Chapter 2 - Strategy-Driven Human Resource Management

Strategy and strategic planning: The Organization and the environment

Strategic planning is about planning for the long-term future. In order to be successful, setting goals and measurable standards are required. The importance of the saying “When you fail to plan, you plan to fail.” has been confirmed by research.

The internal and external environment largely decides which actions must be performed by management to provide the right people to accomplish strategic goals. Therefore, HR is considered to play an important role in gathering the right combination of people to reassure the organization's goals and company objectives.

The External environment

The external environment consists of different elements which exist outside the organization and cannot be controlled. There are nine major forces that exist within the external environment:

1. Customers have a big influence on the organization through the purchases of goods and services that they perform. Therefore, offered products by the organization must be improved continuously and an added value must be provided in order for the client to view this product or service as valuable. Skilled personnel is required to successfully add creativity to the knowledge of the organization and increase the quality of the offered producs and services.
2. Competition is an unavoidable component when it comes to reaching clients. Each firm’s performance must be understood relative to the actions of its competitors. Organizations also compete often for the same employees and sometimes suppliers.
3. Suppliers are the party who provide the resources to organizations. For this reason, partnerships with suppliers affect the organization’s performance.  
4. Labor force are the employees and the talent pool available to an organization and have a direct effect on the firm’s performance.
5. Shareholders are the owners of a corporation and generally influence management. Most shareholders are not involved in the day-to-day activities of the firm, but they are involved with picking the directors of the corporation. The board of directors has the permission to fire top management, if the performance doesn’t equal the expectations.
6. Society determines what acceptable business practices are. Individuals and groups of stakeholders have various ways to put pressure on businesses to make changes.
7. Technology has changed the way businesses are operating. Computers and internet have changed the way businesses are performing because of their speed. A requirement exists to obtain employees who are comfortable with constantly changing processes, because of the dynamic of new and changing technology.
8. The economy is an element that cannot be controlled and therefore factors such as economic growth, inflation, interest rates etc. cannot be controlled as well. Through measurement of the gross domestic product (GDP), research has shown that businesses perform better during economic growth than during times of recession.
9. The Government sets laws and regulations for businesses to obey. According to the National Association of Manufacturers, the annual costs of complying with these government regulations amount up to an average of $19,564 per employee. The Occupational Safety and Health Administration (OSHA) sets safety standards and the Environmental Protection Agency (EPA) sets pollution standards that must be met. In addition, every employer must obey the wage guidelines from the Department of Labor (DOL).

Strategic Vision and Mission

G.F. Keller stated “Many military historians and contemporary business students view the Chinese military strategist Sun Tzu as the developer of ‘the Bible’ of strategy.” Sun Tzu’s principles can be divided into two components:

1. Knowing oneself
2. Knowing the enemy

Translated into business this means that one should know the internal and external business environment in which one is operating. Strategic planning follows a process that will be detailed in the next paragraphs.

What is Strategy?

Research has established that HRM is an important strategic asset when it comes to influencing the performance of both smaller and larger firms. Strategy is a plan of action designed to achieve a particular set of objectives. Strategic advantage can be created by correct use of the internal and external environment. Strategic advantage arises when you analyze the environment and react to it quicker than competitors do, while using all internal resources efficiently.

In order to confirm the strategy required, three major (strategic) questions should be answered:

1. What is our present situation (where are we now)?
2. Where do we want to go?
3. How do we envision to get there?

For the first questions, different elements should be analyzed, such as: profits made, satisfaction of products for customers, workforce progress, technological development. Question 2 basically plans what we want the organization to look like in a particular point in the future. In addition, question three gives the required information to create the plan that will support the organization in accomplishing its goals.

Visions and Missions

A vision and mission are considered the two most critical components of any successful corporate strategy. Together, these two components direct every employee to the company’s goals and objectives.

The vision – A vision is what we expect to become as an organization at a particular point in time in the future. A vision is not specific in terms of ‘how’ it will be achieved. It provides a focus point in the future. The vision is considered a state of being. It defines who we are, what we stand for, what we believe in and what we want to become.

The mission – lays out our expectations of what we’re going to do in order to become the organization that we have envisioned. The mission statement provides the activities of the organizational units and what they aspire to accomplish, in order to align with the organizational vision. The mission is usually more specific and narrow than the vision. It takes into account whom we serve and how.

When you put the mission and the vision together, the people in the organization get a more complete picture of the direction in which they are expected to go. This way it helps the organization to direct the people towards its goals. Creating a focus is what makes the mission and vision powerful. Working towards the same end result will make the outcome that it will be achieved more likely.

A strong vision and a good mission statement are critical parts of the strategic planning.

Vission + Mission = FOCUS!

Strategy Types and Analysis

Types of Strategies

The different types of strategies can be broken down into three categories: cost leadership, differentiation, and focus or niche strategies.

COST LEADERSHIP. Cost leaders use everything in their power to minimize the costs required to produce products or services. Reducing these production costs can be combined with either applying the same profit margin and increasing profits or lower the margin and provide more competetive prices.

However, low cost strategies have a downside as well. Being considered ‘too cheap’ by clients might cause the association that a brand and the products or services offered, might be unreliable.

DIFFERENTIATION. Applying the strategy of differentiation attempt to create an impression of difference in the mind of the customer, when it comes to the offered products or services. Differentiation is not necessarily based on an actual difference, but the perception of it. According to Coca Cola, the key(s) to selling consumer products are differentiation, differentiation and differentiation, which it achieved with the scripted name logo and contour bottle.

