Discovering New Sources of Discovering New Sources of Profitability in aProfitability in a Networked EconomyNetworked Economy

Arnoldo Hax Alfred P. Sloan Professor of Management

TTHE HE DDELTA ELTA MMODEL:ODEL:

1.1.The creation of economic valueThe creation of economic value 2.2.The development of customer The development of customer

bondingbonding 3.3.The achievement of the “Spirit The achievement of the “Spirit

of Success”of Success”

The Tenets of StrategyThe Tenets of Strategy

Three Distinct Strategic OptionsThree Distinct Strategic OptionsSystem LockSystem Lock--InIn• System Economics• Market Dominance• Achieving Complementer Share

Total Customer SolutionsTotal Customer Solutions• Customer Economics• Cooperation• Achieving Customer Share

Best ProductBest Product• Product Economics• Rivalry• Achieving Product Share

The Delta The Delta ModelModel ––

Enabled Through

Effective Use of Technology

System Lock-In

Total Customer Solutions

Best Product

Proprietary StandardProprietary Standard Microsoft, Intel

Low CostLow Cost Southwest Airlines,

Nucor

Dominant ExchangeDominant Exchange eBay, Yellow Pages

Horizontal BreadthHorizontal Breadth Fidelity

Exclusive ChannelExclusive Channel rural Wal-Mart

DifferentiationDifferentiation Sony Wega

Redefining theRedefining the Customer RelationshipCustomer Relationship

Saturn

CustomerCustomer IntegrationIntegration

EDS

The Triangle:The Triangle: Options for Strategic PositioningOptions for Strategic Positioning

Enabled Through

Effective Use of Technology

Transforming the organization Transforming the organization from best product to total from best product to total customer solutionscustomer solutions

The Challenge to The Challenge toDecommoditizationDecommoditization::

zz Change your mindsetChange your mindset zz The transformation is not straight forwardThe transformation is not straight forward

The case of The case of CodelcoCodelco and the International Copper Associationand the International Copper Association

Transforming the OrganizationTransforming the Organization

Total Customer SolutionsTotal Customer Solutions Best ProductBest Product

System LockSystem Lock--InIn

RegulatorsRegulators • Underground cables • Efficient motors

Business PartnersBusiness Partners • Suppliers • Contractors

ComplementorsComplementors • Architects • Construction • Motor producers

Targeting Key EndTargeting Key End--UsersUsers • Alcatel • KME • ABB • Electrolux

• Carrier • General Electric • Siemens

Old Codelco -the lowest cost producer

zz Redefine the game you are playingRedefine the game you are playing Transforming the CSN OrganizationTransforming the CSN Organization

zz DecommoditizeDecommoditize your customeryour customer The case of The case of CastrolCastrol

Transforming the OrganizationTransforming the Organization

What is Castrol Logic?

A customized lubrication solution involving products and

services that results in documented:

Cost Reductions &

Productivity Improvements

Source: rol

Documentation

Client Engagement Process

Continuous Improvement

Initial Information Exchange

Management Survey

ProposalImplementation

Transforming the OrganizationTransforming the Organization Rethink the customer engagement processRethink the customer engagement process

Cast

• The Best Product Positioning is not necessarily the most profitable or the best way to serve your customer.

Segment everything, but most important segment your customers and consumers (e.g. Unilever Asia).

Tier 3. Lower (but not bottom) LSM, lessaffluent emerging consumers in developingparts of the region Purchasing basket primarily of essentials.

Tier 3. Including Retailers, Wholesalers,Drugstores, Small Retailers System Lock-In by being only Supplier to produceECR (Efficiency Customer Response) principles.

