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7 Powers: The Foundations of Business Strategy

Tags: #business #strategy #competition #innovation #investment #economics #growth #leadership #management

Authors: Hamilton Helmer

Overview

My goal in this book is to provide you, the reader, with a practical guide to crafting and executing successful business strategies. This guide, which I call Power Dynamics, is built around a core framework, the 7 Powers. These seven represent the only pathways available to any business in any location for achieving lasting competitive advantage, and hence superior returns over the long term. My approach draws on my decades of experience as a strategy advisor, active equity investor, and teacher of business strategy at Stanford University. In this book, I go beyond describing the 7 Powers – I present a unified strategic framework, drawing heavily on concepts from microeconomics. I use real-world examples, including those from my own investment experience, to illustrate the 7 Powers in action. More, I explicitly link the concepts of Power Dynamics to the fundamental determinants of business value, as expressed in the Fundamental Equation of Strategy. This rigorous and robust foundation assures that my approach is comprehensive and grounded in the bedrock of business success. Throughout this book, I emphasize the importance of invention as the critical first step to achieving Power. I also explore the relationship between Dynamics – the crafting of strategy – and Statics – the ultimate configuration of Power that underpins a successful business. This emphasis reflects the realities of today’s business world, where successful businesses must navigate complex, rapidly changing environments. The 7 Powers, with its focus on clarity, practicality, and analytical rigor, is designed to serve as a real-time strategy compass, guiding you through these treacherous waters. My hope is that this book will empower you to identify, create, and seize opportunities for Power in your own business, enabling you to build a durable and valuable enterprise.

Book Outline

1. Introduction

This book is about achieving lasting business success, which is only possible by creating what I call Power. Power is the set of conditions that allow a company to earn superior returns over the long term, even against fierce competition. This is not simply about doing things well, but about creating a durable strategic advantage. The rest of this book details exactly what Power is, and how to attain it.

Key concept: Strategy: a route to continuing Power in significant markets.

This is what I call The Mantra. This seemingly simple statement describes the requirements of a strategy – it must show a path to creating and sustaining Power in the market.

2. Chapter 1: Scale Economies

Scale Economies is the first of the seven types of Power I detail. A company with Scale Economies enjoys lower unit costs as its scale increases. This can provide a powerful advantage, but only if competitors are prevented from achieving a similar scale.

Key concept: Scale Economies: Benefit: Reduced Cost; Barrier: Prohibitive Costs of Share Gains

A common example is a business with high fixed costs. As these costs are spread over a larger customer base, unit costs fall, giving the leader an advantage. This is the Benefit. The Barrier is the difficulty competitors have in gaining the scale necessary to match the lower unit costs.

3. Chapter 2: Network Economies

Network Economies occur when the value of a product or service increases as more people use it. Think of social networks: Facebook is far more valuable to users than a competitor with a much smaller user base, making it extremely difficult to dislodge.

Key concept: Network Economies: Benefit: Enhanced Pricing; Barrier: Unattractive Cost/Benefit of Share Gains

Here the value of a product or service increases as more people use it. This positive feedback loop can be very strong, as with social networks, where joining a network with more users is inherently more valuable. This is the Benefit. The Barrier stems from the difficulty of competing against an entrenched leader with a vast existing network.

4. Chapter 3: Counter-Positioning

Counter-Positioning involves defeating an incumbent not by attacking head-on, but by adopting a new, superior business model that they are unable or unwilling to imitate. Vanguard, for example, was able to build a highly successful business with low-cost index funds by exploiting the inherent conflict of interest faced by active asset managers.

Key concept: Counter-Positioning: Benefit: Superior Business Model; Barrier: Collateral Damage

Counter-Positioning involves adopting a new, superior business model that the incumbent is unwilling or unable to adopt due to the damage it would cause to their existing business. This damage is the Barrier. The Benefit is of course the superior economics of the new business model.

5. Chapter 4: Switching Costs

Switching Costs arise when there are costs to a customer for changing to a different product or service, creating an advantage for the incumbent. These costs can be financial, such as the cost of new software, procedural, like the time it takes to learn a new system, or even relational, as when a customer values the relationship they’ve built with a provider.

Key concept: Switching Costs: Benefit: Enhanced Pricing; Barrier: Unattractive Cost/Benefit of Share Gains

Once a customer adopts a product or service, they often incur costs to switch to an alternative, be they monetary, procedural, or relational. These switching costs create an advantage for the incumbent in selling follow-on products to their locked-in customer base, as these customers are unlikely to switch simply due to pricing.

