Only the unprepared fear Commoditisation




Published: Dec 2013

Author: Matthew Griffin, 311 Institute Ltd • Reading Time 10 Minutes



"At 2AM a year or two after your blockbuster products initial launch you'll wake up in a sweat wondering why your margins are collapsing and why your market share is plummeting. Well my friend we have news for you - your product has become a commodity. You have a Plan B though... don't you?"

The 311 Institute is a global Innovation and Business Management consulting firm and our mission is to help our clients discover and maximise the potential of new mass markets.

We are a world renowned Innovation and Management Strategy consulting group with Academic and Enterprise Affiliates in the US, Europe and APJ. Our Associates and Alliance Partners help Fortune 500, Government, Entrepreneurs and Non Profit enterprises create new uncontested markets and realise higher value by building Accelerator Communities and Innovation Centers of Excellence, predicting and leading industry trends and innovating new and alternative routes to market.


In today's world one thing is certain - at 2AM a year or two after your blockbuster products initial launch you'll wake up in a sweat wondering why your margins are collapsing and why your market share is plummeting. Well my friend, we have news for you - your product has become a commodity. You have a Plan B though... don't you?

The commoditisation of your core market is inevitable and it's the single greatest danger your organisation will face. Left unchecked it will cause your revenues to flat line and send your margins into free fall, your business will be put under greater and greater pressure and eventually you'll rush through an ill-conceived structural reorganisation, take an axe to expenses and lay people off - does this sound all too familiar?

The peer to peer nature of the internet has helped to dramatically accelerate the rate of innovation by providing more and more individuals and organisations with faster and easier access to funding, resources and advanced manufacturing techniques. In the past new breakthrough products - category killers, if we want to give them their true name, would emerge every ten to fifteen years, now it's every five to seven. Meanwhile imitators are cloning your blockbuster products and undercutting you on price in your key markets faster than ever before - what used to take five years now takes less than two but unfortunately it doesn't stop there - simple products, such as shoes and accessories with low levels of patent protection are now copied and manufactured en masse in factories in the Far East within hours of release. Given enough time everything will be commoditised - whether it's space travel or robotics, electricity or the car. Nothing escapes.

Given the inevitability of the situation what can your organisation do? If you stand still you'll die an agonising public death. Evolution is your saviour. Products, services and business models - evolve them all and learn how to do it quickly.


Fight or Flee?

Commoditisation occurs when an organisations competitors have access to IP, assets and resources that make it affordable enough for them to create and sell legally similar versions of what was originally considered a premium, or differentiated, product or service. The slow, staggering decline of what many now call the Old Guard organisations such as Nokia, MG Rover, Nikon, Oracle and HP are all too frequently directly attributable to the rising wave of commoditisation that flows over their once profitable market places and erodes their value. Whether it be the pharmaceutical companies whose patents have expired and now face a tsunami of generic drugs flooding their once virgin, profitable markets or the increasing commoditisation of the mobile phone ecosystem that has many of the world's largest mobile device manufacturers in a race to the bottom no industry is immune.

The commoditisation, particularly of mass markets is inevitable and when it takes place it's only a matter of time until the more short sighted organisations - the ones who didn't see or react to the market changes until it they were already upon them ask themselves that most prophetic of questions - "Fight or Flee?" What Executives are really asking here of course is whether or not they should they exit their now heavily commoditised market and focus on higher margin markets - with all of the downstream organisational disruption and reskilling that that entails.

The technology industry is a prolific example of this - in the 1980's and 1990's when hardware was highly lucrative, specialised and profitable a plethora of organisations wanted to jump on the bandwagon but as they did the market started becoming increasingly commoditised and profits shrank to low single figures - now in 2013 we're witnessing organisations like Dell and Amazon selling their hardware as loss leaders. Some organisations failed, lots of organisations continued to struggle, some organisations merged and others like IBM started taking flight to higher margin markets such as software and services. As time has passed these higher margin markets too have started commoditising and the flight has started all over again.

Are we therefore to assume that organisations will always be stuck in a cycle of Flight or Flee? Is there no way to change the game? What about Fight, Pioneer and Dominate?


