Strategic Human Resource Management Chapter 2 Chapter 2 introduces Strategic Human Resource (HR) Management. In today’s competitive market, organizations must engage in strategic planning to survive and prosper. The goal of strategic management in an organization is to deploy and allocate resources in a way that gives it a competitive advantage. Two of the three classes of resources (organizational and human) are directly tied to the HRM function. To be maximally effective, the HRM function must be integrally involved in the company’s strategic management process. This means that HRMs should (1) have input into the strategic plan, both in terms of people-related issues and the ability of the human resource pool to implement particular strategic alternatives; (2) have specific knowledge of the organization’s strategic goals; (3) know what types of employee skills, behaviors, and attitudes are needed to support the strategic plan; and (4) develop programs to ensure that employees have those skills, behaviors, and attitudes. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objectives Describe differences between strategy formulation and strategy implementation. List strategic management process components. Discuss HRM function’s role in strategy formulation. Describe linkages between HRM and strategy formulation. Discuss typologies of strategies and associated HRM practices. Describe HR issues and practices associated with directional strategies. This chapter discusses concepts of business models and strategy, levels of integration between the HRM function and the strategic management process in strategy formulation, common strategic models, various types of employee skills, behaviors, and attitudes, ways HRM practices aid in implementing the strategic plan, and the role of HR in creating competitive advantage. Objectives include: 1. Describe the differences between strategy formulation and strategy implementation. 2. List strategic management process components. 3. Discuss HRM function’s role in strategy formulation. 4. Describe the linkages between HRM and strategy formulation. 5. Discuss typologies of strategies and associated HRM practices. 6. Describe HR issues and practices associated with various directional strategies.

Introduction Goal of strategic management is to deploy and allocate resources in a way that gives an organization competitive advantage. HRM function must be integrally involved in the company’s strategic management process. A business model is how the firm will create value for customers profitably. fixed and variable costs contributing and gross margins The goal of strategic management in an organization is to allocate resources for a competitive advantage. HR managers should have input into the strategic plan, have specific knowledge of the organization’s strategic goals, know what types of employee skills, behaviors, and attitudes are needed to support the strategic plan, and develop programs to ensure that employees have those skills, behaviors, and attitudes. A business model is how the firm will create value for customers profitably. 2-3

Business Model Accounting Concepts Fixed Costs Variable Costs Margins Gross Margin Understanding the concepts of fixed and variable costs and contributing and gross margins is helpful to understand business models. First, fixed costs are generally considered the costs that are incurred regardless of the number of units produced. Second, you have a number of variable costs, which are those costs that vary directly with the units produced. Margins are the difference between what you charge for your product and the variable costs of that product. They are called contribution margins because they are what contributes to your ability to cover your fixed costs. Fourth, the gross margin is the total amount of margin you made and is calculated as the number of units sold times the contribution margin

What is Strategic Management? Strategic human resource management (SHRM) is the pattern of planned HR activities and deployments intended to enable an organization to achieve its goals. Strategic management is a process to address the organization’s competitive challenges by integrating goals, policies and action sequences into a cohesive whole. Strategic Management is a process for analyzing a company's competitive situation, developing the company's strategic goals, and devising a plan of action and allocation of resources that will help a company achieve its goals. Strategy comes from the Greek word strategos, which has its roots in military language. It refers to a general’s grand design behind a war or battle Webster’s New American Dictionary defines strategy as the “skillful employment and coordination of tactics” and as “artful planning and management.” To take a strategic approach to HRM, first understand the role of HRM in the strategic management process. HR managers should be trained to identify the competitive issues the company faces with regard to human resources and think strategically about how to respond. Strategic HRM is the pattern of planned HR deployments and activities intended to enable an organization to achieve its goals. 2-5

2 Phases of Strategic Management Strategy Formulation Implementation Success of the strategic management process depends largely on the extent to which the HRM function is involved Strategic Management has two distinct phases: Strategy Formulation: Strategic planning groups decide on a strategic direction by defining the company’s mission and goals, its external opportunities and threats, and its internal strengths and weaknesses. Strategy Implementation: The organization follows through on the strategy that has been chosen. This includes structuring the organization, allocating resources, ensuring that the firm has skilled employees in place, and developing reward systems that align employee behavior with the strategic goals. This process entails a constant cycling of information and decision making.

