7 Powers: Foundations of Business Strategy

About the Book

• The book, "7 Powers: The Foundations of Business Strategy" by Hamilton Helmer, offers insight on strategy and strategic power, and how companies can reach and maintain it.
• Reed Hastings, Netflix Co-Founder and CEO, wrote the foreword.
• The book is a bloomberg selection of "The Best Books of 2017".

Praise for 7 Powers

• Hamilton Helmer offers great insights that can turn into real-world action.
• Spotify widely utilizes the 7 Powers while discussing new initiatives.
• 7 Powers distills key types of strategic power; how to find, leverage and maintain them, as a fantastic took set for businesses at every stage.
• Ek is the CEO and Co-Founder of Spotify.
• Everyone is trying to eat your lunch, and if you don't read 7 Powers, you're going to die a lot sooner.
• Hastings is the CEO and Co-Founder of Netflix.
• 7 Powers lays out a clear, compelling, and insightful view for thinking about the persistent sources of competitive advantage.
• Helmer draws on 3 decades of experience to illustrate how companies establish power and shape their industries, at every turn with entertaining and illuminating examples.
• Levin is the Philip H Knight Dean, at Stanford Graduate School of Business.
• Helmer understands strategy starts with invention
• He can show what it takes for a new invention to become a valuable business.
• Thiel is an entrepreneur and investor
• 7 Powers provides vital guidance for developing strategy for any business person.
• Chizen is the former CEO of Adobe.
• Helmer is a deep thinker who makes a compelling connection between passion and good business.
• Making a small number of decisions wisely is far more important than making a lot of decisions correctly, while explaining how the leaders of the world's most successful businesses get that small number just right.
• Moritz is the chairman of Sequoia Capital.
• Silicon Valley correctly places enormous value on execution and on culture, but in placing great emphasis on execution and culture, has led to insufficient importance being placed on strategy.
• Collison is the CEO and Co-Founder of Stripe.
• 7 Powers offers an innovative approach to understanding some of the key underlying drivers of company value and capturing ideas that certainly are not well understood in the markets.
• The result has been one of the most exceptional and sustained alpha records.
• Grossman is the former CEO of Barclays Global Investors.
• This book is a must-read for anyone starting or growing a business, laying out an elegant and insightful framework that really helped inspire thinking about building and maintaining strategic advantage in a competitive landscape.
• Koller is the Co-Founder and former President of Coursera.
• A startup must have a compelling way of getting traction to be investable, otherwise, it's simply a bleeding hole that burns through money rigorously laying out the strategies for a company to get this traction and details what it takes to get there.
• Anyone starting a business should read it
• O'Sullivan is the founder and managing partner, SOSV
• Hamilton has condensed 40 years of thought and practice into strategy into a single readable book.
• Baumgartner is the chief investment officer, institute for advanced study.
• Mentor has benefited from a continuing consulting relationship with Hamilton for the better part of 20 years and has incorporated many of his ideas and principles into the core of our strategy.
• 7 Powers consolidates these ideas and principles into a powerful framework and vocabulary to describe and permit analysis of where a company stands in its competitive space. It's a powerful work.
• Hinckley is the President, Mentor Graphics Corporation

Foreword

• Reed Hastings had a meeting with Hamilton Helmer and Larry Tint, founders of Strategy Capital, in 2004
• Netflix had gone public 2.5 years prior.
• Hamilton began with an overview of Power Dynamics, his novel strategy framework, and then utilized that framework to offer up a penetrating assessment of Netflix's strategic imperatives.
• By 2009, the existential threat from Blockbuster was behind Netflix, and they were on track to reach almost $1.7 billion in sales, while facing off against huge competitors with resources far beyond Netflix's: Google, Amazon, Time Warner and Apple
• Lack of strategic insight is a risk.
• The IBM PC had a breakthrough product with customer take-up that was amazing; 40,000 upon announcement of the product and more than 100,000 in its first year.
• IBM's execution was flawless, and management never missed a beat, scaling physical production as rapidly as they did without tripping up.
• IBM got the strategy wrong. By outsourcing the OS and permitting Microsoft to sell it to others, IBM squandered their opportunity for network economy, and ceded further ground outsourcing the microprocessor to Intel while still promoting applications hard-wired to it, sealing the fate of the PC, rendering it an unattractive box-assembly business.
• Such execution alone will not ensure success.
• Netflix released its first culture deck in August of 2009, which identified nine highly valued behaviors, the first of which was "Judgement".
• Hamilton developed a program which conveyed to a large number of Netflix's key people a fundamental understanding of strategy, and was a huge success.
• A strategy framework must address all key strategy issues facing an organization, with Helmer forging ahead with entirely novel conceptual advances, and then to bind these together into a unified whole, like 'Counter-Positioning'.
• Through inventing the concept of Counter-Positioning, Helmer was able to peel back the layers to peer into the deeper reality of these situations
• At Netflix, aggressively prioritizing attention allowed for focusing on what is essential to accomplish.
• Over a span of decades, Helmer developed and refined Power Progression, illustrating the approximate time fuse for each of the competitive battles facing a business person.

