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7 Powers: The Foundations of Business Strategy
7 Powers breaks fresh ground by constructing a comprehensive strategy toolset that is easy for you to learn, communicate and quickly apply.Drawing on his decades of experience as a business strategy advisor, active equity investor and Stanford University teacher, Hamilton Helmer develops from first principles a practical theory of Strategy rooted in the notion of Power, those conditions which create the potential for persistent differential returns.Using rich real-world examples, Helmer rigorously characterizes exactly what your business must achieve to create Power. And create Power it must, for without it your business is at risk. He explains why invention always comes first and then develops the Power Progression to enable you to target when your Power must be in the origination, take-off or stability phases of your business. Every business faces a do-or-die strategy a crux directional choice made amidst swirling uncertainty. To get this right you need at your fingertips a real-time strategy compass to discern your true north. 7 Powers is that compass.
210 pages, Paperback
Published October 27, 2016
About the author
Hamilton Wright Helmer
1 book22 followersHamilton Helmer has spent his career as a practicing business strategist. At Helmer & Associates (later Deep Strategy), a strategy consulting firm he founded, he has led over 200 strategy projects with major clients such as Adobe Systems, Agilent Technologies, Coursera, Hewlett-Packard, John Hancock Mutual Life, Mentor Graphics, Netflix, Raychem, and Spotify. In the last two decades he has also utilized his Strategy concepts as an active equity investor and is currently Chief Investment Officer and Co-Founder Strategy Capital. Prior to Helmer & Associates he was employed at Bain & Company. He holds a Ph.D. in Economics from Yale University and is a Phi Beta Kappa graduate of Williams College. Mr. Helmer just retired as Chairman of the Board of American Science and Engineering (NASDAQ: ASEI) and currently teaches Business Strategy in the Economics Department of Stanford University.
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June 4, 2021
I really think this book is overrated. A lot of people in Silicon Valley seem to love this book and it's highly recommended by Reed Hastings, who wrote the foreword. If you find it too cumbersome to read Porter, Christensen, and Greenwald, then this book is not a bad summary of some of the bigger ideas in their works. However, a lot of the text is circular theory dressed up with Econ math to explain some tangentially relevant cases. It reads like an Econ PhD wanting to show the business world that he has a very original set of ideas which are really a loose collection of existing work dressed up with unnecessary algebra.
The central idea of this book is that business value creation requires the seeking of "Power," which Helmer defines as the set of conditions for creating the potential for persistent differential returns. In other words, the business can earn superior economics over a long period of time (sounds oddly familiar...). He identifies 7 Powers:
1. Scale Economies - ability to spread fixed costs over a larger customer base and use pricing to edge out competitors. Netflix spreading original content costs over its user base is an example
2. Network Economies - value accrues to the product or service because other people use it. Network economies often exhibit qualities such as (1) winner take all market; a tipping point occurs after which it becomes very difficult to unseat the incumbent (2) boundedness; only relevant for a particular domain--Facebook is for personal use, LinkedIn professional (3) Decisive early product - who scales fastest may be determined by who gets a good product early on to attract the critical mass of users
3. Counter positioning - A newcomer adopts a superior business model the incumbent does not mimic due to anticipated damage to their existing business. For example, Vanguard's low-fee index fund model was difficult for Fidelity to copy because Fidelity's core business which was very profitable relied on active strategies which charged high fees. Adopting Vanguard's approach in combination with existing business model would have risked making the entire business less profitable
4. Switching costs - self explanatory. Example used is SAP has terrible customer feedback but most users do not want to switch because of the disruption it would cause to their business
5. Branding - self explanatory. People pay more for Coke even if it tastes the exact same as a private label Cola
6. Cornered resource - below market price to an exclusive good. Pixar had John Lasseter and Ed Catmull, along with the rest of the Brain Trust, which provided hit after hit after hit. Additionally, these people were not easily hired away by Disney simply for money
7. Process power - benefits of hysteresis--doing something and improving it over a long period of time that confers an advantage. Toyota's manufacturing process was not easily copied by others, even though Toyota was open in sharing its best practices with competitors like GM. Over time excellence in process gets internalized over a complex and long set of actions and is difficult to replicate quickly
Look I think this book emphasizes many of the right ideas about business analysis, and provides some useful frameworks for thinking about businesses. But two of the powers, cornered resource and process power, are literally non-explanations. The book struggles to define how having a group of people who consistently produced hits at Pixar is a "cornered resource" other than the fact that they all wanted to work there and were creative geniuses, and so you couldn't pay them enough to do it somewhere else. That seems like a fairly intuitive advantage in and of itself. Similarly, process power and the Toyota Production Model is not explained at all, and is simply labeled as an example of success due to a process that someone spent a long time working at which is difficult to replicate. Again, this seems like a unique example that is self explanatory. Even counter -positioning, which is perhaps the only original idea in this book, is struggling to differentiate itself clearly as a concept from Christensen's concept of Disruptive Technologies in the book The Innovator's Dilemma, despite the author's attempt to distinguish the two. The example of Kodak facing digital cameras as a disruptive technology and not counter positioning is relatively clear. Kodak invented the digital camera, but the company's expertise was in film not semiconductors, so it was not a business model counterpositioning that did Kodak in. But the concept does not appear to distinguish itself in many of the examples that Christensen brings up in The Innovator's Dilemma. Indeed, a central concept of Christensen's argument is that even incumbents that have leading expertise in the disruptive technology find themselves at odds with cannibalizing their own business because of the strategic problems it creates.
Ultimately I think this book would be fine if (1) It cut out the unnecessary simplistic Econ math (2) The author didn't act like this was an incredibly inventive work and (3) the concepts of cornered resource and process power were not a bunch of circular non-explanations. I don't get why this book is so highly regarded.
The central idea of this book is that business value creation requires the seeking of "Power," which Helmer defines as the set of conditions for creating the potential for persistent differential returns. In other words, the business can earn superior economics over a long period of time (sounds oddly familiar...). He identifies 7 Powers:
1. Scale Economies - ability to spread fixed costs over a larger customer base and use pricing to edge out competitors. Netflix spreading original content costs over its user base is an example
2. Network Economies - value accrues to the product or service because other people use it. Network economies often exhibit qualities such as (1) winner take all market; a tipping point occurs after which it becomes very difficult to unseat the incumbent (2) boundedness; only relevant for a particular domain--Facebook is for personal use, LinkedIn professional (3) Decisive early product - who scales fastest may be determined by who gets a good product early on to attract the critical mass of users
3. Counter positioning - A newcomer adopts a superior business model the incumbent does not mimic due to anticipated damage to their existing business. For example, Vanguard's low-fee index fund model was difficult for Fidelity to copy because Fidelity's core business which was very profitable relied on active strategies which charged high fees. Adopting Vanguard's approach in combination with existing business model would have risked making the entire business less profitable
4. Switching costs - self explanatory. Example used is SAP has terrible customer feedback but most users do not want to switch because of the disruption it would cause to their business
5. Branding - self explanatory. People pay more for Coke even if it tastes the exact same as a private label Cola
6. Cornered resource - below market price to an exclusive good. Pixar had John Lasseter and Ed Catmull, along with the rest of the Brain Trust, which provided hit after hit after hit. Additionally, these people were not easily hired away by Disney simply for money
7. Process power - benefits of hysteresis--doing something and improving it over a long period of time that confers an advantage. Toyota's manufacturing process was not easily copied by others, even though Toyota was open in sharing its best practices with competitors like GM. Over time excellence in process gets internalized over a complex and long set of actions and is difficult to replicate quickly
Look I think this book emphasizes many of the right ideas about business analysis, and provides some useful frameworks for thinking about businesses. But two of the powers, cornered resource and process power, are literally non-explanations. The book struggles to define how having a group of people who consistently produced hits at Pixar is a "cornered resource" other than the fact that they all wanted to work there and were creative geniuses, and so you couldn't pay them enough to do it somewhere else. That seems like a fairly intuitive advantage in and of itself. Similarly, process power and the Toyota Production Model is not explained at all, and is simply labeled as an example of success due to a process that someone spent a long time working at which is difficult to replicate. Again, this seems like a unique example that is self explanatory. Even counter -positioning, which is perhaps the only original idea in this book, is struggling to differentiate itself clearly as a concept from Christensen's concept of Disruptive Technologies in the book The Innovator's Dilemma, despite the author's attempt to distinguish the two. The example of Kodak facing digital cameras as a disruptive technology and not counter positioning is relatively clear. Kodak invented the digital camera, but the company's expertise was in film not semiconductors, so it was not a business model counterpositioning that did Kodak in. But the concept does not appear to distinguish itself in many of the examples that Christensen brings up in The Innovator's Dilemma. Indeed, a central concept of Christensen's argument is that even incumbents that have leading expertise in the disruptive technology find themselves at odds with cannibalizing their own business because of the strategic problems it creates.
Ultimately I think this book would be fine if (1) It cut out the unnecessary simplistic Econ math (2) The author didn't act like this was an incredibly inventive work and (3) the concepts of cornered resource and process power were not a bunch of circular non-explanations. I don't get why this book is so highly regarded.
September 7, 2020
Quite possibly the only book about business strategy you ever need to read.
This is miles better, and more practical than Rumelt or Porter, and it resolves for me some of the edge cases with Christensen’s disruption theory.
It’s great.
This is miles better, and more practical than Rumelt or Porter, and it resolves for me some of the edge cases with Christensen’s disruption theory.
It’s great.
December 21, 2017
This book is a good starting point to think about business strategy, but has a few flaws and over-generalizations.
My biggest personal annoyance that pervades the book is a conflicting view on markets that is never reconciled. In one chapter Helmer proclaims that passive etfs are superior to other forms of investing, but later posits that his methodology has allowed him to outperform the market. The examples are cherry-picked to fit a narrative and the book primarily focuses on all or nothing strategies, with little discussion of tactics. The appendices proving the mathematics behind concepts such as economies of scale were largely unnecessary to explain business maxims.
It provided good overarching themes and was a quick enjoyable read, but doesn’t offer any outside the box insights.
My biggest personal annoyance that pervades the book is a conflicting view on markets that is never reconciled. In one chapter Helmer proclaims that passive etfs are superior to other forms of investing, but later posits that his methodology has allowed him to outperform the market. The examples are cherry-picked to fit a narrative and the book primarily focuses on all or nothing strategies, with little discussion of tactics. The appendices proving the mathematics behind concepts such as economies of scale were largely unnecessary to explain business maxims.
It provided good overarching themes and was a quick enjoyable read, but doesn’t offer any outside the box insights.
October 15, 2020
Mind-blowing
Simply, the best book on Strategy and strategy.
Pick it up.
Read it once a year before the yearly planning.
Simply, the best book on Strategy and strategy.
Pick it up.
Read it once a year before the yearly planning.
December 28, 2020
Reading this short book is more helpful than 3 other lengthy strategy books that I read. Short and practical, focus on the content, not the author - the quality standard of a business book.
