7 Powers of Business Strategy

Business strategy has only one ultimate aim, maximize the potential business value, and can do this by utilizing one of the 7 available powers. That’s the central axiom underlying foundation of business strategy, as detailed in the 2016 book “7 Powers: The Foundations of Business Strategy” by Hamilton Helmer.

7 powers by hamilton helmer

Business Strategy vs. Operational Excellence

While the purpose of business strategy can be summarized in just a few words (“maximize the potential business value”), those few words carry a lot of weight. Let’s break them down.

Business value is defined in the same way a value investor looks at a business: the sum of initial capital investment, the discounted cash flows from business operations, and the discounted terminal value. Finance students will recognize this as the Net Present Value (NPV) of an investment.

The definition of business strategy contains another very important word: potential. A strategist’s job is to help the firm identify business opportunities that maximize the return potential. However, it’s the management team’s job to ensure the potential value is captured and converted it actual business value.

The best way to maximize captured business value is by achieving operational excellence. This is an important observation because it clarifies why operational excellence is not a business strategy (even though it is so often designated as such).

To achieve business success, you need both a great strategy and great execution. If either is lacking, the business might not be so successful. That’s why we often hear that a “great strategy poorly executed” is not worth more than a “poor strategy greatly executed.”

Fundamental Business Equation

Helmer distills the definition of business value into the following fundamental business equation:

$latex V = M_{0}\ g\ \overline{s}\ \overline{m}&s=3$


  • $latex V$ = potential business value
  •  $latex M_0$ = current market size
  •  $latex g$ = discounted growth factor
  •  $latex \overline{s}$ = long-term average market share
  • $latex \overline{m}$ = long-term average differential margin (margin in excess of cost of capital)

$latex M_0$ and $latex g$, together, represent the Market Scale. $latex \overline{s}$ and $latex \overline{m}$, together, represent the Power.

Power is the potential to realize persistent differential returns and the key to value creation. Combining Power with operational excellence is a sure way to create significant enterprise value.

The third and fourth factor of the equation, $latex \overline{s}$ and $latex \overline{m}$, are carefully defined as the long-term average of the market share and differential margin. The long-term nature is a key attribute of what makes a Power, a Power.

The reason why a Power must be durable is rooted in the mathematics of the discounted cash flow model. As Helmer puts it in the book: “If a company were growing at 10% per year, the next three years account for only 15% of its value.” In other words, future cash flow is very important, and Power is what ensures you get those.

Aside from the long-term nature, Power has two other important attributes: benefits and barriers. A benefit is something that materially improves the cash flow to the firm. A barrier is something that prevents competitors from arbitraging out the benefits.

Strategy Statics: The 7 Powers

Strategy statics are defined as the study of strategic position at a single point in time. According to Helmer, there are only 7 Powers, or strategies, available to a company. The 7 powers are:

  1. Counter-Positioning: Adopting a new, superior business model that the incumbents can’t easily or are unwilling to replicate due to potential damage to their current operations.
  2. Cornered Resource: Preferential access at attractive terms to a coveted asset that can independently enhance value.
  3. Scale Economics: A business in which the per unit cost declines as production volume increases.
  4. Network Economics: A business in which the value realized by a customer increases as the install base increases.
  5. Switching Costs: The value loss expected by a customer that would be incurred from switching to an alternate supplier for additional purchases.
  6. Branding: The durable attribution of higher value to an objectively identical offering that arises from historical information about the seller.
  7. Process Power: Embedded company organization and activity sets which enable lower costs and/or superior products, and which can be matched only by an extended commitment.

The exhaustive nature of the 7 powers makes it an attractive framework for business strategists. Each of the 7 powers provides a benefit to the firm that has the power and presents a barrier to the competitors that don’t.

Benefits from Power

The benefits generated by Power can be separated into two major categories: either they increase the perceived value of the products or they decrease the cost of making the product. We can analyze how this enhances the potential business value through the lens of the value/price dynamic chart I discussed in a previous blog post:

Increasing the perceived value while maintaining the acquisition cost will increase a customer’s willingness to purchase. This will grow the top line of the business. Decreasing the cost while maintaining the perceived value for the customer will increase the firm margin. This will grow the bottom line of the business.

Benefits are relatively common and often bear little positive impact on the company value as they are generally subject to full arbitrage.

Barriers due to Power

The barriers imposed by Power can also be split into two categories: the competitor is either unwilling or unable to challenge the Power.

The best way I found to think of how a barrier works in the real world is to view it through the lens of Sun Tzu’s Art of War: “The supreme art of war is to subdue the enemy without fighting.” A great barrier will cause your competitor to evaluate that the cost of breaking down the barrier exceeds the benefits it would yield after the barrier has come down.

Unlike benefits, barriers are uncommon and often a true source of company value specifically because they can prevent arbitrage. Often, it is the quality of the barrier that truly defines the impact of the Power.

Strategy Dynamics: Technology, Invention, Value

Strategy dynamics, on the other hand, is the study of strategic development over time.

