Strategic human resource management is the process of linking the human resource function with the strategic objectives of the organization in order to improve performance.
If a global company is to function successfully, strategies at different levels need to inter-relate. Alternatively if an organization’s [human resource management] policies and practices must fit with its strategy in its competitive environment and with the immediate business conditions that it faces.
The intention of this paper is to explain the meaning of strategic management, give an overview of its conceptual framework, describe the three levels of strategy formulation and comment on the links between business strategy and human resource management (HRM), Explain three models of human resources (HR) strategy: control, resource and integrative and Outline some key aspects of international and comparative HRM.
Background
Over the past two decades, HR researchers and practitioners have focused their attention on other important questions.
First, what determines whether an organization adopts a strategic approach to HRM, and how is HR strategy formulated? Of interest is which organizations are most likely to adopt a strategic approach to HRM. Is there, for example, a positive association with a given set of external and internal characteristics or contingencies and the adoption of SHRM? Another area of interest concerns the policies and practices making up different HR strategies. Is it possible to identify a cluster or ‘bundle’ of HR practices with different strategic competitive models? Finally, much research productivity in recent years has been devoted to examining the relationship between different clusters of HR practices and organizational performance.
Does HR strategy really matter? For organizational practitioners who are looking for ways to gain a competitive advantage, the implication of HR strategic choices for company performance is certainly the key factor.
Model of strategic management
In the descriptive and prescriptive management texts, strategic management appearsas a cycle in which several activities follow and feed upon one another. The strategic management process is typically broken down into five steps
- Vision, Mission and goals
- Principles
- Organisational analysis
- Moat or Value Proposition
- strategic formulation
- strategy implementation
- strategy evaluation.
Through the years or research these 7 have developed from Three (2, 3, 7) to Five (2, 3, 5, 6, 7) to today, what we now see as the Best Practice 7, listed above.
At the corporate level, the strategic management process includes activities that range from appraising the organization’s current mission and goals to strategic evaluation.
The first step in the strategic management model begins with senior Executives evaluating their position in relation to the organization’s Mission, Vision and goals. The mission describes the organization’s Why and aspirations for serving their customers; it is the organization’s raison d’être and indicates the direction in which Executive are going. Vision is the expression of the Executive to “bring people along” the “why you want to join us, belong to us, be our customer or be our employee”, the Goals are the desired ends sought through the actual operating procedures of the organization and typically describe short-term measurable outcomes (Daft, 2001).
Having established the Vision, Mission and Goals, the Executive set out to establish the founding principles, to ensure that all stakeholders have a clear understanding of the organisations expectations on each other, setting a common language, a manner in which to behave and expect others to behave.
Organisational analysis looks at the internal organizational strengths and weaknesses and the external environment for opportunities and threats. The factors that are most important to the organization’s future are referred to as strategic factors and can be summarized by the acronym SWOT – Strengths, Weaknesses, Opportunities and Threats
Moat or Value Proposition looks at how the organisation has something to offer that drive the customers’ “Rational to Buy”, and “Prepensity to Pay”, what is it that seperates you from your competitors, why would customers and staff alike select your organisation to “invest” their time and money/salaries into.
Strategic formulation involves senior managers evaluating the interaction between strategic factors and making strategic choices that guide managers to meet the organization’s goals. Some strategies are formulated at the corporate, business and specific functional levels. The term ‘strategic choice’ raises the question of who makes decisions and why they are made (McLoughlin & Clark, 1988). The notion of strategic choice also draws attention to strategic management as a ‘political process’ whereby decisions and actions on issues are taken by a ‘power-dominant’ group of managers within the organization. Child (1972, quoted in McLoughlin & Clark, 1988, p. 41)
affirms this interpretation of the decision-making process when he writes:
[W]hen incorporating strategic choice in a theory of organizations, one is recognizing the operation of an essentially political process, in which constraints and opportunities are functions of the power exercised by decision-makers in the light of ideological values.
In a political model of strategic management, it is necessary to consider the distribution of power within the organization. According to Purcell and Ahlstrand (1994, p. 45), we must consider ‘where power lies, how it comes to be there, and how the outcome of competing power plays and coalitions within senior management are linked to employee relations’. The strategic choice perspective on organizational decision-making makes the discourse on strategy ‘more concrete’ and provides important insights into how the employment relationship is managed.
Strategy implementation is an area of activity that focuses on the techniques used by managers to implement their strategies. In particular, it refers to activities that deal with leadership style, the structure of the organization, the information and control systems, and the management of human resources (see Figure 1.2 above). Influential management consultants and academics (for example Champy, 1996; Kotter, 1996)
emphasize that leadership is the most important and difficult part of the strategic implementation process.
