An Analysis of the Business Environment of Hong Kong Disneyland Chan Bo Yee, BowieBSc studentHTMi Switzerland  Abstract

Hong Kong was an obvious destination for the fifth Disneyland, however, HKDL fails to reach its target visitors after its grand opening.  This paper investigates the cause of HKDL’s underperformance and examines the proposal that its main threat is its business environment. The paper analyses HKDL’s business environment, emphasising the marketing, social and economic conditions within which it operates, and uses Porter’s five forces model to gain insight into the issues HKDL must address. The analysis reveals that the underperformance of HKDL and its failure to gain competitive advantage is largely due to poor management and a failure to embrace the importance of corporate social responsibility  planning in building up customer loyalty.  Although HKDL used France Disneyland as its learning standard, its management has only focused on risk patterns rather than appraisal and learning about potential chance and risk.

Introduction

“The dawn of the theme park industry rose from one man’s dream, Walt Disney. Today the sun never sets on Disney’s global theme park landscape,” as proudly announced by Michael Eisner (Disney chief executive) during Disneyland’s 50th anniversary celebrations (Traveltrade, 2005).  Eisner planned to realise his vision by locating the fifth Disney Park in Asia. Among the choices between Hong Kong, Shanghai and India, the business environment in Hong Kong seemed to be a viable choice (Horner and Swarbrooke, 2004).

Being a leading destination in Asia, Hong Kong has good infrastructures, highly skilled labour and steadily increasing annual tourist arrivals. According to Mainelli and Yeandle (2007), Hong Kong is a leading destination in Asia and many people anticipated that Disney would perform well and also move forward Hong Kong’s economy.

Unfortunately, Eisner failed to fulfil his vision in Hong Kong. During the pre-opening time, Hong Kong Disneyland (HKDL) was not able to fulfil guests’ expectations. There was much negative feedback before HKDL’s grand opening and HKDL failed to reach target numbers of guest arrivals in the first year (HKDL, 2006). On the other hand, the

incentive business environment of HKDL is very competitive due to the threats from direct competitors (Ocean Park), a potential entrant (Shanghai Disneyland), and substitutes (Hong Kong’s entertainment industry) that produced a hard rival environment. These competitors threaten the viability of HKDL. The aim of this paper is to explore the competitiveness of HKDL by analysing its macroenvironment and using Porter’s five forces model (Porter, 1980) to explore how it can sustain competitive advantage

On 12th September 2005, HKDL had its grand opening. The maximum capacity of the park is 34,000 visitors per day, making it the smallest Disneyland, with only five themed parks while other Disneylands have at least six (The Standard, 2005).

Prior to opening in China, Disney had attempted entry into the growing Chinese market (Kolter & Armstrong, 2006); firstly, by the publication of Mickey Mouse and Donald Duck books in Mandarin; secondly, by the creation of a Disney character based on the Chinese traditional legend, Mulan; and later by giving Mickey and Minnie Mouse Chinese costumes designed by the famous Hong Kong designer Vivienne Tam.  Thus, HKDL took steps to avoid the cultural clashes which happened in France, by preparing the population for the entry of Disney and enabling their identification with Disney characters and concepts. 

Aspects of culture were taken on board at HKDL in determining the resort design and opening date, both were based on FengShui (Ball, Horner and Nield, 2007). For instance, HKDL’s new entrance was shifted 12 degrees after consulting a Chinese FengShui master who said it will maximise prosperity for the park, and the walkway between the train station and gate are bent in order to avoid the positive energy slipping past the entrance and out to the China Sea (Holson, 2005).  Disney is almost certainly not relying on luck to keep it successful, but in these moves is showing the local community respect.  This is one of the unique selling points of HKDL and designed to attract the Chinese market and create a win-win situation. Unfortunately, these efforts cannot recover the damage done by a poor reputation.

Errors made, for example, with the Disneyland Paris food and beverage services, were also avoided. Euro Disneyland failed to incorporate European eating habits and, initially, banned alcohol in the park in the world’s largest wine consumption country, France. After the chaos this created in Paris, Disney learned lessons and tried to avoid the same mistakes. Hong Kong is known as a food paradise, where people can easily enjoy different cuisine, so tea and dim sum are not enough.  HKDL introduced a series of restaurants. Nevertheless, Disney loses some competitive advantage because the prices at its restaurants are relatively higher than at local higher-middle class restaurants. Also,

there is an impression that theme park’s restaurants do not offer good cuisine, especially traditional cuisine (Cousins, Foskett & Gillespie, 2002).

