Branding Ferro Alloys in a Commoditized World Ferro alloys are additives used during steel making for alloying and, in some cases, refining of steel. Like most products sold in a Business to Business (B2B) setup, ferro alloys are treated as a commodity. We, at Tata Steel, have attempted to create a difference by branding Silico Manganese, meant for sale to the SME segment, and breaking this commodity trap. Commodity Trap : Commodities are product-service offerings that in the eyes of the buyer are lowly differentiated from others and have a high degree of substitutability. The decision to buy such product-service offers are often through a straight price discovery (L1 quote). It is well known that B2B buyers drive suppliers into a commodity trap. This is done by defining conditions of supply, having two or three suppliers, and encouraging alternate sources (vendor development) to keep suppliers in check. B2B buyers are informed buyers and usually know as much about the product as the seller does. This drives substitutability and thus makes buying decisions easy - a straightforward price discovery. The emergence of e-auction platforms (like Metal Junction etc.) has only served to accelerate this trend. As a result, suppliers too focus most of their energy on improving transaction efficiency as a route to improve market share and margins through : Logistics and supply chain initiatives like buffer management, establishing JIT Supply capability, etc. Initiatives in minimizing associated costs like bulk packing, IT integration to increase ordering efficiency etc. This heavy emphasis on transactional selling has led to depletion of the importance of marketing in most B2B situations. However, just focusing on improving transactional efficiency has limited the ability of suppliers to “ring fence” their customers as concentrating on a single differentiator – e.g. focusing on transactional efficiency or on low cost - is not enough to stave off competition. Markets can be segmented : Like in a Business to Consumer (B2C) market, differences exist in the B2B market place, although they are less obvious. Savvy
Ferro alloys are additives used during steel making for alloying and, in some cases, refining of steel. Like most products sold in a Business to Business (B2B) setup, ferro alloys are treated as a commodity. We, at Tata Steel, have attempted to create a difference by branding Silico Manganese, meant for sale to the SME segment, and breaking this commodity trap
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Branding Ferro Alloys in a Commoditized World
Ferro alloys are additives used during steel making for alloying and, in some cases,
refining of steel. Like most products sold in a Business to Business (B2B) setup, ferro
alloys are treated as a commodity. We, at Tata Steel, have attempted to create a
difference by branding Silico Manganese, meant for sale to the SME segment, and
breaking this commodity trap.
Commodity Trap : Commodities are product-service offerings that in the eyes of
the buyer are lowly differentiated from others and have a high degree of
substitutability. The decision to buy such product-service offers are often through a
straight price discovery (L1 quote).
It is well known that B2B buyers drive suppliers into a commodity trap. This is done
by defining conditions of supply, having two or three suppliers, and encouraging
alternate sources (vendor development) to keep suppliers in check. B2B buyers are
informed buyers and usually know as much about the product as the seller does.
This drives substitutability and thus makes buying decisions easy - a
straightforward price discovery. The emergence of e-auction platforms (like Metal
Junction etc.) has only served to accelerate this trend.
As a result, suppliers too focus most of their energy on improving transaction
efficiency as a route to improve market share and margins through :
Logistics and supply chain initiatives like buffer management, establishing
JIT Supply capability, etc.
Initiatives in minimizing associated costs like bulk packing, IT integration to
increase ordering efficiency etc.
This heavy emphasis on transactional selling has led to depletion of the importance
of marketing in most B2B situations.
However, just focusing on improving transactional efficiency has limited the ability
of suppliers to “ring fence” their customers as concentrating on a single
differentiator – e.g. focusing on transactional efficiency or on low cost - is not
enough to stave off competition.
Markets can be segmented : Like in a Business to Consumer (B2C) market,
differences exist in the B2B market place, although they are less obvious. Savvy
segmentation of differing needs and cost points of the market is needed to discover
differentiation levers. It is necessary, as a first step in de-commoditizing, to
understand customer needs, and devise and communicate customized offerings that
meet those needs.
Silico Manganese is used in steel making mostly for making long products. In India,
secondary producers of steel (most of whom are SMEs) account for around 70% of the
total market for Silico Manganese. It is virtually impossible for big organizations like
Tata Steel to service SME steel manufacturers. These SMEs represent a large untapped
market for such ferro alloy manufacturers and are usually serviced by traders.
Increasing competition for market share of large steel manufacturers, coupled with
our plans of increasing production capacity of Silico Manganese multifold in the
coming years, it became necessary to make inroads in the SME segment. We did an
extensive market study of the Durgapur, Raipur and Mandi/Govindgarh clusters
and attempted to understand the market. While each cluster is different, the market
characteristics common to the clusters are as follows :
First, for a steel maker, silico manganese constitutes less than 10% of the total
buy and is not worth too much managerial attention.
Second, customers need to establish technical capabilities (of sampling and
chemical analysis laboratory) to evaluate each purchase. Apart from cost and
effort needed in analysis, malpractices (through the corruption of the lab staff)
are common.
Third, the customer is known to the ferroalloy seller and is not anonymous. The
purchasing decision is influenced by technical people, the plant managers and
purchase managers in varying degrees, and the ferro alloy seller can use these
touch-points to establish his brand.
Fourth, the customer has established standards (technical specifications like
chemistry, size and packing) for supply and ignores all other elements of supply.
Thus, ferro alloys have become a commodity and are treated as such.
Lastly, the SME segment is under serviced by manufacturers due to their small
volume of buy (most manufacturers will only supply in truck loads – 16MT and
multiples – too large a quantity for SMEs to buy at a time), making room for
intermediaries (traders) who compete with suppliers for the heart of the
customer.
Gokarn | Branding Ferro Alloys in a Commoditized World 3 | P a g e
In addition, while the metallurgical properties of Silico Manganese are almost
constant, the priority that different steelmakers give each property is different. For
example, while makers of steel components for automobile applications, and tool
and alloy steel makers (concentrated in the north and west) place a very high
emphasis on quality (mainly impurity levels : %C, %S and %P) and make no
allowances in the purchase specifications, manufacturers of billets and re-bars,
(concentrated in eastern and central regions) do, at times, play between quality and
price. However in Durgapur, which faces a shortage of power, the correct grade
(60/15) is valued because use of inferior grades results in an increase in furnace
smelting time, reducing the number of daily heats.
The kind and size of steel making furnace (induction or electric arc) too determines
the size of ferro alloy that SME steel manufacturers ideally require and their ideal
volume of buy per order.
These commonalities and differences provided an opportunity for us for creating
customized product-service offerings for the customer set responsive to these
differentiators.
We decided that our differentiated product-service offer would serve these un-met
needs of customers and that we would offer benefits as follows :
Product Consistency – guaranteed exact 50 kg weight