Chicken Run Antz

Pokemon: The First Movie

Inflation-Adjusted U.S. Box-Office Revenue

(millions of 2000 dollars)

572 552

454

436

393

381

370

354

328

293

275

254

240

232

200

182

182

1n 171

148

138

135

118

113

113

113

107

107 102

89

U.S. Revenue (~usted)

185 153

136

76

313

52

103

84

91

94

217

246

87

192

157

163

146

171

142

112

138

121

100

99

101

101

90

107 91

86

Revenue Outside U.S. (unadjusted)

n/a 71

64

n/a

459

n/a

165

n/a

n/a

n/a

285

240

n/a

167

195

195

207

264

206

111

180

183

226

152

117

40

135

65 80

70

Year of Original Release

1937 1961

1967

1940

1994

1959

1942

1940

1950

1955

1992

1999

1953

1995

1988

1998

1991

1999

1995

1989

2000

1998

1996

1997

1998

1998

1996

2000 1998

1999

Creative Producer Walt Disney Walt Disney

Walt Disney

Walt Disney

Jeffrey Katzenberg

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Jeffrey Katzenberg

John Lasseter

Walt Disney

John Lasseter

Jeffrey Katzenberg

John Lasseter

Jeffrey Katzenberg

Bonnie Arnold

James Pentecost

Jeffrey Katzenberg

Pam Marsden

Pam Coats

Don Hahn

R. Clements, A. Dewey, and J. Musker

Jeffrey Katzenberg

D. Beece, A. Hecht, G. Csupo, and A. Klasky

D. Falk, K. Ross, D. Goldberg, J. Medjuck, and Reitman

Jeffrey Katzenberg P. Cox, B. Lewis, A. Warner, and

J. Katzenberg N. Grossfield, M. Kubo, and T. Kawaguchi

Studio Walt Disney Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Pixar/Disney

Walt Disney

Pixar/Disney

Walt Disney

Pixar/Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Walt Disney

Dreamworks

Nickelodeon/ Paramount

Warner Bros. Dreamworks

Dreamworks Sho_gakukan

Source:

Note: www.boxofficereport.com, Independent Movie Data Base (www.imdb.com).

Out of the top 100 grossing films of all time (including both animated and non-animated movies), Paramount and Fox distributed 16 each; Disney, 14; Universal and Warner, 13 each; MGM/ UA, 12; Sony (under the Columbia and TriStar labels), 11; RKO, 2; and Avco, Selznick, and Orion, 1 each.

Walt

Disney

Co

.: T he Entertainm

e nt King

701-035

Exhibit 8 D o m estic Box-O ffice Marke t Sh ares in Percent (with number o f m ovie r eleases in parentheses)a

-22-

Distributor 1985 1988 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

1999 Box-Office Revenues ($ million)

Disney b

WarnerC

Universal d

Paramount Foxe

Sony I

MGM/UA9 Dreamwo rks

4 (NA)

17 (NA) 15 (NA)

11 (NA) 10 (NA) 19 (NA)

8 (NA)

19.4(18)

11.2 (31 ) 9.8 (20)

15.2 (19) 11.6 (14) 9.3 (36)

10.3 (21 )

16.7 (35)

17.5 (40) 13.1 (21)

14.9 (17) 13.1 (20 ) 13.9 (34)

2.8 (15)

15.1 (43)

17.9 (46) 11 .0 (23)

12.0 (21) 11 .6 (20) 20.0 (27)

2 .3 (16)

20.5 (47)

2 1.9 (43) 11 .7 (22)

9.9 (20) 14.2 (24) 19.1 (20)

1.2 (9)

19.2 (60)

2 1.9 (50) 13.9 (22)

9.3 (15) 10.7 (21) 17.5 (39)

1.8 (12)

23.1 (68)

22.3 (NA) 12.5 (NA)

13.9 (NA) 9.4(NA) 9.2(NA)

2.8 (NA)

27.5 (75)

22.9 (NA) 12.5 (NA)

10.0 (NA) 7 .6 (NA)

12.8 (NA)

6.2 (NA)

25.2 (85) 20.7 (59) 8.4 (19)

12 .6 (25) 12.5 (19) 11 .1 (40)

5.1 (20)

1,263.0

1,061.0 954.0

855.0 794.0 652.0

3 10.0 3 10.0

Busines

s Po licy

and

Strategic

Manag

e m e nt

Total 84.0 86.8 92.0 89.9 98.5 94.3 93.2 94.5 95.6

21.0 (68) 17.1 (60) 9.9 (14)

11.8 (28) 11 .2 (24) 20.4 (37)

2.5 (17) 1.7 (3)

93.9

21 .9 (71)

18.7 (56) 5.5 (18)

15.8(19) 10.6 (16) 10.9(41)

2.9 (18) 6 .9 (7)

93.2

23.0 (66) 20.2 (48) 13.0 (23)

11 .0(18) 11 .0 (21) 9.0 (31)

4.0 (13) 4 .0 (9)

79.2 5 ,889.0

Source: Standard & Poor's, Variety, Hollywood Reporter.

NA: Not available.

a Some data approximated by Standard & Poor's and casewriter.

b Includes Disney and Touchstone/Hollywood labels, as well as separately run studio, Miramax—maker of lower-budget movies-that Disney acquired in 1993. From 1996 to 1999, Miramax averaged 38 releases per year and a 6% market share.

c Includes Warner Bros. label and New丘e, a separately run studio that makes lower-budget movies. From 1996 to 1999, New Line averaged 29 movie releases per year and a 6% market share

d Owned by Vivendi Universal.

e Owned by News Corp., includes Fox and Fox Searchlight labels.

f Includes Sony Pictures, Sony Pictures Classics, and Columbia Pictures labels and used to include TriStar (which was folded into Columbia in the late 1990s).

g Includes MGM, United Artists (UA), and Goldwyn labels.

Walt Disney Co.: The Entertainment King

The Walt D isney Company: The Entertainment King 701-035

Exhibit 9 Most-Watched TV Networks and Programs, 1980-1999

Rank Network3 Pro臣am Rank Network3 Program 198归1 1990-91

1 CBS (19 8) Dallas (CBS) 1 NBC (12 7) Cheers (NBC) 2 ABC (18.2) 60 Minutes (CBS) 2 ABC (12.5) 60 Minutes (CBS) 3 NBC (16.6) The Dukes of Hazzard (CBS) 3 CBS (12.3) Roseanne (ABC) 4 Private Benjamin (CBS) 4 FOX (6.4) A Different World (NBC) 5 M*A*S*H (CBS) 5 The Cosby Show (NBC)

1981-82 1991-92 1 CBS (19 0) Dallas (CBS) 1 CBS (13.8) 60 Minutes (CBS) 2 ABC (18.1) Dallas (CBS) 2 NBC (12.3) Roseanne (ABC) 3 NBC (15.2) 60 Minutes (CBS) 3 ABC (12.2) Murphy Brown (CBS) 4 Three's Company (ABC) 4 FOX (8.0) Cheers (NBC) 4 NFL Football (CBS) 5 Home Improvement (ABC)

1982--83 1992-93 1 CBS (18.2) 60 Minutes (CBS) 1 CBS (13.3) 60 Minutes (CBS) 2 ABC (17.7) Dallas (CBS) 2 ABC (12.4) Roseanne (ABC) 3 NBC (1 5.1 ) M*A*S*H* (CBS) 3 NBC (11.0) Home Improvement (ABC) 3 Magnum P I. (CBS) 4 FOX (7.7) Murphy Brown (CBS) 5 Dynasty (ABC) 5 Murder, She Wrote (CBS)

1983-84 1993-94 1 CBS (1 8.0) Dallas (CBS) 1 CBS (14.0) Home Improvement (ABC) 2 ABC (17 2) Dynasty (ABC) 2 ABC (12.4) 60 Minutes (CBS) 3 NBC (14.9) The A Team (NBC) 3 NBC (11 .0) Seinfeld (NBC) 4 60 Minutes (CBS) 4 FOX (7.2) Roseanne (ABC) 5 Simon & Simon (CBS) 5 Grace Under Fire (ABC)

1984--85 1994-95 1 CBS (16.9) Dynasty (ABC) 1 ABC (12.0) Seinfeld (NBC) 2 NBC (1 6 2) Dallas (CBS) 2 NBC (11 5) ER(NBC) 3 ABC (15.4) The Cosby Show (NBC) 3 CBS (11.1) Home Improvement (ABC) 4 60 Minutes (CBS) 4 FOX (7.7) Grace Under Fire (ABC) 5 Family Ties (NBC) 5 UPN (3.4) Monday Night Football (ABC)

1985--86 1995-96 1 NBC (17.5) The Cosby Show (NBC) 1 NBC (1 1.7) ER (NBC) 2 CBS (16.7) Family Ties (NBC) 2 ABC (10.6) Seinfeld (NBC) 3 ABC (14.9) Murder, She Wrote (CBS) 3 CBS (9.6) Friends (NBC) 4 60 Minutes (CBS) 4 FOX (7.3) Caroline in the City (NBC) 5 Cheers (NBC) 5 UPN (31 ) Monday Night Football (ABC)

