Introduction
Target pricing: a
marketing management
tool for pricing new cars
Ogenyi Ejye Omar
The author
Ogenyi Ejye Omar is a Research Reader and lectures in
Retail Marketing and Marketing Management at the School
of Retail Studies, London College of Printing and Distributive
Trades (LCPDT), The London Institute, London, UK.
Abstract
Over the past 15 years, many UK car manufacturers have
learned that quality must be designed into cars before they
are manufactured – it is expensive, if not misguided, to create
quality by inspection after the car has left the production line.
Examines the rigorous cost management technique which
helps prevent senior managers from launching low-margin
cars which do not generate enough returns on investment.
Finds that most UK-based car manufacturers employ the logic
of target costing as a marketing management tool to deter-
mine the prices of new car models. Suggests that before a
new car is launched, senior managers must determine its
ideal selling price, establish the feasibility of meeting that
price, and then control costs to ensure that the set price is
met. Reports the conclusive evidence that when target
costing works well, quantifiable hurdles are established in a
transparent process, and senior managers are more likely to
commit themselves to what the statistical numbers show.
Pricing Strategy & Practice
Volume 5 · Number 2 · 1997 · pp. 61–69
© MCB University Press · ISSN 0968-4905
61
In their quest to reduce manufacturing costs
and launch cars with predetermined targets, the
UK car manufacturers are turning to the Japan-
ese price management tool (target pricing) for a
solution. Target pricing is a rigorous price man-
agement technique that helps prevent managers
from launching low-margin products that do
not generate appropriate returns on investment.
However, its greater value lies in its ability to
bring the challenge of the marketplace back
through the chain of production to product
designers (Cooper and Chew, 1996). The logic
is to look at the future dimensions in the mar-
ketplace, mapping the customer segments and
targeting the most attractive consumer quad-
rants (see Figure 1). The manufacturers deter-
mine what level of quality and functionality will
succeed within each market segment, given
predetermined targets. The firm designs the
sourcing, production, delivery processes and
retail outlets that enables it to achieve its desired
profits at the set target. In effect, the manufac-
turer reasons backward from customers’ needs
and willingness to pay a specific price instead of
following the flawed but common practice of
cost-plus pricing. Target costing ensures that
success with the customers yields economic
success for the manufacturer, and greater oper-
ating margins for dealers.
While target costing considers quality and
price separately, historically, price has been
considered an indicator of quality (Curry and
Riesz, 1988). During the last decade, however,
this notion of proportional correspondence
between price and quality has seriously been
questioned by Crosby (1979) and Hayes and
Wheelwright (1984), who claimed that improve-
ments in quality need not increase costs.
Two elements are used by car manufacturing
firms as the basis for control and performance
measurement – the time base and the cost struc-
ture (money). Product mix, sales volumes,
capacity, efficiency, utilization and productivity
are measured by time. At the corporate level,
forecast activity levels, performance measures,
levels of investment and similar activities use the
money base. Hill (1995), emphasized the
importance of getting the correct links between
the time-based and money-based measures in
terms of accuracy, and in terms of key factors
associated with car manufacturing.
 Target pricing: a marketing management tool for pricing new cars
Ogenyi Ejye Omar
Figure 1 The target pricing process
The price and cost management issues
addressed in this article are controlled by both
time and money functions within the firm. This
paper highlights a number of areas that need to
be addressed from the point of view of car man-
ufacturing and retailing firms. It links the areas
of new car pricing strategy with target costing
and illustrates some of the key issues that need
to be developed, and the essential direction
these improvements need to take. It shows the
ways in which target costing influences new car
pricing strategy while drawing attention to the
essential nature of UK car distribution needs.
