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iSTRATEGICHUMAN RESOURCEMANAGEMENT

iiiSTRATEGICHUMAN RESOURCEMANAGEMENTA GUIDE TO ACTION3RD EDITIONMichael ArmstrongLondon and Philadelphia

ivPublisher’s noteEvery possible effort has been made to ensure that the information contained in this book isaccurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in thispublication can be accepted by the editor, the publisher or the author.First published in Great Britain in 1992 as Human Resource Management: Strategy and ActionSecond edition published as Strategic Human Resource Management: A Guide to Action 2000Third edition 2006Apart from any fair dealing for the purposes of research or private study, or criticism orreview, as permitted under the Copyright, Designs and Patents Act 1988, this publication mayonly be reproduced, stored or transmitted, in any form or by any means, with the priorpermission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproductionoutside these terms should be sent to the publishers at the undermentioned addresses:120 Pentonville RoadLondon N1 9JNUnited Kingdom525 South 4th Street, #241Philadelphia PA 19147USAwww.kogan-page.co.uk Michael Armstrong, 1992, 2000, 2006The right of Michael Armstrong to be identified as the author of this work has been assertedby him in accordance with the Copyright, Designs and Patents Act 1988.ISBN 0 7494 4511 4British Library Cataloguing-in-Publication DataA CIP record for this book is available from the British Library.Library of Congress Cataloging-in-Publication DataArmstrong, Michael, 1928–Strategic human resource management : a guide to action / MichaelArmstrong.-- 3rd ed.p. cm.Includes bibliographical references and index.ISBN 0-7494-4511-41. Personnel management. I. Title.HF5549.A89784 2005658.3 01--dc222005024402Typeset by Saxon Graphics Ltd, DerbyPrinted and bound in the United States by Thomson-Shore, Inc.

vContentsPrefaceixPART 1 THE FRAMEWORK OF STRATEGIC HUMAN RESOURCEMANAGEMENT1Human resource managementHuman resource management defined 3; Models of HRM 4;Aims of HRM 6; Characteristics of HRM 8; Reservations aboutHRM 13; HRM and personnel management 1632Strategy: concept and processStrategy defined 19; The concept of strategy 20; Thefundamentals of strategy 22; The formulation of strategy 24193Strategic human resource management: concept and processStrategic HRM defined 29; The meaning of strategic HRM 30;Aims of strategic HRM 30; Approaches to strategic HRM 31;Limitations to the concept of strategic HRM 35; Conclusion 35294HR strategiesHR strategies defined 37; Types of HR strategies 38; Criteria foran effective HR strategy 4237

vi l ContentsPART 2 STRATEGIC HUMAN RESOURCE MANAGEMENT INACTION5 Formulating and implementing HR strategiesFundamental process considerations 48; Characteristics of theprocess 49; Developing HR strategies 52; Setting out thestrategy 64; Conducting a strategic review 65; Implementing HRstrategies 69476 Improving business performance through strategic HRMHow HR impacts on organizational performance 72; How HRMstrategies make an impact 75; How strategic HRM conceptsimpact on practice 77717 Roles in strategic HRMThe strategic role of top management 79; The strategic role offront-line management 79; The strategic role of the HR director 81;The strategic role of HR specialists 8179PART 3 HR STRATEGIES8 Strategies for improving organizational effectivenessStrategies for improving organizational effectiveness 90;Strategies for organizational development 91; Strategies fororganizational transformation 95; Strategies for culturemanagement 99; Strategies for knowledge management 106;Commitment strategy 110; Strategies for developing a climateof trust 112; Quality management strategies 114; Continuousimprovement strategies 115; Customer service strategy 115899 Resourcing strategyResourcing strategy defined 117; The objective of resourcingstrategy 117; The strategic HRM approach to resourcing 118;Integrating business and resourcing strategies 118; Bundlingresourcing strategies and activities 119; The components ofemployee resourcing strategy 120; Human resourceplanning 120; Resourcing plans 123; Retention strategy 126;Flexibility strategy 130; Talent management strategy 13011710 Learning and development strategyStrategic HRD 133; Strategies for creating a learningculture 136; Organizational learning strategies 137;133

