Aligning HR Strategy With Business Strategy

Human Resources Executive Program

Challa S.S.J.Ram Phani

Dilbert on HR

Alignment and Consistency

Organizational Alignment
Congruence between: (a) HR practices and the key success factors they are supposed to promote; and (b) the business context (strategy, environment, organization of work, people, and culture)

HR Consistency
Consistency within the set of HR policies and practices:
Technical complementarities Message congruence Reputational consistency (over time) Interpersonal consistency (among subgroups)

A critical challenge is to sustain this alignment and consistency in dynamic or changing environments.

Stars, Guardians, Foot Soldiers

Organizational Performance
HIGH star

Individual Performance on the Job

LOW guardian

foot soldier HIGH

LOW

Stars, Guardians, Foot Soldiers

Stars
Big upside for success, low downside for failure High reward dispersion Many are called, few are chosen Experimental recruitment Individual ability is key

Foot Soldiers
Performance evaluation focuses on acceptable performance Performance-based rewards can be used at aggregate level Seniority or politics may be used in hiring and reward allocations

Guardians
Failure penalized severely Low reward dispersion Careful screening/orientation Slow advancement from within Fit often important (to facilitate communication and coordination)

Bundling Star and Guardian Tasks

Guardian tasks will tend to swamp star tasks, due to:
Risk-aversion. Differences in controllability (usually easier to prevent disaster than to ensure success).

If possible, unbundle star from guardian tasks. If not possible to unbundle:

Provide insurance and put special emphasis on star elements. Rely on intrinsic motivation, social rewards, and/or promotion, which usually foster the desired mix of risktaking and caution better than do explicit incentives.

Key Issues in Job Design

Bundle together tasks that:
Have similar measurement properties (i.e., easy or hard to measure)
Involve similar skills/recruitment demands

Involve similar market wage demands

Are complementary (e.g., sales and follow-on service) Are comparable in terms of the workers ability to control outcomes None of these applies to the Portman PVs

Strategic HR Alignment at Portman

Strategy and Vision Differentiation Service! High cost Total experience Reputation Key HR Success Factors
1. Zero defect 2. Cooperation, 3. Reputation service; empowered teamwork, PVs who are fast, seamlessness flexible, agile, show initiative

Degree of Alignment

Human Resource Levers Recruitment/Selection Training/Development Reward and Recognition Due Process Careers/Promotions Job Design Employment security Measurement Information Sharing

Zero defect

(- / 0 / +)__ Teamwork

___________ Reputation

Substantive Focus
Initial focus: evolution of HR practices and employment relations
Alignment between business strategy and organization-building (particularly HR practices) at founding Examine patterns of organizational development
Continuous versus discontinuous change? What affects how/when the HR function emerges? How do founding conditions affect evolution (path dependence)?

Substantive Focus
Additional topics added by other GSB faculty:
Strategy formulation and implementation Financial contracting Globalization and sourcing decisions

Ultimate aim: link early organization building and HRM to success/failure:

Survival Time to market Growth Profitability

Meanwhile...
Examine the different HR models that founders adopt and their implications:
For early organizational development For evolution of the company

Examine lock-in and social influences on organizational evolution

Example: administrative overhead

Relevance for Established Firms

Insights into alignment and consistency Origins, evolution, role and effectiveness of the HR function Understanding HR lock-in Organizational structure and boundary issues

Managing/integrating acquisitions
Replicating the dynamism of start-ups in more mature enterprises

SPEC Design
Phase One
Collected retrospective histories from:
Founder CEO Senior executive with HR responsibility

Phase Two
Conduct follow-up interviews after:
Two years Five years

Gathered information from:

Company documents (e.g., business plans) Public sources (e.g., newspapers)

Build continuous record from public sources, including information on:

IPOs Mergers/acquisitions Executive changes Etc.

