Like many other commodity-type industries, steel has a reputation—largely deserved—for lackluster marketing and product promotion. With steel, however, the cyclical nature of demand, the complexity and asset intensity of the production process, and the political sensitivity of operating in a sector essential to the development of most modern economies focuses managers’ attention with special force on questions of volume, not responsiveness to customer needs. And even when attention does shift to marketing, the industry’s deep-seated "tonnage mentality" often continues to dominate—and distort—the decision-making process. This need not be the case. An effective marketing orientation in steel is possible—if it is based on careful attention to mix management, customer segmentation, and margin assessment.

Steel industry marketing does not have to be a contradiction in terms. In recent years, for example, British Steel has reversed builders’ preferences for concrete in the construction of UK car parks through an aggressive promotion campaign that both trained civil engineers in how to use steel and documented its superior lifecycle economics. Similarly, in the US, the Steel-Automotive Partnership has reestablished steel as the premier automotive material. As a result, mid-1980s forecasts of the growing usage of alternative materials in North American vehicles have proven wildly optimistic. And in Japan, the development of new products, such as the noise-dampening sheet used in Toyota’s Lexus or the variable-shape beams used in shipbuilding, has been a model of customer responsiveness.

In each case, the key leverage point is at the company, rather than the industry, level. In other words, the real driver of increased competitiveness against other materials is improved company-specific performance—in cost, quality, delivery, and product development. Steel usage grows as steel companies demonstrate their ability to serve their customers better.

At most steel companies, a lingering "tonnage mentality" encourages managers to chase unattractive sales

But how well, on average, do these companies identify customer requirements, select customer groups for which they can develop a competitive edge, and design and produce the right product or service packages? The honest answer: not very. At most steel companies, a lingering "tonnage mentality" undermines profitability by encouraging managers to chase unattractive sales, to focus on the needs of the plant instead of those of customers, and to tolerate a spotty record of new product and service development.

Marketing commodities

A tonnage mentality is common in many commodity-type industries. These businesses are generally mature and slow to evolve; their product attributes are usually well known; and their product families are mostly stable. Indeed, because industry norms (for example, the American Society for the Testing of Materials standards in the US, or those of the Deutsche Industrie Norm in Europe) lead to standardized product attributes, the opportunities for product differentiation—and, thus, for product promotion—are relatively constrained. When there is little new under the sun, the task of defining product and service offerings—the core of strategic marketing—becomes, in effect, a question of effective mix management—that is, of positioning a company within an existing market structure.

Moreover, since commodity-type businesses are over- whelmingly cost driven, the scope and importance of the classic marketing function are limited. The spectacular success of the steel industry during the past several years in the US construction market, where steel’s share versus concrete has grown—after 30 years of steady decline—from around 40 percent in 1988 to around 50 percent today (Exhibit 1), is the direct result of low-cost minimill entry. No boost in steel marketing supported this shift, and no promotional response by concrete producers could have thwarted it. Low costs and low prices made all the difference.

Similarly, in the beverage container market, total system economics—even excluding recycling—now favor aluminum over tinplate (Exhibit 2). The reason: a collapse in aluminum billet prices, largely triggered by the appearance of excess capacity in the former Soviet Union. This does not mean that promotional efforts by tinplate producers are pointless or unwarranted. At best, however, such efforts can only slow, not stop, the continued erosion of tinplate’s competitiveness in, say, Europe, where it still commands a substantial share of the beverage container market.

Lastly, when a product can be effectively differentiated, marketing’s central role in developing and maintaining customers’ perceptions of its advantages legitimizes substantial marketing-related expenditures. Not surprisingly, in commodity-type industries, these expenditures are quite low. In the specialty chemicals industry, for example, sales and marketing expenses often run up to 25 percent of manufacturing costs. For steel, the equivalent figure is less than 5 percent.

Mix management, cost-based competition, and skimpy promotional budgets: these, then, are the primary characteristics—and constraints—of marketing in a commodity-type environment.

Managing the mix

Effective mix management—that is, shifting sales toward those products and customers that generate the greatest returns—involves three key skills: segmenting the market to match customer requirements with company capabilities, understanding actual costs at the micro level, and managing prices at the transaction level. These skills can significantly boost company profitability. They can also promote greater steel usage by supporting improved customer service.

Customer segmentation

Almost all steel companies segment their customers by product and consuming industry. This has nothing to do with how those customers actually make buying decisions

Almost all steel companies define the segments in which they participate along two dimensions: product and consuming industry. Industry statistics are typically maintained on the same basis and have been for decades. As a result, it is very easy to calculate shifts in demand patterns or market share. Unfortunately, this is a very lazy approach. It has absolutely nothing to do with how customers actually make buying decisions.

