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Overview: Strategic Human Resource Management in Five Leading Firms • 287

OVERVIEW:
STRATEGIC HUMAN RESOURCE MANAGEMENT
IN FIVE LEADING FIRMS

Brian E. Becker and Mark A. Huselid1

This article synthesizes findings from five case studies conducted in firms known to be leaders
in the management of people. We drew three broad conclusions:

1. The foundation of a value-added HR function is a business strategy that relies on people as


a source of competitive advantage and a management culture that embraces that belief;
2. A value-added HR function will be characterized by operational excellence, a focus on
client service for individual employees and managers, and delivery of these services at the
lowest possible cost; and
3. A value-added HR function requires HR managers that understand the human capital
implications of business problems and can access or modify the HR system to solve those
problems. © 1999 John Wiley & Sons, Inc.

Introduction actually manage people to provide a source Studies that


of competitive advantage are scarce, and compare and
contrast human
The recent emphasis among practitioners studies that compare and contrast human capital
and academics on “people” (and people capital management systems in leading management
management systems) as a source of com- firms are even more difficult to find. Indeed, systems in
petitive advantage has focused increasing while the empirical literature linking bet- leading firms are
interest on the science and practice of Hu- ter HRM with firm performance has con- even more
difficult to find.
man Resource Management. Indeed, it sistently found that more effective HR
would appear that the field of HRM is management is associated with superior
“coming of age” as the end of the millen- financial performance (see Becker &
nium approaches. While academic research Huselid, 1998, for an overview), what is
has made a number of significant contribu- missing is a clearer understanding of how
tions to these developments, Steve Kerr of these processes operate, and subsequently,
General Electric has argued persuasively how firms might actually manage their
that much of the best work is being done people to help provide a source of competi-
by consultants and professionals in the tive advantage.
field (Hodgetts, 1996). In fact, one could In this special issue of Human Resource
make a convincing case that the practice of Management, we attempt to provide some
strategic HRM has outpaced the academic insight into the “state of the practice”
work on this topic. Yet, data on how firms through the presentation of five detailed

Human Resource Management, Winter 1999, Vol. 38, No. 4, Pp. 287–301
© 1999 John Wiley & Sons, Inc. CCC 0090-4848/99/040287-15
288 • H UMAN RESOURCE MANAGEMENT, Winter 1999

case studies describing the HRM strategies The New Paradigm2


employed by firms known to be leaders in
the management of people. From June For most firms, the traditional path to sus-
through October 1997, we interviewed more tainable competitive advantage has turned
than 60 senior executives across these five on such barriers to entry as economies of scale,
companies, who came together to form a patent protection, access to capital, and regu-
Partnership through the auspices of the lated competition. What might be called a new
Global Consulting Alliance. Partnership economic paradigm, however, has given rise
firms subsequently shared information and to a new source of competitive advantage
learned from each other about leading edge and has challenged much of the conventional
HR practices. The distillation of these ex- wisdom about strategy, the role of an
periences is presented in this special issue. organization’s human resources, and HR’s
Using a detailed, structured interview for- relationship to firm performance. As global-
mat and extensive evaluation of background ization and the accompanying demands for
data, we spent on average a day and a half continuous change make innovation, adapt-
interviewing the senior HR and Line leader- ability, speed, and efficiency essential features
ship in the each of the following Partnership of the business landscape, the strategic
firms: importance of intellectual capital and intan-
gible assets have increased substantially
• Herman Miller, (Pfeffer, 1994; 1998). While these assets are
• Lucent, largely invisible (Itami, 1987) and do not
• Praxair, appear on the firm’s balance sheet, the sources
• Quantum, and of this capital are not.3 They are found in the
The HRM system • Sears. human capital of the firm’s employees, the
that develops and capabilities represented by the firm’s organi-
maintains a These data, along with an extensive evalu- zational processes and the value of brands and
firm’s strategic
infrastructure ation of background materials provided by customer relationships (Svelby, 1997). In the
should be each company, provided us with rich detail on words of James Chestnut, CFO for The Coca
considered an how leading firms use their HRM systems to Cola Company, the company’s phenomenal
investment. implement their competitive strategies and to market value is largely attributable to its brand
achieve their operational goals. In collabora- and its management systems, rather than any
tion with the Senior HR leader in each firm, collection of tangible assets (Stewart, 1998).
we prepared the cases that form the basis of Accordingly, many firms have increasingly
this special issue. broadened their focus from strategy content
This special issue is organized as follows. to strategy implementation. Speed, innovation,
This overview article provides an outline of and adaptability reflect competencies and
theoretical rationale and empirical literature capabilities (Hamel & Prahalad, 1994) for
linking HRM systems with corporate financial strategy implementation that have as their
performance. We next highlight the patterns that foundation the firm’s human capital.4 This has
emerged from our research in the five Partner- direct implications for a firm’s HRM system
ship companies. This discussion of patterns is and function. Traditionally focused on trans-
followed by the individual company cases. actions, practices, and compliance, the HR
Wayne Brockbank then provides a “look over function was—and often still is—appropriately
the horizon” by discussing the implications of considered a cost center. In contrast, the HRM
these findings for the practice of HR in the system that develops and maintains a firm’s
future. This is followed by our interview with strategic infrastructure should be considered
Mike Losey, Tony Rucci, and Dave Ulrich that an investment. It is an essential element of
provides a provocative response to this special the infrastructure that supports this value
issue. Finally, Joe Ryan reviews William creation process and is a potential strategic
Joyce’s new book, MegaChange: How Today’s lever for the organization.
Leading Companies Have Transformed Their The appropriate form for this strategic HR
Workforces. system continues to be debated. Pfeffer
Overview: Strategic Human Resource Management in Five Leading Firms • 289

