Economic and Business Responses to the Pressures of Commoditization

This paper examines the pressures of commoditization will continue to exert itself on companies and managers everywhere: the increasing impact of demographic change; the requirement to maintain a keen eye on costs in order to compete effectively within the global market; the continued advance of technology; the ability to standardize processes and eliminate major inefficiencies; the pressure to outsource and offshore business activities in order to exploit the cost advantages of cheaper labour and the opportunity for your competition to attack your markets and replicate your products and services more freely.Tackling commoditization in a fragmented or short-termist way will not allow you to understand its effects and nor will it provide the solid platform required to build an effective response. So when it comes to considering the potential impacts of commoditization you need to ask yourself the following two questions: 1. Can all or part of our business become commoditized? It is easy to believe that you are immune to the effects of commoditization and that you don�t need to respond to something that may not even be on your horizon. When responding to this question the best approach is to start from the position that everything you do is capable of becoming commoditized if not now, then certainly at some point in the future. Of course you may find that not everything can be commoditized, but it is far better to come to this conclusion after completing a thorough analysis of your business than making assumptions based upon a limited perspective or worse still, gut feel 2. How should we respond to the threat of commoditization? In particular should we embrace it or avoid it? This is a crucial question to answer once you have understood the threats and opportunities commoditization poses to the organization. As with any strategic decision it is likely to have significant operational implications. In some cases you may find that you have little alternative but to become more commoditized yourself, whilst in others you may be able to adopt a more flexible approach. When considering the response, you will need to think about such things as: � How can we insulate ourselves from the threat of commoditization? � Given the choice what parts of our business should we allow to become commoditized? � Where and in which markets should we innovate as a way of avoiding the commoditization trap? � Where should we target our investments � with our customers, on our back office processes, in research and development, on acquisitions or all of the above?