How the theory of Strategic Human Resource Management can assist organisations in achieving and sustaining competitive advantage - Essay Example

The growing importance of human resource management was brought about due to economic shifts such as low capital investment, poor productivity and high inflation, apart from demographic shifts leading to people with higher education having high expectations (Devanna, Fombrun and Tichy, 1981). The increasing complexities and difficulties of management gave rise to the concept of managing at the strategic level. Managing at the strategic level is concerned with the long-term positioning of the organization. With the changes in the work environment, the private sector started recognizing that apart from financial and technological capital, human capital can also provide competitive advantage. This led to innovation in HR practices or strategic human resources management. Delery and Doty (1996) defined strategic HRM practices as those that are “theoretically or empirically related to overall organizational performance” (cited in Akhtar, Ding and Ge, 2008). Strategic Human Resources Management (SHRM) is about linking people with the organization – integrating HRM strategies into corporate strategies (Budhwar & Aryee, 2008). In other words SHRM aims to align or integrate decisions about people with the results that the organization aims to achieve (Brand & Bax, 2002). This is done because it is believed that integrating business strategy with HRM can lead to effective management of human resources and thereby enhanced organizational performance. The primary role of HR in the past has been compliance with laws, rules and regulation. If the HR departments have a future-orientation and if the HR strategies operate as an integral part of the overall business plan, firms can achieve competitive advantage, according to Budhwar and Aryee (2008). This paper evaluates whether and how the theory of SHRM can assist organizations in achieving competitive advantage. Integration of HRM into the business strategy has several benefits such as solutions for solving complex organizational problems, enhancing organizational performance, giving equal importance to human, technical and financial resources as sources of competitive advantage, while also providing long-term focus to HRM (Budhwar and Aryee, 2008). HRM also plays a significant role on knowledge creation, in knowledge management and knowledge-based competition (Lengnick-Hall et al, 2009). SHRM strategies can be used for knowledge creation, storage and dissemination in organizations. HR practices influence an organization’s social climate which in turn leads to knowledge exchange and better organization performance. Many researchers and scholars have contributed to strategic HRM with their own models and processes. For instance, Storey (1992) developed a model that demonstrates a shift from traditional personnel management to HRM. This model comprises of four key aspects – a constellation of beliefs and assumptions, strategic thrust informing decisions about people management, the involvement of line managers and shaping of employment relationship through commitment rather than forceful compliance. According to Storey, since the model has linkage between employment policies and corporate plan, it can lead to competitive advantage. This model also identifies that strategic approach to HRM can be developed by bringing about changes in various elements of HRM functions such as recruitment and selection, training and development, and the conditions of employment. He suggested changes such as nurturing the workforce rather than monitoring them and management action should be based on the business need rather than following set procedures. Devolution to line managers has been proposed by many scholars as a core aspect of SHRM. SHRM has led to redefining the roles of the top management. Certain functions and issues are too complex for the top management to handle and devolvement of HRM to the line managers can lead to faster response (Budhwar, 2000). The line managers have the knowledge that enables them to influence both strategic and operational organizational priorities (MacNeill, 2003). Since the middle managers interact the most with the employees, they are best positioned to motivate inspire, encourage, enable and facilitate change by allowing the employees to become committed (Thornhill and Saunders, 1998). Whittaker and Marchington (2003) also agree that line managers play a significant role in employee relations, rewards and recognitions. This is precisely what Storey suggests that employees should be nurtured rather than monitored. Renwick (2003) however believes that line managers are not competent to undertake HR functions because they tend to speed up decisions by by-passing procedures. The resource-based view (RBV) infers that firms can create competitive advantage through unique combination of resources and business practices (Werbel and DeMarie, 2005). RBV has also influenced the field of SHRM. Unique HR practices create competitive advantage through creation of unique (difficult to imitate) organizational culture that institutionalizes competitive advantage. There has been shift in the RBV emphasis from external factors towards internal firm resources identified as sources of competitive advantage (Wright, Dunford and Snell, 2001). The RBV has laid emphasis on the contribution of human resources to firm performance. However, sustained competitive advantage is a combination of