7 Powers

05 Oct 2025

Book	7 Powers: The Foundations of Business Strategy
Author	Hamilton Helmer
Published	October 27, 2016

Elegant = “simple but not simplistic”. Strategy must be elegant. Also relates to “Occam’s razor”.

A Strategy framework must be “simple but not simplistic.” If not simple, then concepts cannot be easily retained for day-to-day reference—usefulness is lost. If simplistic, then you risk missing something crucial.

There are typically only a few critical choices that lead to a “celebrated business” (ie businesses that achieve Power).

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. Get these crux choices wrong and you face a future of persistent pain, or even outright failure. To get them right, you must constantly attune your strategy to unfolding circumstances—ponderous planning cycles or handoffs to outside experts won’t get you there. This reality begs the question, “Can the intellectual discipline of Strategy make a difference in such adaptation?” After decades as a business advisor, active equity investor and teacher, my conclusion is, “Yes it can.

Upper-case Strategy is the study of possible lower-case strategies.

Strategy: the study of the fundamental determinants of potential business value

2 types of Strategy: a study of strategic state (statics) and a study of paths that can achieve strategic states (dynamics).

Strategy can be usefully separated into two topics: Statics—i.e. “Being There”: what makes Intel’s microprocessor business so durably valuable? Dynamics—i.e. “Getting There”: what developments yielded this attractive state of affairs in the first place?

Definition of “power”. Essentially equivalent to the business concept of a “moat” (ie a differentiated position that is hard to attack/ easy to defend).

Power: the set of conditions creating the potential for persistent differential returns

Lower-case strategy is a route to Power (or a moat).

strategy: a route to continuing Power in significant markets

Power = durable/ persistent differential returns

Persistence. The Fundamental Formula of Strategy specifies unchanging m —differential margins. Anyone who has done valuation work, M&A or value investing knows well that the bulk of a business’ value comes in the out years. For faster-growing companies, this reality becomes more accentuated. You won’t yield much from a few good years of positive m which then tapers off or disappears altogether.

For example, let’s use a common valuation model: if a company were growing at 10% per year, the next three years would account for only about 15% of its value. Remember, we’ve reserved the term “Power” for those conditions that create durable differential returns. In other words, we are trying to discern long-term competitive equilibria, not just next year’s results. Intel’s current $150B market cap reflects not only investors’ expectations of high returns but also those which continue for a very long time. Thus persistence proves a key feature in this value focus, and such persistence requires that any theory of Strategy is a dynamic equilibrium theory—it’s all about establishing and maintaining an unassailable perch. Strategy requires you identify and develop those rare conditions which produce a value sinecure immune to competitive onslaught. Intel eventually achieved this in microprocessors but could never get there in memories

Achieving Power involves a Benefit, which is the differential returns, and a Barrier, a defensibility of those returns (ie hard for a competitor to replicate or achieve).

Power is as hard to achieve as it is important. As stated above, its defining feature ex post is persistent differential returns. Accordingly, we must associate it with both magnitude and duration.

Benefit. The conditions created by Power must materially augment cash flow, and this is the magnitude aspect of our dual attributes. It can manifest as any combination of increased prices, reduced costs and/or lessened investment needs.

Barrier. The Benefit must not only augment cash flow, but it must persist, too. There must be some aspect of the Power conditions which prevents existing and potential competitors, both direct and functional, from engaging in the sort of value-destroying arbitrage Intel experienced with its memory business. This is the duration aspect of Power

Power tends to be acheived in step functions, rather than incrementally. This is also important/ interesting because it’s diametrically opposed to agile/ lean methods to product development.

My many years of advising companies and making value-driven equity bets has made it crystal clear to me that the ascent of great companies is not linear but more a step function. There are critical moments when decisions are made that inexorably shape the company’s future trajectory. To get these crux moves right, you must flexibly adapt your strategy to emerging circumstances. The goal of this book is ambitious: to enable such flexibility by making the discipline of Strategy relevant to you in those high-flux formative moments.

