SHRM Foundation’s Effective Practice Guidelines Series

Human Resource Strategy

Adapting to the Age of Globalization SHRM Foundation’s Effective Practice Guidelines Series

Human Resource Adapting to the Age of Strategy Globalization

by Patrick M. Wright, Ph.D. Human Resource Strategy

This publication is designed to provide accurate and authoritative information regarding the subject matter covered. Neither the pub- lisher nor the author is engaged in rendering legal or other professional service. If legal advice or other expert assistance is required, the services of a competent, licensed professional should be sought. Any federal and state laws discussed in this book are subject to frequent revision and interpretation by amendments or judicial revisions that may significantly affect employer or employee rights and obligations. Readers are encouraged to seek legal counsel regarding specific policies and practices in their organizations.

This book is published by the SHRM Foundation, an affiliate of the Society for Human Resource Management (SHRM©). The interpretations, conclusions and recommendations in this book are those of the author and do not necessarily represent those of the SHRM Foundation.

©2008 SHRM Foundation. All rights reserved. Printed in the United States of America.

This publication may not be reproduced, stored in a retrieval system or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the SHRM Foundation, 1800 Duke Street, Alexandria, VA 22314.

The SHRM Foundation is the 501(c)3 nonprofit affiliate of the Society for Human Resource Management (SHRM). The SHRM Foundation maximizes the impact of the HR profession on organizational decision-making and performance by promoting innova- tion, education, research and the use of research-based knowledge. The Foundation is governed by a volunteer board of directors, comprising distinguished HR academic and practice leaders. Contributions to the SHRM Foundation are tax deductible. Visit the Foundation online at www.shrm.org/foundation.

For more information, contact the SHRM Foundation at (703) 535-6020.

08-0557 Table of Contents

v Foreword Human Resource vii Acknowledgments ix About the Author

1 Human Resource Strategy: Adapting to the Age of Globalization

Strategy 3 What Is HR Strategy?

4 Three Versions of a Generic HR Strategy

6 How HR Strategies Affect Performance

9 Real-World Impact of HR Strategies

15 Building Your Own HR Strategy

20 Future Challenges

21 Conclusion

23 Sources and Suggested Readings Foreword

Dear Colleague:

As a busy human resource practitioner, you probably find it difficult to keep up with the latest academic research in the field. Yet knowing which HR practices have been shown by research to be effective can help you in your role as an HR professional.

That’s why the SHRM Foundation created the Effective Practice Guidelines series. These reports distill the latest research findings and expert opinion into specific advice on how to conduct effective HR practice. Written in a concise, easy-to-read style, these publications provide practical information to help you do your job better.

The Effective Practice Guidelines were created in 2004. The SHRM Foundation publishes new reports annually on different HR topics. Past reports, available online at www.shrm.org/foundation, include Performance Management, Selection Assessment Methods, Employee Engagement and Commitment, Implementing Total Rewards Strategies, Developing Leadership Talent and Retaining Talent. You are now reading the seventh report in the series: Human Resource Strategy.

For each report, a subject matter expert is chosen to be the author. After the initial draft is written, the report is reviewed by both academics and practitioners to ensure that the material is research-based, comprehensive and presented in an easy-to-use format. An annotated bibliography, “Sources and Suggested Readings” section, is included with each report as a convenient reference tool.

This process ensures that the advice you receive in these reports is not only useful, but based on solid academic research.

Our vision for the SHRM Foundation is to “maximize the impact of the HR profession on organizational decision-making and performance, by promoting innovation, education, research and the use of research- based knowledge.” In addition, the Foundation is strategically focused on initiatives designed to help organizations maximize leadership talent.

We are confident that the Effective Practice Guidelines series takes us one step closer to making that vision a reality.

Frederick P. Morgeson, Ph.D. Chair, SHRM Foundation Research Applications Committee Professor and Valade Research Scholar, Michigan State University

v Acknowledgements

The SHRM Foundation is grateful for the assistance of the following individuals in producing this report:

Content Editor Dan Henry, Sr. Frederick P. Morgeson, Ph.D. Chief Human Resource Officer Professor and Valade Research Bright Horizons Family Solutions Scholar Sumita Raghuram, Ph.D. The Eli Broad Graduate School of Associate Professor of Human Management Resource Management Michigan State University Department of Labor Studies and Employment Relations Reviewers Pennsylvania State University Rajiv Burman, SPHR, CCP, James R. Schultz, SPHR, GPHR CEBS, CHRP Vice President-HR, Global Vice President Human Resources, Downstream USA & Canada Griffith Laboratories Chevron Corporation

John E. Delery, Ph.D. Project Manager Professor and Raymond F. Orr Chair Department of Management Beth M. McFarland, CAE Sam M. Walton College of Business Manager, Special Projects University of Arkansas SHRM Foundation

Mark Fogel Corporate Vice President HR and Customer Care Leviton Manufacturing Co., Inc.

Major funding for the Effective Practice Guidelines series is provided by the HR Certification Institute and the Society for Human Resource Management.

vii About the Author Patrick M. Wright

Dr. Wright is the William J. Conaty GE Professor of Strategic Human Resources in the School of Industrial and Labor Relations at Cornell University. He is also a Senior Research Fellow in the School of Social Sciences at Tilburg University. He holds a BA in psychology from Wheaton College and an MBA and a Ph.D. in organizational behavior/ human resource management from Michigan State University. Professor Wright teaches, conducts research and consults in the area of strategic human resource management, particularly focusing on how firms rely on people as a source of competitive advantage. He has published more than 60 research articles, 20 chapters in books and edited volumes, co- authored a leading human resource management textbook, now in its 6th edition, and co-authored or co-edited six books.

He has taught in Executive Development programs at Cornell University, University of Southern California and Texas A&M and has conducted programs and/or consulted for a number of large public and private sector organizations. Dr. Wright served as the Chair of the HR Division of the Academy of Management and on the Board of Directors for the SHRM Foundation, World at Work and Human Resource Planning Society. He was inducted as a Fellow in the National Academy of Human Resources in 2005 and won the 2007 HRM Scholar Award from the Dutch HRM Network.

ix HR strategies need to simultaneously focus on building skills, motivation and behavior for a successful business strategy. Human Resource Strategy

Human Resource Strategy: Adapting to the Age of Globalization

Globalization of individual companies and capital markets over the past two decades has changed the business landscape. Many firms have expanded operations overseas, and even strictly domestic businesses are facing competition from abroad. To respond to global competition, firms are using new technologies to provide better, lower-cost solutions for their customers, but these technological innovations have led to constant movement of customers and competitors. At the same time, global capital markets are pressuring firms to innovate and reduce costs—not an easy feat. All of these trends are pushing companies to manage their assets as effectively as possible—especially their human assets.

This report will explore a variety of ways to adapt your overall HR strategy to the new realities of global competition. Let’s first take a look at how one company responded to these new pressures.

Delta Air Lines: From Clear Skies to Crash Landing In the 1970s and 1980s, Delta Air Lines became the premier U.S. airline for customer service with a culture of “southern hospitality” and employees who went above and beyond the call of duty. The company’s human resource strategy helped build the skills, motivation and opportunities for employees to deliver great customer service, and that allowed Delta to attract business travelers who paid premium prices for travel. Delta’s success shows just how important HR strategy can be, especially in its impact on company performance.

Figure 1: Delta Air Lines: Pre-1994 Business Model

Valued Customer Driven by Delivered by Outcome Revenues

Internal promotion Extensive training Skilled, Outstanding High pay experienced, Profits customer Non-union committed service Flexible work rules employees Family culture Costs

Core Competence

1 Human Resource Strategy

How did Delta do it? But by the 1990s, things were • A great reputation in the industry changing. Major business trends enabled Delta to recruit and select altered the competitive climate, and only the best employees who had HR strategy had to change too. In skills and attitudes that fit well into 1994, after two straight years of record the company’s family-oriented financial losses, CEO Ron Allen rolled culture. out a new strategy called “Leadership 7.5.” Allen aimed to reduce Delta’s cost • Delta invested more than most per available seat mile (CASM) from airlines in training. more than 10 cents to 7.5 cents, which would match that of major competitor • Non-union status allowed for Southwest Airlines. Along with a flexible work rules that let new business strategy came a massive employees react to any situation transformation of Delta’s HR strategy. and get the job done.

• Delta’s internal promotion system In Delta’s new HR strategy: led to long employee tenure and a workforce with a wealth of • Training dollars were cut. experience and knowledge. • Experienced employees were laid • Relatively high pay also encouraged off and replaced with contingent employees to stay with Delta for the employees. long haul because they believed the • Delta put fewer flight attendants on company cared about them. each flight and fewer mechanics at Before 1994, as seen in Figure 1, the gates. Delta’s HR strategy was perfectly • Pay was frozen or cut for just about aligned with its business strategy so that all employee groups. HR practices built employees’ skills and motivation to make the business work. The Delta business model and HR strategy now resembled Figure 2.

