Human Resource Management Might Not Be One of the Most Valuable Activities in an Organisation - Literature review Example

Human Resource Management might not be one of the most valuable activities in an organisation BY YOU YOUR SCHOOL INFO HERE HERE Human resource management might not be one of the most valuable activities in an organisation Introduction In a previous essay, the nature of human resource management (HRM) was described, including the specific activities which make up this domain of knowledge. These activities included recruitment strategies and employee training, with an emphasis on how they can theoretically benefit an organisation. In diverse and dynamic organisations, however, there are many other activities and strategies that are designed to improve an organisation’s competitive position. Some of these actions include focusing on managers having strong leadership skills, setting control systems to gain more employee compliance, or even focusing on how to build a high quality customer service system to better satisfy customers or other stakeholders. Though there are many benefits of employee training and recruitment strategies, it can be argued that HRM might not be one of the most valuable activities in an organisation. Not all organisations rely on having satisfied employees (a function of soft HRM) in order to be competitive. In some instances, it is other activities along the value chain which can make an organisation achieve high profitability, competitive advantage or have a solid and positive market reputation. In fact, Nandan (2005) states that in an organisational climate where it is possible for competition to replicate existing organisational models, the only real asset a company has is its brand reputation. Others argue that it is having an entrepreneurial spirit within the organisation that will bring a business better competitive success; or the ability to transform a vision into reality (Ireland, Covin and Kuratko 2009). Theorists and organisational practitioners who state firmly that human resource management is the most valuable asset of a firm might be missing the reality of today’s organisational situations. Making a statement such as this in an environment that calls for entrepreneurship, innovation, marketing a strong brand, or building superior customer service systems might be underestimating that HRM is only a moderate contributor to organisational success. This essay explores the advantages of HRM, in comparison to other organisational activities, to determine which is most effective in giving an organisation competitive advantage and profitability. HRM may not be the most valuable organisational activity based on literature indicating that other, supplementary activities have better results for an organisation. These include public relations strategy and development, ensuring superior customer service systems, and having a competent management team capable of making quality strategic decisions. The evidence points toward organisational culture as the most significant advantage of HRM, but only a moderate contributor to total organisational success. Training, costs and bureaucracy: a comparative analysis Employee training, transmitting information and knowledge to increase the work performance of employees and improve their skills bases, can have many positive benefits to the organisation. These advantages include improving the quality of work output, increasing productivity, reducing turnover ratios, and improving job satisfaction. In fact, Schmidt (2010) asserts that there is a direct correlation between job training and employee job satisfaction. A more content organisational workforce contributes to cost reductions in an organisation. Gustafson (2002) suggests that when there is a high turnover rate in a business, it can cost between $3,000 and $10,000 USD per single employee. In the year 2000, it was estimated that the costs to an organisation for recruiting and training new employees cost 50 percent of the employee’s entire salary. Today, this figure might even be higher based on inflation rates. The loss of unhappy workers, due to improper or insufficient training, means a loss of intellectual capital that is critical to keeping the organisation productive and ensuring high quality work outputs. Every time a knowledgeable worker leaves an organisation due to dissatisfaction, productivity drops, measurably, along the organisation’s learning curve. Therefore, those who argue that HRM is the most valuable asset to an organisation may have a very defensible claim. One can consider an organisation with 5,000 employees. With a turnover rate of 10%, this would mean the organisation loses 500 employees every year. The per-employee costs to an organisation with high turnover rates, at a mean average rate of $6,500 per employee ($3000 + $10,000 / 2), would mean that the organisation would spend approximately $3.2 million (every year) to hire and train 500 new employees to fill vacant employment spots. These figures are substantial and would represent controllable costs that could be better managed by reducing turnover intentions in employees. With the knowledge that training and job satisfaction are directly correlated, HRM might potentially save a larger organisation, literally, millions of dollars in recruitment, selection and training activities. These funds, if controlled through a set of competent HRM strategies, could be allocated to product development, providing employee bonus schemes, buying new capital assets, or other strategies that give the business a better market and competitive position. Instead, companies that do not recognise the value of