Strategic

Strategic Human
Human Resource
Resource Management
Management

CHAPTER
CHAPTER 11
AN
AN INVESTMENT
INVESTMENT PERSPECTIVE
PERSPECTIVE OF
OF
HUMAN
HUMAN RESOURCE
RESOURCE MANAGEMENT
MANAGEMENT
 The
The Strategic
Strategic View
View of
of Human
Human Resources
Resources

•• Employees
Employees are
are human
human assets
assets
–– Increase
Increaseininvalue
valuetotoorganization
organizationand
andmarketplace
marketplacewhen
when
investments
investmentsofofappropriate
appropriatepolicies
policies&&programs
programsare
areapplied
applied
•• Effective
Effective organizations
organizations recognize
recognize that
that employees
employees
have
have value
value
–– Much
Muchas
asorganization’s
organization’sphysical
physical&&capital
capitalassets
assetshave
havevalue
value
•• Employees
Employees are
are valuable
valuable source
source of
of sustainable
sustainable
competitive
competitive advantage
advantage

1–2
 Exhibit
Exhibit1-1
1-1
Sources
Sources of
of Employee
Employee Value
Value

1–3
 Sources
Sources of
of Employee
Employee Value
Value

•• Technical
Technical Knowledge
Knowledge
–– Markets,
Markets,processes,
processes,customers,
customers,environment
environment
•• Ability
Ability to
to Learn
Learn and
and Grow
Grow
–– Openness
Opennesstotonewnewideas
ideas
–– Acquisition
Acquisitionofofknowledge
knowledge&&skills
skills
•• Decision
Decision Making
Making Capabilities
Capabilities
•• Motivation
Motivation
•• Commitment
Commitment
•• Teamwork
Teamwork
–– Interpersonal
Interpersonalskills,
skills,leadership
leadershipability
ability
1–4
 Adopting
Adopting an
an Investment
Investment Perspective
Perspective

•• Determines
Determines how
how to
to best
best invest
invest in
in people
people
•• Costs
Costs
–– Out-of-pocket
Out-of-pocket
–– Opportunity
Opportunity
•• Human
Human assets
assets become
become competitive
competitive advantage
advantage
•• Required
Required skills
skills become
become less
less manual,
manual, more
more
knowledge-based
knowledge-based
•• Appropriate,
Appropriate, integrated,
integrated, strategy-consistent
strategy-consistent
approach
approach isis needed
needed

1–5
 AA Dilemma
Dilemma

•• Failure
Failure to
to invest
invest in
in employees
employees causes
causes
–– Inefficiency
Inefficiency
–– Weakening
Weakening ofof organization’s
organization’s competitive
competitive
position
position
•• Human
Human assets
assets are
are risky
risky investment
investment
•• Require
Require extra
extra effort
effort to
to ensure
ensure that
that they
they
are
are not
not lost
lost

1–6
 Exhibit
Exhibit1-2
1-2
Types
Types of
of Organizational
Organizational Assets/Capital
Assets/Capital

1–7
 Research
Research Findings
Findings

•• HR
HR practices
practices directly
directly related
related to
to profitability
profitability &
&
market
market value
value
•• Primary
Primary reason
reason for
for profitability
profitability (Watson
(Watson Wyatt
Wyatt
study)
study)
–– Effective
Effectivemanagement
managementofofhuman
humancapital
capital
•• Integrated
Integrated management
management of of human
human capital
capital can
can
result
result in
in 47%
47% increase
increase in
in market
market value
value
•• Top
Top 10%
10% of of organizations
organizations studied
studied experienced
experienced
391%
391% return
return on
on investment
investment inin management
management of of
human
human capital
capital
1–8
 Exhibit
Exhibit1-3
1-3
HR
HR Value
Value Chain
Chain

1–9
 HR
HR Metrics
Metrics Are
Are Complex
Complex

•• 90%
90% of
of Fortune
Fortune 500
500 organizations
organizations evaluate
evaluate HR
HR
operations
operations on
on basis
basis of
of three
three metrics
metrics (below)
(below) &
& HR
HR
expense
expense as
as percentage
percentage ofof operational
operational expenses:
expenses:
–– Employee
Employeeretention
retentionand
andturnover
turnover
–– Corporate
Corporatemorale
morale
–– Employee
Employeesatisfaction
satisfaction
•• These
These metrics
metrics do
do not
not necessarily
necessarily illustrate
illustrate how
how
HR
HR impacts
impacts
–– Profits
Profits
–– Shareholder
Shareholdervalue
value

