Notes - 7 Powers

October 26, 2024

Part I — Strategy Statics

Chapter 1: Scale Economies

Size Matters

This chapter begins by looking at Netflix in 2003 when the company was successfully challenging Blockbuster with its DVD-by-mail rental business. However, the company lacked a strategy that could lead to Power.

Netflix found its path to Power in 2011 when they decided to pursue exclusive streaming rights. This started with House of Cards in 2012. This allowed them to amortize the cost of content over a much larger subscriber base than their competitors, leading to lower content costs per subscriber.

Scale Economies—the First of the 7 Powers

This section explains the first of the 7 Powers: Scale Economies. It asks: why do Scale Economies result in Power? To answer this, the author reminds us that Power requires two components:

• Benefit: a condition that materially improves the cash flow of the Power wielder. This could be through reduced cost, enhanced pricing, and/or decreased investment needs.
• Barrier: some obstacle that prevents competitors from arbitraging away this benefit.

Scale Economies’ benefit is straightforward: lowered costs. For Netflix, their large subscriber base leads to lower content costs per subscriber.

The barrier comes from the unattractive cost/benefit analysis that competitors face when considering challenging the scale leader. For example, to gain market share, a competitor would have to lower prices. However, because of their lower costs, the leader can match these price cuts, leading to a loss for the competitor.

This dynamic played out between Intel and AMD. Intel used its scale advantage to repeatedly fight off challenges from AMD.

The 7 Powers Chart

To help understand Scale Economies, the author introduces the 7 Powers Chart. The chart is designed to categorize and analyze the different types of Power. It begins by breaking down the Benefit and Barrier concepts:

Benefit:

• Enhancing value (enabling higher pricing)
• Lowering cost

Barrier:

• Competitors are unable to copy.
• Competitors could copy but choose not to because the outcome would be unattractive.

Using this framework, the author places Scale Economies in the chart.

Scale Economies:

• Benefit: Lower cost
• Barrier: Deterring economics (competitors choose not to copy).

Defining Scale Economies

The author provides a definition for Scale Economies: “A business in which per-unit cost declines as production volume increases.” This means that as a company produces more of a product, the cost of producing each individual unit goes down.

The Netflix example shows one way that Scale Economies can occur: there was a large, fixed cost associated with creating original content. As the number of subscribers increased, this fixed cost was spread out over a larger base, leading to a lower cost per subscriber.

Other ways that scale economies emerge:

• Learning economies: As companies produce more of a product, they learn how to do it more efficiently.
• Purchasing economies: Larger companies can negotiate better prices for inputs because they are buying in larger quantities.

Value and Power

The goal of a strategy is to increase the value of a business. The author notes that Netflix’s stock price increased dramatically after they were able to create Power in their streaming business. This increase in value shows the impact of Power. However, Power alone is not enough. A company also needs operational excellence to succeed. Netflix’s stock price dropped in 2011 due to operational mistakes. This shows that even with a strong strategy, companies can fail if they don't execute well.

Parsing Power Intensity: Industry Economics + Competitive Position

This section explains how to measure the intensity of Power. The intensity of Power depends on two factors:

• Industry Economics: Some industries are more susceptible to Scale Economies than others. For example, industries with high fixed costs are more likely to exhibit Scale Economies.
• Competitive Position: The scale leader has more Power than its smaller competitors.

The author uses the concept of Surplus Leader Margin (SLM) to measure Power intensity. SLM represents the profit margin the company with Power can achieve when pricing is set so that its competitor’s profits are zero.

For Scale Economies arising from fixed costs, SLM is determined by:

• Scale Economy Intensity: The relative significance of fixed costs for the company.
• Scale Advantage: The size difference between the leader and the follower.

Both factors must be present for Power to exist. Even if there are strong potential scale economies, the leader will have no Power if there is no scale advantage.

The author uses Netflix to show how companies can use a two-pronged attack to increase their Power:

1. Change the economics of the industry
2. Increase the scale advantage

Netflix’s move to exclusive content changed the economics of the industry and gave them a scale advantage.

This section concludes by noting the importance of independently understanding both Industry Economics and Competitive Position when developing a strategy.

Chapter 2: Network Economies

This chapter introduces the concept of Network Economies, the second Power type in the 7 Powers framework. It uses the example of BranchOut, a Facebook app designed to facilitate professional networking, to illustrate how Network Economies work.