Figure 2: Delta Air Lines: Post-1994 Business Model (Leadership 7.5)

Valued Delivered by Customer Driven by Outcome Revenues Commodity Layoffs workforce: Competitive Low wages contingent (low) cost Profits Low training temporary travel Contractors low tenure Costs

2 Human Resource Strategy

Despite what is obviously a Figure 3: How the IBM HR Strategy Supports and Enables the Business Strategy thoughtful process of developing HR strategy, the chart and

explanation above fall flat because Performance-Based Opportunities they lack concrete guidance about IBM Differentiatiors: Leadership Diverse, Talented People specific ways that you could adapt The Employee Innovation Business Experience HR practices to your own situation. Y Value Flexibility Values-based Climate g An inspiring Focus on climate in which That’s why this report uses a specific enterprises that employees flourish definition of HR strategy, designed value innovation by creating value

e M S trat for our clients and to give you that concrete guidance Global On-demand the world IB Anticipate and Build Skills Integration Infrastructure Human and help you identify specific Resource Lead the Transformation Focus Areas practices that are adaptable for you. Grow IBM

Getting Down to Specifics For our purposes, HR strategy means a system of human resource As an HR professional, you are 1) innovation, 2) business value, 3) practices for a particular job or responding to the same economic global integration, and 4) on-demand collection of jobs aimed at the best transformations that drove the infrastructure. Behind this overall employee performance possible to changes at Delta. You need access to strategy are all of the employees who meet the firm’s ultimate goals. the most recent research on how to make it work. IBM’s HR strategy make employees a source of long- identifies company characteristics • This definition of HR strategy term competitive advantage under that motivate and energize those emphasizes the system of HR the pressures of globalization. This employees. practices, because it is the SHRM Foundation report gives you broad array of practices that access to the research, principles, matter in terms of employee IBM motivates its performance—not individual guidelines and tools for creating an employees through: HR strategy that will add value to tests, recruiting or interview your organization. The first step is to • Performance-based opportunities. techniques, for example. • It is also important to remember understand what HR strategy is. • Leadership. that HR strategies are best • Hiring diverse and talented people. designed and implemented for What is HR strategy? a particular job or a set of jobs. If you ask the CEO of a large • Flexibility. Few firms manage their clerical multinational company to explain • A values-based climate. workers the same way they HR strategy, you’ll probably get a manage their senior executives. pretty general description of how But what role does HR play in Each group is recruited HR supports his or her business. building the ideal IBM workforce? differently, is selected according Computer giant IBM, for example, Again, at IBM, the goals are clear. to different criteria, attends has a well-articulated HR strategy, as different training programs and is shown in Figure 3. At IBM, HR is expected to: paid differently. If your company is focused on customer service, • Anticipate and build skills. IBM’s HR Strategy you’ll need to build customer • Lead transformation. service skills and behaviors into As you can see, IBM’s overall business all customer-oriented jobs, strategy focuses on four areas: • Grow IBM.

3 Human Resource Strategy

KEY TERMS

Strategic HRM HR Strategy HR Best Practices Commitment vs. Control Strategies Human resource Focus Human capital Single HR practice practice system Two very different overall HR Level of Organization or business strategies, labeled “commitment” and Job level Job level interest level “control,” have been identified and Designed jointly between Designed entirely analyzed (Arthur, 1992). Responsibility Designed mostly by HR line and HR by HR The commitment HR strategy would Get people to have Get people to have Get the right people in include: (skills), feel (attitudes) (skills), feel (attitudes) Goal or the right place in the and do (behaviors) or do (behaviors) objective business to maximize • Broadly defined tasks. things that lead to job something that leads business success and business success to job success • High levels of employee participation. • Highly skilled workers. but your specific strategy of strategy and HR best practices—terms • Extensive training. recruitment, selection, training that are often used interchangeably and rewards for a cashier will be but are actually very different. They • High wages. different from those of a store differ in their primary focus, HR • High benefits. manager. involvement and ultimate goals—but all will be components of your overall However, the control HR strategy • Finally, the best HR strategies HR strategy. would represent the opposite: always stay focused on getting the best performance from employees. • Narrowly defined jobs. Three Versions of a Generic Usually, this means getting • Low participation. employees to: HR Strategy • Low skill requirements. • Have something (skills, The HPWS Approach competencies, abilities). • Intense supervision or control. Often, when you’re considering • Feel something (commitment, how HR practices influence your • Limited training. engagement, motivation). firm’s performance, you may focus • Low wages. on training or staffing practices. • Do something (come to However, as shown in the Key Terms • Low benefits. work, be productive, serve above, these are more “best practices” In practice, as you might expect, the customers, stay with the than strategies. One landmark study commitment strategy generally leads organization). (Huselid, 1995) created a popular to the best firm performance for framework that can be used as a kind If your HR practices are correctly those using a differentiation business of generic HR strategy. The framework designed and put in place, you’ll strategy, but the control strategy is known as the high-performance work get the best employee performance, may work best for firms with a cost- system (HPWS) and is explained in which means you’ll get the best business strategy. In real-life terms, Table 1 on page 6. overall company performance as well. the two strategies go head to head Implementing all of the practices in a comparison of Costco and Strategic Human Resource outlined in Table 1 as part of the Wal-Mart in Box 1. Management, HR Strategy and HPWS approach is probably in the best interest of any company because HR Best Practices The Value Matrix Approach HPWS improves firm performance The chart above provides a and works well across many different The HPWS approach suggests that it comparison of strategic human organizations. can fit all firms, regardless of resource management (HRM), HR

4 Human Resource Strategy

overall business strategy, while the Figure 4: Human Capital Architecture commitment/control approach says that different HR strategies are Box 1 Externalization Internalization appropriate to different business Costco vs. Wal-Mart: Collaborative HC Strategic HC strategies. high • Partnership • Commitment-based Battle of the Bulk Stores - select on past - staff based on potential A third possibility is the value matrix experience - develop (firm-specific) Wal-Mart has been an amazingly approach (Lepak and Snell, 1999), - develop the - autonomy/self-direction relationship - extensive pay and successful company. But over Relational which says that a firm can implement - evolving scope benefits the past few years, the company - rewards for ideas - “fail” forward four possible HR strategies has faced increasing competition (commitment, performance, Support HC Core HC • Compliance-based • Performance-based and scrutiny of its HR strategies, compliance and partnership) tied to Uniqueness - limited scope - staff on current need/skill which have long focused on four distinct job groups representing (outsource) - targeted development - rules and procedures - market-driven pay low workforce costs as a means of different types of workers (strategic, - contract/hourly pay - reward productivity keeping prices low. ransactional core, support or collaborative). - error avoiding - mistakes above water T line

low Sam’s Club, the bulk division of Firms can distinguish the skill sets of low Strategic Value high Wal-Mart, has been competing particular jobs in terms of their value against Costco in recent years. to the firm and their uniqueness in the In a thorough comparison of goal of overall employee engagement, labor market. In this value/uniqueness the HR strategies and business where HR practices elicit high levels matrix, known as the human capital results of these two companies of skill, motivation and attitudes that architecture, each quadrant includes (Cascio, 2006), Costco was encourage workers to contribute descriptions of the appropriate HR shown to invest more in its proactively and stay with the firm. At strategy, as seen in Figure 4. sales associates through pay and the other end are HR practices that health care benefits and to work seek to minimize the costs associated with unions rather than actively Is There an Ideal Generic with managing employees while fighting against unions, as Wal- HR Strategy? maintaining sufficient work design and Mart does. Keep in mind that all of these attempts controls to be sure that they do their to create generic HR strategies are jobs. One study put it this way: Most importantly, despite the simply different points on a spectrum. fact that Costco pays higher “The goal of control human resource At one end of the spectrum is the wages, it actually has lower labor systems is to reduce direct labor costs and higher profitability per employee than does Wal-Mart. Sam’s Club vs. Costco The study concluded:

“These figures illustrate nicely Sam’s Club Costco the common fallacy that labor Profit per employee $11,615 $21,805 rates equal labor costs. Costco’s hourly labor rates are 40% Average hourly wage $10.11 $17.00 higher ($17 vs. $10.11), but Percent with health care < 50% 82% when employee productivity is considered (sales per employee), Percent of health care premiums paid 33% 8% Costco’s labor costs are lower than those at Sam’s Club (5.5% Turnover 44% 17% at Costco compared to 6.25% at Turnover cost per employee $5,274 $3,628 Sam’s Club.)”

Source: Casico, W. The high cost of low wages. Harvard Business Review.

