chapter four
Internal marketing and
human resource
management
Introduction
An examination of the internal marketing model proposed earlier shows that a number of mechanisms proposed in the model for the achievement of effective implementation of marketing and other strategies, namely inter-functional co-ordination, employee motivation, job satisfaction and empowerment, are functions that have been, in the past, mainly in the remit of the personnel or human resource management (HRM). This raises questions as to the respective roles of marketing and HRM in the achievement of implementation objectives. This chapter discusses the roles of HRM and marketing in IM, methods of increasing inter-functional co-ordination, and the implications of IM for management style and organizational culture. Issues relating to empowerment are discussed in Chapter 5.
The roles of marketing and HRM in internal marketing
There is, perhaps, an implicit assumption in discussions of internal marketing that effective use of inwardly directed marketing techniques can solve all employee-related quality and customer satisfaction problems. There are, however, limits to what can be achieved by marketing techniques alone and it is of crucial importance to note that internal marketing requires the involvement of a number of departments working in unison. This is illustrated by a case study reported by Richardson and Robinson1.
Richardson and Robinson report a study on the implementation of internal marketing within a retail bank in which the effectiveness of the internal marketing programme is assessed by using groups of 'shoppers’ to evaluate the service provided over a period of 3 months. Although the programme was generally a success, it is interesting to note how some of the problems that arose during the programme were solved. For instance, in one branch, three tellers were found to have performed particularly badly. Their weaknesses were pointed out to them. However, the performance of only one of them improved. Further investigation revealed that these two individuals did not enjoy the customer contact aspect of the job. That is, they were typical of task-oriented people doing people-oriented jobs2. They were therefore moved to back office positions and replaced with more suitable staff, and the subsequent performance ratings for the tellers improved markedly.
What this example illustrates is that, in certain circumstances, administrative action by the personnel function is much more likely to be effective than usage of marketing-like devices. The example also illustrates the importance of careful recruitment and selection for the motivation and effectiveness of staff.
Another branch suffered a loss in performance when some members were on training courses or on leave, and the replacement staff were from administrative (that is) task-oriented jobs and hence less skilled in dealing with people. Another branch, whilst showing a small improvement in performance, was well below the overall improvement levels achieved. On investigation, it was discovered that shortage of staff was leading to careless mistakes in one department and consequently lack of satisfaction on the part of customers. The employment of an extra member of staff led to increase in morale and a dramatic improvement in performance. These two examples illustrate the need for training and adequate staffing levels. The simple use of internally directed marketing efforts clearly cannot compensate for lack of training and inappropriate staffing levels.
We have dealt with this example at length to illustrate the differing roles of marketing and the personnel function, and the need for marketing and personnel to work together. Another purpose has been to show that the personnel function already has a wide array of techniques to improve performance and motivation techniques; for instance, job rotation, self-managing groups, career planning. Marketing techniques merely add to that array.
Boundary between marketing and HRM
The discussion above raises the question as to where the boundary between HRM and marketing lies, and inter-functional co-ordination can be achieved in the face of inter-functional conflict. This is important because some internal marketers have argued that activities that have traditionally been thought to be the preserve of the personnel functions should be undertaken by the marketing function. For example, Berry and Parasuraman extend the limits of internal marketing to include activities that are traditionally associated with the personnel function:
‘Internal marketing is attracting, developing, motivating and retaining qualified employees through job-products that satisfy their needs. Internal marketing is the philosophy of treating employees as customers.. . and it is the strategy of shaping job-products to fit human needs.’3
Compare this with Willman's definition of human resource management:
‘Human resource management is concerned with the set of decisions and policies through which the organizations attract, recruit and motivate, reward and develop their employees. In addition it is concerned with the ways in which employment is terminated.’4
In fact, George goes much further than Berry and Parasuraman and suggests that:
‘It is time to replace the personnel department in service firms with product managers who can implement a marketing approach to service employment management.’5
The underlying reason for such an assertion is the fact that there is still relatively little recognition in the HRM literature that the nature of services requires different types of HRM practices to those required in the production of physical/manufactured goods. The services marketing literature has highlighted this and also the fact that it is imperative to have the right personnel at the point of delivery, because of their impact on the perception of the quality of service delivery and as it also provides a marketing opportunity, as well as the fact that the actions of the personnel themselves form part of the product that customers are buying.
