Over the years I have attended many courses, workshops, and talks on business strategy. Some memorable, and some not. Some engaging and useful, and others confusing and a waste of time. The best of the lot were courses by Arnoldo Hax, Emeritus Professor of Management at the MIT Sloan School of Management.
As a teacher, Arnoldo opened up your thinking, pulled out the core assumptions, and exposed them to the unforgiving light of day. All the while being a wildly enthusiastic and entertaining speaker. I worked with him in both Unilever and ICI, and in both his name became a verb. Business unit managers asked each other “have you been ‘Haxed’ yet?”.
From the wealth of ideas he threw at us, I want to pick out one overarching concept which I use a lot, the Delta Model.
The Delta Model
Hax argues that too many strategy processes put competitors at the heart of our thinking, seeking sustainable competitive advantage. This puts all the focus on what others in your sector are doing, not on the customer. A good example is Porter’s “Five Forces” analysis, where competitive rivalry is right at the heart of the model, and customers are on the periphery.
“if the strategy process doesn’t end up surprising you, it hasn’t worked.”Arnoldo Hax
Instead, we should put the customer at the heart of our thinking and ask what will bring the customer to our products and services? What will attract, satisfy, and keep the customer? Hax offers three fundamental strategies for a customer-focused business and puts these at the points of a triangle. The delta in the Delta Model.
Best Product is the most familiar position. You develop products that best meet the needs of the various customer groups. This is the default strategy for many companies, but risks commoditisation, falling prices and falling market share.
Total Customer Solutions focuses on providing the buyer a complete service customised to their requirements.
System Lock-In is where you have achieved such dominance in the marketplace that your customers have no practical alternative. To go elsewhere would be a perverse decision.
3 core strategies and 8 approaches
The model then goes into more detail with eight ways of achieving the three core strategies.
The Best Product positioning can be achieved by being a low-cost producer or by product differentiation. These are two of Porter’s three generic strategies. These are simple to understand, but difficult to execute. If you are a low-cost producer, you are constantly under attack from people who want your market share. It is hard for an SME because you lack scale. The best approach is to be modular and scalable. Able to translate your offer across distinct groups of customers, and able to grow extreme speed when the opportunity arises. This is the route for many software SMEs.
“We do not compete on price. We innovate away from our competitors.”3m
A differentiated product has better performance attributes than other offers. There is a reason for the customer to buy the product and pay a premium. They are getting more for their money. It is an attractive idea, but difficult to sustain. It puts you on a treadmill of constant innovation. Any differentiation is slowly whittled away. Perhaps the best example of a company following the strategy over time is 3M. They are focused on the best product positioning, but told me that innovation was their core skill, not cost saving and efficiency – “We do not compete on price. We innovate away from our competitors.”. An SME should not take the big players on head-to-head, but find new niches – ‘land and expand’.
Total customer solution
The key to the Total Customer Solutions strategy is customer understanding. The options in this strategy depend on solving customer problems and integrating with the customer.
New customer relationships are about targeting individual customers with tailored solutions. Showing that you understand your customers’ business so well that you are helping them to be more successful. What you offer feels targeted at their specific needs.
Customer integration goes a stage further and makes you a part of the customers’ processes. It means they are outsourcing part of their activity to you, not just buying a product or service. A classic approach is to layer services and knowledge on top of the product.
The company that supplies my heating oil monitors the contents of my tank and makes sure that I never run out. They have turned a commodity product into utility. They make my life easier, so I am less likely to switch to another supplier.
A catalyst company supplied its customers with a sophisticated computer model that enabled them to optimise their chemical plant. The model improved the yield, reduced energy consumption, and saved on materials. Paradoxically, it led to lower sales per customer, but since the model only worked for that company’s catalysts, it increased customer loyalty and generated new customers.
For me, new customer relationships and customer integration feel like the same thing. But Hax separates them in his model.
The ‘one-stop shop’ positions a company to supply all the products and services required in its chosen area. Making life easy for the customer. This is the space of integrators who bring together the products and services of multiple suppliers. Sometimes by acquisition of smaller companies, the Cisco strategy, and sometimes by building networks. A good example of the network approach is Retrofitworks. It offers a one-stop shop for house owners wanting to improve energy efficiency, bringing together designers, suppliers and tradespeople to deliver a complete solution.
System Lock-In is a strategy aiming at a monopoly position. A position where the customer has no practical alternatives. This is difficult to achieve, and not popular with customers or regulators, but even partial success is profitable. The big examples of system lock-in attract the disapproving attention of governments and regulators, eager to protect the consumer. But in specific niches it is common.
The exclusive channel restricts the access of other players to the customer. Walmart grew by opening stores in rural areas with no existing supermarkets within a 25-mile radius. The locals welcomed them because it gave an increased range of choice. It also made it harder for followers to enter that small geographic area. In my local convenience store, there is room for one freezer for ice cream, and one display of baked goods. Both close to the till to encourage impulse buying. The manufacturer supplied those displays and keeps them stocked with their goods. Literally freezing out the competition.
Dominant exchange links buyers and sellers in a buyer friendly way. The dominant exchange is the place you go first when looking for a particular product or service. Amazon is the classic example, but it coexists with eBay and Etsy in the Western world, each serving a different customer need. In the East, and in certain B2B sectors, Alibaba challenges Amazon.
Standards are important in developing and spreading a technology or method. National and international standards codify requirements and methods, but develop through a slow consensus process. Proprietary standards originate with a single company. Whenever you hear the phrase “de facto industry standard” you are looking at a proprietary standard.
What characterises the de facto standards is the ecosystem that grows around them. It is not the company creating the standard that decides its dominance, but the users. Wintel, the Windows operating systems combined with Intel chips, is a powerful standard. If you want to have access to the widest range of software, you need to be using Windows. If you want your software to have the largest market, you need to start with Windows. Again, other proprietary standards, such as the Apple ecosystem, coexist by offering a different customer proposition.
Autodesk and Photoshop are other examples of proprietary standards. You can compete with them, but if you are a new entrant, you need to be compatible. That means in any purchasing decision the industry standard offer will always be on the list and a competitor must both be compatible and offer other kinds of benefits.
The book of the model
Arnoldo Hax’s book “The Delta Model: reinventing your business strategy” is excellent. It gives details of how to select your strategy, how to analyse your market, what capabilities you need and how to execute. I recommend it to anybody who wants to explore this model in depth.
When looking at business strategy, whether for a start-up or a large corporate, I find the Delta Model extremely useful. It is simple and highlights the key choices you need to make. It pushes the customer relationship into the foreground and reduces internal focus. You don’t have to go through all the detailed steps recommended in the book. A simple conversation about which of the core strategies will work, and what approaches will be most useful in getting there, will be revealing.
In his courses, Arnoldo used to say “if the strategy process doesn’t end up surprising you, it hasn’t worked.”.
So keep asking the questions – how will we attract customers, how will we delight them, and how will we keep them coming back?