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Strategies for Tackling the “Commoditisation Trap” (II)

Strategies for Tackling the “Commoditisation Trap” (II)

  • João Gomes • Partner @BlueBiz

This article follows on from “The Commoditisation Trap” (Part 1)¹.

I invite my reader to answer the question: what strategies can you use to combat the “Commoditisation Trap”?

Let’s look at it in turn:

  • Strategies to combat the Commoditisation Trap;
  • Risks and challenges of (De)commoditisation;
  • Positive and negative effects of (De)commoditisation;
  • Concrete actions for (De)commoditisation;
  • Public policies to support (De)commoditisation in Africa;
  • Conclusion.

A. Strategies to combat the commoditisation trap², risks and challenges

Commoditisation can be combated by… (De)commoditising services and/or products. In the table below, I summarise the characteristics, risks and challenges of (De)commoditisation.

B. Positive effects of (De)commoditisation

Effects for Companies

  1. Higher profit margin: companies that manage to (De)commoditise their products/services can generally charge higher prices, which results in higher profit margins;
  2. Sustainable Competitiveness: by differentiating themselves from the competition, companies can create a sustainable competitive advantage by becoming less susceptible to price pressures.

In the African context, (De)commoditisation can catalyse economic growth, the creation of quality jobs and the attraction of FDI

  1. Customer loyalty: (De)commoditised products/services can create a more loyal customer base, as customers see a distinct value in the company’s offering.

Effects on States

  1. Diversification of the Economy: States that promote (De)commoditisation are in a better position to diversify their economies, reducing vulnerability to economic shocks;
  2. Job creation: higher value-added sectors, often associated with (De)commoditisation, can create higher quality and better paid jobs;
  3. Attraction of Foreign Direct Investment (FDI): (De)commoditisation can attract foreign direct investment in high value-added sectors.

Effects on Individuals

  1. Access to Higher Quality Products and Services: individuals can benefit from access to higher quality products and services associated with (De)commoditisation;
  2. Better Quality of Life: the creation of higher quality jobs and economic diversification can lead to a general improvement in quality of life;
  3. Increased Career Opportunities: (De)commoditisation can open up new career opportunities in higher value-added sectors, encouraging education and skills development.

C. Cons of (De)commoditisation

But it’s not all roses on the journey to (De)commoditisation.

  1. Higher Costs: (De)commoditising often involves significant investments in Research and Development (R&D) and marketing, which can increase costs;
  2. Market Acceptance Risk: the introduction of something new and different may not be well received by the market, which can result in a worsening of the acceptance risk;
  3. Internal Resistance: the transformation towards (De)commoditisation may encounter internal resistance from employees and departments used to more traditional approaches.

D. Concrete actions for (De)commoditisation

An interesting case study on the coffee value chain in Tanzania helps us to realise a set of successful practical (De)commoditisation actions to avoid what I have called the “scissors effect”².

  1. Product differentiation

Develop unique product/service attributes that differentiate your offering from commoditised alternatives. This may involve improvements in quality, design or functionality;

  1. Brand Building

Create a strong brand identity that communicates a clear value proposition and resonates with consumers. This includes developing a compelling brand story, logo and messaging;

  1. Customer Experience

Deliver exceptional customer experiences through personalised service, convenience and responsiveness;

  1. Price Positioning

Instead of competing on price alone, consider positioning your product as a premium offering, emphasising the unique value it provides.

Not everything is easy in the (De)commoditisation process, costs, for example, are high

E. Public policies to support (De)commoditisation in Africa

Public policies to encourage (De)commoditisation, promoted by African governments, may vary according to the specific circumstances of each country, but some notable initiatives and examples include:

  1. Promoting Agricultural Value Chains: many African countries are encouraging agricultural diversification and the creation of value chains to add value to agricultural products. For example, Ghana has supported the production of high-quality cocoa and the manufacture of cocoa products, such as chocolate, for export;
  2. Development of the Technology Sector: some African countries are promoting the technology and innovation sector to create high added value products and services. For example, Kenya is known for its innovative technology ecosystem, especially in fintech;
  3. Education and Technical Training: investments in education and technical training are key to developing a skilled workforce for high value-added sectors. For example, Rwanda has made remarkable progress in this regard, with an emphasis on investment in technical education;
  4. Incentives: offer incentives to companies that invest in decommoditisation activities, such as financial incentives and/or tax exemptions for manufacturing, exporting or technology.

F. Conclusions

See Also

This article is a continuation of the text “The Commoditisation Trap (Part 1)”.

(De)commoditisation offers companies the possibility of achieving higher profit margins, competitive sustainability, market expansion and customer loyalty. These benefits result from product or service differentiation, a focus on quality and innovation, and a customer-centred approach.

However, it’s not all roses on the (De)commoditisation journey. High costs, operational complexity and the risks of non-acceptance by the market are inherent challenges in this process, requiring significant investments in R&D, marketing and customer education.

In the African context, (De)commoditisation can catalyse economic growth, economic diversification, the creation of quality jobs and the attraction of FDI, benefiting states, companies and individuals. Public policies play a crucial role in this context, promoting agricultural value chains, encouraging the technology sector, education and facilitating access to the global market.

Examples of concrete actions for (De)commoditisation, illustrated by the case study of the coffee value chain in Tanzania, are product differentiation, brand building, quality assurance, a focus on customer experience and price positioning. These actions are essential for companies seeking to differentiate themselves and succeed in the dynamic African business environment.

¹ Published in Economia & Mercado magazine, November 2013 edition.

² Definition of Commoditisation: In Part 1 of this article I provided a definition of commoditisation, highlighting that it refers to products and services i) without distinctive characteristics (generic and without differentiation); ii) often perceived as highly interchangeable (easily substitutable); iii) which leads to competition based on high volume and, above all, iv) low and highly variable (volatile) prices, v) with low margins. All in all, these effects vi) pose major long-term viability challenges for commoditised businesses. I call this integrated set of properties the “scissors effect”.

³ Reference to the book “The Blue Ocean Strategy” by MAUBORGNE, Renée, KIM, W. Chan.

⁴ UMSCHEID, Marc, “De-commoditisation of Differentiated Products: The case of the Tanzanian coffee sector”, ISBN: 978-3659651615 (2016).

⁵ FDI: Foreign Direct Investment.

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