Commoditization And De-commoditization In Markets: An Overview

1.Define a commodity?

2.List the PC ecosystems players in order of most to least “commoditized.” For each, give a brief explanation of how you judged the unit cost of each so that you could decide who retained a lot vs. little profits. You are welcome to do online research…

3.Use the chapters on industry analysis and market structure in Strategy Essentials and our in class discussion on market structure (see the matrix in the beer deck). Also consider the kind of good being considered (is it a search, experience or credence good?) and your own judgment/ideas. Make a list of market, product or context factors that increase the likelihood of a product (or service) being commoditized (meaning, that customers use price to choose a firm to buy from). Please aim for a list of 4-6 conditions:

4.Assume that some customer segments of a product or service can be “un-commoditized”. For example “cans” were thought to be a commodity in the 1950’s, but but by 1980, not all can customers (i.e., Coke is a customer) believed that all can sellers were equal. To uncommodize a segment, a firm has to achieve a DEFENSIBLY higher WTP-C wedge for that segment.
 

Definition of Commodities

Commodity can be defined as a service or an economic good which has total or partial compatibility, which implies that the instances of market treats is equivalent or nearly equivalent with no regard put to the production. The price related to a commodity is mainly defined as the function of the market where the commodity belongs. The physical commodities which are present in the market have actively traded derivative and spot markets (Adams and Glück 2015). The major commodities include, basic resources, raw materials, agricultural products including, sugar, iron ore or rice. Commodity can be used as a term related to specific economic services or goods that can have partial or full compatibility. The items which belong to the category of non-commodity have many aspects related to the differentiation of the products, like, the user interface, the brand and perceived quality (Algieri and Leccadito 2017).

Commodities can be divided into two different types which include, hard commodities and soft commodities. Soft commodities include those goods which are grown, like, rice or wheat. Hard commodities include goods which are mined, like, gold, oil and helium. Commodities related to energy include, gas, electricity, oil and coal. The major characteristic of differentiating electricity is that it cannot be stored in an economical manner and it needs to consumed immediately after its production (Andreasson et al. 2016).

Commoditization can be defined as the process where the services or goods in the market loses its differentiation across the supply base, by the process of diffusion of intellectual capital which is necessary to produce or acquire it efficiently. The decrease in the margins of the organization in the market is related to the process of commoditization of the products (Brooks, Prokopczuk and Wu 2015).

The commoditization of the products of the organization can be arranged in the following manner,

• The highest commoditized organization in the market of PC ecosystems is Dell, as it is evident from the chart that Dell occupies the least part of the market of PCs.
• The second most commoditized organization in the market is Microsoft as it occupies only 11% of the market as per the unit cost.
• The least commoditized organization in the market is Intel as it occupies a large part of the market. The organization manufactures many other hardware related devices including, microprocessors, CD drives, battery, display module (Cheng and Xiong 2014).

Huge part of the PC market is occupied by Intel and this makes the organization the least commoditized among the companies. Intel has been able to retain its profits in the market and made its products differentiable from the other products in the market.

The PC industry can be analysed based on the various determinants including the Porter’s Five Forces Framework. The five different factors which are used for the analysis of the market are, power of the suppliers, threats related to the substitutes, power of the buyers, barriers related to entry and rivalry in the market (Chkili, Hammoudeh and Nguyen 2014).

Types of Commodities

Industry can be defined as the area where the close competitors in a market or a group of firms compete with each other so that the suppliers and the customers can consider the organizations to be close alternatives for each other.

Market can be defined based on the products that are being sold and the geographical area as well. The organizations are considered to be competitors if they manufacture products which are interchangeable. The similarity of the services or products offered by the organizations is a common manner of defining a market (Ewald, Pantelous and Sermpinis 2016). 

The kind of goods that are being considered for discussion are products related to PC systems. The PC systems fall in the category of experience goods. These type of goods can be defined as those services or products the value of which can be determined only after using or experiencing the products. The purchase of experience goods is based on the recommendation of the services or products in the market or their reputation. The quality or experience of the previous customers influence the sales of the products in the future as well (Hain, Hess and Uhrig-Homburg 2018).

Commoditization mainly occurs when the customers are able to buy the same products from different large or small business firms. The price of the products or services is the major factor which is related to the differentiation in the market and the quality of the goods does not act as a factor in this case. The organizations in this case cannot raise the prices of the goods as they need to compete with the other players in the market. The commoditization process takes place in many industry sectors. The industries where commoditization occurs frequently are, technology, services, industrial, health care (Henderson, Pearson and Wang 2014).

