Do you think it would be great if you could wake up each morning, pick up the daily newspaper off your doorstep, turn to the financial pages, and check a table to see how much money your company made yesterday? If you do, then you are probably thinking about your company's product as a tradeable commodity, with little in your business to differentiate yourself from others selling that commodity. If that is your business model, you are probably set for returns that range from average to poor. Such is the nature of commodity businesses.
So if you are in a business, whose major product is a commodity, you need a strategy for decommoditising. One of the most original thinkers on this subject is Henry Weil of MIT. He put forward several possible strategies, including;
• Reduce the amount of capital you have employed in the business - this gives you more flexibility to respond to changes in markets
• Have dramatically lower costs than your competitors - opening up possibilities for adding back costs that allow differentiation
• Bundle services with the commodity product - which means understanding who your customers are and what they need; even saying the word 'customer' is a triumph for many in commodity businesses
• Take the moral high ground on key issues - making people want to be your customers.
BP has used all of these strategies. It started by looking at its products - crude oil, refined products, retailing of gasoline, and petrochemicals - and realising that all of these were thought of as commodity businesses. Then came a cultural stage of embedding the idea that our goal as a business, any part of the business, is to figure out how to be distinctive in our sector. Example: We explore for oil, others explore for oil. There was a time when BP was producing oil from some large fields in the North Sea and Alaska, and small fields in any number of countries around the world. In this its profile was similar to Shell, Exxon, Mobil and others. Certainly it was not distinctive. John Browne asked how to make oil production distinctive, and settled on a strategy of exploring and investing in production only in places where large fields were possible - a strategy of finding elephants.
But the crude oil produced is still a commodity, you say. Still goes into the market where you can see its price on the front page of the paper every day. OK, but the crudes being produced get different values compared to benchmark crude oils, the well- known Brent and West Texas Intermediate, for example. So the group in the company that is responsible for bringing the crude oil to market needs what? A marketing team, of course. A team that establishes the quality of a new crude oil, why it should command a superior price vis à vis the benchmark, that convinces refineries of other companies that this is crude they want to get hold of. In other words, a distinctive process that decommoditizes the product.
If you can exercise control over an asset without owning 100% of it, or if you can use other people's money, giving them a fair return, if you can find ways of maintaining control over your free cash flow, if you can acquire assets so that they come onto the books with low capital employed, then you have flexibility. BP found ways of doing this with refineries, and a lot of opportunistic independent refiners found ways of acquiring assets from major oil companies for little more than the working capital, thus gaining an advantaged position in a commodity business - as long as the market measure of success was return on capital employed.
One of John Browne's defining leadership techniques is to be relentless about cost reduction. Anything is a good excuse for cutting costs. Low oil prices, let's cut costs. High oil prices, let's be clear that we are not using this as an excuse to let costs run wild. Merger? We have to take out costs in all overlap areas to make it successful, but let's use this time to re-examine costs in other areas as well. Exxon does this really well.
Bundling services doesn't always work, but when it does, it really does. Air BP is a great example of this. Their product is Jet Fuel, and this is almost the ultimate commodity, traded in liquid markets, and so tightly specified that there is no opportunity for product differentiation. So what does Air BP do? First it recognises that how it participates in logistics on the airport is a differentiator. It asks how we train our Albanian customers in safety or checking the fuel quality. This is a service we sell with the fuel. Secondly, it realised that the business is not about the fuel, but about credit terms for buying the fuel - that different airlines had different credit worthiness, leading to different terms, but if you were a big global player you were internally hedging some of that credit risk, in a way that many of your smaller competitors could not.
Finally, taking the moral high ground. Again, it doesn't always work, but when it does, oh boy! BP did this on climate change, on cleaner fuels, on political donations. You almost always have to do it first to get the impact, but it does allow you to step away from the pack in a commodity business, especially with the retail customer. But a warning, this has to be about substance, not about an advertising campaign. Indeed, advertising is not a strategy for decommoditizing, is it?
About Leadership:About Leadership is a series of 52 columns on corporate leadership - essential skills, leading teams, managing your career, the strategic and business practices to make a company and its leader distinctive from competitors. These columns will be of interest to people leading small and medium sized companies today, many of whom have not had much formal training in management skills and techniques; for the many people in big companies who aspire to senior management; and for anyone who thinks: Give me a hint, how can I do this better?