Review

As product managers, we can take a lot from Helmer's work. He offers us a framework for dissecting the anatomy of business strategy, focusing on the core determinants of lasting business value and the conditions conducive for enduring differential returns - or as he puts it, power.

Helmer plots out seven power sources that we, as product managers, can utilize in mapping out our company's competitive edge. These are scale economics, network economics, counter-positioning, switching costs, branding, cornered resource, and process power.

Counter-Positioning strikes a chord with me. It's a reminder that incumbents are not always just asleep at the wheel. Instead, they might be consciously choosing to guard their existing business. And that's why they often struggle with disruption.

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The Crux

I’m predicting this book will become a business classic. It is one of the best books on business strategy that I’ve come across. Good Strategy/Bad Strategy (it’s predecessor) had me agreeing with the theory, but I was left wondering how to put it into action. This book addresses that and gives you a framework to follow to create your strategy. This book can stand alone, so I’ll be recommending this ahead of Good Strategy/Bad Strategy from now on.

andrewclark.co.uk

Book Review and Summary: The Cold Start Problem by Andrew Chen

Get a comprehensive review and summary of the best-selling book "The Cold Start Problem" by Andrew Chen, the growth and product development expert. Learn about the key principles and practices for driving user acquisition and retention in the early stages of a product's lifecycle.

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The Innovator’s Dilemma

This book is a product management classic. A great framework for how disruptive technologies change market dynamics. It’s full of great insight for challengers and incumbents. The book is clearly well researched. The conclusions are both surprising and straight forward. A must for anyone trying to innovate and break into a market. Well worth the time.

andrewclark.co.uk

Key Takeaways

The 20% that gave me 80% of the value.

Introduction

• Great execution is crucial, but not sufficient for success.
• Strategy is all about power. Power means having the conditions that allow for consistently higher returns.
• Being intelligent, informed, and motivated isn't enough to gain power. Others possess these traits too, leading to constant arbitrage pressure.
• Persistence is key: the bulk of a business’ value comes in the out years. If a grows at 10% per year, the next three years account for only about 15% of its value.
• Power is persistent differential returns, it has both a magnitude and duration.
• Each power has a unique benefit and barrier.
• A benefit: the conditions that allow for higher returns
• A barrier: the force that helps persist those higher returns (defeating arbitrage)
• Benefit conditions aren’t rare, but barrier conditions are. Look to the barrier first.
• Power, unlike strength, is a relative concept. Power is assessed with respect to each potential competitor.
• Great companies ascend in a step function; critical moments and key decisions shape the trajectory. To get the crux moves right, you need to adapt your strategy to the context.

1. Scale Economies

• Scale Economies refer to a decline in unit costs as a business grows in size, leading to power through reduced operational costs.
• Competing smaller firms may attempt to capture market share by offering lower prices, but the leading firm can counteract these moves by leveraging their cost advantage to match price cuts, deterring competitors and maintaining their scale advantage.
• The benefit of scale economies is reduced costs.
• The barrier to scale economies relies in the prohibitive costs of gaining market share.
• Scale economies can come from a variety of factors that contribute to lowering costs: like fixed cost dilution, volume/area relationships, distribution network density, learning economies and purchasing economies.
• The significance of scale economies is determined by the industry's economic structure and the leader's relative scale. Without a scale differential, even strong potential scale economies won't translate into power.

2. Network Economies

• Network Economies occur when the value of a product to a customer is increased by the use of the product by others.
• Benefit: In a leadership position a company can charge higher prices than competitors, as their user base brings more value
• Barrier: Unattractive cost/benefit of gaining share. It’s hard to discount your service enough to compensate for the less followers.
• Industries with network economies are marked by winner-takes-all dynamics, bounded barriers, and the importance of an early decisive product for fast scaling and dominance.
• The power of network economies is a function of the strength of network economies in that industry, and absolute difference in installed base of the leader vs the competitor. The wider the gap and the stronger the advantage the bigger the power.
• The common strategy is therefore to scale as quickly as possible (although it’s often hard to tell how strong the network economies will be in a new industry).
• Indirect network effects, also known as demand-side network effects, occur when the value of a product or service increases as more complementary products or services become available. In other words, the growth of a network indirectly benefits its users by attracting more complementary offerings.

