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European Management Journal Vol. 9, No. 4, pp. 379391, 2001 2001 Published by Elsevier Science Ltd Printed in Great Britain S0263-2373(01)00041-X 0263-2373/01 $20.00 + 0.00

The Delta Model Discovering New Sources of Protability in a Networked Economy

ARNOLDO HAX, Sloan School of Management, MIT, Boston DEAN WILDE II, Dean and Company, Virginia
The Delta Model presents a new approach and a new discipline to strategic management. There are four unique contributions: The Triangle (a new set of strategic options); The Adaptive Processes (linking strategy and expectation); The Metrics (aligning Aggregate and Granular Metrics to strategy); Experimentation and Feedback (experimenting in business transformation and monitoring performance). Finally, Michael Porters Five Forces Model is re-interpreted through the Delta Model. 2001 Published by Elsevier Science Ltd. Keywords: Delta model, Corporate strategy, Business transformation, Internal strategy, Five Forces Model, Strategic options

The Three Tenets of Strategy

Before we engage in a description of the key contributions of the Delta Model to strategic thinking, it seems appropriate to pose two questions: What is the central purpose of strategy? and What are the basic means to achieve it? In our view, brief answers to these questions reside in the three tenets of strategy (see Figure 1), the rst one dening strategic purpose and the remaining two pointing to the ways to reach it.

Tenet 1: The Creation of Economic Value The Central Purpose of Strategy. It has been long accepted that the rm as a whole, and the individual businesses of the rm, have as a fundamental objective the achievement of superior and sustainable nancial performance, measured in long-term protability. Implicit in this statement there are three major challenges. First, the nancial performance has to be superior, meaning that you have to command a signicant leadership position. Thus, the rm has to develop a sense of creativity, originality and uniqueness deserving of specially attractive rewards. This will never be acquired by simply imitating or following the competitors steps sameness will never lead to greatness. Second, this superior nancial performance has to be sustainable, meaning that not only should it be supported by a solid leadership position, but that this
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Introduction
The Delta Model encompasses a set of frameworks and methodologies that we have developed through the years to help managers in the articulation and implementation of effective corporate and business strategies. It grew from our conviction that the world of business had been experiencing transformations of such magnitude that made the existing managerial frameworks either invalid or incomplete. Moreover, the emergence of the internet, with the previously unimagined potentials for communication, and the technologies surrounding e-business and e-commerce, made available some new powerful tools that allow completely different business approaches to become feasible.
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Figure 1 The Three Tenets of Strategy

position should be long-lasting, unassailable, and endure the inevitable changes that the environment will generate. This calls for exible adaptation to new circumstances, and a will and ability to transform the organization continuously. We should look forward, not backward. We should never be complacent. We should experiment and engage in a continuous learning process that embraces rather than rejects change. And, third, this superior and sustainable nancial performance should be measured in terms of longrun protability, meaning that there is a critical tradeoff between short- and long-term results. This is another fundamental principle that is easier said than done. The future offers uncertainty and risk. There is so much pressure for short-term results that it is hard to maintain a solid commitment towards a future full of surprises. Yet this is what is expected from managers today. Economic Value Creation is the central purpose of strategy, but this is just the result, the output of a job well done. How do we achieve it? The key answer is found in our next two tenets:

that will allow addressing this issue properly, or they are so absorbed in a product-centric mindset that they do not seem to relate to this kind of strategic thinking. Many reasons contribute to this lack of intense customer focus. A very important one is the barrier that distribution channels often pose, that tend to block the rm from its nal consumers. Michael Dell thought that he was reducing costs when he decided to skip the wholesale and retail channels and deal directly with the customers. However, what we found out is that this new business model opened a world of intelligence and information that he would put to use in offering customized solutions to key customers that could have not been generated under the old distribution scheme. Another reason for the lack of customer focus, is the product-silo mentality that often permeates many business organizations. Companies tend to commoditize the customers by offering standardized products, through mass distribution channels, making no attempt to understand and satisfy individual customer needs. Typically the point of contact with the client organization is the clients purchasing department through a conventional salesforce. This leads to an arms length relationship that prevents any deep knowledge to be nurtured and developed. Finally, a unique value proposition to the client should encompass all of the rms portfolio of businesses and functional capabilities. In other words, this proposition calls for a full corporate strategy as opposed to an isolated business strategy based upon individual products. The customer at the center of the Delta Model and its primary output is a differentiated value proposition.