5 Human Resource Strategy

costs or improve efficiency, by enforcing employee compliance Table 1: Components of a High-Performance Work System Strategy: A Questionnaire with specified rules and procedures and basing employee rewards on 1. What proportion of the workforce is included in a formal information-sharing program, some measurable output criteria such as a newsletter? […] Commitment human resource 2. What proportion of workers have had a formal job analysis? systems shape employee behaviors and 3. What proportion of non-entry-level jobs have been filled from within in recent years? attitudes by forging psychological 4. What proportion of the workforce is administered attitude surveys regularly? links between organizational and 5. What proportion of the workforce participates in Quality of Work Life (QWL) programs, employee goals. In other words, the Quality Circles (QC) and/or labor-management teams? focus is on developing committed 6. What proportion of the workforce has access to company incentive plans, profit-sharing employees who can be trusted to plans and/or gain-sharing plans? use their discretion to carry out 7. What is the average number of hours of training for a typical employee over the last 12 tasks in ways that are consistent with months? organizational goals.” (Arthur, 1992) 8. What proportion of the workforce has access to a formal grievance procedure and/or complaint resolution system? Although you may personally prefer to aim toward “developing committed 9. What proportion of the workforce takes an employment test prior to hiring? employees,” some firms succeed 10. What proportion of the workforce has performance appraisals to determine financially by taking the route of compensation? “enforcing employee compliance.” 11. What proportion of the workforce receives formal performance appraisals? 12. Which of the following promotion decision rules is used most often? In the end, you can aim HR a. Merit of performance rating alone. strategies at investing in human capital by building skills and b. Seniority only if merit is equal. motivation of the workforce c. Seniority among employees who meet a minimum merit requirement. and providing opportunities to d. Seniority. participate, or you can aim at 13. For each of the five positions that your firm hires most frequently, how many qualified minimizing the cost of your human applicants are there, on average? capital by controlling behavior, lowering the skill level of jobs and limiting opportunities to participate research has seldom identified how is on what employees have and feel. in decision-making in the firm. this relationship works. Figure 5 Recruitment, selection, training Delta’s Leadership 7.5 strategy illustrates one model based on and development are all aimed at certainly resembled a transformation what employees have, how they bringing in or building certain skills, from a commitment to a control feel and what they do. You have enabling employees to effectively HR strategy. But the question is: already seen that the primary impact perform their jobs. In addition, How did the new HR strategy affect of HR practices is on the workers their experience with these practices, Delta’s company performance? themselves—the human capital. Let’s along with rewards, performance look more closely at the human capital management and communication, through the analysis of this model. shapes workers’ perceptions of the How HR Strategies Affect company’s fairness and desirability. Performance And those perceptions then influence What Employees Do is Based on Researchers have found a significant their commitment, motivation and What They Have and Feel relationship between HR strategies engagement. and profitability. However, this The initial impact of HR practices

6 Human Resource Strategy

• What employees do is largely a 2. Discretionary behavior refers to by a less skilled employee) may function of what they have, because employees using their discretion result in a permanent decrease in they cannot be productive if they to go above and beyond their job productivity. don’t have the right skills. descriptions—such as the airline In discussing HR strategy, productivity gate agent who races to return a • What they do is also a function of is usually measured using the number forgotten briefcase. what they feel, because they may of products produced or delivered choose not to be productive if they 3. Counterproductive behavior is all divided by the number of full-time have negative feelings toward the those things we do not want to employees (FTEs) or number of labor organization. see our employees doing: stealing hours. If employees are engaged Ultimately, HR strategy has the most supplies, taking long personal in positive behaviors, fewer will be significant impact on what employees calls, even sabotaging products or needed for a high level of output. On actually do on the job. If the strategy equipment. the other hand, careless or deliberate mistakes and negative employee focuses on customer service, for 4. Attendance is the extent to which behavior can cause product defects, example, it will affect things like employees show up on time. some of which can’t be repaired. whether employees are friendly Although perfect attendance is and helpful, whether they give the neither possible nor even desired In some industries—such as mining right answers and solve customers’ (in the case of a sick employee), and refining—accidents can be costly problems. If the strategy is about workers who call in sick when they or fatal, and HR strategies must be efficiency, it will encourage employees feel fine create scheduling hassles developed to encourage safe behavior to look for ways to lower costs or and reduce productivity. of employees. operate more efficiently. Do they engage in cost-saving behavior or 5. Turnover, of course, refers to an waste time and money? The bottom employee leaving the organization. Employee Actions line is that what employees actually Again, zero turnover is neither Affect Customers do will decide how well the business possible nor desired, but excessive Any employee who interacts with strategy is executed. turnover of average employees customers has the potential to elicit results in additional replacement positive or negative experiences. Box In the end, what employees do costs, and turnover of an is the critical link in executing 2 describes the author’s personal outstanding employee (if replaced strategy. Because what employees experience of how an HR strategy has do depends on what they have and feel, HR strategies need to focus Figure 5: HR Strategy and Performance simultaneously on building skills, motivation and behavior for a successful business strategy. What Customer Employees Have Outcomes HR Strategy Skills What Satisfaction Employee Actions Affect Recruitment Abilities Employees Do Retention Financial Selection Competencies Business Success Task behavior Outcomes Training Discretionary behavior Expenses Development There are five types of employee Counterproductive Revenues Performance behavior Operational Profits behavior relevant to a company’s management What Attendance Outcomes Rewards Employees Feel success. Turnover Productivity Communication Motivation Quality Commitment Shrinkage 1. Task behavior refers to things that Engagement Accidents employees are supposed to do as part of their jobs (from the bare minimum to the maximum).

7 Human Resource Strategy

influenced what employees feel Box 2 and do, with significant impact on customers and company profits. Flying the Not-So-Friendly Skies

Living in Ithaca, New York, one does not have a lot of options for Employee Actions Affect flying from the local airport, which happens to be only five minutes Company Finances from my house. I have flown for the past 11 years on one of the few Employee behavior can affect your airlines serving Ithaca, logging over 100,000 miles per year, with seven firm’s financial outcomes, especially to 10 full-fare business class tickets each year. In fact, two years ago, in its impact on operations and they recognized me as one of their top 500 fliers. customer service. For instance, when Facing bankruptcy, the airline recently engaged in a cost-cutting quality and productivity decrease, strategy that required workers to take a 30 percent pay cut and later there is an immediate impact have their pensions handed over to the Pension Benefit Guarantee on expenses if products must be Corporation, resulting in an estimated 70 percent cut in their pension destroyed, reworked or produced value. The management defined a set of standard operating procedures at higher cost. When customers get for employees to follow to control costs, and they have little discretion. defective products or services, they will take their business elsewhere, Needless to say, as the situation developed, the employees were not obviously affecting the firm’s feeling positive about their employer and certainly were not generating revenue stream. As revenues decrease positive customer impressions. Many would make derogatory and expenses increase, the firm’s comments about the airline. Rather than doting on first-class profitability will soon deteriorate. passengers as they had in the old days, flight attendants now would serve a drink or a meal and then sit in their jump seats reading until Every HR practice costs money to a customer rang the call button. These flight attendants exhibited develop and time to implement and only the minimum level of task behavior, no discretionary behavior and deliver. These costs go directly to considerable counterproductive behavior. I continued to fly with the the organization’s bottom line. For airline because I assumed that in this era of turmoil in the industry, all instance, being selective in hiring airlines were in the same situation. may result in better employees, but it will cost more in terms of testing However, last year, scheduling considerations led me to fly a different and interviewing. In addition, airline. I quickly discovered how flawed my assumption had been. The providing more training for flight attendants never let my glass remain half empty without refilling employees will increase their skills it. They were happy and helpful. They seemed to enjoy their jobs and and potentially their attitudes, but appeared glad to be of service. Now I drive an extra hour to get to the every day of training costs both real airport served by the other—“happier” —airline and consider the extra money—for travel, accommodations, cost in time worth every minute. meals, trainer fees—and days when The positive employee behavior created a positive customer impression the employee is off the job. and now will create an additional stream of revenue. Lack of effective You shouldn’t think in terms of employee behavior at the other airline created a negative customer doing more and more HR strategy, impression and loss of considerable revenue. because at some point you will have diminishing returns when the additional investment in the practice costs more than the benefit gained. Do implement high-performance HR practices that increase productivity,

8 Human Resource Strategy

but don’t let their costs surpass the benefits—or there’s no real Figure 6: The Balanced Scorecard financial gain for the company.

