Overview: Strategic Human Resource Management in · PDF file288 • HUMAN RESOURCE MANAGEMENT, Winter 1999 The HRM system that develops and maintains a firm's strategic infrastructure

OVERVIEW:STRATEGIC HUMAN RESOURCE MANAGEMENTIN FIVE LEADING FIRMS

Brian E. Becker and Mark A. Huselid'

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

1 . The foundation of a value-added HRfunction is a business strategy that relies on people asa 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 onclient service for individual employees and managers, and delivery of these services at thelowest possible cost; and

3 . A value-added HR function requires HR managers that understand the human capitalimplications of business problems and can access or modify the HR system to solve thoseproblems. © 1999 John Wiley & Sons, Inc .

Introduction

The recent emphasis among practitionersand academics on "people" (and peoplemanagement systems) as a source of com-petitive advantage has focused increasinginterest on the science and practice of Hu-man Resource Management . Indeed, itwould appear that the field of HRM is"coming of age" as the end of the millen-nium approaches . While academic researchhas made a number of significant contribu-tions to these developments, Steve Kerr ofGeneral Electric has argued persuasivelythat much of the best work is being doneby consultants and professionals in thefield (Hodgetts, 1996) . In fact, one couldmake a convincing case that the practice ofstrategic HRM has outpaced the academicwork on this topic . Yet, data on how firms

actually manage people to provide a sourceof competitive advantage are scarce, andstudies that compare and contrast humancapital management systems in leadingfirms are even more difficult to find . Indeed,while the empirical literature linking bet-ter HRM with firm performance has con-sistently found that more effective HRmanagement is associated with superiorfinancial performance (see Becker &Huselid, 1998, for an overview), what ismissing is a clearer understanding of howthese processes operate, and subsequently,how firms might actually manage theirpeople to help provide a source of competi-tive advantage .

In this special issue of Human ResourceManagement, we attempt to provide someinsight into the "state of the practice"through the presentation of five detailed

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Studies thatcompare andcontrast humancapitalmanagementsystems inleadingfirms areeven moredifficult to find.

Human Resource Management, Winter 1999, Vol . 38, No . 4, Pp. 287-301©1999 John Wiley & Sons, Inc .

CCC 0090-4848/99/040287-15

288 • HUMAN RESOURCE MANAGEMENT, Winter 1999

The HRM systemthat develops andmaintains afirm's strategicinfrastructureshould beconsidered aninvestment.

case studies describing the HRM strategiesemployed by firms known to be leaders inthe management of people . From Junethrough October 1997, we interviewed morethan 60 senior executives across these fivecompanies, who came together to form aPartnership through the auspices of theGlobal Consulting Alliance . Partnershipfirms subsequently shared information andlearned from each other about leading edgeHR practices. The distillation of these ex-periences is presented in this special issue .

Using a detailed, structured interview for-mat and extensive evaluation of backgrounddata, we spent on average a day and a halfinterviewing the senior HR and Line leader-ship in the each of the following Partnershipfirms :

•

Herman Miller,•

Lucent,•

Praxair,•

Quantum, and•

Sears .

These data, along with an extensive evalu-ation of background materials provided byeach company, provided us with rich detail onhow leading firms use their HRM systems toimplement their competitive strategies and toachieve their operational goals . In collabora-tion with the Senior HR leader in each firm,we prepared the cases that form the basis ofthis special issue .

This special issue is organized as follows .This overview article provides an outline oftheoretical rationale and empirical literaturelinking HRM systems with corporate financialperformance. We next highlight the patterns thatemerged from our research in the five Partner-ship companies . This discussion of patterns isfollowed by the individual company cases .Wayne Brockbank then provides a "look overthe horizon" by discussing the implications ofthese findings for the practice of HR in thefuture. This is followed by our interview withMike Losey, Tony Rucci, and Dave Ulrich thatprovides a provocative response to this specialissue . Finally, Joe Ryan reviews WilliamJoyce's new book, MegaChange : How Today'sLeading Companies Have Transformed TheirWorkforces .

The New Paradigm2

For most firms, the traditional path to sus-tainable competitive advantage has turnedon such barriers to entry as economies of scale,patent protection, access to capital, and regu-lated competition . What might be called a neweconomic paradigm, however, has given riseto a new source of competitive advantageand has challenged much of the conventionalwisdom about strategy, the role of anorganization's human resources, and HR'srelationship to firm performance . As global-ization and the accompanying demands forcontinuous change make innovation, adapt-ability, speed, and efficiency essential featuresof the business landscape, the strategicimportance of intellectual capital and intan-gible assets have increased substantially(Pfeffer, 1994; 1998) . While these assets arelargely invisible (Itami, 1987) and do notappear on the firm's balance sheet, the sourcesof this capital are not . 3 They are found in thehuman capital of the firm's employees, thecapabilities represented by the firm's organi-zational processes and the value of brands andcustomer relationships (Svelby, 1997) . In thewords of James Chestnut, CFO for The CocaCola Company, the company's phenomenalmarket value is largely attributable to its brandand its management systems, rather than anycollection of tangible assets (Stewart, 1998) .

Accordingly, many firms have increasinglybroadened their focus from strategy contentto strategy implementation . Speed, innovation,and adaptability reflect competencies andcapabilities (Hamel & Prahalad, 1994) forstrategy implementation that have as theirfoundation the firm's human capital . 4 This hasdirect implications for a firm's HRM systemand function. Traditionally focused on trans-actions, practices, and compliance, the HRfunction was-and often still is-appropriatelyconsidered a cost center . In contrast, the HRMsystem that develops and maintains a firm'sstrategic infrastructure should be consideredan investment . It is an essential element ofthe infrastructure that supports this valuecreation process and is a potential strategiclever for the organization .