The major factors that affect the likelihood of the products based on the decision of the consumers are,

• The brand name related to the particular product is an important deciding factor for the consumers and the purchase decision that is taken by them. The way by which the consumers relate to the name of the brand affects the likelihood and commoditization of the products. The brand name therefore is a critical factor which affect the credibility of the goods in the market (Prokopczuk, Symeonidis and Simen 2017).
• The placement of the products in the suitable retail environment is also important to decide its reliability in the market. The commoditization of the goods is also highly affected by the placement of the goods in the market. The placement related function of the goods is quite different in case of an e-commerce business. The likelihood of the goods depends on the placement of the services or the products in the most viewed areas of the websites (Roncoroni, Fusai and Cummins 2015).
• Packaging is another important factor that affects the commoditization of the goods produced by an organization. The attractiveness of the goods is increased with the help of the packaging. The packaging also helps in differentiating the goods of a particular organization from those of the other organizations. The purchase related decisions of the customers are affected by the packaging of the products. The choice of the products by the customers is therefore affected by the way the products are packed (Sockin and Xiong 2015).
• The reputation of the organization in the market is an important factor that affects the commoditization of the products and the purchase decision of the customers. The positive brand reputation helps in increasing the customer base of the organizations. The purchasing style of the customers is frequently affected by the reputation of the brand in the market.
• Pricing is a major factor that affects the commoditization of the products or goods manufactured by the company. The purchase decision of the consumers largely depends upon the prices of the goods that are set by the organizations (Adams and Glück 2015). The prices of goods act as a major factor of differentiation between the organizations. The commoditization of services or goods is also hugely affected by the pricing policies of the companies.

The industry that is taken into consideration in this case is the technology industry which faces the issue related to commoditization quite frequently. The five factors that have been discussed above affect the commoditization of products in a huge way. The goods manufactured by an organization are commoditized with the help of the above mentioned factors (Algieri and Leccadito 2017).

De-commoditization is the process related to the presentation of fresh products or commodities with do not have any measurable differences between one another. However, the products are chosen in such a way so that they have a special link between them and are the linked in a strong manner to the issues with the top-priority which include subsistence and sustainability. The de-commoditization of items related to the food market holds a lot of importance in the markets of the developing countries (Brooks, Prokopczuk and Wu 2015). On the other hand, this process is not promoted in the developed markets. De-commoditization is related to safety, health, product valorisation, sustainable markets and sustainable systems of production. The modern environment in which the products are marketed offers many perspectives for de-commoditization of products or goods (Cheng and Xiong 2014).

Commoditization

The firm of a particular segment needs to have higher WTP-C wedge so that the segment can be de-commoditized. WTP is the short form for ‘Willingness to Pay” which is related to the purchase related decision taken by the customers of the particular segment. For example, if a person likes cookies. The box of cookies may be priced (P) at 2.50 dollars and the particular customer loves cookies. The customer is then willing to pay even 2.51 dollars for the same box. However, the major point of discussion will be that whether the customer will pay 2.52 dollars or 2.53 dollars for the product (Ewald, Pantelous and Sermpinis 2016). The major factors related to economics that are to be considered in this case are,

1. Willingness to Pay (WTP)
2. Price (charged by the firm) (P)
3. Cost (incurred to produce) (C)

WTP – P = Happiness – which depicts that the difference between the WTP and the P is amount of happiness which is related to the consumer surplus.

P – C = Gross Profit. The difference related to the price and the cost is the gross profit of the firm.

WTP – C = Size of the Wedge – This implies that the more the size of the wedge the happier is the firm and the de-commoditization of the goods are more likely to happen 

References

Adams, Z. and Glück, T., 2015. Financialization in commodity markets: A passing trend or the new normal?. Journal of Banking & Finance, 60, pp.93-111.

Algieri, B. and Leccadito, A., 2017. Wave after Wave: Contagion Risk from Commodity Markets.

Andreasson, P., Bekiros, S., Nguyen, D.K. and Uddin, G.S., 2016. Impact of speculation and economic uncertainty on commodity markets. International review of financial analysis, 43, pp.115-127.

Brooks, C., Prokopczuk, M. and Wu, Y., 2015. Booms and busts in commodity markets: bubbles or fundamentals?. Journal of Futures Markets, 35(10), pp.916-938.

Cheng, I.H. and Xiong, W., 2014. Financialization of commodity markets. Annu. Rev. Financ. Econ., 6(1), pp.419-441.

Chkili, W., Hammoudeh, S. and Nguyen, D.K., 2014. Volatility forecasting and risk management for commodity markets in the presence of asymmetry and long memory. Energy Economics, 41, pp.1-18.

Ewald, C.O., Pantelous, A.A. and Sermpinis, G., 2016. Special Issue of Quantitative Finance on ‘Commodity Markets’.

Hain, M., Hess, J. and Uhrig-Homburg, M., 2018. Relative value arbitrage in European commodity markets. Energy Economics, 69, pp.140-154.

Henderson, B.J., Pearson, N.D. and Wang, L., 2014. New evidence on the financialization of commodity markets. The Review of Financial Studies, 28(5), pp.1285-1311.

Prokopczuk, M., Symeonidis, L. and Simen, C.W., 2017. Variance risk in commodity markets. Journal of Banking & Finance, 81, pp.136-149.

Roncoroni, A., Fusai, G. and Cummins, M., 2015. Handbook of multi-commodity markets and products: structuring, trading and risk management. John Wiley & Sons.

Sockin, M. and Xiong, W., 2015. Informational frictions and commodity markets. The Journal of Finance, 70(5), pp.2063-2098