International entry strategy of Disney
Introduction
In the current increasingly competitive global business environment, businesses looking to take their operations beyond the shores of their home countries are having to pay greater attention to the international entry strategy they choose from a long list of potential entry strategies. Business have to take into consideration such factors as practicability, profitability, as well as safety of the entry strategy of choice (Wit & Meyer 45). A mode of entry refers to a channel that an organization uses to venture into a new international market. The theory of international investment forms the basis of the focus on market entry mode choice. Indeed, the choice of market entry strategy strongly impacts on the international activities of the company and its rivals in the market or industry and can be a source of competitive advantage in international marketing (Gupta 56). This translates that a firm looking to enter any foreign market needs to critically consider the type of entry strategy to employ and make significant strategies accordingly.
Licensing, exporting, entering into joint ventures, and sole venture are the most common international entry strategies used by firms during expansion (Anton 45). All of these strategies need backup supplies and thus the organization’s initial choice of a given entry strategy is challenging to change or amend without incurring substantial loss of money and time. This means that entry strategy choice is a very critical strategic decision in itself. This paper explores one international entry by Walt Disney World Company (commonly known as Disney Company or Disney) for its maiden international Disney theme park in Tokyo, Japan.
Disney Entry Strategy in Japan
In 1983, Walt Disney Co. through its subsidiary Tokyo Disneyland (TDL) decided to establish its first international Disney theme park. Over years, Disney Company had successfully created a magic and fantasy in its domestic market in the United States which had grown to become synonymous with Disney brand (Gupta 23). The company built reputation for creating animated cartoons since the 1920s, gradually growing into a multi-faceted corporation. Over a period of more than 50 years, Disney Co. revolutionized the whole concept of theme parks by introducing Disneyland Anaheim in the state of California. The theme parks have grown into enchanting place in which both children and adults gain long-lasting “experiences of the heart.” This has served to give Disney Co. a major competitive advantage in what it terms as the “Disney Difference” (Wit & Meyer 78) In going international, Disney Co. was looking to bring its theme parks concept ‘American Disneyland’ to Tokyo.
Initially, Disney Co. opted to use licensing as its international entry strategy in Japan before later adopting direct foreign investment mode. By definition, licensing refers to a contractual agreement with an individual or several agents in a foreign country in which the company transfers its right to make use of all or part of its patents, company name, technology, trademarks, and/or business methods. In this arrangement, the licensee pays up initial fees and/or an agreed upon percentage of sales to the licensing party (Gupta 56). As a mode of entry, firms prefer to use licensing in foreign country where the local government is strong and has greater involvement in international operations of organizations. By 1989, as a result of the Disney Co. licensing company with Tokyo Disneyland (owned and run by Oriental Land Limited Company – a Japanese company), Disney receive royalties totaling $573 million, an amount more than the company’s operating income (Anton 64).
The Japanese government, since the 1960s, commissioned the area of the Tokyo Bay to be utilized entirely for leisure purposes. The Oriental Land Company (OLCL) sent study teams on missions abroad to determine how best to utilize the land for leisure. Upon visiting the California Disneyland, the OLCL decided to extend an offer to Disney Co. to establish a similar Disneyland in Tokyo (Anton 67). While Disney Co. was interested, it could not take up the offer because of commitments developing its Florida Park. In addition, senior management at Disney were hesitant about building a Disney theme park in Japan, a country culturally different from America besides considering the venture as high risk. In April 1983, the two parties reached a licensing agreement that would see OCLC take on all risks involves while Disney Co. would remain safe. Disney Co. licensed OLCL to utilize its intellectual property, trademarks as well as engineering designs for rides (Misawa 15). On its part, Disney Co. would earn royalties of 10 percent on admission revenues and a further 5 percent on sale of beverages, food and souvenirs whilst offering continued technical help to OLCL. While the Tokyo Disneyland would borrow heavily from the American style, it would be to a larger extent a Japanese product. The Tokyo theme park would be owned by a local Japanese company and adhere almost perfectly to the local Japanese regulations and customs (Anton 75). In this regard, the Tokyo Disneyland licensing entry strategy did not raise the typical challenges characteristic of other international operations and entering the Japanese market was largely seamless process. Considering that Disney Co. had no knowledge on the local Japan market, using a licensing agreement with a local based company was the most appropriate international entry strategy.