The appropriate form for this strategic HRsystem continues to be debated . Pfeffer

(1998), for example, argues that acommon thread runs through theapproach to people management athigh performance companies. H Rsystems in these organizations arecharacterized by employee security,selective hiring, decentralized de-cision-making, well-paying jobs,extensive development, reducedstatus differentiation, and exten-sive communication and informs-

Quintlie Changes in Sophistication of HR Architecture

tion sharing . We would emphasizethat while this provides a usefultemplate as a point of departure,the strategic influence of an HRsystem requires that it be implemented as aninternally coherent system that is aligned withthe business goals and objectives of the orga-nization. Recalling that the logic for the newstrategic role for HR is driven by changingmarket conditions that highlight the impor-tance of human capital issues, we should keepin mind that entirely new approaches are notthe sole source of value creation. Firms havealways had a choice to emphasize employeeperformance in their HR systems, and HRprofessionals have long known how toimplement such a focus . Market conditions,however, often enabled firms to achieve con-siderable success by giving limited attentionto employee performance issues, thinkinginstead of employees largely as a cost to beminimized . While perhaps not an impera-tive for every firm, the economic returns toa "high performance" HRM system have in-creased to the point that what might haveappeared a luxury 20 years ago is now asource of competitive advantage .

The Financial Returns to Strategic HR

In the 1990s one of the most exciting newareas of academic research has focused onestablishing an empirical link between HRstrategies and systems and a firm's finan-cial performance . Studies at the level of thefirm, one industry, and multiple industrieshave demonstrated a strong positive rela-tionship (Becker & Huselid, 1998) . Our ownwork, based on three separate national sur-veys and the experience of more than 2,400firms, has repeatedly shown an economi-

390,000 -

370,000 -

350,000 -

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310,000 -

290,000

Overview: Strategic Human Resource Management in Five Leading Firms • 2 8 9

Source : Huselid sod Becker (1995)

FIGURE 1 . Dollar change in market value per employee .

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cally and statistically significant impact ofthe HRM system on both market-based andaccounting-based measures of firm perfor-mance. Figure 1 illustrates the relationshipbetween a high performance HRM systemand firm market value per employee . InFigure 1 the HR system is measured as anindex of attributes that taps the variouselements of an HR system that select, main-tain, develop, and reinforce employee per-formance (the x-axis), scaled from zero(the least developed HRM systems in oursample) to 100 (the most sophisticatedHRM systems) . Firm performance is mea-sured in terms of market value peremployee . 5

The pattern of these results suggests thechanging nature of the HR influence on firmperformance. The first stage (up to the 20thpercentile) could be interpreted as the devel-opment of a professional HR capability . Thiscapability has value because it gets the firm"in the game". In the second stage (betweenthe 20th and 60th percentile) the HR func-tion develops operational excellence but doesnot have a significant incremental influenceon firm performance . In the last stage, the HRsystem once again has a noticeable payoff interms of the firm's bottom line . For example,moving from the 60th to the 80th percentileimproved market value in the average firm by$20,000 per employee, or $200 million in afirm with 10,000 employees .b Our experienceswith these firms suggest that it is in this thirdstage that an HR system has achieved bothoperational excellence and is aligned with thefirm's strategic goals .


It may beaxiomatic, butjust as labor is aderived demandin basiceconomictheory, thedemand for astrategic HRpresence uderived from thelarger corporateor businessstrategy.

The Strategic Influence of HR: Lessonsfrom Partnership Companies

The HR strategies described in the accompa-nying case studies are among the most inno-vative in the world . They are exemplars of thespecific HR systems reflected in the moreabstract "60th to the 100th percentile" rela-tionships depicted in Figure 1 . Nevertheless,while the HR management systems at thePartnership firms are among the best in theworld, all of those interviewed acknowledgethat much work remains to be done . Thefocus of this introduction is to highlight theelements of a value-added HR function, asrepresented in the cumulative experience ofPartnership firms, illustrating areas both ofconsiderable progress and remaining chal-lenges. We hope that it will serve as a catalystfor further research and as a "call to action"for those firms wishing to improve their ownHR management systems .

There are probably several ways one couldorganize the foundational elements of a value-added HR function, but we focus on three key(and recurring) themes :

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A corporate strategy and managementculture that is appropriately alignedand supportive ;

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an HR function characterized by op-erational and professional excellence ;and

• HR managers that are effective "busi-ness partners" and an HR functionstructured to support that role .

Each of these elements is a necessary, butnot sufficient, condition for HR to play a strate-gic organizational role . They reinforce oneanother and leverage the contributions of theother elements. Indeed, in our more recent re-search we focus specifically on the appropriatealignment between the HR system and thesupporting "organizational logic" represented bytop management's leadership style, the align-ment between HR and corporate strategies, andthe effectiveness of the HR function (Huselid& Becker, 1998). We find that when each ofthese elements is appropriately aligned, the firmsaverage 27% higher gains than they would ex-pect from the "sum of these parts" . For the

purposes of this article, they are also a conve-nient framework to integrate the wide range ofexperiences reflected in our interviews at thePartnership companies .

Lessons Learned

This section highlights each of the three ma-jor foundational elements to a value-added HRrole and then develops supporting policies,practices, or strategies that further implementand illustrate those elements . We have at-tempted to provide a sample of representativeillustrations from the cases . The case studiesthat follow this article will provide a more com-plete picture of each firm's HR strategy.

Element #1 : The foundation of a value-added HR function is a business strategythat relies on people as a source of com-petitive advantage and a management cul-ture that embraces that belief.

It may be axiomatic, but just as labor is aderived demand in basic economic theory, thedemand for a strategic HR presence is derivedfrom the larger corporate or business strat-egy. It might be nice to believe that every suc-cessful firm is now compelled to rely on peopleas a source of competitive advantage, but thereare in fact very successful firms that have notentirely embraced such a strategy. On the onehand, we have examples such as Quantum,which as a startup in 1980 established its"people" strategy as the first step in its busi-ness plan. In the more typical firm, however,a strategic HR presence has been a relativelyrecent phenomenon . Most Partnership com-panies tend to fall somewhere in betweenthese experiences, and in general reflect re-cent converts to strategies that include a"people-based" component . Herman Miller,Inc. (HMI) would be an exception, as theirphilosophy of employee advocacy and "servant-based leadership" has a very long traditionthroughout the firm .

