Selecting HR Strategies to Increase Firm Performance
No HR strategy is “good” or “bad” in and of itself. Rather, an HR strategy’s effect on firm performance depends on how well it fits with other factors. Most of the practitioner and scholarly literature in HR suggests that fit leads to better performance, and lack of fit creates inconsistencies that reduce performance.166 Fit refers to the compatibility between HR strategies and other important aspects of the organization.
Figure 1.3 depicts the key factors that firms should consider in determining which HR strategies will have a positive impact on firm performance: organizational strategies, environment, organizational characteristics, and organizational capabilities. As the figure shows, the relative contribution of an HR strategy to firm performance increases:
FIGURE 1.3 Effective HR Strategy Formulation and Implementation
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▪ The better the match between the HR strategy and the firm’s overall organizational strategies
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▪ The more the HR strategy is attuned to the environment in which the firm is operating
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▪ The more closely the HR strategy is molded to unique organizational features
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▪ The better the HR strategy enables the firm to capitalize on its distinctive competencies
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▪ The more the HR strategies are mutually consistent or reinforce one another
Fit with Organizational Strategies
A corporation may have multiple businesses that are very similar to or completely different from one another. Corporate strategy refers to the mix of businesses a corporation decides to hold and the flow of resources among those businesses. The main strategic business decisions at the corporate level concern acquisition, divestment, diversification, and growth. Business unit strategies refer to the formulation and implementation of strategies by firms that are relatively autonomous, even if they are part of a larger corporation. For instance, AT&T as a corporate entity once owned hundreds of largely independent firms, including perfume makers and Hostess Twinkies, each with its own business strategy.167 Similarly, diversified giant DuPont combines businesses such as drugs, agriculture, and chemicals under one roof.168 In firms that produce a single product or highly related products or services, the business and corporate strategies are identical. For companies that have distinct corporate and business unit strategies, it is important to examine each in terms of its fit with HR strategies.
Corporate Strategies
There are two major types of corporate strategies and matching HR strategies. Corporations adopting an evolutionary business strategy engage in aggressive acquisitions of new businesses, even if these are totally unrelated to one another.169
In evolutionary firms, the management of change is crucial to survival. Entrepreneurship is encouraged and control is deemphasized because each unit is relatively autonomous. HR strategies that foster flexibility, quick response, entrepreneurship, risk sharing, and decentralization are particularly appropriate. Because the evolutionary corporation is not committed to a particular business or industry, it may hire workers from the external market as needed and lay them off to reduce costs if necessary, with no promise of rehiring them. These HR strategies are appropriate because they “fit” with the organizational reality that change is the only constant.
At the other end of the spectrum, corporations adopting a steady-state strategy are very choosy about how they grow. They avoid acquiring firms outside their industry or even companies within the industry that are very different from them. Top managers exercise a great deal of direct control over the company, and internal development of new products and technologies and interunit coordination are very important.170 This is the case at Rubbermaid, a company known for producing such mundane products as trash cans and dustpans. Yet Rubbermaid’s record for innovation is anything but mundane. The company brings out new products at the rate of one a day.171 The HR strategies most appropriate to steady-state firms emphasize efficiency, detailed work planning, internal grooming of employees for promotion and long-term career development, centralization, and a paternalistic attitude.
Porter’s Business Unit Strategies
Two well-known business unit strategies were formulated by Porter172 and Miles and Snow173 to analyze which HR strategies represent the best fit with a firm’s business strategy.
Porter has identified three types of business unit strategies that help a firm cope with competitive forces and outperform other firms in the industry. For each of these strategies, a certain set of HR strategies would fit best.174
The overall cost leadership strategy is aimed at gaining a competitive advantage through lower costs. Cost leadership requires aggressive construction of efficient plant facilities (which requires sustained capital investment), intense supervision of labor, vigorous pursuit of cost reductions, and tight control of distribution costs and overhead. Firms that have successfully pursued a low-cost leadership strategy include Briggs & Stratton, Emerson Electric, Texas Instruments, Black & Decker, and DuPont.175
Low-cost firms tend to emphasize structured tasks and responsibilities, products designed for easy manufacture, and the need to predict costs with minimal margin of error. The HR strategies that fit a low-cost orientation emphasize efficient, low-cost production; reinforce adherence to rational, highly structured procedures to minimize uncertainty; and discourage creativity and innovation (which may lead to costly experimentation and mistakes).
