Dow Corning is a global leader in silicone-based products. It sold its products to more than 80 countries globally and has a 40% worldwide market share in 2006. Its success to date was a large part driven by a major marketing initiative that revived the company half a decade ago, the launch of dual brand strategy and the resultant launch of the Xiameter brand. The Xiameter brand was an instant success, but is now experiencing challenges from increasing competition.
This paper will discuss what caused the decline of Dow Corning to force it to introduce the Xiameter brand. It will then discuss one major change that complemented this Xiameter brand and it was the change in customer segmentation scheme. The report to conclude by providing a number of recommendations that would ensure continued success of the Xiameter brand. THE DECLINE OF DOW CORNING Dow Corning experienced some challenging years from the period of 1995 to 2001.
While its sales were on average positively trended (excluding the 2 years when the global economy collapsed, explained later), however, its profitability and net income have been falling steadily. Such poor performance can be attributed to the changing forces in the external markets, and also the misalignment internal to the Dow Corning organisation. In the external environment, a number of factors have led to the decline performance of Dow Corning between 1995 and 2001. Marco economic slowdown – there were two tough years for Dow Corning, in 1998 and 2001, where net income was in the red.
The causes were obvious, 1998 was the year post the Asian Financial Crisis and the slowdown in industrial economy was significant globally, and in 2001, the global economy headed into its first recession in 20 years (OECD measures) and this was further worsened by the Sep 11 terrorist attacks. Both of these macroeconomic movements led to a sharp reduction in the industrial economy globally, thereby greatly reducing the global sales and net income of Dow Corning. Commodization of silicones market – it’s been more than half a decade since Dow Corning’s pioneering development of silicones application in the commercial market. A large number of silicone products, and the associated technology behind it, are now mature products that can be easily replicated. A large number of Dow Corning’s offerings can no longer be differentiated with competitors’ offerings. Due to the commodization of silicones product, many customers have become the ‘experienced purchasers’ or ‘price seeker’ who is highly price-sensitive and not willing to pay for premium to get value-added service.
Since Dow Corning has put a lot of focus to produce tailor-made service and products to its customers, it was very difficult for Dow Corning to sacrifice their profit margin to sell its product at a lower price, thus it led to the fact that Dow Corning has lost its market share to those low-margin and smaller scale silicone company who produce standardized product at very low price. * Growing base of price seekers – Dow Corning’s inability to match the rock-bottom prices being offered by low price competitors was further worsened by the fact that the customer base of price seekers are growing rapidly.
This meant more and more customers were defecting from Dow Corning, impacting its performance. Dow Corning’s poor performance was largely due to the external factors listed above, but they were complemented by the following internal factors. * Complacency culture – Dow Corning internally was quite complacent because it believed its company and products were superior and premium to other offerings in the market. Such believe also meant premium prices were maintained. It is this complacency that made Dow Corning unaware of the commodization trend of silicones market and the emergency of low price competitors.
Unable to respond due to this ignorance, Dow Corning performance declined. * Poor management – it took five consecutive years of stagnant financial performance before management of Dow Corning realise something is wrong. Dow Corning was probably lucky this happened more than a decade ago, if it happened in the increasing competitive market today, the company would have struggled a lot more than it did. THE NEW CUSTOMER SEGMENTATION AND ITS BENEFITS Dow Corning success to date is driven by its relationship with customers.
A lot more could be achieved through this relationship by further understanding the customers and this is exactly what this new needs-based segmentation scheme was able to achieve. Dow Corning previously believed industry groupings were the most ideal way to serve its diverse customers base, but it was with this new needs based segmentation it revealed more about its customers and improved the way customers are served. Firstly, exact needs of customers were revealed with this new segmentation method.
While Dow Corning certainly would know its customers before this segmentation change, but because previously segmentation was done by industry groups, Dow Corning would approach its clients with the mindset on “what does the industry need”, and not “what does the customer really needs”. For example, under the Innovative solution segment, these customers are pioneers in their respective markets, they are the trend setters, and the silicone products that were used and sold by Dow Corning to the industry at present would not meet its needs.