Because of the nature of the service delivery process, it is essential that employees have the right training and attitudes. In particular, customer contact employees need to be more people oriented rather than task oriented. Furthermore, where the personnel and the services that they perform form a large part of the product being offered (high contact services), then marketing needs to be as closely involved as the HRM/personnel function in the recruitment, training and rewarding of employees. Motivation of these employees constitutes an essential element in the success of these services.
A useful definition of the boundary between marketing and HRM is provided by Kotler, who states that marketing consists of non-coercive actions to induce a response in another social unit6. That is, the use of force or formal authority is not considered to be a marketing solution to a problem. This is an important distinction, in that in many cases the persuasive tactics employed by internal marketing are likely to be unsuccessful, and in these instances ‘formal’ mechanisms that personnel management is empowered to use (by the contractual nature of employment) would need to be employed in order to achieve the implementation objectives.
Links between HRM and internal marketing
At the operational level, internal marketing implies the co-ordination of HRM and other functions so that the promises of the external marketing campaign are delivered. At the strategic level, the major objective of IM is to motivate employees towards customer orientation. This requires a supportive management style, recruitment policy, training and planning procedures7.
Supportive senior management and management style is essential for the achievement of a motivated customer-oriented workforce. At a basic level, if senior managers are not customer oriented, then it is unlikely that the rest of the organization is likely to be customer oriented. This is because employees take their cues from senior management as to the types of behaviours and attitudes that are regarded as important to the organization. The management style also needs to be supportive. For example, where a product or service needs to be customized, employees need to be empowered to make the necessary decisions in order to satisfy customer needs (see Chapter 5 for a more detailed discussion). Such a situation requires a participative style of management. Centralized decision making in this context would lead to slow service, dissatisfied customers and frustrated employees.
A supportive personnel policy is also crucial in order to ensure that employees with the requisite skills, competencies and attitudes are recruited. Retention of good employees requires competitive remuneration policies and career progression paths. Remuneration policies need to reflect strategic objectives such as customer orientation and service orientation to achieve external and internal marketing objectives.
Training is essential to ensure that employees have the skills and competencies needed to produce the products and services at a level of quality expected by customers and to take advantage of marketing opportunities that arise. Training is also required to inculcate the core values of customer orientation and other attitudes (such as service orientation). The adoption of changes in policies and new ideas are generally more likely to be successful if the employees that are affected by the changes are involved in the planning process.
It is clear from the above that IM is very dependent on supporting HRM policies if it is to succeed. At the same time, the discussion above suggests that IM can be used by management to disseminate core organizational values throughout the firm. That is, IM can help to create a shared system of beliefs. For instance, for service firms, this may mean the implementation of a service orientation culture amongst employees. IM techniques together with HRM techniques could be used to achieve this objective. For instance, IM techniques could be used to communicate the importance of product quality, supported by training and incentives for appropriate behavioural outcomes.
Leadership and integration in internal marketing
Marketing management has long ascribed to itself the role of an integrative function, which is responsible for co-ordinating other company functions so that the performance of the company is customer oriented. The basis for this claim rests on the marketing function's direct contact with external customers. And in the case of services marketing, because of the importance of personnel in the delivery of service, some marketers have argued for supplanting of the personnel department so that a more marketing-like approach could be adopted for attracting, recruiting and managing service employees.
However, if such a policy were to be adopted, then it is bound to lead to conflict between marketing and HRM and operations management and other directly affected departments. This is because it may be seen as an attempt by the marketing function to increase its influence within the organization at the expense of other functional areas.
Inter-functional conflict can also arise because of differing priorities of functions. For instance, marketing may wish to increase sales via price promotions. The resulting increase in demand will have an impact on the production schedules, and may also increase the costs of the operations management department. If there is insufficient slack in production capacity, staff may have to accept more flexible working patterns. Inter-functional conflict can also arise due to different perspectives and approaches to problems. For instance, there is considerable evidence that conflict between the marketing and R&D department arises due to the fact that, whilst marketing's focus is on customer needs, R&D's focus is on exploiting new technologies.
Organizations, therefore, need to look at ways of increasing crossfunctional co-ordination. For instance, in service marketing, where it is necessary to have friendly, customer-oriented personnel, the marketing department could have involvement in job specification, training and remuneration of contact employees. George goes even further and suggests that, for service-oriented firms, ‘Policies for these two functional areas must be prepared simultaneously with each document containing ideas about the other’8.
Other methods of integrating the personnel and marketing functions include9:
Involving representatives from personnel on marketing committees and vice versa.
