7 Powers

The Foundations of Business Strategy

Ignite the success of your venture.

What secret recipe does a business require for sustained success?

Let’s unravel this mystery through Hamilton Helmer’s concept of “seven powers”. In this Summary, we’ll delve into each power, illuminated by seven case studies. Whether you’re an established business leader strategizing a competitive face-off or an entrepreneur in pursuit of a lucrative business idea, these nuggets of wisdom can be instrumental.

However, before we embark, let’s define the term “power” in this context: it refers to a strategic position enabling your company to achieve staggering, enduring success. If your venture lacks at least one of these powers, the roadblocks that lay ahead could render your strategy inadequate. These powers embody two key components: the benefit and the barrier. The benefits accrued should decisively overshadow any costs, and from the vantage point of the power holder, the barrier should appear virtually insurmountable for the competitors.

Each subsequent power and its accompanying example reveal the inherent benefits of strategic positioning and the near-insurmountable nature of barriers erected. Our intent is to comprehend the determinants of business success and failure and recognize when it’s feasible (or not) to challenge a power-holder.

The Rise of Netflix

Rewind to 2007: Netflix outpaced Blockbuster, having disrupted traditional video rental norms by offering a convenient rent-from-home alternative. Despite Blockbuster’s belated attempt at replicating this model, the Netflix brand became the synonymous reference for home-based DVD rentals.

But what truly distinguished Netflix was its ability to anticipate industry trends. Recognizing the finite life span of DVDs, Netflix foresaw the impending shift towards streaming as a more viable option for consuming shows and movies. Thus, in 2007, Netflix broke new ground by entering the streaming market.

This ability to anticipate wasn’t a one-off for Netflix. As they developed their streaming platform, they grappled with the complexities of managing contracts for multi-region, multi-timespan content usage. To maintain their dominant position, they needed a game changer, leading to their foray into original content production with Lilyhammer and House of Cards in 2012.

At this juncture, Netflix had amassed over 30 million users. A single episode of House of Cards cost $4.5 million to produce, implying a required income of $0.15 per user per episode.

Here’s where it gets interesting: the cost per episode isn’t static but is contingent on the user base. Thus, the larger the user base Netflix attracted, the lower the cost per user to deliver content.

This is the phenomenon of scale economy, the inaugural power. Scale economy emerges when your business costs reduce as your product supply expands.

Unseating a company with the power of scale economy is no mean feat. Picture a nascent streaming platform with merely three million users trying to produce a series like House of Cards. Their cost per user would be tenfold that of Netflix, making the prospect of outperforming Netflix prohibitively expensive.

The power of scale economy underscores the potential for enduring industry dominance, posing formidable challenges for competitors.

The BranchOut Saga

By 2010, LinkedIn had an impressive 70 million users (a number that pales in comparison to the 930 million reported in 2023). An ambitious serial entrepreneur decided to tap into this market, launching his own networking app, BranchOut.

Recognizing LinkedIn’s massive user base and superior positioning, BranchOut astutely avoided a direct face-off. Instead, they harnessed the colossal user base of Facebook (608 million at that time), creating an app that integrated seamlessly with Facebook.

Portraying themselves as the conduit between personal and professional spheres, they promised to dissolve the boundary between the two. Despite initial success, they eventually plateaued at around 17 million users before Facebook acquired them, repurposing the app for workplace communication.

The attempt to challenge LinkedIn via a unique approach was commendable, yet it soon became evident that users preferred to keep their professional and personal lives separate. However, the underlying lesson from this saga is the near-impossibility of directly competing with LinkedIn due to its advantage of network economy, the second power.

Network economy materializes when the value proposition hinges on the user base itself. That is, users aren’t merely consuming the product; they are the product. The larger the network, the greater the value to subscribers, advertisers, and investors. The formidable barrier to combating a company that wields network-economy power is self-evident — the colossal investment required to accumulate a sizable network to even qualify as a viable competitor is practically insurmountable.

BranchOut, while unsuccessful in its venture, chose the only path that could have potentially led to success, leveraging Facebook’s nearly ten-fold network economy compared to LinkedIn’s.

Kodak

One company that held scale-economy power at its height was Kodak. Kodak was built on consumers’ need to continually purchase film along with some proprietary technology. They saw the writing on the wall. Digital photography would one day make film obsolete.

We can criticize Kodak for not being more forward-thinking, but the fact is that they did spend a great deal seeking out survival options. The problem was, there was nowhere for them to shift. Change was happening on a technological level, and they simply didn’t possess any ground in the digital photography or photograph storage industries. They weren’t competitive in those fields.

Kodak lost to the power of counter-position. In this strategic position, you unseat an incumbent power by providing a new position that is both successful in finding a market and that the incumbent either can’t or won’t compete with.

The incumbent power either can’t compete, as was the case with Kodak, or they won’t because the costs are too high or would cannibalize their existing business model. While this is a challenging strategic position to take, counter-positioning can put you in a nearly undefeatable position. Just watch out for a BranchOut situation, because misreading your market can cost you big time.

 

Power Shift: A Study of SAP

Within the sprawling landscape of enterprise resource planning software, SAP stands tall, even as it grapples with mixed reviews. A survey encompassing clientele from the United States and Europe unraveled an interesting contradiction: while 43% expressed dissatisfaction with the company’s customer service and half were unsure of predicting SAP’s future success, a whopping 89% voiced their commitment to stick with the service.

