Organizational success increasingly requires managers to engage in three levels of strategic decision making: corporate-level, business-level/competi-
tive, and functional. Many organizations consist of several businesses. They therefore need a corporate- level strategy. An organization’s corporate-level strategy identifies the portfolio of businesses that, in total, will comprise the organization and the ways in which these businesses will relate to each other.
At the next level down, each of these businesses is then guided by a business/competitive strategy. A competitive strategy identifies how to build and strengthen the business’s long-term competitive position in the marketplace.
Finally, each business will in turn be comprised of departments, such as manufacturing, sales, and HRM.
Functional strategies identify the basic courses of action that each of the business’s departments will pursue in order to help the business attain its competitive goals. Strategies at all three levels, however, impact on the HRM function under the strategic approach to HRM as suggested in the next few
paragraphs.
Strategic Planning and Building a Competitive Advantage
If you do not know where you are going, how will you ever get there? Although organizations pursue three levels of strategies, the term strategic planning is usually reserved for the company’s corporate- level, organization-wide strategic planning process. It is through strategic planning that managers will ideally seek to balance two sets of forces—the organization’s external opportunities and threats and its internal strengths and weaknesses. The strategic planning process helps organizations determine where they are going. When developing a strategic plan, an organization specifies its overall purpose and
objectives and indicates how these are to be achieved. It is through the development and implementation of a strategic plan that organizations try to build and sustain a competitive advantage.
Organizations try to achieve competitive advantages for each business they are in. A competitive
advantage can be defined as any factor that allows an organization to differentiate its product and service from those of its competitors to increase market share. Organizations can accomplish this aim in one of two ways: through cost leadership or differentiation.
With cost leadership, an organization provides the same services or products as its competitors, but produces them at a lower cost. By doing so, the organization earns a better return on its investment in capital and human resources. For example, Wal-Mart is an industry cost leader; it maintains its
competitive advantage through its satellite-based distribution systems and the fact that it generally keeps store location costs to a minimum by placing most stores on low-cost land outside small to medium- sized southern towns. Timex and Hyundai are other examples of businesses that have successfully used a cost leadership strategy.
Differentiation is a second example of a competitive strategy. In a differentiation strategy, an
organization seeks to be unique in its industry along dimensions that are widely valued or preferred by buyers. Like Mercedes Benz, organizations can usually charge a premium price if they successfully stake out their claim to being substantially different from their competition in some coveted way. Rolex and BMW are other organizations that have successfully used a differentiation strategy.
Strategy and HRM
Effective HRM practices can enhance an organization’s competitive advantage by creating both cost leadership and differentiation. In today’s competitive global environment, maintaining a competitive advantage puts a premium on having a committed and competent workforce. Low-cost, high-quality products and services are a result of committed employees all working hard to produce the best products and provide the best services that they can at the lowest possible cost.
The HRM function focuses its activities on ways to help the organization achieve corporate goals like growing operations through recruiting and hiring employees, orienting and training them, and making their initial and future job assignments. When organizations view the HRM area as a true strategic partner, they also use input from HRM managers in their initial formulation of corporate strategy.
HRM contributions to a cost leadership strategy focus on recruiting and retaining employees who can work as efficiently and productively as possible. On the other hand, more experienced employees may demand higher wages, so it might also be possible to reengineer jobs to require minimal skills and then to select employees who can perform the jobs but who may not remain long with the organization. A number of organizations (i.e., fast-food restaurants) often control labor costs with this type of an approach. Training may emphasize efficient production methods, and reward systems may be based more on quantity than on quality of output. One popular approach to reducing costs today is to move production to countries where labor costs are lower than in the home country.
HRM managers contribute to the successful use of a differentiation strategy by recruiting and retaining employees who can perform high-quality work and/or who can provide exemplary customer service.
Likewise, employee training will likely focus on quality improvement, and reward systems may be based on factors such as quality of work and customer satisfaction.
As noted earlier, functional strategies address how the organization will manage its basic functional activities, such as marketing, finance, operations, research and development, and human resources management. Thus it is at this level that HRM strategy formulation or planning formally be-
gins to take shape. It is clearly important that an HRM functional strategy be closely integrated and coordinated with the corporate, business, and other functional strategies. Indeed, without such integration and coordination, organizational competitiveness will clearly suffer.
As effective partners in helping organizations successfully achieve their goals, HRM managers need to have a clear understanding of exactly what are the organization’s strategies, and then they must ensure that their own efforts are consistent with and provide support for those strategies. To the extent that the HRM function is seen as a strategic partner and/or a center of expertise, of course, its managers should also be actively involved in the formulation of corporate and business strategies as well as other
functional strategies.