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SHRM FOUNDATION’S EFFECTIVE PRACTICE GUIDELINES SERIES

Human Resource

Strategy ADAPTING TO THE AGE OF GLOBALIZATION

SHRM FOUNDATION’S EFFECTIVE PRACTICE GUIDELINES SERIES

Human Resource

Strategy

ADAPTING TO THE AGE OF GLOBALIZATION

by Patrick M. Wright, Ph.D.

Human Resource

Strategy This publication is designed to provide accurate and authoritative information regarding the subject matter covered. Neither the publisher nor the author is engaged in rendering legal or other professional service. If legal advice or other expert assistance is required, the services of a competent, licensed professional should be sought. Any federal and state laws discussed in this book are subject to frequent revision and interpretation by amendments or judicial revisions that may significantly affect employer or employee rights and obligations. Readers are encouraged to seek legal counsel regarding specific policies and practices in their organizations. This book is published by the SHRM Foundation, an affiliate of the Society for Human Resource Management (SHRM©). The interpretations, conclusions and recommendations in this book are those of the author and do not necessarily represent those of the SHRM Foundation. ©2008 SHRM Foundation. All rights reserved. Printed in the United States of America.

This publication may not be reproduced, stored in a retrieval system or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the SHRM Foundation, 1800 Duke Street, Alexandria, VA 22314. The SHRM Foundation is the 501(c)3 nonprofit affiliate of the Society for Human Resource Management (SHRM). The SHRM Foundation maximizes the impact of the HR profession on organizational decision-making and performance by promoting innovation, education, research and the use of research-based knowledge. The Foundation is governed by a volunteer board of directors, comprising distinguished HR academic and practice leaders. Contributions to the SHRM Foundation are tax deductible. Visit the Foundation online at www.shrm.org/foundation. For more information, contact the SHRM Foundation at (703) 535-6020. 08-0557

Table of

Contents v

Foreword

vii

Acknowledgments

ix

About the Author

1

Human Resource Strategy: Adapting to the Age of Globalization

3

What Is HR Strategy?

4

Three Versions of a Generic HR Strategy

6

How HR Strategies Affect Performance

9

Real-World Impact of HR Strategies

15

Building Your Own HR Strategy

20

Future Challenges

21

Conclusion

23

Sources and Suggested Readings

Foreword Dear Colleague: As a busy human resource practitioner, you probably find it difficult to keep up with the latest academic research in the field. Yet knowing which HR practices have been shown by research to be effective can help you in your role as an HR professional. That’s why the SHRM Foundation created the Effective Practice Guidelines series. These reports distill the latest research findings and expert opinion into specific advice on how to conduct effective HR practice. Written in a concise, easy-to-read style, these publications provide practical information to help you do your job better. The Effective Practice Guidelines were created in 2004. The SHRM Foundation publishes new reports annually on different HR topics. Past reports, available online at www.shrm.org/foundation, include Performance Management, Selection Assessment Methods, Employee Engagement and Commitment, Implementing Total Rewards Strategies, Developing Leadership Talent and Retaining Talent. You are now reading the seventh report in the series: Human Resource Strategy. For each report, a subject matter expert is chosen to be the author. After the initial draft is written, the report is reviewed by both academics and practitioners to ensure that the material is research-based, comprehensive and presented in an easy-to-use format. An annotated bibliography, “Sources and Suggested Readings” section, is included with each report as a convenient reference tool. This process ensures that the advice you receive in these reports is not only useful, but based on solid academic research. Our vision for the SHRM Foundation is to “maximize the impact of the HR profession on organizational decision-making and performance, by promoting innovation, education, research and the use of researchbased knowledge.” In addition, the Foundation is strategically focused on initiatives designed to help organizations maximize leadership talent. We are confident that the Effective Practice Guidelines series takes us one step closer to making that vision a reality.

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

v

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

CONTENT EDITOR Frederick P. Morgeson, Ph.D. Professor and Valade Research Scholar The Eli Broad Graduate School of Management Michigan State University

Dan Henry, Sr. Chief Human Resource Officer Bright Horizons Family Solutions

REVIEWERS

Sumita Raghuram, Ph.D. Associate Professor of Human Resource Management Department of Labor Studies and Employment Relations Pennsylvania State University

Rajiv Burman, SPHR, CCP, CEBS, CHRP Vice President Human Resources, USA & Canada Griffith Laboratories

James R. Schultz, SPHR, GPHR Vice President-HR, Global Downstream Chevron Corporation

John E. Delery, Ph.D. Professor and Raymond F. Orr Chair Department of Management Sam M. Walton College of Business University of Arkansas

