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1. Which is greater: the value of Pixar and Disney in an exclusive relationship, or the sum of the value that each could create if they operated independently of one another or were allowed to form relationships with other companies? Why?
In order to understand whether or not the joint value of the two firms is higher than the sum of the two taken separately, we need to perform a complete SWOT analysis, that is shown in Exhibit 1 for Disney and in Exhibit 2 for Pixar. Without lingering over the analysis of each single SWOT, let’s focus on the match of the two SWOTs, where we highlighted that weaknesses of one firm are covered by the strengths of the other and vice versa. As it is evident from Exhibits 3 and 4, Pixar seems to be the engine for the new success of Walt Disney: this is mainly due to its new ideas and cost effective and unique ability at producing CG films something that Walt Disney had been missing since the release of The Lion King . On the other side, Walt Disney provided Pixar with important financial funds, a strong brand name worldwide recognized, able to boast consumer loyalty - and a diversified portfolio (from entertainment parks to books production, TV channels and home-video). With just a simple contract, at the beginning of its history, Pixar was able to make itself and its characters known worldwide. Having proved such strict reciprocal relationship between Disney and Pixar, the fit must be considered in light of the environment the two firms were facing at the ‘90s and thereafter. Both firms were facing the opportunity given by the new and innovative CG market. In particular, Walt Disney was looking forward to maintain its power and dominance throughout time and environment changes, while Pixar was facing the chance to get advantage of its previous business (computer hardware and software) to build up a primacy in CG films. In a certain way, therefore, the opportunity was the same for both firms: being the leader in the new market. Moreover both firms were threatened by competition in their own markets and by the risks related to the new one. Hence that was the point: on one hand, Walt Disney needed an innovative partner to take again to the film field as a leader; Pixar, instead, needed a strong partner that facilitated its escalation, gave it prestige and financial support. What’s more, given the film market environment, to pursue its objectives, Walt Disney needed expressly a new young partner, not so powerful – at least at its beginnings: nor DreamWorks nor 20th Century Fox nor Warner Bros could be potential partners because of their well-known rivalry with Disney. Meanwhile, Pixar, as a new entrant, was looking for the most successful and the most powerful partner in order to start its new business in the most effective way and thus lowering the risk. Therefore that is why an exclusive relationship between Pixar and Walt Disney was recommended against any other exclusive relationship with other partners. All the analysis just considered can be rephrased under the Better-off test to demonstrate the added value from this exclusive relationship: - industry attractiveness: from Walt Disney’s point of view, given the change in the film market and its incapacity at successfully and cost-effectively producing CG films, the threat of new competitors could be mitigated by broadening its scope and entering into a deal with someone who was efficient and successful at creating CG films from a technical point of view - in this ,
sense the industry in which Pixar operated was attractive to Walt Disney; for what concerns Pixar, instead, the new emerging CG film market could have helped the firm on escaping from the large competition in computer hardware and software market and taking advantage of its knowledge to beat the competition in the new film market and gaining new revenues; - competitive advantage: with regards to Disney, Pixar constituted a source of cost advantage since, by entering a deal with it, it could have benefited from its cost efficiency; Pixar, instead, under the umbrella of Disney brand, could have taken advantage of the willingness-to-pay from consumers; - risk considerations: both firms were facing the threat to succumb in their market and precisely Disney in the CG film one and Pixar in the software and hardware one. By diversifying and entering the new CG market, both firms can share the revenues across the two businesses. 2. Assuming that Pixar and Disney are more valuable in an exclusive relationship, can that value be realized through a new contract? Or is common ownership required (i.e. must Disney acquire Pixar)? Assessing this question requires to understand and compare the transaction costs occurred in an acquisition against the costs generated by any other type of contract (e.g.: alliance, joint-venture, etc.). Any form of contract, in fact, leads to some costs: an acquisition requires a consistent lump sum and thereafter integration and organizational costs; long-term contracts instead might lack of precision and completeness, leaving room for opportunistic behaviors. In the specific case of Walt Disney and Pixar, being their exclusive relationship valuable, an acquisition could be better than any other type of contract. To sustain this assertion, we will use the Best-Alternative test which relies on transaction costs analysis. Looking at their joint history, we can reasonably infer that, starting from their first agreement in 1991, Walt Disney had the chance to test year by year both the actual potential, strengths and weaknesses of that question mark (Pixar) and the actual attractiveness of the emerging new CG film market which was far from the graphic hand-drawn market in which Walt Disney was born and dominated. Eventually the new market marked its primacy over the old one (as it can be seen in Exhibit 5, in the 2000s all CG films, whatever was the producer, registered higher revenues than CG films) and Pixar gave proof, for sure, of its great capacities and added value with respect to the competitors. The success signed by Pixar over those years had increased its market power, consequently: its total box revenues were higher than those of Walt Disney and any other competitors, and so Pixar stocks were performing above not only Walt Disney but also the average market trend (statistics given by SP500) (see Exhibits 6 ). The greatest evidence of Pixar’s growing and important market power was given by the fact that: on one side, in 2004 Pixar was looking for another partner than Walt Disney, and, on the other side, by joining any other contract, Pixar was intentioned to gain all the major possible profits and not just a small fraction – as it had been since then with Disney. Pixar was actually leading the game: everyone would like to work in partnership with Pixar and, eventually, Pixar needed a marginal partner which sustained it.