Introduction

• Celebrated businesses are underpinned by the few decisive strategy choices made amidst the uncertainty of rapid change.
• It is essential to attune strategy to unfolding circumstances; ponderous planning cycles or handoffs to outside experts won't get you there.
• Strategy serves best rather in developing the "prepared mind" of those on the ground.
• A strategy framework must be "simple but not simplistic; being easily retained for day-to-day reference, remaining useful without overlooking crucial detail.
• I started my Strategy career right out of graduate school at Bain & Company in 1978 as Bill Bain's openness to an oddball
• The 7 Powers, a Strategy framework, clears this hurdle as it is born of hundreds of consulting engagements and decades of active equity investing.
• This framework covers all attractive strategic positions, is not simplistic, and its unitary focus on Power makes it sufficiently simple to be learned, retained and used by any business person.
• Businesses with no type of these seven Power types lack a viable strategy, and are vulnerable
• The goal in writing this book is to enable flexibly navigating the hazardous shoals of strategy development via a lens through which to see the strategic landscape.
• Internalizing the 7 Powers will result in having the "prepared mind" referenced by Pasteur, being ready to identify, create and seize an opportunity for Power in those rare formative moments.
• Fluently harnessing the 7 Powers, will empower you by putting at your fingertips a workable understanding of Strategy to guide you in those crucial high-flux moments.
• A useful cognitive guide is the precepts of Strategy that must be distilled to a framework that is simple but not simplistic.
• Power is the deep driver of potential fundamental business value.
• A brief look at Intel, one of the most important companies to come out of Silicon Valley, and an especially telling case being one of rare instances of dramatic success mirrored by an equally dramatic failure, help to isolate success drivers in defining Power.
• In 1968, Robert Noyce and Gordon Moore, cut ties with Fairchild Semiconductor to found Intel in Santa Clara, California: which went on to develop the first microprocessor, as well as the numerous ubiquitous technologies they now sustain: the Internet, search, social media and digital entertainment.
• Without Intel, modern society, would not exist.
• Over half a century, Noyce and Moore's humble startup has become the undisputed leader in microprocessors, boasting some $50B in revenues and a market cap of around $150B.
• Strategy: the study of the fundamental determinants of potential business value
• Statics makes Intel's microprocessor business so durably valuable, and Dynamics details developments.
• Intel did not start out in the microprocessor business by initially thrusting into computer memories, styling themselves "The Memory Company”.
• The invention of microprocessors came about only as an offshoot of a development job for Busicom, generating much needed cash for their memories business.
• $0 is the value outcome for memories and $150B for microprocessors.
• Intel was first mover in each market, and both were large, fast-growth semiconductor businesses, each enjoying the considerable benefits of Intel's managerial, technical and financial prowess.
• Microprocessors possessed a sort of rare characteristics which materially improved cash flow, while simultaneously inhibiting competitive arbitrage,
• Power: the set of conditions creating the potential for persistent differential returns.
• Power is the core concept of strategy and the Holy Grail of business.
• The task this book is to detail the specific conditions that result in Power (Part I: Statics) and how to attain them (Part II: Dynamics).
• The mantra: a route to continuing Power in significant markets is an exhaustive characterization of requirements of a strategy.
• Strategy, in the business sense, has become ubiquitous, with an inclination to elevate nearly any problem to higher status by affixing "strategy" or "strategic".
• By adopting a heterodox, narrower view of Strategy and strategy, considerable conceptual clarity and usefulness is gained.
• Game Theory's definition of strategy simply refers to the set of actions available to a player and thus proves far more inclusive than my definition, not sufficiently constrained to provide a normative framework.
• The definition of strategy is distanced from the school of thought which centers on cleverness in choices; the idea that if you read Sun Tzu, you can somehow make lemonade out of lemons.
• Business value refers to absolute fundamental shareholder values and the ongoing enterprise value shareholders attribute to the strategically separate business of an individual firm.
• Fundamental Equation of Strategy: Value = Mogsm
• The product of Mo and g reflect market scale over time and captures the "significant markets" component of this definition.
• Competitive arbitrage is expressed in margins and market share simultaneously, so the maintenance or increase of market share, while maintaining a positive and material long-term differential margin, provides the numerical expression of Power.
• Operational excellence is required to achieve potential, confirmed by Intel through the lens that over time competitive arbitrage drove m in memories negative, whereas Power enabled Intel to maintain a high and positive m in microprocessors.
• The strategy definition is an exhaustive statement of value, moreover, which is normative as well, and makes for the imperatives of "The Mantra" and you will create business value, inclusive of both Statics and Dynamics.
• Persistence (long-term competitive equilibria), dual attributes (magnitude and duration), industry economics and competitive position, complex competition, single business focus, and leadership are key factors.
• Power is as hard to achieve as it is important, and it's defining feature ex post is persistent differential returns; Accordingly, Power must be associated with both magnitude and duration.
• Conditions must augment cash flow, known as its Benefits, which can manifest as any combination of increased prices, reduced costs and/or lessened investment needs.
• There must be some aspect of the Power conditions which prevents engaging in the value-destroying arbitrage Intel experienced with its memory business, known as its Barrier.
• The Conditions of Power involve the interaction between the underlying industry's economics with the specific business' competitive position.
• Good strategy involves assessing Power with respect to each competitor, including potential as well as existing competitors, and functional as well as direct competitors.
• The protagonist of Strategy and of a strategy is each strategically separate business by itself, even if they exist within the same corporation.
• The notion of Power is what underlies Warren Buffett's view that if you combine a poor business with a good manager, it is not the business that loses its reputation
• There are critical moments when decisions are made that inexorably shape the company's future trajectory, and to get these crux moves right, strategy must be flexibly adapted to emerging circumstances.
• This introduction formally deduces definitions of Power, strategy and Strategy from the determinants of business value, ensuring major business objectives are not overlooked.