PROJECT MANAGER Beth M. McFarland, CAE Manager, Special Projects SHRM Foundation

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

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

vii

About the Author Patrick M. Wright Dr. Wright is the William J. Conaty GE Professor of Strategic Human Resources in the School of Industrial and Labor Relations at Cornell University. He is also a Senior Research Fellow in the School of Social Sciences at Tilburg University. He holds a BA in psychology from Wheaton College and an MBA and a Ph.D. in organizational behavior/ human resource management from Michigan State University. Professor Wright teaches, conducts research and consults in the area of strategic human resource management, particularly focusing on how firms rely on people as a source of competitive advantage. He has published more than 60 research articles, 20 chapters in books and edited volumes, coauthored a leading human resource management textbook, now in its 6th edition, and co-authored or co-edited six books. He has taught in Executive Development programs at Cornell University, University of Southern California and Texas A&M and has conducted programs and/or consulted for a number of large public and private sector organizations. Dr. Wright served as the Chair of the HR Division of the Academy of Management and on the Board of Directors for the SHRM Foundation, World at Work and Human Resource Planning Society. He was inducted as a Fellow in the National Academy of Human Resources in 2005 and won the 2007 HRM Scholar Award from the Dutch HRM Network.

ix

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

Human Resource Strategy

Human Resource Strategy: Adapting to the Age of Globalization Globalization of individual companies and capital markets over the past two decades has changed the business landscape. Many firms have expanded operations overseas, and even strictly domestic businesses are facing competition from abroad. To respond to global competition, firms are using new technologies to provide better, lower-cost solutions for their customers, but these technological innovations have led to constant movement of customers and competitors. At the same time, global capital markets are pressuring firms to innovate and reduce costs—not an easy feat. All of these trends are pushing companies to manage their assets as effectively as possible—especially their human assets. This report will explore a variety of ways to adapt your overall HR strategy to the new realities of global competition. Let’s first take a look at how one company responded to these new pressures. Delta Air Lines: From Clear Skies to Crash Landing In the 1970s and 1980s, Delta Air Lines became the premier U.S. airline for customer service with a culture of “southern hospitality” and employees who went above and beyond the call of duty. The company’s human resource strategy helped build the skills, motivation and opportunities for employees to deliver great customer service, and that allowed Delta to attract business travelers who paid premium prices for travel. Delta’s success shows just how important HR strategy can be, especially in its impact on company performance.

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

Valued Customer Driven by

Delivered by

Outcome Revenues

Internal promotion Extensive training High pay Non-union Flexible work rules Family culture

Skilled, experienced, committed employees

Outstanding customer

Profits

service Costs

CORE COMPETENCE

1

Human Resource Strategy

How did Delta do it?

only the best employees who had skills and attitudes that fit well into the company’s family-oriented culture.

employees react to any situation and get the job done.

But by the 1990s, things were changing. Major business trends altered the competitive climate, and HR strategy had to change too. In 1994, after two straight years of record financial losses, CEO Ron Allen rolled out a new strategy called “Leadership 7.5.” Allen aimed to reduce Delta’s cost per available seat mile (CASM) from more than 10 cents to 7.5 cents, which would match that of major competitor Southwest Airlines. Along with a new business strategy came a massive transformation of Delta’s HR strategy. In Delta’s new HR strategy:

a workforce with a wealth of experience and knowledge. employees. long haul because they believed the company cared about them. Before 1994, as seen in Figure 1, Delta’s HR strategy was perfectly aligned with its business strategy so that HR practices built employees’ skills and motivation to make the business work.

the gates.

The Delta business model and HR strategy now resembled Figure 2.

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

Driven by

Delivered by

Valued Customer Outcome Revenues

Layoffs Low wages Low training Contractors

Commodity workforce:

contingent temporary low tenure

Competitive (low) cost travel

Profits

Costs

2

Human Resource Strategy

Figure 3: How the IBM HR Strategy Supports and Enables the Business Strategy

IBM STRATEGY

Performance-Based Opportunities

Innovation

Business Value

IBM Differentiatiors: The Employee Experience

Leadership

Diverse, Talented People

Flexibility

Values-based Climate

Focus on enterprises that value innovation Global Integration

On-demand Infrastructure

Anticipate and Build Skills Human Resource Focus Areas

An inspiring climate in which employees flourish by creating value for our clients and the world

Lead the Transformation

thoughtful process of developing HR strategy, the chart and explanation above fall flat because they lack concrete guidance about specific ways that you could adapt HR practices to your own situation. That’s why this report uses a specific definition of HR strategy, designed to give you that concrete guidance and help you identify specific practices that are adaptable for you.

Grow IBM

Getting Down to Specifics

As an HR professional, you are responding to the same economic transformations that drove the changes at Delta. You need access to the most recent research on how to make employees a source of longterm competitive advantage under the pressures of globalization. This SHRM Foundation report gives you access to the research, principles, guidelines and tools for creating an HR strategy that will add value to your organization. The first step is to understand what HR strategy is.

