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C H A P T E R

2 Strategic Human

Resource Management

L E A R N I N G O B J E C T I V E S

Afte r reading th is chapter, you shou ld be able to:

LO 2-1 Describe the differences between strategy formulation and strategy implementation, page 74

LO 2 -2 List the components of the strategic management process, page 75

LO 2 -3 Discuss the role of the HRM function in strategy formulation, page 77

LO 2 -4 Describe the linkages between HRM and strategy formulation, page 78

LO 2 -5 Discuss the more popular typologies of generic strategies and the various HRM practices

associated with each, page 83

LO 2 -6 Describe the different HRM issues and practices associated with various directional

strategies, page 92

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E n t e r t h e W o r l d o f B u s i n e s s

HP's New Strategy

n the face o f increasing co m pe tition, the largest

roducer of PCs and laptops, Hewlett Packard,

ecently decided to get out of the PC business

ltogether. After ou tdue ling Dell to become

he world's largest manufacturer of computers

HP shipped over 64 million PCs in 2010), the

ompany has announced its intention to spin or

ell its personal-systems group, a division that

rought in $40.74 billion in sales in 2010. CEO

eo Apotheker concluded that, "to be successful

the cons um er device business we wo uld have

ad to inves t a lot o f capital and I believe we can

nvest it in better places."

These investments seem to be taking HP further

nto m arkets that targ et businesses as customers.

he thinking is that such businesses provide

gher potential profit margins. For instance, in

008 the company acquired the tech services

ompany Electronic Data Systems for $13.9 billion

an effort to compete against IBM's tech-services

vision. In 2010 it also acquired 3Com in an

ffort to compete with Cisco Systems' network-

quipment business. HP recently announced a

10.25 billion purchase of British enterprise soft

are company Autonomy, which will compete

gainst Mr. Ap othe ker's form er e mp loyer, SAP.

Industry analysts agree that the conditions of

e PC market make it a business which is hard to

for Chir>a, M

i m

run. Margins for PCs run in the 2-6% range, much

lower than HP thinks it can generate by focusing

on software and services.

Interestingly, this is not the first tim e th at the

markets have questioned the wisdom of HP's

strategy. Ten years ago HP made headlines for

making a controversial $25 billion acquisition.

What was the acquisition? Ironically in light of

today's strategy, HP bought PC maker Compaq

in an effort to strengthen its position in the PC

market.

SOURCE: From Y. Kane and N. Wingfield, "Pioneering Firm Bows to

Post-PC World," Wall Street Journal, August 19, 2011. Reproduced

with permission of Dow Jones & Company, Inc. via Copyright Clear

ance Center.

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7 2 P A R T I The Human Resource Environment

IntroductionAs the HP exam ple just illustrated, business organizations exist in an environm ent of

competition. They can use a number of resources to compete with other companies.

These resources are physical (such as plant, equipment, technology, and geographic

location), organizational (the structure, planning, controlling, and coordinatingsystems, and group relations), and human (the experience, skill, and intelligence

of employees). It is these resources under the control of the company that provide

competitive advantage.1

The goal of strategic management in an organization is to deploy and allocate

resources in a way that gives it a competitive advantage. As you can see, two of the

three classes of resources (organizational and human) are directly tied to the human

resource man agem ent function. As C hap ter 1 pointed out, the role of hum an resource

management is to ensure that a company’s human resources provide a competitive

advantage. Ch apter 1 also pointed out some of the m ajor comp etitive challenges that

companies face today. These challenges require companies to take a proactive, strate-

gic approach in the marketplace.

To be maximally effective, the HRM function must be integrally involved in the

com pany ’s strategic managem ent process.2 Th is means that human resource managers

should (1 ) hav e input into the strategic plan, bo th in terms of peoplerelated issues

and in terms of the ability of the human resource pool to implement particular stra-

tegic alternatives; (2) have specific knowledge of the organization’s strategic goals;

(3 ̂ know what types of employee skills, behaviors, and attitudes are need ed to support

the strategic plan; and (4) develop programs to ensure that employees have those

skills, behaviors, and attitudes.

We begin this chapter by discussing the concepts of business models and strat-

egy and by depicting the strategic management process. Then, we discuss the levelsof integration between the HRM function and the strategic management process in

strategy formulation. Next, we review some of the more common strategic models

and, within the context of these models, discuss the various types of employee skills,

behaviors, and attitudes, and the ways HRM practices aid in implementing the strate-

gic plan. Finally, we discuss the role of HR in creating competitive advantage.

O What Is a Business Model?A business mod el is a story of how the firm will create va lue for customers and, more

important, how it will do so profitably. We often hear or read of companies that have“transformed their business model” in one way or another, but what that m eans is not

always clear. To understand this, we need to grasp a few basic accounting concepts.

First, fixed costs are generally considered the costs that are incurred regardless of

the number of units produced. For instance, if you are producing widgets in a factory,

you have the rent you pay for the factory, depreciation of the machines, the utilities,

the property taxes, and so on. In addition , you generally have a set number of employ-

ees who work a set number of hours with a specified level of benefits, and while you

might be able to vary these over time, on a regular basis you pay the same total labor

costs whether your factory runs at 70% capacity or 95% capacity.

Second, you have a number of variable costs, which are those costs that vary

directly with the units produced. For instance, all of the materials that go into the

widget might cos t a total of $10, which m eans that you have to charge a t least $10 per

widget, or you cannot even cover the variable costs of production.

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C H A P T E R 2 Strategic Human Resource Management 7 3

Third is the concept of “contribution margins,” or margins. Margins are the differ-

nce between what you charge for your product and the variable costs of that product.

hey are called contribution margins because they are what contributes to your abil-

ty to cover your fixed costs. So, for instance, if you charged $15 for each w idget, your

ontribution m argin would be $5 ($15 price $10 variable cost).

Fourth, the gross margin is the total amount of margin you made and is calculated as

he number of units sold times the contribution margin. If you sold 1,000,000 units, your

ross margin would then be $5,000,000. Did you make a profit? Tha t depends. Profit refers

o what is left after you have paid your variable costs and your fixed costs. If your gross

margin was $5,000,000, and your fixed costs were $6,000,000, then you lost $1,000,000.

GM'S ATTEMPT TO SURVIVE

et’s look at how a business model plays out with the recent challenges faced by

General Motors (GM). Critics of GM talk about the fact that GM has higher labor

osts than their foreign competitors. T hi s is true, but misleading. G M ’s average hourly

wage for their existing workforce is reasonably competitive. However, the two aspectshat make GM uncompetitive are their benefit costs (in particular, health care) and

most important, the cost o f their legacy workforce.

A legacy workforce describes the former workers (i.e., those no longer working for

he company) to whom the firm still owes financial obligations. GM and the United

Auto Workers (UAW) union have negotiated contracts over the years that provide

ubstantial retirement benefits for former GM workers. In particular, retired GM

workers have defined benefit plans that guarantee a certain percentage of their final

preretirement) salary as a pension payment as long as they live as well as having the

ompany pay for their health insurance. In addition, the contract specifies that work-

rs are entitled to retire at full pensio n after 30 years of service.This might have seemed sustainable when the projections were that GM would

ontinue growing its sales and m argins. However, since the 1970s, foreign competitors

ave been eating away at G M ’s market share to the extent that GM ’s former 50% of

he market has shrunk to closer to 20%. In addition, with the current economic crisis,

he market itself has been shrinking, leaving GM with a decreasing percentage of a

ecreasing market. For instance, in December of 2005, GM sold 26% of the cars in the

lobal market of almost 1.5 million, but by January of 2009, the market had shrunk

o 656,000, and GM was down to 20% of those sales. Thus, in addition to the legacy

workforce, they had a significant number of plants with thousands of employees that

were completely unnecessary, given the volum e of cars GM can produ ce and sell.34

If you look at Figure 2.1, you’ll see that the solid lines represent the old GM business

model, which was based on projections that GM would be able to sell 4 million units at a

easonably high margin, and thus completely cover its fixed costs to make a strong profit.

