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?
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For insight on business model innovation and the perils of commoditization, read my recently released book, Beyond Price.
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Hi Kay, You really have nailed the problem. It is a trap many companies fall into, even as they kick and scream all the way down. Yet, even when companies embrace business model innovation at their highest levels, challenges remain! I can remember from my days selling packaging how difficult it was to get purchasing agents to focus on anything other than price, even when the higher ups sent a completely different message. Companies must commit to change at all levels, including the trenches (where business actually gets done).
It is so sad to watch how unaligned the different parts of a company are sometimes, purchasing being a classic example. Smart sellers know how to bypass purchasing. Still, when purchasing says its all about price price price, but the company is trying to win on something other than price, leaders have failed in their communication. A crew boat with everyone rowing at different speeds goes in circles. When this happens in a company, opportunities are lost to create a stronger company and better jobs for employees and community alike.
Your comments certainly ring true for marketing companies which are now facing a renewed push to treat the vast majority of their services in a commodity like way by P&G (which is often a trendsetter). It’s surprising that an industry supposedly built on the back of unique, creative output could be at such risk, but many of the services involved to support the message actually look very pedestrian (buying services, planning, research, list management). Vertical integration and consolidation have long been a fact of life in the industry, but in a way that still allowed (and almost encouraged) cross cooperation between the largest holding companies, primarily due to some of the unique ways in which business is won/lost in the industry. Avoiding the pricing pressure that comes with commoditization will be very difficult indeed.
Good morning Fred. It’s afternoon here in Oslo. P&G is a really interesting example of a company in my mind. They are known as being among the most innovative, but even they are finding their price premiums crushed in the rush to store brands by more price-focused consumers. The challenge for P&G I think is to focus less on their existing lines (creating yet more line extensions) and focus instead on consumer problems around the globe for which they could build unique answers. Like many in the US, a cushy economy made making money way too easy. It’s time they go back to their true DNA—creating categories that make a difference. P&G work in the developing world is a good start.