Cost is a fact and Pricing is a strategy - we believe so and may be it is true for certain styles of management. As an admirer of Japanese Management style, Costing assumes strategic significance and when managed well, helps us achieve key business goals - Market Share and Profits.
The Basics - Segment, Target & Position
Maslow’s Hierarchy of Needs theory is forever useful to design and re-design an organisation, based on ever changing SPELT (Socio, Political, Economic, Legal & Technological) environment.
Having internalised simplified concept as above, it is difficult to deny Product or Services costing, as much as pricing, will depend on the segment intended to cater.
A deep commitment to understanding this positioning will help us design the organisation overall in terms of Business Processes from end to end. Moving up or below the triangle is welcome. However, right costing will completely depend on strategic positioning of Products and Services.
It is no wonder economies of scale and customised products still own markets, but at different risk levels and profit levels. Many a times, Niche marketers catering to customised segments continue to be isolated from the vagaries of SPELT changes.
The Process Approach:
The following questions cannot be answered as simple as they seem.
Right costing will depend a lot more on how accurately we are able to answer these questions. Meaning, it helps us do the Right Things more than do Things Right.
A Business should satisfy customer wants - either real or felt. Anything that is consumed by a Customer is at a COST - that he has paid in Consideration of Some Thing. Benefit to Cost ratio should always be greater than one. Measurements become very critical, as very few customers can define benefits exactly. It is better a product or service provider is able to demonstrate benefits and cost as desired by both provider and consumer.
Value for money expectations of customers have redefined Activity Based Costing into Value Based Costing.
To quote Henry Ford:
The Facts - To Be Remembered At All Times:
Innovation in products, services and processes are very vital to sustain businesses. It is true - to remain in same place today, we need to keep running. Else, we will be run over - meaning over taken. It does not mean complacency. It simply means that often we need to change ourselves and not merely after situation demands. Stability and Growth are twin engines of today’s businesses. How well we manage them defines our sustainability.
The Realities:
We do not want to be negative. However, amount of payment defaults the World and in particular our Country is going through simply says that our business plans are yet to be robust and fool proof enough, despite best scrutiniees. Cash flow remains the Oxygen for Organisations, in otherwise polluting Business Environs.
Strategic Costing and Differentiation:
Cost leadership may be vital to ensure success, but not sufficient enough. It makes a better tool when combined with product / services strategies. Success of Businessmen largely depends on his / her ability to woo customer away from Cost Focus to Value and Relationship Focus as Bill Gates says:
From the table as above, it is clear Product / Service and Process innovations are the drivers for sustaining successes combined with Cost Leadership.
The 7 Ss of Right Costing
As professionals, we are familiar with 5S and 6 Sigma. Borrowing the principles from them, Costing Management can be defined in 7S terms:
1.Set Target
2.Select Processes
3.Segregate Costs
4.Separate VAs & Potential NVAs
5.Substantiate
6.Supplement
7.Sustain
Many Indian Organisations have proven time and again that they reinvent themselves to sustain leadership in Business.
Conclusion:
World has moved from Target Costing to Target Profiting by offering Target Values to Customers. Some of the Indian Organisations have begum treading this path towards eternal Glory.