owever, the reality was that its products didn’t sell at the higher prices, so to try to sell

million vehicles, GM offered discounts, which cut into its margins. When GM ended

p selling only 3.5 million vehicles, and those were sold at a lower margin, the company

ould not cover its fixed costs, resulting in a $9 billion loss in 2008 (this is illustrated by

he dotted blue line in the figure). So , when G M refers to the “ redesigned business model,”

hat it is referring to is a significant reduction in fixed costs (through closing plants and

utting workers) to get the fixedcost base low enough (.the dotted red line) to be able to

ill be profitable selling fewer cars at lower margins (again, the dotted blue line).One can easily see how, given the large component that labor costs are to most

ompanies, reference to business models almost inevitably leads to discussions of

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7 4 P A R T 1 The Human Resource Environment

figure 2.1

An Illustration of a

Business Model forGM

labor costs. These can be the high cost associated with current unionized employees

in developed countries within North America or Europe or, in some cases, the high

costs associated with a legacy workforce. For instance, the Big Three automakers have

huge numbers of retired or la idoff workers for whom they still have the liability of

paying pensions and health care benefits. This is a significant component of their

fixedcost base, which makes it difficult for them to compete with other automakers

that either have fewer retirees to cover or have no comparable costs because their

home governments provide pensions and health care.

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care off competitors, how to keep competitors weaker, how to react to and influence

ending legislation, how to deal with various stakeho lders and special interest groups,

ow to lower production costs, how to raise revenues, what techn ology to implement,

nd how many and what types of people to employ. Each of these decisions may pres-

nt competitive challenges that have to be considered.

Strategic management is more than a collection of strategic types. It is a process

r analyzing a company’s competitive situation, developing the company’s strategic

oals, and devising a plan of action and allocation of resources (human, organiza-

onal, and physical) that will increase the likelihood of achieving those goals. This

nd of strategic approach sho uld be emphasized in hum an resource managem ent. H R

anagers should be trained to identify the com petitive issues the com pany faces with

gard to human resources and think strategically about how to respond.

Strategic human resource management (S H RM ) can be thought of as “the pat-

rn of planned human resource deployments and activities intended to enable an

rganization to achieve its goals.”8 For example, manv firms have developed inte-

ated manufacturing systems such as advanced manufacturing technology, justin-

me inventory control, and total quality management in an effort to increase theirompetitive position. However, these systems must be run by people. S H RM in these

ses entails assessing the employee skills required to run these systems and engaging

HRM practices, such as selection and training, that deve lop these skills in employ-

s.9 To take a strategic approach to HR M, we must first understand the role of HR M

the strategic man agem ent process.

OMPONENTS OF THE STRATEGIC MANAGEMENT PROCESS

he strategic management process has two distinct yet interdependent phases: strategy

rmulation and strategy implementation. During strategy formulation the strategicanning groups decide on a strategic direction by defining the company’s mission and

als, its external opportunities and threats, and its internal strengths and weaknesses.

hey then generate various strategic alternatives and compare those alternatives’ abil-

y to achieve the company’s mission and goals. During strategy implementation, the

ganization follows through on the chosen strategy. This consists of structuring the

ganization, allocating resources, ensuring that the firm has skilled employees in place,

d developing reward systems that align employee behavior with the organization’s

rategic goals. Both of these strategic management phases must be performed effec-

vely. It is important to note that this process does not happen sequentially. A s we will

scuss later with regard to emergent strategies, this process entails a con stant cycling offormation and decision making. Figure 2.2 presents the strategic m anagem ent process.

In recent years organizations have recognized that the success of the strategic

anagement process depends largely on the extent to which the HRM function is

volved.10

NKAGE BETWEEN HRM AND THE STRATEGIC ANAGEMENT PROCESS

he strategic choice really consists of answering questions about competition— that

how the firm will compete to achieve its missions and goals. These decisions con-t of addressing the issues of where to compete, how to compete, and with what to

mpete, which are described in Figure 2.3.

Strategic Human

Resource

Management

(SHRM)

A pa tte rn o f planne dhuman resource

deployments and

activities intend ed

to enable an organi

zation to achieve its

goals.

LO 2-2List the components of

the strategic management

process.

Strategy

Formulat ion

The process of

deciding on a stra

tegic direction by

defining a com

pany's mission and

goals, its external

opp ortuni t ies and

threats, and its inter

nal strengths and

weaknesses.

Strategy

Implementat ion

The process of

devising structures

and allocating

resources to enact

the strategy a com

pany has chosen.

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f i g u r e

2 .

2

A

M o d e l o f t h e

S t r a t e g i c

M a n a g e m

e n t

P r o c e s s

76

E m e r g e n t

s t r a t e g i e s

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1. Wh ere to com pete?

In what market or markets (industries, products, etc.) wi l l we compete?

2. How to compete?

On w hat cr i ter ion o r di f ferent iat ing character is t ic (s) wil l we c om pete? Cost?

Quali ty? Reliabi l ity? Delivery?

3. With w hat wi l l we com pete?Wh at resources wi l l al low us to beat our c om pet i t ion?

How wi l l we acquire, develop, and deplo y those resources to com pete?

figure 2.3

Strategy—Decisions

about Competition

Altho ugh these decisions are all important, strategic decision makers often pay less

attention to the “with what will we compete” issue, resulting in poor strategic deci-

ions. For example, PepsiCo in the 1980s acquired the fastfood chains of Kentucky

Fried Chicken, Taco Bell, and Pizza Hut (“where to compete” decisions) in an effort

o increase its customer base. However, it failed to adequately recognize the differ-

ences between its existing workforce (mostly professionals) and that of the fastfoodindustry (lower skilled people and high schoolers) as well as its ability to manage such

a workforce. This was one reason that PepsiCo , in 1998, spun off the fastfood chains.

In essence, it had made a decision about where to compete without fully understand-

ing what resources would be needed to compete in that market.

Boeing illustrates how failing to address the “with what” issue resulted in problems

in its “how to com pete” decisions. W hen the aerospace firm’s consumer products divi-

sion entered into a price war with Airbus Industrie, it was forced to move away from

its traditional customer service strategy toward emphasizing cost reduction .11 Th e

strategy was a success on the sales end as Boeing received large numbers of orders for

aircraft from firms such as Delta, Continental, Southwest, and Singapore Airlines.

However, it had recently gone through a large workforce reduction (thus, it didn’thave enough people to fill the orders) and did not have the production technology to

enable the necessary increase in productivity. The result of this failure to address “with

what will we compete” in making a decision about how to compete resulted in the

firm’s inability to meet delivery deadlines and the ensuing penalties it had to pay to its

customers. The end result is that after all the travails, for the first time in the history of

he industry, Airbus sold more planes than Boeing in 2003. Luckily, Boeing was able to

overcome this stumble, in large part because o f a num ber of stumbles on the part of its

chief rival, Airbus. Boeing’s 787 Dreamliner has generated a number of orders, while

Airbus’s behemoth A380 has been beset by a number of production delays, enabling

Boeing to regain its market lead. The “ Co m peting through Globalizatio n” box illustra-

es how firms face a “with what to compete” question in India in terms of talent.

ROLE OF HRM IN STRATEGY FORMULATION

As the preceding examp les illustrate, often the “with what will we com pete” questions

present ideal avenues for HRM to influence the strategic management process. This

might be through either limiting strategic options or forcing thoughtfulness among

he executive team regarding how and at what cost the firm might gain or develop the

human resources (people) necessary for such a strategy to be successful. For example,

HRM executives at PepsiCo could have noted that the firm had no expertise in man-

ging the workforce of fastfood restaurants. The limiting role would have been for

hese executives to argue against the acqu isition because of this lack of resources. O n

LO 2-3Discuss the role of the

HRM function in strategy

formulation.

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LO 2-4Describe the linkages

between HRM and strategy

formulation.

figure 2.4

Linkages of Strategic

Planning and HRM

the other hand, they might have influenced the decision by educating top execu tives

as to the costs (of hiring, training, and so on ) a ssociated with gaining people who had

the right skills to manage such a workforce.

