Counter positioning is an avenue for defeating an incumbent who appears unassailable by conventional wisdom metrics of competitive strength

The Mantra

Strategy

• a route to continuing Power in significant markets
  • route → dynamic, how you get there
  • continuing → persistence / duration
  • significant markets → size × growth
• equation of strategy: Potential Value = Market Scale × Power.
  • Execution realizes the potential; Power sets the ceiling.

I refer to this as The Mantra, since it provides an exhaustive characterization of the requirements of a strategy.

Potential Value = [Market Scale] * [Power]

Power

• Power: the set of conditions creating the potential for persistent differential returns (i.e., returns that resist competitive arbitrage over the long run)
• Power is the core concept of Strategy. It is the Holy Grail of business.
• Every Power has two parts — always ask about BOTH:
  • Benefit: improves cash flow (↑ price, ↓ cost, or ↓ investment)
  • Barrier: prevents competitors from arbitraging the benefit away
  • Helmer's rule: "Always look to the Barrier first" — Benefits are everywhere, Barriers are rare.
• Power intensity has 2 components — analyze separately:
  a. Industry economics (does the structure allow Power at all?)
  b. Competitive position (are you the one with the advantage?)
  • Surplus Leader Margin = the margin the leader earns when pricing so the follower breaks even. Both terms must be positive for Power.

The Definition of Strategy

Strategy: the study of the fundamental determinants of potential business value

The objective here is both positive—to reveal the foundations of business value—and normative—to guide businesspeople in their own value-creation efforts.

Statics and Dynamics Split

Following a line of reasoning common in Economics, Strategy can be usefully separated into two topics:

• Statics—i.e. "Being There": what makes Intel's microprocessor business so durably valuable?
• Dynamics—i.e. "Getting There": what developments yielded this attractive state of affairs in the first place?

These two form the core of the discipline of Strategy, and though interwoven, they lead to quite different, although highly complementary, lines of inquiry.

The Critical Distinction Between Statics and Dynamics

Here's the first important takeaway from our consideration of Dynamics: "getting there" (Dynamics) is completely different from "being there" (Statics). This is a distinction not only for academics but for practitioners as well. For example, in the early days of strategy consulting, the two were frequently conflated: a close study of Statics indicated that high relative market share led to attractive returns; this fed the instinct to gain market share (Dynamics), usually via aggressive pricing. Such policies usually did not create value, as competitors would push back until the cost of share gains typically outweighed their benefits.

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.

Statics vs Dynamics Scope

Statics concerned itself only with Power and hence just the last two terms (s, market share, and m, differential margins); primarily, it focused on just one (m). In contrast, in a Dynamics context, a company can profoundly influence both the two market size terms (M0, the current market size, and g, the discounted growth factor). The creation of compelling value, for example, is joined at the hip to the creation of a market. In the lingo of economists: in Statics M0 and g are taken as exogenous, whereas in Dynamics they are endogenous.

"Simple, but not simplistic"

If not simple, then concepts cannot be easily retained for day-to-day reference - usefulness is lost. If simplistic, then you risk missing something crucial.

Chance only favors the prepared mind

This reality begs the question, "Can the intellectual discipline of Strategy make a difference in such adaptation?" After decades as a business advisor, active equity investor and teacher, my conclusion is, "Yes it can." But with this hard-won conclusion comes a caveat informed by Pasteur's well-known dictum: "Chance only favors the prepared mind." Strategy serves best not as an analytical redoubt, but rather in developing the "prepared mind" of those on the ground.

Definition of "Judgment"

From Reed Hastings' Foreword, quoting the Netflix culture deck:

Our first public "culture deck," released in August of 2009, identified nine highly valued behaviors. The first was "Judgment." As we elaborated:

• You make wise decisions … despite ambiguity
• You identify root causes and get beyond treating symptoms
• You think strategically and can articulate what you are and are not trying to do
• You smartly separate what must be done well now and what can be improved later

"As I noted earlier, the Barrier in Scale Economies comes from a follower's rational economic calculation (often learned) that, despite the attractive returns being earned by the leader, attack carries an unattractive payoff."

The core definition of Power:

We can only assume microprocessors possessed some sort of rare characteristics which materially improved cash flow, while simultaneously inhibiting competitive arbitrage. I refer to these as Power.

Power: the set of conditions creating the potential for persistent differential returns

The Benefit/Barrier granularity :

I can now build up the chart by providing granularity surrounding both the Benefit and the Barrier. With regard to the Benefit, cash flow is improved by (1) enhancing value (enabling higher pricing) and/or (2) lowering cost ceteris paribus. With regard to the Barrier, a competitor fails to arbitrage out the Benefit because (1) they are unable to, or (2) they can, but refrain from so doing because they expect the outcome to be economically unattractive.

The "always look to the Barrier first" advice

As I delineate the seven types of Power in the chapters to come, I will similarly describe their unique Benefit/Barrier combination. The Benefit conditions probably won't sound all too rare—they are met often in business. Indeed, every major cost-cutting initiative qualifies. The Barrier conditions, on the other hand, prove far rarer, a reality that merely proves the ubiquity of competitive arbitrage. As a strategist, then, my advice is, "Always look to the Barrier first." 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.

"A productive way to more formally calibrate the intensity of the scale leader's power is to assess the economic leeway they have in balancing attractive returns with appropriate retaliatory behavior to maintain share. The greater this leeway, the more attractive the longer-term equilibrium is likely to be for the leader."