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SMM232

International Human ResourceManagement

Lecture 3

Strategic HRM:

Best Fit, Best Practice

andResource-based theories

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Learning Outcomes

Understand and explain strategic dimensions to

HRM in an international context

Outline and evaluate models of strategic HRM

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Two related strategic questions1. What is the relationship between firm strategy and HR strategy and how

can we look at this for an international business?

2. What specific international HRM strategic decisions must be made?

We saw last time that it was possible to identify a Big Five set of international

HRM challenges. (Mendenhall et al, 2007)

Enhancing global business strategy

Aligning HR issues with global business strategy

Designing and leading change

Building corporate cultures

Developing global leaders

Working out a strategy will involve looking at what these priorities mean for

individual organisations and developing more detailed policies and

practices to tackle them. This is not easy and presents a number of

complex problems and dilemmas.

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What is strategy? Developing or identifying a strategy is not easy. Strategising is not

always a rational exercise. Firms do not act people do!

Strategy does not imply a strategic plan. Strategy is a set ofchoices to

anticipate and respond to a firms environment. Some choices made by set

piece planning: some emerge.

Choices have consequences possibly unforeseen and unintended. Deriving an HR strategy from business strategy is difficult. Differing views on

strategy formation and the links between business strategy and HR strategy

(for an overview, see Beardwell et.al. (2004): 32-59).

Key challenges: being viable (i.e. surviving in the chosen market) and

acquiring sustained advantage (i.e. superior returns) (Boxall & Purcell).

Strategy must be executed in and through the firms organisational

environment: culture, incentives, structure, people (Markides, 2004: 8)

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What is human resources strategy?Boxall and Purcell (2008: 60-1)

Consists of critical goals and means for managing labour that isis not just about HR administration.

High pay strategy top-level recruitment: internal promotion

Is connected with and inevitably affects company performance:

Competitiveness, profitability, sustained competitive advantage

Is made by the whole management structure not just HR

Is likely to be partly planned but also partly emergent

Will be variegated that is, differs for different employee groups

Easier to define for a business unit than for a whole undertaking

Is complex in multidivisional firms.

Is more complex in firms that compete across national boundaries

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Strategic choices in international HRM

How central are people to the costs and resources of the firm? Are key resources such as knowledge dependent on people? How important is it to circulate knowledge? Where should we set the boundaries of the firm outsourcing?

What aspects of HRM should be centralised or localised? Limitations imposed by local law and practice (law, pay & benefits) Do we want to transfer HR practices from HQ to other countries? Why? Is the environment uncertain: are tight controls needed? What sort of

controls: financial, control by home-company nationals or soft controls?

Who should we hire to fill non-home country posts and why? How should we pay and manage them?

What management style is needed now and in the future? Coordination, integration, control.

How important is it for the business to be integrated socially forexample after a foreign acquisition?

What are the values and culture of the firm?

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What will determine the answer to

these questions?

We will look at three approaches

HR Strategy derived from corporate strategy

(Best fit approach)

HR strategy derived from identifying successful HR policies

and practices used by others

(Best practice approach)

Corporate strategy builds on organisational capabilities (on

HR?)

(Resource-based theory)

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BEST FITBoxall & Purcell, 2008: Chapter 3

HR strategy derived from corporate strategy.

Vertical integration between firm strategy and HR

Links business goals to management of individuals.

Also often referred to as contingency theory: that is,

the strategy is contingent or dependent on the

companys circumstances.

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HR and Competitive strategy

Company mission and values

Desired competitive strategy

(e.g. cost leadership, differentiation, focus)

Required employee behaviours(appropriate to business)

Supportive HR practices

(staffing policies, appraisal, pay, training)

HR outcomes

(employee behaviour aligned with employee goals)

Source: Boxall & Purcell (2008: 67)

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HR strategy and competitive strategy

Organisational

feature

Defenders Prospectors Analysers

Competitivestrategy

Limited stable productline - efficiency

Changing productline - innovation

Mixed product line fast emulation ofprospectors

Staffing anddevelopmentstrategy

Internal development long job tenure

(make)

Recruitment

(buy)

Mixed approach

Performance

appraisal

Process oriented

linked to trainingneeds

Results oriented

linked to pay

Process oriented -

promotions

Pay policies Stability and internalequity

Externalcompetitiveness

??????

Source: Miles and Snow (1978)

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Schuler and Jackson

Schuler & Jackson (1999) build a model of HRM strategy based on

desired employee behaviours for different types of competitive strategy:

risk taking, creative, short-term etc. - each on a spectrum.

Like Miles & Snow, they suggest a limited number of basic competitive

strategies: innovation, quality enhancement, cost reduction.

Example: innovation needs high degree of creativity; long-term focus;

co-operation; moderate concern for quality; tolerance for ambiguity

and unpredictability.

