Case Sample (Disney Pixar)

Case Study Analysis of

Disney.Pixer

EXECUTIVE SUMMARY For its creativity in the animation business, since 1991, Disney chose Pixar to become partner and had had a 3 in-a-row movie contract. One of the movie, “Toy Story”, by Disney-Pixar made a tremendous success in the Box office and made a revenue of more than US$350 million. Since, then Disney-Pixar combination was thought to be “Bringing back Walt Himself!” And Disney had to depend on the characters and revenue generated by the partner Pixar. But as the exiting co-production agreements was about to expire in 2006, Disney was in dilemma about the future action. . In this baffling situation, would it be a wise move by Disney to acquire Pixar with a cost around $7.4 billion is the main is the main theme of this case study. Careful observation of this case gives several problem area for Disney-Pixar acquisition dilemma. For example, from financial management perspective, the question was- “does is make sense to spend such amount for acquisition? And is the dilution is acceptable by the existing shareholders?” and the recommendation for this question is — if the company only consider the NPV figure then the obvious decision would be not to acquire Pixar because NPV of the acquisition is negative i.e. -$.5 million considering only the financial gains. But NPV can ignore some synergy effect like marketing gains, strategic benefits, monopoly power which can be acquired through acquisition. Moreover, technology transfer through acquiring Pixar will be a milestone for Disney. So if we consider those synergy effect, then Disney can acquire Pixar. However, exercise dilution won’t be an issue if synergy effect overpass dilution effect. Moreover, HRM department was in needs of solution regarding team effectiveness and the recondition according to analysis is— Disney should follow the Belbin’s model. And roles should be distributed in such way so that same weakness could not affect the whole team. As for differentiation strategy Disney should follow the combination of cost and differentiation strategy.

TABLE OF CONTENTS Executive Summary ........................................................................................................................ 2 Table of contents ............................................................................................................................. 3 Chapter 1 ......................................................................................................................................... 6 1.1

Case Background.............................................................................................................. 6

1.2 Research Problem ................................................................................................................. 7 1.2.1 High cost of acquisition and excessive stock dilution problem ..................................... 7 1.2.2 Very low opportunity to expose the creativity in Disney .............................................. 7 1.2.3 Increasing competition in global market and low differentiation strategy for sustainability ........................................................................................................................... 7 1.3 Research Questions ............................................................................................................... 8 1.3.1 Research Question 1: ..................................................................................................... 8 1.3.2 Research Question 2: ..................................................................................................... 8 1.3.2 Research Question 3: ..................................................................................................... 8 1.4 Research Aims and objectives .............................................................................................. 8 1.5 Structure of the report ........................................................................................................... 9 Chapter 2 ....................................................................................................................................... 10 2.1 Case brief ............................................................................................................................ 10 Chapter 3 ....................................................................................................................................... 12 3.1 Financial Management ........................................................................................................ 12 3.1.1 MM (Modigliani-Miller) propositions ......................................................................... 12 3.1.2 NPV of Acquisition...................................................................................................... 13 3.1.2 Balance Score Card (BSC)........................................................................................... 13 3.2 Human Resource Management (HRM) .............................................................................. 14 3.2.1 Belbin’s Team Roles Model ........................................................................................ 14

3.2.2 Human Resource (HR) Score Card .............................................................................. 15 3.2.1 Six Sigma Model.......................................................................................................... 15 3.3 International Business Management ................................................................................... 16 3.3.1 Integration/ Responsiveness Grid Model ..................................................................... 16 3.3.2 Risk reward analysis .................................................................................................... 17 3.3.3 Porter’s Generic Competitive Strategies ...................................................................... 18 Chapter 4: Analysis and findings .................................................................................................. 19 4.1 Financial Management ........................................................................................................ 19 4.1.1 Analyzing the Sub Problem 1: Regarding NPV of Acquisition .................................. 19 4.1.2 Analyzing the Sub Problem 2: Regarding financing the acquisition cost ................... 19 4.1.3 Analyzing the Sub Problem 3: Regarding Balance Score Card ................................... 20 4.2 Human Resource management ........................................................................................... 20 4.2.1 Analyzing the Sub Problem 4: Team effectiveness and Belbin’s model ..................... 20 4.2.2 Analyzing the Sub Problem 5: Regarding HR score card ............................................ 21 4.2.3 Analysis of the Sub Problem 6: Reducing wastage cost .............................................. 21 4.3 International Business ......................................................................................................... 21 4.3.1 Analysis of Sub Problem 7: Global business strategy ................................................. 21 4.3.2 Analysis of Sub Problem 8: Motivation of global employee ....................................... 22 4.3.3 Analysis of Sub Problem 9: Differentiation................................................................. 22 Chapter 5 ....................................................................................................................................... 23 5.1 Alternate Solution 1 [Best Fit Solution] ............................................................................. 23 5.1.1 Regarding Financial Problem ...................................................................................... 23 5.1.2 Regarding HRM (Human Resource Management) Problem ....................................... 24 5.3.1 Regarding International Business problem .................................................................. 24 5.2 Alternate Solution 2 ............................................................................................................ 25 Page | 4

