Discovering New Sources of Profitability in a ... · Discovering New Sources of Profitability in a Profitability in a Networked Economy Networked Economy ... The case of Codelco Codelco
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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
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