A firm with a differentiation business strategy attempts to achieve a competitive advantage by creating a product or service that is perceived as being unique. Some common characteristics of such firms are strong marketing abilities, an emphasis on product engineering and basic research, a corporate reputation for quality products, and amenities that are attractive to highly skilled labor. Approaches to differentiating can take many forms, including design or brand image (Fieldcrest in top-of-the-line towels and linens, Mercedes-Benz in automobiles), technology (Hyster in lift trucks, Coleman in camping equipment), features (Jenn-Air in electric ranges), customer service (IBM in computers), and dealer networks (Caterpillar Tractor in construction equipment).
Differentiation provides a competitive advantage because of the brand loyalty it fosters. This enables the differentiator to enjoy higher profit margins, which, in turn, allow it to invest in extensive research, experiment with new ideas and product designs, cater to the needs of different customers, and support creative initiatives by managers and employees.
HR strategies that fit a differentiation strategy emphasize innovation, flexibility, renewal of the workforce by attracting new talent from other firms, opportunities for mavericks, and reinforcement (rather than discouragement) of creative flair.
The focus strategy relies on both a low-cost position and differentiation, with the objective of serving a narrow target market better than other firms. The firm seeks to achieve differentiation either from better meeting the needs of the particular target, or from lowering costs in serving this target, or both.176 Firms that have used this strategy successfully include Illinois Tool Works (in the specialty market for fasteners), Gymboree (a national franchise providing creative activities and accessories for children under the age of 5), Fort Howard Paper (manufacturer of specialized industrial grade papers), and Porter Paint (producer of paints for professional housepainters).
The HR strategies likely to fit the focus strategy best would be somewhere in the middle of those described for low-cost producers and differentiators. At Illinois Tool Works (ITW), for instance, the chairman stresses working hand-in-hand with customers both to find out what they want and to learn how ITW can help them lower their operating costs. HR strategies reflect this focus by boosting efficiency to hold costs down. ITW’s business is decentralized into 200 fairly small operating units, headed by managers whose pay is largely tied to sales and profits at their individual operations. The company’s workers are nonunion, which helps to hold costs down. To keep ITW’s products geared to customer needs, management puts heavy emphasis on R&D. ITW’s R&D spending of almost $40 million a year keeps creativity high; ITW holds over 4,000 active patents.177
Miles and Snow’s Business Strategies
Miles and Snow created another well-known classification of business unit strategies.178 They characterize successful businesses as adopting either a defender or a prospector strategy.
Defenders are conservative business units that prefer to maintain a secure position in relatively stable product or service areas instead of looking to expand into uncharted territory. Defenders tend to be highly formalized, emphasize cost control, and operate in a stable environment. Many defenders develop an elaborate internal system for promoting, transferring, and rewarding workers that is relatively isolated from the uncertainties of the external labor market. In exchange for a long-term commitment to the firm, employees are rewarded with job security and the expectation of upward mobility through the ranks.
A proposed set of HR strategies that best fit defenders’ needs, categorized according to the six major strategic HR choices we saw in Figure 1.2 earlier, are summarized in Figure 1.4. These strategies include work flows emphasizing managerial control and reliability, staffing and employee separation policies designed to foster long-term employee attachment to the firm, performance appraisals focused on managerial control and hierarchy, structured training programs, and compensation policies that emphasize job security.
Unlike defenders, whose success comes primarily from efficiently serving a stable market, prospectors emphasize growth and innovation, development of new products, and an eagerness to be the first in new-product or market areas, even if some of these efforts fail.179 The prospector’s strategy is associated with flexible and decentralized organizational structures, complex products (such as computers and pharmaceuticals), and unstable environments that change rapidly.
The HR strategies that match the strategic orientation of prospectors, also summarized in Figure 1.4, include work flows that foster creativity and adaptability; staffing and employee separation policies that focus on the external labor market; customized, participative employee appraisals used for multiple purposes (including employee development); training strategies targeting broad skills; and a decentralized compensation system that rewards risk taking and performance.