Literature review
The continuing interest in the UK car industry
is probably due to the way in which it is seen as a
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Pricing Strategy & Practice
Volume 5 · Number 2 · 1997 · 61–69
paradigm of wider social and economic phe-
nomena. Wells and Rawlinson (1994), attrib-
uted the significance of the automotive sector to
economic, organizational and environmental
conditions prevailing in the UK. Dicken (1988)
argues for industrial geography in the 1990s to
embrace and integrate the separate traditions of
enterprise geography and structuralism, while at
the same time making a more powerful contri-
bution to the realms of business and economics.
Criticisms levelled at the traditional price and
cost-management approaches in the UK have
become increasingly both vocal and broader
based. The decline in the UK motor car manu-
facturing industry makes such criticisms more
relevant. Ferrara (1990), argued that the con-
certed pressure for improvement has increased
because of growing competition from other
 Target pricing: a marketing management tool for pricing new cars
Ogenyi Ejye Omar
European and Japanese manufacturers. To
assess the alternative strategies, car manufactur-
ers need insights and, in the competitive climate
of the 1990s, the pressure to make significant
and speedy strategic responses has never been
greater. Traditional pricing and costing meth-
ods used by the UK car manufacturers do not
provide enough information to help the decision
process. Davies et al. (1991), tracing the perfor-
mance history of traditional price and costing
systems employed by the UK car manufactur-
ers, rated them as being reactive. According to
Hill (1989), what is needed is an executive
response, developing proactively systems which
fulfil the needs of the decision-making processes
necessary to meet the demands of today’s mar-
kets and competitive threats.
A survey of British car manufacturers by
Davies et al. (1991), reported that in the previ-
ous five years “significant revisions to price and
cost-management systems were cited by 68 per
cent of respondents.” The survey reported that
many of these revisions “were ‘traditional’
rather than ‘new’ cost-management
techniques”. The authors concluded that
“introducing advanced price and cost-manage-
ment techniques may not be the best improve-
ment for many producers.” They were con-
cerned that developing basic systems will not
give a company the insights it requires, for if
traditional practices provided what was needed,
then the essential criticism levelled against these
systems would not be widespread.
In their attempts to improve the competitive
nature of their performance, car manufacturers
are paying greater attention to a whole range of
improvements in quality, processes, inventory
holdings and workforce policies. All are essen-
tial measures to effect change. Not only is the
level of response high, but the approaches are
challenging the very basis of previous practice.
As Kaplan (1984), revealed, “during the
1970s, most UK car manufacturers used man-
agement control systems that were developed
decades ago for a competitive environment
drastically different from that of today.”
Although, Davies et al. (1991), concluded other-
wise, Cooper and Kaplan (1985) observed that
“when trying to assess the level of contribution
provided by each product as a prerequisite for
judging what steps to take, many companies find
that the accounting information provided fails to
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Pricing Strategy & Practice
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differentiate between them. While higher vol-
umes may decrease costs and product prolifera-
tion may increase them, these essential trade-offs
are rarely differentiated within the traditional
price and cost-management procedures.”
The use of traditional pricing and cost-
management systems which are regarded as out-
dated, creates added costs in terms of labour
and overheads allocation. The problems of
traditional full-costing techniques that rely on
an allocation formula to distribute cost elements
is unlikely to prescribe a true cost allocation
solution. As a consequence, the product may be
de-emphasized or overpriced, while the margin-
al-extensions of the product line and customers
served may be under-priced or over-emphasized
in their importance. This may be true even
when a real competitive advantage exists for a
product while there is no comparable advantage
in the extension coverage.
Research objectives
Target pricing involves more than listing mone-
tary targets and projected margins. It is a highly
structured product development discipline,
adapted to such specific elements of a manufac-
turer’s strategic positioning as new car pricing
dynamics, car-complexity, life-cycle analyses,
component suppliers and dealership relations. It
requires manufacturers to make a series of deci-
sions that include defining the car that customers
want, ascertaining the economics required for
profitability, allocating targets to components
and identifying the gap between target prices and
initial projections of manufacturing costs.