• In 2011, Rick Marini launched BranchOut with the goal of creating a LinkedIn within Facebook, leveraging Facebook's large user base to gain an advantage over LinkedIn, the incumbent in the professional networking space.
• However, the strategy failed. BranchOut users found little value in connecting with their Facebook friends professionally, and the app struggled to gain traction. Ultimately, BranchOut was sold for a nominal sum.

This example highlights a key aspect of Network Economies: the value of a network increases as its user base grows. The larger the network, the more valuable it becomes for each individual user.

• LinkedIn already had a substantial user base in the professional networking space, providing a significant advantage over BranchOut.
• This network effect created a powerful barrier to entry for BranchOut, as it struggled to attract users to its smaller, less valuable network.

Benefit and Barrier of Network Economies:

Like all Power types, Network Economies possess both a Benefit and a Barrier, which together create the potential for persistent differential returns.

• Benefit: Increased value for each customer as the network grows. This can manifest in various ways, such as increased utility, lower search costs, or greater access to information.
• Barrier: The difficulty for competitors to overcome the network effects of the incumbent. The larger the incumbent's network, the harder it becomes for a challenger to attract users to its smaller, less valuable network.

Surplus Leader Margin (SLM) for Network Economies:

To formally calibrate the intensity of Power in a network economy, the concept of Surplus Leader Margin (SLM) is introduced. This measures the profit margin the business with Power can achieve while pricing its product so that its competitor makes zero profit.

• The formula for SLM in a network economy is:

SLM = δ [S N – W N ]

Where:

• δ represents the marginal benefit to all users from one new user joining the network.
• S N represents the number of users in the stronger network.
• W N represents the number of users in the weaker network.

Components of Power Intensity in Network Economies:

Breaking down the SLM formula reveals two components that determine the intensity of Power in a network economy:

• Industry Economics: Represented by δ in the SLM formula, it measures the strength of the network effect inherent in the business.
• Competitive Position: Represented by [S N – W N ] in the SLM formula, it measures the relative size of the stronger network compared to the weaker network.

For Power to exist, both industry economics and competitive position must be significantly positive. A strong network effect alone is not enough if the incumbent's network size is not significantly larger than its competitors'.

Important Observations on Network Economies:

The chapter concludes with several observations regarding Network Economies:

• Positive network effects do not guarantee Power. If the network effect is not strong enough relative to the potential user base and the cost structure, even a single profitable player may not exist.
• Early scaling is critical. Due to the tipping point dynamics of Network Economies, the firm that scales its network the fastest often gains a decisive advantage.
• Complements can play a crucial role. If a business relies on complements, and those complements are exclusive to each offering, the leader will attract more and better complements, further enhancing its value proposition and solidifying its Power.

By understanding Network Economies, businesses can identify opportunities to create Power by leveraging the inherent value of network effects and strategically positioning themselves to capitalize on these dynamics.

Chapter 3: Counter-Positioning

Counter-Positioning is a strategy in which a newcomer utilizes a superior business model that the incumbent is unable or unwilling to mimic due to the potential damage it would inflict on their existing business. This chapter uses the example of Vanguard and its founder, John Bogle, to illustrate this concept.

Bogle and the Rise of Vanguard

In 1974, John Bogle founded Vanguard, a mutual fund company, and in 1976, he launched the First Index Investment Trust, later renamed the Vanguard 500 Index Fund. This fund was the first index mutual fund available to the public and was considered "Bogle's Folly" by many on Wall Street. The prevailing wisdom at the time held that actively managed funds were superior, and that an index fund would provide mediocre returns at best.

However, Bogle's innovation was rooted in a deep understanding of the economics of the mutual fund industry. He recognized that high fees charged by actively managed funds eroded returns, making index funds, with their low fees, a superior choice for investors.

The success of Vanguard and its index funds was slow but steady. By 2015, Vanguard managed over $3 trillion in assets, with much of this growth coming at the expense of actively managed funds.

Counter-Positioning and the 7 Powers

Counter-Positioning is positioned in the 7 Powers Chart as follows:

• Benefit: Lower costs.
• Barrier: The incumbent cannot or will not mimic the newcomer's approach due to the potential damage it would cause to their existing business (referred to as collateral damage).

