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Cost Leadership
Cost leaders do everything that they can to lower the organizational costs required to produce their products or services. However, cost leaders do not necessarily provide their products or services to the customer for a lower price. They can choose to keep their prices down and maintain the same margin as their higher-cost competitors, or they can choose to charge the same price as their competitors and thus increase their profit margin above that of their competitors on each of the goods or services they sell. Walmart has had great success with this strategy; and during the recession and coming out of it, Walmart reduced its prices even more aggressively to combat loss of business to “dollar” stores.37 However, low-cost strategies can have a downside as well. Tata Motors’ cheap Nano automobile at first failed because potential customers saw it as “too cheap” and therefore thought, “It must be unreliable.” So, Tata is now building more expensive Nanos, hoping that they will catch on with young buyers.38
Differentiation
This strategy attempts to create an impression of difference for the company’s product or service in the mind of the customer. The differentiator company stresses its advantage over its competitors.39 If a company like Apple is successful in creating this impression, it can charge a higher price for its product or service than can its competitors. Differentiation, it should be noted, is not necessarily based on real difference but on the perception of difference, which is often created through advertising.40 Nike, Harley Davidson, Margaritaville, and others place their corporate name prominently on their products to differentiate those products from those of the competition. According to Coca-Cola, the three keys to selling consumer products are differentiation, differentiation, and differentiation, which it achieves with its scripted name logo and contour bottle.
Work Application 2-5
Identify the strategy of an organization where you work or have worked and explain how the organization uses the strategy against its competitors to gain customers.
Focus or Niche
With this strategy, the company focuses on a specific portion of a larger market. For instance, the company may focus on a regional market, a particular product line, or a buyer group. Within a particular target segment or market niche, the firm may use differentiation or a cost leadershipstrategy. Businesses can win big by thinking small.41 It is hard to compete head-on with the big companies like Coca-Cola and Pepsi, but the much smaller Dr Pepper Snapple Group’s two non-colas have a differentiated taste for a much smaller target market. However, it is still very profitable.42
How Strategy Affects HRM
There are several areas where the generic corporate strategy affects how we do our jobs within HR. Let’s take a look at a few of the significant differences between generic strategies. A little later in this chapter, we will also review how HRM affects the ability to commit to a particular corporate strategy. We will continue to discuss these areas in greater detail as we progress through the book.
HRM and Cost Leadership
If our organization is following a generic cost leadership strategy, we are going to be most interested in minimizing all internal costs, including employee costs. So we are concerned with maximum efficiency and effectiveness.43 Because we are concerned with maximum efficiency, we will probably create highly specialized jobs within the organization so that we have people doing the same thing repeatedly, like McDonald’s. This will generally cause employees to get much better and faster at their jobs. We will also have a specific job description for each position and job-specific training with very little, if any, cross-training. We will hire new workers based on technical skills and abilities, and we will most likely emphasize performance pay by which the employees get paid more if they perform their job faster and better. We may also provide incentives that emphasize cost controls and efficiency. Finally, it’s quite likely that managers will use narrowly focused performance appraisals as a control mechanism to allow them to weed out less efficient and less effective employees.
2-2 Applying the Concept
Strategy
Identify which strategy is used by each brand or company listed, and write the letter corresponding to the company’s strategy by the company’s name.
1. cost leadership
2. differentiation
3. focus or niche
· ____ 6. iPhone
· ____ 7. Bodybuilder magazine
· ____ 8. Rolex watches
· ____ 9. TOMS shoes
· ____10. Walmart
HRM and Differentiation
On the other hand, if our organization is following a differentiator strategy, we’re going to be more concerned with employees who are flexible and adaptable, who have the ability to innovate and create new processes, and who can work in uncertain environments within cross-functional teams.44 In a differentiator organization, we will most likely have much broader job classifications, as well as broader work-planning processes. Individuals will be hired and paid based on individual knowledge and skill sets, not specifically based on skills related to the job they fill upon entering the organization. Training will be broad, and designed to provide flexibility in operating the business. Here, our incentive programs will reward innovation and creativity. Finally, in the differentiator organization, performance appraisals will generally be used as a tool to develop the skill sets of the valuable knowledge workers within the organization, not as a tool to punish and weed out poor performers. So you can see very quickly that HRM will need to do its job in a significantly different way based on the type of generic strategy that the company decides to follow.
