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Monday, June 17, 2013

How Herbert Dow Beat a Low Price Competitor

Every industry and every business tends to have at least a few competitors who know only one way to compete: unreasonably low pricing. These businesses undercut pricing so much that few make any profits. Unfortunately, as they go down the tubes toward oblivion, they often drag a few good companies with them.

Everyone knows that competing is part of being in business. Problems occur when some companies don't want to play by the rules.

One man who ran into just this sort of problem was Herbert Dow.

Herbert Dow founded Dow Chemical in Midland, Michigan, after inventing a way to produce bromine inexpensively. He sold the chemical for industrial purposes all over the US for 36 cents per pound at the turn of the 20th century. He couldn't go overseas, however, because the international market was controlled by a giant German chemical cartel that sold it at a fixed price of 49 cents per pound. It was understood that the Germans would stay out of the US market so long as Dow and the other American suppliers stayed within their borders.

Eventually, Dow's business was in trouble, and he had to expand. He took his bromine to England and easily beat the cartel's fixed price of 49 cents per pound. Things were okay for a while, until a German visitor came to Michigan and threatened Dow that he had to cease and desist. Dow didn't like being told what to do, so he told the cartel to get lost.

Shortly thereafter, German bromine started appearing for sale in the US for 15 cents per pound, well below Dow's price. The cartel flooded the US market, offering the chemical far below their own costs, intending to drive Dow out of business. But Dow outsmarted them. He stopped selling in the US entirely and instead arranged for someone to secretly start buying up all the German bromine he could get his hands on. Dow repackaged it as his own product, shipped it to Europe, and made it widely available (even in Germany) at 27 cents per pound. The Germans were left wondering why Dow hadn't gone out of business and why there suddenly seemed to be such a high demand for bromine in the US.

The cartel lowered its price to 12 cents and then 10 cents. Dow just kept buying more and more, gaining huge market share in Europe. Finally, the Germans caught on and had to lower their prices at home. Dow had broken the German chemical monopoly and expanded his business greatly. And customers got a wider range of options for buying bromine at lower prices.

Dow went on to use the same trick against the German dye and magnesium monopolies. This is now the textbook way to deal with predatory price cutting.

The way Dow went about dealing with a low-ball competitor may not be the solution for you in dealing with your own competition. But his method does show that you can win by thinking creatively and putting some thought into outfoxing an opponent in other ways than just matching their low prices.

The Five Dollar Workday

Henry Ford, the famous Ford Motor Company founder, was known for many things. Among them was his role in promoting the assembly line as a viable means for mass-producing automobiles, a process that made cars more affordable for middle-class Americans.

Ford had a global vision with consumerism as one of its centerpieces. He had an intense commitment to lowering costs through systemization and building a more process-driven company.

This focus made his next move (which is not as well known) quite a shock at the time.

The Five Dollar Workday

In January 1914, Henry Ford made a radical decision. He increased Ford Motor Company employee wages from $2.34/day to $5/day (equivalent to approximately $110 today) and reduced the workday from nine hours to eight.

While this was one of the most generous pay hikes of its time, Ford didn't do this simply out of the goodness of his heart. At the time, the Detroit area was already becoming known for companies offering higher-than-average pay. In addition, the boredom of repetitious, assembly-line work led to higher employee turnover rates. One of the underlying reasons behind Ford's move to increase wages was the desire to attract and retain top-notch employees by effectively creating golden handcuffs.

Ford used his PR machine and news journalist contacts to spread the word about the generous pay. Soon, there were thousands of applicants at every Ford factory, which allowed the company to hire only the best applicants. The fortunate hires stayed with Ford much longer than they otherwise might, since they couldn't get similar pay elsewhere. In one bold move, Ford had managed to solve most of his company's labor problems.

But higher employee retention was only one benefit of Ford's plan. Within two short years of the pay raise, Ford's profits increased by 200% to $60 million per year. Within five years, Ford Model T's were rolling out at the rate of one every 24 seconds, much faster than the 12 days each had initially taken to produce. By the end of 1914, the 13,000 Ford Motor Company employees were producing 260,000 automobiles annually, while the rest of the automotive industry produced 280,000 combined.

At the time, much of corporate America did not view employees as an asset. Instead, they were seen as part of a company's expense. With this single move, Ford was able to open the eyes of the corporate world. Ford had created a workforce that became a model for the eight-hour workday and HR departments of today. More importantly, he set the pace for the eventual rise of middle-class America. Ford employees could actually afford to buy one of the cars they produced.

With the $5-per-day pay hike, Ford was able to reduce employee turnover, increase the pool of high-quality applicants, reduce absenteeism drastically, and attract top-notch employees. The corresponding morale increase led to the highest productivity rates in history.

So what's the moral of this story? What can we glean from it and apply to our own companies in the 21st century?

When companies shift their mindset from viewing employees as an expense item on the financials to an asset with vast potential, they can begin to see brighter possibilities for the whole company as well. Employees who truly believe they are appreciated and feel valuable to their company are much more likely to be highly productive and happy with what they are doing. Content employees are much less likely to actively seek opportunities elsewhere. Loyal, long-term employees lead to stability and customer satisfaction.

Henry Ford made a big splash with his five-dollar workday. The same kind of impact can be made today by implementing innovative ideas that show employees you appreciate what they do.

Studies and surveys have shown that higher pay is not the top motivator for employees to stay with their company. Feeling valued, being content in their role, and accomplishing larger goals are more important criteria. Find effective ways to instill those feelings in your employees, and you can make your own splash.

Friday, June 14, 2013

How to Grow Your Business During Any Economy -- and it's not by being the lowest priced provider

While the economy seems to be slowly recovering, it's far from smooth sailing, and many businesses are still struggling to find firm footing. Even so, you don't have to look hard to find businesses that are thriving. What's the secret behind these companies that the struggling ones haven't found?

It may be tempting to think that lowering prices is the best way to compete in a struggling economy. When times are tough, people think longer and harder before making the choice to buy something. But this doesn't mean they will always opt for the cheapest option. If they did, Apple wouldn't be the brand leader it is today. There are many inexpensive alternatives to Apple's popular products, yet they continue to break sales records with each successive new product release.

The Internet has made it easy to compare prices and find the cheapest alternative. Only one company can be the cheapest, and the low-price shopper will spend as much time as necessary to find what they are looking for.

This type of person is not your target customer because they will leave you as soon as they find someone else offering a lower price. There's no brand loyalty in this game. Instead, it's a race to the bottom, with eventual closure its only prize.

A Better Approach

The much better approach is to increase the value you bring to your marketplace instead of lowering your prices.

This value could be found in offering helpful knowledge to people looking for the types of products you sell. It could mean offering bonuses such as free shipping or discounted installation. It could be as simple as a friendly, smiling person greeting customers in store or on the phone. The more value you can find and bring to the table, the less impact price will have as the sole factor for buying what you sell.

When you bring value like that, you become invaluable to your community and to the types of customers you want to attract. These are customers who won't leave you for the latest sale by the low-price companies. Instead, they're real customers who come back because they appreciate real value.