Introduction
Today, McDonald’s Corporation is a publicly traded company and arguably one of the largest fast food chains globally, offering a range of food items, snacks, and beverages. Founded in 1940, the company has grown significantly, with an estimated 69 million daily customers from over 120 countries (Mozammel, 2019). Considering the strength and reputation of its brand, the company has been criticized heavily for some of its business and food practices. However, these have not hindered it from continuous prosperity.
Such dominance, despite heavy criticism, has been linked to the firm’s extensive application of multiple contemporary management techniques, which have provided it with the best decision-making and handling of risks (Mozammel, 2019). However, as it looks to achieve its critical success factors, such as innovation and technology, job satisfaction, customer satisfaction, and a marketing strategy that aims to promote and sell its products, it is critical to consider target costing as an addition to its management techniques.
The management method could be vital to unlocking its potential even as it looks to grow its business and assert its dominance as a world leader. Therefore, this paper analyzes this strategy, provides a rationale for its selection, and discusses it comprehensively, looking into its description, implementation process, and application by Samsung, Toyota, and Honda. The paper then contextualizes it for McDonald’s, focusing on its applicability and a viable implementation plan that hasbeen successful in the organization.
Rationale for Selection
Target costing is primarily selected because it is not a contemporary management technique provided in the text, but isimplemented in McDonald’s. The firm is famous for its cost leadership strategy, which hinges on its ability to decrease production costs and offer quality products at significantly subsidized prices (Ma, 2021). The success of this strategy is often driven by the utilization of full-cost pricing, which is the direct opposite of target costing. In this regard, the company is known for considering all the direct costs of a menu item’s production, including labor, overhead fees, and raw materials.
Furthermore, it usually finds indirect costs such as advertising and marketing expenditures, research and development costs, and distribution costs. Through such full-cost pricing, the company then tries to minimize them while still ensuring that all expenses are covered in the price of a menu item, while still enabling it to remain profitable (Ma, 2021). While this strategy is a critical contribution to the organization’s overall management strategy, consideration needs to be made for target costing.
Apart from the evidence of this technique’s lack of implementation, it is chosen because of its potential to aid McDonald’s in achieving its critical success factors. The firm operates in one of the world’s most competitive fast-food industries. As such, it needs target costing to remain as competitive as possible while managing its costs.
Additionally, the technique ensures that all expenses linked to selling and producing a product are aligned with the budget and do not exceed the desired price, which is pivotal in ensuring that McDonald’s improves efficiency and profitability and controls its costs (Blocher et al., 2022). Moreover, the technique is associated with quality control due to the analysis it involves and would thus ensure that the corporation maintains its reputation. Furthermore, the method is innovative, especially since various unknowns are involved. This encourages experimentation, allowing the firm to be innovative and remain relevant to its customer base while satisfying its needs. In this regard, with these contributions, the technique could be a game changer for McDonald’s and escalate the achievement of its critical success factors, making a suitable choice for it and its operations.
Analysis of the Technique
Description
Target costing is a management technique that has existed for decades. The method is primarily attributed to the Japanese, believed to have originated in the 1960s (Ahn et al., 2018). The Japanese hoarded it for their benefit as they looked to respond to increasing global competition and produce high-quality products at competitive prices. As such, they used it as a management tool for managing costs and improving competitiveness while adopting a “kaizen” philosophy that focused on cost reduction and continuous improvement (Ahn et al., 2018). This involved a combination of cost reduction and product design during production and price negotiations with suppliers.
With the technique’s success, the Western world gained interest, leading to its adoption and popularity in the 1980s and 1990s, particularly in North America and Europe (Ahn et al., 2018). This was critical for its evolution as more businesses invested in the technique. However, as adoption continued, evidence started emerging of the utilization of a critical element of the technique, the retrograde approach to product cost determination, in the Volkswagen Beetle’s development in Germany and Ford production in the US in the 1930s (Ahn et al., 2018). This led to the belief that a full-fledged application of the approach started post World War II when scarcity of resources hit the world, forcing Americans to resort to a strategy where they had to maximize the attributes of desirable products while reducing costs (Ahn et al., 2018).
Later, it became known as value engineering when Japan took it and became its pioneer in renaming its target costing. However, in 1995, the Japan Cost Society’s target cost management was made the term’s official name as they saw target costing as being too vague and not reflective of the Japanese word “genka kikaku” (Ahn et al., 2018). However, target costing has already gained prominence worldwide and is still used to date.
