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You are here: UK Essays Essays Strategic Management Managing Human Capital
Managing Human Capital
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Managing Human Capital
Introduction
The fact that the human resources management plays a major role in a firm's performance is a
relatively recent development. The question of how strategic is human resource management
(HRM) and how strategic human resource management (SHRM) is linked to organizational
performance has been subject to great interest to both practitioners and academicians (Wright et
al., 1999 cited in Cerdin & Som 2003). Human resource strategy basically concerns how human
resources may be utilized in order to achieve the objectives of a firm. So, the link between
corporate strategy and management of human resources has started to be considered as one of the
parameters of business success. It is now commonly argued that strategy for human resources
and corporate strategy should be interlinked for achieving organizational success, for responding
to rapidly changing business circumstances so as to gain a competitive edge over competitor.
Ulrich (2004) said HR practices seem to matter; logic says it is so; survey findings confirm it.
Strategic human resource management involves the linking of HRM with the strategic goals and
objectives of the organisation in order to achieve a progressive business performance and
achieve an organisational structure that promotes innovation and flexibility.
In this assignment firstly we do a thorough literature review of strategic human resource
management literature in order to understand the various components of strategic human
resource management and its linkage with organizational performance. We then try to
understand how organizational performance is measured, how strategic human resource practices
are evaluated.
Literature Review
Martell and Carroll (1995) said there has been a growing interest among academic press about
the notion how strategic is human resource management. It builds upon the idea that human
capital is one of the most critical components of strategic success for many companies, managers
are being encouraged to link specific HRM practices to strategic outcomes (Schuler and
Jackson 1987 cited in ).According to Ulrich et.al 1995 researchers have pointed out that by
matching HRM with strategy, the critical human resource skills, attitudes, behaviours, and
performances that are needed to successfully implement strategies can be acquired, developed,
motivated and maintained. Agreeing to this logic Guest (2007) said since strategic success is
typically measured in financial terms, in order for HRM practices to be judged to be truly
effective, they must contribute to the firm's bottom line. This approach to HRM, linking it to
both strategy and organizational performance, represents what has evolved to be known as
strategic human resource management.
Devanna, Fombrun and Tichy (1981 cited in Bratton and Gold 2007) defined strategic human
resource management in three levels of management strategic level, managerial level and
operational level, where strategic-level activities look to the long term future, the managerial
level speak about the medium term while the operational level is concerned about the short-term
day-to-day management of the organization. For example, long-term strategic level activities
could ask what kinds of people will be needed in the future, whose implication can be traced
back to the current practices of recruitment, selection and training practices. Medium-term
development of new markets, compensation and rewards practices, promotion policies and its
linkage to performance appraisal systems, professional development and training activities and
mid-term career paths. Short-term operational level activities would focus on daily activities of
staffing and monitoring, salary and wages, control systems and skills training (Bratton and Gold
2007).
Schuler (1992 cited in Noe 2000) said: there shouldn't be any mystery about the word strategic
in the phrase strategic human resource management; Strategic Human Resource Management is
largely about integration and adaptation. Its concern is to ensure that: (1) HR management is
fully integrated with the strategy and the strategic needs of the firm; (2) HR policies cohere both
across policy areas and across hierarchies; and (3) HR practices are adjusted, and used by line
managers and employees as part of their everyday work.
Combining the above perspective of strategic human resource management, Martell and Carroll
(1995) defined strategic human resource management as having a long-term focus, the
expectation that effective HRM policies should produce organizational performance benefits,
and having a linkage between HRM and strategy processes. There was a constant debate on the
topic of how SHRM practices themselves should be measured and linked to firm performance.
Schuler (2000) suggested a 5P (HR Philosophy, Policies, Programs, Practices and Processes)
model of strategic human resource management encompassing the SHRM practices.
Armstrong (2000) suggested ten HRM practices in the areas of selection, appraisal, incentive
compensation, job design, grievance procedures, information sharing, attitude assessment, and
labour management participation. Becker et al. (1997) on the other hand included rigorous
recruitment and selection, performance-contingent compensation systems, and management
development and training activities linked to the needs of the business. Watson (2008) stretched
the list to include intensity of recruiting efforts, average number of hours of training per
employee per year, promotion criteria. Schuler and Jackson (2007) identified seven alternative
strategic' HR practices of which their research found support on profit sharing, results-oriented
appraisals and security that were related to overall organizational performance.