In approving the licensing agreement, the senior management of Disney Co. was conscious of the risk associated with entering a foreign market. There are significant cultural differences between the familiar American business environment and the completely foreign Japanese market. From the Power Distance Index (PDI) perspective, Japanese are more willing to take on higher levels of hierarchical power relative to the United States (Anton 84). This dimension became evident when the Tokyo Disneyland implemented an adaptation requiring employees to display their surnames on the personal ID badges as opposed to first names as is the case in US theme parks. From a cultural point of view, therefore, settling on a licensing agreement as the mode of entry into the Japanese market was the right decision on the part of Disney Co. considering the company’s lack of local Japanese market and the significant cultural differences between the two countries (Gupta 87).
By nature, a licensing agreement as an international entry strategy is typified by low risk and development costs. Disney Co. senior management made the right call opting for this method so as to avoid any tangible risks. This is especially because it can be argued that the entry and construction strategies for the Tokyo Disneyland projected laid entirely with OLCL (Misawa 61). In fact, the licensing agreement as a type of non-equity entry mode afforded Disney Co. substantial ownership advantages because it enabled the company to take full advantage of its unique resources in a relatively risk-free manner and at considerably low costs.
However, the Tokyo Disneyland venture forced Disney Co. to forfeit internationalization advantages as a result of its little exposure to international business mechanisms. Disney Co. did not have lots of entry mode options in this case other the licensing agreement with OLCL so as to realize success in the Japanese local market. In addition, this mode of international entry rendered Disney Co. without control over both the delivery and marketing of its Disney experience. The company strived to compensate for this limitation by sending Disnoids, a small American management team to serve as advisor and consultants so as to alight the new Tokyo theme park with the Disney doctrine (Misawa 63).
The licensing agreement as a mode of entry also left Disney Co. at loss in terms of locational advantages due to the lack of direct operations of its new Japan investment. All the advantages generated from the strong market demand along with the willingness of customers to pay for leisure services goes directly to the licensee while Disney receives a fraction of the advantages in form of royalties (Misawa 70). It is on this ground that Disneyland decided to adopt an ownership position in the next Disneyland Paris venture so as to directly exploit its unique resources without having to share revenues. Disney Co. would transition from its initial licensing agreement entry strategy in Japan to direct foreign investment mode. This move was consistent with the Uppsala Model of Internationalization which posits that firms usually develop their international activities in small steps as opposed to taking large foreign investments at once. This was an appropriate strategy in view of the high psychic distance between Japan and the United States as well as Disney Company’s lack of exposure to the region (Misawa 76).
In light of the relatively low ex-ante (negotiating contracts) as well as ex-post (monitoring) costs related to engaging with such a developed country as Japan (with high contracts and awareness of property rights), it is fair that to say that Disney’s senior management appropriately opted for the licensing agreement entry mode over a governance structure of higher control levels (Misawa 79). This decision helped save the company costs related to complexity and monitoring which would have been incredibly higher for such a firm only starting its internationalization process.
In order to gain competitive advantage, an organization’s resources need to be rare, valuable, non-substitutable and imperfectly inimitable. According the Resource-based theory, a firm’s transferability of capabilities and resources is much easier when equity-based strategies of entry are used as compared to non-equity based modes. Majority of entry strategies are effective in keeping the value of transferred capabilities and resources; the variation is only with level of efficiency on the part of the partner (Gupta 98). Considering that Disney Company found a committed Japanese partner able to transfer the company’s value-generating resources whilst making vital local adaptations without compromising value is testament the licensing agreement strategy paid off.
Institutional theory concerns itself with how companies enter and operate in institutional environments defined by specific rules, norms and values. Internal and external isomorphism relate to the challenges firms face in imitating the local firms or parent firm so as to best customize the needs of the host market or the headquarter respectively (Anton 90). Taking the large institutional differences between the Japanese and US markets, Disney Co. decision to utilize a licensing agreement as an entry strategy was consistent with the institutional theory, due to the high pressure in the Japanese market (external isomorphism) together with the greater need to contractually ascertain the effective transfer of Disney’s brand to Tokyo Disneyland (internal isomorphism).
References:
Anton, Clavé S. The Global Theme Park Industry. Wallingford, UK: CABI, 2007.
Gupta, Anil K. Global Strategy and the Organization. United States: JOHN WILEY & SONS (NJ, 2002.
Misawa, Mitsuru. Cases on International Business and Finance in Japanese Corporations. Hong Kong: Hong Kong University Press, 2007.
Wit, Bob , and Ron Meyer. Strategy Synthesis: Resolving Strategy Paradoxes to Create Competitive Advantage. London: Thomson Learning, 2005.
