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PART   1
Strategic Management and HRM
It has been said that the most important assets of any business walk out the door at the
end of each day. Indeed, people and the management of people are increasingly seen as key
elements of competitive advantage .

Spurred on by increasing competition, fast paced technological change, globalization and other factors, businesses are seeking to understand how one of the last truly competitive resources, their human resources, can be managed for competitive advantage.
This idea that the human resources of a firm can play a strategic role in the success of
an organization has led to the formation of a field of research often referred to as

strategic human resource management (SHRM).

This relatively young field represents an intersection of the strategic management and human resource management (HRM) .
defined strategic human resource
management as “the pattern of planned human resource deployments and activities intended to
enable the firm to achieve its goals” .
discuss this intersection between Strategic
Management and HRM, what we know, and future directions for SHRM research. We will begin
by briefly discussing the concept of strategy and the popularization of the resource-based view
(RBV) of the firm. Next we will address its role in creating the link between HRM and Strategic
Management including key questions that the RBV has raised in relation to SHRM. We will then
examine the current state of affairs in SHRM; the progress made, and key questions and
concerns occupying the attention of SHRM researchers.
.
Strategy And The Resource-Based View Of The Firm

The field of strategy focuses on how firms can position themselves to compete, and its
popularity began increasing exponentially in the mid 1980s with two books.

First, Peters &Strategic Management and HRM CAHRS WP06-04
Waterman’s (1982) In Search of Excellence provided a practitioner-oriented analysis of
excellent companies and the common threads that united them. However, Porter’s (1980)
Competitive Strategy presented a more academically based analysis of strategy, but in a way
that practitioners/executives quickly gravitated toward. This Industrial/Organization Economicsbased
analysis primarily focused on industry characteristics, in particular the five forces of
barriers to entry, power of buyers, power of suppliers, substitutes, and competitive rivalry as the
determinants of industry profitability. While this analysis did propose four generic strategies
(cost, differentiation, focus, and ‘stuck in the middle’), the bulk of the analysis focused on
external factors that determined company profitability. This framework seemed to dominate
strategic management thinking of the early 1980s.

However, with the advent of the resource-based view of the firm , strategic management research moved to a more internal focus. Rather than
simply developing competitive strategies to address the environment, the resource-based view
suggested that firms should look inward to their resources, both physical and intellectual, for
sources of competitive advantage. Though others had addressed the concept of the RBV
previously, Barney (1991) specifically explicated how firm resources contribute to the sustained
competitive advantage of the firm. He suggested that resources that are valuable, rare,
inimitable and non-substitutable will lead to competitive advantage.
Value in this context is defined as resources either exploiting opportunities or
neutralizing threats to the organization and rarity is defined as being a resource that is not
currently available to a large number of the organization’s current or future competitors . Inimitability refers to the fact it is difficult for other firms to copy or otherwise reproduce
the resources for their own use. Finally, non-substitutability means that other resources cannot
be used by competitors in order to replicate the benefit (Barney 1991). When all four of these
conditions are met, it is said that the firm or organization possess resources which can
potentially lead to a sustained competitive advantage over time.

The resource-based view has become almost the assumed paradigm within strategic
management research (Barney and Wright, 2001). It has been the basic theoretical foundation
from which much of the current strategic management research regarding knowledge-based
views of the firm (Grant, 1996), human capital (Hitt et al., 2001), and dynamic capabilities
(Teece, Pisano, & Schuen, 1997) are derived. In fact, Priem and Butler (2001) mapped RBV
studies against eighteen strategy research topics, demonstrating the breadth of its diffusion
within the strategic management domain. More importantly from the standpoint of this chapter,
the resource-based view has become the guiding paradigm on which virtually all strategic HRM
research is based (Wright, Dunford, & Snell, 2001).
In spite of the wide acceptance of the RBV, it is not without criticism. Priem and Butler,
(2001a, b) have leveled the most cogent critique to date suggesting that the RBV does not truly
constitute a theory. Their argument focuses primarily on two basic issues. First, they suggest
that the RBV is basically tautological in its definition of key constructs. They note that Barney’s
statement that “if a firm’s valuable resources are absolutely unique among a set of competing
and potentially competing firms, those resources will generate at least a competitive advantage
(Barney, 2001: 102)” essentially requires definitional dependence. In other words, without
definitional dependence (i.e. “valuable resources”) the diametrical statement – that unique firms
possess competitive advantages – does not logically follow.
Their second major criticism of the RBV as a “theory” focuses on the inability to test it
(Priem & Butler, 2001b). They note the necessity condition of “falsifiability” for a theory. In other
words, in order for a set of stated relationships to constitute a theory, the relationships must be
able to be measured and tested in a way that allows for the theory to be found to be false. This
relates directly to the tautology criticism, but brings the debate into the empirical realm.
In spite of these criticisms, even the critics agree that the impact of the RBV on strategic
management research has been significant and that the effort to focus on the internal aspects of
the organization in explaining competitive advantage has been a useful one .

While the debate might continue as to the theoretical implications of the RBV for
strategic management research, it is clear that it has made a significant contribution to Strategic
Management and, more specifically, SHRM research (Wright, Dunford & Snell, 2001).
A Brief History Of Strategic HRM
Wright and McMahan’s (1992) definition of strategic human resource management
illustrates that the major focus of the field should be on aligning HR with firm strategies. Jim
Walker’s (1980) classic book, Human Resource Planning, was one of the first to directly suggest
considering a firm’s business strategy when developing a human resource plan.