Strong CEO Support and Buy-In from LineManagers

While HR's role is driven by the under-lying firm strategy, the manifestation of that

strategic imperative is the commitment of theCEO to realizing a strategic role for HR . Doesthe CEO really believe that HR can be morethan a cost center and that most of the em-ployees are more than an expense to be mini-mized? It should not be surprising that HR'sstrategic role will always be limited when theCEO, or senior executive leadership, does notfully embrace such a presence . The majorityof the Partnership companies are goingthrough the transition from an operational HRfocus to one that is more strategic . These aretypically driven by senior business leaders . Anexemplar would include Arthur Martinet atSears who recognized that Sears employeeshad to "feel comfortable outside a command-and-control environment getting them usedto risk taking and innovation ."

Buy-in from line managers is necessary forHR to serve as a business partner because linemanagers have to accept and participate in thisnew role. Aside from the firms where HR hasplayed this role from the inception of the com-pany, the experience among the Partnershipfirms is mixed . On the one hand there are firmslike Praxair. Considerable support and com-munication during the development of their"visioning" process, along with the develop-ment of specific, actionable goals at each levelof the business were key features. The resultwas more rapid strategy implementation anda greater sense of "mental ownership" amongPraxair's employees . On the other hand, linemanagers at some of the other Partnershipfirms have taken a "wait-and-see" attitudewhile clinging to the traditional relationships .Clearly, line managers are going to be moresupportive of this new role where they under-stand the business case for such a change . Thiscan occur at two levels. First, there are com-panies that have attempted to articulate therole HR or people issues serve as performancedrivers in the implementation of strategy. Moreelaborate are balanced scorecard models likethe one used at Sears, where there are clearlydefined and empirically verified relationshipsbetween individual sales associate behaviors,customer satisfaction, and ultimately finan-cial performance . In short, for the senior lead-ership outside of HR to buy-in to a broaderHR role, the business case for investments inhuman capital must be clearly articulated . This

Overview : Strategic Human Resource Management in Five Leading Firms • 29 1

requires more than "hand waving" and slogans .It requires a common understanding of thefirm's strategy and the role HR issues play inthe value chain that implements that strategy .As respondents in several companies noted, itis also a two-way street. HR has to show thatit can provide some leadership around thesebusiness issues and be aggressive in gettingthat message out . At Lucent, one of HR's stra-tegic goals is to motivate change by aggres-sively sharing this story of their new role . Intheir words, "We can't mumble our way to 50percent growth."

Buy-in from line managers and the cen-trality of a people-based competitive strategyis also reflected in the extent to which thecompany is willing to share "confidential"information that, on the one hand, may haveproprietary value, but on the other, is essen-tial if employees are to understand the strate-gic significance of their jobs and theirperformance . There were several examples ofthis type of communication, but a usefulexemplar is Herman Miller. HMI believes thatparticipation in decision-making is a crucialingredient in the process of facilitating "own-ership" among employees . Thus, HMI givestheir owner-employees a significant amountof information about the ongoing financialcondition of the business; their recent adop-tion of the Economic Value Added (EVA)framework is an important additional step inthis direction. In fact, HMI uses the EVAframework (and the resulting communicationprocess) as the basis for driving "lean think-ing" throughout the organization . Communi-cation is further facilitated by quarterlymeetings, town hall meetings, and a variety ofmore informal brown bag lunches to transmitfinancial and operational information through-out the firm. In addition, they have a groupcalled the Monthly Business Exchange orMBX, which is a meeting of the 350 teamleaders who gather every month to exchangeinformation and ideas . These meetings arevideotaped for later distribution, and the teamleaders go back and pass out information tothe rest of their team members .

Buy-in also means that line managers areheld accountable for HR issues in their per-formance reviews and bonus plans . Most ofthe Partnership firms are beginning to move

In fact, HMI usesthe EVAframework (andthe resultingcommunicationprocess) as thebasis for driving"lean thinking"throughout theorganization.

2 9 2 • HUMAN RESOURCE MANAGEMENT, Winter 1999

Relying oncompetencies asa source ofcompetitiveadvantage raisessome interestingquestions .

in this direction, but it remains one of the morechallenging points of change . A good examplein this regard is Quantum, where "building acompany with an extraordinary work environ-ment" is one of three strategic goals . To thisend they have identified nine Value Behaviorsthat contribute to the quality of the work en-vironment, as well as their goals to increasemarket share and firm value . This is more thana management by objective (MBO) program ;fully 50 percent of a manager's bonus is basedon these behaviors which emphasize how workis done as much as what is achieved. In theirwords, "You can't simply `get results' too oftenwhile leaving a pile of dead bodies behind you ."

Competing on the Basis of "People Quality"Means Developing an Understanding of theUnderlying Competencies Required andAligning the HR System to Build ThoseCompetencies

Competency based models, if not a best prac-tice, are certainly a common practice . Themajority of the Partnership firms have devel-oped-in one form or another-a set of coreleadership competencies that are the basis fortargeted selection processes, performancemanagement, development, and in somecases, compensation policies . The integrationof competency models into the larger HRsystem is a potentially important element inthe transition of HR to a more strategic player .In principle, it is an affirmation that "who youhire in a wide range of jobs really does make adifference", suggesting that the firm's futureis dependent on more than a handful of se-nior executives . Moreover, the breadth of thecompetencies have tended to highlight andreinforce the role of human capital issues inthe successful performance of all managers .For example, Praxair is on its second genera-tion of competency models . Despite theconsiderable external praise attracted by theearlier efforts, Praxair has developed a newmodel around values and integrity to reflectthe heightened importance of process in itsstreamlined management structure .