In December 2007, Disneyland admitted that the park had only attracted 4 million visitors in the year 2006-2007, this represented a fall of 23 percent compared to the first year attendance figures (Bloomberg, 2007).

The marketing environment

Marketing environments consist of the microenvironment and the macroenvironment. The microenvironment concerns the internal factors affecting the company whereas the macro-environment concerns the external factors that can affect the microenvironment during product development, business and strategic planning (Kolter, Bowen and Makens, 2006) Organisations need to be aware of environmental changes in order to do forecasting, thus they scan the environment for market information about trends and competitive intelligence. Political factors such as defence, legislation, regulation of the business sector and  government spending can directly affect marketing decisions by setting the rules by which the business can be conducted (Jobber, 2007).

As the Hong Kong Government (HKSAR) wanted to have this project, it provided an excellent deal for Disney. According to the official HKSAR website, the government invested HKD 22.45 billion (HKSAR, 1999). They also provided the site near the new airport in Penny Bay ton a 50-year lease at reasonable terms, and the rights to renew the lease for a further 50 years, In addition they offered a connection to the railway network provided by the Mass Transit Railway and access via new road systems. Also, Disney has the option for 20 years to buy a site nearby in order to have further development.

Further major infrastructure works included supplementary transportation links via two public ferry piers and transport interchanges, police posts, a fire ambulance station, drainage and sewage works. Also, a special feature of the site is a water recreation centre including a large lake, which will also serve as an irrigation reservoir (HKSAR, 2005). Thus HKDL was provided with sufficient infrastructure to build an accessible theme park.

Nevertheless, HKDL faces many threats. Firstly, the lease of 50 years might become a risk. With a lease contract over this lengthy time, it may burden HKDL so that it becomes inflexible towards change. For instance, if the trend of theme parks declines in 20 years, the number of guests will decrease as well, negatively affecting the revenue. HKDL

could have difficulties in changing their strategy or moving out Hong Kong because of this fixed long-term agreement. Moreover, HKDL sits on land that the government reclaimed from the sea, which necessitated the destruction of coral and coastline, which together with the noise and smoke pollution caused by daily fireworks led to environmentalist protests and negative consumer perceptions about HKDL. (Einhorn, 2005).

With the support of the Closer Economic Partnership Arrangement, a free trade agreement with mainland China, Hong Kong has benefits from both business industry and tourism. For example, the Individual visit scheme (IVS) was first introduced in July 2003 with the aim of attracting tourists from southern China to Hong Kong (Yearbook, 2008).  Since the introduction of the IVS, tourist arrivals have increased steadily with tourist arrivals doubling between 2002 and 2007. Therefore, IVS has presented an increased potential number of guest visits to HKDL.

The demographic environment is one of the key elements of the macroenvironment.  Hong Kong has an aging population, low fertility rates and increasing life expectancy.  Leigh (2006) has pointed out that if this trend continues, Hong Kong’s old-age dependency ratio will exceed other Asian countries in 2030.  Meanwhile, Disney’s main target markets are children and teenagers, whom they could possibly benefit from if they started to build up awareness or loyalty from these groups. With the current trend of aging population, this target market will become smaller due to a declining birth rate. It will not only decrease the number of the whole target market, but also the individual family members. Due to parents’ preoccupation to keep their children happy (Swarbrooke & Horner, 2007), children will be the dominant members to make decisions about a destination. When this dominant member is missing, parents no longer have these responsibilities. According to Swarbrooke & Horner (2007), the main motivator of adults is usually to relax; therefore a theme park may not be the best choice for this.

On the other hand, aging populations increase healthcare costs. At the same time, Hong Kong government had put a lot of effort in health care, not only through financial support, but also to provide different services. This can be shown through the elderly health care voucher pilot scheme and “TsimShaTusi District Elderly Service” (Hong Kong: the Bureau, 2008), therefore the Hong Kong government might lose the ability to support HKDL which will still be burdened with the long-term lease agreement.

The Economic Environment

Being one of the leading finance centres in the world (Mainelli and Yeandle, 2007), Hong Kong is substantially a stable economic

environment. According to Holmes, Feulner and Grady (2008), Hong Kong has ranked number one on the ‘The Global Financial Centres Index’ for 14 consecutive years. Nevertheless, Hong Kong faced a huge challenge in 1998 in the Asian financial crisis. Luckily, Hong Kong recovered quickly with the backing of China, now a member of the World Trade Organisation (Lin, 2002), who signed off a free trade agreement, the Closer Economic Partnership Arrangement, between mainland China and Hong Kong.

