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Chapter 2

Human Resources – Chapter 2

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Aaron Schat

Human Resources – Chapter 2: Strategic Human Resource Management The goal of strategic management in an organization is to deploy and allocate resources in a way that gives it a competitive advantage. Resources can be physical, organizational or human. Two of the three classes of resources are directly tied to the HR management function. The role of HR management is to ensure that a company’s human resources provide a competitive advantage. HR managers should: 1. Have input into the strategic plan, both in terms of people-related issues and in terms of the ability of the HR pool to implement particular strategic alternatives 2. Have specific knowledge of the organization’s strategic goals 3. Know what types of employee skills, behaviors and attitudes are needed to support the strategic plan 4. Develop programs to ensure that employees have those skills, behaviors and attitudes. What is a Business Model? Abusiness model is a story of how the firm will create value for customers and more importantly, how it will do so profitably. “Contribution margins” or margins are the difference between what to charge for your product and the variable costs of that product. They are called contribution margins because they are what contributes to your ability to cover your fixed costs. The gross margin is the total amount of margin you made and is calculated as the number of units sold times the contribution margin. What is Strategic Management? Strategic management is a process, an approach to addressing the competitive challenges an organization faces. Strategic management is more than a collection of different strategic models. It is a process for analyzing a company’s competitive situation, developing the company’s strategic goals and deciding a plan of action and allocation of resources that will increase the likelihood of achieving those goals. Strategic human resource management (SHRM) – a pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals. Components of the Strategic Management Process The strategic management process has two distinct yet interdependent phases: strategy formulation and strategy implementation. During strategy formulation the strategic planning groups decide on a strategic direction by defining the company’s mission and goals, its external opportunities and threats and its internal strengths and weaknesses. They then generate various strategic alternatives and compare those alternatives’ability to achieve the company’s mission and goals. During strategy implementation, the organization follows through on the chosen strategy Linkage between HRM and the Strategic Management Process The strategic choice really consists of answering questions about competition. Where to compete? How to compete? With what will we compete? Role of HRM in Strategy Formulation Afirm’s strategic management decision-making process usually takes place at its top levels, with a strategic planning group consisting of the CEO, CFO, president and various VP’s. However, each component of the process involves people-related business issues. Therefore, the HRM function needs to be involved in each of those components. Four levels of integration seem to exist between the HRM function and the strategic management function: 1. Administrative linkage – lowest level of integration. The HRM function’s attention is focused on day-to-day activities. The company’s strategic business planning function exists without any input from the HRM department. 2. One-way linkage – the firm’s strategic business planning function develops the strategic plan and then informs the HRM function of the plan. It precludes the company from considering HR issues while formulating the strategic plan. This level often leads to strategic plans that the company cannot successfully implement. 3. Two-way linkage – allows for consideration of HR issues during the strategy formulation process. Integration happens in 3 steps – HRM is informed of the various strategies the company is considering, HRM then analyzes the strategies and presents the results. Finally, once the strategic decision has been made, the plan is passed to the HRM executive, who develops programs to implement it. The strategic planning function and the HRM function are interdependent in two-way linkage. 4. Integrative linkage – it is dynamic and multifaceted, based on continuing rather than sequential interaction. In most cases, the HRM executive is an integral member of the senior management team – HRM functions are built right into the strategy formulation and implementation processes. Strategy Formulation Components relevant to strategy formulation are: 1. The organization’s mission (statement of the organization’s reason for being) 2. The organization’s goals – what an organization hopes to achieve in the medium to long- term future. (Reflect how the mission will be operationalized) 3. External analysis – consists of examining the organization’s operating environment to identify strategic opportunities and threats 4. Internal analysis – the process of examining an organization’s strengths and weaknesses External analysis and internal analysis combined constitute what has come to be called the SWOT analysis. 5. Strategic choice – the organization’s strategy; the ways an organization will attempt to fulfill its mission and achieve its long-term goals. Many of the opportunities and threats in the external environment are people related. It is of utmost importance that all people-related business issues be considered during strategy formulation. Strategy Implementation After an organization has chosen its strategy, it has to execute that strategy. Five important variables determine success in strategy implementation: organizational structure; task design; the selection, training and development of people; reward systems; and types of information and information systems. HRM has primary responsibility for three of these five implementation variables: task, people and reward systems. HRM can also directly affect the two remaining variables: organizational structure and types of information and information systems. This is what has been referred to as the “vertical alignment” of HR with strategy. Vertical alignment means that the HR practices and processes are aimed at addressing the strategic needs of the business, but the link between strategy and HR practices is primarily through people. The HRM function implements strategy through administering HRM practices: job analysis and design, recruitment and selection processes, training and development programs, performance management systems, reward systems and employee and labor relations programs. HRM Practices The HRM function can be thought of as having 6 menus of HRM practices, from which companies can choose those most appropriate for implementing their strategy. 1. Job analysis and design 2. Recruitment and selection 3. Training and development 4. Performance management 5. Pay structure, incentives and benefits 6. Labor relations and employee relations High-tech companies in the growth stage used compensation systems that were highly geared toward incentive pay, with a lower % of total pay devoted to salary and benefits. Compensation systems among mature companies devoted a lower % of total pay to incentives and a high % to benefits. Strategic Types Companies can be classified by the generic strategies they pursue. They are similarities in the ways companies seek to compete in their industries. We focus on two generic strategies proposed by Porter: cost and differentiation. Competitive advantage stems from a company’s being able to create value in its production process. Value can be created by: 1. Reducing costs 2. Differentiating a product or service – in a way that it allows the company to charge a premium price. The “overall cost leadership” strategy focuses on becoming the lowest-cost producer in an industry. This strategy provides above average returns within an industry. The “differentiation” strategy” attempts to show a company’s product as being different from others. Differentiating a product will produce above-average returns and may protect it from price sensitivity. HRM Needs
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