- New study by Roland Berger and the International Controller Association (ICV) shows that standardized products are impacting prices and margins, thus threatening companies in all industries
- The premium segment is being affected too: Roughly 20% of high-end products and services are already substitutable
- Only one-third of the companies are actively doing something about the commodity trap
- Innovation, performance upgrades, better quality and changing the business model are key levers for escaping the commodity trap
- Especially the logistics, energy, financial, telecommunications and consumer goods sectors have a lot of catching up to do
Munich, 22-4-2014 — /EuropaWire/ — Almost all industries today are struggling with the increasing commoditization of their products and services. This is putting considerable pressure on prices and margins and leads to fiercer competition. And not only the mass market is being affected: even more complex and innovative products are subject to increasingly technical and qualitative standardization. The upshot is that new market players are getting more and more competitive while established providers are successively becoming interchangeable. A new study by Roland Berger Strategy Consultants and the International Controller Association (ICV), entitled “Escaping the commodity trap”, shows that 63% of the companies surveyed are already facing the commoditization of their products and services.
“Companies that focus on price competition instead of investing in innovation, added value and adjusting their business models will inevitably face steadily falling prices for substitutable products or services,” explains Roland Berger expert Michael Zollenkop. “This means profit margins will continuously shrink, the industry will consolidate and many companies will fold.”
Premium segment increasingly affected
While the standardization of products and services has been evident in the low-end and mid-market segments for some time, the premium segment is now being increasingly confronted with this situation: 20% of the surveyed companies are feeling the effects of commoditization on their high-end products.
However, even though this is becoming more and more of a problem, so far only 54% of the companies have taken concrete actions to address this. Of the companies already in this trap, only about one-third are actually doing something about it. “Many companies recognize the commodity trap and the related dangers too late,” says Conrad Günther, Managing Director of the Board of the International Controller Associations (ICV). “Therefore, companies need to be on the lookout for the first signs of commoditization in order to proactively take appropriate action with a suitable strategy or possibly even a new business model.” Especially the logistics, energy, financial, telecommunications and consumer goods sectors have a lot of catching up to do. There is a huge gap in these sectors between their advanced state of commoditization and the actions taken so far.
The three core elements of commoditization
The Roland Berger analysis identified three key elements that can push a company into the commodity trap: customers, technologies/ products and competition. “These three elements are closely interlinked,” warns Zollenkop. “Depending on the company and the industry, the downward spiral can start at any one of these elements, spread to the others and ultimately lead to the commodity trap. The result is continuously plummeting prices and margins.”
It doesn’t help that product information is much more transparent today for consumers – e.g. as regards getting value for the money. Customer loyalty to a specific provider can quickly wane in both the B2B and B2C sectors if the purchasing decision hinges mainly on price.
Technological maturity, know-how transfer and technical and qualitative standardization of products and services play a key role. This is leading to fiercer competition: New providers are crowding into the international markets with comparable offers and additional production capacity. Overcapacity may result and the pressure on prices and margins rises.
Ways out of the commodity trap
Companies in the commodity trap have two options to get out: Either they play by the rules and engage in fierce competition or they change the rules to their advantage. In the former case, companies must have competitive prices to establish themselves as a sustainable commodity provider. “This especially means further cost cutting in order to continuously offer cheaper products and services,” explains Günther. “Companies can maintain stable margins by expanding their business, realizing economies of scale and becoming more flexible. Nevertheless, commoditization will always remain an issue.”
However, if companies want to escape this price competition, they must first analyze how their products are positioned in the markets and to what extent they are affected by commoditization. After this they can start to define an appropriate strategy. Short- and medium-term actions include marketing and customer loyalty programs, differentiated product portfolios for the various markets and pin-pointed research and development initiatives. “To ensure long-term success, companies need to fundamentally rethink their product portfolios, adjust their business models to the new market conditions and make their organizational structures more flexible,” advises Zollenkop.