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.
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Outline and Notes of the Podcast Discussion
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."
Applying the 7 Powers to Infrastructure Businesses:
Powers first developed at Origination with Infrastructure-related examples:
Cornered Resource: Cell Phone Towers (AMT), Railroads, Gravel Pits, Landfills, Pipelines, patents, WJE lab, DBE Contractors, Regulated monopolies (Electric, gas, water), Contractors “buying politicians” such as Brown and Root with LBJ to win Mansfield / Marshall Ford Dam construction contracts in 1937 (ref. Path to Power by Robert Caro).
Counter-Positioning: Nucor Steel (mini-mills) vs. U.S. Steel (integrated mills)
Powers first developed at Takeoff with Infrastructure-related examples:
Network: landline telephone (AT&T), public transportation, Ride-sharing & e-scooter aps
Scale: Tesla gigafactory, cable/broadband internet, U.S. Steel before Mini-Mills, Using Lobbyists, maybe eventually engineering consulting firms (consolidated, rationalized competition, tacit collusion)
Switching Costs: Bentley, AutoDesk, Adina, Microsoft
Powers first developed at Stability:
Brand: Typically only applies to consumer products, not applicable for B2B or B2G. fasteners (Fastenal, Hilti), paint (Sherwin-Williams)
Process Power: Toyota is the classic example. Les Schwab tires. Maybe privately held, employee-owned Contractors like Kiewit, Cianbro, etc.
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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%.
Strategy Definition for Military Applications:
A plan of action or policy designed to achieve a major or overall aim.
My fav: Using limited means for unlimited benefit or gain
Threads to pull for future episodes
Apply other strategy models and approaches to infrastructure businesses. For example: Michael Porter's five forces, Buffett's moat concept as systematized by Pat Dorsey, Bruce Greenwald's Competition Demystified, and John Boyd's OODA Loop, etc.
Podcast Hosts
Scott Snelling, P.E. and Jason Toth, P.E., PMP
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