Chapter 2_ Making Human Resource Management Strategic _ Human Resource Management, 3rd Edition

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 1/75 Chapter 2 Making Human Resource Management Strategic A MANAGER'S PERSPECTIVE E LIZABETH CLOSES HER OFFICE DOOR AND BEGINS THINKING ABOUT THE SMALL CHAIN OF CONVENIENCE STORES SHE PURCHASED LAST MONTH. THE PREVIOUS OWNER WORKED HARD AND SUCCESSFULLY GREW FROM A SINGLE STORE TO THE CURRENT FOUR OUTLETS . E LIZABETH WAS EXCITED WHEN SHE LEARNED THAT HE HAD ACCEPTED HER BID TO PURCHASE THE STORES. HOWEVER, NOW THAT THE DEAL HAS CLOSED, SHE KNOWS SHE NEEDS TO MAKE SOME CHANGES. THE STORES ARE ALL LOCATED IN DESIRABLE LOCATIONS AND ARE CURRENTLY PROFITABLE, BUT SHE HAS ALREADY FOUND IT DIFFICULT TO WORK WITH SOME OF HER MANAGERS . T HE LACK OF QUALITY EMPLOYEES HAS REQUIRED HER TO SPEND SEVERAL HOURS DOING MANAGERIAL DUTIES IN TWO OF THE STORES. ELIZABETH HAS ALSO HEARD RUMORS THAT A LARGE NATIONAL CHAIN IS THINKING OF EXPANDING INTO HER TERRITORY . E VEN IF THE COMPETITOR DOES NOT EXPAND, SHE IS

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 2/75 CONVINCED THAT THE STORES WILL FAIL UNLESS SHE MAKES SOME CRITICAL DECISIONS AND DEVELOPS A BETTER STRATEGIC PLAN . Elizabeth knows that effective human resource management must be a big part of her strategic plan. She honestly believes that making em- ployees happy is the key to making customers happy. Obviously, rais- ing wages would make employees happy; yet, Elizabeth also under- stands that her choices are constrained by a need to produce profit. Paying too much in wages could result in losses that threaten her abil- ity to keep the stores open. An even bigger issue is thus her need to de- velop a plan for ensuring loyal customers and earnings sufficient to cover her business expenditures. Elizabeth remembers a few years back when she attended an educa- tional retreat and took a strategic management course that focused on different ways businesses compete with each other to deliver services and goods. She doesn't think her stores currently have a clear strategy. Do people shop at her stores because she sells products that are supe- rior to those sold by other stores? Perhaps customers are loyal only be- cause prices are cheaper. As she reflects on these questions, Elizabeth realizes that she doesn't really have a plan for how she will compete with other stores, particularly a large national chain. She wonders if her human resource decisions might need to be different depending on her strategy. The previous store owner emphasized developing loyalty and trying to make sure that employees stayed at the stores for long periods of time. She thinks this approach offers a lot of benefits. But she sometimes wonders if it would help to bring in more new people. What about di- versity? Can her stores benefit from new skills and ways of thinking? Given the current economy and relatively high rate of unemployment, Elizabeth is quite certain that she would be able to identify and hire some very good new employees. Would now be a good time to bring in some outside talent?

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 3/75 As she thinks about her decisions, Elizabeth reminds herself that this is a big opportunity. She is excited by the prospect of making a differ- ence and helping her new stores rise to even greater heights. WHAT DO YOU THINK? Suppose Elizabeth hears the following comments during a meeting with some friends who are entrepreneurs. Which of the statements do you think are true? Having good employees is more important than having good production equipment. Much of the workforce lacks needed skills, so high-quality employees are difficult to find and retain.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 4/75 The most effective way for an organization to compete with other organizations is to produce similar goods and services at lower prices. Organizations are most effective when they develop a highly committed workforce. An organization seeking to produce the highest-quality products should have different human resource practices from an organization seeking to produce inexpensive products. LEARNING OBJECTIVES After reading this chapter you should be able to: Describe the strategy formulation process. Describe two generic competitive business strategies that organizations use. Explain the universalistic and contingency approaches to human resource strategy, including key characteristics of the commitment strategy. Describe four human resource strategies that organizations commonly use. Explain how human resource strategies and competitive business strategies are aligned.

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 5/75 How Can a Strategic Approach to Human Resources Improve an Organization? Suppose someone gave you $10,000 to invest in a single company, with the condition that you must leave the money invested in the same company for the next 30 years. At the end of 30 years, you get to keep all the profits from the investment. What company would you choose? Would it be a technology-focused company like Microsoft? How about a global leader like Coca-Cola? Maybe a large company with numerous products, such as General Electric? What would be the most important factors to consider when making this choice? As discussed in Chapter 1 , profitability is an important part of organi- zational effectiveness and a factor you would certainly want to con- sider in choosing an investment. In fact, business researchers and stock analysts spend a lot of time trying to learn why some companies are consistently more profitable than others. One possible explanation is that highly profitable companies are simply in desirable industries. Perhaps it is just easier to earn profits doing some types of work. Another potential explanation is that profitable companies have better technological capabilities—better equipment and processes. Still an- other possibility is that highly profitable companies are just bigger. Their large size might provide them with more power and resources, making it easier to produce goods and services. Yet none of these theo- ries really explains why some companies are more profitable than others. In any industry, and at any size, some companies do well, and others do not. Research suggests that a major key for long-term profitability is a clear strategy for being better than competitors, along with a highly effec- tive workforce that carries out that strategy. A good example is Southwest Airlines. The combination of a clear strategy and high-qual- ity workforce allowed Southwest Airlines to earn the highest stock re- turn of any company over a 30-year period. 1 2

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 6/75 Southwest started out as a small company with three airplanes. Government regulations prohibited it from flying to states not border- ing Texas. In the ensuing years Southwest Airlines has been consis- tently profitable, even at a time when other airlines have consistently lost money and many have faced bankruptcy. Just think about it. If you had been able to invest your $10,000 in Southwest Airlines over a re- cent 30-year period, that investment would have grown to over $10.2 million. As mentioned, one element of Southwest's success is its clear strategic direction. What are the elements of the company's strategy? First, it has a clear strategy of offering low fares. Unlike other major airlines, Southwest does not use a complicated price structure whereby some passengers pay much more than others. Instead, it aims to have the lowest available fare. The fact that other airlines are forced to sub- stantially cut their fares once Southwest enters a market indicates how successful Southwest's low-fare strategy is. Unfortunately for competitors, their costs to fly passengers are as much as 70 percent higher than Southwest's costs. Why? Southwest is simply more effi- cient. This makes it possible for Southwest to earn profits while selling tickets at prices that would represent losses for other airlines. What makes Southwest so much more efficient than other airlines? The company gets more productivity out of its employees. Southwest needs only about one-third as many employees as its competitors to fly the same number of customers. How can it do this? The secret seems to be best captured by the company's founder, Herb Kelleher, who has said that Southwest's order of top priorities is employees, customers, and then shareholders. In short, Southwest Airlines uses human re- source practices to find and keep a large number of loyal employees who concentrate on reducing costs. One way that Southwest reduces cost is by encouraging each employee to pitch in and help finish tasks, even if those tasks are not part of that person's normal job. For instance, flight attendants help clean airplane 3 4 5 6

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 7/75 cabins, and pilots help move luggage. This practice greatly reduces the time that a plane is on the ground between flights. Southwest has also developed a culture that makes it fun to work there. The company re- ceives as many as 100 job applications for each open position. Southwest is thus in the position of being able to hire only the very best employees. In particular, it focuses on hiring people who have the right attitude and who are willing to work hard to meet customer needs. The company also pays well and was one of the first airline companies to share profits with employees. The pattern of long-term success doesn't, however, prevent Southwest Airlines from continually facing strategic challenges. Herb Kelleher was followed as CEO by James Parker, who led the company through three somewhat troubling years. First, terrorist attacks and rising fuel costs made it increasingly difficult for airlines to earn profits. Then employees demanded higher wages, with negotiations frequently cre- ating conflict between managers and employees. Nevertheless, Southwest continued to outperform its competitors and return profits. Gary Kelly, who took over in 2004 after Parker's retirement, makes it clear that he will not deviate from Southwest's core strategy: to be the airline with the lowest fares and the lowest cost structure. He also continues to emphasize the development of highly committed em- ployees who spend their entire careers working to improve Southwest Airlines. This consistent approach of adopting a low-cost strategy and emphasizing commitment to employees has been helpful during recent times of economic difficulty. Southwest did post financial losses during the recession that began in 2008, but its lean structure and ef- ficient practices helped it recover more quickly than competitors. Success relative to competitors even allowed Southwest to expand by purchasing AirTran Airways in 2011, which among other benefits has allowed expansion of cross-border routes to Mexico and Caribbean destinations while retaining its cost focus. 7 8 9 10 11 12 13 14 15

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 8/75 Building Strength Through HR S OUTHWEST A IRLINES Southwest Airlines is a low-cost airline that employs over 46,000 peo- ple to move over 100 million passengers each year. Human resource management at Southwest builds competitive advantage by Having a clear strategic direction for competing with other airlines. Creating a company culture where everyone is committed to suc- cess and doing whatever it takes to serve customers. Being highly selective and hiring only the very best employees. Paying above-average wages to obtain and keep the best employees. The Southwest Airlines example illustrates how a strategic approach to human resource management increases organizational effective- ness. For Southwest, employees are a critical resource in meeting the needs of customers. The overall strategic direction of the organization guides decisions about how people are recruited, selected, trained, and compensated. These human resource practices help create a work- force that provides the talent necessary to serve customers well. Organizations such as Southwest that have clear strategies for effec- tively meeting the needs of customers, and clear human resource practices that match those strategies, simply get better results than other organizations. How Is Strategy Formulated?

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 9/75 LEARNING OBJECTIVE 1 We use the term strategy to discuss many things in our lives. We talk about strategies for taking exams, strategies for getting jobs, and strategies for saving money. But just what are we talking about when we use this term? We can think of a strategy as a set of coordinated choices and actions. Strategy concerns where you want to go and how you want to get there. Strategy is more than just decisions, however; it also concerns putting choices into practice. Strategy Coordinated choices and actions that provide direction for peo- ple and organizations. With regard to human resource management in organizations, there are actually two types of strategy. One is competitive business strat- egy , which focuses on choices and actions about how to serve the needs of customers. The other is human resource strategy , which fo- cuses on choices and actions concerning the management of people within the organization. These two types of strategy must work to- gether to ensure high organizational effectiveness—as they do at Southwest Airlines. Competitive business strategy Strategy that focuses on different ways to provide goods and services that meet customer needs. Human resource strategy Strategy that focuses on different ways of managing employees of an organization. One way of understanding similarities and differences in these two forms of strategy is to examine the common elements of strategy for- mulation. The first step in strategy formulation is gathering informa-

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 10/75 tion (see Figure 2.1 ). Information gathering commonly involves as- sessments both of the external environment and of internal capabili- ties. Once relevant information has been gathered, it is analyzed, and decisions are made. The set of decisions made constitutes a strategic plan, which must then be implemented. In the following sections, we look at the first two steps. Figure 2.1 Strategy Formulation Process. GATHERING INFORMATION Effective strategic leaders seek a great deal of information. They con- stantly scan their external environment in an effort to understand their internal resources and capabilities. Such assessments may not al- low them to predict the future perfectly but can help them better un- derstand what has already happened, an understanding that will en- able them to make better decisions. Assessing the External Environment An external environment consists of all the physical and social fac- tors outside of an organization's boundaries. Some of these elements provide an organization with potentially favorable conditions and are 16 17

