Published in: 2016
Hamilton Helmer has spent his career as a practicing business strategist and in the last two decades he has also utilized his Strategy concepts as an active equity investor. This book is endorsed by Daniel Ek (Spotify), Reed Hastings (Netflix) and Peter Thiel (PayPal etc). The 7 Powers are a Strategy framework born of hundreds of consulting engagements and decades of equity investing.
WHAT STRATEGY IS. Strategy is the study of the fundamental determinants of potential business value. Power is the set of conditions creating the potential for persistent differential returns. Power is as hard to achieve as it is important. The first cause of every Power type is invention, be it the invention of a product, process, business model or brand. Below are the 7 Powers and what you must do to get there.
SCALE ECONOMIES. Scale economies is a business in which per unit cost declines as production volume increases. You must simultaneously pursue a business model that promises scale economics (Industry Economics), while at the same time offering up a product differentially attractive enough to pull in customers and gain relative share (competitive position). In the case of Netflix, their lead in subscribers translated directly in lower content costs per subscriber for originals and exclusives (i.e. House of Cards). This can emerge from Volume/area relationships (i.e. warehouses), Distribution network density (i.e. UPS – more customers per area), Learning economies or Purchasing economies (i.e. Wal-Mart).
NETWORK ECONOMIES. Network economies is when a business in which the value realized by a customer increase as the installed base increases. This power ensures the ability to earn outsized returns well into the future, driving up value. There can, however, be positive network effects but no potential for power. Here the needs are similar to Scale Economics, except that installed base, rather than sales share, is the goal.
COUNTER-POSITIONING.A newcomer adopts a new, superior business model which the incumbents does not mimic due to anticipated damage to their existing business. You must pioneer a new, superior business model that promises collateral damage for incumbents if mimicked. Power must be considered relative to each competitor, actual and implicit. With Counter-Positioning, this is particularly important.
BRANDING. The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller. Over an extensive period of time, you make the consistent creative choices which foster in the customer’s mind an affinity that goes beyond the product’s objective attributes.
CORNERED RESOURCE. Preferential access at attractive terms to a coveted asset can independently enhance value. You must secure the rights to a valuable resource on attractive terms. This often comes from having developed that resource in the first place and then gaining ownership of it, the most common avenue being a patent award for research developments.
SWITCHING COSTS. A switching cost is the value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases. Switching Costs can be divided into three broad groups: Financial, Procedural and Relational. With Switching Costs, you must first attain a customer base, meaning the same new-product requirements demanded of Scale and Network Economies factor in here as well.
PROCESS POWER. Process power is embedded in an organization and its activity sets which enable lower costs and/or superior products, and which can be matched only by an extended commitment. Experience curves belong to this power. You evolve a new complex process which renders itself inimitable within a reasonable period and yet offers significant advantages over a longer period of time.
PRODUCT DIFFERENCES. The product differences must be dramatic in order to achieve that “gotta have” response. Andy Grove, the Intel CEO, suggested that 10x was in the right ballpark for semiconductors. But it misses the mark elsewhere. For example, a 50% increase in photovoltaic efficiency, or battery with double the existing charge-storage density, would both likely clear the bar.
STAY UPDATED. Strategy and strategies are about only one thing: potential fundamental business value. To get them right, you must constantly attune your strategy to unfolding circumstances – ponderous planning cycles or handoffs to outside experts won’t get you there. For a complex subject such as strategy, “simple but not simplistic” is a high hurdle. The 7 Powers clears this hurdle.