Strategic Human Resource Management - (MHRM 612-2) PDF

STRATEGIC
HUMAN RESOURCE
MANAGEMENT
Abraraw Chane and

Alemayehu Mulugeta
Addis Ababa University
School of Commerce
March 2016
Addis Ababa, Ethiopia
TABLE OF CONTENTS
Table of Figures ................................................................................................................................... 7

INTRODUCTION ................................................................................................................................... 8
MODULE OBJECTIVES .................................................................................................................... 9
LEARNING OUTCOMES .................................................................................................................. 9
CHAPTER ONE ....................................................................................................................................... 10
STRATEGY AND STRATEGY MAKING ....................................................................................................... 10
1.1. INTRODUCTION ................................................................................................................. 10
1.2. WHAT IS STRATEGY? ........................................................................................................ 11
1.3. FEATURES OF STRATEGY ................................................................................................ 15
1.4. MODELS OF STRATEGY MAKING ................................................................................... 17
1.5. APPROACHES TO STRATEGY MAKING .......................................................................... 21
1.6. PORTER’S GENERIC STRATEGIES ................................................................................... 25
1.7. THE MILES AND SNOW STRATEGY FRAMEWORK ...................................................... 36
1.8. CHAPTER SUMMARY ........................................................................................................ 40
1.9. SELF-CHECK QUESTIONS 1 .............................................................................................. 40
1.10. CASE ANALYSIS 1 .......................................................................................................... 41
CHAPTER TWO .................................................................................................................................. 42
AN OVERVIEW OF STRATEGIC HUMAN RESOURCE MANAGEMENT ...................................... 42
2.1. INTRODUCTION ................................................................................................................. 42
2.2. WHAT IS SHRM? ................................................................................................................. 43
2.3. ASPECTS OF SHRM ............................................................................................................ 47
2.4. WHY STUDY SHRM............................................................................................................ 49
2.5. TRADITIONAL VERSUS STRATEGIC HRM ..................................................................... 51
2.6. DIMENSIONS OF SHRM ..................................................................................................... 54
2.7. EVOLUTION OF SHRM: FROM PM TO STRATEGIC HRM............................................. 58
2.8. CHARACTERISTICS OF SHRM .......................................................................................... 64
2.9. CHAPTER SUMMARY ........................................................................................................ 67
2.10. SELF-CHECK QUESTIONS 2 .......................................................................................... 67
2.11. CASE ANALYSIS 2 .......................................................................................................... 68
CHAPTER THREE ............................................................................................................................... 70
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MODELS OF STRATEGIC HUMAN RESOURCE MANAGEMENT ................................................. 70
3.1. INTRODUCTION ................................................................................................................. 70
3.2. IMPORTANCE OF THE SHRM MODELS ........................................................................... 71
3.3. THE MATCHING MODEL OF SHRM ................................................................................. 71
3.4. THE HARVARD MODEL OF SHRM ................................................................................... 73
3.5. THE GUEST’S MODEL OF SHRM ...................................................................................... 76
3.6. THE STOREY’S MODEL OF SHRM ................................................................................... 79
3.7. THE HARD AND SOFT MODEL OF SHRM ....................................................................... 82
3.8. THE WARWICK’S MODEL OF SHRM ............................................................................... 84
3.8. CHAPTER SUMMARY ........................................................................................................ 87
3.9. SELF-CHECK QUESTIONS 3 .............................................................................................. 87
3.10. CASE ANALYSIS 3.1 ....................................................................................................... 88
CHAPTER FOUR ................................................................................................................................. 89
PERSPECTIVES ON STRATEGIC HUMAN RESOURCE MANAGEMENT ..................................... 89
4.1. INTRODUCTION ................................................................................................................. 89
4.2. THE UNIVERSALISTIC PERSPECTIVE OF SHRM ........................................................... 90
4.3. THE CONTINGENCY PERSPECTIVE OF SHRM ............................................................... 93
4.4. THE CONFIGURATIONAL PERSPECTIVE OF SHRM ...................................................... 97
4.5. THE CONTEXTUAL PERSPECTIVE OF SHRM ................................................................. 99
4.6. THE INVESTMENT PERSPECTIVE OF SHRM ................................................................ 101
4.6.1. HR INVESTMENT CONSIDERATIONS .................................................................... 103
4.6.2. INVESTMENTS IN TRAINING AND DEVELOPMENT ........................................... 107
4.6.3. INVESTMENT PRACTICES FOR IMPROVED RETENTION ................................... 113
4.6.4. INVESTMENTS IN JOB-SECURE WORKFORCES .................................................. 116
4.6.5. NONTRADITIONAL INVESTMENT APPROACHES ............................................... 117
4.7. CHAPTER SUMMARY ...................................................................................................... 118
4.8. SELF-CHECK QUESTIONS 4 ............................................................................................ 118
4.9. CASE ANALYSIS 4.1 ......................................................................................................... 119
CHAPTER FIVE ................................................................................................................................. 120
THEORETICAL FOUNDATIONS OF STRATEGIC HUMAN RESOURCE MANAGEMENT ........ 120
5.1. INTRODUCTION ............................................................................................................... 120
5.2. THE ROLE OF THEORY IN SHRM ................................................................................... 121
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5.3. THE RESOURCE-BASED THEORY .................................................................................. 122
5.4. THE OPEN SYSTEMS THEORY ....................................................................................... 126
5.5. BEHAVIORAL THEORY OF THE FIRM .......................................................................... 130
5.6. MULTIPLE CONSTITUENCY THEORY AND SHRM ...................................................... 139
5.7. INSTITUTIONAL THEORY AND SHRM .......................................................................... 142
5.8. AGENCY/TRANSACTION COST THEORY AND SHRM ................................................ 144
5.9. CHAPTER SUMMARY ...................................................................................................... 147
5.10. SELF-CHECK QUESTIONS 5 ........................................................................................ 147
5.11. CASE ANALYSIS 5 ........................................................................................................ 148
CHAPTER SIX ................................................................................................................................... 149
PRINCIPLES OF STRATEGIC HUMAN RESOURCE MANAGEMENT ......................................... 149
6.1. INTRODUCTION ............................................................................................................... 149
6.2. INTEGRATION OF HR TO STRATEGY ........................................................................... 150
6.3. CONSISTENCY OF HRM PRACTICES ............................................................................. 156
6.4. DEVOLVEMENT OF HRM TO LINE MANGEMENT ...................................................... 161
6.5. HIGH EMPLOYEE COMMITMENT .................................................................................. 166
6.5.1. TYPES OF COMMITMENT........................................................................................ 167
6.5.2. ANTECEDENTS OF COMMITMENT ........................................................................ 169
6.6. HIGH QUALITY EMPLOYEES AND INTERNAL PRACTICES ...................................... 172
6.7. MANAGEMENT-EMPLOYEE RELATION ....................................................................... 174
6.8. PEOPLE AS A STRATEGIC RESOURCE .......................................................................... 175
6.9. CHAPTER SUMMARY ...................................................................................................... 183
6.11. CASE ANALYSIS 6 .............................................................................................................. 184
CHAPTER SEVEN ............................................................................................................................. 185
STRATEGIC ROLE OF HUMAN RESOURCE MANAGEMENT ..................................................... 185
7.1. INTRODUCTION ............................................................................................................... 185
7.2. THE STRATEGIC NATURE OF HR ACTIVITY ............................................................... 186
7.3. THE CHANGING ROLES OF HRM ................................................................................... 188
7.4. WHAT BEING STRATEGIC MEANS ................................................................................ 201
7.5. THE STRATEGIC ROLE OF HR DIRECTORS.................................................................. 207
7.6. THE STRATEGIC ROLE OF HEADS OF HR FUNCTIONS .............................................. 207
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7.7. THE STRATEGIC ROLE OF HR BUSINESS PARTNERS ................................................ 209
7.7. CHAPTER SUMMARY ...................................................................................................... 211
7.8. SELF-CHECK QUESTIONS 7 ............................................................................................ 212
7.9. CASE ANALYSIS 7.1 ......................................................................................................... 212
CHAPTER EIGHT .............................................................................................................................. 213
ENVIRONMENTAL FORCES OF STRATEGIC HUMAN RESOURCE MANAGEMENT .............. 213
8.1. INTRODUCTION ............................................................................................................... 213
8.2. SOCIO-CULTURAL FORCES ............................................................................................ 214
8.3. POLITICAL/LEGAL FORCES............................................................................................ 219
8.4. ECONOMIC FORCES ........................................................................................................ 222
8.5. ENVIRONMENTAL FORCES ............................................................................................ 225
8.6. THE WORKFORCE ............................................................................................................ 227
8.7. THE ORGANIZATION’S CULTURE ................................................................................. 229
8.8. THE ORGANIZATION’S STRATEGY .............................................................................. 232
8.9. TECHNOLOGY OF PRODUCTION AND ORGANIZATION OF WORK ......................... 235
8.9.1. PHYSICAL LAYOUT, AND WORKER PRIVACY AND PROXIMITY .................... 236
8.9.2. REQUIRED SKILLS ................................................................................................... 237
8.9.3. MONITORING EMPLOYEE INPUT .......................................................................... 237
8.9.4. TASK AMBIGUITY AND CREATIVITY ................................................................... 239
8.9.5. PATTERN OF WORKER INTERDEPENDENCE AND COOPERATION .................. 239
8.10. CHAPTER SUMMARY .................................................................................................. 240
8.12. CASE ANALYSIS ........................................................................................................... 242
CHAPTER NINE ................................................................................................................................ 244
PERFORMANCE IMPACT OF STRATEGIC HUMAN RESOURCE MANAGEMENT ................... 244
9.1. INTRODUCTION .................................................................................................................. 244
9.2. NATURE OF FIRM PERFORMANCE ............................................................................... 245
9.3. MODELS OF THE HRM-PERFORMANCE RELATIONSHIP ........................................... 246
9.4. INDIVIDUAL HIGH-PERFORMANCE PRACTICES ........................................................ 253
9.5. LIMITATIONS OF INDIVIDUAL HR PRACTICES .......................................................... 277
9.6. EVOLUTION OF PRACTICES ........................................................................................... 277
9.7. SYSTEMS OF HIGH PERFORMANCE HR PRACTICES.................................................. 278
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9.8. INDIVIDUAL BEST PRACTICES VERSUS SYSTEMS OF PRACTICES......................... 281
9.9. CHAPTER SUMMARY ...................................................................................................... 281
9.11. CASE ANALYSIS 9 ........................................................................................................ 283
ANSWER KEY FOR SELF-CHECK QUESTIONS ............................................................................ 284
SELF-CHECK QUESTIONS 1........................................................................................................ 284
REFERENCES................................................................................................................................ 293
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Table of Figures
Figure1. 1 Whittington’s (1993) Generic Perspective on Strategy......................................................... 22

Figure1. 2 Product/Market/Distinctive-Competence Choices and Generic Competitive Strategies ........ 26
Figure1. 3 Types of Business-Level Strategies ..................................................................................... 33
Figure1. 4 Miles and Snow’ Strategy Framework................................................................................. 39
Figure 2. 1 Differences between Traditional HRM and Strategic HRM ................................................. 52
Figure 3. 1 The Human Resource Cycle of the Matching Model of SHRM........................................... 72
Figure 3. 2 The Harvard Model of SHRM ............................................................................................ 75
Figure 3. 3 The Guest’s Model of SHRM............................................................................................ 78
Figure 3. 4 The Storey’s Model of SHRM............................................................................................ 81
Figure 3. 5 The Warwick’s Model of SHRM........................................................................................ 86
Figure 4. 1 The Universalistic Perspective of SHRM ........................................................................... 91
Figure 4. 2 The Contingency Perspective of SHRM ............................................................................. 94
Figure 4. 3 The Configurational Perspective of SHRM ........................................................................ 98
Figure 4. 4 The Contextual Perspective of SHRM .............................................................................. 100
Figure 5. 1 Systems Model of the HR System .................................................................................... 128
Figure 5. 2 Behavioral Perspective of SHRM ..................................................................................... 133
Figure 6. 1 Attributes of resources and capabilities that lead to competitive advantage ....................... 177
Figure 7. 1 Transactional versus Strategic Role of the HR Professional .............................................. 187
Figure 7. 2 The Changing Roles of HRM ........................................................................................... 190
Figure 7. 3 Tyson’s Three Ideal Types of HR roles ............................................................................ 191
Figure 7. 4 Storey’s Model of Strategic HR Role ............................................................................... 193
Figure 7. 5 Ulrich’s HR Role Model (1997) ....................................................................................... 197
Figure 7. 6 Strategic HR Role Framework ......................................................................................... 199
Figure 7. 7 Ulrich and Brockbank’s Improved Strategic HR Role Model............................................ 200
Figure 9. 1 HRM Impact on Performance Logic.................................................................................. 245
Figure 9. 2 The General Causal Model of the HRM-Performance Relationship ................................... 249
Figure 9. 3 An Extended General Causal Model of the HRM - Performance Relationship ................. 250
Figure 9. 4 Individual Human Resource Practices Impacting Firm Performance ................................ 276
Figure 9. 5 Systems of Employee Skill Practices and Employee Motivation Practices ....................... 279
Figure 9. 6 Systems of Human Resource Practices Impacting Firm Performance ................................ 280
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INTRODUCTION
The Strategic Human Resource Management (SHRM) module provides students with a critical
understanding of the theories, principles, historical trends, current issues and practices relevant to HRM
strategy in organizations. This will support the development of subject specific and key transferable skills
necessary for employment in roles which require the effective management of both human and knowledge
capital within the organization, therefore extending beyond purely HRM roles. By exploring the shifting
of roles from process manager or administrator to strategic business advisor and partner, students will
understand the unique strategic positioning of contemporary human resource management and the
subsequent demands placed on professionals working in this area. The module will serve as an intellectual
platform to proceed to further modules of study.
Many managers and organizations recognize that a critical source of competitive advantage often comes
not from having the most ingenious product design, the best marketing strategy, or the most state of the
art production technology, but rather from having an effective system for obtaining, mobilizing, and
managing the organization's human assets. A number of recent developments, including demographic
changes in the labor force, the rapid pace of technological change, increased global competition,
experiments with new organizational arrangements, and public policy attention to work force issues, are
making HRM topics increasingly important for all managers in organizations. Although many
organizations recognize the importance of managing the work force effectively and even "know" what
approaches are effective, it is remarkable how often firms and managers fail to implement these
approaches.
The course is about both the design and execution of human resource management strategies. It has two
central themes: (1) How to think systematically and strategically about aspects of managing the
organization's human assets, and (2) What really needs to be done to implement these policies and to
achieve competitive advantage. It will not get into the technical details of personnel management such as
the psychometric aspects of test validation, the specifics of job evaluation methods, the mechanics of
interviewing, or the intricacies of employment law. Instead, this course adopts the perspective of a general
manager and addresses human resource topics from a strategic perspective.
The module is divided into ten chapters. The first chapter reviews the strategy and strategy making
concept. The second chapter provides general highlight about strategic human resource management. The
third, the forth, and the fifth chapters address models, perspectives, and theoretical basis of SHRM,
respectively. The sixth and the seventh chapters deal with the major principles of the field and strategic
roles of HR, respectively. Chapter eight discusses environmental forces of HR and chapter nine is about
the performance impact of HR.
This course compares where HRM is now and where it needs to be in the future based upon needed
strategic competencies. Its focus is to address ways in which HRM can partner with the organization to
meet business objectives. The content of this course is valuable for all managers, no matter in which
direction their careers progress. Every manager should have human resources management skills and a
basic understanding of employment laws in order to function effectively in today’s economy.
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MODULE OBJECTIVES
Given globalization, the growing integration of the world economy into one marketplace, Corporations are subject to
unprecedented levels of competition. The critical source of competitive advantage for these corporations is not their
physical assets, but their people. It is people, not companies, who innovate, create new products, make decisions,
develop and implement business plans, penetrate new markets, and serve clients and customers. While developing
effective business strategy is important to organizational success, the capacity to implement any given business
strategy is completely dependent on a corporation’s people. Thus, this module will have the following objectives:
1. Prepare students and provide an understanding of the expectations of studying in this program
2. Provide students with a critical understanding of the theories, principles, historical trends, current issues and
practices relevant to human resource management strategy in organizations
3. Enable students to recognize the opportunities and challenges facing contemporary HRM
4. Encourage an approach which views human resource management as a core element of the overall
organizational strategy rather than a purely procedural or reactive activity
5. Develop knowledge of the skills required by organizational leaders for successfully managing human and
knowledge capital
LEARNING OUTCOMES
Students who successfully complete this module will be able to:
1. Apply appropriate writing style conventions and academic integrity to academic writing through online
discussion and assessments
2. Identify, analyze and evaluate scholarly writing
3. Apply a high level of self-awareness to online interactions
4. Understand the nature of ‘master’s level’ learning and, in particular, the role of critical reflection in learning
5. Understand how human resource management strategy is developed in response to internal and external
environmental factors
6. Understand the relationship between human resource management strategy and organizational performance
7. Evaluate the impact of HRM strategies, concepts and values upon the organization’s success
8. Understand a range of human resource management activities (e.g. recruitment, selection and assessment,
succession planning, performance management, reward management, talent development, disciplinary, etc.)
9. Apply theories and concepts relevant to strategic human resource management in contemporary organizations
10. Compare and contrast a range of approaches and models for human resource management including the nature
of work, the employment relationship and the psychological contract
11. Define the implications for the development of human resource management policies and practices applied by
an organization and operating locally, nationally and internationally
12. Evaluate all human resource concepts and practices in cultural terms
13. Consider the changing nature of human resource management (e.g. outsourcing, issues around the future of
nature of work)
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CHAPTER ONE
STRATEGY AND STRATEGY MAKING
CHAPTER OUTLINE CHAPTER OBJECTIVE
1.1 Introduction Upon the completion of this chapter, you will be

1.2. What is Strategy? able to:
1.3. Features of Strategy 1. Define the terms strategy and strategy
1.4. Models of Strategy Making making
1.5. Approaches to Strategy Making 2. Discuss the different feature of strategy
1.6. Porter’s Generic Strategies 3. Compare and contrast industrial
1.7. The Miles and Snow Strategy organization and resource-based models
Framework of strategy choice
1.8. Chapter Summary 4. Discuss the Whittington’s approaches to
1.9. Self-Check Questions strategy making
1.10. Case Analysis 5. Identify competitive and generic
strategies
1.1. INTRODUCTION
Because the term SHRM is made up of two major concepts – strategy and HRM – clarifying the
concept of strategy is a logical first step in the discussion of SHRM. The term strategy bridges
between the basic concepts of HRM and SHRM. This chapter discusses strategy and strategy
making. Since the course is strategic human resource management, strategy is important stage in
the courses’ discussion. Thus, in this chapter, definitions of strategy, Mintzberg’s five Ps for
strategy, major features of strategy, models of strategy making, approaches to strategy making,
Porter’s competitive strategies, and the Miles and Snow strategic framework are discussed in
relation to SHRM. Understanding the concept of strategy and how strategy is made has
paramount importance in strategic human resource management, since this new discipline is the
combination of strategy and HRM. The varying conceptions of understanding ‘strategy’ make
also the discussion at this juncture important. At the end of every subtopic, activity questions are
given to let you stop and check yourself. At the end of the chapter self-check questions and case
analysis questions are given to let you check yourself before proceeding to the next chapter.
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1.2. WHAT IS STRATEGY?
Strategy was originally a military term which represents the art of leading and directing the
military force to the most advantageous position. This original meaning of the term denotes that
strategy is the art of the commander-in-chief; it is about directing the military force; and it is
about positioning. Later, it became a business term denoting how top management is leading the
organization in a particular direction in order to achieve organizational objectives. Over the past
forty years or so, a lot has been written about the concepts, process, and formation of strategy in
business organizations. Several researchers agree that strategy has two fundamental meanings:
forward looking and fit between the organization and the world around it. Many of its
definitions and descriptions lie in these two basic ideas.
One of the earliest definitions by Xenephon as cited in Macmillan and Tampoe (2000) is that
‘strategy is knowing the business you propose to carry out’. This definition stresses that strategy
requires knowledge of the business, an intention for the future, and an orientation towards action.
It also emphasizes the link between leadership and strategy formulation and sees strategy as the
direct responsibility of those in charge.
Another definition by Andrews (1971) is that strategy is ‘the pattern of major objectives,
purposes, or goals and essential policies or plans for achieving those goals, stated in such a way
as to define what business the company is in or is to be in and the kind of company it is or is to
be’. In this definition, strategy is concerned with both purpose and the means purpose will be
achieved. It implies that strategy must address the fundamental nature of the business in the
future. It also implies that managers are able and responsible for making deliberate choice about
the future nature and scope of their business. Still another definition by Ohmae (1983) is that
strategy is ‘the way in which a corporation endeavors to differentiate itself positively from its
competitors, using its relative strengths to better satisfy customer needs’. This definition
emphasizes both the competitor aspect of strategy and the need to build capabilities.
Highlighting the fact that strategy requires thought about the future but also effective action to
realize the conception, Macmillan and Tampoe (2000) defined strategy as ‘ideas and actions to
conceive and secure the future’.
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Strategy, as forward looking, means that it is about deciding in advance where we want to go and
how we mean to get there. In this case, strategy is a declaration of intent. Broadly defined,
strategy is ‘the determination of the basic long-term goals and objectives of an enterprise, and the
adoption of courses of action and the allocation of resources necessary for carrying out these
goals’ (Chandler 1962). It is, thus, an end and a means. Allocation of necessary resources, which
includes the HR, to carry out the goals is an aspect of strategy.
In the realm of fit between the organization and its environment, strategy is concerned with how
the organization positions itself with regard to the environment, and in particular, to its
competitors. It is concerned with the match between the internal capabilities of the company and
its external environment. The internal capabilities, most of which reside in its HR, must fit to the
environment with which it operates. DeWit and Meyer’s (1998) definition of strategy, as ‘an
organization’s intention to achieve certain goals through planned alignment between the
organization and its environment’, denotes the ‘fit’ or the positioning concept.
Moreover, Johnson and Scholes (1993) defined strategy as ‘the direction and scope of an
organization over the longer term, which matches its resources to its changing environment, and
in particular to its market, customers, and clients to meet stakeholder expectations.’ It involves
the constant search for ways in which the firm’s unique resources can be redeployed in changing
circumstances. Hence, strategy is about the unique resources an organization has in relation to
its competitors.
Activity 1.1. Explain the statement that defines strategy as ‘fit between the
organization and the world around it’.
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The definitions and descriptions discussed above reveal that the concept of strategy is not a
straightforward one and there are different theories that explain what it is and how it works. It is
therefore important to present Mintzberg’s five Ps for strategy at this juncture. Mintzberg
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suggested five different definitions of strategy, called ‘the five Ps for strategy’ by taking the
first letters of the definitions. Strategy is a plan, a ploy, a position, a perspective, and a pattern.
Strategy is a plan. To almost everyone, strategy is a plan or some sort of consciously intended
course of action. Simply, it is a guideline (or set of guidelines) to deal with a situation. Strategy
as a plan has two essential characteristics: (1) it is made in advance of the actions to which it
applies; and (2) it is developed consciously and purposefully. Many of the definitions of strategy
such as determination of the basic long-term goals and objectives, critical choice about the ends
and means of a business, and the long-term direction and scope of an organization agree that it is
a plan. This is fine, and planning is an essential part of the strategy formulation process. The
problem with planning, however, is that it's not enough on its own. This is where the other four
Ps come into play.
Strategy is a Ploy. According to Mintzberg (1987), strategies as plans may be general or

specific. In specific sense, strategy as plan can be a ploy too. Thus, strategy is a ploy or a
specific maneuver intended to outwit an opponent or a competitor. A company may threaten to
expand plant capacity to discourage a competitor from building a new plant. Here the real
strategy (as plan, that is, the real intention) is the threat, not the expansion itself, and as such is a
ploy. For example, a grocery chain might threaten to expand a store, so that a competitor doesn't
move into the same area; or a telecommunications company might buy up patents that a
competitor could potentially use to launch a rival product.
Strategy is a Pattern. Mintzberg (1987) argues that defining strategy as plan is not sufficient;
there must also be a definition that encompasses the resulting behavior. If strategies can be
intended, they can also be realized. Strategy is a pattern - specifically, a pattern in a stream of
actions. Strategy is consistency in behavior, whether or not intended. The definitions of strategy
as plan and pattern can be quite independent of one another: plans may go unrealized, while
patterns may appear without preconception. Plans are intended strategy, whereas patterns are
realized strategy; from this we can distinguish deliberate strategies, where intentions that existed
previously were realized, and emergent strategies where patterns developed in the absence of
intentions, or despite them.
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Strategic plans and ploys are both deliberate exercises. Sometimes, however, strategy emerges
from past organizational behavior. Rather than being an intentional choice, a consistent and
successful way of doing business can develop into a strategy. For instance, imagine a manager
who makes decisions that further enhance an already highly responsive customer support
process. Despite not deliberately choosing to build a strategic advantage, his pattern of actions
nevertheless creates one. To use this element of the 5 Ps, take note of the patterns you see in your
team and organization. Then, ask yourself whether these patterns have become an implicit part of
your strategy; and think about the impact these patterns should have on how you approach
strategic planning.
Strategy is a position. “Position" is another way to define strategy – that is, how you decide to
position yourself in the marketplace. In this way, strategy is a means of locating an organization
in an "environment". By this definition strategy becomes the mediating force, or "match",
between organization and environment, that is, between the internal and the external context. It is
crucially concerned with how the organization positions itself with regard to the environment
and in particular to its competitors.
Strategy is a perspective. The choices an organization makes about its strategy rely heavily on
its culture – just as patterns of behavior can emerge as strategy, patterns of thinking will shape an
organization's perspective, and the things that it is able to do well. For instance, an organization
that encourages risk-taking and innovation from employees might focus on coming up with
innovative products as the main thrust behind its strategy. By contrast, an organization that
emphasizes the reliable processing of data may follow a strategy of offering these services to
other organizations under outsourcing arrangements.
Perspective looks inward into the firm. Strategy is a perspective shared by members of an
organization, through their intentions and/or actions. In effect, when we talk of strategy in this
context, we are entering the realm of the collective mind – individuals united by common
thinking and/or behavior. Content of strategy consists not just of a chosen position, but of an
ingrained way of perceiving the world. Strategy in this respect is to the organization what
personality is to the individual. What is of key importance is that strategy is a perspective shared
by members of an organization, through their intentions and/or by their actions. In effect, when
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we talk of strategy in this context, we are entering the realm of the collective mind - individuals
united by common thinking and/or behavior. Thus, strategy is an organization’s fundamental
way of doing things.
Activity 1.2. What is the difference between strategy as a plan and strategy as a
pattern?
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1.3. FEATURES OF STRATEGY
Strategy has many features. Different writers tend to emphasize particular aspects, possibly
under the influence of their own original academic discipline. Macmillan and Tampoe (2000)
listed ten important aspects of strategy. These are listed below with brief description.
1. Strategy is a statement of ends, purposes, and intent. Purpose or intent must act as the
driver of the future. No useful activity can occur without some underlying purpose. The role
of strategy is to determine, clarify, or refine purpose. This may require creating new visions
of the future to inspire the organization to greater efforts or wider scope. It may entail
reconciling conflicting purposes or stating purposes in more concrete terms.
2. Strategy is a high level plan. Strategy is also concerned with the means by which intent or
purpose will be achieved. The strategy will define such means in broad and general terms.
As detail is added and answers the questions: who, when, where, how, and with what, the
strategy develops into a plan or perhaps a set of plans with varying scope and focus. It is
impossible to draw a hard distinction between a strategy and a plan. In general, strategies
tend to be at a higher level and to take an overall view; plans tend to be more detailed, more
quantified, and more specific about times and responsibilities.
3. Strategy is the means of beating the competition. One aim of strategy is to win and this
means beating the competition in a game which may be won or lost. Strategies are therefore
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required to keep ahead of the competitors as a bunch. Companies may also have strategies for
outmaneuvering particular competitors at particular times for particular kinds of business.
4. Strategy is an element of leadership. Strategy has close association with leadership and
setting strategy is one of the responsibilities of leadership. Nobody can lead an enterprise if
he or she does not agree with its strategy. Conversely, organizations that are leaderless or
inadequately led have difficulty defining clear strategies even if they continue to function in
their day-to-day activities. When leaders change strategies tend to change. Conversely, if the
strategy needs to change, it may be necessary to appoint a new leader. A change of leader
may be both a symbol that a change in strategy has occurred and an opportunity to appoint an
individual with a leadership style appropriate to the new strategy.
5. Strategy is positioning for the future. Strategy may be seen as preparation for the
uncertainty of the future. One purpose of strategy is therefore to position the enterprise for
the future so as to be prepared for this uncertainty. One way to achieve this is to make the
enterprise more adaptable.
6. Strategy is building capacity. Certain capabilities may be seen as improving the chances of
future success so that strategy may relate to building capabilities. The capabilities of an
enterprise may be exceptional or even unique. The essence of any firm is partly defined by
the unique set of skills and knowledge of its people and teams. Strategic building of
capabilities can exploit this uniqueness.
7. Strategy is fit between capabilities and opportunities. One aim of strategy is to achieve
survival and future success. Success results from a good match between the capabilities of
the enterprise and the opportunities to serve the needs of customers better than competitors.
One aspect of strategy is to improve the fit between capabilities and the opportunities
available and thereby to make the business more successful.
8. Strategy is the result of deep involvement with business. This aspect contrasts with the
idea of strategy as detached thinking about the business. Strategy emerges from deep
involvement of managers with the business rather than doing abstract exercises in strategy
formulation.
16
9. Strategy is a pattern of behavior resulting from embedded culture. Every enterprise has
its own culture. This culture is easy to observe but hard to change. The strategies that an
enterprise is able to adopt are partly determined by this culture. Those within the enterprise
see the outside world through their own conditioned perspective and this influences
everything they do and permeates their strategy even though they may be unaware of this. In
addition, since cultures are hard to imitate, culture may sometimes be a source of competitive
advantage.
10. Strategy is an emerging pattern of successful behavior. Few strategies are implemented
in their entirety in the form in which they were formulated. Similarly, the reasons for success
when analyzed retrospectively may be different from what was expected in advance. Part of
strategy may therefore be in recognizing the patterns that seem to have led to success even if
these patterns arose by chance rather than as a result of planed actions.
Activity 1.3. How can strategy be the result of deep involvement with business?
Explain with example.
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1.4. MODELS OF STRATEGY MAKING
Firms use two major models to help them develop their vision and mission and then choose one
or more strategies to use in the pursuit of strategic competitiveness and above-average returns:
the industrial organization model and the resource-based model.
The Industrial Organization Model
From the 1960s through the 1980s, the external environment was thought to be the primary
determinant of strategies that firms selected to be successful. The industrial organization (I/O)
model of strategy explains the external environment’s dominant influence on a firm’s strategic
17
actions. The model specifies that the industry in which a company chooses to compete has a
stronger influence on performance than do the choices managers make inside their organizations.
The firm’s performance is believed to be determined primarily by a range of industry properties,
including economies of scale, barriers to market entry, diversification, product differentiation,
and the degree of concentration of firms in the industry.
Grounded in economics, the I/O model has four underlying assumptions. First, the external
environment is assumed to impose pressures and constraints that determine the strategies that
would result in above-average returns. Second, most firms competing within an industry or
within a certain segment of that industry are assumed to control similar strategically relevant
resources and to pursue similar strategies in light of those resources. Third, resources used to
implement strategies are assumed to be highly mobile across firms, so any resource differences
that might develop between firms will be short-lived. Fourth, organizational decision makers are
assumed to be rational and committed to acting in the firm’s best interests, as shown by their
profit-maximizing behaviors. The I/O model challenges firms to locate the most attractive
industry in which to compete. Because most firms are assumed to have similar valuable
resources that are mobile across companies, their performance generally can be increased only
when they operate in the industry with the highest profit potential and learn how to use their
resources to implement the strategy required by the industry’s structural characteristics.
The five forces model of competition is an analytical tool used to help firms with this task. The
model encompasses several variables and tries to capture the complexity of competition. The five
forces model suggests that an industry’s profitability (i.e., its rate of return on invested capital
relative to its cost of capital) is a function of interactions among five forces: suppliers, buyers,
competitive rivalry among firms currently in the industry, product substitutes, and potential
entrants to the industry. Firms can use this tool to understand an industry’s profit potential and
the strategy necessary to establish a defensible competitive position, given the industry’s
structural characteristics. Typically, the model suggests that firms can earn above-average
returns by manufacturing standardized products or producing standardized services at costs
below those of competitors (a cost leadership strategy) or by manufacturing differentiated
products for which customers are willing to pay a price premium (a differentiation strategy).
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The cost leadership and product differentiation strategies are fully described later in this chapter.
The I/O model suggests that above-average returns are earned when firms implement the strategy
dictated by the characteristics of the general, industry, and competitor environments. Companies
that develop or acquire the internal skills needed to implement strategies required by the external
environment are likely to succeed, while those that do not are likely to fail. Hence, this model
suggests that returns are determined primarily by external characteristics rather than by the
firm’s unique internal resources and capabilities.
This suggests that both the environment and the firm’s characteristics play a role in determining
the firm’s specific level of profitability. Thus, there is likely a reciprocal relationship between the
environment and the firm’s strategy, thereby affecting the firm’s performance. As you can see,
the I/O model considers a firm’s strategy to be a set of commitments, actions, and decisions that
are formed in response to the characteristics of the industry in which the firm has decided to
compete. The resource-based model, discussed next, takes a different view of the major
influences on strategy formulation and implementation.
Resource-Based Model
The resource-based model assumes that each organization is a collection of unique resources and
capabilities. The uniqueness of its resources and capabilities is the basis for a firm’s strategy and
its ability to earn above-average returns. Resources are inputs into a firm’s production process,
such as capital equipment, the skills of individual employees, patents, finances, and talented
managers. In general, a firm’s resources are classified into three categories: physical, human, and
organizational capital.
Individual resources alone may not yield a competitive advantage. In fact, resources have a
greater likelihood of being a source of competitive advantage when they are formed into a
capability. A capability is the capacity for a set of resources to perform a task or an activity in an
integrative manner. Capabilities evolve over time and must be managed dynamically in pursuit
of above-average returns. Core competencies are resources and capabilities that serve as a
source of competitive advantage for a firm over its rivals. Core competencies are often visible in
the form of organizational functions. For example, marketing is a core competence for Philip
19
Morris, a division of the Altria Group, Inc. This means that Philip Morris has used its resources
to form marketing related capabilities that in turn allow the firm to market its products in ways
that are superior to how competitors market their products.
According to the resource-based model, differences in firms’ performances across time are due
primarily to their unique resources and capabilities rather than to the industry’s structural
characteristics. This model also assumes that firms acquire different resources and develop
unique capabilities based on how they combine and use the resources; that resources and
certainly capabilities are not highly mobile across firms; and that the differences in resources and
capabilities are the basis of competitive advantage. Through continued use, capabilities become
stronger and more difficult for competitors to understand and imitate. As a source of competitive
advantage, a capability “should be neither so simple that it is highly imitable, nor so complex
that it defies internal steering and control.” The resource-based model suggests that the strategy
the firm chooses should allow it to use its competitive advantages in an attractive industry (the
I/O model is used to identify an attractive industry). Not all of a firm’s resources and capabilities
have the potential to be the basis for competitive advantage. This potential is realized when
resources and capabilities are valuable, rare, costly to imitate, and non-substitutable. Resources
are valuable when they allow a firm to take advantage of opportunities or neutralize threats in its
external environment. They are rare when possessed by few, if any, current and potential
competitors. Resources are costly to imitate when other firms either cannot obtain them or are at
a cost disadvantage in obtaining them compared with the firm that already possesses them. And
they are non-substitutable when they have no structural equivalents.
Many resources can either be imitated or substituted over time. Therefore, it is difficult to
achieve and sustain a competitive advantage based on resources alone. When these four criteria
are met, however, resources and capabilities become core competencies. As noted previously,
research shows that both the industry environment and a firm’s internal assets affect that firm’s
performance over time. Thus, to form a vision and mission, and subsequently to select one or
more strategies and to determine how to implement them, firms use both the I/O and the
resource-based models. In fact, these models complement each other in that one (I/O) focuses
outside the firm while the other (resource-based) focuses inside the firm. Successful strategy
formulation and implementation actions result only when the firm properly uses both models.
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In industrial organization and resource-based models, strategic utilization and development of
HR is important. The resource-based model, as HR are resources that are sources of sustainable
competitive advantage, is the basis for strategic HRM.
Activity 1.4. What are the differences between the industrial organization and the
resource-based models of managing strategies?
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1.5. APPROACHES TO STRATEGY MAKING
In the strategic management literature, it was believed that strategy is a deliberate process.
However, Mintzberg (1987), in his definition of strategy as a plan and as a pattern, distinguished
the approaches of strategy formation as deliberate and emergent. He argues that strategy may be
formed intentionally or may be emerged incrementally. Formal approach to strategy formation
results in deliberation on the part of decision-makers which results in thinking before action
whereas the incremental approach allows the strategy to emerge in response to an evolving
situation. According to Mintzberg (1987), for a variety of reasons and pressures, top decision-
makers do not follow a formal and rational approach when formulating their organizational
strategy. Based on their experiences and intuitions managers adopt an informal and bounded
rational approach to strategy formation.
More specifically, Whittington (1993) presents four generic approaches to strategy formation -
classical, evolutionary, processual, and systemic - along the two dimensions of ‘processes’ and
‘outcomes of strategy’. The process dimension deals with the extent to which strategy is formed
in a rational, formal, planned and deliberate manner, or is a result of bounded rational approach
i.e. emergent in nature. The outcome dimension relates to the extent to which organizational
strategy focuses on profit-maximizing outcomes or more diverse/pluralist outcomes (see Figure
1.1).
21
OUTCOMES
Profit-Maximizing
Classical Evolutionary
PROCESSES
Deliberate Emergent
Systemic Processual
Pluralistic
Figure1. 1 Whittington’s (1993) Generic Perspective on Strategy
The Classical Approach: According to Whittington (1993), in the classical approach, strategy
is formed as a rational process of deliberate calculation. The process of strategy formation is seen
as being separate from the process of implementation. In the process and outcomes dimensions
of strategy, it is a mix of maximum profit-maximization and a formal planned and deliberate
approach to strategy formation. Organizations adopting the classical approach follow a clear,
rational, planned and deliberate process of strategy formation and aim for maximization of
profits. This approach is most likely to be successful when the organization’s objectives and
goals are clear, the external environment is relatively stable, the information about both the
external and internal environment is reliable and the decision-makers are able to analyze it
thoroughly and make highly calculated decisions in order to adopt the best possible choice.
Strategy formulation is left to top managers and the implementation is carried out by operational
managers of different departments. This scenario demonstrates the difference between ‘first-
order’ strategy or decisions and ‘second-order’ strategy or decisions, where the former represents
the strategy formation by top managers and the latter is an implementation of the same by lower-
level managers. It also represents the classic top-down approach of Chandler (1962) where
22
organization structure follows the strategy. In the HRM area this approach simply implies that
the role of the HR-function is to maximize the contribution of human assets in order to achieve
corporate goals. It encompasses approaches by which we attempt to link individual attitude and
role behavior to organizational performance in a logical and rational manner.
The Evolutionary Approach: In the evolutionary approach, strategy is a product of market

forces in which the most efficient and productive organizations win through. In the process and
outcome dimensions, it is a mix of profit-maximization and an emergent kind of strategy
formation. According to the evolutionary approach, it is not possible to adopt a rational, planned
and deliberate process, although profit-maximization is still the focus. Competitive processes
ruthlessly select out the fittest for survival. It is the market that decides and not the manager.
The only thing the manager can do is to adapt the organization as optimally as possible to the
demands of the market place. If this is not done, the organization will not survive. In such
competitive and uncertain conditions where managers do not feel they are in command, only the
best can survive. The key to success thus largely lies with a good fit between organizational
strategy and business environment. Kay (1999) emphasizing the evolutionary nature of strategy,
comments that there is often little ‘intentionality’ in firms and that it is frequently the market
rather than the visionary executive that chose the strategic match that was most effective.
In the field of SHRM, evolutionary approach is recognized in HR managers who want to keep
their HR as flexible as possible, embarking on corporate/business strategies and making use of
transaction cost economics in order to decide on make or buy issues. Make or buy, both with
respect to the employees themselves and in connection with the kind of HRM activities that
should take place in-house or should be outsourced and/or delegated to line management or to
autonomous work groups.
The Processual Approach: In the processual approach, strategy formulation is an incremental

process that evolves through discussion and disagreement. It may be impossible to specify what
the strategy is until after the event. In the process and outcome dimensions, it is a mix of the
emergent approach and pluralistic type of outcome. This approach is different on the profit-
maximization perspective where managers are not clear about what the ‘optimum’ level of
output is or should be. A high degree of confusion and complexity exists both within the
23
organizations and in the markets; the strategy emerges in small steps (increments) and often at
irregular intervals from a practical process of learning, negotiating and compromising instead of
clear series of steps. This is related to the inability of senior managers to comprehend huge banks
of information, a variety of simultaneously occurring factors and a lack of desire to optimize and
rationalize decisions. The outcome is then perhaps a set of ‘satisficing’ behaviors, acceptable to
the ‘dominant coalitions’, which is the reality of strategy-making. Quinn (1980) has produced the
concept of ‘logical incrementalism’, which suggests that strategy evolves in several steps rather
than being conceived as a whole.
In the context of SHRM this approach refers to the incremental way in which strategic assets
(among which patents, knowledge, culture, and organizational routines) gradually develop over
time into core competences. The main role of the HRM function is to develop and maintain
people-related competences over time. The HRM function can also be seen as responsible for
contributing to the social fabric, which builds up over the long term, encompassing the less
planned and intentional processes of skill formation, tacit knowledge, willingness to change and
spontaneous co-operation among the members of the organization.
The Systemic Approach: In the systemic approach, strategy is shaped by the social system in
which it is embedded. In other words, strategy reflects the social system in which it is enacted.
In the process and outcome dimensions, it is a mix of deliberate process and pluralistic
outcomes. Emphasizing the social embeddedness of economic activity, the objectives and
practices depend on the particular social system in which strategy making takes place. This
approach emphasizes the significance of larger social systems, characterized by factors such as
national culture, national business systems, demographic composition of a given society, and the
dominant institutions of the society within which a firm is operating. Networks, in which
economic activity is embedded, may include families, the state, professional and educational
background, religion and ethnicity and these networks influence the means and ends of action.
The strategy formation is strongly influenced by such factors, and faced by these pressures the
strategist may intentionally deviate from rational planning and profit-maximization. From the
SHRM point of view, it refers to the social context of the organization and how this influences
and shapes HRM policies and practices. It will not be sensible to suggest that organizations
adopt only one of the four particular approaches to strategy formation, but certainly it has to be a
24
mixture of possible combinations along the two dimensions of processes and profit-
maximization.
In addition, Mintzberg, Ahlstrand, and Lampel (1993) have identified three prescriptive and
seven descriptive schools of strategic thought. These schools of thought differ according to their
premises and the nature of the strategy process (Macmillan and Tampoe, 2000). The three
prescriptive schools are the design, the planning, and the positioning schools. The design school
sees strategy formulation as a deliberate process of conscious thought with the responsibility
resting with the chief executive. The planning school sees strategy as a formal process and
provides a clear model of how to do strategic planning using clear and logical methods. The
positioning school sees the formation of strategy as depending on an analytical process. These
three prescriptive schools may all be seen as variations of what Whittington called the classical
school.
Activity 1.5. Explain the evolutionary approach to strategy making.
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1.6. PORTER’S GENERIC STRATEGIES
Michael Porter developed the most commonly cited generic strategy framework. According to
Porter’s typology, a business unit must address two basic competitive concerns. First, managers
must determine whether the business unit should focus its efforts on an identifiable subset of the
industry in which it operates or seek to serve the entire market as a whole. For example, specialty
clothing stores in shopping malls adopt the focus concept and concentrate their efforts on limited
product lines primarily intended for a small market niche. In contrast, many chain grocery stores
seek to serve the mass market – or at least most of it – by selecting an array of products and
services that appeal to the general public as a whole. The smaller the business, the more
desirable a focus strategy tends to be - although this is not always the case.
25
Second, managers must determine whether the bbusiness
usiness unit should compete primarily by
minimizing its costs relative to those of its competitors (that is, a low
low-cost
cost strategy) or by seeking
to offer unique and/or unusual products and services (that is, a differentiation strategy). Porter
views these two
wo alternatives as mutually exclusive because differentiation efforts tend to erode a
low-cost
cost structure by raising production, promotional, and other expenses. In fact, Porter labeled
business units attempting to emphasize both cost leadership and differentiation
differentiation simultaneously as
“stuck in the middle.” However, this is not necessarily the case, and the low-cost-differentiation
low
strategy is a viable alternative for some businesses. Combining the two strategies is difficult, but
businesses able to do so can perform exceptionally well.
Companies pursue a business--level

level strategy to gain a competitive advantage that enables them to
outperform rivals and achieve above
above-average
average returns. They can choose from three basic generic
competitive approaches - cost leadership,
leaders differentiation, and focus - although, as we will see,
these can be combined in different ways. These strategies are called generic because all
businesses or industries can pursue them, regardless of whether they are manufacturing, service,
or nonprofit
it enterprises. Each of the generic strategies results from a company’s making
consistent choices on product, market, and distinctive competences - choices that reinforce each
other. Figure 1.2 summarizes the choices appropriate for each of the three generic
gener strategies.
Figure1. 2 Product/Market/Distinctive-Competence
Product/Market/Distinctive Competence Choices and Generic Competitive Strategies
Cost-leadership strategy
A company’s goal in pursuing a cost-leadership strategy is to outperform competitors by doing

everything the company can to produce goods or services at a cost lower than those of
competitors. Two advantages accrue from a cost-leadership
cost leadership strategy. First, because of its lower
26
costs, the cost leader is able to charge a lower price than its competitors and yet make the same
level of profit. If companies in the industry charge similar prices for their products, the cost
leader still makes a higher profit than its competitors because of its lower costs. Second, if
rivalry within the industry increases and companies start to compete on price, the cost leader will
be able to withstand competition better than the other companies because of its lower costs. For
both of these reasons, cost leaders are likely to earn above-average profits. How does a company
become the cost leader? It achieves this position by means of the product/market/distinctive-
competence choices that it makes to gain a low-cost competitive advantage (see Figure 2.2).
The cost leader chooses a low level of product differentiation. Differentiation is expensive; if the
company expends resources to make its products unique, then its costs rise. The cost leader aims
for a level of differentiation not markedly inferior to that of the differentiator (a company that
competes by spending resources on product development), but a level obtainable at low cost. The
cost leader does not try to be the industry leader in differentiation; it waits until customers want a
feature or service before providing it. For example, a cost leader does not introduce stereo sound
in television sets. It adds stereo sound only when consumers clearly want it.
The cost leader also normally ignores the different market segments and positions its product to
appeal to the average customer. This is because developing a line of products tailored to the
needs of different market segments is an expensive proposition. A cost leader normally engages
in only a limited amount of market segmentation. Even though no customer may be totally happy
with the product, the fact that the company normally charges a lower price than its competitors
attracts customers to its products.
In developing distinctive competences, the overriding goal of the cost leader must be to increase
its efficiency and lower its costs compared with its rivals. The development of distinctive
competences in manufacturing and materials management is central to achieving this goal.
Companies pursuing a low-cost strategy may attempt to ride down the experience curve so that
they can lower their manufacturing costs.
Achieving a low-cost position may also require that the company develop skills in flexible
manufacturing and adopt efficient materials management techniques Consequently, the
manufacturing and materials management functions are the center of attention for a company
pursuing a cost-leadership strategy, and the distinctive competences of other functions are
27
shaped to meet the needs of manufacturing and materials management. For example, the sales
function may develop the competence of capturing large, stable sets of customers’ orders. This,
in turn, allows manufacturing to make longer production runs and so achieve economies of scale
and reduce costs. The human resource function may focus on instituting training programs and
compensation systems that lower costs by enhancing employees’ productivity, and the research
and development function may specialize in process improvements to lower the manufacturing
costs.
Cost leadership strategy is a strategy to gain competitive advantage through lower costs of
operations and lower prices for products. These firms aggressively seek efficiencies in
production and use tight controls to gain an advantage over their competitors. According
Schuler and Jackson (1987), cost leaders’ strategies can be translated in HRM characterized by
few and simple tasks, few skills required to do the job, narrow career paths, training few
employees, evaluation on short term criteria, and individual incentives.
Differentiation strategy
The objective of the generic differentiation strategy is to achieve a competitive advantage by

creating a product that is perceived by customers to be unique in some important way. The
differentiated product’s ability to satisfy a customer’s need in a way that its competitors cannot
means that the company can charge a premium price - a price considerably above the industry
average. The ability to increase revenues by charging premium prices (rather than by reducing
costs as the cost leader does) allows the differentiator to outperform its competitors and gain
above-average profits. The premium price is usually substantially above the price charged by the
cost leader, and customers pay it because they believe the product’s differentiated qualities are
worth the difference. Consequently, the product is priced on the basis of what customers are
willing to pay for it. Cars made by Mercedes-Benz, BMW, and Lexus command premium prices
because customers perceive that the luxury and prestige of owning these vehicles are something
worth paying for.
As Figure 1.2 shows, a differentiator chooses a high level of product differentiation to gain a
competitive advantage. Product differentiation can be achieved in three principal ways: quality,
28
innovation, and responsiveness to customers. Innovation is very important for high-tech products
for which new features are the source of differentiation, and many people pay a premium price
for new and innovative products, such as a state-of-the-art computer, stereo, or car. When
differentiation is based on responsiveness to customers, a company offers comprehensive after-
sale service and product repair. This is an especially important consideration for complex
products such as cars and domestic appliances, which are likely to break down periodically. In
service organizations, quality-of-service attributes are also very important. Similarly, law firms
and accounting firms emphasize to clients the service aspects of their operations: their
knowledge, professionalism, and reputation.
Finally, a product’s appeal to customers’ psychological desires can become a source of

differentiation. The appeal can be to prestige or status, to patriotism, to safety of home and
family, or to value for money. Differentiation can also be tailored to age groups and to
socioeconomic groups. Indeed, the bases of differentiation are endless.
A company that pursues a differentiation strategy strives to differentiate itself along as many
dimensions as possible. The less it resembles its rivals, the more it is protected from competition
and the wider its market appeal.
Generally, a differentiator chooses to segment its market into many niches. Now and then, a
company may offer a product designed for each market niche and decide to be a broad
differentiator, but a company may also choose to serve just those niches in which it has a
specific differentiation advantage. For example, Sony produces over twenty different kinds of
high-definition, flat-screen televisions, filling all the niches from mid-priced to high-priced sets.
However, its lowest priced models are always priced hundreds of dollars above those of its
competitors, bringing into play the premium-price factor. You have to pay extra for a Sony.
Similarly, although Mercedes-Benz has filled niches below its old high-priced models with its S
and C series, it has made no attempt to produce a car for every market segment.
Finally, in choosing which distinctive competence to pursue, a differentiated company

concentrates on the organizational function that provides the sources of its differentiation
advantage. Differentiation on the basis of innovation and technological competence depends on
29
the R&D function. Efforts to improve service to customers depend on the quality of the sales
function. A focus on a specific function does not mean, however, that the control of costs is not
important for a differentiator. A differentiator does not want to increase costs unnecessarily and
tries to keep them somewhere near those of the cost leader. However, because developing the
distinctive competence needed to provide a differentiation advantage is often expensive, a
differentiator usually has higher costs than the cost leader. Still, it must control all costs that do
not contribute to its differentiation advantage so that the price of the product does not exceed
what customers are willing to pay. Because bigger profits are earned by controlling costs and by
maximizing revenues, it pays to control costs but not to minimize them to the point of losing the
source of differentiation.
Differentiation strategy is a strategy to gain competitive advantage by creating a distinct product

or offering a unique service. This strategy requires higher emphasis on employee training and
employee flexibility to change. Organizations with a differentiation strategy translate their
strategy in HRM characterized by many and complex tasks, many skills required to do the job,
broad career paths, training all employees, evaluation on long term criteria and group incentives.
Cost Leadership and Differentiation
Recently, changes in production techniques - in particular, the development of flexible

manufacturing technologies - have made the choice between cost-leadership and differentiation
strategies less clear-cut. With technological developments, companies have found it easier to
obtain the benefits of both strategies. The reason is that the new flexible technologies allow firms
to pursue a differentiation strategy at a low cost; that is, companies can combine these two
generic strategies.
Traditionally, differentiation was obtainable only at high cost, because the necessity of producing
different models for different market segments meant that firms had to have short production
runs, which raised manufacturing costs. In addition, the differentiated firm had to bear higher
marketing costs than the cost leader because it was servicing many market segments. As a result,
differentiators had higher costs than cost leaders, which produced large batches of standardized
products. However, flexible manufacturing may enable a firm pursuing differentiation to
30
manufacture a range of products at a cost comparable to that of the cost leader. The use of
flexible manufacturing cells reduces the costs of retooling the production line and the costs
associated with small production runs. Indeed, a factor promoting the current trend toward
market fragmentation and niche marketing in many consumer goods industries, such as mobile
phones, computers, and appliances, is the substantial reduction of the costs of differentiation
achieved via flexible manufacturing.
Another way that a differentiated producer may be able to realize significant economies of scale
is by standardizing many of the component parts used in its end products. In the 2000s, for
example, DaimlerChrysler began to offer more than twenty different models of cars and
minivans to different segments of the auto market. However, despite their different appearances,
all twenty models are based on only three different platforms. Moreover, most of the cars use
many of the same components, including axles, drive units, suspensions, and gear boxes. As a
result, DaimlerChrysler has been able to realize significant economies of scale in the
manufacture and bulk purchase of standardized component parts.
A company can also reduce both production and marketing costs if it limits the number of
models in the product line by offering packages of options rather than letting consumers decide
exactly what options they require. It is increasingly common for auto manufacturers, for
example, to offer an economy auto package, a luxury package, and a sports package to appeal to
their principal market segments. Package offerings substantially lower manufacturing costs
because long production runs of the various packages are possible. At the same time, the firm is
able to focus its advertising and marketing efforts on particular market segments, so these costs
are also decreased. Once again, the firm is reaping gains from differentiation and low cost at the
same time.
Taking advantage of new developments in production and marketing, some companies are
managing to reap the gains from cost-leadership and differentiation strategies simultaneously.
Because they can charge a premium price for their products compared with the price charged by
the pure cost leader and because they have lower costs than the pure differentiator, they obtain at
least an equal, and probably a higher, level of profit than firms pursuing only one of the generic
strategies.
31
Focus Strategy
The third generic competitive strategy, the focus strategy, differs from the other two chiefly in
that it is directed toward serving the needs of a limited customer group or segment. A focus
strategy concentrates on serving a particular market niche, which can be defined geographically,
by type of customer, or by a segment of the product line. For example, a geographic niche can be
defined by region or even by locality. Selecting a niche by type of customer might mean serving
only the very rich, the very young, or the very adventurous. A company that concentrates on a
segment of the product line may focus only on vegetarian foods, on very fast cars, or on designer
clothes or sunglasses, for example. In following a focus strategy, a company is specializing in
some way. Once it has chosen its market segment, a company pursues a focus strategy through
either a differentiation or a low-cost approach. Figure 1.3 shows these two different kinds of
focus strategies and compares them with a pure cost-leadership or pure differentiation strategy.
In essence, a focused company is a specialized differentiator or a cost leader. If a company uses a

focused low-cost approach, it competes against the cost leader in the market segments in which it
has no cost disadvantage. For example, in local cement markets, the focuser has lower
transportation costs than the low-cost national company. The focuser may also have a cost
advantage because it is producing complex or custom-built products that do not lend themselves
easily to economies of scale in production and, therefore, offer few experience-curve advantages.
With a focus strategy, a company concentrates on small-volume custom products, for which it
has a cost advantage, and leaves the large-volume standardized market to the cost leader.
If a company uses a focused differentiation approach, then all the means of differentiation that
are open to the differentiator are available to the focused company. The point is that the focused
company competes with the differentiator in only one or a few segments. Focused companies are
likely to be able to differentiate their products successfully because of their detailed knowledge
of a small customer set or of a geographic region.
Furthermore, concentration on a small range of products sometimes allows a focuser to develop

innovations faster than a large differentiator can. However, the focuser does not attempt to serve
all market segments, because doing so would bring it into direct competition with the
differentiator. Instead, a focused company concentrates on building market share in one or a few
32
market segments and, if successful, may begin to serve more and more market segments and chip
away at the differentiator’s competitive advantage over time.
Figure 1.2 illustrated the specific product/market/distinctive competence choices made by a

focused company. Differentiation can be high or low because the company can pursue a low-cost
or a differentiation approach. As for customer groups, a focused company chooses specific
niches in which to compete rather than going for a whole market, as a cost leader does, or filling
a large number of niches, as a broad differentiator does. The focused firm can pursue any
distinctive competence because it can seek any kind of differentiation or low-cost advantage.
Thus, it might find a cost advantage and develop superior efficiency in low-cost manufacturing
within a region. Alternatively, a focused firm might develop superior skills in responsiveness to
customers, based on its ability to serve the needs of regional customers in ways that a national
differentiator would find very expensive.
The many avenues that a focused company can take to develop a competitive advantage explain
why there are so many more small companies than large ones. A focused company has enormous
opportunity to develop its own niche and compete against larger low-cost and differentiated
companies. A focus strategy provides an opportunity for an entrepreneur to find and then take
advantage of a gap in the market by developing an innovative product that customers cannot do
without. Many large companies started with a focus strategy, and, of course, one means by which
companies can expand is to take over other focused companies.
Figure1. 3 Types of Business-Level Strategies
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Stuck in the Middle
Each generic strategy requires a company to make consistent product/market/distinctive-

competence choices to establish a competitive advantage. Thus, for example, a low-cost
company cannot strive for a high level of market segmentation, as a differentiator does, and
provide a wide range of products, because doing so would raise production costs too much and
the company would lose its low-cost advantage. Similarly, a differentiator with a competence in
innovation that tries to reduce its expenditures on research and development, or one with a
competence in responsiveness to customers through after-sale service that seeks to economize on
its sales-force to decrease costs, is asking for trouble because it will lose its competitive
advantage as its distinctive competence disappears.
Choosing a business-level strategy successfully means giving serious attention to all elements of
the competitive plan. Many companies, through ignorance or error, do not do the planning
necessary for success in their chosen strategy. Such companies are said to be stuck in the
middle because they have made product/market choices in such a way that they have been
unable to obtain or sustain a competitive advantage. As a result, they have no consistent
business-level strategy, experience below-average performance, and suffer when industry
competition intensifies.
Some companies that find themselves stuck in the middle may have started out pursuing one of
the three generic strategies but then made poor resource allocation decisions or experienced a
hostile, changing environment. It is very easy to lose control of a generic strategy unless strategic
managers keep close track of the business and its environment, constantly adjusting
product/market choices to suit changing conditions within the industry. There are many paths to
getting stuck in the middle. Quite commonly, a focuser gets stuck in the middle when it becomes
overconfident and starts to act like a broad differentiator.
People Express, a now defunct airline, exemplified a company in this situation. It started out as a
specialized air carrier serving a narrow market niche: low-priced travel on the eastern seaboard.
In pursuing this focus strategy based on cost leadership, it was very successful. But when it tried
to expand to other geographic regions and began taking over other airlines to gain a larger
number of planes, it lost its niche. People Express became just one more carrier in an
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increasingly competitive market where it had no competitive advantage against other national
carriers. The result was financial disaster, and People Express was incorporated into Continental
Airlines. By contrast, Southwest Airlines, a focused low-cost company, continues to focus on
this strategy and has grown successfully to become a national low-cost leader—as Continental
and other national carriers are currently seeking to do.
Differentiators, too, can fail in the market and end up stuck in the middle if competitors attack
their markets with more specialized or low-cost products that blunt their competitive edge. This
happened to IBM in the mainframe computer market as PCs grew more powerful and became
able to do the job of the much more expensive mainframes. The increasing movement toward
flexible manufacturing systems aggravates the problems faced by cost leaders and differentiators.
Many large firms will become stuck in the middle unless they make the investment needed to
pursue both strategies simultaneously. No company is safe in a highly competitive global
environment, and each must be constantly on the lookout to take advantage of competitive
advantages as they arise and to defend the advantages it already has.
To sum up, successful management of a generic competitive strategy requires that strategic
managers attend to two main issues. First, they must ensure that their product/market/distinctive-
competence decisions are oriented toward one specific competitive strategy. Second, they need
to monitor the environment so that they can keep the firm’s sources of competitive advantage in
tune with changing opportunities and threats.
Depending on the overall strategy employed by the firm, the HR strategies will show substantial
variation. HRM cannot be conceptualized as a stand-alone corporate issue. Strategically
speaking it must flow from and be dependent up on the organization’s market oriented corporate
strategy. Thus, each competitive strategy discussed above involves a unique set of responses
from workers and a particular HR strategy that might generate and reinforce a unique pattern of
behavior. HRM is therefore seen to be strategic by virtue of its alignment with business strategy
and its internal consistency.
Considering the emphasis on organizational strategy leading individual HR practices that interact
with organizational strategy in order to improve organizational performance, a number of HRM
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combinations can be adopted by firms to support Porter’s model of business strategies. In this
regard, Schuler (1989) proposes corresponding HRM philosophies of ‘accumulation’ (careful
selection of good candidates based on personality rather technical fit), ‘utilization’ (selection of
individuals on the basis of technical fit), and ‘facilitation’ (the ability of employees to work
together in collaborative situations). Thus, firms following a quality strategy will require a
combination of accumulation and facilitation HRM philosophies in order to acquire, maintain
and retain core competencies; firms pursuing a cost-reduction strategy will require a utilization
HRM philosophy and will emphasize short-run relationships, minimize training and development
and highlight external pay comparability; and firms following an innovation strategy will require
a facilitation HRM philosophy so as to bring out the best out of existing staff.
Activity 1.6. Compare and contrast differentiation strategy and cost leadership strategy.
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1.7. THE MILES AND SNOW STRATEGY FRAMEWORK
Miles and Snow have proposed a strategy classification of four distinct characters: defenders,
prospectors, analyzers and reactors. The classification is based on assessment of how the
company responds to the following three problems or challenges: (1) entrepreneurial, which
defines the organization’s product-market domain; (2) engineering, which focuses on the choice
of technologies and process for production and distribution; and (3) administration, which
involves the formalization, rationalization and innovation of an organization’s structure and
policy processes
The defenders are companies which have a stable set of products or services and compete
primarily on the basis of price, quality, and service. Defender organizations face the
entrepreneurial problem of how to maintain a stable share of the market, and hence they function
best in stable environments. A common solution to this problem is cost leadership, and so these
36
organizations achieve success by specializing in particular areas and using established and
standardized technical processes to maintain low costs. In addition, defender organizations tend
to be vertically integrated in order to achieve cost efficiency. Defender organizations face the
administrative problem of having to ensure efficiency, and thus they require centralization,
formal procedures, and discrete functions. Because their environments change slowly, defender
organizations can rely on long-term planning. The defender strategy entails a decision not to
aggressively pursue new markets but rather drive to seal off portion of the total market to create
stable, hard-to-enter domain for competitors.
Defenders are companies with a limited product line that focus on improving the efficiency of
their existing operations. This cost orientation makes them unlikely to innovate in new areas.
Defenders create a secure market share with moderate, steady growth, narrowed its product
market domains and limit their search for new opportunities, and instead, focus on internal ways
to enhance organizational effectiveness. In the context of HRM, this strategy matches with
filling job vacancies internally, adopting multiple methods for promotion, and offering a broader
career path. Furthermore, careful attention to employee training and development, stress internal
pay equity, and many types of employee incentives
In this classification the prospectors are defined as companies which are first in the market and
have a very broad product-market definition. Prospector organizations face the entrepreneurial
problem of locating and exploiting new product and market opportunities. These organizations
thrive in changing business environments that have an element of unpredictability, and succeed
by constantly examining the market in a quest for new opportunities. Moreover, prospector
organizations have broad product or service lines and often promote creativity over efficiency.
Prospector organizations face the operational problem of not being dependent on any one
technology. Consequently, prospector companies prioritize new product and service
development and innovation to meet new and changing customer needs and demands and to
create new demands. The administrative problem of these companies is how to coordinate
diverse business activities and promote innovation. Prospector organizations solve this problem
by being decentralized, employing generalists (not specialists), having few levels of
management, and encouraging collaboration among different departments and units. The
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prospector strategy can be seen as the most aggressive on of all these four. For prospector it is
important to have reputation as innovator both in product and market development.
Prospectors are companies with fairly broad product lines that focus on product innovation and
market opportunities. This sales orientation makes them somewhat inefficient. They tend to
emphasize creatively over efficiency. Firms employing prospector strategy are characterized by
rapid growth and continue resource deployment, particularly of management and technical
personnel. The ability to develop new products and enter new markets requires creativity. Firms
with this strategy can compete not only in the early phase of product development when the
emphasis is on uniqueness, but later on as well, they operate routinely and efficiently through
using formalized structure and processes. In the HRM practice, this strategy matches with
assessing performance on a short term and individual basis, and provide lower base pay and poor
job security
The analyzers have been defined as companies, which have characteristics from both of the
prior strategies and they seek a balance between stable and changing domains. Analyzer
organizations share characteristics with prospector and defender organizations; thus, they face
the entrepreneurial problem of how to maintain their shares in existing markets and how to find
and exploit new markets and product opportunities. These organizations have the operational
problem of maintaining the efficiency of established products or services, while remaining
flexible enough to pursue new business activities. Consequently, they seek technical efficiency to
maintain low costs, but they also emphasize new product and service development to remain
competitive when the market changes. The administrative problem is how to manage both of
these aspects. Like prospector organizations, analyzer organizations cultivate collaboration
among different departments and units. Analyzer organizations are characterized by balance, a
balance between defender and prospector organizations, analyzer drivers for strategy are
minimizing risk while maximizing the opportunity for profit.
Analyzers are companies that operate in at least two different product market areas: one stable
and one variable. In the stable areas, efficiency is emphasized while in the variable areas,
innovation is emphasized. The HR strategies for analyzers are mostly midway between those of
defenders and prospectors.
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The reactor organizations do not have a systematic strategy, operational driver, or structure, they
exhibit actions both of inconsistent and unstable. They are not prepared for changes they face in
their business environments. If a reactor organization has a defined strategy and structure, it is no
longer appropriate for the organization’s environment. A reactor has no proactive strategy. They
react to events as they occur and their response is inappropriate for the situation. Miles et al.
(1978) have identified three reasons why organizations become reactors: (1) top management
may not have clearly articulated the organization’s strategy; (2) management does not fully
shape the organization’s structure and processes to fit a chosen strategy; and (3) tendency for
management to maintain the organization’s current strategy-structure relationship despite
overwhelming changes in environmental conditions
Also the failure to execute defender, prospector or analyzer strategy can lead the organization
actual strategy to be reactor approach. Reactors are companies that lack a consistent strategy –
structure - culture relationship. Their responses to environmental pressures tend to be piecemeal
strategic changes. They are organizations in which top managers frequently perceive change and
uncertainty occurring in their organizational environments but are unable to respond effectively.
Strategy Definition
Prospector Is innovative and growth oriented, searches for new markets and
new growth opportunities, encourages risk taking
Defender Protects current markets, maintains stable growth, serves current
customers
Analyzer Maintains current markets and current customer satisfaction with
moderate emphasis on innovation
Reactor No clear strategy, reacts to changes in the environment, drifts with
events
Figure1. 4 Miles and Snow’ Strategy Framework
Activity 1.7. Are prospectors and defenders opposite? Why or why not?
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1.8. CHAPTER SUMMARY
Strategy is the pattern of major objectives, purposes, or goals and essential policies or plans for achieving those
goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is
or is to be. Strategy is defined as a plan, a ploy, a pattern, a perspective, a position. Firms use two major models to
help them develop their vision and mission and then choose one or more strategies to use in the pursuit of strategic
competitiveness: the industrial organization (I/O) model and resource-based (RB) model.
For a variety of reasons and pressures, top decision-makers do not follow a formal and rational approach when
formulating their organizational strategy. Based on their experiences and intuitions they adopt an informal and
bounded rational approach to strategy formation. In the strategy making process, four generic approaches identified -
classical, evolutionary, processual, and systemic - along the two dimensions of ‘processes’ and ‘outcomes’ of
strategy. The process dimension deals with the extent to which strategy is formed in a rational, formal, planned and
deliberate manner, or is a result of bounded rational approach, that is, emergent in nature. The outcome dimension
relates to the extent to which organizational strategy focuses on profit-maximizing outcomes or more
diverse/pluralist outcomes.
Competitive strategy implies a series of systematic and related decisions that gives a business a competitive
advantage relative to other businesses. A competitive strategy creates a defendable position in an industry so that a
firm can outperform competitors. Organizations in the same industry and with similar goals may show remarkable
differences in their strategies to achieve those goals and identified three different competitive strategies: cost
leadership, differentiation, and focus. Cost leadership strategy is a strategy to gain competitive advantage through
lower costs of operations and lower prices for products. Differentiation strategy is a strategy to gain competitive
advantage by creating a distinct product or offering a unique service. Focus strategy is a strategy aimed to gain a
competitive advantage by focusing on needs of a specific segment(s) of the total market. Based on assessment of
how the company responds to the entrepreneurial, engineering, and administration challenges, Miles and Snow
proposed a strategy classification of four distinct characters: defenders, prospectors, analyzers and reactors.
1.9. SELF-CHECK QUESTIONS 1

