1. Strategic Human Resource Management
Chapter 2
Strategic Human Resource Management
Chapter 2 introduces Strategic HRM. In today’s competitive market, organizations must engage in strategic planning to survive and prosper. The goal of strategic management in an organization is to deploy and allocate resources in a way that gives it a competitive advantage.
Two of the three classes of resources (organizational and human) are directly tied to the HRM function. To be maximally effective, the HRM function must be integrally involved in the company’s strategic management process. This means that HRMs should:
(1) have input into the strategic plan, both in terms of people-related issues and the ability of the human resource pool to implement particular strategic alternatives;
(2) have specific knowledge of the organization’s strategic goals;
(3) know what types of employee skills, behaviors, and attitudes are needed to support the strategic plan; and
(4) develop programs to ensure that employees have those skills, behaviors, and attitudes.
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Learning Objectives
LO 2-1 Describe the differences between strategy formulation and strategy implementation. LO 2-2 List the components of the strategic management process. LO 2-3 Discuss the role of the HRM function in strategy formulation. LO 2-4 Describe the linkages between HRM and strategy formulation. LO 2-5 Discuss the more popular typologies of generic strategies and the various HRM practices associated with each. LO 2-6 Describe the different HRM issues and practices associated with various directional strategies.
Chapter 2 discusses concepts of business models and strategy, levels of integration between the HRM function and the strategic management process in strategy formulation, common strategic models, various types of employee skills, behaviors, and attitudes, ways HRM practices aid in implementing the strategic plan, and the role of HR in creating competitive advantage. Objectives include:
1. Describe the differences between strategy formulation and strategy implementation.
2. List strategic management process components.
3. Discuss HRM function’s role in strategy formulation.
4. Describe the linkages between HRM and strategy formulation.
5. Discuss typologies of strategies and associated HRM practices.
6. Describe HR issues and practices associated with various directional strategies.
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Introduction
Goal of strategic management is to deploy and allocate resources for a competitive advantage.
HRM function must be integrally involved in the company’s strategic management process.
A business model is how the firm will create value for customers profitably.
The goal of strategic management is to allocate resources for a competitive advantage. HR managers should have input into the strategic plan, have specific knowledge of the organization’s strategic goals, know what types of employee skills, behaviors, and attitudes are needed to support the strategic plan, and develop programs to ensure that employees have those skills, behaviors, and attitudes. A business model is how the firm will create value for customers profitably.
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4. Business Model Accounting Concepts
Fixed Costs
Variable Costs
Margins
Gross Margin
Understanding the concepts of fixed and variable costs and contributing and gross margins is helpful to understand business models. First, fixed costs are generally considered the costs that are incurred regardless of the number of units produced. Second, you have a number of variable costs, which are those costs that vary directly with the units produced. Margins are the difference between what you charge for your product and the variable costs of that product. They are called contribution margins because they are what contributes to your ability to cover your fixed costs. Fourth, the gross margin is the total amount of margin you made and is calculated as the number of units sold times the contribution margin
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5. What is Strategic Management?
Strategic HRM is the pattern of planned HR activities and deployments intended to enable an organization to achieve its goals
Strategic management is a process to address the organization’s competitive challenges by integrating goals, policies and action sequences into a cohesive whole.
Strategic Management is a process for analyzing a company's competitive situation, developing the company's strategic goals, and devising a plan of action and allocation of resources that will help a company achieve its goals. Strategy comes from the Greek word strategos, which has its roots in military language. It refers to a general’s grand design behind a war or battle. Webster’s New American Dictionary defines strategy as the “skillful employment and coordination of tactics” and as “artful planning and management.” It is managing the “pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole.” These strategies can be either the generic approach to competing or the specific adjustments and actions taken to deal with a particular situation. To take a strategic approach to HRM, first understand the role of HRM in the strategic management process. HR managers should be trained to identify the competitive issues the company faces with regard to human resources and think strategically about how to respond.
