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

In general, leaders spend insufficient quality time and effort on strategy. And when they do spend time they don’t really know what strategy is or how to go about building one. Many leaders just want to get on with the doing or the execution. Operational excellence is essential and hard but it does not assure long-term success and differential returns. You need to ask yourself the right strategic questions so you can make the right strategic calls. Then all the sweat you put into your operational efficiencies are more likely to be worth it. 

If you have worked with me or read some of my articles you will know one person who I rate highly when it comes to strategy is Roger Martin. You can read about his strategy framework in my essay – Craft Your Winning Strategy With 5 Key Questions

In this essay I’m going to focus on another wise strategic owl Hamilton Helmer, the author of the book 7 Powers: The Foundations of Business Strategy and the co-founder of the very successful hedge fund Strategic Capital

Reed Hastings, co-founder and CEO of Netflix, said about Helmer’s book, “It will change how you think about business and pull into focus your critical strategy challenges, not to mention their solutions.”

There are two essays on the 7 Powers. The first includes:

  1. Difference between Creating and Capturing Value
  2. Explanation of What Power Is
  3. Description of four of the 7 Powers:
    • Counter-Positioning
    • Cornered Resource
    • Network Economies
    • Scale Economies

The second essay includes:

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

In summary, the 7 Powers are:

Creating and Capturing Value

There are two major step changes in the value of a company:

  1. Finding Product Market Fit is Creating Value 
  2. Getting Power is Capturing Value

Both are incredibly hard to achieve, distinct and involve different things. 

Finding product market fit is primarily about value creation for the customer i.e. your product or service addresses the needs of a target market effectively.  

Getting power, on the other hand, is about capturing value for the company. 

You can’t get Power unless you have product market fit. But product market fit doesn’t guarantee you will capture value. Once you have the potential for Power – i.e. you have got product market fit – you need to go and seize it. If you don’t you face extinction – just ask those failed companies that looked so promising after reaching product market fit!

Hamilton’s work focuses on getting the Power i.e. capturing value. 

What is Power?

Hamilton defines Power as “the set of conditions creating the potential for persistent differential returns.” 

To achieve Power you need two components – benefits and barriers:

  1. Benefits. If you start a business you generally want to build something of value over time. Your initial aim is to offer something better than is currently offered e.g. better brand, better business model, better product. Ultimately these benefits manifest into increased cash flow through increased prices, reduced costs and/or reduced investment requirements. However, benefits are necessary but not sufficient. 
  1. Barriers. You also need to build something of durable value i.e. create a barrier which prevents competitors from coming in and stealing your customers. Ultimately to create a durable cash flow.

Benefits are more common than barriers. Benefits are generally subject to arbitrage. Barriers are rare which is why I believe most companies find it so hard to define their durable competitive advantages. 

Power is a relative concept. It’s about your advantages relative to specific competitors. Good strategy involves assessing Power in relation to each competitor, including actual and potential, direct and indirect i.e. anyone who can arbitrage away your advantage or margin.

Ultimately it comes down to cash flow – Power creates superior, significant and sustainable cash flow – the 3 S’s of Power!

Now let’s get into the 7 Powers which act as your strategy compass.

Why 7? Because to date he can’t find an 8th! And according to Hamilton, it’s empirical. 

Power # 1 – Counter-Positioning

The Power: Counter-Positioning is where a newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.

The Benefit: The new business model is superior due to lower costs and/or the ability to charge higher prices

The Barrier: Collateral damage the incumbents think they would suffer from adopting the new model.

This strategy is about creating a new way of doing business that directly challenges the traditional models of existing players

The incumbents’ concern about the damage to the status quo (their current operations, revenue streams, or customer base) often prevents them from responding – they wait and wait – thereby leaving the door open for the newcomers to take advantage.

Counter-Positioning is often radical and contrarian – the incumbents will ridicule you or even generously give you the business model (unable to overcome cognitive bias) as Borders did when they handed over their online business to Amazon; they thought it was unimportant and non-strategic! 

The whole software sector has been using Counter-Positioning for years. As Mark Andreessen famously said, “software is eating the world.” He could have said (although not quite as eloquently I admit) “software is Counter-Positioning hardware.” 

You normally associate Counter-Positioning with start ups or scale ups. However, one of my favourite examples, which Ben Gilbert and David Rosenthal in their brilliant podcast show Acquired brought to my attention, is Costco. 