Tier 2. The middle LSM focused on upwardmobility and social migration Upgradation to higher aspirational brands and affordable price

Tier 2. Modern Trade. aller, more cash driven, largely local Shape and Win

Tier 1. The affluent high LSM (Life stylemanagement) across Asia focusing on Aging,Single/Working Women, and Teenagers Satisfy their needs and vitality, Quality Time,Customized Product, and Solutions

Tier 1. Modern Trade. tablished Systemsand Business Scale, often International Reaction and Conflict Anticipation andCollaboration

ConsumersConsumersCustomersCustomers

Segmentation:Segmentation: The Key to Superior Strategy and ManagementThe Key to Superior Strategy and Management

Sm

Es

Prevent the customer from commoditizing youPrevent the customer from commoditizing youThe case of Eastman Chemicals Coating businessThe case of Eastman Chemicals Coating business

Channels are essential, they “own” the customersChannels are essential, they “own” the customersThe case of Hindustan Lever and Unilever de MexicoThe case of Hindustan Lever and Unilever de Mexico

Transforming the OrganizationTransforming the Organization

Total Customer SolutionsTotal Customer Solutions Best ProductBest Product

System LockSystem Lock--InIn

ChannelsMassive Direct (the Case of Hindustan Lever D & E market)

Target Direct (the Case of Unilever deMexico high segment market)

General Channel/Mass Distribution

The Paint and Coating IndustryThe Paint and Coating Industry

Paint and Coating

Manufacturers

Distributors

Eastman Chemicals End 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

The Food Service IndustryThe Food Service Industry

Unilever Bestfoods

Food Service Distributors Operators Final Consumer

• Corporate broad line (e.g. Sysco)

• Specialized distributors

• Other national,regional and local distributors

Tier 1- 100 chains

Tier 2/3- 1500 chains

Tier 4/5- Thousands of independents

push

pull

TheThe Role of ITRole of IT

TheThe Role ofRole of

InnovationInnovation

Total Network Support (e.g. e-system)

Customer and Supplier Support (e.g. B2B, B2C)

Internal Support

(e.g. SAP)

Open Architecture -Complementors as Key

Joint with

Customers

Internal Product

Development

zz Use technology wisely: This is a very hard taskUse technology wisely: This is a very hard task The case of Advanced Micro DevicesThe case of Advanced Micro Devices

Transforming the OrganizationTransforming the Organization

You have to change dramatically the way you:You have to change dramatically the way you: manage, manage, assign responsibilities, assign responsibilities, reward people, reward people, monitor the business progress, and monitor the business progress, and most important, the way you “sell”most important, the way you “sell”

The transformation has to be accomplished by a change in both The transformation has to be accomplished by a change in boththe frontthe front--end as well as the backend as well as the back--end of the organizational end of the organizationalstructure. structure.

Transforming the OrganizationTransforming the Organization

Beware of the organizational structure Beware of the organizational structure implicationsimplications

The backThe back--end should be segmented according to the way we end should be segmented according to the way wesegment Products and Technologies:segment Products and Technologies: Administration functions,Administration functions, Supply chain functions,Supply chain functions, New product development technologies,New product development technologies, Process technologies,Process technologies, Information technologies,Information technologies, Functional activities related to product marketingFunctional activities related to product marketing

Transforming the OrganizationTransforming the Organization

Beware of the organizational structure Beware of the organizational structure implicationsimplications

The frontThe front--end should be segmented according to the way in which end should be segmented according to the way in whichwe segment the markets:we segment the markets:

Clients,Clients, EndEnd--users,users, Solutions and services,Solutions and services, Geographical areas,Geographical areas, Functional activities related to customer marketingFunctional activities related to customer marketing

Transforming the OrganizationTransforming the Organization

Beware of the organizational structure Beware of the organizational structure implicationsimplications

zz Seek System LockSeek System Lock--In OpportunitiesIn Opportunities This is very hard to accomplish; however if successfulThis is very hard to accomplish; however if successful the rewards are enormousthe rewards are enormous

Transforming the OrganizationTransforming the Organization

The way to win is not to beat The way to win is not to beat your competitor but to bond with your competitor but to bond with your customersyour customers

ACHIEVING YOUR POTENTIALACHIEVING YOUR POTENTIAL