Types of Collateral Damage

There are three types of collateral damage that can prevent an incumbent from mimicking a newcomer's superior business model:

1. Milk: The newcomer's business model slowly siphons off profits from the incumbent's existing business. The incumbent is reluctant to respond aggressively as this would accelerate the decline of their core business. The Vanguard example illustrates this type of collateral damage.
2. History's Slave: The incumbent is locked into a business model or approach due to their history and past investments, making it difficult for them to adopt the newcomer's model. This is similar to the sunk cost fallacy, where individuals or organizations continue to invest in a failing venture because they have already invested significant resources.
3. Job Security: The incumbent's management team may resist adopting the newcomer's business model as it threatens their jobs or status.

Counter-Positioning and Disruptive Innovation

This chapter notes the distinction between Counter-Positioning and Disruptive Innovation, a concept popularized by Clayton Christensen. While both involve a newcomer challenging an incumbent with a new business model, Counter-Positioning focuses on situations where the incumbent is aware of the threat but chooses not to respond due to the potential for collateral damage. In contrast, Disruptive Innovation often involves incumbents being blindsided by newcomers who target a different market segment with a simpler or less expensive product.

Key Observations on Counter-Positioning

• Relative Power: Counter-Positioning is a concept that applies to a newcomer's power relative to the incumbent. It does not address the newcomer's power relative to other firms utilizing the same new business model.
• Challenger's Posture: The challenger can influence the incumbent's response by avoiding direct attacks and adopting a respectful tone. This may delay the incumbent's recognition of the threat and give the challenger time to establish its position.
• Non-Exclusivity: Counter-Positioning is not an exclusive source of power. Multiple challengers can simultaneously target an incumbent with Counter-Positioning strategies.
• Management Challenge: Responding to a Counter-Positioning challenge is one of the most difficult tasks for incumbent management. It requires carefully weighing the potential for collateral damage against the threat posed by the newcomer.

Counter-Positioning Surplus Leader Margin

The Surplus Leader Margin (SLM) in a Counter-Positioning scenario is the margin the challenger can earn while pricing its product below the incumbent's offering. This margin represents the potential profit the challenger can capture without prompting a direct response from the incumbent. The SLM is influenced by several factors, including the cost difference between the challenger's and incumbent's business models, the degree of product substitutability, and the expected cannibalization rate.

The chapter concludes by highlighting the dynamic nature of Counter-Positioning. As the challenger gains market share, the incumbent's potential collateral damage decreases, making it more likely that they will eventually respond. The challenger must be prepared to defend its position against the incumbent's eventual counter-attack.

Chapter 4: Switching Costs

This chapter of explains and exemplifies Switching Costs, the fourth of the seven types of powers explored in the book.

The chapter opens with an anecdote about the high cost of replacing enterprise resource planning (ERP) software, arguing that the phenomenon illustrates the power of Switching Costs. While many software companies offer ERP solutions, including Oracle and Salesforce, the German software corporation SAP has dominated the market for decades.

Once an ERP system like SAP is integrated into a client’s business, it is very difficult and expensive to switch to a different system. This is because employees have invested time and effort into learning to use SAP, and companies have tailored their workflows and processes to fit the software. Switching to a competitor’s ERP would require companies to retrain employees, redesign workflows, and potentially purchase new hardware and software, making it prohibitively expensive and time-consuming. This allows SAP to charge high prices and maintain a dominant market position. As a testament to this power, SAP’s stock price has increased by over 1000% since 1995.

Switching Costs arise when a customer values compatibility across multiple purchases from a specific firm over time. This can include repeat purchases of the same product or purchases of complementary goods. Companies that have embedded Switching Costs for their current customers can charge higher prices than competitors for equivalent products or services. Importantly, this benefit only accrues to the Power holder in selling follow-on products to their current customers. There is no Benefit with potential customers, and there is no Benefit if there are no follow-on products.

The Barrier in Switching Costs is the cost incurred by customers in switching to an alternate supplier for additional purchases. To maintain these costs, companies must ensure that switching remains unattractive. This can be achieved by increasing the magnitude of the Switching Costs, making them difficult to circumvent, or creating the expectation that the costs will be ongoing.

The chapter defines Switching Costs as follows:

• The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.