Contents l viiLearning organization strategy 138; Individual learningstrategies 13911 Strategies for managing performancePerformance management 142; Performance managementdefined 142; Purpose of performance management 143;Performance management concerns 143; The scope ofperformance management strategy 144; The process ofperformance management 145; Conclusion 14714112 Reward strategyReward strategy defined 149; Why have a reward strategy? 149;Characteristics of reward strategy 150; The structure of rewardstrategy 150; The content of reward strategy 151; Guidingprinciples 154; Developing reward strategy 155; Effectivereward strategies 157; Reward strategy and line managementcapability 15814913 Employee relations strategyEmployee relations strategy defined 159; Concerns of employeerelations strategy 160; Strategic directions 160; The backgroundto employee relations strategies 161; The HRM approach toemployee relations 161; Policy options 163; Formulatingemployee relations strategies 163; Partnership agreements 164;Employee voice strategies 166159ReferencesFurther readingAuthor indexSubject index169179185189

ixPrefaceThis third edition of Strategic Human Resource Management has been substantially revised to incorporate the latest research and thinking. A number ofchapters such as those concerned with strategic HRM in general in Parts 1and 2 have been almost completely rewritten, as has Chapter 12 on rewardstrategies. A new chapter on enhancing organizational effectiveness hasbeen included and revisions made to all the other chapters.The book is set out under the following headings: Part 1: The framework of strategic human resource management. Thisprovides an introduction to HRM, the general concept of strategy andthe process of strategic HRM. Part 2: Strategic human resource management in action. This describes theformulation and implementation of HRM strategies, the impact ofstrategic human resource management, the strategic contribution of theHR function, and roles in strategic HRM. Part 3: HR strategies. This covers each of the main areas in which HRstrategies are developed, namely: enhancing organizational effectiveness,resourcing, learning and development, managing performance, rewardand employee relations.

1Part 1The framework of strategichuman resourcemanagement

31Human resourcemanagementIn this chapter, the concept of human resource management (HRM) isdefined initially and the various models of HRM are described.Consideration is then given to its aims and characteristics. The chapterconcludes with a review of reservations about HRM and the relationshipbetween HRM and personnel management.HUMAN RESOURCE MANAGEMENT DEFINEDHuman resource management is defined as a strategic and coherentapproach to the management of an organization’s most valued assets – thepeople working there who individually and collectively contribute to theachievement of its objectives.John Storey (1989) believes that HRM can be regarded as a ‘set of interrelated policies with an ideological and philosophical underpinning’. Hesuggests four aspects that constitute the meaningful version of HRM:l a particular constellation of beliefs and assumptions;l a strategic thrust informing decisions about people management;

4 l The framework of strategic HRMl the central involvement of line managers;l reliance upon a set of ‘levers’ to shape the employment relationship.MODELS OF HRMThe matching model of HRMOne of the first explicit statements of the HRM concept was made by theMichigan School (Fombrun et al, 1984). They held that HR systems and theorganization structure should be managed in a way that is congruent withorganizational strategy (hence the name ‘matching model’). They furtherexplained that there is a human resource cycle (an adaptation of which isillustrated in Figure 1.1), which consists of four generic processes or functions that are performed in all organizations. These are:l selection – matching available human resources to jobs;l appraisal (performance management);l rewards – ‘the reward system is one of the most under-utilized andmishandled managerial tools for driving organizational performance’; itmust reward short- as well as long-term achievements, bearing in mind that‘business must perform in the present to succeed in the future’;l development – developing high-quality formanceDevelopmentFigure 1.1 The human resource cycle (adapted from Fombrun et al, 1984)