6. Chapter 5: Branding

Branding creates a lasting association in the mind of a customer, allowing a price premium. Tiffany & Co., for example, is able to charge much higher prices for jewelry than competitors because of the brand’s long cultivated association with quality and luxury, creating both an emotional connection and lowering uncertainty for the customer.

Key concept: Branding: Benefit: Enhanced Pricing; Barrier: Time Constant and Uncertainty

Branding creates a price premium by eliciting positive feelings, associations and memories in a customer’s mind, distinct from the objective attributes of the product, and/or by reducing uncertainty regarding product attributes. The Barrier to achieving such a premium is the very long time required to build a strong brand, and the uncertainty inherent in that endeavor.

7. Chapter 6: Cornered Resource

Cornered Resource involves gaining control of a valuable asset that others can’t easily access. It could be a patent, a unique geographical location, or even a rare and valuable team of people. Pixar, for instance, enjoyed a long period of success due to the unique talents and collective experience of its core creative team.

Key concept: Cornered Resource: Benefit: Varied; Barrier: Fiat

This type of Power involves preferential access at attractive terms to an asset that can independently enhance value. Think of a patent on a blockbuster drug, control over a key input, or even a unique, highly-skilled team. The Barrier is based on the ‘fiat’ of ownership, regulation, or some other circumstance that prevents others from accessing the resource.

8. Chapter 7: Process Power

Process Power arises when a company has developed complex internal processes that deliver substantial advantages in cost or product quality. This Power is most closely associated with operational excellence. However, operational excellence alone is not enough – it must be coupled with the Barrier of the long time it takes to replicate such a system, making it hard for competitors to catch up. Toyota is a prime example of this type of Power, with its famous Toyota Production System.

Key concept: Process Power: Benefit: Reduced Costs and/or Superior Deliverables; Barrier: Time Constant

Process Power involves developing an advantage based on superior internal processes. Toyota, with its famous Toyota Production System, is a great example of this type of Power. The Barrier here is the long time it takes to develop such a system; it cannot be copied easily.

9. Chapter 8: The Path to Power

Having described all seven Power types, we can now turn to how Power is achieved. The first step is invention. All Power originates in an invention that creates value for the customer. This could be a new product, a new process, a new business model, or a new brand. Without invention, there is no Power.

Key concept: Invention is the Mother of Power.

This statement reflects that the starting point for creating Power in any business is an invention that yields compelling value for the customer. This value creation, in turn, drives the market size piece of the Fundamental Equation of Strategy, creating a double value whammy.

10. Chapter 9: The Power Progression

Timing is crucial to establishing Power. Certain Power types can only be established at specific stages of a company or industry’s development. I call this The Power Progression.

Key concept: The Power Progression

This is a framework for understanding when different types of Power can be first established. Counter-Positioning and Cornered Resource tend to be established first, in the Origination stage. Scale Economies, Network Economies, and Switching Costs must be achieved in the Takeoff stage. Finally, Process Power and Branding typically emerge only in the Stability stage.

Essential Questions

1. What are the 7 Powers and why are they important?

The seven powers are Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power. These powers represent the fundamental building blocks of lasting business success. Each power creates a unique competitive advantage that allows companies to earn superior returns over the long term.

2. What is the relationship between invention and Power?

Invention is the crucial first step toward achieving Power. It involves creating something new that offers compelling value to customers and disrupts the existing market dynamics. This could be a new product, process, business model, or brand. Without invention, there is no foundation for building a lasting competitive advantage.

3. How does the Power Progression framework guide strategic decision-making?

The Power Progression framework explains the optimal timing for establishing different types of Power. It highlights that certain Powers are best established during specific stages of a business or industry’s lifecycle. For example, Counter-Positioning and Cornered Resource are typically established during the Origination stage, while Scale Economies, Network Economies, and Switching Costs are best pursued during the Takeoff stage. Understanding this progression helps companies prioritize their strategic efforts and seize the right opportunities at the right time.

Key Takeaways

1. Harnessing Network Effects is Crucial for Building Sustainable Value

Network Economies, where the value of a product or service increases with the number of users, are especially powerful in today’s interconnected world. Businesses that can successfully tap into network effects can create significant value and build a strong competitive advantage that is difficult to challenge.

Practical Application:

A startup developing a new AI-powered software platform could focus on building network effects by incentivizing early adoption and encouraging user-generated content, thus increasing the platform’s value as more users join.

