The consumer is supreme. Retaining consumers by providing customized products and superior service is regarded as the lifeline for a successful company. The emergence of global competition, rapid diffusion of technology, and the rise of Internet have created a very different competitive environment compared to what existed a decade ago. Indeed, according to Professor Sinha "[t]he Internet represents the biggest threat thus far to a company's ability to brand its products, extract price premiums from buyers, and generate high profit margins." Companies must be able to compete in the global marketplace and at the same time be flexible to respond to rapid market changes. Consumers demand more for less and increasingly look for customized goods. Obviously, one of the greatest challenges faced by organizations in this information age is how to provide increasingly customized and innovative products at the lowest possible price and still satisfy the board of directors and owners who demand higher ROIs, EVAs and profits.
How can companies meet this challenge? Functional cost cutting is no longer an option without rapid deterioration in product and service quality. Price increases are rarely possible due to high competition and availability of substitutes. Some viable options are: (1) Abandon unprofitable products, services and customers; (2) Streamline internal business processes to identify and remove waste; and (3) Collaborate with business partners to reduce costs along the value-chain. All of these options require a company to properly and accurately measure costs of products and services to determine true profit margins.
Product costs may be measured either based on a traditional cost measurement system or an activity-based cost measurement system. Tra ...