8 STRATEGIES TO COMPETE AND THRIVE IN A MATURE, COMMODITIZED OR DYING INUSTRY

I’m writing from the air, descending into the heart of The Great Tech War of 2012: San Francisco. During my last trip here, a few weeks ago, I got a taste of what this battle is all about. My client was a once high-flying tech pioneer now struggling with the erosive power of commoditization. It used to take generations for your core business to devolve from the high-margin cutting edge to a low-price commodity. Now it can take just a few years. What you once sold for enviable profits someone else might offer for free any day now. View my webcast on this topic here.

My recent post about Netflix sparked a heated debate on various newsgroup message boards, and illustrates the dilemma well. There are three ways to price your service: cost, competition, value. When you have no competition your price can soar to just under the value you deliver. Netflix enjoyed those days when it was the only movie-streaming business that worked well. But as soon as direct competition enters, things change. You have to lower your price to resemble the competition’s and often, as in Netflix’s case, start paying suppliers more.

So how can you fight the commoditization? How do you remain extraordinary and profitable in a fast-moving world? There are at least eight ways to do it.

1. Bring back the dead:  My wife’s birthday was this weekend and I’m under strict orders not to buy her any more gadgets. But when I saw an old turntable and a collection of vinyl records, I could not resist. Vinyl is making a comeback. Record companies are reissuing albums on the huge black disks and even releasing new albums in the old format. Music fans are turning back to vinyl for nostalgia, because it offers better sound quality, and for the fantastic artwork you just can’t replicate on an iPod. With clever marketing, what is old can become new. What new (or old) reason can you give customers to rediscover your out-of-date product or service?
2. Create new occasions:  Walk into your kitchen. Open your refrigerator. Do you see a box of Arm & Hammer baking soda? Arm & Hammer was competing with the ultimate commodity. One type of baking soda is as indistinguishable from another as salt or sand. But the company pulled itself out of a low-price, commodity battle where everyone is the same by creating new uses and occasions for its baking soda. What new uses can you create for your product/service?
3. Become the ingredient:  Another strategy that has worked well for Arm & Hammer is to borrow other people’s roads into your home. Today you find Arm & Hammer in toothpaste (whiter teeth!), detergent (cleaner clothes!), and deodorant (fresher smell…!). The beauty of becoming an ingredient is that customers become less price sensitive. They are willing to pay a higher price for your ingredient because it represents only a small portion of their total cost. Whose road can you borrow by becoming an ingredient in their product/service?
4. Move the action:  U-Haul is not in the truck rental business. Best Buy is not really an electronics retailer. At least not when judged by profits. U-Haul gets you into their store with the promise of low-cost truck rental. Then they sell you high-margin boxes and packing tape. Best Buy lures you in with competitively priced TVs, and profits by selling you service plans you are unlikely to fully use. To where can you move your profits?
5. Shift the basis of competition:  Our 5-year-old Mac just died. The PC in my home office has better specs than most Macs and it cost just $700 from Costco, but we’ll probably end up spending three times that for another Mac. Why? We like the design. The Mac is the only computer you can proudly place in your living room. In commodity games everyone competes on the same basis (performance) so you can distinguish yourself by choosing a completely different dimension (design). On what basis are your competitors competing? How can you compete on something entirely different?
6. Attach a business:  Thomson Travel in the U.K. sells cheap airline tickets and tours. It can afford to because it does not depend on these sales for profits. It makes its profits by funneling its customers into Thomson Travel Charter Airlines airplanes. What related high-margin business can you attach to your lower-margin core?
7. Rapid-fire innovation:  Trying to simply run faster than your competition is not a strategy I usually recommend, but if you really are swifter, it can work. When Lee Pillsbury was part of the top team leading Marriott hotels, they conducted a massive study to identify the most important factors that drive a business traveler’s hotel decisions--speed of room service, the risk of the hotel giving away your room if you check in late, speed of checkout, etc. They then filled a pipeline of strategies to address each factor and unleashed a stream of innovations on the competition--30-minute room-service guarantee, late check-in guarantee, etc. By the time the competition could copy one innovation, Marriott was already pulling the trigger on the next. Do this long and fast enough and eventually the competition will give in. What are your next 10 innovations?
8. Change the basis of pricing:  Xerox grew to dominate the copying business not just by offering great technology, but because at a time when the competition was pricing per machine, Xerox was offering a service priced per copy. Redbox is doing the same in the supposedly now-dead DVD market: pricing per day rather than per rental. Fill in the blanks: “My competition charges $_____ per ______” (e.g., $3 per rental)." Then replace the blanks with something different.

Economists may tell you that every industry will eventually mature into a low-margin, commodity environment. But don’t believe them. If you are willing to resist the pull of consensus, and have the courage to be extraordinary, you can continue to thrive profitably.

COMMENTARY:   Commoditization is a very real threat to every organization and it is comparatively straight forward to identify the early warning signs, which include:

• Increasing competition.
• Prevalence of me-too products and services. 
• A belief that all suppliers are fundamentally the same.
• The decreasing desire on the customer’s part to look at new options or features.
• An increasing preference for customers to select on the basis of price and little else.
• A reluctance for customers to pay for anything they consider unnecessary.
• Increasing pressures on margins.

Strong brands might help to insulate the organization from some of the worst impacts of commodization, but as we have seen in the past with organizations such as IBM, HP, Xerox, even the strongest and most dominant organizations come under threat from time to time. Even for those organizations which operate within a safe sector, such as energy for example, commoditization is still an issue they have to address, especially in terms of their non-core activities.  

At its extreme, commoditization leaves the leaders of corporations with a very simple and stark choice: do we allow ourselves to become commoditized and hence do our best to survive, or do we do our best to avoid it?  Of course for some, the former may be the only choice open to them andfor many it will probably be a mix of both.  Naturally, there is a strategic choice involved as some organizations can be considered to be driving commoditization. In doing so they are gaining first mover advantage. Take easy Everything, which has a range of companies under its umbrella which are initiating a wave of commoditization in a number of sectors, most notably easyJet, but also cinemas, car hire, cruise liners and hotel accommodation.

As the zone of commoditization continues to expand, organizations must do everything they can to ensure they can compete without either destroying the value they offer to their customers or going out of business because their underlying costs are just too high to compete with the leaner more efficient companies which are emerging from India, China, South America and Asia.These companies are able to lower their prices without destroying their business.

Cost is one of the biggest drivers of commodization.  The company with the lowest production costs, assuming quality being about the same among competitors, has generated first-mover advantages for itself by simply competing on price.  If its competitors cannot compete on the basis of price, they are in danger of going out of business.  

The Internet has been a powerful force driving commodization.  Consumers can no surf the Net and compare features and prices.   Shoppers can scan bar codes or QR codes to locate the lowest price and store that carries the same item or comparable items.  They can even obtain product reviews right on their smartphone.      

In my opinion, business sectors that are already in commodization or ripe for commodization include cellular phones, desktop computers, tablets, mobile apps, software, digital cameras, portable music players, HD televisions, and digital music.  The highend smartphone, sector is particularly susceptible as more competitors enter the market, and companies match feature-for-feature.  The Apple iPhone is already feeling pricing pressures, as iOS loses lost its market share dominance to Android-based smartphones.  The iPad is also under attack as Barnes & Noble, Amazon.com, Samsung and others enter the tablet market.  

Courtesy of an article dated November 14, 2011 reporting in Fast Company