Commoditization Collision Challenges- Valutrics

Failure to innovate and stay relevant can lead to erosion in differentiation and a painful descent into commoditization hell, where gain and losses are driven solely by costs and prices and there are no real winners. Commoditization is a painful game to play.

Today’s business world is extremely unstable. It resembles a permanent storm characterized by a set of collisions that have merged on all markets at an increasing pace. Some collisions might occur more gradually than others depending on the sector. The force of the storm also varies. Every business sector will have to face it at some point.
Because these collisions are crucial in business, they deserve explanation.

Collision #1: Critical Price
Initially, the retail price of a disruptive technology is always very high. Consider the list price of the first LCD flat-screen TVs, about $20,000. Of course, this price will quickly decline, sometimes plunging by nearly half each year. Because of the cross-elasticity between the sales volume and the average list price of a SKU (stock keeping unit), the demand tends to increase at a slower rate until the price reaches a point of inflection, a critical list price, at which customers will perceive that the product is finally accessible. They then will begin to buy it en masse. Suddenly, sales are booming and demand soars . The critical price can be compared to a psychological price threshold, below which large numbers of potential buyers are suddenly ready to buy a product or a service. It is a way to cross the chasm from highly innovative products aimed at limited markets to highly diffused products reaching the mass market. Markets are thus moving from specialties to commodities. For example, the critical retail price for a digital camera went down to about $499; such an affordable price boosted sales, not profits.
Crossing the chasm has mainly been described as a desirable move.
In practical terms, it is not necessarily so. As soon as the chasm is successfully crossed, premium prices tend to disappear. Competition on price then increases constantly. Once you have stepped straight into the commodity trap, you will have to adapt as fast as you can to a radically new competitive reality.

Collision #2: Critical Mass
If the new product or service is a potential success, the next question is how much time will it need to reach the critical mass market? Nowadays, the average adoption (or diffusion) rate of any successful marketing concept is shortening. In fact, adoption rates at record speeds are becoming the rule in particularly turbulent product categories, such as DVD players and even high-definition television sets. Remember, it took nearly 15 years for color TV to reach the mass market (from 1955 to 1970). The introduction phase of the product life cycle was extremely long. In stark contrast, the success of DVD players was so instantaneous that the introduction phase of its life cycle was simply bypassed. The spread of products into households is speedier than ever.
The first theoretical consequence is that the traditional innovation adoption curve must be revised. The so-called normal curve tends to be skewed more and more to the left. Most often, it becomes quite abnormal. This radical shift is caused by new business practices. It is crucial for companies to learn how to manage their product and service portfolios properly. The aim is to preserve an optimal balance between specialties and commodities. Specifically, the game is to maximally protect specialties and use them as cash cows.

Executives must also learn how to generate profits from commodities. This challenge has been well understood and executed by Dell, for example. As long as they were the only player in their sector to manage this challenge effectively, both their differentiation and their competitive edge were assured. Several years later, competitors learned how to match or even surpass their competencies.
A few years ago, Michael Dell gave many conferences to MBA students around the world. He would stress how surprised he was that so many students were reading case studies of his direct, low-cost business model but that nobody had been able to reproduce it yet. He was somewhat cynical during his heyday. Now his comments have come back to haunt him. Dell, too, has fallen into the commodity trap.
The same pattern can also be seen in the mobile phone sector, in which the adoption rates of new technologies are accelerating: the adoption rate of 1G technology was fast but nowhere near as fast as 2G, and 3G has been even faster! The Japanese market, dominated by NTT Docomo, is a perfect example of this phenomenon. The number of NTT Docomo subscribers is increasing at a faster and faster rate with every launch of a new technology. Another noteworthy type of increased speed is the time frame of new product or service development, which is different from the diffusion rate. It is the next collision on which we will focus, called time-to-market.

