LO 2-1 Describe the differences between strategy formulation and strategy implementation, page 74

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

After reading this chapter, you should 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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HP's New Strategy

In the face o f increasing c o m p e titio n , th e largest producer o f PCs and la p to p s , H e w le tt Packard, recently d e c id e d to g e t o u t o f th e PC business a ltogether. A fte r o u td u e lin g D ell to b e co m e the w orld's largest m a n u fa ctu re r o f c o m p u te rs (HP s h ip p e d o v e r 64 m illio n PCs in 2010), th e com pany has a n n o u n ce d its in te n tio n to spin o r sell its personal-system s g ro u p , a d ivisio n th a t b ro u g h t in $40 .74 b illio n in sales in 2010. C EO Leo A p o th e k e r c o n c lu d e d th a t, " t o be successful in the co nsu m e r d e vice business w e w o u ld have had to invest a lo t o f c a pita l and I b e lie v e w e can invest it in b e tte r p la ces."

These investm ents seem to be ta king HP fu rth e r into m arkets th a t ta rg e t businesses as custom ers. The th in k in g is th a t such businesses p ro vid e higher p o te n tia l p ro fit m argins. For instance, in 2008 th e co m p an y a cquired th e tech services com pany Electronic Data Systems fo r $13.9 b illio n in an e ffo rt to c o m p e te against IBM's tech-services division. In 2010 it also a cquired 3C om in an effort to c o m p e te w ith Cisco Systems' n etw o rk- e q u ip m e n t business. HP recently ann ou nce d a $10.25 b illio n purchase o f British e nte rp rise s o ft­ ware co m p an y A u to n o m y, w hich w ill c o m p e te against Mr. A p o th e ke r's fo rm e r em ployer, SAP.

Industry analysts agree th a t th e c o n d itio n s o f the PC m arket m ake it a business w hich is hard to

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run. M argins fo r PCs run in th e 2 -6 % range, much lo w e r than HP th in ks it can g e n e ra te by focusing on so ftw are and services.

Interestingly, th is is n o t th e firs t tim e th a t the m arkets have q u e s tio n e d th e w isd o m o f HP's strategy. Ten years ago HP m ade h eadlines fo r m aking a co ntrove rsia l $25 b illio n a cquisition. W h a t was th e a cqu isitio n ? Ironically in lig h t o f to da y's strategy, HP b o u g h t PC m aker C om pa q in an e ffo rt to s tre n g th e n its p o s itio n in th e PC m arket.

SOURCE: From Y. Kane and N. W ingfield, "Pioneering Firm Bows to Post-PC W orld," Wall Street Journal, August 19, 2011. Reproduced with permission o f Dow Jones & Company, Inc. via C opyright Clear­ ance Center.

7 2 P A R T I T he H um an Resource E n v iro n m e n t

Introduction

A s the H P exam ple just illustrated, business organizations exist in an environm ent of com petition. T hey can use a number o f resources to com pete with other com panies. T hese resources are physical (such as plant, equipm ent, technology, and geographic location ), organizational (the structure, planning, controlling, and coordinating systems, and group relations), and hum an (the experience, skill, and intelligence of em ployees). It is these resources under the control of the com pany that provide com petitive advan tage.1

T h e goal o f strategic m anagem ent in an organization is to deploy and allocate resources in a way that gives it a com petitive advantage. A s you can see, two o f the three classes of resources (organizational and hum an) are directly tied to the human resource m anagem ent function. A s C hapter 1 pointed out, the role o f hum an resource m anagem ent is to ensure that a com pany’s hum an resources provide a com petitive advantage. C hapter 1 also pointed out some o f the major com petitive challenges that com panies face today. T hese challenges require com panies to take a proactive, strate­ gic approach in the m arketplace.

To be m aximally effective, the H R M function must be integrally involved in the com pany’s strategic m anagem ent process.2 T his m eans that hum an resource managers should (1) have input into the strategic plan, both in terms o f people-related issues and in terms o f the ability o f the hum an resource pool to im plem ent particular stra­ tegic alternatives; (2) have specific knowledge of the organization’s strategic goals; (3 ^ know what types o f employee skills, behaviors, and attitudes are needed 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 m odels and strat­ egy and by depicting the strategic m anagem ent process. Then, we discuss the levels of integration between the H R M function and the strategic m anagem ent process in strategy formulation. N ext, we review some of the more com m on strategic models and, within the context of these models, discuss the various types o f employee skills, behaviors, and attitudes, and the ways H R M practices aid in im plem enting the strate­ gic plan. Finally, we discuss the role of HR in creating com petitive advantage.

O What Is a Business Model?

A business model is a story of how the firm will create value for customers and, more important, how it will do so profitably. We often hear or read of com panies that have “transformed their business m odel” in one way or another, but what that means 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 o f 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 o f 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 o f the materials that go into the widget might cost a total o f $10, which means that you have to charge at least $10 per widget, or you cannot even cover the variable costs o f production.

C H A P T E R 2 S tra te g ic H um an Resource M a n a g e m e n t 7 3

Third is the concept o f “contribution m argins,” or margins. M argins are the differ­ ence between what you charge for your product and the variable costs of that product. They are called contribution margins because they are what contributes to your abil­ ity to cover your fixed costs. So, for instance, if you charged $15 for each widget, your contribution margin would be $5 ($15 price - $10 variable cost).

Fourth, the gross margin is the total amount of margin you made and is calculated as the number of units sold times the contribution margin. If you sold 1,000,000 units, your gross margin would then be $5,000,000. Did you make a profit? T hat depends. Profit refers to 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

Let’s look at how a business model plays out with the recent challenges faced by G eneral M otors (G M ). C ritics of G M talk about the fact that G M has higher labor costs than their foreign competitors. T his is true, but misleading. G M ’s average hourly wage for their existing workforce is reasonably com petitive. However, the two aspects that make G M uncom petitive are their benefit costs (in particular, health care) and most important, the cost of their legacy workforce.

A legacy workforce describes the former workers (i.e., those no longer working for the com pany) to whom the firm still owes financial obligations. G M and the U nited A uto Workers (U A W ) union have negotiated contracts over the years that provide substantial retirement benefits for former G M workers. In particular, retired G M workers have defined benefit plans that guarantee a certain percentage of their final (preretirement) salary as a pension paym ent as long as they live as well as having the company pay for their health insurance. In addition, the contract specifies that work­ ers are entitled to retire at full pension after 30 years of service.