1–10
 HR
HR Metrics
Metrics
•• Absence
AbsenceRate
Rate
[(Number
[(Numberofofdays
daysabsent
absentininmonth)
month)÷÷(Average
(Averagenumber
numberofofemployees
employeesduring
during
mo.)
mo.)××(number
(numberofofworkdays)]
workdays)]××100
100
•• Cost
Costper
perHire
Hire
(Advertising
(Advertising++Agency
AgencyFees
Fees++Employee
EmployeeReferrals
Referrals++Travel
Travelcost
costofofapplicants
applicants
and
andstaff
staff++Relocation
Relocationcosts
costs++Recruiter
Recruiterpay
payand
andbenefits)
benefits)÷÷Number
Numberofof
Hires
Hires
•• Health
HealthCare
CareCosts
Costsper
perEmployee
Employee
Total
Totalcost
costofofhealth
healthcare
care÷÷Total
TotalEmployees
Employees
•• HR
HRExpense
ExpenseFactor
Factor
HR
HRexpense
expense÷÷Total
Totaloperating
operatingexpense
expense
Sources: Robert Grossman, “Measuring Up,” HR Magazine, January 2000, pp. 29–35; Peter V. Le Blanc, Paul Mulvey, and Jude T.
Rich, “Improving the Return on Human Capital: New Metrics,” Compensation and Benefits Review, January/February 2000, pp. 13–
20;Thomas E. Murphy and Sourushe Zandvakili, “Data and Metrics-Driven Approach to Human Resource Practices: Using
Customers, Employees, and Financial Metrics,” Human Resource Management 39, no. 1 (Spring 2000), pp. 93–105; [HR Planning,
Commerce Clearing House Incorporated, July 17, 1996;] SHRM/EMA 2000 Cost Per Hire and Staffing Metrics Survey; www.shrm.org. Figure 1–5

1–11
 HR
HR Metrics
Metrics (cont’d)
(cont’d)
•• Human
HumanCapital
CapitalROI
ROI
Revenue
Revenue−−(Operating
(OperatingExpense
Expense−−[Compensation
[Compensationcost
cost++Benefit
Benefitcost])
cost])÷÷
(Compensation
(Compensationcost
cost++Benefit
Benefitcost)
cost)
•• Human
HumanCapital
CapitalValue
ValueAdded
Added
Revenue
Revenue−−(Operating
(OperatingExpense
Expense−−([Compensation
([Compensationcost
cost++Benefit
BenefitCost])
Cost])÷÷
Total
TotalNumber
NumberofofFTE
FTE
•• Revenue
RevenueFactor
Factor
Revenue
Revenue÷÷Total
TotalNumber
NumberofofFTE
FTE
•• Time
Timeto
tofill
fill
Total
Totaldays
dayselapsed
elapsedtotofillfillrequisitions
requisitions÷÷Number
Numberhired
hired
Sources: Robert Grossman, “Measuring Up,” HR Magazine, January 2000, pp. 29–35; Peter V. Le Blanc, Paul Mulvey,
and Jude T. Rich, “Improving the Return on Human Capital: New Metrics,” Compensation and Benefits Review,
January/February 2000, pp. 13–20;Thomas E. Murphy and Sourushe Zandvakili, “Data and Metrics-Driven Approach to
Human Resource Practices: Using Customers, Employees, and Financial Metrics,” Human Resource Management 39,
no. 1 (Spring 2000), pp. 93–105; [HR Planning, Commerce Clearing House Incorporated, July 17, 1996;] SHRM/EMA Figure 1–5 (cont’d)
2000 Cost Per Hire and Staffing Metrics Survey; www.shrm.org.

