David Stutz writes a nice essay thinking about the nature of a commodity, the standards that frame them, and the bursts of innovation that seem to happen when new commodities emerge. He obviously is starting to see the ying/yang way that firms and public goods are interleaved to make markets.

I’ve been wondering recently if there is almost a guiding principle that a firm must embrace as inevitable the commoditization of it’s markets. Christensen tries to make a case like this in his new book. I didn’t find it sufficent; but clearly it’s an idea that’s in the air.

I should probably see if I can take a stab at stating my model. A company stands on a foundation of suppliers that are preferably mostly comoditized. It then adds value that creates a sufficently uncomoditized output so that there is a profit to be made. If the firm stands on a fast moving technology – like those associated with Moore’s law and his friends – two things happen. One is that new oportunities are continously being created in front of the firm for new more differentiated products. Meanwhile on the back end the suppliers are becoming more capable of moving up into the firm’s value creation skills. Even if the firm has strong resource endowments (unique geographic position, or strong IP rights for example) sooner or later the fast pace of the underlying technology provides a way to go around or thru those resource endowments. Meanwhile if the firm captures excessive amounts of the value being created as profits it creates a population of users that are unserved because. They can’t afford the offering; that’s a kind of pricing failure. That unserved market provides a green field for competitors. If the firm fails to create the comoditizing standard behind it that green field will create one. The low price point of that one will then displace the firm.

This is very similar to the move that Eric von Hippel’s work on tool kits advocates. You creating a toolkit and that enables customers to seach for innovations that leverage your firms assets. With luck you set standards with that toolkit and the resulting path dependencies lead in your door. Even if these standards are quite open you still get early mover advantages the the resulting mindless power-law growth.