7 Powers with Hamilton Helmer

Abstract
Summary Notes

Abstract

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal revisit their interview with Hamilton Helmer, the mastermind behind the "Seven Powers" framework, which details the strategies that lead to enduring company success. As a celebration of their LP feed going public, they release a remastered version of their original interview with Helmer, offering insights into the creation and application of his framework. Helmer shares his journey from a PhD in economics at Yale to strategy consulting at Bain & Company, eventually founding Strategy Capital. He discusses the importance of identifying and leveraging a company's source of power—be it counter-positioning, network effects, or switching costs—to maintain a competitive edge and ensure long-term profitability. The episode also features a sponsorship from Pilot, a startup-focused accounting firm, and teases future content involving Helmer's strategic expertise.

Summary Notes

Introduction to "Acquired" Podcast and Hosts

  • Ben Gilbert and David Rosenthal introduce themselves as hosts of the "Acquired" podcast.
  • Ben Gilbert is the co-founder and managing director of Pioneer Square Labs and PSL Ventures.
  • David Rosenthal is an angel investor based in San Francisco.
  • They discuss the recurring theme of the "seven powers" on their podcast.
  • The episode features a remastered interview with Hamilton Helmer, the creator of the "seven powers" framework.

"Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures." "And I'm David Rosenthal. And I'm angel investor, based in San Francisco."

The quote introduces the hosts and the focus of the podcast on technology companies and their success strategies.

Discussion on the Seven Powers Framework

  • Ben Gilbert and David Rosenthal note the importance of the "seven powers" framework in their podcast and decide to release a remastered interview with Hamilton Helmer.
  • They mention the framework's relevance and timelessness, despite the interview being conducted before the pandemic.
  • David Rosenthal shares a story of how the interview was conducted remotely due to concerns about COVID-19.

"David and I had a realization. We talk about seven powers on every single episode, literally every single episode. And in March of 2020, we actually interviewed Hamilton Helmer to talk about the framework, but we estimate that only about 2% ever actually heard that since it was an LP episode at the time."

The quote explains the hosts' decision to release the remastered interview with Hamilton Helmer, highlighting the significance of the "seven powers" framework in their discussions.

Pilot as a Sponsor

  • Pilot is introduced as a sponsor, offering accounting, tax, and bookkeeping services for startups and growth companies.
  • The company is described as the largest startup-focused accounting firm in the US, backed by notable investors.
  • The hosts emphasize the importance of outsourcing non-core activities like accounting to focus on product and customer development.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds. Pilot is the one team for all of your company's accounting, tax and bookkeeping needs."

The quote introduces Pilot as a sponsor, emphasizing their services and role in helping companies focus on their core competencies.

Hamilton Helmer's Background and Introduction to Strategy

  • Hamilton Helmer shares his journey from earning a Ph.D. in economics at Yale to working at Bain & Company.
  • He discusses his early interest in business and his first entrepreneurial venture in the rug business.
  • Helmer describes his transition into strategy consulting and his experience interviewing with Bill Bain.

"So I was very interested. But then when I finished my Ph.D., in those days, it was really odd for somebody with a Ph.D. to go into business. Ph.D. in Econ. I mean, you think Econ, it's about the business world. It's not highly theoretical, mostly math."

The quote reflects on Hamilton Helmer's unconventional path from academia to the business world, highlighting the theoretical nature of economics compared to the practical aspects of business.

Move to Silicon Valley and Engagement with Tech Companies

  • Hamilton Helmer talks about moving to California in 1994 and getting involved with technology companies.
  • He reflects on the economic vitality of the Bay Area and the importance of timing in his move.
  • Helmer mentions his investment activities in major tech companies during the formative years of Silicon Valley.

"In 94, I came out here and I was attracted by the economic vitality, but it's also a family decision. My wife just absolutely adored California from her prior experience."

The quote explains Hamilton Helmer's decision to move to California, emphasizing the region's economic opportunities and personal reasons.

Concept of Power and the Seven Powers Framework

  • Hamilton Helmer defines "power" as the persistence of strong performance in a company.
  • He explains the importance of understanding factors that drive persistent performance to grasp what drives value in a business.
  • Helmer discusses the non-linear path companies take to establish power and the importance of a mental model for strategizing.

"So persistence. And in the future says that if you can understand the issues that drive persistence, you're going to understand what drives value."

The quote highlights the key idea that understanding the factors leading to persistent performance is crucial for evaluating a company's value.

Writing the Seven Powers Book

  • Hamilton Helmer shares his motivation for writing the "Seven Powers" book, aiming to provide a mental model for strategy.
  • He details the 20-year-long process of writing the book, striving for simplicity without sacrificing completeness.
  • Helmer expresses his desire to share his ideas and make them useful to others.