Next stage is to identify HRM practices that will support and promote

these behaviours: recruitment, appraisal, pay, training and development.

Their innovation strategy is similar to the prospector type.

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Class exercise 10 minutes Look at the empty cell for pay policies in the Miles & Snow chart:

discuss in pairs the approach to pay that you think would fit bestfor each type of firm.

For example, what would be the role of bonuses? How importantwould information be about wage developments in the widerlabour market? What about long-term benefits (such as pensions).

How would you justify your decision for example, if you had tomake a proposal to a Board of Directors?

If we compare Miles & Snow, with Schuler & Jackson the result

might be a surprise.

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Critique of best fit approaches

Hard to link competitive strategy and HR policies: firms in similarsituations adopt a wide range of policies.

Best fit models oversimplify organisational reality (Beardwell, et.al.2004: 46-7) by assuming firms have one dominant strategy (such ascost or innovation) with a simple relationship between this and HRM.

No guarantee that HR policies will produce a unique set of employeebehaviours law of unintended consequences.

Strategies for different groups of employees can vary see below (alsoLepak and Snell, 1999)

Large firms have many business models & employee groups - implying

different HR policies: but consistency requires standard policies.

Best fit is a problem internationally as contingency theory could alsobe used to argue that strategy should fit national institutions or culture.

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Internal fitHR policies should be consistentwith each other in the same organisation.

HR strategists have been advised that they should aim for positive bundling of HR

policies They [should] avoid deadly combinations: policies which work in directly

opposite directions, such as strong training for teamwork but appraisal which only

rewards highly individualistic behaviour.

(Boxall and Purcell, 2003: 56)

Internal fit is also problematic. Boxall & Purcell (2003) highlight how change can

cause conflicts between HR policies. For example, firms have increased the use of

HR practices:

that foster higher skill and solicit greater commitment... However, at the same

time, firms have had to pursue downsizing . [this] reduces trust in managementand undermines employee commitment.

(Boxall and Purcell, 2003: 57)

Managers need to accept balancing tensions among competing objectives.

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Break

Divide into pairs and discuss briefly one of the following questions be prepared to report back with a couple of points per pair

Can you think of any competing objectives or tensions in

an international business that might create difficulties for

people management?

or

Can having differing policies for different employeegroups create problems in a business? Does this apply in

any organisations you have worked in?

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Best fit in an international context

Two approaches

1. Contingency matrix approach (Luthans, Marsnik &

Luthans, 1997). MNEs HRM policies should fit the

country of operation based on its culture and

institutions

2. Different HR strategies and skills needed for multi-

domestic, global, transnational businesses. Policies

should fit the type of firm and its international orientation

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Perlmutters typology

Perlmutter (1969) distinguished three dominant orientations for HQs of

MNCs, using a survey of managers at MNC headquarters.

Ethnocentric (home-country oriented)

This works at home: therefore it must work in your country

Polycentric (host-country oriented)

These guys know best financial controls: but no job at HQ

Geocentric (world-oriented)

Where in the world .?

Each is associated with a pattern of organisational design and HRM.

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StrategyandHQ orientationPerlmutters typology

Organisation Ethnocentric Polycentric Geocentric

Authority High in HQ Lower in HQ Collaborationbetween HQ/subs.

Communication From HQ to subs. Low littlehorizontal linkage Two way andbetween subs.

Identification Nationality of owner Nationality of hostcountry

International butwith HQ interests

Staffing Home countrynationals sent tosubsidiaries

Local nationals inhost country only

Best peopleeverywhere

HRM system Exportive Adaptive Integrative

Source: adapted from Harzing (2004) pp. 60-61.

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Strategic choices(see Beardwell & Holden, 2007: 644-647)

Exportive HR = ethnocentric (global) Parent company HRM policies and practices transferred to subsidiaries

(low local fit [isomorphism] high internal consistency)

Example: British business applies individual performance appraisal to nationalculture that emphasises teamwork.

Adaptive HR = polycentric (multinational) MNC allows (must allow?) HR system in host-country to reflect local

environment (high local fit low internal consistency)

Example: US company recognises trade unions in its European subsidiaries butnot in the USA.

Integrative HR = geocentric (transnational) Tries to optimise internal consistency, but allows for local fit and learningfrom best practice for diffusion

Example: Dutch business decides to introduce flexible working hours in worldwidelocations to encourage female staff retention local HR implements

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Institutional theory(see Brewster et.al., 2007: 222-225)

Institutional theory aims to explain the forces that make institutions

more similar to each other that is, that promote fit. Institutionaltheorists refer to this fit as isomorphism (from the Greek for havingthe same shape or form).