With such critical phases in the concept’s development, it has grown expansively and is more comprehensive in its modern form. In this regard, it is a management technique that involves setting a target cost for a given service or product before delivery or manufacturing (Blocher et al., 2022). The pricing is often subject to market conditions and accounts for factors such as competition level, homogeneous products, and switching costs for the final consumer. In this regard, it effectively and efficiently establishes a product’s life cycle cost, which should essentially be enough for its development for a specified quality and functionality with assured profitability (Blocher et al., 2022). It is thus considered among the most effective cost management methods due to its comprehensiveness in cost management, long-term profit achievement, and reduction of product premium costs.
Thus, the technique is viewed as a continuous process that covers a product’s entire life cycle. In this regard, companies must regularly review and update their target costs to reflect changes in customer needs, market conditions, and production costs. Additionally, it remains a crucial tool for firms that want to balance competing customer value, cost, and quality demands.
It also facilitates effective and sustainable progressive production as it promotes collaboration between design, engineering, manufacturing, and cost management teams through a detailed understanding of the costs associated with each product and the potential for cost savings through design and manufacturing improvements. Therefore, it is guided by the principles of value chain participation, market-based pricing, design process concentration, customer concentration, orientation on the product’s life cycle, and cooperation within the system among multiple specialized sectors (Blocher et al., 2022).
These objective and specific principles of the technique are why, since its emergence in the 1960s, it has become a widely used cost management approach in various industries, including consumer goods, automotive, and electronics (Ahn et al., 2018). As such, its proponents consider it a valuable tool and a path to gaining absolute competitive advantage, especially in today’s competitive global marketplace.
Implementation Process
Despite the great potential that target costing has in revolutionizing a business and its operation, it is critical to implement it procedurally and thoroughly, with all stages considered and undertaken as required. This is critical mainly because the technique borders on the collaboration of various departments and players, making the implementation process key. Additionally, in undertaking the stages, it is critical to be guided by the cost, including the objective that the management is trying to achieve through utilizing the technique.
Target Profit Establishment
The first step in target costing is determining the target profit for the product of interest. In doing this, it is critical to appreciate the role played by marketing in establishing the target cost. This is why, in this stage, the firm must conduct comprehensive market research to understand what the customer wants. It is also critical to know the general needs of the market and the market price for similar products.
Once there is sufficient information on these, it is crucial to estimate the sales volume, and from the expected revenue, the desired profit is deducted. Management must, however, ensure that its profit margin aligns with the firm’s long-term strategy (Yahya, 2018). This extends to making propositions for sales volumes and retail prices based on research collected from the study and the desired market share for the company. This total sales revenue can be estimated over the product’s life cycle. The profit will then be established through return on sales and total sales revenue.
Target Cost Determination
With the target profit established, the next step in target costing is determining the target cost. This is a critical step as it sets the cost target for the product’s life cycle. It is usually calculated by subtracting the desired profit margin from the expected product market price. The target cost is known to serve as the basis upon which the whole cost reduction process is founded and guides decision-making through the product development, production, and marketing stages.
According to Yahya (2018), management accounting is vital in determining target costs because it provides the information needed for marketing analysis support. As such, the phase is often seen as a team-oriented one that requires the participation of employees from different departments to ensure that the target cost determination and reduction process is as comprehensive as possible. Bragg (2019) recommends that at this stage, product designers’ expertise be sought as they help create designs that accord the desired end products the utmost quality while still ensuring affordability. In this regard, it is also essential that the other members engaged in target cost determination understand what their work means and how it translates to the firm’s performance.
The other feature is ensuring that those involved in cost determination have the proper training with enough knowledge of the market and the product to uniquely apply their knowledge in ways that provide the cost planning and eventual achievement of the target cost as precisely as possible (Blocher et al., 2022). Even with these considerations, upon determination of the target cost, it is essential to validate it before moving to the next stage (Bragg, 2019). This involves considering the feasibility of achieving the target cost given the product’s current state, the market conditions, and the production process. If the target cost is unachievable, it is vital to revise the desired profit margin or reassess the target price and market for feasibility to be achieved.
Functional Cost Analysis Performance
After determining the target cost and ensuring its feasibility, the next phase is conducting a functional cost analysis. Its objective is often to provide accurate estimates of the total product cost, including the factors that significantly impact the product cost. Thus, it involves gathering data, analyzing costs, identifying cost drivers, allocating overheads, and evaluating results (Bragg, 2019). Usually, its successful completion depends on the preparation of a logical diagram, which is traditionally based on the identification of the specific product’s function.
Negotiation can also occur in this step with the relationship between the functions, applicable costs, and parts of the desired product. This is usually its starting point. Management can broker a good deal for its development based on how well it bargains with the departments responsible for different product aspects and outside suppliers.
