The Commodity Continuum

By Jeremi Bauer DBA (c), MBA

Many business leaders look at their business and say to themselves, “We’re not in the commodity business.”  No matter how it is said, the real question is how does one determine if their product is a commodity or not?  I got the idea of the commodity continuum from the wise words of legendary CEO, Jack Welch.  He did not describe what the continuum was, he merely hinted at it as he was describing how to place people within an organization.  His suggestions were about getting strategy right, and to do so depended upon matching people with jobs (a condition I am a big fan of, more about this in a latter post).  He continued by saying that this matching of people with jobs largely depended upon where the business was on the “commodity continuum”.

So, what is a commodity?  A commodity is simply a good for which there is demand, but which is supplied without qualitative  differentiation across a market. A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it.  For example, if someone lends another person a $10 bill, it does not matter if they are given back the same $10 bill or a different one, since currency is fungible.  Ok, now that we have that out of the way, what is on the opposite end of the spectrum?  Well, besides a completely new product that has never before been seen or used (i.e. the first light bulb) the continuum moves across various levels of differentiation into total differentiation.  (See the figure below)

Somewhere on this continuum is where your business will fall.  Once you have determined where it is, the next step is to determine which direction you want to go.  Most will choose the direction towards ‘Total Differentiation’ others will choose ‘Commodity’ in either case you will have some changes to make in your organization to remain competitive.  Lets look in brief at these two directions below, assuming your business lies smack dab in the middle.

Move Towards Commodity

Things you will have to consider:

1. The further down this path the more the sale becomes about price
2. The further down this path the less you have do differentiate on
3. The further down this path the more your organization will change
4. The further down this path the more you will have to sell to maintain your current financials

Let’s talk about point 3 since the others are pretty much no brainers.  How will your organization have to change?  What type of change are we looking at?  How much will it cost to change in this manner?  Who will be affected by such a change?  These are all questions a business leader must ask themselves and their advisors or executive staff before deciding to move in this direction.  The answers will provide the needed guidance to ensure successful execution.  Once the questions have been answered, and the decision has been made to proceed 3 things must take pace immediately.

1. Execute the plan
2. Communicate to everyone involved in the organization what you’re doing and why you’re doing it
3. Execute the plan (don’t look back)

Move Towards Total Differentiation

This is a longer and more arduous path because many leaders believe they have achieved ‘Total Differentiation’ only to lose business to a competitor because they were cheaper.  That’s right, I said it, they were cheaper, period!  This is how you know you’re still in the commodity side of the equation.  If a customer, client, patron, whatever, cannot tell how you differ from the guy down the block, then they will make their decision the only way they can tell the difference, PRICE.  Unless you’re moving in the commodity direction on purpose; PRICE is a terrible place to compete.  I can guarantee you that someone else out there is willing to go out of business faster than you because they believe they’ll make it up with volume.  What a load of malarkey!  If you sell at 10% below your cost it doesn’t matter how much you sell it’s still 10% below your cost! Anyway, how then do you move towards ‘Total Differentiation’? Here are 5 steps to get you going:

1. Find something that separates you from your competitor. (Delivery schedule, minimum order quantity, online account management, dedicated sales person, Ivey League engineers/lawyers/doctors, tablet or smart phone apps, anything you can think of EXCEPT: Quality, Service, and fair price as these are all expected)
2. Become “IT”, make what ever you chose in step one the lifeblood of your culture.
3. Speak “IT” to EVERYONE, your employees, your neighbor, the mailman, and especially your customers.
4. Execute “IT” don’t let your foot off the gas here, you need to constantly execute on your ‘IT” differentiator and make sure your employees know that they are accountable to execute on “IT” as well.
5. See Step 1. Continue the process until you’re a ‘Total Differentiated’ organization.

Here is a little formula I picked up from John Jantsch, author or Duct Tape Marketing and it’s a simple one to drive home the idea.

We (verb) + (Target Market) + (Something that matters to the target market)

It is the last part of the formula that people forget about, just because your firm hires Ivey League engineers/lawyers/doctors, does not mean that it matters to your customers.  You have to tell them why this matters to them to help them out.  The best course of action would be to ask them what matters to them and then differentiate on that point.  I know, you’re saying, ‘but who has time to ask our customers what matters to them, we’re busy selling them…’ What, a commodity???

There will most likely need to be some changes in your organization to go all the way but this 5 step process will get you started and the formula will help you create a value proposition…oops I said VP didn’t I….more on this in a later post.  Ultimately this will get you out of the commodity business and into higher profits.

Until next time….

Jeremi Bauer