Executives, entrepreneurs and investors are too ready to believe that commodity is destiny. The result is a dulling of strategic focus and a narrowing of the business mind.
Conventional wisdom has it that most innovations eventually become commodities, bought on the basis of price and nothing else. Citing a quotation by a Columbia Business School professor that epitomizes that point of view — “In the long run, everything is a toaster” — the author uses the technological history of toast to persuasively undermine that notion. Drawing on the wisdom of economists Ronald Coase, Paul Samuelson, John Maynard Keynes and Adam Smith, he makes a historical case that commodity is not destiny, and uses brands such as Starbucks, Evian, Dasani, Scott Paper, Yahoo and Google, Hoover and Dyson to illustrate the point.
The danger, he says, is that executives, entrepreneurs and investors may buy into the commodity designation far more often than they should, making the commodity ideology a self-fulfilling prophecy. Businesses that believe that today’s breakthrough is tomorrow’s toaster understandably fear rapidly diminishing returns from their innovation investments, and the economics of “good enough” innovation become good enough. The potential of ideas is inherently undervalued. Sustainable innovation opportunities are either missed or dismissed. Intense price competition, the author argues, may not signal the prolific presence of substitutable commodities but rather an arid absence of innovation. That signal, he says, should give a clear and present incentive for executives and entrepreneurs to innovate in order to differentiate; to identify hidden or untapped potential for new value creation.
2 Comments On: The Myth of Commoditization
I sell professional liability insurance to physicians. The cost of this coverage is very high relative to expences most docs are faced with. In addition they are under incredible stress with many experiencing slow reductions in income…especially primary care docs, as the medical landscape contiues to change. There are very small variables between malpractice insurers and my experience has been that in almost every case, the doc or more often the practice manager, bases their decision on price rather than other attributes such as service or even the endorsement by their local medical society. I see the same thing in the dental arena where ironically, it seems that most dentists do better financially than your average doc but base all decisions on the lowest price for liabilty insurance or any other insurance for that matter. My perception is that insurance in many instances is in fact a commodity and it is next to impossible to get buyers to value the serice aspects. If anyone has thoughts on this please let me know.
I am the author of Creating Competitive Advantage and I speak internationally on the subject. Michael Schrage is right in his article. My company has conductd research for scores of different industries and price comes up as a top buying criteria in only one industry: Insurance. Not because insurance is a commodity as you suggest but because the industry has been unable to differentiate themselves, with too much focus on products and not on how they are delivered. We are helping insurance industry clients find their ways out of commodity corners. It just takes some attention. As Mr. Schrage suggests, you become a commodity when you are no longer creative enough to make your offers more appealing.