Human resource management l 5The Harvard frameworkThe other founding fathers of HRM were the Harvard school of Beer et al(1984) who developed what Boxall (1992) calls the ‘Harvard framework’.This framework is based on the belief that the problems of historicalpersonnel management can only be solved:when general managers develop a viewpoint of how they wish to seeemployees involved in and developed by the enterprise, and of what HRMpolicies and practices may achieve those goals. Without either a centralphilosophy or a strategic vision – which can be provided only by generalmanagers – HRM is likely to remain a set of independent activities, eachguided by its own practice tradition.Beer and his colleagues believed that ‘today, many pressures are demandinga broader, more comprehensive and more strategic perspective with regardto the organization’s human resources’. These pressures have created a needfor: ‘A longer-term perspective in managing people and consideration ofpeople as potential assets rather than merely a variable cost’. They were thefirst to underline the HRM tenet that it belongs to line managers. They alsostated that: ‘human resource management involves all management decisions and action that affect the nature of the relationship between the organization and its employees – its human resources’.The Harvard school suggested that HRM had two characteristicfeatures: 1) line managers accept more responsibility for ensuring thealignment of competitive strategy and personnel policies; 2) personnel hasthe mission of setting policies that govern how personnel activities aredeveloped and implemented in ways that make them more mutually reinforcing. The Harvard framework as modelled by Beer et al is shown inFigure 1.2.According to Boxall (1992) the advantages of this model are that it:l incorporates recognition of a range of stakeholder interests;l recognizes the importance of ‘trade-offs’, either explicitly or implicitly,between the interests of owners and those of employees as well asbetween various interest groups;l widens the context of HRM to include ‘employee influence’, the organization of work and the associated question of supervisory style;l acknowledges a broad range of contextual influences on management’schoice of strategy, suggesting a meshing of both product market and sociocultural logics;l emphasizes strategic choice – it is not driven by situational or environmental determinism.

6 l The framework of strategic HRMStakeholderinterests: shareholders management employees government unionsSituational factors: work forcecharacteristics business strategyand conditions managementphilosophy labour market unions task technology laws and socialvaluesHRM policychoices: employeeinfluence humanresource flow rewardsystems work systemsHR outcomes: commitment congruence costeffectivenessLong-termconsequences: individualwell-being organizationaleffectiveness societalwell-beingFigure 1.2 The Harvard model of HRM (from Beer et al, 1984)The Harvard model has exerted considerable influence over the theory andpractice of HRM, particularly in its emphasis on the fact that HRM is theconcern of management in general rather than the personnel function inparticular.AIMS OF HRMThe overall purpose of human resource management is to ensure that theorganization is able to achieve success through people. As Ulrich and Lake(1990) remark: ‘HRM systems can be the source of organizational capabilities that allow firms to learn and capitalize on new opportunities.’Specifically, HRM is concerned with achieving objectives in the areassummarized below.Organizational effectiveness‘Distinctive human resource practices shape the core competencies thatdetermine how firms compete’ (Cappelli and Crocker-Hefter, 1996).

Human resource management l 7Extensive research (see Chapter 4) has shown that such practices can make asignificant impact on firm performance. HRM strategies aim to supportprogrammes for improving organizational effectiveness by developingpolicies in such areas as knowledge management, talent management andgenerally creating ‘a great place to work’. This is the ‘big idea’ as describedby Purcell et al (2003), which consists of a ‘clear vision and a set of integratedvalues’. More specifically, HR strategies can be concerned with the development of continuous improvement and customer relations policies.Human capitalThe human capital of an organization consists of the people who workthere and on whom the success of the business depends. Human capitalhas been defined by Bontis et al (1999) as follows: ‘Human capital represents the human factor in the organization; the combined intelligence,skills and expertise that gives the organization its distinctive character.The human elements of the organization are those that are capable oflearning, changing, innovating and providing the creative thrust which ifproperly motivated can ensure the long-term survival of the organization.’Human capital can be regarded as the prime asset of an organization, andbusinesses need to invest in that asset to ensure their survival and growth.HRM aims to ensure that the organization obtains and retains the skilled,committed and well-motivated workforce it needs. This means taking stepsto assess and satisfy future people needs and to enhance and develop theinherent capacities of people – their contributions, potential and employability – by providing learning and continuous development opportunities.It involves the operation of ‘rigorous recruitment and selection procedures,performance-contingent incentive compensation systems, and managementdevelopment and training activities linked to the needs of the business’(Becker et al, 1997). It also means engaging in talent management – theprocess of acquiring and nurturing talent, wherever it is and wherever it isneeded, by using a number of interdependent HRM policies and practices inthe fields of resourcing, learning and development, performancemanagement and succession planning.Knowledge managementKnowledge management is ‘any process or practice of creating, acquiring,capturing, sharing and using knowledge, wherever it resides, to enhancelearning and performance in organizations’ (Scarborough et al 1999). HRMaims to support the development of firm-specific knowledge and skills thatare the result of organizational learning processes.

