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Strategy, HRM and performance2. HRM and strategy
2.1. Introduction
Does strategy matter? And if so, in what sense does it matter with respect to the linkage between HRM and performance?
2.2 What is strategy?
Strategy outlines an organization’s goals, including different performance indicators (sales, profit, growth etc.) and the
means to achieve those goals (e.g. finance, human resources and technology). Especially in larger organizations a distinction
is being made between corporate strategy and business strategy.
Corporate strategy Business strategy HRM strategy
Deals with the overarching strategy in Is most important for achieving Is the process, decisions and
large corporations (such as competitive advantage as this is choices the organization makes
multinational corporations), which are focused on a specific market, which regarding its human resources and
composed of various business units requires different goals and resources how they are organized
operating in different markets, each in order to achieve competitive
with their own business strategy. positioning
Strategy is about achieving a fit between an organization and its environment or developing a course of action for achieving
an organization’s purpose. The most well-known, and still dominant strategy in strategic management textbooks is the
rational planned approach also called the ‘classical’ approach.
- Its main characteristics still strongly connote the military background: a controlled and conscious process of thought
directly derived from derived from the notion of rational economic man, for which the prime responsibility rests
with the CEO, who is in charge of a fully-formulated, explicit, and articulated decision-making process, in which
there is a strict distinction between formulation and implementation.
- Relies heavily on the readiness and capacity of managers to adopt profit-maximizing strategies through rational
long-term planning.
- Main characteristics of this approach strongly connotate with military strategy, which is where the vast strategy
literature finds its roots.
- Early HRM work bears a striking resemblance to classical approach – the plea for strategic HRM implies:
The use of planning.
A coherent approach to the design and management of personnel systems based on an employment policy
and manpower strategy.
HRM activities being matched to some explicit strategy.
People of the organization being seen as a strategic resource for achieving competitive advantage.
The concept of strategy has many guises. One of the first to demonstrate this was Mintzberg (1987); who distinguished five
meanings of strategy – the 5 P’s:
1. Strategy as a plan (intended) – a direction, a guide, or course of action into the future, focused on looking ahead.
2. Strategy as a pattern (realized) – consistency in behavior over time, focused on looking at the past.
3. Strategy as a ploy – a specific maneuver intended to outwit an opponent or competitor.
4. Strategy as a position – the way in which the organization positions its products/services in particular markets in
order to achieve a competitive advantage.
5. Strategy as a perspective – an organization’s fundamental way of doing things, including the way in which the
members of the organization perceive their environment & customers.
Three prescriptive schools of strategy
School Characteristic of the process Key player Environment Strategy Dominant discipline
Design Conception CEO Opportunities/threats Explicit perspective None
Planning Formal planning Planners Stable and controlled Explicit plan System theory/cybernetics
Positioning Analysis Analysts Can be analyzed Explicit generic position Economics
- The design school sees strategy formation as a deliberate process of conscious thought.
SWOT analysis is part of this school.
- The planning school sees strategy as a formal process.
Entails a stepwise approach to creating an all-encompassing strategy.
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, More formalized and detailed version of the design school.
- The positioning school perceives strategy mainly from an industrial economics perspective.
The competitive position of an organization in its industry/market is analyzed using economic models and
techniques. Porter (1980; 1985) made important contributions to this school:
Five forces for competitive analysis (threat of new entrants, bargaining power of suppliers,
bargaining power of buyers, threat of substitutes, competitive rivalry);
The value chain;
Generic strategies (differentiation, cost leadership, focus).
The underlying assumption of these three schools is that the environment is stable and can be studied objectively in order
to distil changes and opportunities for strategy. This kind of approach towards strategy and strategy development has been
labelled an outside-in approach. The environment (the marketplace) is the starting point for analysis and the subsequent
development of proper strategic responses in order to achieve the desired strategic positioning.
Six descriptive schools of strategy
School Characteristic of the Key player Environment Strategy Dominant discipline
process
Entrepreneurial Vision Leader Can be influenced Implicit perspective None
Cognitive Mental process Mind Hard to understand Mental perspective Psychology
Learning Emergent Everyone who Demanding Implicit patterns Psychology
learns
Power Negotiation Everyone with Can be moulded but difficult Positions, ploys Politics
power
Cultural Collective process Collectivistic Incidental Collective perspective Anthropology
Environmental Reactive process Environment, Dominant and deterministic Specific position Biology
stakeholders
- The entrepreneurial school emphasizes the important role of a visionary leader who is actively engaged in search
for new opportunities in order to speed up the company’s growth.
- The cognitive school considers strategy formulation as a cognitive process that takes place in the mind of the
strategist.
Strategies emerge as perspectives (frames, mental maps, schemes) that shape how people deal with inputs
from the environment. These inputs are subject to many distorting filters before they are decoded by
cognitive maps. ‘Bounded rationality’.
- The learning school views strategy as a stepwise incremental process.
