978-1259278211 Case 36 Solution Manual Part 1

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Teaching Note: Case 36 – Pixar

Case Objectives

1. To investigate how external environmental issues can affect a firm’s strategy.

2. To examine how a reevaluation of strategy involves assessment of internal activities and

resources.

3. To discuss the decisions and actions that a firm has to undertake to sustain a competitive

advantage.

See the table below to determine where to use this case:

NOTE: There are both PRIMARY and Secondary chapters that can be used for this case. The

Chapter Use Key Concepts Additional Readings or

Exercises

PRIMARY

2: External

Environment

External environmental forces; five

NOTE additional web link

3: Internal

Value chain; tangible vs. intangible

NOTE additional reading

SECONDARY

1: Strategy

Concept

Strategic management; vision,

5: Business-

Level Strategy

Generic strategies

11: Strategic

Leadership; learning organizations NOTE additional reading and

12: Managing

Innovation; sustaining vs. disruptive

NOTE additional web link

Case Synopsis

Going into 2015 Pixar was poised to release two films, Inside Out and The

Good Dinosaur, but this followed a year without any releases and less than

Pixar’s track record had made it one of the world’s most successful

animation companies. The string of successful releases since Toy Story’s

success in 1995 – Up, Cars, Ratatouille, and Wall-E —suggested that Pixar

Concerns at the time of the acquisition were that Disney’s difficulties resurrecting its animation

department would have a negative effect on Pixar’s unique creative culture. However, actions

taken by Pixar’s major original investor, Steve Jobs, president Edwin Catmull, and “creative”

vice president John Lasseter had not only made Pixar successful, but were becoming mutually

But Pixar had had difficulty stepping up its pace of production. The firm had built up its

workforce to well over 1,000 employees, had handed over directorial duties to new talent, and

had added new divisions. Since a large part of its success could be attributed to the talent that the

considering the increasing competition as more and more studios tried to grab a share of the

animated film market. Could Pixar continue to develop hits, both for itself and for

Disney, and hold onto the creative talent necessary to do so?

Teaching Plan

Although primarily indicated for the external environment and internal analysis chapters, this

short case allows for discussion of the full arc of strategic analysis, formulation, and

implementation. The movie industry has had some challenges: as public tastes change,

technological developments allow innovation, yet movie distribution channels affect profits.

Investigating the strategic decisions of an innovative company like Pixar can help students grasp

these elements. Pixar gives an example of how one firm formulated and implemented strategy in

the movie industry environment.

Since most students have watched movies, and may be very familiar with Pixar films, it can be

interesting to show them that things behind the scenes may not be as simple as they thought.

ICEBREAKER

This case can start with an icebreaker. Starting from the perspective of a customer may make it

easier for students to transition to a strategic analysis.

How many of you have seen an animated movie? Which one was your favorite? Why?

It’s entirely possible that all students have seen at least one animated movie. If students have

never seen one, ask them why not – it may be because they are not movie watchers in general, or

It might be interesting to put a list on the board to tally up favorite animated movies, and why

they were favorites, and then identify which studio made them: Favorite Animated Movie, Why a

Favorite, and Which Studio. There’s a high likelihood that the majority of the student’s favorite

If there are older students in the class, some of them may remember the Disney classic animated

films, i.e. Sleeping Beauty, Snow White, even The Lion King. Ask if the Disney movies had the

same kind of broad appeal as the Pixar films. Students may say the Disney movies were more

Summary of Discussion Questions

Here is a list of the suggested discussion questions. You can decide which questions to assign,

and also which additional readings or exercises to include that can augment each discussion.

Discussion Questions:

1. PRIMARY QUESTIONS: What elements in the external environment might affect

Pixar’s strategy?

2. What key internal resources does Pixar have that might help it support its competitive

strategy?

3. SECONDARY QUESTIONS: How does Pixar use strategic management? What is

Pixar’s competitive strategy, and what is the basis of Pixar’s competitive advantage?

4. How has strategic leadership and the management of innovation helped Pixar sustain its

competitive edge?

Discussion Questions and Responses

1. What elements in the external environment might affect Pixar’s strategy?

Referencing Chapter 2: Analyzing the External Environment of the Firm

The basic question strategic management tries to answer is: How can we create competitive

advantages in the marketplace that are not only unique and valuable but also difficult for

competitors to copy or substitute?

