the effects of target costing implementation on an organizational
TRANSCRIPT
The Effects of Target Costing Implementation onan Organizational Culture in France
Ekutu L. Bonzemba(Doctoral Candidate)
&
Hiroshi Okano(Associate Professor)
Graduate School of BusinessOsaka City University
3-3-138 Sugimoto, SumiyoshiOSAKA 558-8585, JAPAN
Tel./Fax : +81 (0)6 605 2207E-mail : [email protected]
To be presented at the Second Asian Interdisciplinary Research in Accounting ConferenceOsaka City University, Japan, 4-6 August, 1998
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Abstract This study examines how Target Costing has been implemented by business organizations that operate in otherbusiness environments than its birth environment, the Japanese one. The study is based on a field observationmade at Renault from mid-April to mid-May 1997.It shows the main redesigns of the product development, management, organization systems, and the type of therelationships with the suppliers made by Renault in order to implement TC. Renault made a shift from acompartmentalized-sequential product development style to an inter-functional one and even an inter-organizational one. In order to enforce the commitment of different members who used to work in a functionalcorporate environment for years—therefore were not well prepared for inter-functional or inter-departmentalinterchanges—the internal contract system was introduced.From our analyses, it can be concluded that TC has been implemented by Renault since the late 1980s. All of thesix key features of TCM (identified by the CAM-I Target Cost Core Group) that distinguish TCM from thetraditional approaches to profit and cost planning are now applied by Renault.
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1. Introduction
Today’s business environment is characterized by the intensification of global competition,
rapid pace of automation and computer technology, environmental and safety issues, short
product life cycle, consumers’ need for high quality and innovative product at reasonable
price, and the like. A company’s survival and growth in such challenging environment depend
among other things on its capacity to produce and market genuinely innovative products that
satisfy both the levels of quality and price expected by its market niche.
In order to satisfy customers, a firm needs to maximize its efficiency throughout its
entire value chain. If efficiency is not maximized throughout the entire value chain, costs
might rise above those of rivals and it might be difficult to recoup these higher costs through
increase of price. It is evident that management accounting has greatly evolved within this last
decade in response to the shift in business environment. New ranges of approaches and
practices such as Activity-Based Costing (ABC), Activity-Based Management (ABM), Total
Quality Management (TQM), Target Costing or Target Cost Management (TCM), life cycle
costing, balanced scorecard, and other new concepts have emerged to the point to create a new
sub-branch of management accounting : accounting for strategic positioning or strategic cost
management.
Closely associated with the determination and exploitation of competitive advantage,
accounting for strategic positioning aims to generate information which supports senior
management’s attempts to achieve or sustain a competitive position in the market, relative to
competitors. To a very large extent, accounting for strategic positioning has little relationship
with the needs of external financial reporting.
Target Costing1 is one of the strategic cost management approaches better suited to
strengthen a company’s competitiveness in meeting today’s business challenges. Unlike the
1 Since each company has its own approach of Target Costing depending on various factors—such as itsenvironment (the nature of the product, the type of the customer serviced, and the degree of influence over thesuppliers and subcontractors), strategy and organization structure—, there is not an accepted definition of TargetCosting system. Here are, for example, two selected ones :· For Horváth et al. (1993) :Target costing is a set of management methods and tools to drive the cost and
activities goals in design and planning for new products, to supply a basis for control in the subsequentoperation phases, and to ensure that those products reach given life cycle profitability targets. (p. 2)
· For the Japanese Accounting Research Association (1996) : TCM is the total profit management activitiescarried out at different stages of a product planning and development processes, while simultaneouslyexamining all the processes involved from the upstream to the downstream in order to satisfy the targetedquality, price, reliability and delivery time corresponding to customers’ needs.(p. 109)
Whatever a definition, the basic ideas in Target Costing are the planning, management and reduction of a newproduct’s costs from the inception integrating all possible external and internal factors.
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conventional cost-plus approach, Target Costing is an "open system" which links external and
internal factors from the inception. The activities to optimize the key success factors (cost,
quality, innovation, and time) of a product are carried out mainly at the development and
design phases, involving a multi-functional team of a company’s participating functions as
well as other members of value-chain, mainly the suppliers.
Emerged in the 1960s at Toyota (Tanaka, M., 1989; Tanaka, T., 1993; Monden, 1995 ;
Okano, 1995a), Target Costing approach is widely used in various manufacturing industries
such as automobile, electronic, electrical, precision equipment, and many other process
industries in Japan (Tani et al, 1994). To adapt quickly to the constraints of new business
environment, many western companies of different sectors are currently implementing
structural reforms of their management systems for new products (Clark and Wheelwringht,
1992 ; Giard and Midler, 1993). Other studies (Horváth, 1993 ; Ansari et al., 1997) show that
American and European companies began to implement such Target Costing as well since the
late 1980s.
Since Target Costing has begun to be adopted and implemented by business
organizations operating in other business environments than its birth one, i.e. the Japanese
environment, it can be assumed that something new about the approach can be learn by
exploring what is happening in other business contexts. This study aims to investigate how the
principles of Target Costing2 are employed by the French business organizations which are
known as characterized by the isolation of the individual, the avoidance of face-to-face
relationships, the compartmentalization of the organization, the struggle for privileges and the
lack of constructive solidarity (Crozier, 1979, 1985 ; Beer, 1982 ; Barsoux and Lawrence ;
1990).