A firm’s strategic management decisionmaking process usually takes place at its top

levels, with a strategic planning group consisting o f the ch ief executive officer, the chief

financial officer, the president, and various vice presidents. However, each component

of the process involves peoplerelated business issues. Therefore, the HRM function

needs to be involved in each of those components. 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 H RM and the strategic planning process.12 However,

the level o f linkage varied, and it is important to understand these different levels.

Four levels of integration seem to exist between the H RM function and the strategic

managem ent function: administrative linkage, oneway linkage, twoway linkage, and

integrative linkage.13 These levels of linkage will be discussed in relation to the differ-

ent com ponents of strategic managem ent. T he linkages are illustrated in Figure 2.4.

Admin istrative LinkageIn admin istrative linkage (the lowest level of integration ), the HRM function ’s atten -tion is focused on daytoday activities. The HRM executive has no time or opportu-

nity to take a strategic outlook toward HRM issues. The company’s strategic business

planning function exists without any input from the HRM department. Thus, in this

level of integration, the HRM department is completely divorced from any compo-

nent of the strategic management process in both strategy formulation and strategy

implementation. The department simply engages in administrative work unrelated to

the company’s core business needs.

One-Way LinkageIn oneway linkage, the firm’s strategic business plann ing function develop s the stra-

tegic plan and then informs the HRM function of the plan. Many believe this level

of integration constitutes strategic H RM — that is, the role of the HR M function is to

design systems and/or programs that implem ent the strategic plan. Altho ugh oneway

A dm in is trat ive

l inkage

Strategic

planning

HRM

funct ion

___ JSOURCE: Adapted from K. Golden and V. Ramanujam, "Between a Dream and a

Nightmare: O n the Integration o f the Human Resource Function and the Strategic

Business Planning Process," Human Resource Management 24 (1985), pp. 429-51.

One-way

linkage

HR M

funct ion

J

Two-way

linkage

Strategic

planning

i rHR M

funct ion

In tegrat ive

linkage

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c h a p t e r 2 Strategic Human Resource Manag emen t 7 9

linkage does recognize the importance of human resources in implementing the stra-

tegic plan, it precludes the company from considering human resource issues while

formulating the strategic plan. This level of integration often leads to strategic plans

that the company cannot successfully implement.

Two-Way LinkageTwoway linkage allows for consideration of human resource issues during the strategy

formulation process. This integration occurs in three sequential steps. First, the stra-

tegic planning team informs the HRM function of the various strategies the company

is considering. Then HRM executives analyze the human resource implications of

the various strategies, presenting the results of this analysis to the strategic planning

team. Finally, after the strategic decision has been made, the strategic plan is passed

on to the HRM executive, who develops programs to implement it. The strategic

planning function and the HRM function are interdependent in twoway linkage.

Integrative LinkageIntegrative linkage is dynamic and multifaceted, based on continuing rather thansequential interaction. In most cases the HRM executive is an integral member of the

senior management team. Rather than an iterative process of information exchange,

companies with integrative linkage have their HRM functions built right into the

strategy formulation and implementation processes. It is this role that we will discuss

throughout the rest of this chapter.

Thus, in strategic HRM, the HRM function is involved in both strategy formu-

lation and strategy implementation. The HRM executive gives strategic planners

information about the company’s human resource capabilities, and these capabilities

are usually a direct function o f the H RM prac tices.14 Th is information about hum an

resource capabilities helps top managers choose the best strategy because they canconsider how well each strategic alternative would be implemented. Once the stra-

tegic choice has been determined, the role of HRM changes to the development and

alignment o f HRM practices that will give the company employees having the n eces-

sary skills to implem ent the strategy.15 In addition , H RM practices m ust be designed

to elicit actions from employees in the comp any .16 In the next two sec tions of this

chapter we show how HRM can provide a competitive advantage in the strategic

management process.

Strategy FormulationFive major components of the strategic management process are relevant to strategyform ulation.17 Th ese co mpo nents are depicted in Figure 2.5. T he first comp onen t is

the organization’s mission. The 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. The mission statement is

often accompanied by a statement of a company’s vision and/or values. For example,

Table 2.1 illustrates the mission and values of Merck & Co ., Inc.

An organization’s goals are what it hopes to achieve in the medium to longterm

future; they reflect how the mission will be operationalized. The overarching goal

of most profitmaking companies in the United States is to maximize stockholder

wealth. But companies have to set other longterm goals in order to maximize stock-

holder wealth.

Goals

What an organi

zation hopes to

achieve in the

medium- to long

term future.

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figure 2.5

Strategy Form ulation

External Analysis

Examining the orga

nization's op erating

envi ronment to

identi fy strategic

opp ortuni t ies and

threats.

Internal Analysis

The process of

examining an orga

nization's stren gths

and weaknesses.

Strategic Choice

The organization's

strategy; the ways

an organization wil lattem pt to ful f il l i ts

mission and achieve

its long-term goals.

External

analysis

Oppor t un i t i es

Threats

Mission Goals Strategic

choice

j

Internalanalysis

Strengths

Weaknesses

HR input

SOURCE: Adapted from K. Golden and V. Ramanujam, "Between a Dream and a Nightmare,"

Human Resource Management 24 (1985), pp. 429-51.

External analysis consists of examining the organization’s operating environ-

ment 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 attem pts 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 hon-estly and accurately assess each resource to decide whether it is a strength or a

weakness.

External analysis and internal analysis combined constitute what has come

to be called the SW O T (strengths, weaknesses, opportunities, threats) analysis.

Table 2.2 shows an examp le of a SW O T analysis for Go ogle. A fter going through

the SW O T an alysis, the strategic plannin g team has all the information it needs to

generate a number of strategic alternatives. The strategic managers compare these

alternatives’ ability to attain the organization’s strategic goals; then they make their

strategic choice. The strategic choice is the organization’s strategy; it describes the

ways the organization will attempt to fulfill its mission and achieve its longterm

goals.Many of the opportunities and threats in the external environment are people

related. W ith fewer and fewer highly qualified individuals e ntering the labor market,

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c h a p t e r 2 Strategic Human Resource Management 8 1

MISSION STATEMENT

Merck & Co., Inc. is a leading research-driven pharmaceutical products and services

company. Merck discovers, develops, manufactures and markets a broa d range of

innovative products to improve human and animal health. The Merck-Medco Managed

Care Division manages pharm acy bene fits for more than 40 m illion Am ericans, encouraging the ap propriate use of medicines and providing disease m anagem ent programs.

Our Miss ion

The mission o f Merck is to prov ide society with sup erior produ cts and services—

innovations and solut ions that imp rove the qua l i ty o f l ife and sat isfy custom er

needs— to prov ide em ployees with meaningful work and advancement

op po rtunit ies and investors with a superior rate of return.

Ou r Values

1. Ou r bus iness is preserv ing and im pro v ing hum an l i fe. A ll o f ou r actio ns must

be measured by our success in achieving this goal. We value above all our ability

to serve everyone who can benefi t f rom the appropriate use of our products and

services, thereb y p roviding lasting con sum er sat isfaction.

2. We are commi t ted to the h ighes t s tandards o f e th ics and in tegr i t y . We are

responsible to ou r customers, to Merck emp loyees and the ir famil ies, to the envi

ronm ents we inhabit , and to the societ ies we serve worldwide . In discharging our

responsibi l it ies, we do not take professional o r ethical shortcuts. O ur interact ions

with all segm ents of society must ref lect the high standards we profess.

3. We are ded icated to the h ighes t level o f sc ient if i c exce l lence and com mi t

our research to im prov ing human and an imal hea l th and the q ua l i t y o f l i fe .

We strive to iden t i fy the mo st cri tical needs o f consumers and customers; we

devo te ou r resources to m eet ing those needs.

