Human Resources Management: Theories, Strategy, and Global Practice

Introduction: The Strategic Value of Human Resources

"Resources are limited: Creativity is unlimited." These are the words — and, most importantly, the belief — that POSCO, the world's second largest steel producer, shares with all its employees and visitors arriving at its Pohang plant, situated far into the sea separating Japan and Korea. These words are written on a huge sign spanning six lanes of traffic, proclaiming the company's philosophy in both Korean and English. (Milkovich and Boudreau, 1997)

This is not only the belief of POSCO; it is a belief that many companies have begun to share at a global level in recent decades.

Even if plant, equipment, and financial assets are and will continue to be important resources for almost any organization, human resources — the people within these organizations — are gaining an ever-increasing role. People are the ones who design and produce the goods and services a company offers to its clients; they control the quality of their work, market the products, allocate financial resources, and set the organization's overall strategies and objectives. In this sense, people perform the same role in a company as the circulatory system performs in the human body. It follows that a company lacking effective employees will face serious challenges in achieving its objectives.

This paper first introduces theories aimed at better understanding human resources management, then discusses how strategic human resources management combined with a company's strategic management process can bring higher benefits to organizations. A brief overview of global human resources management and the application of technology in HRM is also offered.

Human Resources Management: Review of Theories

Human Resources Management (HRM), as the system of integrated decisions that defines the employment relationship, directly affects both people's lives and the ability of employers to compete in the marketplace. This makes HR-specific decisions among the most crucial and difficult decisions that company managers must make. Critically, these decisions must never be made in isolation; they must always take into consideration the political, economic, and cultural forces in society. (Milkovich and Boudreau, 1997)

As an important work on the subject, Jackson and Schuler's "Understanding Human Resource Management in the Context of Organizations and Their Environments" offers an overview of the most important theoretical perspectives used to understand HRM. In their framework, HRM comprises: (a) specific HR practices such as recruitment, selection, training, and appraisal; (b) formal HR policies that direct and to some extent constrain the development of those practices; and (c) overarching HR philosophies that are reflected in the policies and practices developed by a given organization.

In an ideal situation, these elements would develop into a system that attracts, develops, motivates, and retains employees who can guarantee the effective operation and survival of the organization and its members.

The context of HRM includes both internal and external factors. Internal factors include technology, organizational size and structure, life-cycle stage, and business strategy. External factors identified by Jackson and Schuler include legal, political, and social environments; labor market conditions; unionization; industry-specific characteristics; and national culture.

Jackson and Schuler summarize eight theoretical perspectives relevant to understanding HRM as follows:

General Systems Theory — This theory begins by viewing the unit of analysis as a composite of interdependent parts that receive inputs from the environment, transform them during throughput, and produce outputs exchanged back into the environment. Applied to HRM, skills and abilities serve as inputs, employee behaviors constitute the throughput, and employee satisfaction and performance represent the outputs.

Role Behavior Perspective — This perspective defines roles as interdependent components making up an organizational system. It shifts focus from individuals to social systems characterized by multiple roles, role senders, and role evaluators. Drawing on Katz and Kahn's definition of role behaviors as "the recurring action of an individual, appropriately interrelated with the repetitive activities of others so as to yield a predictable outcome," this approach stipulates that HR practices must elicit employee behaviors consistent with organizational strategies.

Institutional Theory — Applied to HRM, this theory suggests that both the adoption of new HRM approaches and their rejection are explained by organizational context. A company might adopt a particular HRM practice simply because others have done so, or might reject it if alternative HRM activities already have deep historical roots within the organization. Understanding such choices requires studying the organization's past.

Resource Dependence Theory — This theory focuses on resource exchanges as the central feature of the relationship between an organization and its constituencies. Organizations gain power over one another by controlling valued resources. In this framework, HRM processes and activities reflect the allocation of power within a system.

Human Capital Theory — This theory assumes that all investments made to obtain productive behaviors from employees — costs including motivation, training, and retention — constitute human capital investments made in anticipation of expected future returns.

Transaction Costs Theory — This theory helps explain how HRM activities are used to attain a governance structure that allows the organization to manage the many implicit and explicit agreements that exist between employers and employees.

Agency Theory — This theory focuses on contracts between two parties: the principal, who delegates work, and the agent, who performs it, and examines the probable challenges that can arise in this relationship.

Resource-Based Theory — This theory combines concepts from organizational economics and strategic management. It suggests that HRM significantly influences an organization's human and organizational resources in ways that can help it gain and maintain competitive advantage — the key to organizational success. (Jackson and Schuler, 1995)

Importance of HRM to Organizations

Today's competitive environment is characterized by fast-changing business and technological conditions and dynamic strategies in finance, marketing, technology, and information. All of these are vital. Nevertheless, the right mix of HRM strategies will prove to be of more critical importance for a company seeking its best business results.

HRM, as the process of reaching organizational objectives through the acquisition, development, retention, and optimal use of human resources, has as its ultimate goal the full realization of every employee's performance potential.