November 10, 2022
Книга про стратегию - с позиции способов получения устойчивых конкурентных преимуществ. Адекватно, но нового немного
December 7, 2022
7 powers
Summary
The author, Hamilton Helmer is a consultant and portfolio manager that created this framework to analyze the companies he invested in. To me it seems like a gathering of some ideas and I don't think there is something really “new”. Maybe the framework and how he uses it to invest might be something innovative… Basically it is resumed in 7 powers including: scale economics, switching costs, cornered resource, counter positioning, branding, network effects, and process.
Scale Economies
I agree that this is one of the most important concepts. Another very good book about this is “Competition Demystified”. In this chapter it mentions some examples like Intel (also a very used example in several other books).
Network Economies
Also a very well known item. No news here.
Below a summary I found on the internet…
Counter-Positioning
Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
This chapter introduces Counter-Positioning, the next Power type. “I developed this concept to depict a not well-understood competitive dynamic I often have observed both as a strategy advisor and an equity investor. I must confess it is my favorite form of Power, both because of my authorship and because it is so contrarian. As we will see, it is an avenue for defeating an incumbent who appears unassailable by conventional wisdom metrics of competitive strength.”
But nearly always, these featured the same outcome: the incumbent responds either not at all or too late. The incumbent’s failure to respond, more often than not, results from thoughtful calculation. They observe the upstart’s new model, and ask, “Am I better off staying the course, or adopting the new model?” Counter-Positioning applies to the subset of cases in which the expected damage to the existing business elicits a “no” answer from the incumbent. The Barrier, simply put, is collateral damage. In the Vanguard case, Fidelity looked at their highly attractive active management franchise and concluded that the new passive funds’ more modest returns would likely fail to offset the damage done by a migration from their flagship products.
What are the potential causes of such decrements? They could be numerous, but over several decades of client strategy work, I have noted two that seem common. The first involves two characteristics of challenges to incumbency:
The challenger’s approach is novel and, at first, unproven. As a consequence, it is shrouded in uncertainty, especially to those looking in from the outside. The low signal-to-noise of the situation only heightens that uncertainty.
The incumbent has a successful business model. This heritage is influential and deeply embedded, as suggested by Nelson and Winter’s notion of “routines,” and with it comes a certain view of how the world works. The CEO probably can’t help but view circumstances through this lens, at least in part. Together these two characteristics frequently lead incumbents to at first belittle the new approach, grossly underestimating its potential.
As noted in the Introduction, Power must be considered relative to each competitor, actual and implicit. With Counter-Positioning, this is particularly important, because this type of Power only applies relative to the incumbent and says nothing regarding Power relative to other firms utilizing the new business model.
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 too late)
Once market erosion becomes severe, a Counter-Positioned incumbent comes under tremendous pressure to do something; at the same time, they face great pressure to not upset the apple cart of the legacy business model. A frequent outcome of this duality? Let’s call it dabbling: the incumbent puts a toe in the water, somehow, but refuses to commit in a way that meaningfully answers the challenge. Counter-Positioning often underlies situations in which the following developments are jointly observed: For the challenger Rapid share gains Strong profitability (or at least the promise of it) For the incumbent Share loss Inability to counter the entrant’s moves Eventual management shake-up (s) Capitulation, often occurring too late
Such reversals are rare in business, because contests typically take place over extended periods and with great thoughtfulness on all sides. Even a momentary lapse by an incumbent won’t present a sufficient opening. The only bet worthwhile for a challenger is one in which even if the incumbent plays its best game, it can be taken off the board. A competent Counter-Positioned challenger must take advantage of the strengths of the incumbent, as it is this strength which molds the Barrier, collateral damage.
Switching Costs
Switching Costs arise when a consumer values compatibility across multiple purchases from a specific firm over time. These can include repeat purchases of the same product or purchases of complementary goods.
Benefit. A company that has embedded Switching Costs for its current customers can charge higher prices than competitors for equivalent products or services. This benefit only accrues to the Power holder in selling follow-on products to their current customers; they hold no Benefit with potential customers and there is no Benefit if there are no follow-on products.
Barrier. To offer an equivalent product, competitors must compensate customers for Switching Costs. The firm that has previously roped in the customer, then, can set or adjust prices in a way that puts their potential rival at a cost disadvantage, rendering such a challenge distinctly unattractive. Thus, as with Scale Economies and Network Economies, the Barrier arises from the unattractive cost/benefit of share gains for the challenger.
Switching Costs can be divided into three broad groups:
Financial.
Procedural.
Relational.
Switching Costs are a non-exclusive Power type: all players can enjoy their benefits.
Branding
Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.
Benefit. A business with Branding is able to charge a higher price for its offering due to one or both of these two reasons:
Affective valence. The built-up associations with the brand elicit good feelings about the offering, distinct from the objective value of the good.
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), which itself serves as the key Barrier.
Brand Dilution. Firms require focus and diligence to guide Branding over time and ensure that the reputation created remains consistent in the valences it generates. Hence, the biggest pitfall lies in diminishing the brand by releasing products which deviate from, or damage, the brand image. Seeking higher “down market” volumes can reduce affective valence by damaging the aura of exclusivity, weakening positive associations with the product.
Problem is, the qualities that make Branding a Power also make it hard to change; the considerable risk is dilution or brand destruction.
Type of Good. Only certain types of goods have Branding potential as they must clear two conditions:
Magnitude: the promise of eventually justifying a significant price premium. Business-to-business goods typically fail to exhibit meaningful affective valence price premia, since most purchasers are only concerned with objective deliverables. Consumer goods, in particular those associated with a sense of identity, tend to have the purchasing decision more driven by affective valence. Here’s the reason: in order to associate with an identity, there must be some way to signal the exclusion of alternative identities.
For Branding Power derived from uncertainty reduction, the customer’s higher willingness to pay is driven by high perceived costs of uncertainty relative to the cost of the good. Such products tend to be those associated with bad tail events: safety, medicine, food, transport, etc. Branded medicine formulations, for example, are identical to those of generics, yet garner a significantly higher price. Duration: a long enough amount of time to achieve such magnitude. If the requisite duration is not present, the Benefit attained will fall prey to normal arbitraging behavior.
Cornered Resource
Cornered Resource definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.
Benefit. In the Pixar case, this resource produced an uncommonly appealing product—“superior deliverables”—driving demand with very attractive price/volume combinations in the form of huge box office returns. No doubt—this was material (a large m in the Fundamental Equation of Strategy). In other instances, however, the Cornered Resource can emerge in varied forms, offering uniquely different benefits. It might, for example, be preferential access to a valuable patent, such as that for a blockbuster drug; a required input, such as a cement producer’s ownership of a nearby limestone source, or a cost-saving production manufacturing approach, such as Bausch and Lomb’s spin casting technology for soft contact lenses.
Barrier. The Barrier in Cornered Resource is unlike anything we have encountered before. You might wonder: “Why does Pixar retain the Brain Trust?” Any one of this group would be highly sought after by other animated film companies, and yet over this period, and no doubt into the future, they have stayed with Pixar. Even during the company’s rocky beginning, there was a loyalty that went beyond simple financial calculation.
Our general term for this sort of barrier is “fiat”; it is not based on ongoing interaction but rather comes by decree, either general or personal.
Another way to put this is that a Cornered Resource is a sufficient condition for potential for differential returns.
Process Power
I save it until last because it is rare. I will use the Toyota Motor Corporation as a case.
Perhaps the best way to think of it is this: Process Power equals operational excellence, plus hysteresis. Having said that, such hysteresis occurs so rarely that I am in strong agreement with Professor Porter’s sentiments.
Benefit. 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. For example, Toyota has maintained the quality increases and cost reductions of the TPS over a span of decades; these assets do not disappear as new workers are brought in and older workers retire.
Barrier. The Barrier in Process Power is hysteresis: these process advances are difficult to replicate, and can only be achieved over a long time period of sustained evolutionary advance. This inherent speed limit in achieving the Benefit results from two factors:
Complexity. Returning to our example: automobile production, combined with all the logistic chains which support it, entails enormous complexity. If process improvements touch many parts of these chains, as they did with Toyota, then achieving them quickly will prove challenging, if not impossible.
Opacity. The development of TPS should tip us off to the long time constant inevitably faced by would-be imitators. The system was fashioned from the bottom up, over decades of trial and error. The fundamental tenets were never formally codified, and much of the organizational knowledge remained tacit, rather than explicit. It would not be an exaggeration to say that even Toyota did not have a full, top-down understanding of what they had created—it took fully fifteen years, for instance, before they were able to transfer TPS to their suppliers. GM’s experience with NUMMI also implies the tacit character of this knowledge: even when Toyota wanted to illuminate their work processes, they could not entirely do so.
Summary
The author, Hamilton Helmer is a consultant and portfolio manager that created this framework to analyze the companies he invested in. To me it seems like a gathering of some ideas and I don't think there is something really “new”. Maybe the framework and how he uses it to invest might be something innovative… Basically it is resumed in 7 powers including: scale economics, switching costs, cornered resource, counter positioning, branding, network effects, and process.
Scale Economies
I agree that this is one of the most important concepts. Another very good book about this is “Competition Demystified”. In this chapter it mentions some examples like Intel (also a very used example in several other books).
Network Economies
Also a very well known item. No news here.
Below a summary I found on the internet…
Counter-Positioning
Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
This chapter introduces Counter-Positioning, the next Power type. “I developed this concept to depict a not well-understood competitive dynamic I often have observed both as a strategy advisor and an equity investor. I must confess it is my favorite form of Power, both because of my authorship and because it is so contrarian. As we will see, it is an avenue for defeating an incumbent who appears unassailable by conventional wisdom metrics of competitive strength.”
But nearly always, these featured the same outcome: the incumbent responds either not at all or too late. The incumbent’s failure to respond, more often than not, results from thoughtful calculation. They observe the upstart’s new model, and ask, “Am I better off staying the course, or adopting the new model?” Counter-Positioning applies to the subset of cases in which the expected damage to the existing business elicits a “no” answer from the incumbent. The Barrier, simply put, is collateral damage. In the Vanguard case, Fidelity looked at their highly attractive active management franchise and concluded that the new passive funds’ more modest returns would likely fail to offset the damage done by a migration from their flagship products.
What are the potential causes of such decrements? They could be numerous, but over several decades of client strategy work, I have noted two that seem common. The first involves two characteristics of challenges to incumbency:
The challenger’s approach is novel and, at first, unproven. As a consequence, it is shrouded in uncertainty, especially to those looking in from the outside. The low signal-to-noise of the situation only heightens that uncertainty.
The incumbent has a successful business model. This heritage is influential and deeply embedded, as suggested by Nelson and Winter’s notion of “routines,” and with it comes a certain view of how the world works. The CEO probably can’t help but view circumstances through this lens, at least in part. Together these two characteristics frequently lead incumbents to at first belittle the new approach, grossly underestimating its potential.
