Process Power is a competitive moat, one of the 7 Powers, and the rarest and hardest to understand.
In 7 Powers, author and investor Hamilton opens by describing the Toyota Production System, which is notable because it enabled Toyota beat its Western rivals over the course of three decades. He points out the tacit quality of the system, writing:
Although Toyota offered full transparency regarding NUMMI practices (note: its joint-venture plant with GM in America), GM just couldn’t replicate the NUMMI results in its own facilities. This was not merely incompetence—the inability to mimic the TPS was shared by many, as noted in a Harvard Business Review article:
“What’s curious is that few manufacturers have managed to imitate Toyota successfully even though the company has been extraordinarily open about its practices. Hundreds of thousands of executives from thousands of businesses have toured Toyota’s plants in Japan and the United States.”
(…) So despite best intentions, and many millions of investment dollars, achieving Toyota-like outcomes proved an elusive medium-term goal for GM. Apparently there existed a Barrier of some sort. Combine this with the twin Benefits of cost efficiency and dramatic quality improvements and there remains only one conclusion—Toyota had tapped some elusive source of Power. Their rising share price throughout these decades, graphed below and resulting in a company worth nearly $200B, serves as final indicator.
Helmer concludes that Process Power must exist, given Toyota’s NPV growth. He defines the Power as ‘embedded company organisation and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment.’
The Power decomposes to:
Benefit: A business with Process Power is able to improve products and/or lower costs as a result of process improvements embedded within the organisation. This goes beyond the typical improvements that may be had from plain ‘operational excellence’ improvements.
Barrier: The barrier here is time. Helmer argues that hysteresis is required in order to replicate these process advances. This time delay results from two factors: a) complexity — automobile manufacturing requires process improvements to spread both upstream and downstream, to all suppliers above it and dealers below it, as is the case with Toyota, meaning that it takes at least a decade of constant improvement before reaping the benefits, and b) opacity — the development of TPS was fashioned from the bottom up, over decades of trial and error.
The best explanation for Process Power is probably Competing Against Time, which serves as a detailed examination of Process Power across multiple industries in the 70s. Apple supply chain tsar (and later CEO) Tim Cook used to assign it to leaders working under him; he’s often cited as saying it’s one of his favourite books.
The following series of cases describe what Process Power is, and how to recognise it.