Xiameter Case Study: Adding Business Model Innovation

DowCorning

I recently spoke with Stacy Coughlin and Kristina Bobrowski about Dow Corning and their experiences with business model innovation in the creation of Xiameter. The story is a great case study of how an established, successful firm can still improve their innovation efforts.

The story has been told by others pretty well already – Xiameter has been made into a Harvard Business Review case study authored by Clayton Christensen, Mark Johnson and Henning Kagermann.  Kay Plantes and Jeffrey Phillips have also written excellents posts on this case after speaking with Stacy.  Here is how Jeffrey describes the advent of Xiameter:

Traditionally, Dow Corning has provided silicone to a range of clients, but wrapped that product in a lot of information, service and support. It became evident to individuals within Dow Corning that a large segment of the potential customer base didn’t want or need anything except the silicone product itself, so Xiameter was launched to offer a radically different business model and distribution of the product to those customers who didn’t want, or need, the service or support associated with the sales and distribution by Dow Corning.

I won’t recap too many details of the case, but I’ll use it to make some points.  This is how the introduction of Xiameter changed Dow Corning’s position on The Innovation Matrix:

Prior to Xiameter, Dow Corning was a Fit for Purpose innovator.  They have been a market leader in the silicon industry since its inception – and their strategy was built around providing the best possible product.  Consequently, all of their innovation efforts were put into sustaining this market-leading position.  They had substantial investments in R&D, significant resources sunk into customisation for lead customers, and a high level of commitment to continuing to build market-leading products.

But at the end of the 1990s, they noticed that a large part of the market didn’t want or need this level of service and support.  For many applications, silicone was becoming a commodity.  The environment around Dow Corning was changing.

Xiameter was developed in response to this.

It represented an increase in Innovation Commitment in two ways.  First, it had very clear support at the CEO level, and this was reinforced by the allocation of resources – people, time and money.  Second, the economic investment was significant.

Xiameter also helped Dow Corning increase their Innovation Competence.  In addition to their skill at product and service innovation, the development of Xiameter built a business model innovation competence as well.  Also, this increased the scope of Dow Corning’s innovation portfolio – this was a clear Horizon 2 investment.

This case illustrates several important points:

  • Your position on The Innovation Matrix is dynamic.  I’ve made the point before in talking about Procter & Gamble – you control your position on The Innovation Matrix, and it can change over time.  Shaun Coffey makes this point in a comment on that post:

    The emphasis on the dynamic nature of a firms position is important, and often misunderstood. Many firms do not recognise that a business model exists at a point in time – and, like all complex systems, every time you act in the market you perturbate the system and a new configuration of the business model emerges. It is simply too easy to conceptualise this once, and then stick with a fixed model until is is so disfunctional that you are in crisis mode.

    This is exactly the problem that Dow Corning avoided by undertaking this initiative.

  • A new business model often requires a standalone division. This has some interesting interplay with points raised by Ralph Ohr in his last post. Big companies have some significant advantages in building new business models – in particular, they have the resources to do so. Constantinos Markides has written about this too – and he outlines the factors that lead to success in new unit spinouts designed to support new business models.
  • Separate business models work best when they share resources. This is where it helps to be big. Plantes outlines one of the key issues in the success of Xiameter:

    Product line managers oversee product category platforms, determining where products are in the life cycle and deciding which products fall under which brands, all with an eye to balancing capacity and brand mix to maximize overall profitability. Everything else except sales and marketing – in other words manufacturing, governance, sustainability and C-level management resources – is shared by the two brands.

    “We also have a highly integrated SAP system utilized in real time, allowing us to offer two brands without adding operational costs, which also adds to efficiency” Coughlin notes.

    Stacy made the point to me when I asked why the Xiameter model hadn’t been copied by competitors. Her response was that they were all running multiple instances of SAP. This is actually kind of mind-boggling. The inability to integrate back-end data is preventing them from achieving economies of scale – and this is one of the keys to successfully implementing the multiple business model strategy.

  • To succeed over time, you have to risk cannabilisation. There definitely appears to have been concern internally about the potential of Xiameter to cannabilise the core Dow Corning customers. Here is how Phillips discussed this:

    But there are several factors at play here. First, Xiameter was introducing a business model to serve unserved or underserved customers who had chosen not to interact with the existing business model, so they were additive to the customer base. Second, Xiameter is more than willing to co-exist with a high-touch, high service business model that Dow Corning provides. In this case, and I suspect in many cases, business model innovation expands the pie and attracts new customers. It does not have to be a zero sum game.

    There are still issues here.  One is that Xiameter achieves its lowest total cost position by taking advantage of resources within Dow Corning, and this can have negative impacts on incentives within the parent firm.  Managing this issue is very tricky. But overall, the business model innovation undertaken by Dow Corning expanded their addressable market – it didn’t just replace existing customers with new ones.

Dynamics are critically important – even if you are just executing a currently successful business model with increasing efficiency, you are rarely standing still. And over time, this approach can be dangerous. Your market may be turning into a commodity as the silicon market was for Dow Corning.

The Innovation Matrix is a tool for you to evaluate where you currently are, but more importantly, it is there to help you figure out how to get to where you want to go.  You can use it to plan the innovation moves that will transform your organisation.

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Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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8 thoughts on “Xiameter Case Study: Adding Business Model Innovation

      • That model is a failure resulted in reduced cost but market share loss. This was also one of the reasons behind the new restructure (apart from new leaderships critical wrong decisions). This resulted in cutting off over 5-10% of employees worldwide (depends on whether you consider hemlock part of DC). I am a little surprised about how feelings, impressions and bias dominate even in an article from a researcher against facts and figures.

        • Asad, the real issue here is we do not know what would have happened to revenue and profits absent the new business model. The business model change was necessitated by the growing commoditization of the business – demanding a lower cost structure. The loss might have been far greater if all sales were through the more expensive structure. When you have a market with excess supply and there is little difference across competitors, cost reduction which unfortunately often means people cuts is very common. I believe the company did the right thing to try to use the DOW brand as a Halo around a commodity business and create a lower cost structure for the commodity business. One question is whether Western HQ companies can ever build the lowest cost structure for a commodity business.