Relying on competencies as a source ofcompetitive advantage raises some interestingquestions. What is it about competency modelsthat provide an inimitable source of strategic

value to a firm? Is it just the understanding thatkey competencies are X instead of Y? It mightbe, if the same competencies were generallyapplicable across a wide range of organizationsrather than entirely contingent on the firm'sspecific strategy and culture . While this remainsan area for further research, the current worksuggests that the majority of competencies aregenerally applicable across firms, though therelevant behaviors would vary (Spencer & Spen-cer, 1993). If true, it seems unlikely that an in-dividual firm could be prevented fromdiscovering the appropriate competency mix,alone or with the assistance of a consultant .

To the extent that more firms discover thesame competencies, the demand for individu-als with those attributes will increase, drivingup salaries and eroding the initial gains frommoving to the competency models in the firstplace. In short, one can only hope to "beat themarket" based on competencies if your firm hasinformation that others lack about the mostappropriate competencies and if your competi-tors have a difficult time replicating the systemthat supports your competency model . Never-theless, if most firms are relying on competencymodels, your firm cannot afford to "opt out" . Todo so would risk a decline in the quality of yourworkforce as the incidence of valuable compe-tencies in your normal applicant pool dimin-ishes as other firms hire a disproportionate shareof individuals with those attributes . Praxair hasexplicitly recognized this challenge associatedwith keeping the best people by giving additionalattention to creating a work environment andcareer opportunities that will encourage theirbest people to stay, allowing Praxair to avoidbeing drawn in to a "bidding war" for the bestavailable talent .

The Strategic Value of Competency Models IsLargely a Function of Their Integration inthe Larger HR System

While discovering the appropriate competen-cies for an organization is probably not aninimitable source of competitive advantage,the capability to integrate that knowledge ef-fectively throughout the entire HR system maywell be. This requires that HR managers thinksystemically (and strategically) about their arearather than functionally and tactically. It is this

infrastructure of an aligned HR system thatcreates what strategy scholars refer to as"causal ambiguity", making it difficult for otherfirms to imitate even if they can begin withthe same competency model .

Employee Development

The threshold question for many firms is the"make or buy" decision . That is, which com-petencies can we develop and which do wehave to acquire in the market? The Partner-ship firms tend to be divided into two groups .A few, like Quantum, have always hired basedon a set of characteristics thought to be fun-damental to success in their organizations, andcontinue to do so . Quantum, for example, re-lies so heavily on team-based product devel-opment and operations teams that if applicantscan't work in teams, "they can't work at Quan-tum." Most of the Partnership firms, however,are in a position where their competitive strat-egy has changed, the market demands havechanged, and they need a work force with adifferent set of competencies than the onesthey currently possess . By necessity, there is aheavy reliance on people development, usu-ally beginning with managers and the moresenior leadership throughout the firm. The"leadership gap" is particularly significant infirms that have a recent history of downsizingcombined with little new hiring (Lucent) orcompanies attempting to substantially shifttheir strategic focus (Praxair) .

Finally, several of the Partnership compa-nies have developed more comprehensiveefforts such as Sears University. For example,Sears University currently serves 20,000managers per year and emphasizes the enroll-ment of intact teams to facilitate knowledgesharing after completion of the program . Notsurprisingly, the success of the program ispremised on strong support from the seniorexecutive team that has been willing to fullyfund the initiative to date .

More targeted development that is alignedwith a larger HR strategy is reflected in ef-forts to support Herman Miller's emphasis onemployee participation, which the companyconsiders both an opportunity and an obliga-tion. A considerable amount of effort is spenttraining employees in the processes through

Overview: Strategic Human Resource Management in Five Leading Firms

which they create value at HMI (the firm isconsidering the adoption of some form of theBalanced Scorecard approach going forward) .This serves the same purpose as the LearningMaps (visually engaging posters that depict aseries of value chains) developed by Sears .While the firm has long had Employee StockOption Plans (ESOP) and Scanlon plans,HMI's recent adoption of EVA has heightenedthe involvement in business literacy training .For example, they have developed a numberof courses directly aimed at increasing busi-ness literacy : EVA101 is a 2-hour formalcourse for all employees that introduces theconcepts to employees (85% of HMI's employ-ees have been through this course to date) .EVA201 is a refresher course that also intro-duces more advanced concepts . EVA301 is inthe works, which will provide even more ad-vanced training on this topic . Finally, HMI hasdeveloped a series of "train the trainer" coursesto help team leaders (of which there are 350)and others in teaching these courses and con-cepts to other employees .

Targeted Selection

The common practice among Partnershipfirms is to use a form of targeted selectionprocess driven by the firm's competencymodel .' Typically they rely on behavioralinterviewing methods and include the activeparticipation of line managers and prospec-tive team members . Perhaps the most signifi-cant aspect of this wider participation in aprocess that emphasizes competencies and adistinctive methodology that supports it is thatthe saliency of competencies tends to be rein-forced in other elements of the HR system .As senior line managers get a better under-standing of the individual characteristics thatcontribute to successful leadership in theirorganization, they will also be more open tointroducing these elements into performancemanagement and compensation decisions .Finally, Quantum makes the point that if afirm selects on the behaviors or competenciesthat really matter on the job, the new hirescan be expected to be productive much sooner .Their view is that applicants who can survivethe Quantum selection process can start at"merge speed" .

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293

Sears Universitycurrently serves20,000 managersper year andemphasizes theenrollment ofintact teams tofacilitateknowledgesharing aftercompletion of theprogram.


While the termmay vary, anumber of thePartnership firmsbelieve they arein anenvironmentwhere employeeswith the type ofcompetenciesthey are seekingare in shortsupply.

