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There Goes the Business Model

When Dow Corning found its offerings being commoditizd, it could have either decreased prices and margins or ceded the low end of the market to competitors. It did neither.
COLLABORATORS Ilan Mochari
Dow Corning's global business model innovation
photo by Saginaw Future

The Challenge

Since its inception in 1943, Dow Corning enjoyed success as a market leader in silicones. In the 1990s, however, silicone was fast becoming a commodity, due to globalization and the rise of the internet. The company had historically provided personalized, hands-on service throughout the sales process, but some clients, knowledgeable about the product, no longer needed such customized services and were increasingly using the Internet to source cheap silicone. Dow Corning needed to find a solution to the issue of stagnating growth in key product areas and to fill resulting excess manufacturing capacity.

The Response

Instead of the conventional responses — cut prices or cede the low end — Dow Corning set out to create a Web-based discount sales channel that sold bulk silicone products for 10 to 15 percent less than its usual prices. Midway through 2001, then-CEO Gary Anderson tapped manager Don Sheets to head up the launch. Sheets knew that in order to succeed, the company had to do more than simply offer its products online — it needed an entirely new business model to create demand for its products.

The Payoff

Xiameter, a fully-automated portal that functioned in 50 countries around the world, was launched in January 2002, six months after Sheets assembled his team. Three months later, Xiameter had recouped Dow Corning’s investment in the new venture. By 2006, 30 percent of Dow Corning’s sales were online, almost three times the industry average. Through Xiameter, Dow Corning retained low-end customers that may have started sourcing silicone elsewhere while also attracting new customers. This helped fill excess manufacturing capacity and increased profitability. At the outset, management had feared cannibalization of existing customers from Dow Corning. Instead, the reverse happened: the vast majority of Xiameter’s clients were new customers that had been priced out of the Dow Corning brand. Less than 10 percent of Dow Corning’s existing clients switched to Xiameter.

The Playbook

Anderson and Sheets made some smart moves. Sheets was free to recruit people from the parent company, but focused on finding team players who “didn’t quite fit into the existing culture.” To protect the launch from the immune system of the established culture, Sheets moved onto his own floor within Dow Corning’s headquarters. Anderson made the terms of engagement clear: Sheets had one year and $1 million to launch. But most important was Sheet’s realization that in order to succeed, the company had to do more than simply offer its products online—it needed to create an entirely new business model.

Xiameter initially offered 400 products through its online order-entry system. Prices were based on spot rates, and discounted between 10 percent and 15 percent. In exchange for these lower prices, customers had to plan for longer delivery times, less customer service and technical assistance, and larger volume requirements than with Dow Corning’s traditional ordering system. Xiameter’s overhead was much lower than Dow Corning’s because it did not offer customers as much flexibility in delivery, order size, and other features.

Sheets clearly understood that when a company sets out to fulfill a new customer value proposition it needs to build a new model when one or more of the following are true:

Your current profit formula (especially overhead cost structure) needs to be changed; you need to develop many new key resources and processes; and, you need to create different core metrics and rules to run your operations.

THE PLUS

Intuit, one of the most innovative companies we know, was evidently having its own problems leveraging white-space opportunities. Check out the short story about how a new Intuit employee, fresh out of college, created a platform for new ideas that worked so well they began selling it to customers.

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