The purpose of this study is to make a
number of critical observations about the
impact on car manufacturing of using target
costing as a base for new car pricing. Since the
financial systems in a firm can have a major
impact on a manufacturer’s ability to develop
and maintain an effective competitive edge, the
aim of target costing is to give car manufactur-
ers the ability to measure and assess their per-
formance accurately in relation to major com-
petitors. The study objectives, therefore, were
to:
• develop propositions about cost concepts; and
• examine the available evidence in support of
the propositions.
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Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

To accomplish these objectives, the previous Table I Number of new cars produced and net earning of UK-based car manu-
research literature was augmented by an facturers in 1995
exploratory investigation of car manufacturing
Number of Sales Percentage Net profit
cost management and pricing systems. Compa-
Company vehicles n share (£billion)
ny interviews were conducted using the free-
elicitation approach recommended by Zeithaml General Motors 7.146 596 23.2 1.65
(1988). This approach generated qualitative Ford 5.764 410 21.1 1.69
data which supplemented previous research and Toyota 4.695 52 2.7 0.97
served as a basis for the conclusion presented. Volkswagen 3.499 81 4.2 (0.75)
Nissan 2.982 91 4.7 (0.09)
Fiat 2.231 70 3.6 (0.74)
Research methodology Chrysler 2.159 5 0.3 1.61
In order to assess accurately the reasons for the Peugeot/Citroen 2.049 143 7.4 (0.17)
UK-based car manufacturers employing target Renault 2.041 120 6.2 0.12
costing as a management tool for pricing new Mitsubishi 1.832 10 0.6 0.13
cars, 12 leading car manufacturers producing Honda 1.828 45 2.4 0.19
and/or marketing new cars (General Motors, Mazda 1.460 16 0.8 0.02
Ford, Toyota, Volkswagen, Nissan, Fiat, Sources: Economist Intelligence Unit (1996); Automotive Management
Chrysler, Peugeot/Citroen, Renault, Mitsubishi, – market data (May 1996); Society of Motor Manufacturers and Traders
Honda and Mazda) in the UK were selected on (SMMT, 1996)
the basis of their market share. They have a
combined market share of 72 percent, sufficient
to influence the structure of new car marketing pricing, allocation of overheads to relevant areas
innovation in the UK (see Table I). of production and marketing, and how the final
In-depth personal interviews were held with price for a new car model was determined.
the managing director and the marketing director
of each firm. Open-ended questions pertaining to
issues such as the company’s knowledge and Analysis and interpretations
awareness about cost structures, overhead alloca- As is typical in exploratory studies using means-
tions and contributions per model were asked. end chains (Zeithaml, 1988), the data generated
Free-elicitation approaches were used to obtain were not numerical. Instead, the data were in
information about the cost-management systems the form of protocols and means-end maps for
(marginal, absorption and target) employed by
individual respondents. Patterns of responses
the manufacturers. These techniques included
and observed similarities across individuals
“triad sorts” and “laddering.” In triad sorts,
form the “results” of this exploratory study.
similar costing systems used in arriving at the
When combined with the descriptive data from
basic car price were divided into sets of three and
personal interviews, the observations and
respondents were probed for distinctions among
insights provide a framework for speculating
them. This initial process uncovered the impor-
about the concepts and their relationships. The
tant distinctions that respondents used to dis-
criminate among cost systems. The laddering analysis concentrated on evaluating the target
process, which followed the triad sorts, involved a cost-management process, operating parame-
sequence of in-depth probes designed to force the ters, market definition and target assessment
respondents up the ladder of abstraction. leading to reliable pricing strategies for new car
As these procedures had elicited successfully models. The four areas of target pricing are:
the more important higher levels of abstraction (1) Operating process:
in previous studies (Gutman and Alden, 1985), • not an exact science;
they were used to reveal the links among new • depends on the credibility of information;
car model attributes, quality and value. After • depends on the manager’s courage to
these indirect methods, managers responded to make difficult decisions;
open-ended questions covering such topics as • evolves all manufacturing and marketing
information needed to make judgments about team;
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 Target pricing: a marketing management tool for pricing new cars
Ogenyi Ejye Omar
• involves sharing responsibility across
functions;
• involves collaborative efforts with both
the dealers and the suppliers;
• requires control through time and focus.
