DreamWorks Animation: Move It or Lose It!

Embraer global strategyBy Saurabh Aphale, John Briscoe, Ankit Dwivedi, Megan Groves and Tosha Sorenson

Just south of San Francisco sits DreamWorks Animation (DWA), a business environment more akin to a Tuscan village than a traditional animation studio. At the time of founding, current CEO Jeffrey Katzenberg and cofounders Geffen and Spielberg may not have thought the animation film industry would bear this level of competition. Rivals’ strategic alliances, technology, diversification, and company culture have contributed to the profound impact of box office returns.  To compete in this intense environment, DWA has developed a core set of capabilities which include pioneering technology, creativity incubation, and an exceptional company culture which foster growth and innovation.  Leaping 41 spots to number six on Fortune 100’s Best Employers to Work For survey has further catapulted DWA into the spotlight.

Recession, Box Office Hits, and Competition

Since inception, DWA has made significant strides within the animation film industry.  DWA’s earlier hits such as Shrek, Madagascar, and Over the Hedge solidified their position in the industry and established their product as arguably the most differentiated. Even during the beginning of the global recession, from 2008 to 2009, their revenues increased 11.56%.

Analyzing the industry through Porter’s Five Forces has revealed a cut-throat rivalry amongst competitors in the animation industry.  Despite all its capabilities and advantages in this hostile environment, DWA still faces a major strategic issue: one box office disappointment could be crippling, especially taking in to consideration its size, intense rivalry, and limited product offerings.

The Situation and Contributing Factors

DWA is relatively small and boutique studio and lacks some of the resources available to competitors like Pixar, which is part of the massive Disney conglomerate. DWA has been unable to create its own unique strategy to compensate for its modest size and resources, and has taken to adopting many of Disney’s strategies. For example, DWA recently formed a partnership with Royal Caribbean to create a themed cruise, mimicking Disney’s own cruise line.

DWA currently has only one distribution channel through Paramount, who lags in international capabilities in comparison to other major distributors such as 20th Century Fox, which results in their movies not being distributed as widely as many of their competitors. Furthermore, they do not have the same resources as sizeable competitors like Disney’s Pixar to hold major marketing and advertising campaigns.

Solid Ground Can Crumble Quickly

DWA boasts high revenue with little debt, but because product offerings are limited to movies and because of its size, one major flop in the box office will cause substantial harm. To their credit, since their debt is negligible, this financial situation could sustain them in the short term if a production were to tank, but they would immediately need a major box office hit to stay afloat lest another flop should sink them.

DWA’s Shrek Forever After grossed a total of $238 million, making it the eighth highest earning film of 2010 thus far in the U.S. and Canada. In spite of this, it disappointed the box office with an opening revenue of $70 million in comparison to analysts’ expected $105 million. Stock prices plummeted 5% during this first week, as it appeared to be overvalued, and since then these prices have spiraled to a deeper total loss of 22%. Though Shrek Forever After was a low risk film given the historic success of its predecessors, DWA’s 2010 second quarter earnings per share were, according to CEO Katzenberg, “meaningfully below” the prior year. Because of its unsatisfactory box office performance, DWA’s 2010 second quarter revenue was only $158 million as compared to last year’s quarterly average of $181 million.

DWA’s next release, How To Train Your Dragon, also failed to meet expectations when it only made $43 million in the box office opening week instead of the projected $60+ million. After these concurrent mediocrities, stock prices are slow to recover and sit 17% below Wall Street’s expected value. This gives DWA less cushion to absorb future underperforming films.


Shrinking Interest in Animated Epics

DWA’s fame has been built on their original scripts and fresh storylines with unique character lineups such as Antz and Kung Fu Panda. These  characters not only became legendary in the animation industry, but also transformed the entire film industry.  By using the voices, facial features and emotional reactions of celebrities in animated films like Shrek, DWA developed a cult following with a wide loyal customer base even among those not traditionally included in the target audience.

DWA’s movies received great acclaim and awards, not just for the original scripts but also for the superb animation produced by the in-house developed software. This software has continually provided DWA with technological advantages as well as industry firsts like creating real life flowing water, which DWA created for the first time in the animation industry in its movie Antz.

DWA’s unique position in the animation industry was preserved by producing one to two uniquely inspired movies per year. In comparison, Disney Animation has cranked out a staggering six to eight full-length animated movies per year. This strategy originally made DWA attractive to its distributors.

