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05 May 2024

Business strategy with Hamilton Helmer (author of 7 Powers)

5Frameworks
13Insights

Frameworks in this episode

Strategy3 steps

Network Effects vs Network Economies: The Materiality Test

Almost everything has some network effect; only ask whether it's large enough to change your margins.

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Strategy3 steps

Startup Power Progression: Eliminate Three, Sequence Four

Cross off the three powers a startup can't have yet, then pursue the remaining four in sequence — counter-positioning first.

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Strategy3 steps

The Benefit-and-Barrier Power Test (To Be or Not to Be)

Only call it power if it delivers a cost/price benefit AND a barrier competitors can't erase.

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Strategy3 steps

The Castle-or-Shack Audit

Go capability by capability and separate the ones a rival can copy (shack) from the ones they truly can't (castle).

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Strategy3 steps

The Process Power Qualifier: Material and Opaque

Operational excellence is only power when it's both material AND impossible for rivals to copy.

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 2

Myth Buster23:00

You Probably Don't Get Scale Economies From Data

Founders often claim scale economies through data, but Helmer says that is rare. The reason is not that data lacks scale economies, but that existing competitors usually have enough scale to be in shouting distance of each other, so cost-per-unit differences are small. As fixed-cost advantages are spread over more scale, the percentage cost advantage flattens.

  • Data-driven scale economies are possible but rare.
  • Competitors often already have enough scale that per-unit cost differences are small.
  • The cost-advantage curve flattens as fixed costs are spread over more scale.
  • Helmer's team 'laughs' whenever someone claims a flywheel; the material ones are rare.

“people often think that they get uh scale economies through data and I'd say that that's possible but it's rare”

Hamilton Helmer · 23:00

“we sort of laugh whenever we say we hear somebody say they have a flywheel”

Hamilton Helmer · 24:00
#scale-economies#data#myth#moats
Myth Buster45:30

Operational Excellence Is Not Power

Helmer invokes Michael Porter's controversial claim that operational excellence is not strategy. In the takeoff phase operational excellence is essential to attaining competitive position, but it is rarely a source of power because it can be mimicked, whether by hiring a consulting firm with best practices or poaching competitors' people. Rare exceptions (Toyota, TSMC-style complexity) exist only when the steps are both material and opaque.

  • Michael Porter, ~40 years ago: operational excellence is not strategy.
  • In the takeoff phase, operational excellence is essential to win competitive position.
  • It's usually mimicable via consultants or hiring from competitors, so not power.
  • Exceptions require steps that are both material and opaque (Toyota, complex fabs).
  • Heuristic: if you can write it down or a consulting firm sells it, it's probably not power.

“this Harvard Professor Michael Porter and he and probably 40 years ago made the very controversial statement that operational excellence is not strategy”

Hamilton Helmer · 46:00

“if you stop running that treadmill you get creamed and uh so you got to do it it's most of your day but it's not…”

Hamilton Helmer · 49:30
#operational-excellence#process-power#porter#strategy

Hot Take· 2

Hot Take39:30

Helmer Doesn't See AI Adding an Eighth Power

Helmer currently sees no change to the seven powers from generative AI, though AI raises the same questions of scale economies, network economies, and switching costs. His bigger bet is that AI's largest impact will be as a 'tertiary' technology, used inside businesses that existed before and after it, much like electricity or semiconductors in automobiles. He compares the hype to 1990s business process re-engineering and contrasts it with crypto, which he feels has a weaker ultimate use case.

  • No change to the seven powers from generative AI so far.
  • AI still raises scale economy, network economy, and switching-cost questions.
  • Biggest impact likely 'tertiary': improving businesses that existed before and after it.
  • Analogy to electricity and to 1990s business process re-engineering.
  • A 50% improvement in programming efficacy alone would be worth an enormous amount.

“my own view currently I I don't see any change in seven powers from it”

Hamilton Helmer · 40:00

“that generative AI will its biggest impact will be that tertiary class it will be used in a lot of things that um uh that…”

Hamilton Helmer · 41:30
#ai#seven-powers#technology#future
Hot Take51:30

Helmer's Big Worry: The US Debt Trajectory

Asked about macro trends affecting founders, Helmer says he is very concerned about US (and global) debt. With a crisis roughly every ten years, he fears reaching one with no 'dry powder' to deficit-spend the way the government did in the financial crisis and Covid. He frames the underlying entitlements problem as the crux of a delicate dance between capitalism and democracy, with two irreconcilable views producing a deadlock: no more taxes and no spending cuts, which yields deficits.