T his might have seemed sustainable when the projections were that G M would continue growing its sales and margins. However, since the 1970s, foreign competitors have been eating away at G M ’s market share to the extent that G M ’s former 50% of the market has shrunk to closer to 20%. In addition, with the current econom ic crisis, the market itself has been shrinking, leaving G M with a decreasing percentage o f a decreasing market. For instance, in December o f 2005, G M sold 26% of the cars in the global market of alm ost 1.5 million, but by January o f 2009, the market had shrunk to 656,000, and G M was down to 20% of those sales. Thus, in addition to the legacy workforce, they had a significant number o f plants with thousands of employees that were completely unnecessary, given the volume o f cars G M can produce and sell.3 4

If you look at Figure 2.1, you’ll see that the solid lines represent the old G M business model, which was based on projections that G M would be able to sell 4 million units at a reasonably high margin, and thus completely cover its fixed costs to make a strong profit. However, the reality was that its products didn’t sell at the higher prices, so to try to sell 4 million vehicles, G M offered discounts, which cut into its margins. W hen G M ended up selling only 3.5 million vehicles, and those were sold at a lower margin, the company could not cover its fixed costs, resulting in a $9 billion loss in 2008 (this is illustrated by the dotted blue line in the figure). So, when G M refers to the “redesigned business model,” what it is referring to is a significant reduction in fixed costs (through closing plants and cutting workers) to get the fixed-cost base low enough (.the dotted red line) to be able to still be profitable selling fewer cars at lower margins (again, the dotted blue line).

O ne can easily see how, given the large com ponent that labor costs are to most com panies, reference to business models alm ost inevitably leads to discussions of

7 4 P A R T 1 T he H u m an Resource E n v iro n m e n t

figure 2.1

An Illustration of a Business Model for GM

labor costs. These can be the high cost associated with current unionized employees in developed countries within N orth A m erica 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 id-off workers for whom they still have the liability of paying pensions and health care benefits. T his is a significant com ponent of their fixed-cost base, which makes it difficult for them to com pete with other automakers that either have fewer retirees to cover or have no comparable costs because their home governm ents provide pensions and health care.

< What Is Strategic Management?

M any authors have noted that in today’s com petitive market, organizations must engage in strategic planning to survive and prosper. Strategy comes from the Greek word strategos, which has its roots in military language. It refers to a general’s grand design behind a war or battle. In fact, Webster’s Nevu American Dictionary defines strat­ egy as the “skillful employm ent and coordination o f tactics” and as “artful planning and m anagem ent.”

Strategic m anagem ent is a process, an approach to addressing the competitive challenges an organization faces. It can be thought o f as m anaging the “pattern or plan that integrates an organization’s m ajor goals, policies, and action sequences into a cohesive whole.”5 These strategies can be either the generic approach to competing or the specific adjustm ents and actions taken to deal with a particular situation.

First, business organizations engage in generic strategies that often fit into some strategic type. O ne exam ple is “cost, differentiation, or focus.”6 A noth er is “defender, analyzer, prospector, or reactor.”7 Different organizations within the same industry often have different generic strategies. T hese generic strategy types describe the con­ sistent way the company attem pts to position itself relative to competitors.

However, a generic strategy is only a small part of strategic managem ent. T he sec­ ond aspect of strategic m anagem ent is the process o f developing strategies for achieving the com pany’s goals in light o f its current environm ent. Thus, business organizations engage in generic strategies, but they also make choices about such things as how to

LO 2-1

Describe the differences between strategy formulation and strategy implementation.

C H A P T E R 2 S tra te g ic H um an Resource M a n a g e m e n t 7 5

scare off competitors, how to keep competitors weaker, how to react to and influence pending legislation, how to deal with various stakeholders and special interest groups, how to lower production costs, how to raise revenues, what technology to implement, and how many and what types o f people to employ. Each o f these decisions may pres­ ent competitive challenges that have to be considered.

Strategic m anagem ent is more than a collection of strategic types. It is a process for analyzing a com pany’s com petitive situation, developing the com pany’s strategic goals, and devising a plan of action and allocation of resources (hum an, organiza­ tional, and physical) that will increase the likelihood of achieving those goals. This kind of strategic approach should be emphasized in hum an resource m anagem ent. H R managers should be trained to identify the com petitive issues the company faces with regard to human resources and think strategically about how to respond.

Strategic hum an resource m anagem ent (S H R M ) can be thought o f as “the pat­ tern of planned hum an resource deployments and activities intended to enable an organization to achieve its goals.”8 For exam ple, manv firms have developed inte­ grated manufacturing systems such as advanced manufacturing technology, just-in­ time inventory control, and total quality m anagem ent in an effort to increase their competitive position. However, these systems must be run by people. S H R M in these cases entails assessing the employee skills required to run these systems and engaging in HRM practices, such as selection and training, that develop these skills in employ­ ees.9 To take a strategic approach to H RM , we must first understand the role of H R M in the strategic m anagem ent process.

COMPONENTS OF THE STRATEGIC MANAGEMENT PROCESS

The strategic management process has two distinct yet interdependent phases: strategy formulation and strategy implementation. During strategy form ulation the strategic planning groups decide on a strategic direction by defining the company’s mission and goals, its external opportunities and threats, and its internal strengths and weaknesses. They then generate various strategic alternatives and compare those alternatives’ abil­ ity to achieve the company’s mission and goals. During strategy im plem entation, the organization follows through on the chosen strategy. T his consists of structuring the organization, allocating resources, ensuring that the firm has skilled employees in place, and developing reward systems that align employee behavior with the organization’s strategic goals. Both of these strategic management phases must be performed effec­ tively. It is important to note that this process does not happen sequentially. A s we will discuss later with regard to emergent strategies, this process entails a constant cycling of information and decision making. Figure 2.2 presents the strategic management process.

In recent years organizations have recognized that the success of the strategic m anagement process depends largely on the extent to which the H R M function is involved.10

LINKAGE BETWEEN HRM AND THE STRATEGIC

MANAGEMENT PROCESS

The strategic choice really consists o f answering questions about com petition— that is, how the firm will com pete to achieve its missions and goals. These decisions con­ sist o f addressing the issues of where to com pete, how to compete, and with what to compete, which are described in Figure 2.3.

S trategic Human Resource M anagem ent (SHRM)

A p a tte rn o f plan ned hu m an resource d e p lo y m e n ts and a c tiv itie s in te n d e d to e n a b le an o rg a n i­ za tio n to achieve its goals.

LO 2-2

List the com ponents of the strategic management process. Strategy Formulation T he process o f d e c id in g on a stra­ te g ic d ire c tio n by d e fin in g a c o m ­ pany's m ission and go als, its external o p p o rtu n itie s and threa ts, and its in te r­ nal s tre n g th s and weaknesses. Strategy Im plem entation The process o f d e v is in g structures an d a llo c a tin g resources to en act th e s tra te g y a c o m ­ pa ny has chosen.

fi gu re 2 .2 A M o d e l of th e S tr a te g ic M a n a g e m e n t P ro c e s s 76 E m e rg en t s tr a te g ie s

C H A P T E R 2 S tra te g ic H um an Resource M a n a g e m e n t 7 7

1. W h e re to com pete?

In w hat m arket or m arkets (industries, products, etc.) will w e com pete? 2. H o w to co m pete?

