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Tuesday, October 11, 2011

Last minute 2 lectures on strategic cost management


Introduced the concept of V-P-C (Value-Price-Cost) through taking an actual case of ECOSS ( a new case authored by me being published by Richard Ivey). The class grasped the point quickly that the "negative features" of village tourism - like not having a TV, not being able to order food a la carte, not having a swimming pool - are actually positive features for some type of tourists who have "been there and done that" and realized that all hotels are the same but staying with people is an experience. Thus, for such customers, ECOSS need not fear of competition from 5 star hotels even if they exist. Hence the principle that "Value is subjective, Cost is Objective and Price is your decision". I took examples for B2C and B2B businesses to explain this.

From a purely economics point of view the "customer gets the product for which he pays a monetary price". From a strategic perspective, the value (defined as something for which the customer will pay money for) is driven by 4 drivers ( product, facility, expertise and image) and the price is driven its own 4 drivers ( money, time, hassles and risk ). I gave plenty of examples of each of these 8 things. I normally use this framework to show that there is really no commodity in actual life - it is we who make anything into a commodity by not being able to differentiate.

The real challenge lies in figuring out which drivers add more value than they add to the costs. The business lies in the skill to recognize which costs are value creating and which costs are non-value creating. You can create "positive net value" by retaining (or even increasing) the costs that create net value. Net value can also be added by reducing costs (or even drop) which do not create a proportionate reduction in the value. Both cost increase and reduction can increase profitability. ( I could have introduced prof Kano's model but did not ) (but you can) 

I defined the objective of the course as "being able to identify which costs you should incur more / less of so that the net impact is positive on P&L and B/S". I also introduced the concept of financial and intangible assets. Intangible assets being relational, structural and human".

I also mentioned about inside-out costing - that in a seller's market you can incur whatever cost you want and add your profit and still sell at the resulting price. But in a competitive market you are squeezed by markets on both sides - customers will pay you only a competitive price. And the vendors too will charge you what your competitors are paying. Both the prices and costs are not controlled by you and what remains is the price. Therefore the key to operating in competitive markets becomes aiming at the right markets and positioning yourself well so that you get the right price and incurring only those costs which create net positive value.  

I also took the example that the value is holistic and not attached to a feature. If you see the feature of an expensive car being non air conditioned you would laugh till you realize it is a formula car! Same for shopvac

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