Power #1: Scale economies

Scale Economies: A business in which per unit cost declines as production volume increases

Netflix as an example of scale economies. They could only produce exclusive/ original content at a certain scale, which would be prohibitly expensive for new entrants.

Netflix’s streaming business is the driver of its remarkable rise to its double-digit billion market capitalization. Getting there has required the relentless pursuit of excellence in every corner of the company. Such dedication and focus is essential for creating value, but it is not sufficient. In addition, Netflix’s success could only emerge once they had crafted a route to continuing Power in significant markets—in other words, a strategy. The cornerstone of this strategy was moving to exclusives and originals which enabled them to wield their scale as a source of profound leverage.

Such Scale Economies fully satisfy our definition of Power: 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.

Power #2: Network Economies

Network Economies definition: A business in which the value realized by a customer increases as the installed base increases.

Characteristics of network economies

Industries exhibiting Network Economies often exhibit these attributes:

Winner take all. Businesses with strong Network Economies are frequently characterized by a tipping point: once a single firm achieves a certain degree of leadership, then the other firms just throw in the towel. Game over—the P&L of a challenge would just be too ugly. For example, even a company as competent and with as deep pockets as Google could not unseat Facebook with Google+.

Boundedness. As powerful as this Barrier is, it is bounded by the character of the network, something well-demonstrated by the continued success of both Facebook and LinkedIn. Facebook has powerful Network Economies itself but these have to do with personal not professional interactions. The boundaries of the network effects determine the boundaries of the business.

Decisive early product. 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. Facebook’s trumping of MySpace is a good example.

Power #3 Counter-postioning

Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.

Specific characteristics of counter-postitioning

1. An upstart who developed a superior, heterodox business model.
2. That business model’s ability to successfully challenge well-entrenched and formidable incumbents.
3. The steady accumulation of customers, all while the incumbent remains seemingly paralyzed and unable to respond.

These elements were not unique to Vanguard—they were pieces of an oft-repeated story. Think of Dell vs. Compaq, Nokia vs. Apple, Amazon vs. Borders, In-N-Out vs. McDonalds, Charles Schwab vs. Merrill Lynch, Netflix vs. Blockbuster, etc. But nearly always, these featured the same outcome: the incumbent responds either not at all or too late.

Counter-positioning vs lower-cost entrant

More generally this situation can be characterized by three conditions:

1. A new superior approach is developed (lower costs and/or improved features).
2. The products from the new approach exhibit a high degree of substitutability for the products from the old approach. In this case, as semiconductor topologies shrunk, digital imaging came to completely supplant chemical imaging.
3. The incumbent has little prospect for Power in this new business: either the industry economics support no Power (a commodity), or the incumbent’s competitive position is such that attainment of Power is unlikely.

Kodak’s formidable strengths had little relevance to semiconductor memory, and those new products were on an inevitable path to commodization. Such reinvention is quite common, as are the associated, and often unfair, castigations of the incumbent’s management failures. “The gales of destruction” was Schumpeter’s famous turn of phrase for such occurrences. But this is not Counter-Positioning.

Power #4: Switching Cost

Switching Costs definition: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.

Switching Costs arise when a consumer values compatibility across multiple purchases from a specific firm over time. These can include repeat purchases of the same product or purchases of complementary goods. 39 Benefit. A company that has embedded Switching Costs for its current customers can charge higher prices than competitors for equivalent products or services. 40 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. Barrier. To offer an equivalent product, 41 competitors must compensate customers for Switching Costs. The firm that has previously roped in the customer, then, can set or adjust prices in a way that puts their potential rival at a cost disadvantage, rendering such a challenge distinctly unattractive. Thus, as with Scale Economies and Network Economies, the Barrier arises from the unattractive cost/benefit of share gains for the challenger.

