Synopsis

All Disney's theme parks and the attractions within the parks can be viewed as innovation in action. Part of Disney's success can be attributed to the Imagineers that understand the skills they must possess to work in this type of innovation environment. The culture at Disney is truly an innovation culture.

Introduction

Not all project managers are happy with their jobs, and they often believe that changing industries might help. Some have delusions about wanting to manage the world's greatest construction projects, while others want to design the next generation cell phone or mobile device. However, the project managers that are probably the happiest are the Imagineering project managers that work for the Walt Disney Company even though they could possibly earn higher salaries elsewhere on projects that have profit and loss statements. Three of their Imagineering project managers (John Hench, Claude Coats, and Martin Sklar) retired with a combined 172 years of Imagineering project management work experience with the Walt Disney Company. But how many project managers in other industries truly understand what skills are needed to be successful as an Imagineering project manager? Is it possible that many of the Imagineering project management skills, which are core innovation skills, are applicable to other industries and we do not recognize it?

The PMBOK® Guide is, as the name implies, just a guide. Each company may have unique or specialized skills needed for the projects they undertake above and beyond what is included in the PMBOK® Guide.* Even though the principles of the PMBOK® Guide still apply to Disney's theme park innovation projects, there are other skills needed that are significantly different from a lot of the material taught in traditional project management courses. Perhaps the most common skills among all Imagineering project managers are brainstorming, problem solving, decision making, and thinking in three rather than two dimensions. While many of these skills are not taught in depth, or even at all, in traditional project management programs, they may very well be necessities for all project managers. Yet most of us may not recognize this fact.

Walt Disney Imagineering

Walt Disney Imagineering (also known as WDI or simply Imagineering) is the design and development arm of The Walt Disney Company, responsible for the creation and construction of Disney theme parks worldwide. Founded by Walt Disney to oversee the production of Disneyland Park, it was originally known as WED Enterprises, from the initials meaning “Walter Elias Disney,” the company founder's full name (Wright 2005, 6).

The term Imagineering was introduced in the 1940s by Alcoa to describe its blending of imagination and engineering, and used by Union Carbide in an in-house magazine in 1957, with an article by Richard F. Sailer called BRAINSTORMING IS IMAGINation engINEERing. Disney filed for a copyright for the term in 1967, claiming first use of the term in 1962. Imagineering is responsible for designing and building Disney theme parks, resorts, cruise ships, and other entertainment venues at all levels of project development. All activities require some form of innovation. Imagineers possess a broad range of skills and talents, and thus over 140 different job titles fall under the banner of Imagineering, including illustrators, architects, engineers, lighting designers, show writers, graphic designers, and many more (Wright 2005, 3). It could be argued that all Imagineers are project managers and all project managers at WDI are Imagineers. Simply stated, the culture is that virtually everyone has innovation skills. Most Imagineers work from the company's headquarters in Glendale, California, but are often deployed to satellite branches within the theme parks for long periods of time.

Project Deliverables

Unlike traditional projects where the outcome of a project is a hardware or software deliverable, Imagineering project outcomes for theme park attractions are visual stories created through innovation. The entire deliverable is designed to operate in a controlled environment where every component of the deliverable has a specific meaning and contributes to part of telling a story. It is visual storytelling. Unlike traditional movies or books, which are two-dimensional, the theme parks and the accompanying characters come to life in three dimensions. Most project managers, including innovators, do not see themselves as storytellers.

The intent of the theme park attraction is to remove people from reality once they enter the attraction and make them believe that they are living out a story and possibly interacting with their favorite characters. Theme park visitors are made to feel that they are participants in the story, rather than just observers, and this includes visitors of all ages.

While some theme parks are composed of rides that appeal to just one of your senses, Disney's attractions appeal to several of the senses thus leaving a greater impact when people exit the attraction, allowing guests “to see, hear, smell, touch and taste in new ways” (Hench and van Pelt 2008, 6). Everything is designed to give people an experience. In the ideal situation, people are made to believe that they are part of the story. When new attractions are launched, Imagineers pay attention to the guests' faces as they come off of a ride. This is important for continuous improvement efforts.

All I want you to think about is when people walk through or have access to anything you design, I want them, when they leave, to have smiles on their faces. Just remember that. It's all I ask of you as a designer. (Walt Disney, quoted in Disney Book Group 1996, 18)

The Importance of Constraints

Most project management courses emphasize that there are three constraints on projects, namely time, cost, and scope. While these constraints exist for Imagineering projects as well, there are three other theme park constraints that are often considered as more important than time, cost, and scope. The additional constraints are safety, quality, and aesthetic value.

Safety, quality, and aesthetic value are all interrelated constraints. Disney will never sacrifice safety. It is first and foremost the primary constraint. All attractions operate every few minutes 365 days each year and must therefore satisfy the strictest of building codes. Some rides require special effects such as fire, smoke, steam and water. All of this is accomplished with safety in mind. Special effects include fire that actually does not burn, simulated fog that one can breathe safely, and explosions that do not destroy anything. Another special effect is the appearance of bubbling molten lava that is actually cool to the touch.

Reliability and maintainability are important quality attributes for all project managers but of critical importance for the Imagineers. In addition to fire, smoke, stream, and water, there are a significant number of moving parts in each attraction. Reliability considers how long something will perform without requiring maintenance. Maintainability discusses how quickly repairs can be made. Attractions are designed with consideration given to component malfunctions and ways to minimize the downtime. Some people may have planned their entire vacation on the desire to see specific attractions, and if these attractions are down for repairs for a lengthy time, park guests will be unhappy.

Brainstorming

With traditional projects, brainstorming may be measured in hours or days. Members of the brainstorming group are small in number and may include marketing for the purpose of identifying the need for a new product or enhancement to an existing product, and technical personnel to state how long it takes and the approximate cost. Quite often, these innovation project managers may not be assigned and brought on board until after the project has been approved, added into the queue, and the statement of work is well defined. At Disney's Imagineering organization, brainstorming may be measured in years and a multitude of Imagineering personnel will participate, including the innovation project managers.

Attractions at most traditional amusement parks are designed by engineers and architects. Imagineering brainstorming at Disney is done by storytellers that must visualize their ideas in both two and three two dimensions. Brainstorming could very well be the most critical skill for an Imagineer. Brainstorming requires that Imagineers put themselves in the guests' shoes and think like kids as well as adults in order to see what the visitors will see. You must know your primary audience when designing an attraction. This is similar to what marketing personnel must do in new product development.

Brainstorming can be structured or unstructured. Structured brainstorming could entail thinking up an attraction based on a newly released animated or non-animated Disney movie. Unstructured brainstorming is usually referred to as “blue sky” brainstorming. Several sessions may be required to come up with the best idea because people need time to brainstorm. Effective brainstorming mandates that we be open-minded to all ideas. And even if everyone agrees on the idea, Imagineers always ask, “Can we make it even better?” Unlike traditional brainstorming, it may take years before an idea comes to fruition at the Imagineering division.

Imagineering brainstorming must focus on a controlled themed environment where every component is part of telling the story. There are critical questions that must be addressed and answered as part of Imagineering brainstorming:

• How much space will I have for the attraction?
• How much time will the guests need to feel the experience?
• Will the attraction be seen on foot or using people movers?
• What colors should we use?
• What music should we use?
• What special effects and/or illusions must be in place?
• Does technology exist for the attraction or must new technology be created?
• What landscaping and architecture will be required?
• What other attractions precede this attraction or follow it?

Before brainstorming is completed, the team must consider the cost. Regardless of the technology, can we afford to build it? This question must be addressed whether it is part of a structured or blue sky brainstorming session.

Guiding Principles

Imagineers are governed by a few key principles when developing new concepts and improving existing attractions. Often new concepts and improvements are created to fulfill specific needs and to make the impossible appear possible. Many ingenious solutions to problems are Imagineered in this way, such as the ride vehicle of the attraction Soarin' Over California. The Imagineers knew they wanted guests to experience the sensation of flight but weren't sure how to accomplish the task of loading the people on to a ride vehicle in an efficient manner where everyone had an optimal viewing position. One day, an Imagineer found an Erector set in his attic, and was able to envision and design a ride vehicle that would effectively simulate hang gliding (Scribner and Rees 2007).

Imagineers are also known for returning to ideas for attractions and shows that, for whatever reason, never came to fruition. It could be years later when they revisit the ideas. These ideas are often reworked and appear in a different form— like the Museum of the Weird, a proposed walk-through wax museum that eventually became the Haunted Mansion (Scribner and Rees 2007).

Finally, there is the principle of “blue sky speculation,” a process where Imagineers generate ideas with no limitations. Many Imagineers consider this to be the true beginning of the design process and operate under the notion that if it can be dreamt, it can be built (Marling 1997). Disney believes that everyone can brainstorm and that everyone wants to contribute to the brainstorming process. No ideas are bad ideas. Effective brainstorming sessions neither evaluate nor criticize the ideas. They are recorded and may be revisited years later.

Imagineers are always seeking to improve on their work—what Walt called “plussing.” He firmly believed that “Disneyland will never be completed as long as there's imagination left in the world,” meaning there is always room for innovation and improvement (Scribner and Rees 2007). Imagineering also has created many ideas that have never been realized, although some, such as Country Bear Jamboree, do take form in one way or another later. Ideas and eventually future attractions can also come from the animated films produced by the Walt Disney Company or other film studios.

The brainstorming subsides when the basic idea is defined, understood, and agreed upon by all group members. It belongs to all of us, keeping strong a rich heritage left to use by Walt Disney. Teamwork is truly the heart of Imagineering… . In that spirit, though Imagineering is a diverse collection of architects, engineers, artists, support staff members, writers, researchers, custodians, schedulers, estimators, machinists, financiers, model-makers, landscape designers, special effects and lighting designers, sound technicians, producers, carpenters, accountants, and filmmakers—we all have the honor of sharing the same unique title. Here, you will find only Imagineers. (Walt Disney Imagineering, 2)

If I could pick any job here, I'd move my office to the Imagineering building and immerse myself in all that lunacy and free-thinking.¹

Imagineering Innovations

Over the years, Walt Disney Imagineering has been granted over 115 patents in areas such as ride systems, special effects, interactive technology, live entertainment, fiber optics, and advanced audio systems.² WDI is responsible for technological advances such as the Circle-Vision 360° film technique and the FastPass virtual queuing system

Imagineering must find a way to blend technology with the story. Imagineering is perhaps best known for its development of Audio-Animatronics, a form of robotics created for use in shows and attractions in the theme parks that allowed Disney to animate things in three dimensions instead of just two dimensions. The idea sprang from Disney's fascination with a mechanical bird he purchased in New Orleans, which eventually led to the development of the attraction The Enchanted Tiki Room. The Tiki Room, which featured singing Audio-Animatronic birds, was the first to use such technology. The 1964 World's Fair featured an Audio-Animatronic figure of Abraham Lincoln that actually stood up and delivered part of the Gettysburg Address (which was incidentally just past its centennial at the time) for the “Great Moments with Mr. Lincoln” figure exhibit, the first human Audio-Animatronic.³

Today, Audio-Animatronics are featured prominently in many popular Disney attractions, including Pirates of the Caribbean, The Haunted Mansion, The Hall of Presidents, Country Bear Jamboree, Star Tours: The Adventures Continue, and Muppet*Vision 3D. Guests also have the opportunity to interact with some Audio-Animatronic characters, such as Lucky the Dinosaur, WALL-E, and Remy from Ratatouille. The next wave of Audio-Animatronic development focuses on completely independent figures, or “Autonomatronics.” Otto, the first Autonomatronic figure, is capable of seeing, hearing, sensing a person's presence, having a conversation, and even sensing and reacting to guests' emotions.

Storyboarding

Most traditional project managers may be unfamiliar with the use of the storyboarding approach as applied to projects. At Disney Imagineering, it is an essential part of the innovation project. Ideas at Imagineering begin as a two-dimensional vision drafted on a piece of white paper. Storyboards assist the Imagineers in seeing the entire attraction. Storyboards are graphic organizers in the form of illustrations or images displayed in sequence for the purpose of pre-visualizing the relationship between time and space in the attraction. Storyboards have also been used in motion pictures, animation, motion graphics, and interactive media. The storyboard provides a visual layout of events as they are to be seen by the guests. The storyboarding process, in the form it is known today, was developed at Walt Disney Productions during the early 1930s, after several years of similar processes being in use at Walt Disney and other animation studios.

A storyboard is essentially a large comic of the attraction produced beforehand to help the Imagineers visualize the scenes and find potential problems before they occur. Storyboards also help estimate the cost of the overall attraction and save development time. Storyboards can be used to identify where changes to the music are needed to fit the mood of the scene. Often storyboards include arrows or instructions that indicate movement. When animation and special effects are part of the attraction, the storyboarding stage may be followed by simplified mock-ups called animatics to give a better idea of how the scene will look and feel with motion and timing. At its simplest, an animatic is a series of still images edited together and displayed in sequence with a rough dialogue and/or rough sound track added to the sequence of still images (usually taken from a storyboard) to test whether the sound and images are working together effectively.

The storyboarding process can be very time-consuming and intricate. Today, storyboarding software is available to speed up the process.

Mock-ups

Once brainstorming has been completed, mock-ups of the idea are created. Mockups are common to some other industries, such as construction. Simple mock-ups can be made from paper, cardboard, Styrofoam, plywood, or metal. “The model-maker is the first Imagineer to make a concept real. The art of bringing a two-dimensional design into three dimensions is one of the most important and valued steps in the Imagineering process. Models enable the Imagineer to visualize, in miniature, the physical layout and dimensions of a concept, and the relationships of show sets or buildings as they will appear” (Disney Book Group 1996, 72).

As the project evolves, so too do the models that represent it. Once the project team is satisfied with the arrangements portrayed on massing models, small-scale detailed-oriented study models are begun. This reflects the architectural styles and colors for the project.

Creating a larger overall model, based on detailed architectural and engineering drawings, is the last step in the model-building process. “This show model is the exact replica of the project as it will be built, featuring the tiniest of details, including building exteriors, landscape, color schemes, the complete ride layout, vehicles, show sets, props, figures and suggested lighting and graphics” (Disney Book Group 1996, 72)

Computer models of the complete attraction, including the actual ride, are next. They are computer generated so that the Imagineers can see what the final product looks like from various positions without actually having to build a full-scale model. Computer models, similar to CAD/CAM modeling, can show in three dimensions the layout of all of the necessary electrical, plumbing, HVAC, special effects, and other needs.

Aesthetics

Imagineers view the aesthetic value of an attraction in a controlled theme environment as a constraint. This aesthetic constraint is more of a passion for perfection than the normal constraints that most project managers are familiar with.⁴

Aesthetics are the design elements that identify the character and the overall theme and control the environment and atmosphere of each setting. This includes color, landscaping, trees, colorful flowers, architecture, music, and special effects. Music must support the mood of the ride. The shape of the rocks used in the landscape is also important. Pointed or sharp rocks may indicate danger whereas rounded or smooth rocks may represent safety. Everything in the attraction is there for the purpose of reinforcing a story. Imagineers go to highly detailed levels of perfection for everything needed to support the story without overwhelming the viewers with too many details. Details that are contradictory can leave the visitors confused about the meaning of the story.

A major contributor to the aesthetics of the attraction are the special effects. Special effects are created by “Illusioneering,” which is a subset of Imagineering. Special effects can come in many different forms. Typical projected special effects can include:⁵

• Steam, smoke clouds, drifting fog, swirling effects
• Erupting volcano, flowing lava
• Lightning flashes and strikes, sparks
• Water ripple, reflection, waterfall, flows
• Rotating and tumbling images
• Flying, falling, rising, moving images
• Moving images with animated sections
• Kaleidoscopic projections
• Liquid projections, bubbles, waves
• Aurora borealis, lumia, abstract light effects
• Twinkling stars (when fiber optics cannot be used, such as on rear-projection screen)
• Spinning galaxies in perspective, comets, rotating space stations, pulsars, meteor showers, shooting stars and any astronomical phenomena
• Fire, torches, forest fire
• Expanding rings
• Ghosts, distorted images
• Explosions, flashes

Perhaps the most important contributor to the aesthetic value of an attraction is color. Traditional project managers rely on sales or marketing personnel to select the colors for a deliverable. At Imagineering, it is done by the Imagineers. Color is a form of communications. Even the colors of the flowers and the landscaping are critical. People feel emotions from certain colors either consciously or subconsciously. Imagineers treat color as a language. Some colors catch the eye quickly and we focus our attention on it. “We must ask not only how colors work together, but how they make the viewer feel in a given situation… . It is the Imagineer's job to understand how colors work together visually and why they can make guests feel better” (Hench 2008, 104).

White represents cleanliness and purity, and in many European and North American cultures … is the color most associated with weddings, and with religious ceremonies such as christenings. Silver-white suggest joy, pleasure and delight. In architecture and interior design, white can be monotonous if used over large areas” (Hench 2008, 135).

“… We have created an entire color vocabulary at Imagineering, which includes colors and patterns we have found that stir basic human instincts—including that of survival. (Disney Book Group 1996, 94).

Aesthetics also impacts the outfits and full-body costumes of the cast members that are part of the attraction. The outfits that the cast members wear must support the attraction. Unlike animation where there are no physical limitations to a character's identity or mobility, people may have restricted motion once in the costume. Care must be taken that the colors used in the full body costumes maintain the character's identity without conflicting with the background colors used in the attraction. Even the colors in the rest rooms must fit the themed environment.

Imagineers also try to address queue design by trying to make it a pleasant experience. As people wait in line to see an attraction, aesthetics can introduce them to the theme of the attraction. The aesthetics must also consider the time it takes people to go from attraction to attraction, as well as what precedes this attraction and what follows it. “For transition to be smooth, there must be a blending of themed foliage, color, sound, music, and architecture. Even the soles of your feet feel a change in the paving explicitly and tell you something new is on the horizon” (Disney Book Group 1996, 90).

The Art of the Show

Over the years, Imagineering has conceived a whole range of retail stores, galleries, and hotels that are designed to be experienced and to create and sustain a very specific mood—for example, the mood of Disney's Contemporary Resort could be called “the hello futuristic optimism,” and it's readily apparent given the resort's A-frame structure, futuristic building techniques, modern décor, and the monorail gliding quietly through the lobby every few minutes. Together, these details combine to tell the story of the hotel (Marling 1997).

Imagineering is, first and foremost, a form of storytelling, and visiting a Disney theme park should feel like entering a show. Extensive theming, atmosphere, and attention to detail are the hallmarks of the Disney experience. The mood is distinct and identifiable, the story made clear by details and props. Pirates of the Caribbean evokes a “rollicking buccaneer adventure,” according to Imagineering Legend John Hench, whereas the Disney Cruise Line's ships create an elegant seafaring atmosphere. Even the shops and restaurants within the theme parks tell stories. Every detail is carefully considered, from the menus to the names of the dishes to the Cast Members' costumes (Hench and van Pelt 2003, 29, 58). Disney parks are meant to be experienced through all senses—for example, as guests walk down Main Street, U.S.A. they are likely to smell freshly baked cookies, a small detail that enhances the story of turn-of-the-century, small-town America.

The story of Disney theme parks is often told visually, and the Imagineers design the guest experience in what they call “The Art of the Show.” John Hench (one of Disney's Imagineering Legends) was fond of comparing theme park design to moviemaking, and often used filmmaking techniques in the Disney parks, such as the technique of forced perspective (Hench and van Pelt 2003, 13, 14, 74, 76, 96). Forced perspective is a design technique in which the designer plays with the scale of an object (i.e., a prototype) in order to affect the viewer's perception of the object's size. One of the most dramatic examples of forced perspective in the Disney Parks is Cinderella's Castle. The scale of architectural elements is much smaller in the upper reaches of the castle compared to the foundation, making it seem significantly taller than its actual height of 189 feet (Wright 2005, 24).

The Power of Acknowledgment

Project managers like to be told that they have done a good job. It is a motivational force encouraging them to continue performing well. However, acknowledgment does not have to come with words; it can come from results. At Disney's Imagineering Division, the fact that more than 132,500,000 visitors passed through the gates of the 11 Disney theme parks in 2013 is probably the greatest form of acknowledgment. The Walt Disney Company does acknowledge some Imagineers in other ways. Disney established a society entitled “Imagineering Legends.” Three of their most prominent Imagineering Legends are John Hench (65 years with Disney), Claude Coats (54 years with Disney), and Martin Sklar (53 years with Disney). The contributions that these three Imagineers have made appear throughout the Disney theme park attractions worldwide. The goal of all Imagineers at Disney may very well be the acknowledgment of becoming an Imagineering Legend.

The Need for Additional Skills

All projects have special characteristics that may mandate a unique set of project management skills above and beyond what we teach using the PMBOK® Guide. Some of the additional skills that Imagineers may need can be summarized as:

• The ability to envision a story
• The ability to brainstorm
• The ability to create a storyboard and build mock-ups in various stages of detail
• A willingness to work with a multitude of disciplines in a team environment
• An understanding of theme park design requirements
• Recognizing that the customers and stakeholders range from toddlers to senior citizens
• An ability to envision the attraction through the eyes and shoes of the guests
• An understanding of the importance of safety, quality, and aesthetic value as additional competing constraints
• A passion for aesthetic details
• An understanding of the importance of colors and the relationship between colors and emotions
• An understanding of how music, animatronics, architecture, and landscaping must support the story

Obviously, this list is not inclusive of all skills. But it does show that not everyone can fulfill their desire to be an Imagineer for Disney. But these skills do apply to many of the projects that most project managers are struggling with. Learning and applying these skills could very well make all of us better innovation project managers.

Discussion Questions

1. Is there a difference between Imagineering and innovation?
2. What do you believe is the most important reason why Disney's Imagineering Division has been so successful and for so long?
3. Why is it that most project managers do not recognize that they either need or can use the skills required to perform as an Imagineering project manager?
4. What's the fundamental difference between a ride and an attraction?
5. What are some of the differences between traditional brainstorming and Imagineering brainstorming?
6. How many project constraints are there on a traditional theme park attraction?
7. How would you prioritize the constraints?
8. Why is it necessary to consider cost before the Imagineering brainstorming sessions are completed?
9. What is Audio-Animatronics?
10. What is storyboarding, and how is it used on Disney projects?
11. What is meant by project aesthetics, and how might it apply to projects other than at Disney?
12. How does Disney determine the customer's perception of value-in-use?

Further Reading

1.   ● Alcorn, Steve, and David Green, Building a Better Mouse: The Story of the Electronic Imagineers Who Designed Epcot (Themeperks Press, 2007).
2.   ● Ghez, Didier, and Alain Littaye, translated into English by Danielle Cohn, Disneyland Paris from Sketch to Reality (Nouveau Millénaire Editions, 2002).
3.   ● Hench, John, with Peggy Van Pelt. Designing Disney: Imagineering and the Art of the Show (Disney Editions, 2003), ISBN 0-7868-5406-5.
4.   ● The Imagineers, Walt Disney Imagineering: A Behind the Dreams Look at Making More Magic Real (Disney Editions, 2010).
5.   ● The Imagineers, The Imagineering Way: Ideas to Ignite Your Creativity (Disney Editions, 2003), ISBN 0-7868-5401-4.
6.   ● The Imagineers, (as “The Disney Imagineers”). The Imagineering Workout: Exercises to Shape Your Creative Muscles (Disney Editions, 2005).
7.   ● The Imagineers, The Imagineering Field Guide to Disneyland (Disney Editions, 2008).
8.   ● The Imagineers, The Imagineering Field Guide to Animal Kingdom at Walt Disney World (Disney Editions, 2007).
9.   ● The Imagineers, The Imagineering Field Guide to Epcot at Walt Disney World (Disney Editions, 2006).
10.   ● The Imagineers, The Imagineering Field Guide to Magic Kingdom at Walt Disney World (Disney Editions, 2005).
11.   ● Kurtti, Jeff. Walt Disney's Legends of Imagineering and the Genesis of the Disney Theme Park (Disney Editions, 2006), ISBN 0-7868-5559-2.
12.   ● Surrell, Jason. The Disney Mountains: Imagineering at Its Peak (Disney Editions, 2007).
13.   ● Surrell, Jason. Pirates of the Caribbean: From the Magic Kingdom to the Movies (Disney Editions, 2007).
14.   ● Surrell, Jason. The Haunted Mansion: From the Magic Kingdom to the Movies (Disney Editions, 2003).

Introduction

The Haunted Mansion attraction opened to the public August 9, 1969. One week after opening, more than 82,000 guests had seen the attraction. During the first busy season, the time to stand in the queue to see the attraction was three to four hours. Eventually, an army of die-hard fans claimed that the Haunted Mansion was their favorite attraction. Today, there are stores and websites dedicated to the selling of souvenirs of the Haunted Mansion and its inhabitants.

Why Study the Haunted Mansion?

Some projects can have unique characteristics that can make them more difficult to manage than other projects. Projects that involve imagination and creativity fall into this category. Years ago, we believed that, if you understood the concepts of project management, you could work in just about any industry. But today, we recognize the importance of these unique characteristics, especially those related to innovation activities, that may make changing industries more complex.

Disney's Haunted Mansion opened to guests in 1969, the same year that the Project Management Institute (PMI) was formed. The Haunted Mansion attraction was completed without either the use of the PMBOK® Guide or PMP credential holders, since these did not appear until the mid-1980s. Many of the individuals assigned to the Haunted Mansion project were some of the most creating and inventive people in the world. So, how did innovation project management take place on such an endeavor as the Haunted Mansion? What were some of the unique characteristics needed for the Haunted Mansion project?

In the Disney (A) Case Study, we identified some of the characteristics that differentiated Imagineering project managers from traditional project managers. We will now look more closely at Imagineering project management in action using Disney's Haunted Mansion Project.