8 l The framework of strategic HRMReward managementHRM aims to enhance motivation, job engagement and commitment byintroducing policies and processes that ensure that people are valued andrewarded for what they do and achieve, and for the levels of skill andcompetence they reach.Employee relationsThe aim is to create a climate in which productive and harmonious relationships can be maintained through partnerships between management andemployees and their trade unions.Meet diverse needsHRM aims to develop and implement policies that balance and adapt to theneeds of its stakeholders and provide for the management of a diverseworkforce, taking into account individual and group differences inemployment, personal needs, work style and aspirations, and the provisionof equal opportunities for all.Rhetoric and realityThe research conducted by Gratton et al (1999) found that there wasgenerally a wide gap between the sort of rhetoric expressed above andreality. Managements may start with good intentions to do some or all ofthese things, but the realization of them – ‘theory in use’ – is often verydifficult. This arises because of contextual and process problems: otherbusiness priorities, short-termism, lack of support from line managers, aninadequate infrastructure of supporting processes, lack of resources,resistance to change and lack of trust.CHARACTERISTICS OF HRMThe characteristics of the HRM concept as they emerged from the writingsof the pioneers and later commentators are that it is:lllldiverse;strategic, with an emphasis on integration;commitment-orientated;based on the belief that people should be treated as human capital;

Human resource management l 9l unitarist rather than pluralist, individual rather than collective, withregard to employee relations;l a management-driven activity – the delivery of HRM is a linemanagement responsibility;l focused on business values.The diversity of HRMBut these characteristic of HRM are by no means universal. There are manymodels, and practices within different organizations are diverse, often onlycorresponding to the conceptual version of HRM in a few respects.Hendry and Pettigrew (1990) play down the prescriptive element of theHRM model and extend the analytical elements. As pointed out by Boxall(1992), such an approach rightly avoids labelling HRM as a single form andadvances more slowly by proceeding more analytically. It is argued byHendry and Pettigrew that ‘better descriptions of structures and strategymaking in complex organizations, and of frameworks for understandingthem, are an essential underpinning for HRM’.A distinction was made by Storey (1989) between the ‘hard’ and ‘soft’versions of HRM. The hard version of HRM emphasizes that people areimportant resources through which organizations achieve competitiveadvantage. These resources have therefore to be acquired, developed anddeployed in ways that will benefit the organization. The focus is on the quantitative, calculative and business-strategic aspects of managing human resourcesin as ‘rational’ a way as for any other economic factor. As Guest (1999)comments: ‘the drive to adopt HRM is based on the business case of a need torespond to an external threat from increasing competition. It is a philosophythat appeals to managements who are striving to increase competitiveadvantage and appreciate that to do this they must invest in human resourcesas well as new technology.’ He also commented that HRM ‘reflects a longstanding capitalist tradition in which the worker is regarded as a commodity’.The emphasis is therefore on the interests of management, integration withbusiness strategy, obtaining added value from people by the processes ofhuman resource development and performance management and the need fora strong corporate culture expressed in mission and value statements and reinforced by communications, training and performance management processes.The soft version of HRM traces its roots to the human-relations school. Itemphasizes communication, motivation and leadership. As described byStorey (1989) it involves ‘treating employees as valued assets, a source ofcompetitive advantage through their commitment, adaptability and highquality (of skills, performance and so on)’. It therefore views employees, inthe words of Guest (1999), as means rather than objects. The soft approach to

