Strategic human resource management
Introduction to strategic human resource management
- To indicate the significance of the business context in developing an understanding of the meaning and application of SHRM.
- To analyse the relationship between strategic management and SHRM.
- To examine the different approaches to SHRM, including:
- The best-fit approach to SHRM
- The configurational approach to SHRM
- The resource-based view of SHRM
- The best-practice approach to SHRM.
- To evaluate the relationship between SHRM and organisational performance.
- To present a number of activities and case studies that will facilitate readers’ understanding of the nature and complexity of the SHRM debate, and enable them to apply their knowledge and understanding.
HRM models and frameworks and their theoretical underpinning as discussed in earlier chapter. The aim of this chapter is to provide a challenging and critical analysis of the strategic human resource management literature, so that you will be able to understand the synthesis both within and between strategic human resource management and strategic management in its various forms.
Since the early 1980s when human resource management arrived on the managerial agenda, there has been considerable debate concerning its nature and its value to organisations. From the seminal works emerging from the Chicago school and the matching model of HRM (Fombrun et al., 1984), the emphasis has very much concerned its strategic role in the organisation. Indeed, the now large literature rarely differentiates between human resource management (HRM) and strategic human resource management (SHRM).
Some writers have associated HRM with the strategic aspects and concerns of ‘best-fit’, in vertically aligning an organisation’s human resources to the needs of the organisation as expressed in the organisational strategy (Fombrun et al., 1984) or by creating ‘congruence’ or ‘horizontal alignment’ between various managerial and HRM policies (Beer et al., 1984; Walton, 1985). Others have focused on HRM as a means of gaining commitment and linked this to outcomes of enhanced organizational performance (Beer et al., 1984; Guest, 1987; Guest et al., 2000a); through best-practice models (Pfeffer, 1994, 1998; MacDuffie, 1995; Arthur, 1994) or high-performance work practices (Huselid, 1995; Guest, 1987).
Others have recognised the ‘harder’ nature of strategic HRM (Storey, 1992), emphasising its contribution to business efficiency. Interlaced with this debate has been the wider controversy concerning the nature of business strategy itself, from which strategic HRM takes its theoretical constructs. Add to this, transformations in organisational forms, which have impacted simultaneously on both structures and relationships in organisations. Bahrami (1992) describes tensions in the US high-technology sector that should be familiar to the UK audience.
The need for increased flexibility (Atkinson, 1984) or ‘agility’ (Bahrami, 1992) in organizational structures and relationships has led to ‘delayering, team-based networks, alliances and partnerships and a new employer–employee covenant’ or psychological contract. These changes in organisational structuring and employer–employee relationships have led to difficulties in finding new organisational forms that both faster creativity and avoid chaos. Thus tensions can arise between ‘innovation and maintaining focus, between rapid response and avoiding duplication, between a focus on future products and meeting time to market criteria, between long-term vision and ensuring performance today’.
These tensions need to be considered within business and human resource strategies, as organisations grapple with remaining lean and focused, yet maintain a loose hands-off management style to encourage creativity and rapid response. These dilemmas are not new to the strategic HRM literature; Kanter in 1989 noted contradictions between remaining ‘lean, mean and fit’ on the one hand, yet being seen as a great company to work for on the other.
Development in SHRM thinking, charted in this chapter through the development of the best-fit approach, the configurational approach, the resource-based view approach and the best-practice approach, have a profound impact on our understanding of the contribution SHRM can make to organisational performance, through increased competitive advantage and added value. Indeed, it becomes clear that whether the focus of SHR practices is on alignment with the external context or on the internal context of the firm, the meaning of SHRM can only really be understood in the context of something else, namely organisational performance, whether that be in terms of economic value added and increased shareholder value, customer value added and increased market share, or people added value through increased employee commitment and reservoirs of employee skills and knowledge.
The debate therefore becomes extremely complex in its ramifications for analyzing processes, evaluating performance and assessing outcomes. The observer therefore must come to the view, in the best postmodern tradition, that the profusion and confusion of policy make straightforward analysis of SHRM in empirical and analytical terms extremely difficult and contingent on positional stances of the actors and observers involved in the research process. However, some kind of analytical context is useful in beginning our evaluations.
In order to understand the development of strategic human resource management, and recognise that SHRM is more than traditional human resource management ‘tagged’ with the word ‘strategic’, it is necessary to consider the nature of strategic management. This will provide an understanding of the ‘strategic’ context within which strategic human resource management has developed, and enable us to understand the increasingly complex relationship between strategic management and strategic human resource management.
Understanding the business context
The nature of business strategy
Boxall (1996) has commented that ‘any credible attempt at model-building in Strategic HRM involves taking a position on the difficult questions: What is Strategy? (content) & How is strategy formed? (process)’. It is the intention of this section to explore these questions, and identify the difficulties and complexities involved in the ‘strategy-making’ process. This section provides an overview of some of the issues and debates, and sets the context for the SHRM debate discussed later in the chapter.
It is not within the remit of this chapter, however, to provide a comprehensive review of strategic management theory. Readers are encouraged to seek further reading on strategic management, particularly if the material is completely new to them. The roots of business strategy stretch far back into history (Alexander the Great 356–323 BC, Julius Caesar 100–44 BC), and early writers linked the term ‘strategy’ to the ancient Greek word ‘strategos’, which means ‘general’ and has connotations of ‘to lead’ and ‘army’.
Thus it is not surprising that many dictionary definitions convey a military perspective: Early writings on business strategy adopted a military model combined with economics, particularly the notion of rational-economic man (Chandler, 1962; Sloan, 1963; Ansoff, 1965). This is known as the classical or rational-planning approach, and has influenced business thinking for many decades. The meaning of strategy has changed, however, and become more complex over the past 20 years or so, where the literature has moved from emphasising a long-term planning perspective (Chandler, 1962) to a more organic evolutionary process occupying a shorter time frame (Ansoff and McDonnell, 1990). Thus strategic management in the late 1990s, early 2000s is seen to be as much about vision and direction as about planning, mechanisms and structure.
Approaches to the strategy-making process
This topic uses the four distinctive approaches to strategy-making identified by Whittington (1993, 2001) as a model of analysis. These are the classical or rationalplanning approach, the evolutionary approach, the processual approach and the systemic approach. As you will see, an organisation’s approach to its ‘strategy-making’ process has implications for our understanding and application of strategic human resource management.
The classical or rational-planning approach
This view suggests that strategy is formed through a formal and rational decisionmaking process. The key stages of the strategy-making process emphasise: firstly, a comprehensive analysis of the external and internal environment, which then enables an organisation to evaluate and choose from a range of strategic choices, which in turn allows for plans to be made to implement the strategy. With this approach, profitability is assumed to be the only goal of business, and the rational-planning approach the means to achieve it.
Alfred Chandler (1962), a business historian, Igor Ansoff (1965), a theorist, and Alfred Sloan (1963), President of General Motors, identified these key characteristics of the classical approach in their work and writings. Chandler defined strategy as:Grant (2002) highlighted the classical approach in his model of common elements in successful strategies: where clear goals, understanding the competitive environment, resource appraisal and effective implementation form the basis of his analysis.
Within the classical perspective, strategy can be and often is viewed at three levels: firstly, at the ‘corporate’ level, which relates to the overall scope of the organisation, its structures, financing and distribution of key resources; secondly, at a ‘business’ level, which relates to its competitive positioning in markets/products/services; thirdly, at an ‘operational’ level, which relates to the methods used by the various functions: marketing, finance, production and of course human resources to meet the objectives of the higher-level strategies.
This approach tends to separate out operational practices from higher-level strategic planning; this is not always helpful in reality, as it is often operational practices and effective systems that are ‘strategic’ to success in organizations (Boxall and Purcell, 2003). This prompted Whittington (2001: 107) to comment that ‘the rigid separation of strategy from operations is no longer valid in a knowledge-based age’.
