7 Powers

by Hamilton Helmer

  “Watching the film, I felt I was in at the dawn of a new era of movie animation, which draws on the best of cartoons and reality, creating a world somewhere in between, where space not only bends but snaps, crackles and pops.”55

  This triumph was foundational. It was Toy Story that enabled Pixar to go public in November of 1995, orchestrated by Steve Jobs as the irrepressible roadshow master of ceremonies. As NASDAQ PIXR, the frequent existential threats facing the fledgling studio receded into memory and Pixar’s negotiating position with its finance and distribution partner, Disney, transformed.

  Figure 6.1: The First Ten Pixar Films

  ©Disney•Pixar

  But what came next did not at all follow the Disney script of its animated films. Whereas Disney struggled to repeat the success of Snow White and the Seven Dwarfs, Pixar followed up with A Bug’s Life in 1998 and Toy Story 2 in 1999. Both were stunning artistic and commercial successes, signaling the start of the most compelling run in the history of the movie business. Who does not have warm recollections of the early Pixar films of Figure 6.1, as well as those they would produce subsequently?

  Pixar’s artistic success over this span was extraordinary. Their first 10 films had an average Rotten Tomatoes score of 94%, with only Cars coming in below 90%. Eight Pixar films have been awarded an Academy Award for Best Animated Feature, and two of their films have been nominated for Best Picture, an impressive achievement for an animated film.

  Their commercial success has been no less impressive. As the chart below illustrates, on average these films achieved a gross profitability nearly four times that of the average of all other theatrical releases or all non-Pixar animated films.

  Figure 6.2: US Gross Profit Margin of Theatrical Release Movies (1980–2008)56

  *(US Box Office – Production Costs)/(Production Costs)

  Together their worldwide gross stands at $5.3B, which does not include substantial merchandise sales and bolstered theme park profits.

  This aggregate performance is impressive but equally impressive is the film-by-film performance. Every film had a positive gross profit margin and all but WALL-E exceeded industry averages.57 This astonishing success emerged from a company that had shrunk to less than 50 employees by 1990 and that had frequently teetered on ruin, often sustained only by Steve Jobs’ largesse.

  Figure 6.3: Gross Profit Margin of Pixar Films vs. Industry Averages (1980–2008)

  *(US Box Office – Production Costs)/(Production Costs)

  The Brain Trust

  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.

  There could be nothing more strategic in every sense of the word. Pixar’s superior performance and market cap duly translated into shareholder value, with a $7.4B final value at the time of Disney’s acquisition in 2006. It was this transaction, not his earnings at Apple, that accounted for most of Steve Jobs’ net worth. Without question—Pixar was wielding some sort of Power.

  But the question is: “What type of Power?” Pixar doesn’t seem to fit the mold of the Power types I have discussed so far. Movies are a collaborative creative endeavor; as such, they are usually immune to the predictable recurrent triumphs indicative of Power. But at Pixar, some Factor X enabled them to beat the long odds. To fathom this hidden factor, we must probe the Pixar backstory.

  In February of 1986, George Lucas, financially stressed by his 1983 divorce settlement, spun out The Graphics Group of the Computer Division of Lucasfilm to Steve Jobs for $5M. The newly independent company was renamed the Pixar Computer Group, and it brought under one roof three extraordinary people:

  John Lasseter: an animation genius who had only two years before been fired by Disney for his tireless advocacy for CGI in animation.

  Ed Catmull: a pioneer CGI computer scientist who possessed the intelligence, self-confidence and humanity to master the nearly impossible art of managing high-octane creatives.

  Steve Jobs: the brilliant and temperamental entrepreneur, who was then struggling with Next Computer, having, only two years prior, been unceremoniously ousted from Apple Computer in a power struggle with John Sculley.

  Great businesses are often blessed with one founding genius. Pixar had three: Jobs became Chairman of the Board and the majority shareholder, Catmull became President and Lasseter became head of their animation department. Exclude any one of this trio, and the Pixar fable would have had an unhappy ending.