10 l The framework of strategic HRMHRM stresses the need to gain the commitment – the ‘hearts and minds’ – ofemployees through involvement, communications and other methods ofdeveloping a high-commitment, high-trust organization. Attention is alsodrawn to the key role of organizational culture.In 1998, Karen Legge defined the ‘hard’ model of HRM as a processemphasizing ‘the close integration of human resource policies with businessstrategy which regards employees as a resource to be managed in the samerational way as any other resource being exploited for maximum return’. Incontrast, the soft version of HRM sees employees as ‘valued assets and as asource of competitive advantage through their commitment, adaptabilityand high level of skills and performance’.It has, however, been observed by Truss (1999) that, ‘even if the rhetoric ofHRM is soft, the reality is often hard, with the interests of the organizationprevailing over those of the individual’. And research carried out by Grattonet al (1999) found that, in the eight organizations they studied, a mixture ofhard and soft HRM approaches was identified. This suggested to theresearchers that the distinction between hard and soft HRM was not asprecise as some commentators have implied.The strategic nature of HRMPerhaps the most significant feature of HRM is the importance attached tostrategic integration, which flows from top management’s vision and leadership, and which requires the full commitment of people to it.David Guest (1987, 1989a, 1989b, 1991) believes that a key policy goal forHRM is strategic integration, by which he means the ability of the organization to integrate HRM issues into its strategic plans, to ensure that thevarious aspects of HRM cohere, and to provide for line managers to incorporate an HRM perspective into their decision making.Karen Legge (1989) considers that one of the common themes of thetypical definitions of HRM is that human resource policies should be integrated with strategic business planning. Keith Sisson (1990) suggests that afeature increasingly associated with HRM is a stress on the integration of HRpolicies both with one another and with business planning more generally.John Storey (1989) suggests that: ‘the concept locates HRM policy formulation firmly at the strategic level and insists that a characteristic of HRM isits internally coherent approach’.The commitment-orientated nature of HRMThe importance of commitment and mutuality was emphasized by Walton(1985) as follows: ‘The new HRM model is composed of policies that

Human resource management l 11promote mutuality – mutual goals, mutual influence, mutual respect,mutual rewards, mutual responsibility. The theory is that policies of mutuality will elicit commitment which in turn will yield both better economicperformance and greater human development.’David Guest (1987) wrote that one of the HRM policy goals was theachievement of high commitment – ‘behavioural commitment to pursueagreed goals, and attitudinal commitment reflected in a strong identification with the enterprise’.It was noted by Karen Legge (1995) that human resources ‘may be tappedmost effectively by mutually consistent policies that promote commitmentand which, as a consequence, foster a willingness in employees to act flexiblyin the interests of the “adaptive organization’s” pursuit of excellence’.But this emphasis on commitment has been criticized from the earliestdays of HRM. Guest (1987) asked: ‘commitment to what?’, and Fowler(1987) has stated:At the heart of the concept is the complete identification of employees withthe aims and values of the business – employee involvement but on thecompany’s terms. Power, in the HRM system, remains very firmly in the handsof the employer. Is it really possible to claim full mutuality when at the end ofthe day the employer can decide unilaterally to close the company or sell it tosomeone else?People as ‘human capital’The notion that people should be regarded as assets rather than variablecosts, in other words treated as human capital, was originally advanced byBeer et al (1984). HRM philosophy, as mentioned by Karen Legge (1995),holds that ‘human resources are valuable and a source of competitiveadvantage’. Armstrong and Baron (2002) stated that: ‘People and theircollective skills, abilities and experience, coupled with their ability to deploythese in the interests of the employing organization, are now recognized asmaking a significant contribution to organizational success and as constituting a significant source of competitive advantage.’Unitarist philosophyThe HRM approach to employee relations is unitarist not pluralist – it isbelieved that employees share the same interests as employers. In the wordsof Gennard and Judge (1997), organizations are assumed to be ‘harmoniousand integrated, all employees sharing the organizational goals and workingas members of one team’.

