MT1 – Strategies for managing industry evolution
How can firms anticipate (the timing issue) the pressures for Commoditization?
Commoditization is such a touchy subject. When firms spend so much time strategizing how to differentiate their products and maximize on product quality and premium prices, there’s no doubt some gut-wrenching feeling comes with commoditizing firm products in response to industry evolution. Hax (2005) disagrees with the old paradigm that the ultimate goal of strategy is to achieve competitive advantage. Rather, he suggests that relying on this kind of behavior leads to commoditization in that “by being obsessed about competitors, we tend to imitate them, and this leads to the convergence of an industry where all of the key players begin to respond by following in each other’s footsteps” (p. 19).
The text identifies two alternatives that help to anticipate commoditization. The first approach is the value-in-use approach which incumbents use to protect their ability to charge premiums (Carpenter & Sanders, 2008). The first approach is the value-in-use approach. According to Carpenter and Sanders (2008), it is this approach that allows firms to increase service benefits while raising or holding prices (p. 177). Additionally, this strategy requires a lot of investment in R&D in that a firm needs to understand how to get customers to see the value in their services and be willing to pay for the bundling.
The second approach to help identify the oncoming of commoditization is the process-innovation approach. Firms will try and lower cost position to cut prices even further (Carpenter & Sanders, 2008). Just as Dell bypassed traditional distribution channels for more innovative inventory management, firms need to be able to prepare for the radical improvements of technology and how it can be used to cut costs and enable firms to better low-cost market position. Hax (2005) shows us in the figure below, that a low-cost position is good, but being the proprietary standard reduces competition, thus giving competitive advantage.
How can firms respond to the pressures for commoditization?
There are two ways in which a firm can respond to commoditization, which Carpenter and Sanders (2008) identify as market focus and service innovation. Market focus takes the approach of downsizing your market. In other words, firms change focus from a broad market to a much smaller subset of the market. Doing so enables a firm to focus on profit rather than sales growth. By focusing on a smaller market, firms are able to really develop their products and entice customers to be willing to pay for premium services and increase the customer-perceived value of the products and services. Firms need to “redefine the customer engagement process….and use capabilities to perform activities for customers they used to do themselves” (Hax, 2005, p. 21).
Lastly, is the service innovation approach to help respond to commoditization. This requires a firm to seek price competitiveness by eliminating services that were once bundles with its product (Carpenter & Sanders, 2008, p. 178). This can be seen in what customers experience with airline fees. Back in the day, paying for a ticket meant you paid for 1 carry on, 1 luggage, meal service, in-flight movie, and headset. Nowadays, paying for a ticket means you only get the ticket and all the rest are now considered additional fees (with the exception of some airlines who still bundle). Nonetheless, service innovation is rarely successful and risky in that, it cannot compete as both a focused differentiator and a low-cost player (Carpenter & Sanders, 2008).
In StratSim, we tried to compete as a quality low-cost competitor, however, we focused a lot on differentiators. Now I see that we cannot implement both approaches because it’s extremely costly (don’t get me started on how much we spent) and our focus then becomes disorganized making our strategic process much more difficult to respond to industry changes and competition. Moving forward, we need to decide whether we’re going for low-cost, or focused differentiators.
Carpenter, M.A. & Sanders, Wm., G. (2008). Strategic management: A dynamic perspective. Upper Saddle River, NJ: Pearson Prentice Hall.
Hax, A. C. (2005). Overcome the dangers of commoditization. Strategic Finance, 19-22. Retrieved from http://link.galegroup.com.library2.csumb.edu:2048/…