The Startup Strategy Compass - The 7 Powers
An overview and visual summary of Hamilton Helmer's Book: 7 Powers - The Foundations of Business Strategy
Introduction
7 Powers is a strategic framework for guiding long term decision making for companies looking to benefit and create a barrier to achieving power. It’s not a book about how to create a business strategy. A strategic framework must be simple but not simplistic, and utilising one or more of the 7 powers increases a company’s chances of achieving persistent and differential returns.
Each of the powers contains both a benefit and a barrier, because true power must satisfy both magnitude and duration. A benefit leads to any combination of increased prices, reduced costs and/or lessened investment needs, and a barrier prevents existing and potential competitors from value-destroying arbitrage.
What are the 7 Powers?
Scale Economies
Network Economies
Counter-Positioning
Switching Costs
Branding
Cornered Resource
Process Power
Scale Economies
The quality of declining unit costs with increased business size.
Benefit - A condition which creates a material improvement in the cash flow of the power wielder through reduced cost, enhanced pricing and/or decreased investment requirements.
Barrier - An obstacle which engenders in competitors an inability and/or unwillingness to engage in behaviours that might, over time, arbitrage out this benefit.
Network Economies
Network economies occur when the value of a product to a customer is increased by the user of the product by others.
Benefit - A company with entrenched network economies can charge higher prices than competitors due a higher value resulting from more users.
Barrier - The unattractive cost/benefit of competing to gain share.
Counter-Positioning
Adopting a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
Benefit - The new business model is superior to the incumbents model as a result of lower costs and/or the ability to charge higher prices.
Barrier - Potential collateral damage or cannibalisation to the incumbent if it were to adopt the counter positioning.
Switching Costs
Switching costs arise when a consumer values compatibility across multiple purchases from a specific firm over time.
Benefit - Companies in industries with high or perceived high switching costs can charge higher prices than competitors for equivalent products or services.
Barrier - Competitors must compensate customers for incurring switching costs, and/or provide value in excess of the incumbent’s product as well as the risks and costs of switching.
Branding
Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.
Benefit - A business with superior branding can charge a higher price for its product due to two reasons:
Affective valance - the associated feeling or prestige that’s separate from objective quality.
Uncertainty reduction - Customer confidence is higher in the quality of a “known brand”, usually due to historical consistency.
Barrier - Strong brands are created over a long period of reinforcing actions and unpredictable uniqueness without any assurance of achieving value.
Cornered Resource
Preferential access at attractive terms to a coveted asset that can independently enhance value.
Benefit - An unfair advantage that cannot be easily replicated or is proprietary to a particular company.
Barrier - A finite resource that may prohibit access due to legal reasons (patent protected), trade secrets or operational advantages beyond personal knowledge.
Process Power
Established company organisation and activities which enable lower costs and/or a superior product.
Benefit - Enables a company to improve product attributes and/or lower costs resulting from process improvements embedded within an organisation.
Barrier - The processes are advanced having often been achieved over a long time period of trial and error, and are subsequently difficult to replicate.
The Path to Power
What does a business have to do to reach that position of power in the first place? To assess which journeys are worth taking, you must first understand which destinations are desirable, and core to the value proposition of the strategic framework is to make assessments. A compass to provide direction rather than a step by step strategic manual. While Netlfix is the example company for creating a path to power, it’s noted that one story can’t comprehensively illustrate the trajectory from hopeful startup to stubborn incumbent.
Invention - the Mother of Power
Action, creation and risk are core to invention. Business value cannot be initially built solely on analytics. The people behind the invention must have a combination of passion, monomania and mastery to fuel their innovation. While planning can be meaningful in boosting power once it's obtained, it rarely leads to creating power and cannot be relied upon in a business where power does not yet exist. Companies can only create substantial value and economic value when creating something new.
The first step to develop power is through invention which is derived from breakthrough products, engaging brands and innovative business models. These are only the first steps. To progress beyond invention you need to be watchful for power openings, and the 7 powers framework assists in focusing your attention on critical issues and increases the odds of a favourable outcome. This is the most that strategy can accomplish.
Getting there - What is required?
Resources
The skills and abilities of the people involved in the formation of the company. This is both the competency of each individual and the collective output of the individuals responsible for the invention.
External conditions
External conditions can be luck or timing, generally positively affecting a company in ways they didn’t necessarily plan for. This can expand to unexpected macroeconomic changes, wider technological innovation or changes in consumer behaviour. While there can be advantageous opportunities to launch a company, trying to launch at an ideal time because of prescient external conditions would suggest that it would be too late to be an advantage.