1–12
 HR
HR Metrics
Metrics (cont’d)
(cont’d)
•• Training
TrainingInvestment
InvestmentFactor
Factor
Total
Totaltraining
trainingcost
cost÷÷Headcount
Headcount
•• Turnover
TurnoverCosts
Costs
Cost
Costtototerminate
terminate++Cost
Costper
perhire
hire++Vacancy
VacancyCost
Cost++Learning
Learningcurve
curveloss
loss
•• Turnover
TurnoverRate
Rate
[Number
[Numberofofseparations
separationsduring
duringmonth
month÷÷Average
Averagenumber
numberofofemployees
employees
during
duringmonth]
month]××100
100
•• Workers’
Workers’Compensation
CompensationCost
Costper
perEmployee
Employee
Total
TotalWC
WCcost
costfor
forYear
Year÷÷Average
Averagenumber
numberofofemployees
employees

Sources: Robert Grossman, “Measuring Up,” HR Magazine, January 2000, pp. 29–35; Peter V. Le Blanc, Paul Mulvey,
and Jude T. Rich, “Improving the Return on Human Capital: New Metrics,” Compensation and Benefits Review,
January/February 2000, pp. 13–20;Thomas E. Murphy and Sourushe Zandvakili, “Data and Metrics-Driven Approach to
Human Resource Practices: Using Customers, Employees, and Financial Metrics,” Human Resource Management 39,
no. 1 (Spring 2000), pp. 93–105; [HR Planning, Commerce Clearing House Incorporated, July 17, 1996;] SHRM/EMA Figure 1–5 (cont’d)
2000 Cost Per Hire and Staffing Metrics Survey; www.shrm.org.

1–13
 Mercer
Mercer Model
Model of
of Measuring
Measuring HR
HR Impact
Impact

•• Identify
Identify problem
problemHR HR can
can impact
impact
•• Calculate
Calculate actual
actual cost
cost of
of problem
problem
•• Choose
Choose HR HR solution
solution that
that addresses
addresses problem
problem
•• Calculate
Calculate cost
cost of
of solution
solution
•• Calculate
Calculate value
value of
of improvement
improvement 66 to to 24
24 months
months
after
after implementation
implementation
•• Calculate
Calculate specific
specific return
return on
on investment
investment
•• ROI
ROI inin human
human assets
assets often
often not
not realized
realized until
until some
some
time
time inin future
future

1–14
 Exhibit
Exhibit1-4
1-4
Factors
Factors Influencing
Influencing Investment
Investment
Orientation
Orientation

1–15
 Investment-Oriented
Investment-Oriented Organization
Organization

•• Sees
Sees people
people as
as central
central to
to mission
mission & & strategy
strategy
•• Mission
Mission statement
statement & & strategic
strategic objectives
objectives
espouse
espouse value
value ofof human
human assets
assets inin achieving
achieving
goals
goals
•• Management
Management philosophy
philosophy encouraging
encouraging
development
development & & retention
retention ofof human
human assets
assets
•• Does
Does not
not treat
treat human
human assets
assets in in same
same ways
ways
as
as physical
physical assets
assets

1–16
 Investment
Investment Orientation
Orientation Factors
Factors

•• Senior
Senior Management
Management Values
Values &
& Actions
Actions
–– Managers
Managersneed
need“investment
“investmentorientation”
orientation”toward
toward
people
people
•• Attitude
Attitude Toward
Toward Risk
Risk
–– Investment
Investmentininhuman
humanresources
resourcesinherently
inherentlyriskier
riskier
–– Human
Humanassets
assetsnever
neverabsolutely
absolutely“owned”
“owned”
•• Nature
Nature of
of Skills
Skills Needed
Needed by
by Employees
Employees
–– The
Themore
moremarketable
marketableemployee
employeeskills,
skills,the
theriskier
riskierthe
the
firm’s
firm’sinvestment
investmentininskill
skilldevelopment
development
1–17
 Investment
Investment Orientation
Orientation Factors
Factors

•• Utilitarian
Utilitarian (“Bottom
(“Bottom Line”)
Line”) Mentality
Mentality
–– Attempt
Attemptmade
madetotoquantify
quantifyemployee
employeeworth
worththrough
through
cost-benefit
cost-benefitanalysis
analysis
–– ““Soft”
Soft”benefits
benefitsofofHR
HRprograms
programsdifficult
difficulttotoobjectively
objectively
quantify
quantify
•• Availability
Availability of
of Outsourcing
Outsourcing
–– Given
Givenavailability
availabilityofofcost-effective
cost-effectiveoutsourcing,
outsourcing,
investments
investmentsininHRHRshould producehighest
shouldproduce highestreturns
returns&&
sustainable
sustainablecompetitive
competitiveadvantages
advantages..

