The Difference Between Competitive Advantages and 7 Powers (65)

This week’s podcast is my third on the well-known 7 Powers framework by Hamilton Helmer. I go through the last 4 of his 7 powers.

You can listen to this podcast here or at iTunes, Google Podcasts and Himalaya.

His fundamental equation of value is:

Value = M0*g*s*m = market scale * power

• M0 is Market at time zero. g is growth. This is about targeting big and growing market opportunities.
• S is long-term persistent market share. How much of it you have
• M is long term persistent margins. (operational margins after cost of capital)
• You can also do potential value = market scale * power.

His break-down of branding is that it evokes positive emotion, leading to increased willingness to pay.

• Affective valence. Built-up associations that elicit good feeling that are distinct from the objective value of the good.
• Uncertainty reduction. Peace of mind because confidence the product will be as expected.
• A brand requires lengthy period of time with reinforcing actions (hysteresis). Legacy brands tend to be powerful. Hard to replicate in short term. Or with copycats.

His break-down of cornered (or scarce) resource is that it must be sufficiently potent to drive high-potential, persistent differential margins (m>>0), with operational excellence spanning the gap between potential and actual. He has five screening tests for cornered resource:

• Idiosyncratic. Such as a brain trust with repeated success over time.
• Non-arbitraged. If a firm gains preferential access to a coveted resource but also pays a price that fully arbitrages out the rents attributable to this resource – then doesn’t matter.
• Transferable. If resources creates value at one company, but cannot if transferred to another, then it is not good. Probably has an essential complement.
• Ongoing.
• Sufficient. It must be complete enough to continue producing differential returns assuming operational excellence.

Related podcasts and articles are:

• 4 Problems with Hamilton Helmer’s 7 Powers (Jeff’s Asia Tech Class – Podcast 62)
• Economies of Scale and Switching Costs According to 7 Powers (Jeff’s Asia Tech Class – Podcast 64)

From the Concept Library, concepts for this article are:

• Competitive Advantage: Share of Consumer Mind
• Competitive Advantage: Surplus Margin Leader in Network Effects
• Competitive Advantage: Proprietary technology
• Competitive Advantage: Process Advantage and Learning Advantages
• Competitive Advantage: Scarce Resource

From the Company Library, companies for this article are:

• None

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I write and speak about digital China and Asia’s latest tech trends.

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