7 Powers

The Foundations of Business Strategy

Hamilton Helmer
Foreword by Reed Hastings

Audiobook Supplement

1
 Copyright © 2016 by Hamilton W. Helmer
Published by arrangement with Hamilton Helmer. Used with permission by Echo
Point Books & Media, LLC. For personal use only with purchase of audiobook.

Table of Contents

Fundamental Equation of Strategy………………………………………………….5

Appendix to Introduction: Derivation of the Fundamental Equation of Strategy…6
Figure 1.1 Blockbuster and Netflix Revenue………………………………………….9
Figure 1.2………………………………………………………………………………..10
Figure 1.3………………………………………..………………………………………11
Figure 1.4: Scale Economies in the 7 Powers………………………………………….12
Figure 1.5: Netflix Stock Price vs. S&P 500 TR (8/2010 = 100%)………………….13
Figure 1.6: Power Intensity Determinants……………………………………………..14
Appendix 1.1: Derivation of Surplus Leader Margin for Scale Economies…………..15
Figure 2.1: BranchOut Monthly Active Users (millions, January 1, 2012 – June 23,
2012)……………………………………………………………………………………..16
Figure 2.2: Network Economies in the 7 Powers………………………………………17
Figure 2.3: Power Intensity Determinants……………………………………………..18
Appendix 2.1: Derivation of Surplus Leader Margin for Network Economies……19
Figure 3.1: Share of Actively Managed US Equity Funds that Beat the US Equity
Market……………………………………………………………………………...……21
Figure 3.2: Vanguard Assets Under Management (1975—2015)………...…………22
Figure 3.3: Cumulative Investment Flows by Fund Type……………….………….23
Figure 3.4: Counter-Positioning in the 7 Powers………………………….…………24
Stand-Alone Attractive? Flowchart………………………………………….…………25
Figure 3.5: Power Intensity Determinants…………………………………..………..26
Appendix 3.1: Derivation of Surplus Leader Margin for Counter-Positioning….27
Figure 4.1: SAP Stock Price…………………………………………………..…….....32
Figure 4.2: Switching Costs in the 7 Powers………………………………...……….33
Figure 4.3: SAP Product Offerings…………………………………………..………..34
Figure 4.4: Number of SAP Acquisitions by Year……………………………………35
Figure 4.5: Power Intensity Determinants…………………………………………….36
Appendix 4.1: Surplus Leader Margin for Switching Costs……………………….37
Figure 5.1: Price Comparisons for Engagement Rings………………………………38
Figure 5.1: Completed eBay Auction for Tiffany Box……………………………….39

2
Figure 5.2: Annual Profit Margins for Blue Nile and Tiffany……………………40
Figure 5.3: Tiffany Stock Price…………………………………………………..……41
Figure 5.4: Branding in the 7 Powers…………………………………………..…….42
Figure 5.5: Power Intensity Determinants……………………………………..……..43
Appendix 5.1: Surplus Leader Margin for Branding…………………………..……..44
Figure 5.6: Branding as a Function of Time, with Different Compression
Factors………………………………………………………………………………….. 46
Figure 6.1: The First Ten Pixar Films…………………………………………………47
Figure 6.2: US Gross Profit Margin of Theatrical Release Movies (1980—2008)…..48
Figure 6.3: Gross Profit Margin of Pixar Films vs. Industry Averages (1980—
2008)……………………………………………………………………………………..49
Figure 6.4: Cornered Resource in the 7 Powers……………………………………..50
Figure 6.5: Early Pixar Film Directors………………………………………………..51
Figure 6.6 Power Intensity Determinants…………………………………………….51
Appendix 6.1: the Resource Based View……………………………………………52
Appendix 6.2: Surplus Leader Margin for Cornered Resources….………………53
Figure 7.1: Shares in US Automobile Market………………………………………54
Figure 7.2: Toyota Stock Price in US Dollars………………………………………55
Figure 7.3: Process Power in the 7 Powers…………………………………………56
Figure 7.4: Experience Curve Sample…………………………….………………….57
Figure 7.5: Power Intensity Determinants……………………….…………………..58
Figure 7.6: The 7 Powers………………………………………….…………………..59
Appendix 7.1: Process Power Surplus Leader Margin……………………………..60
Figure 7.6: Process Power as a Function of Time…………………………………..61
Figure 8.1: Accelerating Net Subscriber Additions (in millions)………………….62
Figure 8.2: Netflix Originals…………………………………………………………..63
Figure 8.3: Netflix Stock Price………………………………………………………..63
Figure 8.4: The Dynamics of Power—1……………………………………………...64
Figure 8.5: The Dynamics of Power—2……………………………………………...65
Figure 8.6: Compelling Value………………………………………………………....66
Figure 8.7: Capabilities-Led Invention………………………………………………..67
Figure 8.8: Customer-Led Invention……………………………………………….…67
Figure 8.9: Competitor-Led Invention……………………………………………..…68
Appendix 8.1: Equity Investing and the 7 Powers as a Strategy Compass……..69
Figure 8.10: Annual Helmer Active Equity Gross Returns (1994—2015)….……71
Figure 8.11: Risk/Return of Helmer Active Equity Investing…….……………..72
Figure 9.1: Intel Stock Price vs. S&P 500 TR (Index Value: 3/17/1980 = 1.00)…73
Figure 9.2: Annual Growth of Microcomputer Shipments (units)…………………74
Figure 9.3…………………………………………….………………………………….75
Figure 9.4…….……………………………………….…………………………………76
3
Figure 9.5………………………………………………………………………………..77
Figure 9.6: Time-Delineated 7 Powers………………………………………………..78
Figure 9.7……………………………….……………………………………………….79
Appendix 9.1: The Power Dynamics Toolkit…………….…………………………...80
Appendix 9.2: A graphical representation of the tools of Power Dynamics and their
relationship……………………………………………………………………………...85
Appendix 9.3: Power Dynamics Glossary…………………………………………….86

4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87