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October 27 - November 21, 2020
Power Progression. At Netflix, we aggressively prioritize our attention in order to focus on what is essential to accomplish now. This applies to strategy as well: what are the near-in strategic imperatives? Unfortunately, existing strategy frameworks offered little guidance. There was recognition that this was an important issue, but none of those other frameworks could address it in a systematic, reliable, sufficiently transparent way. How did Hamilton respond to this void? Over a span of decades, he developed and refined the Power Progression, illustrating the approximate time fuse for each
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But how and why do successes like this take wing? The field of Strategy examines precisely that question. To define it more formally: Strategy: the study of the fundamental determinants of potential business value The objective here is both positive—to reveal the foundations of business value—and normative—to guide businesspeople in their own value-creation efforts. Following a line of reasoning common in Economics, 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
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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.
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 experienced with its memory business. This is the duration aspect of Power
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. We derive the SLM for Netflix-like fixed cost Scale Economies in the appendix to this chapter. If the fixed cost = C, then: Surplus Leader Margin = [C/(Leader Sales)] * [(Leader Sales)/(Follower Sales) – 1] The first term of this equation20 indicates the relative significance of fixed cost in the company’s overall financials, while the second term shows the degree of scale advantage. Put another way: Surplus Leader Margin = [Scale
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A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
Though this isn’t always the case, I have noticed a frequently repeated script for how an incumbent reacts to a CP challenge. I whimsically refer to it as the Five Stages of Counter-Positioning: Denial Ridicule Fear Anger Capitulation (frequently
Surplus leader margin (SLM) is the margin the company with Power can earn while pricing is such that the margin of the weaker firm is zero. SLM is an indicator of the intensity of Power. The surplus indicated (if positive) gives S the opportunity for profits and/or Power position enforcement. In the cases of Network Economies and Scale Economies, the scale leader is S, so SLM indicates retaliatory latitude in protecting market share. In the case of CP, S is the challenger, and Power position enforcement involves diminishing the likelihood that W, the incumbent, will enter N to battle S. Such
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Procedural. Procedural Switching Costs are somewhat murkier but no less persuasive. They stem from the loss of familiarity with the product or from the the risk and uncertainty associated with the adoption of a new product. When employees have invested time and effort to learn the particulars of how to use a certain product, there can be a significant cost to retraining them in a different system. In the case of SAP, applications exist for a wide array of enterprise functions. This
means that there are employees in human resources, sales and marketing, procurement, accounting, not to mention managers across these many divisions, who have all learned how to create reports based on the SAP system and its complementary software. Such a system-switch breeds organizational discontent by forcing many within the ranks of the organization to change their daily routines. Furthermore, procedural changes open the door for errors. With databases, these are particularly costly, since they involve the totality of the customer’s information. Even when a competitor provides services and
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Often a customer establishes close, beneficial relationships with the provider’s sales and service teams. Such familiarity, ease of communication and mutual positive feelings can create resistance to the prospect of severing those ties and switching to another vendor. Additionally, if the customer has developed affection for the product and their identity as a user, or if they enjoy the camaraderie which exists amongst a community of like users, they may shrink from the prospect of switching identities and abandoning that community.43
Switching Costs offer no Benefit if no additional related sales are made to the customer. To assure that such additional sales take place, one tactic might be to develop more and more add-on products. This has been SAP’s tack, as seen from this Wikipedia list of the company’s offerings.