Blog

Disney Cruise Line: Staying afloat in a new industry

Disney Cruise LineMaybe Disney has just spoiled me. All I know is that from the moment I make my reservation with Disney to the moment I step off their ship, I am treated like royalty. As I was walking off the [Norwegian] ship this morning,the last thing I heard was a man scream at the top of his lungs, “I will NEVER sail this cruise line EVER again.” I was not surprised when the woman at Guest Services yelled equally as loud back, “Good, I hope you never do!” I think it is fair to say that exchange would have NEVER have happened on a Disney ship. — Nickelodeon Norwegian Cruise passenger

By Rodrigo Quezada, Munish Jhavri, Stephanie Snyder, Nick Ford, Lauren Sanne and Riley Roberts

The family cruise line industry is not an easy one in which to stay afloat, especially the niche market of family cruises. Competition is stiff, as cruise lines are realizing more and more that partnering with a well-known brand and creating a theme cruise can be a great way to capture a specific market, particularly themes that cater to children and families. There has been a recent surge in the introduction of such cruises, including a partnership between Norwegian Cruise Lines and Nickelodeon, mentioned above, DreamWorks and Royal Caribbean, and others. However, as the quote above shows, much can go wrong when expanding into unknown markets if a company loses sight of its key strategic advantages.

Strategic diversification of a company’s offerings is a great way to expand market share and increase revenue. But for many companies, it frequently turns into a terrible, expensive mistake, often resulting in negative publicity and even a loss of brand equity. To avoid a very public embarrassment, management must ensure that the new venture will neither damage the core brand nor be expected to support it. A successful company will recognize that the parent brand must be capable of supporting the expansion. If the company is not clear on this issue from the outset the expansion will most likely fail, negatively impacting both the finances and reputation of the parent company.

Disney’s expansion into the cruise industry is a perfect example of a company that successfully confronted the challenges of diversification into a new industry while maintaining its core strengths. Disney’s success is a result of its strategic focus on its three most important core capabilities: brand, corporate culture and constant innovation. Disney never lost sight of these attributes and remembered that the goal of Disney Cruise Lines was to create a new successful business, not to simply support the parent Walt Disney Company brand. This allowed Disney to transport the Disney “magic” from the traditional experience of theme parks and beloved movies to a completely new environment on board a cruise ship. Disney’s strategic expansion leveraged a 70-year tradition into a distinct, new product line without diminishing the brand in any way, a difficult and rare feat. Disney’s CEO, Robert Iger, explains,

Since our maiden voyage in 1998, Disney Cruise Line has been a huge success for our guests and for our shareholders alike. It has brought our unparalleled family vacation experience to the high seas, and has also generated high margins and double-digit returns on invested capital.

In fact, Disney is so adept at managing their own brand that they created the Disney Institute to offer custom brand solutions for other businesses. The Disney Institute covers a range of topics including people management, brand loyalty and how to inspire creativity, illustrating that Disney has solidified its role as a strategic leader across many industries.

Disney’s success in the cruise industry is impressive, but no reason to become complacent. History shows that numerous successful companies just like Disney have been at the top of their game only to be nearly toppled by a loss of focus, poor management decisions and an assortment of strategic mishaps when attempting to expand to a complementary industry. One such example is Hooters Air. In 2003, Hooters restaurant chain acquired Pace Airlines and re-themed the flights with an atmosphere similar to the restaurants, complete with flight attendants wearing traditional Hooters attire. The airline was envisioned to be a low price airline but the interior of each plane was redesigned to give the appearance of a gentleman’s club, including enlarged leather seats that could more comfortably accommodate larger customers. Hooter’s Air even offered free meals to passengers despite an industry trend of cutting down on gratuitous frills.

The acquisition of Pace by Hooters was disastrous. Fearful of being connected with the Hooter’s brand, major customers began cancelling their contracts. Hooter’s Air attempted to stay in business with its intended customers, golfers moving between suburban areas and resorts, but the market was simply too small to accommodate an airline. It quickly became apparent that the Hooter’s brand, while strong enough to sell hot wings and beer, was incapable of drawing customers to fly the friendly skies.

On top of the details regarding Hooter’s Air’s failure, the intentions of the owner, Robert Brooks, leaves observers scratching their heads. He’s quoted as hoping the airline would act as a means of generating awareness of the restaurant chain, essentially creating incredibly expensive flying billboards. Brooks’ death and lack of a strategic plan left his heirs and the management of Hooter’s Air without direction; the airline “crashed and burned,” closing its doors permanently in 2009.

The debacle that was Hooter’s Air is demonstrative of how not to expand into another industry. Hooters had clearly not done meaningful market research and showed a schizophrenic approach to its branding. Wanting to be perceived as a low cost airline that supplied free meals, served by scantily clad women, and large leather chairs to its customers, it managed to turn off existing customers while failing to attract new ones. Brook’s confusing statements regarding the purpose of the airline vis-à-vis the core business also reemphasize Disney’s more reasonable and clearly more successful strategy of using the core Disney business of family films and entertainment to market the cruise.

Like Hooters, AT&T offers another example of a company’s failure to diversify into an industry that was a good strategic fit. AT&T, whose core business was telecommunications, was convinced that it would be able to leverage its brand into the computer manufacturing market and began making efforts to enter this market in the mid 1980’s. Backed by this belief, in 1991, it acquired NCR Corporation as part of a hostile takeover and orchestrated one of ‘The 25 Dumbest Business Decisions of All Time’ as recognized by the University of Phoenix.

