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Technology Commoditization

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Companies, especially technology related ones, used to spend a significant amount of time, effort, and capital to innovate and develop a Competitive Advantage on the basis of their design and engineering.

Development of high-tech production and design tools that integrate design and engineering knowledge has simplified the Innovation and Production processes.  Consequently, it is now much easier for new entrants to leverage readily and cheaply available technical knowledge and tools to accelerate the development of their own technology-intensive products.  We can call this phenomenon the Technology Commoditization.

There are 3 primary reasons for this rise in Technology Commoditization:

  1. Flagrant replication of Intellectual Property (IP).
  2. Companies being compelled by governments to share technology in order to get permissions to do business.
  3. Regular knowledge transfer due to employees relocating from multinationals to local companies.

In a few instances, these fresh, unknown companies are catching up with long-established companies and are turning out to be extremely tough competitors, all because of Technology Commoditization.

There are additional, less familiar factors at play as well, and they are accelerating commoditization and rendering product differentiation tougher to sustain.

On the bright side, Technology Commoditization has produced new worldwide competitors and has allowed for new alternatives for customers.  At the same time it has also brought forth dire and possibly existential problems for established market leaders.

Market leaders now have to contemplate strategies to counter this existential challenge.  Incumbent companies can counter these pressures through the deployment of the following 4 strategies:

  1. Instead of focusing on the commoditized portions of the Value Chain, emphasis should be on complex systems design and defendable areas.
  2. Differentiation should be based on pushing the design envelope and scaling rapidly in areas where embedded knowledge in tools is high.
  3. Noticeable IP should be the point of differentiation and should be uncompromisingly safeguarded.
  4. Process knowledge should be guarded in indiscernible areas.

Let us delve a little deeper into some of the strategies.

Instead of focusing on the commoditized portions of the Value Chain, emphasis should be on complex systems design and defendable areas.

Numerous companies have assumed this approach, particularly in areas where the product can be distinguished into commoditized and proprietary components.

An example will be that of GE which acquires several of its components e.g., parts that are easily replicated for its commercial jet engines, from lower-cost geographical locations.

GE produces what it regards as vital parts, such as ceramic matrix composite blades and combustors, themselves, and executes concluding assembly in its own factories.

Differentiation should be based on pushing the design envelope and scaling rapidly in areas where embedded knowledge in tools is high.

In case of reliance solely on high-tech tools, it seems rational to go beyond the tool capabilities in order to hold rivals at bay.

Leading chip-makers, for example, use this strategy by attempting to keep at the frontier of tool capabilities by driving improvements which utilize profound knowledge and expertise from various fields.

Noticeable IP should be the point of differentiation and should be uncompromisingly safeguarded.

Such a strategy is logical only when handling Innovations where the core invention is noticeable.

Companies can manufacture proprietary products that are difficult to make and then determinedly defend their patents.

Interested in learning more about Technology Commoditization?  You can download an editable PowerPoint on Technology Commoditization here on the Flevy documents marketplace.

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About Mark Bridges

Mark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.

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