"Taming The CEO’s Nightmare", Businessworld (India), June 12, 2010 by Devangshu Dutta
In his latest book, Richard A. D’Aveni focuses on a topic of acute concern for most businesses: commoditisation. In a few recent interviews, he accurately described it as the “black plague on modern corporations” and a “deadly disease that’s spreading like crazy”. Beating The Commodity Trap too reflects these views.
If one had to pick the ultimate nightmares to keep CEOs awake at night, commoditisation would definitely be among the top of the list. Specifically, given the economic uncertainties around the world in the past couple of years, business leaders who are not concerned about their products or services being turned into commodities are either supremely equipped to maintain their differentiation, or immensely deluded as to their capabilities to fight market forces. D’Aveni says maintaining differentiation alone is not enough to sustain business.
A product or service becomes a commodity when it is not distinguishable from competing offerings and, therefore, not valued above the competition. D’Aveni views commoditisation along two important attributes: the benefits or features that are being offered and the price (margin) that is available to the business. Based on his model, he has identified three types of competitive stress that a business could face.
In his latest book, Richard A. D’Aveni focuses on a topic of acute concern for most businesses: commoditisation. In a few recent interviews, he accurately described it as the “black plague on modern corporations” and a “deadly disease that’s spreading like crazy”. Beating The Commodity Trap too reflects these views.
If one had to pick the ultimate nightmares to keep CEOs awake at night, commoditisation would definitely be among the top of the list. Specifically, given the economic uncertainties around the world in the past couple of years, business leaders who are not concerned about their products or services being turned into commodities are either supremely equipped to maintain their differentiation, or immensely deluded as to their capabilities to fight market forces. D’Aveni says maintaining differentiation alone is not enough to sustain business.
A product or service becomes a commodity when it is not distinguishable from competing offerings and, therefore, not valued above the competition. D’Aveni views commoditisation along two important attributes: the benefits or features that are being offered and the price (margin) that is available to the business. Based on his model, he has identified three types of competitive stress that a business could face.
Deterioration: In a deteriorating market, competitors present low-cost and low-benefit offerings that appeal to the mass market. This is possibly commoditisation in its “purest” sense, where the customer ends up valuing the lowest price over and above any other benefit or feature. In this scenario, a business can either get stuck in the commodity trap, fighting an ever downward spiral of price and cost minimisation, or could marginalise itself to a niche where it can protect its margins.
Proliferation: A proliferating market constantly sees the emergence of new combinations of benefits and price that serve specific segments. This is not about the business offering turning into a true commodity, but extreme differentiation and proliferation of choice do make it difficult for businesses to create a clear value statement that can be priced above competition. D’Aveni describes this as “being squeezed in the middle of a pack of piranhas” which are snapping away pieces of the market.
Escalation: This form of commoditisation is possibly the most prevalent in industries prone to disruptive changes, such as technology, consumer electronics and communications. Extreme competition here results in more for less, as each competitor goes one-up in terms of offering more benefits for the same price.
The book suggests competitive strategies that a business could take to avoid the commodity trap. They can be boiled down to the biological choice: fight or flight (escape). D’Aveni echoes the basic warfare strategy laid out by many military and business strategists. He says businesses need to gauge the opponents, choose their battles, and pick opponents against whom they can win. He also calls for pre-emptive action: where companies can, they should either change the business environment to avoid commodity battles, or initiate the battle of commoditisation and control its direction and momentum. Anticipation and pre-emption is the key. For this, D’Aveni offers a simple framework to analyse a current market situation in terms of a price-benefit matrix, and to identify the advance corrective actions to be taken.
The book is short and straight-forward enough to pick through a domestic flight, or to read in the back-seat during a long commute- between office and home. The easy-to-understand framework gets the messages across quickly. In analysing the variations of commoditisation, both in consumer and business-oriented industries, the author also offers something for everyone. However, the book’s strengths also turn out to be among its biggest weaknesses. The book would have benefited from more depth to each of the concepts. Skipping quickly from one area to the other, in some places, the book risks losing coherence of thought.
One of the other glitches is with the examples quoted. The predominantly US market examples reduce the book’s relevance for a global audience — the author presumes that the reader will know the company he talks about and its context well enough to understand the lessons being discussed.
In some cases, the examples are incomplete and possibly even incorrect: one such is the example of Zara. The broad-brush attributes Zara’s business success to turning fashion into commodity, and ignores the fact that fashionability and desirability are the cornerstone of Zara’s offer, not the cheapest price. These are far more accurate examples of commoditisation in this context.
However, if you are sufficiently concerned about the possibility of being commoditised out of profitability, or being marginalised out of market share, you could easily overlook these flaws. The fundamental premise of the book is far too important to ignore.
Author's Details:
Richard A. D’Aveni is professor of strategic management at the Tuck School of Business at Dartmouth College in the US. He is considered one of the prominent management thinkers today. D’Aveni’s books include Hypercompetition (1994) and Strategic Supremacy (2001).
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