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C H A P T E R
2 Strategic Human
Resource Management
L E A R N I N G O B J E C T I V E S
Afte r reading th is chapter, you shou ld be able to:
LO 2-1 Describe the differences between strategy formulation and strategy implementation, page 74
LO 2 -2 List the components of the strategic management process, page 75
LO 2 -3 Discuss the role of the HRM function in strategy formulation, page 77
LO 2 -4 Describe the linkages between HRM and strategy formulation, page 78
LO 2 -5 Discuss the more popular typologies of generic strategies and the various HRM practices
associated with each, page 83
LO 2 -6 Describe the different HRM issues and practices associated with various directional
strategies, page 92
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E n t e r t h e W o r l d o f B u s i n e s s
HP's New Strategy
n the face o f increasing co m pe tition, the largest
roducer of PCs and laptops, Hewlett Packard,
ecently decided to get out of the PC business
ltogether. After ou tdue ling Dell to become
he world's largest manufacturer of computers
HP shipped over 64 million PCs in 2010), the
ompany has announced its intention to spin or
ell its personal-systems group, a division that
rought in $40.74 billion in sales in 2010. CEO
eo Apotheker concluded that, "to be successful
the cons um er device business we wo uld have
ad to inves t a lot o f capital and I believe we can
nvest it in better places."
These investments seem to be taking HP further
nto m arkets that targ et businesses as customers.
he thinking is that such businesses provide
gher potential profit margins. For instance, in
008 the company acquired the tech services
ompany Electronic Data Systems for $13.9 billion
an effort to compete against IBM's tech-services
vision. In 2010 it also acquired 3Com in an
ffort to compete with Cisco Systems' network-
quipment business. HP recently announced a
10.25 billion purchase of British enterprise soft
are company Autonomy, which will compete
gainst Mr. Ap othe ker's form er e mp loyer, SAP.
Industry analysts agree that the conditions of
e PC market make it a business which is hard to
for Chir>a, M
i m
run. Margins for PCs run in the 2-6% range, much
lower than HP thinks it can generate by focusing
on software and services.
Interestingly, this is not the first tim e th at the
markets have questioned the wisdom of HP's
strategy. Ten years ago HP made headlines for
making a controversial $25 billion acquisition.
What was the acquisition? Ironically in light of
today's strategy, HP bought PC maker Compaq
in an effort to strengthen its position in the PC
market.
SOURCE: From Y. Kane and N. Wingfield, "Pioneering Firm Bows to
Post-PC World," Wall Street Journal, August 19, 2011. Reproduced
with permission of Dow Jones & Company, Inc. via Copyright Clear
ance Center.
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7 2 P A R T I The Human Resource Environment
IntroductionAs the HP exam ple just illustrated, business organizations exist in an environm ent of
competition. They can use a number of resources to compete with other companies.
These resources are physical (such as plant, equipment, technology, and geographic
location), organizational (the structure, planning, controlling, and coordinatingsystems, and group relations), and human (the experience, skill, and intelligence
of employees). It is these resources under the control of the company that provide
competitive advantage.1
The goal of strategic management in an organization is to deploy and allocate
resources in a way that gives it a competitive advantage. As you can see, two of the
three classes of resources (organizational and human) are directly tied to the human
resource man agem ent function. As C hap ter 1 pointed out, the role of hum an resource
management is to ensure that a company’s human resources provide a competitive
advantage. Ch apter 1 also pointed out some of the m ajor comp etitive challenges that
companies face today. These challenges require companies to take a proactive, strate-
gic approach in the marketplace.
To be maximally effective, the HRM function must be integrally involved in the
com pany ’s strategic managem ent process.2 Th is means that human resource managers
should (1 ) hav e input into the strategic plan, bo th in terms of peoplerelated issues
and in terms of the ability of the human resource pool to implement particular stra-
tegic alternatives; (2) have specific knowledge of the organization’s strategic goals;
(3 ̂ know what types of employee skills, behaviors, and attitudes are need ed to support
the strategic plan; and (4) develop programs to ensure that employees have those
skills, behaviors, and attitudes.
We begin this chapter by discussing the concepts of business models and strat-
egy and by depicting the strategic management process. Then, we discuss the levelsof integration between the HRM function and the strategic management process in
strategy formulation. Next, we review some of the more common strategic models
and, within the context of these models, discuss the various types of employee skills,
behaviors, and attitudes, and the ways HRM practices aid in implementing the strate-
gic plan. Finally, we discuss the role of HR in creating competitive advantage.
O What Is a Business Model?A business mod el is a story of how the firm will create va lue for customers and, more
important, how it will do so profitably. We often hear or read of companies that have“transformed their business model” in one way or another, but what that m eans is not
always clear. To understand this, we need to grasp a few basic accounting concepts.
First, fixed costs are generally considered the costs that are incurred regardless of
the number of units produced. For instance, if you are producing widgets in a factory,
you have the rent you pay for the factory, depreciation of the machines, the utilities,
the property taxes, and so on. In addition , you generally have a set number of employ-
ees who work a set number of hours with a specified level of benefits, and while you
might be able to vary these over time, on a regular basis you pay the same total labor
costs whether your factory runs at 70% capacity or 95% capacity.
Second, you have a number of variable costs, which are those costs that vary
directly with the units produced. For instance, all of the materials that go into the
widget might cos t a total of $10, which m eans that you have to charge a t least $10 per
widget, or you cannot even cover the variable costs of production.
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C H A P T E R 2 Strategic Human Resource Management 7 3
Third is the concept of “contribution margins,” or margins. Margins are the differ-
nce between what you charge for your product and the variable costs of that product.
hey are called contribution margins because they are what contributes to your abil-
ty to cover your fixed costs. So, for instance, if you charged $15 for each w idget, your
ontribution m argin would be $5 ($15 price $10 variable cost).
Fourth, the gross margin is the total amount of margin you made and is calculated as
he number of units sold times the contribution margin. If you sold 1,000,000 units, your
ross margin would then be $5,000,000. Did you make a profit? Tha t depends. Profit refers
o what is left after you have paid your variable costs and your fixed costs. If your gross
margin was $5,000,000, and your fixed costs were $6,000,000, then you lost $1,000,000.
GM'S ATTEMPT TO SURVIVE
et’s look at how a business model plays out with the recent challenges faced by
General Motors (GM). Critics of GM talk about the fact that GM has higher labor
osts than their foreign competitors. T hi s is true, but misleading. G M ’s average hourly
wage for their existing workforce is reasonably competitive. However, the two aspectshat make GM uncompetitive are their benefit costs (in particular, health care) and
most important, the cost o f their legacy workforce.
A legacy workforce describes the former workers (i.e., those no longer working for
he company) to whom the firm still owes financial obligations. GM and the United
Auto Workers (UAW) union have negotiated contracts over the years that provide
ubstantial retirement benefits for former GM workers. In particular, retired GM
workers have defined benefit plans that guarantee a certain percentage of their final
preretirement) salary as a pension payment as long as they live as well as having the
ompany pay for their health insurance. In addition, the contract specifies that work-
rs are entitled to retire at full pensio n after 30 years of service.This might have seemed sustainable when the projections were that GM would
ontinue growing its sales and m argins. However, since the 1970s, foreign competitors
ave been eating away at G M ’s market share to the extent that GM ’s former 50% of
he market has shrunk to closer to 20%. In addition, with the current economic crisis,
he market itself has been shrinking, leaving GM with a decreasing percentage of a
ecreasing market. For instance, in December of 2005, GM sold 26% of the cars in the
lobal market of almost 1.5 million, but by January of 2009, the market had shrunk
o 656,000, and GM was down to 20% of those sales. Thus, in addition to the legacy
workforce, they had a significant number of plants with thousands of employees that
were completely unnecessary, given the volum e of cars GM can produ ce and sell.34
If you look at Figure 2.1, you’ll see that the solid lines represent the old GM business
model, which was based on projections that GM would be able to sell 4 million units at a
easonably high margin, and thus completely cover its fixed costs to make a strong profit.
owever, the reality was that its products didn’t sell at the higher prices, so to try to sell
million vehicles, GM offered discounts, which cut into its margins. When GM ended
p selling only 3.5 million vehicles, and those were sold at a lower margin, the company
ould not cover its fixed costs, resulting in a $9 billion loss in 2008 (this is illustrated by
he dotted blue line in the figure). So , when G M refers to the “ redesigned business model,”
hat it is referring to is a significant reduction in fixed costs (through closing plants and
utting workers) to get the fixedcost base low enough (.the dotted red line) to be able to
ill be profitable selling fewer cars at lower margins (again, the dotted blue line).One can easily see how, given the large component that labor costs are to most
ompanies, reference to business models almost inevitably leads to discussions of
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7 4 P A R T 1 The Human Resource Environment
figure 2.1
An Illustration of a
Business Model forGM
labor costs. These can be the high cost associated with current unionized employees
in developed countries within North America or Europe or, in some cases, the high
costs associated with a legacy workforce. For instance, the Big Three automakers have
huge numbers of retired or la idoff workers for whom they still have the liability of
paying pensions and health care benefits. This is a significant component of their
fixedcost base, which makes it difficult for them to compete with other automakers
that either have fewer retirees to cover or have no comparable costs because their
home governments provide pensions and health care.
