7 Powers by Hamilton Helmer | Book Summary
I would highly recommend everyone read this book from cover to cover, but here is a quick summary of the key points, with Netflix as an example for applying the concepts, to get you 80% there.
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7 Powers
Economies of scale - able to spread fixed costs across a larger base
Benefit: lower per unit costs
More units to spread across, so should have higher margins
Barrier: it is prohibitively expensive for competitors to gain share
How to get: have a product with scale economies and win share
Can come from:
Fixed cost leverage - Netflix
Route density - UPS
Asset utilization -manufacturing plant
Purchasing power - Walmart
Network effects - the value to all users increases with each incremental user
Benefit: can charge higher prices
Higher value to users, so should have higher margins / prices
Barrier: very high cost for share gain
How to get: have a product with a network and scale quickly
Indirect network effects: when other people start building things in your network
Ex: Shopify app store
Counter Positioning - different business model → disruption of incumbents
Benefit: share capture / value creation
Barrier: collateral cost of changing business model for incumbent not worth it
How to get: Innovate with new business model
Switching costs - it is prohibitively expensive for customers to leave
Benefit: can charge higher prices due to switching challenges
Barrier: it is incredibly expensive and time consuming to switch, so cost of share gain is prohibitive for competitors
How to get: you need to first acquire a large number of customers
Types of switching costs:
Financial - paying for the actual switch
Procedural - retraining employees
Other unexpected costs
*Razorblade and handle situation - could fall under high switching costs*
Branding - an asset that communicates value and evokes positive feelings in customers
Benefit - higher prices
More positive feelings and ease of mind, so should have enduring higher margins
Barrier: it takes a long time to build a brand, history dependence
*I don’t necessarily think this is true. Warby Parker built brand very quickly*
How to get: consistently deliver quality over time
Cornered resources - some critical asset is exclusively available to a company
Benefit: higher prices or lower costs
Barrier: created by law or by personal choice or some decree
How to get: secure rights to a valuable resource on attractive terms, often through development
Process power - a company’s way of “doing things”
Benefit: improve product or lower costs due to process improvement
Barrier: processes are hard to replicate and can only be achieved over a long period of time, due to complexity and opacity
How to get: developed over time / hysteresis
Overall Company Value = market size * share
Market size is related to compelling value
Share is related to power, which comes from innovation.
Netflix Example
Helmer uses Netflix as a key example throughout the book to demonstrate power. Netflix’s two key pieces of innovation are (1) online on-demand streaming and (2) vertical integration for content creation. Through these pieces of innovation, Netflix directly achieved 4 of the 7 powers:
Economies of scale - as a first mover in streaming, Netflix acquired the most users, thus enabling them to allocate content costs across a larger customer base and achieve lower content creation costs per subscriber, among other fixed costs.
Network Effects - more subscribers —> more content —> more subscribers
Cornered Resources - because they develop their own content, other on-demand streaming services don’t have access to shows like House of Cards.
Counter-positioning - if Blockbuster also provided streaming services, they would have cannibalized their own video rental sales.