Strategy Statics: Scale Economies

• The journey begins to construct the 7 Powers, starting with the scale economies and detailing Netflix's Power
• In 2003, investment in Netflix was made due to their impressive mail-order DVD-rental business, intermidiating Blockbuster's model as the investment hypothesis was grounded in this dilema: Blockbuster would drag their feet facing up to the painful existential imperatives that confronted them and Netflix would continue cannibalize their customers.
• A "a route to continuing Power in a significant market." Netflix's DVD-by-mail business made the grade sealed the deal.
• There was a long-term time fuse to this distribution business, as the physical DVD to eventually be supplanted by digital streaming, while the digital future was rising as Netflix could see it in 2007.
• Creating originals was risky as Netflix with Red Envelope Entertainment original content, and forward integration might prove "a bridge too far."
• Exclusive rights/originals, component of Netflix's cost structure, created fixed major, radically changing industry economics.
• Scale Economies refer to declining unit costs with increased business size, beginning with Adam Smith's Wealth of Nations; the first of the 7 Powers
• Components that must be simultaneously present are its benefits, yielding improvement in the cash flow of the Power wielder via reduced cost, enhanced pricing and/or decreased investment requirements, that the Barrier engenders an inability and/or unwillingness to arbitrage out this benefit.
• Reduced costs are Scale Economies benefits.
• Netflix’s lead in subscribers translated directly in lower content costs per subscriber for originals and exclusives.
• Other firms are prevented due to an interplay of well-managed competitors. Smaller firms pick up market share, so improving their cost position to offer better value/lower prices.
• The leader would reduce their relative scale advantage, matched price cuts as a defensive redoubt, the follower expects retaliation and builds data into impact analysis.
• The unattractive cost/benefit is itself the Barrier for Scale Economies. The Barrier must be thoughtfully maintained by the incumbent leader.
• Scale Economies need conditions for Power: Reduced costs with prohibitive costs of share gains
• If competitors offer the same deliverable; similar amounts of content (same price) with Netflix, P&L will suffer offer less content (raise prices), lose market share.
• A business in which per unit cost declines as production volume increases.
• Technology firms present a feature of Scale Economies: a single fixed cost declining per unit as prorated over higher volumes.
• Volume/area relationships: production costs tied to area, density tied to volume, resulting in lower per-volume costs with increasing scale (bulk milk tanks).
• Distribution network density: delivery costs decline as more economical route structures as accommodated (UPS).
• Learning economies: learning leads to a benefit and positively correlated with production levels (leader).
• Purchasing economies: larger scale buyer elicit better pricing (Wal-Mart).
• Share price trajectory is instructive of successful strategy

