Edison Explains: Seven strategic powers – understanding sustainable competitive advantage

Strategy frameworks: Timeless principles or academic theory?

We are regular readers of Andrew Hollingworth’s Holland Views. His recent newsletter linked to an April 2023 research note on Netflix and encouraged the reader to read Hamilton Helmer’s 7 Powers: The Foundations of Business Strategy.

Helmer’s ‘7 Powers’ offers a structured approach to understanding what creates lasting value in business. Unlike traditional strategy frameworks that focus on planning, Helmer examines the fundamental question of what makes a business defensible over time. For investors, this matters enormously. Companies with genuine strategic ‘powers’ can sustain superior returns, while those without them face margin compression and commoditisation.

This Edison Explains examines Helmer’s framework and considers its practical application for equity investors seeking businesses with durable competitive advantages.

What are the seven powers?

Helmer identifies seven distinct sources of competitive advantage, each creating a ‘power’ that enables a business to improve profits while limiting competitive arbitrage. The framework divides these into two categories:

• Powers relating to barriers (preventing competition):
  1. Scale economies: unit costs decline with increased business size, making it uneconomical for smaller competitors to match pricing (eg Walmart’s distribution network, Amazon’s fulfilment infrastructure).
  2. Network economies: the value of the service increases with each additional user, creating switching costs and raising barriers to entry (eg Facebook, Visa’s payment network).
  3. Counter-positioning: a new business model that incumbents cannot adopt without damaging their existing business (eg Netflix vs traditional broadcasters, Vanguard’s index funds vs active managers).
• Powers relating to benefits (superior offerings):
  1. Switching costs: the value loss expected by customers when changing to an alternative supplier (eg SAP enterprise software, Apple’s iOS ecosystem).
  2. Branding: objective entanglement of higher perceived value with a specific brand rather than its attributes (eg Tiffany & Co, Coca-Cola).
  3. Cornered resource: preferential access to a valuable resource that competitors cannot replicate (eg Pixar’s creative talent and culture, De Beers’ diamond supply).
  4. Process power: embedded company processes that enable superior margins and cannot be easily replicated (eg Toyota Production System, LVMH’s luxury brand management).

Each power operates differently and suits different business models, but all share the characteristic of being both valuable and difficult for competitors to match.

Why does this matter for investors?

The presence of one or more powers determines whether a company can sustain returns above its cost of capital. Without genuine power, competition inevitably erodes margins towards commodity levels, regardless of how innovative or well-managed a company appears initially.

Edison insight: the most valuable companies typically possess multiple powers that reinforce each other. Amazon exhibits scale economies in logistics, network economies in its marketplace and switching costs through Prime membership. Microsoft combines network economies (Windows ecosystem), switching costs (Office suite) and process power (enterprise sales capabilities).

Understanding which powers a company possesses helps investors:

• assess the durability of current profit margins,
• evaluate whether growth investments will compound advantages,
• identify businesses trading below intrinsic value due to underappreciated structural advantages, and
• avoid ‘value traps’ where apparently cheap valuations reflect an absence of defensibility.

The framework is particularly useful when analysing technology companies, where traditional metrics like book value offer limited insight, but where network effects and switching costs can create extraordinary value.

How do you identify these powers in practice?

Helmer emphasises that powers must be rigorously tested, not assumed. Simply having customers or market share does not constitute power; the test is whether the company can maintain superior profitability when competitors actively attempt to arbitrage it away.

Scale economies are evident when the largest player has substantially lower costs per unit. Cloud infrastructure (AWS, Azure) demonstrates this clearly, as fixed investments in data centres are spread across larger revenue bases.

Network economies require that value increases with users. LinkedIn’s professional network becomes more valuable as more professionals join, creating a snowball effect that competitors struggle to replicate.

Switching costs should be measurable in customer churn rates and retention economics. Enterprise software companies like Salesforce benefits from embedded workflows and integrated data that make migration costly and risky.

Branding commands price premiums without superior attributes. Luxury goods provide obvious examples, but branding also appears in business services where reputation for reliability (Accenture, Deloitte) commands premium fees.

Cornered resources include patents, unique talent or exclusive partnerships. Pharmaceutical patents provide time-limited but powerful protection, while Nvidia’s early lead in GPUs for AI represents a harder-to-replicate resource advantage.

Counter-positioning appears when new entrants adopt models incumbents cannot match. Netflix’s streaming model is positioned against traditional broadcasters, which could not abandon lucrative cable bundles without destroying their economics.

Process power is the hardest to observe but often the most durable. Toyota’s manufacturing systems took competitors decades to approach, and even then required wholesale cultural transformation.

What are the limitations of the framework

While Helmer’s framework provides a valuable analytical structure, it has limitations investors should recognise.

First, identifying powers in real time is challenging. What appear to be network effects may simply be an early-mover advantage that competition can overcome. For example, Theranos’s claimed processing power in blood testing proved illusory.

Second, powers can decay. Kodak possessed multiple powers (branding, process power, cornered resources in film chemistry) that digital photography rendered irrelevant. Nokia’s network effects in mobile phones evaporated with the transition to smartphones.

Third, the framework does not address timing or magnitude. Knowing a company has switching costs does not determine whether its shares are attractively priced; that requires traditional valuation discipline.

Fourth, regulatory changes can eliminate powers overnight. Data network effects face increasing privacy regulation, while pharmaceutical patents face political pressure on pricing.

Finally, the framework emphasises competitive position but does not address execution risk, management quality or capital allocation – all crucial to investment returns.

What’s the bottom line?

Helmer’s 7 Powers framework offers investors a structured method for assessing business quality and competitive durability. Companies possessing genuine powers can sustain superior returns and justify premium valuations, while those without them face structural headwinds regardless of operational excellence.

The framework is most valuable when combined with rigorous industry analysis and traditional valuation discipline. Used thoughtfully, it can help investors distinguish between businesses with temporary advantages and those with structural moats; a distinction that can compound dramatically over investment horizons.

For equity investors, the key question is not whether a business is currently profitable, but whether it possesses powers that can sustain profitability against determined competition. That is the insight Helmer’s framework helps illuminate.

This Edison Explains summarises key concepts from Hamilton Helmer’s work for investor education. Investors should conduct their own analysis and consider multiple frameworks when making investment decisions.