The Mantra

Strategy: a route to continuing Power in significant markets

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

Potential Value = [Market Scale] * [Power]

This simple math confirms my strategy definition as an exhaustive statement of value. Moreover, it's normative as well. Fulfill the imperatives of "The Mantra" and you will create business value.

Conditions for Power

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

Power is the core concept of Strategy and of this book, too. It is the Holy Grail of business—notoriously difficult to reach, but well worth your attention and study.

From the glossary: The set of conditions needed for persistent differential returns. Power requires both a Benefit, something that materially increases cash flow, and a Barrier, conditions such that all the value to the firm of the Benefit is not arbitraged out by competition.

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."

Life of a novel is not in its conception, but in its performance, which eludes summary.

Why the first printed books were designed to look handmade

• There was no mass-market consumer expecting a cheap $10.99 product. The book market was wealthy people accustomed to artisanal luxury goods. So printers made printed books imitate manuscripts — fonts mimicked handwritten scripts, and blank spaces were left for hand-illumination.
• The richest buyers didn't even want paper. Isabella d'Este ordered her books printed on vellum — animal skin — even when the rest of the print run was on paper. The technology was new but the expectations were old.
• The printed book had to pretend it wasn't mass-produced to find its first customers. The commodity market for cheap books didn't exist yet — distribution networks hadn't caught up, and the culture still valued books as luxury objects.

The print revolution and the digital revolution are similar shape — one technology, successive shockwaves

• The computer, personal computer, internet, cell phone, social media, and LLMs feel like ten separate tech revolutions. They're not. They're all deeper penetration of one revolution: the development of the computer.
• The printing press followed the exact same pattern. It arrived in 1450 and kept hitting Europe with successive shockwaves for 150 years — each one as disruptive as the last, each arriving roughly a decade or two apart.
• 1450s: the press itself. 1490s: printing becomes economically sustainable. 1510s: pamphlet distribution networks mature. Then newspapers. Then magazines. Each is a new application of one underlying technology finding new forms as it disseminates more deeply.
• The Reformation was enabled by pamphlets the way the Arab Spring was enabled by cell phones. A pamphlet could travel Wittenberg to London in seventeen days — impossible even a decade before.
• The timescales are surprisingly similar. Print kept reshaping Europe for 150 years. We're roughly 80 years into the computer revolution and still getting hit by successive waves.

"Suddenly it's possible to get a printed pamphlet from Wittenberg to London in seventeen days. Oh my God, we can coordinate our resistance movement against the Catholics. Boom. The Reformation happens. That wasn't possible even a decade earlier when it took months to get a pamphlet from one end of Europe to the other."

Why pamphlets were invented as a cash flow hack

• Printing a full book meant borrowing roughly $1.5 million upfront for paper alone, then waiting months for a slow print run to finish before seeing any return.
• Paper had to be bought in bulk lots so the color matched throughout — you couldn't just buy sheets as needed.
• Printers solved the cash flow problem by running a second press for pamphlets alongside the slow book press. A pamphlet took two to four days to produce and could be sold immediately.
• Pamphlets were five pages, hand-stitched, cheap, and ephemeral. You'd print a thousand, sell some locally, sell the rest to traveling news writers who'd carry them to the next city.
• Content ranged from siege reports to royal wedding fashion to tabloid crime stories. One pamphlet title: "The Scandalous Tale of a Doctor from Padua and How He Seduced His Maid, Murdered His Wife, Murdered the Maid, Cut Out Her Heart and Ate It, and How He Was Justly Punished by God."

How Venice and book fairs solved the distribution problem

• Venice was the airport hub of the Mediterranean, the place you changed boats sailing from anywhere to anywhere. The hub system made print economically viable for the first time.
• Print 300 Bibles in Venice, hand ten to each of thirty ship captains heading to thirty cities. Now you can actually sell them.
• Book fairs emerged as the second distribution layer. A printer would spend all year producing a thousand copies of one book, go to a fair with a thousand other printers, trade stock, and go home with five copies each of 200 different titles to sell in local bookshops.
• The Frankfurt Book Fair, which still exists today, was born from this exact need.
• It took forty years, from 1450 to the 1490, before printing was even economically sustainable. The technology existed long before the business model caught up.

The problem is printed books are a mass-produced commodity in a world that does not have distribution networks for mass-produced commodities. Mass production is incredibly rare in this period. Coins are mass-produced, but that's really about it. Almost everything is artisanally produced. When you have a mass-produced product, you need a distribution mechanism before you can sell it.