1–18
 Reading
Reading1.1:
1.1:The
TheHidden
HiddenLeverage
Leverageof
ofHuman
HumanCapital
Capital
Model
Model for
for Management
Management Success
Success
•• Strengthen
Strengthen key
key •• Leverage
Leverage
relationships
relationships downtime
downtime
–– Customers
Customers –– Use
Usevariable-pay
variable-pay
–– Employees –– Address
Addressneglected
neglected
Employees
areas:
areas:
–– Shareholders
Shareholders •• Infrastructure
Infrastructure
•• Marketing
Marketing
•• Operations
Operations

1–19
 Reading
Reading1.1
1.1
Model
Model for
for Management
Management Success
Success
•• Refocusing
Refocusing staff on •• Building
staff on Building return
return on
on
what’s
what’s important
important compensation
compensation
–– Performance
Performance –– Link
Linkbase-pay
base-pay
management
managementas as progression
progressiontoto
disciplined,
disciplined,strategic,
strategic, competency
competency
value-added
value-addedprocess
process achievement
achievement
–– Clearly
Clearlydefine,
define, –– Link
Linkincentive
incentivepay
paytoto
differentiate
differentiate&&balance
balance annual,
annual,semiannual,
semiannual,oror
between
betweencore
core quarterly
quarterlyresults
results
competencies
competencies&&results
results

1–20
 Reading
Reading1.2
1.2
Seven
Seven Common
Common Misconceptions
Misconceptions
1.
1. Conscientiousness
Conscientiousness isis aa better
better predictor
predictor ofof
performance
performance than than intelligence.
intelligence.
2.
2. Companies
Companies that that screen
screen job
job applicants
applicants for
for values
values
have
have higher
higher performance
performancethan than those
those that
that screen
screen
for
for intelligence.
intelligence.
3.
3. Integrity
Integrity tests
tests don’t
don’t work
work well
well in
in practice
practice
because
because so so many
many people
people lie
lie on
on them.
them.
4.
4. Integrity
Integrity tests
tests have
have adverse
adverse impact
impact onon racial
racial
minorities.
minorities.

1–21
 Reading
Reading1.2
1.2
Seven
Seven Common
Common Misconceptions
Misconceptions
5.
5. Encouraging
Encouraging employee
employee participation
participation isis more
more
effective
effective for
for improving
improving organizational
organizational
performance
performance thanthan setting
setting performance
performance goals.
goals.
6.
6. Most
Most errors
errors in
in performance
performance appraisal
appraisal can
can bebe
eliminated
eliminated byby providing
providing training
training to
to managers
managers on on
how
how toto avoid
avoid them.
them.
7.
7. IfIf employees
employees areare asked
asked how
how important
important paypay isis to
to
them,
them, they
they are
are likely
likely to
to overestimate
overestimate itsits true
true
importance.
importance.

1–22
 Reading
Reading1.2
1.2
Seven
Seven Common
Common Misconceptions:
Misconceptions: Implications
Implications

1.
1. Select
Select new
new employees
employees on on both
both intelligence
intelligence andand
conscientiousness.
conscientiousness.
2.
2. Assess
Assess intelligence
intelligence andand conscientiousness
conscientiousness beforebefore
values.
values.
3.
3. Define
Define the
the values
values that
that are
are important
important and and assess
assess
them
them through
through carefully
carefully developed,
developed, valid
valid
procedures.
procedures.
4.
4. Use
Use integrity
integrity tests
tests with
with ability
ability tests
tests for
for high
high
predictability.
predictability.

1–23
 Reading
Reading1.2
1.2
Seven
Seven Common
Common Misconceptions:
Misconceptions: Implications
Implications

5.
5. Develop
Develop compelling
compelling goals;
goals; enlist
enlist participation
participation
and
and support
support itit through
through rewards.
rewards.
6.
6. Training
Training andand feedback
feedback are are important,
important, but
but errors
errors
are
are difficult
difficult to
to eliminate.
eliminate. Top
Top managers
managers should
should
serve
serve as
as role
role models
models in in quality
quality ofof performance
performance
reviews.
reviews.
7.
7. Attitude
Attitude surveys
surveys are are subject
subject toto biases;
biases; study
study
behaviors
behaviors as as well
well as as attitudes.
attitudes.