training as a function of human resources management, could be creating a situation where controllable expenditures become largely uncontrollable. Furthermore, Kotter and Heskett (1992) conducted an empirical study and found that when a firm has a unified organisational culture (an effort of HRM), it led to a 765 percent increase in profitability for a large group of companies studied between 1977 and 1988. These are substantially large statistics which show that HRM strategies, in this case organisational culture development, provide many financial benefits for an organisation. This longitudinal study by Kotter and Heskett over a period of 11 years provides quality support that HRM might be one of the most valuable activities for a firm. However, others that do not prescribe to the idea that HRM is the most valuable organisational activity might suggest that $3.2 million USD is an acceptable expenditure in recruitment and training and simply part of the status quo. They might also argue that the 11-year study conducted by Kotter and Heskett did not use a large enough sample of companies for the study, thereby only representing certain industries and not the whole of all global organisations. Furthermore, Siyanbola and Raji (2013) are under the belief that effective management and establishment of a cost control methodology is the best method of improving an organisation’s profitability. These authors suggest that using statistical metrics to measure variances in process and systems leads to greater control of costs within the organisation. They suggest that cost control methodologies as a function of management eliminate inefficiencies throughout the organisational model, better organises operations, and creates a checks and balances system (Siyanbola and Raji). Why would this necessarily outweigh the many financial advantages of an HRM strategy? Under a quality cost control system, when inefficiencies or redundancies are identified, managers would create a change environment that would tell employees about new ways of performing their job roles. Compliance-based policies and altered job descriptions would theoretically ensure that employees are meeting their new obligations related to process and operations. Therefore, it becomes a mandated system of job role activities designed to remove inefficiency and employees must submit to these new expectations. Failure to comply could lead to many negative consequences. Whilst this might not provide the most motivating and satisfying job environment, if employees want to retain their career positions, they will have to comply with job role changes (as part of cost control management strategy). It would be unrealistic in today’s bureaucratic organisations to believe that employees cannot be forced to comply with changes to their job roles as a mandate of a centralised business structure. Though HRM literature often suggests that a more decentralised organisation provides more motivation and encouragement to employees, historically the command-and-control system has made many organisations profitable. In fact, Boeing, a major international producer of aircraft, maintains a very autocratic structure with many employee controls to ensure top quality work outputs. This company makes billions of USD every year and is a foremost brand name for providing superior quality aircraft. Even with such a minimal emphasis on soft HRM practices, Boeing continues to achieve competitive and market success as a result of having autocratic compliance systems. In fact, Bloomberg Business (2007) illustrates that 60 percent of Boeing’s executive team have been with the organisation for over 20 years. This tend to support the argument that HRM is not the most valuable activity for an organisation as the highly-controlled, bureaucratic structure at Boeing continues to retain employees and bring the business substantial profitability and top quality work outputs. Yet another example can be illustrated by the Four Seasons hospitality company that achieves strong profitability and competitive advantage not through HRM, but through technology. The Four Seasons property purchased what is referred to as Optims Revenue Management software package that improves yield management. This software package takes real-time demand data that gives suggestions on how to make internal labourers more efficient and effective. The software calculates labour expenses for various activities in the business and creates suggestions for maximising profit for every internal transaction occurring along the business model. Costs are controlled by readjusting and allocating labour regularly in various areas of the value chain, thereby improving profitability for the hospitality firm. The Four Seasons case study illustrates that HRM is not the most financially-valuable activity, but using technologies that consider job roles and various inputs quantitatively that provides better control of costs and ensuring a higher annual income for the firm. Having viewed both sides of the argument, it would appear that HRM, though valuable, is only a moderate contributor to an organisation’s competitiveness, ability to retain employees and profitability. HRM is not the only strategy that can retain employees and keep them satisfied to remain over the long-term, as illustrated by the Boeing case study. Companies that control costs and quality through strong control systems and compliance measures, as shown by Boeing, will not necessarily dissatisfy employees or increase their turnover intentions. It is also a logical assumption to assume that these control systems at Boeing for ensuring top quality outputs are quite