Deterioration, proliferation, and escalation are the three traps that threaten a firm’s markets, says Richard A. D’Aveni in ‘ Beating the Commodity Trap ’ (www.harvardbusiness.org). The Wal-Mart effect, the rise of China, off-shoring and outsourcing to low-cost countries, recession, eroding consumer loyalty, discontinuous technological revolutions, and other relentless forces of hyper-competition are eroding and unseating the price and benefit positions of leading products in almost every market, he adds.
“The spread of Six Sigma, Total Quality Management (TQM), customer relationship management (CRM), and supply chain management (SCM) software and new manufacturing technologies is levelling the global playing field and erasing cost and product benefit-based advantages.” As a result of the confluence of these factors, the author observes, industry after industry is facing an unstoppable pressure towards commoditisation.
Deterioration
Deterioration, the first in the list, is a trap about ‘very low cost – low benefit products or services’ attracting the mass market, as in the case of Wal-Mart’s ‘every day low prices’ approach to merchandising. A response to this challenge can be to ‘move on,’ as exemplified by Intel.
When Asian companies began taking over the memory chip industry, Intel realised it could not compete on price, so it shifted to making microprocessor chips for personal computers, narrates D’Aveni. “When it faced newly competitive followers in microprocessors such as AMD during the late 1990s and cheap Asian microprocessors in the early 2000s, Intel moved to making chips for consumer electronics and other special applications.”
An inspiration for the company was the new slogan that Paul Otellini offered: ‘Leap ahead.’ The leap was spearheaded with Intel’s Viiv chip for consumer electronics, with the potential to draw together the home PC, TiVo, stereo, and cable television, the author recounts.
New alliances
“Alliances with Cisco in networking and Motorola in wireless communications were established. Chips for digital medical systems for hospitals and remote health monitoring at home were developed. Intel also introduced its dual core chips into Apple computers for the first time, and was developing chips for devices from BlackBerrys to iPods.” And, interestingly, Intel hired 20,000 new employees, including a bevy of anthropologists to shake up the engineering firm, informs the book.
D’Aveni finds a similar ‘move on’ strategy in the field of fashion clothing by haute couture companies, to sidestep Zara’s market power. “They are designing everything from designer hotels and restaurants (Armani, Bulgari, Versace, and others); consumer electronics and appliances (Armani is working with Samsung); cell phones (Prada is in partnership with LG); automobiles (Versace is designing the interiors of Lamborghinis); helicopters (Armani and Versace are designing the interiors of helicopters created by AgustaWestland)…”
Contain by surrounding
To beat the deterioration trap, you can establish positions around the competitor, advises D’Aveni. He mentions the example of Microsoft, which bundles numerous applications, such as Microsoft Office, browsers, and security software into its operating systems.
“In security software, Microsoft’s bundling strategy poses a tremendous threat to standalone software makers such as Symantec and McAfee. By offering security products such as firewalls and antivirus programs for free, Microsoft makes it impossible for rivals to compete on price. This type of deterioration is tough to beat, as companies such as Lotus and Netscape discovered.”
Yet, Intuit could beat back Microsoft Money in accounting products by offering more responsive customer service and the ability to keep up with fast-changing tax and accounting rules, the book chronicles.
Competition in the security space, too, is not static; they are adding features that Microsoft doesn’t offer. McAfee is adding software that provides improved security management for computer systems administrators who want to establish and enforce policies about the degree of protection and access to various machines, types of data, and software, the author notes.
“While Microsoft is protecting the operating system, Symantec is protecting information, and in the future might offer more protection in other areas such as interactions and identity.” Both accounting/tax and security software require expertise and frequent and timely updating that is difficult for a behemoth like Microsoft to provide, D’Aveni reasons.
Proliferation
Proliferation, the second commodity trap, is about new price-benefit positions surrounding and eroding a product’s value proposition by targeting smaller segments of the customer base. Rivals use these new positions to slice away slivers of the market of broadly positioned incumbents, the author describes.
Proliferators can be dealt with sequentially or simultaneously, depending on whether the company has the resources to overwhelm the competition one piece at a time or all at once, he suggests. “In its early days, Microsoft used a sequential strategy to meet and bury many software challengers, incorporating software into Microsoft software before the challengers became killer applications…”
The book tracks how the Redmond giant moved from MS-DOS to graphical user interface software (imitating and limiting Apple), to widely used applications such as word processing (eliminating Corel’s WordPerfect as a rival), then spreadsheets (eliminating Lotus), and PowerPoint presentation software (eliminating Corel’s Presentation), consolidating them all into an office suite. The attack of rival Internet browsers (such as Netscape) was one of the brutal strategies in the IT field.
Victoria’s Secret
It is no secret that Victoria’s Secret offers ‘a collection of diamond-studded bras and briefs for price tags of up to $15 million.’ No one ever buys them – in fact, they are never produced – but this faces down high-end fashion designers that might want to extend into the middle and upper-middle lingerie market, writes D’Aveni.
If the company cannot fight all its threats immediately, it can sometimes neutralise selected threats by scaring off some of the proliferators, thereby freeing up time and resources to focus on more immediate threats, he explains. “Attacking, buying up, or eliminating proliferators is a very resource-intensive strategy, but sometimes ‘ghost’ products or brands can be used to scare away the proliferators or keep them at bay.”
Quite bizarrely, the IT counterpart of the lingerie example is Microsoft, again, which “has been accused of using ‘vapourware’ (announced products that do not come to market) to prevent or delay customers from buying a rival’s software.”
Escalation
This trap happens when companies become locked into a form of one-upmanship, each trying to outdo its rivals by offering the customer more benefits at the same or a lower price, elucidates D’Aveni. “Customers get more and more for their money, and companies lose their margins… Managers facing escalation can’t stand still or they will lose market share to rivals.”
The ‘commodity Dell’ situation faced by the computer industry in 2000 was one such. Dell, as the book documents, developed a model to deliver high-quality, customer-designed, low-cost computers directly to consumer and business clients, driving down costs and squeezing margins across the industry.
“Prices fell to incredible levels and Dell appeared to be unstoppable. Given this escalation of the price and benefits war, competitors such as Hewlett-Packard and IBM found it increasingly difficult to compete against Dell in the PC business. Both HP and IBM found different paths out of this trap…”
Innumerable takeaways.
Tailpiece
“When I went to the doctor complaining about sleeplessness…”
“She gave you a pill?”
“No, the prescription was to get out of the ‘unlimited talk time’ plan!”
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