7 Powers: The Foundations of Business Strategy 1/4
MK: it’s an interesting, but a very strangely written book. It’s a strategy book written with math in mind, with quite unusual terms. Nonetheless, the content may be useful, just needs quite a bit of digging and processing.
0/ Some Needed Terms Used Throughout the Book
Power – the set of conditions creating the potential for persistent differential returns.
Strategy – a route to continuing Power in significant markets.
Benefit – something reducing costs or increasing value (and allowing raising prices).
Barrier – something detracting challengers: inability or the expectations of an economically unattractive outcome. (Unwilling or Unable to challenge)
Surplus Leader Margin – the profit margin the business with power can expect to achieve if pricing is such that its competitor’s profit is zero.
1/ Scale Economics: Size Matters
Obviously, this means that when volumes go up, unit costs go down.
The benefit of the scale are the lowered costs, of course.
The barrier [to competition] is harder, because low costs often lead to price wars (race to the bottom). So, the cost/benefit becomes unattractive for the challenger.
Scale economies make lots of sense for allocating fixed costs (thanks Econ 101). What else?
Volume/Area Relationships – warehousing (the bigger the building is, the cheaper per unit of volume it is to store the goods).
Distribution Network Density – the denser the distribution network (i.e. more notes), the lower the cost of reaching each customer in the area.
Learning Economies – if learning leads to a benefit (lower cost or better deliverable) and is positively correlated with the production levels.
Purchasing economies (obviously) – a larger scale buy usually gets better pricing.
Power only creates value when it’s coupled with execution.
2/ Group Value
Network economies either scale rapidly or die. [MK: mostly die, of course]
The more people join, the higher value there is for them and everyone else.
Benefit: more users —> more value —> can charge higher prices simply due to the numbers.
Barrier: unattractive cost/benefit of gaining share. (and fully switching from a competitor is an even more expensive exercise)
The leader can price the services well below the breakeven point for the contenders.
There can be positive network effects without benefits to the company (its cash flow is off, for instance, or it has no clue how to monetize itself (Twitter)).
Indirect (demand-side) network effects: creating an ecosystem (e.g. AppStore) makes each new app increase the value of the network, simultaneously making the whole thing increasingly harder to replicate.
Winner take all. Once one firm achieves a certain degree of leadership, others give up. (Google+ anyone?)
Boundedness. [MK: in my time it was called “positioning”] Facebook is for personal, LinkedIn is for business, social commerce is very hard.
Decisive early product. The initial growth trajectory matters. Facebook was able to eliminate MySpace’s Surplus Leader Margin and then burying them completely.
Businesses competing with their installed base can fall into this category. [MK: an emerging example of this is Travelpayouts – a global travel marketplace.]