General Management Alvaro de la Garza Musi Final Assignment To: Walt Disney Studios’ Board of Directors Subject: The Acquisition of Pixar Inc. The analysis to evaluate the allignment of the adquisition of Pixar Inc. (and this memorandum) will follow the logic below: a. b. c. d. e.
Value Chain Presentation Industry Analysis Walt Disney Studios Business Model Pixar Inc. Business Model The Acquisition
The Value Chain
Industry Analysis The industry analysis will be done through the Porter 5 forces analysis so to link these forces to what creates each company’s competitive edge: -
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Threat of Substitutes: Currently substitutes to the animated studios products is low as they produce not only box office movies, but these same products adapted to cable TV, Home video and video games which are the present substitutes to this industry. Rivalry among competitors: The industry faces fierce competition, there are several companies in the animated studios industry: Fox, Sony, Lucasfilm, DreamWorks, MGM, Universal, Paramount, Disney and Pixar. All these different enterprises strived to produce a new CG blockbuster every year. Bargaining power of consumers: It is extremely low, in the movie industry the public has absolutely no control over the price they pay to attend to the movie theater, rent a movie on cable TV or buy it as a home video movie. This is mostly due to the small fraction of the consumer income this expense represent and also because (at least in the movie theater) the supply of new movies is much lower than the demand for these.
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Bargaining power of the suppliers: The different suppliers in the CG industry specifically are composed by animators, voices, directors, etc. Even though not enough information is given to assess the bargaining power of directors, actors, voices, etc. it can be seen that the animators salaries accounted for 80% of each film’s cost. Furthermore, the top animators pay rose from $125,000 in 1994 to $550,000 in 1999. These two facts infer that the bargaining power from the suppliers’ side is very high. Barriers to entry: This industry requires a huge investment to release a single movie, costs span from $80 million to $150 million for one CG movie. Furthermore, brand and marketing play a very important role in the revenues a movie will bring. For these reasons, barriers to entry are pretty high due to the large amounts of money needed to start a movie in this business.
Walt Disney Business Model Walt Disney was the pioneer of animated children’s movies. The company always employed the most talented story writers in the business and owned the most advanced production studios. Although box office sales were a major source of revenue and a triggering signal for success, Disney’s actual financial success derived from alternate revenue streams such as the sale of toys, apparel, books, television showings, home video sales and video games. Walt Disney Studios competitive advantage comes from its strong brand, extensive know-how about the industry, and high capital position. These are valuable assets for Disney because of the following reasons: -
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Disney strong branding develops an image of a company's products in the minds of consumers, attributing good characteristics and qualities to its future products that will prove attractive to its target audience. Other benefits that make Disney’s brand an asset are: the ability to charge higher prices and increase profit per consumer, faster market penetration in new products, and hard commoditization of your products. The extensive industry know-how the company has creates a competitive advantage in the way that Disney supplier relationships and distribution networks are extremely strong and it can leverage on them to develop the best product positioning and release at low prices. One of the strongest entry barriers to this market is the capital investment; therefore Disney easily builds an advantage with its strong investment capability. It has $43 billion in assets compared to Pixar’s $1 billion. This forces other competitors (such as it happened with Pixar) to create coproduction agreements with Walt Disney Studios in order to decrease the extensive costs of producing a movie. The agreements, as it’s depicted in the case, are always favorable towards Disney.
Pixar Inc. Business Model Pixar works very differently than Disney, mostly in the culture aspect. In Pixar they use a bottom-top approach, in the company ideas from every employee are highly appreciated. The company makes sure that people have the freedom to communicate, and the sharing of individual ideas is always encouraged. Pixar Inc. focuses on the quality of its films instead of revenue; this is why the culture is so strong in this company. Pixar takes advantage of the strong preparation of
its people and creates a strong collaborative environment for its employees to create very good quality films. The competitive advantage of Pixar resides in its core capabilities and its differentiators within the industry. The most important identified were: 3D leadership in computer animation, skilled and highly educated staff, and its culture. These different characteristics provide leverage in the following ways: -
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Due to the fact that Pixar started as a tech company, it developed three very successful software technologies: RenderMan, Marionette, and Ringmaster. As the owner of the programs Pixar sold them to Disney, Lucasfilms, Sony, and Dreamworks. Furthermore, Pixar requires lower operating costs as they make most of their software in-house. These two facts render the company an advantage as it has an extra source of revenue and can create products at lower costs. The company’s staff, with its high skill and education aim towards creating the best movies in the CG industry. Also, Pixar does not hires and fires animators based on movie production; on the contrary, Pixar keeps and develops employees which creates loyalty to the company. Pixar’s superiority in its workforce provides the company with a competitive edge. They are superior in storytelling and creativity, which can be seen in all its movies: collecting an average of $537 million in Box Office in comparison to Disney’s $270 million average. Its employees are also very critical towards their own creations and follow Pixar’s perfectionism. The company’s culture, as stated before, is one of Pixar’s greatest assets. According to its three guiding principles: 1. “Everyone must have the freedom to communicate with anyone” 2. “It must be safe for everyone to offer ideas” 3. “Stay close to innovations happening in the academic community” Pixar is able to create a completely different environment than the normal in the industry. An industry where ideas are protected and guarded; where secrets and IP protection persists; Pixar managed to create a place where sharing, collective creativity and teamwork is fostered. Differentiating Pixar from the rest and providing a better position in this creative industry.
The Acquisition The assessment of the most strategic way to proceed with Disney’s acquisition of Pixar will be done by identifying all the pros and cons of this transaction and evaluate if the pros outweigh the cons or vice versa. The Pros: Acquire Pixar’s core strengths and capabilities in producing computer motion pictures. Assuming Disney has just started developing their own computer animation department, WDS could save a lot of time and resources absorbing Pixar.
Pixar’s technology will allow Disney reduce production costs (as they will be in-house) and attract new customers with high quality innovative films. A decrease in the competitive environment as Pixar is currently Disney’s strongest competitor and largest player in the development of computer animated movies. In the case of the acquisition, Disney will increase both its market share and power. A merger will create financial and organizational synergies in the companies. The Cons: Industry analysts claim that the transaction will be too expensive for Disney by looking at its current net income of $2.5 billion. Mixing the two cultures could create clashes and tension due to the extreme differences between its organizational structures. Considering the organizations, Pixar employees could face a loss of independence and take the final decision of leaving the company. Pixar has always opposed the production of cheap, low-quality sequels while Disney uses this as one of its main sources of revenue. After the analysis done above, I conclude that the best decision from Walt Disney Studios would be to acquire Pixar. Even though the company will have to incur a large amount of debt and it will require large efforts to merge both company cultures I believe the pros highly outweigh the cons. Furthermore, looking at the strategy Disney is currently following of reducing costs as much as possible, absorbing Pixar will support this matter; not only that Disney has always strove to be the first one in the business, currently Pixar is beating him in the computer animated ambit so therefore an acquisition seems best. Lastly, the acquisition will improve Disney’s capabilities in the fastest manner possible, helping the company with new innovative products and continue as a leader in the market.
