7 Powers Classification Exercise
In this post I am going to attempt to classify several companies I follow according to Hamilton Helmer's 7 Powers framework. Note I was put off by the book's not particularly academic sounding title for a long time but in the end was glad I read it:
Source: Hamilton Helmer - 7 Powers
The 7 powers, along with examples from the book are: Scale Economies (Netflix), Network Economies (Facebook/LinkedIn), Counter-Positioning (Vanguard v Fidelity), Switching Costs (SAP), Branding (Tiffany's), Cornered Resource (Pixar), Process Power (Toyota Production System).
CDON is the leading Nordic e-commerce platform. They clearly benefit from Scale Economies. CDON's incremental unit cost per additional merchant on its platform are extremely low. As the leader CDON gets to spread its fixed infrastructure costs and IT development costs over the largest merchant base, therefore it can charge lower prices than competitors. Merchants are incentivized to choose CDON as it helps them reach the widest possible audience.
Flyht (FLY CN) is a SaaS software provider that provides a range of aircraft monitoring services to Tier 2 to Tier 4 airlines. As their SaaS solution is being rolled out over an installed hardware base of 2,800 units that takes 150+ hours to install per unit their moat is most definitely based on Switching Costs. Customers that are looking for SaaS data solutions to help improve operations and save costs will need to connect to onboard hardware. Flyht already has this hardware installed for about 10-15% of the commercial aircraft market and should therefore be their goto partner for data-centric solutions.
Maxcyte (MXCT LN) is a provider of flow electroporation technology that is used in clinical trials for cell therapy. Switching Costs are definitely one source of the moat here as scientists who are trained on Maxcyte's system will face a learning curve moving to other systems. Lock-in also occurs while going through FDA approval phases. As the leading provider of flow electroporation, which is itself currently the leading solution for genetic modification of T cells there is also some element of having developed a Cornered Resource. Using simpler verbiage one might also just call it the superior product in its niche.
Schrole (SCL AU) is a vertical jobs platform for international school & international teachers. By working towards becoming the leading jobs platform in their vertical, they are trying to benefit from Network Economies. Once they have become the leading source of teacher candidates for schools, and the leading source of jobs for teachers, it should become difficult for other players to catch up due to network effects.
Smarteye (SEYE SS) is the leading provider of Driver Monitoring Systems. While they have one competitor in Seeing Machines Smarteye has about 2x their market share last I checked. Once again, Switching Costs are a large source of SmartEye's moat. Once SmartEye achieves a design win it is locked into a given automotive platform for up to 14 years.
Intellicheck (IDN US) has developed the only proven technology solution that instantly and accurately authenticates a drivers’ license. Intellicheck is probably the best example of a Cornered Resource, where IDN has a good historical relationship with the DMV to thank for being the only player that has a database of historical barcode formats for drivers' licences. Thanks to this, its authentication solution has a 99%+ accuracy rate.
Intelligent Systems (INS US) is a card processor whose primary client is Goldman Sachs (GS). Interestingly, there are signs of Switching Costs and Process Power at INS. Switching Costs is a reference to the much-used comparison that switching processors is like open heart surgery. In order to understand their Process Power we have to go back to why INS won the GS card business. Goldman's first card was the Apple Card, which differentiated itself on relatively low fees. As low fees necessitate low cost, GS had to seek out a low-cost (but flexible and adaptable) specialist in card processing, INS won out against much larger players in the space, which may be evidence of its process advantage.
There are many frameworks and tools to analyze companies. I spend most of my time looking at smaller companies where powers or competitive advantage is not fully visible yet. Still, looking at these companies through the lens of the powers, I was struck in particular by how far ahead of their competition Maxcyte and Intellicheck are. Using this particular framework to emphasize the incipient competitive advantages or powers that support companies' growth trajectories can help develop conviction. As long as a company continues to increase its relative power, in a growing market it should (continue to) succeed over the long-term.