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-1057275-112712500to:Robert Iger, President and Chief executive officerfrom:Burrows & Hoffman, PEAK entertainment consulting firmTHRU: Kevin Mayer, Executive Vice PResident, Corportate Stategy and Business Developmentsubject:Power of suppliers IN disney theme parksdate: CREATEDATE \@ "MMMM d, yyyy" \* MERGEFORMAT August 17, 2014Burrows and Hoffman (B&H) Peak Consulting continued its analysis of the Walt Disney Company’s theme parks by looking at Disney’s supplier industries. According to Michael Porter’s five forces framework, supplier industries can threaten the buying industry’s profitability if they hold too much power (2008). Looking at four main supplier industries—food and service contractors, beverage wholesalers, advertising agencies, and ride inspection services—B&H concluded that Disney’s suppliers are not able to easily influence Disney’s input prices. Disney should continue to monitor its suppliers, however, especially as Disney has publicly committed to using suppliers with better environmental and humanitarian reputations.Overview of Disney Suppliers. There are many industries that provide supplies to Disney’s theme parks, from fireworks to entertainers to costume design (GSC). B&H chose to analyze four of the main supplier industries: food and service contractors, beverage wholesalers, advertising agencies, and ride inspection services, based on the Vice President of Supply Chain Management, John Lund’s priorities (GSC). Although manufacturing of retail goods is also very important to the theme park industry, B&H chose not to include them since these supply industries are more directly involved with Disney’s other industries (i.e. retail stores).Determinants of the Power of Suppliers. Suppliers to Disney theme parks have little collective influence over the parks and resorts. The following factors all contribute to the suppliers’ lack of power. a. Concentration of supplier industries. As Porter mentions, supplier industries have less power than the buying industry if they are less concentrated (2008). Essentially, if Disney’s supplier industries have more firms than the number of firms in the theme park industry, they will not have much influence on the industry. The food and service contractor, beverage wholesaler, and advertising agency industries have more firms than the theme park industry (Appendix A). Because each of these industries has more firms, they are less concentrated and therefore have little ability to coerce Disney to pay higher prices. Disney could simply switch to one of the many other firms under such a threat. Conversely, the ride inspection industry is more highly concentrated than Disney and therefore more likely to hold power over Disney. The government mandates that all theme park rides be periodically tested by independent companies that are licensed by National Association of Amusement Ride Safety Officials (NAARSO) (Clave). According to the International Association of Amusement Parks and Attractions (IAAPA), there are only eight such licensed inspection agencies in the United States. This industry could therefore hold some power over Disney, but as B&H analyzed next, it is also just as reliant on the theme park industry.b. Suppliers working in multiple industries. Another determinant of power is the number of industries in which the suppliers operate. If a supplier operates in many other industries beside the theme park industry, it is not dependent on theme parks for business. It may therefore have some power, since it can threaten to drop the theme park industry altogether if its demands are not met. The food and service contractor, beverage wholesaler, and advertising agency industries all operate in multiple industries, and therefore do not rely solely on Disney or other theme parks for business. On the other hand, the ride inspection industry only operates in the theme park industry. As stated previously, Disney is very dependent on the inspection agencies, but they are likely just as reliant on Disney and the other theme parks for business.c. Switching costs and differentiated products. Supplier industries have more power if they have differentiated products and the buying industry has high switching costs. Disney’s switching costs are high in the short-run, because it contracts with many of its supplier industries (Disney website). In the long-run, however, contracts can be rewritten. Disney likely has higher switching costs for specialized or differentiated products. For example, the switching costs for ride inspections are probably higher, since safety is a top priority for Disney and switching companies would require a lot of research and information gathering. For less specialized products, such as food and beer, switching costs are probably quite low. However, there are some food vendors that supply highly differentiated and specific products, such as