From 9989e3f91e391668221a1a10e6ecd8d0a1f52c21 Mon Sep 17 00:00:00 2001
From: Phil Crosby <phil.crosby@gmail.com>
Date: Thu, 16 May 2024 23:02:20 -0700
Subject: [PATCH] Update website

---
 docs/7-powers-hamilton-helmer.html | 448 +++++++++++++++++++++++++++++
 docs/index.html                    |   1 +
 2 files changed, 449 insertions(+)
 create mode 100644 docs/7-powers-hamilton-helmer.html
diff --git a/docs/7-powers-hamilton-helmer.html b/docs/7-powers-hamilton-helmer.html
new file mode 100644
index 0000000..0fb8378
--- /dev/null
+++ b/docs/7-powers-hamilton-helmer.html
@@ -0,0 +1,448 @@
+<!DOCTYPE html>
+<html lang="en">
+
+<head>
+  <meta charset="UTF-8">
+  <meta name="viewport" content="width=device-width, initial-scale=1">
+  <link rel="stylesheet" type="text/css" media="screen" href="./styles.css" />
+  <title>7 Powers - Hamilton Helmer - Book Notes</title>
+</head>
+
+<body>
+
+  <nav>
+    <a href="./" id="home">Book Notes</a>
+    <div></div>
+    <a href="https://github.com/philc/book-notes" id="github"><img src="./github.svg" /></a>
+  </nav>
+  <div id="title">
+    <h1>7 Powers - Hamilton Helmer</h1>
+  </div>
+
+  <div id="content">
+  
+<h2>Intro</h2>
+<ul>
+<li>A strategy framework &quot;prepares the mind&quot; so that you can correctly make the crux decisions. It
+should be simple but not simplistic.</li>
+<li>Statics: &quot;being there.&quot; E.g. What makes Intel's microprocessor business so durably valuable?</li>
+<li>Dynamics: &quot;getting there.&quot; E.g. What developments yielded this attractive state of affairs at
+Intel in the first place?</li>
+<li>Power: the set of conditions creating the potential for persistent differential returns
+<ul>
+<li>&quot;We can only assume microprocessors possessed some sort of rare characteristics which materially
+improved cash flow, while simultaneously inhibiting competitive arbitrage.&quot;</li>
+</ul>
+</li>
+<li>Strategy: a route to continuing Power in significant markets.</li>
+<li>Potential value = market scale * Power</li>
+<li>Being a clever business person is not sufficient to achieve differential long-term value creation.</li>
+<li>Power delivers to the firm both a Benefit and a Barrier
+<ul>
+<li>For the differential returns to be durable, there must be some barrier preventing the
+competition from performing arbitrage.</li>
+</ul>
+</li>
+<li>&quot;In Intel's case, the heart of its microprocessors strategy can be best understood not by sorting
+through the multiplicity of Intel's value improvements, but by deducing why decades of capable and
+committed competition failed to emulate or undermine those improvements.&quot;</li>
+<li>Single business focus: each business within a company will have its own strategy landscape.</li>
+</ul>
+<h2>Scale economies (chap 1)</h2>
+<ul>
+<li>Netflix, on transitioning from mail DVDs to streaming:
+<ul>
+<li>&quot;Given the uncertainty inherent in this emerging field, they took their time, demurring on
+high-testosterone bet-the-company antics.&quot;</li>
+</ul>
+</li>
+<li>&quot;But deploying smart tactics, though complex and demanding, is not itself a strategy, and indeed
+any potential for Power remained opaque in those early days. For the time, Netflix could only stay
+alert and hope that Pasteur's dictum [(&quot;Chance Favors the Prepared Mind&quot;)] would eventually bear
+fruit and chance would favor their prepared minds.&quot;</li>
+<li>Netflix was able to afford original content because the cost to produce it was amortized across
+their large subscriber base. Less scaled competitors couldn't justify the investment on original
+content.
