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The purpose of this paper is to discuss the issue of integration of business strategy and human resource management. The first section of this paper offers a brief overview of vertical and horizontal integration. The second and third parts elaborate how different perspectives of strategy making influence the linkage between strategy and HRM. The fourth section establishes the importance of internal resources of a firm in successful integration. The fifth section is devoted to discuss emerging models of shared services which intend to free HR from routine functional duties of HRM to focus more on strategic matters. The sixth section of this paper sheds some light on empirical evidence of integration of strategy and HRM. The conclusion offers a summary of findings in this piece of work.
Integration of an organisation's strategy and human resource management strategy is a necessary condition for HRM to be considered strategic (Redman and Wilkinson 2009). Strategic human resource management is an outcome of a two way link between strategy and HRM. Human resource strategy is informed by organisational strategy as well as it helps to shape the nature of that strategy. This two way linkage implies full integration of strategy and HRM; however, if organisational strategy informs HRM without being informed by it in any intended and informed way, the integration is considered partial (Purcell (2001, cited in Millmore et al., 2007: 15). The Integration of organisation strategy with HRM practices is called vertical integration, while internal coordination of HRM policies and practices is called horizontal integration. Guest (1987, cited in Millmore et al., 2007: 23) recognised that human resource activities not only need to be internally consistent but they also need to cohere with other functional areas such as marketing, service provision and production etc. to gain full horizontal integration. However this linkage is highly problematic and complicated due to a number of different approaches to strategy making.
The conventional models of integrating business strategy and HRM assume a classical model of strategy making (Legge, 2005). The classical approach emphasises strategy as being a rational, deliberate, linear and top-down process, where conception is separated from implementation through the creation of strategic plans which are passed down to others to implement. A number of matching models have been proposed in literature following classical approach. Kochan and Barcocci (1985, cited in Millmore et al : 16) suggested that HRM strategy should be linked to the life cycle stage of an organisation, related relatively to its start-up, growth, maturity and decline. Fombrun et al. (1984, cited in Millmore et al : 16) presented a model as an attempt to fit their four generic HR systems (selection, appraisal, reward and development) to the different stages of growth which organisation go through from start-up to maturity. Miles and Snow (1984, cited in Legge: 141) identified three types of effective behaviours, i.e. defender, prospector and analyser. The argument in favour of this top-down approach to link strategy with HR practices is weak because strategy will change during organisation's life cycle and it will affect HRM strategy in return. Moreover, industry sector of an organisation and the nature of occupational group involved may have significant effect on an organisation's chosen strategy (Purcell, 2001, cited in Redman and Wilkinson 2009:9). The underlying assumption of matching literature is that employee attitudes and behaviour can be moulded by management strategy; however human resource outcomes cannot be taken for granted (Boxall 1992, cited in Redman and Wilkinson 2009:9). The best approach fails to acknowledge the importance of social norms and legal rules in the search for alignment (Paauwe and Boselie 2007, cited in Redman and Wilkinson 2009:9). The classical approach also takes no account of the significance of power, politics and culture (Kamoche 1994; Purcelland Ahlstrand 1994, cited in Gratton et al 1999: 44). These factors suggest that a much more complex model of relationship between strategy making and HRM is needed to represent such linkage in reality (Millmore et al. 2007).
Whittington (1993, cited in Lynda et al: 44) has identified three other perspectives on strategy formulation, i.e. evolutionary, processual and systematic. The evolutionary perspective implies that market selects the winners and the environmental fit is the main goal; therefore, strategy is emergent. According to processual perspective strategy is a means for managers to codify a complex world and is discovered in action rather than formulated. The systematic approach suggests that social systems play a key role in shaping strategic goals. Management ability to formulate strategy is minimised where environmental factors shape the fate of an organisation. In other words, success will depend on management's ability to scan and interpret environment, so that organizational and human resource strategies are well adapted to environmental circumstances (Millmore, et al. 2007). The same political, cultural and capability constraints will affects management's ability to interpret environment, and strategy formulation will depend on senior management's discretion. Organisations which are well adapted to environment will benefit from this situation but consequences for less well-adapted organisation will be negative. In reality, however, all strategies are not strictly deliberate or emergent. There are a number of strategies which are partly deliberate and partly emergent. This mixed approach of strategy making is not only more close to reality; it also enables HRM strategy to fulfil multiple roles. HRM corresponds to deliberate part of strategy and also fosters capabilities and behaviours required to promote emergent aspects of strategy. This strategic approach ensures that human resource strategy is both informed by organisational strategy and helps to develop and realize organizational strategy (Millmore et al. 2007).
