The disneyixar relationship dynamics lessons for outsourcing vs vertical integration

The Disney-Pixar Relationship Dynamics by Yuna Sin on Prezi

the disneyixar relationship dynamics lessons for outsourcing vs vertical integration

The Disney-Pixar Relationship Dynamics Outsourcing vs. Vertical Integration FONTS Approaches Disney & Pixar Juna Sin Strategic. Read the latest articles of Organizational Dynamics at, The Disney–Pixar relationship dynamics: Lessons for outsourcing vs. vertical. The Disney – Pixar Relationship Dynamics: Lessons for outsourcing vs. vertical integration, Organizational Dynamics 40(1): 43– Benamati, J. and Rajkumar.

By using vertical integration instead of outsourcing, a firm can totally avoid this threat. Outsourcing has disadvantages that include losing control over the outsourced activity or even exposing clients to the potential opportunism of suppliers. For instance, they may charge excess fees for services that are not included in the contract.

They may also make promises knowing well that they will break these in an instant, should the benefits from breaking these promises exceed the costs or disadvantages. On the other hand, outsourcing is more flexible than vertical integration because suppliers make investments. This makes outsourcing less risky than vertical integration. A company should use vertical integration for activities with high strategic value.

These are activities based on resources and capabilities that generate a competitive advantage.

the disneyixar relationship dynamics lessons for outsourcing vs vertical integration

For instance, product design is an activity that has high strategic value for Apple. These are companies that have outsourced most of the resources and capabilities necessary to enjoy a competitive advantage and they generally fail.

Only activities with limited strategic value can and should be outsourced. A new exclusivity contract for five films was signed in with the same allocation of roles, but considerable differences in the cost benefit split. Under the new contract, Pixar would bear 50 percent of production costs in return for 50 percent of box office takings, and the profits on sales of tie-in merchandising would be shared equally between Disney and Pixar.

The other clauses were unchanged. Disney also acquired 5 percent of the Pixar. Finding Nemo is Pixar s greatest success to date. It knocked Disney s The Lion King off the top of the rankings for the most profitable animated film in history. It also became the best-selling DVD ever for any film category. Steve Jobs took advantage of this situation to make a new proposal to Disney in His objective was to strike a deal similar to the one that George Lucas had with Twentieth Century Fox for his Star Wars series.

First, Pixar offered to pay all production costs in return for percent of box office takings and full ownership rights to the films. Second, Pixar proposed to reduce the distribution fee from Third, Pixar asked for these new conditions to be applied retroactively to The Incredibles and Cars, two films covered by the contract.

Steve Jobs justified this last demand as follows: To fold the two remaining films into a new deal is consistent with common practice in Hollywood, where studios often grant such concessions to keep a valued partner It would have mirrored the renegotiation of the contract between Disney and Pixar after Pixar s first hit, Toy Story, under which the two remaining films from the old deal became the first two under a new contract.

After discussions lasting several months, Disney put forward the following counterproposal: While Pixar was prepared to raise the distribution fee, it would not budge on the respective shares of takings.

Negotiations eventually broke down in February which led some Disney board members to ask for the departure of Michael Eisner. Table 2 shows the breakdown of costs and benefits between Disney and Pixar in the agreement, the agreement and the various proposals and counterproposal made by the two partners in and Four studios were approached to handle the distribution of the films Pixar would make after the end of its contract with Disney: Contrary to expectations, no agreement was announced with any of these studios.

During the negotiations, Chicken Littlethe first 3D animated film made entirely by Disney, was only Table 2 Breakdown of costs and benefits between Disney and Pixar.

Its box office takings were lower than those of A Bug s Life, the Pixar film that had registered the lowest audience figures. In JanuaryDisney announced the takeover of Pixar for 7. After the takeover, Ed Catmull became president of both animation studios. Although they were renamed Disney and Pixar Animation, they did not truly merge. For instance, the Pixar teams did not move to join Disney s teams in Burbank. The merger agreement also explicitly stipulated that the Pixar Animation logo on Pixar s facilities in Emeryville would not be replaced by the Disney and Pixar Animation logo.

Nevertheless, considerable pressure was put on Pixar. First, the pace of production was increased seven films were announced for the period. However, the fact that vertical integration can help deal with the opportunism of a supplier is clearly visible in the relationship between Disney and Pixar. Specifically, Disney s takeover of Pixar can largely be explained by the increasing opportunism of Steve Jobs.

After the success of Finding Nemo, Jobs demanded that the agreement should be reviewed in favor of Pixar. More important, he asked for the new terms to apply retroactively to The Incredibles and Cars. This behavior can be classified as opportunistic because the two films should have been governed by the contract and not by a new one.

In addition, they were already in production. Therefore, it is not surprising that Disney turned down Pixar s offer. As its chief financial officer explained: Disney management could not accept Pixar s final offer because it would have cost Disney hundreds of millions of dollars it is entitled to under the existing agreement.

Consistent with the opportunism approach, it is essentially the small numbers bargaining situation that made it possible for Jobs to behave opportunistically.

For Disney, the only alternative to Pixar was Dreamwork the studio set up by Jeff Katzenberg after leaving Disney on acrimonious terms. To some extent, the takeover of Pixar was a way for Disney to alleviate the increasing opportunism of its partner.

As Steve Jobs commented after the merger: Disney and Pixar can now collaborate without the barriers that come from two different companies with two different sets of shareholders. Competitive Advantage in 3D Animation Technologies For the competitive advantage approach, vertical integration is primarily driven by the need to achieve a competitive advantage. This approach is very useful for explaining why Disney began by outsourcing the production of 3D animated films to Pixar before deciding to acquire its partner.

