Battling Goliath

Mr. Ranganath, CEO of a company lamented the state of the industry his business was in. Industrial gases, he said, had become worse than a commodity business. Small and mid-sized manufacturers were not only fighting fall in demand from the manufacturing sector, large multi-nationals were squeezing them with lower prices and quicker deliveries.

Hopeless as his situation might seem to be, Mr. Ranganath may find a clue in Michael Porter’s Generic Strategies – Focus.

The bewildering problem is not unique to the gas industry. Many sectors of business are being assaulted by big producers – domestic and foreign – who enjoy cost advantages of scale. Some use technology and capital-intensive processes to achieve higher productivity, consequently lower costs. Others have deep pockets and can not only withstand a prolonged price war they may even make reasonable profits at lower prices than others in their industry. Competing against large multinationals has become an everyday nightmare for many businesses. Solutions are neither easy nor quick. But they may exist. They may lie in the way customers buy and use products, or in the chinks in the armour of the giants.

A small company may start with a simple question that unfortunately does not have a simple answer, “How do I convert my commodity business into a highly differentiated offering?” The exercise must begin with an insightful enquiry into the market, buyer behaviour and the firm’s own capabilities. This should lead the business to a deep understanding of the market, its different constituents, their needs and behaviour patterns. It should also map its own presence (or absence) and that of competition in the different slices of the market. This process of market segmentation helps businesses identify industry and application sectors, their special needs and difficulties, if any. It may present undiscovered opportunities, or risks depending on where the competition is weak, or firmly entrenched.

From this understanding, a firm may be able to design and present special products, services, or product+service offerings that are distinct from those of competitors and offer significant value to buyers.

Our industrial gases company, for example, may find a number of foundries who mix more than one gas for certain applications. If it were to offer accurately pre-mixed gases it may develop an advantage over its competitor who may not be doing so. Here is an example.

In fluxless melting furnaces, Argon is mixed with Sulphur Fluoride (SF6). The mixture can be hazardous if SF6 is higher than 2% by volume. In safer and significantly lower proportions, the efficiency of the furnace declines leading to higher gas consumption and cost. Most producers sell the two gases separately. Is there an opportunity to sell pre-mixed gas at a higher price and better profit? Will foundries be willing to pay a higher price, if they saved more from improved furnace efficiencies?

In hardening of sand moulds, many users measure Carbon Dioxide (CO2) qualitatively and inaccurately. Often this leads to higher than optimal consumption. It is reasonable to expect a buyer will appreciate technical advice and assistance in optimum use of the gas. This may save money. More importantly, it may improve the quality of the moulds and consequently castings. The same principle applies to moulds that use Amine and other gases. Again, it is reasonable to expect buyers to be willing to pay a better price. They may become more loyal if such services were packaged with the gas.

It is conceivable that many customers may not require pre-mixed gases, or technical assistance for their optimum use. But if those that do, constitute a small but viable segment of the market for a mid-sized gases company, it might focus on such segments to win new customers. Or to grow its share where it is already present. Mr. Ranganath’s company may wisely choose a small, rather than a large and noticeable segment. Large organisations look for large payoffs. Battling a small operator in a narrow segment may not be cost-effective for a large mainstream marketer. Such a move may also be contrary to its cost driven one-product-for-all strategy. Inaction from the dominant player may help the small producer to entrench itself in its small target segment, stop losses and start growing profitably.

Many firms have successfully used the strategy of niche marketing. Even large operators who command dominant market shares have employed this strategy in markets where they have had to fight dominant companies. Why has this method proved successful? Niche marketing relies on two basic principles for success.

Niche, as the word implies is a small segment of the market. Small is frequently unattractive to a dominant player. A competitor targeting a niche market often goes unnoticed and unchallenged till that segment becomes larger and profitable. By then the small operator has acquired substantial domain expertise and a band of loyal customers. It is now difficult to dislodge.

Niche players add considerable value to their products and services to make them attractive to buyers. By doing so they render greater value and benefits than other firms. This not only becomes a source of competitive advantage, it also builds closer and stronger relationships with customers. Delivering greater value commands better prices. Stronger relationships reduce vulnerability.

The firm employing niche marketing strategy must carefully assess its resources and the capability to deliver relevant and requisite value to customers in the target segment. Sometimes, it may be able to acquire the resources, or the capability. Occasionally this may not be possible. It must then seek alternative solutions.

The choice of a strategy depends not only on the opportunities and threats from the market, it is intimately connected with the ability of the firm to execute the gameplan. Strategy is the fit between the internal and external circumstances of the firm. And as David showed long ago, it is the key to battling Goliath. Are you listening Mr. Ranganath?