Tenet 2: The Creation of the Unique Customer Value Proposition Customer Bonding as the Foundation of Economic Value Creation A rm owes itself to its customers. They are the depository of all the rms activities. At the heart of management and, certainly, at the heart of strategy, resides the customer. We have to serve the customer in a distinctive way if we expect to enjoy superior performance. The name of the game is to attract, to satisfy, and to retain the customer, and to establish an unbreakable link and close relationship which we refer to as customer bonding. Bonding implies another key challenge because it can only be established if we acquire a deep knowledge and understanding of each of the customers we are serving (or at least the most important ones), and we offer them a superior and unique economic value proposition. This sounds rather trivial and highly conventional, yet we have observed again and again that most companies, even those which are in consumer oriented industries, lack the intimate customer knowledge
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Tenet 3: The Creation of the Spirit of Success The Net Flow of Talent as a Key Strategic Performance Indicator The nal tenet has to do with our capacity to attract, to satisfy and to retain talent. This is more valid today than ever before. In part this is due to the fact that the booming American economy has created job
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opportunities unparalleled in our recent history. Moreover, the so-called new economics offers two very precious opportunities to the young talented professional: an entrepreneurial climate that pushes the state-of-the-art of management, and the nancial rewards which are associated with it. Every rm is facing this enormous challenge of outbidding the dot.com magnetic attraction, to offer its employees a working climate as exciting as the dot.com rms seem to have. This is why an important indicator of the strategic health of the company is the so-called net ow of talent.1 If it is positive, it means that you have no problem in attracting and retaining your key personnel. If it is negative, the opposite is true. It provides undeniable evidence that your organization, regardless of the nature of its current nancial statements, is about to face very signicant threats in its immediate future. We call the spirit of success the desired nature of a working environment that is invigorating, energized, and condent of creating the collective capabilities to become the leading organization we all hope to work for.

The Triangle: Opening the Mindset to a New Set of Strategic Options

The rst reection that normally takes place in the process of dening the strategy of the rm or a business is to decide on the relevant strategic positioning. This is simply an attempt to capture the essence of how the rm chooses to compete in its relevant market place, or, in our terminology, how the rm decides to attract, to satisfy, and to retain the customer. We recognize three distinct strategic options, which

The Delta Model: A Brief Overview

We believe that the Delta Model offers four major contributions. If taken as a whole, the total model constitutes a new approach and a new discipline for strategic management. We will now review the four contributions: the Triangle, the Adaptive Processes, the Metrics, and the Experimentation and Feedback (see Figure 2).

