Introduction
In the fast-paced world of business, understanding what makes a company successful in the long run is crucial. Hamilton Helmer's book "7 Powers" offers valuable insights into the strategic positions that can lead to extreme and durable success. This summary explores each of these seven powers through engaging case studies, providing practical knowledge for business leaders and entrepreneurs alike.
The concept of "power" in this context refers to a strategic position that gives a company the potential for extraordinary and lasting success. Each power consists of two key components: the benefit and the barrier. The benefit must outweigh any associated costs, while the barrier should be nearly insurmountable for competitors. Understanding these powers can help you make better decisions when challenging established competitors or identifying promising business ideas.
Let's dive into each of the seven powers and explore real-world examples that illustrate their effectiveness.
Power 1: Scale Economies
The Netflix Story
Netflix's journey from a DVD-by-mail service to a streaming giant exemplifies the power of scale economies. In 2007, Netflix made a pivotal move by entering the streaming market, foreseeing the limited lifespan of DVDs. This foresight wasn't a one-time occurrence; Netflix continued to innovate by venturing into original content production in 2012 with shows like "Lilyhammer" and "House of Cards."
The economics behind Netflix's strategy reveal the essence of scale economies. With over 30 million users at the time, Netflix could afford to spend $4.5 million per episode on "House of Cards," as the cost per user was relatively low. This demonstrates how scale economies work: as the product supply increases, the cost of doing business decreases.
The Power of Scale Economies
Scale economies constitute a powerful strategic position because:
- They represent the potential for long-term industry dominance.
- They create a significant barrier for competitors to overcome.
For instance, a newer streaming platform with only three million users would face a cost per user ten times higher than Netflix's when producing similar content. This prohibitive cost makes it extremely difficult for newcomers to compete effectively.
Power 2: Network Economies
The BranchOut Challenge
The story of BranchOut's attempt to challenge LinkedIn illustrates the power of network economies. In 2010, LinkedIn had over 70 million users, while Facebook boasted 608 million. BranchOut, recognizing LinkedIn's strong position, chose to leverage Facebook's massive user base by creating an app that integrated with the social media platform.
Initially successful, BranchOut branded itself as the bridge between personal and professional life. However, it ultimately failed to gain significant traction, peaking at about 17 million users before being acquired by Facebook and repurposed.
Understanding Network Economies
Network economies work when the user base itself provides the value. In other words, the users aren't just buying the product – they are the product. The larger the network, the more valuable it becomes to subscribers, advertisers, and investors.
The barrier to challenging a company with network economy power is formidable:
- The costs of building a comparable network are often insurmountable.
- Users are less likely to switch to a smaller network with fewer connections.
BranchOut's strategy of leveraging Facebook's existing network was clever, but it ultimately failed due to user preferences and the strength of LinkedIn's established professional network.
Power 3: Counter-Positioning
The Fall of Kodak
Kodak's story serves as a cautionary tale about the power of counter-positioning. Once a dominant force in the photography industry, Kodak built its success on consumers' need for film and proprietary technology. However, the company failed to adapt effectively to the digital photography revolution.
Despite recognizing the threat of digital technology and investing in research, Kodak couldn't find a viable path forward. The company lacked a competitive edge in digital photography and photo storage, leaving it vulnerable to new entrants in the market.
The Power of Counter-Positioning
Counter-positioning occurs when a new entrant provides a position that is both successful in finding a market and that the incumbent either can't or won't compete with. This power can be incredibly effective because:
- Incumbents may be unable to compete due to technological limitations or lack of expertise.
- Established companies might be unwilling to cannibalize their existing business models.
While counter-positioning can lead to a nearly unbeatable position, it's crucial to accurately read the market to avoid situations like BranchOut's failure.
Power 4: Switching Costs
The SAP Phenomenon
SAP's dominance in the enterprise resource planning (ERP) software market demonstrates the power of switching costs. Despite less-than-stellar reviews and customer dissatisfaction, a surprising 89% of surveyed users said they would continue to use SAP's services.
This paradox illustrates how switching costs can create a form of customer loyalty, even when satisfaction is low. Customers may be reluctant to switch due to:
- Time and training costs associated with adopting a new system
- Existing connections and integrations within the current platform
- Substantial investments in add-ons and upsell components
Leveraging Switching Costs
The power of switching costs lies in creating a sort of die-hard loyalty in your customer base. However, this is only beneficial if you can continue selling to those same customers. For SAP, this means focusing on selling optional components and upgrades to their existing user base.