Organizational leaders must become aware of factors in the overall environment that might affect

their ability to create a competitive advantage. So how do managers become environmentally

Environmental scanning involves surveillance of a firm’s external environment to predict

environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint

Environmental monitoring is a firm’s analysis of the external environment that tracks the

evolution of environmental trends, sequences of events, or streams of activities. Leaders need to

What factors or trends might be most important to Pixar? To assess how the external

environment might affect Pixar’s strategy, it’s necessary to take a look at the factors in the

See which factors in the general environment students might pick that have a significant impact

on the movie industry. Although there is not much information directly in the case, some of this

is intuitive. Students might respond as follows:

Demographic – Although global box office revenues have growth every year, the U.S. box office

has remained flat since 2010. In 2014 the number of frequent moviegoers had increased or

remained flat among 40+ age groups, but fell or remained constant for younger age groups,

including the largest frequent-moviegoing age groups (18-24-year olds and 25-39-year olds), See

http://www.mpaa.org/wp-content/uploads/2015/03/MPAA-Theatrical-Market-Statistics-2014.pdf

The implication for Pixar, now part of Disney, is that if the movie touches people’s hearts, i.e., if

the story is great, then the characters from the story will have value. If Pixar can create the

Sociocultural – The recent explosion of comic book characters from paper to film (i.e.

Spiderman, Iron Man, The Avengers) implies that audiences of all ages are willing to engage in

make-believe. The Pixar creations have also gone from film to paper (comic book publisher

Once again, the implication is that good characters sell merchandise, and can be licensed. For the

Economic – Costs of movie production keep going up, however revenue from the movie-going

public has not increased. On the other hand, when the economy declines, more people go to the

Technological – Advances in technology, especially computer-generated animation techniques

It’s also necessary to assess the segments of the external competitive environment that include

competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model

One important question is “what business is Pixar in?” Until students are sure about the

There are several components to the movie business that may need to be broken out in order to

assess the profitability potential of firms like Pixar. Pixar is in the movie production industry,

Help students apply Porter’s Five Forces of competition by drawing a diagram on the board

similar to the following and having students fill in the details:

Based on the external environmental industry analysis, the movie production business may

NOTE – ADDITIONAL READING, VIDEO STORIES:

For information about the movie business in general, see this 2005 article about how movie

studios make profits. The majority of the big movie studios (Disney, Fox, Warner Brothers,

Paramount, Universal, Sony) make their money from three sources: the box office (movie

Rivalry

High

Substitutes’

Threat

Buyers’

Power

High

Suppliers’

Power

High

Suggested: Production

studios compete for talent,

and distribution deals:

Suggested: Movie

producers are dependent

on finding quality

Suggested: Talent is hard to

Suggested: Other forms

of entertainment exist –

Suggested: Anyone

theatre-goers), DVD/video/downloads (home viewing), and TV licensing (rights to broadcast a

movie on TV). TV licensing yields the best profit – box office usually loses a studio money. See

the story at

http://www.slate.com/articles/arts/the_hollywood_economist/2005/08/hollywoods_profits_demy

stified.html . See revenue and profit data at http://www.edwardjayepstein.com/TVnumbers.htm.

http://www.essortment.com/hobbies/electronicdevic_sfhs.htm )

Regarding profitability at Pixar, the deals for licensing in general have not been as lucrative in

recent years – Toy Story and Cars had the best results – and some analysts are worried about the

is the best business plan” is one of Mr. Lasseter’s favorite lines. See

http://www.nytimes.com/2009/04/06/business/media/06pixar.html?pagewanted=1&_r=1

Should Pixar be worried about profitability now that it’s part of Disney?

The overall movie business, Hollywood itself, in 2009, does not now follow the formula it

invented in the 1930s: “In terms of product, what most distinguished Studio Era Hollywood was

a devotion to three principles: a corporate approach to creativity, being in it for the long haul

(rather than just a one-weekend killing), and reaching every part of the moviegoing public. There

As the above article points out, “No small factor in the animation boom of the past two decades

has been the tweaking of cartoons to appeal to parents as well as children. Dreamworks

Animation has been especially proficient. Its Shrek films include as many pop-culture references

On the other hand, Dreamworks, even with hits like Shrek, has been chasing Pixar’s success

almost since Dreamworks’ beginning in 1994 (NOTE embedded video):

http://www.ultimatemovierankings.com/pixar-movies-vs-dreamworks-movies/

Here’s a 4-minute video news story about the rivalry between Pixar and Dreamworks Animation

from 2009, explaining how Pixar differentiates itself from Dreamworks:

http://video.foxbusiness.com/3697051/disneys-pixar-vs-dreamworks-animation/?

category_id=9824c119cf18c40fc33fb1cf1ff66fe52d60c85c

If Pixar has been able to do it, why hasn’t Dreamworks been as successful?

Regarding the money-making potential of sequels, up until 2009 Pixar had only made one

sequel, Toy Story 2. Going into 2012, Pixar had three sequels planned: Toy Story 3, Cars 2, and

Monsters, Inc. 2. The Toy Story 2 sequel was a moneymaking and creative hit, but some feel

By making so many sequels, is Pixar taking a chance that its reputation for creative and technical

genius will be compromised? Is this a good business move?