Helmer screens Cornered Resources for idiosyncrasy, non-arbitraged access, transferability, ongoing contribution and sufficiency for potential differential returns.

Evidence 6 passages

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The power hurdle is high. To qualify an attribute must be sufficiently potent to drive high-potential, persistent differential margins. Bar M is much greater than zero, with operational excellence spanning the gap between potential and actual. With an enterprise like Pixar, there are numerous resources critical to success, and sorting through this multiplicity to try and isolate the power source can be a challenge. Over the years, I found that five screening tests for a cornered resource often help in this process. 1. Idiosyncratic If a firm repeatedly acquires coveted assets at attractive terms, then the proper strategy question is, why are they able to do this? For example, if one discovered that Exxon was able to persistently gain the rights to desirable hydrocarbon properties, then understanding their path to access would be the more crux issue. Perhaps their relative scale allows them to develop better discovery processes? If so, their discovery processes are the cornered resource, the true source of power, and it would be misleading to simply cite only the acquired leases. Examining the Pixar brain trust through this lens, then, proves highly informative. in particular, you might notice one striking aspect of the brain trust. It is largely restricted to a specific set of individuals. As a first indication, consider that every one of their first 11 films
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was directed by one of this group, except for Brad Bird, discussed below. Further, Pixar's record shows that simple inclusion into the group will not preternaturally endow newbie directors with the brain trust process. Such directors frequently fail, as evidenced by the replacement of Ash and Colin Brady on Toy Story 2, Jan Pinkava on Ratatouille, and Brenda Chapin on Brave. I believe the brain trust is more than a combination of individual talents. Rather it is the foundational members' shared experience in the early trial years that has yielded one success after another. If indeed we observed new directors being brought into the fold, and achieving Pixar-level commercial and artistic success, then we could conclude that power came not from the brain trust, but instead from some deeper current. From this assessment, I've come to believe that the most important strategic challenge for Pixar is renewal of its director pool. An informed observer might ask about Brad Bird, who masterminded several of Pixar's biggest successes, coming into the studio and directing The Incredibles, based on a screenplay he had previously developed outside the purview of the brain trust, and later stepping in to rescue Ratatouille. Wouldn't he exemplify the sort of untested outsider Director mentioned above?
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In fact, not really. On closer inspection, Brad Bird fits the assessment of the restricted nature of the brain trust. A classmate and friend of Lasseter from CalArts, Bird already shared a creative shorthand with many of the central figures of the brain trust. More, he was an accomplished and established animated film director upon his arrival at Pixar, as demonstrated by his fine film, The Iron Giant. 2. Non-Arbitraged What if a firm gains preferential access to a coveted resource, but then pays a price that fully arbitrages out the rents attributable to this resource? In this case, it fails the differential return test of power. Consider movie stars. A turn by Brad Pitt would probably advance box office prospects, therefore proving coveted. But his compensation captures much or all of this additional value, and so fails the power test. Likewise, although the Pixar brain trust is highly compensated, the amounts do not come close to matching their value. I was an investor in Pixar when it was public, and I realized a very nice return over the life of my investment, until the Disney acquisition. Three, transferable. If a resource creates value at a single company, but would fail to do so at other companies, then isolating that resource as the source of power would entail overlooking some other essential complement beyond operational excellence. The word coveted in the definition conveys the
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expectation by many that the asset will create value. In the lead-up to his acquisition of Pixar, Bob Iger had an epiphany. The legacy of Disney's animated characters formed the core of the corporation, and only the Pixar team could revive that legacy. This motivated his purchase of Pixar, as well as his decision to place Catmull and Lasseter at the helm of Disney Animation, which resulted in the meteoric revival of that story division. Such a comeback would never have been possible without Catmull and Lasseter in key decision-making roles, and the brain trust on call, and it ultimately vindicated the steep price paid by Disney. This resource was transferable. 4. Ongoing In searching for power, a strategist tries to isolate a causal factor that explains continued differential returns. There's a contrapositive to this too. One would then expect differential returns to suffer should the identified factor be taken away. Clearly this perspective has bearing on the identification of a cornered resource. There may be many factors
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that proved formative in developing power, but whose contributions then became embedded in the business. For example, post-it notes emerged as a highly profitable business for 3M, only because as Dr. Spencer Silver tirelessly sought commercial application for his not-so-sticky glue. Once the Post-It application was established, the business's differential returns were not predicated on him and his unique glue, but rather a different, in part at least cornered resource. U.S. Patent $3,691,140 U.S. Patent $5,194,299 and the Post-it Trademark At Pixar, Steve Jobs offered a similar case in point. He was essential to Pixar's ascendancy, viewing him simply as patient money utterly understates his contribution. But his importance diminished as Pixar developed, and eventually his value became embedded in the company to the point where his continued presence was no longer needed to drive differential returns. The brain trust, on the other hand, endures as the sustaining force behind their success. 5. Sufficient The final cornered resource test concerns completeness. For a resource to qualify as power, it must be sufficient for continued differential returns, assuming operational excellence. Frequently, as I have observed, many will mistake specific leadership for a cornered resource. In fact, it fails this sufficiency test. For example, I am a fan of the abilities of George Fisher. He did a fine job leading Motorola.
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When he took the helmet Kodak, there were high hopes that his presence would lead to a revival of the company. That is, that he was a cornered resource. The rough patch that followed was, in my view, not his fault. It was merely an indication of the hopeless cul-de-sac created by the company's focus on chemical film in a solid-state age. These difficulties, however, yield an insight. Fisher was not a cornered resource. and the Motorola success involved other compliments to his talent that were not later present at Kodak. Another way to put this is that a cornered resource is a sufficient condition for potential for differential returns. In my view, current evidence best supports the assertion that the Pixar Braintrust as a unit is the company's cornered resource, as opposed to individual members, such as Catmull or Lasseter. One might view Lasseter plus Catmull together as the real cornered resource, and then suggest that the other brain trust hires serve merely as a reflection of their selection skills. You could even view the revival of Disney animation under Lasseter's and Catmull's leadership as evidentiary to this view. The failure of newbie Pixar directors, however, tends to belie this. Figure 6.6 Power Intensity Determinants scale economies industry economics scale economy intensity competitive position relative scale Competitive Position Relative Scale Network Economies

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