1. What are the major assumptions of the resource-based model of strategy making?
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2. Is strategy an element of leadership or vice versa? Explain
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3. In what situation do the classical approach to strategy making more successful?
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4. What is a company’s goal in pursuing a cost-leadership strategy?
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5. What is the difference between prospector and defender organizations?
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1.10. CASE ANALYSIS 1
In 1998, after Germany’s Daimler-Benz acquired Chrysler, the third-largest U.S. automobile manufacturer, to form
Daimler- Chrysler, many observers thought that Chrysler would break away from its troubled U.S. brethren, Ford and
General Motors, and join ranks with the Japanese automobile makers. The strategic plan was to emphasize bold design,
better product quality, and higher productivity by sharing designs and parts between the two companies. Jurgen Schrempp,
the CEO of the combined companies, told shareholders to “expect the extraordinary” and went on to say that
DaimlerChrysler “has the size, profitability and reach to take on everyone.”
The grand scheme proved extraordinary, but for all of the wrong reasons. In 2006, Chrysler saw its market share fall to
10.6%, and the company announced that it would lose $1.26 billion. This shocked shareholders, who had been told a few
months earlier that the Chrysler unit would break even in 2006. What went wrong? First, Schrempp and his planners may
have overestimated Chrysler’s competitiveness prior to the merger. Chrysler was the most profitable of the three U.S. auto
companies in the late 1990s, but the U.S. economy was very strong and the company’s core offering of pickup trucks,
SUVs, and minivans provided the right products for a time of low gas prices. After the merger, the Germans discovered
that Chrysler’s factories were in worse shape than they had thought and product quality was poor. Second, sharing design
and engineering resources and parts between Daimler’s Mercedes-Benz models and Chrysler proved to be very difficult.
Mercedes was a luxury car maker, Chrysler a mass market manufacturer, and it would take years to redesign Chrysler cars
so that they could use Daimler parts and benefit from Daimler engineering. In addition, Daimler’s engineers and managers
were not enthusiastic about helping Chrysler, which many saw as a black hole into which the profitable Mercedes-Benz
line would pour billions of Euros. To be fair, the new cars that Chrysler did produce, including the 300C sedan and the PT
Cruiser, garnered good reviews. Sales of the 300C were strong, but not strong enough to shift the balance of Chrysler’s
business away from the small truck segment. Despite several years of financial struggle, by 2004 it looked as if things
might finally be turning around at Chrysler. In 2004, and then again in 2005, the company made good money. The
company actually gained market share in 2005.
Dieter Zetsche, then Chrysler’s German CEO, hoped to capitalize on this with the introduction of a new SUV, the seven-
seat Jeep Commander. The timing of the Commander, launched in mid-2005, could not have been worse. In 2005, the price
of oil surged dramatically, as strong demand from developed nations and China combined with tight supplies (which were
made worse by supply disruptions caused by Hurricane Katrina). By mid-2006, oil had reached $70 a barrel, up from half
that just 18 months earlier, and gas prices hit $3 a gallon. To make matters worse, Ford and General Motors, which
themselves were hemorrhaging red ink, were engaged in an aggressive price war, offering deep incentives to move their
own excess inventory, and Chrysler was forced to match prices or lose market share. Meanwhile, Japanese manufacturers,
and particularly Toyota and Honda, which had been expanding their U.S. production facilities for fifteen years, were
gaining share with their smaller fuel-efficient offerings and popular hybrids. In September 2006, Chrysler announced that
due to a build-up of inventory on dealers’ lots, it would cut production by 16%, double the planned figure announced in
June 2006. In addition to slumping sales, the new CEO, Thomas LaSorda, revealed that the company was facing sharply
higher costs for its raw materials and parts, some of which were up as much as 60%. Chrysler was also suffering from high
health care costs and pension liabilities for its unionized workforce. Scrambling to fill the gap in its product line, Chrysler
announced that it might enter into a partnership with China’s Chery Motors, to produce small fuel-efficient cars in China,
which would then be imported into the United States.
Chrysler’s woes, however, continued, and in February 2007 Chrysler announced a dramatic restructuring plan, including
the closing down of a factory and laying off of 13,000 employees. Executives at Daimler concluded that its plans for
Chrysler had failed and announced that the company might be sold. This transpired in May 2007, when Chrysler was
purchased by Cerberus, a private equity group, for $4.7 billion. Cerberus brought in a new CEO for Chrysler, Bob Nardelli,
formally CEO at Home Depot and before that a senior executive at General Electric. Under Nardelli, Chrysler is exploring
potential alliances with foreign car makers to design cars that Chrysler will build, the company is taking steps to merge its
Chrysler and Dodge brands, poorly performing dealers have been culled from the company’s network, the powerful Jeep
brand is being refocused on its rugged outdoor image, and Chrysler struck a deal with the United Auto Workers union
under which retiree health care liabilities, a major source of costs, have been transferred to an independent trust.
Questions
1. What was the planned strategy at Daimler-Benz for Chrysler in 1998?
2. In retrospect, Daimler-Benz’s plans for Chrysler seem overly optimistic. What decision-making errors might Daimler-Benz
have made in its evaluation of Chrysler? How might those errors have been avoided?
3. What opportunities and threats was Chrysler facing in 2005 and 2006? What were Chrysler’s strengths and weaknesses? Did its
product strategy make sense, given these?
4. Why did Chrysler get its forecasts for product sales and earnings so badly wrong in 2006? What does this teach you about the
nature of planning?
5. What must Chrysler do now if it is to regain its footing in this industry?
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CHAPTER TWO
AN OVERVIEW OF STRATEGIC HUMAN RESOURCE MANAGEMENT

2.1. Introduction Upon the completion of this chapter, you will be able to:
2.2. What is SHRM? 1. Define SHRM from different perspectives
2.3. Aspects of SHRM 2. Distinguish strategic HRM from traditional HRM
2.4. Traditional versus Strategic HRM 3. Explain the importance of studying SHRM
2.5. Why Study SHRM? 4. Explain the relationship between SHRM and
2.6. Dimensions of SHRM dimensions such as leadership, workplace learning,
2.7. Evolution of SHRM performance, re-engineering, and unionization
2.8. Features of SHRM 5. Discuss stages in the evolution of SHRM
2.9. Chapter Summary 6. Identify the major characteristics of SHRM
2.10. Self-Check Questions 2
2.11. Case Analysis 2.1
2.1. INTRODUCTION
This chapter deals with an overview of strategic human resource management (SHRM). Since
SHRM is a multi-word term which consists of strategy, human, resource, and management,
clarifying these concepts is an important first step in the SHRM discussion. The chapter first
discusses the terms resource, management, strategy, human resource, and human resource
management. This is supported by the different aspects of SHRM. Second, a distinction is made
between traditional HRM and strategic HRM. Third, the importance of studying SHRM and its
relation to leadership, workplace learning, performance, re-engineering, and unionization are
highlighted. Forth, the evolution of SHRM ranging from the record-keeping activity to the
strategic activities is discussed. Finally, important characteristics of SHRM are presented with
sufficient detail. Throughout the chapter, activity questions with blank spaces are provided to
pause your reading and check your understanding. Write the answers for the questions on the
spaces provided. Also answer the self-check questions that test your understanding of the chapter
on the spaces provided. Your final task in the chapter is to read the case carefully and answer the
questions that follow.
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2.2. WHAT IS SHRM?
SHRM is a popular field of study and practice in modern organizations. However, despite its
popularity, there is no universally agreed definition of the term. Why? Why the term SHRM does
not have one universally agreed definition? Many reasons might be mentioned. First, SHRM is a
multi-word term consisting of strategic, human, resource, and management. While some
definitions give emphasis to the ‘human’ aspect, others emphasize on the ‘resource’ aspect, and
still others may emphasize on the ‘management’ or on the ‘strategic’ aspects. Equally, the
conception of strategy might also influence the understanding of the term SHRM. Second,
SHRM is about human beings, and the dynamic nature of human beings might result in varying
definitions. Third, the SHRM field has evolved through time, for example, from personnel
management to HRM to SHRM, resulting in varying definitions in its evolutionary stages. Forth,
HR is perceived either as variable cost or as valuable asset, which results in varying definitions
depending on the perspectives. Fifth, SHRM comprises of diversified activities, such as
recruitment, selection, training, development, compensation, performance appraisal, safety and
health, diversity management, etc., and their linkage with the organization’s strategy, which
results in varying definitions. It is, therefore, logical to define the terms resource, strategy,
management, human resource, and human resource management before defining SHRM.
What is Resource? The term resource is used in many ways in different contexts and
disciplines. In an organizational context, resource is a productive factor required to accomplish
an activity or a means to achieve a desired outcome. Specifically, a resource is a valuable input
that is readily available to use if or when needed by the organization. Thus, resources can be
defined as the inputs used in the production of those things that we desire. Typically, resources
are materials, energy, services, staff, knowledge, or other assets that are transformed to produce
benefit and in the process may be consumed or made unavailable. The total quantity, or stock, of
resources that an organization has determines what that organization can produce. Every
organization has, in varying degrees, vast amounts of different resources, or factors of
production. Generally, resources have two characteristics: a productive factor required to
accomplish an activity and readily available for use in the organization.
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What is Human Resource? Human resources are people in work organizations who set overall
strategies and goals, design work systems, produce goods and services, monitor quality, allocate
financial resources and market the products and services. Human beings, therefore, become
human capital by virtue of the roles they assume in the work organization. Employment roles are
defined and described in a manner designed to maximize particular employees’ contributions to
achieving organizational objectives. In management terms, ‘human resource’ refers to the traits
that people bring to the workplace – intelligence, aptitude, commitment, tacit knowledge and
skills, and an ability to learn. But the contribution of this human resource to the organization is
typically variable and unpredictable. This indeterminacy of an employee’s contribution to her or
his work organization makes the human resource the ‘most vexatious of assets to manage’.
The practice of referring to people as resources as if they were any other factor of production is
often criticized. The term ‘human resource’ reduces people to the same category of value as
materials, money and technology – all resources and resources, as discussed above, are only
valuable to the extent they can be exploited and leveraged into economic value. People are
sometimes preferred as alternative, but in spite of its connotations, HR is most commonly used.
Using this commonly used term, an organization’s HR are the people it employs to carry out
various jobs, tasks, and functions in exchange for wages, salaries, and other rewards. The CEO
responsible for the overall effectiveness of the organization, the advertising manager responsible
for creating newspaper ads, the operations manager sent to open a new manufacturing facility in
Bahir Dar, the financial analyst who manages the organization’s cash reserves, and the custodian
who cleans the offices after everyone else goes home are all HR. In his/her own way, each is
vital ingredient that helps determine the overall effectiveness or lack of effectiveness of the
organization as it strives to accomplish its goals and objectives. Broadly described, HR is the
total knowledge, skills, creative abilities, talents, and aptitudes of an organization’s workforce as
well as the values, attitudes, and beliefs of the individuals involved.
What is Management? The word manage came into English usage directly from the Italian
maneggiare, meaning ‘to handle and train horses’. In the sixteenth century, the meaning was
extended to include a general sense of taking charge or directing. The answer to the question
‘Who is a manager?’ depends on the manager’s social position in the organization’s hierarchy. A
manager is an organizational member who is ‘institutionally empowered to determine and/or
44
regulate certain aspects of the actions of others’. Collectively, managers are traditionally
differentiated horizontally by their function activities (for example, production manager or HR
manager) and vertically by the level at which they are located in their organizational hierarchy
(for example, counter manager or branch manager).
Management has been variously conceptualized as ‘the central process whereby work
organizations achieve the semblance of congruence and direction’, as ‘art, science, magic and
politics’ and as a process designed to coordinate and control productive activities. In his seminal
work, Fayol envisioned management as a science. For Fayol, management is primarily
concerned with internal planning, organizing, directing and controlling – known as the ‘PODC’
tradition. The creation of a formal organizational structure and work configuration is, therefore,
the raison d’être for management. This classical stereotype presents an idealized image of
management as a rationally designed system for realizing goals, but there are competing
theoretical perspectives.
What is Human Resource Management? HRM, in theory and in practice, encompasses a

diverse body of scholarship and managerial activities concerned with managing work and
people. An early definition of HRM focuses on all managerial activities affecting the
employment relationship. HRM involves all management decisions and actions that affect the
nature of the relationship between the organization and employees – its human resources.
Acknowledging HRM as only one ‘recipe’ from a range of alternatives, Storey (2001) contends
that HRM plays a pivotal role in sophisticated organizations, emphasizing the importance of the
strategic dimension and employee ‘commitment’ in generating HR activities. In his view:
‘Human resource management is a distinctive approach to employment management which seeks
to achieve competitive advantage through the strategic deployment of a highly committed and
capable workforce using an array of cultural, structural and personnel techniques.’
According to this definition, HRM is about employment relationship. It is a distinctive

management approach, which seeks to achieve competitive advantage through people. It is about
strategic deployment of highly committed and capable workforce, utilizing cultural, structural,
and personnel techniques. Traditionally, competitive advantage was considered as a strategic
management concept. If competitive advantage is achieved through people, it becomes the issue
45
of HRM, which puts HRM beyond the traditional activities such as recruitment, selection,
training, development, etc. HRM includes formal human resource functions (recruitment,
selection, training and development, appraisal, compensation, and employee relations) performed
within the organization or external to it and more informal management of employees performed
by all administrators.
What is Strategy? The word ‘strategy’ comes from the Greek noun ‘strategus’, meaning
‘commander in chief’. The development and usage of the word suggests that it is composed of
stratos (army) and agein (to lead) and in its military context means ‘to produce large-scale
operations’. The Oxford Dictionary defines strategy in terms of ‘generalship’. In a management
context, the word ‘strategy’ has now replaced the more traditional term, long-term planning, to
denote an activity that top managers perform in order to accomplish an organization’s goals.
Strategy is the maintenance of a ‘vision of the future’ that is constantly updated by data on both
the internal and the external environment. A strategy is a specific pattern of decisions and actions
that managers take to achieve an organization’s goals. Therefore, a strategy can often be defined
more precisely as the specific pattern of decisions and actions that managers take to achieve
superior organizational performance. The concept of strategy is defined in sufficient detail in
chapter two of this module. With these conceptions of the terms HR, strategy, and management
moving one step ahead and defining the term SHRM is not difficult.
What is SHRM? SHRM is the comprehensive set of managerial activities and tasks related to
developing and maintaining a qualified workforce that contributes to organizational
effectiveness, as defined by the organization’s strategic goals. The objective of SHRM is
achieving or contributing to organizational effectiveness through developing and maintaining a
qualified workforce by managers. SHRM is comprehensive which consists of a set of managerial
activities and tasks. HRM is about developing people. It is about maintaining qualified
workforce in the organization. SHRM occurs in a complex and dynamic environment within the
organizational context. A significant trend today is for HR managers to adopt a strategic perspec-
tive of their job and to recognize critical links between organizational and HR strategies.
46
Another definition of SHRM is that it is a strategic and coherent approach to the management of
an organization’s most valued assets – the people working there, who individually and
collectively contribute to the achievement of its objectives. According to this definition, SHRM
is the process of integrating HRM to business strategy. It is about designing and maintain
coherent HRM activities. HR is a valuable asset. The people of an organization individually and
collectively contribute to the achievement of an organization’s objectives. Thus, SHRM is not
only about management of the people of an organization, but it is about the management of both
work and people towards desired ends that involves all management decisions and actions that
affect the nature of the relationship between the organization and employees – its HR.
Activity 2.1. SHRM is about employment relationship. Explain

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2.3. ASPECTS OF SHRM
SHRM can also be clarified in terms of the following major aspects: First, it is a managerial
approach that states that organizational problems are solved through the integration of HR and
business strategy from the outset of strategy formation. Second, SHRM is a new discipline
different from the functional-oriented traditional HRM and the classical external-oriented
strategic management. Third, SHRM is a sub-field of the broad HRM discipline distinct from the
micro-HRM and the international HRM. Forth, SHRM is an overall organizational rather than a
functional activity that is left to the HR specialists. Each aspect is discussed below.
1. SHRM is a management approach: SHRM is a management approach concerned with

solving organizational problems through people management. It is a management activity
which involves the integration of human factors to strategic goals of the organization. Thus,
SHRM is a managerial activity that every manager must perform. It is a means to solve
organizational problems through the integration of HR and strategy. The essence of the
SHRM perspective is that employees are viewed as valuable assets and SHRM, in turn, is the
47
development and implementation of an overall plan that seeks to gain and sustain
competitive advantage by managing these human assets through an integrated, synergistic set
of HR practices that both complements and promotes the overall business strategy of the
organization.
2. SHRM is a new discipline: SHRM is a new discipline which integrates HRM with the
process of strategic management. It is a new field of study and practice which consists of
elements from both strategic management and HRM through the integration of HR into the
strategic management process. Its core aspects are the importance given to the integration of
HRM into the business and corporate strategy and the devolvement of HRM to line managers
instead of personnel specialists. By ‘devolvement’ we mean that line managers are
responsible for HR and by ‘integration’ we mean HR managers are responsible for
business/corporate strategy. Moreover, the formulation and implementation of internally
consistent and complementary HRM activities is an important concern of the new discipline.
These concepts are broadly discussed in chapter six of the module.
3. SHRM is a new approach to the management of people: SHRM is a set of practices and
activities jointly shared by HR and line managers to solve people-related business problems.
It is the pattern of planned human resource deployments and activities intended to enable an
organization to achieve its goals. As these conceptions emphasize, SHRM is distinguished
from the traditional HRM in two ways: First, it entails the vertical linkage of HRM practices
with the strategic management process of the organization. Second, it emphasizes the
horizontal coordination and congruence among the various HRM practices through a pattern
of planned action. From this perspective SHRM is defined as the process of designing and
implementing a set of internally consistent policies and practices that ensure a firm’s human
capital contributes to the achievement of its business objectives
4. SHRM is a subfield of the broad HRM discipline: SHRM is a subfield of the broad HRM
discipline, which covers the overall HR strategies adopted by business units and companies
and tries to measure their impacts on performance. It is different from the micro HRM and
the international HRM sub-fields. While micro HRM covers the sub-function of HR policy
and practice which consists of managing individuals, small groups, work organizations, and
employee work systems; international HRM covers HRM in companies operating across
national boundaries. Thus, different from these two sub-fields, SHRM is about design and
48
execution of HR strategies, HR’s impact on organizational performance, and the role it plays
in business success. Thus, as a sub-field of the broad people management discipline, SHRM
is concerned with ensuring that: (1) HRM is fully integrated with the strategy and strategic
needs of the firm; (2) HR policies cohere both across policy areas and across hierarchies; and
(3) HR practices are adjusted, accepted and used by line managers and employees as part of
their everyday work.
5. SHRM is overall organizational rather than functional activity: SHRM is a macro-
organizational approach to viewing the role and function of HRM in the larger organization,
which believes that HR is too important to be left to the HR specialists. It is a set of processes
and activities jointly shared by human resources and line managers to solve people-related
business problems. SHRM is concerned with seeing the people of the organization as a
strategic resource for the achievement of competitive advantage.
Activity 2.2. Is SHRM a new discipline? What is your position? Why or Why not?
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2.4. WHY STUDY SHRM
Why study SHRM? How does this topic relate to the career interests or aspirations of present or
future executives? Staffing the organization, designing jobs, building teams, developing
employee skills, identifying approaches to improve performance and customer service, and
rewarding employee success are as relevant to line managers as they are to HR managers. A
successful executive needs to understand human behavior, work with employees effectively, and
be knowledgeable about numerous systems and practices available to put together a skilled and
motivated workforce. The executive also has to be aware of economic, technological, social, and
legal issues that affect human resources and, in turn, facilitate or constrain efforts to attain
strategic objectives.
49
Executives do not want to hire the wrong person, experience high turnover, manage unmotivated
employees, be taken to court for discrimination actions, be cited for unsafe practices, have their
customers’ satisfaction undermined by poorly trained staff, or commit unfair labor practices.
Despite their best efforts, executives often fail at HRM because they hire the wrong people or do
not motivate or develop their staff. You are likely to manage people at some point in your career.
Research shows that the manner in which you conduct the human resource responsibilities of
your management job - recruiting, selecting, training, evaluating, and rewarding - will be key to
your effectiveness as a manager.
Organizations can gain a competitive advantage by effectively managing their human resources.
This competitive advantage may be in the form of cost leadership (e.g., being a low-cost
provider) or product differentiation (e.g., having high levels of service quality). The effectiveness
of each organization’s HRM practices is rated based on the presence of such benefits as incentive
plans, employee grievance systems, formal performance appraisal systems, and employee
participation in decision making. Organizations with high HRM effectiveness ratings clearly
outperform those with low HRM rankings. Studies show that productivity is highly correlated
with effective HRM practices.
However, achieving a competitive advantage through human resources must be based on the
unique combination of an organization’s human capital, strategy, and core capabilities that
differs from organization to organization. This means executives cannot simply rely on the
benchmarks and strategies of others, even though these may be suggestive of better approaches
to managing people. Instead, they must develop their own HR strategies. If they can successfully
develop and implement these strategies, they may well achieve a sustained competitive
advantage in their markets.
Organizations can achieve a sustainable competitive advantage through people if the human
resources are valuable because they improve the efficiency or effectiveness of the organization;
the human resources are rare because employees’ knowledge and skills are not equally available
to competitors; the human resources are difficult to emulate and cannot be easily copied by
others; and the human resources are organized so that employee talents can be combined and
deployed as needed at a moment’s notice. Thus, studying SHRM is significant since
organizations achieve competitive advantage through SHRM as it encourages proactive rather
50
than reactive behavior, communicates company goals explicitly, focuses on the gaps between the
current situation and a vision of the future, and identifies human resource opportunities and
constraints in implementing strategic plans.
Activity 2.3. Is studying SHRM important for line managers? Explain

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2.5. TRADITIONAL VERSUS STRATEGIC HRM
Traditional HRM is transactional in nature, concerned essentially with providing administrative

support in terms of staffing, recruitment, compensation, and benefits. The HR function is an
administrative function headed by personnel and the roles of the personnel are mainly focused on
cost control and administrative activities. On the other hand, the emphasis of strategic HRM is
that of a strategic business partner. Strategic HRM activities include team-based job design,
flexible workforce, quality improvement practices, employee empowerment, and planned
development of talent. Major differences between traditional and strategic HRM include: (1) that
strategic HRM focuses on organizational performance rather than individual performance, and
(2) that strategic HRM emphasizes the role of HRM systems as solutions to business problems
rather than individual HRM practices in isolation. Therefore, strategic HRM extends beyond the
management of human capital and people.
Strategic HRM differs significantly from traditional HRM. Figure 2.1 shows that the main
responsibility for managing human resources in a traditional arrangement rests with HR
specialists in a division (large companies) or team. In a strategic approach the main
responsibility for people management rests with any individual that is in direct contact with
them, such as line managers. Thus, any individual in an organization who has responsibility for
people manages human resources in addition to his or her regular position. For years the HRM
function had not been linked to the corporate profit margin or what is referred to as the bottom
line. The role of HRM in the firm’s overall strategy was usually couched in fuzzy terms and
51
abstractions. HRM was merely a tagalong unit with people oriented plans, not a major part of
planning or strategic thinking.
Figure 2. 1 Differences between Traditional HRM and Strategic HRM
Despite the appeal that strategic HRM is important, many organizations have had a difficult time
adopting a strategic perspective. First, many organizations take a short
short-run
run approach and focus
only on current and short-term
term performance. This is not surprising given the emphasis by many
stockholders on achieving attractive quarterly performance results.
Second, many HR managers do not have a strategic perspective. They are narrowly trained and
educated
cated and pay attention primarily to their area of expertise - compensation, labor law,
performance evaluation, diversity management, training, and other HR areas. They have
insufficient knowledge of international operations, finance, accounting, marketing, and
production.
Finally, while some progress is being made in measuring HRM activities,

act this is still a
challenging endeavor. Placingg values on and tracking HRM pr
programs
ograms is challenging for many
HR managers. Using such HR matrix requires quantifying human behavior and attitudes. Despite
this fact, forward-looking
looking companies rely on data
data to make informed decisions about how best to
manage their talent.
52
Today, because of the recognition of the crucial importance of people, HRM in an increasing
number of organizations has become a major player in developing strategic plans and facilitating
changes within the organization. Organizational and human resource plans and strategies are
inextricably linked. The HRM strategies must reflect clearly the organization’s strategy
regarding people, profit, and overall effectiveness. The human resource manager, like all
managers, is expected to play a crucial role in improving the skills of employees and the firm’s
profitability. In essence, HRM in a growing number of organizations is now viewed as a “profit
center” and not simply a “cost center.”
The strategic importance of HRM means that a number of key concepts must be applied. Some
of these concepts are:
• Analyzing and solving problems from a profit-oriented, not just a service-oriented,
point of view.
• Assessing and interpreting costs or benefits of such HRM issues as productivity,
salaries and benefits, recruitment, training, absenteeism, overseas relocation, layoffs,
meetings, and attitude surveys.
• Using planning models that include realistic, challenging, specific, and meaningful
goals.
• Preparing reports on HRM solutions to problems encountered by the firm.
• Training the human resource staff and emphasizing the strategic importance of HRM
and the importance of contributing to the firm’s profits.
The increased strategic importance of HRM means that human resource specialists must show
mangers that they contribute to the goals and mission of the firm. The actions, language, and
performance of the HRM function must be measured, precisely communicated, and evaluated.
The new strategic positioning of HRM means that accountability must be taken seriously, and
the investment in human assets is the focal point.
The era of accountability for HRM has resulted from concerns about productivity, from
widespread downsizing and redesigning of organizations, from the need to effectively manage an
increasingly diverse workforce, and from the need to effectively use all the resources of an
organization to compete in an increasingly complex and competitive world.
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The HRM function today is much more integrated and strategically involved. The importance of
recruiting, selecting, training, developing, rewarding, compensating, and motivating the
workforce is recognized and practiced by managers in every unit and functional area of an
institution. HRM and every other function must work together to achieve the level of
organizational effectiveness required to compete locally and internationally.
If the HRM function is to be successful, managers in other functions must be knowledgeable and
involved. Managers play a major role in setting the direction, tone, and effectiveness of the
relationship between the employees, the firm, and the work performed. Managers must
understand that carrying out HRM activities and programs is strategically vital.
Activity 2.4. Compare and contrast traditional HRM and strategic HRM in
terms of responsibility for HR and accountability?
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2.6. DIMENSIONS OF SHRM
In addition to focusing on the definitions and aspects of SHRM and typologies of HR strategy,
researchers have identified a number of important themes associated with the notion of SHRM
that are discussed briefly here. These are HR practices and performance, re-engineering
organizations and work, leadership, workplace learning, and trade unions.
HRM Practices and Performance: Although most HRM models provide no clear focus for any
test of the HRM–performance link, the models tend to assume that an alignment between
business strategy and HR strategy will improve organizational performance and competitiveness.
During the past decade, demonstrating that there is indeed a positive link between particular sets
or ‘bundles’ of HR practices and business performance has become ‘the dominant research
issue’. The dominant empirical questions on this topic ask ‘What types of performance data are
available to measure the HRM–performance link?’ and ‘Do “high-commitment-type” HRM
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systems produce above-average results compared with “control-type” systems?’ A number of
studies have found that, in spite of the methodological challenges, bundles of HRM practices are
positively associated with superior organization performance. The performance impact of SHRM
is discussed in sufficient detail in Chapter 9.
Re-engineering and SHRM: All normative models of SHRM emphasize the importance of
organizational design. As discussed in chapter 3 under the storey’s model of SHRM, the ‘soft’
HRM model is concerned with job designs that encourage the vertical and horizontal
compression of tasks and greater worker autonomy. The redesign of work organizations has been
variously labeled ‘high performing work systems’ (HPWS), ‘business process re-engineering’
and ‘high commitment management’. The literature emphasizes core features of this approach to
organizational design and management, including a ‘flattened’ hierarchy, decentralized decision-
making to line managers or work teams, ‘enabling’ information technology, ‘strong’ leadership
and a set of HR practices that make workers’ behavior more congruent with the organization’s
culture and goals.
Leadership and SHRM: The concept of managerial leadership permeates and structures the
theory and practice of work organizations and hence the way we understand SHRM. In the
management texts, leadership has been defined in terms of traits, behavior, contingency, power,
and occupation of an administrative position. Most definitions reflect the assumption that
leadership involves a process whereby an individual exerts influence upon others in an
organizational context. Leadership is by nature dialectical: it is socially constructed through the
interaction of both leaders and followers. Leadership is the process wherein an individual
member of a group or organization influences the interpretation of events, the choice of
objectives and strategies, the organization of work activities, the motivation of people to achieve
the objectives, the maintenance of cooperative relationships, the development of skills and
confidence by members, and the enlistment of support and cooperation from people outside the
group or organization.
This definition, while emphasizing many aspects of ‘people skills’, tends to be focused upon the
dynamics and surface features of leadership as a social influence process. More critical accounts
of leadership tend to focus upon the hierarchical forms to which it gives rise, power
55
relationships, and the gender dominance. As such, it is argued that leadership is not simply a
process of behaving or a process of manipulating rewards; it is a process of ‘power-based reality
construction’. Most of the leadership research and literature tends to be androcentric in nature
and rarely acknowledges the limited representation of ethnic groups and women in senior
leadership positions. Within the literature, however, there is a continuing debate over the alleged
differences between a manager and a leader. For examples, managers are people who do things
right and leaders are the people who do the right thing; managers develop plans whereas leaders
create a vision and a strategy for achieving the vision. Further, managers and leaders differ in
their methods for promoting their agenda. Managers organize and engage in a process of
controlling and problem-solving, while leaders engage in a process of alignment and seek to
motivate and inspire. Clearly, an individual can be a manager without leading, and an individual
can be a leader without being a manager (for example an informal group leader or elected trade
union leader). However, many writers argue that a balance of management and leadership is
necessary for a work organization to operate effectively.
The concept of leadership is a central building block of the ‘soft’ HRM model’s concern with
developing a ‘strong’ organizational culture and building a high level of worker commitment and
cooperation. The current interest in alternative leadership paradigms in the 1980s, variously
labeled ‘transformational leadership’, ‘charismatic leadership’, ‘self-leadership’, or ‘principle-
centered leadership’ can be explained by understanding the prerequisites of the resource-based
SHRM model. Managers are looking for a style of leadership that will develop the firm’s human
endowment and, moreover, generate employee commitment, flexibility, innovation and change.
Many management gurus make an explicit link between strategic HRM, workplace learning, and
leadership when they write that ‘leaders are designers, stewards, and teachers’ and that a learning
organization will remain only a ‘good idea, an intriguing but distant vision’ until the leadership
skills required are more readily available. Thus, it would seem that a key constraint on the
development of a resource-based SHRM model and a ‘learning organization’ is leadership
competencies.
The integrative theoretical of leadership and strategy developed depicts the organizational leader
to be ‘key’ to both the formulation and implementation of competitive strategy. Leaders who are
‘open and participative’ and ‘challenge-seekers’ are more likely adopt a ‘soft’ SHRM model to
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match the high risk ‘prospector’ and ‘differentiation’ competitive strategies, than leaders who
desire ‘control’ and are ‘challenge-averse’ and focus on ‘defender’ and ‘cost’ leadership
strategies.
In essence, the ‘transformational’ leader extols to employees the need for working beyond
contract for the ‘common’ good. This leadership style emphasizes the importance of vision
building and the ability to communicate this vision and, simultaneously, enthuse subordinates to
make their vision a reality: ‘to innovate, to change and indeed to conquer new frontiers in the
marketplace or on the shop floor’. In contemporary parlance, the transformational leader is
empowering workers. However, to go beyond the rhetoric, the transformational model shifts the
focus away from the hierarchical nature of work organizations, control processes, inherent
conflicts of interest between leaders and the led, and innate power relationships, towards the
individualization of the employment relationship, and the development of individual leadership
qualities or traits that might lead to gender and racial stereotyping of leadership traits. Even
though the new leadership paradigms emphasize ‘shared leadership’ and empowerment among
‘core’ workers, they represent a ‘unitary’ frame of reference on employment relations and are
squarely aimed at ‘bottom-line’ results. The general assumption is that ‘enlightened’ leadership
will result in higher productivity and effectiveness.
Workplace learning and SHRM: Within most formulations of SHRM, formal and informal
work-related learning has come to represent a key lever that can help managers to achieve the
substantive HRM goals of commitment, flexibility and quality. As such, this growing field of
research occupies centre stage in the ‘soft’ resource-based SHRM model. From a managerial
perspective, formal and informal learning can strengthen an organization’s ‘core competencies’
and thus act as a lever to sustainable competitive advantage – having the ability to learn faster
than one’s competitors is of the essence here. There is a growing body of work that has taken a
more critical look at workplace learning. Some of these writers, for example, emphasize how
workplace learning can strengthen ‘cultural control’, strengthen the power of those at the ‘apex
of the organization’ and be a source of conflict when linked to productivity or flexibility
bargaining and job control.
57
Trade unions and SHRM: The notion of worker commitment embedded in the HRM model
has led writers from both ends of the political spectrum to argue that there is a contradiction
between the normative HRM model and trade unions. In the prescriptive management literature,
the argument is that the collectivist culture, with its ‘them and us’ attitude, sits uncomfortably
with the HRM goal of high employee commitment and the individualization of the employment
relationship. The critical perspective also presents the HRM model as being inconsistent with
traditional industrial relations, albeit for very different reasons. Critics argue that ‘high-
commitment’ HR strategies are designed to provide workers with a false sense of job security
and to obscure underlying sources of conflict inherent in capitalist employment relations. Other
scholars, taking an ‘orthodox pluralist’ perspective, have argued that trade unions and the ‘high-
performance–high-commitment’ HRM model cannot only coexist but are indeed necessary if an
HPWS is to succeed. What is apparent is that this part of the SHRM debate has been strongly
influenced by economic, political and legal developments.
Activity 2.5. Based upon your own work experience, or upon your studies of
organizations, is continuous learning at the workplace more or less
important for some organizations than others? If so, why?
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2.7. EVOLUTION OF SHRM: FROM PM TO STRATEGIC HRM
Historically, the area of SHRM has its beginning in the late 1970s and early 1980s when the
HRM field was being influenced by the rapid emergence of the area of strategic management.
Its popularity is associated with the seminal research works of Fombrun et al. (1984) and Beer et
al. (1984). Nonetheless, the field is still experiencing problems of status identity and precise
definition. There have been different conceptions and understandings in the SHRM literature.
For instance, it is understood as a management approach; as a new field of study and practice;
and as a sub-field of HRM.
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The historical trends of the HRM function can be examined from different viewpoints, which
include the evolution of HRM as a professional and scientific discipline, as an aid to
management, as a political and economic conflict between management and employees, and as a
growing movement of employee involvement influenced by developments in
industrial/organizational and social psychology. This historical examination will demonstrate the
growing importance of employees from being just one of the means of production in the 20th-
century industrial economy to being a key source of sustainable competitive advantage in the
21st-century knowledge economy.
In this section, the field of HRM in terms of its evolution since the early 20th century is
examined. In addition, this historical analysis will show how the role of HRM in the firm has
changed over time from primarily being concerned with routine transactional HR activities to
dealing with complex transformational ones. Transactional activities are the routine bookkeeping
tasks - for example, changing an employee’s home address or health care provider - whereas
transformational activities are those actions of an organization that “add value” to the
consumption of the firm’s product or service. An example of a transformational HR activity
would be a training program for retail clerks to improve customer service behavior. Thus,
transformational activities increase the strategic importance and visibility of the HR function in
the firm. This general change over time examined in terms of five broad phases of the historical
development of industry.
Pre–World War II: In the early 20th century and prior to World War II, the personnel function
(the precursor of the term HRM) was primarily involved in record keeping of employee
information; in other words, it fulfilled a “caretaker” function. During this period of time, the
prevailing management philosophy was called “scientific management.” The central thrust of
scientific management was to maximize employee productivity. It was thought that there was
one best way to do any work, and this best way was determined through time and motion studies
that determined the most efficient use of human capabilities in the production process. Then, the
work could be divided into pieces, and the number of tasks to be completed by a worker during
an average workday could be computed. These findings formed the basis of piece-rate pay
systems, which were seen as the most efficient way to motivate employees. At this point in
history, there were very few government influences in employment relations, and thus,
59
employment terms, practices, and conditions were left to the owners of the firm. As a result,
employee abuses such as child labor and unsafe working conditions were common. Some
employers set up labor welfare and administration departments to look after the interests of
workers by maintaining records on health and safety as well as recording hours worked and
payroll.
Post–World War II (1945–1960): The mobilization and utilization of labor during the War had
a great impact on the development of the personnel function. Managers realized that employee
productivity and motivation had a significant impact on the profitability of the firm. The human
relations movement after the War emphasized that employees were motivated not just by money
but also by social and psychological factors, such as recognition of work achievements and work
norms.
Due to the need for classification of large numbers of individuals in military service during the
war, systematic efforts began to classify workers around occupational categories in order to
improve recruitment and selection procedures. The central aspect of these classification systems
was the job description, which listed the tasks, duties, and responsibilities of any individual who
held the job in question. These job description classification systems could also be used to design
appropriate compensation programs, evaluate individual employee performance, and provide a
basis for termination.
Because of the abusive worker practices prior to the War, employees started forming trade
unions, which played an important role in bargaining for better employment terms and
conditions. There were a significant number of employment laws enacted that allowed the
establishment of labor unions and defined their scope in relationship with management. Thus,
personnel departments had to assume considerably more record keeping and reporting to
governmental agencies. Because of these trends, the personnel department had to establish
specialist divisions, such as recruitment, labor relations, training and benefits, and government
relations. With its changing and expanding role, personnel departments started keeping
increasing numbers and types of employee records, and computer technology began to emerge as
a possible way to store and retrieve employee information. With increasing legislation on
employment relations and employee unionization, industrial relations became one of the main
60
foci of the department. Union-management bargaining over employment contracts dominated the
activity of the personnel department.
Social Issues Era (1963–1980): This period witnessed an unprecedented increase in the amount
of labor legislation that governed various parts of the employment relationship, such as
prohibition of discriminatory practices, occupational health and safety, retirement benefits, and
tax regulation. As a result, the personnel department was burdened with the additional
responsibility of legislative compliance that required collection, analysis, and reporting of
voluminous data to statutory authorities. For example, to demonstrate that there was no unfair
discrimination in employment practices, data pertaining to all employment functions, such as
recruitment, training, compensation, and benefits, had to be diligently collected, analyzed, and
stored. To avoid the threat of punitive damages for noncompliance, it was necessary to ensure
that the data were comprehensive, accurate, and up-to-date, which made it essential to automate
the data collection, analysis, and report generation process. As you go through the chapters of
this book, these varying laws and government guidelines will be covered within the specific HR
topics.
It was about this time that personnel departments were beginning to be called Human Resources
Departments and the field of human resource management was born. The increasing need to be
in compliance with numerous employee protection legislations or suffer significant monetary
penalties made senior managers aware of the importance of the HRM function. In other words,
effective and correct practices in HRM were starting to affect the “bottom line” of the firms, so
there was a significant growth of HR departments, and computer technology had advanced to the
point where it was beginning to be used. As a result, there was an increasing demand for HR
departments to adopt computer technology to process employee information more effectively
and efficiently. Another factor was the booming economy in most industrialized countries. As a
result, employee trade unions successfully bargained for better employment terms, such as health
care and retirement benefits. As a result, labor costs increased, which put pressure on personnel
managers to justify cost increases against productivity improvements. With the increased
emphasis on employee participation and empowerment, the personnel function transformed into
a “protector” rather than a “caretaker” function, shifting the focus away from maintenance to
61
development of employees. Thus, the breadth and depth of HRM functions expanded,
necessitating the need for strategic thinking and better delivery of HR services.
Cost-Effectiveness Era (1980 to the Early 1990s): With increasing competition from emerging
economies, multinational firms increased their focus on cost reduction through automation and
other productivity improvement measures. As regards HRM, the increased administrative burden
intensified the need to fulfill a growing number of legislative requirements, while the overall
functional focus shifted from employee administration to employee development and
involvement. To improve effectiveness and efficiency in service delivery, through cost reduction
and value-added services, the HR departments came under pressure to harness technology that
was becoming cheaper and more powerful.
In addition, there was a growing realization within management that people costs were a very
significant part of their budgets. Some companies estimated that personnel costs were as high as
80% of their operating costs. As a result, there was a growing demand on the HRM function to
cost justify their employee programs and services. In one of the first books to address this
growing need to cost justify the HRM function, Cascio (1984) indicated that the language of
business is dollars and cents and HR managers need to realize this fact. In a later edition of his
book, Cascio (1991) quotes Jacques Fitz-Enz (1980), who more accurately states the need for
HRM to cost justify their function:
Few human resources managers - even the most energetic - take the time to analyze the return on
the corporation’s personnel dollar. We feel we aren’t valued in our own organizations, that we
can’t get the resources we need. We complain that management won’t buy our proposals and
wonder why our advice is so often ignored until the crisis stage. But the human resources
manager seldom stands back to look at the total business and ask: Why am I at the bottom
looking up? The answer is painfully apparent. We don’t act like business managers - like
entrepreneurs whose business happens to be people. Even small and medium firms could afford
computer-based HR systems that were run by increasingly user friendly microcomputers, and
could be shown to be cost-effective. The prevailing management thinking regarding the use of
computers in HR was not a reduction in the number of employees needed in HR departments but
that their activities and time could be shifted from the transactional record keeping to more
transformational activities that would add value to the organization. This change in the function
62
of HRM could then be clearly measured in terms of cost-benefit ratios to the “bottom line” of the
company.
Emergence of Strategic HRM (1990 to Present): The economic landscape underwent radical
changes throughout the 1990s with increasing globalization, technological breakthroughs
(particularly Internet-enabled Web services), and hyper-competition. Business process
reengineering exercises became more common and frequent, with several initiatives, such as
right sizing of employee numbers, reducing the layers of management, reducing the bureaucracy
of organizational structures, autonomous work teams, and outsourcing.
Firms today realize that innovative and creative employees who hold the key to organizational
knowledge provide a sustainable competitive advantage because unlike other resources,
intellectual capital is difficult to imitate by competitors. Accordingly, the people management
function has become strategic in its importance and outlook and is geared to attract, retain, and
engage talent. These developments have led to the creation of the HR or workforce scorecard as
well as added emphasis on the return on investment (ROI) of the HR function and its programs.
The increased use of technology and the changed focus of the HRM function as adding value to
the organization’s product or service led to the emergence of the HR department as a strategic
partner. With the growing importance and recognition of people and people management in
contemporary organizations, strategic HRM (SHRM) has become critically important in
management thinking and practice. SHRM derives its theoretical significance from the resource-
based view of the firm that treats human capital as a strategic asset and a competitive advantage
in improving organizational performance.
Reflecting the systems view, Becker and Huselid (2006) stress the importance of HR structure—
that is, the “systems, practices, competencies, and employee performance behaviors that reflect
the development and management of the firm’s strategic human capital”—for organizational
performance. Context is a crucial element in SHRM, and therefore, researchers increasingly
emphasize the “best-fit” approach to SHRM as opposed to the “best-practice” approach. The
success of SHRM is contingent on several factors, such as national and organizational culture,
size, industry type, occupational category, and business strategy. Accordingly, Becker and
Huselid (2006) argued that “it is the fit between the HR architecture and the strategic capabilities
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and business processes that implement strategy that is the basis of HR’s contribution to
competitive advantage”.
A good example of the importance of HR and the information provided by an HRIS can be found
in the human resources planning (HRP) function. HRP is primarily concerned with forecasting
the need for additional employees in the future and the availability of those employees either
inside or external to the company. A good example is when a company is considering a strategic
decision to expand by establishing a production facility in a new location. Using the information
recorded and analyzed in the HRIS, HRP can provide estimates of whether or not there are
enough people available in the external labor market of the new location to staff the new facility.
Thus, the availability of potential employees in the labor market may be critical to the strategic
decision to build the new facility, and this, of course, could involve millions or billions of
dollars. Therefore, in determining the strategic fit between technology and HR, it is not the
strategy per se that leads to competitive advantage but rather how well it is “implemented,”
taking into account the environmental realities that can be unique to each organization and,
indeed, between units and functions of the organization.
Activity 2.6. What are the factors that changed the primary role of HRM from a
caretaker of records to a strategic partner?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
__________________________________________________________________________
2.8. CHARACTERISTICS OF SHRM
The concept of SHRM is characterized by diversity, strategic, commitment-oriented, human

capital, unitary, individualistic, management-driven, and business value. Each of these
characteristics is described below.
1. HRM is Diverse: HRM is diverse. There are many HRM models. HRM practices in
different organizations are diverse. HRM covers a vast array of activities and shows a huge range
of variations across occupations, organizational levels, business units, firms, industries and
societies. There are ‘hard’ and ‘soft’ versions of HRM. The hard version of HRM emphasizes
that people are important resources through which organizations achieve competitive advantage.
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These resources have therefore to be acquired, developed and deployed in ways that will benefit
the organization. The focus is on the quantitative, calculative and business-strategic aspects of
managing human resources in as ‘rational’ a way as for any other economic factor. The soft
version of HRM traces its roots to the human-relations school; it emphasizes communication,
motivation and leadership. It involves ‘treating employees as valued assets, a source of
competitive advantage through their commitment, adaptability and high quality (of skills,
performance and so on)’. The soft approach to HRM stresses the need to gain the commitment –
the ‘hearts and minds’ – of employees through involvement, communications and other methods
of developing a high-commitment, high-trust organization. Attention is also drawn to the key
role of organizational culture.
2. HRM is Strategic: Perhaps the most significant feature of HRM is the importance attached
to strategic integration, which flows from top management’s vision and leadership, and which
requires the full commitment of people to it. This is a key policy goal for HRM, which is
concerned with the ability of the organization to integrate HRM issues into its strategic plans, to
ensure that the various aspects of HRM cohere, and to encourage line managers to incorporate an
HRM perspective into their decision making. One of the common themes of the typical
definitions of HRM is that HR policies should be integrated with strategic business planning. A
feature increasingly associated with HRM is a stress on the integration of HR policies both with
one another and with business planning more generally.
3. HRM is Commitment-Orientated: The concept of HRM is composed of policies that
promote mutuality – mutual goals, mutual influence, mutual respect, mutual rewards, and mutual
responsibility. The theory is that policies of mutuality will elicit commitment which in turn will
yield both better economic performance and greater human development. One of the HRM
policy goals is the achievement of high commitment – behavioral commitment to pursue agreed
goals, and attitudinal commitment reflected in a strong identification with the enterprise. HR
may be tapped most effectively by mutually consistent policies that promote commitment and
which, as a consequence, foster a willingness in employees to act flexibly in the interests of the
“adaptive organization’s” pursuit of excellence’. At the heart of the concept is the complete
identification of employees with the aims and values of the business – employee involvement.
4. HRM Views People as Human Capital: People are regarded as assets rather than variable
costs, in other words treated as human capital, HRM philosophy holds that HR is valuable and a
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source of competitive advantage. People and their collective skills, abilities and experience,
coupled with their ability to deploy these in the interests of the employing organization, are
recognized as making a significant contribution to organizational success and as constituting a
significant source of competitive advantage.
5. HRM’s Approach is Unitary rather than Pluralist: The HRM approach to employee
relations is basically unitary. It is believed that employees share the same interests as employers.
This contrasts with what could be regarded as the more realistic pluralist view, which says that
all organizations contain a number of interest groups and that the interests of employers and
employees do not necessarily coincide.
6. HRM is Individualistic rather than Collectivistic: HRM is individualistic in that it
emphasizes the importance of maintaining links between the organization and individual
employees in preference to operating through group and representative systems.
7. HRM is a Management-Driven Activity: HRM can be described as a central, senior
management-driven strategic activity that is developed, owned and delivered by management as
a whole to promote the interests of their organization. The adoption of HRM is both a product of
and a cause of a significant concentration of power in the hands of management. HRM is about
the rediscovery of management prerogative.
8. HRM Focuses on Business Values: The concept of HRM has been largely based on a
management- and business-orientated philosophy. It is concerned with the total interests of the
organization. The interests of the members of the organization are recognized but subordinated to
those of the enterprise: hence the importance attached to strategic integration and strong cultures,
which flow from top management’s vision and leadership, and which require people who will be
committed to the strategy, who will be adaptable to change and who will fit the culture. By
implication, HRM is too important to be left to personnel managers. HRM policies are adapted to
drive business values and are modified in the light of changing business objectives and
conditions.
Activity 2.7. What is meant by the commitment oriented feature of SHRM?
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
__________________________________________________________________________
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Despite its popularity, there is no universally agreed definition of the term SHRM. Its multi-word nature, its
evolution, and its varied perspectives contribute to lack of one agreed upon definition. Broadly, SHRM is defined as
the comprehensive set of managerial activities and tasks concerned with developing and maintaining a qualified
workforce in ways that contribute organizational effectiveness. SHRM is also conceptualized as a managerial
approach that states that organizational problems are solved through the integration of HR and business strategy
from the outset of strategy formation; as a new discipline different from the traditional HRM that is functional-
oriented and the classical strategic management that is external-oriented; as a sub-field of the broad HRM discipline
district from the micro-HRM and the international HRM; and as an overall organizational rather than a functional
activity that is left to the HR specialists. Studying SHRM is significant since organizations achieve competitive
advantage through SHRM as it encourages proactive rather than reactive behavior, communicates company goals
explicitly, focuses on the gaps between the current situation and a vision of the future, and identifies human resource
opportunities and constraints in implementing strategic plans. Traditional HRM is transactional in nature, concerned
essentially with providing administrative support in terms of staffing, recruitment, compensation, and benefits.
Major differences between traditional and strategic HRM include: (1) that strategic HRM focuses on organizational
performance rather than individual performance, and (2) that strategic HRM emphasizes the role of HRM systems as
solutions to business problems rather than individual HRM practices in isolation. HRM has evolved from the mere
record keeping function of the early 1900s to the current integration function. Specifically, it has evolved through
five stages: record keeping of employee information, personnel function, emphasis on employee participation and
empowerment, computer-based HR systems, and emphasis on the return on investment of the HR function. The
people management discipline has been evolved from personnel management to human resource management to
strategic human resource management. HRM is diverse, strategic, commitment-oriented, based on the belief that
people are assets, unitarist rather than pluralist, individualistic rather than collective, a management-driven activity,
and focused on business values.