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Therefore, after 2004, on the part of both Walt Disney and Pixar, entering into a new contract would not be cost saving: the positions of the two firms were too strong – both felt and wanted to be a leader. Consequently, negotiation would require too much effort in dealing with any minimal term and property rights. In fact, the very last negotiation, incurred in 2004, was about how long Disney would have hold the rights of the future Pixar movies, whether Pixar would have the rights to any sequels and who would have got tv rights. However, despite the tremendous Pixar’s market power, to maintain its role in the film market, given its high costs in CG film production and its lack of capabilities in producing them at successful levels (such that, as it is evident from Exhibit 1, Walt Disney produced an CG film only once and never after!), Walt Disney needed Pixar. Moreover, Pixar wanted – as it was actually looking for in the meanwhile of its renegotiation with Disney – a partner with which collaborating, and Walt Disney was actually the strongest one in terms of brand and customer loyalty. Therefore, despite the negative opinions given by financial investors, an acquisition was the only possible way to sustain a relationship between the two firms: the organizational costs would be for sure lower than those required to state a contract. However, in the mean time all media commentators sustained also that an acquisition would threaten a cultural clash and, thus, huge organizational costs. By the way, it should be considered the following aspects: Pixar’s leader Lasseter worked at Disney during its early years, when every employee was made part of the creation of the film: it is as saying that, in a certain way, Pixar’s culture had some of its roots in Walt Disney; therefore such a cultural clash could be expected not so insurmountable and destructive; during all those years after “The Lion King”, Walt Disney had been successful only thanks to the close relationship with Pixar. Therefore, it could be eventually inferred that incurring an acquisition would ask for lower transaction costs than loosing the opportunity to be successful or facing even higher transaction costs in contractual negotiations. 3. Which are the key lessons you learned from this case analysis?