The chapter goes on to list three broad groups of Switching Costs:

• Financial Switching Costs include those which are transparently monetary from the outset. For ERP, these would include the purchase of both a new database and the sum total of its complementary applications.
• Procedural Switching Costs are incurred from the process of switching. This can involve the cost of searching for and evaluating alternatives, the time and effort required to learn a new system, and the risk of disruption to existing operations. In the ERP example, these Procedural Switching Costs are incurred from tailoring the enterprise’s business processes to the ERP software and the extensive training employees require to utilize the system fully.
• Relational Switching Costs arise from the emotional bonds customers have with their current provider. Customers may value the relationship they have built with a particular company, and be reluctant to switch to a competitor, even if it offers a better deal. For ERP, such relational costs are incurred from the enterprise’s dependence on the supplier for support, troubleshooting, and updates.

Companies can take a variety of steps to build Switching Costs. The chapter explains that one tactic might be to develop more and more add-on products, extending the revenue coverage of the Switching Costs (Financial), and often increasing their intensity by making the prospect of disentanglement more and more forbidding (Procedural). A high level of integration into customer operations, and the extensive training that demands, can also further disincentivize such disentanglement. This sort of training also has the potential of building emotional bonds to the current supplier (Relational). The chapter points to SAP as an example of a company that has successfully implemented this strategy, noting that the company offers a vast array of products and has a history of acquiring other companies to add to its portfolio.

Chapter 5: Branding

This chapter explores the concept of Branding as a Power type, using Tiffany & Co. as an example.

• Tiffany's sustained high valuation and profitability can be attributed to the power of its brand.
• Branding allows businesses to charge a price premium for products that may be objectively identical to those offered by competitors.

Benefit

• Affective Valence: Consumers associate positive emotions and experiences with the brand, increasing their willingness to pay. For example, people might prefer Coca-Cola over a generic cola, even if they taste the same, due to Coke's brand associations.
• Uncertainty Reduction: Branding helps reduce the perceived risk for customers. They trust the quality and consistency of the product due to the brand's reputation, even if they haven't tried that specific product before.

Barrier

• Time: Establishing a strong brand takes a long time. Building trust and positive associations in the minds of consumers requires consistent quality and messaging over an extended period. This makes it difficult for competitors to quickly replicate a successful brand.

Challenges and Characteristics of Branding

• Brand Dilution: Maintaining a strong brand requires careful management and focus. Releasing products that deviate from the brand's core values or message can damage the brand's image and erode its power.
• Non-exclusivity: Unlike some other Power types, Branding is non-exclusive. Multiple competitors can have strong brands targeting the same customer segment (e.g., luxury fashion brands like Prada, Louis Vuitton, and Hermès). However, even in such a competitive landscape, brands still provide an advantage over competitors with weaker or no branding.
• Type of Good: Branding is not applicable to all products. To have Branding potential, a product needs to meet two conditions:
  1. Magnitude: It should eventually justify a significant price premium.
  2. Duration: The product should exist long enough for the brand to develop and achieve the desired magnitude. Otherwise, competitors can quickly erode any price premium.

Branding: Industry Economics and Competitive Position

• The intensity of Branding Power is influenced by both industry economics and competitive position.
• Industry economics determine the potential magnitude and sustainability of brand value over time.
• Competitive position reflects how effectively a company has leveraged those industry dynamics to build its brand relative to competitors.

The sources offer a simplified model to represent this relationship, where B(t) represents brand value over time (t). The higher the B(t), the stronger the brand and the greater the potential price premium the company can charge.

Conclusion

Chapter 5 emphasizes the importance of Branding as a powerful driver of value. By understanding the key elements of Branding—Benefit, Barrier, and the factors influencing its intensity—companies can build strong brands that enable them to command premium prices, withstand competitive pressures, and achieve sustainable success.

Chapter 6: Cornered Resource - Preferential Access For Value Creation

Chapter 6 introduces the concept of Cornered Resource as a type of Power, defined as preferential access at attractive terms to a coveted asset that can independently enhance value. The chapter uses Pixar Animation Studios as a case study to illustrate this concept.

• Pixar's Cornered Resource: Pixar's consistent success in producing critically acclaimed and commercially successful animated films is attributed to their unique creative culture and process, embodied in a group called the Brain Trust. The Brain Trust comprises experienced directors, writers, and animators who collaboratively develop and refine film ideas through a process of rigorous critique and feedback. This group, with its deep experience and shared commitment to excellence, constitutes Pixar's Cornered Resource.

• Identifying Cornered Resources: Determining a Cornered Resource can be challenging, and the chapter outlines five tests to help identify them:

  • Idiosyncratic: The resource should be unique and difficult to replicate, setting the company apart from competitors. The Brain Trust, with its specific composition and working dynamics, fits this criterion.