The literature abounds with both authorized and unauthorized stories of Walt Disney's Haunted Mansion. The Haunted Mansion is considered part of Disney's heritage and has attracted research by numerous Disney historians, creating both authorized and unauthorized versions of the attraction. Unfortunately, all of the versions do not directly discuss project management, thus mandating some assumptions and interpretation. The comparison of Imagineering project management with traditional project management, and the accompanying conclusions, are solely the author's interpretation and may not necessarily represent Disney's conclusions. The material in this case study was extracted from numerous sources that are referenced throughout this case study.

Constraints

All projects have constraints. For almost 50 years, we taught project managers to focus on the triple constraints of time, cost, and scope. But for the projects at the Disney theme parks, we must also include the constraints of safety, quality, aesthetic value, and others such as customer satisfaction.

The PMBOK® Guide did not begin discussing the importance of competing constraints until the fourth edition was released in 2008. Prior to that time, only the importance of the traditional triple constraints was emphasized. Yet even as early as the 1950s, with the design of the Disneyland theme park, Disney understood the importance of competing constraints and the fact that they must be prioritized.

The most important constraint at Disney was, and still is, the safety of the guests. This constraint is never sacrificed at Disney. In the author's opinion, quality and aesthetic value were probably tied for second and third behind safety. If tradeoffs had to be made on certain attractions, it appears that the tradeoffs took place on time, cost, and scope, but not safety, aesthetic value, or quality. Safety, aesthetic value, and quality are today attributes of the Disney image. The importance of these constraints will be discussed further in this case study.

Life Cycle Phases

When companies strive for some degree of project management maturity, they usually begin with the creation of an enterprise project management methodology developed around required life-cycle phases. The literature does not identify any project management methodology, nor does it identify any life-cycle phases for Disney's theme park attractions. However, the literature does identify many of the various steps in creating an attraction. From these steps, we can assume that typical life-cycle phases might appear such as shown in Figure 13-1. Some of the detailed steps that are performed in each life-cycle phase are described in the Disney (A) Case Study.

The life-cycle phases shown in Figure 13-1 appear as sequential phases. However, in reality, many of the phases can overlap. As an example, special effect activities can take place in any or all of the life-cycle phases, including construction.

The Scope Constraint

Most project managers are accustomed to having a well-defined statement of work (SOW) at the onset of a project. The SOW serves as the scope constraint. Even though the SOW may be highly narrative, the accompanying work breakdown structure (WBS) and specifications can provide significant detail to support the narrative SOW.

Well-defined SOWs are based on a well-defined business case where the concept for the project is understood. If the concept is not well understood, then the SOW may not appear until the end of the concept development or idea generation life-cycle phase in Figure 13-1.

On a project such as the Haunted Mansion, we must remember that, first of all, it is an Imagineering project and Imagineering efforts will continue throughout the life of the project and beyond due to continuous improvement efforts. Expecting a well-defined SOW at the beginning of the project, and having it remain unchanged throughout the project, is highly unlikely on a project such as the Haunted Mansion. The SOW is most likely a constantly evolving document, possibly finalized as we approach the opening day of the attraction.

To understand the complexity of creating a formal SOW, we must first look at the questions that had to be addressed during the concept development phase of the Haunted Mansion Project. Typical questions include:

• Should the attraction be based on a single ghost story concept or several stories?
• Should it be a scary or humorous attraction?
• What should the Haunted Mansion look like?
• What colors and type of landscaping should be used?
• Should it be a walk-through attraction or a ride using a people mover?
• If it is a ride, how many people can we have in the people mover at one time?
• How long should it take to go through the attraction?
• How many ghostly special effects will be needed?
• Will a script be needed to accompany some of the special effects?
• Will we need a host to guide people through the ghostly attraction?
• If a host is needed, will it be a live person or a ghost doing the hosting?
• Will there be eerie music to accompany the special effects?
• Does technology exist for the ghostly images or must new technology be created?
• How much should be budgeted for the attraction?

The answers to the questions were not easy to determine at the onset of the project and were also influenced by who was working on the project at that time and the innovative technology available for special effects. Walt assigned some of his seasoned veterans to this project. Many of the team members had been working with Walt for decades and had been highly creative on other projects. They brought with them their own unique ideas that often created ego problems. If people were reassigned during the Haunted Mansion Project, which they were, their replacements came with their own ideas and then the answers for many of the above questions could then change.

To understand the complexities of creating a SOW for the Haunted Mansion, many of these questions could not be answered until the project was well under way. The questions were, as expected, interrelated and not always easy to answer even in later life-cycle stages. The answer to one question could cause the answers to several other questions to change. If the answers to some of these questions could not be made until well into the project, then there could be a significant amount of scope changes.

Scope Changes

To understand the interrelatedness of the questions and how scope changes can occur even near the completion of the project, consider The Hatbox Ghost special effect. The Hatbox Ghost was a character that was planned for the Haunted Mansion at Disneyland but was removed shortly after the attraction's debut. Located formerly in the ride's attic scene, the figure was described as “an elderly ghost in a cloak and top hat, leaning on a cane with a wavering hand and clutching a hatbox in the other”⁶

The idea behind The Hatbox Ghost was for his head to vanish from atop his shoulders and reappear alternately inside his hatbox, in time with an adjacent bride figure's beating heart. According to Imagineer Chris Merritt in an interview with DoomBuggies.com, the effect was never completely successful due to the illusion's close proximity to the ride vehicles: “The gag was based purely on lighting. The ghost's head was illuminated by black lighting. A light inside the hatbox he held would rhythmically illuminate and hide the head in the hatbox, while, in tandem, the actual head on the ghost's shoulders would be hidden by extinguishing the black lighting.”⁷

The Hatbox Ghost illusion was installed inside the Haunted Mansion and in place for cast member (park employee) previews on the nights of August 7 and 8, 1969 (Surrell 2009, 86). Almost immediately, it became apparent that the effect had failed, as ambient light in the attraction's attic scene prevented the specter's face from disappearing fully, despite the turning off of its designated spotlight. Attempts were made to remedy technical problems, but the effect wasn't convincing enough, and the ghost was decommissioned after a few months. This was just one example of how things can change well into the project.

The Time Constraint

Walt thought up the idea for the Haunted Mansion in the early 1950s. It took almost 18 years for the idea to become reality. To understand the time constraint and complexity of the project, including the interrelatedness of the questions asked previously, we should look at a brief history of the attraction.

The Haunted Mansion is a haunted house dark ride located at Disneyland, Magic Kingdom (Walt Disney World), and Tokyo Disneyland. Phantom Manor, a significantly re-imagined version of the Haunted Mansion, is located exclusively in Disneyland Paris. Another Disney attraction involving the supernatural and set in a mansion, Mystic Manor, recently opened at Hong Kong Disneyland. The Haunted Mansion features a ride-through tour in Omnimover (or people mover) vehicles called “Doom Buggies,” preceded by a walk-through show in the queue. The attraction utilizes a range of technology, from centuries-old theatrical effects to modern special effects and spectral Audio-Animatronics.

The attraction predates Disneyland, to when Walt Disney hired the first of his Imagineers. The first known illustration of the park showed a Main Street setting, green fields, western village and a carnival. Disney Imagineering Legend Harper Goff developed a black-and-white sketch of a crooked street leading away from Main Street by a peaceful church and graveyard, with a run-down manor perched high on a hill that towered over Main Street.

Disney assigned Imagineer Ken Anderson to create a story around Goff's idea. Plans were made to build a New Orleans–themed land in the small transition area between Frontierland and Adventureland. Weeks later, New Orleans Square appeared on the souvenir map and promised a thieves' market, a pirate wax museum, and a haunted house walk-through. Anderson studied New Orleans and old plantations and came up with a drawing of an antebellum manor overgrown with weeds, dead trees, swarms of bats, and boarded doors and windows topped by a screeching cat as a weather vane.

Walt, however, did not like the idea of a run-down building in his pristine park. He visited the Winchester Mystery House in San Jose, California, and was captivated by the massive mansion with its stairs to nowhere, doors that opened to walls and holes, and elevators. When the decision was made to begin full-scale development of the Haunted Mansion, Imagineer Marc Davis asked Walt if he wanted the house to look scary. At a panel discussion celebrating the fortieth anniversary of the Haunted Mansion, Davis's widow, Disney costume designer Alice Estes Davis, described their conversation:

[Marc] said that he had a talk with Walt in regard to how he wanted the outside of the house done… . Marc said, “do you want it like Charles Addams,” and Walt said no, he said, “No, I want the lawn beautifully manicured. I want beautiful flowers. I want the house well-painted and well cared for so that people would know that we took care of things in the park,” that is was a clean, good park for families to come and have a good time. And he said also “I want them to know that the haunted house is not scary. You can put all the spider webs or whatever else you want inside, I don't care about that… but the outside has to be pristine and clean at all times.”⁸

Anderson came up with several possible stories for the mansion. Some of the stories included:

• A wedding gone awry when a ghost suddenly appears and kills the groom. The man that eventually appears hanging from the ceiling in the attic could be the bride's husband.
• Similar to the above story, a ghost appears and kills the groom. The bride then commits suicide and she appears hanging in the attic.
• A newly married bride discovers that her husband is really a blood thirsty pirate. The pirate kills his bride in a jealous rage, but her ghost returns to haunt him. He could not live with himself for what he did to his true love, so he hangs himself in the attic rafters.
• Another story focused on calling the Haunted Mansion “Bloodmere Manor,” which may have involved more bloody scenes and body parts. People would appear as having been violently murdered. The story would end with the Headless Horseman in the graveyard.

The number one rule in Imagineering is that the attraction must tell a story. Unfortunately, no one could agree on what the story should be or whether the attraction could be described by just one story. In the meantime, other Imagineers were developing illusions for the Haunted House without having any story to go by. It appeared that no firm statement of work existed other than the fact that the Haunted House attraction would eventually be built. There were still too many questions that were unanswered.

In 1961, handbills announcing a 1963 opening of the Haunted Mansion were given out at Disneyland's main entrance. Construction began a year later, and the exterior was completed in 1963. The Haunted Mansion was actually a replica of a pre-existing building. Even though the façade of the Haunted Mansion was completed, the project was put on hold because of Disney's involvement in the 1964-1965 New York World's Fair. Similar to what happens in most companies when priorities change, all of the resources that were assigned to the Haunted Mansion project were reassigned to efforts to support the World's Fair. Work on the Haunted Mansion came and went over the years due to changes in priorities.

In 1963, Inspired by Walt, Marty Sklar, former vice chairman and principal creative executive at Walt Disney Imagineering, created a sign inviting ghosts to continue practicing their trade in active retirement in the Haunted Mansion. The sign is shown in Figure 13-2.⁹ The intent of the sign was to keep people focused on the fact that the Haunted Mansion would eventually be built even though the sign hung for many years in front of an empty building. The public's perception of the abandoned construction project took on a life of its own, even though there was still no story line to accompany the abandoned building.

The popularity of the sign began to grow. Some of Disney's literature stated:

The world's greatest collection of “actively retired” ghosts will soon call this Haunted Mansion “home.” Walt Disney and his “Imagineers” are now creating 1001 eerie illusions. Marble busts will talk. Portraits that appear “normal” one minute will change before your eyes. And, of course, ordinary ghost tricks (walking through solid walls, disappearing at the drop of a sheet) will also be seen… and felt. Here will live famous and infamous ghosts, ghosts trying to make a name for themselves… and ghosts afraid to live by themselves!¹⁰

When the project started up again in 1966, a new team of Imagineers were assigned. This was the fourth different Imagineering team that worked on the Haunted Mansion Project. Marc Davis and Claude Coats were responsible for the continuity of the ride and the backgrounds. The responsibility for the special effects was placed in the hands of two Imagineers that were also referred to as Illusioneers, Rolly Crump and Yale Gracey. Rolly Crump was an artist who loved stage magic and illusions, and Yale Gracey was an animator, mechanical genius, and considered the father of Illusioneering. Walt had an army of talented people in various organizations that he could select from. He had a knack of putting people “in conflict” together and telling them to work as a team, knowing full well that the results would be exceptional even with the ego problems that can typically exist with highly talented teams.

Following Walt's death in 1966, many of the Imagineers clashed over the direction of the project. Imagineer Xavier Atencio was brought on board to put together a coherent story. Without having a coherent story for direction, there was a fear that the Haunted Mansion would simply be a multitude of special effects and illusions. Even with Atencio's focus, there was still the decision of whether or not the Haunted Mansion should be a scary attraction.

Walt's original dream was to scare people, but in a pleasant sort of way. That meant that there would be no oozing of blood, missing eye sockets, gory body parts, or horrifying decaying bodies that might be seen as offensive to some. The decision was made that the animation should focus on the lighter or cartoon-like tone of a Haunted Mansion rather than the scarier tone. The Imagineers also decided that, instead of looking like an “old spook house” that may have been Ken Anderson's original thoughts, the Haunted Mansion would be full of illusions.

The Haunted Mansion's long development was rife with repeatedly discarded story concepts, disagreement on the type of scenes and effects to be used, conflicts over how many viewers should be carted through the attraction per hour—even as basic an idea as whether the attraction should be scary or not. Egos were bruised, tempers flared, and at the end of the day, it just seemed that there were “too many cooks in the kitchen,” as Imagineer Marc Davis would often recall. (Baham 2014, xiv)

Making the attraction cartoon-like rather than scary, and having the outside of the Haunted Mansion pristine, was certainly in line with Walt's original idea for the attraction. But how do you then make the Haunted Mansion structure look somewhat scary? Imagineering Legend John Hench was regarded as the color expert at Disney's Imagineering Division. According to John Hench (2008, 116):

We wanted to create an imposing southern-style house that would look old, but not in ruins. So, we painted it a cool off-white with dark, cold blue-grey accents in shadowed areas such as the porch ceilings and wrought iron details. To accentuate the eerie, deserted feelings, I had the underside of exterior details painted the same dark color, creating exaggerated, unnaturally deep cast shadows, since we associate dark shadows with things hidden, or half-hidden. The shadow treatment enhanced the structure's other-worldliness.

There was still another critical decision that had to be made. Should the attraction be a walk-through or a ride? There were pros and cons to each approach. With a walk-through, it would be easier to create a single storyline for the entire attraction. Believing that Ken Anderson's approach in the 1950s of a single story-line and a walk-through attraction would be selected, the Imagineers created some illusions where the guests could be more actively involved with the ghosts. However, walk-throughs required a live host as a tour guide, the speed of the tour may then be difficult to control, and there would always be the risk of vandalism or damage to props and equipment in the attraction.

The decision was made to go with a ride. This meant that, instead of a single storyline that would work with a walk-through, the ride would have several stories. Storylines would be needed for each of the ghosts. The tour guide could now be one of the dastardly ghosts. The total attraction, and each individual story, had to be unique and with some degree of weirdness.

Additional Time Constraints

For most project managers, time management refers to the duration of the project, which for the Haunted Mansion would be 18 years from Walt's original concept to the date when the attraction was opened to the public. But for the Imagineers, there were two other time management issues once the decision was made that this would be a ride rather than a walk-through:

• How much time will people need to view each of the scenes?
• How many people can we service each hour?

Writer Bob Thomas wrote an article in which he interviewed Carl Walker from Disneyland, and Dick Irvine, representing WED (Thomas 1969):¹¹

“Then there was the matter of how to conduct people through the ride,” said Walker. “At first, it might be a walk-through, with 30 on a conducted tour. But that was difficult to manage, and besides, people don't scare as easily in crowds. So, we made it a ride-through, with three people in a car—their crypt so to speak,” said Irvine. “The cars could be programmed to face the right direction, tilt back and keep moving. They provided the capacity we need for rides at Disneyland—2,300 [people] per hour.”

The people-mover system was called the “Doom Buggies.” It was a modification of the Omnimover system that Disney used in the 1964 New York World's Fair. Since the people were seated, the Imagineers could force the viewers to watch precisely what was intended. The Doom Buggies were programmed to control the angle (i.e., line of sight) by which the guests would see the set without being able to see the supporting animatronics. It also kept the guests at a distance where they could not touch any of the props used in the scenes. Like other attractions at Disney's theme parks, the Haunted Mansion had now become a controlled environment for the guests.

This concept also allowed the designers to be able to place infrastructure elements of the attraction, such as lighting and projectors, behind, above or below the vehicles without concern for having the illusions of the attraction revealed to the riders. The system consists of a chain of vehicles operating on a track, usually hidden beneath the floor. The chain of vehicles maintains constant motion at a specific speed, thus controlling the viewing time. The duration of the rides varies from 5:50–8:20 minutes, at a maximum speed of three miles per hour.¹²

One of the features that differentiates this system from other people-mover systems is the ability of the vehicle to be rotated to a predetermined orientation. In addition to the main ride rails, each vehicle also has two control rails attached to a wheel. One rail controls the swiveling, allowing the vehicle to face in any direction at any point on the track. The other rail allows the vehicle to tilt in relation to the inclining and declining portions of the track.

Because the entire attraction is in a controlled environment, the Imagineers can control what the guests see. The Imagineers can make it appear that one of the ghosts is in the doom buggy with them.

The Cost Constraint

The Haunted Mansion was completed at a cost of $7 million. In today's dollars, that would be equivalent to more than $50 million. When the Haunted Mansion was built, mainframe computers were just entering the marketplace. Cost control software did not exist, and all cost control was done manually.

There is a misbelief that, when imagination and creativity are allowed to run wild on projects, budgets must be unlimited. That certainly is not the case. Disney monitors all costs. Budgets for each attraction are established during the idea/conceptual phase.

The larger the project, the greater the chance for scope changes and increases in the budget. Unfortunately, the literature does not provide any information related to the original budget or the number of scope changes. The cost of each attraction at Disney's theme parks is generally regarded as proprietary knowledge.

The Safety Constraint

Safety is the main concern at Disney. Walt wanted the Haunted Mansion to be scary but in a pleasant sort of way. The term “scared to death” could lead to wrongful death lawsuits.

Since the Haunted Mansion was a controlled environment, repeat visitors recognized the predictability of the attraction. An attempt was made to have some cast members dress up in a knight's armor suit and wielding an axe (actually made of rubber). This eventually scared the heck out of some people, and there were complaints. Disney discontinued this practice.

The Aesthetics Constraint

Aesthetics and quality go hand-in-hand. All Disney theme park attractions must be aesthetically appealing to the guests. The Haunted Mansion was no exception. The Imagineers converted ideas into reality. Imagineers, and especially Illusioneers, are often equated as dreamers, inventors and even mad scientists. They must have an obsessive commitment to detail and quality.

Nightly maintenance takes place in the Haunted Mansion to make sure that every prop is in place. All of the props are real. Some of the props, such as the pipe organ, was used in the film 20,000 Leagues under the Sea.

Even the cobwebs and dust must be aesthetically in place. The cobwebs are made by a liquid cobweb spinner. There must also be a proper amount of dust (which is actually a rubber cement that cannot induce allergies in guests).

A tour of the Haunted Mansion includes:

• The Grounds
• The Foyer
• The Stretching Room
• The Portrait Corridor
• The Library and Music Room
• The Endless Staircase
• The Endless Hallway
• The Conservatory
• The Corridor of Doors
• The Séance Circle
• The Grand Hall
• The Attic
• The Graveyard
• The Crypt

When the decision was made to have a not-so-scary Haunted Mansion, the two Imagineers/Illusioneers, Yale Gracey and Rolly Crump, read ghost stories and watched ghost movies to decide what type of ghosts they could create. The two created numerous effects and often left the special effects running all night long. The night cleaning crew were often spooked and complained to the management, who, in turn, asked the Imagineers not to scare off the cleaning crew.

But instead of leaving the lights on and the special effects off, the two Imagineers decided to connect their special effects to a motion-detector switch. When the duo came to work in the morning, they found a broom hastily left in the middle of their studios. The Imagineers had to clean their studios by themselves from that point on, as management told them that the night cleaning crew were never coming back.

In each location are special effects to support the aesthetic constraint. Some of the special effects include:

• Digital projections
• Computer-controlled effects
• Audio-Animatronics
• Holograms (although they were not used)
• Special lighting
• Real props

Many of the special effects and illusions are based on Pepper's Ghost, an illusion that dates back to the 1800s. Pepper's Ghost is an illusion technique used in theatres, haunted houses, dark rides, and magic tricks. It uses plate glass, Plexiglas, or plastic film and special lighting techniques to make objects seem to appear or disappear, become transparent, or to make one object morph into another. It is named after John Henry Pepper, who popularized the effect in the 1800s.

For the illusion to work, two rooms are required. The viewer must be able to see into the main room, but not into the hidden room. The edge of the glass separating the rooms is sometimes hidden by a cleverly designed pattern in the floor.

The hidden room may be an identical mirror-image of the main room, so that its reflected image matches the main rooms; this approach is useful in making objects seem to appear or disappear. This illusion can also be used to make one object or person reflected in the mirror appear to morph into another behind the glass (or vice versa). The hidden room may instead be painted black, with only light-colored objects in it. In this case, when light is cast on the room, only the light objects reflect the light and appear as ghostly translucent images superimposed in the visible room.

In the Haunted Mansion at Disneyland, Walt Disney World, and Tokyo Disneyland, the glass is vertical to the viewer as opposed to the normal angled position, reflecting animated props below and above the viewer that create the appearance of three-dimensional, translucent “ghosts” that appear to dance through the ballroom and interact with props in the physical ballroom. The apparitions appear and disappear when the lights on the animations turn on and off.

Some of the special effects created for the Haunted Mansion include:

• A ghost host
• Exploding ghosts
• Talking and singing statues
• Furniture that comes to life
• A man made of dripping wax
• A grandfather clock that looks like a coffin
• A graveyard band of ghosts playing music
• A pet cemetery
• An invisible ghost horse with only a saddle and reins
• A ghost poetess creating a poem
• Dancing ghosts
• Ghosts that fade in and out
• Ghosts that suddenly become headless
• A ghost playing a piano
• Portraits that change from reality to the supernatural
• Wallpaper patterned with monster faces
• Hanging ghosts
• A crypt that plays music if you touch the instruments

Some of the above special effects are discussed below in more detail.¹³

Ghost Host

The Ghost Host is one of the first characters that guests to the Mansion meet, so to speak. He remains invisible throughout the tour, guiding “foolish mortals” with an ominous voice. The voice is that of Paul Frees, a popular Disneyland announcer and vocal talent (well-known as the voice of the Pillsbury Doughboy, Ludwig von Drake, and Boris Badenov in the popular TV series The Adventures of Rocky and Bullwinkle) was called on to provide the voice of the unseen “Ghost Host.” Frees's gleefully sardonic narration often features death-related puns and maniacal laughter. In the Stretching Room scene near the beginning of the tour, it is revealed that he committed suicide by hanging himself from the rafters in the cupola.

Aging Man

Above the fireplace in the foyer of the Walt Disney World and Tokyo Haunted Mansions is a portrait of a former owner of the house. The painting gradually changes from a handsome blue-eyed and black-haired young man to a withered, balding old man and finally, to a decaying skeleton. This portrait can also be found in the changing portrait hallway of the Disneyland Haunted Mansion, but it morphs from the young man to the skeleton with flashes of lightning.

Changing Portrait Characters

Lightning flashes transform these paintings (at the Disneyland and Walt Disney World Haunted Mansions) from benign to frightening. The portraits consist of:

• A beautiful young princess reclining on a couch who changes into a werecat
• A gallant knight (identified as “The Black Prince” in concept art) atop a rearing horse, who both become skeletal
• A handsome young man who decays into a ghastly corpse
• The beautiful, red-haired Medusa, who becomes a hideous Gorgon

Stretching Portrait Characters

The following characters are depicted in the portraits of the Stretching Room:

• A balding man with a brown mustache and beard, dressed in a black tailcoat, a white shirt, a red sash, and a black bowtie. When the portrait stretches, it is revealed that he is not wearing pants (only red and white-striped boxer shorts), and he is standing atop a lit keg of dynamite. In an early attraction script, which gave the names of the characters in the stretching portraits, he was an ambassador named Alexander Nitrokoff, who came to the Mansion one night “with a bang.”
• Constance Hatchaway, an old woman holding a rose and smiling. When the portrait stretches, it is revealed that she is seated on top of the tombstone of her late husband, George Hightower, who is depicted as a marble bust with his head split by an ax. The ghost of Constance as a young woman is later seen in the attic.
• A brown-haired man with his arms crossed, dressed in a brown suit and wearing a brown derby hat. When the portrait stretches, it is revealed that he is sitting on the shoulders of another man, who is sitting on the shoulders of another man who is waist-deep in quicksand.
• A pretty young brunette holding a pink parasol. When the portrait stretches, it is revealed that she is balancing on a fraying tightrope above the gaping jaws of an alligator.

Coffin Occupant

In the center of the Conservatory is a large coffin occupied by a possessed corpse attempting to break out. He calls for help in the voice of a feeble old man, and his skeletal hands can be seen attempting to pry open the nailed-down coffin lid. He is voiced by Xavier Atencio, who wrote the attraction's script.

Madame Leota

Madame Leota is one of the iconic characters of the ride. She is the spirit of a psychic medium, conducting an otherworldly séance in an attempt to summon spirits and assist them in materializing. Her ghostly head appears within a crystal ball on a table in the middle of her dark chamber, from which she speaks her incantations. Musical instruments and furniture levitate and make noises in response. Imagineer Leota Toombs was chosen for the face of the medium in the crystal ball. Leota Toombs also played the Ghost Hostess who appears at the end of the attraction, though it is unknown whether or not she and Madame Leota are meant to be the same character.

In 2002, a tombstone for Madame Leota debuted at Walt Disney World's Mansion. The epitaph reads: “Dear sweet Leota, beloved by all. In regions beyond now, but having a ball.”

