7 Powers: The Foundations of Business Strategy

by Hamilton Wright Helmer

There are exceptions, but by and large the Power Progression is borne out: Origination: Counter-Positioning and Cornered Resource Takeoff: Scale Economies, Network Economies and Switching Costs Stability: Process Power and Branding

As a value investor, I consider Warren Buffett one of my heroes. I previously mentioned his insight that good managers can rarely reverse the course of a bad business, i.e. one without Power. Over and over, I have witnessed Buffett’s axiom play out in the press, with business leaders castigated for poor management ability in the face of seemingly impossible circumstances. Yahoo, Twitter and Zynga come to mind here. That said, when it comes to establishing Power in the first place, make no mistake: leadership is fundamental. Operation Crush would never have happened were it not for Andy Grove’s implacable, aggressive leadership. Going back further, the company would not have even pursued microprocessors were it not for the leadership of Bob Noyce.

The 3 S’s. Power, the potential to realize persistent differential returns, is the key to value creation. Power is created if a business attribute is simultaneously: Superior—improves free cash flow Significant—the cash flow improvement must be material Sustainable—the improvement must be largely immune to competitive arbitrage

Commentary. In this book I have focused on Benefit + Barrier which has a one-to-one mapping to the 3 S’s (Superior + Significant = Benefit and Sustainable = Barrier). However, in the field, the tripartite 3 S test of Power proves useful additionally because, since it calls out “Significant” separately, it makes materiality explicit. For example, businesses often tout network effects but, when looked at carefully, they are not material and therefore do not qualify as Power.

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 ...

To the best of my knowledge the seven Power types positioned on this chart are the only strategies available to a company. If you do not have at least one of these for each competitor (current and potential, direct and functional), you cannot satisfy The Mantra and hence are lacking a viable strategy. In the 200+ strategy cases I have led over my career, these seven were sufficient.

The key strategic questions for you are: (1) “What Power types do I now have?” and (2) “What Power types do I need to worry about establishing now?” The 7 Powers informs you that there are only seven possibilities for (1) and usually you can quickly rule out several. The Power Progression informs you that at any given growth stage the maximum number of new Powers that you might explore is 3. This focusing is very valuable. If you cannot see a route to one of these 7, your strategy problem is not yet solved.

The potential for these Power types is usually evident long before detailed forecasting is possible. What I have found working with early-stage companies in Silicon Valley and working with mature companies considering new directions is that it is possible to have meaningful conversations about the potential for Power at quite an early stage.113 My investment results are also indicative of this ex ante transparency.

Looking at the seven Power types we can see that this always involves an invention, whether that be an invention of product, business model, process or brand. Eventually such inventions lead to a Benefit as expressed in a product attribute, be that features, price or reliability. The marker for sufficiency of such a Benefit is usually “compelling value,” eliciting a “gotta have” response. There are three paths to achieving compelling value: Capabilities-led, Customer-led and Competitor-led. These each present distinctly different tactical imperatives.

Different Power types present the opportunity for first establishing a Barrier at different times in the development of your business. Knowing when this window is open and when it shuts is valuable in recognizing and seizing the opportunity. The break between

takeoff and stability is when unit growth falls below about 30%–40% per year.