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 11/75 labeled opportunities ; other elements provide potentially unfavor- able conditions and are labeled threats . Although opportunities are generally easier to control than threats, a clear understanding of both is critical for effective strategy formulation. External environment Forces outside the organization's boundaries that influence the organization and its outcomes. Opportunities Positive elements of an organization's external environment. Threats Negative elements of an organization's external environment. One way of thinking about the importance of assessing threats and op- portunities is to consider them in relation to your future goal of find- ing a job. A successful job search depends on a clear strategy, which requires an understanding of environmental conditions. Features of the environment might include the number of businesses hiring peo- ple in your field, the number of other new graduates looking for simi- lar jobs, and the geographic location of potential employers. If the economy is bad and few businesses are hiring new employees, or if a large number of new graduates are highly qualified for the position you desire, you will face a threat. In contrast, a new technology that makes your skills valuable to a large number of organizations repre- sents an opportunity. Having information about the job market in gen- eral helps you develop a good plan, or strategy, for finding a job. Just as you will use environmental information in finding a job, orga- nizational leaders use information about environmental opportunities and threats to form their strategies. Important elements of organiza- 18 19

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 12/75 tional environments include demographic and cultural trends, eco- nomic and political conditions, and technological developments. Demographic and cultural trends include population growth, the age distribution of the population, the percentage of women in the work- force, and changes in the relative sizes of ethnic groups. As discussed in Chapter 1 , people in the United States are living longer, and the percentage of ethnic minorities is growing. These features provide op- portunities for organizations offering services to senior citizens and for organizations that produce and sell goods and services especially desired by, for example, Latino individuals. Critical features of the economic environment include interest rates and new job creation, whereas the political environment includes laws and the positions of elected officials. Recent changes associated with the Affordable Care Act have created numerous opportunities and threats for organizations, particularly those working in the healthcare industry. Other important threats and opportunities con- cern legal changes related to international trade. Stories about trade opportunities and threats in countries such as China appear almost ev- ery day. An especially important aspect of current organizational environ- ments is technological change. Trends such as improving manufactur- ing technologies and increased availability of information create op- portunities for some organizations and threats for others. An example of technological innovation is Twitter, which is discussed in the ac- companying Technology in HR feature. Effective strategy formulation thus begins with information about threats and opportunities outside the organization. In formulating competitive business strategy, a company's understanding of these trends can help determine what goods and services to provide. Knowledge can also guide choices about whether to focus on lowering costs or on providing goods with superior features. Understanding 20

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 13/75 broad changes outside the organization is also critical for human re- source strategy. Organizations need information about demographic and cultural changes, for example, to forecast how many workers with particular skills will be available in the future. An interesting example of how environmental changes influence organizations is currently seen in Taiwan. The rapid rise and economic development of China has opened doors and markets for many companies located in Taiwan. Moreover, the job market in Taiwan has been depressed due to the economic downturn, but workers have found many opportunities in China. At least 1.5 million people from Taiwan are now working in China. The changing nature of the global market thus provides both opportunity and threat for companies located in Taiwan and China. Problems occurring in one area often create opportunities for compa- nies and workers in other areas. Assessing Internal Capabilities Strategy formulation also requires assessment of an organization's in- ternal resources and capabilities. Areas of high capability are labeled strengths , and areas of low capability are called weaknesses . Strengths Positive elements that define areas in which an organization has high internal capability. Weaknesses Negative factors that define areas in which an organization has low internal capability. The example of a job search can be helpful for thinking about strengths and weaknesses. Threats and opportunities focus on the en- vironment—in the case of your job search, environment signifies things other than you. Strengths and weaknesses focus internally—in the job search example, on your own characteristics. Your strengths 21

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 14/75 might include past experience working in the industry or your gradua- tion from a school with a strong reputation for producing high-quality graduates. These are all capabilities that help set you apart from other job seekers. At the same time, you probably have some weaknesses. Perhaps you have decided you must live in a certain city, or maybe your grades are lower than you wish. These weaknesses might work against your ability to obtain a desirable job. The strengths and weak- nesses of companies are similar in that they focus on characteristics that are part of the organization itself. Technology in HR T WITTER AS AN O PPORTUNITY FOR B USINESS The micro-blogging service Twitter offers an exciting opportunity for businesses. Companies can use Twitter to send short messages not only to customers but also to current and prospective employees. Companies such as Southwest Airlines, KFC, and General Mills have found success in communicating with customers. Southwest uses Twitter to connect with first-time customers by sending them an inex- pensive yet personalized message of thanks and invitation for future service. Twitter was an important part of KFC's strategy for launching its grilled chicken product. Potential customers received information and links to vouchers for a free meal. In a similar way, General Mills found success by encouraging tweets about its new line of gluten-free baking products. The benefits of new products were extolled by cus- tomers rather than by a marketing department. Human resource practices can also benefit from micro-blogging. For example, in the United Kingdom the Royal Air Force has employees continually sending short messages about what it is like to work in dif- ferent roles. These posts on Twitter, along with responses to questions, serve as an important recruiting tool. Twitter can also be used as a

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 15/75 training tool. Employees in training classes become more engaged by sending messages to instructors and other participants. Experienced employees can send tweets that help teach others the steps of complet- ing important work tasks. Of course, companies can also make mistakes as they get involved in social networking. In contrast to traditional communication such as advertising and job posting, micro-blogging creates two-way commu- nication. Customers and potential employees talk back and share their thoughts with many others. Blatant attempts to sell products or make a company look good are often met with criticism. Here are some steps to keep in mind to avoid some common pitfalls: 1. Listen before you speak. Successful companies begin their interac- tions by first finding out what is being said about them. 2. Follow key people. Identify people who frequently send tweets that relate to your company and its services or products. 3. Respond with help. Respond to tweets by offering help and ad- dressing customer service issues. Sources: Tim Bradshaw, “It Pays to Think Before You Tweet; Twitter May Be the Latest Hot Marketing Tool, but Companies Need to Ensure the Tone of Their Message Suits the Medium before Launching a Campaign,” Financial Times, July 21, 2009, p. 14; Anonymous, “Make Twitter an Effective Business Tool in 4 Steps,” PR News 65, no. 29

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 16/75 (2009); Emily Bryson York, “Social Media Allows Giants to Exploit Niche Markets,” Advertising Age 80, no. 25 (2009): 3-4; Pat Gallagan, “Twitter as a Learning Tool. Really,” Training and Development 63, no. 3 (2009): 28–30; Anonymous, “RAF Uses Twitter and Flickr to Show Potential Recruits Life in Force,” New Media Age, July 23, 2009, p. 3. Obviously it is more desirable to have strengths than weaknesses, but an understanding of both is essential for true success. Just as an hon- est assessment can help you get a job, organizations do better when they continually assess both strengths and weaknesses. Most strengths and weaknesses can be thought of in terms of the resources that an or- ganization has. Some are tangible, such as money and equipment; oth- ers are intangible, such as reputation. From a resource-based view of organizations, resources—including human resources—are true strengths when they are both valuable and rare. Accordingly, the ability to attract and keep high-quality em- ployees represents a strength for the organization only when high- quality employees are hard to find. After all, if such employees are easy to find, every company will have them. Consistent with the resource-based perspective, good management of skilled people is critical because high-quality employees are relatively rare. A recent report by the Task Force on Workforce Development concluded that much of the workforce lacks required skills. There is a shortage not only of technological and computer skills but also of more general skills such as critical thinking and communication. This shortage is not confined to the United States; similar issues have been identified in other countries, such as the United Kingdom, France, and Germany. Thus, effective ways to attract and keep em- ployees do, in fact, represent sources of internal strength that can give an organization a competitive advantage. Yet to be true strengths, human resource practices must also provide something that is difficult to imitate and for which there is no substi- tute. As you will see later in this chapter, creating an integrated set of 22 23

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 17/75 human resource practices is extremely difficult. Competitors are often able to imitate parts of a human resource strategy, but they can rarely imitate the entire package. This is particularly true when an organi- zation is able to retain high-quality employees throughout long ca- reers. In terms of substitutability, there is always the possibility that machines can replace employees, as has already occurred in some manufacturing organizations. However, people are still needed to de- sign and operate the machines. Given the current emphasis on knowl- edge and service work, it appears that most organizations will con- tinue to need employees, and thus human resource strategies, well into the future. In summary, human resource practices can represent a critical inter- nal strength for organizations. Conversely, lack of effective human re- source management can represent a major weakness. Gathering infor- mation about human resource capabilities is therefore a vital part of an effective assessment of organizational strengths and weaknesses. ANALYZING INFORMATION AND MAKING DECISIONS Once information has been gathered, the next step in the strategy-for- mulation process is to analyze the information and make decisions. Spending time and effort to gather information is of little value unless it is used to arrive at high-quality decisions that are then carried out. Research suggests four steps that can be used to make decisions effectively. These steps are illustrated in Figure 2.2 . The first step, to build collective intuition, develops when a group of people meet to- gether often to discuss the information that has been gathered. Through these meetings, each member can share what he or she knows with other group members. The outcome is a sense of intuition, or “gut feel,” about the proper strategic direction. 24 25

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 18/75 Figure 2.2 Effective Decision Making. Source: Information from Kathleen M. Eisenhardt, “Strategy as Strategic Decision Making,” Sloan Management Review 40 (1999): 65–72. The second step is to stimulate conflict. It may seem strange, but expe- riencing conflict about how to do things is very important for making good decisions. In the absence of conflict, important threats and weaknesses are often ignored. Making sure that the team of decision makers includes people with different backgrounds can be helpful. Experienced managers and younger employees, for example, bring different insights to the decision-making process, as do marketing per- sonnel and operations personnel. Another way to encourage conflict is to assign team members to advocate different possibilities, even if they don't really believe those possibilities are best. The third step in good decision making is to maintain an appropriate pace. Decision makers too often see their task as so large that they be- come paralyzed. The key to effective decisions is to focus on issues that are large enough to be meaningful but small enough to be resolved. In this way, the team can view each decision as part of a larger set of de- cisions. The best plan is to set a flexible timeline that provides guid- 26

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 19/75 LEARNING OBJECTIVE 2 ance for moving the decision forward but does not force the group to make the decision prematurely. The final step is to diffuse politics. Bad decisions result when members of the decision-making team focus on making themselves look good at the expense of others. To avoid this problem, the team should begin with a common goal that develops a sense of cooperation rather than competition. Each team member should have a clear area of responsi- bility, in which he or she can provide expert input. Strategy formulation is best done by a group of decision makers work- ing together to carefully analyze the information obtained from as- sessing the organization's external environment and internal capabili- ties. The group then makes decisions about the best way to provide goods and services. This process of gathering and analyzing informa- tion is fundamental in determining how to compete with other organi- zations. Good decision making also provides plans for building a high- quality workforce. CONCEPT CHECK 1. 1. What are the three steps in the strategy-formulation process? 2. 2. What are some components of an organization's external environment? 3. 3. Why does human resource management represent an important potential strength for organizations? 4. 4. What four steps are necessary for effective decision making? What Are Common Competitive Business Strategies?

