By Bill in Strategy — Jul 26, 2024

The 7 Powers Framework

Cover of 7 Powers: The Foundations of Business Strategy and picture of Hamilton Helmer

Hamilton Helmer is a strategist and co-founder of Strategy Capital, and his book 7 Powers: The Foundations of Business Strategy outlines seven key Powers, which are explored in more detail below:

Scale Economies: Cost advantages from increased production.
Network Economies: Enhanced value with more users.
Counter-Positioning: New business models that disrupt competitors.
Switching Costs: High costs for customers changing products.
Branding: Strong brand differentiation.
Cornered Resource: Control over essential, scarce resources.
Process Power: Superior, hard-to-replicate processes.

Helmer starts by defining the following terms:

Strategy: The study of the fundamental determinants of potential business value.
- Statics - i.e. “Being There”: What makes this business durably valuable?
- Dynamics - i.e. “Getting There”: What developments yielded this attractive state of affairs in the first place?
Power: The set of conditions creating the potential for persistent differential returns.
strategy: A route to continuing Power in significant markets.

Powers possess the following characteristics:

Persistence over time.
They should provide both:
- A benefit: By increasing cash flows through higher prices, reduced costs, or decreased investments.
- A barrier: By preventing existing and potential competitors from engaging in behaviors that might negate the benefit.

Usually benefits are easier to see than barriers, so in order to analyze the Powers within a market, one should start by analyzing barriers.

1 - Scale Economies

When Netflix decided to own exclusive rights and create original content, it transformed what were previously complex variable costs (broadcasting series and movies) into fixed costs (e.g., $100 million for producing "House of Cards"). This shift created an advantage for Netflix: for 30 million subscribers, the $100 million investment translates to just over $3 per customer, compared to $100 per customer for a potential competitor with only 1 million subscribers.

Hamilton Helmer defines scale economies as a "business in which per unit cost declines as production volume increases."

Scale economies are a Power that brings:

A benefit: Lower cost per unit produced.
A barrier: Dominant firms benefiting from scale economies can cut prices to match those of smaller competitors. Over time, this creates a moat as gaining market share becomes prohibitively expensive for smaller firms.

Scale economies can also emerge from:

Volume/area relationships, where production costs are tied to a specific area while utility is tied to volume.
Distribution network density, where delivery costs decline as customer density increases.
Learning economies.
Purchasing economies, where it is easier to secure better prices for larger quantities of goods.

2 - Network Economies

Network economies occur when a product's value increases as more people use it. For example, LinkedIn becomes more valuable for employees and recruiters when the platform has a large user base. Helmer defines Network Economies as “a business in which the value realized by a customer increases as the installed base increases.”

Network economies are a Power that brings:

A benefit: Companies with Network Economies provide greater value to their customers, enabling them to charge higher prices.
A barrier: The high cost and low benefit of switching to a less valuable platform discourage users from leaving.

Businesses with strong Network Economies often become winner-take-all markets because, beyond a certain tipping point, the leading company gains an insurmountable advantage, making it difficult for others to capture significant market share.

3 - Counter-Positioning

Counter-Positioning is a Power allowing a new entrant to dislodge a market leader that seems unassailable as measured per conventional performance metrics within this market.

Vanguard disrupted the asset management market by offering to simply track the market instead of actively managing equity. At first, brokers were reluctant to advise their customers to buy the market as a whole as it meant they provided no value to them. This is why Vanguard’s Assets under Management grew slowly at first, before taking off. The incumbent in this market, Fidelity, did not respond by offering passively-managed solutions as they thought it would damage their existing business too much. The Vanguard story is characteristic of the Counter-Positioning Power as it features:

A new entrant with a heterodox, superior business model compared to incumbents.
This business model must be compatible with gaining market share from incumbents.
No retaliation from the incumbents.

More specifically, Helmer defines Counter-Positioning as: “A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business”.

Counter-Positioning is a Power that brings:

A benefit: The Superior business model, which leads to higher cash flows.
A barrier: The fact that it does not make sense for the incumbents to adopt the same business model as the upstart because it would damage their existing business. This can be because of:
- Milking (Negative Combined NPV): this happens when the management of an incumbent chooses to milk its existing business instead of embracing a better model. Vanguard possessed the capabilities to enter the passive funds business, but its active funds one was very profitable as it had higher fees and sales commissions, which is why it did not.
- Cognitive bias: the CEO’s view can differ from an unbiased, rational one.
- Agency issues: there can be misalignments between the interests of the incumbent and of its management, resulting in the latter making decisions benefiting itself at the expense of the former.
- If a business model is not suited to the incumbents (because, for instance, they do not have the capacities to replicate it correctly and with a sufficient competitive advantage), it does not qualify as Counter-Positioning for the upstart.

4 - Switching Costs

Switching costs occur when buying a product from a different company would result in costs. More specifically, Helmer defines Switching Costs as: “The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases”.

Counter-Positioning is a Power that brings:

A benefit: The ability to charge higher prices to current customers, who are locked-in with their vendor.
A barrier: Competitors must compensate customers for the costs of switching if they want to acquire them.

When switching costs are high, acquiring new customers is too costly for the players in the market, as they would need to compensate them for the costs incurred. In these markets, it thus makes sense to capture market shares fast.

5 - Branding

The jeweler Tiffany & Co can price its diamond rings higher than CostCo can because of the company’s reputation in customers’ minds. It has branding power, which Helmer defines as “The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller“.

Branding is a Power that brings:

A benefit: The ability to charge higher prices due to:
- Customers’ emotions and affection for the brand.
- Uncertainty reduction when a company has built itself a reputation through consistency of its products.
A barrier: The long time of building the brand.

Branding Power is different from mere brand awareness.

6 - Cornered Resource

Helmer defines Cornered Resource as “Preferential access at attractive terms to a coveted asset that can independently enhance value”.

Cornered Resource is a Power that brings varied Benefits and Barriers depending on the situation. To identify if an asset is a Cornered Resource for a firm, Helmer has developed 5 criteria:

It must be idiosyncratic (specific to the company).
It must not be arbitraged, meaning that the price the firm is paying for the asset must not cover the value it brings.
It must be transferable.
It must be ongoing.
It must be sufficient for increased returns, if the firm executes well operationally.

7 - Process Power

Helmer defines Process Power as “Embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment”.

Process Power is a Power that brings:

A benefit: Improving products and lowering costs as a result of process improvements within the firm.
A barrier: The process improvement can only be replicated over a long time period, either because of its complexity or because of the opacity of the firm.