Strategic Analysis
There are two primary components of strategic analysis used by most organizations. The first is called five-forces analysis, and it is a tool that organizations use to analyze the external competitive environment. The second is called SWOT analysis (SWOT stands for strengths, weaknesses, opportunities, and threats), and it is used to analyze the company-specific environment. There are many other strategic analysis tools, but let’s save those for another course.
Five-Forces Analysis
Five-forces analysis is again brought to us by Michael Porter, who identified competition within an industry as being a composite of five competitive forces that should be considered in analyzing competitive situations.45 See Exhibit 2-4 for a list of the five forces.
1. Rivalry among competitors. Porter calls this scrambling and jockeying for position.46 Businesses do this in different ways, including competing for customers on the basis of price, quality, or speed of delivery. How much rivalry there is among competitors determines things like how competitive the industry is and which competitors are targeting the same customer groups. Rivals need to anticipate each other’s moves. Cokeand Pepsi are long-time rivals in the soft drink industry, while Nissan and Toyota are long-time rivals in the auto industry.
2. Threat of substitute products and services. Companies in other industries may try to take a company’s customers away. For example, newer methods of storing and playing music and videos—like the streaming music services YouTube and Pandora—are taking significant market share from manufacturers of MP3/MP4 players, which previously took significant market share from CD and DVD manufacturers.
3. Potential new entrants. How difficult and costly is it for new businesses to enter the industry as competitors? Does the company need to plan for new competition? Are there significant barriers to entry that would prevent such new competition? In many industries today, all it takes to enter is the ability to create and host a website.47 If it is easy to enter an industry and profitability is significant, then the threat of new entrants is much higher. If it’s more difficult to enter an industry, for instance because of high capital equipment costs or other barriers to entry, and profitability is lower, possibly because the product is a commodity (think about the steel manufacturing industry), then the threat of new entrants is significantly lower.
4. Power of suppliers. How much does our business depend on its suppliers? If the business has only one major supplier of a critical component, with no alternatives available, then the supplier has greater bargaining power over the business. However, if our business can get its major supplies from any one of many different suppliers, then the suppliers will have very little power over the business.
5. Power of buyers. How much does our business depend on its buyers? If one buyer or a few large buyers purchase most of what we provide, then the buyer has significant bargaining power over our company. As an example, almost every business student has heard of the power Walmartholds over its suppliers because of the volume of goods that it buys. However, if we provide products or services to many different buyers, none of which provides us with a major portion of our business, then the buyers may have very little bargaining power.
Exhibit 2-4 Five-Forces Competitive Analysis
Companies use the five-forces analysis and other industry and competitive situation analysis tools primarily at the corporate level to make decisions regarding which lines of business to enter and exit and how to allocate resources among existing lines of business.
Work Application 2-6
Conduct a five-forces competitive analysis for an organization where you work or have worked.
SWOT Analysis
While five-forces analysis is a primary tool for analyzing the external environment, SWOT analysis is a tool to analyze the organization’s internal environment, meaning its specific capabilities and limitations. In the process of SWOT analysis, the organization creates a list of its strengths, weaknesses, opportunities, and threats. See Exhibit 2-5 for a format in which to list SWOTs. Once this list is created, the organization evaluates each of the sections of the list in order to decide where it can use its resources most effectively.
Exhibit 2-5 SWOT Analysis
If, for example, we have an organizational strength that is critical to maintain in order to serve our most important customer groups, then we will allocate resources toward maintenance of that strength. If, however, we have strengths on our list that no longer provide us with the potential for advantage over our competitors, then we may choose not to use organizational resources to maintain those strengths. So as you can see, the process of SWOT analysis is a process of balancing our available resources in order to make the most of our strengths and opportunities and to minimize any danger to the organization from its weaknesses and threats.
American Airlines’ strategy includes starting new routes and having a strong customer loyalty program; however, it risks both competition from airlines with lower fares and the increasing costs of fuel and labor.