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C H A P T E R 2 Strategic Human Resource Management 7 5
care off competitors, how to keep competitors weaker, how to react to and influence
ending legislation, how to deal with various stakeho lders and special interest groups,
ow to lower production costs, how to raise revenues, what techn ology to implement,
nd how many and what types of people to employ. Each of these decisions may pres-
nt competitive challenges that have to be considered.
Strategic management is more than a collection of strategic types. It is a process
r analyzing a company’s competitive situation, developing the company’s strategic
oals, and devising a plan of action and allocation of resources (human, organiza-
onal, and physical) that will increase the likelihood of achieving those goals. This
nd of strategic approach sho uld be emphasized in hum an resource managem ent. H R
anagers should be trained to identify the com petitive issues the com pany faces with
gard to human resources and think strategically about how to respond.
Strategic human resource management (S H RM ) can be thought of as “the pat-
rn of planned human resource deployments and activities intended to enable an
rganization to achieve its goals.”8 For example, manv firms have developed inte-
ated manufacturing systems such as advanced manufacturing technology, justin-
me inventory control, and total quality management in an effort to increase theirompetitive position. However, these systems must be run by people. S H RM in these
ses entails assessing the employee skills required to run these systems and engaging
HRM practices, such as selection and training, that deve lop these skills in employ-
s.9 To take a strategic approach to HR M, we must first understand the role of HR M
the strategic man agem ent process.
OMPONENTS OF THE STRATEGIC MANAGEMENT PROCESS
he strategic management process has two distinct yet interdependent phases: strategy
rmulation and strategy implementation. During strategy formulation the strategicanning groups decide on a strategic direction by defining the company’s mission and
als, its external opportunities and threats, and its internal strengths and weaknesses.
hey then generate various strategic alternatives and compare those alternatives’ abil-
y to achieve the company’s mission and goals. During strategy implementation, the
ganization follows through on the chosen strategy. This consists of structuring the
ganization, allocating resources, ensuring that the firm has skilled employees in place,
d developing reward systems that align employee behavior with the organization’s
rategic goals. Both of these strategic management phases must be performed effec-
vely. It is important to note that this process does not happen sequentially. A s we will
scuss later with regard to emergent strategies, this process entails a con stant cycling offormation and decision making. Figure 2.2 presents the strategic m anagem ent process.
In recent years organizations have recognized that the success of the strategic
anagement process depends largely on the extent to which the HRM function is
volved.10
NKAGE BETWEEN HRM AND THE STRATEGIC ANAGEMENT PROCESS
he strategic choice really consists of answering questions about competition— that
how the firm will compete to achieve its missions and goals. These decisions con-t of addressing the issues of where to compete, how to compete, and with what to
mpete, which are described in Figure 2.3.
Strategic Human
Resource
Management
(SHRM)
A pa tte rn o f planne dhuman resource
deployments and
activities intend ed
to enable an organi
zation to achieve its
goals.
LO 2-2List the components of
the strategic management
process.
Strategy
Formulat ion
The process of
deciding on a stra
tegic direction by
defining a com
pany's mission and
goals, its external
opp ortuni t ies and
threats, and its inter
nal strengths and
weaknesses.
Strategy
Implementat ion
The process of
devising structures
and allocating
resources to enact
the strategy a com
pany has chosen.
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f i g u r e
2 .
2
A
M o d e l o f t h e
S t r a t e g i c
M a n a g e m
e n t
P r o c e s s
76
E m e r g e n t
s t r a t e g i e s
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C H A P T E R 2 Strategic Human Resource Management 7 7
1. Wh ere to com pete?
In what market or markets (industries, products, etc.) wi l l we compete?
2. How to compete?
On w hat cr i ter ion o r di f ferent iat ing character is t ic (s) wil l we c om pete? Cost?
Quali ty? Reliabi l ity? Delivery?
3. With w hat wi l l we com pete?Wh at resources wi l l al low us to beat our c om pet i t ion?
How wi l l we acquire, develop, and deplo y those resources to com pete?
figure 2.3
Strategy—Decisions
about Competition
Altho ugh these decisions are all important, strategic decision makers often pay less
attention to the “with what will we compete” issue, resulting in poor strategic deci-
ions. For example, PepsiCo in the 1980s acquired the fastfood chains of Kentucky
Fried Chicken, Taco Bell, and Pizza Hut (“where to compete” decisions) in an effort
o increase its customer base. However, it failed to adequately recognize the differ-
ences between its existing workforce (mostly professionals) and that of the fastfoodindustry (lower skilled people and high schoolers) as well as its ability to manage such
a workforce. This was one reason that PepsiCo , in 1998, spun off the fastfood chains.
In essence, it had made a decision about where to compete without fully understand-
ing what resources would be needed to compete in that market.
Boeing illustrates how failing to address the “with what” issue resulted in problems
in its “how to com pete” decisions. W hen the aerospace firm’s consumer products divi-
sion entered into a price war with Airbus Industrie, it was forced to move away from
its traditional customer service strategy toward emphasizing cost reduction .11 Th e
strategy was a success on the sales end as Boeing received large numbers of orders for
aircraft from firms such as Delta, Continental, Southwest, and Singapore Airlines.
However, it had recently gone through a large workforce reduction (thus, it didn’thave enough people to fill the orders) and did not have the production technology to
enable the necessary increase in productivity. The result of this failure to address “with
what will we compete” in making a decision about how to compete resulted in the
firm’s inability to meet delivery deadlines and the ensuing penalties it had to pay to its
customers. The end result is that after all the travails, for the first time in the history of
he industry, Airbus sold more planes than Boeing in 2003. Luckily, Boeing was able to
overcome this stumble, in large part because o f a num ber of stumbles on the part of its
chief rival, Airbus. Boeing’s 787 Dreamliner has generated a number of orders, while
Airbus’s behemoth A380 has been beset by a number of production delays, enabling
Boeing to regain its market lead. The “ Co m peting through Globalizatio n” box illustra-
es how firms face a “with what to compete” question in India in terms of talent.
ROLE OF HRM IN STRATEGY FORMULATION
As the preceding examp les illustrate, often the “with what will we com pete” questions
present ideal avenues for HRM to influence the strategic management process. This
might be through either limiting strategic options or forcing thoughtfulness among
he executive team regarding how and at what cost the firm might gain or develop the
human resources (people) necessary for such a strategy to be successful. For example,
HRM executives at PepsiCo could have noted that the firm had no expertise in man-
ging the workforce of fastfood restaurants. The limiting role would have been for
hese executives to argue against the acqu isition because of this lack of resources. O n
LO 2-3Discuss the role of the
HRM function in strategy
formulation.
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7 8 P A R T 1 The Human Resource Environment
LO 2-4Describe the linkages
between HRM and strategy
formulation.
figure 2.4
Linkages of Strategic
Planning and HRM
the other hand, they might have influenced the decision by educating top execu tives
as to the costs (of hiring, training, and so on ) a ssociated with gaining people who had
the right skills to manage such a workforce.
A firm’s strategic management decisionmaking process usually takes place at its top
levels, with a strategic planning group consisting o f the ch ief executive officer, the chief
financial officer, the president, and various vice presidents. However, each component
of the process involves peoplerelated business issues. Therefore, the HRM function
needs to be involved in each of those components. One recent study of 115 strategic
business units within Fortune 500 corporations found that between 49 and 69% of the
companies had some link between H RM and the strategic planning process.12 However,
the level o f linkage varied, and it is important to understand these different levels.
