APPENDIX

HR AueruruENT wlrH Two SrnarectEs

HH AuenruENT wtrH ruE Low-Cost-PnovtoeR Srnaresv
A fil'm competing on cost leadership attempts to be the low-cost provider of a
product or service udthin a marketplace. The product or service must be perceived by the consumer to be comparable to that offered by the competition
and. to have a price advantage. McDonald's uses this approach, aF do ZelTers
and Timex.
Buyers are price sensitive, and businesses appeal to this price corsciousness by providing products or senrices at prices lower than those of competitors. Survival is the ultimate goal, but organizations price low to gain market
share Gy underpricing competitors) or by earning a higher profit margin by
selling at the going market rate. This stategy reguires the company to balance
the delivery of a product that still appeals to customers with not spending too
much on gaining market share. McDoha1d's could deliver a cheaper hamburger, but would it have any taste? McDonald's could underprice its competitors,.but it may risk its suwival by going too low. The key is to manage costs

down every year.

The adoption of a low-cost-provider strategy by a firm has immediate
implications for F{R strategy. Costs are an important element of this strategy, so
labour costs are carefully controlled. Efficienry and controlling costs arc Pa.ra'
mount. The implications of a low-cost-provider stategy for five key comPonents of HR are discussed beloq but first we start with the job description of a
tlpica-l employee working in a company that competes as i low-cost provider.

Tnr

EmpuovEe

that t}-re comPany can

jobr h"r" to b" of lin]-it"d ..
job
HEHfepeUti"erequires
wages.
The
at
low
hire petple witn minimat sUtis

To keep wages 1o*,

hd pr"gr.!@urs.

There

f.t.""P"t.

:,httt"
"e"d
iompuny

orl

aireits its efforts at doingthe'

dentbehlvio*,
["mployees. ffte
"*ot
of scale. For example, in
economies
on
and
capitalizing
with
less
more
same or

25 000 production
it produced
when
workers, the'same number of workers it employed n 1966
only L million vehides. Toyota achieved what low-cost providers want-an
increase in productivity and reduced ou[:ut cost Per employee. Oo*S-more-with fewer employees is the goal of most orgarLizations with a low-cost-

i987 Toyota produced about 3.5

provider strategy.

nist-tafing on the part of the employee is. not needed, but corrfort with
repetitive, unskilled work is necessary. Customers like those frequenting
McDonald's are'""tained" not to make idiosyncratic requests (such as a

CHAPIER 2:ALIGNI}{G HR

WlTtl

SIMITGY

"medium-rare

hamburep
system is required

r,' nr t,r^t _

;Jf#"T#:|fl::i?,.:1:1 .l Tq:"
L;#;";-*re

response

* pssible. The *,,,""*#heimPact" do more with less, makelo.e a".*lJr,

*hi"h;;;;:;;J"","
*oT
i89rlal_I.y.*

and so on,
employee. Altemativ"t.rli"
so tishttv rraoi*^-r :
lkilled
I^,^^
^^_ , r ,
that li
thus saving costs.
.

r*ffiilit

#,

rs:no ther wuy-16-ru

*u, to save
r. costs.'
tr.

at a low-cos+-rlJ"l

"

Ii)

HH Plalrurruo

"rganization.

t wiil faciiitate "o,

the personnel work

*" crty

level, succession plaruring

1, the
is mil
to
nexi lever. outsia*
only the feeder rine
;*JC;
P:_lT*ing
monitored to ensure
level people are in
that enryadequate
;-;q;;,;r";;::L*
supplv. The_ avairab,rtti,
of fringe
-i::*' tuTPt-fly
tc[1Poran{_un:mpkyed,
orr-is part
on-is
.ogBl&r"0, studr
parr of the
plar .
,]ri"rq anr ^^
*..,,-Ti-[,91-1'

h*;

;J;e

i.ryl-"r,r,.Jlil

"a{iff
supply of low-skilled
At the :i"T{""ffi
ml#:,1}
brJ;;"Xrurn'u
,:1-[:{,L@;ffi*fr
"I"*tiru
in other organizations
,*"
managerrrtent assumes
tr,u

tance as

2)

worke-rs.

ii-,por-

Serecnoru

O"ar***,

is orim,-1,, ^^,,
dG;'r*:ffi*[".ily,.*

:il*

0'

towest, revel and

is from rhe sru-

rotrrs are available

on-site, rylllbrJvgld "f

ilh"#**::y.,T.l*"s

rowerwases and
rringe

-;"4;;;;;;

0"""o,",**,

#,,I.:,,;]#t

*'"esvl#ffii;"T#-a[r"T,;*]*ffi
$iJ#j]il"Hrllil:'HlTi*.:n*.'*i7ri''hi'1'ii:;i}ffi
rv
--rr

y:$illffi
wage
rates

s[gillly-f

YA!_wa6es

in counures sueh

;".-:::ffi:T::xl;"ffi
l:

