Relationship between Organizational Capabilities and Performance of Target Costing: An Empirical Study of Japanese Companies

INTRODUCTION Target costing is officially defined in Japan as an overall profit management process by which quality, price, reliability, delivery term and other targets are set at the time of product planning and development at the levels that meet the perceived customer needs. Achievement of these targets is simultaneously attempted in all areas from the upstream to downstream processes (Japan Accounting Association, 1996). As such, for the last 30 years, target costing has made a significant contribution to many Japanese companies by enhancing their competitive positions in the global market (Ansari and Bell, 1997). Due to a relatively short history of target costing implementation, low performance of target costing in Western companies can be attributed to two reasons: 1) lack of an empirically proven theoretical framework and generalized guidelines for implementation and 2) inability in terms of employees' attitude and organizational maturity to adapt to radical changes caused by the introduction of target costing (Yook, 2003). During the last decade, many studies have been conducted using a case approach or questionnaire and helped identify key prerequisites in introducing target costing successfully (Ansari and Bell, 1997; Cooper and Slagmulder, 1999a; Kato, 1993; Tani and Kato, 1994; Tani, 1995). These studies, however, failed to identify the core success factors that should be aggressively managed when target costing is introduced, to find out how to evaluate the performance of target costing once implemented, and to test if a company is ready for target costing. Some of the previous studies defined success factors as a combination of organizational resources and routines developed within the organization, such as necessary tools (e.g., VE, Cost Table, etc.), cross-functional structure, top management support, and a heavyweight project manager. This study will focus on the organizational capabilities as success factors and examine the relationships between the success factors and the performance of target costing. The main reason for focusing on the organizational capabilities is that target costing is not a collection of tools and techniques, but a dynamic system of connecting them. Organizational capabilities will also show many different aspects of various knowledge accumulated in the organization. Since the scope and depth of target costing in Japanese companies are substantially more intensive than U.S. counterparts, the results of this study will provide valuable insights on target costing to U.S. companies. PREVIOUS RESEARCH During the last decade, numerous studies have been conducted on the effectiveness of target costing systems in Japan as well as outside Japan (Kato et. al, 1995). Three different approaches have been generally employed in these studies: descriptive or narrative, analytical, and empirical. Most of the descriptive and empirical studies on target costing were not based on any conceptual foundation of target costing mainly due to the lack of research dealing with theoretical aspects of target costing. This section provides a brief review of existing literature in the three categories. The majority of the studies on target costing have used the descriptive approach which includes case studies. For example, Tani (1998) and Yoshikawa et al. (1990) explain different kinds of cost tables and their roles in a target costing system. Cost tables are widely known as a major database for target costing activities. Cooper and Slagmulder (1997) discuss VE (value engineering) as the most popular technique used in the target costing process. Another topic studied using the descriptive approach was the determination and allocation of target costs. Koga (1999) uses the concept of product life-cycle costs to demonstrate that actual costs always exceed the target in the target costing process. The studies by Cooper (1995) and Hiromoto (1988) are also representative on this topic. …