Collision #3: Critical Time-to-Market
To review our last example, NTT Docomo, the time to develop a new concept (in this case a new technology) has decreased sharply over the years.
Enormous pressure is being put on R&D departments to feed the frenetic race for innovation. Some companies are even developing an internal culture of perpetual crisis. Samsung exemplified this policy for many years: don’t predict the future, invent the future! It sounds good.
The problem is how to sustain this constant pressure on your troops over time. If you try hard to push a competitor out of the market with speedy innovation as your strategic weapon, there is a high probability that, sooner or later, another competitor will do the same thing to you.
It is not surprising that one of the main issues experts are working on is maintaining the momentum.
For example, Samsung fought hard against Sony, quite successfully. Now LG is putting the same pressure on Samsung, and Samsung is suffering. Which (Chinese?) company will be the next to chase LG’s tail? The sequence of reciprocal pressure is never-ending, and the stakes are constantly rising.
This race for time-to-market is extremely demanding. It might also affect overall quality. Many companies, especially in the software industry, are launching products that are permanent works-in-progress, to the chagrin of their final users. Microsoft Vista software is plagued by perpetual problems. It has now lost trust internally and externally.
Launching unfinished products drives the commoditization process because it tarnishes overall consumer perceptions. Skepticism prevails. Both Microsoft and the final users are hoping Windows 7 will solve the problems once and for all. Microsoft must not fail again. Telling customers you do not “support” a product anymore because a new one is coming down the pipeline is the ideal way to stoke frustration and drag your customer satisfaction index down. And what can we say about the humbling of Toyota? A combination of high-speed global growth and ambitious cost cuts led to the quality lapses that have seriously tarnished the once-mighty brands of Toyota and Lexus.
Finally, decreasing the time-to-market and increasing disruptive innovations (including technologies) reinforces commoditization. If you innovate, in a relatively short time frame, on each of the attributes of your products or services, you quickly eliminate product differentiation because innovations become banal. Clearly, product differentiation alone cannot singly drive growth and stock performance. Companies fiercely engaged in hypercompetition are burning the candle at both ends. From an objective standpoint, do they have a choice?

Collision #4: Critical Displacement
As soon as a disruptive technology successfully crosses the chasm, it will quickly replace the old one. Two important rules appeared in a major article in 1995. First, when a disruptive technology meets the performance demands of mainstream customers, the customers will switch to it, even it is inferior to the sustaining technology. Second, supply quality improves more quickly than demand requires.
Let’s take a simple example to illustrate those two rules. When they reached the price threshold, digital cameras did not exceed 3.1 megapixels. Nevertheless, the technical performance of this disruptive technology was sufficient for mainstream consumers, despite the fact that it was obviously far from the quality definition of traditional film photography (the old technology). Digital cameras have since been inserted in mobile phones, creating a new concept: camera phones. During the introduction phase, the image definition was about 1.1 megapixels.
They were fun to use. Final users were not concerned with taking professional-quality pictures. The technology improved fast, however, and now mobile phones are competing directly with digital cameras.
There is significant negative cross-elasticity between the sales of both products. Displacement is not at 100 percent because mobile phones have not entirely replaced digital cameras yet, but the increase in the sales of camera phones flattened the sales of digital cameras. Now some digital cameras deliver 15 megapixels!
This process is repeating itself endlessly. What is remarkable is that most often, companies that were the leaders in an old industry are unable to maintain their position when a disruptive technology emerges. Generally, they (almost) disappear because by the time they recognize the threat and take it seriously, it is too late. Kodak is a striking example. It was considered a major blue chip on the stock exchange for many years—not anymore. Polaroid suffered the same fate.
The impact of a disruptive technology is not limited to the tangible (i.e., a product and its technical performance). It might also severely impact intangibles, namely services, in particular the simultaneous production and delivery of a service. In the marketing of the intangible, service and distribution are indissociable. That is how the Internet has killed the traditional brick-only travel agency in the United States.
Slowly but surely, this radical transformation is spreading around the world. Voice-Over Internet telephone (VOIP) is another example of a service provided by the Internet, as is satellite radio. One key strategic issue in the world of media (content and transportation) is television over the Internet or Internet Protocol Television (or IPTV). A large company like Microsoft is betting heavily on it. It is a strategic stake for them. They see it as a possible rebound (or revenge) against the overwhelming spread of Google’s search engines, control of individual information, and online advertising. Sometimes there is a displacement between the tangible and the intangible parts of a commercial offer. In the music industry, sales of CDs are falling steadily. At the same time, sales from downloading music are rising. In software, the de- materialization of products is building momentum. People have stopped buying specific software in the packaging format of a CD or a DVD inserted in a cardboard box. They increasingly connect to a specific Web site and download the product. The major recording labels such as Sony Music Entertainment, Universal Music Group, Warner Music Group, and EMI, the packaging industry, and the mass retailers must reposition themselves. A sweeping transformation is affecting all of their business models.

