Disney!Pixar Practicum Case Final Write-up

Group 2: CEN, Cate

FORNACIARI, Jacopo GUPTA, Nikhita KEATING, Alex

LEE, Joon

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EXECUTIVE SUMMARY

Disney currently faces difficult decision regarding its relationship with Pixar. Although previous collaborations with Pixar have brought immense success for Disney in terms of revenue and recognition, Pixars CEO Steve Jobs has been trying to negotiate a fairer deal with no success. Disney wishes to stay with previous negotiation terms, as it is more favorable for Disney. Tension has increased between the two firms, and in response, Jobs began a searching for partnerships with other companies due to negotiation issues. This poses a threat for Disney, and Disney must make a decision on how to manage this current situation as soon as possible. Through our analysis, we offer five potential decisions that Disney can make regarding this issue. These options include the full-on acquisition of Pixar, continuing the current relationship through renegotiation of a fairer deal, creating strategic alliances with other companies, outsourcing technology of future films, and internal development of computer generated animation technology capabilities in-house. To assist with the decision making process, we utilized numerous tools and frameworks in order to thoroughly analyze situation regarding the two firms and their external and internal factors. One of the tools we utilized was the Porters Five Forces analysis for both of the companies. This allowed us to better understand the industry that Disney and Pixar individually falls under, and the current situations and pressures that the firms face within their specific industry. Aside from external analysis, we also conducted internal analysis for both of the firms. We were able to recognize and pinpoint the similarities and differences between the organizational structure and core capabilities that Disney and Pixar individually operates under, and the synergies that exist between the two firms. Next, we delved deeper and analyzed the benefits and disadvantages of the acquisition, as well as other alternative options as mentioned previously. Finally, we compared the pros and cons for each option and arrived at the best possible decision for Disney regarding its current situation. After careful consideration, the final decision that we recommend for Disney is to go ahead with the full-on acquisition of Pixar. We believe that this is the best option considering the amount of value and talent that Pixar would bring into the firm as the leader in the computer generated animation industry. Considering the amount of success that previous collaborations brought, it is easy to see that the relationship with Pixar is a valuable resource that Disney should not risk damaging. Through the merge, Disney would receive access to Pixars top of the line technologic capabilities and talented human resource, while Pixar would benefit from Disneys access to funding, vast distribution channels, and capabilities to produce merchandise. The other options previously mentioned each contains important flaws, and would not allow Disney and Pixar to fully exploit their synergies while bringing potential threat to Disney in the case that Pixar partners with a competitor. Aside from the acquisition, we also recommend for Disney to extend a generous offer to Steve Jobs in order to keep him happy as the would-be majority shareholder of Disney, and to keep Pixar employees satisfied and engaged. This could be achieved by ensuring that Pixar and Disney remain two separate entities in terms of organizational structure, protecting the individuality of Pixar artists and maintaining the valuable culture that made Pixar what it is today.

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HISTORY AND BACKGROUND

The official Walt Disney Company was created in 1923, when Walt Disney signed a

contract with M. J. Winkler. The iconic Mickey was introduced through Steamboat Willis in

1928, and the first feature-length film, Snow White and the Seven Dwarfs was released in

1937. The company made a huge step forward with the release of their first live action film in

1950, Treasure Island. Sadly, Walt Disney passed away in 1966, but the resort opening revived

Disneys excitement in 1971.

On the other hand, Pixar originally began as a tech-company named Lucasfilms

Computer Division. Steve Jobs saw potential in its technology and purchased the company for

$10 million, renaming it Pixar. The company enjoyed its many successes, including the release

of the highest grossing animated film of all time, Toy Story 3.

PREVIOUS COLLABORATIONS

Disney and Pixar signed a deal in 1991 to produce three CG animated movies. A part of

the agreement was that Disney funds production cost for movie rights, and Pixar gets paid a

participation fee. Pixar only earned $56 million in revenue, but Jobs was content as he

capitalized on the learning experience. Toy Story (1995) was the first film of the three, becoming

the highest grossing film of the year. The deal was renegotiated in 1997, stating the last 2

pictures from the original deal would become the first 2 pictures of the new deal. The estimated

cost of each film was $120, which was distributed evenly between the 2 companies. Disney

would also keep exclusive distribution rights to make sequels.

Since 2002, Jobs had been trying to renegotiate a better deal for Pixar. Disney, however,

wants to stay with the original agreement since it was much more favorable for the company.

Pixar extended a final offer in 2004: Disney would own distribution rights for 5 years, which

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would then be returned to Pixar, and Disney would give up ownership of the films. Disney

declined this offer, so Pixar began searching for negotiations with other suitors. Jobs was fully

confident that they could find a better-suited partner.

