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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 wont 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 Belbins 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 Belbins 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 Porters 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 Belbins 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
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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 Porters 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 worlds 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 Disneys current problem this report is structured. As a result company
surroundings will be better understood. Moreover, companys 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, Disneys 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 Kingdomthe main problem in Disneys 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 Eisners 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 Disneys 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 technologyWhen Robert Iger was the
chief, Disneys 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
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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 Pixars 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
Disneys 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 Belbins 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
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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 Porters 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. Porters Generic Competitive Strategies will be very helpful
in this regard (Richard 2002).

Figure 7 Porters 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.
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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 companys variable are net profit margin and
leverage ratio. Disneys 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
customers 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 companys 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 Belbins 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 wont 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 Belbins 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.

Page | 25

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, Disneys 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 Companys 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

Page | 26

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 Belbins 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

Page | 27

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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