This is not to suggest that external analysis and planning should be ignored, but proposes a recognition that operational practices or ‘tactical excellence’ may provide sustainable competitive advantage by ensuring that an organisation is adaptable and can flex with the environment. This becomes significant in contributing to our understanding of SHRM later in the chapter.
Common elements in successful strategies
The classical approach, however, forms the basis of much of our early understanding of how organisations ‘make strategy’ and define competitive advantage. It is worth spending time on the activity below, which will enable you to understand and apply the strategic management process from a classical rational-planning perspective.
Drawing on Johnson and Scholes (2002), it focuses on strategic analysis, which requires you to analyse the external and internal environment of an organisation and identify its key source of competitive advantage, which will then enable you to identify and evaluate the range of strategic choices open to the organisation. This in turn will enable you to consider the implementation stage of the strategy-making process in the organisation. In this activity, you have probably raised more questions than answers, and you have probably identified some of the shortcomings of the classical approach.
Mintzberg (1990) clearly identified the ‘basic premises’ of the classical approach as being the disciplined ‘readiness and capacity of managers to adopt profit-maximising strategies through rational long-term planning’ (Whittington, 2001: 15). He questioned the feasibility of adopting this approach as either a model for prescription of best practice or as a model of analysis, as he considered it to be an inflexible and oversimplified view of the ‘strategymaking’ process, relying too heavily on military models and their assumed culture of discipline.
Mintzberg (1987) argued that making strategy in practice tends to be complex and messy, and he preferred to think about strategy as ‘crafting’ rather than ‘planning’. The classical approach is, however, the basis for much strategy discussion and analysis, and, as we will see later, underpins much strategic HRM thinking, particularly the ‘best-fit’ school of thought and the notion of vertical integration. If, however, we accept that devising and implementing strategies in organisations is a complex and organic process, it highlights the complexity of both defining and applying strategic human resource management.
The evolutionary approach
An alternative view of the strategy-making process is the evolutionary approach. This suggests that strategy is made through an informal evolutionary process in which managers rely less upon top managers to plan and act rationally and more upon the markets to secure profit maximisation. Whittington (2001) highlights the links between the evolutionary approach and the ‘natural law of the jungle’. Henderson (1989: 143) argued that ‘Darwin is probably a better guide to business competition than economists are’, as he recognised that markets are rarely static and indeed likened competition to a process of natural selection, where only the fittest survive.
Darwin noted that more individuals of each species are born than can survive, thus there is a frequently recurring struggle for existence. Evolutionarists, therefore, argue that markets, not managers, choose the prevailing strategies. Thus in this approach, the rational-planning models that analyse the external and internal environment, in order to select the most appropriate strategic choices and then to identify and plan structural, product and service changes to meet market need, become irrelevant. The evolutionary approach suggests that markets are too competitive for ‘expensive strategizing and too unpredictable to outguess’ (Whittington, 2001: 19). They believe that sophisticated strategies can deliver only a temporary advantage, and some suggest focusing instead on efficiency and managing the ‘transaction costs’.
The processual approach
Quinn (1978) recognised that in practice strategy formation tends to be fragmented, evolutionary and largely intuitive. His ‘logical incrementalist’ view, therefore, while acknowledging the value of the rational-analytical approach, identified the need to take account of the psychological, political and behavioural relationships which influence and contribute to strategy. Quinn’s view fits well within Whittington’s processual approach which recognises ‘organisations and markets’ as ‘sticky, messy phenomena, from which strategies emerge with much confusion and in small steps’ (2001: 21).
The foundations of the processual school can be traced back to the work of the American Carnegie School, according to Whittington (2001) and the work of Cyert and March (1956) and Simon (1947). They uncovered two key themes: first, the cognitive limitations of human action, and secondly, that human beings are influenced by ‘bounded rationality’ (Simon, 1947). Thus no single human being, whether the chief executive or a production worker, is likely to have all the answers to complex and difficult problems, and we all often have to act without knowing everything we would like to know.
Thus complexity and uncertainty become facts of life in strategic management and consequently in SHRM (Boxall and Purcell, 2003). It is important for organizations to recognise this to avoid falling into a fog of complacency or the ‘success trap’ (Barr et al., 1992), and it also highlights the limitations of some of the prescriptions for success advocated in both the strategic management and SHRM literature. In practice, an organisation’s approach to SHRM has considerable influence here on the strategic management process, as to effectively manage the environment better than their competitors, some writers would suggest that the organisation needs to adopt a learning and open systems perspective.
Mintzberg (1987) recognised this in his ideas on ‘crafting strategy’, and the fluid and organic nature of the strategy-making process. He compared the skills required of those involved in the process to those of a traditional craftsperson – traditional skill, dedication, perfection, mastery of detail, sense of involvement and intimacy through experience and commitment. Thus he recognised that planned strategies are not always realised strategies, and that strategies can often emerge and evolve .
Thus the classic sequence of plan first, implementation second can become blurred, as ‘strategy is discovered in action’ (March, 1976). Secondly, the processualists noted the significance of the micro-politics within organisations, a theme since developed by Pettigrew (1973, 1985) and Wilson (1992). This approach recognises the inherent rivalries and conflicting goals present within organisations, and the impact this can have on strategy implementation. As we will see later in the chapter, it is these pluralist tensions that are sometimes ignored in certain branches of the SHRM literature, most notably the best-practice approach.
The systemic approach
This leads us on to the final perspective identified by Whittington (1993, 2001), the systemic approach. The systemic approach suggests that strategy is shaped by the social system within which it operates. Strategic choices, therefore, are shaped by the cultural and institutional interests of a broader society.
So, for example, state intervention in France and Germany has shaped HRM in a way that is different from the USA and the UK. A key theme of the systemic approach is that ‘decision-makers are not detached, calculating individuals interacting in purely economic transactions’ (Whittington, 2001: 26) but are members of a community ‘rooted in a densely interwoven social system’. Therefore, in reality, organisations and their members’ choices are embedded in a network of social relations (Whittington, 1993).
Thus according to this approach, organizations differ according to the social and economic systems in which they are embedded. The four approaches to strategy identified differ considerably in their implications for advice to management. Understanding that strategy formulation does not always occur in a rational-planned manner, owing to complexities in both the external and internal environment, is significant for our understanding of strategic human resource management.
Whittington (1993) summarised his four generic approaches of classical, evolutionary, systemic and processual, discussed above, in Figure.
By plotting his model on two continua of outcomes (profit maximisation–pluralistic) and processes (deliberate –emergent), Whittington (1993, 2001) recognises that the strategy process changes depending upon the context and outcomes. In terms of strategic human resource management, therefore, the term ‘strategic’ has broader and more complex connotations than those advocated in the prescriptive ‘classical’ strategy literature. As turbulence in the environment increases, organisations are recognising the importance of human resources to the competitive performance of the organisation, and therefore its role at a strategic level rather than an operational one.
By now you should be familiar with different approaches to understanding the nature of strategy, and have gained an appreciation of the complexities involved in the strategic management process. You may have realised that our understanding and interpretation of SHRM will, to a certain extent, be influenced by our interpretation of the context of strategic management. It is to the definition and the various interpretations of strategic human resource management that we turn next.
The rise of strategic human resource management
In the past 20 years or so, the management of people within organisations has moved from the sidelines to centre stage. The contribution that human resources may make to an organisation’s performance and effectiveness has become the subject of much scrutiny. Much of this change has been linked to changes in the business environment, with the impact of globalisation leading to the need for increased competitiveness, flexibility, responsiveness, quality and the need for all functions of the business to demonstrate their contribution to the bottom line.
