Five Ways to Dodge the Commodity Death Spiral
Don’t allow your company to sleep-walk toward its demise. If you face “commoditization creep,” take these steps before the point of no return.
Cuyahoga Falls, OH (January 20, 2016) – for immediate release
Cuyahoga Falls, OH (January 2016)—Think of your company’s most exciting products—the ones that drive the bulk of your profits. Who invented them? If the names of retirees come to mind, your company could be in trouble. Now consider the products your company has launched in the last five years. Are they innovative blockbusters… or do they look suspiciously like your competitors’ products? If you’re developing “me-too” and incremental products, you’re not innovating. You’re producing commodities—and that, says Dan Adams, is very bad for business.
“Your customers won’t miss the fact that your products are interchangeable with your competitors’—and they will pressure you for lower prices,” says Adams, founder of The AIM Institute (www.danadams-aim.com) and author of New Product Blueprinting: The Handbook for B2B Organic Growth. “This will lead to profit declines.”
So imagine you’ve been cranking out “me-too” products, your profits have declined, and it is now time to prepare next year’s budget. What to do? Adams asks, “Should you cheerfully tell your boss to expect more profit declines? I’m guessing…no. To keep your job, you’ll have to reduce costs. Where will you cut? Unfortunately, it will probably be in long-term areas like R&D or marketing. This, of course, sets you up for even worse decisions a year from now.”
If any of this is sounding familiar, your company is experiencing the “commodity death spiral.” It’s a business-busting decline that begins with companies creating me-too products that lead to budget cuts, driving even less new product development capability…especially for high-impact new products.
“The farther you spiral down, the more depressing your business will get,” explains Adams. “You’ll have less profits and even fewer options. Sure, your business might survive, but if it does, it will be on ‘life support’—where it is no longer relevant.”
Don’t panic. Unless you wait too long, you can reverse this deadly trajectory. But you’ll get precious little help. There are many forces pulling your products toward commoditization: competitors trying to imitate your products, purchasing agents trying to standardize your products, and new technologies trying to obsolete your products. In contrast, the forces moving your company toward specialization must come from within. “If you want to move away from commodity toward specialty products, the sobering truth is you will get no help from the outside,” he says. “Forces pulling a supplier toward ‘specialty’ come from the supplier… or they don’t come at all.”
Read on for some tips from The AIM Institute. Founded in 2005, the Institute works primarily with Fortune 500 B2B companies eager to boost their innovation results; their real-world experience may help you avoid the commodity death spiral.
Measure your progress. Is your business sinking down—or recovering from—the commodity death spiral? Tracking your New Product Vitality Index over time can provide insight. This is the percentage of your total current sales from “new” products (typically introduced in the last five years). Many companies do this, but here’s the catch: You can fire out new products at Gatling gun speed, but if they make customers yawn, you could still be drifting toward the big ‘C.’”
Is a product “new” because it’s now available in “green” as well as “blue”? Instead of word-smithing internal definitions of what constitutes a “new” product, Adams recommends you consider if your products deliver new value to customers. Customers are the arbiter of true value, and they “vote” that a product delivers value by paying a price premium. He suggests, “In addition to a revenue vitality index, create a gross profit vitality index. If the latter isn’t higher than the former you’re kidding yourself. Customers see no added value in your ‘new’ products.”
Change your time horizon. In a 1972 Harvard Business Review article, Richard Vancil complained that long-term product development expenses are buried within short-term operating plans, allowing short-sighted business leaders to “raid” funds needed for their future. Few would argue that this problem has gone away since then.
“To combat it, consider putting all your budget dollars in either a short-term benefit bucket or a long-term benefit bucket,” Adams suggests. “And make sure someone is watching the long-term benefit bucket. This is critical. I’ve seen short-term thinkers quickly destroy what long-term builders took many years to build up. Be very, very nervous about this.”
Work on high-impact, high-innovation products. Some companies play it safe and work on only “low-risk” me-too and incremental new products. But this feeds the commodity death spiral, so this strategy marks the beginning of the end. Those who sacrifice innovation on the altar of safety end up losing both.
“While each me-too and incremental project may have low risks, a business built only on ‘low-risk’ projects is actually at great risk,” says Adams. “So make sure your new product portfolio has a healthy proportion of high-impact new products—products that will deliver significant value to your customers.”
Research by Nagji and Tuff (Bansi Nagji and Geoff Tuff, Managing Your Innovation Portfolio, Harvard Business Review, May 2012) makes this point clear: Among high-performing companies such as Google, 70% of return on investments came from transformational projects… not adjacent or core projects.
Get out more to minimize risk. While it’s risky to incrementalize, it’s also dangerous to invest in “great-hope” projects: high-stakes gambles with lower odds than management realizes. These kinds of projects pull in lots of manpower, funding, and management attention. But after two or three years, they often end with a whimper, typically from a fatal flaw that should have been discovered much earlier.
“So if there’s too much risk with both me-too and great-hope projects, what’s the answer?” Adams asks. “I believe we need to ‘get out more.’ We need to spend much more time in our
customers’ world to reduce our commercial risk. And we need to reduce our technical risk through open innovation by uncovering and introducing technologies from outside our companies.”
Directly engage your customers. In its landmark study, The Global Innovation 1000, Booz Allen Hamilton found that companies that directly engage customers in their innovation processes had profit growth three times faster than those using “indirect customer insight.”
Adams explains how direct engagement increases as you move through six important “customer insight levels”:
- Level 1: Our Conference Room: Deciding what customers want around your conference room table.
- Level 2: Ask Our Experts: Polling your sales force, tech service, and others to determine customer needs.
- Level 3: Customer Survey: Using surveys and polls to ask customers what they want.
- Level 4: Qualitative Customer Interviews: Sending interview teams to hear the voice of the customer.
- Level 5: Quantitative Customer Interviews: Adding numerical feedback to drive out bias and wishful thinking.
- Level 6: B2B-Optimized Interviews: B2B-optimized methods to fully engage knowledgeable B2B customers. (To learn more about B2B optimized interviews, visit www.theaiminstitute.com.)
“No company has ever sustainably grown by avoiding its responsibility to innovate on behalf of its customers,” says Adams. “Me-too and incremental product development will eventually lead to commoditization; only the rate of descent is in question. But you can prevent your company spiraling into irrelevance. Once you truly grasp the very real, very profitable benefits of changing the way you innovate, nothing will hold you back.”
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