In order to create efficient HR Financial practices that don’t cost more than • profitability STRATEGY • revenue growth they are worth, you need a plan, or • grow and mix • sustain • cost/productivity strategy map, to keep you on track. • harvest • asset utilization

From Balanced Scorecard to Customer Process • market share VALUE = f Vision Strategy Maps ATTRIBUTES • acquisition • product/service • innovation and • cost (ABC) • retention attributes • operations Overall organizational effectiveness • quality (ppm) • satisfaction • relationship Strategy • post-sales • time (MCE) is determined by more than • profitability • reputation/image service just financial outcomes. A firm must also have a set of customer Learning metrics that show how well it is • employee (skill, attitude, performance, retention) serving that group. In addition, • information (available, accurate) other operational metrics can • procedures (alignment, improvement) help evaluate the effectiveness of business processes. The balanced scorecard offers a way of calculating Source: Scott Snell, personal communication. all the aspects of your operation that go into creating your HR • Financial performance today Now it’s time to draw on some strategy (see Figure 6). The depends on customer metrics real-world examples of HR balanced scorecard also suggests from 2-3 months ago. strategies in action. that measuring employees’ learning • Customer metrics depend on outcomes can help monitor the meeting operational and people Real-World Impact of performance of a firm based on metrics from 2-3 months earlier. HR Strategies how well it is able to generate and The primary impact of an HR transfer knowledge. • Operational metrics are strategy is on the employees influenced by the people metrics These different categories are themselves, in terms of what they even 2-3 months before that. all related in a way known as a have, feel and do. Let’s revisit the strategy map. The point is that the scores on people example of Delta Air Lines to assess In creating your own strategy metrics today will largely influence a a real-world example of the impact map, it is important to know that firm’s financial performance six to 12 of a new HR strategy. (See Box 3 financial metrics are determined by months down the road. So trying to on page 10.) how well a firm meets its customer manage a firm by looking at today’s metrics, and customer metrics are financial metrics resembles driving Impact on Employees determined by how well the firm out the rear-view mirror because Commitment HR strategies meets its operational and people they are not determined by what have a positive effect on how metrics, and operational metrics are you do today but by what you did employees feel and increase influenced by the people scores. nine months ago. So the only way to manage financial metrics for the their satisfaction. This is what is These links exist in a causal future is to focus on people, operations often called employee engagement sequence, so that: and customers today. (see Employee Engagement and

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Not much is known about the improvement of employees’ skills Box 3 based on a commitment strategy. Delta Air Lines: So Be It One study found that the HR practices in petrochemical refineries Delta Air Lines’ Leadership 7.5 strategy moved the company from a were related to how plant managers commitment to a control HR strategy, focusing on reducing costs and not evaluated the skills of the workforce worrying much about employee commitment. In a front-page Wall Street (Wright et al., 1999). Another Journal article about the Leadership 7.5 strategy, Delta CEO Ron Allen study found that HR strategies were was quoted as saying, “Employee morale is not what it used to be. So be related to the skill levels, creativity it.” Why? Because the new strategy had resulted in record profits for Delta and expertise of employees within in 1994. But there was trouble brewing. a group of Japanese organizations The day after the article came out, Delta employees began wearing “So (Takeuchi et al., 2007). As already Be It” buttons indicating their lack of engagement. Delta dropped to the noted, there are negative side bottom of the industry in on-time performance. The airline also had the effects of skill building when highest number of baggage handling and customer complaints. In fact, employees become more mobile. from 1992 to 1993, customer complaints skyrocketed by 253 percent. With extensive training and selective Then the following year, complaints rose an additional 188 percent. hiring come employees that are Revenues from 1993 to 1998 rose at a compounded annual growth rate of more likely to leave the organization just over 3 percent, when the industry average was 13 percent. (Gardner et al., 2006).

Delta had lost its core customer: the business traveler. Here was an HR Ultimately, HR strategies affect what strategy that resulted in short-term profitability, but had destroyed the employees do. Commitment HR human element that had been Delta’s source of competitive advantage. strategies mean better performance on core tasks, more going beyond By the early 2000s, Delta’s profits had evaporated and it declared the call of duty, greater willingness bankruptcy. In 2008, Delta emerged from bankruptcy, but sought to to share knowledge and generally merge with another airline (Northwest, at the time of this writing) because lower quit rates or turnover (Sun its business model seemingly no longer allowed it to differentiate itself et al., 2007). This again highlights from its competitors. the need for you to think in terms of a coherent HR strategy with many complementary practices that Commitment published by the and wants to see it succeed. build the skills and commitment of SHRM Foundation). It describes an Employees generally react positively employees. employee’s emotional attachment to these strategies with increasing to and/or identification with the satisfaction. The specific practices of Impact on Operations organization and is what most challenging jobs, direct participation Labor productivity, quality and employers would like to see in their in decision-making and extensive shrinkage—all key to operations— workforce. information-sharing are associated are also affected positively by HR with both work and life satisfaction. There are strong correlations strategy. One important study In contrast with some who view between a commitment-based (MacDuffie, 1995) examines the the commitment HR strategy as HR strategy and an employee’s impact of an overall HR strategy in exploiting workers by making them organizational commitment, or automobile manufacturing plants. work harder, it seems that employees how much he or she personally The results show a strong positive want to be managed in this way identifies with the organization impact on labor productivity (the (Guest, 2002).

10 Human Resource Strategy

So research strongly suggests that Figure 7: Delta Air Lines: Post-1994 Business Model (Leadership 7.5) service climate has an impact on customers and that HR strategy that

Valued Customer focuses on service is strongly related Delivered by Driven by Outcome to customer satisfaction as well. Revenues

Commodity Layoffs workforce: Competitive Low wages Profits Impact on Financial Contingent (low) cost Low training Temporary travel Performance Contractors Low tenure Costs Plenty of research exists showing links between HR strategies and a

Unintended Consequences: variety of financial outcomes because Low on-time performance financial performance information Customer complaints Baggage handling problems for all U.S. publicly held companies Safety problems is readily available.

In a study of the HR practices at more than 700 companies (Huselid, 1995), HR practices were shown number of employee hours required (Schneider et al., 1980, 1985). The to be clearly related to both to assemble a vehicle) and on service climate—which refers to financial and stock price measures quality (the number of customer- employees’ shared perceptions of what of performance. Those connections reported defects of the automobiles practices will be expected, rewarded are demonstrated in studies of produced). A study of steel and supported—is especially the banking industry (Delery and production lines sees HR strategies important in making a positive Doty, 1996), manufacturing firms associated with a greater percentage impact on customers (Johnson, (Youndt et al., 1996), in firms in of “uptime” for the lines (Ichniowski 1996; Schneider et al., 1998). New Zealand (Guthrie, 2001) et al., 1997). HR strategies are Among small businesses in the and in other U.S. cross-industry also related to innovation, quality, same industry, HR practices drive studies (Datta et al., 2005; Snell and workers’ compensation costs and cooperation, customer orientation, Youndt, 1995). shrinkage (Collins and Smith, 2006; employee commitment and Wright et al., 2003). Finally, as consulting firms build managerial competence—and their human capital practices, But although many researchers find therefore have a major influence on some of them are establishing a that HR strategy is related to labor customer satisfaction (Rogg et al., link between HR strategies and productivity, that conclusion is not 2001). performance, too. For example, universal; at least two studies see no And in call centers, HR practices WatsonWyatt developed what the relationship (Capelli and Newmark, emphasizing employee training, company refers to as its Human 2001; Guest et al., 2003). discretion and rewards lead to Capital Index©. It consists of a higher service quality as measured number of specific practices that Impact on Customers by customer satisfaction surveys. have been statistically tied to firm HR strategies are clearly linked to HR practices are also related to performance as measured by total employee attitudes, and the way higher revenue per call as well as return to shareholders over a five- employees perceive their experience net revenues per call, which seems year timeframe. The practices are with management is strongly related to say that when customers are very grouped into six categories with an to customer satisfaction results satisfied, they actually buy more expected increase in shareholder (Batt et al.). return associated with each.

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Their findings are illustrated below: Caveat #1: Causal Direction Caveat #3: Fitting HR Strategy It is not clear yet whether HR to Business Strategy strategy causes performance, or vice There is no strong support for the Category Total Return to Shareholders versa. For instance, questions such need to fit HR strategy to business Total rewards and accountability 16.5% as “how many hours of training do strategy. As you may remember from Collegial, flexible workplace 9.0% employees receive each year?” or the earlier table showing some of the Recruiting and retention differences in merit increases offered HR practices measured in previous excellence 7.9% to high and low performers are clearly studies, practices are stated in very Communications integrity 7.1% influenced by financial performance. generic terms. For example, “the Focused HR service technologies 6.5% When a firm’s financial situation use of valid selection tests” is a great Prudent use of resources -33.9% suffers, it trains less and offers low or idea, but a valid test for a customer no merit increases. service representative will be vastly different from a valid test for a In almost all studies of the subject, it Often, studies measure financial computer programmer. Often, the is clear that HR practices are related performance of firms up until the annual number of training hours is to corporate financial and economic survey of the HR practices, so they assessed but not the type of training. performance—and this has important actually demonstrate a relationship Of course, training for a sales rep at a implications for your organization. In between current HR practices and past retail store such as Gap will be quite fact, as one important study concludes: performance. Others use performance different from the training needed for measures taken only after measuring “Based on four national surveys and a pharmaceutical sales rep. observations on more than 2,000 HR practices. A few studies suggest firms, our judgment is that the that it’s impossible to conclude which In the end, although you should effect of a one standard deviation direction the causal arrow points, recognize these three caveats, you change in the HR system is 10-20% but most likely it points both ways. can rest assured that there are of a firm’s market value.” (Huselid HR strategies can positively affect firm solid positive results associated and Becker, 2000) performance, but firm performance can with commitment HR strategies. also affect HR strategies. But although research shows a Quantitative analysis of this research consistent relationship between shows that a very small increase in the Caveat #2: Measuring high-performance HR strategies and use of HPWS could result in more HR Practices employee, operational, customer than a 4 percent increase in return on and financial performance measures, a firm’s assets (Combs et al., 2006). In There is no consensus regarding the the exact nature and size of this addition, these findings seem to work exact HR practices that make up relationship is less certain. for small and medium-sized businesses, a high-performance HR strategy. as described in Box 4. There is some agreement about the categories of ability, motivation and One Real-World Impact: The message here is that commitment opportunity, but which practices The Sysco HR Strategy HR strategies have consistently should be assessed within each Sysco Corporation is a model been demonstrated to have positive category is less clear. So comparing for change. The world’s largest relationships with employee, operational, across studies is difficult because each food service firm with operations customer and financial outcomes. study may have measured slightly throughout North America, Sysco different HR strategies. In addition, provides all of the materials (food, Three Caveats Before many studies ask a single person in napkins, silverware, pots and Moving Ahead the organization to report the HR pans) necessary for a restaurant There are some cautionary aspects practices, perhaps capturing more of to run its business. This industry in all this research that you should that individual’s perceptions than the was traditionally fragmented with consider. true set of practices. lots of small, local food service