What these customers really need from Dow Corning is joint R&D, the service and expertise, rather than a developed product offering. For this reason, these customers do not want to hear about what Dow Corning has made, because they want to develop something with Dow Corning instead. The new segmentation method highlighted the exact needs of the customers, much better than the previous segmentation. Secondly, the new segmentation approach helped to understand the level of contact, engagements and partnerships its clients want from Dow Corning.
The previous industry segmentation meant industry specialists will spend similar efforts to sell and service the customers. The actions of these industry specialists cannot be blamed because the earlier segmentation by industry meant financial performance were evaluated on an industry group basis, and obviously each specialist would want to encourage its customers to buy all kinds of premium products Dow Corning can offer.
However, what is realised through the new segmentation is that some customers would prefer to be left alone and not subject to outsell (such as the price seekers), and yet some customers would want a high degree of engagement with Dow Corning (such as the proven solutions segment), or even partnership with Dow Corning (like the innovation solution segment). Getting this understanding of customers’ preference on level of engagement is critical to build a long lasting relationship and to not annoy the customer.
Thirdly, this needs based segmentation made client profitability much more transparent throughout the organisation. Previously, client profitability would have partially hidden within industry segmentation groups, where only industry profitability can be derived but not client profitability. With this new segmentation, because similar needs clients (based on their need for level of engagement and product requirements, as described in first two points above) are grouped together, the profitability of these customer groups can be easily derived.
This importance of this new customer information is evident with the fact that it leads on to the discovery of key characteristics of each client segment. In the example from the case, it is found that the contributor to low profitability for price seekers is that they incur lengthy price negotiations and costly selling time. All of these information and characteristics are critical in Dow Corning’s decision on whether to continue a relationship with these clients, of if it is to be continued, what resource adjustments are needed to serve these clients.
Fourthly, by segmenting clients through needs based, it helped Dow Corning to better understand how customers’ buying behaviour is changing and how customers’ product life cycle drives this changing behaviour. Dow Corning had previously thought its premium offerings were driving the company, and was not aware of the large and growing contribution it gets from price seekers. It is only through this new segmentation method did Dow Corning realise that a lot of its customers have defected to become price seekers or cost-effective solutions seekers.
These customers are not interested in the latest offerings from Dow Corning and are more price sensitive, because these customers have reached a mature stage of their respective product life cycle and low cost of inputs is critical to them. Dow Corning is definitely better off with the new segmentation scheme than the existing scheme, and some of these benefits are implicitly highlighted above. Overall, the benefits are: * Better understanding of customers – leading to better products and services being offered to match customers’ exact needs, in long run this will lead to better sales. Better and more appropriate level of engagements with customers – easier to foster a better long term relationship when Dow Corning is not annoying its customers. * Better pricing decisions – when client profitability is known, the right pricing can be negotiated more easily and overall allowed the business to operate profitably.
* Better resources allocation – internal resources will be aligned to those customers that require it. For example, R&D resources would be poured into the innovation solution segment instead of price seekers, and sales resources will be moved from price seekers to other segments. Better planning – a better understanding of customers’ trends and changing behaviour would allow Dow Corning to better plan and prepare for the future. If Dow Corning was aware of growing price seeker segment, it would have devised strategies to target that segment earlier. THE RECOMMENDATIONS TO XIAMETER FOR A SUSTAINABLE FUTURE Xiameter first mover advantage gave it a significant lead over its competitors during the first few years of operation.
With this web-enabled channel and unbundling of products from services, it opened up a market that was previously untapped. However, competitors have caught up and they are challenging Xiameter from all angles, with some challenging through price, some through services, and some through a combination of both. To continue with its success, Xiameter will need a few changes to its value proposition and business model. Xiameter’s “Dare to compare” value proposition was based on low price. This proposition is still valid in today’s competitive environment.