1986-87 1996-97 1 NBC (1 7.8) The Cosby Show (NBC) 1 NBC (10.5) ER (NBC) 2 CBS (15 8) Family Ties (NBC) 2 CBS (9.6) Seinfeld (NBC) 3 ABC(14.1) Cheers (NBC) 3 ABC (9.2) Friends (NBC) 4 Murder, She Wrote (CBS) 4 FOX (7.7) Suddenly Susan (NBC) 5 Night Court (NBC) 5 UPN (3.2) Naked Truth (NBC)

1987-88 1997- 98 1 NBC (1 6.0) The Cosby Show (NBC) 1 NBC (10.2) Seinfeld (NBC) 2 ABC (13.7) A Different Wo什d (NBC) 2 CBS (9.6) ER(NBC) 3 CBS (13.4) Cheers (NBC) 3 ABC (8.4) Veronica's Closet (NBC) 4 Growing Pains (ABC) 4 FOX(7.1) Friends (NBC) 5 Night Court (NBC) 5 WB (3.1) Monday Night Football (ABC)

1988-89 1998-99 1 NBC (15.9) The Cosby Show (NBC) 1 CBS (9.0) ER (NBC) 2 ABC (12.9) Roseanne (ABC) 2 NBC (8.9) Friends (NBC) 3 CBS (12.5) Roseanne (ABC) 3 ABC(B.1) Frasier (NBC) 3 A Different Wo什d (NBC) 4 FOX (7.0) Monday Night Football (ABC) 5 Cheers (NBC) 5 WB(32) Veronica's Closet (NBC)

198贮90 1999-00 1 NBC (14.6) Roseanne (ABC) 1 ABC (9.3) Who Wants To Be a M仆lionaire {ABC) 2 ABC (12.9) The Cosby Show (NBC) 2 CBS (8.6) Who Wants To Be a M仆l ionaire (ABC) 3 CBS (12 2) Cheers (NBC) 3 NBC (8 6) Who Wants To Be a Millionaire (ABC) 4 A Different World (NBC) 4 FOX (5.9) ER (NBC) 5 Funniest Home Videos (ABC) 5 UPN (2.7) Friends (NBC)

Sources: 2000 Nielsen M edia Research (2000 Report on Television) and www.entertainmentscene.com.

•Ranked by average prime-time Nielsen ratings

23

701-035 -24-

Exhibit 10 Business Lines of Disney Competitors

Disney AOL-Time Warner Viacom-CBS Bertelsmann Vivendi- Universal NewsCo虫 竺

Broadcast TV stations Broadcast TV network Cable distribution systems Cable networks Satellite TV Film production Film library Movie theaters Music Radio Publishing Internet Theme pa水s Retailing Audio/video

JJJJJ JJJJJJJJJJJ JJJJJ ,/

JJJJJJJJ

Busine

ss Policy

and

St rategic

Manag

e m e nt

JJJJJ

JJJJJ

J

JJJJJJ

JJJJJJ

JJJJ

JJJJ JJ

,/

~ 2000 Revenuesb ($ billions) Pretax Income($ millions) Net Income ($ millions) Avg. 5-year ROE Avg. 10-year ROE

./

$25.4 2,633.0 1,196.0

8.9 15.0

$36.2 8,400.0

(3,500) (18.2)/3.1

NA

$20.0 560.6

(816.1) 4.4 0.3

$15.7d NA NA NA NA

$17.79 613.0 246.0 7.6/15.0 9.8/11 .6

$14.2 1,724.0 1,921.0

7.0 7.4

$10.QC 2,381.2 1,097.6

9 .0 8 .2

Source: The Economist; annual reports; Standard & Poor's; OneSource; Bloomberg.

•sony Corporation of America.

bBertelsmann figure is from the fiscal year ended June 30, 2000.

crncludes only the media portions of the company. The total was $64.5 billion.

dThe company is privately held.

erncludes only the media portions of the company. The total was $48.4 billion.

Walt Disney Co.: The Entertainment King

The Walt Disney Company: The Entertainment King

Endnotes

1 Robert La Franco, "Eisner's Bumpy沁de," Forbes, July 5, 1999, p. 50. 2Joe Flower, Prince of the Magic Kingdom (New York: John Wiley & Sons, 1991), p. 143. 3 John Huey, "Eisner Exp! 础s Everything," Fortune, April 17, 1995.

701-035

4 In 1922, Disney and Ub lwerks started Laugh-0七rams, which went out of business in 1923. After Walt moved to Hollywood, he persuaded lwerks to join his new company a year later

5 The name of the studio was changed to Walt Disney Productions in 1929

6 Dave Smith and Steven Clark, Disney: The First 100 Years (New York: Hyperion, 1999), p. 16

7 Among the primary an皿ators, only Ub Iwerks rem血ed loyal to Disney. 8 Robert De Roos, "The Magic Worlds of Walt Disney," in Disney Discourse (Eric Smoodin, ed., New York, Routledge,

1994), p. 52 9 Walt even sold his car to help finance the soundtrack. 10Bob Thomas, Building a Company (New York: Hyperion, 1998), pp. 60-62

11 Dave Smith and Steven Clark, Disney: The First 100 Years (New York: Hyperion, 1999), p. 26 12 Joe Flower, Prince of the Ma炉c Kingdom (New York: John Wiley & Sons, 1991), p. 55. In the 1990s, org皿zation charts

were still uncommon at Disney. People were expected to know how the organization worked without reference to charts. 13 Dave Smith and Steven Clark, Disney: The First 100 Years (New York: Hyperion, 1999), p. 30.

14 Douglas Gomery, "Disney's Business History: A Reinterpretation," in Disney Discourse (Eric Smoodin, ed., New York, Routledge, 1994), p. 72.

15 Snow White had not been nominated for an Oscar in 1938 for Best Picture. However, at the 1939 awards show, the Academy of Motion Picture Arts and Sciences awarded the movie an honorary full-size Oscar along with seven miniature Oscars.

16 Douglas Gomery, "Disney's Business H讫tory: A Reinterpretation," in Disney Discourse (Eric Smoodin, ed., New York, Routledge, 1994), pp. 73--74.

17 Dave Smith and Steven Clark, Disney: The First 100 Years (New York: Hyperion, 1999), p. 57

18 The company had found that it could produce a full-length animated film only once every three or four years, rather than the two per year that it had initially tried for.

19 Dave Smith and Steven Clark, Disney: The First 100 Years (New York: Hyperion, 1999), pp. 59-60. 20 Ibid., p. 70.

21 "The Walt Disney Company (A)," HBS No. 388--147 (Boston: Harvard Business School Publishing, 1988), p. 4. 22 Ibid., p. 3.

23 Dave Smith and Steven Clark, Disney: The First 100 Years (New York: Hyperion, 1999), p. 64. 24 The company also established a division to create its own nonlicensed products specifically for Disneyland.

25 Douglas Gomery, "Disney's Business 比story: A Reinterpretation," in Disney Discourse (Eric Smoodin, ed., New York, Routledge, 1994), p. 76.

26 Dave Smith and Steven Clark, Disney: The First 100 Years (New York: Hyperion, 1999), p. 101. 27 "The Walt Disney Company (A)," HBS No. 388--147, p.14.

28 Howard Rudnitsky, "Creativity, With Discipline," Forbes, March 6, 1989, p. 41 29 In 1986, the company changed its name to The Walt Disney Company. 30 汕chael D. Eisner and Tony Schwartz, Work in Progress (New York: Random House, 1998), p. 152. 31 Ibid., p. 157.

32 Disney also sought to spread the risk of film production by offering shares in limited partnerships. Through Silver Screen Partners II and III, nearly half a billion dollars was raised to expand film and television production activities. The 血ted partners shared the financial cost of producing a movie but were residual cl血ants on the profit stream with a highly leveraged position.

33 "The Walt Disney Company (A)," HBS No. 388--147, p. 1. 34 Newsweek, April 13, 1992, p . 67.

35 "The Walt Disney Company (B)," HBS No. 794-129, p. 2 36 "Mickey Mouse to Get L虹ed," via hotelchatter.com, accessed September 2008.

37 The rationale for Pleasure Island was that Disney World's adult visitors needed more things to do at night. Opened in 1989, the complex was a six-acre nightlife haven featuring dance clubs, shopping boutiques, and restaurants. Early performance was below par. One of the problems was the pricing policy. Each club had a separate cover charge, which discouraged guests from moving between venues, leaving the streets of Pleasure Island empty. Disney instituted a single

25

Business Policy and Strategic Management

701-035 The Walt Disney Company: The Entertainment King

adult-rate admission charge for the en缸e area, rev血ped the less successful clubs, and began holding a nightly "New Year's Eve" outdoor celebration. Managers had monthly "in-costume" duties to keep them in closer touch with guests and to give them insights into how to 皿prove operations. For example, add巾onal food and beverage stations appeared, and layout was rearranged to better suit the waiters and waitresses. Disney also began advertising heavily in the local media, cultivating the one-加d of guests who came for a night out from the surrounding Orlando area

38 KCAL was later sold because Disney acq皿ed a second station in Los Angeles as part of the ABC deal. Owning both stations would have been a violation of FCC rules.

