February 8, 2006
Excerpts: Let Go to Grow -- Part III
The impact of these forces on the ecosystem is inevitable: overcapacity, customer power (which translates fairly immediately to price competition), and then componentization as a necessary response and commoditization as the inevitable outcome. These all interact, too. They feed back into the environment of globalization, deregulation, and technology; this is demonstrated by the competitive intensity of the consumer electronics ecosystemmanufacturers, supply chain services, contract manufacturers, designers, retailers, electronic commerce portals, and fabrication plant giants. This used to be a high-tech industry. Now, it is a commodity ecosystem characterized by overcapacity, customer power, componentization, and thus continually shrinking margins and price cuts.
The interaction of all these new competitive changes also produces a system of continual innovation in technology, methods, and services. Because these are rapidly componentized and incorporated into the products of all the main players in the mass market, the innovations themselves end up pushing these companies toward commoditization. Digital cameras, computer storage, mobile phones, and PDAs exemplify the breakneck pace of innovation and commoditization.
As competition intensifies, overcapacity grows. Technology generates competition; so does deregulation. Globalization adds to it. For example, China and India are fueling competition around the world by offering low-cost services and products. Customer power increases as a direct result of deregulation, compounded by the degree to which the Internet provides customers with information and new choices. When customer power is constrained by regulation, options are limited because of market protectionism, and information on services and prices carefully protects providers, the customer ends up at the end of the industry value chains. When customers learn how to pick and choose, they go for the best deal and increasingly know where to find it. Ecosystems reshaped by the deregulation globalization Internet combination of forces have seen prices drop at least 20 percent over a five-year period; telecommunications, air fares, consumer electronics, and, more recently, prescription drugs are leading examples.
The Ecosystem Response
The response to increased competitive intensity is componentization: the move to interchangeable parts. As carmakers, PC hardware product brands, and financial service firms respond to competitive intensity, they focus on cost efficiency. They abandon their in-house manufacturing and proprietary parts and seek out low-cost suppliers that can provide off-the-shelf resources. These resources increasingly also include off-the-shelf processes, such as customer service, back-office functions, distribution, and supply chain management. The Internet becomes the enabling vehicle for collaboration in componentized engineering, design, and research.
For all this to be efficiently managed, low cost, quality, and speed are essential. Companies in the mainstream of the ecosystem have no choice but to move toward standardized interfaces: shared agreements, some specific and some implicit, on how components link together. For instance, customers can now add more memory to their PCs without going through the manufacturer: They walk into a store like Best Buy or run a search on Google and quickly pick their best option. The component providers offer different prices and vary the details of their products, but their components interface directly to the PC.
This content is excerpted from Chapter 2 of the book titled, "Let Go to Grow: Escaping the Commodity Trap", authored by Linda Sanford, with Dave Taylor, copyright 2006 by International Business Machines Corporation, ISBN 0131482084, published Dec. 2005 by Prentice Hall Professional. Reproduced by permission of Pearson Education, Inc. All rights reserved.
About Dylan Schleicher
Dylan Schleicher has been a part of the 800-CEO-READ claque since 2003. Even though he's stayed on at the company, he has not stayed put. After beginning in shipping & receiving, he joined customer service and accounting before moving into his current, highly elliptical orbit of duties overseeing the ChangeThis and In the Books websites, the company's annual review of books and in-house design. He lives with his wife and two children in the Washington Heights neighborhood on Milwaukee's West Side.