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.

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 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

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Innovation at work

Some reflections from Arnoldo C. Hax

Commodities exist only in the minds of the inept. Even products all that the customer needed was commodity lubricants at the lowest
that cannot be differentiated in terms of their internal properties, possible price. A fundamental change took place when Castrol real-
which could therefore, by nature, be defined as commodities, need ized that it had a wealth of plant maintenance knowledge that could
to be considered carefully. Take copper, for example, a product that be constructively passed on to customers willing to engage in a com-
everybody would consider the ultimate commodity. However, the pletely different relationship. Instead of selling commodity lubricants,
copper business is far from resembling a commodity: Carrier, the Castrol was able to change its value proposition toward selling cus-
world’s leader in air conditioner manufacturing, uses copper in a tomized solutions based on customized products and services that
completely different way than General Motors uses it. If you do not enhance the productivity and hence the return on investment of the
reflect those differences in your product offering, you are commodi- customer plants.
tizing and short changing your potentials.
The customer does not have power over you. My belief is that the
Select your customer; do not let the customer select you. Many relationship with the customer should be based on mutual trust, fair-
companies let the customer come to them without any careful tar- ness, and win-win opportunities. This is the most intelligent and the
geting or screening. It is not surprising, then, that they often end up only reasonable way to perform business. Because of the ample
with customers left over by their competitors, customers who might access to information that particularly the Internet has provided to
not necessarily be on the preferred list. A common pitfall is to think final consumers, there is now the sentiment that the customer can
that the bigger the customer, the better it is for you. This is often exercise power over you to your own detriment. This is a dangerous
not the case. For instance, Walmart, the greatest retailer in the trap to fall into because it ignores the mutual benefits that can be
world, is so self-sufficient that all it expects from you is to provide established through a closer relationship. Take the case of National
the lowest price with the fastest delivery. This might not be the Starch, a world leader in the adhesive business. Together with Boeing,
most exciting value proposition for you. A case in point is the strate- it was able to revolutionize the ways in which wings adhere to the
gy that we developed for Unilever de México. Without neglecting body of the aircraft. Instead of welding or riveting them, wings are
Walmart as an important customer, we decided to target local now stuck to the body with adhesive products. This joint innovation
Mexican retail chains and fragmented individual retailers as higher produced enormous benefits for National Starch and Boeing. Neither
priority customers since we could provide them with transfer of one would have come up with this solution independent of the other.
knowledge and support that they would badly need and create
increasing revenue opportunities for us. Technology is too important to be left to the technical staff. Often
companies limit the use of their technological know-how to their
The customer is not always right. The proper interaction with cus- products and processes. But this technical knowledge should be a key
tomers goes beyond just listening to their needs, it is developing component of the customer value proposition, and should be used
jointly a mutually acceptable proposition where you uncover how throughout the business to create totally unique situations that are
your capabilities, complemented with external parties, can generate exceedingly difficult to replicate. Amazon.com is great at this. It uses
products, services, and solutions that were not apparent to start technology to figure out preferences one customer at a time, and
with. One example that comes to mind is the case of Castrol, a pre- based on that, offers varied products and services specific to each
mier lubricant manufacturer in the world. The initial belief was that customer’s taste. Amazon’s technology is crucial to its business
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 |