4. We exp ec t pro f i t s , but on ly from w ork th at sat i s fies cus tom er needs and

ben ef i t s hum ani ty . O ur abi l ity to m eet our respon sibil it ies dep end s on ma intain

ing a f inancial po sit ion tha t invites investme nt in lead ing-ed ge research and thatmakes possible effective delivery of research results.

5. We recognize that th e ab i l i t y to exce l— to mos t co mp et i t ive ly m eet society' s

and cus tomers ' needs— depend s on the in tegr i ty , kno wled ge, imaginat ion,

sk i l l , d ivers i ty , and teamwork of employees, and we value these qual i t ies most

highly. To this end, we strive to create an environ m ent o f mutual respect, encour

agement, and teamwork—a working environment that rewards commitment and

performance and is responsive to the needs of em ployees and their families.

SOURCE: Courtesy of Merck.

rSTRENGTHS

1WEAKNESSES

Expanding Liquidity Issues with C hinese Gov ernm ent

Operat ional Eff ic iency Dependence on Advert is ing Segment

Broad Range of Services Portfolio Losses at YouTube

OPPORTUNITIES THREATS

Growing Demand for On l ine Video Weak Economic O ut look

Grow th in Internet Ad vert is ing Ma rket Invalid Cl icks

Inorganic Grow th Microsoft-Yaho o! Deal

table 2.1

Merck & Co.'s

Mission and Values

table 2.2

SWO T Analysis for

Google, Inc.

SOURCE: GlobalData.

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COMPETING THROUGH GLOBALIZATION

A Talent Shortage among Millions of Graduates

We often hear

about how many

firms have moved call center

and technology operations to

India because of the large sup

ply of college grad uate talent.

For example, universities in

India have seats fo r 1.5 million

engineering students, up from

390,000 in 2000. However,

according to assessment tests

administered by the National

Associat ion o f Software and

Services Com panies, 75% o ftechnical graduates and 85% of

general graduates are unem

ployable in the information tech

nolog y and call ce nter industries.

The problem is multifaceted.

First, because faculty are paid so

low, they do not put much effort

into teaching. For instance,

Pradeep Singh, a 23-year-old

engineering graduate, quickly

learned that they need not go

v______________________________

to classes. "The faculty take it

very casually, and the students

take it very casually, like they've

all agreed n ot to be bothered

too much," he says.

In addit ion, cheating, often

encouraged by the graders, is

widespread. For instance, Dee-

pack Sharma says he failed sev

eral exams unti l he found the

secret: putting his cell phone

number on his exam. After

doing this he says he got a call

f rom the examiner who of feredto pass him and his friends if

they paid 10,000 rupees each

(about $250). Af ter ge t t ing the

money toge ther and pay ing

the examiner, they all passed

the test. He says, "I feel almost

certain th at i f I d idn ' t pay the

money, I w ou ld have failed the

exam again."

Large Indian companies

such as W ip ro a nd Tata have

attempted to br idge the wide

gap between job requirements

and skil ls of graduates through

developing significant internal

training programs. For instance,

Tata puts rec ent gradu ates

though a 72-day training pro

cess and Wipro has developed

a 90-day program.

As human capita l (or ta l

ent) continues to becom e

one o f the critical assets that

companies must manage to

be competi t ive, f i rms doingbusiness in India may have

to think twice before they let

the idea of mill ions of college

graduates entice them to make

investments.

SOURCE: From G. Anand, "India Grad

uates Millions, but Too Few Are Fit to

Hire," Wall Street Journal Online, April

6, 2011. Reproduced with permission of

Dow Jones & Company, Inc. via Copy

right Clearance Center.

organizations compete not just for customers but for employees. It is H R M ’s role to

keep close tabs on the externa l env ironm ent for human resource—related oppo rtuni-

ties and threats, especially those directly related to the HRM function: potential

labor shortages, competitor wage rates, government regulations affecting employ-

ment, and so on. For example, as discussed in Chapter 1, U.S. companies are find-

ing that more and more high school graduates lack the basic skills needed to work,

which is one source of the “hu m an cap ital sho rtage .”18 However, no t recognizing

this environm ental threat, m any compan ies have encouraged the exit of older, more

skilled workers while hiring less skilled younger workers who require basic skills

training.19 In fact, the “C om peting through G lobaliza tion” box illustrates how a skill

shortage exists in India, in spite o f the huge number o f college graduates.

An analysis of a company’s internal strengths and weaknesses also requires

input from the HRM function. Today companies are increasingly realizing that

their human resources are one of their most important assets. In fact, one estimate

is that over onethird of the total growth in U.S. gross national product (GNP)

between 1943 and 1990 was the result of increases in human capital. A company’s

failure to con sider the stren gths and w eakn esses £>f its workforce may resu lt inits choosing strategies it is not capable of pursuing.20 However, some research

8 2

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has demon strated that few comp anies have achieved this level of linka ge.21

For example, one company chose a strategy of cost reduction through techno-

ogical improvements. It built a plant designed around a computerintegrated

manufacturing system with statistical process controls. Although this choice may

eem like a good one, the company soon learned otherwise. It discovered that its

employees could not operate the new equipment because 25% of the workforce

was function ally illit era te.22

Thus, with an integrative linkage, strategic planners consider all the peoplerelated

business issues before making a strategic choice. These issues are identified with regard

o the mission, goals, opportunities, threats, strengths, and weaknesses, leading the

trategic planning team to make a more intelligent strategic choice. Although this

process does not guarantee success, companies that address these issues are more likely

o make choices that will ultimately succeed.

Recent research has supported the need to have HRM executives integrally

nvolved in strategy formulation. One study of U.S. petrochemical refineries found

hat the level of HRM involvement was positively related to the refinery manager’s

valuation of the effectiveness of the H RM func tion.23 A second study of man ufac-uring firms found that HRM involvement was highest when top managers viewed

mployees as a strategic asset and assoc iated them with reduced turnover.24 However,

both studies found that HRM involvement was unrelated to operating unit financial

performance.

Research has indicated that few companies have fully integrated HRM into the

trategy formulation process.25 As we’ve mentioned before, companies are begin-

ning to recognize that in an intensely competitive environment, managing human

esources strategically can provide a competitive advantage. Thus, companies at the

administrative linkage level will either become more integrated or face extinct ion. In

ddition, companies will move toward becoming integratively linked in an effort to

manage human resources strategically.It is of utmost im portance th at all peoplerelated business issues be considered dur-

ng strategy formulation. These issues are identified in the HRM function. Mecha-

nisms or structures for integrating the HRM function into strategy formulation may

help the strategic planning team make the most effective strategic choice. Once that

trategic choice is determined, HRM must take an active role in implementing it.

This role will be discussed in the next section.

Strategy Implementation

After an organization has chosen its strategy, it has to execu te th at strategy— make itome to life in its daytoday workings. The strategy a company pursues dictates cer-

ain HR needs. For a company to have a good strategy foundation, certain tasks must

be accomplished in pursuit of the company’s goals, individuals must possess certain

kills to perform those tasks, and these individuals must be motivated to perform their

kills effectively.

The basic premise behind strategy implementation is that “an organization has a

variety of structural forms and organizational processes to choose from when imple-

menting a given strategy,” and these choices make an economic difference.26 Five

mportant variables determine success in strategy implementation: organizational

tructure; task design; the selection, training, and developm ent o f people; reward sys-

ems; and types of information and information systems.

LO 2-5Discuss the more populartypologies of generic

strategies and the various

HRM practices associated

with each.

