Whether you are running or buying a business the 7 Powers strategy framework will guide you to capture enduring business value.

Here is my second essay on the 7 Powers which includes:

  • Description of the remaining three of the 7 Powers:
    1. Switching Costs
    2. Branding
    3. Process Power
  • What the Path to Power is
  • The Power Progression – how Power is relevant to different stages of a company’s growth. 

I recommend you read Part I before you dig into Part II.

Power #5 – Switching Costs

The Power: Switching Costs are the customer’s perception of the additional costs (e.g. procedural, financial or relational) required to end the current relationship and secure an alternative supplier

The Benefit: Ability to charge higher prices for the same product

The Barrier: Competitor’s costs to persuade the customer to switch

A Switching Cost is when you have a product or service like an ERP system which is so embedded into your company’s processes that it’s so painful to change to a new supplier you don’t bother to switch. Not just the financial costs of retraining all of your staff to use a new product or service but also the emotional costs of dealing with annoyed employees having to learn something new and change their routines. They may also have strong relational ties to the product and community using it. And any migration of data will inevitably have some hiccups. 

If you are a mature business it is extremely hard to create Switching Costs – customers are smart, so why would they let you make it harder to switch products or services?

Usually companies succeed in getting Switching Costs Power when they are in the lift-off phase (i.e. fast growth) and are acquiring new customers. Customers often just want to get hold of the product rather than worry about how hard it might be to switch at a later date. For example, when I got my first iPod I had no idea it would be the start of my being hooked into the Apple world – since my first iPod I have gone on to buy multiple iPads, iPhones, and Macbooks all because I can’t be bothered to create a new tech ecosystem.

Slack is another example of a business gaining Switching Cost Power in the scale-up phase. They acquired lots of customers in their growth phase – they were a real innovator in the communication space. Switching away from Slack would be costly not just in terms of direct costs of migration but also in terms of disruption to workflows and potential loss of data or integrations specific to Slack. 

Also when you have Switching Costs it’s worth attracting new customers but there comes a point when the value of the Switching Costs is outweighed by the cost of acquiring the customer. There are lots of crappy businesses which pay too much for customers even though they have Switching Costs. To some degree, Slack, as a more mature business, is in a much harder position to grow as it now competes with Microsoft and the ability to economically acquire customers is not what it used to be. 

If you know of a SaaS business with really powerful Switching Costs let me know and I will invest assuming you haven’t told too many other people and the valuation is silly!!

Power #6 – Branding

The Power: Branding Power is achieved when a company has created a perception of higher value to an objectively identical product or service 

The Benefit: Command a premium price or secure customer loyalty

The Barrier: Uncertainty, cost and time taken to build a strong brand

Branding as a Power is a far narrower concept than brand awareness. You can create brand awareness through an advertising campaign on TV but you would have paid for it so its value is fully arbitraged out and others can do the same. 

Branding is much more durable. Branding is where you establish a perception that either customers feel really good about your product (e.g. prefer to be seen with an Apple product than another one) or you get a reputation that assures customers and reduces their uncertainty (e.g. pay more for Nurofen product than a generic ibuprofen brand). 

Creating a brand is very hard. Steve Jobs deliberately built aesthetics into the Apple culture as well as the brand. It takes a long period of time and only works in certain kinds of products or services – Apple is one of very few in the tech industry with a Power brand

There are many challenges and potential pitfalls you can fall into when building a brand. Hamilton gives an example of Hermes going into cognac – have you ever tried a Hermes cognac? I doubt it but it was a thing which failed. Their Branding Power did not translate from perfume to spirits. 

For Branding to be Power it can’t be easily emulated – the reason being it takes long time for those kinds of understandings with customers to be embedded in customer’s minds.

As Tom Russo in his interview on shareholder value creation and global brands says, There is even an argument that, at the very high end of businesses, their products ascend to ‘Giffen good’ status, i.e., the more you charge, the more they are in demand, because the brands stand in part for ‘price paid is value received’. That is obviously an unusual status and hard to sustain, but the general notion that a brand allows you to have steadier, loyal demand for a product at prices sufficiently high to generate high returns on capital is profound.”

Power #7 – Process Power

The Power: A business whose organisation and activity set enables lower costs and/or superior products that can only be matched by an extended commitment

The Benefit: Improved product and/or lower costs due to superior processes 

The Barrier: The significant time and/or investment needed to create the process

Process Power comes from developing a complex process. It is built over time, step by step, often with tacit knowledge (the company itself might not know how it got there or it’s opaque). And they end up with something material and valuable i.e. enough to move the profit needle. This process is so hard to copy that you can exploit the Power for years to come.

