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Strategy: Porter's Five Forces vs. Hax's Delta Model

3/22/2012

20 Comments

 
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Strategy: Michael Porter's "Five Forces" Model vs. Arnoldo Hax's "Delta Model"
There are two strategy models that I use and highly recommend.

The “Five Competitive Forces” model was developed by Dr. Michael E. Porter (Harvard) in 1980 and has become the classic tool for analyzing the industry structure in strategic processes.  Porter identified five competitive forces that shape every industry and market.

The model is based on the insight that corporate strategy should meet the opportunities and threats in the organization’s external environment. Competitive strategy, in particular, should be based on understanding the industry structures and the way that they change. 

Porter's five forces are:
· Threat of substitute products or services, e.g. Palm PDAs and Blackberries replaced by Smartphones
· Threat of new market entrants, competitors
· Bargaining Power of customers/buyers, e.g. haggling
· Bargaining Power of suppliers, e.g. raising commmodity prices
· Rivalry among existing competitors


I’ve not found much fault with the model except that the advent of the internet has made Porter's model even more dynamic and accelerated.  For example, the customer has increased his bargaining power with the ability to compare products and prices online instantaneously and new competitors can easily sell worldwide.

I attended a course from Dr. Arnoldo Hax at MIT Sloan (a brilliant and engaging person) introducing a competing strategic model named the Delta Model.  The Delta Model does not treat the customer as a competitive force but rather as the focus and reason for being.  The goal is to attract, satisfy (delight), and keep the customer. The Model shows a wide range of potential strategies – all pointing to the use of technology to promoting bonding (with customers, partners, etc.). 

The range of Delta Model potential strategies include:
· Low Cost – Southwest Airlines, Walmart. This is very difficult since you must have the correct infrastructure and operations to sustain it.
· Best Product – best technical features, superior in performance, etc.
· Redefining the customer experience – Amazon (both Amazon.com and via the Kindle), Starbucks, Apple  iTunes, Singapore Airlines. This is an appreciable change in the customer value proposition.
· Customer integration – Facebook, Google is Dell, SAP are tied deep into many companies’ IT and manufacturing respectively.
· Dominant Exchange - Google, YouTube, Facebook, Wikipedia, iTunes are the defacto paths to browse, see videos, network socially, research, and sell/buy music respectively.  Dominant exchange is achieved when a critical mass of collaborating users is reached and each new user makes the service even more useful (e.g. YouTube, Facebook).
· Horizontal Breadth – Fidelity, Amazon offer “one stop shopping” for financial products and very much all products respectively.
· System Lock-in - Intel, Microsoft very much own the microprocessor and operating systems in PCs.  Apple owns the tablet market with Google Android moving in. System Lock is the strongest form of bonding and integration among complete industries around a product (e.g. all the software companies developing Windows specific solutions). It focuses in the entire system economics instead of product-centered economics. Success is due primarily to the complementors that create solutions based on your product.

Strategies based on Best Product or Low Cost are the most difficult to sustain.  Dominant Exchange and System Lock-in strategies are the most sustainable because they involve the complementors and the whole system.

You can see the Delta Model strategies being used in companies today. Amazon is a dominant exhange in ecommerce and becoming the dominant exchange in e-reading with the Kindle. Apple is covering many of the strategies with arguably Best Product(s), Redefining the customer experience, Dominant Exchange, and System Lock-in.  Google is arguably Best Product (browser and analytics), Dominant Exchange, customer integration (Analytics), and also moving into System Lock-in with their browser and Android.  All of these companies are aggressively using technology to enable their strategies.

Which model is best?
I don’t think that one has to use one model exclusively of the other. For example, one has to recognize the bargaining power of the customer (Porter) and should therefore constantly watch its cost structure but an organization should never think of the customer as anything but the center of its strategy and also work on its differentiators and compelling value proposition.  Hax is correct in saying that Porter’s model is very turbulent and always in a state of violent competition from all sides…but that is a true reflection of the market.  The Delta Model provides a customer centric approach with a number of potential strategies and is proactive in approach (IMHO).  Hax does have a point that you wouldn't constantly be looking over your shoulder at competition if you are looking forward focused on bonding with the customer and doing the right strategy.

