System lock-in and customer bonding: the Delta Model

Excellent products or services are a basic prerequisite for sustainable business success. On their own, they are no longer enough for future competition. The Delta Model offers a framework for developing one’s own unique value strategy.

For many years, the declared aim of strategy development was to achieve a sustainable competitive advantage over the competition in the respective industry. The focus of strategic considerations was therefore on one’s own industry and its competitors. In many cases, this led to the competition being copied and the customer simply being lost from view.

As a result, exactly the opposite of what was intended happened: little differentiation from the competition and thus greater competitive intensity. The strong product orientation of most companies has further intensified this development and driven the commoditisation of markets even further.

More recent strategy concepts put the customer at the centre. Customers have very different needs and therefore also different benefit expectations, behaviours and bottlenecks. It would be a big mistake to commoditise them.

Attention should therefore be focused on recognising and characterising customers and their needs, segmenting customers and understanding precisely the differences between the individual segments. Only then does it become possible to offer the target customer segments highly attractive value propositions and thus differentiate oneself from the competition.

With the Delta Model, Arnoldo C. Hax, long-standing professor at the Massachusetts Institute of Technology (MIT), provides an approach for avoiding commoditisation and achieving customer bonding. Hax puts the customer at the centre of strategy and thus shifts the focus. A company should not concentrate on being better than the competition. It should strive to achieve customer bonding.

Hax’s basic paradigm is: product and competitor orientation lead to commoditisation. Hax makes a crucial distinction here. In essence, he states that a product can be a commodity, but a business never, because every customer is different.

The core question in the Delta Model is: how can the customer be bound through an attractive and individual package of services, and how can switching barriers be built up that are as high as possible? It is about understanding what really matters to individual customers and implementing customer-specific strategies.

The intelligent use of information and communication technologies opens up far-reaching possibilities for this, both in gaining information about customer needs and customer behaviour and in serving these needs.

Another key point of the Delta Model is the “extended enterprise”. This means involving so-called complementors, that is, providers of complementary products and services, as key players in strategic considerations and making use of them in particular in developing the service packages.

The main objective of the Delta Model is customer bonding. The German translation “Kundenbindung” captures this only inadequately. Customer bonding means increasing the complexity of a relationship, whether with customers or with complementors, to such an extent that barriers arise. These barriers make it unattractive for the customer or partner to switch provider, and they make it very difficult for competitors to poach customers or partners.

The Delta Model contains three basic strategic options: Best Product, Total Customer Solutions and System Lock-in.

The Best Product strategy means attracting the customer through the features of an outstanding product. The focus is on product economics, gaining product share, internal product development and the internal supply chain. Customer bonding in this option is very low and depends only on the product’s characteristics. The strategic focus is on the product, one’s own company, the industry and the competitors.

The Total Customer Solutions strategy means offering the customer a tailor-made solution for their most pressing needs. The focus is on customer solutions, customer economics, the individualised bundling of products and services, and joint product innovation with the customer. Added to this is an integrated supply chain from the supplier via the customer to the complementor.

Customer bonding in this option is potentially high and is reinforced by individualisation and joint learning. The strategic focus is the extended enterprise, that is, one’s own company with its customers, suppliers and complementors.

The System Lock-in strategy aims to create dominance in the market. The focus is on system economics, gaining share among complementors and an open structure in which complementors act as key innovators. Further priorities are a product and service portfolio extended by complementors, the offering of system solutions, and a system supply chain as a network of interlocking companies.

Customer bonding in this option is potentially the highest. It arises from the lock-out of competitors and the lock-in of complementors. The strategic focus is the network of interconnected companies. It is important to note that the lock-in does not always have to relate to the entire system or the entire industry. A lock-in with individual customers or customer segments also falls under this option.

The three basic options are subdivided into a total of eight positions, which can be understood as stages towards customer bonding. The Delta Model is therefore a dynamic concept. The path begins with a solid positioning in the Best Product option, based on an efficient cost structure and innovative products.

From there, a company develops towards Total Customer Solutions by offering customers individual service packages and thereby achieving customer bonding. Opportunities for a system lock-in should be sought and used wherever they arise.