39 The Wall Street Journal, July 12, 1995, p. B2.

40 Jeremy Gerard, "Disney's New Dream: 42nd Street Fantasia," Variety, February 7-13, 1994, p. 57. 41 Ibid.

42 汕chael D. Eisner and Tony Schwartz, Work in Progress (New York: Random House, 1998), p . 157 43 沁chard Turner, "Is Walt Disney Ready to Rewrite Its Own Script?" The Wall Street Journal, August 26, 1994, p . Bl. 44 Disney had previously considered buying CBS or NBC. Disney terminated negotiations with General Electric, which

owned NBC, due to widely disparate bids. And although CBS cha江man Larry Tisch had publicly maintained that his network was not for sale, Disney was, according to Eisner, in talks with CBS right up until the ABC deal was announced.

45 The ABC deal made Disney the nation's sixth-largest TV station owner and the加d-largest radio station owner .

46 The Wall Street Journal, August 4, 1995, p. AS.

47 Elizabeth Jensen and Thomas King, "World of Disney Isn't So Wonderful for ABC," The Wall Street Journal, July 12, 1996, p . Bl.

48Ibid. 49 The show had already been running on the Disney Channel.

50 Elizabeth Jensen and Thomas King, "World of Disney Isn't So Wonderful for ABC," The Wall Street Journal, July 12, 1996, p. Bl.

51 Ibid . 52 Complicating the relationship, Dreamworks partner Katzenberg was still in the midst of a lawsuit with Disney, in w如ch

he was arguing that he had been guaranteed a percentage of all the future profits of the projects he had initiated while wor如g there. In 1999, a settlement was reached giving Katzenberg $250 million.

53 Dwight Oestricher, "Disney's Eisner Vows that Growth Will Return," D彻 Jones News Service, November 4, 1999. 54 Sharon Epperson, "Third Quarter Turns Out to Be Magical for Disney," CNBC News Transcripts, August 3, 2000 55 Disney's 1999 annual report, p. 8.

56 Ronald Grover," At Disney, There's Life After Toons," Business Week, November 11, 1996, p . 102 57Ibid. 58 "1999 US Economic Review," MPA Worldwide Market Research, p. 16.

59 While Disney maintained its dominance in animation, the company had f扯ed to repeat the enormous success of The 切n King (1994). The 10 animated films that followed were all less profitable. Moreover, three of the company's biggest hits over this time were not created by Disney but by Pixar, a Northern California studio specializing in computer-generated 皿agery (CGI) acclaimed for both its technical w四rdry and its storytelling skill. Disney had a deal to distribute five Pixar films through 2007, sharing the profits 50-50. To make CGI films like Pixar's, Disney built a $70 m业on digital studio. Dinosaur (2000) was Disney's first CGI film, but while the film was lauded for its special effects, it was derided by movie critics for its weak dialogue and plot. Disney had faced an assault over the past several years as Dreamworks, Fox, and Warner Brothers all tried to p roduce full-length animated films, but without Disney-level success. In 2000, Fox closed its an皿扣on studio, deciding to focus instead on CGI animation of the 压d produced by Pixar. After several costly failures, Warner Brothers' 血mated division scaled back production, opting for lower-quality animation and movies based on established brands such as Pokemon 2000 (which fared poorly). Only Dreamworks remained committed to matching Disney with several new films in the works, some traditionally animated, some computer generated. In the latter category was Chicken Run, one of only three non- Disney animated films in history to earn $100 m曲on at the U.S. box office.

60 Claudia Eller, "Disney Chief Lets Out a Roar Amid 心议iety Over Costly 'Dinosaur,"' Los Angeles Times, May 12, 2000, p. Cl.

61 The Internet Group had its own trac如g stock and 监ted its results separately from the rest of Disney 62 And like Yahoo and AOL, the GO Network offered e-m叫， chat rooms, a search engine, and stock and weather updates. 63Ronna Abramson, "Disney Puts a Stop to Go.com," TheStandard .com, January 29, 2001.

64 Bruce Orwall, "Eisner Moves to Slow Down Disney Spending," The Wall Street Journal, August 16, 1999, p . Bl

65 In 1999, Disney set up a new group called Strategic Sourcing to cut its procurement costs. Its function was to negotiate better terms from the vendors that supplied Disney with the $9 billion worth of goods and services it purchased each year. For example, Disney calculated that it used 110 million shopping bags and gift boxes per annum. By standardizing box and bag

26

Walt Disney Co.: The Entertainment King

The Walt Disney Company: The Entertainment King 701-035

sizes and by consolida血g and leveraging its purchasing power, Disney estimated that it was able to save $1.5 m业on a year In taking this approach with all its purchases, Disney projected that the Strategic Sourcing program would save it $300 million a year by 2004 (1999 annual report, p. 5)

66 Disney's Web site, www.disney.com. 67 "Disney's'The Lion氐ng'(B): The Synergy Group," HBS Case No. 899-042. 68 "Disney Roars in Kingdom of Movie Merchandise," Los Angeles Times, August 11, 1994. 69 1999 armual report, p. 7. Figures compare sales levels two years before each park opened with sales five years after.

70 Marc G11nther, "Eisner's Mouse Trap," Fortune, September 6, 1999, p. 116. 71 David Germain, "Disney Earnings Drop as Revenue Slump Continues," AP Business Wire, November 4, 1999.

72 Christopher Parkes, "Disney Chief Draws on the Past," The Financial Times, November句， 1999. 73 1999 annual report, p. 12. 74 When Harvard gave Walt an honorary master's degree in 1938, Walt remarked, "I try to entertain, not educate: an

皿portant part of education is stimulating an interest in things." (Cynthia Rossano, "Honoris Causa," Harvard Magazine, May- J山1e 2001, p. H28.)

75 Suzy Wetlaufer, "Common Sense and Conflict: An Interv氐w with Disney's Michael Eisner," Harvard Business Review, January-February 2000, p. 124.

76 Disney had only moderate success selling shows to other networks, producing The PJs on Fox and Felicity on the WB Network but few others.

77 Bruce Orwall, "Michael Eisner's New Agenda," The Wall Street Journal, January 26, 2000, p. Bl. 78 Disney's 1999 armual report, p. 34. 79 "Two Sharks in a Fishbowl," The Economist, September 13, 1999, p. 67. 80 1999 annual report, p. 7. 81 Kathleen Morris, "This Phantom is a Menace to Toymakers," Business Week, July 19, 1999, p. 42 82 1999 annual report, p. 3. 83 Paul Farhi, "Commercial KO'd by Offensive P皿ch Line," The Washington Post加ne 26, 1999, p. C7. 84 Marc Gunther, "Eisner's Mouse Trap," Fortune, September 6, 1999, p. 107. 85 Bruce Orwall, "From its ABC to its DVDs, Disney is Seeing Brighter Picture," The Wall Street Journal, March 27, 2000,

p. Bl. 86 Suzy Wetlaufer, "Common Sense and Conflict: An Interview with Disney's 汕chael Eisner," Harvard Business Review,

January-February 2000, p. 117 87 Frank Rose, "The Eisner School of Business," Fortune, July 6, 1998, p. 29. 88lbid. 89 lbid.

90 Claudia Eller and James Bates, "It's Quitting Time Ag皿at Disney," Los Angeles Times, January 13, 2000, p. Al 91 Bernard J. Wolfson, "Creative Brain Drain at Disney?" The Orange County R~ 炉ster, October 20, 1999, p. Cl. 92 Claudia Eller and James Bates, "It's Q皿ting Time Ag皿at Disney," Los Angeles Times, January 13, 2000, p. Al 93 lbid. 94 Bernard We血aub, "Clouds Over Disneyland," The New York Times, April 9, 1995, sec. 3, p. 12.

27

Business Policy and Strategic Management

帘 HARVARD I BUSINEssl SCHOOL 9-707-445

REV , AUGUST 25, 2008

JOR DAN SIEGEL

Lincoln Electric

Introduction

John Stropki, CEO of Lincoln Electric, returned home from Mumbai to company headquarters in Cleveland, having sampled the local Maharashtran delicacies while studying opportunities in the Indian market. From匝 vantage point in 2006, Stropki looked back on his company's more than 100 years in the welding equipment and consumables ind ustry with pride, wondering whether a strong push into India should be the next step in his company's globalization. An India expansion had been considered for several years, but thus far the company had focused on growing its operations in China and elsewhere around the globe. If Stropki were to approve a significant allocation of resources toward an India expansion, he wondered what would be the best way to enter. He had a wealth of company lessons and experiences to apply to the India investment decision, as his company had had international operations since the 1940s, had struggled internationally in the late 1980s and early 1990s, and had gone on to regain its global competitive advantage in the late 1990s and early 2000s. During Stropki's tenure as CEO since 2004, the company had further expanded globally and by 2006 owned manufacturing operations in 19 countries across five continents.

Most recently, the company had enjoyed increasing success in China as a result of its aggressive expansion through both a joint venture and set of majority-owned plants. As Stropki opened the Cleveland newspaper to check the previous Sunday's Cleveland Browns score, he wondered how he could apply the lessons of the Chinese experience in particular, to India.