(2) Operational parameters:
• new cars are cost and priced before
designed and developed;
• technological innovations tie new car
costs to its design;
• model design is based on quality and
value for money;
• investment returns are predetermined;
• cost and volume are variable elements;
• overhead allocation is functional and
component unit based.
(3) Strategic market definition:
• an iterative process associated with car
design;
• both consumers and competitors are of
equal, parallel concern;
• prices are defined in terms of customer-
perceived value and prestige;
• customers are defined in terms of discre-
tionary income;
• competition is defined in terms of total
transportation system;
• targets are defined costs that must not be
exceeded.
(4) Market focus:
• target is set against future profitability;
• target is a profit-management tool;
• target is also a cost-control tool;
• target ignores the traditional cost-plus
system of pricing;
• target aids, directs and drives marketing
strategy.
The operating process
Cooper and Chew (1996) have explained that
target costing is not an exact science. They
emphasized that it depends on credible data and
on managers who have the courage to make
difficult judgments. However, 78 percent of the
manufacturers using this method believe that
target costing is an iterative process that cannot
be separated from the ordinary push-and-pull of
the car design process. Almost 60 percent
expressed the view that targets evolve as manu-
facturing teams seek to balance new car func-
tionality, price, volumes, capital investment and
costs. Others (35 percent) simply explained that
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Pricing Strategy & Practice
Volume 5 · Number 2 · 1997 · 61–69
since target costing is integrative, responsibility
for achieving targets must be shared across
functions. Over 70 percent agreed that to use
target costing effectively, manufacturers must
treat their component suppliers and dealers as
partners both during the car design process and
when the car cost targets are set.
Operational parameters
This study is about pricing and costing new cars
before being designed and developed. Evidence
gathered from the UK-based car manufacturers
who were questioned with respect to why they
are only now using this process, expressed previ-
ous lack of interest as: “…lack of involvement
gave engineers and enthusiasts, who were unlike-
ly to see the whole picture, undue influence over
the manufacturer’s competitive position.”
When senior managers tried to drive costs
out of their operations (expose facts) by cutting
staff, eliminating frills, out-sourcing or re-
engineering downstream processes, they often
discovered that as much as 70 to 80 percent of a
car’s costs were effectively inimitable after it left
the designer’s drawing board. As product and
process technologies have become more inte-
grated, a new car’s cost has become tied even
more strongly to its design.
Market definition
Almost 80 percent of the manufacturers ques-
tioned with respect to their marketing strategies
think that it is not enough to focus on the cus-
tomers only because competitors are a parallel
concern. They defined competitors as “compa-
nies that make things similar to what we make”
which is the producers’ view of competition
within the UK motor car industry. On the other
hand, the Japanese car manufacturers inter-
viewed for this research defined competitors
from the customers’ perspective as: “I am about
to make a new car purchase, so what are my
options”?. Nissan, for example, benchmarks
itself not just against car manufacturers but also
against the various motor car component manu-
facturers (Garrahan and Stewart, 1991). The
company understood that it was competing for
consumers’ discretionary income against
makers of all other transportation systems.
 Target pricing: a marketing management tool for pricing new cars
Ogenyi Ejye Omar
Assessing overall targets
Motor car manufacturers derive overall targets in
a number of different ways, but the purpose is
always the same: “to think rigorously about the
future profitability.” Some Japanese manufactur-
ers agreed to classifying target costing as a profit-
management tool rather than as a cost-control
tool applied by many other UK-based car manu-
facturers. In both cases, however, the task is to
assess and calculate the costs that must not be
exceeded if acceptable margins from specific car
models at specific price points are to be realized.
For many traditional UK-based manufacturers
such as Ford, General Motors and Rover, this
order of logic represents a radical shift in thinking.