"ritji ;H[,:
fr ,::r,:,jx;,*r,,*. " ",:,- f
*.T:#*"til;:J;*,",: j:JJ:9.:j";.,:t,.*.;,,i,,*;
provinces,
ao

r-r.^

-.-,'T,across

so fi.ir.,rs

;r;; :;* f

t:"{iffi
jis,;Hlff#
l

3fiffi.5iryHi'ffi,,'-1r1tr#"tl#,,ffi
ffif #:ffi :;,,ft:J1:.#:i::xT*
PliI

;l*,ff iH[x*:Hxr;iu*;di

r{tx0DUol0l

"t_

,,:,{

I
t

.ri
,':.

*n:l:

.a":.

';,''f$.

;!vl-:{i,..,.::

I
i

2l

fringe benefits, so the savings gained by using pan-time -oik"r, is substantial among larg-e employe$. Food frandrises employ part-time workers
al:nost exdusively to reduce labour costs. '
r
Pay for performance, such as incq;rtive compensation that is linked to Pro----!1
ductivfr rewards-EZffiidual effort. Group rewards are based on explicit,
results-oriented criteria and the meeting of short-term perforr,Ence goalc'
It is important to note that innovative compensation schemes may pro5dV"

,,,'

duce a compettive advantage. Programs designed to reduce labour costs, such

as outsourcing or using part-time workers, can easily be imitated by competitors, and so may produce no long-terrr competitive advantage. Howeveg an
irurovative compensation scheme thht carurot be duplicated by rivals may Proin an a:rangement between the
frde a competi@xample,
(A&P)
and the United Food and
Great Atlantic and Pacific Tea Company
Comrrercial Workers (UFCW), workers took a 25% pay cut in exchange for
cash bonuses. If the store's employees could keep labour costs at 10% of. sales
by working more efficiently or generating more sto:e Ea.ffic, they would receive
. a cash bonus of l% of store sales. This arrangemmt resulted in an 81% increase.
- operating profits. However, unions were oPPosed to the spread of this pracin
tice, and so A&P's rivals in the low-margin food business were unable to

reduce their labour costs in the same.way (schuller'and ]ackson,7987). Any

lncmdves for performan-ce would rjwald cosla"lngs. or improvements in
efficiency, as thii example

shows.

1.

.
.

Too'*'*o
f 'Truirring
ir *irti*al, as few skills are required- Any taining is based on
increasing efficiency in the culrent job, or specialization for the current position Such trairring is fast and inexpersive. McDonald's can train a new hambr.uger flipper or cashjer in r:nder an hour. There is little to no investrrent in the
long-term development of the employee, nol in the acquisition of skills for jobs

theturrent one.
staff is lean, with the organization relying on outside-suptrairiing
The
pliers. I{owevet most training takes place on the job in the forrn of direct
instruction from or coaching by the superwisor. The jobs are so ruIrrow in scope,
so repetitive in nature, that little need for Eaining exists.
other than

-6--

TEHTUHIYIAI\IL,E

L YALUA

I I gII

Short-term results, with explicit and standard.ized criteria, hre used for evalute and specific.c.
-;.ating
:,' a6--srn"otoloveeilperf
ormance.T]:ret'eedba&-i5-ffi?diateandspecifi
an employee's performance.
_.ii.:!-,-- i.:l*1,;rnaiita,rats are'tretd eccountable only for
-a-ii:.';:: :
,,,,{,:l{br that of the team or the company ({Jhich, 1991). Only the supervisor Proi:j'-{r-i;,1-. input
i--,,} for
F^- +},o
erralrratinn Fnrrnc
kenf to
fo.aa minimum,
minimum. and
Forrrs are kept
.f::11-'vides
the perforrrance
-arfnm"-no evaluation.
.lf..;ii rrri-o ie rlnna
roaincf
nheclr
rnarks
Feedtrarkif
based
on
a perforrnance
done against
fi.:'"F",
l-revieW tend.s to be one-way, with litile opporhnity for the employee to debate
:'the results or receive developmental feedback. Results are used for consideration for promotion.

ii

*"* T-*: T:l*j,l_*:1 T_,i::i:TT::

cfimTR

U:ALIGNIIIG tlR WITH SIMTEGY

LaaouR Relarrorvs

tLl

Low-cost providers try to

prgygn!