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 20/75 Earlier we made the point that competitive business strategy and hu- man resource strategy must work together to ensure high organiza- tional effectiveness. In this section, we look more closely at competi- tive business strategies, which encompass various types of strategies. For instance, large corporations have strategies that guide their choices concerning the types of businesses they will pursue. Some cor- porations are made up of business units that are very similar; Whirlpool Corporation, for example, focuses only on making and sell- ing appliances. Other corporations are made up of business units that are very different from one another. At General Electric, business units do very different things: some make small appliances, others provide financial services, and still others manufacture plastics. Decisions related to business types make up corporate-level strategy . Corporate-level strategy A competitive strategy that concerns the different businesses and diversity of products and services that an organization produces. Good corporate-level strategy is important, but a different kind of strategy is most critical for day-to-day human resource activities. This other type of strategy is business-level strategy , which concerns how the organization will compete with other companies that provide simi- lar goods and services. A corporation with several different business units needs a business-level strategy for each unit. Because each unit provides a specific type of good or service to meet a particular set of customer needs, strategies for the various units might be similar, or they might be very different. In any case, it is within business units that strategic human resource practices add the most value. Throughout this textbook we therefore focus on business-level com- petitive strategy. Business-level strategy

3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 21/75 A competitive strategy that concerns how an organization, or part of an organization, will compete with other organizations that produce similar goods or services. Organizations can pursue a wide variety of strategies, but two generic business-level strategies capture the main ways business units com- pete: cost leadership and differentiation. Organizations with a cost leadership strategy seek to become low-cost producers of goods and services; their goal is to develop efficient production methods that en- able them to sell at a lower price than competitors. Organizations with a differentiation strategy seek to produce goods and services that are somehow superior to the goods and services provided by competitors; their goal is to create unique value for which customers are willing to pay a higher price. Cost leadership strategy A business-level strategy that seeks to produce goods and ser- vices inexpensively. Differentiation strategy A business-level strategy that seeks to produce goods and ser- vices that are in some manner superior to what is produced by competitors. COST LEADERSHIP STRATEGY An organization chooses the cost leadership strategy when its deci- sions and actions focus on providing value by reducing cost. The goal of a business pursuing cost leadership is to become highly efficient, which will allow the organization to create value by producing goods and services at lower cost. Many organizations using a cost leadership strategy sell at prices lower than their competitors. However, not ev- ery company that sells at low prices is using a cost leadership strategy. Cost is, of course, not the same thing as price. Cost captures the ex- 27

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 22/75 penses associated with creating the product, whereas price is what the organization receives for the product. The difference between cost and price creates profit. The key to the cost leadership strategy is in controlling expenses, not in simply setting low prices. Southwest Airlines provides a good example of a firm with an effec- tive cost leadership strategy. Southwest tries to have the lowest prices, but that is not the real basis of its strategy. Its strategy, rather, is to re- duce the expenses associated with providing air travel. Other airlines often sell tickets at prices similar to Southwest's, but their costs are higher, which results in lower profits. These firms are sometimes forced to match Southwest's ticket prices, even when the matching price is below what it costs them to fly passengers. The practice of set- ting prices below costs is one reason for the high bankruptcy rate in the airline industry. Organizations with a successful cost leadership strategy usually pro- duce basic and standardized products and services and often have a relatively large share of the market. They pay lower prices for raw ma- terials because they buy them in large quantities, and they use tech- nology to develop efficient manufacturing methods. Walmart is an- other organization that has succeeded with a cost leadership strategy. Walmart has extremely efficient operations. It buys in high volume, which enables it to obtain favorable prices from suppliers. It also has a very efficient transportation system, which allows it to move goods at relatively low cost. Overall, this efficiency enables Walmart to sell products at low prices but still earn a profit. A focus on cost reduction cannot come at the expense of producing goods and services with at least acceptable levels of quality and desir- able features. Even if an organization's products are lower-priced than competing products, customers will not purchase them if their quality is unacceptable. Of course, it isn't always easy to tell what customers will consider when making the tradeoff between price and desirable features. For instance, observers long thought that Southwest's policy

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 23/75 of no assigned seats would cause problems, but customers don't seem to care enough about seat choice to pay a higher price. In fact, the CEO once posted a blog about doing away with the open seating policy, but quickly received over 700 email messages that were mostly against such a move. In contrast, even though it costs more, Southwest is up- dating its planes to include Internet connectivity and personal enter- tainment stations. Such updates are needed because competitors be- gan including similar amenities and passengers communicated a de- sire for the benefits, even at a slightly higher cost. The key to success is not necessarily providing all the unique features that other airlines of- fer but rather reducing costs while providing enough of those features to satisfy passengers. One problem with a cost leadership strategy is that usually just one or- ganization can be the lowest-cost provider in any industry, and this is often an organization that has a large share of the market and is de- fending its territory. Therefore, only a relatively small number of business organizations can be successful with a cost leadership strat- egy. Another problem occurs when the market changes in such a way that the goods or services provided are no longer valued. Changes in technology can have this effect. Such changes can result in an organi- zation that is a highly efficient provider of goods or services that no one needs or wants. In the end, the cost leadership strategy can result in long-term success for organizations such as Walmart and Southwest Airlines. But what is it that allows firms such as these to succeed with a cost leadership strategy? Both firms are obsessed with cost reduction. They have cul- tures that create a sense of frugality, discipline, and attention to detail, as well as tight control structures that carefully track cost changes, and they continually focus on learning how to do what they do more efficiently. Much of their cost leadership ability stems from their strategic human resource management practices: Their employees work more efficiently than employees at other organizations. 28 29

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 24/75 DIFFERENTIATION STRATEGY An organization following the differentiation strategy focuses on offer- ing value by providing something better than competitors—something for which customers are willing to pay a higher price. The organiza- tion may differentiate its goods or services in any one of several ways. For example, the product itself may be unique, as when a pharmaceu- tical firm has a drug that no other firm has. A marketing approach is another way of differentiating goods and services. Most advertising is created to generate perceptions that goods or services are somehow different from those offered by competitors. Yet another area for dif- ferentiation is excellent customer service. Customers are often willing to pay more for a product if they know that the organization will help them if a problem arises. The effect of differentiation for fast-food restaurants is described in the accompanying “How Do We Know?” feature. Target is a retail store that employs a business-level strategy of differ- entiation, seeking to set prices close to those of retailers such as Walmart. But the source of competitive advantage is not the cost struc- ture itself. Rather, Target seeks to provide something slightly different from Walmart at a similar but perhaps slightly higher price. Target has store designer brands that are geared toward slightly more up- scale customers. It also focuses on having clean, well-organized stores, as well as enough employees to ensure rapid checkout. In the end, Target tries to beat Walmart not by having lower cost but rather by providing a different value. Target's unique value is attractive to a cer- tain set of customers as long as costs are only slightly higher. This dif- ferentiation strategy works best when economic conditions are gener- ally favorable. For example, early in the recession of 2008, consumers appeared to be less willing to shop at Target instead of Walmart, but relative profits at Target have substantially improved as the economy has recovered. 30

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 25/75 Another example of a firm with a differentiation strategy is BMW, which produces automobiles that are more expensive than those of many of its competitors. Consumers are willing to pay a higher price for a BMW because they perceive it has greater value, particularly in the areas of reliability, comfort, and image. People expect a BMW to be a more enjoyable car to drive than a less-expensive alternative. Whereas few organizations in a given industry can successfully use the cost leadership strategy, a large number of organizations can si- multaneously pursue differentiation strategies. Each simply seeks to differentiate in a unique way. The key is to create value that is per- ceived as high enough to warrant a higher price. Of course, organiza- tions with a differentiation strategy cannot simply ignore cost. Usually, their cost structures—and associated prices—must be close to those of competitors. If costs and prices are too far out of line, the added value of the unique features may not be sufficient to encourage purchases. How Do We Know? W HAT D IFFERENTIATES F AST -F OOD R ESTAURANTS ? Have you ever wondered why some people like to eat at McDonald's, but others prefer Burger King? What sets one fast-food chain apart from another? To find out, Bonnie Knutson asked 200 college students about their perceptions of Arby's, Burger King, KFC, McDonald's, Subway, Taco Bell, and Wendy's. She asked the students to rate these restaurants on features such as atmosphere, menu choices, consis- tency, and price. The study found that students have common beliefs about differences between fast-food restaurants. McDonald's received the highest over- all ratings. Students saw McDonald's as particularly strong in terms of combination meals, kid's meals, consistency, and value. They gave

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 26/75 Taco Bell the highest rating for low-priced food. Subway received the highest rating for good nutrition, and Wendy's for menu variety. The Bottom Line. The results of this study illustrate the concepts of cost leadership and differentiation. Taco Bell is seen as a low-cost provider, which can be an effective strategy as long as the cost structure really allows it to produce and serve food at low cost. Subway has been suc- cessful at differentiating itself based on nutrition, and Wendy's has differentiated based on menu variety. These restaurants also have dif- ferent human resource strategies that help support their competitive strategies. Professor Knutson concludes that fast-food restaurants should place high importance on creating a clear brand image that is consistent with their strategy for competing with other restaurants. Source: Bonnie J. Knutson, “College Students and Fast Food: How Students Perceive Restaurant Brands,” Cornell Hotel and Restaurant Administration Quarterly 41, no. 3 (2000): 68–74. The requirements for succeeding with a differentiation strategy are quite different from those associated with the cost leadership strategy. Organizations using a differentiation strategy must continually strug- gle to show that their products are truly unique, which often requires them to adapt rapidly to changing customer preferences. Differentiators must also be highly innovative, and they must take risks and continually prospect for new ways of doing things. But dif- ferentiation and cost leadership are similar in one respect: Organizations that succeed with differentiation do so because of their human resource practices. Organizations using the differentiation strategy are creative and innovative because they have employees who do things better than the employees of their competitors, which helps them to be perceived as providing something with higher value. COMBINATION STRATEGY An interesting question is whether an organization can simultane- ously pursue both cost leadership and differentiation. Theoretically,

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 27/75 this is difficult. Organizations trying to purse both strategies often end up doing neither very well; they are stuck in the middle with no real competitive advantage. Their desire to add unique features creates a cost structure that does not allow them to produce goods and services at the lowest cost. Yet their focus on cost does not allow them to de- velop features that are truly exceptional. Most organizations must therefore choose one or the other approach and make strategic decisions accordingly. An organization with a pri- mary cost leadership strategy should seek to differentiate only as long as doing so does not harm its ability to be the lowest-cost producer. Similarly, an organization with a primary differentiation strategy should seek to reduce costs wherever possible. But cost reduction only makes sense if it does not destroy the features that make the organization's product unique and valuable. Cases where an organization is successful at simultaneously pursuing cost leadership and differentiation strategies are rare and tend to oc- cur in markets where competition is not strong. If the market does not include a truly low-cost provider, and if most competitors are stuck between cost and differentiation, then an organization may be able to have it both ways for a time. An organization may also pioneer a unique innovation that provides it with a secret or protected way of doing things that is both unique and low in cost. Unfortunately, such scenarios do not typically last very long. CONCEPT CHECK 1. 1. What are the basic characteristics of the cost leadership strategy? 2. 2. What are the main features of the differentiation strategy? 31

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 28/75 LEARNING OBJECTIVE 3 What Are Basic Approaches to Human Resource Strategy? Our discussion of competitive strategy shows that successful organiza- tions create value by doing things for customers that other organiza- tions do not do as well. The continued success of these organizations depends on their possessing capabilities that competitors cannot eas- ily copy. One source of potential capability is physical resources, such as technology and equipment, which are often easy for competitors to duplicate. As we have seen, another source of potential capability— one that is less easy to copy—is human resources. Effective human resource practices create a rare and difficult-to-imitate capability by increasing employee skills, motivation, and opportunity, which in turn translate to positive operational and financial outcomes. Effective human resource management capabilities are particularly difficult to copy because effectiveness comes not from a single practice but from a number of related practices. These practices are developed over extended periods of time. Social relationships that arise from hu- man resource practices are also extremely difficult to copy. Taken to- gether, these factors make human resource capabilities a source of po- tentially sustainable competitive advantage. The same characteristics that make human resource practices difficult to duplicate can sometimes make their results difficult to understand and predict. Nevertheless, research has identified consistent patterns of good human resource management. Researchers have taken two basic approaches in investigating human resource patterns: The universalistic approach seeks to identify a set of human re- source practices that is beneficial for all organizations. The goal of universalistic research is therefore to find the one best way of man- aging human resources. Universalistic approach 32 33 34 35