Strategy evaluation is an activity that determines to what extent the actual change and performance match the desired change and performance. The strategic management model depicts the five major activities as forming a rational and linear process. It is, however, important to note that it is a normative model, that is, it shows how strategic management should be done rather than describing what is actually done by senior managers (Wheelen & Hunger, 1995). As we have already noted, the notion that strategic decision-making is a political process implies a potential gap between the theoretical model and reality.
Hierarchy of strategy
Another aspect of strategic management in the multidivisional business organization concerns the level to which strategic issues apply. Conventional wisdom identifies different levels of strategy – a hierarchy of strategy (Figure 2.3):
- corporate
- business
- functional.
Corporate-level strategy
Corporate-level strategy describes a corporation’s overall direction in terms of its general philosophy towards the growth and the management of its various business units. Such strategies determine the types of business a corporation wants to be involved in and what business units should be acquired, modified or sold. This strategy addresses the question, ‘What business are we in?’ Devising a strategy for a multidivisional company involves at least four types of initiative: establishing investment priorities and steering corporate resources into the most attractive business units initiating actions to improve the combined performance of those business units with which the corporation first became involved finding ways to improve the synergy between related business units in order to increase performance making decisions dealing with diversification.
Business-level strategy
Business-level strategy deals with decisions and actions pertaining to each business unit, the main objective of a business-level strategy being to make the unit more competitive in its marketplace. This level of strategy addresses the question, ‘How do we compete?’ Although business-level strategy is guided by ‘upstream’, corporate-level strategy, business unit management must craft a strategy that is appropriate for its own operating situation. In the 1980s, Porter (1980, 1985) made a significant contribution to our understanding of business strategy by formulating a framework that described three competitive strategies: cost leadership, differentiation and focus.
The low-cost leadership strategy attempts to increase the organization’s market share by having the lowest unit cost and price compared with competitors. The simple alternative to cost leadership is differentiation strategy. This assumes that managers distinguish their services and products from those of their competitors in the same industry by providing distinctive levels of service, product or high quality such that the customer is prepared to pay a premium price. With the focus strategy, managers focus on a specific buyer group or regional market. A market strategy can be narrow or broad, as in the notion of niche markets being very narrow or focused.
This allows the firm to choose from four generic business-level strategies – low-cost leadership, differentiation, focused differentiation and focused low-cost leadership – in order to establish and exploit a competitive advantage within a particular competitive scope (Figure 2.4).
Miles and Snow (1984) have identified four modes of strategic orientation: defenders, prospectors, analysers and reactors. Defenders are companies with a limited product line and a management focus on improving the efficiency of their existing operations. Commitment to this cost orientation makes senior managers unlikely to explore new areas. Prospectors are companies with fairly broad product lines that focus on product innovation and market opportunities. This sales orientation makes senior managers emphasize ‘creativity over efficiency’. Analysers are companies that operate in at least two different product market areas, one stable and one variable. In this situation, senior managers emphasize efficiency in the stable areas and innovation in the variable areas. Reactors are companies that lack a consistent strategy–structure–culture relationship. In this reactive orientation, senior management’s responses to environmental changes and pressures thus tend to be piecemeal strategic adjustments. Competing companies within a single industry can choose any one of these four types of strategy and adopt a corresponding combination of structure, culture and processes consistent with that strategy in response to the environment. The different competitive strategies influence the ‘downstream’ functional strategies.
Functional-level strategy
Functional-level strategy pertains to the major functional operations within the business unit, including research and development, marketing, manufacturing, finance and HR. This strategy level is typically primarily concerned with maximizing resource productivity and addresses the question, ‘How do we support the business-level competitive strategy?’ Consistent with this, at the functional level, HRM policies and practices support the business strategy goals.
These three levels of strategy – corporate, business and functional – form a hierarchy of strategy within large multidivisional corporations. In different corporations, the specific operation of the hierarchy of strategy might vary between ‘top-down’ and ‘bottom-up’ strategic planning. The top-down approach resembles a ‘cascade’ in which the ‘downstream’ strategic decisions are dependent on higher ‘upstream’ strategic decisions (Wheelen & Hunger, 1995). The bottom-up approach to strategymaking recognizes that individuals ‘deep’ within the organization might contribute to strategic planning. Mintzberg (1978) has incorporated this idea into a model of ‘emergent strategies’, which are unplanned responses to unforeseen circumstances by nonexecutive employees within the organization. Strategic management literature emphasizes that the strategies at different levels must be fully integrated. Thus:
strategies at different levels need to inter-relate. The strategy at corporate level must build upon the strategies at the lower levels in the hierarchy. However, at the same time, all parts of the business have to work to accommodate the overriding corporate goals. (F.A. Maljers, Chairman of the Board of Unilever, quoted by Wheelen & Hunger, 1995, p. 20)
The need to integrate business strategy and HRM strategy has received much attention from the HR academic community, and it is to this discourse that we now turn.