The scope of this study is limited to the automobile industry. Renault, the leading
French automobile manufacturer and the examples of two of its suppliers are discussed.
Renault was selected for a variety of reasons. Firstly, Renault reformed its product
development system in 1988 in order to implement the new practice of ‘coût-objectif’ (target
costing) after various benchmarks of its Japanese competitors. Secondly, there were
2 Target Costing approach includes at least the following principles : prices determine costs, competitive marketconsiderations drive cost planning, design is key to cost reduction, cross-functional teams manage costs, andsuppliers are early involved in product development process and cost planning (Bonzemba, 1996 ; Okano,1995a,b ; Ansari et al. 1997). It can be argued that without the synergy of a cross-functional teams working intandem to manage costs, the benefits of Target Costing can be hardly reached. Moreover, Kato (1993a,b)stipulated that all the benefits of Target Costing cannot be reached unless the it is backed up by its supportingmodule which includes among others concurrent product development, quality circle, etc.
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opportunities for us to conduct field researches in France thanks to Professor Philippe Lorino
of ESSEC3.
First hand information came from field research undertaken in France from mid-April
to mid-May 1997. During those occasions, different interview sessions were conducted with
various executives and other key persons of the department implied in TCM processes such as
Purchasing, Cost Estimation and Finance using open questionnaires. First hand information
from interviews is supplemented by information from other sources as well, such as
companies’ internal publications, other independent publications, newspaper articles, etc.
2. Preconditions of Product Development’s Reform at Renault
Renault had a typical functional organizational system in the 1960s and shifted to one of the
centralized project coordination4 from 1970 to 1988 (Milder, 1995). Under the conventional
centralized project coordination system at Renault (Exhibit 1), communication remained
essentially intra-functional during the execution of a project. Only different departmental or
functional heads could meet in committees to analyze project-related problems.
Also since different activities were carried out sequentially while cross-functional
dialogue was limited to only the firm top level, designers and engineers involved in earlier
stages of vehicle development process had less contact, or none at all, with engineers and
other technicians involved in the later stages. From marketing research to mass-production
and then to product sales of products, inter-functional communication between the participants
in a project was very weak.
*INSERT EXHIBIT 1 ABOUT HERE*
Moreover, as explained by Clark and Fujimoto (1991), a Product Manager in this mode
of organization has almost no responsibility on working level-people, and even a limited
responsibility, if at all, on other key factors related to a project :
3 Ecole Supérieure des Sciences Economiques et Commerciales4 These two systems are referred to as the Functional Structure and Lightweight Product Manager respectively byClark and Fujimoto (1991).
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Product managers in this mode of organization are lightweights in several respects. They have no direct
access to working-level people and, compared to functional managers, have less status or power in the
organization. They have little influence outside of product engineering and only limited influence within it,
and they have neither direct market contact nor concept responsibility. Their main purpose is to coordinate :
to collect information on the status work, to help the functional groups solve conflicts, and to facilitate
achievement of overall project objectives (p. 255).
In the 1980s, it became clear that with such product development systems Renault
could not be able to coordinate its ambitious in regard to the timing, quality and cost control
of projects (Midler, 1993, 1995). Moreover, Renault was in an acute financial crisis—during
the fiscal years 1985 and 1986, for example, the company lost more than 10 billions of francs.
When the economic objectives of an ongoing project were evaluated at each pillar
stage (Conception and Development, Manufacture, and Commercialization), there was always
a systematic discontinuity between the original estimates and the actual data.5 One of the main
causes of this divergence was the inability of the new project management system to fully
exploit different opportunities in the early stages of the product life cycle.
Tools such as strategic marketing, profit planning, cost estimation, and value
engineering existed at Renault. However, a managerial system that could articulate different
tools, practices and cultures in a global vision of objectives and performance were under-
explored as is the case in many Western companies (Lorino 1994, 1997). Usually, different
activities related to the new product development process were carried out sequentially and
separately (Exhibit 2).
*INSERT EXHIBIT 2 ABOUT HERE*
5 In the small car segment (Category 1), the market share of Renault was threatening both in France and otherparts of Western Europe in the 1980s. Renault’s success story in this category was the R4 introduced since the1960s. However, the R4 could no longer successfully compete vis-à-vis other competitors, because it becametechnically obsolete. On the other hand, the R5 introduced in the middle 1970s could not sustain this marketniche because it was made for niche of Category 2.From 1973 to 1986, Renault has made 5 different attempts (Project VBG [1973-1976] ; Project Z [1981-1983] ;Project X49 [1981-1982] ; Project X44 [1983-1984] ; and Project X45 [1984-1985]) to introduce a new small forCategory 1. However, all of these attempts usually failed at the exploration stage; because all of those projectswere estimated not profitable and not attractive unless it cannibalizes the cars of the Category 2. For furtherdetail, see Midler (1993).