  • Non-arbitraged: The resource should be protected from competitive forces that could erode its value. Pixar's control over the Brain Trust, through employment contracts and its unique internal culture, prevents competitors from easily replicating this resource.

  • Transferable: The resource should be transferable to other products or markets within the company, contributing to its overall value. Pixar's Brain Trust has proven its ability to generate success across multiple films and franchises.

  • Ongoing: The resource should be a persistent driver of differential returns. While individuals may come and go, the Brain Trust as a collective entity has maintained its importance to Pixar's success.

  • Sufficient: The resource should be capable of generating differential returns on its own, assuming operational excellence. The Brain Trust's track record suggests its sufficiency in driving Pixar's success.

• Power Intensity: The chapter highlights how the intensity of a Cornered Resource Power can be understood through the interplay of industry economics and competitive position.

  • Industry economics determine the inherent value and scarcity of the resource.
  • Competitive position reflects the company's ability to acquire and leverage the resource effectively.

• The Resource-Based View: The chapter also discusses the Resource-Based View (RBV) of strategy, a school of thought that emphasizes the role of resources in achieving competitive advantage. The chapter acknowledges the broader scope of RBV but focuses specifically on resources that qualify as Power. It also highlights the importance of RBV for understanding the dynamics of Power, particularly the role of resources in fostering invention.

In conclusion, Chapter 6 emphasizes that a Cornered Resource, providing preferential access to a valuable and protected asset, can be a significant driver of Power and value creation.

Chapter 7: Process Power

Chapter 7 focuses on Process Power, the last of the 7 Powers described in the book.

• Process Power Definition: Embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.
• Benefit: A company with Process Power is able to improve product attributes and/or lower costs as a result of process improvements embedded within the organization.
• Barrier: The Barrier in Process Power is hysteresis: these process advances are difficult to replicate, and can only be achieved over a long time period of sustained evolutionary advance.

This chapter uses Toyota Motor Corporation and its Toyota Production System (TPS) to illustrate the concept of Process Power. Toyota was able to achieve significant market share growth over decades by leveraging its superior manufacturing process, TPS.

How Toyota Developed Process Power

• Inspiration and Observation: In 1950, Eiji Toyoda, a managing director at Toyota, observed a “just in time” inventory management approach used in US supermarkets. He decided to apply this approach to car manufacturing.
• Incremental Improvement: Toyota gradually developed TPS over decades of trial and error.
• Tacit Knowledge: Fundamental tenets of TPS were never formally codified. Much of the organizational knowledge remained tacit and not explicit.
• Slow Transferability: It took Toyota fifteen years to transfer TPS to their suppliers, demonstrating the difficulty of replicating the process.

Why Process Power is Difficult to Replicate

The Barrier in Process Power arises from hysteresis, or the difficulty of achieving process advances in a short time frame. Two factors contribute to hysteresis:

• Complexity: The complex nature of business processes, especially in manufacturing, makes it challenging to implement process improvements across the entire system quickly.
• Opacity: The tacit nature of knowledge embedded in a process makes it difficult for competitors to understand and replicate.

The challenge of replicating Process Power is highlighted by GM's attempt to learn and implement TPS. Despite a joint venture with Toyota and training opportunities for their employees, GM was unable to fully grasp and replicate TPS. This example demonstrates that Process Power cannot be achieved quickly, even with a dedicated effort.

Process Power, Operational Excellence, and the Discipline of Strategy

The chapter also discusses the relationship between Process Power and operational excellence.

• Operational excellence focuses on incremental improvements, which are typically easy to mimic and, therefore, not a source of sustainable advantage.
• Process Power is distinguished by hysteresis, making it difficult to replicate, and thus, a source of Power.
• Process Power = Operational excellence + Hysteresis.

The chapter highlights the distinction between operational excellence and strategy:

• Operational Excellence, though important, is not a strategy by itself because it does not necessarily lead to sustainable competitive advantage.
• Strategy, on the other hand, focuses on achieving and maintaining a unique and advantageous position that is difficult for competitors to copy.

The chapter contrasts the concept of Process Power with the Experience Curve, which suggests that per-unit cost declines with cumulative production volume. While the Experience Curve acknowledges the benefits of learning and process improvement, it does not address the potential for Power because it assumes all firms can achieve similar gains over time. In reality, the substantial cost differences observed between firms highlight that the gains from experience are not equally shared, and firms like Toyota can achieve Process Power.

