Chapter 8: The Delta Model - Adaptive Management for a Changing World

Arnoldo C. HaxDean L. Wilde II

Overview

The most influential contemporary strategic framework, espoused by Michael Porter, is based on two exclusive ways to compete: low cost or differentiation.^[1] A company can achieve low cost by aggressively reducing costs or differentiate by creating something that is perceived industrywide as unique. Although low cost and differentiation call for fairly distinct strategies, both center on product economics or on delivering the "best product". Customers are attracted by a low price or by the differentiating product characteristics that go beyond price.

Although the best-product strategy continues to be relevant, our research shows that it does not describe all the ways companies compete in the current environment. Two companies illustrate this point:

• Microsoft has been a phenomenal success, perhaps the model for a modern business in a complex environment. By 1998, Microsoft had created $270 billion of market value in excess of debt and equity. Did it do this by having the best product? Microsoft does not have a 90 percent share of the market for personal computer operating systems because of low price. While it may have an effective cost infrastructure, its position is not based on being the low-cost provider. On the other hand, its operating system and, most certainly, the MS-DOS product that fueled its dominance, has never had the best features or been the easiest to use. In fact, many would argue that Apple had the best set of differentiated features. Nonetheless, Microsoft is unambiguously the market leader. The source of its success is a distinctive competitive position that is not best product, but rather one supported by the economics of the system as a whole, which we label "system lock-in".

• Jack Welch, General Electric's legendary CEO, gets upset if someone describes GE as a conglomerate. GE's tremendous strength in financial services has made it unique among its peers in its ability to provide sophisticated financing options to customers and support to businesses in its portfolio. Beyond financial services, GE has actively extended from selling products to providing after-market services for many of its core businesses. In the aircraft business, for example, where GE effectively splits the market 50/50 with Pratt & Whitney, the commercial airlines have traditionally maintained their own engines. GE is now offering to maintain their engines, and can present a fairly compelling offer to the airlines, owing to their technical expertise and their ability to capture a higher volume of business than any one carrier. GE signed a ten year, $2.3 billion contract with British Airways in March 2000 under which GE will carry out 85 percent of the engine maintenance work on BA's entire fleet—including engines made by rivals Rolls-Royce and Pratt & Whitney. Today, GE is busy transforming the carrier's maintenance practices. It is moving BA to a just-in-time inventory system for parts, and instituting self-directed teams and other advanced management practices from its own plants. David J. Kilonback, who oversees the deal for BA, says the shift saved the carrier money and management time, in addition to providing speedier engine turnaround. Building on the BA deal, GE inked a $1 billion, multiyear contract in September 2000 to service US Air's GE engines. A closer examination of GE thus reveals a wellconceived strategic approach, which we label "customer solutions".

The Delta Project

Three years ago, we initiated a dialogue among some senior executives and faculty members at the MIT Sloan School of Management to identify the issues and challenges that managers were facing. The senior managers participating were Skip LeFauve, CEO of Saturn; Gerhard Schulmeyer, then CEO of Asea Brown Boveri America; Iain Anderson, CEO of Chemical Coordination at Unilever; Judy Lewent, CFO of Merck; and Bert Morris, chief executive of operations at National Westminster Bank. The faculty members were Charles Fine, Arnoldo Hax, Henry Jacoby, Thomas Magnanti, Robert McKersie, Stewart Myers, John Rockart, Edgar Schein, Michael Scott Morton, and John Van Maanen. We explored in depth the forces confronting business worldwide to determine whether current frameworks responded to modern issues.

What resulted from the discussions was a coherent picture of a world that defies clear definition. The only common denominator is continuous, inexorable change. Conventional theories and business practices are not providing the necessary guidance and support for decision making.

The Delta Project discussions were the foundation for our own reflections on how to respond effectively to these challenges and led to a new framework we call the "Delta model". It is anchored in a different business model and offers adaptive processes that can help managers deal with the new challenges of complexity, uncertainty, and change.

Clearly, existing management frameworks do not address the challenges managers face today (see the sidebar). Based on our research on more than 100 companies, we have developed the Delta model, which makes four major contributions. First, it defines strategic positions that reflect fundamentally new sources of profitability. Second, it aligns these strategic options with a firm's activities and thus provides congruency between strategic direction and execution. Third, it introduces adaptive processes with the capability to continually respond to an uncertain environment. And, finally, it shows that granular metrics are the drivers of performance in complex industries.

^[1]Porter 1980.