7 Powers: The Foundations of Business Strategy 1/4

https://www.amazon.com/7-Powers-Foundations-Business-Strategy-ebook/dp/B01MRLFFQ7

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?

Examples

  • 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.

Examples

  • 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.]

Part 2.