Strategic Management

Professor Camilla Quenta

Mariam Faisal
Individual Case Memo

I. Strategic Profile and Strategic Problem(s)

Disney's strategic profile revolves around its role as a global entertainment conglomerate. It
focuses on content creation and distribution, with key segments in media networks, film and television
production, theme parks and resorts, and consumer products. Most importantly, Disney's strategic profile
is rooted in its core business of creating and distributing family-oriented animated films. However,
Disney's own animated film business had been in decline since Jeffrey Katzenberg, its ‘creative force’
[21], left to establish rival studio Dreamworks. The business started to rely on revenue from its
partnership with Pixar to maintain performance. It was also struggling to make all releases following The
Lion King as successful as the former, but they all fell below par. While new CG technology disrupted the
market, negotiations with Pixar reached an inconclusive halt as well.
Thus, this memo aims to analyze if the value of Disney and Pixar is greater if they are in an
exclusive relationship or if the sum of the value that each could create is greater if they just operated
independently like they used to. The analysis involves an examination of both internal and external
factors, employing a SWOT analysis as a guiding framework.

II. Situation Analysis (External)

Disney operates in a dynamic external environment influenced by economic, technological, and
sociocultural factors, impacting not only Disney but also the entire entertainment industry.
Economically, Disney's heavy dependence on North America for its revenues leaves the company
susceptible to changes in economic conditions. For example, the spiking of the US inflation rate may
adversely affect the business, hence more than 70% increase in household spending rather than tourism
and entertainment is a threat to Disney (economist, 2021). Demographically, shifts in consumer
preferences and an aging population have affected Disney's target audience; For instance, age group has a
huge impact on Disney product choices i.e. Disney+. According to Statista, 16% of US adults in the
18–29 age group and 17% of the 30–44 age group like Disney+ compared to people over 45 years of age
[17]. Content regulation by the US FCC and labor union law are a threat to the company [19], whereas
government policy for strong intellectual property rights (IPRs) is an opportunity for Disney's strategic
development. The US Federal Communications Commission regulation of television and radio networks,
privacy and data protection laws, and the kid’s movies content development needs to strictly adhere to the
quality guidelines which imposes a threat to the companies’ external environment [18].
Technologically, the animation industry experienced a seismic shift in the 1990s, primarily due to
the rise of computer-generated (CG) animation technology. This innovation, pioneered by companies like
Pixar, allowed studios to produce animated films more efficiently and quickly compared to traditional
hand-drawn animation. One significant consequence of this disruption was the increased threat of
substitutes in the animation industry. As CG technology became more prevalent, the ease of creating
substitute products grew, intensifying competition. This shift was compounded by the fact that only a few
suppliers, like Pixar, held the technology and talent necessary to operate it. This gave these suppliers
significant bargaining power, affecting the negotiation dynamics between studios and technology
providers.
Furthermore, the lucrative nature of the CG space and the growing accessibility of technology
reduced the barriers to entry, leading to an influx of new entrants. This increased the competitive
rivalry within the industry. Consumers, too, benefited from this change as they had access to numerous
substitutes with relatively lower quality and price differentiation, giving consumers more influence over
the industry. However, Disney products and entertainment theme park ideas are based on the movies
having themes in connection with the films they produce, which provide low to moderate substitutes in
the market despite high competition [20].
During this period, Disney faced external challenges, including discontinuing its "Secret Lab" in
2001 and adapting to the CG animation industry. This transition necessitated significant workforce
retraining and slowed production, underscoring Disney's struggle to keep up with industry advancements.
Consequently, from 1998 to 2004, Disney heavily relied on Pixar's CG technology, contributing
significantly to its income. While this collaboration boosted Disney's revenues by $3.5 billion and total
operating income by over $1.2 billion, it also subjected Disney to external industry pressures. At the same
time, DreamWorks emerged as a strong competitor, catering to diverse age groups, highlighting the
importance of Disney conducting in-depth consumer research to align with evolving market preferences.