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

The building of such product portfolios can serve to boost all three categories of Switching Costs. Not only does it extend the revenue coverage of the Switching Costs (Financial), but it often increases their intensity by making the prospect of disentanglement more and more forbidding (Procedural). A high level of integration into customer operations, and the extensive training that demands, can also further disincentivize such disentanglement. This sort of training also has the potential of building emotional bonds to the current supplier (Relational)

Power #5: Brand

Branding definition: 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. Benefit. A business with Branding is able to charge a higher price for its offering due to one or both of these two reasons: 1. Affective valence. The built-up associations with the brand elicit good feelings about the offering, distinct from the objective value of the good. For example, Safeway’s cola may be indistinguishable from Coke’s in a blind taste test, but even after revealing the result, the taste tester remains willing to pay more for Coke. 2. Uncertainty reduction. A customer attains “peace of mind” knowing that the branded product will be as just as expected. Consider another example: Bayer aspirin. Search for aspirin on Amazon.com and you will see a 200 count of Bayer 325 mg. aspirin for $9.47 side-by-side with a 500 count of Kirkland 325 mg. aspirin for $10.93. So Bayer has a price per tablet premium of 117%. Some customers still would prefer the Bayer because of diminished uncertainty: Bayer’s long history of consistency makes customers more confident that they are getting exactly what they want. Note that the Benefit from Branding does not depend on prior ownership, as with Switching Costs. Barrier. A strong brand can only be created over a lengthy period of reinforcing actions (hysteresis ), which itself serves as the key Barrier.

Brands can be eroded when companies behave inconsistently with their image or “valence”

Brand Dilution. Firms require focus and diligence to guide Branding over time and ensure that the reputation created remains consistent in the valences it generates. Hence, the biggest pitfall lies in diminishing the brand by releasing products which deviate from, or damage, the brand image. Seeking higher “down market” volumes can reduce affective valence by damaging the aura of exclusivity, weakening positive associations with the product

Type of Good. Only certain types of goods have Branding potential (more on this in the Appendix on Surplus Leader Margin) as they must clear two conditions: 1. Magnitude: the promise of eventually justifying a significant price premium. a. Business-to-business goods typically fail to exhibit meaningful affective valence price premia, since most purchasers are only concerned with objective deliverables. Consumer goods, in particular those associated with a sense of identity, tend to have the purchasing decision more driven by affective valence. Here’s the reason: in order to associate with an identity, there must be some way to signal the exclusion of alternative identities. b. 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. Branded medicine formulations, for example, are identical to those of generics, yet garner a significantly higher price. 2. Duration: a long enough amount of time to achieve such magnitude. If the requisite duration is not present, the Benefit attained will fall prey to normal arbitraging behavior

Power #6: Cornered Resource

Cornered Resource definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.

Talent as an example of Cornered Resource

This Power type is given a name in Economics: Cornered Resource. The services of this cohesive group of talented, battle-hardened veterans were available only to Pixar; they had it cornered. To put this into our 7 Powers framework: Benefit. In the Pixar case, this resource produced an uncommonly appealing product—“superior deliverables”— driving demand with very attractive price/volume combinations in the form of huge box office returns. No doubt—this was material (a large m in the Fundamental Equation of Strategy). In other instances, however, the Cornered Resource can emerge in varied forms, offering uniquely different benefits. It might, for example, be preferential access to a valuable patent, such as that for a blockbuster drug; a required input, such as a cement producer’s ownership of a nearby limestone source, or a costsaving production manufacturing approach, such as Bausch and Lomb’s spin casting technology for soft contact lenses. Barrier. The Barrier in Cornered Resource is unlike anything we have encountered before. You might wonder: “Why does Pixar retain the Brain Trust?” Any one of this group would be highly sought after by other animated film companies, and yet over this period, and no doubt into the future, they have stayed with Pixar. Even during the company’s rocky beginning, there was a loyalty that went beyond simple financial calculation. To illustrate: in 1988, long before Disney began its association with Pixar, Lasseter won an Academy Award for his Pixar short Tin Toy, prompting Disney CEO Michael Eisner and Disney Chairman Jeffrey Katzenberg to try to recruit their former employee back into the Disney fold. Lasseter demurred: “I can go to Disney and be a director, or I can stay here and make history.”