As noted in the Introduction, Power must be considered relative to each competitor, actual and implicit. With Counter-Positioning, this is particularly important, because this type of Power only applies relative to the incumbent and says nothing regarding Power relative to other firms utilizing the new business model.
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 too late)
Once market erosion becomes severe, a Counter-Positioned incumbent comes under tremendous pressure to do something; at the same time, they face great pressure to not upset the apple cart of the legacy business model. A frequent outcome of this duality? Let’s call it dabbling: the incumbent puts a toe in the water, somehow, but refuses to commit in a way that meaningfully answers the challenge. Counter-Positioning often underlies situations in which the following developments are jointly observed: For the challenger Rapid share gains Strong profitability (or at least the promise of it) For the incumbent Share loss Inability to counter the entrant’s moves Eventual management shake-up (s) Capitulation, often occurring too late
Such reversals are rare in business, because contests typically take place over extended periods and with great thoughtfulness on all sides. Even a momentary lapse by an incumbent won’t present a sufficient opening. The only bet worthwhile for a challenger is one in which even if the incumbent plays its best game, it can be taken off the board. A competent Counter-Positioned challenger must take advantage of the strengths of the incumbent, as it is this strength which molds the Barrier, collateral damage.
Switching Costs
Switching Costs arise when a consumer values compatibility across multiple purchases from a specific firm over time. These can include repeat purchases of the same product or purchases of complementary goods.
Benefit. A company that has embedded Switching Costs for its current customers can charge higher prices than competitors for equivalent products or services. This benefit only accrues to the Power holder in selling follow-on products to their current customers; they hold no Benefit with potential customers and there is no Benefit if there are no follow-on products.
Barrier. To offer an equivalent product, competitors must compensate customers for Switching Costs. The firm that has previously roped in the customer, then, can set or adjust prices in a way that puts their potential rival at a cost disadvantage, rendering such a challenge distinctly unattractive. Thus, as with Scale Economies and Network Economies, the Barrier arises from the unattractive cost/benefit of share gains for the challenger.
Switching Costs can be divided into three broad groups:
Financial.
Procedural.
Relational.
Switching Costs are a non-exclusive Power type: all players can enjoy their benefits.
Branding
Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.
Benefit. A business with Branding is able to charge a higher price for its offering due to one or both of these two reasons:
Affective valence. The built-up associations with the brand elicit good feelings about the offering, distinct from the objective value of the good.
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), which itself serves as the key Barrier.
Brand Dilution. Firms require focus and diligence to guide Branding over time and ensure that the reputation created remains consistent in the valences it generates. Hence, the biggest pitfall lies in diminishing the brand by releasing products which deviate from, or damage, the brand image. Seeking higher “down market” volumes can reduce affective valence by damaging the aura of exclusivity, weakening positive associations with the product.
Problem is, the qualities that make Branding a Power also make it hard to change; the considerable risk is dilution or brand destruction.
Type of Good. Only certain types of goods have Branding potential as they must clear two conditions:
Magnitude: the promise of eventually justifying a significant price premium. Business-to-business goods typically fail to exhibit meaningful affective valence price premia, since most purchasers are only concerned with objective deliverables. Consumer goods, in particular those associated with a sense of identity, tend to have the purchasing decision more driven by affective valence. Here’s the reason: in order to associate with an identity, there must be some way to signal the exclusion of alternative identities.
For Branding Power derived from uncertainty reduction, the customer’s higher willingness to pay is driven by high perceived costs of uncertainty relative to the cost of the good. Such products tend to be those associated with bad tail events: safety, medicine, food, transport, etc. Branded medicine formulations, for example, are identical to those of generics, yet garner a significantly higher price. Duration: a long enough amount of time to achieve such magnitude. If the requisite duration is not present, the Benefit attained will fall prey to normal arbitraging behavior.
Cornered Resource
Cornered Resource definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.
Benefit. In the Pixar case, this resource produced an uncommonly appealing product—“superior deliverables”—driving demand with very attractive price/volume combinations in the form of huge box office returns. No doubt—this was material (a large m in the Fundamental Equation of Strategy). In other instances, however, the Cornered Resource can emerge in varied forms, offering uniquely different benefits. It might, for example, be preferential access to a valuable patent, such as that for a blockbuster drug; a required input, such as a cement producer’s ownership of a nearby limestone source, or a cost-saving production manufacturing approach, such as Bausch and Lomb’s spin casting technology for soft contact lenses.
Barrier. The Barrier in Cornered Resource is unlike anything we have encountered before. You might wonder: “Why does Pixar retain the Brain Trust?” Any one of this group would be highly sought after by other animated film companies, and yet over this period, and no doubt into the future, they have stayed with Pixar. Even during the company’s rocky beginning, there was a loyalty that went beyond simple financial calculation.
Our general term for this sort of barrier is “fiat”; it is not based on ongoing interaction but rather comes by decree, either general or personal.
Another way to put this is that a Cornered Resource is a sufficient condition for potential for differential returns.
Process Power
I save it until last because it is rare. I will use the Toyota Motor Corporation as a case.
Perhaps the best way to think of it is this: Process Power equals operational excellence, plus hysteresis. Having said that, such hysteresis occurs so rarely that I am in strong agreement with Professor Porter’s sentiments.
Benefit. 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. For example, Toyota has maintained the quality increases and cost reductions of the TPS over a span of decades; these assets do not disappear as new workers are brought in and older workers retire.
Barrier. The Barrier in Process Power is hysteresis: these process advances are difficult to replicate, and can only be achieved over a long time period of sustained evolutionary advance. This inherent speed limit in achieving the Benefit results from two factors:
Complexity. Returning to our example: automobile production, combined with all the logistic chains which support it, entails enormous complexity. If process improvements touch many parts of these chains, as they did with Toyota, then achieving them quickly will prove challenging, if not impossible.
Opacity. The development of TPS should tip us off to the long time constant inevitably faced by would-be imitators. The system was fashioned from the bottom up, over decades of trial and error. The fundamental tenets were never formally codified, and much of the organizational knowledge remained tacit, rather than explicit. It would not be an exaggeration to say that even Toyota did not have a full, top-down understanding of what they had created—it took fully fifteen years, for instance, before they were able to transfer TPS to their suppliers. GM’s experience with NUMMI also implies the tacit character of this knowledge: even when Toyota wanted to illuminate their work processes, they could not entirely do so.
April 4, 2021
Este livro é um excelente guia para entender estratégia competitiva por novas perspectivas, mais poderosas (ao meu ver) do que o clássico de Michael Porter.
Alguns dos 7 Powers são semelhantes a outros livros (ex: Competition Demystified). Mesmo assim, Helmer oferece uma visão bem autêntica e com exemplos atualizados. Também há novidades entre os 7 Powers, como Counter Positioning: é um tipo especial de situação, que guarda algumas semelhanças com o Innovator’s Dilemma.
Algumas aplicações oferecem muitos insights: se destaca o estudo de caso do Netflix, em que Helmer investiu e entendeu (talvez melhor que qualquer um) a inevitável evolução de uma empresa vencedora em aluguel de DVDs para a líder em streaming que é hoje. De forma contra-intuitiva, nem todos os caminhos do Netflix levariam a empresa ao patamar onde está hoje. Não é à toa que Reed Hastings chamou Helmer para ensinar seu framework aos seus funcionários. Os estudos de caso da Toyota e da Intel também são muito ricos, com várias reflexões úteis.
Tão relevante quanto os conceitos de estratégia em si, que são estáticos, Helmer explora os 7 Powers de forma dinâmica: como uma empresa pode aproveitar oportunidade de “cristalizar” sua vantagem competitiva. Recomendo muito!
Alguns dos 7 Powers são semelhantes a outros livros (ex: Competition Demystified). Mesmo assim, Helmer oferece uma visão bem autêntica e com exemplos atualizados. Também há novidades entre os 7 Powers, como Counter Positioning: é um tipo especial de situação, que guarda algumas semelhanças com o Innovator’s Dilemma.
Algumas aplicações oferecem muitos insights: se destaca o estudo de caso do Netflix, em que Helmer investiu e entendeu (talvez melhor que qualquer um) a inevitável evolução de uma empresa vencedora em aluguel de DVDs para a líder em streaming que é hoje. De forma contra-intuitiva, nem todos os caminhos do Netflix levariam a empresa ao patamar onde está hoje. Não é à toa que Reed Hastings chamou Helmer para ensinar seu framework aos seus funcionários. Os estudos de caso da Toyota e da Intel também são muito ricos, com várias reflexões úteis.
Tão relevante quanto os conceitos de estratégia em si, que são estáticos, Helmer explora os 7 Powers de forma dinâmica: como uma empresa pode aproveitar oportunidade de “cristalizar” sua vantagem competitiva. Recomendo muito!
June 24, 2022
Some good factors to think about:
- A lasting business needs to offer significant benefits to the consumer and put barriers in place for competitors.
- Invention spurs Power. Competitor success (i.e. the existence of a copycat) can be validation but you shouldn’t be strictly excited about it.
Negative point: Case studies make for great stories, but retroactive analysis of businesses allows you to cherry pick and justify pretty much any strategy technique. I want a strategy book that has strict rules and is testable/falsifiable.
I heard about this book through the Acquired podcast (would recommend) and David Gregg lent me his copy (thanks David).
- A lasting business needs to offer significant benefits to the consumer and put barriers in place for competitors.
- Invention spurs Power. Competitor success (i.e. the existence of a copycat) can be validation but you shouldn’t be strictly excited about it.
Negative point: Case studies make for great stories, but retroactive analysis of businesses allows you to cherry pick and justify pretty much any strategy technique. I want a strategy book that has strict rules and is testable/falsifiable.
I heard about this book through the Acquired podcast (would recommend) and David Gregg lent me his copy (thanks David).
May 14, 2021
Audible. Found this book super pragmatic. I've read and discussed strategy a lot in my life that doesn't engrain itself into my thinking fully. Hamilton's 'simple, not simplistic' framework just feels very useful.
Listening to it means I didn't dive as deep into the math or some nuances, yet the 7 powers and associated examples are great to get me started. Most helpful business book I've read in a while.
Listening to it means I didn't dive as deep into the math or some nuances, yet the 7 powers and associated examples are great to get me started. Most helpful business book I've read in a while.
January 1, 2021
Awesome
One of the best books on competitive advantages. More complete than Competition Demystified in my opinion. Love it that the author is a successful investor himself.
One of the best books on competitive advantages. More complete than Competition Demystified in my opinion. Love it that the author is a successful investor himself.
October 31, 2020
Provide a totally new angle about strategy. Need to think much when reading this one. Will re-read this book for sure
August 26, 2023
Make your business successful.
What does it take for a business to succeed in the long run?
An answer can be found by exploring Hamilton Helmer’s “seven powers.” In this book, you’ll learn about each of these powers through seven case studies. If you’re a business leader, the insights to be gained from each story can help you make better decisions when it comes to stepping into the arena and challenging an incumbent competitor. And if you’re an entrepreneur, they can help you better identify a winning business idea based on its potential strategic position.