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figure 2.6

Variables to

Be Considered

in Strategy

Implementat ion

As we see in Figure 2.6, HRM has primary responsibility for three of these five

implementation variables: task, people, and reward systems. In addition, HRM can

directly affect the two remaining variables: structure and information and decision

processes. First, for the strategy to be successfully implemented, the tasks must be

designed an d grouped into jobs in a way that is efficient and effe ctive.27 In Chap ter

4 we will exam ine how this can be done through the processes of job analysis and

jo b des ign. Second, the HRM fu nction must ensure th at the organizat ion is staffed

with people who have the necessary knowledge, skill, and ability to perform their

part in implementing the strategy. This goal is achieved primarily through recruit-

ment, selection and placement, training, development, and career management—

topics covered in Chapters 5, 6, 7, and 9. In addition, the HRM function must

develop performance management and reward systems that lead employees to work

for and support the strategic plan. The specitic types of performance management

systems are covered in Chapter 8, and the many issues involved in developing

reward systems are discussed in Chapters 11 through 13. In other words, the role of

the HRM function becomes one of (1) ensuring that the company has the proper

number of employees with the levels and types of skills required by the strategic

plan28 and (2) developing “control” systems that ensure that those employees are

acting in ways that promote the achievement of the goals specified in the strategicpla n .29

In essence, th is is what has been referred to as the “vertical alignm ent” of H R with

strategy. Vertical alignment means that the HR practices and processes are aimed at

addressing the strategic needs of the business. But the link between strategy and HR

practices is primarily through people. For instance, as IBM moved from being a manu-

facturer of personal computers to being a fully integrated service provider, the types of

people it needed ch anged significantly. Instead o f employing thousands of workers in

manufacturing or assembly plants, IBM increasingly needed software engineers to help

write new “middleware” programs, and an army of consultants who could help their

corporate customers to implement these systems. In addition, as IBM increasingly

differentiated itself as being the “ integrated solutions” provider (m eaning it could sell

Seloct ion,

t raining, and

dev e lopmen t

o f peop le J

Reward

systems

Product

market

s t rategy

Organizat ional

structure

Types

of

information

Performance

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COMPETING THROUGH SUSTAINABILITY

Helping the Rainforest Tribes?

As many fi rm s seek

to promote the wel

fare o f their su ppliers,

some firms have g one far backinto the supp ly chain. Many

firms develop partnerships with

rainforest villages as a way to

seek to pro f i t whi le he lping the

planet. For instance, Aveda,

the cosmetics company which

is a unit of Estee Lauder, has

established a partnership with

the Yawanawa' Indian tribe

in the rainforest of western

Brazil. Aveda uses pictures of

the Indian tr ibe mem bers to

promote its popular Uruku line

of lipsticks, eye shadows, and

facial bronzers that are sup

posed to use urukum, a fruit the

tribe uses to make body paint.

The "green /sustainab i li ty"

emphasis allows them to charge

a premium price to consumers.

However, the tribe has notdelivered any urukum to Aveda

between 2008 and 2010 since it

is more commonly referred to as

"annatto" which is grown com

mercially all over the globe. Thisdoes not mean that Aveda has

not h elped the vil lage; it has

improved access to health care,

education, and gov ernm ent ser

vices. They provided $50,000

for the tr ibe to buy seedl ings to

grow urukum on a larger scale.

The provided addit ional funds

for the t r ibe to buy food , c loth

ing, and o ther supplies. They

helped build a new village, a

school, and a health clinic.

However, the tribe soon lost

interest in the required weeding

and caring for the plants to the

po int that the plants were in a

"state of crisis" according to

the d irector of the zoo-botanical

park of the Federal University of

Acre Flav io Rod riq ues. In add i

tion, an internal tribal squabblecreated division regarding

whether or not the tribe should

even co ntinue the partnership.

While one can certainly

admire the motivation of Avedato d o wel l by doing go od, given

tha t the m arket crop for urukum

is about $500 annually, it by

no means provides enough to

make th e v illag e self-sufficient.

This led Mr. Rodrigues to write

in a 2001 report that "The

project probably does not

have economic viability. The

impression th at rem ained with

the technical team is that the

multinational has more interest

in the m arketing aspect o f work

ing with an indigenous commu

nity in the Amazon than it does

in the p roduc tion of annatto."

SOURCE: From John Lyons, "Skin-Deep

Gains for Amazon Tribe, Wall Street

Journal Online, May 5, 2011. Repro

duced with permission of Dow Jones &

Company, Inc. via Copyright ClearanceCenter.

the hardware, software, consulting, and service for a company’s entire information

technology needs), employees needed a new mindset which emphasized cooperat-

ing across different business divisions rather than running independently. Thus, the

change in strategy required different kinds of skills, different kinds o f employees, and

different kinds of behaviors. The “Competing through Sustainability” box illustrates

how the cosmetics company Aveda sought to support an Amazonian tribe throughsourcing cosmetic raw materials from them.

How does the HRM function implement strategy? As Figure 2.7 shows, it is

through administering HRM practices: job analysis/design, recruitment, selection sys-

tems, training and development programs, performance management systems, reward

systems, and labor relations programs. The details of each of these HRM practices are

the focus of the rest of this book. However, at this point it is important to present a

general overview of the HRM practices and their role in strategy implementation.

We then discuss the various strategies companies pursue and the types of HRM sys-

tems congruent with those strategies. First we focus on how the strategic types are

implemented; then we discuss the HRM practices associated with various directional

strategies.

8 5

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figure 2.7

Strategy Implem entation

HRM practices

R ecruitm ent Jo b analysis

Training Jo b designP erform ance S election

m ana gem ent D e ve lo pm e nt

Labor Pay s tru ctu re

re lations Incentives

Em ployee Benefits

relations

■ t

Human Human

resource resource

capabil i ty actions

Skills Behaviors

A b il it ie s Results

K no w ledg e (P roductiv ity ,

absenteeism,

turnover)

Emergent strategies

HRM PRACTICES

The HRM function can be thought of as having six menus of HRM practices, from

which companies ca n choose the ones m ost appropriate for implementing their strat-

egy. Each of these menus refers to a particular functional area of HRM: job analysis/

design, recruitment/selection, training and development, performance management,

pay structure/incentive s/ben efits, and labor—employee re lation s.30 Th ese men us are

presented in Table 2.3.

Job Analysis

The process of ge t

t ing detai led infor

mation abo ut jobs.

Job Design

The process of

defining the way

work wi l l be per

formed and the

tasks that wil l be

required in agiven job.

Job Analysis and DesignCompanies produce a given product or service (or set of products or services), and themanufacture of these products requires that a number of tasks be performed. These

tasks are grouped together to form jobs. Job analysis is the process of getting detailed

information about jobs. Job design addresses what tasks should be grouped into a par-

ticular job. T he way that jobs are designed should have an important tie to the strategy

of an organization because the strategy requires either new and different tasks or differ-

ent ways of performing the same tasks. In addition, because m any strategies entail the

introduction of new technologies, this affects the way that work is perform ed.31

In general, jobs can vary from having a narrow range of tasks (most of which are

simplified and require a limited range of skills) to having a broad array of complex

tasks requiring multiple skills. In the past, the narrow design o f jobs has been used toincrease efficiency, while the broad design of jobs has been associated with efforts to

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Job Analys is and Design

Few tasks Many tasks

Simp le tasks

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Employee Training and Deveiopment A number of skills are instilled in employees through training and development.

Train ing refers to a plann ed effort to facilitate the learning o f jobrelated knowledge,

skills, and beh avior by employees. Dev elopm ent involves acquiring knowledge, skills,

and behavior that improve employees’ ability to meet the challenges of a variety of

existing jobs or jobs that do not yet exist. Changes in strategies often require changes

in the types, levels, and mixes o f skills. Th us, the acq uisition o f strategyrelated skills

is an essential element of the implementation of strategy. For example, many com-

panies have recently emphasized quality in their products, engaging in total quality

managem ent programs. These programs require extensive training o f all employees in

the TQ M philosophy, methods, and often other skills that ensure quality.34

Through recruitment, selection, training, and development, companies can obtain

a pool o f hum an resources capable o f implem enting a given strategy.35 In fact, it’s

not uncommon for companies to partner with universities to develop students while

obtaining important information.

