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The Effects of Target CostingImplementation on

an Organizational Culture in France

Ekutu L. Bonzemba

(Doctoral Candidate)

&

Hiroshi Okano

(Associate Professor)

Graduate School of Business

Osaka City University

3-3-138 Sugimoto, Sumiyoshi

OSAKA 558-8585, JAPAN

Tel./Fax: +81 (0)6 605 2207

E-mail: [email protected]

[email protected]

To be presented at the Second Asian Interdisciplinary Research in Accounting Conference

Osaka 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 other

business environments than its birth environment, the Japanese one. The study is based on a field observation

made 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 the

relationships with the suppliers made by Renault in order to implement TC. Renault made a shift from a

compartmentalized-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 functional

corporate environment for yearstherefore were not well prepared for inter-functional or inter-departmental

interchangesthe 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 the

six key features of TCM (identified by the CAM-I Target Cost Core Group) that distinguish TCM from the

traditional approaches to profit and cost planning are now applied by Renault.


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1. Introduction

Todays 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 companys 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

managements 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 companys competitiveness in meeting todays business challenges. Unlike the

1 Since each company has its own approach of Target Costing depending on various factorssuch as its

environment (the nature of the product, the type of the customer serviced, and the degree of influence over the

suppliers and subcontractors), strategy and organization structure, there is not an accepted definition of Target

Costing system. Here are, for example, two selected ones:

For Horvth et al. (1993):Target costing is a set of management methods and tools to drive the cost andactivities goals in design and planning for new products, to supply a basis for control in the subsequent

operation 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 simultaneously

examining all the processes involved from the upstream to the downstream in order to satisfy the targeted

quality, 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 new

products 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 companys 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 (Horvth, 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 ofcot-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 market

considerations drive cost planning, design is key to cost reduction, cross-functional teams manage costs, and

suppliers 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 in

tandem 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 supporting

module 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 Developments 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 earlierstages of vehicle development process had less contact, or none at all, with engineers and

other technicians involved in the later stages. From marketingresearch 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 Suprieure des Sciences Economiques et Commerciales4 These two systems are referred to as the Functional Structure and Lightweight Product Manager respectively by

Clark 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 crisisduring

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).


5 In the small car segment (Category 1), the market share of Renault was threatening both in France and other

parts of Western Europe in the 1980s. Renaults success story in this category was the R4 introduced since the

1960s. However, the R4 could no longer successfully compete vis--vis other competitors, because it became

technically obsolete. On the other hand, the R5 introduced in the middle 1970s could not sustain this market

niche 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 for

Category 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 further

detail, 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 firms inter-functional capabilities and knowledge;

(2) to coordinate and benefit from the capabilities and expertise of those firms belonging to

Renaults 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. Lvy, 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 projectstarted 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 Renaults 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 companys 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)Lauto qui nexistait 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 vehicles target cost is broken down by functional elementssuch 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 Renaults 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 Departmentwhereas 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 productsincremental 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.


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 Lvy. 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.



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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 Renaults 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 alsobe asked to delegate staffs to work with other functions involved at the Renault sites.

D. Internal Contract System to Enhancing Commitment for the Targets8

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 organizations 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 eventsopportunities and/or threats not controllable by the Project

Director and his teamwill 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 pointedout by the Exhibit 5 and explained below.


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 example

n 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) "Dcentralisation et Contractualisation Interne", in Ecosip, Cohender, Jacot, Lorino(eds), Cohrence, 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 thecorresponding 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 whichinclude economical dimensions, this 4

thcontract 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. Itshould 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 Renaults

overall performance. Suppliers involvement in the product development process thereforebecomes a necessity for the enhancement of a vehicles overall performance.

The shift of the Renaults 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 the

interview of Jean-Baptiste Duzan, Senior Vice-President and Head of Renaults 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 phasesof vehicle project development. They input opinions on technical feasibility, propose

alternative solutions, and help determine the projects 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.


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 Renaults 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 As 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 priceof 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 Renaults 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 Renaults 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 companys factory by Renault might also be made.

In contrast to the Renaults 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 components 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 Renaults 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

components 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 reachedeither by joint-effort or only

Company A effort. On the other hand, for products designed by Company A according to

Renaults 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

groups overall activities.

Partnership in New Car Development with Renault

Although Company B has always been one of Renaults 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


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optimize major success factors for carsquality, cost, and timehad greatly affected the

working relationship between the two parties throughout a vehicles 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 Bs 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 Renaults development process for a

new product by sending resident engineers to Renaults specific R&D center. As

it is classified an expert supplier by Renault, Company Bs early involvement for a

project means working with Renault from the exploratory stage.

(2) Company Bs products are designed and worked out in order to meet

predetermined technical parameters and economic onescomponents price

targetsnegotiated 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 Bs 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 vehicles designthe 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 Bs components to Renault. Besides the submission of a products cost

structure to Renault, an audit and inspection of both factory and R&D center might also becarried out by Renault when necessary. The negotiation takes into account the interests of the


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two parties. Both Company B and Renault are aware of the importance of each others

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 Bs

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 Bs 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 Bs 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 operationsproduction, 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.


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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

Bs 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 Renaults 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).


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.


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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 systemsin 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 eventsopportunities and/or threatsrelated 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 ones 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 Renaults 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

wrongwithout 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 technicalsolutions at the target prices, Renault introduced a pre-contract (advance contract) clause


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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 Renaults 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 dtre 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.


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Exhibit 1: Project coordination structure

o o o

Project Manager Project Manager's

Scope

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


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Exhibit 3: Synthesis of Target Costing process

Exhibit 4: Project directors structure

o o o o o

Project Manager Project Manager's

Scope

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


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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 project

supervisors

Source: Adapted from Nakla and Soler (1994, p.26)


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Exhibit 6: Project development phases and distribution of tasks between Renault and its

suppliers

Renault Suppliers

Conduct innovation studies (ProductEngineering)

Produce detailed documentation for twoproject scenarios

Assist in developing project alternatives(Expert Suppliers)

Choose scenario Select expert suppliers

Asses quality, cost and delivery risks

Assist in assessing engineering feasibilityand determining product economic approach

(Expert Suppliers)

Commit to project economic objectives Issue calls to tender and select pilot suppliers

for development work Validate ZM prototypes, if project involved a

new chassis, and design ZB prototypes

Participate in study (Pilot Suppliers) Deliver parts for ZM prototypes

Validate ZB prototypes and design PPPprototypes

Freeze exterior and interior styling details Authorize tooling expenditure Conduct interactive product/process

development Select additional suppliers for full production

run Award supply contracts

Participate in study pilot (Plot Suppliers) Deliver parts for ZM prototypes Commit to conditions for supply of parts on

full production run Draw up and submit quality assurance file

Consolidate product/process validations(PPP and PSP prototypes)

Make production system operational Obtain compliance for production resources

and parts: approval initial samples Validate pre-series

Finalize tooling Submit initial samples Deliver parts for PPP, PSP and PS runs

Exhibit 7 Continued

Exploratory

Preparatory

Envelope study

Detailed design

Production setup


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Perform final setup Authorize production release

Ensure reliable build up in production rates

Full production run of vehicles Sell vehicles

Suggest improvement

Production start-up

Production

Target Costing - 1

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