Case study

Motor vehicle manufacturers focus on relentless cost reductions to lower prices through efficiency improvements, improved productivity, and relocation of manufacturing closer to markets with high demand to avoid logistics expenses, trade barriers, and currency risks. As in other industries, cost management, with specific emphasis on driving expenses down without compromising quality, remains a priority. Studies show that short-term cost-cutting (short-termism) often harms organizations across industries and can even perversely ultimately increase costs. Moreover, past research has shown that reactive cost-cutting and business restructuring proved to do little to reduce total expenses or improve the bottom line. Research has found that many automotive manufacturers have failed to learn from the mistake of others in the industry by making cost-cutting their major goal. If it is instead managed with a strategic approach, it will result in considerable value for the company through reduced costs and competitive advantage.

This was demonstrated by Hyundai Automotive Group in 2006, when its chairman ordered a 30% reduction in costs. The company did not execute sweeping cuts across the board but instead chose to adopt a strategic cost management approach by exempting value-adding activities from the trimming of expenditure. This involved proactively supporting and agreeing to cost increases from suppliers involved in providing engineering, design, and quality improvements. The company also chose not to cut back on research and development expenditure, nor to curtail expansion programs in key markets such as the US, China, and India. The successful implementation of cost reduction through productivity enhancements helped the company to enhance brand value globally and increase sales domestically.

However, cost-cutting in isolation has its limits, and sometimes strategic cost management is best approached in partnership with other firms. An example of this is the announcement in January 2019 by Ford and Volkswagen of a strategic alliance. This partnership has since expanded. Ford's CEO, Jim Hackett,describes this allianceas a method to save money through shared engineering. In sum, Strategic cost management must follow corporate strategy, as evidenced by the Ford-Volkswagen alliance. If the corporate strategy within this alliance fails to maintain its pace and momentum, the financial results can be expected to lose steam as well.

The finance function requires effective, decisive, and inspirational leadership to create a strong link between strategy and strategic cost management.

The head of the finance function should drive corporate governance and compliance in strategic cost management. Finance personnel should incorporate "strategic thinking" when addressing cost management using the following steps:

• Communication.Strategy and its integration with strategic cost management should be clearly articulated, concise, and easy to understand.
• Cost differentiation.Differentiate between costs that are relevant to strategy and have a long-term, sustainable impact in the achievement of relevant organizational objectives versus costs that are irrelevant, add no value, and therefore are irrelevant in any form of decision-making to support corporate objectives.
• Change management.Adopt an effective change management strategy that will align strategy and strategic cost management activities. This will ensure that the finance team embraces the new strategy to associate and integrate it with cost management. It is imperative that change management embeds the objectives of job rotation and multiskilling, ensuring finance professionals work in specific business functions with a strategic focus to develop skills in understanding and developing strategies.
• Technology.Using systems and processes that integrate strategy with strategic cost management is crucial in achieving a strategic focus on cost management. Technology should be an enabler for creativity and innovation in the finance function to further enhance the integration of strategy with strategic cost management.

Questions

Q1. What is do you understand by "strategic cost management" and how does it differ from Cost management adopted by many companies in motor vehicle manufacturing?

Q2. Illustrate howHyundai Automotive Group benefited from strategic cost management and the areas that were targeted in its goals of strategic cost reduction?

Q3. Wat can we learn from the example of Ford and Volkswagen of a strategic alliance in not treating cost reduction in isolation?

Q4. What does it take the function of finance to adopt strategic cost management and what steps are needed to achieve expected benefits of this approach?

Q5. Discuss why you think strategic cost management approach is a strategic function and tool?