Four levels of integration seem to exist between the H RM function and the strategic
managem ent function: administrative linkage, oneway linkage, twoway linkage, and
integrative linkage.13 These levels of linkage will be discussed in relation to the differ-
ent com ponents of strategic managem ent. T he linkages are illustrated in Figure 2.4.
Admin istrative LinkageIn admin istrative linkage (the lowest level of integration ), the HRM function ’s atten -tion is focused on daytoday activities. The HRM executive has no time or opportu-
nity to take a strategic outlook toward HRM issues. The company’s strategic business
planning function exists without any input from the HRM department. Thus, in this
level of integration, the HRM department is completely divorced from any compo-
nent of the strategic management process in both strategy formulation and strategy
implementation. The department simply engages in administrative work unrelated to
the company’s core business needs.
One-Way LinkageIn oneway linkage, the firm’s strategic business plann ing function develop s the stra-
tegic plan and then informs the HRM function of the plan. Many believe this level
of integration constitutes strategic H RM — that is, the role of the HR M function is to
design systems and/or programs that implem ent the strategic plan. Altho ugh oneway
A dm in is trat ive
l inkage
Strategic
planning
HRM
funct ion
___ JSOURCE: Adapted from K. Golden and V. Ramanujam, "Between a Dream and a
Nightmare: O n the Integration o f the Human Resource Function and the Strategic
Business Planning Process," Human Resource Management 24 (1985), pp. 429-51.
One-way
linkage
HR M
funct ion
J
Two-way
linkage
Strategic
planning
i rHR M
funct ion
In tegrat ive
linkage
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c h a p t e r 2 Strategic Human Resource Manag emen t 7 9
linkage does recognize the importance of human resources in implementing the stra-
tegic plan, it precludes the company from considering human resource issues while
formulating the strategic plan. This level of integration often leads to strategic plans
that the company cannot successfully implement.
Two-Way LinkageTwoway linkage allows for consideration of human resource issues during the strategy
formulation process. This integration occurs in three sequential steps. First, the stra-
tegic planning team informs the HRM function of the various strategies the company
is considering. Then HRM executives analyze the human resource implications of
the various strategies, presenting the results of this analysis to the strategic planning
team. Finally, after the strategic decision has been made, the strategic plan is passed
on to the HRM executive, who develops programs to implement it. The strategic
planning function and the HRM function are interdependent in twoway linkage.
Integrative LinkageIntegrative linkage is dynamic and multifaceted, based on continuing rather thansequential interaction. In most cases the HRM executive is an integral member of the
senior management team. Rather than an iterative process of information exchange,
companies with integrative linkage have their HRM functions built right into the
strategy formulation and implementation processes. It is this role that we will discuss
throughout the rest of this chapter.
Thus, in strategic HRM, the HRM function is involved in both strategy formu-
lation and strategy implementation. The HRM executive gives strategic planners
information about the company’s human resource capabilities, and these capabilities
are usually a direct function o f the H RM prac tices.14 Th is information about hum an
resource capabilities helps top managers choose the best strategy because they canconsider how well each strategic alternative would be implemented. Once the stra-
tegic choice has been determined, the role of HRM changes to the development and
alignment o f HRM practices that will give the company employees having the n eces-
sary skills to implem ent the strategy.15 In addition , H RM practices m ust be designed
to elicit actions from employees in the comp any .16 In the next two sec tions of this
chapter we show how HRM can provide a competitive advantage in the strategic
management process.
Strategy FormulationFive major components of the strategic management process are relevant to strategyform ulation.17 Th ese co mpo nents are depicted in Figure 2.5. T he first comp onen t is
the organization’s mission. The mission is a statement of the organization’s reason
for being; it usually specifies the customers served, the needs satisfied and/or the
values received by the customers, and the technology used. The mission statement is
often accompanied by a statement of a company’s vision and/or values. For example,
Table 2.1 illustrates the mission and values of Merck & Co ., Inc.
An organization’s goals are what it hopes to achieve in the medium to longterm
future; they reflect how the mission will be operationalized. The overarching goal
of most profitmaking companies in the United States is to maximize stockholder
wealth. But companies have to set other longterm goals in order to maximize stock-
holder wealth.
Goals
What an organi
zation hopes to
achieve in the
medium- to long
term future.
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8 0 P A R T 1 The Human Resource Environment
figure 2.5
Strategy Form ulation
External Analysis
Examining the orga
nization's op erating
envi ronment to
identi fy strategic
opp ortuni t ies and
threats.
Internal Analysis
The process of
examining an orga
nization's stren gths
and weaknesses.
Strategic Choice
The organization's
strategy; the ways
an organization wil lattem pt to ful f il l i ts
mission and achieve
its long-term goals.
External
analysis
Oppor t un i t i es
Threats
Mission Goals Strategic
choice
j
Internalanalysis
Strengths
Weaknesses
HR input
SOURCE: Adapted from K. Golden and V. Ramanujam, "Between a Dream and a Nightmare,"
Human Resource Management 24 (1985), pp. 429-51.
External analysis consists of examining the organization’s operating environ-
ment to identify the strategic opportunities and threats. Examples of opportunities
are customer markets that are not being served, technological advances that can aid
the company, and labor pools that have not been tapped. Threats include potential
labor shortages, new competitors entering the market, pending legislation that might
adversely affect the company, and competitors’ technological innovations.
Internal analysis attem pts to identify the organization’s strengths and weaknesses.
It focuses on the quantity and quality of resources available to the organization—
financial, capital, technological, and human resources. Organizations have to hon-estly and accurately assess each resource to decide whether it is a strength or a
weakness.
External analysis and internal analysis combined constitute what has come
to be called the SW O T (strengths, weaknesses, opportunities, threats) analysis.
Table 2.2 shows an examp le of a SW O T analysis for Go ogle. A fter going through
the SW O T an alysis, the strategic plannin g team has all the information it needs to
generate a number of strategic alternatives. The strategic managers compare these
alternatives’ ability to attain the organization’s strategic goals; then they make their
strategic choice. The strategic choice is the organization’s strategy; it describes the
ways the organization will attempt to fulfill its mission and achieve its longterm
goals.Many of the opportunities and threats in the external environment are people
related. W ith fewer and fewer highly qualified individuals e ntering the labor market,
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c h a p t e r 2 Strategic Human Resource Management 8 1
MISSION STATEMENT
Merck & Co., Inc. is a leading research-driven pharmaceutical products and services
company. Merck discovers, develops, manufactures and markets a broa d range of
innovative products to improve human and animal health. The Merck-Medco Managed
Care Division manages pharm acy bene fits for more than 40 m illion Am ericans, encouraging the ap propriate use of medicines and providing disease m anagem ent programs.
Our Miss ion
The mission o f Merck is to prov ide society with sup erior produ cts and services—
innovations and solut ions that imp rove the qua l i ty o f l ife and sat isfy custom er
needs— to prov ide em ployees with meaningful work and advancement
op po rtunit ies and investors with a superior rate of return.
Ou r Values
1. Ou r bus iness is preserv ing and im pro v ing hum an l i fe. A ll o f ou r actio ns must
be measured by our success in achieving this goal. We value above all our ability
to serve everyone who can benefi t f rom the appropriate use of our products and
services, thereb y p roviding lasting con sum er sat isfaction.
2. We are commi t ted to the h ighes t s tandards o f e th ics and in tegr i t y . We are
responsible to ou r customers, to Merck emp loyees and the ir famil ies, to the envi
ronm ents we inhabit , and to the societ ies we serve worldwide . In discharging our
responsibi l it ies, we do not take professional o r ethical shortcuts. O ur interact ions
with all segm ents of society must ref lect the high standards we profess.
3. We are ded icated to the h ighes t level o f sc ient if i c exce l lence and com mi t
our research to im prov ing human and an imal hea l th and the q ua l i t y o f l i fe .
We strive to iden t i fy the mo st cri tical needs o f consumers and customers; we
devo te ou r resources to m eet ing those needs.
