Competitive Strategy – Businesses

For businesses competitive strategy is the key to the carrying out of the mission (purpose of the business) and reaching towards the organization’s vision (where the business wants to be). Competitive strategy sets out the broad parameters of how a business will attract and retain customers or clients, it lays out what attracts customers to a business’ product or service and why they would choose that business’ product or service over those of their consumer market competitors. A critical component of the labor relations process from the business perspective it so align the labor relations strategy to the business’ competitive strategy. 

The first step in this is to understand the general competitive strategy and to identify which strategy the business has selected. There are really two broad strategies of low cost leadership and differentiation. Low cost leadership entails delivering a product or service at the lowest cost possible to  consumers. The idea is the low cost of the product will be the main concern of the consumers and if your product has the lowest cost they will naturally select your product. Differentiation entails attracting consumers to a business’ product or service by some characteristic that makes it different from the competitors. This might include serving a specific consumer markets needs or desires – often referred to as niche market differentiation. It might also entail a best quality of best “bang for the buck” differentiation – i.e. the product might cost more initially, but the quality of the product will lead to it lasting longer or having a higher value to the customer over time. 

Too often when business’ select these business strategies they assume there is a natural alignment to similar labor relations strategies. There is often for instance the assumption that achieving low cost leadership for a product or service will require adopting a labor relations strategy of having the lowest overall labor cost. This would entail keeping wages and benefits low, spending little money on training and development and of course avoiding or even busting unionization attempts that might lead to increased labor costs.

This strategy, however, is short-sighted. For instance, having low cost labor does not automatically translate into low cost products or services. Low cost labor might lead to more scrap, less discretionary effort, and fewer widgets per hour. For instance, consider the following scenario in the production of the ubiquitous “widget.” 

Company A and B both have adopted low cost leadership as their competitive strategy in the widget market. 

Company A has adopted a corresponding low cost labor strategy, while Company B has adopted a more employee centered labor strategy. 

In the production of the widgets the costs of the widget at completion is 30% from labor costs, 30% from materials and 40% overhead and other costs. 

Both Company A and B pay the same amount for their materials – about $10 per widget.   They also have the same overhead costs.  Company A pays employees $15 per hour in total labor costs and Company B pays employees $25 per hour in total labor costs.

Company A’s employees produce 10 widgets per hour/employee, with a scrap rate of 30%.

Company B’s employees produce 15 widgets per hour/employee with a scrap rate of 10%.

When we calculate the costs per widget. We see that the total labor costs for 10 widgets for Company A is $15 or $1.50  per widget. For Company be the same ten widgets cost $16.70 in labor or $1.67 per widget. Already, much of the total compensation gap has been closed. 

However, there is still more to consider. Employee A will have produced 30% of scrap in that hour. This is an additional $30 of total cost or $3 per widget. Bringing the cost of the widget to $4.50 for Company A.

Company B employees will produce $10 of waste for every ten widgets or an additional cost of $1 per widget for a total widget costs of $2.67. Company B’s total widget costs is over 40% lower than Company A’s and thus they can engage in a clear low-cost leadership model in the consumer market. 

While this is an overly simplified example of why we have to think a bit deeper about how we align labor strategy to business strategy, it points out that there are a myriad of factors to consider. We would also see such an analysis become critical in aligning to other competitive strategies. For instance, how do unions impact things like quality of productivity? How do they impact other labor costs like absenteeism, turnover, sabotage? What labor relations strategies lead to high quality production if you have adopted a high-quality differentiation strategy? If you are serving a niche market, what labor relations strategies lead to employees focusing on meeting customer needs.