SMM232 International Human Resource Management

Lecture 3 Strategic HRM: Best Fit, Best Practice and Resource-based theories

Learning Outcomes

Understand and explain strategic dimensions to HRM in an international context

Outline and evaluate models of strategic HRM

Two related strategic questions

1.

What is the relationship between firm strategy and HR strategy and how can we look at this for an international business? What specific international HRM strategic decisions must be made?

2.

We saw last time that it was possible to identify a Big Five set of international HRM challenges. (Mendenhall et al, 2007)
Enhancing global business strategy Aligning HR issues with global business strategy Designing and leading change Building corporate cultures Developing global leaders

Working out a strategy will involve looking at what these priorities mean for individual organisations and developing more detailed policies and practices to tackle them. This is not easy and presents a number of complex problems and dilemmas.

What is strategy?

Developing or identifying a strategy is not easy. Strategising is not always a rational exercise. Firms do not act people do! Strategy does not imply a strategic plan. Strategy is a set of choices to anticipate and respond to a firms environment. Some choices made by set piece planning: some emerge. Choices have consequences possibly unforeseen and unintended. Deriving an HR strategy from business strategy is difficult. Differing views on strategy formation and the links between business strategy and HR strategy (for an overview, see Beardwell et.al. (2004): 32-59). Key challenges: being viable (i.e. surviving in the chosen market) and acquiring sustained advantage (i.e. superior returns) (Boxall & Purcell). Strategy must be executed in and through the firms organisational environment: culture, incentives, structure, people (Markides, 2004: 8)

What is human resources strategy?

Boxall and Purcell (2008: 60-1)

Consists of critical goals and means for managing labour that is is not just about HR administration.
High pay strategy top-level recruitment: internal promotion

Is connected with and inevitably affects company performance:

Competitiveness, profitability, sustained competitive advantage

Is made by the whole management structure not just HR Is likely to be partly planned but also partly emergent Will be variegated that is, differs for different employee groups Easier to define for a business unit than for a whole undertaking Is complex in multidivisional firms. Is more complex in firms that compete across national boundaries

Strategic choices in international HRM

How central are people to the costs and resources of the firm?
Are key resources such as knowledge dependent on people? How important is it to circulate knowledge? Where should we set the boundaries of the firm outsourcing?

What aspects of HRM should be centralised or localised?

Limitations imposed by local law and practice (law, pay & benefits) Do we want to transfer HR practices from HQ to other countries? Why? Is the environment uncertain: are tight controls needed? What sort of controls: financial, control by home-company nationals or soft controls? How should we pay and manage them?

Who should we hire to fill non-home country posts and why? What management style is needed now and in the future?
Coordination, integration, control.

How important is it for the business to be integrated socially for example after a foreign acquisition?
What are the values and culture of the firm?

What will determine the answer to these questions?

We will look at three approaches HR Strategy derived from corporate strategy (Best fit approach) HR strategy derived from identifying successful HR policies and practices used by others (Best practice approach) Corporate strategy builds on organisational capabilities (on HR?) (Resource-based theory)

BEST FIT
Boxall & Purcell, 2008: Chapter 3

HR strategy derived from corporate strategy. Vertical integration between firm strategy and HR Links business goals to management of individuals. Also often referred to as contingency theory: that is, the strategy is contingent or dependent on the companys circumstances.

HR and Competitive strategy

Company mission and values Desired competitive strategy
(e.g. cost leadership, differentiation, focus)

Required employee behaviours

(appropriate to business)

Supportive HR practices
(staffing policies, appraisal, pay, training)

HR outcomes
(employee behaviour aligned with employee goals)
Source: Boxall & Purcell (2008: 67)

HR strategy and competitive strategy

Organisational feature Competitive strategy Defenders Prospectors Analysers Limited stable productChanging product Mixed product line line - efficiency line - innovation fast emulation of prospectors Internal development Recruitment long job tenure (buy) (make) Process oriented linked to training needs Mixed approach

Staffing and development strategy Performance appraisal Pay policies

Results oriented Process oriented linked to pay promotions ??????

Stability and internal External equity competitiveness

Source: Miles and Snow (1978)

Schuler and Jackson

Schuler & Jackson (1999) build a model of HRM strategy based on desired employee behaviours for different types of competitive strategy: risk taking, creative, short-term etc. - each on a spectrum. Like Miles & Snow, they suggest a limited number of basic competitive strategies: innovation, quality enhancement, cost reduction. Example: innovation needs high degree of creativity; long-term focus; co-operation; moderate concern for quality; tolerance for ambiguity and unpredictability. Next stage is to identify HRM practices that will support and promote these behaviours: recruitment, appraisal, pay, training and development. Their innovation strategy is similar to the prospector type.