Traditionally, the UK manufacturers perform
financial analysis associated with car development
only after much of the development work has
been done, and then only to determine whether to
continue investment. In contrast to the Japanese
target costing system, a financial analysis done
early in the design process can accomplish much
more. It can tell design teams and general man-
agers a great deal about what is required to make
the car a success. As one management accountant
explained: “…in both cases, the nature of the
analysis may be the same, but shifts in timing and
focus make a huge difference.”
Similarly, another car manufacturer per-
formed a financial analysis (on the basis of cost-
plus) to estimate a likely return on investment
for a redesigned car launched under a single set
of market conditions. The purpose of the analy-
sis, he noted, was to make senior managers
more comfortable with their decision to go
ahead. It was observed that:
…although the analysis aided the approval
process, it provided little guidance to the design
team. It displayed no sensitivity to the fact that
conditions such as launch date, cost and volume,
are variable and that small changes matter.
In launching a new car model, any miss in cost
target would always be catastrophic no matter
how small a percentage, for example, “a 0.5
percent error in cost target will eliminate a
return on the manufacturer’s investment of
nearly £200 million.”
Discussion
Target pricing drives motor car development
strategy that focusses the design team on the
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Volume 5 · Number 2 · 1997 · 61–69
ultimate customer and on the real opportunity
in the market. Evidence suggested that leading
Japanese motor car manufacturers have used
target costing to their advantage, and have
introduced it in the UK.
Target pricing and costing ensures that devel-
opment teams bring profitable new motor cars to
the UK market not only with the right level of
quality and functionality but also with appropri-
ate prices for the targeted customer segment. In
alignment with the previous research conducted
in this area, all indications are that car manufac-
turers and component suppliers have come to
realize that it is a discipline that harmonizes the
labour of disparate participants in the develop-
ment effort, from designers, manufacturing
engineers, market researchers, component sup-
pliers to the dealers (Cooper and Chew 1996;
Davies et al., 1991; and Wells and Rawlinson
1994).
Nevertheless, although a preemptive and
disciplined approach to costs has always been
reasonable, it has not always been urgent, and
manufacturers do not usually undertake difficult
tasks if the tasks are avoidable. In a structured,
closed, UK economy, however, price and cost
targeting are no longer avoidable, largely
because of the erosion of important “first-
mover” advantages. In the past, many leading
UK car manufacturers such as Rover, British
Leyland and Jaguar, for example, who led by
technical differentiation, found that they could
take a cost-plus approach to releasing new cars
because they anticipated profiting from serial
generations of car models. They believed that
being first to market was most important; that in
preparing to be first, design teams needed to
focus only on selecting and executing the appro-
priate bundle of car attributes; and that ultimate-
ly, over several iterations of the brand, the mar-
ketplace would allow the manufacturer to earn a
reasonable return on total capital employed.
By that logic, when a new car model was first
released, it might carry a comparatively high
price considered affordable by only a small
number of “leader users,” such as businesses
hoping to turn a new technology to their advan-
tage or comparatively wealthy, adventurous
technophiles. Lead users would pay a premium
for the first-generation model and help create
excitement for the new features; they would
even help establish the car model. The revenues
 Target pricing: a marketing management tool for pricing new cars
Ogenyi Ejye Omar
from lead users would rarely cover the cost of
developing the model. Peugeot, for example,
did not expect the first releases of its 405 model
to recover R&D costs. But the Peugeot manu-
facturer assumed that they would have time to
scale up to mass production and introduce
serially cheaper versions of products for increas-
ingly broader segments of customers. Unfortu-
nately that did not happen because of severe
vertical competition from other manufacturers,
and a new 406 model was launched instead to
replace the flagging 405. The mass market is
usually the source of most profits and this
applies to the UK car market.
