OVERVIEW: STRATEGIC HUMAN RESOURCE MANAGEMENT IN FIVE .
OVERVIEW:STRATEGIC HUMAN RESOURCE MANAGEMENTIN FIVE LEADING FIRMSBrian E . Becker and Mark A . Huselid'This article synthesizes findings from five case studies conducted in firms known to be leadersin the management of people . We drew three broad conclusions :1.The foundation of a value-added HR function is a business strategy that relies on people asa source of competitive advantage and a management culture that embraces that belief, 2 . A value-added HR function will be characterized by operational excellence, a focus onclient service for individual employees and managers, and delivery of these services at thelowest possible cost; and3 . A value-added HR function requires HR managers that understand the human capitalimplications of business problems and can access or modify the HR system to solve thoseproblems . 1999 John Wiley & Sons, Inc . IntroductionThe recent emphasis among practitionersand academics on "people" (and peoplemanagement systems) as a source of competitive advantage has focused increasinginterest on the science and practice of Human Resource Management . Indeed, itwould appear that the field of HRM is"coming of age" as the end of the millennium approaches . While academic researchhas made a number of significant contributions to these developments, Steve Kerr ofGeneral Electric has argued persuasivelythat much of the best work is being doneby consultants and professionals in thefield (Hodgetts, 1996) . In fact, one couldmake a convincing case that the practice ofstrategic HRM has outpaced the academicwork on this topic . Yet, data on how firmsactually manage people to provide a sourceof competitive advantage are scarce, andstudies that compare and contrast humancapital management systems in leadingfirms are even more difficult to find . Indeed,while the empirical literature linking better HRM with firm performance has consistently found that more effective HRmanagement is associated with superiorfinancial performance (see Becker &Huselid, 1998, for an overview), what ismissing is a clearer understanding of howthese processes operate, and subsequently,how firms might actually manage theirpeople to help provide a source of competitive advantage .In this special issue of Human ResourceManagement, we attempt to provide someinsight into the "state of the practice"through the presentation of five detailedHuman Resource Management, Winter 1999, Vol . 38, No . 4, Pp. 287-301 1999 John Wiley & Sons, Inc .Studies thatcompare andcontrast humancapitalmanagementsystems inleading firms areeven moredifficult to find.CCC 0090-4848/99/040287-15
288 HUMAN RESOURCE MANAGEMENT,Winter 1999case studies describing the HRM strategiesemployed by firms known to be leaders inthe management of people . From Junethrough October 1997, we interviewed morethan 60 senior executives across these fivecompanies, who came together to form aPartnership through the auspices of theGlobal Consulting Alliance . Partnershipfirms subsequently shared information andlearned from each other about leading edgeHR practices . The distillation of these experiences is presented in this special issue .Using a detailed, structured interview format and extensive evaluation of backgrounddata, we spent on average a day and a halfinterviewing the senior HR and Line leadership in the each of the following Partnershipfirms :The HRM systemthat develops andmaintains afirm's strategicinfrastructureshould beconsidered aninvestment. Herman Miller,Lucent,Praxair,Quantum, andSears .These data, along with an extensive evaluation of background materials provided byeach company, provided us with rich detail onhow leading firms use their HRM systems toimplement their competitive strategies and toachieve their operational goals . In collaboration with the Senior HR leader in each firm,we prepared the cases that form the basis ofthis special issue .This special issue is organized as follows.This overview article provides an outline oftheoretical rationale and empirical literaturelinking HRM systems with corporate financialperformance. We next highlight the patterns thatemerged from our research in the five Partnership companies . This discussion of patterns isfollowed by the individual company cases .Wayne Brockbank then provides a "look overthe horizon" by discussing the implications ofthese findings for the practice of HR in thefuture . This is followed by our interview withMike Losey, Tony Rucci, and Dave Ulrich thatprovides a provocative response to this specialissue . Finally, Joe Ryan reviews WilliamJoyce's new book, MegaChange : How Today'sLeading Companies Have Transformed TheirWorkforces .The New Paradigm2For most firms, the traditional path to sustainable competitive advantage has turnedon such barriers to entry as economies of scale,patent protection, access to capital, and regulated competition . What might be called a neweconomic paradigm, however, has given riseto a new source of competitive advantageand has challenged much of the conventionalwisdom about