His fundamental equation of value is:
Value = M0*g*s*m = market scale * power
- M0 is Market at time zero. g is growth. This is about targeting big and growing market opportunities.
- S is long-term persistent market share. How much of it you have
- M is long term persistent margins. (operational margins after cost of capital)
- You can also do potential value = market scale * power.
His break-down of branding is that it evokes positive emotion, leading to increased willingness to pay.
- Affective valence. Built-up associations that elicit good feeling that are distinct from the objective value of the good.
- Uncertainty reduction. Peace of mind because confidence the product will be as expected.
- A brand requires lengthy period of time with reinforcing actions (hysteresis). Legacy brands tend to be powerful. Hard to replicate in short term. Or with copycats.
His break-down of cornered (or scarce) resource is that it must be sufficiently potent to drive high-potential, persistent differential margins (m>>0), with operational excellence spanning the gap between potential and actual. He has five screening tests for cornered resource:
- Idiosyncratic. Such as a brain trust with repeated success over time.
- Non–arbitraged. If a firm gains preferential access to a coveted resource but also pays a price that fully arbitrages out the rents attributable to this resource – then doesn’t matter.
- Transferable. If resources creates value at one company, but cannot if transferred to another, then it is not good. Probably has an essential complement.
- Sufficient. It must be complete enough to continue producing differential returns assuming operational excellence.
Related podcasts and articles are:
- 4 Problems with Hamilton Helmer’s 7 Powers (Jeff’s Asia Tech Class – Podcast 62)
- Economies of Scale and Switching Costs According to 7 Powers (Jeff’s Asia Tech Class – Podcast 64)
From the Concept Library, concepts for this article are:
- Competitive Advantage: Share of Consumer Mind
- Competitive Advantage: Surplus Margin Leader in Network Effects
- Competitive Advantage: Proprietary Technology
- Competitive Advantage: Learning Advantages and Process Advantage
- Competitive Advantage: Scarce Resource
- 7 Powers
I write, speak and consult about digital strategy and transformation.
My book Moats and Marathons details how to measure competitive advantage in digital businesses.
I also host Tech Strategy, a podcast and subscription newsletter on the strategies of the best digital companies in the US, China and Asia.
With my subscription newsletter, you will:
Get a deeper understanding of the strategies and business models of the best digital companies.
Get specific frameworks for measuring competitive advantage in digital businesses and for traditional businesses doing digital transformation.
Get an edge in predicting what is going to happen next and who is going to win.
Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.