This is the first part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”
Differentiation is not enough
Differentiation may keep a product from being a generic commodity item, but in itself it does not eliminate the intense competition and low profitability that are characteristics of commodity business.
Differentiation by itself does not create a significant enough barrier to entry. Without a significant barrier to entry, competitors can rush in and undercut the incumbent firm and outmarket it.
A very relevant example is the fate of American automakers. But the nature and the pace at which the commoditization of luxury cars happened was startling. Immediately after WW-2, Cadillacs, Mercedez Benz dominated their markets and made enormous profits.
This turned out to be an open invitation to competitors.
Europeans came in first and then Japanese rushed in- with their Lexus, Acura and Infinity. However, they didn’t immediately start undercutting Cadillacs and Mercs in prices or even competing with them. They just started offering their own varieties of cars and started stealing away market share from the incumbents.
As a result , with lower sales, their overhead cost margins soared and ultimately led to very low profit margins.
Since by DuPont formula, return on capital employed is directly dependent on profit margins, it plummeted. With the result being, there is no difference between automakers and any other commodity business.
Can we think of a similar example in India?
How about the business of broking?