Performance Management

There seems to be some increased attention tothe performance management process amongPartnership firms . Companies that have madean effort to upgrade their performance manage-ment systems tend to do so as part of a largereffort to integrate their competency modelsthroughout the HR system. Some of the mostsignificant performance management compe-tencies were found in those firms that werestrongly team oriented . For example, at Praxairthere are four levels of performance manage-ment : company-wide, business unit, broadteams within business units, and specific projectteams. Praxair is experimenting with a processthat allows teams to decide who outside of theirteam (i .e ., support staff assigned to multipleteams) should benefit from their teams' successand what the nature of that reward should be .Quantum's emphasis on their nine key ValueBehaviors in performance management is simi-lar. Quantum's near total reliance on team-basedwork structures, however, requires a multi-stepprocess including multiple rankings of individu-als within teams by other members (25%) andthe team leader (25%), and separate ratings ofthe team by the business unit manager (50%) .Similarly, for more than five years Sears hasmandated multi-perspective appraisal of allmanagers. The process emphasizes behaviorsconsistent with the leadership competenciesthat support the 3 C's (Sears' strategic impera-tives, which include transforming the retailinggiant into a Compelling Place to Work, a Com-pelling Place to Shop, and a Compelling Placeto Invest) . At the level of Sales Associates, em-ployees get direct feedback from customers whothey have served. When setting performanceobjectives, the key challenge is to improve the"line of sight" between individual or team be-havior and firm-level outcomes. At the sametime, the performance objectives are structuredlike a treadmill ; if the employee doesn't con-tinue to improve, s/he will move backward .

Emphasis on Becoming the Employer ofChoice

While the term may vary, a number of thePartnership firms believe they are in an envi-ronment where employees with the type of

competencies they are seeking are in shortsupply. At the same time, it is critical to thesuccess of any people-based strategy to attractand retain the very best . Becoming an "Em-ployer of Choice", however, requires an alignedHR system. It is very easy (and very expen-sive) to provide compensation and benefitlevels that will be attractive. The challenge isto also structure an HR system that selects,develops, and produces a level of performancethat can justify those investments . If leveragedwithin a High Performance Work System(Becker & Huselid, 1998), however, an Em-ployer of Choice strategy can add consider-able value. Sears, for example, is committedto competing based on customer service,which is driven by the quality of their 200,000Sales Associates (70% of whom are part-time,a group that averages 100% turnover perannum) . The intellectual capital representedby their understanding of the Sears strategy-the key to the 3 C's-walks out the door ifSears can't be a "compelling place to work" .

For Quantum, building an extraordinarywork environment is an end in itself, though itis understood to also be related to the firm'sbusiness objectives . The Quantum approach, asstated in company documents, is to structurean environment characterized by the following :

1 . Achieving long-term business success2 . Ensuring that Quantum's employees

feel valued3 . Ensuring a sense of pride of associa-

tion with the company4. Instilling a sense of camaraderie and

that "all of us are in this together"5 . Ensuring that each employee has the

opportunity to reach her highest po-tential personally and professionally

6 . Generating a sense of excitement andfun .

A Strong Pay-Performance Relationship

A strong pay-performance relationship is anessential element of a strategy that relies onpeople as a source of competitive advantage,not only for the effort elicited, but more im-portantly as a signal that the "right behaviorsmatter, and will be reflected in an employee'spaycheck" . The trend toward increasing use

of variable pay is apparent among Partnershipfirms, but it did not appear to be the mostimportant strategic lever in any firm . Severalfirms mentioned the importance of sensitiz-ing employees to the interests of the companyand the importance of profit sharing and stockoptions in that role . In recent years, Lucenthas increased the use of stock options . Theprogram is considered an essential foundationfor aligning employee interests with the goalof doubling the firm's market value in the nextfew years. Lucent provided all employees with100 options as "founders grants" when thecompany went public and has expanded theiruse among managers, though only 5% of theeligible pool received awards last year .

Perhaps a more interesting indicationthat people-based strategies are being takenseriously is the extent to which managers,particularly senior managers, have a portionof their bonus allocation based on the hu-man capital dimensions of their perfor-mance. There is some evidence of such achange. A small change occurred in one ofthe Lucent units when managerial bonuseswere based on financial (20%), customer(20%), and people (20%) dimensions . Thepeople issues were MBO goals around threeHR issues (e.g ., diversity goals, where su-pervisors were required to have developmentplans for all of their subordinates) and wereonly rewarded if the company also met itsearnings per share goal. This is a very com-mon problem in implementing a strategythat involves a people-based dimension .Senior business leaders and particularCFOs are willing to include some payoutfor human capital related outcomes, but areoften faced with paying bonuses when thefinancials don't seem to warrant it . Unfor-tunately, this probably indicates that thesenior leadership does not fully understandhow human capital issues create value inthe organization, often as leading indicators,and are largely including people-related di-mensions in the bonus pool as an article offaith . In short, there is no consensus aroundthe business case for how these people di-mensions affect the implementation of thefirm's strategy-and ultimately financialperformance .

Quantum and Sears are two exceptions .

Overview: Strategic Human Resource Management in Five Leading Firms • 2 95

In Quantum's case, it follows from the belief-from the inception of the firm-in the strate-gic role of people issues . Bonuses are basedequally on results and adherence to Quantum'snine Value Behaviors . This is more than anarticle of faith . Care is taken to set "nestedobjectives" so that each employee's goals fittogether with a subordinate's goals at eachlevel. Each employee understands how his/herperformance affects the next level in the chain,ending with firm performance as a whole ; andevery employee understands the goals of otheremployees with whom they work. Sears isequally explicit in articulating the value chainof strategy implementation and the role andimpact of people and customer issues on fi-nancial performance . Learning Maps reinforcean understanding of these relationships . Searscurrently assigns 50% of variable pay basedon financial performance and 50% dividedevenly between the other two dimensions . For1998, each of the three dimensions wasequally weighted . This is possible becauseSears has made the commitment to articulateand empirically verify the performance driv-ers in its strategy, and as a result, the seniorexecutive leadership realizes that solid perfor-mance on people issues should be rewardedbecause they are a harbinger of financial per-formance in future periods .

Element #2: Avalue-added HR functionwill be characterized by operational ex-cellence, a focus on client service for in-dividual employees and managers, anddelivery of these services at the lowestpossible cost .