First of all, we have learned that the impact and the personality of a single man can make a huge difference in the development and in the growth of a company. More specifically, during the renegotiation in 2004, the fights between Eisner and Jobs made it impossible to find a suitable agreement, putting at risk the future of both Disney and Pixar. Even though some said that the acquisition failed because of the length of the negotiations, the role played by the chairmen was crucial, for they represented the company as a whole. We could also note that the rocky relationships between the two men might also be due to the very different companies they worked for. If cultures are not so similar, mergers and acquisitions often fail to occur or -even worse- if they do, the company will entail huge costs to retrain workers, having different responses to changes. If we follow Disney’s story, we can say that it reached the maturity phase in the 21st century, with the only alternative of acquiring Pixar as to maintain its market power and dominance. -
Talking about fit, probably the reason for the low revenues for Disney is that the company was not actually adapting to the new innovations brought by computer-generated drawings. Disney was in fact trying to stick to the old-fashioned hand-drawn pictures in order to cut costs. On the other hand, Pixar had always been up to date, trying to serve the demand for new and creative lifelike characters, focusing on the development of a unique technology for animation and editing. The young firm created and exploited its own experience curve, gaining an incredible competitive advantage on all the other competitors. Fit is also seen at the organizational level, where people are not only hired for their creativity but also for their fit to the values of Pixar. On the contrary, Disney lacked of a perfect blending of technology and creativity. We have also learned that if the fit between the environment and a company is very weak, there is the need to find other alternatives. In the late ‘90s, Disney was no more fitting the changing environment of animation, as its technology was more than surpassed and thus it needed look for entering into a deal with Pixar. At the cultural level, Disney and Pixar differ a lot in the amount of communications and information shared: in Pixar, communication is fostered by the creation of campus-like company whereas in Disney there is a more rigid exchange of ideas (for example their reward system focuses on the idea given by the individual and not by the community of the group). In our opinion, Disney in fact should have had a different organizational structure, less rigid and more flexible, to best fit such a creative and unpredictable environment and it should have also tried to find ways to keep talents in the organization rather than letting them switch to more attractive companies. Moreover, Pixar has been very smart in diversifying in the animation sector, exploiting its dated experience in computers and software to speed up the editing phase, the colouring of images, sudden changes and used it also to become different from other companies by trying to create more lifelike characters. This increased shareholders value through the creation of synergies among Pixar’s businesses. Even if these firms were very different, they could have defeated every competitor, since strengths and weaknesses compensated each other in a unique formula, joining together a consolidated brand power with an inimitable technology.
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Exhibit 1 - Disney SWOT Matrix
Strengths ● Consolidated brand power ● Presence of multiple distribution channels ● Good Financials ● Broad product portfolio ● Strong cable and satellite networks ● Consolidated supply chain ● Strong workforce (qualitatively and numerically speaking)
Weaknesses ● Lack of 3D technology ● Too much dependency on Pixar for the development of 3D movies ● No possibility of product differentiation ● Lack of successful new ideas after the “King Lion” ● Negative opinion for Hong Kong Disneyland resort ● Slow recent revenue growth
Opportunities ● ● ● ●
International Markets Expansion of cruise Business New entertaiment Growth in data services
Threats ● ● ● ●
Pixar’s new move Presence of new strong competitors Piracy issues Further economic downtown adding pressure to revenue
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Exhibit 2 - Pixar SWOT Matrix
Strengths ● Remarkable cost advantage and cost savings ● Effective organisational communication ● Loyal costumers ● Market share Leadership ● Reputation Management ● Excellent use of 3D technology and consequently excellent computer graphic ● Strong and consolidated brand ● Talented team Opportunities ● ● ● ●
Big boom of 3D animation New deals from other company Asset leverage Product and services expansion process ● Takeovers ● Growing international movie audience
Weaknesses ● Poor supply chain ● Long development time needed for movies ● Limited annual movie release increased revenue volatility ● No consolidated distribution channel ● Business focused only on animation
Threats ● Presence of digital piracy threat that could decrease sales of Pixar movies ● Hostile takeover from an other company
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Exhibit 3 - How Pixar’s Strengths can mitigate Disney’s Weaknesses points Disney’s Weaknesses ● "Lack" of 3D technology ● Too much dependency on Pixar for the development of 3D movies ● No possibility of product differentiation ● Lack of successful new ideas after “The Lion King” ● Negative opinion for Hong Kong Disneyland resort ● Slow recent revenue growth
Pixar’s Strengths ● Excellent use of 3D technology and consequently excellent computer graphic ● Remarkable cost advantage and cost savings ● Effective organisational communication ● Loyal costumers ● Reputation Management ● Strong and consolidated brand ● Talented team ● Market share Leadership
Exhibit 4 -How Disney’s Strengths can mitigate Pixar’s Weaknesses pointsPixar’s Weaknesses ● Poor supply chain ● Long development time needed for movies ● Limited annual movie release increased revenue volatility ● No consolidated distribution channel ● Business focused only on animation
Disney’s Strengths ● Consolidated brand power ● Presence of multiple distribution channels ● Good Financials ● Broad product portfolio ● Strong cable and satellite networks ● Consolidated supply/distribution chain ● Strong workforce (qualitatively and numerically speaking)
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Exhibit 5
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Exhibit 6
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