7 Powers: The Foundations of Business Strategy

by Hamilton Wright Helmer

“simple but not simplistic.”

If your business does not have at least one of these seven Power types, then you lack a viable strategy, and you are vulnerable.

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

Strategy can be usefully separated into two topics: 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

And so it is the task of this book to detail the specific conditions that result in Power (Part I: Statics) and how to attain them (Part II: Dynamics).

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.

NPV = M0 g s m Where: M0 ≡ current market size g ≡ discounted market growth factor s ≡ long-term market share m ≡ long-term differential margin (net profit margin in excess of that needed to cover the cost of capital)

Remember, we’ve reserved the term “Power” for those conditions that create durable differential returns. In other words, we are trying to discern long-term competitive equilibria, not just next year’s results.

Strategy requires you identify and develop those rare conditions which produce a value sinecure immune to competitive onslaught.

Dual Attributes. Power is as hard to achieve as it is important. As stated above, its defining feature ex post is persistent differential returns. Accordingly, we must associate it with both magnitude and duration.

Benefit. The conditions created by Power must materially augment cash flow, and this is the magnitude aspect of our dual attributes. It can manifest as any combination of increased prices, reduced costs and/or lessened investment needs.

Barrier. The Benefit must not only augment cash flow, but it must persist, too. There must be some aspect of the Power conditions which prevents existing and potential competitors, both direct and functional, from engaging in the sort of value-destroying arbitrage Intel ex...

As a strategist, then, my advice is, “Always look to the Barrier first.”

SCALE ECONOMIES

strategy must meet the high hurdle of “A route to continuing Power in a significant market.”

as astute strategists, they knew that if they didn’t obsolete themselves, someone else would do it to them.

Here now Netflix finally made a radical move: a major resource commitment to originals, starting with House of Cards in 2012.

Creating originals, and thus tying up all the rights to that content, was more expensive.

Exclusive rights and originals made content, a major component of Netflix’s cost structure, a fixed-cost item.

This was a radical change in industry economics, and it put to rest the specter of a value-destroying commodity rat race.

Scale Economies—the First of the 7 Powers The quality of declining unit costs with increased business size is referred to as Scale Economies.

#1

Power is a configuration that creates the potential for persistent significant differential returns, even in the face of fully committed and competent competition.

Definition of Power

A Benefit: some condition which yields material improvement in the cash flow of the Power wielder via reduced cost, enhanced pricing and/or decreased investment requirements. A Barrier: some obstacle which engenders in competitors an inability and/or unwillingness to engage in behaviors that might, over time, arbitrage out this benefit.

The 2 components of Power

For Scale Economies, the Benefit is straightforward: lowered costs.

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

Here let’s define Scale Economies: A business in which per unit cost declines as production volume increases.

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.

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

A business in which the value realized by a customer increases as the installed base increases.

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