Playing To Win
7 Powers & Playing to Win
Utility & Compatibility
I think readers and podcast hosts are bound and determined to make me better read on the strategy literature — good for them! I gotten asked one too many times about Hamilton Helmer’s 7 Powers: The Foundations of Business Strategy, his self-published (impressive!) book on strategy. So, I am adding it to my ongoing Playing to Win/Practitioner Insights (PTW/PI) series on exploring the relationship between Playing to Win and other strategy frameworks in 7 Powers & Playing to Win: Utility & Compatibility. All previous PTW/PI can be found here.
Compatibility
Overall, there is high compatibility between Playing to Win and 7 Powers. Helmer highlights that very few key choices make all the difference in company success — I absolutely concur. He clearly understands the difference between a strategy choice and an operating imperative. On that front, he uses different terms, but readers know that I care little about terms if the idea is right. He has a whole chapter on “‘Me Too’ Won’t Do,” which I love. He understands that good things come from distinctive choices.
Perhaps the greatest compatibility is with the structure of his “7 Powers Compass” — shown below.
It is a classic two-by-two matrix. On one axis, Helmer has ‘Benefit to Holder’ with the choice being Delta Cost vs Delta Value, which is the same as Low Cost vs Differentiation, while on the other he has Unwilling to Challenge/Unable to Challenge, which is the same as my view of the Can’t/Won’t Test in terms of competitor replication.
So, our views are very compatible: your strategy is only sustainably valuable if you generate a cost or value benefit with a barrier to competitive replication to protect it.
Helmer uses his matrix to align his seven forms of sustainable advantage (aka Powers) against the two axes. I have no quibbles with four of them — Scale Economies, Network Economies, Process Power, and Branding. Each is important and the source of success for many companies.
For the other three — Switching Costs, Counter-Positioning, and Cornered Resource — I have a reservation or see limitations.
Reservation
I don’t love Switching Costs as a sustainable competitive advantage. I like advantages that provide the customer with something of genuine value. That is obvious in the category of differentiation/Delta Value. But low-cost advantages are also beneficial to customers in that cost leaders tend to help suppress pricing in their markets, plus provide an attractive alternative for customers who want to choose a stripped-down offering — as with Vanguard or Southwest Airlines.
In the case of Switching Costs (as described by Helmer), existing customers of the company with this Power are basically screwed. They wish they could leave but would incur painful costs if they were to. So, the avoidance of a big negative is the ‘customer benefit,’ which I don’t think of as a true advantage. For me, it is an early warning that you are slowly going to wither away and die. Customers already see another provider as superior — and eventually they will switch.
In addition, it is a narrow Power. It applies only to existing customers who are stuck with the provider in question. And it is a big negative to non-customers who watch the provider in question ensnare its customers.
Competitors and customers will respond. For example, Salesforce used SAP’s Switching Costs to successfully attack it. A big part of Salesforce’s pitch has been: if you want to avoid painful entrapment by SAP, come to us. And boy has it worked! Salesforce has caught up to SAP in market capitalization despite SAP being in market for twice as long as Salesforce.
Customers figure out a way around Switching Costs. They did it for IBM — and IBM is in a slow death spiral. They even overcame it for Microsoft. Customers overcame the entrapment of Windows by switching screens — from a PC screen (where Windows continues to dominate) to a tablet screen (where Windows has a tiny share) and/or a smartphone screen (where Windows has been competitively expunged).
So, I view Switching Costs as more of a mixed blessing/two-edged sword than a great Power.
Limitations
For me it is important to recognize key strategic limitations of Cornered Resource and Counter-Positioning
Cornered Resource
I concur entirely that a Cornered Resource can be a powerful and sustainable source of competitive advantage, for example ownership of a patent or control of a favorable natural resource or location. But Helmer also cites talent in this category, and I would really be careful on this front. For a Power to have a positive impact on value (as emphasized by Helmer), its benefit must accrue to the owner of the company. When it comes to human talent, over the past half-century or so, companies have been increasingly less able to corner talent resources while talent resources have been increasingly able to corner companies!
I wrote about this first over twenty years ago (2003), chronicling the degree to which talent had figured out how to siphon more and more value away from capital and predicted that the extraction would accelerate — and have been right.
Goldman Sachs provides a good example. Before going public in 1999, it was owned by its partners — i.e., by its talent. In that era, it would have been silly for talent to extract value from itself. But when it went public, its talent gained a wonderful new extraction source: shareholders.
In a relatively fragmented industry, Goldman has a stunningly high 25% global share of investment banking revenues. You could argue that Goldman has a Cornered Resource — a bevy of skilled, experienced, best-in-the-world investment bankers (plus others, like traders).
However, despite this Cornered Resource that helps it be most outstanding in investment banking, its shareholders earned a pathetic 5% compound annual return (CAGR) on their stock over the first 20 years of Goldman’s public life — truly pathetic! Over the past five years, the stock has veritably exploded, but that has only raised the 25-year CAGR to a still-anemic 8.4%. But who has done awesomely over those 25 years? It is the thousands of highly paid investment bankers (and traders) who extract the lion’s share of the benefits of the Cornered Resource.