Creating liaison or boundary spanning roles. That is, appointing individuals within functions whose role is to communicate with other departments regarding any actions or policies that may impact on each other.
Duplicating a personnel unit within marketing whilst maintaining a personnel department, or merging the personnel and marketing departments.
Shared information systems. Such systems increase the speed and flow of information between functions, and help to build trust and thereby reduce the areas of inter-functional conflict.
Cross-functional teams. Cross-functional teams have been found to be the most successful integrating mechanism. However, the teams need to have a clear focus and the composition of the teams needs careful consideration to ensure success.
Matrix organizational structures in order to increase horizontal communication.
Many of these practices have been adopted already by firms in order to create knowledge in new ways, to increase sharing of information, and to respond more rapidly to changes in the market.
Given the nature of inter-functional rivalry and the potential for conflict, it is suggested that internal marketing cannot and should not be the sole responsibility of any department (i.e. marketing, HR or any other). Moreover, because of the very nature of internal marketing's function of motivating all employees towards the effective and integrated implementation of corporate and functional goals, the impetus for such a programme needs to come from strategic management. Such a policy avoids inter-departmental conflict and gives internal marketing the high level of managerial commitment that is necessary for its effective implementation and the achievement of high quality, customer-sensitive service delivery.
Internal marketing and organizational culture
Internal marketing is more than an instrument for disseminating organizational values. Given that the central aim of internal marketing is to develop customer-conscious employees, treating employees as customers and the use of marketing-like techniques to achieve these aims, IM itself constitutes a new cultural initiative. It requires that customer orientation is central to all the organization's activities and a core part of the organizational culture. This has a number of major implications for HRM function and the style of management (see Exhibit 4.1).
Having customer orientation at the centre of organization activities implies that HRM, like all other departments, needs to align its activities to the needs of the external market as envisioned by the marketing function. Such an alignment suggests a strategic approach to HRM. Alignment of human resources with the strategic requirements of the organization is widely accepted nowadays, and is the major thrust behind the emergence of strategic HRM concept and function. A strategic approach to HRM ensures that the requirements of implementation of strategies are taken into account at an early stage. It also ensures that the requisite competencies are developed within the organization, and the employees recruited have the requisite competencies and attitudes to perform tasks required to deliver products and services customers want and give the organization competitive advantage in the market. In such a climate, internal marketing programmes designed to support external marketing strategy or other corporate strategies are more likely to be accepted than in organizations where a strategic approach to HRM is lacking.
The treatment of employees as customers also implies a new approach to management. The underlying implication that organizations should attempt to understand the needs of their employees and then attempt to satisfy those needs implies a degree of consultation with employees and, hence, a management style that is participative to some extent. Whilst a participative management style is not strictly necessary for the implementation of specific internal marketing programmes, it is more likely to lead to their acceptance and efficient execution. For instance, a participative management style is likely to require less use of persuasive types of communications to employees, as consensus and agreement are an intrinsic part of the consultation process. As a minimum, this discussion implies that the existing style of management needs to be taken into account when designing internal marketing programmes. Internal marketing programmes based on the assumption of participative management are likely to fail in organizations dominated by a control-oriented centralized management style.
Exhibit 4.1. Turnaround: the role of HRM in the implementation of customer-focused management at Sears
The year 1992 was the worst financially in the history of the premier American retailer, Sears. It suffered a net loss $3.9 billion on sales of $52.3 billion. The losses were the culmination of years of poor performance by the retailer. Like many mass retailers, Sears had been slow to react to the changing needs of the consumer and had been losing market share to discount stores such as Wal-Mart, who were more focused in their activities. Sears’ response of competing on price meant lower margins and consequently less expenditure on the hiring, training, motivating and remuneration of sales staff. The policy led to very high employee turnover and a dramatic fall in customer satisfaction levels.
In response to this situation, Sears instituted a turnaround strategy designed to narrow its focus on retailing. This led to the closure of its catalogue operations and divestment of its insurance and property subsidiaries – The Allstate Corp. and The Homart Development Co. By 1996, the company marked its first year of operations focused exclusively on retailing.
Sears also made changes to its retailing strategy. Realizing that 70 per cent of its customers were women, Sears launched ‘the softer side of Sears’ strategy and store refits that included installation of wider aisles, softer lighting and elaborate displays, emulating the more upmarket department stores. Service to customers was also increased and made more responsive to the needs of busy women. Sears also introduced new own-label lines in clothing and cosmetics. Over 100 stores were closed, reducing its mallbased stores portfolio. These changes increased sales by 9 per cent and generated a net income in 1993 of $750 million.
