Forget Commodities. I’m a “Specialty Supplier” Right?

When it comes to margins and serving customers who remain loyal to us due to the high-end products we provide—everyone knows the value of being a specialty products’ provider, right? And in addition, its our least loyal, price-shopping customers that make us often consider cutting out commodity products altogether.

So what would be wrong with increasing our focus on specialty products—and backing away from commodities? Well, not so fast. There is that issue of having a “full shopping cart” from which to sell—and if you compare this to a grocer—you’ve got to have both milk, eggs, and butter on the shelf—and your own bakery, fresh fish, and maybe even organic produce.

But perhaps a more convincing reason to think carefully before giving up the “everyday stuff” and focusing on the high-end only is the threat the competitive low cost commodity provider poses of moving up the chain and competing with us nose-to-nose for the most profitable business too.

Consider the examples from the steel industry described in Clayton Christiansen and Michael Raynor’s book The Innovator’s Solution. They describe a steel industry in the 1960’s that was dominated by the big “integrated” mills who watched as smaller “minimills” started up and, due to their low manufacturing capabilities, could only produce rebar—a low grade form of steel.

When the minimills entered with rebar—which accounts for only 4% of total steel use—and offered it at drastically lower prices—the large mills were almost happy to stop offering it as it only produced margins of 7%. They then began to focus their resources on higher margin products and customers.

When the minimills improved manufacturing and began to offer angle iron and other components—once again, the large mills were almost relieved to walk away from this low profit business—as the margins had always been low in this category as well. Once again they aligned resources and product offerings on more discrete customers segments—allowing the minimills to capture the low margin commodity business.

This happened again with structural beams, which the minimills perfected after great effort. Once more, they exerted heavy competitive pressure on the large mills and, once more—they took away more share.

Finally, the minimills perfected the ability to produce sheet steel—and the end of the story is, that today the minimills have grown larger than the former traditional mills—such as Bethlehem Steel—and the industry now is forever changed.

There is a point at which a company needs to assess, “Do I walk away from low margin commodity business and just focus on the profitable high-end? Or, do I invest in a broad spectrum of product and services offerings, compete on the lowest margin business, and keep my share of market?”

This will be a different decision for every company, in every market, and against every different form of competitor.

However, before you retreat “upstream” to Specialty-Land too quickly—you may wish to consider what door you leave open—for your competitor to enter.

Death by (Slow) Improvement

Beware "incrementalism.” Wikipedia describes the concept as “a method of working by adding to a project using many small (often unplanned) changes instead of a few (extensively planned) large jumps.” A similar example would be making subtle improvements to a service, program, or company—while the world goes on changing around us—or by us.

In Good To Great, the first chapter of Jim Collins’ unequaled business book is titled “Good Is The Enemy of Great.” Why fiddle with it if it’s not broke—right?

Wrong! “Incrementalism” can be the death of innovation, and at the very least—slow down innovation to the point of insignificance. And when businesses take a string of very small, for the most part insignificant steps unto themselves—and slowly marches along—the business itself can be left vulnerable to a competitor, supplier, or and entire industry “leap-frogging” over the top of them and leaving them behind.

For instance, in the building products wholesale distribution industry, I often suggest that "rule changing" behavior is needed that leaps ahead in huge bounds. Instead of an exclusive focus on slight improvements—such as order fill rates, accuracy, and customer services—distributors should be evaluating “reinventing” what they offer and what it is they do.

They might instead consider offering private labeling, job site delivery, job site installation and repair, and special warranty considerations that guarantee replacement value no matter what.

Now THOSE are the type of offerings that just might be considered leap-frogging.

And keep a company out of the pot of boiling water.