Strategy Analysis - Problem Recognition

Strategy Analysis - Problem recognition

Dow Corning is the leader in the silicone product industry with 40% worldwide market share (in 2006). Until the beginning of 2000s, customers had been willing to pay a premium for the R&D and services, as long as manufacturers were able to provide tailored solutions to their needs. Thus, Dow Corning positioned itself as an innovative company and aggressively market the quality of its technical support to differentiate its offer from competitors. But increasing competition, rising costs, and more importantly commoditization of products put some pressure on prices. The company’s profits were stable in 1997-1998 ($2500-2600 millions) and net income was flat ($-600 million in 1998 and $100 million in 1999). Therefore, Dow Corning needed to find new ways to address its changing environment.

To evaluate the customer needs, the company came up with a new segmentation study which revealed a segment of customers who didn’t want to pay for the added services traditionally offered with silicone products. Dow Corning needed to adapt its strategy to meet the needs of this fast growing segment. At the same time, it had to maintain a high quality of service and continue serving its current customers who valued Dow Corning technical support.

To achieve these two goals, the company wisely develop a two brands strategy and formulate different offers to each customer segments (price seekers vs support seekers). Dow Corning would provide customers with innovative products and technical assistance and a new discount channel under the Xiameter Brand name would serve customers seeking for low prices and no added service.

Xiamater was designed as low cost structure allowing it to profit solely from selling products. Xiameter could take advantage of Dow Corning products and infrastructures but remained an autonomous business unit. To decrease costs and offer competitive prices, flexibility and choice around such issues as ordering method, quantity, shipping and payment terms were reduced. Its value proposition was directed toward bulk orders of good quality commonly used silicone products for which no technical support was needed. This strategy, which also included the development of a fully automated web-based ordering system, reduced the need for management, staff and logistics, and further cut costs allowing Xiameter to offer competitive prices (Xiameter costs were 30% lower than those of Competitors).

Since Dow Corning and Xiameter offerings were clearly differentiated, there was no threat of cannibalization of Dow Corning products and services by Xiameter. In fact, the two brands complemented each other. Xiameter took advantage of Dow Corning commoditized products and structure to offer competitive prices whereas in limiting its offer to customers who needed technical support and innovative products (thus avoiding price competition), Dow Corning clarified its positioning and reinforced its value proposition.

Furthermore, the senior management took the time to promote the two brands strategy to employees to ensure their cooperation in implementing the new marketing plan. For example, it solved problems arising from the creation of Xiameter (compensation package, performance incentive, etc.) before its launch.

In 2006, the first mover advantage of Xiamater started to erode. Other silicone suppliers had developed online ordering system. Some of them provided a full range of products and services through this new channel and progressively increased the volume of orders placed on line. As the online competition increasing, Xiameter was under pressure and its business model was contested.

Recommendation for Future growth

1. Positioning

Dow Corning should maintain a clear distinction between its own positioning and Xiameter's one. It is vital for the company to promote attributes of each Brand and clarify the differences between the two value propositions to customers. In this respect, I strongly suggest that Xiameter do not provide services to clients as part of its value proposition. Special product testing and technical support provided by Dow Corning are keys that help the customers figuring out the distinction between Dow and Xiameter. Moreover, any attempt to provide technical support to customer will affect Xiameter’s cost structure and therefore it competitive pricing strategy.

2. Product

Providing a limited number of products has helped Xiameter control its cost and cut prices. Since low prices is the most important competitive advantage of Xiameter, adding a full range of products will go against the marketing strategy. I recommend that Xiameter stick