1. What is SHRM?
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
2. What are the linkages, if any, between SHRM, leadership and learning?
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
3. What does the ‘HR is too important to be left to the HR specialists’ mean?
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
4. Explain with example the management-driven characteristic of HRM.
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
5. What are the major differences between traditional HRM and Strategic HRM?
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
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Air National’s (AN) 1986 Annual Report glowed with optimism. Bradley Smith, CEO, stated in his letter to
shareholders, ‘As a newly privatized company we face the future with enthusiasm, confident that we can compete in
a deregulated industry.’ By April 1988, however, the tone had changed with a reported pre-tax loss of $93 million.
The newly appointed CEO, Clive Warren, announced a major change in the company’s business strategy that would
lead to a transformation of business operations and HR practices in Europe’s largest airline company. During the
early 1980s, civil aviation was a highly regulated market and competition was managed through close, if not always
harmonious, relationships between airlines, their competitors and governments. National flag carriers dominated the
markets and market shares were determined, not by competition, but by the skill of their governments in negotiating
bilateral ‘air service agreement’. These agreements established the volume and distribution of air traffic and thereby
revenue. Within these markets AN dominated other carriers. Despite the emergence of new entrants, in 1983 AN’s
share of the domestic market, for instance, increased by 60 per cent.
In the middle of the 1980s, Air National’s (AN) external environment was subjected to two sets of significant
changes. First, in 1986, AN was privatized by Britain’s Conservative government. This potentially reduced the
political influence of the old corporation and exposed the new company to competitive forces. Preparation for
privatization required painful restructuring and ‘downsizing’ of assets and the workforce, driven largely by the need
to make the company attractive to initially skeptical investors. Paradoxically, however, privatization also offered
significant political leverage which AN was able to deploy to secure further stability in its key product markets. It
was this factor, rather than the stimulus of market competition, that gave senior management the degree of stability
and security to plan and implement new business and HRM strategies. The second set of pressures, potentially more
decisive, was generated by prolonged economic recession and the ongoing deregulation of civil aviation in Europe
and North American.
With these environmental forces, AN attempted to grow out of the recession by adopting a low-cost competitive
strategy and joining the industry-wide price war. Bradley Smith, CEO, when he displayed the following overhead
transparency to his senior management team (SMT) in April 1986 stated that ‘this strategy requires us to be
aggressive in the market place and to be diligent in our pursuit of cost reductions and cost minimization in areas like
service, marketing and advertising’. The low-cost competitive strategy failed. Passenger numbers slumped by 7 per
cent during 1988 contributing to a pre-tax loss. Following the appointment of a new CEO, AN changed its
competitive strategy and began to develop a differentiation business strategy or what is also referred to as an ‘added-
value’ strategy. Under the guidance of the newly appointed CEO, Clive Warren, Air National prioritized high-
quality customer service and ‘reengineered’ the company. Management structures were reorganized to give a tighter
focus on operational issues beneath corporate level. Air National’s operations were divided into route groups based
on five major markets Each group was to be headed by a general manager who was given authority over the
development of the business with particular emphasis on marketing. The company’s advertising began also to
emphasize the added-value elements of AN’s services. New brand names were developed and new uniforms were
introduced for the cabin crews and point-of-service staff.
AN’s re-engineering also aimed at cutting the company’s cost base. Aircraft and buildings were sold and persistently
unprofitable routes either suspended or abandoned altogether. AN’s overall route portfolio was cut by 4 per cent
during 1989 alone. Labor costs offered the most significant potential savings and, with 35 000 employees AN’s
reengineering included ‘one of the biggest redundancy programs in British history’. Once the redundancy program
was underway the company was able to focus on product development, marketing, customer service, and HR
development. The company’s sharpened focus on the new ‘customer first’ program prompted a major review of the
management of employees and their interface with customers. The competitive and HRM strategies pursued by AN
in the wake of this re-engineering process are congruent with those SHRM models that emphasize empowerment
and employee development. As the CEO, Clive Warren, stated in a TV interview: ‘In an industry like ours, where
there are no assembly lines or robots, people are our most important asset, and our long-term survival depends upon
how they work as part of a team. This means that, to get superior performance, managers have to care about how
they live and develop, not just about how they work and produce.’
The key features of leadership style associated with the adopted strategies were more formally illustrated by AN’s
Director of Human Resources, Elizabeth Hoffman. In the closing part of her presentation, Elizabeth Hoffman
outlined the need for a new approach to managing AN’s employees: ‘We must emphasize to our managers that they
must give up control if our employees are to improve their performance.’ As part of the ‘new way of doing things’,
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demarcations between craft groups, such as avionics and mechanical engineers, were removed and staff were
organized into teams of multi-skilled operatives led by team leaders. Even those middle managers who supported the
new re-engineered workplace found this approach to managing their subordinates uncomfortable at times, as one
maintenance manager acknowledged: The hard part is sharing power. No matter how you rationalize it, after a while
you want to just make your own decisions and follow it through. I confess that my own thinking tends to be
hierarchical in certain situations… I like to be able to say yes or no without having to confer all the time and seek
consensus from the team. So there are some real disadvantages for me in this new regime we have, but I realize it’s
the right way to go.
AN instituted a series of customer service training seminars and invested in training and development. The senior
management also developed a ‘strategic partnership’ with the unions. At the onset of the re-engineering process
Clive Warren and Elizabeth Hoffman undertook to ‘open the books’ to the unions and established team briefings and
regular, formal consultation meetings with union representatives. A profit-related pay system was also launched
with the full support of the unions. In addition, the senior management held major training programs, designed and
delivered by leading business school academics, on the importance of trust, motivation and ‘visionary’ leadership.
Running parallel to these developments was the company’s concurrent objective of cost reductions. Between 1988
and 1992, AN shed 37 per cent of its workforce with nearly 25 per cent going in 1988. Job cuts were managed
entirely through voluntary severance and redeployment. However, the requirement to sustain and improve
performance in the face of such job losses produced a preoccupation with productivity levels and attempts to alter
shift patterns at times provoked conflict. Disputes were resolved quickly and usually by the company reminding
employees of AN’s commitment to job security, training and development, and through senior management
‘throwing money at the problem’. Reviewing the last decade, Clive Warren considered that AN had been
‘transformed by re-engineering’. Deep in debt in the late 1980s, Air National went into profit in the first quarter of
1997. The company’s aircraft were flying to 164 destinations in 75 countries from 16 UK airports. AN accounted for
70 per cent of UK scheduled domestic and international passenger traffic and ‘is now the largest international air
passenger carrier in the world’, said Warren.
Questions
1. What factors enabled Air National’s senior management to take a strategic approach to its business and to
adopt an empowering–developmental approach to HRM?
2. How useful is the concept of ‘strategic choice’ in understanding the linkage between Air National’s
competitive and HR strategies?
3. To what extent do re-engineering principles affect management development and practices?
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CHAPTER THREE
MODELS OF STRATEGIC HUMAN RESOURCE MANAGEMENT

3.1. Introduction Upon the completion of this chapter, you will be able to:
3.2. Importance of the models 1. Discuss the main thesis of the Matching Model
3.3. The Matching Model of SHRM of SHRM
3.4. The Harvard Model of SHRM 2. Describe the Harvard model of SHRM
3.5. The Guest’s Model of SHRM 3. Compare the Matching Model and the Harvard
3.6. The Storey’s Model of SHRM Model of SHRM
3.7. The Hard and Soft Model of HRM 4. Compare and contrast the Guest’s and the
3.8. The Warwick’s Model of SHRM Storey’s Models of SHRM
3.9. Chapter Summary 5. Discuss the major contribution of the Warwick’s
3.10. Self-Check Questions Model to SHRM
3.11. Case analysis 6. Compare hard and soft versions of HRM
3.1. INTRODUCTION
In chapters 1 and 2 of this module, we have discussed strategy and strategy making and overview
of SHRM focusing on the concept of strategy and the strategy making approaches and the
concept and characteristics of SHRM. We have explained that strategy is conceptualized as
intended plan or as pattern of behavior – strategy may be intended or emerged. An intended
strategy might not be realized and unintended strategy might be realized emphasizing that
strategy formulation and strategy implementation might not be separated. In addition, we have
identified Whittington’s four approaches of making a strategy diagramed in two dimensions: In
one dimension, the expected outcome of the strategy may be profit maximization or may
pluralist (include other outcomes) and in the other dimension, strategy may be emergent or
planned. In these dimension four approach of strategy making: the classical, the evolutionary, the
processual, and the systemic approaches are discussed in relation to HR. We will now turn to an
important part of the mainstream SHRM discourse – the search for the defining features and
goals of SHRM – by exploring the theoretical models in this area. Here, though there are a
number of models that influenced the theory and practices of SHRM in its history, the Matching
Model of Fombrun, Tichy and Devanna (1984), the Harvard Model of Beer, Spector, Lawrence,
Mills, and Walton (1984), the Guest’s Model (1987), the Warwick Model of Hendry and
Pettigrew (1990), the Storey’s Model (1992), and the hard and soft model are discussed.
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3.2. IMPORTANCE OF THE SHRM MODELS
Over the past three decades, HRM scholars have debated the meaning of the term HRM and
attempted to define its fundamental traits by producing polar or multi-conceptual models. A
number of polar models contrast the fundamental traits of SHRM with those of traditional HRM,
while others provide statements on employer goals and HR outcomes. These models help to
focus debate around such questions as ‘What is the difference between HRM and personnel
management?’ and ‘What outcomes are employers seeking when they implement a SHRM
approach? Here, we identify six major HRM models that seek to demonstrate in analytical terms
the distinctiveness and goals of SHRM (Beer et al., 1984; Fombrun et al., 1984; Guest, 1987;
Hendry and Pettigrew, 1990; Storey, 1992). These models fulfill at least four important
intellectual functions for those studying SHRM:
1. They provide an analytical framework for studying SHRM, such as HR practices,
situational factors, stakeholders, strategic choice levels and HR and performance
outcomes.
2. They legitimize SHRM. For those advocating ‘Invest in People’, the models help to
demonstrate to skeptics the legitimacy and effectiveness of HRM. A key issue here is the
distinctiveness of SHRM practices: ‘it is not the presence of selection or training but a
distinctive approach to selection or training that matters. It is the use of high performance
or high commitment HRM practices’.
3. They provide a characterization of SHRM that establishes the variables and relationships
to be researched.
4. They serve as a heuristic device – something to help us discover and understand the
world of work – for explaining the nature and significance of key HR practices and HR
outcomes.
3.3. THE MATCHING MODEL OF SHRM
One of the first explicit statements of the SHRM concept was made by the Michigan School
Fombrun, Tichy and Devanna (1984). They developed an SHRM model usually referred to as the
‘Matching Model of SHRM’. This model holds that human resource systems and the
organization structure should be managed in a way that is congruent with organizational strategy.
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It has got its name from the focus of matching the human resource system to an organization’s
business strategy. It highlights the ‘resource’ aspect of HRM and emphasises the efficient
utilization of HR to meet organizational objectives. It states that like other resources of
organization, HR have to be obtained cheaply, used sparingly, and developed and exploited as
fully as possible. The main aim of the model is, therefore, to develop an appropriate HR system
that will characterize those HRM strategies that contribute to the most efficient implementation
of business strategies.
This model emphasizes the interrelatedness and the coherence of HRM activities prescribing that
the different HRM activities are interrelated and consistent to each other. According to Fombrun
et al (1984), there has to be a fit between HR and business strategies (though not manifest in the
model) and the four areas of HRM have to be both coherent and consistent among themselves
and also linked to the business strategy.
The Matching Model of SHRM also hold that there is a human resource cycle, which consists of
four generic processes or functions that are performed in all organizations. In terms of
overarching goals of SHRM, these four HR activities are linked to the firm’s performance. These
are: (1) Selection – matching available human resources to jobs; (2) appraisal – performance
management; (3) rewards – ‘the reward system is one of the most under-utilized and mishandled
managerial tools for driving organizational performance’; it must reward short- as well as long-
term achievements, bearing in mind that ‘business must perform in the present to succeed in the
future’; and (4) development – developing high-quality employees
Figure 3. 1 The Human Resource Cycle of the Matching Model of SHRM
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The Matching model has weaknesses and strengths. The weakness is its apparent prescriptive
nature with its focus on four key HRM practices. It also ignores different stakeholder interests,
situational factors and the notion of management's strategic choice. The strength, however, is
that it emphasizes the interrelatedness and the coherence of HRM activities and the importance
of 'matching' internal HRM policies and practices to the organization's business strategy. The
notion of the SHRM cycle is useful as a heuristic framework for explaining the nature and
significance of key HR practices that make up the complex field of SHRM. It is also a simple
model that serves as a useful framework to explain the significance of key HRM practices. It is
important to note that the overall performance of the organization depends on the effective
operation of each of the components and their co-ordination with the business’s strategy.
Activity 3.1. What is the main aim of the Matching Model of SHRM? Discuss the
interrelatedness of the four areas of HRM.
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
________________________________________________________________________
3.4. THE HARVARD MODEL OF SHRM
The Harvard Model of SHRM is developed by the Harvard School of Beer, Spector, Lawrence,
Mills, and Walton (1984). This model stresses the human aspect of HRM and is concerned with
the employer-employee relationship. It highlights the interests of different stakeholders in the
organization such as shareholders, management, employee groups, government, community and
unions and how their interests are related to the objectives of management. Its analytical
framework consists of six basic components: situational factors, stakeholder interests, HRM
policy choices, HR outcomes, long-term consequences, and a feedback loop.
The situational factors incorporate workforce characteristics, business strategy and conditions,
management philosophy, labor market regulations, societal values, and patterns of unionization,
and influence management's choice of HR strategy. The stakeholder interests recognize the
importance of 'trade-offs', either explicitly or implicitly, between the interests of owners and
73
those of employees and their organizations. HRM policy choices emphasize that management's
decisions and actions in HRM can be appreciated fully only if it is recognized that they result
from an interaction between constraints and choices.
The HR outcomes are high employee commitment to organizational goals and high individual
performance leading to cost-effective products or services. The long-term consequences
distinguish between three levels: individual, organizational and societal. At the individual
employee level the long-term outputs comprise the psychological rewards workers receive in
exchange for effort. At the organizational level increased effectiveness ensures the survival of
the organization. In turn, at the societal level, as a result of fully utilizing people at work, some
of society's goals are attained. Finally, the feedback loop helps to flow the outputs directly into
the organization and to the stakeholders.
The actual content of HRM, according to this model, is described in relation to four policy areas,
namely, human resource flows, reward systems, employee influence, and works systems. Each of
the four policy areas is characterised by a series of tasks to which managers must attend. The
outcomes that these four HR policies need to achieve are commitment, competence, congruence,
and cost effectiveness. The aim of these outcomes is therefore to develop and sustain mutual
trust and improve individual/group performance at the minimum cost so as to achieve individual
well-being, organisational effectiveness and societal well-being. The model allows for analysis
of these outcomes at both the organizational and societal level.
The Harvard model suggested that HRM has two characteristic features: 1) line managers accept
more responsibility for ensuring the alignment of competitive strategy and personnel policies; 2)
personnel has the mission of setting policies that govern how personnel activities are developed
and implemented in ways that make them more mutually reinforcing. It is acknowledged by
many researchers that the model exerted considerable influence over the theory and practice of
HRM, particularly in its emphasis on the fact that HRM is the concern of management in general
rather than the personnel function in particular. However, it has been criticised for not explaining
the complex relationship between strategic management and HRM.
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Figure 3. 2 The Harvard Model of SHRM
This model - or 'the map of the HRM territory' as the authors prefer to call it - exerted
considerable influence over the theory and practice of HRM, particularly in its emphasis on the
fact that HRM is the concern of management in general rather than the HR function in particular.
As Boxall, Purcell and Wright (2007)
(2007) point out, ‘HRM is not just what HR departments do.’
Specifically, it has the following advantages:
• It incorporates recognition of a range of stakeholder interests;
• It recognizes the importance of ‘trade
‘trade-offs’,
offs’, either explicitly or implicitly, between the
interests of owners and those of employees as well as between various interest groups;
• It widens the context of HRM to include ‘employee influence’, the organization of work
and the associated question of supervisory style;
• It acknowledges a broad rang
rangee of contextual influences on management’s choice of
strategy, suggesting a meshing of both product
product-market and socio-cultural
cultural logics;
• It emphasizes strategic choice – it is not driven by situational or environmental
determinism.
Activity 3.2. What are the differences between the Harvard and the Matching
Models of SHRM?
______________________________________________________________________________
_________________________ _____________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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3.5. THE GUEST’S MODEL OF SHRM
In David Guest’s (1989, 1997) framework, different approaches to labor management are
examined in the context of goals, employee behavior, performance and long-term financial
outcomes. According to this SHRM model, managers are advised to consider the effects of a
core set of integrated HR practices on individual and organizational performance.
For Guest, HRM differs significantly from personnel management, and he attempts to identify
the major assumptions or stereotypes underpinning each approach to employment management.
Personnel management seeks ‘compliance’, whereas HRM seeks ‘commitment’ from employees.
In personnel management, the psychological contract is expressed in terms of a ‘fair day’s work
for a fair day’s pay’, whereas in HRM it is ‘reciprocal commitment’. In the area of employee
relations, personnel management is said to be pluralist, collective and ‘low trust’, whereas HRM
is unitarist, individual and ‘high trust’. The points of differences between personnel management
and HRM are also reflected in the design of organizations. Thus, organizations adopting the
personnel management model exhibit ‘mechanistic’, top-down and centralized design features,
whereas firms adopting HRM are allegedly ‘organic’, bottom-up and decentralized. Finally, the
policy goals of personnel management and HRM are different. In the former, they are
administrative efficiency, standard performance and minimization of cost. In contrast, the policy
goals of HRM are an adaptive workforce, an improvement in performance and maximum
utilization of human potential.
According to these stereotypes, HRM is distinctively different from personnel management

because:
(1) it integrates HR into strategic management;
(2) it seeks employees’ commitment to organizational goals;
(3) the HR perspective is unitary with a focus on the individual;
(4) it works better in organizations that have an ‘organic’ structure; and
(5) employer goals prioritize the full utilization of human assets.
Implicit in the contrasting stereotypes is an assumption that the dominant HRM model is ‘better’
(allowing enhanced commitment and flexibility) within the current more flexible labor markets
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and in decentralized, flexible, empowering and organic organizational structures. However,
variations in context might limit its effectiveness The central hypothesis of Guest’s (1997)
framework is that managers should adopt a distinct set or ‘bundle’ of HR practices in a coherent
fashion; the outcome will be superior individual and organizational performance.
Guest’s model has six components:

1. An HR strategy
2. A set of HR policies
3. A set of HR outcomes
4. Behavioral outcomes
5. Performance outcomes
6. Financial outcomes.
The model acknowledges the close links between HR strategy and the general business strategies
of differentiation, focus and cost. The ‘core’ hypothesis, however, is that HR practices should be
designed to lead to a set of HR outcomes of ‘high employee commitment’, ‘high quality’ and
‘flexibility’. Like Beer et al., Guest sees high employee commitment as a critical HR outcome,
concerned with the employer’s goals of binding employees to the organization and obtaining the
behavioral outcomes of increased effort, cooperation and organizational citizenship. ‘Quality’
refers to all aspects of employee behavior that relate directly to the quality of goods and services.
Flexibility is concerned with how receptive employees are to innovation and change. The model
focuses on the link between HR practices and performance. Only when all three HR outcomes –
commitment, quality and flexibility – are achieved can superior performance outcomes be
expected. As Guest (1989, 1997) emphasizes, these HRM goals are a ‘package’: ‘Only when a
coherent strategy, directed towards these four policy goals, fully integrated into business strategy
and fully sponsored by line management at all levels is applied will the high productivity and
related outcomes sought by industry be achieved’.
Guest (1987, 1989, 1997) recognizes a number of conceptual issues associated with the dominant
HRM model. The first is that the values underpinning the model are predominantly individualist-
oriented: ‘There is no recognition of any broader concept of pluralism within society giving rise
to solidaristic collective orientation’. The second concerns the status of some of the concepts,
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such as that of commitment, which is suggested to be ‘a rather messy, ill-defined concept’
(Guest, 1987). A third issue is the explicit link between HRM and performance. This raises the
problem of deciding which types of performance indicators to use in order to establish the links
between HR practices and performance. It has been argued elsewhere that Guest’s model may
simply be a polar ‘ideal type’ towards which organizations can move, thus proposing unrealistic
conditions for the practice of HRM. It may also make the error of criticizing managers for not
conforming to an image constructed by academics. Furthermore, it presents the HRM model as
being inconsistent with collective approaches to managing the employment relationship.
Figure 3. 3 The Guest’s Model of SHRM
Guest sees employee commitment as a vital HRM outcome that is concerned with binding
employees to the organization and obtaining the behavioral outcomes of increased effort, co-
operation, involvement and what he calls organizational citizenship. “High-quality employees”
refers to issues of workplace learning and the need for the organization to have an able, qualified
and skilful workforce to produce high-quality services and products. The right-hand side of the
model focuses on the link between HRM and performance. According to the model, only when
all three HRM outcomes – quality, commitment and flexibility – are achieved can we expect
improved behavioral and performance outcomes. Guest argues that “only when a coherent
strategy – directed towards these policy goals, fully integrated into business strategy and fully
sponsored by line management at all levels – is applied will the high productivity and related
outcomes sought by industry be achieved”.
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In contrast, the strength of the Guest model is that it clearly maps out the field of HRM and
classifies its inputs and outcomes. The model is useful for examining the key employer goals
usually associated with the normative models of HRM: strategic integration, commitment,
flexibility and quality. The constituents of the model hypothesizing a relationship between
specific HR practices and performance can be empirically tested by research. Guest’s
constructed set of theoretical propositions can also provide a framework for a critical dialogue on
the precise nature, tensions and contradictions of HRM.
Activity 3.3. What is the main message of the Guest’s Model of SHRM?
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3.6. THE STOREY’S MODEL OF SHRM
The Storey Model of SHRM demonstrates the differences between what Storey (1992) terms the
‘personnel and industrials’ and the HRM paradigm by creating an ‘ideal type’. It is a ‘mental
image’ that cannot actually be found in any real workplace. The model emphasizes the potential
for ‘people’ to be a key strategic asset in the contemporary firm and the key prescriptions in how
they should be managed to maximize their performance.
The Model has four main components: beliefs and assumptions, strategic aspects, line
management, and key levers. According to the stereotypes depicted in Figure 3.3, the SHRM
‘recipe’ of ideas and practices prescribes certain priorities. In this framework, the most
fundamental belief and assumption is the notion that, ultimately, among all the factors of
production, it is HR that really distinguishes successful firms from mediocre ones. The aim
should not be mere compliance with rules, but employee commitment; and employees should,
for example, be very carefully selected and developed. It follows logically from this that
employees ought to be nurtured as a valued asset and not simply regarded as a cost. Moreover,
another underlying belief is that the employer’s goal should not merely be to seek employees’
compliance with rules, but to ‘strive’ for ‘commitment and engagement’ that goes ‘beyond the
contract’
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The strategic aspects element shows that HRM is a matter of critical importance to corporate
planning. It prescribes that top management involvement is necessary and HR policies should be
integrated into the business strategy. In Storey’s words, ‘decisions about human resources
policies should … take their cue from an explicit alignment of the competitive environment,
business strategy and HRM strategy’.
The third component, line management, argues that general managers, and not HRM specialists,
are vital to the effective delivery of HRM practices. Because HR practice is critical to the core
activities of the business, it is too important to be left to personnel specialists alone. Line
managers must be closely involved both as deliverers and drivers of the HR policies and much
greater attention is paid to the management of managers themselves. Line managers have
emerged in almost all cases as the crucial players in HR issues.
The key levers are issues and techniques strongly featured, explicitly or implicitly, in discussions
of HRM. In this component, the model prescribes that managing culture is more important than
managing procedures and systems; integrated action on selection, communication, training
reward, and development is essential; and restructuring and job redesign allows developed
responsibility and empowerment. The key levers element in the model focuses on the methods
used to implement HRM. In researcher–manager interviews on HRM, Storey found considerable
unevenness in the adoption of these key levers, such as performance-related pay, harmonization
of conditions and investment to produce a work-related learning company. What is persuasive
about the HRM narrative is evidence of a shift away from personnel procedures and rules as a
basis of good practice, to the management of organizational culture as proof of avant-garde
practice.
Storey (1989) not only identified the shift towards SHRM, he also described two approaches to
HRM as ‘hard’ and ‘soft’. The hard version emphasizes that people are important resources
through which organizations achieve competitive advantage. These resources have, therefore, to
be acquired, developed and deployed in ways that will benefit the organization. The focus is on
the strategic aspects of managing HR in as ‘rational’ way as for any other economic factor. The
emphasis is on the interests of management, integration with business strategy, and obtaining
added value from people by the processes of HR development and performance management.
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The soft version emphasizes communicating, motivating, leading and treating employees as
valued assets. People are a source of competitive advantage through their commitment,
adaptability and high quality. It explains the need to gain the commitment of employees through
involvement, communications and other methods of developing a high-commitment, high-trust
organization. The soft and hard model of SHRM is discussed in a separate section in this
chapter.
Figure 3. 4 The Storey’s Model of SHRM
Activity 3.4. What does the Storey Model of SHRM emphasize?

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3.7. THE HARD AND SOFT MODEL OF SHRM
HRM has frequently been described as a concept with two distinct versions: soft and hard. These
two versions are diametrically opposed along a number of dimensions, and they have been used
by many commentators as devices to categorize approaches to managing people according to
developmental-humanist or utilitarian-instrumentalist principles. The hard and soft versions of
HRM show the key distinctions as being whether the emphasis is placed on the human or the
resource in managing HR.
Soft HRM is associated with the human relations movement, the utilization of individual talents
and McGregor’s Theory Y perspective on individuals (developmental-humanism). This has been
equated with the concept of a ‘high commitment work system’, which is aimed at eliciting a
commitment so that behavior is primarily self-regulated rather than controlled by sanctions and
pressures external to the individual and relations within the organization are based on high levels
of trust. Soft HRM is also associated with the goals of flexibility and adaptability and implies
that communication plays a central role in management.
The soft version of HRM emphasizes communication, motivation and leadership. It involves
treating employees as valued assets, a source of competitive advantage through their
commitment, adaptability and high quality. It therefore views employees as means rather than
objects. The soft approach stresses the need to gain the commitment – the ‘hearts and minds’ – of
employees through involvement, communications and other methods of developing a high-
commitment, high-trust organization.
Thus, soft HRM places an emphasis on "human" and is associated with the human relations
school of management. Legge refers to this as "Developmental Humanism". Whilst
emphasizing the importance of integrating HR policies with business objectives, the soft model
focuses on treating employees as valued assets and a source of competitive advantage through
their commitment, adaptability and high quality skill and performance. Employees are proactive
rather than passive inputs into productive processes, capable of development, worthy of trust and
collaboration which is achieved through participation. The soft version is seen as a method of
releasing untapped reserves of human resourcefulness by increasing employee commitment,
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participation and involvement. Employee commitment is sought with the expectation that
effectiveness will follow as second-order consequences.
Hard HRM, on the other hand, stresses the quantitative, calculative and business-strategic
aspects of managing the ‘headcount resource’ in as ‘rational’ a way as for any other factor of
production (utilitarian-instrumentalism). Hard HRM focuses on the importance of strategic fit,
where human resource policies and practices are closely linked to the strategic objectives of the
organization (external fit), and are coherent among themselves (internal fit), with the ultimate
aim being increased competitive advantage.
The hard version of HRM emphasizes that people are important resources through which
organizations achieve competitive advantage. These resources have therefore to be acquired,
developed and deployed in ways that will benefit the organization. The focus is on the
calculative aspects of managing HR as any other economic factor. The emphasis is therefore on
the interests of management, integration with business strategy, obtaining added value from
people by the processes of HR development and performance management.
Hard HRM stresses the "resource" aspect of HRM; Legge (1995) refers to this as "Utilitarian
Instrumentalism". This hard model stresses HRM's focus on the crucial importance of the close
integration of human resource policies, systems and activities with business strategy. From this
perspective human resources are largely a factor of production, an expense of doing business
rather than the only resource capable of turning inanimate factors of production into wealth.
Human Resources are viewed as passive, to be provided and deployed as numbers and skills at
the right price, rather than the source of creative energy.
Hard HRM is as calculative and tough minded as any other branch of management,
communicating through the tough language of business and economics. This emphasis on the
quantitative, calculative and business-strategic aspects of managing the "headcount" has been
termed human asset accounting. The hard HRM approach has some kinship with scientific
management as people are reduced to passive objects that are not cherished as a whole people
but assessed on whether they possess the skills/attributes the organization requires.
The soft version of HRM assumes that employees will work best and thereby increase
organizational performance, if they are fully committed to the organization. The soft version
emphasizes that this commitment will be generated if employees are trusted, if they are trained
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and developed, and if they are allowed to work autonomously and have control over their work.
In other words, the strategic dimension of the soft model of HRM, in contrast to the hard model,
is that control comes through commitment.
Under the hard model, on the other hand, control is more concerned with performance systems,
performance management and tight control over individual activities, with the ultimate goal
being to secure the competitive advantage of the organization. This implies that the individual is
managed on a much more instrumental basis than under the soft model.
Ultimately, then, there is a tension and conflict between elements of self-expression and high
trust contained within the soft model, and direction and low trust within the hard model.
Although hard and soft models of HRM therefore derive from very different intellectual
traditions, and incorporate diametrically opposed assumptions about human nature and
managerial control, both have been incorporated within the same theories or models of HRM.
These two perspectives on HRM indicate that the same term – HRM – is capable of signaling
diametrically opposite sets of assumptions.
It is evident that HRM does not provide a consistent set of policies and procedures. The
distinction between hard and soft forms of HRM offers management two sharply contrasting
alternatives within a supposedly single approach. Whilst hard and soft HRM both give weight to
a link with strategy and the importance of people, different meanings are attributed to these
components and different assumptions of human nature underlie each.
Activity 3.5. What are the assumption differences between hard HRM and soft
HRM?
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3.8. THE WARWICK’S MODEL OF SHRM
One of the major setbacks in the conceptual developments of the HRM concept up to this time
was that most of the earlier developments were within an American Context. Approaches outside
of this context required a perspective of the particular cultural context that exists in different
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countries. The Warwick’s model of SHRM emanates from the Centre for Corporate Strategy and
Change at the University of Warwick, UK, and with two particular researchers: Hendry and
Pettigrew (1990). The model extends the Harvard framework by drawing on its analytical
aspects. It differs from the Harvard model by reflecting European traditions and management
styles. It takes account of business strategy and HRM practices, the external and internal context
in which these activities take place; and the processes by which such changes take place,
including interactions between changes in both context and content.
The Warwick Model of SHRM (Figure 3.5) basically comprise five interrelated elements which
allows an analysis of how external factors impact upon the internal operations of the organization
reflecting the open system theory of organizational thinking. These are: the outer context, the
inner context, business strategy content, the HRM context, and the HRM content. The outer
context or the wider environmental context consists of the socioeconomic, technical, political-
legal, and competitive contexts. The inner (organizational) context covers culture, structure,
leadership, task-technology, and business outputs. The business strategy contains objectives,
product market, strategy and tactics. HRM context consists of the context in which HRM is
practiced including role, definition, organization, and HR outputs. Finally, the content of HRM
includes HR flows, work systems, reward systems, and employee relations.
Organizations in this case achieve an alignment between the external and internal context to
experience higher performance. The model recognizes the wider context in which HRM operates
and emphasizes the full range of tasks and skills that define HRM as a strategic function. Hendry
and Pettigrew (1990) argue that, better descriptions of structures and strategy making in complex
organizations, and of frameworks for understanding them, are essential underpinnings for HRM.
They believe that as a movement, HRM expressed a mission, to achieve a turnaround in industry.
HRM was in a real sense heavily normative from the outset; it provided a diagnosis and proposed
solutions. Hendry and Pettigrew (1990) further added that, what HRM did at this point was to
provide a label to wrap around some of the observable changes, while providing a focus for
challenging deficiencies – in attitudes, scope, coherence, and direction – of existing personnel
management.
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The model’s strength is that it identifies and classifies important environmental influences on
HRM. It maps the connections between the wider environment and the organizational contexts,
and explores how HRM adapts to changes
changes in context implying that those organizations achieving
an alignment between these two contexts will experience superior performance. However, its
weakness is that the process whereby internal HR practices are linked to business output or
performance is not developed.
Figure 3. 5 The Warwick’s Model of SHRM
Activity 3.6. What are the major differences between the Harvard Model of HRM and the
Warwick’s Model of HRM?
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The Matching Model of SHRM holds that HR systems and the organization structure should be managed in a way
that is congruent with organizational strategy. It also holds that there is a human resource cycle, which consists of
four generic processes or functions that are performed in all organizations: selection, appraisal, rewards, and
development. The Harvard Model of SHRM is stresses the human aspect of HRM and is concerned with the
employer-employee relationship. Its analytical framework consists of six basic components: situational factors,
stakeholder interests, HRM policy choices, HR outcomes, long-term consequences, and a feedback loop. In Guest’s
framework, different approaches to labor management are examined in the context of goals, employee behavior,
performance and long-term financial outcomes. Its central hypothesis is that managers should adopt a distinct set or
‘bundle’ of HR practices in a coherent fashion; the outcome will be superior individual and organizational
performance. The Storey Model of SHRM emphasizes the potential for ‘people’ to be a key strategic asset in the
contemporary firm and the key prescriptions in how they should be managed to maximize their performance. Its four
main components are beliefs and assumptions, strategic aspects, line management, and key levers. The hard model
of HRM is a process emphasizing the close integration of HR policies with business strategy which regards
employees as a resource to be managed in the same rational way as any other resource being exploited for maximum
return whereas the soft version of HRM sees employees as valued assets and as a source of competitive advantage
through their commitment, adaptability and high level of skills and performance. The Warwick’s model of SHRM
extends the Harvard framework by drawing on its analytical aspects. It takes account of business strategy and HRM
practices, the external and internal context in which these activities take place; and the processes by which such
changes take place, including interactions between changes in both context and content. It has five elements: the
outer context, the inner context, business strategy content, the HRM context, and the HRM content.

1. What are the weaknesses and the strengths of the Matching Model of SHRM?
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2. What are the two characteristic features suggested by the Harvard Model of SHRM
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3. Discuss the four major components of the Storey’s Model of SHRM
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4. What are the inner and the outer contexts in the Warwick’s Model of SHRM?
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5. What are the major differences between the hard and the soft Models of SHRM?
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3.10. CASE ANALYSIS 3.1
In the twenty-first century, Ethiopia is tackling environmental issues similar to those of many countries in the world:
the more sustainable use of water, managing natural resources, reducing waste and improving energy efficiency. The
country is particularly concerned about the decline of its unique plants, animals and ecosystems. The country is
striving to build a positive image of Ethiopia through exporting environmentally sensitive products and maintaining
a reputation of being sustainable at home and abroad. The government has therefore recognized that there is a need
to increase reporting on sustainable practices among Ethiopian businesses in order to raise the profile of Ethiopia
globally on this important issue.
For the last few years, the Ministry for the Environment has promoted several grant-funding programs to support
environmental initiatives. In an attempt to control administration costs and improve the evaluation of the program’s
outcomes, a decision was recently made to combine the funds supporting environmental initiatives at the community
level. It is hoped that merging these funds will mean that the program will be more streamlined and that there will be
more flexibility to meet government priorities.
The combined funding program, called the Community Environment Fund (CEF), aims to support community
groups, businesses and regional governments in taking environmental actions. To be eligible for funding, applicants
have to demonstrate that their projects will support one or more of the following objectives: (1) raise awareness of
environmental damage; (2) support and strengthen partnerships between community, industry, and regional
governments on practical environmental initiatives; (3) involve the community in practically focused action for the
environment; (4) empower the community to take action that improves the quality of the environment, and (5)
increase community-based advice, educational opportunities and public information about environmental legislation.
As a result, many organizations showed their interests to participate in the government’s priorities, one of which is
Black Lion hospital. Black Lion Hospital, located in the center of the city of Addis Ababa, provides a wide range of
complex medical, surgery and mental health services, and is not only one of Ethiopia’s largest healthcare centers,
but also its oldest. The hospital has a poor reputation in terms of its HRM and struggles with adversarial union
relations. Workers are given low autonomy in their jobs, and the organizational structure contains several layers of
management. Decision-making is primarily centralized.
The hospital’s administration recently became aware of the funding provided by the government’s new
environmental initiative. Subsequently, in a public meeting, the Chief Executive Officer announced the creation of
an Environmental/Sustainability Innovation Committee, made up of staff members chosen by management from the
various hospital departments: ‘Environmental stewardship is a key component of our hospital’s strategic and
operational planning, and through this new committee we will be contributing to our organization’s and the
country’s goals to become more sustainable.’ The committee, he said, would recommend and develop projects that
would meet the funding criteria outlined by the government.
This new and revolutionary approach by the hospital administration took most of the staff by surprise. Although
many were eager to learn about the environmental issues and contribute their ideas through this experience, others
were suspicious of management’s motives in involving staff members when they had never been asked to participate
in such a public initiative before. Shortly before the initial meeting of the selected group, the HR department
received an angry call from the union executive questioning why they had not been asked to sit on the committee
and asking what criteria had been used to select the employees who were to participate. The union demanded a
meeting with management to discuss how workloads and jobs would be impacted by the employees’ involvement.
Questions
1. Using one of the five major HRM models, identify which aspects of the case illustrate traditional HRM and
SHRM approaches.
2. What contribution can a set of ‘best’ HR practices make to this organization?
3. Reflecting upon the national business system, discuss how the effectiveness of HR practices depends on the
context of an organization.
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CHAPTER FOUR
PERSPECTIVES ON STRATEGIC HUMAN RESOURCE MANAGEMENT

4.1. Introduction Upon the completion of this chapter, you will be
4.2. The Universalistic Perspective of SHRM? able to:
4.3. The Contingency Perspective of SHRM 1. Describe the universalistic perspective of
4.4. The Configurational Perspective of SHRM SHRM
4.5. The Contextual Perspective of SHRM 2. Identify the main thesis of the
4.6. The Investment Perspective of SHRM contingency perspective of SHRM
4.7. Chapter Summary 3. Compare and contrast the configurational
4.8. Self-Check Questions and the contingency perspective of
4.9. Case analysis SHRM
4. Discuss the contextual perspectives on
SHRM
5. Define and explain SHRM from the
perspective of investment view.
4.1. INTRODUCTION
Four perspectives have been defined in the SHRM literature: the universalistic perspective, the
contingent point of view, the configurational approach and the contextual outlook. These four
‘modes of theorizing’ represent four different approaches to the same SHRM question, each of
them emphasizing a specific dimension of the reality of SHRM. This criterion allows a complete
and systematic classification of the literature, because the four perspectives together show a
spectrum that encompasses all possible approaches. The fifth perspective – the investment
perspective of HR – is also another view that sees HR as valuable resource rather than variable
cost, which indeed influences SHRM theory and practice. This chapter deals with these
perspectives which discuss how the scholars in the SHRM community view SHRM. In chapter
three we discussed the Matching, the Harvard, the Guest, the Storey, and the Warwick Models of
SHRM that clarified the concept of the SHRM theory. The soft and hard model of SHRM was
also discussed as extension of the Storey’s Model.
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4.2. THE UNIVERSALISTIC PERSPECTIVE OF SHRM
The universalistic perspective of SHRM states that some HR practices are better than others and
all organizations should adopt these best practices. According to this perspective, there is a
universal relationship between individual ‘best’ HR practice and organizational performance,
thus, also called ‘best practice approach’. HR practices are universal in the sense that they are
best in any situation.
Pfeffer (1994) is one of the supporters of the universalistic view of SHRM. He argues that there
is a set of interrelated HR practices that characterize achieving competitive success through HR
management. Under the universalistic approach, SHRM practices are those that contribute to the
achievement of higher organizational performance, regardless of the organization’s strategy.
Proponents of the best practice approach argue that a single high performance HR strategy
enhances effectiveness regardless of organizational goals, work systems, or context.
The universalistic perspective is the simplest approach to the analysis of human resource
management strategies. It starts, in all its explanations and prescriptions, from the premise of the
existence of a linear relationship between variables that can be extended to the entire population.
Researchers can, therefore, identify best HRM practices that are characterized by: (1) having
demonstrated capacity to improve organizational performance, and (2) having to be
generalizable.
Regarding the level of analysis, universalistic models have focused mainly on a sub-functional
point of view, analyzing how certain isolated HR policies are linked to organizational
performance. In other cases, they analyze more than one best practice, defining what have been
called high performance work systems. Nevertheless, we can observe that, contrary to the other
approaches that will be described below, the universalistic perspective does not study either the
synergic interdependence or the integration of practices, and the contribution of these practices to
performance is analyzed only from an additive point of view. As a result, this view implicitly
denies that the different elements that build the system could be combined in different patterns of
practices that could be equally efficient for the organization.
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Figure 4. 1 The Universalistic Perspective of SHRM
Although the literature has pointed out many best HRM practices, it is possible to identify topics
that emerge repeatedly, which, in general terms, represent the core of the universalistic
contribution. At first sight, we can observe that this perspective focuses mainly on certain
practices oriented to reinforce employees’ abilities, for example, variable compensation, certain
methods of recruitment and selection, comprehensive training or performance appraisal. On the
other hand, interest has recently shifted towards aspects much more related to commitment and
participation of the workforce, consensus in problem solving, teamwork and work incentives, job
redesign or the establishment of new mechanisms of compensation.
Proponents of the best practice approach argue that a single high performance HR strategy
enhances effectiveness regardless of organizational goals, work systems, or context. Within the
area of SHRM, there are significant researches that support the notion that certain HR practices
are linked to organizational performance. For Pfeffer (1994) the best HR practices applicable to
all organizations in any situation are employment security, selective hiring, self-managed teams,
high compensation contingent on performance, training to provide a skilled and motivated
workforce, reduction of status differentials, and sharing information. Similarly, Guest (1999)
listed out careful selection, training, job design that ensure flexibility, commitment and
motivation, communication, and employee share ownership programs as best HR practices.
Moreover, Delery and Doty (1996) identified seven strategic HR practices, namely: the use of
internal career ladders, formal training systems, results-orientated appraisal, performance-based
compensation, employment security, employee voice and broadly defined jobs.
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If we compare it to the other perspectives, the universalistic approach is characterized by a lack
of solid theoretical foundations. Its emphasis on empirical testing of the HRM performance
relationship leads to high levels of statistical significance, but, on the other hand, it also leads to
lack of consideration of crucial variables, constructs and relationships. Among the theories that
have been used to develop universalistic propositions, we can highlight the agency and
transaction costs framework. According to the arguments of the universalistic writers, the
influence on performance of certain policies, such as appraisal or benefit sharing, has been
demonstrated because those practices contribute to overcoming the problems of opportunism and
also to reducing internal management costs. Furthermore, the basic proposition of human capital
theory, which argues that organizations with valuable knowledge, skills and abilities will present
better performance levels, has also fostered many universalistic conclusions.
Pfeffer (1994; 1998) argues that employees work both harder and smarter today. According to
him this is because of the effective HR practices that are emerging as organizations seek to
attract, motivate and retain employees that increase performance. Employees work harder
because of greater job involvement, greater peer pressure for results, and the economic gains
based on high performance. Employees work smarter because they can use their knowledge and
skills, acquired through training and development in the job themselves, in getting the work
done. Therefore, SHRM is a process of finding and applying best HR practices in order to
improve the performance of the firm.
Work in the universalistic perspective is largely unconcerned with interaction effect among
organizational variables and implicitly assumes that the effect of HR variables are additive. Such
a reductive, linear view of an organizational system ignores the notion of system-level resources.
The insights that are provided by the universalistic perspective are often regarded as limited and
of no significant value. The universalistic perspective also negates the notion that sustainable
competitive advantage can be achieved through differentiation in the firm’s resources, strategies
and policies. Practices that are universally implemented would have similar rather than different
effects on competing firms.
Activity 4.1. What does the Universalistic perspective of SHRM state?

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4.3. THE CONTINGENCY PERSPECTIVE OF SHRM
The contingency perspective of SHRM states that, in order to be effective, an organization’s HR

policies must be consistent with other aspects of the organization. The relationship between the
HR policies and practices and the organization’s performance varies depending on other third
variable, named contingency variables. These factors moderate the link between HRM and
organizational performance. The primary contingency factor is the organization’s strategy. The
contingency perspective, also called best-fit approach, emphasizes that HR strategies should be
contingent on the context, circumstances of the organization, and its type. Studies show that
there are different contingency factors, such as life cycle stage of the organization, competitive
strategy, and strategic configuration that moderate the relationship between HRM and
organizational performance.
Baird and Meshoulam (1988) state that as the organization grows and develops, HRM programs,
practices and procedures must change to meet its needs. Consistent with growth and
development models it can be suggested that HRM develops through a series of stages as the
organization becomes more complex. Every organizations passes through the introduction,
growth, maturity, decline, and turnaround stages in its life and the HR practices and strategies
vary at each stage of development. Thus, to be successful, an organization must choose the
appropriate HR practice and strategy for its level of development. In the case of competitive
strategy, Schuler and Jackson (1999) claim that effectiveness can be increased by systematically
melding HR practices with the selected innovation, quality, or cost leadership competitive
strategies of Porter. An organization’s HR strategies vary depending on its competitive strategy
whether innovation, quality, or cost leadership. Thus, in order to improve its performance, an
organization must choose the best HR practice that fits to its strategy.
Another approach to best fit is the proposition that organizations will be more effective if they
adopt a policy of strategic configuration by matching their strategy to one of the ideal types of
prospector, analyzer, defender, or reactor business strategies. They suggest that organizations
should align their HR systems with the strategy linked to their configuration. These four different
strategy types of organizations require different HR practices and strategies to be effective.
Thus, the firm must choose the appropriate HR strategy that best fits to its generic strategy.
Proponents of the contingency perspective argue that a firm can be effective if its HR practices
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and strategy are aligned with other aspects and strategies of the firm vertically and horizontally.
The vertical (external) alignment is the level of alignment between the components of the
organization’s HR strategy and core features of its business strategy. Horizontal (internal)
alignment measures the level of alignment among components of the organization’s HR
strategies such as recruitment, selection, training and compensation.
Figure 4. 2 The Contingency Perspective of SHRM
The contingent model introduces a different starting assumption in relation to what the
relationship between variables means. Contrary to the linearity argued by the universalists, they
propose a model based on interactivity, bringing to the HRM context the generic contingent
model. The relationship between the dependent and the independent variable will no longer be
stable, and it will vary depending on other third variables, named contingency variables. Those
factors moderate the link between human resource management and performance and, therefore,
deny the existence of best practices that could lead to superior performance under any
circumstance.
Despite the heterogeneity of approaches, we can group the contingency relationships proposed
by the literature into three generic categories: (1) strategic variables: a significant group of the
contingent papers explains that the contribution of HR practices to performance depends directly
on the extent to which they fit the business strategy; (2) organizational variables, such as size,
technology or structure; and (3) a broad set of environmental factors, external to the
organization, such as the competitive, technological, macro-economical and labor context.
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The arguments of the contingency approach build a theoretical body that is more solid than the
universalistic foundations, although this approach does not reach the statistical strength of the
latter. Basically, two theoretical frameworks have fostered the development of contingency
models: behavioral theory and the resources and capabilities view of the firm. As far as the first
theory is concerned, many contingency propositions have been proposed regarding the fit
between business strategy and human resource management strategy, as well as other
organizational and environmental variables. On the other hand, the resources and capabilities
view has not only been used to analyze strategic fit, but also to introduce the reciprocal
relationship between human aspects and the formulation of organizational strategies. Its rare,
valuable and inimitable character makes it a strategic asset, and a central element of strategic
management. Together with the behavioral and the resource-based paradigms, other theoretical
perspectives have been used to explore contingency relationships, such as the institutional,
transaction costs theory, social capital theory, or the resource dependence framework, which
introduces power relationships as a contingency factor.
Perhaps, the most notable argument in favor of the fit perspective was presented by Baird and
Meshoulam (1988). They argued that HR must be closely integrated into the planning process of
the firm. In addition they also advocated the idea that a firm can achieve success if it is able to
develop HR policies and practices that complement and support both other HR policies and
practices and the other elements of the organization’s strategic plan. Two types of fit were
identified by these theorists. These are internal and external. Internal fit refers to the level of that
HR practices complement and support each other. External fit on the other hand, refers to the
level of complement and support between HR practices and other elements of the strategic plan.
The contingency perspective assumes that business performance will be improved when there is
consistency or fit between the business strategy and HR policies. It has been argued that HRM
practices that are not aligned and consistent with organizational strategy and which conflict with
other HRM practices can restrain both individual and organizational performance. There are
several benefits that are attributed to the fit perspective on SHRM. Firms that seek to pursue
innovation as a strategy used HRM practices that will complement the strategy.
Based on contingency or fit perspective, SHRM can be defined as the integration of HR practices
and policies to the overall organizational objectives with the aim of improving performance.
SHRM is the process of linking the human resource functions with the strategic objectives of the
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organization in order to produce better performance. Another definition that agrees with this
perspective is that SHRM is the linking of HRM with the strategic goals and objectives of the
organization in order to achieve a progressive business performance and achieve an
organizational structure that promotes innovation and flexibility. The goals and objectives of
HRM are aligned with the strategic objectives and plans of the organization. The role of HRM is
to determine the HR needed to support strategic objectives and to ensure that employees are
selected, trained, evaluated, and rewarded in ways that further the achievement of business
objectives. SHRM is frequently described as a linear, balanced process that begins with the
identification of goals that will guide HR practices. The integration of the HR programs with the
goals of the organization will result to the organization’s increased value. The recruitment,
compensation, performance appraisal, promotion, training and other functions are designed and
managed so that they work towards the strategic objectives of the firm. SHRM has the purpose
of improving the way that HR is managed within firms. The main objective of SHRM is to
improve organizational performance as judged by its impact on the organization’s declared
corporate strategy. SHRM means accepting the HRM function as a strategic partner in both the
formulation of the organization’s strategies and the implementation of those strategies through
activities such as recruiting, selecting, training, and rewarding personnel.
The fit perspective proposes that there should be a strategic integration between HR policies and
practices and organizational strategies. Strategic integration or fit has three dimensions. These
are the integration or fit of HR policies with business strategy; the integration or
complementarity and consistency of mutuality employment policies aimed at generating
employee commitment, flexibility and quality. Integration with business strategy can be
concerned with developing HR polices that fit either the organization’s stage of development or
its orientation. The fundamental strategic management problem is to keep the strategy, structure
and HR dimensions of the organization in direct alignment. One of the weaknesses of the fit
perspective is the lack of evidences that a tight fit leads to positive outcomes. The concept of fit
implies inflexibility and rigidity which could be detrimental to organizational outcomes.
Activity 4.2. Describe the concept of SHRM from the perspective of contingency?
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4.4. THE CONFIGURATIONAL PERSPECTIVE OF SHRM
The configurational perspective of SHRM is a holistic approach that emphasizes the importance
of the pattern of HR practices and is concerned with how this pattern of HR practices is related to
the organizational performance. A firm with bundles of associated HR practices will have a
higher level of performance, providing it also achieves high levels of fit with its competitive
strategy. The configurational perspective posits a simultaneous internal and external fit between
a firm’s external environment, business strategy and HR strategy, implying that business
strategies and HRM policies interact, according to organizational context in determining business
performance.
‘Bundling’ is the development and implementation of several HR practices together so that they
are interrelated and therefore complement and reinforce each other. This is the process of
horizontal integration, which is also referred to as the use of ‘complementarities’. The aim of
bundling is to achieve high performance through coherence, which exists when a mutually
reinforcing set of HR policies and practices have been developed that jointly contribute to the
attainment of the organization’s strategies for matching resources to organizational needs,
improving performance and quality and, in commercial enterprises, achieving competitive
advantage.
Bundling can also take place in a number of other ways. For example, the development of high-
performance, high-commitment or high involvement systems is in effect bundling because it
groups a number of HR practices together to produce synergy and thus make a greater impact.
Another form of bundling is provided by competency frameworks, which are used in assessment
and development centers and to specify recruitment standards, identify learning and development
needs, indicate the standards of behavior or performance required and serve as the basis for HR
planning. They could also be incorporated into performance management processes in which the
aims are primarily developmental and competencies are used as criteria for reviewing behavior
and assessing learning and development needs. According to this perspective, if consistency
within the configuration of HR practices and between the HR practices and strategy is achieved,
then the organization will achieve better performance. The problem with the configurational
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approach is deciding on the best way to relate different practices together as there is no evidence
that one bundle is generally better than another.
The configurational perspective contributes to the explanation of SHRM with a useful insight
about the internal aspects of the function, by means of the analysis of the synergic integration of
the elements that build it. In this sense, the HRM system is defined as a multidimensional set of
elements that can be combined in different ways to obtain an infinite number of possible
configurations. From among them, researchers can extract management patterns that represent
different ideal possibilities for managing HR. Thus, the system must not only be consistent with
the environmental and organizational conditions, but also internally coherent. It is important to
notice that these configurational patterns, rather than empirically observable phenomena, are
ideal types in the same way as those proposed by sociological theory, to which real organizations
tend to a certain extent.
Figure 4. 3 The Configurational Perspective of SHRM
A shift of approach concerning the link between the variables involved in SHRM lies under this
new perspective. One of its main contributions relies on the assumption that the relationship
between the configurational patterns and organizational performance is not linear, since the
interdependence of practices multiplies (or divides) the combined effect. Thus, the ‘black box’ of
the universalistic and contingency models is opened, so that the HR function can be analyzed as
a complex and interactive system. Although configurational models acknowledge the importance
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of contingency models, they are defined under the principle of equifinality, which entails the
possibility of achieving the same business goals with different combinations of policies that may
be equally efficient for the organization, and also by rejecting the universalistic objective of
definitively finding best practices.
In order to explain the internal dynamics of the HRM function, the configurational perspective
has relied mainly on methodologies that allow the definition of management patterns, such as
cluster analysis, factor analysis or neural network techniques. From a different point of view, it is
possible to observe examples of regression as well. Nevertheless, several articles have also
stressed the need to refine configurational methodologies. The analysis of the combination of the
elements that build the HR system and the study of their synergic relationships require more
sophisticated empirical tools, which could grasp the complexity of the internal integration of the
system.
Activity 4.3. What is the difference between the contingency perspective and the
configurational perspective?
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4.5. THE CONTEXTUAL PERSPECTIVE OF SHRM
The contextual perspective proposes an important shift in the point of view of the analysis of
SHRM. Unlike the previous approaches, it introduces a descriptive and global explanation
through a broader model, applicable to different environments encompassing the particularities
of all geographical and industrial contexts. Proponents of this perspective argue that it is
necessary to expand the concept of SHRM so as to offer a complex explanation, not only of its
internal working and how it can reinforce the achievement of business goals, but also of its
influence on the external and organizational context in which managerial decisions are made. In
this sense, the main contribution of the contextual approach lies in the reconsideration of the
relationship between the SHRM system and its context. While the rest of the perspectives, at
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best, considered the context as a contingency variable, this approach proposes an explanation
that exceeds the organizational level and integrates the function in a macro-social framework
with which it interacts. According to these authors, context both conditions and is conditioned by
the human resource management strategy. Strategies are not just explained through their
contribution to organizational performance, but also through their influence on other internal
aspects of the organization, as well as their effects on the external environment.
Figure 4. 4 The Contextual Perspective of SHRM
The change of perspective proposed by the contextual model becomes apparent basically in the
reconsideration of three aspects of SHRM: the nature of human resources, the level of analysis
and the actors implied in this organizational function. The extension of the model that they
propose, as has been said, reconsiders the importance of environmental factors by including
variables that have been traditionally underestimated, such as the influence of public
administrations or trade unions or the incidence of social and institutional conditioning. This
reconsideration of the nature of HR also influences the position of this function within the firm.
In this sense, HRM is described as a function that is no longer the exclusive responsibility of
personnel specialists, but is extended to the rest of managers, especially at the line level.
Regarding the level of analysis, contrary to the organizational, and sometimes functional or sub-
functional level in the previous literature, the contextual approach proposes a much broader
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scope, integrating the HRM system in the environment in which it is developed. Because of that,
much of the contextual literature is focused on a European level, or develops comparative studies
about the implications of different national environments for HRM. Following this new nature, it
is also necessary to reconsider the actors who participate in the HR function. Thus, a broader set
of stakeholders is considered in the formulation and implementation of HR strategies. These
stakeholders may be not only internal but also external, and both influence and are influenced by
strategic decisions. Thus, the mutuality of interests is considered as a necessary requisite for the
maintenance of the firm’s position in the long term.
While the three previous perspectives share, in a broad sense, the same theoretical foundations,
the contextual model has a different starting point. Its reconsideration of the framework of
SHRM implies a criticism of many of the assumptions of the rational and normative theory.
Contrary to it, their theoretical underpinnings are much closer to having an industrial relationship
scope. The descriptive objective of the contextual perspective determines the methodologies used
to a large extent. In fact, the analytical techniques rely almost exclusively on simple statistics,
such as the analysis of means and standard deviations. Nevertheless, it must be said that the
application of more complex quantitative and qualitative techniques could allow a deeper
analysis of the social, institutional and political forces, and a better understanding of the effects
of HRM decisions on the environment. Thus, the contextual conclusions could complete the
rational and normative approach of the rest of perspectives with a more social and descriptive
insight.
Activity 4.4. What is the difference between the contingency perspective and the
contextual perspective of SHRM?
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4.6. THE INVESTMENT PERSPECTIVE OF SHRM
HRM practitioners and management scholars have long advocated that HR should be viewed
from an investment perspective. Current practices in many organizations indicate that employees
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are viewed as valuable investments. However, some still view their employees as variable costs
of production, while physical assets are treated as investments. When employees are viewed as
variable costs, there is little recognition of the firm’s contribution to their training or the costs of
recruiting and training their replacements. Likewise, there is less incentive to provide training or
make other investments in them.
A focus solely on investment in physical resources, as opposed to human resources, is short-

sighted. Strategists have found that having superior production facilities or a superior product are
usually not enough to sustain an advantage over competitors. Physical facilities can be
duplicated, cloned, or reverse-engineered and no longer provide a sustainable advantage.
Maintainable advantage usually derives from outstanding depth in selected human skills,
logistics capabilities, knowledge bases, or other service strengths that competitors cannot
reproduce. Thus, with their perspective, there is recognition of the importance of having superior
human resources. There is little doubt that organizations will need to invest heavily in their
human resources in order to be competitive during the twenty-first century.
To be competitive, organizations in many industries must have highly skilled, knowledgeable

workers. They must also have a relatively stable labor force since employee turnover works
directly against obtaining the kind of coordination and organizational learning that leads to fast
response and high-quality products and services. These investments will become increasingly
important due to forecasts of shifts in skill needs from manual to cerebral.
Contemporary management practices indicate that many leading companies have recognized the
strategic importance of HR and have adopted an investment perspective toward these resources.
Further, there is greater awareness of the costs of treating employees as variable costs, which is
beginning to change views of HR practices. There is also a growing recognition of the
relationship between companies’ overall strategies and their HR practices. For example,
companies pursuing strategies of innovation have the potential to be severely damaged by
turnover because of reliance on individual expertise and unrecorded knowledge that has been
quickly acquired. Accordingly, such companies tend to provide greater job security for some
employees. A final reason for an investment perspective of HR is to reinforce the idea that for
HRM to play a meaningful role in the strategic management of organizations, it must be viewed
as contributing to the bottom line.
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This section begins with consideration of factors relevant to strategy-based HR investment
decisions. Factors to be discussed include the organization’s managerial values, risk and return
trade-offs, the economic rationale for investments in training, the investment analysis approach
of utility theory, and outsourcing as an alternative to investments in human resources. Following
the discussion of these factors, specific investments in strategy-related training and development
will be considered. This discussion will include investments in the future “employability” of
employees, current practices in training investment, on-the-job training, management
development, prevention of skill obsolescence, and reductions in career plateauing.
Practices for investing in improved retention and reduced turnover will be discussed, beginning
with an examination of organizational cultures that emphasize interpersonal relationship values.
This will be followed by discussions of effective selection procedures, compensation and
benefits, job enrichment and job satisfaction, practices providing work life balance,
organizational direction, and other practices that facilitate retention. Next, there will be a
discussion of the costs of downsizing and layoffs. This will be followed by a discussion of how
to avoid business cycle–based layoffs, alternatives to layoffs, and employment guarantees. There
will also be a discussion of the relationship between job insecurity and work effort.
Nontraditional investment approaches will also be examined. These include investments in
disabled employees, investments in employee health, and countercyclical hiring.
4.6.1. HR INVESTMENT CONSIDERATIONS
Several factors will be considered in the discussion of strategic HR investment decisions. As

noted earlier, these will include management’s values, views of risk, the economic rationale for
investment in training, utility theory, and alternatives to HR investments. Investments in training
are covered in this section because they are fundamental to the formation of human capital.
Firms also invest in many other HR practices with the expectation that there will be impacts on
performance and financial returns.
Management Values: Fundamental values must be addressed in many HR issues, particularly

those involved in major strategic initiatives. When senior managers formulate and implement
strategies, their values and philosophies are communicated to members of the organization
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through HR policies and practices. For example, senior managers who are committed to the
preservation of the organization’s HR can manage the stress associated with major strategic
events, through such measures as dealing with rumors and providing accurate information, so
that misinformation does not have such a debilitating impact on employees. How employees are
treated following significant strategic events, such as a merger and acquisition, is a reflection of
these values, and communicates whether the organization views employees from an investment
perspective. Those adopting an investment perspective seek to enhance the value of their human
capital or, at the very least, prevent its depreciation.
Risk and Return on Investment: Although there are a number of important benefits to
investments in human resources, such investments contain an element of risk. Investing in
human resources is inherently more risky than investing in physical capital because the employer
does not own the resource. Employees are free to leave, although contractual arrangements may
limit their mobility. In order for investments in human resources to be attractive, the returns must
be great enough to overcome the risks. Further, for some investments, such as cash outlays to
maintain no-layoff policies, the benefits are not easily quantified and there are meaningful costs.
Decision makers have to be prepared to trade off current costs for long-term strategic benefits,
such as a more flexible, committed workforce and related positive aspects of the organizational
culture to which such policies contribute.
Economic Rationale for Investment in Training: Because HR investments frequently involve

training, it is instructive to consider the difference between specific and general training. The
distinction between specific and general training in human capital theory provides guidance for
understanding when employers will provide training. The decision whether to invest in training
and development depends, in part, on whether the education imparts skills that are specific to the
employing organization (specific training) or are general and transferable to other employers
(general training). Employers generally invest in or pay part of the cost of specific training
because employees cannot readily transfer such skills to other employers. Employers recoup
their investments after employees complete training by paying employees only part of the
revenue derived from their increased productivity (marginal product).
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Conversely, conventional human capital theory predicts that employers will pay for none of the
cost of general training because employees can transfer skills developed at employers’ expense
to other employers. Accordingly, employers would rather hire an employee who has the requisite
general skills. When employees having the requisite general skills cannot be hired, the employer
must invest in general training without assurance that the unskilled employee will remain
employed long enough after training for the employer to recoup the investment.
General training can be obtained in on-the-job training as well as in formal programs such as
tuition reimbursement. It also can occur unintentionally simply as a byproduct of the work
situation as employees learn work skills that are applicable to other employers. Employers may
make general training investments in employees by paying a wage during training, which has
been reduced by the training costs. Employers also can recoup some of their investments in
general training because employees incur costs of mobility, such as the costs of finding new jobs
and relocating. If the costs of mobility are high enough (moving expenses, realtors’ fees,
psychological costs of moving children, etc.) the employer can pay a wage lower than the
employee’s new general skills would warrant at other places of employment.
Labor economists also argue that employers are more reluctant to lay off employees in whom
they have invested in specific training. Like general training, specific training can be obtained
through formal programs. It also can be obtained through on-the-job experience, as much of what
employees learn on the job tends to be of a specific nature. Employees who receive specific
training from an employer receive a lower wage after training than their productivity would
warrant because no other employers have use for these specific skills. Thus, it is likely that the
employer will have invested more heavily in these employees and would not want to lose the
investment. To a certain extent, the distinction between general and specific training is
misleading. There are probably few skills that have no transferability to other employers.
Likewise, probably few skills are completely general. Further, employers do not seem to make
clear distinctions between general and specific training. There are many considerations in layoff
decisions in addition to the employer’s investment, such as equity, contractual obligations, and
different business needs. Nonetheless, the concepts of specific and general training can provide
insights on the conditions in which investments in HR are more favorable.
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Utility Theory: In considering investments in human resources in terms of hiring or
development of current employees in order to pursue given strategies, there must be a method for
evaluating the financial attractiveness of such investments. There must also be a method to be
used in “selling” the investment to senior management. These tasks may be accomplished by
determining the returns for such investments through cost– benefit analytical approaches such as
utility analysis. Utility theory attempts to determine the economic value of HR programs,
activities, and procedures. As such, utility theory might be used to determine the dollar value of a
selection test that enables an employer to identify and hire managers for a specific job whose
productivity is higher than those hired without the test. The calculations of utility might involve
several variables. For example, validity of the selection test would be a critical variable, in that it
provides an indication of the predictive ability of the test. Additionally, the increased production,
its contribution to profitability, and the standard deviation of the contribution, would be variables
in the calculations. Finally, other variables might be included in the analysis, such as the cost of
testing enough applicants to obtain a sufficient number having scores above the cut-off point.
Outsourcing as an Alternative to Investment in HR: As indicated earlier, investments in

human resources should support the organization’s strategies. Unless there is the potential to
build capabilities that provide an advantage over competition, cost considerations often lead to
the rational decision to outsource through specialized service providers rather than invest in
human resources. In general, strategic outsourcing is advocated where (1) world-class
capabilities and a strategic advantage cannot be developed; (2) the resources devoted to services
performed internally will be greater than those needed to outsource the service; and (3) excessive
dependency on suppliers can be avoided. When an activity is performed internally at a higher
cost, the misallocated resources will put the company at a disadvantage to its competitors.
Firms have been outsourcing HR activities at a phenomenal rate. Furthermore, they have been
outsourcing a wide range of activities. For example, firms routinely outsource executive search
activities, payroll functions, employee assistance programs, HR information systems, benefits
administration, and outplacement. As a result of the demand for outsourcing, a whole new
service industry of personnel service providers has been created. Although many firms have been
willing to outsource a wide range of their HR activities, virtually all of them have retained the
critical and sensitive functions of performance management, employee relations, and labor
relations.
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Activity 4.5. How does the nature of employee skill determine the HR investment decision?
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4.6.2. INVESTMENTS IN TRAINING AND DEVELOPMENT
Specific investment approaches will be examined in this section, beginning with new
approaches, which result in enhanced “employability” of employees.
Investments in Employability: While there have been dramatic declines in the prevalence of
employment security policies, some companies are now investing in their HR by providing
developmental experiences that make employees much more employable should the employment
relationship end. These developmental investments might include the provision for growth
opportunities, a learning environment, training, and retraining. Having a workforce that is
characterized by its employability is probably a necessary prerequisite for corporate survival.
General Electric’s experiences provide an example of the new employability approach. In the
aftermath of General Electric’s workforce reductions of 25 percent, there was recognition by its
chief executive officer (CEO) Jack Welch that the company would have to attract quality
employees with desirable achievement opportunities instead of job security policies.
Interestingly, Welch stated that strong managers, like him, produce the only real job security in
the current environment. His rationale was that such managers make the major structural changes
necessary to increase their companies’ competitiveness and ultimate survivability, often through
the elimination of unneeded jobs. Conversely, he argued that weak managers, who do not take
such actions, endanger the competitiveness of their companies, ultimately causing the loss of
jobs. Because the types of experiences that result in future employability (e.g., valuable learning
experiences and progressively more challenging assignments) are typically not the result of
chance, and are instead the product of intentional developmental programs, they involve resource
allocations or monetary outlays and will be considered as investments in this discussion.
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If security no longer comes from being employed, then it must come from being employable. In
a post-entrepreneurial era in which corporations need the flexibility to change and restructuring
is a fact of life, the promise of very long-term employment security would be the wrong one to
expect employers to make. But employability security - the knowledge that today’s work will
enhance the person’s value in terms of future opportunities—that is a promise that can be made
and kept. Employability security comes from the chance to accumulate human capital - skills and
reputation—that can be invested in new opportunities as they arise.
Another view of the concept of employability and the respective obligations of employers and
employees is that the employer has an obligation to coach and counsel as well as to provide
appropriate training programs. Training programs provide the opportunity to improve existing
skills and/or acquire new ones. It is the employer’s responsibility to make such opportunities
available; it is the employee’s responsibility to take advantage of them.
On-the-Job Training: On-the-job training is another way in which an employer may invest in
human capital needed for strategic advantage. Such investments may be made by structuring a
job so that employees learn while they work. For example, employees’ skills may be increased
by learning how to perform new tasks or operate new equipment. Employers may structure jobs
so that these skills may be learned from other employees. They may also give employees time to
learn new procedures or how to operate new equipment through self-instruction, such as by
reading technical manuals, or by learning new software through self-instruction. Employers may
also absorb the costs of lower productivity while workers lacking relevant skills learn through
interaction with skilled employees or through trial-and-error processes.
Gary Becker has noted that on-the-job training’s impact on workers’ productivity levels is
frequently underrated. Likewise, economist Lester Thurow argues that on-the-job training
provides the bulk of skills used on the job while formal education serves a signaling function of
communicating to employers the trainability of job applicants. Economists calling attention to
the importance of on-the-job training point out that a worker’s productivity is determined by the
capital intensity of the job; type and extent of on-the-job training provided; the worker’s ability
to learn from the training, which is signaled by education; and how the jobs are structured, such
as their promotion possibilities and responsibility level. The contribution of on-the-job training
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to productivity has also been hypothesized to vary according to occupation as a result of
differences in such factors as the rapidity of skill obsolescence and difficulty of job tasks. The
contribution to worker productivity of on-the-job training has been verified in an empirical
analysis of governmental employees with on-the-job training being measured by the employees’
years of job experience.
Investments in Management Development: The continued development of managerial

personnel is a critical strategic issue in most organizations and a particularly difficult challenge
given the massive shifts in strategy. Before considering management development, it is useful to
quickly review some evolving and forecasted trends in the managerial environment. It is clear
that organizations are becoming less hierarchical and that many middle-management positions
have been eliminated. Further, larger numbers of workers are better educated and many are
professionals. As a result, they expect to participate more in decision making. In the future, more
work is expected to be performed in task force or project teams, power will be shared,
managerial status will be deemphasized, and leadership responsibilities may be rotated. Because
of the participative aspect of these empowerment trends, many professionals and highly educated
employees may have more exposure to managerial responsibilities and may develop related skills
as a natural part of their work.
An important management development approach has been to rotate managers through

successively more challenging assignments. Frequently, these job rotation programs seek to
provide a broad view of the organization and as a result, may involve interdepartmental or cross-
functional assignments. Use of job rotational programs is positively correlated with company
size and is used most in transportation and communications and least in service industries.
Advantages of job rotation include the development of generalists, avoidance of over-

