The Myth of Commoditization

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.

Unlike software, silicon or recombinant DNA, toast makes an unlikely symbol of sustainable innovation. Heated bread lacks the high-tech cachet of multicore microprocessors or polymerase chain reactions . But the technological history of toast, in fact, persuasively undermines one of the truisms that profoundly distort innovation investment worldwide.

That flawed conventional wisdom is crisply described in a recent Financial Times column bearish on technology:

“Bruce Greenwald, the Columbia Business School professor whose course on value investing is recommended even by Warren Buffett, nails this phenomenon memorably. ‘In the long run,’ he says, ‘everything is a toaster.’ In other words, all great innovations eventually become commodities, bought on the basis of price and nothing else. …Sooner or later, Microsoft software programs, Intel microprocessors, Dell computers and Cisco routers will all be toasters.”

Clever, glib and memorable — but is it true? History says no. While toasters will never be icons of postindustrial innovation, even a cursory review of their ongoing reinvention reveals that they’re not commodities by any meaningful definition of the word. Moreover, they still make good money, as well as better toast. The toaster’s technical evolution is a case study in profitable innovation, not just price competition. Commodity isn’t destiny.

England’s Crompton & Company offered an electric toaster as early as 1893. The technical breakthrough that made modern toasters possible, however, was the 1905 invention of Nichrome — the nickel-chromium alloy that became the dominant medium for controlled infrared heating. In 1909, General Electric Co.’s D-12 became America’s first commercially successful toaster. It retailed for $3 and could toast only one side of the bread at a time; because wall outlets were uncommon, the power cord was designed to be screwed into a light socket.

A decade later, Charles Strite revolutionized toasting technology with his 1919 invention of the pop-up toaster. He initially sold it to restaurants. By 1926, the Toastmaster — a consumer version — hit the shelves with advertisements proclaiming, “Perfect toast every time! Without turning! Without burning!”

Toaster sales in the United States alone grew from 400,000 units in 1922 to 1.2 million by 1930. Their rise prompted bakeries to innovate to the technology by selling presliced loaves of bread. Wonder Bread, for example, was originally Wonder-Cut Bread.

Fully automatic toasters appeared in the 1940s. General Electric transformed both the appliance and kitchen countertops in 1956 with its introduction of the toaster oven.

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2 Comments On: The Myth of Commoditization

  • Pete Scarborough | May 24, 2010

    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.

  • Jaynie Smith | May 24, 2010

    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.

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