Low cost strategy and differentiation strategy on HR
Executive Summary:
The report will develop key points using the Porter competitive model as a guide. It will describe low cost strategy and differentiation strategy and its impact in key HR function such as HR planning, recruitment and selection, orientation, training and development, career planning, performance management, compensation management, Health and safety and International Operations.
Theory description:
Michael Porter made a major contribution to the field of strategic management by grouping the different positions organizations can compete in five competitive strategies. Porter’s business strategy concentrates itself with the product and the market scope. The importance of gaining a competitive advantage is extreme in the economy and it grows out from the value an organization is able to for their consumer that exceeds the firms cost of creating it. [1]
The five forces govern the profit structure of an industry by determining how the economic value it creates is apportioned. That value may be drained away through the rivalry among existing competitors, of course, but it can also be bargained away through the power of suppliers or the power of customers or be constrained by the threat of new entrants or the threat of substitutes. Strategy can be viewed as building defenses against the competitive forces or as finding a position in an industry where the forces are weaker. Changes in the strength of the forces signal changes in the competitive landscape critical to ongoing strategy formulation. [2]
Low-cost Provider Strategy – the goal of this strategy is to provide a product or service at a price lower than that of competitors while appealing to a broad range of customers.
Low cost strategy is centered on the capability of the company to produce and deliver products of competitive quality at lower costs. Cost leadership strategy is much more than cost reduction initiatives that get lot of prominence in strategic planning and review session of any company as a means to improve the bottom line of a company by improving its efficiency. Some companies use their efficient cost structures to protect their markets from the competitors by responding to competitors’ move of making in-roads in the market space by reducing prices. Such reactive response may make a company predominantly inward focused.
Positioning – low cost strategy
Better way to strategically position a company on the advantage of cost is to increase market share by transforming from lowest cost producer to lowest cost supplier of products. This way the company translates its cost advantage into price advantage for its customers and thereby improves the market share. The prospect of increasing the market share provides a great opportunity for the company to leverage the economies of scale coupled with the ruthless cost cutting measures it plans to execute. More the competitive space it occupies – which also means that more competitors eliminated – more effective are economies of scale and as a result the costs are driven still lower. When a company is able to transform the efforts of cost reduction into cost advantage for customers the company can be said to be successfully pursuing low cost leadership strategy.
Wal-Mart is one company that continuously strives to reduce costs and in the market place it has got the image of supplier of products at the lowest prices. This is how Wal-Mart captures the markets and eliminates the competitors and improves revenues and market share. Economies of scale and efficiency form the core around which Wal-Mart executes its strategy. Companies pursuing cost leadership strategy compare each and every activity along their value chain with competitors and are committed to surpass them. Innovation in such companies is focused on process improvements rather than on products .Therefore, companies pursuing cost leadership strategy target mass markets with proven products. [3]
Differentiation strategy – an organization employing this strategy seeks to differentiate its products from other competitors’ products in ways that will appeal to a broad range of customers. [4] Examples of suceesful organizations are Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles.
HR functions and Porters strategies:
Human resources Planning can be defined as a process by which an organization ensures that it has the right number and kinds of people, at the right place, at the right time, capable of effectively and efficiently completing those tasks that will help the organization achieve its overall objectives or in other words HRP can be defined as planning for the future personnel needs of an organization, taking into account both internal activities and factors in the external environment. When adopting low cost strategy organizations the product must be perceived by consumers as comparable to the ones offered by the competition and have a price advantage. The objective is to gain market share or to earn higher profit margin, this options have direct impact in HR Planning. When analyzing the function we can observe that at entry level succession planning is minimal. Outside labor markets are monitored to satisfy entry level needs and resource to fringe workers. [5] On the other hand, Organizations that adopt a differentiation strategy the impact in HR planning, is the following the company recognizes that people are the key in gaining a competitive advantage in the market and their strategies reflect that concern.
Succession management is vital in this environment is critical, employees need to possess certain competencies and skills to advance in the company, with this organizations invest in developing skills is part of the promotion policy. HR management focuses on career and training and job security and employee loyalty is very with these organizations. [6]
Recruitment and Selection function incorporates the process to discover the sources of manpower to meet the requirements of the staffing the sources of manpower to meet the requirements of the staffing schedule and employ effective measures for attracting the manpower in adequate numbers to facilitate effective selection of an effective working force. Selection is the process of choosing the most suitable candidates from those who apply for the job. It is a process of offering jobs to desired candidates.
