By Tuck Communications
Published Nov 10, 2009
When Tuck Professor of Strategic Management Richard D'Aveni returned from a restaurant dinner to retrieve his new Lexus, he was reminded of the inescapable reality of commoditization, the topic of his new book. "I remember you," the valet recalled. "You came in with a Honda."
In Beating the Commodity Trap (Harvard Business School Press, December 2009), D'Aveni tackles commoditization, which occurs when a product becomes indistinguishable from others like it and consumers buy on price alone. Honda has designed the Accord to compete with the Lexus GS 300. It has similar features and style, but it is significantly cheaper. The valet unwittingly demonstrated the success of the tactic, and Professor D'Aveni was not impressed. "I was ticked off!" he recalled.
The incident demonstrated what D'Aveni calls the "brutal fact of 21st-century business life." Firms in almost every industry are suffering from commoditization, which forces them to constantly improve quality or other product benefits while decreasing prices to keep up with competitors. A commodity trap is where a company sees its competitive position eroded to the extent that it can no longer command a premium price in its market.
D'Aveni's book is meant as a practical guide for firms, helping them to recognize and address their situations. He describes three different circumstances under which commoditization takes place. Deterioration happens when a low-end player undermines everyone else in the industry with low prices. Spanish retailer Zara, for example, began using new mass-production strategies to offer cheap knockoffs of designer clothing and shook up the entire fashion industry. Proliferation is when competitors develop new combinations of price and benefits that attack part of your market. Wal-Mart, he points out, is under attack by the warehouse clubs, dollar stores, Target's cheap chic, and Kroger's—all of whom have been successful at biting off a sliver of the discount retailer's market. The third circumstance is escalation, in which prices decline while benefits increase. Apple, for example, dominated the smart-phone industry with the iPhone, which offered many features at an unbeatable price.âï¿½¨
The classic strategy for firms facing a commodity trap is to differentiate their product from others like it. "Now," says D'Aveni, "because of changes in technology and globalization, continual differentiation is a necessity, not a competitive advantage." The book outlines three different strategies: escape the trap, undermine the trap, or use the trap to your advantage. Regardless of the strategy a firm pursues, however, beating the commodity trap involves forcing fundamental changes in the way one's industry is structured and behaves.
Competition, of course, has always been part of the Western commercial landscape. One of the book's case studies describes how Harley-Davidson responded to competition from Honda, Suzuki, and Yamaha back in the 1970s and '80s. But the commoditization that companies face today, says D'Aveni, is different because of the order of magnitude. Rapid technological change has mobilized the enormous workforces of India and China, revolutionizing service and manufacturing industries with low-cost labor. While the Asian Tiger threat of the '80s was largely neutralized in two decades, D'Aveni estimates it will take a century before standards of living in China and India improve, with a corresponding rise in costs of production in those countries. "In the '70s and '80s, people could hold on and survive," he says. "But if this turns out to be three, even four generations of people, the long run is not feasible to wait for. That's why I wrote this book now.
D'Aveni has a knack for being the first to articulate phenomena in terms that later become standard. His best-selling book Hypercompetition (Free Press, 1994) described the climate in which rapid technological change and globalization make it impossible for firms to sustain competitive advantage. This concept and the strategies he devised to deal with it became highly influential. In 2009, The Times of London named him one of the world's top 50 thinkers for his work on business strategy.
Over the past three years, D'Aveni has had some 60 Fortune 500 CEOs speak in his Tuck classes, and he used their experiences in his latest book. He also used information gathered from consulting work he does for companies fighting hypercompetition and analyzed quantitative industry data. In his acknowledgements, he thanks the CEOs and the MBA and Masters of Engineering Management students who worked on independent-study projects or statistical analysis. "They gave me lots of ideas for different places in the book, so I got their permission and involved them in the research, and I thought they learned a lot. So this is truly a Tuck product."