The firms we interviewed uniformly ac-knowledged their continuing responsibility to"sweat the basics", providing essential HR ser-vices to individual employees and managers pro-fessionally and efficiently with very short cycletimes. These are typically the same services thatHR has provided as part of its traditional role,though improvements in speed support thestrategic role, and the service quality providesindirect support for efforts to be the Employerof Choice. As an indication of the breadth ofexperience in this aspect of HR, the followingparagraphs highlight various examples of opera-tional excellence drawn from the interviews :

The firms weintervieweduniformlyacknowledgedtheir continuingresponsibility to"sweat thebasics",providingessential HRservices toindividualemployees andmanagersprofessionallyand efficientlywith very shortcycle times.


The thirdelement of avalue-added HRfunction is thecapability towork with linemanagers as abusiness partner.

•

Lucent monitors service quality atall levels. For example, they report99% data entry accuracy in thefirm's HRIS, with a goal of 100% .Ninety percent of the clients usingthe employee services center havetheir problem handled on the firstcall. Business Services, the opera-tional support for managers, nowaverages 115 days from job requisi-tion to start date, with a goal of 40days. Fifty-six percent of clients us-ing business services report being"very satisfied" with HR ; the goal is90% by the end of the fiscal year .

•

Sears indicates a considerable profi-ciency at handling high volume ser-vice demands in-house and veryefficiently. Sears finds that they canprovide these services more cheaplythan it would cost to outsource them .As an example, they have reduced thenumber of Associate Service Centers(handling benefits questions) from200 to 1 over a seven-year period. AtSears, as with many of the Partner-ship firms, delivering the basics con-tinues to be important to maintain andbuild their legitimacy with line man-agers and other constituenciesthroughout the firm .

•

The HR function at Herman Millerhas long operated in a very lean man-ner (as have the other staff supportareas). Consistent with the desire tolink HR more closely with the needsof the business, the HR function hasrecently led the way in the adoptionof a worldwide shared services envi-ronment. In addition, the HR func-tion reorganized earlier this year andhas moved significant resources fromcorporate HR to line or business unitroles. The business unit leaders, how-ever, will only get the level of supportfor which they are willing to pay. Whilethe firm is still adjusting to the simul-taneous deployment of shared servicesand a concurrent movement of a sig-nificant proportion of HR resourcesto the line or business unit levels, earlyindications of the success of this tran-

sition have been so strong that other"leverage" areas (finance, accounting,marketing) will soon be adopting ashared services environment as well .

Element #3 : A value-added HR functionrequires HR managers that understandthe human capital implications of busi-ness problems and can access or modifythe HR system to solve those problems .

The third element of a value-added HRfunction is the capability to work with linemanagers as a business partner. This capabil-ity takes several forms, but based on the in-terviews with Partnership firms would at aminimum include : (1) HR managers with thecompetencies to serve as a business partner,(2) an HR function structured with the ap-propriate mix of responsibilities and resourcesallocated between corporate and business HRunits, and (3) sufficient resources to supportthe "business partner" role. Each of the Part-nership firms considered the business part-ner role important, though some had moreexperience with that role than did others .Since its inception, Quantum has so fully in-corporated this strategic role that it is some-times difficult to delineate this separate aspectof the company's activities . In recent years,Sears has moved well along that same path . Itis useful, however, for those firms in transi-tion to highlight the approach adopted by sev-eral of the Partnership firms that are currentlygoing through these changes .

Lucent

Lucent's new HR structure is the foundationof a new and higher profile for the HR func-tion. The model emphasizes client services atthree levels : individual employees/retirees(300,000), supervisors/coaches (33,000), andsenior leaders (381) . The linchpin for valuecreation throughout Lucent is the role of HRBusiness Partner, in which HR leaders workdirectly with the senior business leaders toimplement strategy. While the Business Part-ners, and indeed each of the three deliverychannels, are measured against strict clientsatisfaction objectives, their ultimate goal isfor the senior executives to say at the end of

the year; "We were very successful and couldn'thave done it without HR" . The vision requiresa strong commitment to the senior leadershipthat HR is working on their problems and thatall HR initiatives are always focused on solu-tions for their clients . The details mean goingto staff meetings, even when there is no dis-cussion of HR issues, so HR representativescan better understand the business-or cre-ating a team of 58 HR professionals (the HRAccelerators) whose job it is to find and elimi-nate (dismantle) HR policies and practicesthat no longer add value for Lucent's share-holders. Another example would be bringingin the marketing manager from Network Sys-tems to address a video town meeting of theworldwide Lucent HR community. She ex-plained what is required to significantly growher business and how HR can partner withher in this effort (better motivational programsfor the sales force, new competencies basedon future oriented thinking, and so on) .

Lucent has also developed a new compe-tency model to support the development of theBusiness Partner role in HR. The competen-cies were developed using internal reviews andexternal benchmarking sources and emphasizefive areas that answer the question, "What arethe knowledge, skills, and commitments that willenable the Business Partners to deliver upontheir customer's (internal client) expectations"?These include the following :

• Understanding the Lucent business,the client's business, and HR busi-ness ;

•

Customer focus ;• Defining, managing, and implement-

ing HR solutions to business problemsby identifying, securing, and leverag-ing resources ;

•

Managing in a changing, competitiveenvironment ; and

•

Personal impact .

These competencies are then to be inte-grated into a HR system of learning anddevelopment, staffing and selection, career de-velopment, and performance management .The initial integration is through individualassessment tools that form the basis of acustomized career development plan. The


Business Partner competency model will, overtime, serve as a foundation for such modelsin other HR roles at Lucent .