5.2.1 Regarding Financial Problem ...................................................................................... 25 5.2.2 Regarding HRM (Human Resource Management) Problem ....................................... 25 5.2.3 Regarding International Business problem .................................................................. 25 5.3 Alternate Solution 3 ............................................................................................................ 26 5.3.1 Regarding Financial Problem ...................................................................................... 26 5.3.2 Regarding HRM (Human Resource Management)...................................................... 26 5.3.3 Regarding International Business Problem .................................................................. 26 5.4 Best Fit Solution and Action plan ....................................................................................... 27 Conclusion .................................................................................................................................... 27 References ..................................................................................................................................... 28

List of figures and tables Figure 1 MM proposition (Modigliani & Miller, 1958) ............................................................... 12 Figure 2 Belbin's Model (Bilbin.com, 2015) ................................................................................ 14 Figure 3 HR Score Card (Martin, 2000) ....................................................................................... 15 Figure 4 Six Sigma Dimension (Geoff, 2006) .............................................................................. 16 Figure 5 Globalization Strategy (Besly, 2005) ............................................................................. 17 Figure 6 Risk Reward Model for global employee (Kethrin, 2005) ............................................. 17 Figure 7 Porter’s Generic Competitive Strategies (Source- Richard, 2002) ................................ 18

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CHAPTER 1 1.1 CASE BACKGROUND Because of the technological advancement in the animation industry through the innovation of CG (Computer Generated) technology which enabled to supersede the hand drawn animation rapidly, animation movie business found a new window of opportunity to make outsized profit with a very low cost, time requirements and also gave the animator a high flexibility to animate. Pixar, a creative name in the animation movie business, leaded this High tech opportunity as they had just inaugurated this technology by the year 2005 throughout the world. On the other hand, Disney, a giant name in the animation industry, was struggling hard to get a clench on CG (Computer Generated) technology which was the competitive advantage of Pixar over its rivalry. For its creativity in the animation business, since 1991, Disney chose Pixar to become partner and had had a 3 in-a-row movie contract. One of the movie, “Toy Story”, by Disney-Pixar made a tremendous success in the Box office and made a revenue of more than US$350 million. Since, then Disney-Pixar combination was thought to be “Bringing back Walt Himself!” And Disney had to depend on the characters and revenue generated by the partner Pixar. But as the exiting co-production agreements was about to expire in 2006, Disney was in dilemma about the future action. The competition in the animation industry become fierce as numbers of giant competitors like Warner Bros, DreamWorks, Fox, Sony were coming into the way because technology was advancing and entry barrier was losing because of the easy access to new technology. In this baffling situation, would it be a wise move by Disney to acquire Pixar with a cost around $7.4 billion is the main is the main theme of this case study. There are can be so many positive effect of acquisition like shared activities, shared resources and increased industry attractiveness along with the negative effect of acquisition like cultural clash, stock dilution etc. Given this dilemma, big question standing in front of Disney is whether to acquire Pixar or not!