But before we start, let’s briefly talk about how we use the term “power”: it’s a strategic position that gives your company the potential for extreme and durable success. If your business doesn’t have at least one of these powers, your strategy won’t be enough to overcome the barriers ahead. The components of power are the benefit and the barrier. The benefits to the position need to outweigh any costs. And the barrier, from the perspective of the power holder, needs to be as close to insurmountable as possible for the competition.
In each of the following powers and their examples, you’ll see the benefit of each strategic position and the prohibitive nature of the barriers they create. The purpose here is to understand how and why certain companies succeed where others fail as well as to understand when it is and isn’t viable to challenge a power-holder.
-
Netflix
Back in 2007, Netflix finally left Blockbuster in the dust. They had already given Blockbuster a run for its money by positioning themselves as the rent-from-home company. Even though Blockbuster tried its own version of mailing DVDs, the name Netflix had become solidly associated with the practice.
However, what Netflix did even better was foresee the future. They knew that DVDs had a limited lifespan. Netflix realized that streaming capabilities would soon make it viable for people to view shows and movies via streaming rather than DVD. So, in 2007, they made their way into the streaming market.
This foresight wasn’t a one-time thing for Netflix. Throughout the course of developing their streaming platform, Netflix found it difficult to manage the contracts that would allow them to use properties in various regions for various timespans. They knew that to retain power, they would need to do something different. So in 2012, they ventured into originals with Lilyhammer and House of Cards.
At that time, Netflix had over 30 million users. A single episode of House of Cards cost $4.5 million to make – meaning that per episode, they would need to be making $0.15 off each user.
Where it gets interesting is when you think about the economics of this. The price per episode is not a fixed thing, but is dependent on the user base. So the more users Netflix could attract, the lower the cost per user to provide content.
This is called scale economy, and it is the first power. Scale economy exists when your cost of doing business decreases as your product supply increases.
It is extremely difficult to unseat the company that has the power of scale economy. Imagine being a newer streaming platform with only three million users and trying to create House of Cards. Your cost per user would be ten times Netflix’s cost, so the cost of beating them at their game becomes prohibitive.
Scale economy constitutes power because it represents the potential for long-term entrenchment at the top of the industry, and it’s very challenging for competitors to overcome.
-
BranchOut
By 2010, LinkedIn had over 70 million users (a drop in the bucket to the 930 million reported in 2023). At that time, an ambitious serial entrepreneur sought to cash in on some of that market share by creating his own networking application called BranchOut.
Understanding that LinkedIn held the high ground, having already attained a massive number of users, BranchOut leadership was smart enough not to try to go head to head. Instead, they opted to leverage the power of Facebook’s user base (608 million at that time) by creating an app that integrated with Facebook.
They branded themselves as the bridge between your personal and professional life, offering to remove the barrier between the two. Initially, success was high. But it plateaued at about 17 million users two years later before finally being bought by Facebook and turned into a workplace chat app.
BranchOut took on LinkedIn the only way that it would have been possible to do so – but it turned out people didn’t want to remove the barrier between their work and professional lives. The lesson here, however, is in why it would have been impossible to meet LinkedIn head-on: it’s because LinkedIn enjoyed network economy, the second power.
Network economy works when the user base itself provides the value. In other words, the users aren’t buying the product – the users are the product. The larger the network, the more value there is to subscribers, advertisers, and investors. The barrier to tackling a company that holds network-economy power is obvious – the costs it would take to build up enough of a network to become a viable competitor are insurmountable.
In the end, BranchOut followed the inevitable path when you factor in user preference for keeping work and life separate, but they did follow the one path that might have succeeded. And that’s because Facebook’s network economy was nearly ten times that of LinkedIn’s.
-
Kodak
One company that held scale-economy power at its height was Kodak. Kodak was built on consumers’ need to continually purchase film along with some proprietary technology. They saw the writing on the wall. Digital photography would one day make film obsolete.
We can criticize Kodak for not being more forward-thinking, but the fact is that they did spend a great deal seeking out survival options. The problem was, there was nowhere for them to shift. Change was happening on a technological level, and they simply didn’t possess any ground in the digital photography or photograph storage industries. They weren’t competitive in those fields.
Kodak lost to the power of counter-position. In this strategic position, you unseat an incumbent power by providing a new position that is both successful in finding a market and that the incumbent either can’t or won’t compete with.
The incumbent power either can’t compete, as was the case with Kodak, or they won’t because the costs are too high or would cannibalize their existing business model. While this is a challenging strategic position to take, counter-positioning can put you in a nearly undefeatable position. Just watch out for a BranchOut situation, because misreading your market can cost you big time.
-
SAP
In the world of enterprise resource planning software, SAP rules in spite of having less-than-stellar reviews. In a study of customers in the US and Europe, they found that 43 percent of users were unhappy with the company’s customer service and 50 percent didn’t feel they could predict the success of SAP in the future.
However, the most surprising statistic found was that 89 percent of those same people said they would continue to pay for and use SAP.
So why would people stay with a product they don’t like? That’s the fourth power – switching costs. People stay with a product with which they’re not fully satisfied because it costs too much to switch. Maybe they���re worried about the cost in terms of time and training, or maybe they don’t want to part ways with the connections they’ve made. It could also be that they have purchased so much in add-ons and upsell components that they feel fully invested in the product.
You harness the power of switching costs when you create a sort of die-hard loyalty in your customer base, but this is only a benefit if you’re able to continue selling to those same customers. After all, with reviews revealing 43 percent dissatisfaction with customer service, you’re not getting new customers. So your advantage lies in selling optional components.
The challenge to competitors in unseating a company that holds switching cost power is in demonstrating a clear advantage to making the switch to your product instead. It isn’t an insurmountable barrier, but it requires thought and research to achieve – as well as a massively superior product.
-
Tiffany
Would you spend three times more for the exact same product just because it had a particular brand name attached to it?
Before you answer that question, here’s a story from 2005 when the show Good Morning America did a little experiment. They bought a $6,600 ring from Costco and a similar ring from Tiffany for $16,600, then hired an expert to do a blind appraisal of each.
The expert ended up assessing the Costco ring at $2,000 higher than its selling price and the Tiffany ring at $4,000 less than asking.
Even so, many people will still gladly fork over the extra money in order to buy from Tiffany. They do it not necessarily for the clout, but for the trust. When making a high-stakes purchase, people don’t want to have to worry about authenticity or quality. You know, when you buy a ring from Tiffany, that you’re getting the real deal.
This is branding power. You attain branding power over a long period of time and with a dedicated focus to building your brand. The barrier to competitors who would challenge this power is that they’ll never be Tiffany or Nike or Coke. There’s no real way to take on a brand power that’s legal, though you can challenge them in other ways.
The road to creating a brand that stands the test of time is long and difficult, but once you achieve it, you’ll be nearly invincible.
-
Pixar
Toy Story premiered in 1995, to massive success. This happens sometimes – but what doesn’t often happen is repeated follow-up success in movie after movie. Pixar clearly had something magical, and it all goes back to its beginnings.
In 1983, George Lucas sold the graphics group of the computer division of Lucasfilm for $5 million. He sold it to Steve Jobs, who changed the name to Pixar and hired animation expert John Lasseter and CGI scientist Ed Catmull.
These three formed the beginnings of the brain trust that would guide Pixar to ultimate success. When Disney bought Pixar, it was careful to also buy the brain trust, because without that core group and its unique combination of talents and skills, there would be no Pixar.
The power of Pixar was the power of cornered resources. That means having something that no one else has, whether that’s a particular patent, access to a singular product or resource, or, in the case of Pixar, just a magical mix of geniuses.
The benefit of cornered resources comes when you have access to something limited that either makes your product superior or lowers your costs, or a combination of both. And the barrier is obvious – competitors can’t do what you do because they have no access to the resources that make you a success.
-
Toyota
Back in the 1960s, GM ruled the day with over a 48 percent market share, while Toyota commanded 0.1 percent. In 1950, the founder of Toyota spent months in a Michigan town studying the largest car factory in the world. He’d been there once before, twenty years earlier, and was very impressed. But on his 1950 visit, he wasn’t impressed at all. Instead, he saw many opportunities for optimization in the processes he was observing. So he set about to create a better way of making cars.
When Toyota came onto the market, it didn’t have an immediately impressive product in terms of looks – but its quality was superior. Over the years, Toyota gained market share and GM lost it. By 2014, they were neck-and-neck. GM reached out to partner with Toyota to try to bring its processes into GM production.
In fact, many companies went to Toyota to study its process. There was no secret. Toyota was very open about its approach, and even helped explain it so others could use it as well. However, no one was ever able to adequately replicate what Toyota did.
What it came down to was that Toyota was built from the ground up on the principles that informed its processes. So it wasn’t just their car-making process, it was all of the inherent support systems built into the DNA of the company that made those processes successful.
Which brings us to the last power – process power. In process power, much like with cornered resources, you have specific processes embedded into your organization that allow you to operate with lowered costs and/or produce a superior product. The barrier to competitors is their inability to replicate your process power in their own organizations. Much like branding power, process power is something that builds over time and can’t be packaged and implemented – it’s about long-term preparation.
-
There is value in seeing how others have achieved their success as well as why some have failed to challenge those powerful organizations. The seven powers can teach you when you should step up to a challenge and how to do it. You can also learn when your business doesn’t have a strategic position to start from; then you can either pivot or move on to greener pastures.
Here’s a quick recap of the seven powers:
Scale Economies: Large-scale operations reduce per-unit costs, giving companies a competitive edge. Network Economies: More users enhance a product's or service's value, particularly notable in tech platforms. Counter-Positioning: New entrants using innovative business models can disrupt incumbents who can't imitate them without self-harm. Switching Costs: High costs associated with changing products or services help retain customers. Branding: A powerful brand fosters customer loyalty and permits premium pricing. Cornered Resource: Exclusive access to a valuable resource confers a significant advantage. Process Power: Unique, superior methods of production can outperform competitors.
What does it take for a business to succeed in the long run?
An answer can be found by exploring Hamilton Helmer’s “seven powers.” In this book, you’ll learn about each of these powers through seven case studies. If you’re a business leader, the insights to be gained from each story can help you make better decisions when it comes to stepping into the arena and challenging an incumbent competitor. And if you’re an entrepreneur, they can help you better identify a winning business idea based on its potential strategic position.
But before we start, let’s briefly talk about how we use the term “power”: it’s a strategic position that gives your company the potential for extreme and durable success. If your business doesn’t have at least one of these powers, your strategy won’t be enough to overcome the barriers ahead. The components of power are the benefit and the barrier. The benefits to the position need to outweigh any costs. And the barrier, from the perspective of the power holder, needs to be as close to insurmountable as possible for the competition.