"My ideas are my babies, and the greatest compliment for me is other people using them and finding them useful. So I wanted to get it out there, but I'm not a natural writer, and I really hadn't published before anything."

The quote reveals Hamilton Helmer's passion for sharing his strategic insights and the personal significance he places on others finding value in his work.

Understanding Need vs. Want in Innovation

  • Ben Gilbert discusses the importance of distinguishing between what customers want and what they actually need.
  • He emphasizes that breakthrough innovations do not come from market surveys but from understanding and meeting true needs.
  • Even if an innovation meets a need, it can still fail if it's not executed correctly.

"You don't do breakthrough stuff with market surveys. You have to understand what the need is and then invent. And if you really meet the need, then it's useful."

The quote highlights the critical approach to innovation that does not rely on market surveys but on a deeper understanding of customer needs. If an innovation genuinely meets a critical need, it has the potential to be useful and successful.

The Concept of Power and Its Relation to Moats

  • Hamilton Helmer introduces the concept of power in business as having two necessary and sufficient conditions: a benefit and a barrier.
  • He differentiates between everyday improvements and those that are material enough to impact competitive dynamics.
  • Helmer is a fan of Warren Buffett and the concept of moats, and he views his seven powers as an exhaustive articulation of moats.

"There are two necessary and sufficient conditions for power. There's a benefit... But the thing that's rare is when you do that, and it's material... But also it satisfies the second condition, which is that not just there's a benefit, but there's a barrier."

This quote explains that for a company to have power in the market, it must offer a significant benefit over competitors and also have a barrier that protects it from competitive threats.

Distilling the Seven Powers

  • Helmer details the empirical process of distilling the seven powers from his experience with strategy cases.
  • The seven powers have covered all scenarios he has encountered, suggesting a comprehensive framework.
  • He remains open to the possibility of an eighth power, which could represent a new investment opportunity.

"It's completely empirical... And so far those seven have covered everything that I've seen."

The quote underscores the empirical nature of Helmer's framework for the seven powers, which is grounded in extensive practical experience and observation.

Counter Positioning as a Strategic Power

  • Counter positioning is a favorite power of Helmer's because it is contrarian and particularly relevant for startups.
  • It involves a new business model that incumbents cannot mimic without incurring significant financial damage.
  • Examples include Netflix's challenge to Blockbuster and Dell's direct-to-consumer model challenging Compac.

"Counter positioning occurs if a company comes up with a new business model and challenges often a powerful incumbent with it."

This quote defines counter positioning as a strategy where a new entrant challenges an established player with an innovative business model that the incumbent cannot easily adopt.

Defining Counter Positioning

  • Counter positioning can be a net negative for incumbents due to cannibalization of their current model.
  • Cognitive bias and agency issues can also prevent incumbents from adapting to new business models.
  • Counter positioning is different from disruptive technology as defined by Christensen in "The Innovator's Dilemma."

"One is that it's a net negative... It's very often true, I'd say almost always true, that there's cognitive bias involved."

The quote explains that counter positioning can be detrimental to incumbents due to the lucrative nature of their current models and cognitive biases that blind them to the potential of new models.

Network Effects and Their Intensity

  • Network effects are widely discussed, but Helmer focuses on the intensity of these effects and their impact on profitability.
  • He explains that network effects must be understood in detail, including their nonlinearity and asymmetry.
  • The mapping function from network participation to monetization is crucial to determine the presence of power.

"Just asserting them gets you zero 1% of the way of understanding what's really going on."

This quote emphasizes that merely claiming network effects exist is insufficient; one must deeply understand their complexities to gauge their true impact on business value.

Switching Costs in Technology Companies

  • Switching costs are not limited to traditional industries but are also significant in technology companies.
  • Tools like Slack exhibit switching costs because of the inconvenience and disruption caused by moving to a different platform.
  • The presence of switching costs can contribute to a company's power in the market.

"Slack has network effects, but also switching costs."

The quote illustrates that even modern technology companies can leverage switching costs as a source of power, adding another layer to their competitive advantage.

Switching Costs and Customer Dynamics

  • Switching costs create a win-lose situation with customers, which can be a management challenge.
  • High switching costs in a product can provoke competition to innovate ways to reduce these costs.
  • Imperfections in translation between different systems illustrate the practical challenges of switching costs.
  • Switching costs only generate profit if there is repeated economic interaction with the customer, such as in the case of ERP companies acquiring various tools for integration.
  • Embedded tools within company processes increase switching difficulty, reinforcing the power of switching costs.