1.2 RESEARCH PROBLEM Careful observation of this case gives several problem area for Disney-Pixar acquisition dilemma. Of them, some critical problems will be focused in this report. By categorizing those problem is different class, some problems are given below1.2.1 High cost of acquisition and excessive stock dilution problem As the investment bank reported, the purchase cost of this acquisition would be between $6.5 billion to $7.4 billion. Exchange ratio of stock was expected to be 2.3:1 (Disney: Pixar). This high cost of acquisition will dilute the stock excessively as the current P/E of Pixar is 46 while Disney has only a P/E of 16. Before making the purchase, these issue must be considered. For the discussion propose the major problem are subcategorized into 3 section as described in chapter 3. 1.2.2 Very low opportunity to expose the creativity in Disney The main source of differentiation of Pixar is not only the CG technology but also the existing creative employees of Pixar who run the system. If the existing employee of the Pixar walk away, there would be nothing to differentiate but some expensive computer parts. Moreover, there would be a cultural clash among the employee as cultural environment was quite different for both of the firms. These 2 issue regarding HRM must be kept in mind while acquisition was going on. For the discussion propose the major problem are subcategorized into 3 section as described in chapter 3. 1.2.3 Increasing competition in global market and low differentiation strategy for sustainability The entry barrier in the world’s animation business was decreasing day by day because of the easy access to new technology. The competition in the international animation industry became fierce as numbers of giant competitors like Warner Bros, DreamWorks, Fox, and Sony were coming into the way. To make differentiation in the international arena, Disney needed the CG technology from the partner Pixar or Disney would face the question of sustainability. For the discussion propose the major problem are subcategorized into 3 section as described in chapter 3.

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1.3 RESEARCH QUESTIONS According to the problem stated in the section 1.2, some questions will be defined accordingly in this section. 1.3.1 Research Question 1: Financially does is make sense to spend such amount for acquisition? And is the dilution is acceptable by the existing shareholders? 1.3.2 Research Question 2: Is there any contract signed with the existing employee for their availability in the firm after the acquisition? And does the company give enough opportunity to use their creativity that enables both the effectiveness and efficiency of the team effort? 1.3.2 Research Question 3: Does Disney has creative strategy to different itself from giant competitors like Warner Bros, DreamWorks, Fox, and Sony? 1.4 RESEARCH AIMS AND OBJECTIVES This research paper will try to achieve the following objectives— The objective Regarding Financial management would be to find out the logical explanation in favor of acquisition and against the acquisition cost. Moreover, this research paper will try to find out the rationale behind the stock dilution during the acquisition. From the Human Resource Management perspective, the objective will be to find out the possible post team effectiveness of Pixar team and the importance of their existence in Disney. The objective regarding international business would be to find out the current international business strategy to differentiate from the international competitors.

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1.5 STRUCTURE OF THE REPORT To know and determine Disney’s current problem this report is structured. As a result company surroundings will be better understood. Moreover, company’s current dilemma regarding acquisition of Pixar will have top priority to find a better solution. In total this report will have five major chapters. The first chapter will be devoted to describe the basic structure, aim and objective. Moreover, in this chapter several relevant research questions will be developed. In the 2nd chapter, an overview of the case will be given precisely. In the third chapter several model will be described so that relevant problem regarding financial management, Human resource management as well as international business could be resolved. In the 4th chapter individual problem will be discussed with respect to findings of the problem. In chapter five several recommendations against the stated problem will be given. By giving a precise conclusion the report will be ended.

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CHAPTER 2 2.1 CASE BRIEF New Management and excessive bureaucracy—

Soon after the departure of Jeffrey

Katzenberg who was famous for his roaring passion, ethics and devotion for animation and had also a dream to escalate Disney to its former glory, Disney’s performance started to decline as he inaugurated the rival- DreamWorks in 1997. In 2005 Robert Iger was promoted to CEO of the Walt Disney (Euro Monitor, 2004). The fall of Disney Kingdom—the main problem in Disney’s operation started from the mid of 2002 when earnings started to decline, shareholders were fleeing and a major lawsuit against Disney regarding Winnie-the-Pooh happened. In 2003 another turmoil happened as Roy Disney, nephew of Walt Disney, resigned from the board and complained about the Eisner’s management style, reticence in investing decision, vague succession plan as well as a “creative brain drain”. Most portion of the shareholders were struggling to get Eisner out of the chair. On the other hand, the strategic business partners, Miramax and Pixar, were unsatisfied about their negligence and unfair treatment of Eisner. Eisner followed the excessive filtering process as well as approval process was bureaucratic (Times magazine, 2004). These strict rules and regulations affected the creativity of Disney’s employees to bloom. After a lots of straggle, at last, in January 2005 Eisner agreed to stand down. Soon after the walk out of Eisner, In 2005 Robert Iger was promoted to CEO of the Walt Disney. After the change in leadership everybody was thinking about the new rise of Disney. Robert Iger believed that- to be successful in the animation business, CG technology needed to be emphasized. So, Disney was struggling hard to get a clench on CG (Computer Generated) technology which was the competitive advantage of Pixar over its rivalry. For its creativity in the animation business, since 1991, Disney chose Pixar to become partner and had had a 3 in-a-row movie contract (Disney, 1990). Excessive Dependency on Pixar for revenue and CG technology—When Robert Iger was the chief, Disney’s was mostly depended on the revenue and characters generated by its partner Pixar. Because of the technological advancement in the animation industry through the innovation of CG (Computer Generated) technology in 2005 which enabled to supersede the hand drawn animation rapidly, animation movie business found a new window of opportunity to Page | 10

