Business strategy with Hamilton Helmer (author of 7 Powers)

Hamilton’s background (00:00:00)

• Hamilton Helmer is an expert in strategy and the author of the book "7 Powers", which provides a framework for developing sustainable competitive advantage.
• His book is highly regarded by business leaders such as Patrick Collison, Peter Thiel, Reed Hastings, and Daniel Ek.
• In this conversation, Hamilton shares insights on how startups can develop power, the relationship between power and strategy, and the impact of AI on power dynamics.
• Startups can start developing power early by focusing on:
  • Product-market fit: Having a product that solves a real problem and is in demand.
  • Distribution: Building a strong distribution network to reach customers.
  • Brand: Creating a strong brand identity and reputation.
  • Data: Collecting and analyzing data to gain insights into customer behavior and market trends.
  • Network effects: Building a network of users or customers who benefit from each other's participation.
• Scale: Being big does not necessarily mean having power.
• Resources: Having a lot of resources does not guarantee power.
• Market share: Having a large market share does not always lead to power.
• Technology: Having advanced technology does not automatically confer power.
• Power is the ability to influence others to do what you want.
• Strategy is the plan for achieving your goals.
• Power and strategy are closely linked: power can help you achieve your strategic goals, and strategy can help you build power.
• Startups should start thinking about power as early as possible.
• Power can help startups:
  • Compete with larger, more established companies.
  • Negotiate better deals with suppliers and customers.
  • Attract and retain top talent.
  • Build a sustainable competitive advantage.
• Individual product managers and non-leaders can contribute to building power for their companies by:
  • Focusing on their unique strengths and contributions.
  • Collaborating with others to achieve common goals.
  • Building relationships with key stakeholders.
  • Advocating for the company's interests.
  • Taking initiative and driving change.
• AI is changing the landscape of power in several ways:
  • AI can automate tasks that were previously done by humans, which can give companies a cost advantage.
  • AI can help companies collect and analyze data, which can give them insights into customer behavior and market trends.
  • AI can be used to create new products and services, which can give companies a competitive advantage.
• Hamilton is currently working on a new book that explores the concept of "power dynamics."
• The book will discuss how power is distributed in different types of organizations and how it can be used to achieve success.

When power becomes important (00:04:08)

• Founders should think about power even before product-market fit.
• Conversations about strategic matters with founders at an early stage have richness and relevance.
• Founders are practical and focused, so observing their reactions to strategic discussions can be meaningful.
• The answer to when founders should start thinking about power is "always".
• At an early stage, founders should consider the underlying characteristics of their business propositions that might tilt them towards the availability of power.
• These conversations are meaningful and can help founders tilt probabilities, but they are not determinative.
• Once founders have achieved product-market fit, they need to understand their source of power to establish their competitive position.
• In a stability phase of business, founders need to know their source of power to defend it.
• Understanding the source of power is foundational knowledge for future steps and acts of the business.

How strategy relates to power (00:08:24)

• Strategy is a ubiquitous term in business with various definitions.
• A useful definition of strategy is focusing on the fundamental determination of business value.
• This narrowing allows for concise advice to founders on what to pay attention to.
• Strategy is a long-term concept that looks far into the future.
• Tactical moves may be successful in the short term but can have negative strategic consequences.
• Focusing on value narrows the scope of strategy and allows for more concise advice.

How power informs strategy (00:12:09)

• Power informs strategies by focusing on one's power.
• Economic structures provide durability of return and refuge from competition.
• Competition takes place based on cost or price advantage.
• A benefit and a barrier, or the "to be or not to be test", creates value and good margins.
• Power structures, such as scale economies, can lead to increased profitability.
• Netflix has scale economies with more subscribers.
• The cost of content is a large fixed cost, but it can be spread over more subscribers, reducing the cost per subscriber.
• This cost advantage makes Netflix more profitable than competitors with fewer subscribers.

The sequence of powers (00:14:46)

• The seven powers that influence business strategy are: branding, process power, cornered resource, counter positioning, scale economies, switching costs, and network economies.
• For early-stage startups, the most relevant powers to focus on are counter positioning, scale economies, switching costs, and network economies.
• Counter positioning is crucial for startups to differentiate themselves from competitors and avoid being easily displaced.
• Scale economies, switching costs, and network economies become more relevant as a startup grows and scales its operations.
• Network economy, scale economy, and switching costs are important powers to consider in business strategy.
• The definitions of these powers can be found in the book "7 Powers" by Hamilton Helmer.