DWA’s Sequel Frenzy

The past strategy of producing a low number of high quality movies supported their differentiation position in the animation industry. However, DWA eventually endangered itself by relying on too few products in order to play it safe and capitalizing on its previous successful films.

With DWA’s new strategy of over-producing sequels, the popularity and success of its movies have been steadily diminishing. This never-ending story phenomenon is destroying DWA’s image as the innovative movie producer.  Customer demands for original scripts and creative imagination in DWA’s products are not being met.

Movie Sequels
Kung Fu Panda 6
How To Train Your Dragon 3
Madagascar 4
Shrek 7

Race for the Best
In the era of intense and increasing competition, DWA is facing a growing challenge against its rivals to gain the share of the available resources to produce the best movies.

Along with its competitors, DWA is facing challenges to attract a highly skilled and talented labor force. In addition to original scripts, DWA must continuously search for inspired movie producers to create the magical world on which DWA relies. This contributes to DWA’s main issue of overly depending on its established brands to contribute to their future.

Until recently, DWA has not had to face the possibility of a major box office flop, but because its unique market position and attractive products are slipping in popularity, DWA’s entire strategy is on the precipice of collapse. In order to re-establish its position, huge efforts are required against its behemoth competitors, who are broadly diversified, allowing them to take more risks.

DWA’s Vicious Cycle

DWA’s feeble efforts to create captivating epics are backfiring. After examining characteristics of DWA’s situation, the underlying causes to this problem emerge. What’s more, this sentiment is reflected throughout social media, online forums and traditional marketing outlets. However, the biggest indicator of this problem is its declining box office performance. Unfortunately this reliance on sequels creates a cyclical effect, and as popularity declines, DWA becomes more desperate to preserve its initial originality.

DWA also seems confused about what it should be focusing its creative development on, as the ingenuity which once brought them great notoriety wanes. The core of its strategy is being called into question.

Furthermore, when DWA does release a fresh film, it suffers from intense marketing rivalry against its competitors who have greater clout and bigger budgets.

DWA under-utilizes marketing techniques compared to Disney’s Pixar. For example, Disney’s Tangled and DreamWorks’ Megamind came out within two weeks of one another, and while Disney dominated billboards and buses and exploded through social media, DWA was practically nowhere to be found. Its advertising should have overlapped Disney’s efforts. Adding to its low visibility, DWA’s small distribution capabilities prevent its films from being widely circulated.

These problems are at the heart of DWA’s strategic issue—that it so heavily depends on its two movies per year that one flounder can cause huge repercussions, leading DWA back into its cautious approach.

By diversifying its products and capturing more market share, can DreamWorks cleverly address this strategic issue?

Throw Caution to the Wind
Perhaps the easiest way for them to address this issue would be to take more creative risk in the films they produce, which would help DWA generate more revenue and afford more room for them to absorb possible future underperformance.

Along with replacing their cautious behavior, other innovative products need to be introduced in order for them to grow and increase their financial padding.

Moreover, the company should aim to release more titles overseas which would generate more revenue. Apart from diversifying the products and widening marketing tactics, increased and varied distribution channels would help amplify market sales, bolstering profitability.

Finding the Open Water

Taking a blue ocean strategy approach can be a massive contributor to the growth of any organization, and DreamWorks is no exception. It must focus on making the competition irrelevant by creating its own market.

One way of doing this would be to develop virtual movies, providing viewers with a life-like experience.

Expanding on their current technology, they could create a virtual environment in which viewers feel as though they’re an active part of the scene. Using multi-media such as specialized glasses, viewers can almost become characters in the movie—when they turn their heads, they can see what is going on in any direction is if the animated world were real. This is something that DWA’s rivals have not entertained doing, and would give them an interesting, unexplored advantage.

DWA could also create alliances with theater chains for 4D releases, another blue ocean strategy. 4D films are another way for the audience to feel as if it is a part of the movie. For example, when a character in the film feels a gust of wind, a breeze will also sweep over the audience in the theater, or a viewer’s seat would turn or tremble to mimic the animated character’s movements. Thus far, this has only been achieved in theme parks and applied only to short movies, so this could be turned into its own unique market.

“Move It”  Forward
If DWA comes in mimicking some of Disney’s distribution channels or marketing efforts or failing to explore fresh storylines, it will get crushed—it simply does not have the resources or experience to compete against the titans of the animation industry.

In the end, exploring fresh story ideas, diversifying marketing and revamping distribution channels may be ways to lead DWA to the mouth of a blue ocean which will boost its revenues and re-engage its fan base. In the words of Madagascar, DWA has got to “move it!”


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This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.