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6. Two Phases of Strategic Management
Strategy Formulation
Strategic planning groups decide on strategy
Strategy Implementation
Organization follows through on the strategy
Success of the strategic management process depends largely on the extent to which the HRM function is involved. Strategic Management has two distinct phases:
Strategy Formulation: Strategic planning groups decide on a strategic direction by defining the company’s mission and goals, its external opportunities and threats, and its internal strengths and weaknesses.
Strategy Implementation: The organization follows through on the strategy that has been chosen. This includes structuring the organization, allocating resources, ensuring that the firm has skilled employees in place, and developing reward systems that align employee behavior with the strategic goals. This process entails a constant cycling of information and decision making.
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7. Strategy – Decisions about Competition
Where? How? With What?
Figure 2.3 Strategy Decisions About Competition
Questions to ask:
Where to compete? In what markets (industries, products, etc.) will we compete?
How to compete? On what criteria or differentiating characteristics will we compete? Cost? Quality? Reliability? Delivery?
With what will we compete? What resources will allow us to beat our competition? How will we acquire, develop, and deploy those resources?
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8. Linkages of Strategic Planning and HRM
One recent study of 115 strategic business units within Fortune 500 corporations found that between 49 and 69% of the companies had some link between HRM and the strategic planning process. However, the level of linkage varied, and it is important to understand these different levels.
SOURCE: Adapted from K. Golden and V. Ramanujam, “Between a Dream and a Nightmare: On the Integration of the Human Resource Function and the Strategic Business Planning Process,” Human Resource Management 24 (1985), pp. 429–51.
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9. Strategic Planning and HRM Linkages
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Administrative
One-way
Two-way
Integrative
Summary
Heading. Text.
Four levels of integration exist between the HRM function and the strategic management function: administrative linkage, one-way linkage, two-way linkage, and integrative linkage. Administrative linkage is the lowest level of interaction. HRM function’s attention is focused on day-to-day activities. In one-way, the firm’s strategic business planning function develops the strategic plan then informs the HRM function of the plan. Although one-way linkage does recognize the importance of HR in implementing the strategic plan, it precludes the company from considering HR issues while formulating the strategic plan. This level of integration often leads to strategic plans that the company cannot successfully implement. Companies with integrative linkage have their HRM functions built right into the strategy formulation and implementation processes. Two-way linkage allows for consideration of HR issues during the strategy formulation process and are interdependent.
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Strategy Formulation
A firm’s strategic management decision-making process usually takes place at its top levels, with a strategic planning group consisting of the chief executive officer, the chief financial officer, the president, and various vice presidents. However, each component of the process involves people-related business issues. Figure 2.5 illustrates the five major components of the strategic management process relevant to strategy formulation. Next, each component will be defined.
SOURCE: Adapted from K. Golden and V. Ramanujam, “Between a Dream and a Nightmare,” Human Resource Management 24 (1985), pp. 429–51.
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Strategy Formulation
Mission
Vision
Goals
External Analysis
Strategic Choice
Internal Analysis
Strategic management process include mission, goals, external and internal analysis and strategic choice.
Strategic Choice is the organization’s strategy; the ways an organization will attempt to fulfill its mission and achieve its long-term goals.
Mission is a statement of the organization’s reason for being; it usually specifies the customers served, the needs satisfied and/or the values received by the customers, and the technology used.
Goals are what it hopes to achieve in the medium- to long-term future; they reflect how the mission will be operationalized.
External analysis consists of examining the organization’s operating environment to identify the strategic opportunities and threats. Examples of opportunities are customer markets that are not being served, technological advances that can aid the company, and labor pools that have not been tapped. Threats include potential labor shortages, new competitors entering the market, pending legislation that might adversely affect the company, and competitors’ technological innovations.
Internal analysis attempts to identify the organization’s strengths and weaknesses. It focuses on the quantity and quality of resources available to the organization—financial, capital, technological, and human resources. Organizations have to accurately assess each resource to decide whether it is a strength or a weakness. .
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12. Table 2.2 SWOT Analysis for Google, Inc.