Collision #5: Critical Price Nears Zero
Not only will the performance of a new technology increase every year, but its price will fall simultaneously. Take computer chips and the famous Moore’s Law (the number of transistors on a chip will double about every two years). It is extremely attractive at first glance.
Executing it, however, could be a business nightmare.
What is incredible is that the continuous, spectacular development of a disruptive technology has a matching inverse pattern related to price. Companies are offering more and more in terms of product or service performance at an even lower price. It is precisely what Avon’s CEO said (at the beginning of this chapter). Au contraire, simply adding extra performance to your product—be it a computer, hotel stay, or lipstick—does not mean you can automatically apply a premium.

The final result of these two patterns, from a consumer perspective, is that you can now buy a digital camera, with a recognized brand name and image definition twice as high as two years ago, at a price half of that of two years ago. Think about it. Most consumers do not realize how serious the business and social consequences of this collision are! The pressure on developers is enormous. Increasing productivity constantly is crucial as a response to such demanding requirements.
Some companies are up to the challenge. Others just throw in the towel. They stay in business as long as they can improve performance at a profit. For example, in the fierce race for flat-screen TV sets, Pioneer is running out of gas.
In some sectors, the price nears zero. Some visionaries are seeing “free as the future of a radical price.” This can apply to selling activities in sectors such as phones, magazines, newspapers, and even pop singers. For example, some companies are delivering their products for free. By bundling their free offer with peripheral services and a mid- or long-term binding contract, they expect to attract and retain consumers and maintain their profitability through an increase in usage. They are not trying to generate a profit from the purchasing act alone. The applicability of this extreme approach is not universal: it requires flexibility in execution. But it might be a clever solution to a dead end.
Let’s take another look at the music industry. Many people say pop stars should earn their money by performing more concerts and should not expect to earn as much income from CD sales (i.e., waiting passively for money to flow in). This is precisely what Prince did. He delivered one of his latest albums for free, as an insert in a newspaper. He then earned money by giving concerts based on the new album. Although the newspaper lost money during the launch, it earned a positive ROI.
In the end, the move was a very sound advertising investment and not an expense at all—a real “win-win” situation. More recently, in an official announcement made in July 2009, Microsoft said it would offer a free version of its popular Office software that could run on the Internet. It clearly looks like a major strategic move that will allow Microsoft to protect its most profitable businesses against Google.

Critical Combined Effects (1+2+3+4 = Commoditization)
None of these collisions happens in isolation. They act simultaneously and produce reinforced effects. The pace of innovation is increasing: both time-to-market and time to reach critical mass are plunging, and mass markets are developing faster than ever, while prices are decreasing. Most often, new products go on special almost immediately after being launched on worldwide markets, or even before. This is particularly true of electronics such as digital cameras, DVD players, and even LCD televisions. Consumers should not be seen as the only cause of this odd situation. Many companies hastily discount prices instead of charging a premium price for new products and services. Such incoherent practices are very short-term oriented and are basically conditioned and irrational business reflexes. They are building loyalty to low prices and promotions while eroding the differentiation and uniqueness effect. It is a real pity. Of course, the relative increase in the appearance of disruptions instead of incremental improvements is adding to the turbulence. The effect of successive incremental improvements is much smoother than that of disruptive technologies. The pace of the appearance of disruptions is increasing and is driving commoditization. For instance, the battle between standards is raging in the electronics sector. LCD and plasma televisions are still fighting, but there is a clear advantage for LCD technology.
Large electronics companies are already seeing the advent of flexible display screens fast approaching. Here again, different standards arise for the same concept: transform a TV screen into a poster that can be rolled up, transported easily, and hung anywhere. Or transform a book into an electronic display through an electronic ink process (HP, DuPont, Xerox, Philips, and many other big players have already entered this race). Dr. Alan Heeger received a Nobel Prize in chemistry in 2000 for his research into tapping the power of plastic. Plugged-in polymers are already being transformed into rollable LCDs; the commercial battle has begun. The prices of the first plastic screens are extremely high, of course, but they will decrease as the technology improves. Some supposedly innovative products might already be “out-of-date.” One example is the Kindle (the electronic book) that Jeff Bezos, Amazon’s CEO, is trying hard to launch after the successful launch of the iPad from Apple. Is it the right format for a digital book? Some people are comparing it with a real book. Obviously, the feel is not the same. There are likely other issues, too. The current digital format, even improved, is probably just a “concept-in-progress.”

