Podcast Summary
Hamilton Helmer and Chenyi Shi's Framework for Expanding Company Scope: The new framework guides founders to diversify their profits by exploring second business lines, developing a solid strategy, and being open to new information for adaptive and evolutionary growth.
Hamilton Helmer and Chenyi Shi have developed a new framework to help founders answer the transforming question - If I were to expand the scope of what my company does, how should I go about it? Most companies have one big founding insight and the rest of their history is just drafting on that. The new framework, in addition to Seven Powers, explores the percent of profits that came from a second business line. This approach guides founders to be more like iPod and less like Bowmar. The nature of developing businesses is adaptive and evolutionary, so it's important to have a solid strategy and be open to new information.
The Seven Powers Framework for Business Durability: Entrepreneurs need a simple but not simplistic framework for decision-making in business. The Seven Powers framework consisting of seven structures can create durability by thinking about power and product/market fit together. Persistence and statistical work suggest that successful companies have economic structures that create attractive outcomes.
To succeed in business, entrepreneurs need a useful mental model that provides a simple but not simplistic framework for decision-making. The Seven Powers framework is one such model, consisting of only seven structures that create durability. These structures can make a business more like an iPod and less like Bowmar. While product/market fit and power are orthogonal, founders should think about both simultaneously to create a durable business. Moreover, persistence and statistical work suggest that highly successful companies have economic structures that create attractive outcomes. Entrepreneurs who adopt a simple but not simplistic framework and think about power and product/market fit together will be better equipped to make better decisions to defend their castles.
Understanding the power framework for strategic questions and corporate success.: Spend 5% of your time on strategy questions to determine the competitiveness of your business. Understanding the difference between corporate and business strategy is crucial for success. The power framework is simple, yet complicated in implementation.
The power framework is a useful cognitive leverage for determining the important strategic questions. While operational excellence is important to a business, it's crucial for entrepreneurs to spend 5% of their time on strategy questions that determine the eventual margin structure and competitiveness of the business. Understanding the difference between corporate and business strategy is essential for multi-business unit corporations. Porsche's durable business model and success in consistently upgrading their cars' performance features was due to their abstraction of design and ability to invest in fixed-cost investments. The seven genotypes of power are simple, but the phenotypes, the exact granular way on which they're articulated and carried forward, are complicated. This framework is still exciting to explore, and new aspects, such as dynamics and corporate strategy, continue to emerge.
The Power Dynamics of Transforming and Diversifying Businesses: Transformation and diversification can boost profits, but it's important to understand power dynamics. Founders should recognize what makes their current model successful and consider diversification carefully to drive economic success.
Transforming businesses and diversification can be beneficial to overall profits, as proven by around 50% of S&P 100 companies generating profits from businesses other than their original. However, it can be difficult to get right, and understanding power dynamics is key. Founders may not realize the idiosyncrasies that led to their success, and VCs focus on top-line growth, which can cause them to miss the window for IPOs. Transformation requires understanding what makes current business models useful in other areas, and while challenging, can drive economic success. It's important to recognize the role of diversification and power dynamics when building businesses.
Utilizing PitchBook for Strategic Business Decisions.: Use PitchBook to analyze long term competitive outcomes and assign accurate profit multiples. When considering transformational steps, define business boundaries and understand industry trends while being strategic.
PitchBook is a great resource for entrepreneurs and analysts looking for information on industries, companies, and funding trends. By analyzing a company's long term competitive outcomes, you can assign a more accurate multiple of profit. Transforming a company is a separate topic from optimizing it and involves considering what can be done next, such as entering a new market or developing a new product. However, the chance of success for transforming steps may not be conclusive, so it's important to be strategic in defining business boundaries and understanding industry trends.
Balancing Economic Value and Business Value with Power Assessment: Understanding your current base of power is essential to assess business transformation directions. Expand your core business to address a broader market rather than starting something new by assessing the extendability of established drivers of power.
Companies should not just focus on creating economic value but also on capturing business value. The creation of economic value and the creation of company value are different and both are important. Power is the missing link to assessing which idea is the best idea. Understanding your current base of power is crucial in assessing transforming directions for the company. If the established business drivers of power are extendable to the additional segment being considered, risk-reward and calculation are better. Expanding the core business to address a broader market is a better option than starting something new. Companies must carefully understand their current base of power and see whether the new segment relies on that as well before moving forward.
Understanding Your Core Business Power for Expansion Opportunities Within Your Umbrella: Identifying and leveraging your core business power, such as scale economies, network economies, and switching costs, is crucial for expansion and transformation opportunities. Consider costs and counter positioning against all competitors, both potential and existing.
Understanding your core business power is crucial to finding expansion opportunities within your current power umbrella. For earlier-stage companies, the most common power types are scale economies, network economies, and switching costs. Counter positioning is typically a type of power you have against incumbents, not wannabes. It's important to have power versus all potential and existing competitors. When expanding internationally, it's important to consider the majority of your business costs, such as customer acquisition and maintenance, in order to leverage your network economies. Your core business power prospect should guide where to transform or take your business to the next level. Digging deeper may reveal unexpected opportunities, such as focusing on food delivery instead of ride-sharing within overlapping driver networks.
