Essay Example on Cost Leadership Strategy: A Simplified Model

Introduction

Cost leadership strategy entails businesses lowering their operational costs to maximize profit. The strategy relies on a controlled process to produce the desired outcomes. Management control entailed closely monitoring activities and then taking viable measures or actions for the attainment of the desired output (Otley & Berry 1980). The two designed a model of the management control system, which took the form of a cybernetic control process with four major conditions. A simplified model for the controlled process presents three primary entries of inputs, processes, and outputs, which are influenced by four requirements.

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In line with the first requirement for a controlled process, the company must formulate distinct objectives that resonate with its expansion strategy. The company might opt to improve its technology as better technologies in production means reduced production costs. The company can also set objectives of improving operational efficiency by spending minimal time in performing numerous tasks.

Relative to the second requirement, the company should formulate a way of measuring outputs relative to the pursuit of its objectives. The measurement should not be narrowed down to financial goals only but should extend to aspects such as the achievement of stakeholder aspirations (Martins & Terblanche 2003). The company can decide to use budgets that provide a distinct objective that is comparable to the actual spending of the company. The revenue in a year can be measured by the total number of sales.

An expansion process is one filled with so much uncertainty. This unpredictability implies that any company looking to expand should have a predictive model that will help solve problems of unexpected process deviations. The predictive model categorizes as the third requirement for a controlled process. According to Ortley and Berry, the production process may deviate from the planned strategy leading to misalignment with the desired goals and targets. The company might notice that their current supplier is running short of supply. The predictive model will guide the managers’ decision to have a viable alternative that the company can refer to in case of such a drawback (Rothaermel 2016). When the company notices that the employed technology is becoming mechanically unstable, the predictive model prescribes that they purchase substitute technologies to solve this predicament.

In cases of process deviations, it is pertinent that the company employs corrective measures to steer the whole expansion process back on track (Otley et al. 1995). The corrective mechanism of restoring raw material supply is confronting another supplier. In replacing faulty technologies, the company can loan or purchase new ones. These actions represent the fourth requirement of a controlled process of enforcing corrective measures vis-à-vis process deviations. An alternative course of action, also known as a mismatch, can then be taken whenever the outcome is discrepant from the expectation. If procuring cheaper raw materials won’t reduce operational costs, the company can focus on using the division of labor. If alternative technologies prove inefficient, the cost leadership strategy can still be met through increasing the purchasing power.

Importance of Simons Levers of Control Model in the Cost Leadership Strategy

Robert Simons, a professor at the Harvard Business School, is amongst other management writer s and theorists. They believe that traditional control systems have run obsolete underscoring the necessity for novel systems that address all the core areas of strategic renewal (Simons 1990). Traditional systems restrict the management’s jurisdictions and result in minimal strategic adaptability and responsiveness (Simons 1994). For the cost leadership strategy, these systems might minimize their full performance. Simons, therefore, prescribes innovative control systems which contain five levers of control to aid in strategic renewal.

As the company expands, it must outline belief systems that outline the company’s purpose and encourage all employees to adhere to it. The company might state its vision of providing high-quality products to the market at affordable prices. The employees can then seek training to improve their production skills to meet this fundamental tenet. Additionally, they will understand how the company plans to provide quality customer service, the performance level the company is looking to achieve with the cost leadership strategy, and how every member should manage internal and external relationships (Kruis et al., 2016). Employees might also get the motivation to create new ways of helping the company achieve its purpose.

As the cost leadership strategy takes root, the company will want to achieve the highest level of employee performance with certain limits. This assertion represents the boundary systems, as outlined in Simon’s levers of the control model (Roberts & Scapens 1985). If the company has innovative employees, telling them what to do will only hinder their creativity, but telling them what not to do will unleash their innovative prowess, but to a certain level. If the company directly deals with client issues, consultants should be forbidden from disclosing other clients’ information or even names. Sometimes the consultant might want to achieve enormous success, thereby telling their current clients about other clients who responded to certain techniques. In line with the cost leadership strategy, the consultant might not be forced to take the client through the fully-acclaimed process and yet get the desired results. However, this move will violate client confidentiality and hinder business success. The company should, therefore, draw the line of not allowing consultants to share client information but are free to explore other means that protect client discretion.

The company in question is one looking to grow, meaning it is starting from a small position. During its early development stages, the company is still bijou, and managers and employees can sit on the same table and make decisions together. As the company expands, the contact between managers and employees is minimized, and managers might not be informed about growing trends in business. The processes to reduce production costs are, for instance, ones that demand constant involvement in decision making (Chenhall 2003). If the company is looking to practice a division of labor by involving inexperienced staff through training them, the managers would have to approve decisions made by the HR team. This mechanism entails the interactive control systems where the managers will then hold regular meetings to scrutinize decisions made by junior employees.

Conclusion

The company might also use diagnostic control in monitoring its expansion progress. Diagnostics is a tool that will be used by the manager to regulate the performance of departments, individuals, and the production team towards meeting the objectives of the company (Skoog 2003). By using the cost leadership strategy, the company would want to lower its internal processes, maximizing on the economies of scale, improve the operating efficiency, and reduce the cost of raw materials. The managers can set these parameters as diagnostic controls for respective stakeholders, and analyze their performance using their achievement level. The entire company team will work towards achieving its targets, reducing supervisory work by the managers.

References

Otley, D., Broadbent, J. and Berry, A., 1995. Research in management control: an overview of its development. British Journal of management, 6, pp.S31-S44.

Martins, E.C. and Terblanche, F., 2003. Building organisational culture that stimulates creativity and innovation. European journal of innovation management.

Rothaermel, F.T., 2016. Strategic management: concepts (Vol. 2). McGraw-Hill Education.

Otley, D.T. and Berry, A.J., 1980. Control, organisation and accounting. Accounting, Organizations and Society, 5(2), pp.231-244.

Simons, R., 1994. Levers of control: How managers use innovative control systems to drive strategic renewal. Harvard Business Press.

Kruis, A.M., Speklé, R.F. and Widener, S.K., 2016. The levers of control framework: An exploratory analysis of balance. Management Accounting Research, 32, pp.27-44.

Roberts, J. and Scapens, R., 1985. Accounting systems and systems of accountability—understanding accounting practices in their organisational contexts. Accounting, organizations and society, 10(4), pp.443-456.

Chenhall, R.H., 2003. Management control systems design within its organizational context: findings from contingency-based research and directions for the future. Accounting, organizations and society, 28(2-3), pp.127-168.

Skoog, M., 2003. Visualizing value creation through the management control of intangibles. Journal of intellectual capital.

Simons, R., 1990. The role of management control systems in creating competitive advantage: new perspectives. In Readings in accounting for management control (pp. 622-645). Springer, Boston, MA.