Welding Industry

Welding is a technique for joining pieces of metal by fusion through the application of concentrated heat. Virtually any two metal items can be joined by welding. Welding is also a supporting activity in most industrial activities, from the manufacture of construction equipment to machine tools, from pipelines to petrochemical complexes. The predom血nt method of welding is arc welding, where a welding power source generates electric current, which is used to create an electric arc, which then melts a filler metal used to create the bond between the two metal parts. The filler m etal is in the form of a stick or w ire electrode, and the electrode often has a series of chemical coatings and/ or shielding gases designed to protect the welded metal from oxygen and nitrogen in the air and thus strengthen the bond. Electrodes are referred to as "consumables," and the power sources and related parts used to create the electric arc are referred to as "equipment."

Professor Jordan Siegel prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effe中ve or ineffective management

Copyright ©2006--2008 President and Fellows of Harvard College. To order copies or request pennission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http:/ /www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission of Harvard Business School.

Lincoln Electric

707-445 Lincoln Electric

As of 2005, the welding industry together with its associated metal-cut血g technology was a $13 billion industry globally. As shown in Exhibit 1, 42% of welding industry sales came from equipment, whereas the remaining 58% came from sales of consumables. Welding products played a crucial role in the development of important structures around the world, such as bridges, o止 production facilities, and a range of other building, infrastructure, and commercial construction projects. As a result, the industry's growth rate in unit volume moved together with the global economic growth rate, which was predicted to be 3.0% in 2006.1 The industry's growth in sales revenue could be even higher, as was the case in 2005 when growth was driven by high demand for welding products in China, India, and Eastern Europe. Customers included companies involved in general metal fabrication; infrastructure buil血g inclu血g oil and gas pipelines and platforms, buildings and bridges, and power generation; and transportation and defense industries (automotive/trucks, rail, ships and aerospace); equipment manufacturers in construction, farming and mining; and retail do-it-yourself (DIY). Sales were spread out across these various customer segments. As shown in Exhibit 2, sales were also spread geographically across the globe, with Asia responsible for 45% of global sales, followed by North America (23%) and Europe (21 %).

Major Welding Competitors in 2006

In 2006 the global arc welding industry was seen as highly competitive. The industry was sigriificantly fragmented, with more than a thousand companies producing equipment and consumables and the top six accounting for only 45% of the global market. Exhibit 3 presents a visual comparison of the leading welding competitors by their level of revenue. Companies competed on the basis of price, brand preference, product quality, customer service, breadth of product offering, and technical expertise and irmovation. In addition, because it was costly to ship welding products due to their weight, it was essential in this industry to set up a local or regional production presence to gain si驴ificant market share.

The following is a brief description of Lincoln's key global competitors:2

ESAB (Charter pk) - $1.3 billion, 2005 sales of welding and related equipment. ESAB, which represented some 75% of revenues of its parent company Charter, was a European-based company with a global presence. While ESAB was the number-three player in the United States, ESAB enjoyed market leadership in Europe, Brazil, Argentina, and India. In 2000, ESAB had agreed to be purchased by Lincoln Electric for $750 million plus the assumption of $300 million in ESAB's debt. Yet Lincoln Electric decided that same year not to go forward with the acquisition after antitrust and other issues arose in the due diligence process.

Illinois Tool Works (ITW) - $1.3 billion, 2005 revenues from welding products. ITW's parent company had sales of nearly $13 billion, with a diversified product line from over 700 business units including plastic and metal components, fasteners, industrial fluids, and adhesives. Additionally, ITW manufactured systems for consumer and industrial packaging, identification systems, industrial spray coating, and quality assurance equipment. ITW's two major welding subsidiaries included Hobart (acquired in 1996) and Miller (acquired in 1993). ITW was Lincoln's strongest U.S. competitor, and ITW maintained a U.S. market position in welding that was second to Lincoln. In U.S. welding equipment, however, ITW's market share was slightly higher than Lincoln's. Elsewhere around the world, Lincoln's welding equipment share was higher than ITW's. ITW did have a large Asian subsidiary named Tien Tai producing consumable products in Taiwan and China.

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Air Liquide - $600 million, 2005 estimated sales derived from welding products. The main business of Air Liquide was industrial gases, but they also had a si即ificant welding business in Europe. Their gas distribution business also provided natural leverage m sales of welding products.

Kobelco - $550-600 皿llion, 2005 estimated sales derived from welding consumables. Kobe Steel, the parent company of Kobelco, was a leading Japanese steelmaker as well as a supplier of aluminum and copper products. Kobelco itself concentrated on welding consumables and enjoyed a dom血nt position in the Asia-Pacific region. Kobelco had also begun establishing a significant position in the China market through its joint venture with Panasonic.

Therrnadyne Holding Corp. - $470 million, 2005 sales. Thermadyne was a primarily U.S.- focused manufacturer and also one that had its strongest market position in a specific niche (gas apparatus equipment), with good brand-name recognition for its "Victor" brand. Thermadyne's competitive position appeared constrained by its lack of product breadth, the limited liquidity of its shares in the public equity markets, and its excess debt level.

Lincoln Electric: Overview

Starting with a capital investment of only $200 in 1895, John C. Lincoln formed the Lincoln Electric Company to produce and sell electric motors that he had designed. In 1907, John's brother James joined the company as a senior manager out of Ohio State University and over the years introduced a series of innovative human resource policies and management practices. Starting in 1909, the company diversified into the production of welding equipment, and by 1922 welding equipment and welding consumable products had become the company's main business.

The company hit $1 billion in sales for the first time in 1995, its centennial year, and that same year the company's shares began trading on Nasdaq. Between 1995 and 2005, the company rose from being the leading U.S. manufacturer of welding products to the leading global manufacturer in its industry. In 2004, John M. Stropki was named chairman, president, and chief executive officer, becoming only the seventh chairman in the company's then 109-year history. In 2005 the company's operating income was $153.5 million and net income was $122 million on sales of $1.6 billion. The company was the world's largest designer and manufacturer of arc welding and cutting products, manufacturing a full line of arc welding equipment, consumable welding products, and other wel如g and cut皿g products. Because of its technological innovation and product and application support, the company was able to earn a price premium for many of its products. In addition, the company's human resource and incentive system had led to a history of industry-leading productivity advances. The company's 20-year record of performance is described in Exhibit 4, and the organizational chart is presented in Exhibit 5.

Human Resour ces and Incentive System

The Lincoln brothers believed that capitalism could actually lead to a classless society if companies would simply provide the right incentives for individuals to fulfill their potential and richly reward those individuals based on their performance. James F. Lincoln was known to begin each company meeting by saying, "Fellow Workers闷 Starting in 1907 and under James F. Lincoln's management, Lincoln was one of the first companies to introduce a number of human resource innovations, several of which would eventually become standard practice across U.S. manufacturing industries. These innovations included the use of employee stock ownership, incentive bonuses determined by merit ratings, the creation of an Employee Advisory Board (which had met bimonthly since 1914), an employee suggestion system, piecework pay, annuities for retired employees, and group life insurance.4 Since 1958 for the U.S. operation, the company had a no-layoff policy, and a

3

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707-445 Lincoln Electric

large share of company profits were shared with workers through annual bonuses (fully 32% of income before interest, taxes, and bonus, in 2005). During industry downturns all employees, including senior managers, shared the pain through reduced discretionary bonuses. As a result of the company's emphasis on incentive pay-for-performance, some 60% of labor costs were variable.

The company encouraged a highly entrepreneurial envirorunent in its manufacturing plants. Lincoln workers managed themselves, with only one foreman in Cleveland for approximately every 68 employees.5 There were tens of thousands of piecework tasks at Lincoln, and hence individual factory employees were given a great deal of autonomy both in solving problems and reporting their own piecework wages. Lincoln production employees had no paid sick days or holidays, and accepted overtime to meet spikes in demand. Factory workers were paid for what they produced and defective work had to be corrected on an employee's own time. Furthermore, whereas the piecework encouraged productivity, a large amount of the employee's annual compensation came from the annual discretionary bonuses. In 1997, for example, the company paid $74 million in bonuses to 3,259 employees (for an average bonus of $23,000; for succeeding years, see Exhibit 6).6 The company determined annual bonuses based on a merit rating, which was based in equal parts on quality, adaptability / flexibility, productivity, dependability / teamwork, and environmental health and safety. Lincoln's incentive system required a high degree of trust between employees and senior management, as workers needed to believe that they would benefit from suggestions they made on a weekly and even daily basis to improve productivity. Trust was something that the company had to build up over many decades, and the no-layoff policy laid a significant foundation for that culture of trust.

