The Death Cycle of Commoditization

  "The quality wars were allegedly won in the 1980's.  Why then are we again overwhelmed by junk?"  Thus begins an interesting article in the April 28 issue of Strategy+Business entitled "Beware Product Death Cycles" by author Art Kleiner.  It's a great summary of how commodization and cost competition are causing previous product quality improvements to backslide to where they were 30 years ago. 

I can certainly identify with the problem today of "disposable products" and the declining quality expectations (and lower cost expectations) for 'commodities' we all seem to be experiencing... can't you?  The CEO of my previous employer used to demonstrate the concept by holding up a small appliance in one hand and a McDonald's Happy Meal in the other and ask "Which costs more"?  (The answer: The Happy Meal)

Many consumer goods today, from kitchen appliances to DVD players are increasing conceived and sold as disposable commodities -- junk at a great price.  Kleiner makes a strong case for the dangers of this path, from the erosion of once strong brands to the ultimate financial failure of these companies.  So why do companies employ these ill-conceived strategies that are so focused on near term gain at the expense of long term brand equity and consumer loyalty?  Kleiner highlights reasons from short term focus by branded companies, to a focus on low cost at the expense of quality by Chinese sources, as well as retailers pushing price points down.

This last point is touched on by Kleiner, but I think vastly understated.  In my own experience, the power in the consumer products industry these days rests clearly with the retailers from the major players like Wal-mart, Target and Costco to the specialty niche players like Bed-Bath& Beyond.   Target, for one, increasingly employs an insane strategy with its suppliers of placing them in 'reverse auctions' that treat all categories as commodities and puts tremendous pressure on the suppliers to reduce costs and margins to levels that reinforce this entire vicious cycle.

The answer?  Innovation.  And not just the product.  Innovation in business models and in getting these products and services to consumers.  Non-traditional marketing and channels provide innovative companies with a direct link to consumers to make their case and educate them on the benefits of the products and why they're worth more than the junk you can buy at Walmart.  It's why entrepreneurial start-ups and large innovators like P&G are increasingly using DRTV, direct marketing and word-of-mouth methods to regain that connection to the end consumer. 

So read the article and think about its implications in your category and your industry.  Are you going to continue the death cycle, or innovate yourself into a position of a higher place and higher profits for the long term?

Comments

[Bill Harris]

I like your ideas, for they show ways businesses can make a difference. I like ideas I read in this morning's Herald, for they show ways all of us can make a difference. I tried to link all of that together in my latest blog entry (http://facilitatedsystems.com/weblog/2005/06/pogo-redux.html).

Thanks.

Bill, thanks for the comments. I'll check out your blog as well.
Best, Mike D.