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 29/75 A human resource perspective that seeks to identify methods of managing people that are effective for all organizations. The contingency approach seeks to match human resource prac- tices with competitive business strategies. In this view, the human resource practices that work best for organizations pursuing a cer- tain competitive strategy will not necessarily work best for organi- zations pursuing a different strategy. Contingency approach A human resource perspective that seeks to align different ways of managing people with different competitive strate- gies for producing goods and services. Research supports both approaches. Fortunately, the two approaches are not contradictory. Whereas some human resource practices are beneficial for all organizations, the benefits of other practices seem to depend on the organization's competitive business strategy. Furthermore, the two approaches have different areas of interest. The universalistic approach tends to focus on broad principles, whereas the contingency approach focuses more on specific practices. The two approaches are thus complementary and often work together to form an overall human resource strategy. THE UNIVERSALISTIC APPROACH The universalistic approach, as we have seen, seeks to identify the best practices for all organizations to follow. One important finding of uni- versalistic research is that human resource practices are most effec- tive when they are bundled together into internally consistent clusters. A single effective human resource practice, such as the use of a good employee-selection test, provides only limited benefits un- less it is combined with other effective practices. For instance, using a computer knowledge test to select employees offers more benefits when such testing is combined with a compensation system that re- wards people who actually use the computer skills to do their jobs. In 36 37 38

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 30/75 a similar way, a training program that encourages innovation is most effective when it is combined with appraisal and compensation sys- tems that measure and reward the behaviors taught during training. Sets of human resource practices that are internally consistent and that reinforce each other are known as human resource bundles . Human resource bundles Groups of human resource practices that work together to cre- ate a consistent work environment. Many practices related to hiring and motivating employees cluster naturally into two bundles. One bundle is based on a control strategy ; the primary focus of human resource practices in this bundle is stan- dardization and efficiency. The second bundle is based on a commit- ment strategy ; the primary focus of practices in this bundle is to em- power workers and build a strong sense of loyalty and commitment . Control strategy A human resource bundle that emphasizes managerial control and tries to streamline production processes. Commitment strategy A human resource bundle that builds strong attachment to the organization and emphasizes worker empowerment. Both the control and commitment strategies have been found in a number of different settings. For example, in the steel production in- dustry, researchers found that the practices of a distinct group of plants represented a commitment strategy. These plants reported widespread use of incentive pay, careful screening of recruits, high teamwork, and extensive sharing of information. Another group of plants used practices representing a control strategy. These practices included close supervision, strict work rules, narrow job responsibili- 39 40

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 31/75 ties, and little formal training. Similar observations were made in a study of automobile assembly plants. One set of plants reported using commitment strategy practices such as extensive recruiting, employee involvement groups, and widespread training. These practices fos- tered a strong sense of cooperation between employees and managers. Other assembly plants reported using control strategy practices such as narrowly defined jobs and close supervision. The control practices created large status differences between employees and managers. Studies comparing the control and commitment strategies almost al- ways conclude that the commitment strategy is better. Organizations with commitment strategies have higher productivity, and they gener- ally produce higher-quality goods and services. The superiority of a commitment strategy is consistent across various types of organiza- tions and industries, but it is particularly strong in manufacturing organizations. Moreover, its benefits have been documented in countries other than the United States, such as New Zealand and South Korea. A strong research conclusion from the universalistic ap- proach is therefore that organizations should adopt a commitment strategy. The commitment strategy is often summarized as a human resource bundle that encourages high involvement. (The major human re- source practices in the commitment strategy bundle are summarized in Table 2.1.) What do these practices have in common? Why are they consistently related to higher productivity and quality? One answer to the question of what the practices have in common is that they communicate a message that management cares about em- ployees. Organizations with managers who value people tend to use good human resource practices to effectively deliver goods and services. These organizations provide employees with opportunities for personal growth. Selective hiring, extensive training, and pay linked to performance provide employees opportunities to excel, which lead to deeper commitment to the organization. The organiza- 41 42 43 44 45 46 47

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 32/75 tional climate conveys a sense of concern for employees, which in- creases job satisfaction and employee commitment. Extensive train- ing also improves employee skills. Employees develop a strong attach- ment to the organization and are less likely to quit. Employees who think that human resource actions simply minimize cost at the ex- pense of employees are less committed and satisfied than employees who see personnel actions as increasing quality and ensuring their well-being. In essence, the commitment strategy bundle of human resources is beneficial because these practices treat employees as a critical resource. Such strong support for the commitment strategy may seem to suggest that all organizations should simply adopt this strategy and the related human resource practices. Unfortunately, it's not quite this simple. The commitment strategy is a broad concept that includes few specific de- tails. The strategy recommends that organizations hire high-quality 48 49 50

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 33/75 employees and give them freedom and responsibility. As explained in the “How Do We Know?” feature, the commitment bundle creates a climate of trust and cooperation, which in turn leads to knowledge ex- change and ultimately increased performance. However, the commit- ment strategy is not clear and consistent about specific ways to do these things. How Do We Know? D O G OOD H UMAN R ESOURCE P RACTICES I MPROVE P ERFORMANCE ? Is it wise for an organization to spend money to find, hire, and train good employees? What are the effects of better hiring, training, and compensation? Are the benefits that these practices bring worth the costs? Christopher Collins and Ken Smith set out to answer these ques- tions by obtaining data from 136 technology firms. They measured high-involvement work practices, which are consistent with the com- mitment strategy. Specific items asked about human resource prac- tices of selection, training, compensation, and performance appraisals. The researchers linked these practices to revenue from new products and sales growth. They also assessed climates for trust and coopera- tion, as well the exchange of knowledge. The study found that organizations using the commitment strategy had increased revenue and growth. The data also provided insight into the process by which human resource practices improve financial returns. Better methods for hiring, training, and paying employees create a climate of trust and cooperation. This good organizational cli- mate leads to more learning and exchange of information among em- ployees. The improved learning and sharing of ideas in turn corre- sponds with increased financial performance. 51

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 34/75 The Bottom Line. Effective human resource practices build a sense of trust and cooperation among workers, which leads them to share in- formation and learn from each other. These positive interactions among employees, which are set in motion by good human resource management, help innovative firms grow and make money. Professors Collins and Smith conclude that leaders of technology firms should carefully choose their human resource practices used to manage knowledge workers. Source: Christopher J. Collins and Ken G. Smith, “Knowledge Exchange and Combination: The Role of Human Resource Practices in the Performance of High-Technology Firms,” Academy of Management Journal 49 (2006): 544–560. THE CONTINGENCY APPROACH The contingency approach to human resource strategy seeks to align people management practices with competitive business strategies. Because this book takes a strategic view of human resource manage- ment, we emphasize the contingency approach. In this section, we look at two key differences in organizations: whether they have a cost leadership or a differentiation strategy and whether they have an in- ternal or an external labor orientation. In the remainder of the chap- ter, we examine how these differences combine to define an organization's human resource strategy. Cost Leadership Versus Differentiation We've already discussed the differences between the competitive busi- ness strategies of cost leadership and differentiation. We've also sug- gested that these two strategies differ in terms of human resource practices. Table 2.2 summarizes important differences in how organi- zations with these strategies approach human resource management. Organizations with a cost leadership strategy focus their efforts on in- creasing efficiency and hire generalists who work in a variety of dif-

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 35/75 ferent positions. They tightly control work processes and carefully define what employees should do. Appropriate behavior is specifically prescribed for employees, and human resource practices focus on minimizing labor costs. A cost leadership strategy with a focus on tightly controlled processes makes sense when the organization knows exactly what it wants peo- ple to do. This situation usually arises when the preferences of con- sumers are well known and seldom change. The result is mass produc- tion of standardized goods or services at the lowest possible cost. As described earlier, Walmart is a good example of a company pursuing this strategy. The company carefully standardizes practices and fo- cuses on reducing deviations within its processes. Employees focus their efforts on shipping and selling goods as efficiently as possible. In contrast, organizations using a differentiation strategy focus their human resource efforts on innovation and quality enhancement. Employees in these organizations are often specialists who perform very specific tasks. Rather than seeking to control processes, these or- ganizations concentrate on outcomes. Workers have more choice about how things should be done, and accordingly, they are held ac- countable for outputs such as quality of the goods and services they produce. A differentiation strategy with a focus on outcomes is particularly ben- eficial when organizations produce customized goods or services. In 52 53 54

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 36/75 these organizations, the best process for completing work is often un- known, and employees are expected to continually look for different ways of doing things. Service organizations such as investment firms and healthcare providers frequently have an outcome focus because their customers have very different needs and expectations. Unique customer expectations require employees to change their actions to best serve each client. For instance, the investment banking firm Morgan Stanley works to build long-term relationships and meet the specific needs of clients, adapting its services for each client. This cus- tomization approach has helped Morgan Stanley obtain important clients such as Google. Internal Versus External Orientation In addition to differing in competitive strategy, organizations differ in the extent to which they develop employees' skills within the organiza- tion. An organization with an internal labor orientation seeks to make its own talent and to keep employees for long periods of time. In contrast, an organization with an external labor orientation seeks to buy talent. These organizations hire people who already have the needed skills and in many cases keep them for only a short period of time. Internal and external orientations have been identified across a number of organizations and industries, including sales, manufac- turing, technology, food, and legal firms. Basic differences between the two orientations are summarized in Table 2.3. Internal labor orientation A human resource perspective that emphasizes hiring workers early in their careers and retaining those workers for long peri- ods of time. External labor orientation 55 56 57 58 59

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 37/75 A human resource perspective that limits attachment to a spe- cific organization and emphasizes hiring workers who already possess the skills they need to complete specific tasks. Organizations with an internal labor orientation generally hire young employees; a primary goal of hiring is to identify people who will have long careers within the organization. Because employee turnover is undesirable, human resource practices focus on developing loyalty and commitment. The idea is to develop a close relationship with em- ployees and to provide them with a sense of stability and security. In exchange, employees agree to sacrifice some of their own personal in- terests. For example, they agree to develop skills that may not be valu- able to other organizations, which decreases their chances of receiv- ing other job offers. An internal orientation has several potential strengths. Organizations are able to predict what skills and capabilities will be available to them in the future, and employees build strong relationships with one another, so coordination and cooperation are high. Organizations with an internal labor orientation also save money because they reduce ex- penses for recruiting, interviewing, and hiring employees. One com- pany that has benefited from emphasizing an internal labor orienta- tion is the British grocery producer Fenmarc, which is profiled in the accompanying “Building Strength Through HR” feature. 60

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 38/75 An internal labor orientation has potential weaknesses as well. Organizations develop long-term commitments that make it difficult for them to adapt. Changes in strategic direction are complicated be- cause workers have been encouraged to develop specific skills neces- sary for carrying out the old strategy. Long-term commitments may also make it difficult for organizations to replace workers whose skills are not up to date. In addition, such organizations tend to develop bu- reaucratic structures that make them inflexible. Organizations with an external labor orientation look very different. These organizations seek out people who have already developed skills, and the primary goal of hiring is to identify people who are able to contribute without additional training. Employee turnover can be desirable in some cases because it provides a way to make sure that the organization is able to continually hire people with the most up-to- date skills. Long-term commitments are avoided. The relationship be- tween the organization and its employees is weak and based on con- tractual agreements. Employees work because they are paid, not nec- essarily because they are loyal. They usually do not develop a strong feeling of attachment to the organization. Building Strength Through HR F ENMARC P RODUCE L TD Fenmarc Produce is a vegetable processor and packer located in the United Kingdom. For a number of years, the company was not consis- tently profitable. A few years ago, the privately held company was purchased by a leadership team that placed special emphasis on link- ing competitive strategy to human resource management. Company leaders, recognizing that vegetables are commodities, decided to focus on making the company a low-cost producer. Fenmarc also sought to become a preferred supplier for the Walmart affiliate Asda, which is a supermarket giant in the United Kingdom. 61

