Aligning Human Resource

With Strategy
CHAPTER LEARNING OUTCOMES
AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:
• Understand the importance of strategic HR planning.
• Identify the risks associated with not planning.
• Discuss approaches to linking strategy and HR, including the barriers to
becoming a strategic partner.
• List the characteristics of an effective HR strategy.
 11 STRATEGIC HRM

Human resources management (HRM) can be viewed as an umbrella term that encompasses
the following:
 Overarching HR philosophies that specify the values that inform an organization's policies and
practices
 Formal HR policies that direct and partially constrain the development of specific practices,
such as to increase workforce diversity
 Specific HR practices, such as recruitment, selection, and appraisal

Strategic HRM is the management of HR

philosophies, policies, and practices to enable the
achievement of the organizational strategy.

Ideally, these philosophies, policies, and practices

form a system that attracts, develops, motivates,
and trains employees who ensure the survival and
effective functioning of the organization and its
members.
 Accounting and finance or sales and
marketing
One area would deal with The second area would
transactional activities, function like
such as payroll, which a decision science,
are routine but necessary, concerned with the
just like accounting effective utilization of
human capital, much
like finance.
strategic HRM
HR practices, the HR programs can
composition and be designed to support
behaviours of employees, the organizational
and the effectiveness of strategy
these decisions given
various business
strategies. 3 These
strategic activities are
comprehensive,
are planned, and in their
contribution to
organizational success
are considered
high-long-term-value-
added.4
 11 THEORIES OF THE STRATEGIC MANAGEMENT
OF HUMAN RESOURCES

personnel management HRM

Human resources management, formerly HRM could make strategic Cumulated research showed
called "personnel management," started contributions to consistent evidence that
as an administrative function and has organizations. Certain
the implementation of high-
traditionally been associated with costs "highperfo
performance HR systems significantly
in organizations. rmance"
predicted various:
Its contributions were often measured by
HR practices, such as  organizational performance
the number of disputes resolved,
selective hiring, extensive indicators, ranging from reduced
applicants
training, and competitive employee
recruited, total hours spent on training
etc.
pay, came to be  turnover to
considered "best  improved quality
It is no wonder that many organizations practices," because they  and organizational performance.
attempted to minimize the size of the HR were often found in the
department by outsourcing most successful
administrative tasks to external vendors. organizations.
 First, employees who have superior
Second, human resources can be
RESOURCE-BASED VIEW performance because of their skills,
difficult for competitors to imitate. If
commitment, or flexibility are
IBM introduces a new software package
valuable-they help the company
in January, Microsoft can probably
In addition to culture, beat out competitors by offering
imitate or duplicate this package by
better service/unique products or
a firm's human February of the same year. However, if
reducing costs. The employee loyalty of
IBM technical support people are trained
resources can create Marks & Spencer, for example, helped and motivated to provide "knock-your-
reduce its labour costs to 8.7 percent,
sustained competitive socks-off service," Microsoft will have a

against an industry average of 10 to 20 difficult time imitating this workforce within

advantage if they percent. This dramatically added value

a month

to the company.
meet all four criteria
Finally, the value of human resources can
Third, the best human resources are rare. "Talent
suggested by the war" describes the fierce competition be hard to substitute. dynamic capabilities

among firms, especially in the high-technology are critical for today's businesses to
resource-based view.
industry, for the best talent. Almost 80 percent of continuously lead the competition.
Canadian organizations indicated that they had Dynamic capabilities allow businesses to
difficulty recruiting quality candidates with skills be the first to discover new
that were important to the organization or in opportunities, to act faster than others
high demand. More reputable employers to seize opportunities, and to quickly
known for their advantage in attracting, create the internal processes needed to
developing, and keeping good talent are more realize these opportunities.
likely to gain access to the best talent on the
market.
Therefore, a firm's human resources are more valuable for sustained
competitive advantage than technological and physical resources,
particularly in today's competitive and fas t-changing environment,
because human resources are less visible, more complex, and can
initiate change.

For these reasons, human resources are increasingly perceived as

strategic resources.