strategy, the role of anorganization's human resources, and HR'srelationship to firm performance . As globalization and the accompanying demands forcontinuous change make innovation, adaptability, speed, and efficiency essential featuresof the business landscape, the strategicimportance of intellectual capital and intangible assets have increased substantially(Pfeffer, 1994 ; 1998) . While these assets arelargely invisible (Itami, 1987) and do notappear on the firm's balance sheet, the sourcesof this capital are not .3 They are found in thehuman capital of the firm's employees, thecapabilities represented by the firm's organizational processes and the value of brands andcustomer relationships (Svelby, 1997) . In thewords of James Chestnut, CFO for The CocaCola Company, the company's phenomenalmarket value is largely attributable to its brandand its management systems, rather than anycollection of tangible assets (Stewart, 1998) .Accordingly, many firms have increasinglybroadened their focus from strategy contentto strategy implementation . Speed, innovation,and adaptability reflect competencies andcapabilities (Hamel & Prahalad, 1994) forstrategy implementation that have as theirfoundation the firm's human capital .4 This hasdirect implications for a firm's HRM systemand function . Traditionally focused on transactions, practices, and compliance, the HRfunction was-and often still is-appropriatelyconsidered a cost center . In contrast, the HRMsystem that develops and maintains a firm'sstrategic infrastructure should be consideredan investment . It is an essential element ofthe infrastructure that supports this valuecreation process and is a potential strategiclever for the organization .The appropriate form for this strategic HRsystem continues to be debated . Pfeffer
Overview : Strategic Human Resource Management in Five Leading Firms(1998), for example, argues that a390,000 common thread runs through the370,000 approach to people management athigh performance companies . H R350,000 systems in these organizations are330,000 characterized by employee security,selective hiring, decentralized de310,000 cision-making, well-paying jobs,290,000extensive development, reduced40608010020status differentiation, and extenQuintlie Changes in Sophistication of HR Architecturesive communication and informstion sharing . We would emphasizeSource : Huselid sod Becker (1995)that while this provides a usefulFIGURE 1 . Dollar change in market value per employee .template as a point of departure,the strategic influence of an HRcally and statistically significant impact ofsystem requires that it be implemented as anthe HRM system on both market-based andinternally coherent system that is aligned withaccounting-based measures of firm perforthe business goals and objectives of the orgamance . Figure 1 illustrates the relationshipnization . Recalling that the logic for the newbetween a high performance HRM systemstrategic role for HR is driven by changingand firm market value per employee . Inmarket conditions that highlight the imporFigure 1 the HR system is measured as antance of human capital issues, we should keepindex of attributes that taps the variousin mind that entirely new approaches are notelements of an HR system that select, mainthe sole source of value creation . Firms havetain, develop, and reinforce employee peralways had a choice to emphasize employeeformance (the x-axis), scaled from zeroperformance in their HR systems, and HR(the least developed HRM systems in ourprofessionals have long known how tosample) to 100 (the most sophisticatedimplement such a focus . Market conditions,however, often enabled firms to achieve conHRM systems) . Firm performance is measiderable success by giving limited attentionsured in terms of market value perto employee performance issues, thinkingemployee . 5The pattern of these results suggests theinstead of employees largely as a cost to be.Whileperhapsnotanimperachangingnature of the HR influence on firmminimizedperformance. The first stage (up to the 20thtive for every firm, the economic returns topercentile)couldbe interpreted as the devela "high performance" HRM system have inopment of a professional HR capability . Thiscreased to the point that what might havecapability has value because it gets the firmappeared a luxury 20 years ago is now asource of competitive advantage ."in the game" . In the second stage (betweenthe 20th and 60th percentile) the HR function develops operational excellence but doesThe Financial Returns to Strategic HRnot have a significant incremental influenceon firm performance . In the last stage, the HRIn the 1990s one of the most exciting newsystem once again has a noticeable payoff inareas of academic research has focused onestablishing an empirical link between HRterms of the firm's bottom line . For example,moving from the 60th to the 80th percentilestrategies and systems and a firm's finanimproved market value in the average firm bycial performance . Studies at the level of thefirm, one industry, and multiple industries 20,000 per employee, or 200 million in afirm with 10,000 employees .b Our experienceshave demonstrated a strong positive relawith these firms suggest that it is in this thirdtionship (Becker & Huselid, 1998) . Our ownstage that an HR system has achieved bothwork, based on three separate national suroperational excellence and is aligned with theveys and the experience of more than 2,400firm's strategic goals .firms, has repeatedly shown an economi- 289