The Best Product option includes two positionings. The first is cost leadership in an undifferentiated product category. Because there can only be one lowest-cost producer, this strategy offers little room for manoeuvre as a competitive position. It also encourages the standardisation of the product offering, the commoditisation of the customer and the intensification of competition.

The second positioning is differentiation. It aims to develop features and functions that make the product distinctive and justify a premium price. As soon as a differentiated product appears on the market, competitors try to imitate it. The competitive advantage is therefore never sustainable.

The Total Customer Solutions option includes three positionings. With the redefined customer relationship, the focus is on the entire customer lifecycle: from the first purchase or first use through the entire period in which the customer uses this type of product or service. The positioning is based on detailed knowledge of the customer, which leads to effective customer segmentation and a differentiated value contribution for each segment.

Customer integration seeks to support the customer’s activities by passing on knowledge and thereby to strengthen their performance. It involves a high degree of outsourcing. This creates a complex network of links with the customer that improves their business opportunities and their competencies in using the product. The company is seen as a bundle of competencies that improve performance on the customer side.

With horizontal breadth, the customer receives an individual solution in the form of a complete offering of products and services, a unique complete solution from a single source. The aim is a dominant position in the customer’s budgets.

The System Lock-in option also includes three positionings. With the exclusive distribution channel, significant barriers make it difficult for competitors to acquire or poach the customer. This position is hard to achieve and maintain, because attempts are usually made to prevent it by regulatory means. It has to be secured customer by customer.

With the dominant platform, the company builds an interface between buyers and sellers that is very hard to bypass once it has reached critical mass. Of all the System Lock-in options, this positioning is the easiest to achieve. The first-mover advantage is decisive here.

With the proprietary standard, the customer becomes aware of the product through the extensive network of complementors whose products and services have been developed specifically for use with this product. This option is not available in most industries. Where it exists, however, the advantages are enormous.

The Delta Model sets four strategic tasks: innovative customer segmentation, the analysis of core competencies, the definition of the value proposition and the Strategic Agenda.

The first questions to be answered are: who are our customers? What different needs, behaviours and benefit expectations do they have? Which characteristic customer clusters can be formed? It is particularly important not to define the concept of customer too narrowly and to include the entire industry value chain in the analysis. One’s own business is often influenced by groups with which there is no direct business relationship at all.

In addition, market segmentation must be distinguished from customer segmentation. A frequently observed mistake is to use criteria of market segmentation such as regions, products, company size, industry or age for customer segmentation. However, mid-sized companies are not all the same, any more than all companies in a region or all end consumers aged 20 to 30.

For customer segmentation, transformis therefore follows the five generic dimensions recommended by Hax. The first is customers’ attitude and their willingness to do business with the company. The second is the differing degree of added value desired. The third is the customer lifecycle. The fourth is different buyer patterns, and the fifth is orientation towards sales channels.

Once customer segmentation is complete, the customer segments identified are placed on the eight stages of the Delta Model according to their benefit expectations and characteristics.

The analysis of core competencies is about more than listing a company’s strengths. It is about identifying the bundles of capabilities that are deeply rooted in the organisation, have developed over several years and form an essential basis of competitiveness.

An effective core competence has to meet three requirements. It must lead to customer benefit, even if the customer cannot trace the perceived benefit back to the company’s core capability. It must lead to differentiation, so it must not be something that can be copied or even bought in the short term. Building up core competencies usually takes several years.

Third, the core competence must not be tied to a particular product or a particular business. It must be replicable or expandable. Deeply rooted core competencies can be transferred to different business segments and product areas.

In this step, the existing core competencies and those sought in future are identified, examined and clearly described. The eight stages of the Delta Model provide orientation.

For cost leadership, the competencies are identified with which considerable advantages over competitors can be built up in the cost infrastructure. For differentiation, it is about the competencies for the continuous development and marketing of highly differentiated products.

For the redefined customer relationship, the existing knowledge about customers is analysed. The competencies for acquiring, satisfying and retaining customers are identified.

For customer integration, the company’s unique knowledge base is assessed. A deeper understanding needs to be developed of how this knowledge can be transferred to customers in order to help them solve their most pressing problems and contribute to improving their profitability.

