(FORTUNE Magazine) – AN IMPRESSIVE turnaround, a popular CEO, a magnificent stock performance, and the potent deployment of a great brand name -- no wonder Wall Street can't stop genuflecting before the Walt Disney Co. But for all the reverential reviews, Disney's most important achievement -- the one that makes the others possible -- has gone largely unnoticed. The company has fashioned a new way of operating its businesses that combines Hollywood's creative chutzpah and strict financial self-discipline. This dynamic fusion lets executives dream up ideas and then act on them with unusual speed and agility. The Disney team has also derived a set of tactics and precepts that it applies like a crowbar throughout its divisions to leverage their success. The results have been as dramatic as if CEO Michael Eisner, like Mickey in Fantasia, had somehow purloined the sorcerer's hat and conjured up a Niagara Falls of cold cash. Says Texas investor Sid Bass, whose family owns the largest stake in Disney: ''The company is as well run as any I have seen.'' A strapping youth, Disney is coming of age. With its unique franchises in theme parks, films, TV, and consumer products, the company is aggressively positioning itself as a worldwide enterprise that can exploit America's overwhelming dominance in the entertainment industry. It may be moving a bit too aggressively in some areas, using its considerable muscle in a manner that has earned it the enmity not only of competitors but also of suppliers. Some who have dealt closely with the company even insist that beneath Mickey's cheerful demeanor is an unfriendly rat. But Eisner & Co. continue to post numbers as dizzying as a wild theme park ride. Revenues and net income have swelled at an average annual rate of 23% and 50%, respectively, since Eisner and President Frank Wells, backed by Walt's nephew Roy Disney, stormed the Magic Kingdom in September 1984 and shook the moribund company out of its Sleeping Beauty-like slumber. The company's return on equity has jumped from 8% to 22%, and its market capitalization has ballooned from $2 billion to $16 billion, making Disney the world's most valuable entertainment company, worth about twice as much as runner-up Time Warner (owner of FORTUNE's publisher). Some industry analysts think the stock, which has risen from a split-adjusted $14 a share in 1984 to a recent high of $136, will likely trade above $200 within two years. Says Fred Anschel of Dean Witter Reynolds: ''It is quite possible to see rising earnings for Disney into the next millennium.'' The product Disney sells -- unique synthetic experiences -- is entirely different from food and autos. The company is nevertheless a business run like many others, only with more imagination. Many of the methods used at Disney have relevance for any manager eager to exploit creative ideas without letting the risks of developing them get out of hand. Michael Eisner, affable and self-deprecating, is 6 foot 3 with a boyish grin, close-set eyes, and the hoarse voice of a Mafia don. Although he can't draw, he is in many ways more Walt than Walt Disney. A devoted family man, Eisner, 47, sprinkles his whimsical letter to the shareholders in the company's annual report with references to the grades and activities of his three teenage sons. (''For your company to earn five times the net income it did when Breck started high school is almost as big an accomplishment as the completion of his applications to college.'') As the TV host of the Magical World of Disney, he has become one of the most easily recognized CEOs in America and evidently one of the most popular: He receives some 25 speech requests a week. Last year he was also the country's highest-paid CEO. Counting gains on stock options he exercised, he took home over $40 million. Eisner resists the idea that he is Disney's creative spark plug, but when you tour backstage at the pavilions of Epcot Center in Orlando, Florida, or walk through the miles of tunnels under the Magic Kingdom at Disney World, it always seems that he, like Kilroy, was there. In the carpentry shop: ''Michael asked us to put backs on these park benches.'' At the Making of Me film in the newly opened Wonders of Life pavilion: ''This attraction was Michael's idea.'' On the spanking-new cars for the monorail: ''Michael wanted seats that fold up.'' Eisner, who previously held creative posts at Paramount and ABC, tosses out ideas like a kid rummaging in a hurry through a trunk of toys -- whoosh, there goes one for a fresh line of Disney ad copy, here comes another for a new kind of health-food restaurant, and then a third for a gag in the sequel to Three Men and a Baby. Confesses Disney's CEO: ''I have to watch what I say, because if I say, 'Why don't we try putting a lamp here that goes sideways,' the next day there will be 12 new lamps there. My problem is not too few ideas; my