As we have already recognised, it is against this backdrop that the traditional separation between strategy and operational activities, such as personnel and then HRM, has become blurred, particularly in a knowledge-based age. There is confusion over the differentiation between human resource management and strategic human resource management. Part of the reason for this confusion will be familiar to you, as it arises from the varying stances of the literature, those of prescription, description or critical evaluation. Some writers see the two terms as synonymous (Mabey et al., 1998), while others consider there to be differences. A wealth of literature has appeared to prescribe, describe and critically evaluate the way organisations manage their human resources.
It has evolved from being highly critical of the personnel function’s contribution to the organisation as being weak, non-strategic and lacking a theoretical base (Drucker, 1968; Watson, 1977; Legge, 1978; Purcell, 1985), through the development of human resource management models and frameworks (Beer et al., 1984; Fombrun et al., 1984; Schuler and Jackson, 1987; Guest, 1987), to critics of the HRM concept who question the empirical, ethical, theoretical and practical base of the subject (Legge, 1995; Keenoy, 1990; Blyton and Turnbull, 1992; Keenoy and Anthony, 1992), to a wave of strategic human resource management literature focusing on the link or vertical integration between human resource practices and an organisation’s business strategy, in order to enhance performance (Schuler and Jackson, 1987; Kochan and Barocci, 1985; Miles and Snow, 1984), and on the relationship between best-practice or high-commitment HR practices and organisational performance (Pfeffer, 1994, 1998; Huselid, 1995; MacDuffie, 1995; Guest, 2001).
Confusion arises because embedded in much of the HRM literature is the notion of strategic integration (Guest, 1987; Beer et al., 1984; Fombrun et al., 1984), but critics have been quick to note the difference between the rhetoric of policy statements and the reality of action (Legge, 1995) and the somewhat piecemeal adoption of HRM practices (Storey, 1992, 1995) and the ingrained ambiguity of a number of these models (Keenoy, 1990; Blyton and Turnbull, 1992). Thus, while the early HRM literature appeared to emphasise a strategic theme, there was much critical evaluation that demonstrated its lack of strategic integration. Thus terms such as ‘old wine in new bottles’ became a familiar explanation for the development of personnel to HRM and then to SHRM.
Exploring the relationship between strategic management and SHRM: the best-fit school of SHRM
The best-fit (or contingency) school of SHRM explores the close link between strategic management and HRM, by assessing the extent to which there is vertical integration between an organisation’s business strategy and its HRM policies and practices. This is where an understanding of the strategic management process and context can enhance our understanding of the development of SHRM, both as an academic field of study and in its application in organisations.
The notion of a link between business strategy and the performance of every individual in the organisation is central to ‘fit’ or vertical integration. Vertical integration can be explicitly demonstrated through the linking of a business goal to individual objectivesetting, to the measurement and rewarding of that business goal. Vertical integration between business strategy or the objectives of the business and individual behaviour and ultimately individual, team and organisational performance is at the core of many models of SHRM.
This vertical integration, where ‘leverage’ is gained through procedures, policies and processes, is widely acknowledged to be a crucial part of any strategic approach to the management of people (Dyer, 1984; Mahoney and Deckop, 1986; Schuler and Jackson, 1987; Fombrun et al., 1984; Gratton et al., 1999). Vertical integration therefore ensures an explicit link or relationship between internal people processes and policies and the external market or business strategy, and thereby ensures that competences are created which have a potential to be a key source of competitive advantage (Wright et al., 1994).
Tyson (1997) identifies the move towards greater vertical integration (between human resource management and business strategy) and horizontal integration (between HR policies themselves and with line managers) as a sign of ‘HRM’s coming of age’. In recognising certain shifts in the HRM paradigm, Tyson identified ‘vertical integration’ as the essential ingredient that enables the HR paradigm to become strategic. This requires, in practice, not only a statement of strategic intent, but planning to ensure that an integrated HR system can support the policies and processes in line with the business strategy.
It is worth while considering the earlier discussions on the nature of strategic management here, as a number of critics, notably Legge (1995), have questioned the applicability of the classical-rational models on the grounds that there is a dearth of empirical evidence to support their credibility. Legge (1995: 135) tends to prefer the processual framework (Whittington, 1993), which is grounded in empirical work and recognises that ‘integrating HRM and business strategy is a highly complex and iterative process, much dependent on the interplay and resources of different stakeholders’.
There have been a number of SHRM models that have attempted to explore the link between business strategy and HR policies and practices, and develop categories of integration or ‘fit’. These include the life-cycle models (Kochan and Barocci, 1985) and the competitive advantage models of Miles and Snow (1978) and Schuler and Jackson (1987) based on the influential work of Porter (1985).
A number of researchers have attempted to apply business and product life-cycle thinking or ‘models’ to the selection and management of appropriate HR policies and practices that fit the relevant stage of an organisation’s development or life cycle (Baird and Meshoulam, 1988; Kochan and Barocci, 1985). So, for example, according to this approach, during the start-up phase of the business there is an emphasis on ‘flexibility’ in HR, to enable the business to grow and foster entrepreneurialism.
In the growth stage, once a business grows beyond a certain size, the emphasis would move to the development of more formal HR policies and procedures. In the maturity stage, as markets mature and margins decrease, and the performance of certain products or the organisation plateaus, the focus of the HR strategy may move to cost control. Finally, in the decline stage of a product or business, the emphasis shifts to rationalisation, with downsizing and redundancy implications for the HR function (Kochan and Barocci, 1985).
The question for HR strategists here is, firstly, how can HR strategy secure and retain the type of human resources that are necessary for the organisation’s continued viability, as industries and sectors develop? Secondly, which HR policies and practices are more likely to contribute to sustainable competitive advantage as organisations go through their life cycle? (Boxall and Purcell, 2003). Retaining viability and sustaining competitive advantage in the ‘mature’ stage of an organisation’s development is at the heart of much SHRM literature.
Baden-Fuller (1995) noted that there are two kinds of mature organisations that manage to survive industry development: ‘one is the firm that succeeds in dominating the direction of industry change and the other, is the firm that manages to adapt to the direction of change’ (Boxall and Purcell, 2003: 198). Abell (1993), Boxall (1996) and Dyer and Shafer (1999) identify that the route to achieving human resource advantage as organisations develop and renew lies in the preparation for retaining viability and competitive advantage in the mature phase.
The need for organisations to pursue ‘dual’ HR strategies, which enable them to master the present while preparing for and pre-empting the future, and avoiding becoming trapped in a single strategy, is identified by Abell (1993), while Dyer and Shafer (1999) developed an approach that demonstrates how an organisation’s HR strategy could contribute to what they termed ‘organisational agility’. This implies an inbuilt capacity to flex and adapt to changes in the external context, which enables the business to change as a matter of course. Interestingly, this work appears to draw on the resource-based view and best-practice view of SHRM discussed later in the chapter, as well as the best-fit approach, reflecting the difficulty of viewing the various approaches to SHRM as distinct entities.
Whittington’s typology of strategy
- Competitive advantage models
Competitive advantage models tend to apply Porter’s (1985) ideas on strategic choice. Porter identified three key bases of competitive advantage: cost leadership, differentiation through quality and service, and focus or ‘niche’ market. Schuler and Jackson (1987) used these as a basis for their model of strategic human resource management, where they defined the appropriate HR policies and practices to ‘fit’ the generic strategies of cost reduction, quality enhancement and innovation.
They argued that business performance will improve when HR practices mutually reinforce the organisation’s hoice of competitive strategy. Thus in Schuler and Jackson’s model (Table 2.2), the organisation’s mission and values are expressed through their desired competitive strategy. This in turn leads to a set of required employee behaviours, which would be reinforced by an appropriate set of HR practices. The outcome of this would be desired employee behaviours, which are aligned with the corporate goals, thus demonstrating the achievement of vertical integration.