STRENGTHS WEAKNESSES
Expanding Liquidity Issues with Chinese Government
Operational Efficiency Dependence on Advertising Segment
Broad Range of Services Portfolio Loses at YouTube
OPPORTUNITIES THREATS
Growing Demand for Online Video Weak Economic Outlook
Growth in Internet Advertising Market Invalid Clicks
Inorganic Growth Microsoft-Yahoo! Deal
Table 2.2 shows SWOT analysis for Google Inc. External analysis and internal analysis combined constitute what has come to be called SWOT (strengths, weaknesses, opportunities, threats) analysis. It is HRM’s role to keep close tabs on the external environment for human resource– related opportunities and threats, especially those directly related to the HRM function: potential labor shortages, competitor wage rates, government regulations affecting employment. It is important that all people-related business issues identified in the HRM function be considered during strategy formulation. An analysis of a company’s internal strengths and weaknesses also requires input from the HRM function. A company’s failure to consider the strengths and weaknesses of its workforce may result in its choosing strategies it is not capable of pursuing
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13. Strategy Implementation Variables
Types of Strategy
Organizational Structure
Task Design
Select, Train, Develop People
Reward Systems
Figure 2.6 presents the variables that determine success in strategy implementation: organizational structure, task design, selection, training and development of people and reward systems, and types of information and information systems. HRM has primary responsibility for task, people, and reward systems and can directly affect structure and information and decision processes. .
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Vertical Alignment
HR practices and processes address the strategic needs of the business.
Through recruitment, selection and placement, training and development and career management, HRM secures the proper number of people with the levels, knowledge and skills required in the strategic plan.
HRM develops “control” systems that ensure that those employees are acting in ways achieve of the goals in the strategic plan.
Vertical alignment occurs when HR practices and processes are aimed at addressing the strategic needs of the business.
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15. HRM’s Three Implementation Variables
Task People Reward Systems
HRM has primary responsibility for three implementation variables: task, people, and reward systems. HRM can affect the two remaining variables: structure and information and decision processes.
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16. Strategy Implementation
This figure presents the strategic management process from strategic choice to firm performance, illustrating the relationships among HR needs, practices, capability and actions. HRM function implements strategy as Figure 2.7 shows, through administering HRM practices: job analysis/design, recruitment, selection systems, training and development programs, performance management systems, reward systems, and labor relations programs.
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HRM Practice Options
Job Analysis/Design
Training/Development
Labor-Employee Relations
Recruitment/Selection
Pay Structure/Incentives/Benefits
Performance Management
HRM function has six menus of HRM practices, from which companies can choose the most appropriate for implementing their strategy. Each of these menus refers to a particular functional area of HRM: job analysis/design, recruitment/selection, training and development, performance management, pay structure, incentives, and benefits, and labor-employee relations.
Job analysis - the process of getting detailed information about jobs.
Recruitment - the process through which the organization seeks applicants.
Job design - making decisions about what tasks should be grouped into a particular job.
Selection - identifying the applicants with the appropriate knowledge, skills, and ability.
Development - the acquisition of knowledge, skills, and behavior that improve employees' ability to meet the challenges of future jobs.
Performance management is the means through which managers ensure that employees’ activities and outputs are congruent with the organization’s goals.
Pay structure, incentives, and benefits.
Labor and employee relations.
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19. Pay Structure, Incentives, and Benefits
Pay has an important role in strategies.
High pay and/or benefits relative to competitors can help company attract and retain high-quality employees, but might have a negative impact on overall labor costs.
Tying pay to performance can elicit specific activities and levels of performance from employees.
The pay system has an important role in implementing strategies. First, a high level of pay and/or benefits relative to that of competitors can ensure that the company attracts and retains high-quality employees, but this might have a negative impact on the company’s overall labor costs. Second, by tying pay to performance, the company can elicit specific activities and levels of performance from employees.
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20. Labor and Employee Relations
Companies can choose to treat employees as an asset or as an expense.
HRM must make choices about how much employees participation in decision making, what rights employees have, and what company’s responsibility is to them.
The approach a company takes in making these decisions can result in it either successfully achieving its short and long-term goals or ceasing to exist.