Strategic orientation
The strategic assumption (first-mover) would
be disastrous for all but the most advanced cars
with high proprietary technologies. The UK
market no longer allows a manufacturer time to
introduce a car model and then scale up. Lean
manufacturers are able to bring “me too”
models to the market so rapidly that the first-
mover manufacturers have no time to inculcate
brand loyalty, let alone recover their develop-
ment costs. Lean competitors, work on shorter
product development and life cycles, and they
manufacture wherever it is cheap.
The growing number and increasing ubiquity
of lean competitors means that copycat design
versions of most new car models will be avail-
able within six months, not a year. So if market
leaders cannot recover costs as they used to,
they have no choice but to manage costs from
the design phase forward and to launch prod-
ucts at prices that will attract broad segments of
customers and forestall imitation. How long
they can hold on to their market will often
depend on how quickly they can offer greater
functionality without raising prices. For manu-
facturers to gain and hold market leadership,
they have to design the cost out of their cars
when they set initial levels of quality and func-
tionality and they have to calibrate car perfor-
mance to an identified price niche. In short,
senior managers need to approach new car
development controlling for future costs.
Market and product dimensions
Motor car manufacturers are aware that the
choices that drive the entire target-costing
process are the customers. What prices will the
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Pricing Strategy & Practice
Volume 5 · Number 2 · 1997 · 61–69
market accept? What functionality will the
customers insist on in relation to what the com-
petitors are offering? In placing the customers’
needs first, target pricing maximizes the prod-
uct’s total profitability, rather than minimizing
its cost. Car manufacturers must try to under-
stand how and why the customers prefer cars
the way they do. They must also try to under-
stand how the competitors’ cars will evolve over
time. This knowledge will help to drive the
direction of future target pricing. The under-
standing of customers’ needs and the direction
of competition requires a thorough knowledge
of the customers’ motor car shopping behavior
in each market segment.
When the Japanese car manufacturers target-
ed the luxury car market in the UK, for exam-
ple, they already knew one critical feature of
luxury cars. They knew that luxury cars had to
be quiet. For years, British motor car manufac-
turers have tried to reduce sound levels in
luxury cars and found the task inherently diffi-
cult. Sound level not only traded off against
acceleration, high-revving engines tended to be
loud. It was also an integrative challenge,
because sound comes from many other design
components, including the drive-shaft, tyres
and door seals. A marketing director of one of
the Japanese UK-based car manufacturers
explained:
Japanese researchers discovered that frequency
was as important to the customers as decibel level;
that is, the nature of the sound was as important as
its loudness. This discovery pointed to a different
design challenge; and instead of minimizing
sound, designers tuned the car in a pleasing
fashion.
The relationship between volume and frequency
points to the challenge facing any car manufac-
turer and/or dealers engaged in motor car posi-
tioning. Customers’ preferences must be
expressed as innovative design options such as
perceived quality and functionality targets. It is
at this point that manufacturers might use such
interfunctional design techniques mapping the
relationship between customers’ demand fea-
tures and specific engineering characteristics.
Market gap identification
Once a target cost has been calculated for a new
car, the design team has to divide it up among the
various functions. How much can the team spend
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Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

on one function as against all others? The team for the project or revising the test until the project
must first calculate the gap between the target passed. Target costing will not tolerate that.
cost and what it estimates it would cost to build The cardinal rule applies to the product as a
the car with the existing processes, supplies, whole. When targets are assigned to individual
productivity levels and materials. The difference subassembly teams some will beat their targets,
is a good approximation of the excess cost that some will meet them, and some will fall short.
must be wrung out of the new car model.
