7 Powers

I’ve been following the board for the last 6 months or so. You folks are great, and I have been impressed with the insights and philosophies shared here. I have stretched my horizons to include a few companies that are favorites, and pared back my number of holdings to some degree to better focus on some higher conviction companies. I am not nearly so focused as some here- currently I have positions in 47 companies. I intend to remove more over time. For now, I wanted to try to contribute to the board by sharing a strategic lens I learned about from the book “7 Powers,” by Hamilton Helmer. Helmer argues that there are only 7 business strategies which actually generate long term advantages.

The book lays these out in a fundamental graph showing the benefit to the company with the advantage (Power) obtained through each of these strategies, and the barriers they are protected by with each of them.

The powers are:

Scale economies- The creation of the ability to spread costs over a larger base of business, making competition uneconomical. (E.g. Netflix, Intel)

Network Effects- The value of your product to customers is enhanced by the use of the product by others (e.g. Facebook, LinkedIn, Visa)

Counter positioning- Introducing a new product or model which your competition would be harmed by adopting (e.g. Netflix vs. Blockbuster- Netflix used mail model to remove late fees, which was 50% of Blockbuster’s revenue; Blockbuster could not copy without killing the cash cow of their business, so they succumbed to inaction and went out of business.)

Branding. Creation of a positive association that makes customers willing to pay more for your product than others, apart from the objective traits of the product. (Quality, reputation, etc.) (e.g. Tesla, Apple, Tiffany)

Switching costs. Building a system/tool which the customer would be averse to replacing due to the high cost and risk of making the change (e.g. SAP, Oracle).

Cornered Resources. Acquiring unique access to a resource or technology which cannot be easily duplicated or circumvented (e.g. patents, copyrights, etc.- Disney, Pixar)

Process Power- The ability to improve product attributes and/or lower costs as a result of process improvements embedded in the organization in a way that competition cannot quickly duplicate (e.g. Toyota with the Toyota Production system, responsible for net margins ~2x most car companies).

It also discusses the routes by which these powers can be attained and the portion of the development of a market where each can be established before the door closes on that power type.

Certain powers can only be created when the market is being formed, and beyond a certain point can no longer be realistically established. Each power creates a benefit to the company that possesses it. But, what makes a power useful is that it also presents a barrier/moat that makes it difficult or impossible for the power to be duplicated by competitors. This is what generates long term, differential margins.

Here is a summary for each power type:

Scale economies- these are established after an innovation by a company utilizing a business model to drive scale economies while selling a product that is attractive enough to attract a disproportionally high number of customers to achieve a high share. When you have established this power you can price your product at a level that is unattractive for your competition and remain profitable due to your cost advantage. The barrier is that in order to achieve parity, competitors have to invest an undesireable or unjustifiable amount of capital to match your scale advantage, or sell at a loss.

Network economies- similar to scale economies, but the desire is to achieve high counts of users/installations rather than sales of discrete units, because the value is in the scale of the customer network, not the scale of the production operation.

Cornered resource- These are established by obtaining exclusive access to a valuable resource, like a patent, trade secret, or creative team, at an attractive price. This resource cannot be duplicated by competitors and the company that has it is able to produce desirable product which cannot be easily duplicated or superseded. The benefit is superior product at an attractive/reasonable cost. The barrier is that IP protection, the trade secret, or unique team is not accessible or usable by others.

Branding- Branding is developed over a long period of time through consistency in making choices that create favorable associations in the customer’s mind beyond the objective aspects of the product. The advantage is that customers are willing to pay more due to those associations (typically quality, luxury, ease, etc.) than competitors, yielding pricing power disproportionate to the actual value or quality of the product. The barrier is that branding takes a considerable time period and consistent execution of a vision to achieve.

Counter Positioning is developed through the introduction of a new, superior business model that incumbents in the space cannot duplicate without harming their own existing business models (inflicting collateral damage). The advantage is that competitors refrain from acting in their own long term strategic interest in facing these threats because they don’t want to give up their current cash cows. The barrier is that unwillingness to adapt to the counterpositioned company. To preserve the barrier, the power wielder must refrain from attracting too much attention from the incumbent, relying on their cognitive bias against action remaining in effect to preserve the barrier.