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 39/75 In order to improve its production processes and ensure the delivery of safe produce, Fenmarc implemented a widespread training pro- gram. The program uses case studies, group activities, and coaching to improve the individual skills of employees. Employees who complete the training report more confidence in their abilities. Fenmarc sees each of its over 400 employees as a valuable contributor. An important part of the organizational philosophy is that every indi- vidual has important opinions that should be valued. Six key princi- ples capture this emphasis on people: Say it as it is. Challenge it, improve it, learn from it. Integrity before profit. Make it fun, make it happen. One team, one purpose. Respect for the individual. Treating people well has helped Fenmarc retain its employees and has also improved efficiency. In a two-year period, the company received 2,200 suggestions for continuous improvement, and accidents fell by 20 percent. Investing more in people has paid off by improving com- pany profitability. Source: Information from David Pollitt, “Investment in Training and Development Bears Fruit for Fenmarc,” Human Resource Management

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 40/75 International Digest 15, no. 1 (2007): 27–29; www.fenmarc.com/ A primary strength of the external orientation is flexibility; it allows the organization to respond quickly to changing conditions. Workers trained by universities or other employers can be added quickly in ar- eas that demand new skills. Labor costs are not fixed, and the total number of employees can be increased or decreased. A primary weak- ness of this orientation is lack of consistency. Employees do not really provide a unique competitive advantage. Employees are essentially shared with other organizations, which makes it more difficult to cre- ate a rare resource that cannot be imitated. What is the basis for choosing an internal or an external labor orienta- tion? Several considerations are important: Will the organization continue to need certain skills and inputs over a long period of time? If so, the organization is more likely to find an internal orientation useful. Does the organization produce goods and services that require unique labor inputs? If so, the organization may not be able to buy the labor inputs it needs. Employees must be trained to perform tasks that exist only in that organization, so an internal orientation is more appropriate than an external one. Does the organization know exactly what it needs employees to do? Sometimes an organization is unclear about what it wants from employees in certain areas. Organizational leaders may know that they need to improve a certain area, but they may be unfamiliar with the employee skills needed to carry out the improvement. Of course, an internal labor strategy allows the organization to enter into a longterm agreement that enables a new employee to become a committed member of the team and change the way some work tasks are completed. In contrast, an external labor strategy allows an organization to quickly acquire specialized skills that are taught in other places, such as universities. Organizational leaders know the skills and abilities needed, and they also know that current em- ployees are unable to fill the needs. In many cases it is easier to 62

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 41/75 LEARNING OBJECTIVE 4 hire specialized workers such as computer programmers with the latest skills than it is to train them. CONCEPT CHECK 1. 1. How does the contingency approach to human resource manage- ment differ from the universalistic approach? 2. 2. What human resource practices are associated with cost reduc- tion strategies? differentiation strategies? 3. 3. What are the differences between an internal labor orientation and an external labor orientation? What Are Common Human Resource Strategies? As we have just seen, the contingency approach identifies two strate- gic choices underlying an organization's human resource strategy: whether to focus on cost leadership or differentiation and whether to make or buy talent. We can combine the two choices into a grid de- scribing four different forms of human resource strategy, as shown in Figure 2.3 . Based on the grid, we could call these four HR strategies the internal/cost, external/cost, internal/differentiation, and external/differentiation approaches. For ease of reference in this book, though, we will call the strategies the Loyal Soldier HR strategy, the Bargain Laborer HR strategy, the Committed Expert HR strategy, and the Free Agent HR strategy. A word about these terms is in order before we begin our discussion. The strategies we will discuss reflect common differences related to managing people at work, but even human resource professionals do not have terms that describe these strategic differences clearly. Because the technical terms are somewhat awkward and hard to con- 63

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 42/75 ceptualize, we have developed the descriptive terms just mentioned. We believe these descriptive terms make this textbook more interest- ing and easier to read, but you should be aware that the terms may not be the exact terms you will hear used in other courses or in the business world. So it is important to remember that you may some- times need to explain the meaning of the terms when you talk to oth- ers who have not read this book. However, using the terms Loyal Soldier, Bargain Laborer, Committed Expert, and Free Agent should help you get a clearer picture of what we mean when we describe the four different strategies. INTERNAL/COST HR STRATEGY: THE LOYAL SOLDIER Combining an internal orientation with a cost leadership strategy re- sults in what we will call a Loyal Soldier HR strategy . We chose this label because this strategy emphasizes hiring and retaining loyal em- ployees who do whatever the company asks of them. Organizations with this strategy design work so that employees have broad roles and perform a variety of different tasks. People are recruited and hired be- cause they fit the organization culture and because of their potential to become loyal employees. Efforts are made to satisfy the needs of employees and build a strong bond that reduces the likelihood of em- ployee turnover. Organizations with this human resource strategy hire people early in their careers and provide them with extensive training in a number of different skills. Careers often include a number of very different positions, with promotions often made into positions that are not closely related to previous experiences. Performance appraisals are designed to facilitate cooperation rather than competition. Compensation includes long-term incentives and benefits and is often linked to the overall performance of the organization. Unions, which can help build feelings of unity, are frequently observed in these organizations. Loyal Soldier HR strategy

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 43/75 A human resource strategy that combines emphasis on longterm employees with a focus on reducing costs (an internal/cost approach). United Parcel Service (UPS) is a good example of a company with a Loyal Soldier HR strategy. UPS's competitive strategy is to provide low- cost shipping. UPS has a strong internal promotion policy. A typical employee enters UPS as a part-time worker moving and sorting boxes. As employees work their way through the ranks, they may perform several different jobs, such as driver and facility manager. The com- pany provides training in a number of areas, with an emphasis on teaching the company's philosophy and policies. Teamwork, coopera- tion, and a strong work ethic are encouraged. Long-term incentives are tied specifically to UPS, and over half of the drivers and full-time employees own stock in the company. Extensive benefit packages in- clude excellent medical and dental plans. The company takes an inter- est in employees and offers wellness programs that encourage physi- cal activity. These programs help reduce injuries and absenteeism. The end result is a strong bond between UPS and its employees. Most employees report a great sense of pride in working for UPS. The bot- tom-line result is that even during difficult economic times, UPS has seen profits that are higher than competitors. Figure 2.3 Strategic Framework for Human Resources. 64 65

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 44/75 EXTERNAL/COST HR STRATEGY: THE BARGAIN LABORER Combining an external orientation with a cost leadership strategy re- sults in a Bargain Laborer HR strategy . The emphasis of this strategy is on obtaining employees who do not demand high wages. Organizations with this strategy design work so that managers can tightly control employee efforts. Each employee is given clearly de- fined tasks that can be learned easily. People are recruited and hired to perform simple tasks that do not require clearly developed skills. Little attention is paid to meeting the long-term needs of employees. Organizations with this human resource strategy do not provide ca- reers with clear paths for promotion and advancement. Performance appraisal focuses on day-to-day feedback and rarely incorporates for- mal measures. Training is mostly limited to on-the-job techniques that teach specific methods for completing particular tasks. Compensation is frequently based on hours worked, and benefits and long-term in- centives are minimal. Short-term employment tends to make unions somewhat rare in organizations that pursue cost efficiency through an external labor orientation. Bargain Laborer HR strategy A human resource strategy that combines emphasis on short- term employees with a focus on reducing costs (an external/cost approach). The Bargain Laborer HR strategy is very common for many positions in the hotel industry. For instance, a regional hotel located in Phoenix, Arizona is constantly searching for employees to work in jobs such as housekeeping and food services. Most people who apply for these jobs are hired. Once hired, employees are given minimal on-the-job train- ing that focuses on how to perform specific tasks. They are expected to carefully follow their supervisor's instructions. Pay is based on the number of hours worked. Most employees do not receive benefits. The

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 45/75 hotel's focus is on reducing labor costs, and employees who receive better job offers from other companies frequently leave. INTERNAL/DIFFERENTIATION HR STRATEGY: THE COMMITTED EXPERT Combining an internal orientation with a differentiation strategy re- sults in the Committed Expert HR strategy . The primary objective of this strategy is to hire and retain employees who specialize in per- forming certain tasks. Organizations using this strategy design work so that employees have a great deal of freedom to innovate and im- prove methods of completing tasks. People are recruited and hired be- cause of their potential fit with the organizational culture, as well as their aptitude for becoming experts in particular areas. These organi- zations hire people early in their careers and train them to be experts in specific fields, such as accounting or sales. Performance appraisals are designed to balance cooperation and competition among employ- ees. Careers generally include numerous promotions into similar jobs with increasing responsibility. Employees receive long-term training that helps them develop strong expertise. Compensation is relatively high and usually includes a good benefits package that ties employees to the organization. Committed Expert HR strategy A human resource strategy that combines emphasis on longterm employees with a focus on producing unique goods and services (an internal/ differentiation approach). Merck, the pharmaceutical company, employs a Committed Expert HR strategy, focusing a great deal of attention on developing employees during long careers. When employees enter Merck, they choose a ca- reer in research, sales and marketing, manufacturing and engineer- ing, finance, or information services. They receive extensive training to provide them with the latest information and skills in their chosen

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 46/75 area of expertise. Many Merck employees have a mentor who guides their careers and shares important information about the organiza- tional culture. Compensation includes base pay and bonuses for ex- ceptional performance. Many employees also receive long-term incen- tives, such as stock options. Merck's human resource practices help support a culture that stimulates creativity and innovation. EXTERNAL/DIFFERENTIATION HR STRATEGY: THE FREE AGENT Combining an external orientation with a differentiation strategy forms what we refer to as a Free Agent HR strategy . The main em- phasis associated with this strategy is hiring people who have critical skills but who are not necessarily expected to remain with the organi- zation for a long period of time. Organizations using this strategy de- sign work so that employees have extensive responsibility within spe- cific areas and substantial freedom to decide how to go about their work. Long-term commitments are avoided, and no efforts are made to encourage strong attachments between employees and the organi- zation. People are recruited because they already have the skills and experience they need to perform specific jobs. They are not led to ex- pect long-term careers in the organization. Higher-level positions are frequently given to people from outside the organization. Performance appraisal focuses on outcomes and results. Training is rare. Short-term compensation is usually high, which is necessary if the organization is to obtain people with top skills. Pay is linked specif- ically to individual performance results. Benefits and longterm com- pensation packages, which tie employees to the organization, are avoided. We rarely see unions in these organizations. Free Agent HR strategy A human resource strategy that combines emphasis on short- term employees with a focus on producing unique goods and services (an external/ differentiation approach). 66

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 47/75 LEARNING OBJECTIVE 5 Free Agent HR strategies are quite common for information technol- ogy firms. Information technology changes rapidly, and top skills are often in short supply. Many companies in information technology of- fer relatively high salaries to get skilled people to leave jobs with com- petitors. People with in-demand skills earn high salaries by frequently jumping from one firm to the next. At the extreme, many companies hire technology specialists on short-term contracts. As a result of these practices, people working in the field of information technology are often more loyal to the profession than to a particular company. CONCEPT CHECK 1. 1. What two human resource strategies are associated with the cost leadership strategy? How do these two HR strategies differ? 2. 2. What two human resource strategies are associated with the dif- ferentiation strategy? How do these two HR strategies differ? How Do Human Resource Strategies Align with Competitive Business Strategies? The four strategies just outlined provide a general framework for de- scribing human resource practices. Of course, most organizations don't fit perfectly into one of the four boxes shown in Figure 2.3 . For a majority of organizations, human resource practices fall mostly into one of the categories, with some practices that don't exactly fit. Some organizations have a more equal mix of two different strategies. In general, however, organizations fall on one continuum from internal to external and another continuum from cost leadership to differenti- ation, which means that they fit somewhere within the framework. The four basic categories are therefore useful for illustrating impor- tant issues and discussing differences across organizations. We will ex- 67