So in Pixar’s case, the Barrier was personal choice. In the case of spin casting technology, it is patent law, and in the case of cement inputs, it is property rights. Our general term for this sort of barrier is “fiat”; it is not based on ongoing interaction but rather comes by decree, either general or personal. In a case of the cart driving the donkey, it was Lasseter’s commitment to Pixar that helped convince Katzenberg to do the three-picture deal with Pixar in 1991. Likewise, Disney’s later CEO, Bob Iger, would decide to acquire Pixar only after realizing such an acquisition would be the sole means of bringing Pixar’s talent to Disney’s flagging animation group. The subsequent revival of Disney Animation affirmed his wisdom.

Tests of a cornered resource

The Five Tests of a Cornered Resource The Power hurdle is high: to qualify, an attribute must be sufficiently potent to drive high-potential, persistent differential margins (m » 0), with operational excellence spanning the gap between potential and actual. With an enterprise like Pixar, there are numerous resources critical to success, and sorting through this multiplicy to try to isolate the Power source can be a challenge. Over the years I have found that five screening tests for a Cornered Resource often help in this process.

1. Idiosyncratic. If a firm repeatedly acquires coveted assets at attractive terms, then the proper strategy question is, “Why are they able to do this?” For example, if one discovered that Exxon was able to persistently gain the rights to desirable hydrocarbon properties, then understanding their path to access would be the more crux issue. Perhaps their relative scale allows them to develop better discovery processes? If so, their discovery processes are the Cornered Resource, the true source of Power, and it would be misleading to simply cite only the acquired leases
2. Non-arbitraged. What if a firm gains preferential access to a coveted resource, but then pays a price that fully arbitrages out the rents attributable to this resource? In this case, it fails the differential return test of Power. Consider movie stars. A turn by Brad Pitt would probably advance box office prospects, therefore proving “coveted,” but his compensation captures much or all of this additional value and so fails the Power test. Likewise, although the Pixar Brain Trust is highly compensated, the amounts do not come close to matching their value. I was an investor in Pixar when it was public, and I realized a very nice return over the life of my investment, until the Disney acquisition.
3. Transferable. If a resource creates value at a single company but would fail to do so at other companies, then isolating that resource as the source of Power would entail overlooking some other essential complement beyond operational excellence. The word “coveted” in the definition conveys the expectation by many that the asset will create value. In the lead-up to his acquisition of Pixar, Bob Iger had an epiphany: the legacy of Disney’s animated characters formed the core of the corporation, and only the Pixar team could revive that legacy. This motivated his purchase of Pixar, as well as his decision to place Catmull and Lasseter at the helm of Disney Animation, which resulted in the meteoric revival of that storied division. Such a comeback would never have been possible without Catmull and Lasseter in key decision-making roles, and the Brain Trust on call, and it ultimately vindicated the steep price paid by Disney. This resource was transferable.
4. Ongoing. In searching for Power, a strategist tries to isolate a causal factor that explains continued differential returns. There’s a contrapositive to this, too: one would then expect differential returns to suffer should the identified factor be taken away. Clearly this perspective has bearing on the identification of a Cornered Resource. There may be many factors that proved formative in developing Power but whose contributions then became embedded in the business. For example, Post-it notes emerged as a highly profitable business for 3M only because Dr. Spenser Silver tirelessly sought commercial application for his not-so-sticky glue. Once the Post-It application was established, the business’ differential returns were not predicated on him and his unique glue, but rather a different— in part, at least—Cornered Resource: U.S. Patent 3,691,140. U.S. Patent 5,194,299 and the Post-It Trademark. At Pixar, Steve Jobs offered a similar case in point. He was essential to Pixar’s ascendancy—viewing him simply as patient money utterly understates his contribution—but his importance diminished as Pixar developed, and eventually his value became embedded in the company to the point where his continued presence was no longer needed to drive differential returns. The Brain Trust, on the other hand, endures as the sustaining force behind their success.
5. Sufficient. The final Cornered Resource test concerns completeness: for a resource to qualify as Power, it must be sufficient for continued differential returns, assuming operational excellence. Frequently, as I have observed, many will mistake specific leadership for a Cornered Resource; in fact, it fails this sufficiency test. For example, I am a fan of the abilities of George Fisher. He did a fine job leading Motorola. When he took the helm at Kodak, there were high hopes that his presence would lead to a revival of the company—i.e. that he was a Cornered Resource. The rough patch that followed was, in my view, not his fault; it was merely an indication of the hopeless cul-de-sac created by the company’s focus on chemical film in a solid-state age. These difficulties, however, yield an insight: Fisher was not a Cornered Resource, and the Motorola success involved other complements to his talent that were not later present at Kodak