dependency on one supervisor, the challenge of new assignments, avoidance of dead-end career
paths, cross-fertilization of ideas gained in other settings, increased interdepartmental
cooperation as a result of the establishment of personal networking, and evaluation by different
superiors in different settings. From a strategic perspective, a major advantage is that such
programs develop a pool of managers who have been exposed to an area of the business who can
then provide management talent in the event that there is an unexpected or sudden increase in the
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level of business in that area. Such rotational programs are also widely used for high-potential or
fast-track managerial personnel.
Conversely, the disadvantages of such job rotational approaches include the institutionalization
of short-term perspectives because of frequent changes in assignments as one is “rotated out,”
underdeveloped peer relationships, reduced loyalty to the organization if rotations are too
frequent, expense when the rotation involves a geographic move, and personal impact on the
employee and family. Other disadvantages include productivity losses due to the learning time
required after each new job assignment, and the complications of rotations involving geographic
transfers of dual career families.
Aside from job rotational approaches, other methods of management development include
sending high-level executives and less senior high-potential managers to executive development
pro-grams at leading universities. Shorter in house training programs for less senior managerial
personnel and more junior high-potential managers are quite common. Use of residential
university pro-grams has been found to be most likely in the financial industry and least likely in
services.
More systematic approaches toward in-house and off-site management development programs
have been recommended by human resource practitioners and scholars. In some organizations,
such approaches are evident. From the author’s personal observations of in-house programs for
project managers in large banks and insurance companies, several companies are taking an
investment perspective in systematic developmental approaches. Such programs involve high-
level management in the analysis of the skills needed and in pilot tests of program content. They
are also conducted on a continuous basis, as opposed to one-shot training sessions. They also
utilize customized cases and materials, involve participants in exercises in which skills are
developed and practiced, provide exercises in which participants apply program content to real
problems that they currently have, and communicate either implicitly or explicitly that the
managers are of critical importance to the organization.
Although these positive trends have been observed, a continuing problem exists. Management
training is still an early casualty of budget cuts when companies encounter economic downturns.
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Unfortunately, in many organizations, management development is given a low priority and is
viewed more as an avoidable cost rather than an investment. Where management development
has to be “sold,” it is important to build in several of the components just noted to include
specification of the results expected and how they will be measured. Given the expense of some
programs, it will be important to be able to determine the returns on the investment.
Unfortunately, most cost-effectiveness studies of development programs have focused only on
individuals and not on organizational impact or have used only subjective measures of
organizational impact.
Prevention of Skill Obsolescence: Technological change is often a cause of skill obsolescence

in engineering, science, and the professions. Because of the rapidity of change, the knowledge
half-lives in electrical engineering and computer science are five years and two and one-half
years, respectively. In addition, other professionals and managers run a risk of having their skills
become obsolete because of changes in technology and methods. Technological change appears
to affect individuals differently, as some grow and develop along with new technology while
others fall behind. Because technological obsolescence can limit an organization’s strategic
alternatives, obsolescence in this area can be devastating and companies should have a strong
incentive to invest in its prevention.
A model using both expectancy theory and human capital theory has been developed to explain
such differences in individuals’ responses to changing technology. Given the critical strategic
impact of technological change, such explanations should be of value to strategists. The model
identifies motivation, along with individual, organizational, and external factors as determinants
of whether individuals will develop the skills needed for new technology. Employees’
expectations of their ability to acquire new skills and the perceived reward instrumentality of
such skills help explain employees’ motivation for skill acquisition. Such motivation is also
related to the expected costs of investing in skill acquisition and the length of time for returns to
be accrued. Nonetheless, the payback period can be misleading as there are several individual
difference variables, such as breadth of interests, education, aptitude, and personality variables,
that also affect individuals’ acquisition of new skills.
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A number of suggestions have been offered for the prevention of obsolescence. One suggestion
is to provide challenge, particularly of a technical nature for technical specialists, in all phases of
their careers. Individuals who face such challenges are less likely to become obsolete in later
career stages. Likewise, responsibility, authority, participation, and employee inter-action also
appear to be related to the prevention of obsolescence. Periodic reassignments requiring new
learning also help to prevent obsolescence and facilitate development. It is important to prevent
employees from becoming overspecialized. Although the organization may benefit in the short
term, excessive specialization may be exploitative and not be in either the individual’s or the
organization’s long-range best interests. Organizations can explicitly encourage employees to
stay abreast of developments in the field by incorporating knowledge acquisition activities and
accomplishments in performance evaluation and reward systems. Organizations also can set
goals for updating knowledge and reward such goal accomplishments. In addition to these
suggestions, funding attendance at conferences and providing time to read professional literature
can help to prevent obsolescence.
Reductions in Career Plateauing: Career plateaus occur when employees have occupied a job
in an organization for some period of time, have mastered all aspects of the job, and have low
prospects for promotion. Eliminating or reducing the incidence of plateaus is important because
they have the potential to create resentment and a sense of futility. As a result, there may be
reductions in productivity. Plateaus are a natural consequence of a lack of organizational growth
or change. They also occur because of the pyramidal shape of organizations and organizational
inflexibility. Other, more employee-specific causes of plateaus are the personal choices of
employees, lack of career skills resulting from naive perceptions of organizational realities, and
lack of requisite skills for promotion.
Employees also may lack appropriate skills because changes in the external environment and
resultant shifts in strategies may not have been anticipated in a company’s managerial
development programs. In such instances, the company may be forced to hire managerial talent
from outside. Aside from the expense of external hiring there may be detrimental effects on
morale. Further, those brought in may not have sufficient knowledge of the primary business to
be effective. A lesson to be derived from such situations is that investment in developmental
programs is not sufficient for the avoidance of plateaus. Instead, alternative future strategic
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scenarios must be considered in the planning of developmental assignments in order to have
promotable managers.
Another cause of plateaus is related to developmental programs. Companies sometimes make

inflexible decisions about which employees should continue in management development pro-
grams or those who should be placed on a fast track. Sometimes, these decisions are based on
performance during the early stages of an employee’s career. Further, the decision may be made
in the manner of a single elimination tournament in which one failure to be promoted or one
unsuccessful performance may cause a manager to be taken out of the developmental program.
Those left out of developmental programs or fast-track assignments are often relegated to dead-
end career paths and become plateaued. In essence, the early identification of fast trackers may
become a self-fulfilling prophecy. Furthermore, perceptions of being plateaued tend to have the
greatest detrimental impact on job satisfaction and company identification for employees who
have less rather than more tenure on the job.
Plateaus also may be avoided by more deliberate identification of stars (outstanding performers
with high potential) and solid citizens (satisfactory or outstanding performers with less
potential). More developmental assignments, challenges, and lateral moves for both categories
can produce a pool of qualified managerial talent that should enable the organization to be more
flexible and adaptive to strategic needs. Job rotation for plateaued employees also can reduce
frustration and increase the chance for improved performance. The stress associated with career
plateauing also may be reduced by managerial actions that provide recognition and appreciation
in the absence of promotions, job enrichment, mentoring assignments, and lateral transfers that
provide growth opportunities also may be helpful in this regard
4.6.3. INVESTMENT PRACTICES FOR IMPROVED RETENTION
Companies invest in their workforces when they pursue practices and develop programs that
increase retention. By failing to make such investments, they incur the high costs of turnover.
Coarse-grained estimates place the costs of turnover at 150 percent of exempt employees’
compensation and at 175 percent for nonexempt employees. The determinants of turnover are
reasonably well under-stood as there has been a great deal of research on the topic. Accordingly,
there are sound practices that employers can follow in order to retain their employees.
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Organizational Cultures Emphasizing Interpersonal Relationship Values: One of the most
important determinants of employee retention is the organization’s culture. By investing in
human resource practices that ultimately affect the organization’s culture, firms can influence
retention. A longitudinal analysis examined the retention of 904 college graduates hired by
public accounting firms over a six-year period. The study found a difference in retention related
to the culture of the firms. For employees of firms with cultures characterized by interpersonal
relationship values (respect for people and a team orientation), the median for retention was 14
months longer than in firms with cultures reflecting task values (detail and stability).
Interestingly, the effects of the culture emphasizing interpersonal values appeared to be universal
and were not contingent on employee characteristics. Other research has found higher retention
in “fearless cultures” in which employees can speak up in order to challenge the status quo
without being concerned about retribution. Retention improves with other related aspects of
culture such as positive relationships with superiors, absence of conflict-laden relationships,
having input into decisions, less emphasis on formal authority, information sharing, and support
for employees.
Effective Selection Procedures: When firms hire employees that match well with the
organization, the job, and their coworkers, there is an increased likelihood of retention. Recent
survey research indicates that careful selection is the most widely used method for retaining
front-line employees. In addition to the use of selection procedures, such as valid tests and
improved interviewing processes to obtain better job matches between employee job
qualifications, the use of realistic job previews (RJPs) also can increase retention. RJPs attempt
to show applicants what the actual job is going to be like. As a result, there is less likelihood that
applicants will accept jobs that fail to conform to their expectations. The exact means by which
RJPs influence retention is the subject of some debate because there are several variables that
can have an impact on their ability to affect retention. Nonetheless, RJPs provide a useful means
for increasing retention in many circumstances. In addition, the use of bio-data, which are data
on objective characteristics such as years of experience, bilingualism, and college education,
improves retention.
Compensation and Benefits: Equitable compensation is important for employee retention. In

turn, greater compensation equity occurs with fair appraisal reviews, equitable ratios of inputs
(e.g., effort, skill, education) to outputs (various rewards), exclusion of politics in compensation
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decisions, fair compensation structures, and communication of compensation procedures.
Increased retention also occurs with performance-based compensation, pay incentives, and
benefits that are valued by employees. Not surprisingly, the most frequently used approach for
retaining senior executives is to improve their compensation and benefits.
Job Enrichment and Job Satisfaction: Job-enrichment practices, such as those building in
increased responsibility or autonomy, knowledge of results, meaningful work, knowledge of how
assigned tasks contribute to the greater activity of the larger organization, and skill variety, have
been found to produce moderate reductions in turnover. Practices that enhance job latitude and
job satisfaction also have a positive impact on employee retention. However, when high-
performing employees feel undervalued, they tend to have higher turnover rates.
Practices Providing Work Life Balance: In addition to job-related factors and the work
environment, the opportunity to obtain a balance between work and home life also has a positive
impact on retention. Alternative work schedules, child care services, and provisions for family
leave also facilitate retention. Conversely, unreasonable workloads are associated with turnover.
Organizational Direction Creating Confidence in the Future: When employees are confident
about their organization’s future direction, they are more likely to stay. Thus, setting a clear
direction for the future and building confidence in the vision for the future should help improve
retention.
Retention of Technical Employees: Retention of information technology specialists and other

technical employees is a particular concern for many employers. The demand for such specialists
and other highly skilled employees is so strong that companies have been very innovative in their
retention efforts. For example, Burlington Northern Santa Fe has implemented a career
development institute in which employees can learn new computer languages and other technical
skills. The company also has increased the amount of communication with its technical
employees and has helped develop their business knowledge and awareness.
Other Practices in Facilitating Retention: Opportunities for training, new learning, growth,
and promotion also have positive impacts on retention. Similarly, liberal transfer policies tend to
reduce employee turnover. When employees can transfer, they have the opportunity to leave
problem situations and are less likely to leave the organization. In addition, effective
management of diversity and prevention of sexual harassment tend to increase retention.
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4.6.4. INVESTMENTS IN JOB-SECURE WORKFORCES
Companies also invest in their HR when they keep employees on the payroll through business
downturns. Nonetheless, by the 1980s and 1990s, it became clear that employment security
policies were often untenable, and downsizing became a daily feature of the business press.
However, companies differed in the extent to which they resorted to downsizing or layoffs as
many of the best ones did little or no downsizing. Although some companies provide
employment security to enhance their chances of remaining union free, others provide such
security for other workforce advantages. Increasingly, companies find that they must operate in
environments characterized by rapidly evolving technological change, compressed product life
cycles, and heavy emphasis on quality. In many such environments, greater employment security
helps companies obtain the commitment, flexibility, and motivation needed from their
workforces.
Employment Guarantees: Although the distinction between no-layoff policies and

employment guarantees may be artificial, the latter, although a somewhat elastic concept, may
take the concept a step further. Employment guarantees have been defined in the popular
management literature as “oral agreements to move heaven and earth to avoid layoffs.”
Employment guarantees are made feasible by many of the same actions as no-layoff policies.
One of most important tactics is understaffing. Companies such as IBM and Motorola staff some
of their operations with 70 to 85 percent of the number of permanent employees needed for
production at normal demand levels. The difference in labor needed is usually made up with
overtime, temporary employees, subcontracting, or employees contracted on a short-term basis.
A second tactic is flexibility in job assignment, which is made possible by employees who can
perform several tasks and the absence of restrictive work practices such as narrow task
definitions. Such flexibility also is supported by retraining for those whose skills have been made
obsolete by technological advances and redeployment of excess labor. An innovative tactic is to
redeploy extra personnel into sales. A more common redeployment may be assignments to
maintenance activities. A third tactic, work sharing, involves sharing the available work by
reducing the number of hours for each employee. However, work sharing or job sharing may not
be legal in some states.
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Numerous benefits to employment guarantees have been found, many of which should have a
positive impact on strategy implementation. Most of these benefits are simply the obverse of
how employees act when they are insecure about their jobs. Several benefits result when a work
scarcity mentality is avoided. These include volunteering ideas for labor savings, working at an
optimal pace, foregoing restrictive work practices, and performing tasks beyond the job
description. Other benefits appear to be related to increased receptivity of employees to changes.
These include accepting management initiated changes, working overtime even when
inconvenient, volunteering for job-broadening training, deployment flexibility, and increased
loyalty. Additional benefits include increased retention, morale-related productivity gains,
elimination of bumping costs, elimination of the need for early-retirement incentives, and
reduced hiring and training costs during post recessionary periods.
Activity 4.6. What HRM activities enable organizations have job-secured workforce?
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4.6.5. NONTRADITIONAL INVESTMENT APPROACHES
Investments in Disabled Employees: A nontraditional area of HR investment involves providing

support for programs that return disabled employees back to the workforce. Frequently, companies deal
with employees who have become disabled by relying on the company’s long-term disability insurance
policy to provide economic support. Unfortunately, there is little emphasis on facilitating the employee’s
return to the job. But, relatively inexpensive devices or aids can allow a physically disabled employee to
be a productive worker again
Investments in Employee Health: Another nontraditional investment approach involves improvement of

employees’ health. Such investments can increase the productivity of employees. For example, in
underdeveloped countries, increasing the quality of nutrition and providing basic medical care can
increase the productivity of employees and would thus constitute investments in HR. Companies
operating maquiladoras in Mexico have learned that they must furnish two meals a day to ensure that their
workers are receiving sufficient nutrition. As a result, some of the better employers place a great deal of
emphasis on high-quality food service as well as medical services. Other health-related programs are
directed at reduction of smoking because the relationship between health problems and smoking is well
known. It has been found that employee absenteeism rates are approximately 50 percent higher for
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smokers. Rates of early disability and mortality are approximately 300 percent higher. Another
investment in HR, that is, investment in fitness centers, is also related to health issues. Large numbers of
companies have invested in fitness centers and physical conditioning programs. Many claim very positive
returns for their investments. Some organizations, such as hospitals, may need to make other
nontraditional investments, such as in programs that reduce the incidence of employee burnout. Such
programs may involve support and close monitoring of the self-esteem of employees working in jobs
having high potential for burnout. Because low self-esteem appears to be a cause of burnout, as well as a
result, a downward spiral can occur without interventions to enhance burned-out employees’ self-esteem.
Activity 4.6. How do increasing the quality of nutrition and providing basic medical care to
employees be considered as investment?
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
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The universalistic perspective of SHRM states that some HR practices are better than others and all organizations
should adopt these best practices. According to this perspective, there is a universal relationship between individual
‘best’ HR practice and organizational performance, thus, also called ‘best practice approach’. HR practices are
universal in the sense that they are best in any situation. The contingency perspective of SHRM states that, in order to
be effective, an organization’s HR policies must be consistent with other aspects of the organization. The relationship
between the HR policies and practices and the organization’s performance varies depending on other third variable,
named contingency variables. These factors moderate the link between HRM and organizational performance. The
primary contingency factor is the organization’s strategy. The configurational perspective posits a simultaneous
internal and external fit between a firm’s external environment, business strategy and HR strategy, implying that
business strategies and HRM policies interact, according to organizational context in determining business
performance. Proponents of the contextual perspective argue that it is necessary to expand the concept of SHRM so as
to offer a complex explanation, not only of its internal working and how it can reinforce the achievement of business
goals, but also of its influence on the external and organizational context in which managerial decisions are made.
Contemporary management practices indicate that many leading companies have recognized the strategic importance
of HR and have adopted an investment perspective toward these resources. Further, there is greater awareness of the
costs of treating employees as variable costs, which is beginning to change views of HR practices. There is also a
growing recognition of the relationship between companies’ overall strategies and their HR practices. This makes a
difference in making investments on HR. Factors that influence the investment decision on HR include the
organization’s managerial values, risk and return trade-offs, the economic rationale for investments in training, the
investment analysis approach of utility theory, and outsourcing as an alternative to investments in HR. Following the
discussion of these factors, specific investments in strategy-related training and development are made by
organizations. In addition, nontraditional investments such as helping disabled workers and investing in employee
health through such programs as those directed at smoking cessation and employee fitness are also practiced.

1. Define SHRM from the perspective of universalistic or best practice. What are the roles of the HR
Directive on the basis of the universalistic perspective?
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2. What does the Configurational perspective of SHRM state?
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3. What are the major critiques of the contingency perspective of SHRM?
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_________________________________________________________________________________________
4. What is the main contribution of the contextual perspective of SHRM?
__________________________________________________________________________________________
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5. What are the major factors that determine HR investment decisions?
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In the past, the decision criteria for mergers and acquisitions were typically based on considerations such as the
strategic fit of the merged organizations, financial criteria, and operational criteria. Mergers and acquisitions were
often conducted without much regard for the human resource issues that would be faced when the organizations
were joined. As a result, several undesirable effects on the organizations’ human resources commonly occurred.
Nonetheless, competitive conditions favor mergers and acquisitions and they remain a frequent occurrence. Layoffs
often accompany mergers or acquisitions, particularly if the two organizations are from the same industry.
In addition to layoffs related to redundancies, top managers of acquiring firms may terminate some competent
employees because they do not fit in with the new culture of the merged organization or because their loyalty to the
new management may be suspect. The desire for a good fit with the cultural objectives of the new organization and
loyalty are understandable. However, the depletion of the stock of human resources deserves serious consideration,
just as with physical resources. Unfortunately, the way that mergers and acquisitions have been carried out has often
conveyed a lack of concern for human resources.
A sense of this disregard is revealed in the following observation: Post combination integration strategies vary from
such “love and marriage” tactics in truly collaborative mergers to much more hostile “rape and pillage” strategies in
raids and financial takeovers. Yet, as a cursory scan of virtually any newspaper or popular business magazine readily
reveals, the simple fact is that the latter are much more common than the former. The cumulative effects of these
developments often cause employee morale and loyalty to decline, and feelings of betrayal may develop.
Nonetheless, such adverse consequences are not inevitable. A few companies, such as Cisco Systems, which has
made over 50 acquisitions, are very adept in handling the human resource issues associated with these actions. An
example of one of Cisco’s practices is illustrative. At Cisco Systems, no one from an acquired firm is laid off
without the personal approval of Cisco’s CEO as well as the CEO of the firm that was acquired.
QUESTIONS
1. Investigate the approach that Cisco Systems has used in its many successful acquisitions. What are some of
the human resource practices that have made its acquisitions successful?
2. If human resources are a major source of competitive advantage and the key determinant of an
organization’s ability to pursue a given strategy, why have the human resource aspects of mergers and
acquisitions been ignored or handled poorly in so many instances in the past?
3. Take a merger or acquisition example in Ethiopia and discuss the effect on the employees, and find out
what human resource practices were used and obtain their evaluations of what was helpful or harmful.
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CHAPTER FIVE
THEORETICAL FOUNDATIONS OF STRATEGIC HUMAN RESOURCE

MANAGEMENT
5.1. Introduction Upon the completion of this chapter, you will be able
5.2. The Role of Theory in SHRM to:
5.3. The Resource-Based Theory 1. Discuss the role of theory in SHRM
5.4. The Behavioral Theory 2. Explain the contribution of RBT to SHRM
5.5. The Systems Theory 3. Define what behavioral perspective of
5.6. The Multiple Constituency Theory SHRM states.
5.7. The Institutional Theory 4. Define SHRM from the systems perspective
5.8. The Agency/Transaction cost Theory 5. Discuss how the multiple constituency
5.9. Chapter Summary theory contributes to the field of SHRM
5.10. Self-Check Questions 6. Explain how agency/transaction cost theory
5.11. Case analysis and SHRM are related.
7. Discuss how institutional theory is linked to
SHRM.
5.1. INTRODUCTION
Chapter four presented perspectives on SHRM. The four major perspectives – the universalistic
(best-practice), the contingency (best-fit), the configurational (bundles), and the contextural
perspectives are discussed. In addition, the investment perspective of SHRM, which sees HR as
valuable asset rather than variable cost, is discussed in sufficient detail. In this chapter,
theoretical bases of the field of SHRM are discussed. Every discipline is grounded on a well-
developed theory, may be formulated or borrowed. In this sense, SHRM as new field of study
does not have its own theory rather uses already established theories from the fields of sociology,
psychology, economics, strategic management, organization study, and management. Selected
theories that serve as bases for the field of SHRM are discussed. These theories are the resource-
based theory, the systems theory, the behavioral theory, the multiple constituency theory, and the
resource dependency theory.
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5.2. THE ROLE OF THEORY IN SHRM
Theory is the attempt to model some aspect of the empirical world. It is a statement of concepts
and their interrelationships that shows how and/or why a phenomenon occurs. Theories, if
accurate, fulfill the objectives of prediction (knowledge of the outcome) and understanding
(knowledge of the process) regarding the relationships among the variables of interest. Thus, a
good theory enables one to both predict what will happen given a set of values or certain
variables, and to understand why this predicted value should result.
Although the primary goals of theorist-researchers and practitioners may differ, a strong
theoretical model has great value to both. Practitioners are primarily concerned with the
accuracy of prediction of a theoretical model in order to guide their decision making; thus, an
accurate theoretical model allows for better decision making in conditions of uncertainty.
Theorist-researchers, on the other hand, have greater concern for understanding the why behind
the prediction. For them, a well developed theoretical model allows for testing of the model and,
based on these tests, revision of the model to increase its accuracy.
Due to the applied nature of SHRM, it is exceedingly important that the field develop or use
theoretical models that allow for both predicting and understanding the effects of HR practices
on organizational functioning. However, until very recently, one of the most glaring
inadequacies of SHRM was the lack of a strong theoretical basis for viewing the HRM function
within the larger organization.
Much of the writings in the field of SHRM have been concerned with either practical advice or
presentation of empirical data. Without good theory, the field of SHRM could be characterized
as a plethora of statements regarding empirical relationships and/or prescriptions for practice that
fail to explain why these relationships exist or should exist. If, in fact, the criticism that the field
of SHRM lacks a strong theoretical foundation is true, then this could undermine the ability of
both practitioners and researchers to fully use HR in support of firm strategy. Prior to an
examination of the current state of theory in SHRM, it is necessary to clearly define SHRM as a
construct, particularly with regard to the difference between the fields of SHRM and traditional
HRM.
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One of the first steps in theory development is to choose the elements whose relationships with
each other are the focus of the theory’s attention. This entails defining the various constructs of
interest to the theory and is one the most important, yet overlooked, tasks in the research process.
Much confusion in organizational research has been created because the focal construct has not
been clearly defined. Thus, it is important to define and distinguish between the constructs of
HRM and SHRM. SHRM is the pattern of planned HR deployments and activities intended to
enable an organization to achieve its goals. This definition highlights two important dimensions
that distinguish it from traditional HRM. The linking of HRM practices HRM practices with the
strategic management process of the organization and the congruence among the various HRM
practices. This definition provides a clear exposition of the variables of interest and their
interrelationship to SHRM theory and research.
SHRM theory should be concerned with the determinants of decisions about HR practices; the
composition of the human capital pool; the specification of required HR behaviors; and the
effectiveness of these decisions given various business strategies. Thus, six theoretical models
that have attempted to describe the determinants of HR practices are examined.
Theoretical
Activityperspectives
5.1. What isbased in sociology, economics, management, and psychology focus on
a theory?
____________________________________________________________________________
different aspects of the domain of HRM in Context.
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
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____________________________________________________________________________
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5.3. THE RESOURCE-BASED THEORY
The resource-based theory owes much of its origins to Edith Penrose’s (1959) work, which
explored the relationship between firm resources and firm growth. However, it did not begin to
take shape until the 1980s, the decade when attention was given to the inside of the
organizations. During this decade, a series of important articles provided insights into how
phenomena such as organizational culture, causal ambiguity, and resources in general could
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contribute to organizational success. The resource-based theory as a basis for the competitive
advantage of a firm lies primarily in the application of a bundle of valuable tangible or intangible
resources at the firm's disposal
Though based in the work of Penrose (1959) and others, Wernerfelt’s (1984) articulation of the
resource based theory of the firm certainly signified the first coherent statement of the theory.
This initial statement of the theory served as the foundation that was extended by others.
However, Barney’s (1991) specification of the characteristics necessary for a sustainable
competitive advantage seemed to be a seminal article in popularizing the theory within the
strategy and other literatures. In this article he noted that resources which are rare, valuable,
inimitable, and non-substitutable can provide sources of sustainable competitive advantages.
The theory was first originated in the fields of organizational economics and strategic
management as a response for the weaknesses of the externally-focused models of competitive
advantage. Since its inception, the strategy literatures have centered on externally focused
competitive advantage models such as Porter’s five forces competitive model. However, due to
the dissatisfaction with the static and externally-focused model of industrial organizational
economics that has dominated the strategy field, researchers began looking inside the
organization. This resulted on the resource-based theory of competitive advantage, which differs
from the traditional strategy paradigm in its emphasis on the link between strategy and the
internal resources of the firm. Specifically, the resource-based theory of competitive advantage is
firm-focused whereas the traditional strategy paradigm is industry-environment focus.
Resources are those tangible and intangible assets which are tied semi-permanently to the firm.
They can include anything that might be thought of as a strength or weakness of a given firm.
Resources can be grouped into physical, human, capital, financial, and technological. Besides,
Resources can also be grouped into property-based and knowledge-based. They argued that
while property-based resources contribute most to performance in stable and predictable settings,
knowledge-based resources are of the greatest utility in changing and unpredictable
environments.
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Resource-based theory is widely acknowledged as one of the most prominent and powerful
theories for describing, explaining, and predicting organizational relationships. It conceptualizes
the firm as a bundle of resources. According to resource-based theory, it is the firms’ resources
and the way that they are combined that make firms different from one another. In essence, two
fundamental assumptions underlie resource-based theory. First, different firms possess different
bundles of resources and capabilities, and some firms within the same industry may perform
certain activities better than the others based on these resource differences. Second, resource
differences among firms can be persistent (less mobile) due to rarity and difficulties in acquiring
or imitating those resources and capabilities.
A popular expression of the theory is associated with the work of Prahalad and Hamel (1990)
who argue that competitive advantage stems, over the long run, from building ‘core
competencies’ in a firm which are superior to those of rivals. In a nutshell, they assert that it is a
firm’s ability to learn faster and apply its learning more effectively than its rivals that gives it
competitive advantage. This makes the point that resources are not simply accounting assets
owned by the firm and disclosed on its balance sheet but anything that has an enabling capacity.
The theory argues that firms possess resources, a subset of which enables them to achieve
competitive advantage, and a subset of those lead to superior long-term performance. Resources
that are valuable and rare can lead to the creation of competitive advantage. That advantage can
be sustained over longer time periods to the extent that the firm is able to protect against resource
imitation, transfer, or substitution. Sustained competitive advantage derives from the resources
and capabilities a firm controls that are valuable, rare, imperfectly imitable, and not substitutable.
These resources and capabilities can be viewed as bundles of tangible and intangible assets,
including a firm’s management skills, its organizational processes and routines, and the
information and knowledge it controls.
Growing acceptance of internal resources as sources of competitive advantage brought

legitimacy to HR’s assertion that people are strategically important to firm success. Thus, given
both the need to conceptually justify the value of HR and the propensity for the SHRM field to
borrow concepts and theories from the broader strategy literature, the integration of the resource-
based theory of the firm into the SHRM literature should surprise no one.
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The applications and implications of the resource-based theory within the strategy literature have
led to an increasing convergence between the fields of strategic management and SHRM. Within
the strategic management literature, the resource-based theory has helped to put an
organization’s HR on the radar screen. Concepts such as knowledge, dynamic capability,
learning organization, and leadership, as sources of competitive advantage, turn attention toward
the intersection of strategy and HR issues.
At the most elementary level, the resource-based theory of the firm provides a conceptual basis
for SHRM, if we needed one, for asserting that key HR are sources of competitive advantage.
Taxonomies of resources always include human capital or employee know-how and resource-
based theorists stress the value of the complex inter-relationships between the firm’s HR and its
other resources: physical, financial, legal, informational and so on.
In resource-based thinking, HRM can be valued not only for its role in implementing a given
competitive scenario, but for its role in generating strategic capability, for its potential to create
firms which are more intelligent and flexible than their competitors over the long haul, firms
which exhibit superior levels of co-ordination and co-operation. By hiring and developing
talented staff and synergizing their contributions within the resource bundle of the firm, HRM
may lay the basis for sustained competitive advantage.
The superiority of an organization’s HRM over the others consists of two parts: human capital
advantage and human process advantage. While the human capital advantage refers to the
potential to capture a stock of exceptional human talent latent with productive possibility, the
human process advantage may be understood as a function of causally ambiguous, socially
complex, historically evolved processes such as learning, co-operation and innovation, which are
thus very difficult to imitate.
In resource-based terms, human capital and human processes may be valuable because they are
socially complex in that competitors may not be able to replicate the diversity and depth of
linked processes that sustain them; and historically sensitive as it takes time, for example, to
build high levels of workforce trust. Some resource-based theorists would also lay great
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emphasis on ’causal ambiguity’, the notion that managers themselves may be substantially in the
dark about what creates advantage.
As applied to the present research the resource-based theory holds that the HR of an organization
is an important source of competitive advantage. The competitive advantage, which is one of the
key phases in the strategic management process, is found in the HR, which is traditionally seen
as a mere functional department. This will create a link between HR and business strategy.
Activity 5.2. What does the resource-based theory state?

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5.4. THE OPEN SYSTEMS THEORY
Systems theory was originated in the natural sciences in efforts to understand sets of objects, the
relationships between those objects, and the relationship between sets of objects and their
environments. The idea was first introduced by the biologist Ludwig Von Bertalanffy in 1950.
Von Bertalanffy (1951) introduced system as a new scientific paradigm contrasting the
analytical, mechanical paradigm characterizing classical science.
A system is an organized or complex whole; an assemblage or combination of things or parts

forming a complex or unitary whole. A system is an ensemble of interacting parts, the sum of
which exhibits behavior not localized in its constituent parts, emphasizing that the whole is more
than the sum of the parts. A system is defined as a set of two or more elements that satisfies the
following three conditions: (1) the behavior of each element has an effect on the behavior of the
whole; (2) the behavior of the elements and their effects on the whole are interdependent; and (3)
however, subgroups of the elements are formed, all have an effect on the behavior of the whole
but none has an independent effect on it. Thus, the concept of system is not limited to material
entities but can be applied to any whole consisting of interacting components.
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Systems theory states that everything is fundamentally interrelated and input into one aspect of a
complex system will affect other aspects of that system which will in turn affect other aspects of
the system and so on and so forth. A fundamental notion of general systems theory is its focus on
interactions and on the relationships between parts in order to understand an entity’s
organization, functioning and outcomes. The center in relationships lead to sustain that the
behavior of a single autonomous element is different from its behavior when the element
interacts with other elements. A systems theory is, hence, a theoretical perspective that analyzes
a phenomenon seen as a whole and not as simply the sum of elementary parts.
Another core tenet is the distinction between open and closed systems. An open system depends
on an environment where it can exchange energy, matter, people, and information with the
external environment whereas a closed system is open for input of energy only. The biologist
Ludwig von Bertalanffy has emphasized the part of general systems theory which he calls open
systems. The basis of his concept is that a living organism is not a conglomeration of separate
elements but a definite system, possessing organization and wholeness.
Systems theory is an interdisciplinary theory about every system in nature, in science, in society
in an economic context, within information systems, and in many scientific domains as well as a
framework with which we can investigate phenomena from a holistic approach. A distinctive
characteristic of systems theories is that it is developed simultaneously across various disciplines
and that scholars working from a systems theory perspective build on the knowledge and
concepts developed within other disciplines. It is thought of not as a single standalone theory, but
a theory for developing theories. Irrespective of the particular properties of the system and of the
elements involved, there appears to exist general systems laws, which apply to any system of a
certain type.
In the realm of organization, open systems theory was developed after World War II in reaction
to earlier theories of organizations, such as the human relations perspective of Elton Mayo and
the administrative theories of Henri Fayol, which treated the organization largely as a self-
contained entity. Organizations, as open systems, receive inputs, transform these inputs in certain
ways, and return outputs to their environments. A business organization is a man-made system
which has a dynamic interplay with its environment — customers, competitors, labor
organizations, suppliers, government, and many other agencies. Furthermore, a business
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organization is a system of interrelated parts working in conjunction with each other in order to
accomplish a number of goals, both those of the organization and those of individual
participants.
In management, a system is the organized collection of people, machines, and materials required
to accomplish a specific purpose and tied together by communication links. A system is a
collection of people gathered together to accomplish a specific purpose in which communication
is important. Basic concepts include that it is a collection of parts; parts are organized for a
purpose; and parts are tied together. A management system is the framework
of processes and procedures used to ensure that an organization can fulfill all tasks required to
achieve its objectives. HRM issues are part of an open system that can be described from the
systems perspective in terms of input, throughput, and output, with all these systems involved in
transactions with a surrounding environment. Skills and abilities are treated as inputs from the
environment; employee behaviors are treated as throughput; and employee satisfaction and
performance treated as outputs.
Input Throughput Output

HR Knowledge, HR Behaviors Productivity,
Skills, and Abilities Satisfaction,
Turnover, etc
Firm Strategy
Figure 5. 1 Systems Model of the HR System
The HRM subsystem functions to acquire, utilized, retain, and displace competencies. Moreover,
HRM is a system in itself embedded in a larger organization. HRM, as a functional unit, is a
system with subsystems such as selection, training, appraisal, compensation, etc. The
coordination of these sub-functions makes the HR system effective. As the HR are embedded in
all functional units of an organization, the HRM function’s coordination with other functional
units makes the HRM system effective and the organization as whole successful. The HRM
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function’s interaction with other functional units, the management, and among its various
activities is a system within HR.
What distinguishes the field of SHRM from other areas in HRM is the synergetic relationship of
the different HRM practices; the integration of HR strategies to business strategy; the
devolvement of HR responsibility to line management; and the strategic roles HR plays in an
organization. Thus, the concepts of integrating HR strategies to business strategy, the
consistency and compelementarity of the different HR practices and policies to each other, the
shared responsibility of HR by line and HR managers, and the strategic roles of HR are based on
the broad systems theory.
In general, systems theory, the unit of analysis is understood as a complex of interdependent

parts. An open (vs closed) system is dependent on the environment for inputs, which are
transformed during throughput to produce outputs that are exchanged in the environment. Open
systems models seldom address organizations or large units within organizations. The Social
Psychology of Organizations is an exception in that it treats HRM as a subsystem embedded in a
larger organizational system. The open systems view of HRM has been developed further by
Wright & Snell (1991), who used it to describe a competence management model of
organizations. Skills and abilities are treated as inputs from the environment; employee
behaviors are treated as throughput; and employee satisfaction and performance are treated as
outputs. In this model, the HRM subsystem functions to acquire, utilize, retain, and displace
competencies. Similarly, Snell's (1992) description of HRM as a control system is based in open
systems theory. In a more narrow discussion, Kozlowski & Salas (1994) presented a multilevel
organizational systems approach for understanding training implementation and transfer. Many
of the more specific theories used to understand HRM in Context assume that organizations
function like open systems.
Activity 5.3. Explain system from the management perspective.

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5.5. BEHAVIORAL THEORY OF THE FIRM
The behavioral theory of the firm first appeared in the 1963 by Richard M. Cyert and James G.
March. Behavioral theory of the firm is a theory of how a firm or company makes decisions. The
behavioral theory states that a company’s decision makers may not make the best decisions all
the time because of lack of information, how a question is framed or their own prejudices and
fears. Because more than one person is usually involved in a company's decision-making
process; and firms often implement policies to reduce the incentive for the personal perceptions
of multiple persons to result in inefficient decisions.
The behavioral theory of the firm looks at the process of how economic decisions are made in a
business firm. This theory deals with concepts of: (1) organization goals, (2) organizational
expectations, (3) organizational choice, and (4) organizational control.
Organization goals: an organization is a coalition of stake holders, with a possibility of sub

coalitions among them. Organization goals therefore must deal with conflicts on desired goals.
Consistency in goals is not a requirement and therefore decision making need not require being
in line with goal consistency. Due to the constraints of time and intellectual capacity, the
bargaining process for goal determination gets constrained. As an adaptive response, coalition
groups develop mutual control systems-- such as budgets, allocation of tasks by division of labor
and specialization. Thus past decisions become precedents for future allocations. These coalition
agreements get institutionalized as semi permanent arrangements. Stake holder conflicts are also
managed by sequential attention to conflicting goals which may involve ignoring of apparent
contradictions. Adequate slack is another conflict management mechanism.
Organizational expectations: looks at how an organization searches for information and how it
processes it. Expectations in an organization are a function of individual ideals, beliefs and
attitudes, coalition beliefs. Information about consequences of specific courses of action are
difficult to get and unreliable. Communication in an organization has considerable biases due to
local priorities and perceptions and attempts of individuals to influence the decision making
authority. Bias correction is introduced in form of restricting data to verifiable sources for
decision making.
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Organizational choice: looks at how alternative available are ordered and selected. Decisions
depend on the information estimates and expectations which are not near to reality.
Organizational procedures, resources spent on information gathering and processing, learning
from past experience and the need to consider only limited alternatives, all influence
organizational perceptions and hence information content, quantity and effort spent on it.
Organizations adapt by using learning to have procedures which avoid uncertainty, maintain the
rules and simplify the rules.
Organizational control: looks at the difference between executive choice and the decisions
actually implemented. Control depends on the elaboration of the standard operating procedures.
Standard operating procedures influence, individual goals, his perceptions of the environment,
range of alternatives concerned and decision rules used. The aim of control is restrict deviation
from standard operating procedures and activities required to implement decisions.
Thus, in an organization – which is considered a coalition of stake holders— multiple goals and
goal conflicts do exist because of mechanisms which facilitate quasi resolution of such goal
conflicts through acceptable level decision rules, sequential attention to goals, inherent limitation
of time and cognition of coalition members. Organizations also facilitate this by avoiding
uncertainty, by imposing plans, standard operating procedures, industry traditions and
uncertainty avoiding contracts. Problem directed search also facilitates localization of
uncertainty and is facilitated by sequential dealing with problems. Organizations learn and adapt
over time especially with respect to goals, attention rules, and search rules.
The behavioral perspective of HRM is one of several alternative theoretical lenses for
understanding why firms differ in their approaches to managing employees, and a broad array of
consequences that follow from differing approaches to managing employees. It has been used
most frequently in studies of strategic human resource management and has been applied
primarily for describing and prescribing the linkages between business strategies, human
resource management systems, and a variety of stakeholder responses closely associated with
employee behaviors. While not generally considered to be a formal theory, the behavioral
perspective of HRM provides a framework for understanding how employees contribute to
organizational effectiveness.
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Grounded in role theory, the behavioral perspective of HRM was first articulated by Randall S.
Schuler and Susan E. Jackson as a framework for articulating how differences in business
strategies might influence the ways employees are managed. Subsequently, the behavioral
perspective of HRM has been developed as a framework for analyzing how management policies
and practices should be designed to maximize organizational effectiveness, given an
organization’s specific and unique environmental context and internal organizational conditions.
Figure 5.2 provides a simple schematic illustration of the key concepts of the behavioral
perspective and their interrelationships.
As defined by Daniel Katz and Robert Kahn, role behaviors refer to the recurring actions of
organizational members as they interact with their role partners to achieve predictable outcomes.
Thus, role behaviors refer to a broad array of employee actions, including those required to
perform specific tasks and jobs as well as behaviors that are not specified in one’s job description
but are understood to contribute to the organization’s long-term success. As the behavioral
perspective of HRM developed, the terminology has been shortened from “employee role
behaviors” to simply “employee behaviors.”
The behavioral perspective of HRM argues that different strategies require different role
behaviors from employees in order for those strategies to be implemented successfully. Role
behaviors that are believed to contribute to organizational effectiveness are referred to as
“desired” (also referred to as “needed”) employee behaviors. Included among this broader set of
desired behaviors are activities such as completing tasks that are officially the responsibility of
another employee as needed, being adaptive and willing to learn and change as needed, and
generally behaving in ways that are consistent with the organization’s stated goals and values.
Thus, the behavioral perspective of HRM assumes that management policies and practices
influence not only what work gets done in an organization, but also how work gets done. The
behavioral perspective also makes several other key assumptions, which are briefly described
next. The following statement of assumptions also specifies the key concepts that comprise the
behavioral perspective.
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Figure 5. 2 Behavioral Perspective of SHRM
Organizational Effectiveness Improves When Employees Behave as Needed. The behavioral

perspective of HRM assumes that the behaviors of employees are one of the major determinants
of organizational effectiveness, as judged by the organization’s primary stakeholders. Ultimately,
stakeholders are an organization’s most important role partners; it is the consequences of
employee behaviors that are of primary concern to stakeholders. Ideally, employee behaviors are
consistent with the long-term needs of the firm, given its competitive strategy and the
expectations of others who depend on the employee—including role partners inside and outside
the organization. The behavioral perspective recognizes that other factors (e.g., the actions of
competitors, economic conditions, industry dynamics) also influence organizational
effectiveness, but it focuses on employee behaviors because it is through behavior that
organizational resources are transformed into goods and services that have economic value.
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Employee behaviors reflect situational influences. According to the behavioral perspective of
HRM, the desirability of specific behaviors is influenced by a variety of contextual factors inside
and outside the organization. Internal contextual factors that influence the behaviors needed for
organizational effectiveness are aspects of the particular organization itself--its size, life cycle
stage, competitive strategy, technology, structure, and history. External contextual factors that
influence the desirability of specific behaviors are conditions outside the organization that affect
organizational functioning, including: industry dynamics, institutional pressures, economic and
political conditions, country cultures, and the action of customers. The behavioral perspective
assumes that a comprehensive consideration of these contextual elements is needed to fully
determine which employee behaviors are desirable. Thus, determining the desired employee
behaviors for a specific organization is the first essential step for effective human resource
management.
Management policies and practices shape employee behaviors. The behavioral perspective of
HRM assumes that employee behaviors are malleable—that is, people are generally motivated to
behave in ways that socially approved of by others and so are responsive to a variety of
informational cues. Two sources of cues emphasized by the behavioral perspective are formal
stated policies concerning how employees are to be treated and informal daily practices or the
actual ways in which employees are treated. An organization’s formal policies and informal
practices for managing employees function together as the human resource management (HRM)
system. The many elements of an HRM system include policies and practices for recruiting,
selecting, socializing, training, developing, supervising, evaluating, paying, recognizing,
promoting, and terminating employees.
Effective policies and practices support needed employee behaviors. All of an organization’s
many specific management policies and practices operate as a set of interrelated forces that
influence employee behaviors. An effective HRM system guides employee behaviors toward
desired behaviors by providing opportunities for employees to engage in the behaviors needed,
ensuring employees have the competencies required to engage in those behaviors, and
motivating employees to behave as needed. If one accepts the assumption that employees
actively interpret and respond to managerial policies and practices, then it follows that an HRM
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system can direct employee behaviors in ways that increase the likelihood of long-term
organizational effectiveness.
In order for employees to behave as needed, they must have the opportunities to do so. Structural
arrangements, job designs, and technology are among the many factors that can create or block
opportunities for employees to behave as needed. Given opportunities to behave as needed,
employees can best meet the behavioral expectations of role partners if they have the required
competencies, i.e., the skills, knowledge and abilities. HRM policies and practices can help
ensure employees have the required competencies by attracting highly competent job applicants,
hiring those who are most highly qualified, providing training and on-the-job learning
opportunities, and rewarding employees according to the competencies they exhibit. Three
components comprising employee motivation are: willingness to join the firm and stay with the
firm as needed, the willingness to exert significant effort toward achieving organizational goals
(e.g., working harder, longer, and/or smarter), and the willingness to work reliably at the agreed
time and place in exchange an agreed compensation and under agreed working conditions.
Policies and practices that influence motivation include the design of work, performance goals
and incentives, feedback, opportunities for advancement, among others.
Effective organizations address the concerns of multiple stakeholders. Evaluations of

organizational effectiveness must take into account the perspectives of the many stakeholders
who are influenced by the actions of employees. Human resource management policies and
practices are presumed to be effective when the expectations they communicates and the
behaviors they elicit are congruent with the organization’s behavioral requirements and satisfy
employees’ role partners. To achieve this goal, the human resource management policies and
practices affecting employees must send clear and consistent messages about the desired role
behaviors. The primary stakeholders for most businesses include investors, customers, members
of the organization itself (i.e., other employees), members of the broader community, and the
organization’s strategic or alliance partners. Organizations are considered effective to the degree
they satisfy their primary stakeholders. Thus, in order to evaluate whether an organization’s
management policies and practices are effective, the consequences of HRM policies and
practices on each stakeholder group should be considered.
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The general model for understanding human resource management that is now referred to as “the
behavioral perspective” reflects the influences of several earlier views of organizations. At the
same time, when it was first introduced, it represented a major departure from earlier work in the
area of human resource management and promoted a strategic approach to the study of human
resource management.
As already mentioned, the behavioral perspective draws most directly on the earlier writings of
Daniel Katz and Robert Kahn. In addition, it incorporates Michael Porter’s approach to
understanding the competitive strategies pursued by firms. The earliest description of the
behavioral perspective, offered by Schuler and Jackson in 1987, used Michael Porter’s
description of competitive strategies as the basis for arguing that different business imperatives
should lead organizations to prefer and adopt HRM systems that were congruent with the
behavioral requirements of their strategies. Subsequently, after Jay Barney introduced the
resource-based view of the firm, the behavioral perspective directed attention to the
organizational value of management policies and practices that create and maintain
human/behavioral resources that are unique, rare, difficult for competitors to imitate, and
valuable.
When it was first introduced, the behavioral perspective represented a departure from prior
approaches to the study of human resource management in several ways. Most notably, the
behavioral perspective argued that organizations can and often do design HRM policies and
practices to achieve their own specific strategic objectives. In the past, HRM scholarship was
grounded in a technical perspective, which assumes that some approaches to managing people
are generally more effective than other ways of managing people. Thus, the goal for HRM
research was to find the “best practices”, and the objective of managers should be to adopt those
“best practices.” In contrast the behavioral perspective assumes HRM policies and practices
should be designed to fit an organization’s specific situation. That is, there is no “one best way”
for managing people. Policies and practices that are effective for one organization may not be
effective in other organizations because organizations differ in the specific employee behaviors
that are needed in order to implement the business strategy and satisfy key stakeholders.
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The embracing of a systems view for understanding HRM also was a major departure from past
approaches. Prior research typically focused on a specific type of HRM activity. For example,
studies of how employees responded to particular forms of pay or compensation were conducted
without taking into account the influence of other aspects of the total HRM system (e.g., hiring
or training policies and practices). Subsequently, HRM scholars embraced the systems view and
began investigations designed to understand how employees respond to a few specific types of
HRM systems—e.g., high performance systems, high involvement systems, high commitment
systems, and so on. Consistent with the behavioral perspective, subsequent studies of these HRM
system archetypes assumed that employees imbued HRM systems with meaning, which in turn
influences their job-related attitudes and behaviors. However, contrary to the logic of the
behavioral perspective, subsequent research on archetypical HRM systems often ignored the
assumption that each organization has somewhat unique behavioral requirements, which reflect
the context in which the organization is situated.
A third departure from prior approaches was broadening the criteria used to evaluate the
effectiveness of HRM policies and practices. Prior research focused attention on a smaller set of
employee outcomes that are general concern to most employers, especially individual job
performance and a few other specific behaviors, such as accepting job offers, absenteeism, and
turnover. Consistent with an approach that treats the organization as the focal unit for study, the
behavioral perspective also drew increased attention to organization-level outcomes and to the
array of role partners with whom employees interact. Thus, HRM scholarship began to
investigate the relationships between entire systems of HRM policies and practices and measures
of organizational effectiveness, including financial performance, customer satisfaction, and
employer reputation. In a fourth departure from past approaches, the behavioral perspective
recognized that employee responses to an organization’s HRM system reflect their interpretation
of both the organization’s formal statements about their practices and the actual behaviors of the
organizational agents who are responsible for implementing those practices. Often, responsibility
for designing the formal policies for managing employee behaviors lies with human resource
professionals, while responsibility for implementing those policies lies with supervisors and
managers; the actual behaviors of organizational agents responsible for managing employees—
i.e., managerial practices--constitute the informal element of an HRM system. Formal policies
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can be thought of as distal stimuli, while informal practices can be thought of proximal stimuli.
Research that investigates the question of how to create alignment between formal policies and
informal practices has its roots in the behavioral perspective and highlights the importance of
understanding the behavior of all employees at all levels in the organization.
Perhaps the most important contribution of the behavioral perspective has been that it provided a
bridge for joining together arenas of managerial scholarship that had previously been
unconnected. Traditional HRM research had focused on understanding the behavior of individual
employees, with little regard for how employee behaviors related to business strategies or the
satisfaction of an organization’s multiple stakeholders. Conversely, traditional research into
strategic management had largely ignored the implications of strategic choices for managing the
firm’s employees; when implications for employee behaviors were acknowledged, the focus was
on CEOs and other members of top management.
Another contribution of the behavioral perspective is that it provides a logic that can be used to
predict and explain various relationships between characteristics of organizations and their
environments on the one hand and management practices, on the other hand. For example, in one
study of several hundred firms, the behavioral perspective what used to develop predictions
HRM systems would differ among firms that placed greater value on innovation (versus other
strategic imperatives such as cost reduction or quality enhancement). Consistent with predictions
based in the behavioral perspective, HRM systems designed to support behaviors needed for
innovation, such as risk taking and teamwork, were more likely to be found in firms pursuing
competitive strategies that emphasized the development of innovative services and products.
Similarly, an investigation of HRM practices in firms that emphasized the delivery of excellent
customer service (versus products) found that the behavioral requirements of customer service
(which is relatively intangible and co-produced through interactions with end-users) provided an
explanation for the differences in HRM systems often found in service versus manufacturing
industries. Jackson and her colleagues have also used the behavioral perspective to address the
question of how to design HRM systems that encourage and support the behaviors needed in
organizations that compete on the basis of knowledge, and to formulate a research agenda for
investigating how HRM systems can be used to promote environmental sustainability.
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The behavioral perspective also is proving to be important for its ability to provide insights about
phenomena at multiple levels of analysis, including individuals, work teams, business units,
organizations, and networks of related organizations. For example, a study of top management
teams by Collins and Clark found that HRM practices that encouraged executives to build their
internal and external social networks were associated with better firm performance, presumably
because such networks could be leveraged to achieve organizational goals. As noted, the
behavioral perspective is not a formal theory, but rather a general framework that can be applied
as a guide for management research and practice. Because the behavioral perspective deals with
broad issues and incorporates numerous complex constructs, it is difficult to conduct research to
test the validity of perspective. Instead, its value lies in its ability to generate useful questions
and provoke analyses that help to answer those questions.
Activity 5.4. Explain how the behavioral theory of the firm contributes to SHRM?
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5.6. MULTIPLE CONSTITUENCY THEORY AND SHRM
Multiple constituency theory was first introduced by Cyert and March in 1963 in their
description of organization as a coalition of self-interested participants. The theory focuses on
how goals are achieved and whose interests are satisfied and affected by the actions taken in the
name of the organization. It also focuses on the way in which resources are managed and
distributed among organizational members and stakeholders in the interests of governance. It
assumes that organizations do not exist independently from people who work for them or interact
with them. The multiple constituency theory reflects a view of social systems in which people
take actions and engage in activities to maximize their own interests. More importantly, it
assumes that each constituent brings its own interests and motivations into the organizational
arena.
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A constituent or stakeholder is defined as those individuals or groups that have an interest in the
decisions or actions of a particular organization. Constituents or stakeholders are those parties,
actors, claimants, or other institutions – both internal and external to the organization. Freeman
(1984) provides the following list of organizational constituencies: owners, employees, unions,
competitors, consumer advocates, customers, suppliers, media, environmentalists, governments,
local community organizations, political groups, financial community, trade associations, activist
groups, and special interest groups.
In the realm of HRM, currently there is a need for HR to become familiar with constituency
theory, to consider specifically which groups are, in fact, their constituents, and think about their
jobs in terms of dealing with and relating to the stakeholders or constituents who have influence
or impact on HR activities. When the HR job is thought about in terms of its constituents, it
becomes apparent that there are many different interacting groups that HR managers must
satisfy, and which have a stake in what HR does. Moreover, each comes with distinct and
sometimes conflicting needs. It is apparent that virtually any professional HR manager is keenly
aware of the groups exerting pressure on the HR activities. A first step is to recognize that the
modern HR activity is part of an open system interfacing with differing and demanding
individuals and groups with the potential to pull HR in different directions. Constituency know-
how is necessary for long term survival and success in HR. The various constituencies of HR
often pull in different directions, putting tremendous pressure on HR professionals.
To some degree, the problems in the HR function can be related to tribal warfare that exists in
organizations, tribes being specialized functions in organizations. These groups look at their
work in very different ways. They have their own values, histories, senses of importance, and
rules for appropriate behavior. Indeed, what one function thinks is vital to success another
function may see as inconsequential. Such value-related conflicts can occur between line
departments and HR. Misconceptions about what HR does are vital. Many managers grossly
understate the complexity of HR work and thereby misread the criticality of the resources which
HR supplies. The assumption in the constituency theory is that HR’s contribution involves both
fairly representing its constituents’ claims and also ensuring that the organization receives the
benefit of the knowledge resources which HR offers. In addition, HR must clearly identify all of
its constituents, know precisely what their viewpoints and demands are, and recognize their
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sources of power relative to HR and other units, both within and external to the organization,
develop appropriate strategies for dealing with its constituents.
Broadly speaking, however, constituents or stakeholders may include both insiders and outsiders
and may be defined as any individual, groups of individuals, or organizations with a special stake
or claim against an organization. They include line managers, top managers, unions, and
competitors. From the perspective of HR, the HR manager is an actor and establishes the
priorities of the HR function and plans policies, procedures, and programs in accordance with
those priorities. However, other groups may view HR as a unit which reacts to events or
conditions in the organization.
An expanding body of research reveal that strategy, product life cycle, technological change,
union presence, and internal labor markets are important factors the influence the HR activities.
From the constituency perspective, the HR manager does not shape the HR program in
accordance with HR-related priorities. Instead, HR managers respond to a wide range of
organizational realities and characteristics that affect HR priorities. From the perspective of
constituency theory, the HR professional must be attentive to the needs of powerful
constituencies in the organization.
The multiple constituency approach treats HR unit as the unit of analysis and defines
environment in terms of the plurality and complexity of constituencies’ expectations. The HR
unit’s environment may be conceived of as a set of network of constituencies. To be effective,
the HR unit must engage in strategic transactions with its constituencies. This is because its
ultimate survival depends on its ability to meet stakeholders’ expectations or demands.
Constituents’ expectations are directly derived from their roles or functional responsibilities,
their unique positions, in the organizational hierarchy, or their career and personal
circumstances.
Activity 5.5. What are the major constituents of the HR function?

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5.7. INSTITUTIONAL THEORY AND SHRM
One theory that has recently evolved in organization theory is the institutional perspective.
Although this theory is currently not well developed and consists of a variety of approaches, the
ideas of institutionalism may help in understanding the determinants of HRM practices.
According to the Concise Oxford English Dictionary (2002), an institution may be defined as ‘an
official organization with an important role in a country’ or ‘an organization founded for a
religious, educational, or social purpose’.
Institutional theory is a widely accepted theoretical posture that emphasizes rational myths,
isomorphism and legitimacy. Institutional theory focuses on the deeper and more resilient
aspects of social structure. It considers the processes by which structures, such as schemes, rules,
norms, and routines, become established as authoritative guidelines for social behavior. Different
components of institutional theory explain how these elements are created, diffused, adopted,
and adapted over space and time; and how they fall into decline and disuse.
There is no single and universally agreed definition of an ’institution’ in the institutional school
of thought. Scott (2001) asserts that institutions are social structures that have attained a high
degree of resilience. They are composed of cultural-cognitive, normative, and regulative
elements that, together with associated activities and resources, provide stability and meaning to
social life. Institutions are transmitted by various types of carriers, including symbolic systems,
relational systems, routines, and artifacts. Institutions operate at different levels of jurisdiction,
from the world system to localized interpersonal relationships. Institutions by definition connote
stability but are subject to change processes, both incremental and discontinuous.
The basic thesis of institutional approaches is that many structures, programs, and practices in
organizations attain legitimacy through the social construction of reality. Institutionalism
involves the processes by which social processes, obligations, or actualities come to take on a
rule-like status in social thought and action. Institutionalism is viewed as the social process by
which individuals come to accept a shared definition of social reality – conceptions whose
validity is seen as independent of the actor’s own views or actions but is taken for granted as
defining the way things are and/or the way things are to be done.
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The main points behind the institutional perspective are (1) what many view as rationally-driven
organizational structures and practices may only appear to be so and (2) structures may serve
some functional goal, although they had not been designed for that particular purpose. Certain
practices can be imposed coercively, as in the case of governments mandating laws or companies
mandating changes in an acquired subsidiary. For example, minimum wage legislation directly
influences the pay practices of organizations. In the absence of these regulatory guidelines, one
could easily hypothesize that HRM practices would differ substantially from the present state.
Practices can also be authorized or legitimated through an organization voluntarily seeking
approval of a super-ordinate entity, as in the case of hospitals and colleges seeking accreditation
from outsider agencies. A form of employment accreditation has evolved through the
administration and dissemination of surveys of the best companies to work for. The desire of
organizations to appear accredited by these surveys can affect the HRM practices regardless of
the effectiveness or efficiency of those practices.
The implications of the institutional perspective for SHRM are important. Similar to the resource
dependency perspective, the institutional perspective notes the fact that not everything that
happens is necessarily intended and that not all outcomes are the result of conscious decision
processes. Thus, it focuses on the fact that not all HRM practices are the result of rational
decision making based on an organization’s strategic goals. In fact, many HRM practices may be
the result of social construction processes whereby external entities influence the creation and
implementation of practices that come to attain a mythical sense of legitimacy.
In addition, due to the inertial nature of many HRM practices according to institutional theory,
the task of SHRM might be to address the institutional aspects of HRM practices. For example,
substantial research evidence exists that demonstrates the invalidity of the traditional
employment for predicting job performance, yet this practice continues in many organizations.
The institutional nature of this practice certainly helps to explain the continued use of it in the
face of convincing evidence of its invalidity. How many more HRM practices continue to exist,
not because of their effectiveness, but due to organizational inertia?
A role theory perspective assumes individuals respond to normative pressures as they seek
approval for their performance in socially defined roles. Similarly, institutional theory views
organizations as social entities that seek approval for their performances in socially constructed
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environments. Organizations conform to gain legitimacy and acceptance, which facilitate
survival. Because multiple constituencies control needed resources, legitimacy and acceptance
are sought from many stakeholders. Research on institutionalization focuses on pressures
emanating from the internal and external environments. Internally, institutionalization arises out
of formalized structures and processes, as well as informal or emergent group and organization
processes. Forces in the external environment include those related to the state (e.g. laws and
regulations), the professions (e.g. licensure and certification), and other organizations –
especially those within the same industrial sector.
Regardless of the source of institutional pressures, two central assertions of this perspective are:
(a) institutionalized activities are resistant to change and (b) organizations in institutionalized
environments are pressured to become similar. Thus, in this theoretical perspective, context is the
major explanation for both resistance to change and the adoption of new HRM approaches. The
first assertion suggests that HRM activities have deep historical roots in the organization, so they
cannot be understood completely without analyzing the organization's past. From the second
assertion it follows that HRM activities may be adopted by an organization simply because other
organizations have done so. Thus, "managerial fads and fashions" ebb and flow in part because a
few legitimate organizations become fashion leaders that are imitated by other organizations that
view imitation as a low-risk way to gain acceptance.
Activity 5.6.Mention any institutional factor that has influence on SHRM in Ethiopia
and explain its influence.
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5.8. AGENCY/TRANSACTION COST THEORY AND SHRM
Another popular theoretical model in the strategic management literature that has recently been
applied to the HRM function is the exploration of transaction as means of controlling employee
behavior. An agency/ transaction cost theory approach to examining the problems of human
exchange are based on the fields of finance and economics. The approach seeks to identify the
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environmental factors that together with a set of related human factors explain why organizations
seek to internalize transactions as a means of reducing the costs associated with these
transactions. The approach identifies bounded rationality and opportunism as the two human
factors that serve as major obstacles to human exchange. Bounded rationality is the term used to
refer to the fact that people are subject to information processing limits. Opportunism refers to
the fact that people will act with self-interest and guile in pursuing their own goals.
These factors in and of themselves are not problems. However, when combined with
environmental characteristics of uncertainty and small number of exchange relationships, they
result in incurring transaction and agency costs. The pairing of uncertainty with bounded
rationality results in a situation where it is very costly or impossible to identify all future
contingencies and specify all of the appropriate responses to each contingency. Opportunism is
relatively harmless so long as competitive exchange (large numbers) relationships exist.
However, when paired with small numbers exchange relationships, opportunism must be held in
check by costly and risky short-term contracting.
Transaction costs are costs associated negotiating, monitoring, evaluating and enforcing
exchanges between parties, and they are incurred in order to make exchanges more efficient. As
transaction costs increase, there is a tendency to internalize the transaction costs through
organization. The agency problem exists when one party requires services from another in a
situation where uncertainty exists and both parties will behave self-interestedly. Agency costs
are the costs associated with establishing efficient contracts between parties. Agency/transaction
cost theory has been very popular in the strategic management literature for studying
diversification, internalization, and restructuring.
Because of the fact that agency/transactions cost theory seeks to explain control in organizations,
they have implications for the design of HRM practices. The central premise of the transaction
cost approach is that employees have strong incentives to shirk (reduce their performance) and
free-ride (rely on the efforts of others in the group) and no incentive to increase their
performance unless task conditions allow employees to demonstrate their unique contributions
and to benefit from those contributions. It views the aggregate performance or groups or
organizations as contingent upon the control systems used to monitor employee behavior. Thus,
the role of HRM practices is to allow for the measurement of unique contributions and to provide
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adequate rewards for individual employment performance. These practices are the means
through which firms are able to align employee behavior with the strategic goals of the
organization.
These models have recently been linked to human resources through the concept of bureaucratic
costs. Bureaucratic costs refer to the transaction costs associated with managing human resources
in a hierarchy. These are the negotiating, monitoring, evaluating, and enforcement costs
associated with managing human resources when an authority relationship exists. Bureaucratic
costs are associated with human inputs, employee actions, and performance outcomes. With
regard to human inputs, prospective employees acting opportunistically may inflate their
espoused levels of skills and abilities, requiring that employers incur bureaucratic costs to ensure
that they obtain personnel with the required skills. These bureaucratic costs continue to be
incurred as employees are asked to make asset-specific investments through gaining firm-
specific skills that provide economic benefits for the firm. Bureaucratic costs are also incurred
because monitoring and evaluating human action is difficult and expensive. Finally, bureaucratic
costs are incurred when there is uncertainty or ambiguity concerning the outcomes of human
action, the costs are associated with evaluating and enforcing exchanges to ensure that both
parties have performed to the agreed upon criteria.
The importance of a transaction cost approach to employee motivation is that it provides a

theoretical framework for linking variables or approaches at the individual, group, and
organizational levels. Given that fact that the agency/transaction costs model has also been
demonstrated as useful in the strategic management literature, it seems possible that it could also
be applied as a theoretical framework for linking strategy to SHRM. It seems intuitive that a
firm’s strategy can have an effect on the nature of work. To the extent that the nature of work
changes to be either more or less uncertain, or more or less observable, the types of HRM
systems necessary to monitor inputs, behaviors, and outcomes should also change. This
framework may provide the theoretical foundation for examining why different strategic
decisions result in differing HRM practices.
Activity 5.7. How is the agency/transaction cost theory linked to HR?
______________________________________________________________________________
______________________________________________________________________________
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Although the primary goals of theorist-researchers and practitioners may differ, a strong theoretical model has great
value to both. Practitioners are primarily concerned with the accuracy of prediction of a theoretical model in order
to guide their decision making, theorist-researchers, on the other hand, have greater concern for understanding the
why behind the prediction. According to resource-based theory, it is the firms’ resources and the way that they are
combined that make firms different from one another. Fundamental assumptions underlie resource-based theory are
that different firms possess different bundles of resources and capabilities that enable them perform certain activities
better than the others, and resource differences among firms can be persistent (less mobile) due to rarity and
difficulties in acquiring or imitating those resources and capabilities.
HRM issues are part of an open system that can be described from the systems perspective in terms of input,
throughput, and output, with all these systems involved in transactions with a surrounding environment. Skills and
abilities are treated as inputs from the environment; employee behaviors are treated as throughput; and employee
satisfaction and performance treated as outputs. The behavioral perspective of HRM argues that different strategies
require different role behaviors from employees in order for those strategies to be implemented successfully. Role
behaviors that are believed to contribute to organizational effectiveness are referred to as “desired” employee
behaviors. Thus, the behavioral perspective of HRM assumes that management policies and practices influence not
only what work gets done in an organization, but also how work gets done. The behavioral perspective also makes
several other key assumptions, which are briefly described next.
When the HR job is thought about in terms of its constituents, it becomes apparent that there are many different
interacting groups that HR managers must satisfy, and which have a stake in what HR does. Moreover, each comes
with distinct and sometimes conflicting needs. It is apparent that virtually any professional HR manager is keenly
aware of the groups exerting pressure on the HR activities. A first step is to recognize that the modern HR activity is
part of an open system interfacing with differing and demanding individuals and groups with the potential to pull
HR in different directions. The implications of the institutional perspective for SHRM are important. Similar to the
resource dependency perspective, the institutional perspective notes the fact that not everything that happens is
necessarily intended and that not all outcomes are the result of conscious decision processes. Agency/transaction
cost theory is linked to human resources through the concept of bureaucratic costs, which refer to the transaction
costs associated with managing human resources in a hierarchy. Specifically, these costs are the negotiating,
monitoring, evaluating, and enforcement costs associated with managing human resources when an authority
relationship exists.
1. What are the major objectives of a theory?