Figure 3 Business Model: Three Distinct Strategic Options

Figure 2 Contributions of the Delta Model

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offer very different approaches to achieve customer bonding. We depict them graphically through a triangle, as displayed in Figure 3. We have chosen the Triangle to display the different strategic positions not simply because it is a visual icon that is easy to remember, but also because it represents the letter Delta, which means transformation. The Best Product positioning builds upon the classical form of competition. The customer is attracted by the inherent characteristics of the product itself either through low cost, which provides a price advantage that can be partly passed to the customer or through differentiation, which introduce unique features that the customer values and for which they are willing to pay a premium. The products tend to be standardized and unbundled. The customer is generic, massive, faceless. The central focus of attention is the competitor, that we are trying to equal or surpass. The drivers are the product economics and the internal supply chain, which provide the engine for efcient product production. Innovation is centered in the internal product development process. The highest limitation of this approach is that it generates the minimum amount of customer bonding, hence making the incumbent rms most vulnerable to new entrants. Its obsessive concern with the competitors often leads to imitation and price war, resulting in rivalry and convergence. The worst of all deals. In spite of the inherent limitations of this strategic position it is by far the most widely adopted, and the default position for those business rms that do not deliberately consider other strategic options. The Total Customer Solution is a complete reversal from the Best Product approach. Instead of commoditizing the customer, we seek an intimate and deep customer understanding and relationship that allows us to develop value propositions that bond to each individual customer. Instead of developing and marketing standardized and isolated products, we seek to provide a coherent composition of products and services aimed at enhancing the customer ability to create their own economic value. Instead of concentrating inwardly on our own supply chain, we seek to develop an integrated supply chain that links us with key suppliers and customers. Instead of focusing on competitors and imitating them, we redene the ways to capture and serve the customer by putting together the overall set of corporate capabilities complemented by proper external parties that enhance our product offering. We are outward driven, the customer economics is our guide. Strategy is not war with our competitors, it is love of our customers. What would you rather do, make war or make love? The innovation process is not oriented toward the design of standardized products, it is aimed at initiatives with our key customers for the joint development of distinctive products. The System Lock-In strategic option has the widest scope; it includes the extended enterprise the rm,
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the customers, the suppliers, and most importantly, the key complementors. A complementor is a rm that engages in the delivery of products and services that enhances our own product and service portfolio. The key to this strategic option is to identify, attract, and nurture the complementors. The complementors are often external, but may also be internal to the corporation, particularly in large and diversied organizations. These complementors are rarely detected and exploited effectively. That is why a system lock-in strategy has to start with a full corporate scope not just for one product or business and has to continue with the identication and incorporation of all the key external players that can become complementors. The customer continues to be the central focus, but now we extend the enterprise to the fullest. We look at the overall system supply chain, not just the supply chain for our product, and we harness the innovation percolating throughout the system as a whole. The richness and depth of complementors supporting your product or service lock your product into the system and lock-out the competition. This compels a customer to buy your offering, creating customer bonding. One obvious way for this to become a reality is for a rm to develop and appropriate the industry standards. This is what Microsoft and Intel, a magic set of complementors, did during the last century which resulted in one of the most successful business ventures ever. Another key for this positioning is the ownership of unique distribution channels that limit the access to external competitors. A company that achieves systems lock-in can exercise an enormous amount of power. A System Lock-In position is not always possible, there is a necessary condition. Massive adoption of the product should in itself signicantly expand the value of the product to the customer. There is a self-reinforcing nature of the value proposition to the customer. This opportunity can be realized by either appropriating a proprietary standard, such as Microsofts Windows operating system, or by controlling the distribution channel. The challenge this position generates is twofold: how to sustain it and how to exercise this power in an ethical way that does not create excesses of monopolistic behavior.

The Various Dimensions of the Triangle Beware of the ProductCentric Mindset

Figure 4 provides a compact summarization of the differences among the three strategic positionings of the Triangle according to some relevant managerial dimensions. We like to use this chart to make patently clear what are the resulting consequences of adopting, without much reection, a Best Product Positioning which triggers a product-centric mentality. We are not suggesting that a Best Product strategy cannot be the most appropriate one. In fact
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Figure 4 The Various Dimensions of the Triangle