1–24
 Reading
Reading3.2
3.2
Distinctive
Distinctive Human
Human Resources
Resources
•• ““Flexibility”
Flexibility” dimension
dimension associated
associated with
with
“prospectors”
“prospectors”
•• ““Established
Established markets”
markets” category
category linked
linked to
to
classifications
classifications like
like “defenders”
“defenders”
•• Employment
Employment practices
practices are
are difficult
difficult to
to
change
change & & transfer
transfer
•• Core
Core competencies
competencies should
should drive
drive business
business
strategy
strategy &
& not
not vice
vice versa
versa

1–25
 Reading
Reading3.2
3.2
Distinctive
Distinctive Human
Human Resources
Resources
•• IfIf competencies
competencies are
are available
available to
to everyone
everyone
on
on open
open market,
market, how
how can
can they
they generate
generate aa
unique
unique competency
competency & & competitive
competitive
advantage
advantage for
for any
any one
one firm?
firm?

1–26
 Final
Final Conclusions
Conclusions (Reading
(Reading 3.2)
3.2)
•• Clear
Clearrelationship
relationshipbetween
betweenbusiness
businessstrategies
strategiesand
and
employment
employmentpractices.
practices.
•• Organizations
Organizationsthatthatwant
wantto to move
movefast
fastand
andseize
seize
opportunities
opportunitiescompete
competethrough
throughflexibility
flexibilityand
andhence
hencedo
donot
not
develop
developcompetencies
competenciesfromfromwithin
within
•• On
Onthe
theother
otherhands,
hands,organizations
organizationsenjoying
enjoyingdominant
dominantroles
roles
in
inestablished
establishedmarkets
marketsof ofniches
nicheslook
lookinternally
internallyand
andrely
rely
on
onorganization
organizationspecific
specificcapabilities.
capabilities.

1–27
 HR
HRcompetencies
competenciesand
andBusiness
BusinessStrategy
Strategy(Reading
(Reading3.2)
3.2)

Business strategy HR competencies

Outside development Inside selection

Flexibility Raiders -
BCG
A.I.G.
Pepsi

Established Markets/ Niches - 49ers

1–28
 Continued
Continued
•• Interestingly
Interestingly there
thereisis no
nocompanies
companies on on quadrants
quadrants
away
away from
from the
the diagonal.
diagonal.ThisThis reflects
reflects aa sort
sort of
of
pattern
pattern
•• Going
Going from
fromthethe “inside”
“inside” to to “outside”
“outside” more
more easy
easy
than
than the
the converse.
converse.
•• Contrary
Contrary examples
examples to to the
the above
above are
are very
very few
few like
like
GE.
GE.
•• Firms
Firms operating
operating with
with anan “outside”
“outside” approach
approach too too
can
can have
have its
its unique
unique abilities.
abilities.

1–29
 Continued
Continued

•• The
The need
need for
for change
change may
may causes
causes aa shift
shift along
along the
the
diagonal.
diagonal. (UPS,
(UPS, IBM)
IBM)
•• The
The shifting
shifting along
along the
the diagonal
diagonal may
may cause
cause eroding
eroding
of
of core
core competency.
competency.
•• In
In current
current product
product markets
markets flexible
flexible firms
firms may
may
respond
respond faster
faster while
while this
this may
may not
not be
be aa case
case across
across
product
product markets.
markets.

1–30
 Public
Public policy
policy discussions
discussions (Reading
(Reading 3.2)
3.2)
•• Changing
Changingemployment
employmentpractices
practicesin inaanation
nationas
asaawhole
wholeisisaa
risky
riskyproposition
proposition
•• Numerous
Numerouspractices
practicesexist
existand
andititisisnot
notalways
alwayspossible
possibleto
to
predict
predictone
onebest
bestpractice.
practice.
•• Practices
Practicesnot
notcentral
centralto
toorganizational
organizationalcore corecompetence
competence
can
canhave
haveone
onebest
bestpractice
practicethat
thatsweeps
sweepsacross
acrossthe
theindustry,
industry,
E.g.:
E.g.:Lean
Leanproduction
productionamong
amongauto
automakers
makers
•• Variety
Varietyininemployment
employmentpractices
practicesisisaasource
sourceof
of
distinctiveness
distinctivenessand
andcompetitive
competitiveadvantage.
advantage.

1–31