Effective market segmentation must be based on key buying factors—the customer-specific rankings of the multiple factors that shape buying decisions. Most North American flat-rolled customers, for example, require high levels of quality and service at a competitive price. Nevertheless, a closer examination of buying preferences identifies three main divisions within this broad market: a price-sensitive segment, a service segment, and a commitment segment.

Price-sensitive buyers, as the name implies, are primarily concerned with the cost—and less so with the quality—of their purchases, as steel usually represents a major portion of their total product costs. By contrast, service customers require the highest levels of quality and delivery performance. For them, price is secondary both to security of supply and to performance, as steel represents a relatively small yet critical component of their total costs. Finally, commitment-focused customers value close, longstanding relationships through which superior steel applications can be developed and employed in their own products and processes (Exhibit 3).

It would be easy to assume that these groupings parallel industry segments—that, for example, automotive customers are service or commitment buyers while "pipe and tubers" are price sensitive. It would also be wrong. Each industry segment—automotive, construction, or whatever—contains price, service, and commitment buyers (Exhibit 4). Performance requirements simply do not correlate with industry segments.

Consequently, building a marketing strategy around target industry segments, rather than target buying characteristics, inevitably under-

mines company profitability. Such an approach both allows some attractive potential customers to be under-served, and causes others to receive services in which they are uninterested and for which they are unwilling to pay. Without a clear understanding of what different customers value, it is impossible to define a meaningful strategy for customer service or to align manufacturing and other functions to provide it.

Margin assessment: costs

The cost accounting systems of most steel companies overstate the profitability of high-end products and segments

The external customer information that provides the basis for effective segmentation must be complemented by internal information—much of which relates to costs—on margins. Reflecting both the complexity of the process and the multiplicity of products, the cost accounting systems of most steel companies are built around standard costs that capture typical production costs but fail to allocate some fixed and overhead charges. If the margins used to identify target markets and customers are calculated against standard costs, however, they can be highly misleading and can lead to inappropriate marketing decisions. As a rule, they overstate the profitability of high-end products and segments, allowing simple products to subsidize more complex ones—a strategic gap aggressively exploited by minimills.

Appropriate adjustments include, first of all, allocating all fixed charges, such as R&D and technical service, which can lower margins by up to 10 percent for high-value-added products. They also include assigning excess "fall down" costs—that is, the costs of products that do not meet the standards for their original applications but can still be sold as prime—to the original order, rather than to the final application. This helps to paint a more accurate picture of margins. When such excess costs, which can exceed $100 per ton, are allocated correctly, the margins for high-value products can again fall by as much as 10 percent.

Equally important, margins should be calculated not per ton but per unit of consumption of such scarce resources as throughput time at bottleneck units. Because the key drivers of throughput time usually include set-up and rolling speed, capturing these costs accurately is particularly important for companies that are capacity-constrained. Experience shows that calculating margins in terms of the overall contribution at bottleneck units tends to alter significantly the relative attractiveness of particular products and customers.

Margin assessment: prices

The other side of the margin equation is price. Here, as well, most steel companies operate with incomplete and misleading data. Even in a commodity-type business like steel, ensuring better pricing information and management represents a significant opportunity for improving profitability and customer service.

Excellence in tactical pricing at the transaction level can increase average prices by 2 percent or more

There is little doubt that general steel price levels are set by supply and demand relationships. Spot market prices, for instance, track very well with aggregate operating rates, cyclical shifts in demand, and the industry’s cost structure. Since it is difficult, however, to influence overall price levels except in concentrated, protected markets, most of the improvement opportunities related to pricing are transactional—that is, they result from careful management of the price charged for each transaction. Senior executives may doubt it, but excellence in such tactical pricing can increase average price levels by 2 percent or more.¹

As on the cost side, the first step here is to develop a database that clearly identifies the realized price—what we call the "pocket price"—associated with each transaction. Most companies start with the invoice price when calculating margins. Although invoice prices include some adjustments—for example, volume discounts—relative to list prices, they do not reflect many others that must be made to identify the real pocket price for each order: payment terms, for instance, or claims records or freight charges. These all represent real adjustments to income that invoice prices do not capture. Every such "revenue leakage" is a point of leverage that can be managed—often with no penalties in terms of satisfaction—to boost actual price realization (Exhibit 5).

Transaction prices for specific products fall within a price band that can be surprisingly large. In fact, the price spread within a product category can exceed even the differences in average prices across categories. At this level, therefore, understanding transaction prices allows managers to identify opportunities to reposition their companies’ mix within the price band, shifting it toward the more attractive customers and segments.

Mapping the value

In effect, transaction prices provide the last piece of essential data that managers need to complete their detailed picture of external buying factors and internal costs. With this information in place, they have three levers with which to improve mix management.

First, if low margins reflect performance shortfalls in the plant, they can move to reduce costs without changing the mix. Second, they can move to increase prices in low-margin areas by working through the less visible components of the pocket price, such as payment terms. And third, they can move to sell more in those product and customer markets that provide high margins. This may not always be possible: the target market may, for example, be too small. But in most cases, it is possible—over time—to reposition a company’s mix in this way.

