Strategy for infrastructure businesses is the focus of this episode of the Build Big Ideas podcast. Specifically, we begin by summarizing Hamilton Helmer's concepts from the book "7 Powers: The Foundations of Business Strategy." We then apply the concepts to various infrastructure businesses. Good businesses have power that their competitors can't access; bad businesses don't. The 7 powers are: scale, counter-positioning, switching costs, branding, cornered resource, and process power. Note that operational excellence is necessary, but not sufficient, to benefit from a power.

Full show notes are available at buildbigideas.com

Definitions

The quotes below are from "7 Powers" by Hamilton Helmer.

"Strategy: The route to Power in significant markets."

"Power: the potential to realize persistent differential return is the key to value creation. Power requires both a benefit and a barrier. (See 7 Powers below)"

"Benefit: something that materially increases cash flow by allowing prices to be raised on customers or costs (of inputs or the processing thereof) reduced."

"Barrier: conditions such that all the value to the firm of the Benefit is not arbitraged out by competitors."

"The Value Axiom: [Business] Strategy has one and only one objective: maximizing potential fundamental business value."

"Fundamental Equation of Strategy: Value = market size now x growth x market share x differential margins."

"Surplus Leader Margin: the profit margin that a Power holder will achieve if pricing is such that a competing firm with no Power has zero profits."

7 Powers (See image attached below)

*Operational Excellence is not a power. It is necessary, but not sufficient. Table stakes.

Scale: "per-unit-cost declines as production volume increases."
Network: "value to the customer increases as the installed base increases."
Counter-Positioning: "A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business."
Switching Costs: "Value loss expected by a customer to switch to a new supplier."
Branding: "Durable attribution of higher value to an objectively identical offering that arises from historical information about the seller." (Trust)
Cornered Resource: "Preferential access at attractive terms to a coveted asset that can independently enhance value." (Five tests: Idiosyncratic, non-arbitraged [bought at a discount], transferable, ongoing, sufficient)
Process Power: "Embedded company organization and activity which enable lower costs and/or superior product, and which can be matched only by an extended commitment."

Dynamics

"Not only is invention the gateway to Power but also the possibility of Power (and the associated durable success) fuels invention."

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“When [a client] comes to you and says,
‘I want you to make this for us.
We’re going to own it.
We’ll pay you a 10% above cost spread
but you have no ownership. No...’

That’s a [bad*] model.
That’s making widgets.
Not a great wealth builder.”
-John Malone
*saltier language has been substituted

Engineering consulting is worse than the above model, because the fee is capped. Also, the margin (spread) is usually less than 9%.