make outsized profit with a very low cost, time requirements and also gave the animator a high flexibility to animate. Pixar, a creative name in the animation movie business, leads this High tech opportunity as they had just inaugurated this technology by the year 2005 throughout the world. Astounded by Pixar’s creativity, Robert Iger turned his attention toward Pixar deeply as Pixar was able to produce such successful movie as “Toy Story” and “Finding Nemo” etc. One of the movie, “Toy Story”, by Disney-Pixar made a tremendous success in the Box office and made a revenue of more than US$350 million. Since, then Disney-Pixar combination was thought to be “Bringing back Walt Himself!” But lots of turmoil happed in the last four years. The Rising competition and Pixar dilemma of acquisition— the competition in the animation industry became fierce as numbers of giant competitors like Warner Bros, DreamWorks, Fox, and Sony were coming into the way because technology was advancing and entry barrier was losing because of the easy access to new technology. In this baffling situation, would it be a wise move by Disney to acquire Pixar with a cost around $7.4 billion is the main is the main theme of this case study (Martin, 2003). There are can be so many positive effect of acquisition like shared activities, shared resources and increased industry attractiveness along with the negative effect of acquisition like cultural clash, stock dilution etc. Given this dilemma, big question standing in front of Disney is whether to acquire Pixar or not! This research paper will try to find out the answer of the question- Is there any enthralling reasons for Disney to acquire Pixar?

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CHAPTER 3 Based on three major area namely financial management, Human Resource Management (HRM) and International Business (IB), the problem of Disney Pixar dilemma will be explained in this chapter with the help of different model. 3.1 FINANCIAL MANAGEMENT The objective Regarding Financial management would be to find out the logical explanation in favor of acquisition and against the acquisition. For this purpose some logical related theories and model will be given in the following section along with criticism. 3.1.1 MM (Modigliani-Miller) propositions Disney’s major problem spins around acquiring Pixar and huge cost concerning the acquisition. And as for financing this huge amount Disney thought of new equity issue as well as bank loan. But how much the proportion of debt and equity will be is the main concerning issues at present. With the help of MM propositions Disney can find the correct financing sources.

Figure 1 MM proposition (Modigliani & Miller, 1958)

Recard (2012) argued against this proposition as the model does not consider the transaction cost. Moreover, Stewart C. (2008) also did not support this model as this model has unrealistic assumption about the borrowing rate. But Ross (2013) and Westerfield (2013) support this model because of the best possible correct assumption.

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3.1.2 NPV of Acquisition Disney spend $7.4 billion for acquiring Pixar which can make as much as 65 sequel of story like “Toy Story”. Does it make sense to spend such an amount is the burning question at present. NPV calculation of Acquisition will be a great help in this regard because NPV consider the “synergy effect” of merger and thus can give the sense whether acquisition adds value to the common shareholders (Ross, 2012). Moreover, it will compare the payment method- cash or common stock which creates sense in this situation. 3.1.2 Balance Score Card (BSC) Because of the lack in operational expertise and team effectives, Disney currently lost their business track. Balance Score Card (BSC) will be helpful to solve this problem by tagging individual department SMART objectives to acquire. Balance score card is a powerful tool used by many organization to control the organization accurately (Relly, 2005). BSC explain the business activities in four specialized section namely financial, customer, internal control and innovation. Under financial section, department head will tag the target to acquire and after the actual result, comparison between actual and target goal will be assessed accordingly to find out the problem therein.

Hill (2010) argued that BSC model is not a rational model because the model does not explain the dimension precisely. Moreover, Martin (2012) also criticized this model by raising an issue

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regarding the usage. But Westerfield (2011) was very optimistic about this model and showed in his model that BSC has realistic assumption by challenging the objection of Hill (2010). 3.2 HUMAN RESOURCE MANAGEMENT (HRM) From the Human Resource Management

perspective, the objective will be to find out the

possible post team effectiveness of Pixar team and the importance of their existence in Disney. Following model will be helpful to solve the Disney dilemma. 3.2.1 Belbin’s Team Roles Model Disney currently could not cream out the best performance of the team because of their bureaucratic human management system. Creativity is the main strength of the film industry and Disney is unable to give the opportunity to the employees to express their creative thinking. Belbin (2015) model will be real help in this case because this model categorizes the team roles into different subcategories so that the team will not be affected by same weakness or same strength which is very helpful to cream out the best team performance (Bilbin.com, 2013). There are three major categories in this model namely thinking, people and action oriented categories. Under thinking categories 3 roles will be included namely monitor evaluator, plant and specialist. Under people category three other roles will be included namely coordinator, resource investigator and team work.