On the other hand, Hong Kong was faced with the disease of severe acute respiratory syndrome (SARS) in 2003. According to Pine and Mckercher (2004), SARS had the largest negative effect on Hong Kong’s GDP. Also, the Hong Kong government (2003) cited that the consumer price index throughout this incident decreased; which actually strengthened the competitiveness of Hong Kong exports. Hong Kong has successfully recovered, and the introduction of the IVS has increased the numbers visiting HKDL.  Thus, Hong Kong has a strong economic environment and can afford to support HKDL’s development.

Nevertheless, another economic crisis has bought the worldwide economic downturn. Both local and International companies in Hong Kong, for example HSBC and GE Capital, have laid off their employees (Singtao, 2008; Mingpao, 2009). In 2009, GE Capital decided to withdraw from Hong Kong and layoff 50% of their employees (Mingpao, 2009).  This has totally affected Hong Kong’s local economy and following this trend, unemployment rates will increase steadily and the purchasing power of citizens will be lower, which in turn may affect the viability of HKDL.

Even though HKDL’s entrance fee is the lowest among its partners (Zeimer, 2005), it is still relatively expensive and middle-lower class citizens who are facing the risk of unemployment, most probably will save their money instead of spending it to have fun. In order to try and build up visitor numbers, HKDL has recently released a new promotion called “Star Guest Program”, this product-based sales promotion is transacting through its official website since February 2009 (HKDL, 2009). The target market is obviously middle-higher class citizens. It aimed to add value of the visit by paying extra for a customised service.  HKDL has not tried to attract the lower-middle class in this promotion and hence may lose in short-term revenue, but it may nevertheless be a wise choice.

In the long term, this is a marketing campaign to build its brand’s equity, and presents a significant opportunity by seeking to maintain a high social status.  Also, for the lower-middle class who cannot afford the entrance fee, the higher social status might enhance the willingness of visiting the park through making accessible things they could usually not

afford. On the other hand, applying an integrated online sales promotion could minimise the distribution costs thereby attracting a wider audience (Brassington & Pettitt, 2003).

This “Star Guest” campaign provides a different customised service. For instance, the visitor can type in a name and automatically see a video with their name on HKDL’s famous site and an audio saying that “the entire park is being transformed and will be dedicated to one special VIP” (Hong Kong Disneyland, 2009). By this promotion, HKDL can provide an image of a place for celebration instead of a theme park. This image is very important for future product and market development.

Nevertheless, it might cause HKDL a decrease in revenue because its direct competitor Ocean Park’s (OP) entrance fee is 25% lower than HKDL. During the economic crisis, citizens become more price conscious. According to competitive analysis model, the “Star Guest Program” has increased both price and value. However, the value might not cause a difference for those who do not participate in this promotion. It has left a great opportunity for OP in that it has enabled them to have buzz marketing while different forums have highly recommended OP (Trip Advisor, 2009; Ciao! Bmch, 2009; About.com, 2009).

 

The Social Environment

English is one the official languages in Hong Kong. Around 3.1% of the

population speak it as a first language and 34.9% as a second language. In

addition, among 15.4% population in Hong Kong are degree holders (The 2006

Census, 2006). Also, the average annual population growth rate was 0.4%

6,864,346 citizens, with 97.1% literacy in 2006 (The 2006 Census, 2006).  With

all these facts, HKDL will not suffer with the problem of lack of skilled labour

supply and many management positions will be required in the theme park.

Unfortunately, HKDL did not utilize this advantage. Prior to the grand opening,

Hong Kong Confederation of Trade Unions received 20 complaints from Disney’s

staff regarding the ignorance of staff health needs along with other problems (The

Standard, 2005). Furthermore, a survey conducted by the Disney Cast Members

Union among 470 of the 5,000 staff found that 63 per cent were unhappy with

management, complaining largely of unequal treatment and what they see as

unfair work distribution (Parry, 2007).

Staff are the most important element in any organization. In the service industry, employees are involved in the service delivery that directly affects guests’ experience. Unfortunately, HKDL has de-motivated its staff and hence have lessened employee morale, which in turn leads to decreased employee performance and poor organisational performance. Besides destroying the magic it has also resulted in a bad press reputation.

Apart from the size and structure of the population, values, belief, religion and custom have also affected HKDL in their management decision-making.

First, Hong Kong’s population has a mix of religions. Most are Buddhist with a minority of Christian, Muslim and Jewish. (CIA, 2008) Therefore, Hong Kong has many different festivals, for instance, Christmas, Easter, Chinese New Year and Lantern Festival. These special occasions provide many opportunities to create unforgettable events and attract worldwide attention.