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Though general standard product development planning was set up to coordinate the
different contributions of each process stage, under this old mode of organization, Renault
failed to meet its ambitious targets as explained by Midler (1995):
In this first step in the ‘projectification’ of the firm, the processes involved top people in the firm only. Its
focus was essentially to manage the project portfolio in a way that would be coherent with the global
strategy of the firm. Another important point is that the projects had no champion to enforce their identity
or to negotiate with the strategies of the skill-based departments. The project was a result of a compromise
between existing professional goals and methodologies. Finally, this phase was oriented towards
implementation of the standard project management tools : planning, budgeting and ROI criterion (p. 365).
So, the traditional product development system at Renault failed (1) to effectively
coordinate and therefore benefit from the firm’s inter-functional capabilities and knowledge ;
(2) to coordinate and benefit from the capabilities and expertise of those firms belonging to
Renault’s external value-chain, suppliers for example.
3. Product Development and Management Systems on Move
In December 1988, once Renault improved its short-term financial situation, the then CEO,
Raymond H. Lévy, introduced a reform involving, among other things, the creation of new
structure and management system for new product development. The new system of product
development was really revolutionary since it implied not only a fundamental change of the
product development process by itself, but also that of the complete product development
organization as well.
However, since developing a new car also implies the involvement of many people and
companies, all aspects of complex interactions between them cannot be instantly changed. So
the dramatic move initially took place in 1988 and various amendments have been taking
place from 1989 onward.
The pilot project completed under the new structure and system was the Renault
Twingo project—started in January 1989. Christophe Midler, an outsider but a real-time
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analyst of the Twingo project from 1989 to 1993, thoroughly described and elucidated
different issues related to the reform and its implications in Renault’s management system.6
The visible structural change at Renault was not a goal in itself ; rather, according to
the theory of Chandler (1962) on the adjustment of the structure to strategy, the change was
the repercussion of the company’s strategic adjustments. Therefore, this study attempts to
investigate that structural change from the perspective of Target Cost Management. The main
points of the new strategy related to the new product development and management systems
are explained below.
A. Reverse of the Development Process of Projects
From the Twingo project onward, the development process of new products has dramatically
changed. There are now about three main simultaneous processes prior to engaging on a new
project :
(1) The identification of potentially successful products by the upper management with the
help of the research and development department linked with the research and
development departments of key suppliers;
(2) The setting of voluntary economic targets which are consistent with the global
objective and strategy of Renault —by the top management with the help of various
concerned departments. In other words, allowable or target costs are determined which
reflect the likely future market prices together with the desired internal rate of return
(IRR).
(3) Since invariably these target costs are below the estimated costs, based on different
methods of estimation, the development team has to find technical solutions relevant to
the economic equation while still ensuring product quality and other features that
might satisfy potential customers of a targeted market niche, as well as the time to
market the product.
6 See Midler, C. (1993) L’auto qui n’existait pas, Management des projects et transformation de l’ entreprise(The Car that Did Not Exist : Project Management and Transformation of the Firm), Paris : InterEditions.
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Thereafter, a vehicle’s target cost is broken down by functional elements—such as the
engine, chassis, transmission, body, and so on, and a functional analysis is carried out. Next,
the target cost is assigned to each function to allow the designers to have a target cost as their
guideline. The assignment of target costs to functions is made by allocating a target cost to
each function according to the importance of each of its components, leading to a
functions/components matrix.
This approach reversed the classical development process which usually started from
the technical objectives. The decision to launch a project is backed up by Renault’s product
strategy, long-term profit plan, and the targeted IRR.7
To reach the appropriate IRR, different cost estimations related to a project should be
correctly done. Renault emphasizes the accuracy of these different estimations, since the
effectiveness of the different estimations during the upstream development can represent a
decisive competitive advantage. The estimations of revenues and investments are carried out
by the Financial Department. Outflows such as the running costs are estimated by the
Production Department.
Cost estimations are essentially carried out by the Prime Cost Department (Direction
Prix de Revient). This Department closely works with the Research and Development
Department and the Purchasing Department—whereas the Purchasing Department of Renault
also works closely with the representatives of suppliers’ Research and Development, and
Commercial Departments.
The Prime Cost Department is essentially staffed by cost estimators who are engineers
with an accumulated experience in the estimation of vehicle and component costs. And in
practice, depending on a given project and on the stage of the development process, three
methods of cost estimation are used :
* Analog estimation : the costs of a future product are determined from those of a
similar existing product to which proportional coefficients are applied. This
method is usually applied when there is no important technological discontinuity
7 For a particular project, IRR is the interest rate that equates the present value of the expected future cash flows,or receipts, to the initial cost outlay.
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between the two generations of products—incremental product modifications, for
example.
* Parametric estimation : the costs of a future product are estimated by the technical
or functional parameters that characterize it. This method is usually utilized for an
initial rough estimation.
* Analytical estimation : this is a classical technical estimation of a product cost,
summing up different components and processes necessary for its fabrication.
A synthesis of the target costing process is depicted by Exhibit 3 below.