Common misconceptions (00:21:13)

• Founders are often overly optimistic about the barriers to entry they've created.
• Understanding whether or not a company has a certain power is difficult and can take weeks of analysis.
• Some common misconceptions about power include:
  • Thinking a company has branding power when it doesn't.
  • Believing a company achieves scale economies through data when it's rare and the cost advantage is often not significant.
  • Assuming a company has network economies when the flywheel effect is not strong enough to tilt returns.

Network effects vs. network economies (00:24:39)

• Network effects are often pitched as a significant barrier to entry, but in reality, they rarely become a true barrier.
• Network economies, on the other hand, are defined as having a material impact on a business's margins and pricing.
• Network effects without network economies occur when the value or benefit of the network is not large enough to create a significant price difference.
• Example: Uber and Lyft both have network effects, but due to high competition and expenses, they do not have network economies.

Uber’s success (00:26:58)

• Uber's success over Lyft can be attributed to modest scale economies and a well-played war of attrition.
• Uber initially made the mistake of defining its business as international transportation, which is geographically specific.
• After refocusing on geographically specific scale economies, Uber expanded into other opportunities like Uber Eats to utilize its platform.
• Uber's success is a result of both its source of power (modest scale economies) and its broader strategy of attrition.

Moats vs. powers (00:29:16)

• A moat is not synonymous with a power.
• A moat is a barrier that makes it difficult for competitors to imitate a company's success.
• A power requires a benefit and a barrier.
• Warren Buffett and Charlie Munger popularized the concept of moats.
• The concept of a moat is useful for understanding how a company can protect itself from competition.
• Network economies occur when the value of a product or service increases as more people use it.
• Microsoft's network effect was not understood by Warren Buffett, which is why he did not invest in the company.

Strategies for non-leaders to leverage power and strategy (00:31:12)

• To understand power in business, it is crucial to differentiate between "castles" (unique advantages) and "shacks" (easily copied features).
• While Netflix's UI development, recommendation engine, and content interface are important, they are largely imitable and thus not considered "castles."
• Product managers should identify their company's unique source of power to guide their work and potentially provide valuable insights to others.
• New ideas for transforming or starting new ventures often originate from lower-level employees.
• During the takeoff phase of a business, rapid growth is driven by technological change, but competitors and complementary businesses may emerge.
• To succeed in the stability phase and win market share, it is essential to recognize and incorporate new features or target new market segments.
• These decisions can be critical in securing a competitive advantage and winning the market share battle.
• It is important to consider the different phases of a business and the corresponding responsibilities required for each phase.

Advice on how to become a strategic thinker (00:37:51)

• Read the book "7 Powers" by Hamilton Helmer.
• Have conversations with colleagues about the topic of strategy.
• Attend strategy training or classes if available.
• Engage in Fireside Chats or company meetings to discuss strategy.
• Power 1: Core Values
  • Core values are the foundation of a company's strategy.
  • They guide decision-making and create a sense of purpose.
• Power 2: Purpose
  • A clear purpose gives a company direction and focus.
  • It inspires employees and stakeholders.
• Power 3: Distinctive Advantage
  • A distinctive advantage is what sets a company apart from its competitors.
  • It can be based on factors such as innovation, customer service, or cost-effectiveness.
• Power 4: Customer Focus
  • Putting the customer at the center of everything a company does is crucial.
  • Understanding customer needs and preferences drives strategy.
• Power 5: Execution
  • Execution is the key to success.
  • It involves having the right people, processes, and systems in place.
• Power 6: Innovation
  • Innovation is essential for staying ahead of the competition.
  • It can involve new products, services, or business models.
• Power 7: Leadership
  • Effective leadership is crucial for successful strategy execution.
  • Leaders must have a clear vision, be able to inspire others, and make tough decisions.