a{on of a union because U,,"y f"i

il*:.T*ffi........:*_*:*:;;.i:;"lff ";XT::_1"il:Tl,Lk:
"'JIl;;H:il';.il;H:
l;ffi IH;f j:::
::;:.TPl"r";";;;"#'ffi
*;;,I'
:j "',Y _o_ _- # ffi ,Tl,ffi;:l
^LsyurS Luuurensauon levels low.
:';qrh
"L:I"m:r:
Now that :^my,ai,i'"g:;ii:"r*;ir:'*:l-T:#:ffi
we have ar
of, hoy FIR programs align
with
a
low_cost
der stoarpev ,* ,," ^_]]t1
;;;##ffi
;"Hffi
di.ff
ffi erentiation
;ffi :r"fl"g.retusexamin"*r,"iffi
:::
Jt"t"gy.

smqf
flB

Ar-teruMENT

wtrH

THE DlrreRErunATroN
SrRaTrey

In most markeis, buv_er

preferences are too diverse
to be satisfied by one undif_
appeal
to a particular mqrket
F;"drraiies.tr,ut
segment are said to compete

fermtiated product' F#rs

the basis of a

on a differentiauon

di.fferenuatior,l*"g),

stalgy. a nil'.o-peting on

*ilJff"r ro*"t',-i'g unique

to its customers' Merceduog*,:ioto-iutph

and valuable

Laurm, Rolex, and Hewlett_

lr"jr"- ,r,", .ffi," successfuJJy
rr," o**]".'*L
*gg

Packard's scientific instn:menb

ar"i"r-o*
by chargug a price premi,m
r"r *,iq";;"rr.
and di-fferent. observatio+

mm:f.,o,no*ur,r,

"*p"ri"r,.l,
what
has

*i

"s.

research oGtuuti"h
what
and what they wiit pay for
these

-"ruet

"ar",

mium price. increa".,:,-t::u-:1.,1.PTg"" o1 geryice

*,"i .o*i..*ds

prei

ilTIil";X[H:,**il;;*{iil;[i,ff:r"pil:ffiil';:::i
outweighs the
The exfra p-rlce

providing thbse f"aturljeatures'

A firm can di-fferentiate itseu

.
.
.
.
.
.
.

Having qualily products

Offering superior customer

ex&a costs of

from its c:ompetitors in many

#ays:

service

Having d more convenient

location
Us*g proprietary technology
Offering valuable features
Demonskating rrnique
sgling
Having a brand_namu.upr'roion
These different features

b" *ythi.g:_Corrmon examples

?Cr"*
show some
s"jr"* ,.*"]-*
:T""
design
Ralphi;il;; *r_l,iiy CIar;:H*
"I.#J"*,range
of

firrns competins on
(BMw), on image (poto

i"f,f i.lXl,ship(Core,),
;ti:Tf,:'"*s'a;;i";:;*"fi
Most of

fi :t":T,fr

the time' these competitive

advantages are cornbined,
Iinking quality products-with
such as by
pr"pn"ory *chnology and
se.ice' thus providing th"
superior.customer
u"y", ffi;;
valre ior tr,"
-Jr,"f The key in j
.

48

:
L

PAII

l:

llllt0DU0t()lt

\.,,'

, ;i

th,s strategy is to-provide the-differentiation that

is perceived to be of value to
customers wlLile keeping costs down. For example,
a slice of lemon in a glass
of ice water delivered to the table is an obvious way
to di-fferentiate the restaurant, but at low cost. After-dirrner mints are less expensive
than varet parking,
but may be equally appreciated by dingrs.

differentiation stuategf cals f61

employees. HRM is a-ffected

in

in organizations

jmptoryes,brainsrather#;";-il;",'d1-Jv-;J;S
T::FI"use
clrillcir+L6
I^.#+

3$X._-thelow@
The starting

point for aligning HR programming with a differentiation

sEategy is the employee.

Txe

Elrrpt-ovee

Organizations competing on a differmtiation sEateg'y require

from their
activify, and

employees creg[ve,leharr!9ur, a
some risk taking,
u. as well as an
.H

--

---,,

ffiirym.nlo1eer':ki1l"".
with ihe

must

rv.,!vr^

ut qt

auturyuuus

i:ll-lo IrT]Ilrp_

!@,andemploiees

Organizations encourage err.rployees to

tion systems, for

new
for example, submit their suggestions to their supervisors, who review
them
f.grrnal!'and give feedback directly to the employle. contrast this
with the tra_
ditional suggestion
fox, which many employles view as a reryding bin
because of the lack of timely feedback.
To mcourage in'ovative behaviour, 3M has an inJormar poriry
of
employees to "bootleg" about-lS% of their time on their own
projects.
{owing

Job clas5ffigatiors are flexible.

