Library / Investment Tools
Date of review: January 2020
Book author: Hamilton Helmer
Вook published: 2016
Book author: Hamilton Helmer
Вook published: 2016
7 Powers: The Foundations of Business Strategy by Hamilton Helmer (2016)
A very good book written by an investor, Hamilton Helmer, who has had a long-term position in Netflix and has known its co-founder, Reed Hastings, since the early 2000s. There are many interesting case studies apart from Netflix, including Intel's strategy in semiconductors, Adobe.
What is Power
Power is the author's definition of competitive advantage, or moat ('set of conditions creating the potential for persistent differential returns'). Most of the powers are quite well-known and have been discussed in other books. But the value of this particular book is that each power is discussed in the context of real-world cases, and each has its own perspective, which I have not come across in other books.
The author also comes up with a fresh equation for Value (V = Market Size x Power), Market Size equals current market size times market growth factor while Power equals long-term market share X long-term differential margin (net profit margin in excess of that needed to cover the cost of capital).
Two conditions are needed for Power – Benefit (material improvement in cashflows) and Barrier (obstacles preventing competitors from engaging in behaviours that might, over time, arbitrage out this benefit).
The book also highlights that invention lies at the core of every Power. Invention changes economics – you get more for less. This gain is further split between the company and other participants of the value chain, including customers.
Market size can also change – a dynamic component of strategy (e.g. Netflix expanded the video market by offering a new service).
The author also comes up with a fresh equation for Value (V = Market Size x Power), Market Size equals current market size times market growth factor while Power equals long-term market share X long-term differential margin (net profit margin in excess of that needed to cover the cost of capital).
Two conditions are needed for Power – Benefit (material improvement in cashflows) and Barrier (obstacles preventing competitors from engaging in behaviours that might, over time, arbitrage out this benefit).
The book also highlights that invention lies at the core of every Power. Invention changes economics – you get more for less. This gain is further split between the company and other participants of the value chain, including customers.
Market size can also change – a dynamic component of strategy (e.g. Netflix expanded the video market by offering a new service).
Seven Powers are
1
Scale economies.
2
Network economies.
3
Counter-positioning - least understood – when a new player enters the market with a superior business model/product not matched by incumbents. The new product can have better quality or lower costs or both. Apple's iPhone could be a good example compared to RIM's Blackberry or Nokia.
4
Switching costs.
5
Branding.
6
Cornered resource - not just about the natural resource sector, but rather about unique talents among management (case of Pixar).
7
Process power – this is a rare type of Power. The author describes Toyota's example of improving production processes as one of the key sources of its success.
How to achieve compelling value
Compelling value is when a customer need is met by a new innovative product that is not served by existing players. Three ways to achieve compelling value:
- Using your Capabilities.
- Customers needs.
- Competitor-led (a competitor has already brought to market a successful product, and the inventor must produce something much better. Sony's PlayStation is an example of a response to established products by competitors – Sega and Nintendo which led Sony to come up with drastically better products.