Hamilton Helmer – Power + Business

**Patrick O'Shaughnessy** (0:04)
Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_1** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
Our guest today is Hamilton Helmer, the co-founder and chief investment officer of Strategy Capital and the author of one of the best business books in history called 7 Powers, which is the topic of our conversation. He has spent his career as a practicing business strategist, advising companies, investing based on strategy insights and teaching strategy. In the last three decades, he has also utilized his strategy concepts as a public equity investor. In this conversation, we cover all seven business powers from counter positioning to scale economies and how companies earn and keep those powers.
Any investor or business person should understand these concepts and 7 Powers is the best work I've seen that explains them in depth. Please enjoy our conversation.
But I'd love to just begin at a very high level with the concept itself, perhaps the necessary preconditions to power, which you described as benefits and barriers. Maybe we could just take these kind of three concepts, benefits and barriers and how they relate to what power means specifically to you at a high level before digging into the specifics.

**Hamilton Helmer** (1:50)
If you start a business, you put something in your time and investments and all this stuff and you do it maybe for love, but you also get to get something back. And that something back has to hopefully be more than what you put in in the first place. You might question whether it was really worthwhile. And so the notion of power is that when you figure out something about a business, you figure out something that's better than what is currently offered.
And so that might be a better business model or it might be an interesting brand or it might be a new product or something like that.
But then the specter of competitive arbitrage comes in. If you do something better, the question then is, okay, but for that to be durable, what you want is a durable success in business. For that to be durable, there has to be something that prevents others from taking all of that away from you. And so the something better is a benefit and the something that keeps it, others from getting it is a barrier.
And so you need both those conditions. And the example I'll use in my book, I'll do it here, is Intel because it's a great control case. So Intel started out with amazing management. I mean, the best, brilliant triumvirate business. And they started out as what they called themselves the memory company. And they did semiconductor memories and they had incredible manufacturing, technology, leadership, all these things. And so the benefit was these great memory chips better than other people's. But the problem was that other people could emulate it. And so their margins started to go down, didn't look that attractive. So despite all the wonderful things that they had, and they were very, very well run business, it just was not going to be an attractive business.
But then they got into CPUs, my process, and it turned out that there was something that could keep others from quickly emulating that. And there's some early things that were particularly strong in terms of how computers were hardwired to that chip and stuff. But later on, the key thing was that to design one of these things is a very, very expensive proposition. And that's a fixed cost to design one of these chips. And if you have much higher volume, that cost is prorated over that. So that's a scale economy, which is a type of power. And so unless other people have your scale, you're at a lower cost position. And so that's durable. So all the nice things that they have, which are necessary, good management, great manufacturing, good marketing, all that are needed, but would not have secured their position and did not in the memory business, which they eventually had to exit. But they needed that something else in addition to all that operational excellence, which was power, which was something that created value, in this case, lower cost, but could not be easily arbitraged out by competitors.