Performance ManagementPerformance management is used to ensure that employees’ activities and outcomes

are congruent with the organization’s objectives. It entails specifying those activities

and outcomes that will result in the firm’s successfully implementing the strategy. For

example, companies that are “steady state” (not diversified) tend to have evaluation

systems that call for subjective performance assessments of managers. Th is stems from

the fact that those above the firstlevel managers in the hierarchy have extensive

knowledge about how the work should be performed. On the other hand, diversified

companies are more likely to use quantitative measures of performance to evaluate

managers because top managers have less knowledge about how work should be per-

formed by those below them in the hierarchy.36Similarly, executives who have extensive knowledge of the behaviors that lead to

effective performance use performance management systems that focus on the behav-

iors of their subordinate managers. However, when executives are unclear about the

specific behaviors that lead to effective performance, they tend to focus on evaluating

the ob jective performance results of their subordinate m anagers.37

An example of how performance management can be aligned with strategy is pro-

vided in Figure 2.8. This comes from a firm in the health care industry whose strategy

figure 2.8

Percentage of Objectives Iden ti f ied in Individual Performance Plans Tha t Are Tied to Each

Strategic Imperative

Strategic

Im p era tive Business A B us in es s B In te rn a tio n al In ve stm e nt Finance Legal IT HR8.S Enterpr ise

A ch ie ve su peri o r

medical performance10.5% 12.5% 2.7% 7.6% 3.1% 2.7% 11.4% 2.1% 10.0%

Effect ively serve our

customers24.7% 27.2% 36.7% 12.2% 10.3% 27.2% 18.9% 19.5% 23.7%

Create g rea t p roduc ts

and services5.6% 6.1% 10.1% 9 .8% 5.0% 10.1% 15.3% 8.9% 6.9%

Create a winning

e n v i r o n me n t27.7% 29.7% 30.1% 29.9% 30.3% 33.7% 2 2.4% 39.4% 27.7%

Establish a cost

advantaqe31.5% 24.5% 20.5% 40.5% 51.3% 26.3% 32% 30.0% 31.7%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

Training

A p la nned e ffo rt to

facil i tate the learn

ing of job-related

knowledge, skills,

and behavior by

employees.

Development

The acquisition of

knowledge, skills,

and behaviors

that imp rove an

employee's abi l i ty to

meet changes in job

requirements and incl ient and customer

demands.

Performance

Management

The means through

which managers

ensure that em ploy

ees' activities and

outputs are congru

ent wi th the organi

zation's goals.

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COMPETING THROUGH TECHNOLOGY

Exam Revision and Project Supervision made Easy through Technology

The University of Portsmouth,

UK, has developed a novel wayof improving exam revision and

project supervision. They've

developed a wiki to enable

students to work collaboratively

during exam revision and

employed the use of Twitter,

a wiki and online learning

logs to facil itate pro ject

supervision.

Exam revision and project

work are both situations wh ere

students go through similar

activities b ut tend to be isolated

from each and their tutor. In

such situations, students could

often struggle and it was felt

they could benefit from sharing

their experience and the

tutor could be of more help bybeing able to identify

wh at areas the ir students

struggled with.

The wiki used for exam

revision goes by the name

of "Exam opedia". The tutor

creates pages containing the

questions from past exams in a

tabular form and students have

read / write access. The tools

used for project supervision

are Twitter fo r short progress

updates or queries, and a wiki

which can be used to post

and collaboratively edit larger

items, and online logs or

e-logs, which are used to

m on itor the progress of the

project.From the students'

perspe ctive, the response to

the survey for Examopedia

showed tha t most o f the

students (17 out of 28) agreed

that it is useful and helped them

collaborate. In terms of being a

helpful source o f informa tion on

the course, it came second to

lectures.

SOURCE:

Study Author: Phil Barker, ICBL, School of

Mathematical and Computer Sciences,

Heriot-Watt University.

Tutor in Study: Manish Malik, Electronic

and Computer Engineering, University of

Portsmouth.

consisted of five “strategic imperatives,” or things that the company was trying to

accomplish. In this company all individuals set performance object ives each year, andeach of their objectives have to be tied to at least one of the strategic imperatives.

The senior VP of HR used the firm’s technology system to examine the extent to

which each business unit or function was focused on each of the imperatives. The

figure illustrates the percentage of objectives that were tied to each imperative across

the different units. It allows the com pany to determine if the m ix of objectives is right

enterprisewide as well as within each business unit or function.

Pay Structure, Incentives, an^i B e n e f i t sThe 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 companyattracts and retains highquality employees, but this might have a negative impact on

the company’s overall labor costs.38 Second, by tying pay to performance, the com-

pany can elicit specific activities and levels of performance from employees.

In a study of how compensation practices are tied to strategies, researchers

examined 33 hightech and 72 traditional companies. They classified them by

whether they were in a growth stage (greater than 20% inflationadjusted increases

in annual sales) or a maturity stage. They found that hightech companies in the

growth stage used compensation systems that were highly geared toward incentive

pay, with a lower percentage of total pay devoted to salary and benefits. On the

other hand, compensation systems among mature companies (both hightech and

XiauiVvOTYaY) ie\ ' ox ei a W w peice n tage c>i toxa\ to m cH im e s aW g'n per-centage to ben efits.39

89

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Labor and Employee RelationsWhether companies are unionized or not, the general approach to relations with

employees can strongly affect their potential for gaining competitive advantage. In

the late 1970s Chrysler Corporation was faced with bankruptcy. Lee Iacocca, the new

president o f Chrysler, asked the union for wage and workrule concessions in an effort

to turn the company around. The union agreed to the concessions, in return receiv-

ing profit sharing and a representative on the board. Within only a few years, the

relationship with and support from the union allowed Chrysler to pull itself out of

bankruptcy and into record profitability.40

Companies can choose to treat employees as an asset that requires investment of

resources or as an expen se to be m inimized.41 They ha ve to m ake choices about how

much employees can and should participate in decision making, what rights employ-

ees 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 longterm goals or ceasing to exist.

Recent research has begun to examine how companies develop sets of HRM

practices that maximize performance and productivity. For example, one studyof automobile assembly plants around the world found that plants that exhibited

both high productivity and high quality used “HRM best practices,” such as heavy

emphasis on recruitment and hiring, compensation tied to performance, low levels

of status differentiation, high levels of training for both new and experienced

employees, and employee participation through structures such as work teams and

problemsolving groups.42 Another study found that HRM systems composed of

selection testing, training, contingent pay, performance appraisal, attitude surveys,

employee pa rticipation , and inform ation sharing resulted in higher levels of produc-

tivity and corp orate fin an cial perform ance , as well as lower em ployee turnover .43

Finally, a recent study found that companies identified as some of the “best places

to work” had higher financial performances than a set of matched companies thatdid not m ake the list.44 Sim ilar results have also been observed in a number o f other

studies.45

In addition to the relationship between HR practices and performance in general,

in today’s fastchanging environment, businesses have to change quickly, requiring

changes in employees’ skills and behaviors. In one study the researchers found that the

flexibility of HR practices, employee skills, and employee beh aviors were all positively

related to firm financial performance, but only the skill flexibility was related to cost

efficiency.46 While these relationships are promising, the causal direction has not yet

been proven. For instance, while effective HR practices should help firms perform

better, it is also true tha t highly profitable firms can invest more in H R practices.47

The 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.48

STRATEGIC TYPES

As we previously discussed, companies can be classified by the generic strategies they

pursue. It is important to note that these generic “stra tegies” are not what we mean by

a strategic plan. They are merely similarities in the ways companies seek to compete

in their industries. Various typologies have been offered, but we focus on the two

generic strategies proposed by Porter: cost and differen tiation.49

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According to Michael Porter of Harvard, competitive advantage stems from a

company’s being able to create value in its production process. Value can be created

n one of two ways. First, value can be created by reducing costs. Second, value can

be created by differentiating a product or service in such a way that it allows the

company to charge a premium price relative to its competitors. This leads to two

basic strategies. According to Porter, the “overall cost leadership” strategy focuses

on becoming the lowest cost producer in an industry. This strategy is achieved by

constructing efficient largescale facilities, by reducing costs through capitalizing on

he experience curve, and bv controlling overhead costs and costs in such areas as

research and development, service, sales force, and advertising. This strategy provides

aboveaverage returns within an industry, and it tends to bar other firms’ entry into

he industry because the firm can lower its prices below com petito rs’ costs.