Strategic Management Process Model Strategy Formulation Strategy Implementation HR Practices Recruiting Training Performance management Labor relations Employee relations Job analysis Job design Selection Development Pay structure Incentives Benefits External Analysis Opportunities Threats Firm Performance Productivity Quality Profitability Mission Goals Strategic Choice HR Needs Skills Behavior Culture HR Capability Skills, Abilities Knowledge HR Actions Behaviors Results Figure 2.2 presents the Strategic Management Process Model. The success of the strategic management process depends largely on the extent to which the HRM function is involved. The mission, goals and strategic choice, along with an external and internal analysis, encompass the strategy formulation that precedes strategy implementation. HR needs shapes the HR practices based on HR capabilities and actions that ultimately determine the firm’s performance. Internal Analysis Strengths Weaknesses

Strategy - Decisions about Competition With What? How? Where? Figure 2.3 Strategy Decisions About Competition Questions to ask: Where to compete? In what markets (industries, products, etc.) will we compete? How to compete? On what criteria or differentiating characteristics will we compete? Cost? Quality? Reliability? Delivery? With what will we compete? What resources will allow us to beat our competition? How will we acquire, develop, and deploy those resources?

Strategic Planning and HRM Linkages Administrative One-way Two-way Integrative 4 Strategic Planning and HRM Linkages are administrative, one-way, two-way and integrative. Administrative linkage is the lowest level of interaction. HRM function’s attention is focused on day-to-day activities. In one-way, the firm’s strategic business planning function develops the strategic plan then informs the HRM function of the plan. Companies with integrative linkage have their HRM functions built right into the strategy formulation and implementation processes. Two-way linkage allows for consideration of HR issues during the strategy formulation process.

Strategy Formulation External Analysis Opportunities Threats Mission Goals Strategic Choice Internal Analysis Strengths Weaknesses Figure 2.5 illustrates the five major components of the strategic management process relevant to strategy formulation. Next, each component will be defined.

SHRM-Strategy Formulation Mission Goals External Analysis Strategic Choice Figure 2.5: Strategic management process include mission, goals, external and internal analysis and strategic choice. Mission is a statement of the organization’s reason for being; it usually specifies the customers served, the needs satisfied and/or the values received by the customers, and the technology used. Goals are what it hopes to achieve in the medium- to long-term future; they reflect how the mission will be operationalized. External analysis consists of examining the organization’s operating environment to identify the strategic opportunities and threats. Examples of opportunities are customer markets that are not being served, technological advances that can aid the company, and labor pools that have not been tapped. Threats include potential labor shortages, new competitors entering the market, pending legislation that might adversely affect the company, and competitors’ technological innovations. Internal analysis attempts to identify the organization’s strengths and weaknesses. It focuses on the quantity and quality of resources available to the organization—financial, capital, technological, and human resources. Organizations have to accurately assess each resource to decide whether it is a strength or a weakness. Internal Analysis

Table 2. 2 shows SWOT analysis for Google Inc Table 2.2 shows SWOT analysis for Google Inc. External analysis and internal analysis combined constitute what has come to be called SWOT (strengths, weaknesses, opportunities, threats) analysis. Strategic choice is the way the organization will fulfill its mission and achieve its long-term goals. It is of utmost importance that all people-related business issues identified in the HRM function be considered during strategy formulation.

Strategy Implementation Variables Organizational Structure Types of Information Task Design Product Market Strategy Performance Reward Systems Figure 2.6 presents the variables that determine success in strategy implementation: organizational structure, task design, selection, training and development of people and reward systems, and types of information and information systems. Select Train Develop People

HRM’s 3 Implementation Variables: Task People Reward systems As shown in Figure 2.6, HRM has primary responsibility for three implementation variables: task, people, and reward systems. HRM can affect the two remaining variables: structure and information and decision processes.

