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Thank you for reading the Brainwaves newsletter. I’m Drew Jackson, your content curator, and today I’m writing about the 7 Powers book. Let’s dive in.

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7 Powers

Thesis: Strategy is an often misunderstood, mystical term, yet it’s critical to a company’s success. Understanding how power integrates with strategy to create and capture sustained value is integral to the long-term success of a company.

Through a random series of events, I stumbled upon the 7 Powers: The Foundations of Business Strategy book by Hamilton Helmer. As an economist in the world of finance, this book was fantastic. I would recommend a read to anyone interested in either A) starting a business someday, B) working at a startup, C) joining an established business, or D) investing in companies. As you can see, I would recommend this book to almost everyone.

Today, I’ll summarize the 7 Powers framework and give some anecdotal examples of each of the 7 different powers to hopefully illustrate how critical this framework is to the field of business strategy.

The 7 powers framework, developed by Hamilton Helmer—a historical business strategist who founded Helmer & Associates, Co-Founder of Strategy Capital, and now a professor at Stanford University in Economics—is a framework to identify and drive business strategy based on 7 types of Power.

Before we dive in, let’s define some of the concepts he uses in the book:

• Strategy: the study of the fundamental determinants of potential business value

• Static Strategy: “Being There”
• Dynamic Strategy: “Getting There” – What events led to this value in the first place?

• Power: the set of conditions creating the potential for persistent differential returns
• strategy (lowercase s): a route to continuing Power in significant markets

Helmer also defines what he calls the “Fundamental Equation of Strategy”:

In this equation, the product of m₀ and g reflects market scale over time (current market size * discounted market growth factor). Referring back to the definition of strategy above (“a route to continuing Power in significant markets”), this portion refers to the “significant markets” part.

Power (“the set of conditions creating the potential for persistent differential returns”), in this case, is the interaction of s and m (the long-term market share * long-term differential margin). Phrased differently, maintaining or increasing market share while maintaining a positive and material long-term differential margin is the expression of Power.

To rephrase the equation:

However, there are some underlying assumptions to this definition, specifically that Power is the condition that creates durable differential returns. Persistence underpins the idea of power, requiring that any theory of Strategy (“the study of the fundamental determinants of potential business value”) is a dynamic strategy—as Helmer puts it, it’s about “establishing and maintaining an unassailable perch”.

Helmer identifies each of his 7 Powers and explains why they are a power based on their magnitude (how big the power is) and duration (how long that power can continue). He does this by explaining the benefit (the magnitude) and the barrier (the duration) of each Power:

• Benefit: Power must materially augment (or increase) cash flow
• Barrier: There must be some aspect of the Power condition that prevents existing and potential competitors from destroying the benefit gained.

However, the concept of Power can be somewhat limited as it is only relative. It describes a business’s strength in relation to that of a specific competitor. Strategists should assess Power with respect to each individual competitor (potential and existing, functional and direct). To explain a bit further, this means that what might provide your business power compared to your direct competitor wouldn’t provide power compared to another competitor.

Before we start discussing each Power, some other terms need discussion. Tactics are not strategy, they are simply an execution of strategy. Power is only a potential for value creation and capture, however it must be coupled with operational excellence. Conversely, operational excellence is not a Power as it can be arbitraged away over time.

To note again, operational excellence is essential, yet is not by itself a Power. It does not by itself assure differential margins combined with a steady or growing market share. Competitors can easily mimic the improvements yielded by operational excellence.

With our foundation built, we’re able to start discussing each of the 7 Powers:

• Scale Economies
• Network Economies
• Counter-Positioning
• Switching Costs
• Branding
• Cornered Resource
• Process Power

Credit WJAR

Scale Economies

Definition: A business in which per unit cost declines as production volume increases.

Stage of Company Growth This Power Can Be Realized: Takeoff

Benefit: Lowered costs (relative to competitors)

Barrier: Firms with economies of scale can price compete with their competition, able to lower their price further than the competitor’s costs while maintaining profitability, essentially putting the competitor out of business as they are constantly losing money.

Exclusivity: Only 1 company can have this Power in an industry.

Examples of Scale Economics:

• Volume/Area Relationships: Scale economies occur when production costs are closely tied to are, while their utility is tied to volume, resulting in lower per-volume costs with increasing sales. E.g., bulk tanks or warehouses
• Distribution Network Density: Delivery costs decline as the density of a distribution network increases (more customers in the same space meaning more routes and more efficiency, etc.)
• Learning Economies: Learning how to do something better (usually over time) leads to reduced costs or improved volume.
• Purchasing Economies: Purchasing more quantity at a lower cost per item (think buying individually vs. buying in bulk).

