Fortifying the Future: Applying the 7 Powers in Defense Tech

Last week, I introduced the idea that to make a Defense Tech company VC-backable, it needed to be both scalable and defensible .

While scalability paints a picture of potential, defensibility illuminates the path to realization. It revolves around mitigating risk and safeguarding investor interests by fortifying the company's position in the market.

In the realm of defense technology, defensibility manifests through technical and economic moats. Technical moats, such as patented technologies, erect barriers against competitors, shielding the company's innovations from replication. Meanwhile, economic moats, like network effects, forge unassailable positions by leveraging market dominance.

I then essentially dismissed network effects and discussed how to use contracts as a proxy for the economic moats.

Today, I want to go back to the idea of economic moats and look at a few examples of companies in this space that have applied Hamilton Helmer’s 7 Powers to create them.

Truth be told, I was reflecting on my post afterwards and realized that I missed a really great opportunity to highlight how companies like Anduril have created Network Effects to create defensibility and propel themselves to the forefront of the Defense Tech market.

My hope is that by sharing these examples, I can help more companies develop strategies that will lead to their success in creating meaningful and adoptable innovation for our security and defense.

Understanding the 7 Powers

Strategy Capital Co-Founder and CIO, Hamilton Helmer, captured lessons he’s learned through a career focused on business strategy in his book 7 Powers: The Foundations of Business Strategy . He intended the book to be a comprehensive strategy toolset for forward looking companies. I find the 7 Powers to be useful in developing defensibility for startups.

I’m not alone in this assessment. Harry Stebbings of 20VC calls Helmer’s book “the most impactful book in business. ” Keith Rabois, who has enjoyed tremendous success at both Khosla Ventures and Founders Fund (and now back to Khosla ), has allegedly called the framework “Silicon Valley’s best kept secret .”

So, what are these 7 Powers?

1. Scale Economies: This power revolves around the concept of per-unit costs decreasing as volume increases. It leads to reduced costs per unit, providing a significant competitive advantage. Think of it as the benefit of mass production.
2. Network Economies: Here, the value of a product or service to a user increases as the number of users increases. This creates a powerful network effect, making the product more valuable as more users join. It's akin to the snowball effect in business.
3. Counter-Positioning: Counter-positioning occurs when a new company adopts a new business model that incumbents won't copy because it would hurt their existing business. It's about finding a niche that existing players can't easily replicate, giving you a unique advantage.
4. Switching Costs: This power stems from the fact that a customer loses value by switching to an alternative supplier for an additional purchase. High switching costs act as a barrier for customers, making them stick with your product or service even if alternatives arise.
5. Branding: Branding is the durable attribution of higher value to an objectively identical offering due to historical information about the seller. It's about building trust, reputation, and recognition that sets you apart from competitors.
6. Cornered Resources: This power entails preferential access, at attractive terms, to an asset that can independently increase value. It could be patents, proprietary technology, or access to scarce resources that give you a significant advantage over rivals.
7. Process Power: Process power is embedded sets of company organization and activity that enable lower costs and/or superior products. It's about having efficient processes, workflows, and methodologies that are hard for competitors to replicate.

Applying the Powers in the Defense Sector

Great, so now we have a basic understanding of the 7 Powers, it’s time to apply them to the Defense Tech scene to understand how they are used in practice.

1. Scale Economies:

Example: SpaceX

• SpaceX has revolutionized the space industry by focusing on reusability and cost reduction in rocket launches. Through its Falcon rockets and Dragon spacecraft, SpaceX benefits from scale economies in manufacturing and launching payloads into space. As SpaceX increases its launch frequency and expands its fleet of reusable rockets, the per-launch costs decrease significantly. This approach has disrupted the traditional aerospace industry, making space exploration more affordable and accessible. SpaceX's ability to leverage scale economies has positioned it as a dominant player in the commercial space launch market, attracting customers from both government agencies and private companies.

2. Network Economies:

Example: Anduril Industries

• Typically, we apply network effects to social media. The more people that are on Facebook, the greater the demand. But that’s just one type of network effect—and quite frankly part of the reason I initially downplayed the power of network effects in Defense Tech.
• Anduril's Lattice OS and hardware devices create a network effect within defense operations. As more devices containing Lattice OS join the network, the value of Anduril's defense solutions increases. This network effect enhances the utility and effectiveness of Anduril's products, making them more appealing to defense agencies. At some point, this network will hit a critical mass, wherein the value produced by the network will exceed the value of any product itself or competing products. Seed firm NfX has built their entire thesis around network effects and provides some fantastic resources for better understanding the 16 different types of network effects and how to apply them for maximum defensibility .
• At some point, Anduril’s network of Lattice OS-based systems could force other companies to either a) adopt the Lattice OS for their own systems and become customers of Anduril or b) not compete for contracts. This is a prime example of using network effects in defense technology.