(1998), for example, argues that a


common thread runs through the
approach to people management at
high performance companies. HR
systems in these organizations are
characterized by employee security,
selective hiring, decentralized de-
cision-making, well-paying jobs,
extensive development, reduced
status differentiation, and exten-
sive communication and informa-
tion sharing. We would emphasize
that while this provides a useful
template as a point of departure, FIGURE 1 . Dollar change in market value per employee.
the strategic influence of an HR
system requires that it be implemented as an cally and statistically significant impact of
internally coherent system that is aligned with the HRM system on both market-based and
the business goals and objectives of the orga- accounting-based measures of firm perfor-
nization. Recalling that the logic for the new mance. Figure 1 illustrates the relationship
strategic role for HR is driven by changing between a high performance HRM system
market conditions that highlight the impor- and firm market value per employee. In
tance of human capital issues, we should keep Figure 1 the HR system is measured as an
in mind that entirely new approaches are not index of attributes that taps the various
the sole source of value creation. Firms have elements of an HR system that select, main-
always had a choice to emphasize employee tain, develop, and reinforce employee per-
performance in their HR systems, and HR formance (the x-axis), scaled from zero
professionals have long known how to (the least developed HRM systems in our
implement such a focus. Market conditions, sample) to 100 (the most sophisticated
however, often enabled firms to achieve con- HRM systems). Firm performance is mea-
siderable success by giving limited attention sured in terms of market value per
to employee performance issues, thinking employee. 5
instead of employees largely as a cost to be The pattern of these results suggests the
minimized. While perhaps not an impera- changing nature of the HR influence on firm
tive for every firm, the economic returns to performance. The first stage (up to the 20th
a “high performance” HRM system have in- percentile) could be interpreted as the devel-
creased to the point that what might have opment of a professional HR capability. This
appeared a luxury 20 years ago is now a capability has value because it gets the firm
source of competitive advantage. “in the game”. In the second stage (between
the 20th and 60th percentile) the HR func-
The Financial Returns to Strategic HR tion develops operational excellence but does
not have a significant incremental influence
In the 1990s one of the most exciting new on firm performance. In the last stage, the HR
areas of academic research has focused on system once again has a noticeable payoff in
establishing an empirical link between HR terms of the firm’s bottom line. For example,
strategies and systems and a firm’s finan- moving from the 60th to the 80th percentile
cial performance. Studies at the level of the improved market value in the average firm by
firm, one industry, and multiple industries $20,000 per employee, or $200 million in a
have demonstrated a strong positive rela- firm with 10,000 employees.6 Our experiences
tionship (Becker & Huselid, 1998). Our own with these firms suggest that it is in this third
work, based on three separate national sur- stage that an HR system has achieved both
veys and the experience of more than 2,400 operational excellence and is aligned with the
firms, has repeatedly shown an economi- firm’s strategic goals.
290 • H UMAN RESOURCE MANAGEMENT, Winter 1999

The Strategic Influence of HR: Lessons purposes of this article, they are also a conve-
from Partnership Companies nient framework to integrate the wide range of
experiences reflected in our interviews at the
The HR strategies described in the accompa- Partnership companies.
nying case studies are among the most inno-
vative in the world. They are exemplars of the Lessons Learned
specific HR systems reflected in the more
abstract “60th to the 100th percentile” rela- This section highlights each of the three ma-
tionships depicted in Figure 1. Nevertheless, jor foundational elements to a value-added HR
while the HR management systems at the role and then develops supporting policies,
Partnership firms are among the best in the practices, or strategies that further implement
world, all of those interviewed acknowledge and illustrate those elements. We have at-
that much work remains to be done. The tempted to provide a sample of representative
focus of this introduction is to highlight the illustrations from the cases. The case studies
elements of a value-added HR function, as that follow this article will provide a more com-
represented in the cumulative experience of plete picture of each firm’s HR strategy.
Partnership firms, illustrating areas both of
considerable progress and remaining chal- Element #1: The foundation of a value-
It may be lenges. We hope that it will serve as a catalyst added HR function is a business strategy
axiomatic, but
for further research and as a “call to action” that relies on people as a source of com-
just as labor is a
derived demand for those firms wishing to improve their own petitive advantage and a management cul-
in basic HR management systems. ture that embraces that belief.
economic There are probably several ways one could
theory, the organize the foundational elements of a value- It may be axiomatic, but just as labor is a
demand for a added HR function, but we focus on three key derived demand in basic economic theory, the
strategic HR
presence is (and recurring) themes: demand for a strategic HR presence is derived
derived from the from the larger corporate or business strat-
larger corporate • A corporate strategy and management egy. It might be nice to believe that every suc-
or business culture that is appropriately aligned cessful firm is now compelled to rely on people
strategy. and supportive; as a source of competitive advantage, but there
• an HR function characterized by op- are in fact very successful firms that have not
erational and professional excellence; entirely embraced such a strategy. On the one
and hand, we have examples such as Quantum,
• HR managers that are effective “busi- which as a startup in 1980 established its
ness partners” and an HR function “people” strategy as the first step in its busi-
structured to support that role. ness plan. In the more typical firm, however,
a strategic HR presence has been a relatively
Each of these elements is a necessary, but recent phenomenon. Most Partnership com-
not sufficient, condition for HR to play a strate- panies tend to fall somewhere in between
gic organizational role. They reinforce one these experiences, and in general reflect re-
another and leverage the contributions of the cent converts to strategies that include a
other elements. Indeed, in our more recent re- “people-based” component. Herman Miller,
search we focus specifically on the appropriate Inc. (HMI) would be an exception, as their
alignment between the HR system and the philosophy of employee advocacy and “servant-
supporting “organizational logic” represented by based leadership” has a very long tradition
top management’s leadership style, the align- throughout the firm.
ment between HR and corporate strategies, and
the effectiveness of the HR function (Huselid Strong CEO Support and Buy-In from Line
& Becker, 1998). We find that when each of Managers
these elements is appropriately aligned, the firms
average 27% higher gains than they would ex- While HR’s role is driven by the under-
pect from the “sum of these parts”. For the lying firm strategy, the manifestation of that
Overview: Strategic Human Resource Management in Five Leading Firms • 291

