Law of Conservation of Value

The premise here is that while products may get commoditized, value never true leaves the overall value chain - it just migrates from one part to a different part. Professor Christensen presents the life cycle of a product as a series of commoditization and de-commoditization. This is closely linked to the concept of integration and modularization. What he says is a product become commodity for a market when it hits the highest level of performance customers require. Beyond that customizers start valuing flexibility and price. So there is a shift towards modularization and outsourcing non core elements to reduce price and develop ability to do mass customization by picking from components available in the market. However the performance and some core components will determine the broader solution's costs. So value will migrate to that component. Sustainable innovation on that component will tend to drive value. 

Consider a product like an accounting service. At some point, it must have been extremely difficult to create accurate reports meeting the regulatory standards, complete the reconciliation of accounts on time and ensure there are no revenue leakages. So you needed better and better team of accountants to achieve these metrics. Then at some point, the performance would have become so good that all regulatory standards are met, reconciliations have started happening on time and most leakages are plugged. At this point any more investment in getting better end to end accounting skills does not add value. This is when modularization start. If the data collation, analysis and report preparation can be separated, then one can focus on reducing effort and hence cost for data collation and report preparation. So now value shifts to innovation around making data collation and report preparation cheaper. This would be in areas of outsourcing, creating factory models to perform activities at scaled using lower skilled resources and automation. The core analysis on the other hand remains untouched - it requires a certain level of skill and comes at a certain cost - so no scope for either reducing cost or improving performance. So a company looking to make money through accounting would do to focus on the data collation and report preparation. However our core competence model would indicate the overall service orchestration or analysis is the core activity. But that's the point - they may be core but they do not serve as source of competitive advantage as you have hit the peak of performance in them and there is no scope to reduce cost. Whereas there is scope for plenty of automation in data collation and report preparation. At some point, one hits the maximum level of automation in these and they too become commodity. At this point, the advent of technologies such as artificial intelligence can shift focus back towards analysis. This technology provides opportunity to automate some of the analysis tasks further reducing the cost - then that becomes the source of competitive advantage in the product and value shifts there. 

Successful companies need to always be in the areas that are going to generate value. That requires companies to transform themselves, changing their core capability every time. Sticking to a single core capability may not be the most profitable business choice. For instance if accounting firms say their core is accounting and stick to the end to end orchestration and analysis letting technology firms take away automation part, they have sold off the family silver. This could possibly be one of the reasons one sees the big four of accounting heavily into technology - since that is where value in accounting service has shifted. 


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