Management of Technology and Innovation in Japan

Invisible Dimensions of Innovation: Strategy for
De-commoditization in the Japanese Electronics
Industry
Ken Kusunoki
Digitization, Modularization, and Commoditization
Companies are having increasing difficulty in creating new value. Competition is
intensifying and squeezing profit margins. Profit is the difference between revenue
and costs; the gap between the cost of providing a good or service and what a customer
is willing to pay for that good or service (I shall refer hereafter to the concept
of WTP, or Willingness to Pay). There are only two ways to increase profits:
Reduce costs or boost customer WTP. Companies have tried various “best practices”
to maintain profitability: restructuring with a focus on “core businesses,”
business process re-engineering, information technology-driven supply chain
management (SCM) initiatives, outsourcing, and globalization.
These efforts are fundamentally focused on reducing cost. And while cost reduction
is important, it is insufficient to sustain profitability. By its very definition,
cost-based competition converges on the physical limits of cost and price and
ultimately is a dead-end path. Companies focused exclusively on reducing costs
will hang themselves with their own ropes. Firms must increase customer WTP in
order to add new value to their products and services.
Competitive environment changes in recent years make it increasingly difficult
to boost WTP. One key underlying factor is the threat of commoditization. The essence
of strategy is doing things differently from competitors, and it is difficult to
create differences once a product or service becomes a commodity; "price" becomes
the only differentiator a firm can show customers. Commoditization, therefore,
means competition converges on cost. Moreover, the speed at which products
and services become commodities has dramatically increased in recent years. We
can see many good examples in the electronics industry which has been hit hard
by the forces of rapid digitization over the last decade.
Digitization affects natures of product systems in a number of ways. Of these,
the most fundamental change is the "modularization" of architectures. Architecture
defines how to break a system down into components and how those system
components are interrelated in what we call “subsystem interdependencies." It is a
concept for understanding system states. Modularization means "breaking down
an entire system into multiple groups (modules), each of which consists of a number
of highly interdependent subsystems, with predefined rules regarding the interface
between modules." Modularization could be defined as a strategy for minimizing
system complexity and relational interdependence between components by