Human Resource Strategy: How HR Drives Performance

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Human Resource Strategy How HR Drives Performance
Patrick M. Wright William J. Conaty/GE Professor
of Strategic HR Leadership School
of ILR Cornell University
www.ilr.cornell.edu
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HR Strategy EPG Origins

• Effective Practice Guidelines Reports
  summarizing the academic research on a specific
  area, i.e., research-based best practice
• Asked by SHRM Foundation to review research on
  the relationship between HR Practices and
  Performance

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What is the Impact of HR Strategy? A Story

• In order to understand how HR drives performance,
  our story begins in the early 1990s as Delta
  Airlines, a company that had been known for its
  outstanding customer service, faced a difficulty
  strategic decision.
• Up until this time, what did their HR strategy
  look like?

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Figure 1 Delta Air Lines Pre 1994 Business Model
Core Competence
Valued Customer Outcome
Delivered by?
Driven by?
Revenues
Outstanding Customer Service
Skilled, Experienced, Committed Employees
Internal Promotion Extensive Training High
Pay Non-Union Flexible work rules Family Culture
Profits
Costs
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Our Storycontinued

• Faced by a war in the Middle East, rising fuel
  prices, and an economic recession (sound
  familiar?), Delta was losing 400-500 million
  (10 per share).
• They unveiled a new business strategy (Leadership
  7.5) with its accompanying HR strategy

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Post 1994 Business Model (Leadership 7.5)
Valued Customer Outcome
Delivered by?
Driven by?
Revenues
Competitive (Low) Cost Travel
Commodity Workforce Contingent Temporary Low
Tenure
Layoffs Low Wage Low Training Contractors
Profits
Costs
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What were the outcomes?
There are morale problemsso be it CEO Ron Allen

• By 1994, Delta was making record profits.
• Their costs had gone from 10.1 cent/ASM, to 9.8,
  and the costs rose at a CAGR of 2 through 1998
• Their revenues were flat, rising at CAGR of 3.
• By 1998, the CAGR was 13 for the industry
• Why?

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Post 1994 Business Model (Leadership 7.5)
Valued Customer Outcome
Delivered by?
Driven by?
Revenues
Competitive (Low) Cost Travel
Commodity Workforce Contingent Temporary Low
Tenure
Layoffs Low Wage Low Training Contractors
Profits
Costs
Unintended Consequences Unions Customer
Service Baggage Handling Safety
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What is the moral of the story?

• How companies treat employees, particularly
  through the HR practices they use, can ultimately
  impact firm performance, either positively or
  negatively
• But, what is HR strategy?

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HR Strategy

• HR Strategy is the system of human resource
  practices for a particular job or collection of
  jobs aimed at the best employee performance
  possible to meet the firms ultimate goals
• System of practices
• Job or collection of jobs
• Performance oriented (have, feel, do)

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Key Terms
HR Best Practices Single HR Practice Job
Level Designed entirely by HR Get people to have
(skills), feel (attitudes) or do (behaviors)
something that leads to job success
Strategic HRM Human Capital Organization or
business level Designed jointly between line and
HR Get right people in right place in the
business to maximize business success
HR Strategy Human Resource Practice System Job
Level Designed mostly by HR Get people to have
(skills), feel (attitudes) and do (behaviors)
things that lead to job and business success
Focus Level of Interest Responsibility Goal or
Objective
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HR Strategy Approaches

• Low Road/Control/HR as a Cost or Commodity
• Low Pay
• Hire anyone
• High turnover
• Low Training
• Narrow Work Design
• Autocratic Decision Making
• Little Information Shared

• High Road/Commitment/ HR as an Asset
• High Pay
• Selective Hiring
• Importance of Retention
• Intensive Training
• Broad Work Design
• Opportunities for Participation
• Information Sharing

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Another Conceptualization AMO

• Ability
• Selection tests, selectivity, structured
  interviews, training more than 20 hours/year
• Motivation
• Pay for performance, merit pay, individual
  incentives, performance feedback, performance
  management
• Opportunity
• Quality circles, suggestion systems, information
  sharing, participation in decisions, grievance
  procedures

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Sams Club vs. Costco
Source Cascio, W. The high cost of low wages.
Harvard Business Review
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HR Strategy and Performance
What Employees Have Skills, Abilities, Competenc
ies
Customer Outcomes Satisfaction Retention
HR Strategy Recruitment Selection Training Develop
ment Performance Management Rewards Communication
What Employees Do Task, Discretionary, Counterpro
ductive Behavior, Attendance, Turnover
Financial Outcomes Expenses Revenues Profits
What Employees Feel Motivation Commitment Engagem
ent
Operational Outcomes Productivity Quality Shrinkag
e Accidents
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HR and Performance What does the research say?

