Strategic HRM and Porters Competitive Strategy - Example

STRATEGIC HRM AND PORTERS COMPETITIVE STRATEGY Name Course Tutor University Department Introduction Many firms are now acknowledging that strategic human resource management is crucial in today's competitive business. Edwards & Rees (2006) noted that the awareness of its importance will be crucial in the performance of a firm. In a real life situation, this awareness can be validated since it is argued that no matter how advanced a company can be, it will always be very hard for a business to sustain its success unless they employ various strategies as a way of complimenting its operations. For this reason, there is a need to match the characteristics of top managers with the nature of the business. Within academia, there has been growing awareness of business competitiveness. Due to the frequency and uncertainty in business, increased competition, need to adapt to new technologies and cost reduction, many organizations are finding it difficult continuously improve their productivity. Strategic human resource management has thus become significant for the development of newer approaches to manage human resource (Purcell 2001). SHRM stresses on the need for a plan to be formulated within the organizational strategies and objectives context so that it can adapt to the ever-changing business environment (Armstrong, 2009). Even though the internal organization characteristics are imperative, external environmental characteristics such as nature of competition and customer preferences are crucial as they influence a firm performance. In this paper, we will adapt Porters framework of competitive strategy. Using his proposed framework, we will analyze three possible generic strategies for competitive advantage in business from literature sources. But first, we will discuss competitive strategy and how behavioral perspective has enabled us to live competitive strategies with HRM policies and practices. Competitive Strategy An organization's ability to understand the external competitiveness business environment strategy helps it to determine particular products or services it should offer. It also helps a firm to make a decision on whether to lower the cost of their goods or services or provide goods with superior qualities. The ability of a firm to improve and maintain its competitive advantage is considered to be crucial for its progress and success. Therefore, most organizations employ strategic initiative as a way of complementing performance. A strategic initiative may be defined as the ability to oversee the strategic performance in the market where a firm is operating. In other words, in such situation a company is said to play a reactive rather than proactive role since it has gained the initiative and its competitors are forced to respond. It is argued that a company that gains a strategic advantage gain full control over their goals or purposes. For instance, is firm gains an advantage that is challenging for its competitors to eliminate; it will be controlled and thereby increasing its effectiveness. Michael Porter has described this concept as the principle of competitive strategy. From his discussion, a firm can use three different strategies that a firm can use to gain competitive advantage: cost leadership, differentiation and focus (Porter 1985). In the cost leadership strategy, firms typically sell or produce its product and services with the lowest prices in the industry as way to gain a competitive advantage. Differentiation strategy refers to where a firm focuses on particular characteristics of goods or services to produce high-quality products or services to customers. On the other hand, focus strategy refers to when the company concentrates on the niche markets within the wider market to target particular customers, thus becoming a unique producer. Understanding changes in the outside business environment is significant for human resource strategy, for example, information about demographic and cultural changes to predict that skills and the number of workers will be available in future. Considering the emphasis on strategies that improve the firm performance, there is several human resource management that can be adopted to support Porters model of business strategies. Schuler & McMillan (1984) proposed several HRM philosophies: accumulation, which refers to the selection of a candidate based on their personal characteristics, utilization, and selection is based on technical characteristics, and facilitation, the ability of workers to work as a team. In this regard, Schuler and Jackson (1987) used this model to argue that performance will improve once the company HR practices fully reinforce competitive strategies To arrive at this conclusion, they stress that different competitive in HR practices will result in different kinds of employee behaviors. Competitive Strategy: Behavioral Perspective The link between competitive strategy and employee behavior give us the foundation for predicting, and modifying both HR strategy and practices. The foundation is based on employees need apart from the skills, ability, and knowledge that is required to perform particular task (Barney 1991). Relatively to the task specific skills, it is more important to understand what is required of the worker in a social setting. The employee behaviors play significant roles, particularly in role conflict and ambiguity. Thus, the functions of these behaviors are assumed to be crucial in the implementation of competitive strategies. However, their role behaviors can vary across competitive strategies. Cost Leadership Strategy Cost leadership strategy is based on a firm's ability to produce and sell its products or services at a lower cost than its competitors. However, this strategy does not entirely rely on reducing cost but rather strategic planning and review of the firm to improve its bottom line through efficiency. In some organization, cost reduction is used efficiently to protect its markets from its competitors by responding to their strategy in the market by reducing products