A well-known case study by Harvard Business Review documents how Dow Corning elected to disrupt its own silicon business rather than allow competitors to steal market share by offering lower price points. The story is worth retelling because Dow Corning’s business model innovation keeps evolving to meet the needs of price-driven customer segments.
As the information age took full hold in the 1990s and markets globalized, Dow Corning recognized that its high-end offering of services surrounding its product left the growing number of price-driven customers shopping elsewhere. “We recognized that a number of product lines were becoming commodity-like, and customers were no longer willing to pay a premium for them,” comments 20-year Dow Corning veteran Stacy Coughlin, an architect of the 2001/2 business model innovation project that created a price-driven brand, XIAMETER. Now the head of Global Marketing Communications for this brand, Coughlin is a key strategist in keeping the XIAMETER® brand and Dow Corning® brand distinct while allowing the XIAMETER brand to share its sister brand’s halo of quality and reliability. The halo enables XIAMETER brand products to offer a compelling value promise – market based pricing without the risk of production interruptions due to supplier quality issues.
To win back the price-conscious shoppers, the XIAMETER® business model unbundled services from Dow Corning products and moved customers to on-line ordering and Web-based product information. Think Amazon applied to a specialty chemical that, due to its maturity, is less special. Products in the earlier stages of the life cycle, on the other hand, bear the Dow Corning brand. This brand comes with applications advisors who help customers use customized Dow Corning silicon-based solutions to optimize their own product’s performance.
I learn in my interview with Coughlin that the XIAMETER brand was improved and dramatically expanded in 2008, a testimony to Dow Corning’s understanding of the requirement to evolve business models in today’s hypercompetitive economy. While some silicon offerings have matured, this substitute for petroleum-based products still offers many opportunities for innovation. Therefore, “in 2008 we refocused the XIAMETER business model to put a lot more of our company’s internal resources into the innovation side of our business – the Dow Corning Brand products – while improving our commodity-product offering. Because we faced both a global recession and far more competitors, the move came at the right time,” according to Coughlin.
With a proven business model, the XIAMETER® team moved many more products to their brand. “We needed to expand the product offering to follow our customers into developing markets where even our most basic products in each category were a step up. And we had to offer these products at market-based prices – similar to our competition,” Coughlin shares. “Furthermore, with far more competitors, including China, products were commoditizing far more rapidly.” The XIAMETER team also dramatically increased marketing communications to build awareness and consideration, added distributors and lowered minimum order sizes.
But how do you manage two brands competing for the same customer, avoiding resource duplication and customer confusion? How do you hold onto high prices when benefits support higher prices, while retaining share in commodity-like products? Dow Corning uses platforms.
Product line managers oversee product category platforms, determining where products are in the life cycle and deciding which products fall under which brands, all with an eye to balancing capacity and brand mix to maximize overall profitability. Everything else except sales and marketing – in other words manufacturing, governance, sustainability and C-level management resources – is shared by the two brands.
There are challenges. “With different sales organizations for each brand, sales representatives must work closely to understand customers’ overall needs – in custom and standard products – so communication must be stronger than ever before,” according to Coughlin. And, “internal communications about each brand, especially across two commercial organizations” is still work-in-process.
In order to be able to sell XIAMETER® products at market-based prices, Dow Corning built a highly efficient operating model to achieve profitability targets. Coughlin states, “Because the business – from ordering to fulfillment – is automated, we reduce the need for manual work that adds costs.” (Dow Corning, a joint venture of Dow Chemical and Corning is a private company and does not release financial information.)
“We also have a highly integrated SAP system utilized in real time, allowing us to offer two brands without adding operational costs, which also adds to efficiency” Coughlin notes. “It takes strong leadership and change management to implement something this dramatically different. I give our executive leadership kudos for making it happen.”
Are you losing segments because of the design of your offering? Disrupt yourself before a new entrant seizes the opportunity.