Walt Disney Pixar

Executive Summary

 Walt Disney Company has enjoyed unchallenged domination of the animated film industry since 1937. However, with the advent of 3D animation technology, the industry is moving away from traditional animation. Through Disney’s partnership with Pixar, they have produced several extremely successful films on favorable terms for Disney, but the relationship between the companies is souring and Pixar is testing the waters for a new partner. A future agreement with Pixar would be costly to negotiate and would almost certainly be less favorable to Disney. Disney has its own capabilities to produce 3D animation, but they lack the superior technology and experience of Pixar.

        Our suggested action is the acquisition of Pixar Inc. This act of vertical integration will not only ensure a working relationship with Pixar and provide a consistent production of high quality films, but will also reduce friction in Disney’s supply chain and use Pixar technology to benefit several other areas of the Disney business. The Pixar brand name will be kept intact and Pixar management will retain full creative control. Production will be scaled up to two films per year and Pixar animation technology and expertise will be integrated into existing Disney production facilities.

Situation Overview

The biggest problem that Walt Disney is facing is the coproduction agreement with Pixar animations. The agreement is set to expire soon and the renewal negotiations are not on the right track as there are several conflicting points relating to margins on distribution and share of profits on the animations produced.

It is the biggest problem for us because for the last decade Disney hasn’t been able to produce effective animations on its own and has had to rely on Pixar for its most successful films and characters. In fact, Disney has lost more money than it made when they created animation movies on their own several times in the past decade as referred in Exhibit-1.

The primary cause for this problem is that Pixar has made themselves indispensable to Disney by accentuating all its strengths and creating sophisticated animations with the help of their superior technology and superior intellectual assets. This has resulted in Pixar producing several blockbuster films, raising the bar for the animated film industry and creating a huge gap in quality from other studios, including Disney.

This is the most important cause of the problem of the changing trends in technology.  Pixar Animations has a unique advantage of having three proprietary pieces of software that provide them with the capability to easily change a scene or a character through mathematical models. This advancement provides them the capability to save huge amounts of time and subsequently gain a cost advantage over other studios that used 2D animation, like Disney traditionally has, which is very time intensive and requires a large staff of artists. As a result, not only do Disney movies cost much more than Pixar movies, but also do not have the same intensity of the animations that they have.

Action Overview

We propose to immediately acquire all outstanding stock in Pixar Inc. Although Pixar is a near perfect strategic fit for us in the current situation, post-acquisition we will have to make a few major amendments in our strategy to make this merger successful. Proposed strategical changes are as follows:

Organizational Changes:

1. Prevent desertion by Pixar employees.

One of the key challenges for us would be to retain the talent that Pixar has. To achieve this, we must allow Pixar to maintain its culture among its employees and allow them a fair deal of autonomy. If key employees exit the firm, Disney will have purchased “the most expensive computers ever sold”. It must be made clear that Disney does not intend to create value by changing the structure or operation of Pixar studios. We must accept a gradual organizational shift to being more collaborative to foster smoother integration with Pixarʼs work environment.

Operational Changes:

1. Leverage the technology acquired from Pixar.

With top class animation software such as RenderMan, Marionette, and Ringmaster under our control, Disney now inherits Pixar’s the first mover advantage and the upper hand in producing motion pictures of the finest quality. We must gradually phase out Disney’s 2D production and focus mainly on the production of 3D computer graphics animated motion pictures since it is less capital and time intensive. As Disney has more production capacity and resources than Pixar , we feel it will be feasible to scale production up to two animated films per year.

2. Increase investment in R&D to maintain and solidify our position as the market leader.

If we do not promote significant innovation in R&D, we will soon find ourselves lagging behind our competitors regarding technological advancement and the whole idea of this acquisition will fail. Pixar has traditionally stood head and shoulders above competitors like Dreamworks since the 3D animated market was created, but the gap in quality is quickly closing. For this acquisition to be successful, Disney must continue to press the technological advantage before it disappears.

Marketing Changes:

1. Infusion of Pixar characters into our overall marketing campaign without diminishing the brand of Pixar.

Pixar as a brand is very powerful and keeping it intact will have a profound impact on its employee retention rate. Keeping that in mind, Disney should tactically utilize marketing techniques to increase the association of the Pixar brand and characters with the Disney brand so that audiences will not miss the connection. Disney can utilize its powerful merchandising channel to incorporate Pixar's characters into the Disney family of characters which would propel ticket and retail sales in both theme parks and consumer products section. The one caveat would be that we must recognize that Pixar employees have a strong connection to their company and over-incorporating their brand may leave some of them dissatisfied.

Competitive strategy:

1. Competition with Dreamworks and others.

Dreamworks has traditionally been Disney/Pixar’s greatest rival in CG animation, but several new firms have recently entered the industry with the intent to aggressively pursue market share. It is inevitable that the animation quality gap will narrow, so Disney must win through its superior distribution and marketing channels that have made it a household name for generations. Disney characters (and Pixar characters) have the advantage of being represented at Disney theme parks and merchandising outlets, which will be difficult to match by smaller studios with limited relationships with their distributors.