*INSERT EXHIBIT 3 ABOUT HERE*
B. The Project Director Structure
As described in the previous section, the traditional-sequential product development system at
Renault was not able to match the skill-based department strategies nor coordinate the
activities of different functional areas into the creation of a well-integrated new product. The
Project Managers (Coordinators) under that system, were literally "lightweights" with a fairly
low corporate status and obviously no decision-making powers. In order to have a project-
based management system which is able to fully coordinate activities of different functional
areas toward a well-integrated new product, the enhancement of the Product Managers’ status
and responsibility was imperative.
This was done with the reform of December 1988, introduced by CEO Lévy. The
reform involved the creation of Project Directors’ structure which gives power and autonomy
to the Project Managers (Project Directors). This new structure is similar to what was featured
"heavyweight" product managers by Clark and Fujimoto (1991) on one hand (Exhibit 4), and
"lean product development" by Womack et al. (1991) on the other.
*INSERT EXHIBIT 4 ABOUT HERE*
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With this powerful formal position almost equal to that of other departmental
managers, project managers are now held directly accountable to the chief executive officer.
Consequently, they now have sufficient status to carry on an equally matched dialogue with
different top departmental persons involved on their projects (Midler, 1995).
C. Cross-Functional Team
In the traditional product development structure, different activities were carried out
sequentially. The cross-functional dialogue was limited to only the top level of the firm. In
contradiction with the traditional-sequential development structure, the new organizational
structure emphasizes simultaneous activities and allows horizontal communication at the
bottom of the firm between the different professionals involved in a project.
With this new structure of project-based organization, all development and
manufacturing activities for a new product are covered by a project management system run
under senior management responsibility, with all contributors working simultaneously within
a common time horizon. The key principles behind the new project management system are :
· Composition of a project team : The project team is headed by a single Project Director,
assisted by project leaders representing Renault’s functional units : Purchasing, Design,
Product Engineering, Process Engineering, Logistics, Product Planning, and Quality. The
Project Director is responsible for ensuring that all project goals such as quality, costs,
delivery times, vehicle weight, recyclability, and so on are met. He does not have
hierarchical relationships towards the persons involved in the conception and development
of a new vehicle. However he has the responsibility to lead, coordinate, animate, and
convince ... the team for the better fulfillment of project targets.
· Adaptive evolving organizational structure : Project organization must be capable of
adapting to each successive development phase, to ensure an optimum match of resources
to project goals. To coordinate direct development activities, the project is broken down
into function groups, which include representatives from the Renault functional units and
from all the suppliers involved. The composition and geographical placement of function
groups may change as the project advances.
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· Specific project site, the "Project Platform": To promote inter-functional exchange and
communication, a specific site is reserved for the project. All units involved in project
development will supply staff to work at this site ; this includes Renault units (Purchasing,
product and Process Engineering, Plants, etc.) and selected suppliers. Suppliers may also
be asked to delegate staffs to work with other functions involved at the Renault sites.
D. Internal Contract System to Enhancing Commitment for the Targets 8
Each product manager has a greater responsibility for striving for the economic and technical
targets of the project under its control so that the entire organization’s long-term profit plan
can come true. This can only be done in conformity with the budget constraints along with
provisions allowed to cope with any uncertainty which may arise.
However, since different targets are set at the upstream phase of the development
process when still virtually nothing is certain and must be carried out to the downstream, it is
likely that unforeseen events—opportunities and /or threats not controllable by the Project
Director and his team—will occur throughout the progress of a project. Therefore in order to
stimulate different contributors of a project and get them involved to better cope with complex
and unforeseen events related to the project, the internal contract system was introduced in
1992 by Louis Schweitzer, the CEO of Renault. Four types of internal contracts are pointed
out by the Exhibit 5 and explained below.
*INSERT EXHIBIT 5 ABOUT HERE*
· The project contract : It deals with the global targets of a vehicle : competitive
positioning, costs, investments, quality, and time. It is agreed upon between the top
management, the Project Director and all departmental supervisors involved in a
project.
8For further details on the internal contract system at Renault, see for examplen Nakhla, M., and Soler L. G . (1994) "Contrats Internes, Coordinations et pilotage Economique de Projet",
Cahiers du Centre de Gestion Scientifique, Ecole des Mines, No. 8.n Tanguy, H. (1996) "Décentralisation et Contractualisation Interne", in Ecosip, Cohender, Jacot, Lorino (eds), Cohérence, Pertinence, Evaluation, Economica.
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· The investment contracts : These contracts deal with the global value of the
necessary investments for the completion of a project. The engineering department
is responsible for internal investments, and the purchasing department for the
external ones. These contracts are agreed upon between a Project Director and the
corresponding departmental supervisors.
· The sub-functional (component) contracts : With the global targets broken down
to functional levels, these contracts involve virtually all contributors and are agreed
upon by the Project Director and all functional and departmental supervisors.
· The inter-functional contracts : In contrast to the preceding contracts which
include economical dimensions, this 4th contract type mainly deals with technical
issues between functions.
A typical contract contains the following components : (1) Technical scope ; (2) Lists
of opportunities and threats from which probable values of costs and investments are
calculated ; (3) Costs targeted according to the technical and economic analysis, and an
‘envelope’ of provision to deal with uncertainty ; and (4) Objectives on quality and time. It
should be noticed that these contracts have no judicial vision. They are readily understood or
perceived as a project-plan collectively made.
