It's Not Luck - Eliyahu M. Goldratt [51]
“You are right. Sorry, Alex.”
“Keep going,” I encourage him, “read the additional entity.” I’m anxious to see their response.
Brandon doesn’t need any encouragement, “ ‘The essence of cost accounting is to calculate the product cost.’ Hmm . . . I’m not sure, but before I object, let’s see what you are going to do with this statement.”
He takes a deep breath and continues, “If, ‘There are important measurements that focus on local optima, e.g., cost accounting based measurements,’ and ‘The essence of cost accounting is to calculate the product cost,’ and ‘Most managers perception of the value of a product is heavily influenced by the local efforts required to design, produce, sell and deliver the product,’ then, ‘Most managers believe that product cost is something real that quantifies the efforts absorbed by the product.’ Whoa, that was long, let me read it again.”
I wait for them while they digest this last mouthful.
At last Jim says, “No problem, I buy it.”
Brandon agrees.
I can’t control my impatience, “You see the unavoidable conclusion? It means that . . .” I’m looking for the precise verbalization written on my tree. “It means that ‘Most managers believe that the product price should be equal to product cost plus reasonable margin.’ ”
They don’t get it, rather, Jim is quick to conclude,
“The key word is ‘should’, ‘. . . it should be equal . . .’ I see, you’re going to connect it to one of our UDEs. The one that states that, ‘In more and more cases the price that the market is willing to pay doesn’t leave enough margin.’ ”
No rush, in due time he will get it. Loudly, I say, “Correct. But, as it turns out, it takes some stages before we are able to connect to it. Bear with me, first we’ll have to go through the mechanism by which prices are determined.”
“You mean the struggle between supply and demand?” Brandon asks.
“Basically,” I confirm. “But let’s try to understand it a little bit better. The companies represent the supply side, and as we see, suppliers have a very precise perception of value of the product they supply—the value is supposed to be product cost plus reasonable margin. Naturally, they push for their perception of value to dictate the actual prices.”
“Wait a minute,” Jim says, “you are talking about suppliers as if they are one entity. That’s not the case, suppliers fight amongst themselves.”
“Exactly the other entity that we have to consider.” I smile at Jim and point to the tree. “I haven’t neglected it—on the contrary. I grabbed what we talked about yesterday, that ‘Competition becomes more and more fierce,’ which leads to the conclusion, ‘Suppliers display a less and less uniform front.’ ”
“Thank you,” says Jim, “and now you have probably got, somewhere here, the demand side?”
“Here it is,” I point it out to him. “ ‘Market perception of value is in accordance with the benefits of having the product.’ ”
Before he has any chance to raise more questions I explain, “Rather than supply and demand, I prefer to show it as a clash between the companies’ perception of value for the product they offer and the market perception of value for the same product.”
“That’s interesting,” Brandon comments. “The two perceptions have nothing in common. The perception of value of the companies is based on the effort they had to put into the product, while the perception of value of the market is based on the benefits gained from using the product. No wonder the price is determined by arm wrestling; there is no agreed upon objective criteria.”
“Exactly,” I say. “And since we are now in a period when suppliers display a less and less uniform front, the unavoidable result is that,” and I read from the appropriate place in the tree, “ ‘Prices and quantities sold are determined more and more by the markets’ perception of value and less and less by the suppliers perception of value.’ ”
“Unavoidably,” Brandon agrees. “And that leads to,” he continues to read, “ ‘More than ever satisfying the market perception