Combining Porter's 5 Forces with Hamilton's 7 Powers provides a good foundation for competitive strategy. Good to KISS (keep it simple stupid) here. In this thread, I'll do a breakdown of Hamilton's 7 Powers for those interested (1/14).
(Note: I have yet to read the book "Competition Demystified", which could be additive to the simple mosaic of Porter and Hamilton). Hamilton's 7 Powers. From 1994 to 2015, Helmer achieved an average annual rate of return of 41.5% per year versus 14.9% per year for the S&P 500.
Helmer believes that a business that develops and retains power over a longer period, becomes a successful and enduring enterprise. Power defined as: the set of conditions creating the potential for persistent differential returns. Persistent because these returns can erode.
I like idea of Power requiring a "Benefit" (to the wielder of Power) and a "Barrier" (to a competitor). A "Benefit" ultimately results in increased cash flow via reduced cost, improved pricing or reduced investment requirements.
"Benefits" are common, and they often bear little positive impact on company value, as they are generally subject to full arbitrage. The true potential for value lies in those rare instances in which you can prevent such arbitrage, and it is the "Barrier" which accomplishes this.
Helmer's 7 Powers: Economies of Scale Network Effects Counter-Positioning Switching Costs Branding Cornered Resource Process Power
Economies of Scale. The quality of declining unit costs with increased business size is referred to as Scale Economies. Benefit: reduced costs. Barrier: prohibitive cost of share gains.
Network Effects. The value of the service to each customer is enhanced as new customers join the “network.” Benefit: company with Network Economies can charge higher prices than its competitors. Often winner takes all. Barrier: Unattractive cost of gaining share.
Counter-Positioning. Newcomer adopts superior biz model which incumbent doesn't mimic due to anticipated damage to their existing business. Benefit: New biz model is superior to incumbent’s, due to lower costs and ability to charge higher prices. Barrier: Collateral damage.
Switching Costs. Benefit. A company that has embedded Switching Costs for its current customers can charge higher prices than competitors for equivalent products or services. Barrier: To offer an equivalent product, competitors must compensate customers for Switching Costs.
Branding. Benefit: A business able to charge a higher price for its offering due to one or both of these two reasons: i) Affective Valence, ii) Peace of Mind. Barrier: A strong brand usually be created over a lengthy period of reinforcing actions (hysteresis).
Cornered Resource. Preferential access at attractive terms to a coveted asset that can independently enhance value. For example, IP. Benefit: “superior deliverables”—driving demand with very attractive price/volume combinations. Barrier: Lack thereof of a cornered resource.
Process Power. Embedded company organization and activity sets which enable lower costs and/or superior product, and which can be matched only by an extended commitment. Benefit: Improved product, reduced cost, opacity of process. Barrier: Difficult to replicate.
And that's all. Qualitative competitive strat must impact numbers and hence valuation. Hamilton's framework comes up in increased price, reduced costs (better margin trajectory), reduced capex.. Stronger and more durable FCF streams. All ties down to fundamental value drivers.
Nice schematic to sum everything up.