Operational excellence is a must-do, not a strategic decision because alone it’s not sufficient to gain competitive advantages. Despite the amount of time and effort leaders spend on improving operations, the end result is usually operational efficiencies not Process Power. Most processes can be copied these days. 

Toyota’s Production System (“TPS”) is a classic example of Process Power. TPS is not what it seems – all of us can see the different procedures it uses such as:

  • just-in-time production
  • kaizen (continuous improvement)
  • kanban (inventory control) and 
  • andon cors which allows any worker to stop the production line if they spot an issue, ensuring quality and efficiency

But underneath these procedures is a deeper, more complex system. Despite transparency and attempts to share these practices, competitors have struggled to replicate the effectiveness of Toyota’s system.

What Is The Path to Power?

Correctly determining the Power is hard. The 7 Powers framework turns it from an essay question to multiple choice. But there is tremendous granularity to the 7 Powers and it can take a lot of work to figure out what Power you have or should be aiming for.

If you start a business even though you don’t know if you will achieve Power, I would argue from the outset you should think about what type of Power you might achieve. 

A big market might look attractive but unless you can capture value from it along with some defensibility (i.e. barriers) it’s not worth all the effort. 

Step-by-step you can work your way into Power. The path will not be linear. You will need to adapt your strategy to emerging circumstances. 

Netflix is a great example of an emerging Power path.

Initially, they had Counter-Positioning Power. Netflix created a different business model to the incumbent Blockbuster – by mail vs brick-and-mortar.

They also achieved Scale Economies relative to other DVD-by-mail operators. 

They also knew streaming was coming – hence why they called themselves Netflix not DVDflix! But streaming had no Power. Netflix realised that operational excellence doesn’t create Power as competitors can easily mimic operational efficiencies thereby arbitraging the value advantage. 

Content was the key nut to crack. 

They went down the path of securing exclusive rights to content but the content owners understood their own Power and started charging on a variable costs basis which put them in the same Power position as Netflix. 

Netflix needed to turn the content into a fixed cost they could spread over their subscriber base i.e. create Scale Economies. So this is why they made the bold move of investing $100 million on the David Fincher-Kevin Spacey Series House of Cards. Bold move which paid off. They were rewarded with a huge uplift in subscriber numbers and this was the foundation of their Barrier of achieving Scale Economies

Power Progression

Hamilton makes the point that getting Power is very different to having Power and protecting your position. 

The 7 Powers gives you a compass but you also need to ask yourself when to apply a Power. Hamilton believes different Powers should be applied according to the development of your business.

There is a progression to the 7 Powers e.g. as a start-up you cannot achieve Scale Economies but you might have a compelling Counter Positioning Power. Also Branding doesn’t generally get built overnight whereas you might have a Cornered Resource from the beginning. Keep checking, experimenting and measuring to see if Power is being created. 

Network Effects, Scale Economies and Switching Costs are most relevant for scaling up companies. They depend on the number of customers you have. The key strategic thing is scaling rapidly, and getting lots of customers. If you get a customer, this adds economic value. You might give things away for free or cheap. You may run an ugly P&L for a while but if you have genuine Power your P&L will become very attractive. If you don’t have Power your business will fail. 

For example, Netflix didn’t know they would gain Power through streaming – they gave it away initially. It wasn’t until they secured great content on their streaming service that they saw the potential of growing online subscriptions.

As your company reaches the Stability phase you are more likely to have created Branding and/or Process Power (i.e. these Powers take time to develop) as well as continue with Powers you have created as you have scaled. 

The Power Progression guides you on what Power to focus on as you go through the growth stages. 

Value Capture Is The Key To A Winning Strategy

Reflecting on the insights from both essays on Hamilton Helmer’s 7 Powers, the essence of a winning strategy lies not just in the intellectual understanding of these Powers but in their practical application and adaptation over time – you need to become the chef who knows why the ingredients go together rather than the cook who has to follow the recipe. 

The first essay laid the groundwork by defining what Power is and introducing the essential distinction between creating value, which is about finding product-market fit and capturing value, which is where the concept of Power comes into play. It also delved into the first four Powers – Counter Positioning, Cornered Resource, Network Economies, and Scale Economies –  setting the stage for a deeper exploration.

In this second essay, we expanded our understanding with the remaining three Powers — Switching Costs, Branding, and Process Power — each providing a unique lens through which to view and bolster a company’s strategic position. Furthermore, we explored the Path to Power and the Power Progression, emphasising that the applicability and relevance of each Power evolve alongside a company’s growth journey.

The 7 Powers framework offers a robust strategic compass. 

7 Powers is a cognitive guide to building an enduring business but it’s the continuous effort to align these Powers with the evolving landscape of business and the unique challenges of one’s company that ultimately secures sustainable value capture.