3. Counter-Positioning

• Counter positioning is a way to defeat an incumbent who appears unassailable by conventional measures of competitive strength. An upstart develops a superior, heterodox business model that successfully challenges well-entrenched incumbents.
• Benefit: the new business model is superior to the incumbent's model due to lower costs and/or the ability to charge higher prices, resulting in superior product deliverables.
• Barrier: for incumbents to respond to counter-positioning is the potential collateral damage to their existing business, which often leads to a calculated decision to stay the course rather than adopt the new model.
• The upstart steadily accumulates customers while the incumbent remains seemingly paralysed and unable to respond effectively.
• Reasons an incumbent doesn’t mimic the upstart: It can be a negative net present value, the heritage of a company can be deeply embedded, the CEO might not want to take the risk.
• The strength of the effect is a function of how much better the new business model is, and how painful the collateral damage of entering the new business model will be for the incumbent.

4. Switching Costs

• Switching costs: The anticipated loss of value a customer may experience when changing to a different supplier.
• Benefit: Higher retention or higher prices. Benefits can be extended further by selling follow-on products to current customers.
• Barrier: Competitors must compensate customers for switching costs. If switching costs are high, such a challenge is distinctly unattractive.
• Develop an ecosystem of add-on products to maximise the benefit of high switching costs.
• Products with high switching costs can have the paradoxical combination of high retention and low satisfaction. Once a customer has bought in, they are hopelessly hooked.
• Types of switching costs: financial, procedural (risk, adaptation), and relational (social).
• In mature markets, switching costs are known, firms know customer lifetime value is high, so they happily increase costs to acquire the customer and compete away the advantage. To benefit from the power, you have to acquire customers before the extent of the switching costs are realised.

5. Branding

• Branding: is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.
• Benefit: the ability to charge a higher price because of two reasons:
• Affective valence: associations with the brand elicit good feelings.
• Uncertainty reduction: peace of mind knowing the branded product will be consistent.
• Barrier: strong brands can only be created over a long period of reinforcing actions. Building a brand requires a long investment runway with no assurance of significant affective valence. Trademarks make brands hard to copy.
• The size of the branding effect is a function of…
• Magnitude: affective valence and uncertainty reduction of that good in that market.
• Duration: is there a long enough runway to develop the brand

6. Cornered Resource

• Creative efforts often resist the type of predictable successes that come with power.
• Cornered resource: where a company has exclusive access to a valuable and rare resource that competitors cannot easily replicate or substitute.
• Benefit: you can produce a superior product, or the same product at a lower price
• Barriers can vary. For talent, it may be personal choice. For technology, it could be patents. For resources, it might be property rights.
• To qualify as a cornered resource, the asset must be idiosyncratic, non-arbitraged, transferable, ongoing and sufficient.
• The size of the advantage is a function of the margin premium due to the cornered resource.

7. Process Power

• Process Power: arises from a company's unique, superior, and difficult-to-imitate processes or ways of doing business.
• Benefits: operate more efficiently, effectively, or with higher quality than its competitors.
• Barriers: they are build through years of experience, learning, and continuous improvement. Making them hard to replicate. Complexity and opacity contribute to this effect.
• Process power definition: embedded company organisation and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.
• The power stems from operational excellence, which is common. BUT the power develops only from a relentless focus to continuous improvement that is tied to time.

Path to Power

• Dynamics (getting there) is completely different from (statics) being there.
• To assess which journeys are worth taking, you must first understand which destinations are desirable.
• What gets you to those positions of power?
• Scale Economies: Pursue a business model that offers economies of scale, while differentiating your product to make it more attractive (so you can gain market share).
• Network Economies: as above but install base is the goal.
• Cornered Resource: Secure rights to a unique, valuable resource.
• Branding: Consistently foster customer affinity beyond product attributes over a long period.
• Counter-Positioning: Develop a superior business model that threatens incumbents if replicated.
• Switching Costs: Establish a customer base with a product that also fulfils Scale and Network Economies requirements.
• Process Power: Evolve a unique, complex process that provides long-term advantages and is hard to imitate.
• Take advantage of flux: external conditions create new threats and opportunities (typically in fits and starts) and find a route to power.
• Use your capabilities to create a product that fulfils a significant customer need that your competitors can’t.

