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Several weeks ago, I wrote a blog, How to Win a Price War. A number of readers sent me notes, including my former Harvard/MIT executive student, Tenglum Low. Tenglum was a top executive of both a major Malaysian steel company and a major brewery, and he related his experience doubling his market share in the face of a price war by focusing on turbocharging his company’s value proposition.
Here is his story (slightly edited):
Your article on “How to win a Price War” is great reading, and a reminder to corporate leaders on how to enhance profitability and market share through value creation and value capturing.
Sun Tzu had often reminded generals and sovereigns that the objective of war is not simply killing the enemy, but instead it is ultimately a means to gain power and kingdoms. The best generals know that the real victory is to win a war without the need to fight any battles.
The most effective generals seek to win a kingdom without destroying its resources, so as to fund their next battle. Hence, in the world of competition, we should destroy the enemies without destroying the industry profitability. When we become the market leader, we can command a substantial portion of the industry profit pool.
I remember fighting the Malaysian steel war in the 1990s as a young Head of Commercial of Southern Steel. Within three years, we grew from 30 percent market share to 60 percent market share in domestic wire rod. Many strategic moves were played in the near duopoly market.
Today, I would like to narrate our moves in response to steep price discounts by the market leader at that time.
The steel products were near homogeneous in quality. But despite this, the slight differences of the products of the steel mills – if synchronized well with the production equipment of the customers – can make great differences in customer productivity. Hence, if any steel mill became the dominant supplier to the users, it could “re-synchronize” its products with the customers’ equipment, and thereby significantly enhance the customer’s productivity. Then, if the customer used the same drawing process with another supplier’s wire rod, the customer’s productivity would drop significantly – and these losses would be much greater than any price discount offered. This essentially locked in a relationship with very high switching costs.
With this knowledge in mind, we evaluated the customers through a new paradigm. We looked at the concept of “supply chain versus supply chain,” and how we could focus on growing carefully targeted customers in order to grow our sales.
The customers, at that time, could be segregated into six areas of downstream products. We decided that we could not be a supplier to all the customers in each segment because each of them wanted to become the leader in its respective downstream segment. Customer competition was extremely intense. We decided instead to pick a few leading players in each downstream segment and nurture them into market leaders. These customers needed to buy more than 70 percent of their steel requirement from us in order for us to “re-synchronize” our products with their production equipment, thus giving them the great benefits of higher productivity, and, once this transition was made, the 30 percent supplied by our competitors would have an inferior value proposition.
To enhance this mutually beneficial relationship and generate more sales, we supplied them with very competitive prices for their export requirement, which filled up their surplus capacity.
Meanwhile, our competitors offered price discounts to their customers in the nail segment to disrupt our dominance.
At that time, nail customers used 0.12 carbon killed steel as their raw material, priced at RM1200/metric ton. (Killed steel is a lower grade of steel, which has a lower drawability than rimmed steel.)
Our competitors offered our customers 0.08 carbon rimmed steel at RM1250/metric ton instead of the usual RM1300/metric ton, which was a big discount.
However, we understood the following issues:
a. At RM1250/metric ton on wire rod produced from imported raw material, the competitors barely made profit (Malaysian steel mills could only produce killed steel, while rimmed steel is imported);
b. The 0.08 carbon rimmed steel is good for drawability, but being much softer steel, it is not suitable for the whole range of nails.
Instead of responding by simply following this value-destroying price war, we shifted the basis for the competition by creating a new product of 0.10 carbon killed steel, and sold it to our customers at a price of RM1230/metric ton. This better met our customers’ needs at a lower cost, and our competitors could not follow us.
We made more profit from these products, and the customers also saved more cost!
Eventually, through our “supply chain versus supply chain,” most customers bought more than 90 percent of their raw material requirements from us.
The moral of the story: The best way to win a price war is not to have one – by turning it into a value war, you will take the best part of the market, while your price-oriented competitors will not know what happened to them.
Many thanks to Tenglum Low, a very thoughtful executive and a great friend – JB
Jonathan Byrnes is a senior lecturer at MIT and author of the recent book, Islands of Profit in a Sea of Red Ink. He is founder and CEO of Profit Isle, a consulting company with which he has advised over 50 major companies, medical institutions and industry associations. Contact him at firstname.lastname@example.org.