demanding, yet even with minimal HRM focus, the business still gives employees the impression that their job is prestigious and that the company is worth staying with. Hence, this particular autocratic company does not have the same type of expenses with high turnover rates even though HRM is only a minor consideration of total business strategy. Evaluating public relations strategy, culture and customer service systems Again, whilst there are clearly advantages of an HRM strategy, organisations that focus on building positive public relations seem to have greater opportunity for profitability and competitive advantage. One study conducted by Knapp (1990) examined nine airline companies that were undertaking a merger with another business entity. The study uncovered that when these businesses maintained relationships with many media sources that supported the rationale behind the merger and applauded its strategies, these companies witnessed significant stock value increases between twelve and 25 percent (Knapp). In an even broader study conducted by Slovin, et al. (1991), 42 different airline companies were studied over a 22 year period and found that when media relationships accompanied the merger announcement, their stock levels increased up to 15.75 percent. Many airline companies are highly centralised where there is less emphasis on soft HRM practices and more emphasis on control and compliance to meet stringent quality expectations. Sears (2009) states that public relations are fundamental for an organisation’s competitiveness, allowing the organisation to build a positive reputation and image in the minds of stakeholders and shareholders. It influences consumer attitudes and consumption behaviour and is a low-cost tool for marketing the business and achieves building stakeholder confidence in the organisation with the assistance of media discourse about the company’s strategies. In fact, Hilsenrath (2004) states that it is a common goal of organisations to create a positive media image for the firm and gives abnormally-high stock returns as a result. Stock value for a public organisation is critical to capital production that can be used for purchasing assets or even expanding the business. One example of this phenomenon was with Groupon, a discounting business with a web-based model, witnessed its stock close (on its first day of trading) at $24, which was $8 USD more than its valuated price as a result of intensive public relations attention. Interestingly, Groupon had actually not achieved profitability in three years at the time of its stock launch (Ovide 2011) and had high operational costs. This did not matter when using public relations strategy to build confidence in the firm’s strategies. The company was able to build rapid economic capital that would not have been achieved without a public relations strategy and there is no evidence that HRM contributed to the rapid financial advantages experienced by this company. However, if the argument about the total value of HRM is to be unbiased, the economic advantages of HRM strategies cannot be underestimated. Very, Lubatkin, Calori and Veiga (1997) state that having a positive organisational culture serves as an attraction for investors. These firms are considered to have high levels of prestige in the minds of the investor and are better suited to satisfying investor expectations (Very, et al.). Building a positive organisational culture, again, is a function of HRM strategy; attempting to build cohesion and a set of shared normative values that drives behaviour and attitude within an organisation. HRM, therefore, should theoretically give a firm new opportunities for attracting shareholders or other independent investors which provide a company with capital. If investors around the world are more willing to invest in the long-term opportunities of an organisation if it has a strong culture, then HRM would seem to represent one of the most fundamental activities internally. To build a positive organisational culture, an HR leader must focus on communications, serve as a teacher to others, and inspire a vision and mission that builds a sense of communal loyalty within the organisation (Fairholm 2009). Therefore, these are activities aligned with the soft HRM strategy that speaks to the minds and hearts of employees, using a leadership approach, to gain their willingness to follow and accept a set of ideals that become a cultural norm. Yilmaz and Ergun (2008) state that having a solid and cohesive organisational culture ensures better team functioning and reduces resistance to change. In an organisation that must regularly evolve to changing external market conditions, change is ever-present and resistance (by not having quality HRM strategies) could lead to poor performance, poor work outcomes and inability to meet with market changes that are critical for gaining competitive and profit advantages. As it pertains to organisational culture as a positive function of HRM and an advantage for an organisation, it should be recognised that HR leaders are not the only individuals that can build a positive and cohesive culture. Managers in the firm can use the same transformational strategies and work on building strong communications and vision to gain employee commitment and set desired behavioural norms. Therefore, HR managers are not the only resource that can accomplish advantages as it relates to positive cultural development. HR managers can recruit individuals most likely to share the same ideas and values of the existing culture, thereby simply selecting candidates that will not require long-term acclimation to the existing culture. It might