Dare to be different: commoditization looms around every corner. Differentiate now--or wind up just another label on a supermarket shelf. (Management).

Most CEOs would give almost anything for a glamorous, all-cash business with a near-guaranteed percentage of profits. But for Gary Loveman, president and CEO of Harrah's Entertainment, the thrill of the gaming industry vanished almost from the beginning. "When I started, this business was commoditized--you have a big box and gaming tables. Your challenge is to differentiate yourself from the other big boxes," he says.

The traditional ways that casinos have distinguished themselves, through investing in facilities, entertainment and food--think pyramids, Venetian canals and Eiffel Towers--were proving less effective as competition increased. So Loveman chose to avoid commoditization through counterintuitive means: Harrah's now uses information technology to identify its best customers and then lavishes perks on them--with the expressed intent of letting its other regular customers see the difference.

"We treat our better customers better," Loveman says of the $4.1-billion, Las Vegas-based company's Gold, Platinum and Diamond levels of service. "We are completely unabashed about it." Customers, he says, have to earn their way up.

Unusual as Loveman's response may be, his predicament is not. Advances in information technology, combined with global competition, mean that sooner or later every CEO faces the threat of commoditization: Suddenly you're surrounded by competitors offering the same products or services at lower prices and correspondingly lower margins. In many markets, real prices--those adjusted for inflation--have declined steadily over the last 20 years. Calculators that sold for hundreds of dollars in the 1970s are giveaways at trade shows today; computing power that once cost millions can now be had for under $600, if not for free. In fact, the apparent increase in customer satisfaction in many industries is a direct result of falling prices.

"Everything is headed toward commoditization if you don't fight it," says Fred Reichheld, founder of Bain & Co.'s Loyalty Practice and author of Loyalty Rules! Defending your company against it, he says, takes a "creative redefinition of markets."

The challenge for leaders is clear: Continuously innovate value in your products and services--or face margin erosion and potential extinction. CEOs have responded by coming up with several creative strategies for fending off the threat. Some have broadened or changed the definition of their customers, while others have reinvented their products and rethought the notion of customer value.

Redefining the customer

The first key to avoiding commoditization is to review just whom your company is serving. Gaining this understanding of customers allows companies to prevent a "downward migration" in spending habits that can lead to products becoming perceived as commodities and to customer defections. A recent study of 1,200 households across 16 industries found that companies have a large opportunity for "migration management"--and that it can stop as many as 30 percent of potential defections.

At Diebold, the automated teller machine maker, chairman and CEO Walden O'Dell says he's interested not only "in what our customers want," but "what our customers customers want." As a result, the $1.9-billion company in North Canton, Ohio, focuses its product development not so much on brighter screens or ease of installation as on embedding advanced end-user capabilities into ATMs. These include on-demand banking statements, automatic bill payment and instant crediting of deposits --with or without a deposit envelope. Such options enable Diebold's customers, primarily financial institutions and retailers, to offer more services to their customers after hours.

"They might be buying A or B," O'Dell says of Diebold's customers. "But what they're really looking for are ways to serve their customers." He says Diebold strives to help its customers improve their profits, their market share and their customer focus.

In this regard, O'Dell is not alone, In a recent study of 110 senior executives from Fortune 1000 companies by Booz Allen Hamilton and the Kellogg School at Northwestern University, almost four out of five said they plan to shift from selling products and services to developing value-added solutions in partnership with customers. "Companies that focus on 'relationship-centric' activities, while emphasizing growth opportunities and adapting to a changing marketplace, are more likely to be top performers than those companies that focus on decreasing working capital, supply-chain efficiency and spinning off non-core businesses," the study concluded.

For RE/MAX, the Denver, Colo.-based real estate franchise network, a redefinition of customers away from industry norms has been crucial. Co-founder and chairman David Liniger says that the firm's success has resulted from the simple idea that RE/MAX customers were the real estate agents themselves, not the buyers and sellers of real estate. More specifically, RE/MAX targets high-performing agents who represent just 20 percent of the entire pool of real estate agents, yet account for some 80 percent of all sales. "We decided we would be a niche marketer, focusing on how the top producers can get better," Linig explains.

RE/MAX'S focus on these agents originally consisted of changing the industry's traditional 60-50 fee split between broker and agent to a franchise system, in which agents kept all commissions after a management fee and expenses. In some cases, that boosted commission retention rates to as much as 85 percent. Additional services followed, including national marketing, training by satellite and coordinated support.

The results are impressive: According to Liniger, the average RE/MAX agent earns $120,000 per year on 24 transactions, versus an industry average of $25,000 on seven transactions. "The customer comes second," he says, but hastens to add, "If your emphasis is on having the best employees, you're going to have the best customer service."

Reinventing the product

Reinterpreting the market is only the beginning, however. Savvy CEOs in industry after industry have begun to understand that neither products nor services can stand alone--and that customers increasingly want total solutions from vendors. In the grocery industry, for example, market leaders have recognized increased consumer demand for bundled goods, defined by the Grocery Manufacturers of America as "the bundling of products, services and information to deliver answers to consumers." This bundling takes the form of shoppers buying complete "mealtime experiences," including selections of complementary prepared foods rather than individual recipe ingredients.