These initiatives are usually interlinked. Increasing prices in unattractive segments is often a good way to implement a shift in mix. Similarly, better understanding of customers’ actual requirements is crucial to any reevaluation of operating practices at the plant level. Costs incurred to provide undervalued services or product attributes can be eliminated or, at least, drastically reduced.

A "value map" relates prices to a customer’s perceived product and service benefits

Ultimately, all these data must be combined to develop an overall view of how a company is positioned—relative both to its competitors and to alternative materials—to meet customer requirements. This can be done by drawing a "value map," which relates prices to a customer’s perceived product and service benefits (Exhibit 6). A value map helps identify opportunities for increasing prices and thus improving profitability. It also helps identify areas where a company is vulnerable and needs to improve its performance—or, for that matter, where its competitive prospects are so poor that exit may be warranted.

Promoting steel

In tandem with effective mix management, product promotion can help boost steel’s competitive prospects, assuming (as is the case in many markets) a rough cost parity between it and alternative materials. The role of such promotion is threefold: to provide information about steel’s advantages, to address issues related to "system economics" (that is, steel’s entire value chain from mill to final application), and to affect customers’ decision-making process. The construction industry, which is probably the single most important market for the promotion of steel, provides a good example of each of these rules. The payoff is significant. For example, we estimate that in the German construction market alone, providing better information, addressing system economics, and shifting the decision point could boost total steel consumption by 15 percent by the year 2000—in effect, doubling beam consumption.

At the moment, steel’s share (versus concrete) of the construction market varies from over 60 percent in Japan and the UK to 20 percent or less in Germany and Mexico. The fundamental reason for this discrepancy involves cost: steel is a more expensive solution in Germany, for example, where steel construction costs are well above parity with concrete, unlike, say, in the UK (Exhibit 7). But these costs represent only a small fraction of the total cost of construction in Germany, as shown by the value chain in Exhibit 8.

In fact, most of steel’s competitive disadvantage in Germany occurs at the construction site rather than in the mill, particularly in painting and fireproofing. German steel companies would have to sell beams for virtually nothing to close the competitive gap with concrete. Consequently, increasing steel’s share of this market requires action at many leverage points along the value chain: on construction practices such as unnecessary painting, for example, or regulatory requirements such as fire standards, or product improvements such as the fire-resistant beams developed by Nippon Steel.

Customer decision making

Beyond attention to system economics, however, promotion of steel in the construction industry also requires a sophisticated understanding of the customer’s materials buying decision. Because this decision is usually made somewhere between architect and engineer, suppliers must inform, educate, and perhaps even train both kinds of professionals about how to work with the material—especially in markets with low steel usage, where neither may be accustomed to designing in it. Suppliers might also promote its advantages to developers, for whom—again, assuming rough cost parity—steel has tremendous advantages: more usable space, shorter construction times, more flexible interior design and redesign, and recyclability. The more developers can be involved in the materials decision, the better the prospects for steel.

Another example from the construction market, this time involving sheet products for roofing applications rather than long products used for framing, illustrates much the same point—albeit with somewhat different conclusions. Although galvanized sheet is a superior roofing material when judged in terms of lifecycle economics (Exhibit 9), the obstacles to developing this market, which has an ultimate potential of around five million tons, are formidable: the right system economics—comprising the infrastructure for developing the metal roofing business—are simply not in place. Asphalt roofs, the currently preferred material, are supported by an extensive infrastructure of small businesses that handle retail sales, installation, and repair. Until a comparable network is developed for steel applications, their huge potential will remain untapped.

Product promotion in other sectors involves the same three levers. In the automotive industry, for example, information efforts must focus on the design community, which today is generally unenthusiastic about steel’s prospects. The major problems with system economics lie in the fabricating area, particularly stamping costs and recycling. And the key to the decision-making process is to strengthen the influence of the automakers’ manufacturing and purchasing functions, which usually favor steel because of their deep experience in working with it, as well as its relatively stable prices.

Improved customer service based on a solid cost position, careful mix management, and effective promotion is the most likely route to a broader usage of steel. Of these three, getting the mix right probably represents the highest-potential combination of latent opportunity and current undermanagement. Segmentation is still not usually defined in terms of customer buying factors rather than of products or consuming industries. Cost accounting systems still provide limited information on actual product costs, especially as they relate to the utilization of bottleneck units. Internally available data on prices still do not consistently reflect realized pocket prices, transaction-specific margins, or opportunities for improvement. Getting all this right is a demanding, resource-intensive effort, but the payoff is immense. Indeed, a five-point improvement in return on sales is both an appropriate—and a realistic—target for a broadly-defined mix improvement effort.