The Elements of High Performance HRMSystems

While the experience of the five Partnershipfirms is certainly compelling, an issue that fre-quently arises for us is the extent to which thepolicies and practices adopted by these firmscan in fact be considered "best practices", orwhether the HR management systems in thesefirms are so highly customized and tailored toeach situation that generalizations across firmsmean very little . In his recent review of theliterature, Pfeffer (1998) argues that there arein fact seven "best practices" that can lead tosuperior economic performance if adopted byany firm. These practices are :

•

employment security•

selective hiring•

teams and decentralized decision-making

•

high pay•

extensive training•

reduced status distinctions•

extensive information sharing

Pfeffer's concept of employment securitydoes not reflect the provision of lifetime em-ployment security to all employees, but ratherreasonable assurances from the organizationthat they will not be able to "work themselvesout of a job" . In addition, the expectation thataverage- to high-performing employees willremain with the firm for reasonable time pe-riods is required if the firm is expected to makesignificant investments in employee trainingand development . Selective hiring, widelyfound in the prior research to be value-addedat the level of the firm, is necessary to makesure that the firm attracts and retains the verybest employees, who are then able to derivemaximum benefit from the rest of the system .Teams and decentralized decision-making haveconsiderable conceptual and practical appealin a delayered environment where employeeshave the requisite knowledge to make theirown decisions and also where market pres-sures require them to do so quickly. High pay,

•

297

The BusinessPartnercompetencymodel will, overtime, serve as afoundation forsuch models inother HR roles atLucent .

2 9 8 • HUMAN RESOURCE MANAGEMENT, Winter 1999

The ability toappropriatelytransform a highperformanceHRM philosophyinto practicerequires that HRmanagersbalance severalcompeting roles.

not considered here to be a form of corporatelargess, serves multiple functions . First, whenmatched with a selective hiring system, it canhelp the firm to generate a substantial pool ofcandidates from which to choose . In addition,paying higher wages than those of competi-tors serves as a form of "efficiency wage", inthat employees are less likely to leave whentheir next-best opportunity, by definition, paysless than their current job . The economic re-turns from extensive training are more likelyto be captured by the firm if employees aremotivated to stay with the firm and contrib-ute to its success (fostered, in part, throughselective hiring, high levels of pay, and teams) .Similarly, reduced status distinctions betweenemployees help to build an esprit de corpsamong employees and encourage the beliefthat all employees are "in this together" . Fi-nally, extensive information sharing is part ofthe "glue" that makes the parts of such a sys-tem work together, in that in an environmentwhere decision-making is decentralized andlargely in the hands of capable and enabledteams, sharing of information is ever morecrucial to the overall organization's success .

While each of these elements representsa choice to emphasize the performance en-hancing dimensions of the HRM system, it isequally important to remember that each ispart of an integrated high performance HRMsystem . Employment security in the absenceof selective hiring and continual developmentbrings to mind a civil service environmentmore than a method for eliciting high perfor-mance from a firm's workforce . Similarly,teams and decentralized decision-making

TABLE I Ulrich's Model of HR as a BusinessPartner.

Strategic Focus

Systems

StrategicPartner

AdministrativeExpert

Operational Focus

Source : Ulrich, 1997 .

ChangeAgent

EmployeeChampion

People

without information sharing, focused selec-tion, and training are unlikely to generateoptimal solutions over the long run. Indeed,one reason that the five firms in this studyhave such successful HR strategies is theirrecognition of these interdependencies . As weobserve the implementation of these strate-gies, however, we are reminded of Schuler's(1990) distinction between HR Philosophiesand HR Practices . These firms philosophicallyembrace each of these elements in their HRstrategy, yet as each moves from philosophyto practice, the five firms we studied show con-siderable diversity.

The ability to appropriately transform ahigh performance HRM philosophy intopractice requires that HR managers balanceseveral competing roles . Ulrich (1997), for ex-ample, defines these roles as AdministrativeExpert, Employee Champion, Change Agent,and Strategic Partner . In these five firms, wehave seen evidence of considerable effort toenrich the HR role by expanding their "abovethe line" activities (change agent and strate-gic partner) while not sacrificing the qualityof their more traditional "below the line" (ad-ministrative expert and employee champion)contributions . Each of the firms in our studyexplicitly recognizes the importance of eachof these roles and is committed to professionalexcellence in each .

Remaining Challenges

While the Partnership firms as a group havemade significant progress in raising the stra-tegic profile of HR in their respective organi-zations, they acknowledge the considerablechallenges that remain . In some cases thesechallenges focus on more fully developing HRas a strategic player and business partner, inothers they have established a strategic foun-dation and are concentrating on the next busi-ness problems facing the firm . Table IIsummarizes the nature of these challenges andtheir distribution across firms . For the mostpart, Partnership firms have achieved a solidrecord of operational excellence in HR . Whilethey continue to look for improvements anddrive out costs where they can, the emphasisis clearly on the issues surrounding the devel-opment and consolidation of a more strategic

role. Indeed, in our experience, one of thedistinguishing characteristics of leading edgeHR management functions is that they have aclear idea of what they are up against and whatthey must accomplish to move to the next level,even if they are not as yet satisfied with theirown performance .

Perhaps the first challenge during thistransition is to develop an appropriate struc-ture within which the HR function allocatesthe appropriate mix of responsibilities andresources between HR at the corporate andbusiness unit level . The tradition in manybusiness units has been operational, and thenew demands of a business partner role arenot always matched by the required resources(time and competencies). This challenge iseven more difficult when this new HR rolemust be integrated within a larger businessenvironment characterized by the rapid,global growth many firms are experiencing .Beyond these role-related issues, those inter-viewed identified a range of firm-specific chal-lenges related to specific business problemsor HR processes . In broadest terms, severalof these could be categorized as the humancapital problems surrounding strategic change .Perhaps the most significant was HR's effortsto support change and specifically to supportefforts at leadership development and organi-zational renewal .

Introduction to SpecialIssue Case Studies

The following case studies are based on one-to two-day interviews at each company, typi-

TABLE ll HR Challenges by Firm .

'Herman Miller also mentioned development of competencies models and diversity management .2 Quantum also mentioned managing joint ventures and acquisitions .


cally supplemented by additional documenta-tion and telephone interviews . These studieswere not designed to provide a comprehen-sive record of each firm's HR strategy and ev-ery HR practice . Instead, we asked participantsto focus on "what matters most" in their ownrespective organizations . Specifically, whatwere they doing in HR that really added valueto their firm and where were their most sig-nificant challenges? The resulting case stud-ies, therefore, are organized around the fol-lowing themes :

•

The Role of HRM Throughout theFirm : This section is designed to pro-vide background for the case studyand, in very broad terms, to describethe relative emphasis on strategic andoperational HR roles throughout eachbusiness .