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Box 4

HR Strategies in Small and Medium-Sized Enterprises

As you look at some of the HR practices discussed thus far, it may be obvious to you that these practices are much more likely to characterize HR in large bureaucratic organizations that have relatively large HR divisions with more than 50 staff members. Although such firms are the focus of mostH R research in the United States, they make up a small minority of the total population of firms and certainly are not where most of the job growth occurs. Rather, small and medium-sized enterprises (SMEs) are where most job growth takes place, and these firms have unique approaches to HR.

A Study of 600 Businesses Because so many SMEs are owner-operated and have few or no HR employees, their HR practices are informal and reflect principles rather than specific practices. In a large study of these firms done at Cornell University, a team of researchers looked at the impact of these more informal HR systems on important firm outcomes. Using clients of Gevity Consulting, an HR outsourcing firm focused on SMEs, the researchers assessed HR practices, employee attitudes and multiple performance outcomes across more than 600 businesses. They focused on three main aspects of HRM and identified a few alternative HR strategies within each.

• Employee selection Small and medium-sized businesses can focus on “person-job fit” by hiring people for the specific job (only looking at the skills directly relevant to the job applied for), or they can focus on “person-organization fit” (looking for broader skills, the ability to get along with team members and fit in the company culture).

• Workforce management Such businesses can emphasize tight controls by closely monitoring day-to-day activities of employees using lots of explicit rules and procedures to dictate their pace and schedules. Or, they can use “involvement and self- management” to get employees involved in defining their activities, giving them more autonomy.

• Motivation and retention SMEs can use monetary incentives—paying higher wages than competitors and using financial rewards for performance—or a family-like community and environment, using social events and meetings to foster employees’ emotional attachment to the company.

Some HR strategies are clearly more effective than others. The results comparing the different approaches are illustrated below.

Employee selection Turnover Revenue Profit Person-job fit Person-organization fit 17.1% lower 7.5% higher 6.1% higher

Workforce Management Tight controls Involvement/self-management 15.1% lower 11.5% higher 3.9% higher

Motivation and Retention Monetary incentives Family-like community 19.1% lower 3.8% higher 13.3% higher

So, although large firms focus primarily on building systematic HR practices and processes that increase employees’ skills and motivation, effective HR strategies among smaller firms seem to focus much more on selecting, managing and motivating employees by creating and supporting family-like cultures to which workers become emotionally attached.

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distributors, until Sysco founder, John Baum, convinced a number Table 2: HR Practices Measured in the Sysco Climate Survey of entrepreneurs to band together under one corporation so that they 1. Do applicants for this job have to take a formal test? would have greater economies of 2. Do employees in this job receive regular information about the company’s performance? scale and bulk purchasing power. 3. Do employees in this job receive a regular formal performance appraisal? In order to do this, Sysco created 4. Do employees in this job have access to a formal grievance procedure? a structure in which each company 5. Do employees in this job receive increased pay, such as merit increases, bonuses, etc., remained autonomous. for individual job performance? By the time Ken Carrig came in as 6. Do employees in this job receive increases in pay for group or companywide the Executive Vice President of HR performance? in 1998, Sysco had more than 60 7. On average, how many hours of training do employees in this job receive on an annual separate operating companies, all basis? of which were managed under the earned autonomy principle: As long argument to company presidents company presidents, including as a firm was delivering satisfactory as to why they should implement retention in key jobs, quality, shrinkage, performance, corporate headquarters effective HR strategies within their productivity, workers’ compensation would leave it alone. Within this companies. expenses and customer satisfaction. structure and culture, Carrig was unable to mandate that companies The companies that implemented In essence, what Carrig did was to implement high-performance work more of the high-performance/ provide support for almost every systems. So he decided to gather data commitment practices far outperformed linkage between HR strategy and to provide convincing evidence of those that had not in terms of pre-tax performance, as shown more directly the importance of people to business operating profit in the short term in Figure 9. But again, HR practices performance and the value of state- (three to nine months after the are stated in relatively generic terms, of-the-art HR practices in effectively survey) and the long term (nine to so they would not be sufficient to managing those people. 15 months after the survey). In fact, guide the design of specific HR there was almost a full percentage programs and policies. In 1998, he put out a low-cost point difference in profit margin climate survey to gather employee between those businesses using the Putting Carrig’s approach to work satisfaction/engagement data most HPWS practices compared with for a fraction of what some were those using the fewest. When it came time to help the paying consulting firms. He made operating companies implement it possible for companies to choose This alone should provide convincing the HR strategies, Carrig’s group to participate in either the fall evidence, but Carrig also showed provided some tools, including: or the spring, depending upon Sysco executives how these same their own business cycles. Because companies outperformed their • A Five-Star Handbook, which data collection was conducted counterparts in terms of both short- provides ideas for how to in partnership with a university, and long-term operating expenses, as implement these basic practices. university researchers were able illustrated in Figure 8. • A Knowledge-Sharing Portal, where to add a number of items. In the business and HR leaders could go first year, 33 companies chose to All of these companies also had significantly higher employee to find out how other operating participate in the survey, summarized companies had developed and in Table 2. engagement. As if this were not enough, Carrig showed similar implemented specific best practices. The results of the survey provided a relationships with almost all of the So, for example, instead of the generic foundation for making a persuasive metrics that mattered to operating “sharing information about company

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performance,” leaders would find out how to conduct a town hall meeting Figure 8: HR Practices and Operating Expenses at Sysco with employees so they could share performance information.

0.01 This Sysco example proves the value 0.008 you can gain from implementing 3–9 Months commitment HR strategies and a 0.006 9–16 Months model for how to develop specific HR 0.004 practices from generic ones. 0.002 0 Note: In order to disguise the data, the mean has been subtracted from Operating E xpenses the numbers on the Y-axis. The final section provides a set of -0.002 guidelines to follow for developing -0.004 your own effective HR strategy. 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Increased use of commitment HR Strategies Building Your Own HR Strategy

Dell Versus Hewlett-Packard Figure 9: HR Strategy and Performance Dell has been a perennially successful company. After its start in Michael Dell’s dormitory room What Customer Employees Have at the University of Texas, the Outcomes HR Strategy Skills What Satisfaction Recruitment Abilities company quickly became one of Employees Do Retention Financial Selection Competencies Task behavior Outcomes the fastest growing in history. Of Training Discretionary behavior Expenses Development all the plateaus and bumps along Counterproductive Revenues Performance behavior Operational Profits the way, none was as serious as the Management What Attendance Outcomes Rewards Employees Feel Turnover Productivity competition Dell faced in mid-late Communication Motivation Quality Commitment 2000 from Hewlett Packard (HP). Shrinkage Engagement Accidents Dell’s corporate model emphasized providing good quality PCs and laptops to the business market. Its “Premiere Pages” made it easy for with HP. How? Through the same years. Although not as cost-efficient companies to custom configure step-by-step process you can follow, as Dell’s, HP’s production got closer and order these products online, described below. and much more cost-competitive. and the Dell direct business model • The largest growth since the mid- (including an extremely effective Step 1: Analyze Your Industry 2000s has been in the consumer lean assembly system) enabled the Within any industry, many of market—not the corporate market. firm to offer these products at a the dynamics change over time Most business users had little significant price advantage over its in ways that alter the nature of choice in computers because IT competition, including HP. competition—and the computer departments made the choice for But recently HP overtook Dell as industry is no different. employees. Now consumers have the world’s largest manufacturer a wide range of choices, and their • HP was able to develop a much of PCs. Now Dell must develop a wants are different from those of leaner production process in recent new HR strategy to better compete business users.