The Power of Progression

• Power acquisition can be parsed into three time windows, before and after takeoff. Different powers come at different times.

Deep Summary

Longer form notes, typically condensed, reworded and de-duplicated.

Introduction

• Achieving great execution is crucial, but not sufficient for success. Strategy is also vital.
• Book recommendation: Michael Porter, Competitive Strategy
• The 7 Powers is a strategy framework that offers an actionable understanding of the main strategy levers.
• Strategy is the study of the key factors that create potential business value.
• Strategy is both statics (being there) and dynamics (getting there).
• Strategy is all about power. Power means having the conditions that allow for consistently higher returns.
• This book studies the conditions that result in Power (Statics) and how to attain them (Dynamics).
• The Mantra: Strategy is a route to continuing Power in significant markets
• Simply being intelligent, informed, and motivated isn't enough to gain power. Others possess these traits too, leading to constant arbitrage pressure.
• Potential Value is a factor of market scale and power.
• Persistence is key: the bulk of a business’ value comes in the out years. If a grows at 10% per year, the next three years account for only about 15% of its value.
• Dual Attributes. Power is as hard to achieve as it is important.
• If power is persistent differential returns, it has both a magnitude and duration.
• A Benefit: the conditions that allow for higher returns
• A Barrier: the force that helps persist those higher returns (defeating arbitrage)
• Each power has a unique benefit and barrier.
• Benefit conditions aren’t rare, but barrier conditions are. Look to the barrier first.
• Conditions of power involve the interaction between the underlying industry's economics and the specific business's competitive position.
• Power, unlike strength, is a relative concept. Power is assessed with respect to each potential competitor.
• Great companies ascend in a step function; critical moments and key decisions shape the trajectory. To get the crux moves right, you need to adapt your strategy to the context.

Part 1: Strategy Statistics

Scale Economies

• Scale Economies refer to a decline in unit costs as a business grows in size, leading to power through reduced operational costs.
• For Netflix, the power stems from the ability to lower content costs per subscriber (as they spread the cost of content over more subscribers).
• Competing smaller firms may attempt to capture market share by offering lower prices, but the leading firm can counteract these moves by leveraging their cost advantage to match price cuts, deterring competitors and maintaining their scale advantage.
• The benefit of scale economies is reduced costs.
• The barrier to scale economies relies in the prohibitive costs of gaining market share.
• Scale economies can come from a variety of factors that contribute to lowering costs, most require operational excellence to be realised:
• Fixed cost dilution (over a larger customer base)
• Volume/area relationships (costs are tied to area, but utility to volume)
• Distribution network density (more customers per area)
• Learning economies (the more you produce the more you learn)
• Purchasing economies (large scale buyers can get better deals)
• Surplus Leader Margin (SLM) is the profit margin a dominant business can achieve by pricing in a way that leaves competitors with zero profits. It is the product of Scale Economy Intensity and Scale Advantage.
• The significance of scale economies is determined by the industry's economic structure and the leader's relative scale. Without a scale differential, even strong potential scale economies won't translate into power.

Network Economies

• Network Economies occur when the value of a product to a customer is increased by the use of the product by others.
• Benefit: In a leadership position a company can charge higher prices than competitors, as their user base brings more value
• Barrier: Unattractive cost/benefit of gaining share. It’s hard to discount your service enough to compensate for the less followers.
• Industries with network economies exhibit these attributes:
• Winner takes all dynamics.
• Boundedness: barriers have boundaries, Facebook dominated social networks, but LinkedIn got professional networks.
• Decisive early product enables fast scaling and dominance.
• The power of network economies is a function of the strength of network economies in that industry, and absolute difference in installed base of the leader vs the competitor. The wider the gap and the stronger the advantage the bigger the power.
• The common strategy is therefore to scale as quickly as possible (although it’s often hard to tell how strong the network economies will be in a new industry).
• Indirect network effects, also known as demand-side network effects, occur when the value of a product or service increases as more complementary products or services become available. In other words, the growth of a network indirectly benefits its users by attracting more complementary offerings.
• For example a new smartphone OS would struggle to reach critical mass due to a lack of apps initially, deterring developers due to a small market.

