Human Resource Management in the International Firm: The Framework Chapter 2 Human Resource Management in the International Firm: The Framework McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

How do you explain Lincoln Electric’s success in the United States? What are potential problems associated with introducing its reward system and other elements of how the firm operates in the United States in its operations in China?

Incentive Scheme & Strategy Quality Low costs Value-Added to Customers Price reductions Improved performance Capabilities Productivity Adaptive to demand changes (Process) Innovation Profits Let’s see how the incentive scheme is aligned with the strategy of the firm. Explain a little bit and say that this year they had a roe of about 14% (lower than previous years but higher than competitors). This looks like a perfect exercise of strategic alignment: incentive schemes match the strategy. So, if it is so simple to get this right, why not everyone uses it? Is it really so simple? Returns to Owners Employee Rewards

The People Strategy Process Business Strategy and Organisational Capabilities; Strategy has to do with making forward-looking choices under conditions of uncertainty. - Choices which parts of value chain the firm will focus on, What will develop and do in house Buy in from outside Geographical mrkts it will serve Myraid of other choices.

The People Strategy Process During 1980s strategy meant competitive positioning based on the analysis of industry characteristic, Then, having the right strategy was not enough, You also need a capacity to execute strategy, (having also right leaders to implement, managing major changes, rewards for new strategy, and soon.....) Focus of strategic HRM was on strategy implementation.

Strategy Process In 1990s the resource-based view of the firm came in Organisational Capabilities: ‘The ability to perform repeatedly a productive task which relates to a firms’s capacity for creating value through effecting the transformation of input , To output; ‘The firm’s ability to combine and leverage its resources to bring about a desired end. Capabilities: 3M innovations, Toyota – improvement process in manufacturing Sothwest Airlines – deliver customer experience at low prices Those managing capabilities earn higher returns. Bacause competitive advantage is more sustainable. Capabilities are difficult to unravel and hard to imitate.

Organisational Capabilities In most cases firm must put in place a range of capabilities to create value. There are usually few that drive the company’s competitive advantage. These differentiating capabilities must satisfy ; 1. They must create value for the customer 2. The capability has to be rare and unique, 3. The capability has to be difficult to duplicate...

Organisational Capabilities in MNCs Best practices; Haier in China, CEMEX in Mexico, Lincoln Electric and Southwest Airlines in USA, Toyota in Japan. While they deploy very different HR practices, all these companies are clear about which organisational capabilities are needed to support their business model, and they make sure that their HR practices drive the necessary actions and behaviours. However, as they internationalize it becomes more challenging. It is difficult to transfer organisational capabilities abroad. The underlying HR practices do not necessarily travel well to a different environment.

Lincoln: A Study in Consistency Strategy Quality Value/costs Incentive System Piecework Price transparently set Price not easily changed Innovation encouraged Bonus Broadens reward criteria Employment Guarantee Complementary Policies High employee stock ownership Managers and employees treated equally Flat and responsive hierarchy Promotion from within Internal training emphasized Effective use of advisory board Internal and external consistency (‘fit’) Piecework: transparency: procedural justice; price not easily changed: linkage to motivation, innovation Guaranteed employment (must take any job, 75% of full week, can be sacked): + loyalty, greater motivation to innovate, greater motivation to invest in firm-specific training - loss of flexibility (expansion, across tasks) Selection: Self-selection and 1/4 leaving during the first 3 months Politics very flat organization - we’re all management! small differences between top executives and workers (US average 326:1 in 1998, Japan 20:1, PRC state-owned company 4-5:1), i.e. distributive justice. President: 90: 360,000, 91: 300,000. Massaro in early 2000: 1.5 million philosophy: individualism, people are capable! Security bad Changes in the 1990s lower profitability ==> lower bonuses (50-60%) though borrowing money in 92-93 to pay) new externally recruited executives: less time with employees, don’t know them, the advisory board ‘doesn’t work’ ==> discussions with United Auto Workers in 1997 Future concerns for Lincoln (in the US?) - lack of growth (otherwise producing for stock to keep up the piece rate compensation) and profitability - does it make sense to retain the very low level of interdependence of work tasks? (if not, what are the problems?) - too little new blood and ideas? Towards lean manufacturing with smaller buffers =>? - what will happen in new units? how to transfer the system?? Built on mutual trust and strong culture - pressure from external shareholders? It is necessary to construe the HR system in an appropriate way. Everything has to be consistent and convincing not to be perceived as alienating, demotivating, and bringing anger. In other way, they have to manage the interpretation and meaning that people give to the system by using a set of complementary policies that give consistent meaning to the incentive system: it has to be fair, empowering, and unifying. Explain the complementary policies: this is difficult to do Being a leader is being able to manage interpretation and meaning: 1. Know possible alternative interpretations; 2. Build complementary policies to reinforce the interpretation In this way employee will trust the scheme, interpret positively because you’re a part of the system TAKE AWAY: you’re not just a designer, you’re also an anthropologist. You have to be able to understand the meanings given and, reinforce the one consistent with what you want. (it relates to culture) Shared values Belief in the individual Meritocracy Fairness Egalitarianism

Best Practices may also fail A number of firms have tried to copy Lincoln’s compensation system but failed. What they have missed is that at Lincoln, the piece-rate system is only one of the tools that drive cost flexibility and productivity. It is the unique bundling of people management and organisational practices that produces the desired effect.

