When considering approaches to the formulation of HR strategy it is necessary to underline the interactive (not unilinear) relationship between business strategy and HRM, as have Hendry and Pettigrew (1990). They emphasized the limits of excessively rationalistic models of strategic and HR planning. The process by which strategies come to be realized is not only through formal HR policies or written directions: strategy realization can also come from actions by managers and others. Since actions provoke reactions (acceptance, confrontation, negotiation etc), these reactions are also part of the strategy process. It is desirable to treat HR strategy as a perspective rather than a rigorous procedure for mapping the future. This does not preclude the preparation of strategic plans that programme a defined strategy in which specific innovations have been proposed, but it does emphasize the fact that those strategic plans cannot be treated as inviolable; strategic plans need to evolve as circumstances change. Mintzberg (1987: 66) made it clear that strategic management is a learning process: ‘Formulation and implementation merge into a fluid process of learning through which creative strategies evolve’.
Many different routes may be followed when formulating HR strategies – there is no one right way. On the basis of their research in 30 well-known companies, Tyson and Witcher (1994: 22) noted that: ‘The process of formulating HR strategy was often as important as the content of the strategy ultimately agreed. It was argued that by working through strategic issues and highlighting points of tension, new ideas emerged and a consensus over goals was found.’
They also commented that: ‘The different approaches to strategy formation reflect different ways to manage change and different ways to bring the people part of the business into line with business goals’ (ibid: 24). In developing HR strategies, process may be as important as content.
Propositions on formulating HR strategy
Boxall (1993) drew up the following propositions about the formulation of HR strategy:
- the strategy formation process is complex, and excessively rationalistic models that advocate formalistic linkages between strategic planning and HR planning are not particularly helpful to our understanding of it;
- business strategy may be an important influence on HR strategy but it is only one of several factors;
- implicit (if not explicit) in the mix of factors that influence the shape of HR strategies is a set of historical compromises and trade-offs from stakeholders.
It is also necessary to stress that coherent and integrated HR strategies are only likely to be developed if the top team understands and acts upon the strategic imperatives associated with the employment, development and engagement of people. This will be achieved more effectively if there is a HR director who is playing an active and respected role as a member of the top management team.
A further vital consideration is that the effective implementation of HR strategies depends on engaging the stakeholders – line managers, staff and their representatives – by involving them in the design process. This is particularly important in the case of line managers, who will be directly concerned with implementing the strategy.
Finally, there is too often a wide gap between the rhetoric of strategic HRM and the reality of its impact, as Gratton et al (1999) stress. Good
intentions can too easily be subverted by the harsh realities of organizational life. For example, strategic objectives such as increasing commitment by providing more security and offering training to increase employability may have to be abandoned or at least modified because of the short-term demands made on the business due to financial pressures.
Schools of strategy development
Purcell (2001: 74–75) has identified three main schools of strategy development: the design school, the process school and the configuration school.
The design school is deliberate and is ‘based on the assumption of economic rationality’. It uses quantitative rather than qualitative tools of
analysis and focuses on market opportunities and threats. What happens inside the company is ‘mere administration or operations’.
The process school adopts a variety of approaches and is concerned with how strategies are made and what influences strategy formulation. ‘It is much more a study of what actually happens with explanations coming from experience rather than deductive theory’ (Purcell, 2001). As Purcell suggests, the implication of the design concept is that ‘everything is possible’, while that of the process school is that ‘little can be done except swim with the tide of events’. The rationalist approach adopted by Purcell’s design school broadly corresponds with the classical approach to strategy, and Porter (1985), with his concepts of competitive advantage and the value chain, is a typical representative of it. Purcell’s process school is the postmodern version of strategy, of which Mintzberg is the most notable exponent.
The configuration school draws attention to the beliefs that: first, strategies vary according to the life-cycle of the organization; second, that they will be contingent to the sector of the organization; and third, that they will be about change and transformation. The focus is on implementation strategies, which is where Purcell thinks HR can play a major role.
Approaches to HR strategy formulation
Ideally, the formulation of HR strategy is conceived as a process that is closely aligned to the formulation of business strategies. HR strategy can influence as well as be influenced by business strategy. Sparrow et al (2010: 69–70) go further: ‘Strategy ceases to exist in the ideal situation; there is business strategy, and this will be associated with an HR process. The two become synonymous with HR nested within the business strategy. You only have a separate HR strategy when HR is not playing at the highest level.’
The process of defining HR strategy involves the initial step of answering the following questions posed by Becker et al (2001: 41):
- What are the performance drivers for each goal?
- Which strategic goals/objectives/outcomes are critical rather than just nice to have?
- How would we measure progress towards these goals?
- What are the barriers to the achievement of each goal?
- How would employees need to behave to ensure that the company achieves these goals?
- Is the HR function providing the company with the employee competencies and behaviours necessary to achieve these objectives?
- If not, what needs to change?
