blog - news and thoughts from the team at Paricint

by Andrew Holmes
Any business, no matter what products or services it delivers into 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.

One of the roles of the CFO and the board is to determine what the current issues are and respond accordingly through a range of interventions which can be internally and externally focused. The strategic and business planning processes are designed to support the board in this activity, and given the changing nature of the competitive landscape, there is good reason to undertake this on an annual or perhaps biannual basis; after all things change.

There is however, one issue which is increasingly present and growing in its significance and that's commoditization, best summed up by Thomas Freidman:

When everything is the same and supply is plentiful, said Greer, clients have too many choices and no basis on which to make the right choice. And when this happens, you're a commodity - Thomas Freidman: The World is Flat

Commoditization's principal impact 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 commoditization with the key signs being:

• 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, commoditization is nothing new - we have lived with it for a long time and certainly if we look back over the last 200-300 years it should be clear to anyone that commoditization is a natural business process which started long ago on the production lines of the factories of Northern England, played its part in the broadening out of the rail and telecommunications industries and more recently has had a profound effect on both the information technology (IT) and airline sectors. However, commoditization is no longer just about machinery, computers and plant. Nor is it about the odd industry or two. It is beginning to be about human capital, skills and expertise and it is spreading into those industries that have previously held up their margins and kept out the competition.

There are two things which should concern any board of directors. First it is how quickly commoditization is now sweeping across the corporate world; in sectors and functions which we had previously thought were safe. And second, it is the depth and breadth to which commoditization is now penetrating into the world of work itself. No longer the preserve of the blue collar worker it is beginning to affect white collar work and the whole area of talent management. There are a range of factors which are driving this, including:

• The intellectual competition coming from Asia, and especially India and China who now produce some four million graduates every year. What makes this number even more daunting is the fact that between 30 and 50 per cent of these graduates are unemployed in their home countries, which leaves 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 organizations can reduce their overheads and focus their capital on innovation and maintaining or reducing the costs of their goods and services
  
• There is a 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 commoditization of products, services and people is possible. Commoditization 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.

At its extreme, commoditization leaves the leaders of corporations with a very simple and stark choice: do we allow ourselves to become commoditized and hence do our best to survive, or do we do our best to avoid it? Of course for some, the former may be the only option open to them and for many it will probably be a mix of both. And as the zone of commoditization continues to expand, organizations must do everything they can to ensure they can compete without either destroying the value they offer their customers or going out of business because their underlying costs are just too high to compete.

But before the board throw up their arms in despair, it is important to note that commoditization is not all bad and if approached in the right way the organization can still succeed. Like most things there is a strategic choice involved. So whilst for some commoditization will be seen as a major strategic threat for others it will be a golden opportunity. What will it be for you?

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