Human Resource Management
Strategic human resource management
The SHRM literature is rooted in ‘manpower’ (sic) planning, but it was the work of influential management gurus (for example Ouchi, 1981; Peters & Waterman, 1982), affirming the importance of the effective management of people as a source of competitive advantage, that encouraged academics to develop frameworks emphasizing the strategic role of the HR function (for example Beer et al., 1985; Fombrun et al., 1984) and attaching the prefix ‘strategic’ to the term ‘human resource management’. Interest among academics and practitioners in linking the strategy concept to HRM can be explained from both the ‘rational choice’ and the ‘constituency-based’ perspective. There is a managerial logic in focusing attention on people’s skills and intellectual assets to provide a major competitive advantage when technological superiority, even once achieved, will quickly erode (Barney, 1991; Pfeffer, 1994, 1998a).
From a ‘constituency-based’ perspective, it is argued that HR academics and HR practitioners have embraced SHRM as a means of securing greater respect for HRM as a field of study and, in the case of HR managers, of appearing more ‘strategic’, thereby enhancing their status within organizations (Bamberger & Meshoulam, 2000; Pfeffer & Salancik, 1977; Powell & DiMaggio, 1991; Purcell & Ahlstrand, 1994; Whipp, 1999).
Concepts and models
In spite of the increasing volume of research and scholarship, the precise meaning of strategic HRM and HR strategy remains problematic. It is unclear, for example, which one of these two terms relates to an outcome or a process (Bamberger & Meshoulam, 2000). For Snell et al., (1996, p. 1996) ‘strategic HRM’ is an outcome: ‘as organizational systems designed to achieve sustainable competitive advantage through people’. For others, however, SHRM is viewed as a process, ‘the process of linking HR practices to business strategy’ (Ulrich, 1997, p. 89). Similarly, Bamberger and Meshoulam (2000, p. 6) describe SHRM as ‘the process by which organizations seek to link the human, social, and intellectual capital of their members to the strategic needs of the firm’.
According to Ulrich (1997, p. 190) ‘HR strategy’ is the outcome: ‘the mission, vision and priorities of the HR function’. Consistent with this view, Bamberger and Meshoulam (2000, p. 5) conceptualize HR strategy as an outcome: ‘the pattern of decisions regarding the policies and practices associated with the HR system’. The authors go on to make a useful distinction between senior management’s ‘espoused’ HR strategy and their ‘emergent’ strategy. The espoused HR strategy refers to the pattern of HR-related decisions made but not necessarily implemented, whereas the emergent HR strategy refers to the pattern of HR-related decisions that have been applied in the workplace. Thus, ‘espoused HR strategy is the road map … and emergent HR strategy is the road actually traveled’ (Bamberger & Meshoulam, 2000, p. 6). Purcell (2001) has also portrayed HR strategy as ‘emerging patterns of action’ that are likely to be much more ‘intuitive’ and only ‘visible’ after the event.
We begin the discussion of SHRM and HR strategy with a focus on the link between organizational strategy formulation and strategic HR formulation. A range of business– HRM links has been classified in terms of a proactive–reactive continuum (Kydd & Oppenheim, 1990) and in terms of environment–human resource strategy–business strategy linkages (Bamberger & Phillips, 1991). In the ‘proactive’ orientation, the HR professional has a seat at the strategic table and is actively engaged in strategy formulation.
In Figure 2.3 above, the two-way arrows on the right-hand side showing both downward and upward influence on strategy depict this type of proactive model.
At the other end of the continuum is the ‘reactive’ orientation, which sees the HR function as being fully subservient to corporate and business-level strategy, and organizational-level strategies as ultimately determining HR policies and practices. Once the business strategy has been determined, an HR strategy is implemented to support the chosen competitive strategy. This type of reactive orientation would be depicted in Figure 2.3 above by a one-way downward arrow from business- to functional- level strategy. In this sense, a HR strategy is concerned with the challenge of matching the philosophy, policies, programmes, practices and processes – the ‘five Ps’– in a way that will stimulate and reinforce the different employee role behaviours appropriate for each competitive strategy (Schuler, 1989, 1992).