These attempts tended to take an existing strategy
typology (e.g. Miles and Snow’s (1978) prospectors, analyzers and defenders) and delineate the
kinds of HRM practices that should be associated with each strategy. These attempts to tie
HRM to strategy have been referred to as “vertical alignment” (Wright & McMahan, 1992).
Beer, Spector, Lawrence, Mills and Walton (1984) introduced an alternative to the
individual HR sub-function framework for HR strategy. They argued that viewing HRM as
separate HR sub-functions was a product of the historical development of HRM and current
views of HR departments. They proposed a more generalist approach to viewing HRM with the
focus on the entire HR system rather than single HR practices. This led to a focus on how the
different HR sub-functions could be aligned and work together to accomplish the goals of HRM
and a more macro view of HRM as whole rather than individual functions. This alignment of HR
functions with each other is often referred to as “horizontal alignment”

The combination of both vertical and horizontal alignment was a significant step in
explaining how HRM could contribute to the accomplishment of strategic goals. However, given
the external focus of the strategic management literature at that time, HR was seen to play only
a secondary role in the accomplishment of strategy with an emphasis on the role that HRM
played in strategy implementation, but not strategy formulation.

“strategic human resource management models emphasize implementation
over strategy formulation. Human resources are considered means, not part of generating or
selecting strategic objectives. Rarely are human resources seen as a strategic capacity from
which competitive choices should be derived” . A shift in strategic management
thinking would be required to change that perception and open the door for further development
of the SHRM literature.
The diffusion of the resource-based view into the Strategic HRM literature spurred this
paradigmatic shift in the view of the link between strategy and HRM. Because the resourcebased
view proposes that firm competitive advantage comes from the internal resources that it
possesses , the RBV provided a legitimate foundation upon
which HRM researchers could argue that people and the human resources of a firm could in fact
contribute to firm-level performance and influence strategy formulation.
This resulted in a number of efforts to conceptually or theoretically tie strategic HRM to
the resource-based view. For instance, Wright, McMahan, and McWilliams (1994) suggested
that while HR practices might be easily imitated, the human capital pool of an organization might
constitute a source of sustainable competitive advantage. Lado and Wilson (1994) argued that
HR practices combined into an overall HR system can be valuable, unique, and difficult to
imitate, thus constituting a resource meeting the conditions necessary for sustained competitive
advantage. Boxall (1996, 1998) proposed a distinction between human resource advantage
(advantage stemming from a superior human capital pool) and organizational process
advantage (advantage stemming from superior processes for managing human capital).
The resource-based view also provided the theoretical rationale for empirical studies of
how HR practices might impact firm success. One of the early empirical studies of this
relationship was carried out by Arthur (1994). Using a sample of steel mini-mills, he found that a
specific set of HR practices was significantly related to firm performance in the form of lower
scrap rates and lower turnover. Huselid (1995), in his landmark study, demonstrated that the
use of a set of 13 HRM practices representing a ‘high-performance work system’ was
significantly and positively related to lower turnover, and higher profits, sales, and market value
for the firms studied. In a similar study, MacDuffie (1995), using data from automobile
manufacturing plants, demonstrated that different bundles of HR practices led to higher
performance, furthering the argument that the integrated HR system, rather than individual HR
practices, leads to higher performance. Delery and Doty (1996) similarly demonstrated the
impact of HR practices on firm performance among a sample of banks.
In sum, the RBV, with its focus on the internal resources possessed by a firm, has given
the field a theoretical understanding of why human resources systems might lead to sustainable
competitive advantage and provided the spark to generate empirical research in this vein
Key Questions Raised By The Application Of RBV To SHRM
In spite of the significant amount of research demonstrating a link between HRM
practices and firm performance, there are several key questions regarding the RBV and its
implications for SHRM research that remain unanswered. First, there is some question as to
whether current research on HRM and performance is truly testing the RBV. Second, there is
still a general lack of understanding around the concept of fit, and its role in the link between
strategy and HRM. Third, there are still unanswered questions regarding HRM and whether or
not HRM defined as systems of HR practices truly constitutes a resource under the conditions
outlined by Barney (1991) and, specifically, whether those resources are truly sustainable over
time. Finally, there are several measurement and methodological issues that, while not within
the direct scope of this chapter, are worth mentioning as they are pertinent to our discussion of
this intersection between Strategic Management and HRM research.

Testing of the RBV within SHRM
While the SHRM research just discussed has used the RBV as a basis for the assertion
that HRM contributes to performance, it has not actually tested the theory that was presented in
Barney’s (1991) article (Wright, Dunford & Snell, 2001). Most of this research has taken a
similar view on how HR practices can lead to firm performance. The model generally argues
that HRM in the form of HR practices directly impacts the employees either by increasing
human capital or motivation or both. This in turn will have an impact on operational outcomes
such as quality, customer service, turnover or other operational level outcomes. These
operational outcomes will in turn impact firm-level outcomes such as financial performance in
the form of revenues, profits or other firm-level measures of performance (Dyer, 1984).
In a similar vein, Wright Dunford and Snell, (2001) point out that there are three
important components of HRM that constitute a resource for the firm that are influenced by the
HR practices or HR system. First, there is the human capital pool comprised of the stock of
employee knowledge, skills, motivation and behaviors. HR practices can help build the
knowledge and skill base as well as elicit relevant behavior.
Second, there is the flow of human capital through the firm. This reflects the movement
of people (with their individual knowledge, skills and abilities) as well as knowledge itself. HR
practices can certainly influence the movement of people. However, more importantly, the types
of reward systems, culture, and other aspects of HRM influence the extent to which employees
are willing to create, share, and apply knowledge internally.

