7 Powers · Hamilton Helmer · 2016
Strategy is all about power and power comes from persistent differential returns. Helmer identifies 7 powers each with benefits and barriers. A benefit refers to the conditions that allow for higher returns. A barrier refers to the force that helps persist those higher returns (defeating arbitrage). Benefit conditions aren’t rare, but barrier conditions are. Look to the barrier first.
Power, unlike strength, is a relative concept. Power is assessed with respect to each potential competitor.
Great companies ascend in a step function; critical moments and key decisions shape the trajectory. To get the key moves right, you need to adapt your strategy to the context.
The 7 Powers
- Scale Economies refer to reduced unit costs as a business grows, leading to power through lower operational costs. Smaller firms may offer lower prices to compete, but the leading firm can counteract by using their cost advantage to match cuts, deterring competitors. The benefit is reduced costs, while the barrier is the high cost of gaining market share. Scale economies arise from factors like fixed cost dilution, volume/area relationships, distribution network density, learning economies, and purchasing economies. The significance depends on the industry's structure and the leader's scale. Without a scale differential, potential economies won't translate into power.
- Network Economies occur when a product's value increases as more people use it. Benefit: Companies in a leadership position can charge higher prices due to their larger user base. Barrier: High costs to gain market share, as it's hard to discount enough to attract users. Industries with network economies often have winner-takes-all dynamics and require rapid scaling for dominance. The power of network economies depends on the strength of the network and the leader's user base compared to competitors. A common strategy is to scale quickly, though predicting network strength in new industries is challenging. Indirect network effects happen when a product's value grows as more complementary products or services become available.
- Counter-Positioning helps defeat a strong incumbent by using a superior, unconventional business model. An upstart challenges well-established competitors with lower costs or higher prices, resulting in better products. Incumbents often avoid adopting the new model due to the risk of harming their existing business. As a result, the upstart gains customers while the incumbent struggles to respond. Incumbents may avoid mimicking the upstart due to negative net present value, deeply embedded company heritage, or a risk-averse CEO. The effect depends on the new model's superiority and the potential damage to the incumbent.
- Switching Costs the anticipated loss of value a customer may experience when changing to a different supplier. Benefit: Higher retention or higher prices. Benefits can be extended further by selling follow-on products to current customers. Barrier: Competitors must compensate customers for switching costs. If switching costs are high, such a challenge is distinctly unattractive. Develop an ecosystem of add-on products to maximise the benefit of high switching costs. Products with high switching costs can have the paradoxical combination of high retention and low satisfaction. Once a customer has bought in, they are hopelessly hooked. Types of switching costs: financial, procedural (risk, adaptation), and relational (social).In mature markets, switching costs are known, firms know customer lifetime value is high, so they happily increase costs to acquire the customer and compete away the advantage. To benefit from the power, you have to acquire customers before the extent of the switching costs are realised.
- Branding is an asset that communicates information and evokes positive emotions, leading to increased willingness to pay. The benefits include the ability to charge higher prices due to affective valence (good feelings) and uncertainty reduction (consistent quality). However, strong brands are built over long periods with consistent actions, requiring significant investment without guaranteed success. Trademarks make brands hard to copy. The branding effect depends on the magnitude of affective valence and uncertainty reduction in the market and the duration available to develop the brand.
- Cornered Resource: A company has exclusive access to a valuable, rare resource that competitors can't easily replicate or substitute. Benefit: produce a superior product or the same product at a lower price. Barriers include personal choice for talent, patents for technology, and property rights for resources. The asset must be unique, non-arbitraged, transferable, ongoing, and sufficient. The advantage size depends on the margin premium from the cornered resource.
- Process Power comes from a company's unique, superior, and hard-to-imitate processes. Benefits: operate more efficiently, effectively, or with higher quality than competitors. Barriers: built through years of experience and continuous improvement, making them hard to replicate. Complexity and opacity add to this.
The Path to Power
Dynamics (getting there) differ from statics (being there). We need to assess worthwhile journeys, and understand desirable destinations. You have to make the right moves at the right time. Key moves include pursuing scale economies by differentiating your product, targeting network economies to build a user base, securing unique resources, fostering long-term customer affinity through branding, developing a superior business model for counter-positioning, establishing a customer base with high switching costs, and evolving unique, hard-to-imitate processes.
Leverage external flux to create new opportunities and use your capabilities to fulfil significant customer needs unmet by competitors.
The Power of Progression
Power acquisition happens in three stages: at origination, during takeoff, and in stability. At origination, focus on cornered resources and counter-positioning, dealing with barriers like fiat and collateral damage. During the explosive growth stage, leverage network economies, scale economies, and switching costs, mindful of the high cost of gaining share. In stability, sustain advantages through branding and process power, considering barriers like hysteresis which delay certain powers until this stage.
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We demonstrate and investigate the boundary conditions for what we term the “IKEA effect” – the increase in valuation of self-made products. Participants saw their amateurish creations – of both utilitarian and hedonic products – as similar in value to the creations of experts, and expected others to share their opinions.
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Book Highlights
How to know whether you are looking at a system or just a bunch of stuff: A) Can you identify parts? … and B) Do the parts affect each other? … and C) Do the parts together produce an effect that is different from the effect of each part on its own? … and perhaps D) Does the effect, the behaviour over time, persist in a variety of circumstances? Donella Meadows · Thinking in Systems
An explicit diagnosis permits one to evaluate the rest of the strategy. Additionally, making the diagnosis an explicit element of the strategy allows the rest of the strategy to be revisited and changed as circumstances change Richard Rumelt · Good Strategy / Bad Strategy
When you think your stakeholders are done talking, just wait. Don’t immediately jump in with your response. Instead, pause for several seconds (maybe two or three) and allow for silence, however uncomfortable that might seem. Tom Greever · Articulating Design Decisions