Managment Discussion & Analysis

Management discussion and analysis (MDA) is an unaudited section of an annual report in which the management discusses the company's financial performance for the past period, its current financial position and provides insight into the company's future prospects, outlining future goals and approaches to new projects in light of its strategy. Additionally, it discloses its basis for critical accounting estimates.

Example

ExxonMobil annual report for the year ended 31 December 2011 contains a management discussion and analysis. It tells the stakeholders about ExxonMobil's:

1. Business environment and risk management
2. Segment-wise performance for financial year 2010 and 2011;
3. Liquidity and capital sources
4. Capital and exploration expenditures;
5. Taxes;
6. Environmental matters
7. Market risk, inflation and other uncertainties and
8. Critical accounting estimates

The MD&A is a very important section of an annual report, especially for those analyzing the fundamentals, which include management and management style. Although this section contains useful information, investors should keep in mind that the section is unaudited.

Audited financial statements and accompanying notes are standardized representation of the company's performance and its financial position which does not allow the management to have their say. MDA fills this gap by giving them an opportunity to justify the performance and communicate what they plan to do in future. The flexibility which MDA allows in communicating plans about future makes it a very important section for the company's stakeholders. However, it ought to be used with caution because the unaudited forward-looking statements of the management might be too optimistic.

Is it possible for a Company or Business unit to follow a Cost Leadership Strategy and a Differentiation Strategy simultaneously?

Some businesses follow the low cost strategy by striving for efficiencies and economies of scale whereas some businesses focus on differentiating themselves from the competitors in a way other than price.

The subject under discussion is, “Is it possible for a Company or Business unit to follow a Cost Leadership Strategy and a Differentiation Strategy simultaneously”? The answer to the question in my point of view is YES, it is quite possible for a company to continue a cost leadership strategy and a differentiation strategy simultaneously but it does not work for everyone.  Toyota is a good example of an organization that produces quality cars at low price coupled with differentiating strategy. A convincing example is the introduction of Lexus in 1989 by Toyota to compete with other luxury brands of BMW and Mercedes Benz new series.

Cost leadership and differentiation strategies are popular research topics within the field of strategy and have been widely discussed, in particular since Michael Porter presented his model of generic strategies in 1980. Porter’s theory argue that cost leadership and differentiation strategies are irreconcilable, that a business unit which is unable to achieve one of the competitive strategies is likely to be "stuck in the middle" of the competitive marketplace with no competitive advantage. That unit, according to Porter, is doomed to below-average performance. Research by Greg Dess and Peter Davis as well as by Rod White advocate that a trade-off does not necessarily need to be and refer to companies i.e. IKEA, Southwest Airlines, Toyota, IBM, Caterpillar, Wal-Mart and McDonald’s as examples of firms that have successfully reconciled both strategies and thus enjoy “dual competitive advantages”.

Businesses that join overall low cost and high quality differentiation strategy offer high quality and low prices which eventually complicate things following cost leadership. Grant (2005) argues: “Common to the success of Japanese companies in consumer goods industries such as cars, motorcycles, consumer electronics, and musical instruments has been the ability to reconcile low cost with high quality and technological progressiveness. The total quality management methods they adopted exploded the myth that there is a trade-off between high quality and low cost.