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2. How can human resource be source of competitive advantage?

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3. Discuss the unique nature of SHRM from the systems perspective?
__________________________________________________________________________________________
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4. What does the behavior theory of the firm state?

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5. Why is identifying its constituents important for an HRM function?

__________________________________________________________________________________________
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Pret a Manger made its name as an environmentally friendly trader, banning genetically modified foods and
sourcing chickens from humane cages in Seville (The Guardian, 2001). It also spelled the end of the brilliantly
constructed illusion through which Pret seemed to offer a taste of sophistication for little more than the cost of an
ordinary sandwich. In its early days, the chain’s brushed steel stools, magenta labels and immaculate chrome bars
seemed the ultimate in industrial chic. Its French name and comparatively adventurous menu all helped create an
aura of exclusivity – instead of ham and tomato sandwiches, Pret offered Brie, tomato and basil baguettes. The
origins of Pret’s classy £3 lunches lie in the mid-1980s, when its two creators met at the University of Westminster,
where they were studying property law. According to one industry expert, Pret was in the right place, at the right
time. There was a revolution going on in sandwiches – packaged sandwiches were finally taking off in a big way,
mostly thanks to Marks & Spencer.
Pret has always been clear about who its customers are. Charging £1.20 for a tiny bottle of orange juice means it is
targeting urban professionals with little time on their hands. In 2001 the chain had just over 100 shops in Britain,
and one in New York. In 2000 it sold 25 million sandwiches, baguettes and wraps and just over 14 million cups of
coffee. Pret sandwiches are still made on the premises, at every store. Shops receive fresh deliveries in the evenings,
which are refrigerated every night until cooks arrive at 6.30am to prepare the day’s sandwiches. One of the partners
holds the purse-strings. The other partner looks after the food, spending Thursday afternoons with a recipe
committee, sampling different ideas. He goes for exotic mixtures, once remarking: ‘The English respond to strong
tastes – look at curry.’ Recent additions include Scotch beef with crispy onions, ‘more than mozzarella’ sandwiches
and Peking duck wraps.
In addition to the distinctive product offering, the company reduced labor turnover to 65 per cent in the first part of
2005, a difficult task in a sector where turnover normally runs at 100 per cent (People Management, 2005b). In
2002, Pret’s turnover ran at 95 per cent. The following year it dropped to 86 per cent, then to 82 per cent in 2004,
and then to 65 per cent in 2005. It seems that about 70 per cent of the turnover is due to staff taking time off to travel
or return to their home country. Many of the frontline employees at Pret are non-UK nationals. The HR manager
believes that some of the company’s employees stay because Pret works hard to continually show its appreciation of
its people. Perks include weekly drinks and an internal magazine that’s allowed to appear uncensored by managers.
In the HR manager’s view, working at Pret is as much about social activities as business matters.
Questions
1. How is the resource-based theory applied in Pret?
2. Does HR contributed uniquely to the Pret’s competitiveness?
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CHAPTER SIX
PRINCIPLES OF STRATEGIC HUMAN RESOURCE MANAGEMENT

6.2. Integration of HR to Strategy to:
6.3. Consistency of HRM Practices 1. Contrast the different aspects of HR integration.
6.4. Devolvement of HRM to Line 2. Identify the different types of HRM consistency
Management 3. Discuss the rationale for devolving HR
6.5. High Employee Commitment responsibility to line management
6.6. High-Quality Staff and Internal 4. Justify the need for high employee commitment
Practices 5. Identify the contribution of high-quality staff to
6.7. Management-Employee Relation quality product
6.8. People as a Strategic Resource 6. Appreciate the benefit of direct management-
6.9. Chapter Summary employee relation
6.10. Self-Check Questions 7. Justify how the people of the organization can
6.11. Case analysis be strategic resources
6.1. INTRODUCTION
It is now common to hear HR practitioners talk about the role they play in assisting the direction
of the ‘business’ for which they work (even HR practitioners in the public sector often refer to
their organizations as ‘businesses’). It is clearly leaping much too far ahead to think that just
because a personnel department calls itself ‘HR’ and that it claims to play an important part in
contributing to the organization’s strategic direction that it is engaging in SHRM. The reality is
much more complicated than that. SHRM is such a complex, and multi-faceted phenomenon that
is not easy. It is helpful to arrive at a neat all-encompassing definition of the term. This section
tries to clarify some of the major principles fundamental to SHRM. The intention is not to paint a
black and white portrait of SHRM but to give an overview of the main strands of SHRM
thinking. Seven major principles taken from the literature are discussed: integration of HR to
strategy, consistency of HRM practices, devolvement of HRM to line management, high
employee-commitment, high-quality staff and internal practices, management-employee relation,
and people as a strategic resource. SHRM is largely about these concepts.
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6.2. INTEGRATION OF HR TO STRATEGY
Integration of HR to business/corporate strategy is perhaps the most fundamental principle of

SHRM. Indeed, the management of people becomes a critical element in the strategic
management of the businesses. SHRM derives its ‘strategic’ facet from the link to wider business
strategy and integration between the various HR policies, procedures and practices: the first
termed vertical integration and the second horizontal integration (internal consistency, discussed
in the next section of the chapter). The definitions of SHRM emphasize integration of HR to
business strategy. The following definitions of SHRM reveal that SHRM is about integrating HR
to the business strategy: (1) SHRM is a discipline that integrates HRM with the process of
strategic management; (2) SHRM is a management activity which involves integration of human
factors to strategic goals of the organization; (3) SHRM is a management process requiring HR
policies and practices to be linked with the strategic objectives of the organization; (4) SHRM is
the process of linking HR practices to business strategy; and is the process by which
organizations seek to link the human, social, and intellectual capital of their members to the
strategic needs of the firm.
Within the HRM literature, critical debates have attempted to examine the relationship of HRM
to business strategies and the extent to which HRM could act as a key means to achieve
competitive advantage in organizations. One of the central features of this debate was the
importance given to the integration of HRM into business and corporate strategy. Both
researchers and practitioners realized increasingly the importance of integration between
business strategy and HRM.
Integration is the degree to which the HRM issues are considered as part of the formulation of
business strategies. Strategic integration refers to that part of the best-fit school that assumes a
necessary alignment between the overall business strategy and the HR strategy. This is based on
the idea that a given business strategy requires a specific type of HR system so that the
organization’s performance is improved. It has many faces and is modeled in different ways. It
is a policy issue, requiring the close involvement of HRM specialists with senior line
management in the development of business policy. On the basis of such involvement, policies
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can be created which relate HRM and the business strategy to each other, allowing HRM
practices to be more easily understood and undertaken by line managers.
However, the concept of integration has varied aspects in the SHRM literature. Integration of the
people to the organization through employee-commitment, the integration of the 5-Ps of HRM
(policies, practices, philosophies, programs, and processes) to business strategy, the
complementarity of specific HR practices and policies to each other, the integration between the
HR practices and policies and the three generic competitive strategies of Porter, the integration
between the HR practices and policies and the four generic business strategies of prospector,
defender, analyzer, and reactor, and the integration between the HR practices and policies and
the firm’s life cycle stage of introduction, growth, maturity, decline and turnaround.
Golden and Ramanujam (1985) identified four types of linkages between strategy and HRM:
administrative, one-way, two-way, and integrative linkages. An administrative linkage between
strategy and HRM represents the lowest level of integration. The HRM department is merely
engaged in administrative work such as salary administration. Thus, there is no linkage between
strategy and HRM. A one-way linkage can be found in organizations where the HR strategy is
derived from the overall business strategy. The HR strategy is affected by the overall business
strategy, but the relationship is only one way. A cost reduction strategy might result in certain
HR interventions for goal achievement, for example, minimum training expenses. A two-way
linkage represents a potential model in which HR experts determine certain external (or internal)
developments that are put on the table of the board of directors. These two way HR issues can
become part of the overall business strategy. The new business strategy in return pushes the HR
strategy towards certain HR interventions that help the organization to achieve its goals. An
integrative linkage represents full alignment of HRM and strategy. Part of an integrative linkage
is the position of the HR director, who has a seat in the board of directors.
According to Thornhill and Saunders (1998), the concept of integration composed of four
aspects. First, HR policy making should be integrated with the corporate strategic planning
process, rather than being arrived at as a reaction to this. Second, HR policies should be
integrated with one another and other business strategies such as finance, marketing and
production. Third, the attitudes and practices of line managers should be integrated with the
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organization’s HR policies. The fourth aspect of integration relates to employees being
integrated with the interests of the organization, with the result that they will demonstrate a high
level of organizational commitment. The first two aspects of integration are unlikely to be
achieved unless they are actively managed by top and middle managers within an organization.
Equally, the third aspect of integration emphasizes the importance of line managers in potentially
transforming the espoused policies of an organization into “theory in use”. Any resistance on the
part of an organization’s line managers will dilute, if not undermine, attempts to translate policy
into practice.
Purcell (1995) presents a two-level integration of HRM into the business strategy – ‘upstream or
first-order decisions’ and ‘downstream or second-order decisions’: First-order decisions, as the
name suggests, mainly address issues at the organizational mission level and vision statement;
these emphasize where the business is going, what sort of actions are needed to guide a future
course, and broad HR-oriented issues that will have an impact in the long term. Second-order
decisions deal with scenario planning at both strategic and divisional levels. These are also
related to hardcore HR policies linked to each core HR function (such as recruitment, selection,
development, communication).
Guest (1987) proposes integration at three levels: (1) First he emphasizes a ‘fit’ between HR
policies and business strategy, (2) Second, he talks about the principle of ‘complementary’
(mutuality) of employment practices aimed at generating employee commitment, flexibility,
improved quality and internal coherence between HR functions, and (3) Third, he propagates
‘internalization’ of the importance of integration of HRM and business strategies by the line
managers.
Bratton and Gold (2007) describe the concept of integration in three aspects: (1) the linking of
HR policies and practices with the strategic management process of the organization; (2) the
internalization of the importance of HR on the part of line managers; and (3) the integration of
the workforce into the organization to foster commitment or an identity of interest with the
strategic goals. Emphasizing integration as a key concept in modern HRM theory, Robbins
(1998) identified four aspects of integration in the theory of HRM: (1) integration among HR
practices, (2) integration between HR systems and other systems within the organization, (3)
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integration between HR systems and business strategy of the organization, and (4) integration
between the HR system and the organization’s environment.
Baron and Kreps (2005) classify the concept of integrations into four different categories as
internal fit, organizational fit, strategic fit, and environmental fit. Internal fit involves the
consistency among the HR policies and practices within an organization for a single employee,
among employees, and temporally for a single employee and among employees. Strategic fit
involves the integration between the organization’s HR systems and the business strategy.
Organizational fit is the fit between the HR systems and other systems within the organization.
Environmental fit involves the HR systems integration to the environment in which the
organization is working. With this regard, the HR systems must fit to the social, political, legal,
technological, economic, and demographic environment of the organization.
A variety of authors have claimed that integration between business strategy and HRM practices
is an important component in the success of organizations. Some of the benefits include that (1)
it generates more diverse solutions to complex organizational problems; (2) it ensures
consideration of HR in organizational goal-setting processes; (3) it ensures consideration of HR
in assessment of organization’s abilities to accomplish goals and implement strategies; (3)
reciprocity in integrating HR and strategic concerns limits the subordination of strategic
considerations to HR preferences and the neglect of HR as a vital source of organizational
competence and competitive advantage; and it facilitates concurrent consideration of strategic
plans and managerial succession.
An important issue for top decision-makers is how to evaluate the extent to which strategic
integration is practised in their organisations. The level of integration of HRM into the corporate
strategy can be evaluated by a number of criteria which include representation of HR managers
on the board; the presence of a written HR strategy; involvement of HR managers in the
formulation of corporate strategy. The strategy and HRM linkage is affected by a number of
influences, including environmental factors such as intense competition, which often requires
productivity enhancements and workforce downsizing; technological change, which requires
different employee skills; and changes in the composition of the workforce.
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A large survey by Abraraw (2015) in 156 large business organizations in Ethiopia revealed a
moderate level of HRM and business/corporate strategy integration in large business
organizations in Ethiopia. Typically, in large business organization in Ethiopia, the HRM
Department is located at the top level in the organization structure, allowing HR Directors to be
members of the senior management team. To a moderate extent, HR Directors participate in the
strategy formulation process. However, the level of integration varies across sector, nature of
ownership, and scope of operation.
Manufacturing organizations are typically low integrated while service providers are high. This,
to some extent, could be explained by the difference between the two sectors in direct employee-
customer contact and product intangibility. The intangibility nature of services makes direct
monitoring of performance by supervisors difficult leaving employees trusted to monitor their
own performance. Customers’ active involvement in the service provision process makes service
providers sensitive to customers' needs, monitor these needs, and use the cues they receive from
customers to guide their job behaviors. Due to these characteristics, service organizations are
more likely to integrate their HRM to business/corporate strategy than manufacturing
organizations. Public organizations are typically high integrated while private organizations are
low. Public organizations in Ethiopia are relatively large in size and have been in operation for
longer year than private organizations.
Scope of operation, classified into multinational and local, has a difference in the level of
strategic integration. Multinational organizations to a great extent are high integrated while local
organizations are low integrated. The influence of parent companies’ practices and their
international experiences could explain the variation. This finding is consistent with Wasbeek’s
(2004) contention that while multinational companies working in Ethiopia have written HR
strategy that is an indicator of strategic integration of HRM, local companies do not have; and
Sheehan’s (2005) conclusion that multinational organizations are more likely to promote SHRM
approaches than local organizations.
Overall, an average number of HR Directors has a seat in the senior management team; and some
senior managers see HR integral in the strategy making process; it is too early to suggest that
integration of HRM to business strategy has become a widespread national phenomenon in
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Ethiopia. However, it is keeping recognized to some extent due to the pressures of the economic
environment and the realization of the importance of HR to the success of the organization by the
management. As is common in many Western Europe and Asian organizations, the HRM
function derives its direction from the corporate plans, instead of really influencing these plans.
The level of integration of HRM to business/corporate strategy can be predicted by top

management support, HR professionals’ capability, HRM budget, HR Director’s involvement in
key decisions, and relative HR Department size. These relationships are further discussed as
follows: (1) The influence of top management on HR practices is acknowledged by most writers,
even if only to the extent of advising that top managements support should be present in
designing and implementing HR policies. Top management is the most powerful force to adopt
SHRM. Their values and skills in regard to HRM affect the adoption of HRM. The power they
have on the resources, their attitude towards HRM, their HR related skills and knowledge, and
their priorities in decision making have significant influence on strategic integration of HRM. (2)
Organizations that greatly involve HR directors in key strategic decisions have high level of
strategic integration. Involvement in strategic decisions of an organization provides HR
Directors the overall picture of the organization, creates an opportunity to make line managers
aware about HR, involves them in strategy formulation, makes strategy implement easy, which
all are important ingredients of strategic integration of HRM. (3) Organizations that assigned
sufficient amount of budget for HRM have high level of HRM – business strategy integration.
The amount of money allocated to HRM has a direct impact on HR practices. Shortage of HRM
budget limits the function’s activities on integrating HRM to business/corporate strategy. (4)
Strategic integration of HRM is determined by the capability of the HR professionals. HR staffs
are often involved in the decision making process about HR policies and practices. A highly
professional HR staff can help improve commitment and achieve excellence in the HR
department. Capable HR professionals run HRM activities effectively and efficiently, train line
managers in HR issues, develop cybernetic HR systems and procedures, perform beyond routine
administrative activities, and see the interrelatedness of organizational systems, which in turn
contribute to strategic integration of HRM to business strategy. (5) HR Department size in an
organization influences strategic integration of HRM to corporate/business strategy the fact that
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when there is sufficient number of HR staff to run HRM activities, it is likely that the HR
Director is engaged in strategic issues as he/she is relieved from operational HR activities.
In sum, supporting and encouraging HRM efforts by the top management, involving HR
Directors in key strategic decisions, developing and maintaining capable HR specialists,
allocating sufficient amount of budget for HRM, and recruiting the right number of employees in
the HR Department are important predictors of strategic integration of HRM to
business/corporate strategy.
Activity 6.1. Explain the level integration of HRM into the business strategy from the
perspective of first-order decisions and second-order decisions.
_____________________________________________________________________________
_____________________________________________________________________________
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6.3. CONSISTENCY OF HRM PRACTICES
HRM practices’ internal consistency is a key concept in the SHRM theory. The field of SHRM
focuses on developing internally consistent HRM practices to build employees’ knowledge,
skills, and abilities in an effort to support competitive strategies and achieve business objectives.
As discussed in chapter 1, SHRM is defined as the process of designing and implementing a set
of internally consistent policies and practices to ensure that firm HR contribute to achieving
business objectives.
The term ‘internal’ is usually prefixed because it deals with the individual HR practices within
the whole HR system of the organization. Internal consistency of HR practices refers to the
degree to which all HR practices of a SHRM system are consistent and complementary. To put
it differently, it means that HR practices of an organization fit together so that they make a
coherent whole; are mutually reinforcing; and are applied consistently. Consistency is aimed at
achieving a coherent approach to managing HR, in a manner that the various practices are
mutually supportive.
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The idea of internal consistency of HR is built in the “HRM system approach’ of the HRM
theory. An HR system is defined as a coherent and consistent set of HR practices that combined
together results in higher organizational performance than the sum of the effects of using each
HR practice separately. The underlying idea of the HR system approach is that linking HR
practices to each other strengthens the HR strategy and philosophy of an organization. For
example, recruitment and selection can be used to signal the type of desired new employees in
terms of their qualities and attitudes. After the selection process, the newcomers can be
socialized in a way that fits the organization’s strategy and culture. The socialization process can
be strengthened by firm specific training and a reward system that matches the strategy.
However, misfits between HR practices (deadly combinations) represent combination of HR

practices that affect each other negatively. For example, the application of team-work negatively
fits to individual performance reward practice. This agrees with the systems theory which states
that the simultaneous action of different parts of an open system functioning in a harmonious and
integrated manner produces more total effect than the sum of the separated effort of individual
parts.
According to Baron and Kreps (2005), there are at least three aspects of internal consistency that
are important and interrelated through their rationales: single-employee, among-employees, and
temporal consistency. (1) Single-employee consistency emphasizes that the different pieces of
HR policy that bear on a single employee should be consistent with one another. The different
pieces of the overall HR system are the practices that bear on individual employees, which
include recruitment, compensation, performance appraisal, promotion, training, etc. For
example, policies that emphasize extensive and expensive training should be complemented by
compensation, promotion, and recruitment policies that reduce turnover. (2) Among-employees
consistency emphasizes that the treatment of different workers should, at least over some span,
be consistent. It is about consistent and similar treatment of different but similarly-situated
employees within the organization. (3) Temporal consistency stresses that the HRM philosophy
and premises of the organization should demonstrate some degree of temporal consistency or
continuity. How an employee is treated today should not differ radically from how he/she was
treated yesterday.
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Consistency among HR practices is the most relevant consistency dimension because the whole
of HR practices ‘can be more than the sum of the parts’. Individual HR practices have limited
ability to generate competitive advantage in isolation of other synergetic practices. Their
consistency and complementarity enhances bottom-line, competitiveness, and performance.
Researchers argue that a set of properly arranged HR practices can have a positive impact on a
firm performance when they are properly implemented.
Baron and Kreps (2005) also state that there are at least five benefits of internally consistent
SHRM systems: First, the different HR practices are technically interdependent. For example, a
firm choosing to invest heavily in training its employees will see increased value in careful
screening of applicants and in practices that are intended to decrease turnover. When on the job
training accumulates over a period of years, practices that reward seniority makes sense. When
the firm employees informal training, provided by more senior workers to their more junior
colleagues, seniority-based rewards also help by putting senior workers at no disadvantage when
they share their knowledge. If these activities are not consistent to each other, that is, if they are
not sending the same messages about what is expected and rewarded, the organization is likely to
be an aggregation of people pulling in different directions. This is hardly a situation for the
successful implementation of strategic business needs. Second, since in consistency, everything
follows the same basic principles, it aids in the learning process that individuals must undertake,
to understand what is expected of them and what they can expect in turn. Third, consistency
aids social learning in the organization. It is easier, to mold individual’s tastes and expectations
when the organization’s practices consistently mimic previously internalized patterns of
relationships in other contexts. It aids learning in the sense of social norms.
Forth, consistency in HR practices allows for better initial matching of the employees to work
settings that result in reduced turnover costs. Since consistency promotes understanding,
prospective employees are better able to comprehend at the outset what they are getting
themselves into. Moreover, to the extent that there are correlations among the preferences of a
given worker, then clusters of HR practices that are consistent in matching those correlations will
achieve better matches. In addition, individual may have a taste for co-workers who have the
same preferences they do and consistent HR practices, in so far as they lead to a workforce that
is homogeneous in terms of such preferences, may promote teamwork and worker cohesion.
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Finally, among-employee consistency diffuses invidious social comparisons and feelings of
distributive injustice. People tend to resent it when someone just-like-them receives significantly
different treatment, apparently for no good reason.
According to Greer (1995), management awareness, management of the function, portfolio of

programs, HR skills, information technology, and awareness of the environment are strategic
components of HRM relevant to consistent HR policies and practices. Management awareness
ranges from a focus on administrative needs, such as hiring and firing, to a full integration of HR
considerations in all management decision making. Management of the function includes the
structure of the HR function and the planning, allocation, and control of its resources which may
vary from very loose through matrixed and decentralized. Portfolio of programs ranges from
simple salary administration and record-keeping programs to very complex and sophisticated
flexible compensation, environmental scanning, and long-range planning programs. HR
professionals need appropriate skills. Basic programs and simple information systems require
basic skills. Information technology ranges from manual record keeping to sophisticated
distributed systems with modeling capabilities.
In Ethiopia, as studied by Abraraw (2015) in 156 large business organizations, there is a

moderate level of HRM practices’ internal consistency. The different parts of the HR system
that bear on individual employees (single-employee consistency) are moderately complementary
to each other. This average level of single-employee consistency is evidenced by low level of
linkage between HRM activities and long term HR vision. In the absence of long term HR
strategy, linking HRM activities to long term HR vision is ridiculous. Moreover, the HRM sub-
area managers’ cooperative work is little and do not have frequent information sharing culture.
In the among-employee consistency aspect of HRM consistency, that is, the treatment of the
different but similarly situated employees in the organization, there is low level of consistency,
which agrees with Wasbeek’s (2004) assertion that ‘[n]epotism was widely practiced in Ethiopia,
because Ethiopians generally mistrust people from other in-groups.’ He also added that at the
local case-study companies ‘the promotion process was informal and nepotism was very
common. … [I]t was likely that relatives or friends of top or higher organizational level
employees would fill the function when a vacancy at top, higher or middle organizational level
came up.’ In the third aspect - temporal consistency - there is low level of continuity or
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consistency in the HRM philosophy and premises of the organizations over time. Many changes
that influence organizations and HRM were made in the policy environment in the past a few
years in Ethiopia. The privatization of state-owned organizations had, and still has, impact on
HRM philosophy as it depends on the acquirers’ views. The introduction of best management
practices, such as management by objective, business process re-engineering, balanced score
card, and kaizen, within the past fifteen years time, is an indicator of the presence of unstable
organizational policy and HRM premises. Because of these and other frequent changes in the
organizations, there was no stable expectation by employees about HR related decisions and
about their roles and norms. However, there is no significant difference in the level of HRM
practices’ internal consistency between manufacturing and service, local and multinational, and
private and public organizations.
In regard to the factors that determined the level of HR consistency, Abraraw (2015) identified
that organizations (1) with relatively capable HR professionals are more classified into the high
consistent group than those with less capable HR professionals; (2) that involve HR directors in
key organizational decisions are more classified into the high consistent group than those that
does not involve; (3) with high top management support for HR are more classified into the high
level of internal consistency group than those with less top management support; (4) that allocate
sufficient amount of budget for the HRM department to run its various activities are more
classified into the high consistent group, and (5) working in intense competition are more
classified into high consistent group than those working with less competitive environment.
Intensity of competition in an industry affects a company's ability to recruit qualified workers,
and develop and maintain existing qualified workforce.
Activity 6.2. What factors determine the level of consistency of HRM policies? Explain
the influence of each factor.
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6.4. DEVOLVEMENT OF HRM TO LINE MANGEMENT
The locus of responsibility for HR management no longer resides with specialist managers but is
now assumed by senior line management. The HR Director’s role is to support line managers
with advice on the HR aspects of their roles, such as the disciplining of staff in a way which is
consistent with the organization’s discipline policy and procedure; thus, the principle of
devolving HR responsibility to line management. Devolvement of HRM activities to line
managers is gaining an increasing recognition in the SHRM literature. Specially, the Western
conception of SHRM focuses on its importance for organizational and HR effectiveness.
Devolvement is the degree to which HRM practices involve and give responsibility to line
managers rather than HR specialists. It is about the extent to which line managers are involved in
and have primary responsibility to certain HR practices. According to proponents of the concept,
devolvement makes line managers responsible for the management of the HR of their unit.
Responsibility for designing the formal policies for managing employee behaviors lies with HR
professionals, while responsibility for implementing those policies lies with supervisors and
managers.
With the closer link between strategy and HR, line managers are given a primary responsibility
for HR. It is argued that within the major areas of HRM, the line manager needs to be aware of
the synergy between human, financial and physical resources. For a line manager, allocating
time, money and energy to the development of subordinate staff is an investment in enhanced
effectiveness and future success; and there is no way this responsibility can be picked up by the
HR manager.
Devolvement is driven by both organizational and effectiveness criteria. On the basis of

organizational criterion, it is now broadly believed that responsibilities should be located at
appropriate places within the organization and that means, increasingly, with line management
rather than specialist functions. For most organizations the most expensive item of operating
costs is the employees. Hence, in cost or profit centre based organizations, there is pressure to
include the management of the HR in line management responsibilities. On the basis of
effectiveness criterion, it is only by motivating and committing the workforce that value can be
added to other resources. It is line managers, not specialist staff functions, who are in frequent,
often constant, contact with employees. For most employees it is their immediate superiors who
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represent the management of the company. Providing these managers with the authority and
responsibility to control and reward their employees makes them more effective people
managers.
Obviously, the responsibility to ensure that the strategic vision of the organization is enacted on a
day-to-day basis is on the line managers. Simultaneously, the organizations’ HR are the most
important resources to achieve the organizations’ visions. Hence, to achieve the strategic vision
of the organization, line managers need to have the authority and responsibility on HRM
decision-making, which requires both a devolvement of power on behalf of a central HR
function and an increase in the skills and understanding of the line managers with respect to HR
activities.
As evidenced from the literature, the issue of devolvement has got great recognition due to the
increasingly competitive business environment, which led to large-scale restructuring in
organizations. As a result, line managers have been given primary responsibility for HRM.
Studies in the area describe the following as rationale for devolving HRM activities to line
management: (1) certain issues are too complex for top management to comprehend; (2) local
managers are able to respond more quickly to local problems and conditions; (3) it results in
motivating employees and effective control, as line managers are in constant contact with
employees; (4) it helps to prepare future managers (by allowing middle managers to practice
decision-making skills); and (5) it helps to reduce costs.
Moreover, most of the criticisms for lack of contribution by HR specialists to organizational

performance and related issues frequently come from line managers. There are four critics that
line managers pose on HR. First, HR specialists’ decisions are based on principles that have
little relevance for competitive prospects. Second, they constrain the autonomy of managers to
make decisions that they feel are in the best interests of the business. Third, they are
unresponsive and slow to act, always wanting to check options thoroughly rather than pursuing a
series of actions and not worrying about the consequences until later. Finally, they propagate
policies that may be fine in theory but hard to put into effect, or inappropriate for their particular
workplace. These criticisms provide a convenient rationale for line managers to take even greater
responsibility for people management activities. Because line managers operate at the workplace
alongside the people they manage, it is suggested that their reactions can be more immediate and
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appropriate. Moreover, their solutions are more likely to tie in with business realities and,
therefore, contribute more overtly to organizational goals and performance. Having ultimate
responsibility may also enhance line management ownership of these issues, and so increase
their commitment to integrating HR with other objectives.
More difficult in the concept of devolvement is its measurement. The level of devolvement can
be measured by the extent to which line managers are involved in certain HR practices; the
number of HR specialists for the total number of employees; and the degree to which line
managers are trained to undertake HR related responsibilities as indictors of devolvement of HR
to line management. On the first issue, not only line managers’ involvement but also their
primary responsibilities for pay, recruitment, training, industrial relations, health and safety and
expansion/reduction decisions are the measures of devolvement. On the second issue, proportion
of HR specialists to total number of employees, the rationale is that the more HR specialists
employed in a central staff function, the less devolvement there is of HRM to line managers. On
the third issue, the more the line managers are trained on HR, the more responsibility they
assume and the better they handle the HR. High devolvement is achieved by delivering authority
and responsibility for HR activities to line management..
However, devolvement of HRM activities to line managers is among the key debatable issues in
the SHRM theory. On the one hand, it is argued that HR resides properly with the people
directly responsible for supervising staff whose primary purpose is to manufacture products, sell
goods, or provide a service. While there might be problems ensuring that these line managers
have sufficient knowledge and skills to supervise staff effectively and consistently, it is
nevertheless maintained that these individuals are in the best position to adopt the most
appropriate HR styles and practices. On the other hand, there are claims that effective HRM
cannot be delivered by line managers whose primary responsibilities lie elsewhere. Under this
situation, it is argued that line managers are bound to need continuous and systematic support
and training from HR specialists to ensure that they do not make mistakes that can be costly at a
later date.
In Ethiopia, there is low level of HRM responsibilities’ devolution to line managers (Abraraw,
2015). While HRM specialists have higher level of sole responsibility for decisions over labor
relations, employee health, security and safety, employee placement, recruitment, training and
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development, compensation, and reward; line managers have a higher level of sole responsibility
for decisions over executing employee performance appraisal and designing job role. However,
all of the responsibilities for HR practices are jointly held by HR specialists and line managers in
consultation with each other. Though it is rare for either party to take major decisions alone in
these HR activities, the primary responsibility lies on HRM specialists not on line managers,
which raises many alternative explanations. Low level of devolvement practice is supported by
the static administrative nature of the HRM Departments; the national cultures of maintaining the
status-quo, high risk avoidance, and low long term orientation; and the low level of
decentralization in Ethiopian organizations. In a decentralized structure, line managers take HR
and other functional responsibilities as it is costly to have a specialized unit for HR at the
business unit level.
The practice of shared responsibility by HR and line managers raises a question of ‘is it a step on
the way to SHRM or is it part of the traditional management responsibility’. The traditional
staffing function of management puts HR responsibility to the line management. For example,
employee motivation and communication and employee development are two of the five major
managerial responsibilities and managerial roles of liaison, leadership, and figurehead are
responsibilities of all managers. On the other hand, devolvement of HRM responsibility to line
managers is a principle of SHRM, which is unlikely for Ethiopian business as HR Departments
are traditional and line managers are less skilled. Thus, one possible explanation for shared
responsibility could be ignorance of the importance of HR in the organization’s success. The
opposing explanation is that shared responsibility resulted from strategic choice, that is, in
response to global and domestic competition. In reality, it is joint responsibility, not full
devolvement, that large business organizations are practicing, suggesting that HR specialists in
Ethiopia continue to move more towards a partnership approach than a truly devolved approach.
Moreover, though essentially both line and HR managers are responsible for HR, line managers’
responsibility is in their areas while HR specialists’ responsibilities are across the organization.
Primary responsibility for policy framework lies on HR managers with senior management
team’s approval in which the HR director is a member. Making HR decisions based on the policy
framework could be any line manager’s responsibility in consultation with the HR specialists.
Thus, there is no devolved rather shared HR responsibility in large business organizations in
Ethiopia. As argued by Larsen and Brewster’s (2003) ‘if HRM is to be taken seriously, HR
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managers must give it away’. However, encouraging line managers to take responsibility for the
HRM aspects of their job is in many organizations one of the key challenges that face HR
specialists the fact that line managers perceive that if HRM is to be taken seriously, HR
specialists must take full responsibility which resulted low level of devolvement.
The level of devolvement of HRM responsibilities to line management in large business

organizations in Ethiopia can be predicted by HRM budget, relative HR Department size,
relative organization size, HR Director’s involvement in key decisions, and intensity of industry
competition. (1) HRM budget and devolvement of HRM responsibility to line managers have
strong positive relationship. Organizations with sufficient HRM budget, as perceived by the HR
directors, are more classified into the high devolved group than those with a relatively
insufficient HRM budget. (2) Organizations with relatively large number of HR staff are more
classified into the high devolved group than those with smaller sizes. This contradicts with the
obvious fact that assigning more HRM responsibility to line managers allows the organization to
reduce the size of the HR Department through reduced workload. (3) Business organizations
with high HR Directors’ involvement in key decisions are more classified into high devolved
group than organizations with less HR Directors’ involvement. (4) Organization size has
conflicting implications on devolvement of HRM responsibility to line management. First, in
small organizations, not in the scope of this research, there are no HR specialists and all HRM
activities are the responsibilities of the line managers. As the organization size increases,
employee management and employee relations become complex and HR specialists that handle
HR issues are employed. Second, when organizations are becoming large, decentralization is an
option for administrative efficiency and proper management of the resources, which results in
devolving HR to the line where they are physically located. (5) Large business organizations
with relatively intense industry competition are more classified into high devolved category than
those with less industry competition. In other words, line managers have higher HR
responsibility in organizations with intense industry competition.
Activity 6.3. What is the rationale for devolving HRM activities to line management?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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6.5. HIGH EMPLOYEE COMMITMENT
There is stress on commitment and the exercise of initiative, with managers now assuming the
role of ‘enabler’, ‘empowerer’ and ‘facilitator’. The concept of a ‘high commitment work
system’, which is aimed at eliciting a commitment so that behavior is primarily self-regulated
rather than controlled by sanctions and pressures external to the individual and relations within
the organization are based on high levels of trust. Commitment is the strength of an individual's
identification with, and involvement in, a particular organization. SHRM seeks employees’
commitment to organizational goals. It is about gaining the ‘hearts and minds’ of employees
through involvement, communications and other methods of developing a high-commitment,
high-trust organization. Employee commitment is sought with the expectation that effectiveness
will follow as second-order consequences. A model that assumes low employee commitment and
that is designed to produce reliable if not outstanding performance simply cannot match the
standards of excellence set by world-class competitors. Thus, managers have a choice between a
strategy based on imposing control and a strategy based on eliciting commitment. This
commitment will be generated if employees are trusted, if they are trained and developed, and if
they are allowed to work autonomously and have control over their work.
Employee commitment is important because high levels of commitment lead to several favorable
organizational outcomes. It reflects the extent to which employee’s identify with an organization
and is committed to its goals. The commitment of employees is an important issue because it
may be used to predict employee’s performance, absenteeism and other behaviors. The
organizational commitment is the subset of employee commitment, which comprised to work
commitment, career commitment and organizational commitment and also added greater the
organizational commitment can aid higher productivity. Organizational commitment leads to
positive organizational outcomes. Job satisfaction has the highest impact on high employees’
commitment and productivity. There is a positive correlation between organizational
commitment and job performance. Low commitment has also been associated with low levels of
morale non-committed employees may depict the organization in negative terms to outsiders
thereby inhibiting the organization’s ability to recruit high-quality employees and decreased
measures of altruism and compliance. Some study examines the relationship of commitment with
various factors.
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Employee commitment is also positively related to personal characteristics such as age, length of
service in a particular organization, and marital status and has inverse relation to the employee’s
level of education. In addition, commitment has been found to be related to such job
characteristics as task autonomy and job challenge and certain work experiences such as job
security, promotion opportunities, training and mentoring opportunities, and supportive and
considerate leadership. In the past research it has been discussed that organization commitment
will lead to behavioral outcomes: lower turnover and higher performance. Highly committed
employee should have a weak intention to quit.
Employees who are committed to their respective organization are more likely not only to remain
with the organization but are also likely to exert more efforts on behalf of the organization and
work towards its success and therefore are also likely to exhibit better performance that the
uncommitted employees. Employee commitment can benefit organization in a number of ways
such as it can improve performance; reduced absenteeism, and turnover thereby resulting in
sustained productivity. Commitment to organization is positively related to such desirable
outcomes as motivation and attendance and is negatively related to outcome as absenteeism and
turnover. Employees with high level of organizational commitment provide a secure and stable
workforce and thus providing competitive advantage to the organization. The committed
employee has been found to be more creative; they are less likely to leave an organization than
those who are uncommitted. A committed employee is perceived to be one who stays with the
organization even in turbulent times, attends work regularly, and protects company’s assets and
goal. Therefore, it is evident that for sustained productivity, employee commitment is an
important factor. With this in mind, employee commitment should be viewed as a business
necessity. Organizations who have difficulty in retaining and replacing competent employees
will find it hard to optimize performance.
6.5.1. TYPES OF COMMITMENT
We might think of commitment simply in terms of feelings of obligation or emotional

attachment. However, in the last 15 years or so, a growing consensus has emerged that
commitment should be viewed as a multidimensional construct. Allen and Meyer (1990)
developed an early model that has received considerable attention. The three-component model
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they advocated was based on their observation that existing definitions of commitment at that
time reflected at least three distinct themes: an affective emotional attachment towards an
organization (Affective Commitment); the recognition of costs associated with leaving an
organization (Continuance Commitment); and a moral obligation to remain with an organization
(Normative Commitment).
One important point is that not all forms of employee commitment are positively associated with
superior performance. For example, an employee who has low affective and normative
commitment, but who has high continuance commitment is unlikely to yield performance
benefits. The main reason such an employee remains with an organization is for the negative
reason that the costs associated with leaving are too great.
In more recent years, this typology has been further explored and refined to consider the extent
to which the social environment created by the organization makes employees feel incorporated,
and gives them a sense of identity. A review of the commitment literature produces five general
factors which relate to the development of employee commitment: (1) Affiliative Commitment:
An organization’s interests and values are compatible with those of the employee, and the
employee feels accepted by the social environment of the organization. (2) Associative
Commitment: Organizational membership increases employees’ self-esteem and status. The
employee feels privileged to be associated with the organization. (3) Moral Commitment:
Employees perceive the organization to be on their side and the organization evokes a sense of
mutual obligation in which both the organization and the employee feel a sense of responsibility
to each other. This type of commitment is also frequently referred to in the literature as
Normative Commitment. (4) Affective commitment: Employees derive satisfaction from their
work and their colleagues, and their work environment is supportive of that satisfaction. Some
researchers suggest that this is the most important form of commitment as it has the most
potential benefits for organizations. Employees who have high affective commitment are those
who will go beyond the call of duty for the good of the organization. In recent literature this form
of commitment has also been referred to as ‘engagement’ and is the form of commitment that is
most usually measured by organizations. (5) Structural commitment: Employees believe they
are involved in a fair economic exchange in which they benefit from the relationship in material
ways.
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6.5.2. ANTECEDENTS OF COMMITMENT
Demographics, recruitment procedures, met expectations, induction and training, relationships

with managers, relationships with colleagues, group membership, and organizational justice and
trust are the major antecedents of commitment.
Demographics: A range of demographic variables have been found to be related to employee

commitment. For a variety of reasons, age has been found to be a positive predictor of employee
commitment. The older employees become, the less alternative employment options are
available. As a result, older employees may view their current employment more favorably. In
addition, older employees may be more committed because they have a stronger investment and
greater history with their organization. With regard to gender, a number of studies have reported
women as being more committed than men. This is typically explained by women having to
overcome more barriers than men to get to their position in the organization. Marital status has
also been shown to relate to commitment, with married employees usually showing more
commitment. However, it is suggested that the reason for this is because married employees will
typically have greater financial and family responsibilities, which increases their need to remain
with the organization.
Recruitment Procedures: Organizations need to pay more attention to addressing employees’

social need to affiliate and belong. Employees want to be in environments that make them feel
comfortable. Organizations have goals and values, and people recruited by the organization
should share these. The argument here is that in order to create commitment, the organization
must have the right sort of employees in the first instance. Employees’ feelings of belonging start
to develop long before employees join the organization. There are several things organizations
can do to make employees feel welcomed and valued as the recruitment and selection process
develops: (1) share details about the organization; (2) provide employees with help and support
throughout the recruitment and selection process, and (3) convey the interests and values that the
organization shares with employees.
Met Expectations: Employees will be more committed if there is a good match between what
the person is looking for in a job and what the job provides. A related notion is that commitment
will be greater when employees’ experiences on the job match their pre-entry expectations.
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Unmet expectations are commonly cited as a cause of dissatisfaction. Such expectations usually
relate to the type of work employees are given to do and the opportunities they receive for
training and development. With this in mind, realistic job previews (giving candidates real
experience of what the job is like) can be very useful.
Induction and Training: Several studies have demonstrated a link between early job
experiences and commitment. The induction program should be the final step of the recruitment
and selection process. A good induction program will make new employees more familiar with
and more at ease within the organization. Employees enter the organization with an assumption
of compatibility and should be welcomed. This will make new recruits more likely to be
receptive to feedback and other interventions that encourage social integration. Training is also
an important part of the induction process. Although commitment is not necessarily the intended,
or at least most obvious, objective of training, it can nevertheless be influenced in the process.
Relationships with Managers: This refers to how the quality of the relationship between
managers and their employees relates to the development of commitment. Several studies have
found that employees who have good relationships with their immediate managers have greater
commitment. Similarly, CIPD (2001) concluded that a good relationship between managers and
employees is one of the most important factors affecting motivation at work. Employees’
commitment reflects their day to day contacts with their line managers about their job, and the
way in which objective targets are set. Effective communication on job-related issues is a key
ingredient in securing individual performance. To a great extent, individual line managers are
responsible for ensuring that these maintenance behaviors occur.
Relationships with Colleagues: Although emotional attachment to colleagues in the workplace

is an important element of commitment, it is not enough on its own. This important aspect,
however, must not be neglected but maintained through frequent, pleasurable contact with peers.
Unless there is occasion for frequent and rewarding interaction, stronger feelings of belonging
that can bind employees to the organization are unlikely to emerge. Organizations that want to
build high levels of commitment should look for ways to build this through group activities both
in and out of work.
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Group Membership: To build commitment, being a member of a particular organization must
not only satisfy employees’ social need to affiliate and belong, but must also create a sense of
collective identity that differentiates the group from other organizations. There are two ways to
achieve this: (1) establish a social boundary that indicates that an identifiable collection of people
or unit exists; and (2) The group must assume some evaluative meaning, that is the group has to
offer something that the employer wants or needs.
Organizational Justice and Trust: It is also argued that employees evaluate their experiences at
work in terms of whether they are fair and reflect a concern on the part of the organization for
the well-being of the employees. Research findings suggest that employees’ commitment to the
organization might be shaped, in part, by their perception of how fairly they are treated by the
organization. It is suggested in the literature that by treating them fairly, organizations
communicate their commitment to employees. This suggests that organizations wanting to foster
greater commitment from their employees must first provide evidence of their commitment to
their employees. Organizational justice also has links with the concept of trust.
Trust in an organization can promote the acceptance of organizational initiatives. When there is
trust, employees are willing to suspend judgment and defer to the authority of others. In addition,
trust permits organizational flexibility because a payback need be neither immediate nor of
equivalent value. There are four areas in which employees’ sense of trust in the employer can be
increased: (1) Growth: As most employees want to be more proficient in their job, a good way
to instill trust is to attend to employees’ development needs; (2) Work-Life balance: Most
employees would like organizations to allow greater personal time when needed; (3) Individual
accommodation: Acts of organizational flexibility or benevolence toward employees; and (4)
Health and Safety: Organizations that are committed to protecting employees’ health and safety
are more likely to be trusted. In summary, people stay in relationships to the extent that they are
uniquely dependent on them relative to the alternatives. The more attractive the alternatives and
the lower the termination costs, the less people are reliant on the existing relationship for the
source of their satisfaction.
Activity 6.4. Which of the determinants of employee commitment discussed above is more
realistic for you? Why?
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______________________________________________________________________________
______________________________________________________________________________
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6.6. HIGH QUALITY EMPLOYEES AND INTERNAL PRACTICES
One of the principles of SHRM identified by Guest (1987) is high-quality staff and internal
practices to achieve high-quality products. “High-quality employees” refers to issues of
workplace learning and the need for the organization to have an able, qualified and skillful
workforce to produce high-quality services and products.
As we have discussed in chapter 1, SHRM is defined as the comprehensive set of managerial

activities and tasks related to developing and maintaining a qualified workforce. This workforce
contributes to organizational effectiveness, as defined by the organization’s strategic goals. As
stated in chapter one, the fundamental aim of SHRM is to generate strategic capability by
ensuring that the organization has the skilled, engaged and well-motivated employees it needs to
achieve sustained competitive advantage. In accordance with the resource-based view as
described before, the strategic goal will be to ‘create firms which are more intelligent and
flexible than their competitors’ by hiring and developing more talented staff and by extending
their skills base.
HR is conceptualized as the total knowledge, skills, creative abilities, talents, and aptitudes of an
organization’s workforce as well as the values, attitudes, and beliefs of the individuals involved,
and HRM is the art of procuring, developing, and maintaining competent workforce to achieve
organizational goals in an effective and efficient manner. Therefore, organizations with high
quality staff in these aspects of HR and that manage them in the most efficient and effective
manner are strategic. Thus, the principle of SHRM is not only hiring and maintaining shire
number of people rather acquiring, developing, and maintaining highly skilled and qualified
people and developing internal processing in such a way that best satisfies the
customers’/clients’ needs.
One of the most critical issues that we face in the 21st century is that technology is currently
outstripping our ability to use it. In other words, we are creating computers and other
technological systems that we can’t figure out how to use as quickly as they are created.
Computers get faster and faster, but the human beings who have to use them don’t. What does
this mean to a business? It means that if we (the people in the organization) can figure out ways
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to take advantage of the technology better and quicker than our competitors, then we can create a
sustainable competitive advantage. Notice that we didn’t say that we create better technology—
that wouldn’t give us a sustainable advantage. Our competitors could just copy the technology in
one form or another once we designed it. We create the ability to continually figure out ways to
use the technology more successfully. So, as the technology changes, our people continually
figure out ways to take advantage of it before our competitors’ people do. This ability within our
people is the thing that creates a continuing advantage over competitors who either don’t have
people with as much knowledge and as many varied skill sets, or don’t have people who want to
assist the organization because they are not engaged and not satisfied.
Knowledge is precious in an organization. We never have enough knowledge. There is a

continuous shortage of knowledge workers for our organizations - those people with specialized
sets of knowledge that they can apply to the problems within our companies. They don’t work
with their hands; they work with their heads. In most countries of the world, too few knowledge
workers with too many knowledge jobs open and waiting for them. This means that for the
foreseeable future, we will have a shortage of knowledge workers in our organizations across the
globe. What does this mean to the organization’s HR Manager? It means that they are going to
be competing for talent with every other HR Manager in the world. If the organization has a
reputation as a difficult place to work, will the organization succeed in getting people to come to
work for them when they have so many other opportunities? Only if the organization manages
their human resources successfully and maintains a reasonable working environment will they
have any chance of filling most of the jobs that they have available.
Activity 6.5. High quality staff is necessary for an organization to produce

high-quality product. How an organization can secure high
quality staff? Explain.
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6.7. MANAGEMENT-EMPLOYEE RELATION
The focus in SHRM shifts from management–trade union relations to management–employee

relations, from collectivism to individualism. It emphasizes the importance of maintaining links
between the organization and individual employees in preference to operating through group and
representative systems. This has changed from a concentration upon the relationship between
management and trade unions to that between management and individual employees. This
sounds self-evident in the second half of the first decade of the twenty-first century. The decline
of trade union power and influence is well documented. Some of this decline may be attributed
to the way in which managers have sought to get ‘closer’ to their employees through such
initiatives as team briefing and other employee involvement techniques.
A commitment strategy attempts to forge a commonality of interest between the organization

(often symbolized by the management) and the employees. To develop that commonality of
interest, there is heavy emphasis on employee training and development, internal staffing and
career development, and compensation levels formulated on the basis of internal equity norms
rather than market rates.
This principle is composed of policies that promote mutuality: Mutual goals, mutual influence,
mutual respect, mutual rewards, and mutual responsibility. The theory is that policies of
mutuality will elicit commitment, which in turn will yield both better economic performance and
greater human development. It can be noted that one of the HRM policy goals was the
achievement of high commitment – ‘behavioral commitment to pursue agreed goals, and
attitudinal commitment reflected in a strong identification with the enterprise’. It was noted by
researchers that human resources ‘may be tapped most effectively by mutually consistent
policies that promote commitment and which, as a consequence, foster a willingness in
employees to act flexibly in the interests of the “adaptive organization’s pursuit of excellence’.
At the heart of the concept is the complete identification of employees with the aims and values
of the business. In addition, SHRM is individualistic in that it emphasizes the importance of
maintaining links between the organization and individual employees in preference to operating
through group and representative systems.
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Activity 6.6. Why is management-employee relationship more important than
management-trade union relationship?
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
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6.8. PEOPLE AS A STRATEGIC RESOURCE
Seeing the people of the organization as a ‘strategic resource’ for achieving competitive
advantage is one of the major principles of SHRM. This principle implies two important values.
The first is contained in the B&Q policy statement on employee recognition (see Box 8.1) and in
the list of values found to be prevalent among the organizations. It is the focus on customers in
order to gain competitive advantage. Such focus has not restricted itself to the private sector,
where one would expect to find the enterprise culture at its liveliest. There can hardly be a
school, hospital, social services department, university or college that has not in some way been
permeated by the language of enterprise. The re-conceptualization of employment, for many, has
found expression in the encouragement of competitiveness through small group working and
promoting individual accountability and responsibility through performance management
schemes. Moreover, they argue, customer-focus philosophy has generated the values of:
enhanced productivity, quality assurance, the fostering of innovation, and flexibility.
The second value enshrined in this principle is that of seeing the people of the organization as a
‘strategic resource’. This strikes at the heart of some of the earliest writing on HRM. It prompts
the question of whether employees are to be seen as human resources or resourceful humans. The
former term recalls Storey’s (1992) oft-quoted phrase that employees, when seen as human
resources, are seen as a ‘headcount resource’ and treated in as rational a way as ‘any other factor
of production’. On the other hand, when employees are treated as ‘resourceful humans’, the
emphasis is upon training and development, employee involvement and all the other HR
practices which are designed to optimize the potential of employees. In reality, of course, it is
rarely an either/or situation as both views can co-exist in any organization at the same time. A
major restructuring program can, at the same time, involve major redundancies and initiatives to
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invest in those employees who are seen as key to the success of the restructuring program.
Whichever view is adopted, and whether the emphasis is upon cost reduction or investment in
human capital, the human resource is an important part of the organization’s strategy.
Resource-based theory conceives of organizational resources as unique bundles that have the
power to give an organization a competitive advantage over others in the same industry or sphere
of operation. Uniqueness or heterogeneity is stressed over sameness or homogeneity. Barney’s
(1991) conception of the resources of an organization is widely drawn to include all of its
strategic assets. These include its organizational attributes, capabilities and knowledge, and the
processes (e.g. management decision-making) that it uses to make and implement strategy. More
specifically, Barney identifies three categories of resources: physical, human and organizational.
Of these, human resources are conceived in terms of the experience, knowledge and
understanding that managers and workers bring to the context of the organization. Grant (1991)
alternatively identifies six categories of resources: financial, physical, human, technological,
reputation and organizational. He recognizes that a number of these resources are intangible:
difficult to value in an accounting sense and yet vital to the performance and success of the
organization which has assembled and developed them.
Grant (1991) also discusses the important distinction between resources and capabilities.
Resources need to be brought together to form capabilities. However, a capability is more than
just a collection of resources: it requires coordination between the people involved and their
cooperation, and also coordination between people and other types of resources, in order to be
able to perform an activity. A capability may also be seen as a collection of organizational
routines, where those involved know and understand these routines and so are able to respond to
a situation in a familiar, competent and productive manner. The establishment of organizational
routines, and therefore capability, helps to demonstrate the link to competitive advantage. An
organization will develop a competitive advantage if it establishes routines or capabilities that
others have yet to understand or perfect. Sustaining a competitive advantage involves an
organization maintaining this lead over others despite their best efforts to catch up.
Expressed more dynamically, an organization may stay ahead of others and enjoy a sustained
competitive advantage by proving to be more effective in adapting its routines and capabilities or
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learning and developing new ones. Barney (1995) identifies the attributes that an organization’s
resources and capabilities must demonstrate in order to achieve sustained competitive
competitiv advantage.
These are shown in Figure 6.33.
Figure 6. 1 Attributes of resources and capabilities that lead to competitive advantage
The attributes described in Figure 6.3 provide a useful conceptualization to show, first, how
competitive advantage may be gained through an organization’s resources and capabilities and,
second, how this may be sustained in some cases or challenged and eroded in others. Resources
and capabilities need to be valuable and rare, as well as effectively
ively organized, to create a
situation of competitive advantage. For this to be sustained, resources and capabilities need to be
both imperfectly imitated and non-substitutable.
non substitutable. The literature identifies three possible reasons
for resource inimitability.
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1. The history and timing of the organization. Firms may enjoy the effects of a ‘resource
position barrier’: they benefit from being a ‘first mover’ in developing an effective resource
base which allows them to produce superior returns over other firms so long as they maintain
this resource advantage. An example of this may be the UK vacuum cleaner manufacturer
Dyson, which produced the first bagless vacuum cleaner. Valuable and rare resources by
definition will be limited and the argument is made that organizations which set up at the
time and place when these are developed should continue to benefit from the advantages that
accrue, where other potential competitors have to contend with barriers to entry and resource
position barriers.
2. Causal ambiguity. Basically, this is where the reasons for an organization’s competitive
advantage are not understood clearly by it or by its competitors. In such circumstances, it will
be difficult to know which resources and capabilities should be imitated to achieve similar
success. If an organization enjoying competitive advantage were able to analyze precisely
why it enjoyed this success, competitors would be able to entice away its best managers to
share their knowledge, just as top football teams persuade successful managers from smaller
clubs to join them. Situations of complexity may actually make it difficult for organizations
to analyze the reasons for their competitive advantage. In addition, much knowledge in an
organization is likely to remain tacitly in the heads of many different employees spread
throughout the organization.
3. Social complexity. The resources, capabilities and relationships in an organization are very
likely to be complex. While according to this reason it is possible to identify how success is
achieved, for example because of good intra-organizational and/or supplier–customer
relationships, the sheer complexity of these and other relevant factors would make it difficult
to replicate them elsewhere. For example, understanding and manipulating a competitor’s
organizational culture to replicate that of the organization enjoying competitive advantage
would be most unlikely in practice.
In summary, resources and capabilities that demonstrate the attributes mentioned above are seen
by resource-based theorists as the principal source of an organization’s competitive advantage.
However, not all organizational resources and capabilities will exhibit such attributes, even
within an organization that enjoys a competitive advantage, and we now consider in more depth
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the nature of the capabilities which do and differentiate them from those that do not and
emphasize how people can be a strategic resource of the organization.
Since resource-based theory sees resources and capabilities as the principal source of competitive
advantage, it may be seen as placing human resources in a central position to realize this. For
example, Barney (1991) includes ‘human capital resources’ as one of his three resource
categories and Grant (1991) ‘human resources’ as one of his six. For Grant, intangible resources,
including employee-based skills, are probably an organization’s most important strategic asset.
Leonard-Barton (1998) also includes employee skills and knowledge as one of her four
dimensions of core capability. Mueller (1996) takes an integrated view, seeing human resources
combined with other key strategic assets, such as product reputation, as the source of competitive
advantage. In either of these approaches, human resources in an organization can be seen as a
pool or stock of human capital, some of which may be linked directly to a situation of
competitive advantage.
However, no matter how strong the attributes and abilities in a human capital pool are, it is
unlikely that these will be harnessed without a range of coordinating interventions. Wright et al.
(1994) differentiate between the potential of human capital and its realization through
appropriate employee behaviors. The achievement of valuable outcomes in the case of human
resources who offer supplemental or enabling capabilities, or competitive advantage in the case
of human resources who are part of an organization’s core capability, stems from the ways in
which these resources are coordinated, developed and treated (cooperation was recognized
earlier as being necessary) as well as integrated with other organizational resources. This
indicates that the management of human resources in general terms is vital and provides a key
link to resource-based theory.
According to resource-based theory, capabilities need to be built or developed rather than being
bought. It is therefore management’s role to build, recognize, develop and use an organization’s
capability, including any core capability, to realize a situation of strategic or competitive
advantage. Management’s role in achieving this aim is potentially multi-faceted. Management
can identify the need to develop a core competence or capability through the statement of an
organization’s strategic intent and then act on this. Management may also identify the existence
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of a latent pool of human capital in an organization, which has the potential to be developed into
a capability for strategic or competitive advantage. Management may also seek to improve the
utilization of an existing capability, particularly in a situation of rapid change. These possibilities
demonstrate that level of managerial capability itself will be important in an organization, in
order for it to be able to recognize, develop and optimize resource-based opportunities.
Unlike other factors of production, people cannot be owned by the organizations that hire them.
The effectiveness of a capability in which people play a part will be affected by the nature of
relationships between them, their levels of cooperation and by their organizational treatment. In
the discussion earlier about whether an organization’s resources may be imitated by others, it
was also recognized that the scope for this is likely to be adversely affected by causal ambiguity
and social complexity. Given that causal linkages are generally more complex than imaged and
difficult to understand, management will need to focus attention on developing organizational
structures, organizing work, fostering cooperative relationships and ensuring consistency of fair
treatment to facilitate the development of an organization’s capability, rather than simply trying
to exert overt forms of control.
This points to a further link between resource-based theory and HRM, related to the potential
contribution of human resource policies or strategies. We may ask, ‘What is the role of human
resource strategies in helping to develop an organization’s capabilities and, in particular, how
can these be used to promote the development of core competence or capability?’ At a fairly
superficial level, it seems obvious that human resource strategies should be important in
developing an organization’s capabilities. Human resource practices related to recruitment and
selection, managing performance, training and development, and reward can be designed to
attract, develop and retain high quality employees. Given that resource-based theory stresses the
need to develop, rather than simply purchase, capabilities related to their organization-specific
nature, training and development appear to become particularly important. The above discussion
about developing capabilities, stressed that learning and knowledge application are key processes
to achieve strategic and competitive advantage.
However, there are two problems in assuming that in practice there is a straightforward, causal
relationship between HRM and the generation of organizational capability in which a range of
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human resource strategies can be simply introduced to facilitate resource-based competitive
advantage. The first of these concerns the scope for human resource strategies to become a
source of competitive advantage, and is related to the assumptions of resource-based theory. The
second explores the evolutionary nature of developing resources and capabilities in practice and
the implications of this for the role of human resource strategies. Each of these is discussed in
turn.
The first problem is related to the definition of capability as a source of competitive advantage
that we discussed earlier. Barney (1991) defined resources and capabilities that lead to sustained
competitive advantage as ones that are not only valuable to an organization but also rare,
inimitable and non-substitutable. It would be very difficult for human resource strategies to be
rare, inimitable and non-substitutable, since by their generic nature they can be developed in
many different organizations. There is, for example, no shortage of books and articles about
HRM, professing good practice and discussing links to strategy; for this reason, HRM can hardly
be thought of as a mysterious set of practices, known only to those who enjoy competitive
advantage in a particular industry or sphere of operation. However, while human resource
practices cannot be a source of competitive advantage in themselves, they can nevertheless be
linked to the development of core capability and competitive advantage through their role in
developing the human capital pool within an organization, and in particular by shaping employee
behaviors that lead to effectiveness. In this way, they argue that human resource practices
moderate the relationship between an organization’s pool of human capital and its competitive
performance. The existence of a pool of human capital without appropriate human resource
strategies, including practices related to selection, training, involvement, etc. as well as
facilitative organizational structures and culture, may result in reduced organizational
performance. Conversely, it is argued, appropriate human resource strategies will enhance
organizational capabilities and performance, and could lead to competitive advantage where a
capability is not only valuable but also rare, inimitable and non-substitutable.
Significantly, this position recognizes an organization’s human resources as the source of

competitive advantage, not the human resource strategies that are used to build them. It makes an
important distinction between ‘human resources as a pool of human capital and human resource
practices’. Mueller (1996) follows this distinction by exploring the evolutionary nature of the
ways in which resources are developed and the implications of this for the role of human
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resource strategies. He recognizes that strategy and its relationship to human resource
management have often been portrayed in an overly rationalistic way. Instead Mueller proposes
an evolutionary approach to strategic human resources where truly valuable strategic assets are
unlikely to result directly from senior management policies. This effectively returns us to the
discussion earlier in this chapter about strategy as an emergent process, where this is formed
from a pattern of activities over time. We recognized earlier that top-down planning approaches
often make very simplified assumptions, do not recognize factors such as social complexity or
bounded rationality, and are unlikely to be realized as intended.
Mueller proposes that strategic human resources are more likely to develop through a process of
evolution rather than as the result of short-term managerial interventions. Management can
pursue a state of persistent strategic intent, perhaps underpinned by a unifying theme such as the
pursuit of continuous improvement. This will be important in terms of providing a focus around
which strategy can develop over the longer term. Strategic human resources can also be
promoted by focusing on skills development related to the organizational routines that underpin
organizational capabilities rather than more superficial training and development programs. They
may also be promoted where there is organizational recognition of and support for the various
forms of spontaneous cooperation and related employee behaviors that develop around
organizational routines, linked to desired capabilities. The role for human resource strategies
therefore becomes one of supporting these spontaneous forms of cooperation and behaviors to
embed them into organizational processes linked to organizational routines and desired
capabilities. Human resources will be effective if they are integrated with other strategies or
policies aimed at promoting and developing organizational capabilities. He sees this approach as
a long-term one and refers to the development of ‘social architecture’ in an organization, which
‘results from ongoing skill formation activities, incidental or informal learning, forms of
spontaneous cooperation, the tacit knowledge that accumulates as the – often unplanned – side-
effect of intentional corporate behavior’.
Activity 6.7. How can an organization’s HR be valuable, rare, inimitable, and non-
substitutable? Explain.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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The major principles of SHRM are integration of HR to strategy, consistency of HRM practices, devolvement of
HRM to line management, high employee-commitment, high-quality staff and internal practices, management-
employee relation, and people as a strategic resource. Integration of HR to business/corporate strategy is the most
fundamental principle. Integration is conceptualized as the degree to which the HRM issues are considered as part of
the formulation of business strategies. Linkages between strategy and HRM can be seen in four different stages:
administrative, one-way, two-way, and integrative linkages. In Ethiopia, though an average number of HR Directors
has a seat in the senior management team and some senior managers see HR as integral in the strategy making
process, it is too early to suggest that integration of HRM to business strategy has become a widespread national
phenomenon. The consistency principle of SHRM states that SHRM involves designing and implementing a set of
internally consistent policies and practices to ensure that firm HR contribute to achieving business objectives.
Internal consistency of HR practices refers to the degree to which all HR practices of a SHRM system are consistent
and complementary. The locus of responsibility for HRM no longer resides with specialist managers but is now
assumed by senior line management. Devolvement is the degree to which HRM practices involve and give
responsibility to line managers rather than HR specialists. It is about the extent to which line managers are involved
in and have primary responsibility to certain HR practices. SHRM is concerned with high employee commitment to
the goals and practices of the organization. It is about gaining the ‘hearts and minds’ of employees through
involvement, communications and other methods of developing a high-commitment, high-trust organization.
Employee commitment is sought with the expectation that effectiveness will follow as second-order consequences.
The focus shifts from management–trade union relations to management–employee relations, from collectivism to
individualism. This has changed from a concentration upon the relationship between management and trade unions
to that between management and individual employees. Finally, SHRM is concerned with acquiring, developing,
and maintaining high-quality staff and internal practices to achieve high-quality products. In other words, SHRM is
the comprehensive set of managerial activities and tasks related to developing and maintaining a qualified
workforce.

