Breaking out of Commoditization


“Commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers.”

Source., Wikipedia

Are you being told by your clients that your product or service is the same as what they can get from others? It will be harder to digest if your company has been in a niche or dominant position. Your technology and process excellence, which once delighted your customer has lost its charm. The sales pitches are sounding dull; your marketing has become impotent. The customers are using their bargaining power, negatively impacting your revenue and margins. The competition offers homogeneous products or services in a stable industry, and entry barriers in place are not able to create a competitive advantage that existed before.

The services business, which has been a way to maximize business performance and reach broader markets, is seeing a decline. Digital Transformation leveraging the technology commoditization is bringing the growth era of the service economy to an end. The end goal of digital transformation is to leverage technology to streamline the current services and achieving optimization and cost reduction.

So, how can you win and regain the helm?  The question is keeping CEOs and management teams wide-awake. Those willing to rethink their approach will have the best possibility to find a way out. Newton’s second law states, “Force equals mass times acceleration.” Larger the size of the organization, greater the force required to accelerate the change. Business model innovation is essential to create lasting competitive advantage in disruptive times.

It’s no secret that “Culture can eat strategy for breakfast.” It will be impossible to correctly channel the energy of resources to produce the desired force for the change. Setting up a vision and embedding common beliefs will define how people behave and ultimately decide what will get lived out in work. Mahatma Gandhi said, “Your beliefs become your thoughts, your thoughts become your words, your words become your actions, your actions become your habit, your habits become your values, and your values become your destiny.” It is very accurate from the organizational perspective as well. In a commoditized industry, the challenge is not doing business with people who need what you have; rather, it’s doing business with people who believe what you believe.

We cannot solve our problems with the same thinking we used when we created them

Albert Einstein
  • Getting out of the Comfort Zone – The Established business model can be a limiting factor. To achieve successful business model innovation, focus on creating a new business model, rather than changing existing ones. While invisible overseers of prevailing business models play a vital role in growing the core, but they are poison to a new business model. The innovation teams must be able to go beyond traditional offerings and established rules of what can be sold and how it can be sold. They have to think beyond the box and experiment out of the comfort zone to make changes to profit formula and redesign the current processes. 
  • The Profit Formulas – The rigidity of exiting cost structure, especially around overheads, coupled with challenges in making a structural change to the business resources, makes business units develop resistance towards newer initiatives. Consider the probability that the fresh idea has the potential to disrupt and displace the old profit formula completely. 
  • Leveraging core capabilities – Kodak ran from filmless imaging, Sony was reluctant to pursue the MP3 players. All of this didn’t exclude leveraging existing capabilities, but they failed to borrow what was needed and reinvent the rest. Resist the urge to force new business models to find homes in the existing ones. The rules of an established business model can be toxic in the way of innovating new ones. It is natural to give sounds business rationalizing to avoid chartering in unknown territory. Doing this will hinder new growth, and even those most aware of their influence can ignorantly fall prey to their restrictive effect.
  • Organizational Design – Discharge innovation program managers from managing existing business. If the manager is responsible for delivering business results by carrying out core business activities, he will rarely feel that changing the rules and thinking out of the box is in his interest. Redesign incentives structure that allows uncertainty of success linked with innovation projects. Innovation projects need a mechanism that provides the time and structure for the new ideas and the change.
  • Commitment from Top –  The business model innovation won’t succeed without support from the corporate executive. It must get help, empowerment, acknowledgment, and guidance from the top management. Killing young innovation projects with long-term potential in search of faster returns and short term growth should be avoided. If leaders are uncomfortable in pursuing something new, they cannot foster the environment to innovate. They must start by rethinking the problem and re-frame the value proposition to tackle a pressing issue. They must have the courage to take a course that firm never imagined it would.
  • Strategic Planning Process – Rethink strategic planning process from being an annual operational exercise that focuses extensively on the improvement of the core business. The renewal through business model innovation must be included in the planning process, and consciously separated from the core business’s rules and norms. 

Business model innovation is the toughest thing to take on. It is harder to structure an approach to an unstructured process of creating new business models. But can you afford to think linearly in this exponential age? Business models can last for a long time but do not last forever, and in today’s context, they don’t even last for long. The most significant risk a company can take is to decide not to create new business models that decouple the company’s future from that of current core business models in play.

The opinions expressed in this article are those of mine. They do not purport to reflect the opinions or views of any organization.

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Strategy, Growth, P&L | Head of International & APAC at Getronics | Leadership through people