The Difference Between Competitive Advantages and 7 Powers (65)

Jan 17, 2021

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This week’s podcast is my third on the well-known 7 Powers framework by Hamilton Helmer. I go through the last 4 of his 7 powers.

You can listen to this podcast here or at iTunes, Google Podcasts and Himalaya.

His fundamental equation of value is:

Value = M0*g*s*m = market scale * power

M0 is Market at time zero. g is growth. This is about targeting big and growing market opportunities.
S is long-term persistent market share. How much of it you have
M is long term persistent margins. (operational margins after cost of capital)
You can also do potential value = market scale * power.

His break-down of branding is that it evokes positive emotion, leading to increased willingness to pay.

Affective valence. Built-up associations that elicit good feeling that are distinct from the objective value of the good.
Uncertainty reduction. Peace of mind because confidence the product will be as expected.
A brand requires lengthy period of time with reinforcing actions (hysteresis). Legacy brands tend to be powerful. Hard to replicate in short term. Or with copycats.

His break-down of cornered (or scarce) resource is that it must be sufficiently potent to drive high-potential, persistent differential margins (m>>0), with operational excellence spanning the gap between potential and actual. He has five screening tests for cornered resource:

Idiosyncratic. Such as a brain trust with repeated success over time.
Non-arbitraged. If a firm gains preferential access to a coveted resource but also pays a price that fully arbitrages out the rents attributable to this resource – then doesn’t matter.
Transferable. If resources creates value at one company, but cannot if transferred to another, then it is not good. Probably has an essential complement.
Ongoing.
Sufficient. It must be complete enough to continue producing differential returns assuming operational excellence.