Counter-Positioning

• Counter positioning is a way to defeat an incumbent who appears unassailable by conventional measures of competitive strength. An upstart develops a superior, heterodox business model that successfully challenges well-entrenched incumbents.
• Benefit: the new business model is superior to the incumbent's model due to lower costs and/or the ability to charge higher prices, resulting in superior product deliverables.
• Barrier: for incumbents to respond to counter-positioning is the potential collateral damage to their existing business, which often leads to a calculated decision to stay the course rather than adopt the new model.
• The upstart steadily accumulates customers while the incumbent remains seemingly paralysed and unable to respond effectively.
• Examples: Vanguard vs. Fidelity, Dell vs. Compaq, Nokia vs. Apple, Amazon vs. Borders, In-N-Out vs. McDonalds, Charles Schwab vs. Merrill Lynch, and Netflix vs. Blockbuster.
• Reasons an incumbent doesn’t mimic the upstart:
• It’s a negative net present value move: Gains made by the new business model will not offset losses in the original business model (e.g. your margin is my opportunity)
• Cognitive bias: Heritage is influential and deeply embedded. The incumbent is optimised and known for the current model.
• Job security: there can be an agency problem with the CEO.
• This type of power is only relevant vs the incumbent, not vs competition amongst upstarts. It’s therefore best paired with another power.
• 5 stages of incumbent reaction: denial, ridicule, fear, anger and capitulation.
• Counter-positioning often underlies situations in which the following developments are jointly observed:
• The incumbent typically loses share, can’t counter the entrant, management might be replaced but often they’ve capitulated until it’s too late.
• The strength of the effect is a function of how much better the new business model is, and how painful the collateral damage of entering the new business model will be for the incumbent.

Switching Costs

• Switching costs: The anticipated loss of value a customer may experience when changing to a different supplier.
• Benefit: Higher retention or higher prices. Benefits can be extended further by selling follow-on products to current customers.
• Barrier: Competitors must compensate customers for switching costs. If switching costs are high, such a challenge is distinctly unattractive.
• Develop an ecosystem of add-on products to maximise the benefit of high switching costs.
• Products with high switching costs can have the paradoxical combination of high retention and low satisfaction. Once a customer has bought in, they are hopelessly hooked.
• Types of switching costs: financial, procedural (risk, adaptation), and relational (social).
• All players in the market can benefit from switching costs.
• In mature markets, switching costs are known, firms know customer lifetime value is high, so they happily increase costs to acquire the customer and compete away the advantage. To benefit from the power, you have to acquire customers before the extent of the switching costs are realised.

Branding

• Tiffany demands a premium. They have earned a reputation over many years for quality control and carefully curating their image. So, you know what you're getting, and you pay a premium for it. The word choice on their website says it all (heritage, elegance, exclusivity, flawless).
• Branding: is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.
• Benefit: the ability to charge a higher price because of two reasons:
• Affective valence: associations with the brand elicit good feelings.
• Uncertainty reduction: peace of mind knowing the branded product will be consistent.
• Barrier: strong brands can only be created over a long period of reinforcing actions. Building a brand requires a long investment runway with no assurance of significant affective valence. Trademarks make brands hard to copy.
• High-end brands must be wary of increasing volumes of ‘down market’ products.
• Brands are subject to changing consumer preferences and counterfeiting.
• Brands can be limited by geographic boundaries, or industry / value proposition.
• The size of the branding effect is a function of…
• Magnitude: affective valence and uncertainty reduction of that good in that market.
• Duration: is there a long enough runway to develop the brand