The Nuances of Business Transformation and Understanding Power: Transforming a business involves understanding its power and network economies. Diversification and repurposing assets can be risky without careful consideration. Nuance and a deep understanding of decision-making processes are essential for success in business transformation.
Understanding the power of your current business is crucial for successful transformation. Re-purposing assets and diversification are high-risk propositions unless it satisfies the same needs or uses the same skills. Reinvention can happen but requires a founder sponsor to pursue it. Unrelated diversification is typically not a good idea. Nuance and understanding of network economies are essential to determine power. Microsoft teams have a competitive advantage due to its high-cost affiliation with its users, creating a hassle for Slack. Good products don't always win against incumbents with a network that extends into the product. Transforming a business requires peeling back the covers beyond surface similarities and finding nuance in decision-making.
Finding Your Next Business Opportunity: To identify new business opportunities, companies should assess their current market position and explore areas for expansion. Repurposing existing capabilities for a different job is less risky than starting from scratch. Consider differential capabilities and occasionally take a risk in inventing new space.
To identify a new business opportunity, a company should first be brutally honest and granular about their current power in the market and figure out if there are areas of expansion within that umbrella. If not, they should look for fertile ground by repurposing their existing capabilities for a different job to be done for customers. This approach is less risky than starting an entirely new invention. Companies should also consider if they have differential capability versus other companies pursuing the same opportunity. One example of a company that successfully leveraged their unique capabilities is Corning with their glass technology. The lesson is to constrain oneself to areas that meet current capabilities and occasionally take a risk in invent space.
The Importance of Innovation and Adaptation for Company Growth: Companies should prioritize innovation and be open to adapting to new technologies for continued growth. Vouch offers a modern tech solution for insurance that can save companies time and money while ensuring compliance.
Invention is a risky but essential step for companies to grow, although it is difficult to continuously come up with successful inventions, which is why it's important to start with innovation under your current power umbrella. Companies should not have a rigid process for innovation, and they should not limit themselves to only pursuing ideas that have the potential to generate billions in revenue. It is important for companies to invest in adapting to new technological advancements for continued growth. Vouch offers a modern tech solution for insurance that is more affordable and customisable than traditional brokers and can save companies time and money while ensuring they meet essential compliance requirements.
Importance of Talent and Innovation in M&A and Business Transformation: To successfully acquire or transform a business, companies should focus on finding new revenue streams and favorable cost structures while also valuing the individual human creativity and skill transferability necessary for innovation and product development.
Companies must have the right talent and capabilities to create new products or enter new markets successfully. Acquisitions require the acquiring company to justify the purchase by finding more revenue rather than just cost savings. Successful acquisitions often involve finding new revenue streams while also having favorable cost structures. Business transformation and M&A require disciplined analysis to ensure that the acquiring company value is greater than the seller's. However, individual human creativity is also essential in transforming and developing new businesses. Entrepreneurs are the locus of inventiveness, and pattern recognition tools can enhance their productivity. Companies in diversification should consider skill transferability to ensure successful product development.
Understanding Your Company's Power Umbrella and its Importance: Expanding into areas of power can be more effective than starting new ventures. Failure to exploit your company's power can allow competitors to gain the upper hand. Entrepreneurs must understand their business definition and the importance of acquiring customers early.
Understanding your company's power umbrella is crucial for success. Expanding into areas where your power extends is more attractive than starting something completely new. Failure to exploit your company's power can create competitive openings for competitors. Blockbuster is an example of a company that failed to understand the full extent of their business and was taken out as a result. The credit card industry evolved from branded charge cards for specific stores to universal cards for everything. Switching costs can lead to companies with switching costs but no profits, making it crucial to acquire customers when the cost does not fully arbitrage out the expected profit stream. Entrepreneurs matter when inventing a new business, understanding business definition is critical.
Understanding the Interplay between Scale Economies and Network Economies in Platforms: A strong distribution infrastructure is crucial for leveraging the cost advantages and creating a flywheel effect in platforms. To succeed in the platform economy, one must understand how scale and network economies intersect and the role of time in this relationship.
Platforms exhibit both scale economies and network economies, which are deeply intertwined and difficult to tease apart. It is important for business operators to understand the structural economic conditions created by both to avoid getting taken out or played. Time as a variable must be introduced to correctly understand the boundaries and relationship between them. A strong distribution infrastructure gives cost advantage and benefits like faster delivery, making the marketplace sticky and creating a flywheel effect that benefits both buyers and sellers. The deep debate on the boundaries and relationship between scale economies and network economies is ongoing and there may be enough topics to write a book about it.
Keys to Successful Content Creation.: Develop a strong strategy, love writing, and be consistent. Focus on getting the theory right and make sure everything fits together in a simple yet not simplistic way. Collaborate and gather insights from various sources to create valuable and engaging content.
Creating a successful newsletter or content platform requires a bundle of skills, including great strategy thinking and writing ability. It may also require a love for writing and a willingness to do it consistently. However, the most satisfying part of content creation is getting the theory right and figuring out how everything fits together in a simple, yet not simplistic way. This can be a difficult and ongoing process as theories and ideas are constantly evolving and being refined. Research and communication are also essential components of creating quality content. While there may not be a single story or definitive answer for every topic, collaborating and gathering insights from various sources can help create valuable and engaging content for an audience.