In each of the following powers and their examples, you’ll see the benefit of each strategic position and the prohibitive nature of the barriers they create. The purpose here is to understand how and why certain companies succeed where others fail as well as to understand when it is and isn’t viable to challenge a power-holder.
-
Netflix
Back in 2007, Netflix finally left Blockbuster in the dust. They had already given Blockbuster a run for its money by positioning themselves as the rent-from-home company. Even though Blockbuster tried its own version of mailing DVDs, the name Netflix had become solidly associated with the practice.
However, what Netflix did even better was foresee the future. They knew that DVDs had a limited lifespan. Netflix realized that streaming capabilities would soon make it viable for people to view shows and movies via streaming rather than DVD. So, in 2007, they made their way into the streaming market.
This foresight wasn’t a one-time thing for Netflix. Throughout the course of developing their streaming platform, Netflix found it difficult to manage the contracts that would allow them to use properties in various regions for various timespans. They knew that to retain power, they would need to do something different. So in 2012, they ventured into originals with Lilyhammer and House of Cards.
At that time, Netflix had over 30 million users. A single episode of House of Cards cost $4.5 million to make – meaning that per episode, they would need to be making $0.15 off each user.
Where it gets interesting is when you think about the economics of this. The price per episode is not a fixed thing, but is dependent on the user base. So the more users Netflix could attract, the lower the cost per user to provide content.
This is called scale economy, and it is the first power. Scale economy exists when your cost of doing business decreases as your product supply increases.
It is extremely difficult to unseat the company that has the power of scale economy. Imagine being a newer streaming platform with only three million users and trying to create House of Cards. Your cost per user would be ten times Netflix’s cost, so the cost of beating them at their game becomes prohibitive.
Scale economy constitutes power because it represents the potential for long-term entrenchment at the top of the industry, and it’s very challenging for competitors to overcome.
-
BranchOut
By 2010, LinkedIn had over 70 million users (a drop in the bucket to the 930 million reported in 2023). At that time, an ambitious serial entrepreneur sought to cash in on some of that market share by creating his own networking application called BranchOut.
Understanding that LinkedIn held the high ground, having already attained a massive number of users, BranchOut leadership was smart enough not to try to go head to head. Instead, they opted to leverage the power of Facebook’s user base (608 million at that time) by creating an app that integrated with Facebook.
They branded themselves as the bridge between your personal and professional life, offering to remove the barrier between the two. Initially, success was high. But it plateaued at about 17 million users two years later before finally being bought by Facebook and turned into a workplace chat app.
BranchOut took on LinkedIn the only way that it would have been possible to do so – but it turned out people didn’t want to remove the barrier between their work and professional lives. The lesson here, however, is in why it would have been impossible to meet LinkedIn head-on: it’s because LinkedIn enjoyed network economy, the second power.
Network economy works when the user base itself provides the value. In other words, the users aren’t buying the product – the users are the product. The larger the network, the more value there is to subscribers, advertisers, and investors. The barrier to tackling a company that holds network-economy power is obvious – the costs it would take to build up enough of a network to become a viable competitor are insurmountable.
In the end, BranchOut followed the inevitable path when you factor in user preference for keeping work and life separate, but they did follow the one path that might have succeeded. And that’s because Facebook’s network economy was nearly ten times that of LinkedIn’s.
-
Kodak
One company that held scale-economy power at its height was Kodak. Kodak was built on consumers’ need to continually purchase film along with some proprietary technology. They saw the writing on the wall. Digital photography would one day make film obsolete.
We can criticize Kodak for not being more forward-thinking, but the fact is that they did spend a great deal seeking out survival options. The problem was, there was nowhere for them to shift. Change was happening on a technological level, and they simply didn’t possess any ground in the digital photography or photograph storage industries. They weren’t competitive in those fields.
Kodak lost to the power of counter-position. In this strategic position, you unseat an incumbent power by providing a new position that is both successful in finding a market and that the incumbent either can’t or won’t compete with.
The incumbent power either can’t compete, as was the case with Kodak, or they won’t because the costs are too high or would cannibalize their existing business model. While this is a challenging strategic position to take, counter-positioning can put you in a nearly undefeatable position. Just watch out for a BranchOut situation, because misreading your market can cost you big time.
-
SAP
In the world of enterprise resource planning software, SAP rules in spite of having less-than-stellar reviews. In a study of customers in the US and Europe, they found that 43 percent of users were unhappy with the company’s customer service and 50 percent didn’t feel they could predict the success of SAP in the future.
However, the most surprising statistic found was that 89 percent of those same people said they would continue to pay for and use SAP.
So why would people stay with a product they don’t like? That’s the fourth power – switching costs. People stay with a product with which they’re not fully satisfied because it costs too much to switch. Maybe they���re worried about the cost in terms of time and training, or maybe they don’t want to part ways with the connections they’ve made. It could also be that they have purchased so much in add-ons and upsell components that they feel fully invested in the product.
You harness the power of switching costs when you create a sort of die-hard loyalty in your customer base, but this is only a benefit if you’re able to continue selling to those same customers. After all, with reviews revealing 43 percent dissatisfaction with customer service, you’re not getting new customers. So your advantage lies in selling optional components.
The challenge to competitors in unseating a company that holds switching cost power is in demonstrating a clear advantage to making the switch to your product instead. It isn’t an insurmountable barrier, but it requires thought and research to achieve – as well as a massively superior product.
-
Tiffany
Would you spend three times more for the exact same product just because it had a particular brand name attached to it?
Before you answer that question, here’s a story from 2005 when the show Good Morning America did a little experiment. They bought a $6,600 ring from Costco and a similar ring from Tiffany for $16,600, then hired an expert to do a blind appraisal of each.
The expert ended up assessing the Costco ring at $2,000 higher than its selling price and the Tiffany ring at $4,000 less than asking.
Even so, many people will still gladly fork over the extra money in order to buy from Tiffany. They do it not necessarily for the clout, but for the trust. When making a high-stakes purchase, people don’t want to have to worry about authenticity or quality. You know, when you buy a ring from Tiffany, that you’re getting the real deal.
This is branding power. You attain branding power over a long period of time and with a dedicated focus to building your brand. The barrier to competitors who would challenge this power is that they’ll never be Tiffany or Nike or Coke. There’s no real way to take on a brand power that’s legal, though you can challenge them in other ways.
The road to creating a brand that stands the test of time is long and difficult, but once you achieve it, you’ll be nearly invincible.
-
Pixar
Toy Story premiered in 1995, to massive success. This happens sometimes – but what doesn’t often happen is repeated follow-up success in movie after movie. Pixar clearly had something magical, and it all goes back to its beginnings.
In 1983, George Lucas sold the graphics group of the computer division of Lucasfilm for $5 million. He sold it to Steve Jobs, who changed the name to Pixar and hired animation expert John Lasseter and CGI scientist Ed Catmull.
These three formed the beginnings of the brain trust that would guide Pixar to ultimate success. When Disney bought Pixar, it was careful to also buy the brain trust, because without that core group and its unique combination of talents and skills, there would be no Pixar.
The power of Pixar was the power of cornered resources. That means having something that no one else has, whether that’s a particular patent, access to a singular product or resource, or, in the case of Pixar, just a magical mix of geniuses.
The benefit of cornered resources comes when you have access to something limited that either makes your product superior or lowers your costs, or a combination of both. And the barrier is obvious – competitors can’t do what you do because they have no access to the resources that make you a success.
-
Toyota
Back in the 1960s, GM ruled the day with over a 48 percent market share, while Toyota commanded 0.1 percent. In 1950, the founder of Toyota spent months in a Michigan town studying the largest car factory in the world. He’d been there once before, twenty years earlier, and was very impressed. But on his 1950 visit, he wasn’t impressed at all. Instead, he saw many opportunities for optimization in the processes he was observing. So he set about to create a better way of making cars.
When Toyota came onto the market, it didn’t have an immediately impressive product in terms of looks – but its quality was superior. Over the years, Toyota gained market share and GM lost it. By 2014, they were neck-and-neck. GM reached out to partner with Toyota to try to bring its processes into GM production.
In fact, many companies went to Toyota to study its process. There was no secret. Toyota was very open about its approach, and even helped explain it so others could use it as well. However, no one was ever able to adequately replicate what Toyota did.
What it came down to was that Toyota was built from the ground up on the principles that informed its processes. So it wasn’t just their car-making process, it was all of the inherent support systems built into the DNA of the company that made those processes successful.
Which brings us to the last power – process power. In process power, much like with cornered resources, you have specific processes embedded into your organization that allow you to operate with lowered costs and/or produce a superior product. The barrier to competitors is their inability to replicate your process power in their own organizations. Much like branding power, process power is something that builds over time and can’t be packaged and implemented – it’s about long-term preparation.
-
There is value in seeing how others have achieved their success as well as why some have failed to challenge those powerful organizations. The seven powers can teach you when you should step up to a challenge and how to do it. You can also learn when your business doesn’t have a strategic position to start from; then you can either pivot or move on to greener pastures.
Here’s a quick recap of the seven powers:
Scale Economies: Large-scale operations reduce per-unit costs, giving companies a competitive edge. Network Economies: More users enhance a product's or service's value, particularly notable in tech platforms. Counter-Positioning: New entrants using innovative business models can disrupt incumbents who can't imitate them without self-harm. Switching Costs: High costs associated with changing products or services help retain customers. Branding: A powerful brand fosters customer loyalty and permits premium pricing. Cornered Resource: Exclusive access to a valuable resource confers a significant advantage. Process Power: Unique, superior methods of production can outperform competitors.
October 14, 2020
I’m torn between the fact that the basic framework is pretty useful and the fact that the author’s tone and writing style is insufferably smug. We are treated to lengthy derivations of pretty straightforward formulas (the author can rearrange equations!) and a whole Appendix where the author investigates how successful his own investing experiences have been.
At least I’ll give the author credit for making bold and falsifiable claims, e.g. that his framework is an exhaustive account of all the strategies available to business. If this is correct, this is very useful; if incorrect, at least the author opens himself up to be challenged.
At least I’ll give the author credit for making bold and falsifiable claims, e.g. that his framework is an exhaustive account of all the strategies available to business. If this is correct, this is very useful; if incorrect, at least the author opens himself up to be challenged.
July 26, 2021
Synopsis
The value of a business can be measured as a function of the size of its industry’s market (that is, total possible customers and how much they buy), its permanent share of that market, and its permanent ability to earn money over and above what it pays on money it borrows and what the owners could get on their money elsewhere (cost of capital). For businesses with a large positive value, the author calls these last two items taken together ‘Powers’.
There are seven (and only seven) Powers. Each has a benefit. This benefit is either more value to a business’s customers or lowered costs to the business. Each Power also raises a barrier to its competitors to copying this Power. For a business to have a Power, it must have both a benefit and a barrier. The seven Powers are:
SCALE
Scale is the size of a business – how many customers, how much it sells. A larger company is said to have more scale.