development of skills, strategically relevant behaviors and supporting people management systems. Wright et al clarify that HR activities lead to the development of a skilled work force and become a source of competitive advantage. This results in higher operating performance, leading to higher profits and in turn resulting in higher stock prices. Theoretically this is appealing but most of the empirical studies assess only two variables – HR practices and performance. Moreover, very studies actually demonstrate that HR practices actually impact the behavior of the workforce. Based on the resource-based view (RBV) theorists now recognize that the ability to implement strategies, by itself is a resource that can be a source of competitive advantage (Barney, 2001 cited in Becker and Huselid, 2006). The RBV suggests that by outsourcing peripheral activities, the firm is able to focus on core competencies (Delmotte and Sels, 2008). This suggests that the organization must have the capabilities and resources to identify the core functions that should be kept in-house and what can be outsourced. According to Ulrich (1997) strategic partnership can be achieved by focusing on activities that are strategically relevant (cited in Delmotte and Sels, 2008). Routine transactional and administrative functions if outsourced to an organization for which these activities are core, the primary organization can use its resources for more strategic activities. Thus, organizations that emphasize on SHRM would rely on outsourcing routine HR function. HR devolution and HR outsourcing are inter-related and both these strategies offer the HR function the opportunity to function as strategic business partner. However, outsourcing HR functions has several contingencies such as finding the right vendor. Moreover, the HR managers, due to lack of experience in outsourcing, may not be able explicitly express what they want from the vendor (Galanaki and Papalexandris, 2005). This defeats the very purpose of outsourcing. Two other approaches to HRM can be found in the literature pertaining to human resource management. These are the ‘hard’ and ‘soft’ approaches to managing people. The ‘soft’ approach considers employees as the greatest assets and key to organizational success (Drucker, White, Hegewisch and Mayne, 1996). Employees have the potential to add value to the organization through their creativity, commitment and skills, and hence they should be carefully selected and provided appropriate training and development. This enhances employee commitment which in turn leads to enhanced performance. In the ‘hard’ approach the focus is on business objectives and human resources are just another factor in production, thereby having no contribution to competitive advantage. The hard approach can be associated with the scientific management while the soft approach is what has been proposed in Storey’s model where nurturing people leads to enhanced organizational commitment. Lengnick-Hall, Lengnick-Hall, Andrade and Drake (2009) identified seven themes in SHRM that reflect the directions and trends researchers have taken over approximately thirty years of research. The authors trace how the field of SHRM has evolved and the direction it is expected to take in the future. Over the years researcher have extended the range of factors, and the scope of issues in SHRM. Issues of ‘fit’ have also been found in SHRM literature. There are various ways in which human talent can contribute to strategic objectives. Lengnick-Hall et al find that as SHRM has grown the contributions that HRM makes to organizational effectiveness is becoming more visible. However, SHRM must remain sensitive to shifts in business environment. This is because issues of horizontal fit remain challenging. There is a growing consensus on the elements of HR but measuring and studying them, remains problematic. Becker and Huselid (2006) emphasize that HR can contribute to competitive advantage only when there is a ‘fit’ between the HR architecture and the strategic capabilities and business processes that implement strategy. Devanna, Fombrun and Tichy (1981) also agree that better the ‘fit’ among the people, tasks, structures and processes, the better is the service delivery to the clients, thus implying that linking the long-term strategy can yield competitive advantage. Wall and Wood (2005) identify three kinds of ‘fit’ between HRM and organizational performance. ‘Internal fit’ indicates that there must be synergy among the practices. For instance recruiting the right people but not providing them training or training them but not empowering them will yield no results. The ‘organizational fit’ links HRM to other practices such as TQM, or effective HRM during lean production. The ‘strategic fit’ assumes that HRM practices should be aligned with the organization’s strategy to achieve the full effect on performance. Following a lot of debates and discussions that strategic HRM can enhance performance, Wall and Wood (2005) evaluated the causal effect of HRM on performance. This was based on evaluation of key empirical studies. The authors find that empirical evidence does not justify that strategic HRM can enhance organizational performance. However, longitudinal research is required with stronger research methods to arrive at any conclusion if strategic HRM practices can actually lead to enhanced organizational performance. The authors also found that empirical work pays only limited focus on issues of fit. Huselid’s (1995) demonstrates