Given the unlimited potential of HR, how to exploit it is explained by

the contingency perspective:
THE CONTINGENCY PERSPECTIVE

Although high-performance H R practices in general contribute to high

performance, they may be more cost effective for businesses that pursue a
differentiation strategy than for those implementing a low-cost strategy. This is
called the contingency perspective of HRM

they vary in their human

capital (e.g., communication
skills), as well as in the
behaviours (e.g., customer
orientation) that they display to
customers.

Such employee differences are

largely shaped by the HR
practices in place, and can be
explained by the human capital
and behavioural
theories.
Classical economists describe three types of resources or inputs used in the
production of goods and services:
 land,
 capital,
 and labour.

Labour, or human capital, refers to the collective sum of the attributes, experience,
knowledge, and commitment that employees choose to invest in their work.

This in tangible asset comprises the knowledge, education, vocational qualifications,

professional certifications, work-related experience, andcompetence of an

organization's employees.
Employees are of value to the organization to the extent that they work toward accomplishing organizational
objectives.
Costs incurred in training, motivating, compensating, and monitoring employees can be viewed as investments in
human capital, just as maintenance of equipment is an investment in the capital of the firm.19
Thus, human capital's value added can be es timated by
The advantages of an organization with effective HR practices may come not only
from having better resources but also from making better use of these resources by
achieving higher productivity per worker and matching the capabilities of employees
with the strategy.

Organizations that compete on service excellence, for example, would invest in service-related human capital. Banks that invested
in HR systems for service quality, such as selecting, training, and rewarding employees' service-related skills, had superior service-
related human capital and subsequently higher customer evaluation of service quality.

To simplify, having a stock of human capital is similar to having a team of talented players. Knowing how to leverage their talents
is like having skills in managing and coaching this team. So, too, without the right HR systems, the employees are less effective.
BEHAVIOURAL THEORY
 The behavioural perspective suggests that different strategies require not
only different human capital, but also different behaviours of employees

 An effective HR system first accurately identifies the behaviours needed to

implement a strategy. For example, what kinds of employee behaviours are
needed for Google to produce innovative ideas? This question may not
sound difficult for HR managers; providing expert opinion on human
behaviour might be where the HR profession adds the most unique value.

 Most HR managers have a clear understanding of whether the company needs risk taking or
rule following, competition or teamwork. H R's role is to tactfully challenge and refocus
baseless ideas of human behaviour
Behavioural perspective suggests that these HR practices should be further linked to a
particular behavioural objective. For example, what kinds of HR practices will produce
innovative behaviours?

Google encouraged innovative behaviours by selecting people with high creativity, providing
them with time and freedom to innovate, and motivating them to innovate through various
incentive programs.

But this is only one of many ways of encouraging creativity; each method may be specific to
each organization’s culture and traditions.
 STRATEGIC HR PLANNING

Continuum merupakan istilah konseptual yang menunjukkan

bahwa sebuah fenomena tidak hanya dilihat hitam atau putih
atau “0” atau “1” saja, tetapi tersebar di rentang antara,
sehingga terdapat banyak area abu-abu dalam sebuah
kontinum
 employees help an organization achieve
success because they are strategic resources,
and
THE IMPORTANCE
OF STRATEGIC HR
PLANNING

the planning process itself results

in improved goal attainment
IMPROVED GOAL ATTAINMENT

Strategic HRM can improve an organization's performance. The goals of these HRM strategies are to
shape employee behaviour so that it is consistent with the direction the organization identifies in its
strategic plans. Organizations with clear strategies provide direction and meaning to employees and
mitigate the need for control by substituting a consistency of purpose-in other words, a mission.

Only one third of Canadian executives state that their strategies

are supported by a workforce plan.But what makes HR planning
so difficult?
 11 LINKING HR PROCESSES TO STRATEGY

1. Start with organizational strategy and then create HR strategy.

Aligning HR strategy
with business strategy 2. Start with HR competencies and then craft corporate strategies based on these
can be done in one of competencies.
these ways:

3. Do a combination of both in a form of reciprocal relationship

 CORPORATE STRATEGY LEADS TO HR STRATEGY
The Employee:

HR Planning

Selection

Compensation
Strategy 1: Low-Cost-Provider Strategy
A firm competing on cost leadership attempts
Training
to be the low-cost provider of a product or
service within a marketplace.

The product or service must be perceived by Performance Evaluation

the consumer to be comparable to that
offered by the competition and to have a
price advantage. Labour Relations

McDonald’s uses this approach, as does

Timex.