1. Explain the different aspects of integration in the SHRM Discipline.
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
2. Explain the differences and similarities among the administrative, one-way, two-way, and integrative
linkages between strategy and HRM.
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
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__________________________________________________________________________________________
__________________________________________________________________________________________
3. Compare and contrast the single-employee, among-employees, and temporal consistency of HRM.
__________________________________________________________________________________________
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__________________________________________________________________________________________
4. What are the benefits of designing and implementing internally consistent HRM policies?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
5. Explain the organizational and the effectiveness criteria of devolving HR responsibility to line
management.
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

In the past, the decision criteria for mergers and acquisitions were typically based on considerations such as the
strategic fit of the merged organizations, financial criteria, and operational criteria. Mergers and acquisitions were
often conducted without much regard for the human resource issues that would be faced when the organizations
were joined. As a result, several undesirable effects on the organizations’ human resources commonly occurred.
Nonetheless, competitive conditions favor mergers and acquisitions and they remain a frequent occurrence. Layoffs
often accompany mergers or acquisitions, particularly if the two organizations are from the same industry.
In addition to layoffs related to redundancies, top managers of acquiring firms may terminate some competent
employees because they do not fit in with the new culture of the merged organization or because their loyalty to the
new management may be suspect. The desire for a good fit with the cultural objectives of the new organization and
loyalty are understandable. However, the depletion of the stock of human resources deserves serious consideration,
just as with physical resources. Unfortunately, the way that mergers and acquisitions have been carried out has often
conveyed a lack of concern for human resources.
A sense of this disregard is revealed in the following observation: Post combination integration strategies vary from
such “love and marriage” tactics in truly collaborative mergers to much more hostile “rape and pillage” strategies in
raids and financial takeovers. Yet, as a cursory scan of virtually any newspaper or popular business magazine readily
reveals, the simple fact is that the latter are much more common than the former. The cumulative effects of these
developments often cause employee morale and loyalty to decline, and feelings of betrayal may develop.
Nonetheless, such adverse consequences are not inevitable. A few companies, such as Cisco Systems, which has
made over 50 acquisitions, are very adept in handling the human resource issues associated with these actions. An
example of one of Cisco’s practices is illustrative. At Cisco Systems, no one from an acquired firm is laid off
without the personal approval of Cisco’s CEO as well as the CEO of the firm that was acquired.
QUESTIONS
1. Investigate the approach that Cisco Systems has used in its many successful acquisitions. What are some of the
human resource practices that have made its acquisitions successful?
2. If human resources are a major source of competitive advantage and the key determinant of an organization’s
ability to pursue a given strategy, why have the human resource aspects of mergers and acquisitions been
ignored or handled poorly in so many instances in the past?
3. Take a merger or acquisition example in Ethiopia and discuss the effect on the employees, and find out what
human resource practices were used and obtain their evaluations of what was helpful or harmful.
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CHAPTER SEVEN
STRATEGIC ROLE OF HUMAN RESOURCE MANAGEMENT
7.2. The Strategic Nature of HR to:
7.3. The Changing Roles of HR 1. Explain how HR relates to the management
7.4. Evolution of HR Role process.
7.5. Roles of HR Professionals 2. Give at least three examples of how managers
7.6. Strategic Partner Model can use HR concepts and techniques.
7.7. What Being Strategic Mean 3. Illustrate the HR management responsibilities of
7.8. Chapter Summary line and HR managers.
7.9. Key terms 4. Illustrate HR’s role in formulating and
7.10. Self-Check Questions executing company strategy.
7.11. Case analysis 5. Compare and contrast the different roles of HR.
6. Describe the Ulrich’s Model of strategic HR
role.
7.1. INTRODUCTION
In chapter 6, we have discussed major principles of SHRM. Strategic integration, strategic

devolvement, and strategic consistency of HR were discussed in some detail. Another principle
of SHRM is it’s the strategic role of HRM in the organization. As emphasized in other chapters
of this module, SHRM is not just about strategic planning. It is equally, if not more, concerned
with the implementation of strategy and the strategic behavior of HR specialists working with
their line management colleagues on an everyday basis to ensure that the business goals of the
organization are achieved and its values are put into practice. Thus, the strategic role of HR
professionals is examined in this chapter, which starts with an overview of the strategic nature of
HR and continues with discussions of the business partner model and what ‘being strategic’
means. The chapter concludes with analyses of the roles of HR directors, HR business partners
and HR advisers or assistants.
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7.2. THE STRATEGIC NATURE OF HR ACTIVITY
Recently we have witnessed the amalgamation of several streams of management into the
strategic management literature including epistemology, organizational learning, the resource
based view, organizational capabilities and competitiveness and innovation and new product
development. Other streams focus on nature and processes and examine the internal focus, which
includes impact of strategic management concepts and frameworks that managers use to develop
competitive strategy. Researchers have contended that the concept of SHRM has evolved into a
bridge between business strategy and the management of human. On the other hand, others opine
SHRM as the overarching concept that links the management and deployment of individuals
within the organization to the business as a whole and its environment.
Ulrich (1997) further distinguished between strategic HR and HR strategy. He stated that
strategic HR was the process of linking HR practices to business strategy. Thus, strategic HR
deals with identifying the capabilities required of a business strategy and using HR practices to
develop those capabilities. On the other hand, he viewed HR strategy as building an agenda for
the HR function and defining the mission, vision and priorities of the HR function. During the
last decade, the HRM field has shifted from a micro focus on individual HRM practices to a
debate on how HRM as a more holistic management approach may contribute to the competitive
advantage of the organization. Researchers drawing largely on a behaviorist psychology
perspective have addressed the link between HRM practices and competitive advantage. From
this perspective, researchers have argued that HRM practices can contribute to competitive
advantage as far as they elicit and reinforce the set of role behaviors that result in lowering costs,
enhancing product differentiation or both.
The work of HR practitioners can be divided into two main areas: transactional activities and
strategic activities. Transactional activities consist of the service delivery aspects of HR –
recruitment, training, dealing with people issues, legal compliance and employee services. HR
strategic activities support the achievement of the organization’s goals and values and involve
the development and implementation of forward-looking HR strategies that are integrated with
one another and aligned to business objectives. Importantly, HR strategic activities also involve
HR practitioners working with their line management colleagues in the continuous development
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and implementation of the business strategy. HR has to get its service delivery activities right –
that’s what it’s there to do, day by day, and its reputation with line managers largely depends on
this. But in accordance with the resource-based view, which emphasizes the importance of
human capital in achieving competitive advantage, the credibility of HR also depends on its
ability to make a strategic contribution that ensures that the organization has the quality of
skilled, motivated and engaged people it needs.
Figure 7. 1 Transactional versus Strategic Role of the HR Professional
As depicted in Figure 7.1 above, transactional HR activities and strategic HR activities are
different in at least five different aspects. One, while the area of interest in the transactional
approach involve recruiting, training, pay, and labor relations that in the strategic approach
involves strategy and culture of the organization. Two, while view of the organization in the
transactional approach is micro-level that in the strategic approach is macro-level. Three, in the
transactional approach, the clients are employees whereas in the strategic approach the clients are
managers and the organization as a whole. Four, in the transaction approach, HR has weak status
in the organization whereas in the strategic approach, it has strong approach. Finally, the
educational requirement in the transactional approach is specialist in HRM, whereas that in the
strategic approach is general HR education with management experience or general manager
with HR experience.
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Activity 7.1. What is meant by strategic HR activity?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
7.3. THE CHANGING ROLES OF HRM
A great shift in HR roles is envisaged today as a consequence of the more prominent links to
business needs and a greater requirement to contributing to organizational performance.
Researches reveal that HR roles in an organization are evolved from record-keeping and welfare
to fixing day-to-day issues with unions, and recently, to contributing to business success through
integrated system of controls between HR and line managers.
With the repositioning of the HR function over time, the roles of HR professionals have
consequently changed in order to battle with internal and external business pressures, and strive
to achieve the strategic goals set by their organizations. The clarification of roles, accordingly,
augments HR professionals’ understanding of how to add value to the organization and help line
managers set clear expectations. The criteria for defining HR roles, thus, have indeed varied over
time, shifting from a focus on activities (what do HR people do), to time (where do HR people
spend time), to metaphors (what identity do HR people have), and to value creation (what value
do HR people create). This section identifies the evolution and selection of HRM roles (more
specifically; the roles HR professionals play) proposed by different authors to emphasize the
development of the HR function and the shift in roles HR professionals play. The changing roles
of HRM as proposed in literature are summarized in Figure 7.2.
The Conformist Innovator and the Deviant Innovator
One of the earliest and most prominent HRM models, put forward by Legge in 1978, identifies
the roles of HR as two main strategies based on the acquisition of power and influence inside the
workplace: The conformist innovator and the deviant innovator. The conformist innovator
endeavors to simply satisfy the requirements of senior management by performing his/her work
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duties as per the set guidelines, rules, values and norms of the organization In contrast, the
deviant innovator crosses the boundary by going beyond the values and norms set by senior
management, and ventures into creating and following a different set of norms driven instead by
current social values, consequently “gaining credibility and support” for his/her insightful ideas.
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Figure 7. 2 The Changing Roles of HRM
The Clerk of Works, the Contract Manager, and the Architect Model
Tyson and Fell (1986) distinguished three ideal types of HR roles and named the clerk of works,
the contract manager, and the architect. These HR roles are founded on different parameters.
They are depicted as modes of operation that depend on HRM’s contribution to the building of
the business. The roles change depending on the organizational context and the expectation of
how HR should operate in this specific context.
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In the clerk of works model, HRM is an administrative support activity with no involvement in
business planning, all authority being vested in line managers. The principal activities for the
HR staff are recruitment,
ent, record
record-keeping, and welfare. HRM is seen as an administrative activity
with a focus on basic routines. In the contract manager model, the principal activities of the HR
staff include confronting unions with a regulatory system, and fixing day-
day-to-day issues with the
unions and responding in a reactive way to problems. There is a strong industrial relations focus.
HR has tightly defined roles that are pragmatic, problem solving ‘fire fighting’ focus. In the
architect model, HR managers seek to create and
and build the organization as a whole contributing
to the success of the business through explicit policies, which influence the corporate plan. HR is
senior creative specialist, initiates policy changes, and acts as partner with senior line managers.
Personnel
nel manager regards himself or herself as a business manager first, and a ‘professional’
personnel manager second.
Figure 7. 3 Tyson’s Three Ideal Types of HR roles
Activity 7.2. What are the principal activities for the HR staff in the clerk of
works model of HR role
role?
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Schuler’s (1990) Model of HR Role
As mentioned above, HRM framework literature of the 1990s involved the beginning of the
transformation of HR roles from traditional or operational roles to more business and strategy
oriented roles. Schuler (1990) describes the HR department’s potential role as a “valued member
of the management team” and emphasizes the necessity for HR managers to take on new roles
and competencies. These roles include partnering up with line management, shaping and
advocating change, planning, integrating and implementing strategies, and managing and
developing talent. According to Shuller, the HR professional is a business person, a shaper of
change, a consultant to organization/partner to line, a strategy formulator and implementor, a
talent manager, an asset manager, and a cost controller.
Wiley’s (1992) Model of Strategic HR Role
Wiley’s (1992) HRM model also depicts roles according to contextual criteria – specifically;
strategic, legal, and operational aspects. Wiley highlights how important a role HR managers
play in contributing to their organization’s processes and maximizing the organization’s potential
through its HR, by supervising various HR activities, such as recruitment, selection,
compensation, training and development. According to Wiley (1992), an HR professional is a
consultant, an assessor, an innovator/change agent, a business partner, and a cost manager.
The Delegator, the Technical Expert, and the Innovator Roles of HR
According to Martell and Caroll (1995), in addition to the traditional roles of policy formulator
and personnel service provider, an HR manager plays delegator, technical expert, and innovator
roles. The delegator role of HR enables line managers serve as primary implementers of HRM
systems. The technical expert role encompasses a number of highly specific HR related skills,
and as innovators, HR managers recommend new approaches in solving HRM related problems.
Storey’s Model of Strategic HR Role
Another early attempt at representing HR’s changing role was Storey’s 1992 model. His
framework was based on strategic integration and the active relationship between HR and
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business strategy. Storey carried out a research study in the period 1986-1988 covering 15 major
British organizations (both private and public), and came up with four roles that he believed may
be performed by Personnel Managers: Advisors, Handmaidens, Regulators, and Change-makers.
He further categorized these four roles, as illustrated in Figure 7.4., on the basis of two
dimensions; interventionary versus non-interventionary, as well as strategic versus tactical.
Figure 7. 4 Storey’s Model of Strategic HR Role
According to Storey, advisors, as the name suggests, are facilitators and consultants (non-
interventionists) for line management. Handmaidens simply implement management’s set
policies, and, as such, are also non-interventionists. Storey’s handmaiden role is thus similar to
Legge’s conformist innovator role. Regulators, on the other hand, are active legislators who
devise the rules and supervise their application. They are therefore interventionists, but only on
the tactical level. Finally, change-makers are the long-term policy planners whose
“interventionism” is geared towards the long-term (hence strategic) implementation of HRM
policies that enhance employee commitment and dedication, whilst observing the long-term
strategic interests of the organization. This latter role was a new one, mostly unfamiliar to the
business world at the time, and was what would become the difference between traditional
Personnel Management, and modern day HRM. Storey (1992) introduced advisor, handmaiden,
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regulator, and change maker roles of HR managers. Advisors act as internal consultants leaving
the actual running to line and top management colleagues. Handmaidens are primarily customer-
oriented in the services they offer, based on a rather subservient, attendant relationship with line
management. Regulators formulate, promulgate, and monitor observance of employment rules.
Change makers are seeking to put relationships with employees on a new footing, one that is in
link with the needs of the business. Advisors and handmaidens are not action oriented whereas
regulators and change makers are more interventionary.
Storey (1992) adds an additional stage and identifies two dimensions - strategic/tactical and
interventionary/non-interventionary, which give rise to four potential roles that drawing on case-
based research into 15 mainstream UK companies and public sector organizations conducted
during 1986-88. The four roles were advisors, handmaidens, regulators, and change-makers.
Advisors assumed a facilitating role, acting as internal consultants offering expertise and advice
to line management, while operating in an essentially non-interventionist manner. Handmaidens
provided specific services at the behest of line management, their ‘attendant’ role was essentially
reactive and non-interventionist. Regulators were interventionists involved in the traditional and
essentially tactical role of formulating, promulgating and monitoring the observance of
employment rules and industrial relations policy: These were “managers of discontent”, seeking
order through temporary, tactical truces with organized labor’. Change-makers were
interventionists with a strategic agenda focused on both the hard realities of business
performance and the softer HR interventions designed to enhance employee commitment and
motivation. It was this new role that perhaps most clearly differentiated HRM from traditional
personnel management.
Activity 7.3. Describe the Storey’s Model of Strategic HR role.

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Ulrich’s Strategic HR Role Model
Perhaps the most influential classification of the roles of the HR professionals and the HR
function is that of Ulrich (1997). Ulrich (1997) identified four HR roles and named
administrative expert, employee champion, change agent, and strategic partner. He explained
these roles in the people versus process dimension, and in the strategic versus operational
dimension (See Figure 7.5).
Partner in strategy execution – The positioning of the HR function as a key organizational

player and a “business partner” is increasingly stressed as important by practitioners and
academics. The role as strategic partner is organized around a strategic focus on processes, and is
focused on designing the organization to realize its purpose and direction and to achieve its
goals. Consequently, this role is based on the outcome that the organization should be able to
execute its intended corporate strategies through the HR function cooperating with both senior
and line managers in focusing on how to ensure the overall needs of the organization. Implicitly,
the main purpose of the HR function is to deliver the “best fit” in tailoring HR strategies to
organizational goals, rather than adopting a “best practice”.
Administrative expert – The second role, the administrative expert or functional expert is
constructed around the task of ensuring that traditional HR processes such as staffing and
training are carried out efficiently and effectively. The underlying notion of this role is that in
considering employees as costs, a competitive advantage can be attained by reducing these costs
and hence increasing efficiency. The HR function should be value adding in all its services and it
should explicitly demonstrate its value to the organization. Some HR practices are delivered
through administrative efficiency (i.e. technology), and others through policies, menus, and
interventions, expanding the “functional expert” role.
Employee champion – In shifting the operational focus from processes to employees, the third
role, the employee champion, emphasizes the needs of employees with the purpose of increasing
commitment and capabilities. This role is related to employee well-being and to the
psychological contract between company and employee. In his most recent modification of the
model, Ulrich splits the employee-champion role into the “employee advocate” and “human
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resource developer”, placing the latter as a more future-focused process role. The employee
champion role is closely related to the more traditional elements of personnel management (i.e.
training, development, and reward structures). What is different, however, is that commitment is
a requirement due to lack of employees, and retention is therefore an important element in an
organization’s HR strategy. In addition, competences are central to the organization in the sense
that they represent the uniqueness of the organization. Retention and competencies are based on
the presence of the right combination of human resources and on the creation of the right
premises for applying these resources.
Change agent – The fourth HR role is based on a strategic focus on people and aims at
managing the transformation and change faced by the organization. The role of change agent
consequently directs focus to the necessity of ensuring that the organization has the capacity to
handle change by assisting employees in their attempts to embrace and implement change.
Change agents are responsible for the delivery of organizational transformation and culture
change, and this role hereby creates value by ensuring that the whole organization is able to
change according to the conditions by building the capability to change into its core
competences. Functioning as a change agent is relatively new to many HR professionals. The
idea is that HR should function as a kind of promoter for change and as such should initiate
change and make sure that the change capacity is high.
In their administrative expert role, HR professionals design and deliver efficient HR processes
for staffing, training, appraising, rewarding, etc. Their role is measured by their administrative
efficiency. They focus on the day-to-day operational HR activities and HR processes, and are
not strategic and people oriented. In their employee champion role, HR professionals are
involved in the day to day problems, concerns and needs of employees. Their role is measured
mainly by employee commitment and competence. In their change agent role, HR professionals
focus on managing transformation and change. They help employees to let go off the old culture
and adapt to a new culture. They are strategic and focus on their employees’ commitment and
competence. Finally, the strategic partner role focuses on aligning HR strategies and practices
with business strategy. While administrative expert and employee champion roles are
administrative oriented, change agent and strategic partner roles are strategic oriented.
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People
Employee Change
Champion Agent
Operational Strategic
Administrative Strategic
Expert Partner
Process
Figure 7. 5 Ulrich’s HR Role Model (1997)
While employee champions and change agents focus on the people, administrative experts and
strategic partners focus on the HR process. In addition, while employee champions and
administrative experts focus on the operational HR activities, change agent and strategic partners
focus on the strategic issues. Studies show that there is a shift in the HR roles towards a more
strategic, business-like approach and a more intensive relationship with line and top
management. However, administrative effectiveness is also a requirement for strategic role of
HR.
Armstrong (2008) suggests that HR has to get its service delivery activities right that is what it is
there to do, day by day, and its reputation with line managers largely depends on this. But in
accordance with the resource-based view, which emphasizes the importance of human capital in
achieving competitive advantage, the credibility of HR also depends on its ability to make a
strategic contribution that ensures that the organization has the quality of skilled, motivated and
engaged people it needs.
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Thus, the roles of HR professionals and functions have changed through time from welfare
worker role of the 1960s to the most recent strategic partner roles. Changes in business contexts
and philosophies have provided HR professionals with the opportunity to become strategic
partners, playing the sorts of roles that help organizations define and meet their strategic needs.
The strategic role of HR is to promote the achievement of the organization’s business goals by
developing and implementing HR strategies that are integrated with the business strategy and are
coherent and mutually supportive; and by ensuring that a strategic approach is adopted by the
HR function that supports the business and adds value.
However, though the strategic role of HR is recognized by researchers and practitioners, many
organizations still need to make significant progress toward fulfilling it. At a theoretical level,
many writers have suggested a number of competing explanations as to what influences strategic
HR roles. The differences in HR practices and roles are linked to environmental and
organizational characteristics. Given that the HR function and HR practitioners are expected to
play an active role, their role varies as the strategies and environments of organizations vary.
Because each institutional environment would require HR practitioners to play (or not to play)
some roles appropriate to the environment, the issue of the role of HR practitioners across
organizational and institutional environments requires further investigation. In spite of the
abundance of literature on HR roles, our knowledge of the role of HR practitioners in Ethiopia
countries is very limited.
Activity 7.4. What are the differences between the change agent and the Strategic
partner roles of HR?
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Figure 7. 6 Strategic HR Role Framework
Since the abundance of HR roles found in literature can get to be confusing, Ulrich and
Brockbank, later in 2005 proposed a new consolidated framework which filters out the noise and
synthesizes the previous work to clarify and update HR professionals’ present roles, and also aid
in their professional development. This updated framework (Figure 7.7.) consists of the
following five HR roles which have evolved from Ulrich’s 1997 HR-role framework.
1. Strategic partner – consists of multiple dimensions: business expert, change agent, strategic
HR planner, knowledge manager and consultant; combining them to align HR systems to
help accomplish the organization’s vision and mission, helping managers to get things done,
and disseminating learning across the organization. This is about partnering up with line
managers to formulate and implement strategies and help achieve the organization’s goals.
2. Employee advocate – focuses on the needs of today’s employees through listening,
understanding and empathizing. HR professionals are responsible for keeping the two-way
employer-employee relationship intact.
3. Human capital developer – in the role of managing and developing human capital
(individuals and teams), focuses on preparing employees to be successful in the future. The
HR manager recognizes human capital as a critical asset and focusing on developing the
workforce.
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4. Functional expert – concerned with the HR practices that are central to HR value, acting
with insight on the basis of the body of knowledge possessed. Some are delivered through
administrative efficiency (such as technology or process design), and others through policies,
menus and interventions. Necessary to distinguish between the foundation HR practices –
recruitment, learning and development, rewards,
reward etc – and the emerging HR practices such as
communications, work process and organization design, and executive leadership
development. HR professionals should work on designing and delivering efficient and
effective HR practices and processes
5. Leader – leading the HR function, collaborating with other functions and providing
leadership to them, setting and enhancing the standards for strategic thinking and ensuring
corporate governance. HR professionals,
profess therefore, must show genuine leadership skills and
gain credibility.
Activity
ty 7.5.Describe the Ulrich and Brockbank’s Improved Strategic HR Role Model
and highlight the improvement made on the previous model.
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Figure 7. 7 Ulrich and Brockbank’s Improved Strategic HR Role Model
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7.4. WHAT BEING STRATEGIC MEANS
The term ‘business partner’ may not be generally accepted but there is a universal chorus of
approval for the notion that HR professionals need to be strategic. However, what ‘being
strategic’ means is not always made clear. It sounds good but what do HR people actually do
when they are acting strategically? And is the process of being strategic reserved for those at the
top or is it something that everyone in HR does?
An answer to the first question is provided by the CIPD in its Professional Standards (2004),
where one of the competencies is strategic capability, defined as ‘The capacity to create an
achievable vision for the future, to foresee longer-term developments, to envisage options (and
their probable consequences), to select sound courses of action, to rise above the day-to-day
detail, and to challenge the status quo.’
The problem with this definition is that it seems to dwell on what HR directors and heads of HR
functions in centers of expertise do rather than provide a realistic picture of the roles of more
junior HR specialists. The latter may aspire to be strategic later in their careers and they will do
their jobs better if they understand how they contribute to attaining the organization’s goals, but
someone in a service centre administering a recruitment exercise or advising on how to handle a
disciplinary problem will not be spending much time on creating an ‘achievable vision for the
future’ let alone foreseeing longer-term developments or challenging the status quo. The research
conducted by Francis and Keegan (2006) elicited the following comment from a CIPD course
tutor about student practitioners: ‘It is complicated by the fact that the majority of their concerns
are operational rather than strategic and there seems to be an increasing divergence between their
needs/concerns and the content of the CIPD program.’ A student remarked to the researchers that
the CIPD thought that they would all be strategic business partners ‘and we’re not you know, we
have to deal with day-to-day HR issues that arise in the business’.
The CIPD (2005) has supported the focus on strategic capability with the concept of the
‘thinking performer’, to the effect that: ‘All personnel and development specialists must be
thinking performers. That is, their central task is to be knowledgeable and competent in their
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various fields and to be able to move beyond compliance to provide a critique of organizational
policies and procedures and to advice on how organizations should develop in the future.’
This concept can be interpreted as meaning that HR professionals have to think carefully about
what they are doing in the context of their organization and within the framework of a
recognized body of knowledge, and they have to perform effectively in the sense of delivering
advice, guidance and services that will help the organization to achieve its strategic goals. But
the extent to which more junior practitioners ‘advice on how organizations should develop in the
future’ may well be limited.
A more realistic assessment of what being strategic means can be produced by analyzing what is
involved at different levels: HR directors, heads of major HR functions (learning and
development, reward, etc) who may be in centers of expertise, business partners embedded in
operational departments, and HR advisers or assistants who may be working in shared service
centers.
HR Changes and Challenges Today
Over the last fifteen years, organizations have generally adopted the concept of Business Partner,
at least partly, and experimented with variations of Business Partner roles with simultaneous
strategies and structures for handling all the rest of HR functions. The goal has been to manage
the tactical areas of HR efficiently and effectively and to simultaneously grow and develop the
strategic areas of HR. Tactical areas of HR include the more compliance or administrative such
as risk management (legal defense, compliance, legal and regulatory requirements and cost
containment), employee relations (policy issues, supervision, etc.), and some day-to-day
operational tasks of managing employment, benefits and payroll. The thinking behind this is that
when these areas are managed effectively, there is then time and resources for the Business
Partner role to deal with the human capital issues that impact the business strategically.
Organizations have tried to manage these other day-to-day tactical areas of HR by reassigning
existing personnel, redefining existing roles or creating new ones, increasing automation,
outsourcing work, transferring tasks to supervising managers, and improving and streamlining
processes. They often try separating the tactical and strategic types of HR work into different
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roles or units. Once separated, they then try to increase training with the goal of building skills
for the generalists, business partners and other senior HR advisors engaging more in strategy and
change. Much of this reconfiguration, although a step in the right direction, has not yet produced
the desired results. Some of the difficulties have involved how roles and units are designed, the
customer-friendliness of processes and training adequacy for both HR and internal users. It is
also important to note that conceptually, the generic business partner or HR generalist roles may
not be designed as comprehensively as we are developing the SBP role.
There is no doubt that decisions need to be made about executing the day-to-day tactical HR
work. These activities do not go away and they need to be handled effectively or they will fall
back in to the Strategic Business Partner’s arena. When this occurs, the immediate needs of the
daily transactional work nearly always smother the strategic, longer-term needs. If for example, a
sexual harassment investigation needs to occur and if the HR department is not structured
appropriately to handle the investigation then the SBP will have to conduct the investigation. A
sexual harassment investigation is something that can’t be postponed. When things like this
begin to pile up, there becomes no time for the strategic work. In several situations we know of,
a person moved into a senior HR role with the greatest intentions of being a Strategic Business
Partner. In many of these instances, these people soon became frustrated, and at times
overwhelmed with the amount of employee relations, payroll and compliance issues that quickly
consumed their time. Often times in this situation, even the most strategic person began to lose
the time to deal with the more strategic aspects of the business.
While all of the more traditional work of HR is important to the organization, our interest here is
primarily in the strategic work of HR and the other human systems needs that should be
incorporated into Strategic Business Partner role.
The Strategic Business Partner Role
To be explicit about the SBP concept, we believe the role must be developed around providing
human capital and organization change perspectives embedded into business leadership teams. In
order to be effective, they will need business credibility, the ability to work in partnership with
the other leaders, and deep HR and OD functional knowledge. The SBP model is a way to ensure
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the human system implications and needed change strategies are part of business leadership
decisions. It involves both what was always intended as strategic work in HR and new work in
strategic thinking, organization design, culture change, human system alignment and change
management. The specific context, characteristics, and demands of any industry or organization
sector will ultimately drive this role.
In order to put more context around the Strategic Business Partner role, as Hanna (1988) says,
we need to start by working from the outside-in. We live in a hyper- turbulent world. Today we
must adapt to numerous unprecedented challenges that change the very nature of what business
we are in and how that business gets conducted. The reality often includes doing business 24/7,
globally across numerous cultural boundaries, with new technologies being invented daily and
shifting technology generations yearly; responding to new forms of competition locally and
globally; learning to manage an ever-shifting set of demographics; and keeping pace with the
speed of change in everything. All of these realities have significant human capital implications,
raising the value of strategic HR thinking (Jamieson, 2007). For example, organizations (and
their SBPs) increasingly need to plan for the use of social media in communications, technology
in working virtually, cultural competence in conducting business and change management for
aligning people and systems during continuous change.
It is within this context that we have to think about the role of the Strategic Business Partner.
We need to take this outside-in approach with a focus on the current and future challenges of the
organization. The SBP needs to be able to join with other business leaders to engage with the
strategic implications of the rapid, specific changes driving their sector, industry and
organization. What role does the SBP have in helping the organization deal with these challenges
and what skills does the SBP need to have in managing the challenges?
In looking for the solution as it relates to leading and managing an organization in this rapidly
changing world, there isn’t one answer. However, it is increasingly clear that the design,
development and maintenance of the human system are as critical to future success as they are in
financial, technical and operational systems. Organizations of all types need talented, engaged
people, in well led, managed and designed organizations, working together and performing with
an eye on today and tomorrow.
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Who is going to step up to meet these challenges? The human systems issues in change, growth,
strategy execution and high performance are paramount and require specialized perspectives and
skill sets. The combined knowledge and skills that come from Strategic HR and OD, when
coupled with business acumen, and an ability to effectively build partnerships can get you there.
Yet, many in senior leadership are not yet convinced. Even though they see people issues as
vital, the executives don’t see HR and HR leaders as driving the people agenda in business today.
When you ask them how HR is doing, barely 4 percent describe their company’s HR as world
class. 46 percent say HR’s capabilities are OK but need to improve, and about a third say that
HR needs significant improvement. The advent and development of the SBP role has potential to
fill this void.
SBP’s can be developed and positioned to support a business with the perspective and skills that
help with organization effectiveness. Human system problems plague senior leaders daily,
including issues like:
• Dealing with the employee or leader who isn’t the right person for a job or doesn’t have
the right capabilities
• Identifying where tomorrow’s leaders will come from
• Helping a team when it isn’t performing at a high level
• Getting sales to work effectively with R&D or manufacturing
• Leading and gaining consensus from strategic planning sessions
• Designing and building an organization capable of executing the strategic direction
• Solving problems that lie at the interface of technology, people and performance
• Increasing innovation or speed across the organizations’ processes
It is worth highlighting that we believe the SBP role requires knowledge and skills from both
Strategic HR and OD disciplines. This is not new, but has rarely been accepted historically. Our
view of the next wave of organization effectiveness work will require the integration of HR and
OD into execution of changes. And that will require shifting some mindsets and maybe changing
some development avenues. There are numerous points of view on the role that HR plays in an
organization and the role OD plays in an organization. In addition, there are numerous points of
view on how to deploy these disciplines (if they are deployed at all). We have seen many
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variations of how these two disciplines are structured, deployed, integrated into roles or left to
operate separately. While these various organization structures and approaches have had
various levels of success, the restructuring of HR and OD departments and redesigning of the
roles continues as organizations search for a more successful solution. From our perspective, we
believe that the SBP role in an organization needs to become a new way of thinking about the
use and delivery of strategic HR and OD knowledge and skills. In other words, the discussion is
not about where HR and OD should report as functions within an organization. The discussion is
about how the strategic aspects of HR and OD can be combined to develop a function and roles
that meet the real business needs.
With this in mind, if an organization plans to make a transition from their current HR
organization mindset and structure to one that includes an SBP role there are many issues that
can hinder the success of this transition:
• Making the decision that human capital issues are now critically important and need to
be addressed in conjunction with other strategic, business considerations.
• Moving from HR as an authoritative role, an order-taking role or an internal customer
service role to a partnership role with the SBPs working in equal executive partnerships
with other leaders.
• Moving from being past-oriented often cited as “this is how we do it around here” to
becoming future-oriented and innovative to deal with unprecedented global challenges
and rapid technology, market and economic shifts.
• Finding and/or developing people for these SBP roles who can understand the “business”
of the organization and what other functional, unit and corporate leader’s need, from a
human capital perspective, to execute strategy.
• Needing new knowledge and skills (e.g., in change, consultation, organization design,
innovation, creativity and problem-solving) that are antithetical to historical HR work.
• Thinking about the organization’s business and strategy in terms of talent implications,
core customers and key competitors, not benchmarks, uniformity, consistency or one-
size-fits-all.
• Balancing the plethora of federal & state regulatory and compliance needs with
differentiating organization resources for competitive advantage.
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7.5. THE STRATEGIC ROLE OF HR DIRECTORS
The strategic role of HR directors is to promote the achievement of the organization’s business
goals by 1) developing and implementing HR strategies that are integrated with the business
strategy and are coherent and mutually supportive and 2) ensuring that a strategic approach is
adopted by the HR function that supports the business and adds value. To carry out this role the
HR director should:
• understand the strategic goals of the organization;
• appreciate the business imperatives and performance drivers relative to these goals;
• comprehend how sustainable competitive advantage can be obtained through the human
capital of the organization and know how HR practices can contribute to the achievement
of strategic goals;
• contribute to the development of the business strategy on an ‘outside-in’ basis by
emphasizing how the organization’s distinctive human resources can make an impact;
• contribute to the development for the business of a clear vision and a set of integrated
values;
• ensure that senior management understands the HR implications of its business strategy;
• be aware of the broader context (the competitive environment and the business,
economic, social and legal factors that affect it) in which the organization operates;
• understand the kinds of employee behavior required successfully to execute the business
strategy;
• think in terms of the bigger and longer-term picture of where HR should go and how to
get there;
• believe in and practice evidence-based management;
• be capable of making a powerful business case for any proposals on the development of
HR strategies.
7.6. THE STRATEGIC ROLE OF HEADS OF HR FUNCTIONS
What skills needed for a strategic HR role? Another, more fundamental reason for the lack of
progress of HR professionals in making a strategic contribution is their strategic skill and ability,
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which in itself affects role performance and perceptions. There are many views in the literature
on the skills required, which can be categorized into three broad areas. One area is around HR
knowledge and technical abilities and also includes business and functional skills. A second area
is organizational/ interpersonal skills including leadership, change, knowledge management and
consultancy skills. A third is a set of personal competencies which range from assertiveness,
drive, resilience and problem-solving, through to having strong personal values. Differentiating
these skills from management skills in general and identifying those skills critical to being
effective in a strategic HR role in particular, however, is not straightforward. Moreover,
increasingly these competencies are shared and may be more likely within a partnership or group
of colleagues, rather than reside with any one person. Indeed, many important questions
including whether some of these skills are more important than others, which are critical to the
individual and which might be shared, remain largely unanswered.
The strategic role of heads of HR functions is fundamentally the same for their function as that
of HR directors for the whole organization. They promote the achievement of the organization’s
business goals by developing and implementing functional strategies that are aligned with the
business strategy and integrated with the strategies for other HR functions, and adopt a strategic
approach in the sense of ensuring that HR activities support the business and add value. To carry
out this role heads of HR functions should:
• understand the strategic goals of the organization as they affect their function;
• appreciate the business imperatives and performance drivers relative to these goals;
• help senior management to understand the implications of its strategy for the HR
function;
• know how HR practices can contribute to the achievement of the strategic goals;
• ensure that their activities provide added value for the organization;
• be aware of the broader context in which the function operates;
• think in terms of the bigger and longer-term picture of where HR strategies for the
function should go and how to get there;
• be capable of making a powerful business case for any proposals on the development of
HR strategies for the function.
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Activity 7.6. What is the difference between the strategic role of the HR Director and the
strategic role of the HR function head?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
7.7. THE STRATEGIC ROLE OF HR BUSINESS PARTNERS
What is Business Partnering? HR business partnering is a model whereby HR professionals work

closely with business leaders and/or line managers to achieve shared organizational objectives, in
particular designing and implementing HR systems and processes that support strategic business
aims. This can involve the formal designation of ‘HR business partners’ - HR professionals who
are embedded within specific areas of the business.
Many varying definitions of HR business partnering exist and the role of HR business partners
can vary widely from one organization to another. For more information on how HR models and
approaches are linked to business strategy see our factsheet on strategic human resource
management.
The concept of HR business partnering, or strategic partnering, emerged during the mid-late
1990s, around the time that US business academic Dave Ulrich set out his initial theories for the
optimum delivery of HR. The business partner role emerged as one of the aspects of the Ulrich
model, which is known as the ‘three-legged stool’ or ‘three-box’ model for HR. However, there
is ongoing debate over how his theories should be interpreted and put into practice (see
Challenges to the HR business partnering model, below) and Ulrich himself has also reviewed
and further developed his own theories in subsequent work.
The concept of business partnering has been enthusiastically adopted by the Chartered Institute
of Personnel and Development (2007). The term ‘business partner’ was defined loosely as
covering ‘a diversity of jobs from strategic to administrative to consultancy’. According to the
CIPD, business partnering ‘makes HR accountable to the business, and expects HR to add real
value’. It involves the restructuring of HR into three specialist functions: shared services, centers
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of excellence and strategic partners. The latter consists of a few HR professionals working
closely with business leaders, influencing strategy and steering its implementation. The task of
strategic partners is to ensure the business makes the best use of its people and its people
opportunities. The role is to highlight the HR issues and possibilities that executives don’t often
see. It also aims to inform and shape HR strategy, so that, as business partners, HR practitioners
work closely with their line management colleagues. They are aware of business strategies and
the opportunities and threats facing the organization. They are capable of analyzing
organizational strengths and weaknesses and diagnosing the issues facing the enterprise and their
human resource implications. They know about the critical success factors that will create
competitive advantage, and they can draw up a convincing business case for innovations that will
add value.
The term ‘added value’ looms large in the concept of the HR business partner. It is often used
rhetorically. In accounting language, where the phrase originated, added value is defined as the
value added to the cost of raw materials and bought-out parts by the process of production and
distribution. In HR speech, added value seems to mean the contribution made by HR to business
success, which is measured by the extent to which the value of that contribution exceeds its cost.
Francis and Keegan (2006) report this comment from a recruitment consultant, which illustrates
how the term has become popular: ‘Most HR professionals will now have “value added”
stamped on their foreheads, because they are always being asked to think in terms of the business
objectives and how what they do supports the business objectives and the business plan.’
However, it can be argued that too much has been made of the business partner model. Perhaps it
is preferable to emphasize that the role of HR professionals is to be part of the business rather
than merely being partners. Tim Miller, group HR director of Standard Chartered Bank, as
reported by Smethurst (2005), dislikes the term: ‘Give me a break!’ he says. ‘It’s so demeaning.
How many people in marketing or finance have to say they are a partner in the business? Why do
we have to think that we’re not an intimate part of the business, just like sales, manufacturing
and engineering? I detest and loathe the term and I won’t use it.’ Another leading group HR
director, Alex Wilson of BT, as reported by Pickard (2005), is equally hostile. He says: The term
worries me to death. HR has to be an integral and fundamental part of developing the strategy of
the business. I don’t even like the term close to the business because, like business partner it
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implies we are working alongside our line management colleagues but on a separate track, rather
than people management being an integral part of the business.
The strategic role of HR business partners is to promote the achievement of the business goals of
the organizational unit or function in which they operate. To carry out this role they should:
• understand the business and its competitive environment;
• understand the goals of their part of the business and its plans to attain them;
• ensure that their activities provide added value for the unit or function;
• build relationships founded on trust with their line management clients;
• provide support to the strategic activities of their colleagues;
• align their activities with business requirements;
• be proactive, anticipating requirements, identifying problems and producing innovative and
evidence-based solutions to them.
Activity 7.7. What is strategic role of the HR business partner?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________

The work of HR practitioners is divided into transactional and strategic activities. HR roles are evolved from record-
keeping and welfare to fixing day-to-day issues with unions to contributing to business success through explicit
policies and integration. According to Shuller (1990), the HR professional is a business person, a shaper of change, a
consultant to organization/partner to line, a strategy formulator and implementor, a talent manager, an asset
manager, and a cost controller. In addition to these traditional roles, an HR manager also plays delegator, technical
expert, and innovator roles. Changes in business contexts and philosophies have provided HR professionals with the
opportunity to become strategic partners, playing the sorts of roles that help organizations define and meet their
strategic needs. The strategic role of HR is to promote the achievement of the organization’s business goals by
developing and implementing HR strategies that are integrated with the business strategy and are coherent and
mutually supportive; and by ensuring that a strategic approach is adopted by the HR function that supports the
business and adds value. According to the strategic partner model of Ulrich, HR managers are strategic partners,
change agents, administrative experts, and employee champions. In their administrative expert role, HR
professionals design and deliver efficient HR processes for staffing, training, appraising, rewarding, etc. In their
employee champion role, HR professionals are involved in the day to day problems, concerns and needs of
employees. Their role is measured mainly by employee commitment and competence. In their change agent role, HR
professionals focus on managing transformation and change. Finally, the strategic partner role focuses on aligning
HR strategies and practices with business strategy. It is measured by strategy execution. HR business partnering is a
model whereby HR professionals work closely with business leaders and/or line managers to achieve shared
organizational objectives. The strategic role of HR directors is to promote the achievement of the organization’s
business goals by developing and implementing HR strategies that are integrated with the business strategy and are
coherent and mutually supportive. The strategic role of heads of HR functions is fundamentally the same for their
function as that of HR directors for the whole organization.
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1. What are the major differences between transactional and strategic HR activities?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
2. Explain the delegator, the technical expert and the innovator roles of HR.
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
3. What do the HR managers play in their administrative expert role?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
4. What does strategic mean for an HR professional?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
5. What is Business Partnering?
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
As a new member of the board of directors for a local bank, Jack Nelson was being introduced to all the employees
in the home office. When he was introduced to Ruth Johnson, he was curious about her work and asked her what her
machine did. Johnson replied that she really did not know what the machine was called or what it did. She explained
that she had only been working there for two months. She did, however, know precisely how to operate the machine.
According to her supervisor, she was an excellent employee.
At one of the branch offices, the supervisor in charge spoke to Nelson confidentially, telling him that “something
was wrong,” but she didn’t know what. For one thing, she explained, employee turnover was too high, and no
sooner had one employee been put on the job than another one resigned. With customers to see and loans to be
made, she continued, she had little time to work with the new employees as they came and went. All branch
supervisors hired their own employees without communication with the home office or other branches. When an
opening developed, the supervisor tried to find a suitable employee to replace the worker who had quit.
After touring the 22 branches and finding similar problems in many of them, Nelson wondered what the home office
should do or what action he should take. The banking firm was generally regarded as a well-run institution that had
grown from 27 to 191 employees during the past eight years. The more he thought about the matter, the more
puzzled Nelson became. He couldn’t quite put his finger on the problem, and he didn’t know whether to report his
findings to the president.
Questions
1. What do you think is causing some of the problems in the bank home office and branches?
2. Do you think setting up an HR unit in the main office would help?
3. What specific functions should an HR unit carry out? What HR functions would then be carried out by
supervisors and other line managers? What role should the Internet play in the new HR organization?
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CHAPTER EIGHT
ENVIRONMENTAL FORCES OF STRATEGIC HUMAN RESOURCE

MANAGEMENT

Upon the completion of this chapter, you will be able
8.1. Introduction to:
8.2. Socio-Cultural Forces of HR 1. Explain influence of socio-cultural forces on
8.3. Political/Legal Forces HR policies and strategies.
8.4. Economic Forces 2. List at list four HR policies that are strongly
8.5. Environmental Forces influenced by political/legal forces.
8.6. The Workforce 3. Identify the major economic and
8.7. The Organization’s Culture environmental forces of HR?
8.8. The Organization’s Strategy 4. Discuss how the nature of the workforce
8.9. Technology of Production and influences HR decisions.
Organization of Work 5. Identify HR policies that best suit to a given
8.10. Chapter Summary organizational strategy and culture.
8.11. Self-Check Questions 6. Design an HR strategy on the bases of
8.12. Case analysis technology of producing goods and services
and organization of work.
8.1. INTRODUCTION
The most important question about the HR policies of any firm is: How well do those policies
fit? HR systems are precisely those systems whose components sometimes work together and
sometimes class. And they are embedded within larger systems of relationships: the firm and its
diverse stakeholders, the society or societies the firm inhabits, etc. Thus, do the HR policies fit in
the broader context of what the firm is trying to do, where it is located, and how it operates, are
fundamental questions. In this chapter, the framework to assess the fit of an HR system within
the organization’s broader context is described. Specifically, the external environment - socio-
cultural, political/legal, economic, and environmental factors; and the workforce, the
organization’s culture, the organization’s strategy, and technology of production and
organization of work as forces for HR policy are discussed.
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8.2. SOCIO-CULTURAL FORCES
Social forces impinging on HRM begin with the local society’s norms about work and
employment in general. The following questions are key in the socio-cultural forces of SHRM:
What in the society lends status to individuals? What sorts of behavior are frowned upon and
what sorts are condoned? What are viewed as the social responsibilities of the firm? What types
of organizational control are (not) acceptable and legitimate?
In the social sphere, population trends are a key driver. There are, however, counter-cyclical
shifts in population trends. On the one hand, there is rising population growth in Ethiopia and
globally, although this is offset by falling birth rates in Europe and the US generally. Higher
migration results in changes in the size of the potential labor force, depending on the ages of the
migrant populations and their age distributions. It also affects the supply and demand for goods
and services in product markets and public services. On the other hand, a generally young
population, in Ethiopia, results in not only increase of skills, knowledge and competencies from
the labor market but also increased demand for different kinds of goods and services by both
younger and older people. It places greater demands to fashionable consumer goods for younger
people delivered by leading-edge, hi-tech businesses. Another mega-social trend is increasing
socio-economic inequality, with rising affluence for wealthy people and elite groups. This is
accompanied by increased relative deprivation for others, rises in asset prices such as housing
and other living materials. All these social developments have both strategic and HR
implications for organizations in terms of demand for labor, supply of labor and demand for
products or services.
At the micro-social level, there are a number of distinctive social trends, all of which impact on
organizations, employees, the customers they serve and the HR function. These developments
include changing sources of social identity, increased dependency on drugs and alcohol, rising
divorce rates, and rising numbers of single-parent households. One social consequence emerging
out of these trends is increased solo-living (or single-person households) amongst all age groups.
Other social trends include increased self-satisfaction and personal narcissism, with reduced
interest in social conformity as well as greater preparedness to take personal responsibility for
the self. Underpinning these trends is increased individualism and reduced collectivism at home,
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at work and in society. The impacts of these developments on working life are wide ranging.
These include rising demand for flexible working arrangements and contractual flexibility, more
individually oriented HR policies and practices, a lower propensity to unionize and take
organized industrial action, and more job mobility within the workforce.
When we reduce to the country level, the population of Ethiopia is highly diverse, containing
over 80 different ethnic groups, the Oromo and the Amhara being dominant ethnic groups jointly
accounting for 61% of the total population. The Ethiopian Orthodox Christianity (43.5%) and
Islam (33.9%) are the major religions (CSA 2007) that dominates the political, cultural, and
social life of the population. Although it is difficult to secure exact figures, a large number of
Ethiopians, especially those with good qualifications, go abroad to seek employment. The labor
force is growing much more rapidly than the population as a whole because of the young
dominated demographic profile as there are many more under 15 years old entering the
workforce each year than there are old people leaving the labor force. Since an organization is a
reflection of the country’s demographic environment, it can be said that the Ethiopian
organizations are characterized by young, ethnically and religiously diverse, and relatively
unskilled workforce.
Culture is a concept which incorporates all intellectual, ethical, physical, technical and other
activities that characterize humankind as a rational being. It is a wide concept which includes the
modes of life, beliefs, traditions, and the whole set of the material and spiritual wealth which
characterize a certain society as distinct from others. The culture of Ethiopia is diverse and
generally structured along ethno-linguistic lines. Family structure typically includes the extended
family. Family ties are strong. Households in the community include from one to six persons,
half of whom are children under age 10. In times of crisis, the family will take full responsibility
for the family member's problems, whether it is financial, health or social. Disputes are settled by
elders of the community. The society respects elders and accepts their admonitions or advice.
Interaction is personal, informal and intimate; a great deal of interdependence is needed to
accomplish a task or solve a problem. The people of Ethiopia have an ancient culture and deep-
rooted values. The country has one of the lowest crime rates in Africa. Employers in Ethiopia
rarely have cause to distrust the honesty and integrity of their workforce.
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According to Hofstede (1991), culture, in Western languages and in its narrow sense, commonly
‘means civilization or refinement of the mind and in particular the results of such refinement,
like education, art, and literature.’ However, in its broadest sense as mental software, culture is
the collective programming of the mind which distinguishes the members of one group or
category from another. It is a collective phenomenon, because it is at least partly shared with
people who live or lived within the same social environment. As almost everyone belongs to a
number of different groups and categories of people at the same time, people unavoidably carry
several layers of mental programming within themselves, corresponding to different levels of
culture. They may vary at the national, regional, ethnic, religion, linguistic, gender, generation,
social class, and organizational levels.
Hofstede (1991) surveyed more than 116,000 IBM employees in over 50 countries and 3 regions
about their work-related values, and found that managers and employees varied on five
dimensions of national culture: (1) power distance, (2) individualism versus collectivism, (3)
masculinity versus femininity, (4) uncertainty avoidance, and (5) long-term versus short-term
orientation. He defined a dimension as an aspect of a culture that can be measured relative to
other cultures. Each of these dimensions is discussed below in relation to HRM and Ethiopia.
Power distance is the extent to which a society accepts the fact that power in institutions and
organizations is distributed unequally. It is reflected in the values of the less powerful members
of society as well as in those of the more powerful ones. The less powerful members of
institutions and organizations within a country expect and accept that power is distributed
unequally. Cultures that endorse low power distance expect and accept power relations that are
more consultative or democratic. People relate to one another more as equals regardless of
formal positions. Subordinates are more comfortable with and demand the right contribution to
and critique the decision making of those in power. In high power distance countries, less
powerful accepts power relations that are more autocratic and paternalistic. Subordinates
acknowledge the power of others simply based on where they are situated in certain formal,
hierarchical positions. Ethiopia is a high power distance country. It has norms, values, and
beliefs which assume that people have their station in life and inequality is fundamentally
acceptable. It is also acceptable that Ethiopians should be dependent on the privileged and
powerful. The powerful are entitled to privileges as well.
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Individualism is the degree to which people in a country prefer to act as individuals rather than
as members of groups. Individualism pertains to societies in which the ties between individuals
are loose, that is, everyone is expected to look after himself or herself and his or her immediate
family. Collectivism pertains to societies in which people from birth onwards are integrated into
strong, cohesive in-groups, which throughout people's lifetime continue to protect them in
exchange for unquestioning loyalty. Ethiopia is a collectivist society. Social groups such as
family, social class, organizations, and teams all take precedence over the individual. In Ethiopia,
one’s identity is based on group membership; collective views are considered better than
individual opinion. Similarly, membership of a group protects individuals in exchange for their
loyalty to the group.
Masculinity indicates the extent to which the dominant values of a society are "masculine", for
example, assertive and competitive. Masculinity pertains to societies in which social gender roles
are clearly distinct, that is, men are supposed to be assertive, tough, and focused on material
success; women are supposed to be more modest, tender, and concerned with the quality of life.
The values were labeled masculine because, within nearly all society, men scored higher in terms
of the values positive sense than of their negative sense. Femininity, the opposite of masculinity,
pertains to societies in which social gender roles overlap: both men and women are supposed to
be modest, tender, and concerned with the quality of life. Thus, masculine cultures’ values are
competitiveness, assertiveness, materialism, ambition, and power whereas feminine cultures
place more value on relationships and quality of life. Ethiopian society is characterized by high
masculinity.
Uncertainty avoidance is the extent to which the members of a culture feel threatened by
uncertain or unknown situations and try to avoid such situations by providing greater career
stability, establishing more formal rules, not tolerating deviant ideas and behaviors, and
believing in absolute truths and the attempt of expertise. This feeling is, among other things,
expressed through nervous stress and in a need for predictability: a need for written and
unwritten rules. In countries that score high on uncertainty avoidance, people have an increased
level of anxiety, which manifests itself in greater nervousness, stress, and aggressiveness that
creates, among other things, a strong inner urge in people to work hard. They try to minimize the
occurrence of unknown and unusual circumstances and to proceed with careful changes step by
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step by planning and by implementing rules, laws, and regulations. In contrast, low uncertainty
avoidance cultures accept and feel comfortable in unstructured situations or changeable
environments and try to have as few rules as possible. People in these cultures are more tolerant
of change. Ethiopia is a strong uncertainty avoidance society with norms, values, and beliefs that
view conflict as unnecessary. Because of strong uncertainty avoidance, Ethiopians sometimes
prefer people who are cautious, not risk-takers. Similarly, rules and regulations are considered
very important and should be followed. The role of experts and people with authority is
considered very important, and their views are considered correct. Consensus making is
considered vital for the health of society.
The fifth dimension developed later is ‘long-term orientation versus short-term orientation’. This
relates to values associated with a long-term orientation such as thrift and perseverance as
opposed to values more frequently associated with a short-term orientation such as respect for
tradition, fulfilling social obligations and protecting one’s ‘face.’ People, in cultures with long-
term orientations, look to the future while those with short-term orientation are related to the past
and the present. Ethiopian society is characterized by low long-term orientation.
As HRM practices are culture bound, these cultural dimensions have implications on HRM
practices. HR practices do vary by national culture the organization is in. Organizations that use
HR practices consistent with the country’s cultural values are more effective. Power distance
determines the relations between managers and employees. In the country with low power
distance, superiors and subordinates are perceived as partners and in consequence the best
management style is the democratic one. In low power distance cultures, employees do not like
close supervision and prefer participative superior. In cultures with high power distance, the
most often used management style is an autocratic one. Both the managers and the subordinates
consider each other as existentially unequal. In high power distance cultures, the superior is the
person who more often takes decisions without the subordinates’ participation and gives the
subordinates precise instructions in how to execute his decisions. The power distance is also
linked with the internal communication in organizations. In the society with low power distance
communication is more open, and more information is transferred from top-to-down and vice
versa. Moreover, studies show that while internal recruitment of managers and use of multiple
selection methods to hire professionals are consistent to high power distance, flexible work
practice is consistent to low power distance.
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Masculinity/femininity dimension which measures the extent to which aggressiveness and
material well-being are valued in a society versus good interpersonal relationships and general
quality of life influences manager-employee relationship as these cultures are reflected in their
relationships. In regard to long-term orientation dimension, use of multiple employment
selection methods, HR strategy planning, and flexible work practices are consistent to high long
term orientation; external recruitment of employees is associated with low long term orientation.
In a similar vein, flexible work practice and external recruitment of employees can be associated
with individualistic culture whereas commitment to employee training and pay system based on
team performance is consistent with collectivist culture.
Strong uncertainty avoidance societies like Ethiopia have norms, values, and beliefs that view
conflict as unnecessary and needing to be avoided. Because of strong uncertainty avoidance
Ethiopians sometimes prefer people who are cautious, not risk-takers. The role of experts and
people with authority is considered very important, and their views are considered correct.
Consensus making is considered vital for the health of society. This dimension of Ethiopian
culture is reflected in organizations as well. Multiple selection method and flexible work practice
are associated with high and low uncertainty avoidance, respectively.
In sum, national values are associated with the tendency of organizations to implement different
HR practices. Organization performance is higher when there is a good fit between national
culture and HR practices. Thus, organizations should understand the cultural values in which the
organization operates to ensure the HR practices appropriate and effective.
Activity 8.1. Mention any major culture in Ethiopia and explain how it influences HRM
activities.
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
________________________________________________________________________
8.3. POLITICAL/LEGAL FORCES
Legal contract law, employment law, health and safety, consumer protection law, company law,
codes of practice, regulatory bodies, the legal system and the courts are examples of the legal
219
forces of SHRM. Specific issues related to the legal environment of HRM may include the
following questions: What are the statutory responsibilities of the organization? What rights do
workers have, both individually and collectively? What sorts of employment practices are
sanctioned? What legally enforced distinctions must be made among workers? What distinctions
are impermissible?
Political party politics, government, opposition, public administration, public policy, devolved
assemblies, local government, pressure groups, public opinion, institutions, and international
organizations are examples of political forces that have influence on HRM activities. Specific
questions that need to be answered in relation to HRM and politics include the following: How
do political pressures work on the organization in terms of HR policies? What do local
governments expect? What support can be obtained from the political system? What
impediments are imposed by the political system?
The legal landscape of employment has expanded exponentially in the last 30 years and there is
no sign that this trend will diminish. This is especially the case in regulation of the individual
employer–employee relationship, encapsulated in the contract of employment, employment
protection, discrimination legislation and health and safety at work. In terms of the contract of
employment, unfair dismissal and redundancy laws are the major areas of legal intervention.
Discrimination law now ranges across sex, equal pay, ethnicity, disability, religion, age and
atypical employment. Health and safety incorporates working time and related working issues.
Legislation covering a statutory national minimum wage, statutory sick pay, family friendly
policy, human rights and transfer of undertakings are all now recognized fields of employment
law. HR departments have to comply with these legal rules, monitor and evaluate them.
Almost all aspects of HRM are affected by the legal and regulatory environment. In the process
of attending to the legal environment, the field also responds to the social and political
environments that give rise to and shape the promulgation, interpretation, and enforcement of
acts of Council of Ministers, executive orders, tax codes, and even funding for HRM
innovations. When corporations expand their operations abroad, however, they face additional
legal concerns. For example, in European countries, organizations are obliged to set aside
specific sums of money for formal training and development. And for corporations that employ
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expatriates abroad, immigration and taxation treaties can influence staffing decisions. Global
corporations also encounter additional social and political realities. For example, in some
countries, civil laws and religious laws coexist and jointly define a legal context for HRM.
Potential topics for investigation include the conditions and processes that facilitate or inhibit the
adoption and transfer of HRM innovations and the feedback processes through which the HRM
activities of organizations create changes in their social, legal, and political environments.
The new constitution, adopted in late 1994, made Ethiopia a federal democratic republic. The
federation is made up of nine ethnic-based regions and two chartered cities. The federal
Government is headed by a President and a Prime Minister. The latter, together with his/her
cabinet (Council of Ministers), exercises full executive powers. The regions, which make up the
federation, also have their own respective regional Governments. Each regional Government has
a head of the regional state, and bureaus, which are set up along the lines of federal ministries.
The legislature consists of a Council of Representatives and a Council of Federation. The
Council of Representatives is the lawmaking organ of the Republic while the Council of
Federation is entrusted with the task of interpreting the federal constitution. Each regional state
has also its own legislative council.
Currently, Ethiopia follows a developmental state ideology of Northeast Asia, which is usually
described as the explanation for the East Asian industrialization. Developmental state is a
shorthand for the seamless web of political, bureaucratic, and moneyed influences that structures
economic life in capitalist Northeast Asia. It is often conceptually positioned between a free
market capitalist economic system and centrally planned economic system, and called a planned-
rational capitalist system, ‘conjoining private ownership with state guidance’. Positioning the
theory of developmental state between a liberal open economy model and a centrally planned
model suggests it being neither capitalist nor socialist in texture.
The introduction of developmental state theory into the state ideology means, in real terms, a
departure from a neo-liberal economic ideology and a drift towards state interventionism. It
seems, however, that this interventionism does not handicap socio-economic development, but it
supports developmental trajectory. It seems justifiable to claim that a developmental state would
be difficult to sustain in a fully democratic system in which people enjoy extensive rights’. He
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also added that in the process of enriching the nation, the state prefers to enrich itself and not the
people. This might have its own influence on HRM practices in the country.
Organizations in both the private and public sectors have to plan responses to the political
pressures emanating from these bodies, using appropriate strategies, policies and practices if they
are to prosper or at least survive. They do this by drawing upon the support of organized pressure
groups, political lobbying or campaigning publicly. Another ongoing political development is
privatization and marketization. These are normally offset by increased state and European
regulation of private and public businesses on the grounds of accountability and the public good.
Both the corporate and public sectors have to address the legal requirements arising out of
regulation, such as employment legislation or health and safety law as outlined below. Most
importantly in the political sphere, there is increasingly active government involvement in labor
markets. This too provides both opportunities and threats to organizations as employers. On the
one hand, they have to reward, train and develop existing staff to retain them. On the other, they
have to compete with one another for scarce skills and competencies in the open labor market.
Activity 8.2. How does the legal environment influence recruitment and training
activities of an organization?
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
8.4. ECONOMIC FORCES
Major issues that might be raised in the discussion of economic force of SHRM include: What
conditions exist in the local labor market? How great is labor mobility? What economic
pressures does the organization face in other product and factor markets? A number of indicative
trends are discernible. One is market uncertainty arising out of recession and slow macro-growth.
This, in turn, is likely to be offset eventually by an economic upturn and, most probably, the
continued globalization of business activities. The economy is also affected by government
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macro-economic policies, such as fiscal policy, monetary policy and its own economic activities,
as well as by international economic forces. On the business front, for example, an increased role
played by international or multinational companies in national economies, and more intense
international competition for goods and services, contributes to falls in demand in domestic
markets and a rise in unemployment. These and other economic forces impinge on demand for
labor, the types of labor required by firms and public organizations, and labor supply. They
determine how people are recruited, trained or retrained. On the other hand, with hyper-
competitive conditions in some markets, pressure is put on competing firms to retain labor, re-
skill it or make it redundant. Firms have to adjust their HR policies and practices accordingly.
In the wider labor market, there continues to be increased demand for higher skilled workers and
reduced demand for lower-skilled ones. Certainly, there appears to be limited growth in skills
levels. These create recruitment, training and general HR issues for many organizations. At
micro-level, there are indications of greater willingness by some workers to switch jobs and
employers, resulting in higher labor turnover, increased transaction costs for employers, and
personal disruption for the individuals concerned. There are also significant changes in the
structure of the economy, the manufacturing and extractive sectors being much less important
than a generation ago, with increased activity in private and public services today. This has
implications for education and training policy generally and for the employment prospects for
existing and potential workers particularly, such as graduates in higher education.
Like all other least developed countries, Ethiopia’s economic structure reveals a feature of a
subsistence economy. Ethiopia is one of the world’s poorest countries. Almost two-thirds of its
people are illiterate. At US$380, Ethiopia's per capita income is much lower than the Sub-
Saharan African average of US$1,165 in 2010. According to the internationally defined
estimates of UNCTAD and the World Bank, about 85.4 per cent of the Ethiopian population
lives under absolute poverty (one US$ a day) and 94.7 per cent under extreme poverty (two US$
a day). Less than 4% of the population currently supplied with electricity and only 25% with
access to safe water. The telephone density in Ethiopia per head of population is among the
lowest in the world, with less than one per cent of the population having access to a telephone.
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The country’s economy is structurally weak and vulnerable. Amongst others, over dependence
on traditional agriculture, a stagnant industrial sector, excessive commodity and market
concentration for export earnings, low levels of human and institutional development, political
instability, successive natural disasters such as drought and a lack of investible financial and
technical resources are major factors responsible for the prevalence of the alarmingly high
incidence of extreme poverty in the country.
Economically, the agricultural sector, consisting mostly of small privately owned farms,
accounts for about half of the country’s Gross Domestic Product (GDP), 80 per cent of its
exports, and 85 per cent of total employment (UNDP 2013). The major agricultural export crop
is coffee, providing approximately 26% of Ethiopia's foreign exchange earnings. Other
traditional major agricultural exports are leather, hides and skins, pulses, oilseeds, and the
traditional "khat," a leafy narcotic that is chewed. Sugar and gold production has also become
important in recent years. Agri-processing, manufacturing and service industries are all growing
in importance. The manufacturing sector currently constitutes only a small portion of the
economy, contributing about 6.5 per cent of GDP. Ethiopia’s comparative advantage lies
primarily in its abundant, low-cost, disciplined and trainable labor force, the size of its domestic
market, and the numerous river basins affording great potential for irrigation and hydropower
generation.
The continuous surge of inflation and unemployment depict the country’s vulnerable
macroeconomic condition. According to the World Bank (2011) report, the annual end-of-period
inflation, which stood at 16.5 percent in February 2011, increased to 39.2 percent in July 2011.
Food inflation almost quadrupled going from 12.8 percent to 47.4 percent during the same
period. Non-food inflation also remains stubbornly high at 27.8 percent, possibly due to the
upward revision of fuel prices, and a series of depreciations of the local currency over the past
year, which has lead to an increase in the cost of production and transportation (World Bank
2011). The country’s unemployment rate is 14.9%. Under the country’s constitution, the state
owns all land and provides long term leases to the tenants and the investors. Its economy is
highly dependent on rain-fed agriculture which constitutes 43% of GDP in 2013, followed by
services by 45% and industry by 12%.
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Another economic issue is the labor market condition. Labor market conditions can be
characterized along several dimensions including unemployment levels, labor diversity, and
labor market structure. Unemployment levels and labor market structures have long been
recognized as important macroeconomic variables, whereas the importance of labor diversity has
been recognized more recently. Unemployment levels reflect the demand for labor relative to the
supply. Generally, excess demand typically results in low unemployment while excess supply
typically results in high unemployment. Furthermore, as unemployment drops, wages and costs
increase and profits and investments decline; these conditions, in turn, reduce demand for labor.
Conversely, as unemployment rises, absenteeism and turnover rates tend to decrease and the link
between employee dissatisfaction and turnover is weakened.
Activity 8.3. Discuss the impact of unemployment rate on HRM activities?