HR Pururulruo
ln a company thai has a differentiation stateg-y and that recognizes people
are
the key to competitive_ advantage, FIn plarrnlng is taken
,"rrl*if. r.,
at sr:rLitomo |v{g'rls

"".y

inJapan, the business pranning go"p reports to'

3yr1nie,
HR bec-l5e the company understands that identifying what'n-eeds tobe
done
is less difficult than planning how to do it.
succession management is critical as employees would have to'possess

many attributes to move ahead. in the organizutiorr. Th*, a sEong errphasis

on
developing skills.for the futur is p"rt oi th" pro*oUon poiiq;ffi
cEfeer moves, kaining, and developmmta] expiriences are substantial.
Long_

tgjobsecudtyjndred@rs,.

t
-

r,

*-

Selecrroru

with a differentiation skateg.y need employees who have a broad

range of skills and the abiliw to learn from others. An irurovative
atrrospherrequjres employees who are seu-motivated and do-not require a great
ael or
Courparries

OIAPTER 2: AUGlllllG HR WIIH SIMTEGY

-W-

Employees are selected for their abilities to think creatively, to be

luPervision.
flexible in work ajfitudes, and to be able to work in teams. However, selection
for these characteristics is more difficult and usually involves tea-rr inter,,riews
and behaviourally based evidence of innovative performance. Employees
would nonnally be recruited through reputation (word of mouth) or through
graduate sdrools. Some testing for creative ability rnight be used.
Conaperusanoru

compensation plaru afiect employee behaviour more directly than most g{

practices. For example, Drucker dessibes a compensation scheme he implemmted at General Electric (GE) in which pay for perfornance was based only
on the previous year's results. As such, for 10 years, GE lost.its capacity for
irnovation because investing in innovation a-ffects expenses and deoeases
profits, so everyone postponed spending on innovation
.
Comperusation is carefuIly designed in fi:rts that have a diEferentiation
stoategy. Pay rates may be slightly below average market ratls but there are
substantial opporh,rnities to increase those base levels tluough incentive pay.
Pay for perforrrance is a lalge part of the comper-,,"ation pa&age and will be
depmdent on individual, groupr and colporate iesults. Th"se resrrlts are a combination of process and financial crit&a and are set in advance, usual.ly on a

lyarly basis.
There is more

lr

li

about the

:i

.r'
li

Tnarrurrue

Training i" part of the di-fferentiation strategy, and companies with

this st
have a skong training team. The focus of training is on toth skills and
atti
Process skilIs, such as decision-making, the abiJity to work in tea.ru,
and c
ative thinking, are emphasized as much as skills needed for the current job.
The training itself is seen as an opportr:nify to generate new ideas

a
procedures. Indeed customers and cross-functional teams might be
included
the training piogra-ur.

Developmerttal experiences are encor:raged...The value of working

ffiolher division or another cour.ky is recognized and encouraged. Emptolr
receive promotions or other job opportuniies based., partialy,
Jn their
ness to undertake training and their Eack record in leaming.
PeRronuarucE EvALUATIoN

]n a.compirny with

a.

differentiation sEategy, perforrrance appraisar is

based on short-terrn iesults but instead o" ure iong-terrr implicaCons

of
50

PARI

l:

ltlTRODUOl0ll

!-

iour. Processes that are deemed to lead to better results in the long term are
rewarded. Thus, companies encourage and appraise attitudes such as empowertrrent, diversity sensitivity, and teamwork in an effort to build future bottomline oqtcomes.

is

*66ua--

lgE44-arti-tor.
or stupidity.

l'=udgment

Evaluation tends to be based on a mixture of individual and group (and

sometimes coqporate) criteria. Thus, an individual might be evaluated on his or
her ability to achieve results and to work as a merrber of the team, the grciup's
perforrnance rnight be measured agairut established quotas, and the company
would be'evaluated with regard to its overall financial perforrnance.
LT
is, appraisals that
employees, functional experts, peers, and so on-are the
indude

norrr. Organizations in the senrice sector are more likely to indude customers
as sources of input for perforrrance appraisal.

Llgoun Heurrorus
Any stuch.:re or process that reduces the capacity to be innovative and flexible
is difficult to tolerate. Tiaditional unions, with rigid collective agreements, are
encouraged to work collectively toward a new.union-management relationship. The gnion-management relationship is draracterized by shared inforuration such as opm booksi shared decision-making about best approaches, and
shared responsibility for solving problems 4s they arise.

ReFERENcES
M, and S. Thorirhitl. 1999.
"Growing from the Inside Orrt

Belcourt,

Human Resources Practices for

Growth SEategies." Proceedings of
the

Administative Scisrces

- Association of Canada.
Schuelter, RS., lnd S.E, Jackson.

1.987.

'T.inking Coirpetitive Strategies with

Human Resource Managemmt

Pradces." Academy of Manhganent
Executioe. VoL 1, No. 3:X7-219.

LIriclI

D., 1991, "I-Ising Human Resources

for Competitive Advantage." h RJ:L
i(Iman and I Kilman, eds.,Making
Oryanizatiotts ComVetitioe. Sarr
Francisco: ]ossey-Bass.

CIIAPTER 2: AUGHING HR

WlTl{

SIMTTGY

,|

,
1,1

,1

I
I