The Delta Model: Putting Customers Before Products

Innovation at work The Delta Model: Putting customers before products Arnoldo C. Hax Alfred P. Sloan Professor of Management For many years the ultimate goal of strategy has been to achieve a competi- tive advantage. Organizations have operated more or less as if they are at war with one another, vying only to offer the superior product. But with the interconnection made possible by the Internet and other new technologies, it is clear that this approach needs to be adjusted. It is a way of thinking that often leads to the commoditization of the product offering, imitation, and, ironically, in the end, reduced quality. | 20 MIT Sloan

System Lock-In • System Economics • Market Dominance • Achieving Complementor Share Figure 1. The triangle: three distinct Enabled through strategic effective use of technology positions Total Customer Best Product Solutions • Product Economics • Customer Economics • Rivalry • Cooperation • Achieving Product • Achieving Customer Share Share Technology now is allowing us to treat like Pan Am were going bankrupt and uct economics, but also the customer eco- our customers in a singularly individual- others were losing huge amounts of nomics, since Fidelity is trying to help ized way. If we choose to do so, we can money, Southwest thrived by doing the customer in enhancing his or her seek a greater proximity to the customer everything right internally. They used a financial performance in as comprehen- and deliver a value proposition that is single type of plane, cut out seat assign- sive a way as possible. driven to satisfy the customer’s specific ments and connections, and avoided needs. This means that the customer is operating in congested airports. All of At the top of the Triangle stands the placed at the very center of strategy and this enabled them to offer a great product most demanding strategic option, which the primary objective is what we refer to at a low price, a product that was impos- we call System Lock-In. Here we are as “customer bonding”: establishing a sible for other airlines to mimic because addressing the full network as the rele- constructive and enduring relationship they had a completely different philoso- vant scope, the gaining of complementor based on mutual trust, collaboration, and phy than Southwest. share as the ultimate objective, and the joint benefits. system economics as the driving force. The left-hand side of the Triangle is the Those who are successful in reaching this In The Delta Model, Dean Wilde, SM crucial position we called Total Customer position gain a de facto dominance in the ’80, and I developed a management Solutions, which represents a 180-degree market, which not only assures them a framework system with just such relation- departure from the Best Product position- customer “Lock-In” but also a competitor ships in mind. Constructed around the ing. Rather than selling standardized and lock-out. The complementors play a key three distinct strategic positions of “The isolated products to depersonalized cus- role because they are the basis for the Triangle,” or delta, the model creates a tomers, we are providing solutions con- consolidation of this power. Bill Gates is starting point for the development of a sisting of a portfolio of customized prod- the richest man in the world not neces- strong organizational vision. At the right- ucts and services that represent a unique sarily because he has developed the best hand side is the so-called Best Product value proposition to individualized cus- product or excels at customer attention, positioning. This is because the primary tomers. This way, the relevant overall but because he has an army of people way to attract, satisfy, and retain the cus- measure of performance becomes the working for him who are not on his pay- tomer is through the inherent characteris- total customer wallet share. It is not our roll: all of the application software devel- tics of the product itself. The position is supply chain that is relevant; it is the opers who are writing for the Windows rather inward and narrow, based upon combined chain that includes the organi- operating systems. Once you reach the prevailing product economics. Consider zation, the customer, and our key suppli- Lock-In it is hard to have it taken away Southwest Airlines. In the rocky com- ers. As for companies like Fidelity, what from you because of the so-called net- mercial airline industry, where companies guides them is not exclusively their prod- work effects, which create the proverbial | MIT Sloan 21

Innovation at work Some reflections from Arnoldo C. Hax all that the customer needed was commodity lubricants at the lowest Commodities exist only in the minds of the inept. Even products possible price. A fundamental change took place when Castrol real- that cannot be differentiated in terms of their internal properties, ized that it had a wealth of plant maintenance knowledge that could which could therefore, by nature, be defined as commodities, need be constructively passed on to customers willing to engage in a com- to be considered carefully. Take copper, for example, a product that pletely different relationship. Instead of selling commodity lubricants, everybody would consider the ultimate commodity. However, the Castrol was able to change its value proposition toward selling cus- copper business is far from resembling a commodity: Carrier, the tomized solutions based on customized products and services that world’s leader in air conditioner manufacturing, uses copper in a enhance the productivity and hence the return on investment of the completely different way than General Motors uses it. If you do not customer plants. reflect those differences in your product offering, you are commodi- tizing and short changing your potentials. The customer does not have power over you. My belief is that the relationship with the customer should be based on mutual trust, fair- Select your customer; do not let the customer select you. Many ness, and win-win opportunities. This is the most intelligent and the companies let the customer come to them without any careful tar- only reasonable way to perform business. Because of the ample geting or screening. It is not surprising, then, that they often end up access to information that particularly the Internet has provided to with customers left over by their competitors, customers who might final consumers, there is now the sentiment that the customer can not necessarily be on the preferred list. A common pitfall is to think exercise power over you to your own detriment. This is a dangerous that the bigger the customer, the better it is for you. This is often trap to fall into because it ignores the mutual benefits that can be not the case. For instance, Walmart, the greatest retailer in the established through a closer relationship. Take the case of National world, is so self-sufficient that all it expects from you is to provide Starch, a world leader in the adhesive business. Together with Boeing, the lowest price with the fastest delivery. This might not be the it was able to revolutionize the ways in which wings adhere to the most exciting value proposition for you. A case in point is the strate- body of the aircraft. Instead of welding or riveting them, wings are gy that we developed for Unilever de México. Without neglecting now stuck to the body with adhesive products. This joint innovation Walmart as an important customer, we decided to target local produced enormous benefits for National Starch and Boeing. Neither Mexican retail chains and fragmented individual retailers as higher one would have come up with this solution independent of the other. priority customers since we could provide them with transfer of knowledge and support that they would badly need and create Technology is too important to be left to the technical staff. Often increasing revenue opportunities for us. companies limit the use of their technological know-how to their products and processes. But this technical knowledge should be a key The customer is not always right. The proper interaction with cus- component of the customer value proposition, and should be used tomers goes beyond just listening to their needs, it is developing throughout the business to create totally unique situations that are jointly a mutually acceptable proposition where you uncover how exceedingly difficult to replicate. Amazon.com is great at this. It uses your capabilities, complemented with external parties, can generate technology to figure out preferences one customer at a time, and products, services, and solutions that were not apparent to start based on that, offers varied products and services specific to each with. One example that comes to mind is the case of Castrol, a pre- customer’s taste. Amazon’s technology is crucial to its business mier lubricant manufacturer in the world. The initial belief was that model. virtuous circle. In Microsoft’s case, cus- as the relevant business stage and the with different firms I have found the tomers want to buy the computer with pursuit of close linkages with comple- Triangle to be an extremely effective tool access to the largest set of applications, mentors are of great relevance for the in opening the minds of executives to dif- and software developers want to write development of an effective strategy, no ferent strategic alternatives and the bene- applications for the computers with the matter what your ultimate goal might be. fits and tradeoffs inherent in each. largest installed base. Moreover, the transformation that a com- pany should undertake to move away I believe that not every organization has from a commoditized product-centric the capacity or the ability to reach a mentality into a Total Customer Solutions System Lock-In positioning. Neverthe- position is, in my opinion, a mandatory less, the need to consider the full network challenge for all executives. In my work | 22 MIT Sloan

The Delta Model: Putting Customers Before Products

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