7 Powers

1. Power is the key to creating lasting business value

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

Power drives value. In business, Power is the ability to generate sustained, above-average profits despite competitive pressures. It consists of two elements: a Benefit that materially improves cash flow, and a Barrier that prevents competitors from arbitraging away this advantage. The Fundamental Equation of Strategy illustrates this concept:

Value = Market Size * Power

Where:

• Market Size = Current market size * Discounted growth factor
• Power = Long-term average market share * Long-term average differential margins

Companies without Power are vulnerable to competitive forces that erode profitability over time. Intel's contrasting experiences in memory chips (no Power) and microprocessors (significant Power) demonstrate the critical importance of establishing and maintaining Power for long-term success.

2. The 7 Powers: Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power

The 7 Powers framework covers all attractive strategic positions, it is not simplistic, while its unitary focus on Power makes it sufficiently simple to be learned, retained and used by any business person.

Understanding the 7 Powers. Each Power type represents a unique way to create and sustain competitive advantage:

1. Scale Economies: Larger production volumes lead to lower per-unit costs
2. Network Economies: Value increases as more users join the network
3. Counter-Positioning: A new, superior business model that incumbents can't easily adopt
4. Switching Costs: Customers face significant costs when changing suppliers
5. Branding: Customers willingly pay more for a perceived higher value
6. Cornered Resource: Exclusive access to a valuable asset
7. Process Power: Superior internal processes that are difficult to replicate

These Powers are not mutually exclusive; companies can leverage multiple types simultaneously. For example, Netflix combined Scale Economies and Network Economies to dominate the streaming market.

3. Strategy must provide a route to continuing Power in significant markets

strategy: a route to continuing Power in significant markets

The Mantra of strategy. A successful strategy must fulfill three key requirements:

1. Route: A clear path to establishing and maintaining Power
2. Continuing: The ability to sustain Power over time
3. Significant markets: Targeting markets large enough to generate substantial value

This definition emphasizes that strategy is not just about short-term gains or operational excellence. Instead, it focuses on creating durable competitive advantages in markets with significant potential. Companies must continuously adapt and layer on different sources of Power as their business progresses to maintain their strategic position.

Examples of successful strategies:

• Apple's ecosystem of devices and services
• Amazon's relentless focus on customer experience and logistics
• Google's dominance in search and digital advertising

4. Invention is the mother of Power and drives market size

"'Me too' won't do" guides the creation of Power.

Invention fuels growth and Power. The first step in establishing Power is creating something new and valuable. This can be a product, process, business model, or brand. Invention serves two crucial purposes:

1. Opens the door to Power by creating unique advantages
2. Drives market size by offering compelling value to customers

There are three paths to achieving compelling value:

1. Capabilities-led: Leveraging existing strengths to create new products (e.g., Adobe Acrobat)
2. Customer-led: Solving a known but unmet customer need (e.g., Corning's fiber optics)
3. Competitor-led: Offering a significantly better alternative to existing solutions (e.g., Sony PlayStation)

Successful inventions often elicit a "gotta have" response from customers, driving rapid adoption and market growth. This initial period of high flux and uncertainty is critical for establishing certain types of Power.

5. The Power Progression: Timing is crucial for establishing different types of Power

Different Power types present the opportunity for first establishing a Barrier at different times in the development of your business.

The Power Progression framework. This tool helps businesses understand when different types of Power become available:

1. Origination (pre-takeoff):

   • Counter-Positioning
   • Cornered Resource

2. Takeoff (rapid growth):

   • Scale Economies
   • Network Economies
   • Switching Costs

3. Stability (slower growth):

   • Process Power
   • Branding

Understanding this progression is crucial for recognizing and seizing opportunities at the right time. For example, Scale Economies must be established during the takeoff phase when market share can be gained at favorable terms. Missing this window can result in permanent disadvantage, as seen in Apple's fumble with the Apple III during the critical takeoff period of personal computers.

6. Operational excellence is necessary but not sufficient for lasting success

Operational excellence by itself is not enough.

Beyond operational excellence. While crucial for day-to-day success, operational excellence alone does not guarantee long-term profitability. This is because improvements in operations can often be imitated by competitors, leading to industry-wide adoption and erosion of any temporary advantages.

Key distinctions:

• Operational excellence: Continuously improving existing processes and products
• Strategic advantage: Creating and maintaining Power that resists competitive arbitrage

However, in high-flux situations like the takeoff stage, excellent execution can be highly strategic. Intel's Operation Crush, which secured the IBM PC contract, demonstrates how operational excellence can be decisive in establishing long-term Power during critical periods.

Areas where operational excellence is crucial but not sufficient:

• Product quality improvements
• Cost-cutting initiatives
• Customer service enhancements
• Supply chain optimizations

7. Leadership plays a crucial role in establishing Power and navigating high-flux situations

In moving from Statics to Dynamics, scope is broadened considerably.

Leadership in dynamic environments. While good management cannot overcome a lack of Power in stable markets, leadership is fundamental in establishing Power during high-flux periods. Leaders must:

1. Recognize emerging opportunities for Power
2. Make bold decisions in uncertain environments
3. Rally the organization to execute effectively during critical periods

Examples of crucial leadership moments:

• Bob Noyce's decision to pursue microprocessors at Intel
• Andy Grove's aggressive Operation Crush to secure the IBM PC contract
• Reed Hastings' pivot to streaming and original content at Netflix

In these dynamic situations, leaders must craft strategy through intelligent adaptation over extended periods, facing daunting uncertainty. This process is more akin to entrepreneurship than planning, requiring a keen understanding of the 7 Powers and the ability to recognize and seize fleeting opportunities for establishing Power.

Last updated: September 4, 2024