After returning to profitability in retailing, in 1994, under the direction of Arthur Martinez (who arrived to head the merchandising group in 1992 and later became CEO from 1995 to 2000), Sears grouped its top 120 executives into five task forces on the themes of customers, employees, financial performance, innovation and values. The task forces were charged with defining world class in each area and providing Sears with measures to track progress. They helped Sears arrive at a new vision for the business, namely to become ‘a compelling place to shop, work and invest.’ They became known as the three compellings or three Cs. The three Cs were supported by three core values – the three Ps – passion for the customer, our people add value and performance leadership. To support this strategy, the senior management set about transforming the HR function and the paternalistic command and control organizational culture.
Transforming human resource management at Sears
The design was a radical departure from the past, as the HR function was henceforth required to treat the internal organization as if it were the customer. That meant it had to identify the requirements of its customers before designing the new look HR function. Based on data derived from employee surveys, the HR transformation team went back and completely changed the HR function. Everyone in the HR function was reassessed according to the new standards of customer service orientation, responsiveness and so on. Then the department was completely restaffed using a ‘zero-based’ staffing approach. In addition, the reporting relationships of HR staff were also changed, so that instead of reporting to HR, they had to report to the businesses they supported and help colleagues in those businesses align with the company's new vision and strategy, thus helping HR to become a strategic business partner. The majority of the time of HR personnel was now spent making Sears a compelling place to work by developing a host of training, development and rewards strategies.
With over 800 full-line department stores, more than 2700 off-the-mall stores and over 300 000 employees, Sears needed a major drive to communicate the new vision and strategies to all its employees. Sears used a number of HR programmes to convey the new mission and inculcate the new Sears culture, including learning maps and monthly store meetings. Sears sales assistants now get much more training than before the turnaround began. For example, whereas no formal orientation existed before, an 8-week orientation process was introduced. Management education, which had been virtually non-existent before the turnaround, is given a high priority and the Sears University, which was established in 1995, was specifically set up to train managers.
The company developed new performance appraisal criteria and compensation systems for all its managers, emphasizing financial and non-financial performance. The annual performance appraisal is a 360-degree appraisal, including feedback from their supervisors, peers and subordinates, rating the managers on 12 leadership criteria, including customer service orientation, initiative and sense of urgency, business knowledge, problem solving, empowerment skills, team skills, and change leadership. The 12 criteria are also used for recruitment and training purposes. Thus, the company rewards managers who improve customer satisfaction and employee satisfaction levels by developing and supporting employees under their control. To further emphasize the importance of non-financial measures, from 1996, one-third of Sears’ senior management's long-term incentives have been based on improvements in employee satisfaction as measured by the employee attitude surveys, one-third on improvements in customer satisfaction, and one-third sales and profitability measures. This was a big change from Sears’ existing executive compensation programme, which rewarded executives for achieving sales and profit targets for their particular business units.
Measuring performance
The transformation team figured it was not sufficient to just have a vision, they had to determine exactly how to put that vision into action. They set out to come up with a business model and a set of indicators – the Sears Total Performance Indicators (TPI) – that would show how value is added in the retail operation and show the link between employee attitudes and profits. Using the data collected for the task forces and data routinely collected, a set of six indicators were refined to measure objectives in the areas of customer satisfaction (one indicator), employee satisfaction (two indicators) and financial performance (three indicators).
In addition, Sears also undertook a statistical modelling exercise to establish the relationship between the different variables in the TPI. Using data from 800 stores, Sears found that if positive employee attitudes (measured by 10 factors relating to their attitudes to the job and the organization) increase by 5 per cent, then customer satisfaction will increase by 1.3 per cent, leading to a 0.5 per cent increase in sales. On the current sales of over $40 billion, this translates to over $200 million annually.
A continuous process of data collection, analysis and modelling and experimentation, the Total Performance Indicators show Sears managers how well they are doing with customers, employees and financially. The model can also be used at a store or regional level to assess performance and indicate remedial action, if necessary.
Sears’ customer satisfaction ratings began creeping upward in 1993 measured against their leading competitors. A Fortune magazine survey published in February 1997 showed more than twice as much customer satisfaction as any other retailer surveyed. In 1996 and 1997, its customer satisfaction scores rose two more percentage points, placing it at parity with its target competition.
