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Effect of SHRM on Mergers and Acquisitions

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Published: Wed, 07 Feb 2018

IS STRATEGIC HUMAN RESOURCE MANAGEMENT AN EFFECTIVE TOOL FOR MERGER AND ACQUISITION PROCESS, IN TERMS OF KNOWLEDGE, SKILLS AND EFFICIENCY?

Introduction

First chapter of my dissertation will talk about the back ground of the proposed dissertation topic. This back ground discussion will lead our focus to the actual problem area. As the main actors of my discussion are human so the related topic’s back ground, like HRM, strategic HRM, and integration of SHRM with overall business strategy and the new role of SHRM especially in the process of mergers and acquisitions, will be focused. Later discussion will focus on aims and objectives of my research and will also explain the dissertation structure.

Background

Business world is so dynamic especially in current era when organizations face lot more complicated challenges and strict competitions. To cope with new challenges, organizations employee new management tools, methods and philosophies. These tools and philosophies help management in gaining competitive advantage to survive in the business world. Among these philosophies, strategic HRM is one, which helps businesses to survive and gain competitive advantage in current dynamic environments.

To learn more about the role of Strategic HRM, first we need to know what strategic human resource management actually means, as we know till that point that this a management philosophy helping organizations in facing new challenges in ever changing environment. The concept of Human resource management is not new. It is on the business horizon from last 100 years discussed and debated in different forms, shapes and names but the actual human resource management can actually be traced back in 1960’s when the importance of employer and employee relationship was more focused. Improved education and skills actually developed the concept of Human resource management over the years. This development took a new turn when in 1980’s HRM became the integral part of business strategy and was named as strategic human resource management. That field of business management is actively involved in all business decision and plans related to relations of employee and organization.

The involvement of SHRM in restructuring and developing organization can be seen in the shape of different tools and methods adopted by organization like decentralize decision making, flattened hierarchies, training etc. This involvement is much needed during Merger and acquisitions process where SHRM can help this process in terms of knowledge, skills and efficiency. To allocate resources accurately ,like employing right people with right skills and knowledge, organizations need to bring in the SHRM at the time of strategy development not at middle or later stages. Introducing SHRM at start of strategy making will help organizations to achieve their goals and objectives of proposed merger or acquisition.

Organizations need to manage their human resources very systematically and strategically to gain competitive advantage. SHRM provides organizations an opportunity to align and integrate people’s resources with strategic management. This integration and alignment will ensure that right people, working on right places with right tool, implementing right policies to gain overall goals and objectives of the organization.

The popularity of SHRM is growing day by day as an effective tool to do effective business. In this growing popularity human resources are treated as “the available talents and energies of people who are available to an organization as potential contributors to the creation and realization of the organization’s mission, vision, strategy, goals and objectives which helps organizations in order to improve the business performance”. Jackson and Schuler (2000)

My research dissertation will try to establish a link between SHRM being an effective tool in M&As process in terms of a knowledge, skills and efficiency contributor. This link can be seen in the statement given by Narasimha,S. (2000) as “Strategic HRM take a different colour when we view them as contributing to organizational knowledge stocks”. So it is apparent that SHRM is capable of doing much more than the traditional HR in achieving business goals and objectives.

Reason to Choose This Dissertation Topic

As my dissertation revolves around SHRM so the main reason of choosing this topic is to establish a link in between organizational development and the role of SHRM. My focus would be the areas where SHRM can play a critical role in developing organizations especially when organizations decide to acquire or merge with some other organizations for number of reasons like to increase the share holders value, expansions , strategic alliances, access to new markets, elimination of competition etc.

Usually organizations face swerve problems when they go through these M&As processes, so my main aim is to focus on what should have been done in advance of this process, during and after the process to make such deals successful. Top management plans, middle level management execute the plans and general employees do what they asked to do, to ensure the success of business plans. In my dissertation I will focus on how SHRM approaches and models can be effectively implemented and executed and how these models maintain the consistency in achieving business goals and objective not only today but in future as well.