+<ul>
+<li>&quot;In the Netflix example we see a feature of Scale Economies that recurs in many technology
+firms: a single fixed cost which declines per unit as it is prorated over higher and higher
+volumes.&quot;</li>
+<li>(Couldn't this be argued to be the case for all complex software, since it has zero marginal
+cost to service new users?)</li>
+</ul>
+</li>
+<li>Benefit: reduced cost</li>
+<li>Barrier: prohibitive costs of share gains</li>
+<li>To gain scale, an entrant must offer lower prices or better quality. A market leader will observe
+that, and price-match to prevent the erosion of their scale economies.</li>
+<li>Other types of scale economies
+<ul>
+<li>Distribution network density</li>
+<li>Learning economies: if learning leads to a product benefit, and it's positively correlated with
+production levels, then a scale advantage accrues to the leader.
+<ul>
+<li>(Google Search R&amp;D arguably has this.)</li>
+</ul>
+</li>
+<li>Purchasing economies: when a large buyer can command lower prices, e.g. Walmart, Costco.</li>
+</ul>
+</li>
+</ul>
+<h2>Network Economies (chap 2)</h2>
+<ul>
+<li>Examples: MS Windows, Facebook, LinkedIn</li>
+<li>&quot;Network Economies occur when the value of a product to a customer is increased by the use of the
+product by others.&quot;</li>
+<li>Benefit: product is more valuable with each incremental user.</li>
+<li>Cost: value deficit of a follower can be prohibitive.</li>
+<li>Common characteristics of Network Economies:
+<ul>
+<li>Winner takes all</li>
+<li>Boundedness: &quot;as powerful as this Barrier is, it is bounded by the character of the network,
+something well-demonstrated by the continued success of both Facebook and LinkedIn. Facebook has
+powerful Network Economies itself but these have to do with personal and not professional
+interactions. The boundaries of the network effects determine the boundaries of the business.&quot;</li>
+</ul>
+</li>
+<li>Indirect network effects (AKA demand side network effects)
+<ul>
+<li>&quot;If a business has important complements and these complements are somehow exclusive to each
+offering, then a leader will attract more and/or better complements.&quot;</li>
+<li>Examples: a mobile OS having a good app ecosystem, which a new entrant cannot replicate.</li>
+</ul>
+</li>
+</ul>
+<h2>Counter positioning (chap 3)</h2>
+<ul>
+<li>Basically, the innovator's dilemma.</li>
+<li>Benefit: new business model is superior to the incumbent's model due to lower costs or the ability
+to charge higher prices.</li>
+<li>Barrier: by adopting the new model, the incumbent will incur collateral damage because they would
+have to give up an existing lucrative position.</li>
+<li>Incumbents are not stupid. They are often constrained from adopting the challenger's strategy.
+<ul>
+<li>&quot;The incumbent's failure to respond, more often than not, results from thoughtful calculation.
+They observe the upstart's new model and ask, 'Am I better off staying the course, or adopting
+the new model?' Counter-Positioning applies to the subset of cases in which the expected damage
+to the existing business elicits a 'no' answer from the incumbent. The Barrier, simply put, is
+collateral damage. In the Vanguard case, Fidelity looked at their highly attractive asset
+management franchise and concluded that the new passive funds' more modest returns would likely
+fail to offset the damage done by a migration from their flagship products.&quot;</li>
+</ul>
+</li>
+<li>Note that some tech revolutions just change the landscape, and the incumbent has no ability to
+compete and obtain power in the new landscape. This is not a case of Counter-Positioning.
+<ul>
+<li>Example: Kodak and digital cameras. They were a film company and had no competency in digital.</li>
+</ul>
+</li>
+<li>Why don't incumbents suffer the collateral damage?
+<ul>
+<li>In retrospect, it may have made sense for the incumbent to suffer the collateral damage and
+adopt the new approach, but new strategies are often high uncertainty, and so it's not
+reasonable for the incumbent to act — action has a lower expected value than inaction.</li>
+<li>There's also an agency problem: it's hard to align a CEO's compensation to allow for pivots.