Class exercise 10 minutes

Look at the empty cell for pay policies in the Miles & Snow chart: discuss in pairs the approach to pay that you think would fit best for each type of firm. For example, what would be the role of bonuses? How important would information be about wage developments in the wider labour market? What about long-term benefits (such as pensions). How would you justify your decision for example, if you had to make a proposal to a Board of Directors? If we compare Miles & Snow, with Schuler & Jackson the result might be a surprise.

Critique of best fit approaches

Hard to link competitive strategy and HR policies: firms in similar situations adopt a wide range of policies. Best fit models oversimplify organisational reality (Beardwell, et.al. 2004: 46-7) by assuming firms have one dominant strategy (such as cost or innovation) with a simple relationship between this and HRM.
No guarantee that HR policies will produce a unique set of employee behaviours law of unintended consequences. Strategies for different groups of employees can vary see below (also Lepak and Snell, 1999)

Large firms have many business models & employee groups - implying different HR policies: but consistency requires standard policies. Best fit is a problem internationally as contingency theory could also be used to argue that strategy should fit national institutions or culture.

Internal fit
HR policies should be consistent with each other in the same organisation. HR strategists have been advised that they should aim for positive bundling of HR policies They [should] avoid deadly combinations: policies which work in directly opposite directions, such as strong training for teamwork but appraisal which only rewards highly individualistic behaviour. (Boxall and Purcell, 2003: 56) Internal fit is also problematic. Boxall & Purcell (2003) highlight how change can cause conflicts between HR policies. For example, firms have increased the use of HR practices: that foster higher skill and solicit greater commitment... However, at the same time, firms have had to pursue downsizing . [this] reduces trust in management and undermines employee commitment. (Boxall and Purcell, 2003: 57) Managers need to accept balancing tensions among competing objectives.

Break
Divide into pairs and discuss briefly one of the following questions be prepared to report back with a couple of points per pair

Can you think of any competing objectives or tensions in an international business that might create difficulties for people management? or Can having differing policies for different employee groups create problems in a business? Does this apply in any organisations you have worked in?

Best fit in an international context

Two approaches
1. Contingency matrix approach (Luthans, Marsnik & Luthans, 1997). MNEs HRM policies should fit the country of operation based on its culture and institutions Different HR strategies and skills needed for multidomestic, global, transnational businesses. Policies should fit the type of firm and its international orientation

2.

Perlmutters typology
Perlmutter (1969) distinguished three dominant orientations for HQs of MNCs, using a survey of managers at MNC headquarters.

Ethnocentric (home-country oriented)

This works at home: therefore it must work in your country These guys know best financial controls: but no job at HQ Where in the world .?

Polycentric (host-country oriented)

Geocentric (world-oriented)

Each is associated with a pattern of organisational design and HRM.

Strategy and HQ orientation

Perlmutters typology
Organisation Authority Communication Identification Staffing Ethnocentric High in HQ From HQ to subs. Polycentric Lower in HQ Low little horizontal linkage Geocentric Collaboration between HQ/subs. Two way and between subs. International but with HQ interests Best people everywhere Integrative

Nationality of owner Nationality of host country Home country nationals sent to subsidiaries Exportive Local nationals in host country only Adaptive

HRM system

Source: adapted from Harzing (2004) pp. 60-61.

Strategic choices
(see Beardwell & Holden, 2007: 644-647)

Exportive HR = ethnocentric (global)

Parent company HRM policies and practices transferred to subsidiaries (low local fit [isomorphism] high internal consistency)
Example: British business applies individual performance appraisal to national culture that emphasises teamwork.

Adaptive HR = polycentric (multinational)

MNC allows (must allow?) HR system in host-country to reflect local environment (high local fit low internal consistency)
Example: US company recognises trade unions in its European subsidiaries but not in the USA.

Integrative HR = geocentric (transnational)

Tries to optimise internal consistency, but allows for local fit and learning from best practice for diffusion
Example: Dutch business decides to introduce flexible working hours in worldwide locations to encourage female staff retention local HR implements

Institutional theory
(see Brewster et.al., 2007: 222-225)
Institutional theory aims to explain the forces that make institutions more similar to each other that is, that promote fit. Institutional theorists refer to this fit as isomorphism (from the Greek for having the same shape or form). It argues that decision-making is not an outcome of rational strategic choice but also of powerful social forces within and outside organisations (Brewster et.al., 2007: 222) Three forces:
Coercive mechanisms = pressures on firms from organisations on which they are dependent and local (cultural) expectations Mimetic mechanisms = managers imitate what other firms do if they are faced with uncertainty. Normative mechanisms = the rules and norms of behaviour which managers and professionals learn and which they regard as legitimate (for example, what is the role of HRM; is it acceptable to pay commissions or bribes?; should managers hire family members?)