strategic imperative is the commitment of the requires more than “hand waving” and slogans.
CEO to realizing a strategic role for HR. Does It requires a common understanding of the
the CEO really believe that HR can be more firm’s strategy and the role HR issues play in
than a cost center and that most of the em- the value chain that implements that strategy.
ployees are more than an expense to be mini- As respondents in several companies noted, it
mized? It should not be surprising that HR’s is also a two-way street. HR has to show that
strategic role will always be limited when the it can provide some leadership around these
CEO, or senior executive leadership, does not business issues and be aggressive in getting
fully embrace such a presence. The majority that message out. At Lucent, one of HR’s stra-
of the Partnership companies are going tegic goals is to motivate change by aggres-
through the transition from an operational HR sively sharing this story of their new role. In
focus to one that is more strategic. These are their words, “We can’t mumble our way to 50
typically driven by senior business leaders. An percent growth.”
exemplar would include Arthur Martinez at Buy-in from line managers and the cen-
Sears who recognized that Sears employees trality of a people-based competitive strategy
had to “feel comfortable outside a command- is also reflected in the extent to which the
and-control environment getting them used company is willing to share “confidential”
to risk taking and innovation.” information that, on the one hand, may have
Buy-in from line managers is necessary for proprietary value, but on the other, is essen- In fact, HMI uses
the EVA
HR to serve as a business partner because line tial if employees are to understand the strate-
framework (and
managers have to accept and participate in this gic significance of their jobs and their the resulting
new role. Aside from the firms where HR has performance. There were several examples of communication
played this role from the inception of the com- this type of communication, but a useful process) as the
pany, the experience among the Partnership exemplar is Herman Miller. HMI believes that basis for driving
firms is mixed. On the one hand there are firms participation in decision-making is a crucial “lean thinking”
throughout the
like Praxair. Considerable support and com- ingredient in the process of facilitating “own- organization.
munication during the development of their ership” among employees. Thus, HMI gives
“visioning” process, along with the develop- their owner-employees a significant amount
ment of specific, actionable goals at each level of information about the ongoing financial
of the business were key features. The result condition of the business; their recent adop-
was more rapid strategy implementation and tion of the Economic Value Added (EVA)
a greater sense of “mental ownership” among framework is an important additional step in
Praxair’s employees. On the other hand, line this direction. In fact, HMI uses the EVA
managers at some of the other Partnership framework (and the resulting communication
firms have taken a “wait-and-see” attitude process) as the basis for driving “lean think-
while clinging to the traditional relationships. ing” throughout the organization. Communi-
Clearly, line managers are going to be more cation is further facilitated by quarterly
supportive of this new role where they under- meetings, town hall meetings, and a variety of
stand the business case for such a change. This more informal brown bag lunches to transmit
can occur at two levels. First, there are com- financial and operational information through-
panies that have attempted to articulate the out the firm. In addition, they have a group
role HR or people issues serve as performance called the Monthly Business Exchange or
drivers in the implementation of strategy. More MBX, which is a meeting of the 350 team
elaborate are balanced scorecard models like leaders who gather every month to exchange
the one used at Sears, where there are clearly information and ideas. These meetings are
defined and empirically verified relationships videotaped for later distribution, and the team
between individual sales associate behaviors, leaders go back and pass out information to
customer satisfaction, and ultimately finan- the rest of their team members.
cial performance. In short, for the senior lead- Buy-in also means that line managers are
ership outside of HR to buy-in to a broader held accountable for HR issues in their per-
HR role, the business case for investments in formance reviews and bonus plans. Most of
human capital must be clearly articulated. This the Partnership firms are beginning to move
292 • H UMAN RESOURCE MANAGEMENT, Winter 1999