O n w hat criterion or d iffe ren tiatin g characteristic(s) will w e com p ete? Cost? Q uality? Reliability? Delivery?

3. W ith w h a t will w e com pete?

W h a t resources will allow us to b eat our com petition?

H o w will w e acquire, d evelop , and d ep lo y those resources to com pete?

figure 2.3

Strategy— Decisions about Competition

A lthough these decisions are all important, strategic decision makers often pay less attention to the “with what will we com pete” issue, resulting in poor strategic deci­ sions. For exam ple, PepsiCo in the 1980s acquired the fast-food chains o f Kentucky Fried Chicken, Taco Bell, and Pizza H ut (“where to com pete” decisions) in an effort to increase its customer base. However, it failed to adequately recognize the differ­ ences between its existing workforce (mostly professionals) and that of the fast-food industry (lower skilled people and high schoolers) as well as its ability to manage such a workforce. T his was one reason that PepsiCo, in 1998, spun off the fast-food chains. In essence, it had made a decision about where to com pete without fully understand­ ing what resources would be needed to com pete 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 T he 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’t have enough people to fill the orders) and did not have the production technology to enable the necessary increase in productivity. T h e result of this failure to address “with what will we com pete” in making a decision about how to compete resulted in the firm’s inability to m eet delivery deadlines and the ensuing penalties it had to pay to its customers. T he end result is that after all the travails, for the first time in the history of the industry, Airbus sold more planes than Boeing in 2003. Luckily, Boeing was able to overcome this stumble, in large part because o f a number o f stumbles on the part o f its chief rival, Airbus. Boeing’s 787 Dreamliner has generated a number o f orders, while Airbus’s behem oth A 3 8 0 has been beset by a number of production delays, enabling Boeing to regain its market lead. T he “C om peting through G lobalization” box illustra­ tes how firms face a “with what to com pete” question in India in terms o f talent.

ROLE OF HRM IN STRATEGY FORMULATION

As the preceding exam ples illustrate, often the “with what will we com pete” questions present ideal avenues for H R M to influence the strategic m anagem ent process. This might be through either lim iting strategic options or forcing thoughtfulness among the executive team regarding how and at what cost the firm m ight gain or develop the human resources (people) necessary for such a strategy to be successful. For example, H RM executives at PepsiCo could have noted that the firm had no expertise in m an­ aging the workforce o f fast-food restaurants. T he lim iting role would have been for these executives to argue against the acquisition because of this lack of resources. O n

LO 2 -3

Discuss the role of the HRM function in strategy formulation.

7 8 P A R T 1 T he H um an Resource E n v iro n m e n t

LO 2 -4

Describe the linkages between HRM and strategy formulation.

figure 2.4

Linkages o f S tra te g ic Planning and HRM

the other hand, they might have influenced the decision by educating top executives as to the costs (o f hiring, training, and so on) associated with gaining people who had the right skills to m anage such a workforce.

A firm’s strategic management decision-making process usually takes place at its top levels, with a strategic planning group consisting of the chief executive officer, the chief financial officer, the president, and various vice presidents. However, each component of the process involves people-related business issues. Therefore, the H R M function needs to be involved in each of those components. O ne 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 R M and the strategic planning process.12 However, the level of linkage varied, and it is important to understand these different levels.

Four levels o f integration seem to exist between the H R M function and the strategic m anagem ent function: administrative linkage, one-way linkage, two-way linkage, and integrative linkage.13 These levels o f linkage will be discussed in relation to the differ­ ent com ponents of strategic management. T he linkages are illustrated in Figure 2.4.

Adm inistrative Linkage

In administrative linkage (the lowest level o f integration), the H R M function’s atten­ tion is focused on day-to-day activities. T h e H R M executive has no time or opportu­ nity to take a strategic outlook toward H R M issues. T he com pany’s strategic business planning function exists without any input from the H R M department. Thus, in this level o f integration, the H R M department is com pletely divorced from any com po­ nent of the strategic m anagem ent process in both strategy formulation and strategy im plem entation. T he departm ent simply engages in administrative work unrelated to the com pany’s core business needs.

One-Way Linkage

In one-way linkage, the firm’s strategic business planning function develops the stra­ tegic plan and then informs the H R M function of the plan. M any believe this level o f integration constitutes strategic H R M — that is, the role o f the H R M function is to design systems and/or programs that im plem ent the strategic plan. A lthough one-way A dm inistrative linkage Strategic planning HRM fu n c tio n

___ J

SOURCE: A d a p te d from K. G olden and V. Ramanujam, "B e tw e e n a Dream and a N ightm are: O n th e In tegration o f th e Human Resource Function and th e Strategic Business Planning Process," Hum an Resource M an a g e m en t 24 (1985), p p. 4 2 9 -5 1 .

O ne-w ay linkage HRM fu n c tio n

J

Two-way linkage Strategic planning

i r

HRM fu n c tio n In teg rative linkage

c h a p t e r 2 S tra te g ic H um an Resource M a n a g e m e n t 7 9

linkage does recognize the importance of hum an resources in im plem enting the stra­ tegic plan, it precludes the com pany from considering hum an resource issues while formulating the strategic plan. T his level o f integration often leads to strategic plans that the company cannot successfully implement.

Two-Way Linkage

Two-way linkage allows for consideration of hum an resource issues during the strategy formulation process. T his integration occurs in three sequential steps. First, the stra­ tegic planning team informs the H R M function o f the various strategies the company is considering. T hen H R M executives analyze the hum an resource im plications 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 H R M executive, who develops programs to im plem ent it. T he strategic planning function and the H R M function are interdependent in two-way linkage.

Integrative Linkage

Integrative linkage is dynamic and m ultifaceted, based on continuing rather than sequential interaction. In m ost cases the H R M executive is an integral member of the senior m anagem ent team. R ather than an iterative process of information exchange, companies with integrative linkage have their H R M functions built right into the strategy formulation and im plem entation processes. It is this role that we will discuss throughout the rest of this chapter.

Thus, in strategic H R M , the H R M function is involved in both strategy formu­ lation and strategy im plem entation. T h e H R M executive gives strategic planners information about the com pany’s hum an resource capabilities, and these capabilities are usually a direct function o f the H R M practices.14 T his information about human resource capabilities helps top managers choose the best strategy because they can consider how well each strategic alternative would be implemented. O nce the stra­ tegic choice has been determined, the role o f HR M changes to the developm ent and alignment of H R M practices that will give the company employees having the neces­ sary skills to im plem ent the strategy.15 In addition, H R M practices must be designed to elicit actions from employees in the company.16 In the next two sections of this chapter we show how H R M can provide a com petitive advantage in the strategic m anagement process.

