7 Powers - A strategic framework

• Strategy & Power
• Attributes of Powers
• The 7 Powers

Recently, I read 7 Powers: The Foundations of Business Strategy by Hamilton Helmer. It was an inspiring read, and I wanted to share it within Alan and with our readers.

This blogpost is a summary of the key concepts of the book. I copy/pasted a few quotes, paraphrased others. If you are interested, I strongly encourage you to buy and read the book, it is amazing!

It is great for a company to have a standard language to communicate about strategy. You have to pick one, and 7 Powers is a good example to discuss a long-term strategy. We use it often at Alan.

Definition

Strategy is a route to continuing Power in significant markets.

In order to understand Strategy, we have two main topics:

1. Statics—i.e. “Being There”: for example, what makes Intel’s microprocessor business so durably valuable?

2. Dynamics—i.e. “Getting There”: what developments yielded this attractive state of affairs in the first place?

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

The ultimate goal is value creation. You create strategic differentiation through increased margin and market share simultaneously.

The 3 S’s of Power

__Power, the potential to realize persistent differential returns, is the key to value creation. __

Power is created if a business attribute is simultaneously:

1. Superior—improves free cash flow.

2. Significant—the cash flow improvement must be material.

3. Sustainable—the improvement must be largely immune to competitive arbitrage.

Persistence

It is very important to create a Power and durable differential returns. You have to focus on long-term competitive equilibria over next year's results. It is all about establishing and maintaining an unassailable perch.

Dual Attributes of Power

Both need to exist:

1. Benefit. The conditions created by Power must materially augment cash flow. It can manifest as any combination of increased prices, reduced costs and/or lessened investment needs.

2. Barrier. Prevents existing and potential competitors, both direct and functional, from engaging in the sort of value-destroying arbitrage.

The Barrier conditions prove far rarer. As a result, “always look to the Barrier first”.

A competitor fails to arbitrage out the Benefit because (1) they are unable to, or (2) they can, but refrain from doing so because they expect the outcome to be economically unattractive.

Complex Competition

Power is about your strength in relation to that of a specific competitor. You need to assess Power with respect to each competitor.

If you do not have at least one of these for each competitor (current and potential, direct and functional), you are lacking a viable strategy.

The key strategic questions for you are: (1) “What Power types do I now have?” and (2) “What Power types do I need to worry about establishing now?”.

At any given growth stage the maximum number of new Powers that you might explore is 3. This focus is very valuable.

Scale Economies

This power is that of a business in which per unit cost declines as production volume increases. This power unlocks the barrier of prohibitive costs of share gains, as the superior cost position can be used as a defensive redoubt (matching price cuts for example).

Network Economies

This power is that of a business in which the value of the service to each customer is enhanced as new customers join the “network”. This leads to price insensitivity and unattractive cost/benefit of gaining share, as the value deficit of a follower can be so large that the price discount needed to offset this is unthinkable.

For example, when BranchOut launched, it was competing with 70m Linkedin users. It would not have been a surprise if users would have had to be paid (a negative price) to switch from LinkedIn.

Counter-Positioning

Kill the value-proposition of the competition with a new, superior business model, which the incumbent does not mimic due to anticipated damage to their existing business. Nokia vs Apple is a good example of that.

Also, in the specific case of counter positioning, the advice is that, in its ascendancy, the challenger should avoid the temptation of trumpeting its superiority, instead suppressing that urge and adopting a tone of respect toward the incumbent.

Switching costs

This power describes the value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases. Having such a power can enable you to charge higher prices than competitors for equivalent products or services, and builds a strong moat as competitors must compensate customers for Switching Costs (either financial, procedural or relational).

The best example might be Apple. The downloads come in a proprietary format, so in switching to another program, Apple customers forfeit their prior purchases. This is an unattractive prospect, which accounts for why so many customers stay locked in.

Branding

This power describes the durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.

Branding is an asset that communicates information, evokes positive emotions and reduces uncertainty for the customer, leading to an increased willingness to pay for the product.

Cornered Resource

This power describes preferential access at attractive terms to a coveted asset that can independently enhance value. This asset can be a team, a preferential access to a valuable patent, a required input, such as a cement producer’s ownership of a nearby limestone source, or a cost-saving production.

Process Power

This power describes embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment. This is hard to replicate given complexity and opacity of knowledge.

For eg. Toyota developed the TPS manufacturing process: 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). It resulted in unsurpassed quality and durability.