  • US debt trajectory is Helmer's biggest concern for founders.
  • A crisis has hit roughly every 10 years (dotcom, financial crisis, Covid).
  • Dry powder = the ability to heavily deficit-spend in a crisis.
  • Entitlements are the hard, underlying driver, not discretionary spending.
  • Two opposing views deadlock into no new taxes and no cuts, producing deficits.

“personally I am very very concerned about the uh debt trajectory of the United States”

Hamilton Helmer · 51:30

“and that leads to a deadlock which is you don't tax anymore and you don't cut spending and that leads to deficits”

Hamilton Helmer · 56:00
#macro#debt#economics#policy

Explainer· 3

Explainer11:00

Strategy Is a Long-Time Concept, Tactics Are Short

Helmer narrows strategy to the fundamental determination of business value, which is the NPV of expected cash flow. Because value looks far into the future, strategy is inherently a long-time-horizon concept while tactics are short. He uses Pearl Harbor as the illustration: an enormous tactical success for Japan but the worst possible strategic move, because it solved Roosevelt's problem of getting US citizens on board for war.

  • Strategy = the fundamental determination of business value (NPV of expected cash flow).
  • Because value is far in the future, strategy is a long-time concept; tactics are short.
  • Pearl Harbor: huge tactical win, catastrophic strategic move for Japan.
  • Focusing on value narrows what founders need to pay attention to.

“strategy is a long longtime concept you you're looking far out in the future so think of Pearl Harbor”

Hamilton Helmer · 11:00

“the difference there is time constant tactical short strategy long”

Hamilton Helmer · 11:30
#strategy#business-value#history
Explainer24:30

Network Effects Are Not Network Economies

Helmer draws a sharp distinction: many businesses have network effects, but only a few have network economies as a power. The dividing line is materiality, whether the value benefit is large enough to create a price delta big enough to give materially different margins into the future. Most platform businesses have some modest network effects that never rise to the level of a real barrier.

  • Network economies only count when they clear a materiality hurdle.
  • Lots of businesses have network effects but not network economies.
  • Materiality = a price delta large enough to change future margins.
  • Uber and Lyft likely have network effects but not network economies.

“there there are lots of things that I would say have Network effects but not Network economies”

Hamilton Helmer · 25:00
#network-effects#network-economies#power#materiality
Explainer29:00

Is It a Castle or a Shack? The Netflix vs Blockbuster Test

Riffing on Buffett's line about economic castles protected by unbreachable moats, Helmer says the trick is understanding why something is a castle and not a shack. Netflix poured resources into UI, AB tests, and its recommendation engine, but those can be mimicked. When Blockbuster finally launched mail-order DVDs, its site's UI was indistinguishable from Netflix because they just copied it, proving that all that thoughtful work was not itself a source of power.

  • Buffett looks for economic castles protected by unbreachable moats.
  • The hard part is knowing why something is a castle, not a shack.
  • Netflix's UI, AB tests, and recommendation engine were vital but mimicable.
  • Blockbuster copied Netflix's UI wholesale when it launched mail-order DVDs.

“one of the tricks to understanding power is you have to have a pretty good understanding of why it's a castle and not a shack”

Hamilton Helmer · 31:30

“if you looked at the Blockbuster site their UI site you couldn't tell it different from Netflix they just copied it”

Hamilton Helmer · 32:30
#moats#netflix#blockbuster#power

Story· 1

Story27:00

Why Uber Ran Away From Lyft

Asked why Uber ended up roughly 20x Lyft's market cap, Helmer offers an admittedly uninformed guess: modest scale economies plus a well-played war of attrition. Uber initially misdefined its business as international transportation, but ride-hailing is extremely geographically specific, so a strong position in the Bay Area doesn't help in London. After the China misstep, Uber refocused on its geographically specific scale economy and extended the platform with Uber Eats.

  • Uber likely won via modest scale economies and a war of attrition.
  • Early misstep: defining the business as international transportation.
  • Ride-hailing is geographically specific; a Bay Area position doesn't transfer to London.
  • Uber refocused on its geographic scale economy and added Uber Eats.
  • The attrition only worked because modest scale economies existed underneath.