A number of external factors influence the formulation of strategy, but firm's internal recourses and capabilities also affect an organisation's strategic choice. In strategic human resource management (SHRM), human resource assets are considered main source of competitive advantage. Much of the work in this area is based on resource-based theory (RBT) of the firm (Barney, 1991; Boxall and Purcell 2003; Allen and Wright 2007, cited in Redman and Wilkinson 2009: 7). Resource based theory suggests that competitive advantage depends on an organisation having superior, valuable, rare and non-substitutable resources at its disposal. The non imitable nature of the resources is the key in this regard, otherwise competitors would be able to replicate these resources and the advantage would be short lived. The complexities and ambiguities associated with HRM practices are considerable and not easy for competitors to imitate (Redman and Wilkinson 2009). Moreover, the linkage of organisational resources and firm strategy cannot be easily identified and imitated by other firms due to the social complexity and causal ambiguity (Barney 1991, Boxall 1998, cited in Wei 2006). Thus, the integration of human resources with the appropriate strategy can generate a sustained competitive advantage for the firm. If human resources and HR strategies are so important to gain competitive advantage, such matters should be within the overall business strategy of organisation rather than separate from it. In other words, HR should be much further up in the business strategy process. Organisation's human resource, capabilities and skills should be taken into account while formulating business strategy for successful implementation of strategy. Thus human resources factors should not only be considered in the implementation of policy but actually influence which business strategy is adopted (Redman and Wilkinson 2009). Resource based perspective also demonstrates that strategies are not universally implementable but are contingent on having the right human resource base necessary to implement them (Wright and McMahan 1992). For HR to develop strategic capability and to produce human resource advantage; HR needs to move further up in business strategy process. Boxall and Purcell 2003, cited in Armstrong 2007: 118).
Integration of business strategy and HR can not be achieved without inclusion of HR in boardroom. The greater the extent to which senior HR directors are able to influence the strategic decision-making process, the more likely it is that effective HRM policy design will be achieved (Poole and Jenkins, 1997; Osterman, 1995, cited in Sheehan). Traditionally HR is not involved in formation of strategy; it is only considered a medium to implement strategies. There are a number of emerging models which intend to free HR function from administrative and advisory work and focus on more strategic business activities. HR shared services, centres of expertise, self service e-HR and HR business partnering are the major components of new emerging models (Storey, 2007). HR shared services are delivered by centralising single or multiple transactional HR services (e.g. payroll, benefit administration). The centralising drive of shared services is strongly integrationist in terms of HR information systems and processes. Centre of expertise concentrate HR functional areas of expertise (e.g. rewards, performance management, employee communications) so they can be delivered as a specialist design service at the corporate centre or as distributed activity brokered through HR consultancy services to the line. Centres of expertise are another manifestation of the reorientation of HR as an integrated and more customer-facing function (Storey, 2007). The emergence of e-HR is a move towards use of intranets, internet and web-based systems of delivery. The main driving force of e-HR is cost reduction, however, at a strategic level e-HR is part of the overall push to devolve HR responsibilities to line managers and employees (Hawking et al. 2004, cited in Storey 2007: 26). There is some survey evidence that e-HR is enabling HR to become more strategic by offloading routine administration work, the process is very uneven and it often has negative consequences in terms of depersonalising the HR function in the experience of its users. (Lawler et al. 224, cited in Storey 2007:26). Ulrich's HR business partner model was perceived as a shift of HR function away from operational-administrative matters towards strategic or business driven HR. The strategic business role became closely identified with the growing aspiration of HR directors to gain a seat in boardroom. However, it soon became evident that the focus of business driven HR was operational and effective implementation of HR policies than formulation of strategy. Royal Bank of Scotland has one of the most successful models of HR business partnering. HR spends considerably less time on HR administration and advisory work and much more on strategic business activities. But the success of the integrationist model of business partnering has created new challenges. It is less successful in measuring business effectiveness and delivery; and outsourcing can achieve similar or even greater cost savings (Storey 2007). According to Francis and keegan (2006, cited in Redman and Wilkinson, 2009: 16) employee champion role of HR is shrinking because HR professionals are encouraged to aspire to the role of strategic or business partner. The 'bread and butter' issues of effectively managing the recruitment, selection, appraisal, development, reward and employee involvement have been ignored and pushed to the periphery (Redman and Wilkinson 2009). The main challenge for HR in 21st century for HR function and leaders is to keep their eye on the prize of a strategic role while also performing the necessary operational role (Lewin 2007, cited in Redman and Wilkinson, 2009: 16). There has been a great deal of debate whether successful integration of business strategy and HR is possible. It is appropriate to explore empirical work in this regard to find the reality.
