When I saw this headline (also a WSJ article today), I expected to read something like this:
“‘On profits, I think what you are seeing is pressure coming from higher energy and commodity prices,’ Norman said. ‘Many companies have difficulty passing these costs on to their customers in today’s competitive environment.'”
In any environment, let alone “today’s competitive environment”, what entitles you to pass along costs to customers? The quote above demonstrates the “old” thinking of Price = Cost + Desired Profit.
In the lean mindset, price is driven by the market. In limited cases do you actually have control over prices (say if you have a unique patented product with no competitors). Remember, Profit = Market Price – Your Costs.
If you want to maintain profits, instead of thinking to raise prices (which will almost always drive volume down, it’s basic economics), think of how to get lean and reduce costs by eliminating waste.
Keep an eye out for that “old” thinking. It’s scary how often you see it and read about it, even in 2005.
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