BENEFIT
A larger company can spread its fixed costs over more sales and will have a lower cost for each item it sells. It can either lower its price to its customers, attracting more customers, or earn a higher profit – the difference between the price its sells its products of services and the cost it pays to produce them.
For example, my neighborhood store pays the same rent each month whether it sells 100 cans of Monster or 100,000. In the first case, the rent is $10/can, in the second, it’s $0.01/can. (Let’s hope they’re selling more than Monster!). A store with more sales has a huge advantage. It has scale.
BARRIER
It is hard to achieve scale against a competitor that already has it. If the smaller store tries to lower its price to sell more Monster, the bigger store can lower its price too, but it has a lower cost, so it doesn’t hurt the bigger store as much. If the smaller store raises prices to match its higher cost, customers will go elsewhere.
NETWORK ECONOMIES
Network economies mean the more people using a company’s product or service, the better it is for each customer (unlike SCALE where ‘more’ benefits the company).
BENEFIT
To see why this is so, look at the network economies of Uber. For every new rider Uber signs up, that’s potentially more business for each driver. For every new driver they sign up, that’s less wait time for riders. New riders go to the service with the most drivers and drivers go to the service with the most riders. The cycle feeds on itself.
BARRIER
Like SCALE, the smaller firm has to offer something else to its customers to overcome the advantages the larger network provides and offer more means costs will be higher for the smaller network.
SWITCHING COSTS
Switching costs are just what they sound like – the cost the customer pays to switch from one product or system to another. For many products, there are no switching costs – most people can switch from Coke to Pepsi without much worry. But let’s say you want to switch to an Apple phone from an Android. There are many costs from the price of the new phone to the time it takes to learn where to find all your old apps and sign back in.
BENEFIT
Customers have a better experience. The more friends you have on the same payment or social networking app, the better it is for you. Also, switching means learning something new and worrying it won’t work the way you’re used to. Finally, you might just like being someone who uses Product A instead of Product B.
BARRIER
Like the previous two Powers, a firm has to make it worth the customer’s while to switch. For example, a phone carrier may buy out the termination penalty of the existing carrier. These costs make competing unattractive.
These three Powers are usually established when the company is growing really fast.
COUNTER-POSITIONING
Counter-Positioning means doing things completely different – and better – than your established competitors.
BENEFIT
Before smartphones, before digital cameras even, to take a photograph you would load film into a camera, take a picture, wait until you had a dozen or so pictures, and take them to drugstore (or mail them if you lived in the boonies) without looking at them first, pay someone to develop them, and make a second trip to pick up the finished product.
Firms with COUNTER-POSITIONING Power deliver a superior product or experience is ways that are completely different than existing companies.
BARRIER
Barriers are often self-imposed by existing firms. They choose not to compete because they don’t see themselves as being in the same business as the new technology. Kodak saw itself in the film business despite having developed the first digital hand-held camera.
CORNERED RESOURCE
A CORNERED RESOURCE is a one-of-a-kind something that only one company has access to. That can be an invention, process, or formula (like Coke’s secret recipe), a unique talent, or even characters (like the Marvel Universe).
BENEFIT
With a CORNERED RESOURCE, a company is in the position to deliver something to a customer that no one else can. This attracts more customers and allows the company to charge more.
BARRIER
Competitors can’t copy the CORNERED RESOURCE, either because they are one-of-a-kind or it is illegal to do so.
These two Powers are almost always established in the beginning before the company really starts to grow.
BRANDING
Customers attach value to ‘gotta-have’ brands over and above the product itself. Air Jordans are more than just a nice pair of shoes.
BENEFIT
In addition to the good feeling a brand brings to the customer, customers usually have less uncertainty about what to expect from a well-known brand.
BARRIER
It takes a lot of time to establish a well-known brand with a good reputation.
PROCESS POWER
Doing things better. This is a rare Power because every company is continually improving so it is hard to pull ahead of competitors.
BENEFIT
A better product or experience for the customer.
BARRIER
It takes time to develop the processes that let you pull ahead of your competitors and stay there.
Because of the time it takes, BRANDING and PROCESS POWER are usually seen in older, stable businesses.
The source of all these Powers is invention: of a product or process, of a brand, or of a new way of organizing – a business model. These inventions have value where there is a desire for something by the customer that a company has the capability to provide that their competitors do not.
The value of a business can be measured as a function of the size of its industry’s market (that is, total possible customers and how much they buy), its permanent share of that market, and its permanent ability to earn money over and above what it pays on money it borrows and what the owners could get on their money elsewhere (cost of capital). For businesses with a large positive value, the author calls these last two items taken together ‘Powers’.
There are seven (and only seven) Powers. Each has a benefit. This benefit is either more value to a business’s customers or lowered costs to the business. Each Power also raises a barrier to its competitors to copying this Power. For a business to have a Power, it must have both a benefit and a barrier. The seven Powers are:
SCALE
Scale is the size of a business – how many customers, how much it sells. A larger company is said to have more scale.
BENEFIT
A larger company can spread its fixed costs over more sales and will have a lower cost for each item it sells. It can either lower its price to its customers, attracting more customers, or earn a higher profit – the difference between the price its sells its products of services and the cost it pays to produce them.
For example, my neighborhood store pays the same rent each month whether it sells 100 cans of Monster or 100,000. In the first case, the rent is $10/can, in the second, it’s $0.01/can. (Let’s hope they’re selling more than Monster!). A store with more sales has a huge advantage. It has scale.
BARRIER
It is hard to achieve scale against a competitor that already has it. If the smaller store tries to lower its price to sell more Monster, the bigger store can lower its price too, but it has a lower cost, so it doesn’t hurt the bigger store as much. If the smaller store raises prices to match its higher cost, customers will go elsewhere.
NETWORK ECONOMIES
Network economies mean the more people using a company’s product or service, the better it is for each customer (unlike SCALE where ‘more’ benefits the company).
BENEFIT
To see why this is so, look at the network economies of Uber. For every new rider Uber signs up, that’s potentially more business for each driver. For every new driver they sign up, that’s less wait time for riders. New riders go to the service with the most drivers and drivers go to the service with the most riders. The cycle feeds on itself.
BARRIER
Like SCALE, the smaller firm has to offer something else to its customers to overcome the advantages the larger network provides and offer more means costs will be higher for the smaller network.
SWITCHING COSTS
Switching costs are just what they sound like – the cost the customer pays to switch from one product or system to another. For many products, there are no switching costs – most people can switch from Coke to Pepsi without much worry. But let’s say you want to switch to an Apple phone from an Android. There are many costs from the price of the new phone to the time it takes to learn where to find all your old apps and sign back in.
BENEFIT
Customers have a better experience. The more friends you have on the same payment or social networking app, the better it is for you. Also, switching means learning something new and worrying it won’t work the way you’re used to. Finally, you might just like being someone who uses Product A instead of Product B.
BARRIER
Like the previous two Powers, a firm has to make it worth the customer’s while to switch. For example, a phone carrier may buy out the termination penalty of the existing carrier. These costs make competing unattractive.
These three Powers are usually established when the company is growing really fast.
COUNTER-POSITIONING
Counter-Positioning means doing things completely different – and better – than your established competitors.
BENEFIT
Before smartphones, before digital cameras even, to take a photograph you would load film into a camera, take a picture, wait until you had a dozen or so pictures, and take them to drugstore (or mail them if you lived in the boonies) without looking at them first, pay someone to develop them, and make a second trip to pick up the finished product.
Firms with COUNTER-POSITIONING Power deliver a superior product or experience is ways that are completely different than existing companies.
BARRIER
Barriers are often self-imposed by existing firms. They choose not to compete because they don’t see themselves as being in the same business as the new technology. Kodak saw itself in the film business despite having developed the first digital hand-held camera.
CORNERED RESOURCE
A CORNERED RESOURCE is a one-of-a-kind something that only one company has access to. That can be an invention, process, or formula (like Coke’s secret recipe), a unique talent, or even characters (like the Marvel Universe).
BENEFIT
With a CORNERED RESOURCE, a company is in the position to deliver something to a customer that no one else can. This attracts more customers and allows the company to charge more.
BARRIER
Competitors can’t copy the CORNERED RESOURCE, either because they are one-of-a-kind or it is illegal to do so.
These two Powers are almost always established in the beginning before the company really starts to grow.
BRANDING
Customers attach value to ‘gotta-have’ brands over and above the product itself. Air Jordans are more than just a nice pair of shoes.
BENEFIT
In addition to the good feeling a brand brings to the customer, customers usually have less uncertainty about what to expect from a well-known brand.
BARRIER
It takes a lot of time to establish a well-known brand with a good reputation.
PROCESS POWER
Doing things better. This is a rare Power because every company is continually improving so it is hard to pull ahead of competitors.
BENEFIT
A better product or experience for the customer.
BARRIER
It takes time to develop the processes that let you pull ahead of your competitors and stay there.
Because of the time it takes, BRANDING and PROCESS POWER are usually seen in older, stable businesses.
The source of all these Powers is invention: of a product or process, of a brand, or of a new way of organizing – a business model. These inventions have value where there is a desire for something by the customer that a company has the capability to provide that their competitors do not.
May 25, 2021
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October 12, 2022
Interesting summary of defensive business strategies. I think you can easily skip reading the book and just go for the summary.
Read
October 17, 2023I remember the lesson of the IBM PC. Here was a breakthrough product— the customer take-up was amazing: 40,000 upon announcement of the product and more than 100,000 in its first year. No one had ever seen anything like it. IBM’s execution was flawless. Their superb management never missed a beat. It would be hard to imagine another company at that time scaling physical production as rapidly as they did without tripping up. Even their marketing was inspired. Remember Charlie Chaplin as the friendly face of their campaign, welcoming all of us to the new world of computing?
But they got the strategy wrong. By outsourcing the OS and permitting Microsoft to sell it to others, IBM squandered their opportunity for the kind of network economy home run that had powered their mainframe juggernaut, System 360. Then their decision to outsource the microprocessor to Intel, while still promoting applications hard-wired to it, likewise ceded yet another important front. As a consequence, they sealed the fate of the PC, rendering it an unattractive box-assembly business. Try as they might, they could never right this ship. The inevitable denouement came with their 2005 fire sale of the business to Lenovo.
• You make wise decisions … despite ambiguity
• You identify root causes and get beyond treating symptoms
• You think strategically and can articulate what you are and are not trying to do
• You smartly separate what must be done well now and what can be improved later
in 1968, Robert Noyce and Gordon Moore, fed up with the strictures of corporate parent Fairchild Camera and Instrument, cut ties with Fairchild Semiconductor to found Intel 1 in Santa Clara, California. Intel went on to develop the first microprocessor, a seminal moment for personal computers and servers. Without Intel, we would have no Google, Facebook, Netflix, Uber, Alibaba, Oracle or Microsoft.
Warren Buffett’s view that if you combine a poor business with a good manager, it is not the business that loses its reputation.
the ascent of great companies is not linear but more a step function.
