"7 Powers: The Foundations of Business Strategy" by Hamilton Helmer is a business strategy book that provides insight and guidance on how to achieve a competitive advantage and succeed in your industry.
The book identifies seven key strategies that businesses can use to create and maintain a competitive edge, including the power of uniqueness, scale, network, integration, alignment, timing, and leverage. Hamilton Helmer argues that by understanding and utilizing these seven powers, businesses can create a sustainable advantage and achieve long-term success.
The book provides detailed explanations and practical examples of each power and offers insights into how businesses can implement them in their own operations. The author's approach is data-driven, fact-based, and actionable, making it a valuable resource for executives, entrepreneurs, and business professionals looking to stay ahead of the competition.
What surprised us the most was the way he thinks about strategy and that a good strategy leads to one or more of the seven powers. It also struck us how many of these the strongest brands in the world can tick off. Think about Apple for a second while you look at the below overview.
"7 Powers" outlines seven core strategies that businesses can use to achieve a competitive advantage and succeed in their respective industries. These seven powers are:
1. Scale Economies:
The advantage of a business due to its size and volume of production
Results in lower costs per unit of output
2. Counter-Positioning:
A strategy where a business deliberately positions itself against dominant players in the market
Allows the business to stand out and cater to unmet needs in the market
3. Switching Costs:
Costs associated with customers switching from one business to another
Can include monetary costs, time and effort, and loss of value-added services
4. Network Economies:
Advantages a business gains from its connections and relationships with other businesses and customers
Can lead to increased market reach and knowledge-sharing
5. Process Power:
A business that leverages its internal organization and processes to achieve lower costs or superior products
Can be a powerful barrier to competition
6. Branding:
The value a business derives from its reputation and brand recognition
Can increase customer loyalty and drive sales
7. Cornered Resources:
A business that has exclusive access to a coveted asset that enhances its value
Examples include patents, property rights, and IP rights.
A firm that leverages scale economies experiences reduced unit costs as production volume increases. For example, Intel's factory setup costs are spread over each unit, making each chip cheaper than rival AMD's. Netflix's shift to original content was also an instance of scale economies, where an upfront price for content reduced costs and margins per subscriber as the subscriber base grew. A competitor with less subscribers would have higher costs and lower margins.
By adopting a superior business model not mimicked by the incumbent, a firm can leverage counter-positioning. Vanguard's passive index fund approach, which disrupted active equity investing, is an example. The low-cost approach saw an increase in assets, but competitors were slow to follow due to potential damage to their existing business.
Firms that leverage switching costs make it costly for customers to switch to an alternative supplier. On-premise software like SAP's ERP solution is an example, as the initial investment and customization make it expensive to switch.
The value customers receive from a business that leverages network economies grows with the user base. LinkedIn is a prime example of this where the professional network's user base makes it difficult to compete. As more users join, they can connect with more colleagues, find more people, and apply for more jobs, increasing its value.
A company that leverages process power has a streamlined organizational structure and set of business processes that lead to reduced costs and/or improved products, which can only be achieved through sustained dedication.
Toyota is a prime example of utilizing process power, through the creation of the Toyota Production System (TPS). TPS was a groundbreaking automobile production process that resulted in higher quality and longer-lasting vehicles. Despite efforts from American car manufacturers to mimic Toyota's methodology, they were unable to match their success. The TPS was so intricate and went beyond the walls of Toyota, extending to their supplier relationships and even incorporating their methods. The TPS's complexity acted as a formidable barrier, allowing Toyota to compete effectively against American car manufacturers and expand their market share.
A business that leverages branding has a higher perceived value for an objectively identical offering due to historical information. Tiffany's jewelry is an example, where customers pay a premium for diamonds due to its reputation for luxury and quality. The iconic Blue Box has also contributed to Tiffany's branding. Tiffany's is now owned by "Super House of Brands" LVMH Group.
A business that leverages a cornered resource has preferential access to a valuable asset that enhances its value. Patents on drugs and IP rights are common examples.
Pixar is a unique example of a cornered resource. Its success in the movie industry is due to its three founders, who formed the Brain Trust. Steve Jobs, Ed Catmull, and John Lasseter were experts in their respective fields and had a strong sense of loyalty to each other. This prevented others from replicating their success, leading to Disney's acquisition of Pixar for $7.4B.
By understanding and utilizing these seven powers, businesses can gain a competitive advantage and achieve long-term success in their respective industries.
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