CHAPTER 1: AN INVESTMENT PERSPECTIVE OF HUMAN RESOURCE MANAGEMENT Copyright © 2005 South-Western. All rights reserved.

1–21–2 The Strategic View of Human Resources Employees are human assetsEmployees are human assets –This chapter introduces the concept of treating human resource management processes, practices and procedures from a strategic point of view – The skills and knowledge possessed by individuals can be valuable assets to any organization, and should be treated as such –Organizations should understand how to value/measure and manage from an investment point of view all assets, including those related to their employees Employees are human assetsEmployees are human assets –This chapter introduces the concept of treating human resource management processes, practices and procedures from a strategic point of view – The skills and knowledge possessed by individuals can be valuable assets to any organization, and should be treated as such –Organizations should understand how to value/measure and manage from an investment point of view all assets, including those related to their employees

Copyright © 2005 South-Western. All rights reserved.1–31–3 The Strategic View of Human Resources Employees are human assetsEmployees are human assets –However, many factors can influence the investment orientation of an organization. Understanding the risks and benefits to the organization of investing in human capital is of great importance –Effective organizations recognize that employees have value Employees are valuable source of sustainable competitive advantageEmployees are valuable source of sustainable competitive advantage The human element is often the most important element of performance. Thus, appropriate resources and investments must be committed by any organization to facilitate systems for attracting, motivating and managing human resourcesThe human element is often the most important element of performance. Thus, appropriate resources and investments must be committed by any organization to facilitate systems for attracting, motivating and managing human resources Employees are human assetsEmployees are human assets –However, many factors can influence the investment orientation of an organization. Understanding the risks and benefits to the organization of investing in human capital is of great importance –Effective organizations recognize that employees have value Employees are valuable source of sustainable competitive advantageEmployees are valuable source of sustainable competitive advantage The human element is often the most important element of performance. Thus, appropriate resources and investments must be committed by any organization to facilitate systems for attracting, motivating and managing human resourcesThe human element is often the most important element of performance. Thus, appropriate resources and investments must be committed by any organization to facilitate systems for attracting, motivating and managing human resources

Copyright © 2005 South-Western. All rights reserved.1–41–4 Sources of Employee Value Technical KnowledgeTechnical Knowledge –Markets, customers, environment Ability to Learn and GrowAbility to Learn and Grow –Openness to new ideas –Acquisition of knowledge & skills Decision Making CapabilitiesDecision Making Capabilities MotivationMotivation CommitmentCommitment TeamworkTeamwork –Interpersonal skills, leadership ability Technical KnowledgeTechnical Knowledge –Markets, customers, environment Ability to Learn and GrowAbility to Learn and Grow –Openness to new ideas –Acquisition of knowledge & skills Decision Making CapabilitiesDecision Making Capabilities MotivationMotivation CommitmentCommitment TeamworkTeamwork –Interpersonal skills, leadership ability

Copyright © 2005 South-Western. All rights reserved.1–51–5 Adopting an Investment Perspective Determines how to best invest in peopleDetermines how to best invest in people CostsCosts –Out-of-pocket (training) –Opportunity Human assets become competitive advantage because can not be imitiatedHuman assets become competitive advantage because can not be imitiated Required skills become less manual, more cerebral &knowledge-basedRequired skills become less manual, more cerebral &knowledge-based Appropriate, integrated, strategy-consistent approach is neededAppropriate, integrated, strategy-consistent approach is needed Determines how to best invest in peopleDetermines how to best invest in people CostsCosts –Out-of-pocket (training) –Opportunity Human assets become competitive advantage because can not be imitiatedHuman assets become competitive advantage because can not be imitiated Required skills become less manual, more cerebral &knowledge-basedRequired skills become less manual, more cerebral &knowledge-based Appropriate, integrated, strategy-consistent approach is neededAppropriate, integrated, strategy-consistent approach is needed

Copyright © 2005 South-Western. All rights reserved.1–61–6 A Dilemma Failure to invest in employees causesFailure to invest in employees causes –Inefficiency –Weakening of organization’s competitive position Human assets are risky investmentHuman assets are risky investment Require extra effort to ensure that they are not lostRequire extra effort to ensure that they are not lost Failure to invest in employees causesFailure to invest in employees causes –Inefficiency –Weakening of organization’s competitive position Human assets are risky investmentHuman assets are risky investment Require extra effort to ensure that they are not lostRequire extra effort to ensure that they are not lost

Copyright © 2005 South-Western. All rights reserved.1–71–7 Exhibit 1-2 Types of Organizational Assets/Capital