+<ul>
+<li>&quot;Addressing the threat of a Counter-Positioned competitor frequently requires upending the
+incumbent's business in multiple ways, and such turmoil is rarely symmetric in its impact on
+enterprise value and compensation, even with best practice Long-Term Incentive Plans in
+place.&quot;</li>
+</ul>
+</li>
+</ul>
+</li>
+<li>Counter-Positioning creates power against a larger incumbent, but creates no power against
+competitors similar to the entrant. E.g. In-N-Out vs. Five Guys. Both of them are
+counter-positioned against McDonald's, but they are not counter-positioned against each other.</li>
+<li>Five Stages of Counter-Positioning (how new incumbents react to counter-positioning):
+<ul>
+<li>Denial; ridicule; fear; anger; capitulation.</li>
+<li>Capitulation happens often too late, via &quot;dabbling,&quot; because there's dual pressures to adopt the
+new model but also preserve the existing business.</li>
+</ul>
+</li>
+<li>&quot;The only bet worthwhile for a challenger is one in which <em>even if the incumbent plays its best
+game</em>, it can be taken off the board. A competent Counter-Positioned challenger must take
+advantage of the strengths of the incumbent, as it is this strength which molds the Barrier,
+collateral damage.&quot;</li>
+</ul>
+<h2>Switching costs (chap 4)</h2>
+<ul>
+<li>It's hard for a business to switch from S&amp;P's ERP software, or MS Office, or for consumers to
+switch away from iTunes.</li>
+<li>&quot;A company like SAP, profiting from the indenture of its clients, has all incentive to hike the
+prices of such services.&quot;</li>
+<li>&quot;Switching Costs arise when a consumer values compatibility across multiple purchases from a
+specific firm over time.&quot;
+<ul>
+<li>Or, if the customer had to customize the deployment of the solution.</li>
+</ul>
+</li>
+<li>Benefit: firm can charge higher prices.</li>
+<li>Barrier: to offer an equivalent product, competitors must compensate customers for Switching
+Costs. This makes share grains for the entrant expensive, and thus less attractive.</li>
+<li>Note that Switching Costs do not offer power over new, potential customers. Entrants can compete
+for those new customers without suffering from the barrier.
+<ul>
+<li>(E.g. Google Docs targeted new businesses, not existing businesses who were already using MS
+Office.)</li>
+</ul>
+</li>
+<li>Types of switching costs
+<ul>
+<li>Financial: customer has to restart their investment and perform a migration.</li>
+<li>Procedural: retraining, unfamiliarity with the new solution, new headcount, risk resulting from
+the migration.</li>
+<li>Relational: it's hard to abandon a community that the user likes and identifies with.</li>
+</ul>
+</li>
+<li>The firm can increase related sales to existing, captured customers, by introducing new product
+lines, potentially by M&amp;A.</li>
+<li>When more product lines are adopted, they increases customer entanglement and thus switching
+costs.</li>
+<li>Switching Costs power can lead to Branding power
+<ul>
+<li>&quot;If the product preference of users already tethered by Switching Costs spills over to a wider
+pool of potential customers, you could find yourself enjoying the effects of Branding.&quot;</li>
+</ul>
+</li>
+</ul>
+<h2>Branding (chap 5)</h2>
+<ul>
+<li>&quot;Branding is an asset that communicates information and evokes positive emotions in the customer,
+leading to an increased willingness to pay for the product.&quot;</li>
+<li>The brand is built on historical information that buyers accumulate about the seller.</li>
+<li>Benefit: the firm is able to charge higher prices due to affective valence or uncertainty
+reduction.
+<ul>
+<li>Affective valence: built-up associations with the brand which elicit good feelings which are
+distinct from the actual underlying value of the good.</li>
+<li>Uncertainty reduction: the customer expects less risk in their usage experience, because of the
+brand's reputation.</li>
+</ul>
+</li>
+<li>Barrier: &quot;a strong brand can only be created over a lengthy period of reinforcing actions
+(hysteresis), which itself serves as the key Barrier. Again, Tiffany has cultivated its brand name
+for more than a century. What's more, copycats face daunting uncertainty in initiating Branding: a
+long investment runway with no assurance of an eventual path to significant affective valence.&quot;</li>
+<li>Brand dilution: taking actions which contradict historical actions. E.g. a luxury brand
+introducing a &quot;value&quot; line of products.</li>
+<li>Only certain types of goods have Branding potential:
+<ul>
+<li>For a brand to have branding power, the type of good being purchased must be bought based on
+affective valence.</li>
+<li>&quot;Business-to-business goods typically fail to exhibit meaningful affective valence price premia,
+since most purchasers are only concerned with objective deliverables. Consumer goods, in
+particular those associated with a sense of identity, tend to have the purchasing decision more
+driven by affective valence. Here's the reason: in order to associate with an identity, there
+must be some way to signal the exclusion of alternative identities.&quot;</li>
+<li>Uncertainty reduction is valuable in products where failure is highly undesirable.