Secondly, HKDL understands the importance of cultural differences and has attempted to avoid the problem of a cultural backlash such as experienced by Disneyland Resort Paris. Instead of planting American culture in Hong Kong, Disneyland had put a lot of effort to embody both American and Chinese cultures.

The bad reputation of HKDL arose amongst others, through the following issues: A case of food poisoning broke out in a park restaurant (Eimer, 2005). Green groups asked the park to change their resort’s wedding menu to take off shark’s fin soup (Ibid). District councillors accused Disney officials of discrimination for refusing to switch to the more environmentally friendly fireworks technology they used in California (Ibid). Local unionists attacked the poor working conditions, long hours and unfair treatment at the park like staff that wear Mickey Mouse costumes earning higher pay than those wearing Donald Duck costumes (Shenzhen Daily, 2008; The Standard, 2005). All these relate to the poor corporate social responsibility (CSR) planning. Wheelen and Hunger (2006) argue that private corporations have responsibilities to society that extend beyond making profit and, further, CSR is the element which makes the business grow. CSR covers different responsibilities including product safety, working conditions, honesty,  avoiding pollution, avoiding discrimination and taking community action (Thompson and Martin, 2005). HKDL has failed to achieve appropriate CSR.  Its focus on revenue has distracted attention from its social responsibilities, which raises the question of whether CSR is solely the responsibility of the private company or whether government should also have a role.

The five forces model

Thus HKDL has a favourable macro-environment. Its microenvironment will be examined using Porter’s five forces model (Porter, 1980).  This model seeks to measure the competitiveness of a company by reference to five forces: (1) direct competitors: those companies that offer same product or service as your company; (2) buyers: the customers who can have varying degrees of power; (3) suppliers: those who provide the materials and other stocks for the business; (4) substitutes: others who provide similar products or services; (5) potential entrants: new companies entering the industry.  Wheelen & Hunger (2006) argue that the stronger these forces, the more limited an organisation’s ability to raise prices and earn greater profit. 

Applying Porter’s five forces can lead to knowledge of the intensity and power of each force by systematically analysing its market’s structure and the competitive situation. Thereby, organisations can develop new strategies to improve their own competitive position. However, there are some limitations to Porter’s model. Its validity is criticised since it was developed in the early 1980s when cyclical growth characterised the global economy. Therefore, it focused on profitability and survival at a time when most industries were fairly stable and predictable (Fineman, Sims & Gabriel, 2006). The model’s meaningfulness may be reduced because it assumes a perfect market with a simple market structure,

however nowadays the dynamic of the industry has changed and is more complicated, with multiple interrelations, segments, product groups and by-products (Mullins, 2005). These important elements are not incorporated in the model.

The aim of analysing suppliers in Porter’s model is to determine the bargaining power of the supplier and the extent to which the company must rely on an individual supplier.  In the case of a theme park, most of the major things bought, for example the rides and buildings, are one-off purchases. The suppliers that affect daily operation are food and beverage, fireworks and office equipment suppliers. All these are replaceable and will not directly affected HKDL’s competitive advantage.

On the other hand, the bargaining power of buyer is determined by the concentration of buyers and how much customers can impose pressure on volumes and margins. In the case of HKDL, their customers have relatively low bargaining power because the theme park is differentiated in its industry. Therefore, the threats from buyers are relatively low.

Therefore, the focus now shifts to industry competitors, potential entrants and substitutes to analyse the business environment of Disneyland.

The direct competitor of HKDL is the people’s amusement park, Ocean Park (OP). HKDL’s entry fee is almost US$24 more than for OP, thus from the point of view of the purchasing power for teenagers, most of them will prefer OP. 

In addition, instead of rides, OP also features a panda exhibit, jellyfish and shark aquarium, a four-story aquarium displaying different species of fish. OP also operates observatories, well-developed laboratories, an education department and a Whales and Dolphins Fund with the aim of saving the environment (Ocean Park, 2008). OP has also organized different campaigns to demonstrate their social responsibility, for example, “Championing the Green Olympics”, “No Straw Day Campaign” and “International Day of Disabled Persons”. In these activities, OP has demonstrated greater CSR effort than HKDL and thus OP has a healthier business and draws more attention from the public.