Whether companies are unionized or not, the general approach to relations with employees can strongly affect their potential for gaining competitive advantage. Companies can choose to treat employees as an asset that requires investment of resources or as an expense to be minimized. They have to make choices about how much employees can and should participate in decision making, what rights employees have, and what the company’s responsibility is to them. The approach a company takes in making these decisions can result in it either successfully achieving its short- and long-term goals or ceasing to exist. A recent study found that companies identified as some of the “best places to work” had higher financial performance. research seems to indicate that while the relationship between practices and performance is consistently positive, we should not go too far out on a limb arguing that increasing the use of HRM practices will automatically result in increased profitability successfully achieving its short and long-term goals or ceasing to exist.
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Porter’s Strategies
Cost
Differentiation
According to Michael Porter, competitive advantage stems from a company’s being able to create value in its production process. Value can be created in one of two ways, either reducing costs or differentiating product or service in such a way that it allows the company to charge a premium price relative to its competitors. For example, Apple has differentiated itself through its own operating system that integrates well with peripheral devices such as the iPod and iPhone.
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22. Five Categories of Directional Strategies
Concentration
Internal Growth
External Growth
Downsizings
Mergers &
Acquisitions
Companies have used five possible categories of directional strategies to meet objectives: external growth, concentration, internal growth, mergers and acquisitions, and downsizing.
Concentration Strategy- A strategy focusing on increasing market share, reducing costs, or creating and maintaining a market niche for products and services.
Internal Growth Strategy- A focus on new market and product development, innovation, and joint ventures.
External Growth Strategy- An emphasis on acquiring vendors and suppliers or buying businesses that allow a company to expand into new markets.
Downsizings is the planned elimination of large numbers of personnel, designed to enhance organizational effectiveness. The current economic crisis means that one important question facing firms is, How can we develop a reputation as an employer of choice, and engage employees to the goals of the firm, while laying off a significant portion of our workforce? How firms answer this question will determine how they can compete by meeting the stakeholder needs of their employees. Another HRM challenge is to boost the morale of employees who remain after the reduction.
Mergers and acquisitions- HR needs to be involved in mergers and acquisitions.
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23. HR’s Role – Strategic Competitive Advantage
Emergent Strategies
Enhancing Competitiveness
it is extremely important for the firm to constantly monitor the effectiveness of both the strategy and the implementation process to identify problem areas and either revise existing structures and strategies or devise new ones. HR can can provide a strategic competitive advantage in two additional ways: through emergent strategies and through enhancing competitiveness.
Emergent strategies consist of the strategies that evolve from the grassroots of the organization and can be thought of as what organizations actually do, as opposed to what they intend to do. most emergent strategies are identified by those lower in the organizational hierarchy. It is often the rank-and-file employees who provide ideas for new markets, new products, and new strategies. HRM plays an important role in facilitating communication throughout the organization, and it is this communication that allows for effective emergent strategies to make their way up to top management. For example, Starbucks’ Frappucino was a drink invented by one of the store employees in California; Starbucks leaders (including Schultz) thought it was a terrible idea. They fought it in a number of meetings, but the employee kept getting more and more information supporting her case for how much customers seemed to like it. The leaders finally gave the go ahead to begin producing it, and it has become a $1 billion a year product, and one that has contributed to the Starbucks brand.
Enhancing competitiveness is achieved in a variety of ways such as adapting to a changing and learning environment, developing a human capital pool, assimilating information, making decisions, and flexibly restructuring to compete.
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Summary
HR – most important asset and single largest most controllable cost within the business model.
HR professionals must develop business, professional-technical, change management and integration competencies.
HRM has a profound impact on strategic plan implementation by developing and aligning HRM practices that ensure the company has motivated employees with necessary skills.
Human resources are the most important asset and the single largest most controllable cost within business model. HR professionals must develop business, professional-technical, change management and integration competencies. HRM has a profound impact on the strategic plan implementation by developing and aligning HRM practices that ensure the company has motivated employees with necessary skills.
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