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• They want function and Step 2: Understand style: sleeker, more colorful Your Value Chain Box 5 and generally more visually The value chain is a tool for attractive products that are as understanding where your company HR Strategies Differ much a fashion statement as a creates value superior to that of your Among Industries technological tool. competitors. Most value chains consist It is always effective to implement • The “touch and feel” of of between four and seven reasonably a state-of-the-art HR strategy, the product is important; discreet sets of processes and activities but in some industries, the they want to pick it up, feel that track the first steps in the design benefit is greater than in others. it, put their fingers on the of your product all the way through to keys before they make their sales, distribution and/or service to the Industry characteristics influence customer. the effectiveness of HR strategies. buying decision. This cannot be done via the Internet but Increasing the use of state-of-the- In Figure 10, which shows the value requires a physical location art HR strategies has a stronger chain of the PC/laptop industry, where customers can compare impact on labor productivity in it becomes clear that Dell has alternative choices. low as opposed to high capital traditionally been strong in the supply intensity industries (14.3 percent • Most consumers are not chain and distribution (to corporate vs. 1 percent), in industries where well-skilled in how to fix their clients). But the company has been growth is high as opposed to low computers and do not have weak in the design stage and in (20.1 percent vs. 3.23 percent) access to the IT departments distribution and service to consumers. and in industries with high versus corporate clients use to service Suddenly, it’s clear how HP has low product differentiation (18.2 their equipment. So consumers supplanted Dell as the number one percent vs. 1.9 percent). need much more one-on-one computer manufacturer. Dell is at a help in the service arena. In addition, among small distinct disadvantage in precisely the businesses, state-of-the-art HR Dell has little or no experience capabilities needed to compete in the strategies are found to be most offering what the average consumer consumer market. effective in retailing and low-skill needs in a home computer—and, Table 4 provides some questions to services firms and somewhat less more importantly, it lacks the help you analyze your own value capability to make the offer. effective—but still worthwhile— chain. But remember, you may need in professional service and Table 3 provides some questions that to consult your business leaders manufacturing firms (Collins, you can ask to determine the ways in to make sure that you see your 2006). which your own company’s industry organization the same way that the may be changing. business leaders see it.

Table 3: How Is Your Industry Changing?

1. Is the industry growing, plateauing or declining? 2. How many new competitors are entering and on what basis are they able to enter? (Cost? Quality? Innovative products or functionalities?) 3. What customer categories within the industry are changing and in what ways? Are different customer segments growing at different rates? How are their demands changing?

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Figure 10: Dell’s Value Chain Table 4: Understanding Your Value Chain

Strong Strong 1. What are the 4-7 major aspects of your value chain that are most interdependent and might be organizationally structured together?

E 2. Among the components you Supply Chain/ Design Manufacturing Distribution Service Inventory identified above, in which is your firm the best in the industry? What makes VALU you sure you are the best? Who in Processes Processes Processes Processes Processes your industry is a close second? 3. Among the components you Consumers Weak Weak Weak with identified above, in which are you at parity with most of your competitors (in other words, you are not the best in the industry, but you are reasonably competitive in that area)? 4. Among the components you identified above, in which are you at a disadvantage relative to your Step 3: Recognize Your the corporate client directly, with no competitors (in other words, one Key Processes finished products in inventory. or more of your competitors are significantly better than you)? Once you have thought about the Now, note that when focusing on the 5. As you look at the future of the components of your value chain new consumer market, Dell will be industry, which component will in terms of grouping together become more important and which engaged in longer production runs interdependent business processes, will become less important for of the exact same product. The just- the next step is to distinguish which success within the industry? How are in-time supply chain is still critical, you positioned with regard to them? processes are key. Key processes are but the manufacturing process will the ones that are most critical to the change considerably. And distribution successful implementation of each to retail outlets changes this process component of the value chain. These so that Dell now will have significant processes must be executed almost inventory carrying costs. flawlessly to truly set you apart from your competitors. Step 4: Identify Your Key People Under Dell’s old business model, the key process seemed to be the just-in-time One of the first things to understand inventory process that ensured that with regard to an HR strategy is that the company had the right parts to firms do not have just one HR strategy, build the required computers to the they have multiple HR strategies required specifications, but little or no because they have different kinds of excess inventory. The manufacturing people who bring different value to the process was built around custom organization. assembly, with parts arriving at a A tool known as the human capital station for just the right computer. On architecture (seen previously in Figure the output side, the model shipped to 4 on page 5) classifies competencies

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held by different jobs or subgroups Mart and Best Buy, it needs sales Table 5: Identifying Key People of employees within jobs in terms people who have experience in of the value that they provide selling to retailers. to the firm’s strategy and the 1. If your value chain is relatively stable, • Because consumers are not as who are the people (either job groups uniqueness of the skills they possess. technologically proficient as or subgroups in a particular job) This is certainly a useful exercise corporate customers, Dell needs to who are most critical to effectively to go through in analyzing your executing each portion of the value organization. However, the ratings provide access to customer service chain? you gain may not differ much from technicians who can work with what you learned by examining your consumers to get their products 2. If your industry is changing and this value chain. Chances are that the most serviced. These needs are illustrated is influencing your value chain, who valuable and unique people are those in Figure 11. are the key people (again, either who are critical to the execution of the Table 5 provides some questions to job groups or subgroups of unique most important parts of your value help you think about the key people employees in a particular job) in the chain. If your industry is changing, you have and what additional key parts of the value chain that need to the key people will be in the areas of change? people you need to improve your the value chain that are becoming organization. 3. For each of those identified above, increasingly important. how unique are their skills? Can they Because design, distribution and be easily bought in the open labor Step 5: Build Your HR Strategy service are critical to the consumer market or are they hard to find? Are Once you have identified key people, market and Dell has little or no they people who need to be brought you can effectively develop and capability there, certain types of into the organization as employees or implement an HR strategy to ensure people must be brought in to build can you contract with them to gain that you have the right people with that capability. access to their skills? the right skills doing the right things • In the design stage, Dell needs in those jobs that are important innovative product designers who to the successful execution of the know about computers and are business strategy. well connected to fashion and Remember that studies of HR trends. strategy suggest that there are some • If Dell is going to begin selling best practices, including: through retail outlets such as Wal-

Figure 11: Dell’s People Needs

E Supply Chain/ Design Manufacturing Distribution Service Inventory VALU

Processes Processes Processes Processes Processes

Innovative Sales to Consumer Product Designers Retailers Service Techs

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• Recruiting large pools of applicants that enable you to be more selective. Figure 12: Dell’s HR Strategy

• Using valid selection tests to assess the skills of the applicants. E Supply Chain/ Design Manufacturing Distribution Service Inventory • Performing regular appraisals to distinguish levels of performance. VALU HR Strategy Processes • Giving regular formal and informal Recruitment: Training and Development: feedback. Innovative Where to find these people? What skills do they need trained? Product Selection: How do we orient them to Dell? • Providing substantial training to Designers What skills do they need and how to Performance Management: assess those skills? What competencies and outcomes upgrade or maintain skill levels. Rewards: should be evaluated? What is the market pay rate and what Information/Participation: • Offering competitive pay packages. types of incentives will attract and What information should be shared motivate them? with them and in what areas should • Tying monetary incentives (merit they participate? increases, bonuses, etc.) to high performance.

• Providing information on the company’s performance, Service representatives could be Nordstrom. Both companies sell competitors and industry. contracted through the Geek Squad clothing, but with different strategies. affiliated with Best Buy. Nordstrom tends to focus on upscale • Allowing employees to participate customers and seeks to establish long- With regard to assessment, the in decisions. term relationships through superior product designers might be assessed customer service. Gap focuses on the This list should now become an based on their creativity, the sales broader consumer market and sells analysis tool that requires time, effort representatives based on interpersonal stylish clothes, but with more of a and insight on your behalf. These skills and the service technicians self-service approach than Nordstrom. general best practices need to fit the based on their technical capability. needs of each job being analyzed. Both firms recruit, hire, train, evaluate Similarly, the rewards, performance and reward sales associates, but in In the Dell example, the company management, training and other very different ways. needs innovative product designers, components of the HR strategy will • Gap tends to hire younger, more sales representatives to retail outlets all exhibit best principles, but will be mobile employees who may stay and consumer service technicians. put into practice quite differently. Each of these jobs is quite different, with the company for a year or less An example of how to build the HR before moving on to a different and although the principles may be strategy for the innovative product retailer. They tend to be paid a common, the actual practices will differ. designers at Dell is presented in market rate, with little in the way of For example, with regard to Figure 12. pay for performance. recruitment, product designers • Nordstrom seeks more experienced might be recruited from Apple or Tailoring Your HR Strategy: sales associates, ones who want other firms that have particular Gap vs. Nordstrom a career in retail sales. In order competence in design. But sales How you put specific practices to attract and retain them, they representatives might be recruited into operation will differ across provide a highly commission-based from consumer goods firms such as business strategies. Think about two pay system that both motivates Proctor and Gamble or Unilever. retail companies, such as Gap and customer service and retains high-

