7 Powers: The Foundations of Business Strategy (With Example) | Book Notes
In 7 Powers: The Foundations of Business Strategy, author Hamilton Helmer writes that the goal of any business is to create sustained value for the enterprise. He defines business value as the combination of market scale and power, which can be simplified into the equation below:
Present business value = [Market scale] * [Power]
Market scale refers to how the market grows over time
Power refers to the conditions needed to generate persistent differential returns
Keeping these two factors in mind, a business strategy should therefore provide a route to establishing continuing power for a company in significant markets. This roadmap should eventually enable the business to attain long-term growth and financial returns.
The seven powers
Power depends on two attributes:
Benefit ✅: condition(s) that increases cash flow by raising prices or reducing costs
Barrier 🚫: obstacle(s) that prevents existing and potential competitors from destroying the business value
Each of the seven powers has a unique benefit-barrier combination that allows a business to obtain a sustainable cash flow.
1. Scale economies
Scale economies refer to businesses in which the per-unit cost of production decreases as the production volume increases.
Benefit ✅: reduced costs due to the scale of production
Barrier 🚫: unattractive costs from taking on the industry leader to attain share gains
2. Network economies
Network economies are businesses whereby the value realised by a customer increases as the customer base grows.
Benefit ✅: increased price as a result of greater value from gaining more customers
Barrier 🚫: unattractive costs of drawing customers away from the market leader
3. Counter-positioning
Counter-positioning occurs when a newcomer adopts a superior business model that the incumbent does not mimic due to the anticipated damage to the existing business.
Benefit ✅: the new business model is able to reduce costs or charge higher prices as a result of superior deliverables
Barrier 🚫: collateral damage to the existing business if mimicked
4. Switching costs
Switching costs refer to the value loss expected by a customer from switching to an alternate supplier with equivalent products or services.
Benefit ✅: the ability to charge higher prices for current customers
Barrier 🚫: unattractive costs of obtaining customers; competitors must compensate customers for switching over to their products or services
5. Branding
Branding is the durable attribution of a higher value to a similar product or service offering that arises from past information about the seller.
Benefit ✅: the ability to charge higher prices as a result of (1) the built-up positive associations with the brand and (2) the “peace of mind” attained by customers given the brand’s reputation and quality
Barrier 🚫: a strong brand requires a lengthy period of reinforcing actions
6. Cornered resource
A cornered resource refers to the preferential access to a coveted asset—at attractive terms—that can independently enhance value.
Benefit ✅: because of the variability of cornered resources, it can result in a range of benefits such as reduced costs and superior deliverables
Barrier 🚫: a cornered resource is not based on any ongoing interaction, but rather it comes by decree, either general (e.g., patent rights) or personal (e.g., talented employees)
7. Process power
Process power refers to the organisation of the company and the activity sets that enable lower costs and/or a superior product.
Benefit ✅: able to lower costs and/or improve product attributes as a result of process improvements embedded within the organisation
Barrier 🚫: processes are difficult to replicate and can only be achieved over a long period of sustained advances
Invention: the path to power
Now that we’ve understood the seven powers, we also need to know how a business can reach the status of power.
Essentially, all the seven powers start with invention, which depends on two factors:
A company’s resources and capabilities
The external conditions and opportunities
Based on the resources and set of given conditions, we can create value by inventing a new product or business model, or establishing a strong brand or process.
However, a company’s success needs more than power alone—it requires market scale as well (recall the business value equation above). While power ensures a business maintains a sizeable portion of the market share, the market has to be large enough for the company to realise sufficient financial returns.
Thankfully, invention not only opens the door for power, but it also helps propel the market.
How to grow the market?
To grow the market, a product needs to be sufficiently superior in the eyes of the customer to drive rapid adoption. In other words, the product needs to have a compelling value.
A compelling value requires a business to mobilise its capabilities to offer a product that fulfils a significant customer need currently unmet by competitive offerings. Helmer segments compelling value into three types, namely:
Capabilities-led: creates a product that customers don’t know they need
Customer-led: creates a product that satisfies an unmet customer need
Competitor-led: creates a product that outperforms competitors’ offerings
The commitment to creating great products and aligning a business’ capabilities to an unmet customer need is the secret sauce to driving rapid customer adoption.
Business case study: Intel
Intel’s route to power in the microprocessors market was a long and tiring journey. While they had the resources and conditions for success—manufacturing prowess, technical depth, exceptional leadership and management and a growing market—they encountered many challenges and uncertainty along the way.
One of Intel’s earliest microprocessors, the 4004, showed little commercial traction. Because semiconductors are a component and not an end product in itself, purchase commitments depend on other manufacturers assessing the new component, designing it into their products and offering those products to consumers. These lags gave competitors ample time to build on Intel’s experience and develop better products of their own.
However, Intel responded by launching Operation Crush—an audacious frontal assault in sales and marketing—and setting a wildly aggressive target of 2,000 design wins for their commercial microprocessor (i.e., competitor-led compelling value). The result was the Intel 8088, which was installed in IBM’s personal computer (PC)—with 750,000 units being sold within a year after it was released.
From invention to power
From the time of the 8088 design win till the end of 2015, Intel’s market cap soared to over US$100 billion. All of this value came mostly from their microprocessor business—more specifically, it resulted from three of the seven powers:
Scale economies
Intel seized the market share lead by the end of the explosive growth stage of the PC market. Once the growth had settled, the stakes were well known, and Intel could use their cost advantage to fend off competitors.
Network economies
In the early years of consumer PC sales, operating systems and some applications had to be explicitly programmed for the microprocessor due to the memory and speed limitations of microchips. Hence, once Intel had achieved an edge in their customer base, most users would have found it beneficial to go with Intel for their choice of PC.
Switching costs
Because of the microchip-specific programming, users were deterred from moving to a non-Intel PC. Otherwise, all the long hours that users had put into their programmes would have been unusable.
Final thoughts
As you can see, the 7 Powers: The Foundations of Business Strategy provides a mental framework to understanding how a business develops from the early stages of invention to establishing power and long-term growth in major markets.
I’ve summarised and simplified what I thought were the key points from the book to make them more digestible and easier to apply in business situations. If you would like to dive deeper into the details of the seven powers, I encourage you to grab a copy of the book to explore more.
Hopefully, this book summary has helped you demystify the complexity of business strategy and enabled you to look at a company’s growth through the lens of the seven powers.
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