E. Early Suppliers’ Involvement into the Development Process
Actually, it is estimated that for a typical car, parts and components purchased outside Renault
represent about 70% of its total costs9. Suppliers clearly play an important role in Renault’s
overall performance. Supplier’s involvement in the product development process therefore
becomes a necessity for the enhancement of a vehicle’s overall performance.
The shift of the Renault’s product development and management systems, as described
earlier, also required the radical change in the nature of its relationship with its suppliers.
From about 1,800 suppliers in 1983 to 1,100 in the late 1980s, and around 800 actually
(Gorgeu and Mathieu, 1995), Renault has changed the way it works with them.
9 This number was given by Christian Hue de la Colombe, the Director of Suppliers Development. See also theinterview of Jean-Baptiste Duzan, Senior Vice-President and Head of Renault’s Purchasing Department, inAutomotive Sourcing (UK), Vol. IV, 1997, pp. 18-30.
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The suppliers have become active players in the development process at Renault. They
are now involved into the development process very early, with an extensive design
responsibility of their parts and components10. This is facilitated by the partnership approach
which emphasizes the two flows of ideas.
Moreover, the partnership approach implies dealing together in the long term basis.
Among the shifts observed in France that characterized assemblers and suppliers in the
automobile industry, Laigle (1995) pointed the fact that actually, a typical contract covers all
product life cycle from the development and design phases to almost the end of mass-
production.
Although Renault has still three main groups of suppliers as explained below, the
Expert Suppliers group on which the company can rely to strengthen the overall performance
of a vehicle, are integrated into the development process as early as the exploratory phase. For
the remaining two (the Pilot and the Production suppliers), the starting point for involvement
depends on the type of component supplied. Exhibit 6 emphasizes tasks’ distributions between
Renault and its suppliers. To summarize, there are typically three suppliers’ involvement
levels at Renault :
· Expert suppliers : Expert suppliers participate in the exploratory and preparatory phases
of vehicle project development. They input opinions on technical feasibility, propose
alternative solutions, and help determine the project’s economic approach. Renault signs
"expert supplier contracts" with these suppliers.
· Pilot suppliers : Pilot suppliers are commissioned with full or partial product/process
development tasks, working from expressions of needs and target price data. Renault signs
"letters of intent" with pilot suppliers.
· Production suppliers : Production suppliers supply parts for full production runs. Renault
signs "supply contracts" with these suppliers.
*INSERT EXHIBIT 6 ABOUT HERE*
10 Although the exact figure was not given to me during one of my interview sessions at Renault, I was told thatin sharp contrast with the past, Renault has now a very higher proportion of what it labeled ‘Expert Suppliers’than the two other types (‘Pilot Suppliers and Production Suppliers) combined.
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However, it should be noticed that on a given project, the same company may act as
expert supplier, pilot supplier, and production supplier. Recently, in order to stimulate the
suppliers to adopt also the TCM philosophy and keep them respect the initially set target
prices their respective parts and components, Renault introduced the pre-contract clause.
The rest of this section is based on the case studies of two suppliers of Renault. Both of
them are first-tier suppliers and have had business relationship with Renault for a very long
period. Therefore, these companies are suitable since they transcended the radically changing
nature of Renault’s product development system and partnership approach with suppliers.
However, following their requests for confidentiality, their names have been disguised.
We referred to them as Company A and Company B, respectively ; and we avoid naming
their products. The cases here deal with supplier activities that sustain the co-development
approach.
Example 1 : The Case of Company A
Company A is an independent automotive components and systems manufacturer. Its products
are supplied for use in cars as well as trucks. It operates worldwide both in the original
equipment market and the aftermarket. Initially operating in France, Italy, Spain, and Brazil,
the company has devoted itself to a globalization strategy since 1987, in accompaniment to its
main customers worldwide. By 1996, for instance, the company has grown to 90 production
plants and 13 R&D centers in 20 countries, in Europe, North America, South America and
Asia.
Company A is organized into 9 industrial operating units, one per product and system
line, and a distribution unit dedicated to the aftermarket. Company A is present in all key
automotive functions :
· Engine, chassis and transmission ;
· Body and style ;
· Passenger compartment and security systems ;
· Electronics and electric motors
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Total customer satisfaction is the ultimate goal of Company A’s strategy, which can be
broken-down into four main sections : total quality, advanced technology, competitive costs,
and international presence. So, Company A is oriented to focus its 30,000 worldwide
employees on growth and profitability objectives, allowing the group to self-finance further
development.
Each year, about 6 percent of revenues are concentrated on R&D, and about another 10
percent towards the increase of factory productivity and the strengthening of products quality.
However, France still remains the biggest market for Company A. In France, Renault is its
first largest customer. Company A and Renault have been in business for more than a decade.
The company is among the key suppliers of Renault despite the dramatically change of its
strategies.