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performing associates who would Differentiation of various types of International cultural and institutional find it difficult to make as much employees will require different differences will compound the need money at competitors. Remember: kinds of training and total for more diverse HR strategies. HR strategies that support business compensation, but, of course, if Even if HR principles remain the strategies emanate from an more resources are flowing toward same, they’ll have to be translated understanding of the competitive the talent, fewer resources are into action differently from environment, value chain, core available for everybody else. Your country to country. But again, business processes and key people or organization’s challenge will be pressure to save money and use competencies. Although the basic figuring out how to attract, select, standardized HR processes and commitment strategy principles will motivate and retain the majority of shared information technology be the same, how they are put into employees with fewer resources. operation may differ across business will be enormous. The double strategies and across jobs. pressure of creating more and more Doing More With Less complex and diverse HR strategies As an HR professional today, you and making them standardized Future Challenges are expected to play a more strategic throughout your organization role than ever before and develop will create many conflicts for the The Talent Problem better and better HR processes, but foreseeable future. Identifying and keeping “talent” is at the same time, you’re being asked becoming more and more important to reduce headcounts. The new Let the Challenges Energize You to CEOs and senior executives. workforce differentiation mentioned Ideally, these challenges will Firms increasingly are trying to above will probably require a variety energize, not frighten or demoralize differentiate “key people” from of new HR approaches—all with you. They highlight the complexity everyone else. But this can have fewer people on your team to help inherent in managing people, a some negative consequences, so design, develop and deliver them. the task of HR executives is to complexity that requires deep create and put in place specific expertise to both understand the Back to Globalization HR strategies for those employees problems and develop coherent labeled as talent—whether they are A world of increasing global responses. New challenges will only potential leaders, scientists who competition is the backdrop for both increase the value of strategic HR develop new products or others. the more differentiated workforce experts and the importance of HR in and fewer resources to deal with it. every organization’s success.

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Conclusion

There is no doubt that the HR strategy you adopt should help your organization’s employees contribute at the highest level possible and improve the bottom line. In helping employees improve their skills, attitudes and behavior and decrease turnover, you help your company meet its ultimate goals, including productivity, quality and customer satisfaction.

Although there is some anecdotal evidence—including the comparison of Sam’s Club and Costco—that may suggest that firms can find success taking the low road or “control” strategy, most of the research doesn’t bear this out.

The various HR strategies from which you can choose can also be thought of as principles for managing the workforce. As an HR professional, you can translate these principles into specific policies and practices for building the right skills, eliciting the right behaviors and achieving the right outcomes for your firm’s own particular business strategy.

Of course, what is right for one company may not be right for another. But certainly, if you can create a coherent HR strategy, you’re likely to be able to demonstrate how HR can add value to your firm in this transforming, globalizing marketplace.

21 The scores on people metrics today will largely influence a firm’s financial performance six to 12 months down the road. So the only way to manage financial metrics for the future is to focus on people, operations and customers today.

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Sources and Suggested Readings

HR Strategies and Employee Outcomes

Batt, R. (2002). Managing customer services. Human resource practices, quit rates, and sales growth. Academy of Management Journal, 45, 587-597.

The relationship between human resource practices, employee quit rates and organizational performance in the service sector is examined. Lower quit rates and higher sales growth were found in organizations that focused on high relative pay and employment security. The relationship between human resource practices and sales growth was partially mediated by quit rates. The customer segment served also moderated these relationships.

Collins, C. J., & Smith, K. G. (2006). Knowledge exchange and combination. The role of human resource practices in the performance of high-technology firms. Academy of Management Journal, 49, 544-560.

A theory of the effect of human resource practices on the organizational social climate conditions that facilitate knowledge exchange and combination as well as the resultant firm performance was developed and tested. Commitment- based human resource practices were positively related to the organizational social climates of trust, cooperation and shared coded language in a study of technology companies. A firm’s social climate was related to the firm’s capability to exchange and combine knowledge. This relationship predicted sales growth and revenue from new products and services.

Guest, D. (2002). Human resource management, corporate performance, and employee well-being: Building the worker into HRM. Journal of Industrial Relations, 44 (3), 335-358.

This article reviews criticisms of HRM strategies, mainly that they exploit workers to the benefit of the corporation. It examines a number of studies demonstrating positive reactions to high-performance/commitment HR strategies and then presents additional data showing how many of these practices are positively related to both work and life satisfaction.

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Tsui, A. S., Pearce, J. L., Porter, perceived organizational support in the contribution of human L. W., & Tripoli, A. M. (1997). and organizational commitment. resource systems to organizational Alternative approaches to the Human resource practices have an effectiveness. This study examines employee-organization relationship. effect on the relationship between the effect of industry characteristics Does investment in employees perceived organizational support on the importance and value of pay off? Academy of Management and organizational commitment or high-performance work systems. Journal, 40, 1089-1122. trust in management, as indicated by Results suggest that industry capital cross-level analyses using hierarchical intensity, growth and differentiation Four approaches to the employee- linear modeling. influence the impact of the human organization relationship are defined resource systems on productivity. from the employer’s perspective. In an empirical study of employees from 10 companies, support was HR Strategies and Gelade, G. A., & Ivery, M. (2003). found for the hypothesis that four Operational Outcomes The impact of human resource different types of relationships management and work climate exist. An overinvestment or on organizational performance. mutual investment relationship led Arthur, J. B. (1994). Effects Personnel Psychology, 56, 383-404. employees to perform better on core of human resource systems on tasks, demonstrate more citizenship manufacturing performance and The relationships between human behavior and express a higher level turnover. Academy of Management resource management, work climate of affective commitment compared Journal, 27, 670-687. and organizational performance in with those who worked in a quasi- the branch network of a retail bank Two types of human resource spot-contract or underinvestment are examined. Previous research on systems were identified, one using relationship. Controlling for group-level climate-performance and control and the other commitment. several variables that could affect HRM-performance relationships They were tested using specific performance and attitudes led to the is extended. The manner in which combinations of policies and same results. climate and HRM function as practices that are useful in predicting joint antecedents of business differences in performance and unit performance is examined. turnover. Commitment systems led to Work climate, human resource Whitener, E. M. (2001). Do higher productivity, lower scrap rates practices and business performance “high commitment” human and lower employee turnover than all have significant correlations. resource practices affect employee control systems. The relationship The common dependence on commitment? A cross-level analysis between turnover and manufacturing HRM factors cannot explain the using a hierarchical linear model. performance was moderated by correlations between climate and Journal of Management, 27, 515-535. human resource systems. performance, according to study The relationships among human results, and work climate partially resource practices, trust in mediates the effects of HRM management and organizational Datta, D. K., Guthrie, J. P., & practices on business performance, as commitment are explored relying Wright, P. M. (2005). Human consistent with a mediation model. on a cross-level paradigm and resource management and labor social exchange theory. Analysis productivity. Does industry matter? from a sample of credit union Academy of Management Journal, Ichniowski, C., Shaw, K., & employees demonstrates that trust 46, 135-145. Prennushi, G. (1997). The effects in management does have an Little research has been conducted of human resource management impact on the relationship between to support the growing interest practices on productivity: A study of

24 Human Resource Strategy

steel finishing lines. The American Youndt, M. A., Snell, S. A., Dean, J. results. The direct effects of HR Economic Review, 87, 291-313. W., & Lepak, D. P. (1996). Human practices on customer satisfaction were resource management, manufacturing not significant and near zero; however, The productivity effects of innovative strategy, and firm performance. the indirect effects were significant employment practices were Academy of Management Journal, 39, and large. The results supported a investigated using a sample from steel 836-867. social context model demonstrating production lines. Lines that used the impact of human resource innovative work practices, including The alternative views regarding the practices on organizational outcomes. incentive pay, teams, flexible job HR-performance relationship in Study limitations and future research assignments, employment security manufacturing settings of universal implications are also discussed. and training, realize considerably and contingency are examined in higher levels of productivity than this study. According to results, a lines using the traditional approach contingency approach to human that includes narrow job definitions, resource management is supported. HR Strategies and strict work rules, hourly pay and While a human-capital-enhancement- Financial Outcomes close supervision. These results focused HR system was directly are consistent with other recent related to multiple dimensions of theoretical models that stressed the operational performance (employee Bae, J., & Layler, J. J. (2000). importance of complementarities on productivity, machine efficiency and Organizational and HRM strategies work practices. customer alignment), further analysis in Korea. Impact on firm performance showed this main effect was mainly in an emerging economy. Academy of the result of linking human-capital- Management Journal, 43, 502-517. Jayaram, J., Droge, C., & Vickery, enhancing HR systems together with S. K. (1999). The impact of human a quality manufacturing strategy. A model was developed and resource management practices on The HR-performance relationship tested to examine the effects of manufacturing performance. Journal was also moderated by other organizational strategic variables, of Operations Management, 18, 1-20. manufacturing strategies. such as management values regarding human resource management and Data from Big 3 suppliers were used sources of competitive advantage. to propose and test a human resource Companies whose scores suggested management analysis framework. HR Strategies and they valued HRM and people as a Human resource management Customer Outcomes source of competitive advantage also practices and manufacturing had a higher probability of having performance relationships are high-involvement HRM strategies. examined. The proposed framework Rogg, K. L., Schmidt, D. B., Shull, Organizational strategic variables suggesting that human resource C., & Schmitt, N. (2001). Human positively affected firm performance. management practices can be grouped resource practices, organizational Companies had better performance into five distinct factors, four of them climate, and customer satisfaction. with high-involvement HRM associated with specific competitive Journal of Management, 27, 431-449. strategies. manufacturing dimensions of This study investigates the impact quality, flexibility, cost and time, organizational climate has on the was supported. These four HRM relationship between human resource factors are significantly related to practices and customer satisfaction their manufacturing performance in small businesses in the same dimensions. The fifth HRM factor is industry. The hypothesized mediated generic. relationship was supported by the