Fight, Pioneer and Dominate

Let's first investigate Fight. Fighting takes spirit, reinvention, strategy and a supportive board and Michael Dell is one such person who has all four. Dell's core business has always been computer hardware, specifically desktop computers and servers. Times had been good to Dell, over the decades he and his company had made hundreds of billions of dollars but in 2008 Apple introduced the first generation iPad and from that moment on the desktop computer business that had been operating at volume but at wafer thin margins began collapsing. If that wasn't enough the advent of server virtualisation, Cloud computing and Hyper Scale Datacentre's meant that Enterprise customers like Google, Amazon and Facebook who had been sucking up Dell's line of servers as fast as they could make them were now starting to virtualise their datacentres and buy stripped down bare metal servers cheaper from Dell's ODM (Original Device Manufacturer) supplier Quanta. With desktop computer and server sales now in full double digit quarter on quarter declines and a lack of higher margin software and services sales to make up the shortfall Dell, like HP was stuck in an unenviable position - caught between three titanic market shifts. Quarterly profits were evaporating, revenues were crashing and shareholders were clamouring for board changes and layoffs to artificially boost the organisations share price and EPS. Confronted with an irreversible trend Dell was confronted by the Fight or Flight dilemma. Flee from the low margin desktop computer and server business that had gotten them footholds in so many organisations and throw themselves headlong into becoming a software and services organisation or fight - go head to head with Quanta and Apple while also focusing on software and services. Dell chose the latter and eliminated the conflict between the shareholders need for ever increasing profit margins and the organisations necessity to be margin and price competitive by taking the company private in the world's largest leveraged buyout. This strategy has let Dell regroup and leverage their supply chain expertise to attack the low margin commodity server providers who are gnawing away at their market share from below and let them retain those valuable datacentre customers who are now prime targets for their growing, higher margin software and services business.

Pioneers have always pushed the limits - by their very definition they are the first people to venture 'there' or achieve 'that'. They are the people that set the bar that everyone else tries to reach. Every industry in existence today owes itself to an original pioneer. The Energy companies owe their fortunes to Thomas Edison, the Telecoms companies owe their fortunes to Alexander Bell and Grocers should raise their hats to the first Aztec farmer who thought it would be a good idea to bring all the food stuffs to a single place - a market. Pioneers come in all shapes and guises but they all have one thing in common - they are always striving to discover or achieve something new and in a world where many core markets are rapidly commoditising you too should be stimulating a pioneering culture within your organisation and striving to create something new because as we see all too often organisations that stay still and fail to innovate at best get acquired and broken down but more often than not they simply fail.

Dominating a market is never easy but it's significantly easier to dominate a newly created market that has no natural competitors than an old crowded one and once you've found one you need to innovate accordingly. Every organisation wants to find the next mass market - niche just doesn't cut it, at least not with the shareholders but identifying the next mass market is at best difficult and if you can't find it then you certainly won't be able to dominate it. Make no mistake these new markets are out there but how do you find them? Where do you even start? New mass markets exist in the undiscovered voids and in the gaps between synergistic markets where large groups of people and businesses have needs or desires that aren't being suitably serviced by an existing solution but finding them takes skill, foresight, a questioning nature and omnipresent observation. There are a multitude of examples of companies that found new multi-billion dollar mass markets and innovated accordingly. From Apple who created the iPad because they observed people's unmet desire for a lightweight, portable computer device that would let them read, browse, watch and play content more comfortably and conveniently than a laptop and IBM who created their Smarter Cities initiative when they observed a dramatic increase in the number of city dwellers and the negative consequences they had on already stretched city services right through to VMWare who saw the opportunity to sell server virtualisation software that allowed organisations to dramatically reduce the number of expensive underutilised servers in their datacentres and GoPro who observed sports enthusiasts struggling with the concept of using cumbersome traditional camcorders to record their extreme adrenaline fuelled adventures.


Conclusions

Your core market is often your strongest so it's likely that the majority of your organisations IP, skills and resources will be aligned to support it so even though it will eventually commoditise it's important to realise that it you can still leverage it as a platform to grow and promote new lines of business. Today the most successful organisations have made it everyone's priority to monitor and report on the state of the markets and look for developing trends that could pose a threat - or present an opportunity - while successfully stimulating cultures and practises that allow them to Fight, Pioneer and Dominate in parallel.


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