Third, the dynamic processes through which organizations change and/or renew
themselves constitute the third area illustrating the link between HRM and the resource-based
view of the firm. HR practices are the primary levers through which the firm can change the pool
of human capital as well as attempt to change the employee behaviors that lead to
organizational success.
There appears to be a general consensus among SHRM researchers around the
general model of the HR to performance relationship and the role of HR practices, the human
capital pool, and employee motivation and behaviors as discussed by Dyer (1984) and others.
The implications of this for RBV and SHRM research is that while separate components of the
full HRM to performance model have been tested such as HR practices (Huselid, 1995;
McDuffie, 1995) and human capital (Richard, 2001; Wright, McMahan & Smart, 1995), a full test
of the causal model through which HRM impacts performance has not (Wright, Gardner,
Moynihan, & Allen, 2005; Wright, Dunford & Snell, 2001; Boxall, 1998). Current research has
established an empirical relationship between HR practices and firm performance, but more
remains to be done. By testing the full model, including the additional components of the
human capital pool and employee relationships and behaviors, a more complete test of the
underlying assumptions of the RBV could be established, thus adding credibility to the
theoretical model of the relationship between HRM and performance.

Fit and the Resource-based View of the Firm

In the Priem and Butler (2001) critique of the RBV, one of the points brought up as a
theoretical weakness of the RBV is lack of definition around the boundaries or contexts in which
it will hold. They point out that “relative to other strategy theories … little effort to establish the
appropriate contexts for the RBV has been apparent” (2001 p. 32). The notion of context has
been an important issue in the study of SHRM (Delery & Doty, 1996, Boxall & Purcell, 2000).
Most often referred to as contingencies (or the idea of fit), contextual arguments center on the
idea that the role that HRM plays in firm performance is contingent on some other variable.

We break our discussion of fit into the role of human capital and HR practices.
Human Capital and Fit. The most often cited perspective for explaining contingency
relationships in SHRM is the behavioral perspective (Jackson, Schuler & Rivero, 1989) which
posits that different firm strategies (other contingencies could be inserted as well) require
different kinds of behaviors from employees. Consequently, the success of these strategies is
dependent at least in part on the ability of the firm to elicit these behaviors from its employees
(Cappelli & Singh, 1992; Wright & Snell, 1998).
Going back to the distinction between human capital skills and employee behavior,
Wright and Snell (1999) noted that skills and abilities tend to be necessary, but not sufficient
conditions for employee behavior. Consequently, any fit to firm strategy must first consider the
kinds of employee behavior (e.g., experimentation and discovery) required to successfully
execute the strategy (e.g., focused on offering innovative products), and the kinds of skills
necessary to exhibit those behaviors (e.g., scientific knowledge). Obviously, the workforce at
Nordstrom’s (an upscale retailer) is quite different from the workforce at Wal-Mart (a discount
retailer). Thus, the resource-based application to SHRM requires focusing on a fit between the
skills and behaviors of employees that are best suited to the firm’s strategy (Wright et al. 1995).
While this idea of fit focuses on across-firm variance in the workforce, Lepak and Snell
(1999) developed a framework that simultaneously addresses variation across firms and
variations in HR systems within firms . Their model of ‘humanresource architecture’ posits that the skills of individuals or jobs within a firm can be placed
along two dimensions: value (to the firm’s strategy) and uniqueness. Their framework
demonstrates how different jobs within firms may need to be managed differently, but it also
helps to explain differences across firms. For instance, within Wal-Mart, those in charge of
logistics have extremely valuable and unique skills, much more so than the average sales
associate. On the other hand, at Nordstrom’s, because customer service is important, sales
associate skills are more critical to the strategy than those of the logistics employees.

HR Practices and Fit. The theoretical assumption that the skills and behaviors of
employees must fit the strategic needs of the firm in order for the workforce to be a source of
competitive advantage leads to the exploration of how HR practices might also need to achieve
some form of fit. With regard to vertical fit, as noted previously, business strategies require
different skills and behaviors from employees. Because HR practices are generally the levers
through which the firm manages these different skills and behaviors, one would expect to see
different practices associated with different strategies. For instance, one would expect that firms
focused on low cost might not pay the same level of wages and benefits as firms focused on
innovation or customer service.
Horizontal fit refers to a fit between HR practices to ensure that the individual HR
practices are set up in such a way that they support each other (Boxall & Purcell, 2003; Baird &
Meshoulam, 1988, Delery, 1998). An example of this would be a selection process that focuses
on finding team players and a compensation system that focuses on team-based rewards.
Theoretically, the rationale for horizontal fit suggests that (a) complementary bundles of HR
practices can be redundantly reinforcing the development of certain skills and behaviors
resulting in a higher likelihood that they will occur and (b) conflicting practices can send mixed
signals to employees regarding necessary skills and behaviors that reduce the probability that
they will be exhibited (Becker & Huselid, 1998). There appears to be some agreement in the
literature that both types of fit are necessary for optimal impact of HRM on performance (Baird &
Meshoulam, 1988; Delery, 1998; Delery & Doty, 1996; Boxall & Purcell, 2003), but not
necessarily empirical support for these types of fit

Potential Pitfalls of Fit. The idea of fit, whether it be vertical or horizontal, raises two
important questions for SHRM researchers. The first question focuses on empirical support for