4. We exp ec t pro f i t s , but on ly from w ork th at sat i s fies cus tom er needs and
ben ef i t s hum ani ty . O ur abi l ity to m eet our respon sibil it ies dep end s on ma intain
ing a f inancial po sit ion tha t invites investme nt in lead ing-ed ge research and thatmakes possible effective delivery of research results.
5. We recognize that th e ab i l i t y to exce l— to mos t co mp et i t ive ly m eet society' s
and cus tomers ' needs— depend s on the in tegr i ty , kno wled ge, imaginat ion,
sk i l l , d ivers i ty , and teamwork of employees, and we value these qual i t ies most
highly. To this end, we strive to create an environ m ent o f mutual respect, encour
agement, and teamwork—a working environment that rewards commitment and
performance and is responsive to the needs of em ployees and their families.
SOURCE: Courtesy of Merck.
rSTRENGTHS
1WEAKNESSES
Expanding Liquidity Issues with C hinese Gov ernm ent
Operat ional Eff ic iency Dependence on Advert is ing Segment
Broad Range of Services Portfolio Losses at YouTube
OPPORTUNITIES THREATS
Growing Demand for On l ine Video Weak Economic O ut look
Grow th in Internet Ad vert is ing Ma rket Invalid Cl icks
Inorganic Grow th Microsoft-Yaho o! Deal
table 2.1
Merck & Co.'s
Mission and Values
table 2.2
SWO T Analysis for
Google, Inc.
SOURCE: GlobalData.
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COMPETING THROUGH GLOBALIZATION
A Talent Shortage among Millions of Graduates
We often hear
about how many
firms have moved call center
and technology operations to
India because of the large sup
ply of college grad uate talent.
For example, universities in
India have seats fo r 1.5 million
engineering students, up from
390,000 in 2000. However,
according to assessment tests
administered by the National
Associat ion o f Software and
Services Com panies, 75% o ftechnical graduates and 85% of
general graduates are unem
ployable in the information tech
nolog y and call ce nter industries.
The problem is multifaceted.
First, because faculty are paid so
low, they do not put much effort
into teaching. For instance,
Pradeep Singh, a 23-year-old
engineering graduate, quickly
learned that they need not go
v______________________________
to classes. "The faculty take it
very casually, and the students
take it very casually, like they've
all agreed n ot to be bothered
too much," he says.
In addit ion, cheating, often
encouraged by the graders, is
widespread. For instance, Dee-
pack Sharma says he failed sev
eral exams unti l he found the
secret: putting his cell phone
number on his exam. After
doing this he says he got a call
f rom the examiner who of feredto pass him and his friends if
they paid 10,000 rupees each
(about $250). Af ter ge t t ing the
money toge ther and pay ing
the examiner, they all passed
the test. He says, "I feel almost
certain th at i f I d idn ' t pay the
money, I w ou ld have failed the
exam again."
Large Indian companies
such as W ip ro a nd Tata have
attempted to br idge the wide
gap between job requirements
and skil ls of graduates through
developing significant internal
training programs. For instance,
Tata puts rec ent gradu ates
though a 72-day training pro
cess and Wipro has developed
a 90-day program.
As human capita l (or ta l
ent) continues to becom e
one o f the critical assets that
companies must manage to
be competi t ive, f i rms doingbusiness in India may have
to think twice before they let
the idea of mill ions of college
graduates entice them to make
investments.
SOURCE: From G. Anand, "India Grad
uates Millions, but Too Few Are Fit to
Hire," Wall Street Journal Online, April
6, 2011. Reproduced with permission of
Dow Jones & Company, Inc. via Copy
right Clearance Center.
organizations compete not just for customers but for employees. It is H R M ’s role to
keep close tabs on the externa l env ironm ent for human resource—related oppo rtuni-
ties and threats, especially those directly related to the HRM function: potential
labor shortages, competitor wage rates, government regulations affecting employ-
ment, and so on. For example, as discussed in Chapter 1, U.S. companies are find-
ing that more and more high school graduates lack the basic skills needed to work,
which is one source of the “hu m an cap ital sho rtage .”18 However, no t recognizing
this environm ental threat, m any compan ies have encouraged the exit of older, more
skilled workers while hiring less skilled younger workers who require basic skills
training.19 In fact, the “C om peting through G lobaliza tion” box illustrates how a skill
shortage exists in India, in spite o f the huge number o f college graduates.
An analysis of a company’s internal strengths and weaknesses also requires
input from the HRM function. Today companies are increasingly realizing that
their human resources are one of their most important assets. In fact, one estimate
is that over onethird of the total growth in U.S. gross national product (GNP)
between 1943 and 1990 was the result of increases in human capital. A company’s
failure to con sider the stren gths and w eakn esses £>f its workforce may resu lt inits choosing strategies it is not capable of pursuing.20 However, some research
8 2
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C H A P T E R 2 Strategic Human Resource Management 8 3
has demon strated that few comp anies have achieved this level of linka ge.21
For example, one company chose a strategy of cost reduction through techno-
ogical improvements. It built a plant designed around a computerintegrated
manufacturing system with statistical process controls. Although this choice may
eem like a good one, the company soon learned otherwise. It discovered that its
employees could not operate the new equipment because 25% of the workforce
was function ally illit era te.22
Thus, with an integrative linkage, strategic planners consider all the peoplerelated
business issues before making a strategic choice. These issues are identified with regard
o the mission, goals, opportunities, threats, strengths, and weaknesses, leading the
trategic planning team to make a more intelligent strategic choice. Although this
process does not guarantee success, companies that address these issues are more likely
o make choices that will ultimately succeed.
Recent research has supported the need to have HRM executives integrally
nvolved in strategy formulation. One study of U.S. petrochemical refineries found
hat the level of HRM involvement was positively related to the refinery manager’s
valuation of the effectiveness of the H RM func tion.23 A second study of man ufac-uring firms found that HRM involvement was highest when top managers viewed
mployees as a strategic asset and assoc iated them with reduced turnover.24 However,
both studies found that HRM involvement was unrelated to operating unit financial
performance.
Research has indicated that few companies have fully integrated HRM into the
trategy formulation process.25 As we’ve mentioned before, companies are begin-
ning to recognize that in an intensely competitive environment, managing human
esources strategically can provide a competitive advantage. Thus, companies at the
administrative linkage level will either become more integrated or face extinct ion. In
ddition, companies will move toward becoming integratively linked in an effort to
manage human resources strategically.It is of utmost im portance th at all peoplerelated business issues be considered dur-
ng strategy formulation. These issues are identified in the HRM function. Mecha-
nisms or structures for integrating the HRM function into strategy formulation may
help the strategic planning team make the most effective strategic choice. Once that
trategic choice is determined, HRM must take an active role in implementing it.
This role will be discussed in the next section.
Strategy Implementation
After an organization has chosen its strategy, it has to execu te th at strategy— make itome to life in its daytoday workings. The strategy a company pursues dictates cer-
ain HR needs. For a company to have a good strategy foundation, certain tasks must
be accomplished in pursuit of the company’s goals, individuals must possess certain
kills to perform those tasks, and these individuals must be motivated to perform their
kills effectively.
The basic premise behind strategy implementation is that “an organization has a
variety of structural forms and organizational processes to choose from when imple-
menting a given strategy,” and these choices make an economic difference.26 Five
mportant variables determine success in strategy implementation: organizational
tructure; task design; the selection, training, and developm ent o f people; reward sys-
ems; and types of information and information systems.
LO 2-5Discuss the more populartypologies of generic
strategies and the various
HRM practices associated
with each.