Strategic HR Area Defender Strategy Prospector Strategy Work Flows
Efficient production
Control emphasis
Explicit job descriptions
Detailed work planning
Innovation
Flexibility
Broad job classes
Loose work planning
Staffing
Internal recruitment
HR department makes selection decision
Emphasis on technical qualifications and skills
Formal hiring and socialization process
External recruitment
Coworkers help make selection decision
Emphasis on fit of applicant with culture
Informal hiring and socialization process of new employees
Employee Separations
Voluntary inducements to leave
Hiring freeze
Continuing concern for terminated employee
Preferential rehiring policy
Layoffs
Recruit as needed
Individual on his or her own
No preferential treatment for laid-off workers
Performance Appraisal
Uniform appraisal procedures
Used as control device
Narrow focus
High dependence on superior
Customized appraisals
Used as developmental tool
Multipurpose appraisals
Multiple inputs for appraisals
Training
Individual training
On-the-job training
Job-specific training
“Make” skills
Team-based or cross-functional training
External training
Generic training emphasizing flexibility
“Buy” skills
Compensation
Fixed pay
Job-based pay
Seniority-based pay
Centralized pay decisions
Variable pay
Individual-based pay
Performance-based pay
Decentralized pay decisions
FIGURE 1.4
Selected HR Strategies That Fit Miles and Snow’s Two Major Types of Business Strategies
Source: Gómez-Mejía, L. R. (2009). Compensation strategies and Miles and Snow’s business strategy taxonomy. Unpublished report. Management Department, Arizona State University. Reprinted with permission.
Fit with the Environment
In addition to reinforcing overall organizational strategies, HR strategies should help the organization better exploit environmental opportunities or cope with the unique environmental forces that affect it. We can examine the environment in terms of four major dimensions: (1) degree of uncertainty (how much accurate information is available to make appropriate business decisions), (2) volatility (how often the environment changes), (3) magnitude of change (how drastic the changes are), and (4) complexity (how many different elements in the environment affect the firm, either individually or together). For example, much of the computer and high-tech industry is very high on all four of these dimensions:
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▪ Degree of uncertainty Compaq thought consumers would continue to pay a premium price for its high-performance computers. The company was proved wrong in the 1990s as low-cost competitors such as Dell, Packard Bell, and AST quickly cut into Compaq’s market. More recently thin Macs have taken over much of the PC market, BlackBerries have been largely replaced by iPhones, and Nokia has seen much of its market taken over by Apple.
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▪ Volatility IBM paid dearly when demand for its mainframe computers declined drastically in the late 1980s and it was caught unprepared.
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▪ Magnitude of change The advent of each successive new generation of computer microprocessor chips (for example, Intel’s 386, 486, Pentium) has almost immediately rendered all previously sold machines obsolete. Polaroid was forced to declare bankruptcy as quick adoption of digital cameras turned its main product (instant photography) obsolete almost overnight.
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▪ Complexity The number and variety of competitors in the computer industry, both domestically and overseas, have grown dramatically in recent years. The life of a product seldom extends more than three years now, as new innovations drive previous equipment and software out of the market.
As Figure 1.5 shows, firms that are high on these four dimensions are more likely to benefit from HR strategies that promote flexibility, adaptivity, quick response, transferability of skills, the ability to secure external talent as needed, and risk sharing with employees through variable pay.
Environmental Dimension Low High Degree of Uncertainty
Detailed work planning
Job-specific training
Fixed pay
High dependence on superior
Loose work planning
Generic training
Variable pay
Multiple inputs for appraisals
Volatility
Control emphasis
Efficient production
Job-specific training
Fixed pay
Flexibility
Innovation
Generic training
Variable pay
Magnitude of Change
Explicit job descriptions
Formal hiring and socialization of new employees
“Make” skills
Uniform appraisal procedures
Broad job classes
Informal hiring and socialization of new employees
“Buy” skills
Customized appraisals
Complexity
Control emphasis
Internal recruitment
Centralized pay decisions
High dependence on superior
Flexibility
External recruitment
Decentralized pay decisions
Multiple inputs for appraisals
FIGURE 1.5
Selected HR Strategies for Firms Low and High on Different Environmental Characteristics
Source: Based on Gomez-Mejia, L. R., and Balkin, D. B. (2012). Management. Englewood Cliffs, NJ: Prentice-Hall; Gomez-Mejia, L. R., Berrone, P., and Franco-Santos, M. (2010). Compensation and organizational Performance. New York, NY: M.E. Sharpe.
Conversely, firms facing environments that are low on uncertainty, volatility, magnitude of change, and complexity benefit from HR strategies that allow for an orderly, rational, and routine approach to dealing with a relatively predictable and stable environment. The “old” AT&T (before divestment), much of the airline and trucking industry before deregulation, utilities, and government bureaucracies fall at the low end of the scale on these four dimensions. Figure 1.5 shows that the HR strategies that fit firms operating under these conditions tend to be rather mechanistic: detailed work planning, job-specific training, fixed pay, explicit job descriptions, centralized pay decisions, and the like.
