Harvard Case - Nissan Motor Co. Ltd.: Target Costing System
"Nissan Motor Co. Ltd.: Target Costing System" Harvard business case study is written by Robin Cooper. It deals with the challenges in the field of Accounting. The case study is 20 page(s) long and it was first published on : Mar 17, 1994
At Fern Fort University, we recommend that Nissan Motor Co. Ltd. continue to implement its target costing system with a focus on refining its cost analysis, enhancing communication across departments, and integrating the system with its overall strategic goals. This includes actively engaging employees in the target costing process, utilizing a combination of financial and non-financial performance indicators, and adapting the system to the specific needs of different product lines and markets.
2. Background
This case study focuses on Nissan Motor Co. Ltd.'s implementation of a target costing system in response to the challenges posed by the Japanese economic recession in the late 1980s. Faced with declining market share and profitability, Nissan sought to regain competitiveness by introducing a rigorous cost management approach. The target costing system aimed to align product development with market price expectations, ensuring profitability while meeting customer needs.
The main protagonists in this case are:
- Yutaka Kume: Nissan's president at the time, who championed the target costing system and oversaw its implementation.
- The Nissan management team: Responsible for developing and executing the target costing strategy, including setting price targets, identifying cost reduction opportunities, and motivating employees to achieve cost targets.
- Nissan's employees: Directly involved in the implementation of the target costing system, from engineers and designers to manufacturing workers and sales personnel.
3. Analysis of the Case Study
This case study can be analyzed through the lens of several frameworks, including:
- Strategic Management: Nissan's target costing system was a strategic response to the challenges of a declining market and increased competition. It aimed to achieve a competitive advantage by offering high-quality products at competitive prices.
- Cost Accounting: The case study highlights the importance of accurate cost accounting and analysis in implementing target costing. Nissan's system relied on detailed cost breakdowns, activity-based costing (ABC), and variance analysis to identify cost reduction opportunities.
- Organizational Change Management: Implementing a target costing system requires significant organizational change, including shifts in culture, communication, and employee incentives. Nissan's success depended on its ability to manage this change effectively.
- Financial Performance Measurement: The case study emphasizes the importance of using both financial and non-financial performance indicators to assess the effectiveness of the target costing system. Nissan tracked metrics such as cost reduction, product quality, and customer satisfaction.
4. Recommendations
- Refine Cost Analysis: Nissan should continue to refine its cost analysis techniques, utilizing advanced methods like ABC to accurately identify cost drivers and pinpoint areas for improvement. This will ensure that cost reduction efforts are targeted effectively.
- Enhance Communication and Collaboration: Nissan should foster open communication and collaboration across departments, ensuring that all stakeholders are aware of the target costing goals and actively participate in the process. This will lead to a more integrated and effective implementation.
- Integrate Target Costing with Strategic Goals: Nissan should integrate its target costing system with its overall strategic goals, ensuring that cost reduction efforts align with its long-term objectives for product development, market expansion, and profitability.
- Engage Employees in the Process: Nissan should actively engage employees in the target costing process, providing them with the necessary training and resources to understand cost targets and contribute to cost reduction initiatives. This will foster a sense of ownership and responsibility for achieving cost goals.
- Utilize a Balanced Scorecard: Nissan should implement a balanced scorecard approach to performance measurement, utilizing both financial and non-financial indicators. This will provide a more comprehensive view of the system's effectiveness and ensure that cost reductions are not achieved at the expense of other key performance areas.
- Adapt the System to Different Product Lines and Markets: Nissan should adapt its target costing system to the specific needs of different product lines and markets, recognizing that cost drivers and market price expectations may vary significantly.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The target costing system aligns with Nissan's core competencies in manufacturing and engineering, and it supports the company's mission to provide high-quality vehicles at competitive prices.
- External Customers and Internal Clients: The target costing system directly addresses the needs of external customers by ensuring that products are priced competitively while meeting quality expectations. It also benefits internal clients by providing a framework for cost-effective operations.
- Competitors: The target costing system helps Nissan to remain competitive by enabling it to offer products at prices comparable to those of its rivals.
- Attractiveness ' Quantitative Measures: The case study demonstrates the positive impact of the target costing system on Nissan's financial performance, with improved profitability and market share.
- Assumptions: These recommendations are based on the assumption that Nissan will continue to prioritize cost management as a key strategic objective and that it will invest in the necessary resources to support the implementation and ongoing refinement of its target costing system.
6. Conclusion
Nissan's implementation of a target costing system was a strategic decision that helped the company to regain competitiveness and improve its financial performance. By continuing to refine and adapt its approach, Nissan can leverage the target costing system to achieve its long-term goals for growth and profitability.
7. Discussion
Other alternatives to Nissan's target costing system include:
- Value Engineering: This approach focuses on identifying and eliminating unnecessary costs while maintaining or enhancing product value.
- Lean Manufacturing: This approach aims to streamline production processes and eliminate waste, leading to cost reductions and improved efficiency.
- Benchmarking: This involves comparing Nissan's costs and processes to those of its competitors to identify areas for improvement.
The key risks associated with Nissan's target costing system include:
- Overemphasis on Cost Reduction: Focusing solely on cost reduction could lead to compromises in product quality or customer satisfaction.
- Lack of Employee Engagement: Employees may resist the target costing system if they are not adequately involved in the process.
- Difficulty in Adapting to Changing Market Conditions: The target costing system may need to be adjusted to account for changes in customer preferences, competition, or economic conditions.
8. Next Steps
Nissan should implement the following steps to further enhance its target costing system:
- Develop a comprehensive training program for employees on the principles and practices of target costing.
- Establish a dedicated team to oversee the implementation and ongoing refinement of the target costing system.
- Conduct regular reviews of the target costing system to ensure its effectiveness and alignment with strategic goals.
- Monitor key performance indicators to track the progress of the target costing system and identify areas for improvement.
By taking these steps, Nissan can ensure that its target costing system remains a valuable tool for driving profitability and achieving its strategic objectives.
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Case Description
Describes Nissan's sophisticated target costing system in the context of new product introduction. On the basis of consumer analysis and a life cycle contribution study, Nissan conducts an exhaustive analysis of component costs to determine whether a new model can be profitably manufactured. Cost reduction measures are then pursued both internally and with suppliers to ensure that the model can be produced to the target cost. The target costing system is central to Nissan's continued competitiveness in the fiercely contested Japanese automobile market.
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