Business Studies Research Paper on the Next Frontier in Strategic Cost Management

Research Proposal

  1. i.                    Research Question

This research will seek to answer the following main questions: What level of estimation can the Albaddad International Company apply in implementing the target costing technique in relation to its competitive advantage?

The main objective of this research is to determine the extent to which the Albaddad International Company uses the concept of target costing technique as well as the dimensions of the competitive advantages. Moreover, the research will aim to determine the most significant dimensions on which the target costing technique can be based on in order to build and strengthen the competitive advantage of the Albaddad International Company.

This research will mainly focus on the pricing of the products as well as the services of the Albaddad International Company. It will also focus on the quality of the services and the customer satisfaction.

The hall and tent industry has attracted many firms in the recent past. This has increased the competition in this industry very much. Because of this, firms are investing much in their products with an aim of maintaining the brand name. This research will be relevant to the Albaddad International Company since the company will use the findings from the research to reduce the costs of production.

  • Design

This study has mainly used a descriptive analytical method of primary and secondary data. The research has based on the previous studies as well as the theoretical reviews in determining the dimensions, which form the competitive advantage and the target costing system. In addition, the design adopted will depend on the analysis of the collected statistics in order to account for the reliability coefficient.

Table of Contents

Abstract…………………………………………………………………………………………….4

Keywords ……………………………………………………………………………………………………………………….4

  1. Introduction ………………………………………………………………….……………6
  2. Theories …………………………………………………………………………..……….7
  3. Research methodology………………………………………………………………..……9
  4. Results and Discussion………………………………………………..………….…..….10
  5. Summary, Conclusion and Recommendations…………………………………….…….14
  6. References………………..……………………………………………………………….16

Abstract

This study was carried out in order to explore the relationship between competitive advantage and the target costing techniques within the Albaddad International Company. During the study, the research question on the target costing focused on the leadership of the customer needs, the target-selling price, and the cost of the price life cycle, the degree of teamwork development, the value chain development, and the stage of product design. Questionnaires were used in eliciting information or data. The information collected was analyzed and conclusions made. Designing to target cost is usually done in some form of construction. However, it is not usually well documented. This could potentially benefit this company from a more systematic approach. During this study, there were two methods that were used for measuring the estimates by the directors of planning and quality, financial managers, as well as the heads of accounting departments within the various branches of the company. The research used a sample population of about 50 respondents from the company employees as well as the loyal customers of the company. However, the rate of response was approximately 80 %. The findings from this research found that:

  • The company has a medium target-costing dimension of around 3.48
  • The dimension of the company’s target selling price leadership was the highest while reducing the products life cycle of the company differentiation was the lowest dimension.
  • The company is enjoying medium competitive advantages, which had a score of about 3.46 according to the research
  • The expansion within the differentiation was the highest in terms of performance while the differentiation cost of the company was the weakest.

In summary, the results from this research revealed that there was a wide difference within the strength of the links between the target costing technique dimensions and the dimension of strengthening the competitive advantage within the Albaddad International Company. The research recommended that the Albaddad International Company have to activate its dimensions of the target costing technique in order to for it to achieve the competitive advantage as well as promote it.

Keywords: Competitive advantage, Target costing, Albaddad International Company, project financial management, target cost, UAE.

The Relationship between Competitive Advantage and Target Costing of the Albaddad International Company

  1. Introduction

The economic transformations of the world have created tremendous opportunities as well as significance challenges on many companies. Consequently, competitive advantages have been an interest for large numbers of researchers. In fact, most of the researchers usually consider target costing as the strategic goal of most of the global business organizations. This is especially where companies are required to adopt the target costing technique in order to succeed in their activities. Most companies within the hall and tent industry in the United Arab Emirates as well as other companies from the rest of the world are now applying this technique in their operations. In fact, the concept is currently being applied in most of the industries in most parts of the world such as the electronics, automobiles, dyeing, machine tools, among other industries.

