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Management

Thinking outside the box will help avoid the commoditisation trap

Managers must come up with unique strategies like Nestle and Disney did to ensure that their products are not branded under one category

PUBLISHED : Friday, 01 July, 2016, 3:00pm
UPDATED : Friday, 01 July, 2016, 9:58pm

Look at almost any industry and you will see companies struggling to differentiate what they have to offer in the marketplace. Managers often ask: “My product is becoming commoditised. Is there a way out?” The good news: executives who are prepared to rethink their approach can find a way out. But that, of course, does not mean it is easy.

Let’s start by looking at the most common – but ineffective – reaction. When feeling trapped by competition, companies tend to spin faster and introduce new features, which can be popular at times, but are no guarantee that customers will be willing to pay extra. Another common approach is to move away from selling products alone, packaging products with services – which usually means upselling consulting – and calling it a solution. But competitors can still copy the idea. So what can managers do?

Expansion plans already? Disney insists focus is on Shanghai as Chinese cities talk up hopes of building more theme parks

Last month saw the opening of the Shanghai Disneyland. The US$5.5 billion project is set to draw crowds from the approximately 330 million people living within a three-hour drive or train ride from Shanghai. Still, in a country where pirated DVDs and fake merchandise have proliferated from Apple watches to LVMH handbags and Nike shoes, selling genuine products has never been easy.

In 2008, Disney opened its first English-language centre in Shanghai, offering instruction to children aged two to 12. Since no child wants more school on the weekend or after the regular school day, Disney strives to make learning fun.

Upon entering the school, children are surrounded by a playful world: an oversized Mickey Mouse statue greets them at the entrance, Donald Duck cartoons play on the television in the waiting area, and the Mickey Mouse logo is even carved into the back of every classroom chair.

Classes typically run for 45 minutes. The classes for kids aged two to three are taught in both Chinese and English, with the parents in the classroom, whereas children from three to six are taught without their parents, and the teaching is focused on encouraging children to speak more in English. For kids aged six to 12, the teaching continues to work on speaking but also incorporates English reading, comprehension, and writing.

Between 2008 and 2012, 44 Disney English centres were built. Parents who would otherwise have bought pirated DVDs are happily paying more than US$1,000 a year for their children’s’ education. Little wonder, then, that Disney English remains a profitable business in China.

What Disney has demonstrated is the importance of extending out from one category to another. Executives who want to counter product commoditisation must start by rethinking what problems their organisations could solve, then re-integrate the firm’s activities in a radically new way.

Nestle appears to have followed a similar path as Mickey Mouse’s. For almost a decade, the world’s largest food company – synonymous with KitKat and Maggi noodles – has been quietly building up a nutritional science division. This is not an unrelated diversification; Nestle is targeting an emerging category between therapeutic pharmaceuticals and basic food.

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Until most recently, big food companies have been focusing on driving consumption through better taste and more value, which inevitably led to more salt, fat, and sugar. When Coca-Cola and PepsiCo pledged to reduce the calories Americans consume by 20 per cent over the next decade, critics decried the modesty of the goal. The problem remains: food provision is a basic category, where demand is cyclical and innovation easily copied.

This is why when Nestle announced its next CEO on June 27, Ulf Mark Schneider—the former chief at Fresenius, a global health care group based in Germany—was appointed. Perhaps not too surprisingly, Schneider will be the first Nestle CEO brought from outside since 1922, signifying the most fundamental shift of the corporate strategy from a commoditised sector (food) to a high growth, high margin area (health).

The best way out of the commoditization trap is, in fact, avoiding it altogether.

Howard Yu is professor of strategy and innovation at IMD Business School in Switzerland