Hey Hackers!
We're in the middle of an AI gold rush. So you’ve built a product with a powerful AI feature. That’s great. But here's the terrifying question: what’s stopping a competitor from replicating your core functionality tomorrow? For most of my career, I've been obsessed with why some products survive that kind of pressure while others fold.
It's rarely about having a slightly better idea. It's about building a business that is fundamentally hard to attack. This is the domain of business strategy that helps build market power. As the AI wave makes technology more accessible, understanding how to build market power is the only thing that will keep you from being in a race to the bottom.
What is Business Strategy, Anyway?
Forget the dense MBA textbooks for a second. At its core, a business's goal is to create value and capture a slice of that value over the long haul. I've always found it helpful to boil this down to a simple (and admittedly nerdy) formula:
Value for Business = (Market Size x Growth) x (Market Share x Margin)
You can simplify this even further to: Market Scale x Market Power.
Your strategy helps make those numbers as big as possible. It's about "where to play" (the market) and "how to win" (your power within it). For this discussion, I'm fascinated by the "how to win" that includes the art of gaining and holding market power.
Market Power: Your Secret Sauce for Profitability
Market power is what separates a wildly profitable business from a constant struggle for survival. A company’s market power is visible in its profit margins. This is why you hear iconoclasts like Peter Thiel championing monopolies. The closer you are to a monopoly, the more power you have to set prices and secure profits. When I see a company with surprisingly high margins in a seemingly competitive space, I know it's one of two things: a sign of a truly powerful moat or something fishy like collusion.
This defensive advantage is what legends like Warren Buffet and Charlie Munger famously call a "moat."
Deconstructing the Battlefield with Porter's Five Forces
When I first learned about Porter’s Five Forces, it felt a bit academic. But applying it to the crowded field of AI startups really makes it click. Let's analyze a typical AI content writing tool (such as Jasper, Copy.ai) to see how Five Forces helps us diagnose market power:
- Industry Rivalry (High): Many similar tools compete aggressively on price.
- Threat of New Entrants (High): New competitors can launch fast due to readily available AI models and APIs.
- Bargaining Power of Suppliers (High): Foundational model providers (like OpenAI) can raise prices or release features that make these tools obsolete.
- Bargaining Power of Buyers (High): With so many options, customers can easily switch to cheaper or better alternatives at any time.
- Threat of Substitutes (High): Customers can simply use Gemini directly, use AI features in other apps (Notion, Canva), or hire a human writer.
This analysis shows the business is in a fundamentally weak position. This makes it difficult to sustain long-term profitability. Yet it is possible that some AI content writer companies will eventually build a defensible business. That difference is market power in action.
The 7 Powers: Your Blueprint for Building a Moat
So how do you actually build this power? Hamilton Helmer's "7 Powers" is the best framework I've found. Here are the seven ways you can build an unassailable moat with examples from the AI companies that are defining the next era of tech.
1. Scale Economies
This is the classic "get big" advantage. Scale economies let you produce more value at a lower per-unit cost making it incredibly hard for smaller players to compete on price.
- AI Example: OpenAI. The story here isn't just about large datasets. It's about the mind-boggling fixed cost of training a foundational model like GPT-5. Every additional query costs fractions of a penny to serve (increasing for reasoning, but it is not a fixed cost) while a new challenger would have to burn a mountain of cash just to get to the starting line.
2. Network Effects
This is my favorite power because it feels like magic. Every new user you acquire makes the product fundamentally better for all the other users creating a self-reinforcing loop.
- AI Example: Glean. An AI-powered enterprise search tool. Within a company, as more employees use Glean to find information, the system learns the organization's specific jargon, identifies internal subject-matter experts and understands the documents most relevant for certain queries. The tool becomes progressively more valuable to the entire company as each new user contributes to its institutional knowledge.
3. Counter-Positioning
This is a jujitsu move. You create a new business model that incumbents can't copy without destroying their own business also captured as "Innovator's Dilemma."
- AI Example: Midjourney. Legacy stock photo giants like Getty are built on curating and licensing human-made art. For them to fully embrace generative AI would mean telling their army of photographers that their work is now competing with a machine. This is a massive financial, cultural and operational conflict for existing businesses. This leaves the field wide open for Midjourney.
4. Switching Costs
High switching costs create a "pain of migrating" that locks customers in. When leaving your product feels like a massive project, you have a strong moat.
- AI Example: Palantir. The moat here isn't just the technical difficulty of migrating data. It’s the human switching cost. Entire teams of analysts at government agencies and hedge funds have built their careers on this platform. Re-training them and rebuilding years of institutional knowledge and workflows is a non-starter for most clients.
5. Branding
A powerful brand is a shortcut for trust. It’s a promise of quality and consistency that lives in your customer’s mind and is built over years by delivering on that promise.
- AI Example: Anthropic. In a world increasingly nervous about AI's potential, Anthropic has built its entire brand around being "helpful, harmless, and honest." For a large enterprise in finance or healthcare, the brand promise of safety is a critical feature that mitigates risk. That trust is a moat that can be more powerful than a few extra points on a performance benchmark.
6. Cornered Resource
This is about having exclusive access to a scarce asset. This can be patents, a world-class team, or, in the age of AI, data.
- AI Example: Tesla. Tesla’s cornered resource isn't just its massive trove of driving data. It's the kind of data. They have billions of miles of video on the trickiest edge cases such as weird intersections, unpredictable pedestrians, bizarre weather. This is uniquely rich data that is very difficult for a competitor to replicate synthetically or with a test fleet.
7. Process Power
This is an operational moat. It’s a set of unique, embedded processes that allow your company to build a superior product or deliver it at a lower cost.
- AI Example: Databricks. The process power of Databricks lies in how they’ve unified the entire data and AI workflow. They turned a complex, fragmented process involving multiple tools into a streamlined "operating system" for data teams. This operational efficiency makes it incredibly hard to displace.
What About Early-Stage Startups?
When you're just starting, you don't have scale or brand. For early-stage companies, I believe hypergrowth is a moat in itself. Rapid growth acts as a signal to attract the best investors and talent, and it gives you the momentum to start building the other moats before anyone else can catch their breath.
Final Thoughts: Weave Your Powers Together
As you build your product, don't think of these powers in isolation. The strongest businesses weave multiple moats together into a self-reinforcing strategy. Your product decisions, marketing, and operations should all be working in concert to dig your moat deeper and wider every single day.
What do you think? What are the most powerful moats you’re seeing in tech with the rise of AI? I'd love to hear your thoughts in the comments.