11 In our Chapter 3 discussion of Counter-Positioning, there is some consideration of the impact of other business units on decisions.
12 “Not simplistic” is another term for “exhaustive.” To be useful as a cognitive guide, a framework needs to cover nearly all circumstances. It is an acceptable simplification to leave out some rare occurrences. If we accept that business value is the overriding objective of any business then from the top down we know from the math that the FES, and the definitions of Power, Strategy and strategy are exhaustive. My assertion that the 7 Powers is exhaustive is of an entirely different character—it is an empirical statement. These seven have been sufficient to cover all the hundreds of cases I have dealt with as a strategy consultant and in the many cases tackled by my students, corporate and academic. It is possible that there are more than 7 Power types. Fortunately, these can simply be added on as they still have to fulfil the FES and the definition of Power. If one looks at the 7 Powers Chart, it is easy to see that the vertical dimension is exhaustive—it is simply the drivers of positive cash flow (somewhat simplified as discussed in the text). Are the four generic barriers of the horizontal dimension the only barrier types? I have thoughts on this but it is well beyond the scope of this book.
13 I wish to thank William C. Brainard of Yale for his help in thinking through the terminal value issues in this derivation. Of course he is in no way responsible for any errors of mine.
Chapter 1
14 The Power type here was Counter-Positioning which will be covered in Chapter 3.
15 http://www.webpreneurblog.com/adapt-or-die-netflix-vs-blockbuster/
16 Netflix also faced other competitors, such as HBO, who came at this business from a different angle, and Netflix needed Power with respect to them as well. With HBO and similar competitors, Netflix’s Power came from Counter-Positioning, which I cover in Chapter 3.
17 To keep matters simple, the third route to improved cash flow, reduced investment needs, is not considered here.
18 https://finance.yahoo.com/
19 A New York Times article details some of the mistakes: http://www.nytimes.com/2013/04/27/business/netflix-looks-back-on-its-near-death-spiral.html?pagewanted=all&_r=0
20 The derivation of this equation is in Appendix 1.1.
21 In economists’ terms, both are endogenous.
Chapter 2
22 Network Economies are well-covered in the Economics literature and so my treatment will be brief. For those looking for a thoughtful exploration I recommend Shapiro, Carl, and Hal R. Varian. Information Rules: A Strategic Guide to the Network Economy. Boston: Harvard Business Press, 2013. Print.
23 Source: http://www.ere.net/2012/06/23/branchout-keeps-falling-down-down/
24 This formula is derived in Appendix 2.1.
25 http://www.forbes.com/quotes/9638/
Chapter 3
26 https://www.vanguard.com/bogle_site/lib/sp19970401.html
27 https://about.vanguard.com/who-we-are/a-remarkable-history/
28 http://www.icifactbook.org/fb_ch2.html#popularity
29 Levitt, Theodore. “Marketing Myopia.” https://hbr.org/2004/07/marketing-myopia. This is a wonderful article that has fueled long and thoughtful discussions of business definition. This capability lack is well noted in the RBV literature.
30 Nelson, Richard R., and Sidney G. Winter. An Evolutionary Theory of Economic Change. Cambridge: Harvard University Press, 2009. Print.
31 Looked at from the perspective of the FES, Disruptive Technologies tell us about the left-hand side of the equation (market scale) but tell us nothing about the right-hand side (Power).
Chapter 4
32 http://www.computerworld.com.au/article/542992/sap_users_rattle_sabers_over_charges_user-friendly_fiori_apps/
33 http://www.amasol.com/files/sap_performance_management_-_a_trend_study_by_compuware_and_pac.pdf
34 http://www.socialmediatoday.com/content/guest-post-back-popular-demand-basic-maintenance-offering-sap
35 http://www.cio.com.au/article/181136/hp_supply_chain_lesson/?pp=2
36 https://finance.yahoo.com/
37 http://www.cio.com.au/article/181136/hp_supply_chain_lesson/
38 https://finance.yahoo.com/q/hp?s=SAP+Historical+Prices
39 Farrell, Joseph, and Paul Klemperer. “Coordination and Lock-in: Competition with Switching Costs and Network Effects.” Handbook of Industrial Organization 3 (2007): 1967–2072. Print.
40 If the Switching Costs were created through customization/integration into the customer’s business, the customer may also perceive the quality of the current product to be better than that of the competitor’s. In this case, the company is able to charge a higher price for a better quality product, but competitors cannot match that quality at a competitive cost.
41 In this book I use the term “product” to denote products and/or services.
42 Burnham, Thomas A., Judy K. Frels and Vijay Mahajan, “Consumer Switching Costs: A Typology, Antecedents, and Consequences.” Journal of the Academy of Marketing Science, 2003, 31:2, pp. 109–126. Print.
43 Note the difference between relational Switching Costs and Branding: if the ability to charge a higher price because of a positive emotional valence precedes the actual owning of the good or service, this is Branding. If it comes only through experience with the product after purchase, then it is a Switching Cost. To overcome this Barrier, a challenger may need to invoke Branding Power and create a reputation for being able to create similar positive relational experiences to replace the positive valence associated with the current vendor.
