Discovering New Sources of Profitability in a Networked Economy

Professor Arnoldo Hax Alfred P. Sloan Professor of Management Massachusetts Institute of Technology

The Delta Model

Three Distinct Strategic Options
System Lock-In System Economics Market Dominance Achieving Complementor Share

Enabled Through Effective Use of Technology

Total Customer Solutions Customer Economics Cooperation Achieving Customer Share Best Product Product Economics Rivalry Achieving Product Share

The Triangle:
Options for Strategic Positioning
System Lock-In
Dominant Exchange eBay, Yellow Pages Industry Standard Microsoft, Intel

Exclusive Channel Rural Wal-Mart

Horizontal Breadth Fidelity

Enabled Through Effective Use of Technology

Low Cost Southwest Airlines, Nucor

Total Customer Solutions

Redefining the Customer Relationship Saturn

Customer Integration EDS

Best Product
Differentiation Sony Wega

The Challenge to Decommoditization:

Transforming the organization from best product to total customer solutions.

Transforming the organization

Change your mindset The transformation is not straight forward
Regulators Underground cables Efficient motors Business Partners Suppliers Contractors Complementors Architects Construction Motor producers

The case of Codelco and the International Copper Association

System Lock-In

Total Customer Solutions

Best Product

Targeting Key End-Users Alcatel Carrier KME General Electric ABB Siemens Electrolux

Old Codelco the lowest cost producer

Transforming the Organization

Redefine the game you are playing
Transforming the CSN Organization Decommoditize your customer The case of Castrol

Transforming the Organization

Rethink the customer engagement process
Client Engagement Process Initial Information Exchange Continuous Improvement Documentation Management Survey

Implementation
Source: Castrol

Proposal

Segmentation:
The Key to Superior Strategy and Management
Segment everything, but most important, segment your customers and consumers (e.g., Unilever Asia)
Customers
Tier 1. Modern Trade. Established Systems and Business Scale, often International Reaction and Conflict Anticipation and Collaboration

Consumers
Tier 1. The affluent high LSM (Life style management) across Asia focusing on Aging, Single/Working Women, and Teenagers Satisfy their needs and vitality, Quality Time, Customized Product, and Solutions Tier 2. The middle LSM focused on upward mobility and social migration Upgrade to higher aspirational brands and affordable price Tier 3. Lower (but not bottom) LSM, less affluent emerging consumers in developing parts of the region Purchasing basket primarily of essentials.

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

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

Transforming the Organization:

Prevent the customer from commoditizing you
The case of Eastman Chemicals Coating Business

Channels are essential, they own the customers

The case of Hindustan Lever and Unilever de Mexico
Channels Massive Direct (the Case of Hindustan Lever D & E market)

System Lock-In

Total Customer Solutions

Best Product

Target Direct (the Case of Unilever de Mexico high segment market)

General Channel/Mass Distribution

Transforming the Organization

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

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

Open Architecture Complementors as Key

The Role of IT

The Role of Innovation

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

Internal Support (e.g. SAP)

Joint with Customers

Internal Product Development

Comparing EEMEA and ROW

IT Spend vs. GDP per Capita*
100000 10000 1000 100 10 1

$US

*GDP per Capita is purchasing power parity (PPP) *Scale is logarithmic to allow the IT Spend per Capita to show up (very small) Sources: IDC Black Book Data, CIO World Factbook, The Economist

3. 9% or tu ga l1 .2 % Is ra el 2. S 6% lo ve ni a C ze 1. 3% ch R S ep au .1 di .5 A % ra bi a 0. S 7% lo va ki a 1. 2% Tu rk ey 0. 3% C hi le 0. 7% B ra zi l 0. 8% P
IT Spend per capita 2001 GDP per Capita

U K

Transforming the Organization

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

Achieving Your Potential

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