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7 Powers

Simple but not simplistic

Strategy → The study of fundamental determinants of potential business value.

Power → The set of conditions creating the potential for persistent significant differential returns

Power is to core of strategy

strategy →A route to continuing Power in significant markets

Potential Value: Market Scale * Power

Operational Excellence is the basis of “persistent” (Intel, Netflix)

Strategy Statics

Chapter 1 - Scale Economies, Size Matters

Scale Economies: The quality of declining units costs with increased business size

Power Requires 2 components simultaneously present:

Benefit: Some condition, which yields material improvement in the cash flow of the power wielder via reduced cost, enhanced pricing and or decreased in investment requirements

Barrier: Some obstacle which engenders a competitors an inability and or unwillingness to engage in behaviors that overtime arbitrage this benefit

Scale Economies: Benefit, reduce costs, barriers, prohibitive costs of share gains

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Surplus Leader Margin (SLM): Profit margin the business with power can expect to achieve if profit is such if its competitor pricing is zero (Scale Economy Intensity * Scale Advantage)

Chapter 2 - Networks Economies

The value to the service of each customer is enhanced as new customers join the network.

Users value of the service depends on the presence of others.

Benefit: Can charge higher prices than its competitors, because of the higher value, as the result of more users.

Barrier Unattractive cost of gaining share. Value deficit of the follower can be so large that the price discount to upset this is unthinkable.

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Industries exhibiting network economies:

Winner take all. Tipping point, once a singe firm achieves leadership, game over.

Bound-ness: Bounded by the character of the network.

Decisive early product: early relative scaling is critical.

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Chapter 3 - Counter positioning

Upstart that develops a Superior business model

Business Models ability to challenge incumbent

Steady Accumulation of customers while incumbent remains paralyze

Benefit: New business model is superior to the incumbent model due to lower cost or ability to charge higher prices. Translates to higher product deliverables.

Barrier: Colleterial Damage. Innovators dilemma.

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Conditions:

New Superior approach is developed. Lower cost, or improves features

Products from new approach has good degree of substitutability from old approach

Incumbent has little prospect for power in the new business. Its a commodity, or assets mismatch.

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Collateral Damage Barrier in Counter Positioning

CP: Milk. Milk the existing business. Cannibalization risk

CP: History Slave → Cognitive Bias

CP: Job Security → Agency problem. Incentives misaligned.

Determinants

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5 Stages of Counter-positioning

Denial

Ridiculed

Fear

Anger

Capitulation

Developments Observed in counter positioning

For the Challenger

Rapid share gains

strong profitability

For the challenged

share loss

inability to act

management shake up

capitulation

Focus in converting strengths into barriers.

Chapter 4 - Switching Costs

Only to existing to customers, not potential

Keep developing new products

Definition: the value loss expected by a customer that will be incurred from switching to an alternate supplier for additional purchases

Types

Financial

Procedural - familiarity with the product, unpredictability, retraining, uncertainty. Organizational discontent. Costly errors

Relational: breaking of emotional bonds.

Switching Cost Multipliers

Non Exclusive.

Enhances competition

No benefit to customer acquisition

Strategy is to capture customers as soon as possible

Tactic is to develop more add-ons products.

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Chapter 5 - Branding

Branding is an asset that communicates information an invokes positive emotion on the customer leading to an increase interest to pay for the product.

Definition: Durable attribution of higher value for an objectively identical offering that arises from historical information about the seller

Benefit:

Charge higher price for there offering

Affective Valance: built up associations distinct of the value

Uncertainty reductions: Customer obtains peace of mind.

Barrier:

Hysteresis: Brand requires time, and long investment runaway. Trademarks

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Challenges and Characteristics:

Brand allusion

Releasing products that deviate from or damage the brand image

Seeking higher down market volumes can reduce affective valence damage the aura of exclusivity

Halston → jc penny

Reset Hysteresis cost

2. Counterfeiting

- Label is the power, not the product

- Flooding the market can diminish the brand

- Tiffany → Costco

3. Changes of computer preferences

- Customer preferences changes with demographics

- Nintendo → Family to Adult Customer change

4. Geographic Boundaries

Affective valance can be applied to a region but no the other

5. Narrowness

6. Non-exclusive type of power. Returns will be higher

7. Type of Goods.

- Magnitude:

- Consumer Goods → Identity

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Chapter 6 - Cornered Resource

Definition: Preferential access at attractive terms to a coveted asset that independently can add value

Benefit: Uncommon appealing product, superior deliverable, profitability

Access to patent, inputs control, manufacturing process.

Barrier: Fiat

Tests

Idiosyncratic

Non- Arbitraged → Brad Pitt compensation eats additional value

Transferable

Ongoing → Continue differential returns

Sufficient → Completeness

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Chapter 7 - Process Power

Benefits: Process Improvements yield better more profitable products

Barrier: Hysteresis → difficult to replicate, requires a long time. Complexity. Opacity

Definition: Embedded company organization and activity sets that enables lower costs and or superior products and can only be match with a strong commitment.

Strategy vs . Operational Excellence

Improvements that can be readily mimic are not strategic.

Rarity: Its tied to time.

Process Power: Operational Excellence + Hysteresis

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