Diving Deep Into Helmer’s 7 Powers Using Company Examples

Seven Powers by Hamilton Helmer is one of the most respected frameworks for competitive advantage analysis in the business and investing world. The framework is aimed at creating conditions for persistent differential returns, and Helmer emphasizes the importance of seven different powers and the benefits in working towards and achieving these. He highlights that invention is key to creating power, as it opens doors for new market opportunities and competitive advantages​​​​​​​​.

Whether you’re an investor looking at potential investments, or a businessperson looking to dive deep into the competitive dynamics and strategic strengths of businesses, this framework can prove itself essential. To really etch each and every one of the Seven Powers into our minds, let’s explore them one by one, using seven different companies as examples.

Companies in Hamilton Helmer's competitive advantage framework

Companies in Hamilton Helmer's competitive advantage framework

At Costco, customers pay annual membership fees which provide entry to its stores. In exchange, Costco operates an every-day-low-pricing (EDLP) strategy by only marking up goods with a maximum of 15%, making for very low prices. Nick Sleep who managed The Nomad Partnership recognized this simple yet effective strategy and very successfully invested in Costco early on.

He describes Costco’s strategy as “retail’s version of perpetual motion,” and points out how the membership fee buys the customer’s loyalty, and Costco in exchange sells goods for prices just covering operating costs. By having the standard mark-up of maximum 15%, additional savings that are achieved through purchasing or scale are returned to the customers in the form of even lower prices.

Visualizing how increased scale leads to lower prices

Visualizing how increased scale leads to lower prices

Costco’s core strategy of cost leadership involves focusing on large sales volumes in big-box stores. By limiting its amount of stock keeping units (SKUs) at 4,000, a bidding war is essentially created between suppliers, ensuring Costco gets the lowest possible prices.

There’s a story of when Costco managed to lower its purchasing price for designer jeans by around 30%. This made for a potential 50% mark-up, while still being at half the cost of most other retailers. But Costco's co-founder Jim Sinegal famously insisted on the standard mark-up. He said, “If I let you [raise the price] this time, you will do it again.” That contract of offering the lowest possible prices to its customers could never be broken according to Sinegal.

Through effective inventory management and warehouse design, Costco’s logistics are very efficient. Its warehouse-style stores serve as both retail and storage spaces, utilizing cross-docking and displaying goods in shipping pallets. This reduces inventory management, and suppliers can basically deliver directly to the shop floor where customers do their shopping.

This spartan design with exposed beams and displaying of goods in their shipping pallets, further signifies that the focus is on keeping down the overhead and offering the lowest possible prices.

Network effects, as defined by Helmer, occur when the value realized by a customer increases as the installed base increases. As for social networks like Meta, the value to each user grows with the addition of new users.

It’s probably easier to think of when Meta (then The Facebook) was first founded. Imagine being the first user of the platform. You wouldn’t have any other people’s profiles to scroll through. No one to text to. And no readers of your posts. Basically, it’s a useless network as long as you’re the only one using it. However, as soon as the second person enters the network, the situation becomes a whole lot different. You now have your first pen-pal, someone who’s engaging with your content, and whom’s posts you can read.

This creates a ripple effect, and when the first two people of the platform show their friends, the network-snowball is set in motion, and up until today – as evident by Meta growing its Monthly Active People (MAP) by 6% in Q4 2023 to 3.98 billion – it hasn’t stopped. Meta today exemplifies these network-effects by providing platforms where users can connect with an ever-increasing number of people, share content, and engage with a wide range of communities and businesses. It’s essentially a central hub for social interaction and information sharing.

This has led to a situation where it’s very challenging for new entrants to compete in the same space, as users typically prefer to be part of a network where most of their connections are already active.

When a newcomer adopts a new, superior business model, that incumbents are unable to mimic due to the anticipated damage it would cause to their existing business, we’re looking at counter positioning.

The Airbnb business model represents a stark contrast to the traditional hotel industry. Airbnb’s approach leverages technology to create a platform where individuals can rent out their own homes or rooms, providing a unique and often more affordable alternative to hotels. Upon launch, this significantly challenged traditional hotels, and replicating the Airbnb model would’ve meant a fundamental shift in business operations and potentially larger risk than reward for them.

The incumbent hotels, with fixed investments in physical properties and established service models, not surprisingly found it difficult to compete with Airbnb’s flexible, low-overhead approach.

Further reading: Brian Chesky: The Pioneer of the Sharing Economy

Switching costs refer to the value loss a customer incur when they switch to an alternate supplier. It provides a protective barrier against competition, and can be a crucial source of stickiness and attractive returns for companies enjoying it.