the idea of fit. Second, even if fit has positive consequences in the short term, does fitting HRM
practices with strategy or other contingent variables universally lead to positive results? That is,
are there negative implications of fit?
As previously discussed, numerous researchers have argued for fitting HRM to
contingent variables. However, the efficacy of fit has not received much empirical support
(Paauwe, 2004; Wright & Sherman, 1999). Huselid’s (1995) landmark study sought to test the fit
hypothesis using a variety of conceptualizations of fit, yet found little support. Similarly, Delery
and Doty (1996) only found limited support across a number of fit tests. The lack of empirical
support may largely be due to focusing only on a fit between generic HRM practices and
strategy, rather than the outcomes, or products (Wright, 1998) of the HRM practices (skills,
behaviors, etc.). Thus, it seems that it may be too early to draw any definite conclusions about
the validity of the fit hypothesis.
However, while fit between HRM practices and various contingency variables might
enhance the ability of HRM to contribute to firm performance, there is also the possibility that a
tight fit between HRM and strategy may inhibit the ability of the firm to remain flexible enough to
adapt to changing circumstances. Firms are increasingly required to adapt to environments that
are constantly changing, both within and outside the firm. A tight fit may appear to be desirable
but during times of transition and/or change a lack of fit might make adaptation and change
more efficient (Lengnick-Hall, Lengnick-Hall, 1988). Wright and Snell (1998) developed a
framework in which HRM contributes to fit and flexibility simultaneously without conflict between
the two, but this framework has yet to be tested and the question remains as to when and where
fit might be more or less appropriate.
The second question raised by contextual issues surrounding SHRM and the idea of fit
is related to the efficacy of fit. Regardless of whether or not fit can have a positive effect on
organizational outcomes, there is still some question as to whether or not true fit with key
contingencies is feasible. Large organizations operate in complex environments, often across
multiple products, industries and geographies. This complexity leads to questions regarding the
ability of the firm to fit HRM practices to all of these diverse and complex circumstances (Boxall
& Purcell, 2003).
In addition, Boxall and Purcell, (2003) argue that there are competing ideals within a
business that require trade-offs in fit. They describe fit as “a process that involves some tension
among competing objectives in management and inevitably implies tensions among competing
interests” (2003, p. 188). A simple example of these tensions can be seen in attempting to fit a
strategy of commitment to employees with a hostile or extremely competitive operating
environment. A firm with a strategic commitment to the well-being of employees operating in an
economic downturn or time of increased competition may be forced to make choices between
commitment to employees and a need for restructuring, layoffs or other non-friendly actions
toward employees in order to stay solvent. In these situations, compromises will have to be
made on either the fit with the strategy or the fit with the environment or both, raising the
question again as to whether or not a true fit with contingencies is feasible.
These questions regarding the ability to achieve fit and the desirability of achieving fit do
not diminish the importance of understanding contextual issues in SHRM research.
Understanding the contextual issues surrounding HRM and its impact on performance remains
critical. In spite of the interest in the role of contextual issues and fit in SHRM, findings in
support of contingency relationships have been mixed (Wright & Sherman, 1999). Much of this
criticism could be due to ineffective methods used in the measurement of HRM or the
contingency and performance variables studied or that the correct contingencies have not yet
been studied (Becker & Gerhart, 1996, Rogers & Wright, 1998; Wright & Sherman, 1999). In
addition, Boxall and Purcell (2000) have argued that more complex and comprehensive models
of contingency relationships are needed in order to understand the impact of context on the
HRM to performance relationship. Regardless of the reasoning, it is clear that the impact of
context on this important relationship is not yet completely understood and more research is
needed to understand the role of context, as well as questions surrounding models of fit in
SHRM research.

HRM Practices and Sustainable Competitive Advantage
Another issue that has been raised by the RBV and its application to SHRM research is the
sustainability of HRM as a competitive advantage. Whether one focuses on bundles of HR
practices as an HR system, the human capital pool or employee relationships and behaviors,
there remains the question as to whether HRM as a resource meets the inimitability and nonsubstitutability
conditions that are required in the RBV for sustained competitive advantage (Barney, 1991).
According to Barney (1991), there are three general reasons why firm resources would
be difficult to imitate: the resources are created and formed under unique historical conditions,
the resources are causally ambiguous, or the resources are socially complex.
Labeled as path dependency by Becker and Gerhart (1996), the unique historical
conditions under which HRM is formed in individual firms may make its understanding and
replication extremely difficult, if not impossible. HR systems are developed over time and the
complex history involved in their development makes them difficult to replicate. The
development and implementation of a single HR practice such as a variable pay system takes
place over time including time to solicit management input and buy-in, work out discrepancies,
and align the practice with current strategies as well as firm culture and needs. The end result
is a practice that reflects the philosophies and culture of the firm and its management, created
to solve the specific needs of the company. Compound that single HR practice with a whole
system of practices each with its own history and evolution specific to a particular firm, its
philosophies and current situation and you have an HR system that cannot be bought or easily
replicated without a significant investment both of time and financial resources.
Causal ambiguity implies that the exact manner in which human resource management
contributes to the competitive advantage of the firm is either unknown or sufficiently ambiguous
so as to be difficult or impossible to imitate. According to Becker and Gerhart (1996), the ability
to replicate a successful HR system would require an understanding of how all of the elements
of this complex system interact and in turn impact the performance of an organization. Given
the previous discussion of the basic HRM to performance model and the manner in which it is
expected that HRM contributes to firm performance, it is difficult to imagine how the intricate
interplay among various HR practices, human capital and employee behaviors, employee
outcomes, operational outcomes and firm-level outcomes could be understood by a competitor
in a meaningful way.
Finally, Barney (1991) points out that competitors will find it difficult to replicate a
competitive advantage based on complex social phenomena. Given the nature of HRM and its
direct relation to employees, almost every aspect of the HR system, the human capital and
especially the employee behavior and relationships has a social component. The way in which
HR practices are communicated and implemented among different departments and parts of the
organization is influenced by the various social relationships involved; top management to
general managers, general managers to department heads or managers and those managers to
employees as well as interactions between departments and employees. The complexity of the
social relationships in the case of HRM makes it difficult for competitors to imitate it.
Finally, for a resource to constitute a source of sustainable competitive advantage it
must be non-substitutable. This implies that competitors should not be able to use a different
set of resources in order to achieve similar results (Barney, 1991). This concept has not yet
been tested, but could provide for interesting research in the area of contextual factors and
SHRM.
If, in fact, it is found that a particular set of HR practices is positively related to
performance in a given context, then, a follow-on question to that which would get at the
substitutability question might be whether or not there is another set of HR practices for which
the results are similar. This could lead to discussions about strategic configurations of HR
practices rather than universal high-performance work systems that have dominated past
research (Delery & Doty, 1996). Regardless of whether there is one or many ways to achieve
similar results in different contextual situations, the testing of these possibilities would lead to an
increased understanding of the relationship between the RBV and SHRM research and the
sustainability of HRM as a strategic resource.

