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Taming the CEO’s Nightmare

May 11th, 2010 by Devangshu Dutta

REVIEW: BEATING THE COMMODITY TRAP: Richard D’Aveni (Harvard Business Press)

In his latest book, Professor Richard A. D’Aveni focusses on a topic that most businesses should be acutely concerned with: the problem of commoditization. In interviews he has accurately described commoditization as “the black plague on modern corporations” and “a deadly disease that’s spreading like crazy”.

Certainly, if one had to pick the ultimate nightmares to keep CEOs awake at night, commoditization would definitely be among the top of the list. Specifically, given the economic uncertainties around the world in the last couple of years, business leaders who are not concerned about their products or services being turned into commodities are either supremely equipped to maintain their differentiation, or immensely deluded as to their capabilities to fight market forces. Prof. D’Aveni suggests that maintaining differentiation alone is not enough to sustain business.

A product or service becomes a commodity when it is not distinguishable from competing offerings and therefore not valued above the competition. Prof. D’Aveni views commoditization along two key attributes: the benefits or features that are being offered and the price (margin) that is available to the business. Based on his model, he has identified three types of competitive stress that a business could face:

  • Deterioration: In a deteriorating market, competitors present low-cost and low-benefit offerings that appeal to the mass market. This is possibly commoditization in its “purest” sense, where the customer ends up valuing the lowest price over and above any other benefit or feature. In this scenario a business can either get stuck in the commodity trap, fighting an ever downward spiral of price and cost minimisation, or could marginalize itself to a niche where it can protect its margins.
  • Proliferation:  According to Professor D’Aveni, a proliferating market constantly sees the emergence of new combinations of benefits and price that serve specific segments. This is not about the business offering turning into a true commodity, but extreme differentiation and proliferation of choice do make it difficult for businesses to create a clear value statement that can be priced above competition. Professor D’Aveni describes this as “being squeezed in the middle of a pack of piranhas” which are snapping away pieces of the market.
  • Escalation: This form of commoditization is possibly the most prevalent in industries that are prone to disruptive changes (such as technology, consumer electronics and communications). Simply put, extreme competition here results in more for less, as each competitor goes one-up in terms of offering more benefits for the same price, the same benefits for a lower price, or at its most extreme, higher benefits for a lower price. Prof. D’Aveni suggests that companies try and control this downward momentum.

The book suggests competitive strategies that a business could take to avoid getting caught in the commodity trap.  These strategies can be boiled down to the biological choice: fight or flight (escape). Professor D’Aveni echoes the basic warfare strategy laid out by many military and business strategists through the ages. He suggests that businesses need to gauge the opponents, choose their battles, and pick opponents against whom they can win. He also calls for pre-emptive action: where companies can, they should either change the business environment to avoid commodity battles entirely, or initiate the battle of commoditization and control its direction and momentum.

In fact, anticipation and pre-emption is the key to avoiding the commodity trap. To help with this, Prof. D’Aveni offers a relatively simple framework to analyse a current market situation in terms of a price-benefit matrix, and to identify the advance corrective actions to be taken.

The book is short and straight-forward enough to pick through a domestic flight, or to read in the back-seat during a long commute between office and home. The easy to understand framework gets the messages across quickly. In analysing the variations of commoditization, both in consumer and business oriented industries, the Professor also offers up something for everyone.

However, the book’s strengths also turn out to be among its biggest weaknesses. The book would have benefited from more depth to each of the concepts. Skipping quickly from one area to the other, in some places the book risks losing coherence of thought.

Some short books are like downhill hairpin bends on a mountain road; Prof. D’Aveni’s book is one of those. Much as you might be tempted to go fast, it’s advisable to go slow. If you speed through it, you might miss a nugget that actually makes sense to your business.

One of the other grouses I had was with the examples quoted. The predominantly US market examples reduce the book’s relevance for a global audience – the Professor presumes the reader will know the company and its context well enough to understand the lessons being discussed. In some cases the examples are incomplete and possibly even incorrect: one such is the example of Zara. The broad-brush attributes Zara’s business success to turning fashion into commodity, and ignores the fact that fashionability and desirability are a cornerstone of Zara’s offer, not the cheapest price. Others would possibly be far more accurate examples of commoditization in the context of price.

However, if you are sufficiently concerned about the possibility of being commoditized out of profitability, or being marginalised out of market share, I would suggest that you could easily overlook these flaws. The fundamental premise of the book is far too important to ignore. [Beating the Commodity Trap on Amazon]

(This review was written for Businessworld.)

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