Another area of my focus would be provision of knowledge and skills by SHRM to the organizations, efficiently. These are new tools and techniques that can have a great effect in the times of mergers and acquisitions and require active involvement of both sides to achieve set goals.

Another field in which I would be looking into to establish my research is performance management. My research will try to identify the Importance and criticalness of implementation of this system into the organization as this implementation is not easy as claimed by Elaine, D. P. (2009, Pg.3) “Performance management is known as the “Achilles’ Heel” of human capital management, and it is the most difficult HR system to implement in organization.” This system is all about defining, assessing and refining the work outcomes and attitude of employees. This effective system of performance management should give organization a leading edge as compare to their rivals.

There are other related issues which need to be addressed like maintaining quality of services with the help of emerging techniques and strategies. Quality in service can be attained by training and development of the employees. Besides that they need good salary and good designations, which can lead employees towards better performance. SHRM have capabilities to address this issue in very systematic way.

Organizations always goes through different phases and some time they need to even face situations like redundancies, re-structuring and some time even closures of businesses. But on the other hand organizations establish strategic alliances and mergers to grow. In this situation HR mangers have to address issues like relocation, new designations, changing nature of job duties, obstacle is changing culture and arranging new training and development programmes. The most sensitive amongst is cultural change which can have really bad effects on business success if not addressed properly. To address this problem area, SHRM can provide solutions like recruiting right people with right talent, knowledge and skill. Actually it is HRM’s strategic approach which can motivate employees for quality of work and development of company by designing most appropriate HR policies. If some one wants to know the working environment and culture of an organization then he should study it HR policies.

AIMS AND OBJECTIVES

The aim and objective of my dissertation is to find out how strategic human resource management (SHRM) can play a vital role in terms of knowledge , skills and efficiency during and after mergers and acquisitions (M&As) process. How the integration of strategic management ( SM ) with human resource management (HRM) can improve and maintain the competitiveness of future preferences of the organizations, especially M&A’s. How useful it could be if we use SHRM as a tool in M&As process to benefit the knowledge, skills and efficiency much needed in this process.

If we look at the dimensions of human resource management (HRM) , two type of dimensions are more apparent, Functional and strategic. Operational issues come under functional HRM and overall company progress and performance is linked with strategic HRM. Majority of Managers involved in M&As are always confused of understanding and implementing the strategy which has been developed over the time. SHRM will focus on the strategy and planning of human resource requirements which are needed on a certain period of time and will ease the difficulties of mangers especially in M&As. This approach will focus on the number of personnel needed along with the behaviour and attitude which can produce best results. This integration will eventually increase the effectiveness of organization in terms of knowledge, skills and efficiency.

The study on this subject provides the information that 80 percent of acquisitions were not gone through well or total failure. How can this commonly practiced business strategy end in complete disaster? Can involvement of SHRM can provide sufficient knowledge, skills and efficiency that such disasters in M&A’s can be avoided.

Even 80 percent of such deals end up in disasters; still such M&A’s are taking place everyday. There are many reasons of these failures, the most important amongst them is little or poor human side involvement especially strategic human resource management. When two firms merge or one big firm acquire the small one, actually the two different working cultures come side by side. The new culture may be the totally a new one or may be part from one firm and part from other merged firm. Bothe higher managements and middle level managements have different level of skills, knowledge and expertise. Most of the mergers fail when these two different cultures collide. My research will identify that can strategic human resource management provide such assistance which can manage the human side of M&As in most effective way that it can provide knowledge, skills and efficiency to the process.

LITRATURE REVIEW

Introduction

To conduct my research I need to take a deep dip into the pool of related information. The information which will provide the base for my research and will give me a deep insight of the work already done on this or related problem area. The information which would be reviewed in this section of my research will come through books, articles, journals and critical reviews.