Implications of institutional theory

The determination of an MNEs HR strategy both at its HQ, in its subsidiaries, and internationally, will be a complex outcome of all these forces: efforts to maintain control, decentralisation, and the clash between home-country and host-country practices. Brewster et.al. (2007) identify three factors that will determine the extent to which organisations adopt standard practices in all their operations or allow for local autonomy:
1. How embedded is the foreign subsidiary in its national setting and how strong are these local institutions: is the subsidiary a greenfield operation, or is it an acquistion? 2. How important are flows of resources capital, knowledge and people between the parent firm and subsidiaries (and horizontally between subsidiaries). Bigger flows need more global co-ordination. 3. What are main characteristics of the parent company and its own national culture issues we will explore later in the module. In other words, how strong is the parent country effect on local practices?

BEST PRACTICE
Boxall & Purcell, 2008: Chapter 3

HR strategy determined by adopting a set of best practices identified by research. Such practices are held to contribute to enhanced performance wherever they are applied. Typically, best practices are offered as lists of bundled practices that together create high performance work systems.
Pffeffer (cited in Boxall & Purcell, 2008:76) has suggested the following list: Employment security Selective hiring Self-managed teams or team working High pay (contingent on company performance) Extensive training Reduction of status differences Sharing information

Critique of Best practice

Problem arises when attempts are made to develop a comprehensive approach to best practice

Too many suggestions too many professors! See Beardwell et.al., (2004: 58) Suggestions too general to help shape HR policies and sometimes contradictory. They are culture bound what is best practice in one country may be inappropriate in another. But it is a compelling idea with applications in specific areas, often based on research (evidence base).

RESOURCE-BASED STRATEGY
Boxall and Purcell, 2008:Chapter 4

Sustained competitive advantage is shaped or determined by a companys resources: people, capital, organisational resources. This approach has been called a search for an exclusive form of fit: that is, a strategy for using resources in a firm that is both successful and unique to that firm.

The Resource Based View (RBV) therefore thinks about strategy in terms of the resources an organisation has.
How might a firm obtain and manipulate its resources human and nonhuman to become the best adapted and most profitable in its sector?

Why do some firms outperform others?

Resource-based theory (RBT) has its origins in theories that have addressed this critical question. It is based on an assumption that successful firms must possess resources that less successful firms lack: success is broadly defined as sustained superior returns (SSR). In addition, it raises an interesting economic question: if factors of production can be bought on the open market, then the prices of especially valuable resources will simply be higher. Therefore buying valuable resources on the market will not guarantee SSR. RBT therefore argues that something unique must happen inside firms to enable them to earn SSR. In fact one of the articles in the field is called Looking inside for competitive advantage (Barney, 1999)

THE VRIO MODEL

VRIO model contends that if resources meet the following criteria, they can allow companies to earn sustained superior returns.

Valuable resources must add value and enable a firm to pursue competitive strategies that improve efficiency and effectiveness Rare resources must be rare: that is, not all competitors should own or have access to them. Imperfectly imitable resources must be hard and/or expensive to copy, and competitors cannot simply duplicate them or find suitable substitutes Organisationally useable firm structures and processes allow resources to be used

Imperfectly imitable
Having imperfectly imitable resources is a key dimension if resources can be copied, they will no longer be unique. What makes a resource imperfectly imitable? Barney (2007:61ff) suggests three criteria:
1.

Unique historical conditions firms are historical entities. They could have a first mover advantage, luck etc. Causal ambiguity a firm (and its competitors) might not entirely understand what is unique, partly because it is taken for granted by firms and invisible to their competitors. Social complexity the firms resources may be attributed to complex patterns of social interaction that are understood but very hard to copy in the short term (personal relationships etc.)

2.

3.

What does it mean in practice?

Barney notes: With just a couple of exceptions (including the pharmaceutical and specialty chemical industries), patents provide little protection from the imitation of a firms physical resources. On the other hand, socially complex resources and capabilities organizational phenomena like reputation, trust, friendship, teamwork and culture while not patentable, are much more difficult to imitate.
(Barney, 1999: 134)

Examples of VRIO resources

(Barney, 2007, Part II)

Culture A firms culture might embrace values and support forms of behaviour that lead to efficiency and effectiveness. Likely to be especially hard to imitate and attempts to manage culture rarely succeed (in the short term). Trust and social capital Trust is the mutual confidence that no party to an exchange will exploit anothers vulnerabilities (Sabel, cited in Barney, 2007:05).
Hard-core trustworthiness high level of trustworthiness, present even though there is mutual vulnerability: based not on compliance (governance) but principles, values and culture. Competitive advantage: inter-firm cooperation; reduced governance costs; decision making speed; effective knowledge sharing.

