{"id":781,"date":"2020-10-26T17:03:34","date_gmt":"2020-10-26T17:03:34","guid":{"rendered":"https:\/\/salarydistribution.com\/2020\/10\/26\/the-7-powers-a-strategic-framework-to-fight-off-increasing-competition\/"},"modified":"2020-10-26T17:03:34","modified_gmt":"2020-10-26T17:03:34","slug":"the-7-powers-a-strategic-framework-to-fight-off-increasing-competition","status":"publish","type":"post","link":"https:\/\/salarydistribution.com\/affiliate-marketing\/2020\/10\/26\/the-7-powers-a-strategic-framework-to-fight-off-increasing-competition\/","title":{"rendered":"The 7 Powers: a Strategic Framework to Fight Off Increasing Competition"},"content":{"rendered":"
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<\/i> <\/i> <\/i> <\/i> <\/i> <\/span> 4.7\/5<\/span> (27) <\/span> <\/span><\/p>\n

It has never been easier to build a business online. By that same token, there has never been more competition. The best way to remain profitable long term is to invest in moats using the 7 Powers Framework.<\/strong><\/p>\n

It\u2019s terrifying being a seller on Amazon. What if Big Bezos decides he wants to make an AmazonBasics version of your best seller? Or what if your supplier decides they want to start competing against you?<\/p>\n

Affiliate marketers have to deal with people spying on and ripping off their campaigns. Facebook costs keep rising. Margins keep shrinking.<\/p>\n

I learned a concept over a decade ago called the moat. Centuries ago, castles would protect themselves from enemies by building moats. These were deep ditches surrounding the castle, filled with water.<\/p>\n


Photo by\u00a0Francesco Ungaro<\/a><\/strong>\u00a0from\u00a0Pexels.<\/a><\/strong><\/p>\n

Warren Buffett refuses to invest in a company unless he feels they have enough strong moats. Moats are the competitive advantages that protect your profit margins despite competition.<\/strong><\/p>\n

This subject fascinates me because so much of the eCommerce world is based around private labeling. Everyone\u2019s re-selling private labeled goods at a significant markup. What\u2019s stopping someone else from coming in and copying you?

<\/strong>Supplement companies such as Bulletproof<\/a>\u00a0and Onnit<\/a>\u00a0are doing roughly $30 million a year in revenue. Anyone can easily start a supplement company by private labeling. Yet these companies are thriving in spite of competition because of the moats they\u2019ve established.<\/p>\n

As much as I understood the concept of moats, I\u2019ve always wondered if there was a framework that breaks down what types of moats there are.<\/p>\n

My research led me to a book called 7 Powers: The Foundations of Business Strategy<\/a><\/em>\u00a0by Hamilton Helmer.<\/p>\n

This book is recommended by some super smart people such as Daniel Ek (founder of Spotify), Reed Hastings (founder of Netflix), and Peter Thiel<\/a> (the first outside investor of Facebook).<\/p>\n

This is a simple and straight to the point framework to help you understand business strategy. Successfully implementing these concepts will help you build a long-lasting and profitable company. Despite the increasing amount of competition.<\/p>\n

Some Helpful Terminology<\/h2>\n

Before we begin, I want us all to be on the same page when it comes to definitions. We\u2019ll be using these terms a lot.<\/p>\n

Strategy:<\/strong>\u00a0the study of the fundamental determinants of potential business value.<\/em>
Power:<\/strong>\u00a0the set of conditions creating the potential for persistent differential returns.<\/em><\/p>\n

Each power needs to have a benefit<\/strong>\u00a0for you while serving as a barrier<\/strong>\u00a0to your competition.<\/p>\n

Benefit: how the power improves cash flows, such as through lower costs or ability to charge higher prices. AKA the magnitude of power.<\/em><\/p>\n

Barrier: the way that competitors are prevented from arbitraging the benefit of the power. AKA the duration of power.<\/p>\n

I\u2019m going to quickly define the 7 powers, and then we\u2019ll go into them in more detail.
<\/em>
The 7 Powers<\/strong><\/p>\n

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  1. \nScale Economies:<\/strong>\u00a0A business where per unit costs decline as volume increases.<\/li>\n
  2. \nNetwork Economies: <\/strong>A business where the customer gains more value as the userbase increases.<\/li>\n
  3. \nCounter Positioning: <\/strong>A business adopts a new, superior business model that incumbents cannot copy because it\u2019ll cannibalize parts of their existing businesses.<\/li>\n
  4. \nSwitching Costs: <\/strong>A business where customers expect a greater loss than the value they gain from switching to an alternate.<\/li>\n
  5. \nBranding: <\/strong>A business that enjoys a higher perceived value to an objectively identical offering due to historical information about them.<\/li>\n
  6. \nCornered Resource:<\/strong>\u00a0A business that has preferential access to a coveted resource that independently enhances value.<\/li>\n
  7. \nProcess Power:<\/strong>\u00a0A business whose organization and activity set enables lower costs and\/or superior products that can only be matched by an extended commitment.<\/li>\n<\/ol>\n