3. Counter-Positioning:

Example: Palantir Technologies

• Palantir's focus on software solutions in defense, rather than traditional hardware-centric approaches, represents counter-positioning. By adopting innovative software models, Palantir provides unique value propositions that incumbents may be hesitant to replicate due to potential collateral damage to their existing business models.
• Another example of Palantir’s counter-positioning is in the way they pursue contracts, eschewing traditional contrac t formats (such as cost-plus contracts) in favor of a more Silicon Valley familiar SaaS model.

4. Switching Costs:

Example: Lockheed Martin

• Description: Lockheed Martin's involvement in the F-35 Joint Strike Fighter program exemplifies the concept of switching costs in the defense industry . Despite facing significant challenges, including massive cost overruns and delays in development and production, the program has persisted due to the sunk-cost fallacy. Governments and defense agencies heavily invested in the F-35 program are reluctant to switch to alternative platforms, fearing the loss of resources already allocated to the project. Lockheed Martin strategically leverages this inertia to maintain its position and prevent the program from being canceled. The high switching costs associated with transitioning to alternative fighter jet programs act as a barrier, allowing Lockheed Martin to continue benefiting from its involvement in the F-35 program and solidify its position in the defense market.

5. Branding:

Example: Boeing Corporation (counter-example)

• Description: Boeing Corporation, once revered for its aerospace and defense innovations, has recently faced significant challenges that have tarnished its brand reputation. A series of incidents, including the crashes of Boeing 737 MAX aircraft due to software design flaws and the failure to ensure proper installation of bolts leading to a window blowout on an Alaskan Airlines flight, have eroded trust in Boeing's products and safety standards. These incidents have not only damaged Boeing's brand in the commercial aviation sector but also cast a shadow over its defense business. Boeing's defense unit is now more susceptible to disruption, with increased risk of losing contracts such as the E-7 Wedgetail with the Air Force due to concerns about reliability and safety. This serves as a cautionary tale highlighting the importance of brand integrity and the significant impact of brand reputation on a company's resilience in the face of adversity.

6. Cornered Resources:

Example: L3Harris Technologies

• Description: L3Harris Technologies has strategically positioned itself in the defense industry by acquiring Rocketjet Aerodyne, a leading manufacturer of solid rocket motors. This acquisition has provided L3Harris with a significant advantage, essentially cornering the market on solid rocket motors used in various defense applications, including missiles, rockets, and propulsion systems. By controlling a key component essential for defense technologies, L3Harris has established a strong foothold in the market, making it challenging for competitors to enter and compete effectively. While emerging companies like FireHawk Aerospace and X-Bow Systems are beginning to challenge this cornered resource, L3Harris maintains a substantial lead as the incumbent, leveraging its expertise and resources to maintain its dominance in the solid rocket motor market.

7. Process Power:

Example: Hadrian

• Description: Hadrian is revolutionizing America’s Space & Defense industry by addressing the bottleneck caused by the capacity limitations of traditional owner-operated machine shops. Through a series of highly automated precision component factories across the US, Hadrian enables Space & Defense manufacturers to obtain parts ten times faster and at half the cost for Rockets, Satellites, Jets & Drones. Hadrian's Process Power stems from its ability to develop and implement highly efficient and innovative manufacturing processes. By leveraging both explicit process design and tacit knowledge acquired through experience, Hadrian has cornered the market on the talent needed to build this business. The company's culture, processes, and technologies are designed to capture and encode Process Power , making it challenging for outsiders to replicate. Hadrian's rapid scaling and unique approach to manufacturing underscore its dominance in this space, positioning it as a leader in automated precision component production for the Space & Defense industry.

These powers clearly work within the Defense Industry and Defense Technology. The above examples highlight how impactful application of the 7 Powers can be in this indutry. By understanding and leveraging these powers, defense technology companies can establish a strong foothold in the industry, ensuring long-term success and resilience in the face of evolving challenges.

Conclusion

Understanding and leveraging these powers can be the key to building a sustainable advantage in a crowded marketplace. For startups, in particular, mastering these concepts can mean the difference between being just another player in the field and becoming a dominant force to be reckoned with.

Remember the power of defensibility and its role in making a Defense Tech company venture-backable.

Keep building!

Andrew