+<ul>
+<li>&quot;Such products tend to be those associated with bad tail events: safety, medicine, food,
+transport, etc.&quot;</li>
+</ul>
+</li>
+</ul>
+</li>
+</ul>
+<h2>Cornered resource (chap 6)</h2>
+<ul>
+<li>Cornered resource: celebrity talent, patent or key invention, property rights on a key resource,
+secret or non-replicable R&amp;D process.</li>
+<li>Pixar had celebrity talent: the only team that could produce animated films at that quality. They
+didn't defect, because they were making history.</li>
+<li>Benefit: the resource produces an uncommonly appealing product.</li>
+<li>Barrier: fiat — the resource is cornered via decree, either general or personal (&quot;personal&quot;
+meaning that the celebrity talent has chosen to exclusively work with the firm for some reason).</li>
+<li>If the firm secures exclusive access to a coveted resource but has to pay such that all of the
+value is arbitraged out, then it is not power. Example: a production studio signing an expensive
+big-name actor.</li>
+</ul>
+<h2>Process power (chap 7)</h2>
+<ul>
+<li>Benefit: the firm is able to improve the product, or lower costs, as the result of process
+improvements embedded in the firm. E.g. Toyota with TPS (Toyota Production System).</li>
+<li>Barrier: hysteresis: the process advances are difficult to replicate and can only be achieved over
+a long time period of sustained evolutionary advance.</li>
+<li>The inherent &quot;speed limit&quot; in replicating a firm's process advancements is due to complexity and
+opacity. Opacity meaning the process is not fully codified and thus not easily portable — it's
+difficult to tease out what parts and dependencies are making it so successful.</li>
+<li>This power is rare.
+<ul>
+<li>&quot;The type of Benefit it cites — evolutionary bottom-up improvement — stands at the heart of
+operational excellence; as such, it is quite common. The rarity of Process Power results from
+the infrequency of the Barrier: an unyielding, long-time constant for the improvements in
+question.&quot;</li>
+<li>Operational excellence is not a strategy. It doesn't confer sustainable differentiation over
+competent competitors.</li>
+</ul>
+</li>
+<li>Argues the quality / cost reduction gains over time — &quot;traveling along the experience curve&quot; --
+are widely similar across firms.</li>
+<li>Operational excellence is essential for establishing sources of power, but it is not itself power.</li>
+</ul>
+<h2>The path to power - &quot;me too&quot; won't do (chap 8)</h2>
+<ul>
+<li>(Helpful chapter on how firms actually transition from having no Power to having Power).</li>
+<li>&quot;Armed with one or more of these Power types, your business is ideally positioned to become a
+durable cash-generator, despite the best efforts of competitors. If you possess none of these,
+your business is at risk.&quot;</li>
+<li>&quot;Competitors can easily mimic the improvements yielded by operational excellence, eventually
+arbitraging out the value to the business.&quot;</li>
+<li>Netflix had counter-positioning power against Blockbuster when it was in the DVD business. But it
+had no power in the streaming business, despite being a first mover, and competent. &quot;Operational
+excellence is not a strategy.&quot;</li>
+<li>&quot;here one might hypothesize some Scale Economies: as Netflix accumulates more data, the acuity of
+their recommendations increases. True, but not linear: these advantages paid only diminishing
+returns, meaning a smaller competitor of an attainable scale could realize most of the same
+benefit.&quot;
+<ul>
+<li>(This sounds like a valid criticism that could be made against any personalization company
+claiming their data sets provide durable Power.)</li>
+</ul>
+</li>
+<li>Netflix spent most of their time on operational excellence, and rightfully so — it was necessary,
+but not sufficient, to guarantee ongoing differentiation.</li>
+<li>Transitioning into originals unlocked Economies of Scale power, because the content became a fixed
+rather than variable cost, and could be consumed by Netflix's existing large subscriber base --
+larger than competitors'.</li>
