| Issue 57 |

Brands or merchandise?

You may have already noticed that the microwave oven, the PC, and the DVD have undergone a process of commoditization. They have become significantly cheaper, the differentiation between the various brand names has blurred, and almost all these products are currently undifferentiated merchandise. How did it happen that you can now buy them at rock bottom prices at supermarkets? What caused IBM to sell the production rights of its laptops to the Chinese company Lenovo? Why is it now cheaper to buy a new DVD than to fix the old one?
 

Did lowered production costs cause this? Apparently not. The microwave, the PC and the DVD have become mass consumer goods in recent years, and while this development unfolded, their production costs have decreased to a tenth of what they used to be, perhaps even less. However, even though the production costs have gone done tremendously, the market prices of these appliances have not decreased to the same degree. In some cases, their prices have even gone up. As long as the customers believed that the leading brands have significant technological advantages, they continued to pay prices for the brand names that were much higher than their production costs.

What caused commoditization, to the demise of the demand for brand names in these domains and settling for generic and undifferentiated brands, and to the eventual disappearance of the brand names? According to the book The Innovator’s Solution, which was reviewed in a previous edition of this newsletter, the main reason for this is not production costs, but the improvement in the quality of the appliances. As long as computers, microwaves and DVDs were not good enough and did not satisfy customer expectations, the demand for the brand names continued. Meaning, as long as the quality of the appliances (including the brand names) was low, customers were prepared to pay more for the leading brands in order to get better products (yet still far from satisfactory). They continued to pay more for a faster computer, for a more powerful microwave, for a DVD with a better picture. However, when these appliances became good enough (faster, stronger, and precise to a satisfactory degree), and when the customers also internalized this – the majority turned their backs on the current brand names, and settled for cheaper generic appliances.

These types of processes, where brand names are usurped by cheaper generic products, have important strategic implications that should be considered and utilized: 

• Value migration: When brand names are merchandized, the added value in the market, as perceived by the customers, migrates to new places. For example – the added value for computers migrated from the actual PC to the operating system and processor, and later migrated to other programs and accessories (mouse, printer, webcam). The brand name manufacturers that adopt an added value strategy need to realize this and migrate at exactly the right time, together with the entire industry, in the direction in which the added value has moved.
• Preparing for rapid change: Commoditization generally occurs very rapidly (customers can be convinced within a few months that the cheaper products are already good enough, and to stop buying brand names). Therefore, the brand name manufacturers must identify new areas of value ahead of time, and invest in them when the time comes, long before the industry undergoes commoditization and the added value quickly migrates to new places. Brand name manufacturers that missed the boat may go bankrupt in the blink of an eye because they were not prepared for a price war.
• Longitudinal sprawl: Subcontractors that manufacture various parts for the brand name manufacturers in a specific industry, at competitive prices, need to exploit commoditization processes to dominate the industry, and expropriate them from the brand name manufacturers. They therefore need to manufacture complete solutions at precisely the right time (such as entire appliances and not just parts of them), and to acquire distribution rights from the brand name manufacturers (like Lenovo acquired its rights from IBM).
• Branding merchandise: In conservative, non-branded markets, the opposite opportunity exists. It is possible and profitable to brand merchandise in an industry where there was no differentiation between the various products for a long period of time. For example – it is possible to brand oranges (Jaffa), flour, or concrete.

In summary: In any given industry, when the quality of the existing solutions improves and becomes satisfactory, brand names may quickly lose their advantage and be usurped by much cheaper generic products. Instead of ignoring such changes, which constitute a strategic threat, you can prepare yourself wisely and use them to grow.
 

• For additional articles on strategy: click here
• For more information about identifying strategic growth directions: click here (in Heb.)

Ideas for innovations in masks

The following ideas were developed using various thinking tools, and do not exist at present (to the best of our knowledge):

1. A reversible mask (one side is a wolf and the other side is Little Red Riding  Hood…)
2. A lifting mask (adds dozens of centimeters to the head and shoulders, as a convenient alternative to stilts).
3. A dynamic mask with changing expressions (happy, surprised, sad, winking, etc.).
4. A mirror mask (shows the person facing it, instead of itself).
5. A mask with a pocket for a wallet (doubles as a purse or bag).
6. A shaker mask (with a large rattle on the top, which you turn with your head).
7. An inflatable mask (with inflatable air pockets for enlarged ears, lips and nose).
8. A mask for the hands (gloves shaped like a clown’s head, etc.).
9. A makeup mask (with face paint on the inside of the mask, which paints the face, like a stamp, and then taken off).
10. A transparent mask (that can be partially painted with makeup, without messing your face).

• Articles on Systematic Innovation  
• We will be glad to read your comments and suggestions

How do you define a technological product?

In the previous column, we wrote about the difference between a technology and a product.
We will now see how to easily check if you have defined a product or if you are selling a technology.
 
To start, try to fill in the blanks in the following sentences:
We sell <product> to <customers>.
The <product> enables <customers> to <what the customers do with the product>.

Examples:
 

• We sell wet wipes to parents of young children. The wet wipes enable the parents to clean their children without the need for water. 
• We sell a sophisticated proxy to cellular operators. The proxy enables the operators to offer their customers faster surfing on the current cellular network.
• We sell apples from the Tree of Knowledge to Adam and Eve. The apples will enable them to distinguish between Good and Evil.

If you cannot fill in the blanks to complete the sentence, then you are still dealing with a technology and not a product.  

And if you claim that your product is too complicated and difficult to understand, and too interesting to be described in such a short sentence, then this is excellent proof that you are in the technology stage.

You need to take what you have and think how to turn it into a product. Yes, one that you can describe using the simple sentence above.

How do you do it? First, you need to understand what you have, and answer questions such as:
 

• What does the technology make possible? 
• Who can benefit from it? For what purpose?
• How does the technology differ from what there is on the market? What does it enable that isn’t currently possible?
• The technology may not make it possible to do something totally new but does it save resources? Do things faster? Improve outcomes?

Answering these and other questions that come up during the discussion, will enable you to complete the sentence, perhaps even in several ways.

When you are equipped with a description of the product, you are ready to continue to the following questions:

• Why will customers buy the product from you? 
• How will you profit if they buy it?

Good luck! 
 

• The column was written by: Neta Weinrib, an expert on marketing technological products. Information about Neta appears here
• More information about marketing assistance for technological products appears here .