It argues that decision-making is not an outcome of rational strategicchoice but also of powerful social forces within and outside

organisations (Brewster et.al., 2007: 222) Three forces: Coercive mechanisms = pressures on firms from organisations on

which they are dependent and local (cultural) expectations

Mimetic mechanisms = managers imitate what other firms do if they

are faced with uncertainty. Normative mechanisms = the rules and norms of behaviour which

managers and professionals learn and which they regard as legitimate(for example, what is the role of HRM; is it acceptable to paycommissions or bribes?; should managers hire family members?)

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Implications of institutional theory

The determination of an MNEs HR strategy both at its HQ, in itssubsidiaries, and internationally, will be a complex outcome of allthese forces: efforts to maintain control, decentralisation, and theclash between home-country and host-country practices.

Brewster et.al. (2007) identify three factors that will determine the

extent to which organisations adopt standard practices in all theiroperations or allow for local autonomy:

1. How embedded is the foreign subsidiary in its national setting andhow strong are these local institutions: is the subsidiary a greenfieldoperation, or is it an acquistion?

2. How important are flows of resources capital, knowledge and people between the parent firm and subsidiaries (and horizontally betweensubsidiaries). Bigger flows need more global co-ordination.

3. What are main characteristics of the parent company and its ownnational culture issues we will explore later in the module. In otherwords, how strong is the parent country effect on local practices?

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BEST PRACTICEBoxall & Purcell, 2008: Chapter 3

HR strategy determined by adopting a set of best practices

identified by research. Such practices are held to contribute to

enhanced performance wherever they are applied.

Typically, best practices are offered as lists of bundled practices that

together create high performance work systems.

Pffeffer (cited in Boxall & Purcell, 2008:76) has suggested the following

list:

Employment security

Selective hiringSelf-managed teams or team working

High pay (contingent on company performance)

Extensive training

Reduction of status differences

Sharing information

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Critique of Best practice

Problem arises when attempts are made to develop a comprehensiveapproach to best practice

Too many suggestions too many professors! See Beardwell et.al.,

(2004: 58)

Suggestions too general to help shape HR policies and sometimes

contradictory.

They are culture bound what is best practice in one country may

be inappropriate in another.

But it is a compelling idea with applications in specific areas, often

based on research (evidence base).

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RESOURCE-BASED STRATEGYBoxall and Purcell, 2008:Chapter 4

Sustained competitive advantage is shaped or determined by a companys

resources: people, capital, organisational resources. This approach has

been called a search for an exclusive form of fit: that is, a strategy for

using resources in a firm that is both successful and unique to that firm.

The Resource Based View (RBV) therefore thinks about strategy in terms

of the resources an organisation has.

How might a firm obtain and manipulate its resources human and non-

human to become the best adapted and most profitable in its sector?

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Why do some firms outperform others?Resource-based theory (RBT) has its origins in theories that have

addressed this critical question.

It is based on an assumption that successful firms must possess

resources that less successful firms lack: success is broadly defined

as sustained superior returns (SSR).

In addition, it raises an interesting economic question: if factors of

production can be bought on the open market, then the prices of

especially valuable resources will simply be higher. Therefore buying

valuable resources on the market will not guarantee SSR.

RBT therefore argues that something unique must happen inside firmsto enable them to earn SSR. In fact one of the articles in the field is

called Looking inside for competitive advantage (Barney, 1999)

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THE VRIO MODEL

VRIOmodel contends that if resources meet the following criteria, they

can allow companies to earn sustained superior returns.

Valuable resources must add value and enable a firm to pursue

competitive strategies that improve efficiency and effectiveness Rare resources must be rare: that is, not all competitors should own

or have access to them.

Imperfectly imitable resources must be hard and/or expensive to

copy, and competitors cannot simply duplicate them or find suitablesubstitutes

Organisationally useable firm structures and processes allow

resources to be used

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Imperfectly imitable

Having imperfectly imitable resources is a key dimension if resources

can be copied, they will no longer be unique.

What makes a resource imperfectly imitable?

Barney (2007:61ff) suggests three criteria:

1. Unique historical conditions firms are historical entities. They

could have a first mover advantage, luck etc.

2. Causal ambiguity a firm (and its competitors) might not entirely

understand what is unique, partly because it is taken for granted by

firms and invisible to their competitors.3. Social complexity the firms resources may be attributed to

complex patterns of social interaction that are understood but very

hard to copy in the short term (personal relationships etc.)

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What does it mean in practice?

Barney notes:

With just a couple of exceptions (including the pharmaceutical

and specialty chemical industries), patents provide little protection

from the imitation of a firms physical resources.

On the other hand, socially complex resources and capabilities

organizational phenomena like reputation, trust, friendship,

teamwork and culture while not patentable, are much more

difficult to imitate.

(Barney, 1999: 134)

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Examples of VRIO resources(Barney, 2007, Part II)

Culture

A firms culture might embrace values and support forms ofbehaviour that lead to efficiency and effectiveness. Likely to beespecially hard to imitate and attempts to manage culture rarely

succeed (in the short term).Trust and social capital

Trust is the mutual confidence that no party to an exchange willexploit anothers vulnerabilities (Sabel, cited in Barney, 2007:05).

