If you have been following the blogs in this series [Overcoming Commoditization – A Study of the Metals Industry (Pt. 3) | McMann & Ransford], then you know by now our point of view that overcoming the inevitable – some degree of commoditization – is not only possible but achievable. And our “industry case study” for overcoming this challenge is literally commoditized: the metals market that includes companies that buy and/or sell steel, aluminum, carbon, and other metals in North America.
This blog, the 4th and final in this series, summarizes the second of two strategies for how to become more differentiated in your markets that put your organization on the growth path and reduce the effects of commoditization.
Strategy 2: Moving Up the Value Chain
If you recall, we had two premises:
- Do Buyers want more from their Sellers? The answer = Sort of.
- Are Buyers willing to enter into partnerships with Sellers that are more strategic to their business than typical PAR transactions? The answer = Yes.
Another effective strategy Sellers are utilizing to take advantage of the opportunity is “Moving Up the Value Chain”. This refers to the practice of getting closer to the end-use customer, or at least the next player in the next step in the supply chain (i.e., collapsing the supply chain).
To help explain this strategy, we have added a simplified diagram of a supply chain. Additionally, we do want to make an important distinction here about the use of Value Chain vs. Supply Chain because we have found they are often used interchangeably:
- Supply Chain definition: the sequence of processes involved in the production and distribution of a commodity.
- Value Chain definition: the process or activities by which a company adds value to an article, including production, marketing, and the provision of after sales service.
While there are many definition variations, and we do not want to dissect them all here. But we do strongly believe that the important distinction between the two is this: if you see your business as being and operating in the “Supply Chain”, then chances are very high that you are seen and, therefore, treated as a vendor/supplier. However, if you see your business as being in and operating within the “Value Chain”, then chances are very high that you are seen, and therefore treated, as a Partner. In other words, where a business finds itself in the supply chain is a self-fulfilling prophecy regarding the market’s view and treatment of that business.
Strategy Success Criteria
This strategy requires an important and material understanding of your customer’s business: This knowledge is key to taking advantage of opportunity and beating the competition. For example, one company we spoke to (we will call them Seller Y) adds as much value to the metal as possible for their customers, and has reaped the following benefits:
- 50% margin improvement of their “value proposition model” compared to their core distribution and service center commodity model (their description, not ours)
- Securing and locking in their own suppliers in order to meet customer demand, thereby “owning” the management of both the input and output steps in their value chain – i.e., both collapsing and moving up the chain
- Increasing their company valuation, allowing them to have increased leverage when making strategic acquisitions and investments
- Smoothing out the typical and significant business peaks and valleys driven by the price/cost swings of commodity metals, allowing them to better plan, forecast and invest; this also provides some protection in down times
As we have previously stated, Buyers have become more demanding and want more sophisticated outcomes from who they buy from. In other words, “Buyers buy by segment, and are buying outcomes”. In other words, they are embedded or entangled in their customers’ business. They know and, therefore, can anticipate the needs of their customers and provide more finished products when they need them This creates a new self-fulfilling prophesy: “Embedding yourselves further in your customers’ business allows you to enhance the value you provide, which in turn makes you a more valuable Partner”.
In fact, Seller Y takes this model and creates net new revenue streams for themselves where they had none to start In other words, knowing where their customers are headed allows them to plan for and become part of their net new value chain even if they are not today.
There are some important implications for your business when considering this strategy.
- Operating Model Implications – from our own experience, one significant implication is the possibility of operating two models concurrently This is not an unheard-of proposition. In fact, many companies do this already But it does require both understanding and agreement that these two (or more) models have different financial models and outcomes, investment needs, talent needs, etc.
- Talent Implications – according to the companies we spoke to and our own clients, there are two talent implications worth stating here:
- The skills required to move up the value chain include product management (understand customer’s business) and product development (mill experience, manufacturing experience, and application experience) And not just the skills, but the capacity of those skills at critical mass.
- Sales talent that focuses on how to solve customer problems, not on relationships.
- Investment Implications – There are potential investments that are likely going to be made as Sellers proceed with their value chain movement journey Many consider retiring some products and services in their catalog to free up some capital to make these investments, which include but are not limited to new equipment, key acquisitions and partnerships.
In summary, this strategy is a powerful force for Sellers to secure many material outcomes for their businesses. And it is a proven one that when implemented does validate the 2 premises we outlined in our earlier blogs on this topic. It is clear that moving up in the value chain creates meaningful differentiation for their business in a commoditized industry.
If you are interested in the complete research report, please visit Overcoming Commoditization Through Intimacy | McMann & Ransford or reach out to Mark Slotnik and Jackie McMann for additional information.