Madame Leota summons the Mansion's restless spirts and encourages them to appear by reciting suitable surreal incantations:

“Serpents and spiders, tail of a rat.
Call in the spirts, wherever they're at!”

“Rap on a table, it's time to respond,
Send us a message from somewhere beyond!”

“Goblins and ghoulies from last Halloween,
Awaken the spirits with your tambourine!”

“Creepies and crawlies, toads in a pond,
Let there be music from regions beyond!”

“Wizards and witches wherever you dwell,
Give us a hint by ringing a bell!”

Duelists

The ghosts of two top-hat-wearing gentlemen emerge from paintings of themselves and shoot each other.

Hitchhiking Ghosts

The Hitchhiking Ghosts—“The Prisoner,” “The Skeleton,” and “The Traveler”—are often considered to be the mascots of The Haunted Mansion. They have the most merchandise, including pins, stuffed toys, action figures, and bobbleheads. The Hitchhiking Ghosts are a tongue-in-cheek send-up of urban legends involving phantom hitchhikers. They are seen standing together inside a crypt, thumbs extended. They hitch a ride with guests traveling in Doom Buggies and appear alongside them in mirrors. “They have selected you to fill our quota, and they'll haunt you until you return,” says the Ghost Host. In 2011 at Walt Disney World's Haunted Mansion, the mirror scene was updated with digital effects that enable the ghosts to interact with the guests.

The Hitchhiking Ghosts are often referred to by fans as “Gus” (Prisoner), “Ezra” (Skeleton), and “Phineas” (Traveler). These names first appeared in fan fiction created by Cast Members who worked at the Walt Disney World Haunted Mansion. Since then, the names have become so well known that they have appeared on merchandise for the characters and in various media licensed by Disney.

Referenced Characters

On numerous tombstones and crypts at the Disneyland, Walt Disney World, and Tokyo Haunted Mansions (and in the Servants Quarters of Walt Disney World's Haunted Mansion) are the names of characters who may or may not appear in the attraction. Most of the names are actually tributes to Imagineers who were involved in the creation of the attraction.

Outside of each Mansion are crypts labeled with pun-based names. At Tokyo, they are identified as “Restless Spirits.”

• Asher T. Ashes (Ashes to ashes)
• Bea Witch (Bewitch)
• Clare Voince (Clairvoyance)
• C. U. Later (See you later)
• Dustin T. Dust (Dust to dust)
• G. I. Missyou (Gee, I miss you)
• Hail N. Hardy (Hale and hearty)
• Hal Lusinashun (Hallucination)
• Hap A. Rition (Apparition)
• Harry After (Hereafter)
• Hobb Gobblin (Hobgoblin)
• L. Beback (I'll be back)
• Emma Spook (I am a spook)
• M. Mortal (I am mortal) or (immortal)
• M. Ready (I am ready)
• Trudy Departed (I truly departed)
• Trudy Dew (I truly do)
• Levi Tation / Lev Itation (Levitation)
• Love U. Trudy (Love you truly)
• Manny Festation (Manifestation)
• Metta Fisiks (Metaphysics)
• M. T. Tomb (Empty tomb)
• Paul Tergyst (Poltergeist)
• Pearl E. Gates (Pearly gates)
• Ray. N. Carnation (Reincarnation)
• Rustin Peece (Rest in peace)
• Rusty Gates (Rusty gates)
• Theo Later (See you later)
• U. R. Gone (You are gone)
• Wee G. Bord (Ouija board)

The Special Effects and Music

The special effects were groundbreaking for the time. This included an attic with the ghost of a spurned bride, a crypt and a cemetery, halls that appear endless, and a mystical fortuneteller named Madame Leota who appears as a disembodied head inside a crystal ball with musical instruments floating in the air around her. Finally, the guests are shown that a “hitchhiking ghost” has hopped into the Doom Buggy with them.

Though the setting is spooky, the mood is kept light by the upbeat “Grim Grinning Ghosts” music that plays throughout the ride. The music was composed by Buddy Baker and the lyrics written by Xavier Atencio. The deep voice of Thurl Ravenscroft sings as part of a quartet of singing busts in the graveyard scene. Ravenscroft's face is used as well as it is projected onto one of the busts, specifically one with a detached head.

Continuous Improvements

All theme park attractions undergo continuous improvement efforts. According to Bob Zalk, Walt Disney Imagineer and show producer (Veness 2009, 24):

The idea of going back into an iconic attraction and adding, changing, adjusting, removing elements—the standards are extremely high when you reach the finish line. We have to deliver. Unlike new attractions, re-imagining an established attraction carries with it its own sense of history and tradition that the entire team has to take into account. It's a big challenge, but an exciting one.

Discussion Questions

1. What are the primary differences between traditional projects and the Haunted Mansion Project?
2. What are typical deliverables on an innovation project compared to the deliverables on the Haunted Mansion Project?
3. Why aren't all the project's constraints of equal importance and can the importance change over the life of a project?
4. Who defines the constraints on an innovation project?
5. Can egos affect innovation?
6. Why was it impossible to prepare a clearly defined statement of work at the beginning of the Haunted Mansion Project?
7. In the list of questions that needed to be addressed at project initiation, which three questions are probably most critical for SOW preparation? (Note: There can be several answers to this question. What is important is the justification behind the three answers selected.)
8. Why did the Haunted Mansion Project take 18 years from concept to completion?
9. Why did Disney not want the exterior of the Haunted Mansion to appear as a traditional haunted house?
10. Most Disney attractions tell a story. Why was it so difficult to create a single story for the Haunted Mansion?
11. Why do some people, such as Imagineers, often have ego issues?
12. Why was the Haunted Mansion attraction created as a “controlled” ride?

Further Reading

1.   ● Cunningham, James D. The Legend of The Haunted Mansion (CreateSpace, 2002).
2.   ● Wasko, Janet. (2001). Understanding Disney. Cambridge, UK: Polity Press.
3.   ● Wilson, C. McNair. (2012). Hatch! Brainstorming Secrets of a Theme Park Designer. Colorado Springs, CO: Book Villages.

Creating a Business Model

For some people, there is a belief, or rather a misconception, that the Walt Disney Company can simply build or duplicate an existing theme park on foreign soil. Thus, they can use their existing business model and very little innovation is necessary.

Each new country poses new challenges that must be addressed in the business model development. Enterprise environmental factors play a critical role. The following is list of questions that needs to be considered during the business model innovation process:

• How will the host country react to an American theme park on their soil?
• Will there be cultural factors that need to be considered?
• Will the cultural factors influence the design of the rides, products for sale in the gift shops, and type of food served in restaurants?
• Will there be political intervention, and if so, of what magnitude?
• Are there laws in the host country that can impact the design and operation of the park?
• Are there religious considerations that must be addressed and well as dress codes?
• Will the host government serve as a financial stakeholder in the project?
• Will the other financial stakeholders be banks or companies located in the host country?
• Which stakeholders will have the greatest influence in decisions on how the park will be run?
• Should Disney focus on just the theme park or a larger effort such as a Disney Vacation Resort in the host country that involves other amenities?
• Will the weather in the host country be an issue?
• How much of a risk should Disney take concerning other amenities such building Disney-themed hotels, golf courses, shopping malls, etc.?
• How much financial exposure should Disney accept?
• Should Disney focus on a joint venture with partners or a licensing agreement?
• Should Disney consider the risk to the Disney brand name if the theme park is a failure?
• Can a financial failure of this theme park prevent other countries from wanting to host a Disney theme park on their soil?
• Can a failure or unfavorable risks lead to stockholder interference?
• If we have a successful business model in one country, can the same business model be replicated for another country?

Understanding Enterprise Environmental Factors

Enterprise environmental factors are conditions that exist now or in the future and may or may not have an impact on the project. If there is an impact, it can occur any time over the life of the project. The enterprise environmental factors can influence how the project will be managed, whether changes in scope or quality are required and whether the project is viewed as a success. These factors can include the state of the economy, present and future legislation, politics, influence of labor unions, competitive forces in play, and cultural issues. The factors can also change after the project is completed and turn an initially successful project into a failure. They can also have an impact on the design of future business models.

Project planning is generally based on history, especially past successes. Enterprise environmental factors are assumptions and predictions about both the present and the future and are therefore directly related to risk management activities. These assumptions impact the design of innovative business models.

It is generally the responsibility of senior management, the project sponsor or the governance committee to identify the enterprise environmental factors. The factors may be listed as enterprise environmental factors in the project's business case or they may appear as assumptions concerning the business environment. The enterprise environmental factors are generally an interpretation by one person or a consensus of several people including experts. One person may see a factor as having a favorable impact on the project, whereas another person may see it as an unfavorable condition. Simply stated, enterprise environmental factors are subject to interpretation as well as misinterpretation by the people requesting and funding the project. The impact can be devastating unless corrections and changes can be done quickly. Even some of the best managed companies, such as the Walt Disney Company, can be impacted by unanticipated changes in the enterprise environmental factors.

Enterprise Environmental Factors and Culture

Perhaps the most important enterprise environmental factor to be considered in Disney's decision to expand globally was the impact of multinational cultures. Expanding onto foreign soil (i.e., outside of the United States) would be a challenge. Disney's theme parks would have to be integrated culturally and socially with that of the host country and its surrounding neighbors.

Disney understood the American culture and foreign visitors that came to Disneyland and Disney World understood that they were visiting an American theme park. But how would people react to an American theme park that was on foreign soil? What might happen if Disney does not adhere to the cultural and social norms of the host country? How much of a change would be necessary from the way that theme parks are managed in the United States?

Enterprise Environmental Factors and Competing Constraints

Before discussing Euro Disney, it is important to understand competing constraints. There are actions that project managers and executives can take to alleviate to some degree the impact of unfavorable enterprise environmental factors. Although we cannot eliminate the enterprise environmental factors, we may have options available to us to lessen the impact. The actions we take almost always mandate tradeoffs on the competing constraints, thus perhaps making it impossible to meet all the constraints. In such a case, the constraints may have to be prioritized to provide guidance in the order of the tradeoffs. The tradeoff may result in a schedule elongation or significant cost overrun.

While most companies focus on the triple constraints of time, cost, and scope, Disney's theme parks in the United States have six constraints; time, cost, scope, safety, aesthetic value, and quality. Although not discussed in the literature, it appears that safety is understandably the most important constraint at Disney, followed by aesthetic value and quality. These three important constraints very rarely undergo tradeoffs because they have a direct bearing on Disney's image and reputation. All tradeoffs appear to be on time, cost, and scope.

When expanding onto foreign soil, the enterprise environmental factors may also impose constraints on culture and even social behavior. Cultural and social constraints can involve designing the settings for attractions to be more aligned to local architecture, serving foods preferred by the population of the host country and dress codes that are acceptable to the general population. Host countries may not want a theme park on their soil that tries to “Americanize” the guests.

All the constraints may be interrelated when tradeoffs are necessary. For example, Disney maintains blueprints for attractions erected at Walt Disney World and Disneyland. Having to modify the attraction to be more aligned with the local architecture of the host country can require the creation of new blueprints, thus possibly increasing the project's cost and elongating the schedule.

The Decision to Build Euro Disney

In 1984, Disney made the decision to build a theme park in Europe by 1992. Disney wanted to build a large, state-of-the-art theme park, a decision which eventually led to “budget breaker” scope changes. Many of the changes were last-minute changes made by Michael Eisner, Disney's chief executive officer.

History has shown that large projects, especially those designed around state-of-the-art technology, are prone to large cost overruns. The baggage-handling system at Denver International Airport and the Iridium Project, which was designed to create a worldwide wireless handheld mobile phone system with the ability to communicate anywhere in the world at any time, are two examples where the cost overruns were in the billions of dollars.

Highly optimistic financial projections were established for Euro Disney based on the expectation of 11 million visitors the first year and 16 million visitors yearly after the turn of the century. Nine years earlier, when Tokyo Disneyland opened on April 15, 1983, more than 13,000 visitors entered the park. Within the same year, Tokyo Disneyland broke the attendance record for theme parks with a one-day attendance of 93,000 visitors. Within four years, they again broke the one-day record with 111,500 visitors.

Disney created a low-risk business model for Disney Tokyo. From the literature, Disney believed that the same type of business model could be used in Euro Disney. However, this time Disney was willing to accept a greater risk because of the potential rewards. The focus was more toward creating a Disney vacation resort than a Disney theme park.

Disney viewed the Euro Disney theme park as a potentially profitable revenue generator for decades in as much as Disney would have a monopoly in leisure and entertainment in Europe. The definition of a monopoly is when you have no rivals and there are high barriers, especially financial, preventing someone from entering the same market.

Site Selection

Approximately 1,200 locations in Europe were considered and everyone wanted to host Euro Disney. The locations included Portugal, Spain, France, Italy, and Greece. Part of Disney's selection criteria included a warm climate, good weather, a centralized location, and available land for further growth. The list was narrowed down to four locations: two in Spain and two in France. Spain had better weather, but France had a denser population. The final decision was to build Euro Disney in the eastern suburbs of Paris in a new town, Marne-la-Vallee. The theme park would be 20 miles from the heart of Paris. This meant that there were 17 million people less than a two-hour drive from Euro Disney, 68 million people within a four-hour drive, 110 million people within a six-hour drive, and another 310 million people less than two hours by air. In addition, Paris was frequently visited by tourists from around the world.

In line with this belief of having a monopoly and the success of the smaller $1.4 billion theme park in Tokyo Disneyland, Disney decided to build a much larger state-of-the-art theme park in Europe, expecting the same financial success as in Tokyo. Disney needed approximately $5 billion to build Euro Disney. More than $1 billion was provided by the French government in the belief that Euro Disney would create 30,000 jobs. Europe was in a recession. France had an unemployment rate near 14 percent. Also, France expected a large percentage of the projected 11 million visitors to the theme park each year to come from outside France, thus bringing revenue into the country.

The French were willing to make concessions to acquire the theme park. The land was provided at a low price of $7,500 per acre. Euro Disney would be built in a plot of 1,945 acres in the center of a 4,400-acre site. The French would pay for new road construction and provide water, sewage, gas, electricity, and other necessary services such as a subway and train system.

Project Financing

To satisfy the French government's legal requirements, and to limit the financial exposure to the Walt Disney Company, a new company was formed: Euro Disney S.C.A. Unlike Tokyo Disneyland, where Japan's Oriental Land Company owned and operated the park, and paid Disney royalties, Euro Disney S.C.A. would be a publicly held company. Disney would own a maximum of 49 percent of the new company and at least 51 percent would be owned by Europeans. For Disney, this was new business model unlike the business models for the US-based parks and Tokyo Disneyland.

Euro Disney S.C.A. was set up using a project financing model. Project financing involves the establishment of a legally independent project company, Euro Disney S.C.A., where the providers of funds are repaid out of cash flow and earnings, and where the assets of the new company, and only the new company, are used as collateral for the loans. Debt repayment would come from Euro Disney S.C.A. rather than from any other entity. In case of a default on the bank loans, lenders could take legal action against Euro Disney S.C.A., but not the Walt Disney Company.

A risk with project financing in the new business model is that the capital assets may have a limited life. The potential limited life constraint often makes it difficult to get lenders to agree to long-term financial arrangements. With Euro Disney, the attractions in the park would have to undergo continuous improvement and new attractions added. If there is insufficient cash flow to fund the growth, the company would have to incur additional debt.

Another critical issue with project financing especially for high-technology projects is that the projects are generally long term. It may be several years before service will begin, and in terms of technology, this can be an eternity. Project financing is often considered a “bet on the future.” And if the project were to fail, the company may be worth nothing after liquidation.

European banks, looking at the financial success of Disneyland, Walt Disney World, and Tokyo Disneyland, rushed in to provide Disney with whatever funding was necessary in the way of construction loans. More than 60 banks entered into loan agreements. Disney negotiated a deal whereby Disney's total investment was $160 million to help fund a $5 billion theme park. Disney would collect hundreds of millions of dollars each year in royalty payments even if the theme park lost money. Following a royalty agreement like that for Tokyo Disneyland, Disney would receive 10 percent royalties on admissions; 5 percent royalties on food, beverage, and merchandise sales; a management fee equivalent to 3 percent of revenue; a licensing fee for using the Disney name and characters; 5 percent of gross revenues of themed hotels; and 49 percent of the profits.¹⁴ Disney also received royalties from companies that sponsored specific rides. For Disney's $160 million investment, Disney estimated that their expected profits would be $230 million to $600 million the first year and $300 million to $1 billion in the second year. In exchange for royalty payments, Disney provided expertise in theme park management and allowed Euro Disney to use the trademarked Disney characters and Disney Imagineering's intellectual property. The business model seemed realistic.

The total price of $5 billion for a theme park would certainly serve as an impediment to prevent rivals from entering the market. The quality and aesthetic value of Disney's products and services, their reputation as one of the world's leaders in leisure and entertainment, and their uniqueness characterized by their brand name made it appear on the surface to be a monopoly. Disney believed that the attendance projections were correct, namely 11 million visitors the first year rising to 16 million per year by the turn of the century.

Much of Disney's thinking was predicated on their phenomenal past success with Disneyland (1955), Disney World (1970), and Tokyo Disneyland (1983). With all three theme parks, Disney adapted correctly to most of the enterprise environmental factors they considered and the impact they might have on project success. The latest theme park, Tokyo Disneyland, was owned and operated by the Oriental Land Company. The construction cost was $1.4 billion and the debt, which was 80 percent of the construction cost, was paid off in three years. The question, of course, was whether these same enterprise environmental factors and assumptions considered in Tokyo Disneyland were transferable to and appropriate for the European marketplace.

Unlike Disneyland and Disney World locations, weather in Tokyo was an issue for Disney. When people in Tokyo showed that they were willing to brave the cold and snow to enjoy the theme park, Disney was convinced that the Europeans would follow suit.

Disneyland and Disney World were based on an American Disney philosophy. The Japanese wanted an American-style theme park like Disneyland and Disney World, and not customized to the Japanese culture. The younger Japanese wanted American-style food. However, some Japanese-style restaurants were built for the adult patrons who preferred traditional Japanese meals.

Blinded by the success of Tokyo Disneyland, Disney believed that the same American Disney philosophy that was part of the Tokyo business model could be introduced into Europe without necessitating any significant changes. However, would the enterprise environmental factors related to culture be the same for the European marketplace? Would the Europeans accept being Americanized once inside the park?

Understanding Cultural Differences

Perhaps Disney's greatest mistake was not fully understanding the cultural differences between the Japanese and the Europeans, primarily the French. This would have a significant impact on Euro Disney's expected revenue stream when the park opened. Some of the critical differences are shown in Table 13-1. These are the differences based on the year when the parks were opened.

In defense of Disney's actions, which some people argue weren't enough to effectively manage the cultural differences, it is important to recognize that Euro Disney is an American theme park and Disney's actions were designed to protect its image, brand names, and reputation. Expecting Disney to make major cultural changes and alter the image of the park would be a mistake.

Land Development

Euro Disney eventually opened in April of 1992. In his opening remarks at its dedication, Disney's CEO Michael Eisner said:

To all who come to this happy place, welcome. Once upon a time… A master storyteller, Walt Disney, inspired by Europe's best loved tales, used his own special gifts to share them with the world. He envisioned a Magic Kingdom where these stories would come to life and called it Disneyland. Now his dream returns to the lands that inspired it. Euro Disneyland is dedicated to the young, and the young at heart… with a hope that it will be a source of joy and inspiration for all the world.

Disney wanted to develop the commercial and residential property it had purchased surrounding the theme park and then sell off the properties while maintaining ownership and control over its commercial use. Real estate sales were expected to supply 22 percent of Euro Disney's revenue beginning in 1992, climbing to 45 percent of revenue by 1995.

The revenue from land development was expected to help pay down Euro Disney's massive debt of $3.5 billion. But when the park opened, Europe was in a recession and it became obvious that Euro Disney had severely miscalculated the French real estate market, which was quite depressed. When Tokyo Disneyland opened in 1983, the Japanese economy was booming, and the Japanese were spending a large portion of their discretionary income on leisure and entertainment. Tokyo Disneyland reaped the benefits. But in Europe, the recession caused people to cut back on leisure and entertainment. Euro Disney suffered. Disney miscalculated the impact of the recession in Europe.

Euro Disney also miscalculated how Europeans would take vacations. Disney hoped that people would take one-week excursions to Euro Disney throughout the school the year. Instead, the Europeans preferred to save up their vacation until August and take a vacation lasting four to five weeks. The cost of spending one week at Euro Disney was almost the same cost as renting a vacation home in Europe for a month. Once again, Euro Disney suffered from a loss of revenue. Disney expected labor costs to be about 13 percent of total revenue. Instead, it was 24 percent of total revenue in 1992 and climbed to 40 percent in 1993.

Disney's Integrated Services

Disney's integrated services, which made up the revenue portion of their business model, generate revenue from four sources: (1) admission to the theme parks and other attractions, (2) food, (3) shopping, and (4) accommodations. Disney's business model for Disneyland and Disney World did not recognize the potential for significant profits through accommodations. In Disneyland and Disney World, Disney allowed others to build money-making hotels around the theme parks. This was now seen as a mistake that Disney regretted. At Disneyland, Disney owned only 1,000 hotel rooms out of 20,000. At Disney World, only 5,700 hotel rooms out of a possible 70,000 were owned by Disney. Disney also generates revenue from the sale of cruise vacation packages and the rental of vacation club properties.

In Tokyo, Disney believed that it again made a mistake in the business model by not investing heavily in accommodations. When the decision to build Tokyo Disneyland was made, Disney was worried about making a heavy investment in a new cultural environment. The decision was made to limit its financial risk with a small investment in accommodations surrounding the park. This put limitations on profit generation in exchange for a perceived reduction in risk and uncertainty. The result was a small investment in accommodations. The risks were further reduced because the theme park was not owned or operated by Disney. Disney received a predefined royalty.

It is important to understand that an increase in daily park attendance does not necessarily translate into a significant increase in profits unless the average stay in a hotel is lengthened, which, in turn, would generate revenue from the high-profit-margin businesses such as hotels, restaurants, and shops. Admission to the theme parks is not a high-margin business.

Because of the success in Tokyo, Disney took an overly optimistic position with Euro Disney, believing that what worked in Japan could be transplanted into Europe. Disney did not want Euro Disney or any of its other theme parks to be just a theme park. Instead, it wanted Euro Disney to be viewed as a vacation resort or a destination vacation where visitors would stay for four to five days or longer. Disney wanted people to see Disney theme parks as a source of family and adult-oriented high-quality entertainment. Therefore, Disney included in the Euro Disney plans a 27-hole golf course, 5,800 hotel rooms (which is more hotel rooms than the city of Cannes), shopping malls, apartments, and vacation homes. Disney also planned on building a second theme park next to Euro Disney to house an MGM Film Tour site, at a construction cost of $2.3 billion. There was even talk of building a third theme park by 2017. This would help fill the large number of hotel rooms. By the year 2017, Euro Disney, under the terms specified in its contract with the French government, was required to complete construction of a total of 18,200 hotel rooms at varying distances from the resort. All of this assumed that Euro Disney would follow in the same steps as did Disneyland, Disney World, and Tokyo Disneyland. Disney believed that they had a firm grasp on the enterprise environmental factors and set higher standards for Euro Disney than even the theme parks in the United States.

Disney University

Just as it had in the United States, Euro Disney set up a Disney University to train approximately 20,000 employees and cast members who applied for jobs at Euro Disney. Training was designed to enforce the Disney culture as well as Disney's policies and procedures that had worked well for decades. The training had to be completed well before the opening of the park. Employees were expected to be bilingual or even trilingual and were required to attend training sessions conducted by Disney University on behavior codes and how to talk to park guests. The company stressed that all visitors should be treated as guests rather than customers.

Disney also established rules related to facial hair such as beards and mustaches (none were allowed), dress codes, covering of tattoos, limited jewelry and makeup, no highlighting or streaking of the hair, limitations on the length of fingernails, and the wearing of appropriate undergarments. The French saw this as an attack on their individual liberties.

Euro Disney, as well as all other Disney theme parks, had very strict rules on the hiding of behind-the-scenes Disney. Photography and filming were strictly forbidden in backstage areas. The edges of the parks were lined with ride buildings and foliage to hide areas that were not for the public to see. Numerous gates allowed entrance into the park for cast members, parade cars, etc. When gates around the park were opened, anything that could be seen through them was considered part of the Disney magic. Therefore, from the second the gates are opened, all of the crew must be in character and in place to “perform.” Since the complex was so big, shuttle buses were needed to take cast members to different parts of the park via roads behind the parks.

Anti-American Sentiment Grows

According to the literature, it appears that the Walt Disney Company understood the sociocultural and economic issues but perhaps did not give them enough attention. Disney did launch an aggressive public relations program targeting young children and government officials. Even with the community relations program, Disney was still viewed as being insensitive to the French culture, the people's need for privacy, and individualism. French labor unions were opposed to the dress code. All this created an anti-American climate that eventually led to deviations from the original plan for Euro Disney.

Some enterprise environmental factors concerning culture were addressed through behavior modification. Others required changes in the design of the attractions. Disney wanted the park to show that many of the Disney characters had a European heritage. This was a necessity because Euro Disney was competing against the historical architecture and sights of Paris. Simply changing the restaurant menus to serve more European food was not enough. When possible, attractions had to show a European flavor. For example, the attraction showing Snow White and the seven dwarfs was located in a Bavarian village. Cinderella was located in a French Inn. Discoveryland featured storylines from the French author, Jules Verne. Castles in the attractions closely resembled the architecture of castles in Europe.