Real World Examples:

• Large retail chains such as Walmart, Costco, Home Depot, etc.
• Distribution networks such as UPS, Amazon, FedEx

Credit LinkedIn

Network Economies

Definition: A business in which the value realized by the customer increases as the number of customers increases.

Stage of Company Growth This Power Can Be Realized: Takeoff

Benefit: The leader (with the greatest network economy) can charge a higher price than competitors because they have the most users.

Barrier: Acquiring customers and trying to usurp the market leader is extremely expensive.

Exclusivity: Only 1 company can have this Power in an industry.

Attributes of Network Economies:

• Winner Takes All: Businesses in Network Economy industries have a tipping point. Once a single firm achieves a dominant share (whatever that may be), other firms simply cannot compete.
• Limited Scale: Network economies are restricted by the size of the network possible.
• Decisive Early Product / Speed: Early scaling is critical in developing network economies Power. Who scales the fastest is usually determined by who gets the product the most right the earliest.

Real World Examples:

• Social media platforms such as Instagram, Facebook, LinkedIn, BeReal, etc.
• Online marketplaces such as eBay, Amazon, Craiglist, etc.

Credit BBC

Counter-Positioning

Definition: A newcomer adopts a new, superior business model that the incumbent does not mimic due to anticipated damage to their existing business.

Stage of Company Growth This Power Can Be Realized: Origination

Benefit: The new business model is superior to the incumbent’s model due to lower costs and/or the ability to charge higher prices (they are more profitable).

Barrier: The expected damage to the existing incumbent’s business is considered “collateral damage”, meaning they feel no need to adopt the new business model.

Exclusivity: Multiple companies can have this Power in an industry

Quick note on Counter-Positioning: Creating something truly new in business is challenging in the best of times. There are few occurrences of the emergence and eventual success of a new business model.

Attributes of Counter-Positioning:

• Process of Counter-Positioning
• An upstart who developed a superior, heterodox business model.
• That business model’s ability to successfully challenge well-entrenched and formidable incumbents.
• The steady accumulation of customers, all while the incumbent remains seemingly paralyzed and unable to respond.
• Counter-Positioning is only relevant to the incumbent, not to any other businesses using the new business model.
• Situations in which Counter-Positioning can be relevant
• For the challenger:
• Rapid share gains
• Strong profitability (or the promise of it)
• For the incumbent:
• Share loss
• Inability to counter the entrant’s moves
• Eventual management shake-up
• Capitulation, often occurring too late
• Unless the incumbent fails to act over an extended period of time, challenging via counter-positioning is often a loser’s game.
• The only bet worthwhile for the challenger is the scenario where the incumbent makes the best moves possible and still loses (a pseudo-guaranteed victory).

Examples of Counter Positioning:

• Milking: The incumbent business decides to milk a declining original business even though the new model is attractive.
• Cognitive Bias: Incumbents belittle the new approach, grossly underestimating its potential. Usually, the challenger’s approach is novel and unproven while the incumbent has a successful business model.
• Agency Issues: The incumbent leadership simply does not want to change (as changing your business model is difficult) even though the new business model is more profitable.

Real World Examples:

• Airbnb
• Netflix
• Vanguard
• Uber

Credit Product HQ

Switching Costs

Definition: A value lost by a customer that would be incurred from switching to an alternative supplier for additional purchases.

Stage of Company Growth This Power Can Be Realized: Takeoff

Benefit: A company that has embedded switching costs for its current customers can charge higher prices than its competitors for equivalent products or services. The benefit only comes from selling follow-on products to current customers. There is no benefit with potential customers and there is no benefit if there are no follow-on products.

Barrier: To offer an equivalent product upfront, competitors must compensate customers for switching costs.

Exclusivity: Multiple companies can have this Power in an industry.

Examples of Switching Costs:

• Financial: It is financially expensive to switch products/services
• Procedural: Costs of the loss of familiarity with the product or risk and uncertainty associated with the adoption of a new product. It is expensive to retrain people on new products/services.
• Relational: Costs of breaking emotional bonds built through the use of the product and through interactions with other users and service providers.

Real World Examples:

• Ecosystem-based products such as Apple, Microsoft, Adobe, etc.
• Highly integrated products such as Salesforce, SAP, Oracle, Microsoft, etc.