Industry Breakdown in 1996

Research Manufacturing Semiconductor Medical-related Telecommunications Computer-related
0 10 20 30 40 50 60

Percentage of Firms

Sample
High-tech firms in As of 1996: Silicon Valley Median Age: 7.3 Years Median Size: 89 Oversampled larger employees and younger firms
100 firms studied in 1994
First revisited in 1996

Range: 9 to 2042

75 additional firms added in 1995

First revisited in 1997-8

A Founder is still CEO: 55% Public Company: 38%

Sample in 1996 (contd)

Median turnover rate (1993-4): ~10-12%
Average tenure distribution of work force in 1994:

All firms Firms >4 years old

6 months or less 7-12 months 1-2 years 2-4 years >4 years

21.0% 16.5% 25.0% 28.9% 8.6%

18.0% 14.8% 23.7% 30.3% 13.2%

HR in Sample Companies
Number of HR employees (FTEs)
Median = 1; Range: 0 to 56 Firms with no full-time HR employees: 16% Firms with no central HR department: 27%

When first full-time HR person hired (if ever):

At 4.2 years after founding
Median = 4 years; Range: 0 to 13.7 years

At 104 employees
Median = 51.7 employees; Range: 2 to 600 employees

HR employees as fraction of total:

Median = 1.47%; Mean = 2.04%; Range: 0 to 33%
For firms with 100+ employees: Mean = 1.45%

HR Models: Core Dimensions

Basis of Attachment & Retention
Criterion for Selection Compensation (money) Qualities of the work (work) Work group as community (love)

Skills Exceptional talent/potential Fit with the team or organization Direct monitoring Peer and/or cultural control Reliance on professional standards Formal processes and procedures

Means of Control & Coordination

Employment Model Dimensions

DIMENSIONS Attachment Selection Coordination/ Control EMPLOYMENT MODEL

Work Work Love Work Money

Potential Skills Fit Skills Skills

Professional Peer/cultural Peer/cultural Formal Direct

STAR ENGINEERING COMMITMENT BUREAUCRACY AUTOCRACY OR DIRECT CONTROL

Founders HR Models
32% 6% Aberrant Autocracy Commitment Star Engineering Bureaucracy

31% 10%

14%

7%

Questions for the HREP Group

Do these models resonate? What type(s) is your company/division? Its HR unit?
What are the key premises and HR challenges associated with these models? Which models are most (least) adaptable?

Which are easiest to scale up (to a larger and more diverse work force)?
Which are hardest to change?

Illustrative Quotes for Models

Star: We recruit only top talent, pay them top
wages, and give them the resources and autonomy they need to do their job.

Commitment: I wanted to build the kind of

company where people would only leave when they retire. documented, have job descriptions for people, project descriptions, and pretty rigorous project management techniques.

Bureaucracy: We make sure things are

Engineering: We were very committed.

Autocracy: You work, you get paid.

It was a skunk-works mentality and the binding energy was very high.

The Alignment Perspective

HRM contributes most to firm performance when it is aligned with business strategy
Strategy entails:
Valued skills/competencies Relations among employees and with customers Relevant time frame

Business Strategies
Five main types of planned strategic advantage:
Radical innovation (I) Technology enhancement (E) Marketing and service (M) Hybrid: innovation (I) or enhancement (E), coupled with marketing or customer relations focus (M) Cost minimization (C)

Distribution of Initial Strategies

Hybrid (I or E with M) Marketer (M) 10% 14% Cost Min (C) 7% Enhancer (E) 20% Innovator (I) 49%

Alignment at Founding
Distribution of HR Models by Strategy Cost Min Hybrid Marketer Enhancer Innovator
0% 20% 40% 60% 80% 100%

Autocracy Commitment Star Engineering Bureaucracy Aberrant

Alignment With Strategy

Commitment firms more likely to be pursuing marketingservice strategy
Long-term relations with employees facilitate long-term relations with customers

Star firms most likely to compete through technological leadership Engineering model quite robust across strategies Autocracy prevalent among firms competing through minimizing costs

Alignment in 19941995
Distribution of HR Models by Strategy Cost Min Hybrid Marketer Enhancer Innovator 0% 20% 40% 60% 80% 100% Autocracy Commitment Star Engineering Bureaucracy Aberrant

 Possible reasons:

Why Does Alignment Weaken?