NCR Corporation began with the cash register business in the 1880s. Since then, it had not only successfully evolved within that market but also diversified into the mainframes and personal computer markets. It had gone through its own business cycles but was one of the most successful businesses emerging out of the 1980s and appeared to be positioned for a decade of great expansion in the personal computer market. AT&T believed that it could use its brand to expand in this market through the well-established NCR and bought the business at a premium of 100% per share in a highly overrated bid. What followed this hostile takeover was the closing down of an existing NCR manufacturing plant, restructuring of the NCR Corporation, job cuts and AT&T’s eventual complete exit from the personal computer industry, the business in which NCR had been doing so well. In 1996, NCR was spun off. AT&T experienced significant losses from this venture and almost destroyed its high potential for growth. So, what went wrong?

AT&T clearly hoped to feed off of the growth of NCR in this new industry. In contrast to Disney, the current AT&T brand had no core support for this new business venture and was effectively an independent function. The firm never came to grips with the demands of the industry nor was it a strategic fit.  As expected, AT&T struggled throughout this integration process. At the micro-level, the cultures at both firms were completely different and in an effort to mend what was not broken, AT&T destroyed the firm. In contrast, Disney’s venture into the cruise industry was such a plausible extension of the core business that its association with other Disney companies seems seamless and obvious. No wonder NCR didn’t ‘ring a bell’ for AT&T.

It is clear that strategic diversification is a crucial aspect of business, but a very difficult one in which to be successful. Disney did it right when entering the cruise industry, with a well thought-out, focused strategy. However, most companies show such an eagerness to go to market that they fail to correctly define the relationship of the new venture and the core brand, expecting the infant new business to somehow support the parent brand. It is often doomed to failure before it ever starts.

Disney has not only been successful in the cruise industry, they have been the market leader in the family cruise niche since entering the space in the 1990s despite a number of competitors attempting to imitate their model. Disney cruise ships were rated #1 for activities, facilities, crew, and service by Conde Nast Traveler in its annual cruise poll and the readers of Conde rated the Disney Cruise Line as the #1 cruise experience. Travel + Leisure also named Disney as the top family-friendly cruise line. The reason for Disney’s success when expanding into the cruise line industry is best stated by Robert Iger, President and CEO, “Ultimately, what sets Disney apart more than anything else is the strength of our brands and the quality of our entertainment, a distinction we are determined to uphold.”

However, nothing better illustrates Disney’s success than the customers who have experienced both the magic of a Disney cruise and the failed attempts of its competitors.

We were on the Norwegian Jewel at Christmas, and the Disney Wonder May 3-7, 09. What a difference! The differences in level of service and amenities between the two boats were night and day!
– Nickelodeon Norwegian Cruise passenger

We were very skeptical that Disney could be that different, until we sailed. We quickly decided that it was well worth the price difference.
- Nickelodeon Norwegian Cruise passenger


References

Craver, Richard. Winston-Salem News, “Pace set for a fall - Bad business model, mismanagement led to failure, lawyer says” August 22, 2010.
http://www2.journalnow.com/business/2010/aug/22/pace-set-for-a-fall-ar-394860/

Cruise Line International Association, The State of the Cruise Industry in 2010: Confident and Offering New Ships, Innovation and Exceptional Value, January 20, 2010
http://www.cruising.org/vacation/news/press_releases/2010/01/state-cruis…

Data Monitor, Walt Disney Company: Company Profile, SWOT Analysis, September 23, 2010
http://web.ebscohost.com/ehost/detail?vid=4&hid=122&sid=549c7dd9-8b85-4440-905b-085c2aaab4b9%40sessionmgr112&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bth&AN=54576964#db=bth&AN=54576964

Disney Announces Expansion of Successful Cruise Business, February 22, 2007
http://corporate.disney.go.com/news/corporate/2007/2007_0222_disney_expa…

Disney Cruise Line Awards and Accolades
http://www.disneycruisenews.com/AssetDetail.aspx?AssetId=89431213-5d4f-4…

Funding Universe, NCR Corporation.
http://www.fundinguniverse.com/company-histories/NCR-Corporation-Company-History.html

Keller, John J. The Wall Street Journal Western Edition, 1995 “Why AT&T takeover of NCR hasn’t been a real bell ringer; missteps with balky unit result in growing losses and plans for job cuts; will Allen pull the plug?” http://www.faqs.org/abstracts/Business-general/Why-ATandT-takeover-of-NCR-hasnt-been-a-real-bell-ringer-missteps-with-balky-unit-result-in-growing-.html#ixzz17z2QR8my

Nickelodean Cruise: Perspective From a Disney Cruise Line Fan 09/03/2009
http://www.passporter.com/articles/nickelodeon-cruise-review.php

The Lollipop Road, A Family Friendly Travel Blog, may 24, 2010
http://www.thelollipoproad.com/blog/cruising/cruis-review-ncls-norwegian…

The Walt Disney Company 2009 Annual Report, Fiscal year 2009 Annual Report and Shareholder Letter
http://amedia.disney.go.com/investorrelations/annual_reports/WDC-10kwrap…

The Walt Disney Company 2009 Factbook
http://amedia.disney.go.com/investorrelations/factbook_2009.pdf

Travel and Leisure, World’s Wackiest Cruises, February 2009
http://www.travelandleisure.com/articles/worlds-wackiest-theme-cruises

University of Phoenix Online, “The 25 Dumbest Business Decisions of All Time.”
http://www.uoponline.com/mbajungle1.asp

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.