Mergers and acquisitions are very common and favourite mode of restructuring and growth as stated by Andrew and Milledge ( 2006, pg.2 ) According to him, 1980’s was the era when almost half of the U.S. businesses restructured themselves. In this wave of restructuring, more than 80,000 companies engaged in merger of acquisition. The extent of popularity of this practice can be imagined with this but most of the mergers and acquisitions were totally or partly flopped due to one or other reason. Why such a huge activity is not well planned, why most of the mergers and acquisitions ends up in disasters. Is there something wrong with the finance side or poor management is the cause of this failure or may be human side of involvement in the process has been neglected. My research will encompass that how an effective human side of involvement in the process can get better results in terms of knowledge, skills and efficiency. The basic aim of this research is to find out various views, ideas and concepts of mergers and acquisitions, causes of their failures especially when strategic human resource management is not actively involved in the process. Along with, the research will review all the SHRM models and their critics, their role in mergers and acquisitions process and how SHRM can provide knowledge, skills and efficiency in the process. As vast data is available on the issue so the research would be narrow down into few headings as below.

  • What is merger and Acquisition?
  • Need of mergers and acquisitions.
  • Main causes of failure of M&As.
  • What is Strategic human resource management?
  • Different approaches and models of Strategic HRM
  • How SHRM can be an effective tool in M&As process in terms of knowledge, skills and efficiency.

What is merger and Acquisition?

Most of the businesses are bound with one sold principle, either they have to grow or leave the market. Growth ensures returns to shareholders, generate profits and gets market share from competitors. On the other hand the businesses without growth lose their market share, lose customers and ultimately they disappear from the market leaving great losses for the shareholders. Mergers and acquisitions actually play a very significant role in strengthening the companies or in case of weak business or entrepreneurs, provide chance to avoid exclusion from the businesses as quickly swallowed by the strong business. M&As are very important for a balanced and healthy economy. Corporate history have seen different roles played by M&As, like “greed is good” role, when corporate businesses buying companies in hostile environment and destroying them and today’s fresh trends in which M&A take place for growth and competitive advantage. Since mid 2004 this activity is mostly based on macroeconomic needs of recovery. (Sherman, et al (2005 )

Merger

When two companies or businesses combine in to one unit, its called merger in which only one company survive and the merged company comes to an end only to exist. The surviving company or business is called acquirer which gets all the assets along with all liabilities. Usually in this process large companies are always acquirer or buyers and smaller companies are target but some time businesses with same size and capabilities, both try to cease to exist and they form a new company. Though these mergers take place with mutual agreements, still merger statistics are treating large companies as buyer and smaller as target. (Gaughan, Patrick A. (2005)

J. Reuvid (2007) describes merger as a transaction in which both companies agrees to combine and form a new business entity which will issue new shares and on the other hand cancelling all the old individually issued shares. Mergers usually give an impression of equal share of both parties involved in the merger but quite often one company actually enjoys dominance in term of equity and majority in board of directors. Usually big businesses are predator and smaller ones are known as victim in all most all transitions.

Mergers can face three kinds of scenarios or situations which are beautifully explained by Weston, J.Fred (2001) in his book “Mergers and Acquisitions”. According to W.J.Fred the first category is synergy or efficiency in which the efficiency level with combined operation is greater than the sum of efficiencies produced by these two businesses individually. The second category points out the situation when bidders overpay due to Hubris and the value of business remain unchanged. Third category talks about the situation when total value of business is decreased due to mistakes made by mangers or agencies. All these three situations lead the business towards new directions.

Acquisition

Mergers and acquisitions are the terms usually used simultaneously. In mergers two companies join together to do business under single business entity but in acquisition, business purchases the other business entity as whole or part of it as explained by Sherman, Andrew J. et al (2005). They claim that companies do it for many reasons like in 2005 Proctor & Gamble acquired Gillette company, Inc. to expand its access to consumer products and some companies acquire other businesses to get access to foreign markets. Usually acquisitions occur to obtain financial or strategic goals.

