February 8, 2006

Excerpts: Let Go to Grow -- Part IV

By: 800-CEO-READ @ 4:48 PM – Filed under: Management & Workplace Culture

Componentization Drives Commoditization
Low-cost producers look for advantages of scale, and specialist players tailor their strategies to standardized interfaces. Going back to the example of PC memory, have you ever heard of Kingston? Look at the ads in your newspaper and youll see that merchants now emphasize low-price components (including Kingston, just one of the commodity players). From a commoditization perspective, contract manufacturers, such as Flextronics, are why your printer, PDA, or digital camera costs less than it did six months ago; they are all built on componentized parts assembled through standardized interfaces to create branded products. HP is among the best-known printer brands, yet it has outsourced all manufacturing, and repairs are handled exclusively by UPS.
When you call a company for customer service or technical assistance, are you reaching a site in Ireland, India, or Omaha? Call centers are now viewed as a business component. So, too, are more and more manufacturing, back-office, and other previously in-house capabilities. How many hospital patients know that their X-rays and MRIs are sent directly to Makati in the Philippines? How many of the standard parts in an American or a Japanese car were made in the home country? Do customers need to know?
Competitive intensity creates ecosystem impact, and commoditization is the inevitable outcome. There will always be a space for the innovator to invent something truly new. But commoditization catches up quickly. New quickly becomes standard, which soon becomes special price, which then begets free printer, installation, or two for the price of one. Mortgages, computer storage, hotel rooms, medications, airplane tickets, mobile phone services: The list is long, and no ecosystem is immune to this commoditization drift.
Commodity Heaven and Hell
Commodity hell for producers is commodity heaven for customers. They pick channels, providers, and products on whatever basis they want, in complete control of the transaction. Customers may not necessarily choose on the basis of price; the key is that they have choices. In some instances, the choice favors design, or fashion is the deciding factor, and they will pay a little more for the same commodity functionality of, say, a printer or a mobile phone. They will in other instances favor a brand for a different reason.
In many cases, the owner of the brand may have little to do with the production, delivery, and servicing of the goods. One illustrative example is Hong Kong-based TAL Group, the coordinator of a value web that such retailers as JC Penney and Lands End use to produce customized dress shirts. JC Penney takes the order in the store, and TAL does the rest, synchronizing hundreds of raw materials providers, factories, and shippers to deliver as small an order as one shirt, with the appropriate logo sewn on, to JC Penney or even direct to the customer. TAL accounts for one in eight of all the dress shirts sold in the United States, but it is doubtful that their purchasers have ever heard of the firm. The customer gets a customized shirt at a commodity price. TAL is an instance of how coordination of value webs can help firms escape from commodity hell. They offer a services web that firms like JC Penney utilize as an extension of their value chain to create a new degree of coordination.

It is coordination of value web capabilities that drives every growth leader.

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.