As you can see, the ‘cost-reduction’-led HR strategy is likely to focus on the delivery of efficiency through mainly ‘hard’ HR techniques, whereas the ‘quality enhancement’ and ‘innovation’-led HR strategies focus on the delivery of added value through ‘softer’ HR techniques and policies. Thus all three of these strategies can be deemed ‘strategic’ in linking HR policies and practices to the goals of the business and the external context of the firm, and therefore in contributing in different ways to ‘bottom-line’ performance.
Another commonly cited competitive advantage framework is that of Miles and Snow (1978), who defined generic types of business strategy as defenders, prospectors and analysers and matched the generic strategies to appropriate HR strategies, policies and practices, the rationale being that if appropriate alignment is achieved between the organisation’s business strategy and its HR policies and practices, a higher level of organisational performance will result.
Business strategies and associated HR policies
One criticism often levelled at the contingency or best-fit school is that they tend to over-simplify organisational reality. In attempting to relate one dominant variable external to the organisation (for example, compete on innovation, quality or cost) to another internal variable (for example, human resource management), they tend to assume a linear, non-problematic relationship. It is unlikely, however, that an organisation is following one strategy alone, as organisations have to compete in an ever-changing external environment where new strategies are constantly evolving and emerging.
How often in organisational change programmes have organisations issued new mission and value statements, proclaiming new organisational values of employee involvement etc. on the one hand, with announcements of compulsory redundancies on the other? Thus cost-reduction reality and high-commitment rhetoric often go hand in hand, particularly in a short-termist-driven UK economy. Delery and Doty (1996) noted the limitation of the contingency school, and proposed the notion of the configurational perspective.
This approach focuses on how unique patterns or configurations of multiple independent variables are related to the dependent variable, by aiming to identify ‘ideal type’ categories of not only the organisation strategy but also the HR strategy. The significant difference here between the contingency approach and the configurational approach is that these configurations represent ‘non-linear synergistic effects and higher-order interactions’ that can result in maximum performance (Delery and Doty, 1996: 808).
As Marchington and Wilkinson (2002: 222) note, the key point about the configurational perspective is that it ‘seeks to derive an internally consistent set of HR practices that maximise horizontal integration and then link these to alternative strategic configurations in order to maximise vertical integration’. Thus, put simply, strategic human resource management, according to configurational theorists, requires an organization to develop an HR system that achieves both horizontal and vertical integration.
Delery and Doty use Miles and Snow’s (1978) categories of ‘defender’ and ‘prospector’ to theoretically derive ‘internal systems’ or configurations of HR practices that maximize horizontal fit, and then link these to strategic configurations of, for example, ‘defender’ or ‘prospector’ to maximise vertical fit.
The configurational approach provides an interesting variation on the contingency approach, and contributes to the strategic human resource management debate in recognizing the need for organisations to achieve both vertical and horizontal fit through their HR practices, so as to contribute to an organisation’s competitive advantage and therefore be deemed strategic.
While Table provides only for the two polar opposites of ‘defender’ and ‘prospector’ type strategies, the approach does allow for deviation from these ideal-type strategies and recognises the need for proportionate deviation from the ideal-type HR systems.
Gaining maximum vertical and horizontal fit through strategic configurations
In analysing the level of vertical integration evident in organisational practice, it soon becomes clear that organisations pursue and interpret vertical integration in different ways. Some organisations tend to adopt a top-down approach to HR ‘strategy-making’, with senior management cascading defined strategic objectives to functional departments, who in turn cascade and roll out policies to employees, while other organizations recognise HRM as a business partner.
Torrington and Hall (1998) have explored the varying interpretations of ‘fit’ or ‘integration’ by attempting to qualify the degree or levels of integration between an organisation’s business strategy and its human resources strategy. They identified five different relationships or levels of ‘vertical integration’.
Torrington and Hall’s five levels of ‘vertical integration’
In the separation model, there is clearly no vertical integration or relationship between those responsible for business strategy and those responsible for HR, thus there is unlikely to be any formal responsibility for human resources in the organisation. The ‘fit’ model, according to Torrington and Hall, recognises that employees are key to achieving the business strategy, therefore the human resources strategy is designed to fit the requirements of the organisation’s business strategy.
This ‘top-down’ version of ‘fit’ can be seen in the matching model (Fombrun et al., 1984) and in the best-fit models of Schuler and Jackson (1987) and Kochan and Barocci (1985). As you have probably already identified, these models assume a classical approach to strategy. Thus they assume that business objectives are cascaded down from senior management through departments to individuals. The ‘dialogue’ model recognises the need for a two-way relationship between those responsible for making business strategy decisions and those responsible for making HR decisions.
In reality, however, in this model the HR role may be limited to passing on essential information to the Board, to enable them to make strategic decisions. The ‘holistic’ model, on the other hand, recognises employees as a key source of competitive advantage, rather than just a mechanism for implementing an organisation’s strategy. Human resource strategy in this model becomes critical, as people competences become key business competences. This is the underpinning assumption behind the resourcebased view of the firm (Barney, 1991; Barney and Wright, 1998), discussed later in this chapter. The final degree of integration identified by Torrington and Hall is the HRdriven model, which places HR as a key strategic partner.
- Limitations of the best-fit models of SHRM
Criticisms of the best-fit approach have identified a number of problems, both in their underlying theoretical assumptions and in their application to organisations. One of these key themes is the reliance on the classical rational-planning approach to strategymaking, its reliance on determinism and the resulting lack of sophistication in their description of generic competitive strategies (Miller, 1992; Ritson, 1999; Boxall and Purcell, 2003).
This criticism is partly answered by the configurational school, which recognises the prevalence of hybrid strategies and the need for HR to respond accordingly (Delery and Doty, 1996). A further criticism is that best-fit models tend to ignore employee interests in the pursuit of enhanced economic performance. Thus, in reality, alignment tends to focus on ‘fit’ as defined by Torrington and Hall (1998), and relies on assumptions of unitarism rather than the alignment of mutual interests.
It has been argued that ‘multiple fits’ are needed, to take account of pluralist interests and conventions within an organisation, by ensuring that an organisation’s HR strategy meets the mutual interests of both shareholders and employees. A third criticism could be leveled at the lack of emphasis on the internal context of individual businesses within the same sector, and the unique characteristics and practices that might provide its main source of sustainable competitive advantage. Marchington and Wilkinson (2002: 225) ask, for example: Why did Tesco choose to work closely with trade unions while Sainsbury’s preferred to minimise union involvement?
We have explored the best-fit school of SHRM and its relationship to strategic management through the contingency and configurational approaches. The contingency approach recommends a strong relationship to strategic management, whether it be to an organisation’s life cycle or competitive forces; this obviously assumes a classical rational-planning model of strategic management.
We have considered this relationship or vertical integration between an organisation’s business strategy and its human resource strategy in some detail, defining the varying degrees of ‘fit’. The configurational approach attempts to answer some of the limitations of the contingency approach, by identifying ‘ideal type’ categories of both the organisation strategy and the HR strategy. It ‘seeks to derive an internally consistent set of HR practices that maximise horizontal integration and then link these to alternative strategic configurations in order to maximize vertical integration’ and therefore organisational performance.
An alternative approach to understanding the relationship between an organisation’s approach to SHRM and its business performance is the resource-based view of SHRM, with its focus on the internal context of the business and its recognition of human resources as ‘strategic assets’.
The resource-based view of SHRM
The resource-based view of the firm (RBV) represents a paradigm shift in SHRM thinking by focusing on the internal resources of the organisation, rather than analyzing performance in terms of the external context. Advocates of the resource-based view of SHRM help us to understand the conditions under which human resources become a scarce, valuable, organisation-specific, difficult-to-imitate resource, in other words key ‘strategic assets’ (Barney and Wright, 1998; Mueller, 1998; Amit and Shoemaker, 1993; Winter, 1987).