Fit with Organizational Characteristics
To be effective, HR strategies must be tailored to the organization’s personality. The features of an organization’s personality can be broken down into five major categories.
The Production Process for Converting Inputs into Output
Firms with a relatively routine production process (such as large-volume steel mills, lumber mills, and automobile plants) tend to benefit from HR strategies that emphasize control, such as explicit job descriptions and job-specific training. The opposite is true for firms with nonroutine production processes (such as advertising firms, custom printers, and biotechnology companies). These firms benefit from flexible HR strategies that support organizational adaptability, quick response to change, and creative decision making. These flexible strategies may include broad job classes, loose work planning, and generic training.
The Firm’s Market Posture
Firms that experience a high rate of sales growth and engage in product innovation destined for a wide market segment tend to benefit from HR strategies that support growth and entrepreneurial activities. These HR strategies include external recruitment (“buying” skills), decentralized pay decisions, and customized appraisals. The opposite is true for firms with low rates of growth and limited product innovation destined for a narrow market segment. These firms tend to benefit more from HR strategies that emphasize efficiency, control, and firm-specific knowledge. Such strategies include internal recruitment (“making” skills), on-the-job training, and high dependence on superiors.
The Firm’s Overall Managerial Philosophy
Companies whose top executives are averse to risk, operate with an autocratic leadership style, establish a strong internal pecking order, and are inwardly rather than outwardly focused may find that certain HR practices match this outlook best. The HR strategies most often used in these kinds of firms include seniority-based pay, formal hiring and socializing of new employees, selection decisions made by the HR department, and use of top-down communication channels. The HR strategies that fit a managerial philosophy high on risk taking, participation, egalitarianism, and an external, proactive environmental orientation include variable pay, giving supervisors a major role in hiring decisions, up-and-down communication channels, and multiple inputs for performance appraisals.
The Firm’s Organizational Structure
Some HR strategies fit very well with highly formalized organizations that are divided into functional areas (for example, marketing, finance, production, and so on) and that concentrate decision making at the top. The HR strategies appropriate for this type of firm include a control emphasis, centralized pay decisions, explicit job descriptions, and job-based pay. Firms whose organizational structures are less regimented will benefit from a different set of HR strategies, including informal hiring and socializing of new employees, decentralized pay decisions, broad job classes, and individual-based pay.
The Firm’s Organizational Culture
Companies that foster an entrepreneurial climate benefit from supporting HR strategies such as loose work planning, informal hiring and socializing of new employees, and variable pay. Firms that discourage entrepreneurship generally prefer a control emphasis, detailed work planning, formal hiring and socializing of new employees, and fixed pay.
A strong emphasis on moral commitment—the extent to which a firm tries to foster a long-term emotional attachment between the firm and its employees—is also associated with certain supporting HR strategies. These include an emphasis on preventive versus remedial disciplinary action to handle employee mistakes, employee protection, and explicit ethical codes to monitor and guide behavior. Firms that are low on moral commitment usually rely on an authoritarian relationship between employee and company. HR strategies consistent with this orientation include an emphasis on discipline or punishment to reduce employee mistakes, employment at will (discussed in Chapters 3 and 14), and informal ethical standards.
Fit with Organizational Capabilities
A firm’s organizational capabilities include its distinctive competencies , those characteristics (such as technical ability, management systems, and reputation) that give the firm a competitive edge. For instance, Mercedes-Benz automobiles are widely regarded as superior because of the quality of their design and engineering. Walmart’s phenomenal success has been due, at least in part, to its ability to track products from supplier to customer better than its competitors can.
HR strategies make a greater contribution to firm performance the greater the extent to which (1) they help the company exploit its specific advantages or strengths while avoiding weaknesses and (2) they assist the firm in better utilizing its own unique blend of human resource skills and assets.
The following examples illustrate how one type of HR strategy—compensation strategy—may be aligned with organizational capabilities.180
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▪ Firms known for excellence in customer service tend to pay their sales force only partially on commission, thereby reducing their sales employees’ potential for abrasive behaviors and overselling.
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▪ Smaller firms can use compensation to their advantage by paying low wages but being generous in offering stock to employees. This strategy allows them to use more of their scarce cash to fuel future growth.
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▪ Organizations may take advantage of their unused capacity in their compensation strategies. For example, most private universities offer free tuition to faculty and their immediate family. With average tuition at private colleges exceeding $30,000 a year in 2014, this benefit represents a huge cash savings to faculty members, thereby allowing private universities to attract and retain good faculty with minimal adverse impact on their cost structure.