problem is too many bad ideas. I have got to control myself. When I hear a bad idea coming out of my mouth, I've got to stop before it gets to somebody who's going to spend money.'' Perhaps his worst idea was to build a 43-story hotel in the shape of Mickey Mouse at Disney World, a notion his associates quickly nixed. Yet many of his seemingly harebrained schemes have made money -- and a few have made piles of it. Shortly before coming to Disney, while still president of Paramount, he hatched the idea of making a movie about a Beverly Hills policeman after being ( stopped by one for speeding. Beverly Hills Cop eventually grossed $313 million worldwide, the most of any comedy ever. A few years ago, noticing one son's passion for Gummi Bear candies, Eisner used the chewy sweets as the subject of a successful Saturday morning cartoon show. More often than not, his family is his muse (see box, p. 116). Disney's uniqueness stems from having a creative executive -- not a finance man or lawyer -- in charge. The management team believes that creative ideas provide the hydraulics for growth. That makes sense: In the film and television business, a new product line born of ideas must be manufactured from scratch every year to fill the distribution pipeline. Backing up Eisner is chief operating officer Frank Wells, 57, a Rhodes scholar and former vice chairman of Warner Brothers. A man of prodigious will and self-discipline, Wells set out with minimal experience at age 50 to climb the highest peak on each of the seven continents. He has made it up all but Everest. Says Eisner: ''It's like I'm a 6-month-old puppy just housebroken. I put a leash on myself and give the leash to Frank Wells and ((CFO)) Gary Wilson.'' The system of checks and balances is much more formal than Eisner makes it sound. Every creative endeavor at Disney, from making a movie to building a hotel, happens within a financial box, with reasonable risk and cost as the walls. Walt Disney Imagineering, a think-tank-cum-carpentry-shop, develops the project's design and engineering requirements. A six-man strategic planning group headed by Wilson, 49, then reviews it to see if the economics make sense. They run the numbers and try to strip every idea of bogus assumptions in a rigorous process they call ''truth-seeking.'' Together the two groups draw up a budget and schedule. The numbers then go to Wells and Eisner, who make a quick decision on whether to proceed. This process explains how Disney managed to conceive and execute ideas for the new Disney-MGM movie studios theme park at Disney World in Orlando, beating MCA to the market by one year -- even though MCA had the idea first. TIGHT financial supervision risks stifling creativity, but Eisner has found a way around that. When the movie Who Framed Roger Rabbit? began to exceed its budget, Eisner immediately called his team together to reassess the project. After weighing the risks and benefits, he opted to enlarge the budgetary box. The film ultimately cost about $40 million to make but also became the ) highest-grossing film of 1988. Each of Disney's three main divisions -- filmed entertainment, consumer products, and theme parks and resorts -- is a bubbling caldron of activity. In a turnaround like Hollywood has never seen before, Eisner and his team have transformed the Walt Disney Studios from little more than a breakeven operation with 3% of the U.S. movie market into an enterprise with operating profits of $257 million and the leading share of last year's box office (19%). Under the guidance of Jeffrey Katzenberg, 38, a bespectacled workaholic who quaffs vast amounts of Diet Coke, 28 of the 36 films the current management has produced have been profitable, perhaps the best winning streak on record. This summer Disney pulled in $15 million more at the box office than last summer, on the strength of such unexpected hits as Honey, I Shrunk the Kids and Dead Poets Society. Mark Manson of Donaldson Lufkin Jenrette says, ''It is worth noting that Disney's movie studio for 1990 has potentially the most exciting film lineup that any individual studio has ever had.'' Probable blockbusters include Dick Tracy, written, directed, and produced by its star, Warren Beatty, as well as sequels to the huge successes Three Men and a Baby and Good Morning, Vietnam. Bette Midler will appear in Stella, and if all goes well, Julie Andrews will return as Mary Poppins. The opening of the new $500 million movie studios theme park in May meant hour-long waits for visitors but record park attendance for Disney. More than 50 million people, mostly young couples pushing strollers and steering kids, passed through the gates of Disney World and Disneyland this year. These parks, along with Tokyo Disneyland, account for 56% of Disney revenues and 64% of operating profits. The Rolls-Royces of amusement parks, they sport operating margins of 30%.