Technology Sows Invention, Invention Creates Value

Helmer identifies two key fundamental forces that drive strategy dynamics: invention and technology.

  1. Invention necessarily precipitates Power. The age-old adage “me too won’t do” guides the creation of Power. Invention is fueled by a founder’s passion or domain mastery, not by the analyst’s Excel sheets.
  2. The relentless forward march of technology assures tectonic shifts in the external environment will always create new threats and opportunities for firms, large or small.

While the relentlessness of technology creates opportunity which, through invention, can yield Power, that doesn’t guarantee a successful business strategy. Remember, the aim of a strategist is to maximize the potential business value, and the business value is a combination of Power and Market Size.

The degree to which invention creates compelling value for the customer determines the potential market size for your product or service. There are three distinct paths to creating compelling value: capabilities-led, customer-led, and competitor-led.

  • Capabilities-led: firms translate some capability into a product with compelling value.
  • Customer-led: incumbents know of the unmet demand but don’t know how to satisfy it.
  • Competitor-led: inventor beats incumbent with a product that elicits a “gotta have” response.

The relentless forward march of technological progress sows the ground for inventions to create compelling value.

Business Lifecycle & 7 Powers

A second aspect of strategy dynamics is the relevant timing of each of the 7 powers in relation to the business lifecycle. I previously discussed the business lifecycle when I wrote about the six phases of transient competitive advantage.

The concept of the transient competitive advantage is not entirely compatible with Helmer’s theory of the 7 Powers, since a key attribute of a Power is its long-term nature and a transient competitive advantage is by definition limited in time. However, that won’t stop us from trying.

According to Helmer, the most critical part of establishing power is during the business take-off – basically that’s when the business sees explosive growth. Therefore, the timing for introducing a Power can be split into three windows:

  • Before take-off (origination)
  • During take-off
  • After take-off (stability)

The origination phase is characterized by the period before a firm clears the compelling value threshold. In other words, it’s when the groundwork for Power is laid but the market size isn’t there yet for a Power to become relevant.

This phase aligns with Phase 1 of the transient competitive advantage framework. Two Powers become available during this phase: counter-positioning and cornered resource.

The take-off phase is characterized by a period of explosive growth as the compelling value becomes obvious to the customer and the product elicits a “gotta have” response.

This aligns with Phases 2 and 3 of the transient competitive advantage framework. Three Powers become available during this phase: economies of scale, network effects, and switching costs.

The stability phase is characterized by a high growth but not exponential growth period. The crucial element is that growth has slowed enough for the market size to not double every two to three years. That’s the case when annual growth is around 30-40%. Growth beyond that creates sufficient flux in the market that counter-moves by competitors can spark change in market leadership.

This aligns with Phases 4 and 5 of the transient competitive advantage framework. Two Powers become available during this phase: brand and process.

Further Discussion

Low-effort strategy development

From the fundamental business equation $latex V = M_{0}\ g\ \overline{s}\ \overline{m}$ one could argue that the low-effort way a strategist can increase the potential business value is by redefining the market size. For example, rather than focusing exclusively on the domestic market, you expand regionally and thus perhaps 10X $latex M_{0}\. That will drastically increase V, all things kept equal.

Obviously, all things are not equal since expanding into new geographies also introduces new potential competitors which will impact your s and m. Therefore, the equation provides business leaders with a good tool to evaluate business expansion by asking the question: what happens to V if such a decision is taken.

Powers & Monopolies

The most important factor of a Power is its ability to put up barriers to existing and potential competitors from arbitraging out the differential margins obtained as a benefit of the Power. This is in line with Peter Thiel’s mantra that “competition is for losers” because it usually drives down prices and margins, but contrary to Jan Eeckhout‘s perspective that market power lack of competition is bad for the economy as a whole because it prevents competitive forces from driving down consumer prices.

Importance of Market Share

You often hear people say “Revenue is a vanity figure” because, really, it’s the free cash flow generation that keeps the business running. Similarly, one could argue market share is a vanity figure because share size without a suitable (differential) margin will not bring you healthy free cash flows.

However, market share is relevant if your chosen Power is economies of scale because, typically, large-volume production provides room for lowering input and processing costs.

Power Density

We can think of a Power as the defining key winning attribute of a business. Therefore a firm should double-down and allocate as much resources as possible to energize this Power. This would yield highly specialized firms with intense “Power Density,” which we define as firm resources allocated to energize the Power relative to a firm’s total resources available to the firm. Allocating as much resources as possible to a certain Power would hinder vertical integration strategies due to lack of sufficient resources.

That raises the question whether a single firm successfully manage resource allocation across such diverse power requirements? Or will it always get beaten by a strategic alliance of two distinct Power-dense firms?

For example, Intel currently manufactures and designs chips, requiring economies of scale for manufacturing and a different power (cornered resource, switching costs, brand, process) for design. The alliance between TSMC (manufacturing) and NVIDIA (design) has made it such that Intel is currently uncompetitive in both businesses.