As national economies become more globalized, companies risk becoming less competitive, causing products and services to lose their uniqueness, according to Tuck School of Business professor Richard D'Aveni. In his new book, "Beating the Commodity Trap: How to Maximize Your Competitive Position and Increase Your Pricing Power," which came out last month, D'Aveni details strategies that companies should use to survive amid widespread "commoditization."
Commoditization has occurred "since the Stone Age" but is accelerating at an unprecedented speed in the 21st century, D'Aveni said in an interview with The Dartmouth. He explained that developing countries that have embraced a capitalist economic system are best equipped to speed up the process, citing China and India, as well as Brazil and Indonesia, as countries that have made major contributions to accelerating commoditization since the late 1990s.
"Commoditization" refers to the process of losing the distinctiveness of a product or competitive position in the marketplace, D'Aveni said. If American and European companies do not proactively combat commoditization, they will be forced to move their operations overseas to remain competitive, D'Aveni said.
"They're beating us at our own game," D'Aveni said. "What's happening over time is that we are becoming a place that is not competitive anymore."
By studying commoditization in approximately 30 industries in the United States and Europe, D'Aveni defined three different types of commoditization that companies encounter proliferation, deterioration and escalation.
Proliferation, which occurs when many new companies offer products or services that differ only slightly, is particularly problematic because "you can't fight everyone, everywhere, all the time," D'Aveni said.
"Attempts to differentiate lead to proliferation of products, which eat up companies like a pack of piranhas," D'Aveni said.
Companies in industries plagued by proliferation should reduce the number of issues they take on, adopt a formula to fight all of the new competitors simultaneously or develop a diverse brand portfolio to deal with the different types of threats, according to D'Aveni.
D'Aveni defined deterioration as the process in which a competitor offers low-quality goods and services at low prices, forcing the entire market to lower its quality and prices in order to compete.
"As the low-end players become cheaper and get commoditized, the high-end players have to speed up," D'Aveni said.
Zara, a popular European chain of clothing stores, rapidly creates low-quality, low-price imitations of designer brand clothing, D'Aveni said. In order to compete, designer brands like Armani must design collections every two months, rather than every season, D'Aveni said.
To combat deterioration, companies should undermine, escape or take advantage of the market power of the low-cost discounter, tactics that Armani has adopted, D'Aveni said.
"Armani now has Armani hotels and the Armani lifestyle, they design the interiors of sports cars and helicopters and spread out into a lot of new products that Zara can't imitate," D'Aveni said.
Escalation, most common in the consumer electronics industry, is the process by which manufacturers are pressured to produce higher quality products and sell them for less, according to D'Aveni.
D'Aveni's book encourages business executives whose industries are facing escalation to either reverse or slow escalation's momentum or use the momentum to surpass all competition, he said.
Apple Inc. is less affected by escalation than its competitors because it continually adapts its products to the market, according to D'Aveni.
"Apple sets the pace that everybody else has to catch up to," he said. "As everybody starts to have products that look like iPods, they essentially convert the iPod to the iPhone, a next generation product."