Early Involvement into the Product Development Process of Renault
Since the beginning of the 1990s, there have been significant changes in the working
relationship between Company A and Renault. The introduction of concurrent engineering
approaches by Renault took the form of co-development with suppliers. Renault needs
partners such as Company A, which has the capability to assure the responsibility of the entire
development process. Their working relationship has been strengthened and is characterized
by :
(1) The early involvement of Company A into the development process of Renault,
with the view also to anticipate as early as possible different problems that might
occur during the mass-production stage ;
(2) The ability to work earlier with a predetermined target price of a component and to
find technical solutions without trading-off the quality or functional target
definition of the component as well as that of a vehicle;
(3) The additional delegation of responsibilities related to both the design and the
manufacture of a component or a system to Company A.
Depending on a project and the type of product to supply, Company A might be
involved in Renault’s development process as an expert supplier and/or a pilot supplier. When
the company is involved as an expert supplier in a project, it is integrated very early from
either the exploratory or preparation phase, depending on the case. However, when it is
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involved as pilot supplier, it is integrated into the development process of Renault from the
detailed design phase.
Whichever the case, Company A assigns specialists from its engineering teams as
‘guest-engineers’ to the specific site reserved by Renault for the project platform. This
promotes inter-functional and inter-organizational exchange and communication. All people
involved in the project jointly work for a certain period of time, when required, and thereafter
continue meeting while the project is in progress on pre-established calendar dates.
While working at a Renault site, Company A resident engineers maintain the liaison
between Renault and their company. They can discuss and negotiate all necessary technical
specifications and other related issues with Renault and, whenever possible, propose
alternative technical solutions. But, when it comes to price negotiation, this is usually carried
out by the commerce (sales) department.
According to Company A, the price negotiation seems to reflect market conditions in
the case it is integrated into the project as an expert supplier. However, when the company is
integrated into the project as a pilot supplier, price is not really negotiated. Instead, it tends to
be a reflection of Renault’s component price targets. In either case, the company has also to
submit its cost structure for the concerned component to Renault. When necessary, an audit of
the company’s factory by Renault might also be made.
In contrast to the Renault’s traditional product development system during which price
could be negotiated several times along with product modification, price is now negotiated
once as a target. Recently, the automaker introduced even a pre-contract approach before the
formal contract. One of the aims of the pre-contract is to stimulate the suppliers involved at
the early phase of the project to initiate also their in-house target costing approach which will
lead to the finding of technical solution to reach a component’s specifications at its target
price. VE/VA activities are conducted to reach this target and, as a rule between the two
parties, a target price should be attained.
Moreover, the Renault’s new approach stipulates that business is not awarded on the
basis of the target price alone. While the technical and quality performance have to be kept
high, the total price/cost of a component needs to be minimized throughout the life cycle of a
car. Once at the mass-production stage, contracts with Renault stipulate that Company A must
find ways to continually reduce the costs of each of its components. Typically, each
component’s price is to be reduced by a fixed rate of 5 percent a year.
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For example
If during the starting of mass production at t1 , a component targeted price is FF1,000 ;
at t2 , the price will fall to FF950 (1000 - 50)
at t3, the it will fall to FF900 (950 - 50) and so on.
Gain-Sharing Between the Two Parties
For the partnership to work, both parties should share the risk as well as the gain of activities.
Consequently, the sharing of benefits is one of the most important issues of the partnership.
Cost-saving ideas might come up from Renault or Company A, and activities for their
implementation might be carried out jointly or separately. Furthermore, reached cost-savings
might be within or beyond the range agreed upon.
However, as a rule between Company A and Renault, for the products integrally
designed by Company A and then proposed to Renault, a big-share of cost-savings is kept by
Company A no matter the ways these savings were reached—either by joint-effort or only
Company A effort. On the other hand, for products designed by Company A according to
Renault’s specifications, cost-savings are shared equitably (half-and-half gain sharing).
Example 2 : The Case of Company B
Company B was a former subsidiary of Renault, but was transferred in the beginning of the
1980s. So, unlike Company A, the relationship between Renault and Company B has always
been very strong. Since the late 1980s, Company B has become the parent company of a
consolidated group of subsidiaries. The group has about 60,000 employees worldwide. It is a
highly integrated organization for consumer products in a variety of industries such as
automobile, mechanical engineering, domestic appliances, and construction. However, the
automobile related activity by itself is the biggest one and represents about 30 percent of the
group’s overall activities.
Partnership in New Car Development with Renault
Although Company B has always been one of Renault’s partners, I was told during the
interview that the working relationship during the development process of new cars has
greatly changed since the beginning of the 1990s. New approaches introduced by Renault to
19
optimize major success factors for cars—quality, cost, and time—had greatly affected the
working relationship between the two parties throughout a vehicle’s life cycle, and even more
so during the development process of a new vehicle.
The implementation of concurrent engineering by Renault coupled with the complexity
of Company B’s products, which have high degree of interdependence with other components
and functional areas of a vehicle, have led to the reinforcement of the cooperation and co-
development practice between the two parties. Therefore, the main great changes introduced
since 1991 have been :
(1) The early involvement of Company B into Renault’s development process for a
new product by sending resident engineers to Renault’s specific R&D center. As
it is classified an expert supplier by Renault, Company B’s early involvement for a
project means working with Renault from the exploratory stage.
(2) Company B’s products are designed and worked out in order to meet
predetermined technical parameters and economic ones—components’ price
targets— negotiated between the two parties, without trading-off the quality or the
functional target definition of a product.