in this direction, but it remains one of the more value to a firm? Is it just the understanding that
challenging points of change. A good example key competencies are X instead of Y? It might
in this regard is Quantum, where “building a be, if the same competencies were generally
company with an extraordinary work environ- applicable across a wide range of organizations
ment” is one of three strategic goals. To this rather than entirely contingent on the firm’s
end they have identified nine Value Behaviors specific strategy and culture. While this remains
that contribute to the quality of the work en- an area for further research, the current work
vironment, as well as their goals to increase suggests that the majority of competencies are
market share and firm value. This is more than generally applicable across firms, though the
a management by objective (MBO) program; relevant behaviors would vary (Spencer & Spen-
fully 50 percent of a manager’s bonus is based cer, 1993). If true, it seems unlikely that an in-
on these behaviors which emphasize how work dividual firm could be prevented from
is done as much as what is achieved. In their discovering the appropriate competency mix,
words, “You can’t simply ‘get results’ too often alone or with the assistance of a consultant.
while leaving a pile of dead bodies behind you.” To the extent that more firms discover the
same competencies, the demand for individu-
Competing on the Basis of “People Quality” als with those attributes will increase, driving
Relying on Means Developing an Understanding of the up salaries and eroding the initial gains from
competencies as
Underlying Competencies Required and moving to the competency models in the first
a source of
competitive Aligning the HR System to Build Those place. In short, one can only hope to “beat the
advantage raises Competencies market” based on competencies if your firm has
some interesting information that others lack about the most
questions. Competency based models, if not a best prac- appropriate competencies and if your competi-
tice, are certainly a common practice. The tors have a difficult time replicating the system
majority of the Partnership firms have devel- that supports your competency model. Never-
oped—in one form or another—a set of core theless, if most firms are relying on competency
leadership competencies that are the basis for models, your firm cannot afford to “opt out”. To
targeted selection processes, performance do so would risk a decline in the quality of your
management, development, and in some workforce as the incidence of valuable compe-
cases, compensation policies. The integration tencies in your normal applicant pool dimin-
of competency models into the larger HR ishes as other firms hire a disproportionate share
system is a potentially important element in of individuals with those attributes. Praxair has
the transition of HR to a more strategic player. explicitly recognized this challenge associated
In principle, it is an affirmation that “who you with keeping the best people by giving additional
hire in a wide range of jobs really does make a attention to creating a work environment and
difference”, suggesting that the firm’s future career opportunities that will encourage their
is dependent on more than a handful of se- best people to stay, allowing Praxair to avoid
nior executives. Moreover, the breadth of the being drawn in to a “bidding war” for the best
competencies have tended to highlight and available talent.
reinforce the role of human capital issues in
the successful performance of all managers. The Strategic Value of Competency Models Is
For example, Praxair is on its second genera- Largely a Function of Their Integration in
tion of competency models. Despite the the Larger HR System
considerable external praise attracted by the
earlier efforts, Praxair has developed a new While discovering the appropriate competen-
model around values and integrity to reflect cies for an organization is probably not an
the heightened importance of process in its inimitable source of competitive advantage,
streamlined management structure. the capability to integrate that knowledge ef-
Relying on competencies as a source of fectively throughout the entire HR system may
competitive advantage raises some interesting well be. This requires that HR managers think
questions. What is it about competency models systemically (and strategically) about their area
that provide an inimitable source of strategic rather than functionally and tactically. It is this
Overview: Strategic Human Resource Management in Five Leading Firms • 293

infrastructure of an aligned HR system that which they create value at HMI (the firm is
creates what strategy scholars refer to as considering the adoption of some form of the
“causal ambiguity”, making it difficult for other Balanced Scorecard approach going forward).
firms to imitate even if they can begin with This serves the same purpose as the Learning
the same competency model. Maps (visually engaging posters that depict a
series of value chains) developed by Sears.
Employee Development While the firm has long had Employee Stock
Option Plans (ESOP) and Scanlon plans,
The threshold question for many firms is the HMI’s recent adoption of EVA has heightened
“make or buy” decision. That is, which com- the involvement in business literacy training.
petencies can we develop and which do we For example, they have developed a number
have to acquire in the market? The Partner- of courses directly aimed at increasing busi-
ship firms tend to be divided into two groups. ness literacy: EVA101 is a 2-hour formal
A few, like Quantum, have always hired based course for all employees that introduces the
on a set of characteristics thought to be fun- concepts to employees (85% of HMI’s employ-
damental to success in their organizations, and ees have been through this course to date).
continue to do so. Quantum, for example, re- EVA201 is a refresher course that also intro-
lies so heavily on team-based product devel- duces more advanced concepts. EVA301 is in
opment and operations teams that if applicants the works, which will provide even more ad-
can’t work in teams, “they can’t work at Quan- vanced training on this topic. Finally, HMI has
tum.” Most of the Partnership firms, however, developed a series of “train the trainer” courses
are in a position where their competitive strat- to help team leaders (of which there are 350)
egy has changed, the market demands have and others in teaching these courses and con-
changed, and they need a work force with a cepts to other employees.
different set of competencies than the ones
they currently possess. By necessity, there is a Targeted Selection
heavy reliance on people development, usu-
ally beginning with managers and the more The common practice among Partnership
senior leadership throughout the firm. The firms is to use a form of targeted selection Sears University
“leadership gap” is particularly significant in process driven by the firm’s competency currently serves
20,000 managers
firms that have a recent history of downsizing model. 7 Typically they rely on behavioral per year and
combined with little new hiring (Lucent) or interviewing methods and include the active emphasizes the
companies attempting to substantially shift participation of line managers and prospec- enrollment of
their strategic focus (Praxair). tive team members. Perhaps the most signifi- intact teams to
Finally, several of the Partnership compa- cant aspect of this wider participation in a facilitate
knowledge
nies have developed more comprehensive process that emphasizes competencies and a
sharing after
efforts such as Sears University. For example, distinctive methodology that supports it is that completion of the
Sears University currently serves 20,000 the saliency of competencies tends to be rein- program.
managers per year and emphasizes the enroll- forced in other elements of the HR system.
ment of intact teams to facilitate knowledge As senior line managers get a better under-
sharing after completion of the program. Not standing of the individual characteristics that
surprisingly, the success of the program is contribute to successful leadership in their
premised on strong support from the senior organization, they will also be more open to
executive team that has been willing to fully introducing these elements into performance
fund the initiative to date. management and compensation decisions.
More targeted development that is aligned Finally, Quantum makes the point that if a
with a larger HR strategy is reflected in ef- firm selects on the behaviors or competencies
forts to support Herman Miller’s emphasis on that really matter on the job, the new hires
employee participation, which the company can be expected to be productive much sooner.
considers both an opportunity and an obliga- Their view is that applicants who can survive
tion. A considerable amount of effort is spent the Quantum selection process can start at
training employees in the processes through “merge speed”.
294 • H UMAN RESOURCE MANAGEMENT, Winter 1999