FG/Bauer-Griffin/GC Images
Designing a Strategy
Once we have identified an organizational vision and mission, decided which generic strategic type we’re going to pursue, and done some analysis of the external environment and our organizational capabilities, we’re ready to start designing our organization’s strategy. The next steps in the design process include setting objectives, creating a strategic plan, implementing that plan, and monitoring and evaluating its success. Let’s take a brief look at each of these steps.
Work Application 2-7
Conduct a SWOT analysis for an organization where you work or have worked.
Setting Objectives
Successful strategic management requires a commitment on the part of managers to a defined set of objectives. Successful managers have a goal orientation,48 which means they set and achieve objectives. Goal orientation can also be learned.49
After developing our vision and mission and completing a situation analysis, the next step is to set objectives that flow from the mission to address strategic issues and problems identified through situation analysis. Objectives state what is to be accomplished in singular, specific, and measurable terms, with a target date. The organization has to write at least one objective for every major goal that is set forth in its strategy. You must begin with the end in mind. Objectives do not state how they will be accomplished—just the end result you want to accomplish.50
Here is a model adapted from Max Weber to help you write effective objectives, followed by a few company examples.
To + action verb + singular, specific, measurable result + target date
Tesla: 51 To + increase + vehicles sales to 500,000 annually + by 2020
Anheuser-Bush InBev: 52 To increase revenues to $100 billion by 2020
Honda: 53 To make two-thirds of overall unit sales from plug-in hybrid or hybrid vehicles and zero-emission vehicles by 2030
We will talk a little more about organizational objectives a little later.
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Strategy Formulation
Work Application 2-8
Write an objective for an organization where you work or have worked that is specific, that is measurable, and that has a target date.
Create a Strategy
Once we’ve identified our set of objectives, the next step is to weave them into a cohesive organizational plan. This is the point at which we determine what we’re going to do to achieve the objectives that we have set. Taking into account the vision and mission that we have decided on—and having determined our environment and each of our strengths, weaknesses, opportunities, and threats—we begin to plan activities within the organization that will allow us to reach those objectives. Looking at this process, you should be able to quickly see that no organization should ever just copy another organization’s strategy—even if that strategy has been successful for the company that is being copied. Why? The simple answer is that no two organizations have the same vision and mission; organizational environment; or strengths, weaknesses, opportunities, and threats. As a result, no two organizations should have the same objectives. Therefore, no two organizations could ever expect to be successful by following the same strategy.
Objectives Statements of what is to be accomplished in singular, specific, and measurable terms, with a target date
2-3 Applying the Concept
Writing Objectives
For each objective, write in the letter corresponding to which “must” criteria is not met.
1. single result
2. specific
3. measurable
4. target date
· ____ 11. To start working out aerobically within a few weeks
· ____ 12. To double ticket sales
· ____ 13. To sell 7% more sandwiches and 15% more chips in 2019
· ____ 14. To decrease the number of sales returns by end of year 2019
· ____ 15. To be perceived as the best restaurant in the Boston area by 2019
Implementing, Monitoring, and Evaluating Strategies
Green Bay Packers coach Vince Lombardi was known to have said, “The best game plan in the world never blocked or tackled anybody.”54 This is true, no matter the organization and the strategic plan—execution of the plan is the key. The last items in the strategic-planning process are implementing and then monitoring and evaluating the plan’s success. The goal here is to ensure that the mission and objectives of the organization are achieved. Successful implementation of strategies requires effective and efficient support systems throughout the organization. It also requires a dedication to the plan at all levels of the organization. Although strategic planning usually goes well, implementation is often a problem.55 One reason is that strategic plans often end up getting buried in bottom drawers; all too frequently, no action is taken to implement the strategy.
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Strategy Implementation
As strategies are implemented, they must also be monitored and evaluated. Controlling is the process of establishing and implementing mechanisms to ensure that objectives are achieved. An important part of controlling is measuring progress toward the achievement of the objective and taking corrective action when needed. Another important part of controlling is staying within budgets when appropriate or changing them when necessary to meet changes in the environment.
