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Once the organizational “big picture” has been established, managers can assess
internal specifics related to the design of a cost management system. A primary
consideration is the firm’s cost structure. Traditionally, cost structure has been
defined in terms of how costs change relative to changes in production or sales
volume.
As firms have become increasingly dependent on automated technology, it has
become more difficult to control costs through sales and production. Many technology
costs are associated with plant, equipment, and infrastructure investments
that provide the capacity to produce goods and services. Higher proportions of
these costs exist in industries that depend on technology for competing on the
bases of quality and price. Manufacturing and service firms have aggressively
adopted advanced technology. The data shown in Exhibit 2–8 reveal the effects of
technology on the efficiency of particular industries.10 Sales per employee traditionally

has been viewed as a measure of organizational productivity. Technology
acquisition and employee training are now regarded as principal sources of productivity
improvement.

The cost management implications of this shift in cost structure are significant.
Most importantly, because most technology costs are not susceptible to short-run
control, cost management efforts are increasingly directed toward the longer term.
Also, managing costs is increasingly a matter of capacity management: high capacity
utilization (if accompanied by high sales volumes) allows a firm to reduce
its per-unit costs in pursuing a cost leadership strategy.
A second implication of the changing cost structure is the firm’s flexibility to
respond to changing short-term conditions. As the proportion of costs relating to
technology investment increases, a firm has less flexibility to take short-term actions
that would reduce costs with no long-term adverse consequences.11
In pursuing either a differentiation or cost leadership strategy, the management
of high technology costs requires beating competitors to the market with new products.
The importance of timeliness is illustrated in the following quote:
There are numerous innovations which have maximized a market window
to achieve phenomenal success—Polaroid is a case in point. Equally, there have
been numerous high-quality products that arrived too late, either because the
market had been acquired by a competitor, or because the need no longer existed.
By the time Head began to produce oversized tennis racquets, Prince had
cornered the market.12
Being first to market may allow a company to set a price that leads to a large
market share, which, in turn, may lead to an industry position of cost leader. Alternatively,
the leading edge company may set a product price that provides a substantial
per-unit profit for all sales generated before competitors are able to offer
alternative products. Rapid time-to-market requires fast development of new products
and services.
Time-to-market is critical in the high-tech industry because profitability depends
on selling an adequate number of units at an acceptable price. Because the price
per unit has been falling steadily for years, getting a new product to the market
late can be disastrous. The risk is described by Richard O’Brien, an economist for
Hewlett-Packard in the following quote will have missed your chance because the price point will have moved.”
Reducing time-to-market is one way a company can cut costs. Exhibit 2–9 lists
other ways, most of which are associated with the earlier stages of the product life
cycle. Thus, as has been previously mentioned, product profitability is largely determined
by an effective design and development process.
Getting products to market quickly and profitably requires a compromise between
the advantages of product innovation and superior product design. Rapid
time-to-market may mean that a firm incurs costs associated with design flaws (such
as the costs of engineering changes) that could have been avoided if more time
had been allowed for the product’s development. Also, if a flawed product is marketed,
costs will likely be incurred for returns, warranty work, or customer “bad
will” regarding the firm’s reputation for product quality.
Time-to-market is important because of the competitive advantages it offers
and because of compressed product life cycles. Both of these factors have a significant
effect on cost management systems, as discussed in the accompanying
News Note.
Another aspect of an organization’s operating environment is supplier relations.
Many companies that have formed strategic alliances with suppliers have found
such relationships to be effective cost control mechanisms. For example, by involving
suppliers early in the design and development stage of new products, a
better design for manufacturability will be achieved and the likelihood of meeting
cost targets will be improved. Additionally, if information systems of customers and
suppliers are linked electronically, the capabilities and functions of systems must
be considered in designing the CMS.