Figure 2 Belbin's Model (Bilbin.com, 2015)

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Farsemen (2009) and Zhang Lei (2012) argued that this model does not cover all the aspects of the team effectiveness. But Mr. Krimth (2005) gives a very positive view about this model and explained via an empirical analysis. 3.2.2 Human Resource (HR) Score Card As Disney is in trouble to get the best output of the employees, the company could not get the proper profit trend from their operation. HR score card will be helpful in this regard because this model will give the specific goal to specific department to achieve for which individual employee will be accountable (Martin, 2012). Moreover, this model also helps to achieve the proper expertise in job section and employer will arrange for career development session for the employees.

Figure 3 HR Score Card (Martin, 2000)

Halt (2012) and Martin (2008) argued about this model by questing the dimension of this model and they suggest other three dimension besides HR original mode. But Kethrin (2009) explained that individual goal assignment will be helpful to cream out the best performance of the company. 3.2.1 Six Sigma Model Increased number of dummy were tested in the previous year by Disney team but no proper idea was found to incorporate in real movie. As a result, wastage cost increased dramatically. Six sigma model introduced by Motorola in 1986 will be effective to solve this problem regarding the HRM management. Under six sigma model, 6 different measures will be introduced and thus Page | 15

wastage cost can be reduced to certain level. Define, measure, analyze, control and improve are the 6 dimensions to resolve the HR dilemma.

Figure 4 Six Sigma Dimension (Geoff, 2006)

Joseph M. Juran (1996) questioned about the dimensions of this model by explaining the effectiveness of this mode. But But Geoff (2001) and Bruce (2005) were gives positive opinion about this model and explained the real scenario of Motorola. 3.3 INTERNATIONAL BUSINESS MANAGEMENT The objective regarding international business would be to find out the current international business strategy to differentiate from the international competitors. Different model will be explained in this section by explaining different theories therein. 3.3.1 Integration/ Responsiveness Grid Model Because of the global fierce competition, Disney needs is in problem of choosing the right globalization strategy (Besley, 2005). Currently the company is using the international strategy but at present the pressure from the local area and pressure from cost both are high for Disney.

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Figure 5 Globalization Strategy (Besly, 2005)

So the company needs a very precise globalization strategy which is “Transitional Strategy”. Transitional strategy is proper because both cost pressure and local pressure is high for Disney. 3.3.2 Risk reward analysis In Disney, both monetary and non-monetary motivation is very low for the employees. As a result the companies were not getting the correct output from the employees (Brown, 2004).

Figure 6 Risk Reward Model for global employee (Kethrin, 2005)

Risk reward analysis will help to resolve the dilemma by giving the correct combination of reward against the taken risk. Moreover, this model will helps to build up the self-confident of the employees.

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3.3.3 Porter’s Generic Competitive Strategies Disney has the competitors like Sony, Warner Brother and 20th Century Fox as a global competitors. On the presence of these competitors, Disney is in dilemma of choosing whether they emphasize on quality or cost. Porter’s Generic Competitive Strategies will be very helpful in this regard (Richard 2002).

Figure 7 Porter’s Generic Competitive Strategies (Source- Richard, 2002)

