7 Powers: The Foundations of Business Strategy

by Hamilton Wright Helmer

You identify root causes and get beyond treating symptoms

Strategy: the study of the fundamental determinants of potential business value

Statics—i.e. “Being There”: what makes Intel’s microprocessor business so durably valuable? Dynamics—i.e. “Getting There”: what developments yielded this attractive state of affairs in the first place?

Power: the set of conditions creating the potential for persistent differential returns

strategy: a route to continuing Power in significant markets I refer to this as The Mantra, since it provides an exhaustive characterization of the requirements of a strategy.

Potential Value = [Market Scale] * [Power]

Remember, we’ve reserved the term “Power” for those conditions that create durable differential returns.

Barrier. The Benefit must not only augment cash flow, but it must persist, too.

The quality of declining unit costs with increased business size is referred to as Scale Economies.

Scale Economies business. Smaller firms would spot this advantage, and their first impulse might be to pick up market share, thus improving their relative cost position and erasing some of this disadvantage while improving their bottom line.

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

cash flow is improved by (1) enhancing value (enabling higher pricing) and/or (2) lowering cost ceteris paribus.

Volume/area relationships. These occur when production costs are closely tied to area, while their utility is tied to volume, resulting in lower per-volume costs with increasing scale.

Distribution network density. As the density of a distribution network increases to accommodate more customers per area, delivery costs decline as more economical route structures can be accommodated.

Learning economies. If learning leads to a benefit (reduced cost or improved deliverables) and is positively correlated with production levels,

Purchasing economies. A larger scale buyer can often elicit better pricing for inputs.

Surplus Leader Margin (SLM). This is the profit margin the business with Power can expect to achieve if pricing is such that its competitor’s profits are zero.

Netflix launched a two-pronged assault. Their thrust into exclusives and originals changed the economic structure of the industry, while their early-in and thoughtful rollout gave them a scale advantage.

First scale, then stickiness. From entrepreneur perspective; roll out the MVP asap and secondly create more related products and services.

To calibrate the intensity of Power, I ask the question “What governs profitability of the company with Power (S) when prices are such that the company with no Power (W) makes no profit at all?

Network Economies occur when the value of a product to a customer is increased by the use of the product by others.

Barrier. The barrier for Network Economies is the unattractive cost/benefit of gaining share, and this can be extremely high.

Winner take all. Businesses with strong Network Economies are frequently characterized by a tipping point:

Boundedness. As powerful as this Barrier is, it is bounded by the character of the network,

Decisive early product. Due to tipping point dynamics, early relative scaling is critical in developing Power.

To understand the ascendancy of Vanguard, I must first note these characteristics: An upstart who developed a superior, heterodox business model. That business model’s ability to successfully challenge well-entrenched and formidable incumbents. The steady accumulation of customers, all while the incumbent remains seemingly paralyzed and unable to respond. These elements were not unique to Vanguard—they were pieces of an oft-repeated story.

Benefit. The new business model is superior to the incumbent’s model due to lower costs and/or the ability to charge higher prices.

They observe the upstart’s new model, and ask, “Am I better off staying the course, or adopting the new model?”

define Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.

A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.

Five Stages of Counter-Positioning: Denial Ridicule Fear Anger Capitulation (frequently too late) Elop’s

Switching Costs arise when a consumer values compatibility across multiple purchases from a specific firm over time.

Switching Costs definition: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.

Switching Costs offer no Benefit if no additional related sales are made to the customer.

The potential benefits accrue only if you have a customer, so the competitive position component of Switching Costs is binary: you either have the customer, or you do not.

Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.

Affective valence. The built-up associations with the brand elicit good feelings about the offering,

Uncertainty reduction. A customer attains “peace of mind” knowing that the branded product will be as just as expected.

Barrier. A strong brand can only be created over a lengthy period of reinforcing actions (hysteresis),

B(t) ≡ brand value as a multiple of the weaker firm’s price

“What governs profitability of the company with Power (S) when prices are such that the company with no Power (W) makes no profit at all?”

the core of the group known as the Brain Trust, the creative cadre instrumental to the studio’s sustained success.

barrier is “fiat”; it is not based on ongoing interaction but rather comes by decree, either general or personal.

Cornered Resource definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.

Brain Trust is more than a combination of individual talents; rather it is the foundational members’ shared experience in the early trial years that has yielded one success after another.

A company with Process Power is able to improve product attributes and/or lower costs as a result of process improvements embedded within the organization.

Process Power equals operational excellence, plus hysteresis.

“What must I do to establish Power?” and “When can I establish it?”

all Power starts with invention.