I) Under Differentiated, Commoditised, One-Size-Fits-All Solutions

this is based on shoddy categorisation and inadequate understanding of what changing circumstances can do; it can lead to one-size-fits-none. Need to remember:

"...People don't want to buy a quarter-inch drill. They want a quarter-inch hole..."

Ted Levitt as quoted by Clayton Christensen et al, 2003

Usually by adding functions, features, etc there is a technological trade-off, ie as it does more things, it does each one less effectively and efficiently.

The sequence to commoditisation is

i) at the start of a new market an organisation develops a proprietary product/service that, while not good enough, comes closer to satisfying customers' needs than any of its competitors. It does this through a proprietary architecture and has attractive profit margins

ii) as an organisation endeavours to keep ahead of its direct competitors, it eventually "overshoots" the functionality and reliability that the customer in the lower tiers of the market can utilize

iii) this results in a change in the order of competition in those tiers that

- starts a movement towards modular architecture, which then

- facilitates the disintegration of the industry, which in turn

- makes it very hard to differentiate the performance or costs of the product/service when compared with competitors who have access to the same components that are assembled to the same standards

This condition begins at the bottom of the market where functional overshoot occurs first, and then moves into the higher tiers of the market.

For traditional players, there is link between disruption and commoditisationthe disruptive innovation will capture markets while commoditisation will steal profits. Sometimes, as commoditisation starts, it initiates a reciprocal process of de-commoditisation, ie it occurs in the value chain where attractive profits were hard to obtain in the past and are now freed up.

The reciprocal process of de-commoditisation involves

"...i) the low cost strategy of modular product assemblers is only viable as long as they are competing against high-cost opponents. This means that as soon as they drive the high-cost suppliers of proprietary products out of a tier of the market, they must move up market to take them on again in order to continue to earn attractive profits.

ii) because the mechanism that constrains or determines how rapidly they can move up-market is the performance-defining subsystems, these elements become not good enough......

iii) competition among subsystem suppliers causes their engineers to devise designs that are increasingly proprietary and interdependent. They must do this as they strive to enable their customers to deliver better performance in their end-use products than the customers could if they used competitors' subsystems.

iv) the leading providers of the subsystems therefore find themselves selling differentiated, proprietary products with attractive profitability.

v) this creation of profitable, proprietary product is the beginning, of course, of the next cycle of commoditization and de-commoditization..."

Clayton Christensen et al, 2003

An example of this process is the personal computer industry in the 1990s. Initially money flowed from the customer to the organisations that designed and assembled computers; later on, less and less of the total potential profit stayed with the computer makers - most of it flowed through to the suppliers, such as Microsoft, Intel, etc. At different times, circumstances will make different points on the value-adding chain more profitable and others less profitable. Remember:

"...the companies that are positioned at a spot in the value chain where the performance is not be good enough to capture the profit. That is the circumstances where differentiated products, scale-based cost advantages, and high entry barriers can be created......the processes of commoditization and de-commoditization are continuously at work, causing the place where money will be to shift across the value chain over time..."

Clayton Christensen et al, 2003

 

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