A METHODOLOGY FOR THE DEVELOPMENT OF A HUMAN RESOURCE STRATEGY Arnoldo C. Hax Sloan School of Management M.I.T. March 1985 WP # 1638-85 A METHODOLOGY FOR THE DEVELOPMENT OF A HUMAN RESOURCE STRATEGY Abstract A human resource strategy is a critical component of the firm's corporate and business strategies, comprising a set of well-coordinaed objectives and action programs aimed at securing a long-term, sustainable advantage over the firm's competitors. A human resource strategy should be consistent with the firm's corporate and business strategies, as well as with the other managerial functional strategies. A process and a structured methodology for designing such a human resource strategy is presented. This methodology has been success- fully tested in actual business environments. -1- Introduction Most top managers whom I have encountered, when asked what is the central priority of their offices and the activity which attracts most of their attention respond that it is the proper identification, development, promotion and reward of their people. Jack Welch, the current chairman of General Electric, said to a group of students at the Harvard Business School that if you define the right task, put the appropriate person in charge of it, and back it up with the right kind of reward system you don't need to be a good manager to obtain excellent performance. The undeniable importance of human resources for every organization has been intensified in American firms due to the development of a number of firms requiring a broader, strategic oriented treatment of human resources. Beer et al [21 summarize these recent pressures as follows: - Increasing international competition, particularly from the Far East. - Increasing complexity and size of organizations. - Slower growth or declining markets in a great many industries. - Greater government involvement in human resources practices. - Increasing education of the work force. - Changing values of the work force. - More concern with career and life satisfaction. - Changes in work force demographics. -2- These concerns have prompted a great deal of attention to the need of managing human resources in a strategic manner: that is, in a way which may allow the firm to establish and sustain a long-term advantage over its competitors. Excellent literature sources which discuss that subject have recently been published, particularly Barocci and Kochan [1], Beer et al [2], Fobrum et al [5], and Skinner [9]. However, in spite of all these considerations, strategic manage- ment of human resources is far from being a reality in most American enterprises. Although the formulation of corporate and business strategies is becoming commonplace, human resource issues do not Rather, seem to be addressed with an appropriate sense of priority. the personnel requirements of those strategies are identified after the fact, and pass along to the personnel managers for them to supply the necessary manpower at the various skill levels demanded by the strategic plans. This practice not only diminishes the strategic role of human resources, but also fails to recognize that the accountability for human resource effectiveness involves every line manager in the organization and it is not a staff activity to be relegated exclusively to the personnel function. This paper describes a methodology we designed for a major American corporation to facilitate the development of a human resource strategy in consonance with corporate and business strategies, as well as the other functional strategies of the firm. The proposed methodology is an extension of the work we have done for -3- the formulation of corporate and business strategies (Hax and Majluf [6] and [7]), and, particularly, for the development of a manufacturing strategy (Fine and Hax [3]). The Proposed Methodology for the Development of a Human Resource Strategy We recognize that any methodology to support the development of human resource strategies should be tailor-made to accomodate the idiosyncrasies of a given firm, the characteristics of its industry and competitive environment, and the managerial style and culture of the organization. However, we find there are enough common issues in the formulation-of a human resource strategy that it is possible to generate a useful, general-purpose process to guide managerial thinking in this area. Moreover, we want to be as structured as possible in the specification of this methodology to allow managers to translate the basic concepts and principles of human resource strategy into pragmatic and concrete action programs. The basic steps of the methodology we propose are summarized in Figure 1. Each step will be revised, with occasional presentation of some of the forms we use to facilitate the reporting of the results of a given step. Obviously, strategic planning is not a form-filling exercise and there are significant dangers in overspecifying the planning process with detailed forms. We use those forms judiciously and we include them in here simply to allow for a more explicit understanding of the objectives of each step of _·____irj_____l___IIX__X__II__ ^III.