44 In Chapter 10, I will assert that the takeoff stage is the one in which Switching Costs Power needs to be established. It is this dynamic which drives that conclusion: after takeoff such arbitraging is likely to eliminate the Benefit, meaning the Power is no longer available.
45 https://en.wikipedia.org/wiki/List_of_SAP_products
46 https://en.wikipedia.org/wiki/SAP_SE
47 https://en.wikipedia.org/wiki/SAP_SE. These are from 1991 to 2014.
48 https://en.wikipedia.org/wiki/SAP_SE
Chapter 5
49 http://abcnews.go.com/GMA/Moms/story?id=1197202
50 http://www.tiffany.com/WorldOfTiffany/TiffanyStory/Legacy/BlueBox.aspx
51 YCharts.com
52 https://finance.yahoo.com/
53 http://investor.tiffany.com/releasedetail.cfm?ReleaseID=741475
54 Rusetski, Alexander. “The Whole New World: Nintendo’s Targeting Choice.” Journal of Business Case Studies (JBCS) 8.2 (2012): 197–212. Print.
Chapter 6
55 http://www.rogerebert.com/reviews/toy-story-1995
56 http://boxofficequant.com/23/ from data from www.the-numbers.com
57 The box office relative to a film’s cost gives an indication of the profitability of a film. Of course this chart is domestic box office only and does not include revenue sources other than theatrical release.
58 From a personal correspondence with Hamilton Helmer.
59 Price, D. A. (2008). The Pixar Touch: The Making of a Company. New York: Alfred A. Knopf, p. 107. Print.
60 If there were many repeats of the Brad Bird experience—a proven director finding commercial success for the first time by joining Pixar—then one might argue that there is a deeper cause at work. But, so far, the Brad Bird experience has been idiosyncratic and hence does not lead to such conclusions.
Chapter 7
61 https://en.wikipedia.org/wiki/Ford_River_Rouge_Complex
62 http://www.inboundlogistics.com/cms/article/the-evolution-of-inbound-logistics-the-ford-and-toyota-legacy-origin-of-the-species/
63 http://www.thehenryford.org/exhibits/modelt/pdf/ModelTHeritageSelfGuidedTour_hfm.pdf
64 https://en.wikipedia.org/wiki/Planned_obsolescence
65 The Economist, July 17, 2015, “Hypercars and Hyperbole.”
66 Spear, Steven, and H. Kent Bowen. “Decoding the DNA of the Toyota Production System” Harvard Business Review 7
7, no. 5 (September–October 1999): 96–106. Print.
67 http://www.thisamericanlife.org/radio-archives/episode/403/transcript
68 https://finance.yahoo.com/
69 Strategic Management to the academic community.
70 Porter, M. E. “What Is Strategy?” Harvard Business Review 74, no. 6 (November–December 1996): 61–78. Print.
71 As noted earlier, when I turn to strategy Dynamics, operational excellence can be vitally important for certain Power types.
72 Argote, L., and D. Epple. “Learning Curves in Manufacturing.” Science 247.4945 (1990): 920–24. Web.
73 In this case, each company would exhibit a similarly sloped Experience Curve parallel to each other and horizontally displaced by their difference in “Experience.”
74 Simon, Herbert A. “Bounded Rationality and Organizational Learning.” Organization Science 2.1 (1991): 125–34. Web.
75 Hughes, Jonathan R.T. “Fact and Theory in Economic History.” Explorations in Economic History 3, no.2 (1966): 75–101. Print.
76 Prahalad, Coimbatore K. “The Role of Core Competencies in the Corporation.” Research Technology Management 36.6 (1993): 40. Print.
Chapter 8
77 “Power = Benefit + Barrier” is open-ended and exhaustive. My view that the 7 Powers of this book are exhaustive is an empirical statement: these seven cover every strategy assignment I have undertaken in my career as well as every situation my students have researched. However, should more Power types emerge, they can simply be added on. Whatever their character, they must satisfy the Benefit + Barrier requirement; otherwise m in the Fundamental Equation of Strategy will not be materially positive, and hence value will not result.
78 http://www.inc.com/magazine/20051201/qa-hastings.html
79 Ibid.
80 http://techcrunch.com/2011/01/27/streaming-subscriber-growth-netflix
81 http://allthingsd.com/20100810/its-official-epix-netflix-announce-multi-year-deal-for-streaming-movies/
82 http://deadline.com/2011/03/netflix-to-enter-original-programming-with-mega-deal-for-david-fincher-kevin-spacey-drama-series-house-of-cards-114184/
83 http://www.nytimes.com/2015/04/20/business/media/netflix-is-betting-its-future-on-exclusive-programming.html?_r=0
84 https://en.wikipedia.org/wiki/List_of_original_programs_distributed_by_Netflix
85 https://finance.yahoo.com/
86 Mintzberg, Henry. Crafting Strategy. Boston, MA: Harvard Business School Press, 1987: 65–75. Print.
87 Porter, Michael E. “Towards a Dynamic Theory of Strategy.” Strat. Mgmt. J. Strategic Management Journal 12.S2 (1991): 95-117. Web.