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 48/75 amine many specific human resource strategies within the framework of the four strategies in Chapters 4 through 13 . In Chapter 14 , we will return to the question of how well the practices of actual organiza- tions fit into the four basic strategies. Recall that the four basic human resource strategies arise from the contingency approach. The core idea of the contingency perspective is the notion that human resource strategies are most effective when they match competitive business strategies. Accordingly, organizations with a cost leadership competitive strategy are expected to do best when they have either a Bargain Laborer or Loyal Soldier HR strategy. Organizations with a competitive business strategy of differentiation are expected to do best when they have either a Committed Expert or Free Agent HR strategy. How well does research support these expecta- tions? We answer this question next. RESEARCH SUPPORTING THE CONTINGENCY PERSPECTIVE The strategic approach to human resource management is relatively new. Researchers have only been studying the contingency perspec- tive for a few years, which means that there are still a number of things we don't clearly understand. However, preliminary research generally supports the notion that organizations are most successful when they take a strategic approach to managing people. Research re- lated to the contingency perspective provides three specific insights. 1. Many organizations do have human resource strategies that fit their competitive strategies. 2. Organizations are more successful when they broadly adapt their human resource practices to fit their competitive strategies. 3. Organizations with a cost leadership or differentiation strategy do perform better when they have a matching human resource strategy.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 49/75 Let's look more specifically at the research related to each insight. A starting point for contingency research has been simply to deter- mine the percentage of organizations that report matching strategies. For instance, research in steel manufacturing mills examined whether plants pursuing a cost leadership or differentiation strategy had matching human resource strategies. About 90 percent of the plants with a cost leadership strategy had human resource practices consis- tent with the Bargain Laborer or Loyal Soldier HR strategies. About 60 percent of the plants with a competitive business strategy of differenti- ation had practices consistent with the Committed Expert HR strategy. Other studies have found support for the notion that orga- nizations naturally tend to adopt the human resource practices that match their competitive strategies. Other factors, such as organiza- tional structure and values that correspond with strategy, have also been linked to different approaches to human resource management that range from minimizing cost to maximizing employee commitment. The next question is whether organizations with matching strategies really have better performance. Although research related to this question does not always use the four human resource strategies out- lined in Figure 2.3 , the results are mostly supportive. Firms benefit from having human resource practices that support their overall strat- egy. For instance, law firms with a competitive strategy of expanding into new markets, which is consistent with a strategy of differentia- tion, have been shown to perform better when they hire and retain highly skilled lawyers. Call centers with a competitive strategy of customizing responses to customers—also consistent with differentia- tion—perform better when their human resource practices ensure good training and high pay. Compared to hotels where customers' service expectations are not as high, hotels providing higher levels of service benefit more from good hiring, training, and compensation practices. Overall, this line of research confirms that organizations perform better when they use human resource practices that help 68 69 70 71 72 73

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 50/75 them secure and motivate employees who have skills that match their approaches for providing value to customers. The final question is whether organizations with a cost leadership or differentiation strategy perform better when they have matching hu- man resource strategies. Research in this area is generally supportive. For instance, a study of manufacturing firms found that plants with a differentiation strategy have higher performance when their human resource practices include selective staffing, comprehensive technical training, and group incentives to ensure that employees are well paid. These practices fit with the Committed Expert HR strategy. As de- scribed in the “How Do We Know?” feature, banks focusing on differ- entiation similarly benefitted from human resource practices that em- powered employees to deliver high-quality service. As additional evi- dence supporting alignment of strategies and practices, manufactur- ing plants using a cost leadership strategy have been found to have higher performance when their practices focused on ensuring compli- ance with policies and procedures, consistent with the Loyal Soldier HR strategy. In still another study, organizations in both service and manufacturing performed best when they combined a cost leadership competitive strategy with a Loyal Soldier HR strategy rather than a hu- man resource strategy focused on differentiation. Also, organizations following a competitive strategy of differentiation performed best with a Committed Expert HR strategy rather than human resource practices associated with a cost focus. Employees working in firms with matching competitive and human resource strategies were also found to have higher morale. How Do We Know? D O H UMAN R ESOURCE P RACTICES I NFLUENCE C USTOMER S ERVICE ? 74 75 76

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 51/75 Why is the customer service at some banks better than others? Is it by chance, or do successful banks encourage specific actions to ensure that employees meet the needs of customers? Samuel Aryee, Fred Walumbwa, Emmanuel Seidu, and Lilian Otaye sought answers to this question by obtaining data from 37 branches of two different banks lo- cated in Ghana. Branch managers reported on human resource practices associated with enhancing employee skills and knowledge, empowerment, infor- mation sharing, and delivery of high-quality service. Managers also rated the market performance of the bank. Front-line employees com- pleted a similar measure that assessed human resource issues such as training, compensation, job design, and performance appraisal, along with a measure of their personal orientation toward providing supe- rior service. Employees also rated the empowerment climate of the bank, as well as the degree to which they personally felt empowered. More senior customer representatives rated the customer service per- formance of the front-line employees. Results of the study showed that human resource practices designed to facilitate differentiated cus- tomer service helped employees feel that they were empowered to do whatever it took to serve customers. Feelings of empowerment, partic- ularly for individuals predisposed toward helpful customer service be- havior, led to higher ratings of individual performance. Increased in- dividual performance further translated into stronger branch-level market performance. The Bottom Line. Human resource practices that emphasize decentral- ized decision making, service quality–focused feedback, extensive ser- vice training, and performance contingent compensation increase feelings of empowerment. Empowerment results in increased cus- tomer service performance for both individuals and bank branches. The authors concluded that effective human resource practices do in- deed represent an effective method for pursuing a strategy of provid- ing excellent service.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 52/75 Source: Samuel Aryee, Fred O. Walumba, Emmanuel Y.M. Seidu, and Lilian E. Otaye, “Impact of High-Performance Work Systems on Individual- and Branch-Level Performance: Test of a Multilevel Model of Intermediate Linkages,” Journal of Applied Psychology 97 (2012): 287–300. PUTTING IT ALL TOGETHER Although research is still developing, the evidence suggests that orga- nizations do better when their human resource strategies fit their competitive strategies. As we have seen, these results support the con- tingency approach to human resource strategy. At this point, we can also tie in the more general universalistic approach. Recall that this approach suggests that organizations benefit from a commitment strategy. The commitment strategy is similar in many ways to the in- ternal labor orientation of the contingency approach. Thus, we can combine the two approaches and conclude that, although there are important exceptions, many organizations improve their longterm success when they adopt an internal labor orientation. Organizations using an internal orientation develop strong bonds with their employ- ees. People are treated as a valuable resource that helps the organiza- tions meet the needs of customers. Given the choice of an internal orientation, the remaining choice con- cerns whether the organization will use a Loyal Soldier or Committed Expert HR strategy. This choice depends on the competitive business strategy of the organization. Organizations seeking cost reduction ben- efit from the Loyal Soldier HR strategy, whereas those seeking innova- tion and creativity benefit from the Committed Expert strategy. In the chapters that follow, we will explore how specific human resource practices differ depending on which strategy is chosen. We will also explore practices associated with the external orientation strategies. 77

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 53/75 CONCEPT CHECK 1. 1. In what ways does research support the contingency approach to human resource management? 2. 1. How does the commitment strategy fit with the contingency approach? A MANAGER'S PERSPECTIVE REVISITED I N THE M ANAGER'S P ERSPECTIVE THAT OPENED THE CHAPTER , E LIZABETH WAS THINKING ABOUT WAYS TO TIE HUMAN RESOURCE STRATEGY TO COMPETITIVE BUSINESS STRATEGY . S HE FELT THAT HER SMALL CHAIN OF CONVENIENCE STORES COULD BENEFIT FROM A BETTER STRATEGY FOR COMPETING WITH OTHER STORES . S HE ALSO WANTED TO FIND WAYS TO USE HUMAN RESOURCE PRACTICES TO HELP THE STORES ACHIEVE A STRATEGY . E LIZABETH WONDERED WHETHER THE PREVIOUS OWNER'S EMPHASIS ON EMPLOYEE LOYALTY WAS THE BEST APPROACH . F OLLOWING ARE ANSWERS TO THE W HAT D O Y OU T HINK ? QUIZ THAT FOLLOWED THE DESCRIPTION OF E LIZABETH'S CIRCUMSTANCES . W ERE YOU ABLE TO CORRECTLY IDENTIFY THE TRUE STATEMENTS ? C OULD YOU DO BETTER NOW ? 1. Having good employees is more important than having good pro- duction equipment. Good employees are an organizational resource that is rare and difficult to imitate. 2. Much of the workforce lacks needed skills, so high-quality employ- ees are difficult to find and retain. Quality employees repre- sent a critical internal strength for organizations, but surveys sug- gest that companies find it difficult to hire and retain enough employ-

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 54/75 ees who have not only technical skills but also critical thinking and communication skills . 3. The most effective way for an organization to compete with other organizations is to produce similar goods and services at lower prices. Organizations can compete through either cost reduc- tion or differentiation. Because only one firm can be the true lowest cost producer, a majority of successful organizations adopt a differ- entiation strategy . 4. Organizations are most effective when they develop a highly com- mitted workforce. The commitment strategy, which empha- sizes treating employees well and seeking to retain them, has been linked with higher overall productivity for organizations . 5. An organization seeking to produce the highest-quality products should have different human resource practices from an organiza- tion seeking to produce inexpensive products. The contin- gency perspective focuses on aligning human resource practices with competitive strategies . Elizabeth's questions are common to all organizations. Organizational leaders must make decisions about how they will compete with other organizations in their respective industries. The strategy formulation process can help guide their decisions. Focusing on either cost leader- ship or differentiation provides them with a way to emphasize things that customers value. Organizations also benefit from ensuring that human resource practices match competitive strategies. A strategy is a set of coordinated choices and actions. The first step in strategy formulation is gathering information from outside and inside the organization. Information about the organization's external envi-

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 55/75 ronment describes opportunities, which are favorable conditions, and threats, which are unfavorable conditions. Demographic and cultural trends, economic and political conditions, and technological develop- ments represent important threats and opportunities for most organi- zations. Information is also gathered about the organization's internal resources and capabilities. Areas of high capability are labeled strengths, and areas of low capability are labeled weaknesses. A strategic set of human resource practices can represent a valuable and rare strength. Once information has been gathered, the next step is to analyze the in- formation and make decisions. Encouraging a group of decision mak- ers to work together can facilitate this process. Members of the group should meet often and develop their collective intuition. They should also make sure that they explore different points of view and numer- ous alternatives. In addition, they should set flexible timelines that keep them moving forward and making decisions. Minimizing organi- zational politics also facilitates decision making. Business-level strategies determine how an organization will compete with other companies that provide similar goods and services. One common strategy is the cost leadership strategy. Organizations using this strategy strive to produce goods and services at the lowest possi- ble cost. They usually produce basic and standardized products. The key to success for these organizations is having employees who are more efficient than the employees of other organizations. Another common competitive business-level strategy is differentia- tion. Organizations using a differentiation strategy strive to produce goods and services that are somehow better than those produced by competitors. They usually strive to produce unique products and to of-