I get weirdly excited about Costco! Costco is a 330 billion dollar company with a business model no one has successfully copied, not even Walmart. Costco deliberately seeks lower overheads. They also target a 14% gross margin. They have much fewer product lines than their competitors and they don’t deliver their products – the goal is to get you to come to the store. So when they negotiate with a supplier because they have fewer product lines they have higher volumes and can get lower prices (i.e. Scale Economies). Every time they get lower prices or they lower their overheads they pass it on to the customer i.e. they share the value with their customers. This results in more members, which leads to higher volumes, they then get even better prices from their suppliers, and the cycle continues. Incredible Counter-Positioning along with Scale Economies and Branding Power

Another example is Vanguard’s attack on the world of active fund management. Up until Vanguard came in with its focus on passive fund management, active fund management was the rule of thumb. Supposedly very clever fund managers were paid a lot of money to beat the markets – the problem was not many consistently did. Vanguard offered a new low-cost model where they simply tracked the markets dispensing with expensive fund managers. It led to a massive disruption in the fund management sector. Most of the active fund managers did nothing and watched Vanguard take market share. Vanguard now has over $8 trillion in funds under management! How about that for Counter-Positioning!?

That being said sometimes the incumbent can’t make the change – it’s a bridge too far. What to do then? Sell up and go find something better to do where you can create a barrier!

Also with Counter-Positioning you need to bear in mind the Power against every type of competitor – existing and potential, direct and indirect (i.e. companies which satisfy the need differently). 

This brings me to my last point about Counter Positioning; it’s only a partial Power (the only one of the 7 Powers). You need to find another Power to create sustainable value e.g. Costco uses Scale Economies and Branding along with Counter-Positioning 

Power #2 – Cornered Resource

The Power: A company has a Cornered Resource when it has preferential access to a coveted resource that independently enhances value

The Benefit: The ability to create a better product, reduce costs or charge higher prices.

The Barrier: No one gets hold of the resource or asset. It comes from legal protections and exclusive agreements/relationships. Also includes the investment required to develop or acquire the resource. May include human capital too.

To qualify as a Cornered Resource, the asset must pass several screening tests, including finding out the real source of Power (e.g. discovery process of acquiring a coveted resource rather than the acquisition of the resource), non-arbitraged (the price paid does not exceed the additional profit), transferable (it could create the same returns at another company), ongoing (the resource creates benefits over a long period), and sufficient (the resource must be enough to create continued differential returns).

The more obvious type of Cornered Resource is a patent. The pharmaceutical industry thrives on holding extremely valuable drug patents which they can exploit to the tune of billions over decades. It could be a required input into a manufacturing process, such as a battery manufacturer’s ownership of a nearby lithium source. 

Nvidia’s power growth is a great illustration of capturing value through Cornered Resources. One example is their acquisition of Mellanox, a supplier of networking technology, in 2019 for $7bn which allows Nvidia to optimise the performance of its network of chips in a way competitors can’t match. At the time analysts thought they were overpaying. Also, Nvidia has access to a large amount of TSMC’s chipmaking capacity that none of its competitors can get access to.

A less obvious Cornered Resource could be talent although this is extremely rare. Hamilton talks about the Pixar Braintrust being a Cornered Resource. The Braintrust scored 14 box office hits in a row – unprecedented consistently positive reviews combined with incredible financial success. It was a very specific group of people which included John Lasseter, the creative genius, Ed Catmull, the technical genius and Steve Jobs, business and financial genius. 

It was Cornered Resource in the sense the Braintrust members would have been offered to go to other companies but due to loyalty and other motivations they chose to stay – that was the Barrier. This led to Disney buying Pixar lock, stock and barrel – it was the only way they could get the Cornered Resource. And this Cornered Resource went on to make a success of Disney’s animation business. 

But don’t assume like many companies that your talent is a Cornered Resource. As I said, it’s very rare.  

Power #3 – Network Economies

The Power: A company achieves Network Economies when a product or service becomes more valuable to its users as more people use it (also known as demand-side economies of scale).

The Benefit: The ability to charge higher prices or monetise more due to additional value created.

The Barrier: Hard to persuade users to switch due to lower value preventing new companies from entering the market.

This Power is particularly relevant in businesses that operate platforms or services where user interaction is a key component of the value proposition, such as social media, online marketplaces, and communication services. 

Facebook is a classic example of a company which benefits from Network Economies. As more people joined Facebook, it became more valuable to users because it increased the chances of connecting with friends, family and acquaintances, making the platform the go-to social network worldwide. Facebook has been so successful at using Network Economies that they have single-handedly reduced humanity’s degrees of separation – each person on Facebook (over 3 billion people) is connected to every other person by an average of three and a half other people.

It’s worth differentiating between Network Economies and Network Effects. Network Effects are a profound driver of product market fit – you can create material value for your customers. To achieve Network Economies you need to be able to keep some value for yourself. 