Credit MJR Marketing

Branding

Definition: The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.

Stage of Company Growth This Power Can Be Realized: Stability

Benefit: Branding allows a company to charge a higher price because consumers either have a built-up emotional attachment to the brand, distinct from the objective value of the good or because the customer is uncertain about a competitor’s products and knows the branded product will be just as expected.

Barrier: A strong brand can only be created over a lengthy period of reinforcing actions.

Exclusivity: Multiple companies can have this Power in an industry.

Attributes of Branding:

• Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.

Challenges of Establishing a Brand:

• Counterfeiting
• Changes in Consumer Preferences
• Geographic Boundaries
• Narrowness of the Brand to Be Effective
• Only Certain Types of Goods (those eventually justifying a significant price premium) Have Branding Potential

Real World Examples:

• Luxury products such as Louis Vuitton, Hermes, Rolex, etc.
• Everyday products such as Coca-Cola, Nike, Apple, etc.

Credit Popular Mechanics

Cornered Resource

Definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.

Stage of Company Growth This Power Can Be Realized: Origination

Benefit: Something competitors want that allows a firm to create enhanced value for themselves either through a lowered cost or increased price.

Barrier: This barrier is not based on ongoing interaction but through either general or personal decree (fiat). It’s a qualitative barrier, not monetary.

Exclusivity: Multiple companies can have this Power in an industry, yet the resource is different for each company.

Tests to Establish Whether Something is a Cornered Resource:

• Idiosyncratic: Does only that business have that thing?
• Non-Arbitraged: Is the value extracted to acquire the cornered resource less than the value provided by the resource?
• Transferable: Could the resource create value at another company? Is it coveted by others in the industry?
• Ongoing: If the resource is taken away, does the value continue or does it stop?
• Sufficient: Is the resource sufficient for continued differential returns, assuming operational excellence?

Real World Examples:

• Physical resource cornering such as DeBeers, Rio Tinto, etc.
• Technology resource cornering such as TSMC, Samsung, Nvidia, etc.
• Intellectual property resource cornering such as IBM, Merck, Pfizer, etc.

Credit Harvard Business Review

Process Power

Definition: Embedded company organization and activity sets which enable lower costs and/or superior products, and which can be matched by competitors only through an extended commitment.

Stage of Company Growth This Power Can Be Realized: Stability

Benefit: Improve product attributes and/or lower costs because of process improvements.

Barrier: Process advances are difficult to replicate and can only be achieved over a long time

period of sustained evolutionary advancements.

Exclusivity: Multiple companies can have this Power in an industry, but usually only one does.

Quick note on Process Power: Unyielding, long-time constant improvements makes process power a very rare occurrence.

Real World Examples:

• Toyota

_________________________

There you have it, the 7 Powers, listed again below:

• Scale Economies
• Network Economies
• Counter-Positioning
• Switching Costs
• Branding
• Cornered Resource
• Process Power

Credit Parveen Kaler

Barriers & Benefits

Ultimately, businesses wishing to find Power have to achieve some benefit and create a competitive barrier that prevents competitors from encroaching on that benefit (reducing the benefit).

Helmer proposes 7 potential benefits and 4 barriers:

Benefits:

• Input – Lower input prices lead to lower costs.
• Scale of Production and/or Distribution – Production and distribution when done at a larger scale can be done cheaper than competitors, lowering costs.
• Production and/or Distribution Approach – The approach to production or distribution is different than competitors and at a lower cost.
• Superior Deliverables – Superior product/service allows the business to charge a higher price.
• Affective Valence – You feel attracted/attached emotionally to a product/service, meaning they can charge you a higher price because you’re not likely to switch.
• Uncertainty – Uncertainty surrounding competitor’s products/services can create an opportunity to charge more for established products/services.
• Benefits from Other Users – More users/customers on the platform creates more value for other customers (the largest network wins). The competitors with this Power can increase price relative to their competitors.

Barriers:

• Collateral Damage – Adopting the competitor’s business model would cause more damage than benefits it would produce
• Share Gain Cost/Benefit – It’s expensive to gain market share and there is no benefit to challenging the competitor with Power
• Hysteresis – Long periods of consistent action create a defensible barrier to competitors who can’t compete immediately.
• Fiat – As the business with the cornered resource develops during takeoff, the resource’s value becomes more widely known, substantially reducing the probability it will be materially underpriced, and the “right” protected by fiat needs to not be fully priced.

