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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 companys competitive edge:
-

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.

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 films 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 childrens 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,
Disneys 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:
-

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 Disneys 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 Pixars $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 its 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:
-

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 companys 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. Pixars 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 Disneys $270 million average.
Its employees are also very critical towards their own creations and follow Pixars
perfectionism.
The companys culture, as stated before, is one of Pixars 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 Disneys 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 Pixars 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.

Pixars 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 Disneys 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 Disneys
capabilities in the fastest manner possible, helping the company with new innovative products
and continue as a leader in the market.

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