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Every company wants to avoid commoditization, ending up in price battles. A causal mechanism that is repeatedly found cross industries is called ‘overshooting’. It helps us to understand the mechanism behing commoditization.

‘Overshooting’ means that the pace of product/technological improvement overshoots the capacity of consumers to absorb more functionality. Incumbent companies are good in making existing products better, but more functionality does not mean that the product or service is actually solving a customer problem or need. And it certainly does not justify higher prices. What happens is that particular customer groups are not willing to pay a premium price for the advanced product.
This leaves the door wide open for new entrants at the low-end of the market to create new business models and to steal customers away from the existing business. Low- end disruptions offer a ‘good enough’ product for a lower price.

 

Apple’s IPhone

The iPhone is an interesting example. The evolution from the iPhone 3 (which was a new disruptive innovation, creating a new market) till the actual model is an interesting case. Consumers with the iPhone 8, that not bought the iPhone X, were buying a phone that is ‘good enough’ for the ‘job to be done’. The ‘job to be done’ for many smartphones is something like ‘connect me to the world’ and/ or ‘help me organize my information’. The iPhone X helps you achieve this, but for a high price. The high price is ‘justified’ by implementing better displays, facial recognition and other functionalities.

Motorola however has launched a series of new cheap smartphones, without the fancy functionalities (Moto). The phone performs good enough when we consider the ‘job to be done’ for a price around 300 euro’s. A typical low-end disruption.

The question is; How would Apple interpret this market dynamic? Are they going to make a phone that competes at the low- end of the market? Probably not, we can come up with a logical argumentation for not pursuing low-end disruptions when we view it from their premium brand positioning. At some point, in every market tier, new players will offer their products with same functionalities, that puts pressure on prices and margins. With efficiency innovations (cheaper labour, automatization) it is possible to withhold good margins for a longer time. Though, at one point it is not sustainable. The basic way to escape commoditization is to move upmarket. A good example is Toyota which entered the American market with their cheap Corona model. When other players started competing in this tier of the market with small cars, profits declined. Toyota moved upmarket with the introduction of the Camry and later the Lexus and consequently serving different customer groups. Taking this logic back to the cheap smartphone from Motorola. At some point Motorola moves upmarket because of the pressure on their margins in the particular tier of the market. If they manage to build a loyal customer base, that will move upwards in the market, the disruptive trajectory becomes clear for Motorola in relation to Apple’s iPhone. This trajectory is combined with product improvements but also business model innovation. The biggest challenge for most incumbent companies is how they can pull their existing brands in the digital age and renew their business models based on the needs and problems customers have. Integrating the value chain further is the way to keep high prices. This means that besides producing better products companies need to dive into the world of the customer and identify needs or problems that are not solved (good enough) by competition. Moving from solely product manufacturing to creating digital services (business models) around existing product lines is important. 

Conclusion

Big companies serve ‘high margin’ customers with ever improving products. When other competitors enter the market margins get smaller . Companies are forced to find profitability in new ways. In other words, companies must seek the performance-defining component in the value chain. This means putting the customer first and build services and products that solve their needs through the entire value chain.

A deep understanding of how disruption works in your market, not only looking at technological possibilities, will help you create strategies and a portfolio of new potential growth models.

Interested in how this works for your company and industry? Leave us a note and lets explore your specific growth challenges. 

Misha de Sterke

Chief corporate innovation Innoleaps 

 misha@innoleaps.com