Such paradoxical loyalty points towards the fourth dimension of power – the cost of switching. Sometimes, customers prefer to grapple with a mediocre product rather than brave the uncertainties and costs of a new choice. This inertia could stem from multiple factors, including the anxiety of time and training investments, reluctance to sever familiar ties, or feeling over-invested in add-ons and upsells.

The key here is to leverage switching costs into an undying customer loyalty. This becomes a significant advantage only if you consistently sell to this captive customer base. Since dissatisfaction with customer service can deter new prospects, the edge lies in selling optional components. Competing brands face the challenge of not just offering a superior product, but also demonstrating tangible benefits of switching.

The Tiffany Paradox

Would you willingly pay triple for a product identical to its competitor, solely because it carries a famous brand tag?

Consider this: In 2005, Good Morning America conducted an experiment. They purchased a ring worth $6,600 from Costco and a comparable one for $16,600 from Tiffany. An independent appraisal later valued the Costco ring at $2,000 above its selling price, and the Tiffany one at $4,000 less.

Interestingly, many consumers willingly pay this ‘brand premium’ at Tiffany, not merely for the status but for the assurance. The faith that their expensive purchase is authentic and of high quality gives Tiffany its branding power. Brands are not built overnight; they grow with persistent effort and time. Competitors might find it an uphill task to challenge established brands like Tiffany, Nike, or Coke. While legal avenues to challenge these behemoths may be limited, innovative strategies can help.

Building a timeless brand is an arduous journey, but once reached, it offers near invulnerability.

The Magic of Pixar

Toy Story, released in 1995, was a phenomenal hit. What sets Pixar apart, however, is its streak of subsequent successes. This magic is rooted in the company’s beginnings.

In 1983, George Lucas sold the graphics group of Lucasfilm’s computer division to Steve Jobs for $5 million. Jobs christened it as Pixar and brought on board animation maestro John Lasseter and CGI scientist Ed Catmull.

The trio became the cornerstone of Pixar’s ascent to glory. Disney, recognizing this unique amalgamation of talents when it acquired Pixar, ensured that this core team remained intact.

Pixar’s charm lies in its cornered resources. Exclusive access to a unique patent, a rare product, or in Pixar’s case, an exceptional blend of genius minds sets it apart from its competitors. The strength of cornered resources emerges when you gain something exclusive that either enhances your product or reduces your costs, or better yet, both. The hurdle for competitors is evident – they cannot replicate what you do without access to the resources that contribute to your success.

 

 

Power Dynamics: The SAP Chronicles

Peering into the intricate world of enterprise resource planning software, you can’t ignore SAP’s towering presence. Yet, it comes with a fair share of backlash. A survey spanning clientele from the United States and Europe revealed a compelling contradiction: while 43% were left wanting better customer service and half harbored doubts about SAP’s future trajectory, a staggering 89% stood steadfast in their commitment to the service.

This counterintuitive allegiance unveils a subtle but significant force – the toll of switching. Occasionally, customers choose to stick with a subpar product rather than risk the unknown and potentially costly terrain of a new choice. This inertia could be rooted in a variety of reasons, like anxiety over new time and training commitments, unwillingness to cut familiar ties, or feeling excessively invested in add-ons and upgrades.

The magic lies in harnessing these switching costs to forge unbreakable bonds of customer loyalty. It morphs into a strategic asset only if you continue to tap into this captive audience. As negative customer service experiences can discourage new customers, the real opportunity may be in selling supplementary components. Rival brands now need to prove their superiority while also presenting compelling reasons to make the switch.

 

The Puzzle of Tiffany

What if you had to pay three times more for a product identical to another, all because it dons a renowned brand label?

Here’s food for thought: In 2005, Good Morning America ran an experiment. They bought a ring for $6,600 from Costco and a similar one for $16,600 from Tiffany. An independent appraisal surprisingly revealed that the Costco ring was valued at $2,000 more than its price tag, while the Tiffany ring fell $4,000 short.

Fascinatingly, a substantial number of consumers happily shell out this ‘brand premium’ at Tiffany. It’s not just about status; it’s about the promise of authenticity and top-tier quality. This trust, and the branding power it affords Tiffany, doesn’t appear overnight—it’s cultivated through unrelenting effort and time. Competitors may find toppling entrenched brands like Tiffany, Nike, or Coke an uphill battle. Legal options to challenge these titans might be few and far between, but the way forward could lie in creative strategies.

Constructing a timeless brand is a journey fraught with challenges, but once there, it provides a shield of near invulnerability.

Pixar’s Enchanting Saga

Toy Story, which hit the screens in 1995, was nothing short of a sensation. But the real wonder of Pixar lies in its uninterrupted string of triumphs that followed. This enchantment is anchored in the company’s genesis.

In 1983, George Lucas offloaded the graphics group of Lucasfilm’s computer division to Steve Jobs for a cool $5 million. Jobs rebranded it as Pixar and roped in animation wizard John Lasseter and CGI guru Ed Catmull.

This dynamic trio fueled Pixar’s meteoric rise. Disney, recognizing this extraordinary blend of talent during its acquisition of Pixar, made it a point to keep this core team together.

Pixar’s allure stems from its exclusive resources. Be it a unique patent, a rare product, or in Pixar’s case, a unique convergence of genius minds—it’s what sets them apart from the competition. The strength of exclusive resources comes to play when you gain something unique that either boosts your product quality or curbs your costs, or ideally, both. The challenge for competitors is clear – they can’t mirror your successes without the same resources fuelling your victories.

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