7 Powers - Hamilton Helmer - Book Summary
I just finished reading 7 Powers by Hamilton Helmer - a book about how leading companies create differential returns over a long period of time in comparison to their category peers.
The book first came to my attention in the analysis section of the Acquired podcast where the hosts Ben and David use the seven powers to assess the subject of each episode.
I then enjoyed hearing Hamilton interviewed on the excellent Lenny Rachitsky podcast and it catalysed me into getting the book and researching more thouroughly.
I definitely recommend you read the book, and if you aren’t a reader, then listen to Lenny’s podcast, and here is my shortened summary.
I’ll explain the seven powers very quickly, before covering Hamilton’s summary of which powers a scaling business should focus on.
What is a power?
In short, a power is a capability or attribute that gives a company both a benefit (something that helps them to grow), but also a barrier (something that prevents others from attacking that power).
There are many things in life that give a benefit to the holder, but if it doesn’t prevent others from also attaining that benefit, then it is not power.
Scale economies
As a company grows it is able to spread its fixed costs across a wider set of customers (the benefit), making it harder for a competitor to compete (the barrier).
As an example Netflix is able to produce shows at a lower cost per subscriber because they have more subscribers than their competitiors.
Network economies
Some companies like an eBay or Facebook provide more value to their users as they increase the number of users on their network (the benefit). This makes the value of a new competitor with fewer users much lower making it harder to compete (the barrier).
Counter-positioning
When starting a company in an existing category, positioning yourself as a new way of solving an existing problem attracts new customers (the benefit) and if the existing incumbent tried to replicate your new way it would devalue their current proposition (the barrier).
Think of Salesforce in 2000s positioning against the on-premise Oracle. For Oracle to have immediately dived into cloud would have reduced the value of their current on-premise business.
Switching costs
If a company builds enough of a customer base and sells multiple products and systems into those customers it is very difficult and expensive for those customers to move to another provider (the benefit). For a new competitor to compete they would need to offer at least the same level of service for a lower cost to account for the pain of moving (the barrier).
Branding
Branding in this context relates to the price a product can command over and above the utility value of the product. Consider a Tiffany ring - it costs significantly more than the same physical product would cost at another retailer because of the long heritage and experience that Tiffany provides (the benefit). Brand like this takes hundreds of years to develop, time that a new startup does not have (the barrier).
Cornered resources
Companies can drive incremental value by having something that no competitors have. That might be people, knowledge or protected rights that allow them to create and sell a product that no-one else can (the benefit). Because the resources are unavailable to the competitors it makes it very expensive or impossible for them to offer a comparable offer at a similar price (the barrier).
Consider a pharmaceutical company holding a patent over a particular compound that prevents others from producing a similar product.
Process power
At scale, global organisations like Unilever or Procter & Gamble develop interrelating processes across their research and development, their manufacturing, their logistics and distribution that make it very difficult or impossible for others to compete.
A retailer like Walmart has built a network that allows them to efficiently supply local stores at low costs (the benefit), whilst smaller retailers without that process have to buy and manage their stores at a much higher cost (the barrier).
Where to start
Not all of these powers are available to every company at every step of their growth.
Indeed some powers like branding and process power may only become available after hundreds of years of existence.
Hamilton breaks the powers down onto a growth curve like this:
The reality for most leaders reading this article is that you are in the origination phase - even businesses with $100m ARR are still in the origination phase.
Therefore Hamilton recommends focusing in on cornered resources and counter-positioning.
Cornered resources: what do you have that no-one else has? Is it a unique combination of people? Is it an algorithm or unique piece of code that can be protected? Is is a physical resource like a piece of land? If you don’t have cornered resources what could you do to acquire and protect some?
Counter-positioning: What would your customers use or do today if you didn’t exist? Pretty much every new company is solving an existing problem or challenge in a new way - so what is the old way and how are you different? To be a power your positioning should self-destruct or cause substantial damage to the existing provider’s core business if they were to replicate your new way.
Do you have real power?
What I love about the book and Hamilton’s explanation is that many businesses think they have power, when they really don’t.
They feel like they have brand power - but customers don’t see it that way.
They think they have network economies, when their network doesn’t afford them any more economic power than their competitors.
Use these seven powers to look critically at your business, and consider which powers could drive substantial differentiated returns over the long term.
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