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Embrace Your Inner Commodity – You Know You Have To
If there’s a phrase that strikes fear in the heart of every forward-looking business owner more than an Australian Taxation Office audit or a Human Resources claim, it’s commoditisation.
It’s like death, but not as you understand it.
Perhaps it’s a little dramatic to say, ‘commoditisation is a polite way of talking about brand extinction’, but at its essence, that’s exactly what it is. Many Small Businesses don’t respond to the commoditisation of their own market with anywhere near the required boldness, speed or commercial rigour, let alone developing a strategy to deliberately leverage it.
Embrace your inner commodity – You know it’s only a matter of time.
Over time, margins on all profitable products and services erode as they become commoditised. Consumers no longer differentiate between brands and buy the cheapest (often generically branded) product.
Examples of commodity status products include milk, bottled water, personal tax lodgement services, internet service providers, medical pathology, petrol and shortly banking.
Inevitable but learnable.
Commoditisation is inevitable and ignoring the problem won’t make it go away. Thankfully commoditisation also follows a predictable and understandable C curve that can be mapped (and even leveraged) by those who know how.
A sustainable business future is usually linked to using (mastering even) one of these three core drivers;
1. Its ability to continually re-differentiate its products, or
2. Its cost position; or
3. Whether, (and to what extent) its market has imperfections it can exploit.
So, which of these three drivers are you relying upon to stay ahead of the inevitable C curve?
Embrace your inner commodity – Before your competitors do.
Of the three options available, the first two are the most commonly chosen.
- The knee-jerk response is (if possible) to focus on re-differentiating their product.
- The more desperate response (when necessary) is to start discounting to compete on price alone, hoping a low-cost advantage will keep them ahead of the C curve.
Opportunity on the C curve.
Most businesses ignore the opportunity to exploit market imperfections and the chance to find and fix a new problem for the customer. Usually, this is because their internal thinking and business systems haven’t been designed to leverage the C curve phenomena.
Simply put, their capacity has not been embedded into their existing business knowledge systems with the C curve in mind.
Why train your team to understand the C Curve?
My company works in professional risk advice. We believe everything can be commoditised, and everything soon will be, so we’ve adapted all our business processes to leverage the inevitable C curve effect.
Our team are all trained to:
- Recognise the stages of commoditisation.
- Understand why collectively, their job is to keep our business ahead of the looming C curve.
- How their job is to move things along our internal C curve to the next stage, better than our competitors.
They do this by creating, using and continually re-creating high-grade processes for everything we do. And if they master these skills, we’ll give them a job for life.
How we train our team to create our internal C Curve.
Our team continually takes something requiring very high levels of knowledge, creativity and experience and turns it into something our less experienced staff member can easily do themselves.
Step 1: Solve a unique customer problem.
It starts with our applying high-level knowledge, experience and creativity to solve a unique problem. This newly created solution allows us to have a differentiated offering in our market giving us a competitive edge while charging a premium price.
- Find people with unique problems and apply your unique knowledge, experience and principles of innovation to solve them.
Step 2: Package our solution into our searchable business knowledge.
All our staff must know how to create reusable resources so we can deliver our speciality offering to a broader group of clients at scale.
Each innovative solution then needs to be documented into our searchable business knowledge system, held on our intranet. This might resemble Wiki’s, checklists, process maps, critical event timelines or strategy papers.
The essential requirement is each solution (and its support knowledge) must be made searchable and immediately shareable, allowing staff with high skills or experience to solve the same or similar problems. (We use Google Sites as our searchable intranet platform to host our business knowledge system).
- Until your personal learnings are embedded into a searchable system that helps others learn and do the same thing more efficiently, your job is not complete.
Step 3: Build a system to deliver scalable, repeatable processes.
Our unique solution and the steps to implement it must now be further broken down into clear and repeatable processes to help our junior staff member with relatively low skill or experience to solve the problem.
This requires an investment in business systems and process mapping (and a market for the solutions we create big enough to justify our ongoing investment).
- By clearly breaking down the processes needed to solve the problem, the solutions can now be either put in the hands of much lower skilled entry-level staff members or outsourced offshore.
Our solutions start to become more internally commoditised, as its processes (with its embedded knowledge) and experience become widely available.
As competitors and newcomers to the market innovate, adapt, appropriate (copy even) and re-invent our solution, competition will inevitably intensify along with pricing pressures.
- Price is then set by the business with the best management, best business knowledge system and lowest labour cost.
Step 4: Begin automating key elements in the process asap.
As we begin to automate components of our solution, we’re now able to outsource back to the end client, some level of involvement in solving their own problem. This might be through online pre-assessments, customer scorecards or user selectable requests for distinct components or services, where customers feel they only pay for what they want and not for what they don’t.
- As a solution reaches full automation, its price is set by the lowest-cost supplier in the market with the best business knowledge system and the best technology.
Ultimately a completely self-service solution will evolve. But because you saw the inevitable devolution of this solution and its support systems, you’ve had the chance to step off the external market C curve early and find a new problem and solution to focus on.
You may even now be leveraging the inevitable C curve effect as in many instances the lowest-cost is now ‘free’. And when packaged properly, the free product can be an efficient and elegant entry-level offering, leading customers back into a higher level problem that requires a higher level unique solution.
And so the process repeats.
Owning the C curve.
If you’re not working the commoditisation curve better than your competitors, you will soon become irrelevant. This is not something you can avoid. It is occurring in every market, including yours.
The only way to sustainably manage the threat of relentless commoditisation (and the price wars and shrinking margins that follow) is through creating innovative ways to solve hard, unique problems that require genuinely differentiated solutions (Step 1).
Remember; when you start turning your products into commodities, the uncomfortable truth is you risk starting to treat your staff and then your customers like commodities too.
The key to avoiding brand death from inevitable commoditisation is the most overlooked investment a business can make; a customer relationship.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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