Strategic Management
Strategic Management is an approach to addressing the competitive challenges an organisation
faces. It is a process for analyzing a company's competitive situation, developing the company's
strategic goals, and devising a plan of action and allocation of resources (human, organisational,
and physical) that will increase the likelihood of achieving those goals.
Strategic Human resource Management can be thought of as the pattern of a planned human
resource deployments and activities intended to enable an organization to achieve its goals. For
example many firms have integrated manufacturing systems such as advanced manufacturing
technology, just-in-time inventory control, TQM in order to improve their competitive position.
However, these systems must be run by people. SHRM 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 employees.
1. For example, in the production of glass microwave shelves, the employees made a suggestion
that was originally thought impractical, but when implemented it saved Camco $25,000
annually. Productivity improvement in just one year after the change was 25 percent, and
absenteeism was reduced by 30 percent.
Strategic management has two distinct interdependent phases' as shown in the fig strategy
formulation and strategy implementation which will be discussed in detail later.
Linkage between HRM and the Strategic Management Process
The strategic choice is all about competition that is how the firm will compete to achieve its
missions and goals. These decisions consist of addressing the issues of where to compete, how to
compete and with what to compete. Although these decisions are all important most often
decision makers does not pay attention to with what will we compete.
2. Pepsi Co in the 1980s acquired the fast food chains KFC, Taco Bell and Pizza Hutt in order to
increase its customer base without fully understanding the differences between its existing
workforce (mostly professionals) and that of the fast food industry (lower skilled people and high
schoolers) and how to manage such a workforce. As a result they had to move out of the fast
food market. The major reason was it decided to compete without fully understanding what
resources it would take to compete in that market (Hollenbeck et al 2002).
3. Boeing illustrates how failing to address the with what issue resulted in problems in its
how to compete decisions. When Aerospace firm's consumer products division entered into a
price war with Airbus Industries it emphasized cost reduction strategy. The strategy was a
success but Boeing had recently gone through a large workforce reduction (thus didn't had
enough people to fill the orders) and thus didn't have the production technology to increase
productivity. As a result they failed to meet delivery deadlines and had to pay penalties
(Hollenbeck et al 2002)
Role of HRM in Strategy Formulation
HRM executive gives strategic planners information about the company's human resource
capabilities, and these capabilities are usually a direct function of the HRM practices. This
information about human resource capabilities helps top managers to choose the best strategy
because they can consider how well strategic alternative would be implemented. Once the
strategic choice has been determined, the role of HRM changes to the development and
alignment of HRM practices that will give the company employees having the necessary skills to
implement the strategy(Noe et al 2003 Pg 60). Four levels of integration seem to exist between
the HRM function and the strategic management function:
* Administrative linkage.
* One-way linkage.
* Two-way linkage.
* Integrative Linkage.
Fig Hollenbeck pg 59
Strategy Formulation
Five major components of the strategic management process are relevant to strategy
formulation (Noe et al 2003). The first component is the organisation's mission. The mission is
a statement of the organisation's reason for being; it usually specifies the customers served, the
needs satisfied, technology used and the value received by the customers. An organisations goal
are what it hopes to achieve in the medium-to long term future; they mostly reflect on how the
mission will be operationalized.
External Analysis consists of examining the organisation's operating environment to identify the
strategic opportunities and threats. Examples of opportunities are customer markets that are not
being served, technological advances that can aid the company and untapped labour pools.
Threats include potential labour shortages, new competitors entering the market and competitors
technological innovations.
Internal analysis attempts to identify the organisations strengths and weaknesses. In this case the
focus is on the quantity and quality of available to the organisation-financial, technological,
capital and human resources. They need to assess carefully decide which resource is strength and
which one is weakness.
