The Innovator's Solution by Clayton Christensen

Author:Clayton Christensen [Christensen, Clayton]
Language: eng
Format: epub
Publisher: Harvard Business School Press
Published: 2004-01-01T05:00:00+00:00

CHAPTER SIX

HOW TO AVOID COMMODITIZATION

What causes commoditization? Is it the inevitable end-state of all companies in competitive markets? Can companies take action at any point in their development that can arrest its onset? Once the tide of commoditization has swept through an industry, can the flow reverse back toward proprietary, differentiated, profitable products? How can I respond to this?

Many executives have resigned themselves to the belief that, no matter how miraculous their innovations, their inevitable fate is to be “commoditized.” These fears are grounded in painful experience. Here’s a frightening example: The first one-gigabyte 3.5-inch disk drives were introduced to the world in 1992 at prices that enabled their manufacturers to earn 60 percent gross margins. These days, disk drive companies are struggling to eke out 15 percent margins on drives that are sixty times better. This isn’t fair, because these things are mechanical and microelectronic marvels. How many of us could mechanically position the head so that it stored and retrieved data in circular tracks that are only 0.00008 inch apart on the surface of disks, without ever reading data off the wrong track? And yet disk drives of this genre are regarded today as undifferentiable commodities. If products this precise and complicated can be commoditized, is there any hope for the rest of us?

It turns out that there is hope. One of the most exciting insights from our research about commoditization is that whenever it is at work somewhere in a value chain, a reciprocal process of de-commoditization is at work somewhere else in the value chain.1 And whereas commoditization destroys a company’s ability to capture profits by undermining differentiability, de-commoditization affords opportunities to create and capture potentially enormous wealth. The reciprocality of these processes means that the locus of the ability to differentiate shifts continuously in a value chain as new waves of disruption wash over an industry. As this happens, companies that position themselves at a spot in the value chain where performance is not yet good enough will capture the profit.

Our purpose in this chapter is to help managers understand how these processes of commoditization and de-commoditization work, so that they can detect when and where they are beginning to happen. We hope that this understanding can help those who are building growth businesses to do so in a place in the value chain where the forces of de-commoditization are at work. We also hope it helps those who are running established businesses to reposition their firms in the value chain to catch these waves of de-commoditization as well. To return to Wayne Gretzky’s insight about great hockey playing, we want to help managers develop the intuition for skating not to where the money presently is in the value chain, but to where the money will be.2

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