Colin Barry

Carl Zeiss (BSSE, Monday, Week 6)


How steps in the value chain get modular/commoditized:
Performance (in terms of functionality and reliability) overshoots customer demand in lower tiers of the market, and the basis of competition in those tiers changes to price. Competition based on price pushes towards modular architecture, which minimizes cost to produce at the expense of performance. Product's components become the differentiators, product's manufacturers become component assemblers. When the relevant dimensions of performance are not determined by manufacturers, profits sink to nothing.

Law of conservation of attractive profits: When modularity and commoditization cause attractive profits to disappear at one stage in the value chain, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.
Example: In personal computer business, the actual assembly of a computer gets commoditized.
Profits shift upstream to component manufacturers. Some component manufacturers capture profits (Intel). Some get commoditized themselves (RAM producers) and profits shift further upstream to makers of component fabrication equipment (Applied Materials).
Some profits also shift downstream to firms that integrate across the not-good-enough interface with the customer (Dell's retailing/logistics).

When you see commoditization coming, think about what piece of value chain you'd like to own.
Good places to look: customer interface (Dell), components (hard-drive head manufacturers), production machinery (Applied Materials), "recipe"/process for production (Intel)