DISNEY INDUSTRY ANALYSIS

Although Disney is involved in many different industries, the industry it belongs to in

this specific case is the film distribution industry. As a first step to evaluating Disneys current

positioning in the industry, we completed the Porters 5 Forces Analysis as shown below.

Power of Buyers: The buyers in the film distribution industry refer to theatres and

retailers that carry films through showings, DVDs, Blu-ray, etc. Although retailers and

theatres make the ultimate decision of which movies they want to purchase, due to the

distributors size, brand recognition, high customer loyalty, bargaining power for retailers

and theatres are moderate. Customers willingness to spend on movies and merchandise

is high, which also works in favor for distributors in terms of bargaining power.

Power of Suppliers: The suppliers in this case are film creators hoping to distribute films.

The bargaining power is low since they require a lot of capital support from distributors.

Also, marketing and distribution are essential for the success of a film, so gaining support

and partnership from large distributors are very important to film creators.

Threat of New Entries: In the film distribution industry, threat of new entries is low due

to the high entry barriers. Currently, there are few big players that dominate the industry,

making it difficult for new start-up companies to match existing companies in size and

success. Film distribution requires high capital investments, which makes it hard for

anyone to enter. Also, success in this industry depends on the number of distribution

channels and partnerships, which is much easier for bigger and well-established brands.

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Threat of Substitutes: Substitutes to the film distribution industry are other channels of

entertainment, including television, theatre, and YouTube, to name a few. Although these

channels are growing in popularity, they are not strong enough to match and compete

with the current success and popularity of movies in our society. Film distributors, such

as Disney, also carry a wide fan-base and strong brand recognition, meaning customers

are willing to go out of their way to see a movie distributed by these companies.

Rivalry: A few big players in the industry currently dominate the market for film

distributors. This makes competition fierce, as many of these large firms share similar

market share. There is a tendency for firms to acquire other studios in order to reduce

competitive pressure. Each distributor wants to partner with the best filmmakers, making

it a blood battle between big players to get their hands on the next top film.

DISNEY INTERNAL ANALYSIS

Aside from analyzing the industry that Disney is a part of, we also analyzed Disney from

an internal point of view by taking a closer look at its core capabilities and working culture.

Some of Disneys core capabilities include its wide distribution channels and partnerships,

including various options such as movies, television, and DVD. Disney also enjoys benefits due

to its large size, including a large budget to invest on new projects as well as a large base of

talented human resources. The large budget is partially backed up by Disneys multiple sources

of revenue, including extra revenue coming from successful merchandising and theme parks.

Due to its past projects and successes, Disney has a lot of valuable knowledge on the movie

industry and customer preferences. For example, Disney has been very successful previously

with creating movie sequels. Lastly, Disney has a large fan base and enjoys strong brand loyalty

and following from customers all over the world.

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In terms of company culture, Disney follows the top-down approach inside the

workplace, where managers tend to enforce the culture. It is considered a large bureaucracy,

including 150,000 employees in 2008. Disney is used to making its films on a tight schedule, and

focuses on profitability rather than the quality of the image itself. The company follows a

hierarchical structure, where individuals make important decisions from top-level management.

PIXAR INDUSTRY ANALYSIS

In this case, Pixar lies in the filmmaker industry, making it a supplier for Disneys

distribution channels. In order to analyze Pixars current positioning in its industry, we also

conducted a Porters 5 Forces Analysis for this industry.

Power of Buyers: Buyers for the filmmaker industry refer to movie distributors such as

Disney. For this industry, the bargaining power of buyers is high due to the high number

of movies available for distributors to choose from. Since distribution and marketing is

critical for a films success, all filmmakers in the industry hope to partner up with strong

distributors to get their films out in the market. There is zero switching cost for buyers, as

distributors can choose among filmmakers and movies to partner with at their leisure.

Power of Suppliers: Suppliers in the filmmaker industry refer to resources needed to

create a film. This might include technology suppliers, equipment manufacturers, and

artistic talent. The shift from hand drawing to CG/outsourcing increases the suppliers

needed. However, Bargaining power for these suppliers are moderate in that although it is

important and sometimes difficult to recruit the best resources, there are many options

available for filmmakers to choose from.

Threat of New Entries: Due to the growth of access to technology, threat of new entries

is high since barriers to entry are lowering. Numerous start-up companies are beginning

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to enter the industry, bringing fresh talent and new ideas to the game. They are each

introducing creative storylines and lovable characters with hopes to becoming the next

Pixar, which is potentially threatening to all players in the industry, including big and

well-established firms.