__._. ___.. -4- 1. Provide a framework for strategic decision making in human resource management. 2. Assure linkage between corporate, business, and human resource strategies. 3. Conduct an initial strategic audit of the human resource management function (a) To assess the availability of human resources/personnel data. (b) To assess the impact of human resources/personnel considerations on strategy formulation. (c) To detect strengths and weaknesses in the current human resource strategy by each decision category. 4. Figure 1: DeVelop human strategies for each strategic business unit (SBU). A Methodology for Structuring the Development of a Human Resource Strategy our methodology. A Framework for Strategic Decision Making in Human Resources The foundation of a human resource strategy is the conceptual framework that organizes the thought processes of the managers involved in the articulation of that strategy. The framework we use consists of, first, defining the major categories of human resource strategic decision making and, second, identifying the performance measures to address the objectives of the human resource strategy. -5- A human resource strategy must be comprehensive, in the sense of addressing all the diverse personnel and human resource activities central to the long-term development of the businesses of the firm. We chose to encompass the totality of these activities within five major decision-making categories: - Selection, promotion and placement: managing the flow of people in, through, and out of the organization. - Appraisal: evaluation of the performance of peple within the organization. - Rewards: providing adequate compensation, fringe benefits and motivational support to employees at all levels. - Management development: creating mechanisms to enhance skills, promotional opportunities and career paths. - Labor/Employee Relations and Voice: establishing a cooperative climate between managers and employees. The definition of these strategic categories linked to human resource management, as well as their corresponding strategic issues and strategic choices are summarized in Figure 2. The way in which these decisions are affected by the various stages in the business life cycle is presented in Figure 3. The second element of our framework consists of identifying effective measures of performance associated with human resource strategies. This is a particularly difficult subject to resolve, since there is no clear concensus on appropriate measurements to use. Beer et al [2] recommend what they refer to as the four Cs: I111 -6- l Str,-cegic Choices Strat.gic Issues Process Definition n Io2 - 40 4 2 0 3 3 U CZ u t 4.43 0 00 a -4- 02 J~ -ef 3O 4 cc a 00 2 On > .,* U 2 c Woc u tg. " .4Uc< 0 0 .0 O2 -,. 0 3 0 3_ 0. O3 O 4,4_ - O p 4)30-4 0 -4 , .4> -03 Z^C -a c3<1) Qa 3 t%4f 0J 3 'IO (a -4 _4 Q > C* C 40 J _ o O r 0 Z 14 -4C 0 4-4 0 -I t0 O U0 -,CCL . CO .0 C; _140 > t _0 O 0 4 -I -aQ.C3 C44 4 -, AH C0 Q -4 M 3 ,4 Z- 1 CZ C4 l U 33vI I2 I 0 -0.t. C a) 2 M C: 4 - 40 31 C-)' 33 33M- I 0 >I . >I E _ O -; . u cn o > rJ a) 0 C. x .-212 O -4 2O E: 0 tO 2 0 3- 3 3L): 3 4. Q rl )4 r 0O 33 33 C3 .44 3 -t 4 . C -· U 4 -4 0 n . 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JJ v-4 0 U C 00 > 0_0D 0 00 (03.4(,,_ la 1-4 to 0 -4 0* wC. 0. ,.,,-I '0 0 . .X1dOOVo NXOISDa 0. al 4 0 co a) X.-, 0 0 - uz X X U o 0c E 0°C C 0C 0 0i$..C _ C ; o Jh.14 _OCX e 'v O 4) _ _ 0 0 -r40.to co rlQl O A.C2. _ H '0C:02.- 000.0'0> CC M 0)00V X 0104 X O 20 < w C to) C co '0003.4 '-402) '.4....02 C.0O}Q O (Vca di Ca 4-) 0~4 -400 M0 0n E4 C 0 3' 0 s;000S o 0 ID2LvIIS aoldnosaa 4C .4 ,NMVH *- e) 0 .o ^,4 '0 III -8- commitment, competence, cost effectiveness, and congruence. found them to be rather ambiguous and difficult to assess. We Instead, we proposed two different sets of measurements: one dealing with organizational outcomes and the other, with individual outcomes. We believe this taxonomy to be a useful one since human resource management basically attempts to seek congruency between organizational and individual objectives. The performance measurements of organizational outcomes we cnose in the application of this framework were conditioned to the characteristids of the firm involved in our analysis and were the following: - Cost (unit cost, total cost, life cycle cost) - Delivery (percentage of on-time shipments, predictability of delivery dates, response time to demand changes) - Quality (return rate, product reliability, cost and rate of field repairs, cost of quality) - Flexibility (product substitutability, product options or variants, response to product or volume changes). The performance measurements for individual outcomes selected were: - Job satisfaction - Job performance - Turnover - Absenteeism - Motivation -9- - Job security - Career prospects - Psychological stress - Safety/health conditions - Income. Obviously, these performance measures could be expanded or modified to fit more closely the strategic position of a firm and its individual circumstances. Linking Corporate and Business Strategies with Human Resource Strategies The essence of strategy is to achieve a long-term sustainable advantage over the firm's competitors in every business in which the firm chooses to participate. The corporate strategic planning process is a disciplined and well-defined organizational effort aimed at the complete specification of corporate, business, and functional strategies. It identifies all the major tasks to be addressed in setting up these strategies and the sequence in which they must be completed. briefly described in Figure 4. These tasks are (For a comprehensive discussion of this subject, the reader is referred to Hax and Majluf [6] and [7]). For the purpose of strategy formulation, we can concentrate on the front-end of the planning process. First, the corporate level articulates the vision of the firm and its strategic posture; next, the business managers develop business strategies in consonance with the corporate thrusts and I111 -10- Less Frequent tan Annual Revew ; Ar.uail Review . Hierarchl.cal Struc.urat Str:egy S;raegc PF!ann;ng Conlt;oners Formuiaton Prorarr..;ng Corporate. oe Levers of Slratec:c and j i Operatonal BudqetJng 1 I 2rX c 0 C, c C V 0 0 corporate philosophy, mission of .L Functional a ,- -G ', ..... ... . usiness .S: the firm, and 1. The vision of the firm: identification of strategic business units (SBUs) and their interactions. thrusts, 2. Strategic posture and planning guidelines: corporate strategic corporate performance objectives, and planning challeng3es. of product3. The mission of the business: business scope, and identification segments. market 4. Formulation of business strategy and broad action programs. 5. Formulation of functional strategy: Participation in business planning, concurrence or non-concurrence to business stra:agy proposals, broad action programs. 6. Consolidation of business and functional strategies. level. 7. Definition and evaluation of specific action programs at the business level. functional the at programs action specific of .8. Definition and evaluation management 9. Resource allocation and definition of performance measurements for control. 10. Budgeting at the business level. 11 Budgeting at the functional level. funds. 12. Budgeting consolidations, and approval of strategic and operational Figure 4: The Formal Corporate Strategic Planning Process (Source: Hax and Majluf 6] and [7]) challenges; and finally, the functional managers provide the necessary functional strategic support. It is important, therefore, to assure the proper linkage between the business strategies and the resulting human resource strategy. To accomplish this, we start by identifying the human resource requirements imposed by the set of broad action programs of each strategic business unit (SBU). this purpose. Figure 5 displays a form for The collection of human resource requirements -11- SBU BROAD ACTION ROGRAk'S I HUMIAN I_ Figure 5: ESOURCE REQUIREMENTS .... ._.,~~~~~~~~I Requirements Placed on Human Resources by SBU's Broad Action Programs human represents the demands placed by the business managers on the resource or personnel function. Occasionally, disagreements might occur between business and personnel managers as to the effectiverequirements. ness or even feasibility of some of these human resource If concurrence cannot be reached by a direct process of negotiation, the organizathe nonconcurrence issues escalate to higher levels of tion for resolution. -12Strategic Audit of the Human Resource Management Functions We feel it is important to conduct a broad strategic audit of the human resource function prior to developing its functional strategies. This initial audit has several objectives. First, to assess the availability and use of human resource data in the organization; second, to measure the impact of human resource considerations on strategy formulation; and, third, to detect the extent to which human resource activities are used and should be used in strategy implementation to accomplish these purposes, we use the forms presented in Figures 6, 7, and 8, respectively. SYSTEMATI CALLY AVA LABLE GREATLY USED NOT AVAILABLE NOT USED 1 1. EXTERNAL MANPOWER STUDIES 2. INVENTORY OF MANAGERIAL TALENTS 2 3 4 . 3,. FORECASTS OF INVENTORY OF FUTURE TALENT 4. INVENTORY OF TECHNICAL TALENT 5. HUMAN RESOURCE AUDIT OF CONSIDERED ACQUISITIONS 6. SUCCESSION PLANS FOR TOP .A.r.AG1ENT O = DATA AVAILABILITY 0 = DATA USAGE Figure 6: Availability and Use of Human Resource Data (Source: Fombrum, Tichy and Devanna [10, Chapter 7]) 5 -13- 1 3 2 O = IMPACT THEY HAVE 0 = IMPACT THEY SHOULD HAVE Figure 7: TO A GREAT EXTENT TO A MODERATE EXTENT TO LITTLE OR NO EXTENT 7 6 5 4 Impact of Human Resource Considerations on Strategy Formulation (Source: Fombrum, Tichy and Devanna NOT USED USED GREATLY SHOULD BE GREATLY USED SHOULDN'T BE USED 1 10, Chapter 7]) 9 I 4 Si 1. MATCHING EXECUTIVES TO STRATEGIC PLANS 2. IDENTIFICATION OF MANAGERIAL CHARACTERISTICS TO RUN FIRM IN LONG TERM. 3. MODIFYING REWARD SYSTEM TO DRIVE MANAGERS TOWARD LONG TERM STRATEGIC OBJECTIVES. 