I just published a 10400 word members-only summary of 7 Powers on Commonplace, probably my longest post ever. I've not seen very many summaries that do a good job of representing the nuances of Helmer's framework. So here's a thread on the highlights.
Conversation
I think the first thing to understand is the context into which Helmer published the book. In my introduction I wrote:
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These authors+books are who Helmer is really targeting with the framework. If you've read them (like I have), you'd know that they tend to be a) sloppy about the goals of strategy, and b) not as useful to the practitioner.
These are strong words, I know. But Helmer delivers.
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The first clue that this is different is in the opening definitions of the book. Helmer starts with 'the goal of business strategy is to increase enterprise value, and I'm going to measure that as the net present values of future free cash flows.' All fairly orthodox stuff.
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But the reason it's important is because it establishes guardrails for the rest of the framework. 7 Powers is a book about moats, and moats are simply 'things that resist margin compression from competitive arbitrage'. Helmer lays this out with one equation:
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Edit in the screenshot: "if you want to grow NPV over the long term (meaning you need to resist margin compression) — then there are really only 7 things that allow you to do so."
These 7 things are what Helmer names 'Powers'.
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There are 7 Powers:
- Scale Economies
- Network Economies
- Counter-Positioning
- Switching Costs
- Branding
- Cornered Resource
- Process Power.
To his knowledge, these Powers are exhaustive. If there are new ones (which is possible, though unlikely!) they should fit in this:
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Anyone who has spent any amount of time analysing businesses would know these moats exist on a spectrum. Some companies have stronger brands than others; some companies have stronger scale economies than others. How do you evaluate moat strength?
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Real answer might resemble a safe rating: how much time it takes to breach the safe. Or: land mines are not designed to kill an enemy force, but to channel it away from places you don't want it. Any moat is really buying time for a response. Should be part of the hist. record.
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Correct! Helmer uses a neat idea: assume that in a price war, the challenger to the company with the moat is taken down to 0 profits. What is the margin leftover in the company with the moat? That margin should be a good proxy for moat strength.