there are excellent companies which are truly extraordinary in every conceivable dimension of performance which are in that vertex of the Triangle. What we want to warn against is the unreective, default adoption of this strategy without considering other alternatives. We have preached repeatedly in the past about the dangers of functional silos. The fact of the matter is that functions are not silos. By their very nature they are supposed to exercise a high degree of synergy in an organization. If in a functionally structured company you are in charge of R&D, you are supposed to care for all of the innovation issues across all the products in your company. Likewise if you are in charge of any other major function, such as nance, human resources, manufacturing, and so forth. What is most concerning to us is the productcentric mindset. That can truly generate parochial silos that prevent a rm from using intelligently all of its capabilities and serving the customer as effectively as it could. If you look at Figure 4 under the Best Product column you can immediately visualize the narrow cascade of responses that are associated with this option. The strategic focus is the single product; the relevant benchmarks are the competitors, the customer value proposition is dictated by the internal product economics; the product offering is standardized; the relevant supply chain is internal; the channels are generic and mass-driven; the product orientation leads to
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an explosion of disconnected brands; the innovation process if self-centered; the IT role, which is so critical for management today, is internalized. At the end, this brings only a feeble degree of customer bonding and a rather conventional view of the business which might limit creativity. It is fundamentally an inward oriented strategy, with an outside view centered on competitors. With this perspective in mind, you can see how this is totally incompatible with a network based internet economy. Contrast the Best Product option with the Total Customer solutions positioning. You can again visualize the signicant enrichment in scope and content that takes place. This extension is maximized when we adopt the System Lock-In strategic positioning. Figure 4 presents the contrast among the three options in a fairly explicit way. We feel there are two dimensions that need to be emphasized both for their criticality as well as the different treatment they receive in each option. These dimensions are the role of the distribution channels (Figure 5) and the role of IT technology (Figure 6). Typically a Best Product strategy depends on generic mass channels for distribution, such as supermarkets, food stores, drug stores, and the like. There are two issues associated with this channel selection. First and foremost, the channel is going to block the rm
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Figure 5 The Role of Distribution Channels in the Three Strategic Options

used its best technology to produce very inexpensive products to serve the D & E market. It developed a new kind of detergent sold in a package that has a dose sufcient for only one wash load, and a shampoo with a quantity enough for one hair wash. Moreover, it channels those products through four million outlets, throughout India, one million managed directly by Hindustan Lever; the remaining three million covered by exclusive distributors. All of them are connected with IT capabilities managed centrally by Hindustan Lever. There are also opportunities to use banks as complementors to provide credit to both distributors and consumers. This massive direct and exclusive distribution channel in combination with an assortment of complementors designed to work only with Unilever distribution establishes a clear system lock-in with highly protable margins. Unilever is rolling out this approach to cover important D & E markets, such as Brazil. On the rich market segment we can again look to Unilever, Unilever de Mexico, as an example. Its newly appointed chairman, Tom Stephens, is developing a Total Customer Solutions strategy targeting the most important and richest customers, such as the ve-star hotels in Mexican resorts. The idea is to produce a customized package of all the products and services available to Unilever, expanded by other key complementors such as Kimberly Clark, and then to deliver them directly through their own distribution channels. Again Information Technology is providing critical support by tracking customer inventory, replenishment, order fulllment, invoicing, proling usage, etc. IT is, in fact, the second dimension we want to discuss in further detail. The Best Product strategic option has as a primary objective the development of a lean internal infrastructure and supply chain that gives the low cost support so essential for this positioning to succeed. Not surprisingly, the most popular IT system adopted by those pursuing this strategy has been the deployment of SAP. Particularly during the last three years, with the fear that was created by the specter of the Y2K monster, companies all over the world rushed to implement SAP. The system effectively consolidates the internal data of a rm, but it is cumbersome to adopt, exceedingly costly, very rigid, and internally-driven. After millions of dollars spent, a company often nds itself with no signicant competitive advantage. Why? Because everybody has adopted SAP, or a similar system, equalizing the playing eld, but at a new, more expensive level. In addition, SAP while solving some problems, brings with it its own baggage since it can be difcult to use as an integrated system to link the rm to its suppliers and customers in user friendly ways. Best Product driven companies have beneted from SAP, but it is not the ideal system for the support of either Total Customer Solutions or System Lock-In straEuropean Management Journal Vol. 19, No. 4, pp. 379391, August 2001

