Organization 8338

Strategic HRM

Professor James C. Hayton, PhD

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Some Relevant Evidence from Employees

• In recent surveys (Mercer consulting, 2006)– 30% of employees (europe) believe that

their organization does a good job of retaining talent

– 28% feel that promotions go to the most qualified

– 25% do not believe that the PA system differentiates well

– 45% do not have an annual PA– 39% feel they are paid fairly relative to

their contributions– 25% believe that pay is adequately

matched to performance.

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Some Relevant Evidence from Employers

• The Big Issues for Employers (Mercer consulting, 2006)1. Attracting and retaining talent (83%

very important; 15% somewhat important)

2. Differentiating high performers (65% v.i., 32%, s.i.)

3. Aligning reward system with strategy (64% v.i., 33%, s.i.)

4. Ensuring pay-for-performance (63% v.i., 35%, s.i.)

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HR Architecture

HR Function:

•HR Leader?•HR Dept?

•HR Competencies•Policies &•Practices

Workforce:

•Human capital•Commitment

•Energy•Fit

Culture:

•Norms•Beliefs

•Cohesion•Harmony/•Conflict

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Multiple Roles of HR Function

StrategicPartner

ChangeAgent

Employee

Advocate

Administrative

Expert

System People

FOCUS

Long Term

TIMEFRAME

Day-to-day

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The Steel Story

• Do people management practices matter in a highly capital intensive industry?

• A study of 36 steel production lines in 17 companies

• Steel manufacture is a continuous process– The key outcome is ‘tonnage per month’ (Q)

• How can HR practices impact Q?– Through the maximization of uptime

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The Steel Story

• Which HR practices?1.Incentive pay (Profit sharing, Line incentives)2.Recruiting and selection (High screening)3.Teamwork (High participation, Multiple teams, Formal team

practices)4.Employment security5.Flexible job assignment (Job rotation)6.Skills training7.Communication (Information sharing, Meet workers, Meet

union)8.Labor relations (Unions, Low grievance filing rate)

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• Researchers found four different different ‘bundles’ of practices in the industry.

System 1:careful selection, training,

compensation, involvement, flexible job designs (rotation),

and implicit promise of job security.

System 4:Traditional - no

Innovative HR practices; Adversarial labor-managementRelationships; inflexible work

Practices.

Note: all S1 adopters were new lines, no new lines adopted less innovative systems

System 2:Information sharing;

teamwork;Extensive skills training;

Worker involvement

System 3:traditional but with

introduction of team organization;

greater labor-management communications

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The Steel Story

• How do these four systems relate to Q? – systematic gains from increased innovativeness in HRM clusters.– System 1 has highest productivity, and System 3 has lowest

productivity even after controlling for the differences in technology across lines.

• What is the Practical Significance?– A conservative estimate of the productivity differential for HRM system

1 is 6.7 percent. – A conservative estimate of a 1 percent increase in uptime is

$27,900/month. – An estimated a benefit of $10 million over 10 years for a change to

system 4 HRM practices• Effect on quality?

– System 1 lines have superior quality as well as quantity

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The Steel Story

• Why don’t all lines have high productivity HRM systems?• There are significant internal barriers to adoption:

– all greenfield lines adopted these practices indicates that transition costs are significant

• Not all managers are equally successful at championing the new practices– In some lines, managers are successful at championing new practices

and overcoming impediments to change– In other cases, managers are able to use the threat of plant closure to

motivate others to change.

• Conclusion: the source of advantage here comes from:– Finding HR practices that, together, support the objectives of

the organization (reduce breakdowns, maximize quality, learning)

– Successfully leading change in the HR system

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The Auto Story

Work systems decentralization of quality related tasks;

problem solving groups; employee suggestions;

job rotation;

work teams.

HRM policiesEmphasis on training of new and experienced employees;

Use of contingent compensation; Avoidance of status differentiation;

Emphasis on recruiting and hiring practices,

Flexible production requires:High levels of conceptual and technical skills among all employees;

Decentralization of important responsibilities from specialists to shop floor teams; Increased "off-line" problem solving activities;

The development of human capabilities also supports continuous learning (kaizen).

•Highest levels of productivity observed in plants that used:–‘high performance’ work systems,

–supported by high performance HRM practices, –WHEN they also pursued a strategy of Flexible manufacturing

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StaffingCareful emphasis on recruiting & selection

Focus on fit with the organization

Work organizationOrganization of work that

Decentralizes decision making; Often uses team-based production;

Work is typically enlarged and enriched

Democracy and participation

Sharing of information to support

decentralization

TrainingEmphasis on training for job skills,

basic skills, business skills,and interpersonal skills;

Training that also builds strong culture - through orientation and socialization programs;

Job rotation

Pay systemsThe use of incentive pay frequently at group, unit and organizational levels;

Efficiency wages - pay above the market rates

SecurityFormal or informal

employment guarantees Internal labor markets

HPWS

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Across Industries

• There was a 40 % decrease in turnover related to the HPWS between the 3 standard deviations (SD) above and 3 SD below the mean.

– For every one SD increase in the HPWS there was a reduction of 7.05% relative to the mean (controlling for all other factors including compensation expenses).

• Productivity: The practical impact of a 1 SD increase in scores on the motivation factor is an average of $27,044 per employee in a single period (– 16% increase on mean sales per employee of $171, 099). – When extended out by 5 years, with an 8% discount rate the impact

grows to $197, 979 per employee.

• Financial performance: – the effect per employee of a 1sd increase in HPWS was $18,641 in

market value relative to the book value. – The effect on return on capital employed is estimated at $3,814 per

employee per year.