Strategy Formulation

Five m ajor com ponents o f the strategic m anagem ent process are relevant to strategy form ulation.17 T hese com ponents are depicted in Figure 2.5. T he first com ponent is the organization’s mission. T h e m ission is a statem ent 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. T h e m ission statem ent is often accom panied by a statem ent o f a com pany’s vision and/or values. For example, Table 2.1 illustrates the m ission and values o f M erck & C o., Inc.

A n organization’s goals are what it hopes to achieve in the medium- to long-term future; they reflect how the m ission will be operationalized. T h e overarching goal o f m ost profit-m aking com panies in the U nited States is to maximize stockholder wealth. But com panies have to set other long-term goals in order to maximize stock­ holder wealth. Goals W hat an o rg a n i­ zatio n ho pe s to achieve in th e m e d iu m - to lo n g ­ te rm future .

8 0 P A R T 1 The H um an Resource E n v iro n m e n t figure 2.5 S tra te g y F o rm u la tio n External Analysis E xam inin g th e o rg a ­ nization's o p e ra tin g e n v iro n m e n t to id e n tify s tra te g ic o p p o rtu n itie s and threats. Internal Analysis T he process o f ex a m in in g an o rg a ­ nization's stre n g th s and weaknesses. Strategic Choice T he o rg a n iz a tio n 's stra te g y; th e ways an o rg a n iz a tio n w ill a tte m p t to fu lfill its m ission and achieve its lo n g -te rm goals.

External analysis

O p p o rtu n itie s Threats

Mission Goals Strategic

choice

j

Internal analysis Strengths W eaknesses HR input

SOURCE: A d a p te d from K. G olden and V. Ramanujam, "B e tw e e n a Dream and a N ig h tm a re ,"

Hum an Resource M an a g e m en t 24 (1985), p p. 4 2 9 -5 1 .

Extern al analysis consists of exam ining the organization’s operating environ­ ment to identify the strategic opportunities and threats. Examples o f opportunities are customer markets that are not being served, technological advances that can aid the company, and labor pools that have not been tapped. T hreats include potential labor shortages, new competitors entering the market, pending legislation that might adversely affect the company, and com petitors’ 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 com bined constitute what has come to be called the S W O T (strengths, w eaknesses, opportunities, threats) analysis. Table 2.2 shows an exam ple o f a S W O T analysis for G oogle. A fter going through the S W O T analysis, the strategic planning team has all the inform ation it needs to generate a num ber o f strategic alternatives. T h e strategic m anagers com pare these altern atives’ ability to attain the organization’s strategic goals; then they make their strategic choice. T h e strategic choice is the organization’s strategy; it describes the ways the organization will attem pt to fulfill its m ission and achieve its long-term goals.

M any of the opportunities and threats in the external environm ent are people- related. W ith fewer and fewer highly qualified individuals entering the labor market,

c h a p t e r 2 S tra te g ic H um an Resource M a n a g e m e n t 8 1

M IS S IO N STA TE M E N T

M erck & Co., Inc. is a le ad ing research-driven ph arm a ceutica l p ro d u c ts and services com pany. M erck discovers, d e velops, m anufactures and m arkets a b ro a d range o f innovative p ro d u c ts to im p ro v e hum an and anim al health. T he M e rc k -M e d c o M an ag ed Care D ivision m anages ph arm a cy b e n e fits fo r m ore than 4 0 m illio n A m ericans, encour­ ag in g th e a p p ro p ria te use o f m ed icin es and p ro v id in g disease m a n a g e m e n t program s.

O u r Mission

The m ission o f M e rck is to p ro v id e s o c ie ty w ith s u p e rio r p ro d u c ts a n d services— in n o v a tio n s a n d s o lu tio n s th a t im p ro v e th e q u a lity o f life a n d satisfy c u s to m e r ne ed s— to p ro v id e e m p lo y e e s w ith m e a n in g fu l w o rk a n d a d v a n c e m e n t o p p o rtu n itie s a n d in ve sto rs w ith a s u p e rio r rate o f return .

O u r Values

1. O u r business is p reserving an d im p ro vin g hum an life. A ll o f o u r a c tio n s m ust b e m ea sure d b y o u r success in a c h ie v in g th is g o a l. W e value a b o v e all o u r a b ility to serve e v e ry o n e w h o can b e n e fit fro m th e a p p ro p ria te use o f o u r p ro d u c ts and services, th e re b y p ro v id in g la stin g c o n s u m e r sa tisfa ctio n .

2. W e are c o m m itte d to th e h ig h est standards o f ethics and in te g rity . W e are re s p o n s ib le to o u r custo m e rs, to M e rck e m p lo y e e s an d th e ir fa m ilie s , to th e e n v i­ ro n m e n ts w e in h a b it, and to th e s o c ie tie s w e serve w o rld w id e . In d is c h a rg in g o u r re s p o n s ib ilitie s , w e d o n o t ta k e p ro fe s s io n a l o r e th ic a l sho rtcu ts. O u r in te ra c tio n s w ith all s e g m e n ts o f s o c ie ty m u s t re fle c t th e h ig h stan dard s w e profess.

3. W e are d e d ic a te d to th e h ig h est level o f scientific exce llen c e and co m m it o ur research to im p ro vin g hum an and anim al h ealth and th e q u a lity o f life.

W e strive to id e n tify th e m o s t c ritic a l ne ed s o f co n su m e rs a n d c u sto m e rs; w e d e v o te o u r resources to m e e tin g th o s e needs.

4. W e e x p e c t p ro fits , b u t only fro m w o rk th a t satisfies cu sto m e r need s and b e n e fits hum anity. O u r a b ility to m e e t o u r re s p o n s ib ilitie s d e p e n d s on m a in ta in ­ in g a fin a n c ia l p o s itio n th a t in v ite s in v e s tm e n t in le a d in g -e d g e research a n d th a t m akes p o s s ib le e ffe c tiv e d e liv e ry o f research results.

5. W e recognize th a t th e ab ility to excel— to m ost c o m p e titiv e ly m e e t society's and custom ers' needs— d ep en d s on th e integrity, kn o w le d g e , im agination, skill, diversity, and te a m w o rk o f em plo yees, and w e value th ese q ualities m ost highly. To th is en d, w e strive to crea te an e n v iro n m e n t o f m utua l respect, e n cou r­ a g e m e n t, and te a m w o rk — a w o rk in g e n v iro n m e n t th a t rew ards c o m m itm e n t and p e rfo rm a n c e and is responsive to th e ne ed s o f e m p lo y e e s an d th e ir fam ilies.

