Thursday, June 17, 2010

More Steel Capacity. Why?

China’s Anshan Iron and Steel Group has announced plans to invest in up to five new steel mills along with a U.S. domestic partner. The last time I looked, the U.S. was swimming in excess steel capacity. So why would this company enter the U.S. to add to an already over-supplied market? This is a political decision, not an economic one. Though, politics will obviously translate into dollars and cents eventually.

Anshan is partnering with Steel Development Company, a U.S. corporation, to invest $175 million in an initial “micro-mill” in Mississippi. Despite its cost, this is really a small investment. (See “Audio Tip #196: Why Economies of Scale Exist” on The capacity of the mill is 300,000 metric tons. This mill will make reinforced metal bar. It adds relatively little to total capacity. The U.S. rebar market has 8 to 10 million short tons of capacity in the U.S. Nor does the new capacity add much to Anshan’s total capacity. Its total capacity in China totals 25 million metric tons.

This is a political investment. The U.S. government is under pressure from U.S. steelworkers. They charge that China competes unfairly in the steel industry. This investment is a partial response to that political problem.

We’ve seen this before. In the 1970s, I worked on a study to determine where a major Japanese electronics manufacturer should establish its first U.S. manufacturing facility. That new U.S. facility was not going to be a lower cost facility than those the company already had in Japan. But it would short-circuit arguments that the Japanese company was dumping its electronic products on the U.S. market. The Japanese automobile manufacturers, notably Honda and Toyota, did the same thing at roughly the same time. Over time, the Japanese auto plants were able to supply the domestic market economically. The domestic plants of the Japanese automakers, of course, have been operating under the cost umbrella held up by the United Autoworkers’ union wage rates and work rules. The U.S. steel industry has a lower union cost umbrella, so we are unlikely to see big foreign investments bringing a lot of new capacity to the U.S. steel industry. That is, we won’t see much more than is needed for political expediency. (See the Perspective, “Must the Cycle Start Again?” on

Monday, June 14, 2010

No Red Letter Day for BlueStar

Illinois opened its electricity market for non-residential customers in 1999. In 2010, about 75% of the electric load for commercial and industrial customers is purchased through alternative suppliers. That deregulation was a big success.

The state then deregulated its residential market in 2002. Virtually no one paid attention. Now there is a competitor about to enter the residential market where few have dared venture in the last eight years. But this entry is virtually certain to fail. BlueStar Energy is an alternative electricity supplier based in Chicago. This company is offering twelve month contracts that would lock in prices for consumers and save them an average of $6 to $7 per month over what those consumers would have paid to Commonwealth Edison.

We have to translate these $6 to $7 a month savings into percentages in order to have any perspective on the company’s prospects for success. These savings amount to an 8% to 9% savings for the consumer. This is not nearly enough to attract many new consumers.

We maintain a database of several hundred price reductions done over the last twenty-five years. These price reductions will vary according to the discounters’ objectives, target segments and with the components of price conveying for the discount. There is a strong warning for BlueStar in this price data. Their discount is not enough. Across our entire database of price reductions, the median discount is 25%, 75% of all discounts are 10% or more. That makes BlueStar’s 8% to 9% offering pretty sickly. (See StrategyStreet/Improve/Pricing/Reduce Price)

But the story gets worse if you are a low-end Price Leader as BlueStar is. BlueStar offers no advantage to the consumer other than price. That makes them a Price Leader. Price Leaders have to offer higher-than-average discounts in order to win significant market share. Low-end competitors have median discounts of 33%, 75% of them offer discounts of 20% or more to their customers.

Apparently, there are four other companies that Illinois has certified to supply residential electricity. They are waiting to see whether BlueStar is successful before entering. They won’t be coming. And BlueStar won’t be staying.

Thursday, June 10, 2010

How to Become the Industry Leader

Charles Schwab is the clear leader in the online brokerage world. While there have been hiccups in its development from a simple discount broker to a full-fledged online brokerage firm offering a range of products, the company has always maintained its leadership in the retail brokerage business. It focuses on the individual investor and, importantly, on investment advisors who manage retail customer accounts.