Performance Management competencies they are seeking are in short


supply. At the same time, it is critical to the
There seems to be some increased attention to success of any people-based strategy to attract
the performance management process among and retain the very best. Becoming an “Em-
Partnership firms. Companies that have made ployer of Choice”, however, requires an aligned
an effort to upgrade their performance manage- HR system. It is very easy (and very expen-
ment systems tend to do so as part of a larger sive) to provide compensation and benefit
effort to integrate their competency models levels that will be attractive. The challenge is
throughout the HR system. Some of the most to also structure an HR system that selects,
significant performance management compe- develops, and produces a level of performance
tencies were found in those firms that were that can justify those investments. If leveraged
strongly team oriented. For example, at Praxair within a High Performance Work System
there are four levels of performance manage- (Becker & Huselid, 1998), however, an Em-
ment: company-wide, business unit, broad ployer of Choice strategy can add consider-
teams within business units, and specific project able value. Sears, for example, is committed
teams. Praxair is experimenting with a process to competing based on customer service,
that allows teams to decide who outside of their which is driven by the quality of their 200,000
team (i.e., support staff assigned to multiple Sales Associates (70% of whom are part-time,
teams) should benefit from their teams’ success a group that averages 100% turnover per
and what the nature of that reward should be. annum). The intellectual capital represented
Quantum’s emphasis on their nine key Value by their understanding of the Sears strategy—
Behaviors in performance management is simi- the key to the 3 C’s—walks out the door if
lar. Quantum’s near total reliance on team-based Sears can’t be a “compelling place to work”.
work structures, however, requires a multi-step For Quantum, building an extraordinary
While the term process including multiple rankings of individu- work environment is an end in itself, though it
may vary, a
number of the als within teams by other members (25%) and is understood to also be related to the firm’s
Partnership firms the team leader (25%), and separate ratings of business objectives. The Quantum approach, as
believe they are the team by the business unit manager (50%). stated in company documents, is to structure
in an Similarly, for more than five years Sears has an environment characterized by the following:
environment mandated multi-perspective appraisal of all
where employees
with the type of
managers. The process emphasizes behaviors 1. Achieving long-term business success
competencies consistent with the leadership competencies 2. Ensuring that Quantum’s employees
they are seeking that support the 3 C’s (Sears’ strategic impera- feel valued
are in short tives, which include transforming the retailing 3. Ensuring a sense of pride of associa-
supply. giant into a Compelling Place to Work, a Com- tion with the company
pelling Place to Shop, and a Compelling Place 4. Instilling a sense of camaraderie and
to Invest). At the level of Sales Associates, em- that “all of us are in this together”
ployees get direct feedback from customers who 5. Ensuring that each employee has the
they have served. When setting performance opportunity to reach her highest po-
objectives, the key challenge is to improve the tential personally and professionally
“line of sight” between individual or team be- 6. Generating a sense of excitement and
havior and firm-level outcomes. At the same fun.
time, the performance objectives are structured
like a treadmill; if the employee doesn’t con- A Strong Pay-Performance Relationship
tinue to improve, s/he will move backward.
A strong pay-performance relationship is an
Emphasis on Becoming the Employer of essential element of a strategy that relies on
Choice people as a source of competitive advantage,
not only for the effort elicited, but more im-
While the term may vary, a number of the portantly as a signal that the “right behaviors
Partnership firms believe they are in an envi- matter, and will be reflected in an employee’s
ronment where employees with the type of paycheck”. The trend toward increasing use
Overview: Strategic Human Resource Management in Five Leading Firms • 295

of variable pay is apparent among Partnership In Quantum’s case, it follows from the belief—
firms, but it did not appear to be the most from the inception of the firm—in the strate-
important strategic lever in any firm. Several gic role of people issues. Bonuses are based
firms mentioned the importance of sensitiz- equally on results and adherence to Quantum’s
ing employees to the interests of the company nine Value Behaviors. This is more than an
and the importance of profit sharing and stock article of faith. Care is taken to set “nested
options in that role. In recent years, Lucent objectives” so that each employee’s goals fit
has increased the use of stock options. The together with a subordinate’s goals at each
program is considered an essential foundation level. Each employee understands how his/her
for aligning employee interests with the goal performance affects the next level in the chain, The firms we
of doubling the firm’s market value in the next ending with firm performance as a whole; and interviewed
few years. Lucent provided all employees with every employee understands the goals of other uniformly
acknowledged
100 options as “founders grants” when the employees with whom they work. Sears is their continuing
company went public and has expanded their equally explicit in articulating the value chain responsibility to
use among managers, though only 5% of the of strategy implementation and the role and “sweat the
eligible pool received awards last year. impact of people and customer issues on fi- basics”,
Perhaps a more interesting indication nancial performance. Learning Maps reinforce providing
essential HR
that people-based strategies are being taken an understanding of these relationships. Sears
services to
seriously is the extent to which managers, currently assigns 50% of variable pay based individual
particularly senior managers, have a portion on financial performance and 50% divided employees and
of their bonus allocation based on the hu- evenly between the other two dimensions. For managers
man capital dimensions of their perfor- 1998, each of the three dimensions was professionally
and efficiently
mance. There is some evidence of such a equally weighted. This is possible because
with very short
change. A small change occurred in one of Sears has made the commitment to articulate cycle times.
the Lucent units when managerial bonuses and empirically verify the performance driv-
were based on financial (20%), customer ers in its strategy, and as a result, the senior
(20%), and people (20%) dimensions. The executive leadership realizes that solid perfor-
people issues were MBO goals around three mance on people issues should be rewarded
HR issues (e.g., diversity goals, where su- because they are a harbinger of financial per-
pervisors were required to have development formance in future periods.
plans for all of their subordinates) and were
only rewarded if the company also met its Element #2: A value-added HR function
earnings per share goal. This is a very com- will be characterized by operational ex-
mon problem in implementing a strategy cellence, a focus on client service for in-
that involves a people-based dimension. dividual employees and managers, and
Senior business leaders and particular delivery of these services at the lowest
CFOs are willing to include some payout possible cost.
for human capital related outcomes, but are
often faced with paying bonuses when the The firms we interviewed uniformly ac-
financials don’t seem to warrant it. Unfor- knowledged their continuing responsibility to
tunately, this probably indicates that the “sweat the basics”, providing essential HR ser-
senior leadership does not fully understand vices to individual employees and managers pro-
how human capital issues create value in fessionally and efficiently with very short cycle
the organization, often as leading indicators, times. These are typically the same services that
and are largely including people-related di- HR has provided as part of its traditional role,
mensions in the bonus pool as an article of though improvements in speed support the
faith. In short, there is no consensus around strategic role, and the service quality provides
the business case for how these people di- indirect support for efforts to be the Employer
mensions affect the implementation of the of Choice. As an indication of the breadth of
firm’s strategy—and ultimately financial experience in this aspect of HR, the following
performance. paragraphs highlight various examples of opera-
Quantum and Sears are two exceptions. tional excellence drawn from the interviews:
296 • H UMAN RESOURCE MANAGEMENT, Winter 1999

