Thanks to everyone who made it to the Brisbane meetup last night.
It's hard to list everything discussed but some of the topics included
NEU, residential property, commercial property, mineral resources, our worst investments, biomedical/biotech stocks, macroeconomics, crypto, promedicus, catapult (and it's current valuation), LBL, ABV, Stealth Group, Resmed (is there a risk of Chinese knockoffs?), PWH (the risks of a stock being priced for growth and not growing), Wisetech, Biome, Cogstate, John Addis's new book was recommended, risk and much more.
I did a short presentation on the book 7 Powers by Hamilton Helmer (below). You can find the original version in the Education discussion in forums https://strawman.com/forums/topic/5863 You can also find my summaries on the Intelligent Investor and several podcasts as well as great educational content from other Strawman users.
7 Powers: The Foundations of Business Strategy
Hamilton Helmer
The conditions required for Power
Benefit – improvement in the cash flow of the wielder via reduced cost, enhanced pricing and/or decreased investing requirements.
Barrier – an obstacle creating an inability/unwillingness to compete for this benefit
Power is created if a business attribute is simultaneously:
- Superior – improves free cash flow
- Significant – cash flow improvement must be material
- Sustainable – improvement must be largely immune to competitive arbitrage
Value = market size x Power
1. Scale Economies
A business experiences scale economies when its per-unit costs decline as production volume increases.
Benefit – reduced cost
Barrier – difficult/costly for competitors to compete
Example: Netflix – has twice as many customers as competitor. With 150M users if Netflix spends $150M to make a series it costs them $1 per customer. It costs the competitor with half as many customers twice as much. The benefit of this scale to Netflix is reduced cost and the barrier is it’s more expensive for competitors to compete.
2. Network Economies
Network economies occur when the value of a product or service increases with the number of users.
Benefit – can charge higher prices than competitors
Barrier – difficulty for competitors to replicate the network
Example: FBs value comes from the number of users. If Amazon, for example, created a new social media site it wouldn’t be very attractive to most people until it reached a significant number of users. To get those users would be incredibly expensive. The exception to this may prove to be Threads v X, with how poorly Elon is running X (Twitter). However, as Strawman user @doktorspleen pointed out, Threads ability to leverage their existing platforms - Instagram and FB may actually prove the point of Network Economies and why Threads is able to have success.
3. Counter-Positioning
Counter-positioning happens when a newcomer adopts a superior business model that incumbents cannot replicate due to anticipated damage to their existing business.
Benefit – better pricing or reduced costs
Barrier – the reluctance or inability of incumbents to change their model
Additional factors
CEOs compensation is designed to make the shift unappealing
Observations
5 stages – denial, ridicule, fear, anger, capitulation (often too late) where incumbent puts toe in the water but fails to fully commit
Challenger should remain humble and show respect towards incumbent
Is one of the toughest management challenges
Example: Netflix v Blockbuster. Blockbuster’s CEO is putting his job on the line if he fails, his compensation is tied to earnings, they’ve invested a lot of money into physical stores. Netflix’s business model is unproven (at the time) and CEO’s often unwilling to take the risk of competing until it’s too late.
4. Switching Costs
Switching costs arise when customers face significant costs to switch to a competitor's product.
Benefit – can charge higher prices
Barrier – high switching costs for customers
Types of switching costs – financial, procedural and/or relational
Switching costs are a non-exclusive power type – all players can enjoy their benefits
Example: a large medical company changing their customer management software. 1000’s of staff need to be retrained, new software purchased, possibly new equipment, there’s down time, errors.
5. Branding
A customer attributes higher value to a product that may be similar to a competitors.
Benefit – can charge higher prices due to “good feelings” about brand or “peace of mind”
Barrier – this can only be built up over time with significant investment
Example: Apple vs Samsung. Toyota vs Hyundai. Both are similar products but Apple and Toyota have a stronger brand and can charge more.
6. Cornered Resource
A valuable asset that is controlled by the company and not easily accessible to others.
Benefit – higher pricing or reduced costs
Barrier – exclusivity of the resource
Example: a patent, a unique location or a talented team
7. Process Power
Process power comes from the ability to perform activities better than competitors.
Benefit – better products and/or lower costs as a result of process improvements embedded within the organisation
Barrier – difficulty for competitors to replicate the process due to complexity, time and opacity (e.g. Toyota may not know what they have, may not have ever codified it or even be able to explain fully how they do it)
Example: Toyota’s manufacturing process/culture.
Hi fellow straw people,
I'll be hosting a Brisbane investing meetup Thursday November the 21st to talk all things investing.
Details
Thursday Nov 21st 6:15pm
Slipstream Brewing Yerongpilly
I'll be doing a short educational presentation on a book or podcast(s) I found valuable. If anyone wants to do a stock pitch (no pressure) or something similar you're more than welcome.
Please RSVP to this or by email so I can make a reservation