However, the greatest threat from a potential new entrant comes from the proposals for a third Disneyland in Asia, due to open in 2012 in Shanghai, only a one hour flight away from HKDL.  This new Disney Park will be eight times larger than HKDL (Subler, 2008). Thus, HKDL faces a same brand competitor within Asia. With the opening of Shanghai Disneyland, there will be three Disneys in Asia competing for the same market. The low product differentiation caused by the

standardised service and products will directly affect HKDL’s revenue as a major market for HKDL is China. Chinese citizens may opt for the convenience, accessibility and the enhanced scope of Shanghai, thus leading to a significant loss of target market and subsequent drop in revenue for HKDL. The entrance fee for Shanghai is not yet released and will be critical to HKSL’s future, however this is likely to be cheaper than HKDL as fees for each Disneyland are adjusted in line with local’s purchasing power.  In its first and second years HKDL failed to attract its target customer numbers (Sinn, 2007) and does not appear to be strong enough to attract different customers, hence after the Shanghai Disneyland opens, with the poor reputation of HKDL, the number of HKDL’s customers may well decrease gradually.

The substitutes affecting the competitiveness of HKDL are the leisure and retail industries.  Being a cosmopolitan city, Hong Kong offers different entertainment activities, including dining, shopping and nightlife. During different festivals, all of these substitutes will organize various events. For example HKDL organized “Disney's Haunted Halloween” while in Lan Kwai Fong (one of the popular and well known areas for a night out in Hong Kong) restaurants, clubs and bars offered a range of events. These offered choices for different types of Halloween celebrations. Thus, the festivals in theme park were no longer unique or special.  HKDL should learn from this and not underestimate the potential power of substitutes and HKDL must strengthen its brand.

Conclusions

HKDL has a favourable macro-environment which could help the park in different areas. However, HKDL has only dealt with its external environment rather than utilised it. For example, the lack of bargaining power with government that lead to HKDL’s flexibility; failed to turn the risk of the changing demographic sector into an advantage; there has been insufficient crisis management planning and it has failed to build a good employer brand to attract quality labour. These indicate ineffective management planning and poor strategic development.

The microenvironment analysed by Porter’s five forces has revealed that HKDL has a competitive environment. However, HKDL does not have outstanding products to help compete with its direct competitor and retain guest loyalty. Also, with the potential entrance of Shanghai Disneyland, HKDL will lose a certain part of its market share after Shanghai’s grand opening. Further, its strong substitutes have directly threatened HKDL visitor numbers and the poor branding lead by inadequate corporate social responsibility arrangements, lack of unique selling point and poor HR management have directly decreased HKDL’s attractiveness and competitiveness.

In order to return the magic back to Disney, it has to add in more effort from management. First of all, staff are the best sales force and must be well managed otherwise employee morale is threatened. In order to recover and build up a strong intellectual capital, a proper reward system should be implemented to increase motivation. A good working environment should be provided and flexibility built into working practices.  It is important to increase employees’ relationships in order to ensure they share the same values as HKDL and provide the best visitor experience.  Moreover, employer branding can also attract and retain human capital, this will directly relate to HKDL’s CSR planning as CSR directly affects the image of the company.

In order to increase transparency and enhance the connection of Hong Kongers to HKDL more environmentally friendly campaigns and customer involvement with, for example, recycling should be introduced.  Also, in order give back to society, HKDL should offer help to organize activities for the minority. These actions will gain society awareness and enhance HKDL’s positive image.

Further, HKDL needs effective promotion internally and externally,  through for example having places to showcase activities and events through intranet, website, newsletter, press, meeting, staff award schemes and notice boards. For external promotion, it can generate positive publicity through different areas, for example through relevant magazines which inform visitors and suppliers. Competitions or award schemes to increase the exposure could be introduced.  Website promotions could be used thus capitalising on Hong Kong’s extensive Internet use. Relationship marketing should be introduced in HKDL thus building up guest loyalty and benefits in assurance revenue and numbers of visitors.  The Internet is also advantageous for positive buzz marketing.

HKDL should reposition it own product to become a unique selling point, it can successfully add in a motivators to attract customers and gain competitive advantage. For instance, Food and Beverage outlets inside the theme park could adopt different strategic approaches providing good quality and variety of cuisine, thus developing their restaurants as one of the attractions.

Unless positive steps are taken to improve the image of HKDL, its future viability will remain uncertain.

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Acknowledgements

The author would love to express her thankfulness to Mr. Hans von Rotz, her tutor, for his continuous support during the whole process of the paper writing. Also, to Mr. Carlos Oberli, the research leader of BSc class, to lead the class through understanding and continuous support, and thanks to Mr. Martin Jost who gave the author a lot of valuable

advice and opinion of this paper.  All three have had a major influence on the development of the ideas and have given constructive feedback.