Is Your Company Headed for the Commodity Death Spiral?

Once upon a time in a company’s evolution, its founder would be laser-focused on delivering superior, differentiated value to customers. Those customers would have specific needs, and the company sets out to fulfill them better than anyone else. But as the years pass and the business grows, that intense focus, well … drifts. Leaders get caught up in other priorities — say, tweaking productivity or quality, forming a powerhouse sales force, or acquiring other businesses.

Leaders who allow this to continue are left with me-too products. Customers start noticing the company’s products are interchangeable with its competitors’. They demand lower prices, and the company must comply. It has to cut its R&D budget to keep profits up. (Ah, the perils of near-term financial thinking!) Now, the company is in the “Commodity Death Spiral” … and its leaders may well not be sure how to reverse it.

I’ve seen this happen over and over when companies fail to make market-facing innovation their top priority.

Business leaders who aren’t constantly working to create new products that deliver more customer value than competitors’ products are eventually forced to compete on price. That way lies mediocrity, irrelevance or even nonexistence. To grow and thrive long-term, businesses must direct the lion’s share of their resources to market-facing innovation.

I’ve done research that bears this out. In a survey of 654 publicly and privately held companies, I found that, on average, senior leaders allocate just 24% of their resources to market-facing innovation (product development). They spend another 16% of their resources on exploratory innovation (technology development), which serves to feed their market-facing innovation.

Here’s the kicker: More resources are devoted to these two types of innovation at companies growing faster than competition (43%) than companies growing slower (36%).

Companies that emphasize market-facing innovation tend to be headed up by “Builders.” In my parlance, a Builder is a leader who still thinks like a founder: driving profitable, sustainable growth by delivering differentiated value to customers, as they brush aside fads, short-term distractions and financial gymnastics. Other types of leaders — most notably the type I call “decorators” — focus on looking good to investors, quarter after quarter after quarter.

(Business leaders can use the quick and easy assessment available at www.areyouabusinessbuilder.com to determine what type of leadership is driving their company.)

So, why is market-facing innovation so vital to long-term success? Here are three reasons:

REASON 1: This is what exceptional companies do. For their book, The Three Rules: How Exceptional Companies Think (New York: Penguin, 2013), authors Michael E. Raynor and Mumtaz Ahmed analyzed data on more than 25,000 companies spanning 45 years. From this, they identified 344 companies with truly exceptional performance. After extensive analysis, they were able to identify a small set of rules used at these companies, but not at lower-performing ones. These exceptional companies followed three rules.

According to Raynor and Ahmed, Rule 1 is “better before cheaper.” Their research showed the exceptional companies competed more on non-price factors like product performance, while low performers competed more on price. Rule 2 is “revenue before cost” — in a nutshell, it’s better to generate more revenue through growth than to try to cut costs. Rule 3 is “there are no other rules.” This confirms my findings: Builders focus on innovating for their customers (better before cheaper) so they can grow faster (revenue before cost).

REASON 2: We’re now in the Innovation Wave (so plan forward, not backward). Recent history has brought us three “waves”: the Quality Wave, started in the 1950s (associated with Dr. W. Edwards Deming and Toyota), the Productivity Wave (which grew out of Toyota’s success and featured Lean and business product design), and the Innovation Wave — which is the stage we’re in now.

The first two waves applied to current operations, so they reached a point of diminishing returns. What does a company do next if it has zero defects or a fully automated factory? Its leadership immerses the company in the Innovation Wave, which impacts future sales and has unlimited potential. Those who figure this out reach that holy grail of business: profitable, sustainable growth.

The key is to plan forward. Many generals have been guilty of planning for the previous war. Quality and productivity improvements are fine, but they were the last century’s war. Today’s battleground is the Innovation Wave, and the key to winning is superior market-facing innovation.

REASON 3: Nothing else drives profitable, sustainable growth. It’s a simple truth: Senior leaders have many initiatives to choose from, but only market-facing innovation can lead to profitable, sustainable growth. Consider how other popular initiatives fall short of such growth:

• Productivity increases can improve profitability, but they don’t impact the revenue line needed for growth. A point of diminishing returns is eventually reached.
• Quality improvements may help revenue growth, but not to the extent they did a few decades ago. Today, reliable quality is usually considered table stakes.
• Cost reductions, when carelessly applied, can damage a business’s growth capabilities and have a negative — not neutral — effect on sustainable growth.
• Sales training can boost revenue growth and lead to better pricing for increased profitability. But it lacks sustainability; if a business doesn’t keep delivering new value, customers will eventually buy from competitors’ well-trained salespeople.
• Acquisitions will boost revenue and perhaps profits. But if the business doesn’t know how to grow the companies it acquires, it’s just building an unsustainable house of cards.

I’ve heard leaders say, “Last year, we implemented productivity improvements, and this year we’re going to focus on market insight for better innovation.” Market-facing innovation shouldn’t be an initiative a business turns on and off. Understanding and meeting market needs should define the company. This is what Builders do.

Leaders reading this who suspect their company is in the Commodity Death Spiral may wonder if there anything they can do to turn things around. Yes — it won’t be easy, but they’ve got to start restoring the Builder’s spirit that brought them to the party.

It’s vital they breathe new life (and pour more funding) into their market-facing innovation efforts. This is non-negotiable if they’re to differentiate their offerings and stop competing on price. But also, they need to adopt the Builder’s mindset and start thinking long-term rather than trying to placate myopic investors.

Dan Adams is the founder of The AIM Institute and author of the books Business Builders: How to Become an Admired & Trusted Corporate Leader(The AIM Institute, 2023) and New Product Blueprinting, as well as the blog “Awkward Realities” and video series “B2B Organic Growth.” He is a chemical engineer with a listing in the National Inventors Hall of Fame. Adams has trained tens of thousands of B2B professionals globally in the front end of innovation and works with senior executives on driving profitable, sustainable growth.