The high competition within the hall and tent industry in the United Arab Emirates market has led to withdrawal of some companies from the industry. However, the Albaddad International Company has been able to stand the competition. Some other companies were forced to apply the modern cost methods. However, the available researches show that the conventional cost methods are not sufficient as well as effective in identifying the opportunities for the successes and survival of companies without using the new techniques of managing the costs. In addition, research has revealed that the conventional cost methods cannot respond to the environmental factors such as the economical, political, social, legal, and technological, which affect the Albaddad International Company and many other companies. Moreover, the conventional costs lack the ability of achieving the cost control as well as substantial reduction in costs.

On the other hand, the Albaddad International Company adopted the target costing technique as well as its application as the technology, which may support the competitive advantages of the company and enable it to achieve a significant reduction in the costs that the company incurs during the design phase of its products and in the early follow up. The significance of this research is that it will stem up from the role, which can be played by the target costing technique in promoting the competitive advantage of the Albaddad International Company within the hall and tents industry in the United Arab Emirates as well as within the global market. This is so important since the company has been able to stand the competition after adopting the use of this technique. In addition, this research is important because it will significantly contribute to the activation of the results, which emerges from the application of the target costing technique in order to promote competition.

  • The Theoretical Framework
  • Target Costing

Currently, competitive as well as the technological progresses have become very critical for both the manufacturing and the service industries. This has resulted from the products life shortage as well as the changing needs and demands of the customers. Therefore, organisations are required to stimulate suitable business operations that will help them in achieving their targeted growth and adopting the most suitable price policies. Pricing basing on studying and analyzing the market is a recent phenomenon. This is what is referred to as target costing.

  1. Benefits of Target Costing

Target costing technique is applied in the various organisations in order to achieve the following objectives:

  • It contributes to the achievement of satisfactory profit margin for the company
  • It provides the company products competing advantage in terms of the specifications as well as the required price, quality, and meeting the needs of the customers.
  • It helps in reducing the costs of producing the elements of the company products in order to achieve the target profits
  • It assists in monitoring the stages of the product life cycle, in addition to the after-sales services.
  • It helps the company to achieve its objects over the long term
  • The dimensions of target costing

Target costing has six main principles, which include the leadership of the target-selling group, focusing on the customer, using as well as developing teamwork, reducing the cost of the product life cycle, focusing on the stage of the product design, and paying attention to all the stages of the value chain.

  1. The dimensions of competitive advantage

The competitive advantage of a company usually means the advantage of the company from the perspective of the market of the company’s products and services, which will put the company in a more competitive position. In most cases, competitive advantage aims at meeting the demands and needs of the customers in order to possess the products of the company.

In addition, competitive advantage can generally be seen as the use of the organization for the internal strengths points of its administrative as well as the functional performance, with an aim of achieving a feature, which its competitors will not be able to imitate or emulate. A firm is said to have a competitive advantage that is sustainable in case it is able to maintain a rate of profit that is higher than the rate of profitability within the industry. This happens for several years and the company has the ability of producing its products at costs that are lower than its competitors.

3.0 Research Methodology

This study employed the descriptive analytical method of both primary and secondary data. Based on literature review from similar studies for other organizations, we came up with a tool to identify some of the dimensions to be used to measure target costing as well as competitive advantage for Albaddad International. For this particular organization, there had been no previous study in regard to target costing and competitive advantage thus no comparison could be made. The research also engaged statistical analysis to provide a reliability coefficient and obtain the highest stability as well as determine some of the methods that result into diminished stability. Apart from that, the research employed correlation coefficient, arithmetic means, standard deviations, and descriptive statistics to correctly measure the components of target costing and dimensions of competitive advantage.

            The population of the study was drawn from the company subject of study and some of its major subsidiary companies.   It involved interviewing and administering questionnaires to some of the company’s directors of planning and quality, financial managers, as well as the heads of accounting departments within the holding company as well as within the various branches of the company who are directly involved in determining target costing and improving the competitive advantage of the company. A list of names of officials from whom the respondents were chosen from was easily obtainable from the company’s offices as the researcher is well accustomed with the organization.

            The research used a sample population of about 50 respondents from the company’s top executives working in financial departments of the company and its subsidiaries. This number was properly selected using scientific sampling to obtain a random sample. 50 questionnaires were sent to each of the participating respondents. For those respondents working at the holding company, the questionnaire was personally handed to them with a brief explanation of the purpose of the questionnaire. However, for respondents working outside the holding company, the questionnaire was sent to their emails with a short letter explaining the purpose of the questionnaire. Out of the 50 questionnaires distributed, 40 questionnaires were received back which constituted a response rate of approximately 80 %.