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8.5. ENVIRONMENTAL FORCES
To protect the ecological environment, there are a number of issues on the business agenda.
These include increased interest in sustainable development, sustainable investment and
sustainable consumption by producers, investors and consumers respectively. For individuals
wanting sustainable production and investment, for example, this means avoiding not only
activities likely to cause illness, disease or death, or to destroy and damage the environment, but
also those organizations that treat people dishonestly or with disrespect. Second, for firms, it
means choosing methods of working and investing that focus primarily on the effects of the
company’s products or services on the environment, people and communities. Another positive
strategy is listing the environmental benefits that producers would like to see their organizations
promote. For workers, this can mean good working conditions and for investors the need to
articulate what they would like to see their money support. Environmentally-sensitive
consumers, in turn, may seek to buy products (or services) which are produced ethically, do not
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harm the environment and promote the well-being of people at work. From an HR viewpoint,
sustainable producers, investors and consumers expect companies to act decently in their
dealings with staff. This means acting ethically in their relations with suppliers and local
communities and managing their businesses with all their organizational stakeholders.
One outcome of this growing interest in environmental issues has been the emergence of ‘green
HR policies’ by a number of environmentally conscious businesses. These companies are noted
as developing strategic environmental management policies, especially in the United States. In
one survey of 93 US companies, it was reported that some companies were undertaking common
green HR initiatives, whether as part of a strategic business plan or a one-off practice. Clearly,
this trend is likely to continue, given the shift to ‘green’ the economy by some leading politicians
and pressure groups. All these environmental developments have implications for the HR
function and the ways in which people are managed at work.
Although green advocacy is limited, employees can have a key role in building a business’s
reputation for green HR, and contented workers can become ‘green’ advocates. A number of
initiatives are possible. First, ‘green’ businesses can get the support of their stakeholders in
promoting a sustainable business model. Second, a variable pay element can link pay to ‘eco-
performance’, with the concept of eco-performance being an extension of a common HR practice
used in environmentally friendly businesses. Third, employees can help customers understand
the importance of ‘green living’, by highlighting the green practices of their own businesses.
Fourth, rewards can be provided to employees who follow green practices established within
their firms, which include: recycling office paper, turning off lights and appliances when staffs
are not in a room, and convincing customers they should recycle their packaging. Employees, in
short, can be ambassadors for everything good about their company. An important one is
advocating sustainability just as naturally as promoting their business over the competition.
Activity 8.4. Currently weather change is a global agenda that forces organization
to respond in their functional activities? What must be the
organizations’ HR strategy to fit to this global change?
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8.6. THE WORKFORCE
The key factors here are mostly demographic. How old is the workforce? How well educated?
How heterogeneous or homogeneous socially? Social homogeneity refers to uniformity with
respect to characteristics - sex, age, ethnic group, income group, and education - and norms of
behavior derived from the society that workers come from. Another important form of
workforce homogeneity is partly social, partly technical – namely, the occupational mix required
in the organization.
The demographic distribution of the workforce can powerfully constrain employment strategy.
For example, firms with a bulge of middle-level managers hired in anticipation of growth that
fizzled out may be unable to sustain life time employment policies. Organizations with workers,
who are, on average, less well educated, will find total quality initiatives more difficult to
implement successfully. The amount of workforce heterogeneity for example, in age, gender,
education, and occupation, also has implications for the degree of diversity an organization
should display in its HR practices. And heterogeneity can fundamentally affect basic
motivational techniques. For instance, peer pressure as a motivational tool or control device
works best in general when the workforce exhibits a fairly high degree of social homogeneity.
The existing Ethiopian workforce is changing. Because of economic shifts and their effects in
different industries, some types of workers are scarce but in high demand, while others are
available in excessive numbers. The rapid growth in technology is creating a need for more
workers with special technical capabilities. These and other factors make it likely that the
workforce composition will continue to change.
Another worker-related shift results from the workforce becoming more diverse. As
organizations develop or increase global operations, diversity in the workforce is becoming more
prominent. Diversity reflects the differences in human characteristics and composition in an
organization. The tangible indicators of diversity that employers must consider include the
following: ethnicity, age/generational differences, gender - men and women, disabilities, and
religion. In addition, individuals can be multicultural and be included in several groups.
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Different organizations approach the management of diversity from several perspectives. For
diversity to succeed, the most crucial component is seeing it as a commitment throughout the
organization, beginning with top management. Diversity results must be measured, and
management accountability for achieving results must be emphasized and rewarded. For
instance, PepsiCo, a large food and beverage company, has developed and implemented a
Diversity and Inclusion Council so that diversity considerations are part of all strategic efforts.
PepsiCo also has regular diversity celebrations, newsletters, and other events. This inclusion of
diversity issues throughout the company contributes to PepsiCo’s success with employees,
managers, and customers. One survey found that more than 60% of firms were committed to
diversity and almost 50% of senior managers recognized the business case for diversity.
The results of increased diversity for organizations, work groups, individuals, and
society/community must be considered. Diversity in some organizations is a core value and part
of its business objectives. They are engaged in recruiting diverse individuals and integrating
them through training and other HR actions, which include establishing communications and
bulletin board systems that enhance diversity efforts. One concern with diversity programs is that
they may be perceived as benefiting only certain groups of persons and not others. Diversity
actions must be well thought out and address both the positive and negative aspects of such
programs, given the workforce composition of many organizations.
Accommodating racial/ethnic differences is a part of everyday life, and such efforts do bring
results. For example, a Michigan manufacturing firm dealt with racial tensions between whites
and workers of other ethnic/racial backgrounds. Initially, few nonwhites attended company
social events, and if they did, they sat apart from the white population. However, after five years
of diversity training and other HR efforts, people of all races and ethnic groups were interacting
more frequently and working together more effectively. This example illustrates why efforts to
integrate people of different types must be made. Integrated work groups, social events,
electronic communications, and other approaches can be used to help with conflict.
In regard to generational difference the expectations of individuals in different age groups and
generations. For employers, these varied expectations present challenges, especially given
economic, global, technology, and other changes in the workplace. Some common
age/generational groups are can be labelled as the Imperial generation (born before 1974), the
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Derg generation (born between 1974 and 1991), and the new generation (born after 1991). As the
economy and industries have changed, the aging of the Ethiopian workforce has become a
significant concern. Workers over age 55 are delaying retirement more often, working more
years, and/or looking for part-time work or phased retirement. Economic conditions are the
predominant reasons why these workers are bypassing the “normal” retirement age of 60. What
the discussion of generations suggests is that managers must be aware of the possible
opportunities as well as the challenges with a multigenerational workforce in an organization.
Women are becoming a greater percentage of workers in the Ethiopian workforce.
Activity 8.5. What HR policies are more important if the workforce is ethnically and
religiously diverse?
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8.7. THE ORGANIZATION’S CULTURE
The organization’s culture refers to the norms of conduct, work attitudes, and the values and
assumptions about relationships that govern behavior at the organization. Many variables enter
here, including: Is the culture egalitarian or hierarchical? Is the culture one of cooperation or
competition among co-workers? Is work itself regarded as a joy or as drudgery that provides a
means to some other end? Is conformity important, or does the organization encourage diversity
or even contention in thought and action? Are workers regarded as mere employees – that is, is
the labor exchange largely “economic” in character? - or are workers regarded more as family
members?
Research on organizational culture suggests several important caveats and reminders in thinking
about the topic. First, please be sure to distinguish the organization’s culture from the norms of
the society in which the organization is embedded. General social norms can either support or
derogate a particular organization’s culture, but organizations sometimes display significantly
diverse organizational cultures within a single social environment.
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This raises a second caveat: Many studies of organizations and their cultures suggest it is
misleading to speak of “organizational culture,” because in fact organizations often display quite
distinct subcultures, even within a single locale or organizational unit. Obviously, variations in
culture, within and between organizations, are likely to have a lot to do with the kinds of work
being performed, that is, the core technology. For instance, we would not be surprised to observe
different value systems among those who heal the sick versus those who manufacture vacuum
cleaners. However, technological determinism is not likely to get us very far, because we also
observe substantial variations in norms and value systems among organizations doing roughly
the same things.
A final caveat concerns the manageability of organizational culture. There is considerable

debate, among both scholars and practitioners, about whether managers can (or should)
consciously manipulate the system of workplace norms and values, or whether instead culture
must be informal and emergent, either because that is its nature or because that is when it is most
beneficial for an organization. We will not make strong assumptions about the ability of
managers or others to engineer cultures according to a particular blueprint they seek, but we will
assume that the HR policies and practices in effect, as well as how they are implemented, can
send powerful messages that are likely to influence organizational norms and values as
experienced by employees.
For this reason, the implications of organizational culture for HR policies (and vice versa) can be
enormous, because culture is either reinforced by or clashes with specific practices and policies,
rendering the culture more or less effective as a means of coordinating and controlling activities.
For instance, a culture that stresses cooperation generally will not mesh well with a system of
performance evaluation to determine raises, bonuses, or promotion employing a strictly enforced
curve to make large distinctions. Wide pay dispersion according to rank fits well with a
hierarchical culture and poorly with an egalitarian culture. A firm that seeks to encourage
individual creativity through explicit rewards and recognition will find that this is more difficult
in a culture stressing conformity in attire and behavior. An organization that wishes to foster a
feeling of family might structure compensation along lines that has the symbolic nature of a gift.
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As emphasized so far in this section, culture is meant to reinforce and be reinforced by
performance evaluation systems, so the connections between them should be tight. If the firm has
a culture of cooperation, stressing individual performance is obviously perilous. If the
organization has or wishes a culture of entrepreneurship, performance evaluation should weight
entrepreneurial efforts heavily; successes should be heavily weighted and failures should be
discounted so that risk taking is not discouraged. If the culture is egalitarian, forced percentages
are out of step. If the culture is clan-like, coarse summary rankings (you are doing okay or, in
exceptional cases, not okay) may be appropriate, or, alternatively, perhaps even no summary
rankings are warranted, relying instead on performance evaluation along a number of
dimensions. This is because the clan-like firm can rely more heavily on intrinsic motivation and
peer pressure (so summary rankings are less needed) and because the act of reducing a complex
web of performance measures to a single stark statistic invokes connotations of the faceless
market, not of friendship or family relations.
Of course, culture is important not only for the content of performance evaluation system, but
also for ht process. Who evaluates performance, how, and with what kinds of involvement and
input from the person being evaluated conveys important cultural messages, such as the degree
of trust placed on employees, the reliance on hierarchy, and how much participation and
openness are valued. To give an example, in organizations that rely heavily on intrinsic
motivation, frequent performance appraisals, even if untied to compensation, can be quite
dysfunctional.
To add another example, piece-rate pay system works best in organizational cultures that place a
premium on individual effort and that legitimize rewards for hard work and/or skill. They
typically work poorly in family-like cultures, or in cultures dominated by professional norms that
denigrate speed and quantity or output relative to the quality, challenge, elegance, thoroughness,
creativity, or subtlety of the work done.
In regard to internal labor market, the culture of an internal labor market naturally support
loyalty and cooperation as virtues. But internal labor markets can and do work well with cultures
that are more family-like and with those that are more market-oriented. Notwithstanding some
notable examples of internal labor markets that make a point of valuing flexibility and
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innovation, internal labor markets tend to have cultures that will emphasize stability and
continuity. For obvious reasons, the culture of an internal labor market will tend to place great
value on process and abiding by rules, values, and conventions.
Organizational culture is also likely to influence the extent of centralization versus

decentralization of HR policies. Greater centralization is expected in organizations whose
cultures value central control over autonomy, egalitarian over meritocracy, and tradition over
change (an emphasis on change will tend to favor decentralization to facilitate more rapid local
adaptations); where there is a presumption of distrust and a belief that workers will shirk unless
they are monitored and controlled; where processes and rule compliance are valued over
outcomes; and when the organization professes some higher calling requiring consistency of
messages and intense enculturation, which are likely to favor centralization of at least some
facets of HRM.
Activity 8.6.For what type of organizational culture is piece-rate wage system more
appropriate? Why?
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8.8. THE ORGANIZATION’S STRATEGY
By the organization’s strategy, we mean the answers to the following questions: What are the
organization’s distinctive competencies, things it can do better than the competition? On what
basis does the organization hope to achieve competitive advantage – for instance, technical
innovation, premium customer service, superior quality, an integrated line of products or
services, low-cost production? On what basis will its competitive advantage be sustained – is the
company relying on financial and knowledge-based barriers to entry, on legal protection, on a
reputation for aggressive behavior in response to challenges? What are the long-term objectives
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– for instance, growth, market share, or niche penetration? What actions are being taken to get
there?
For instance, performance evaluation systems should be congruent with the strategy of the firm,
helping to communicate that strategy clearly and forcefully to individuals and putting positive
value on behaviors that reinforce the strategy. For example, a manufacturing firm whose strategy
involves providing high levels of quality and after-sale service to customers should not reduce
performance evaluation of salespersons to levels of dollars sold or new customers developed.
Looking at reorder levels of surveyed measures of customer satisfaction may be much better. In
the same context, a firm that emphasizes after-sale service may wish to slow down the pace of
performance evaluation, so that a greater amount of relevant information can be brought to bear.
Although the need for congruence between strategy and performance evaluation is obvious, it is
not hard to find examples of organizations that fail to satisfy this simple desideratum. When an
organization changes its strategy, using performance evaluation to communicate the nature,
importance, and salience of the change to employees can be very effective.
To add another example, piece-rate pay systems emphasize speed and efficiency. They can lead
to neglect of quality, unless it is easy to monitor. In some service industries where there are high
rates of repeat services for the same server, this problem is ameliorated by the server’s desire for
a loyal clientele. Thus, piece-rate pays systems mesh well with strategies for which low-cost
production and speed of provision are important.
Organizations whose strategies entail rapid growth are less likely to be plagued by the potential
dysfunctions and costs of internal labor markets. Internal labor markets also appear well suited to
strategies entail a long-term, stable workforce – for instance, strategies based on quality, service,
long-term relationships with clients. The ability to sustain an internal labor market may also
depend on the financial strategy of the firm. A number of firms that have taken a long-term
orientation to their workforce have eschewed the short-term pressures imposed by the capital
markets by keeping stock ownership closely held or by resisting external debt.
In regard to globalization, corporations can follow quite different global strategies that bear on
HRM. For instance, one form of globalization involves developing the capacity to serve locally
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differentiated markets, which vary markedly in their particular characteristics and need, while
leveraging corporate-wide resources. This strategy would seem to presuppose a considerable
amount of hiring of local personnel, well versed in their specific markets, and consequently
entail a fair amount of differentiation in HR policies and practices across business units and
especially across locales. Hence, one would expect to see a fairly low degree of centralization in
HR.
In contrast, some globalization strategies are predicated more on developing global brand equity
and facilitating the transfer of knowledge, products, and technologies from one business unit to
locale throughout the organization, particularly when the client or customer being served is itself
a global enterprise. In this setting, we would expect to observe a higher degree of uniformity and
consistency in HR practices sought across business units and locales. This will support
coordination and facilitate transfers of personnel, which are likely to be important in
implementing this form of global strategy. Consequently, we would expect to observe a
somewhat stronger role for central HR function in firms pursuing this type of strategy, which
would include balancing the need for locally competitive HR practices against the need for
companywide consistency, assisting with global rotations, and serving as internal consultants to
maximize organizational learning and teamwork across intra-organizational boundaries. In
addition, this version of globalization is likely to rely more extensively on expatriate hiring, to
ensure that new operations established in far-flung locales are appropriately integrated with
corporate strategy and culture.
In regard to the different competitive strategies firms follow, there is a significant influence on
HRM priority. For instance, competing firms that follow differentiation and cost-leadership
strategies will follow different HRM priorities suggesting that business strategy an important
influencing force for HRM. Differentiation implies creating and developing new products or
services that will set a firm apart from others in the industry. Thus, to facilitate a differentiation
strategy, firms need to foster innovation. In contrast, firms pursuing a cost-efficiency strategy
will continue to offer the same products or services as others in the industry. Reducing costs,
becoming more cost-efficient, and thus being able to lower prices are the ways a firm sets itself
apart from the competition
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Regardless of the type of strategy, as firms begin strategizing, they begin to emphasize planning.
Thus, firms with either strategy are likely to place a high priority on human resource planning.
Similarly, as firms begin to strategize, they begin to focus and seek ways to become more
effective and to get the most from employees, both in terms of quantity and quality. Although the
specific issues will vary depending upon the type of strategy, all firms with clear strategies are
likely to give priority to HR improvement. HRM priorities will differ for firms with different
competitive strategies. Specifically, firms pursuing a differentiation strategy place a higher
priority on HRM innovation than firms pursuing a cost-efficiency strategy.
Activity 8.7.How does an organization’s strategy influence HR strategy and policy?

Discuss with example.
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8.9. TECHNOLOGY OF PRODUCTION AND ORGANIZATION OF WORK
Technological advancements and their adaptation as per the requirement is an important

consideration in HRM. The challenge is to make technology a viable, productive part of the work
setting. During the past decades, there have been ground-breaking technological innovations in
society. These have implications for organizations, managers and workers. The most obvious
examples are the World-Wide Web, email, intranets, Blackberries, video-conferencing and, in
HRM particularly, the introduction of HR databases, electronic payroll systems and electronic
record systems, all linked with innovatory ICTs. During the past 10 years or so, ever-newer
forms of ICTs have been launched, most of which have implications for how people construct
their identities and how they are managed at work. These include Google’s search engine;
Wikipedia, an online free encyclopedia; Twitter, claimed to be one stage on from Google by
applying human intelligence and recommendation to the ordering of information. Other
technological communication innovations include the iPhone, with its touch screen, rotating
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screen and zooming screen; the classified advertising database now operating in over 50
countries; and Facebook with over 300 million people active on the website. Developments in
medical and health technologies are also extending life expectancies and how long people work
and remain in the labor market. Other important technological drivers include improvements in
biotechnology, hi-tech medicine and a remarkable range of complex pharmaceutical products.
A number of implications arise out of the applications of these new technologies. First, there has
been the dramatic reduction in the costs of digital information and communication processing,
which is not showing any sign of decreasing returns and is unlikely to do so in the future.
Second, there has been the technologically driven ‘digital convergence’ between communication
and computer technology at all levels, which is rendering feasible any combination of
communication forms. Third, there has been the rapid growth in international electronic
networking, both terrestrial and through satellites. Fourth, these developments affect
communication between individuals, within organizations, amongst organizations, and
increasingly between individuals and machines. They affect all aspects of society, including
work, business and the public sector. Fifth, these technologies render physical space and distance
irrelevant in many business, working and human transactions. This effectively makes ICTs the
first global, technological transformation process. They radically affect how people work, what
they do at work, and how people are managed within organizations.
In this module, by technology of production, we mean something a bit broader than what is
raised so far and what you might think. In addition to the usual definition of technology, the
conception in this section includes the factors and conditions that bear on how labor inputs are
converted to outputs. We have in mind the broad picture of how tasks are organized and
coordinated, not simply what kinds of machines are employed. A list of some of these factors
and conditions follows, together with some examples of how each bears on important HR policy
issues.
8.9.1. PHYSICAL LAYOUT, AND WORKER PRIVACY AND PROXIMITY
Is the work conducted in a single location, with workers in close proximity to one another, or is
the work conducted at isolated locations? This is potentially important in at least two ways:
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First, work conducted in isolation will be harder to monitor and harder to direct. Consider far-
flung service-oriented companies, such as the Ethiopian Postal Services Enterprise. It is not
surprising that such companies typically combine information technology, for example, on-board
devices that transmit data to central mainframes with strong inculturation of their workforce in
order to ensure compliance with company policies and quality standards. In contrast when work
is conducted in an environment with many similar workers present, peer pressure can more
readily be employed for good or in case of peer-induced output restriction, for bad. Second,
when workers are in close proximity and technically interdependent, it also becomes harder to
treat differently workers who see themselves as similar and worker dispute is more easily
mobilized. It is hardly a coincidence that unions are more prevalent in such settings.
8.9.2. REQUIRED SKILLS
What skills are required? Are those skills acquired externally or on the job? Are those skills firm-
specific or are they transportable? When workers’ skills are acquired on the job, new hires are
usually less productive than workers with longer job tenures. Even when skills can be acquired
off the job, the firm often pays for their acquisition. In either case, the costs of turnover can be
high and the firm will take steps to retain its already-trained workers and attract workers it will
want to keep. When skills are acquired on the job and skill requirements increase with rank,
promotion-from-within systems acquire substantial advantages. When workers acquire skills on
the job, they often do so from co-workers, which have implications for how rewards are
distributed. In particular, seniority-based pay and promotion systems are employed under these
circumstances, so that senior workers are willing to share knowledge with their junior
colleagues.
8.9.3. MONITORING EMPLOYEE INPUT
For a variety of reasons, it is often important to monitor what the employee does on the job. This
can mean monitoring the employee’s overall level of effort, or how the employee allocates time
among tasks. Thus, the technological questions are: How and how well can we do it? How
expensive is it to monitor? How easy is it to observe the employee? How intrusive would direct
monitoring be?
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This is connected to matters of physical proximity and privacy. In many cases, direct monitoring
of activity is either too costly or too intrusive to undertake. In such cases, indirect measures of
employee contributions are sought. Indirect measures are simply levels of output achieved by the
worker: How many pieces of fabric does a fabric cutter cut? How many students passed the
exam? What are the unit costs achieved by a plant? What profits are achieved by the firm? The
relevant technological questions here are:
1. To what extent can the employee, by her level of input, control these measures of output? In
almost every job, the tangible measures of output are not completely under the control of the
individual employee. Raw materials may be bad. Uncontrollable factors may intervene, such
as a crippling natural disaster in a salesperson’s or plant manager’s territory. If we measure a
salesperson’s output by the Birr volume of sales or the number of units sold, we will be
looking at a very noisy measure of labor input because so many factors outside the
salesperson’s control can influence a good or bad result. In contrast, if we look at the output
of a piece-rate cutter of fabric, there is a much more direct and noise-less connection between
labor input and the level of output.
2. When employee input is multi-faceted, are there good (relatively noise-free) measures of the
different facets? Can we find a good summary measure of the many facets, good in the sense
that it captures what is important to the firm? For instance, fabric cutters might sacrifice
quality for speed. It is probably cheap and easy to monitor the speed with which a fabric
cutter works, but it may be very difficult or expensive to get good contemporaneous
information about quality of his work.
These two factors play a critical role in designing extrinsic incentives. When workers have little
control over tangible measures of output, it can become next-to-useless to base incentive
compensation on those measures of output. Furthermore, when a job involves a number of tasks
only some of which are easy for the individual to control, performance-based rewards will often
encourage a risk-averse employee to focus on those tasks over which he or she has the greatest
control. But it is often the hardest-to-measure stuff that is most important from the
organization’s viewpoint.
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8.9.4. TASK AMBIGUITY AND CREATIVITY
When “what to do” is reduced to a standard operating procedure, task ambiguity is low. But
some jobs score quite high on task ambiguity and requisite discretion, such as a physicians, self-
directed research scientists, and high-level general managers. In these jobs, it can be just as
important to exercise good judgment in selecting what tasks to carry out as it is to execute those
tasks well. A physician who selects the wrong procedure but performs it masterfully is of little
use to the patient. In extreme cases, creativity – finding entirely new tasks to perform or new
ways to perform old tasks - is the most important factor in good performance. In general, the
greater the level of task ambiguity, the harder it is to control performance by explicit incentives,
because it is harder to measure performance. At the very least, explicit incentives should be
based on long-term performance, usually defined in a broad, diffuse, and subjective manner.
Reliance on intrinsic goals or rewards is often more effective still.
8.9.5. PATTERN OF WORKER INTERDEPENDENCE AND COOPERATION
By worker interdependence, we mean the extent to which the product of one worker’s efforts is
affected by the efforts of other workers. In some cases, each worker’s efforts stand or fall on
their own; examples might include writers and traveling salespersons except insofar as a writer’s
success depends on the editor or publisher, a salesperson’s success depend on the quality of the
product being sold or on after-sale service given by others. In other cases, interdependencies are
sequential – each person depends on a sequence of predecessors but not on anyone further down
the chain. Sequential manufacture along an assembly line or in a batch process often has this
character. In still other cases, interdependencies are complex and reciprocal; the results of one
person’s efforts depend on the efforts of others, whose results depend in turn on the efforts of the
first. Many sorts of team production, for example hospital care, have the character.
The greater the interdependence, the harder it is to separate the level of one worker’s
performance from the overall performance of the group. For that reason, extrinsic, single worker
incentive schemes are harder to maintain, especially if they generate wide disparities in rewards.
How would you like to fly on an airplane in which the pilot and copilot were fighting over the
controls, competing to receive credit back at the headquarters for landing the plane? When
interdependence is high, group-based incentive systems are often employed, with some reliance
on peer pressure to control free-riding.
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When workers must cooperate extensively, there is the same kind of potential for distortion of
incentives discussed above in the case of Sears’ automotive repair centers. The extent of an
employee’s cooperation will often be harder to measure and take longer to reveal itself than other
aspects of that same employee’s job performance, such as the quantity of output, attendance, etc.
performance evaluation and reward schemes that focus too much on short-term and easier-to-
measure outcomes can provide inadequate incentives for workers to cooperate. For this reason,
for example, the most experienced or lead workers in a piece-rate facility such as fabric cutting,
who are expected to devote some of their time to training new workers and solving problems that
arise, sometimes receive time-based pay rather than piece-rate wages.
The impact of patterns of interdependence doesn’t end with questions of monitoring and
incentives. There are also social ramifications; for instance, high levels of interdependence
generally involve high levels of personal interaction, which can trigger processes of social
comparison.
Activity 8.8. What are the implications of monitoring employee input, task ambiguity and
creativity, and pattern of worker interdependence and cooperation on
specific HRM activities?
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
An organization’s HR policies must fit with the broader context of the organization. Socio-cultural, economic,
political/legal, and environmental factors are important factors that require HR policies to fit with. Social forces
impinging on HRM begin with the local society’s norms about work and employment in general. The following
questions are key in the socio-cultural forces of SHRM: What in the society lends status to individuals? What sorts
of behavior are frowned upon and what sorts are condoned? What are viewed as the social responsibilities of the
firm? What types of organizational control are (not) acceptable and legitimate? National values are associated with
the tendency of organizations to implement different HR practices. Organization performance is higher when there
is a good fit between national culture and HR practices. Thus, organizations should understand the cultural values in
which the organization operates to ensure the HR practices appropriate and effective. The implications of
organizational culture for HR policies (and vice versa) can be enormous, because culture is either reinforced by or
clashes with specific practices and policies, rendering the culture more or less effective as a means of coordinating
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and controlling activities. Thus, the organization’s culture is an important force that influences HR strategies and
policies. In regard to the different competitive strategies firms follow, there is a significant influence on HRM
priority. For instance, competing firms that follow differentiation and cost-leadership strategies will follow different
HRM priorities suggesting that business strategy as an important influencing force for HRM.
Moreover, the workforce, the organization’s culture, the organization’s strategy, and technology of production and
organization of work are important factors that influence HR policies of a firm. The key factors in the workforce are
mostly demographic that seek answers for the questions: How old is the workforce? How well educated? How
heterogeneous or homogeneous socially? Under the factor of an organization’s culture, the following questions are
usually posed: Is the culture egalitarian or hierarchical? Is the culture one of cooperation or competition among co-
workers? Is work itself regarded as a joy or as drudgery that provides a means to some other end? Is conformity
important, or does the organization encourage diversity or even contention in thought and action? Are workers
regarded as mere employees or are workers regarded more as family members? By the organization’s strategy, we
mean the answers to the following questions: What are the organization’s distinctive competencies? On what basis
does the organization hope to achieve competitive advantage? On what basis will its competitive advantage be
sustained? What are the long-term objectives? What actions are being taken to get there? The conception of
technology involves the factors and conditions that bear on how labor inputs are converted to outputs, how tasks are
organized and coordinated, and not simply on what kinds of machines are employed.
1. Discuss how organizational culture forces employee performance evaluation strategy of an

organization?
_________________________________________________________________________________
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2. When a firm’s globalization strategy is more on developing global brand equity and facilitating
the transfer of knowledge, products, and technologies from one business unit to locale
throughout the organization, what impact will it have on HRM strategies?
_________________________________________________________________________________
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3. Explain how uncertainty avoidance culture influences HRM and mention any three HRM
activities that are related to high uncertainty avoidance.
_________________________________________________________________________________
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_________________________________________________________________________________
_________________________________________________________________________________
4. How do labor mobility influence SHRM activities?
_________________________________________________________________________________
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5. When the required employee skill is acquired from the organization on the job, what
compensation and promotion schemes are more appropriate? Why?
_________________________________________________________________________________
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________________________________________________________________________________
8.12. CASE ANALYSIS

The Construction and Business Bank (CBB) will end a 40 year journey when it is incorporated into the Commercial
Bank of Ethiopia (CBE) by the end of this fiscal year. It will also mark an end of a long saga in Ethiopia’s banking
history, which involved nationalization, mergers, and restructuring. What had once been a housing mortgage bank
will add just 122 branches to its giant sibling, which currently has 992 branches as of December 22, 2015. The
Government Financial Enterprises Agency (GFEA), whose decision it was to merge the banks, told journalists on
December 22, 2015 at the head office of CBB that its intention was to create one giant bank that would be
competitive in Africa and worldwide. The CBE now has only one international branch in Juba, South Sudan. Its
unaudited gross profit for the past fiscal year, which ended on July 7, 2015, was 12 billion Br. Before passing this
decision, the Agency had conducted a study on how the public financial institutions, CBE, CBB, the Development
Bank of Ethiopia (DBE) and Ethiopian Insurance Cooperation (EIC) should be structured in implementing the
second Growth & Transformation Plan (GTP II).
A source close to CBB told Fortune that the Bank had been unable to improve its ailing financial performance,
leading to the latest decision. For the past six years CBB has been going through a reform program intended to
enable it to stand on its own two feet, according to this official. Capital injection was one of the options the Agency
considered but a plan to inject 1.5 billion Br was later dropped, according to a senior official. This bank had been
identified as one of five least performing banks in Ethiopia up to five years ago, according to this official who spoke
anonymously.
One of CBB’s problems could be a lack of mission that differentiated it from CBE, according to Abdulmenan
Mohammed Hamza, accounts manager at Portobello Group Ltd., a London based holding company. “Although the
bank does not want to disclose figures of either their loans or deposits, it is not as it is expected which has scared the
Agency. It is not going to be an easy thing for the Agency to support two state-owned banks that have the same
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features,” Abdulmenan added. It would have been good to redirect the CBB to the mortgage business, for which it
was initially established, he suggested.
News of the merger was no surprise for the management, but for the employees, who heard the information
suddenly, it has been worrying. Sintayew Woldemichael, director of the Agency, has assured staff that there will be
no layoffs, with all the CBB personnel continuing in their jobs. The Bank has 1,993 employees working in its 122
branches. Both CBB and CBE are using the CORE banking solution supplied by Temenos. CBB’s, which was
procured for 306.9 million Br, was inaugurated on November 14, 2015. “Since our technologies are similar, other
tasks, like transferring accounts and updating them to the new version will be a matter of a single night’s work,” the
CBB official claimed.
This official is not sure what his fate under the CBE will be, but he says no layoffs are going to happen. The
management of the Bank has known for a while that the larger bank was going to take theirs over, but for the
majority of the employees the announcement was breaking news. Some employees have expressed their fear that the
new management could decide to shed some employees, while for CBB’s public communications officer, Abay
Sime, there is only the odd feeling of having to work under a different management after eight years with the Bank.
“There may be a shift of workers to the different branches in redundant places but still there should be no fear with
the employees,” the senior official told Fortune, adding that loss of job is not a risk as the industry needs more
branches in the future.
The concern has, however, been shared by customers as well, some of whom were observed closing their accounts
with the CBB. One client, Sileshi Aweke, was at the bank the day after he learned the news from the social media.
He had an account with CBB for the past five years. “I was never sure about this bank,” he said. He had delayed
decision, but now he is not clear what is going to happen to his account. “Even the accountants do not know what is
going to happen from here onwards,” he said. “I do not want to risk my money.” According to an unaudited report,
CBB has total assets of 7.6 billion Br, a drop in the ocean compared to CBE’s 276 billion Br. Its paid-up capital was
also 500 million Br. The senior official Fortune talked to, claimed that CBB’s competitiveness was at the level of
Awash and Dashen banks, whose latest reports show assets of 23.8 billion Br and 24.7 billion Br, and capital of 1.7
billion Br and 1.2 billion Br, respectively.
In 1975, CBB came into being following the year the socialist regime took over, with the merger of the Savings &
Mortgage Corporation and Imperial Saving & Home Ownership Public Association, forming the Housing & Saving
Bank with a working capital of six million Birr. This bank later changed its name to the Construction & Business
Bank, with a mandate of import financing, export financing, non-resident accounts, loans, mortgages, saving
deposits, investment and money transfer services. CBE came into operation on January 1, 1964, with capital of 20
million Br, by taking over the commercial banking activities of the former State Bank of Ethiopia; the remaining
part of the bank became the National Bank of Ethiopia, Ethiopia’s central bank. Later, in 1980 CBE took over Addis
Bank, the addition of which increased its capital to 65 million Br. Addis Bank itself was the result of a merger
between Addis Ababa Bank, which was nationalized, and the Ethiopian operations of the Banco di Roma and Banco
di Napoli. Addis Ababa Bank was an affiliate of National & Grindlays Bank. In the 1970’s the Khartoum
government nationalized a branch the State Bank of Ethiopia had opened there. When Ethiopia’s civil war came to a
close in 1991, the Commercial Bank of Ethiopia also lost its branches in Eritrea, which became the Commercial
Bank of Eritrea. (Source: Fortune, Vol. 16 No. 817, Sunday, December 27, 2015)
Discussion Questions
1. Discuss the CBB’s concern for employees in the acquisition decision. What impact will it have on
employees?
2. Discuss the major causes for the acquisition decision.
3. Is it a good strategy for CBB to be acquired by the CBE? What will be the impact on customers and other
stakeholders?
4. How can the diverse cultures of the two banks be managed? Will the integration be easy? Why or why not?
5. What are the advantages and the disadvantages of the acquisition for CBE?
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CHAPTER NINE
PERFORMANCE IMPACT OF STRATEGIC HUMAN RESOURCE
MANAGEMENT

9.2. Nature of Firm Performance to:
9.3. Models of the HRM–Performance 1. Discuss the HRM-Performance relationship Models
Relationship 2. Identify individual high performance HR practices
9.4. Individual High Performance Practices 3. Identify limitations of individual high performance
9.5. Limitations of Individual Practices HR practices
9.6. Evolution of Practices 4. Discuss the evolution of individual HR practices to
9.7. Systems of High Performance HR systems of HR practices
Practices 5. Explain how individual HR practices contribute to
9.8. Individual Best Practices vs. Systems of firm performance
Practices 6. Explain how systems of HR practices contribute to
9.9. Chapter Summary firm performance
9.10. Self-Check Questions 7. Compare and contrast individual best HR practices
9.11. Case Analysis with systems of HR practices
9.1. INTRODUCTION
A major premise of SHRM is that investments in HR can provide a sustainable source of

competitive advantage and can increase the likelihood of successful implementation of the firm’s
business strategies. Because of these effects, investments in human capital have the potential to
produce attractive rates of return for the firm’s shareholders. The process of investing in HR goes
beyond simply hiring and retaining good people. Investments in HR can take several forms. They
may be relatively direct, such as training employees in order to increase their productivity or may
take a more indirect approach as well. This chapter will examine the impact of individual HR
practices and systems of such practices. The chapter begins by examining the models of HRM-
Performance relationships. Then, it focuses on the impact of individual high-performance HR
practices. It then addresses the limitations of individual best practices in terms of their effect on
performance and of the evolution of individual practices to systems of practices. The discussion
then focuses on the effects of systems of high performance practices. Finally, there is an
examination of the contingency view of SHRM, which maintains that the full benefit of
individual best practices or systems of practices is realized only when these practices support the
firm’s business strategy and match well with the firm’s organizational context.
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9.2. NATURE OF FIRM PERFORMANCE
Firm performance is one of the most broadly and extensively used dependent variables in
organizational studies today, and yet, at the same time, it remains one of the most imprecise and
loosely-defined constructs. In the strategy literature, the focus of attention on this construct has
been concerned almost entirely with financial measures of performance. Conceptually, firm
performance has been defined as the comparison of the value produced by a company with the
value owners expected to receive from the company. A narrow definition of performance centers
on the use of simple outcome-based financial indicators that are assumed to reflect the
fulfillment of the economic goals of the firm. The literature reveals that studies into the HRM-
performance link have, as yet, not determined a specific and precise meaning for the firm
performance construct. In HRM-performance research, the performance outcomes of HRM can
be viewed in different ways. Researchers mostly use four levels of outcomes: HR related
outcomes (affective, cognitive and behavior); organizational outcomes (productivity, quality,
efficiencies); financial outcomes (profit, sales); market based outcomes (market value). This
categorization of outcomes has a significant importance exploring HRM-Performance link. The
relevance lies in two aspects: (1) some outcomes, such as HR outcomes, are more proximal to
HR practices than others; (2) the impact that HR practices have on more distal outcomes are
through the impact on more proximal outcomes. To truly demonstrate the impact of HR practices
on profitability, it is essentially to see how they impact proximal outcomes and more distal
outcomes (see Figure 9.1.).
Figure 9. 1 HRM Impact on Performance Logic
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Thus, the major problem in HRM–performance relation is the measures of performance to be
taken. With respect to performance, the most important problem refers to the use of objective
(explicitly measured) or subjective (based on perception) performance measures. Referring to the
objective data, although profitability is assumed to be a profound end goal of HRM, the problem
is that there is no convincing methodology for measuring the influence of HR practices on
profitability. There are so many other factors which will intervene to influence profitability. This
has led many researchers to explore measures that are closer to the HR practices, for example
employee turnover or absence. While both profitability and absence are objective measures,
however, both objective and subjective measures are highly variable between sectors, economic
philosophies and geographic areas.
9.3. MODELS OF THE HRM-PERFORMANCE RELATIONSHIP
The assumption underpinning the practice of strategic HRM is that people are the organization’s
key resource and organizational performance largely depends on them. If, therefore, an
appropriate range of HR policies and processes is developed and implemented effectively, then
HR will make a substantial impact on firm performance. Firm performance is positively
impacted by the presence of SHRM practices which tend to create a significant contribution on
organizational competencies, and this in turn becomes a great boost for further enhancing
innovativeness. Organizations link the maximization of performance with SHRM practices. As a
result of intensive competition, shorter product life cycles, volatile product and market
environments, firms constantly search for newer sources of competitive advantage, one of the
most important being SHRM that has the potential to improve and determine an organization’s
fate.
Human capital theory also suggests that HR practices can directly influence firm performance.
People possess skills, knowledge and abilities that provide economic value to firms – since firm
investments to increase employee skills, knowledge and abilities carry both out-of pocket and
opportunity costs, they are only justified if they produce future returns via increased productivity.
The higher the potential for employee contribution in a firm, the more likely it is that the firm will
invest in human capital via HRM activities, and that these investments will lead to higher individual
productivity and firm performance.
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The SHRM approaches – the universalistic, the contingency, and the configurational - discussed
in chapter four suggest different routes through which HR practices contribute to business
performance. Universalistic or best practice approach of SHRM requires that the key set of
important strategic HR practices is identified, and that these practices influence business
performance, maximizing horizontal fit. This approach suggests that business strategies and HR
practices are mutually independent in determining business performance. Contingency or
strategic fit approach of SHRM requires that a business strategy is identified, and then that we
consider how individual HR practices interact with that strategy to result in business
performance, thus maximizing vertical fit. This is a sequential model, the choice of business
strategy preceding the choice of HR practices.
Configurational or bundles approach of SHRM requires that we first derive from theory
internally consistent configurations of HR practices to maximize horizontal fit. Then we select a
strategic configuration theory. Finally, we link the theoretically derived SHRM systems to
different strategic configurations to maximize vertical fit. This approach advocates interrelation,
suggesting that business strategies interact with HR practices in determining business
performance.
Although there is no clear picture as to which of these perspectives is strongest there is at least
some evidence that a contextual approach is preferable. In practicing SHRM, we have to
distinguish between ‘intended’ HR policies, which are developed by the decision makers of the
organization, ‘actual’ HR practices that are implemented with respect to the intended HR
policies, and ‘perceived’ HR practices which indicate how employees experience actual HR
practices. Actual HR practices are those which are applied, usually through and by line
managers, who undertake on a daily basis a whole series of actions that have an impact on how
employees experience HR practices that are applied to them. Although the process of
successfully implementing HR practices depends on the skills of the line managers in
communicating and dealing with problems, there is the risk that line managers simply fail to
implement practices or may implement them badly, affecting in turn employees’ responses.
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The General Causal Model of the HRM–Performance Relationship
Many of the HRM-performance relationship models focus on the two end-points. At one end is
HRM strategy and at the other end is business performance (operational or financial). But what
happens between these two endpoints? Exactly how do HR practices influence business
performance? The mechanism, which remains unknown, is often referred as the black box.
In trying to illuminate the black box, researchers initially concentrated on the skills, attitudes and
behavior of employees. This was based on the assumption that improved performance is
achieved through people, in terms of better skills, attitudes and behavior. This reflects a general
consensus that HR practices do not lead directly to business performance. Rather, they influence
human capital, in terms of employee skills, attitudes and behavior, and it is these HRM outcomes
that ultimately lead to performance. This process of A influencing B through C is known as
mediation. Here, HRM outcomes positively mediate the relationship between HRM and
performance. This is known as the mediating model (or general causal model).
We can distinguish two types of linkages in this model. There is a direct linkage from HR
practices to business performance, which is also called the unmediated HRM effect. This
suggests that HR practices have a direct influence on business performance. The indirect linkage
through HRM outcomes, which is also called the mediated HRM effect, indicates that HR
practices influence HRM outcomes, which in turn influence business performance. It is not
necessary for both direct and indirect linkages to be present at the same time. It is possible that a
mediated effect may exist in the absence of an unmediated effect. In cases where both direct and
indirect linkages are present, the intervening process is called partial mediation. In cases where
only the indirect linkage is present, the intervening process is called full mediation. The final
link in the diagram of Figure 9.2 is labeled as reverse causality. The argument for this is that
high-performing firms can afford HR practices. Thus, the performance outcome makes available
to the organization the ability to implement costly HR interventions. Few studies have
investigated the strength of forward versus reverse causality. However, in small firms reverse
causality from operational performance to HR practices is stronger than forward causality from
HR practices to operational performance through employee attitudes and behavior.
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Figure 9. 2 The General Causal Model of the HRM-Performance Relationship
While we have explored how the black box works, we yet have to decide on what it actually
contains. All agree that HRM outcomes constitute the heart of the general linkage framework
presented in Figure 9.2. Some add in further sub-boxes to such linkages. For example, attitudinal
outcomes could be a sub-box consisting of employee motivation, commitment and satisfaction.
Behavioral outcomes could make an additional sub-box containing employee presence
(counterpart of absenteeism), employee retention (counterpart of turnover) and organizational
citizenship behavior (OCB), which refers to the work-related behavior that goes above and
beyond that which is dictated by organizational policy and one’s job description. However, this
process produces two fundamental questions. How many sub-boxes explain the black box, and
what is the content of each sub-box? Details of HRM activities, HRM outcomes, and firm
performance dimensions are presented in an extended general causal model of the HRM-
Performance relationship in Figure 9.3. It also indicates the organizational and individual
employee level contingencies of the three components of the model.
Activity 9.1 Discuss the relationships of HRM activities, HRM outcomes, and
firm performance.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
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Figure 9. 3 An Extended General Causal Model of the HRM - Performance Relationship
The AMO Model of the HRM–Performance Relationship
In trying to unlock the black box a large number of models have been proposed, but one of the
most influential is the AMO model, arguing that organizational performance is best served by
employees who have the ‘ability’ to do the work possessing the necessary skills and knowledge,
who are ‘motivated’ to work and who have the ‘opportunity’ to arrange their skills in doing
their work. Their model asserts that performance is a function of Ability + Motivation +
Opportunity (i.e. AMO).
The philosophy of the AMO model is that there is no specific list of HR practices that may
influence performance. Instead, the whole process depends on HR architecture that covers
policies designed to build and retain human capital and to influence employee behavior. Thus,
according to the HR architecture concept, there is a range of HRM policy domains (ability,
motivation, opportunity) that are determined according to organizational context (e.g. industry,
culture, country). The basic HRM policies that are required in order to turn AMO into action are
usually considered to be the following: recruitment and selection; training and development;
250
career opportunities that are linked to ability and skill; rewards and benefits that are linked to
motivation and incentive and involvement, team working, work–life balance, job challenge and
autonomy that are linked to opportunity to participate.
In response to AMO policies, employees will develop organizational commitment, motivation

and job satisfaction (attitudinal outcomes). These attitudes will lead to employees demonstrating
a range of positive behavioral outcomes. Discretionary behavior (i.e. making the right choices
about how to do a job, such as speed, care, innovation and style) and organizational citizenship
behavior lie at the heart of the employment relationship and should be strongly connected to
performance outcomes. Highly committed, motivated and satisfied employees are more likely to
engage in discretionary behavior and OCB to help the organization to be successful. Therefore, it
is argued that one of the prime functions of AMO policies is thus the way they help develop
attitudes or feelings of satisfaction, commitment and motivation in most employees since these
translate into discretionary behavior, provided the job allows for it.
However, the relationship between HRM policies and attitudinal outcomes is affected by the
behaviors of front-line management. Nearly all policies are applied through and by line managers
and therefore whether they implement those policies well or badly, consistently or inconsistently,
will impact on the outcomes of the policies. This process of external influence is called
moderation.
Performance outcomes constitute the ultimate impact of AMO policies, through the serial
influence of employee attitudes and behavior. These outcomes may be operational, such as
effectiveness (i.e. if the organization meets its objectives) and efficiency (i.e. if the organization
uses the fewest possible resources to meet its objectives), or financial, such as ROI (return on
investment), ROE (return on equity) and ROCE (return on capital employed). Finally, reverse
causality may be encountered from performance to employee attitudes, indicating that the
success of the organization brings positive attitudes to employees, because employees feel proud
to tell people who they work for and want to stay working for the firm for the foreseeable future.
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The Psychological Contract Model of the HRM–Performance Relationship
An alternative approach to illuminating the black box is to focus more directly on the
relationship between employer and employee. While employees will typically have an
employment contract, in recent years researchers have also begun to focus on the less codified
elements of the relationship between employer and employee. This relationship is known as the
psychological contract. It is defined as an individual’s system of belief, shaped by the
organization, regarding terms of an exchange agreement between himself/herself and the
organization. Psychological contracts are informal and unwritten in nature, depending on the
dynamic interaction between individuals and the organization. They construct the expectation by
both parties to the nature of the exchange between the employer and the employee. There are two
somewhat different types of psychological contract that can be considered: transactional and
relational. Transactional contracts tend to involve short-term, specific and monetary-related
beliefs such as competitive wage rates and performance-based pay. Relational contracts are
more concerned with a long-term relationship, characterized by both monetary and nonmonetary
reward including issues such as job security, loyalty, development opportunity, commitment and
trust.
Given the turbulence in employment and employment types in recent years, a number of
theorists and practitioners have argued that the traditional psychological contract is progressively
replaced by the new psychological contract. The latter is described as an offer by the employer of
fair pay and treatment in return for employee commitment to the work performed, considering
that employees are responsible for their own career development as well as for their training and
development.
A major function of HRM is to cultivate a positive psychological contract that will lead to
greater employee motivation, commitment and satisfaction, the attitudinal outcomes we earlier
identified as a key stage in the AMO model of the HRM–performance relationship. In other
words, psychological contracts can be treated as beliefs stemming from HRM policies and
practices. Psychological contract fulfillment is focused on employers’ promise fulfillment as
perceived by employees; hence they are likely to reciprocate by fulfilling their own promises and
perceived obligations. This is based on the notions of reciprocity and social exchange. If
employers uphold their side of the bargain, employees will feel satisfied, committed and
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motivated, and so they will reciprocate by upholding their side of the bargain. Therefore, in this
model, HR policies influence organizational performance as a result of psychological contract
fulfillment.
The nature of the psychological contract itself, however, is shaped by the HR policies in
operation. An initial interaction between the organization and potential employees not only
transmits the formal employment terms and conditions of the organization to the potential job
applicants but also communicates the organization’s beliefs about future employment. Thus an
organization that emphasizes training and development may develop an expectation amongst
prospective employees that they are part of its permanent employment. The components of
employee reward may also serve to construct psychological contract terms by establishing the
belief in the perceived value of employees; in other words, that they are worth their rewards in
whatever form they are given.
The appropriate use of HR policies can therefore create a positive organizational environment
that will influence the degree of fulfillment of employer and employee promises. Thus, HR
policies determine the status of psychological contracts by shaping the day-to-day behaviors of
the members in an organization. Consequently, a major function of HR policies is to cultivate a
positive psychological contract that will lead to improved organizational performance. Effective
HR policies produce positive psychological contracts, generating positive attitudinal reactions,
which consequently will improve organizational performance.
Activity 9.2 Describe the psychological contract model of HRM-Performance

Relationship.
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________________
9.4. INDIVIDUAL HIGH-PERFORMANCE PRACTICES
A number of researchers have identified several high performance practices or best practices.
One of the most prominent of these advocates of universal best practices is Professor Jeffrey
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Pfeffer of Stanford University. Pfeffer’s research indicates that seven management practices are
nearly universal in their ability to enhance firm performance:
1. Employment security
2. Selective hiring of new personnel
3. Self-managed teams and decentralization of decision making as the basic principles of
organizational design
4. Comparatively high compensation contingent on organizational performance
5. Extensive training
6. Reduced status distinctions and barriers, including dress, language, office arrangements,
and wage differences across levels
7. Extensive sharing of financial and performance information throughout the organization
Empirical evidence on the performance effects of these and several other human resource
practices is presented in this section. Research results on whether such practices actually have a
positive impact on various measures of firm performance are presented by the major categories
of individual practices.
1. Employment Security
The Cambridge Dictionary of business defines ‘employment security’ as ‘assurance (or lack of
it) that an employee will be able to work in his/her job as long as he/she delights and will not
become unemployed’. It is about the protection of workers against fluctuations in earned income
as a result of job loss. Employment security usually arises from the terms of the contract of
employment, collective bargaining agreement, or labor legislation that prevents arbitrary
termination, layoffs, and lockouts. It may also occur during economic downturns, as part of
restructuring, or be related to other various reasons for dismissals.
Pfeffer (1998) regards employment security as fundamentally underpinning the other six HR
practices mentioned above, principally because it is regarded as unrealistic to ask employees to
offer their ideas, hard work and commitment without some expectation of employment security
and concern for their future careers. The contribution a positive psychological contract makes to
open and trusting employment relationships, and the notion of mutuality that is seen as a key
component in partnership agreements both relate to this.
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There are obviously limits to how much employment security can be guaranteed. It does not
mean that employees are necessarily able to stay in the same job for life, nor does it prevent the
dismissal of staff who fails to perform to the required level. Similarly, a major collapse in the
product market that necessitates reductions in the labor force should not be seen as undermining
this principle. The most significant point about including employment security as one of the high
commitment HR practices is that it asserts that job reductions will be avoided wherever possible,
and that employees should expect to maintain their employment with the organization – if
appropriate through internal transfers. Employment security can be enhanced by well-devised
and forward-looking systems of human resource planning and an understanding of how
organizations may be structured to achieve flexibility. It is perhaps best summed up by the view
that workers should be treated not as a variable cost but as a critical asset in the long-term
viability and success of the organization. Indeed, there is also a business case for employment
security. Laying people off too readily constitutes a cost for firms that have done a good job
selecting, training and developing their workforce. Layoffs put important strategic assets on the
street for the competition to employ.
The definition and measurement of employment security has varied considerably, to a large
extent depending on whether information is sought about policy or practice. For example, some
researchers include three measures in reaching their assessment of employment security: a policy
of no compulsory redundancy; the use of temporaries primarily to protect the core workforce;
and an expectation on the part of senior managers that new employees will stay with the firm
until retirement. Studies reckon that compulsory lay-offs and downsizing undermine
employment security, and see the following as alternatives: (1) proportionately reducing working
hours to ‘spread the pain’ of reduced employment costs across the entire workforce; (2) reducing
wages to reduce the labor costs; (3) freezing recruitment to prevent overstaffing; and (4) putting
production workers into sales to build up demand. This is some way short of full-blown
employment security, and it is clear that employment security is not expected to reduce corporate
profits. The employer’s financial flexibility is maintained by increasing employee workloads and
by ensuring that salaries are related to organizational performance in the event of a downturn in
demand.
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Employment security practices help to preserve the firm’s investments in its human resources.
They also provide the stability needed to unleash the innovativeness of employees for the benefit
of the firm. It has been asserted that employees who are more secure in their jobs are more likely
to use their knowledge to increase the firm’s productivity. Studies show that employment
security practices are positively related to return on asset.
Employment security creates a climate of confidence among employees which cultivates their
commitment on the company’s workforce. Employment security requires a certain degree of
reciprocity: firstly, a company must signal a clear message that jobs are secure; then, employees
believing that this is true, feel confident and commit themselves to expend extra effort for the
company’s benefit; finally, a company that have learnt that job security contributes to its
performance, invests again in job security. The conceptual model of job security also involves
antecedents and consequences. Antecedents include worker characteristics, job characteristics,
organizational change and job technology change. Consequences include psychological health,
physical health, organizational withdrawal, unionization activity, organizational commitment and
job stress. Job involvement, cultural values, and procedural justices moderate job security
perceptions and attitudes.
However, today’s business environments are far from providing employment security to their
employees the fact that technological changes contribute to keeping the employees for shorter
periods of time, thus increasing employment insecurity. When companies do provide
employment security, then empirical evidence suggests that it has a positive effect on to firm
performance. Employment security impacts operational performance indirectly through
organizational commitment.
Activity 9.3. How does employee security influence firm performance?

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2. Selective Hiring of New Employees
Hiring is the practice of finding, evaluating, and establishing a working relationship with future
employees. Selective hiring involves developing recruitment strategies that are more proactive in
their approach to attract well-qualified candidates with specific skill sets. Recruiting selectively
requires more work to be done up front before meeting with any potential candidates. It is
described as a focus on the fit between employees and their work environment.
Recruiting and retaining outstanding people and capturing a stock of exceptional human talent
are seen as an effective way to achieve sustained competitive advantage. Even though employers
have always wanted to recruit the best people available, this is nowadays more likely to be
systematized through the use of sophisticated selection techniques and taking greater care when
hiring. Increasingly, employers are looking for applicants who possess a range of social,
interpersonal and team-working skills in addition to technical ability. Social skill, team-working
skills, trainability, and commitment are considered by many employers as important selection
criteria. The proxies used to measure ‘selective hiring’ vary widely including (1) the number of
applicants per position or as many good applicants as the organization needs; (2) the proportion
administered an employment test prior to hiring; and (3) the sophistication of selection
processes, such as the use of psychometric tests and realistic job previews.
These measures capture quite different components of the selection process and on whether the
focus is on the overall approach taken by employers or the precise techniques they use.
Moreover, some of them emphasize inputs rather than outputs in terms of the quality of those
eventually recruited. For example, attracting a large number of applicants for a position may
indicate poor HR procedures due to failures to define the job and the field adequately prior to
advertising. It is also possible that selective hiring, especially when it focuses on how well new
recruits might fit with the prevailing organizational culture, can lead to under-represented groups
being excluded from employment. Moreover, an excessive ‘cloning’ of employees could be
problematic if the organization is keen to promote initiative and diversity, and counterproductive
if business needs and markets change. On the other hand, there may be situations where it is
impossible to attract sufficient applicants due to skills shortages – as with some professional jobs
in the health and education sectors – where the emphasis shifts to generating a pool of potential
recruits rather than finding more sophisticated ways to choose between them.
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Recruiting high quality, committed staff is seen as central to ‘best practice’ HRM, and the use of
psychometric tests, structured interviews and work sampling is likely to increase the validity of
selection decisions. Competencies to be sought at the selection stage include trainability,
flexibility, commitment, drive and persistence, and initiative. The key point about ‘best practice’
selection is that it should be integrated and systematic, making use of the techniques which are
appropriate for the position and the organization, and administered by individuals who have
themselves been trained.
Staffing selectivity is significantly related in a positive direction to organizational performance.