The People Strategy Process Clarify the strategy (business model) necessary to win in the market Specify organizational capabilities required to support the business model Design and deploy HR practices that enable differentiating capabilities

Recruitment & Selection Process & Content Development The HR Wheel Internal Consistency Sustainable Performance Change Capability & Strategic Agility Differentiation Organizational Outcomes Guiding Principles Human Capital & Social Architecture STRATEGY Balancing Dualities ORGANIZATIONAL STRATEGY Business Support CAPABILITIES Recruitment & Selection HR Function Roles HR Practices HR Service Delivery Development & Training HRM Process & Content Development Performance Management

HR Practices: Guiding Principles Starting point: Internal consistency Fit across HR practices Fit with other parts of the work organization Consistency between HRM strategy, policies, and actual practices Differentiation? Internally across employee groups, and Across units Externally from other firms Balancing dualities: Too much consistency or too high degree of differentiation?

ALLIANCE PARTNER EMPLOYEES Employee Group Differentiation High ALLIANCE PARTNER EMPLOYEES Low value High firm-specificity CORE EMPLOYEES High value High firm-specificity Firm-specificity (uniqueness) CONTRACT EMPLOYEES Low value Low firm-specificity KEY EMPLOYEES High value Low firm-specificity Low Low High Strategic value _________________________ Source: Lepak and Snell (1999)

Key HR Practices Recruitment & Selection • Workforce planning • Employer branding • Recruitment • Induction & socialization • Selection • International transfers • Termination & outplacement Development & Training • Training (on & off-the-job) • Talent assessment and reviews • Succession planning • Career management • Coaching and mentoring • Leadership development Performance Management • Job evaluation • Goal/standard setting • Performance measurement • Appraisal and feedback • Compensation and benefits • Rewards and recognition Communication Labor & Industrial Relations

HR Function Roles HRM Process & Content Development Developing policies, tools, and processes that help the firm develop and maintain organizational capabilities required to support the business model HR Service Delivery Ensuring that core HR processes are carried out at low cost and with desired service levels Business Support Contribute to discussions about strategy and organizational capabilities Work with line and top managers on people-related issues

Organizational Outcomes Human Capital Knowledge and skills required to carry out the strategy Social Architecture Social capital Share values, beliefs, and norms (corporate culture) Global mindset Change Capability & Strategic Agility Sustainable Performance

Theoretical perspective Three Stages of HRM Activity Focus of attention Theoretical perspective Metaphor Building HRM Foundations – getting the basics in place Internal consistency Fit (across HRM and work practices) The builder Realigning HRM Adjusting to environmental & strategy change Change (with environment and strategy) The change partner Steering via HRM Long-term capability development Constructive tension between opposites Duality The navigator

Building HRM Getting the HRM foundations right is always the starting point Fit with strategy and intended organizational capabilities is crucial for competitiveness But over time the Builder can become a Custodian…

From Builder to Custodian to… Well-integrated, successful HRM systems can become rigid Commitment to practices whose appropriateness is taken-for-granted Complacency HR people too remote from the line to see the real needs Cannot change parts without disrupting others ― changes always come with costs The needs of the organization change over time, in part due to international expansion Changes in strategy and external environment Entry into new institutional and cultural contexts In face 1: the environment & strategy taken for granted as they were totally, in reality of course there are not very likely to be so. In face 2 the relationship between HRM and the environment is problematized. If there were an automatic adaptation of HRM practices to such changes it would be unproblematic - in reality of course not the case. Rather, there are lots of examples of custodians of existing HRM practices: taken for granted, their own face may be at stake. Small HR empires may have developed over time, e.g being responsible for formal corporate training, e.g. AT & T had 2500 people in their corporate training unit! Glaxo-Wellcome Strategic aim to speed up significantly the product development process. Took ten years and included among others: introduction of cross-functional team work, changes in performance management, selection and development, technology, workflows, careers and deeper cultural norms and values Motorola and other Western firms in China How to localize a significant part of the operations? Return to this question during the next session Now: One specific example of environmental change and how to handle it Need for realignment of HRM

HR and Change To realign HRM successfully the HR function must: Understand the new strategy and the organizational capabilities required to support it Design and successfully implement HR practices that help fill organizational capabilities gaps through - Investments in Human Capital - Developments in the Social Architecture of the firm But HR is also increasingly expected to act as a sparring partner to line management in discussions on how to manage processes of change … ... and point to the dangers of becoming fixated on change!

Tensions and Contradictions facing Multinational Firms Short term versus Long term Entrepreneurship versus Global customer orientation Local responsiveness versus Global integration Innovativeness versus Global efficiency Challenge versus Risk management Engagement versus Explanation Teamwork versus Accountability Loyalty versus Layoffs Change versus Continuity

From Tensions and Contradictions to Dualities Short term AND Long term Entrepreneurship AND Global customer orientation Local responsivenes AND Global integration Innovativeness AND Globally efficiency Challenge AND Risk management Engagement AND Explanation Teamwork AND Accountability Loyalty AND Layoffs Change AND Continuity

Some of the Dualities Facing Multinatinal Firms Managing today’s assets— building tomorrow’s assets Satisfying customer needs— being ahead of the customer Short term—long term Exploitation—exploration Loose—tight Opportunistic—planned Entrepreneurship—control/accountability Flexibility—efficiency Competition—partnership Low cost—high value-added Differentiation—integration Decentralization—centralization Unit performance—corporate integration Individual accountability—team responsibility Change—continuity Speed of responsiveness—care in implementation Professional—generalist Technical logic—business logic Taking risks—avoiding failures Task orientation—people orientation

It’s the key task for the Navigator function of HRM Steering between dualities is crucial for the multinational corporation It’s the key task for the Navigator function of HRM 1-25

Get the basics right … … then focus on the change agenda … … and prepare yourself to manage tension and contradiction