7 POWERS The Foundations of Business Strategy Hamilton Helmer Review by Andre Marafon

Everything should be made as simple as possible, but no simpler

-- Albert Einstein

Strategy is a widely discussed subject, so it’s quite hard to find something fresh and applicable. . Michael Porter has given us the tools to understand market chains in his outstanding take On Competition. It seems only fair, after the harsh stance of Frank Slootman on strategy, that this review gives us some insight on the elegant mental model of Hamilton Helmer’s book.

Power is the deep driver of potential fundamental business value. Rare characteristics which materially improve cash flow, while simultaneously inhibiting competitive arbitrage. Set conditions creating the potential for persistent differential returns.

Hamilton Helmer is a recognized investor, consultant, and professor at Stanford University. He has been an early investor on Netflix and served several blue-chip clients. His book builds on Porter’s strategy framework and delivers us a go-to mental model when discussing investments.

He builds a fundamental equation for understanding value generation and derives a specific argument for each of the 7 powers. A must read for the investors who like formulas and mathematical representations. I personally enjoyed the accessible reminder on the main drivers of strategy, that if well executed can deliver disproportional returns.

What Hamilton Helmer calls power; we call it competitive advantage. An attribute that has high magnitude and duration. What the author accomplishes in this book is to show us the benefit and barrier associated with each of these powers listed below.

Benefit: Materially augment cash flow: increased prices, reduced cost and /or lessened investment needs.

Barrier: It must persist. Conditions that prevent existing and potential competitors from engaging in the sort of value-destroying arbitrage.

Hamilton Helmer’s mental model builds a matrix of 7 powers, which he believes represent all the comparative advantages he has seen to date. I will share a brief view on each of them, and follow-up on those I find it most interesting and hard to perceive.

1.???? Scale Economics:

1. Benefit: Reduced cost.
2. Barrier: Prohibitive costs of share gains (i.e., competitors face returns below their cost of capital).

2.???? Network Effects:

1. Benefit: Higher prices.
2. Barrier: Unattractive cost/benefits of gaining share for competitors.

3.???? Counter Positioning:

1. Benefit: The new business model is superior to the incumbent’s model due to lower costs and/or the ability to charge higher prices.
2. Barrier: Changing to the new business plan would destroy the incumbent P&L. Lots of collateral damage.

4.???? Switching Costs:

1. Benefit: Switching costs for its current customers can charge higher prices than competitors for equivalent services. Yet, no benefit on follow-on products.
2. Barrier: To offer an equivalent product, competitors must compensate for switching costs. Unattractive cost/benefit of share gains. Possible types: (1) financial, (2) procedural – familiarity with product – execution risk, (3) relational.[1]

5.???? Branding:

1. Benefit: Higher prices. Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.
2. Barrier: Hysteresis. The passage of time. With brand consistency, there is affective valence and uncertainty reduction.

6.???? Cornered Resource:

1. Benefit: Preferential access at attractive terms to a coveted asset that can independently enhance value.
2. Barrier: It can be natural, personal or a process, patent, property rights, etc.

7.???? Process Power:

1. Benefit: Able to improve product attributes and/or lower costs because of process improvements embedded within the organization.
2. Barrier: Hysteresis. These process advances are difficult to replicate and can only be achieved over a long time of sustained evolutionary advance (iterations).

What I find most interesting is that operational prowess is not considered a power source, but a conduit for enabling a winning strategy. Just as Frank Slootman described it: No strategy is better than its execution. Therefore, Process Power is not to be misinterpreted as operational excellence, but as an innovation in the business model or strategy that requires the passage of time and several iterations to make it financially successful. This change typically occurs in the dark hours of the night and is highly difficult to interpret from the outside.

To make it tangible, the best-known example of Process Power I know is Wal-Mart. In my professional experience, Armac’s service approach to rental is an example of a solid strategy innovation followed by Process Power.

Another remarkable take away from this book is understanding that most discussions of strategy stop at a static point: “being there”. However, it is quite as interesting to understand the dynamics of strategy: “getting there”. For that purpose, Hamilton Helmer remembers us that ‘all Powers start with invention. Invention of a product, process, business model, or brand’.

Planning rarely creates competitive advantages. Action is the core principle of strategy. The author concludes, ‘if you want your business to create value, then action and creativity must come foremost’.

Considering Hamilton Helmer’s strong view on innovation and action, we should remember that whenever there is a new technology in place[2], there will always be an opening for a pioneering challenger. Incumbents should remember and respect that.

Reading this book has been a fascinating reminder to think of strategy non-linearly and as an action driven effort. Organizing different kinds of competitive advantages into clear models that can be applied dynamically.

Hamilton Helmer accomplished what he intended. A simple mental model, with elegant nuances. Simple, not easy.

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[1] Spoiler on the next power, Branding: If the product preferences of users already tethered by switching costs spills over to a wider pool of potential clients, you could also enjoy the effects of branding.

[2] Business-model or product innovation should be considered a new technology as well.