Measurement and Methodological Issues
In addition to key questions surrounding the RBV and SHRM research, there are also
capital (Hitt et al. 2001), social capital (Inkpen & Tsang, 2005; McFadyen, Ann, & Albert, 2004),
capabilities (Dutta, Narasimhan, & Rajiv, 2005), and dynamic capabilities (Teece, Pisano, &
Schuen, 1997), as critical resources that lead to organizational success. While HRM practices
strongly influence these resources, the SHRM literature seems almost devoid of empirical
attention to them. Only recently have researchers began to explore these issues (Kinnie, Swart,
& Purcell, 2005; Thompson & Heron, 2005). Additional research in these areas would provide
tremendous synergy between HRM and strategy.
In addition, alternative theories such as ‘learning organizations’ (Fiol & Lyles, 1985;
Fisher & White, 2000), real options theory (McGrath, 1997; Trigeorgis, 1996) and institutional
theory (Meyer & Rowan, 1977) can be combined with SHRM research to enhance our
understanding of the strategic nature of HRM. For instance, Bhattacharya and Wright (2005)
showed how real options theory can be applied to understanding flexibility in SHRM. In addition,
Paauwe and Boselie (Chapter 9) provide a detailed analysis of how institutional theory can
better inform SHRM research. The use of these in addressing questions in SHRM research will
several measurement and methodological issues which have hindered our ability to better
understand the relationship between strategy and HRM. Measurement issues relating to the
HRM, competitive advantage and key control variables have made the comparison of results
across studies and interpretation of findings difficult (Rogers & Wright, 1998; Dyer & Reeves,
1995). In addition, there are questions around the appropriate level of analysis within the firm at
which to test these relationships as well as issues related to the mixing of variables measured at
different levels of analysis (Rogers & Wright 1998, Becker & Gerhart, 1996). Finally, as was
pointed out, the majority of research to date has focused on the relationship between HR
systems and firm-level performance and, while the findings indicate a positive relationship, there
is insufficient evidence at this point to be able to infer that the relationship is causal (Wright et
al., 2005). A full discussion of these issues is beyond the scope of this chapter and a more
thorough discussion may be found in other chapters in this text , but it is important to note in discussing key questions in SHRM that they exist and need to
be addressed or at least considered in future research.

Future Directions
Research on SHRM management over the past decade has made significant progress in
developing our understanding of the role that HRM plays in firm performance. The field now
has a significant foundation upon which to build future research. In our opinion, future research
should focus on both answering key questions that remain in understanding the relationship
between HRM and performance and by expanding or broadening what is considered SHRM.
Such extension would encompass both other resources and other theories currently studied in
strategic management research.

Key Unanswered Questions
The previous portion of the chapter pointed out several key questions that have been
raised as a result of the application of the RBV to SHRM research that are not yet answered.
First, research that directly tests the concepts outlined in the RBV has not been done (Priem &
Butler, 2001). Thus future research should focus on testing the concepts of the RBV by testing
the full model through which HRM leads to competitive advantage or firm performance. Do HR
practices impact the human capital pool and the relationships and behaviors of the employees
and do those outcomes in turn impact both operational and firm-level performance? Answering
these questions by testing the full causal model would be a significant contribution to our
understanding of the strategic nature of HRM. In essence, this reflects the “black box process”
that Priem and Butler (2001) argued must be addressed by RBV theorists and researchers.
Second, future research should focus on understanding the contextual questions
surrounding the HRM to performance relationship. Mixed results in past contextual research is
not reason enough to abandon the question all together. It is highly likely that HRM matters
more or less in certain situations or under certain conditions. Efforts should be made to
continue to test established models of HRM in new and unique situations. In addition, more
thorough tests of moderating variables in the HRM to performance relationship should be
tested. Given the complexity involved in the measurement and testing of these relationships
and the mixed results of past research in this area it is likely that researchers will need to seek
out contexts with reduced complexity such as departments within large organizations or small
businesses where reduced complexity will provide more meaningful measures of potential
moderating variables and more meaningful tests of the moderating relationships can be
performed.
Another step that needs to be taken in understanding the role of context in the HRM to
performance relationship is to move away from universal-type models of HRM such as highperformance
work systems and high-involvement work systems and develop and test different
configurations of HR practices that might apply to specific situations. In doing this, researchers
will be able to better understand the specific bundles or HR practices that are applicable or fit
with different types of organizations or situations, thus making a significant contribution to our
understanding of the types of HRM that will matter in a given situation.