Figure 6 The Role of IT in the Three Strategic Options

from the nal consumer which will limit the intimate understanding that is so essential for development of a customer-oriented strategy. Secondly, mass channels are only good for mass consumers, excluding the two extremes from receiving a proper treatment. Those extremes are the very poor and the very rich. That is why consumer-good producer giants, like Unilever have to concentrate effort in creating direct channels to satisfy those segments. Take the case of Unilever and the very poor market segment. One of the best rms of Unilever is its Indian company, Hindustan Lever. The mass market in India is large, consisting of about 800 million people living under extremely poor conditions. It would be unthinkable for Unilever to dismiss this market simply because its existing products and distribution channels are inappropriate to deal with it. This demographic segment is normally referred to as the D & E segment, the lowest level of income and consumption power at the other end of the spectrum from the richer A, B, and C segments. People in this segment do not have steady income. They cannot afford to buy a full box of detergent or a bottle of shampoo. They do not go to the mass distribution channels. What does Hindustan Lever do? That is when creativity and technology play a fundamental role. Hindustan Lever
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tegies. For these options, as we have discussed in the Unilever example, the internet and the e-commerce, and e-system technologies play a much more effective role. In fact it is the availability of these new technologies that makes these strategic options so attractive, relevant, and feasible.

that exist in the Triangle that is critical to dene the changing role of each adaptive process and among the processes themselves since each one strongly inuences the other. Rather than simply mandating that strategy and execution should be properly congruent and match consistently, we go one step further to discuss in detail the role of the adaptive processes in supporting each of the three strategic positionings of the Triangle. Figure 8 gives us a summarized view of these roles. What we nd particularly intriguing is that most managers naturally dene each process according to a Best Product strategy. Namely, Operational Effectiveness seeks to establish an internally efcient cost infrastructure; Customer Targeting seeks coverage through distribution channels; and Innovation seeks the proper development of the rms products aided by appropriate platforms and rst-to-market expectations. As recognized in Figure 8 the situation is quite different when the adaptive process supports the TCS and the SLI strategic options. In the TCS strategy, Operational Effectiveness has as the key objective the maximization of the customer value, and it is supported by the combined value chain of the rm and its customers. Customer Targeting is aimed at developing individual customer bonding, by increasing marketing intelligence and customer interface. Innovation is targeted at the development of a composition of customized products jointly with the customer. In the SLI strategic position the role of each process

The Adaptive Processes How to Really Link Strategy and Execution

The Triangle provides us with guidance on how to get the strategy formation dialogue started. The Adaptive Processes tell us how to carry the strategic position to a high level of execution excellence. Each strategic positioning of the Triangle generates a very different set of tasks and activities. We have discussed, in broad, conceptual terms what these differences are. Now it is important to esh out those differences from an action-driven agenda. To accomplish this goal, we identify three business processes which we feel capture quite concretely the nature of the managerial work. These processes are: 1. Operational Effectiveness (OE) the production and delivery of goods and services. 2. Customer Targeting (CT) the management of the customer interfaces 3. Innovation (I) the process of new product development. Collectively we call them adaptive processes, to emphasize the changing nature of the tasks. Figure 7 provides a representation of the interactions

Figure 7 The Adaptive Processes: Linking Strategy with Execution

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Figure 8 Role of the Adaptive Processes in Supporting the Strategic Options of the Triangle

continues to change. Now Operational Effectiveness is concerned with enhancing the overall system performance, by consolidating strong partnerships with complementors. Customer Targeting attempts to consolidate a harmonized system architecture through a network of complementors and complementor interfaces. The ultimate innovation goal is to develop an appropriate industry standard, managing the breadth and range of applications and interfaces. Once more, our primary objective is to prevent a product-centric mentality and to expand alternatives open to the business. Rivalry and competition may not be the winning strategies.

parameters that will allow us to go in-depth for the necessary understanding of their behavior. The aggregate metrics we propose are those associated with the adaptive processes just discussed. Since these processes are the instruments for the execution of each strategic option, they also serve as the guidelines to dene the strategy performance. Figure 9 provides a summary of a selected set of generic metrics according to adaptive processes and strategic options. Of course specic tailor-made metrics could and should be introduced in each individual business situation. We have not incorporated nancial metrics, normally associated with the overall business performance, because they are of more standard character. Notice that the various processes carry on their normal thrusts: Operational Effectiveness is the depository of the cost drivers; Customer Targeting, of the prot drivers; and Innovation, of the renewal drivers. Also notice that the BP options is product oriented; TCS, customer oriented; and SLI, system oriented. The logic is clear, however we continue to observe that most rms only concentrate their attention on product related opportunities. It is yet another manifestation of the pervasive product-centric mindset. Aggregate metrics, as the ones that we have just discussed, are essential to gather the full picture of overall performance. However, they are not enough. They should be complemented by individual granular metrics whose objective is understanding the variability inherent in the behavior of some critical paraEuropean Management Journal Vol. 19, No. 4, pp. 379391, August 2001

