SIMULATING THE COMMODITIZATION PROCESS
Henry Weil has seen it happen with alarming predictability: innovative businesses in newly emerging industries start out as high-profit, rapid-growth juggernauts. Then, over time, they deteriorate into practitioners of marketing trench warfare as the proliferation of competitors and endemic overcapacity turn once-unique products and services into low-margin commodities.
Mr. Weil, a senior lecturer at the Sloan School of Management, has developed a computer simulation of this process based on his study of the airline industry. That model, in fact, can be adapted to project the commoditization trajectory of virtually any industry. More importantly, it may flash warning signals that can save companies from becoming victims of these dynamics.
Mr. Weil's computer simulation has more recently been used in case studies for telecommunications, oil and chemical industries. The histories confirm two central themes. First, companies that can't differentiate themselves (or find new markets where they can) cannot break the vicious cycle of commoditization and price wars. Second, price-driven commoditization with its low margins reduces funding for investment in technology or other differentiation stratagems--the very steps that can help distinguish products and free companies from the discount-to-the-death nature of commodity businesses.
The work is funded by the Sloan School International Center for Research on the Management of Technology. (Source: The MIT Report)
A version of this article appeared in MIT Tech Talk on June 4, 1997.