• Lucent monitors service quality at sition have been so strong that other
all levels. For example, they report “leverage” areas (finance, accounting,
99% data entry accuracy in the marketing) will soon be adopting a
firm’s HRIS, with a goal of 100%. shared services environment as well.
Ninety percent of the clients using
the employee services center have Element #3: A value-added HR function
their problem handled on the first requires HR managers that understand
The third
element of a call. Business Services, the opera- the human capital implications of busi-
value-added HR tional support for managers, now ness problems and can access or modify
function is the averages 115 days from job requisi- the HR system to solve those problems.
capability to tion to start date, with a goal of 40
work with line days. Fifty-six percent of clients us- The third element of a value-added HR
managers as a
business partner.
ing business services report being function is the capability to work with line
“very satisfied” with HR; the goal is managers as a business partner. This capabil-
90% by the end of the fiscal year. ity takes several forms, but based on the in-
• Sears indicates a considerable profi- terviews with Partnership firms would at a
ciency at handling high volume ser- minimum include: (1) HR managers with the
vice demands in-house and very competencies to serve as a business partner,
efficiently. Sears finds that they can (2) an HR function structured with the ap-
provide these services more cheaply propriate mix of responsibilities and resources
than it would cost to outsource them. allocated between corporate and business HR
As an example, they have reduced the units, and (3) sufficient resources to support
number of Associate Service Centers the “business partner” role. Each of the Part-
(handling benefits questions) from nership firms considered the business part-
200 to 1 over a seven-year period. At ner role important, though some had more
Sears, as with many of the Partner- experience with that role than did others.
ship firms, delivering the basics con- Since its inception, Quantum has so fully in-
tinues to be important to maintain and corporated this strategic role that it is some-
build their legitimacy with line man- times difficult to delineate this separate aspect
agers and other constituencies of the company’s activities. In recent years,
throughout the firm. Sears has moved well along that same path. It
• The HR function at Herman Miller is useful, however, for those firms in transi-
has long operated in a very lean man- tion to highlight the approach adopted by sev-
ner (as have the other staff support eral of the Partnership firms that are currently
areas). Consistent with the desire to going through these changes.
link HR more closely with the needs
of the business, the HR function has Lucent
recently led the way in the adoption
of a worldwide shared services envi- Lucent’s new HR structure is the foundation
ronment. In addition, the HR func- of a new and higher profile for the HR func-
tion reorganized earlier this year and tion. The model emphasizes client services at
has moved significant resources from three levels: individual employees/retirees
corporate HR to line or business unit (300,000), supervisors/coaches (33,000), and
roles. The business unit leaders, how- senior leaders (381). The linchpin for value
ever, will only get the level of support creation throughout Lucent is the role of HR
for which they are willing to pay. While Business Partner, in which HR leaders work
the firm is still adjusting to the simul- directly with the senior business leaders to
taneous deployment of shared services implement strategy. While the Business Part-
and a concurrent movement of a sig- ners, and indeed each of the three delivery
nificant proportion of HR resources channels, are measured against strict client
to the line or business unit levels, early satisfaction objectives, their ultimate goal is
indications of the success of this tran- for the senior executives to say at the end of
Overview: Strategic Human Resource Management in Five Leading Firms • 297