AI’s impact on the seven powers (00:39:27)

• Hamilton Helmer, author of "7 Powers," believes that AI will not significantly alter the seven key powers that drive business success.
• AI may impact scale economies, network effects, and switching costs, which are relevant to business models.
• Helmer identifies three types of players in the AI landscape: technology companies, companies that rely on AI for their existence, and companies that have incorporated AI into their operations.
• He compares the impact of AI to the introduction of electricity, requiring redesign, incorporation, investment, and learning.
• Helmer suggests that AI will primarily benefit existing businesses through process improvements, similar to business process re-engineering in the 1990s.
• He sees AI as having more tangible use cases compared to cryptocurrencies.
• Helmer is constantly searching for an eighth power, believing that if it exists, it could present a significant investment opportunity.

Why moving fast is not a power (00:45:43)

• Moving fast is not always a power.
• Operational excellence is not a strategy, but it is essential for attaining competitive position.
• In the takeoff phase of a business, operational excellence is everything.
• In a stability phase of business, operational excellence is a must, but it is not a power.
• Process power can be a power, but it is rare.
• Process power is material and inimitable.
• If you haven't written down or can't describe your process, it might be a sign that process power is a power of yours.

Three things that create value in a company (00:50:24)

• The only three things that create value in a company are power, market size, and operational excellence.
• All other factors that contribute to a company's value fall into these three categories.
• Power is the ability to influence others to do what you want.
• It can be achieved through various means, such as control over resources, knowledge, or relationships.
• Power is essential for creating value because it allows a company to:
  • Set prices
  • Control costs
  • Influence customer behavior
  • Attract and retain talent
• Market size refers to the total number of potential customers for a company's products or services.
• A larger market size means more potential revenue for the company.
• Companies can increase their market size by:
  • Expanding into new geographic markets
  • Developing new products or services
  • Targeting new customer segments
• Operational excellence refers to the efficiency and effectiveness with which a company operates.
• It involves optimizing processes, reducing costs, and improving quality.
• Operational excellence is essential for creating value because it allows a company to:
  • Produce goods or services at a lower cost
  • Deliver products or services faster
  • Improve customer satisfaction

The debt trajectory of the U.S. (00:51:16)

• The U.S. is on a trajectory of extremely high indebtedness.
• There have been financial crises about once every 10 years in the last 30 years.
• The U.S. government's ability to deficit spend and take on debt has acted as a buffer during crises.
• The current debt trajectory is unsustainable and will eventually lead to a loss of confidence in the U.S. creditworthiness.
• This will make it difficult for companies to raise capital and will negatively impact entrepreneurship.
• The problem is rooted in the delicate balance between capitalism and democracy.
• Entitlements are the main driver of the debt problem.
• There are two opposing views on the debt problem:
  • Capitalism is rapacious and results in inequality that the government must address.
  • Government intervention is leading to creeping socialism and undermining economic freedom.
• These opposing views lead to a deadlock where taxes are not raised, spending is not cut, and deficits continue to grow.

Optimism for the future (00:56:35)

• The vitality of an economy depends on entrepreneurs and creative action.
• The US has huge advantages in entrepreneurship and creative action.
• Silicon Valley is a place where entrepreneurship and creative action are vital and active.
• Action is the first principle of business.
• The book "7 Powers" is oriented towards giving guideposts for entrepreneurs on their journey.
• Encouragement to take action and not just theorize about business strategy.
• Life is full of surprises and entrepreneurs may end up in unexpected places.

Lightning round (00:59:25)

• Hamilton Helmer recommends "The Road to Reality" by Roger Penrose and "The Gene" by Siddhartha Mukherjee as must-read books.
• His favorite recent movie is "American Fiction" for its thought-provoking and complex storytelling.
• He recently discovered a 150-year-old Persian rug that inspires and uplifts him daily, showcasing his appreciation for art.
• Helmer believes buying a home offers the best value in art, as it can inspire and enhance one's life.
• His life mottos, "don't just do something, stand there" and "everything is always about something else," reflect his contemplative nature.
• Helmer admires historical leaders like Winston Churchill and Teddy Roosevelt, as well as artists like Michelangelo, for their exceptional qualities and achievements.
• He encourages readers to explore his book, "7 Powers," which aims to empower company founders and entrepreneurs.
• Helmer appreciates his audience's support and invites them to subscribe, rate, and review his podcast to help others discover it.