The chapter briefly discusses routines as described by economists Richard Nelson and Sidney Winter. Routines, while important for operational efficiency, typically do not lead to Power because they lack a significant barrier to replication.

Intensity of Process Power

The intensity of Process Power is determined by:

• Industry economics: This defines the maximum potential cost advantage (D(t)) achievable through process improvements over time.
• Competitive Position: The specific firm’s process advantage at a given point in time (t).

Power Progression and Process Power

The chapter introduces the Power Progression, which maps the timing of Power establishment for each Power type. Process Power, along with Branding, typically emerges during the Stability stage, when business growth slows down but remains substantial. The time-delineated 7 Powers Chart highlights this timing.

Key Takeaways from Chapter 7

• Process Power is a rare but potent form of Power.
• Process Power results from a company’s ability to continuously improve its processes over an extended period, creating a unique and difficult-to-replicate system.
• Hysteresis, arising from complexity and opacity, is the key barrier to replication in Process Power.
• Process Power is distinct from operational excellence because it incorporates a barrier to imitation.
• The Power Progression framework highlights that Process Power typically emerges during the Stability stage of a business.

This chapter concludes Part I of the book, which focuses on Strategy Statics. Part II of the book focuses on Strategy Dynamics and the process of establishing Power.

Part II — Strategy Dynamics

Chapter 8: The Path to Power

Chapter 8 shifts the discussion from Strategy Statics (what makes a business valuable) to Strategy Dynamics, focusing specifically on how businesses develop Power. While operational excellence is important, it doesn't guarantee differential margins or growing market share because competitors can copy operational improvements.

Invention is Necessary, but Not Sufficient, for Power

Netflix's streaming business illustrates that invention is necessary but not sufficient to achieve continuing Power. Netflix solved a variety of operational problems:

• Content acquisition and licensing
• Streaming infrastructure and technology
• User interface and experience
• Marketing and customer acquisition

Even after solving these operational problems, Netflix lacked Power because its content costs were variable, and its innovations were easily imitable. Only by inventing a new business model, exclusive and original content, could Netflix leverage its scale advantage and create Power. However, even after introducing originals, Netflix found that competitors could still bid up the price of exclusive content. The ultimate key to Netflix's success in streaming was the invention of their own original programming.

Netflix's streaming success highlights a key insight: creating Power requires invention, but the invention must be paired with a strategic path to Power.

Examining each of the 7 Powers through the lens of Strategy Dynamics reinforces this lesson. All seven require invention:

• Scale Economies: Invent a business model with Scale Economies and a product attractive enough to gain market share.
• Network Economies: Invent a product that will gain a large installed base.
• Cornered Resource: Invent and secure rights to a valuable resource.
• Branding: Invent a brand identity through consistent creative choices.
• Counter-Positioning: Invent a superior business model that incumbents can't copy without harming their existing business.
• Switching Costs: Invent a product that creates Switching Costs after gaining a customer base.
• Process Power: Invent a complex, inimitable process with significant advantages.

Ultimately, 'me too' strategies are not enough to achieve Power; companies must make strategic inventions.

Invention's One-Two Punch: Power and Market Size

Invention not only opens the door for Power, but it also drives market size, enhancing business value in two ways. In Netflix's case, the invention of streaming both enabled Power and created the streaming market.

Compelling Value Drives Market Size

Products that achieve rapid adoption, or "compelling value," are essential for driving market size. These products must offer dramatic improvements over existing options, evoking a "gotta have" response from customers.

There are three primary paths to creating compelling value, each with its own tactical approach:

• Capabilities-led: Leverage existing capabilities to develop a product with compelling value. Adobe Acrobat is an example of this path, transforming a capability (digital document portability) into a product that addressed a critical need (reliable document sharing).
• Customer-led: Identify and solve a widely recognized customer need, even if the solution is initially unclear. Corning's fiber optics demonstrate this approach; Corning invested heavily to develop a solution for the recognized need for higher-capacity communication lines.
• Competitor-led: Capitalize on competitor missteps or limitations to create a product that offers superior value. Sony's PlayStation exemplifies this path, entering the video game market with a CD-based console after Sega's cartridge-based system faltered.

The takeaway from Chapter 8 is that achieving Power requires more than operational excellence; it requires strategic invention informed by the 7 Powers framework. By understanding the dynamics of Power creation, businesses can navigate periods of high uncertainty and position themselves for sustainable success.