Competitors face a significant challenge when trying to unseat a company with switching cost power. To overcome this barrier, they must:
- Demonstrate a clear advantage to making the switch
- Offer a product that is substantially superior to the incumbent's offering
While not insurmountable, overcoming switching costs requires careful thought, research, and a truly exceptional product.
Power 5: Branding
The Tiffany Premium
The power of branding is perfectly illustrated by Tiffany & Co.'s ability to command premium prices for their jewelry. In a 2005 experiment conducted by Good Morning America, a $6,600 ring from Costco was appraised higher than a similar $16,600 ring from Tiffany. Despite this, many consumers still willingly pay the Tiffany premium.
This phenomenon isn't just about status or clout; it's about trust. When making high-stakes purchases like engagement rings, people want assurance of authenticity and quality. Tiffany's brand power provides that peace of mind.
Building and Leveraging Brand Power
Branding power is achieved through:
- Long-term dedication to building a reputation
- Consistent delivery of quality products or services
- Creating emotional connections with consumers
The barrier for competitors challenging a strong brand is significant. It's nearly impossible to replicate the history, reputation, and emotional resonance of established brands like Tiffany, Nike, or Coca-Cola.
While creating a lasting brand is a long and difficult process, once achieved, it provides a nearly invincible market position.
Power 6: Cornered Resources
The Pixar Magic
Pixar's consistent success in producing hit animated films demonstrates the power of cornered resources. The company's journey began in 1983 when Steve Jobs acquired Lucasfilm's computer graphics group, renaming it Pixar and assembling a team of exceptional talents.
The "brain trust" formed by Steve Jobs, animation expert John Lasseter, and CGI scientist Ed Catmull became Pixar's cornered resource. This unique combination of skills and vision led to groundbreaking successes like "Toy Story" and subsequent hits.
Understanding Cornered Resources
The power of cornered resources comes from having exclusive access to something that others don't, such as:
- Specific patents or intellectual property
- Unique products or natural resources
- Exceptional talent or expertise
The benefit of cornered resources is twofold:
- It allows you to create superior products or services
- It can lower your production costs
The barrier for competitors is clear – they simply can't replicate what you have because they lack access to the same resources.
Power 7: Process Power
Toyota's Manufacturing Revolution
Toyota's rise from a minor player to a global automotive powerhouse illustrates the strength of process power. In the 1950s, Toyota's founder studied GM's manufacturing processes and identified numerous opportunities for optimization. Over time, Toyota developed a superior approach to car manufacturing that emphasized quality and efficiency.
Despite openly sharing their methods, other companies struggled to replicate Toyota's success. This is because Toyota's process power wasn't just about specific techniques; it was deeply embedded in the company's culture and organizational structure.
Harnessing Process Power
Process power involves:
- Developing unique, efficient methods of production or service delivery
- Embedding these processes into the organization's DNA
- Continuously refining and improving these processes
The barrier for competitors lies in their inability to truly replicate these processes within their own organizations. Like branding power, process power is built over time and can't be easily packaged or implemented externally.
Applying the 7 Powers in Business Strategy
Understanding these seven powers can provide valuable insights for both established businesses and aspiring entrepreneurs:
Identifying Opportunities: Recognize which powers are at play in your industry and where there might be gaps to exploit.
Assessing Competitive Advantage: Evaluate your own business to determine which powers you possess or could develop.
Strategic Decision-Making: Use the framework to guide decisions about market entry, product development, and resource allocation.
Risk Assessment: Understand the barriers you'll face when challenging incumbents with established powers.
Long-term Planning: Develop strategies to build and maintain powers that align with your business goals and market position.
Final Thoughts
The seven powers – Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resources, and Process Power – offer a comprehensive framework for understanding business success. By studying how successful companies have leveraged these powers and why others have failed to challenge them, we can gain valuable insights into effective business strategy.
Key takeaways include:
- Recognize when your business has a strategic advantage and how to leverage it.
- Understand the challenges of competing against established powers.
- Identify opportunities to develop or acquire new powers in your industry.
- Be prepared to pivot or seek new opportunities if your current position lacks strategic advantage.
Remember, while these powers can lead to extraordinary success, they are not easily attained or maintained. Building a truly powerful strategic position requires long-term commitment, innovation, and adaptability.
By applying the lessons from the seven powers, business leaders and entrepreneurs can make more informed decisions, identify promising opportunities, and build more resilient and successful organizations. Whether you're looking to challenge an incumbent or defend your market position, understanding these powers is crucial in today's competitive business landscape.