Efficiency and controlling costs

are paramount.
The Employee
To keep wages low, jobs have to be of limited scope so
that the company can hire people with minimal skills at low
wages. The job requires highly repetitive and predictable
behaviours

HR Planning
At the entry level, succession planning is minimal,
ensuring only the feeder line to the next level. Outside
labour markets are monitored to ensure that entry-level
people are in adequate supply. The availability and use of
fringe workers-those who are retired, temporarily
unemployed, students, and so on-is part of the plann ing
strategy, particu larly if the employment market is offering
better opportunities to the normal supp ly of low-skilled
workers
Selection
Recruitment is primarily at the entry, or lowest, level and is from the
surrounding external labour market.
Recruitment is by word of mouth, and application forms are available
on-site, thus saving the costs of recruiting in newspapers.

Most other positions are staffed internally through promotions.

Thus, career paths are narrow.

Compensation
A low-cost-provider strategy includes lower wages and fringe benefits. Beyond the legal
minimum pay requirements, firms with this strategy carefully monitor what their
competitors are paying in the local labour market.
These firms' strategy tends to be a lag strategy, where they attempt to pay wages
slightly below industry norms

Cost reduction in wages can also be achieved through the use of part-time workers,
who receive no fringe benefits.

Pay for performance, such as incentive compensation that is linked to productivity,

rewards individual effort.

Programs designed to reduce labour costs, such as outsourcing or using part-time

workers, can easily be imitated by competitors, and so may produce no longterm
competitive advantage
Training

Training is minimal, as few skills are required. Any training

is based on increasing efficiency in the current job, or
specialization for the current position. Such training is fast
and inexpensive.

McDonald's can train a new hamburger

flipper or cashier within a few hours. There is little
to no investment in the long-term development of the
employee, nor in the acquisition of skills for jobs other
than the current one

Performance Evaluation
Short-term results, with explicit and standardized criteria,
are used to evaluate an employee's performance. The
feedback is immediate and specific. Individuals are held
accountable only for their own behaviour or results, not for
that of the team or the company. Only the supervisor provides
input for the performance evaluation. Forms are kept
to a minimum, and rating is done against check marks.
Feedback, if based on a performance review, tends to be
one-way, with little opportunity for the employee to debate
the results or receive developmental feedback. Results are
used for consideration for promotion.
Labour Relations

Low-cost providers try to prevent the formation of a union because they believe
that unions drive up wages.

Unions find low-cost providers, such as McDonald's, difficult to unionize.

(Employees working part-time hours have little interest in unionization because

they believe that this is a part-time job that they will leave in the near future, and
they are unlikely to benefit from belonging to a union, to which they have to
pay fees. It is also difficult to organize those working night shifts.)
 The Employee

Strategy 2: The Differentiation Strategy

HR Planning
A firm can differentiate itself from its competitors in
many ways:
• Having quality products
• Offering superior customer service Selection
• Having a more convenient location
• Using proprietary technology
Compensation
• Offering valuable features
• Demonstrating unique styling
• Having a brand-name reputation Training

A differentiation strategy calls for innovation and

creativity among employees.
Performance Evaluation
HRM is affected in fundamentally different ways in
organizations that want to use employees' brains rather
than their limited (mainly manual) skills in the low-cost- Labour Relations
provider strategy.
 The Employee
Organizations competing on a differentiation strategy
require from their employees creative behaviour, a long
term focus, interdependent activity, and some risk taking,
as well as an ability to work in an ambiguous and
unpredictable environment.

HR Planning

In a company that has a differentiation strategy and that recognizes people are the key to competitive advantage, HR
planning is taken very seriously.

For example, at Sumitomo Metals in Japan, the business planning group reports to HR because the company
understands that identifying what needs to be done is less difficult than planning how to do it.

Succession management is critical as employees have to possess many attributes to move ahead in the organization.
Thus, a strong emphasis on developing skills for the future is part of the promotion policy.

Investments in career moves, training, and developmental experiences are substantial. Long-term job security and
reciprocal loyalty are the norm
Selection
Companies with a differentiation strategy need employees who have a
broad range of skills and the ab ility to learn from others.

An innovative atmosphere requires employees who are self-motivated and

do not require a great deal of supervision.

