Chapter 2

An effective business model needs to meet two criteria: First, the model should be able to explain how
businesses and firms achieve superior financial performance. Second, and perhaps more important from
a practical point of view, is the normative side of the model. The framework should provide guidelines
and tools that will help to create a winning strategy and support the successful implementation of that
strategy.

The Best Product strategy continues to be relevant; however, the problem is that in the current
environment it does not describe all the ways that companies compete, nor is it always the most
effective strategic position.

Total Customer Solutions and System Lock-In produce a new business model that details how to compete
successfully in the 21st-century economy.

The Triangle: Three Distinctive Strategic Options

The primary message from the Triangle is that bonding is a powerful source of profitability. First,
bonding is a continuum. We can cut the Triangle at the Best Product point and extend it into a straight
line ending at the System Lock-In point. Second, bonding is the adhesive between a business and its
customers and complementors,

Bonding is a continuum that extends from the first loyalty that a customer feels toward a product to a
full lock-in with Proprietary Standards. A successful Best Product business should generate a dominant
design. Total Customer Solutions draws upon customer lock-in. System Lock-In utilizes the most
complete form of bonding enabling competitive lock-out as well as customer lock-in.
Best Product: The Dominant Design

The competitor generating this design captures the first element of loyalty from customers, as well as
the benefits of first mover advantage. The bonding at this extreme is feeble. Customer loyalty is to the
attributes of the product and they swiftly switch to a different provider when offered superior attributes.

Total Customer Solutions: Customer Lock-in

Customization and learning are the primary tools for creating customer lock-in. Customization does not
create bonding. Bonds are created when the customer produces the customization.

System Lock-In: Customer Lock-in

Learning also adds to customer lock-in. there is great benefit to be derived from customer proximity, as
it allows the service provider to better understand the customer and appropriately customize the
service, but, as importantly, it encourages the customer to learn how to get the most from the service.
As a result, the bonding increases over time and a newcomer finds it very hard to break into a
relationship that has developed mutual investments and benefits to both parties. Customer lock-in
results from formalizing a structure to these relationships that becomes a valuable asset to the
customer going beyond the product itself.

System Lock-In: Competitor Lock-out

Four forces can contribute to competitor lock-out:

1. Restrictions imposed by distribution channels. The brand that moves the most products
generates the most profit.
2. Brands create customer demand that causes retailers to stock the branded product, at the
expense of other competitive products.
3. Innovation
 4. Patent

Proprietary Standards

 It should be based on a platform or architecture open to complementors.

 There should be lock-in between the standard and the complementors’ products.
 It must be proprietary so that there is a way to appropriate the economic rents of the system.

Three ways to achieve Total Customer Solutions:

1. Redefining Customer Experience

2. Horizontal Breadth
3. Customer Integration

Three ways to achieve a System Lock-In position:

1. Restricted Access
2. Dominant Exchange
3. Proprietary Standard.