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Competing Theories for HR Strategies

• Universalism– High performance work systems

• E.g., careful selection, emphasis on training and internal development, formal appraisals, profit sharing, employee voice and participation, employment security

– Hypothesis: The ‘more’ of this kind of HR the better

– Evidence: A lot of support in US

• Contingency theory– Hypothesis 1: HR choices must fit internally– Hypothesis 2: HR choices must fit with strategy

and other factors– Evidence: Strong support for internal fit argument– Evidence: Some support for external congruence

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The Contingency Perspective The First Rule of Strategic Human Resource Management

• EXTERNAL CONGRUENCE with the business strategy.

• Does the strategy require HIGH QUALITY HUMAN RESOURCES or not?

• Does the strategy require a cohesive workforce with a strong shared IDENTITY?

• Does the strategy require DISCRETIONARY inputs (cooperation, helping, knowledge sharing)?

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The Contingency PerspectiveThe Second Rule of Strategic Human Resource Management

• INTERNAL CONSISTENCY of HR Practices and Policies

• INTERNAL CONSISTENCY CREATES SYNERGY

• While each HR practice (selection, compensation etc) can have its own positive effect, when they are used in combination the whole is greater than the sum of the parts.

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A Simplistic Illustration of EXTERNAL CONGRUENCE of HR System with the business strategy.

Weak HRM

InnovationStrategy

Not supported

HRM supports business strategy

OverinvestIn HRM

Does not support Low

Cost strategy

HRM supports business strategy

Low HighCost of HR System

Innovation

Generic Strategy

Low Cost

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What is the Goal of your Organization?

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What are the goals of these organizations? (Take 5 mins - discuss with your neighbors)

• Google• Apple• Starbucks• Ryan Air• Zara• McKinsey

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Porter’s Cost Leadership Strategy  

• The overall cost leadership strategy is aimed at gaining a competitive advantage through lower costs.

• Cost leadership requires efficient plant facilities, close supervision of labor, continuous pursuit of cost reductions, and tight control of distribution costs and overhead.

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Porter’s Cost Leadership Strategy HR Implications 

• Efficiency orientation to production– Minimize waste– Maximize productivity of resources

• HR Strategy– Detailed work planning– Explicit job descriptions– Emphasis on matching people to job– Emphasis on job-specific training– Performance appraisal emphasizes outcomes– Emphasis on job-based pay– Focus is efficient use of human capital

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Porter’s Differentiation Strategy

• A differentiation business strategy attempts to achieve a competitive advantage by creating a product or service that is perceived as unique.

• Approaches to differentiation can take may forms, among them: design or brand image; technology; features; customer service; and dealer networks.

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Porter’s Differentiation StrategyHR Implications

• Effectiveness orientation– Maximize responsiveness to environmental change– Maximize innovation and creativity

• HR Strategy– Broad planning, strong mission and culture– Broad job descriptions– Emphasis on matching people to organization– Emphasis on career development– Work in teams– Performance appraisal emphasizes inputs– Pay based on inputs and organizational performance– Tends to be a high cost approach to managing people

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Metrics: HR’s Feedback Mechanism

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The Third Rule of Strategic Human Resource Management

• If SHRM involves a system…• And this system is complex, and open to its

environment…

• Then, it requires a FEEDBACK MECHANISM• Human Capital Metrics are used to assess

the link between the system and the performance of the firm.– To be useful, metrics must be leading indicators– For any given firm, metrics will be unique to

their strategy and context

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THE SEARS EXAMPLE

Copyright James Hayton 2008

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A Truncated version of the Sears Map (Total Performance Indicator Model)

Job Attitudes

Org Attitudes

EmployeeBehaviors

EmployeeRetention

PerceivedService

Helpfulness

PerceivedMerchandize

Value

CustomerImpression

CustomerRecommend

CustomerRetention

ROAMargins

Rev. growth

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THE SYSCO CASE

Copyright SDA Bocconi 2008

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Sysco Case

1. What is Sysco’s strategy?

2. What are the strategic drivers here?(e.g., what are the essential processes at Sysco?)

3. What are the key HR strategic drivers?

4. What are the HR enablers at Sysco?

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SYSCO - A Model for SuccessKeys to SYSCO’s Past & Future Success: Autonomous, entrepreneurial management

structure

Vast army of Marketing Associates

Innovative quality products

Industry-leading development and use of technology

Commitment to employees, customers, suppliers & shareholders

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Human Capital Metrics

• 1. Work Climate/Employee Satisfaction

• 2. Productivity• 3. Retention

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Sysco’s Work-Climate Survey

•Leadership support•Front-line supervisor•Rewards•Quality of life•Engagement•Diversity•Customer focus

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What drives Employee Satisfaction?

(FLS) My supervisor removes obstacles so I can do my job better

(LS) The leadership of our operating company spends a good amount of time talking with employees

(R) Doing my job well leads to monetary rewards

(FLS) My supervisor cares about me as a person

(FLS) I have received constructive feedback on my performance within the last 6 months

Predictors of Positive Work Climate

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DrivesDrives

EffectiveManagement

Practices

EffectiveManagement

Practices

Long-TermProfitability

&Growth

Long-TermProfitability

&Growth

DrivesDrivesEmployee

SatisfactionEmployee

SatisfactionDrivesDrives

CustomerSatisfaction

CustomerSatisfaction

Execution

Innovation

(2)

(1)

Leveraging the Value-Profit-Chain…At SYSCO

SYSCO Practices:

•Leadership Support•Front-Line Supervisor •Rewards•Quality of Life•Diversity/Engagement•Customer Focus

36 0 1% 2% 3% 4% 5% 6% 7%

Correlation between Key Metrics and Growth

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Wrap-up

• HR Architecture decisions impact top and bottom line performance

• Greater investments in HRM can produce higher levels of performance

• Match investment decisions to strategy– Know why you need to build capabilities

through people• Monitor investments to test hypotheses

about organizational performance