Build Big Ideas

Strategy for Infrastructure Businesses, 7 Powers by Hamilton Helmer, Ep. 15

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Strategy for infrastructure businesses is the focus of this episode of the Build Big Ideas podcast.  Specifically, we begin by summarizing Hamilton Helmer's concepts from the book "7 Powers: The Foundations of Business Strategy."  We then apply the concepts to various infrastructure businesses.  Good businesses have power that their competitors can't access; bad businesses don't.  The 7 powers are: scale, counter-positioning, switching costs, branding, cornered resource, and process power.  Note that operational excellence is necessary, but not sufficient, to benefit from a power.

Full show notes are available at buildbigideas.com 

Definitions

The quotes below are from "7 Powers" by Hamilton Helmer.

"Strategy: The route to Power in significant markets."

"Power: the potential to realize persistent differential return is the key to value creation.  Power requires both a benefit and a barrier.  (See 7 Powers below)"

"Benefit: something that materially increases cash flow by allowing prices to be raised on customers or costs (of inputs or the processing thereof) reduced."

"Barrier: conditions such that all the value to the firm of the Benefit is not arbitraged out by competitors."

"The Value Axiom: [Business] Strategy has one and only one objective: maximizing potential fundamental business value."

"Fundamental Equation of Strategy:  Value = market size now x growth x market share x differential margins."

"Surplus Leader Margin: the profit margin that a Power holder will achieve if pricing is such that a competing firm with no Power has zero profits."

7 Powers (See image attached below)

*Operational Excellence is not a power.  It is necessary, but not sufficient. Table stakes.

  • Scale: "per-unit-cost declines as production volume increases."
  • Network: "value to the customer increases as the installed base increases."
  • Counter-Positioning: "A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business."
  • Switching Costs: "Value loss expected by a customer to switch to a new supplier."
  • Branding: "Durable attribution of higher value to an objectively identical offering that arises from historical information about the seller." (Trust)
  • Cornered Resource: "Preferential access at attractive terms to a coveted asset that can independently enhance value." (Five tests: Idiosyncratic, non-arbitraged [bought at a discount], transferable, ongoing, sufficient)
  • Process Power: "Embedded company organization and activity which enable lower costs and/or superior product, and which can be matched only by an extended commitment."

    • Dynamics

    "Not only is invention the gateway to Power but also the possibility of Power (and the associated durable success) fuels invention."

    ----------

    “When [a client] comes to you and says,

    ‘I want you to make this for us.
    We’re going to own it.
    We’ll pay you a 10% above cost spread
    but you have no ownership. No...’

    That’s a [bad*] model.

    That’s making widgets.
    Not a great wealth builder.”
    -John Malone
    *saltier language has been substituted

    Engineering consulting is worse than the above model, because the fee is capped.  Also, the margin (spread) is usually less than 9%.

    ...more
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