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Quality Management
A. Blanton Godfrey

Commodity Quality

Quality can be used to turn commodities into highly profitable brands.

In the past few months, I have heard everything from crude oil to spacecraft be called commodities. What those who use that term usually mean is that all that matters to their customers is price, that there is no differentiation in quality between what they provide and what others provide.

 Quality professionals have debated this issue for years with their colleagues in research, design, engineering, operations and sales. In the late 1970s, one popular book even made a case for the automobile as a commodity. The authors, professors from a leading business school, argued that the only success factor for automobile manufacturers in the future would be production efficiency. They maintained that cars were all the same: four-door sedans with eight-cylinder engines in the front and rear-wheel drive. Basically, the only differences were in cosmetic details, such as chrome, paint and even fins. (I don't remember if or how they explained the success of the Volkswagen Beetle--this four-cylinder, rear-engine small car had become the best-selling car ever produced.)

 Today, no one would seriously think of the automobile as a commodity. One recent report identified 69 different types of automobiles being sold in the United States.There are now diesel cars, electric cars, LPG cars and hybrid cars in the market. And, of course, there is the best-selling "car" of all in the U.S. market--the pickup truck (in many sizes and engine types, and with two- or four-wheel drive). There are even vehicles that look like combinations of pickups and cars or sport utility vehicles and pickup trucks.

 Years ago, when I was still working at Bell Labs, I had an argument with a business unit manager over whether the telephone was becoming a commodity. He thought that the consumer's only concern was price and that the best strategy for AT&T to pursue was cost efficiency. He stated that there was no way to differentiate telephones in the marketplace. A visit to an electronics store today will show in a glance how far wrong that strategy would have been. The consumer now chooses between basic wall or desk sets and myriad phones laden with features ranging from multiple-lines to built-in answering machines, caller identification and even video. The wired sets are matched one-for-one with cordless sets, which also range from the basic units to ones with incredible features, range and style. There's even more variety in cellular phones. The ongoing battle to create new features, new quality levels and new sales in this market is truly astounding.

 The history of business successes is full of stories about creative people who took a product that others considered a commodity and grabbed market share or a premium price position by differentiating their product. One of the best-known stories is that of Frank Perdue. He took one of the basic commodities, chicken, and used a superior process for removing pin feathers to create a superior product. He later gained even more market share and maintained his price premium by switching to more convenient packaging for home use.

 Others have found creative ways to distinguish their products by learning more about customer needs. A producer of a petroleum-based compound used for setting concrete railroad ties found that it could reduce the price of its product by 20 percent by changing the packaging size to exactly meet mixing specifications. The new packages were precisely what the customers wanted--and were willing to pay extra for.

 Anyone still having trouble believing there are no commodities--only noncreative managers who think they produce commodities--needs only to look at the fashion industry. Nothing could be more commodity-like than a sweat shirt, but consumers all over the world are willing to pay premium prices for shirts with professional team logos or the Nike "swoosh."

 Absolut vodka may present the best case of branding. Absolut realized it wasn't just selling odorless, tasteless, colorless alcohol, it was selling a premium-priced drink and image. With careful packaging, advertising and marketing, Absolut created a dominant market position. It's selling what the customers want--not just vodka, but also a lifestyle.

 Many products do seem to go through cycles where, for short times, they are treated as commodities. Then someone figures out how to create a differentiated market position either by new technology, new features, new distribution, new packaging, or just by marketing and branding. The other producers then realize that they are not in a commodity market after all.

 With some products, for some customers, price is the all-important dimension. As long as everything else is reasonably equal, customers will buy the cheapest. Unfortunately, the competition for these customers is intense and the margins extremely low. For most companies, however, making the effort to determine customer needs and develop the right features and differentiation strategies provides rewarding returns. In a commodity market, being the only company that knows its product is not a commodity can be highly profitable.

About the Author

 A. Blanton Godfrey is chairman and CEO of Juran Institute Inc. in Wilton, Connecticut. He is the co-editor of Juran's Quality Handbook, Fifth Edition. Special copies signed by both Godfrey and Joseph M. Juran are available from Juran Institute ( www.juran.com ) . Contact Godfrey by e-mail at agodfrey@qualitydigest.com .