            The questionnaire was designed to measure the variable of target costing employed by the company and the resulting competitive advantage variable they brought to the company. In regard to target costing variable, the dimensions measured by the questionnaire include; leadership of target price, the focus placed on customers, use of work teams and training and development programs in place, how well the company is able to reduce the cost of life cycle of product differentiation, focus placed on design phase of product differentiation and how well the value chain of a product is managed at all levels. In regard to the competitive advantage variable, the dimensions measured include; excellence and quality of product differentiation, product differentiation cost, the company’s innovativeness and creativity in product differentiation, expansion of product differentiations and alliance. The mechanism proposed by Rankin et al. (34) was used to develop the questionnaire for this research study.

4.0 Results and Discussion

4.1 Descriptive Analysis

The research showed that percentage of respondents who are between the age of 40 and 49 years was 35% while those between 30 and 39 years composed of 26% of all respondents. Those within 20 and 29 years were of 24% while those of 50 years and above constituted 15% of the research sample. In regard to their level of education, the results showed that over 80% of the respondents held a fist degree from a university while 15% of the research sample had higher qualifications. Only 5% of the respondents held a college degree or diploma or less. In regard to area of specialization, 64% held a degree in business administration, 33% had done accounting, and only 3% had other specializations. In regard to experience, over 50% had five or less years of experience, 30% had an experience of between 6 to 10 years, 15% had between 11 to 15 years and the remaining 5% had over 15 years of experience in their field of specialization.

From these results, we can conclude that those officials of average age and a relatively high level of education, with good scientific specialization and quality experience understand the relative worth of using target costing and since our research sample composed enough of these features, then the results obtained are marked by professional credibility thus enhancing their reliability.

4.2 Responding the Research Questions

The results were analysed and their means and standard deviations tabulated. In regard to the first dimension of target costing which was leadership of the target price of products, the research showed that target costing was largely employed in this angle. The mean for the contribution of target costing in helping expand the market for the organization’s products was 4.29, a contribution of an average 4.26 in helping increase the market share within the diverse markets the organization operates in, an average of 4.19 in assisting the company establish the target profit pursuant to financial policy requirements, and an average of 4.10 in helping determine the target price pursuant to the listing regulations of the country. In addition, target costing had a contribution of 4.01in helping the organization diversify its market based on demand and supply market conditions. The results here support the argument of many scholars (Ibusuki and Kaminisk: 90; Zeenat: 43; and Ellram: 16) who have emphasized on immense benefits of target costing in pricing of new products, lower product cost, attaining quality for customers, and material purchasing which have positively reflect on the competitive advantage of a company.

            The results also produced a positive response in regard the benefits of target costing in ensuring the organization puts more focus on its customers. The average contribution of target costing in enhancing customer focus was 4.09 mainly in ensuring customer satisfaction and meeting their diverse and unique needs, and also in regard to ensuring quality products for the consumers. These results upholds the argument presented by Mondem (59) who rejected the use of standard conventional costs technique to control costs and supported the use of target costing which he felt its inherent success emanated from its dependent of market trends and that helps link strategic marketing with operational control.

            The results for use of work teams by the organization was high where high means were recorded for helping develop an experienced and highly specialized work team with diverse duties and capabilities based on their geographical competitiveness. Customer and client involvement was also high with target costing. Thus this supported the argument by Ansari et al. (26) that target costing help build team works composed of representatives from outside the organization.

            Target costing also helped reduce the life cycle of product differentiation, though the results obtained showed a medium degree of this effect. Thus the organization does not give enough attention to product differentiation phase. According to Fouda (45) this is a very important strategic aspect of a modern organization as it helps plan for reduced cost of new products, attaining a proper profit margin through reduced cost of production, producing high quality products, and product development. Our last dimension for the target-costing variable was in regard to proper management of the value chain. The response rate for this aspect ranged between 2.92 and 3.78. This too indicated less than enough attention accorded to the value chain.

The following part discusses results in regard to the competitive advantage variable, which included dimensions like excellence and quality of product differentiation, differentiation cost, market diversification, innovation and creativity in product differentiation as well as alliance.

