Hey GM! Prices Are Set by the Market
General Motors Cuts Prices on 80 Percent of Its U.S. Models
Remember the “new” Toyota Production System thinking:
Profit = Market-Set Price (minus) Your Costs
The “old” approach (still apparently endorsed by many companies) was:
Price = Desired Profit (minus) Your Costs
Under the old approach, a company would attempt to increase profits by increasing their price.
The TPS innovation was to accept that prices are set by the market and the only thing you can control is your costs. That’s how you increase profit, by focusing on your costs.
Has GM finally realized that the market values their product less than what they had been charging? The good news for GM is that, from a supply/demand perspective, that lower prices should increase sales volume. Then again, if they’re reducing base costs and cutting incentives, then the “real price” hasn’t changed.
The question: Can GM embrace lean/TPS and reduce production costs enough to be profitable? Or will they continue to blame their “legacy costs?”
Toyota is able to charge more because the market values Toyota’s quality and reliability. Some analysts say the “value gap” is much larger than the “cost gap” that GM is always blaming. In other words, if GM did as good of a job as Toyota, GM would be able to charge as much for their vehicles (the market would allow the higher pricing, really) and GM would be more profitable.