Hard-core trustworthiness high level of trustworthiness, present

even though there is mutual vulnerability: based not on compliance(governance) but principles, values and culture. Competitiveadvantage: inter-firm cooperation; reduced governance costs;decision making speed; effective knowledge sharing.

Social capital = nature of networks, shared meanings, nature ofpersonal relationships (see Beardwell & Holden, 2007: 652-3)

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Resource Based Theory and HR

RBT has a special significance for HR: HR has a responsibility for managing

and developing resources that are hard to copy.

1. Key role of culture and organisation that are hard to imitate not just

policy or practices but how these are implemented.

2.

RBT stresses ensuring that valuable and rare resources can beused: organisational capability or core competence (Hamel &

Pralahad).

For example, ability to manage HR aspects of international expansion

(hiring, transferring HR practices, M&A, alliances etc.)

1. Seems to fit organisational reality. Firms rarely change the people tofit the strategy they start from the here and now: implies

development and adaptation of employees.

2. Suitable for turbulent times firms find it hard to position

themselves in terms of markets etc. to work out best fit.

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RBTs challenge for HR

What is the firms competitive strategy and the people management

implications (fit).

How can the firm effectively differentiate itself from its competitors?

For example, which employees represent the greatest potential for

differentiation from the competition and which represent the table

stakes.

Does HR have a deep understanding of aspects of the firm that are

inimitable and contribute to effectiveness are these supported by HR

policies (evidence base best practice).

Does the firm have organisational capability for current and futurecompetitive strategies (training needs or new hires)

Does the HR function deliver organisational capability at an

appropriate cost?

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HR Strategy Tool

Having examined all the complexities of the issue, you can consult a

simple and practical HR Strategy Tool, developed by the Chartered

Institute of Personnel and Development (CIPD) the professional

body for HR managers in the UK.

The tool is on UELPlus

As we progress through the module, it might be easier to see how the

issues raised can be fitted into a strategic context but with the

knowledge that this is especially complex in an international

organisation.

What approach does the CIPD strategy tool adopt?

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References Barney, J. Looking inside for competitive advantage in Schuler & Jackson (1999) Strategic Human

Resource Management. Oxford: Blackwell

Barney, J.B. and Clark, D.N. (2007) Resource-based Theory. Oxford: Oxford University Press Beardwell, I., Holden, L. and Claydon, T. (2004) Human Resource Management a Contemporary

Approach (4th edn). Harlow: Prentice Hall

Boxall, P. and Purcell, J. (2008) Strategy and Human Resource Management (2ndedn). Basingstoke:

Palgrave Macmillan

Hamel, G. and Pralahad, C. (1994) Competing for the Future. Boston, MA: Harvard Business School

Press

Lepak, D. and Snell, S. (1999) The strategic management of human capital: determinants andimplications of different relationships. Academy of Management Review24(1):1-18

Luthans, F., Marsnik, P. A. and Luthans, K. W. (1997), A contingency matrix approach to IHRM. Hum.

Resour. Manage., 36: 183199

Markides, C. and Geroski, P. (2005) How smart companies bypass radical innovation to enter and

conquer new markets. San Francisco, CA: Jossey-Bass.

Mendenhall, M.E., Oddou, G., & Stahl, G.K. (2007) Readings and Cases in International Human

Resource Management. (4th edition). London: Routledge.

Miles, R.E. and Snow, C.C. (1986) Organizations: new concepts for new forms. California Management

Review, vol. 28, no. 3: 62:73

Perlmutter (1969). The Tortuous Evolution of the Multinational Corporation, reproduced in Bartlett, C.,

Ghoshal, S. and Beamish, P. (2008) Transnational Management. New York: McGraw-Hill 56-65

Schuler, R. and Jackson, S. (2006) Strategic Human Resource Management. Oxford: Blackwell

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Additional reading suggestionsBarney, J. (1991) Firm resources and sustained competitive advantage.Journal of

Management, 37 (3) 670-687. (The classic article).

Barney, J.B. & Wright, P.M. (1997), On becoming a strategic partner: the role of human

resources in gaining competitive advantage, Center for Advanced Human Resource

Studies), Cornell Univ. (www.ilr.cornell.edu/CAHRS)

Barney, J.B. & Delwyn, N. (2007) Resource-Based Theory, Chapter 6.

Dickmann, M. & Muller-Camen, M. (2006) A typology of international human resource

management strategies and processes, Int. Journal of Human Resource Management,

17: 4, 580-601.

Lepak, D.P. & Snell, S.A. (1999) The human resource architecture Academy of

Management Review(for a discussion, see Boxall and Purcell, pp. 121-127)