An ever-increasing determinant of organizational effectiveness is the planning for and managing of human resources in exactly the way the business requires. As organizations evolve, the growing complexity of their operating environment automatically causes an increased dependency on the people who constitute the organization. (Irudayam, 1996)

Every day, employees are asked to demonstrate increasingly differentiated and focused skills, as technical, economic, political, and socio-cultural environments are characterized by ever more complex technologies.

Managers must therefore understand that significant factors in maximizing every employee's performance potential rest on well-developed HR policies that, after ensuring a tailored selection process, offer employees the opportunity to learn and develop themselves, manage retention and turnover, administer compensation and benefits, and ultimately provide employees with the critical tools they need to bring competitive advantage to their company.

Strategic HRM and Firm Performance

As noted by Chang and Huang (2005), there has been considerable debate about whether Strategic Human Resources Management (SHRM) is consistently and positively related to firm performance. Within this framework, the Universalistic perspective leads to the hypothesis that firms adopting SHRM practices will significantly outperform those that do not.

Authors who argue that SHRM has a positive influence on organizational performance contend that it can help companies improve the cost efficiency of their human resources, increase the level of innovation and organizational agility, promote operational efficiency, and increase positive performance outcomes. (Chang and Huang, 2005)

As noted by the same authors, the most influential set of best practices is that developed by Pfeffer — initially identifying 16 practices in his first book on the subject, and later condensing them to seven in 1998. These practices include: selective hiring, employment security, self-managed teams, extensive training, information sharing, reduction of status differences, and high pay contingent on organizational performance.

Other authors analyzed by Chang and Huang argue that SHRM benefits companies both directly and indirectly by transforming passivity into initiative through clearly communicating organizational goals and encouraging the participation of line managers. In addition, by generating structural cohesion — defined as "an employee-generated synergy that propels a company forward, enabling the firm to respond to its environment while still moving forward" (Chang and Huang, 2005) — SHRM positively influences organizational performance.

Various other studies reinforce the idea that a strong strategic orientation in human resources tends to appear in high-performing firms, in contrast to low-performing firms, which tend to apply more conventional methods. (Jackson and Schuler, 1995)

Conclusion

As the preceding sections of this paper have demonstrated, the importance of HRM working in concert with the strategic management process of the organization is a necessity for any company seeking sustained success in today's business world.

Nevertheless, in order to realize all the positive outcomes that a sound HR strategy can bring, the implementation of that strategy must be a continuous activity, and awareness of its importance must be cultivated from the top management level down through every hierarchical tier. Every member of the organization should understand the significance of effectively implementing the HR plan and strategy. In this way, they will be more willing to cooperate in the process and better positioned to share in the benefits it generates.

References

Armstrong, M. A Handbook of Human Resource Management (7th ed.). Kogan Page, 2000, London.

Jackson, S.E., & Schuler, R.S. Managing Human Resources: A Partnership Perspective. South-Western College, 2000, Cincinnati, OH.

Milkovich, G.T., & Boudreau, J.W. Human Resource Management. Times Mirror Higher Education Group, USA, 1997, pp. 2–10.

Jackson, S.E., & Schuler, R.S. "Understanding human resource management in the context of organizations and their environments." Annual Review of Psychology. Palo Alto: 1995. Vol. 46, pp. 237–264.

Irudayam, A. "The importance of HRM strategies." The Hindu Business Line, Dec. 1996, pp. 1–3.

Chang, W-J. A., & Huang, T.C. "Relationship between strategic human resource management and firm performance — a contingency perspective." International Journal of Manpower, 2005, Vol. 26, No. 5, pp. 434–449.

Jain, P. "A comparative analysis of strategic human resource management issues in an organizational context." Library Review, 2005, Vol. 54, No. 3, pp. 166–179.

Jackson, S.E., & Schuler, R.S. Strategic Human Resource Management. Blackwell, 1999, Oxford.

Massey, R. "Taking a strategic approach to human resources management." Health Manpower Management, 1994, Vol. 20, No. 5, pp. 27–30.

Thompson, A.A., & Strickland, A.J. "Strategic management: Concepts and cases." Long-Range Planning, 1996, Vol. 29, No. 6, pp. 907–908.

Trim, P.R.J. "Human resource management development and strategic management enhanced by simulation exercises." Journal of Management Development, 2004, Vol. 23, No. 4, pp. 399–413.

"Maximizing the return on HR investment." Human Resource Management, 2004, Vol. 12, No. 3, pp. 8–10.

Zhang, M. "Transferring human resources management across national boundaries: the case of Chinese multinational companies in the UK." Employee Relations, 2003, Vol. 25, No. 6, pp. 614–626.

Singh, K. "Strategic HR orientation and firm performance in India." The International Journal of Human Resource Management, 2003, Vol. 14, No. 4, pp. 530–543.

Horan, P., & Vernon, P. "Expanding HR's global potential: shared service centers in multi-country regions." Compensation and Benefits Review, 2003, Vol. 35, No. 4, pp. 45–52.

Brooks, A. "Dispelling HR's fear of technology takeover." Employee Benefit Plan Review, 2006, Vol. 60, No. 10, pp. 6–8.