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Quality Management
Quality management is one example of where the controlling process allows the company to adjust its internal processes to reach a predetermined level of quality control. Quality must consistently be monitored—because while quality costs, lack of quality costs much more. So as part of strategy execution, we always need to watch quality through the controlling process.
How HR Promotes Strategy
So, HR managers need to recruit, select, train, evaluate, and interact with employees differently based on different organizational strategies. We showed you earlier how we might manage people differently based on different generic strategies. The same holds true when looking at different sets of objectives, different competitors, different organizational strengths and weaknesses, and many other industry and company characteristics. If the objective is to win a race, you wouldn’t hire an Uber driver to drive a Formula One race car! Both the cabbie and the Formula One driver can drive, but they do it differently to achieve different goals. HR managers have to evaluate all of the organizational characteristics to determine what kinds of people to bring into the organization and then how to maintain those people once they have become a part of the company. This is the reason that it’s so critical for HR managers to understand organizational strategy.56 In fact, as you go through the remainder of this book, you will see continuing references to how HRM will affect the company’s ability to do its work over the long term. Everything that HR does must mesh with the chosen strategy to provide the right kinds of employees, who will learn and do the right types of jobs so that the company can achieve its goals.
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Linking HR Strategy to Organizational Strategy
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Enhancing Firm Competitiveness
Structure
The selection of a proper organizational structure is critical to successfully implement strategy and therefore to business success.57 Organizational structure refers to the way in which an organization groups its resources to accomplish its mission. There must be a sound organizational structure if a strategy is to be successfully implemented.58 Why do you see firms that seem to be equal in size and capability execute at different levels of efficiency? The answer lies in how their resources are differently structured and managed.59
LO 2-4
Identify and describe the major components of organizational structure and why it is important to understand them.
In HRM, managers need to have an understanding of organizational structure to do their jobs correctly. An organization is a system that is typically, but not always, structured into departments such as finance, marketing, production, human resources, and so on. Each of these departments affects the organization as a whole, and each department is affected by the other departments. Organizations structure their resources to transform inputs into outputs. All of an organization’s resources must be structured effectively if it is to achieve its mission.60 As a manager in any department, you will be responsible for part of the organization’s structure.
Organizational structure The way in which an organization groups its resources to accomplish its mission
Basics of Organizational Structure
One way to look at organizational structure is to identify a series of fundamental components. Each of these components identifies a way in which we divide the organization up and group its resources to make them more efficient and effective. Let’s discuss complexity, formalization, and centralization as structural components.
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Organization Design
Complexity
Complexity, the first major component of organizational structure, is the degree to which three types of differentiation exist within the organization. These three types of differentiation are vertical differentiation, horizontal differentiation, and spatial differentiation. Each of these three subcomponents demonstrates a way in which we break the organization up into smaller and more differentiated pieces. How one does this is very important. For example, Microsoft is currently working through how it wants to change its organizational structure under new CEO Satya Nadella because its historical structure has become too expensive.61
Vertical differentiation deals with how we break the organization up vertically, meaning how many layers there are in the organization from the top to the bottom. How many bosses are there, and whom does each one report to? Whom does the HR manager report to? You also need a clear overall boss who is accountable for results.62 The organizational chart is typically used to show the chain of command. The federal government’s General Schedule (GS) Pay System has 15 vertical grades, plus 10 steps within each grade for a whopping 150 vertical tiers!63
Horizontal differentiation identifies how we break the organization up horizontally. We usually do this by breaking the organization up into departments. For example, HR is commonly a department within the organizational structure, advising and assisting all the other departments in the firm. But there are other ways in which we can segment the organization horizontally, including by customer type, product or process type, geographic divisions, and so on. Zappos famously changed to a “holacracy” form of structure, meaning a structure in which there are no departments, job titles, or managers. This is a radical way to wipe out vertical and horizontal differentiation.64
Spatial differentiation deals with the physical separation of different parts of the organization. For instance, we may have headquarters in Los Angeles, California, while we may have a production plant in Indonesia. Spatial differentiation can make it much more difficult to manage the organization due to the fact that the organization is spread out among many locations. For example, GE operates in more than 160 countries.65 Now that is complex!