Cornered Resource

• Creative efforts often resist the type of predictable successes that come with power.
• Cornered resource: where a company has exclusive access to a valuable and rare resource that competitors cannot easily replicate or substitute.
• Benefit: you can produce a superior product, or the same product at a lower price
• Barriers can vary. For talent, it may be personal choice. For technology, it could be patents. For resources, it might be property rights.
• To qualify as a cornered resource, the asset must meet five criteria:
• Idiosyncratic: The resource must be peculiar or unique to the company and not readily available to competitors. It should be difficult or impossible for rivals to imitate or substitute.
• Non-arbitraged: There should be no close substitutes for the resource that can be easily traded or exchanged in the market. This ensures that the company maintains its competitive advantage.
• Transferable: The resource must be able to create value for the company by being applied to its products, services, or processes. It should contribute to the company's value proposition and bottom line.
• Ongoing: The resource should provide a sustained competitive advantage over time. It should not be easily eroded or rendered obsolete by changes in the market or technological advancements.
• Sufficient: The resource must be significant enough to make a material difference in the company's performance and market position. It should provide a meaningful edge over competitors.
• The size of the advantage is a function of the margin premium due to the cornered resource.

Process Power

• Few manufacturers have managed to imitate Toyota successfully, even though it’s open about it’s practices. The system was much bigger than what happens on the assembly line, it’s everything you have to do to support that.
• Process Power: arises from a company's unique, superior, and difficult-to-imitate processes or ways of doing business.
• Benefits: operate more efficiently, effectively, or with higher quality than its competitors.
• Barriers: they are build through years of experience, learning, and continuous improvement. Making them hard to replicate. Complexity and opacity contribute to this effect.
• Process power definition: embedded company organisation and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.
• The power stems from operational excellence, which is common. BUT the power develops only from a relentless focus to continuous improvement that is tied to time.
• The Experience Curve is a concept that notes a pattern in company costs decreasing over time. This pattern shows that for each doubling of units produced, the cost per unit falls between 70% and 85% of its previous cost before the doubling. This demonstrates that increased production experience leads to cost efficiency.

Part 2: Strategy Dynamics

Path to Power

• Netflix knew it would have to pivot from DVD rental to streaming. They didn’t have any unique power in that space. They invested 1-2% of revenue on it. They launched ‘watch it now’ with 1000 titles, just 10% of their catalogue. Customers responded with enthusiasm.
• Netflix knew originals and exclusive content would give it power, with ‘House of Cards’ proving to be the first powerhouse. It also meant if the networks stopped selling shows, they’d just produce original content. Taking away a major risk.
• Key moves that empowered Netflix:
• Competitive Position: Their innovative service and early customer influx gave them a lasting scale advantage.
• Industry Economics: Originals and exclusives converted their main cost (content) from variable to fixed, creating Scale Economies for the first time.
• Dynamics (getting there) is completely different from (statics) being there.
• To assess which journeys are worth taking, you must first understand which destinations are desirable.
• What gets you to those positions of power?
• Scale Economies: Pursue a business model that offers economies of scale, while differentiating your product to make it more attractive (so you can gain market share).
• Network Economies: as above but install base is the goal.
• Cornered Resource: Secure rights to a unique, valuable resource.
• Branding: Consistently foster customer affinity beyond product attributes over a long period.
• Counter-Positioning: Develop a superior business model that threatens incumbents if replicated.
• Switching Costs: Establish a customer base with a product that also fulfils Scale and Network Economies requirements.
• Process Power: Evolve a unique, complex process that provides long-term advantages and is hard to imitate.
• Take advantage of flux: external conditions create new threats and opportunities (typically in fits and starts) and find a route to power.
• Use your capabilities to create a product that fulfils a significant customer need that your competitors can’t.

The Power of Progression

• Power acquisition can be parsed into three time windows, before and after takeoff. Different powers come at different times.
• Stage 1: Origination: Before clearing the compelling value threshold.
• Powers: cornered resource and counter-positioning
• Barriers:
• Fiat: The issue of whether a right protected by fiat is fully priced, becoming less likely to be underpriced as the business develops in the takeoff stage.
• Collateral Damage: The economics of a challenger's business model threatening damage to the incumbent, initiated in the origination stage.
• Stage 2: During: The period of explosive growth
• Powers: network economies, scale economies and switching costs
• Barriers:
• Cost of Gaining Share: Share gains on attractive terms are generally only possible in the takeoff stage; otherwise, the cost is too high to be worthwhile.
• Stage 3: Stability: Growth slows, focus on sustaining your advantage
• Powers: branding power and process power
• Barriers:
• Hysteresis: A structural time constant facing all players that delays the availability of certain Powers until the stability stage