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CHAPTER 4: ANALYSIS AND FINDINGS With the context of financial management, Human Resource Management (HRM) and International Business (IB), this chapter will try to analyze the problem and finding for DisneyPixar dilemma. 4.1 FINANCIAL MANAGEMENT Under the financial management though the main problem is regarding the high acquisition cost and excessive dilution, for discussion purpose, main problem are subcategorized into following 3 sub problems. 4.1.1 Analyzing the Sub Problem 1: Regarding NPV of Acquisition Before taking the decision of acquisition it is crucial to analyze whether the acquiring company worth the cost. From the exhibit 11 of the case study, it is found that from the estimation of the cash flow from 2006 to 2015, Pixar share and Disney share exchange ratio should be 1.09 to 1.4. Which means for 1 Pixar share, Disney will give 1.4 own share. As per 2006 the Pixar share value Pixar worth 5 times 1.4 billion which results in total of $7 billion. But Disney needs to spend $7.4 billion in total for acquiring Pixar which can make as much as 65 sequel of story like “Toy Story”. So NPV of acquisition is -$.5 billion by considering all the relevant cost of transaction. The analysis shows that the NPV is not positive for Disney which indicates that there is no net benefit of acquiring Pixar if correct strategy is not followed. 4.1.2 Analyzing the Sub Problem 2: Regarding financing the acquisition cost From the exhibit 2 of the case study, it is found that the company is currently following 70-30 strategy where 70% is the equity funding and 30% is the debt funding. For many project the company followed this strategy. Ignoring the debt source of financing is not a good strategy for a company like Disney. Such debt ignorance deprive from the benefit of tax. In the year of 2006 the company paid $2,403 million tax to the government from which major percentage can be saved through proper debt and equity combination. To acquire the company like Pixar the company was thinking of debt source largely by ignoring their traditional way of funding. For this purpose they hired Deutsche Bank to analyze the issue regarding the funding. Page | 19

4.1.3 Analyzing the Sub Problem 3: Regarding Balance Score Card Disney company analysis and financial statements gives the basics of BSC analysis. Analysis found that for financial success measure the company’s variable are net profit margin and leverage ratio. Disney’s targeted the net profit margin growth was 5% but 2006s statement shows a negative growth in Net profit margin growth of 2%. And the leverage ratio was to be 25% but the company resulted in 30% leverage in 2006 which did not acquire the target. From the customer’s satisfaction perspective, target increase in customer was expected to be 5% but the actual result was 3%. And innovation of Disney could not buzz the film industry. The company largely dependent on Pixar rather than increasing the company’s creativity. Employees were not giving their best result because the activity ratio like asset turnover was very low. 4.2 HUMAN RESOURCE MANAGEMENT Under the HRM, though the main problem is regarding very low opportunity to expose the creativity in Disney, for discussion purpose, main problem are subcategorized into following 3 sub problems. 4.2.1 Analyzing the Sub Problem 4: Team effectiveness and Belbin’s model Creativity is the main strength of the film industry and Disney is unable to give the opportunity to the employees to express their creative thinking. Disney currently could not cream out the best performance of the team because of their bureaucratic human management system. Analysis found that Disney followed a very bureaucratic way to make the move idea which impede the creative thinking of the employee. The creative team did not give all the employee same opportunity to share the idea which creates the problem in “free to talk” concept. As a result the Disney could not make proper animation movie character which attracts the viewer on the first sight. There are three major categories in this model namely thinking, people and action oriented categories. Under thinking categories 3 roles will be included namely monitor evaluator, plant and specialist. Under people category three other roles will be included namely coordinator, resource investigator and team work. But unfortunately Disney followed neither of the strategy.

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4.2.2 Analyzing the Sub Problem 5: Regarding HR score card Disney did not give the specific goal to specific department to achieve for which individual employee will be accountable. Moreover, Disney did not help the employees to achieve the proper expertise in job section and did not arrange for career development session for the employees. In such case the problem will be severe because employees work without knowing their goal to achieve. 4.2.3 Analysis of the Sub Problem 6: Reducing wastage cost Analysis of the case found that wastage cost increased dramatically because increased number of dummy were tested in the previous year by Disney team but no proper idea was found to incorporate in real movie. There is no integration among define, measure, analyze, control and improve of the employees’ performance. As a result most of the cost of producing a movie goes for wastage purpose. It is important to reduce this cost by proper incorporation of define, measure, analyze, control and improve of the employees’ performance. 4.3 INTERNATIONAL BUSINESS Under the International business, though the main problem is regarding increasing competition in global market and low differentiation strategy for sustainability, for discussion purpose, main problem are subcategorized into following 3 sub problems. 4.3.1 Analysis of Sub Problem 7: Global business strategy Currently the company is using the international strategy but at present the pressure from the local area and pressure from cost both are high for Disney. So, international strategy is not a proper strategy for Disney. Because of the global fierce competition, Disney is in need of choosing the right globalization strategy. Because giant global competitors like Sony, Warner Brother and 20th Century Fox are in the way of Disney. So, for better performance and sustainability the company should concentrate on proper business strategy for global world.