the year; “We were very successful and couldn’t Business Partner competency model will, over
have done it without HR”. The vision requires time, serve as a foundation for such models
a strong commitment to the senior leadership in other HR roles at Lucent.
that HR is working on their problems and that
all HR initiatives are always focused on solu- The Elements of High Performance HRM
tions for their clients. The details mean going Systems
to staff meetings, even when there is no dis-
cussion of HR issues, so HR representatives While the experience of the five Partnership
can better understand the business—or cre- firms is certainly compelling, an issue that fre-
ating a team of 58 HR professionals (the HR quently arises for us is the extent to which the
Accelerators) whose job it is to find and elimi- policies and practices adopted by these firms
nate (dismantle) HR policies and practices can in fact be considered “best practices”, or
that no longer add value for Lucent’s share- whether the HR management systems in these
holders. Another example would be bringing firms are so highly customized and tailored to
in the marketing manager from Network Sys- each situation that generalizations across firms
tems to address a video town meeting of the mean very little. In his recent review of the
worldwide Lucent HR community. She ex- literature, Pfeffer (1998) argues that there are
plained what is required to significantly grow in fact seven “best practices” that can lead to
her business and how HR can partner with superior economic performance if adopted by
her in this effort (better motivational programs any firm. These practices are:
for the sales force, new competencies based The Business
on future oriented thinking, and so on). • employment security Partner
Lucent has also developed a new compe- • selective hiring competency
model will, over
tency model to support the development of the • teams and decentralized decision- time, serve as a
Business Partner role in HR. The competen- making foundation for
cies were developed using internal reviews and • high pay such models in
external benchmarking sources and emphasize • extensive training other HR roles at
five areas that answer the question, “What are • reduced status distinctions Lucent.
the knowledge, skills, and commitments that will • extensive information sharing
enable the Business Partners to deliver upon
their customer’s (internal client) expectations”? Pfeffer’s concept of employment security
These include the following: does not reflect the provision of lifetime em-
ployment security to all employees, but rather
• Understanding the Lucent business, reasonable assurances from the organization
the client’s business, and HR busi- that they will not be able to “work themselves
ness; out of a job”. In addition, the expectation that
• Customer focus; average- to high-performing employees will
• Defining, managing, and implement- remain with the firm for reasonable time pe-
ing HR solutions to business problems riods is required if the firm is expected to make
by identifying, securing, and leverag- significant investments in employee training
ing resources; and development. Selective hiring, widely
• Managing in a changing, competitive found in the prior research to be value-added
environment; and at the level of the firm, is necessary to make
• Personal impact. sure that the firm attracts and retains the very
best employees, who are then able to derive
These competencies are then to be inte- maximum benefit from the rest of the system.
grated into a HR system of learning and Teams and decentralized decision-making have
development, staffing and selection, career de- considerable conceptual and practical appeal
velopment, and performance management. in a delayered environment where employees
The initial integration is through individual have the requisite knowledge to make their
assessment tools that form the basis of a own decisions and also where market pres-
customized career development plan. The sures require them to do so quickly. High pay,
298 • H UMAN RESOURCE MANAGEMENT, Winter 1999

not considered here to be a form of corporate without information sharing, focused selec-
largess, serves multiple functions. First, when tion, and training are unlikely to generate
matched with a selective hiring system, it can optimal solutions over the long run. Indeed,
help the firm to generate a substantial pool of one reason that the five firms in this study
candidates from which to choose. In addition, have such successful HR strategies is their
paying higher wages than those of competi- recognition of these interdependencies. As we
tors serves as a form of “efficiency wage”, in observe the implementation of these strate-
that employees are less likely to leave when gies, however, we are reminded of Schuler’s
their next-best opportunity, by definition, pays (1990) distinction between HR Philosophies
less than their current job. The economic re- and HR Practices. These firms philosophically
The ability to
appropriately
turns from extensive training are more likely embrace each of these elements in their HR
transform a high to be captured by the firm if employees are strategy, yet as each moves from philosophy
performance motivated to stay with the firm and contrib- to practice, the five firms we studied show con-
HRM philosophy ute to its success (fostered, in part, through siderable diversity.
into practice selective hiring, high levels of pay, and teams). The ability to appropriately transform a
requires that HR
Similarly, reduced status distinctions between high performance HRM philosophy into
managers
balance several employees help to build an esprit de corps practice requires that HR managers balance
competing roles. among employees and encourage the belief several competing roles. Ulrich (1997), for ex-
that all employees are “in this together”. Fi- ample, defines these roles as Administrative
nally, extensive information sharing is part of Expert, Employee Champion, Change Agent,
the “glue” that makes the parts of such a sys- and Strategic Partner. In these five firms, we
tem work together, in that in an environment have seen evidence of considerable effort to
where decision-making is decentralized and enrich the HR role by expanding their “above
largely in the hands of capable and enabled the line” activities (change agent and strate-
teams, sharing of information is ever more gic partner) while not sacrificing the quality
crucial to the overall organization’s success. of their more traditional “below the line” (ad-
While each of these elements represents ministrative expert and employee champion)
a choice to emphasize the performance en- contributions. Each of the firms in our study
hancing dimensions of the HRM system, it is explicitly recognizes the importance of each
equally important to remember that each is of these roles and is committed to professional
part of an integrated high performance HRM excellence in each.
system. Employment security in the absence
of selective hiring and continual development Remaining Challenges
brings to mind a civil service environment
more than a method for eliciting high perfor- While the Partnership firms as a group have
mance from a firm’s workforce. Similarly, made significant progress in raising the stra-
teams and decentralized decision-making tegic profile of HR in their respective organi-
zations, they acknowledge the considerable
challenges that remain. In some cases these
challenges focus on more fully developing HR
TABLE I Ulrich's Model of HR as a Business
as a strategic player and business partner, in
Partner.
others they have established a strategic foun-
Strategic Focus dation and are concentrating on the next busi-
ness problems facing the firm. Table II
Strategic Change summarizes the nature of these challenges and
Partner Agent
their distribution across firms. For the most
Systems People part, Partnership firms have achieved a solid
Administrative Employee record of operational excellence in HR. While
Expert Champion
they continue to look for improvements and
drive out costs where they can, the emphasis
Operational Focus
is clearly on the issues surrounding the devel-
Source: Ulrich, 1997. opment and consolidation of a more strategic
Overview: Strategic Human Resource Management in Five Leading Firms • 299