While the Walt Disney Company did the best that it could to address the enterprise environmental factors related to culture without altering its image and reputation, it could not adequately address the factors related to politics. For example, since many visitors were staying at the Euro Disney just for a one-day excursion, the traffic through the town and the accompanying noise irritated many of the local residents. The communities surrounding Euro Disney were mainly farming communities that had opposed the construction of Euro Disney. The French government had to step in to ease tension. Shortly after Euro Disney opened, French farmers used Euro Disney as a site for a protest, driving their tractors to the entrance and blocking it. This globally televised act of protest was aimed not at Disney but at the US government, which had been demanding that French agricultural subsidies be cut. This protest was televised worldwide. Also, Euro Disney encountered several disputes with French labor unions that believed that Disney was attacking the civil liberties of their union members.

Anti-American sentiment increased even more when tensions grew surrounding America's war in Iraq and France's refusal to back it. The drop in the number of American tourists to France was drastic and was felt by the tourism industry especially in Paris. One worker at the restaurant atop the Eiffel tower noted the replacement of American tourists with Spanish and Italian tourists. Other factors that affected tourism was the harsh weather in Europe, a series of transportation strikes, and the outbreak of severe acute respiratory syndrome in Asia.

Underestimating the Impact of Culture

It appeared that, even though Disney took steps to address almost all the cultural differences, Disney had underestimated the magnitude of the differences in culture between the United States and Europe. The impact could be clearly seen through the enterprise environmental factors, as shown in Table 13-2.

There were other mistakes that were made:

• At various locations in the park, there was an insufficient number of restrooms.
• Park staffing assumed that Friday would be a busy day and Monday a light day when, in fact, the reverse was true.
• Park management underestimated the success of the convention business and had to increase convention facilities.

Missing the Targets

On opening day, Euro Disney had expected that as many as 500,000 visitors and 90,000 cars might try to enter the park, even though the capacity of the park was estimated at slightly above 50,000 visitors. Approximately 50,000 visitors showed up, and only 3 out of every 10 visitors were native French. Attendance figures were disappointing. Some people argued that the low attendance was due to Disney's insensitivity to the French culture. Others believed it was due in part to economic conditions in Europe at that time. As the year progressed, Euro Disney lowered their daily projection from 60,000 to 25,000 visitors. The Walt Disney stock plunged, eventually losing one third of its value.

In the first two years of operations, Euro Disney's losses were estimated at $2 billion. Euro Disney also had a debt load of $3.5 billion, with some interest payments as high as 11 percent. The 22 percent operating profit from land development, which was planned to pay down the debt, never materialized. Hotel occupancy was 55 percent rather than the expected 68 percent. Some hotels were shutting down for the winter season. Operating expenses had risen from an expected 60 percent of revenue to 69 percent of revenue. The MGM Film Studio theme park project was put on hold.

While project management seemed to be successful regarding construction of the park, the miscalculation of the impact of the enterprise environmental factors was quite apparent. Euro Disney was seen as a project management success, Imagineering and innovation at its best, but possibly a business failure. The possible causes of failure were because Disney:

• Failed to recognize competitive leisure and entertainment offerings
• Failed to recognize the sociocultural and economic issues
• Had a wrong assessment of market conditions, which led to strategic and financial miscalculations
• Took on an overly ambitious $3.5 billion debt load that was hard to pay off
• Overdeveloped the property and land
• Failed to recognize guest awareness of pricing

There were also communication issues. Park executives were not returning phone calls to the media resulting in a failed reputation with the media.

Three interesting comments about the Walt Disney Company appeared in articles and newspapers. In one article, Euro Disney was viewed as “a cultural Chernobyl.” In another article, a European banker stated that “Euro Disney is a good theme park married to a bankrupt real estate company and the two can't be divorced.” A former Disney executive stated that during Euro Disney financing negotiations, “We were arrogant. It was like we're building the Taj Mahal and people will come—on our terms.”

People were even attacking the name of the park. People outside of Europe often viewed “Euro” as being synonymous with fashion, glamor, and even high society. As Michael Eisner, Disney's CEO, stated:

As Americans, we had believed that the word “Euro” in front of Disney was glamorous and exciting. For Europeans, it turned out to be a term they associated with business, currency, and commerce. Renaming the park “Disneyland Paris” was a way of identifying it not just with Walt's original creation but with one of the most romantic and exciting cities in the world. (Eisner and Schwartz 1998, 292)

Changing the name was Disney's attempt to decommercialize the theme park.

In addition to changing the name of the theme park in October of 1994, Disney also took additional steps to overcome the impact of the enterprise environmental factors. Previously, energetic visitors could cover all the rides in about five hours. There were not enough attractions to convince people to stay overnight. Euro Disney eventually:

• Enhanced theme park areas such as Frontierland, Space Mountain, and Animal Kingdom
• Added new attractions, bringing the total number of attractions to 29, including:
  • Zorro
  • Mary Poppins
  • Aladdin
  • Cinderella's Castle
  • Temple of Peril
  • Nautilus
• Stressed the European heritage of many of the Disney characters
• Cut park admission prices by 33 percent
• Cut hotel room costs by 33 percent
• Offered discount prices for winter months
• Offered cheaper meals in the hotels
• Allowed restaurants to serve wine and beer; however, the French never forgot the mistake that Disney made
• Offered more foods from around the world
• Changed the marketing and advertising strategy to include:
  • “California is only 20 miles from Paris”
  • “Fairytales can come true”
• Lowered their projected daily attendance from 60,000 to 25,000 people per day
• Offered package deals that were affordable to everyone. (However, this did not include the entrance fees to the park which were still higher than in the United States.)

Disney wanted to make people believe that, once they entered Disneyland Paris, they had escaped the real world. They would be in “a kingdom where dreams come true.” To do this, Disney had to recognize that the European culture was not the same as the culture in the United States or Japan. Disney would not be able to “Americanize” some cultures.

Debt Restructuring

In the fall of 1993, optimism and euphoria over the park came to an end and Euro Disney was in financial distress with a $3.5 billion debt load. If the Walt Disney Company pulled the plug on Euro Disney, there would have been a bankrupt theme park and a massive expanse of virtually worthless real estate. This would certainly blemish Disney's image globally and could significantly hamper Disney's plans for the construction of other theme parks outside of the United States.

The Walt Disney Company developed a rescue plan for Euro Disney that initially was rejected by the French banks. Disney fought back by imposing a deadline for agreement by March 31, 1994, and even threatened with the possible closure of Euro Disney if debt restructuring did not take place. Eisner believed that the French already had so much money invested in the park that they would be forced to restructure the debt. By mid-March, Disney's commitment to support Euro Disney had risen to $750 million. When the banks refused to consider Disney's refinancing plan, Eisner announced to the shareholders that the park might be closed by the end of March, and this would be announced at the annual shareholders' meeting on March 15.

On March 14, the banks capitulated, fearing a huge financial loss if Euro Disney closed. A new preliminary deal was struck whereby Euro Disney's lead banks were required to contribute an additional $500 million. The aim was to cut the park's high-cost debt in half and make Euro Disney profitable by 1996, a date considered unrealistic by many analysts.

Part of the deal stated that Disney would spend about $750 million to buy 49 percent of the new rights offering that was estimated at $1.1 billion. The banks agreed to forgive 18 months of interest payments on the outstanding debt and would defer all principal payments for three years. The banks would also underwrite the remaining 51 percent of the rights offering. For its part, in addition to its $750 million, Disney agreed to eliminate for five years its lucrative management fees (3 percent of revenue), royalties on the sale of tickets (10 percent), and concession sales (5 percent). Disney's management fees were approximately $450 million per year regardless if Euro Disney lost money. Royalties would gradually be reintroduced at a lower level. The capital infusion was not well received by the shareholders, even though then they recognized that, if the park went into receivership, further expansion and the image of the company could be hurt. Some believed that this debt restructuring was just a temporary Band-Aid and that unfavorable changes in the economy or the enterprise environmental factors could require future debt refinancing.

Prince al-Waleed, nephew of King Fahd of Saudi Arabia, purchased 24 percent of Euro Disney S.C.A. for $500 million. After the restructuring, Disney's stake in Euro Disney S.C.A. dropped from 49 percent to 39 percent. The remaining 37 percent was held by a collection of more than 60 banks, mostly French, and individual shareholders primarily from the European community.

The debt restructuring, which included debt payment forgiveness and deferral of some principal payments, was a desperately needed lifeline for Euro Disney and gave it some financial breathing room to change its marketing strategy and attract more visitors. By 1995, with debt refinancing and some theme park enhancements in place, Euro Disney had its first quarterly profit of $35.3 million. However, there was no guarantee that Euro Disney's financial headaches would completely disappear.

By 1996, attendance at Disneyland Paris was more than the Louvre Art Museum, the Eiffel Tower, and Buckingham Palace. At the same time, Tokyo Disneyland was having remarkable attendance success. In 1999, Tokyo Disneyland had 17.5 million visitors. This was more than any other theme park worldwide.

Walt Disney Studios Park

Initial plans for a second theme park, the $2.3 billion MGM Film Studio Tour, was scheduled to open in 1996, though these plans were canceled around mid-1992 due to the resort's financial crisis at the time. After the resort began to make a profit, these plans were revived on a much smaller scale. The new theme park included a history of films, including cinema, cartoons, and how films are made. The new budget was $600 million. The MGM Studio theme park was renamed Walt Disney Studios Park and opened on March 16, 2002. It was dedicated to show business, themed after movies, production, and behind-the-scenes. In 2013, the park hosted approximately 4.4 million guests, making it the third-most visited amusement park in Europe and the twenty-first-most visited in the world though it has the lowest attendance figures of all eleven Walt Disney theme parks.

To all who enter this studio of dreams…welcome. Walt Disney Studios is dedicated to our timeless fascination and affection for cinema and television. Here we celebrate the art and the artistry of storytellers from Europe and around the world who create magic. May this special place stir our own memories of the past, and our dreams of the future.¹⁵

—Michael D. Eisner, CEO, the Walt Disney Company, March 16, 2002

The Walt Disney Company had planned to open a third park in Disneyland Paris by 2017, but this plan was pushed into 2030.

Another Debt Restructuring

By 2000, Euro Disney's restructured debt load had risen to $2 billion. With the opening of the Disney Studios Park, Disneyland Paris now included seven hotels, two convention centers, 68 restaurants and 52 boutiques. But Europe's economy was struggling. The slowdown in the European travel and tourism industry had negatively affected Euro Disney's operations and cash flow. The company was strapped for cash. Once again, the word “bankruptcy” raised its ugly head. Euro Disney's financial difficulties forced it to focus on short-term cash flow rather than expansion, enhancing rides and building new attractions.

In response to the cash flow situation, Euro Disney S.C.A. initiated discussions with its lenders and Disney to obtain waivers of its fiscal 2003 loan covenants and to obtain supplemental financing to address Euro Disney's cash requirements. Because of an agreement entered into on March 28, 2003, the Walt Disney Company did not charge Euro Disney royalties and management fees for the period from January 1, 2003, to September 30, 2003. Additionally, the Disney Company agreed to allow Euro Disney to pay its royalties and management fees annually in arrears for fiscal 2004, instead of quarterly.

In fiscal 2005, Euro Disney S.C.A. completed a financial restructuring, which provided for an increase in capital and refinancing of its borrowings. Pursuant to the financial restructuring, the Walt Disney Company agreed to conditionally and unconditionally defer certain management fees and royalties and convert them into long-term subordinated debt and provide a new 10-year line of credit for liquidity needs.

Jeffrey Speed, the chief financial officer (CFO) of Euro Disney, said that the modified agreement would provide “significant liquidity.”

2007–2013

By the end of 2007, Disneyland Paris had more than 14 million visitors. The theme park had 54 attractions, 54 shops, and 68 themed restaurants. In 2008, Disneyland Resort Paris welcomed its 200 millionth guest since the opening in 1992. Table 13-3 shows the attendance figures for 2008-2013.

A study done by the Inter-Ministerial Delegation reviewing Disneyland Resort Paris's contribution to the French economy was released in time for the Resort's 20th anniversary in March 2012. It found that despite the Resort's financial hardships, it has generated “37 billion euros in tourism-related revenues over twenty years,” supports on average 55,000 jobs in France annually, and that one job at Disneyland Paris generates nearly three jobs elsewhere in France.¹⁶

In 2012, Disney announced that it would again refinance the debt of Disneyland Paris with a loan of $1.6 billion and a credit facility of $120 million. Disneyland Paris had not been profitable in 12 of the first 20 years of operations.

Disney's 2013 Form 10-K Report

The following information was extracted from Disney's 2013 Form 10-K Report:

Parks and Resorts revenues increased 9%, or $1.2 billion, to $14.087 billion due to an increase of $1.1 billion at our domestic operations and an increase of $112 million at our international operations. Domestic theme park revenue was $11.394 billion and international theme park revenue was $2.693 billion.

Table 13-4 shows some additional information relative to the theme parks and resorts. Numbers in parentheses show a decrease from the previous fiscal year.

Conclusions

Improper assumptions about the enterprise environmental factors can wreak havoc on any project, including innovation. Not all the impacts created by the enterprise environmental factors can be controlled or managed effectively. Disney did what was expected of a company of its stature to correct the impact of the enterprise environmental factors while protecting its name, image, and reputation. While the factors might not have had a direct impact on the way the theme park projects were managed, especially the quality and aesthetic aspects, the factors can and did have a direct bearing on how people define the success and failure of a project.

It is important to understand that theme parks must continuously grow. They must add more rides, update existing attractions, and improve other aesthetic elements as necessary. To do this requires capital, often making it difficult to pay down a large debt load.

Disney demonstrated “Imagineering” at its best, not only in the design and construction of the theme park attractions but also in the way that it handled necessary changes due to cultural issues. Disneyland Paris is an American theme park. Disney maintained its brand name and image. Cultural issues can never be resolved in a manner where everyone is 100 percent pleased. But if I am ever in such a conflicting position, I would want Disney in my corner.

Discussion Questions

1. Should culture be considered as part of business model innovation?
2. Did Disney spend enough time and effort initially to understand the impact of the enterprise environmental factors as related to culture?
3. What steps did Disney take to address the cultural issues?
4. How should Disney have defended itself from French labor unions that argued that what was being taught to the 20,000 workers at Disney University was a violation of their individual rights?
5. What lessons were learned from the Tokyo Disneyland business model?
6. What could Disney have done in the first two years of operations at Euro Disney to get a higher occupancy rate?
7. Do you believe that Disney should have allowed Euro Disney to close in 1994 because of its financial headaches?
8. Can executives or project managers ever really control the enterprise environmental factors?
9. How can we prevent last-minute scope changes caused by executive meddling assuming there will be a major impact on cost?
10. Euro Disney had a major debt restructuring three times between 1993 and 2013. Why was the debt restructuring necessary? What was the driving force that caused the debt restructuring?
11. Should enterprise environmental factors be tracked the same way that we track and report budgets and schedules?

Further Reading

1.   ● Borden, Lark. Euro Disneyland: In Paris, when it drizzles, it sizzles. Gannett News Service, March 11, 1992.
2.   ● Chu, Jeff, and Marne-La-Vallee Monday. Happily ever after? Time, March 18, 2002, http://content.time.com/time/magazine/article/0,9171,218398,00.html.
3.   ● Corliss, Richard, and Marne-La-Vallee. Voila! Disney invades Europe. Will the French resist? Time, April 20, 1992.
4.   ● “Disney Magic Spreads across the Atlantic; Popular US Theme Park Prepares for Opening of Euro Disneyland Resort near Paris in April 1992.” Nation’s Restaurant News. October 28, 1991, 3.
5.   ● “Disney's $1.7 Billion French Birthday Gift.” Time. September 19, 2012.
6.   ● Disneyland Paris. Come and join Disneyland Paris! The search for recruits continues around the UK. Press release, October 29, 2009. Euro Disney S.C.A. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2009-10-29-recruitment-england.pdf, accessed May 14, 2019.
7.   ● Disneyland Paris. Disneyland Paris launches a unique “pop-up” office concept for its European recruitment drive. Press release, March 11, 2011. Euro Disney S.C.A. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2011-03-08-recruitment-pop-up-office.pdf, accessed May 14, 2019.
8.   ● Disneyland Paris. European recruitment tour: Launching the new season at Disneyland Paris. Press release, January 25, 2010. Euro Disney S.C.A. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2010-01-25-european-recruitment.pdf, accessed May 14, 2019.
9.   ● Disneyland Resort Paris. Disneyland Resort Paris celebrates its 200 millionth visit. Press release, August 12, 2008. Archived at https://web.archive.org/web/20131105162910/http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2008-08-12-visiteur-200millionieme.pdf, accessed May 14, 2019.
10.   ● Euro Disney S.C.A Euro Disney S.C.A. announces net profit in fiscal year 2008. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2008-10-21-euro-disney-sca-reports-annual-results-for-fiscal-year-2008.pdf, accessed May 14, 2019.
11.   ● Euro Disney S.C.A. Disneyland resort Paris launches new European advertising campaign: “Believe in Your Dreams.” Press release, March 3, 2006. Euro Disney S.C.A. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2006-03-03-disneyland-resort-paris-launches-new-european-advertising-campaign-believe-in-your-reams.pdf, accessed May 14, 2019.
12.   ● Euro Disney S.C.A “Euro Disney S.C.A. reports annual results for fiscal year 2007. Press release, November 8, 2007. Euro Disney S.C.A. Archived at https://web.archive.org/web/20141024030130/http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2007-11-8-euro-disney-sca-reports-annual-results-for-fiscal-year-2007.pdf, accessed May 14, 2019.
13.   ● Euro Disney S.C.A. Disneyland resort Paris partners with the TGV East European Line. Press release, April 19, 2006. Euro Disney S.C.A. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2006-04-19-disneylandresort-paris-partners-with-the-tgv-est-european-line.pdf, accessed May 19, 2019.
14.   ● Euro Disney S.C.A. Effective launch of share consolidation. Press release, January 11, 2005. Archived at https://web.archive.org/web/20141023222343/http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2005-01-11-euro-disney-sca-reports-first-quarter-revenues-for-fiscal-year-2005.pdf, accessed May 14, 2019.
15.   ● Euro Disney S.C.A Euro Disney S.C.A. reports annual results for fiscal year 2005. Press release, November 16, 2005. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2005-11-16-euro-disney-scareports-annual-results-for-fiscal-year-2005.pdf, accessed May 14, 2019.
16.   ● Euro Disney S.C.A Euro Disney S.C.A. reports fiscal year 2009 results. Press release, November 12, 2009. Archived at https://web.archive.org/web/20120916020800/http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2009-11-12-euro-disney-sca-reports-annual-results-for-fiscal-year-2009.pdf, accessed May 14, 2019.
17.   ● Euro Disney S.C.A Euro Disney S.C.A. reports fiscal year 2010 results. Press release, November 10, 2010. Archived at https://web.archive.org/web/20111027032419/http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2010-11-10-euro-disney-sca-reports-annual-results-for-fiscal-year-2010.pdf, accessed May 14, 2019.
18.   ● Euro Disney S.C.A. Euro Disney group improves its debt profile with the 1.3 billion refinancing of the group's debt by the Walt Disney Company. Press release, September 18, 2012. Euro Disney S.C.A. Archived at http://corporate.disneylandparis.com/CORP/EN/Neutral/Images/uk-2012-09-18-debt-Press-release.pdf, accessed May 14, 2019.
19.   ● “Euro Disneyland,” case study. Thunderbird, The American Graduate School of International Management, TB0195, June 15, 1999. Available for download at www.academia.edu/31430890/Eurodisneyland_TB0195_PDF_ENG.
20.   ● Ferguson, Anne. Maximizing the mouse. Management Today, September 1989, p. 60.
21.   ● Graves, Nelson. Euro Disney attendance in upturn but woes persist. Renter European Business Report, September 4, 1992.
22.   ● The Good Life France. Disneyland Paris—The main rides and attractions. March 27, 2013. www.thegoodlifefrance.com/disneyland-paris-the-main-ridesand-attractions/
23.   ● Hopkins, Nic. Saudi Prince in talks with Euro Disney over rescue. Times (London), September 6, 2003.
24.   ● Joce, Will. Five fun facts about Disneyland Paris. Venere Travel Blog. Venere.com, January 10, 2011. www.venere.com/blog/disneyland-paris-facts-9818/.
25.   ● Kleege, Stephen. Magic of Disney wins backers for Paris theme hotels. American Banker , March 26, 1991, p. 11.
26.   ● Kraft, Scott. Disneyland Paris is staging a comeback. But long-term prospects hinge on the region's economic improvement. Los Angeles Times, February 4, 1996
27.   ● Loveman, Gary W., Leonard A. Schlesinger, and Robert Anthony. Euro Disney: The first 100 days. Harvard Business School Case 693-013, August 1992. (Revised June 1993).
28.   ● Mathiason, Nick. The magic dims in Walt's Kingdom. Observer, August 10, 2003, p. 4.
29.   ● McGrath, John. The lawyers who rebuilt Euro Disney. International Financial Law Review, August 10, May 1994, p. 10.
30.   ● New York Times, “COMPANY NEWS: Euro Disney Park.” February 5, 1991.
31.   ● New York Times . Euro Disney adding alcohol. June 12, 1993.
32.   ● O'Brien, Tim. Walt Disney Studios makes Paris debut. Amusement Business, March 25, 2002, p. 3.
33.   ● Rawsthorn, Alice. Poisoned apple within the Magic Kingdom. Financial Times, November 25, 1993, p. 23.
34.   ● Rawsthorn, Alice, and Michael Skapinker. Empty pockets hit imported dream. Financial Times, July 9, 1993, p. 23.
35.   ● Taylor, Charles Foster, and Stephen Richardson. Focus on leisure—Euro Disneyland. Estates Gazette, April 7, 1990, p. 85.
36.   ● Thompson, Kevin. Euro Disneyland: Disney's attempt at foreign corporate expansion. Yahoo Contributor Network, December 20, 2006.
37.   ● Telegraph Media Group. Disneyland Paris top attractions. The Telegraph. Telegraph Media Group Limited, May 13, 2011.
38.   ● Walt Disney Co DIS (NYSE). Reuters.com. Stocks.us.reuters.com.
39.   ● Webster, Paul. Red carpet rolled out for Euro Disney. Guardian, May 3, 1991, p. 27.
40.   ● White, Christina. Hollywood on the Seine. Business Week, March 25, 2002.
41.   ● Wise, Deborah. Will Euro Disneyland be able to overcome two main obstacles? The Guardian, March 1, 1991, p. 26.
42.   ● Wrubel, Robert. Le defi Mickey Mouse. Financial World, October 17, 1989, p. 21.

Licensing Agreements

A licensing agreement is a legal contract between two parties, known as the licensor and the licensee. In a typical licensing agreement, the licensor, such as the Walt Disney Company, grants the licensee the right to produce and sell goods, apply a brand name or trademark, or use patented technology owned by the licensor. Legal restrictions often mandate that the licensee must be a company in the host's country that is willing to accept such an arrangement with the licensor. In exchange, the licensee usually submits to a series of conditions regarding the use of the licensor's property and agrees to make payments known as royalties.

Licensing agreements cover a wide range of well-known situations. For example, a retailer in the theme park might reach agreement with Disney to develop, produce, and sell merchandise bearing Disney characters. Or a construction company might license proprietary theme park design technology from Disney to gain a competitive edge rather than expending the time and money trying to develop its own technology. Or a greeting card company might reach an agreement with Disney to produce a line of greeting cards bearing the images of popular Disney animated characters.

One of the most important elements of a licensing agreement covers the financial arrangement between the two parties. Payments from the licensee to the licensor usually take the form of guaranteed minimum payments and royalties on sales. Royalties typically range from 6 to 10 percent, depending on the specific property involved and the licensee's level of experience and sophistication. Not all licensors require guarantees, although some experts recommend that licensors get as much compensation up front as possible. In some cases, licensors use guarantees as the basis for renewing a licensing agreement. If the licensee meets the minimum sales figures or theme park attendance figures, the contract is renewed; otherwise, the licensor has the option of discontinuing the relationship.

Another important element of a licensing agreement establishes the time frame of the deal. Many licensors insist on a strict market release date for products licensed to outside manufacturers. This also applies to the time needed to construct the theme park. After all, it is not in the licensor's best interest to grant a license to a company that cannot build the theme park in a timely manner or never markets the products. The licensing agreement will also include provisions about the length of the contract, renewal options, and termination conditions.

Another common element of a licensing agreement covers which party maintains control of copyrights, patents, or trademarks. Many contracts also include a provision about territorial rights, or who manages distribution in various parts of the country or the world. In addition to the various clauses inserted into agreements to protect the licensor, some licensees may add their own requirements. They may insist on a guarantee that the licensor owns the rights to the property, for example, or they may insert a clause prohibiting the licensor from competing directly with the licensed property in certain markets.

There are advantages as well as disadvantages with licensing agreements. The primary advantage is that the licensing agreement can limit Disney's financial exposure. It is entirely possible that Disney may not have to provide any financial support for the construction of the new theme park. Disney would provide expertise in the design, construction, and management of the park and its attractions. Disney can demand that all attractions be identical to those at Disneyland and Disney World. The theme park could be an exact duplication of Disneyland or Disney World.

In exchange, Disney would receive royalty payments based on admission fees and the sale of food, beverages, and merchandise. Disney may also receive royalty payments for the use of Disney characters. This includes use in themed hotels. Disney can also collect a percentage of sponsorship fees. Disney would receive royalty payments regardless of whether the theme park was profitable or lost money.

The disadvantages are limitations on profitability and possibly future opportunities. If the theme park is highly profitable, Disney would receive only royalty payments and would not share in the profitability of the park. All profits may stay with the licensee. The licensee may demand that Disney not be allowed to enter certain markets that could be seen as a competitor for the new theme park. This could limit Disney's ability for future expansion in foreign markets. Since Disney would not be managing the theme park under the licensing agreement, Disney could be faced with a loss of quality control, thus affecting Disney's image and reputation. Licensing agreements therefore can appear as risk minimization for the licensor and risk maximization for the licensee.

