Dodging the Commoditization Bullet
Commoditization doesn’t just happen to commodities. Commoditization is a serious and ubiquitous threat. But, as the experience of Tupperware proves, the commoditization bullet can be successfully and repeatedly dodged.
May 4 2010 by Richard Dâ€™aveni And Rick Goings
The grim reality is that everything becomes a commodity, eventually. A commoditization bullet with your name on it is being loaded at this moment. And its arrival is approaching ever faster as the pace of commoditization accelerates. Companies throughout the world are becoming better and better at imitation. At the same time, innovation remains as difficult and demanding as ever.
Commoditization is the process of losing your uniqueness in the eyes of customers. When it occurs you have to constantly improve quality or other product benefits while decreasing prices. In other cases you have to lower quality to keep pace with falling prices. Commoditization does not respect geography or history. It is the natural outcome of competition and changing customer priorities.
The impact of the commoditization bullet can be seen in industries as diverse as fast moving consumer packaged goods and electronic products to artificial sweeteners and shipbuilding. Think of retailers such as Wal-Mart and Tesco, which have introduced private-label products into their supermarkets, squeezing the margins of big brand products, and forcing companies, even giants like Unilever and Procter and Gamble, to rethink their strategies. Think of the impact that Dell once had on prices in the personal computer market. And now, of course, Dell itself faces further commoditization as low-cost producers from outside its industry and outside the U.S. gain share in its markets.
Commoditization is also at work in the increasing competition between Microsoft and Google. Microsoft has introduced Bing, a new search engine, to invade Google’s core territory. Meanwhile, Google has introduced Chrome, which does the same to Microsoft’s core in operating systems. Each is worried about the other giving away its basic product. If Microsoft creates a great free search engine where is Google’s competitive advantage? Similarly, if Chrome challenges Microsoft, where is Microsoft’s advantage? This is what commoditization is all about.
If you think back to what Microsoft did with Netscape, you will remember that Microsoft gave away Internet Explorer with its operating system and captured the market. In its current battle with Google, Microsoft is in the more entrenched position thanks to so many people using its software. Substantial switching costs suggest it will probably win the game with Google as it did with Netscape.
Tupperware Under Fire
So, what can and should companies do when they are faced by commoditization? This is something that Tupperware, headquartered in Orlando, Florida, has had to think long and hard about for years. Its products - airtight plastic storage containers for food - are design classics, now sold in nearly 100 countries by an independent direct sales force numbering more than two million people. But, its products are easily imitated, modified with new bells and whistles or colors and shapes. They can also be produced with inferior plastics to cut price and durability.
Over its history, since Tupperware was developed in 1946 by Earl Silas Tupper, the company has successfully faced commoditization in three of its most powerful and potentially lethal forms. The bullets have come thick and fast, but it has proved adept at either dodging them or out-running them.
First, Tupperware has faced - and continues to face - escalation. Escalation is when price is constantly driven down even as product benefits continue to rise. It is the equivalent of a commercial arms race. The first to blink loses the market, forcing firms to do what they hate most: squeeze margins.
In Tupperware’s markets escalation is endemic. Its strategy is to avoid lower prices faster than its competitors. It prefers to be a price leader. Tupperware uses its direct selling channel to demonstrate its products’ benefits so it can raise prices through educating its customers about its higher quality. This is a benefit of owning your own channel, rather than selling through retailers who are pushing for lower prices, even as one improves.
Escalation can currently be seen at work among TV manufacturers. At the start of the decade, the industry was revitalized by a new generation of high-tech screens. Some retailers, such as Circuit City, envisaged a comfortable future of high margins selling premium-priced LCD televisions. But then the price plummeted. A top of the range LCD TV came down in price from $5,000 to $1,000. As a result, consumer electronic specialty retailers are now losing their margins and manufacturers are continually reducing their prices. It is similar to what happened when the iPod was introduced - Apple led the pack by harnessing the escalation forcing others to desperately catch up.
At the moment, Korean TV manufacturers, such as Samsung, are ahead of the chasing pack and making life difficult for the competition. What the manufacturers desperately need is the new leapfrog technology which gets them away from LCD screens. The integration of the TV and the Internet will break this commoditization cycle and restart a new one based on the next technology.
Second, Tupperware continuously faces deterioration. This type of commoditization occurs when a discounter reduces quality and prices so much that rivals are left in the dust without hope of catching up. Typically, these are very low cost – low benefit products or services that attract the mass market, such as Wal-Mart’s “every day low prices” approach to merchandising.