Employees are selected for their abilities to think creatively, to be flexible

in work attitudes, and to be able to work in teams.

Compensation
Compensation plans affect employee behaviour more directly than most HR practices.

For example, Drucker describes a compensation scheme he implemented at General Electric (GE) in
which pay for performance was based only on the previous year's results.

As such, for ten years, GE lost its capacity for innovation because investing in innovation affects
expenses and decreases profits, so everyone postponed spending on innovation.
 Training
Companies with a differentiation strategy have a strong training team.

The focus of training is on both skills and attitudes. Process skills, such as decision making, the ability to work in
teams, and creative thinking, are emphasized as much as skills needed for the current job.

The training itself is seen as an opportunity to generate new ideas and procedures.

Performance Evaluation

In companies with a differentiation strategy, performance appraisal is based not on short-term results but
instead on the long-term implications of behaviour.

Processes that are deemed to lead to better results in the long term are rewarded.

Appraisals that include input from employees, functional experts, peers, and so on-360° evaluations-are
the norm. Organizations in the service sector are more likely to include customers as sources of input for
performance appraisal.
Labour Relations

Any structure or process that reduces the capacity to be innovative and flexible is difficult to tolerate.

Traditional unions, with rigid collective agreements, are encouraged to work collectively toward a new union-management relationship.

This relationship is characterized by shared information such as open books, shared decision making about best approaches, and shared
responsibility for solving problems as they arise.
HR COMPETENCIES LEAD TO BUSINESS STRATEGY

A competing view states that an organization cannot implement a strategy if it does not have the human
resources necessary. Currently, companies are scrambling to find qualified workers in many fields.

Small businesses seem to be better at this second approach. Diversity management efforts are currently
building on this theme. For example, if the number of employees who speak Mandarin reaches a sufficient
number within an organization, the observant executive will start to explore Asian markets.

This "skills determine strategy" outlook relies too heavily on employee capabilities and not enough on
environmental analysis; nor is consideration given to changing HR practices in training or compensation to
facilitate this change in strategy.

These perspectives represent two extremes on a continuum between organizational strategy and HR
practices. The reality is closer to the concept of reciprocal interdependencies.
RECIPROCAL INTERDEPENDENCY BETWEEN HR
STRATEGY AND BUSINESS STRATEGY

An emerging perspective sees HR strategy as contributing to business-level strategy and vice versa. Increasingly, in large
firms, senior HR vice-presidents are asked not only to review business plans to ensure consistency with HR strategy but
also to provide input to this strategy based on HR strengths and weaknesses.

In this context, an organization chooses a business strategy, such as being a leader in innovative products, based on its in-
house, highly educated, trained employees who have been socialized to value creativity.

Simply phrased, an organization develops its employees and then capitalizes on their skills; the employees then learn
new skills, and so it continues.

In many ways, HR strategy generates the business strategy, and business strategy determines HR strategy. This concept
of reciprocal interdependence is widely accepted in the HR strategy literature.

An emerging view is that HR should build its strategies by starting with the issues facing the business. All HR programs
should be created to solve real business problems and add value, thus becoming indistinguishable from the business.35
HR BECOMES A BUSINESS PARTNER
The key point here is the concept of concurrent strategy formulation. Strategy development is conducted at the same
time that HRM issues are considered. The HR senior management team moves from outsider status to insider status.

The implications are not trivial; HR managers must understand the numbers language of business or the outcome
expectations of nonprofit organizations. They must be able to understand analyses presented by marketing, financial,
and operational managers. Cost-benefit assessments of options within the HR domain will have to be prepared and
defended.

Entrepreneurial instincts will have to be sharpened, as HR managers will be expected to engage in scanning HR
capabilities for business opportunities in this two-way approachto strategic HR planning

An example of this occurred when an organization was experiencing a rapid downward spiral in business. The traditional
HR response would have been to prepare for downsizing the workforce. Instead the HR manager created a unit to lobby-
successfully-the government to support two major contracts, using their employees' unique competencies.

