(Cost management and customer service) Companies sometimes experience difficult financial times, sometimes so drastic that they declare bankruptcy. If a firm either does not conduct sufficient R&D or if its R&D is not sufficiently effective, it will soon find that many of its products are in the decline phase of their life cycles. With the exception of a veiy few products in the devel¬ opment stages of their product life cycles, Polaroid Corp found itself in this dilemma and was forced to file for Chapter 11 bankruptcy in October 2001. Polaroid had been unable to adequately reduce costs or increase cash flow, and its financial condition had deteriorated to the extent that it was unable to pay some of its debts.

Companies also find themselves in situations that necessitate better cost management for a variety of reasons. A healthy firm can discover that its competitors are taking away market share because they are able to offer customers lower prices by operating with greater efficiencies. If the healthy firm lowers its prices but does nothing to reduce its costs, its operating prof¬ its will decline, and stockholders will ultimately experience diminished mar¬ ket values in the company’s stock prices.

In highly competitive industries in which many companies are posi¬ tioned for high volumes of sales, the risk of market downturn exists. In this situation, companies must reduce costs and operations without damaging the company’s future. Belt-tightening cannot be excluded from management’s re¬ sponsibilities. Surely, however, managers can go beyond using unimaginative across-the-board cost cutting.

a. What is the implied mission (build, hold, or harvest) for most of the Po¬ laroid Corp. products? Explain.

b. When are across-the-board spending cuts a rational approach to cost management?

C. How could a cost management system help avoid the adverse effects of cost cutting?

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