Key Takeaways
Business success comes down to the ability to create sustainable power. There are 7 different kinds of power a company can have:
1) Scale Economies
2) Network Economies
3) Counter-Positioning
4) Switching Costs
5) Branding
6) Cornered Resource
7) Process Power
Each of these powers produce a benefit to the business that has the power and a barrier preventing competitors from taking that power. By understanding these powers and having them in mind, a business can create a strategy for attaining them.
Invention and action is the key to creating new opportunities for Power and it is only from these that new Power can be created. It is also vitally important that a company understand and have a route to power during the invention stage because otherwise competitors can arbitrage their advantage away from them.
Notes & Quotes
Business success comes down to a few strategy choices
“The arc of any celebrated business is underpinned by decisive strategy choices that are few and typically made amidst the profound uncertainty of rapid change...To get them right, you must constantly attune your strategy to unfolding circumstances”
Definition of strategy
Strategy = a route to continuing Power in significant markets
Definition of potential value
Potential Value = [Market Scale] * [Power]
Definition of power
“Power is a configuration that creates the potential for persistent significant differential returns, even in the face of fully committed and competent competition.”
“Power must be considered relative to each competitor, actual and implicit.”
The 7 Powers
Scale Economies
Definition of scale economies
“The quality of declining unit costs with increased business size is referred to as Scale Economies.”
“A business in which per unit cost declines as production volume increases.”
The Benefit
Reduced costs
The Barrier
Prohibitive costs of share gains
Example: Netflix
“Netflix launched a two-pronged assault. Their thrust into exclusives and originals changed the economic structure of the industry, while their early-in and thoughtful rollout gave them a scale advantage.”
“the Benefit flowing from the reduction in content cost enabled by their vast pool of subscribers, and the Barrier resulting from the unattractive cost/benefit of market share onslaughts.”
Network Economies
Definition of Network Economies
“The value of the service to each customer is enhanced as new customers join the ‘network.’”
“Network Economies occur when the value of a product to a customer is increased by the use of the product by others.”
The Benefit
Ability to charge higher prices
“once the leader has achieved an edge in installed base, most users will find it to their benefit to choose that leader.”
The Barrier
Unattractive cost/benefit of gaining market share
Attributes of Network Economies
“The boundaries of the network effects determine the boundaries of the business.”
“Due to tipping point dynamics, early relative scaling is critical in developing Power. Who scales the fastest is often determined by who gets the product most right early on.”
Counter-Positioning
“Creating something really new in business is challenging in the best of times.”
Definition of Counter-Positioning
“A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.”
The Benefit
Superior business model, lower costs/higher prices
The Barrier
Collateral damage to existing business model(s)
“The incumbent’s failure to respond, more often than not, results from thoughtful calculation.”
Under the radar is better
“In its ascendancy, the challenger should avoid the temptation of trumpeting its superiority, instead suppressing that urge and adopting a tone of respect toward the incumbent. This behavior may result in the incumbent delaying objective cognition, giving the challenger a headstart on the new business model.”
It’s not an exclusive source of Power
“Counter-Positioning is not an exclusive source of Power.”
Common phrase from incumbents
“At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind.”
Turning a strength into weakness: the ideal counter-positioning strategy
“there are fighting styles which turn the contest on its head by converting strength into weakness.”
“The only bet worthwhile for a challenger is one in which even if the incumbent plays its best game, it can be taken off the board. A competent Counter-Positioned challenger must take advantage of the strengths of the incumbent, as it is this strength which molds the Barrier, collateral damage.”
Switching Costs
Example of Switching Costs
“SAP’s paradoxical combination of high retention and low satisfaction reflects the economic reality of a software product of great value to a corporation but one that also comes with high Switching Costs. Once a customer has bought in, they are hopelessly hooked, enabling SAP to then reap the rewards of a future stream of revenues for annual maintenance charges, upgrades, add-on services, software and consulting.”
Note: Sounds similar to EMR software Epic in hospitals
Definition of Switching Costs
“The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.”
The Benefit
Can charge higher prices.
“This benefit only accrues to the Power holder in selling follow-on products to their current customers; they hold no Benefit with potential customers and there is no Benefit if there are no follow-on products.”