External analysis and internal analysis combined constitute what has come to be called SWOT
analysis. After going through the SWOT analysis the strategic planning team has all the
information to generate a number of strategic alternatives. The strategic managers compare this
alternative's ability to attain the organization's strategic goals, and then they make their strategic
choice. Most of the opportunities and threats are people related. HRM's role is to keep close tabs
on the external environment for human resource-related opportunities and threats, especially
those directly related to the HRM function: potential labour shortages, competitor wages rate,
government regulations affecting employment etc. For example
4. U.S. companies are finding that more and more high school graduates lack the basic skills
needed to work which is one source of human capital shortage. However not recognizing this
environmental threat, many companies have encouraged the exit of older, more skilled workers
while less skilled younger workers.
5. A large electric utility, sensing society's increasing concern about air pollution, decided to
reduce coal burning and shift to hydro power. This in turn necessitated replacement of its plant
and equipment as well as major changes in its human resource strategy. Not only were new skills
required, but the changeover from existing procedures and systems (e.g., compensation,
appraisal, and training) also had to be smooth and cause as little disruption to the work as
possible. A strategy based on considerable in-house and external training was drawn up and
implemented. By the time the utility switched to hydro power, it had the necessary supply of
skilled labour.
6. Allied Exteriors Incorporated: A new direction Allied Exteriors Incorporated is a medium-
sized corporation, which until five years ago had been a small family-owned business and grown
large over the years. They specialises in the design and production of a variety of exterior
cladding materials for buildings, largely residential. Allied Exteriors had been archaic as far as
their management attitude is concerned towards employees and any potential problem brought
about HRM manager were neglected and rejected. They had a strict McGregor's Theory X
philosophy. This approach to human resource management had already resulted in Allied
Exteriors becoming well known for its poor quality products, its inability to deliver on time and
its poor customer service.
7. Air National's human resources strategy The competitive and HR strategies pursued by AN
mainline business in the wake of this restructuring process are congruent with an HR strategy
that emphasizes employee empowerment and commitment. As their CEO Clive Warren stated in
a television interview, In an industry like ours, where there are no assembly lines or robots,
people are our most important assets and our long term survival depends on how they work as
part of a team'.
An analysis of a company's internal strengths and weaknesses also requires input from the HRM
function. Today companies are increasingly realising that their human resources are one of their
most important assets. A company's failure to consider the strengths and weaknesses of its
workforce may result in its choosing strategies it is not capable of pursuing. For example:
1. One company in U.S choose a strategy of cost reduction through technological improvements.
It built a plant designed around a computer integrated manufacturing system with statistical
process controls. Though it looks like a good strategy the company soon discovered that
employees couldn't operate the new equipment because 25% of the workforce was functionally
illiterate.
Thus with an integrative linkage, strategic planners consider all the people-related business
issues before making a strategic choice. These 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.
Recent research has backed the need to have HRM executives integrally involved in strategy in
strategy formulation.
2. A study in U.S petrochemical refineries found that the level of HRM involvement was
positively related to the refinery manager's evaluation of the effectiveness of the HRM function.
A second study of manufacturing firms found that HRM involvement was highest when top
managers viewed employees as a strategic asset and associated with reduced turnover. Both the
studies found that HRM involvement was unrelated to operating unit financial performance.
3. Delta Air Lines and HRM's role in Strategy Formulation Delta Air Lines had one source of
sustainable competitive advantage its highly committed workforce, which delivered the highest
level of customer service in the industry. The company had a financial turmoil as a result got rid
some of its staff which later on seen it to become 4th to 7th airlines. Thus a human resource
executive could have proposed an alternative strategy that would have reduced cost without
sacrificing its workforce.
Influence of Strategic HRM in facilitating organisational culture towards
innovation and flexibility
As cultural values change, human resource departments discover new challenges. While there are
several cultural challenges three more important ones are discussed below: work-related
attitudes, ethnic diversity, and attitudes toward government and those in power.
Work-Related Attitudes
The increasing entry of women and educated young person's into the labour force has resulted in
some changes in employee expectations. The old cultural value that men work and women stay
home has undergone a radical modification during the last two decades.