Since March 1997, Sears cash tills have been randomly generating receipts that ask customers to call an automated toll-free number and respond to questions. The survey results show customer satisfaction has risen several per cent since 1996. This has been verified externally, for instance by a Fortune magazine survey in 1997, which showed that Sears’ customer satisfaction increased by 5.6 per cent from 1995 to1996 and 2 per cent from 1996 to 1997.
Employee satisfaction scores have also increased. The employee satisfaction score was estimated to be 69.5 in 1999, having risen 1.5 per cent in the past year and a half alone. And what has been found is that stores that have higher employee satisfaction ratings generally perform better financially than those with lower ratings. Another measure of employee satisfaction is the fact that the company's turnover rate has plummeted from 100 per cent turnover when the turnaround project started to 66 per cent. This compares with an employee turnover rate of nearly 75 per cent a year for typical retail stores in the USA.
Sources: Laabs, J. (1999). The HR side of Sears’ comeback. Workforce, 78 (3), March, 24–9. Sherman, S. (1997). Bringing Sears into the new world. Fortune, 136 (7), 13 October, 183–4. Martinez, A. (1999). Sears strategy for continuing renewal. Chain Store Age, July, 64–74. Rucci, R., Kirn, S. and Quinn, R. T. (1998). The employee–customer–profit chain at Sears. Harvard Business Review, January/February, 82–97.
The acceptance by the HRM function that marketing-like techniques can be used internally for the purposes of motivation and inter-functional integration is likely to transform the HRM function itself. For instance, if the customer orientation philosophy is adopted by HRM, then it will begin to market its services to its internal users rather than waiting to be approached or relying on formal mechanisms. In some instances, this is prompted by the need to compete with external suppliers. In these cases, internal marketing is acting as an agent of change and transforming the way the HRM function has traditionally operated.
Summary
Internal marketing programmes are not implemented in a vacuum. Effective implementation of IM programmes requires a supportive environment and structures. In particular, it requires close co-operation between the HRM and marketing functions in order to ensure that the requisite HRM policies are in place to support the external marketing strategies. A major role of IM is to increase inter-functional integration and to reduce inter-functional conflict, as this is a major barrier to effective implementation. Inter-functional conflict can arise for a number of reasons, including the perception that one function is trying to increase its power at the expense of the other. Greater inter-functional integration can be achieved in a number of ways including, amongst others, crossfunctional teams, creating boundary spanning roles, and representation of marketing and HRM personnel on each other's committees.
Whilst closer co-operation and inter-functional integration are essential for the success of IM programmes, in the longer term IM also requires a culture shift in organizational values. Indeed, IM is a cultural initiative in itself. The acceptance of the central aim of internal marketing of developing customer-conscious employees, treating employees as customers and the use of marketing-like techniques to achieve these aims means that the organization is taking on board a new set of values. The IM approach also implies that a strategic human resource management approach and a participative style of management are more consistent with the implementation of internal marketing strategies. These values and approaches to management need to become part of organizational culture. The best way of transmitting these values through the organization is for senior management to buy into customer orientation and other values associated with internal marketing.
References
1. Richardson, B. A. and Robinson, G. C. (1986). The impact of internal marketing on customer service in a retail bank. International Journal of Bank Marketing, 4 (5), 3–30.
2. Blake, R. and Mouton, J. (1964). The Management Grid. Houston, TX: Gulf.
3. Berry, L. L. and Parasuraman, A. (1991). Marketing Services: Competing Through Quality, p. 151. New York: The Free Press.
4. Willman, P. (1989). Human resource management in the service sector. In Management in Service Industries (P. Jones, ed.), Chapter 14, pp. 209–22. London: Piton. Quotation from p. 210.
5. George, W. R. (1977). The retailing of services – a challenging future. Journal of Retailing, Fall, 85–98.
6. Kotler, P. (1972). A generic concept of marketing. Journal of Marketing, 36 (April), 346–54.
7. Grönroos, C. (1981). Internal marketing – an integral part of marketing theory. In Marketing of Services (J. H. Donnelly and W. R. George, eds), pp. 236–8. American Marketing Association Proceedings Series.
8. George, W. R. (1990). Internal marketing and organizational behaviour: a partnership in developing customer-conscious employees at every level. Journal of Business Research, 20, 63–70. Quotation from p. 68.
9. Glassman, M. and McAfee, B. (1992). Integrating the personnel and marketing functions. Business Horizons, 35 (3), May/June, 52–9.