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 56/75 fer exceptional service. The key to success for these organizations is having employees who do things better than the employees of other organizations. Two basic approaches to human resource strategy are the universalis- tic approach and the contingency approach. The universalistic ap- proach focuses on identifying a set of practices that are beneficial to all organizations. This approach has identified a bundle of practices, labeled the commitment strategy, that appear to be generally benefi- cial. Practices in the commitment bundle communicate the message that management cares about employees. The commitment strategy also helps ensure that employees have the training and freedom to pursue important job tasks. The contingency approach seeks to align human resource practices with competitive business practices. One distinction within this ap- proach is a focus on cost leadership versus a focus on differentiation. Organizations mainly concerned with reducing costs emphasize pro- cesses and general roles. They carefully prescribe appropriate behav- iors for performing work. Organizations that focus on differentiation are more interested in innovation and quality enhancement. They em- phasize career development and having good results. Another distinc- tion of interest in the contingency approach is whether an organiza- tion has an internal or an external labor orientation. Organizations with an internal labor orientation seek long-term relationships with employees, whereas organizations with an external labor orientation seek flexibility and do not make long-term commitments to employees.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 57/75 The dimension of cost versus differentiation can be combined with the dimension of internal versus external labor orientation. The result is four different forms of human resource strategy. Organizations using the Loyal Soldier HR strategy focus on developing long-term relation- ships with employees and encouraging efficiency by having them con- tribute in a number of different roles. Organizations using the Bargain Laborer HR strategy also encourage efficiency but do not develop strong relationships with employees. Organizations using the Committed Expert HR strategy develop long-term relationships with employees and encourage them to become experts in a particular area. Finally, organizations using the Free Agent HR strategy seek em- ployees who make short-term contributions in highly specialized roles. Organizations are likely to have human resource practices that fit with their competitive business strategies. Organizations that effectively re- cruit, select, train, and compensate their employees develop an advan- tage that is hard for other organizations to copy. This advantage is maximized when the organization has a clear competitive strategy and a matching human resource strategy. Organizations whose human resource strategies match their competitive strategies do indeed per- form better. A strategic approach to human resource management sees people as an important resource vital to organizational effective- ness. Research suggests that organizations with a cost leadership com- petitive strategy excel when they follow a Loyal Soldier HR strategy. Similarly, organizations with a differentiation competitive strategy ex- cel when they use a Committed Expert strategy. Bargain Laborer HR strategy 61

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 58/75 Business-level strategy 48 Committed Expert HR strategy 62 Commitment strategy 53 Competitive business strategy 42 Contingency approach 53 Control strategy 53 Corporate-level strategy 48 Cost leadership strategy 48 Differentiation strategy 48 External environment 43 External labor orientation 57 Free Agent HR strategy 62 Human resource bundles 53 Human resource strategy 42 Internal labor orientation 57 Loyal Soldier HR strategy 60 Opportunities 43 Strategy 42 Strengths 44

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 59/75 Threats 43 Universalistic approach 53 Weaknesses 44 1. Why are effective human resource practices often a better competi- tive resource than equipment and buildings? 2. What are some external opportunities and threats that you think organizations will face in the next 10 years? What types of organi- zations will benefit most? 3. Why can groups be more effective than individuals for making decisions? 4. What are the primary differences between a cost leadership and a differentiation strategy? 5. What are the key elements of the commitment strategy from the universalistic approach? Why does this approach generally con- tribute to success for organizations? 6. What human resource practices might be associated with a cost re- duction emphasis? What practices might be associated with a dif- ferentiation emphasis? 7. What are the strengths and weaknesses of internal and external la- bor orientations? 8. Choose a company where you or someone you know works. Which of the four human resource strategies do you think is most com- mon in the company? 9. What are the key elements of the four human resource strategies: Loyal Soldier, Bargain Laborer, Committed Expert, and Free Agent? 10. The chapter text pointed out that a majority of organizations have a human resource strategy that fits their competitive strategy. What should an organization do if the strategies don't match?

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 60/75 Of course, every company wants to attract the best people it can. Equally important at UPS is attracting people who fit the company cul- ture, which encourages high energy, hard work, fairness, inclusive- ness, teamwork, and sharing the wealth. Those who work at UPS are more than employees; they're business partners. Promotions come largely from within the organization. Managers typically will handle assignments in about a half dozen dif- ferent functional areas of the business during their careers. This employer/employee relationship remains relevant in today's economy, because the nature of UPS's business involves an extraordinary degree of teamwork. Every business day, UPS moves 13 million packages around the globe. In effect, UPS is the world's conveyor belt for commerce, one that re- quires 350,000 employees to work in harmony and with precision. Every day, 85,000 drivers take responsibility for roughly 6 percent of the nation's GDP, which is delivered from their package cars. Every day, thousands of decisions must be made by managers in the field to keep the conveyor belt moving smoothly—decisions about lost packages, transportation schedules, preparations for bad weather, and myriad other details. And every day, logistics and financial services people are creatively exploring ways for customers to streamline their supply chains to improve productivity and service. Successfully coaching people is also critical to the company's success. Managers must be empathetic to one of the world's largest and most diverse employee workforces. They must be team builders. That takes experience and training; it's not something that can be gotten from a textbook or learned overnight.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 61/75 How does UPS attract and retain such leaders? The answer lies in con- nection , the way the company connects to the world. This connection begins with the way UPSers connect inside, to each other and, as in any enduring culture, to their roots. QUESTIONS 1. How do practices such as internal promotion and assignment of broad job duties help UPS achieve its competitive business strategy? 2. How do the human resource practices at UPS help build teamwork? 3. Why are training and experience so important at UPS? Source: Lea Soupata, “Managing Culture for Competitive Advantage at United Parcel Service,” Journal of Organizational Excellence 20, no. 3 (2001): 19–26. [Reprinted with permission of John Wiley & Sons, Inc.] Mountain Bank is located in the northwest United States. The bank has four major business lines: retail banking, consumer lending, real es- tate and mortgage banking, and corporate banking. Traditionally, Mountain Bank has had a strong presence in the retail banking line, with only a limited presence in the other lines. However, deregulation in the banking industry has led to mergers and acquisitions for Mountain Bank, as well as for several of its competitors. Retail banking includes traditional banking activities such as provid- ing checking and savings accounts. Mountain Bank currently has about 50 percent of the market for retail accounts in its area. Often, however, these accounts are not very profitable. Consumer lending encompasses a variety of secured and unsecured consumer loans, such as home equity lines of credit, automobile loans, boat loans, and card lines of credit. Mountain Bank currently has about 25 percent of

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 62/75 this market. Real estate and mortgage banking involves obtaining and servicing home mortgage loans, which are seen as a stable form of in- come for most banks. Mountain Bank currently has less than 10 per- cent of this market. Corporate banking provides services to businesses. Corporate clients are provided with a wide variety of basic services, as well as financing for equipment acquisitions and plant expansions. These services are often seen as very profitable. However, Mountain Bank has a very small presence in the corporate market—less than 5 percent of the market, according to current estimates. Mountain Bank has established a strategy of leveraging its strong re- tail banking presence into gains in the real estate and corporate areas. Past experience suggests that one of the best methods for achieving this leverage is cross-selling, which occurs when tellers and customer service representatives convince customers with retail accounts to open corporate accounts or to obtain home mortgages from Mountain Bank. Recent studies have found that bank tellers are critical to the success of Mountain Bank. In fact, one study found that customers' experi- ences with tellers is the single most important driver of customer sat- isfaction. After all, a bank teller is often the only person an individual customer has contact with when visiting a bank branch. Although fewer tellers are needed every year due to technological improve- ments, tellers are still the heart and soul of a bank. A typical branch of Mountain Bank has three to seven tellers, depend- ing on size and location. Floating tellers (part-timers) are also used to increase the staff during lunch hours and pay days. Mountain Bank has traditionally approached the teller position as a low-paying, entry- level position. Tellers are frequently part-time employees. Turnover is quite high, and successful tellers are often transferred to customer ser- vice positions. Job Description

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 63/75 Job: Bank Teller Pay: $14 per hour Receives and pays out money and keeps records of money and nego- tiable instruments involved in financial transactions. Receives checks and cash for deposit, verifies amount, and examines checks for en- dorsements. Cashes checks and pays out money after verification of signatures and customer balances. Enters customers' transactions into a computer to record transactions and issues computer-generated re- ceipts. Places holds on accounts for uncollected funds. Orders daily supply of cash and counts incoming cash. Balances currency, coin, and checks in cash drawer at end of shift, using calculator, and compares totaled amounts with data displayed on computer screen. Explains, promotes, and sells products and services, such as traveler's checks, savings bonds, money orders, and cashier's checks. QUESTIONS 1. What competitive business strategy do you recommend for Mountain Bank? 2. Based on the universalistic approach and commitment strategy, what types of human resource practices do you recommend for Mountain Bank with respect to its tellers? 3. Which of the four human resource strategies do you recommend for Mountain Bank with respect to its tellers? Why?

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 64/75 Explore the websites of several companies. Choose at least two compa- nies from the same industry. See what you can learn about their com- petitive strategies. Visit the part of their website that links to employ- ment opportunities. See if you can find answers to the following questions: 1. Does the website clearly identify either a cost or a differentiation strategy? 2. Does the information on the website fit with your general beliefs about the company? 3. Does the website have a portal for selling goods or services? If so, does it seem to emphasize price or quality features? 4. What has happened to the stock price of the company over the past 10 years? 5. What types of jobs are advertised in the employment section of the website? 6. Does the website emphasize long-term relationships between the organization and employees? Does it emphasize training programs? Based on the information you obtain, do the following: 1. Evaluate how well the websites succeed in communicating information. 2. Determine whether you think each company's competitive strategy and human resource strategy match. 3. Identify any relationships between strategies and stock prices. 4. Compare and contrast the strategies and practices of the companies that are direct competitors.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 65/75 Access the companion website to test your knowledge by completing a Mega Manufacturing interactive role-playing exercise. In this exercise, you meet with senior management at Mega and try to convince other members of the management team that HR needs to have a “seat at the table” and function as a business partner within the company. The CFO, however, expresses the opinion that HR is just a “touchy feely” department that adds no legitimate business value. Your objective is to gain credibility and show that a strategic approach to HR can improve Mega Manufacturing. Based on previous discus- sions, you have learned that Mega believes that its products are better than those of its competitors. You also know that the company prefers to hire experienced people who won't require much training. How will you defend the HR function to the CFO and others in the meeting who may share the same opinion of HR? ENDNOTES 1. Jeffrey Pfeffer, “Competitive Advantage Through People,” California Management Review 34, no. 2 (1992): 9–28; Jon Birger, “The 30 Best Stocks from 1972 to 2002,” Money 31, no. 11 (2002): 88. 2. Birger, “The 30 Best Stocks,” 88. 3. Daniel Fisher, “Is There Such a Thing as Nonstop Growth?” Forbes 170, no. 1 (2002): 82. 4. Wendy Zeller and Michael Arndt, “Holding Steady as Rivals Sputter, Can Southwest Stay on Top?” BusinessWeek , Issue 3818 (February 2003): 66.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 66/75 5. Pfeffer, “Competitive Advantage Through People,” 9–28. 6. Birger, “The 30 Best Stocks,” 88. 7. Sally B. Donnelly, “One Airline's Magic,' Time 160, no. 18 (2002): 45; Melanie Trottman, “Inside Southwest Airlines, Storied Culture Feels Strains,” Wall Street Journal , July 11, 2003, A1. 8. Company website http://www.southwest.com. 9. Justin Martin, “Balancing Elephants,” Fortune Small Business 14, no. 8 (2004): 84–90. 10. Melanie Trottman and Scott McCartney, “Southwest's CEO Abruptly Quits a ‘Draining Job’; Parker's 3-Year Tenure Saw Labor Woes, Sept. 11 Costs; Airline Gives Upbeat Forecast,” Wall Street Journal , A1, July 16, 2004. 11. Melanie Trottman, “Southwest Air Profit Rises 12% As Cost-Cutting Shows Results,” Wall Street Journal , B6, October 15, 2004. 12. Melanie Trottman, “At Southwest, New CEO Sits in a Hot Seat,” Wall Street Journal , B1, July 19, 2004. 13. Sophie Segal, “Third Consecutive Quarterly Loss for Southwest,” Airfinance Journal (April 6, 2009): 45. 14. Paulo Prada, Susan Carey, and Mike Esterl, “Corporate News: Southwest Air Turns in a Profit—UAL is Aided by Fuel Hedging, but