The Metrics Aggregate and Granular Metrics Are Needed, Both Aligned to Strategy
Performance measurements and quantiable indicators are essential for the development, execution and monitoring of the desired strategy. The Delta Model aligns performance metrics to the strategic options selected, and recognizes that these metrics will be fundamentally different depending on the strategic position they intend to support. We recognize two types of metrics. First, we need aggregate metrics to give us the overall, integrated view of the business and the rms performance. Second, we need granular metrics in very specic
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Figure 9 Performance Metrics for the Business Drivers of the Delta Model

meters such as product costs, customer protability, workers productivity, and so on. The performance of these parameters is inevitably non-linear. This so called 80/20 rule is universal, in the sense that a small percentage if items (say 20 per cent of the customers) account for a disproportional amount of the output (say 80 per cent of the prot). We need to measure this variability in order to assess what is the cause. With that knowledge we can begin to learn how to improve performance by making corrective actions or taking on innovative solutions. Due to the limitations of space we will not provide specic examples of this.

Experimentation and Feedback: The Key Adaptive Mechanisms

The nal contribution of the Delta Model addresses the issues of experimentation and feedback. Experimentation is the key for carrying on in a responsible way a major business transformation. Particularly when we want to move from one strategic option to another, (say from Best Product to Total Customer Solutions), one is forced to enter unknown territory, without a full understanding of the preferred path to follow. The way to resolve this challenge is to design a careful set of experiments aimed at collecting more thorough knowledge prior to committing to a full scale organizational effort. Simple experiments can do it. For example, in an attempt to bring all the Siemens US companies to adopt a total customer solutions strategy we simply
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requested to identify three critical customers. These were not necessarily the most important, protable and biggest customers. These were customers friendly to us, willing to participate in a joint activity that might generate signicant mutual benets, and whose business portfolios would provide valid lessons transferable subsequently to the all customer community. For each customer we identied ve high priority needs in terms of products and service requirements. We thoroughly investigated the customer economic and the competitors offerings. The critical output was to develop a unique value proposition for each customer to identify the degree of economic value-added for the customer and for Siemens, to implement and validate these ideas, and nally to begin to roll-over the successful approach to the rest of the customer base. The nal issue is feedback. What can we say about the future? Maybe two things: we will not be able to predict it, and it will surprise us. Therefore, you might as well take that as a given and imbed this concept in your strategy. When it comes to this matter in Figure 2 we say, rather obnoxiously that plans are not made to be followed. We dont intend to negate the importance of identifying a central purpose to the rm and its business. This is, in fact, what our Triangle is supposed to help us establish. We do not imply that improvisation and reactionary moves should prevail. The adaptive process and the relevant metrics allows us to put our act together. However, after we have done all of that, we will need to modify the selected course of action and the consequent strategic agenda to allow for unexpected changes in our basic hypoth387

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esis. Thus we need feedback. Measure, monitor and follow up performance and build enough exibility into your management system, organizational structures and resources to allow for proper changes to be made.

central mentality that we have denounced before; strategy is war. Lets put to work the lessons of the Delta Model to reinterpret Porters Five Forces in a fundamental new way that will move us out of the Best Product positioning of the Triangle toward TCS and SLI (Figure 11). The trick is not to take this industry as given. Think of the ve forces as a way to identify actions which will lead to a very strange positioning for you, and for all of your relevant partners: customers, suppliers, and complementors. This is the process of business transformations that we can engage in.

