(105)7 Powers: The Foundations of Business Strategy — A Book Summary
I first came to know of the book, The 7 Powers, while I was reading James Currier’s article, The 7 Powers Known to Tesla, Pixar, Netflix, Apple & Twilio
The article presented this graphic that shared the 7 Powers for Tesla, Netflix, Apple, Pixar and Twilio.
It piqued my curiosity and on a little Googling found that the book was highly recommended by a lot of influential CEOs:
- Netflix CEO — Reed hastings
- Spotify CEO and Co-Founder — Daniel Ek;
- Entrepreneur and investor — Peter Thiel;
- Former CEO of Adobe — Bruce Chizen; and
- Chairman of Sequoia Capital — Mike Moritz.
I had to pick the book.
7 Powers provides a comprehensive strategic framework that can help intentionally build enduring businesses.
The book talks about the seven powers below:
Here are the 7 Powers:
Power 1: Scale Economics
A business in which per unit cost declines as production volume increases.
Benefit: Reduced costs
Barrier: Prohibitive costs of share gains.
If your business has a low fixed cost base, it can benefit enormously from scale. This is why many technology companies try to get big fast. Not for scale itself but because being big is one of the best ways to protect their profits.
This is why many technology companies try to get big fast. Not for scale itself but because being big is one of the best ways to protect their profits.
Hamilton provided the example of Netflix and how their move toward original content gave them an advantage in scale economy.
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?
A network economy is a business where the value realized by a customer increases as the userbase increases.
Facebook is a canonical example of a service that benefits from network economies.
As the user base grows, you’re able to connect with more of your friends.
This is why Facebook’s major focus, in the beginning, was retention. It’s why they rolled out school by school, and why the entire Facebook product experience focused on getting users to seven friends in ten days. Once a user had seven friends, they were much less likely to churn and thus added value to Facebook’s network.
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.
Barrier: Cannibalization of existing business
Counter positioning is when a new business adopts a new, superior business model that incumbents can’t mimic due to anticipated damage to their existing business. It’s similar to Clayton Christensen’s disruption theory but lacks the emphasis on moving from the low to the high end of the market.
Five stages of counter positioning
- Denial
- Ridicule
- Fear
- Anger
- Capitulation
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: Competitor has to compensate the customer to switch
Switching costs occur when it’s easier to stay with a product or service than it is to switch (even if the alternative is objectively better). Additional products, features, integrations, consulting, and training can make it even harder to switch.
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
Barrier: The significant time and uncertainty needed to build a brand
Brand is arguably the most powerful and least understood of the 7 Powers. It’s so durable because of how complicated, time-intensive, and lucky you have to build a brand.
If you look at Warren Buffett’s Berkshire Hathaway portfolio you see a lot of powerful brands: American Express, Wells Fargo, Apple, Heinz, Coca Cola, Bank of America, Goldman Sachs, IBM, and John & Johnson.
Power 6: Cornered Resource
Preferential access at attractive terms to a coveted asset that can independently enhance value.
Benefit: Produces uncommonly appealing product
Barrier: Ranges from property and patent law to personal preference, e.g. retention of key talent
A company has a cornered resource when it has preferential access to limited resources or talent.
A good example for talent is Amazon, who according to The Information, has a 17-person senior leadership team, called the S-team, who have an average tenure of 15 years — the majority of the company’s 23-year lifespan.
The S-Team has a deeper understanding of what it takes to scale a business like Amazon’s than anyone else in the world and have shared almost two decades of experience.
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: The significant time and/or investment needed to create the process
Process Power is one of the hardest powers to copy, Toyota is famously transparent about the Toyota Production System (TPS) processes but other companies haven’t been able to replicate it.