"I mean, one is that in general, it creates a win lose situation with your customer." "So if you look at EDA and electronic design automation tools, there are libraries that are associated with those. But if you move from one tool company to another, the translation never works very well." "Right. But then another subtlety is that, remember, you can only monetize that if there's a repeated economic interaction."

These quotes emphasize the strategic implications of switching costs, the challenges they pose in customer relationships, and the necessity of repeat interactions for monetization.

SaaS Business Model and Switching Costs

  • SaaS (Software as a Service) models benefit greatly from switching costs, as they rely on constant sales and subscriptions.
  • The financing and valuation of SaaS companies often assume low churn rates due to high switching costs.
  • Customer acquisition costs can neutralize the benefits of switching costs if they become too high.
  • The value of switching costs can be arbitraged out by acquisition costs, which is why it is a source of power in the takeoff phase but can diminish over time.

"Yeah. So if a SaaS model has really good switching costs, boy, does that help." "I actually think the way that these companies are financed are predicated on switching costs as a primary source of power."

These quotes highlight the synergy between SaaS business models and switching costs, and how they influence the financing and valuation of such companies.

Counter Positioning and Software-Centric Companies

  • Software-centric companies may create a barrier for incumbents due to the need to overhaul their existing models.
  • The distinction between technology-enabled and pure technology products is critical in assessing the competitiveness of incumbents.
  • Counter positioning is a partial source of power because it does not protect against potential competitors who can mimic the same strategy.
  • Combining counter positioning with another source of power is necessary for durability.

"Do you think that in general, companies that are highly software centric in how they approach a business, that for an incumbent that isn't that way, that for them to adopt has to blow up their model so much that it's counterpositioned." "My answer would be yes. Against technology enabled businesses, because they can tech enable just as easy as these new entrants can start."

These quotes discuss the strategic concept of counter positioning and the challenges incumbents face when competing with software-centric startups.

Market Dynamics and Competitive Arbitrage

  • In the takeoff phase of a business, there are often more customers than products, and the market has not yet settled.
  • Companies that are several years ahead in a market with middle phase types of power (network economy, scale economy, switching costs) have a significant competitive advantage.
  • Identifying investment opportunities where a company is almost in a category of one can be very promising if it demonstrates unique characteristics that are difficult to replicate.

"So what happens in the takeoff phase of a business? Think about what's going on. There's more customers than product." "If somebody is several years ahead of you and it's one of the middle phase types of power, which is most common in tech, network economy, scale economy, switching costs, those are the three most common ones. If it's one of those, then your size matters."

These quotes explain the dynamics of the takeoff phase in business and the competitive advantages of being ahead in the market with certain types of power.

Cornered Resources and Leadership in Tech

  • Cornered resources are rare in tech, but they provide a significant power advantage when present.
  • Executive talent and founders are often mistaken for cornered resources, but their value can be arbitraged by the market.
  • Great leadership is crucial for strategy and building a company, but it is not sufficient without sources of power.
  • Intel's experience with memory and CPU businesses illustrates the difference between leadership and market power.

"A your thoughts on cornered resources in general, but in particular, something that just really spun around in my mind reading this is lots of people in tech, especially lots of VCs, think that executive talent and founders are a cornered resource." "They had two businesses. They started as the memory company. They started with the best of the best. I mean, they."

These quotes discuss the concept of cornered resources and the role of leadership in tech, highlighting that while leadership is important, it is not a guarantee of business success without other sources of power.

Nature of Invention and Leadership in Technology

  • Invention often comes with high uncertainty and requires deep insights.
  • Leadership plays a crucial role in pursuing technological advancements, especially when facing skepticism.
  • The story of Intel's leadership, specifically Bob Noyce and the chairman of the board, demonstrates the importance of commitment to innovation despite financial constraints and internal opposition.

ard was against it. Their head of sales was adamant that this would never turn into anything that was. And he was a sharp guy. I don't mean to mean adamant that this would never turn into anything. Andy Grove was dead set against it, I believe is correct. And Bob Noyce went out and kind of talked to people, and this is the nature of invention. High uncertainty bars very large bandwidth, deep insights. And he finally said, no, I really think this eventually is going to go somewhere. And then the chairman of the board, what was his name? I can't remember.

The quote illustrates the challenges and skepticism faced by innovators within their own organizations and the critical role of key figures, like Bob Noyce, in overcoming these challenges through conviction and communication.

Pixar's Power from Cornered Resources

  • The success of Pixar is attributed to the combination of top talents: Steve Jobs, John Lasseter, and Ed Catmull.
  • The brain trust at Pixar was essential but not sufficient alone to guarantee success.
  • The original team who worked on Toy Story had a unique experience that contributed to Pixar's string of successful films.
  • The ability to maintain a cohesive team was a significant factor in Pixar's sustained success.

