7 powers, p.1
7 Powers, page 1
PRAISE FOR 7 POWERS
Hamilton Helmer is the best kind of big thinker—he offers great insights that you can turn into real world action. At Spotify the 7 Powers are widely used as we discuss new initiatives. His distillation of the key types of strategic power, how to find them, how to leverage them, and how to maintain them is a fantastic tool set for companies at every stage.
DANIEL EK, CEO AND CO-FOUNDER OF SPOTIFY
The forces of competition are just incredibly strong. Everyone is trying to eat your lunch, and if you don’t read 7 Powers you’re going to die a lot sooner.
REED HASTINGS, CEO AND CO-FOUNDER OF NETFLIX
7 Powers lays out a clear, compelling and insightful framework for thinking about the persistent sources of competitive advantage. Helmer draws on three decades of experience to break down how companies establish power and shape their industries, illustrating at every turn with entertaining and illuminating examples.
JONATHAN LEVIN, PHILIP H KNIGHT DEAN,
STANFORD GRADUATE SCHOOL OF BUSINESS
Hamilton Helmer understands that strategy starts with invention. He can’t tell you what to invent, but he can and does show what it takes for a new invention to become a valuable business.
PETER THIEL, ENTREPRENEUR AND INVESTOR
7 Powers provides vital guidance for any business person developing strategy. I have known Hamilton for more than a decade since his time as a strategy advisor to Adobe, and I am delighted that he is now sharing his original and compelling business insights.
BRUCE CHIZEN, FORMER CEO OF ADOBE
Hamilton is a deep thinker who makes a compelling connection between passion and good business. His ideas are well thought out, wise, and often challenging. I always look forward to what he has to say.
PETE DOCTER, PIXAR DIRECTOR AND TWO-TIME
ACADEMY AWARD WINNER FOR UP and Inside Out
Making a small number of decisions wisely is far more important than making a lot of decisions correctly. Hamilton Helmer explains exactly how the leaders of the world’s most successful businesses get that small number just right.
MIKE MORITZ, CHAIRMAN OF SEQUOIA CAPITAL
Silicon Valley correctly places enormous value on execution and on culture. However, I think this sometimes leads to insufficient importance being placed on strategy. Hamilton Helmer’s deeply incisive work will hopefully help correct that.
PATRICK COLLISON, CEO AND CO-FOUNDER OF STRIPE
7 Powers is a highly innovative approach to understanding some of the key underlying drivers of company value and capturing ideas that certainly are not very well understood in the markets. And the result has been one of the most exceptional and sustained alpha records I’ve ever seen.
BLAKE GROSSMAN, FORMER CEO OF BARCLAYS GLOBAL INVESTORS
This book is a must-read for anyone starting or growing a business. It lays out an elegant and insightful framework that really helped inspire my thinking about building and maintaining strategic advantage in a competitive landscape.
DAPHNE KOLLER, CO-FOUNDER AND
FORMER PRESIDENT OF COURSERA
A startup must have a compelling way of getting traction to be investable. Otherwise, it’s simply a bleeding hole that burns through money. 7 Powers rigorously lays out the strategies for a company to get this traction and details what it takes to get there. Anyone starting a business should read it.
SEAN O’SULLIVAN, FOUNDER AND MANAGING PARTNER, SOSV
A master in the discipline of strategy, Hamilton has condensed 40 years of thought and practice into a single readable book. Read it and to your benefit you will see the 7 Powers everywhere you look.
MARK BAUMGARTNER, CHIEF INVESTMENT OFFICER,
INSTITUTE FOR ADVANCED STUDY
Mentor has benefited from a continuing consulting relationship with Hamilton for the better part of 20 years and has incorporated many of his ideas and principles into the core of our strategy. 7 Powers consolidates those ideas and principles into a powerful framework and vocabulary to describe and permit analysis of where a company stands in its competitive space. It’s a powerful work.
GREG HINCKLEY, PRESIDENT, MENTOR GRAPHICS CORPORATION
7 Powers
The Foundations of Business Strategy
Hamilton Helmer
Foreword by Reed Hastings
Copyrighted Material
7 Powers: The Foundations of Business Strategy
Copyright © 2016 by Hamilton W. Helmer. All rights reserved.
No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without prior written permission from the publisher, except for the inclusion of brief quotations in a review.