Threat of Substitutes: Substitutes for animation filmmakers includes other types of

films such as comedy, action, etc. Although the other types of movies are popular and

classic, animated films are extremely popular among children and adults alike. The

lovable, relatable characters from CG feature films tend to create a large buzz and fan

bases around the world. For this reason, threat of substitutes is considered moderate in

this industry.

Rivalry: Rivalry for this industry is high due to the large amount of competition coming

from both start-up companies as well as larger, well-established entities. As access to

technology grew, more startup companies joined the industry with hopes of becoming the

next Pixar. At the same time, there are many other big players in the industry, such as

DreamWorks and Katzenburgs Studio, to name a few. With competition coming from

both sides of the spectrum, rivalry is high and growing.

PIXAR INTERNAL ANALYSIS

To see the difference and possible synergies between Pixar and Disney, we further

analyzed the core capabilities and culture of Pixar internally. Some core capabilities that Pixar

possesses include technological successes, such as its 3D leadership in computer animation.

Since it started as a tech company, Pixar owns a number of programs and software. Some of

these include Rendermann, Marinotte, and Ringmaster, which are all considered top of the line

and state of the art for its time. Pixar is also made up of a group of very skilled staff, and most

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technical employees held a PHD. They are very strong in storytelling and creativity, which is

showcased in all of its work. Typically, Pixar requires lower operating costs as they make most

of their software in-house. Its employees are also very critical towards their own creations, and

they follow the Pixar perfectionism of not allowing cheapquals. Instead of focusing on

revenue, Pixar focuses more on the quality of its films.

The working culture at Pixar is very interesting and different. They use the bottom-up

approach, where ideas of the mass and people are highly appreciated and valued. Pixar

capitalizes on the primacy of its people, and offers a highly collaborative environment for its

employees. The company makes sure that people have the freedom to communicate, and the

sharing of individual ideas is highly encouraged. This egalitarian environment makes it so each

individual feels equal, and has the same rights and opportunities to make big things happen. To

further tap into their market, Pixar focuses highly on innovative happenings in the academic

community. Also, employees are hired at-will with no binding contract, so each Pixar employee

is hard working, happy, and proud to be a part of the company.

THE ACQUISITION

Among the different pros of Disneys acquisition of Pixar is the possibility to acquire

core strengths of Pixar in producing computer motion pictures. While Disney just started

developing its own computer animation films, Pixar already generated billions of dollars from its

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technology. Furthermore, revenues would increase through merging the companies. This will

help Disney attract new customers and generate of revenues from high-quality, innovative types

of films. This will also have a positive effect on Disneys merchandise sales and theme park

tickets. Lastly, it will result in decreased competition considering Pixar is the largest player in

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the industry in terms of developing and producing computer animated movies. In collaboration,

Disney can greatly increase its market power. In addition, the timing of the acquisition is perfect

for Disney, since the companys profitability has been decreasing steadily since the late 90s.

Not only does the acquisition benefit Disney, there are numerous positives for Pixar as

well. After the merge, Pixar could focus on its core strengths in producing computer animated

films, without worry of increased investment costs for making and marketing merchandise and

home entertainment. Disney already has various lines to produce merchandise products, and has

distribution channels to place them. Pixar would be able to utilize those resources to produce

merchandise such as apparel and toys. The acquisition would also allow Pixar to have a quick

access to funding for new ideas and projects, as Disneys size benefits comes with larger

budgets. The merger would also benefit Steve Jobs with his company Apple, since there would

be an increased amount of content that could be released through the Itunes store.

While there are pros to the acquisition, there are also potentials for cons. For example, it

can be argued that the transaction could be too expensive for Disney, considering its current net

income of $2.5 billion. Many feared that the stock split could dilute Disneys earnings per share

excessively. Furthermore, cultural clashes could be possible after the acquisition, given the

different organizational structures that characterize the two companies, as mentioned previously.

Considering those differences, Pixar employees might fear the possibility of losing their

independence and decide to leave the company following the merger. In addition, Pixar has

always opposed to the production of direct to video low budget sequels, which instead have

always been one of Disneys main sources of revenues. Lastly, Steve Jobs would become

Disneys largest shareholder after the acquisition. Disney would need to find ways of changing

the ownership structure to handle the complex figure of Apples founder.

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SYNERGIES

The merger allows Disney and Pixar to exploit both financial and organizational

synergies. From the financial perspective, the merger would increase Disneys stock price. It

would eliminate the trouble of coming to agreements regarding production and distribution fees.

Financial performances would improve, driven by the high growth rate of Pixar (39%), new

improved films, and other streams of revenues such as merchandising. From an organizational

point of view, the acquisition allows Disney and Pixar to concentrate on individual strengths,

which will turn into increased productivity and generate more sales. Disney has good stories,

knowledge of the merchandising industry, and strong distribution channels while Pixar has the

technology and creativity. Both parties can market its production together and get more profit.

