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Concept

Cornered Resource

Cornered Resource is one of the 7 Powers, a framework for competitive advantage developed by Hamilton Helmer.

On the face of it, a cornered resource is an remarkably easy power to understand. If there are only 10 gold mines in the world, and you own, say, six of those mines, you pretty much have a competitive advantage that lasts so long as no new gold mines are found.

That is an extremely contrived example, but perhaps you can see the point we’re going for.

Helmer, though, states that this Power is a lot weirder than you might expect. In the chapter on Cornered Resource, he opens with a wacky example: that of the Pixar Brain Trust. Helmer points out that of Pixar’s first 11 films, nine films were directed by people who were part of the original Toy Story team; the remaining two films were directed by Brad Bird, a close friend — and some would say extension — of that same team. Helmer’s thesis is that this core group of storytellers are what explains Pixar’s unusual success, and the group was a Cornered Resource unavailable to everyone else in the movie industry. It also implies that when the team retires, Pixar’s differentiated returns should go away.

One thing, however, is for sure: you cannot argue that the individuals involved were not value accretive to Pixar. After all, it resulted in the $7.4B acquisition price paid by Disney in 2006, 20 years after Pixar’s birth.

Helmer writes:

There is no precedent for this sort of sustained success in the movie business. Certain directors—William Wyler and Stephen Spielberg, for example—or certain franchise series—Indiana Jones and the Rocky movies, to name a couple—have impressive multiple commercial successes, but no one can boast such a long and unbroken track record, involving multiple directors and teams.

(…) 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 have come to believe that the most important strategic challenge for Pixar is renewal of its director pool.

In a sentence, Helmer’s definition for Cornered Resource is ‘preferential access at attractive terms to a coveted asset that can independently enhance value’.

The Power decomposes to:

  • Benefit: This is highly variable, and dependent on the resource in question. In Pixar’s case, the benefit from the Brain Trust was the differentiated margins it received from its consistent ability to produce hits; in other companies, it may result from a number of uniquely different benefits. Helmer writes: ‘it might be preferential access to a valuable patent, such as that for a blockbuster drug; a required input, such as a cement producer’s ownership of a nearby limestone source, or a cost-saving production manufacturing approach, such as Bausch and Lomb’s spin casting technology for soft contact lenses.’

  • Barrier: The barrier in Cornered Resource is again a bizarre thing. Consider that the original team that created Pixar’s early hits could leave at any point in time. So what kept them together? Helmer writes: ‘in 1988, long before Disney began its association with Pixar, Lasseter won an Academy Award for his Pixar short Tin Toy, prompting Disney CEO Michael Eisner and Disney Chairman Jeffrey Katzenberg to try and recruit their former employee back into the Disney fold. Lasseter demurred: “I can go to Disney and be a director, or I can stay here and make history.” So in Pixar’s case the Barrier was personal choice. (emphasis mine) In the case of spin casting technology, it is patent law, and in the case of cement inputs, it is property rights. Our general term for this sort of barrier is “fiat”; it is not based on ongoing interaction but rather comes by decree, either general or personal.’

This is an extremely weird Power. Helmer himself agrees, saying:

The Power hurdle is high: to qualify, an attribute must be sufficiently potent to drive high-potential, persistent differential margins (𝑚 >>0), 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 to isolate the Power source can be a challenge.

Helmer offers five screening tests for a Cornered Resource, since spotting one might be really difficult:

  1. Idiosyncratic. If a firm repeatedly acquires coveted assets at attractive terms, then the proper question to ask is ‘Why are they able to do this?’ For instance, if a company is able to consistently close customers in a difficult market above and beyond what its competitors are able to do, then maybe it is the sales team that is a Cornered Resource. Or, as Helmer writes: ‘if 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.’

  2. Non-arbitraged. If the business gains preferential access to a coveted resource, but then pays a price that fully captures the benefits of the resource, it doesn’t count as a Power. Helmer gives the example of making a film with Brad Pitt, which would probably advance box office receipts, but Pitt’s comp is so high that his compensation captures much or all of the additional value, and so fails the ‘attractive terms’ portion of the Cornered Resource definition.

  3. Transferable. The resource must be transferable. If a suspected Cornered Resource fails to recreate value at a different company, then you’re likely missing some other complement that is required to make that Cornered Resource work. The Pixar Brain Trust was certainly transferable: after the Disney acquisition, Bob Iger put Ed Catmull and John Lasseter in charge of Disney Animation, where they successfully revived the storied division.

  4. Ongoing. If you remove the Cornered Resource from the business, the business should fail to generate the same differentiated margins.

  5. Sufficient. For a resource to qualify as Power, it has to be sufficient as an explanation for continued differential returns. This, is a bit of a flip side to the Transferable test — if say, you transferred a successful CEO in one context to another context and that CEO fails, then that CEO is not a Cornered Resource because they are not sufficient, and there are likely other complements at their previous company that made them successful.

Here are some cases that illustrate this dynamic.

Cases

Taking Process Control To The Limit at Koch

How Bernard Paulson turned information into a strategic advantage at Koch Industries, producing its first cash cow.

 Members only

Bootstrapping to Millions in Singapore’s Point of Sale Market

A story of bootstrapping success, with a little help from a distorted market.

 Members only

Marvel Studios: The Origin Story

The Marvel Cinematic Universe was created thanks to a brilliant piece of financial manoeuvring.

John Malone and TCI: Inventing EBITDA in the Cable Industry

The story of John Malone’s incredible run at TCI ... and the invention of EBITDA.

 Members only

Y Combinator and Power in Silicon Valley

A demonstration of power by Silicon Valley’s top startup accelerator.

Stanley Ho’s Lucrative War

How Macau’s king of gambling cut his teeth as a 20-something tycoon during World War 2.

 Members only