Confirming Pages545C H A P T E R T H I R T E E N Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing After studying this chapter, you should be able to . . . 1. Explain how to use target costing to facilitate strategic management 2. Apply the theory of constraints to strategic management 3. Describe how life-cycle costing facilitates strategic management 4. Outline the objectives and techniques of strategic pricing Having two of the worlds best selling cars, the Camry and the Corolla, as well as a number of other popular models, Toyota is among the worlds most successful automakers. The reason for Toyotas success is that it is able to consistently produce high-quality cars with attractive features at competitive prices. Target costing, a method Toyota pioneered in the 1960s, is one method it uses to achieve high quality and desirable features at a competitive price. Target costing is a design approach in which cost management plays a large part, as we will see in this chapter. Using target costing, a company designs a product to achieve a desired profit while satisfying the customers expectations for quality and product features. The balanc- ing of costs, features, and quality takes place throughout the design, manufacturing, sale, and service of the car but has the strongest influence in the first phase, design. When design alternatives are being examined and selected, Toyota has the maximum flexibility for choos- ing options that affect manufacturing and all other product costs such as customer service and warranty work. Once the design is complete and manufacturing has begun, the cost consequences of the choice of features and manufacturing methods are set until the next model change. As a result, the development of a good, cost-effective design is critical. Target costing places a strong focus on using the design process to improve the product and reduce its cost. For example, in the redesign of the Camry, Toyota made the running lamps part of the headlamp assembly and made the grill part of the bumper, which saves time and materials in manufacturing and produces a more crash-resistant bumpera win/win for Toyota and the car buyer. Target costing is the first of four costing methods we study in the chapter. Each of the four methods is used for cost planning during the product (or service) life cycle. For example, target costing is used at an early phase in the products life cycle to help an organization design the product to achieve a desired profit. The other methods, which are used at different phases in the life cycle, are the theory of constraints, life-cycle costing, and strategic pricing. While once managers focused only on manufacturing costs, they now look at costs upstream (before manufacturing) and downstream (after manufacturing) in the product life cycle to get blo26940_ch13_545-588.indd 545blo26940_ch13_545-588.indd 5458/27/09 11:01:04 AM8/27/09 11:01:04 AMConfirming Pages546 Part Two Planning and Decision Makinga comprehensive analysis of product cost and profitability ( Exhibit 13.1 ). For example, in target costing we consider the role of product design (an upstream activity) in reducing costs in the manufacturing and downstream phases of the life cycle. Then, we see how the theory of constraints is used in the manufacturing phase to reduce manufacturing costs and to speed up delivery downstream. Then we look at life-cycle costing, which provides a comprehensive evaluation of the profitability of the different products, including costs throughout the product life cycle. Finally, strategic pricing uses life-cycle concepts in pricing decisions. Of the four methods for cost planning, target costing, theory of constraints, and life-cycle costing are based on the product or services cost life cycle, while the last method, strate- gic pricing, considers both the cost life cycle and the sales life cycle. The cost life cycle is the sequence of activities within the organization that begins with research and develop- ment followed by design, manufacturing (or providing the service), marketing/distribution, and customer service. It is the life cycle of the product or service from the viewpoint of costs incurred. The cost life cycle is illustrated in Exhibit 13.1 . 1 The sales life cycle is the sequence of phases in the products or services life in the market from the introduction of the product or service to the market, the growth in sales, and finally maturity, decline, and withdrawal from the market. Sales are at first small, peak in the maturity phase, and decline thereafter, as illustrated in Exhibit 13.2 . These four methods are commonly used by manufacturing firms, where new product devel- opment, manufacturing speed, and efficiency are important. Because a product with physical characteristics is involved, applications in manufacturing firms are more intuitive a