(3) Because of its technical expertise, Company B is given full responsibility on the
design and manufacture of its products. The company has also the responsibility to
carry out different VE /VA activities necessary for meeting the overall
requirements of its products. Moreover, because of the interdependence between
Company B’s products and other components and functional areas of a car,
Company B remains a very active player throughout the development process and
may even greatly influence a change in a vehicle’s design—the sharing of
experience and technical expertise between Renault and Company B has been very
crucial during all stages of the development process of a car.
The target price negotiation is backed up by the submission of the estimated cost
structure of Company B’s components to Renault. Besides the submission of a product’s cost
structure to Renault, an audit and inspection of both factory and R&D center might also be
carried out by Renault when necessary. The negotiation takes into account the interests of the
20
two parties. Both Company B and Renault are aware of the importance of each other’s
existence and act accordingly during the negotiation. Besides the initial target price
negotiation, Company B is also asked to reduce up to 8 percents of product cost per year, as
decided on a case by case.
To cope with all different constraints and secure its business, in general, Company B’s
in-house product development and target cost activities are first carried out independently of
Renault. Using its expertise and engineering capability, the company can make a product
sample on its owns then proposes it to Renault. This is very important since Company B’
products have higher degree of interdependence with other components and functional areas
of a vehicle and it is not possible to test their integrity independently of Renault.
The new approach introduced by Renault requires that the economic targets of a
project be set first, and thereafter all participants have to look for the technical solutions to
deal with voluntary economic targets to secure their profitability and to reach the engineering
specifications of the project. Therefore, once engaged into the development process with
Renault, taking different constraints and parameters of a specific new car into account,
Company B has to adjust some of its targets and concurrently conduct different activities with
Renault. Resident engineers assigned at Renault development center facilitate the on-time
flowing of necessary information and the company is able to react quickly accordingly.
Managing the Survival
Company B’s ways to manage its survival and improve its performance lie first on its policy
and willingness to form alliances with its most demanding industrial customers, among them
Renault is included. The mobilization of combined efforts to anticipate the future needs of end
users of vehicles creates long-term bonds which limit unpredictable impacts on price
fluctuation.
Alliances with customers are enhanced by Company B’s policy of continual
improvement of productivity and quality through ongoing training programs to improve the
skills of its employees. Employees actively participate in the development and refinement of
all aspects of operations—production, marketing and cost control. Company B and its
subsidiaries also maintain permanent programs of cost reduction in all areas through
investments in research and development, implementation of total quality programs, savings
on raw materials, energy, subcontracting and other outside services.
21
Another means to sustain its profitability and to manage its survival are the initiation
of new technology, coupled with the development of new products designed to meet the
evolving requirements of customers. I was told for example that over one-half of Company
B’s and its subsidiaries actual products were introduced from only the beginning the 1990s.
With its expertise and product development capacity, Company B is very active on initiating
and carrying different activities on its own. Its capabilities have often led it to influence
greatly Renault’s projects.
4. Discussion and Conclusion
In order to cope with the challenges of its business environment, Renault decided to reform its
product development strategy in the late 1980s. An important redesign of its in-house
organization mixed with the changes of working relationships with suppliers (Midler, 1993)
were necessary before the introduction of Target Costing at Renault (Exhibit 7).
*INSERT EXHIBIT 7 ABOUT HERE*
The product development organization shifted from a project coordination structure to
autonomous and powerful teams in which Product Manager status and responsibility were
enhanced. This new project-based management system is able to fully coordinate the activities
of different functional areas towards the creation of a well-integrated new product.
In contradiction to its classical development process which used to start with the
technical objectives of project, the new approach starts by setting different economic targets.
Then the technical solutions that meet the economic equation are to be found by a project team
to secure the profitability and the survival of the company.
The project team has turned into a multi-functional ‘project platform’, headed by a
Project Director. Presently, a typical project team regroups Renault members from the
Purchasing, Design, Product Engineering, Process Engineering, Logistics, Product Planning,
and Quality Departments together with supplier resident engineers. These individuals
simultaneously collaborate to find technical solutions that optimize voluntary economic
targets for a given project.
22
To enforce the commitment of different internal players involved into a project to
reach its overall targeted cost/performance objectives and the economic objectives of their
company, the internal contract systems—in written form were introduced. The internal
contracts not only stimulate the different contributors of a project, but they also aim to help
them cope with complex and unforeseen events—opportunities and /or threats—related to the
project.
The internal contract system might suggest that at Renault, target costs are not only
decomposed by functions, components, and cost elements ; but also by individual level with
each one’s sphere of responsibility and accountability while still working in a multi-functional
team. An important research question in the future will concern the elucidation of this issue,
and investigate how it is correlated with the performance evaluation of each contributor of a
project.
French business organizations which are known as characterized by the isolation of the
individual, the avoidance of face-to-face relationships, the compartmentalization of the
organization, the struggle for privileges and the lack of constructive solidarity (Crozier, 1979,
1985 ; Beer, 1982 ; Barsoux and Lawrence ; 1990).
