I remember that last year when Microsoft bought Nokia, Nokia CEO said: “we didn’t do anything wrong, but somehow, we lost”. But the world changed too fast. (Here you can read the full article).
One word could characterize these times: competitiveness. And, to be competitive, a company have to be productive and innovative. Continually!
Today, we talk about “The cost principle” and “The non-cost principle”.
Increasing the productivity begins with changing the mindset. For example, many people thinking that the price of a product is the sum of cost and profit. This is
The cost principle
So, using the cost principle, we will have:
As you can see, using this formula means that the Selling price is a function of cost (we want to have the same profit ratio).
Selling price=f (cost)
According to this formula, when the cost of energy goes up, for example, the product selling price is raised to reflect the higher energy cost and maintain the desired level of profit. Similarly, when the cost of raw materials goes up, the product price is raised to reflect the higher raw materials cost and maintain the desired level of profit.
On the other words, no matter how big the costs are we will maintain the same profit ratio by increasing the selling price.
Which, you know very well, is not working in the real world.
The non-cost principle
In the real world, the consumer decide the maximum price, and we have to rewrite the above formula as follows:
Selling price – Cost = Profit
In this new formula, the Profit is a function of cost.
What do you say? This new formula shows us a new perspective on profit calculations.
Applying this formula, since consumers decide the selling price, profit is what remains after subtracting the costs from it. The only way to increase the profit, then, is to reduce the costs. Consequently, cost reduction activity should have the highest priority.
Adoption of the non-cost principle and the elimination of waste will permit you to take the lead of reduction the selling price of your products and to be one step ahead of your competition.
There are many aspects which require a different mindset. For example, instead to be focused on individual efficiency or how much is produced, be focused on process efficiency or on how much is delivered to clients, and so on.
I look forward to your comments and questions.