Expanding the Role of SHRM
Future research in SHRM should focus on conceptually expanding what is considered to
be the role of SHRM. Historically, SHRM has been viewed as the interface between HRM and
strategic management (Boxall, 1996) with the focus of much research being on understanding
how the HRM function (namely HRM practices) can be strategically aligned so as to contribute
directly to competitive advantage. This implies a concern with how HR practices can contribute
to strategy implementation without addressing the larger question of how HRM can contribute or
play a role in strategy formulation (Lengnick-Hall & Lengnick-Hall, 1988).
Wright et. al. (2001) argued that it is the human capital (the knowledge skills and abilities
of the human resources) as well as the relationships and motivation of the employees that leads
to competitive advantage. The purpose of HR practices is to develop or acquire this human
capital and influence the relationships and behaviors of the employees so that they can
contribute to the strategic goals of the firm. Future research should examine human capital and
the social interactions and motivations of the human element within a firm (Snell, Shadur, &
Wright, 2002), not only as independent variables but also as mediating and dependent
variables. A focus in this area will bring the field more in line with contemporary views in
strategic management. Research in this area will also help us to get beyond questions
regarding how HR practices can facilitate the strategic goals of a firm and begin to understand
how organizations can understand the resources found in their human element and use that
understanding to influence or even drive their decisions about their strategic direction. For
instance, IBM’s strong HR processes/competencies led it into the business of offering
outsourced HR services. This was an internal resource that was extended into a new product
line, and illustrates how an understanding of such resources can influence strategic direction.
Along these same lines, another way to break away from this notion of HRM as a
facilitator of the strategic direction of the firm is by focusing on some of the resources currently
salient to strategic management researchers. In their review of the RBV and SHRM
relationship, Wright, Dunford and Snell, (2001) argue that the RBV created a link between HRM
and strategic management research and that as a result of this link the two fields were
converging. Because of this convergence, the potential impact of SHRM research on
mainstream strategy issues is tremendous. Increasingly, strategy researchers are focusing on
knowledge and knowledge-based resources (Argote, & Ingram, 2000; Grant, 1996;), human
capital (Hitt et al. 2001), social capital (Inkpen & Tsang, 2005; McFadyen, Ann, & Albert, 2004),
capabilities (Dutta, Narasimhan, & Rajiv, 2005), and dynamic capabilities (Teece, Pisano, &
Schuen, 1997), as critical resources that lead to organizational success. While HRM practices
strongly influence these resources, the SHRM literature seems almost devoid of empirical
attention to them. Only recently have researchers began to explore these issues (Kinnie, Swart,
& Purcell, 2005; Thompson & Heron, 2005). Additional research in these areas would provide
tremendous synergy between HRM and strategy.
Conclusion
While the field of strategic HRM is relatively young, significant progress has been made
at a rapid pace. Researchers have provided great theoretical and empirical advancements in a
period of just over 25 years. Much of this progress is the result of the RBV and its emphasis on
the internal resources of the firm as a source of sustainable competitive advantage. The RBV
and its application to SHRM research created an important link between strategic management
and HRM research. Its application has been followed by a significant amount of research using
the RBV as a basis for assertions about the strategic nature of HRM.
However, the link between HRM and strategic management can be strengthened by
breaking away from the focus on HR practices. Other key resources currently being researched
in strategic management have the potential to be directly influenced by HRM, but their coverage
by SHRM researchers has been minimal, leaving a tremendous opportunity for future research
in this area. In addition to this, new theories relevant to strategic management have yet to be
combined with SHRM research, leaving potential for additional contributions to our
understanding of the intersection between strategic management and HRM.


================================
approach to HRM labelled strategic human resource management, or SHRM. By a
strategic approach to HRM, we are referring to a managerial process requiring human
resource (HR) policies and practices to be linked with the strategic objectives of the
organization. Just as the term ‘human resource management’ has been contested, so
too has the notion of SHRM. One aspect for debate is the lack of conceptual clarity
(Bamberger & Meshoulam, 2000). Do, for example, the related concepts of SHRM and
HR strategy relate to a process or an outcome?
Over the past decade, HR researchers and practitioners have focused their attention
on other important questions. First, what determines whether an organization adopts
a strategic approach to HRM, and how is HR strategy formulated? Of interest is which
organizations are most likely to adopt a strategic approach to HRM. Is there, for
example, a positive association with a given set of external and internal characteristics
or contingencies and the adoption of SHRM? Another area of interest concerns the
policies and practices making up different HR strategies. Is it possible to identify a
cluster or ‘bundle’ of HR practices with different strategic competitive models? Finally,
much research productivity in recent years has been devoted to examining the relationship
between different clusters of HR practices and organizational performance.
Does HR strategy really matter? For organizational practitioners who are looking for
ways to gain a competitive advantage, the implication of HR strategic choices for
company performance is certainly the key factor.
Before, however, we look at some of the issues associated with the SHRM debate, we
need first to examine the strategic management process.
How do ‘big’ corporate decisions
impact on HRM? Does the evidence suggest that firms adopting different
competitive strategies adopt different HR strategies? How does HRM impact on the
‘bottom line’? There is a common theme running through this chapter, much of the
HR research pointing out that there are fundamental structural constraints that attest
to the complexity of implementing different HRM models.


The word ‘strategy’, deriving from the Greek noun strategus, meaning ‘commander in
chief’, was first used in the English language in 1656. The development and usage of
the word suggests that it is composed of stratos (army) and agein (to lead). In a
management context, the word ‘strategy’ has now replaced the more traditional
term – ‘long-term planning’ – to denote a specific pattern of decisions and actions


Model of strategic management
In the descriptive and prescriptive management texts, strategic management appears
as a cycle in which several activities follow and feed upon one another. The strategic
management process is typically broken down into five steps:


1. mission and goals
2. environmental analysis
3. strategic formulation
4. strategy implementation
5. strategy evaluation.
At the corporate level, the strategic
management process includes activities that range from appraising the organization’s
current mission and goals to strategic evaluation.
The first step in the strategic management model begins with senior managers evaluating
their position in relation to the organization’s current mission and goals. The
mission describes the organization’s values and aspirations; it is the organization’s
raison d’être and indicates the direction in which senior management is going. Goals
are the desired ends sought through the actual operating procedures of the organization
and typically describe short-term measurable outcomes
Environmental analysis looks at the internal organizational strengths and weak-