role. Indeed, in our experience, one of the cally supplemented by additional documenta-
distinguishing characteristics of leading edge tion and telephone interviews. These studies
HR management functions is that they have a were not designed to provide a comprehen-
clear idea of what they are up against and what sive record of each firm’s HR strategy and ev-
they must accomplish to move to the next level, ery HR practice. Instead, we asked participants
even if they are not as yet satisfied with their to focus on “what matters most” in their own
own performance. respective organizations. Specifically, what
Perhaps the first challenge during this were they doing in HR that really added value
transition is to develop an appropriate struc- to their firm and where were their most sig-
ture within which the HR function allocates nificant challenges? The resulting case stud-
the appropriate mix of responsibilities and ies, therefore, are organized around the fol-
resources between HR at the corporate and lowing themes:
business unit level. The tradition in many
business units has been operational, and the • The Role of HRM Throughout the
new demands of a business partner role are Firm: This section is designed to pro-
not always matched by the required resources vide background for the case study
(time and competencies). This challenge is and, in very broad terms, to describe
even more difficult when this new HR role the relative emphasis on strategic and
must be integrated within a larger business operational HR roles throughout each
environment characterized by the rapid, business.
global growth many firms are experiencing. • High Impact HRM Practices: This
Beyond these role-related issues, those inter- section focuses on those HR strategies,
viewed identified a range of firm-specific chal- philosophies, practices, or processes
lenges related to specific business problems that are making the most important
or HR processes. In broadest terms, several contribution to the firm’s success. In
of these could be categorized as the human short, it’s what is being done well and
capital problems surrounding strategic change. having a significant impact.
Perhaps the most significant was HR’s efforts • The Challenges: This section focuses
to support change and specifically to support on the most important challenges con-
efforts at leadership development and organi- fronting HR in each firm over the next
zational renewal. few years.

Introduction to Special As we noted in the introduction, Wayne


Issue Case Studies Brockbank of the University of Michigan
concludes with an excellent essay that gives
The following case studies are based on one- a “look over the horizon” for the HR pro-
to two-day interviews at each company, typi- fession as it prepares to enter the twenty-

TABLE II HR Challenges by Firm.


300 • H UMAN RESOURCE MANAGEMENT, Winter 1999

first century. Mike Losey, Tony Rucci, and guest editors. The interview is followed by
Dave Ulrich then comment on this special Joe Ryan’s review of William Joyce’s new
issue in an interview conducted by us as book on Megachange.

BRIAN E. BECKER (Ph.D., University of Wisconsin–Madison) is Professor of Human


Resources, and Chairman of the Department of Organization and Human Resources,
in the School of Management at the State University of New York at Buffalo. Professor
Becker has published widely on the financial effects of employment systems in both
union and non-union organizations. His current research and consulting interests fo-
cus on the relationship between human resources systems, strategy implementation,
and firm performance.

MARK A. HUSELID is an Associate Professor in the School of Management and Labor


Relations (SMLR) at Rutgers University. He holds a Ph.D. in Human Resource Man-
agement, an M.A. in Industrial and Organizational Psychology, and an M.B.A. His cur-
rent research and consulting activities focus on measuring and evaluating the impact of
human resource management systems on firm performance. He has published widely
on these topics and currently serves on the editorial board of five major academic jour-
nals. The recipient of numerous awards for his research, Huselid is on the Board of
Directors of the SHRM Foundation and is a member of the Executive Committee of the
Human Resource Management Division of the Academy of Management.

REFERENCES

Becker, B.E., Huselid, M.A., Pickus. P.S., & Spratt, Itami, H. (1987). Mobilizing invisible assets. Boston:
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mance work systems and firm performance: A Harvard Business School Press.
synthesis of research and managerial implica- Schuler, R.S. (1990). Repositioning the human re-
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Hamel, G., & Prahalad, C.K. (1994). Competing for Spencer, L.M., & Spencer, S.M. (1993). Competence
the future. Boston: Harvard Business School Press. at work. New York: John Wiley & Sons, Inc.
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Huselid, M.A., & Becker, B.E. (1998). High Perfor- Svelby, K.E. (1997). The new organizational wealth.
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Overview: Strategic Human Resource Management in Five Leading Firms • 301

ENDNOTES
1. The authors thank Herman Miller, Lucent, 4. These human capital based competencies
Praxair, Quantum, Sears, and the Global are in part the source of the “intangible capi-
Consulting Alliance for their generous sup- tal” represented by the difference between
port in the development of this project. In the book value of a firm’s assets (i.e.,
addition, Dorothy Simmons provided valu- shareholder’s initial investment) and the cur-
able research support in the development rent market value of those assets. The best
of this article and the cases upon which it is known variant of this measure is known as
based, for which we are grateful. Tobin’s q, which is a ratio of firm market
2. Much of the next two sections was adapted value to the replacement cost of its assets.
from Brian Becker, Mark Huselid, Peter 5. This relationship statistically controls for
Pickus, and Michael Spratt (1997). “HR as other differences across firms that might
Source of Shareholder Value: Research and influence this relationship (R&D invest-
Recommendations”, Human Resource Man- ment, industry, plant and equipment, prior
agement, Vol. 36, 1, pp. 39–48. sales growth, etc.).
3. Not only are investments in human capital 6. For ease of interpretation, these dollar val-
not reflected in a firm’s balance sheet, they ues are based on the average market values
are expensed in their entirety on an annual of firms in the sample. The actual effects
basis. Thus, in contrast to capital investments are in percentages so they would be propor-
(e.g., the purchase of a building) that are de- tionately larger or smaller based on an indi-
preciated over their useful lifetimes, invest- vidual firm’s market value per employee.
ments in people lower accounting earnings 7. Given the mix of participant responsibilities,
(net income and cash flow) by their full it was not always possible to discuss every
amount in the year in which they are incurred. aspect of the firm’s HR function on each
This provides managers whose compensation visit. Other firms may also have imple-
is tied to accounting rates of return a signifi- mented processes like targeted selection, but
cant disincentive to invest in human capital. they were not mentioned in the interviews.