In the 1970s and 1980s, for example, Rubbermaid, led by Stan Gault, started to attack Tupperware. Rubbermaid added a new product every day to its line; linked up with Wal-Mart to build its sales volumes; and produced Tupperware imitations using less expensive, lower quality resins with lower prices and no lifetime product guarantees.
Tupperware was hurt badly by the Rubbermaid onslaught. But it survived thanks to a strategy of sidestepping the low-end discounters through moving on to new more highly engineered plastics, new product categories, and even stainless steel kitchen products. Additionally, Tupperware leveraged its direct selling skills in the highly lucrative Latin America beauty market by acquiring Sara Lee’s beauty brands and sales force.
In short, the Tupperware strategy was to go where the competition couldn’t go with its cheap plastics. Another escape route was geographical. Faced with the domestic market power of the Wal-Mart-Rubbermaid alliance, Tupperware moved overseas to Europe, Latin America and Asia. This provided new revenues and importantly bought time for Tupperware to figure out how to wage war in the commoditized domestic market.
Finally, Tupperware has faced and continues to face proliferation – that is, a multitude of products and rivals that surround a firm’s products with similar offering, creating a problem because you can’t fight everyone, everywhere, all the time.
As Tupperware has expanded its categories beyond its traditional milky-white plastic food storage products and moved into global markets, a host of competitors have emerged. Traditional competitors to the company include Rubbermaid (now owned by Newell) and Sterilite. In addition, there are international players such as Betterware (UK), and Chinese imitators. There is Avon and Mary Kay in the beauty aids market; Williams-Sonoma in the upscale kitchen market; and a regular stream of new entrants - such as SC Johnson’s Gladware which entered the market in 2005 with ads proclaiming it was “Just like Tupperware, but for less”. Tupperware was surrounded on all sides.
Product proliferation is common in this industry given how fast imitation and innovation occur. In one case, a competitor hired Tupperware’s engineers and built molds using Tupperware’s drawings. In another case, a large competitor’s Chinese division knocked off Tupperware’s “flat-out” products (bowls and containers that can be flattened to less than one inch thickness and then telescoped out for use), which took four years of development.
Faced by proliferation, Tupperware selects its battles carefully, typically creating its own wolf pack of products to surround and overwhelm competitors in the categories it wants to compete in. To do this Tupperware uses outsourced manufacturing so it can be flexible and tailor its product line to different countries’ needs and desires. It also uses design, fashion and functionality to proliferate its own offerings in the categories in which it wants to be the leader.
So what are the lessons from Tupperware’s long-standing - and so far successful - battle with commoditization? First we have learned that you can beat escalation by reversing its momentum as Tupperware does using its sales force to increase perceived quality and price with some products. Or you can harness the escalation, outpace rivals, and when and if they catch up, leapfrogging to the next generation of products as the television industry is doing. Second, deterioration can be beaten by going where the discounter can’t go. Firms sidestep a discounter by moving on, moving upscale or moving away from the discounter. Finally, proliferation can be beaten by selecting your battles wisely and then eliminating selected target with the force of your own proliferation.
Creating a Commodity Defying Organization
In brief, commodity defying firms create temporary advantages to grab fleeting opportunities, and do it quickly and frequently. How can a company develop the reflexes to dodge the commoditization bullets heading its way?
The Tupperware experience indicates that defying commoditization involves seven elements that recognize that commoditization is never completely beaten by creating a high energy organization:
1. Building and sustaining a unique relationship with customers: The Tupperware sales force uses parties to sell products and distributes brochures. This direct sales channel is an important weapon in the war against commoditization. While competitors can only put products on shelves where they all look alike on the surface, and where consumers are often unable to understand how to use them, the Tupperware sales force can demonstrate the differences between products and how best to use them to increase the refrigerator life of food or to improve the cooking experience. As the Tupperware sales force likes to say: “Put your garbage in Rubbermaid, and your food in Tupperware”, making fun of Rubbermaid’s large presence in trash cans and barrels.
Tupperware has also focused on giving its sales channel a contemporary feel. Tupperware once offered only one type of party - the “June Cleaver” party from the 1950s - now the sales force is trained in more than 50 party varieties. Each is pitched as a “girls night out”. The options include the “Beauty Spa Escape” where lights are dimmed, new age relaxing music plays in the background, and party-goers receive cold compresses for their eyes, warm towel on their necks, and personal help with skin problems); the “Tex-Mex” party where there is a cookery demonstration using Tupperware products to prove that anyone can make Tex-Mex food quickly and inexpensively; and “Hot Soup” parties for the cold, rainy and dark winter months in Belgium and the Netherlands. More types of parties are invented by Tupperware all the time to keep the sales force energized.