The strategic management model


nesses and the external environment for opportunities and threats. The factors that
are most important to the organization’s future are referred to as strategic factors and
can be summarized by the acronym SWOT – Strengths, Weaknesses, Opportunities
and Threats.
Strategic formulation involves senior managers evaluating the interaction between
strategic factors and making strategic choices that guide managers to meet the organization’s
goals. Some strategies are formulated at the corporate, business and specific
functional levels. The term ‘strategic choice’ raises the question of who makes decisions
and why they are made . The notion of strategic
choice also draws attention to strategic management as a ‘political process’ whereby
decisions and actions on issues are taken by a ‘power-dominant’ group of managers
within the organization.
When incorporating strategic choice in a theory of organizations, one is recognizing the
operation of an essentially political process, in which constraints and opportunities are
functions of the power exercised by decision-makers in the light of ideological values.
In a political model of strategic management, it is necessary to consider the distribution
of power within the organization.
we must consider ‘where power lies, how it comes to be there, and how the
outcome of competing power plays and coalitions within senior management
are linked to employee relations’. The strategic choice perspective on organizational
decision-making makes the discourse on strategy ‘more concrete’ and provides important
insights into how the employment relationship is managed.
Strategy implementation is an area of activity that focuses on the techniques used by
managers to implement their strategies. In particular, it refers to activities that deal
with leadership style, the structure of the organization, the information and control
systems, and the management of human resources . Influential
management consultants and academics
emphasize that leadership is the most important and difficult part of the strategic
implementation process.
Strategy evaluation is an activity that determines to what extent the actual change
and performance match the desired change and performance.
The strategic management model depicts the five major activities as forming a
rational and linear process. It is, however, important to note that it is a normative
model, that is, it shows how strategic management should be done rather than
describing what is actually done by senior managers . As we have already noted, the notion that strategic decision-making is a political process
implies a potential gap between the theoretical model and reality.
Hierarchy of strategy
Another aspect of strategic management in the multidivisional business organization
concerns the level to which strategic issues apply. Conventional wisdom identifies
different levels of strategy – a hierarchy of strategy :
1. corporate
2. business
3. functional.


Corporate-level strategy
Corporate-level strategy describes a corporation’s overall direction in terms of its
general philosophy towards the growth and the management of its various business
units. Such strategies determine the types of business a corporation wants to be
involved in and what business units should be acquired, modified or sold. This
strategy addresses the question, ‘What business are we in?’ Devising a strategy for a
multidivisional company involves at least four types of initiative:
establishing investment priorities and steering corporate resources into the most
attractive business units

Human initiating actions to improve the combined performance of those business units
with which the corporation first became involved
finding ways to improve the synergy between related business units in order to
increase performance
making decisions dealing with diversification.
Business-level strategy
Business-level strategy deals with decisions and actions pertaining to each business
unit, the main objective of a business-level strategy being to make the unit more
competitive in its marketplace. This level of strategy addresses the question, ‘How do
we compete?’ Although business-level strategy is guided by ‘upstream’, corporate-level
strategy, business unit management must craft a strategy that is appropriate for its
own operating situation. In the 1980s, Porter (1980, 1985) made a significant contribution
to our understanding of business strategy by formulating a framework that
described three competitive strategies: cost leadership, differentiation and focus.
The low-cost leadership strategy attempts to increase the organization’s market
share by having the lowest unit cost and price compared with competitors. The
simple alternative to cost leadership is differentiation strategy. This assumes that
managers distinguish their services and products from those of their competitors in
the same industry by providing distinctive levels of service, product or high quality
such that the customer is prepared to pay a premium price. With the focus strategy,
managers focus on a specific buyer group or regional market. A market strategy can
be narrow or broad, as in the notion of niche markets being very narrow or focused.
This allows the firm to choose from four generic business-level strategies – low-cost
leadership, differentiation, focused differentiation and focused low-cost leadership –
in order to establish and exploit a competitive advantage within a particular competitive
scope .
Strategic Human Resource Management
Porter’s competitive strategies
have identified four modes of strategic orientation:
defenders, prospectors, analysers and reactors. Defenders are companies with a limited
product line and a management focus on improving the efficiency of their existing
operations. Commitment to this cost orientation makes senior managers unlikely to
explore new areas. Prospectors are companies with fairly broad product lines that focus
on product innovation and market opportunities. This sales orientation makes senior
managers emphasize ‘creativity over efficiency’. Analysers are companies that operate
in at least two different product market areas, one stable and one variable. In this situation,
senior managers emphasize efficiency in the stable areas and innovation in the
variable areas. Reactors are companies that lack a consistent strategy–structure–culture
relationship. In this reactive orientation, senior management’s responses to environmental
changes and pressures thus tend to be piecemeal strategic adjustments.
Competing companies within a single industry can choose any one of these four types
of strategy and adopt a corresponding combination of structure, culture and processes
consistent with that strategy in response to the environment. The different competitive
strategies influence the ‘downstream’ functional strategies.
Functional-level strategy
Functional-level strategy pertains to the major functional operations within the business
unit, including research and development, marketing, manufacturing, finance
and HR. This strategy level is typically primarily concerned with maximizing resource
productivity and addresses the question, ‘How do we support the business-level
competitive strategy?’ Consistent with this, at the functional level, HRM policies and
practices support the business strategy goals.
These three levels of strategy – corporate, business and functional – form a hierarchy
of strategy within large multidivisional corporations. In different corporations, the
specific operation of the hierarchy of strategy might vary between ‘top-down’ and
‘bottom-up’ strategic planning. The top-down approach resembles a ‘cascade’ in
which the ‘downstream’ strategic decisions are dependent on higher ‘upstream’
strategic decisions . The bottom-up approach to strategymaking
recognizes that individuals ‘deep’ within the organization might contribute to
strategic planning. Mintzberg (1978) has incorporated this idea into a model of ‘emergent
strategies’, which are unplanned responses to unforeseen circumstances by nonexecutive
employees within the organization. Strategic management literature
emphasizes that the strategies at different levels must be fully integrated. Thus:
strategies at different levels need to inter-relate. The strategy at corporate level must
build upon the strategies at the lower levels in the hierarchy. However, at the same
time, all parts of the business have to work to accommodate the overriding corporate
goals.
The need to integrate business strategy and HRM strategy has received much attention
from the HR academic community, and it is to this discourse that we now turn.
Strategic human resource management
The SHRM literature is rooted in ‘manpower’ (sic) planning, but it was the work of
influential management gurus ,
affirming the importance of the effective management of people as a source of
competitive advantage, that encouraged academics to develop frameworks emphasizing
the strategic role of the HR function
and attaching the prefix ‘strategic’ to the term ‘human resource management’.
Interest among academics and practitioners in linking the strategy concept to
HRM can be explained from both the ‘rational choice’ and the ‘constituency-based’
perspective. There is a managerial logic in focusing attention on people’s skills and
intellectual assets to provide a major competitive advantage when technological superiority,
even once achieved, will quickly erode .
From a ‘constituency-based’ perspective, it is argued that HR academics and HR practitioners
have embraced SHRM as a means of securing greater respect for HRM as a
field of study and, in the case of HR managers, of appearing more ‘strategic’, thereby
enhancing their status within organizations



