Nissan Motor Company Essay Example

Efficiency: Target costing highlights commonalities and simplification which Nissan may be able to employ for the design and manufacturing of new model. As a result manufacturing efficiency will improve and cost will reduce.

Life cycle view: Target costing involves profit analysis over the lifecycle of the product. This ensures development of new model will only get approval if the profits generated throughout the life cycle outweigh the cost involved. Since most of the cost decisions are made during design stage, understanding the profitability throughout the product life cycle is critical to launch a profitable model.

Partnership with suppliers: By involving suppliers in cost reduction activities, Nissan fosters relationship with suppliers and benefit from their expertise.

• What approach could be used other than target costing?

Two other approaches used to price products are cost-plus pricing and value pricing. Under cost-plus pricing the company uses cost as a starting point to determine the price, rather than price to determine the allowable cost as under target costing. The firm adds a markup to its cost base to provide for non-assigned costs and the desired profit margin. Different cost-bases can be used – e. g. variable manufacturing cost, all manufacturing costs or the full cost of the product (including costs of other business function than manufacturing). The markup percentage depends on the cost base used and the desired profit margin, but external factors like competition and demand also have to be taken into account.

Downside of using cost plus is that it ignores the concept of price elasticity. Without knowing customer response towards a certain model, Nissan may charge less and lose profit on a particular model. On the other hand, by setting price simply

based on cost, Nissan will have less incentive to cut costs as all the costs are passed to the end consumer. Higher cost versus competition may result in loss in market share for Nissan, which may lead it to a downward spiral as the selling price will rise to cover fixed costs due to loss in demand.

Another possible approach is value pricing, where the price is set based on the perceived value provided to the customer. Similarly to target pricing, this approach also starts with looking at the demand side. Target costing can also be supplied with kaizen costing which is used more for improving efficiency in the production phase rather than in the product planning and design phase where target costing is used.

• What barriers exist for introducing target costing into western countries?

Activity based costing system is more common in western countries than target based costing. Some of the reasons are:

High cost of implementation: Target costing is an iterative process and therefore requires more time, effort and cost to compute target costs. In western countries where labour costs are high, this time can be used for other priories such as marketing, which will help boast the perceived customer price.

Sharing information: Target costing also requires large amount of confidential information to be shared among employees (various members of value chain) and suppliers to achieve cost reduction. This increase the chance of secure information (features of new upcoming models) being leaked to competitors. However, with correct controls in place this can be avoided.

Organisational structure and culture: Target costing is commonly based on cross-functional teams where people from different business functions get together to identify areas for cost-improvement. While

Japanese companies have organizational structure and culture that supports target costing, many of the western companies trying to adopt the system have failed to develop the necessary organizational capabilities to support the system. If the cross-functional teams don’t function properly, it will be difficult to achieve the full potential from target costing. Conflicts and frustration may develop as a result on the cost cutting targets, and the teams might not work efficiently.

Allocation of indirect costs: Under ABC method all indirect cost are allocated to individual product, whereas under target costing some indirect costs are considered as period expense. Hence, ABC method is better in highlighting if one product is subsiding cost of another and allows organisation to make more informed decision on products promotion and cancellations.