During this stage, value engineering also takes place. It covers designing a product from various angles at highly subsidized costs through a thorough review of the particular desired functions that customers need (Blocher et al., 2022; Yahya, 2018). Through value engineering, purchasing, design, production, planning, and other essential processes are established on a company-wide basis. As such, functional cost analysis involves the performance of checks on the various parts, with designs also altered to ensure a certain implementation level. In this regard, value engineering blends with functional analysis to provide an appropriate and accurate proposition of alternatives for improving costs.
Cost Estimate Determination
The functional cost analysis determines the estimated cost for the whole product. The estimate covers all the direct and indirect costs associated with product production and includes allowances for expected decreases or increases (Bragg, 2019). Management accountants are considered the experts in this area as they have the knowledge and easy access to information relating to any effects of the proposed functional alterations.
Estimate Comparison with Target
Once determined, the estimated cost is then compared with the target. This is critical to establish whether the product directly meets its objective. A decision is made if the cost estimate is equal to the target.
However, if it is more than the target cost, the process returns to the performance of charge functional analysis to ensure that it is reduced to the desired levels (Yahya, 2018). In the second performance of this iterative process, changes to the product design, optimization of manufacturing processes, or the use of alternative suppliers or materials may be initiated. Undertaking such actions is pivotal since the main goal here is to reduce costs while ensuring the product’s desired functionality and performance are maintained.
Final Decision-Making
Final decision-making is the next step upon satisfaction of the cost estimate comparison with the target cost. This is where management decides whether to launch the product based on market needs, manufacturing feasibility, and consumer acceptability. If management chooses to proceed with production, several other factors must be considered for successful implementation. Primarily, it is essential to continue with team engagement, considering that the actual cost is often above the target cost (Bragg, 2019). Furthermore, the decision should be adequately supported by the product’s target cost, estimated cost, and sales volume.
Cost Management During Production
The final stage in the process is managing costs during production. It involves monitoring costs associated with each component and process and undertaking the desired actions to reduce and control costs as needed. This step is essential in ensuring that the product remains on target to meet its cost objectives and the company remains profitable. In this regard, the stage hinges on ensuring that actual costs match target costs while identifying any cost overruns before they reach unmanageable levels (Yahya, 2018). This is why strategies such as cost control, cost tracking, and continuous improvement must be included in the final phase for the target costing management technique to succeed.
Application by Other Organizations
Target costing is widely used across different industries by various organizations. This is attributed to its role in helping firms increase profitability while controlling costs and achieving the desired competitive advantage. Despite the application’s objectives being similar, the application depends on how the management of specific organizations integrates the technique into its overall design and production process, including the role the method plays in overall decision-making. In this regard, some organizations where the course is known to have been applied include Toyota, Honda, Samsung, and Procter & Gamble.
Toyota Motor Corporation
Toyota Motor Corporation is one of the largest automakers in the world, and it is widely known for its utilization of target costing. The technique is critical to the firm’s overall cost management strategy. It is utilized throughout the product development process to ensure that the firm remains competitive by controlling costs and boosting profitability.
However, more specifically, the company optimizes target costing to reduce costs during design. This is because it wholly focuses on alterations made to existing automobiles rather than the design of new ones (Narsaiah, 2020). This allows it to easily set cost reduction goals and focus on achieving new targets through design alterations that facilitate its achievement of the overall cost reduction objective. For success, the company has a vigorous testing process that helps its management judge the costs of the new design compared to older ones, so that a substantial implementation cost reduction is guaranteed.
Honda Motor Company Limited
Like Toyota, Honda is another automaker that depends on target costing for decision-making and overall management. The automaker utilizes six target costing steps to assist its overall cost management strategy. They include product feature identification, target sales price establishment, target cost computation, cost breakdown performance, target costing process engagement, and final decision-making (Narsaiah, 2020). Through this process, the firm has continuously rolled out new products and designs, with continuous improvement seen in its plans while maintaining reasonably low production costs.
Samsung Electronics Company Limited
Samsung is another company that has successfully applied target costing. The firm is a leading electronics manufacturer and depends on the technique for profitability improvement and cost management. The method is essential to control costs across its vast product portfolio while identifying and implementing cost savings initiatives throughout product production and development.
The technique has been evident in some of its designs, such as the Galaxy S21 smartphone, where the company opted for a flat display instead of a curved one to lower production costs (Ibadi et al., 2020). The technique is also evident in its home appliance and semiconductor divisions, where target costs are set for each product and designs are optimized with a focus on cost-effective raw materials and reduction in the number of parts required (Ibadi et al., 2020). In this regard, the method remains critical to the firm’s global success.