The Major Threat to Differentiation
Commoditization is the inexorable transformation of unique goods and services into commodities. It leads to a total lack of differentiation between the offers in a specific sector. For example, there is a perception that there are no differences between the brands of high-end LCD TV sets, between the mortgages offered by different financial institutions, between the business propositions of industrial contractors, between large steel suppliers, and so forth. When the customers or industrial buyers perceive all offers as the same, then their only buying criterion, or basis of selection among available brands or suppliers, is price. The product or service offered need not be a basic commodity per se (such as a raw material). As long as it is “perceived” as undifferentiated, it transforms itself into a commodity according to the strict economic definition and automatically joins the ranks of commodities with its exclusively price-driven competitive behaviors.
Technically speaking, commoditization is a market process that affects the role of the brand (as a buying criterion) in the customer’s decision-making process, regardless of its presence or necessity. It does not imply the demise of the brands, as warned by experts, especially gurus wanting to spread hype. It does decrease the expected returns from a strong brand policy as a result of two related issues. First, it drastically limits the capacity and freedom of a manufacturer or service provider to apply a systematic pricing premium to an offer with unique added value. A strong brand no longer guarantees a price premium.
Second, it transforms absolute brand loyalty into shared brand loyalty among an evoked set of comparable brands, a well-known megatrend occurring worldwide and across product/service categories. It leads to the erosion and potential disappearance of exclusivity and proprietary business privileges. Paradoxically, from an ironic standpoint, commoditization represents the development of a socialist approach in a pure capitalist arena.

Commoditization as a Lack of Relationship
From an environmental and social perspective, a commodity is an object outside of oneself, a thing whose qualities satisfy a human. It is a useful thing, but mostly it is a thing, not a relationship. The lack of relationship between the thing (a product or a service) and the client is important because it is a potential source of disengagement among buyers and an explanation for the increase in the number of people switching brands, distributors, mass distributors, and so on. Obviously, the commoditization process occurs differently in product or service categories. Goods and services can be described as having high commodity potential (HCP) or low commodity potential (LCP), depending mainly on their suitability for mass production and distribution.
Commoditization has two major consequences. First, it can be defined along a continuum, with different products and services ranging from high to low commoditization potential. Second, directly related to the previous consequence, rebuilding a relationship between products or services and the targeted consumers will be more or less straightforward, depending on whether the brand belongs to the mass or the selective market. Cult brands are a different story. Remember, nothing is impossible. Even for a very basic commodity, in an extreme case of a total absence of relationship, it is still possible to create uniqueness. Specialty salt is a good example. The product might
be handmade, organic, or even protected by a label of origin. The final result is the selling of a selective salt at a sizeable premium. Salt is not salt anymore.

