Question

Strategic Types & HRM Needs Michael Porter has identified two primary ways that companies compete within an industry: on cost and on differentiation. Companies' profit margins are calculated as the difference between the price they charge for an item and the costs they incur to produce that product. All else equal, the higher the price charged or the lower the costs incurred, the higher the profit. The two "generic strategies" focus on each respective aspect of profitability. Companies with a differentiation strategy attempt to convince consumers that their product is unique in some way or ways that justifies paying a higher price. Companies with a cost leadership strategy attempt to find ways to lower the costs incurred per unit below competitors'. In this exercise, you will gain a better understanding of the two generic strategies as well as the HRM needs for the two strategy types. Read the case below and answer the questions that follow. Pam is an entrepreneur who loves animals and is interested in starting a company that makes clothing—hats, sweaters, boots, etc.—for household pets. Even though there is a good deal of competition in this market, Pam believes that many of the companies in this industry are positioned with differentiation strategies at the premium end of the market, creating the opportunity for a company to do well with a cost leadership strategy. Pam is weighing several options for her business, both strategic issues and issues specific to HRM. Help her make the decisions that best fit with her cost leadership strategy

1). What should Pam's production strategy be?

A). She should hand-make the clothing at home to ensure quality.

B). She should have a number of production facilities around the country to be closer to her customers.

C). She should have one centrally located facility to achieve economies of scale.

2). What attitude toward risk should her employees have?

A). Risk seeking

B). Risk averse

c). Risk neutral

3).What attributes should her compensation system have?

A). High pay differentials between superiors and subordinates

B). Medium pay differentials between superiors and subordinates

C). Low pay differentials between superiors and subordinates

4). Pam should emphasize rewards for employees who come up with ideas for __________.

A). new product lines

B). cutting costs

C).better customer service

Answer 1

1) C.

Ensuring quality does not go with a cost-leadership strategy. So, (A) is not correct. A number of facilities closer to customers will ensure responsiveness but not reduce the cost. So, (B) also does not go with a cost leadership strategy. (C) is directly related to a cost leadership strategy because of reduced cost due to economies of scale.

2) B.

Cost leadership strategy is always risk-averse. Risk-taking strategies are more innovative and go with differentiation.

3) A.

Companies pursuing a cost-leadership strategy develop an internally consistent pay system with high pay differentials between superiors and subordinates. Reson being the companies do not need a high level of cooperation and coordination among the employees. They plan to carry out tasks as per the set standards.

4) B

New product lines, better customer service are all components of differentiation. When we are talking about the cost leadership strategy, the internal reward policies of HR strategies should also be subordinate and hence cost-cutting is the best method.