Mercedes Benz Production of the AVV Case Study


What is the competitive environment faced by MB?

MB’s competitive environment consists of other brand manufacturers producing all-utility vehicles, a new market for automobile manufacturers in the 1990s. Competitors were also produced vehicles that conformed to consumer safety demands (airbags, etc.) and that were cost-efficient. By the time MB entered into the AAV market, consumers were moving towards more luxury brand automobiles, which conformed more to MB’s aim.

How has MB reacted to the changing world market for luxury automobiles?

It has accommodated consumer demand for more safety — as the sampling of consumers showed this to be the most common demand in vehicles with a “relative percentage rating of 41%” (Albright, 2000, p. 3). But, of course, most significantly, it has expanded its luxury class to include production of the AAV — a new type of vehicle for MB, never before produced. Its purpose is to combine the SUV phenomenon with the luxury brand stylings of MB for a new vehicular experience.

3) Using Cooper’s cost, quality, and functionality chart, discuss the factors on which MB competes with other automobile producers such as Jeep, Ford, and GM.

Using Cooper’s cost, quality and functionality chart, the factors that MB uses to compete with its competitors are related to production expenses — MB produces parts in-house by bringing in teams to manufacture whole systems. Its MB-style chassis is most important to the company because this is what delivers the typical quality smooth MB drive, but safety is number one on the importance list for consumers. Thus, MB achieves balance between price and functionality by being aware of costs that competitors are maintaining and also providing the functions important to consumers. For example, it discovers consumer costs by purchasing competitors’ vehicles and breaking them down to discover how they were put together and at what price. Surveys of consumers were also conducted in order to discover functions that they preferred and these were combined with functions MB preferred to still maintain. Because the market for the consumer interested in the luxury AAV was primarily in the U.S., MB decided to build and manufacturer the cars right in the U.S. so as to reduce shipping costs and also be closer to consumer (helpful for getting important consumer input).

4) How does AAV project link with MB strategy in terms of market coverage?

In terms of market coverage, MB’s AAV strategy helped the manufacturer reach a new audience of consumer — the driver seeking a larger luxury vehicle that conformed to the AAV trend. Because the market for this driver was primarily in the U.S., MB decided to be as close to the consumer as possible — so it manufactured in the U.S. This allowed American consumers to give direct input and ideas about what they would like to see, which enabled MB to understand more clearly and effectively its target audience. The AAV project was thus designed to conform to every wish of the consumer while meeting cost guidelines of the corporation as well as class guidelines of the MB standard.

5) Explain the process of developing a component importance index. How can such an index guide managers in making cost reduction decisions?

There are 5 steps to the development of the component importance index: 1) consumer importance categories must be ranked, 2) the target costs and percentages must be identified according to each function group, 3) a category-function group matrix must be constructed — this allows the company to see what the contribution of the function group is to mission of meeting customers’ demands/wishes, 4) the function groups are placed in order of importance, and 5) the target cost is indexed.

Overall, the index enables the company to visualize and quantify otherwise abstract concepts that would be hard to assess without taking these steps. These steps enable the manufacturer to bring together numerous ideas, assess their relation, and give guidance on how to achieve the aim. Thus, these steps help the manufacturer reduce costs by giving clear analysis of cost-benefit ratios.

6) How does MB approach cost reduction to achieve target costs?

It utilizes suppliers to deliver whole-systems ready to go, works both with engineers and cost-experts to keep all aspects of the operation within the agreed-upon parameters. Thus, it uses value engineering and ensures that actual cost is lower than target cost.

7) How do suppliers factor into the target costing process? Why are they so critically important to the success of the MB AAV?

Suppliers play a large role in the manufacturing process and can quickly drive up costs. For the AAV, suppliers essentially became partners in the process, so it was a win-win for both them and MB. Suppliers helped to design the whole-systems with MB that would be used in the AAV, which helped keep prices low.

8) What role does the accounting department play in the target costing process?

In this process, the accounting department is important for overseeing cost control in both the developmental stage and the production stage. By giving guidance on cost, they are able to assist MB in keeping actual costs below target costs and ensuring that the project is not derailed because of going over-budget.


Albright, T. (2000). Case I: Mercedes-Benz: All-Activity Vehicle (AAV). NJ:

Institute of Management Accountants.

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