Switching costs are attained through having a customer base- these are similar to the scale economy and network effect powers above. However, the advantage achieved through the switching cost power is available even if the market share is not high enough to dominate competitors. This is because it is largely power over the customer instead of power over competitors. The advantage is that customers will be incentivized to remain engaged in their current relationship with the company than risk the disruption and cost of a transition, leading to pricing power and the ability to grow sales within existing customers through progressive price increases. The barrier is that once you have a committed customer, the competition has to show a very compelling reason to change (new capability, drastic cost savings, significant risk reduction, etc.)

Process power- To achieve process power, the company must develop a new, difficult, and complex process or culture that enables the creation of superior value or lower cost when applied over a long period of time, and which is not imitatable within a reasonable period. For example, the Toyota Production System takes decades for new entrants to establish, drive into suppliers, etc. The advantage is the benefits of that process uniquely accrue to the company. The barrier is that the process cannot be easily duplicated.

Overlaying these on an S curve, in the origination/slow initial ramp phase, it is possible to establish the cornered resource and counter positioning powers, and these can help to drive acceleration and initial growth upward. In the takeoff phase, which runs from the initial acceleration in growth until around 35-40% annual growth rates are hit on the deceleration side of the curve, Network Economies, Scale Economies, and Switching Cost powers can be established. When growth is below these levels, the Stability portion of the curve is reached and Branding and Process Power can be established.

Applying this strategy lens, Helmer selects stocks for personal investing, in addition to his teaching work at Stanford and work as a researcher and consultant. He reports he achieved an annual CAGR of 41.5% over 22 years.

Here are my top 5 holdings and my understanding of their strategic power:

1.) TTD- 18% allocation

TTD is in the Takeoff Phase- growth ~50+ % overall, higher in some categories.

Sources of Power:

A.) Counterpositioning: Business model is inherently more friendly to ad agencies and customers as they are not incentivized to steer campaigns to any particular channel/site.
B.) Cornered resource: Their Next Wave AI platform may count as a cornered resource, but ultimately may be duplicatable.
C.) Network effects: More customer spend drives more sites to make inventory available through TTD’s platform, and more inventory availability allows better tailoring and niche targeting of specific users for this customers- a virtuous circle.

Potential sources of future power:
D.) Scale economies- I don’t think this is likely in light of Google and Facebook’s overall size and employee count advantages. Maybe someday, and maybe with specific niches. But, they should be able to roll up any smaller competitors. Their cookie footprint also may be considered a source of scale economies if it is ultimately able to improve their ability to match targets across platforms (This is Saul’s iPhone. This is Saul’s Hulu account. This is Saul’s Audible stream, etc.). They may also be able to achieve economies of scale in relation to overall sales relative to the cost to develop and maintain the AI and other software at a high level, but again, relative to major players in AI already, this seems unlikely to be a persistent source of pricing advantage such as what Intel has enjoyed in processors since the 80’s.
E.) Switching Costs- These don’t appear to be applicable as the system is a web hosted interface, and could be easily displaced by a competing web hosted interface if one were created that produced better results.

In my view, TTD is in the strongest strategic position, with the most potential Power of all my holdings. That, combined with their high gross margin and TAM are why they are by far my largest holding.

2.) Shopify- 9% allocation
Shopify is in the Takeoff phase.

Sources of Power:
A.) Network Effects- The developer network building custom apps for Shopify adds a lot of diversity and low cost (to Shopify) methods to improve the functionality of customer sites. These people are there because of the large number of Shopify customers, and their presence makes the ecosystem more attractive to those customers. It also raises the bar on what competitors have to offer in order to be comparable. The same logic applies to the end channel retailers like Facebook and Amazon that Shopify customers access directly.
B.) Switching Costs- Migrating an e-commerce site from one platform to another is laborious, and most customers who are big enough to matter will put in a huge investment of time to do so.
C.) Economies of Scale- The development expense for a new tool or feature can be amortized over Shopify’s incredibly large customer base. Further, with that large customer base, niche demands will aggregate more readily than for competitors, making it economical for Shop to develop features that will benefit small percentages of customers simply because they have so many of them, while competitors will find those features inconsequential and have a more limited offering.

Potential Sources of future power:
a.) Cornered resource- Future patents?? It seems in software workarounds are pretty common and easy to do.

3.) Alteryx- 5% allocation

Alteryx is in the Takeoff Phase
Sources of Power:
A.) Switching costs- the use of Alteryx involves creating data links to the systems that host the information analyzed on the platform. Reports and analyses are performed on the data that is connected to the platform, so as a company adopts the system and begins to build business processes, reports, filters, etc. using the system, it becomes costly and complex to undo and replace with a different system.
B.) Economies of Scale- Part 1: AYX is the largest independent analysis platform of its type, and is able to develop and expand its feature set more easily due to its operating leverage.