Reinterpreting Porters Five Forces Model Through the Delta Model: Thinking Out of the Box
One of the most inuential strategic frameworks has been Michael Porters Five Forces Model. Based on well-established industrial economic principles, Porter argues that the degree of attractiveness of a given industry is determined by ve players which have a claim on the economic values created by the industrial activity. These forces are: the intensity of rivalry among existing competitors, the threat of new potential entrants, the threat of possible substitutes, the bargaining power of buyers, and the bargaining power of suppliers (see Figure 10). The conventional interpretation of Porters framework has emphasized rivalry and competition as the key components of strategy. We start by analyzing the industry which we are in, namely one that is shaped by our competitors. Not only are we concerned with the incumbent rms, but also with those that could enter either directly on indirectly, by means of substitutes. In addition, we are concerned about the amount of wealth that can be appropriated by our buyers or suppliers. The strategic focus is internal, the prevailing climate is friction, the way to win is by defeating and outsmarting those who could have a claim on the industry wealth. Whether Porter intended it or not, the legacy has been a product-

Search for the 10X Force In his wonderful book Only the Paranoid Survive, Andy Grove, the Chairman of Intel, introduces a powerful new concept: the 10X Force. This is not just a substitute product in a given industry, but a change of such magnitude that will denitely modify the rules of competition and the playing eld. He calls this a 10X Force because it is a force that is an order of magnitude larger than the existing forces in the industry. We nd this concept quite intriguing and, at times, quite practical. What it simply suggests is that one should enter the strategic reection with a completely open mind. Reject the stereotype of the industry, dont emulate, dont take anything for granted, and, above all, reject the product-centric mentality and commoditization mindsets. We talked about Hindustan Levers approach toward the D & E market segment. We were told a similar story about Frito Lay in Brazil, but with a completely different outcome. In Brazil, as in India, a great proportion of the population belongs to a low-income

Figure 10 Porters Five Forces Model

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Figure 11 Reinterpreting Porters 5-Forces Through the Delta Model

segment. Frito Lay decided that this segment was too remote for them. Poor people did not have the habit of snacking, their chips were totally foreign for this segment, and they didnt have the distribution channels to reach the poor people. Therefore, they abandoned the distribution business to small third party distributors obtaining fairly mediocre performance. Contrast that with the decision of Hindustan Lever of developing the product and establishing the direct channels to capture the market leading to signicant lock-in.

segmentation and targeting. Having completed this knowledge we could move further and develop the proverbial unique economic value propositions to the customer, which is the source of the barriers we alluded to. It is interesting to note in here that it is not your industry knowledge that is more critical to achieve this state of relationship with the customer. It is rather the customers industry that is relevant. You should know deeply what are the prot and cost drivers of your customer so that your skills, capabilities, and product and services offering contribute to enhance your customer performance.

Generate Barriers Around Your Customers Dont think of barriers to entry as those forces that prevent an outsider from penetrating the overall industry. Rather think about building barriers around your key customers so as to establish a high switching cost and a customer lock-in. This is not based on an abusive behavior; on the contrary, it is built on a relationship so strong and so mutually benecial that both parties will never break apart. The key to achieving this position is to gain a deep customer and consumer understanding through careful
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Your Competitors Are Not the Relevant Benchmarks This could be seen as heretical; after all, your competitors are at the center of Porters Five Forces. We do not suggest that you should ignore your competitors. Study them intensely. Maybe you would learn how not to do it. Or you might reach that level of excellence where you could afford to ignore them because if you use them as benchmarks, your standards will decline. Merck used to do that. They col389

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lected extraordinarily detailed competitor intelligence, but not to follow or imitate them. As we have said before, competitor imitation leads towards commoditization and congruency which is the opposite of leadership. It is not your industry that is the most relevant when you pursue a TCS or SLC strategy. The key industries that you should really comprehend are those of your customers, suppliers, and complementors. It is the overall management system and how to inuence it that is critical.

Fragmented Industries Offer Big Opportunities If your customers, suppliers, and complementors are numerous, fragmented and somehow ignored by the top industry players, you could have a golden opportunity to restructure the industry and emerge as a key powerful leader. The beauty of the new technology is that one can access directly the fragmented players and create a virtual entity that could enjoy the economies of scale that have been otherwise reserved for the major players. Also, one could provide them with state of the art managerial capabilities that would have been impossible to acquire under the old circumstances. (e.g. Brazilian Health Industry, ICA, Staples, Home Depot).

