The Trusted Strategic Accountant
As the most trusted advisor, CPAs hold the ear of business owners. But while they continue to have this envious position, the advice they provide must move well past statutory and regulatory services and into strategic advisory services. Dr. Michael Porter, a long-time strategist and professor at Harvard Business School, provides a framework to help them do so.
Differentiated Versus Low-Cost
Business owners often struggle to effectively answer the question, “How do you compete against your competitors?” Dr. Porter suggests that companies can compete successfully by providing a premium, differentiated product or a homogenous low-cost offering.
When it comes to differentiation, CPAs can help business owners understand if the products and services they offer are much different from other competitors. Companies that compete by offering differentiated products or services should consider themselves premium providers and command a higher price than other competitors. Alternatively, some business owners provide similar, if not exact, replicas of all other products and services in the same market. This business owner is usually a low-cost provider and will compete on price and quality.
Consider this example: A low-cost provider of homogenous luggage, backpacks and shoulder bags is considering expanding its product line to include premier fashion differentiated handbags. Presently, the low-cost producer offers almost no customer service except for a direct phone number for the sales representative and provides virtually no guarantee for the performance of their bags. However, with this new endeavor and now knowing that the clientele will be paying a premium, the low-cost producer is considering offering a warranty and a customer service hotline for bags requiring some service.
With an understanding of the differences between differentiated producers and low-cost producers, the CPA has a straightforward, two-variable framework to begin current and future strategic conversations. In the case at hand, the accountant can now ask the following questions:
- Does the business have the financial and human resources needed to staff a client services department and the additional sales representatives to call on the clients interested in the premium bags?
- How will this new addition of premium handbags influence the company’s brand?
- Will customers purchase premium products from a company that historically provided low-cost products?
- What are the profit margins of the premium handbags, and how will they affect the overall profits?
There will be a stream of questions that the strategic CPA can develop after framing the business in a manner reflective of differentiated offerings or low cost. However, one thing that is important to take from Porter is his view that most companies are not well suited and not very successful at offering both differentiated and low-cost offerings, mainly because they each have different requirements and competencies. For example, consider a company such as USAA, which offers financial service products to military families. USAA is a differentiated service and charges prices higher than most of its competitors in the financial services marketplace. Everything that USAA does supports this premium service, including a customer service department that helps quickly solve client issues. USAA has continued to perform well and is coming up on its 100th anniversary.
Similarly, low-cost airline Southwest provides almost no customization, no premier services and their flights usually are homogenous regardless of the customer. Southwest focuses all of its resources on logistics, getting flights to take off and land on time, for a price lower than all other competitors. Southwest does not try to do multiple things, such as offering premium and low-cost services simultaneously. Both USAA and Southwest Airlines continue to develop a competitive strategy entrenching themselves in offering either premier or lower-cost services, ensuring that they do not muddy the plan by attempting to be all things to all customers.
By using this tool regularly, CPAs can move from trusted advisor to strategic trusted advisor.
Read part two in this series, Moving Forward by Going Backward.
Dr. Christopher Young, MBA, MAFF, CVA, is associate professor of Professional Practice at Rutgers University and the founder of the Red Maple Group, a full-service economic firm.
This article appeared in the Summer 2022 issue of New Jersey CPA magazine. Read the full issue.