Contrast Porter’s

Exam Question 2012

1. Compare and contrast Porter’s low cost versus differentiation strategy. (5 marks)
2. Critically evaluate how organisations taking a low cost or a differentiated strategy would have different performance measurement and management framework designs (e.g., strategic planning, budgeting, performance measurement, target setting, performance evaluation, incentive systems, information flows). (15 marks)

Porters low cost and differentiation strategy are very different.  Low cost is focused on having the competitive advantage of being a cost leader in the market whereas differentiators have more of an emphasis on providing something different and unique and to fill some sort of niche in the market.  When it comes to performance measures and framework designs, these two strategies are noticeably different, as I will further explain throughout this essay.

Cost leaders or low cost companies are very budget focused and want to keep costs within the firm down.  Strategic planning would be focusing on sticking to budgets and being extremely efficient and having excellent cost control in order to achieve their goal of seeking to become the lowest cost producers in the industry.  Budgeting performance would be extremely important for meeting the targets that the company would have set, as most of these targets would be focusing on trying to keep costs down.  Performance evaluations would be focused on how well employers and manager’s stick to forecasted budgets and how efficient resources and time is being used throughout the organisation.  In this type of company, efficient workers are a necessity as there is not much lenience on mistakes and inefficient use of resources.  I believe cost leaders would try to motivate managers with non-financial incentives, as their aim is to keep costs down.  Although, financial incentives could be offered if they produced below the budget but still up to company quality.  Regarding information flows and systems, feedback is often an indicator of a cost leader.  This could be due to low cost companies having more of a short-term focus; so giving feedback over short term is effective in this situation.  Even though feedback is limited and static because it is looking at past events, it makes sense for cost leaders to use this system as they will be always trying to “look back” in order to see if budgets are being met and efficiency is being used.  Although there would still be an element of feed-forward being used for future planning and improvements.  Low cost companies would generally be at the stage of being a cash cow according to the BCG matrix, they have market share so now they have to generate as much cash but still producing at a low cost.  Being at this stage also means their systems and procedures would be fairly familiarised throughout the firm and everybody should know their roles within the business.