Innovation and technology are powerful forces in commoditization. Harvard economist Joseph Schumpeter coined the term “creative destruction,” a process that involves several stages, beginning with emergence and moving on to growth, status, and a depleted industry.It doesn’t take long to think of several industries that have moved through these stages. Some have transformed themselves to stay relevant, while others have expired. The lifecycle is much shorter now, and commoditization is occurring at an increasing rate. The accounting profession is not exempt.
Characteristics of a depleted industry include commoditization, increased regulation, consolidations, an internal focus, a lack of new value, and outsiders entering the business.
The news is not all bad.
In fact, creative destruction provides great opportunities for entrepreneurs who are innovative and utilize technology for self-protection — while creating new value for their customers and clients. Dan Sullivan, founder of The Strategic Coach, says, “Value today comes from three sources: leadership, relationships and creativity. Leadership provides direction, relationships provide confidence and creativity provides new capabilities.”
Let’s explore why some firms get caught in the commoditization trap, while others transform themselves and grow. There are five circles that represent the process. Great companies operate within all five, while others get caught in the inner circles. (See graphic.)
Circle 1 represents the sale of a product. (Professional service firms sell products, even though they typically refer to the services they provide.) With time, almost any product can be re-engineered or cloned, and globalization has increased the rate at which this is happening. Patents and copyrights can normally protect a product only for a limited time.
Circle 2 adds services to products in order to differentiate them from competitors. Services can also be duplicated with lower prices. Commoditization enters the picture at this stage, and companies often respond by striving for efficiency and effectiveness in order to remain competitive. Working more hours while lowering prices is not an acceptable strategy.
Circle 3 offers protection through the use of unique processes. While all companies have these, most do not take the time to identify, document and train to them. Unique processes result in intellectual property, and without protection firms can easily lose the advantage that these hold when employees depart. Clients perceive greater value from unique processes. Value comes from a client’s perception — not from effort or hours worked.
Circle 4 represents your community of clients or customers. This is where a firm can leverage its intellectual property into intellectual capital. This requires an entrepreneurial spirit. Bureaucrats typically resist.
Your firm or business likely has multiple communities, which may be separate or integrated. Entrepreneurs and small businesses especially value communities. All clients, however, perceive a significant value in community, because they need to belong within a group of trusted peers. CPAs are, in fact, most trusted among business advisors, and they have regular opportunities to assist clients in overcoming dangers, focusing on opportunities and maximizing strengths.
By their nature, communities also provide a viable marketing channel to any business. Technology and the Internet provide an affordable real-time community. Just consider the rapid expansion of social-networking Web sites.
Circle 5 represents the global environment outside your community. Potential customers reside within this circle. They do not currently conduct business with you, but they may be attracted to your communities via the communications that come from these. (Communications may include articles, press releases, forums, videos and podcasts, to name a few.)
Now that you are familiar with the five circles, ask yourself the following questions:
* Within which circles does my business operate?
* Do we have a strategic plan that allows us to operate in all five?
* Is there a leader and champion who can get us there?
Sadly, most businesses focus on the current company and maximizing profits (Circles 1 and 2), while subjecting themselves to commoditization and creative destruction.
A firm must focus on the future company as well as the current company. The future company requires an investment of cash flow, but it ultimately provides increased perceived value — resulting in increased margins and profits.
A strategic byproduct of this strategy is the retention and attraction of quality people to your firm.
Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
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