The “differentiation” strategy, according to Porter, attempts to create the impres-

ion that the company’s product or service is different from that of others in the

ndustry. The perceived differentiation can come from creating a brand image, from

echnology, from offering unique features, or from unique customer service. If a com-

pany succeeds in differentiating its produc t, it will achieve ab oveaverage returns, andhe differentiation may protect it from price sensitivity. For instance, Dell Computer

Company built its reputation on providing the lowest cost computers through lever-

aging its supply chain and direct selling model. However, recently they have seen

hare eroding as the consumer market grows and HP has offered more differentiated,

tylishlooking computers sold through retail outlets where customers can touch and

eel them. In addition, Apple has differentiated itself through its own operating sys-

em that integrates well with peripheral devices such as the iPod and iPhone. In both

ases, these companies can charge a premium (albeit higher for Apple) over Dell’s

pricing.50

HRM NEEDS IN STRATEGIC TYPES

While all of the strategic types require competent people in a generic sense, each of

he strategies also requires different types of employees with different types of behav-

ors and attitudes. As we noted earlier, different strategies require employees with

pecific skills and also require these employees to ex hibit different “role beh aviors.” 51

Role behaviors are the behaviors required of an individual in his or her role as a

obholder in a social work en vironm en t. These role behav iors vary on a number of

imensions. Additionally, different role behaviors are required by the different strate-

ies. For example, companies engaged in a cost strategy require employees to have a

high concern for quantity and a shortterm focus, to be comfortable with stability,

nd to be risk averse. These employees are expected to exhibit role behaviors that are

elatively repetitive and performed independently or autonomously.

Thus, companies engaged in cost strategies, because of the focus on efficient

roduction, tend to specifically define the skills they require and invest in training

mployees in these skill areas. They also rely on behavioral performance management

ystems with a large performancebased compensation component. These companies

rom ote internally and develop internally consisten t pay systems with high pay differ-

ntials between superiors and subordinates. They seek efficiency through worker par-

icipation, soliciting employees’ ideas on how to achieve more efficient production.

On the other hand, employees in companies with a differentiation strategy need

o be highly creative and coop erative; to h ave only a m oderate con cern for quantity,longterm focus, and a tolerance for ambiguity; and to be risk takers. Employees

Role Behaviors

Behaviors tha t are

required of an indi

vidual in his or her

role as a jobholder

in a social work

environment.

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LO 2-6Describe the different

HRM issues and practices

associated with various

directional strategies.

External Growth

Strategy

An em phasis on

acquir ing vendors

and suppl iers or

buying businesses

that al low a com

pany to expand intonew markets.

in these companies are expected to exhibit role behaviors that include cooperating

with others, developing new ideas, and taking a balanced approach to process and

results.

Thus differentiation companies will seek to generate more creativity through

broadly defined jobs with general job descriptions. They may recruit more from

outside, engage in limited socialization of newcomers, and provide broader career

paths. Training and development activities focus on cooperation. The compens-

ation system is geared toward external equity, as it is heavily driven by recruiting

needs. These companies develop resultsbased performance management system

and divisional—corpora te performance evaluation s to encourage risk taking on the

part of managers.52

EVIDENCE-BASED HR

Control (mechanisms through which employees are managed in an organization)' vs

commitment (the extent to which employees identify with and are involved in an

organization). W ith the increase of wom en in the workplace and in man agement,studies show that whilst men are more taskorientated, women are more relationship

orientated when managing and that there is not one best way. Studies also show that

companies with womenfriendly policies that take into account family responsibili-

ties increase workplace commitment, meaning that women are less likely to change

organizations than their male counterparts.

DIRECTIONAL STRATEGIES

As discussed earlier in this chapter, strategic typologies are useful for classifying theways different organizations seek to compete within an industry. However, it is also

necessary to understand how increasing size (growth) or decreasing it (downsizing)

affects the HRM function. For example, the top management team might decide

that they need to invest more in product development or to diversify as a means for

growth. With these types of strategies, it is more useful for the HRM function to aid

in evaluating the feasibility of the various alternatives and to develop programs that

support the strategic choice.

Companies have used four possible categories of directional strategies to meet

ob jectives.53 Strategies em phasizing market share or operating co sts are considered

“concentration” strategies. With this type of strategy, a company attempts to focus

on what it does best within its established markets and can be thought of as “sticking

to its knitting.” Strategies focusing on market development, product development,

innovation, or joint ventures make up the “internal growth” strategy. Companies

with an internal growth strategy channel their resources toward building on exist-

ing strengths. Those attempting to integrate vertically or horizontally or to diversify

are exhibiting an “external growth” strategy, usually through mergers or acquisi-

tions. This strategy attempts to expand a company’s resources or to strengthen its

market pos ition through a cquiring or creating new businesses. Finally, a “divestm ent,”

or downsizing, strategy is one made up of retrenchment, divestitures, or liquidation.

These strategies are observed among companies facing serious economic difficulties

and seeking to pare down their operations. T he human resource im plications o f eachof these strategies are quite different.

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Concentration StrategiesConcentration strategies require that the company maintain the current skills that

exist in the organization. T his requires that training programs provide a m eans o f keep-

ing those skills sharp among people in the organization and that compensation pro-

grams focus on retaining people w ho have those skills. Appraisals in this strategy tend

to be more behavioral because the environm ent is more certain, and the behav iors nec -essary for effective performance tend to be established through extensive experience.

internal Growth StrategiesInternal growth strategies present unique staffing problems. Growth requires that a

company constantly hire, transfer, and promote individuals, and expansion into dif-

ferent markets may change the necessary skills that prospective employees must have.

In addition, appraisals often consist of a combination of behaviors and results. The

behavioral appraisal emphasis stems from the knowledge of effective behaviors in a

particular product market, and the results appraisals focus on achieving growth goals.

Com pensation packages are heavily weighted toward incentives for achieving growthgoals. Training needs differ depending on the way the company attempts to grow

internally. For example, if the organization seeks to expand its markets, training will

focus on knowledge of each market, particularly when the company is expanding into

international markets. On the other hand, when the company is seeking innovation

or product development, training will be of a more technical nature, as well as focus-

ing on interpersonal skills such as team building. Joint ventures require extensive

training in conflict resolution techniques because of the problems associated with

combining people from two distinct organizational cultures.

Mergers and AcquisitionsIncreasingly we see both consolidation within industries and mergers across indus-

tries. For example, British Petroleum’s acquisition of Amoco Oil represented a con-

solidation, or reduction in the number of firms within the industry. On the other

hand, Citicorp’s merger with Traveller’s Group to form Citigroup represented firms

from different industries (pure financial services and insurance) combining to change

the dynamics within both. W hatever the type, one thing is for sure— mergers and

acquisitions are on the increase, and HRM needs to be involved.54 In addition, these

mergers more frequently consist o f global megam ergers, in spite of some w arnings that

these might not be effective.

Acc ording to a report by the Con ference Board, “people issues” may be one o f themajor reasons that mergers do not always live up to expectations. Some companies

now heavily weigh firm cultures before embarking on a merger or acquisition. For

example, prior to acquiring ValueRx, executives at Express Scripts Inc. interviewed

senior executives and middle managers at the potential target firm in order to get a

sense of its culture.55 In spite of this, fewer than on ethird o f the H RM execu tives sur-

veyed said that they had a major influence in how mergers are planned, yet 80 percent

of them said tha t people issues have a significant im pact after the deals are finalized.56

In addition to the desirability of HRM playing a role in evaluating a m erger opportu-

nity, H RM certainly has a role in the actual im plementation o f a merger or acquisition.

Training in conflict resolution is also necessary when compan ies engage in an external

growth strategy. A ll the op tions for external growth con sist of acquiring or developingnew businesses, and these businesses often have distinct cultures. Thus many HRM

Concentration

Strategy

A strate gy focu sing

on increasing mar

ket share, reducing

costs, or creating

and maintaining a

market niche for

products and

services.