The currents of commerce carry Disney consumer products all over the world. Last year the Japanese bought over $1 billion of knickknacks -- Mickey Mouse watches, sweatshirts, stuffed animals, and crib linen, all manufactured under license. Disney's new chain of U.S. retail stores has fast become one of the hottest concepts in retailing (see box, last page). In children's records the Disney label dominates the charts, walking off with half the market. Take a guess which magazine is Italy's third most popular, after TV Guide and Vatican? Answer: Topolino, the Italian-language version of The Mickey Mouse Magazine. Weekly circulation tops 700,000. Here are the principles that keep the Disney magic alive: -- Exploit the most profitable niches and synergies in the franchise. By the time Eisner arrived, Disney World in Orlando was already on its way to becoming what it is today -- the most popular vacation destination in the U.S. But the company had neglected a rich niche in its business: hotels. Disney's three existing hotels, probably the most profitable in the U.S., registered unheard-of occupancy rates of 92% to 96%, vs. 66% for the industry. Eisner promptly embarked on an ambitious $1 billion hotel expansion plan. Two major hotels -- Disney's Grand Floridian Beach Resort and Disney's Caribbean Beach Resort -- have opened in the past two years. Disney's Yacht Club and Beach Resort along with the Dolphin and the Swan hotels, built and owned by Tishman Realty & Construction, Metropolitan Life Insurance, and Aoki Corp., will open over the next few years, adding 3,400 rooms and 250,000 square feet of convention space -- the largest convention center east of the Mississippi. Growing convention traffic helps boost attendance at the theme parks when schools are in session, leveling out seasonal fluctuations in the business. By the time Euro Disneyland begins operating in 1992 with another six hotels, Disney will have doubled its room count to over 20,000, becoming a mid-size hotel group about the size of the Ritz Carlton chain. To make box office grosses even more boffo, the company recently launched a new studio called Hollywood Pictures, which will operate as a nearly identical twin to Touchstone, its highly successful producer of films for grownups. The company hopes to pick up market share once held by the many disappearing independent studios. Disney's three divisions cross-fertilize each other in myriad ways. The animation studio creates cartoon characters like Roger Rabbit for use in films. These characters are quickly licensed to merchandisers who turn them out as stuffed animals and print them on T-shirts and other products that can be sold in the parks, in the chain of Disney retail stores, and through the company's gift catalogues. The characters can become costumes for park cast members or the subjects of new rides or attractions. In the case of Roger, a movie sequel and a string of cartoons will continue to build the freaked-out rabbit's franchise. The company needs a steady stream of such characters to keep its parks fresh for the growing number of repeat visitors. In August, / Eisner added a farm full of them when he bought the rights to Miss Piggy, Kermit the Frog, and other Jim Henson Muppets for a reported $150 million. -- Stay ahead technologically. In addition to developing its own patents -- one is for a 3-D camera -- Disney has found many applications for such other new technologies as lasers and fiber optics. The animation studios have come up with a new proprietary Computer-Assisted Post-Production System (Capps) that digitizes animators' drawings so they can be colorized and manipulated. The system will sharply cut the time and cost to make cartoon shorts and features. Walt Disney Imagineering has bought the rights to a new technology called Sarcos that was designed for medical use with prosthetic devices. The equipment is being installed in the mechanical ''audio-animatronic '' figures and animals that appear at the theme parks. In a private demonstration of a prototype at Imagineering headquarters in Glendale, California, a life-size robotic man sang the Joe Cocker hit ''Feelin' Alright?'' swaying and rolling its eyes and displaying elaborately choreographed contortions right down to its finger tips. Disney executives hope the eerily lifelike robots will help keep attractions more sensational than competitors'. -- Keep a choke hold on costs. Disney's average cost of producing a film (before paying for prints and advertising) is about $14.5 million, vs. the industry average of over $18 million. The studio keeps costs down by avoiding expensive star vehicles and focusing instead on creating the best scripts. Starting with the material rather than the star makes a picture cheaper and easier to cast. When the studio does go after big stars, such as Bette Midler (in Ruthless People) or the recently recruited Goldie Hawn, it does so when their careers have stalled, attracting them with long-term contracts that include offers to produce or direct. The actors accept lower salaries in return for a share of box office grosses or profits. Such caution has given Disney by far the highest return on investment in the film business. The company also saves money by reducing the size of newspaper ads promoting its movies, so that none run larger than four-fifths of a page (except in the company's hometown paper, the Los Angeles Times). Most readers of newspapers check the ads only for the show times, so the extra space is often wasted, says studio president Richard Frank.