Develop and Nurture the Integrated Value Chain Your customers and your suppliers are your natural partners, that you need to cultivate around the joint structures value proposition to your customer. Those relationships can be greatly enhanced by the use of e-business and e-commerce technology. The chain of interrelationships often extends beyond the customer to include the nal consumer.

The Required Resources and Capabilities for the Delta Model

Besides Porters framework, the other inuential school of thinking in strategy has been the ResourceBased View of the rm. This postulates that rms enjoy high levels of prots not because of the intrinsic characteristics of the industry in which they compete, but rather due to the resources and capabilities that they are able to appropriate. The concerns we have had with this school of thought are that it has not been clearly stated what these resources and capabilities should be. After the reection we have made on the potentials that the Delta Model offers for obtaining a strong strategic positioning, we can suggest a small list of desirable capabilities that will allow a rm to develop a new business model more in tune with todays challenges. 1. First and foremost, you need a deep customer and consumer understanding obtained via a detailed segmentation and supported by aggregated and granular metrics. 2. This understanding should also be extended to critical suppliers and complementors. Do not get trapped in your identity trends alone. 3. The implementation of the new business model is realizable mostly because of the opportunities and potentials offered by the internet and its associated technologies: e-business, e-commerce, e-systems. The appropriation of this skill is essential. 4. Create the dynamic and entrepreneurial environment of risk-taking and reward-sharing originated by the professional challenges associated with the new technologies. 5. The ultimate output is the development and implementation of unique and exciting value propositions for all the key players: customers, consumers, suppliers, and complementors. The
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If you dont reach the consumer directly, you have to make a concerted effort to attempt to have as much consumer understanding as possible. The consumer, the nal user, the ultimate payer in the chain is absolutely critical. With todays technology it is even possible to individualize each and every one of the consumers and tailor his/her needs in a highly customized way.

Add a New Player: The Complementors Why has Microsoft been so successful? Because Bill Gates has an army of people working for him who are not on his payroll. These are the complementors: software producers, CD ROM developers, and a cadre of professionals whose primary work is to extend the usefulness of the Windows operating system. Suppliers and customers are critical to achieving customer lock-in. Complementors go even further; they are the instruments for seeking competitor lockout and system lock-in. Identify key potential complementors. Incidentally, many could be in your own backyard, they are other businesses in your company portfolio that have not been integrated in a well-conceived corporate (not business) strategy. Make the complementors your loyal partners, by providing them with a mutually exciting value proposition. Have them invest in your business. Make the relationship stable and long lasting.
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rst mover advantage is overwhelming. You have to be fast. Of course we need to complement these capabilities with all the conventional and traditional skills associated with good management. We have purposely emphasized only those that are required by this new business model. If you think about it, they are the ones needed for the realization of the three tenets we

addressed at the very beginning. We have closed the circle. Note

1. We are grateful to our dear colleague, Professor William F. Pounds from the Sloan School of Management at MIT, for the creation of this insightful concept.

ARNOLDO HAX, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139, USA. E-mail: ahax@mit.edu Dr Hax is the Alfred P. Sloan Professor of Management at MIT. He served as Deputy Dean of the Sloan School from 1987 through 1990. He has published extensively in the elds of strategic planning, management control, operational management and operations research. His most recent books are: Strategic Management: An Integrative Approach (co-authored with Nicolas Majluff) and The Delta Project, Discovering New Sources of Protability in a Networked Economy (co-authored with Dean Wilde).

DEAN WILDE II, Dean and Company, 8065 Leesburg Pike, Suite 500, Vienna, Virginia 221822733, USA. E-mail: wilde@ dean.com Dean Wilde is Chairman and a founding partner of Dean and Company, an international strategy consulting rm founded in 1993, now employing over 80 professionals. He has 20 years experience in consulting to companies on strategy, organization and operations issues. He is also a Visiting Lecturer at the Sloan School of Management, MIT.

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