or services prices (Armstrong 2008). This strategy makes a firm to be internally focused on tight controls, minimization of overheads and pursuing economies of scale. This is a good way to position a firm to the advantage of cost by increasing its market share in the industry by supplying its products and services at a lower cost. As a result, the company's cost advantage is translated into price advantage to the customer, thereby increasing the market share. Increasing the market share gives the firm an opportunity to execute economies of scale thus cutting the overall cost of production. If the firm manages to occupy a larger market share, that is, more competitors are reduced; it becomes easier to apply economies of scale. Once the company transforms cost reduction into cost advantage to its customer, it is said to be pursuing a cost leadership strategy. In HRM, the primary objective is to increase the productivity of the firm, that is, output per individual. This translates to a reduction in the number of workers, as well as the wage levels. Schuler and Jckson (1987) noted that if the management wants to pursue cost leadership, they can design jobs that are repetitive, reducing the number of employees, rewarding short-term results, and less training. For instance, various industries decreased their workforce from 1980 steel, 40%, metal 30%, and textile by 17%. As a result, their productivity increased fro, 1.2% to about 4.1 % annually. Similar strategies have been employed in other companies such as Chrysler and Ford. Furthermore, many firms have also employed the strategy of reducing wage levels. For example, companies such as Whirlpool and Electrolux have reduced the overall labor cost by shifting their production plants from the United States where labor wages are much higher in other countries where labor is cheap. Consequently, this cost-effective strategy has put the companies back on the road to profitability. Since this strategy focuses on the general skills, the recruitment process is solely largely internal labor orientation. People are normally hired early in their careers, and then through orientation, training, and internal promotion they end up in the top positions in the organization. The internal orientation strategy helps an organization to predict which skills and capacities they will have in future. Also, since most of the employees are retained in the firm, they build strong relationships with one another, thereby increasing cooperation and coordination. Internal orientation labor also helps a firm to save money because it minimized employees interviewing and hiring expenses. For instance, a Brutish fresh produce IPL recruits approximately 80% of its workforce internally. Employing internal orientation in cost reduction may also lead to a loyal soldier HR strategy, which concentrates on the importance of hiring and retaining trustworthy workers. According to Leopold, Harris & Watson (2005), firms that use this strategy, their work design allows the workers have many roles and different tasks. They also an emphasis on loyalty and thus they hire people they believe would fit in their organization culture. For this reason, firms ensure that they satisfy their workers and build strong relationships to maintain a higher employee turnover. Majority of their workers were employed in their earlier stage of their profession, and thus they have received extensive training in various skills over time. Their careers path will include varying positions, promotions that may not be related to previous work experiences, and so on. Their performance appraisals allow the workers to work as a team through cooperation. The employees' compensation comprises long-term benefits that are awarded depending on the organizational performance. Employing external orientation in cost reduction results in bargain labor HR strategy. In this case, the company recruits workers who do not demand higher wages. The tasks are designed in a way that the manager oversees and control employees' efforts. The roles are clearly defined, and this makes or easier for an individual to learn easily. These simple tasks do not necessarily require developed skills and thus do not attract high wages. For example, IPL a fresh fruits supplier company employs agency workers in various roles including sorting and packing fruits for sale. Most of the work in these roles is routine, and when the work is low, the agency workers will not be needed by the company (Pfeffer 1994). This category of employees does not demand strong relationship and meeting the long-term demands, and thus there is no career path for advancement or promotion. Training is only required to educate on specific skills required to complete a particular task. Performance appraisal emphases on daily feedbacks, but rarely integrate formal measures. Long term benefits to employees are minimal because in most cases they are compensated for the work performed in a day. Cost-reduction can also be pursued by employing more part-time employees, subcontractors, flexible jobs. In other words, there are several ways an organization can employ to reduce costs (Huselid, Jackson & Schuler 1997). Even though the methods used may differ, they all share the same objective to reduce the output cost per worker. These organizations focus on creating efficiency through job standardization so that the workers can learn various easy tasks. For example, a machine operator role is to fill carton in the machine so that it does not stop. Another aim of cost strategy is to ensure that the worker becomes skilled and efficient when performing tasks. Doing repetitive tasks help the employee to learn how they can minimize errors. Studies are done to find how to perform tasks faster, and thus individuals should follow the best practices. Differentiation strategy Porter noted that differentiation strategy is when a company pursues to be unique in the industry where it operates by emphasizing on the values that are valued by the customers. Their primary objective is to create value for which their customers are willing to pay