No, no, I think there's some subtleties to that story. I just have my own view about this, and I talk about this a little bit in the book. You have to come up with great stories for good animated films. The brain trust itself was insufficient to guarantee that, and the marker for that is how many directors had to be replaced that were into their projects. And so then you go back and then ask what was in common with the directors that weren't replaced. And with the exception of Brad Bird, who's a whole story by himself, brilliant guy, the answer is that it was this core group of people that worked together that came up with the original Toy Story movie, and that they were sort of a band of brothers, and together they had an experience of what it meant to create really compelling animated films.

The quote explains that while the brain trust was critical, the unique experience and teamwork of the original Toy Story creators were key to Pixar's continued success.

Bob Iger's Strategic Decisions for Disney

  • Bob Iger is recognized for his strategic decisions as CEO of Disney.
  • His decision to acquire Pixar was driven by the need to revive Disney's core competency in animated films despite the high cost.
  • Iger's strategy was to secure the creative talent and resources that were central to Disney's brand and future success.

Yeah, exactly. And I'm a huge fan of Iger's. I mean, I think as a strategist, and he made three critical Disney decisions all of which I thought were brilliant. And I think his Pixar decision was he realized that at the heart of Disney was animated films, and that even though the price investment banker would say this is really expensive, he realized that actually they had to revive that or the whole Disney franchise was at risk. And so it was worth a much bigger price.

The quote highlights Bob Iger's recognition of the importance of animated films to Disney's brand and his willingness to invest heavily in Pixar to secure this cornerstone of the company's success.

Crusoe: A Clean Compute Cloud Provider

  • Crusoe is a clean compute cloud provider that partners with Nvidia for AI workloads.
  • Their data centers operate on wasted, stranded, or clean energy, offering better performance per dollar than traditional providers.
  • Crusoe's environmental approach and cost-effective solutions are significant differentiators in the cloud computing market.

Crusoe, as listeners know by now, is a clean compute cloud provider specifically built for AI workloads. Nvidia is one of their major partners, and literally Crusoe's data centers are nothing but racks and racks of a because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers.

This quote describes Crusoe's business model and its focus on providing AI-specific cloud services powered by alternative energy sources for improved performance and cost-efficiency.

Identifying Opportunities for Power in Markets

  • Identifying opportunities for power involves understanding rapidly advancing technical frontiers and their potential to change a market.
  • It is important to recognize how technology can become economically viable as it progresses through various applications.
  • The progression of technology from macro applications to devices and then to applications can signal commercial viability and opportunities for power.

So it's kind of what you would imagine. I mean, you're in the thick of it. It's a rapidly advancing technical frontier that's seeming to change the possibilities in a whole space. So I was mentioning to you before I started, genetics is very interesting to us. Of course, we have no insight into therapeutics, but that whole field, you can tell that the incredible cost decline of sequencing and other aspects of it creates the possibility of doing things that were never cost justified before or time justified.

The quote conveys the idea that opportunities for power arise when advancements in technology lead to new possibilities and applications that were previously not cost-effective or feasible.

Extending Power and Geographic Expansion

  • Successful companies must consider how to leverage their established power in new markets or applications.
  • The extension of power depends on whether the company's competitive advantages apply in the new context.
  • Netflix's expansion strategy illustrates the importance of content scalability across different geographies.
  • Companies like Disney and Fox demonstrate how geographic expansion can be aligned with existing power to create new opportunities.

So thinking that through of how to extend power where the power umbrella fits, is something that's really interesting. And it's important economically, of course, because getting power is really hard. And if there any place that you can take advantage of your. And it's sometimes unusual. Think of Disney going into theme parks. Back to Disney again. Here we are.

The quote underscores the strategic importance of understanding how a company's existing power can be extended into new markets or applications, using Disney's foray into theme parks as an example.

Future Work on Business Powers

  • The search for additional powers beyond the established seven is ongoing.
  • Exploring the "act two" of companies with power involves understanding the nuances of power and how it can be expanded or adapted.
  • Geographic expansion is nuanced in terms of power, with different implications for companies like Uber and Netflix.
  • The potential for a company to extend its power is a significant factor in its valuation and future strategy.

Well, first of all, I would love to find another power. So far, I haven't. So every company that we deal with faces this question eventually. Is that okay? If I'm successful, I've established a company with power. What's next? So, act two. And what I'm trying to figure out is, do we have anything that's interesting and valuable to say about that?

This quote indicates the author's interest in exploring the next steps for companies that have established power and how they can continue to grow and leverage that power in their business strategies.

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