SOURCE: C ourtesy o f Merck.

r

S TRENG THS

1

W E A K N E S S E S

E x p a n d in g L iq u id ity Issues w ith C h ine se G o v e rn m e n t O p e ra tio n a l E fficien cy D e p e n d e n c e o n A d v e rtis in g S e g m e n t Broad Range o f Services P o rtfo lio Losses a t YouTube

O P P O R T U N IT IE S THREATS

G ro w in g D e m a n d fo r O n lin e V id e o W e a k E c o n o m ic O u tlo o k G ro w th in In te rn e t A d v e rtis in g M a rk e t Inva lid Clicks

In o rg a n ic G ro w th M ic ro s o ft-Y a h o o ! Deal

table 2.1

M erck & Co.'s M ission and Values

table 2.2

S W O T Analysis fo r G o o g le , Inc.

COMPETING THROUGH GLOBALIZATION

A Talent Shortage among Millions of Graduates

W e often hear a b o u t how many firm s have m oved call ce nte r and te c h n o lo g y ope ra tion s to India because o f th e large sup­ ply o f college g ra du ate talent. For exam ple, universities in India have seats fo r 1.5 m illion engineering students, up from 390,000 in 2000. However, according to assessment tests adm inistered by th e N ational Association o f Softw are and Services C om panies, 75% o f technical graduates and 85% o f general graduates are unem ­ ployable in th e in fo rm a tio n te c h ­ n olog y and call ce nte r industries. The p ro b le m is m u ltifa c e te d . First, because fa culty are p aid so low, th e y d o n o t p u t m uch e ffo rt into te ach ing . For instance, Pradeep Singh, a 23-year-old e n g in ee rin g g ra d u a te , quickly learned th a t th e y need n o t go

v______________________________

to classes. "T h e fa c u lty take it very casually, and th e stu de nts take it very casually, like th e y 'v e all agree d n o t to be b o th e re d to o m u c h ," he says.

In a d d itio n , c h e a tin g , o fte n e n c o u ra g e d b y th e g ra d e rs , is w id e s p re a d . For instan ce, D ee- p ack Sharm a says he fa ile d sev­ eral exam s u n til he fo u n d th e secret: p u ttin g his cell p h o n e n u m b e r on his exam . A fte r d o in g th is he says he g o t a call fro m th e e x a m in e r w h o o ffe re d to pass him and his frie n d s if th e y p a id 1 0 ,0 00 rup ee s each (a b o u t $250). A fte r g e ttin g th e m o n e y to g e th e r and p a y in g th e e xam in e r, th e y all passed th e te s t. He says, "I fe e l a lm o s t c e rta in th a t if I d id n 't pay th e m oney, I w o u ld have fa ile d th e exam a g a in ."

Large Indian co m p an ies such as W ip ro and Tata have

a tte m p te d to b rid g e th e w id e g a p b e tw e e n jo b re q u ire m e n ts and skills o f g ra d u a te s th ro u g h d e v e lo p in g s ig n ific a n t internal tra in in g pro gram s. For instance, Tata puts re ce n t g ra du ates th o u g h a 7 2-da y tra in in g p ro ­ cess and W ip ro has d e v e lo p e d a 9 0-da y p ro g ra m .

As hum an c a pita l (or ta l­ ent) co n tin u e s to b e co m e one o f th e critica l assets th a t c o m p a n ie s m ust m anage to be c o m p e titiv e , firm s d o in g business in India m ay have to th in k tw ic e b e fo re th e y le t th e idea o f m illio n s o f c o lle g e g ra d u a te s e n tic e th e m to m ake investm ents.

SOURCE: From G. A nand, "In d ia G rad­ uates M illions, b u t Too Few A re Fit to H ire ," Wall S treet Jo u rn a l O nline, A p ril 6, 2011. R eproduced w ith perm ission o f D ow Jones & C om pany, Inc. via C o p y­ rig h t Clearance Center.

organizations com pete not just for custom ers but for employees. It is H R M ’s role to keep close tabs on the external environm ent for hum an resource—related opportuni­ ties and threats, especially those directly related to the H R M function: potential labor shortages, com petitor wage rates, governm ent regulations affecting employ­ m ent, and so on. For exam ple, as discussed in C h apter 1, U .S . com panies are find­ ing that more and more high school graduates lack the basic skills needed to work, which is one source of the “hum an capital shortage.” 18 However, not recognizing this environm ental threat, many com panies 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 lobalization” box illustrates how a skill shortage exists in India, in spite of the huge number of college graduates.

A n analysis o f a com pan y’s internal strengths and w eaknesses also requires input from the H R M function. Today com panies are increasingly realizing that their hum an resources are one o f their m ost im portant assets. In fact, one estim ate is that over one-third o f the to tal grow th in U .S . gross n atio n al product (G N P ) between 1943 and 1990 was the result o f increases in hum an capital. A com pany’s failure to consider the strengths and w eaknesses £>f its workforce may result in its choosing strategies it is not capable o f pursuing.20 However, som e research

C H A P T E R 2 S tra te g ic H um an Resource M a n a g e m e n t 8 3

has dem onstrated that few com panies have achieved this level o f lin kage.21 For exam ple, one com pany chose a strategy o f cost reduction through tech n o ­ logical im provem ents. It built a plan t designed around a com puter-integrated m anufacturing system with statistical process controls. A lth o u gh this choice may seem like a good one, the com pany soon learned otherw ise. It discovered th at its employees could not operate the new equipm ent because 25% o f the workforce was functionally illiterate.22

Thus, with an integrative linkage, strategic planners consider all the people-related business issues before m aking a strategic choice. T hese issues are identified with regard to the mission, goals, opportunities, threats, strengths, and weaknesses, leading the strategic planning team to make a more intelligent strategic choice. A lthough this process does not guarantee success, com panies that address these issues are more likely to make choices that will ultimately succeed.

R ecent research has supported the need to have H R M executives integrally involved in strategy formulation. O ne study of U .S . petrochem ical refineries found that the level of H R M involvem ent was positively related to the refinery m anager’s evaluation of the effectiveness of the H R M function.23 A second study of m anufac­ turing firms found that H R M involvem ent was highest when top managers viewed employees as a strategic asset and associated them with reduced turnover.24 However, both studies found that H R M involvem ent was unrelated to operating unit financial performance.

Research has indicated that few com panies have fully integrated H R M into the strategy formulation process.25 A s we’ve m entioned before, com panies are begin­ ning to recognize that in an intensely com petitive environm ent, m anaging hum an resources strategically can provide a com petitive advantage. T hus, com panies at the administrative linkage level will either become more integrated or face extinction. In addition, com panies will move toward becom ing integratively linked in an effort to manage hum an resources strategically.

It is o f utmost importance that all people-related business issues be considered dur­ ing strategy formulation. These issues are identified in the H R M function. M echa­ nisms or structures for integrating the H R M function into strategy formulation may help the strategic planning team make the m ost effective strategic choice. O nce that strategic choice is determined, H R M must take an active role in im plem enting it. This role will be discussed in the next section.