Starting point for this school relates back to Lindblom (1959), with his disjointed incrementalism (science of
‘muddling through’). Change and direction are the result of mutual adjustment between the different actors
involved and between outside events and internal decisions. Strategy-making is a collective learning process
over time, in which it is hard to distinguish between formulation and implementation.
Contributions: logical incrementalism (Quinn, 1980); single & double loop learning (Argyris & Schön, 1978);
the fifth discipline (Senge, 1990); dynamic capabilities (Prahalad & Hamel, 1990).
- The power/political school regards the formation of strategy as a bargaining process between power blocks both
inside the organization & between organizations.
Emphasizes the use of power & politics to negotiate strategies that favor particular interests.
- The cultural school considers strategy formulation as a process of social interactions, based on the beliefs & shared
understandings of the members of an organization.
The resulting perspective is reflected in the patterns by which deeply embedded resources (capabilities) are
protected and used for achieving competitive advantage.
- The environmental school focuses on the environment as the central actor to the strategy-making process.
Organization must respond to the forces of the environment, otherwise it will be ‘selected out’.
Has its roots in contingency theory. Gained popularity through Hannan & Freeman’s writings on population
ecology of organizations using a biological analogy (1977).
The configurational school is an approach to synthesize the previous 9 schools. This school emphasizes that there is no one
best way of organizing and strategy formulation, but specific circumstances will make a certain configuration of context,
strategy, structure, and process effective (see 2.4).
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, 2.3. Implications for HRM and performance
These ten schools reveal that there is no universally agreed best way of strategy formulation and subsequent organizing,
including with regard to the shaping HRM policies. The field of strategic management is characterized, by different streams
and approaches. The field's plurality, however, enables us to learn important lessons about the relationship between
strategy, HRM, and performance. The different schools highlight the importance of taking multiple factors into account,
including different roles:
- The role of the entrepreneur: very often the founder and owner of the company. Plays an important role in shaping
HRM policies and creating a related culture. A lack of explicit HRM practices (often the case in small companies)
creates space for flexibility, but also leaves ample room for favoritism.
- Cognitive/framing processes: due to bounded rationality, cognitive processes distort filters and (de)coding
processes, resulting in differences in the mental maps of the participants involved, which in turn may give rise to
divergent opinions on how to shape HRM strategies, policies, and practices.
- Incrementalism/learning: due to the different parties involved (both inside and outside the organizational
boundaries), formulating HRM strategy can be considered an emergent and stepwise iterative process with
feedback loops, making it increasingly difficult to understand cause and effect linkages, and also difficult to
distinguish formulation and implementation.
- Power and resources: power position and resources of parties involved are often neglected in research. This also
includes the kind of resources the parties can mobilize through their networks in order to enforce and strengthen
their HRM demands. Everybody knows how crucial power position and resources are in shaping both collective
bargaining agreement outcomes and HRM policies.
- Culture/ideology: the way in which collective perspectives and intentions develop over time will undoubtedly have
an effect upon the shaping of HRM policies. It will also affect the way in which the effectiveness of both HRM and
employees themselves are perceived by other members of the organization, and the degree to which related values
and perceptions are shared.
- Environmental and institutional forces: environmental forces, stemming from trade unions, tripartite
(governments, employers’ federations, trade unions) and bipartite consultative bodies at the national level, and
guidelines can have large impact on an organization’s HRM strategy and policies. These forces are sources of societal
pressure to which management must react in order to achieve legitimacy and not be selected out.
2.4. In search of synthesis
Three modes of strategy synthesis
The ‘boundary’ school The ‘dynamic’ school The ‘configurational’ school
Questions Where to draw the With whom & how do firms What are the contingencies?
boundary? compete? Which strategy
How to manage across the How do they sustain their configurations are effective?
divide? competitive advantage over time?
Base - Agency theory (economics/ - Resource-based theory of the - Social sciences;
disciplines/ psychology); firm (economics); - History;
theories - Transaction costs theory; - Entrepreneurship (economics); - Equilibrium models
- Industrial organization; - Innovation theories (biology);
- Control theory (sociology); (organization theory); - Catastrophe theories
- Decision-making theories - Learning theories (mathematics).
(psychology). (organizational behavior).
Problem- - The strategy sourcing - The roots of competitiveness - Archetypes (Miller &
solving tools process (Venkatesan, (Prahalad & Hamel, 1990); Friesen, 1980);
1992); - The capability matrix - Strategic types (Miles &
- Porter’s value chain (Schoemaker, 1992). Snow, 1978);
(Porter, 1992). - FAR method (Volberda,
1998).
New - Strategizing; - Coevolution of capabilities & - Conceptually derived
directions - Joint value creation; competition; typology;
- Building trust; - Managerial dimensions - Empirically based
- Learning across ofdynamic capabilities. - taxonomies;
boundaries. - Configurations as sources
of competitive advantage.
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