Management of Technology and Innovation in Japan

Invisible Dimensions of Innovation 57
Commoditization is the phenomenon whereby “product or service value converges
along the simple dimension of price, after competing firms are unable to
differentiate themselves along existing innovation dimensions due to the limitations
of either technology or customer cognition.” Once we define commoditization
in this way, two basic strategies emerge by which firms may avoid or escape
commoditization.
One possible strategy is to consider innovation strictly in a dimensional context,
and maintain performance differences that competitors cannot easily catch up
with. Increasing WTP is possible if a firm can maintain performance high enough
to be unreachable by competitors – even assuming that the innovation is along a
visible dimension. I call this the black-box strategy, which looks to the internal
context of a product system, or “product architecture” as the source of WTP.
As we have seen, progressive modularization in the electronics industry is a
major driver of commoditization. Yet even in a commoditized product market, a
competitor may be able to maintain differentiation and increase WTP if it can create
a difficult-to-imitate innovation in a lower-level subsystem – even if the innovation
is visible to competitors. "Black box" means a subsystem incorporating performance
competitors cannot easily imitate. Let's return to the PC industry
example. As we have seen, it is now difficult to maintain continuous profitability
because the industry seems thoroughly commoditized. But if we look down a level
from the top of the product-system, we can see Intel successfully maintaining
profitability in its MPU business. Intel's Pentium processor holds visible innovations:
high-performance and high speed. But at the same time, the Pentium processor
is a black box supported by deep product and manufacturing technology; rivals
cannot keep up with Intel’s performance. Intel's MPU is a classic example of the
black-box strategy.
In fact, many Japanese electronics companies try to overcome commoditization
through the black-box strategy. Examples include Hirose Electric’s connectors,
Rohm’s custom mobile telephone handset LSIs, Fanuc’s numerical controllers,
and Nitto Denko’s polarized LCD film. Hirose Electric maintains its strong profitability
by distancing itself from customers who refuse to recognize values other
than price, and focusing its resources on developing high value-added connectors.
For example, one of Hirose’s mainstay products is a connector that links a mobile
telephone’s printed circuit board to the handset’s internal antenna. With this connector,
the width and weight of a single strand of human hair, Hirose commands
more than a 50 percent worldwide market share. Hirose Electric’s connectors
maintain high margins because they outperform rivals’ products along the dimensions
of compactness, thinness, and weight. The ultra compact mold development
technology and multi-model/small lot production expertise that enables Hirose to
create its black-box products.
Apart from these components manufacturers, there are other companies profitably
using the black-box strategy in the critical subsystems they build for larger
product-systems. Canon developed CMOS sensors and controllers at the heart of
its digital cameras. Canon's EOS Kiss single lens reflex digital camera uses a
unique CMOS sensor to achieve 11-megapixel resolutions, the industry’s highest
image quality level. Faced with competition from Korean and Taiwanese rivals in