290 HUMAN RESOURCE MANAGEMENT,Winter1999The Strategic Influence of HR: Lessonsfrom Partnership CompaniesIt may beaxiomatic, butjust as labor is aderived demandin basiceconomictheory, thedemand for astrategic HRpresence uderived from thelarger corporateThe HR strategies described in the accompanying case studies are among the most innovative in the world . They are exemplars of thespecific HR systems reflected in the moreabstract "60th to the 100th percentile" relationships depicted in Figure 1 . Nevertheless,while the HR management systems at thePartnership firms are among the best in theworld, all of those interviewed acknowledgethat much work remains to be done . Thefocus of this introduction is to highlight theelements of a value-added HR function, asrepresented in the cumulative experience ofPartnership firms, illustrating areas both ofconsiderable progress and remaining challenges . We hope that it will serve as a catalystfor further research and as a "call to action"for those firms wishing to improve their ownHR management systems .There are probably several ways one couldorganize the foundational elements of a valueadded HR function, but we focus on three key(and recurring) themes : or businessstrategy. A corporate strategy and managementculture that is appropriately alignedand supportive ;an HR function characterized by operational and professional excellence ;andHR managers that are effective "business partners" and an HR functionstructured to support that role .Each of these elements is a necessary, butnot sufficient, condition for HR to play a strategic organizational role . They reinforce oneanother and leverage the contributions of theother elements. Indeed, in our more recent research we focus specifically on the appropriatealignment between the HR system and thesupporting "organizational logic" represented bytop management's leadership style, the alignment between HR and corporate strategies, andthe effectiveness of the HR function (Huselid& Becker, 1998) . We find that when each ofthese elements is appropriately aligned, the firmsaverage 27% higher gains than they would expect from the "sum of these parts" . For thepurposes of this article, they are also a convenient framework to integrate the wide range ofexperiences reflected in our interviews at thePartnership companies .Lessons LearnedThis section highlights each of the three major foundational elements to a value-added HRrole and then develops supporting policies,practices, or strategies that further implementand illustrate those elements . We have attempted to provide a sample of representativeillustrations from the cases . The case studiesthat follow this article will provide a more complete picture of each firm's HR strategy.Element #1 : The foundation of a valueadded HR function is a business strategythat relies on people as a source of competitive advantage and a management culture that embraces that belief.It may be axiomatic, but just as labor is aderived demand in basic economic theory, thedemand for a strategic HR presence is derivedfrom the larger corporate or business strategy. It might be nice to believe that every successful firm is now compelled to rely on peopleas a source of competitive advantage, but thereare in fact very successful firms that have notentirely embraced such a strategy. On the onehand, we have examples such as Quantum,which as a startup in 1980 established its"people" strategy as the first step in its business plan. In the more typical firm, however,a strategic HR presence has been a relativelyrecent phenomenon . Most Partnership companies tend to fall somewhere in betweenthese experiences, and in general reflect recent converts to strategies that include a"people-based" component . Herman Miller,Inc . (HMI) would be an exception, as theirphilosophy of employee advocacy and "servantbased leadership" has a very long traditionthroughout the firm .Strong CEO Support and Buy-In from LineManagersWhile HR's role is driven by the underlying firm strategy, the manifestation of that