Proponents of the resource-based view of the firm (Penrose, 1959; Wernerfelt, 1984; Amit and Shoemaker, 1993) argue that it is the range and manipulation of an organisation’s resources, including human resources, that give an organization its ‘uniqueness’ and source of sustainable competitive advantage. Their work has resulted in an ‘explosion of interest in the Resource-Based perspective’ (Boxall and Purcell, 2003: 72), particularly in seeking ways to build and develop ‘unique bundles’ of human and technical resources that will lead to enhanced organisational performance and sustainable competitive advantage.
Barney (1991, 1995) and Barney and Wright (1998) contribute to the debate on strategic HRM in two important ways. Firstly, by adopting a resource-based view (Barney, 1991; Wernerfelt, 1984), they provide an economic foundation for examining the role of human resource management in gaining sustainable competitive advantage. Secondly, in providing a tool of analysis in the VRIO framework, and by considering the implications for operationalising human resource strategy, they emphasise the role of the HR executive as a strategic partner in developing and sustaining an organisation’s competitive advantage.
The resource-based view therefore recognises the HR function (department) as a key ‘strategic’ player in developing sustainable competitive advantage and an organisation’s human resources (employees) as key assets in developing and maintaining sustainable competitive advantage.
The resource-based view of SHRM explores the ways in which an organisation’s human resources can provide sustainable competitive advantage. This is best explained by the VRIO framework:
Organisations need to consider how the human resources function can create value; it is quite common in organisations to reduce costs through HR such as the reduction in headcount and the introduction of flexible working practices etc., but it is also important to consider how they might increase revenue. Reicheld (1996) has identified human resources’ contribution to the business as efficiency, but also as customer selection, customer retention and customer referral, thus highlighting the impact of HR’s contribution through enhanced customer service and customer added value.
This view is reflected by Thompson (2001), in recognising the paradigm shift from traditional added value through economy and efficiency to ensuring that the potential value of outputs is maximized by ensuring that they fully meet the needs of the customers for whom the product or service is intended. The suggestion of the resource-based view is that if Human Resources wishes to be a ‘strategic partner’, they need to know which human resources contribute the most to sustainable competitive advantage in the business, as some human resources may provide greater leverage for competitive advantage than others.
Hamel and Prahalad (1993) therefore identify that productivity and performance can be improved by gaining the same output from fewer resources (rightsizing) and by achieving more output from given resources (leveraging). In order to achieve this, Human Resources may ask themselves the following questions:
- On what basis is the firm seeking to distinguish itself from its competitors? Production efficiency? Innovation? Customer service?
- Where in the value chain is the greatest leverage for achieving differentiation?
- Which employees provide the greatest potential to differentiate a firm from its competitors?
This approach has further implications for the role of human resource managers in a firm, as they need to understand the economic consequences of human resource practices and understand where they fit in the value chain. Barney and Wright (1998: 42) suggest that the Human Resources function needs to be able to explore the following questions:
- Who are your internal customers and how well do you know their part of the business?
- Are there organisational policies and practices that make it difficult for your internal clients to be successful?
- What services do you provide? What services should you provide? What services should you not provide?
- How do these services reduce internal customers’ costs/increase their revenues?
- Can these services be provided more efficiently by outside vendors?
- Can you provide these services more efficiently?
- Do managers in the HR function understand the economic consequence of their jobs?
The value of an organisation’s resources is not sufficient alone, however, for sustainable competitive advantage, because if other organisations possess the same value, then it will only provide competitive parity. Therefore an organisation needs to consider the next stage of the framework: rarity.
The HR Executive needs to consider how to develop and exploit rare characteristics of a firm’s human resources to gain competitive advantage. Nordstrom is an interesting case, because it operates in a highly competitive retail industry where you would usually expect a lower level of skill and subsequently high labour turnover. Nordstrom, however, focused on individual salespeople as a key source of its competitive advantage. It therefore invested in attracting and retaining young collegeeducated people who desired a career in retailing.
To ensure horizontal integration, it also provided a highly incentive-based compensation system (up to twice the industry average), and it encouraged employees to make a ‘heroic effort’ to attend to customers’ needs. Thus, by investing in its human resources, and ensuring an integrated approach to development and reward, Nordstrom has taken a ‘relatively homogeneous labour pool, and exploited the rare characteristics to gain a competitive advantage’ (Barney and Wright, 1998: 34).
If an organisation’s human resources add value and are rare, they can provide competitive advantage in the short term, but if other firms can imitate these characteristics, then over time competitive advantage may be lost and replaced with competitive parity. The third element of the VRIO framework requires Human Resources to develop and nurture characteristics that cannot be easily imitated by the organisation’s competitors. Barney and Wright (1998) recognise the significance of ‘socially complex phenomena’ here, such as an organisation’s unique history and culture, which can be used to identify nique practices and behaviours which enable organisations to ‘leapfrog’ their competitors.
Alchian and Demsetz (1972) also identified the contribution of social complexity in providing competitive advantage, in their work on the potential synergy that results from effective teamwork. They found that this ensured a rare and difficult-to-copy commodity for two reasons: firstly, it provided competitive advantage through its causal ambiguity, as the specific source of the competitive advantage was difficult to identify; secondly, through its social complexity, as synergy resulted as team members were involved in socially complex relationships that are not transferable across organisations. So characteristics such as trust and good relationships become firm-specific assets that provide value, are rare and are difficult for competitors to copy.
The extract above (Box 2.3) demonstrates the strength of inimitability: SW Airlines exemplifies the role that socially complex phenomena, such as culture, can play in gaining competitive advantage. Top management attribute the company’s success to its ‘personality’, a culture of ‘fun’ and ‘trust’, that empowers employees to do what it takes to meet the customers’ needs. This is reinforced through an extensive selection process, and a culture of trust and empowerment reinforced by the CEO. SW Airlines attributes its strong financial success to its ‘personality’, which CEO Kelleher believes cannot be imitated by its competitors. So the human resources of SW Airlines serve as a source of sustainable competitive advantage, because they create value, are rare and are virtually impossible to imitate.
Finally, to ensure that the HR function can provide sustainable competitive advantage, the VRIO framework suggests that organisations need to ensure that they are organized so that they can capitalise on the above, adding value, rarity and inimitability. This implies a focus on horizontal integration, or integrated, coherent systems of HR practices rather than individual practices, that enable employees to reach their potential (Guest, 1987; Gratton et al., 1999; Wright and Snell, 1991; Wright et al., 1996).
This requires organisations to ensure that their policies and practices in the HR functional areas are coordinated and coherent, and not contradictory. Adopting such a macro-view, however, is relatively new to the field of SHRM, as ‘each of the various HRM functions have evolved in isolation, with little coordination across the disciplines’ (Wright and McMahan, 1992). Thus there is much best-practice literature focusing on the microperspective, for example on identifying appropriate training systems, or conducting performance appraisals, or designing selection systems.
Although this literature has now evolved and recognised the ‘strategic’ nature of the functional areas, it has tended to focus on vertical integration at the expense of horizontal integration, thus there is still limited development in the interplay between employee resourcing, employee development, performance, reward and employee relations strategies. This discussion is explored in more detail in the next section: best-practice SHRM.
So, to conclude on the VRIO framework, if there are aspects of human resources that do not provide value, they can only be a source of competitive disadvantage and should be discarded; aspects of the organisation’s human resources that provide value and are rare provide competitive parity only; aspects that provide value, are rare but are easily copied provide temporary competitive advantage, but in time are likely to be imitated and then only provide parity.
So to achieve competitive advantage that is sustainable over time, the HR function needs to ensure the organisation’s human resources provide value, are rare, are difficult to copy and that there are appropriate HR systems and practices in place to capitalise on this. Mueller (1998), in advocating the resource-based view of SHRM, argues that ‘the existing theorising in strategic HRM needs to be complemented by an evolutionary perspective on the creation of human resource competencies’.
He echoes Mintzberg’s concerns (1987) that an overly-rationalistic approach to strategy-making tends to focus too much attention on past successes and failures, when what is really needed is a level of strategic thinking that is radically different from the past. He identifies a lack of theoretical and empirical evidence to justify the emphasis on rational, codified policies of HRM, and reflects Bamberger and Phillips (1991) in describing human resource strategy as an ‘emergent pattern in a stream of human-resource related decisions occurring over time’.
Thus the strategic planning approach may be viewed by some as a ‘metaphor employed by senior management to “legitimise emergent decisions and actions”’ (Gioia and Chittipeddi, 1991). Unlike contingency and universalist theorists (Schuler and Jackson, 1987; Miles and Snow, 1978; Kochan and Barocci, 1985; Pfeffer, 1994, 1998; Huselid, 1995), Mueller is more wary of the claimed relationship between strategic HRM and the overall financial performance of an organisation. He recognises that enlightened best-practice HR activities do not automatically translate into competitive superiority but rather require more complex and subtle conditions for human resources to become ‘strategic assets’.
He defines these as ‘the social architecture’ or ‘social patterns’ within an organisation which build up incrementally over time and are therefore difficult to copy. The focus on ‘social architecture’ rather than culture is deliberate as it provides an emphasis on developing and changing behaviours rather than values, which are notoriously difficult to change (Ogbonna, 1992). Mueller identifies an organisation’s ‘social architecture’ as a key element in the resource-based view of SHRM, together with an embedded ‘persistent strategic intent’ on the part of senior management and embedded learning in daily work routines, which enable the development of ‘hidden reservoirs’ of skills and knowledge, which in turn can be exploited by the organisation as ‘strategic assets’. The role of Human Resources is then to channel these behaviours and skills so that the organisation can tap into these hidden reservoirs. This thinking is reflected in the work of Hamel and Prahalad (1993, 1994), discussed below.
- Applying the resource-based view of SHRM
In adopting a focus on the internal context of the business, HR issues and practices are core to providing sustainable competitive advantage, as they focus on how organizations can define and build core competencies or capabilities which are superior to those of their competitors. One key framework here is the work of Hamel and Prahalad (1993, 1994) and their notion of ‘core competencies’ in their ‘new strategy paradigm’. They argue that ‘for most companies, the emphasis on competing in the present, means that too much management energy is devoted to preserving the past and not enough to creating the future’.
Thus it is organisations that focus on identifying and developing their core competencies that are more likely to be able to stay ahead of their competitors. The key point here is not to anticipate the future, but create it, by not only focusing on organisational transformation and competing for market share, but also regenerating strategies and competing for opportunity share. Thus in creating the future, strategy is not only seen as learning, positioning and planning but also forgetting, foresight and strategic architecture, where strategy goes beyond achieving ‘fit’ and resource allocation to achieving ‘stretch’ and resource ‘leverage’.
The level of both tacit and explicit knowledge within the firm, coupled with the ability of employees to learn, becomes crucial. Indeed, Boxall and Purcell (2003) argue that there is little point in making a distinction between the resource-based view and the knowledge-based view of the firm, as both approaches advocate that it is a firm’s ability to learn faster than its competitors that leads to sustainable competitive advantage. Alternatively, Boxall and Purcell present Leonard’s (1998) similar analysis based on ‘capabilities’.
These are ‘knowledge sets’ consisting of four dimensions: employee skills and knowledge, technical systems, managerial systems, and values and norms. In this model, employee development and incentive systems become a key driving force in achieving sustainable competitive advantage through core capability. Interestingly, Leonard emphasises the interlocking, systemic nature of these dimensions and warns organisations of the need to build in opportunities for renewal, to avoid stagnation.
Hamel and Prahalad’s notion of ‘core competency’
When organisations grow through mergers or acquisitions, as they appear increasingly to do (Hubbard, 1999), it has been argued that the resource-based view takes on further significance. When mergers and acquisitions fail, it is often not at the planning stage but at the implementation stage (Hunt et al., 1987) and people and employee issues have been noted as the cause of one-third of such failures in one survey (Marks and Mirvis, 1982). Thus ‘human factors’ have been identified as crucial to successful mergers and acquisitions.
The work of Hamel and Prahalad (1994) indicated that CEOs and directors of multidivisional firms should be encouraged to identify clusters of ‘know-how’ in their organisations which ‘transcend the artificial divisions of Strategic Business Units’ or at least have the potential to do so. Thus the role of Human Resources shifts to a ‘strategic’ focus on ‘managing capability’ and ‘know-how’, and ensuring that organisations retain both tacit and explicit knowledge (Nonaka and Takeuchi, 1995) in order to become more innovative, as organisations move to knowledge- based strategies as opposed to product-based ones.
The resource-based view of SHRM has recognised that both human capital and organizational processes can add value to an organisation; however, they are likely to be more powerful when they mutually reinforce and support one another. The role of Human Resources in ensuring that exceptional value is achieved and in assisting organisations to build competitive advantage lies in their ability to implement an integrated and mutually reinforcing HR system which ensures that talent, once recruited, is developed, rewarded and managed in order to reach their full potential.
This theme of horizontal integration or achieving congruence between HR policies and practices is developed further in the next section, best-practice approach to SHRM.
- Limitations of the resource-based view
The resource-based view is not without its critics, however, particularly in relation to its strong focus on the internal context of the business. Some writers have suggested that the effectiveness of the resource-based view approach is inextricably linked to the external context of the firm (Miller and Shamsie, 1996; Porter, 1991). They have recognized that the resource-based view approach provides more added value when the external environment is less predictable.
Other writers have noted the tendency for advocates of the resource-based view to focus on differences between firms in the same sector, as sources of sustainable competitive advantage. This sometimes ignores the value and significance of common ‘base-line’ or ‘table stake’ (Hamel and Prahalad, 1994) characteristics across industries, which account for their legitimacy in that particular industry. Thus in the retail sector, there are strong similarities in how the industry employs a mix of core and peripheral labour, with the periphery tending to be made up of relatively low-skilled employees, who traditionally demonstrate higher rates of employee turnover.
Thus in reality, economic performance and efficiency tend to be delivered through rightsizing, by gaining the same output from fewer and cheaper resources, rather than through leverage, by achieving more output from given resources. The example of B&Q in the UK, employing more mature people as both their core and particularly their peripheral workforce, is a good example of how an organisation can partially differentiate themselves from their competitors, by focusing on adding value through the knowledge and skills of their human resources.
Thus leverage is gained, as the knowledge of B&Q’s human resources add value to the level of customer service provided, which theoretically in turn will enhance customer retention and therefore shareholder value. An exploration of the empirical evidence to support this relationship between SHRM and organisational performance is discussed in more detail in the next section: the best-practice approach to strategic human resource management.
Best-practice SHRM: high-commitment models
The notion of best-practice or ‘high-commitment’ HRM was identified initially in the early US models of HRM, many of which mooted the idea that the adoption of certain ‘best’ human resource practices would result in enhanced organisational performance, manifested in improved employee attitudes and behaviours, lower levels of absenteeism and turnover, higher levels of skills and therefore higher productivity, enhanced quality and efficiency. This can be identified as a key theme in the development of the SHRM debate, that of best-practice SHRM or universalism.
Here, it is argued that all organizations will benefit and see improvements in organisational performance if they identify, gain commitment to and implement a set of best-HRM practices. Since the early work of Beer et al. (1984) and Guest (1987), there has been much work done on defining sets of HR practices that enhance organisational performance.
These models of best practice can take many forms; while some have advocated a universal set of HR practices that would enhance the performance of all organisations to which they were applied (Pfeffer, 1994, 1998), others have focused on high-commitment models (Walton, 1985; Guest 2001) and high-involvement practices (Wood, 1999) which reflect an underlying assumption that a strong commitment to the organisational goals and values will provide competitive advantage.
Others have focused on ‘high-performance work systems/ practices (Berg, 1999; Applebaum et al., 2000). This work has been accompanied by a growing body of research exploring the relationship between these ‘sets of HR practices’ and organisational performance (Pfeffer, 1994; Huselid, 1995; Huselid and Becker, 1996; Patterson et al., 1997; Guest, 2001). Although there is a wealth of literature advocating the best-practice approach, with supporting empirical evidence, it is still difficult to reach generalised conclusions from these studies.
This is mainly as a result of conflicting views about what constitutes an ideal set of HR best practices, whether or not they should be horizontally integrated into ‘bundles’ that fit the organisational context and the contribution that these sets of HR practices can make to organizational performance.
- Universalism and high commitment
One of the models most commonly cited is Pfeffer’s (1994) 16 HR practices for ‘competitive advantage through people’ which he revised to seven practices for ‘building profits by putting people first’ in 1998. These have been adapted for the UK audience by Marchington and Wilkinson (2002).
Pfeffer (1994) explains how changes in the external environment have reduced the impact of traditional sources of competitive advantage, and increased the significance of new sources of competitive advantage, namely human resources that enable an organization to adapt and innovate. Pfeffer’s relevance in a European context has been questioned owing to his lack of commitment to independent worker representation and joint regulation (Boxall and Purcell, 2003), hence Marchington and Wilkinson’s adaptation, highlighted in Table.
HR practices for ‘competitive advantage through people’
With the universalist approach or ‘ideal set of practices’ (Guest, 1997), the concern is with how close organisations can get to the ideal set of practices, the hypothesis being that the closer an organisation gets, the better the organization will perform, in terms of higher productivity, service levels and profitability. The role of Human Resources, therefore, becomes one of identifying and gaining senior management commitment to a set of HR best practices, and ensuring that they are implemented and that reward is distributed accordingly.
The first difficulty with the best-practice approach is the variation in what constitutes best practice. Agreement on the underlying principles of the best-practice approach is reflected in Youndt et al.’s (1996: 839) summary below: Lists of best practices, however, vary intensely in their constitution and in their relationship to organisational performance. A sample of these variations is provided in Table. This results in confusion about which particular HR practices constitute high commitment, and a lack of empirical evidence and ‘theoretical rigour’ (Guest 1987: 267) to support their universal application. Capelli and Crocker-Hefter (1996: 7) note:
- Integrated bundles of HRM: horizontal integration
A key theme that emerges in relation to best-practice HRM is that individual practices cannot be implemented effectively in isolation (Storey, 1992) but rather combining them into integrated and complementary bundles is crucial (MacDuffie, 1995). Thus the notion of achieving horizontal integration within and between HR practices gains significance in the best-practice debate.
HR practices for ‘competitive advantage through people’
The need for horizontal integration in the application of SHRM principles is one element that is found in the configurational school of thought, the resource-based view approach and in certain best-practice models. It emphasises the coordination and congruence between HR practices, through ‘a pattern of planned action’ (Wright and McMahan, 1999). In the configurational school, cohesion is thought likely to create synergistic benefits, which in turn enable the organisation’s strategic goals to be met.
Roche (1999: 669), in his study on Irish organisations, noted that ‘organisations with a relatively high degree of integration of human resource strategy into business strategy are much more likely to adopt commitment-oriented bundles of HRM practices’. Where some of the best-practice models differ is in those that advocate the ‘universal’ application of SHRM, notably Pfeffer (1994, 1998). Pfeffer’s argument is that best practice may be used in any organisation, irrespective of product life cycle, market situation or workforce characteristics, and improved performance will ensue.
This approach ignores potentially significant differences between organisations, industries, sectors and countries however. The work of Delery and Doty (1996) has highlighted the complex relationship between the management of human resources and organisational performance, and their research supports the contingency approach (Schuler and Jackson, 1987) in indicating that there are some key HR practices, specifically internal career opportunities, results-oriented appraisals and participation/ voice, that must be aligned with the business strategy or, in other words, be context-specific.
The ‘bundles’ approach, however, is additive, and accepts that as long as there is a core of integrated high-commitment practices, other practices can be added or ignored, and still produce enhanced performance. Guest et al.’s analysis of the WERS data (2000a: 15), however, found that the ‘only combination of practices that made any sense was a straightforward count of all the practices’. As with many high-commitment-based models, there is an underlying assumption of unitarism, which ignores the inherent pluralist values and tensions present in many organisations. Coupled with further criticisms of context avoidance and assumed rationality etween implementation and performance, the best-practice advocates, particularly the universalists, are not without their critics.
High-performance work practices
In recognising HRM systems as ‘strategic assets’ and in identifying the strategic value of a skilled, motivated and adaptable workforce, the relationship between strategic human resource management and organisational performance moves to centre stage. The traditional HR function, when viewed as a cost centre, focuses on transactions, practices and compliance; when this is replaced by a strategic HRM system it is viewed as an investment and focuses on developing and maintaining a firm’s strategic infrastructure (Becker et al., 1997).
This systems approach and concentration on ‘bundles’ of integrated HR practices is at the centre of thinking on high-performance work practices. The work of Huselid (1995) and Huselid and Becker (1996) identified integrated systems of high-performance work High-performance work practices as significant economic assets for organisations, concluding that ‘the magnitude of the return on investment in High Performance Work Practices is substantial’ (Huselid, 1995: 667) and that plausible changes in the quality of a firm’s high-performance work practices are associated with changes in market value of between $15 000 and $60 000 per employee.
This differs from the universal approach, in that highperformance work practices are recognised as being highly idiosyncratic and in need of being tailored to meet an individual organisation’s specific context in order to provide maximum performance. These high-performance work practices will only have a strategic impact, therefore, if they are aligned and integrated with each other, and if the total HRM system supports key business priorities.
This requires a ‘systems’ thinking approach on the part of HR managers, which enables them to avoid ‘deadly combinations’ of HR practices which work against each other, for example team-based culture and individual performance-related pay, and to seek out ‘powerful connections’ or synergies between practices, for example building up new employees’ expectations through sophisticated selection and meeting them through appropriate induction, personal evelopment plans and reward strategies.
The impact of human resource management practices on organisational performance has been recognised as a key element of differentiation between HRM and strategic human resource management. Much research interest has been generated in exploring the influence of ‘high-performance work practices’ on shareholder value (Huselid, 1995) and in human capital management (Ulrich, 1997; Ulrich et al., 1995). A survey by Patterson et al. (1997), published for the CIPD, cited evidence for human resource management as a key contributor to improved performance.
Patterson argued that 17 per cent of the variation in company profitability could be explained by HRM practices and job design, as opposed to just 8 per cent from research and development, 2 per cent from strategy and 1 per cent from both quality and technology! Other studies have reviewed the links between high-commitment HRM and performance, and two recent studies by Guest et al. (2000a, b) have argued the economic and business case for recognizing people as a key source of competitive advantage in organisations and therefore a key contributor to enhanced organisational performance.
In terms of HR managers, research has highlighted the need for the development of business-related capabilities (an understanding of the business context and the implementation of competitive trategies) alongside professional HRM capabilities. Huselid et al. (1997) concluded that while professional HRM capabilities are necessary, but not sufficient alone for better firm performance, business-related capabilities are not only underdeveloped within most firms but represent the area of greatest economic opportunity.
The important message for HR managers is not only to understand and implement a systems perspective, but to understand how HR can add value to their particular business, so that they can become key ‘strategic assets’.
- SHRM and performance: the critique
Criticisms aimed at advocates of the high-commitment/performance link are mainly centred on the validity of the research methods employed and problems associated with inconsistencies in the best-practice models used (Marchington and Wilkinson, 2002). In terms of evidence it is difficult to pinpoint whether it is the HR practices that in turn lead to enhanced organisational performance or whether financial success has enabled the implementation of appropriate HR practices.
It is difficult to see how organizations operating in highly competitive markets, with tight financial control and margins, would be able to invest in some of the HR practices advocated in the best-practice models. This is not to say that HR could not make a contribution in this type of business environment, but rather that the contribution would not be that espoused by the best-practice models. Here, the enhanced performance could be delivered through the efficiency and tight cost control more associated with ‘hard’ HR practices (Storey, 1995) and the contingency school.
A further difficulty is the underlying theme of ‘unitarism’ pervading many of the best-practice approaches. As Boxall and Purcell (2003) note, many advocates of best-practice, high-commitment models tend to ‘fudge’ the question of pluralist goals and interests. If the introduction of best-practice HR could meet the goals of all stakeholders within the business equally, the implementation of such practices would not be problematic. However, it is unlikely that this would be the case, particularly within a short-termist-driven economy, where the majority of organisations are looking primarily to increase return on shareholder value.
Thus if this return can best be met through cost reduction strategies or increasing leverage in a way that does not fit employees’ goals or interests, how can these practices engender high commitment and therefore be labelled ‘best practice’? It is not surprising, therefore, that ethical differences between the rhetoric of human resource best practice and the reality of human resource real practices are highlighted (Legge, 1998).
High-commitment models, therefore, which at first appear to satisfy ethical principles of deontology in treating employees with respect and as ends in their own right, rather than as means to other ends (Legge, 1998), in reality can assume a utilitarian perspective, where it is deemed ethical to use employees as a means to an end, if it is for the greater good of the organisation. This might justify downsizing and rightsizing strategies, but it is difficult to see how this might justify recent tensions between shareholder interests and senior management goals.
A common theme of the best-practice models is contingent pay; thus, when an organisation is performing well, employees will be rewarded accordingly. There have been many recent cases, however, where senior managers of poor performing organizations have been rewarded with large pay-offs. Becker and Gerhart (1996) discuss and debate the impact of HRM on organizational performance further.
They compare the views of those writers that advocate synergistic systems, holistic approaches, internal–external fit and contingency factors (Amit and Shoemaker, 1993; Delery and Doty, 1996; Dyer and Reeves, 1995; Huselid, 1995; Milgrom and Roberts, 1995) with those that suggest that there is an identifiable set of best practices for managing employees which have universal, additive, positive effects on organisation performance (Applebaum and Batt, 1994; Kochan and Osterman, 1994; Pfeffer, 1994). They provide a useful critique of the Best-Practice School as they identify difficulties of generalisability in best-practice research and the inconsistencies in the best-practice models, such as Arthur’s (1994) low emphasis on variable pay, whereas Huselid (1995) and MacDuffie (1995) have a high emphasis on variable pay.
- Measuring the impact of SHRM on performance and the balanced scorecard
We have so far considered the complexity of the strategic human resource management debate, and recognised that our understanding and application of strategic HRM principles is contingent upon the particular body of literature in which we site our analysis. What then are the implications for the HR practitioner, and particularly the HR strategist? We started to consider the role of the HR practitioner at the end of our consideration of the best-fit school. It is now appropriate to consider in more detail how strategic management processes in firms can be improved to deal more effectively with key HR issues and take advantage of HR opportunities.
A study by Ernst & Young in 1997, cited in Armstrong and Baron (2002), found that more than a third of the data used to justify business analysts’ decisions were non-financial, and that when non-financial factors, notably ‘human resources’, were taken into account better investment decisions were made. The non-financial metrics most valued by investors are identified in Table.
Non-financial metrics most valued by investors
This presents an opportunity for HR managers to develop business capability and demonstrate the contribution of SHRM to organisational performance. One method that is worthy of further consideration is the balanced scorecard (Kaplan and Norton, 1996, 2001). This is also concerned with relating critical non-financial factors to financial outcomes, by assisting firms to map the key cause–effect linkages in their desired strategies.
Interestingly, Kaplan and Norton challenge the short-termism found in many Western traditional budgeting processes and, as with the Ernst & Young study, they imply a central role for HRM in the strategic management of the firm and, importantly, suggest practical ways for bringing it about (Boxall and Purcell, 2003). Kaplan and Norton identify the significance of executed strategy and the implementation stage of the strategic management process as key drivers in enhancing organisational performance.
They recognise, along with Mintzberg (1987), that ‘business failure is seen to stem mostly from failing to implement and not from failing to have wonderful visions’ (Kaplan and Norton, 2001: 1). Therefore, as with the resourcebased view, implementation is identified as a key process which is often poorly executed. Kaplan and Norton adopt a stakeholder perspective, based on the premise that for an organisation to be considered successful, it must satisfy the requirements of key stakeholders; namely investors, customers and employees. They suggest identifying objectives, measures, targets and initiatives on four key perspectives of business performance:
- Financial: ‘to succeed financially how should we appear to our shareholders?’
- Customer: ‘to achieve our vision how should we appear to our customers?’
- Internal business processes: ‘to satisfy our shareholders and customers what business processes must we excel at?’
- Learning and growth: ‘to achieve our vision, how will we sustain our ability to change and improve?’
They recognise that investors require financial performance, measured through profitability, market value and cash flow or EVA (economic value added); customers require quality products and services, which can be measured by market share, customer service, customer retention and loyalty or CVA (customer value added); and employees require a healthy place to work, which recognises opportunities for personal development and growth, and these can be measured by attitude surveys, skill audits and performance appraisal criteria, which recognise not only what they do, but what they know and how they feel or PVA (people value added).
These can be delivered through appropriate and integrated systems, including HR systems. The balanced scorecard approach therefore provides an integrated framework for balancing shareholder and strategic goals, and extending those balanced performance measures down through the organisation, from corporate to divisional to functional departments and then on to individuals (Grant, 2002). By balancing a set of strategic and financial goals, the scorecard can be used to reward current practice, but also offer incentives to invest in long-term effectiveness, by integrating financial measures of current performance with measures of ‘future performance’.
Thus it provides a template that can be adapted to provide the information that organisations require now and in the future, for the creation of shareholder value. The balanced scorecard at Sears, for example (Yeung and Berman, 1997: 324), focused on the creation of a vision that the company was ‘a compelling place to invest’, ‘a compelling place to shop’, and ‘a compelling place to work’, whereas the balanced scorecard at Mobil North American Marketing and Refining (Kaplan and Norton, 2001) focused on cascading down financial performance goals into specific operating goals, through which performance-related pay bonuses were determined. An abridged version of this, including some of the strategic objectives and measures in Mobil’s Balanced Scorecard, is included in Table.
Kaplan and Norton (2001) recognise the impact that key human resource activities can have on business performance in the learning and growth element of the balanced scorecard, where employee skills, knowledge and satisfaction are identified as improving internal processes, and therefore contributing to customer added value and economic added value. Thus, the scorecard provides a mechanism for integrating key HR performance drivers into the strategic management process.
Boxall and Purcell (2003) highlight the similarities between Kaplan and Norton’s (2001: 93) Learning and Growth categories of strategic competencies, skills and knowledge required by employees to support the strategy, strategic technologies, information support systems required to support the strategy and climate for action, the cultural shifts needed to motivate, empower and align the workforce behind the strategy, and the AMO theory of performance, where performance is seen as a function of employee ability, motivation and opportunity.
Thus the balanced scorecard contributes to the development of SHRM, not only in establishing goals and measures to demonstrate cause–effect linkages, but also in encouraging a process that stimulates debate and shared understanding between the different areas of the business. However, the balanced scorecard approach does not escape criticism, particularly in relation to the measurement of some HR activities which are not directly linked to productivity, thus requiring an acknowledgement of the multidimensional nature of organisational performance and a recognition of multiple ‘bottom lines’ in SHRM. Boxall and Purcell (2003) suggest the use of two others besides labour productivity, these being organisational flexibility and social legitimacy.
So, although the balanced scorecard has taken account of the impact and influence of an organisation’s human resources in achieving competitive advantage, there is still room for the process to become more HR driven.