Talent is truly in charge, not the shareholders — which is why senior Goldman management must spend so much of its time apologizing and excuse-mongering to shareholders.
The same holds in Hollywood. Since the breakdown of the studio system, talent is making more and more, not the studio shareholders. That is why the answer to the question of how to make a small fortune is to grow a large fortune and then invest it in Hollywood!
So, with this Power, recognize its limitations.
Counter-Positioning
Taking advantage of Counter-Positioning can also be very helpful in strategy. It was for AG Lafley’s Olay strategy, which could have been derailed by a damaging competitive move by Estée Lauder to add one of its prestige channel brands (probably Clinique) to the mass channel to compete directly with Olay. But it never has done so, undoubtedly because Lauder fears retaliation by its prestige channel customers. It is examples like this that have caused me to include the ‘Won’t’ in my Can’t/Won’t test.
But in my experience, it is only a short period of grace until the competitor responds, in the vast majority cases. For example, Dollar Shave Club (DSC) had Counter-Positioning going for it against dominant incumbent Gillette — which would have been excoriated by its retail distribution channel if it had led or even very quickly followed with a direct-to-consumer shave club concept. But DSC’s market share success gave Gillette the legitimate excuse to launch Gillette Shave Club, which helped ensure that DSC would never earn a profit. But as the expression goes, for any turkey business there is a turkey buyer and Unilever paid $1billion for this ‘promising’ direct-to-consumer business. After seven years of razor-thin margins, Unilever sold DSC to private equity for an ‘undisclosed’ (i.e., minimal) price.
Counter-Positioning is not on its own a competitive advantage. It doesn’t stop any competitor other than the counter-positioned one from following — which J&J’s Neutrogena did in the case of Olay. Helmer isn’t blind to this by any means and categorizes Counter-Positioning as a Power exclusively for the ‘origination’ phase of a company’s journey — meaning its Power must switch to one of the others in due course.
Are There Only 7 Powers?
The boldest claim in the book (p. 135) is: “In other words, to assess which journeys are worth taking, you must first understand which destinations are desirable. Fortunately, the 7 Powers does exactly that: it maps the only seven worthwhile destinations.” [Emphasis added]
It feels to me that there is at least another one — the configuration of reinforcing choices. This comes from Mike Porter’s legendary 1996 Harvard Business School article What is Strategy? (which is nostalgic for me because in the many years I worked with Mike, he only thanked me for anything one single time, and that was in the introduction to this article). The article introduced his concept of the Activity System, which represents a set of choices that individually wouldn’t create a sustainable advantage, but together does.
AG and I did one for P&G while he was CEO and we included it in Playing to Win (reproduced below). It leverages five core activities — Innovation, Consumer Understanding, Brand Building, Scale, and Go-to-Market (plus an array of reinforcing ones) to deliver more value to customers at similar cost. P&G doesn’t have to be superior to all its CPG competitors on all these activities — and, in fact, it definitely isn’t. Unilever has similar scale, L’Oréal is awesome on consumer understanding, J&J is terrific on innovation, etc. But no competitor combines those activities in the value-generating way P&G does — and it has sustained that advantage for a very long time. That has rewarded its shareholders with the highest market capitalization in the world by more than double its closest competitor (Unilever — J&J isn’t a CPG competitor any longer after it spun off Kenvue and is now a pharma/medical devices company).
In the article, Mike featured the activity systems of IKEA, Vanguard and Southwest Airlines again showing that the configuration of activities to produce competitive advantage is powerful, because the article was written 28 years ago, and all are still on top.
It is conceivable that Helmer would see all these examples as illustrating one of his 7 Powers (i.e. P&G as Branding) but it feels to me as though they illustrate a different way of achieving advantage than specified in the 7 Powers.
Practitioner Insights
Overall, I think this is a good book for a strategy practitioner. Plus, for a strategy geek like me, all the economic proofs at the end of the chapters were fun to read and absorb.
In contrast to the planning-dominated view of strategy, 7 Powers unambiguously reminds the reader that choice must be distinctive to produce advantage. It is consistent with Playing to Win and, of course, Mike Porter in arguing that there are two fundamental forms of advantage — one having sustainably lower costs, the other generating sustainably greater value (differentiation). Plus, it is only sustainable if there is a clear reason why competitors are unable (Can’t) or unwilling to (Won’t) replicate. As you think about how to achieve that sustainably advantaged position, the 7 Powers can provide a helpful list of ways to consider, keeping in mind the reservation and limitations noted.
It would be convenient if there were only a small set of ways (like seven) to find a happy place on the D Cost vs DValue/Unwilling or Unable (Low-Cost vs Differentiation/Can’t-Won’t) matrix. It would make strategy simpler. But in my experience, there are numerous ways — that may well incorporate multiple aspects of the 7 Powers — e.g. I could argue that P&G harnesses Branding, Process Power and Scale Economies to achieve its great success. So, my final piece of practitioner advice is to not stop your search with the seven.