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 67/75 Continental Posts a Loss Amid Lackluster Demand,” Wall Street Journal , B2, July 22, 2009. 15. Paul Seidenman and David J. Spanovich, “Synergies Evolve in Southwest—AirTran Integration,” Aviation Week and Space Technology, September 17, 2012. 16. R. Duane Ireland and Michael A. Hitt, “Achieving and Maintaining Strategic Competitiveness in the 21st Century: The Role of Strategic Leadership,” The Academy of Management Executive 13 (1999): 43–57. 17. Robert B. Duncan, “Characteristics of Organizational Environments and Perceived Environmental Uncertainty,” Administrative Science Quarterly 17 (1972): 313–327. 18. Jane E. Dutton and Susan E. Jackson, “Categorizing Strategic Issues: Links to Organization Action,” Academy of Management Review 12 (1987): 76–91. 19. Donald C. Hambrick and Phyllis A. Mason, “Upper Echelons: The Organization as a Reflection of Its Top Managers,” Academy of Management Review 19 (1984): 193–207. 20. Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson, Strategic Management: Competitiveness, and Globalization 6th ed. (Mason, OH: South-Western, 2005); Michael E. Porter, Competitive Strategy (New York: Free Press, 1985). 21. Min-Huei Chien, “The Study of Human Resource Development and Organizational Change in Taiwan,” Journal of American Academy of Business 11 (2007): 309–314.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 68/75 22. Susan Meisinger, “Shortage of Skilled Workers Threatens Economy,” HR Magazine 49, no. 11 (2004): 12. 23. Anonymous, “International Comparisons of Qualifications,” Labor Market Trends 112 (September 2004): 351. 24. Patrick M. Wright, Gary C. McMahan, and Abigail McWilliams, “Human Resources and Sustained Competitive Advantage: A Resource- Based Perspective,” International Journal of Human Resource Management 5 (1994): 301–326. 25. Kathleen M. Eisenhardt, “ Strategy as Strategic Decision Making,” Sloan Management Review 40 (1999): 65–72. 26. Karen A. Jehn, “A Multimethod Examination of the Benefits and Detriments of Intragroup Conflict,” Administrative Science Quarterly 40: 256–282. 27. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985). 28. Jim Edwards, “Sour Tweets Get Sweet Results,” Brandweek 49, no. 33 (2008): 6. 29. Raymond E. Miles and Charles C. Snow, “Designing Strategic Human Resource Systems,” Organization Dynamic 13, no. 1 (1984): 36– 52. 30. Jonathan Birchall, “Target's Sales Slip Further Behind Walmart,” Financial Times , May 21, 2009, 15; Kerri Shannon, “Target Corp. Has

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 69/75 Dethroned Wal-Mart as Discount King,” Money Morning, August 25, 2011. 31. Porter, Competitive Advantage . 32. Jay Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management , 17 (1991): 99–120. 33. A Kaifeng Jiang, David P. Lepak, Jia Hu, and Judith C. Baer, “How Does Human Resource Management Influence Organizational Outcomes? A Meta-Analytic Investigation of Mediating Mechanisms,” Academy of Management Journal 55 (2012): 1264–1294. 34. Patrick Wright and Gary C. McMahan, “Theoretical Perspectives for Strategic Human Resource Management,” Journal of Management 18 (1992): 295–320. 35. Randall S. Schuler and Susan E. Jackson, “Linking Competitive Strategies with Human Resource Management Practices,” Academy of Management Executive 1 (1987): 207–219. 36. John E. Delery and D. Harold Doty, “Modes of Theorizing in Strategic Human Resource Management: Tests of Universalistic, Contingency, and Configurational Performance Predictions,” Academy of Management Journal 39 (1996): 802–835. 37. Brian Becker and Barry Gerhart, “The Impact of Human Resource Management on Organizational Performance: Progress and Prospects,” Academy of Management Journal 39 (1996): 779–801.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 70/75 38. John Paul MacDuffie, “Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World Auto Industry,” Industrial and Labor Relations Review 48 (1995): 197–221. 39. Richard E. Walton, “From Control to Commitment,” Harvard Business Review 63 (1985): 77–84; John Paul MacDuffie, “Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World Auto Industry,” Industrial and Labor Relations Review 48 (1995): 197–221; Casey Ichinowski, Kathryn Shaw, and Giovanna Prennushi, “The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines,” American Economic Review 87 (1997): 291–313. 40. Jeffrey Pfeffer, Competitive Advantage through People (Boston: Harvard Business School Press, 1994). 41. Ichinowski, Shaw, and Prennushi, “The Effects of Human Resource Management Practices on Productivity.” 42. MacDuffie, “Human Resource Bundles and Manufacturing Performance.” 43. Ichinowski, Shaw, and Prennushi, “The Effects of Human Resource Management Practices on Productivity”; Scott Snell and James W. Dean, Jr., “Integrated Manufacturing and Human Resource Management: A Human Capital Perspective,” Academy of Management Journal 35 (1992): 467–504. 44. John T. Delaney and Mark A. Huselid, “The Impact of Human Resource Management Practices on Perceptions of Organizational Performance,” Academy of Management Journal 39 (1996): 949–969.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 71/75 45. James P. Guthrie, “High-Involvement Work Practices, Turnover, and Productivity: Evidence from New Zealand,” Academy of Management Journal 44 (2001): 180–190; Johngseok Bae and John J. Lawler, “Organizational and HRM Strategies in Korea: Impact on Firm Performance in an Emerging Economy,” Academy of Management Journal 43 (2000): 502–517. 46. Nathan Bennett, David J. Ketchen, Jr., and Elyssa Blanton Schultz, “An Examination of Factors Associated with the Integration of Human Resource Management and Strategic Decision Making,” Human Resource Management 37 (1998): 3–16. 47. Yaping Gond, Kenneth S. Law, Song Chang, and Katherine R. Xin, “Human Resource Management and Firm Performance: The Differential Role of Managerial Affective and Continuance Commitment,” Journal of Applied Psychology 94 (2009): 263–275. 48. Riki Takeuchi, Gilad Chen, and David P. Lepak, “Through the Looking Glass of a Social System: CrossLevel Effects of High- Performance Work Systems on Employee Attitudes,” Personnel Psychology 62 (2009): 1–29. 49. Jeffrey B. Arthur, “Effects of Human Resource Systems on Manufacturing Performance and Turnover,” Academy of Management Journal 3 (1994): 670–687; Guthrie, “High-Involvement Work Practices, Turnover, and Productivity.” 50. Lisa H. Nishii, David P. Lepak, and Benjamin Schneider, “Employee Attributions of the ‘Why’ of HR Practices: Their Effects on Employee Attitudes and Behaviors, and Customer Satisfaction,” Personnel Psychology , 61 (2009): 503–545.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 72/75 51. Becker and Gerhart, “The Impact of Human Resource Management.” 52. Jeffrey A. Sonnenfeld and Maury A. Peiperl, “Staffing Policy as a Strategic Response: A Typology of Career Systems,” Academy of Management Review 13 (1988): 588–600. 53. Peter Bamberger and Ilan Meshoulam, Human Resource Strategy: Formulation, Implementation, and Impact (Thousand Oaks, CA: Sage Publications, 2000). 54. Sonnenfeld and Peiperl, “Staffing Policy as a Strategic Response.” 55. Bamberger and Meshoulam, Human Resource Strategy . 56. Safeev Varki and Shirley Wong, “Consumer Involvement in Relationship Marketing of Services,” Journal of Service Research 6 (2003): 83–91. 57. David Rynecki and Doris Burke, “Morgan Stanley's Man on the Spot,” Fortune , November 15, 2004, 120; Justin Hibbard, “Morgan Stanley: No Stars—and Lots of Top Tech IPOs,” BusinessWeek , Issue 3916 (2005): 56. 58. David P. LePak and Scott A. Snell, “The Human Resource Architecture: Toward a Theory of Human Capital Allocation and Development,” Academy of Management Review 24 (1999): 31–48; Anne S. Tsui, Jone L. Pearce, Lyman W. Porter, and Angela M. Tripoli, “Alternative Approaches to the Employee–Organization Relationship: Does Investment in Employees Pay Off?” Academy of Management Journal 40 (1997): 1089–1121.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 73/75 59. Stanley B. Malos and Michael A. Campion, “Human Resource Strategy and Career Mobility in Professional Service Firms: A Test of an Options-Based Model,” Academy of Management Journal 43 (2000): 749–760; John K. Masters and Grant Miles, “Predicting the Use of External Labor Arrangements: A Test of the Transaction Costs Perspective,” Academy of Management Journal 45 (2002): 431–442; Tsui, Pearce, Porter, and Tripoli, “Alternative Approaches to the Employee– Organization Relationship: Does Investment in Employees Pay Off?” 60. Tsui, Pearce, Porter, and Tripoli, “Alternative Approaches to the Employee–Organization Relationship”; Sonnenfeld and Peiperl, “Staffing Policy as a Strategic Response.” 61. LePak and Snell, “The Human Resource Architecture.” 5 62. Ibid., 31–48; Sonnenfeld and Peiperl, “Staffing Policy as a Strategic Response.” 63. Masters and Miles, “Predicting the Use of External Labor Arrangements.” 64. Sarah Bloom, Employee Wellness Programs, Professional Safety, 53, no. 8 (2008): 41–42. 65. Anonymous, “UPS versus FedEx,” Financieal Times , March 26, 2009, page 14. 66. Company website http://www.merck.com.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 74/75 67. Katherine Spencer Lee, “IT Compensation on the Rise in '05,” Computerworld , January 18, 2005, http://www.computerworld.com/careertopics/careers . 68. Jeffrey B. Arthur, “The Link Between Business Strategy and Industrial Relations Systems in American Steel Mini-mills,” Industrial and Labor Relations Review 45 (1992): 488–506. 69. Johngseok Bae and John J. Lawler, “Organizational and HRM Strategies in Korea: Impact on Firm Performance in an Emerging Economy,” Academy of Management Journal 43 (2000): 502–517; Snell and Dean, “Integrated Manufacturing and Human Resource Management.” 70. Soo Min Toh, Frederick P. Morgeson, and Michael A. Campion, “Human Resource Configurations: Investigating Fit with the Organizational Context,” Journal of Applied Psychology 93 (2008): 864– 882. 71. Michael A. Hitt, Leonard Bierman, Katshuhiko Shimizu, and Rahul Kochhar, “Direct and Moderating Effects of Human Capital on Strategy and Performance in Professional Service Firms: A Resource-Based Perspective,” Academy of Management Journal 44 (2001): 13–28. 72. Rosemary Batt, “Managing Customer Services: Human Resource Practices, Quit Rates, and Sales Growth,” Academy of Management Journal 45 (2002): 586–597. 73. Li-Yun Sun, Samual Aryee, and Kenneth S. Law, “High Performance Human Resource Practices, Citizenship Behavior, and Organizational Performance: A Relational Perspective,” Academy of Management Journal 50 (2007): 558–577.

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3/28/24, 9:41 AM Chapter 2: Making Human Resource Management Strategic | Human Resource Management, 3rd Edition https://learning.oreilly.com/library/view/human-resource-management/9781118582800/13_chapter02.html 75/75 74. Patrick M. Wright, Dennis L. Smart, and Gary C. McMahan, “Matches Between Human Resources and Strategy Among NCAA Basketball Teams,” Academy of Management Journal 38 (1995): 1052– 1074; Mark A. Youndt, Scott A. Snell, James W. Dean, Jr., and David P. LePak, “Human Resource Management, Manufacturing Strategy, and Firm Performance,” Academy of Management Journal 39 (1996): 836– 866. 75. Youndt, Snell, Dean, and LePak, “Human Resource Management, Manufacturing Strategy, and Firm Performance.” 76. Allan Bird and Schon Beechler, “Links Between Business Strategy and Human Resource Management Strategy in U.S.-Based Japanese Subsidiaries: An Empirical Investigation,” Journal of International Business Studies 26 (1995): 23–46. 77. Miles and Snow, “Designing Strategic Human Resource Systems.”

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