Research conducted by Wright et al (2004) identified two approaches that can be adopted by HR in strategy formulation: the ‘inside-out’ approach and the ‘outside-in’ approach. The inside-out approach begins with the status quo HR function (in terms of skills, processes, technologies etc) and then attempts (with varying degrees of success) to identify linkages to the business (usually through focusing on ‘people issues’), making minor adjustments to HR activities along the way. The ‘outside-in’ starts with the customer, competitor and other issues the business faces. The HR strategy then derives directly from these challenges to ‘create real solutions and add real value’ (ibid: 37). Wright et al made the point that ‘the most advanced linkage was the “integrative” linkage in which the senior HR executive was part of the top management team, and was able to sit at the table and contribute during development of the business strategy’ (ibid: 37). Their recommendations on adopting an outside-in approach are set out below.
Source review Adopting an outside-in approach to the formulation of HR strategy – Wright et al (2004: 45–46)
- Develop a formal process for involving line executives in the development of HR strategy
- Have formal mechanisms for tracking developments in the external environment as part of the process.
- Begin with the assumption that everything the current HR function is doing is either wrong or does not exist.
- Identify the key business and people metrics that will determine or indicate the success of the business, then constantly track and communicate those metrics to the entire internal HR community.
- Based on the business issues and metrics, develop the HR strategy that will maximally drive performance on those metrics.
- Remember that the HR strategy is a process, not a document, intervention, or event. Any strategy is a pattern in a stream of decisions, and as business and people issues change or obstacles appear, the pattern (strategy) will also have to change.
In reality, however, HR strategies will often flow from business strategies, which will be dominated by product/market and financial considerations. But there is still room for HR to make a useful, even essential, contribution at the stage when business strategies are conceived, for example, by focusing on resource issues. This contribution may be more significant if strategy formulation is an emergent or evolutionary process – HR strategic issues will then be dealt with as they arise during the course of formulating and implementing the corporate strategy.
Strategic options and choices
The process of developing HR strategies involves generating strategic HRM options and then making appropriate strategic choices. It has been noted by Cappelli (1999: 8) that: ‘The choice of practices that an employer pursues is heavily contingent on a number of factors at the organizational level, including their own business and production strategies, support of HR policies, and cooperative labour relations’. The process of developing HR strategies involves the adoption of a contingent approach in generating strategic HRM options and then making appropriate strategic choices. There is seldom if ever one right way forward.
Choices should relate to but also anticipate the critical needs of the business and the people in it. They should be founded on detailed analysis and study, not just wishful thinking, and should incorporate the experienced and collective judgement of top management about the organizational requirements while also taking into account the needs of line managers and employees generally. The emerging strategies should anticipate the problems of implementation that may arise if line managers are not committed to the strategy and/or lack the skills and time to play their part, and the strategies should be capable of being turned into actionable programmes. Consideration needs to be given to the impact of the five forces on HR policy choice identified by Baron and Kreps (1999):
- the external environment (social, political, legal and economic);
- the workforce;
- the organization’s culture;
- the organization’s strategy;
- the technology of production and organization of work.
A methodology for formulating HR strategies
Wright et al (2004: 40) pointed out that the basic approach to the development of a people strategy resembles that of any strategic decision process:
- Scan the firm’s external environment.
- Identify the strategic business issues that need to be addressed.
- Pinpoint people issues critical to the success of the business.
- Develop a strategy to address the relevant issues, including connecting relevant metrics to the strategy.
- Communicate the strategy.
Considerations to be taken into account
The main considerations to be taken into account in formulating HR strategies are achieving vertical and horizontal fit.
Achieving vertical fit – integrating business and HR strategies
Wright and Snell (1998) suggested that seeking fit required knowledge of the skills and behaviours necessary to implement the strategy, knowledge of the HRM practices needed to elicit those skills and behaviours, and the ability to quickly implement the desired system of HRM practices.
When considering how to integrate business and HR strategies, it should be remembered that business and HR issues influence each other and in turn influence corporate and business unit strategies. It is also necessary to note that in establishing these links, account must be taken of the fact that strategies for change have also to be integrated with changes in the external and internal environments. Fit may exist at a point in time but circumstances will change and then fit no longer exists. An excessive pursuit of ‘fit’ with the status quo will inhibit the flexibility of approach that is essential in turbulent conditions. This is the ‘temporal’ factor in achieving fit identified by Gratton et al (1999). An additional factor that will make the achievement of good vertical fit difficult is that the business strategy may not be clearly defined – it could be in an emergent or evolutionary state. This would mean that there could be nothing with which to fit the HR strategy.
Achieving horizontal fit (bundling)
Horizontal fit or integration is achieved when the various HR strategies cohere and are mutually supporting. This can be attained by the process of ‘bundling’ as described in Chapter 3. Bundling is carried out by first identifying appropriate HR practices, and then assessing how the items in the bundle can be linked together so that they become mutually reinforcing and therefore coherent. This may mean identifying integrating processes and finally drawing up programmes for the development of these practices, paying particular attention to the links between them.
The use of high performance, high involvement or high commitment systems as described earlier in this chapter is an integrating process. The essence of these systems is that they each consist of a set of complementary work practices that are developed and maintained as a whole.