Helmer explains the differences between benefits and barriers as the following:

“Benefits are common, and they often bear little positive impact on company value, as they are generally subject to full arbitrage. The true potential for value lies in those rare instances in which you can prevent such arbitrage [through a Barrier].”

Credit Shopify

Dynamics vs. Statics

Dynamics is the process of getting there which is completely different from statics, the process of being there. Statics could be considered the destination, the goal, whereas dynamics could be considered the journey taken to get to the goal.

Statics are easy, they are the 7 Powers–what Hamilton claims are the only definitive goals for business strategy.

Dynamics, however, are more complicated.

Let’s explore them.

Question 1: How do you create Power in a business? What must you do to get there?

Luckily, Helmer spells this out quite clearly:

• Scale Economies: You must simultaneously pursue a business model that promises Scale Economies while at the same time offering a product differentially attractive enough to pull in customers and gain relative sales share.
• Network Economies: You must simultaneously pursue a business model that promises Network Economies while at the same time offering a product differentially attractive enough to pull in customers and gain the largest installed base of customers.
• Cornered Resource: Secure the rights to a valuable resource on attractive terms (pay less for the resource than it is worth to you).
• Branding: Over an extensive period of time, you make consistent creative choices that foster in the customer’s mind an affinity that goes beyond the product’s objective attributes (its worth is more than it is actually worth).
• Counter-Positioning: You pioneer a new, superior business model that promises collateral damage for incumbents if mimicked.
• Switching Costs: You must simultaneously pursue a business model that promises Switching while at the same time offering a product differentially attractive enough to pull in customers and gain a large installed base of customers. Following this, add-on products must be offered to customers in order to capitalize on switching costs.
• Process Power: You evolve a new complex process that renders itself inimitable within a reasonable period and yet offers significant advantages over a longer period of time.

But where do you start for all of these?

Credit Facts.net

All Power starts with invention. The first cause of every Power type is invention—whether that be the invention of a product, process, business model, or brand. You must create something new that produces substantial economic gain in the value chain.

The invention process is simple:

• Fluctuations in external conditions create new threats and opportunities.
• Any company wishing to capitalize on these new conditions must invent.
• Amidst this invention, you must find a route to Power.

It is important to note here that most inventions will not assure Power. However, Power arrives only on the heels of invention. If you want your business to create value, then action and creativity must come foremost.

Invention comes in three different ways:

• Capabilities led compelling value: This is when a company tries to translate some capability it has into a new product with compelling value. This is difficult to do as you have no idea if the market will be there. The solution is there, but it’s unclear whether the problem you’re trying to solve is there.
• Customer led compelling value: The market has an unmet need, but no company knows how to satisfy it yet, leading to the development of a solution to a problem that already exists.
• Competitor led compelling value: A competitor has already brought to market a successful product and the inventor must produce something so much better that people will “have to have it.”

Question 2: When is the right time to get Power in a business?

Helmer details 3 stages where different Powers can be realized:

• Stage 1: Origination: This occurs before a company clears a compelling value threshold, at which time sales rapidly pick up signaling the beginning of the takeoff period.
• Stage 2: Takeoff: When customer acquisition can take place at favorable terms. Usually a period in the industry of 30-40%+ growth every year.
• Stage 3: Stability: The business may still be growing but growth is below 30-40% per year.

But where do each of the 7 Powers sit on the 3-stage framework?

Credit Parveen Kaler

Helmer cites the following stages for when each Power can (and should) be realized. As you can see, some Powers are foundational to businesses, beginning at the very start, and others take a long time to develop.

Conclusion

As a reminder, here is our definition of strategy and our definition of Power:

• Power: the set of conditions creating the potential for persistent differential returns
• strategy (lowercase s): a route to continuing Power in significant markets

Here are the 7 Powers:

• Scale Economies
• Network Economies
• Counter-Positioning
• Switching Costs
• Branding
• Cornered Resource
• Process Power

Powers are established through invention—whether that be an invention of a product, business model, process, or brand. Different power types need to be established at different times in the business’s growth timeline.

The potential for these Power types is usually evident long before detailed forecasting is possible.

To conclude, I’ll finish with the following quote from Helmer:

“Armed with one or more of these Power types, your business is ideally positioned to become a durable cash-generator, despite the best efforts of competitors. If you possess none of these, your business is at risk. Period.”

See you Saturday for The Saturday Morning Newsletter,

Drew Jackson

Twitter: @brainwavesdotme

Email: brainwaves.me@gmail.com

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