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8 4 P A R T 1 The Human Resource Environment
figure 2.6
Variables to
Be Considered
in Strategy
Implementat ion
As we see in Figure 2.6, HRM has primary responsibility for three of these five
implementation variables: task, people, and reward systems. In addition, HRM can
directly affect the two remaining variables: structure and information and decision
processes. First, for the strategy to be successfully implemented, the tasks must be
designed an d grouped into jobs in a way that is efficient and effe ctive.27 In Chap ter
4 we will exam ine how this can be done through the processes of job analysis and
jo b des ign. Second, the HRM fu nction must ensure th at the organizat ion is staffed
with people who have the necessary knowledge, skill, and ability to perform their
part in implementing the strategy. This goal is achieved primarily through recruit-
ment, selection and placement, training, development, and career management—
topics covered in Chapters 5, 6, 7, and 9. In addition, the HRM function must
develop performance management and reward systems that lead employees to work
for and support the strategic plan. The specitic types of performance management
systems are covered in Chapter 8, and the many issues involved in developing
reward systems are discussed in Chapters 11 through 13. In other words, the role of
the HRM function becomes one of (1) ensuring that the company has the proper
number of employees with the levels and types of skills required by the strategic
plan28 and (2) developing “control” systems that ensure that those employees are
acting in ways that promote the achievement of the goals specified in the strategicpla n .29
In essence, th is is what has been referred to as the “vertical alignm ent” of H R with
strategy. Vertical alignment means that the HR practices and processes are aimed at
addressing the strategic needs of the business. But the link between strategy and HR
practices is primarily through people. For instance, as IBM moved from being a manu-
facturer of personal computers to being a fully integrated service provider, the types of
people it needed ch anged significantly. Instead o f employing thousands of workers in
manufacturing or assembly plants, IBM increasingly needed software engineers to help
write new “middleware” programs, and an army of consultants who could help their
corporate customers to implement these systems. In addition, as IBM increasingly
differentiated itself as being the “ integrated solutions” provider (m eaning it could sell
Seloct ion,
t raining, and
dev e lopmen t
o f peop le J
Reward
systems
Product
market
s t rategy
Organizat ional
structure
Types
of
information
Performance
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COMPETING THROUGH SUSTAINABILITY
Helping the Rainforest Tribes?
As many fi rm s seek
to promote the wel
fare o f their su ppliers,
some firms have g one far backinto the supp ly chain. Many
firms develop partnerships with
rainforest villages as a way to
seek to pro f i t whi le he lping the
planet. For instance, Aveda,
the cosmetics company which
is a unit of Estee Lauder, has
established a partnership with
the Yawanawa' Indian tribe
in the rainforest of western
Brazil. Aveda uses pictures of
the Indian tr ibe mem bers to
promote its popular Uruku line
of lipsticks, eye shadows, and
facial bronzers that are sup
posed to use urukum, a fruit the
tribe uses to make body paint.
The "green /sustainab i li ty"
emphasis allows them to charge
a premium price to consumers.
However, the tribe has notdelivered any urukum to Aveda
between 2008 and 2010 since it
is more commonly referred to as
"annatto" which is grown com
mercially all over the globe. Thisdoes not mean that Aveda has
not h elped the vil lage; it has
improved access to health care,
education, and gov ernm ent ser
vices. They provided $50,000
for the tr ibe to buy seedl ings to
grow urukum on a larger scale.
The provided addit ional funds
for the t r ibe to buy food , c loth
ing, and o ther supplies. They
helped build a new village, a
school, and a health clinic.
However, the tribe soon lost
interest in the required weeding
and caring for the plants to the
po int that the plants were in a
"state of crisis" according to
the d irector of the zoo-botanical
park of the Federal University of
Acre Flav io Rod riq ues. In add i
tion, an internal tribal squabblecreated division regarding
whether or not the tribe should
even co ntinue the partnership.
While one can certainly
admire the motivation of Avedato d o wel l by doing go od, given
tha t the m arket crop for urukum
is about $500 annually, it by
no means provides enough to
make th e v illag e self-sufficient.
This led Mr. Rodrigues to write
in a 2001 report that "The
project probably does not
have economic viability. The
impression th at rem ained with
the technical team is that the
multinational has more interest
in the m arketing aspect o f work
ing with an indigenous commu
nity in the Amazon than it does
in the p roduc tion of annatto."
SOURCE: From John Lyons, "Skin-Deep
Gains for Amazon Tribe, Wall Street
Journal Online, May 5, 2011. Repro
duced with permission of Dow Jones &
Company, Inc. via Copyright ClearanceCenter.
the hardware, software, consulting, and service for a company’s entire information
technology needs), employees needed a new mindset which emphasized cooperat-
ing across different business divisions rather than running independently. Thus, the
change in strategy required different kinds of skills, different kinds o f employees, and
different kinds of behaviors. The “Competing through Sustainability” box illustrates
how the cosmetics company Aveda sought to support an Amazonian tribe throughsourcing cosmetic raw materials from them.
How does the HRM function implement strategy? As Figure 2.7 shows, it is
through administering HRM practices: job analysis/design, recruitment, selection sys-
tems, training and development programs, performance management systems, reward
systems, and labor relations programs. The details of each of these HRM practices are
the focus of the rest of this book. However, at this point it is important to present a
general overview of the HRM practices and their role in strategy implementation.
We then discuss the various strategies companies pursue and the types of HRM sys-
tems congruent with those strategies. First we focus on how the strategic types are
implemented; then we discuss the HRM practices associated with various directional
strategies.
8 5
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8 6 P A R T 1 The Human Resource Environment
figure 2.7
Strategy Implem entation
HRM practices
R ecruitm ent Jo b analysis
Training Jo b designP erform ance S election
m ana gem ent D e ve lo pm e nt
Labor Pay s tru ctu re
re lations Incentives
Em ployee Benefits
relations
■ t
Human Human
resource resource
capabil i ty actions
Skills Behaviors
A b il it ie s Results
K no w ledg e (P roductiv ity ,
absenteeism,
turnover)
Emergent strategies
HRM PRACTICES
The HRM function can be thought of as having six menus of HRM practices, from
which companies ca n choose the ones m ost appropriate for implementing their strat-
egy. Each of these menus refers to a particular functional area of HRM: job analysis/
design, recruitment/selection, training and development, performance management,
pay structure/incentive s/ben efits, and labor—employee re lation s.30 Th ese men us are
presented in Table 2.3.
Job Analysis
The process of ge t
t ing detai led infor
mation abo ut jobs.
Job Design
The process of
defining the way
work wi l l be per
formed and the
tasks that wil l be
required in agiven job.
Job Analysis and DesignCompanies produce a given product or service (or set of products or services), and themanufacture of these products requires that a number of tasks be performed. These
tasks are grouped together to form jobs. Job analysis is the process of getting detailed
information about jobs. Job design addresses what tasks should be grouped into a par-
ticular job. T he way that jobs are designed should have an important tie to the strategy
of an organization because the strategy requires either new and different tasks or differ-
ent ways of performing the same tasks. In addition, because m any strategies entail the
introduction of new technologies, this affects the way that work is perform ed.31
In general, jobs can vary from having a narrow range of tasks (most of which are
simplified and require a limited range of skills) to having a broad array of complex
tasks requiring multiple skills. In the past, the narrow design o f jobs has been used toincrease efficiency, while the broad design of jobs has been associated with efforts to
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C H A P T E R 2 Strategic Human Resource Management 8 7
Job Analys is and Design
Few tasks Many tasks
Simp le tasks
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8 8 P A R T 1 The Human Resource Environment
Employee Training and Deveiopment A number of skills are instilled in employees through training and development.
Train ing refers to a plann ed effort to facilitate the learning o f jobrelated knowledge,
skills, and beh avior by employees. Dev elopm ent involves acquiring knowledge, skills,
and behavior that improve employees’ ability to meet the challenges of a variety of
existing jobs or jobs that do not yet exist. Changes in strategies often require changes
in the types, levels, and mixes o f skills. Th us, the acq uisition o f strategyrelated skills
is an essential element of the implementation of strategy. For example, many com-
panies have recently emphasized quality in their products, engaging in total quality
managem ent programs. These programs require extensive training o f all employees in
the TQ M philosophy, methods, and often other skills that ensure quality.34
Through recruitment, selection, training, and development, companies can obtain
a pool o f hum an resources capable o f implem enting a given strategy.35 In fact, it’s
not uncommon for companies to partner with universities to develop students while
obtaining important information.