Increased heterogeneity of workforce Were picking up lagged (or leading) adjustments in HR models Alignment matters more early on (when survival pressures are strongest)? Entry of professional management and emergence of an HR function promotes isomorphism (and wider adoption of bureaucratic model)? Founders model may limit ability later to change strategy and/or HR model as needed

What Else Affects Initial Model?

Some speculations:
Founders background, stock of social capital, and position in social networks Ties to external gatekeepers (e.g., VCs) Competitive labor market strategy
Early versus late entrant Need for scalability (engineering and bureaucracy models most easily scalable)

Effects of Founders HR Models

Time to Initial Public Offering
Change to Non-founder CEO
Firms founded under Star or Commitment model are 12 times more likely than Autocracy firms to go public Change to non-founder CEO is much more frequent when founders espoused a Star or Commitment model Star and Commitment firms hire HR specialists sooner Commitment firms more HR-intensive early on Autocracy firms hire later

Development of the HR Function

 Growth in Administrative Overhead

Effects of Founders HR Models

Commitment firms develop least managerial overhead, especially compared to firms founded along Bureaucratic lines.
Founders Organizational Model Commitment Bureaucracy
Number of Non-Administrative Employees Number of Managers & Administrators* Percent of Total Employment Number of Managers & Administrators* Percent of Total Employment

50 500 1500

9.2 66.8 177.0

15.4 % 11.8% 10.6%

25.4 186.2 493.2

33.7% 27.1% 24.7%

*Predicted differences in managerial and administrative overhead (FTEs), controlling for firm size, age, industry, strategy, gender and occupational composition, and public status

Effects of Founders HR Models

Diversity
Star firms most likely to hire women at outset in core scientific/technical jobs Commitment firms least likely to hire/retain women in core jobs over time

Turnover

Among firms retaining the initial HR model, Star firms have most turnover (except for Autocracy)
Possible reasons
By design (to screen out non-stars) Reliance on stock options Resentment of stars as firm matures and broadens its occupational mix Disillusionment of stars (rise of bureaucracy, maturation of technology, etc.)

Changes in HR Blueprints

5.00%

0.00% Founder's Model CEO's Model

5.00%

0.00%

5.00%

0.00%

5.00% Autocracy Star Bureaucracy

0.00%

Bureaucracy & Commitment Models Endure

Aberrant Star Commitment Engineering Autocracy Bureaucracy 52% 40% 67% 54% 53% 71% 48% 60% 33% 46% 47% 29%

0%

20%

40%

60%

80%

100%

Stayed with Initial Model

Changed Model

Some Transitions Have Been Rare

Aberrant Star Commitment Engineering Autocracy Bureaucracy 11% 25% 33% 50% 80% 45% 89% 75% 67% 50% 20% 55%

0%

20%

40%

60%

80%

100%

Changed to Model

Started with Model

Changing the HR Models

Tends to accompany top leader succession
Especially for changes away from Commitment or Star models
Rewriting implicit contracts

Model change is highly destabilizing

CEOs in firms that had changed the HR model were more likely to cite organizational and/or legal challenges as significant

Model Change and Turnover

Destabilizing effects (contd)
Changing the model significantly raises turnover
Especially shifts to Bureaucracy or Aberrant model Less acute when firms shift to Engineering Model Ease of transitioning to and from Engineering may help explain its prevalence in Silicon Valley Disruptive effects of changing the model are generally greater (smaller) when firms move further from (closer to) one of the basic model types.
Exceptions: Bureaucracy and Autocracy

This is compelling evidence of the virtues of having a coherent, consistent HR model

Key Take-Aways: Alignment

Constantly map HR practices against strategy, key success factors, and business context
What success factors arent being supported by HR levers? Can you identify (and communicate!) the link between each HR lever and some key success factor(s)? Track changes in five factors (strategy, environment, technology/work, culture, workforce) systematically to assess implications for realigning HRM
They help drive strategy and structure (including financial) They help answer the question: how will we adapt and respond to the need for change?
Hence, HR systems built around values and processes (the how and why) may be more enduring than systems built around specific skills and outcomes (the what), especially in dynamic environments.

