A recent article over on Chief Executive on how Dow Corning beat commoditization by embracing it tells a great story about how the onset of commoditization might actually provide an advantage to your company and your supply chain and how a careful study and segmentation of the market can be productive and profitable.
About ten years ago, when Dow Corning realized that silicone was about to become a commodity as the markets matured, it did a strategic customer segmentation exercise that revealed that not only did its customers exist within four segments, but that there were still opportunities for success in each segment through better service and appropriate strategies. In particular, Dow Corning realized that it could be much more profitable if it could find a better way to serve the “price seeker” segment which knew what products it needed, and how to use them, but also knew that it didn’t need high value services bundled into the price of the product. This segment simply wanted standard silicones at the lowest possible price point.
However, as CFO Don Sheets realized, you can’t win the price seeker segment merely by cutting prices, as that inevitably results in unacceptably, and sometimes dangerously, low margins. The only way to win is to define and implement an appropriate business model specialized to that customer segment that provides value to the customer (low cost) and the business (reasonable margins).
Sometimes merely cutting value added services (that the price seekers don’t want) is enough, but sometimes it isn’t. If the organization was focussed on high-value, chances are the processes don’t support the price points necessary to win the “price seeker” segment as low-cost was never the primary goal, as in Dow Corning’s case. In order to support the target price points that were identified as necessary to win in the space, production and distribution had to be optimized and, in Dow Corning’s case, minimum order quantities and order lead times were required to create the necessary efficiencies in the supply chain to lower production, logistic, and storage costs sufficiently to support a lower price point. This ensured that all prices could be minimized with proper planning. In addition, Dow Corning created the new product line as a web-enabled business to allow the customer to place orders with no human interaction to minimize resource overheads. This allowed for the creation of a low-cost brand that allowed Dow Corning to tackle the price-seeker market, earn back their investment in three (3) months, and drive a majority of business from new customers.