Falling Into the Commodity Trap

Talking to Marco Gianotten from Giarte, we discussed the rise and fall of various IT-players. In my opinion this has a lot to do with a company's ability to keep away from what I call the commodity trap.

It was Peter Drucker who said the two functions of a business are marketing and innovation (and everything else is cost) [Peter Drucker, Management, 1947 (sic!)]. In a nutshell he advocated that if a company is not able to market a message which attracts customers it will not be successful. Secondly if there is no innovation, competition will overtake you and the market will see you as a laggard.
When asked to give an opinion on a company from the IT-world, I narrowed these principles down to some measures that indicate where one is positioned in the commodity trap matrix. This matrix plots customer value in relation to organizational excellence, and results in the quadrants Commodity, Hype, Innovation and Margin. So far the theory, just two (simplified) examples to explain: Outsourcing and Enterprise Resource Planning (ERP).

Outsourcing

If an outsourcing company can sell application management contracts based upon their "CMM-level 5" label, this is a Hype indicator. CMM stands for Capability Maturity Model, a measure for the maturity of an IT organization. Only if the company also can deliver this quality in practice it can become sustainable Margin. Why is this not enough for Innovation? Well, if multiple vendors offer equivalent things the price will be the selection factor, and this will kill all room for innovation.

ERP

An ERP vendor per definition sells a commodity item: "one solution fits all". In the early days moving to ERP had a certain Hype factor, but these days are gone. Margin is addressed by the vendors via trends like Software as a Service (SaaS) and preloaded business content. For arguments sake we could call the move to Service Oriented Architecture (SOA) as Innovation, but it will become Commodity itself soon. I don't see much real Innovation from the big ERP vendors at the moment other than the notion that they are opening up there platforms for collaboration with other technologies.
Is striving for the Innovation quadrant a holy grail? Of course not. Markets and customer demands change. Economy of scale daily duals with customer intimacy and finding and organizing talent keeps every manager awake. The position of an organization in the quadrants is always relative to time and dimension. When a product can be marketed, sold and delivered successful, 95% of the organization should concentrate on bringing in the money that allows for innovation in the first place. Sustained margin business is very lucrative, also for the longer term. But keep in mind: Being in the postal business seemed a "business-for-eternity" not that long ago.

My advice: Every senior executive should at least every once in a while mirror if his or her organization has a balanced approach to keep away from the commodity trap.

As always, comments welcomed. Contact Hans van Nes at Results2Match.com.