Xiameter, since its launch, was able to offer products at low prices because it featured a lean and disciplined business model that fully took advantage of Dow Corning’s scale economies to maximise capacity utilisation. These low cost drivers are still present, rules have not been changed, and Dow Corning is still leading the industry with its growing global footprint. There is no reason to suggest that Xiameter cannot continue to produce silicones at lower prices than competitors, and it certain can still “dare to compare”. The challenging decision then is how far should Xiameter “dare to compete”.
Should Xiameter compete purely based on price alone when competition has eroded Xiameter’s margins through undercutting and by offering more services? The recommendation below will suggest changes are needed to Xiameter’s business model and how these changes will lead to sustainable success. Xiameter cannot afford to offer lowest prices, and it needs to offer more bundled offerings. Xiameter should not start a price war, especially considering they are the leader of the industry and its pricing will have a significant impact on the long term prosperity of the silicones industry.
There are certain clients Xiameter can still supply at lowest prices, but these clients must be those that are willing to strictly adhere to previously defined ordering rules, with no service requirements, and these clients orders a significant amount that is compatible with Xiameter’s unbeatable economies of scale. For other clients, it is suggested a tiered pricing system. Tiered Pricing Tiered pricing meant Xiameter will supply silicones to clients at different price points, and the differences in prices would be justified through the order quantity and level of bundled services provided.
As described above, lowest prices will still be offered to customers that warrant these lowest prices because of the low costs to serve and profitability is maintained. For clients that order in smaller quantities and required some basic services, the prices would simply be higher and how much higher would depend on a tiered price schedule that clearly informs clients on their options. What is important to note here is that bundled services are basic services at most, such as timed discussions with specialists, more complex delivery schedules, or a limited degree of customer service.
The key is that these basic services can be provided by leveraging on pre-existing infrastructure and would not be in conflict with the true premium services and solutions Dow Corning would offer. This tiered pricing would be successful because it maintains profitability for Xiameter, and to the customer it gives them options. Research has indicated even low price seekers are becoming increasingly loyal to their brands, and customers are unlikely to churn away because the higher prices in the tiered system are offset by additional options and secured with Xiameter’s strong brand.
Furthermore, if the price increase is too costly for customers, Xiameter can invite the use of distributors to carry Xiameter’s products but have them absorb some of the cost increases. There can still be a win-win situation in such arrangement with distributors, as distributors would love to carry a market leading brand and its higher prices and capacity to bulk order should be adequate to cushion and absorb some of the price increase to customers. These partnerships with distributors will need to be carefully evaluated to ensure service qualities are not compromised.
Since Dow Corning successfully utilised distributors with its premium offerings, the same list of distributors can be used, and since distributors are more likely to sell to smaller price sensitive customers, they would surely welcome a lower cost offering from Xiameter. Expand the Xiameter brand Xiameter should expand its product range. Competitors are offering full range products through their online channels and this is a $5bn portal, it is a no brainer for Xiameter. However, the primary reason of expanding Xiameter’s product range is to maximise what it can get from leveraging on Dow Corning.
Dow Corning is an innovator with a strong brand in the silicone industry, as its innovations become mature and being commoditized, there is simply not a need for these products to be sold only through Dow Corning. Xiameter is a proven channel to sell these commoditized offerings and they should be doing so. While there would be arguments from Industry heads on the possible cannibalisation of sales by selling under the Xiameter brand, such arguments are weak because Xiameter has proven to create a win-win situation for both Xiameter and Dow Corning.
Plus what is offered through Xiameter are those commoditised products which Dow Corning would struggle to sell at its premium prices. Furthermore, emerging markets are gaining increasing share of Dow Corning’s business, and these markets demand a broad range of products, not necessarily the leading innovative products, at low prices. Xiameter is again the perfect channel to further penetrate into these markets.