Priorities of Each Adaptive Process
The concept of assigning priorities to the adaptive processes could be controversial. Some might insist on giving equal importance to each process and argue for the criticality of simultaneously having low cost, excellent customer targeting, and superior innovation. Choosing priorities does not dismiss one process or another but recognizes the intrinsic difference of each strategic position with its unavoidable, inherent trade-offs.
We've ranked the adaptive process priorities for each strategic option (see figure 8.7). The "consistency corridor" aligns the process of highest importance to each strategic position. Accordingly, the best-product position needs the lowest-cost infrastructure, which originates in the operational effectiveness process. Second, it requires the support of a stream of new products to prolong its current vitality into the future, the innovation process. Finally, the customer targeting process ensures the massive access to distribution channels.
Figure 8.7: Priorities of Adaptive Processes in Each Strategic Position
The customer solutions position has the effective targeting of the customer as its first priority. This is necessary to identify the required product bundles and to detect the needs for customization. Second, the operational effectiveness process ensures the delivery of the products and services to improve the customer economics. Innovation has the third ranking, not because it is unimportant for joint product development with the customer, but because the customer solutions position does not necessarily require leadership in new products, services, and features relative to that called for in the other strategic positions. Often the new product capabilities to support this strategy originate through alliances and the close collaboration with the customer.
The system lock-in position has innovation as its leading adaptive process. It contributes to the creation of the systems architecture that allows for standards to be conceived and owned. The next level of support comes from targeting the system's complementors to consolidate the lock-in position and, quite significantly, the lock-out of competitors. Finally, the operational effectiveness position is responsible for improving the system performance. While this process is important, the two previous adaptive processes are more relevant.
Feedback is a core attribute of the Delta model and addresses the additional problem in linking strategy with execution mentioned earlier—growing market uncertainties and the requirement for an adaptive strategy. During implementation, managers need to monitor its performance and intended results and make corrections as needed. Closely related to feedback are learning and communication. As actions are tested and their merits or limitations become apparent, managers can understand more deeply the business issues they intend to solve.
Feedback is an integral part of the processes. For example, Capital One, a leader in the credit card industry, strongly emphasizes customer targeting. It has realized huge competitive advantage by recognizing that the credit card industry isn't one market, but millions. While the credit card may seem simple—money and interest rates—the potential variations are infinite. The challenge is to identify these segments before the competition. The linchpin of Capital One's customer targeting process is scientific trials, testing, and feedback. At the beginning of the process, Capital One managers brainstorm offers, drawing from a broad range of sources, including intuition and research. Next, they vary the core offer along the key dimensions—product, price, promotion, and channel—and identify a range of customer cells for test marketing. Then they screen the results to select the offers with the highest profit or net present value in view of the full customer life cycle.
In-depth metrics are critical in this screening. Capital One dissects profitability down to the smallest micro-segment, for example, types of customers, frequency of use, type of use (credit or transactions), bill paying, tenure, and costs of acquiring the customer. Having the right data is clearly important because acquisition costs have risen from $40 to more than $200 per customer during the past ten years.
If an offer passes the test, Capital One rolls it out to the whole target group. More importantly, information generated in the process yields hypotheses for other offers that may be more profitable. Capital One designs a family of offers with the understanding that they will not necessarily be successful, but that they provide seeds for future success. This approach contrasts starkly with the conventional "trial", in which a company launches a test of one product variation to a nonsegmented group of customers. When this fails, the company learns little in the process that can indicate a more successful variation.
Capital One's approach has enabled it to be the first to exploit innovations, such as balance transfers and secured cards. It is a competence that extends well beyond credit cards and is applicable to many other products, such as cellular phones, installment loans, auto loans, mortgages, life insurance, and mutual funds.
All three adaptive processes have common responsive mechanisms for obtaining feedback:
Set hypotheses in the context of the vision expressed by the Delta model and the role of each adaptive process based on the business strategic position.
Identify variations to reflect the drivers of cost, revenue, and profit for the business. Each adaptive process has its own set of drivers that change according to the role of the process as the company moves from best product to customer solutions to system lock-in.
Admit that the future is unpredictable by conducting trials and tests. In a basic sense, optimization represents an unreachable ideal that can be more destructive than helpful; instead we are committed to a continuous stream of experimentation.
Measure and screen performance to allow the company to separate success from failure and learn from both. In-depth measures are essential. High-level, aggregate indicators do not sort out the pockets of high profitability.