Copyright © 2005 South-Western. All rights reserved.1–81–8 Research Findings HR practices directly related to profitability & market valueHR practices directly related to profitability & market value Primary reason for profitability:Primary reason for profitability: –Effective management of human capital/ providing rewards Integrated management of human capital can result in 47% increase in market valueIntegrated management of human capital can result in 47% increase in market value Top 10% of organizations studied experienced 391% return on investment in management of human capitalTop 10% of organizations studied experienced 391% return on investment in management of human capital HR practices directly related to profitability & market valueHR practices directly related to profitability & market value Primary reason for profitability:Primary reason for profitability: –Effective management of human capital/ providing rewards Integrated management of human capital can result in 47% increase in market valueIntegrated management of human capital can result in 47% increase in market value Top 10% of organizations studied experienced 391% return on investment in management of human capitalTop 10% of organizations studied experienced 391% return on investment in management of human capital

Copyright © 2005 South-Western. All rights reserved.1–91–9 HR Value Chain performance could measure by four sets of outcomes

Copyright © 2005 South-Western. All rights reserved.1–10 HR Metrics Are Complex 90% of Fortune 500 organizations evaluate HR operations on basis of three metrics:90% of Fortune 500 organizations evaluate HR operations on basis of three metrics: –Employee retention and turnover –Corporate morale –Employee satisfaction These metrics do not necessarily illustrate how HR impactsThese metrics do not necessarily illustrate how HR impacts –Profits –Shareholder value 90% of Fortune 500 organizations evaluate HR operations on basis of three metrics:90% of Fortune 500 organizations evaluate HR operations on basis of three metrics: –Employee retention and turnover –Corporate morale –Employee satisfaction These metrics do not necessarily illustrate how HR impactsThese metrics do not necessarily illustrate how HR impacts –Profits –Shareholder value

Copyright © 2005 South-Western. All rights reserved.1–11 Exhibit 1-4 Factors Influencing Investment Orientation

Copyright © 2005 South-Western. All rights reserved.1–12 Investment Orientation Factors Senior Management Values & ActionsSenior Management Values & Actions –Managers need “investment orientation” toward people Attitude Toward RiskAttitude Toward Risk –Investment in human resources inherently riskier –Human assets never absolutely “owned” Nature of Skills Needed by EmployeesNature of Skills Needed by Employees –The more marketable employee skills, the riskier the firm’s investment in skill development Senior Management Values & ActionsSenior Management Values & Actions –Managers need “investment orientation” toward people Attitude Toward RiskAttitude Toward Risk –Investment in human resources inherently riskier –Human assets never absolutely “owned” Nature of Skills Needed by EmployeesNature of Skills Needed by Employees –The more marketable employee skills, the riskier the firm’s investment in skill development

Copyright © 2005 South-Western. All rights reserved.1–13 Investment Orientation Factors Utilitarian (“Bottom Line”) MentalityUtilitarian (“Bottom Line”) Mentality –Attempt made to quantify employee worth through cost-benefit analysis –“Soft” benefits of HR programs difficult to objectively quantify Availability of OutsourcingAvailability of Outsourcing –Given availability of cost-effective outsourcing, investments in HR should produce highest returns & sustainable competitive advantages. Utilitarian (“Bottom Line”) MentalityUtilitarian (“Bottom Line”) Mentality –Attempt made to quantify employee worth through cost-benefit analysis –“Soft” benefits of HR programs difficult to objectively quantify Availability of OutsourcingAvailability of Outsourcing –Given availability of cost-effective outsourcing, investments in HR should produce highest returns & sustainable competitive advantages.

Copyright © 2005 South-Western. All rights reserved.1–14 Reading 1.3 (Pfeffer) Effective HRM Practices Reading 1.3 (Pfeffer) Effective HRM Practices Employment SecurityEmployment Security Selectivity in RecruitingSelectivity in Recruiting High WagesHigh Wages Incentive payIncentive pay Employee OwnershipEmployee Ownership Information SharingInformation Sharing Participation & OwnershipParticipation & Ownership Self-Managed TeamsSelf-Managed Teams Employment SecurityEmployment Security Selectivity in RecruitingSelectivity in Recruiting High WagesHigh Wages Incentive payIncentive pay Employee OwnershipEmployee Ownership Information SharingInformation Sharing Participation & OwnershipParticipation & Ownership Self-Managed TeamsSelf-Managed Teams Training & DevelopmentTraining & Development Cross-Utilization & Cross-TrainingCross-Utilization & Cross-Training Symbolic EgalitarianismSymbolic Egalitarianism Wage CompressionWage Compression Promotion From WithinPromotion From Within Taking the Long ViewTaking the Long View Measurement of PracticeMeasurement of Practice Overall PhilosophyOverall Philosophy

Copyright © 2005 South-Western. All rights reserved.1–15 Reading 1.3 Effective HRM Practices Very few firms will engage in all practicesVery few firms will engage in all practices While these practices are important for success, there are other determinants as wellWhile these practices are important for success, there are other determinants as well Downsides existDownsides exist –Requires more involvement and responsibility than some employees want –Managers & others may resist them as well –Turnover may result Very few firms will engage in all practicesVery few firms will engage in all practices While these practices are important for success, there are other determinants as wellWhile these practices are important for success, there are other determinants as well Downsides existDownsides exist –Requires more involvement and responsibility than some employees want –Managers & others may resist them as well –Turnover may result