Concepts and models
In spite of the increasing volume of research and scholarship, the precise meaning of
strategic HRM and HR strategy remains problematic. It is unclear, for example, which
one of these two terms relates to an outcome or a process
‘strategic HRM’ is an outcome: ‘as organizational
systems designed to achieve sustainable competitive advantage through people’. For
others, however, SHRM is viewed as a process, ‘the process of linking HR practices to
business strategy’ (
SHRM as ‘the process by which organizations seek to link the human,
social, and intellectual capital of their members to the strategic needs of the firm’.
According to Ulrich (1997, p. 190) ‘HR strategy’ is the outcome: ‘the mission, vision
and priorities of the HR function’. Consistent with this view, Bamberger and
Meshoulam (2000, p. 5) conceptualize HR strategy as an outcome: ‘the pattern of decisions
regarding the policies and practices associated with the HR system’. The authors
go on to make a useful distinction between senior management’s ‘espoused’ HR
strategy and their ‘emergent’ strategy. The espoused HR strategy refers to the pattern
of HR-related decisions made but not necessarily implemented, whereas the emergent
HR strategy refers to the pattern of HR-related decisions that have been applied in the
workplace. Thus, ‘espoused HR strategy is the road map … and emergent HR strategy
is the road actually traveled’ --- has
also portrayed HR strategy as ‘emerging patterns of action’ that are likely to be much
more ‘intuitive’ and only ‘visible’ after the event.
We begin the discussion of SHRM and HR strategy with a focus on the link between
organizational strategy formulation and strategic HR formulation. A range of business–
HRM links has been classified in terms of a proactive–reactive continuum (Kydd &
Oppenheim, 1990) and in terms of environment–human resource strategy–business
strategy linkages (Bamberger & Phillips, 1991). In the ‘proactive’ orientation, the HR
professional has a seat at the strategic table and is actively engaged in strategy formulation.
the two-way arrows on the right-hand side showing both
downward and upward influence on strategy depict this type of proactive model.
At the other end of the continuum is the ‘reactive’ orientation, which sees the HR
function as being fully subservient to corporate and business-level strategy, and
organizational-level strategies as ultimately determining HR policies and practices.
Once the business strategy has been determined, an HR strategy is implemented to
support the chosen competitive strategy. This type of reactive orientation would be
depicted in Figure 2.3 above by a one-way downward arrow from business- to functional-
level strategy. In this sense, a HR strategy is concerned with the challenge of
matching the philosophy, policies, programmes, practices and processes – the ‘five Ps’
– in a way that will stimulate and reinforce the different employee role behaviours
appropriate for each competitive strategy .
The importance of the environment as a determinant of HR strategy has been
incorporated into some models. Extending strategic management concepts,
Bamberger and Phillips’ (1991) model depicts links between three poles: the environment,
human resource strategy and the business strategy . In the hierarchy
of the strategic decision-making model , the HR strategy is influenced
by contextual variables such as markets, technology, national government policies,
European Union policies and trade unions. Purcell and Ahlstrand (1994) argue,
however, that those models which incorporate contextual influences as a mediating
variable of HR policies and practices tend to lack ‘precision and detail’ in terms of the
precise nature of the environment linkages, and that ‘much of the work on the linkages
has been developed at an abstract and highly generalized level’ .
In the late 1980s, Purcell made a significant contribution to research on
business–HRM strategy. Drawing on the literature on ‘strategic choice’ in industrial
relations) and using the
notion of a hierarchy of strategy, Purcell (1989) identified what he called, ‘upstream’
and ‘downstream’ types of strategic decision. The upstream or ‘first-order’ strategic
decisions are concerned with the long-term direction of the corporation. If a firstorder
decision is made to take over another enterprise, for example a French company
acquiring a water company in southern England, a second set of considerations
applies concerning the extent to which the new operation is to be integrated with or
separate from existing operations. These are classified as downstream or ‘secondorder’,
strategic decisions. Different HR strategies are called ‘third-order’ strategic decisions
because they establish the basic parameters for managing people in the
workplace. Purcell (1989, p. 71) wrote, ‘[in theory] strategy in human resources
management is determined in the context of first-order, long-run decisions on the
direction and scope of the firm’s activities and purpose … and second-order decisions
on the structure of the firm’.
In a major study of HRM in multidivisional companies, Purcell and Ahlstrand
(1994) argue that what actually determines HR strategy will be determined by decisions
at all three levels and by the ability and leadership style of local managers to
follow through goals in the context of specific environmental conditions. Case study
analysis has, however, highlighted the problematic nature of strategic choice modelbuilding.
The conception of strategic choice might exaggerate the ability of managers
to make decisions and take action independent of the environmental contexts in
which they do business .
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18 years of managerial working exercise which covers business planning , strategic planning, marketing, sales management,
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