Joint Ventures

A joint venture is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing shared equity. The theme park would be shared ownership. They both may exercise control over the enterprise and consequently share revenues, expenses, and assets.

A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify or expand their business globally. A joint venture can ensure the success of smaller projects for those firms that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project's startup cost, as well as the resulting profits.

Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. For example, it may take years before the theme park arrives at the desired yearly attendance figures. Ultimately, both short-term and long-term successes are important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary.

With joint ventures, there can be a dominant partner together with participation of the public. There may also be cases where the public shareholding is a substantial portion of the investment, but the founding partners retain their identity. In such cases, local governments may provide some funding in the way of loans or tax incentives in hope of creating jobs.

Further consideration relates to starting a new legal entity on foreign soil. The licensor may have to abide by legal requirements in the host country related to ownership of shares of stock in the new venture, the use of local labor, abiding by local union contracts, how procurement will be performed and restrictions on land development. Such an enterprise is sometimes called ‘an incorporated joint venture’ and can include technology contracts (rights related to knowhow, patents, trademarks, brand use agreements and copyright), technical services, and assisted-supply arrangements.

Joint ventures are profit and risk maximization strategies for the licensor and risk minimization for the licensee. A joint venture does not preclude the licensor such as Disney from collecting royalties. However, it does require that both the licensor and licensee make significant financial contributions. The result is usually a much larger project than each party could afford if they had to do it alone. The main disadvantage is that the licensor and licensee can have different opinions when critical decisions must be made.

The Business Model

For Disney, the decision to expand internationally was inevitable. The business model used for Disneyland and Disney would need to be changed and account for joint venture relationships and/or partnerships. There would most likely be a different business model for each country where a new theme park would open.

The international theme parks and accompanying business models appear on paper as a form of open source innovation. Each business model can be impacted by different enterprise environmental factors such as government requirements, political intervention and culture.

Tokyo Disneyland

Disney's partner for Tokyo Disneyland was the Oriental Land Company. Disney had to decide whether the partnership should be based on a joint venture or a licensing agreement. Unsure about how the enterprise environmental factors would affect the acceptance of the theme park and the fact that this was Disney's first theme park outside of the United States, Disney opted for the risk minimization strategy of a licensing agreement. Under this agreement, Tokyo Disneyland was not partially or wholly owned by Disney. With the licensing agreement, Disney would receive royalty payments of 10 percent of the admission fees and 5 percent of the sales on food, beverages and merchandise. Disney receives its royalty payments even if Tokyo Disneyland loses money. Disney did have a small investment in the theme park of $3.5 million, which amounted to 0.42 percent of the initial construction cost. Because Disney opted for the risk minimization licensing agreement, Disney made the decision not to invest heavily in land development surrounding the theme park.

In April 1979, the first basic contract for the construction of Disneyland in Tokyo was signed. Japanese engineers and architects flocked to California to tour Disneyland and prepare to construct the new operating dreamland in Tokyo. Just one year later, construction of the park began and was covered by hundreds of media reporters as an indication of the high expectations for the park in the future. Though successful in the building process, the final cost of Tokyo Disneyland almost doubled the estimated budget costing 180 billion yen rather than the projected 100 billion yen. Despite this discrepancy, Tokyo Disneyland has been a constant source of pride since opening day over 30 years ago.

With only a few exceptions, Tokyo Disneyland features the same attractions found in Disneyland and Walt Disney World's Magic Kingdom. It was the first Disney theme park to be built outside the United States, and it opened on April 15, 1983. The park was constructed by Walt Disney Imagineering in the same style as Disneyland in California and Magic Kingdom in Florida.

There are seven themed areas in the park: the World Bazaar, the four classic Disney lands—Adventureland, Westernland, Fantasyland, and Tomorrowland—and two mini-lands, Critter Country and Mickey's Toontown. Many of the games and rides in these areas mirror those in the original Disneyland as they are based on American Disney films and fantasies. Fantasyland includes Peter Pan's Flight, Snow White's Scary Adventures, Dumbo the Flying Elephant and more based on classic Disney films and characters. The park is noted for its extensive open spaces, to accommodate the large crowds that visit the park.

The day the park opened, the attendance was 13,200 visitors. On August 13 of the same year, more than 93,000 people visited the park. This was a one-day attendance record surpassing all Disney theme parks. Three years later, Tokyo Disneyland broke the record again with a one-day attendance of 111,500 people.

Euro Disney (Disneyland Paris)

In Tokyo Disneyland's first year of operations, 1983, it was evident that Tokyo Disneyland would be a success. In 1984, Disney made the decision to build a second foreign theme park, this time in Europe. Disney wanted the theme park opened by 1992. Disney wanted to build a state-of-the-art theme park, a decision that eventually led to “budget breaker” scope changes. Many of the changes were last-minute changes made by Michael Eisner, Disney's CEO.

Using the first year's results from Tokyo Disneyland, highly optimistic financial projections were established for Euro Disney based on the expectation of 11 million visitors the first year and 16 million visitors yearly after the turn of the century. When Tokyo Disneyland opened on April 15, 1983, more than 13,000 visitors entered the park.

Disney viewed the Euro Disney theme park as a potentially profitable revenue generator for decades inasmuch as Disney would have a monopoly in leisure and entertainment in Europe. Unlike Tokyo Disneyland, Disney opted for a joint venture that was designed around a profit maximization strategy. Disney would receive 10 percent royalties on admissions; 5 percent royalties on food, beverage, and merchandise sales; a management fee equivalent to 3 percent of revenue, a licensing fee for using the Disney name and characters; 5 percent of gross revenues of themed hotels; and 49 percent of the profits. Disney also received royalties from companies that invested in and endorsed specific rides. If Euro Disney was as successful as Tokyo Disneyland, Disney could receive more than $1 billion in royalties and profit sharing each year.

Part of Disney's decision to use a joint venture relationship was because it realized that they made a serious mistake in Disneyland, Disney World, and Tokyo Disneyland by not investing heavily in property development surrounding the theme parks. With the intent of maximizing its profits, Disney agreed to build 18,200 hotel rooms surrounding Euro Disney by 2017.

Walt Disney Studios Park

Disney recognized that, if you want people to come back to the theme park again and again, you must either add new attractions to the park, build an adjacent theme park on a closely related topic, or do both. Initial plans for a second theme park at Euro Disney, the $2.3 billion MGM Film Studio Tour, was scheduled to open in 1996, though these plans were canceled around mid-1992 due to the resort's financial crisis at the time. After the resort began to make a profit, these plans were revived on a much smaller scale. The new theme park included a history of films, including cinema, cartoons, and how films are made. The new budget was $600 million. The MGM Studio theme park was renamed Walt Disney Studios Park and opened on March 16, 2002. It was dedicated to show business, themed after movies, production, and behind-the-scenes. Just like Euro Disney, the second theme park was part of the original joint venture relationship rather than just a licensing agreement.

In 2013, the park hosted approximately 4.4 million guests, making it the third-most visited amusement park in Europe and the twenty-first-most visited in the world though it had the lowest attendance figures of all eleven Walt Disney theme parks.

Tokyo DisneySea Park

In 1997, Tokyo Disneyland recognized the need for a second theme park. Attendance at the Tokyo Disneyland theme park was levelling off as indicated in Table 13-5.

Between 75 and 80 percent of the visitors to Tokyo Disneyland were repeat visitors. Even with new attractions being built each year, there was apprehension that people might not return to the park after two or three visits. Furthermore, there were expectations that there might be a drop in attendance by as much as 4 percent over the new four years. A new theme park would be needed.

The concepts and designs for a DisneySea park had been in development at Walt Disney Imagineering for more than 20 years. However, for a second theme park in Tokyo, Disney initially recommended that the new theme park be similar to the Walt Disney Studios Park that was in the planning stages for Euro Disney. Disney's partner in Japan, the Oriental Land Company, believed that the Japanese would not be as enamored with movie-making as were the American and the Europeans. Instead, the decision was to build Tokyo DisneySea park for about $3.5 billion. This was based heavily on the knowledge that the Japanese had a love for the sea. Unlike Tokyo Disneyland, the overall intention of the new park was to create a more adult-themed park, including faster, scarier rides, and shows designed more for an older audience.

The success of Tokyo Disneyland made it quite apparent that Disney would have been better off financially had they chosen a joint venture rather than a licensing agreement. However, a sea park was not the same as a Disneyland park. Disney believed that the Tokyo DisneySea park did have some risks. The Oriental Land Company believed that the Tokyo DisneySea park could be just as successful as Tokyo Disneyland. But coming up with $3.5 billion was very risky. The Oriental Land Company would have preferred to minimize its risks by having a joint venture, but eventually negotiated a licensing agreement for the $3.5 billion theme park. The debt for Tokyo Disneyland was paid off in three years after the park opened. The Oriental Land Company believed that the Tokyo DisneySea park could also be paid off in a reasonably short period of time as well.

In 2013, Tokyo Disneyland hosted 17.21 million visitors, moving its ranking to the world's second most visited theme park, surpassing Disneyland in California, USA, but falling behind the Magic Kingdom in Florida, USA. However, as seen in Table 13-6, the Tokyo DisneySea park attracted 14.08 million visitors in 2013 making it the world's fourth most visited them park. All 11 of Disney's theme parks totaled 132,549,000 visitors in 2013.

Future of Tokyo Disneyland

Since the park opened in 1983, Tokyo Disneyland has regularly been the most profitable Disney Resort. By 1994, over 140 million people had entered through the gates of Tokyo Disneyland (the population of Japan is only 127.6 million) and the popularity had increased. Just two years later, it employed 12,390 people, marking Tokyo Disneyland as the biggest workplace in Japan's diversionary outings. Though the attendance trend is similar to that of other Japanese theme parks, the revenue produced by Tokyo Disneyland is larger than all other national theme parks combined, thus greatly profiting the Japanese economy. Many speculate that Tokyo Disneyland is such an economic success due to timing and location; the theme park lies in a metropolitan area with a population of 30 million and opened at the height of a booming economy where hard-working citizens desired a fun escape from reality. One of the main goals of Tokyo Japan was to ever improve the park and grow away from the restrictions of American Disney. Recently Japan had been merging their national identity with the Disneyland Park by adding attractions with distinctly Japanese qualities. Cinderella's Castle displays the classic Disney character and story plot yet presents the story through the eyes of the Japanese. Meet the World, located in World Bazaar, shows true national identity and pride as it embodies Japanese history; instead of classic Disney characters, Meet the World characters wear the traditional Japanese Kimono. Once nominated by Disney Legends, Masatomo Takahashi, the former president of The Oriental Land Company, states this growth and development as one as the primary goals: “We must not just repeat what we receive from Disney. I am convinced that we must contribute to the cultural exchange between Japan and U.S.A.”

Hong Kong Disneyland

In 1988–1989, negotiations began to bring the original Disneyland to a new territory, namely Hong Kong. Hong Kong was recognized as an international finance center and the gateway to China. Disney recognized that, even though many countries and cities in Southeast Asia, such as Hong Kong, may be on the cutting edge of technology, they were not familiar with many of the Disney products, including comics of Disney characters such as Mickey Mouse. Because of the potential risk of limited brand awareness, marketing and advertising would be critical. Even with the limited brand awareness, the Hong Kong government recognized significant benefits in the venture:

• Hong Kong Disneyland will attract millions of tourists a year, create thousands of jobs, enrich the quality of life, and enhance Hong Kong's international image.
• The world-class theme park has the potential to provide Hong Kong with a net economic benefit of billions of dollars over 40 years.
• It is estimated that attendance in the park's first year of operation will be over 5 million. This figure will gradually rise to around 10 million a year after 15 years.
• About 18,400 new jobs are expected to be created directly and indirectly on opening, rising to 35,800 over a 20-year period.
• Around 6,000 jobs are expected to be created during the construction of facilities for Phase I of Hong Kong Disneyland. In addition, some 10,000 jobs are expected to be created by the land reclamation and other infrastructural works funded by the government.

The benefits of the base case were based on several assumptions, including:

• The park opens in 2005.
• The park's attendance in its first year of operation is estimated at 5.2 million.
• The park gradually reaches full annual capacity of 10 million after 15 years.
• Nearly all employees at Hong Kong Disneyland will be Hong Kong people. Management of the park will initially be undertaken by about 40 Disney employees from around the world. But eventually about 35 local employees will be trained to take up these management duties.
• Disney would provide master planning, project management expertise, real estate development, design of the attractions, and other such support activities.
• Staff training for key personnel will take place in Hong Kong and the United States. In the United States, trainees will receive hands-on experience at existing Disney theme parks.
• In Hong Kong, the company will develop suitable training packages for a wide spectrum of Hong Kong Disneyland employees. A “Disney University” will be established as part of this process.
• Hong Kong Disneyland will attract 3.4 million incoming tourists in Year 1, rising to 7.3 million after 15 years.

Hong Kong Disneyland is located on reclaimed land in Penny's Bay, Lantau Island. It is the first theme park located inside the Hong Kong Disneyland Resort and is owned and managed by the Hong Kong International Theme Parks. Unlike Disneyland Paris, Disney preferred to be actively involved in the management of the park rather than just being an investor. As part of a negotiated joint venture agreement, the government paid $2.9 billion (US$) to build the park and Disney contributed $314 million (US$).

Criticisms

Discussion Questions

1. What is the fundamental difference between a licensing agreement and a joint venture as related to Disney's theme parks?
2. Why did Disney opt for a licensing agreement for Tokyo Disneyland?
3. Why did Disney opt for a joint venture agreement with Euro Disney?
4. Does the size of the theme park have a bearing on whether to select a licensing agreement or a joint venture?
5. What is the difference between a theme park and a vacation resort?
6. If the goal is a vacation resort, should Disney negotiate a licensing agreement or a joint venture?
7. Why was it necessary to build the Walt Disney Studios Park as part of Euro Disneyland?
8. Why was it necessary to construct Tokyo DisneySea?
9. For the agreement with Tokyo DisneySea, would Disney have preferred a licensing agreement or a joint venture?
10. What did Disney see as the risks with Hong Kong Disneyland?
11. What is feng shui?

Further Reading

1.   ● Disneyland web site, www.tokyodisneyresort.jp/.
2.   ● Fan, Maureen. Culture shock. The Standard. Hong Kong. November 22, 2006.
3.   ● Hong Kong Disneyland feng shui secrets and facts. The Disneyland Report.com. Site is no longer active; report is archived at https://web.archive.org/web/20120426001021/http://www.disneylandreport.com/disneysecrets/hong_kong_disneyland_secrets/hong_kong_disneyland_feng_shui_secrets_facts.html, accessed May 14, 2019.
4.   ● “Hong Kong Disneyland Posts Record-Breaking Performance in Fiscal Year 2012.” Hong Kong Disneyland press release, February 18, 2013. http://news-en.hongkongdisneyland.com/PressReleases/PressReleaseDetail.aspx?AssetId=d609d58f-0913-43d6-90a9-9d45365d58c0, accessed May 14, 2019.
5.   ● China Daily , Hong Kong grows its Disneyland. September 28, 2009.
6.   ● Misawa, Misuru. Disneyland Tokyo: Licensing vs. Joint Venture. Asia Case Research Centre, University of Hong Kong (Case HKU420, Reference no. C106-002-1), 2006.
7.   ● TEA/AECOM 2013 Global Attractions Report.” Themed Entertainment Association. 2014.
8.   ● TEA/AECOM 2017 Theme Index and Museum Index. Themed Entertainment Association.
9.   ● Raz, Aviad E. Domesticating Disney: Adaption in Disneyland Tokyo. Journal of Popular Culture 33 (4) (2000): 77–99.
10.   ● Rishou, Makiya. Disneyland in Tokyo is a 10-year hit. Los Angeles Times. April 12, 1994.
11.   ● Wikipedia, the Free Encyclopedia; “Tokyo Disneyland.”
12.   ● Wikipedia, the Free Encyclopedia; “Disneyland Paris.”
13.   ● Wikipedia, the Free Encyclopedia; Joint Ventures.
14.   ● Wikipedia, the Free Encyclopedia; Disneyland Shanghai.
15.   ● Wikipedia, the Free Encyclopedia; Tokyo Disney Sea Park.

Business Model Innovation

Aircraft manufacturers use the concept of platform innovation. The platform is the core structure of the plane from which each airline can then customize the plane according to their needs such as the design of the galley and types of seats. This opportunity for customization encourages the airlines to work with the manufacturer in the design of the platform. Supply chain companies also participate in platform design because, if a plane flies for 30–40 years, each component manufacturer may have a 30- to 40-year production contract for their components.

Companies that focus on platform innovation often prefer to outsource as much work as possible to suppliers without sacrificing the quality, the integrity of the design of the platform and the accompanying fundamentals. Platform innovators prefer being in the assembly business rather than the manufacturing business. This adds complexities and risks to the design of a new platform but if done correctly, can lower the cost of the platform.

Innovation Using Life-Cycle Cost Analysis

Aircraft manufacturers often use the concept of life-cycle cost analysis (LCCA) when designing a new aircraft. LCCA is a tool to determine the most cost-effective option among competing alternatives to purchase, own, operate, maintain, and dispose of a product. LCCA provides options for innovation activities. Aircraft manufacturers will work with their customers to find more cost-effective and innovative ways of redesigning the galley to service the passengers in flight or reducing the cost of aircraft maintenance.

For a completely new aircraft, manufacturers will partner with their contractors to create innovative products such as more fuel-efficient engines and light-weight composite materials that will result in lowering the operating cost of the plane. Innovation can also take place in developing new working relationships with the suppliers and how much additional responsibilities will be provided to them during innovation activities. However, the greater the number of innovations desired, the greater the risk of unexpected downstream events such as safety issues that may occur due to unknowns. For new product development, innovation risks may not appear until after the product is in use.

The Safety Constraint

When we discuss the triple constraint, we are generally referring to time, cost, and scope. But there are other constraints, and when human life is involved, safety becomes perhaps the most important innovation constraint. There are many forms of safety. On IT projects, safety protocols are installed to make sure that proprietary data is not compromised. Food and health-care products manufacturers worry about product tampering and safety protection for the consumers. Manufacturers worry about consumers using their products in a safe manner. Companies like Disney have safety as the number one constraint for rides and attractions at the theme parks. Most companies would rather allow projects to intentionally fail or be canceled before risking lawsuits over violations of safety. This is particularly true if the there is a chance for loss of human life.

The Boeing 787 Dreamliner Decision

The Boeing 787 “Dreamliner” is a long-range, mid-size wide-body, twin-engine jet airliner that can handle 242 to 335 passengers in typical three-class seating configurations. It is Boeing's most fuel-efficient airliner and is a pioneering airliner with the use of composite materials (carbon fiber, aluminum and titanium) as the primary material in the construction of its airframe and an electrical system using lithium-ion batteries. The 787 would reduce airline maintenance costs and replacement costs. The expectation was that the 787 would be 10 percent lower cost-per-seat mile than any other aircraft. The 787 was designed to be 20 percent more fuel efficient than the Boeing 767, which it was intended to replace.

To maximize shareholder value, Boeing decided to outsource 70 percent of the work on the 787 rather than the 35–50 percent outsourcing that was used on the 737 and 747 aircrafts. This was expected to shorten the development time from six to four years and lower development costs from $10 billion to $6 billion. The lowering of Boeing's assembly costs would spread significant financial risk to Boeing's suppliers, which were now responsible for more assembly work. This was a significant change in Boeing's business model.

The longest-range 787 variant can fly 8,000 to 8,500 nautical miles, enough to cover the Los Angeles to Bangkok or New York City to Hong Kong routes. Its cruising airspeed is Mach 0.85, equivalent to 561 mph at typical cruise altitudes. As of July 2018, the 787 had orders for 1,387 aircraft from its 71 customers and delivered 716 aircraft.

The airline industry spends significantly more than a decade and perhaps as much as $30 billion in designing a new commercial aircraft. But even in the design and manufacturing phases, safety issues and problems can still exist but remain hidden. The only real way to verify that safety issues have been addressed is in the commercial use of the plane. Boeing had to push back the launch date of the 787 seven times, and the first few aircraft were delivered three years late. Boeing has reportedly spent $32 billion on the 787 Program.

Companies like Boeing and Airbus may end up spending billions of dollars after the planes are put in use to resolve any and all safety issues. This is what consumers expect from them. And Boeing and Airbus must comply, as seen in the literature, with the problems with the batteries on the 787 Dreamliner and other issues the A380.

Innovation Problems

In the Boeing 787 Dreamliner's first year of service, at least four aircraft suffered from electrical system problems stemming from its lithium-ion batteries. Teething problems are common within the first year of any new aircraft design's life:

• November 1, 2011: Landing gear failed to deploy
• July 23, 2012: Corrosion risk identified in an engine component
• December 4, 2012: Leakage in fuel line connectors
• December 4, 2012: A power generator failed
• January 7, 2013: Smoke in the cockpit during an inspection
• January 8, 2013: Faulty left-wing surge tank vent
• January 9, 2013: Indicator falsely reported brake problems
• January 11, 2013: Engine oil leak
• January 11, 2013: Crack developed on the cockpit wide screen

But after a number of incidents, including an electrical fire aboard an All Nippon Airways 787, and a similar fire found by maintenance workers on a landed Japan Airlines 787 at Boston's Logan International Airport, the US Federal Aviation Administration (FAA) ordered a review into the design and manufacture of the Boeing 787 Dreamliner, following five incidents in five days involving the aircraft, mostly involved with problems with the batteries and electrical systems. This was followed with a full grounding of the entire Boeing 787 fleet, the first such grounding since that of DC-10s following the American Airlines Flight 191 disaster in 1979. (Wingfield-Hayes 2013a). It is reported that the plane has had two major battery thermal runaway events in 100,000 flight hours, which substantially exceeded the 10 million flight hours predicted by Boeing, and had done so in a dangerous manner (Hradecky 2013).

In December 2012, Boeing's CEO, James McNerney, told media outlets that the problems were no greater than those experienced by the company with the introduction of other new models, such as the Boeing 777 (Spira 2012). However, on January 7, 2013, a battery overheated and started a fire in an empty 787 operated by Japan Airlines (JAL) at Boston's Logan International Airport (Cooper 2013). On January 9, United Airlines reported a problem in one of its six 787s with the wiring in the same area as the battery fire on JAL's airliner; subsequently, the US National Transportation Safety Board opened a safety probe (Ostrower and Nicas 2013).

On January 11, 2013, the FAA announced a comprehensive review of the 787's critical systems, including the design, manufacture, and assembly of the aircraft. US Department of Transportation secretary Ray LaHood stated the administration was “looking for the root causes” behind the recent issues. The head of the FAA, Michael Huerta, said that so far nothing found “suggests [the 787] is not safe” (Topham 2013). Japan's transport ministry has also launched an investigation in response (Mukai 2013).

On January 16, 2013, an All Nippon Airways (ANA) 787 made an emergency landing at Takamatsu Airport on Shikoku Island after the flight crew received a computer warning that there was smoke inside one of the electrical compartments (Wingfield-Hayes 2013b). ANA said that there was an error message in the cockpit citing a battery malfunction. Passengers and crew were evacuated using the emergency slides.²⁰ According to the Register, there are no fire-suppression systems in the electrical compartments holding batteries, only smoke detectors (Thomson 2013).

US-based aviation regulators’ oversight into the 2007 safety approval and FAA certification of the 787 has now come under scrutiny, as a key US Senate committee prepares for a hearing into the procedures of aviation safety certification “in coming weeks.” However, an FAA spokesperson defended their 2007 safety certification of the 787 by saying, “The whole aviation system is designed so that if the worst case happens, there are systems in place to prevent that from interfering with other systems on the plane”.²¹

On February 12, 2013, the Wall Street Journal reported that “Aviation safety investigators are examining whether the formation of microscopic structures known as dendrites inside the Boeing Co. 787's lithium-ion batteries played a role in twin incidents that prompted the fleet to be grounded nearly a month ago”²²

On January 16, 2013, both major Japanese airlines ANA and JAL announced that they were voluntarily grounding or suspending flights for their fleets of 787s after multiple incidents involving different 787s, including emergency landings. These two carriers operated 24 of the 50 Dreamliners delivered to date (McCurry 2013). The grounding was expected to cost ANA over $1.1 million a day (Topham and Scott 2013).

On January 16, 2013, the FAA issued an emergency airworthiness directive ordering all US-based airlines to ground their Boeing 787s until yet-to-be- modifications are made to the electrical system to reduce the risk of the battery overheating or catching fire.²³ This was the first time that the FAA has grounded an airliner type since 1979. The FAA also announced plans to conduct an extensive review of the 787's critical systems. The focus of the review was on the safety of the lithium-ion batteries made of lithium cobalt oxide (LiCoO₂). The 787 battery contract was signed in 2005.²⁴ when LiCoO₂ batteries were the only type of lithium aerospace battery available, but since then newer and safer types (such as LiFePO), which provide less reaction energy during thermal runaway, have become available (Dudley 2013, DallØkken 2013). FAA approved a 787 battery in 2007 with nine “special conditions” (Scott and Saito 2013).²⁵ A battery approved by FAA (through Mobile Power Solutions) was made by Rose Electronics using Kokam cells,²⁶ but the batteries installed in the 787 were made by Yuasa (Brewin 2013).