4. CHANGING STAFFING PATTERNS TO HELP IMPLEMENT STRATEGIES. 5. APPRAISING KEY PERSC;NEL FOR THEIR FUTURE I;1CARRYING OUT STRATEGIC GOALS. 6. CONiUCTING DEVELOPMENT PRCSAiAMS DE;;: E TO SUPPORT STPATEcGC -.'A5ES. | 7. CC:.UCTI:;G CAREER PLANNIN TO HELP DEVELOP KEY PERSONNEL FOR STRATEGIC PLANS O = EXTENT TO WHICH HR ACTIVITIES SHOULD BE USED Q = EXTENT TO *;:;!CH HR ACTIVITIES ARE USED Figure 8: The Extent to Which Human Resource Activities are Used in Strategy Implementation and the Extent to Which They Should be Used (Source: Fombrum, Tichy and Devanna [10, Chapter 7]) III -14- These forms were taken from a survey conducted by Fombrum, Tichy and Devanna [10, Chapter 2], which facilitates the comparisons of our business managers against the sample reported in the Fombrum Finally, the audit attempts to identify the strengths and study. weaknesses of the existing human resource policies in each of the five strategic categories. Figure 9 presents a format for this evaluation. PERSONN;EL UNIT DECISION CATEGORY DESCRIPTION OF POLICY STRENGThS WEAKNESSES SELECTION, PROMOTION AND PLACEMENT APPRAISAL REWARDS DEVELOPMENT LABOR/EMPLOYEE RELATIONS, VOICE NOTE: Figure 9: IN THE ASSESSMENT OF STRENGTHS AND WEAKNESSES TRY TO HAVE RELEVANT COMPETITORS IN MIND AND USE PROPER ORGANIZATIONAL AND INDIVIDUAL OUTCOMES. Characterize Your Present Personnel Policies Regarding the Major Decision Making Categories -15Development of Human Resource Strategies The preceding analysis gives the necessary understanding of the basic issues involved in setting up a human resource strategy. The next step is to state strategic objectives, articulated through broad action programs, for each of the human resource strategic decision categories. Figure 10 is helpful for performing this task. SBU OBJECTIVES DECISION CATEGORY OBJECTIVES LONG RANGE SHORT RANGE BROAD ACTION PROGRAMS SELECTION, PROMOT I ON, & PLACEMENT APPRAISAL REWARDS DEVELOPMENT LABOR/ EMPLOYEE RELAT IONS, VOICE Figure 10: . In~~~~~~~ Define Broad Action Programs for Each Human Resource Strategic Decision aking Category .. _.II. .. . _ __ III -16- Each broad action program has to be supported by a set of specific action programs that can be monitored easily and whose contributions are measurable. Thus, for each human resource decision category, we suggest spelling out the information pertaining to its corresponding specific action programs, as indicated in Figure 11. DECISION CATEGORY PROGRAM ESCRIPTIO PRICRITV l COST l Fi - I S ! T RES^OCNi;!ti-r ABSQLU POSTPONEMENT SGNIICANLY i OUR HURT ORI P- N TH B if - POSTPONEENT ILL WIL AVERSELY AFFECT POSIT C PEIRAILE - IF FUNDS WERE TO BE BE AVAILBLE TO ENHAN'I OUR PSITION Figure : DefineS . Support Each of the Figure 11: ARKET,, Define Specific Action Programs to Support Each of the Broad Action Programs Related to the Personnel Strategic Decision Category Conclusion Human resources can be a formidable weapon to achieve competitive superiority. In this paper, we have attempted to provide a conceptual framework as well as a set of pragmatic methodological guidelines to -17- design a human resource strategy for a business firm. For the sake of brevity, we have covered only the essential elements of this methodology. We recognize that much more sophistication is needed to embrace the details of strategy formulation and implementation in a complex, specific business environment. -18- References [1] Barocci, T. A., & Kochan, T A. (1985). Management and Industrial Relations. Human Resource Little Boston: Brown and Company. [2] Beer, M., Spector, B., Lawrence, P. R., Mills, D. Q., & Walton, R. E. (1984). Managing Human Assets. New York: The Free Press. [3] Fine, C. H., & Hax, A. C. Strategy, (1985). Designing a Manufacturing Working Paper, Sloan School of Management, to appear in Interfaces, 1985. [4] (1982). Fombrum, C. J., & Tichy, N. M. Strategic Planning and Human Resource Management: At Rainbow's End. - In R. B. Lamb (Ed.), Competitive Strategic Management. Englewood Cliffs, NJ: Prentice Hall, pp. 319-332. [5] Fombrum, C. J., Tichy, N. M., & Devanna, M. A. Strategic Human Resource Management. [6] Hax, A. C., & Majluf, N. S. Planning Process. [7] New York: John Wiley. The Corporate Strategic Interfaces, 14 (1), 47-60. Hax, A. C., & Majluf, N. S. An (1984). (1984). (1984). Integrative Perspective. Strategic Management: Englewood Cliffs, NJ: Prentice Hall. [8] Career Dynamics Schein, E. S. (1978). (Part 3). New York: Addison Wesley, pp. 189-256. [9] Skinner, W. Resources. [10] Tichy, N. M., (1981). Big Hat, No Cattle: Managing Human Harvard Business Review, 59 (5), 106-114. Fombrum, C. J., & Resource Management. Devanna, M. A. (1982). Human Sloan Management Review, 23 (2), 47-61.