Choosing Consistent and Appropriate HR Tactics to Implement HR Strategies
Even the best-laid strategic HR plans may fail when specific HR programs are poorly chosen or implemented.181 In addition to fitting with each of the four factors just described (organizational strategy, environment, organizational characteristics, and organizational capabilities), a firm’s HR strategies are more likely to be effective if they reinforce one another rather than work at cross-purposes. For instance, many organizations are currently trying to improve their performance by structuring work in teams. However, these same organizations often continue to use a traditional performance appraisal system in which each employee is evaluated individually. The appraisal system needs to be overhauled to make it consistent with the emphasis on team performance.
Because it is not always possible to know beforehand whether an HR program will meet its objectives, a periodic evaluation of HR programs is necessary. Figure 1.6 lists a series of important questions that should be raised to examine the appropriateness of HR programs. These questions should be answered as new programs are being chosen and while they are in effect.
HR programs that look good on paper may turn out to be disasters when implemented because they conflict too much with company realities. To avoid this kind of unpleasant surprise, it is important to ask the following questions before implementing a new HR program.
Are the HR Programs Effective Tools for Implementing HR Strategies?
• Are the proposed HR programs the most appropriate ones for implementing the firm’s HR strategies?
• Has an analysis been done of how each of the past, current, or planned HR programs contributes to or hinders the successful implementation of the firm’s HR strategies?
• Can the proposed HR programs be easily changed or modified to meet new strategic considerations without violating either a “psychological” or a legal contract with employees?
Do the HR Programs Meet Resource Constraints?
• Does the organization have the capacity to implement the proposed HR programs? In other words, are the HR programs realistic?
• Are the proposed programs going to be introduced at a rate that can be easily absorbed, or will the timing and extent of changes lead to widespread confusion and strong employee resistance?
How Will the HR Programs Be Communicated?
• Are the proposed HR programs well understood by those who will implement them (for example, line supervisors and employees)?
• Does top management understand how the proposed programs are intended to affect the firm’s strategic objectives?
Who Will Put the HR Programs in Motion?
• Is the HR department playing the role of an internal consultant to assist employees and managers responsible for carrying out the proposed HR programs?
• Is top management visibly and emphatically committed to the proposed programs?
FIGURE 1.6
But Will It Work? Questions for Testing the Appropriateness of HR Programs Before Implementation
HR Best Practices
Several authors have argued that certain HR practices are associated with sustained high firm performance.182 Figure 1.7 shows the most common HR best practices. Debate continues among academics about whether high firm performance leads to given HR practices, or vice versa (that is, whether introducing particular HR practices causes better firm performance).183 For instance, can firms that are doing well afford to provide higher wages and more job security, or do firms that pay more and have a more stable workforce derive a performance premium by following these practices? It is extraordinarily difficult to prove the casual relationship one way or the other, yet it seems reasonable that organizations should consider implementation of those practices associated with the highest-performing firms.
• Offer high employment security because this indicates that the firm is committed to the employee’s welfare
• Develop a good selection program that can screen the best applicants
• Offer wages that are highly competitive as this helps reduce employee turnover and helps in the attraction of high-quality employees
• Recognize employees by providing monetary and non-monetary rewards
• Make employees part-owners of the firm by providing them with stock in the firm
• Communicate effectively with employees so that they are kept informed of major issues confronting the organization and any major initiatives
• Encourage employee involvement so that there is strong “buy-in” of human resource practices and important managerial initiatives
• Encourage teamwork so that employees are more willing to collaborate with each other
• Invest in training programs to improve employee skills
• Provide opportunities for learning at work so that employees are “stretched” in the use of their skills
• Give a higher priority to internal candidates for promotion because this enhances employee motivation by providing future career opportunities
FIGURE 1.7
Select HR Best Practices
Sources:Based on www.best-in-classroom.com. (2014). Human resources best practices; www.hrdailyadvisor.blr.com. (2014). Top 10 best practices in HR management; Pfeffer, J. (1995). Producing sustainable competitive advantage through the effective management of people. Academy of Management Executive, 10, 55–72; Wright, P. M., Gardner, T. M., Moynihan, L. M., and Allen, M. R. (2005). The relationship between HR practices and firm performance: Examining causal order. Personnel Psychology, 68, 409–446; Chuang, C. H., and Liao, H. (2010). Strategic human resource management in service context. Personnel Psychology, 63(1), 153–196; Gomez-Mejia, L. R., and Balkin, D. B. (2011). Management: People, performance and change, Prentice-Hall.