The commoditisation of everything

The following is a summary of a presentation we recently made to staff about the role of commoditisation in our industry. We hope you can also get some benefit from it.

There really is only one sustainable career or endeavour – commoditisation. This is the work of taking something requiring high levels of knowledge, experience and creativity, and turning it into something that a novice can easily do for themselves, for free. If you want to maintain and grow your real value over an extended period, that is it. There is nothing else.

This involves at least 5 main steps to commoditisation. You should know what they are, how to do them, and be able to identify where on this spectrum each activity you are involved in currently sits.

Your job is to move things along this spectrum to the next stage faster than your competitors.

Step 1: Solve a unique problem

The first step involves you applying high knowledge, experience and creativity to solve a unique problem.

The new solution created through your innovation results in a differentiated offering in the market that can produce a momentary competitive advantage that supports a price premium.

Your job at this stage is to find people with unique problems and apply your unique knowledge, experience and principles of innovation to solve them.

You can (and must) charge a premium for this service, because it uses your two most limited resources, personal time and energy.

Step 2: Package into a recognisable body of knowledge

Your innovative solution must then be packaged into a recognisable body of knowledge that allows someone with high skills or experience to solve the same or similar problems.

Through an investment in training of people with high skill and creating reusable resources (such as templates and checklists) you can deliver the differentiated offering to a wider group of people.

Services in this stage are still hard to scale. But the investment in the training and resources must be recouped by reaching a wider audience. If there is not a broader audience, then the investment is not justified.

Whenever you solve a problem your job is not complete until you have embedded your own personal learning into a system that enables others to learn and do the same thing more efficiently.

Step 3: Build a system to deliver clear and repeatable processes

The body of knowledge and the steps to apply it must then be broken down further into clear and repeatable processes that allow a person with relatively low skill or experience to solve the problem.

This stage requires yet further investment in business systems and process engineering. The market for the solution must be broader still to justify this continued investment.

By an investment in business systems, i.e. clearly breaking down the processes necessary to solve the problem, the solutions can be put in the hands of much lower skilled people.

The offering starts to become more commoditised, as the solution and its embeded knowledge and experience become widely diffused.

Competition from within and outside will intensify. Price is then set by the firm with the best management and lowest labour cost.

Step 4: Invest in automation

Automation of the solution to the problem then allows self-service, or at least some level of involvement of the end client in the process of solving their problem.

This is achieved through a large investment in technology. This must be justified by a very large and enduring client base.

The solution soon becomes a true commodity and the price is set by the lowest-cost supplier in the market, i.e. with the best management and the best technology. In many cases the lowest cost is now free.

Step 5: Enable mass customisation

The traditional methods for differentiating commoditised products, and thereby competing away from price, is branding (Coke) and customer experience (Starbucks).

There is arguably a third strategy, mass customisation. This is when technology enables the client to apply their own innovation to produce a customised outcome that has special value to them, due to their personal investment of time and creativity in the outcome.

Mass customisation often results in valuable personal data from the end client (allowing further customisation), as well as valuable insights from group data (allowing machine learning). This data becomes a competitive advantage in itself from which further value can be extracted.

You must apply all three strategies in the commoditised markets in which we compete, branding, customer experience and mass customisation.

Dealing with commoditisation

If you are not working the commoditisation curve better than your competitors, you will become irrelevant. This is not something you can avoid. It is occurring in every market, including ours.

The only way to sustainably resist the threat of relentless commoditisation (and the price wars and narrow margins that follow) is through a continual investment in innovation, i.e. solving hard unique problems that give rise to genuinely differentiated outcomes (Step 1). You need to find people who value novelty and who are prepared to pay for it. You can then take this learning from that experience and ride it down the cost curve until you reach free. Over-delivering value to your clients all the way.

However, the catch is that the time-honoured effort to counter commoditisation with innovation is now itself widespread and common. Innovation is now becoming a commoditised strategy in itself…

You must understand and invest in a business operating system that allows you to sustainably compete along the commoditisation curve over the long term.

ANDREW ANDREYEV

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Key Issues in Buying or Selling a Business

Key Issues in Buying or Selling a Business

There are a number of important issues that need to be considered when advising clients on buying or selling a business. Join Andrew Andreyev, Principal of Andreyev Lawyers on Thursday 29 October 2020 at 12:00pm – 1:00pm (AEDT) for this webinar on buying and selling a business.

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