The triangle we discussed earlier is the motor that drives the selection of strategic positioning, which, in turn, defines the role of each adaptive process. A firm's actions must be aligned with its strategic position, and the results must give feedback for adapting the strategy. This is the essence of adaptive management. Consistency, congruency, and feedback are the guiding principles. Not only does the role of each process need to adapt to each strategic option, but also the priorities with regard to each are affected. Next we examine the role of each adaptive process in supporting each strategic position of the business (see figure 8.6).
| || ||Best System Performance |
| ||Target Customer Bundles||Target System Architecture |
|Product Innovation||Customer Sourced Innovation||System Innovation |
When operational effectiveness supports a best-product strategy, it is imperative to reduce the product costs by paying careful attention to the drivers of that cost. However, in the case of customer solutions, operational effectiveness is also concerned with the horizontal linkages between products in the bundled offer. The ultimate goal is to improve the customer's economics, even if that sometimes raises the product's costs. The relevant cost focus is the combined impact on the customer's business and the company's. In the system lock-in strategy, the product cost is perhaps the least relevant among all the positions. What is important is the value of the system through the creation of standards, the investments by the complementors, and their integration to improve overall performance.
For example, a data communications provider of private lines seeking a bestproduct position would focus on reducing maintenance costs to a minimum, given certain quality guidelines. A customer solutions provider would look closely at the customer's activities. It would reduce the customer's costs by adding equipment to diagnose a problem or perhaps by adding large-scale alternate back-up systems. In intranet services, in which a customer buys a highly secure private-line network using Internet protocols, a company might attempt a system lock-in position. Customers may find it increasingly expensive to switch or split vendors as they add applications and geographic locations to the same secure intranet. Establishing a low-cost infrastructure is less important than encouraging the customer to install more sites and to use more applications that run on an intranet platform.
When supporting a customer solutions position, companies seek to target key customers by offering a bundled solution, either alone or through alliances. This often requires targeting vertical markets and resorting to customized products as appropriate.
Channel ownership itself becomes an issue, in order to gain greater knowledge and access to the customer. For instance, in 1993, Merck, a leading research-based pharmaceutical company, acquired Medco, a premier distributor of generic drugs. This allowed Merck to obtain the leading mail-order catalog, have access to unique distribution, and gain ownership of a customer database covering patients, physicians, and proprietary formulary.
When locking in a system, the key "customer" targets are the complementors, so the company can consolidate the lock-in position and neutralize competitor's actions. In short, the targeted customer is fundamentally different in these three options. At times, the final consumer or product user, although important, is not the critical strategic target. For example, we all know that its customers do not universally love Microsoft. The power of the owner of the systems standards gives the end user few choices.
In the software industry, software game providers typically adhere to a bestproduct strategic position and target customers as a way to get access to as many customers as possible. American Management Systems, which has a customer solutions position, implements customized software and thus targets vertical markets. Novell, which has a system lock-in position, has the proprietary standard for LAN operating systems and needs to put its premium effort into attracting and serving both application developers and the 30,000 value-added resellers that distribute and customize NetWare.
When it comes to supporting a best-product strategy, renewal of the business is seen in terms of securing a continuous stream of products, often by sharing a common platform. If truly successful, that innovation will lead to establishment of a dominant design that represents the strongest base for competitive advantage with a bestproduct strategy. In the case of the customer solutions strategy, innovation plays an important role through the successful development of joint products with key customers. In this respect, this adaptive process is central not only for developing future customers, but for maintaining current ones. Furthermore, the customer is the primary source of innovation, not the conventional R&D labs.
The role of innovation in system lock-in is perhaps more critical than in any other strategic option. Often the technology is responsible for designing the architecture that will generate the system standard, that will allow the ownership of that standard, and that will preclude the standard from being copied or becoming obsolete. As we have indicated, it is more likely that a standard will be achieved if the architecture is based on open interfaces and characterized by rapid evolution with backward compatibility. In this instance, it is the innovation of the complementors that sustains the standard.
In the semiconductor industry, Hitachi and NEC are among the leading producers in dynamic random access memory (DRAM) semiconductors. This segment has been characterized by short product life cycles and declining prices. To succeed, every one to two years these companies develop new chips, which employ technology four times better than the previous generation, in facilities that cost more than $1 billion to construct. These two companies have chosen the best-product position and pursue innovation to support their competitive advantage.
Motorola's semiconductor business follows a customer solutions strategy that focuses on the automobile industry, among others. The BMW 740 has fifty microprocessors that control many aspects of its functionality and are critical to its differentiation. Motorola works with the manufacturers to develop these customized chips; the innovations are joint.
As a system lock-in provider, Intel depends on the rapid development of a complex standard. It developed five microprocessors, from the 8086 to the Pentium, from 1978 to 1996.This innovation is unique in at least two respects. First, it requires backward compatibility, which allows old complementors to work with the new product and ensures the continuation of the standard. Second, having secured the standard, it has the luxury of occasionally incorporating a larger part of the system into its standard to enhance its features and to further extend the interfaces with applications. There is a balancing act in grabbing additional functions from one complementor and in preserving the relationships and open architecture with other complementors, but a proven standard allows the freedom to do this.