Hello Innovator!

Inspired by a recent conversation with an early-stage founder, this week’s edition focuses on the balance between disruption and commoditization.

Here’s what you’ll find:

• This Week’s Article: Does Disruption = Commoditization?

• Share This: The Commoditization/Decommoditization Loop

• Case Study: Tata Steel’s Pivot from Commoditization to Value-Added Solutions

Does Disruption = Commoditization?

I recently had a conversation with an early-stage founder who brought up a thoughtful and poignant question about disruption strategy. He asked…

This is a valid concern, especially for a founder aiming to leverage a disruptive strategy to bring a new product to market. It represents a foresight that is too often ignored as entrepreneurs focus on early traction in a new venture.

The Differences Between Disruption and Commoditization

While both disruption and commoditization involve shifts in pricing and market structures, they arise from different mechanisms and lead to different outcomes.

Disruption: Creating New Market Demand

Disruptive innovation introduces simpler, more convenient, and often cheaper products or services that appeal to new or previously overlooked customer segments.

• Examples of Disruption: Products that enter the market by addressing non-consumption (i.e., customers who previously did not have access to or could not afford the incumbent’s offering).

• Business Model Shift: Disruptive businesses succeed by creating a new value network, rather than simply competing in an existing one.

• Market Response: Incumbents typically ignore the disruption initially because the new offering does not appeal to their most profitable customers. By the time they take notice, the disruptor has improved its offering enough to challenge the incumbent directly.

Commoditization: When Products are No Longer Unique

Commoditization occurs when products or services become undifferentiated and compete primarily on price.

• Examples of Commoditization: When high-end performance exceeds what customers actually need, marginal improvements become less valuable, and customers shift their focus to price.

• Business Model Shift: As differentiation erodes, profit margins shrink, and companies must cut costs, increase efficiency, or find alternative revenue streams to survive.

• Market Response: Incumbents struggle to maintain profitability as price competition intensifies. The result is often industry consolidation, where only the lowest-cost producers survive. 

When Does Disruption Lead to Commoditization?

Disruption does not necessarily lead to commoditization. Instead, it depends on the trajectory of the innovation and how companies respond.

If the disruptor moves upmarket, offering improved quality and services while maintaining its cost advantages, it can avoid pure commoditization.

If incumbents fail to respond effectively, they may retreat to high-margin niches, leaving the disruptor an opening to capture the broader market and drive down industry-wide prices.

If differentiation is maintained, companies can prevent their offerings from becoming commoditized by focusing on brand, customer experience, or unique capabilities.

The Reciprocal Forces of Commoditization and De-Commoditization

When a product or service becomes commoditized, differentiation erodes, and companies are forced into price wars. But this process doesn’t happen in isolation. Commoditization destroys profit in one area, but it creates new opportunities for differentiation elsewhere.

In a commoditized market, customers no longer value incremental improvement. This makes differentiation difficult and opens the door to modularization in production. For example, outsourcing the undifferentiated components to a cheaper manufacturer.

Welcome to Stage 1 of the death spiral (more on this in future editions).

In the process, profit margins begin to shrink and incumbents turn their focus to brand as a key differentiator. Commoditization has set in.

De-Commoditization Creates Opportunity

The hidden secret behind commoditization lies in your ability to understand the value network and to discover new opportunities to stay ahead. When one part of the value chain becomes a commodity, another part becomes a new source of differentiation and profit.

Companies that manage to refocus their attention to areas where performance is "not good enough" can capture new value. This can be achieved by shifting to adjacent markets where differentiation still matters, by building proprietary technology or services around the commodity, or by moving up the value chain to provide higher-margin solutions.

Strategic Implications for Startups and Incumbents

Understanding the relationship between commoditization and de-commoditization can help companies avoid being trapped in a race to the bottom.

For Startups: Find the De-Commoditization Sweet Spot

Rather than competing solely on price, startups should maintain focus on their disruptive strategies by identifying areas of non-consumption. In doing so, founders should seek to develop a differentiated business model that captures value beyond cost-cutting by targeting customers whose needs are still underserved by commoditized products.

For Incumbent Orgs: Shift to Where Value Still Exists

Similarly, established companies facing commoditization should shift investment to new market segments or new value networks where product performance is "not good enough." And, secondarily, incumbent orgs must maintain an awareness of the market around them so they are poised to respond if (when) a disruptive competitor arises.

The Takeaway

Disruption does not always mean lower prices. Instead, it often triggers a cycle where commoditization occurs in one area, but opportunities for differentiation emerge elsewhere. The key is recognizing where in the value chain those opportunities lie and positioning your company accordingly.

Disruption and commoditization are distinct forces that shape markets differently. Disruption introduces new demand, while commoditization strips away differentiation and drives price wars. Understanding the mechanics of each can help founders and executives position their companies for long-term success.