Selecting executives who have the best abilities to implement a desired strategy in a given
industrial context is related to firm performance. With greater diversification at the corporate
level, the firm-specific experience and knowledge of CEOs becomes less important than
portfolio management skills. Portfolio management skill refers to the ability to manage diverse
businesses on the basis of general principles instead of in-depth knowledge of the specific
business.
Conversely, with less diversified firms, knowledge of the core business is much more valuable.
Such knowledge of less diversified firms typically develops with increasing organizational
tenure. It has been argued that as executives acquire longer tenure within their firms, however,
they apply fewer innovative or novel ideas to new situations. Accordingly, there appears to be a
downside to the value of firm-specific knowledge as an inverse relationship has been found
between firm performance and CEO tenure in non-diversified firms. Studies show that firms
selecting CEOs from the ranks of executives inside the organization or CEOs with longer tenure
experienced declines in their ROA during the period after their selection. Furthermore, for firms
having low levels of diversification, the selection of outsiders or executives with low levels of
tenure was associated with increased ROAs in the period after the CEO’s selection. Thus, better
firm performance can be obtained when the selection practices are coordinated or matched with
the firm’s strategy.
This practice can ensure that the right people, with the desirable characteristics and knowledge,
are in the right place, so that they fit in the culture and the climate of the organization. Moreover,
pinpointing the rights employees would decrease the cost of employees’ education and
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development. Attracting and selecting the right employees increase the employee productivity,
boost organizational performance, and contribute in reducing turnover. Hiring standards reflect
not only organizations' skill requirements but also the preferences of various groups for such
standards and their ability to enforce these preferences. A possible indirect link between selective
hiring and organizational performance can be the forging of internal bonds between managers
and employees that creates the write culture for productivity growth. An effective hiring process
ensures the presence of employees with the right qualifications, leading to production of quality
products and consequently in increase of economic performance. Pre-employment tests are a key
component of selective hiring that can select employees that stay with a company longer. Passing
pre-employment tests may give an applicant a stronger sense of belonging to the company,
resulting in higher degrees of commitment if employed.
Activity 9.4. What is meant by selective hiring? How does it impact firm performance?
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3. Extensive Training
Having recruited ‘outstanding human talent’, employers need to ensure that these people remain
at the forefront of their field, not only in terms of professional expertise and product knowledge
but also through working in teams or in interpersonal relations. Business people view this as one
element in ‘organizational process advantage’, the idea that employers aim to synergize the
contribution of talented and exceptional employees. There is little doubt that there has been a
growing recognition of the importance of individual and organizational learning as a source of
sustained competitive advantage as employers introduce more skills specific forms of training
and experience continuing skills shortages in some areas.
This is one of the most widely quoted and important elements of high commitment HRM. The
use of the word ‘learning’ is crucial as it demonstrates employer willingness to encourage and
facilitate employee development rather than just providing specific training to cover short-term
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crises. Different types of measure have been used here: fully fledged ‘learning companies’,
employee development and assessment programs or task-based and interpersonal skills training.
The time and effort devoted to learning opportunities is also important. A range of proxies have
been used here – such as the number of days’ training received by all workers, the proportion of
workers who have been trained, the budget set aside for training, or the establishment of agreed
training targets over a two-year period. Training was provided at fewer workplaces in the private
sector than the public sector.
Some researchers used several measures for assessing training in their studies, each of which
related to the amount of money spent, whilst others focus instead on the amount of training
received by workers. Of course, there are problems in trying to measure and evaluate the
concentration of training and learning. While it is clearly important to establish how much time
and resources employers invest in formal training, and whether or not this covers the entire
workforce, it is also crucial to identify the type of training which is provided and who has
responsibility for managing this. Quite a number of the studies have looked solely at the financial
or quantitative aspects – in terms of money or time invested in training – and ignored the quality
or relevance of training and learning that is provided. It is now widely acknowledged that most
workers are overqualified for the jobs they do, and as such extra training may add little to
organizational performance or worker skills. Even where training opportunities are provided,
there is often ‘no explicit aim within the training of increasing the individuals’ skill base or
broadening their experience’. Similarly, questions need to be asked about whether or not longer
term budget safeguards are established so as to protect training provision or if training is tied in
to ‘increased promotability within the organization’. The quality of training, both in terms of its
focus and its delivery, is clearly more important than a simple count of the amount provided.
Many firms view training as a high-performance practice. Examination of productivity data

before and after the training revealed that there was a substantial impact on productivity.
Training also has been found to have a positive impact on perceptual measures of organizational
performance. The type of training and its quality has an impact on the financial and productivity
effects to be realized by firms. In addition, there is probably a great deal of truth in the assertion
that there is greater likelihood of positive performance effects when training is integrated into the
culture of the firm
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Training and development may be related to firm performance in many ways. Firstly, training
programs increase the firm specificity of employee skills, which, in turn, increases employee
productivity and reduces job dissatisfaction that results in employee turnover. Secondly, training
and developing internal personnel reduces the cost and risk of selecting, hiring, and internalizing
people from external labor markets, which again increases employee productivity and reduces
turnover. Training and development like job security requires a certain degree of reciprocity: A
company that trains and develops systematically its employees advocate them that their market
value develops more favorably than in other firms. This increases employees’ productivity,
commitment, and lowers turnover. Companies may also assist their employees in career
planning. In doing so, companies encourage employees to take more responsibility for their own
development, including the development of skills viewed as significant in the company.
Comparisons on rapid-growth and slow-growth firms show that rapid-growth firms depend
heavily on the abilities and efforts of their employees to maintain their growth-oriented
strategies. The fast-growth firms used training programs to achieve their objectives and
emphasized employee development to a significantly greater extent than their slow-growth
counterparts. Therefore, training and employee development practices are more common in
rapid-growth firms than slow-growth ones.
4. Extensive Sharing of Financial and Performance Information Throughout the Organization
There are a number of reasons why information sharing or employee involvement is an essential
component of the high commitment paradigm. First, open communications about financial
performance, strategy and operational matters not only ensures workers are informed about
organizational issues, it also conveys a symbolic and substantive message that they are to be
trusted and treated in an open and positive manner. Second, for team-working to be successful
workers require information in order to provide a basis from which to offer their suggestions and
contribute to improvements in organizational performance. Third, participation can provide
management with some legitimacy for its actions on the grounds that ideas have been put
forward by workers and/or at least considered by them before decisions are ultimately made.
Even if management has more power at its disposal than do workers, the employment
relationship is not complete and legally defined in detail but open to interpretation and
disagreement over how it is enforced on a daily basis.
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Information sharing or employee involvement appears in just about every description of, or
prescription for, ‘best practice’ or high commitment HRM. Employee involvement can include
downward communications, upward problem-solving groups and project teams, all of which are
designed to increase the involvement of individual employees in their workplace. The precise
mix of employee involvement techniques depends upon the circumstances, but the range of
measures used and the ‘flexible’ definition of involvement are potentially confusing. Many of the
studies restrict this to downward communications from management to employees which
measure the frequency of information disclosure, the regularity of team-briefing or quality
circles or the extent to which workers are informed or consulted about business operations or
performance.
The fact that employee involvement is often little more than a cascade of information from
management any meaningful worker contribution is unlikely. Indeed, one of the objectives of
schemes such as team briefing is to reinforce the supervisor as an information disseminator who
adapts messages to suit specific operational requirements. This one-way version of information
sharing – rather than being seen as educative, empowering and liberating as the terminology
might imply – could more easily be interpreted instead as indoctrinating, emasculating and
controlling.
The sharing of financial or performance information is often referred to as open-book

management. Essentially, the practice encourages empowered employees to act in the best
interests of the firm by making informed decisions and taking informed actions. The practice has
the potential to enhance motivation by instilling a sense that employees are trusted and valued
and by combining employee empowerment with various incentives such as profit sharing or cost
savings. Although there is little empirical evidence on the performance impact of open-book
management, there is a great deal of anecdotal evidence derived from the experiences of
companies that have implemented the practice. Firms have obtained positive impacts in
achieving a number of specific firm goals such as reduced error rates, increased average sales per
customer, improved quality, improved order accuracy, and reduced expenses for shop supplies.
Although anecdotal reports do not control for other factors that may have contributed to such
performance improvements, the large number of positive reports argue for an optimistic view of
the potential impact of this practice.
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Sharing of information may have a dual effect: Firstly, it conveys employees the right meaning
that the company trusts them. Secondly, in order to make informed decision, employees should
have access to critical information. Communicating performance data on a routine basis
throughout the year help employees to improve and develop. Employees presumably want to be
good at their jobs, but if they never receive any performance feedback, they may perceive to
have a satisfactory performance when in fact they do not. Furthermore, information sharing
fosters organizational transparency which reduces turnover and forges synergistic working
relationship among employees. There is a positive association of information sharing with
productivity and profitability, and a negative one with labor cost.
Information sharing is not a widespread HR practice as someone might have expected it to be.
Many companies are vulnerable to share critical information with their employees because in this
way employees become more powerful and companies may lose control of them. Furthermore,
information sharing always involves the danger of leaking important information to competitors.
Activity 9.5. Should the management share financial and performance information
to the employees? Why or why not?
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5. Self-managed Team and Decentralization of Decision-Making
Self-managed team is a self-organized, semiautonomous small group of employees whose

members determine, plan, and manage their day-to-day activities and duties under reduced or no
supervision. It is also called self-directed team or self-managed natural work team. A self-
managed team is a group of employees that is responsible and accountable for all or most aspects
of producing a product or delivering a service. While traditional organizational structures assign
tasks to employees depending on their specialist skills or the functional department within which
they work, a self-managed team carries out supporting tasks, such as planning and scheduling the
workflow and managing annual leave and absence, in addition to technical tasks. Specifically, a
self-directed work team is a group of people who combine different skills and talents to work
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without the usual managerial supervision toward a common purpose or goal. Self-managed
teams are relatively autonomous teams whose members share or rotate leadership responsibilities
and hold themselves mutually responsible for a set of performance goals assigned by higher
management.
Self-managed team creates a stronger sense of commitment to the work effort among members;
improve quality, speed, and innovation, have more satisfied employees and lower turnover and
absenteeism; facilitates faster new product development; allow cross trained team members
greater flexibility in dealing with personnel shortages due to illness or turnover; and keeps
operational cost down because of reduction in managerial ranks and increased efficiencies. In
conclusion, self-managed work teams can help a company improve its bottom line, foster team
work, and boost employee morale. However, the difficult part is changing attitudes, behaviors,
and resolving conflicts.
Self-managed teams and decentralization of decision making as the basic principles of

organizational design is positively related to organizational performance. This practice has
become more prevalent over the last decade for a variety of reasons, not least as a way of pooling
ideas and improving work processes. It has been identified by many employers as a fundamental
component of organizational success. It is also one of the key attributes that employers look for
in new recruits Teamwork is typically seen as leading to better decision-making and the
achievement of more creative solutions. Evidence suggests that employees who work in teams
generally report higher levels of satisfaction than their counterparts working under more
‘traditional’ regimes, although they also report working hard as well.
The range of measures used by researchers to assess team-working has been rather narrower than
those used to assess many of the other ‘best practices’. Generally, it refers to the proportion of
workers in teams, the use of formal teams or the deliberate design of jobs to make use of
workers’ abilities. However, such measures cannot tell us whether or not these teams actually are
self-managed or act as autonomous groups, and much depends upon decisions concerning, inter
alia, the choice of team leader, responsibility for organizing work schedules, and control over
quality. A distinction is also made between off-line teams – such as quality circles – and on-line
teams where workers are involved in daily decisions about work organization. Regarding the
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latter, a survey showed that whilst 65 per cent of workplaces claim to have team-working, just 5
per cent of these could actually be categorized as autonomous groups where team members have
responsibility for managing their own time and appoint their own leaders.
In contrast, there is a less optimistic perspective on self-managed teams, which suggests that they
are intrusive and difficult to implement in practice, and that they serve to strengthen – rather than
weaken – management control. It may also be impossible to introduce any realistic version of
team-working when workers are unable to enlarge their jobs to embrace higher level skills or
where there are legal, technical or safety reasons that prevent workers from making certain types
of decision. Moreover, the prospect of team-working is limited where the rotation of a range of
low-level jobs means that one boring job is merely swapped for another boring job on a regular
basis. In situations such as these, team-working may only serve to make work more stressful and
intrusive, and add nothing to the skills or initiative that workers are able to deploy. While these
criticisms of self-managed teams can be seen as failures of implementation, some analysts see
this form of organization as potentially flawed because it gives the impression of control without
devolving any real power or influence. Self-managing teams produce a form of control more
powerful, less apparent, and more difficult to resist than that of the former bureaucracy because
it shifts the locus of control from management to workers – what he terms ‘concertive control’.
The consequence of this is that peer pressure and rational rules combine to create a new iron
cage whose bars are almost invisible to the workers it incarcerates. The negative impact of team-
working may be especially problematic for lower skilled workers.
Teams and teamwork have become critical to the success of many organizations, and self-
managed teams fit with greater decentralization. Self-managed teams are different than
traditional work teams in that the team itself governs the sequence of work needed for the
performance of a series of interdependent tasks. Such teams may order materials, perform
maintenance, and perform inspections of the quality of the output. High-performance work teams
produce significant improvements in quality (reductions in defect rates) and labor productivity.
More and more, employees are required to work in teams, make joint decisions, and undertake
common initiatives in order to meet the objectives of their team and organization. Self-managed
teams can affect firm growth in two ways: Firstly, a surplus of junior managers in a firm may
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create and support dynamics of firm growth. The growth stage is perhaps the most dynamic stage
of a firm’s life cycle. As the business expands, new levels of management are added. Decision-
making becomes more decentralized, middle managers gain authority and self-managed teams
proliferate as the firm adds more and more projects and customers. Secondly, teamwork and
decentralization of decision making promotes employee commitment participation and create a
sense of attachment, thus indirectly affecting firm performance
Several studies identified self-managed teams and decentralization as important high-

performance HRM practices. Decentralized teams have a positive effect on two dimensions of
the performance, time and flexibility. Participation in self-managed teams is associated with
significantly higher levels of employment security and satisfaction for workers.
Research results on the effects of delegated or decentralized decision making may be

summarized as follows: Not surprisingly, increased delegation has a significant positive
relationship with operational outcomes. Once again, this confirms the notion that employees feel
empowered by increased delegation, and this empowerment can lead to significant improvements
in the operational outcomes of the organization. Organizations that make a conscious effort to
increase delegation of work are likely to benefit by improving their operational outcomes.
Activity 9.6. Is self-managed team applicable? Explain from the perspective of Ethiopian
organizations?
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6. Comparatively High Compensation Contingent on Organizational Performance
Although both send a signal to employees that they deserve to be rewarded for superior
contributions, there are two elements to this practice – higher than average compensation and
performance-related reward. To be effective, this needs to be at a level in excess of that for
comparable workers in other organizations so as to attract and retain high-quality labor. In
addition, according to this scenario, rewards should reflect different levels of worker
contribution, perhaps being paid as a regular bonus or through profit sharing schemes. Despite
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the extensive criticisms of performance-related pay, it is included in most lists of ‘best practice’.
The other two measures for this factor are the proportion of the workforce who have access to
company incentive schemes and the proportion whose performance appraisals are used to
determine their compensation. This is referred to as contingent compensation.
Despite the importance of compensation and financial incentives to employees and firms, there
has been a surprising lack of good research on its performance effects. Furthermore, traditional
compensation practices have come under criticism. Employees today are expected to work in
teams rather than solely on their own. They are expected to keep learning new skills and to
assume broader roles. They are expected to take more risks and responsibility for results. As a
consequence we are slowly coming to the realization that we may be paying for the wrong
things, sending inconsistent messages about the company to its employees, or creating artificial
expectations of continued advancement and raises, no matter how well the company performs.
Researches that explored whether the relationship between financial incentives and performance
is stronger for extrinsic tasks than for intrinsic (i.e., challenging and interesting) tasks, revealed
that regardless of the kind of work people are doing, incentives improve performance. Financial
incentives improve performance quantity without eroding intrinsic motivation. A well-designed
compensation program that is fully and properly aligned with an organization’s values and
culture does wonders for self-esteem and an eagerness to learn, not to mention performance. In
addition to the ability of compensation practices to complement other sources of motivation, they
tend to work best where organizational contingencies, such as culture, are taken into account. As
the individual practices are discussed, a number of contingencies will be noted that are probably
important to consider before implementing even the most robust of the potential “universal” best
practices.
Performance-based compensation is the dominant human resource practice that firms use to
evaluate and reward employees’ efforts. Evidently, performance-based compensation has a
positive effect upon employee and organizational performance. However, there is scarce
evidence on the effects of compensation policy on firm growth. Empirical studies on the
relationship between performance-related pay and company performance have generally found a
positive relationship, but a growing body of empirical evidence suggests that it is not just pay
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level that matters, but pay structure as well. Employee incentives differentiate the rapid-growth
from the slow-growth firms. Firms that were eager to achieve rapid-growth provided their
employees financial incentives and stock options as part of their compensation packages. In
doing so, firms managed to elicit high levels of performance from employees, provide employees
the feeling that they have an ownership interest in the firm, attract and retain high-quality
employees, and shift a portion of a firm’s business risk to the employees. Performance-based
compensation is the single strongest predictor of firm performance. Both performance-based
compensation and merit-based promotion can be viewed as ingredients in organizational
incentive systems that encourage individual performance and retention. Incentive plan is
effective in decreasing turnover rates. Incentive plans were related to higher revenues, increased
profits, and decreased cost.
Compensation and incentives directly affect operational performance. To be effective,

compensation practices and policies must be aligned with organizational objectives. While
performance-based compensation can motivate employees, sometimes employees perceive it as a
management mechanism to control their behavior. In such a case, employees are less loyal and
committed, thus compensation plans have the opposite than desired outcome. Employee turnover
can significantly slow revenue growth, particularly in knowledge-intensive industries. Given that
much of the tacit knowledge resides within employees, significant turnover poses a threat to firm
performance and its future growth potential. With high turnover rates, firm growth flees away
along with leaving managers who often become employers of rival firms or establish themselves
rival firms. As with many compensation issues in organizations, there are different perspectives
on high-compensation as well as on making it contingent on organizational performance. Studies
reveal that it is folly for companies to claim that their employees are their source of competitive
advantage while they pay their workforces only the market average. Successful organizations
have achieved success because of their superior workforce, maintained by paying relatively high
wages in a low-wage industry.
Stock options and profit sharing, which are discussed later in a separate section, provide other
means of making a portion of compensation contingent on the firm’s performance. Many leading
companies such as Microsoft and Intel have adopted stock option programs for all or very broad
categories of employees, such as those having satisfactory performance. It has been asserted that
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such forms of compensation add value by: (1) helping to attract and retain employees; (2)
building organizational commitment; (3) reinforcing skill and knowledge acquisition; (4)
motivating behaviors in line with the company’s strategic objectives. Thus, for broad-based
stock options to have an effect on performance, they should make a positive contribution in at
least one of these four ways. The literature indicates that broad-based stock options may not
produce all of the benefits that their proponents have claimed. For example, there is little
empirical evidence supporting the effectiveness of broad-based stock options in attracting
potential employees. Likewise, stock options are probably not universally effective because there
are several factors that influence their impact. As an example of their specific applicability, it has
been observed that stock options work better for employees who are comfortable with risk.
Employers such as Microsoft use stock options to attract risk taking employees. Stock options
can even help with retention because their impact can be enhanced by the use of vesting
schedules that do not allow options to be exercised until employees have stayed with the
company for a certain number of years.
A review of the literature indicates several other factors that influence the performance effects of
stock options. For example, organizational culture appears have an interaction effect with stock
options. It has been found that a combination of participative organizational culture and stock
options produces faster growth rates while neither produces such results alone. Productivity
effects also appear to lag the implementation of stock options because three or four years are
required before employees develop commitment and cooperative work practices. Stock options
also appear to work better in smaller companies. In addition, employees must be well informed
before stock options are likely to influence them to act like the owners of the company and to
align their behaviors with the firm’s goals. Information must be shared with employees and they
must be trained so that they can understand financial measures and be knowledgeable about the
financial drivers of the firm.
Activity 9.7. Explain the statement “it is folly for companies to claim that their employees
are their source of competitive advantage while they pay their workforces
only the market average.”
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7. Reduced Status Distinctions
Status distinction such as dress, office arrangement, reserved parking, and wage differences
across levels is common in traditional organizations. The status distinction varies across
organization. Reduction of these status distinctions across levels in the organization is related to
higher organizational performance. Reduction of status differentials is also called symbolic
egalitarianism.
Symbolic manifestations of egalitarianism seen in the HR practices of some Japanese companies

are meant to convey messages to manual workers and lower grade office staff that they are
valuable assets who deserve to be treated in a similar way to their more senior colleagues. It is
also seen as a way to encourage employees to offer ideas within an ‘open’ management culture.
This can be seen through egalitarian symbols, such as staff uniforms, shared canteen and car-
parking facilities, but it is also underpinned by the harmonization of many terms and conditions
of employment such as holidays, sick-pay schemes, pensions, and hours of work. The principal
point behind moves to single status and harmonization is that it seeks to break down artificial
barriers between different groups of staff, thus encouraging and supporting team-working and
flexibility. Extending employee share ownership to the workforce as a whole is a further way in
which status differences can be reduced, typically through schemes whereby staffs are allocated
shares according to some predetermined formula. Pfeffer (1998) argues that ‘employee
ownership, effectively implemented, can align the interests of employees with those of
shareholders by making employees shareholders too’.
There are several examples of top-performing companies that have devoted substantial effort to
the elimination of status differentials. Executives in these companies believe that such
differentials create dysfunctional divisions in the workforce and detract from the company’s
performance. Many high performing companies have gone to great lengths to minimize status
differentials in their organizations. For example, at Southwest Airlines, there is low tolerance for
elitism. As the Vice President for People has explained: “Arrogant people will not fit in. Nor will
someone who is really proud of his or her title.” The company’s executives do not have big
offices, and they provide their home telephone numbers for employees. Indeed, many of the
firm’s executives have worked their way up from the ranks. In addition, Southwest’s reputation
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for casual attire is legendary. At Chaparral Steel, another company known for managerial
excellence and firm performance, there is no reserved parking for anyone, and casual attire is the
norm except when there is a meeting with customers. At Intel Corporation, there are no perks.
Everybody has the same office, with a chair, a computer, a couple of bookshelves and some
storage space. Compensation also has important status implications in many organizations. The
compensation of top executives can become a major status differential and thus a potential cause
of decreased organizational performance.
Activity 9.8. How do staff uniform, shared canteen, shared car-parking facilities, and
harmonized terms and conditions of employment such as holidays, sick-
pay schemes, pensions, and hours of work impact firm performance?
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8. Other Individual HR Practices
Incentive-Based Compensation: The previous discussion on contingent compensation linked

to firm performance overlaps with incentive-based compensation. Nonetheless, because
incentives can be unrelated to organizational performance, this form of compensation will be
discussed separately. For example, incentives can include commissions based on sales,
individual sales goals, and the like. In this regard, studies reveal that incentive-based
compensation is significantly related to organizational performance.
Team-Based Compensation: Studies indicate that teams are more effective and demonstrate
more helping behaviors when bonuses are allocated within the team on the basis of equity. As
the size of the bonuses increased, there is also a significant increase in team productivity and
effectiveness. In addition, there is significantly greater satisfaction with the team bonuses when
members perceived that team performance is linked to team bonuses and when they perceived
clear goals for the team. Such compensation practices have a positive impact on team
performance.
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Financial rewards for results are only part of the compensation picture for teams. Teams are
often asked to do things differently and to take risks that may not always produce desired results.
If rewards are tied only to results, teams will not be motivated to take risks. Therefore,
companies reward teams for desired activities and behaviors. Timely recognition for team
members also is critical as with other employees.
Diversity: Research on the creativity of groups has found that ethnic diversity is positively
related with creativity. Correspondingly, it has been asserted that the heightened creativity
produced by a more diverse workforce can have a positive impact on the firm’s performance if
properly managed. While it is a desirable practice to hire people who will fit well with the
organization, this practice can result in dysfunctional homogeneity if carried to an extreme. With
extreme homogeneity, organizations may become less capable of adapting to changing
circumstances and less flexible. Recent research has examined this assertion by analyzing the
hiring for affirmative action purposes during economic downturns. This research has found that
firms placing greater emphasis on such hiring have better financial performance than other firms,
as measured by shareholder returns, two years after the economic recovery. Emphasis on hiring
for affirmative action purposes was correlated with the lagged financial performance variable.
Not surprisingly, the effects of increased diversity do not result in immediate performance
because time is needed for the benefits of diversity to be manifested in increased performance.
Hiring for affirmative action purposes has the additional benefit of enhancing the firm’s
reputation among female and minority job applicants, as well as reducing the likelihood of
litigation and its associated costs.
Profit Sharing: Studies reveal that profit sharing scheme is positively related to firm
performance. Specifically, profit sharing has a positive impact on return on assets (ROA), return
on equity (ROE), and organization’s survival. Profit sharing means that profits are shared
between capital owners and employees by giving employees in addition to a fixed wage a
variable part of income directly related to profits or some other measures of company
performance. As opposed to traditional bonuses which are linked to individual performance,
profit sharing is a collective scheme applied to all or most employees in a firm or establishment.
In practice, profit sharing can take different forms. The main differences concern the timing of
the benefits and the mode of payment: profit sharing can provide employees with immediate or
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deferred benefits and it can be paid in cash, company shares or other securities. Cash-based
profit sharing links employee bonuses directly to some measure of firm performance and most
frequently provides an immediate payment. Share-based profit sharing, on the other hand,
involves the possibility of employees acquiring shares in the company free or on preferential
terms.
Profit sharing is an option for the employer to lessen the principal-agent-problems of costly
supervision. By tying a portion of pay to company performance, employee and employer
incentives are brought into closer alignment. Profit sharing might be the preferred choices when
individual output cannot be easily determined, i.e. when production is complex and
interdependent and worker cooperation plays an important role. In such an environment,
individual incentives are not useful. A second potential benefit of profit sharing is that it
introduces a certain degree of wage flexibility. In times of lower firm profitability, profit sharing
automatically decreases worker compensation without the need for costly renegotiation of wages
or layoffs that come at the cost of a loss of firm-specific skills. Profit sharing might hence be
interesting for firms that experience variability in firm performance or new firms that have
uncertain prospects. A third motivation is that by tying pay to company performance, employees’
identification with the employer rises thus blurring the traditional distinction between capital and
labor. Profit sharing should be preferably introduced in firms where monitoring costs are high,
where the organizational structure is complex and worker cooperation is a key production
component. Profit sharing might also be desirable in firms that operate on unstable markets or
young firms whose future prospects are yet uncertain. Furthermore, industrial relations may play
an important role with respect to the adoption of profit sharing.
Positive Labor Relations: The manner in which firms handle relations with their unions and the
workers they represent can have a number of effects. Such labor relations practices can affect the
productivity of the workforce and financial performance. More specifically, it has been well
established in the industrial relations or labor relations literature that unionism can have both
positive and negative impacts on productivity. One explanation of the effects of unions is that
through their representation of workers in grievance procedures and collective bargaining, unions
provide workers with a means of expressing their concerns to management about workplace
conditions. This means that unions provide a voice mechanism, which in some situations can
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have a positive impact on firm performance. For example, in situations in which management is
unreceptive to the concerns of individual workers and there is no union to provide a voice, the
only other alternative for dissatisfied workers is an exit response of leaving for better conditions
elsewhere.
Because of the voice mechanism, it is argued that unionized firms have lower quit rates and
encourage firms to provide more rational and professional management. In turn, these secondary
effects lead to greater productivity. Unions also can have a positive impact on productivity under
certain labor market conditions. This can occur in situations in which the employer has
monopoly power in the labor market (a condition of monopsony). When unions negotiate higher
wages under such conditions, the economically rational response of employers is to add more
capital per worker and to enhance the quality of labor. In turn, these secondary effects have the
potential to increase productivity. However, unions may negotiate more restrictive work rules
that lead to higher levels of employment than are necessary.
Obviously, such secondary effects can lead to decreases in productiv-ity.41 A concise summary
of the effects of labor relations on firm productivity is provided in the following: An important
implication of the voice-response model is that productivity is likely to depend on the state of
labor–management relations in shops. When those relations are poor, management is likely to
have trouble getting high productivity. When they are good, workers and management may pull
together for the benefit of the firm. Three studies have examined the link between productivity
and the state of industrial relations at plants, and all three have found strong support for this
proposition. In addition, it can be argued that under very specific conditions, the net effect of
unionism and good labor relations may be positive. This argument is provided in the following:
What unions do to productivity is one of the key factors in assessing the overall impact of
unions. The new quantitative studies indicate that productivity is generally higher in unionized
establishments than in otherwise comparable establishments that are nonunion, but that the
relationship is far from immutable and has notable exceptions. Higher productivity appears to
run hand in hand with good industrial relations and to be spurred by competition in the product
market, while lower productivity under unionism appears to exist under the opposite
circumstances.
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In spite of these findings, most employers probably do not feel that their firms obtain greater
productivity as a result of unionism. Otherwise, they would encourage their workers to form
unions, and this is obviously not the case with most employers. The effects of poor labor
relations are more obvious. Strikes can provide an indication of the quality and impact of labor
relations practices. While at first appearance strikes might not appear to be a human resource
practice, they can reflect to some degree the quality of the firm’s labor relations effort or the
overall management of the firm. Obviously, unionization does not equate with strikes but it does
bring their potential. Furthermore, there is probably more than a grain of truth to the old
expression that firms that have unions usually deserve them. Indeed, there are abundant
examples of firms that were unionized as a result of their poor treatment of employees. Thus,
there is a question of causality here in that unionism and subsequent strikes or work stoppages
are sometimes reflective of poor management. Nonetheless, there are many factors, aside from
the quality of a firm’s labor relations function, that predispose a firm toward unionism.
Performance Management: There is empirical evidence that results-oriented appraisals have a

positive impact on firm performance. In addition, companies that do not have good appraisal
systems run the risk of not being able to justify terminations or the denial of promotions. Having
no documentation of inadequate or substandard performance places the firm in danger of being
on the losing side in litigation or arbitration and creates financial liability. Nonetheless,
performance appraisals do not always accurately reflect the performance of the employee nor do
their ratings always have an impact on results such as compensation. Because of these and other
problems, the practice of performance appraisal is being revised in some organizations because
of fundamental questions about its contributions and the changing role of human resource
management. Indeed, 360-degree feedback approaches are being adopted by many organizations
because of problems with traditional appraisal systems.
Activity 9.9. How does diversity impact firm performance?

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Figure 9. 4 Individual Human Resource Practices Impacting Firm Performance
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9.5. LIMITATIONS OF INDIVIDUAL HR PRACTICES
Individual human resource practices tend to be highly inter-correlated. As a result, it is easy to

overestimate their actual impact on performance. For example, if it is found that merit-based
compensation practices have a significant correlation coefficient of r = .40 with firm
profitability, then the statistical interpretation is that such compensation systems account for 16
percent (r2) of the variance in firm profitability. Unfortunately, this would be a misleading
interpretation because the compensation practice is probably only one of several other highly
correlated human resource practices that are simultaneously influencing profitability. A more
accurate interpretation would be that several high-performance practices are responsible for 16
percent of the variance in profitability. Indeed, simple relationships between individual human
resource practices and measures of firm performance overstate their contributions because when
additional practices are added to multiple regression equations, the size of their coefficients
(magnitude of contribution) decreases and may even become statistically insignificant.
9.6. EVOLUTION OF PRACTICES
While the individual practice perspective has limitations, it seems reasonable to infer that
decisions about the adoption of human resource practices may occur, at least on occasion, on an
individual practice basis. Indeed, until recently, much of the human resource literature focused
on the impact of individual practices. Furthermore, systems of human resource practices are not
developed and implemented over night but appear to evolve. HR systems are path dependent.
They consist of policies that are developed over time and cannot be simply purchased in the
market by competitors. Firms have often adopted human resource practices to address specific
competitiveness concerns, such as lagging product development. To counter such a weakness,
the firm may have adopted an individual practice of compensation leadership in order to attract
highly talented research and development personnel. Unfortunately, not all individual practices
are effective by themselves. For example, a firm may make the decision to adopt another
individual practice, such as work teams, without changes in supporting systems such as team-
based compensation systems. Isolated decisions on individual practices, such as in the latter
example, have sometimes resulted in a potpourri of disjointed practices that may even be
incompatible with each other.
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Activity 9.10. What is the major limitation of individual HR practices’ impact on
firm performance?
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9.7. SYSTEMS OF HIGH PERFORMANCE HR PRACTICES
A practical implication of the limitations of individual practices and their high inter-correlation is
that it is unusual to find a firm that employs only one or two such practices. The more common
situation is one in which the firm employs several such practices or systems of these practices.
For example, practices such as highly selective recruiting practices, heavy investment in training,
team-based compensation, and dual technical and managerial career tracks are compatible with
each other and constitute systems that are critical for implementation of a business strategy that
emphasizes innovation through research and development. Thus, the literature has asserted that
such strategic human resource systems should produce superior performance because of such
compatibilities or synergies.
Because of the potential synergies that are possible when firms employ systems of
complementary human resource practices, the question has arisen as to whether systems of such
practices have a greater impact on firm performance than individual practices. Thus, we shall
examine the effects of systems of practices. Recently, sophisticated empirical studies have
provided definitive answers to persistent questions about the bottom-line performance effects of
systems of human resource practices. While the literature has long asserted that certain practices
will produce higher performance, until recently there was only scattered evidence for individual
practices and virtually no evidence on systems of practices. While there is now evidence on the
performance effects of such systems, the particular practices to be included in the various
systems are often a function of the research methodology. Many of the studies examining
systems of human resource practices have employed statically derived groupings of practices. By
using statistical procedures such as factor analysis, they usually identify groups or clusters of
individual practices and then label each cluster as a system. Although the systems consist of
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empirically related practices, there may be less logical consistency than would occur if a human
resource executive were asked to develop such systems. A summary of the performance impact
of systems of human resource practices is presented in Figure 9.4.
One of the most comprehensive studies of the financial effects of the human resource systems is
that studied by Mark Huselid. His study has been received with great interest by both
academicians and practitioners. The results of this study warrant substantial confidence as the
study employed a comprehensive set of variables that controlled for various influences on firm
performance. The study examined two separate systems of highly inter-correlated practices, the
first being employee skills and organizational structures and the second being employee
motivation and hiring selectivity. This skills system included: (1) Information sharing, (2) Use of
formal job analysis, (3) Promotion from within, (4) Use of attitude surveys of the workforce, (5)
Use of quality of work life programs, (6) Profit sharing or gain sharing, (7) Employee training,
(8) Employee access to grievance procedures, and (9) Use of selection tests. The second system
of motivation practices was made up of (1) compensation based on performance appraisals, (2)
use of formal performance appraisals, (3) merit-based promotions, and (4) hiring selectivity.
System of Employee Skill Practices System of Employee Motivation Practices

• Information sharing • Compensation based on performance
• Use of formal job analysis appraisals
• Promotion from within • Use of formal performance appraisals
• Use of attitude surveys of the workforce • Merit-based promotions
• Use of quality of work life programs • Hiring selectivity
• Profit sharing or gain sharing
• Employee training
• Employee access to grievance procedures
• Use of selection tests
Figure 9. 5 Systems of Employee Skill Practices and Employee Motivation Practices
This comprehensive study found very strong evidence that systems of human resource practices
have a positive impact on firm performance. In general, the system of employee skills was
significantly related to increased gross rate of returns on assets. Thus, firms that use systems of
high performance skill enhancement practices generally have higher rates of return. Furthermore,
firms that use systems of high performance motivation practices generally have higher
productivity. Obviously, a myriad of organizational, technical, economic, environmental, and
temporal variables have influences on different measures of firm performance. Nonetheless,
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when the influence of these variables is controlled, analyses of the impact of systems of human
resource practices clearly indicate increased likelihood of increased performance for firms that
implement them under the appropriate circumstances.
Note: P = perceptual measures of performance.

Figure 9. 6 Systems of Human Resource Practices Impacting Firm Performance
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9.8. INDIVIDUAL BEST PRACTICES VERSUS SYSTEMS OF PRACTICES
As noted earlier in the discussion of individual best practices, many researchers used perceptual
measures of organizational performance. These measures are relative in the sense that survey
respondents report on how their organizations perform compared to others in the same industry.
As noted in the discussions of individual practices, the results indicate that several such practices
are significantly related to performance. Nonetheless, tests of individual HR practices do not
support the assertion that complementarities among HRM practices enhance firm performance.
The evidence on the superiority of the approaches is mixed, with neither perspective clearly
dominant in its performance effects. For the individual best practices perspective, there are some
practices, such as selective staffing, that have very strong effects. Such practices can be expected
to produce performance effects even in the absence of a complementary system of supporting
practices, such as practices that help motivate and maintain a workforce. Nonetheless, the
adoption of single practices or a single “silver bullet” practice is seldom a good means for
increasing and sustaining firm performance.
The fact that high-performance human resource practices tend to have high inter-correlations
provides good evidence that firms tend to maintain systems of high-performance human resource
practices. While they may adopt such practices incrementally and begin with only one such
practice, over time the better-performing firms are likely to develop supporting systems of high-
performance practices. Before the impact of systems can be determined, the manner in which
their components fit together within the context of the firm must be better understood. Effective
systems are not likely to be collections of uncomplimentary practices. It is necessary to
understand how the elements interact.

Three major models that explain the relationship between HRM and organizational performance have been critically
presented. These are the universalistic or best practice models of HRM, arguing that the organization is developing a
range of interconnected and mutually reinforcing HR practices that will always produce superior results whatever
the accompanying circumstances; the contingency or strategic fit models of HRM, arguing that the organization is
developing a range of HR practices that fit the business’s strategies outside the area of HRM; and the
configurational or bundles models of HRM, implying that the existence of specific combinations of HR practices
that depend on organizational context lead to higher business performance. The general causal model of the HRM–
performance relationship is presented whereby the precise mediating mechanisms through which HR practices
influence business performance are explored. These mediating mechanisms assume that HRM outcomes such as
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employee skills, attitudes and behavior positively mediate the relationship between HRM and performance. In trying
to illuminate the black box, the AMO HRM–performance framework is explored, arguing that organizational
performance is best served by employees who have the ability to do the work, possessing the necessary skills and
knowledge, who are motivated to work appropriately and who have the opportunity to arrange their skills in doing
their work. Additionally, the psychological contract HRM–performance framework is presented, whereby the state
of the psychological contract, based on the notions of reciprocity and social exchange, mediates the relationship
between HR policies and organizational performance.A number of researchers have identified several high
performance practices or best practices. Pfeffer’s seven human resource practices that are nearly universal in their
ability to enhance firm performance are employment security, selective hiring of new personnel, self-managed teams
and decentralization of decision making as the basic principles of organizational design, comparatively high
compensation contingent on organizational performance, extensive training, reduced status distinctions and barriers,
and extensive sharing of financial and performance information throughout the organization. The fact that individual
HR practices are highly inter-correlated and might have some synergistic effect, impact of systems of HR practices
were studied. The system of employee skills that includes information sharing, use of formal job analysis, promotion
from within, use of attitude surveys of the workforce, use of quality of work life programs, profit sharing or gain
sharing, employee training, employee access to grievance procedures, and use of selection tests has positive impact
on firm performance. The system of motivation practices made up of compensation based on performance
appraisals, use of formal performance appraisals, merit-based promotions, and hiring selectivity has also positive
impact on firm performance.

1. What is the philosophy of the AMO (Ability + Motivation + Opportunity) Model of the HRM –
Performance relationship?
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2. How does training and development relate to firm performance?
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3. How can extensive sharing of information be an essential component of the high commitment paradigm?
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4. What are the performance results of self-managed team?
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5. Are individual HR practices or systems of practices that impact firm performance? Why?
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Performance appraisal systems serve many purposes, such as providing formal feedback to employees on how
they stack up with respect to the organization’s performance standards, serving as input for compensation
decisions, identifying areas in which future development is needed, reinforcing good performance, providing
input for promotional decisions, and establishing the documentation needed to justify termination of
employment. Nonetheless, while performance appraisal is one of the fundamental activities in human
resources, it has always been a lightning rod for criticism and has recently come under renewed attack as
indicated in this section.
Some criticisms of traditional performance appraisal systems, in which supervisors appraise subordinates, are
that they frequently do not provide good assessments of managers. More specifically, traditional performance
appraisal systems often do not provide accurate evaluations of opportunistic managers who take advantage of
their own subordinates in order to enhance their superiors’ perceptions of their own performance. For example,
such managers may not give credit where credit is due, such as to employees who may have created an
innovative process that helped improve the unit’s productivity. Instead, they may attribute improved
performance to their managerial skills and take the credit for themselves.
With this background in mind, there is much to be learned from the experiences of the Otis Elevator Company.
The company had concerns that its old paper-based performance appraisal system was too slow and
cumbersome. There were also concerns about whether the raters could be assured of the confidentiality of their
ratings. Because of these problems, the company wanted a better system for appraising and developing the
performance of its engineering managers. Specifically, the company was interested in enhancing these
managers’ project management and project team leadership skills. The engineering managers needed
substantial improvement in their skills, and the company wanted a performance appraisal system that would
provide feedback from the managers’ subordinates, peers, and customers as well as their direct superiors.
Given these concerns, it is not surprising that Otis Elevator decided to develop a 360-degree feedback system.
With 360-degree feedback systems, superiors, peers, and subordinates evaluate managers. The innovative
aspect of the company’s approach to the 360-degree system is that the company decided to base the system on
the Internet and its own intranet. An independent contractor, E-Group, developed the system and handles the
collation and analysis of the feedback information.
E-Group chose a 75-item survey called LEAPS, which measures seven dimensions of leadership, for the 360-
degree instrument. The instrument was loaded on a Web site so that all raters can pull up the information and
complete the appraisal in approximately 20 minutes. After completing the appraisal, they simply submit the
results via e-mail to E-Group to process. Because the system is encrypted, the company is able to provide
greater confidentiality and anonymity for the raters than with the previous paper-and-pencil system. In addition
to the LEAPS items, the company included a fairly large set of other items to assess managers’ technical
competency and their contributions to the business. E-Group was able to provide appraisal profiles for the
managers within three days after the last of the evaluators e-mailed their input for the manager. In addition, the
profile of actual ratings for each manager from E-group also includes an ideal leadership profile developed by
Otis executives. By comparison on his or her actual ratings with the ideal profile, managers can identify areas
for future development. Otis Elevator chose to use the system only for developmental purposes, although
recently it began to consider other purposes for the system.
Questions
1. Aside from the advantage of instantaneous transmission of information, what other advantages do you
see with this type of performance appraisal system on the Internet?
2. What problems do you think Otis Elevator experienced once the 360-degree system was successfully
implemented on the Internet?
3. In the past, many human resource professionals have been almost obsessed with the forms or format
used in performance appraisal systems. How is the Internet application of 360-degree performance
appraisal systems different from the old obsession with form or format?
4. What else is necessary to help ensure that a performance appraisal system will be successful? How
would you determine if the system affects the firm’s performance?
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ANSWER KEY FOR SELF-CHECK QUESTIONS
SELF-CHECK QUESTIONS 1
1. Is strategy an element of leadership or vice versa? Explain

Strategy is an element of leadership. Setting strategy is one of the responsibilities of leadership.
Nobody can lead an enterprise if he or she does not agree with its strategy. Conversely,
organizations that are leaderless or inadequately led have difficulty defining clear strategies even if
they continue to function in their day-to-day activities. When leaders change strategies tend to
change. Conversely, if the strategy needs to change, it may be necessary to appoint a new leader.
2. What are the major assumptions of the resource-based model of strategy making?
The resource-based model assumes that each organization is a collection of unique resources and
capabilities. The uniqueness of its resources and capabilities is the basis for a firm’s strategy and its
ability to earn above-average returns. It also assumes that firms acquire different resources and
develop unique capabilities based on how they combine and use the resources; that resources and
certainly capabilities are not highly mobile across firms; and that the differences in resources and
capabilities are the basis of competitive advantage.
3. In what situation do the classical approach to strategy making more successful?

The classical approach to strategy making is most likely to be successful when the organization’s
objectives and goals are clear, the external environment is relatively stable, the information about
both the external and internal environment is reliable and the decision-makers are able to analyze it
thoroughly and make highly calculated decisions in order to adopt the best possible choice.
4. What is a company’s goal in pursuing a cost-leadership strategy?

A company’s goal in pursuing a cost-leadership strategy is to outperform competitors by doing
everything the company can to produce goods or services at a cost lower than those of competitors.
Because of its lower costs, the cost leader is able to charge a lower price than its competitors and yet
make the same level of profit. If rivalry within the industry increases and companies start to compete
on price, the cost leader will be able to withstand competition better than the other companies
because of its lower costs.
5. What is the difference between prospector and defender organizations?
Defender organizations face the entrepreneurial problem of how to maintain a stable share of the
market, and hence they function best in stable environments. Defenders create a secure market share
with moderate, steady growth, narrowed its product market domains and limit their search for new
opportunities, and instead, focus on internal ways to enhance organizational effectiveness.
Prospector organizations face the operational problem of not being dependent on any one
technology. Consequently, prospector companies prioritize new product and service development and
innovation to meet new and changing customer needs and demands and to create new demands. They
tend to emphasize creatively over efficiency.
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1. What is SHRM?
SHRM is the comprehensive set of managerial activities and tasks related to developing and
maintaining a qualified workforce that contributes to organizational effectiveness, as defined
by the organization’s strategic goals. Its objective is achieving or contributing to
organizational effectiveness through developing and maintaining a qualified workforce by
managers.
2. What are the linkages, if any, between SHRM, leadership and learning?
Many management gurus make an explicit link between strategic HRM, workplace learning,
and leadership when they write that ‘leaders are designers, stewards, and teachers’ and that
a learning organization will remain only a ‘good idea, an intriguing but distant vision’ until
the leadership skills required are more readily available. Thus, it would seem that a key
constraint on the development of a resource-based SHRM model and a ‘learning
organization’ is leadership competencies.
3. What is meant by phrase ‘HR is too important to be left to the HR specialists’?

SHRM has been largely based on a management- and business-orientated philosophy. It is
concerned with the total interests of the organization. The interests of the members of the
organization are recognized but subordinated to those of the enterprise: hence the
importance attached to strategic integration and strong cultures, which flow from top
management’s vision and leadership, and which require people who will be committed to the
strategy, who will be adaptable to change and who will fit the culture.
4. Explain with example the management-driven characteristic of HRM.

HRM is developed, owned and delivered by management as a whole to promote the interests
of their organization. The adoption of HRM is both a product of and a cause of a significant
concentration of power in the hands of management. HRM is about the rediscovery of
management prerogative.
5. What are the major differences between traditional HRM and Strategic HRM?
Major differences between traditional and strategic HRM include: (1) that strategic HRM
focuses on organizational performance rather than individual performance, and (2) that
strategic HRM emphasizes the role of HRM systems as solutions to business problems rather
than individual HRM practices in isolation. Strategic HRM differs significantly from
traditional HRM. While the main responsibility for managing human resources in a
traditional arrangement rests with HR specialists in a division or team, in SHRM the main
responsibility for people management rests with any individual that is in direct contact with
them, such as line managers. Thus, any individual in an organization who has responsibility
for people manages human resources in addition to his or her regular position.
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1. What are the weaknesses and the strengths of the Matching Model of SHRM?
The weakness is its apparent prescriptive nature with its focus on four key HRM practices. It
also ignores different stakeholder interests, situational factors and the notion of
management's strategic choice. The strength, however, is that it emphasizes the
interrelatedness and the coherence of HRM activities and the importance of 'matching'
internal HRM policies and practices to the organization's business strategy.
2. What are the two characteristic features suggested by the Harvard Model of SHRM
The two characteristic features suggested by the Harvard Model of SHRM are: 1) line
managers accept more responsibility for ensuring the alignment of competitive strategy and
personnel policies; 2) personnel has the mission of setting policies that govern how
personnel activities are developed and implemented in ways that make them more mutually
reinforcing.
3. Discuss the four major components of the Storey’s Model of SHRM
The four main components of the Model are beliefs and assumptions, strategic aspects, line
management, and key levers. The prevailing beliefs and assumptions are that it is the HR
which gives competitive edge; the aim should not be mere compliance with rules, but
employee commitment; and employees should, for example, be very carefully selected and
developed. The strategic aspects element shows that HRM is a matter of critical importance
to corporate planning. The third component, line management, argues that general
managers, and not HRM specialists, are vital to the effective delivery of HRM practices. The
key levers are issues and techniques strongly featured, explicitly or implicitly, in discussions
of HRM.
4. What are the inner and the outer contexts in the Warwick’s Model of SHRM?
The inner context in the model include the organization’s culture, structure, leadership, task-
technology, and business outputs whereas the outer context include socioeconomic,
technical, political-legal, and competitive factors that influence the HRM effectiveness.
5. What are the major differences between the hard and the soft Models of SHRM?
The soft version of HRM emphasizes communication, motivation and leadership. It involves
treating employees as valued assets, a source of competitive advantage through their
commitment, adaptability and high quality. It therefore views employees as means rather
than objects. The soft approach stresses the need to gain the commitment – the ‘hearts and
minds’ – of employees through involvement, communications and other methods of
developing a high-commitment, high-trust organization. The hard version of HRM
emphasizes that people are important resources through which organizations achieve
competitive advantage. These resources have therefore to be acquired, developed and
deployed in ways that will benefit the organization.
286
1. Define SHRM from the perspective of universalistic or best practice. What are the roles
of the HR Directive on the basis of the universalistic perspective?
From the perspective of universalistic or best practice, SHRM is a process of finding and
applying best HR practices in order to improve the performance of the firm. The HR Director
is therefore expected to identify best HR practices that result in high organizational
performance regardless of other situations and apply them in their organizations or
divisions.
2. What does the Configurational perspective of SHRM state?
The configurational perspective of SHRM is a holistic approach that emphasizes the

importance of the pattern of HR practices and is concerned with how this pattern of HR
practices is related to the organizational performance. It posits a simultaneous internal and
external fit between a firm’s external environment, business strategy and HR strategy,
implying that business strategies and HRM policies interact, according to organizational
context in determining business performance.
3. What are the major critiques of the contingency perspective of SHRM?
The fit perspective proposes that there should be a strategic integration between HR policies
and practices and organizational strategies. Strategic integration or fit has three dimensions.
the integration or fit of HR policies with business strategy; the integration or
complementarity and consistency of mutuality employment policies; and the internalization
of the importance of HR on the part of line managers. One of the weaknesses of the fit
perspective is the lack of evidences that a tight fit leads to positive outcomes. The concept of
fit implies inflexibility and rigidity which could be detrimental to organizational outcomes.
4. What is the main contribution of the contextual perspective of SHRM?
The main contribution of the contextual approach lies in the reconsideration of the
relationship between the SHRM system and its context that have been traditionally
underestimated, such as the influence of public administrations or trade unions or the
incidence of social and institutional conditioning.
5. What are the major factors that determine HR investment decisions?
The major factors that determine investment decisions on HR by management include the
organization’s managerial values, risk and return trade-offs, the economic rationale for
investments in training, the investment analysis approach of utility theory, and outsourcing
as an alternative to investments in human resources.
287
1. What are the major objectives of a theory?
A theory fulfills to major objectives: prediction (knowledge of the outcome) and
understanding (knowledge of the process) regarding the relationships among the variables of
interest. Thus, a good theory enables one to both predict what will happen given a set of
values or certain variables, and to understand why this predicted value should result.
2. How can human resource be source of competitive advantage?
In resource-based terms, human resources are a valuable source of competitive advantage
because they are socially complex in that competitors may not be able to replicate the
diversity and depth of linked processes that sustain them; historically sensitive as it takes
time, for example, to build high levels of workforce trust; and ’causal ambiguity’, the notion
that managers themselves may be substantially in the dark about what creates advantage.
3. Discuss the unique nature of SHRM from the systems perspective?
What distinguishes the field of SHRM from other areas in HRM is the synergetic relationship
of the different HRM practices; the integration of HR strategies to business strategy; the
devolvement of HR responsibility to line management; and the strategic roles HR plays in an
organization. HRM and strategic management are subsystems of the broad organizational
system. The different HRM activities are sub-systems of the broad organizational HRM
system, HRM and line management are components that support each other to accomplish an
overall organizational objective. And the roles played by the HR managers in an
organizations affect and are affected by the overall organization’s system.
4. What does the behavior theory of the firm state?
Behavioral theory of the firm is a theory of how a firm or company makes decisions. The
behavioral theory states that a company’s decision makers may not make the best decisions
all the time because of lack of information, how a question is framed or their own prejudices
and fears. It looks at the process of how economic decisions are made in a business firm,
which deals with concepts of organization goals, organizational expectations, organizational
choice, and organizational control.
5. Why is identifying its constituents important for an HRM function?
When the HR job is thought about in terms of its constituents, it becomes apparent that there
are many different interacting groups that HR managers must satisfy, and which have a stake
in what HR does. Moreover, each comes with distinct and sometimes conflicting needs. It is
apparent that virtually any professional HR manager is keenly aware of the groups exerting
pressure on the HR activities. A first step is to recognize that the modern HR activity is part
of an open system interfacing with differing and demanding individuals and groups with the
potential to pull HR in different directions.
288
1. Explain the different aspects of integration in the SHRM Discipline.
The concept of integration has varied aspects in the SHRM literature. Integration of the people to the
organization through employee-commitment, the integration of the 5-Ps of HRM (policies, practices,
philosophies, programs, and processes) to business strategy, the complementarity of specific HR
practices and policies to each other, the integration between the HR practices and policies and the
three generic competitive strategies of Porter, the integration between the HR practices and policies
and the four generic business strategies of prospector, defender, analyzer, and reactor, and the
integration between the HR practices and policies and the firm’s life cycle stage of introduction,
growth, maturity, decline and turnaround.
2. Explain the differences and similarities among the administrative, one-way, two-way, and
integrative linkages between strategy and HRM.
An administrative linkage represents the lowest level of integration in which the HRM department is
merely engaged in administrative work such as salary administration. Thus, there is no linkage
between strategy and HRM. A one-way linkage can be found in organizations where the HR strategy
is derived from the overall business strategy. The HR strategy is affected by the overall business
strategy, but the relationship is only one way. A two-way linkage represents a potential model in
which HR experts determine certain external (or internal) developments that are put on the table of
the board of directors. These two way HR issues can become part of the overall business strategy.
An integrative linkage represents full alignment of HRM and strategy.
3. Compare and contrast the single-employee, among-employees, and temporal consistency of
HRM.
Single-employee consistency emphasizes that the different pieces of HR policy that bear on a single
employee should be consistent with one another. The different pieces of the overall HR system are
the practices that bear on individual employees, which include recruitment, compensation,
performance appraisal, promotion, training, etc. Among-employees consistency emphasizes that the
treatment of different workers should, at least over some span, be consistent. It is about consistent
and similar treatment of different but similarly-situated employees within the organization. Temporal
consistency stresses that the HRM philosophy and premises of the organization should demonstrate
some degree of temporal consistency or continuity.
4. What are the benefits of designing and implementing internally consistent HRM policies?
First, the different HR practices are technically interdependent. For example, a firm choosing to
invest heavily in training its employees will see increased value in careful screening of applicants and
in practices that are intended to decrease turnover. Second, since in consistency, everything follows
the same basic principles, it aids in the learning process that individuals must undertake, to
understand what is expected of them and what they can expect in turn. Third, consistency aids social
learning in the organization. It is easier, to mold individual’s tastes and expectations when the
organization’s practices consistently mimic previously internalized patterns of relationships in other
contexts. It aids learning in the sense of social norms. Forth, consistency in HR practices allows for
better initial matching of the employees to work settings that result in reduced turnover costs. Finally,
among-employee consistency diffuses invidious social comparisons and feelings of distributive
injustice.
289
5. Explain the organizational and the effectiveness criteria of devolving HR responsibility to line
management.
Devolvement is driven by both organizational and effectiveness criteria. On the basis of
organizational criterion, it is now broadly believed that responsibilities should be located at
appropriate places within the organization and that means, increasingly, with line management
rather than specialist functions. On the basis of effectiveness criterion, it is only by motivating and
committing the workforce that value can be added to other resources. It is line managers, not
specialist staff functions, who are in frequent, often constant, contact with employees.
1. What are the major differences between transactional and strategic HR activities?
Transactional HR activities and strategic HR activities are different in at least five different aspects.
One, while the area of interest in the transactional approach involve recruiting, training, pay, and
labor relations that in the strategic approach involves strategy and culture of the organization. Two,
while view of the organization in the transactional approach is micro-level that in the strategic
approach is macro-level. Three, in the transactional approach, the clients are employees whereas in
the strategic approach the clients are managers and the organization as a whole. Four, in the
transaction approach, HR has weak status in the organization whereas in the strategic approach, it
has strong approach. Finally, the educational requirement in the transactional approach is specialist
in HRM, whereas that in the strategic approach is general HR education with management
experience or general manager with HR experience.
2. Explain the delegator, the technical expert and the innovator roles of HR.
In addition to other roles, an HR manager plays a delegator, a technical expert, and an innovator
role. The delegator role of HR enables line managers serve as primary implementers of HRM
systems. The technical expert role encompasses a number of highly specific HR related skills, and as
innovators, HR managers recommend new approaches in solving HRM related problems.
3. What do the HR managers play in their administrative expert role?
In their administrative expert role, HR professionals design and deliver efficient HR processes for
staffing, training, appraising, rewarding, etc. Their role is measured by their administrative
efficiency. They focus on the day-to-day operational HR activities and HR processes, and are not
strategic and people oriented.
4. What does strategic mean for an HR professional?
What makes HR professionals strategic is their strategic capability, which is defined by CIPD as ‘the
capacity to create an achievable vision for the future, to foresee longer-term developments, to
envisage options (and their probable consequences), to select sound courses of action, to rise above
the day-to-day detail, and to challenge the status quo.’
5. What is Business Partnering?
HR business partnering is a model whereby HR professionals work closely with business leaders
and/or line managers to achieve shared organizational objectives, in particular designing and
implementing HR systems and processes that support strategic business aims. This can involve the
formal designation of ‘HR business partners’ - HR professionals who are embedded within specific
areas of the business.
290
1. Discuss how organizational culture forces employee performance evaluation strategy?
Culture is meant to reinforce and be reinforced by performance evaluation systems, so the
connections between them should be tight. If the firm has a culture of cooperation, stressing
individual performance is obviously unsafe. If the organization has or wishes a culture of
entrepreneurship, performance evaluation should weight entrepreneurial efforts heavily; successes
should be heavily weighted and failures should be discounted so that risk taking is not discouraged.
2. When a firm’s globalization strategy is more on developing global brand equity and facilitating
the transfer of knowledge, products, and technologies from one business unit to locale
throughout the organization, what impact will it have on HRM strategies?
In this setting, a higher degree of uniformity and consistency in HR practices across business units
and locales will be observed. This will support coordination and facilitate transfers of personnel,
which are likely to be important in implementing this form of global strategy. Consequently, there
will be a somewhat stronger role for central HR function in firms pursuing this type of strategy,
which would include balancing the need for locally competitive HR practices against the need for
companywide consistency.
3. Explain how uncertainty avoidance culture influences HRM and mention any three HRM
activities that are related to high uncertainty avoidance.
Uncertainty avoidance culture influences many HRM activities. Conflict handling, stress
management, and consensus can be mentioned as important HRM issues that are influenced by
uncertainty avoidance culture. Thus, participating and communicating employees in business and
organizational issues is an important HRM practices in a society with high uncertainty avoidance.
The selection process must also multi-stage and scientific to identify people, especially in managerial
positions, who are cautious and risk takers.
4. How do labor mobility influence SHRM activities?
Where labor mobility is low, especially among mid-career employees, internal labor markets are
favored because it is relatively more costly to recruit mid-career employees. But where labor mobility
is moderately high, an internal labor structure can benefit the individual firm by restraining
voluntary departures. Internal labor market is not favored in industries and locales where labor
mobility is so high that, even with the internal labor market in place, the firm would lose workers in
whom it has invested.
5. When the required employee skill is acquired from the organization on the job, what
compensation and promotion schemes are more appropriate? Why?
When workers acquire skills on the job, they often do so from co-workers, which have implications
for how rewards are distributed. To compensate employees in exchange for their skills and
knowledge devoted to the organization, seniority-based pay is more appropriate because the senior
employee is the most trained and knowledgeable since skill is acquired on the job. Employees must
also be promoted based on their seniority so that senior workers are willing to share knowledge with
their junior colleagues.
291
1. What is the philosophy of the AMO (Ability + Motivation + Opportunity) Model of the
HRM – Performance relationship?
The philosophy of the AMO model is that there is no specific list of HR practices that may influence
performance. Instead, the whole process depends on HR architecture that covers policies designed to
build and retain human capital and to influence employee behavior.
2. How does training and development relate to firm performance?
Training and development are related to firm performance in many ways. Firstly, training programs
increase the firm specificity of employee skills, which, in turn, increases employee productivity and
reduces job dissatisfaction that results in employee turnover. Secondly, training and developing
internal personnel reduces the cost and risk of selecting, hiring, and internalizing people from
external labor markets, which again increases employee productivity and reduces turnover.
3. How can extensive sharing of information be an essential component of the high
commitment paradigm?
There are a number of reasons why information sharing is an essential component of the high
commitment paradigm. First, open communications about financial performance, strategy and
operational matters not only ensures workers are informed about organizational issues, it also
conveys a symbolic and substantive message that they are to be trusted and treated in an open and
positive manner. Second, for team-working to be successful workers require information in order to
provide a basis from which to offer their suggestions and contribute to improvements in
organizational performance. Third, participation can provide management with some legitimacy for
its actions on the grounds that ideas have been put forward by workers and/or at least considered by
them before decisions are ultimately made.
4. What are the performance results of self-managed team?
Self-managed team creates a stronger sense of commitment to the work effort among members;
improve quality, speed, and innovation, have more satisfied employees and lower turnover and
absenteeism; facilitates faster new product development; allow cross trained team members greater
flexibility in dealing with personnel shortages due to illness or turnover; and keeps operational cost
down because of reduction in managerial ranks and increased efficiencies.
5. Are individual HR practices or systems of practices that impact firm performance?
Why?
Both individual HR practices and systems of practices impact firm performance. Neither perspective
is clearly dominant in its performance effects. For individual best practice perspective, there are
some practices (e.g. selective staffing) that have very strong effects even in the absence of a
complementary system. Nonetheless, the adoption of single practices is seldom a good means for
increasing and sustaining firm performance. The fact that high performance HR practices tend to
have high inter-correlations provides good evidence that firms tend to maintain systems of HPHR
practices.
292
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STRATEGIC

Abraraw Chane and

Table of Figures ................................................................................................................................... 7

Figure1. 1 Whittington’s (1993) Generic Perspective on Strategy......................................................... 22

STRATEGY AND STRATEGY MAKING

CHAPTER OUTLINE CHAPTER OBJECTIVE

1.1 Introduction Upon the completion of this chapter, you will be

Strategy is a Ploy. According to Mintzberg (1987), strategies as plans may be general or

1.3. FEATURES OF STRATEGY

1.4. MODELS OF STRATEGY MAKING

The Industrial Organization Model

1.5. APPROACHES TO STRATEGY MAKING

Figure1. 1 Whittington’s (1993) Generic Perspective on Strategy

The Evolutionary Approach: In the evolutionary approach, strategy is a product of market

The Processual Approach: In the processual approach, strategy formulation is an incremental

1.6. PORTER’S GENERIC STRATEGIES

Companies pursue a business--level

A company’s goal in pursuing a cost-leadership strategy is to outperform competitors by doing

The objective of the generic differentiation strategy is to achieve a competitive advantage by

Finally, a product’s appeal to customers’ psychological desires can become a source of

Finally, in choosing which distinctive competence to pursue, a differentiated company

Differentiation strategy is a strategy to gain competitive advantage by creating a distinct product

Cost Leadership and Differentiation

Recently, changes in production techniques - in particular, the development of flexible

In essence, a focused company is a specialized differentiator or a cost leader. If a company uses a

Furthermore, concentration on a small range of products sometimes allows a focuser to develop

Figure 1.2 illustrated the specific product/market/distinctive competence choices made by a

Figure1. 3 Types of Business-Level Strategies

Each generic strategy requires a company to make consistent product/market/distinctive-

1.7. THE MILES AND SNOW STRATEGY FRAMEWORK

1.9. SELF-CHECK QUESTIONS 1

AN OVERVIEW OF STRATEGIC HUMAN RESOURCE MANAGEMENT

CHAPTER OUTLINE CHAPTER OBJECTIVE

What is Human Resource Management? HRM, in theory and in practice, encompasses a

According to this definition, HRM is about employment relationship. It is a distinctive

Activity 2.1. SHRM is about employment relationship. Explain

2.3. ASPECTS OF SHRM

1. SHRM is a management approach: SHRM is a management approach concerned with

2.4. WHY STUDY SHRM

Activity 2.3. Is studying SHRM important for line managers? Explain

2.5. TRADITIONAL VERSUS STRATEGIC HRM

Traditional HRM is transactional in nature, concerned essentially with providing administrative

Figure 2. 1 Differences between Traditional HRM and Strategic HRM

Finally, while some progress is being made in measuring HRM activities,

2.6. DIMENSIONS OF SHRM

2.7. EVOLUTION OF SHRM: FROM PM TO STRATEGIC HRM

2.8. CHARACTERISTICS OF SHRM

The concept of SHRM is characterized by diversity, strategic, commitment-oriented, human

2.10. SELF-CHECK QUESTIONS 2

MODELS OF STRATEGIC HUMAN RESOURCE MANAGEMENT

3.3. THE MATCHING MODEL OF SHRM

Figure 3. 1 The Human Resource Cycle of the Matching Model of SHRM

3.4. THE HARVARD MODEL OF SHRM

According to these stereotypes, HRM is distinctively different from personnel management

Guest’s model has six components:

Figure 3. 3 The Guest’s Model of SHRM

3.6. THE STOREY’S MODEL OF SHRM

Figure 3. 4 The Storey’s Model of SHRM

Activity 3.4. What does the Storey Model of SHRM emphasize?

3.8. THE WARWICK’S MODEL OF SHRM

Figure 3. 5 The Warwick’s Model of SHRM

3.9. SELF-CHECK QUESTIONS 3

PERSPECTIVES ON STRATEGIC HUMAN RESOURCE MANAGEMENT