Performance ManagementPerformance management is used to ensure that employees’ activities and outcomes
are congruent with the organization’s objectives. It entails specifying those activities
and outcomes that will result in the firm’s successfully implementing the strategy. For
example, companies that are “steady state” (not diversified) tend to have evaluation
systems that call for subjective performance assessments of managers. Th is stems from
the fact that those above the firstlevel managers in the hierarchy have extensive
knowledge about how the work should be performed. On the other hand, diversified
companies are more likely to use quantitative measures of performance to evaluate
managers because top managers have less knowledge about how work should be per-
formed by those below them in the hierarchy.36Similarly, executives who have extensive knowledge of the behaviors that lead to
effective performance use performance management systems that focus on the behav-
iors of their subordinate managers. However, when executives are unclear about the
specific behaviors that lead to effective performance, they tend to focus on evaluating
the ob jective performance results of their subordinate m anagers.37
An example of how performance management can be aligned with strategy is pro-
vided in Figure 2.8. This comes from a firm in the health care industry whose strategy
figure 2.8
Percentage of Objectives Iden ti f ied in Individual Performance Plans Tha t Are Tied to Each
Strategic Imperative
Strategic
Im p era tive Business A B us in es s B In te rn a tio n al In ve stm e nt Finance Legal IT HR8.S Enterpr ise
A ch ie ve su peri o r
medical performance10.5% 12.5% 2.7% 7.6% 3.1% 2.7% 11.4% 2.1% 10.0%
Effect ively serve our
customers24.7% 27.2% 36.7% 12.2% 10.3% 27.2% 18.9% 19.5% 23.7%
Create g rea t p roduc ts
and services5.6% 6.1% 10.1% 9 .8% 5.0% 10.1% 15.3% 8.9% 6.9%
Create a winning
e n v i r o n me n t27.7% 29.7% 30.1% 29.9% 30.3% 33.7% 2 2.4% 39.4% 27.7%
Establish a cost
advantaqe31.5% 24.5% 20.5% 40.5% 51.3% 26.3% 32% 30.0% 31.7%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
Training
A p la nned e ffo rt to
facil i tate the learn
ing of job-related
knowledge, skills,
and behavior by
employees.
Development
The acquisition of
knowledge, skills,
and behaviors
that imp rove an
employee's abi l i ty to
meet changes in job
requirements and incl ient and customer
demands.
Performance
Management
The means through
which managers
ensure that em ploy
ees' activities and
outputs are congru
ent wi th the organi
zation's goals.
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COMPETING THROUGH TECHNOLOGY
Exam Revision and Project Supervision made Easy through Technology
The University of Portsmouth,
UK, has developed a novel wayof improving exam revision and
project supervision. They've
developed a wiki to enable
students to work collaboratively
during exam revision and
employed the use of Twitter,
a wiki and online learning
logs to facil itate pro ject
supervision.
Exam revision and project
work are both situations wh ere
students go through similar
activities b ut tend to be isolated
from each and their tutor. In
such situations, students could
often struggle and it was felt
they could benefit from sharing
their experience and the
tutor could be of more help bybeing able to identify
wh at areas the ir students
struggled with.
The wiki used for exam
revision goes by the name
of "Exam opedia". The tutor
creates pages containing the
questions from past exams in a
tabular form and students have
read / write access. The tools
used for project supervision
are Twitter fo r short progress
updates or queries, and a wiki
which can be used to post
and collaboratively edit larger
items, and online logs or
e-logs, which are used to
m on itor the progress of the
project.From the students'
perspe ctive, the response to
the survey for Examopedia
showed tha t most o f the
students (17 out of 28) agreed
that it is useful and helped them
collaborate. In terms of being a
helpful source o f informa tion on
the course, it came second to
lectures.
SOURCE:
Study Author: Phil Barker, ICBL, School of
Mathematical and Computer Sciences,
Heriot-Watt University.
Tutor in Study: Manish Malik, Electronic
and Computer Engineering, University of
Portsmouth.
consisted of five “strategic imperatives,” or things that the company was trying to
accomplish. In this company all individuals set performance object ives each year, andeach of their objectives have to be tied to at least one of the strategic imperatives.
The senior VP of HR used the firm’s technology system to examine the extent to
which each business unit or function was focused on each of the imperatives. The
figure illustrates the percentage of objectives that were tied to each imperative across
the different units. It allows the com pany to determine if the m ix of objectives is right
enterprisewide as well as within each business unit or function.
Pay Structure, Incentives, an^i B e n e f i t sThe pay system has an important role in implementing strategies. First, a high level
of pay and/or benefits relative to that of competitors can ensure that the companyattracts and retains highquality employees, but this might have a negative impact on
the company’s overall labor costs.38 Second, by tying pay to performance, the com-
pany can elicit specific activities and levels of performance from employees.
In a study of how compensation practices are tied to strategies, researchers
examined 33 hightech and 72 traditional companies. They classified them by
whether they were in a growth stage (greater than 20% inflationadjusted increases
in annual sales) or a maturity stage. They found that hightech companies in the
growth stage used compensation systems that were highly geared toward incentive
pay, with a lower percentage of total pay devoted to salary and benefits. On the
other hand, compensation systems among mature companies (both hightech and
XiauiVvOTYaY) ie\ ' ox ei a W w peice n tage c>i toxa\ to m cH im e s aW g'n per-centage to ben efits.39
89
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9 0 P A R T 1 The Human Resource Environment
Labor and Employee RelationsWhether companies are unionized or not, the general approach to relations with
employees can strongly affect their potential for gaining competitive advantage. In
the late 1970s Chrysler Corporation was faced with bankruptcy. Lee Iacocca, the new
president o f Chrysler, asked the union for wage and workrule concessions in an effort
to turn the company around. The union agreed to the concessions, in return receiv-
ing profit sharing and a representative on the board. Within only a few years, the
relationship with and support from the union allowed Chrysler to pull itself out of
bankruptcy and into record profitability.40
Companies can choose to treat employees as an asset that requires investment of
resources or as an expen se to be m inimized.41 They ha ve to m ake choices about how
much employees can and should participate in decision making, what rights employ-
ees have, and what the company’s responsibility is to them. The approach a company
takes in making these decisions can result in it either successfully achieving its short
and longterm goals or ceasing to exist.
Recent research has begun to examine how companies develop sets of HRM
practices that maximize performance and productivity. For example, one studyof automobile assembly plants around the world found that plants that exhibited
both high productivity and high quality used “HRM best practices,” such as heavy
emphasis on recruitment and hiring, compensation tied to performance, low levels
of status differentiation, high levels of training for both new and experienced
employees, and employee participation through structures such as work teams and
problemsolving groups.42 Another study found that HRM systems composed of
selection testing, training, contingent pay, performance appraisal, attitude surveys,
employee pa rticipation , and inform ation sharing resulted in higher levels of produc-
tivity and corp orate fin an cial perform ance , as well as lower em ployee turnover .43
Finally, a recent study found that companies identified as some of the “best places
to work” had higher financial performances than a set of matched companies thatdid not m ake the list.44 Sim ilar results have also been observed in a number o f other
studies.45
In addition to the relationship between HR practices and performance in general,
in today’s fastchanging environment, businesses have to change quickly, requiring
changes in employees’ skills and behaviors. In one study the researchers found that the
flexibility of HR practices, employee skills, and employee beh aviors were all positively
related to firm financial performance, but only the skill flexibility was related to cost
efficiency.46 While these relationships are promising, the causal direction has not yet
been proven. For instance, while effective HR practices should help firms perform
better, it is also true tha t highly profitable firms can invest more in H R practices.47
The research seems to indicate that while the relationship between practices and
performance is consistently positive, we should not go too far out on a limb arguing
that increasing the use of HRM practices will automatically result in increased
profitability.48
STRATEGIC TYPES
As we previously discussed, companies can be classified by the generic strategies they
pursue. It is important to note that these generic “stra tegies” are not what we mean by
a strategic plan. They are merely similarities in the ways companies seek to compete
in their industries. Various typologies have been offered, but we focus on the two
generic strategies proposed by Porter: cost and differen tiation.49
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C H A P T E R 2 Strategic Human Resource Management 9 1
According to Michael Porter of Harvard, competitive advantage stems from a
company’s being able to create value in its production process. Value can be created
n one of two ways. First, value can be created by reducing costs. Second, value can
be created by differentiating a product or service in such a way that it allows the
company to charge a premium price relative to its competitors. This leads to two
basic strategies. According to Porter, the “overall cost leadership” strategy focuses
on becoming the lowest cost producer in an industry. This strategy is achieved by
constructing efficient largescale facilities, by reducing costs through capitalizing on
he experience curve, and bv controlling overhead costs and costs in such areas as
research and development, service, sales force, and advertising. This strategy provides
aboveaverage returns within an industry, and it tends to bar other firms’ entry into
he industry because the firm can lower its prices below com petito rs’ costs.