• There are over 100 studies now on the
  relationship between HR practices and
  performance, and in the aggregate, they suggest a
  positive relationship

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HR and Performance What does the research say?

• Employees
• Feel Engagement/Commitment
• Do - Behavior
• Have - Skill?
• Customers - consistent
• Operations pretty consistent
• Financials strong and consistent

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Caveats to the Research

• Causal Direction
• Measuring HR Practices
• Which HR Practices
• Single respondents
• Fit to Strategy
• Has not been demonstrated
• Due to measuring principles, not practices

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HR Impact Sysco Foods

• Sysco Corporation exemplifies how they have
  attempted to implement HR strategies to drive
  business performance
• Decentralized structure with earned autonomy
  principle provides lattitude in how businesses
  manage people
• They wanted to test how these people management
  practices impacted performance

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HR and Employee Engagement
Note In order to disguise the date, the mean has
been subtracted from the numbers on the Y-axis.
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HR Practices and Operating Expense
Note In order to disguise the date, the mean has
been subtracted from the numbers on the Y-axis.
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HR Practices and Pre-Tax Profits at Sysco
Note In order to disguise the date, the mean has
been subtracted from the numbers on the Y-axis.
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HR Strategy and Performance Sysco Findings
What Employees Have Skills, Abilities, Competenc
ies
Customer Outcomes Satisfaction Retention
HR Strategy Recruitment Selection Training Develop
ment Performance Management Rewards Communication
What Employees Do Task, Discretionary, Counterpro
ductive Behavior, Attendance, Turnover
Financial Outcomes Expenses Revenues Profits
What Employees Feel Motivation Commitment Engagem
ent
Operational Outcomes Productivity Quality Shrinkag
e Accidents
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Now, how do you develop an HR Strategy?

• Before getting to the details, we need to
  recognize a caveat
• While it is important to treat everyone well, in
  a world of limited resources, we must prioritize
  where to devote our resources
• This prioritization entails determining the key
  job groups that will leverage firm success

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Now, how do you develop an HR Strategy? How about
Dell?

• Step 1 Analyze the industry to determine what
  pressures exist
• Innovation pressures?
• Cost pressures?
• Customer pressures?
• Step 2 Analyze your value chain to determine
  how/where you create value

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Dells Value Chain
strong
strong
Supply Chain/ Inventory
Distribution
Manufacturing
Service
Design
VALUE

• Processes

• Processes

• Processes

• Processes

• Processes

Weak
Weak
Weak with consumers
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How to build an HR Strategy

• Step 3 Determine the key job groups to focus on
• Could be based on most critical to strategy
• Could be based on most critical to the strategic
  change

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Dells people needs
Supply Chain/ Inventory
Distribution
Manufacturing
Service
Design
VALUE

• Processes

• Processes

• Processes

• Processes

• Processes

• Innovative
• Product
• Designers

• Sales to Retailers

• Consumer
• Service Techs

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How to build an HR Strategy

• Step 4 Determine the key HR practices necessary
  to build a workforce that has the right
  competencies, feels the right level of
  commitment, and does the right things

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Dells HR Strategy
Supply Chain/ Inventory
Distribution
Manufacturing
Service
Design
VALUE

• Processes

HR Strategy
Recruitment Where to find these
people? Selection What skills do they need and
how to assess those skills Rewards What is the
market pay rate and what types of incentives will
attract and motivate them?
Training and Development What skills do they need
trained? How do we orient them to
Dell? Performance Management What competencies
and outcomes should be evaluated? Information/Part
icipation What information should be shared with
them and in what areas should they participate?

• Innovative
• Product
• Designers

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Conclusion

• The relationship between HR practices and
  performance (employee, customer, operational, and
  financial) is well documented
• While there are some caveats, we can be pretty
  certain that all else equal, firms are better off
  implementing progressive HR practices rather than
  not doing so

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Patrick M. WrightCornell UniversityILR
School397 ILR Library BuildingIthaca, New York
14853t. 607.255.3429f. 607.255.1836pmw6_at_cornel
l.eduwww.ilr.cornell.edu