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

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:

Valued Customer Outcome
Revenues
Skilled, Experienced, Committed Employees Outstanding Customer Service

Driven by?
Internal Promotion Extensive Training High Pay Non-Union Flexible work rules Family Culture

Delivered by?

Profits
Costs

Core Competence

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):

Delivered by?
Commodity Workforce: Contingent Temporary Low Tenure

Driven by?
Layoffs Low Wage Low Training Contractors

Valued Customer Outcome

Revenues

Competitive (Low) Cost Travel

Costs

Profits

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):

Delivered by?
Commodity Workforce: Contingent Temporary Low Tenure

Driven by?
Layoffs Low Wage Low Training Contractors

Valued Customer Outcome

Revenues

Competitive (Low) Cost Travel

Costs

Profits

Unintended Consequences: Unions Customer Service Baggage Handling Safety

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?

Figure 2: How The IBM HR Strategy Supports and Enables the Business Strategy
Performance-Based Opportunities IBM Differentiators: The Employee Experience
Innovation Business Value

Leadership

Diverse, Talented People

I B M
S T R A T E G Y

Flexibility

Values-based Climate

Focus on Enterprises that Value Innovation

Global Integration On Demand Infrastructure

Anticipate and Build Skills

An inspiring climate in which employees flourish by creating value for our clients and the world

Human Resources Focus Areas

Lead the Transformation

Grow IBM

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
Strategic HRM
Focus Human Capital

HR Strategy
Human Resource Practice System

HR Best Practices
Single HR Practice

Level of Interest

Organization or business level

Job Level

Job Level

Responsibility

Designed jointly between line and HR Get right people in right place in the business to maximize business success

Designed mostly by HR

Designed entirely by HR Get people to have (skills), feel (attitudes) or do (behaviors) something that leads to job success

Goal or Objective

Get people to have (skills), feel (attitudes) and do (behaviors) things that lead to job and business success

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

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

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

Profit per employee $11,615 $21,805

Average Hourly Wage Percent with Health Care Percent of Health Care Premiums Paid Turnover
Turnover cost per employee

$9.86
<50% 33%

$17.00
82% 8%

44%
$5,274

17%
$3,628

Source: Cascio, W. The high cost of low wages. Harvard Business Review

HR Strategy and Performance

What Employees Have Skills, Abilities, Competencies

HR Strategy Recruitment Selection Training Development Performance Management Rewards Communication

What Employees Feel Motivation Commitment Engagement

What Employees Do Task, Discretionary, Counterproductive Behavior, Attendance, Turnover

Customer Outcomes Satisfaction Retention

Operational Outcomes Productivity Quality Shrinkage Accidents

Financial Outcomes Expenses Revenues Profits

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.

HR Practices and Operating Expense

Note: In order to disguise the date, the mean has been subtracted from the numbers on the Y-axis.

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.

HR Strategy and Performance: Sysco Findings

What Employees Have Skills, Abilities, Competencies

HR Strategy Recruitment Selection Training Development Performance Management Rewards Communication

What Employees Feel Motivation Commitment Engagement

What Employees Do Task, Discretionary, Counterproductive Behavior, Attendance, Turnover

Customer Outcomes Satisfaction Retention

Operational Outcomes Productivity Quality Shrinkage Accidents

Financial Outcomes Expenses Revenues Profits

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

Supply Chain/ Inventory

Design

Manufacturing

Distribution

Service

Processes

Processes

Processes Processes

Processes

VALUE

strong
Weak with consumers

Weak

Weak

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 VALUE

Design

Supply Chain/ Inventory

Manufacturing

Distribution

Service

Processes

Processes

Processes
Processes

Processes

Innovative Product Designers

Sales to Retailers

Consumer Service Techs

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
Design Supply Chain/ Inventory Manufacturing Distribution Service

HR Strategy
Processes

Recruitment: Where to find these people? Selection:

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?

Innovative Product Designers

What skills do they need and how to assess those skills Rewards:

Information/Participation: What is the market pay rate and what types of incentives will What information should be attract and motivate them? shared with them and in what areas should they participate?

VALUE

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. Wright
Cornell University ILR School 397 ILR Library Building Ithaca, New York 14853 t. 607.255.3429 f. 607.255.1836 pmw6@cornell.edu

www.ilr.cornell.edu
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