For horizontal breadth, the complete product and service portfolio that the company can offer its customers, alone or with the support of its extended enterprise, is analysed and described.

For the exclusive distribution channel, competencies are identified for creating entry barriers, which prevent competitors from accessing the customer base, and exit barriers, which bind customers to the company.

For the dominant platform, the possibilities of providing customers with proprietary systems that are decisive for their business success are examined.

For the proprietary standard, it is about the competence to generate significant and influential intellectual property. It attracts complementors and creates a strong network over which the company retains as much control as possible.

This makes it possible to match customer requirements in the individual segments with the company’s own core competencies. This is an essential basis for defining the value proposition for the target customer segments and thus for the company’s strategic positioning.

The third step is about deciding, taking into account the core competencies identified, which customer segments are to be the focus in future. The bonding potential of the respective customer segments plays an important role here. This concerns the question of which customer segments can, on the basis of their needs and behaviours, be developed towards Total Customer Solutions and, if possible, System Lock-in.

So it is about deciding consciously for, and therefore also against, serving individual customer segments. It is important that the company chooses its customers and is not chosen by them. Otherwise it gives up control.

A separate value proposition can now be defined for each target customer segment chosen. The value proposition is the unique combination of benefit criteria that, from the customer’s point of view, influence the purchase decision. The presentation is based on Kaplan/Norton.

Once the value propositions for the target customer segments have been clearly defined, the relevant levers for implementing these service packages must be identified, the necessary measures derived and bundled in an implementation plan, the Strategic Agenda. The focus is on the three adaptive processes of the Delta Model: operational effectiveness, customer targeting and innovation.

Operational effectiveness comprises all processes that create products and services and make them available to the customer. The aim is to organise these processes as cost-efficiently as possible.

Customer targeting comprises all processes that ensure customer relationships are managed effectively. In particular, it is about attracting customers, satisfying their needs and retaining them.

Innovation comprises all processes that ensure a continuous stream of new, attractive products and services, from the idea to market readiness.

The individual value propositions for different target customer segments result in very different and sometimes contradictory requirements for these adaptive processes. However, a company should be able to offer equally competitive solutions for different and contradictory customer needs. This is an enormous challenge for many companies. It has to be discussed and resolved when drawing up the Strategic Agenda.

The first step consists of three work blocks: customer segmentation, identification of core competencies and specification of the value proposition.

Customer segmentation is preceded by a company check that looks at corporate development, strategy, organisational structure and current challenges. In a three-day workshop with key players from marketing and sales, the industry value chain is analysed and the critical success factors of the industry are identified. Characteristic customers are identified, customer clusters are worked out and characterised by their needs and requirements. The result is an industry-specific customer segmentation outside existing observation grids.

To identify the core competencies, the necessary documentation structures and a suitable search grid for the composition of the team are prepared. In a one-day workshop with selected key players, the storyline is described. The successes of recent years are worked out and their causes made concrete. Capabilities are bundled into core competencies, the core competencies are tested and flops are analysed. Finally, the validation is planned. The result is the company’s core competencies.

To specify the value proposition, the documentation structures and a proposal for the structure of the value proposition are prepared. In a two-day workshop, the management team defines the attractiveness criteria for the identified customer segments and selects the attractive target customer segments. It agrees on the structure for describing the value proposition and defines basic criteria and differentiation criteria.

The value proposition and the economic targets for the defined target customer segments are then specified and the need for action is derived. The result is a defined value proposition for the target customer segments.

The Delta Model offers a new perspective on customers, competitors and one’s own strategic positioning. Engaging intensively with the specific needs of potential customers, and the characterisation and segmentation that follow, enable a company to develop unique value propositions that give it unique selling points. Important participants in the value chain can be assessed systematically and the differences worked out in order to arrive at one’s own unique strategic positioning.

The lock-in concept reveals possibilities that traditional models and concepts do not even touch on. In addition, the Delta Model can broaden the awareness of key players in such a way that something new emerges in the discussion and a foresighted self-renewal process becomes possible. The result is a unique offering with sustainable competitive advantages.