3M's Metalworking Abrasives De-Commoditization Challenge

Problem: Abrasive products were the very fist 3M products with sales dating back to 1902. Today 3M has a wide range of products, and abrasives are a relatively small part of the total portfolio. The market potential for metalworking abrasives in the United States (2006) is estimated at $141.67M For more details about demand trends and a break down by US cities please see APPENDIX 1 and APPENDIX 2. While data was unavailable for 3M abrasive sales alone, the 2004 sales of the 3M industrial division (which includes abrasives, tapes, adhesives, specialty materials, and supply chain execution software solutions) were $3.8 billion, raising 13.1 percent from the $3.3 Billion in 2003

The current product-innovation-based-differentiation strategy of 3M abrasives is challenged by a number of competitors. Recently, 3M has seen an erosion of market share and a weakened perceived value proposition due to changes in the market place and in customer preferences. 3M has been faced with:

1. Increased competition from narrow product line niche abrasives manufacturers

2. Decreased product differentiation

3. Pricing pressure from its end customers

4. Misalignment of salespeople incentive structure

3M currently segments customers by their product needs and product line use. Instead, 3M should segment by purchasing orientation, due to differing value placed on a number of dimensions including delivery speed, distribution terms, availability, technical expertise, support, brand, relationship, reliability, breadth of product offering etc. This will allow 3M to understand what is important to the customer when making a purchase decision. They will therefore be able to differentiate on the product solutions and after sale service, increasing the customers’ willingness to pay.

Issues: A brief look at the industry shows increased competition, a trend to view abrasives as commodities, and pressure to lower prices from end customers. Most abrasives manufacturers sell through distributors and must understand how to co-create value within the entire value chain. 3M also uses a highly trained sales force to qualify and materialize sales leads, but does not provide them with profitability data, and may have a misalignment of compensation incentives.

Increased competition: 3M’s top competitors in metalworking abrasives are VSM Abrasives, Saint Gobain Abrasives, Hermes Abrasives, and other miscellaneous coated and surface conditioning converters. The main differentiation criteria competitors mentioned were responsiveness (speed of order fulfillment), broadness of product line, customer service, and technical service. 3M currently does not offer 24hour delivery promises like some of the competitors. 3M does have 24 hour delivery capability for standard products, but they do not promote this because they can’t control the reliability of their distributors. (See APPENDIX 3 for detailed competitor information).

Abrasives seen as commodities: Another result of competition has been the lessened opportunity to sustain differentiation in the industry. Because many abrasive manufacturers operate in niche markets, they are able to gain a core competency in one customer solution or another. 3M has in the past been able to provide the broadest and most specialized array of abrasive products in the industry. However, because niche competitors operate in every category in the abrasive industry, there is increased competition within each. Therefore the variation in performance, efficiency, and cost of abrasives are limited. 3M must differentiate with value added services as opposed to product superiority.

In terms of product lines for metalworking, 3M has the largest selection of quality coated abrasives and surface conditioning products but, they lack a sufficient line of bonded abrasives However, an individual customer won’t typically use both types of abrasives in the same application and 3M believes coated products provide customers with a better value than bonded abrasives.

Pricing Pressures: 3M’s end customers understand the limited product differentiation in the industry. Therefore, they often purchase based on price alone. Commoditization has begun to erode value in the industry as firms compete on price and customers demand low cost strategies. Competitors have a significant advantage in this area as they can keep manufacturing costs low through narrow offerings and lower overhead costs.