Technology Development

Award-winning engineers were responsible for Lincoln Electric's technological leadership in welding, and the company spent approximately 2% of sales on research and development (R&D). With outstanding R&D productivity, the company led its industry in new market introductions and quality performance. More than 50% of Lincoln Electric's equipment sales in 2005 were generated by welding machines introduced in the previous five years. The company held many valuable patents, primarily in arc welding. Lincoln Electric took pride in its technological focus and believed that its product focus had led it to become known as "The Welding Experts," in contrast to its leading competitors who chose to 中versify their resources far away from welding. In 1996 the company approved a multimillion-dollar expansion of its research and development facil让ies. In 2001, the $20 million David C. Lincoln Technology Center was completed, ensuring Lincoln Electric's leadership position in product development. The company had the most aggressive, comprehensive, and successful R&D program in the welding industry. Although many of these activities were located in Cleveland, Lincoln Electric in 2004 began building regional engineering development centers in Shanghai and Poland in addition to its existing training and demonstration centers in Australia, Canada, Italy, Mexico Netherlands, Singapore, and Spain. During the 1990s, the company invested extensively in automated welding products together with its Japanese supplier FANUC Robotics.

Product Mix

Lincoln was one of only a few worldwide broad-line manufacturers of both arc welding equipment and consumable products. The benefits of producing both equipment and consumables were tied to the value of providing welding "solutions" rather than just individual products. Lincoln could solve customers'process problems and improve process productivity with its ability to combine both equipment and consumables development needs into one integrated package. Lincoln's equipment products ranged from $300 units available at Home Depot, Lowes, or Wal-Mart, etc., to automated industrial welding systems costing $250,000, although the majority of equipment

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Lincoln Electric 707-445

products were in the $1,000 to $10,000 range. Many of Lincoln's most advanced equipment products were produced through its supply arrangement with FANUC Robotics. These products combined a robotic arm, a welding power source, and a wire feeder to automatically produce welds using various computer software, welding fixtures and fasteners, and accessories. In 1990, the company expanded its arc welding line by purchasing Harris Calorific, a manufacturer of gas-cutting and gas- welding equipment. Starting in the early 1990s the company began growing sales in the North America retail channel. In 1999 the company completed the divestiture of its motor business. In 2002, the company formed Lincoln Electric Welding, Cutting, Tools and Accessories, Inc., dedicated to growing the retail channel. In 2003 Lincoln complemented its successful line of retail products with the acquisition of the Century and Marquette welding and battery-charged brands, which had leading positions in the automotive and retail channels. In 2005, the company broadened its metal- joining base when it acquired J.W. Harris Company, a privately held brazing and soldering alloys business based in Mason, Ohio. J.W. Harris was a global leader in the production of brazing and soldering alloys with about $100 million in annual sales. Harris products could be sold to Lincoln's existing set of customers, and vice versa. Also, the introduction of Lincoln's management system and purchasing and lo护stics capabilities had led to cost savings at the Harris plants. As a result, the acquisition had produced synergies on both the cost and revenue sides by 2006.

Marketing

Lincoln's products were marketed and sold in 86 countries, and one of the company's selling points was that it could offer advice to its customers on how to use its welding equipment without charging them directly for the advice. To the extent possible, the company did receive a product price premium in exchange for the advice it gave, and some Lincoln products also received a higher price premium than others based on the size of the productivity gains they afforded to customers. Lincoln employees applied their skills and knowledge to provide world-class welding training for the company's distributors and customers. The company believed that it had a competitive advantage because of its highly trained technical sales force and the support of its welding research and development staff, which allowed it to assist the consumers of its products in optimizing their wel如g applications. As part of the sales process, Lincoln employees visited prospective customers, evalua血g their welding requirements, and made specific product recommendations together with a return-on-investment projection. Lincoln also employed its technical expertise to present its Guaranteed Cost Reduction Program to end users, through which the company guaranteed that the user would save money in its manufacturing process when it utilized Lincoln's products. This allowed the company to introduce its products to new users and to establish and maintain very close relationships with its consumers. In addition to these sales activities, the company also marketed itself actively as a leading sponsor of the organized motor racing sport industry. At motor racing events like NASCAR, Indy Car, and NH卧， Lincoln used the opportunity to demonstrate its products to local prospects.

Design and Production

As a result of the company's renewed commitment to R&D starting in 1997, Lincoln was able to design an expanded product line and diversify its production across multiple welding technologies. In 1997, over 30 new products, including a new computer-based welding machine and the industry's first digital communications protocol, called ArcLink, were introduced at an international welding show in Essen, Germany. The company, having recovered from the crisis of 1993, also invested heavily in modernization of its Cleveland plant.7

5

Lincoln Electric

707-445 Lincoln Electric

Lincoln's Global Strategy

W血e Lincoln had international operations dating back to the 1940s, its first major international expansion occurred between 1986 and 1992, when the company expanded from five manufacturing plants in the U.S., Canada, Australia, and France, to encompass 22 plants in 15 countries. In 1987 the company expanded its Australian operation by purchasing assets from Air Liquide. Then, the company bought a minority interest in an existing plant and also constructed a new plant in Venezuela. That was followed by a series of acquisitions in Mexico, Brazil, Scotland, Norway, the United Kingdom, the Netherlands, Spain, and Germany. The new acquisitions in Europe and Latin America that had cost $325 million suffered large operating losses, and in 1992, while the U.S. operation continued to be strongly profitable, the losses internationally were so serious that the company faced a stark choice.8 In order to pay its U.S. employees their annual bonus, the company had to borrow the money.9

There were numerous potential explanations for the difficulties faced after the company's late 1980s-era expansion. Lincoln wanted the new acquisitions to operate in Lincoln USA's image and to be led by managers from Cleveland. The company's international managers were expected to introduce piecework, a bonus system, and an advisory board冈 As business historian Virginia Dawson noted in a 1999 history of Lincoln Electric, "The inexperience of Lincoln executives with trade unions and lack of knowledge of labor practices and laws in other countries proved major stumbling blocks in the effort to integrate the new acquisitions into Lincoln's distinctive management culture四 Many of the local managers and local employees did not believe that these practices were appropriate for their local env江onrnent, and as a result, many of the practices were either never 皿plemented or implemented without success. The company was also unlucky in having bought compan记s in Europe just before a global economic downturn. Anthony Massaro, a 26-year veteran executive at Westinghouse Electric with extensive international experience and a graduate of the Advanced Management Program at Harvard Business School, was recruited to restructure Lincoln's international operations. Massaro closed unprofitable plants in Japan, Venezuela, Germany, and Brazil. He had found that some of the European plants were engaging in duplicative production and actually competing with each other. Massaro rationalized manufacturing so that some plants made consumables while others made welding machinery.12 The then CEO of the company, Donald Hastings, announced that henceforward the company would learn from its experience and rely more on joint ventures and strate驴c alliances.13

Starting in 1996, companywide profitability had returned, and the company renewed its global expansion. In that same year, the company acquired Electronic Welding Systems in Italy and formed a joint venture in Indonesia. Also in 1996, Massaro was promoted to the position of president and chief executive officer. In 1997 the company opened its joint-venture electrode plant in Indonesia. In 1998, the company opened an electrode plant in Shanghai, along with completing acquisitions of Uhrhan & Schwill, a Germany-based designer and installer of pipe welding systems, and Indalco, a Canada-based manufacturer of aluminum wire and rod. In 1998 the company also acquired a 50% interest in ASKaynak, a leading Turkish producer of welding consumables, and opened a distribution center in Johannesburg, South A行ica. In 1999 Lincoln acquired a 35% equity position in Taiwan- based Kuang Tai, a leading supplier of welding consumables in Asia. It also completed construction and start-up of a new wire manufacturing facility in Torreon, Mexico. In 2000, Lincoln acquired Italian manufacturer C.I.F.E. Spa, Europe's premier producer of MIG wire, strengthening Lincoln's position as a leader in the European welding consumables business. Also in 2000, production began in Lincoln's new manufacturing facility in Brazil. In 2001 the company expanded its operations in South America with the acquisition of Messer Soldaduras de Venezuela, the country's leading manufacturer of consumable welding products. In 2002, the company acquired Bester S.A., a welding equipment manufacturer based in Poland, driving the company's growth in Eastern Europe.

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Exhibit 7 shows the geographic coverage of Lincoln's plants in 2006, and Exhibit 8 describes how Lincoln senior management viewed their competitive advantage by geographic region. Exhibit 9 describes Lincoln's subsidiaries according to their operating performance, total sales, and total assets.

In 2004 Massaro retired, and John Stropki, the newly appointed chairman and CEO, continued the company's international expansion with particular emphasis on the China market. In 2004, the company acquired controlling interests in two welding businesses in C血a, giving Lincoln a leading share in that growing market. Also in 2004, the company started construction of a new welding equipment plant in Shanghai. Adjacent to the plant, Lincoln started building a multistory building that would serve as its regional headquarters, applications, and R&D center, as well as serving as a training, demonstration, and customer service area. Outside China, the company continued its international expansion in 2004 by upgrading its Bester equipment plant in Poland to serve Eastern Europe, another growing and 皿portant market for the company; by constructing a new machine manufacturing facility in Mexico; by expanding operations in Brazil, Venezuela, and Australia; and by planning a new welding consumables production facility with its joint venture partner in Turkey. In China, also in 2004, Lincoln obtained a controlling interest in the Shanghai Kuang Tai Metal Industry Co. With increased ownership, all China equipment manufacturing was subsequently incorporated into Lincoln's operations. In addition, Lincoln purchased 70% of Rui Tai Welding and Metal Co., a manufacturer of stick electrodes located in northern China. Exhibit 10 shows the company's geographic coverage within the country.

