There is a long-standing tendency for products to become commodities over time.  As markets mature, manufacturers add new features and match those of their competitors, until eventually goods from various manufacturers become homogenized and, as a result, commoditized.  This can lead to slashed prices and reduced profits as companies selling undifferentiated goods are left to compete on price alone.  The tendency toward commoditization, and the resulting ability to swap out one product for another with no perceivable impact, was summed up elegantly by Columbia Business School Professor Bruce Greenwald when he declared, “In the long run, everything is a toaster.”*

But with commoditization can come opportunity for innovative companies.  For example, the widespread availability of the ubiquitous and arguably commoditized toaster created an opportunity for the Wonder company, which introduced America’s first pre-sliced loaf.  Previously, bread loaves had to be laboriously cut by hand to fit into toasters.  Wonder’s innovation saved consumers both time and effort, inspiring the phrase “the best thing since sliced bread.”

The IT industry is also susceptible to the effects of commoditization.  Bill McCracken, CEO, CA Technologies, recounts that during his tenure at IBM, the company once dominated the PC market until overtaken by Dell, seen then as a small upstart.  Dell’s success was in accepting the commoditization of memory chips, hard drives and CPUs and understanding the opportunity the now-commoditized components created for a flexible PC supply chain that sourced components effectively, built PCs on demand, and delivered customized machines quickly and relatively inexpensively. 

The value was less  in the components than in the ability to procure the components from suppliers as needed (obviating the need to carry inventory) and to swap out those components and suppliers quickly on the basis of quality and price--ensuring the best computer for the money at any point in time.  By recognizing this, Dell thwarted competitors who were burdened with the warehousing of components and PCs that were prone to obsolescence and declining in value each day. 

A profound parallel can be observed today within cloud computing.  Its raison d'être is to provision IT resources that are trending towards commoditization, offering Software-as-a-Service (SaaS), Infrastructure-as-a-Service (IaaS), and Platform-as-a-Service (PaaS). 

Available through public, private and hybrid clouds, software applications such as line of business, CRM and human resources applications are beginning to become commoditized.  In the past, management software, once seen as a commodity of sorts, was often an afterthought to the technology-driven business service.  In an ironic shift, the software application commoditization trend has created an opportunity for management software, the tools that enable the business service supply chain.

In the context of the cloud, the definition of management software must expand to reflect not only the new entities that are to be managed in a cloud environment, but also the new techniques that can be employed to manage those entities.  For example, instead of managing systems in house, companies are managing business services across both public and private clouds.  Instead of making do with existing IT investments, companies are free to swap out infrastructure components continuously in search of the right mix to deliver the optimum business service.  Management software moves from being the overseer of relatively static environments to the orchestrator of extremely fluid environments.    

It is this new generation of management software that allows companies to build and capitalize on a business service supply chain that truly leverages the power of cloud computing.  With the ability to flexibly and securely source and automate software components and manage performance and IT resources, companies are able to creatively construct and change business services as needed, using the IT components that best meet their needs at any point in time.  A company’s use of SaaS (bypassing the expense of maintaining on-premise software applications) is comparable to Dell’s ability to bypass carrying extensive inventory.  Just as in the Dell example, the opportunity is in the ability to bring together commoditized components in the most effective manner, while maintaining the flexibility to swiftly replace components when and if preferred alternatives become available, thus delivering the highest value, market-differentiating business service possible.

In the end, it is the consumers that make out best from the impact of commoditization. They are the beneficiaries of the innovations seen in new features and functions that producers pursue in order to differentiate their commoditized products in the market.  More importantly, consumers can leverage the flexibility made available to them by producers that recognize the importance of supply chains when assembling commoditized products.  In the case of cloud computing, that translates to the ability to securely and efficiently provision, manage and change hybrid cloud environments made up of the best software applications available at any point in time.     

The vast opportunities afforded by cloud computing are accompanied by a like number of challenges to fully leverage the cloud’s potential.  However, with an unprecedented number of levers at their disposal with which to optimize the cloud environment, IT organizations have never been better equipped to affect business transformation within their companies.  For companies that value the opportunity to leverage market-differentiating business services that save money, react swiftly to market conditions and take advantage of the latest technology advancements, that opportunity is, I think, the best thing since sliced bread.  

 I was interviewed about related themes at CA World 2011 last week.  To watch the video, click here. 

*Greenwald, Bruce and Judd Kahn.  Competition Demystified: A Radically Simplified Approach to Business Strategy.  Penguin Publishing, 1985.