The great example is that technically e-books existed the first time anyone typed a book on a computer. Certainly in the 1970s there was such a thing as an e-book. But there was no market for e-books until the Kindle came out and made a commodity way to buy and sell e-books, then the e-book industry came into existence. So the e-book as a commodity is several decades younger than the e-book technically existing.

In the same way, you're Gutenberg. You have figured out how to produce 300 copies of a book for the cost of one copy of a book. You do so. You print your Bible. You have 300 Bibles. You sell seven of them to the seven people in your small landlocked German town who are legally allowed to read the Bible in a period in which only priests are allowed to read the Bible. Congratulations, Mr. Gutenberg, you have 293 Bibles, and you can't sell them, and you go bankrupt.

There has to be a distribution mechanism for books to find their market because there are certainly 300 people in Europe that want this, but there are not 300 people in one location where it's being produced. So Gutenberg goes bankrupt. The bank seizes his press. They try to go into the business. The bank goes bankrupt. There is so much overhead. You spend hundreds of thousands of dollars on the production cost of the books, and then you get nothing back.

In Through the Looking Glass, Alice, a young girl, gets schooled by the Red Queen in an important life lesson

Alice never could quite make out, in thinking it over afterwards, how it was that they began: all she remembers is, that they were running hand in hand, and the Queen went so fast that it was all she could do to keep up with her: and still the Queen kept crying ‘Faster! Faster!’ but Alice felt she could not go faster, though she had not breath left to say so.

The most curious part of the thing was, that the trees and the other things round them never changed their places at all: however fast they went, they never seemed to pass anything. ‘I wonder if all the things move along with us?’ thought poor puzzled Alice. And the Queen seemed to guess her thoughts, for she cried, ‘Faster! Don’t try to talk!’

Eventually, the Queen stops running and props Alice up against a tree, telling her to rest.

Alice looked round her in great surprise. ‘Why, I do believe we’ve been under this tree the whole time! Everything’s just as it was!’

‘Of course it is,’ said the Queen, ‘what would you have it?’

‘Well, in our country,’ said Alice, still panting a little, ‘you’d generally get to somewhere else — if you ran very fast for a long time, as we’ve been doing.’

‘A slow sort of country!’ said the Queen. ‘Now, here, you see, it takes all the running you can do, to keep in the same place.

If you want to get somewhere else, you must run at least twice as fast as that!’

"Of course they don't call them golden ages as they're happening. "Golden age" is a term people use later, after they're over. That doesn't mean that golden ages aren't real, but rather that their participants take them for granted at the time. They don't know how good they have it. But while it's usually a mistake to take one's good fortune for granted, it's not in this case. What a golden age feels like, at the time, is just that smart people are working hard on interesting problems and getting results. It would be overfitting to optimize for more than that.

In fact there's a single principle that will both save you from working on things like brand, and also automatically find golden ages for you. Follow the problems.

The way to find golden ages is not to go looking for them. The way to find them — the way almost all their participants have found them historically — is by following interesting problems. If you're smart and ambitious and honest with yourself, there's no better guide than your taste in problems. Go where interesting problems are, and you'll probably find that other smart and ambitious people have turned up there too. And later they'll look back on what you did together and call it a golden age.

"The most striking thing to me about the brand age is the sheer strangeness of it. The zombie watch brands that appear to be independent and even have their own retail stores, and yet are all owned by a few holding companies. The giant, awkwardly shaped watches that reverse 500 years of progress in making them smaller. The business model that requires a company to rebuy their own watches on the secondary market to catch rogue customers. The very concept of rogue customers. It's all so strange. And the reason it's strange is that there's no function for form to follow."

"Rolex was ahead of its time in both dimensions: their cases were not merely recognizable, but big too, at least by golden age standards. That was not the result of clever marketing, though. It was a byproduct of the founder Hans Wilsdorf's obsession with building waterproof watches.

As its name suggests, that was the raison d'etre of the Rolex Oyster. Watches like the Oyster were designed to be tough, like Jeeps. In the golden age there were two poles of watch design. At one end were tool watches, which were thick, tough, and usually made of steel. At the other end were dress watches, which were thin, elegant, and usually made of gold. But Rolex blurred the line between them. When they made thick, tough watches, they made them out of gold as well as steel. The result was a sort of luxury Jeep. And if that phrase didn't ring a bell in your head, stop and think about it, because that is exactly what everyone is driving now. That's what SUVs are, luxury Jeeps. What happened to watches is the same thing that happened to cars"

"Branding isn't merely orthogonal to good design, but opposed to it. Branding by definition has to be distinctive. But good design, like math or science, seeks the right answer, and right answers tend to converge.

Branding is centrifugal; design is centripetal."