4. This shift carries implications for human resource managers. For example, child care facilities
provided by the employer will become a more common demand confronting human resource
departments. Sick dayspaid days off for illnesshave become personal leave days and
maternity leave has been renamed parental leave to reflect the reality of working men
leaving the workforce to take care of their young children.
Ethnic Diversity
The coexistence of anglophones and francophones with dozens of other national, racial, and
ethnic groups, each with its unique cultural and social background, makes U.K society a cultural
mosaic .
5. According to the latest census results, for the first time in history, less than half of Canada's
immigrants came from European countries. Currently, only 47 percent of immigrants originate
from Britain or other European countries.
Attitudes towards Government
Basic assumptions on the role of government in business and society, including desirability of a
welfare state with a key interventionist role for the government.
6. In the past, the Canadian national character was called a conservative syndrome,56
reflecting Canadians' tendency to be guided by tradition and focus on maintenance of order and
predictability. Canadians were said to be a hybrid product of several nationalities and ethnic
groups not quite as American as the Americans, not quite as British as the British and not
quite as French as the French.57 However, more recently, Canada's national self-image has
changed somewhat (symbolized in the Charter of Rights and Freedoms, aggressive entry into
foreign markets, and reduced dependence on governmental programs).
Although a review of previous studies reveals that SHRM has gained popularity, specifically,
with respect to the debate on HRM and performance, the focus has mainly been limited to the
linkage between HR practices and organizational performance. The implication is that SHRM
accepts HR function as an important strategic partner in the formulation of the company's
strategies as well as in the implementation of those strategies through HR practices. Majority of
work in SHRM (Paauwe and Boselie, 2002; Barney, 1991; Delery, 1998) has adopted the
resource-based view (RBV) perspective, which emphasizes the gaining of competitive advantage
by means of utilization of the resources of the organization through the employees. The RBV
theory caused a change in strategic management thinking from an outside-in approach to an
inside-out approach (Wright et al 2001). It is specifically applied to the field of human resource
management because it is people that encompass the properties assumptions of value, rareness,
inimitability, and no substitution, which are the necessary conditions for organizational success
(Barney, 1991). However, research using RBV theory tends to neglect the importance of
contextual factors, including the organizational setting, an issue that is crucial from HRM point
of view. Fields et al (2000) and Nyambegera et al (2000) argue that contextual variables,
particularly national culture, have an influence on choice of HRM strategies.
7. For example, two similar electronic manufacturers might have different missions. One might
define theirs as to become a successful organization in the entertainment business, the other
may define theirs as to occupy a technological leadership position in the industry. The
associated strategies are likely to show significant differences also. Apart from manufacturing
electronic goods used for home entertainment, the firm might acquire video and film production
firms and get into the music industry (e.g., produce compact discs); while the focus of the second
firm Mr. might be more committed to developing innovative electronic products through
research and development.
8. Dell
A culture change at Dell has allowed it to strengthen its position in the marketplace, according to
an HR vice-president at the computer company. It has moved from a focus on growth and US-
centricity to one on leadership, talent management and a global outlook. The New Dell' is
characterised by leadership and talent management, and 50 percent of Dell's business is outside
the U.S. Eighty percent of our senior executives have come from within the company. In the Old
Dell, 75% percent came from outside.
9. Jack Stack open book' and APA industries
Jack Stack one of the American management gurus' runs an engine- rebuilding firm called
Springfield Manufacturing Company in Illinois. His firm practises open-book' management
which involves a full sharing of all information about the company's performance among
employees. The approach
has been remarkably successful with phenomenal increases in the firm's share values , the
generation of a significant amount of income from seminars ,speaking engagements and books,
and the growth of a network of similar firms throughout the United States.
Coopers and Lybrand
Coopers and Lybrand, one of six worldwide professional service firms, is dedicated to client
service. The company leaders believe that their advantage in the marketplace is their ability to
anticipate and meet client needs more effectively than their competitors. At the same time, they
know that their intellectual capital, represented by their employee's competence and vice
chairman of learning, education and human resources, the company developed a strategy called
Nexus to integrate the employee commitment and client-service initiatives.
Our people are our customer's most important asset.
We want to be the employer of choice of employees our customers would choose.

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