Disney rethinks its China strategy

December 2, 2013 4:00 pm

Disney rethinks its China strategy

By Howard Yu and Stefan Michel

The story. When China lifted a ban on Walt Disney characters in 1978 and joined the World Trade Organisation in 2001, the US entertainment company saw a huge potential new market for sales and distribution of film, television content and DVDs in an increasingly liberalising economy.The challenge. Within a short period of time, Disney realised that DVD piracy in China was undermining its own efforts; also, local competitors were making and distributing movies that resembled Disney’s at minimal cost. Moreover, because government censorship required Disney to remove sections of its movies before distribution, their local release was delayed, which gave the pirates a further edge. According to the State Administration of Radio, Film and Television, box office revenue in the Chinese film industry was worth roughly $700m by 2008. The estimated market for pirated DVDs was more than $5bn.

The strategy. Disney judged that its best opportunities lay with the rise of China’s middle class. Annual disposable income among urban residents had grown at an average of 8 per cent a year since 1990.

Education offered a new direction. Disney had produced educational films and materials for various markets for 40 years. But in China it decided on a much bolder approach after its research highlighted three distinctive aspects of the Chinese market:
● The one-child policy. This has created the “4:2:1 phenomenon”, where it is expected that four grandparents and two parents will eventually be supported by one child. Disney realised that parents might be reluctant to spend more than a few renminbi on a movie but they would dip into their savings to secure the best education for their child.

Mindful that children were studying at evenings and weekends, Disney believed it could make learning English entertaining.
● American brands. Disney research found that middle-class Chinese consumers often see US brands, including Mickey Mouse, Starbucks and McDonald’s, as expressions of economic progress, social mobility and personal freedom.

At the same time, Disney knew it would need to localise the course content of its language centres. Some local English-teaching schools were already using Disney characters – without its approval – indicating demand for their use in teaching English.
● Spending power. The rapid rise of the middle class in general, and a credit boom in particular, had created a fast-growing market in China for luxury goods such as high-end BMWs and Louis Vuitton handbags. These were important points for Disney in considering pricing.

The results. Disney opened its first English-language centre in a theme park in Shanghai in 2008. By 2012, it had 44 English schools in 10 cities across China. By 2015, Disney English plans to have 148 schools teaching 150,000 children annually with operating earnings projected to pass $100m.

It follows standards set by the education authorities and creates material based on local fables and songs. But a Mickey Mouse statue stands at the entrance of each centre and a Mickey logo is carved into every chair. The curriculum, aimed at children aged from two to 10 years old, is taught by native English-speakers.

Disney English charges premium prices of between $465 and $1,850 for annual tuition.

The lessons. Faced with an increasingly commoditised product, Disney reinvented its China business model and developed a new product category.

Traditional marketing approaches – targeting an existing client focus group, liaising with current distributors, or extensive customer surveys – would have yielded little insight in this case.

Companies wanting to counter commoditisation can rethink what customer problems they can solve; this may involve a radical adjustment to activities in a particular market.

The writers are, respectively, professor of strategic management and innovation at IMD, and director of IMD’s EMBA programme

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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