The Disney–Pixar relationship dynamics: Lessons for outsourcing vs. vertical integration

Abstract

The choice between outsourcing and vertical integration is a crucial decision for many firms. However, there is no standard framework for making firm boundary decisions. Thus, it is often unclear for managers whether they should outsource or integrate an activity. An in-depth reviewof the academic literature suggests that threedifferentapproaches canhelpmanagersmake successful firm boundary decisions. First, the ‘‘opportunism approach’’ is based on the assumption that suppliers may behave opportunistically towards their clients. Vertical integration is away for clients to respond to such a threat. Second, the ‘‘competitive advantage approach’’ suggests that it is vital for firms to possess the resources and capabilities that offer the potential for competitive advantage. Outsourcing can be used to access all other resources and capabilities. Third, the ‘‘flexibility approach’’ considers the uncertainty associatedwith an activity. The greater the uncertainty, the better off firms are to use flexible arrangements such as outsourcing. While the three approaches are often used in isolation, only a simultaneous consideration of the opportunism approach, the competitive advantage approach and the flexibility approach can capture the full richness of firm boundary decisions. This paper proposes a framework that combines the three approaches. The operational nature of the framework is demonstrated by applying it to a symbolic case: the relationship between Disney and Pixar in 3D animated films. In 1991, Disney decided to outsource the production of 3D animated films to Pixar, while focusing on their marketing and distribution. Between 1995 and 2005, the films resulting from the Disney—Pixar partnership generated over $3 billion in box office takings worldwide. Over 150 million home videos (cassette tapes and DVDs) and countless articles of tie-in merchandising were also sold in a relationship that Steve Jobs, Pixar’s CEO, described as ‘‘one of themost successful in Hollywood history.’’ In 2006, Disney eventually bought its partner for $7.4 billion.