Industry watchers are enamored with high-efficiency solar cells, ultra-effective water filters, novel strains of algae for biofuels, high-energy density batteries, super-bright LEDs, and extra-long wind turbine blades. Such products tout capabilities, technical advantages, and bankability, resulting in deals won on these merits.
However, many cleantech businesses are now being forced into one price war after another, causing margins to erode, valuations to drop, and in some cases, businesses to close. Will this happen to you – and if so, what can you do?
Stalked by commoditization. How to make sure it doesn’t surprise you.
A commodity is a product that is in demand, but not differentiated from similar products across the market or competitors. An offering might look different, be patented, or have a unique design or manufacturing process, but it may actually be a commodity (or be perceived as one). This is especially the case in cleantech, where the ultimate product is typically electricity, clean water, fuel, or light – a commodity.
Commoditization happens. The key is discerning early warnings. Signs you’ve got a commodity or are going to be commoditized are:
- If one of the top metrics or targets the industry uses is cost per X (watt, volume, lumen, etc.)
- If alternative products, substitutes, or competitors’ offerings produce the same benefits
- If the number of competitors is rapidly increasing
- If competitors’ offerings – even though inferior to yours – are now “good enough” for your target markets
- If competitors are quickly closing gaps in the advantages only you had previously
- If your industry is being pushed towards standardization
Although some of these signs may become evident in your industry, make sure you know where your business sits in the value chain, because not all the links of a value chain will necessarily be commoditized. For example, there are hundreds of LED component companies but only a few MOCVD equipment makers.
So you’re going to be commoditized. Here’s what you can do.
Commoditization can be a good thing for spurring faster adoption of clean technologies. But it can be a scary thing for cleantech businesses, which are responsible for generating profits. Fortunately, depending on your business goals, there are a variety of strategies to tackle commoditization while ensuring your cleantech product has impact. Here are a few:
Integrate upstream or downstream in the value chain. If your suppliers or customers make significantly higher margins than your business does, then integration could result in a lower cost structure or enable a differentiated offering.
Focus on serving the high end. High-quality, high-reliability, or high-performance markets may have fewer customers, but they also may have less competition and be much more profitable.
Add services. Bundling value-add services with your offering (such as superior support, delivery, or financing/payment terms) can sway total cost of ownership (TCO)-minded customers.
Differentiate with form factor. An offering may be a commodity, but that may not be true for that very same offering in different form factors. Unique form factors – for applications that benefit from them – can increase profits and slow down price erosion.
Become a commodity company. The main objective here is to achieve economies of scale and be the lower cost producer. Although this may not seem “sexy” for a high-tech business, just remember that some of the world’s most valuable companies are in commodities such as oil, chemicals, paper, agriculture, and minerals.
Brand your company or offerings — but don’t underestimate this. Be aware that the cost, effort, and expertise required to build – and more importantly successfully differentiate – a brand is often underestimated. Moreover, my previous experience with B2B commodity markets revealed that brand superiority is more often a tie-breaker than a price premium (as is often the case in B2C commodity markets). In other words, brand may get customers to give you the deal… but not necessarily to pay more.
Handling commoditization through strategic innovation
Innovation – of all types – can create competitive advantage, especially when faced with commoditization.
Many people think of innovation in terms of “big breakthroughs” – for example, PARC enabled semiconductor materials company Dowa Electronics to announce a new category of LED products in less than one year, which allows them to enter new markets. But subtle innovations can also be significantly valuable – for example, PARC is enabling a major solar company to increase photovoltaic cell efficiency by up to 1% (absolute) through improvement of their gridlines, without increasing costs. In price-sensitive markets, a seemingly small improvement can actually make a big difference.
So companies facing commoditization should expand their range of innovation, not just in scope but also in where they innovate: from technology and product development to business and workflow processes. Time is of the essence when facing commoditization: any and every advantage can be useful. By recognizing commoditization trends, preparing a strategy, and then expanding the range of innovation in executing towards that strategy, a company can avoid being caught off-guard and handle the challenges that lay ahead.