Porto Maceo is a small island nation with beaches and several recreational activities such as entertainment parks, jungle safaris and museums. It is thronged by thousands of tourists all year. Porto Maceo also has a strong banking industry that has helped the small nation to become a global business hub. ZOA Air is the only air carrier in Porto Maceo, and it caters to the travel needs of both leisure and business travellers. ZOA Air has a modest fleet of aircraft that consists of Boeings and Airbuses. ZOA flies business travellers and leisure travellers from neighbouring countries as well as from other continents. The frequency of short-haul flights to neighbouring countries is high. These short-haul flights are timed so that business travellers arrive in the country, wrap up their business engagements and conveniently leave on the same day. Long-haul flights from other continents are less frequent than the short-haul flights. Most leisure travellers prefer to travel by economy class whereas most business travellers choose to pay a premium to travel business class. ZOA has always been a full-service airline that believes in providing the best service to its customers. Recently, a number of no-frills budget airlines have started operations and this has impacted ZOA’s passenger load factor for the short-haul as well as the long-haul flights. The no-frills airlines are able to offer greater
flight frequencies and a greater diversity of airfares to travellers. In the face of the changed business environment, even established aviation companies have started offering a couple of no-frills flights to Porto Maceo. The recent data consolidated by ZOA’s management accountant indicates that the average airfare being charged by ZOA is approximately 70 per cent more than the average airfare charged by lowbudget
airlines. In the last three years, ZOA’s revenues have increased at an annual rate of 5 per cent though the aviation industry has grown at an annual rate of 15 per cent. This sluggish performance has forced ZOA’s management to reconsider its business strategy to address its operational and financial troubles. The management is considering either of the following two strategies:
Strategy 1: To follow the cost leadership approach and reposition ZOA as a no-frills budget airline
Strategy 2: To follow the product differentiation approach and reposition ZOA as a niche airline for the corporate traveller

Required
1. What should ZOA be able to do following implementation of the product differentiation strategy?
2. If ZOA is following a product differentiation approach, then it would attach more importance to strategic management accounting than traditional management accounting. Explain.
3. Outline why a broad-based product differentiation strategy alone may not work for ZOA.
4. What would ZOA’s product differentiation strategy fail to attract?

5. Identify the correct statement about the effect of product differentiation and cost leadership on ZOA’s value chain.
6. Identify what a business aims to do if it follows a cost leadership strategy.
7. Determine some of the results if ZOA follows a cost leadership strategy.
8. As mentioned in the chapter, Porter’s ideas on the strategic positioning of a product or service through cost leadership or product differentiation can have an impact on management accounting. Identify the cost drivers suggested by Shank’s cost-driver analysis for this strategic positioning exercise.