Businesses are not just their products/ services but their abilities to produce/ develop/ improve those products (ie same distinction as production vs production capacity)

Businesses encompass not just products and services, but the abilities that enable their efficient production. There are immediate abilities, specific to current output, and higher-level abilities, which circumscribe the company’s domains of competitiveness. There are even further stages beyond these which shape the ways in which these higher-level abilities may transform over time. Core competencies, distinctive competencies, routines, capabilities and dynamic capabilities all figure into this conversation.

Power #7: Process Power

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

Toyota Production System (TPS) as an example of Process Power

The TPS is not what it seems. On the surface, it consists of a fairly straightforward variety of interlocking procedures, such as justin-time production, kaizen (continuous improvement), kanban (inventory control), andon cords (devices to allow workers to stop production and identify a problem so it can be fixed). Observing all this, GM workers naturally assumed you could clone TPS by copying these procedures. It turns out, though, that these production techniques merely manifest some deeper, more complex system, as illustrated by the frustration of Ernie Shaefer, the manager of the GM plant in Van Nuys, California: “…what’s different when you walk into the NUMMI plant? Well, you can see a lot of things different. But the one thing you don’t see is the system that supports the NUMMI plant. I don’t think, at that time, anybody understood the large nature of this system…. You know, they never prohibited us from walking through the plant, understanding, even asking questions of some of their key people. I’ve often puzzled over that—why they did that. And I think they recognized, we were asking all the wrong questions. 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?” So despite best intentions, and many millions of investment dollars, achieving Toyota-like outcomes proved an elusive medium-term goal for GM. Apparently there existed a Barrier of some sort. Combine this with the twin Benefits of cost efficiency and dramatic quality improvements and there remains only one conclusion—Toyota had tapped some elusive source of Power

The benefit of Process Power is the speed/ velocity of product development at low cost and high quality. The barrier seems to be the difficulty of achieving or replicating this combination of speed, efficiency and quality. Often this type of process is achieved through iteration and the resulting tacit/ implicit knowledge.

Benefit. A company with Process Power is able to improve product attributes and/or lower costs as a result of process improvements embedded within the organization. For example, Toyota has maintained the quality increases and cost reductions of the TPS over a span of decades; these assets do not disappear as new workers are brought in and older workers retire.

Barrier. The Barrier in Process Power is hysteresis: these process advances are difficult to replicate, and can only be achieved over a long time period of sustained evolutionary advance. This inherent speed limit in achieving the Benefit results from two factors:

1. Complexity. Returning to our example: automobile production, combined with all the logistic chains which support it, entails enormous complexity. If process improvements touch many parts of these chains, as they did with Toyota, then achieving them quickly will prove challenging, if not impossible.
2. Opacity. The development of TPS should tip us off to the long time constant inevitably faced by would-be imitators. The system was fashioned from the bottom up, over decades of trial and error. The fundamental tenets were never formally codified, and much of the organizational knowledge remained tacit, rather than explicit. It would not be an exaggeration to say that even Toyota did not have a full, top-down understanding of what they had created—it took fully fifteen years, for instance, before they were able to transfer TPS to their suppliers.

Strategy dynamics for a subset of the 7 powers

Scale Economies. With this first Power type, you must simultaneously pursue a business model that promises Scale Economies (industry economics), while at the same time offering up a product differentially attractive enough to pull in customers and gain relative share (competitive position). Network Economies. Here the needs are similar to Scale Economies, except that installed base, rather than sales share, is the goal.

