Beating the commodity trap
How to Maximize Your Competitive Position and Increase Your Pricing Power
Description
In the face of rampant commoditization, businesses are often caught in a trap where their products or services become indistinguishable from competitors', leading to a price war. The traditional solution, differentiation, soon becomes ineffective as competitors quickly match any unique features.
A more effective strategy involves understanding the specific type of commodity trap in your industry, and then devising a business strategy to not only escape the trap but also leverage it for future growth. This involves six steps: identifying what customers are willing to pay for, pinpointing your differentiating factors, investing resources wisely, developing a unique brand identity, conveying your personal and company value to the customer, and making your expertise more visible.
By following these steps, businesses can escape the commoditization trap and position themselves for future growth.
Table of contents
011-commodity trap #1 – degradation
-Recognize the predicament:
When a new low-end competitor enters the market offering a basic version of a product at a much lower price, it disrupts the existing market dynamics. These competitors usually benefit from economies of scale, making it hard for established companies to match their prices. Consequently, customers become hesitant to pay extra for value-added services like superior service or expertise. Attempts by existing companies to lower prices and reduce product features lead to decreased margins but often fail to prevent market share loss. This situation poses a challenge as direct competition with these entrants can further fragment the market and lower industry revenues.
-Detect the predicament early
To counteract market deterioration and the influence of dominant discounters, companies can adopt strategies that focus on quality over price, targeting customers who prioritize and are willing to pay for quality, thus maintaining margins and avoiding price wars. Publicizing low operational costs can deter competitors from initiating price cuts. Additionally, companies can leverage idle capacity as a threat to flood the market with low-priced goods if necessary, preventing competitors from reducing prices. These tactics help companies manage market power and maintain profitability in the face of aggressive discounting.
-Evade the predicament
In response to competition from dominant discounters, businesses can adopt strategies like moving upscale, focusing on superior products that justify higher prices. This involves investing in features that enhance product quality, as seen with Italian silk makers who co-invested in advanced silk-making technology. Alternatively, businesses can change their channels, time, or place to avoid direct competition, like Procter & Gamble did with a new pet food brand. Companies can also shift focus to other markets, as Intel and Armani did, or introduce new products for growing market segments, like Wrigley's sugar-free gum brands. These strategies help businesses sidestep competitors and tap into new opportunities.
022-commodity trap #2 – multiplication
-Recognize the predicament
Proliferation refers to the situation where a product's unique selling proposition becomes diluted due to the emergence of numerous new products. These new offerings target specific niches within the customer pool, leading to the fragmentation of the larger market into multiple segments. This often gives rise to new business models as companies fiercely compete to cater to these specific segments. Signs of proliferation include an increasingly fragmented market due to new offerings, a threatened value proposition as new offerings target narrow niches, and constant pressure to reduce prices to retain customers due to attacks on multiple competitive fronts.
-Detect the predicament early
Sears, once a retail giant, faced a proliferation trap by the mid-1990s, struggling against a diverse set of competitors including regional department stores, discounters like Wal-Mart and Kmart, and specialists such as Home Depot and Lowe’s. Despite efforts to reposition its mall stores, abandon its mail-order catalog, and sell its stand-alone chains, Sears couldn't keep pace with the evolving retail landscape. The proliferation trap, where extreme differentiation leads to commoditization, forced Sears into a position where it had to either reduce prices to maintain market share or lose market share to maintain prices, ultimately leading to its downfall. This case exemplifies how producing many overlapping products can threaten the uniqueness of each product, pushing firms into fierce price competition.
-Evade the predicament
In the competitive business landscape, it's crucial for companies to identify their core competencies and strategically select their battles. A case in point is Holiday Inn, a once-dominant player in the hospitality industry. By the mid-1970s, the company had expanded to over 1,400 locations. However, it faced stiff competition from both high-end and budget competitors. In response, Holiday Inn attempted to shift upmarket, a move that required significant investments in existing properties. This strategy, however, proved to be a misstep. The company was slow to adapt to the changing market dynamics, and its competitors quickly outpaced it. The financial strain from the upmarket shift and the inability to compete effectively led to a decline in Holiday Inn's market position. In 1988, the company was sold to Bass plc, which later rebranded as InterContinental Hotels Group.
Despite having a diverse portfolio of properties, Holiday Inn has not been able to regain its former market dominance. This example underscores the importance of strategic focus in business. Companies must not only identify their core competencies but also ensure that their strategies align with these competencies. Missteps can lead to significant financial strain and loss of market position, as was the case with Holiday Inn. Therefore, in the face of competition, strategic focus and alignment with core competencies are key to maintaining market dominance.
033-commodity trap #3 – intensification
-Recognize the predicament
Escalation is a competitive cycle where companies strive to outperform rivals by offering more customer benefits. This intense competition often blinds companies to dwindling profits. Key indicators of an escalation trap include a constant sense of competition with rivals, falling profit margins despite increasing volume, customers taking previously valued benefits for granted, and demanding more for less money. This phenomenon can lead to a vicious cycle where companies are so focused on outdoing each other that they fail to notice their declining profitability. It's crucial for businesses to recognize and avoid this trap to maintain sustainable growth.
-Detect the predicament early
In the early 2000s, Dell's direct-to-consumer model was successful, but competition intensified as Hewlett-Packard and IBM faced price wars. Hewlett-Packard acquired Compaq and diversified its offerings, while IBM sold its PC division to Lenovo and pivoted to premium computers and services. This strategic shift left Dell squeezed between Lenovo's low-cost products and Hewlett-Packard's high-end market presence.
-Evade the predicament:
To escape the escalation trap and regain market momentum, companies must redefine the primary benefit customers value, a move that outpaces competitors and shifts market focus. Examples include Apple's iPod to iPhone transition and General Electric's shift from manufacturing to services. This strategy changes competition dynamics, forcing rivals to adapt. Companies also need to enhance their transition capabilities, simultaneously managing current operations, preparing for next-gen products, and envisioning future possibilities. This requires dedicated resources and a willingness to rotate and retrain staff. Monitoring the price-benefit equation is crucial to understand and predict benefit shifts, requiring competitive intelligence and marketing skills to extend the current benefit and launch new products based on new primary benefits swiftly and with less risk.
044-maintaining your optimal competitive position.
Richard D’Aveni emphasizes the importance of recognizing and navigating commodity traps, which are situations where products or services become indistinguishable from one another and compete primarily on price. To avoid these traps and identify opportunities, D’Aveni suggests conducting a price-benefit analysis. This analysis helps businesses understand the value they offer relative to the price and how they compare to competitors. By charting the market, considering factors like market share and the projected price line, companies can identify their competitive position and the "sweet spot" in the market.
A price-benefit analysis can reveal emerging opportunities, competitor strategies, and potential market changes. It allows companies to anticipate shifts and adapt their strategies accordingly. For instance, by understanding what customers value, a company can direct its research and development efforts toward features or services that customers are willing to pay more for, both now and in the future. This forward-looking approach is akin to "skating to where the puck will be," as Wayne Gretzky famously said, rather than where it is currently.
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