The “differentiation” strategy, according to Porter, attempts to create the impres-
ion that the company’s product or service is different from that of others in the
ndustry. The perceived differentiation can come from creating a brand image, from
echnology, from offering unique features, or from unique customer service. If a com-
pany succeeds in differentiating its produc t, it will achieve ab oveaverage returns, andhe differentiation may protect it from price sensitivity. For instance, Dell Computer
Company built its reputation on providing the lowest cost computers through lever-
aging its supply chain and direct selling model. However, recently they have seen
hare eroding as the consumer market grows and HP has offered more differentiated,
tylishlooking computers sold through retail outlets where customers can touch and
eel them. In addition, Apple has differentiated itself through its own operating sys-
em that integrates well with peripheral devices such as the iPod and iPhone. In both
ases, these companies can charge a premium (albeit higher for Apple) over Dell’s
pricing.50
HRM NEEDS IN STRATEGIC TYPES
While all of the strategic types require competent people in a generic sense, each of
he strategies also requires different types of employees with different types of behav-
ors and attitudes. As we noted earlier, different strategies require employees with
pecific skills and also require these employees to ex hibit different “role beh aviors.” 51
Role behaviors are the behaviors required of an individual in his or her role as a
obholder in a social work en vironm en t. These role behav iors vary on a number of
imensions. Additionally, different role behaviors are required by the different strate-
ies. For example, companies engaged in a cost strategy require employees to have a
high concern for quantity and a shortterm focus, to be comfortable with stability,
nd to be risk averse. These employees are expected to exhibit role behaviors that are
elatively repetitive and performed independently or autonomously.
Thus, companies engaged in cost strategies, because of the focus on efficient
roduction, tend to specifically define the skills they require and invest in training
mployees in these skill areas. They also rely on behavioral performance management
ystems with a large performancebased compensation component. These companies
rom ote internally and develop internally consisten t pay systems with high pay differ-
ntials between superiors and subordinates. They seek efficiency through worker par-
icipation, soliciting employees’ ideas on how to achieve more efficient production.
On the other hand, employees in companies with a differentiation strategy need
o be highly creative and coop erative; to h ave only a m oderate con cern for quantity,longterm focus, and a tolerance for ambiguity; and to be risk takers. Employees
Role Behaviors
Behaviors tha t are
required of an indi
vidual in his or her
role as a jobholder
in a social work
environment.
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9 2 P A R T 1 The Human Resource Environment
LO 2-6Describe the different
HRM issues and practices
associated with various
directional strategies.
External Growth
Strategy
An em phasis on
acquir ing vendors
and suppl iers or
buying businesses
that al low a com
pany to expand intonew markets.
in these companies are expected to exhibit role behaviors that include cooperating
with others, developing new ideas, and taking a balanced approach to process and
results.
Thus differentiation companies will seek to generate more creativity through
broadly defined jobs with general job descriptions. They may recruit more from
outside, engage in limited socialization of newcomers, and provide broader career
paths. Training and development activities focus on cooperation. The compens-
ation system is geared toward external equity, as it is heavily driven by recruiting
needs. These companies develop resultsbased performance management system
and divisional—corpora te performance evaluation s to encourage risk taking on the
part of managers.52
EVIDENCE-BASED HR
Control (mechanisms through which employees are managed in an organization)' vs
commitment (the extent to which employees identify with and are involved in an
organization). W ith the increase of wom en in the workplace and in man agement,studies show that whilst men are more taskorientated, women are more relationship
orientated when managing and that there is not one best way. Studies also show that
companies with womenfriendly policies that take into account family responsibili-
ties increase workplace commitment, meaning that women are less likely to change
organizations than their male counterparts.
DIRECTIONAL STRATEGIES
As discussed earlier in this chapter, strategic typologies are useful for classifying theways different organizations seek to compete within an industry. However, it is also
necessary to understand how increasing size (growth) or decreasing it (downsizing)
affects the HRM function. For example, the top management team might decide
that they need to invest more in product development or to diversify as a means for
growth. With these types of strategies, it is more useful for the HRM function to aid
in evaluating the feasibility of the various alternatives and to develop programs that
support the strategic choice.
Companies have used four possible categories of directional strategies to meet
ob jectives.53 Strategies em phasizing market share or operating co sts are considered
“concentration” strategies. With this type of strategy, a company attempts to focus
on what it does best within its established markets and can be thought of as “sticking
to its knitting.” Strategies focusing on market development, product development,
innovation, or joint ventures make up the “internal growth” strategy. Companies
with an internal growth strategy channel their resources toward building on exist-
ing strengths. Those attempting to integrate vertically or horizontally or to diversify
are exhibiting an “external growth” strategy, usually through mergers or acquisi-
tions. This strategy attempts to expand a company’s resources or to strengthen its
market pos ition through a cquiring or creating new businesses. Finally, a “divestm ent,”
or downsizing, strategy is one made up of retrenchment, divestitures, or liquidation.
These strategies are observed among companies facing serious economic difficulties
and seeking to pare down their operations. T he human resource im plications o f eachof these strategies are quite different.
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C H A P T E R 2 Strategic Human Resource Management 9 3
Concentration StrategiesConcentration strategies require that the company maintain the current skills that
exist in the organization. T his requires that training programs provide a m eans o f keep-
ing those skills sharp among people in the organization and that compensation pro-
grams focus on retaining people w ho have those skills. Appraisals in this strategy tend
to be more behavioral because the environm ent is more certain, and the behav iors nec -essary for effective performance tend to be established through extensive experience.
internal Growth StrategiesInternal growth strategies present unique staffing problems. Growth requires that a
company constantly hire, transfer, and promote individuals, and expansion into dif-
ferent markets may change the necessary skills that prospective employees must have.
In addition, appraisals often consist of a combination of behaviors and results. The
behavioral appraisal emphasis stems from the knowledge of effective behaviors in a
particular product market, and the results appraisals focus on achieving growth goals.
Com pensation packages are heavily weighted toward incentives for achieving growthgoals. Training needs differ depending on the way the company attempts to grow
internally. For example, if the organization seeks to expand its markets, training will
focus on knowledge of each market, particularly when the company is expanding into
international markets. On the other hand, when the company is seeking innovation
or product development, training will be of a more technical nature, as well as focus-
ing on interpersonal skills such as team building. Joint ventures require extensive
training in conflict resolution techniques because of the problems associated with
combining people from two distinct organizational cultures.
Mergers and AcquisitionsIncreasingly we see both consolidation within industries and mergers across indus-
tries. For example, British Petroleum’s acquisition of Amoco Oil represented a con-
solidation, or reduction in the number of firms within the industry. On the other
hand, Citicorp’s merger with Traveller’s Group to form Citigroup represented firms
from different industries (pure financial services and insurance) combining to change
the dynamics within both. W hatever the type, one thing is for sure— mergers and
acquisitions are on the increase, and HRM needs to be involved.54 In addition, these
mergers more frequently consist o f global megam ergers, in spite of some w arnings that
these might not be effective.
Acc ording to a report by the Con ference Board, “people issues” may be one o f themajor reasons that mergers do not always live up to expectations. Some companies
now heavily weigh firm cultures before embarking on a merger or acquisition. For
example, prior to acquiring ValueRx, executives at Express Scripts Inc. interviewed
senior executives and middle managers at the potential target firm in order to get a
sense of its culture.55 In spite of this, fewer than on ethird o f the H RM execu tives sur-
veyed said that they had a major influence in how mergers are planned, yet 80 percent
of them said tha t people issues have a significant im pact after the deals are finalized.56
In addition to the desirability of HRM playing a role in evaluating a m erger opportu-
nity, H RM certainly has a role in the actual im plementation o f a merger or acquisition.
Training in conflict resolution is also necessary when compan ies engage in an external
growth strategy. A ll the op tions for external growth con sist of acquiring or developingnew businesses, and these businesses often have distinct cultures. Thus many HRM
Concentration
Strategy
A strate gy focu sing
on increasing mar
ket share, reducing
costs, or creating
and maintaining a
market niche for
products and
services.
Internal Growth
Strategy
A fo cu s on new
market and prod
uct development,
innovation, and jointventures.