the signature Disney ice cream bars. The vendor that has dedicated assets for the production of these ice cream bars probably has more power over Disney than the average food supplier, due to high switching costs.e. Relationship-specific investments. As Porter also discusses, suppliers with relationship-specific investments have more power than those without them. Disney’s supplier industries are highly concentrated in the same areas that have high theme park concentration, which suggests some level of site-specificity. Also, of the eight ride inspection services discussed earlier, six are in the southern California and central Florida areas, where Disney operates its North American theme parks (IAAPA).d. Vertical Integration: Disney is well known for owning and maintaining its own supply chain for many aspects of its theme park operations. Human capital is rarely contracted out, and Disney even requires all its theme park employees to attend Disney University, where graduates receive fanciful titles like “imaginers”, “dreamers” and “characters”, based on their job requirements. Disney cannot home grow all of the supplies needed to manage and run their world famous theme parks. In fact, beyond the human capital aspect, vertical integration at Disney is limited when it comes to food, beverages, merchandise, construction materials and so on. The suppliers of Disney theme parks will not foreseeably ever be a threat for forward integration. For example, a food supplier would not decide to open its own food stand in competition with the food stands that are available inside the Disney parks. These suppliers are just inputs and not credible threats. One example of a supplier that holds bargaining power over Disney, and which Disney cannot replicate, are inspection services (such as the for mentioned NAARSO inspectors). Disney would not be able to vertically integrate its own inspectors and Considerations. The Disney supply management team has made the strategically sound decision to diversify its supply partners by recently welcoming small business owners, women owned business, and environmentally conscience companies into the Disney portfolio of suppliers. Disney has made a point of giving priority to these categories of suppliers, telling a story to its investors and to the greater business community as a whole that Disney is turning a new leaf and focusing on adding conscientious partners to its team. This positive PR campaign camouflages Disney’s dual purpose. Diversification, encouraging competition and creating a new client base, ultimately decentralizes supplies, decreasing supplier power over Disney as well as bargaining power. Additionally, by building business relationships with environmentally friendly companies, Disney is looking ahead to a future where being associated with “green” companies will be a top priority for consumers. (CITE NY TIMES) Although strategically sound now, a continued practice of eliminating suppliers who don’t comply with the new environmental and humanitarian rules that Disney is setting for itself, could then limit Disney’s power over its suppliers, as choices will be limited based on if their operating practices align with Disney’s values. Deviating from choosing conscientious partners now would paint Disney as hypocritical, insincere and ultimately turn many customers away. Conclusion. The B&H analysis shows that Disney has successfully positioned itself within ReferencesBaye, M. (2010). Managerial economics & business strategy. New York, New York: McGraw-Hill/Irwin.Bryman, A. (1999). The Disneyization of society. The Sociological Review, 47(1), 25-47.Clave, S. E. (2007). The global theme park industry. (pp. 426-429) Cambridge, MA: CAB International. NBCUniversal Media, LLC. (2014). Form 10-5 Annual Report for the period ending 12/31/13. Retrived from , Jason. (2009, August 1). Disney World raises ticket prices. Orlando Sentinel. Retrieved from , Jason. (2011, September 13) SeaWorld raises ticket prices for 2nd time in less than year. Orlando Sentinel. Retrieved from , Jason. (2012, July 3) SeaWorld Orlando raises some ticket prices. Orlando Sentinel. Retrieved from , Jason. (2013, June 7). SeaWorld raises ticket prices for 3rd time in year. Orlando Sentinel. Retrieved from , Jason. (2012, May 29). Universal Orlando raises most ticket prices. Orlando Sentinel. Retrieved from , Susan. (2014, February 27). Orlando Sentinel. Retrieved from , Robert. (2010, August 6). Universal Orlando raises ticket prices, too [Web log post]. Retrieved from , M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 25-40.SeaWorld Entertainment, Inc. and Subsidiaries. (2014). Annual report on form 10-k for the year ended December 31, 2013. 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(2014). Fiscal year 2013 annual financial report and shareholder letter. Retrieved from ................
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