Organizations that adopt low cost strategy focus less Recruitment and selection. It is mostly done at level entry and the pool is the surrounding labor market pool and recruitment and selection budgets are lower organizations that adopt differentiation strategies. Recruitment methods are based on mouth to mouth and on-site applications, resource to local newspapers. Career paths are narrow and positions that are not entry level are filled in house. [7] When adopting a differentiation strategy an organization reaffirms that human capital is key in gaining your competitive advantage it centralizes the importance of Recruitment and Selection. In this picture, the strategy reflects the need for a pool of employees with a broad range of skills and competencies. The employee that they seek is one that will need less supervision and with an innovative mind and ability to work in teams. On the other hand, the selection process involves team interviews and behaviorally based evidence of innovative performance and resources to testing may occur. [8]
Orientation
Training and Development is the field concerned with organizational activity aimed at bettering the performance of individuals and groups in organizational settings. [9] This concept is differs from company to company , low cost strategy will incorporate a training and development process focused on increasing the efficiency of the job, training is provide in a minimal delivery due to the skills to perform the job being lower. Investment in career development is few and the focus in acquiring new skills is non existence. If we analyze the food industry, this is the predominant rule. Employees are trained to perform a job and their trained on the basis in delivering a service. While in a differentiation organization, employees are viewed as the key for their success and investment in training and career development are higher. In organizations as Apple INC have developed training and development programs that will focus on skills and attitudes, decision making, ability to work in teams, creative thinking, it is aimed to be a process that will incite innovation and creativity. Apple’s training and development can range from training the staff or employees on how to use a new piece of software, complete a form, give good customer service or write a professional letter. Training and development programs are an essential component of a learning environment that can improve the Apple Inc.’s ability to attract and retain employees with the skills and competencies needed to achieve results for the benefit of the company. Training and developing new and current staff to fill up new roles and work in dissimilar ways will be a decisive part in the endeavors of the company to meet its transformation challenges. Ways that
employees learn and achieve results will also continue to transform how Apple Inc. do business and engage or force the employees in further innovation and improvements in line with its objectives. [10]
Career Planning includes the steps an individual undergoes in an organization during working period, which takes the person through the hierarchic ladder with expansion in duties and responsibilities with resultant increase in pay and status. It is a process which enables an organization to meet its current and future manpower requirement through provision of career opportunities for its employees.
Planned and systematized progression of events in the field of work of Individuals during their employable periods of life. [11] Low cost organizations will invest little in career planning due to the fact their aim is to provide a low cost service and investing in career planning will increase their costs. Although, at the corporate level some techniques maybe visible. In a differentiation strategy organization career planning is a tool to improve employee motivation and loyalty. Methods as career development workshop, human resources planning and forecasting, succession planning, career development pathing programs and mentoring are set in place to guide employees. [12]
Performance management is the process of creating a work environment or setting in which people are enabled to perform to the best of their abilities. Performance management is a whole work system that begins when a job is defined as needed. It ends when an employee leaves your organization. [13] Low strategy organizations develop performance management plans that are standard are measured by standard criteria, when executing performance reviews the feedback is immediate, specific in the form a review and accountability is implemented. Appraisals are performed by the direct supervisor not utilizing the 360 appraisal method the objective here is for promotion consideration. These plans are implemented in the food and restaurant industry where positions normally are less complex in the bottom level.
As in differentiation environment like Apple INC performance management is based on long term implications of behavior, the objective is geared to implement behavior that will have long term efficient behaviors. The plan tries to encourage empowerment, diversity, and team work, innovation that will reach efficient and effective outcomes.
Performance reviews are 360, evaluation is done by measuring group work in terms of objectives not defragmenting the individual effort. [14]
Compensation Management is an important task for HR; it is complex task that is performed periodically which configures each employee’s compensation in order to be included in the payroll process. Organizations with low cost strategies manage their compensation strategy in order to monitor the wages offered by organizations in their market; they incorporate lower wages and fringe benefits and adopt a lag strategy by utilizing outsourcing to countries or states where wages are lower. The reduction in wages can be achieved by using part time employees, because they do not receive fringe benefits. In pay performance dimension is used to reward individual effort in low cost organizations. Companies with differentiation strategies develop their compensation strategy very carefully. Wages can be slightly below the market average, but the opportunities to increase your pay through other means are plenty for example incentive pay. By placing yourself as a differentiation focused company pay performance is incorporate and it depends on individual, group and corporate achievements. [15]
Health and Safety policies are extremely important in the Canadian workplace environment. Organizations will comply with the legal requirements and will ensure employees have a safe and healthy work environment. Where organizations differ is their level of complexity of H&S practices. In low cost driven organizations the investment in health and safety is used as the main goal of achieving legal compliance. Manufacturing sector gear their practices to ensure the safety requirements are met. As in a differentiation organization we see the reach to a next step by implementing employee wellness programs and use health and safety to increase their competitive advantage by positioning as going beyond the limits.
International Operations