FOCUS OR NICHE. The focus or niche strategy aims at a s pecific portion of a larger market. This could be for instance, a regional market, a particular product line or a buyer group.

How does strategy affects HRM?

There are different areas where the generic corporate strategy affects how jobs within HR are being performed.

HRM AND COST LEADERSHIP. In cases where a cost leadership strategy is being applied, a fairly great interest in minimizing all internal costs, including employee costs exists. When applying this strategy, a high interest for maximum efficiency exists, in order to minimize the costs associated with production.

HRM AND DIFFERENTIATION. When applying a differentiation strategy, the organization is going to be concerned with employees that are flexible and adaptable, innovative and able to create new processes, who can work in uncertain environments, with cross-functional teams. In a differentiation organization there would be much broader job classifications as well as a broader work-planning process.

Strategic Analysis

There are two primary components of strategic analysis used by most organizations. The five forces analysis is a tool that organizations use to analyze the external competetive environment. The second component is called SWOT-analysis. This analysis is used to analyze company-specific environment.

FIVE FORCES ANALYSIS. This anlaysis has been introduced by Michael Porter, who identified competition within an industry as being composite of five competetive forces that should be considered when analyzing competetive situations.

1. Rivalry among competitors.
2. Threat of substitute products and services
3. Potential new entrants
4. Power of suppliers
5. Power of buyers

Companies use the five-forces analysis and other competetive situation analysis tool primarly to make decisions on which business lines to enter and exit and how to allocate resources among the existing business lines.

SWOT ANALYSIS. This tool helps analyzing the internal environment of the organization, concerning its specific capabilities and limitations. When applying this analysis, the organization creates a list of its strengths, weaknesses, opportunities and threats.

Designing a Strategy

Once the organizational vission, mission, generic strategy and analysis of the external environment have been established, the organization’s strategy can be defined.

SETTING OBJECTIVES. Successful strategic management requires a commitment on the part of managers to a defined set of objectives. Successful managers usually have a goal orentiation, meaning they set and achieve objectives. Objectives state what is to be accomplished in singular, specific, and measurable terms, with a target date. The organization has to write atleast one objective for every major goal in the strategy.

The following presents a model adapted from Max Weber to write effective objectives:

To + action verb + singular, specific, measurable result + target date

CREATE A STRATEGY. After setting the strategy, the next step would be to include everything into an organizational plan. Each strategy is tailored to its company and would therefore not be necessarily successful for another company.

IMPLEMENTING, MONITORING AND EVALUATING STRATEGIES. The last step in the strategic planning process is to implement, monitor and evaluate the plan. Measuring progress towards the objective is also considered an important part of controlling. Staying within the budgets is also crucial when it comes to controlling the objectives. In addition, quality must consistently be controlled.

How HR Promotes strategy

HR managers need to recruit, select, train, evaluate, and interact with employees differently, depending on organizational strategies.

Structure

Organizational structure refers to the way in which an organization groups its resources to accomplish its mission.

Each department affects the organization as a whole and each department is affected by other departments as well. Usually an organization is divided into departments such as finance, marketing production, human resources and so on.

Basics of organizational structure

One way to identify an organizational structure is to look at the fundamental components. Complexity, formalization and centralization could be considered structural components.

COMPLEXITY. The first component of organizational structure, is the degree to which three types of differentiation exists within the organization. These different types of differentiation can be horizontal- , vertical – and spatial differentiation. Vertical diferentiation deals with how we break the organization up vertically: the layers of the organization from top to bottom. Horizontal differentiation identifies how we break the organization up horizontally, referring to the different departments. Spatial differentiation refers to the physical seperation of the different departments.

FORMALIZATION. Formalization is the degree to which jobs are standardized within an organization. This refers to the degree to which policies, procedures and rules are created that “program” the jobs of the employees.

CENTRALIZATION. Centralization is the degree to which decision making is concentrated within the organization.

Organizational Culture

Organizational culture is another characteristic that affects how the HR manager operates within the firm. Providing the right organization culture is one of the most important responsibilities of the CEO and other corporate executives.

Organizational culture consists of the values, beliefs, and assumptions about appropriate behavior that members of an organization share.

There are five artifacts of organizational culture to support employees to learn the culture:

1. Heroes
2. Stories
3. Slogans
4. Symbols
5. Ceremonies

There are three levels of culture, which include behavior, values and beliefs, and assumptions. 

Measurement tools for strategic HRM

The Economic added value (EVA) is a measure of profits that remain after the cost of capital has been deducted from operating profits. It provides a better understanding to managers and stakeholders of the overall business performance. This definition could be translated into the following formula:

EVA = Net operating profit after tax – (Capital used x Cost of Capital)

The Return on Investment is a measure of the financial return we receive because of something that we do to invest in our organization or its people. The ROI is mostly being used in financial analyses.

The ROI could be translated into the following formula:

ROI =             Gain from investment – Cost of investment

                                      Cost of Investment

Balanced scorecard

The balanced scorecard (BSC) measures financial, customer service, internal process, and learning and growth (or sustainability) measures. All four elements of the scorecard are just as important, because the success rate in each area affects the other.

HR Scorecard

The HR Scorecard identifies HR deliverables and HR system alignment, compares HR alignment with strategy, and measures organizational gains created by HR practices.

Trends and issues in HRM

There are structural and cultural issues that cause organizations not to adapt timely to changes. It’s important for managers to decentralize and allow members within a department to make decisions within their area of responsibility. Formalization should also be reduced, in order to allow processes to adapt to new changes. In addition, more complexity should be allowed, in order for employees to respond in a more suitable way.