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Commoditization-a virulent form of hypercompetition-is destroying markets, disrupting industries, and shuttering long-successful firms. Conventional wisdom says the best way to combat commoditization is differentiation. But differentiation is difficult and expensive to implement, and keeps you ahead of the pack only temporarily. In Beating the Commodity Trap, Richard D'Aveni provides a radical new framework for fighting back. Drawing on an in-depth study of more than thirty industries, he recommends first identifying the commoditization trap you're facing: -Deterioration: Low-end firms enter with low-cost/low-benefit offerings that attract the mass market-as Zara did to high-end fashion companies. -Proliferation: Companies develop new combinations of price paired with several unique benefits that attack part of an incumbents' market-as Japanese motorcycle makers did to Harley-Davidson. -Escalation: Players offer more benefits for the same or lower price, squeezing everyone's margins-as the iPhone did in mobile devices. The author provides a tool for diagnosing your competitive position and shows how to strengthen it while also boosting your pricing power-by destroying the commoditization trap confronting you, escaping it, or turning it to your advantage. Illustrated with a wealth of examples, this concise, practical guide gives you the framework and tactics you need to battle commoditization.
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Everyone in business today is facing hyper competition on steroids. “Commoditization”—the process of making one product or service become completely interchangeable with that provided by others—is occurring everywhere. As soon as you improve the quality or other features of your offering, your actions will immediately be matched by others and generally at a lower price point as well. You will then get squeezed between the need to lower your own prices to stay competitive and the steadily rising costs of all your business inputs. Commoditization means you become unable to charge more for what you have to offer.
The conventional answer to commoditization is to differentiate, but before long everyone else has the same bells and whistles as well. A better approach is to get to understand what kind of commodity trap is arising in your industry—there are actually three types which crop up over and over—and then work to identify and resolve the dilemmas and challenges which are posed by each kind of trap. In fact, by coming up with a commodity trap specific business strategy, you can not only escape and destroy the trap but you can also position your firm to take advantage of the trap to grow even more in the future.
So how do you beat the commodity trap? There are six steps involved:
Deterioration happens when a new low-end competitor comes along and creates a dominant low-price/low-benefits position. This often expands the market size at the low end as positions around that low-price/low-benefits combination tend to get swallowed up as well. This is what happened with the growth of Wal-Mart, the arrival of Geico as a U. S. auto insurer and the establishment and subsequent growth of Southwest or Ryanair. There's a lot of money at the low end of almost every established marketplace.
The telltale signs of deterioration are:
■An apparently dominant low-cost competitor comes along offering a stripped-down version of your product which disrupts the status quo dramatically.
■The new market entrant has economies of scale which make it hard or impossible for you to compete with them on price.
■Customers look at their offering and become far more reluctant to pay for value-added benefits like superior service or greater industry expertise.
■Even though you lower prices and reduce the product benefits you offer which results in lower margins, you are still faced with losing market share.
Deterioration is tough. You can't compete head-to-head with these new competitors and hope to win because they are playing to their strengths, not yours. Even if you do try and match their offering, all you end up doing is fragmenting the market further and reducing overall industry revenue levels.
“How can companies respond to deterioration? What should you do if the entire market is moving toward the low end? The answer comes from the problem: as low end discounters gain market power, their rivals must reduce or manage the market power of the dominant discounter by sidestepping, undermining, or containing or controlling the discounters." — Richard D'Aveni
Escape the trap Sidestep the discounter
If you find yourself in a battle with a dominant low-end discounter who has lots more financial muscle than you, this may be a case where discretion is the better part of valor. Your options will probably include:
■Move upscale—concede the lowend of the market to the discounter and be done with it. Focus on turning out a superior prod-uct which is worth paying extra for. Put all your resources into doing the things which a mass-production low-end player wouldn't dream of doing. Inject features into your products which make them demonstrably better and therefore worth a premium. Redefine benefits for your customers by focusing intensively on high-value added positions in the marketplace. Italian silk makers responded to the threat of Chinese manufacturers by banding together to co-invest in new silk making technology which produced fabrics which don't tear, irritate skin or stain. They also added convenience, innovation and flexibility to their services.
■Move away from direct competition
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