1) innovation, 2) business value, 3) global integration, and 4) on-demand infrastructure. Behind this overall strategy are all of the employees who make it work. IBM’s HR strategy identifies company characteristics that motivate and energize those employees. IBM motivates its employees through:

WHAT IS HR STRATEGY? If you ask the CEO of a large multinational company to explain HR strategy, you’ll probably get a pretty general description of how HR supports his or her business. Computer giant IBM, for example, has a well-articulated HR strategy, as shown in Figure 3. IBM’s HR Strategy As you can see, IBM’s overall business strategy focuses on four areas:

building the ideal IBM workforce? Again, at IBM, the goals are clear. At IBM, HR is expected to:

For our purposes, HR strategy means a system of human resource practices for a particular job or collection of jobs aimed at the best employee performance possible to meet the firm’s ultimate goals.

practices, because it is the broad array of practices that matter in terms of employee performance—not individual tests, recruiting or interview techniques, for example.

designed and implemented for a particular job or a set of jobs. Few firms manage their clerical workers the same way they manage their senior executives. Each group is recruited differently, is selected according to different criteria, attends different training programs and is paid differently. If your company is focused on customer service, you’ll need to build customer service skills and behaviors into all customer-oriented jobs,

3

Human Resource Strategy

KEY TERMS Strategic HRM

HR Strategy

HR Best Practices

Focus

Human capital

Human resource practice system

Single HR practice

Level of interest

Organization or business level

Job level

Job level

Responsibility

Designed jointly between line and HR

Designed mostly by HR

Designed entirely by HR

Get the right people in the right place in the business to maximize business success

Get people to have (skills), feel (attitudes) and do (behaviors) things that lead to job and business success

Get people to have (skills), feel (attitudes) or do (behaviors) something that leads to job success

Goal or objective

but your specific strategy of recruitment, selection, training and rewards for a cashier will be different from those of a store manager. always stay focused on getting the best performance from employees. Usually, this means getting employees to:

strategy and HR best practices—terms that are often used interchangeably but are actually very different. They differ in their primary focus, HR involvement and ultimate goals—but all will be components of your overall HR strategy.

Commitment vs. Control Strategies Two very different overall HR strategies, labeled “commitment” and “control,” have been identified and analyzed (Arthur, 1992). The commitment HR strategy would include:

would represent the opposite:

THREE VERSIONS OF A GENERIC HR STRATEGY The HPWS Approach

competencies, abilities). engagement, motivation). work, be productive, serve customers, stay with the organization). If your HR practices are correctly designed and put in place, you’ll get the best employee performance, which means you’ll get the best overall company performance as well. Strategic Human Resource Management, HR Strategy and HR Best Practices The chart above provides a comparison of strategic human resource management (HRM), HR 4

Often, when you’re considering how HR practices influence your firm’s performance, you may focus on training or staffing practices. However, as shown in the Key Terms above, these are more “best practices” than strategies. One landmark study (Huselid, 1995) created a popular framework that can be used as a kind of generic HR strategy. The framework is known as the high-performance work system (HPWS) and is explained in Table 1 on page 6. Implementing all of the practices outlined in Table 1 as part of the HPWS approach is probably in the best interest of any company because HPWS improves firm performance and works well across many different organizations.

commitment strategy generally leads to the best firm performance for those using a differentiation business strategy, but the control strategy may work best for firms with a costbusiness strategy. In real-life terms, the two strategies go head to head in a comparison of Costco and Wal-Mart in Box 1. The Value Matrix Approach The HPWS approach suggests that it can fit all firms, regardless of

Human Resource Strategy

Firms can distinguish the skill sets of particular jobs in terms of their value to the firm and their uniqueness in the labor market. In this value/uniqueness matrix, known as the human capital architecture, each quadrant includes descriptions of the appropriate HR strategy, as seen in Figure 4. Is There an Ideal Generic HR Strategy? Keep in mind that all of these attempts to create generic HR strategies are simply different points on a spectrum. At one end of the spectrum is the

Internalization

Collaborative HC

Strategic HC

experience - develop the relationship - evolving scope - rewards for ideas

- develop (firm-specific) - autonomy/self-direction - extensive pay and benefits - “fail” forward

Support HC

Core HC

(outsource) - rules and procedures - contract/hourly pay - error avoiding

- targeted development - market-driven pay - reward productivity - mistakes above water line

low

Strategic Value

high

goal of overall employee engagement, where HR practices elicit high levels of skill, motivation and attitudes that encourage workers to contribute proactively and stay with the firm. At the other end are HR practices that seek to minimize the costs associated with managing employees while maintaining sufficient work design and controls to be sure that they do their jobs. One study put it this way: “The goal of control human resource systems is to reduce direct labor

Sam’s Club vs. Costco Sam’s Club

Costco

Profit per employee

$11,615

$21,805

Average hourly wage

$10.11

$17.00

Percent with health care

< 50%

82%

Percent of health care premiums paid

3...