#20 — 7 Powers
April 15, 2024•2 min read
Hamilton Helmer's "7 Powers" provides a strategic framework for building enduringly valuable businesses. Here's what startup founders need to know:
1. Scale Economies
As volume increases, per unit costs decline. Netflix demonstrates this with original content, where fixed production costs are spread across millions of subscribers (48¢ per subscriber vs. $43.47 for smaller competitors).
2. Network Economies
Value increases as userbase grows. Facebook optimized for getting users to seven friends in ten days, dramatically reducing churn once this threshold was reached.
3. Counter Positioning
Adopting a superior business model incumbents can't mimic without cannibalizing existing business. Vanguard's low-cost passive index funds challenged active investing firms who couldn't match their approach without undermining their core business.
4. Switching Costs
When customers face greater losses than gains from switching. Enterprise software like Salesforce creates significant organizational switching costs through training, integrations, and business logic implementation.
5. Branding
When customers perceive higher value for objectively identical offerings. Tiffany & Co.'s blue box commands such brand power that people purchase empty boxes on eBay.
6. Cornered Resource
Preferential access to coveted resources. Amazon's S-team, with 15-year average tenure, possesses unmatched institutional knowledge about scaling their business.
7. Process Power
Organizational systems enabling superior products/lower costs that require extended commitment to match. Toyota's production system remains difficult to replicate despite transparency about their methods.
Why it matters
Product/market fit is necessary but insufficient for building enduring value. The framework helps founders identify which powers they can develop at different business stages:
- Origination: Counter positioning and cornered resources
- Takeoff: Scale economies, network economies, and switching costs
- Stability: Brand and process power
Reed Hastings, Netflix CEO, emphasizes: "Most of my time and that of everyone else at Netflix must be spent achieving superb execution. Fail at this, and you will surely stumble. Sadly, though, such execution alone will not ensure success. If you don't get your strategy right, you are at risk."
The bottom line: Deciding what to work on is as important as working hard. Netflix wouldn't be Netflix without its counter positioning and scale economy advantages.
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