The Barrier
The high costs needed to compensate customers to switch. The unattractive cost/benefit of gaining market share.
Add-on products are needed
“Switching Costs offer no Benefit if no additional related sales are made to the customer. To assure that such additional sales take place, one tactic might be to develop more and more add-on products.”
Only apply to existing customers
“The potential benefits accrue only if you have a customer”
Can lead to other Powers
“Switching Costs can pave the path for other Powers as well. Connecting users and building a large supply of complementary goods may generate Network Effects. Or if the product preference of users already tethered by Switching Costs spills over to a wider pool of potential customers, you could find yourself enjoying the effects of Branding.”
Branding
Definition of Branding
“The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.”
“Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.”
The Benefit
Ability to charge higher prices.
“A business with Branding is able to charge a higher price for its offering due to one or both of these two reasons: Affective valence. Uncertainty reduction.”
“the Benefit from Branding does not depend on prior ownership, as with Switching Costs.”
The Barrier
Takes a long time of consistent behavior.
Challenges to Branding
“Dilution threatens Branding Power because it can “reset the hysteresis clock,” forcing a company to restart the slow and uncertain process of building affective valence.”
“Because Branding relies upon repeated positive interactions with consumers, counterfeiters who flood the market with inconsistent offerings can gradually undermine it.”
“Changing consumer preferences . Over time, customer preferences may vary in a way that undermines the value of Branding.”
Hard to change
“Problem is, the qualities that make Branding a Power also make it hard to change; the considerable risk is dilution or brand destruction.”
Location specific
“The affective valence may apply in one region but not another.”
Non-exclusive Power
“Note that Branding is a non-exclusive type of Power.”
Characteristics needed for Branding product
“Only certain types of goods have Branding potential”
“Magnitude: for Branding Power derived from uncertainty reduction, the customer’s higher willingness to pay is driven by high perceived costs of uncertainty relative to the cost of the good. Such products tend to be those associated with bad tail events: safety, medicine, food, transport, etc.”
“Duration: a long enough amount of time to achieve such magnitude.”
Cornered Resource
About Ed Catmull of Pixar
“possessed the intelligence, self-confidence and humanity to master the nearly impossible art of managing high-octane creatives.”
Definition of Cornered Resource
“Preferential access at attractive terms to a coveted asset that can independently enhance value.”
“Another way to put this is that a Cornered Resource is a sufficient condition for potential for differential returns.”
The Benefit
Uncommon product that leads to attractive profits.
The Barrier
The difficulty of attaining the cornered resource.
“I believe the Brain Trust is more than a combination of individual talents; rather it is the foundational members’ shared experience in the early trial years that has yielded one success after another.”
Process Power
“We didn’t understand this bigger picture thing. All of our questions were focused on the floor, the assembly plant, what’s happening on the line. That’s not the real issue. The issue is how do you support that system with all the other functions that have to take place in the organization?”
The definition of Process Power
“Embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.”
Note: Similar to what many call culture
The Benefit
Ability to produce products at lower costs.
The Barrier
Difficult to replicate and can only be achieved over long periods of time.
It’s rare
“The rarity of Process Power results from the infrequency of the Barrier: an unyielding, long-time constant for the improvements in question.”
Strategy Dynamics (aka How to Get There)
Operational excellence is not enough
“Operational excellence is not strategy.”
Getting there is different than being there
“Here’s the first important takeaway from our consideration of Dynamics: “getting there” (Dynamics) is completely different from “being there” (Statics). This is a distinction not only for academics but for practitioners as well.”
Experimentation and action is key to strategy
“Netflix adaptively found its way to streaming ascendancy via successive thoughtful experimentation, demonstrating once again that action is the first principle of strategy, just as it is in business.”
Invention is the first step
“the first cause of every Power type is invention, be it the invention of a product, process, business model or brand. The adage “‘Me too’ won’t do” guides the creation of Power.”
“Action, creation, risk—these lie at the root of invention.”
“The nature of flux demands that it unfolds in fits and starts, so any company wishing to capitalize on these new conditions must invent—again, by crafting, not design.”
“Invention has a powerful one-two value punch: it both opens the door for Power and also propels market size.”
Planning does not create power
“Planning rarely creates Power.”
Change creates opportunities
“Flux in external conditions creates new threats and opportunities.”