It’s worthwhile to review your organization, market structure, and competitors against Porter’s and Hax’s strategic models.
20 Comments
Howard Nomura
3/22/2012 02:38:43 pm

Thank you. I've never heard of the Delta Model. Interesting.

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James Seymour
3/27/2012 05:30:20 am

I've always used the Five Forces model in strategy. At first glance, the Delta Model seems more for analyzing where you are so rather than being pro-active I will have to research and study this more. Thank you.

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Julian Cooper
4/27/2012 11:17:29 am

Porter really does stand the test of time. I've looked at alternative models over the years but nothing seems to quite topple Porter. I like this model though, even if mainly a reminder of the mix of tools and approaches that technology companies in particular can use.

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Frank Lio
4/30/2012 04:03:20 am

Agreed. Prof. Hax said that Porter's model is less relevant due to the internet and that he never anticipated on-line shopping breaking up the model, Yet, I recall Porter's response that the internet simply accelerated the interaction between the 5 forces. I still see Hax's model as a complementary and valuable tool to develop strategy.

Thanks for your comments!

Gao
7/9/2012 11:31:13 pm

Thanks for detailed elaboration on the two concepts. I am familiarising my self with procurement process and found this informative.

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Frank
7/18/2012 03:15:23 am

You are most welcome!

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Frank
7/18/2012 03:15:55 am

Thank you for the reference and your kind words!

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7/17/2012 10:40:58 pm

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Frank
7/18/2012 03:14:48 am

Thank you for your kind words!

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Mkt Maven
10/26/2012 08:29:39 am

Interesting concept. I have never seen this model before. Porter's model has served me well and survived the test of time. Thanks for sharing.

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Christine Chang
12/7/2012 04:32:22 am

So different. I have not seen this before. Thank you.

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AMILCAR MELENDEZ
3/12/2013 01:29:07 am

I love trhe concept, seems very challenging vs Poter's model of
competitive advantage.

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Frank Lio
3/13/2013 10:09:11 am

Yes, Amilcar, it does take some internalizing to understand the Delta Model but it is actually a very simple strategy: "Bond with and make the customer the center of your strategy". You can have fun studying different companies and see how they employ the Delta Model to win. Thanks for your comment!

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Poker Stars link
4/1/2013 05:03:45 am

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Frank
4/2/2013 03:28:03 am

There are plenty of blog creation sites that start out with free basic packages - it takes more creativity than money. Weebly and Wordpress have free starter sites. Feel free to contact me vai the "Contact" form on the menu bar.

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Reiffel Range
2/8/2014 02:35:16 am

It seems to me that these two models are complementary. Five forces allows users to analyze the competitive forces in their industry, but provides no guidance about which strategy to adopt. The delta model assumes the reader understands the dynamic of the industry, but provides a set of strategic choices. Neither prescribes how to match strategy to situation.

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abhay nadkarni link
4/9/2016 05:08:48 am

I see Porter's model as analytical for better understanding of what to do, and in strategic action terms, as defensive against various competitive and external threats.

I see Hax's Delta model as being proactive in gaining competitive advantage. I would recommend reading an earlier book that Hax and Maljuf wrote on developing strategy, which is more comprehensive.

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Frank Lio
4/11/2016 12:56:05 pm

Excellent insight. Prof. Hax actually said that Porter was more akin to looking over your shoulder. He felt that his model was more aligning with the customer. Thanks for your comment and suggestion.

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Herman Van Herterijck link
2/28/2017 03:21:55 pm

I just discovered this and I like the way you analyzed and summarized these two models. I had the great opportunity to work with both models and also in real live cases with as well M. Porter at HBS and A; Hax at MIT. I fully agree with your conclusions. The tis models are complementary and help you to think thoroughly through all issues when developing your strategy. The Has model also helps you furthermore in developing your slaes and marketing strategies... and in that context I like to refer to the Customer 9+ organization (see also Earl Sasser of HBS).

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    Frank Lio is a Product Manager, Strategist, and Change Agent in the Hi-Tech industry. His growing track record of successes include creating 3 winning software products, leading nationwide seminars, and turning around a failing business unit.  He is currently serving a dual role as Product Manager and Business Team Support Manager at Instron ITW.

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