BOOK REVIEW: Beating the Commodity Trap: How To Maximise Your Competitive Position and Increase Your Pricing PowerBy Richard A D'Aveni, Harvard Business Press; €23
COMMODITISATION IS an ugly word and an ugly reality for companies. Across almost every industry, managers are being stunned as new forces such as China and India exert their vast economic power and leverage technology to move forward rapidly. Timescales are shrinking and the commoditisation clock is ticking.
That’s the background against which author Richard D’Aveni writes. D’Aveni is professor of strategic management at the Tuck school of business at Dartmouth and has been cited as one of the world’s top management thinkers. He says that many companies are in the grip of a particularly virulent form of hypercompetition that he calls “the commodity trap”. Left unchecked, this has the potential to destroy entire markets, disrupt whole industries and drive previously successful companies out of business.
It’s not just a case of threats from the emerging East, nor is it a new phenomenon. Retailers such Walmart and Tesco have been squeezing the margins of big-brand companies for years. Dell enjoyed an advantage in the PC market for many years before itself becoming a victim of commoditisation from low-cost producers.
Zara, the Spanish fashion retailer, is another classic example. Its business model, based on superior production and excellent supply chain management, has allowed it to imitate but undercut mid-range fashions labels.
Half of all consumers in Europe and the United States now shop at value retailers such as Walmart – up from 25 per cent in 1996. The trend started well before the downturn and it’s a pattern that is set to continue.
D’Aveni identifies three main reasons for commodity traps. The first is deterioration where, in response to low-cost aggressors, incumbents slash prices and benefits, eroding market value. The second is proliferation, where companies develop new value propositions – new combinations of price and several unique benefits – that attack part of the incumbent’s market. The Japanese motorcycle manufacturers did this in the 1990s by creating different bikes for thrill-seekers, responsible consumers and commuters, siphoning off customers who did not fit the Harley-Davidson weekend-rebel image.
Finally there is “escalation” which affects industries such as consumer electronics. Here prices decline while benefits grow. Think Apple and its iPods where prices go down while functionality increases. Any three of these patterns spell trouble.
The good news is that there are ways to avoid these traps. One option is to sidestep the discounter. This can be done by moving upscale, moving away or moving on. In response to Zara, for example, some companies such as Hermes have refocused on the luxury end of the market. Hermes reduced the number of stores carrying its goods to increase its exclusivity. Some high-end brands are also using rare fibres such as baby cashmere, which comes from the first combing of a young goat, requiring some 20 goats to make a single sweater – a position where no mass-producing low-end player could go.
Intel refocused away from low-end chip production for PCs in the late 1990s when it realised it could not compete with new Asian competitors such as AMD and started making high-end chips for consumer electronics and special applications.
Other options include changing distribution channels, time or place. Colgate and PG share the oral care products market in the US but Colgate has a dominant global presence with over 70 per cent market share in many territories outside the States. It achieved this by divesting itself of non-core businesses in the US and concentrating aggressively on global toothpaste sales.
Then there’s the trend of top fashion designers using their expertise in new areas such as boutique hotels and restaurants. Armani is attempting to create a unique lifestyle and consumer experience appealing to wealthy consumers.
Gucci and Dior, for example, are now fighting back at Zara, issuing eight collections a year rather than two and making half of their sales from new products each year.
By rapidly introducing products and repositioning brands to have clearer positions and better defined customer segments, customers are now buying the intangible brand image, uniqueness and emotional content, partly neutralising Zara’s emphasis on imitating the physical product.
The best way to avoid the commoditisation trap is through innovation, D’Aveni argues, and the best way to do this is to make sure that your R&D strategy is in synch with your future needs for new benefit or lower costs.
You must ensure that you create the customer benefits desired in the different segments or market you wish to enter as part of a containment or outflanking strategy and you must sequence the benefits being produced by R&D to help avoid, undermine or overwhelm rivals.
D’Aveni has produced a well-researched book with useful frameworks and a rich mine of case study material for how managers can avoid or react to the problem of the commodity trap.
Frank Dillon is a freelance journalist and media lecturer
