(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 my full reading list, and why I’m doing it DIY.

In summary, this book is 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.

TLDR

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.

My Notes

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:

  1. 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.

Benefit: Reduced cost

Barrier: Prohibitive cost of market share gains

eg Netflix.
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

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

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.

Further Observations

- 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

  1. Denial
  2. Ridicule
  3. Fear
  4. Anger
  5. Capitulation

Power 4: Switching Costs

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.

Types

- Financial

- 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

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

Benefit: Produces uncommonly appealing product

Barrier: unacquirable commodity

Eg Pixar’s talent pool

Power 7: Process Power

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

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)?

  1. Competitive Position: an attractive new service caused sign ups, resulting in scale advantage.
  2. 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

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.

Dad, Hub, LDN/E17 resident. Strategy @Spotify. ex Universal Music. Here I share my thoughts or things I learn, please help me understand them more. @CWStoneman

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