Strategic Cost Analysis : Avoiding the Impact of Inflation
As the aftermath of the economic recession caused by COVID-19 led to inflation, companies try to avoid its impact by making adjustments on manufacturing costs. However, when doing so in times of inflation, it would be more advantageous to perform strategic cost analysis to be able to offer cheaper alternatives that do not sacrifice quality as a competitive pricing strategy.
A Harvard Business Review article cited that during periods of inflation, most companies simply follow the trend of raising the prices of their products, mainly to maintain profit margins for the benefit of investors. Yet companies that deviated from such pricing trend found themselves in a better market position by adopting operating cost reduction strategies.
What Does Strategic Cost Analysis Involve?
Strategic cost analysis involves diagnosing all economic values, from the most basic costs up to the price paid by the consumer. The process involves creating a value chain diagram that analyzes every value added in each stage of the entire production and market processes to reveal the changing cost components.
The analysis also involves evaluating and comparing the long-term shifts in cost position between competitors and how they relate to the company. The final step involves factoring in the potential effects of future inflation into the company’s own operational and manufacturing costs and to that of the competition.
Having an understanding of how these values come into play in the company’s business operations provides a clearer background when formulating effective strategies when seeking a way out of the competitive pricing trap. This is important when aiming to establish and distinguish one’s company as a low-cost producer of quality product in a particular segment of the market.
Case Example : Microsoft’s Surface Pro Series vs. Surface Pro Alternatives
When smart tablets became popular to many business owners and professionals who are often out and about as part of their daily routine of activities, Microsoft came out with a series of laptops that can be converted into powerful tablet forms.
However, production of the hybrid Microsoft laptops known as Surface Pro series required investing in longer processes and raw materials that made the device way too expensive for ordinary businessmen and professionals.
Moreover, Microsoft focused on following the sustainability trend by complying with all requirements in order to be certified by the Environmental Protection Agency (EPA) as a gold-registered sustainable product in accordance with the EPA’s Electronic Product Environmental Assessment Tool (EPEAT),
As a certified producer of eco-friendly products, Microsoft attained recognition as a company worthy of the attention of the emerging breed of investors who prefer to provide funding on companies that focus on Environmental, Social and Governance (ESG).
Nonetheless, other laptop manufacturers came out with their own versions of the 2-in-1 laptop that offered the basic features of Microsoft’s Surface Pro. This made their hybrid devices stood out in the market as the more economical choice, thereby establishing their position in the market by becoming the more economical brands over Microsoft.
Although these companies are not making sustainability claims about their products, they adhere to environment-responsible practices such as using renewable energy to reduce both operational and manufacturing costs, as well as using recycled packaging materials to help reduce wastes that go into landfills. Now that inflation has reduced the buying power of consumers, those looking to purchase a 2-in-1 personal device automatically search for surface pro alternatives.