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4.3.2 Analysis of Sub Problem 8: Motivation of global employee Findings shows that Disney was not getting the correct output from the employees because both monetary and non-monetary motivation is very low for the employees. The discrepancy in power delegation as we as motivation discourage the employees to give their creative output. The company did not consider the risk reward concept to determine the motivation. This creates severe problem in Disney. 4.3.3 Analysis of Sub Problem 9: Differentiation On the presence of giant competitors like Sony, Warner Brother and 20th Century Fox, Disney is in dilemma of choosing whether they emphasize on quality or cost. At present the company emphasizes on quality assurance by ignoring the cost completely. But the competitors like Sony and WB produce the same kinds of movie with a lower cost. In such case the profitability of Disney is decreasing. The combination of both the cost and differentiation is crucial for company development.

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CHAPTER 5 In the previous two chapter i.e. 4 & 5 several problems are identified based on the current situation of Disney on the context of financial management, Human Resource Management and International Business. This chapter will try to give alternate solution along with the best fit option and action plan accordingly. 5.1 ALTERNATE SOLUTION 1 [BEST FIT SOLUTION] In this section alternate solution and recommendation will be given based on the sub problem analysis done in section 4.1 5.1.1 Regarding Financial Problem Whether the acquisition causes a positive effect on a company depends on the sources of synergy from acquisition. Disney can acquire Pixar if revenue is enhanced through marketing gains or strategic benefits or monopoly power. Moreover, if cost is reduced through economy of scale or economy of vertical integration or technology transfer or contemporary resources or through elimination of inefficient management, then Disney can acquire Pixar. Financial gain like tax gain through unused debt capacity usage or usage of tax losses or usage of surplus fund can motivate the acquisition. However, from the analysis it was found that NPV of the acquisition is negative i.e. -$.5 million considering only the financial gains. And most importantly, as the investment bank reported, the purchase cost of this acquisition would be between $6.5 billion to $7.4 billion. Exchange ratio of stock was expected to be 2.3:1 (Disney: Pixar). This high cost of acquisition will dilute the stock excessively as the current P/E of Pixar is 46 while Disney has only a P/E of 16. Recommendation: if the company only consider the NPV figure then the obvious decision would be not to acquire Pixar because NPV of the acquisition is negative i.e. -$.5 million considering only the financial gains. But NPV can ignore some synergy effect like marketing gains, strategic benefits, monopoly power which can be acquired through acquisition. Moreover, technology transfer through acquiring Pixar will be a milestone for Disney. So if we consider those synergy effect, then Disney can acquire Pixar. However, exercise dilution won’t be an issue if synergy effect overpass dilution effect.

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5.1.2 Regarding HRM (Human Resource Management) Problem As the Creativity is the main strength of the film industry and Disney is unable to give the opportunity to the employees to express their creative thinking, some effective measure should be taken for this purpose. For example, Disney should give the opportunity to “free to talk” while accumulating the movie ideas. Moreover, while dividing the team, management should not create a team with same strength or same weakness. Recommendation: Disney should follow the Belbin’s model. There are three major categories in this model namely thinking, people and action oriented categories. And based on these categories, people who have the role like monitor evaluator, plant and specialist should devote the thinking job like idea generation. Under people category Disney should devote those people who have roles like coordinator, resource investigator and team work. Lastly to implement the idea, Disney should devote a team who are expert in action oriented roles. Moreover, Disney should give equal opportunity to all employee to share their movie ideas. 5.3.1 Regarding International Business problem At present the pressure from the local area and pressure from cost both are high for Disney, though Disney is following the international strategy. Disney is in need of choosing the right globalization strategy. Because giant global competitors like Sony, Warner Brother and 20 th Century Fox are in the way of Disney. Recommendation: as the international strategy is not a proper strategy for Disney, Globalization will be a right fit because the pressure from the local area and pressure from cost both are high for Disney.