that HR practices could have profound impact on both accounting and market based measures of performance (cited in Wright, Dunford and Snell, 2001). Another longitudinal study cited by Wright et al. demonstrated that a firm achieved superior competitive position because of HR advantages but in three years two of its competitors caught up with this firm. It is generally believed that HR advantage cannot be imitated but possibly the competitors could imitate the HR advantage that the firm has developed. HR systems can be easily imitated than SHRM researchers believe. Becker and Huselid (2006) and Lengnick-Hall et al. (2009) agree that more attention should be paid to implementation issues in SHRM and particularly to issues of vertical and horizontal fit. The horizontal fit is internal fit among the elements of HR architecture while the vertical fit is external fit between the HR architecture and the strategic business process. The HR practices may be well integrated but if they do not improve strategy execution, it is of little strategic value. The programs and policies may appear to be fit from an outside-observer perspective but implementation makes the difference between success and failure in achieving the intended objectives. Werbel and DeMarie (2005) contend that rather than focus on either vertical or horizontal linkages, a theoretical approach to SHRM should combine both of these dimensions. Thus the Person-Environment (PE) fit should become the linking pin between vertical and horizontal alignment and this can lead to sustained competitive advantage. However, PE fit includes PJ (Person-Job) fit, PO (Person-Organization) fit, and PG (Person-Group) fit. The different types of fit help in making vertical linkages which help develop human resource practices. These in turn lead to the development of organizational competencies. Corporate governance and SHRM are linked in several ways. Corporate governance is the mechanism to ensure that executives respect the rights and interest of all the stakeholders (Martin, Farndale, Paauwe and Stiles, 2012). Martin and Gollan (2012) analyzed the role played by HRM and leadership in the rise and spectacular failure of the Royal bank of Scotland (RBS). Prior to the global financial crisis, the HR practices of the Bank were used as a benchmark for excellent HR practices. The Bank has a sophisticated approach to human capital metrics and leadership development. Leadership quality was the most important driver sales and financial performance. The Bank could not sustain the global financial crisis and post-crisis there was a shift in corporate governance, ethics and strategy. A shift in these practices shaped the organizational climate and the HR policies at the Bank. The changed leadership tried to implement ‘soft’ HRM practices to sustain the morale of the employees that remained, tried to keep them engaged and motivated, and efforts were made to cascade information throughout the organization. The efforts did not bring the expected synergies. The HR functions were provided with a greater opportunity to influence the corporate governance regime. However, in financial services the shareholder value model is dominant and the need to satisfy the financial markets takes precedence over the stakeholder model of corporate governance and HR. Ethics have no place in such circumstances as HR’s concern is to contribute to shareholder value. Thus, a shift in HR strategy was imminent given the changes in the business environment. Storey’s model of shift from traditional personnel management to HRM is very comprehensive. It encompasses shift in various HR functions. Devolution of HR functions to line managers, forms part of SHRM and has many benefits although it is likely that the line managers are not qualified to handle HR functions. It is also likely that they compromise with their basic role in trying to maintain both roles. The resource-based view has also been applied to SHRM. Outsourcing of routine administrative functions can be cost-effective and enable the people to focus on core competencies. However, several issues are critical to the success of this strategy such as the vendor selection. The benefits of SHRM theoretically are many such as solving complex organizational problems, enhanced performance, using resources efficiently, knowledge exchange, creation, storage and dissemination, cost benefits and ultimately achieving competitive advantage. SHRM is a ‘soft’ approach to managing people where human capital are not merely ‘resources’ but they are treated as humans. The ‘soft’ approach is about managing and nurturing people rather than controlling them through rules and regulations. This definitely is a better approach to encourage and motivate them, which enhances employee commitment. Researchers also agree that SHRM can contribute to competitive advantage when there is a ‘fit’ between HR architecture and the business processes. Without the ‘fit’ between processes, strategy and objectives, competitive advantage cannot be achieved. Several researchers also point to the implementation issues of SHRM. Merely having the policies in place does not ensure competitive advantage. Another important finding is that firms may enjoy competitive advantage for some time but HR practices can be imitated and hence the firm could lose its competitive advantage. Moreover, corporate governance can lead to failure of excellent HR practices when business objectives are focused on shareholders. 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