Commoditisation refers to the process whereby differentiation is eroded by competition, leading to a commoditised market with price-based competition. Customers treat the offering as a commodity, selecting between vendors purely on price with no differentiating factors as the basis of competition.
The only viable strategy in a commodity market is to be the lowest cost vendor.
Fortunately in practice, pure commodity markets are rare – most have the capacity to innovate or to differentiate on service. But it is useful to define a commodity market as one where price is of such overwhelming importance to customers that it dwarfs all other purchasing factors.
When is it useful?
Without innovation, every market drifts towards commoditisation. Competitors match winning features, eliminating all differentiation between products.
Every company is trying to climb a down escalator, the bottom of which is a pure commoditised market. Every strategy has to explain how you will innovate faster than you are being commoditised, or else accet it and focus ruthlessly on low cost.
There is much talk about how PCs became commodities. When they were first introduced, there was differentiation. There were different form factors, designs, operating systems, each targeting different parts of the market.
Then along came Microsoft. Microsoft DOS and then Windows very effectively commoditised PC assembly – by creating a standard look and feel and standard apps regardless of the make, it became almost impossible for PC makers to create differentiation that users would pay for. Product innovation did not pay off, and soon even business system innovation, pioneered by Dell, stopped being a differentiator too.
Like Windows, it can be a strategic aim to commoditise part of the value chain that is complimentary with yours. The launch of Android has very effectively commoditised Mobile Operating Systems – neither Nokia or Blackberry or Windows are able to earn any money from this stage of the value chain. We might feel bad for Microsoft………..if only they had not done the same thing to Netscape Navigator, by bundling their Internet Explorer into Windows for free.
How do you do the analysis?
You can measure if a market is commoditised by measuring the degree of price differences between competitors. If it is impossible to sustain a price premium, the market is commoditised.
You can estimate whether a market is heading towards commoditisation by tracking its price over time. In 2013 with the launch of the iPhone5S, Apple has maintained its price premium over competing phones for over 6 years since the first iPhone was launched. Its pace of innovation has been enough to keep it ahead of the downward commoditisation escalator.
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