Stanley F, Reed ( 2007 ) defines acquisition as a process by which assets or stocks or both of an organization or business are bought by other organization or business. After acquisitions the buyer becomes the owner of stocks and assets and the target or acquired company lose their ownership. It’s kind of generic term which explains the transfer of ownership. Its more common then mergers as there’s no occurrence of successive mergers.

Need of Mergers and Acquisitions

Why businesses engage in mergers and acquisitions, what are the main reasons, what are the forces working behind this activity which been very popular in last 2 decades?

For almost all businesses the ultimate objective is maximizing profit. Keeping in mind this objective studies shows that traditionally there are two causes of why businesses go for mergers and acquisitions. First one is financial in which prime objective is increasing the share holder’s value and second one is based on managerial motive which focuses on knowledge, growth, sale, performance etc. Studies on this subject shows number of reason behind these M&As and the factors involved behind this activity, all will be analysed from various perspective.

M&As are borderless as explained by Sturgess, B. ( 1989 ) in ” Booming International Mergers and acquisition” . Sturgess describe that mergers and acquisitions can be of local nature or it can go across borders. He explains that local firms can go abroad to acquire foreign businesses or foreign businesses who merge or acquire domestic business.

These M&As can provide short term finances to companies as described by Fluck and lynch (1999). If the firm is unable to finance profitable projects due to one or other reasons they go for M&As to acquire these funds required to finance the big project which will eventually increase shareholders value.

The managerial motives ‘under which mangers try to increase their powers or gains and address other issues like maximizing growth, increasing sale volume etc’ has been explained by Napier, N.K et al (1989) in “Communication during mergers: the experience of two banks” very elaborately.

Apart from the traditional motives the academic, researchers and other people involved in this process has begun to think other reasons and causes of M&As brought in by the rapid changes in the business over the time. One of them is Angwin (2001) who states that the firms go for M&As to avoid the fear of being taken over or being destroyed by other large firms. To exist they simply want to be merged or acquired by other firms where they can remain operational and in the market. The other reason what he describes is as public motive in which companies merge or been acquired to increase the performance and shareholders value which allow them to gain all competitive advantages to remain active in the today’s competitive markets.

Some time companies reach to their maturity with becoming more bureaucratic, leaving fewer opportunities for the individuals. According to Lenvinson (1970) M&A can help such companies by bringing new ideas, enriched working culture, attitude and fresh knowledge. If such companies will not address there obsolescence on time then they will lose their competitiveness and soon will vanish from the market.

Vermeulen and Barkema (2001) also claim that M&A can be very helpful in bringing up up-to-date knowledge and techniques in the businesses to survive in the market in long run. The new knowledge can be of in different field of operation in which company is not engaged yet but in near future this might be the key knowledge in surviving in business world.

All the causes and reasons behind merger and acquisitions can be categorised into seven heads and are known as theories of mergers and acquisitions. These theories can be easily understandable with the help of a diagram as below and can explain the facts which are active behind almost all M&As.

Efficiency theory explains mergers as the way of getting synergies into three main heads which are financial, managerial and operational. For example if we look into the financial head then we consider that the financial efficiency after merger should be greater than the sum of individual financial efficiencies. But this theory has been criticised by Montgomery and Sing ( 1984 ). They claims that in any efficient capital market such synergies like financial synergy cannot be achieved then how businesses can go for mergers only on this ground.

According to monopoly theory the businesses go for mergers and acquisitions to improve and increase the competitiveness but this competitiveness may not be achieved as criticised by Revenscraft and Scherer (1987). He claims that the monopoly theory is comparatively weaker than efficiency theory due to the unfavourable results on businesses.

According to Trautwein, F. ( 1990 ) Raider theory is basically a form of acquisition in which a takeover bid is made to gain the control of shares. Theoretically it’s not a complex theory as frequently cited in business literature claimed by Thomas Straub ( 2007 ) in Reasons for frequent failure in mergers and acquisitions. He states that this form of M&As is regarded as peoples outcome in which these peoples or raiders attempt to get some of the wealth of shareholders for which they have made bid.