During periods of rapid change, look for routes to Power
“Amidst this cacophony, you must find a route to Power.”
Invention first, then route to power
“In the midst of invention, you need to be ever watchful for Power openings.”
“Power arrives only on the heels of invention. If you want your business to create value, then action and creativity must come foremost.”
“So if you want to develop Power, your first step is invention: breakthrough products, engaging brands, innovative business models. The first step, yes, but it can’t be the last step.”
“most invention is merely a manifestation of operational excellence and thus not immune to the arbitraging actions of competition. So in this formative period, as your invention takes shape, you must attune yourself to the exigencies of Power and stay constantly vigilant.”
Paths to compelling value
“There are three paths to achieving compelling value: Capabilities-led, Customer-led and Competitor-led.”
Creating compelling value
“Compelling value requires that you mobilize your capabilities to offer up a product that fulfills a significant customer need currently unmet by competitive offerings. This need drives customer adoption.”
Capabilities-led compelling value
“Capabilities-led compelling value : when a company tries to translate some capability into a product with compelling value.”
“But here’s the uncertainty of such a capabilities-led initiative: the customer need is unknown, making such efforts profoundly risky. So risky, in fact, that they should probably be undertaken only if an assured Barrier appears early on.”
“A lot of times, people don’t know what they want until you show it to them.”
Need to stay in the game to find value
“Success requires that a company stay in the game, appropriately morphing to suit the requirements of the situation.”
Competitor-led compelling value
“The third and final path to compelling value is competitor-led. In this case, a competitor has already brought to market a successful product, and the inventor must produce something so much better (in whole product terms) that it elicits the “gotta have” response.”
Advanced technology creates an opening
“Once again, an advancing technology frontier created an opening for a pioneering challenger.”
Value appears when uncertainty disappears
“By far the most important “value moment” for a business occurs when the bars of uncertainty are radically diminished with regards to the Fundamental Equation of Strategy, market size and Power.”
“It is the period of invention, with all its high flux, that gives rise to this “value moment,” offering the potential for traction in both market size and Power. High uncertainty persists during this interval because these transitions are typically not linear and quite difficult to forecast accurately.”
Can all come from a single win
“The one-sentence story of Intel is a single design win, then a decade and a half of very high Switching Costs, then Scale Economies.”
The takeoff period (growth stage) is where power is rooted
“So there we have it: all of Intel’s sources of Power were rooted in the takeoff period. Again, takeoff is the stage when differential customer acquisition can take place at favorable terms, which is why it presents such ideal Power opportunities.”
“They did not understand the nature of Power attainment in the takeoff stage: you and your competitor are in a race for relative scale, and there can only be one winner.”
“Intel’s experience imparts a crucial “When?” lesson: the takeoff period represents a singular time. Only then can you initiate three important types of Power: Scale Economies, Network Economies and Switching Costs. If unrealized, these opportunities disappear forever afterward.”
Need to establish power
“Unfortunately, if a company has not established Power, competitive arbitrage will catch up as soon as growth slows”
The Power Progression
Origination: Counter-Positioning andCornered Resource
Takeoff: Scale Economies, Network Economies, and Switching Costs
Stability: Process Power and Branding
“There are exceptions, but by and large the Power Progression is borne out: Origination: Counter-Positioning and Cornered Resource Takeoff: Scale Economies, Network Economies and Switching Costs Stability: Process Power and Branding”
“If you cannot see a route to one of these 7, your strategy problem is not yet solved.”
The true potential for value
“Benefits are common, and they often bear little positive impact on company value, as they are generally subject to full arbitrage. The true potential for value lies in those rare instances in which you can prevent such arbitrage, and it is the Barrier which accomplishes this.”
Leadership (personal) is key to establishing Power
“when it comes to establishing Power in the first place, make no mistake: leadership is fundamental.”
Power comes from superiority and significance
Power is created if a business attribute is simultaneously: Superior—improves free cash flow Significant—the cash flow improvement must be material Sustainable—the improvement must be largely immune to competitive arbitrage
Understanding of Power can happen early
What I have found working with early-stage companies in Silicon Valley and working with mature companies considering new directions is that it is possible to have meaningful conversations about the potential for Power at quite an early stage.