“over time Uber has just uh very successfully played a war of attrition”

Hamilton Helmer · 27:30

“which is they misdefined their business they said it was International transportation and it's not that business is extremely geographically specific you know”

Hamilton Helmer · 28:00
#uber#scale-economies#case-study#competition

Q&A· 2

Q&A04:00

When Should Founders Start Thinking About Power? Always

Helmer used to believe you achieve product-market fit first and only then think about strategy. Over the last five years his view flipped: even before product-market fit, founders should be thinking about strategy, though not as a fully articulated plan. At the early stage you have wildly more degrees of freedom, so the question is which underlying characteristics of a business proposition might tilt it toward power.

  • Old model: do product-market fit, then strategy; putting strategy first seemed useless.
  • New view: think about strategy always, even pre-product-market-fit.
  • Early strategy is not detailed planning; it is asking which characteristics tilt probabilities toward power.
  • Early on you have far more degrees of freedom, so these conversations are meaningful.

“one of the things that has really surprised me in the last five years has been that my understanding of the answer to that question…”

Hamilton Helmer · 04:30

“the answer is always”

Hamilton Helmer · 06:00
#strategy#startups#product-market-fit#power
Q&A44:30

Is There an Eighth Power?

Helmer is always hunting for an eighth power because finding one that is obscure would also be a great investment opportunity. So far he has found none and is satisfied that seven is an exhaustive set, while stressing it is an empirical seven, not a theoretical one, so he will never say never.

  • He actively looks for an eighth power, partly as an investment edge.
  • So far none found; seven seems exhaustive.
  • It's an empirical seven, not a theoretical one.
  • Making unusual returns would be the tell that a new power had been discovered.

“I'm always looking for it because if you find it it probably means it's so obscure there would also be a great investment opportunity we're…”

Hamilton Helmer · 45:00
#seven-powers#investing#strategy

Takeaway· 3

Takeaway15:30

Which Powers a Startup Can Actually Pursue Early

Helmer gives a heuristic for which of the seven powers are available to an early-stage startup. Branding and process power only arrive in the stability phase, so take them off the table; cornered resource is a different class of business (e.g. pharma patents). That leaves counter-positioning, scale economies, switching costs, and network economies, which are sequenced, with almost every startup beginning at counter-positioning.

  • Branding and process power only appear in a business's stability phase; not available to startups.
  • Brand recognition you buy (e.g. a Super Bowl ad) is not power.
  • Cornered resource is a distinct class (e.g. prescription pharmaceuticals).
  • The four to focus on: counter-positioning, scale economies, switching costs, network economies.
  • They are sequenced; almost every startup starts with counter-positioning.

“brand recognition for a startup may be incredibly important but you can get brand recognition by buying an ad in the Super Bowl that's not…”

Hamilton Helmer · 16:30

“so you can take those three off the table and that then leaves counter positioning scale economies uh uh switching costs and network economies and…”

Hamilton Helmer · 18:00
#seven-powers#startups#counter-positioning#strategy
Takeaway50:00

Only Three Things Create Value in a Company

Helmer argues that only three things create value in a company: power, market size, and operational excellence. It feels reductive given how many things a business must attend to, but he says both intuitions are right, because every one of those many things falls into one of the three categories. It is an exhaustive set that simply comes out of the math.

  • The three value drivers: power, market size, operational excellence.
  • It feels reductive, but every business concern maps into one of the three.
  • It's an exhaustive set that falls out of the math of business value.

“the only three things that create value in a company are power Market size and operational excellence”

Lenny Rachitsky · 50:00

“all those things fall into those three categories so it's an exhaustive set and it's just it simply comes out of the math”

Hamilton Helmer · 50:30
#business-value#strategy#frameworks
Takeaway58:00

Action Is the First Principle of Business

Helmer closes by emphasizing that action is the first principle of business: you do stuff. His book is oriented toward that, meant not to tell founders what to do but to give guideposts on the journey. He pushes back on people who sit around theorizing about strategy or reading about startup ideas without ever trying, noting that life is full of surprises and you'll end up somewhere you didn't expect.

  • Action is the first principle of business; you do stuff.
  • The book offers guideposts, not a prescriptive to-do list.
  • Too many people theorize about strategy without ever trying.
  • Doing leads to unexpected places.

“remember action is the first principle of business you do stuff”

Hamilton Helmer · 58:00
#execution#founders#advice