88 In Chapter 1 I used the economist’s term “endogenous” in reference to Industry Economics, meaning that the business could itself influence this as opposed to considering it beyond their span of control. Streaming is a good example of this. Netflix changed the Industry Economics—those conditions faced by all players.
89 The arrows in my diagram have dotted outlines to indicate possibility as opposed to guarantee: resources + changed external circumstances may or may not lead to invention and invention may or may not lead to Power. Netflix could have easily decided not to enter streaming. Or they could have entered streaming but fumbled the originals ball.
90 Bob Manz, my thoughtful partner in Helmer & Associates, coined this term.
91 Unlike prior discussions in this book, value in this context pertains to the value to the customer not the value to the offering company. However, we fulfill the value to the company requirement of the Benefit by including in the definition of compelling value the condition that pricing is such that attractive margins are realized.
92 Grove, Andrew S. Only The Paranoid Survive. New York: Currency Doubleday, 1996. Print.
93 Hamilton Helmer interview with Bob Wulff of Adobe.
94 Business Week, May 25, 1998 as cited in http://archive.wired.com/gadgets/mac/commentary/cultofmac/2006/03/70512?currentPage=all
95 Hecht, Jeff. City of Light: The Story of Fiber Optics. New York: Oxford UP, 1999. 139. Print.
96 I interviewed Dr. Schultz on this invention. Peter still has a large sample of this historic pull at his home in St. Thomas!
97 Nathan, John. Sony: The Extraordinary Story behind the People and the Products. London: HarperCollinsBusiness, 1999. 304. Print.
98 Burgelman, Robert A., and Grove, Andrew S. Strategy Is Destiny: How Strategy-Making Shapes a Company’s Future. New York: Free, 2002. Print.
99 Alpha is the returns above those from just investing in “the market” after appropriate adjustment for risk.
100 This 22-year period encompasses both periods when my equity investing was for proprietary accounts and for Strategy Capital. There were two periods I exited public equities entirely and these are not included. Their inclusion would have increased my returns relative to the benchmark as the entry and exit decisions were favorably timed.
101 Of course this compounding adds up. Over the investing period, my portfolio increased 615.9 times versus 12.1 times for the S&P 500 TR.
102 My portfolio is unlevered.
103 This probability is an assessment of draws: “For all draws across the investment period 1994–2015, what share of the draws failed to outperform the market for different hold periods?”
104 Another similarly revealing pairing is IBM’s mainframe business versus its PC business, the first having Power and the second not.
Chapter 9
105 For those wishing to learn more, I recommend The Intel Trinity. My brief narrative on Intel draws heavily on this fine study by Michael Malone. Malone, Michael. The Intel Trinity: How Noyce, Moore, and Grove Built the World’s Most Important Company. HarperBusiness, 2015. Print.
106 https://en.wikipedia.org/wiki/IBM_Personal_Computer
107 https://finance.yahoo.com/
108 I want to express my appreciation to Wally Rhines, the CEO of Mentor Graphics, and Bill Mitchell of Gemfinder and Mitchell Capital for their acute analysis of Intel’s sources of Power.
109 In a personal correspondence with Hamilton Helmer.
110 http://jeremyreimer.com/m-item.lsp?i=137
111 It is possible for Cornered Resources to come into play after origination. For example, certain process innovations achieved at a later stage might either be patented or kept as trade secrets. However, most of these tend to fail the test of significance. They are usually incremental in their contribution to returns, as the fundamental positions have often been arbitraged out much earlier.
112 If a market is large, the scaling may have been so extensive during the takeoff phase that such complexity/opacity might be achieved.
113 This quality also underlies the investment results discussed in Appendix 8.1.
ABOUT THE AUTHOR
Hamilton Helmer has spent his career as a practicing business strategist. At Helmer & Associates (later Deep Strategy), a strategy consulting firm he founded, he has led over 200 strategy projects with major clients such as Adobe Systems, Agilent Technologies, Coursera, Hewlett-Packard, John Hancock Mutual Life, Mentor Graphics, Netflix, Raychem, and Spotify. In the last two decades he has also utilized his Strategy concepts as an active equity investor and is currently Chief Investment Officer and Co-Founder of Strategy Capital. Prior to Helmer & Associates he was employed at Bain & Company. He holds a Ph.D. in Economics from Yale University and is a Phi Beta Kappa graduate of Williams College. Mr. Helmer just retired as Chairman of the Board of American Science and Engineering (NASDAQ: ASEI) and currently teaches Business Strategy in the Economics Department of Stanford University.
More information may be found at www.7powers.com.
-o-filter: grayscale(100%); -ms-filter: grayscale(100%); filter: grayscale(100%); " class="sharethis-inline-share-buttons">share
7 Powers Page 15