Strategic Challenges

The company set a series of ambitious financial goals, but meanw血e growth in its primary market of the United States would be far from sufficient to meet these goals. The company was still dependent on North America for appr?ximately 60% of its sales, and yet other markets for welding products and consumables were growmg significantly faster. Long-term company financial targets included sales growth at double the rate of growth in worldwide industrial production, operating margins over 15%, earnings growth of 10% annually, and return on equity exceeding 20%. As a result, as of 2005 the company spent approximately two-thirds of free cash flow for international expansion. 14

Lessons from Prior Experience in Asia

Lincoln Electric saw Japan, South Korea, and China as advanced versions of what the Indian welding market was likely to become. Therefore the company wondered which lessons could be gleaned from the company's mixed record of success in these three countries. In Japan, the market for welding had closely tracked the overall explosive development of the manufacturing sector from the 1960s to the 1980s. The country started out producing low-end consumables for domestic production, but as the market grew domestic producers began focusing domestic production on advanced, automated welding equipment products. Low-end consumables were subsequently imported from first South Korea and then China. The Japanese welding market had reached a steady state in which the market demanded the latest high-technology welding products with exceptional pre-sales and post-sales support on the one hand, while also requiring high-quality commodity consumables at competitive prices. South Korea was moving toward that same industry steady-state outcome, albeit at a pace that was twice as fast as in Japan. In China, the country had gone from being a producer of only low-end consumables to embracing the most advanced wel如g technology. This had occurred within a span of just 5-10 years.

Japan Lincoln's distribution in Japan was very limited. The company did not have any market access at the commodity end of the market, and the company had limited in-country demonstration

7

Lincoln Electric

707-445 Lincoln Electric

or after-sales support capability, which was critical in Japan for high-tech sales. There was also no Lincoln distribution channel, brand recognition, or sales force to sell corrunodity products that might be imported from China or Taiwan. The Lincoln welding consumables business in Japan consisted principa且y of niche products sold to a sma且 group of customers. Lincoln's welding machine requirements were complicated by the power supply situation in Japan, where there were two voltages and frequencies in use. The one that caused the problem was the corrunon use of 200 volt 3-phase power. While some Lincoln power sources ran adequately on this, the performance was 皿paired and Japanese customers were reluctant to pay a price premium for a product that was not optimized for their application. Yet Lincoln did not undertake a program to optim江e machines for the Japanese market. The conclusion might be that Lincoln did not enter the Japan market with sufficient resources early enough to establish an effective presence against strong local competitors.

South Korea In South Korea, the company had no production presence but had used the same reliable local distributor for 27 years. The distributor had good countrywide coverage and was effective in gaining access to most of the business that Lincoln could reasonably expect. Most of the challenge had been that Korean comp皿es were reluctant to invest in high-end welding equipment, but that was changing as Hyundai Heavy Industries and others began to themselves move into high- end shipbuilding and thus demand the latest welding technology. Now that high-end demand was increasing, Lincoln needed to meet the challenge of providing prompt product delivery and complete technical support without any local production presence. Lincoln was still shipping its high-end machines to Korea from Cleveland and faced long lead times to ship the products. As the company developed its machine production line in China, it planned to ship product from China to Korea and other Asian markets.

China Lincoln had a sales presence in ChiI田 for several decades, but beginning in 1997 Lincoln was able to establish a viable manufacturing platform. The company started by creating the Lincoln Electric Shanghai Welding Company in a goverrunent-created free trade zone. Establishing the Shanghai operation, however, proved difficult. The company found it difficult to find competent local managers, difficult to deal with the local goverrunent authorities, difficult to establish distribution channels, and difficult to make the operation profitable (due to a combination of challenges in day-to-day manufacturing management and the lack of a strong distribution channel for its domestically produced products). As a result of these negative experiences, the company decided to progress further on its Chinese expansion with a Taiwanese partner. As mentioned earlier, this began with acquiring a 35% interest in Kuang Tai, which, although it was a Taiwan- headquartered company, also had one of the largest consumables factories in China (Jin Tai Welding). Lincoln selected Kuang Tai because of its established production plant and distribution network, its ability to locate experienced, bilingual operations managers, its reliability, its proven ability to deal effectively with an extensive Chinese bureaucracy, and the company's concern with the complexities and uncertainties of alternatively partnering with a state-owned enterprise. Over time Lincoln increased its minority position in this consumables factory to 46%, and the company also purchased a control血g interest in two other consumables plants. Efforts to expand this manufacturing platform continued, which included the opening of the Shanghai machine plant in 2005, but the main effort was subsequently focused on developing stronger distribution and marketing, a local R&D capability, a broad logistics network, and local management and technical staffing.

As a result of these efforts, Lincoln had achieved many of its goals to establish a significant presence in China but now saw its future growth restricted due to the partnership structure. The partner was very competent, but the two sides did not always agree on how to grow the business (volume vs. profits). The decision-making process was time-consuming for an operation that Lincoln did not control. Hence, all subsequent major investment in China was done through majority-

8

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controlled operations. Yet Lincoln senior management acknowledged that they could not have gotten to their current market presence without the joint venture experience. Also, in its majority owned operations the company had continued to battle its way through difficulties in finding, retaining, and affording talented local general managers. The company found that the cost of talented local general managers was equivalent to what the company paid in the U.S. and that there was frequent turnover in the Chinese market. The company also continued to find it challenging to attract and retain the local talent needed to build capabilities in supply chain logistics, IT, quality assurance, product development, and purchasing and sourcing. In 2006 the company had an organization in China in which the two top managers, and six out of 14 senior managers, were expatriates. Lincoln Electric had set up or acquired 16 operations in 11 countries over the previous nine years, but of all those operations, China had proven to be the most challenging. Yet among these challenges, the company was not overly concerned about the loss of its intellectual property. Lincoln Electric had heretofore chosen not to produce its most technologically advanced products in China, although it reserved the option to do so in future years.

Opportunity in India

Since the growth of the welding industry closely tracked the development of a country's entire economy, India had become an attractive market over the previous 15 years. Since 1991 India had enjoyed real average annual growth in GDP of almost 6%, making it one of the faster-growing countries in the world. To put the 血portance of the Indian market in further perspective, its 2005 market of US$415 million compared to US$601 million for all the countries of Latin America combined and US$312 mi且ion for all countries of East Europe, the other two world regions with still- developing economies and above-average welding market growth rates (- 4% CAG).15 India's growth reached over 7.5% in 2005, and a 2003 study by Goldman Sachs projected that over the next 50 years India would become the fastest-growing of the world's major economies. In a 2005 interview with the Pipeline and Gas Journal, Stropki noted that "India is currently rebuilding its infrastructure and therefore will need thousands of miles of new oil and gas pipelines."16

India's welding market was also the third-largest in Asia by 2006, with $500 million in annual industry sales expected by year end.17 Industry growth was even higher than the country's growth rate because of India's recent focus on construction and infrastructure projects. One of the interesting features of the Indian market was that only approximately 56% of welding consumable sales were taken up by large firms that developed their own designs and technology, whereas the other approximately 44% of welding consumables were sold by over 300 small firms that inunediately could try to imitate any new design on the market and try to sell it at a sharp discount.18

Significant large competitors who already had a strong presence in the Indian market included Ador Welding Ltd., a company contro且ed and managed by the local Advani family. As described in Exhibit 11, Ador enjoyed over $50 million in sales in 2005 with a 15% operating margin, and a portion of its shares traded on the local stock exchange. In July 2006, a research analyst at Karvy Stock Broking Limited estimated that Ador's revenues would grow at a cost-adjusted annual rate of 20% over the next two years and that Ador would continue to enjoy a return on capital employed at over 40%. The company had shifted some production to Silvassa, a government-created tax-free zone, and by concentrating production at a smaller number of facilities Ador had realized both economies of scale as well as tax savings. In July 2006 the company's publicly traded shares were valued at 10.9x FY07 estimated net earnings per share, and EBITDA per share was predicted by the same local analyst to grow at a CAGR of 29% and net earnings per share to grow at a CAGR of 23% over the next two years. Ador had annual sales of 241.6 crore (large values of India's currency, the rupee, are counted in terms of crore, with one crore the same as 10,000,000 rupees). The company had produced 17,217 MT of consumable welding products in FY06, and Ador had previously

9

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constructed plant lines that could produce far more than that should the market continue to grow.19 Ador had in FY06 paid a dividend of 15 rupees, equal to a 4% yield on the stock.20

As described in Exhibit 12, the other large company was ESAB India, which was controlled by Lincoln's multinational competitor ESAB and which enjoyed over $50 million in sales in 2005. ESAB entered the market in 1988 with the acquisition of Philips'Indian welding plant for 6x operating earnings at 60 million rupees (otherwise denominated as 6 Indian crore). Through a series of acquisitions, ESAB India built up its market share but had enjoyed little profitability. In fact, the company only attained its admirable 18% operating margin in 2004 after a series of one-time write- offs to clean up the balance sheet, the introduction of current technology, the introduction of strict internal controls, staff changes, and the reorganization and expansion of distribution channels. Prior to 2005, ESAB India had invested in India entirely through acquisitions to the amount of 40 Indian crore.21 In August 2005, ESAB India began construction of its first greenfield manufacturing plant in India for an announced cost of 20 Indian crore (the same as 200 million Indian rupees, which amounted at that time to US$4.6 m让lion). ESAB's announced investment of 20 crore, which included the cost of procuring technology from the parent company, would enable ESAB India to complete a 50,000 square foot facility in eight months.22 The third and remaining large competitor in India was EWAC Alloys Ltd., a 50-50 joint venture between German welding firm Messer and L&T of India. That joint venture enjoyed $30 m血on in revenues in 2005.

