Forget Commodities. I’m a “Specialty Supplier.” Right?
When
it comes to margins and serving customers who remain loyal to us due to the
high-end products we provide—everyone knows the value of being a specialty
products’ provider, right? And in addition, its our least loyal, price-shopping
customers that make us often consider cutting out commodity products
altogether.
So
what would be wrong with increasing our focus on specialty products—and backing
away from commodities? Well, not so fast. There is that issue of having a “full
shopping cart” from which to sell—and if you compare this to a grocer—you’ve
got to have both milk, eggs, and butter on the shelf—and your own
bakery, fresh fish, and maybe even organic produce.
But
perhaps a more convincing reason to think carefully before giving up the
“everyday stuff” and focusing on the high-end only is the threat the
competitive low cost commodity provider poses of moving up the chain and
competing with us nose-to-nose for the most profitable business too.
Consider
the examples from the steel industry described in Clayton Christiansen and
Michael Raynor’s book The Innovator’s Solution. They describe a steel
industry in the 1960’s that was dominated by the big “integrated” mills who
watched as smaller “minimills” started up and, due to their low manufacturing
capabilities, could only produce rebar—a low grade form of steel.
When
the minimills entered with rebar—which accounts for only 4% of total steel
use—and offered it at drastically lower prices—the large mills were almost
happy to stop offering it as it only produced margins of 7%. They then began to
focus their resources on higher margin products and customers.
When
the minimills improved manufacturing and began to offer angle iron and other
components—once again, the large mills were almost relieved to walk away from
this low profit business—as the margins had always been low in this category as
well. Once again they aligned resources and product offerings on more discrete
customers segments—allowing the minimills to capture the low margin commodity
business.
This
happened again with structural beams, which the minimills perfected after great
effort. Once more, they exerted heavy competitive pressure on the large mills
and, once more—they took away more share.
Finally,
the minimills perfected the ability to produce sheet steel—and the end of the
story is, that today the minimills have grown larger than the former
traditional mills—such as Bethlehem Steel—and the industry now is forever
changed.
There
is a point at which a company needs to assess, “Do I walk away from low margin
commodity business and just focus on the profitable high-end? Or, do I invest
in a broad spectrum of product and services offerings, compete on the lowest
margin business, and keep my share of market?”
This
will be a different decision for every company, in every market, and against
every different form of competitor.
However,
before you retreat “upstream” to Specialty-Land too quickly—you may wish
to consider what door you leave open—for your competitor to enter.
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