III. Situation Analysis (Internal) - make it concise and correct typos

Analyzing Disney's internal situation reveals a company with a rich array of resources,
capabilities, and core competencies that underpin its competitive advantage. One key competency is its
human resources management, which nurtures a collaborative environment, retains creative talent and
fosters creative leadership. Disney receives employee loyalty through handsome wages, welfare, culture,
and environment [22]. Furthermore, Disney's diversified revenue streams, encompassing various
distribution channels like box office, television, licensing agreements, merchandise, and theme parks, are
core competencies in their own right, further supported by effective marketing and a commitment to
outstanding customer service.
Crucially, Disney's co-production agreement with Pixar massively added to its resources and
capabilities. As disruptive CG technology transformed the industry, Disney's ability to create value in
inbound logistics and production lagged, whereas Pixar excelled with a decade of proprietary software
systems. This gave Pixar a distinct edge, reflected in its superior box office performance; Exhibit 1 in the
case clearly suggests that by November 2005, Pixar’s 6 films alone averaged $537.8 million in Total Box
Office, which is approximately 100% more than Disney’s Total Box Average of $270.7 million from a
long list of 19 films [21]. Combining Disney's core competencies with the co-production agreement
created substantial value that is valuable, rare, non-substitutable, and challenging to imitate because it was
almost as if both companies joined forces in their respective absolute advantage fields. Replicating these
strategies would require significant investments and time requirements.
 Disney's internal landscape is further enriched by a multitude of resources, like strong brand
recognition. Walt Disney brand logos and slogans make their presence special in the market which makes
it a rare resource for businesses and difficult to replicate due to its widespread consumer recognition and
well-defined association [1]. Mickey Mouse, the Avengers, and Star Wars are all licensed characters that
appear on a variety of consumable products, and like other characters are well-known for their lifelong
existence. While patents and licenses protect Disney from imitation, the Patents of Disney are not well
organized which means that the organization is not using these patents to their full potential [16].
Disney's value chain analysis uncovers critical functions and activities that contribute to core
competencies. Disney is all about storytelling, whether in their films, TV shows, theme parks, or products.
They aim to provide enjoyable experiences for people of all ages. While they handle many things
internally, Disney also values having a variety of suppliers and diversity in everything they undertake.
Their inbound logistics ensure the timely acquisition of materials and resources for executing these
operations. Backed by a robust procurement system, Disney has over 7600 facilities in over 70 different
countries that make, sell, and distribute Disney branded products, or they are used in Disney’s theme
parks and stores [2]. Theme Parks all branded by Disney, have hotels, restaurants, and stores all on the
premises of the park. Studios are where the ideas and stories start, they are also where they are developed
and turned into the experience they were looking for, and then delivered into the world. Thus, it speaks to
Disney's excellent operations leveraging advanced technology and creative talent.
Disney's outbound logistics involve duplicating content for distribution, from movie theaters to
digital formats, ensuring global accessibility. Its marketing and sales strategies have evolved to target
diverse demographics, expanding from children and families to people from all walks of life, bolstered by
strategic acquisitions like Marvel and Star Wars. They employ content marketing to engage and attract
audiences, utilizing various distribution channels. Disney also leverages partnerships, such as offering
Disney toys with McDonald's Happy Meals. Moreover, Disney's approach includes remaking old classics,
captivating both new and nostalgic audiences [2].
Exceptional customer service, especially in its theme parks, enhances the overall experience,
fostering customer loyalty. These services revolve around customer satisfaction, including a 30-day return
policy on merchandise and dedicated call centers for inquiries [2]. They prioritize accessibility with
subtitles for content and provide exceptional customer service at their resorts, parks, and cruises. In
addition, Disney actively addresses societal changes, modifying films to remove controversial aspects,
especially in older productions. They invest in CSR training, prioritize safety, and maintain theme park
attractions for a magical and secure experience.
The company's support activities include a solid corporate infrastructure, talent management and
recruitment for creative professionals, extensive research and development to stay technologically
innovative, and efficient procurement processes to manage supplier relationships, all of which justifies the
brand that Disney has built today with immense faith and loyalty from its consumers.
All of the above add value to Disney and remain crucial in supporting the overall operation and
seamless functioning of the value chain.
IV. SWOT Analysis

Strengths:
1. High Brand Value and Recognition
2. Diverse portfolio [9]
3. Financial stability and strength; Large
cash flow [8]
4. High-quality intellectual property
5. Experienced Team (since Disney focuses
on hiring people with experience and who
can do the job)
6. Global Presence and Expansion [10]
7. Network of strong loyal suppliers
8. Well-known and reputed artists on the
team
Weaknesses:
1. High Operating costs and poor financial
planning [11]
2. Late in adopting new technology, for
example, delayed entry into CG Space
3. Secret lab failure due to poor investment
decisions
4. High Dependence on partnerships like
Pixar
5. Vulnerability to economic downturns in
overexposed regions like North America
6. High Attrition Rate to train and retain
employees
7. Strong Competition like DreamWorks

Opportunities:
1. Disney's online streaming services:
Disney+, Hulu, ESPN+ to compete with
Amazon, Netflix, etc
2. Further global Expansion of theme parks
[12]
3. Adopting 3D Technology to gain more
consumers and dive into more markets
4. Using social media keeps their characters
alive
5. Changing movie themes according to
changing consumer preferences
6. Strategic Acquisitions
7. Using their brand reputation to partner
with other companies to become a source
of promotion and marketing for them
Threats:
1. Shortage of labor with the required skill
set to work with the latest technology for
example CG software
2. Increasing competition from other rapidly
evolving companies, for example in terms
of streaming services
3. Companies like DreamWork target a
wider audience than just children
4. High expenses to train and retain
employees
5. Economic bubble collapse
6. Jack of all trades, master of none. Failure
to specialize in one thing to develop a
competitive advantage in it