At Siemens Medical Systems, president and CEO Tom McCausland leads a business whose product is fundamentally different than it was a decade ago. "About 70 percent of the products we sell have been introduced in the last three years. What's enabled us to do that is a switch--our products used to be mechanical, now they're digitized. The differentiation is in the electronics. You can issue upgrades without parts."

This capability has led Siemens to rethink the very nature of its offerings. "[Our product] is not necessarily an x-ray or an MRI, but information. We provide information that helps you diagnose more accurately." McCausland says this insight has transformed Siemens's view of itself from a provider of medical imaging to something more complex. "Our business is really health-care information technology," he says. "And our end product is really an electronic patient record: information on lab tests, pathology, and drugs as well as voice dictation."

This revised view of its products has, in turn, changed the way that Siemens sells its equipment and services. Typically, medical imaging equipment has a six- to sevenyear mechanical lifespan-but will likely become obsolete during that period as advances in imaging and software add diagnostic capabilities. To prevent this, Siemens now offers a financing program called EVOLVE, under which customers pay a monthly fee to purchase not just the equipment, but a guarantee of nonobsolescence. As software updates become available, they are downloaded to customers' equipment from a central location, with training personnel scheduled to arrive the next day.

Rethinking Customer Value

According to a study by the American Productivity & Quality Center, a nonprofit group based in Houston that studies quality and best practices, leading companies now manage customer strategies by measuring "relative perceived customer value." This is measured by focusing on differences between competitors in total value, including nonproduct attributes such as reliability, total cost of ownership and brand experience. While most companies still measure "customer satisfaction," top-performing companies have shifted toward "customer value" measurements.

Harrah's Loveman puts it more simply: "Why do people go to the same hair stylist all the time? Nobody goes to a different hair stylist because of a special. You trust them. You know what you're going to get."

Gaining that trust requires a commitment to customer value similar to the one made by Harrah's. Using data collected through its Total Rewards program (a sort of frequent-gambler card inserted into slot machines that tracks how much is wagered/won/lost), the company has identified hundreds of customer segments among its more than 25 million slot players. Using predictive software, Harrah's can now estimate how much a given customer will be worth, based on four demographic factors: age, gender, game preference and location. This revelation taught Harrah's two things:

* A single customer segment represented just 30 percent of customers, but 80 percent of revenues--and 100 percent of profits.

* By targeting offers to highly specific customer segments, the firm could boost its market share by six percentage points -and increase net income by 12.4 percent during a difficult market in 2002.

Meanwhile, Robert M. Dutkowsky, chairman and CEO of J.D. Edwards, the Denver-based enterprise software provider, has a different kind of commoditization problem. "Most industries have an 800-pound gorilla. We have an 80,000-pound gorilla called Microsoft that's trying to turn everything into a commodity," he says.

Dutkowsky says the key for J.D. Edwards is to make sure that it focuses on offering solutions to customers, including training and customization of software for a particular industry--and in making sure that every branding or marketing effort reinforces that message. "The reality of it is that there is clearly a commodity level in the software market," he says. "If you're a commodity player, you try to make your brand ubiquitous."

But, Dutkowsky adds, "when customers install products like ours, it's like brain surgery. We only need to sell our product to a couple of thousand people a year. You try to provide the distinction that, when I make the once-ma-lifetime decision, this is a company I need to talk to."

Recreating the organization

In addition to changing their definitions of customer, product and value, companies need to reorganize themselves internally to deliver non-commodity value m new ways. For example, Keithley Instruments, an Ohio-based manufacturer of precision electrical measuring devices used in the high-tech industry, reinvigorated itself by creating seven industry-focused teams.

"We look for interrelatedness among applications," says Joseph P. Keithley, chairman, president and CEO. "Our objective is to understand better than our customers the issues concerning the performance of their products."

Each industry team includes a development engineer, an application engineer and a senior marketing executive. The team spends weeks at a customer's site, learning the business inside and out. Keithley engineers then use their expertise not only to design appropriate test and measurement equipment, but also to suggest design improvements in the customer's products.

Over time, this level of service gives Keithley two advantages. First, as Keithley becomes more entwined in the product-development process, it becomes harder for Keithley's competitors to even get in the door. Second, the ground-floor knowledge that Keithley acquires about product and design allows it to anticipate industry-wide customer needs well in advance of competitors. Successful as this kind of organization is, Joseph Keithley says it isn't easy. "People have to have an impact on others without direct supervisory responsibility," he says.

The company's transformation, begun in 1993, ultimately required it to change its sales force, its compensation system and some of its people. "There were some who just weren't going to get on board," Keithley recalls, "so we said, 'Why don't you do something different so we don't drive you crazy and you don't drive us crazy?'"

Loveman of Harrah's insists that the CEO is essential in making sure that companies avoid the threat of commoditization. "The role is to be a developer of the idea, and then you have to be an enforcer," he says. "If I had been the senior vice president of marketing, these ideas would have failed. I had to be the COO, and then the CEO. You have to go out and educate. And you have to be willing to have a public hanging from time to time."