For information about this title or to order other books and/or electronic media, contact the publisher:
Deep Strategy LLC
1 First Street, Los Altos, CA 94022
7powers.com
ISBNs: 978-0-9981163-0-3 (Hardbound)
978-0-9981163-1-0 (Paperback)
978-0-9981163-2-7 (Kindle)
Printed in the United States of America
Cover and Interior design: Irene Young and Carol Ehrlich
TABLE OF CONTENTS
Foreword by Reed Hastings
Introduction
Part I—Strategy Statics
Chapter 1: Scale Economies
Chapter 2: Network Economies
Chapter 3: Counter-Positioning
Chapter 4: Switching Costs
Chapter 5: Branding
Chapter 6: Cornered Resource
Chapter 7: Process Power
Part II—Strategy Dynamics
Chapter 8: The Path to Power
Chapter 9: The Power Progression
Acknowledgments
Bibliography
Chapter Notes
FOREWORD
BY REED HASTINGS
Hard to imagine, but my relationship with Hamilton began purely as a courtesy. Among the many entries on my calendar for Sept. 29, 2004 was a visit from him and Larry Tint, founders of Strategy Capital, a hedge fund investor in Netflix. At that time Netflix was a small DVD-by-mail rental company, and we had only gone public two and a half years before.
Typically, in meetings of this type, investors will suss out management, probe for additional color on the company. They are kicking the tires, in other words. But Hamilton and Larry took this sit-down in an entirely—and refreshingly—unexpected direction. Hamilton started with a crisp overview of Power Dynamics, his novel strategy framework, and then utilized that very framework to offer up a penetrating assessment of Netflix’s strategic imperatives. Incisive, extraordinary. The meeting quickly became anything but a courtesy.
Hamilton’s impressions stuck with me, and a half-decade later they percolated into an idea. By that point, in 2009, the existential threat from Blockbuster was behind us, and we were on track to reach almost $1.7 billion in sales. These were hard-won advances, but even so our strategy challenges were no less daunting. The clock was ticking on our red envelope business, as DVDs by mail was clearly a transitional technology. And looming was the prospect of facing off against huge competitors with resources far beyond ours: Google, Amazon, Time Warner and Apple to name several.
As I had learned over my years as a business person, strategy is an unusual beast. Most of my time and that of everyone else at Netflix must be spent achieving superb execution. Fail at this, and you will surely stumble. Sadly, though, such execution alone will not ensure success. If you don’t get your strategy right, you are at risk. I have been around long enough that I remember the lesson of the IBM PC. Here was a breakthrough product—the customer take-up was amazing: 40,000 upon announcement of the product and more than 100,000 in its first year. No one had ever seen anything like it. IBM’s execution was flawless. Their superb management never missed a beat. It would be hard to imagine another company at that time scaling physical production as rapidly as they did without tripping up. Even their marketing was inspired. Remember Charlie Chaplin as the friendly face of their campaign, welcoming all of us to the new world of computing?
But they got the strategy wrong. By outsourcing the OS and permitting Microsoft to sell it to others, IBM squandered their opportunity for the kind of network economy home run that had powered their mainframe juggernaut, System 360. Then their decision to outsource the microprocessor to Intel, while still promoting applications hard-wired to it, likewise ceded yet another important front. As a consequence, they sealed the fate of the PC, rendering it an unattractive box-assembly business. Try as they might, they could never right this ship. The inevitable denouement came with their 2005 fire sale of the business to Lenovo.
But rewind to my 2009 problem. The question facing me was this: How could we energetically pursue thoughtful strategizing at Netflix? Fortunately, by this time, we had expended a great deal of effort honing our unique culture—and that provided the key. We could face up to our challenging strategic climate by tapping into the very values we had worked so hard to embed in the company.
Our first public “culture deck,” released in August of 2009, identified nine highly valued behaviors. The first was “Judgment.” As we elaborated:
You make wise decisions … despite ambiguity
You identify root causes and get beyond treating symptoms
You think strategically and can articulate what you are and are not trying to do
You smartly separate what must be done well now and what can be improve d later
Wisdom, root causes, thinking strategically, smart prioritization—it made sense to me that all of this mapped to strategy. But to remain true to our culture, senior management could not simply impose its own view of strategy. Instead we had to develop in our people an understanding of the levers of strategy so that, on their own, they could flexibly apply this to their work. Only in this way could we honor another of the pillars of our culture: managing through context, not control.
This perspective, however, created a dilemma for me. Strategy is a complex subject—how could this “context” be learned by our people expeditiously? Having held a lifelong interest in education, I have always been much taken with an anecdote concerning the Nobel laureate physicist Richard Feynman, as recounted by James Gleick in his book Genius. Professor Feynman, one of the truly great science teachers of his time, was asked to do a lecture on a difficult area of Quantum Mechanics. Feynman agreed but then several days later recanted, saying “You know I couldn’t do it…That means we really don’t understand it.”
In the very same way, our challenge around strategy was clear: did anyone “really understand it” enough to teach it? Fortunately, I recalled the succinctness with which Hamilton summarized strategy in his 2004 presentation. I initiated a dialog with Hamilton and grew more and more convinced of his unique qualifications. In the end, Hamilton developed a program which conveyed to a large number of Netflix’s key people a fundamental understanding of strategy. This effort was a huge success. Still today, many Netflixers look back on it as one of the best educational experiences of their professional lives.
