Consider coal; something most of us are familiar with and which is a commodity; something freely available. Although there are many different types of coal most of us treat coal as coal, we can’t distinguish Anthracite from Bauxite, so when it comes to purchasing coal we tend to seek out the lowest cost per tonne. This near exclusive focus on price lies at the heart of commoditization. When faced with two or more quite similar offerings you are more likely than not going to choose the one which is cheaper. And the reason why it is increasingly difficult to distinguish one product or service from another is paradoxically because we know more about them. The impact of technology and availability of information (through such mediums as the internet) make it much easier to compare one product and service from another. Such transparency reinforces the impacts of commoditization because it allows you to play one provider off against another; knowledge is indeed power. There are also a range of factors driving commoditization. These include the impacts of China, Brazil, India and South Africa; the aging of the western economies; the never ending drive of technology and of course the impact of economic cycles. All these help to drive the effects of commoditization deeper into the economy.
Although familiar with common commodities such as coffee and cotton, we may be less so with the products and services we purchase. For example, do you consider IT or project managers as a commodity? They are. Their costs are much lower in real terms than 10-15 years ago because their craft is now visible through standardized methods, tools, techniques and software. Taking these two examples of commoditization further helps us to understand why commoditization is something every organization should be increasingly concerned with.
All organizations, unless a monopoly, are subject to competitive forces. And when competing in the open market, we use a range of approaches to beat off the competition. However, the competitive forces we now have to deal with are different from those in the past because of the impacts of commoditization. It is clear that competing on price alone is a strategy with which few succeed.
Addressing commoditization necessitates a more considered response, and has to tackle not only the broad competitive landscape but also the full spectrum of organizational activities. When faced with a competitor with a ruthless focus on price you need to respond more creatively and comprehensively. Nothing should be left off the agenda; there can be no sacred cows.
As you read this, you may have wondered whether it is something that you and your organization should be concerned about. An in depth response is provided in a groundbreaking and important Gower book called Commoditization and the Strategic Response. Read all of chapter one – Commitization – coming to a company near you.