After those three large competitors, the remaining incumbent companies were relatively small and included D & H Secheron, a private Indian company; Indo Matsushita, a subsidiary of Japan's Matsushita; and Anand Arc, another privately held Indian company. Anand Arc manufactured a full range of welding consumables and claimed that it produced the highest-quality electrodes in India.23 From its plants in Mumbai and Pulghar, its product range included electrodes for welding all types of metals encountered in the Indian welding industry. In addition to Anand Arc, D&H Welding was another local company with $3.5 million in sales in 2005.24 GEE Ltd. and MIG Weld were two even smaller local companies contro且ed by consortia of investment firms.

In regards to India's labor market institutions, the country was generally friendly to the use of incentive pay-for-performance, although there were a few notable regulations in place. Most importantly, the company was free to implement both piecework and a discretionary bonus without getting approval from a union, a government, or any other third party, and without incurring any future obligation. The remaining restrictions were for the most part not heavily constraining. Piecework could be implemented, but in most cases pay had to meet a minimum wage level.25 The minimum wage varied by state and in a few states there was still no minimum wage, though more and more states had been implementing minimum wage levels in recent years. Pieceworkers were entitled to the same number of days of paid annual leave as their salaried counterparts, and annual leave pay was calculated based on average earnings over the preceding month. Discretionary bonuses could be paid, but there was a requirement that they could be paid only in addition to a required statutory bonus.26 The statutory bonus was required for all workers earning up to 3,500 rupees per month, and could range from a minimum of 8.33% to a maximum of 20% of each worker's annual salary (the exact percent depended on the firm's performance for the year). The base on which the bonus was calculated was capped at 2,500 rupees per month; that is, any employee earning between 2,501 and 3,500 rupees per month would received a bonus calculated on a base of 2,500 rupees per month.27 The average industrial worker's salary was estimated to be just under 4,000 rupees per month in 2005 (approximately $88 at the December 2005 exchange rate)邸 However, in August 2006, Indian Prime M血ster Manmohan Singh had promised to raise the legislated base on which a discretionary bonus had to be calculated, noting "I agree that current ceilings were set more than a decade ago. We will soon take a favorable decision on it."29

10

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Lincoln could enter India by acquisition, by joint venture, or by building a new plant on its own. If the company were to enter by acquisition, it was unclear what type of valuation to apply to any of the Indian incumbent companies. In other markets, Lincoln would go forward with an acquisition only if it met the following criteria: the acquisition was accretive immediately under the new FASB goodwill rule; the investment had a minimum internal rate of return, based upon total investment, of an initial 10%, increasing to a minimum of 18% over the first 3-4 years (with synergy credits); the acquisition price was less than Bx EBITDA; the resulting companywide balance sheet would continue to justify the corporate-targeted credit rating; all liabilities were recognized appropriately on the balance sheet; and full financial and legal due diligence could be conducted before a Lincoln commitment. In India in 2006, the market was booming and any significant welding acquisition would likely require paying an acquisition premium greater than Lincoln Electric had been used to paying in the past. Other factors also making an acquisition strategy difficult included the fact that one of the targets was already owned by a Lincoln Electric competitor and other local targets had a combination of family control and remaining dispersed ownership structures. Alternatively, if the company were to enter by joint venture, the question was: How could Lincoln ensure its ability to make key business decisions? If the company were to build its own plant, the question was: Would the cost of starting from scratch be more than sufficiently compensated by the total control the company would enjoy?

11

707-445

Exhibit 1 Global Sales for the Welding Indus try in 2005

Consumables 58%

Source: Lincoln Electric.

Welding Equipment Cutting Products

42%

Exhibit 2 Geographic Pattern of Sales for the Global Welding Industry in 2005

Lltln Amlr1CI S%

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Source: Lincoln Electric.

12

Europe 21%

Lincoln Electric

Lincoln Electric

707-445

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o'I> \

令｀ ~~

Sources: Data on individual companies came from public company releases and casewriter estimates based on publicly released financial statements. Sources for each company include: for ESAB, http:/ / www.charterplc.com/charter/ ar2005_1inks/ar2005.pdf; for ITW, http:/ / library.corporateir.net/ library / 71/ 710/ 71064/ items/175644/ AnnuallnvestorDayPartl.pdf; for A心quide, http: //www.airliquide.com / file/ stdpagetranslation/ dow呴ad心enter-ra七n/2005-financial-report.pdf; for Kobelco, http:/ / www.kobelco.co.kp; for Thermadyne, http://www.thermadyne com/ up!Files/pressRelease/ThermadynePressReleasewithSchedules-Julyl l2006.pdf; for Bohler, http://www.kobelco.co.jp / ICSFiles/ metafile/ 2006/ 01 / 27 / annual2005comp.pdf; for Da山en, http://www.daihen.co.jp/gaiyou_e/gaimain.htm; for Panasonic, http://ir-site.panasonic.com/annual/2006/; for Fronius, http://www.fronius.com/; for Fronius, http://www hypertherm.com/; for Sichuan Atlantic, http:/ /www.chinaweld-atlantic.com/weldEn/introduction.htm; and for Hyundai, http:/ / www.hdweld.co.kr/ eng/ company / introduce.asp

707-445

Exhibit 5 Organization Chart

Chainnan, President & Chief Executive Officer

John Stropki

E汜cutive Secretary

Marylee Baller

Vice Presiden~President Lincoln Electric Asia Pacific

TomFlohn

Vice Presidenl President Lincoln Europe & Russia

Dave LeBlanc

Vice President, President Lincoln Electric Latin America

Ralph Fernandez

Vice President, President & CEO, Lincoln Electric Canada

Joseph Doria

Via, President Group President Cutt1 ng Brazing & Subsidiaries

Dave Nangle

Sr. v,ce President, Sales & Marketing and Sr. Vice President

for Middle East & Africa (MEA)

Richard Seif

Sr. Vice President, Global Engineering & U.S. Operations

George Blankenship

Sr. Vice President, Chief Financial Officer & Treasurer

Vince Pe~ella

Sr. Vice President, General Counsel & Secretary

Fred Stueber

Vice Presiden~Strategic Planning & Acquisitions

Rob Gudbranson

Vice President, Global Operations Development

Vinod Kapoor

Director, Corporate Relations

Roy Morrow

Vice President, Human Resources

Gretchen Farrell

Source: Lincoln Electric.

Note: All senior executives above report directly to John Stropki, L incoln Electric's Chairman, President and Chief Executive Officer.

-15-

Busines

s Po licy and

Strategi

c Manag

e m e nt

707-445 -16-

Exhibit 6 Gross Bonus Trends at Lincoln Electric in the United States

The Lincoln Electric Company Gross Bonus Trends

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Lincoln Electric. Linco

ln Elec tric

707-445

Exhibit 7 Lincoln's Global Presence in 2006

芦THE WELDING EXPERTS,.. --

”。........"""'"飞闷• ""'叩还吐c-..., 沁心 毗切叩UHODOU•R花归

． 应…正． 。一O汕，心...... ,“叩，女

U切._比

＂恤喊""必心....... , .. 干._.

．皿“靠“如氐 -0心心

L.OCAllONS

"'lld<l"""" . ... 叫....叩

.-o. 记I

-17-

B u si nes s Policy

and

St rategic

Manag

e m e nt

一 ,,

', 32 Faci而es in 18 Countries on 5 Continents

Welding or Cutting令. . We're There!

Source: Lincoln Electric.

707-445 -18-

Exhibit 8 How Lincoln Senior Management Viewed Their Global Advantage in 2006

Asia Pacific

. Valued name in Australia, SE Asia . Cost-effective consumable manufacture in Indonesia & China

Li nco

ln Electric

Source: Lincoln Electric.

707-445

Exhibi t 9 Lincoln Electric's Regional Performance

I Region Year ROA~~~!~:~:n~~T~:6 :i~~!!\n

-19-

U.S.A. and Canada Mexico and Latin America Europe Asia and Australia

2005

2005 2005 2005

0.28

0.16 0.07 0.05

1077.5

121.4 426.3 125.0

652.5

83.0 313.3

98.1

B u sines s Po licy and

Strate

gi c M an ag e m e nt

Source:

Note:

Lincoln Electric.

ROA is defined as Operating Income/Total Assets.

707-445 -20-

Exhibit 10 Lincoln's Plants in China

+SLE

Source: Lincoln Electric.

