The Root Cause of Our Economic Mess Is Commoditization
If your business can’t offer its target market(s) differentiated benefits that matter, recognize that your business is stuck in a quicksand called commoditization. Endless cost cutting to survive the recession-magnified price discounting will only push you deeper into the muck, making it even harder to escape competing on price. You only have three smart options:
- Redefine your business model strategy to become the lowest cost competitor. You’ll earn profits despite market commoditization
- Redefine your business model strategy to escape commoditization and compete beyond price
- Exit the business
Over the last ten years our economy’s productivity increased dramatically through industry consolidation, value chain and process redesign, outsourcing and IT investments. These changes lowered inflation, but also created pervasive commoditization.
Big banks engaged in these activities and ended up as lumbering copycats of each other, earning their returns by taking enormous risks rather than having a better value promise for business and consumer customers. Rating agencies, AIG, Greenspan’s low interest rate policies, a lack of federal regulation, Barney Frank’s push for affordable housing and Asian foreign currency surpluses enabled the banks to take these risks, much as spouses and friends might enable an alcoholic partner or friend. The housing bubble and massive credit card consumer debt emerged from the drunken dance. Consumers must bear some of the blame for our mindless enjoyment of the short term riches.
That’s my theory of what went wrong. What’s yours? Until bank boards begin to demand strong strategic thinking from bank CEOs and their teams, banks will be right back at taking whatever level of risk new regulations will let them get away with.
Watch what will happen in pharmaceutical markets too. Big pharma is following the bank model, with mergers and acquisitions engaged in solely to cut costs. Pharmaceutical companies also purportedly acquire competitors to improve their new drug product portfolio, which parallels acquiring another financial institution to get better retail locations or stronger investment advisors. But the pharmaceutical mergers I predict will do little to improve drug discovery success and may, in the case of Genetech’s acquisition by Wyeth, reduce drug discovery success. Commoditization marches on with generic drug companies (the Walmarts of the drug industry) and inventive biotech start-ups poised to earn attractive profits. Changes in health care policy will whittle away any profits big pharma might have made in the past by bringing other companies’ discoveries to market.
Are your actions as a company creating more commoditization? What are you doing to compete beyond price discounts?
For insight on business model innovation and the perils of commoditization, read my recently released book, Beyond Price.
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- Is It Time to Invert Your Strategy? (blogs.harvardbusiness.org)