Hamilton is so much more than an able synthesizer and communicator, as 7 Powers demonstrates. Any strategy framework, to be broadly useful to a business person, must address all the key strategy issues facing an organization. Hamilton has long been aware of the deficiencies in existing frameworks. His solution? To forge ahead with entirely novel conceptual advances, and then to bind these together into a unified whole. Let me give you two examples of such advances from 7 Powers which stand out for me:
Counter-Positioning. Throughout my business career I have often observed powerful incumbents, once lauded for their business acumen, failing to adjust to a new competitive reality. The result is always a stunning fall from grace. A superficial thinker might pin this on lack of vision and leadership. Not Hamilton. By inventing the concept of Counter-Positioning, he was able to peel back the layers to peer into the deeper reality of these situations. Rather than lacking vision, Hamilton established, these incumbents are in fact acting in an entirely predictable and economically rational way. Our earlier battle with Blockbuster bore out this notion.
Power Progression. At Netflix, we aggressively prioritize our attention in order to focus on what is essential to accomplish now. This applies to strategy as well: what are the near-in strategic imperatives? Unfortunately, existing strategy frameworks offered little guidance. There was recognition that this was an important issue, but none of those other frameworks could address it in a systematic, reliable, sufficiently transparent way. How did Hamilton respond to this void? Over a span of decades, he developed and refined the Power Progression, illustrating the approximate time fuse for each of the competitive battles facing a business person. It’s an extraordinary advance in the usefulness of strategic thinking.
These two advances in understanding are essential for getting to the root of a broad swath of strategy challenges. They are just some of the fruits of my association with Hamilton. Now it’s you who’s in for a treat. 7 Powers tightly integrates the numerous insights he has developed in his several decades of consulting, active equity investing and teaching. It is a uniquely clear and comprehensive distillation of strategy. It will change how you think about business and pull into focus your critical strategy challenges, not to mention their solutions. It may not be the lightest of beach reads; you probably won’t tear through it in a night, but I am confident that your attention will be rewarded many times over.
— Reed Hastings
CEO and Co-Founder of Netflix
This book is dedicated to my
family—the joy of my life
INTRODUCTION
The Strategy Compass
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.” But with this hard-won conclusion comes a caveat informed by Pasteur’s well-known dictum: “Chance only favors the prepared mind.” Strategy serves best not as an analytical redoubt, but rather in developing the “prepared mind” of those on the ground.
To fulfill this role as a real-time strategy compass, 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. Easier said than done, though. For a subject as complex as Strategy, “simple but not simplistic” is a high hurdle.
Thanks to Bill Bain’s openness to an oddball like me, I was privileged to start my Strategy career right out of graduate school at Bain & Company in 1978. Professor Michael Porter hadn’t yet published his landmark book Competitive Strategy, and BCG and Bain & Company were in overdrive, embedding a Strategy sensibility in the corporate world, and in the process building two of the most respected brands in management consulting. In the decades since, Strategy as a discipline has made enormous strides, both theoretically and empirically. Even so, current Strategy frameworks are not up to the challenge of “simple but not simplistic.” The simple ones are too simplistic, and those less simplistic are still not simple.
The 7 Powers, a Strategy framework borne of hundreds of consulting engagements and decades of active equity investing, clears this hurdle. Because it 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. It can be, and indeed has been, successfully employed inside businesses as a shared, actionable understanding of the primary levers of Strategy. If your business does not have at least one of these seven Power types, then you lack a viable strategy, and you are vulnerable.
My goal in writing this book is to enable you to flexibly navigate the hazardous shoals of strategy development. I am not offering you specific advice for your individual business; rather I am giving you a lens through which to see your strategic landscape. This lens will bring into high relief the critical strategy challenges you must solve. But here’s the irony: only by dealing in theory can this book be of most practical value.
If you read this book and internalize the 7 Powers, you will have the “prepared mind” referenced by Pasteur and be ready to identify, create and seize an opportunity for Power in those rare formative moments. The success of your business depends on it.
“Not Simplistic” First
We will now begin our Strategy journey together. When we are done, you will be fluent in the 7 Powers. This will empower you by putting at your fingertips a workable understanding of Strategy to guide you in those crucial high-flux moments that will define your business.
Making the right decisions in these moments has enormous payback. This high return, however, is matched with the high hurdle discussed above: to be a useful such cognitive guide, the precepts of Strategy must be distilled to a framework that is simple but not simplistic.
To gain your confidence that the 7 Powers clears this hurdle I will, in this Introduction, detail how Power is the deep driver of potential fundamental business value. This formally articulated connection will give you assurance that what follows in the rest of the book is comprehensive, another word for “not simplistic.” The seven ensuing chapters, each on one Power type, will build on this foundation to fashion the 7 Powers. My experience with many business-people is that the resulting construct is sufficiently “simple” to serve this role of an ongoing strategy compass.