Overview : Strategic Human Resource Management in Five Leading Firmsstrategic imperative is the commitment of theCEO to realizing a strategic role for HR . Doesthe CEO really believe that HR can be morethan a cost center and that most of the employees are more than an expense to be minimized? It should not be surprising that HR'sstrategic role will always be limited when theCEO, or senior executive leadership, does notfully embrace such a presence . The majorityof the Partnership companies are goingthrough the transition from an operational HRfocus to one that is more strategic . These aretypically driven by senior business leaders . Anexemplar would include Arthur Martinet atSears who recognized that Sears employeeshad to "feel comfortable outside a commandand-control environment getting them usedto risk taking and innovation ."Buy-in from line managers is necessary forHR to serve as a business partner because linemanagers have to accept and participate in thisnew role . Aside from the firms where HR hasplayed this role from the inception of the company, the experience among the Partnershipfirms is mixed . On the one hand there are firmslike Praxair. Considerable support and communication during the development of their"visioning" process, along with the development of specific, actionable goals at each levelof the business were key features . The resultwas more rapid strategy implementation anda greater sense of "mental ownership" amongPraxair's employees . On the other hand, linemanagers at some of the other Partnershipfirms have taken a "wait-and-see" attitudewhile clinging to the traditional relationships .Clearly, line managers are going to be moresupportive of this new role where they understand the business case for such a change . Thiscan occur at two levels . First, there are companies that have attempted to articulate therole HR or people issues serve as performancedrivers in the implementation of strategy . Moreelaborate are balanced scorecard models likethe one used at Sears, where there are clearlydefined and empirically verified relationshipsbetween individual sales associate behaviors,customer satisfaction, and ultimately financial performance . In short, for the senior leadership outside of HR to buy-in to a broaderHR role, the business case for investments inhuman capital must be clearly articulated . Thisrequires more than "hand waving" and slogans .It requires a common understanding of thefirm's strategy and the role HR issues play inthe value chain that implements that strategy .As respondents in several companies noted, itis also a two-way street . H R has to show thatit can provide some leadership around thesebusiness issues and be aggressive in gettingthat message out . At Lucent, one of HR's strategic goals is to motivate change by aggressively sharing this story of their new role . Intheir words, "We can't mumble our way to 50percent growth."Buy-in from line managers and the centrality of a people-based competitive strategyis also reflected in the extent to which thecompany is willing to share "confidential"information that, on the one hand, may haveproprietary value, but on the other, is essential if employees are to understand the strategic significance of their jobs and theirperformance . There were several examples ofthis type of communication, but a usefulexemplar is Herman Miller. HMI believes thatparticipation in decision-making is a crucialingredient in the process of facilitating "ownership" among employees . Thus, HMI givestheir owner-employees a significant amountof information about the ongoing financialcondition of the business; their recent adoption of the Economic Value Added (EVA)framework is an important additional step inthis direction . In fact, HMI uses the EVAframework (and the resulting communicationprocess) as the basis for driving "lean thinking" throughout the organization . Communication is further facilitated by quarterlymeetings, town hall meetings, and a variety ofmore informal brown bag lunches to transmitfinancial and operational information throughout the firm . In addition, they have a groupcalled the Monthly Business Exchange orMBX, which is a meeting of the 350 teamleaders who gather every month to exchangeinformation and ideas . These meetings arevideotaped for later distribution, and the teamleaders go back and pass out information tothe rest of their team members .Buy-in also means that line managers areheld accountable for HR issues in their performance reviews and bonus plans . Most ofthe Partnership firms are beginning to move 291In fact, HMI usesthe EVAframework (andthe resultingcommunicationprocess) as thebasis for driving"lean thinking"throughout theorganization.
2 92 HUMAN RESOURCE MANAGEMENT,Winter1999in this direction, but it remains one of the morechallenging points of change . A good examplein this regard is Quantum, where "building acompany with an extraordinary work environment" is one of three strategic goals . To thisend they have identified nine Value Behaviorsthat contribute to the quality of the work environment, as well as their goals to increasemarket share and firm value . This is more thana management by objective (MBO) program ;fully 50 percent of a manager's bonus is basedon these behaviors which emphasize how workis done as much as what is achieved . In theirwords, "You can't simply
OVERVIEW: STRATEGIC HUMAN RESOURCE MANAGEMENT IN FIVE LEADING FIRMS Brian E. Becker and Mark A. Huselid' This article synthesizes findings from five case studies conducted in firms known to be leaders
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