The results indicated that the organization is continuously working towards reducing its direct costs and expenses in relation to product differentiation, product distribution, and marketing strategy, which is the most important thing that most organizations seek to achieve. Achieving this objective enables organizations to offer their products to the market at a competitive price thus increasing their competitiveness in the market. In regard excellence and quality of product differentiation, there was a high degree of approval most especially in regard to the efforts of the organization help meet market needs. 

            The results also indicated that cost targeting was highly effective in reducing differentiation costs. In regard of persuasion to lower the rate of providing unprofitable product differentiations and in improving the productivity of employees and enhancing their capabilities in using technology, there was a high degree of approval. The results were also positive in regard to the response rate of the organization to come up with differentiated products to curb competition and the ability to keep up with technological advancements as well as offering competitive prices for their products and the importance of target costing in increasing organizational competitiveness in this regard. In regard to market diversification in product differentiation based on labour market, customer needs, costs, analysis, and increased rate of response to changing consumer needs, the study indicated that these are some of the most crucial aspects of target costing helping most organizations in the Arab region penetrate new markets, which increases their profit and market share. In regard to alliance and partnership with other organizations, it emerged as most important aspect of the competitive advantage variable. It was also important in helping reduce financial and administrative burdens. 

From the analysis of the above results, it is clear that there is a huge link between target costing and the competitive advantage of the organization. Where the dimensions of target costing were employed there emerged a correlation with the competiveness of the company. The internal correlation for each of the tested fields were however homogeneous but it also showed that including several or more dimensions of cost targeting had a greater chance of producing a higher competitive advantage as compared to only one dimension. Some of the factors had less effect on competitive advantage, for example focus on the design stage, while other factors such as customer focus and price leadership were the most effective. These results will be important for the Albaddad finance and marketing departments in motivating them to employ target costing strategy to increase their competitive advantage.

5.0 Summary, Recommendations and Conclusions

The results indicate that Albaddad International has been adopting target costing to increase its competitiveness in the market. Target costing has been described as the most important cost management strategy for most market oriented organizations. Target costing is generally used in presentation of the product during the entire life cycle of the product to increase profitability and enhance the decision making process. There is a high link between target costing and competitiveness of Albaddad International. It has also shown that Albaddad International is very careful to involve internal and external environment in seeking to solve their unique challenges. Some of the recommendations of this paper are that the organization should strengthen its use of target costing. Special attention should be given to the product design phase in a bid to seek to reduce the cost of differentiation and generally the entire value chain. The organization should also seek to keep up with technological advancements as its sustainability will depend on it. To ensure the effectiveness of target costing in increasing its competitive advantage, the organization should consider developing a specialized administrative unit entrusted with target costing strategy of the company.

References

Ansari, S., & Bell J. Target Costing Core Group, Target Costing: The Next Frontier in Strategic Cost Management. USA: Mac Graw-Hill Inc, 1997.

Ellram, L. (2006). The Implementation of Target Costing in the United States: Theory versus Practice. Journal of Supply Chain Management: A Global Review of Purchasing and Supply, 2006, 42(1), 13-26.

Fouda, S.  A proposed framework for integration between the target costing method and strategic cost analysis to reduce activities through the concept of the value chain. In Jamiat al-Iskandariyah., & Kulliyat al-Tijarah (Eds.). Journal of the Faculty of Commerce for Scientific Research, 2007, (pp. 209-235).

Ibusuki, U., & Kaminiski, P. Product development Process with focus on Value Engineering and Target-Costing: Case Study in an Automotive Company. International Journal of Production Economics, 2007, 105(2), 459-474. http://dx.doi.org/10.1016/j.ijpe.2005.08.009

Monden, Y. Cost Reduction System: Target Costing and Kaizen Costing. Portland: Productivity Press,1995.

Rankin, P., Knezek, G., Wallace, S. & Zhang, S. Scaling Methods. London: Lawrence Erlbaum Associates, 2004.

Zeenat, Mohammed. Use the entrance target costing to raise the efficiency of new product pricing decisions in the circumstances of contemporary dynamic environment. The Scientific Journal of the Economy, 1995, Egypt, No. 1.