But success is not determined component by
It usually makes no sense to apply cost-
component; it is achieved, or not, by the final
reduction requirements uniformly across all the
product. When components turn out to be more
components and subsystems of the contemplat-
expensive than anticipated, that cost must be
ed model. Rather, the design team can consult
offset somewhere else in the design. This
customer value surveys, historical trends and
requirement demands a degree of cooperation
other data to guide it in determining how much
and team spirit that will necessitate change for
cost it can remove from each component or
many organizations.
subassembly. The team will allocate more costs
to critical features (allowing for increased
engine cost in a car that is intended to have a Managerial and marketing implications
peppier ride, for example). But the extra money
Any system that cuts across organizational
it allocates to improving one model feature must
boundaries and communicates so many vital
come from another function’s allocation,
economic and market objectives is bound to
because the target cost remains fixed.
have a profound impact on how the organization
Evidence from this study suggests that the
does business. One of the main benefits of target
UK-based Japanese car manufacturing firms
costing is that it forces car manufacturers to
using a target costing system, aim to keep prices
delineate their car development goals very
constant while adding as much functionality as
precisely and in a single vernacular.
possible to each new generation of vehicles. The
In some organizations, the observation was
system, therefore, attaches great importance to
that clarity of communication was sacrificed to a
determining what features and level of perfor-
general commitment to decentralization. At one
mance the customer will want most, and it uses
large manufacturer, the researchers observed
those preferences as the basis for assigning costs
that nearly every functional department was
to major functions and group components. All
using a unit of analysis that it had developed to
design team members, whatever their function
answer a question of importance to itself only
speciality, must regard the overall final cost
and that varied subtly from every other function-
target as an unalterable commitment; target
al department’s unit of analysis. Competitors’
commitments rated above design commitments.
specifications were collected by car model, exist-
The idea is that aggressive targets focus the
ing costs were computed by parts, customer’s
efforts of the design team on creative solutions
needs were defined in terms of brand attribute,
and press value engineering to its limits. Targets
manufacturing constraints were determined by
must fall under the protection of what is known
installation point, and the capabilities of the
as the cardinal rule (if you cannot meet the
dealers were measured by the volume of sales.
targets, you cannot launch the car). That being
All those measures were related, but none
the case, the process of car definition and target
addressed overall investment cost targets. There
generation continues, but not in the factory.
Some companies have a layered set of targets. was no overall context within which to work. As
The first pass is the simplest, and failure here a result, a car designer assigned to a particular
leads to a more sophisticated life-cycle analysis. subsystem (model shape) could not get a clear
But this approach must not become a game with answer to the question: “How much do cus-
ever lower hurdles, each test becoming less tomers value this shaping style?” Target costing
rigorous than the one before. As one manager requires that such problems be addressed
puts it: directly. It forces car manufacturers to be specif-
…in the past, if a specific project failed the test for ic about what customers want and what prices
funding, we just kept changing the assumptions they are prepared to pay. Finally, target costing
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Ogenyi Ejye Omar
creates opportunities to demonstrate a commit-
ment to customers. Its discipline may be painful
to the people who work on a project, but it sends
an important message to the management and
the organization as a whole that customers come
first and that if the company does not create
value for them, a competitor will.
Recommendations
For target pricing to succeed, targets must not
only be valid, employees must also see them as
valid. They cannot be the outcome of a manufac-
turer’s political process. The market analysis that
yields the target process, the financial analysis
that generates the target costs and the desegrega-
tion procedures that allocate costs among com-
ponents and subassemblies must all be trusted.
The target-costing process must, therefore, be
highly transparent throughout the organization.
Moreover, cost-reduction objectives must be
achievable most of the time. Setting the bar too
high can be as damaging as having no bar at all.
In fact, the Japanese set a series of what they call
tip-toe objectives (objectives that may be
reached by “standing on tiptoes”) – a stretch
that strains the organization but does not defeat
it. Also, the requirements for motor car func-
tionality must be articulated clearly so that
nobody tries to achieve the target cost by reduc-
ing model functionality below acceptable levels.
It is not good to reduce costs by short-changing
customers’ car performance demands.
When target pricing works well, quantifiable
cost elements are established in a transparent
process, and senior managers commit them-
selves to what the statistical numbers show.
Engineers receive goals that are clear and achiev-
able, dealers receive achievable instructions, and
everyone adheres to the cardinal rule. A car
manufacturer that meets those requirements is
not guaranteed a victory in the UK car market
but it does earn the right to compete effectively.
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