+<li>&quot;The saga of Netflix's ascent exemplifies intelligent adaptation over an extended period in the
+face of daunting uncertainty. The terrain of entrepreneurs, not planners.&quot;</li>
+<li>&quot;Prior to Netflix's success, the value potential was opaque to the investment community, not
+because investors were thoughtless or ill-informed, but because the 'route to Power' was not just
+unknown, but unknowable — even to Netflix management.&quot;
+<ul>
+<li>As soon as they established power and proved it, their share price increased 100x.</li>
+</ul>
+</li>
+<li>What route did Netflix take to creating Power? They took the competitive position of an attractive
+new service. &quot;Netflix's pioneering rollout excited customers, and their influx propelled Netflix
+to an early relative scale advantage that the company has never relinquished.&quot;</li>
+<li>The 7 powers maps &quot;the only seven worthwhile destinations&quot; for a company.</li>
+<li>&quot;Crafting&quot;: the author argues that Netflix crafted their course through experimentation and
+testing the waters, rather than far-sighted strategic planning.
+<ul>
+<li>Crafting was the only feasible way to discover and develop all of the complements to their
+streaming product.</li>
+</ul>
+</li>
+<li>The first cause of every power type is invention: some new thing to break in with.</li>
+<li>&quot;Flux&quot; creates new footholds for invention to crack open the market and for firms to obtain power.</li>
+<li>&quot;The 7 Powers framework focuses your attention on the critical issues and increases the odds of a
+favorable outcome.&quot; This is &quot;the most that strategy can accomplish, as the company develops
+inventions.&quot;</li>
+<li>(If power only follows invention, then a firm without power should dedicate itself to having a
+malleable development process and seek positions of high potential energy, to fuel the rate of
+invention.)</li>
+<li>Value capture: &quot;Invention drives a favorable change in system economics — you get more for less.
+The resulting gain in the end will be split somehow between your company and other segments of the
+value chain. The 7 Powers is all about making sure that you get some of the increase. But it is
+the gain customers experience that will shape the market size.&quot;</li>
+<li>&quot;Compelling value&quot;, that is sufficiently compelling such that customers rapidly adopt a product,
+differs in magnitude by industry. For software, compelling may mean a 10x improvement. For battery
+efficiency, it might be 2x. Jobs described this threshold as &quot;insanely great&quot; products.</li>
+<li>How to create invention and compelling value? Several options:
+<ul>
+<li>Start from:</li>
+<li>
+<ol>
+<li>Your capabilities: customer need is unknown; takes awhile. E.g. Pixar.</li>
+</ol>
+</li>
+<li>
+<ol start="2">
+<li>Customer needs: well-known customer problem. Risk is technical: can you solve the problem?</li>
+</ol>
+</li>
+<li>
+<ol start="3">
+<li>Competitor-led: With a new technique or changing environment, can you offer 10x better
+solution and then stay ahead?</li>
+</ol>
+</li>
+</ul>
+</li>
+</ul>
+<h2>The power progression (chap 9)</h2>
+<ul>
+<li>Intel as a case study: they had operational excellence and world class management in both their
+memory and microprocessor business, but only one provided an enduring high-margin business,
+because in microprocessors Intel had Power.</li>
+<li>MS-DOS and Lotus 123 were written for the Intel processor. This meant that IBM PC clones had to
+adopt Intel chips too. This network economy eventually disappeared as OSes and applications
+abstracted away the chipset.</li>
+<li>&quot;The one-sentence story of Intel is a single design win, then a decade and a half of very high
+Switching Costs, then Scale Economies.&quot;</li>
+<li>(This chapter has a helpful, thorough analysis of each of Intel's sources of power)</li>
+<li>All of Intel's sources of Power (scale economies, network economies, switching costs) were rooted
+in their takeoff period.</li>
+<li>Network economies: the takeoff stage is critical for this power, because Network Economies are