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9 4 P A R T 1 The Human Resource Environment
programs face problems in integrating and standardizing practices across the com-
pany’s businesses. The relative value of standardizing practices across businesses must
be weighed against the unique environmental requirements of each business and the
extent of desired integration of the two firms. For example, with regard to pay prac-
tices, a company m ay desire a consistent internal wage structure to m aintain employee
perceptions of equity in the larger organization. In a recent new business developed
by IBM, the employees pressured the company to maintain the same wage structure as
IBM ’s main operation. However, some bu sinesses may function in environm ents where
pay practices are driven heavily by market forces. Req uiring these businesses to adhere
to pay practices in other environm ents may result in an ineffective wage structure.
Downsizing
The planned
el imination o f large
numbers of personnel, designed to
enhance organiza
tional effectiveness.
DownsizingO f increasing importance to organizations in today’s com petitive env ironm ent is
H R M ’s role in downsizing or “rightsizing.” The number of organizations undergoing
downsizing increased significantly from the third to the fourth quarter of 2008, and
while this trend has slowed, layoffs are still sign ifican t (see Figure 2 .9) .57
One would have great difficulty ignoring the massive “war for talent” that went on
during the late 1990s, particularly with the notable dotcom craze. Firms during this
time sought to becom e “ employers of choice,” to e stablish “em ployment brands,” and
to develop “employee value propositions” as ways to ensure that they would be able to
attract and retain talented employees.
figure 2.9
Layoff Events and Separations 2004-2011
800,000Layoffs over the past 7 years
4,000
2004 2005
r = revised p = preliminary
2006 2007 2008 2009 2010 2011
SOURCE: http://www.bls.gov/news.release/mslo.nrO.htm .
http://www.bls.gov/news.release/mslo.nrO.htmhttp://www.bls.gov/news.release/mslo.nrO.htm
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C H A P T E R 2 Strategic Human Resource Management 9 5
The current economic crisis means that one important question facing firms is,
How can we develop a reputation as an employer of choice, and engage employees
to the goals of the firm, while laying off a significant portion of our workforce? How
firms answer this question will determine how they can compete by meeting the
stakeholder needs of their employees.
In spite o f the increasing frequen cy o f downsizing, research reveals that it is far from
universally successful for achieving the goals of increased productivity and increased
profitability. For example, Table 2.4 illustrates the results of a survey conducted by
the American Management Association indicating that only about onethird of the
companies that went through downsizings actually achieved their goal of increased
productivity. Anoth er survey by the A M A found that over twothirds of the co m pa-
nies that downsize repeat the effort a year later.58 Also, research by the consulting firm
Mitchell & Com pany found that co mpan ies that downsized during the 1980s lagged
the industry average stock price in 1991.59 Thus it is important to understand the best
ways of managing downsizings, particularly from the standpoint of HRM.
Downsizing presents a number of challenges and opportunities for HRM.60 In terms
of challenges, the HRM function must “surgically” reduce the workforce by cuttingonly the workers who are less valuable in their performance. Achieving this is dif-
ficult because the best workers are most able (and often willing) to find alternative
employment and may leave voluntarily prior to any layoff. For example, in 1992 Gen-
eral Motors and the United Auto Workers agreed to an early retirement program for
individuals between the ages of 51 and 65 who had been employed for 10 or more years.
The program provided those who agreed to retire their full pension benefits, even if
they obtained em ployment elsewhere, and as much as $13,0 00 toward the purchase o f a
GM car.61 A s m ention ed earlier in the chapter, this is part o f G M ’s labor cost problem.
Early retirement programs, although humane, essentially reduce the workforce
with a “grenade” approach. This type of reduction does not distinguish between
r
. DESIRED OU TCO ME
PERCENTAGE THAT AC HIEVED
DESIR ED RESULT .
Reduced expenses 46%
Increased profits 32
Impro ved cash f low 24
■ Increased pro du ctivity 22
Increased return on investment 21
Increased competi t ive advantage 19Reduced bureaucracy 17
Im proved decis ion m aking 14
Increased custom er satisfaction 14
Increased sales 13
Increased market share 12
Improved p roduc t qual i ty 9
Technological advances 9
Increased innovation 7
Avo id ance o f a ta keover 6
SOURCE: From Wall Street Journal, June 6, 1991.pany, Inc. via Copyright Clearance Center.
Reproduced with permission of Dow Jones & Com-
table 2.4
Effects o f
Dow nsizing on
Desired Outcomes
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9 6 P A R T 1 The Human Resource Environment
good and poor performers but rather eliminates an entire group of employees. In fact,
recent research indicates that when companies downsize by offering early retirement
programs, they usually end up rehiring to replace e ssential ta lent w ithin a year. Often
the company does not achieve its costcutting goals because it spends 50 to 150% of
the departing employee’s salary in hiring an d retraining new workers.62
Another HRM challenge is to boost the morale of employees who remain after
the reduction; this is discussed in greater detail in Chapter 5. Survivors may feel
guilt over keeping their jobs when their friends have been laid off, or they may envy
their friends who have retired with attractive severan ce and pension benefits. Their
reduced satisfaction with and commitment to the organization may interfere with
work performance. Thus the HRM function must maintain open communication
with remaining employees to build their trust and commitment rather than with-
hold ing info rma tion.63 A ll employees should be informed of the purpose of the
downsizing, the costs to be cut, the duration of the downsizing, and the strategies
to be pursued. In addition, com panies going through downsizing often develop com -
pen sation programs that tie the individual’s comp ensation to the co mp any’s success.
Employee ownership programs often result from downsizing, and gainsharing planssuch as the Scanlon plan (discussed in Chapter 12) originated in companies facing
econo mic difficulties.
In spite of these challenges, downsizing provides opportunities for HRM. First,
it often allows the com pany to “get rid of dead w ood” and make way for fresh ideas.
In addition, downsizing is often a unique opportunity to change an organization’s
culture. In firms characterized by antago nistic labo rm anagem ent relations, down-
sizing can force the parties to cooperate and to develop new, positive relation-
ships.64 Finally, downsizing can demonstrate to topmanagement decision makers
the value of the company’s human resources to its ultimate success. The role of
HRM is to effectively manage the process in a way that makes this value undeni-
able. We discuss the implications of downsizing as a labor force management strat-egy in Chapter 5.
STRATEGY EVALUATION AND CONTROL
A final compon ent to the strategic man agement process is that of strategy evalua-
tion and control. Thus far we have focused on the planning and implementation of
strategy. However, it is extremely important for the firm to constantly monitor the
effectiveness of both the strategy and the implementation process. This monitoring
makes it possible for the com pany to identify problem areas an d either revise existing
structures and strategies or devise new ones. In this process we see emergen t strategiesappear as well as the critical nature of human resources in competitive advantage.
O The Role of Human Resources in Providing Strategic Competitive AdvantageThus far we have presented the strategic management process as including a stepby
step procedure by which HRM issues are raised prior to deciding on a strategy and
then HRM practices are developed to implement that strategy. However, we must
note that human resources can provide a strategic competitive advantage in two addi-
tional ways: through emergent strategies and through enhancing competitiveness.
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C H A P T E R 2 Strategic Human Resource Management 9 7
EMERGENT STRATEGIES
Having discussed the process of strategic management, we also must distinguish
between intended strategies and emergent strategies. Most people think of strategies
s being proactive, rational decisions aimed toward some predetermined goal. The
view of strategy we have presented thus far in the chapter focuses on intended strate-
ies. Intended strategies are the result of the ration al decisionm aking process used byop managers as they develop a strategic plan. This is consistent with the definition
f strategy as “the pattern or plan that integrates an organization’s major goals, poli-
ies, and ac tion sequen ces into a cohesive whole.”65 Th e idea of emergent strategies is
videnced by the feedback loop in Figure 2.2.
Most strategies that companies espouse are intended strategies. For example, when
Howard Schultz founded Starbucks , he had the idea of creating a third place (betw een
work and home) where people could enjoy traditional Italianstyle coffee. He knew
hat the smell ot the co ffee and the deeper, darker, stronger taste would attrac t a new
et of customers to enjoy coffee the way he though t it should be enjoyed. T his w orked,
but as Starbucks grew, customers began asking if they could have non fat milk in their
attes, or if they could ge t flavor shots in their coffees. S chultz swore that such things
would essentially pollute the coffee