How to handle Commoditization- Fight or Flight?

“Zara is possibly the most innovative and devastating retailer in the world.”

– Daniel Piette , Fashion Director, Louis Vuitton

Fashion business was initially controlled by French and Italian haute couture houses like Georgio Armani, Versace, Prada etc. Their clients were upper class segment of society; slowly they started catering to upper middle class segment. Some fashion houses also stared catering to middle class.

Zara, a Spanish company, changed all the rules. Their superior production technologies and supply-chain management captured mass market and middle class segment. Their products were significantly lower than their competitors. With over 200 designers of its own, Zara identifies the trends of haute couture and ready-to-wear. It can then move these fashions to the middle market in about four weeks, compared to the six months taken by others.

Zara has commoditized the fashion industry. It becomes very difficult for competitors to match their offerings, if they lower their prices further, they will be ruined.

Management expert Richard D’Aveni calls this commodity trap, he believes that everything becomes commodity over a period of time. Commodity trap is where competitive edge of company gets eroded, so that it can no longer command premium pricing in market. The company then responds by further reducing the price and thereby making more loss and goes down further.

'It's a tough business model based on a low price point, but a shot of vodka really increases volume.'

There are two ways in which you can fight commoditization, either fight or flee. Winning the fight depends on the amount of resources you have available to throw at the battle relative to the low-end competitor. If you are hopelessly outmatched, then the choice may be to flee, as long as a sidestepping move is feasible.

Richard suggests three strategies if entire market is going down

  1. Side step– Some companies can shift their positions to sidestep the market power of the low-end discounter, by making its power irrelevant or even by avoiding it ex. some fashion firms have conceded the low and mid ends of the market and are moving upscale or away from the parts of the market where Zara has the most power. In this way, the haute couture and ready-to-wear companies hope to perform a neat sidestep by moving into other high-end areas to retain their exclusivity.

 

  1. Destroy the trap– The second way to beat a deterioration trap is to attack it. Undermining the market power of the low-end discounter can be achieved by eroding its power from below by offering even lower costs and benefits, through a reinvented value chain that generates profits at the same time. Alternatively, this can be achieved by redefining the way customers see price. Ex. European mass retailer H&M is trying to neutralize Zara’s model of designer-less fast fashion imitations by offering equally low-priced products while using stars such as Madonna and guest designers such as Karl Lagerfeld, Stella McCartney, and Roberto Cavalli to raise H&M’s image.

 

  1. Turn trap into your advantage– In this strategy, companies work to confine the power of the discounter to a limited part of the market. Ex. H&M is also beginning to confine Zara to its customer niche by introducing a series of specialized stores targeting different segments, such as children’s, accessories, and lingerie, to surround Zara.

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Commoditization is not confined just to retail industry; it is applicable to any industry including HR consultancy business. How different is Mercer from Hewitt, Towers or Hays? What happens if one of them suddenly decides to drop price or some new player emerges which provides such services at very low prices?

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