How can firms anticipate (the timing issue) the pressure for commoditization?
Commoditization occurs when industrywide sales are dependent less on unique product features and more on pricing (Carpenter, & Sanders, 2008). There are two ways a firm can anticipate the pressure for commoditization, which are taking the value-use approach, and the process-innovation approach (Carpenter, & Sanders, 2008).
The value-added approach occurs when firms bundle their products with other complimentary products (Carpenter, & Sanders, 2008). One example of bundling is video games. Video games have two parts to it, the software in the games and the console to play the games; one cannot be used without the other. Bought separately, they can be rather expensive. Derdenger and Kumar (n.d.) conducted a study on video game and consoles sales in which they found an increase in early entry and an increase of sales, in the gaming sector, when firms offered a reasonably priced bundle that included the console and a game (p. 42). I can attest to this in that I didn’t buy a Sony PlayStation II until I found a bundle with a game that I liked. When the console first came out, I found it rather expensive since I had to buy the console and a game separately. I did not think it was worth the price since I knew that I would not be spending a lot of time on it in the near future. I found a bundle with a game I liked and the price was more reasonable since it would have costed a lot more money to buy the two separately.
The process-innovation approach occurs when firms identify and implement process or service improvements in their internal processes in order to reduce their cost of goods sold (Carpenter, & Sanders, 2008). Similar to previous topics in this course, the lean concepts and applications come to mind. In the lean philosophies, we are streamlining the processes by identifying value-added steps and reducing the wastes within the processes. The cost savings are not always passed on to the consumer, but they provide cost savings that may affect our profitability. On the other hand, firms may pass the savings onto their customers and create a competitive advantage by offering a lower priced product in the marketplace.
How can firms respond to the pressures for commoditization?
Firms can respond to the pressures for commoditization with the market focus approach, and the service innovation approach (Carpenter, & Sanders, 2008).
The market focus approach calls for a firm to narrow its customer base and implement tactics such as maintaining or increasing service levels, initially reducing the number of customers served, and increasing price or avoiding further reductions (Carpenter, & Sanders, 2008). The example that the text provides is when big retailers begin to reduce the number of stores they have opened during a restructuring phase. I have experienced consolidation firsthand. At the current company I work for, we recently shut down a facility and consolidated the workload into other facilities. The obvious purpose was a cost reduction, but in this case, we wanted to consolidate some of our resources and capabilities.
The service innovation approach requires that firms compete in pricing by eliminating the services that were once bundled (Carpenter, & Sanders, 2008). The example that the text provides is an airline charging for a service, such as meals or carry-ons, that they once included. In this manner, the airline is creating an additional revenue stream by charging for something that they once “gave away”.
Carpenter, M.A., & Sanders, W.G., (2008). Strategic Management: A Dynamic Perspective –
Integrated Stratsim Simulation Experience. Upper Saddle River, NJ: Pearson Prentice Hall.
Derdenger, T., & Kumar, V., (n.d.). The dynamic effects of bundling as a product strategy.
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