Next comes the valuation theory In which Trautwein, F. ( 1990 ) claims that mergers and acquisitions are carried out by top management, the people who have more accurate and true information about the real value of the business. This information is more authentic than the information taken from the investment or stock market.

According to the empire building theory the managers are more concerned to maximize their use and that’s the only aim in their mind and that’s why they plan a merger or acquisition.

The process theory try to explain mergers and acquisitions as the result of decision made by the management which may not be rational as management did not considered the alternatives and have not done any deep analysis. Without a deep and thorough analysis management can’t reach on a decision of that critical nature.

The economic disturbances like recent credit crunches actually modify and reshape the behaviours and expectations of individual, individual who made the decision of mergers ad acquisitions. So with the change of economic environment many firms go for alternatives and amongst these alternatives M&As is more popular that’s why the business engage in this critical manoeuvre. Trautwein, F. ( 1990 )

Main causes of failure of M&As

Most of the researches and reports shows that almost 60% M&As end up in disaster. There are plenty of reasons of these failures and some are explained by Robert F. Bruner ( 2009) in his books “Deals from Hell: M&A Lessons that Rise Above the Ashes”. He summed up these reasons in six main heads.

  1. People involved in these deals were unable to take quick and prompt decisions and actions as they were unable to clearly understand what’s happening. The reason of there confusion is that the deals are so complicated and shows a blurry picture.
  2. Problems of one department or area would travel to other parts of business as flexibility was at its lower level. Problems were not cordoned off and it effects the whole environment.
  3. Some weak decisions and choices were made by management which exposed the risks of the emerged firm. Te new firms can’t avoid exposed risks which caused a failure. These choices or decisions were either deliberately or mistakenly made.
  4. The decision makers were prejudiced by the past’s successes, cost effectiveness, over optimism and pride which led them towards wrong choice or activity.
  5. Companies were not doing businesses as usual. Errors and problems were common and business environments were lacking of something of important nature.
  6. The operational teams collapsed or became ineffective. The reasons behind this collapse or ineffectiveness were existence of different working culture of acquirer and target, problem related to political issues and to much stress on operational team individuals. All these problems broke down the operational teams which resulted in failure.

On the other hand Gerhard, P ( 2002 ) claims that the main factor of failure of M&A transactions are overestimates of revenue , cost synergies and post-transaction integration efforts which are too slow and having low capacities and are not aggressive enough to address these areas effectively. He explains that these causes are the main problem with M&As which leads these transaction in disaster or some time in total failure.

What is Strategic human resource management.(HRM)

The concept of HRM was developed in USA in 1960s and 1970s with initial academic work done by different authors and then it spread around the world and been adopted by almost all organizations around the world. Brewster (1994, pg.1) The concept of Strategic human resource management or SHRM can be traced back in in1980’s and has been distinguished from traditional personnel ‘by virtue of the way in which the former ignored , but the later embraces strategy’ Guest (1993, Pg.213). This integration of strategy make it distinctive from all personnel management forms as concluded by Purcell ( 2001, Pg.59) In following words. ‘The integration with strategy is central to all models of HRM and virtually all authors are agreed that this is the distinctive feature of HRM, compared with personnel.’ Under this concept the HR strategies are integrated with business strategies to achieve the organizational goals. Under this integration, the strategies developed and implemented, lead the organizations to achieve the set goals and objectives very effectively. It’s a conceptual approach, in which strategists find an ideal point where in long run human resources should be and how to get there. It also explains how a more strategic approach can be adopted by the members of HR on daily basis to monitor that the HR strategies are assisting overall business strategy and they are adding value in it. Armstrong, M ( 2008 )

Earlier concept of SHRM was developed from the two models presented by Harved Business School in 1980 in which business strategy has been integrated in HRM. These two models are known as “Harved Matching Model” and ” Harved Framework Model”. This was the first time when Mission, Organisation Strategy and HRM were identified as the key player in the success of business. Later on these key players were integrated together to give the right tack to an organisation which leads towards success, effectiveness and competiveness. (Jain, P. (2005)