InDisney did not have any expertise in 3D animation. At that time however, 3D animation capabilities were not required to possess a competitive advantage in the animated films industry. Bythe situation had radically changed. Despite all its efforts, Disney had been unable to develop expertise in 3D animation in-house.

Vertical Integration Definition from Financial Times Lexicon

Therefore, the takeover of Pixar was a way for Disney to integrate sorely needed 3D animation capabilities. It is important to note that the lack of technological capabilities was not the only reason for the takeover. Apart from skills in 3D animation skills, Disney also seemed to lack creativity. Under Michael Eisner, the company never really faced up to the change of paradigm that affected the animated film business. Only Pixar had managed to strike the perfect balance between the creative and technological facets of 3D animated films.

When you go into other studios, you ll find that most are either artistically driven or technically driven. We ve tried hard to make sure that our technical people and creative people are peers.

We ve found that when the technology is strong, it inspires the artists. And when the artists are strong, they challenge the technology. Uncertainty Around 3D Animation Technologies The flexibility approach is less frequently used than the opportunism approach and the competitive advantage approach.

However, it seems to have a particularly strong explanatory power in the case of the Disney Pixar relationship. Inthe big question was what sort of reception the audience would give an animated film made entirely with 3D technologies.

It is important to remember that Tron the first feature-length film mixing traditional animation and computer-generated imagery animation had been an expensive flop for Disney in As the uncertainty around the potential of computer-generated imagery animation was high, Disney found it preferable to let a partner invest in this emerging technology.

In other words, outsourcing the production of 3D animated films was a way for Disney to avoid risky investments in an unproven technology.

the disneyixar relationship dynamics lessons for outsourcing vs vertical integration

As one success followed another, the uncertainty surrounding 3D animation progressively melted away. As the need for flexibility disappeared, the benefits of outsourcing as compared to vertical integration also decreased. Thus, it is often difficult for managers to determine whether they should outsource or integrate an activity.

The framework proposed in this article suggests that three different approaches must be simultaneously considered to make successful outsourcing or vertical integration decisions: The Disney Pixar relationship between and clearly illustrates the framework. Taken individually, no approach can fully analyze the dynamics of the Disney Pixar relationship.

However, the framework suggests that outsourcing the production of 3D animated films made sense for Disney in because: Byvertical integration had become necessary for Disney because: Lessons from the Disney Pixar relationship are straightforward. First, a firm should use vertical integration when there is a threat of being unfairly exploited by its supplier. Otherwise, it is safe to use outsourcing. Second, a firm should use vertical integration for activities with high strategic value cf.

Only activities with limited strategic value should be outsourced. Third, outsourcing is generally a more flexible option than vertical integration. Hence, firms should use outsourcing when the environment is uncertain. It is worth noting that the framework sometimes leads to contradictory recommendations for managers. For instance, the threat of opportunism may be high suggesting vertical integrationwhereas the level of uncertainty may also be high suggesting outsourcing.

Likewise, the potential for competitive advantage may be high suggesting vertical integrationwhereas the level of uncertainty may also be high suggesting outsourcing. In such cases, decisions to use outsourcing or vertical integration will depend on the weights placed by managers on the three approaches. While various contingencies may influence how managers weigh and act on the three approaches, risk orientation is a particularly important one.

For instance, risk averse managers will be reluctant to outsource an activity when the threat of opportunism is high, no matter the level of uncertainty. Even when the framework suggests that outsourcing is feasible, it must be kept in mind that successful outsourcing also requires an ability to select and control suppliers.

For instance, Boeing had always designed and built its planes inhouse. To increase flexibility, they made the decision to outsource most of the Dreamliner s manufacturing to a global network of over 50 suppliers.

The Disney-Pixar relationship dynamics : lessons for outsourcing vs. vertical integration - EconBiz

Only final assembly would be performed by Boeing, using modules provided by the suppliers. Because manufacturing was outsourced to over 50 suppliers worldwide, the potential for supplier opportunism was low.

To avoid losing competitive advantage, Boeing also kept final assembly in-house. Only the production and some of the design of the modules were outsourced. Today, the project is over two years behind schedule.

The Disney-Pixar relationship dynamics : lessons for outsourcing vs. vertical integration

A major reason for the delay is that Boeing was not sufficiently prepared, and somehow lost control over its suppliers. In addition, some suppliers were unable to live up to the expectations of Boeing. As a result, Boeing has brought back major production lines in-house and hired engineers to oversee its suppliers.

Finally, it is important to note that other factors also have a decisive influence on outsourcing vs. In the Disney Pixar relationship, the adversarial relationship between Steve Jobs and Michael Eisner helps explain why the negotiations broke up in Conversely, Pixar s decision to accept Disney s takeover offer in was partly due to Jobs health problems.

the disneyixar relationship dynamics lessons for outsourcing vs vertical integration

As Galyn Susman, associate producer of the Ratatouille film, revealed at a conference of the Amis de l Ecole de Paris in About four years ago, Pixar was about to go completely independent from our distribution and marketing deal with Disney and do it on our own. We were considering having someone else do the distribution, but we would do everything else, including all of the marketing. Then Steve was diagnosed with cancer, and upon his recovery I think he realized he needed to do only one company and spend more time with his family.

Pixar was sold to Disney. He s the largest individual shareholder of Disney.