25 Human Resource Strategy

Becker, B., & Gerhart, B. (1996). Combs, J., Youngmei, L., Hall, Delery, J. E., & Doty, D. H. (1996). The impact of human resource A., & Ketchen, D. (2006). How Modes of theorizing in strategic management on organizational much do high-performance work human resource management: performance: Progress and practices matter? A meta-analysis Tests of universalistic, contingency, prospects. Academy of Management of their effects on organizational and configurational performance Journal, 39, 779-812. performance. Personnel Psychology, predictions. Academy of Management 59, 501-528. Journal, 39, 802-836. The authors describe the reasons human resource management Despite growing evidence that Many believe the field of strategic decisions influence organizational high-performance work practices human resource management performance in an important and (HPWPs) affect organizational does not have a solid theoretical unique way. They hope research performance, previous research has foundation. Strategic HRM literature on the link between HRM and led to findings that vary, making it uses three dominant modes of organizational performance will be difficult to estimate the size of the theorizing: universalistic, contingency advanced by this research forum. Key overall effect. This study uses meta- and configurational perspectives, as questions that have not been resolved analysis to estimate effect size as well described in this article. The authors are identified and suggestions are as determine if the effects are larger identified seven key strategic human made that are intended to assist for HPWP systems versus individual resource practices and developed researchers who are investigating practices, operational versus theoretical arguments consistent with these questions to build a larger financial performance measures, each perspective. According to the body of knowledge that will have and manufacturing versus service results, each perspective can be used implications in theory and practice. organizations. Four suggestions are to develop theoretical arguments offered that intend to shape future that explain significant variations of research to answer questions that are financial performance. Bhattacharya, M., Gibson, D. emerging. E., & Doty, D. H. (2005). The effects of flexibility in employee Huselid, M. A. (1995). The impact skills, employee behaviors, and Delaney, J. T., & Huselid, M. A. of human resource management human resource practices on (1996). The impact of human practices on turnover, productivity, firm performance. Journal of resource management practices and corporate financial performance. Management, 31, 622-640. on perceptions of organizational Academy of Management Journal, 38, performance. Academy of 635-673. The authors believe that flexibility of Management Journal, 39, 949-970. employee skills, employee behaviors The connection between high- and HR practices is an important Positive associations were found performance work practice systems component of HR flexibility and is between human resource management and firm performance is investigated related to high firm performance. practices, such as training and in this study. HPWPs have a financial Perceptual measures of HR flexibility staffing selectivity, and perceptual and statistically significant impact on and accounting measures of firm firm performance measures using both intermediate employee outcomes performance were used to support the National Organizations Survey. (turnover and productivity) and short- their prediction. Skill flexibility was Methodological issues for further and long-term measures of corporate the only component that contributed consideration in examining the financial performance, according to cost efficiency, while skill, behavior relationship between HRM systems to results from a national sample. and HR practice flexibility were and firm performance were suggested. The impact of HPWPs on firm strongly associated with firm financial performance is partially contingent performance. on interrelationships, and links with competitive strategy received limited support.

26 Human Resource Strategy

Snell, S. A., & Youndt, M. performance. Lower labor turnover simultaneous performance measures A. (1995). Human resource and higher profit per employee were controlled for, the correlations management and firm performance: were found to be associated with between these measures and future Testing a contingency model of the greater use of HRM, while performance were significantly executive controls. Journal of higher productivity was not as reduced. These authors argue that Management, 21, 711-737. determined by objective measures their results do not prove reverse of performance. The association is causation, but that they call into The relationship between human not significant after controlling for question the assumption that HR resource management controls that prior year’s performance. Subjective drives business performance. executives use and the changes that performance estimates suggest there occur in the financial performance is a strong association between of their firms was studied. Firm HRM and productivity and financial performance was higher when the performance. The association Links Between HR approach to HRM was based on between HRM and performance was Strategies and behavior control and executives had confirmed by this study, but it does Business Strategies complete knowledge of cause-effect not demonstrate that HRM causes relations, according to the results. higher performance. Output control HRM had neither Arthur, J. B. (1992). The link a direct nor a moderating effect between business strategy and on firm performance. An HRM Wright, P., Gardner, T., Moynihan, industrial relations systems in approach based on input control with L., & Allen, M. (2005). The HR- American steel minimills. Industrial & ambiguous standards of desirability performance relationship: Examining Labor Relations Review, 45, 488-506. led to higher performance. Executives causal direction. Personnel Psychology, need to be aware of a number of The suggestion that variations 58, 409-446. unforeseen events that could influence in workplace industrial relations their decision on their options of This study examines the extent to policies and practices are related to HRM and the effect these decisions which measures of HR practices variations in business strategies is tested. Workplace industrial relations will have on the firm performance, and organizational commitment and business strategies among U.S. according to the findings of this study. predict future performance more steel minimills were studied using strongly than past performance a cluster analysis of questionnaire predicts them. Using a sample of data. Findings suggest the industrial business units from a large food Causal Direction in the relations systems emphasize service firm, more than 3,000 HR Strategy-Performance either cost reduction or employee employees in core jobs across over Relationship commitment. The mills’ business 40 business units reported the HR strategies appear to stress either practices used in their jobs and manufacturing a large quantity of their organizational commitment. Guest, D. E., Michie, J., Conway, a few products at the lowest cost N., & Sheehan, M. (2003). Human These measures were related to possible or a strategy that is more resource management and corporate past, simultaneous and future flexible based on factors other than performance in the UK. British measures of operational and financial cost. An important relationship Journal of Industrial Relations, 41, performance taken from company between the workplace industrial 291-314. archives. The results indicated that relations systems type and the choice both HR practice and commitment of business strategy in these mills Objective and subjective measures were strongly related to was found after further investigation. performance measures and later unit performance. However, cross-sectional and longitudinal they were also strongly related to data were used to explore the past performance, and when past or relationship between HRM and

27 Don’t miss these other Effective Practice Guidelines reports from the SHRM Foundation:

Retaining Talent: A guide to analyzing and managing employee turnover One of the most critical issues facing organizations is how to retain the employees they want to keep. This report will help you to analyze and manage employee turnover in your organization. Learn why employees leave, why they stay and how to develop an effective retention management plan.

Developing Leadership Talent: A guide to succession planning and leadership development Effective succession planning involves more than just a replacement planning process. It also includes a comprehensive employee development system. Learn how to maximize leadership talent in your organization.

Employee Engagement and Commitment: A guide to understanding, measuring and increasing engagement in your organization

Employees who are engaged in their work and committed to their organizations give you crucial competitive advantages-including higher productivity and lower employee turnover. This report will help you separate fact from hype regarding engagement. Learn the specific HR practices that will help you to increase employee engagement in your own organization.

Visit www.shrm.org/foundation and select “SHRM Foundation Products” to download these reports free.

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For more than 40 years, the SHRM Foundation has been committed Supporting the SHRM “ to advancing and supporting the human resource profession. Foundation is important because it provides a The Foundation relies on generous donations from HR professionals strong legacy for future HR like you to support innovative academic research, scholarships, professionals and solidifies educational programs and practitioner resources. As an independent, financial security for the nonprofit affiliate of SHRM, the Foundation is not funded by SHRM continued advancement membership dues. of our profession.” —Tina M. Lynch, SPHR With your generous support, the SHRM Foundation can do the District Director, following annually: Pennsylvania SHRM State Council ■■ Fund $750,000 in research grants. Past President, ■■ Produce two new Effective Practice Guidelines reports to make Pittsburgh Human research findings easily accessible for HR practitioners. Resources Association ■■ Award $150,000 in education and certification scholarships to professional and student SHRM members. ■■ Produce a new educational DVD. ■■ Explore the knowledge gaps uncovered in a recent study on human capital challenges and identify next steps to address these.

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