Cornered Resource. You must secure the rights to a valuable resource on attractive terms. This often comes from having developed that resource in the first place and then gaining ownership of it, the most common avenue being a patent award for research developments.

Branding. Over an extensive period of time, you make the consistent creative choices which foster in the customer’s mind an affinity that goes beyond the product’s objective attributes.

Counter-Positioning. You pioneer a new, superior business model that promises collateral damage for incumbents if mimicked. Switching Costs. With Switching Costs, you must first attain a customer base, meaning the same new-product requirements demanded of Scale and Network Economies factor in here as well.

Process Power. You evolve a new complex process which renders itself inimitable within a reasonable period and yet offers significant advantages over a longer period of time. We are covering a lot of ground here, but you will notice a common thread: the first cause of every Power type is invention, be it the invention of a product, process, business model or brand

Planning rarely produces Power. It comes about typically as a result of innovation.

Planning rarely creates Power. It may meaningfully boost Power once you have established it, but if Power does not yet exist, you can’t rely on planning. Instead you must create something new that produces substantial economic gain in the value chain

The role of invention in acheiving Power

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. Had Netflix invented the streaming product without introducing originals, they would have been left with an easily imitated commodity business. There would have been no Power and little value in the business. This is where the 7 Powers figures in. In the midst of invention, you need to be ever watchful for Power openings. The 7 Powers framework focuses your attention on the critical issues and increases the odds of a favorable outcome. This is the most Strategy can accomplish. It’s not everything, certainly, but it’s a lot

Bias towards action, risk taking and obsessive focus (as opposed to market over-analysis) are more likely to lead to invention and subsequently Power

Action, creation, risk—these lie at the root of invention. Business value does not start with bloodless analytics. Passion, monomania and domain mastery fuel invention and so are central

So if you want to develop Power, your first step is invention: breakthrough products, engaging brands, innovative business models. Had Netflix invented the streaming product without introducing originals, they would have been left with an easily imitated commodity business. There would have been no Power and little value in the business.

This is where the 7 Powers figures in. In the midst of invention, you need to be ever watchful for Power openings. The 7 Powers framework focuses your attention on the critical issues and increases the odds of a favorable outcome. This is the most Strategy can accomplish. It’s not everything, certainly, but it’s a lot.

First invent, then scale. Also invention can often lead to larger scale.

By looking through the lens of the 7 Powers, we have come to a vital insight: Power arrives only on the heels of invention. If you want your business to create value, then action and creativity must come foremost. But success requires more than Power alone; it needs scale.

Recall the Fundamental Equation of Strategy: Value = [Market Size] * [Power]

In Statics, rightfully, we focused solely on Power and took market size as a given. Not so with Dynamics. Recall that Netflix’s invention (streaming) not only created an opportunity for Power but created the streaming market as well. Both factors must be present to bring about value increases of 100x. Invention has a powerful one-two value punch: it both opens the door for Power and also propels market size

Invention drives a favorable change in system economics—you get more for less. The resulting gain in the end will be split somehow between your company and other segments of the value chain. The 7 Powers is all about making sure that you get some of the increase. But it is the gain customers experience that will shape the market size. In the Netflix streaming case, if customers hadn’t responded favorably to this new delivery mode, then all opportunities for Power would have come to naught.

New, innovative products must have “compelling value”, that is be a lot better than existing alternatives. In general, the hueristic is 10X but that may vary by industry/ product type.

The product differences must be dramatic in order to achieve that “gotta have” response. Just how much is enough? It is tempting to try to attach a number. Andy Grove, the formidable Intel CEO, did just that, suggesting that 10x was in the right ballpark. And it was probably dead-on, at least for the business he was in—semiconductors. But it misses the mark elsewhere. For example, a 50% increase in photovoltaic efficiency, or a battery with double the existing charge-storage density, would both likely clear the bar. 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

Success often requires long-term/ future-looking commitments/ bets, which can be challenging for larger organizations with established business models.

