Reference no: EM133615011

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 alliance as 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.

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