Strategy Implementation

After an organization has chosen its strategy, it has to execute that strategy— make it come to life in its day-to-day workings. T h e strategy a company pursues dictates cer­ tain H R needs. For a company to have a good strategy foundation, certain tasks must be accom plished in pursuit of the com pany’s goals, individuals must possess certain skills to perform those tasks, and these individuals must be m otivated to perform their skills effectively.

T he basic premise behind strategy im plem entation is that “an organization has a variety of structural forms and organizational processes to choose from when im ple­ menting a given strategy,” and these choices make an econom ic difference.26 Five important variables determine success in strategy im plem entation: organizational structure; task design; the selection, training, and developm ent o f people; reward sys­ tems; and types of information and information systems.

LO 2 -5

Discuss the more popular typologies of generic strategies and the various HRM practices associated with each.

8 4 P A R T 1 T he H um an Resource E n v iro n m e n t figure 2.6 Variables to Be C o n s id e re d in S trateg y Im p le m e n ta tio n

A s we see in Figure 2.6, H R M has prim ary responsibility for three o f these five im plem entation variables: task, people, and reward system s. In addition, H R M can directly affect the two rem aining variables: structure and inform ation and decision processes. First, for the strategy to be successfully im plem ented, the tasks must be designed and grouped into jobs in a way that is efficient and effective.27 In C h apter 4 we will exam ine how this can be done through the processes o f jo b analysis and job design. Seco n d, the H R M function m ust ensure that the organization is staffed with people who have the necessary knowledge, skill, and ability to perform their part in im plem enting the strategy. T h is goal is achieved prim arily through recruit­ m ent, selection and placem ent, training, developm ent, and career m anagem ent— topics covered in C h apters 5, 6, 7, and 9. In addition, the H R M function must develop perform ance m anagem ent and reward system s that lead em ployees to work for and support the strategic plan. T h e specitic types o f perform ance m anagem ent system s are covered in C h ap ter 8, and the m any issues involved in developing reward systems are discussed in C h apters 11 through 13. In other words, the role of the H R M function becom es one o f (1) ensuring that the com pany has the proper num ber o f em ployees with the levels and types o f skills required by the strategic p lan 28 and (2) developing “co n trol” system s that ensure that those em ployees are acting in ways that prom ote the ach ievem en t o f the goals specified in the strategic p lan .29

In essence, this is what has been referred to as the “vertical alignm ent” of H R with strategy. Vertical alignm ent m eans that the H R 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 m anu­ facturer of personal computers to being a fully integrated service provider, the types of people it needed changed significantly. Instead of employing thousands of workers in manufacturing or assembly plants, IBM increasingly needed software engineers to help write new “middleware” programs, and an army o f consultants who could help their corporate customers to im plem ent these systems. In addition, as IBM increasingly differentiated itself as being the “ integrated solutions” provider (m eaning it could sell

Seloction, training, and d e ve lo p m e n t o f p e o p le

J

Reward systems Product m arket strategy O rganizational structure Types of information P erform ance

COMPETING THROUGH SUSTAINABILITY

Helping the Rainforest Tribes?

As m any firm s seek to p ro m o te th e w e l­ fare o f th e ir suppliers, som e firm s have g o n e fa r back into th e s u p p ly chain. M any firm s d e v e lo p p artne rships w ith rainforest villa ge s as a w ay to seek to p ro fit w h ile h e lp in g th e pla ne t. For instance, A veda, th e co sm e tics c o m p a n y w hich is a u n it o f Estee Lauder, has e stab lish ed a p a rtn e rs h ip w ith th e Yawanawa' Indian trib e in th e ra in fo re st o f w estern Brazil. A ve da uses p ictures o f the Indian trib e m e m b e rs to p ro m o te its p o p u la r Uruku line o f lipsticks, eye shadow s, and facial bronzers th a t are su p ­ posed to use u rukum , a fru it th e trib e uses to m ake b o d y p aint. The "g re e n /s u s ta in a b ility " em phasis allow s th e m to charge a p re m iu m p rice to consum ers.

H ow ever, th e trib e has n o t d e liv e re d any urukum to A veda

b e tw e e n 2008 and 201 0 since it is m ore c o m m o n ly referred to as "a n n a tto " w hich is g ro w n c o m ­ m ercially all o v e r th e g lo b e . This d o e s n o t m ean th a t A ve da has n o t h e lp e d th e villa g e ; it has im p ro v e d access to health care, e d u c a tio n , and g o v e rn m e n t ser­ vices. T hey p ro v id e d $ 50,000 fo r th e trib e to b uy s e e d lin g s to g ro w urukum on a large r scale. The p ro v id e d a d d itio n a l fu nd s fo r th e trib e to b uy fo o d , c lo th ­ ing, and o th e r supplies. They h e lp e d b u ild a new villa g e , a school, and a health clinic.

H ow ever, th e trib e soon lost in te re st in th e re q u ire d w e e d in g and caring fo r th e p lants to th e p o in t th a t th e p la nts w ere in a "s ta te o f crisis" a cc o rd in g to th e d ire c to r o f th e z o o -b o ta n ic a l park o f th e Federal U niversity o f Acre Flavio R odriques. In a d d i­ tio n , an interna l trib a l s q u a b b le cre a te d d ivisio n reg ardin g

w h e th e r o r n o t th e trib e should even c o n tin u e th e partnership.

W h ile one can certainly a dm ire th e m o tiv a tio n o f Aveda to d o w ell by d o in g g o o d , given th a t th e m arket crop fo r urukum is a b o u t $500 annually, it by no m eans p ro vid e s enough to m ake th e v illa g e self-sufficient. This led Mr. R odrigues to w rite in a 2001 re p o rt th a t "T he p ro je c t p ro b a b ly d oe s n o t have e c o n o m ic viability. The im pression th a t rem ained with th e te chn ical te am is th a t the m u ltin a tio n a l has m ore interest in th e m a rk e tin g aspect o f w ork­ ing w ith an in d ig e n o u s co m m u ­ n ity in th e A m azon than it does in th e p ro d u c tio n o f a n n a tto ." SOURCE: From John Lyons, "Skin-D eep Gains fo r Am azon Tribe, Wall Street Jo u rn a l O nline, M ay 5, 2011. Repro­ d u ce d w ith perm ission o f D ow Jones & C om pany, Inc. via C o p y rig h t Clearance Center.

the hardware, software, consulting, and service for a com pany’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 of employees, and different kinds o f behaviors. T he “C om peting through Sustainability” box illustrates how the cosm etics company A veda sought to support an Am azonian tribe through sourcing cosm etic raw materials from them.