As the long time leader in the online brokerage industry, Schwab has emphasized the Customer Buying Hierarchy elements of Reliability and Convenience. Its advertising emphasizes Reliability, especially a personal caring relationship with its customers, for example, with its “talk to Chuck” advertising. The eponymous chairman and his company have consistently emphasized a relationship of trust between Schwab and the investor. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on

Over the last few years, Schwab has entered many different product categories. As part of that effort, the company has recently introduced eight branded exchange-traded funds with very low cost management fees and commission-free trading. A couple of years ago, the company brought out a Visa credit card with no annual fee and a 2% cash-back feature. Its effort in entering these product categories has been to become a one-stop-shop for its customers. These are Convenience innovations. The customer has no need to leave Schwab to buy other products.

Schwab has been insightful in the way it manages its products and customer relationships. Two recent statements by Walter Bettinger, the current CEO of Charles Schwab, demonstrate the company’s commitment to Reliability and Convenience. In the first, the CEO acknowledges that the company may have to offer some products that have poor profitability in order to maintain a long term customer relationship. His observation: “We’ve never looked at product by product profitability as the answer to building a business.” A Standard Leader often has to measure profitability at the customer, rather than the product, level. (See the Perspective, “What We Do Know Can Hurt Us” on The second statement is equally compelling and counter-intuitive in many companies. He observes: “Most companies are taken down, not by their competitors’ moves, but by their own.” In other words, industry leadership changes because the former leader fails, not because the new leader wins.

Tuesday, June 8, 2010

Can a High End Guy Hit the Mass Market?

Starbucks is a high-end competitor in the fast food industry. We call these high-end competitors Performance Leaders (see “Audio Tip #82: Performance Leader Products and Companies” on As individuals, these Performance Leaders almost always have small market shares. Starbucks has 4% of the U.S. market for brewed coffee. As a group, Performance Leader market shares usually fall below 15% of a total market. Sometimes these Performance Leaders, following the allure of the volume in the mass market, create products to enter the mass market. We call the competitors who serve the mass market as their primary function Standard Leaders. Standard Leaders control the majority of most markets.

Starbucks has decided to enter the Standard Leader product category with its Seattle’s Best coffee. This coffee brand, and its coffee beans, sell today in Border’s Book Stores and many supermarkets. Starbucks wants to sell the product in fast food outlets, coffee houses and even in vending machines. By expanding the Seattle’s Best Coffee franchise, Starbucks hopes to land a blow to slow the invasion of McDonalds and Dunkin’ Donuts into the specialty coffee market. These latter firms are Standard Leaders who offer espresso-based coffee drinks at lower prices than Starbucks.

It is very common for a Standard Leader to enter the high-end Performance Leader product category with its own brand, as McDonalds and Dunkin’ Donuts has done. (See “Audio Tip #60: Customer Segmentation by Needs” on The list of Standard Leaders who enter the Performance Leader product category is almost as long as the list of Standard Leaders. Think of Toyota and Lexus, Dell and Alienware Computers, Marriott and the Ritz Hotel chain, Gap and Banana Republic, among others. Many Standard Leaders discover, as their industries mature, that they must offer Performance Leader products, and sometimes low-end, Price Leader, products in order to offer a full line of products for their end users or channels of distribution.

It is much less common for a Performance Leader company to enter the Standard Leader product category, as Starbucks plans. This is a much tougher initiative. The Standard Leader category sells to much different consumers with different value propositions and significantly higher demands for economies of scale. Apple tried this Standard Leader entry several years ago and backed off in the face of withering competition from Windows-based computer makers. Some Performance Leaders have succeeded, at least to some extent. Harley-Davison offers the Buell motorcycle. Pella offers windows through large hardware and lumber stores. American Express has succeeded in offering a credit card. Years ago, Marriott, while still a Performance Leader, entered the Standard Leader price point with Courtyard and the Price Leader price point with Fairfield Inn.

It can be done, but it is a daunting task. Most Performance Leaders stay strictly Performance Leaders. For example, one company with some similarity to Starbucks is Samuel Adams. That company has yet to offer a Samuel Adams Standard Leader product.

