(Interaction of costs and quality) In Digital Equipment Corp.'s 1994 reorganization, its second in as many years, the company eliminated hundreds of sales and marketing jobs in its health- industries group, which had been bringing in $800 million ofannual revenue by selling computers to hospitals and other health-care providers world-wide.

Digital says it cut [costs and positions] because it had to act fast. It was losing about $3 million a day, and its cost of sales was much higher than that of its rivals. Robert B. Palmer, the chief executive ojfcer ofthe Maynard, Mass., company, saw across-the-board cuts in all units, regardless ofprofitability, as the way to go. .. .

But in the health-industries group, the cutbacks imposed unexpected costs. Digital disrupted longstanding ties between its veteran salespeople and major customers by transferring their accounts to new sales divisions. It also switched hundreds of smaller accounts to outside distributors without notifying the customers.

702 PART V Cost Control At the industry’s annual conference, “I had customers coming up to me and saying, T haven't seen a Digital sales rep in nine months. Whom do I talk to now?' " recalls Joseph Lesica, a former marketing manager in the group who resigned last year. “That really hurt our credibility. I was embarrassed. "

Resellers of Digital computers, who account for most of its health-care sales, also complained about diminished technology and sales support. “There were months when you couldn't find any¬ body with a Digital badge," complains an official at one former reseller who had been accustomed to Digital sales reps accompanying him on customer calls. “They walked away from large numbers ofclients. "Adds Richard Tarrant, chiefexecutive ofIDX Systems Corp., a Burlington, Vt. reseller that used to have an exclusive arrangement with Digital: uNow, they'rejust one ofseveral vendors we use."

Many Digital customers turned to International Business Machines Corp. [IBM] and Hewlett- Packard Co. and so did some employees of Digital's downsized health-care group. Mr. Lesica says some laid-off workers went to Hewlett-Packard and quickly set about bringing Digital clients with them. “That's another way [Digital] shot itself in the foot," he says.

[SOURCE: Alex Markels and Matt Murray, “Call It Dumbsizing: Why Some Companies Regret Cost-Cutting,” Wall Street Journal (May 4, 1996), pp. Al, A6. Reprinted by permission of The Wall Street Journal, © 1996 Dow Jones & Company, Inc. All Rights Reserved Worldwide.]

a. What is the implied mission (build, hold, or harvest) of the health-industries group of Digital? Explain.

b. Describe the circumstances in which across-the-board cuts in spending rep¬ resent a rational approach to cost management.

c. When Digital decided to cut costs, what were the apparent criteria used to determine which costs were cut? What evidence is there that Digital employs activity-based costing concepts?

d. How could a better, integrated cost management system have helped Digital avoid the adverse effects of its cost-cutting efforts?

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