How does the H R M function im plem ent strategy? A s Figure 2.7 shows, it is through adm inistering H R M practices: job analysis/design, recruitment, selection sys­ tems, training and developm ent programs, performance m anagem ent systems, reward systems, and labor relations programs. T h e details of each of these H R M practices are the focus of the rest of this book. However, at this point it is im portant to present a general overview of the H R M practices and their role in strategy im plem entation. We then discuss the various strategies com panies pursue and the types of H R M sys­ tems congruent with those strategies. First we focus on how the strategic types are im plemented; then we discuss the H R M practices associated with various directional strategies.

8 6 P A R T 1 The H um an Resource E n v iro n m e n t figure 2.7 Strategy Im p le m e n ta tio n HRM practices R e c ru itm e n t J o b analysis T rain ing J o b d e s ig n P e rfo rm a n c e S e le c tio n m a n a g e m e n t D e v e lo p m e n t L a b o r Pay s tru c tu re re la tio n s In c e n tiv e s E m p lo y e e B e n e fits re la tio n s ■ t Human Human resource resource capability actions Skills B eh aviors A b ilitie s Results K n o w le d g e (P ro d u c tiv ity , a b s e n te e is m , tu rn o v e r) Em ergent strategies

HRM PRACTICES

T he H R M function can be thought of as having six menus o f H R M practices, from which com panies can choose the ones m ost appropriate for im plem enting their strat­ egy. Each of these menus refers to a particular functional area o f H R M : job analysis/ design, recruitm ent/selection, training and developm ent, performance m anagem ent, pay structure/incentives/benefits, and labor—employee relations.30 These menus are presented in Table 2.3. Job Analysis The process o f g e t­ tin g d e ta ile d in fo r­ m atio n a b o u t jo b s. Job Design T he process o f d e fin in g th e w ay w o rk w ill b e p e r­ fo rm e d a n d th e tasks th a t w ill b e re q u ire d in a g iv e n jo b .

Job Analysis and Design

C om panies produce a given product or service (or set of products or services), and the manufacture of these products requires that a number o f tasks be performed. These tasks are grouped together to form jobs. Jo b analysis is the process of getting detailed information about jobs. Jo b design addresses what tasks should be grouped into a par­ ticular job. T he way that jobs are designed should have an im portant tie to the strategy o f an organization because the strategy requires either new and different tasks or differ­ ent ways o f performing the same tasks. In addition, because many strategies entail the introduction of new technologies, this affects the way that work is performed.31

In general, jobs can vary from having a narrow range o f tasks (m ost of which are simplified and require a limited range of skills) to having a broad array o f com plex tasks requiring multiple skills. In the past, the narrow design o f jobs has been used to increase efficiency, while the broad design of jobs has been associated with efforts to

C H A P T E R 2 S tra te g ic H um an Resource M a n a g e m e n t 8 7

Jo b Analysis and Design

Few tasks M a n y tasks S im p le tasks <-» C o m p le x tasks Few skills re q u ire d M a n y skills re q u ire d S p e cific jo b d e s c rip tio n s <-> G e n e ra l jo b d e s c rip tio n s

R e c ru itm e n t an d S election

E xternal sources <-» In te rn a l sources L im ite d so c ia liz a tio n <-> E xtensive so c ia liz a tio n A ssessm e nt o f s p e c ific skills A ssessm e nt o f g e n e ra l skills

N a rro w c a re e r p a th s B road care er p a th s

Training and D e v e lo p m e n t

Focus on c u rre n t jo b skills Focus on fu tu re jo b skills In d iv id u a l o rie n ta tio n <-> G ro u p o rie n ta tio n

Train fe w e m p lo y e e s <-> Train all e m p lo y e e s S p o n ta n e o u s , u n p la n n e d P lanned, s yste m a tic

P erfo rm a n c e M a n a g e m e n t

B eh avioral criteria Results c rite ria

D e v e lo p m e n ta l o rie n ta tio n A d m in is tra tiv e o rie n ta tio n S h o rt-te rm c rite ria *-> L o n g -te rm c rite ria In d iv id u a l o rie n ta tio n G ro u p o rie n ta tio n

Pay S tru ctu re, Incentives, and B enefits

Pay w e ig h te d to w a rd salary and Pay w e ig h te d to w a rd in ce n tive s b e n e fits

S h o rt-te rm in c e n tiv e s <-> L o n g -te rm in ce n tive s E m phasis on in te rn a l e q u ity <-4 E m phasis on e x te rn a l e q u ity

In d iv id u a l in c e n tiv e s G ro u p in ce n tive s

L ab or an d E m p lo y ee Relations

C o lle c tiv e b a rg a in in g In d iv id u a l b a rg a in in g

T o p -d o w n d e c is io n m a k in g P a rtic ip a tio n in d e c is io n m a k in g F orm al d u e process N o d u e process

V ie w e m p lo y e e s as e xp e n se V ie w e m p lo y e e s as assets

SOURCES: A d a p te d from R. S. Schuler and S. F. Jackson, "L in kin g C o m p e titiv e Strategies w ith Human Resource M an a g e m en t Practices," A ca d e m y o f M an a g e m en t Executive 1 (1987), pp. 2 0 7 -1 9 ; and C. Fisher, L. Schoenfeldt, and B. Shaw, Hum an Resource M anagem ent, 2nd ed. (Boston: H o u g h to n M ifflin , 1992).

increase innovation. However, with the advent of total quality m anagem ent methods and a variety o f employee involvem ent programs such as quality circles, many jobs are moving toward the broader end of the spectrum.32

Employee Recruitm ent and Selection

R ecruitm ent is the process through which the organization seeks applicants for poten­ tial employment. Selection refers to the process by which it attem pts to identify appli­ cants with the necessary knowledge, skills, abilities, and other characteristics that will help the company achieve its goals. C om panies engaging in different strategies need different types and numbers of employees. Thus, the strategy a company is pursuing will have a direct im pact on the types o f employees that it seeks to recruit and select.33

table 2.3

M en u o f HRM Practice O p tio n s

R e cru itm e n t

T he process o f see kin g a p p li­ cants fo r p o te n tia l e m p lo y m e n t.

S election

The process by which an organization a tte m p ts to identify applican ts w ith the necessary know l­ e d g e , skills, abilities, and o th e r character­ istics th a t w ill help it achieve its goals.

8 8 P A R T 1 T he H um an Resource E n v iro n m e n t

Employee Training and Deveiopment

A number o f skills are instilled in employees through training and development. Training refers to a planned effort to facilitate the learning o f job-related knowledge, skills, and behavior by employees. D evelopm 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. C hanges in strategies often require changes in the types, levels, and m ixes o f skills. Thus, the acquisition of strategy-related skills is an essential elem ent o f the im plem entation of strategy. For exam ple, many com ­ panies have recently emphasized quality in their products, engaging in total quality m anagem ent programs. T hese programs require extensive training of all employees in the T Q M philosophy, methods, and often other skills that ensure quality.34

Through recruitment, selection, training, and developm ent, com panies can obtain a pool of hum an resources capable of im plem enting a given strategy.35 In fact, it’s not uncom mon for com panies to partner with universities to develop students while obtaining im portant information.