Disney’s SWOT analysis reveals a lot of critical points. For example, its poor Financial Planning
is its big weakness costing it a lot – In 2018, Walt Disney reported a loss of over $ 1 billion due to its
investment in Hulu and BAMtech streaming technology [11]. However, if it keeps leveraging the
opportunities in the market, it can make up for it, especially in terms of its further global expansion in
terms of not only its streaming services but also theme parks. As of May 2020, Disney+ had attained 54.5
million subscribers worldwide, which equates to a revenue of about $3.7 billion annually [13]. If Disney
focuses on expanding Disney+ into developed and emerging economies globally, it can potentially grow
and nurture the streaming service into a $30 billion giant [13]. Disney has made a lot of strategic
acquisitions in the past, which shows its strength in making critical decisions, like Marvel, Pixar, and Fox.
Disney can make other strategic acquisitions in the future and catalyze its growth.[14]
 However, there are some things that pose a threat to Disney and it cannot control them -
Economic Uncertainty. Walt Disney’s earnings for 2020 were devastated by the pandemic and global
lockdown. The uncertainty in the market led to a sudden drop in net income from $11 billion in 2019 to
$2.8 billion in FY2020 [15]. It does mean that Disney can focus more on their online service in such
circumstances. Thus to secure its future, Disney must navigate not only its threats and weaknesses but
also its strengths and opportunities carefully.

V. Strategy Formulation
Disney is faced with four strategic alternatives to determine the future of its relationship with
Pixar. First is, Revamp Disney Animation; Disney can invest in a complete overhaul of its animation
capabilities to compete directly with Pixar. This would grant Disney 100% ownership of its films,
allowing for complete control over the sequels for the movies it created in collaboration with Pixar, which
has proven to be a substantial source of revenue for Disney. For example, films like Toy Story and Ice
Age generated between 30% and 90% more income than the originals for Disney[21]. However, the
financial burden of such an undertaking and the uncertainty of success as a latecomer to the CG animation
space poses significant challenges. The second route Disney can opt for is Outsourcing Animation;
Disney might choose to outsource its CG animation production to another studio. While this option would
reduce the financial burden compared to revamping its animation entirely, it carries the risk of
compromising film quality and thus potentially jeopardizing Disney's brand and revenues. This is
considering that no other studio has even come close to Pixar when it comes to creating computer
animation and feature films. A third way for Disney is to renegotiate with Pixar: Disney could pursue a
new distribution deal with Pixar, maybe offer more ownership to films or sequels or offer a higher
distribution rate. This approach offers a familiar partnership that has led to numerous box office
successes. However, previous negotiations reached an impasse, making a new agreement challenging to
achieve. The final option is for Disney to acquire Pixar outright. While this is the most expensive
alternative as it requires Disney to spend approximately $7.4 Billion [21], it ensures a harmonious
partnership and secures Disney's access to Pixar's track record of box office hits. Merril Lynch analyst
Jessica Reif Cohen termed it a ‘near-perfect strategic fit’ [7].
Considering these options, acquiring Pixar appears to be the most favorable course of action for
Disney. The history of their partnership has been marked by successful collaborations, and an acquisition
would eliminate the potential disputes that have disrupted the partnership. The financial costs associated
with the acquisition, while significant, can be mitigated by maintaining Pixar's successful operations;
Disney has a huge number of streams, other than the creation of animation movies, through which it earns
a lot of its revenue. Those streams always were and could remain independent of Pixar, even after the
acquisition allowing Disney to hedge its financial risks against income from those sources.
This approach allows Disney to fully capitalize on the synergies between the two companies.
While it allows Disney to acquire the incompatible talent and technology of Pixar, it also allows Disney to
retain their own intangible resources, the ones they are investing time and money in to create. When asked
about regrets about collaborating with Disney, Steve Jobs said “We call it going to Disney University”.
And yes while the talent Disney acquires with Pixar means nothing if Disney can't retain them, we see
that employee retention and loyalty at Disney have been impressively high. They know how to make them
feel included and rewarded by not only holding regular film ideas brainstorming sessions with them but
also rewarding them with bonuses of up to $20,000 for winning ideas [21].

VI. Strategic Alternative Implementation

The initial step in Disney's strategy implementation is the acquisition of Pixar, which presents a
considerable financial burden, ranging between $6.5 billion and $7.4 billion. However as discussed
above, this initial cost must be viewed in the context of long-term value creation.
Then Bob Iger should focus on the complex process of successfully integrating Pixar into its
operations. To ensure a successful vertical acquisition, Disney should be cautious not to disrupt their
existing practices. One approach is to maintain Pixar's internal structure while situating them under
Disney to retain Pixar's creative independence and not stifle the talent that has consistently delivered box
office hits. Another potential downside of this acquisition is cultural clashes. Therefore, Disney should
work on establishing clear lines of control, incentives, and open channels of communication to ensure that
when all the leaders from both companies sit at the same table of directors, and all the staff work together,
there are no threatening clashes and major bones of contention. All of this would ensure maximum
utilization of the potential.

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