2. Counter-Positioning Offers a Path to Defeating Seemingly Unassailable Incumbents

Challenging powerful incumbents head-on is often a losing battle. Counter-Positioning, which involves adopting a new and superior business model that the incumbent is unwilling or unable to mimic, offers a strategic path to success. This approach leverages the incumbent’s strengths as a weakness, creating a competitive advantage based on their inability to respond effectively.

Practical Application:

An AI company might avoid directly competing with established giants like Google or Microsoft in areas like general-purpose search. Instead, they could focus on developing a Counter-Positioned offering, specializing in a niche area like medical image analysis or legal document review, where the incumbent’s existing business model would be less effective.

3. Process Power Requires a Long-Term Commitment and a Culture of Continuous Improvement

Process Power, which involves developing superior internal processes, often takes years, if not decades, to achieve. It’s about building a deep and durable organizational capability that is difficult to replicate. Companies must be patient and persistent in their efforts to achieve Process Power, recognizing that it is a long-term game.

Practical Application:

An AI company developing autonomous driving technology needs to understand that Process Power, with its long development timelines, will be a key to success. They must commit to a long-term vision and invest heavily in continuous improvement and refinement of their technology, recognizing that overnight success is unlikely.

Suggested Deep Dive

Chapter: Chapter 3: Counter-Positioning

This chapter provides a compelling argument for why challenging incumbents requires a strategic approach that exploits their inherent weaknesses. It introduces the concept of “collateral damage” and its role in preventing incumbents from mimicking innovative business models. The examples of Vanguard and other successful challengers provide valuable lessons for entrepreneurs and strategists seeking to disrupt established industries, which is particularly relevant in the context of AI, where new technologies and business models are constantly emerging.

Memorable Quotes

Introduction. 14

“Chance only favors the prepared mind.” Strategy serves best not as an analytical redoubt, but rather in developing the “prepared mind” of those on the ground.

Introduction. 17

Strategy: a route to continuing Power in significant markets

Chapter 3: Counter-Positioning. 59

“When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”

Chapter 8: The Path to Power. 93

“A lot of times, people don’t know what they want until you show it to them.”

Chapter 8: The Path to Power. 133

Invention is the Mother of Power.

Comparative Analysis

“7 Powers” stands out for its clear and concise framework, providing a practical approach to strategy that contrasts with the often abstract and academic nature of other strategy books. Unlike Porter’s Five Forces, which primarily focuses on industry analysis, Helmer’s 7 Powers delves into a company’s internal capabilities and their strategic deployment. It also complements Christensen’s “Innovator’s Dilemma” by highlighting how invention is not just about disruption, but about strategically leveraging it to build lasting competitive advantage. Notably, Helmer’s emphasis on Power Dynamics and the Value Axiom provides a clear lens for evaluating strategic decisions. This book, however, might benefit from more in-depth discussion of the interplay between different Power types and how they can be combined effectively. Furthermore, it might explore in greater detail the evolving nature of Power in today’s rapidly changing technological landscape, particularly in fields such as AI and machine learning.

Reflection

“7 Powers” presents a compelling and insightful framework for understanding business strategy. Its focus on identifying and establishing “Power” provides a tangible and actionable approach that can be applied across industries. The emphasis on invention as the foundation of Power is particularly insightful, highlighting the importance of creativity and a deep understanding of customer needs in building a successful business. However, the book’s focus on Power Dynamics could lead readers to overlook other critical aspects of business success, such as operational excellence, corporate culture, and ethical considerations. Additionally, the book’s assertion that the 7 Powers are the only paths to lasting success may be overly deterministic, neglecting the role of luck and unforeseen circumstances in shaping business outcomes. Nevertheless, “7 Powers” serves as a valuable tool for entrepreneurs, investors, and anyone seeking to understand the dynamics of competitive advantage in the modern business landscape. Its practical framework and real-world examples offer a fresh perspective on strategic decision-making and the creation of enduring business value.

Flashcards

What is the benefit of Scale Economies?

Reduced cost due to spreading fixed costs over larger volume.

What is the barrier to Scale Economies?

Prohibitive costs competitors face in gaining the scale necessary to match the leader’s lower unit costs.

What are Network Economies?

The value of a product or service increases as more people use it.

What is Counter-Positioning?

Adopting a new, superior business model that the incumbent cannot mimic due to potential damage to their existing business.

What are Switching Costs?

Costs incurred by a customer when switching to an alternative provider.

What is Branding?

Durable attribution of higher value to an objectively identical offering due to historical information about the seller.

What is Cornered Resource?

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

What is Process Power?

Superior processes that are difficult to replicate and provide a durable advantage.