Internal Growth

Strategy

A fo cu s on new

market and prod

uct development,

innovation, and jointventures.

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programs face problems in integrating and standardizing practices across the com-

pany’s businesses. The relative value of standardizing practices across businesses must

be weighed against the unique environmental requirements of each business and the

extent of desired integration of the two firms. For example, with regard to pay prac-

tices, a company m ay desire a consistent internal wage structure to m aintain employee

perceptions of equity in the larger organization. In a recent new business developed

by IBM, the employees pressured the company to maintain the same wage structure as

IBM ’s main operation. However, some bu sinesses may function in environm ents where

pay practices are driven heavily by market forces. Req uiring these businesses to adhere

to pay practices in other environm ents may result in an ineffective wage structure.

Downsizing

The planned

el imination o f large

numbers of personnel, designed to

enhance organiza

tional effectiveness.

DownsizingO f increasing importance to organizations in today’s com petitive env ironm ent is

H R M ’s role in downsizing or “rightsizing.” The number of organizations undergoing

downsizing increased significantly from the third to the fourth quarter of 2008, and

while this trend has slowed, layoffs are still sign ifican t (see Figure 2 .9) .57

One would have great difficulty ignoring the massive “war for talent” that went on

during the late 1990s, particularly with the notable dotcom craze. Firms during this

time sought to becom e “ employers of choice,” to e stablish “em ployment brands,” and

to develop “employee value propositions” as ways to ensure that they would be able to

attract and retain talented employees.

figure 2.9

Layoff Events and Separations 2004-2011

800,000Layoffs over the past 7 years

4,000

2004 2005

r = revised p = preliminary

2006 2007 2008 2009 2010 2011

SOURCE: http://www.bls.gov/news.release/mslo.nrO.htm .

http://www.bls.gov/news.release/mslo.nrO.htmhttp://www.bls.gov/news.release/mslo.nrO.htm

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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.

In spite o f the increasing frequen cy o f downsizing, research reveals that it is far from

universally successful for achieving the goals of increased productivity and increased

profitability. For example, Table 2.4 illustrates the results of a survey conducted by

the American Management Association indicating that only about onethird of the

companies that went through downsizings actually achieved their goal of increased

productivity. Anoth er survey by the A M A found that over twothirds of the co m pa-

nies that downsize repeat the effort a year later.58 Also, research by the consulting firm

Mitchell & Com pany found that co mpan ies that downsized during the 1980s lagged

the industry average stock price in 1991.59 Thus it is important to understand the best

ways of managing downsizings, particularly from the standpoint of HRM.

Downsizing presents a number of challenges and opportunities for HRM.60 In terms

of challenges, the HRM function must “surgically” reduce the workforce by cuttingonly the workers who are less valuable in their performance. Achieving this is dif-

ficult because the best workers are most able (and often willing) to find alternative

employment and may leave voluntarily prior to any layoff. For example, in 1992 Gen-

eral Motors and the United Auto Workers agreed to an early retirement program for

individuals between the ages of 51 and 65 who had been employed for 10 or more years.

The program provided those who agreed to retire their full pension benefits, even if

they obtained em ployment elsewhere, and as much as $13,0 00 toward the purchase o f a

GM car.61 A s m ention ed earlier in the chapter, this is part o f G M ’s labor cost problem.

Early retirement programs, although humane, essentially reduce the workforce

with a “grenade” approach. This type of reduction does not distinguish between

r

. DESIRED OU TCO ME

PERCENTAGE THAT AC HIEVED

DESIR ED RESULT .

Reduced expenses 46%

Increased profits 32

Impro ved cash f low 24

■ Increased pro du ctivity 22

Increased return on investment 21

Increased competi t ive advantage 19Reduced bureaucracy 17

Im proved decis ion m aking 14

Increased custom er satisfaction 14

Increased sales 13

Increased market share 12

Improved p roduc t qual i ty 9

Technological advances 9

Increased innovation 7

Avo id ance o f a ta keover 6

SOURCE: From Wall Street Journal, June 6, 1991.pany, Inc. via Copyright Clearance Center.

Reproduced with permission of Dow Jones & Com-

table 2.4

Effects o f

Dow nsizing on

Desired Outcomes

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good and poor performers but rather eliminates an entire group of employees. In fact,

recent research indicates that when companies downsize by offering early retirement

programs, they usually end up rehiring to replace e ssential ta lent w ithin a year. Often

the company does not achieve its costcutting goals because it spends 50 to 150% of

the departing employee’s salary in hiring an d retraining new workers.62

Another HRM challenge is to boost the morale of employees who remain after

the reduction; this is discussed in greater detail in Chapter 5. Survivors may feel

guilt over keeping their jobs when their friends have been laid off, or they may envy

their friends who have retired with attractive severan ce and pension benefits. Their

reduced satisfaction with and commitment to the organization may interfere with

work performance. Thus the HRM function must maintain open communication

with remaining employees to build their trust and commitment rather than with-

hold ing info rma tion.63 A ll employees should be informed of the purpose of the

downsizing, the costs to be cut, the duration of the downsizing, and the strategies

to be pursued. In addition, com panies going through downsizing often develop com -

pen sation programs that tie the individual’s comp ensation to the co mp any’s success.

Employee ownership programs often result from downsizing, and gainsharing planssuch as the Scanlon plan (discussed in Chapter 12) originated in companies facing

econo mic difficulties.

In spite of these challenges, downsizing provides opportunities for HRM. First,

it often allows the com pany to “get rid of dead w ood” and make way for fresh ideas.

In addition, downsizing is often a unique opportunity to change an organization’s

culture. In firms characterized by antago nistic labo rm anagem ent relations, down-

sizing can force the parties to cooperate and to develop new, positive relation-

ships.64 Finally, downsizing can demonstrate to topmanagement decision makers

the value of the company’s human resources to its ultimate success. The role of

HRM is to effectively manage the process in a way that makes this value undeni-

able. We discuss the implications of downsizing as a labor force management strat-egy in Chapter 5.

STRATEGY EVALUATION AND CONTROL

A final compon ent to the strategic man agement process is that of strategy evalua-

tion and control. Thus far we have focused on the planning and implementation of

strategy. However, it is extremely important for the firm to constantly monitor the

effectiveness of both the strategy and the implementation process. This monitoring

makes it possible for the com pany to identify problem areas an d either revise existing

structures and strategies or devise new ones. In this process we see emergen t strategiesappear as well as the critical nature of human resources in competitive advantage.

O The Role of Human Resources in Providing Strategic Competitive AdvantageThus far we have presented the strategic management process as including a stepby

step procedure by which HRM issues are raised prior to deciding on a strategy and

then HRM practices are developed to implement that strategy. However, we must

note that human resources can provide a strategic competitive advantage in two addi-

tional ways: through emergent strategies and through enhancing competitiveness.

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EMERGENT STRATEGIES

Having discussed the process of strategic management, we also must distinguish

between intended strategies and emergent strategies. Most people think of strategies

s being proactive, rational decisions aimed toward some predetermined goal. The

view of strategy we have presented thus far in the chapter focuses on intended strate-

ies. Intended strategies are the result of the ration al decisionm aking process used byop managers as they develop a strategic plan. This is consistent with the definition

f strategy as “the pattern or plan that integrates an organization’s major goals, poli-

ies, and ac tion sequen ces into a cohesive whole.”65 Th e idea of emergent strategies is

videnced by the feedback loop in Figure 2.2.

Most strategies that companies espouse are intended strategies. For example, when

Howard Schultz founded Starbucks , he had the idea of creating a third place (betw een

work and home) where people could enjoy traditional Italianstyle coffee. He knew

hat the smell ot the co ffee and the deeper, darker, stronger taste would attrac t a new

et of customers to enjoy coffee the way he though t it should be enjoyed. T his w orked,

but as Starbucks grew, customers began asking if they could have non fat milk in their

attes, or if they could ge t flavor shots in their coffees. S chultz swore that such things

would essentially pollute the coffee

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