-- Be financially creative. Tokyo Disneyland is the only company theme park + that Disney does not own and operate. It licenses the operation to a Japanese company and collects royalties, which naturally subject the company's earnings and stock to currency fluctuations. CFO Wilson did not like that and designed an imaginative hedging scheme. In May of 1988, when the yen was a strong 124 to the dollar, he sold 20 years of projected royalties from the Tokyo theme park to a group of Japanese financial institutions. The value of the payments were then discounted back to the present and converted from yen into U.S. dollars -- 750 million of them. By placing this hoard in U.S. government bonds, he not only hedged against a subsequent decline in the yen, which soon went from 124 to 150, he also captured a handsome interest rate spread. Long- term bonds yield 6% in Japan, so that's the rate at which the Japanese banks discounted the future royalties back to the present. But with the bonds he bought in the U.S., Wilson locked in 10% on his money, and he can get even higher yields by reinvesting this cash in Disney's own operations. In Europe, Disney's financiers were doubly smart. First they came up with a clever two-tiered corporate structure for the $2.5 billion Euro Disneyland project that combines a limited partnership and a publicly traded corporation. During construction the partnership creates operating losses that can be used as tax shelters; the public company, through its traded shares, gives Europeans a chance to participate in the success of the project once the gates open in 1992. Disney also cut a deal with the French government that gives the company 49% of the equity plus operating control of the park in return for a $200 million investment. When the stock went on the Paris Bourse in October, Disney's stake suddenly became worth $1 billion -- an overnight gain of $800 million. -- Find efficient ways to stretch the marketing budget. Disney has pioneered ''participant campaigns'' in which corporations pay to sponsor exhibits or attractions in the parks, particularly at the pavilions at Epcot, and in the development of joint promotions, such as November's media blitz to push the new TV cartoon show Chip 'n Dale's Rescue Rangers. In return for the use of the characters in its commercials, McDonald's will spend a reported $30 million on a nationwide campaign, hoping to persuade young viewers to drag their parents into its restaurants so they can pick up toys and gadgets featuring the Chip 'n Dale characters. Disney, which will spend nothing for ( this campaign, expects the promotion to boost the show's ratings. Or consider another example: Delta Air Lines, which paid $40 million to be the official airline of Disney World, shows Touchstone movies on its flights and, on occasion, short videos touting Mickey and the parks to, among others, affluent German travelers on the Frankfurt to Orlando route. -- Add a touch of class. Eisner, who grew up on Park Avenue in Manhattan, has brought a needed touch of savoir-vivre to the company. He has hired a clique of famous architects that includes Michael Graves, Robert Stern, and Frank Gehry to design its many buildings, including the company's new Burbank headquarters and hotels for Disney World and Euro Disneyland. He wants these buildings to be so architecturally distinctive that some will become attractions in their own right. The hotels offer rooms in a variety of price ranges and reflect an awareness that the company's customer base is not simply Middle America, but more specifically the white-collar portion of it. The Grand Floridian hotel at Disney World, which has been open for a year, is striving for a five-star Mobil Guide rating. For Eisner and Wells, Disney is a battleship increasingly difficult to steer. ''As each of the divisions becomes more successful, relationships between them are harder to manage,'' says Wells. One of the most difficult tasks is allocating costs to the various divisions for their role in exploiting the growing opportunities for synergy. Who, for example, pays for 100 or so brief new films that are featured in the movie studios theme park -- the filmed entertainment division or the theme parks? Instead of spending endless hours negotiating these matters, Wells makes a call that can, if necessary, be appealed. Similarly, to push projects along and avoid costly delays, Eisner holds a regular meeting he calls a charrette (French for cart), a decision-making session borrowed from the world of architecture. All the key parties in a project, say to build a new hotel, convene in one room and make decisions on everything from the architectural details to the sconces, furniture, and cutlery. Eisner is fond of using deadlines as a motivational tool, so almost every project that gets assigned comes with a demanding deadline attached. Says he: ''It's kind of cruel, and it doesn't always work. And sometimes you compromise quality -- but rarely, rarely.'' IN THE GOSSIPY, increasingly publicized world of Hollywood, Disney is both ! revered and reviled for its success. More than a few competitors would love to see the company stumble -- and Disney executives know it. Laments film chief Katzenberg: ''Around here, success breeds panic, and deep, deep fear of imminent failure. And it makes everybody run faster. I've never worked harder.'' The stress of all the success seems to have fostered a dark side to the Disney story. There are charges, well substantiated, that management is often too aggressive and overbearing in dealings with suppliers, engendering the kind of resentment that could come back to haunt the company if it should ever stumble. ''They are impossible to deal with,'' says one producer flatly. Another Hollywood executive elaborates: ''They feel they must win at all costs.'' When Disney executives last year were negotiating the purchase of Wrather Corp., a real estate company that owned the Disneyland Hotel, they threatened to sharply increase the fees for the use of the monorail, which joins the hotel to the theme park. This gun-to-the-head tactic forced Wrather to sell the company reportedly for less than what Wrather's top executives thought it was worth. DISNEY has been justifiably fierce in defending its copyrights and trademarks against pirating and knockoffs, but in many people's opinion the company went too far when it filed suit against the American Academy of Motion Picture Arts and Sciences for using Disney's Snow White character in last spring's Academy Award presentation without permission. (She performed an un- Snow-Whitely song and dance.) ''Hi ho, hi ho, it's off to court we go,'' sang one Hollywood wit. MCA has accused Disney of swiping its ideas for the movie studio theme park, a charge Disney executives vehemently deny.