Thursday, June 3, 2010

What's Missing in Internet Retailing

Every year I buy several things online. I don’t like to shop in stores because I usually need to buy only one thing. I hate to take the time to go to a store to buy just one item.

Online shopping, for me, beats bricks and mortar shopping on almost every dimension of the Customer Buying Hierarchy. (See “Video #17: Value and the Customer Buying Hierarchy” on It has the advantage of Function. I can buy almost anything I want online. It has some advantages, though not all, over bricks and mortar in Reliability. When I shop online, I usually can find several web sites that will give me product reviews on exactly what I am trying to buy. Online shopping is more Convenient. I can sit at my desk to purchase, rather than going to a store and jostling with other equally impatient consumers. Online shopping is also more Convenient for me because I can easily check prices at a number of online outlets without having to visit them physically. So, online shopping also offers a Price advantage. I can usually get a lowest price guarantee when I shop online. That doesn’t necessarily mean that I will buy from the online site offering the lowest price, but I could if I wanted to do so.

I am sure I am not the only consumer who finds online shopping so advantageous. Web sales account for about 6.5% of total retail sales. That is a relatively small share, though it is growing. In 2009, total online sales increased by about 2%, while retail sales in bricks and mortar stores declined. So, online sales are growing market share in the retail sales industry. Why, though, doesn’t it have a higher share of total retail sales? Industry statistics lead me to think that the problem lies in a form of Reliability. (See the Perspective, “Customer Segmentation: Finding the Human Dimension” on

The way people purchase today suggests that Reliability still remains a problem for online retailers. The top 500 web sites offering retail products grew 9% last year, considerably faster than total online sales at a 2% growth rate. However, the top 100 retail online sites grew 12%. Consumers clearly preferred the bigger online retail companies last year. Even more impressive, those companies that offer only online sales in the top 500 internet sales sites grew at 20% last year. Consumers are showing a strong preference for those online retailers who live and die with their online performance.

The online-only retailers tell the story of Amazon and the several thousand dwarves. Amazon has a 52% market share of the web-only online sales. The sales statistics and Amazon’s market power suggest that a form of Reliability is holding back the growth of internet retail sales. Consumers would like to know that they will receive the product that they ordered, that the product will work, that, if the product does not work, the retailer will stand behind it and that the retailer will guard the consumer’s credit card information carefully. Amazon has hurdled these barriers well and has reaped the rewards in growth and market share. All the other retailers selling online, especially those outside of the top 100, need to concentrate on creating assurances for their consumers that they can do as well as Amazon in these forms of Reliability.

Tuesday, June 1, 2010

Always Low Prices Meets Lower Prices

Wal-Mart has come to dominate the grocery industry by offering wide product choices and low prices in their 2700 super centers. The company today is the biggest of the industry’s Standard Leaders. (See “Audio Tip #181: Using Physical Measures to Control Costs” on And because the company has a well earned reputation for low prices, it found new customers during the last recession.

But underneath the new customer growth it found that some of their Core customers had migrated even further down on the food chain to discounting competitors, such as Save-A-Lot and Aldi stores. These companies offer even lower prices. They are able to offer these lower prices because they are Strippers. These are low-end, Price Leader (see “Audio Tip #83: Price Leader Products and Companies”), competitors who strip benefits from the product offering in order to achieve a low cost structure and consequent very low prices, which attract price-sensitive customers.

Save-A-Lot and Aldi compete with similar business models. They offer from 1400 to 1800 items, which is a small fraction of the offerings in a typical supermarket. The vast majority of their products are private labeled. The stores themselves are small, 15,000 to 17,000 square feet, and the store displays and amenities are spartan. Still, these retailers are growing relatively rapidly in the U.S. Wal-Mart feels like it needs to respond to their growth.

Wal-Mart does offer smaller stores. Their Neighborhood Markets concept are grocery stores in small towns and suburbs. But these are larger formats, averaging 42,000 square feet. The company’s small store format, called Marketside, has a 15,000 square foot footprint but has achieved relatively little presence so far. The Marketside business model has yet to develop any vibrancy.

Can Wal-Mart succeed at the very low end of the marketplace? I wouldn’t bet against them. They have succeeded in Mexico by offering seven separate store formats to meet the needs of consumers at various budget levels.