On January 20, the NTSB declared that overvoltage was not the cause of the Boston incident, as voltage did not exceed the battery limit of 32 V,²⁷ and the charging unit passed tests. The battery had signs of short-circuiting and thermal runaway.²⁸ Despite this, on January 24 the NTSB announced that it had not yet pinpointed the cause of the Boston fire; the FAA will not allow US-based Dreamliners to fly again until the problem is found and corrected. In a press briefing that day, NTSB Chairwoman Deborah Hersman said that the NTSB had found evidence of failure of multiple safety systems designed to prevent these battery problems, and stated that fire must never happen on an airplane (Weld and Mouwad 2013). The Japan Transport Safety Board (JTSB) has said on January 23 that the battery in ANA jet's in Japan reached a maximum voltage of 31 V (lower than the 32 V limit like the Boston JAL 787), but had a sudden unexplained voltage drop to near zero (Mitra-Thakur 2013). All cells had signs of thermal damage before thermal runaway (Hradecky 2013). ANA and JAL had replaced several 787 batteries before the mishaps. As of January 29, 2013, JTSB approved the Yuasa factory quality control while the American NTSB continues to look for defects in the Boston battery (Tabuchi 2013; Cooper and Matsuda 2013).²⁹

Industry experts disagreed on the consequences of the grounding: Airbus was confident that Boeing would resolve the issue (Keene 2013) and that no airlines would “switch from one airplane type to another because there's a maintenance issue,” while other experts saw the problem as “costly” and “could take upwards of a year” (Wall and Rothman 2013; White 2013).

The only US-based airline that operated the Dreamliner at that time was United Airlines, which had six.³⁰ Chile's Directorate General of Civil Aviation (DGAC) grounded LAN Airlines’ three 787s (La Tercera 2013). The Indian Directorate General of Civil Aviation (DGCA) directed Air India to ground its six Dreamliners. The Japanese Transport Ministry made the ANA and JAL groundings official and indefinite following the FAA announcement (Upadhyay 2013). The European Aviation Safety Agency had also followed the FAA's advice and grounded the only two European 787s operated by LOT Polish Airlines.³¹ Qatar Airways announced that it was grounding its five Dreamliners.³² Ethiopian Air was the final operator to announce temporary groundings of its four Dreamliners.³³

As of January 17, 2013, all 50 of the aircraft delivered to date have been grounded (Topham and Scott 2013). On January 18, Boeing announced that it was halting 787 deliveries until the battery problem was resolved (Topham and Scott 2013, Negishi and Kelly 2013, Madslien 2013). On February 4, 2013, the FAA said it would permit Boeing to conduct test flights of 787 aircraft to gather additional data (Freed 2013).

On April 19, 2013, the FAA approved Boeing's new design for the Boeing 787 battery. This would allow the eight airlines that maintained a fleet of 50 787 planes to begin making repairs. The repairs would include a containment and venting system for the batteries (Henningan 2013). The new design would add more protection and would also increase the weight of the plane by more than 150 pounds. This was a necessity to ensure safety. The cost of the repairs would be $465,000 per plane. Boeing committed more than 300 people on 10 teams to make the repairs, which would take about five days per plane.³⁴

ANA, which operated 17 Dreamliner jets, estimated that it was losing $868,300 per plane over a two-week period and would be talking with Boeing about compensation for losses. Other airlines were also expected to seek some compensation.

Final Results

Boeing was successful in resolving the battery issues and sales of the 787 are doing well. As of July 2018, Boeing had 1387 orders for the Boeing 787 and delivered 716. Boeing's 787 could become Boeing most profitable aircraft program in Boeing's history.

Both Airbus and Boeing understand the importance of customer confidence. If the aircraft customers lose confidence in the aircraft manufacturer's ability to deliver a safe aircraft, significant business will be lost. Aircrafts can have more than 100,000 components. In the cabin area alone on the A380 are more than 23,000 parts. Given the fact that it takes at least 10 years and billions of dollars to design and test these planes, it is impossible to prevent some of these teething problems to have been simulated. Dry runs cannot simulate every possible scenario that could happen. The reliability of every part and every system can be proven only when the aircraft is in operations. The A380 has undergone more testing than any other jet. Yet despite the testing, it may be some time until all the problems are resolved. Because lives may be at stake, Airbus may end up spending billions to correct all of the potential problems that may occur.

There will always be risks with the design and development of new aircraft. Typical risks include:³⁵

• Innovation risks: dealing with new and unproven technologies
• Outsourcing risks: expecting suppliers and partners to take on design and development risks
• Tiered outsourcing risks: asking the suppliers and partners to manage and integrate the work of lower tiered suppliers
• Offshore risks: having critical components manufactured far away from the final assembly plant
• Communication by computer risks: expecting communication by computer to replace face-to-face communication
• Labor relations risks: having critical decisions related to outsourcing made by executives without any input from the people doing the work
• Disengaged C-suite risks: having executives not wanting to be involved in the day-to-day activities of designing a new plane
• Project management skills risks: having a project team that lacks critical skills such as in supply chain management

Lessons Learned

There are several lessons learned from the Boeing 787 program:

• Proper testing campaign for new technology. In the case of 787, the number of tests needed to certify its batteries was not enough.
  • Flaws in manufacturing, insufficient testing, and a poor understanding of an innovative battery all contributed to the grounding of Boeing's 787 fleet (Mouawad 2014)
  • “We advanced the state of the art for testing lithium ion batteries,” Mike Sinnett, Boeing's chief engineer for the 787 Program, said at a hearing of the aviation subcommittee of the House Transportation Committee. The hearing was titled “Lessons Learned from the Boeing 787 Incidents” (Reed 2013).
• Strict quality control on the products provided by the suppliers. Choice of the supplier based only on the quality.
  • But whatever the outcome, experts said that with so many lives at stake, the design and manufacture of new aircraft should be based solely on legitimate issues of cost and quality, and the selection process for suppliers should be transparent and untainted by other commercial or political concerns.
  • “The greatest enemy of good aircraft is people who interfere with the freedom to shop for the highest quality,” Mr. Aboulafia said (Stewart 2013).
  • But these were exacerbated by Boeing's decision to massively increase the percentage of parts it sourced from outside contractors. The wing tips were made in Korea, the cabin lighting in Germany, cargo doors in Sweden, escape slides in New Jersey, landing gear in France. The plan backfired. Outsourcing parts led to three years of delays. Parts didn't fit together properly. Shims used to bridge small parts weren't attached correctly. Many aircraft had to have their tails extensively reworked. The company ended up buying some suppliers, to take their business back in house. All new projects, especially ones as ambitious as the Dreamliner, face teething issues, but the 787's woes continued to mount. Unions blame the company's reliance on outsourcing (Rushe 2013).
• Careful control and the right attitude by Federal Aviation Administration (FAA). The Federal Aviation Administration should maintain an attitude toward airplane makers that is intransigent.
  • But the Dreamliner's problems are not just a Boeing issue. They are a lesson in the limits of outsourcing and the all too cozy relationships between regulator and regulated that have caused problems across industries from automotive to food and financial services in recent years (Rushe 2013, 48).
  • Consultant and former airline executive Robert Mann said Boeing's clout put pressure on the Federal Aviation Authority (FAA) to speedily approve the Dreamliner, despite its radical design and manufacturing process.
• The ultimate goal of designing a new aircraft should be to increase shareholder value.
  • When the goal focuses more so on maximum shareholder value, especially in the short term, we often take unnecessary risks and turn a good opportunity into a potential disaster.

Discussion Questions

1. Can safety be considered as a constraint on an innovation project and considered to be at a higher priority than even time, cost, and scope?
2. Should the innovation project manager on the 787 Program have the authority on how safety is defined, measured, and reported during innovation activities?
3. What type of innovation did Boeing use?
4. What innovation mistakes did Boeing make?

Performance Venues and Facilities

It houses the following performance venues:

• The Concert Hall, with 2,679 seats, the home of the Sydney Symphony Orchestra and used by a large number of other concert presenters. It contains the Sydney Opera House Grand Organ, the largest mechanical tracker action organ in the world, with over 10,000 pipes.
• The Joan Sutherland Theatre, a proscenium theatre with 1,507 seats, the Sydney home of Opera Australia and The Australian Ballet.
• The Drama Theatre, a proscenium theatre with 544 seats, used by the Sydney Theatre Company and other dance and theatrical presenters.
• The Playhouse, an end-stage theatre with 398 seats.
• The Studio, a flexible space with a maximum capacity of 400, depending on configuration.
• The Utzon Room, a small multi-purpose venue, seating up to 210.
• The Forecourt, a flexible open-air venue with a wide range of configuration options, including the possibility of utilizing the Monumental Steps as audience seating, used for a range of community events and major outdoor performances. The Forecourt will be closed to visitors and performances in 2011–2014 to construct a new entrance tunnel to a rebuilt loading dock for the Joan Sutherland Theatre.

Other areas (e.g., the northern and western foyers) are also used for performances on an occasional basis. Venues are also used for conferences, ceremonies, and social functions.

The building also houses a recording studio, cafes, restaurants, and bars and retail outlets. Guided tours are available, including a frequent tour of the front-of-house spaces, and a daily backstage tour that takes visitors backstage to see areas normally reserved for performers and crew members.

Construction History

Planning began in the late 1940s, when Eugene Goossens, the director of the NSW State Conservatorium of Music, lobbied for a suitable venue for large theatrical productions. The normal venue for such productions, the Sydney Town Hall, was not considered large enough. By 1954, Goossens succeeded in gaining the support of NSW Premier Joseph Cahill, who called for designs for a dedicated opera house.

A design competition was launched by Cahill on 13 September 1955 and received 233 entries, representing architects from 32 countries. The criteria specified a large hall seating 3,000 and a small hall for 1,200 people, each to be designed for different uses, including full-scale operas, orchestral and choral concerts, mass meetings, lectures, ballet performances and other presentations (UNESCO 2018, 6). The winner, announced in 1957, was Jørn Utzon, a Danish architect. According to legend the Utzon design was rescued from a final cut of 30 “rejects” by the noted Finnish architect Eero Saarinen. The prize was £5,000 (Ellis 1992). Utzon visited Sydney in 1957 to help supervise the project (Pearman 2007). His office moved to Sydney in February 1963.

Utzon received the Pritzker Prize, architecture's highest honor, in 2003 (Totaro 2008). The Pritzker Prize citation stated:

There is no doubt that the Sydney Opera House is his masterpiece. It is one of the great iconic buildings of the 20th century, an image of great beauty that has become known throughout the world—a symbol for not only a city, but a whole country and continent.³⁸

Stage I: Podium

Stage I commenced on March 2, 1959. The government had pushed for work to begin early, fearing that funding, or public opinion, might turn against them. However, Utzon had still not completed the final designs. Major structural issues still remained unresolved. By January 23, 1961, work was running 47 weeks behind, mainly because of unexpected difficulties (inclement weather, unexpected difficulty diverting stormwater, construction beginning before proper construction drawings had been prepared, changes of original contract documents).³⁹ Work on the podium was finally completed in February 1963. The forced early start led to significant later problems, not least of which was the fact that the podium columns were not strong enough to support the roof structure and had to be rebuilt (Murray 2004).

Stage II: Roof

The shells of the competition entry were originally of undefined geometry (Arup and Zunz 1969), but, early in the design process, the “shells” were perceived as a series of parabolas supported by precast concrete ribs. However, engineers Ove Arup and Partners were unable to find an acceptable solution to constructing them. The formwork for using in-situ concrete would have been prohibitively expensive, but, because there was no repetition in any of the roof forms, the construction of precast concrete for each individual section would possibly have been even more expensive.

From 1957 to 1963, the design team went through at least 12 iterations of the form of the shells trying to find an economically acceptable form (including schemes with parabolas, circular ribs and ellipsoids) before a workable solution was completed. The design work on the shells involved one of the earliest uses of computers in structural analysis, in order to understand the complex forces to which the shells would be subjected (Jones 2006). In mid-1961, the design team found a solution to the problem: the shells all being created as sections from a sphere. This solution allows arches of varying length to be cast in a common mold, and a number of arch segments of common length to be placed adjacent to one another, to form a spherical section. With whom exactly this solution originated has been the subject of some controversy. It was originally credited to Utzon. Ove Arup's letter to Ashworth, a member of the Sydney Opera House executive committee, states: “Utzon came up with an idea of making all the shells of uniform curvature throughout in both directions” (Jones 2006, 199). Peter Jones, the author of Ove Arup's biography, states that “the architect and his supporters alike claimed to recall the precise eureka moment … ; the engineers and some of their associates, with equal conviction, recall discussion in both central London and at Ove's house.”

Ove Arup and Partners' site engineer supervised the construction of the shells, which used an innovative adjustable steel-trussed “erection arch” to support the different roofs before completion. On April 6, 1962, it was estimated that the Opera House would be completed between August 1964 and March 1965.

Stage III: Interiors

Stage III, the interiors, started with Utzon moving his entire office to Sydney in February 1963. However, there was a change of government in 1965, and the new Robert Askin government declared the project under the jurisdiction of the Ministry of Public Works. This ultimately led to Utzon's resignation in 1966.

The cost of the project so far, even in October 1966, was still only $22.9 million,⁴⁰ less than a quarter of the final $102 million cost. However, the projected costs for the design were at this stage much more significant.

The second stage of construction was progressing toward completion when Utzon resigned. His position was principally taken over by Peter Hall, who became largely responsible for the interior design. Other persons appointed that same year to replace Utzon were E. H. Farmer as government architect, D. S. Littlemore, and Lionel Todd.

Following Utzon's resignation, the acoustic advisor, Lothar Cremer, confirmed to the Sydney Opera House Executive Committee (SOHEC) that Utzon's original acoustic design allowed for only 2000 seats in the main hall and further stated that increasing the number of seats to 3,000 as specified in the brief would be disastrous for the acoustics. According to Peter Jones, the stage designer, Martin Carr, criticized the “shape, height and width of the stage, the physical facilities for artists, the location of the dressing rooms, the widths of doors and lifts, and the location of lighting switchboards.”⁴¹

Significant Changes to Utzon's Design

The final constructions were modified from Utzon's original designs:

• The major hall, which was originally to be a multipurpose opera/concert hall, became solely a concert hall, called the Concert Hall. The minor hall, originally for stage productions only, had the added function of opera and ballet to deal with and was called the Opera Theatre, later renamed the Joan Sutherland Theatre. As a result, the Joan Sutherland Theatre is inadequate to stage large-scale opera and ballet. A theatre, a cinema and a library were also added. These were later changed to two live drama theatres and a smaller theatre “in the round.” These now comprise the Drama Theatre, the Playhouse, and the Studio, respectively. These changes were primarily because of inadequacies in the original competition brief, which did not make it adequately clear how the Opera House was to be used. The layout of the interiors was changed, and the stage machinery, already designed and fitted inside the major hall, was pulled out and largely thrown away.
• Externally, the cladding to the podium and the paving (the podium was originally not to be clad down to the water, but to be left open).
• The construction of the glass walls (Utzon was planning to use a system of prefabricated plywood mullions, but a different system was designed to deal with the glass).
• Utzon's plywood corridor designs, and his acoustic and seating designs for the interior of both major halls, were scrapped completely. His design for the Concert Hall was rejected as it only seated 2000, which was considered insufficient. Utzon employed the acoustic consultant Lothar Cremer, and his designs for the major halls were later modeled and found to be very good. The subsequent Todd, Hall and Littlemore versions of both major halls have some problems with acoustics, particularly for the performing musicians. The orchestra pit in the Joan Sutherland Theatre is cramped and dangerous to musicians' hearing (Morgan 2006). The Concert Hall has a very high roof, leading to a lack of early reflections onstage—perspex rings (the “acoustic clouds”) hanging over the stage were added shortly before opening in an (unsuccessful) attempt to address this problem.

Completion and Cost

The Opera House was formally completed in 1973, having cost $102 million.⁴² H. R. “Sam” Hoare, the Hornibrook director in charge of the project, provided the following approximations in 1973: Stage I: podium Civil & Civic Pty Ltd approximately $5.5 million. Stage II: roof shells M.R. Hornibrook (NSW) Pty Ltd approximately $12.5 million. Stage III: completion The Hornibrook Group $56.5 million. Separate contracts: stage equipment, stage lighting and organ $9.0m. Fees and other costs $16.5 million.

The original cost estimate in 1957 was £3,500,000 ($7 million). The original completion date set by the government was January 26 ,1963 (Australia Day) (Jones 2006). Thus, the project was completed 10 years late and over budget by more than 14 times.

Jørn Utzon and His Resignation

Before the Sydney Opera House competition, Jørn Utzon had won 7 of the 18 competitions he had entered but had never seen any of his designs built. Utzon's submitted concept for the Sydney Opera House was almost universally admired and considered groundbreaking. The Assessors Report of January 1957, stated:

The drawings submitted for this scheme are simple to the point of being diagrammatic. Nevertheless, as we have returned again and again to the study of these drawings, we are convinced that they present a concept of an Opera House which is capable of becoming one of the great buildings of the world.

For the first stage, Utzon worked very successfully with the rest of the design team and the client, but, as the project progressed, the Cahill government insisted on progressive revisions. They also did not fully appreciate the costs or work involved in design and construction. Tensions between the client and the design team grew further when an early start to construction was demanded despite an incomplete design. This resulted in a continuing series of delays and setbacks while various technical engineering issues were being refined. The building was unique, and the problems with the design issues and cost increases were exacerbated by commencement of work before the completion of the final plans.

After the election of Robert Askin as premier of New South Wales in 1965, the relationship of client, architect, engineers, and contractors became increasingly tense. Askin had been a “vocal critic of the project prior to gaining office” (Farrelly 2008). His new minister for public works, Davis Hughes, was even less sympathetic. Elizabeth Farrelly (2008), Australian architecture critic, has written that:

[A]t an election night dinner party in Mosman, Hughes's daughter Sue Burgoyne boasted that her father would soon sack Utzon. Hughes had no interest in art, architecture or aesthetics. A fraud, as well as a philistine, he had been exposed before Parliament and dumped as Country Party leader for 19 years of falsely claiming a university degree. The Opera House gave Hughes a second chance. For him, as for Utzon, it was all about control; about the triumph of homegrown mediocrity over foreign genius.

Differences ensued. One of the first was that Utzon believed the clients should receive information on all aspects of the design and construction through his practice, while the clients wanted a system (notably drawn in sketch form by Davis Hughes) where architect, contractors, and engineers each reported to the client directly and separately. This had great implications for procurement methods and cost control, with Utzon wishing to negotiate contracts with chosen suppliers (such as Ralph Symonds for the plywood interiors) and the New South Wales government insisting contracts be put out to tender (Murray 2004).

Utzon was highly reluctant to respond to questions or criticism from the client's Sydney Opera House executive committee (SOHEC). However, he was greatly supported throughout by a member of the committee and one of the original competition judges, Professor Harry Ingham Ashworth. Utzon was unwilling to compromise on some aspects of his designs that the clients wanted to change.

Utzon's ability was never in doubt, despite questions raised by Davis Hughes, who attempted to portray Utzon as an impractical dreamer. Ove Arup actually stated that Utzon was “probably the best of any I have come across in my long experience of working with architects” and “The Opera House could become the world's foremost contemporary masterpiece if Utzon is given his head.”⁴³

In October 1965, Utzon gave Hughes a schedule setting out the completion dates of parts of his work for stage III. Utzon was at this time working closely with Ralph Symonds, a manufacturer of plywood based in Sydney and highly regarded by many, despite an Arup engineer warning that Ralph Symonds's “knowledge of the design stresses of plywood, was extremely sketchy” and that the technical advice was “elementary to say the least and completely useless for our purposes.” In any case, Hughes shortly after withheld permission for the construction of plywood prototypes for the interiors, and the relationship between Utzon and the client never recovered. By February 1966, Utzon was owed more than $100,000 in fees (Farrelly 2008). Hughes then withheld funding so that Utzon could not even pay his own staff. The government minutes record that following several threats of resignation, Utzon finally stated to Davis Hughes, “If you don't do it, I resign.” Hughes replied: “I accept your resignation. Thank you very much. Goodbye.”

Utzon left the project on February 28, 1966. He said that Hughes's refusal to pay him any fees and the lack of collaboration caused his resignation and later famously described the situation as “Malice in Blunderland.” In March 1966, Hughes offered him a subordinate role as “design architect” under a panel of executive architects, without any supervisory powers over the House's construction, but Utzon rejected this. Utzon left the country, never to return.

Following his resignation, there was great controversy about who was in the right and who was in the wrong. The Sydney Morning Herald initially reported: “No architect in the world has enjoyed greater freedom than Mr. Utzon. Few clients have been more patient or more generous than the people and the Government of NSW. One would not like history to record that this partnership was brought to an end by a fit of temper on the one side or by a fit of meanness on the other.” On March 17, 1966, it reported:

It was not his fault that a succession of Governments and the Opera House Trust should so signally have failed to impose any control or order on the project … . his concept was so daring that he himself could solve its problems only step by step … . his insistence on perfection led him to alter his design as he went along.⁴⁴

The Sydney Opera House opened the way for the immensely complex geometries of some modern architecture. It was one of the first examples of the use of computer-aided design to design complex shapes. The design techniques developed by Utzon and Arup for the Sydney Opera House have been further developed and are now used for architecture, such as works of Gehry and blobitecture, as well as most reinforced concrete structures. The design is also one of the first in the world to use araldite to glue the precast structural elements together and proved the concept for future use.

Opening Day

The Opera House was formally opened by Elizabeth II, Queen of Australia, on October 20, 1973. A large crowd attended. Utzon was not invited to the ceremony, nor was his name mentioned. The opening was televised and included fireworks and a performance of Beethoven's Symphony No. 9.

Discussion Questions

1. Who acted originally as the innovation project manager?
2. What type of innovation was used on the project?
3. Did the project demonstrate that an innovation culture was in place?
4. What type of governance was used at the beginning of the innovation project?
5. What's the danger when there is a lack of governance from the business owners?
6. Can scope creep be controlled on a project as this, and if so, how?
7. Was there any process in place for controlling innovation scope creep?
8. What could have been done to control scope creep?
9. Was firing Utzon (or accepting his resignation) the solution for controlling innovation scope creep?
10. Does the end justify the means? Or, how many people today know that the project was completed 10 years late and 14 times its original budget?

Background

Ampore Faucet Company had grown into one of the world's largest suppliers of faucets for both commercial and home use. Competition was fierce. Consumers would evaluate faucets on artistic design and quality. Each faucet had to be available in at least 25 different colors. Commercial buyers, such as construction companies erecting apartment buildings, seemed more interested in the cost than the average consumer who viewed the faucet as an object of art, irrespective of price.

Ampore did not spend a great deal of money advertising on the radio or on television. Some money was allocated for ads in professional journals. Most of Ampore's advertising and marketing funds were allocated to regional home and garden trade shows and two annual builders' trade shows. One large builder could purchase more than 5,000 components for the furnishing of one newly constructed hotel or one apartment complex. Missing an opportunity to display the new products at these trade shows could easily result in a 6- to 12-month window of lost revenue.

Culture

Ampore Faucet had a noncooperative culture that had a serious impact on innovation project management. Marketing and engineering would never talk to one another. Engineering wanted the freedom to design new products and explore new technologies whereas marketing wanted to control the design process and have final approval to make sure that what was designed could be sold. Some of the conflicts became so intense that senior management refused to intervene and instead allowed the conflicts to grow. Some executives view this as meaningful conflicts with the mistaken belief that this would increase innovations.

The conflict between marketing and engineering became so fierce that early attempts to implement innovation project management failed. Nobody wanted to be the project manager. Functional team members refused to attend team meetings and spent most of their time working on their own pet projects rather than the required work. Line managers also showed little interest in supporting innovation project management because of the conflicts. This became a serious issue when innovation project managers needed support from workers not in their own functional units.

Each functional unit had its own budget for innovation work, and the person responsible for the innovation project was assigned from the funding functional unit. Each functional unit had its own innovation culture. Marketing wanted innovation in colors, design, and aesthetic characteristics. Its projects were primarily incremental innovation and product improvements. Engineering was interested in new technology development and application as well as improvements in quality. Engineering's focus was on radical innovation.

All previous attempts to develop some standardization for project management, especially for innovation projects, were met with resistance. Each functional unit had its own definition of innovation success. Marketing viewed success in terms of yearly sales, whereas engineering defined success as creating a new design that would eventually become commercialized regardless of the number of units sold. Each functional unit had its own forms, guidelines, templates and checklists for its projects. Each functional unit had its own way of managing projects. There were no project management offices in Ampore. Most of the workers viewed innovation project management as their secondary rather than their primary job.

The focus of senior management was more on short-term profitability than long-term innovation benefits. As such, senior management did not establish any lists of strategic goals and objectives, nor did senior management provide any list of prioritized strategic needs. Instead, they gave each functional unit the authority and freedom to establish their own strategic innovation objectives, priorities and supporting budgets.

Project management became so disliked that the procurement manager refused to assign any of her employees to project teams. Instead, she mandated that all project staffing requests for work come through her. She insulated her workers from outside work requests as well as external pressure. She claimed that this would protect them from the continuous conflicts between engineering and marketing.

The Executive Decision

Senior management began to realize that their competitors were becoming more innovative than their firm. The executive council mandated that another attempt to implement good project management practices company-wide must occur quickly. Project management would be needed not only for new product development but also for specialty products and enhancements. The vice presidents for marketing and engineering reluctantly agreed to try and patch up their differences but did not appear confident that any changes would take place. Strange as it may seem, nobody could identify the initial cause of the conflicts or how the trouble actually began. Senior management hired an external consultant to identify the problems, provide recommendations and alternatives, and act as a mediator. The consultant's process would have to begin with interviews.

Engineering Interviews

The following comments were made during engineering interviews:

• “We are loaded down with work. If marketing would stay out of engineering, we could get our job done.”
• “Marketing doesn't understand that there's more work for us to do other than just new product development.”
• “Marketing personnel should spend their time at the country club and in bar rooms. This will allow us in engineering to finish our work uninterrupted!”
• “Marketing expects everyone in engineering to stop what they are doing in order to put out marketing fires. I believe that most of the time the problem is that marketing doesn't know what they want up front. This leads to change after change. Why can't we get a good definition of what we want at the beginning of each project?”