Strategic Implementation HR Practices Recruiting Training Performance management Labor relations Employee relations Job analysis Job design Selection Development Pay structure Incentives Benefits Firm Performance Productivity Quality Profitability Strategic Choice Human Resource Needs Skills Behavior Culture Human Resource Capability Skills, Abilities Knowledge This figure presents the strategic management process from strategic choice to firm performance, illustrating the relationships among HR needs, practices, capability and actions. Human Resource Actions Behaviors Results -productivity -absenteeism -turnover 2-15

HRM Practices Job Analysis/Design Training/Development Recruitment /Selection Performance Management Recruitment/Selection Training/Development Pay Structure/Incentives/Benefits Labor-Employee Relations HRM function can be thought of as having six menus of HRM practices, from which companies can choose the most appropriate for implementing their strategy. Each of these menus refers to a particular functional area of HRM: job analysis/design, recruitment/selection, training and development, performance management, pay structure, incentives, and benefits, and labor-employee relations. Job analysis - the process of getting detailed information about jobs. Recruitment - the process through which the organization seeks applicants. Job design - making decisions about what tasks should be grouped into a particular job. Selection - identifying the applicants with the appropriate knowledge, skills, and ability. Development - the acquisition of knowledge, skills, and behavior that improve employees' ability to meet the challenges of future jobs. Performance management is the means through which managers ensure that employees’ activities and outputs are congruent with the organization’s goals. Pay structure, incentives, and benefits. Labor and employee relations.

Porter’s Strategies Cost Differentiation According to Michael Porter, competitive advantage stems from a company’s being able to create value in its production process. Value can be created in one of two ways, either reducing costs or differentiating product or service in such a way that it allows the company to charge a premium price relative to its competitors.

5 Categories of Directional Strategies Concentration 5 Categories of Directional Strategies Internal Growth External Growth Downsizings 5 Categories of Directional Strategies: Companies have used five possible categories of directional strategies to meet objectives: external growth, concentration, internal growth, mergers and acquisitions, and downsizing. Concentration Strategy- A strategy focusing on increasing market share, reducing costs, or creating and maintaining a market niche for products and services. Internal Growth Strategy A focus on new market and product development, innovation, and joint ventures. External Growth Strategy- An emphasis on acquiring vendors and suppliers or buying businesses that allow a company to expand into new markets. Downsizings is the planned elimination of large numbers of personnel, designed to enhance organizational effectiveness. Mergers and acquisitions. HR needs to be involved in mergers and acquisitions. Role Behaviors are the behaviors required of an individual in his or her role as a job holder. Different role behaviors are required for different strategies. Mergers & Acquisitions

HR’s Role - Strategic Competitive Advantage Emergent Strategies Enhancing Competitiveness Strategic Competitive Advantage = HR can can provide a strategic competitive advantage in two additional ways: through emergent strategies and through enhancing competitiveness. Emergent strategies consist of the strategies that evolve from the grassroots of the organization and can be thought of as what organizations actually do, as opposed to what they intend to do. Enhancing competitiveness is achieved in a variety of ways such as adapting to a changing and learning environment, developing a human capital pool, assimilating information, making decisions, and flexibly restructuring to compete.

Summary HR are most important asset and single largest most controllable cost within the business model. HR professionals must develop business, professional-technical, change management and integration competencies. HRM has a profound impact on the strategic plan implementation by developing and aligning HRM practices that ensure the company has motivated employees with necessary skills. Human resources are the most important asset and the single largest most controllable cost within business model. HR professionals must develop business, professional-technical, change management and integration competencies. HRM has a profound impact on the strategic plan implementation by developing and aligning HRM practices that ensure the company has motivated employees with necessary skills. 2-20