Hamilton Helmer's 7 Powers.

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As part of my management assignments I am often tasked with strategy-related topics. Hamilton Helmer’s book “7 Powers” is a great way to think about business strategy. Especially for startups this is an excellent framework. Earning money and product-market-fit is important - but it is equally important to make sure you got a barrier that you can defend. Helmer calls these barriers “The 7 Powers”.

I recently discovered the excellent Acquired podcast. They use Helmer’s 7 powers to evaluate startups and investments. Pretty cool. But they also have a couple of very cool interviews with Hamilton himself. Don’t miss them!

But now let’s check out the 7 Powers!

Power 1: Scale Economies

Example: Intel. It is very costly to set up the manufacturing process for a microprocessor plant. For a big company like Intel it is therefore possible to fight off smaller incumbents like AMD. They simply produce a lot more and the setup costs are spread over a bigger number of units.

Power 2: Network Economies

Example: Linkedin. The more people join Linkedin the more valuable it is for other professionals, as well as recruiters. It’s a self-reinforcing cycle.

Power 3: Counter-Positioning

Example: Vanguard sells passively traded funds. These funds are cheaper than actively traded funds. At the beginning the actively traded funds business did not want to compete with Vanguard - because they feared that passively traded funds would simply kill their core business.

Power 4: Switching Costs

Example: SAP (or business software in general). It is very costly to set up SAP for your business. Not only in terms of Dollar value, but also in terms of processes. Switching away from SAP becomes very hard for companies.

Power 5: Branding

Example: Tiffany’s is able to sell jewelry at a higher price than competitors. They achieve this through carefully built brand awareness, customer experience and packaging.

Power 6: Cornered Resource

Pixar had a superior leadership team (Catmull, Jobs) leading to extreme success. There were attempts to lure them into other companies, but to to their commitment and bonding it was not really possible. Another example is intellectual property.

Power 7: Process Power

Toyota created the Toyota production system which helped to optimize the processes at their plants. It drove out waste and increased quality and output. It took incumbents quite a while to match this.