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5.2 ALTERNATE SOLUTION 2 In this section 2nd alternate solution and recommendation will be given based on the sub problem analysis done in section 4.1 5.2.1 Regarding Financial Problem The company is currently following 70-30 strategy where 70% is the equity funding and 30% is the debt funding. For many project the company followed this strategy. Currently if acquisition happens now, then the company will finance $5.25 million through equity and rest $2.25 million will be funded through debt. But ignoring the debt source of financing is not a good strategy for a company like Disney. So company should choose more from debt source. Recommendation: debt ignorance will deprive Disney from the benefit of tax. So if acquisition happen, then Disney should choose 60-40 strategy where 60% is the debt funding and 40% is the equity funding. Deutsche Bank will be a great help in this regard. 5.2.2 Regarding HRM (Human Resource Management) Problem Dividing the individual goal for individual personnel is very effective way to increase the accountability of the employees. Disney did not give the specific goal to specific department to achieve for which individual employee will be accountable. It will create inefficiency problem. Recommendation: Disney should tag the specific goal to specific department to achieve for which individual employee will be accountable. It will increase both the efficiency and effectiveness of Disney personnel. Moreover, Disney should help the employees to achieve the proper expertise in job section and should arrange for career development session for the employees. 5.2.3 Regarding International Business problem The discrepancy in power delegation as well as discrepancy in motivation discourage the employees to give their creative output. The company did not consider the risk reward concept to determine the motivation. This creates severe problem in Disney. Recommendation: At this point risk reward consideration will be fruitful to get the best output from employee. Every employee should be rewarded according to the risk they have taken.

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5.3 ALTERNATE SOLUTION 3 5.3.1 Regarding Financial Problem The analysis shows that all the section of Balance Score Card did not match the targeted figure. For example, from the financial perspective, Disney’s targeted the net profit margin growth was 5% but 2006s statement shows a negative growth in Net profit margin growth of 2%. And the leverage ratio was to be 25% but the company resulted in 30% leverage in 2006 which did not acquire the target. Moreover, customer satisfaction and employee improvement were not satisfactory. Recommendation: to improve the financial performance ROI should be the targeted variable rather than net profit. Cost of sales should be reduced by 10% through reducing the dummy wastage. To improve customer satisfaction, Survey should be conducted. 5.3.2 Regarding HRM (Human Resource Management) Because increased number of dummy were tested in the previous year by Disney team and no proper idea was found to incorporate in real movie, wastage cost of Disney increased dramatically. Disney should incorporate proper observation system to increase the employee effectiveness. Recommendation: Disney should follow the practice of Motorola Company’s Six Sigma strategy to increase the effectiveness. Proper integration among define, measure, analyze, control and improve of the employees’ performance would give a better result. Moreover, proper control system should be setup to compare the output. 5.3.3 Regarding International Business Problem Disney is in dilemma of choosing whether they emphasize on quality or cost because of the presence of giant competitors like Sony, Warner Brother and 20th Century Fox. At present the company emphasizes on quality assurance by ignoring the cost completely. Which is not a good strategy for a company like Disney. Recommendation: as the competitors like Sony and WB produce the same kinds of movie with a lower cost, the combination of both the cost and differentiation is crucial for company development

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5.4 BEST FIT SOLUTION AND ACTION PLAN From the three alternate solution, First alternate will be best where to mitigate financial problem- if the company only consider the NPV figure then the obvious decision would be not to acquire Pixar because NPV of the acquisition is negative i.e. -$.5 million considering only the financial gains. But NPV can ignore some synergy effect like marketing gains, strategic benefits, monopoly power which can be acquired through acquisition. On the other hand to resolve human resource problem- Disney should follow the Belbin’s model. There are three major categories in this model namely thinking, people and action oriented categories. And based on these categories, people who have the role like monitor evaluator, plant and specialist should devote the thinking job like idea generation. And last of all to mitigate International business problem- as the international strategy is not a proper strategy for Disney, Globalization will be a right fit because the pressure from the local area and pressure from cost both are high for Disney. Action Plan— to implement the solution, in total 3 months will be needed with the cost of $1 million. To mitigate the financial problem, Disney should impose an investment banker who will assess the macro effect of the merger and acquisition. The time will be 25 days to analyses 5 days to present the information to the governing board. Budget to implement the financial solution is $650,000. On the other hand to mitigate the HR problem, Disney should impose a charismatic leader. The time will be 25 days to find the leader. Budget to implement the HR solution is $250,000. And to implement the international problem solution- Disney also need to renovate the department. Time needed will be 30 days with the cost of $100,000.

CONCLUSION Because of its creativity in the animation business, since 1991, Disney chose Pixar to become partner and had had a 3 in-a-row movie contract. One of the movie, “Toy Story”, by DisneyPixar made a tremendous success in the Box office and made a revenue of more than US$350 million. Since, then Disney-Pixar combination was thought to be “Bringing back Walt Himself!” And Disney had to depend on the characters and revenue generated by the partner Pixar. But

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recently because the management is considering to acquire Pixar. The whole report was devoted to find this answer. And based on NPV, the answer is yes.

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