So complexity involves the way in which we divide the organization into different segments, both physically and within artificial boundaries such as departments. Why does this matter to the organization’s managers? The more the organization is broken into segments, the more difficult it becomes to manage within it. If we have many vertical layers in the organization (vertical differentiation) and many horizontal divisions of the organization (horizontal differentiation), and if the organization has many different physical locations (spatial differentiation), then it is much more difficult to conduct business than if there were fewer divisions. More complexity makes it more difficult to communicate between the different parts of the organization, makes it more difficult to make decisions within the organization, and makes it more difficult to find information that we need when it’s in another part of the organization. In fact, duplication of processes is a common problem in highly complex organizations.66 As a result of this difficulty in making decisions and communicating, the cost of managing an organization goes up as it becomes more complex and bureaucratic. As an example, in a February 2014 article, Bloomberg noted that as college and university bureaucracies in the United States get larger, the cost of college goes up for students.67 This means that we want to minimize complexity as much as possible in order to minimize organizational costs.
Complexity Degree to which three types of differentiation exist within the organization
Formalization
Formalization, the second major component of organizational structure, is the degree to which jobs are standardized within an organization, meaning the degree to which we have created policies, procedures, and rules that “program” the jobs of the employees. If we make things routine by creating standard operating procedures and other standard processes, we can usually increase the efficiency and effectiveness of the people within the organization, in turn making the entire organization more productive on a per-unit basis.68 So the more that we can formalize the jobs within the organization, the easier it is to manage the people in those jobs. We also tend to see lower costs in organizations that are highly formalized, because jobs in such organizations are done in a routine, repetitive manner—at least when it is possible to do so.
As a result, we generally want to formalize all of the processes that we can within the organization, but we can’t always formalize everything that we do. How much we’re able to formalize jobs within the organization depends on what the organization is designed to do. If the organization is designed to do the same thing over and over, such as producing a low-cost commodity, then we can usually formalize many of its procedures. On the other hand, if the organization is designed to do unique and nonroutine things as a differentiator (meaning it never does the same thing twice), then we will probably not be able to formalize very much of what the organization does.69
Centralization
Centralization, the third major component of organizational structure, is the degree to which decision making is concentrated within the organization. The degree of centralization in an organization has to do with dispersion of authority for decision making and delegation of authority. If we can concentrate authority in decision making with one or a few individuals, we can concentrate on hiring people who are very good at making business decisions in those few positions and not worry about the decision-making skills of the rest of our employees.70
Work Application 2-9
Briefly describe the complexity, formalization, and centralization of the organizational structure where you work or have worked.
Centralization of decision making tends to create greater control within the organization, because the organization’s few decision makers will soon find that they make similar decisions over and over. They thereby become very good at determining the best course of action in a particular situation. In other words, there is a learning curve in decision making. The more decisions you make, the better you get at making high-quality decisions.71
However, there’s a tradeoff to centralized decision making. As the organization gets larger, we may have to go through many layers of the organization in order to get a decision made. This can slow down the processes within the firm—in some cases, to such an extent that by the time a decision is made, it becomes irrelevant. For example, TEPCO was criticized for having a complex bureaucratic decision-making process that led to the meltdown of three reactors at one of its nuclear plants in Japan.72 So we have to balance centralization and decentralization within our firms, and the current trend has been toward decentralization.73 However, we know that centralized decision making gives us greater control and thus generally tends to lower our costs for decision making. So other things being equal, we would rather have highly centralized decision making.
Is There One “Best” Structure?
No. The best structure is one that fits the firm’s current competitive situation as well as its internal capabilities and that enables it to implement its strategies successfully. Warren Buffett advises businesses to keep things simple.74 Peter Drucker may have said it as well as anyone when he noted: “The simplest organization structure that will do the job is the best one. What makes an organization structure ‘good’ is the problems it does not create. . . . To obtain both the greatest possible simplicity and the greatest ‘fit,’ organization design has to start out with a clear focus on KEY ACTIVITIES needed to produce KEY RESULTS.”75