In France, where Tupperware has operated for 49 years, its products were largely sold in small villages and rural areas where women liked to give Tupperware parties with close friends and neighbors to create a social life. More socially active urban dwellers in cities such as Paris, Lyon, Bordeaux, and Nice tended not to be Tupperware consumers. These busy professionals often know less about cooking and are more interested in assembling a surefire meal than cooking one. With no real competition, Tupperware tailored parties to appeal to women in French cities. These include a “Decadent and Delicious Desserts Party” where the hostess demonstrates how to make great French desserts quickly using Tupperware products. Cookbooks are also on sale and, thanks to the success of these parties, Tupperware is now the largest seller of cookbooks in France. Meanwhile, Tupperware’s competitors have made few inroads into the French market. Sterilite, for example, sells its products through Wal-Mart which has limited French presence in the face of competition from the French retailer Carrefour.
While Tupperware’s sales force model is universal, it is adapted for local markets. Fuller Cosmetics, the number two cosmetics company in Mexico, is owned by Tupperware and is being spread through Latin America. In many places in the emerging world, the Tupperware sales force is a substitute for retailers where traditional retailers are handicapped by poor infrastructure, high overheads, and dispersed populations. In response, Tupperware has created a brochure distribution channel that is distributed to people in their villages by the sales force. This provides the ability to tailor to local needs and provides a broader product line than can be sold through traditional Tupperware parties.
2. Moving beyond the product to become a trusted brand: In some locations, emerging markets for instance, the channel is more important for Tupperware; in others the brand is more important - including the US and Europe.
In the US, keeping the brand contemporary is essential to maintaining a relationship of trust with consumers. Tupperware’s roots lie in the stereotypically innocent and naÃ¯ve mother in the 1950s television show, Leave it to Beaver. The modern reality is less sugary. Ice-T recently hosted a Tupperware party for gangster rappers in at a New York night club. The rapper invited friends from the music industry and from the TV show he stars in, Law and Order. His appearance on the Conan O’Brien show to talk about a rapper selling Tupperware jolted the audience with laughter at Tupperware’s new cool and incongruent image, creating a lot of excitement and fun for customers and the sales force.
3. Having a clear mission that is meaningful to customers: Tupperware is shaped by its mission to be the premier global direct seller of premium, innovative products; and to enlighten, educate and empower women worldwide. The sales force is energized by continuously giving them new products to sell or new ways to sell existing lines. Tupperware has even used live HSN and QVC links to remote Tupperware parties to help sales.
As part of the second element of the company’s mission, Tupperware hired the actress Brooke Shields to be its spokesperson for its “Chain of Confidence” initiative, dedicated to helping women and girls gain confidence and success in their lives. Ms Shields spoke about the initiative on a number of shows, including Entertainment Tonight, the most watched entertainment news show in America, and The View, a popular all female panel show that speaks often about women’s issues, with a mainly female audience, on day time network TV.
4. Energizing the people on the front line: Tupperware’s people are its biggest advantage, but they have to be handled with a great deal of care to create a high energy organization. Tupperware seeks to match sales success with motivation, recognition and rewards. Its new compensation system is designed to deliver good commissions (30 percent of sales) to party sales consultants, but is now also focused on signing up other parties from attendees, and to recruit new sales people. In addition, Tupperware runs “Women Recognition Events” in various luxury locations. The goal is to reward and honor their successful people (mostly women from modest backgrounds, especially overseas) by showing them things they never dreamed they could have. There is also an emphasis on personal training and coaching for the sales force; listening to them for advice on product innovations and people management; providing them with earnings and growth opportunities; and never undercutting them.
Trust between the sales force and Tupperware Brands Corporation is a critical ingredient to creating high energy. At one time, Tupperware allowed the sales force to utilize kiosks in Target stores where they could both sell and sign up people for parties. But the presence in Target caused customers to assume Tupperware no longer did parties. This increased the cancellation rate for the parties, as people started to think they could go to their local Target. The kiosks were closed as soon as this was discovered. In addition, online sales via Tupperware.com pay a commission to the local Tupperware representative.
