In the dynamic world of insurance, executives constantly seek ways to steer their companies toward sustainable success. In this third installment (Part 1 and Part 2) of our series on strategy for insurance executives, we will probe into the concept of Power—a critical economic position that enables a business to generate above-market profits for an indefinite period. This article will introduce Hamilton Helmer’s “The 7 Powers” and provide a brief description of each, accompanied by relevant business examples.

Introduction

Contrary to popular belief, businesses are not primarily in business to make money!!

Instead, they exist to create value.

The challenge lies in capturing as much of that value as possible.

Unfortunately, many companies fail in this endeavor and end up as undifferentiated commodities. However, powerful businesses stand apart by effectively differentiating themselves and capturing value through one or more of the 7 Powers outlined in Hamilton Helmer’s seminal book. (I first came across 7 Powers from The Acquired Podcast. I have followed the podcast for years and think the way Ben Gilbert and David Rosenthal analyze companies using the 7 Powers model is perhaps the best way to evaluate competitive advantage in business).

The Concept of Power

Power, in an economic context, refers to a company’s ability to generate above-market profits consistently over time. This is achieved through strategic positioning and leveraging unique advantages that competitors find difficult to replicate. Helmer identifies seven distinct sources of power (I have moved Branding to the last position compares to Mr. Helmers list):

1. Scale Economies

Scale economies refer to cost advantages that businesses achieve due to their size. When a company produces goods or services at a larger scale, it can spread its fixed costs over more units, reducing the cost per unit. This allows the business to offer lower prices or enjoy higher margins.

Example: Walmart leverages scale economies by purchasing goods in massive quantities, enabling the retail giant to negotiate lower prices from suppliers and pass those savings on to customers.

2. Network Economies

Network economies occur when the value of a product or service increases as more people use it. This creates a positive feedback loop where the network’s growth attracts more users, further enhancing its value.

Example: Social media platforms like Facebook benefit from network economies. As more users join the platform, the value of being part of the network increases for each user, attracting even more users.

3. Counter-Positioning

Counter-positioning involves adopting a new, superior business model that incumbents cannot easily replicate due to their existing commitments and investments in their current model. This allows the challenger to capture market share without immediate retaliation.

Example: Netflix counter-positioned against traditional cable TV providers by offering a subscription-based streaming service, which was more convenient and cost-effective for consumers.

4. Switching Costs

Switching costs are the costs that customers incur when changing from one product or service to another. High switching costs create a barrier to entry for competitors and help retain customers.

Example: Enterprise software companies like SAP benefit from high switching costs because once a business integrates their software into its operations, switching to a competitor would involve significant time, effort, and expense.

5. Process Power

Process power stems from unique processes or ways of doing things that competitors need help to copy. These processes often lead to superior efficiency or quality.

Example: Toyota’s Just-In-Time (JIT) manufacturing process revolutionized production efficiency and quality control in the automotive industry, giving it a competitive edge.

6. Cornered Resource

A cornered resource is a unique asset or capability that is difficult for competitors to obtain or replicate. This could be anything from intellectual property to exclusive access to raw materials.

Example: De Beers historically controlled a significant portion of the world’s diamond supply, giving it substantial power over the diamond market.

7. Branding

A strong brand can create a perception of quality and reliability that differentiates a company from its competitors. This perception allows the company to charge premium prices and retain customer loyalty.

Example: Apple’s brand is synonymous with innovation and quality, allowing it to command higher prices for its products compared to competitors.

Conclusion

Understanding and leveraging these seven sources of power can transform an insurance company from an undifferentiated commodity into a powerful, value-capturing entity. In future articles, we will dig deeper into each of these powers, providing detailed strategies and examples relevant to the insurance industry.

Stay tuned as we explore how you can harness these powers to build a robust and profitable insurance business. Your journey towards creating lasting value and achieving sustainable success starts here.