Potential sources of future power:
C.) Economies of Scale- Part 2 & 3: The dominance AYX is developing in its space is generating large numbers of non-data scientist users who are familiar with the platform and able to function independently with it. These people will expand the reach of the company as ambassadors given their high levels of product satisfaction, helping the company to grow as they move through their future roles. Additionally, the prominence of the system has already encouraged related companies like Tableau to build connections to enable data to be more easily moved between systems; as this becomes more common, the product will get easier (and cheaper and more useful) to implement, akin to the eventual dominance of Windows or Office.

4.) Mercado Libre- 3.6% allocation

MELI is in the Takeoff phase
Sources of Power:
A.) Network effects
See Shopify- the Mercado platform is a version of Amazon, consisting of both a company run e-commerce system and a 3rd party e-commerce platform that similarly benefits from traffic driving merchants to use the site, which drives traffic due to the amount of goods available through the system.
B.) Economies of Scale- This is a small relative advantage. MELI has been able to fend off Amazon in Mexico and hold its own, though it is a much smaller company. It may be assailed by larger competitors willing to invest substantially, but at present is the largest company of its kind in South and Central America.
C.) Switching Costs- The Mercado Paygo (similar to PayPal/Square) merchants payment platform has switching costs similar to, but probably smaller than, Shopify.

Potential future sources of power:
n/a- I cannot see them developing Branding or Process Power. This is a Me Too hybrid that is taking business models from the US and applying them in a difficult area of the world to operate in, where the competition is sparse. If they can build scale and network effects prior to serious competition, they should be able to capitalize on long term growth in the region.

5.) Guardant Health- 3.6% Allocation

Guardant is in the Origination Phase, starting the Takeoff Phase

Sources of Power:
A.) Cornered Resource- the FDA approval (pending) of their Guardant 360 test is a cornered resource. Others (NVTA?) may be able to develop comparable tests, however, in time.

Potential future sources of Power:
B.) Scale economies- Given that there is only one significant vendor of the raw testing equipment used in this space, I don’t see scale economies as being a realistic source of competitive advantage in terms of achieving lower costs for routine tests. However, the data that is generated in this testing is another matter. Having access to large amounts of genetic information can be very valuable in development of other tests through data analysis using superior data sets. Especially for more rare or unique diseases, having an abundance of data seems like it would make it easier for GH to expand their capability and accuracy over time more easily than new entrants. However, with Alphabet’s 23 and Me and other mass market test companies, this may not bear fruit as they may never achieve a dominant scale. This source of Power probably won’t make itself felt for another 2-5 years as their volumes ramp up.

I would say this company has the weakest/most tenuous Power of the top 5. Accordingly, I am keeping an eye on them and am more apt to sell out if it appears another company is gaining power over them of one type or another.

I hope this thought process adds something of value to the community- perhaps as a way of better interpreting the significance of evidence of slowing growth, or of choosing amongst several apparently similar candidates, the one(s) with more Powers at play could be prioritized.


GLAD YOU HAVE MELI…and mentioned it…up lately. I OWN, BUT NOT ENOUGH.
At least I did not sell MELI, as I did ULTA, after buying at $17

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Excellent post. After reading it I jumped on Amazon and bought the book, excited to read it.

We have been discussing SQ lately, here are my thoughts on SQ and the 7 powers (I haven’t read the book so I might get some of these wrong)

Switching costs- When a company starts using SQ, trains employees, has it integrated into a bank account, it becomes a pain to switch. Especially if the company uses the add on products of payroll, loans, etc. Each new product increases the cost of switching.

Brand - Square has built a brand around innovation and helping small businesses.

Counter Positioning- Square is offering services that are counter to big banks. Specifically the Cash APP and Square loans.

Economies of Scale - As Square grows the cost of each new product is spread over all the customers.

Its interesting to think about the 7 powers and how they may differ between cohorts. I think SQ is strong in what I mentioned above with small business, but I’m less sure the same powers will translate to larger business.

To be determined.

How do you think the strength of the 7 powers can be measured? Maybe net expansion rate?




When you read the book, Helmer does a lot of summaries with mathematical explanations of his content. One of the items I recall is that Power results in either differentialy high margins, or larger market share. I would expect these to be the best methods to measure Power quantitatively.