Invention
The combination of product, business model, brand and process. Despite the potential for invention, someone must seize it. Invention must be crafted rather than designed.
Power
Invention does not guarantee power. Even operational excellence, a constant process of re-invention, does not result in power.
Market
A large enough market to achieve power and exponential growth is a given. Markets must either be sufficiently sized or provide the ability to expand significantly. Market size and power must both be present to bring about value increases of 100x.
Compelling Value
Invention drives a favourable change in system economics, and the 7 Powers is about making sure you get some of the increase split between you and the other segments of the value chain.
The gain that customers experience will shape the market size. The product or service differences must be dramatic to go beyond a must have response from a consumer, ideally leading to organic word of mouth. Exceeded expectations of a product that lead to high levels of retention and word of mouth drive outsized customer adoption and growth.
The Power Progression
Acquiring power can be broken down into three time windows:
Stage 1: Before - Origination
Prior to reaching compelling value, or when sales begin to rapidly grow. The alignment of key components of invention—resources, external forces, and a well-timed, sizable market entry—combines to create compelling value and establish market power.
Best suited to:
Counter positioning
Cornered resource
Stage 2: During - Takeoff
The period of explosive growth. A business in the take off phase has customer acquisition, sales and growth, or product virality advantages that enable continuous explosive growth for a period of time to establish power while overcoming arbitrage attempts.
Best suited to:
Scale economies
Switching costs
Network economies
Stage 3: After - Stability
The business is still growing, but growth has slowed to around 30-40% from its previously explosive period. Growth is still high enough to achieve persistent and differentiated returns.
Best suited to:
Process power
Branding
Despite each power being allocated to a time window, a histogram in the book illustrates that the powers can be utilised in other time windows outside of what is listed below.
Summary
Understanding the 7 powers will enable you to develop a lens with which to identify, create and seize opportunities to increase the likelihood of success in business, whether as a founder, investor, consultant or advisor. The 7 powers are prone to misinterpretation, and an incorrect application or assumption of the various powers will make your business vulnerable. Most startups assume their inherent advantage is scale, many over-simplify the landscape with which they’re operating in, as well as the powers of incumbents or alternatives to their product or service. Simple but not simplistic not only requires a depth of understanding but a rigorous application beyond theory. Arguably the greatest challenge is that you won’t necessarily understand which of the 7 powers you possess, or the lack of which will make you vulnerable, until the business has progressed.
Helmer refers to Silicon Valley as his "home turf," highlighting the region's pivotal role in global business disruption. Throughout the book, he discusses how the 7 Powers framework has empowered Silicon Valley companies to become world leaders in transformation, disrupting industries like media, transportation, and hospitality.
Netlfix is primarily used as an example because of Helmer’s early investment in the company and its suitability to illustrate the frameworks (it’s worth noting that Netflix co-founder and CEO Reed Hastings wrote the foreword). Netflix and other companies such as AirBnb, Uber, Facebook and X (formerly Twitter) have not only achieved unprecedented fiscal value by leveraging scale and network effects but have also significantly impacted the global political landscape in profound and still unfolding ways.
The term power is reserved for conditions that create durable differential returns, rather than short lived value, whether private or publicly bloated valuations, the outcome of a well implemented strategy leads to a significant advantage that develops an immunity from competitive onslaught. At least any obvious forms of competitive arbitrage.
Between its simple but not simplistic ethos, and complementary visual aids, 7 Powers succeeds at quickly becoming part of your strategic vernacular. It's not only a must-read but a must-take-notes to pair with the visuals, to familiarise yourself with the powers and surrounding conditions for understanding its strategic framework. It is remarkably efficient at delivering its message in roughly 180 pages.
Many business books achieve popularity by providing a how-to guide or playbook that is fundamentally flawed by the sheer variability and complexity of strategy and decision making required to go from invention, to take-off, to power. 7 Powers provides a solid framework for decision making that increases your odds of creating and investing in companies capable of achieving persistent and differential returns.
Disclaimer - Respect to the Author
Unless otherwise stated, I only provide summaries of books that I highly recommend purchasing, and I will never provide a summary of a book to be used in lieu of purchasing and reading the entire book out of respect to the author. Further, this is a blend of my notes and independent thoughts and does not necessarily portray an accurate depiction of the book.
Further Reading
Buy the book here (via Booko).
Learn more about Hamilton Helmer’s work here.
- provides an exceptional, and comprehensive summary of 7 Powers here.
Cedric Chin has a great blog/website at Commoncog which provides a summary of 7 Powers (for paying members) here. I’m yet to read it but am a fan of his weekly newsletter and other work.