Success requires that a company stay in the game, appropriately morphing to suit the requirements of the situation. Typically this takes a long time—five years, in Adobe’s case—and involves many twists and turns. High testosterone commitments, with all the attendant weight of expectation, should be avoided. If the new business is a standalone one, such commitments will lead to unsustainable external funding requirements, and if the new business has been created by an existing one, such commitments will give rise to the corporate antibodies ever lurking to neutralize new initiatives.

Paths to products with “compelling value”

There are three distinct paths to creating compelling value. Each has different tactical needs, so it is instructive to think of them separately. First is Capabilities-led compelling value : when a company tries to translate some capability into a product with compelling value

A second path to compelling value is customer-led compelling value. In this case, many players spy an unmet need, but no one knows how to satisfy it

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

In cases of competitor-led compelling value, the uncertainty is two-fold: (1) Will the new features be differentially attractive enough to drive share gains? And (2) will the existing competitors be sufficiently delayed in their response? Competitor-led origination often requires gut-wrenching big bang commitments up front. The time constants are less, and competitive response far more imminent. Often, you must make formal arrangements with providers of complements ahead of time—they will not sign up without such commitments

Relationship between “value axiom”, benefit/ barriers and the fundamental equation of strategy

1. The Value Axiom. Strategy has one and only one objective: maximizing potential fundamental business value. Commentary. This is an assumption not a proof. My experience is that this narrowing of the scope of Strategy and strategy has a profoundly positive impact on the usefulness of the discipline. Note that this is fundamental not speculative value. Further it is about potential value. Realizing that value requires operational excellence.
2. The 3 S’s. Power, the potential to realize persistent differential returns, is the key to value creation. 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 Commentary. In this book I have focused on Benefit + Barrier which has a one-to-one mapping to the 3 S’s (Superior + Significant = Benefit and Sustainable = Barrier). However, in the field, the tripartite 3 S test of Power proves useful additionally because, since it calls out “Significant” separately, it makes materiality explicit. For example, businesses often tout network effects but, when looked at carefully, they are not material and therefore do not qualify as Power
3. The Fundamental Equation of Strategy. Value = M * g * s * m Commentary. The interpretation of this is that Value = Market Size * Power. M is the current market size, g is a discounted growth factor for the market, s is long-term average market share and m is long-term average differential margins (the profit margin above that needed to return the cost of capital). I have found that the explicit tying of Strategy concepts to the exact determinants of the net present value of free cash flow puts to rest a lot of fuzzy thinking about the relationship between Strategy and value. It has also helped me as an active equity investor. It is important that s and m are long-term equilibrium values. Short-term movements in these have little impact on fundamental value

I have made the foundational assumption that Strategy and strategies are about only one thing: potential fundamental business value. I refer to this as the Value Axiom, and it is the bedrock of Power Dynamics and the 7 Powers. This assertion represents an intentional narrowing on my part. The last several decades have proven to me that much acuity and usefulness results from adopting the Value Axiom. 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. At that moment, the cash flow future makes a step-change in transparency. 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

Invention => Benefit => Barrier => Power

The first cause of a strategy is invention. Tectonic changes in value take place when Power is first established with an acceptable level of certainty. Looking at the seven Power types we can see that this always involves an invention, whether that be an invention of product, business model, process or brand. Eventually such inventions lead to a Benefit as expressed in a product attribute, be that features, price or reliability. The marker for sufficiency of such a Benefit is usually “compelling value,” eliciting a “gotta have” response.

Power is only acheived with Barriers. Benefits are not sufficient

Chapter 8 demonstrated the vital role of invention in implanting Benefits and forging the potential for Power. But as I have discussed throughout this book, 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. Thus, the decisive attainment of Power often syncs up with the establishment of the Barrier

Strategy is maximally useful on the tails of invention, where it acts as a compass in all of the uncertainty

Strategy (the discipline) can only contribute in this period if it serves as a strategy compass to guide on-the-ground “inventors,” increasing their likelihood of finding a path to Power. To serve as such a cognitive guide, a Strategy framework must be simple but not simplistic. That is the objective of the 7 Powers