The activities which directly or indirectly influence the individual’s behaviour to formulate and implement strategically, what ever business needs. As it is a conceptual framework in which individuals are directed strategically to achieve the set goals in most effective way. Schuler R. S (1992) defines SHRM as all the activities affecting the individual’s behaviour in an attempt to develop and put into the practice the strategic requirements of the organisation. This academic Schuler, R.S et al ( 2001 .pg 127 ) further explains that ‘by strategic we mean that HR activities should be systematically designed and intentionally linked to an analysis of the business and its context.’

It’s a combination of two concepts, HRM and strategy. HRM models are used by focusing on strategy and these models are integrated with business’s overall strategy as explained by Armstrong, M ( 2006 ) in his ” Handbook of Human Resource Management Practice”. This concept deals with the key philosophies of strategy like strategic intent, competitive advantage, strategic fit and strategic capability etc.

He further explains that Strategic HRM is an approach which leads businesses to formulate and implement policies, programmes and practices related to employment relationship, resourcing, performance management, reward etc. These policies and decisions are made on the overall intentions and plans of organization.

Some academic claims that HRM and strategic HRM are almost identical concepts as Mathis &Jackson (1985 Pg.3-4 ) define HRM as ” the strategic planning and management of human resources for an organization…HRM is more broadly focused and strategic in nature”. Four meanings of strategic HRM has been described by Hendry and Pettigrew (1986 ) as

  • The use of planning ,
  • A rational way to the design and management of personnel systems which are based on an employment policy and human strategy along with philosophy.
  • HRM activities are matched with overall organisational strategy.
  • To achieve competitive advantage ,human resources are viewed as strategic resources

The definitions and statements which explain SHRM, given by different authors and researchers, clearly shows the growing need and importance of strategic HRM in business world. Day by day businesses world is becoming more complex and competitive and strategic HRM can play a vital role in ensuring competitiveness as Jain, P ( 2005 ) claims that today the human resources are viewed as the potential contributors in the achievement of organizational goals with the help of available energies and talent these people have. These resources should have four qualities to maintain their competitiveness as suggested by Boxhall, (1996). These suggested qualities are

  • That they must increase the value of activities.
  • Rarity and uniqueness must be established.
  • Hard to copy
  • And hard to be replaced by other alternatives like technology.

The people are the assets to the organizations and these assets should be used strategically to achieve competitive advantage and business goals and objectives in long run.

Strategic HRM address’s some of the critical issues in organizations which deal with the change in culture, structure and knowledge management and how it can be used effectively. Theses changes can increase the organizational effectiveness and performance. It provides efficient way of matching activities and resources to the future requirement of the organization. It Guide’s how peoples skills and abilities can be developed over the time and how the change can be managed. Human capital requirements and development of process capabilities are focused under strategic HRM.

Different approaches and models of Strategic HRM

Human resources play a critical role in the successful achievement of goals and objectives of an organization. The vital importance of managing human resource and strategically deploying these resources can be well understood by the statement of the Managing Director of British Chrome and steel in 1998. He stated that “There is no other source of competitive advantage! Others can copy our investment, technology and scale – but NOT the quality of our people….” Steve, B. ( 2000 ,pg 222 ) As the importance is apparent so these resources should be controlled effectively to get the maximum results. To find out how these resources can be used so effectively and strategically different gurus and academics of this subject have presented couple of theories, frame works and models. These Gurus and academics have also described how these approaches and models of strategic HRM can be developed and implemented though implementation of these HR strategies is not that easy as HR mangers need to realize the Strategic human resource requirements not only in numbers but also attitudes, behaviours and commitments. Alan, P. ( 2007, pg.271) These models and approaches can be categorised into two types: General and Particular approach to the practices of strategic HRM.

Universality, Contingency and Configurational , are the thr


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