Strategy Statics: Volume/Area Relationships

• Volume/area relationships are seen when production costs are closely tied to area, while their utility is tied to volume, resulting in lower per-volume costs with increasing scale; bulk milk tanks.
• Distribution network density occurs when delivery costs decline as more economical route structures accommodated per area (UPS).
• Learning economies: reduced cost or improved deliverables correlate positively from learning with production levels, then a scale advantage accrues to the leader.
• Purchasing economies often better pricing for inputs from a larger scale buyer (Wal-Mart).
• Intent is to increase the value of the business.
• In situations of high flux, it often takes time for cash flow to reliably reflect Power, so investor expectations may move up and down.
• There must be a value that is potential for value, can only be realized when coupled with operational excellence.
• The Barrier in Scale Economies comes from a follower's rational economic calculation (often learned) that, despite the attractive returns being earned by the leader, attack carries an unattractive payoff.
• To formally calibrate the intensity of the scale leader's Power is to assess the economic leeway that they have in balancing attractive returns with appropriate retaliatory behavior to maintain the shares.
• This leeway is the notion of "Surplus Leader Margin" (SLM); the profit margin the business with power can expect to achieve if pricing is such that its competitor's profits are zero.
• If fixed cost = C, then Surplus Leader Margin = [C/(Leader Sales)] * [(Leader Sales)/(Follower Sales) – 1]
• Equation * indicates the relative significance of fixed cost, and the second term shows the degree of scale advantage, (Scale Economy Intensity) * [Scale Advantage].

Strategy Statics: Industry Economics

• One term is for economic structure; a condition faced by all firms, and the second term reflects the position of the leader relative to the follower; For Power to exist, both of these terms must be significantly positive. For example, any potential scale economies (C is large), relative to sales), the leader margin will still be zero without any scale differential
• The Netflix thrust exclusives/originals was also a scale advantage, having accepted the existing industry economic structure with no route to Power could have been available if streaming business; dependent on a declining DVD rental business.
• Netflix is the driver of its remarkable capitalization, and requires for relentless pursuit of excellence in every corner of the company in other words, a strategy; shifting was very moving to originals by lowering the reduction of power.
• Assumptions: variable cost per unit, profit equals (π) - the total cost is (c Q + C).

Strategy Statics: Network Economies

• Occurs when the value of a product, such as Facebook, Steinway Pianos or Exchange Traded Funds, to a customer is increased by use by others.
• A business in a leadership position (with strong Network Economies) can charge higher prices than its competitors because of the results, so Linkedin can charge more than a compeding product for for (HR Solutions Suite).
• The barrier for Network Economies may become cost-benefit of gaining share, a non-trivial payment and with as deep pockets to unseat Facebook with Google+.
• Businesses with strong Network Economies are defined often with a tipping point when single firms throws in the a challenge could not defeat.
• The barrier here is bounded by the character network, personal for professional . The boundaries effects determine the boundaries.
• With tipping, early relative scaling is key developing Power, a good example; Facebook.
• The success on this dance lies on users' value while network's central feature was of this business agressively while coexist because were divided: users personal to keep. For years facebook learned the lesson network for work can result with great businesses.
• Surplus Leader Margin = 1 – 1/[1+d(SN – WN)] shows intensity industry relation network effects, of stylized way (8 + cost of all for users.)
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Strategy Statics: Counter-Positioning

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Strategy Statics: Switching Costs

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Power Intensity Determinants

• Scale Economies have Scale Economy Intensity with Relative Scale

• Network Economies have Intensity of Network Effect with Absolute difference in installed base

• Counter Positioning have New Business Model superiority with Binary: entrant_new model and Incumbent_Old model

• Switching Costs have Magnitude and Intensity of Switching Costs with number of current customers

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General Strategy

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