more. This strategy can be achieved through high quality, customer service, and greater awareness. However, the main challenge for a firm pursuing this strategy is to find features that will provide valuable benefits to the users. Also, the company should be capable of delivering that benefit, and it must be difficult for its competitors to imitate. These conditions can either be created informally or through an official corporate policy. Creation of unique products or services through innovation and new venture development may be as a result of the decision of top management or other employees who have taken the initiative to solve a problem in a different approach or to change. Research indicates that many successful companies allow all level of organization to participate in making the decision to pursue development initiatives through creativity (Lundy & Cowling 1996). For example, 3M formed a policy that allows employees to commit about 15% of their time on projects as a way of encouraging them to be more creative. The firm may also use a less systematic approach to encouraging the workers to give suggestions on how they can improve how they do their job or making products. Firms are pursuing differentiation strategy, the profile of employees include a higher level of cooperation, creativity, long-term focus, high-quality concern, risk taking, and high tolerance to ambiguity (Schuler, Jackson & Storey 2001). The results of pursuing differentiation competitive strategy in human resource management include hiring skilled personnel and use a less authoritative management style, giving workers more discretion, investing in human resource, rewarding employees, and appraising performance. Consequently, the employees feel more in control, and their morale is enhanced and thus greater commitment to self rather than the firm. At the same time, the firm can also benefit because of the success of differentiation, for instance, in Hewlett-Packard and PepsiCo where both employees and organization benefit from this strategy. Therefore, differentiation strategy has substantial implications for human resource management. Unlike emphasizing on the employees management to work harder or smarter, differentiation strategy requires their employees to work differently, and this is what is regarded to be the key ingredient (Edwin & Schweiger 1998). A firm can either employ internal or external orientation in differentiation strategy. When internal orientation is combined with a differentiation strategy, it results in Committed Expert HR Strategy. Firms that use this strategy pursue to hire and retain workers who have specialized in performing particular tasks. Their works are designed in such a way that the employees are allowed to be innovative in creating better approach of managing their work. Employees are hired based on their potential to fit in that organization culture. People are recruited and hired because of their potential fit with the organizational culture, as well as their ability to become professions in particular areas (Schuler, Jackson & Storey 2001). Employees are hired early in their careers, but they are trained to become experts in particular fields such as finance or marketing. Employees' performance appraisals are designed to achieve both competition and cooperation among the employees. The employees are offered various promotions that are in line with their previous jobs to increase responsibility. Their compensation packages are considerably high Compensation is relatively high and usually includes a good benefits package that ties employees to the organization. Furthermore, they offer long-term training to their workers to strengthen their expertise. For instance, Coca-Cola Company hired university graduates as a trainee who later professional in the various field and promoted to head Coca-Cola in various divisions. Alternatively, a firm may combine external orientation with a differentiation strategy resulting to a Free Agent HR Strategy. Its primary role is to hire individuals who have the necessary skills; however, they are not expected to remain in the company for a long period. For this reason, work is designed to ensure that the workers have a wide-ranging responsibility in their specific line of work and they have the independence to decide how to perform their work (Marchington & Zagelmeyer 2005). Since the employees are not required in the firm in long-term, commitment is avoided or efforts to create strong working relationships between the workers and the company. During recruitment, skills and experience needed to perform specific jobs are given priority. The organization opts to higher outside the organization, especially for higher-level positions and so employees do not expect long-term careers with a firm. Also, firms using this strategy their employee performance appraisal emphasizes of task outcomes. The companies aim at hiring individuals with top skills, and thus their short-term reward is high. Consequently, long-term benefits are avoided because workers are not expected to work for the same company for a long period (Cooke, Shen & McBride 2005). Employees are paid depending on the skills they possess, as well as performance results. For example, Accenture, a global IT outsourcing firm hire top skilled IT professional who receives huge salaries to perform technical roles. Unlike cost strategy that aims at achieving efficiency, differentiation strategy is focused on innovation. The high autonomy processes encourage innovation. The primary objective of a differentiation strategy is to create new products or services that are better than those of their rivals (Brown 1990). Similarly, this objective is more likely to be met if the people involved are free to try new approaches. Besides, close interaction between employing through teamwork allows them to learn new things. The managers who are supervising the work can thus determine the best method of performing the tasks. It becomes easier to successively complete tasks because each person performs specific tasks that are overseen by the supervisor. Focus