In spite of the fact that integration of business strategy and HR is one of the widely debated topics, there is little evidence of successful integration. Hoque and Noon (2001, cited in Storey 2007: 34) demonstrated, using the Workforce Employee Relations Survey (WERS98) data, that HR specialists were distinct from personnel experts in four respects, i.e. higher level of qualifications, involvement in strategic planning processes, delegation of authority to line managers and adoption of sophisticated 'high commitment' practices associated with HRM. Tyson and Fell (1986, cited in Gratton et al. 1999: 46) found limited scope within organisation for HR to perform an 'architect' function because its representation at corporate level was so limited. Tyson (1995, cited in Gratton et al. 1999: 46) study also concluded that HR matters may constitute a second or third order strategy (Purcell, 1989, cited in Gratton et al. 1999: 46). In only three instances the HR director played an active role in formulating the overall business strategy. A senior director of Kraft Jacobs Suchard UK (Gratton et al. 1999) summed up the HR position in his firm, "I don't think HR gets factored into the development of business strategies. HR would be involved in our three year planning, in terms of development, succession planning and so on, but it doesn't determine which way the company goes or how the company is going to expand into different coresâ€¦HR falls out of business strategy." Though there are a very few examples of successful integration of strategy and HRM, the steady growth of HR is a positive sign. Strategic HRM is still in its infancy and only time will tell how successful integrationist theory is. As Redman and Wilkinson (2009)have summarised that 'our knowledge base of strategic human resource management is still rather limited, not least by its somewhat fragmented nature, and there is, as yet, little consensus in the empirical findings.'
The integration of business strategies and HRM is highly complicated and there are very few examples of successful integration. There are a number of factors which make this process hugely problematic. The first and foremost is the nature of strategy formulation. The classical, rationale or top down approach is considered the main approach of strategy making but in today's highly volatile business environment, the validity of this static approach is highly questionable. Business environment, market conditions, social, political and cultural factors and industry conditions influence business strategies; therefore, evolutionary or emergent approach to strategy formulation is needed to cope with uncertainty and to integrate business strategy and HRM. According to Mabey and Salaman (1995, cited in Milmore et al. 2007: 17), 'experience suggests that strategic decision-making, either corporate or HR, is incremental, piecemeal, ad hoc, incomplete and negotiated and only partly rationale.' In reality formulation of strategy is partly deliberate and partly emergent. This mixed approach helps HR to form a reciprocal link with business strategy. Internal resources of a firm are also key factors which influence its strategic choice. Resource based theory emphasises the importance of internal firm resources to achieve competitive advantage. Since human resources are key assets a firm possesses, it is important to give them a consideration while setting business objectives and devising strategies. For effective implementation of strategies, HRM should not only play important role in implementation of strategy, it should also participate in formulation of business strategy. Organisations which formulate their strategy considering interrelationship between competitive strategy and human resources are more likely to improve their performance than those who simply use human resources to implement strategy (Lengnick-Hall and Lengnick-Hall 1988, cited in Milomore et al.: 22). There is a growing emphasis on HR function's representation at corporate level. HR managers can only have appropriate input in strategic decision making, if they have representation on the board of directors or senior committee level (Poole and Jenkins, 1997; Shipton and McAuley, 1993, cited in Sheehan: 192-209). HR shared services are used to achieve this objective. Ulrich (1997) HR business partner model gives more strategic role to HR function while administration duties are transferred to line managers. Huselid, Jackson and Schuler (1997, cited in Wei 2006) differentiated technical HRM activities from strategic HRM activities. Technical HR activities range from selection and training of high quality employees and motivating them to work toward organisational goals which ensure its human resources are unique from other firms. Adoption of superior technical HR activities is a key to implement internally consistent HR practices which helps to achieve horizontal fit among those HR practices. Strategic HRM activities are those that are integrated or congruent with the company strategy, which can ensure the inimitability of the firm's human resources. In spite of the growing popularity of the HRM concept and the strategy-HRM fit thesis, there is little empirical evidence to show its presence in organizational practice. There is also no evidence that tight fit leads to positive outcomes, and the concept of fit implies inflexibility and rigidity which could, in themselves, be detrimental to organizational outcomes (Lengnick-Hall and Lengnick-Hall 1990, cited in Gratton et al.: 44).