even reduce turnover rates by selecting individuals who already fit the mould of the company’s culture without a great deal of post-hire HRM development. Montana and Charnov (2008) describe Expectancy Theory, which states that employees in the organisation will select a specific behaviour based on the level of perceived benefits they will receive for manifesting this behaviour. To show this, there is a leadership strategy known as transactional leadership, whereby a manager provides financial or other rewards to employees who meet specific, identified targets and exceeding performance expectations. Therefore, it might not just be HRM strategy that gains higher performance, but providing management-issued bonuses or other rewards that serve as incentives for adopting desirable behaviours or incorporating themselves into the existing organisational culture as a result of expecting rewards for these efforts. In no way would HRM recruitment efforts or training methods contribute to an individual’s willingness to conform and comply when they realise it will being them financial rewards for doing so. Giving employees a day-off with pay for achieving a target goal or adding a few hundred Pounds to their pay check are not necessarily activities that must be filtered through the HRM division of an organisation. Additionally, many researchers and practitioners believe that establishing effective customer service systems are keys to building customer loyalty and retaining existing customers. Choi and Chu (2011) conducted a study of 540 customers of hotels and found that service quality was a major predictor of whether to patronise the organisation in the future. Bad service will make them defect to another competitor, meaning a loss in revenues. One method of looking at service’s importance is by discussing banks in the United Kingdom. Poor service strategy is a main reason why customers move their assets from one bank to another. Banks in the UK often have poor queuing systems, waiting lines that are often long in retail and commercial banks. Adan, Boxma and Resing (2001) state that signs and physical barriers are important to making a queue appear organised and avoid customer frustration about which customers will be serviced first. In the UK banks, even if the HR leader has a strong recruitment strategy to find the most capable workers and identify those who can be an asset to the organisational culture, if there are legitimate service-related problems in the actual operational model, customers are still going to be frustrated or disappointed. Heavy training in how to perform service work quickly and competently will still have negative outcomes if the actual service model (such as UK bank queues) continues to linger. Even the most well-developed and intensive set of HRM strategies to improve customer interaction quality and train high productivity guidelines cannot make tangible operational failures appear top quality or satisfactory for customers that provide revenues sustaining a business. Deming (2002) states that 85 percent of all business failures are a direct result of poor management and strategy. Managers that set up poor service systems can have the most talented, productive and motivated employees developed through HR strategies, however when operations are poor, management quality and operational strategy, in the long-term, is far more critical than HRM practice and strategy. When viewing the issue of public relations and customer service, it would seem that these activities are the most critical and valuable to an organisation. Capital improvement and more shareholder/investor interest in the organisation are critical to maintaining a profitable position and being able to use resources to expand the business or gain market share. If there is poor customer service, valuable customer segments are going to defect. It is highly doubtful that well-trained employees that share a single, cohesive cultural ideal are going to be sufficient for retaining customers when there is a poor service mentality and structure within the organisation. Even though having an organisational culture can theoretically build more investor interest in an organisation, supported by HR-based strategies, it is doubtful that without public relations and effective service systems that the organisation will maintain long-term revenue growth and maximise its stock value. In society, today, when thinking of the factors that drive shareholders to purchase stock in a firm, it is rare to hear in media that it had to do with well-trained employees. It is the ability of an organisation to retain customers, maintain a positive market and competitive position, and allocate its tangible resources in a way that provides customer value. Would a shareholder, knowing that a firm’s customer service systems are poor and seeing revenue losses on financial documents, readily invest in a firm with only a strong recruitment and training model? This is highly doubtful, therefore indicating that HRM might not be the most valuable asset of an organisation today. Further evidence of HRM as a moderate contributor The Sony Corporation has historically had a business where there was little emphasis on HRM as a means of improving its competitive position. As a Japanese company, there was high power distance between managers and employees with little opportunity for shared decision-making or consultation with lower-level employees. This long-standing set of beliefs maintained decision-making at the highest hierarchy and employees expected to comply with policy and rules related to job performance. In 2006, the company began to question this strategy