    Power 1: Scale Economies<\/h2>\n

    As the volume increases, the per-unit costs decrease.<\/em><\/p>\n

    We all understand this. The more widgets that you\u2019re able to purchase from a supplier, the bigger the discount you\u2019ll receive. Your local diner can\u2019t get a discount on potatoes like McDonald\u2019s can.<\/p>\n

    The author demonstrates scale economies through Netflix.<\/p>\n

    In the early days, Netflix negotiated deals with different content providers. They were able to get fantastic deals because the content providers didn\u2019t understand the value of streaming.<\/p>\n

    Eventually, the content providers started to wisen up. Their streaming rights were worth more than they realized. So they kept increasing the cost of the streaming rights to their content. Some of the content would permanently become unavailable because Disney, Starz, and NBC would start their own services.<\/p>\n

    Netflix realized early on that the differentiator in the streaming wars would be original content<\/strong>.<\/p>\n

    In 2011, they spent $100m for two seasons of House of Cards. This is where Scale Economies come in. <\/strong><\/p>\n

    <\/p>\n

    Netflix had a first mover\u2019s advantage which led them to acquiring a massive userbase. Their scale economies meant they could acquire original content at a much cheaper relative cost compared to a newcomer like Hulu.<\/p>\n

    D&D (D.B. Weiss & David Benioff) were the showrunners for the massively successful show Game of Thrones<\/em>. After the series was over, they were looking for a new streaming service to develop movies and shows for.<\/p>\n

    This caused a bidding war among Disney, Apple, Amazon, Netflix, and others. In the end, Netflix won by paying $200 million for the rights. Even though the other companies had a larger war chest, it made more financial sense for Netflix to pay that much.<\/p>\n

    Scale economies are why some companies are willing to run at break-even or unprofitably for a few years. They know that once they achieve scale economies, they can lower their costs. To the point where they\u2019re profitable, and<\/em>\u00a0their competition can\u2019t keep up.<\/p>\n

    Power 2: Network Economies<\/h2>\n

    Your customer\u2019s experience improves as more people join.<\/em><\/p>\n

    Technology can be an initial advantage. However, it can over time become a commodity and easily replicated.<\/p>\n

    You can build an app like Tinder for around $50,000 USD. What you can\u2019t copy are the users and the community.
    <\/strong><\/p>\n

    How useful would a dating app be if there were no more new matches after the first day? How useful is a job board if no one\u2019s actively posting jobs there?<\/p>\n

    The service becomes more useful the more people that join. Sometimes it can be a winner takes all situation. Because of that, these companies will raise massive amounts of money and focus on growth.<\/p>\n

    Some examples include Facebook, Linkedin, eBay, and Tinder.<\/p>\n

    Power 3: Counter Positioning<\/h2>\n

    A business adopts a new, superior business model that incumbents cannot copy because it\u2019ll cannibalize parts of their existing businesses.<\/em><\/p>\n

    A fear that small businesses have is if they achieve product \/ market fit, a bigger and more well-funded competitor can come in and copy their idea.<\/p>\n

    Counter positioning is when you have a business model that will harm them <\/strong>if they try to copy it.<\/p>\n

    Think about Kodak film cameras vs. digital cameras. It\u2019s easy to say in hindsight, \u201cWow, how did Kodak not see that digital cameras were coming to destroy them?<\/em>\u201d<\/p>\n

    They did see it, but they couldn\u2019t do anything about it. Their biggest cash cow was selling film rolls. Betting on and investing in digital cameras would be killing their existing business. <\/strong><\/p>\n

    Next, digital cameras were a different industry. Developing technology wasn\u2019t their strength.<\/p>\n

    It\u2019s easy to see what the right move was in hindsight. If you were the CEO Kodak during that time, it\u2019s easier to keep your job by doing what works.<\/p>\n

    Counter position isn\u2019t the same as disruptive technology. McDonald\u2019s is the biggest hamburger seller in the world. Shake Shack<\/a>\u00a0has taken a counter-position by selling gourmet hamburgers that cost twice as much.<\/p>\n

    McDonald\u2019s can\u2019t copy the same strategy without hurting their brand.<\/p>\n

    Whenever there is a leader in a market, realize that their strength is also<\/em>\u00a0a weakness. There\u2019s always room for the \u201copposite.\u201d<\/p>\n