(notes on) 7 Powers: Foundations of Business by Hamilton Helmer
NB. These notes contribute towards my diyMBA, my attempt to learn lots without a formal MBA programme. Check out the my first module Accounting & Finance here, full reading list, and why I’m doing a diyMBA here.
A worthy read. The author takes many tried and tested ideas, and ties them together in a cohesive manner allowing for a more robust analysis of fascinating case studies, namely Intel. Buy here.
The business strategy (small s) is a route to continuing power in significant markets. Being there (statics) is one thing, but getting there (dynamics) is quite another.
Not only should businesses know which of the 7 Powers will be their static strategy, but also how and when to build and execute on them.
Timing is key. Me too won’t do. Invent new things and create compelling value. Only then will businesses have the opportunity to gain continued power in a significant market.
Strategy (capital S): the study of the fundamental determinants of potential business value
Power: set of conditions creating the potential for persistent differential returns
strategy (small s): A route to continuing power in significant markets
Strategy can be separated into two topics:
- Strategy Statics (7 Powers) : ‘Being There’. What makes a business so valuable for so long?
2. Strategy Dynamics: ‘Getting There’. What developments yielded this attractive state of affairs in the first place?
Example: Intel. Why did they fail in the Memory business but succeed in the Microprocessor business? They had the same team, cash, equal competition & similar industries. What was the difference?
Power 1: Scale Economies.
A business in which per unit cost declines as production volume increases.
Benefit: Reduced cost
Barrier: Prohibitive cost of market share gains
Content owners charge per play — variable cost.
Netflix commissions Originals — fixed cost.
£100m content cost / 30m subs = £3.3 cost/subscriber
By increasing fixed costs, cost/subscriber decreases as subs increase.
Therefore, a smaller competitor must pay a higher cost per user price just to compete.
Other scale economies include…
Volume/area. When costs are tied to a geographical area, and utility tied to volume. eg Milk tanker, warehouse
Distribution network density. The more customers in a distribution network, the cheaper the delivery costs. eg UPS or DHL
Learning Economies. When learning leads to benefits, which is in turn correlated to production levels.
Purchasing Economies. Larger scale buyers get better deals. eg Walmart, Tesco
Power 2: Network Economies
The value of a service to each user increases as new users join the network.
Benefit: Leader can charge higher prices, as their network is more valuable
Barrier: The unattractive cost of gaining share. How much cheaper do you have to make your network for it to become the preferred choice?
Power 3: Counter Positioning
A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
Benefit: New model is superior to incumbent model due to lower costs or higher prices.
Barriers: Incumbents fail to respond for fear of damaging their core business
Further Reading: Clayton Christensen’s work on Disruptive Technologies
Disruptive Technologies are not always the same as Counter Positioning. For example…
Disruptive Tech: Kodak vs Digital photos
Counter Positioning: Posh Burgers (Five Guys) vs McDonalds. No new technologies are involved.
Both — Netflix vs Blockbuster.
- power is relevant to each incumbent, so is not a strategy in itself (someone else could be competing with you)
- Cognitive Bias may deter an incumbent into action. The challenger should be modest in its superiority, so as not to prompt the incumbent into overcoming bias and investing in new business model
Five stages of counter positioning
Power 4: Switching Costs
The value loss expected by a customer that would be incurred from switching to an alternative supplier for additional purchases.
Benefit: Company with embedded Switching Costs can charge higher prices than competitors. Only adds power to sell additional services to existing customers. No benefit in acquiring new customers or if there are no additional services.
Barrier: To offer equivalent product, competitors must compensate customers for Switch Costs.
- Procedural (investment of learning to use product)
- Relational (both with product and personnel)
Switching Costs can pave the way to other powers. Eg connecting users + large product suite = Network Effects
Power 5: Branding
The durable attribution of higher value to an objectively identical offering that arises from historic info about the seller.
Benefit: Business with branding is able to charge higher price due to either/both:
Barrier: Strong branding only possible after long period of reinforcing actions
Affective Valence: brand association elicit good feelings (that people pay for)
Uncertainty Reduction: ‘Peace of mind’ that product will be good.
Power 6: Cornered Resource
Preferential access at attractive terms to a coveted asset that can independently enhance value.
Benefit: Produces uncommonly appealing product
Barrier: unacquirable commodity
Eg Pixar’s talent pool
Power 7: Process Power
Embedded company organisation and activity sets which enable lower costs and/or superior product.
Benefit: enables a company to improve products and/or lower costs as a result of embedded process improvements.
Barrier: replicating takes time, depending on complexity & opacity (can we describe what the process even is?)
Can be matched only by extended commitment.
Strategy Dynamics: The Path To Power
How to get to power?
The first cause of every power type is invention. You must create something new that produces substantial economic gain in the value chain.
Eg Netflix — what established their power (after DVDs)?
- Competitive Position: an attractive new service caused sign ups, resulting in scale advantage.
- Industry Economics: originals and exclusives. Converted top content from variable to fixed cost, creating scale economies
These factors developed the strategy, ie “a route to continuing power in significant markets”.
“Me too won’t do”
The first cause of every power is invention, be it in a product, process, business model, or brand.
Invention can lead to your company capturing a larger part of the value chain. The 7 Powers determine how much.
Compelling Value. The difference in the customer’s experience that determines the size of the overall market pie.
How do we increase compelling value?
Capabilities Led Compellng Value
eg Adobe Acrobat. When a company translates an internal capability into a product
Customer Led Compelling Value
eg fibre optics. Everyone knows the customers need, but nobody knows how to satisfy it.
Competitor Led Compelling Value
eg Sony PlayStation. Competitor already has successful product, but the inventor must produce something substantially better.
Strategy Dynamics: The Power Progression
Timing. Intel 8088 processor story. The takeoff period is key.
Intel’s experience imparts a crucial “When?” lesson: the takeoff period represents a singular time. Only then can you initiate three important types of Power: Scale Economies, Network Economies and Switching Costs.
If unrealised, these opportunities disappear forever afterward.