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    « Planning Horizon | Main | Selling Uptime »

    March 29, 2007

    Solutions to Escape Commoditizaion

    In a previous post I mentioned a Harvard Business Review article on "Strategies to Fight Low Cost Rivals".  There was an excellent example of a company that escaped the commoditization trap.  Orica traditionally sold explosive materials such as dynamite.  When they were faced with aggressive price competition from low cost providers they changed their business from selling quantities of explosives to removing quantities of rock.  They combined their products, their expertise and a value proposition that fit their customers real needs.  Selling dynamite satisfied Orica's needs, removing rock satisfied their customers needs.  Customers wanted to remove rock so they could build bridges and roads.

    In a previous life I used to sell products to companies that manufactured durable goods: construction equipment, machinery, military equipment.  We saw some interesting models developing:

    • Jet engine manufactures went from selling engines to engine up time for airlines.
    • Ship builders went from selling ships to selling the transportation of goods from one location to another.
    • Makers of industrial refrigeration equipment went from selling temperature differential per cubic meter.

    Every one of these industries sold product but there was a service component.  They grew their expertise on the service end and stopped selling products.  They started selling exactly what the customer wanted in a value proposition that they understood.

    How does this apply to the AEC Reprographics market?  That is the million dollar question.  The companies that can figure this out and transform their business can escape the commoditization trap.

    I don't have the answers, but here are some ideas:

    • Instead of selling printing and delivery - why not focus on the volume of content, where it needs to go and how fast it needs to get there?
    • If you are selling printer service, why not sell printer up-time (probably more valuable in a production environment than an FM)?

    Whatever direction you take there will always be objections and problems.  That doesn't mean you should continue your pursuit.  I'm sure when Pratt & Whitney decided to start selling up-time instead of engines there were lots of people who said it couldn't be done.  Now that is the standard in the industry.

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    Comments

    Rish

    Hi,
    Nice piece, i enjoyed reading views on commoditization. I an in the design business, this issue leads a lot of companies our way.
    I have a couple of questions and would love to hear your thoughts on it.

    1. what do you think are some of the early symptoms of commoditization for businesses in consumer goods (assuming that it is slightly difficult to identify that in that segment due to market dynamics)

    2. And the second is that, as more and more companies are moving from product or service providers to a solutions provider offering a 'platform/suite of services' how do you think business will start competing in the future, when everyone is a platform solutions provider and what form will commoditization take? \

    best,rish

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