Disney's labor relations have raised eyebrows, too. Despite the towering pay for top executives, Disney skimps when it comes to compensating workers. In Florida, where Disney employs 32,000 to man the attractions, concessions, and hotels, starting wages are deliberately kept at a measly $5 to $6 an hour. Says a young employee at the Grand Floridian: ''The pay is not good, so there's a lot of turnover.'' The attrition is deliberate. William Sullivan, vice president of the Magic Kingdom park, explains, ''We encourage turnover in some areas so we can keep bringing in new employees who look fresh and enthusiastic.'' The tactic seems shortsighted considering that Disney takes considerable pains to train these people, putting them through a three-day course that introduces them to the company's history and values. Disney is so esteemed for its ability to motivate employees that companies like AT&T, Du Pont, Pan Am, and even New York's Metropolitan Museum of Art send managers to the Disney University in Orlando to find out how Disney does it. Among other questionable doings is the well-publicized bird-bashing incident. In late September, after a two-month investigation, the U.S. Fish & Wildlife Service and the Florida Game & Fresh Water Fish Commission filed suit against Disney World and its head gamekeeper in Orlando, charging them with the ''illegal capture, taking, molesting, and killing of protected migratory birds.'' The 20-page investigative report recounts tales of company employees using traps and sticks to ruthlessly and cruelly destroy black vultures, egrets, and other species of wild birds, with the blessing of the park's managers. Their motive: The birds were considered noisy and bothersome to guests and zoo animals, and left droppings on the park's immaculate paths and boardwalks. At first Disney officials tried to pass off the incident as a misunderstanding over the conditions of a permit that allowed trapping and relocating the vultures. The company has since expressed its regret and responded to the charges by hiring a wildlife consultant and setting up an advisory committee of zoologists. The individuals named in the report have been reassigned to other jobs. If convicted, the company could face fines of up to $30,000 and the loss of state permits that allow it to display live animals. So far Disney's bad behavior has had zero effect on its prospects. The main question about Disney's balance sheet is how much stronger it can get: $3 billion to $5 billion of unused debt capacity, a figure that could grow to $7 billion by 1992 if Disney can't find an affordable television network (CBS would be a good fit), record company, or other potentially synergistic business big enough to sink its teeth into. Although the growing cash flow -- $1.3 billion this year -- and lack of leverage would seem to invite raiders, the company has grown so valuable, it is just about unaffordable. Disney would cost $25 billion to $30 billion at today's prices, more than the record price KKR paid for RJR Nabisco. The Bass family owns 18.6% of the stock and, understandably, has a warm rapport with Disney's management. The family's investment, made five years ago at a cost of $360 million, is worth about $3.1 ! billion today. Says 47-year-old Sid Bass: ''The executor of my estate is going to get the job of disposing of my shares. And the other family members have said to me that they have similar long-term commitments.'' Adds security analyst Andrew Wallach of Drexel Burnham Lambert: ''Frankly, it is hard to imagine finding a better management team. And there is nothing obvious you can do to Disney to improve its performance.'' Along with Coca-Cola, American Express, and a handful of other companies, Disney stands as one of America's undisputed international success stories. With over $3.5 billion of its licensed goods sold at retail each year across the globe, with hit movies and television programs spreading through Europe and the Far East and a major European theme park in the works, the company has become the archetypal American corporation for the 1990s: a creative company that can move with agility to exploit international opportunities in industries where the U.S. has a competitive advantage. Pauline Kael, film critic for The New Yorker, once described the Walt Disney Co. as a purveyor of ''corrupt popular culture.'' That stinging phrase carries an element of truth: Something is phony about those cute, cheerful Disney characters, something a little too saccharine in their appeal to our emotions. But in a world increasingly rude, dirty, and mismanaged, Disney's wholesome formula has never worked better.

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