HR managers have to develop strategies to deal with rapid training and high turnover rates. This option will have to be
compared with outsourcing, use of robots, or even increasing wages to reduce the costs of turnover. The HR manager is no
longer the auditor, but a partner and problem solver. Linkages between the HR manager and other managers, both formal and
informal, ensure that this partnership role is enacted.
11 STRATEGIC PARTNERING
 11 BECOMING MORE STRATEGIC
HR departments are restructuring in order to be able to do the basics right (payroll, safety training, and so on)
while enhancing the performance of business units and supporting strategic moves. Traditionally, HR has been
organized into functional units (training, compensation, and so on). However, there are some more innovative
practices, where the unit is organized according to the services provided, as outlined in HR Planning Notebook
It seems feasible to design HR policies to match
strategy, but what happens when an organization has
more than one business strategy and more than one
HR strategy?
.
 11 HR STRATEGY DIFFERENTIATION

Firms with more than one business strategy are likely to have more than one approach to HR
strategy. As different divisions are responsible for realizing different aspects of the strategy,
employees in different divisions may be encouraged to display different behaviours through
appropriate HR practices.

For example, 3M adopted HR practices that support innovation in the research and
development branch while adopting policies that support low costs in the manufacturing
branch.

But to achieve equity, the company cultivated a culture of trust by implementing a series of HR practices such as
 educating employees on company's mission and objectives,
 ensuring compensation fairness,
 and facilitating communication to enhance employee engagement and perception of fairness
From a strategic perspective, different positions assume different roles in strategy
implementation.

Two considerations are

(1) when a position is directly responsible for creating the strategic capabilities of the business;
and
(2) when different job holders may vary substantially in their job performance, then the
position is considered a strategic position
At Big Pharma, the strategic
capability of the business is new
product development, thus the
R&D scientists would assume the
most strategic role.
Walmart's strategic capability is
its distribution and logistics
systems that allow it to achieve
high efficiency at low costs, thus
the distribution and logistics
specialists should be considered
strategic positions.
 Organizations should have a special HR
strategy for these strategic positions to
ensure that they can attract, motivate,
and retain top players in these positions

From a human capital perspective,

even within the same positions,
some individuals may deserve
differential HR strategy than others
for two reasons-because their
human
capital is
(1) valuable to the business
strategy and
(2) unique (hard to replace)
 CHARACTERISTICS OF AN EFFECTIVE HRM
STRATEGY

The purpose of HR strategy is to capitalize on the dis tinctive competencies of the organization and add value
through the effective use of human resources. Effective HRM strategies include external and internal fit, and a
focus on results.
EXTERNAL FIT

HR programs must align with or fit the

overall strategy of the organization. If the
business strategy is to differentiate from
competitors based on superior service,
then selection and training programs
should be developed to hire and train
people in the skills and behaviours

necessary to deliver superior service.

INTERNAL FIT

We look at two types of internal fit:

a fit with other functional areas, such as

HR programs must also be consistent
marketing, and a fit among all HR programs.
with each other.
That is, training, selection, and appraisal
Fit with other functional areas is important. If
must work together to support a strategy.
the marketing department is developing an
advertising plan that promises access to 24-
If the customer service representatives
hour customer service representatives but:
use technology, then:

the HR plan does not include compensation

the staffing department must hire people
differentials for shift work, the overall marketing
either who are computer literate or who
strategy might fail.
have the kinds of intelligence that enable
them to learn computer skills rapidly.
 FOCUS ON RESULTS

HR program ~ employee human capital and behaviours ~

organizational strategy ~ organizational outcome

So, if the overall corporate outcome for a retailer is "growth in sales," and the strategy
to do this is through customer service (a differentiation strategy), then what employee
human capital and behaviours are required? If, for example, product knowledge and
sales skills are needed, then HR programs could be designed to select and/ or develop
these skills.
 SUMMARY
Strategic HRM is a set of distinct but interrelated philosophies, policies, and practices with the goal of enabling the
organization to achieve its strategy.

HR strategy is embedded in theories of the resource-based view of the firm, the behavioural perspective, and the
human capital approach. By involving HR in discussions of strategic policies, an organization has a better chance of
being effective in the implementation of these policies.

There are various approaches to linking HRM strategies to organizational strategies. We can start with the corporate
strategy that leads to the HR strategy, or start with the HR competencies that lead to the business strategy, or use a
blend of the interrelationship of the HR strategy and the corporate strategy.

Aligning HR strategy with the corporate strategy and with other functional strategies is important.