Commoditisation – a Strategic Threat or Golden Opportunity?

Any business, no matter what products or services it delivers to its chosen markets has to contend with a range of competitive and operational issues. The significance of such issues usually waxes and wanes with local conditions, the broader economic backdrop and a plethora of other factors.

PLANNING PROCESSES

One of the roles of the chief financial officer and the board is to determine the current issues and respond to them through a range of interventions that can be internally and externally focused. Strategic and business planning processes are designed to support the board in this activity. Given the changing nature of the competitive landscape, there is good reason to undertake this on an annual or perhaps biannual basis. There is, however, one issue which is growing in significance and that’s commoditisation. It is best summed up by Thomas Freidman, in his book The World is Flat when he writes:

"When everything is the same and supply is plentiful … clients have too many choices and no basis on which to make the right choice. And when this happens, you’re a commodity."

ARE YOU AT RISK?

The principal impact of commoditisation is its ability to undermine profitability through the invasion of cheaper product and service alternatives which are usually of a similar or higher quality. Although increasingly pervasive, it is comparatively straightforward to determine if your business is at risk from commoditisation. The key signs are:

• Increasing competition
• Prevalence of me-too products and services
• A belief that all suppliers are fundamentally the same
• The decreasing desire on the customer’s part to look at new options or features
• An increasing preference for customers to select on the basis of price and little else
• Increasing pressures on margins

Of course, commoditisation is nothing new. We have lived with it for a long time. If we look back over the last 200-300 years it should be clear to anyone that commoditisation is a natural business process that started long ago on the production lines in factories in England and played its part in broadening out the rail and telecommunications industries. More recently, it has had a profound effect on both the information technology and airline sectors. However, commoditisation is no longer just about machinery, computers and plants. Nor is it centred on one or two industries. It is beginning to be about human capital, skills and expertise and is spreading into industries that have previously held up their margins and kept out of the competition.

There are two things which should concern any board of directors. Firstly, how quickly commoditisation is sweeping across the corporate world, in sectors and functions previously thought safe. Secondly, how much commoditisation is penetrating the world of work – and no longer just blue collar workers, but also white collar workers and the whole area of talent management?

DRIVING FACTORS

There are a range of factors which are driving this. The intellectual competition coming from Asia – especially India and China, which now produce some four million graduates every year. What makes this number even more daunting is the fact that between 30-50% of these graduates are unemployed in their home countries, leaving a vast number of intelligent workers to be mopped up by the global economy.

Western economies are aging fast and have to adjust to the realities of longer working lives with a less productive workforce. Technology continues to disrupt the status quo, opening up new opportunities to competitors and facilitating the shift of labour to low cost economies. Work continues to be codified and systematised in order to increase the efficiency of core business processes so that organisations can reduce their overheads and focus their capital on innovation and maintaining or reducing the cost of goods and services.

There is growing imbalance between the number of graduates and the jobs that require graduate-level capabilities. With the number of graduates increasing faster than graduate-level jobs, degree holders have become commodities. A whole generation has been brought up in a world where goods and services can be obtained cheaply – no one wants to pay more than they have to for the products and services they buy.

These and many other factors work together to create an environment in which the commoditisation of products, services and people is possible. Commoditisation may not be new for some, but for many it is a new reality that needs to be understood and responded to. The implications for companies are both broad and deep as the economics of intense competition, the impacts of low cost producers of high end products and services and the intellectual competition coming from the BRIC economies begins to bite.

ENSURING COMPETITIVITY

At its extreme, commoditisation leaves the leaders of corporations with a very simple and stark choice – do they allow themselves to become commoditised and do their best to survive, or do they do their best to avoid it? For some, the former may be the only option but many will probably try a mixture of both. And as the zone of commoditisation continues to expand, organisations must do everything they can to ensure they can compete without destroying the value of product or service or going out of business because underlying costs are just too high for them to compete.

Before the board throw their arms up in despair, it is important to note that commoditisation is not all bad and, if approached the right way, the organisation can still succeed. While for some, commoditisation will be seen as a major strategic threat, for others it will be a golden opportunity.

Andrew Holmes’ new book: Commoditization and the Strategic Response (978-0-566-08743-1) was published in February by Gower. Priced at £55 but readers of Finance Director Europe magazine will receive a 25% discount (reduced price £41.25) by quoting: GW8BW/25% when ordering online
http://www.gowerpub.com/TitleDetails.asp?sQueryISBN=056608743X&sPassString=Y&sKeyword