Commoditization is a word that sends chills up the spines of CEOs worldwide. A commodity is a completely replaceable, fungible item, purchased from any of many suppliers, with prices depressed to not much above the variable cost of production. Yuck!
The strategies that companies have used to battle commoditization, like product differentiation and bundling, are themselves being commoditized. Private-label copycats and new competition from emerging markets are increasing the forces of commoditization. With all this comes the need to look at the problem anew.
Richard A. d’Aveni of Darmouth’s Tuck School of Business has produced a slim volume entitled, “Beating the Commodity Trap: How to Maximize Your Competitive Position and Increase Your Pricing Power,” that performs just such a task. The best part of the book is the framework it lays out for thinking about commoditization; the three “traps”:
Deterioration – in which competitors duplicate some or all of your value proposition at a lower price
Proliferation – in which various firms serve business niches that eat away at your market
Escalation – in which competitors increase value and reduce cost at the same time
d’Aveni goes on to describe various strategies to use if you find yourself in one of these traps. Probably the most successful example cited is Microsoft’s response to a proliferation trap, in which smaller competitors created add-ons to Windows to provide capabilities like media management, virus protection and (the most famous case) web browsing. Microsoft used its monopoly power to duplicate these features and include them in Windows for free, both making Windows more valuable and eliminating the market potential for these competitors (”overwhelming” the trap, in d’Aveni’s parlance).
Of course, despite d’Aveni’s rigorous analytical approach and his numerous examples of successful counter-commoditizing, reading about the many ways commoditizers attack industry leaders in “Beating the Commodity Trap” may leave you with the feeling you have when you watch “Night of the Living Dead.” Even when you think the zombies are defeated, more always emerge from the shadows.