Commoditization as a Loss of Managerial Control
From a general managerial perspective, commoditization means a present and future loss of control by companies over their business assets, that is, their brands and financial returns and, ultimately, their potential survival. (A typical question is “What does our future as a bank, travel agency, academic institution, scientific journal, car dealer, etc., hold?”). Business equity is on shaky ground.
All these effects are creating real nightmares not only for marketing experts but also for many corporate executives, especially those who sell products or services that were not previously associated with commodity markets but are now deeply engaged in them. The commoditization process is in its growth phase. It is here to stay and will not fade away.
We need to take a closer look at the causes of this long-term, irreversible economic development. Because of the severity of the recession, desperate attempts to reinstall protectionism might surface, but the political order of large economic markets has been clearly and firmly established. It is designed to facilitate open exchanges and free competition. This is why it is important to understand the economic mechanisms underlying the business world.

The Descriptive Model of Commoditization
Globalization and digitization are jointly fueling the commoditization process. Their major consequences are located either on the supply side or the demand side. Of course, subsequent consequences might appear, such as cross impacts on both sides. In order to keep the focus on the major economic issues, I simplify the picture and limit the number of causal relationships.
The major impact of globalization—brand proliferation—is on the supply side. By comparison, the major impact of digitization affects the demand side: customer empowerment. Together they explain the major shift in the overall configuration of brand choice behavior in the last 20 years. Specifically, there is a much larger choice of brands on the supply side; many more comparisons among available and accessible brands; and a resulting decline in absolute brand loyalty, which is translated into greater difficulty maintaining margins and the overall financial performance of a company.
Let’s start with the supply side. Several years ago, somebody who wanted to buy a pair of shoes in a small town had a limited choice: one general store, perhaps two, and a very limited selection of brands per store. Another way to buy this item was the traditional mailorder catalog. Nowadays, the same customer is probably connected to the Internet and has access to a large set of online stores, domestic or foreign (who cares anymore?), with a nearly unlimited selection of brands and models. The same situation applies to industrial goods.
Globalization has positioned the customer in a perfect competitive setting. Monopolies have been abolished. The choice is yours: bricks only (physical storefronts), click only (online stores), or bricks and clicks. The basic economic rule of supply and demand applies. The greater the choice, the more clients increase their expectations and the more extensively they bargain during the buying process. They will demand a zero-defect offer at a “fair price,” which implies requesting higher quality at a lower price. This is known as the more-for-less paradigm. Over the years, people learn to negotiate more effectively. This system can be called the global factory. It is a continuous, irreversible learning curve. Customers are clamoring for more, more, more!
Globalization means the proliferation of brands and an infinite extension of the limits of choice. The consequence is obvious: brand dilution. Many brands are landing in customers’ backyards. Competition is giving way to hypercompetition. To add to the complexity, the number of counterfeit products is also on the rise. Both gray and parallel markets are becoming well organized, with their own codes and rules. They are creating different levels of competitive market structures, in direct competition, and building efficient underground economies.
On the demand side, consumer empowerment is mounting. Clicking a mouse button is an easy way to surf around and, during online shopping activities, to comparison shop conveniently and intensively. The consumer is in control because the power has shifted along the distribution channel from manufacturers to distributors to final customers.
For many years, marketing experts insisted that the customer was the boss. We all assumed the customer was a “rabbit” and companies were hunters. The consumer was thus both target and boss. The problem is that today, the rabbit holds the rifle and is hunting for companies. Some people are happy because the customer finally is the boss. Their delight might be premature, though, because the commercial hunt has been reversed. The customer is becoming more and more aware of business practices because of easy access to information. Online transparency is a reality. People’s fear that intense data collection is making the consumer naked is justified. However, companies are equally vulnerable. Many customers who enter the car dealership showroom are already aware of the technical issues related to the model they are looking for, and they know the price they should pay. People who say the impact of the
Internet on the car industry is overstated because the market share of clients buying a car online is very limited are short-sighted. The focus should shift to the “information search” phase, which immediately precedes the “buying” phase in the consumer’s decision process. These people will then notice that search activities are extremely intense and that a very large majority of potential buyers surf from manufacturer sites to dealer sites to independent sites in search of diverse information. If, as a brand manufacturer, you are not doing so well during the “information search” phase, do not be surprised if your sales are lower than projected. Where there’s smoke, there’s fire.

