The Delta Model: Discovering New Sources of Profitability in a Networked Economy Arnoldo C. Hax

1.The Creation of Economic Value 2.The Development of Customer Bonding 3.The Achievement of the “Spirit of Success” THE TENETS OF STRATEGY

Customer Bonding - The Driving Force in Strategy

The Delta Model - Three Distinct Strategic Options System Lock-In System Economics Monopolistic Power Total Customer Solutions Customer Economics Cooperation Best Product Product Economics Rivalry

The Triangle: Options for Strategic Positioning System Lock-In Total Customer Solutions Best Product Proprietary Standard Microsoft, Intel Low Cost Southwest Airlines, Nucor Dominant Exchange eBay, Yellow Pages Horizontal Breadth MCI Worldcom Exclusive Channel Walls Differentiation Sony Wega Redefining the Customer Relationship Saturn Customer Integration EDS

Expanding Your Mindset Strategic FocusRelevant BenchmarkingValue Proposition Supply ChainChannels Innovation The NetworkComplementorsPortfolio of Products and Services Extended by Complementors System - Extended & Complementors Massive Direct Open Architecture - Complementors as Key Extended Enterprise ProductCustomersCompetitors Customized Bundle of Products & Services Standardized Products Extended - Suppliers, the Firm, The Customers InternalTargeted Direct Generic - Mass Joint with Customers Internal Product Development

The Role of IT Total Network Support (e.g. e-system) Customer & Supplier Support (e.g. B2B, B2C) Internal Support (e.g. SAP) The Degree of Customer Bonding The Highest - Competitor Lock-Out Very Small - Depending on Product Characteristics Potentially High - Customer Lock-In

THE CHALLENGES TO TRANSFORM THE ORGANIZATION FROM BEST PRODUCT TO TOTAL CUSTOMER SOLUTIONS

1. Fight the product-centric mindset The Best Product Positioning is not necessarily the most profitable or best way to serve your customer

2. The transformation is not straightforward The alternative to a Best Product positioning are not always easy to define or to accept. (The case of Codelco and the International Copper Assoc.)

3. You have to redefine the game you are playing. It is not that your products are unimportant; it is not that you should ignore the efficiency of product delivery - it is simply that often this is not enough. (The case of CSN.) Transforming the focus of the CSN Organization From Support UnitsTo Strategic Marketing Units Steel (e.g. processor, Automotive rerollers, etc.) Civil construction Export House appliances Mining Packaging Energy Ports

4. The Challenge: “Commodities only exist in the minds of the inept.” Product differentiation, as technology gets more mature, is very hard to achieve. If your product becomes a commodity, you are deprived from superior financial performance, from serving your customer splendidly, and from having fun. (You violate the three tenets.) Do not sell products; sell customer solutions: customization, learning, and services bundled with products as a unique customer offering. (The Case of National Starch). Use all the corporate capabilities supported by key complementors. This is a corporate strategy. (The case of Siemens USA.)

Competitive Driving Forces Product Differentiation Product Technology Specialty Products Specification Products Source: Castrol Premium Products

Competitive Driving Forces Product Differentiation Source: Castrol The technology is mature … less opportunity to differentiate” Before Future

Competitive Driving Forces Service Differentiation Services Responsive Minimum Required to Maintain Businesses Source: Castrol Significantly Differentiated Occasionally Differentiated

Competitive Driving Forces Service Differentiation Source: Castrol “Customers are demanding more than just products” Before Future

5. Decommoditize your customer. Start with segmentation: segment your markets, your customers, your customers’ customers, and customers’ attitudes (productivity, cost, and price consciousness). (The case of Castrol.) Do not treat every customer equally. You could not and should not provide everyone the same degree of attention. Select your customers. Do not let your customers select you.

Market Segmentation Food & Beverage Mining Glass Cement Sugar Pulp & Paper TextileWood Source: Castrol

Market Segmentation Primary Target Segment Productivity Conscious Customers These customers are conscious of total costs and new production yields higher sales Source: Castrol

Market Segmentation Secondary Target Segment Cost Conscious Customers These customers are conscious of total costs but new production does not necessarily yield higher sales or economies of scale Source: Castrol

Market Segmentation The Least Desirable Segment Price Conscious Customers These customers are not necessarily conscious of total costs and generally buy on price/unit Source: Castrol

6. Rethink the customer engagement process. You are not selling products by the ton, or by the gallon, or by the drum. You are selling documented improvements in your customer costs and productivity. Use an executive team as part of the customer management process. “Sales are too important to be left to the sales force.” (The case of Castrol.)

What is Castrol Logic? A customized lubrication solution involving products and services that results in documented: Cost Reductions & Productivity Improvements

Customer Experience How do we deliver cost savings? Source: Castrol Documentation Client Engagement Process Continuous Improvement Initial Information Exchange Management Survey Proposal Implementation

7. Prevent the customer from commoditizing you. Your customers might feel they benefit from standardizing the product offering of their suppliers, and move the bargaining power in their favor. The problem is“You get what you pay for.” (The case of Eastman Chemicals Coating Business.)

The Paint and Coating Industry Paint and Coating Manufacturers Distributors Eastman ChemicalsEnd Users Tier 1- Preferred strategic solution seekers Tier 2- Large price seekers Tier 3- Least attractive price seekers Tier 4- Local manufacturers Tier 5- Specific targeted companies Tier 1- Full alignment with EC Tier2- Large power bargainers Tier 3- Fragmented local agents Tier 4- Specialty distributors Architectural Automotive Industrial maintenance Building products Appliances Metal office furniture Solvents Resins Additives Colorants

8. Channels are essential, they “own” the customers. Ownership or control of the channels is critical to the pursuit of a Total Customer Solutions strategy. Generic channels are only effective for the “average customer. They are unsatisfactory for the very poor and the very rich. (The case of Hindustan Lever and Unilever de México.) If you cannot own the channels, use a “pull” strategy. (The case of Unilever Bestfoods Food Service.)

The Food Service Industry Unilever Bestfoods Food ServiceDistributorsOperatorsFinal Consumer Corporate broad line (e.g. Sysco) Specialized distributors Other national,regional and local distributors Tier chains Tier 2/ chains Tier 4/5- Thousands of independents push pull

9. Use technology wisely: This is a very hard task. Joint development with our customers is an effective mechanism to get customer lock-in. Product technology is not enough, add service technical support. Effective IT infrastructure is imperative: e-Business allows the implementation of the integrated value chain, e-Commerce allows access to massive fragmented customers. Technology-based system lock-in is very hard to achieve, if you can do it is a dream. (The case of Advanced Micro Devices.)

10. Beware of the organizational structure implications You have to change dramatically the way you manage, assign responsibilities, reward people, monitor the business progress, and most important, the way you “sell”. (The case of Motorola Semi- Conductors.)

The Delta Model Framework

Reinterpreting Porter’s five forces through the Delta Model

THE DELTA PROJECT: DISCOVERING NEW SOURCES OF PROFITABILITY IN A NETWORKED ECONOMY Arnoldo C. Hax and Dean Wilde Palgrave,