Six Ways to Avoid the Commodity Death Spiral

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Lost in the Crowd? Six Ways to Avoid the Commodity Death Spiral

If your company is pinning all its hopes on “me-too” products, you’ll continue to face an uphill battle to get ahead of your competition. Dan Adams offers six ways to avoid the commodity death spiral. 

Cuyahoga Falls, OH (March 2012)—Take a good hard look at your new product development strategies. What words come to mind? Do you think fresh, daring, and original? Or do you think, Hmmm, now where have I seen this before? If your widgets look suspiciously like your competitor’s widgets, or theirs look like yours, or you have innovative ideas but somehow you never get them to market in time, look out. You’re not turning out new products. Instead, you’re producing commodities—and that, says Dan Adams, is very bad for business.

“Your customers will notice that your products seem interchangeable with those of your competitors—and they will pressure you for lower prices,” says Adams, president of Advanced Industrial Marketing and author of New Product Blueprinting: The Handbook for B2B Organic Growth (AIM Press, 2008, ISBN: 978-0-9801123-4-4, $35.00). “This will lead to profit declines.

“So what should you plan for as you go over the company’s budget?” he adds. “Should you cheerfully tell your boss to expect more profit declines? I’m guessing…no. To make the most of 2012, you’ll have to reduce costs. Where will you cut? Unfortunately, it will probably have to be in long-term areas like R&D or marketing.”

If any of this is ringing true, your company is firmly strapped into what Adams calls the “commodity death spiral.” It’s a business-busting decline that begins with companies creating me-too products that lead to budget cuts that mean they’ll have even less new product development capability…especially for high-impact new products.

“The farther you spiral down, the smaller 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.”

If the thought of the “commodity death spiral” has you panicking, don’t. Adams offers solutions that will help you behave and think differently when it comes to new product development. Read on for a few tips that will help you avoid the commodity death spiral.

Take ownership of your future. There are many forces pulling your products toward commoditization: competitors trying to imitate your products, purchasing agents trying to

standardize your products, new technologies trying to obsolete your products…the list could go on and on. Resist them, says Adams. Bolster your resolve to forge ahead with a true innovation strategy.

“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.”

Measure your progress. Is your business moving down the commodity death spiral or reversing direction? Tracking your New Product Vitality Index over time can provide insight, notes Adams. This is the percentage of your total sales from “new” products (typically introduced in the last three to five years).

“But don’t forget a simpler metric: average selling price,” he adds. “This is how customers ‘vote’ on the value your products deliver relative to the next best alternatives. You can fire out new products at Gatling gun speed, but if this metric keeps dropping, you’re moving toward the big ‘C.’”

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. This problem still exists, says Adams.

“To combat it, consider putting all your budget dollars in either a short-term bucket or a long-term bucket,” he suggests. “And make sure someone is watching the long-term bucket.”

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, in the commodity death spiral, this strategy is 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.”

Get out more. It will help you 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 2007 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 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 VOC Interviews: Sending interview teams to hear the voice of the customer.

Level 5: Quantitative VOC Interviews: Adding numerical feedback to drive out bias and wishful thinking.

Level 6: B2B VOC Interviews: B2B-optimized methods to fully engage knowledgeable B2B customers. (To learn more about B2B optimized interviews, visit http://theaiminstitute.com/services/new-product-blueprinting//elearning.)

“No company has ever grown by copying its competition or by failing to innovate when its competition’s products began hitting a little too close to home,” says Adams. “Me-too products and incremental steps in new product development will always lead to commoditization. But you can avoid allowing your company to spiral into irrelevance. Once you understand the very real, very profitable benefits of changing the way you innovate, nothing will hold you back.”

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About the Author:

Dan Adams, president of Advanced Industrial Marketing, Inc., is author of New Product Blueprinting: The Handbook for B2B Organic Growth (AIM Press, 2008, ISBN: 978-0-9801123-4-4, $35.00). In over 30 years of working within and with major B2B corporations, he has explored every aspect of product development, building New Product Blueprinting from the ground up. He is a chemical engineer and holder of many patents and innovation awards, including a listing in the National Inventors Hall of Fame. Adams was head of strategic planning for a billion-dollar company and has extensive experience in Fortune 500 marketing, business development, and leadership positions. Dan’s front-end-of-innovation work with DuPont (as a lead client) led to a novel training/implementation model, for which he and his coauthor received the “best article of the year” award from the Product Development and Management Association. An award-winning speaker, he is a guest lecturer at Wharton’s Executive MBA program and trains in every region of the world.

About the Book:

New Product Blueprinting: The Handbook for B2B Organic Growth (AIM Press, 2008, ISBN: 978-0-9801123-4-4, $35.00) is available at bookstores nationwide and from major online booksellers.

For more information, visit http://theaiminstitute.com/services/new-product-blueprinting/.