They could also exchange the valuable and talented human resources, which enables them to

develop improved content and continue producing top hit motion pictures.

ALTERNATIVE OPTIONS

Other than acquiring Pixar, there are several alternatives available for Disney. These

options include renegotiating the contract and continue working with Pixar without acquisition,

creating strategic alliances with other companies, outsourcing the technology, and developing

internally. In the following paragraphs, we will further explore the pros and cons of each option.

The first option is to continue working with Pixar through renegotiating the contracts.

This less expensive compared to acquisition, and Disney can continue its current relationship

with Pixar. Since Disney and Pixars previous collaborations such as Toy Story have been

successful, it would be beneficial for Disney to continue this relationship without costing a lot,

which will generate higher revenue while reducing competition. However, there are also

negatives to this option. In order to continue the current relationship, both parties have to agree

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on every aspect of production, which is hard to do. Also, this relationship cannot fully exploit

synergies because both of them are seeking their own benefits. There is a high possibility of

competitive threat for Disney. With this option, Pixar might break the relationship and work with

other companies instead, since Disney and Pixar would not gain exclusivity for their movies.

Another option is to build strategic alliance with other companies such as Warner

Brothers, Fox, DreamWorks, Universal, MGM, or Paramount. By building strategic alliance with

any of these companies, financial capabilities can be achieved versus partnering with Pixar only.

Disney and the other company can produce higher quality products with higher input cost. In

addition, by working with other companies with different strengths, Disney can diversify its

products and produce different type of films to attract new audiences. However, there are

negative sides of this option also. First, it is hard to build new relationship from scratch. From

experience of working with Pixar, its easy to see that building relationships with other

companies can be stressful and costly for Disney. Also, with this option, Pixar will become a

competitor for Disney, which is threatening for Disneys business.

Thirdly, there is an option for Disney to outsource the technology. Since Disney does not

have highly qualified technology compared to Pixar, it is important to improve its technology

used in film production. Improved quality of film from outsourcing will be beneficial to Disney

because it can produce better films versus doing it in-house. Also, this reduces overall costs

because outsourcing technology is less expensive compared to acquisition or in-house

development. Disney would not need to hire new employees or purchase equipment, which will

save financial resources. One of the negative sides of this option is that Disney will lose

exclusivity in their films because other companies can utilize the same sources. Also, this option

makes Pixar a competitor, which is difficult to compete with in terms of technology and talent.

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Researching for a high quality source can also be time consuming, and this will delay Disneys

speed in producing new films. Lastly, it can be hard to find negotiation point and build a

common agreement with the company that outsources its technology.

The last option is for Disney to focus on internal development, such as acquiring skilled

employees and developing 3D technology in-house. This option gives Disney control over all

aspects of films, such as release date and raw materials used in production. Also, it improves

overall company quality and competitiveness in the industry, which will put Disney ahead of the

industry. However, the development cost will be significantly higher since Disney has to

research and purchase all equipment from the beginning. Also, the human resource investment is

costly since they have to pay to bring skilled employees to the company, and train current

employees.

RECOMMENDATIONS

The current situation that Disney faces is very unique. Considering its relationship with

Pixar, Disney holds a powerful set of options to choose from. Considering the pros and cons of

options we introduced previously, we recommend going with the full acquisition of Pixar.

While it is recommended for Disney to acquire Pixar, the merger should be done in a way

that ensures a positive, sustainable relationship that maintains diversity. Through the acquisition,

Disney can exclusively hold onto the talent that Pixar cultivates. Pixar and Disney both bring a

value of fan base and name recognition, which can be powerful when combined. Most

importantly, Disney will have control of the revenue stream for both organizations, which will

prevent any polarizing negotiations, as both will be under the same roof. Each employee of both

sides will consider themselves citizens of Disney, increasing cohesiveness in the firm.

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Although the two organizations would be under the same roof, they should still maintain

independence in terms of structure, while being collaborative in the creative process. It is also

important to mutually mention both names in all collaborative films, so audience and fans of

either company can be attracted to the films.

When negotiating the deal with Steve Jobs, Disney should be generous in the offer it

extends. If they hope to maintain a great relationship with the organization they are buying,

Disney must make sure Pixar is happy with the deal. The key target of the negotiations is Steve

Jobs, as he is the would-be majority shareholder for Disney. Disney can offer him leadership in

the creative department, and exclusive deals with Apple ITunes to bring additional benefits.

Overall, we believe that acquisition is a great decision for Disney at this point.

Combined, Pixar and Disney bring a powerful arrangement of tools and resources. To ensure a

sustainable competitive advantage, we recommend acquisition over all other alternatives.