You would think Uber would be another great example of a company benefiting from Network Economies. Yes and no. Uber has and does benefit from Network Economies but not all Network Economies are created equal and theirs is weak. Using James Courier’s analysis of Uber there are 5 stages to Uber’s Network Effect:

  1. Driver supply
  2. Lower wait times and fares
  3. More riders
  4. More riders per hour, higher earning potential for drivers
  5. More drivers

However, this loop breaks down because lower wait times can’t go below zero minutes and the difference between zero and 3 minutes of wait time for the average user makes no difference. The 3 or 4 minutes is useful to get your stuff together and get out of the house or restaurant. This means simply adding more and more drivers to reduce wait times has its limit. 

As a result barriers to entry for other ride-sharing businesses are relatively low – not difficult to get to 3-minute wait times. This means Uber can’t create a supply-side advantage with their Network Effect. So in some large markets, Uber will have strong competitors fighting for Network Economies which means it’s not really a source of Power. 

Network Economies focus on the economic benefits and monetisation strategies that a company can leverage as a result of network effects. It’s about how a business can capitalise on the increased value brought by a growing user base. 

Power #4 – Scale Economies

The Power: Scale Economies are achieved when per-unit costs decline as unit production volume increases. Or better terms with suppliers due to larger order volumes (e.g. Costco). Or companies with extensive distribution networks can serve more customers at a lower cost per unit (e.g. Amazon). Or through learning and experience reducing costs over time (e.g. TSMC)

The Benefit: Increased cashflow through reduced cost, margin expansion or price reduction, and/or reduced investment requirements

The Barrier: Prohibitive costs of arbitraging out this advantage

Hamilton talks about Netflix as an example of Scale Economies. Hamilton’s initial investment in Netflix was due to their DVD-rental business which was a good example of Counter-Positioning against Blockbuster. Blockbuster made 50% of its revenue from late fees and Netflix forced them into either losing their market share or eliminating their late fees. The investment thesis proved correct as Blockbuster imploded. 

But there was a time bomb attached to Netflix’s business – the DVD business would be supplanted by streaming services. Netflix had seen the future (the clue being in their name!) – they knew they must switch to streaming before someone else did. 

But where was their next Power to come from? Netflix decided they needed to secure exclusive streaming rights to certain properties – this was achieved through acquiring other people’s properties and creating their own – the beginning of Netflix Originals. This was a bold move which meant that content became a huge fixed cost item for Netflix. So any newcomer would have to invest in content too. 

How does Scale Economies work for Netflix? If they spent $100m making House of Cards (their original original) and their streaming business had 50 million users then their cost per customer was $2. If a competitor with only 10 million customers invested $100 million too, their cost per customer would be $10. So if this competitor offers similar amounts of content at the same price their profits suffer or losses increase and if they offer less content or raise praise they will lose customers. Lose-lose.

As with all of these Powers, there are nuances you need to understand. One of the Scale Economies nuances is that fixed costs are often not as fixed as you think they are. 

Another nuance is not to confuse Scale Economies with pure size. A scale advantage only creates value if one firm has a sizable relative scale position compared to its competitors. If there are many scaled competitors of similar size Scale Economies are less likely to be material. For example, automotive OEMs are massively scaled but none have relative scale benefits compared to the other and hence have not generally good investments.

That’s four out of the seven Powers explained – see my second essay for the remaining three. 

The Holy Grail Of Business – Finding Durable Differential Returns

Working within Private Equity you hear a lot of chat about value creation. Strategy should be at the core of your value creation methods. As Hamilton Helmer says, “Strategy is the study of fundamental determinants of potential business value.”

When you create a strategy you should always bring value into the equation. A great strategy helps you win i.e. create and capture value – not only now but also into the future

Strategy and value (creation and capture) are duels. For example, a disruptive technology does not necessarily map to value i.e. you can disrupt something and it can be a lousy business. You can use pricing to attract customers to your product or service and offer £1 of value for 50p – you might attract lots of users and think you have product market fit but there’s no power, there’s no value.

If you are running an established company you need to figure out what your Power is and how to maintain that Power i.e. how to persistently create value. For example, I think Google’s core business model (advertising) is at risk – due to generative AI Gartner predicts a 25% drop in search engine queries by 2026. Google needs to go on their own journey of discovering Power in new areas. Nothing is forever – just ask Kodak, Blockbuster or Woolworths.

As a coach I don’t tell people what to do. As an advisor on strategy I do! My advice is simple – have 7 Powers at the core of your strategic thinking! 

And I leave you with a quote from Jensen Hwang of Nvidia, who runs the third most valuable company in the world

“You build a great company by doing things that other people can’t do. You don’t build a great company by fighting other people to do things that everybody can do.”