Chapter 9: The Power Progression

Chapter 9 focuses on the Dynamics of strategy and aims to answer the second key question about achieving Power in business: "When can you reach a position of Power?" The chapter uses the case study of Intel's microprocessor business to illustrate this concept.

Intel's Journey to Power

Intel's microprocessor business started with the invention of the microprocessor itself. This invention opened up the possibility for Intel to establish Power in the market. However, the takeoff period, characterized by explosive growth in the personal computer market, played a crucial role in cementing Intel's dominance.

Several factors contributed to Intel's Power during this takeoff period:

• Scale Economies: Intel was able to achieve significant cost advantages due to their large-scale production capacity. This was amplified by their aggressive capacity expansion strategy known as "Operation Crush."
• Network Economies: The complementary relationship between microprocessors and software led to a network effect, where the value of Intel's processors increased as more software was developed for their platform.
• Switching Costs: The complexity of computer systems and the importance of compatibility created switching costs for customers, making it difficult for them to switch to alternative microprocessor suppliers.

The takeoff period was crucial because the rapid growth and high degree of flux during this stage allowed Intel to establish these Power types at a time when competitive arbitrage was less effective.

The Power Progression Framework

The chapter introduces the Power Progression framework, which maps the timing of Power establishment for each of the seven Power types.

The Power Progression breaks down the business lifecycle into three stages based on growth rates:

1. Origination: This stage occurs before a company's product achieves compelling value, and sales growth is limited.
2. Takeoff: This stage is characterized by explosive sales growth.
3. Stability: Growth slows down from the explosive levels of the takeoff stage, typically settling at around 30-40% per year.

It's important to note that these stages differ from the traditional product life cycle stages (introduction, growth, maturity, decline) because they are defined by business growth rather than industry growth, and the breakpoints are different. The Power Progression is specifically focused on the timing of Power acquisition, while the product life cycle model does not serve this purpose.

The Power Progression then maps each of the seven Power types to the stage in which they must be established:

Origination Stage:

• Counter-Positioning: A newcomer can establish Counter-Positioning by introducing a superior business model that incumbents are hesitant to mimic due to potential damage to their existing business.
• Cornered Resource: A company can gain Power by securing preferential access to a valuable resource during this early stage.

Takeoff Stage:

• Scale Economies: The rapid growth during takeoff enables a company to achieve significant cost advantages through large-scale production.
• Network Economies: The rapid customer acquisition during takeoff can help establish a strong network effect.
• Switching Costs: As customers rapidly adopt a product during takeoff, switching costs become more significant, making it difficult for them to switch to competitors later on.

Stability Stage:

• Process Power: A company can develop Process Power by gradually refining its internal processes over an extended period, making them difficult for competitors to replicate. The stability stage provides the necessary time and scale for this evolution.
• Branding: Building a strong brand takes time and consistent effort. The stability stage offers a more stable environment for cultivating brand loyalty and recognition.

Barriers and Timing

The Power Progression highlights that each of the four generic barriers to arbitrage is specific to a particular stage:

• Hysteresis: This barrier, relevant for Process Power and Branding, relies on the inherent time it takes to develop a complex process or build a strong brand. This makes the stability stage the most suitable for establishing these Power types.
• Collateral Damage: Relevant for Counter-Positioning, this barrier depends on the incumbent's reluctance to imitate a new business model due to potential negative consequences for their existing business. This dynamic is most pronounced during the origination stage when the new model is still unproven and the incumbent's business is relatively strong.
• Proprietary Rights: This barrier, relevant for Cornered Resource, relies on legal protections or exclusive access to a valuable asset. This can be established at any stage, but the origination stage offers the best opportunity to secure such rights before competition intensifies.
• Cost of Gaining Share: This barrier, relevant for Scale Economies, Network Economies, and Switching Costs, depends on the ability to acquire customers at a cost lower than their lifetime value. The takeoff stage presents the ideal opportunity for this because the flux in the market makes it difficult for competitors to respond effectively to aggressive customer acquisition efforts.

The Importance of Dynamics

The chapter concludes by emphasizing that understanding the dynamics of strategy is crucial for creating value. The Power Progression framework provides a practical tool for identifying the right time to establish different types of Power, enabling businesses to navigate the complexities of the market and position themselves for long-term success.