C H A P T E R 1 SCALE ECONOMIES
If, say, Netflix paid $100M for House of Cards and their streaming business had 30M customers, then the cost per customer was three dollars and change. In this scenario, a competitor with only one million subscribers would have to ante up $100 per subscriber.
The quality of declining unit costs with increased business size is referred to as Scale Economies.
This situation creates a very difficult position for Netflix’s smaller-scale streaming competitors. If they offer the same deliverable as Netflix, similar amounts of content for the same price, their P&L will suffer. If they try to remediate this by offering less content or raising prices, customers will abandon their service and they will lose market share. Such a competitive cul-de-sac is the hallmark of Power.
As noted above, Power requires a Benefit and a Barrier.
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.
Buffett’s observation: “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”
Vanguard, by design, possessed a fundamental advantage in the iron law of active management: the average gross return of active funds has to equal the market return, and since their expenses are substantially higher than passive funds, their average net returns will always be less than those of passive funds.
This allows me to 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.
C H A P T E R 4 SWITCHING COSTS
Switching Costs definition:
The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
C H A P T E R 5 BRANDING
A strong brand can only be created over a lengthy period of reinforcing actions (hysteresis ), which itself serves as the key Barrier.
C H A P T E R 6 CORNERED RESOURCE
Cornered Resource is a sufficient condition for potential for differential returns.
C H A P T E R 7 PROCESS POWER
In 1950, Toyota hardly blipped on anyone’s radar in the US auto market: they held a .1% market share compared to General Motors’ astounding 48.5%.
Even the Ford Model T, a poster child for simplicity in the car business, had 7,882 assembly steps.
just-in-time production, kaizen (continuous improvement), kanban (inventory control), andon cords (devices to allow workers to stop production and identify a problem so it can be fixed). Observing all this, GM workers naturally assumed you could clone TPS by copying these procedures.
Sydney Winter, put forth the view that innovation was rarely driven by top-down purposive initiatives, but rather by the adaptive responses of “boundedly rational” agents.
But they got the strategy wrong. By outsourcing the OS and permitting Microsoft to sell it to others, IBM squandered their opportunity for the kind of network economy home run that had powered their mainframe juggernaut, System 360. Then their decision to outsource the microprocessor to Intel, while still promoting applications hard-wired to it, likewise ceded yet another important front. As a consequence, they sealed the fate of the PC, rendering it an unattractive box-assembly business. Try as they might, they could never right this ship. The inevitable denouement came with their 2005 fire sale of the business to Lenovo.
• You make wise decisions … despite ambiguity
• You identify root causes and get beyond treating symptoms
• You think strategically and can articulate what you are and are not trying to do
• You smartly separate what must be done well now and what can be improved later
in 1968, Robert Noyce and Gordon Moore, fed up with the strictures of corporate parent Fairchild Camera and Instrument, cut ties with Fairchild Semiconductor to found Intel 1 in Santa Clara, California. Intel went on to develop the first microprocessor, a seminal moment for personal computers and servers. Without Intel, we would have no Google, Facebook, Netflix, Uber, Alibaba, Oracle or Microsoft.
Warren Buffett’s view that if you combine a poor business with a good manager, it is not the business that loses its reputation.
the ascent of great companies is not linear but more a step function.
C H A P T E R 1 SCALE ECONOMIES
If, say, Netflix paid $100M for House of Cards and their streaming business had 30M customers, then the cost per customer was three dollars and change. In this scenario, a competitor with only one million subscribers would have to ante up $100 per subscriber.
The quality of declining unit costs with increased business size is referred to as Scale Economies.
This situation creates a very difficult position for Netflix’s smaller-scale streaming competitors. If they offer the same deliverable as Netflix, similar amounts of content for the same price, their P&L will suffer. If they try to remediate this by offering less content or raising prices, customers will abandon their service and they will lose market share. Such a competitive cul-de-sac is the hallmark of Power.
As noted above, Power requires a Benefit and a Barrier.
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.
Buffett’s observation: “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”
Vanguard, by design, possessed a fundamental advantage in the iron law of active management: the average gross return of active funds has to equal the market return, and since their expenses are substantially higher than passive funds, their average net returns will always be less than those of passive funds.
This allows me to 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.
C H A P T E R 4 SWITCHING COSTS
Switching Costs definition:
The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
C H A P T E R 5 BRANDING
A strong brand can only be created over a lengthy period of reinforcing actions (hysteresis ), which itself serves as the key Barrier.
C H A P T E R 6 CORNERED RESOURCE
Cornered Resource is a sufficient condition for potential for differential returns.
C H A P T E R 7 PROCESS POWER
In 1950, Toyota hardly blipped on anyone’s radar in the US auto market: they held a .1% market share compared to General Motors’ astounding 48.5%.
Even the Ford Model T, a poster child for simplicity in the car business, had 7,882 assembly steps.
just-in-time production, kaizen (continuous improvement), kanban (inventory control), andon cords (devices to allow workers to stop production and identify a problem so it can be fixed). Observing all this, GM workers naturally assumed you could clone TPS by copying these procedures.
Sydney Winter, put forth the view that innovation was rarely driven by top-down purposive initiatives, but rather by the adaptive responses of “boundedly rational” agents.
February 27, 2024
Good strategy book in that Helmer develops a framework, provides relevant corporate examples, and develops a way to quantify one's strategic position (unique to a strategy practitioner). That said, I find it still too theoretical, so would only recommend it if one were wanting to study Strategy...
Also, to be fair, I found myself skimming... so 3 star is a bit tough, as I didn't give it the proper attention to really score it at all.
Quotes -
Power is a configuration that creates the potential for persistent significant differential returns, even in the face of fully committed and competent competition. To fulfill this, two components must be simultaneously present: 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. For Scale Economies, the Benefit is straightforward: lowered costs.
1. Scale Benefits ....A business in which per unit cost declines as production volume increases.
2. Network Economies....Network Economies occur when the value of a product to a customer is increased by the use of the product by others.
3. Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
4. Switching Costs definition: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
5. Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product....Branding definition: The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.
6. Cornered Resource definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.
7. Process Power: Embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.
Also, to be fair, I found myself skimming... so 3 star is a bit tough, as I didn't give it the proper attention to really score it at all.
Quotes -
Power is a configuration that creates the potential for persistent significant differential returns, even in the face of fully committed and competent competition. To fulfill this, two components must be simultaneously present: 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. For Scale Economies, the Benefit is straightforward: lowered costs.
1. Scale Benefits ....A business in which per unit cost declines as production volume increases.
2. Network Economies....Network Economies occur when the value of a product to a customer is increased by the use of the product by others.
3. Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
4. Switching Costs definition: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
5. Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product....Branding definition: The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.
6. Cornered Resource definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.
7. Process Power: Embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.
September 11, 2023
The book builds on 7powers that drive business strategy. The 7 powers mentioned somewhat relate to moats. The author provides famous examples of an industry in which we are able to achieve Power 1: Scale Economics Netflix where per unit cost is meagre due to the sheer number of subscribers. Power 2 mentions Facebook as a dominant social network where each added "customer" increases the value of the network as well as the business. Power 3 is when a business adopts a new, superior business model that incumbents cannot mimic due to the anticipated cannibalization of their existing business. Power 4 switching costs mention SAP as an example of when business where customers expect a greater loss than the gain from switching to an alternate. Power 5 branding is a business that enjoys a higher perceived value to an objectively identical offering due to historical information about them, examples were Tiffany and Hermes. Power 6 cornered resource is a business that has preferential access to a coveted resource that independently enhances value. A good example of talent (cornered resource) is Amazon, which according to The Information, has a 17-person senior leadership team, called the S-team, who have an average tenure of 15 years – the majority of the company's 23-year lifespan. Power 7 process power A business whose organization and activity set enables lower costs and/or superior products that can only be matched by an extended commitment, mentions Total Production System invented by Toyoda San.
December 19, 2023
An astute framework. I really liked it, despite finding some of the need to derive and explain strategic components through formulas a bit far-fetched.
Power progression:
> origination:
- cornered resources; must secure the rights to a valuable resource on attractive terms
- counter-positioning; a new, superior business model that promises collateral damage for incumbents if mimicked
> takeoff
- Network economies
- scale economies
- switching costs
> stability
- branding
- process power; inimitable within a reasonable period
Other notes:
- the nature of power attainmemt in the takeoff stage: you and your competitor are in a race for relative scale; and there can only be one winner. The takeoff period represents a singular time. Only then can you initiate three important types of power: scale economies, network economies, and switching costs. If unrealized, these opportunities disappear forever afterwards.
- power comes on the heels of invention, be it in products, processes, Brands or business models. However, most invention is merely a manifestation of operational excellence and thus not immune to the arbitraging actions of competition. So in this formative period, as your invention takes shape, you must attune yourself to the exigencies of power and stay constantly vigilant.
- the most important time in valuation is when uncertainty regarding market size and power diminish
Power progression:
> origination:
- cornered resources; must secure the rights to a valuable resource on attractive terms
- counter-positioning; a new, superior business model that promises collateral damage for incumbents if mimicked
> takeoff
- Network economies
- scale economies
- switching costs
> stability
- branding
- process power; inimitable within a reasonable period
Other notes:
- the nature of power attainmemt in the takeoff stage: you and your competitor are in a race for relative scale; and there can only be one winner. The takeoff period represents a singular time. Only then can you initiate three important types of power: scale economies, network economies, and switching costs. If unrealized, these opportunities disappear forever afterwards.
- power comes on the heels of invention, be it in products, processes, Brands or business models. However, most invention is merely a manifestation of operational excellence and thus not immune to the arbitraging actions of competition. So in this formative period, as your invention takes shape, you must attune yourself to the exigencies of power and stay constantly vigilant.
- the most important time in valuation is when uncertainty regarding market size and power diminish
June 7, 2020
This is the kind of book I had envisioned when people (especially technical folks like software engineers) make jokes about MBAs and their love of strategy books. There is a tonne of jargon and most of the book is spent reframing the world in the author's framework.
This all sounds very critical but the truth is that I really enjoyed it. The 7 Powers is a digestible but comprehensive look at the subject of "competitive advantage" – value investors endlessly preach about the value of finding a moat (like Buffett's investment in Coca Cola due to its branding) but don't offer much advice in the way of characterising a moat. The 7 Powers details 7 ways in which a company can build durable differential margins, ranging from the obvious ones like Branding and Scale/Network Economies to more subtle factors like counter-positioning (Netflix) and process power (Toyota). Filled with tangible examples as well as sufficient generalisation as well as clear diagrams for future reference, the 7 Powers is clearly designed to be used practically.
I came across this book while listening to Episode 174 of the Invest Like The Best podcast (Patrick O'Shaughnessy) and the concepts were interesting enough to warrant a read of the book. But if you don't have time to read the book, the podcast is a fantastic summary.
