Network Economies occur when the value of a product to a customer is increased by the use of the product by others.

Surplus Leader Margin (SLM). This is the profit margin the business with Power can expect to achieve if pricing is such that its competitor’s profits are zero.

The quality of declining unit costs with increased business size is referred to as Scale Economies.

Scale Economies—the First of the 7 Powers

The notion of Power (and the impact of its lack) is what underlies Warren Buffett’s view that if you combine a poor business with a good manager, it is not the business that loses its reputation. On the other hand, always the domain of Economists, I am a strong believer in the importance of leadership in the creation of value.

“Always look to the Barrier first.” In Intel’s case, the heart of its microprocessors strategy can be best understood not by sorting through the multiplicity of Intel’s value improvements, but by deducing why decades of capable and committed competition failed to emulate or undermine those improvements.

Potential Value = [Market Scale] * [Power]

For the purposes of this book, “value” refers to absolute fundamental shareholder value5—the ongoing enterprise value shareholders attribute to the strategically separate business of an individual firm. The best proxy for this is the net present value (NPV) of expected future free cash flow (FCF) of that activity.6 NPV = Σ(CFi/[1+d]i) Where: CFi ≡

strategy: a route to continuing Power in significant markets I refer to this as The Mantra, since it provides an exhaustive characterization of the requirements of a strategy.