Social capital = nature of networks, shared meanings, nature of personal relationships (see Beardwell & Holden, 2007: 652-3)

Resource Based Theory and HR

RBT has a special significance for HR: HR has a responsibility for managing and developing resources that are hard to copy.
1.

Key role of culture and organisation that are hard to imitate not just policy or practices but how these are implemented. RBT stresses ensuring that valuable and rare resources can be used: organisational capability or core competence (Hamel & Pralahad).

2.

For example, ability to manage HR aspects of international expansion (hiring, transferring HR practices, M&A, alliances etc.)

1.

Seems to fit organisational reality. Firms rarely change the people to fit the strategy they start from the here and now: implies development and adaptation of employees. Suitable for turbulent times firms find it hard to position themselves in terms of markets etc. to work out best fit.

2.

RBTs challenge for HR

What is the firms competitive strategy and the people management implications (fit). How can the firm effectively differentiate itself from its competitors?

For example, which employees represent the greatest potential for differentiation from the competition and which represent the table stakes.

Does HR have a deep understanding of aspects of the firm that are inimitable and contribute to effectiveness are these supported by HR policies (evidence base best practice). Does the firm have organisational capability for current and future competitive strategies (training needs or new hires) Does the HR function deliver organisational capability at an appropriate cost?

HR Strategy Tool

Having examined all the complexities of the issue, you can consult a simple and practical HR Strategy Tool, developed by the Chartered Institute of Personnel and Development (CIPD) the professional body for HR managers in the UK. The tool is on UELPlus As we progress through the module, it might be easier to see how the issues raised can be fitted into a strategic context but with the knowledge that this is especially complex in an international organisation. What approach does the CIPD strategy tool adopt?

References
Barney, J. Looking inside for competitive advantage in Schuler & Jackson (1999) Strategic Human Resource Management. Oxford: Blackwell Barney, J.B. and Clark, D.N. (2007) Resource-based Theory. Oxford: Oxford University Press Beardwell, I., Holden, L. and Claydon, T. (2004) Human Resource Management a Contemporary Approach (4th edn). Harlow: Prentice Hall Boxall, P. and Purcell, J. (2008) Strategy and Human Resource Management (2nd edn). Basingstoke: Palgrave Macmillan Hamel, G. and Pralahad, C. (1994) Competing for the Future. Boston, MA: Harvard Business School Press Lepak, D. and Snell, S. (1999) The strategic management of human capital: determinants and implications of different relationships. Academy of Management Review 24(1):1-18 Luthans, F., Marsnik, P. A. and Luthans, K. W. (1997), A contingency matrix approach to IHRM. Hum. Resour. Manage., 36: 183199 Markides, C. and Geroski, P. (2005) How smart companies bypass radical innovation to enter and conquer new markets. San Francisco, CA: Jossey-Bass. Mendenhall, M.E., Oddou, G., & Stahl, G.K. (2007) Readings and Cases in International Human Resource Management. (4th edition). London: Routledge. Miles, R.E. and Snow, C.C. (1986) Organizations: new concepts for new forms. California Management Review, vol. 28, no. 3: 62:73 Perlmutter (1969). The Tortuous Evolution of the Multinational Corporation, reproduced in Bartlett, C., Ghoshal, S. and Beamish, P. (2008) Transnational Management. New York: McGraw-Hill 56-65 Schuler, R. and Jackson, S. (2006) Strategic Human Resource Management. Oxford: Blackwell

Additional reading suggestions

Barney, J. (1991) Firm resources and sustained competitive advantage. Journal of Management, 37 (3) 670-687. (The classic article). Barney, J.B. & Wright, P.M. (1997), On becoming a strategic partner: the role of human resources in gaining competitive advantage, Center for Advanced Human Resource Studies), Cornell Univ. (www.ilr.cornell.edu/CAHRS) Barney, J.B. & Delwyn, N. (2007) Resource-Based Theory, Chapter 6. Dickmann, M. & Muller-Camen, M. (2006) A typology of international human resource management strategies and processes, Int. Journal of Human Resource Management, 17: 4, 580-601. Lepak, D.P. & Snell, S.A. (1999) The human resource architecture Academy of Management Review (for a discussion, see Boxall and Purcell, pp. 121-127)