They are completely rewriting the rules of business, and companies must adapt to this new environment. Far too many companies and executives are reluctant to change. Even worse, some of the companies speak about the new realities but do not act accordingly. The necessary moves apply to others, not to them, of course.

The Two Major Megatrends in the Economy
At the turn of the millennium, many business students and executives were fed up with hearing about the so-called “new” economy. Experts heralded its appearance at the beginning of the dot.com era, but this trend was scuttled by the NASDAQ crash. Some experts then backpedaled and adopted what might be called an “I told you so” attitude. They argued that the Internet was hype only and would surely fade away. Only a limited number of courageous people resisted the short-term backlash, believing that everybody else was dreaming, and insisted that digitization would have a highly significant, long-term impact on business operations. They rightly did not change their minds and attitudes based on the ever-shifting winds in the business world.
They discovered that a new economy was being woven, which implies a new setting for business, and that more time was needed to manage the overall change. Just as a tanker can’t make a U-turn on a dime, neither can the global economy. A new reality has set in, and here are the two megatrends that characterize it.

Low-Cost Business Models
Many labels have been used for new business models that advocate rigorous management of customer expectations and delivery of high added value paired with low cost. At first, the “low-cost” expression was used mainly to describe a new type of airline, such as Southwest Airlines, Jet Blue, and Easy Jet. Now the term is becoming more generic and is widely used across industries. The “more-for-less” customer request is being integrated into the basic structure of companies. The dual effect of globalization and digitization is not only at the crux of the commoditization process; it is also the economic source of the low-cost business models and their endless rise. Globalization and digitization have jointly created the perfect economic environment for the growth of the low-cost business models. Globalization is the fertile soil, and digitization is the fertilizer. This context is the visible manifestation of commoditization from a business practice perspective. Low-cost business models are proliferating. Very low-cost, instead of low-cost, business models are even emerging. The increased pressure to perpetually lower costs reflects the principle of communicating vessels on the global economic scale, specifically the current process of rebalancing PPP (purchase power parity) between the so-called incumbents and emerging economies. If one side is going up, the other should go down. The question is whether the process will stop smoothly at the equilibrium. It will probably take a long time to stabilize.
Let us look at famous examples from two disparate sectors. The first one, in consumer services, involves the comeback of McDonald’s at Starbucks’ expense; and the second concerns the race to build very cheap cars.
Starbucks’ famous business model is under heavy attack. In early 2009, they had to close thousands of stores and fire thousands of employees. The reasons for this huge setback generated much discussion. The fact that they opened too many stores is an oft-repeated argument: remember the famous joke about the opening of a new Starbucks in the Starbucks. There is another good explanation: commoditization. Slowly but surely, they lost their uniqueness in their core activity: specialty coffees. This sparked the famous controversy over the $4 “Frappucino.” The threat has come from an unexpected mass-market competitor, McDonald’s. McDonald’s is not only recession resistant, but they are also a very aggressive competitor. They know how to make money by selling commodities. This managerial skill may not be as cultivated in the more “selective” culture prevailing at Starbucks, which is too bad! McDonald’s quickly acquired new high-tech coffee machines that can produce “Ice Mochas” at a low cost, namely a price roughly half that of the Frappucino. Many not-so-loyal customers, more sensitive to price than to the “coffee experience,” switched over.
To hammer in their supremacy, McDonald’s brazenly posted an outdoor advertisement near Starbucks’ head office arguing that paying four bucks for espresso is dumb. The fairness of this strategy may be debatable, but it worked. Online buzz marketing took up the slack, multiplying, for free, both the impact of the message and the total size of the audience.
The second example is the rise of low-cost cars. Are they cheap cars? Is this the real issue? When a very large and highly diversified company like Tata of India launched the Nano, it might have been perceived as “cheap” because its basic equipment is designed to meet the low requirements of the company’s domestic market, coupled with a rock-bottom price to make it accessible to people with very limited budgets. When the initial product is revamped and adapted to the needs of more “sophisticated” markets, in the European community, for example, then the cheap car becomes a low-cost product. Even if the price increased from about 1,500 Euros in India to 5,000 Euros in Europe, it is still a good deal. Many European consumers might be attracted to such cars because their purchasing power is decreasing. Of course, the competition will soon step up to the plate. Renault is already playing the game with the Dacia Logan. They tout it as the best cheap car in the world. Their model can be considered a “super budget automobile.” Just because you are playing in the low-cost league doesn’t mean you can afford to neglect your image. Toyota is designing low-cost cars for Russia. Volkswagen will assemble their low-cost models in Russia. Nissan is planning new low-cost small cars for Brazil, and China is coming out with the QQ. After years of making their mass-market cars more expensive, the world’s automakers have abruptly shifted into reverse. The situation is quite urgent. The car has become a commodity to an unprecedented degree. Emergent countries might be in a better position to profit from this trend because they can surf the wave of commoditization. Ratan Tata, the chairman of the Tata Group, expects to sell 250,000 to 500,000 Nanos a year, as of 2010–2011. In contrast, this business reinvention is harder for the “Detroit Three” and for GM in particular. The Tata way has nothing to do with the GM way. Remarkably, though, all these car makers are asking their governments for bailouts.