5. Building a warrior culture: Faced with a profusion of competitors, Tupperware picks its battles carefully so that it doesn’t become overstretched, and selects markets with less intense competition. But, when it competes it does so ferociously - with a warrior culture – often creating its own wolf pack of products to surround and overwhelm proliferators in chosen categories. The Tupperware culture emphasizes taking responsibility, even for failures, and then moving forward. The warrior mentality comes with an emphasis on responsiveness - what Tupperware labels response-ability.
This can be seen in Tupperware’s multi-faceted responses to the arrival of Sterilite in its market. Sterilite was positioned as a lower priced competitor than Rubbermaid. This caused further deterioration of the market.
Tupperware’s response first involved improving the functionality of its products. Previously known for its simple but effective milky-white food storage containers, Tupperware introduced new colors, better resins, and features, such as aeration, that all improved the functionality of its products. It conceded the low end of the market, and focused on the higher quality market where the Tupperware sales force could demonstrate the value of the products’ features. It moved into new product categories – such as cutlery, microwavable products, food preparation, kitchen tools and gadgets, professional cookware, water filtration and on-the go-products. Tupperware also moved beyond simply offering plastic products to products which combined plastic and metal - such as ice cream scoopers with a metal head and plastic handle. For this it outsourced manufacturing.
In parallel Tupperware globalized to 2.4 million sales force in nearly 100 countries - it now has a 70,000 sales force in Russia and 50,000 in India. Its global expansion has been aggressive and clever at capturing hidden opportunities - Tupperware sold well in Turkey, but the many Turks in Germany had been ignored, so Tupperware moved aggressively into the German Turk market.
6. Pushing innovation frontiers: Tupperware’s goal is to bring luxury to the masses. It seeks to constantly change the rules of the game by redefining the primary benefit of the product or radically enhancing its performance and appearance. There is instant feedback from the sales force to test new products, colors, and designs. It collaborates with suppliers (including DuPont, General Electric, and Bayer) to develop new resins and emphasizes designing to customer needs within specific niches. The reality for Tupperware is that mass markets are dead. Tupperware designers realized that a market is just a lot of niches - some big and some small. As a result, it designs to the needs of customers within specific niches, and avoids making design compromises to create a “mass-market” product.
In Europe, Tupperware developed a “smart” storage container that enabled pungent cheeses beloved by many Europeans to be kept fresh without contaminating the refrigerator’s environment. Elsewhere, Tupperware developed a microwave steamer technology which allows the use of a metal shield in the microwave to enhance the taste and texture of food; bowls which flatten for storage; non-electrical food processors that enable busy working women to prepare great meals in minutes; refrigerator storage with flexible lids for overfilling; the use of resins that withstand wide temperature extremes so casseroles can be microwaved, browned in an oven, used for serving, and then put in the freezer for storage. Along the way, Tupperware won the prestigious Red Dot Award for Best of the Best Product Design and the 2009 Design Team of the Year award.
This stream of new technology and design innovations changes the game in food storage. As the competition continues to escalate, Tupperware restarts the momentum and makes everyone else play constant catch up or be left in Tupperware’s wake.
7. Constant vigilance: Tupperware is highly responsive. For example, it takes intellectual property protection very seriously and legal action against theft of the company’s intellectual property is done very early before competing companies grow in size. As Leonardo DaVinci noted, “It is easier to resist at the beginning, than at the end”.
Such vigilance in the face of commoditization is unusual. As tempting as it is to put the blame on cheap producers in China or some other external factor, the perils of commoditization are very much related to how managers act or do not act. Commoditization is often the result of a failure to act early enough.
Many managers do not see commoditization coming; and fail to respond in a timely manner. They continue to fight against low-end competition by discounting higher-value offerings. This has the unfortunate and unintended effect of increasing the depth and severity of commoditization. In a hole, executives often grab the nearest spade and carry on digging.
The reality is that commoditization doesn’t usually simply happen to a firm. Most commoditization results from managers failing to innovate, issuing bad products, or denying trends already in motion. After this continues for a while the firms are then caught, unable to escape due to the dilemmas created by accelerating commoditization. The bullets of commoditization are fired by firms themselves as well as by their competitors. As Lord Nelson put it: “Eternal vigilance is the price of safety.”
Richard D’Aveni is the author of Beating the Commodity Trap (Harvard Business Press, 2010). D’Aveni is Professor of Strategic Management at the Tuck School of Business at Dartmouth College. His other books are Hypercompetition and Strategic Supremacy. Rick Goings has been Chairman and Chief Executive Officer of Tupperware since October 1997. He also serves as a Director of R. R. Donnelley & Sons.