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A new approach to segment strategy, distribution, and pricing can help companies win in the evolving cutting-tools market.
Cutting tools—end mills, drill bits, and other implements that remove materials—are essential components of machines used in multiple industries. If you need a hip replacement, doctors rely on devices equipped with cutting tools to shape the implant and associated bone. Within the defense sector, cutting tools enable the creation of the specialized ships, vehicles, and planes that move troops. And within the oil and gas industry, they make precise incisions in wells and pipes. These are just a few of the many applications for customized cutting tools that come in all shapes and sizes.
For the past few years, growth within the US cutting-tool sector has been about 1.5 percent annually—roughly in line with GDP. Over the same period, the market continued to consolidate, with cutting-tool companies undertaking more than 200 mergers and acquisitions, totaling more than $4 billion in value, since 2000. These transactions have allowed companies to enter new market segments, gain access to additional customers, and expand their portfolios—some of the best strategies for gaining share in this flat market.
Although growth is slow, cutting-tool vendors can capture additional value if they anticipate the changes ahead and adjust their long-term strategies. To assist them, we examined recent market trends, combining research data with insights obtained from interviews with more than 50 executives of cutting-tools companies as well as their major distributors and customers. Our analysis revealed some important dynamics. Overall growth will remain stable, but the customer base will shift as demand for cutting tools rises in some industries and drops in others. All customers will consider a variety of factors when making a purchase, but distributor recommendations will be paramount. We also discovered that companies can unlock value if they revamp their distribution networks and pricing approach, two areas that have often remained unchanged for years out of habit or inertia.
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