Linco

ln Elec tric

Business Policy and Strategic Management

Lincoln Electric

Exhibit 11 Ador Welding Limite d

Net Sales/Income from operations Less: Excise Duty Net Sales/Income from operations (Net of Excise Duty)

Total E劝enditure (Increase) / Decrease in Stock in Trade Consumption of Raw Material & Packing Material Staff Cost Other Expenditure Interest & Finance Charges Depreciation Additional Depreciation Profit Before Tax Provision for Taxation Deferred Tax Impact Fringe Benefit Tax Profit After Tax Prior Period Adjustments (Including Excess/Short Provision of Taxes) Net Profit Basic and di.luted EPS excluding exceptional items lor the period, for the year to date and for the previous year (not annualized) Basic and diluted EPS excluding exceptional items for the period, for the year to date and for the previous year (not annualized) Aggregate of non-promoter share holding Number of shares Percentage of shareholding

s~ 和m~nt R~nnu~IN~t of Exds~D田yl Consumables E'luipment & Project En俨ineerin~

Net Sales/Income from Operations Segment Profit before Interest and Tax

Consumables E'luipment & Project En~ineerin~ Total — Less: Interest & Finance Charges Other Unallocable expenses net of Unallocable Income

Total Profit Before Tax Capital Employed

Consumables Equipment & Project Engineering Unallocable Cor orate Assets net off Unallocable Cor orate Liabilities

Total Capital Employed

Source: Adapted from Ador Welding Limited company website

707-445

~nits: RuE!ees in Crorel Financial Year ended 31st March

2006 2005 276.14 223.99 34.54 27.15

241.60 196.84

-2.88 2.30 13118 104.43 22.98 18.52 44.79 43.12 -0.11 0.38 6.29 6.51

11.09 48.36 28.93 7.55 6.05

-0.29 -5.05 0.90

40.20 27.93 -0.16 -0.80 40.04 27.13 29.45 19.95

25.20 13.17

5,995,933 5,829,683 44.09% 42.87%

180.07 153.99 61.53 42.85

241.60 196.84

37.96 28.09 10.94 5.11 48.90 33.20

-0.11 0.38 0.65 3.89

48.36 28.93

63.95 33.65 13.62 10.52 25.38 42.00

102.95 86.17

21

Lincoln Electric

707-445 Lincoln Electric

Exhibit 12 ESAB India Limited

Audited Financial Results for ESAB INDIA LIMITED

Gross Sales Less Excise Duty Net Sales Other Income Profit on sale of land/ leasehold rights Total Income

Increase in Stock-in-trade Consumption of Raw & Packing Materials Purchases - Finished Goods Staff Cost Other Expenditure Total Expenditure Profit before Interest and Depreciation Interest Depreciation Profit before Tax

Taxation

Profit after Taxation Minority Interest Profit after Minority Interest

Basic and Diluted Earnings Per Share (Rs.) Aggregate of non-promoter shareholding Number of shares Percentage of holding (to total shareholding)

Se钾ent Revenue (Net) Consumables Equipment Total — Segment Profit Consumables Equipment Total — Less: Interest Other una llocated exp enditure n et of unallocated incom e Total Profit Before Tax Capital Employed Consumables Equipment

Source: Adapted from ESAB India company website.

22

(Units: Rupees In Millions)

Consolidated and Audited for the year ended 31 December

2005 2004 2716.0 2138.4

334.4 256.8 2381.6 1881.6

53.8 39.6 45.3 4.2

2480.7 1925.4

-55.2 -17.6 1173.0 957.0

213.7 98.4 160.6 181.1 357.6 314.3

1849.7 1533.2 631.0 392.2

5.0 7.5 44.6 53.4

581.4 331.3

-184.7 -127.5

396.7 203.8 0.5

396.7 204.3

25.78 13.27

9,649,820 9,649,820 62.7 62.7

1829.9 1499.6 551.7 382.0

2381.6 1881.6

483.0 381.4 93.8 40.6

576.8 422.0

5.0 7.5 -9.6 83.2

581.4 331.3

428.5 411.1 122.7 56.3

Business Policy and Strategic Management

Lincoln Electric 707-445

Endnotes

1 "LINK Global Economic Outlook," Development Policy and Analysis Division, United Nations Department of Economic and Social Affairs, October 2005.

2 Data on individual companies are from public company releases and casewriter estimates based on publicly released 侐ancial statements. Sources for each company: for ESAB, http:/ /www.charterplc.com/ charter/ar2005_links/ar2005.pdf; for ITW, http: / / library.corporateir.net / library / 71/ 710/ 71064/ items/ 175644/ Annua!InvestorDayPartl.pdf; for A江 Liquide, http://www.airliquide.com/ file/ stdpagetranslation/ download- center-ra-en / 2005-financial-report.pdf; for Kobelco, http: / /www.kobelco.co.jp/ ICSFiles/metafile/ 2006/0l / 27 / annual2005comp.pdf; for Thermadyne, http:/ / www.thermadyne.com/uplFiles/pressRelease/ Thermadyne PressReleasewithSchedu1es-Ju1y112006.pdf; for Bohler, http://www .kobelco.co.jp / ICSFiles/ metafile/2006/ 01/27 /annual2005comp.pdf; for D扯en, http: / /www.da如en.co.jp/gaiyou_e/gaimain.htm; for Panasonic, http://正site.panasonic.com/annual/2006/; for Fronius, http:/ /www.fronius.com/; for Fronius, http: / /www hypertherm.com/; for Sichuan Atlantic, http: //www.chinaweld atlantic.com/weldEn/introduction.htm; and for Hyundai, http:/ /www.hdweld.co.kr/eng/company / introduce.asp .

3 Vir驴tia P. Dawson, Lincoln Electric: A History (Cleveland: 丘coin Electric Company, 1999), p. 3.

4 Dawson, Lincoln Electric: A History.

5 Data were provided by Lincoln Electric to the casewriter in November 2006.

6 Dawson, Lincoln Electric: A History, p. 149. Also, more recent data were supplied by Lincoln Electric to the casewriter.

7Ibid.

8 Donald F. Hastings, "Lincoln Electric's Harsh Lessons from International Expansion," Haroard Business Review, May-June 1999, p.164.

9 Dawson, Lincoln Electric: A History, p. 138.

lO Ibid., p. 41.

11 Ibid., p . 138.

12 Ibid., pp. 141- 142.

13 Marcus Gleisser, "Lincoln Electric Has Learned Its Lesson And Is Seeking Help In Heading Overseas," Plain Dealer (Cleveland, Ohio), June 1, 1996.

14 Lincoln Electric, personal communication with author on September 5, 2006.

15 Data on market size were supplied by Lincoln Electric to the casewriter in March and September 2006

16 Jeff Share, "CEO sees inevitable move to automatic welding," Pipeline and Gas Journal, June 1, 2005

17 Lincoln Electric, personal communication with author on September 24, 2006.

18 Es血ates on the size of the organized and unorganized In中an welding sector come from Lincoln Electric and were sent to the author in April 2006.

19 All estimates on Ador Welding's future growth and performance in this paragraph come from the following local analyst report: Vivek Kumar, "Ador Welding (Rs360)," Karvy Stock Bro如g Limited, July 19, 2006. The analyst sent a copy of the report by request in September 2006

20 All estimates on Ador Wel气's future performance in this paragraph come from the following local analyst report: Vivek Kumar, "Ador Wel血g (Rs360)," Karvy Stock Bro压gL皿ted, July 19, 2006. The analyst sent a copy of the report by request in September 2006.

21 "ESAB to Set Up Wel如g Equipment Plant Near Chenn玑"Business Line (The Hindu), July 30, 2005

23

Lincoln Elect ric

707-445 Lincoln Electric

22 "Esab's New Plant to Start Operations by April '06; ESAB India Has Begun to Build a Plant at Irungatukottai ... ", Business Standard (In中a), August 1, 2005. The US dollar amount is calculated by multiplying the 20 crore cost of the plant by 10,000,000 to get the number of rupees, in this case 200,000,000 rupees. That 200,000,000 rupee amount is then divided by the exchange rate on August 1, 2005, 43.515 rupees to one U.S. dollar, to get USD$4.6 million.

23 Company website, accessed from http: / / www.anandarc.com/ flash / profile.html on August 27, 2006.

24 Secur扣es and Exchange Board of India website, accessed from http: / /seb正山far.nic.in/ on September 11, 2006.

25 India Minimum Wage Act 1948 and related amending acts through 1961, Sourced on July 29, 2008 at http: / / indiacode.nic.in/ fullactl.asp?tfnm=194811.

26 In如 Payment of Bonus Act (1965) and related amending acts through 1995. Sourced on July 29, 2008 at http: / / labour.nic.in/ act / acts/pba.doc.

27 Ibid.

28 Daily wage sourced on August 14, 2008 at URL http:/ / labourbureau.nic.in/ ASI_Data_2004_05.htrn (item 8b), and multiplied by an estimated 22 workdays per month to arrive at a monthly average. The exchange rate for December 31, 2005 was accessed on August 14, 2008 from http:/ / www.oanda.com/ convert/ fxhistory.

29 Business Standard, "Bonus Ceiling for Workers Increased," October 2, 2007.

24