Target Costing: Nissan V. Olympus

Target Costing: Nissan V. Olympus

Target Costing: Nissan v. Olympus

Overview:

Nissan Motor Company was the world’s 4th largest automobile manufacturer in 1990. They had 10% of the market for cars and trucks, with roughly 2 million passenger cars being produced each year. To increase its market share, Nissan implemented a plan to achieve domestic sales of 1.5 million cars by 1992. It also sought to obtain the number one rating in customer satisfaction. The company tried to develop a plan to produce a line of automobiles that matched consumer lifestyles. Nissan had a three stage process of introducing new models, the conceptual design stage, the product development stage, and the production stage, which typically took 10 years to complete.

Olympus Optical Company was founded in 1919 as a producer of microscopes. The company developed its first camera in 1936 and by 1990 it was the world’s fourth largest camera manufacturer. The company had four major revenue producing divisions, a consumer products division, a scientific equipment division, an endoscope division, and a diagnostics division. Olympus relied heavily on the sales of its SLR camera models until a major shift in consumer preferences. When compact camera sales began to skyrocket, Olympus fell behind since it never established a market share for the compact camera market. Management then decided to reconstruct its camera business with a three year program.

Market-Driven Costing:

At the Market-Driven costing level, initial profit planning and extensive market research are used to determine what price level the market will support. Existing products, market position, estimates of sales volume and consumer perceptions of value are considered. This information is then used to determine an appropriate range of prices or the allowable cost. “The allowable cost is the cost at which the product must be manufactured if it is to earn the target profit margin at the target selling price.” (Cooper, 398) This will not be the final target cost, however, since the allowable cost does not incorporate the costs associated with manufacturing or the suppliers.

Nissan Motor Company used market-driven costing in its conceptual design stage. Here the designers would identify an appropriate product mix or the matrix of vehicles it intended to produce. The market mix contained information related to each product and helped Nissan to achieve the desired level of market coverage. Additionally, Nissan hired outside consulting firms to identify new products for the matrix by collecting information regarding consumer preferences. With this information, management then chose an appropriate matrix of models to cover the market.

Nissan would then identify different consumer mind-sets relating to each model. Each model was designed to fit these identified mind-sets.

Olympus Optical Company instated a new strategy to recapture its lost market share. The company focused on both the SLR market and the low-cost compact camera market. In the SLR market, Olympus began to differentiate its products by using innovative technology. In the low-cost camera market, the company developed a full-line of cameras with zoom lens models. In addition to new technology and new product lines, Olympus reduced the time it took to bring its camera to the market to18 months. This allowed the company to react to changes in the market since the industry was so competitive.

Also, another major portion of its market-driven costing plan was to use extensive research to identify the mix of cameras it would be producing. The volume of information collected to be used in decision making was greatly increased. This information came from six different sources, such as the corporate plan, the technology review, and qualitative information about consumer trends. After extensive reviews of the plan and several meetings with management, Olympus would formally accept and eventually implement the plan.

Product-Level Target Costing:

Product-Level costing focuses on production efficiencies through evaluating a firm's manufacturing costs. Target cost is the most important measure, which is similar to allowable cost, but differs by focusing on the firm’s capabilities rather than the market demand. If engineers can find a way to improve the functionality of a product, they must also find a way to reduce related costs.

Nissan then determined the estimated sales for each vehicle as well as projected revenues. When the target profit level was determined, Nissan would compare estimated actual costs to the allowable costs. If the actual costs were greater than the allowable costs, Nissan employed a system of value engineering to rework the products to