Effective HR models dont just align with strategy:

Gauging Strategic HR Alignment

Business Unit Strategy/Vision/Objectives Products/Services Customers/Markets Technology Timing

Key Success Factors

1.

2.

3.

4.

5.

Human Resource Levers Vision/Purpose Recruitment/Selection Training/Development Reward and Recognition Careers/Promotions Job Design/Teamwork Measurement Information Sharing Culture

+ + + + + + 0 + +

Degree of Alignment (- / 0 / +) 0 0 0 + + 0 + + 0 + 0 0 0 0 0 0 0 0 + 0 + 0

+ + 0 0 0 +

Key Take-Aways: Consistency

Monitor, manage, and publicize consistency of the HR model(s)
Does it clearly answer basic value questions, such as:
Trust vs. distrust? Intrinsic motivation vs. shirking? Egalitarianism or meritocracy? Centralization vs. local decision-making and control? Openness vs. secrecy? Competition vs. cooperation? Tradition and stability or flux and change? Individuals or groups as key organizational units? Outcomes (results) or process (following rules)? Is the firm primarily an economic entity, a non-economic entity devoted to members, or serving some higher calling? Does the organization offer jobs or careers?

Key Take-Aways: Consistency

Monitoring/managing consistency (contd)
Is there clarity and consensus about the model(s):
Within senior management? Within the HR function? Between HR and line management? Among employees? In the labor market?

Does the model(s) promote distributive and procedural justice among subgroups within the organization? Does the model leverage or tap into behavioral scripts familiar to your labor force?
For example, in SPEC firms, the star model from academia.

(How) are these aspects of consistency assessed and managed in your organization?

Key Take-Aways: Trust

The role of trust in HRM is tested by:
Leaders credibility, sincerity, and symbolic actions Crisis situations and tough times The (seemingly) little stuff

For instance, compare Portman Hotel to Southwest Airlines

Key Take-Aways: Change

Entrepreneurs (and change agents) beware: history is powerful.
In SPEC firms, the founders model, not the current CEOs model, shapes the present-day overhead burden Anticipate HR lock-in problems
Example: the soft drink debacle at Cisco Systems

Have a timeline (and transition plan) for evolving the organization structure and HR system, which parallels your timeline for achieving financial, technological, and growth milestones

Changing models often requires new leadership

Especially in firms built along star or commitment lines

Key Take-Aways: Change

For high involvement organizations, slow and steady seems to win the race.
Organizations seeking to build strong cultures and enduring high involvement systems seem to benefit from limiting themselves to strategies involving measured and focused growth.
Again, compare Portman Hotel to Southwest Airlines

Key Take-Aways: HRs Role

Any organization in which people are the most valuable asset cant afford to relegate HRM to the HR function.
HRM is a line responsibility, for which line managers must be accountable (and educated!). Competitive advantage through people requires the HR function to play a different role than it traditionally has:
Organizational and people side of business development Research experts about HR drivers of strategic advantage (e.g., customer satisfaction/loyalty, technical innovation, etc.)

Key partner in strategic sourcing decisions

Portfolio managers for human assets

Key Take-Aways: HRs Role

Playing this new role is likely, in turn, to require numerous organizational changes:
New skills, values, and career paths for HR people
A customer-focused business orientation, rather than the traditional notion of HR as serving employees and being the companys conscience Business skills, training, and language General management paths into and out of HR

Outsourcing low value-added activities relating to personnel administration (payroll, benefits, etc.) Organizational redesign (e.g., linking HR function more closely to strategic planning, purchasing, and R&D) Hard metrics (if you cant measure it, it aint real) Top management support (material and symbolic)