Toward an understanding of industry commoditization: Its nature and role in evolving marketing competition

Abstract

This paper aims to improve current knowledge on the commoditization of industries, a unique phenomenon of evolving marketing competition characterized by increasing homogeneity of products, higher price sensitivity among customers, lower switching costs, and greater industry stability. As commoditization is relevant to an ever-greater number of diverse industries, this research addresses two main questions: (1) How can managers assess their industry's level of commoditization to be better informed about their firm's competitive environment? and (2) How does the level of commoditization in an industry affect the effectiveness of marketing strategies? Initially, in-depth field interviews identified the characteristics of the commoditization phenomenon. Subsequently, a survey study among 141 companies from ten industries applied a measure to assess an industry's commoditization level. The results showed significant differences between high and low commodity markets in terms of the impact of three different strategic orientations on firm performance. The application of the value disciplines framework revealed that as commoditization increases, operational excellence and product leadership lose impact, while customer intimacy becomes a more vital performance driver. The results indicate that commoditization assessment may become a vital part of a firm's strategic efforts to address evolving marketing competition.

Introduction

A major theme in the study of evolving marketing competition has been the need to understand the causes of differing competitive environments and the implications of environmental changes for firms' strategic orientations (Heil & Montgomery, 2001, Weitz, 1985). Marketing scholars have increasingly emphasized one particular phenomenon as a critical factor in evolving markets: the commoditization of industries (e.g., Olson & Sharma, 2008, Sharma & Sheth, 2004, Ulaga & Chacour, 2001). Preliminarily, we consider commoditization as occurring when competitors in comparatively stable industries offer increasingly homogenous products to price-sensitive customers who incur relatively low costs in changing suppliers.

Previous research has indicated that commoditization is not limited to a single industry but rather constitutes a general trend pertaining to an increasing number of industries (Greenstein, 2004, Olson & Sharma, 2008, Sharma & Sheth, 2004). Thus, commoditization appears to be an important phenomenon in evolving marketing competition (Heil & Helsen, 2001, Unger, 1983). For example, many high-tech industries currently face the challenge of commoditization as a steadily greater number of offerings from their component suppliers are undifferentiated, including computer memory, television parts, and disk drives (Christensen & Raynor, 2003, Greenstein, 2004, Kohli & Thakor, 1997).

At least two developments are fundamental to this market evolution (Matthyssens & Vandenbempt, 2008, Shapiro, 2002): First, customers have become more informed. They can learn a great deal about a product and its use and will be able to find substitutes if necessary. Second, increasing transparency in competitive markets allows firms to imitate and improve on a competitor's product, providing sufficient alternatives to the customer, increasing the likelihood that he or she will switch to a different supplier.

In examining the consequences of commoditization, prior research has shown that commoditized industries are more likely to experience price wars (Davenport, 2005, Guiltinan & Gundlach, 1996, Heil & Helsen, 2001). In a similar vein, researchers have argued that increased commoditization will lead to lower profitability of firms (Matthyssens & Vandenbempt, 2008, Narver & Slater, 1990, Rangan & Bowman, 1992).

The increasing practical importance of understanding commoditization, coupled with recent academic interest in the topic, suggests two avenues for improving our comprehension of the phenomenon. One requirement is a commonly accepted conceptualization and operationalization of an industry's level of commoditization. While studies have mentioned a few key characteristics related to commoditization, such as homogenous products (Pelham, 1997) and industry stability (Hambrick, 1983b), the literature offers no comprehensive construct that captures multiple dimensions of commoditization. A second need is for clear guidance on how firms can effectively leverage different marketing strategies as markets trend toward commoditization. Specifically, marketing managers may need to rebalance their companies' strategic orientations. While some researchers assert that only operational excellence may count in commoditized markets (Pelham, 1997), others claim that product- and customer-centered strategies are key to performance in these environments (Robinson et al., 2002). Generalizable empirical evidence, however, is still lacking.

The primary purpose of the current article is to address these two neglected research issues. We first explore the nature and facets of commoditization, develop new scale items, adapt existing scales to capture an industry's level of commoditization. Then, we investigate the differential impact of various strategic orientations on firm performance, comparing high and low commodity markets. In doing so, we address three essential questions, which—in a more general form—have been raised as essential to marketing strategy research (Day & Montgomery, 1999): (1) How do commoditized and non-commoditized industries function?, (2) How do firms in these industries relate to their environment?, and (3) What are the contributions of different strategic orientations to firm performance in these industries?

In the following sections, we first discuss the in-depth field interviews that we initially conducted to identify the multiple dimensions of the commoditization phenomenon. Next, we review the literature on commoditization and derive hypotheses regarding differences between high and low commoditization markets in terms of the impact of different competitive foci on firm performance. Subsequently, we present a large-scale empirical study conducted among marketing executives, which applies a multidimensional measure to assess an industry's commoditization level and enables us to explore differences between high and low commoditization markets in terms of the impact of different strategy levers on firm performance. Finally, we discuss the theoretical and managerial implications of the article and offer directions for further research.