of strong centralisation and began working on softer elements of HRM to gain employee commitment and reduce turnover. The business hired a new CEO in 2006 named Howard Stringer who began to bring Western models of HR into the business in an effort to decentralise and build better job satisfaction outcomes. Stringer sought to make employees more integral resources in decision-making and eliminate the high level of power distance between managers which was impacting firm performance. Years after Stringer’s tenure as CEO, the company developed a more positive HRM system to decentralise the company and motivate employees to be more committed. However, in 2011 the company reported a massive loss of 199.8 billion Yen and in 2012, this loss was 67.3 billion Yen (Hirai 2012). These were the largest financial losses ever reported in Sony’s long operating history. Hence, even though the firm was working on implementing a new set of HR strategies, the company achieved no revenue advantages and failed to properly adapt to the competitive landscape and other external market conditions. In the case of Sony, the problem was that management was not divesting under-performing business divisions and undertaking competitive marketing strategies to outperform other competition in this very saturated market. As indicated by Deming (2002) the majority of these mistakes were a direct result of poor management strategy developments and the existence of an HRM ideology did nothing to improve the capital or competitive position of this firm. The case of Sony provides strong evidence that HRM is not always going to be a contributor to organisational success, despite having recruitment, training and soft strategies in place that work on improving the working conditions and job role relevancy for employees. In this particular case, Sony achieved no advantages whatsoever as a result of injecting a Western HRM concept and now Sony struggles to remain competitive in the consumer electronics and movie-related industries. If these advantages of a new HRM policy had been a reality, it would have reflected in financial reports justifying that the firm was selecting the most appropriate strategies for growth and improving market share. Yet another example of this is Volkswagen, a company that has focused in recent years on work-life balance strategies to improve worker job conditions and satisfaction. However, despite attempts to improve employee satisfaction, the carmaker is coming under scrutiny for continuing to inject millions of Euros into under-performing luxury cars. The business loses $38,252 USD for every Phaeton sold, $25,459 on the Vel Satis, and thousands on the Jaguar X-type, Renault Laguna and the high-priced Bugatti Veyron models (to name only a few). The company has failed to comment why it continues to invest high financial resources on certain models, which is baffling industry experts. Once again, the Volkswagen case illustrates that whilst HRM strategies at the company designed to improve work-life balance are being implemented, it is still management failures that make Volkswagen continue to accept losses on many, many different car models. Supply strategies and procurement, coupled with an unrealistic estimate of demand for these vehicles and price-sensitivity, force the company to lose revenues and competitive position. Volkswagen boasts training on competency, providing career development paths and ensuring a balance between personal life and work as concentrated HRM strategies. However, this does not supersede management talent and proficiency in decision-making which would be a more substantial contributor to Volkswagen achieving more profitability and growth in many international markets. Conclusion Though there is evidence that HRM can improve turnover rates and turnover costs, satisfy employees, and give employees skills required to achieve top quality work outputs, HRM does not appear strong enough to maintain an organisation’s competitive advantage or long-term profitability. The case study of Sony, Volkswagen, the UK banking sector, and Groupon tend to support that public relations, competent management decision-making, and service systems contribute more largely to a firm’s ability to be sustainable financially and competitively. To be completely impartial in this analysis, it should be recognised, however, that HRM can reduce some costs to the business and, likely, provide employees with the ability to engage with customers more effectively. HRM is certainly not a detriment to the business, which was clearly identified in this report, however it does not appear to be the most valuable activity within a business. The Sony case is the most compelling situation where a very well-developed set of HRM strategies to boost commitment and dedication had absolutely no impact on the firm’s competitive advantages or its ability to outperform competition. Based on the research identified in this report, HRM should be considered a moderate contributor to organisational success, but not the primary engine by which an organisation thrives and grows. Even with effective training, recruitment and job satisfaction improvement strategies, a business can fail to build customer loyalty or improve its revenue position. Hence, HRM is not the most valuable activity in a firm and seems superseded by managerial talent, brand-building in public relations, and in building effective customer service systems. HRM seems more effective for building a cohesive organisational culture which does make investment in the organisation more attractive to shareholders and other investors. 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