Machinery companies are traditionally perceived as "me too" manufacturers which have to compete aggressively on price. This doesn't apply across the board to all businesses, however. Columbus McKinnon (CMCO 1.79%) is one notable exception; it is the largest manufacturer of hoists in the U.S. and also provides other material handling products such as rigging tools, cranes, and actuators. It has been free cash flow positive in nine out of the past 10 years and seen its gross margins expand from 24.3% in fiscal 2010 to 29.2% in fiscal 2013. Columbus McKinnon boasts several competitive advantages that enable it to avoid brutal price-based competition.

Focused market leadership
Columbus McKinnon obviously shares the same beliefs as former General Electric CEO Jack Welch, who was famous for stating that if a business was not first or second in its industry then it should be either sold or closed. About 84% of the company's revenues come from products for which it is the top manufacturer in the U.S. For products like powered hoists, manual hoists, hoist parts, load chains, and tire shredders, Columbus McKinnon's market share is higher than 45%.

By focusing on its strengths and niche product areas, Columbus McKinnon has managed to build up strong brands and a robust pipeline of new products. Its "Yale Hoist" brand of manual hoists has been in existence since 1881 and is now synonymous with quality and reliability. Columbus McKinnon's other brands are also at least half a century old. New products also accounted for close to a quarter of Columbus McKinnon's fiscal 2013 revenues.

Similarly, Lindsay (LNN -0.25%) is a machinery company which focuses on a specific niche – irrigation systems and solutions. It is the second-largest manufactuer of pivots and laterals in the world with a 32% share of the global market. Being focused on the needs of its core customers, the farmers, Lindsay has developed ancillary products and services to satisfy them. One example is GPS positioning and guidance services that include both software and GPS units, which Lindsay aptly named "Wheresmycows Farm Mapping." With these farm maps, farmers can make more informed decisions on stock rotation and feed requirements. This helps Lindsay to build stronger customer loyalty.

Razor and blade business model
Columbus McKinnon has the largest installed base of hoists among its competitors in the country, with follow-on sales of replacement components and repair parts make up about three quarters of its revenues. The high level of recurring revenues from maintainence and repair helps Columbus McKinnon to partially offset the cyclicality and economic sensitive nature of the industry.

More importantly, these replacement components and repair parts cost under $5,000 a piece, compared with the five-figure sum for a high-capacity hoist. This is similar to how the razor and blade model works. While a consumer may compare prices before buying a razor, he probably doesn't check the price of the blades he buys for two reasons. First, he has no choice, because other brands' blades won't fit with the razor he bought. Second, the blades cost much less than the razor, so he is less concerned about price. As a result, Columbus McKinnon can earn higher margins on maintenance and repair products because customers have lower price sensitivity for these items.

However, the razor and blade model isn't perfect. Columbus McKinnon can alienate its customer base if its maintenance and repair service quality isn't up to standard. To avoid this problem, it has about 179 certified hoist service and repair stations located across the country to attend to customers' needs.

Another variation of the razor and blade model is the provision of credit, such as what Deere (DE -0.54%) offers with its financial services division. John Deere Financial Services assists with the financing of sales and leases of equipment by its dealers. While Deere's dealers are very price sensitive when it comes to the initial equipment purchase, they are less concerned about the interest rates that they are paying Deere for the financing. Deere's operating margins for its financial services segment (37%) are more than double that of its core agricultural equipment business (16%).

Companies can make decent profit margins as long as they know how to manage customer price sensitivity. As seen in the case of Columbus McKinnon and Deere, a large installed base and the provision of credit help to lower the price sensitivity of customers and raise margins concurrently.

One-stop shop acts as a defensive firewall
Columbus McKinnon positions itself as a one-stop shop for all kinds of material handling products. Its product range is very diverse and comprehensive, with no single product SKU (stock keeping unit) accounting for more than 1% of sales. Companies like Harley-Davidson and Boeing saw Honda and Airbus encroach on their market space because they allowed competitors to penetrate the market with lower-end models. Columbus McKinnon didn't make the same mistakes. By covering the entire spectrum of material handling products, its customers choose to concentrate their purchases with Columbus McKinnon and not a single-product competitor.

Foolish final thoughts
Columbus McKinnon is a rarity in the competitive machinery industry. It takes full advantage of its focused market niche, has a one-stop-shop defensive firewall, and sees benefits from having a large installed base.