The importance of the environment as a determinant of HR strategy has been incorporated into some models. Extending strategic management concepts, Bamberger and Phillips’ (1991) model depicts links between three poles: the environment, human resource strategy and the business strategy (Figure 2.5). In the hierarchy of the strategic decision-making model (see Figure 2.3 above), the HR strategy is influenced by contextual variables such as markets, technology, national government policies,
European Union policies and trade unions. Purcell and Ahlstrand (1994) argue, however, that those models which incorporate contextual influences as a mediating variable of HR policies and practices tend to lack ‘precision and detail’ in terms of the precise nature of the environment linkages, and that ‘much of the work on the linkages has been developed at an abstract and highly generalized level’ (p. 36).
In the late 1980s, Purcell made a significant contribution to research on business–HRM strategy. Drawing on the literature on ‘strategic choice’ in industrial relations (for example Kochan et al., 1986; Thurley & Wood, 1983) and using the notion of a hierarchy of strategy, Purcell (1989) identified what he called, ‘upstream’ and ‘downstream’ types of strategic decision. The upstream or ‘first-order’ strategic decisions are concerned with the long-term direction of the corporation. If a firstorder decision is made to take over another enterprise, for example a French company acquiring a water company in southern England, a second set of considerations applies concerning the extent to which the new operation is to be integrated with or separate from existing operations. These are classified as downstream or ‘secondorder’, strategic decisions. Different HR strategies are called ‘third-order’ strategic decisions because they establish the basic parameters for managing people in the workplace. Purcell (1989, p. 71) wrote, ‘[in theory] strategy in human resources management is determined in the context of first-order, long-run decisions on the direction and scope of the firm’s activities and purpose … and second-order decisions on the structure of the firm’.
In a major study of HRM in multidivisional companies, Purcell and Ahlstrand (1994) argue that what actually determines HR strategy will be determined by decisions at all three levels and by the ability and leadership style of local managers to follow through goals in the context of specific environmental conditions. Case study analysis has, however, highlighted the problematic nature of strategic choice modelbuilding. The conception of strategic choice might exaggerate the ability of managers to make decisions and take action independent of the environmental contexts in which they do business (Colling, 1995).
Another part of the strategic HRM debate has focused on the integration or ‘fit’ of business strategy with HR strategy. This shift in managerial thought, calling for the HR function to be ‘strategically integrated’, is depicted in Beer et al.’s (1984) model of HRM. The authors espoused the need to establish a close two-way relationship or ‘fit’ between the external business strategy and the elements of the internal HR strategy:‘An organization’s HRM policies and practices must fit with its strategy in its competitive environment and with the immediate business conditions that it faces’ (Beer et al., 1984, p. 25). The concept of integration has three aspects: the linking of HR policies and practices with the strategic management process of the organization the internalization of the importance of HR on the part of line managers the integration of the workforce into the organization to foster commitment or an ‘identity of interest’ with the strategic goals.Not surprisingly, this approach to SHRM has been referred to as the ‘matching’ model.
The matching model
Early interest in the ‘matching’ model was evident in Devanna et al.’s (1984) work: ‘HR systems and organizational structure should be managed in a way that is congruent with organizational strategy’ (p. 37). This is close to Chandler’s (1962) distinction between strategy and structure and his often-quoted maxim that ‘structure follows strategy’. In the Devanna et al. model, HRM–strategy–structure follow and feed upon one another and are influenced by environmental forces (Figure 2.6).
Similarly, the notion of ‘fit’ between an external competitive strategy and the internal HR strategy is a central tenet of the HRM model advanced by Beer et al. (1984,)
The authors emphasize the analysis of the linkages between the two strategies and how each strategy provides goals and constraints for the other. There must be a ‘fit between competitive strategy and internal HRM strategy and a fit among the elements of the HRM strategy’ (Beer et al., 1984, p. 13).
The relationship between business strategy and HR strategy is said to be ‘reactive’ in the sense that HR strategy is subservient to ‘product market logic’ and the corporate strategy. The latter is assumed to be the independent variable (Boxall, 1992; Purcell & Ahlstrand, 1994). As Miller (1987, cited in Boxall, 1992, p. 66) emphasizes, ‘HRM cannot be conceptualized as a stand-alone corporate issue. Strategically speaking it must flow from and be dependent upon the organization’s (market oriented) corporate strategy’. There is some theorization of the link between product markets and organizational design, and approaches to people management. Thus, for example, each Porterian competitive strategy involves a unique set of responses from workers, or ‘needed role behaviours’, and a particular HR strategy that might generate and reinforce a unique pattern of behaviour (Cappelli & Singh, 1992; Schuler & Jackson, 1987). HRM is therefore seen to be ‘strategic’!