The “Wikification” of the Economy
In 2007, at Davos, Swiss businessman, economist, and philanthropist Klaus Schwab affirmed that the most important issue facing the economy will be the power shift from the center to the periphery. Vertical-and-control structures are being eroded and replaced by (online) communities and different (open) platforms. He added that we are moving into the Web 2.0 world, which has tremendous implications on business models, at the national level. In 2009, the gathering at Davos was gloomier, for obvious reasons. Executives from around the world were preoccupied with the recession. The ambiance at Davos aside, it is important to remember that commoditization and the recession are closely related.
The worldwide opening of international borders has created large markets and a giant trade platform where everything is connected. First came the Internet revolution, then the wireless revolution. Wireless technology links not just people, allowing them to exchange information from anywhere in the world, but also objects. With the development of the semantic world, machines can also communicate directly. This might be tremendously useful, but it is harder to achieve than businesses might think.
“From a business perspective, a comparative advantage cannot be counted on to create [. . .] net gains greater than the net losses from trade (Paul Samuelson, MIT).” Commoditization proneness as applied to the content of commercial offers (brands, products, services, distribution channels, and low prices) is putting extreme pressure on brands, and they must be on their guard.
In their first edition of each year, Time magazine highlights the person of the year. In 2007, there was a mirror on the cover page, with a title: “You.” Time was telling people around the world that they control the information age. Now it’s your turn. The huge development of social networks and online communities is a new reality. Nearly everyone has a friend online, who is a friend of a friend, and so on.
This is a tremendous revolution. The problem is that online communities have nothing to do with traditional communities in general and brand communities in particular. The famous but traditional Harley- Davidson brand community is not easily transferable and manageable in an online context. Online consumers are increasingly disengaged. They still consume, but they are less and less dependent on brand manufacturers.
The key business challenge is to figure out how to harness the power of masses of one, to extract value from social “graphiti,” to benefit from prosumers instead of consumers, and to get crowd-sourcing right. The contribution revolution is taking shape. It is about participation, “ideagoras,” collaboration, and placing a huge bet on collective intelligence, introduced with great fanfare in the “wiki-economy” (an open economy where mass collaboration changes everything through massive online communities). It is an extreme challenge for traditional companies because it taps the contributions of countless people inside and outside organizations, peering collaboration in innovation among competitors, Internet leaders, and so on. It is putting system contribution to work on a worldwide basis with an open approach. It is sending huge shock waves through the business world.
What’s more, the “wiki” business approach does not follow the rules of business territory, decision disclosure, and especially total control by companies. This reversal is still in the introduction phase. In the near future, be vigilant and be ready to adapt. If you don’t, then you will definitely stagnate.
In a nutshell, total access is replacing total control. Customer value creation at a very low cost is the major stake of this new competitive game. John G. Stumpf, Wells Fargo’s chief executive, said in March 2009, “This downturn is different. It will define a generation.” Truly, a new generation is emerging—in the economy, business practices, and leadership profiles. It centers on customer value creation.