  Of course, tri-partite leadership is challenging in the best of cases, but it worked at Pixar. As Pixar filmmaker Pete Docter told me:

  “Here there was a clear definition of power: John on creative, Ed on technical, and Jobs on business and financial. There was an implicit trust of each other, as well as one guy with the final word (Steve).”58

  But even with these three engaged and committed, Pixar still struggled to survive its early years, draining cash and taxing Jobs’ net worth. The company was initially focused on selling specialized hardware—but only as a survival tactic. At the same time, it was building up its animation department with key CalArts hires: Andrew Stanton and Pete Docter.

  After deep layoffs terminated Pixar’s hardware aspirations, a three-picture deal with its computer customer, Disney, gave Pixar a new lease on life in 1991. Surely it was Jobs’ “reality distortion field” that made this possible—a nearly bankrupt pipsqueak landing The Walt Disney Company as a filmmaking partner.

  The gestation and birth of Toy Story was itself a “Perils of Pauline” roller coaster ride. There were false starts, conflicts, do-or-die deadlines, politics and epiphanies. And many, many late nights. Like a Marines squad that has gone to war and back, the filmmaking team forged deep, resilient bonds of trust, respect and understanding. The next two films extended and strengthened them.

  This “Band of Brothers” later came to form the core of the group known as the Brain Trust, the creative cadre instrumental to the studio’s sustained success. This core group is the Factor X that lies at the heart of Pixar’s Power.

  Cornered Resource: the Benefit and the Barrier

  This Power type is given a name in Economics: Cornered Resource. The services of this cohesive group of talented, battle-hardened veterans were available only to Pixar; they had it cornered. To put this into our 7 Powers framework:

  Benefit. In the Pixar case, this resource produced an uncommonly appealing product—“superior deliverables”—driving demand with very attractive price/volume combinations in the form of huge box office returns. No doubt—this was material (a large m in the Fundamental Equation of Strategy). In other instances, however, the Cornered Resource can emerge in varied forms, offering uniquely different benefits. It might, for example, 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 unlike anything we have encountered before. You might wonder: “Why does Pixar retain the Brain Trust?” Any one of this group would be highly sought after by other animated film companies, and yet over this period, and no doubt into the future, they have stayed with Pixar. Even during the company’s rocky beginning, there was a loyalty that went beyond simple financial calculation. To illustrate: 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 to 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.”59 So in Pixar’s case,
the Barrier was personal choice. 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. In a case of the cart driving the donkey, it was Lasseter’s commitment to Pixar that helped convince Katzenberg to do the three-picture deal with Pixar in 1991. Likewise, Disney’s later CEO, Bob Iger, would decide to acquire Pixar only after realizing such an acquisition would be the sole means of bringing Pixar’s talent to Disney’s flagging animation group. The subsequent revival of Disney Animation affirmed his wisdom.

  This now allows me to place Cornered Resource on our 7 Powers display.

  Figure 6.4: Cornered Resource in the 7 Powers

  Cornered Resource definition:

  Preferential access at attractive terms to a coveted asset that can independently enhance value.

  The Five Tests of a Cornered Resource

  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 multiplicy to try to isolate the Power source can be a challenge. Over the years I have found that five screening tests for a Cornered Resource often help in this process.

  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.

  Figure 6.5: Early Pixar Film Directors

  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 eleven films 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 Chapman 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 have 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? 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.60

  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.

  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 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 storied 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.

  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 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 Dr. Spenser Silver tirelessly sought commercial application for his not-so-sticky glue. Once the Post-It application was established, the business’ 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.

  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. When he took the helm at Kodak, there were high hopes that his presence would lead to a revival of the company—i.e. 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 complements 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 Brain Trust as a unit is the company’s Cornered Resource, as opposed to individual members, such as Catmull or Lasseter. One might view Lasseter + 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

  Appendix 6.1: the Resource Based View

  The notion of resource is a broad and inclusive one that goes far beyond the considerations of this chapter. There is a major school of thought in Strategy, the Resource Based View (“RBV”), which focuses on resources. I have benefited from the fine scholarship of the RBV and even had the privilege of studying under the brilliant Professor Richard R. Nelson, one of the RBV pioneers.

  Businesses encompass not just products and services, but the abilities that enable their efficient production. There are immediate abilities, specific to current output, and higher-level abilities, which circumscribe the company’s domains of competitiveness. There are even further stages beyond these which shape the ways in which these higher-level abilities may transform over time. Core competencies, distinctive competencies, routines, capabilities and dynamic capabilities all figure into this conversation.