VIEWPOINTS : THE MOUSE THAT ROARED : Disney’s Rapid Growth Looks Great but May Be Setting Firm Up for a Fall

Americans celebrate big winners. Indeed, Walt Disney Co. Chairman Michael D. Eisner, along with Mickey Mouse, recently were pictured on the cover of Time magazine. Eisner has taken Disney from a $100-million kingdom (in net income, that is) to a $450-million empire in four short years. So it’s quite easy to understand the mouse’s broad grin on the magazine cover.

However, our studies of other companies suggest that the euphoria at Disney won’t last. In fact, we believe that Eisner has unintentionally set up Disney for a fall. In mature industries, steep growth curves almost always portend steep declines.

There are plenty of examples, including several semiconductor companies, Maui & Sons beach wear and, our favorite, Izod. Our prediction is that the mouse will follow the same path as the alligator did a few years back.

The Izod case is a classic example of how too broad a distribution can dilute, even destroy, the power of a valuable status symbol. Before 1980, the alligator appeared on tennis clothes almost exclusively. Then, the company, focusing on short-term financial returns, decided to put the alligator on everything--belts, luggage, beach towels and so on. Izod’s sales broke records for a while. But pretty soon everybody had alligators; and because everybody had them, nobody wanted them anymore. So much for Izod.

The mouse always has been a great status symbol. It said, “I’ve been to Disneyland recently, have you?” It was a conversation starter. But now the mouse is everywhere, on everything. There are catalogue sales, three successful retail outlets now and perhaps 100 more stores in the not-so-distant future. The mouse is even used to hawk weed killer on TV. This, of course, means big sales for Disney this year. But what about next? The mouse doesn’t have the same snob appeal it had even two years ago. Watch out, Mickey.

And as for the classic Disney films, nobody in our families or neighborhoods will ever pay to see “Pinocchio” or “Dumbo” in a theater again. We’ll play them at home on our VCR. Sure, the $29.95 we paid for the “Lady and the Tramp” videocassette added to Disney’s 1988 revenues. But what about 1993 or 1998? We hope Disney considered the trade-off between the short term and long term before mass marketing even some of these animated classics.

Sound, cost-conscious management at Disney’s adult movie production company, Touchstone Films, has accounted for much of Disney’s recent financial triumphs. Touchstone is momentarily the top-grossing studio in Hollywood, with a 30% share of all U.S. box-office receipts during the first three months of this year.

It has reportedly turned a profit on 22 of the 23 films released since Eisner took the helm. That’s astounding. But movie making is a fickle business. How long can this growth frenzy last?

The Eisner gang deserves good marks for its amusement park management. They’ve raised prices dramatically, rather than adding capacity in the United States. The Tokyo and Paris expansions make sense, but the rumored Texas Disneyland does not. And even some of the amusement park magic is lost when you can buy Mickey Mouse T-shirts at shopping malls.

Eisner has been quite good at management in the traditional American model. That is, in our business schools we teach future executives the science of making the quick buck--jump on growth opportunities with both feet.

Most Japanese executives and a few maverick Americans are taking another tack. Sony’s Akio Morita tells how he once quoted a higher unit price for a larger volume order of transistor radios because he didn’t want to add capacity irresponsibly. Ford Motor Co. has raised prices on its Taurus rather than adding capacity, thereby sacrificing short-term market share for long-term profit.

Rapid growth should be cause for concern rather than cause for celebration in corporate board rooms. We have found that American companies operating in volatile industries are more profitable in the long run if they maintain stable operations instead of chasing markets. Good management often means giving up market share during boom periods.

We also have found that Japanese firms, whose managers often have lifetime commitments to their firms, are better able to maintain stability than comparable American firms. While the likes of Caterpillar and General Motors show big swings in sales from year to year, Komatsu and Toyota sales demonstrate steady, if slow growth.

Our advice to Disney is two-fold. First, consider the long-term implications of your decisions. What will sales of the mouse be like in 1993 given your 1988 strategies?

Second, structure incentives, particularly for top executives, that promote and reward operational stability. In other words, base their pay on long-term performance. That’s the key to long-term profits.

But valuing stability over fast growth doesn’t make sense to most U.S. executives who emphasize short-term rewards. After all, why should Lee Iaccoca worry about 1992 when he can make $18 million a year now? And so the big winners of today often turn into the big losers of tomorrow.

Our fear is that Mickey and the others are following the same path.

DR, M. WUERKER