Marketing Interviews

Our livelihood rests heavily on income generated from trade shows. Since new product development is four to six months in duration, we have to beat up on engineering to make sure that our marketing schedules are met. Why can't engineering understand the importance of these trade shows?

Because of the time required to develop new products [4–6 months], we sometimes have to rush into projects without having a good definition of the scope of work required. When a customer at a trade show gives us an idea for a new product, we rush to get the project underway for introduction at the next trade show. We then go back to the customer and ask for more clarification and/or specifications. Sometimes we must work with the customer for months to get the information we need. I know that this is a problem for engineering, but it cannot be helped.

The consultant wrestled with the comments but was still somewhat perplexed. “Why doesn't engineering understand marketing's problems?” pondered the consultant. In a follow-up interview with an engineering manager, the following comment was made:

We are currently working on 375 different projects in engineering, and that includes those which marketing requested. Why can't marketing understand our problems?

Discussion Questions

1. What are the critical issues that impact innovation?
2. What can be done about solving these issues?
3. Can excellence in innovation project management still be achieved and, if so, how? What steps would you recommend?
4. Given the current noncooperative culture and its impact on innovation, how long will it take to achieve a good cooperative innovation project management culture, and even excellence?
5. What obstacles exist in getting marketing and engineering to agree to a singular methodology for innovation project management?
6. What might happen if benchmarking studies indicate that either marketing or engineering are at fault?
7. Assuming an approach for innovation project management can be implemented and agreed to, should it be accompanied by a process for the prioritization of projects, or should some committee external to the methodology accomplish the prioritization?

Background

Two executives worked in a company that focused heavily on incremental innovation. Each executive funded a pet project that focused on radical innovation rather than incremental and had little chance of success. Despite repeated requests by the innovation project managers and team members to cancel the projects, the executives, who were acting as the innovation sponsors, continued their decision to throw away good money after bad money. The sponsors then had to find a way to prevent their embarrassment from such a blunder from becoming apparent to all.

The Story Line

Two vice presidents came up with ideas for pet projects and funded the projects internally using money from their functional areas. Even though there was an R&D group, the projects would be performed within their functional areas. Both projects had budgets close to $2 million and schedules of approximately one year. These were somewhat high-risk radical innovation projects because they both required that a technical breakthrough be made. There was no guarantee that the technical breakthrough could be made at all. And even if the technical breakthrough could be made, both executives estimated that the shelf life of both products would be about one year before becoming obsolete but that they could easily recover their R&D costs.

These two projects were considered as pet projects because they were established at the personal request of two senior managers and without and real business case. Had these two projects been required to go through the formal project selection process, neither project would have been approved. The budgets for these projects were way out of line for the value that the company would receive, and the return on investment would be below minimum levels even if the technical breakthrough could be made. The PMO, which is actively involved in the project selection process, also stated that they would never recommend approval of a project where the end result would have a shelf life of one year or less. Simply stated, these projects existed for the self-satisfaction of the two executives and to gain them prestige from their colleagues.

Nevertheless, both executives found money for their projects and were willing to let the projects go forward without the standard approval process. Each executive was able to get an experienced project manager from their group to manage their pet project.

The Gate Review Meetings

At the first gate review meeting, both project managers stood up and recommended that their projects be canceled and that the resources be assigned to other more promising projects. They both stated that the technical breakthrough needed could not be made in a timely manner. Under normal conditions, both of these project managers should have received medals for bravery in standing up and recommending that their project be canceled. This certainly appeared as a recommendation in the best interest of the company.

But both executives were not willing to give up that easily. Canceling both projects would be humiliating for the two executives that were sponsoring these projects. Instead, both executives stated that the project was to continue on to the next gate review meeting, at which time a decision would be made for possible cancellation of both projects.

At the second gate review meeting, both project managers once again recommended that their projects be canceled. And as before, both executives asserted that the project should continue to the next gate review meeting before a decision would be made.

As luck would have it, the necessary technical breakthrough was finally made, but six months late. That meant that the window of opportunity to sell the products and recover the R&D costs would be six months rather than one year. Unfortunately, the marketplace knew that these products might be obsolete in six months and no sales occurred of either product.

Marketing informed both executives that had they been informed about these two projects, they would have told the executives that the competition was also working on technical breakthroughs that were more advanced than these two projects were attempting. Both executives had to find a way to save face and avoid the humiliation of having to admit that they squandered a few million dollars on two useless R&D projects. This could very well impact their year-end bonuses.

Discussion Questions

1. What type of innovation was used?
2. What innovation mistakes were made?
3. Is it customary for companies to allow executives to have pet or secret innovation projects going on that never follow the normal project approval process?
4. Who got promoted and who got fired? In other words, how did the executives save face?

Naming the Project “Iridium”

Motorola cellular telephone system engineer, Jim Williams, from the Motorola facility near Chicago, suggested the name, Iridium. The proposed 77-satellite constellation reminded him of the electrons that encircle the nucleus in the classical Bohr model of the atom. When he consulted the periodic table of the elements to discover which atom had 77 electrons, he found Iridium—a creative name that had a nice ring. Fortunately, the system had not yet been scaled back to 66 satellites, or else he might have suggested the name Dysprosium.

Obtaining Executive Support

Initially, Bertiger's colleagues and superiors at Motorola had rejected the Iridium concept because of its cost. Originally, the Iridium concept was considered perfect for the US government. Unfortunately, the era of lucrative government-funded projects was coming to an end and it was unlikely that the government would fund a project of this magnitude. However, the idea behind the Iridium concept intrigued Durrell Hillis, the senior vice president and general manager of Motorola's Space and Technology Group. Hillis believed that Iridium was workable if it could be developed as a commercial system. Hillis instructed Bertiger and his team to continue working on the Iridium concept but to keep it quiet (Bennahum 1998):

I created a bootleg project with secrecy so no one in the company would know about it,” Hillis recalls. He was worried that if word leaked out, the ferociously competitive business units at Motorola, all of which had to fight for R&D funds, would smother the project with nay-saying. (p. 194)

After 14 months of rewrites on the commercialized business plan, Hillis and the Iridium team leaders presented the idea to Robert Galvin, Motorola's chairman at the time, who gave approval to go ahead with the project. Robert Galvin, and later his successor and son Christopher Galvin, viewed Iridium as a potential symbol of Motorola's technological prowess and believed that this would become the eighth wonder in the world. In one of the initial meetings, Robert Galvin turned to John Mitchell, Motorola's president and chief operating officer, and said, “If you don't write out a check for this John, I will, out of my own pocket” (Hardy 1996). To the engineers at Motorola, the challenge of launching Iridium's constellation provided considerable motivation. They continued developing the project that resulted in initial service in November 1998 at a total cost of over $5 billion.

Launching the Venture

On June 26, 1990, Hillis and his team formally announced the launch of the Iridium Project to the general public. The response was not very pleasing to Motorola, with skepticism over the fact that this would be a new technology, the target markets were too small, the revenue model was questionable, obtaining licenses to operate in 170 countries could be a problem, and the cost of a phone call might be overpriced. Local phone companies that Motorola assumed would buy into the project viewed Iridium as a potential competitor, since the Iridium system bypassed traditional landlines. In many countries, Postal Telephone and Telegraph (PTT) operators are state owned and a major source of revenue because of the high profit margins. Another issue was that the Iridium Project was announced before permission was granted by the Federal Communications Commission (FCC) to operate at the desired frequencies.

Both Mitchell and Galvin made it clear that Motorola would not go it alone and would absorb the initial financial risk for a hefty price tag of about $3.5 billion. Funds would need to be obtained from public markets and private investors. In order to minimize Motorola's exposure to financial risk, Iridium would need to be set up as a project-financed company. Project financing involves the establishment of a legally independent project company where the providers of funds are repaid out of cash flow and earnings, and where the assets of the unit (and only the unit) are used as collateral for the loans. Debt repayment would come from the project company only rather than from any other entity. A risk with project financing is that the capital assets may have a limited life. The potential limited life constraint often makes it difficult to get lenders to agree to long-term financial arrangements.

Another critical issue with project financing, especially for high-technology projects, is that the projects are generally long term. It would be nearly eight years before service would begin, and in terms of technology, eight years is an eternity. The Iridium Project was certainly a “bet on the future.” And if the project were to fail, the company could be worth nothing after liquidation.

In 1991, Motorola established Iridium Limited Liability Corporation (Iridium LLC) as a separate company. In December 1991, Iridium promoted Leo Mondale to vice president of Iridium International. Financing the project was still a critical issue. Mondale decided that, instead of having just one gateway, there should be as many as 12 regional gateways that plugged into local, ground-based telephone lines. This would make Iridium a truly global project rather than appear as an American-based project designed to seize market share from state-run telephone companies. This would also make it easier to get regulatory approval to operate in 170 countries. Investors would pay $40 million for the right to own their own regional gateway. As stated by Flower (1993):

The motive of the investors is clear: They are taking a chance on owning a slice of a de-facto world monopoly. Each of them will not only have a piece of the company, they will own the Iridium gateways and act as the local distributors in their respective home markets. For them it's a game worth playing.

There were political ramifications with selling regional gateways. What if in the future the US government forbids shipment of replacement parts to certain gateways? What if sanctions are imposed? What if Iridium were to become a political tool during international diplomacy because of the number of jobs it creates?

In addition to financial incentives, gateway owners were granted seats on the board of directors. As described by David Bennahum (1996), reporter for Wired:

Four times a year, 28 Iridium board members from 17 countries gather to coordinate overall business decisions. They met around the world, shuttling between Moscow, London, Kyoto, Rio de Janeiro, and Rome, surrounded by an entourage of assistants and translators. Resembling a United Nations in miniature, board meetings were conducted with simultaneous translation in Russian, Japanese, Chinese, and English. (p. 136)

The partner with the largest equity share was Motorola. For its contribution of $400 million, Motorola originally received an equity stake of 25 percent, and 6 of 28 seats on Iridium's board. Additionally, Motorola made loan guarantees to Iridium of $750 million, with Iridium holding an option for an additional $350 million loan.

For its part, Iridium agreed to $6.6 billion in long-term contracts with Motorola that included a $3.4 billion firm-fixed-price contract for satellite design and launch, and $2.9 billion for operations and maintenance. Iridium also exposed Motorola to developing satellite technology that would provide the latter with significant expertise in building satellite communications systems, as well as vast intellectual property.

The Iridium System

The Iridium system is a satellite-based, wireless personal communications network providing a robust suite of voice features to virtually any destination anywhere on Earth.

The Iridium system comprises three principal components: the satellite network, the ground network, and the Iridium subscriber products, including phones and pagers. The design of the Iridium network allows voice and data to be routed virtually anywhere in the world. Voice and data calls are relayed from one satellite to another until they reach the satellite above the Iridium Subscriber Unit (handset) and the signal is relayed back to Earth.

The Terrestrial and Space-Based Network

The Iridium constellation consists of 66 operational satellites and 11 spares orbiting in a constellation of six polar planes. Each plane has 11 mission satellites performing as nodes in the telephony network. The remaining 11 satellites orbit as spares ready to replace any unserviceable satellite. This constellation ensures that every region on the globe is covered by at least one satellite at all times.

The satellites are in a near-polar orbit at an altitude of 485 miles (780 km). They circle the Earth once every 100 minutes traveling at a rate of 16,832 miles per hour. The satellite weight is 1,500 pounds. Each satellite is approximately 40 feet in length and 12 feet in width. In addition, each satellite has 48 spot beams, 30 miles in diameter per beam.

Each satellite is cross-linked to four other satellites; two satellites in the same orbital plane and two in an adjacent plane. The ground network is composed of the System Control Segment and telephony gateways used to connect into the terrestrial telephone system. The System Control Segment is the central management component for the Iridium system. It provides global operational support and control services for the satellite constellation, delivers satellite-tracking data to the gateways, and performs the termination control function of messaging services. The System Control Segment consists of three main components: four Telemetry Tracking and Control sites, the Operational Support Network, and the Satellite Network Operation Center. The primary linkage between the System Control Segment, the satellites, and the gateways is via K-Band feeder links and cross-links throughout the satellite constellation.

Gateways are the terrestrial infrastructure that provides telephony services, messaging, and support to the network operations. The key features of gateways are their support and management of mobile subscribers and the interconnection of the Iridium network to the terrestrial phone system. Gateways also provide network management functions for their own network elements and links.

Project Initiation: Developing the Business Case

For the Iridium Project to be a business success rather than just a technical success there had to exist an established customer base. Independent studies conducted by A.T. Kearney, Booz, Allen & Hamilton, and Gallup indicated that 34 million people had a demonstrated need for mobile satellite services, with that number expected to grow to 42 million by 2002. Of these 42 million, Iridium anticipated 4.2 million to be satellite-only subscribers, 15.5 million satellite and world terrestrial roaming subscribers and 22.3 million terrestrial roaming-only subscribers.

A universal necessity in conducting business is ensuring that you are never out of touch. Iridium would provide this unique solution to business with the essential communications tool. This proposition of one phone, one number with the capability to be accessed anywhere, anytime was a message that target markets—the global traveler, the mining, rural, maritime industries, government, disaster relief, and community aid groups—would readily embrace.

Also, at the same time of Iridium's conception, there appeared to be another potentially lucrative opportunity in the telecommunications marketplace. When users of mobile or cellular phones crossed international borders, they soon discovered that there existed a lack of common standards thus making some phones inoperable. Motorola viewed this as an opportunity to create a worldwide standard allowing phones to be used anywhere in the world.

The expected breakeven market for Iridium was estimated between 400,000 to 600,000 customers globally, assuming a reasonable usage rate per customer per month. With a launch date for Iridium service established for 1998, Iridium hoped to recover all its investment within one year. By 2002, Iridium anticipated a customer base of 5 million users. The initial Iridium target market had been the vertical market, those of the industry, government, and world agencies that have defended needs and far-reaching communication requirements. Both industrial and public sector customers also had needs. Often isolated in remote locations outside of cellular coverage, industrial users were expected to use handheld Iridium satellite services to complement or replace their existing radio or satellite communications terminals. The vertical markets for Iridium would include:

• Aviation
• Construction
• Disaster relief/emergency
• Forestry
• Government
• Leisure travel
• Maritime
• Media and entertainment
• Military
• Mining
• Oil and gas
• Utilities

Using their own marketing resources, Iridium appeared to have identified an attractive market segment after having screened over 200,000 people, interviewed 23,000 people from 42 countries, and surveyed over 3,000 corporations.

Iridium would also need regional strategic partners, not only for investment purposes and to share the risks, but also to provide services throughout their territories. The strategic regional partners or gateway operating companies would have exclusive rights to their territories and were obligated to market and sell Iridium services. The gateways would also be responsible for end-user sales, activation and for deactivation of Iridium services, account maintenance, and billing.

Iridium would need each country to grant full licenses for access to the Iridium system. Iridium would need to identify the “priority” countries that account for the majority of the business plan.

Because of the number of countries involved in the Iridium network, Iridium would need to establish global customer care centers for support services in all languages. No matter where an Iridium user was located, he or she would have access to a customer service representative in their native language. The customer care centers would be strategically located to offer 24-hours-a-day, 7-days-a-week, and 365-days-a-year support.

The “Hidden” Business Case

The decision by Motorola to invest heavily into the Iridium Project may have been driven by a secondary or hidden business case. Over the years, Motorola achieved a reputation of being a first-mover. With the Iridium Project, Motorola was poised to capture first-mover advantage in providing global telephone service via low-Earth-orbiting satellites. In addition, even if the Iridium Project never resulted in providing service, Motorola would still have amassed valuable intellectual property that would make Motorola possibly the major player for years to come in satellite communications. There may have also been the desire of Robert and Christopher Galvin to have their names etched in history as the pioneers in satellite communication.

Risk Management

Good business cases identify the risks that the project must consider. For simplicity's sake, the initial risks associated with the Iridium Project could be classified as follows.

The Collective Belief

Although the literature doesn't clearly identify it, there was most likely a collective belief among the workers assigned to the Iridium Project. The collective belief is a fervent, and perhaps blind, desire to achieve that can permeate the entire team, the project sponsor, and even the most senior levels of management. The collective belief can make a rational organization act in an irrational manner.

When a collective belief exists, people are selected based on their support for the collective belief. Nonbelievers are pressured into supporting the collective belief and team members are not allowed to challenge the results. As the collective belief grows, both advocates and nonbelievers are trampled. The pressure of the collective belief can outweigh the reality of the results.

The larger the project and the greater the financial risk to the firm, the higher up the collective belief resides. On the Iridium Project, the collective belief originated with Galvin, Motorola's CEO. Therefore, who could possibly function as the person willing to cancel the Iridium Project? Since it most likely should be someone higher up than Galvin, oversight should have been done by someone on the board of directors or even the entire Iridium board of directors. Unfortunately, the entire Iridium board of directors was also part of the collective belief and shirked their responsibility for oversight on the Iridium Project. In the end, Iridium had nobody willing to pull the plug.

Large projects incur large cost overruns and schedule slippages. Making the decision to cancel such a project, once it has started, is very difficult, according to David Davis (1985, 100–101)

The difficulty of abandoning a project after several million dollars have been committed to it tends to prevent objective review and recosting. For this reason, ideally an independent management team—one not involved in the project's development—should do the recosting and, if possible, the entire review. …If the numbers do not holdup in the review and recosting, the company should abandon the project. The number of bad projects that make it to the operational stage serves as proof that their supporters often balk at this decision.

…Senior managers need to create an environment that rewards honesty and courage and provides for more decision making on the part of project managers. Companies must have an atmosphere that encourages projects to succeed, but executives must allow them to fail.

The longer the project, the greater the necessity for the exit champions and project sponsors to make sure that the business plan has “exit ramps” such that the project can be terminated before massive resources are committed and consumed. Unfortunately, when a collective belief exists, exit ramps are purposefully omitted from the project and business plans.

Iridium's Infancy Years

By 1992, the Iridium Project attracted such stalwart companies as General Electric, Lockheed, and Raytheon. Some companies wanted to be involved to be part of the satellite technology revolution, while others were afraid of falling behind the technology curve. In any event, Iridium was lining up strategic partners, but slowly.

The Iridium Plan, submitted to the Federal Communications Commission in August 1992, called for a constellation of 66 satellites, expected to be in operation by 1998, and more powerful than originally proposed, thus keeping the project's cost at the previously estimated $3.37 billion. But the Iridium Project, while based on lofty forecasts of available customers, was now attracting other companies competing for FCC approval on similar satellite systems, including Loral Corp., TRW Inc., and Hughes Aircraft Co., a unit of General Motors Corp. There were at least nine companies competing for the potential billions of dollars in untapped revenue possible from satellite communications.

Even with the increased competition, Motorola was signing up partners. Motorola had set an internal deadline of December 15, 1992, to find the necessary funding for Iridium. Signed letters of intent were received from the Brazilian government and United Communications Co., of Bangkok, Thailand, to buy 5 percent stakes in the project, each now valued at about $80 million. The terms of the agreement implied that the Iridium consortium would finance the project with roughly 50 percent equity and 50 percent debt.

When the December 15 deadline arrived, Motorola was relatively silent on the signing of funding partners, fueling speculation that it was having trouble. Motorola did admit that the process was time-consuming because some investors required government approval before proceeding. Motorola was expected to announce at some point, perhaps in the first half of 1993, whether it was ready to proceed with the next step, namely receiving enough cash from its investors, securing loans, and ordering satellite and group equipment.

As the competition increased, so did the optimism about the potential size of the customer base:

“We're talking about a business generating billions of dollars in revenue,” says John F. Mitchell, Vice Chairman at Motorola. “Do a simple income extrapolation,” adds Edward J. Nowacki, a general manager at TRW's Space & Electronics Group, Redondo Beach, Calif., which plans a $1.3 billion, 12-satellite system called Odyssey. “You conclude that even a tiny fraction of the people around the world who can afford our services will make them successful.” Mr. Mitchell says that if just 1 percent to 1.5 percent of the expected 100 million cellular users in the year 2000 become regular users at $3 a minute, Iridium will breakeven. How does he know this? “Marketing studies,” which he won't share. TRW's Mr. Nowacki says Odyssey will blanket the Earth with two-way voice communication service priced at “only a slight premium” to cellular. “With two million subscribers we can get a substantial return on our investment,” he says. “Loral Qualcomm Satellite Services, Inc. aims to be the ‘friendly’ satellite by letting phone-company partners use and run its system's ground stations”,” says Executive Vice President Anthony Navarra. “By the year 2000 there will be 15 million unserved cellular customers in the world,” he says (Keller 1993, B1).

But while Motorola and other competitors were trying to justify their investment with “inflated market projections” and a desire from the public for faster and clearer reception, financial market analysts were not so benevolent. First, market analysts questioned the size of the customer base that would be willing to pay $3,000 or more for a satellite phone in addition to $3–$7 per minute for a call. Second, the system required a line-of-sight transmission, which meant that the system would not work in buildings or in cars. If a businessman were attending a meeting in Bangkok and needed to call his company, he must exit the building, raise the antenna on his $3,000 handset, point the antenna toward the heavens, and then make the call. Third, the low-flying satellites would eventually crash into the Earth's atmosphere every 5–7 years because of atmospheric drag and would need to be replaced. That would most likely result in high capital costs. And fourth, some industry analysts believed that the start-up costs would be closer to $6 billion to $10 billion rather than the $3.37 billion estimated by Iridium. In addition, the land-based cellular phone business was expanding in more countries, thus creating another competitive threat for Iridium.

The original business case needed to be reevaluated periodically. But with strong collective beliefs and no exit champions, the fear of a missed opportunity, irrespective of the cost, took center stage.

Reasonably sure that 18 out of 21 investors were on board, Motorola hoped to start launching test satellites in 1996 and begin commercial service by 1998. But critics argued that Iridium might be obsolete by the time it actually starts working.

Eventually, Iridium was able to attract financial support from 19 strategic partners:

• AIG Affiliated Companies
• China Great Wall Industry Corporation (CGWIC)
• Iridium Africa Corporation (based in Cape Town)
• Iridium Canada, Inc.
• Iridium India Telecom Private Ltd, (ITIL)
• Iridium Italia S.p.A.
• Iridium Middle East Corporation
• Iridium SudAmerica Corporation
• Khrunichev State Research and Production Space Center
• Korea Mobile TELECOM
• Lockheed Martin
• Motorola
• Nippon Iridium Corporation
• Pacific Electric Wire & Cable Co. Ltd (PEWC)
• Raytheon
• STET
• Sprint
• Thai Satellite Telecommunications Co., Ltd.
• Verbacom

Seventeen of the strategic partners also participated in gateway operations with the creation of operating companies.

As previously noted, the Iridium board of directors consisted of 28 telecommunications executives. All but one board member was a member of the consortium as well. This made it very difficult for the board to fulfill its oversight obligation effectively given the members' vested/financial interest in the Iridium Project.

In August 1993, Lockheed announced that it would receive $700 million in revenue for satellite construction. Lockheed would build the satellite structure, solar panels, attitude, and propulsion systems, along with other parts and engineering support. Motorola and Raytheon Corp. would build the satellite's communications gear and antenna.

In April 1994, McDonnell Douglas Corp. received from Iridium a $400 million contract to launch 40 satellites for Iridium. Other contracts for launch-services would be awarded to Russia's Khrunichev Space Center and China's Great Wall Industry Corporation, both members of the consortium. The lower-cost contracts with Russia and China were putting extraordinary pressure on U.S. providers to lower their costs.

At the same time, one of Iridium's competitors, the Globalstar system, which was a 48-satellite mobile telephone system led by Loral Corporation, announced that it intended to charge 65 cents per minute in the areas it served. Iridium's critics were arguing that Iridium would be too pricey to attract a high volume of callers (Cole 1994, A4).

Debt Financing

In September 1994, Iridium said that it had completed its equity financing by raising an additional $733.5 million. This brought the total capital committed to Iridium through equity financing to $1.57 billion. The completion of equity financing permitted Iridium to enter into debt financing to build the global wireless satellite network.

In September 1995, Iridium announced that it would be issuing $300 million 10-year senior subordinated discounted notes rated Caa by Moody's and CCC+ by Standard & Poor's, via the investment banker Goldman Sachs Inc. The bonds were considered a high-risk, high-yield “junk” bonds after investors concluded that the rewards weren't worth the risk.

The rating agencies cited the reasons for the low rating to be yet unproven sophisticated technology and the fact that a significant portion of the system's hardware would be located in space. But there were other serious concerns:

• The ultimate cost of the Iridium Project would be much higher than projected, and it was unlikely that Iridium would recover that cost.
• Iridium would be hemorrhaging cash for several more years before service would begin.
• The optimistic number of potential customers for satellite phones may not choose the Iridium system.
• The number of competitors had increased since the Iridium concept was first developed.
• If Iridium defaulted on its debt, the investors could lay claim to Iridium's assets. But what would investors do with more than 66 satellites in space, waiting to disintegrate on reentering the atmosphere?

Iridium was set up as “project financing” in which case, if a default occurred, only the assets of Iridium could be attached. With project financing, the consortium's investors would be held harmless for any debt incurred from the stock and bond markets and could simply walk away from Iridium. These risks associated with project financing were well understood by those that invested in the equity and credit markets.

Goldman Sachs & Co., the lead underwriter for the securities offering, determined that for the bond issue to be completed successfully, there would need to exist a completion guarantee from investors with deep pockets, such as Motorola. Goldman Sachs cited a recent $400 million offering by one of Iridium's competitors, Globalstar, which had a guarantee from the managing general partner, Loral Corp. (Hardy 1995, A5).