Strategy Focus strategy is used by organizations that selects a segment in the industry and put more effort in its strategy to meet their need by excluding the rest. This concept of segmentation has become an important concept in marketing and development. In this strategy, a company can either become a differentiator or cost leader. Nevertheless, in this case, a firm focuses on a particular segment, product line or geographical with the intention of serving them very well by either reducing cost or differentiates products or services (Kamoche 1996). The idea behind focus strategy is to specialize in their activities such that other broader company (Cost leadership and differentiation) will not be able to offer their best. This is also referred as the niche strategy. As a result, superior values are developed where those focusing on broader line cannot specialize. A firm pursuing focus strategy can either use cost leadership of differentiation strategy. A focus-low cost strategy refers to where a firm achieves cost advantage in the target segment. In other words, the organization exploits the cost behavior, in particular, segment to out-compete the rivals by reducing cost. On the contrary, differentiation focus strategy the firm offers focused segment something different from the competitors. This strategy exploits special needs of a particular segment, where the customer can afford to pay a premium price (Becker & Gerhart 1996). The implications of managing people are very significant to an organization. At Corning Glass Works, the idea quality products or improvement often come from the workers. However, to carry on these concepts the employees make short-term action team that solves particular problems. The staffs are also allowed to suggest the improvement to their managers rather than the traditional suggestion box method. At Corning, quality improvement refers to encouraging the staffs to be more committed to quality and continue to improve. Nevertheless, quality improvement approach is also backed by human resource practices such as decision making, feedback, team work, clear job descriptions and flexible job classification. Improving quality means changing the production process so that the workers can be more involved and flexible. As a result, their job classification also changes. For instance, Brunswick's Mercury Marine division reduced the number of job classification from 126 to 12, consequently increasing flexibility in the process, as well as the workers. The plant operator gained an opportunity to learn new skills such as inspecting their work, maintenance, and running the machines. A company that employs such human resource practices, employees are more willing to commit, and thus there are more willing to give their best. These practices improve not only quality but also the volume output increases too. A good example is the case of L.L. Bean that employ focus competitive strategy, and the sales increased ten times and the number of workers increased five times. The qualities of employees behaviors that are required for pursuing this strategy of focus are relative repetitive jobs, intermediate focus, high-quality concern, modest cooperation, high output, interdependent behavior, and low-risk tasks. In organizations that pursue focus strategy, fewer employees are required, greater employee commitment and utilization to produce the same output (Jackson, Hitt & DeNisi 2003). When quality increases, the demand also increases, however, this demand can be met by a segment of employees than in previously. Toyota produces more than 3.5 millions vehicles annually with a workforce of about 25,000 employees, which was about the same number when the company was producing 1 million vehicles. This has been facilitated by the cooperation of workforce, thus increasing output. Moreover, the company now requires fewer workers to repair the rejects that are produced as a result of poor quality. In an attempt for a firm to gain competitive advantage through focus strategy, key human resource practices include fixed job description and high level of staff participation. Performance appraisals are mostly short-term and result focused. The management style is relatively egalitarian, and employees are guaranteed some security. Moreover, the firms offer a broad and continuous training and development of employees. These human resource practices help in facilitating quality improvement to ensure that the staffs is reliable to identify with the firm's mission and flexible when offered new job assignments and in the case of changes in technology. Conclusion Globally, many firms have been attacked for failure to keep prices down, maintain quality, and ignore differentiation. As a result, many companies have opted integrating human resource management and business strategy for their success and continuity. They are pursuing a competitive strategy aimed at cost reduction, differentiation, and focusing. The primary objective of employing these strategies is to gain a competitive advantage over their rival in the same industry either both local and international levels. Even though the current market conditions and cost tends to limit choices of competitive strategy, these constraints can be used as their choice of strategy. Research indicates that effectiveness can be increased by incorporating human resource with competitive strategy (Wright et al. 2005). In this view, human resource can be considered to be an important asset in the organization; even its failure or success is not expected to turn entirely to managing people. References List Armstrong, M. 2008. Strategic Human Resource Management: A Guide to Action, 4th Edition, Kogan Page, London. Armstrong, M.A. 2009. A Handbook of Human Resources Management. (11th ed.).London: Kogan Page. Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1): 99–120. Becker, B.E & Gerhart, B. 1996. The Impact of Human Resource Management on Organisational Performance: Progress and prospects. Academy of Management Journal, 39: 779–801. Brown, L. 1990. 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