+often characterized by a tipping point: &quot;once the leader has achieved an edge in installed base,
+most users will find it to their benefit to choose that leader.&quot;
+<ul>
+<li>(This was the case with Microsoft's languages, and later their operating systems. &quot;We set the
+standard.&quot;)</li>
+</ul>
+</li>
+<li>&quot;Takeoff is the stage when differential customer acquisition can take place at favorable terms,
+which is why it presents such ideal Power opportunities.&quot;
+<ul>
+<li>From the author's experience, the &quot;takeoff period&quot; for companies in a market lasts while the
+business is growing 40% or more per year. Such high growth indicates ongoing flux and
+opportunity to establish power, and for market leadership swaps.</li>
+</ul>
+</li>
+<li>&quot;If a company has not established Power, competitive arbitrage will catch up as soon as growth
+slows; fundamentals will assert themselves, and the favorable early returns will prove fleeting.&quot;
+<ul>
+<li>The company will transition to being a low-margin player running hard on a treadmill of
+competition.</li>
+<li>(See also Thiel: competition is for losers)</li>
+</ul>
+</li>
+<li>&quot;The [Benefits of power] are common, and they often bear little positive impact on company value,
+as they are generally subject to full arbitrage. The true potential for value lies in those rare
+instances in which you can <em>prevent</em> such arbitrage, and it is the Barrier which accomplishes
+this. Thus, the decisive attainment of Power often syncs up with the establishment of the
+Barrier.&quot;</li>
+<li>So, the question is, &quot;when must Power be established&quot;? It varies by the type of Power.</li>
+<li>Power progression: Phase of business -&gt; when a power can be established
+<ul>
+<li>Origination: Cornered Resource, Counter-Positioning</li>
+<li>Takeoff: Network Economies, Scale Economies, Switching Costs</li>
+<li>Stability: Branding, Process Power</li>
+</ul>
+</li>
+<li>&quot;The Counter-Positioning and Cornered Resource are most likely to be established in the
+origination stage. These are wonderful, durable types of Power specifically because your 'route to
+Power' is locked in early, so long as you execute well.&quot;</li>
+<li>Process Power is developed in the stability phase. &quot;Only when a company has scaled sufficiently
+and operated long enough can it have evolved processes which are sufficiently complex or opaque to
+defy speedy emulation.&quot;</li>
+<li>Branding: if one can invest enough time into branding, and remaining a market leader until the
+stability phase, then you can qualify for this power, which is unavailable to new entrants.</li>
+<li>&quot;In the high flux shortened time frame of the takeoff Stage, sufficiently timely imitation becomes
+less likely, and excellent execution can be highly strategic.&quot;</li>
+<li>(Warren Buffet) &quot;Good managers can rarely reverse the course of a bad business,&quot; i.e. one without
+Power.</li>
+<li>A business must have a route to Power over each one of its competitors for it to have sustainable
+differentiation. The Power used may be different per competitor.</li>
+<li>The prospect of monopoly profits is the incentive — the fuel — for invention.
+<ul>
+<li>&quot;From a static viewpoint, the search for Power may seem like a zero sum game of preventing gains
+flowing to consumers. But from a Dynamics viewpoint, it is the possibility of Power that is a
+critical motivator of invention.&quot;</li>
+</ul>
+</li>
+</ul>
+
+  </div>
+
+  <footer>
+    <hr></hr>
+    All content on this page, including text excerpts, is copyrighted by the author of the book.
+  </footer>
+
+</body>
+
+</html>
diff --git a/docs/index.html b/docs/index.html
index c604734..6a27ade 100644
--- a/docs/index.html
+++ b/docs/index.html
@@ -22,6 +22,7 @@ <h1>Book Notes</h1>
   <div id="content">
   <h2>Business</h2>
 <ul>
+<li><a href="7-powers-hamilton-helmer.html">7 Powers - Hamilton Helmer</a></li>
 <li><a href="powerful-patty-mccord.html">Powerful - Patty McCord</a></li>
 <li><a href="radical-candor-kim-scott.html">Radical Candor - Kim Scott</a></li>
 <li><a href="slack-tom-demarco.html">Slack - Tom DeMarco</a></li>