Because of the concern by investors, Iridium withdrew its planned $300 million debt offering. Also, Globalstar, even with its loan guarantee, eventually withdrew its $400 million offering. Investors wanted both an equity position in Iridium and a 20 percent return. Additionally, Iridium would need to go back to its original 17-member consortium and arrange for internal financing.

In February 1996, Iridium had raised an additional $315 million from the 17-member consortium and private investors. In August 1996, Iridium had secured a $750 million credit line with 62 banks co-arranged by Chase Securities Inc., a unit of Chase Manhattan Corp. and the investment banking division of Barclays Bank PLC. The credit line was oversubscribed by more than double its original goal because the line of credit was backed by a financial guarantee by Motorola and its AAA credit rating. Because of the guarantee by Motorola, the lending rate was slightly more than the 5.5 percent baseline international commercial lending rate and significantly lower than the rate in the $300 million bond offering that was eventually recalled.

Despite this initial success, Iridium still faced financial hurdles. By the end of 1996, Iridium planned on raising more than $2.65 billion from investors. It was estimated that more than 300 banks around the globe would be involved, and that this would be the largest private debt placement ever. Iridium believed that this debt placement campaign might not be that difficult since the launch date for Iridium services was getting closer.

The M-Star Project

In October 1996, Motorola announced that it was working on a new project, dubbed M-Star, which would be a $6.1 billion network of 72 low-orbit satellites capable of worldwide voice, video, and high-speed data links targeted at the international community. The project was separate from the Iridium venture and was expected to take four years to complete after FCC approval. According to Bary Bertiger, now corporate vice president and general manager of Motorola's satellite communications group, “Unlike Iridium, Motorola has no plans to detach M-Star as a separate entity. We won't fund it ourselves, but we will have fewer partners than in Iridium” (Hardy 1996, B4).

The M-Star Project raised some eyebrows in the investment community. Iridium employed 2,000 people, but M-Star had only 80. The Iridium Project generated almost 1100 patents for Motorola, and that intellectual property would most likely be transferred to M-Star. Also, Motorola had three contracts with Iridium for construction and operation of the global communication system providing for approximately $6.5 billion in payments to Motorola over a 10-year period that began in 1993. Was M-Star being developed at the expense of Iridium? Could M-Star replace Iridium? What would happen to the existing 17-member consortium at Iridium if Motorola were to withdraw its support in favor of its own internal competitive system?

A New CEO

In 1996, Iridium began forming a very strong top management team with the hiring of Dr. Edward Staiano as CEO and vice chairman. Prior to joining Iridium in 1996, Staiano had worked for Motorola for 23 years, during which time he developed a reputation for being hard-nosed and unforgiving. During his final 11 years with Motorola, Staiano led the company's General Systems Sector to record growth levels. In 1995, the division accounted for approximately 40 percent of Motorola's total sales of $27 billion. In leaving Motorola's payroll for Iridium's, Staiano gave up a $1.3 million per year contract with Motorola for a $500,000 base salary plus 750,000 Iridium stock options that vested over a five-year period. Staiano commented (Hardy 1996, B8):

I was spending 40 percent to 50 percent of my time [at Motorola] on Iridium anyway… . If I can make Iridium's dream come true, I'll make a significant amount of money.

Project Management at Motorola (and Iridium)

Motorola fully understood the necessity of good project management on an effort of this magnitude. Just the building, launching, and positioning of the satellites would require cooperative efforts of some 6000 engineers located in the United States, Ireland, Italy, Canada, China, India, and Germany. The following were part of Motorola's project management practices on the Iridium Project:

• Selection of partners. Motorola had to find highly qualified partners that would be willing to be upfront with all problems and willing to work with teams to find resolutions to these problems as soon as they surfaced. Teamwork and open communications would be essential.
• Existing versus new technology. Motorola wanted to use as much existing technology as possible rather than completely “reinvent the wheel.” This was critical when considering that the Iridium Project would require upward of 15 million lines of code. Motorola estimated that only about 2 million lines of code would need to be prepared from scratch. The rest would come from existing time-tested legacy software from existing projects.
• Use of the Capability Maturity Model (CMM). Each strategic partner was selected and evaluated against their knowledge of the CMM developed by the Software Engineering Institute (SEI) at Carnegie-Mellon University. In many cases, Motorola would offer a crash course in CMM for some strategic partners. In 1995, Motorola had reached level 3 of the 5 levels in CMM and had planned to reach level 4 by 1996.
• The work breakdown structure (WBS). The WBS was decomposed into major systems, then subsystems and then products.
• Scheduling systems. Primavera Project Planner was the prime tool used for planning, tracking progress, and quickly spotting scheduling bottlenecks. The level 1 schedule on Primavera was a summary schedule for executive-level briefings. Level 2 was a more detailed schedule. Level 3 schedules were for line managers. Level 4 schedules were for the product teams.
• Tradeoffs. Scope change control processes were established for tradeoffs on scope, cost, schedule, and risks. Considerable flexibility in product development was provided to the partners and contractors. There was a decentralization of decision making and contractors were empowered to make decisions. These meant that all other product teams that could be affected by a contractor's decision would be notified and provide feedback.

By 1996, 23 out of 47 major milestones were completed on or ahead of schedule and under budget. This was in contradiction to the 1994 Standish Group report that cited that less than 9 percent of large software projects come in on time and within budget.

Satellite Launches

At 11:28 a.m. on a Friday morning the second week of January 1997, a Delta 2 rocket carrying a global positioning system (GPS) exploded on launch, scattering debris above its Cape Canaveral launch pad. The launch, which was originally scheduled for the third quarter of 1996, would certainly have an impact on Iridium's schedule while an industry board composed of representatives from McDonnell-Douglas and the Air Force determined the cause of the explosion. Other launches had already been delayed for a variety of technical reasons.

In May 1997, after six failed tries, the first five Iridium satellites were launched. Iridium still believed that the target date for launch of service, September 1998, was still achievable but that all slack in the schedule had been eliminated due to the earlier failures.

By this time, Motorola had amassed tremendous knowledge on how to mass-produce satellites. As described by Bennahum (1998):

The Iridium constellation was built on an assembly line, with all the attendant reduction in risk and cost that comes from doing something over and over until it is no longer an art but a process. At the peak of this undertaking, instead of taking 18 to 36 months to build one satellite, the production lines disgorged a finished bird every four and a half days, sealed it in a container, and placed it on the flatbed of an idling truck that drove it to California or Arizona, where a waiting Boeing 747 carried it to a launchpad in the mountains of Taiyuan, China, or on the steppes of Baikonur in Kazakhstan.

An Initial Public Offering (IPO)

Iridium was burning cash at the rate of $100 million per month. Iridium filed a preliminary document with the Security and Exchange Commission (SEC) for an initial public offering of 10 million shares to be offered at $19 to $21 a share. Because of the launch delays, the IPO was delayed.

In June 1997, after the first five satellites were placed in orbit, Iridium filed for an IPO of 12 million shares priced at $20 per share. This would cover about three months of operating expenses, including satellite purchases and launch costs. The majority of the money would go to Motorola.

Signing up Customers

The reality of the Iridium concept was now at hand. All that was left to do was to sign up 500,000 to 600,000 customers, as predicted, to use the service. Iridium set aside $180 million for a marketing campaign including advertising, public relations and worldwide, and direct mail effort. Part of the advertising campaign included direct mail translated into 13 languages, ads on television and on airlines, airport booths, and Internet web pages.

How to market Iridium was a challenge. People would certainly hate the phone. According to John Windolph, executive director of marketing communications at Iridium, “It's huge! It will scare people. It is like a brick-size device with an antenna like a stout bread stick. If we had a campaign that featured our product, we'd lose.” The decision was to focus on the fears of being out of touch. Thus the marketing campaign began. But Iridium still did not have a clear picture of who would subscribe to the system. An executive earning $700,000 would probably purchase the bulky phone, have his or her assistant carry the phone in their briefcase, be reimbursed by their company for the use of the phone, and pay $3 to $7 per minute for calls, also a business expense. But are there 600,000 executives worldwide that need the service?

There were several other critical questions that needed to be addressed. How do we hide or downplay the $3400 purchase price of the handset and the usage cost of $7 per minute? How do we avoid discussions about competitors that are offering similar services at a lower cost? With operating licenses in about 180 countries, do we advertise in all of them? Do we take out ads in Oil and Gas Daily? Do we advertise in girlie magazines? Do we use full-page or double-page spreads?

Iridium had to rely heavily on its “gateway” partners for marketing and sales support. Iridium itself would not be able to reach the entire potential audience. Would the gateway partners provide the required marketing and sales support? Do the gateway partners know how to sell the Iridium system and the associated products?

The answer to these questions appeared quickly (Cauley 1999, A1):

Over a matter of weeks, more than one million sales inquiries poured into Iridium's sales offices. They were forwarded to Iridium's partners—and many of them promptly disappeared, say several Iridium insiders. With no marketing channels and precious few sales people in place, most global partners were unable to follow up on the inquiries. A mountain of hot sales tips soon went cold.

Iridium's Rapid Ascent

On November 1, 1998, the Iridium system was officially launched. It was truly a remarkable feat that the 11-year project was finally launched, just a little more than a month late”:

After 11 years of hard work, we are proud to announce that we are open for business. Iridium will open up the world of business, commerce, disaster relief and humanitarian assistance with our first-of-its-kind global communications service… The potential use of Iridium products is boundless. Business people who travel the globe and want to stay in touch with home and office, industries that operate in remote areas—all will find Iridium to be the answer to their communications needs.⁴⁵

On November 2, 1998, Iridium began providing service. With the Iridium system finally up and running, most financial analysts issued “buy” recommendations for Iridium stock with expected yearly revenues of $6 to $7 billion within five years. On January 25, 1999, Iridium CEO Ed Staiano participated in a news conference call to discuss the company's earnings for the fourth-quarter of 1998:

In the fourth quarter of 1998, Iridium made history as we became the first truly global mobile telephone company. Today, a single wireless network, the Iridium Network, covers the planet. And we have moved into 1999 with an aggressive strategy to put a large number of customers on our system, and quickly transform Iridium from a technological event to a revenue generator. We think the prospects for doing this are excellent. Our system is performing at a level beyond expectations.

Financing is now in place through projected cash flow positives. Customer interest remains very high and a number of potentially large customers have now evaluated our service and have given it very high ratings. With all of this going for us, we are in position to sell the service and that is precisely where we are focusing the bulk of our efforts.⁴⁶

Roy Grant, chief financial officer, also participated in the call:

Last week Iridium raised approximately $250 million through a very successful 7.5 million-share public offering. This offering had three major benefits. It provided $250 million of cash to our balance sheet. It increased our public float to approximately 20 million shares. And it freed up restrictions placed on $300 million of the $350 million of Motorola guarantees. These restrictions were placed on that particular level of guarantees by our bankers in our $800 million secured credit facility.

With this $250 million, combined with the $350 million of additional guarantees from Motorola, this means we have approximately $600 million of funds in excess of what we need to break cash flow breakeven. This provides a significant contingency for the company.⁴⁷

Iridium's Rapid Descent

It took more than a decade for the Iridium Project to ascend and only a few months for descent. In the first week of March, almost five weeks after the January teleconference, Iridium's financial woes began to surface. Iridium had expected 200,000 subscribers by the end of 1998 and additional subscribers at a rate of 40,000 per month. Iridium's bond covenants stated a target of 27,000 subscribers by the end of March. Failure to meet such a small target could send investor confidence spiraling downward. Iridium had only 10,000 subscribers. The market that was out there 10 years ago was not the market that was there today. Also, 10 years ago there was little competition for Iridium.

Iridium cited the main cause of the shortfall in subscriptions as being shortages of phones, glitches in some of the technology, software problems and, most important, a lack of trained sales channels. Iridium found out that it had to train a sales staff and that Iridium itself would have to sell the product, not its distributors. The investor community did not appear pleased with the sales problem that should have been addressed years ago, not four months into commercial service.

Iridium's advertising campaign was dubbed “Calling Planet Earth” and promised that you had the freedom to communicate anytime and anywhere. This was not exactly true, because the system could not work within buildings or even cars. Furthermore, Iridium underestimated the amount of time subscribers would require to examine and test the system before signing on. In some cases, this would be six months.

Many people blamed marketing and sales for Iridium's rapid descent (Surowieckipp 1999):

True, Iridium committed so many marketing and sales mistakes that its experiences could form the basis of a textbook on how not to sell a product. Its phones started out costing $3,000, were the size of a brick, and didn't work as promised. They weren't available in stores when Iridium ran a $180 million advertising campaign. And Iridium's prices, which ranged from $3.00 to $7.50 a call, were out of this world.

Iridium's business plan was flawed. With service beginning on November 2, 1998, it was unlikely that 27,000 subscribers would be on board by March of 1999, given the time required to test the product. The original business plan required that the consortium market and sell the product prior to the onset of service. But selling the service from just a brochure was almost impossible. Subscribers want to touch the phone, use it, and test it prior to committing to a subscription.

Iridium announced that it was entering into negotiations with its lenders to alter the terms of an $800 million secured credit agreement due to the weaker-than-expected subscriber and revenue numbers. Covenants on the credit agreement are shown in Table 13-8:

The stock, which had traded as high as almost $73 per share, was now at approximately $20 per share. And, in yet another setback, the chief financial officer, Roy T. Grant, resigned.

The Iridium “Flu”

The bankruptcy of Iridium was having a flu-like effect on the entire industry. ICO Global Communications, one of Iridium's major competitors, also filed for bankruptcy protection just two weeks after the Iridium filing. ICO failed to raise $500 million it sought from public-rights offerings that had already been extended twice. Another competitor, the Globalstar Satellite Communications System, was still financially sound (Hardy 1999, 216–217).

They [Iridium) set everybody's expectations way too high.

—Anthony Navarro, Globalstar Chief Operating Officer

Searching for a White Knight

Iridium desperately needed a qualified bidder who would function as a white knight. It was up to the federal bankruptcy court to determine whether someone was a qualified bidder. A qualified bidder was required to submit a refundable cash deposit or letter of credit issued by a respected bank that would equal the greater of $10 million or 10 percent of the value of the amount bid to take control of Iridium.

According to bankruptcy court filing, Iridium was generating revenue of $1.5 million per month. On December 9, 1999, Motorola agreed to a $20 million cash infusion for Iridium. Iridium desperately needed a white knight quickly or it could run out of cash by February 15, 2000. With a monthly operating cost of $10 million, and a staggering cost of $300 million every few years for satellite replenishment, it was questionable if anyone could make a successful business from Iridium's assets because of asset specificity.

The cellular-phone entrepreneur Craig McCaw planned on a short-term cash infusion while he considered a much larger investment to rescue Iridium. He was also leading a group of investors who pledged $1.2 billion to rescue the ICO satellite system that filed for bankruptcy protection shortly after the Iridium filing (WSJ 2000, 1).

Several supposedly white knights came forth, but Craig McCaw's group was regarded as the only credible candidate. Although McCaw's proposed restructuring plan was not fully disclosed, it was expected that Motorola's involvement would be that of a minority stakeholder. Also, under the restructuring plan, Motorola would reduce its monthly fee for operating and maintaining the Iridium system from $45 million to $8.8 million (Thurm 2000a, 1).

The Definition of Failure (October 1999)

The Iridium network was an engineering marvel. Motorola's never-say-die attitude created technical miracles and overcame NASA-level technical problems. Iridium overcame global political issues, international regulatory snafus and a range of other geopolitical issues on seven continents. The Iridium system was, in fact, what Motorola's Galvin called the eighth wonder of the world.

But did the bankruptcy indicate a failure for Motorola? Absolutely not! Motorola collected $3.65 billion in Iridium contracts. Assuming $750 million in profit from these contracts, Motorola's net loss on Iridium was about $1.25 billion. Simply stated, Motorola spent $1.25 billion for a project that would have cost them perhaps as much as $5 billion out of their own pocket had they wished to develop the technology themselves. Iridium provided Motorola with more than 1000 patents in building satellite communication systems. Iridium allowed Motorola to amass a leadership position in the global satellite industry. Motorola was also signed up as the prime contractor to build the 288-satellite “Internet In the Sky,” dubbed the Teledesic Project. Backers of the Teledesic Project, which had a price tag of $15 billion to transmit data, video and voice, included Boeing, Microsoft's Chairman Bill Gates, and cellular magnate Craig McCaw. Iridium had enhanced Motorola's reputation for decades to come.

Motorola stated that it had no intention of providing additional funding to ailing Iridium, unless, of course, other consortium members followed suit. Several members of the consortium stated that they would not provide any additional investment and were considering liquidating their involvement in Iridium (Thurm 2000b, 1).

In March 2000, McCaw withdrew its offer to bail out Iridium even at a deep discount, asserting that his efforts would be spent on salvaging the ICO satellite system instead. This, in effect, signed Iridium's death warrant. One of the reasons for McCaw's reluctance to rescue Iridium may have been the discontent by some of the investors who would have been completely left out as part of the restructuring effort, thus losing perhaps their entire investment.

The Satellite Deorbiting Plan

With the withdrawal of McCaw's financing, Iridium notified the US Bankruptcy Court that Iridium had not been able to attract a qualified buyer by the deadline assigned by the court. Iridium would terminate its commercial service after 11:59 p.m. on March 17, 2000, and would begin the process of liquidating its assets.

Immediately following the Iridium announcement, Motorola issued the following press release:

Motorola will maintain the Iridium satellite system for a limited period of time while the deorbiting plan is being finalized. During this period, we also will continue to work with the subscribers in remote locations to obtain alternative communications. However, the continuation of limited Iridium service during this time will depend on whether the individual gateway companies, which are separate operating companies, remain open. In order to support those customers who purchased Iridium service directly from Motorola, Customer Support Call Centers and a website that are available 24 hours a day, seven days a week have been established by Motorola. Included in the information for customers is a list of alternative satellite communications services.

The deorbiting plan would likely take two years to complete at a cost of $50 million to $70 million. This would include all 66 satellites and the other 22 satellites in space serving as spare or decommissioned failures. Iridium would most likely deorbit the satellites four at a time by firing their thrusters to drop them into the atmosphere, where they would burn up.

Iridium Is Rescued for $25 Million

In November 2000, a group of investors led by an airline executive won bankruptcy court approval to form Iridium Satellite Corporation and purchase all remaining assets of failed Iridium Corporation. The purchase was at a fire-sale price of $25 million, which was less than a penny on the dollar. As part of the proposed sale, Motorola would turn over responsibility for operating the system to Boeing. Although Motorola would retain a 2 percent stake in the new system, Motorola would have no further obligations to operate, maintain, or decommission the constellation.

Almost immediately after the announcement, Iridium Satellite was awarded a $72 million contract from the Defense Information Systems Agency, which is part of the Department of Defense (DoD) (Satellite Today 2000, 1):

Iridium will not only add to our existing capability, it will provide a commercial alternative to our purely military systems. This may enable real civil/military dual use, keep us closer to leading edge technologically, and provide a real alternative for the future.

—Dave Oliver, Principal Deputy Undersecretary of Defense for Acquisition

Iridium had been rescued from the brink of extinction. As part of the agreement, the newly formed company acquired all of the assets of the original Iridium and its subsidiaries. This included the satellite constellation, the terrestrial network, Iridium real estate, and the intellectual property originally developed by Iridium. Because of the new company's significantly reduced cost structure, it was able to develop a workable business model based on a targeted market for Iridium's products and services (Paterik 2005).

Everyone thinks the Iridium satellites crashed and burned, but they're all still up there.

—Weldon Knape, WCC Chief Executive Officer

Shareholder Lawsuits

The benefit to Motorola, potentially at the expense of Iridium and its investors, did not go unnoticed. At least 20 investor groups filed suit against Motorola and Iridium, citing:

• Motorola milked Iridium and used the partners' money to finance its own foray into satellite communication technology.
• By using Iridium, Motorola ensured that its reputation would not be tarnished if the project failed.
• Most of the money raised through the IPOs went to Motorola for designing most of the satellite and ground-station hardware and software.
• Iridium used the proceeds of its $1.45 billion in bonds, with interest rates from 10.875 percent to 14 percent, mainly to pay Motorola for satellites.
• Defendants falsely reported achievable subscriber numbers and revenue figures.
• Defendants failed to disclose the seriousness of technical issues.
• Defendants failed to disclose delays in handset deliveries.
• Defendants violated covenants between itself and its lenders.
• Defendants delayed disclosure of information, provided misleading information, and artificially inflated Iridium's stock price.
• Defendants took advantage of the artificially inflated price to sell significant amounts of their own holdings for millions of dollars in personal profit.

The Bankruptcy Court Ruling

On September 4, 2007, after almost 10 months, the Bankruptcy Court in Manhattan ruled in favor or Motorola and irritated the burned creditors that had hoped to get a $3.7 billion judgment against Motorola. The judge ruled that even though financial experts now know that Iridium was a hopeless one-way cash flow, flawed technology project, and doomed business model, and thus that the capital markets were “terribly wrong” about Iridium's hopes for huge profits, Iridium was “solvent” during the critical period when it successfully raised rather impressive amounts of debt and equity in the capital markets. Even when the bad news began to appear, Iridium's investors and underwriters still believed that Iridium had the potential to become a viable enterprise.

The day after the court ruling, newspapers reported that Iridium LLC, the now privately held company, was preparing to raise about $500 million in a private equity offering to be followed by an IPO within the next year or two.

Epilogue 2011

When Iridium went into bankruptcy, it was considered as a technical masterpiece but a business failure. While many people were willing to write off Iridium, it is alive and doing reasonably well. Following the court ruling in 2007, Iridium announced plans for the second-generation Iridium satellites called Iridium NEXT. Satellite launches for Iridium NEXT would begin in 2015 and be completed by 2017. The original Iridium satellites that were expected to have a life expectancy of 5–7 years after their launch in 1997–1998 were now expected to be fully operational until 2014 through 2020.

Iridium was able to receive new contracts from the US government and also attract new users. Iridium also created a consortium of investors that would provide financial support. On June 2, 2010, Iridium announced the award of a $2.9 billion contract to Thales Alenia Space for satellite procurement. At the same time, a $492 million contract was awarded to Space X for the launch of these satellites from Vandenberg Air Force Base in California.

In 2010, Iridium stock had a high of $11.13 and a low of $6.27. The market capitalization was $656 million and the earnings per share were $.09. But while Iridium was maintaining its growth, there were new risks that had to be considered:

• There are too many satellites in space, and there is a risk that an Iridium satellite will collide with another satellite. (An Iridium satellite did collide with a Russian satellite.) Some people say that this is a defined and acceptable risk.
• There is also the risk of swarms of whirling debris hitting the Iridium satellites.
• Additional spare satellites may be needed and perhaps not every plane will have a spare. Typically, moving satellites can take up to two weeks and consume a great deal of fuel, thus shortening the satellite's life expectancy.
• The original Iridium satellites were manufactured on an assembly line. In its peak during 1997–1998, Iridium produced a satellite every 4.3 days, whereas single satellite development was typically 21 days. Iridium was also able to keep construction costs at about $5 million per satellite. This process would have to be duplicated again or even improved on.
• Some people argue that Iridium's survival is based on the large number of contracts it receives from the US government. If the government reduces its support or even pulls out of Iridium, the financial risks may significantly increase.

Epilogue 2019

On October 29, 2018, Lion Air Flight JT 610 crashed shortly after takeoff from Jakarta, killing all 189 people on board (Tangel and Wall 2018). Less than six months later, on March 10, 2019, an Ethiopian Airlines jet crashed on takeoff, killing 157 aboard (Korte 2019). Both planes were Boeing 737 MAX 8 jetliners.

It can take months to get black box data from plane crashes. But within a week of the Ethiopian Airlines crash, the US Federal Aviation Administration (FAA) was receiving raw data from Aireon LLC, the brainchild of Iridium (Wall 2019):

Using gear it has placed on satellites, Aireon gathers data such as a plane's speed, heading, altitude, and position. It gets updates every eight seconds or less. Air-traffic-control providers increasingly use the data to track planes from tarmac to tarmac—a capability only made possible with the development of sophisticated satellite networks.

The fact that it was possible traces back about a decade, when Iridium was developing concepts for a new constellation of satellites and recognized that its satellites had excess capacity. CEO Matt Desch and another top executive, Don Thoma, decided to focus on air-traffic control, and thus, in conjunction with Nav Canada, spun off Aireon as an aircraft-tracking company using Iridium NEXT satellites that carry Aireon flight trackers. Thoma left Iridium to run Aireon (Wall 2019).

Once governments from the United States, Canada, and others started crunching the data provided by Aireon, it was clear that the two crashes had exposed a serious safety issue. A day after declaring the planes safe to fly, the FAA joined other countries in grounding the 737 MAX.

Iridium ended 2018 with 1,121,000 billable subscribers for its payload and other data services:

Our core business has never been stronger, and momentum in commercial IoT continues to fuel innovation and new applications, which are driving new commercial partnerships and subscriber growth. We achieved our highest revenue growth as a public company and our best OEBITDA growth in seven years… . With the completion of the Iridium(R) NEXT upgrade of our constellation, our financial transformation is well underway. Having now completed an intense period of capital investment, we are turning our attention to a new growth phase for the company that should deliver new sources of revenue and OEBITDA growth, supporting significant free cash flow that can benefit shareholders.⁴⁹

The company continues to be at the front edge of technological breakthroughs, proving that the need for Iridium still exists.

Discussion Questions

1. What type of innovation project was Iridium?
2. Did the innovation project have a sponsor?
3. Did the project require a technical breakthrough?
4. Was there a valid business case for Iridium?
5. Was the project co-creation with its customers?
6. Did the so-called business case change?
7. Why was Iridium a Limited Liability Corporation (LLC)?
8. Did Iridium understand the risks?
9. How is Iridium adapting to a quick-paced technological landscape?