With regard to Square I concur regarding the switching cost power, especially for businesses that adopt lots of the software products. Square is not in the phase of the business where branding can be established, but they do make design decisions similar to Apple, meaning they will probably have Brand at some point, but not yet. Their product is attractive, but it is valued based on its function rather than reputation at this point. I am not sure about counter positioning- the essence of CP is that competitors have to cut their own share or profitability to challenge the incumbent. I don’t know that this is the case for square- maybe you can speak to what the banks would need to do to compete with them and how they are disincented to do it.



Square is not in the phase of the business where branding can be established,

Dunno, I walked into a coffee shop on the Hood Canal (read: middle of nowhere) to get a 12oz, signed my CC receipt with my fingernail and asked the barista “is that a Square?” She said “yep”.
I asked my daughter in San Francisco to see who was using Square at the outdoor Art Festival/Market she was on the way to. She said “I already know, they all use Square”

Even so, there is something squirrelly about SQ valuation. I’ve never owned it where it turned green. It is not in my portfolio anymore.


I get what you mean- they are well known and very popular. I own a bit myself. But in the context of strategic power, that’s not what is meant by branding. Branding here means customers are willing to pay more for an objectively equivalent product. Think of Coke versus Shasta.

For Square, to show brand power, merchants would be paying Square more than, say, Stripe or Shopify and be happy to do so, not because the product better, but because of the brand. Using it because it is better is not evidence of brand.


Thank you for the excellent post!

For Guardant Health, I don’t think their cornered resource will last. Other players, such as Foundation Medicine, will likely get their liquid biopsy service approved in 1-2 years. But the thing that worries me most is Illumina’s Trusight Oncology 500 reagent. If Illumina manage to have this reagent approved by FDA, the playing field will be leveled for smaller laboratories and hospitals to develop their in-house NGS assays.

Regarding scale economies, I don’t think the data generated from large numbers of tumor panel sequencing will likely generate new proprietary insights that others don’t know. These mutations are already well known.



Thanks for posting this. The seven powers is something that I have never heard of and is definitely food for thought.

Could you help me to understand something? You mention in your holdings that you consider Shopify to be in the takeoff phase. Yet, Shopify’s revenue growth rate is decelerating. Why do you consider it to be in the takeoff phase rather than the deceleration phase?


Yes, that’s a good question. I know many people are concerned about Shop no longer growing as fast as it did when it was a smaller company.

In the book, Helmer suggests that Takeoff lasts until growth slows to 40% YoY or less. Because they are still above that level, I considered them to be still in Takeoff. (In his scheme, there are only three phases to the S curve- Origination, Takeoff, and Stability).

One interesting point I noted is that most of Intel’s stock market value emerged after Takeoff, during the Stability phase. For Intel, the transition to Stability began when PC shipments dropped below 40% in 1984. After 1984, PC shipments never grew again by more than 30%, and in many years less than 10%.

The idea of Power is that is speaks to the long term profitability potential of the company that develops it. This is borne out in the Intel example.

In 1979, during Takeoff, Intel’s stock was at a split adjusted $0.23. At that point, PC sales grew by around 70% per year. During Takeoff the stock price surged as high as $0.93. At the end of the Takeoff phase, in early 1985, they were at about $0.53. Ten years later, in 1995, they were at about $4.30. They quintupled again by 1998, reaching over $20. This was because they began to reap the major benefits of the Powers they established in Takeoff during Stability- their economies of scale gave them a dominant presence, they were able to benefit from Network Economies as the computer world standardized on Microsoft productivity software and Intel processors.

One way to use this framework is to preferentially select and buy the fast growers who also have Power, as they are more likely to have long run returns than those who grow fast without Power, and will be subject to commoditization by competitors. That said, it is still valid to jump out before growth slows, as has worked for many on this board to date.


That said, it is still valid to jump out before growth slows, as has worked for many on this board to date.


I’ve thought about this issue quite a bit and over the years I’ve decided that I haven’t found the secret sauce to identifying companies that are able to successfully make the transition from the Takeoff phase to the Stability Phase.

Jumping out when growth slows is relatively easy and not prone to many squishy factors like identifying if a company has Power or is going to successfully transition from growth to stability.

Ultimately takeoff vs stability, in my opinion, is evaluating a company, its leadership, and its product in completely different ways. The successful transition is easy to see in retrospect, but I’m not sure it is easy to identify prospectively.



Helmer runs Strategy Capital hedge fund which seems to apply his 7 powers approach. http://strategycapital.com/

The fund’s most recent 13F filings lists a number of stocks frequently discussed on this board.