I use the 7 Powers framework from the book “7 Powers: The Foundations of Business Strategy” by Hamilton Helmer. It’s a killer framework for understanding why some businesses create lasting value and compound returns over time.
Each “Power” is a sustainable strategic advantage that lets a company generate outsized returns for a long time. I ask the 7 questions for each stock I am considering to buy.
1. Counter-Positioning
- What it is: A new entrant adopts a superior business model that incumbents can’t copy without damaging their own biz.
- Example: Netflix vs. Blockbuster. Blockbuster couldn’t move to streaming without killing its DVD revenue.
- Why it matters: Creates asymmetric pressure; the old guard is paralyzed.
2. Scale Economies
- What it is: Unit costs drop as volume increases.
- Example: Amazon, Costco. Bigger = cheaper = stronger moat.
- Why it matters: Hard to compete if you can’t match their cost base.
3. Switching Costs
- What it is: Customers stick around because switching is painful.
- Example: Adobe Creative Cloud, Microsoft Office, Salesforce.
- Why it matters: High retention = stable cash flows = compounding machine.
4. Network Effects
- What it is: The product gets better as more people use it.
- Example: Meta, Visa, LinkedIn.
- Why it matters: Leads to dominance, creates a feedback loop of growth.
5. Branding
- What it is: Emotional or symbolic value, not just functional.
- Example: L’Oréal, Hermès, Apple.
- Why it matters: Lets companies charge premium prices and keeps customers loyal even if alternatives exist.
6. Cornered Resource
- What it is: Exclusive access to a critical asset — talent, IP, data, supply.
- Example: ASML (EUV tech), Novo Nordisk (Ozempic IP), Ferrari (brand + heritage + team).
- Why it matters: If no one else can get it, you win.
7. Process Power
- What it is: Unique internal processes that drive efficiency, innovation, or quality — and are hard to copy.
- Example: Toyota (lean manufacturing), Amazon (logistics, culture of innovation).
- Why it matters: Long-lasting edge baked into the org’s DNA.
If I had to chose one, Network effects would be the most important one for me.
Here are my current holdings:
