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 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.
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’.
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