However, with the classical patterns of the French organizational interaction have been
the isolation of the individual, the avoidance of face-to-face relationships, the
compartmentalization of the organization, and the lack of constructive solidarity (Crozier,
1979, 1985 ; Beer, 1982 ; Barsoux and Lawrence ; 1990), management seemed to favor work
in isolation, punctuated by formal meetings. Therefore, we think that Renault’s employees
were not well prepared for inter-functional or inter-departmental interchange, in order to carry
out in tandem different activities related to the Target Costing. The internal contract system
was not introduced along with the multi-functional team system at Renault in the late 1980s.
Rather, it was introduced later in 1992. This fact suggest that something was going
wrong without it.
In order to strengthen the competitiveness of its entire value chain, Renault introduced
the Japanese-model of supplier relationships as well (Midler, 1993 ; Chanaron, 1995 ; Laigle,
1995 ; Gorgeu and Mathieu, 1995 ; Kesseler, 1997). Therefore, suppliers have become
integral members of the development process and are now involved into a vehicle
development process at the early stage. To stimulate them to find their respective technical
solutions at the target prices, Renault introduced a pre-contract (advance contract) clause
23
which also aims to stimulate those not yet applying Target Costing approach for their in-house
activities to adopt it.
However, as is the case of Renault’s cross-functional team, the characteristics of the
French organizational interactions do not encourage the inter-organizational exchange neither.
Therefore, although the official justification of the pre-contract clause is to stimulate the
suppliers to adopt the Target Costing approach, its raison d’être might be complex. Surely it
might serve as guardrail to avoid friction in the later stage of cost/price negotiation between
Renault and its suppliers.
The competition being what it is, competitors usually copy the “the winning formula”
of others. However, in what concerns the Target Costing approach, it was expected that its
management side might be more difficult to be effectively implemented rather than the
calculation side, unless aspects of the Japanese-management-like environment are established
(Okano, 1995b ; Bonzemba, 1996).
As shown here in this paper and by Midler (1993) for the case of Renault, the
important redesign of in-house organization mixed with the changes of working relationships
with suppliers were necessary for the implementation of the Target Costing approach. That
was also true in the case of Chrysler (Dyer, 1996), for example. Since the philosophy of Target
Costing is beginning to be implemented by some American and European companies as well,
we think that a new area to be explored in the future should focus on the behavioral issues of
people involved into the process. Another prospective agenda of Target Costing research
should focus on different issues related to an organizational context.
24
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Exhibit 1 : Project coordination structure
o o o
Project Manager Project Manager'sScope
Departemental management
Project committee
Departemental project players
Contibutors from outside
Departemental project supervisors
Exhibit 2 : Sequential process during the development of a new product
ExplorationEngineering
Production processpreparation
TestsProduction
Time
Activities
27
Exhibit 3 : Synthesis of Target Costing process
Exhibit 4 : Project director’s structure
o o o o o
Project Manager Project Manager'sScope
Departemental management
Departemental project players
Contibutors from outside
Departemental project supervisors
Identification of a product(market research, competitive analysis, ...)
Setting of economic targets(IRR, cost, quality, time)
Internal and external contracts’setting
Technical solutions (VE/VA activities)to achieve economic targets
28
Exhibit 5 : Internal contract system
Project Director Engineering Dept. Purchasing Dept.
Top Management
Project contrat
Investment contract
Investment contract
Sub-functional contracts
Inter-functional contracts
Departemental projectsupervisors
Source : Adapted from Nakla and Soler (1994, p.26)
29
Exhibit 6 : Project development phases and distribution of tasks between Renault and itssuppliers
Renault Suppliers
Ø Conduct innovation studies (ProductEngineering)
Ø Produce detailed documentation for twoproject scenarios
Ø Assist in developing project alternatives(Expert Suppliers)
Ø Choose scenarioØ Select expert suppliersØ Asses quality, cost and delivery risks
Ø Assist in assessing engineering feasibilityand determining product economic approach(Expert Suppliers)
Ø Commit to project economic objectivesØ Issue calls to tender and select pilot suppliers
for development workØ Validate ZM prototypes, if project involved a
new chassis, and design ZB prototypes
Ø Participate in study (Pilot Suppliers)Ø Deliver parts for ZM prototypes
Ø Validate ZB prototypes and design PPPprototypes
Ø Freeze exterior and interior styling detailsØ Authorize tooling expenditureØ Conduct interactive product/process
developmentØ Select additional suppliers for full production
runØ Award supply contracts
Ø Participate in study pilot (Plot Suppliers)Ø Deliver parts for ZM prototypesØ Commit to conditions for supply of parts on
full production runØ Draw up and submit quality assurance file
Ø Consolidate product/process validations(PPP and PSP prototypes)
Ø Make production system operationalØ Obtain compliance for production resources
and parts : approval initial samplesØ Validate pre-series
Ø Finalize toolingØ Submit initial samplesØ Deliver parts for PPP, PSP and PS runs
Exhibit 7 Continued
Exploratory
Preparatory
Envelope study
Detailed design
Production setup
30
Ø Perform final setupØ Authorize production release
Ø Ensure reliable build up in production rates
Ø Full production run of vehiclesØ Sell vehicles
Ø Suggest improvement
Production start-up
Production