SAP, a provider of enterprise resource planning (ERP) software, is a classic example of a business that benefits from high switching costs. The initial implementation of SAP’s ERP solution is not only financially expensive but also involves a significant time investment in customizing the software to fit the company’s unique workflows and training employees to use it effectively.

This creates a situation where the cost and effort involved in switching to an alternative solution becomes discouraging for customers, thereby incentivizing them to continue using SAP even when there technically might be superior options available. The challenge for competitors here lies in offering products that not only match the quality of SAP’s offerings, but also provide enough additional value to justify the cost of switching.

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Brands with products that are consistently sold on the secondhand market with large premiums to the original prices (sometimes 2-5 times more expensive), could be enjoying significant branding power. It’s a function of scarcity and desirability, which are both key for true luxury brands.

Another way to look at branding is that it’s essentially the one thing that would make customers choose one company’s products over another, even if they’re objectively identical offerings.

Ferrari is a brand synonymous with luxury, performance, and exclusivity. This association has been built over almost 100 years through consistent delivery of high-quality, high-performance vehicles. As well as participation in elite motorsports like Formula 1, and a carefully cultivated brand image.

This is further signified by Ferrari when doing extensive background research on all its potential customers. Getting in the door isn’t easy, and just having the funds available to buy a Ferrari is far from enough. There’s multi-year waiting lists, and to even get listed on them may require you to leave a cash deposit to the dealer to showcase you’re serious about the purchase. However, this might still not be enough, and if you really want a Ferrari, the best path often is to buy a used one to get in the loop. Then, after spending money at the dealership for maintenance and building a relationship, you might be eligible to buy a new one.

Ferrari is the perfect example of what it takes to create and sustain a powerful brand. It’s not only about the exceptional quality and performance of its vehicles, but also its exclusivity and the prestige associated with owning a Ferrari. By controlling supply, meticulously vetting potential buyers, and maintaining an air of exclusivity, Ferrari has cemented itself as a brand of luxury and performance.

Further reading: Pricing Power Through Scarcity: A Case Study of Ferrari

Having preferential access at attractive terms to a unique asset that independently enhances value, is according to Helmer referred to as a cornered resource. In the case of ARM, this unique asset is its intellectual property (IP) development in the semiconductor and software design sector. This IP is not only valuable but also scarce in the sense that ARM has developed and owns these designs, which cannot be easily replicated or replaced by competitors.

ARM’s business model revolves around licensing these designs to semiconductor companies like TSMC and Samsung Electronics, rather than manufacturing the chips themselves. This has proven to be a great model, allowing ARM to leverage its IP across a broad range of applications and industries, from essentially having a monopoly in smartphones, to IoT devices – effectively cornering the market on mobile and low-power processors. Here’s ARM’s royalty revenue visualized:

Arm's royalty revenue by launch year cohorts

Arm's royalty revenue by launch year cohorts

Moreover, ARM’s strategy involves building a robust ecosystem around its technology. This ecosystem includes chip manufacturers, technology partners, and a developer community, all of which contribute to and rely on ARM’s IP. This interconnected network not only amplifies the value of the IP but also creates barriers to entry for competitors, as it’s difficult for them to replicate this extensive and deeply integrated ecosystem.

A prime example of how operational excellence can create a significant competitive advantage is Toyota’s implementation of the Process Power concept. According to Helmer, it refers to a company achieving such a high level of efficiency and effectiveness in its operations that it becomes an advantage competitors can’t replicate.

This is probably best described through Toyota’s renowned Toyota Production System (TPS). TPS is a holistic approach to manufacturing that emphasizes efficiency, quality, and continuous improvement. It has become a benchmark in the automotive industry and beyond, known for its principles like Just-In-Time production and Kaizen (continuous improvements).

Toyota’s operational excellence has not only significantly reduced waste and increased efficiency in its production processes, but has also allowed for the production of high-quality vehicles at lower costs. Despite Toyota even allowing competitors to tour its factories to observe the TPS in action, many have had large trouble replicating the operational efficiency to the same extent.

This can be seen as truly mastering Process Power, and illustrates how a company’s internal processes – when refined and perfected – can become a core element of its strategic advantage, making it difficult for competitors to challenge its market position.

Hamilton Helmer’s “Seven Powers” is a crucial framework in business, offering insights into how companies like Costco, Meta, Airbnb, SAP, Ferrari, ARM Holdings, and Toyota have all mastered different aspects of competitive advantages. From Costco’s efficient low-cost model to Meta’s expansive network, and Airbnb’s disruptive approach to the hotel industry, each company showcases its own Power. The examples above illustrate the diverse ways companies can achieve market dominance, guiding investors and business leaders in navigating competitive landscapes.