•

High Impact HRM Practices : Thissection focuses on those HR strategies,philosophies, practices, or processesthat are making the most importantcontribution to the firm's success . Inshort, it's what is being done well andhaving a significant impact .

•

The Challenges : This section focuseson the most important challenges con-fronting HR in each firm over the nextfew years .

As we noted in the introduction, WayneBrockbank of the University of Michiganconcludes with an excellent essay that givesa "look over the horizon" for the HR pro-fession as it prepares to enter the twenty-

•

299

Firm SupportHighGrowth

Employs.Development3 Renewal

Acquiring &RetainingTalent

PerformanceManagement

ChangeManagement

Corporate &Business,Unit FIRStructure

Competenclesfor StrategicHR Role

GlobalGrowth

New LaborRelationsModel

SuccessionPlanning andLeadershipDevelopment

Clarify HRStrategicRole

Herman Miller' x x

Lucent x x x x x

Praxair x x x x

Quantumz x x x x x

Sears x x x


first century. Mike Losey Tony Rucci, andDave Ulrich then comment on this specialissue in an interview conducted by us as

BRIAN E. BECKER (Ph.D ., University of Wisconsin-Madison) is Professor of HumanResources, and Chairman of the Department of Organization and Human Resources,in the School of Management at the State University of New York at Buffalo . ProfessorBecker has published widely on the financial effects of employment systems in bothunion 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. HUSELm is an Associate Professor in the School of Management and LaborRelations (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 ofhuman resource management systems on firm performance . He has published widelyon 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 ofDirectors of the SHRM Foundation and is a member of the Executive Committee of theHuman Resource Management Division of the Academy of Management .

Becker, B.E ., Huselid, M.A., Pickus . P.S ., & Sprats,M. (1997) . HR as a source of shareholder value :Research and recommendations . Human Re-source Management, 36, 39-47 .

Becker, B.E ., & Huselid, M.A. (1998) . High perfor-mance work systems and firm performance : Asynthesis of research and managerial implica-tions. Research in Personnel and Human Re-source Management, 16, 53-101 .

Hamel, G ., & Prahalad, C .K. (1994) . Competing forthe future . Boston: Harvard Business School Press .

Hodgetts, R .M. (1996) . A conversation with SteveKerr. Organizational Dynamics, 24, 68-79 .

Huselid, M.A ., & Becker, B .E. (1998) . High Perfor-mance Work Systems, Intellectual Capital, andthe Creation of Shareholder Wealth . Workingpaper. School of Management and Labor Rela-tions, Rutgers University.

REFERENCES

guest editors . The interview is followed byJoe Ryan's review of William Joyce's newbook on Megachange .

Itami, H . (1987) . Mobilizing invisible assets . Boston :Harvard University Press .

Pfeffer, J . (1994). Competitive advantage throughpeople. Boston : Harvard Business School Press .

Pfeffer, J . (1998) . The human equation . Boston :Harvard Business School Press .

Schuler, R .S. (1990) . Repositioning the human re-source function: Transformation or demise?Academy of Management Executive, 4, 49-60 .

Spencer, L.M ., & Spencer, S.M. (1993). Competenceat work . New York: John Wiley & Sons, Inc .

Stewart, T.A. (1998) . Real Assets, Unreal Reporting.Fortune, July 6, 207-208 .

Svelby K.E . (1997) . The new organizational wealth .San Francisco : Berrett-Koehler .

Ulrich, D. (1997) . Human resource champions : Thenext agenda for adding value and delivering re-sults . Boston: Harvard Business School Press .

1 . The authors thank Herman Miller, Lucent,Praxair, Quantum, Sears, and the GlobalConsulting Alliance for their generous sup-port in the development of this project . Inaddition, Dorothy Simmons provided valu-able research support in the developmentof this article and the cases upon which it isbased, for which we are grateful .

2 . Much of the next two sections was adaptedfrom Brian Becker, Mark Huselid, PeterPickus, and Michael Spratt (1997) . "HR asSource of Shareholder Value : Research andRecommendations", Human Resource Man-agement, Vol . 36, "pp. 39-48 .

3 . Not only are investments in human capitalnot reflected in a firm's balance sheet, theyare expensed in their entirety on an annualbasis. Thus, in contrast to capital investments(e .g., the purchase of a building) that are de-preciated over their useful lifetimes, invest-ments in people lower accounting earnings(net income and cash flow) by their fullamount in the year in which they are incurred.This provides managers whose compensationis tied to accounting rates of return a signifi-cant disincentive to invest in human capital .

Overview: Strategic Human Resource Management in Five Leading Firms • 301

ENDNOTES

4 . These human capital based competenciesare in part the source of the "intangible capi-tal" represented by the difference betweenthe book value of a firm's assets (i .e .,shareholder's initial investment) and the cur-rent market value of those assets . The bestknown variant of this measure is known asTobin's q, which is a ratio of firm marketvalue to the replacement cost of its assets .

5 . This relationship statistically controls forother differences across firms that mightinfluence this relationship (R&D invest-ment, industry, plant and equipment, priorsales growth, etc .) .

6 . For ease of interpretation, these dollar val-ues are based on the average market valuesof firms in the sample . The actual effectsare in percentages so they would be propor-tionately larger or smaller based on an indi-vidual firm's market value per employee .

7 . Given the mix of participant responsibilities,it was not always possible to discuss everyaspect of the firm's HR function on eachvisit. Other firms may also have imple-mented processes like targeted selection, butthey were not mentioned in the interviews .

Documents

Overview: Strategic Human Resource Management in · PDF file288 • HUMAN RESOURCE MANAGEMENT, Winter 1999 The HRM system that develops and maintains a firm's strategic infrastructure