7 Powers: The Foundations of Business Strategy

by Hamilton Wright Helmer

3. The Fundamental Equation of Strategy. Value = M0 g s m Commentary. The interpretation of this is that Value = Market Size * Power. M0 is the current market size, g is a discounted growth factor for the market, s is long-term average market share and m is long-term average differential margins (the profit margin above that needed to return the cost of capital). I have found that the explicit tying of Strategy concepts to the exact determinants of the net present value of free cash flow puts to rest a lot of fuzzy thinking about the relationship between Strategy and value. It has also helped me as an active equity investor. It is important that s and m are long-term equilibrium values. Short-term movements in these have little impact on fundamental value.