Procter & Gamble Company
Procter & Gamble, a consumer goods firm, is another company that uses target costing for cost controls and profitability enhancement. Through value engineering, the organization utilizes the approach to establish the target costs for its products and identify areas of reduction (Chowdhary & Anand, 2020). The technique is particularly vital to the company when developing new products, like when it developed the Tide Pods laundry detergent.
The method helped ensure product profitability while still making sales at competitive prices. The technique is also notable in the company’s collaboration with suppliers. There is evidence that it worked with a supplier to reduce the cost of manufacturing plastic cups for its Pantene Pro-V shampoo bottles by about 25% (Chowdhary & Anand, 2020). These are clear indications of the extent to which the company depends on the method for its overall success.
Applicability to McDonald’s
Just like the other four companies, McDonald’s can benefit significantly from target costing, particularly considering the highly competitive nature in which it operates. In this regard, McDonald’s is mandated to offer competitive prices to its customers, and the best way to do this is through this technique while also maintaining its market position (Kostrzewa-Nowak & Gos, 2022). Through this approach, McDonald’s can primarily determine the maximum cost incurred to produce a product while achieving its desired profits (Aqeel, 2021). As such, the technique can ensure that it does not overprice its products relative to the competition and drive its customers away.
Further still, the technique is significantly applicable to the company when it comes to the analysis of the costs. Through it, McDonald’s can analyze the cost of ingredients, labor, packaging, and other direct and indirect expenses associated with the production of its products. In identifying these costs, the company can focus on the label of cost reduction opportunities and find ways to reduce costs while maintaining or even improving product quality (Aqeel, 2021).
For instance, through target costing, McDonald’s can work with suppliers and negotiate better prices for ingredients on the grounds of economies of scale and streamline its operations to lower labor costs. The company can also look into opportunities for packaging cost reduction and optimization of its supply chain by minimizing expenditure on transportation. This will allow it to meet its target costs and maintain its profit margins. The company can also benefit from cost analysis to determine the prices for some of the costs and set targets for each product (Aqeel, 2021). Target costing is extensively applicable to McDonald’s and can be a valuable tool to its management, ensuring that it maintains profitability while offering competitively priced menu items.
Implementation Plan
For the successful implementation of this technique in McDonald’s, several processes would have to be followed. Primarily, McDonald’s will have to define its target profit margin for each menu item. This involves setting a target profit percentage that the company desires for each product. The next step will be to analyze costs, looking at the costs associated with ingredients, labor, packaging, and even marketing.
For this stage to be as comprehensive as possible, the company will need to conduct a thorough cost analysis to identify cost drivers for each product. Based on the research, McDonald’s will need to set a target cost for each menu item (Kostrzewa-Nowak & Gos, 2022). This will be equated to the maximum fee that the company can incur while still achieving its target profit margin.
The next step in the plan will be to identify cost-reduction opportunities. This is where the firm will look into various avenues that enable it to reduce costs by analyzing each cost driver and finding ways to reduce costs. This could involve negotiating with suppliers to get better prices, optimizing the supply chain to reduce transportation costs, and improving operational efficiency through a reduction in labor costs.
The next phase of the plan will be to implement cost-saving strategies that have been identified. This will drive the company to redesign its menu, alter the supply chain, and reconfigure its production processes (Aqeel, 2021). The final part of the plan will involve monitoring performance and making adjustments as needed.
Considering the ever-changing market, the company will have to invest in research and be ready to track its costs, profit margins, and sales, as well as ensure they are aligned with its targets and the general nature of the market. With these, the company will be assured of maintaining a strong competitive edge against competitors while achieving its desired profits. The time and budget required for its successful implementation will vary depending on factors such as the complexity of the company’s menu, the extent of cost analysis required, and the resources available to implement the changes (Kostrzewa-Nowak & Gos, 2022). However, a drastic change will be made upon full implementation and integration within its operations and management system.
Conclusion
McDonald’s is among the leading fast food industry companies and needs to heighten its implementation of target costing. The technique transforms the marketplace with its comprehensive implementation processes that ensure the proper setting of target costs and engagement of experts and departments within a firm. The process is also pinned on value engineering, which also provides a level of risk reduction. This is evident from the success of companies like Samsung, Toyota, Honda, and Procter & Gamble. In this regard, it is time for McDonald’s to redesign its cost leadership strategy and shift from full costing to target costing or use a combination of the two to grow expansively and widen its customer base through a comprehensive implementation plan.
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