This all sounds very critical but the truth is that I really enjoyed it. The 7 Powers is a digestible but comprehensive look at the subject of "competitive advantage" – value investors endlessly preach about the value of finding a moat (like Buffett's investment in Coca Cola due to its branding) but don't offer much advice in the way of characterising a moat. The 7 Powers details 7 ways in which a company can build durable differential margins, ranging from the obvious ones like Branding and Scale/Network Economies to more subtle factors like counter-positioning (Netflix) and process power (Toyota). Filled with tangible examples as well as sufficient generalisation as well as clear diagrams for future reference, the 7 Powers is clearly designed to be used practically.
I came across this book while listening to Episode 174 of the Invest Like The Best podcast (Patrick O'Shaughnessy) and the concepts were interesting enough to warrant a read of the book. But if you don't have time to read the book, the podcast is a fantastic summary.
June 9, 2021
I heard about this one through the “Acquired” podcast. The hosts of that show regularly work Helmer’s “7 powers” into their discussions, so, after listening to several episodes, I felt I had to check this book out for myself.
In the end, I found it to be okay. The work is centered around seven ways that companies can create power (the ability to realize persistent and sustainable returns). I won’t spoil those seven subjects for you here, otherwise, I’d be giving away the bulk of the book.
And that brings to light my main complaint with this one: I didn’t feel as though there was a ton of substance to it besides learning what those seven powers were. Sure, I was still excited to find out about them, but the process of getting there was a bit uninspiring or surface-level at times.
What I did love was the more specific company breakdowns, such as those related to the rise of Netflix. Such stories provide much-needed application and help illustrate the seven powers quite well. However, those stories are lacking in number; I would've liked more of them.
For the reasons above, I’m not too sure I’d recommend this one. That’s not to say it’s a bad book, just that I think there’s more value to be had elsewhere, first.
-Brian Sachetta
Author of “Get Out of Your Head”
In the end, I found it to be okay. The work is centered around seven ways that companies can create power (the ability to realize persistent and sustainable returns). I won’t spoil those seven subjects for you here, otherwise, I’d be giving away the bulk of the book.
And that brings to light my main complaint with this one: I didn’t feel as though there was a ton of substance to it besides learning what those seven powers were. Sure, I was still excited to find out about them, but the process of getting there was a bit uninspiring or surface-level at times.
What I did love was the more specific company breakdowns, such as those related to the rise of Netflix. Such stories provide much-needed application and help illustrate the seven powers quite well. However, those stories are lacking in number; I would've liked more of them.
For the reasons above, I’m not too sure I’d recommend this one. That’s not to say it’s a bad book, just that I think there’s more value to be had elsewhere, first.
-Brian Sachetta
Author of “Get Out of Your Head”
May 19, 2022
Short and forgettable but at least agreeable. However, I have no idea how he failed to mention "scale economies shared" (Amazon). Just good old economies of scale, which is common sense. Also failed to mention "moat" which is sustainable competitive advantage. Granted, he used different words. The 7 powers are useful whether you own your business or a stock picker. As a shareholder of these I've welcomed some info on Netflix (you oughta listen to the guy who bought it before it came up with its streaming service) and Intel. I have to admit it was too advanced for me with a bunch of math formulas, it's not the lightest book to listen to while mowing the lawn. I always take consultants' advice with a grain of salt but this one seems to know what he is talking about. It just didn't resonate with me. I'm still at a stage of "build it and they will come", and instead of overcomplicating stuff just listen to your customer and provide value, it's not that difficult. Other reviews here sum the book up well. It's not groundbreaking and much of it is common sense, at least if you have prior training or a general interest in owning quality companies and knowing what makes them great.
March 5, 2021
7 Powers is my favorite book on strategy.
Hamilton Helmer provides real world examples grounded in decades of experience as a strategy advisor, active equity investor, and Stanford University professor that help us build a set of mental models to think through strategy.
The crux of 7 Powers is a business can try to improve its strengths, mitigate its weaknesses, eliminate competitor risk, better serve its customers, maximize shareholder value, or take advantage of its pricing power.
But there are very few times when a business can do all at once.
What Hamilton Helmer provides us, through 7 Powers, is a comprehensive strategic framework that can help every business choose what to focus on next.
If you’re looking for a teaser of the book, I spent some time writing up notes. You can find them here: https://theinterleavingeffect.com/p/7... or as a podcast here: https://open.spotify.com/episode/1kWw...
Hamilton Helmer provides real world examples grounded in decades of experience as a strategy advisor, active equity investor, and Stanford University professor that help us build a set of mental models to think through strategy.
The crux of 7 Powers is a business can try to improve its strengths, mitigate its weaknesses, eliminate competitor risk, better serve its customers, maximize shareholder value, or take advantage of its pricing power.
But there are very few times when a business can do all at once.
What Hamilton Helmer provides us, through 7 Powers, is a comprehensive strategic framework that can help every business choose what to focus on next.
If you’re looking for a teaser of the book, I spent some time writing up notes. You can find them here: https://theinterleavingeffect.com/p/7... or as a podcast here: https://open.spotify.com/episode/1kWw...
April 30, 2021
Thiel recommends this, was *really* good, even practically useful as a simple compass.
Seven Powers are
Scale Economies
Network Effects
Counter Positioning
Switching Costs
Branding
Cornered Resource
Process Power
Out of these, I found CP and PP to be most interesting/surprising.
The points regarding the Toyota Production System were super interesting as I already read a bunch of books about that topic:
"TPS is not what it seems. On the surface, it consists of a fairly straightforward variety of interlocking procedures, such as jit production, kaizen, kanban, andon cords. It turns out these techniques merely manifest some deeper, more complex system."
"The issue is how do you support that system with all the other functions that have to take place in the org?"
The part about Dynamics and power progression about at what point in the business development there are windows of opportunity for developing a power seems useful as well.
Seven Powers are
Scale Economies
Network Effects
Counter Positioning
Switching Costs
Branding
Cornered Resource
Process Power
Out of these, I found CP and PP to be most interesting/surprising.
The points regarding the Toyota Production System were super interesting as I already read a bunch of books about that topic:
"TPS is not what it seems. On the surface, it consists of a fairly straightforward variety of interlocking procedures, such as jit production, kaizen, kanban, andon cords. It turns out these techniques merely manifest some deeper, more complex system."
"The issue is how do you support that system with all the other functions that have to take place in the org?"
The part about Dynamics and power progression about at what point in the business development there are windows of opportunity for developing a power seems useful as well.
July 7, 2023
Excellent business book that is very concise and exhaustive in finding ways to secure long term value for different businesses. Many of these ideas I was familiar with from other business books (e.g., competition demystified), however, I greatly appreciated the new packaging and addition of other concepts (namely Counter Positioning as a partial short term strategy against incumbents). The book sacrifices some detail and case studies for brevity.
Continuing to use this as the barometer for my ratings:
5 - strongly recommend; great read even if not interested in specific topic
4 - strongly recommend for folks interested in topic; recommend generally
3 - neutral on book; would be a lower priority recommendation to someone interested in topic
2 - would not recommend to someone interested in topic; would strongly not recommend to anyone not interested in topic
1 - would strongly not recommend to anyone
Continuing to use this as the barometer for my ratings:
5 - strongly recommend; great read even if not interested in specific topic
4 - strongly recommend for folks interested in topic; recommend generally
3 - neutral on book; would be a lower priority recommendation to someone interested in topic
2 - would not recommend to someone interested in topic; would strongly not recommend to anyone not interested in topic
1 - would strongly not recommend to anyone
August 31, 2020
What makes this book stand out from the others is its focus on using strategy to build a meaningful and lasting business, not just purely drive business growth. In the tech industry nowadays, people are so obsessed with product/market fit and try to drive growth via rapid optimization but there was not much discussion about what companies should do beyond product/market fit. Why some of those post P/M fit companies became great (10x) but some could barely survive (10%)? This book will tell you that a sound strategy can make the difference between an initial product/market fit being ephemeral versus the beginning of a significant and enduring business. It narrowly defines a successful strategy as creating a route to persistent differential returns for a business, giving people a new mental model for thinking about how to build a moat, especially for tech companies.
September 26, 2020
Business strategy condensed into an easy-to-remember framework. A "power" is what drives lasting dominance - it is the combination of a benefit, and a barrier that prevents a given competitor from attaining that benefit. Though there are many strategies that provide a benefit to a company, there are only a limited set that _also_ have a barrier sufficient to prevent a competitor from attaining that same benefit and therefore reducing profit margin through competitive arbitrage.
The author describes what he considers to be an exhaustive set of 7 potential powers: Scale, Network, Switching costs, Cornered resource, Counter-positioning, Process, Branding.
I found both the framework and the explanation of each power to be compelling and have found myself trying to apply this framework to understand (or think of ways to improve) the business strategy of the company where I work.
The author describes what he considers to be an exhaustive set of 7 potential powers: Scale, Network, Switching costs, Cornered resource, Counter-positioning, Process, Branding.
I found both the framework and the explanation of each power to be compelling and have found myself trying to apply this framework to understand (or think of ways to improve) the business strategy of the company where I work.
September 22, 2021
Who should read this? Business people. Product People. Those interested in building a company that makes money, that delivers on a mission with enduring, repeatable, differentiated success.
This book is more rigorous than most books about "business strategy." You will find equations, derivations, formal definitions and explicit inclusion and exclusion based on that. This is likely to be expected given the author's work as a professor at Stanford Economics department. But also from his focus as an active equity investor.
There is also plenty of case examples and stories (that most business books are chock full of) to complement this more rigorous approach. The summaries and repetition arer helpful for retention and the conclusion nicely re-summarizes the key lessons.
Some readers may find it a be a bit more difficult to read than other books in this category. I think it's worth pressing through. and gaining the knowledge the author conveys in the way he does so (though I must admit I skipped a good amount of the equations as thats not naturally how I learn.) I considered rating this only 3 stars given some of these challenges and the more niche nature of the knowledge it imparts but the power of the insights were such that it needed to be bumped up.
4 Star reviews mean I really enjoyed this book, I will likely read it again someday. I would recommend it to many people and it changed my mind about something important.
This book is more rigorous than most books about "business strategy." You will find equations, derivations, formal definitions and explicit inclusion and exclusion based on that. This is likely to be expected given the author's work as a professor at Stanford Economics department. But also from his focus as an active equity investor.
There is also plenty of case examples and stories (that most business books are chock full of) to complement this more rigorous approach. The summaries and repetition arer helpful for retention and the conclusion nicely re-summarizes the key lessons.
Some readers may find it a be a bit more difficult to read than other books in this category. I think it's worth pressing through. and gaining the knowledge the author conveys in the way he does so (though I must admit I skipped a good amount of the equations as thats not naturally how I learn.) I considered rating this only 3 stars given some of these challenges and the more niche nature of the knowledge it imparts but the power of the insights were such that it needed to be bumped up.
4 Star reviews mean I really enjoyed this book, I will likely read it again someday. I would recommend it to many people and it changed my mind about something important.
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