12 l The framework of strategic HRMGuest (1987, 1989a, 1989b, 1991) considers that HRM values are: unitaristto the extent that they assume no underlying and inevitable differences ofinterest between management and workers; and individualistic in that theyemphasize the individual–organization linkage in preference to operatingthrough group and representative systems.HRM as a management-driven activityHRM can be described as a central, senior-management-driven strategicactivity, which is developed, owned and delivered by management as awhole to promote the interests of the organization that they serve. JohnPurcell (1993) thinks that ‘the adoption of HRM is both a product of and acause of a significant concentration of power in the hands of management’,while the widespread use ‘of the language of HRM, if not its practice, is acombination of its intuitive appeal to managers and, more importantly, aresponse to the turbulence of product and financial markets’. He asserts thatHRM is about the rediscovery of management prerogative. He considers thatHRM policies and practices, when applied within a firm as a break from thepast, are often associated with words such as ‘commitment’, ‘competence’,‘empowerment’, ‘flexibility’, ‘culture’, ‘performance’, ‘assessment’, ‘reward’,‘teamwork’, ‘involvement’, ‘cooperation’, ‘harmonization’, ‘quality’ and‘learning’. But ‘the danger of descriptions of HRM as modern bestmanagement practice is that they stereotype the past and idealize the future’.Keith Sisson (1990) suggested that: ‘The locus of responsibility forpersonnel management no longer resides with (or is “relegated to”)specialist managers.’ More recently, Purcell et al (2003) underlined theimportance of line management commitment and capability as the meansby which HR policies are brought to life.Focus on business valuesThe concept of HRM is largely based on a management- and businessorientated philosophy. It is concerned with the total interests of the organization – the interests of the members of the organization are recognized butsubordinated to those of the enterprise. Hence the importance attached tostrategic integration and strong cultures, which flow from top management’svision and leadership, and which require people who will be committed tothe strategy, who will be adaptable to change and who will fit the culture.By implication, as Guest (1991) says: ‘HRM is too important to be left topersonnel managers.’In 1995 Karen Legge noted that HRM policies are adapted to drivebusiness values and are modified in the light of changing business objec-

Human resource management l 13tives and conditions. She describes this process as ‘thinking pragmatism’and suggests that evidence indicates more support for the hard versions ofHRM than the soft version.RESERVATIONS ABOUT HRMFor some time, HRM was a controversial topic, especially in academiccircles. The main reservations have been that HRM promises more than itdelivers and that its morality is suspect.HRM promises more than it can deliverCommentNoon (1992) has commented that HRM has serious deficiencies as a theory:‘It is built with concepts and propositions, but the associated variables andhypotheses are not made explicit. It is too comprehensive If HRM islabelled a “theory” it raises expectations about its ability to describe andpredict.’ Guest (1991) believes that HRM is an ‘optimistic but ambiguousconcept’; it is all hype and hope.Mabey et al (1998) follow this up by asserting that ‘the heralded outcomes(of HRM) are almost without exception unrealistically high’. To put theconcept of HRM into practice involves strategic integration, developing acoherent and consistent set of employment policies, and gainingcommitment. This requires high levels of determination and competence atall levels of management and a strong and effective HR function staffed bybusiness-orientated people. It may be difficult to meet these criteria, especially when the proposed HRM culture conflicts with the establishedcorporate culture and traditional managerial attitudes and behaviour.Gratton et al (1999) are convinced on the basis of their research that thereis ‘a disjunction between rhetoric and reality in the area of human resourcemanagement between HRM theory and HRM practice, between what theHR function says it is doing and that practice as perceived by employers,and between what senior management believes to be the role of the HRfunction, and the role it actually plays’. In their conclusions they refer to the‘hyperbole and rhetoric of human resource management’.ResponseThere is no doubt that many organizations that think they are practisingHRM are doing nothing of the kind. It is difficult, and it is best not to expect

14 l The framework of strategic HRMtoo much. Most of the managements who hurriedly adopted performancerelated pay as an HRM device that would act as a lever for change have beensorely disappointed.But the research conducted by Guest and Conway (1997) covering a stratified random sample of 1,000 workers established that a notably high levelof HRM was found to be in place. This contradicts the vi

Part 2: Strategic human resource management in action. This describes the formulation and implementation of HRM strategies, the impact of strategic human resource management, the strategic contribution of the HR function, and roles in strategic HRM. Part 3: HR strategies. This covers each of the main areas in which HR

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