Performance Management

Perform ance m anagem ent is used to ensure that employees’ activities and outcomes are congruent with the organization’s objectives. It entails specifying those activities and outcom es that will result in the firm’s successfully im plem enting the strategy. For exam ple, com panies that are “steady state” (not diversified) tend to have evaluation systems that call for subjective performance assessments o f managers. T his stems from the fact that those above the first-level managers in the hierarchy have extensive knowledge about how the work should be performed. O n the other hand, diversified com panies are more likely to use quantitative measures o f performance to evaluate managers because top managers have less knowledge about how work should be per­ formed by those below them in the hierarchy.36

Similarly, executives who have extensive knowledge of the behaviors that lead to effective performance use performance m anagem ent 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 objective performance results o f their subordinate m anagers.37

A n exam ple of how performance m anagem ent can be aligned with strategy is pro­ vided in Figure 2.8. T his comes from a firm in the health care industry whose strategy figure 2.8

P ercentage o f O b je c tiv e s Id e n tifie d in In d iv id u a l P e rfo rm a n c e Plans T h a t A re T ie d to Each S trateg ic Im p e ra tiv e

S tra te g ic

Im p e ra tiv e Business A B u siness B In te rn a tio n a l In v e s tm e n t Fin an ce L eg a l IT HR8.S E n te rp ris e A c h ie v e s u p e rio r

m e d ica l p e rfo rm a n c e 1 0 .5 % 1 2 .5 % 2 .7 % 7 .6 % 3 .1 % 2 .7 % 1 1 .4 % 2 .1 % 1 0 .0 % E ffe c tiv e ly se rve o u r

c u s to m e rs 2 4 .7 % 2 7 .2 % 3 6 .7 % 1 2 .2 % 1 0 .3 % 2 7 .2 % 1 8 .9 % 1 9 .5 % 2 3 .7 % C re a te g re a t p ro d u c ts a n d se rvice s 5 .6 % 6 .1 % 1 0 .1 % 9 .8 % 5 .0 % 1 0 .1 % 1 5 .3 % 8 .9 % 6 .9 % C re a te a w in n in g e n v iro n m e n t 2 7 .7 % 2 9 .7 % 3 0 .1 % 2 9 .9 % 3 0 .3 % 3 3 .7 % 2 2 .4 % 3 9 .4 % 2 7 .7 % E sta b lish a c o s t a d v a n ta q e 3 1 .5 % 2 4 .5 % 2 0 .5 % 4 0 .5 % 5 1 .3 % 2 6 .3 % 3 2 % 3 0 .0 % 3 1 .7 % Total 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % Training A p la n n e d e ffo rt to fa c ilita te th e learn­ ing o f jo b -re la te d k n o w le d g e , skills, and be h a vio r by em ployees. Developm ent The a c q u is itio n o f k n o w le d g e , skills, and behaviors th a t im p ro v e an e m p lo yee's a b ility to m e e t cha ng es in jo b re q u ire m e n ts a n d in c lie n t a n d c u s to m e r dem ands. Performance M anagem ent The m eans th ro u g h w hich m an ag ers ensure th a t e m p lo y ­ ees' a c tiv itie s and o u tp u ts are c o n g ru ­ e n t w ith th e o rg a n i­ zation's goals.

COMPETING THROUGH TECHNOLOGY

Exam Revision and Project Supervision made Easy through

Technology

The U niversity o f P o rtsm o uth, UK, has d e v e lo p e d a novel way of im p ro v in g exam revision and project supervision. T he y've d e ve lo p e d a w iki to e na ble students to w o rk c o lla b o ra tiv e ly during exam revision and e m p lo ye d th e use o f Twitter, a wiki and o n lin e lea rn ing logs to fa c ilita te p ro je c t supervision.

Exam revision and p ro je c t w ork are b o th situ atio ns w here students g o th ro u g h sim ilar activities b u t te n d to be isolated from each and th e ir tu to r. In such situations, s tu d e n ts co u ld often s tru g g le and it was fe lt they c o u ld b e n e fit from sharing

th e ir e x p e rie n c e and th e tu to r c o u ld be o f m ore h e lp by b e in g a ble to id e n tify

w h a t areas th e ir s tu de nts s tru g g le d w ith.

T he w iki used fo r exam revision g oe s b y th e nam e o f "E x a m o p e d ia ". The tu to r creates pages c o n ta in in g th e q u e stio n s fro m past exam s in a ta b u la r fo rm and stu d e n ts have read / w rite access. The to o ls used fo r p ro je c t supervision are T w itte r fo r s h o rt progress u p d a te s o r q ue rie s, and a w iki w hich can be used to p o st a nd c o lla b o ra tiv e ly e d it larger item s, and o n lin e logs o r e -log s, w hich are used to

m o n ito r th e progress o f the p ro je ct.

From th e students' p ers p e c tiv e , th e response to th e survey fo r Exam opedia sh ow ed th a t m o s t o f the stu d e n ts (17 o u t o f 28) agreed th a t it is useful and h elpe d them c o lla b o ra te . In te rm s o f being a h e lp fu l source o f info rm a tio n on th e course, it cam e second to lectures.

SOURCE:

Study Author: Phil Barker, ICBL, School of Mathematical and Com puter Sciences, Heriot-Watt University.

Tutor in Study: Manish Malik, Electronic and Com puter Engineering, University of Portsm outh.

consisted of five “strategic im peratives,” or things that the company was trying to accomplish. In this company all individuals set performance objectives each year, and each of their objectives have to be tied to at least one o f the strategic imperatives. The senior V P of H R used the firm ’s technology system to exam ine the extent to which each business unit or function was focused on each o f the imperatives. T he figure illustrates the percentage of objectives that were tied to each imperative across the different units. It allows the company to determine if the mix o f objectives is right enterprisewide as well as within each business unit or function.

Pay Structure, Incentives, an^i

B e n e f it s

The pay system has an im portant role in im plem enting strategies. First, a high level of pay and/or benefits relative to that of competitors can ensure that the company attracts and retains high-quality employees, but this might have a negative im pact on the com pany’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 o f how com pensation practices are tied to strategies, researchers exam ined 33 h igh-tech and 72 traditional com panies. T hey classified them by whether they were in a growth stage (greater than 20% inflation-adjusted increases in annual sales) or a m aturity stage. T hey found that high-tech com panies in the growth stage used com pensation systems that were highly geared toward incentive pay, with a lower percentage o f total pay devoted to salary and benefits. O n the other hand, com pensation systems am ong m ature com panies (both high-tech and XiauiVvOTYaY) ie \' o x e i a W w p eice n tage c>i toxa\ to m c H im e s aW g'n per­

centage to benefits.39