Human Resource Management: Gaining a Competitive Advantage

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1 Human Resource Management: Gaining a Competitive Advantage 1 CHAPTER LEARNING OBJECTIVES After reading this chapter, you should be able to: LO 1-1 LO 1-2 LO 1-3 LO 1-4 LO 1-5 LO 1-6 LO 1-7 Discuss the roles and activities of a company s human resource management function. page 6 Discuss the implications of the economy, the makeup of the labor force, and ethics for company sustainability. page 16 Discuss how human resource management affects a company s balanced scorecard. page 29 Discuss what companies should do to compete in the global marketplace. page 46 Identify how new technology, such as social networking, is influencing human resource management. page 50 Discuss human resource management practices that support high-performance work systems. page 53 Provide a brief description of human resource management practices. page 56 2

2 ENTER THE WORLD OF BUSINESS >>> Mars Incorporated: HR Practices Help Create Sweet Success You may have enjoyed Mars Incorporated products if you have had M&Ms, Snickers, Lifesavers, Wrigley s Juicy Fruit, or Uncle Ben s Converted Rice. But are you aware that the Ms on M&Ms stand for Forrest Mars and R. Bruce Murrie, the son of the president of competitor Hershey s, which supplied Mars with chocolate when there was limited availability of cocoa during World War II? Mars is the third largest private company in the United States with 72,000 employees located in the U.S. and 72 other countries around the world. It operates in six business segments including food, drinks, pet care, chocolate, gum and confections, and symbioscience (a technology-based health and life sciences business focused on product development). Today, Mars includes eleven brands with revenues of $1 billion or more. Granted some of that success is attributed directly to the quality of and demand for the products that Mars offers consumers (who doesn t like M&Ms?). But a lot of the success is due to the HR practices that Mars uses to attract, motivate, and retain high-caliber employees. This has resulted in Mars ranking #95 on the 2013 Fortune 100 Best Companies to Work For. It all starts with the Five Principles of Mars Quality, Responsibility, Mutuality, Efficiency and Freedom which are the foundation of the company culture and business approach. The Five Principles, found on the walls in its offices and manufacturing plants throughout the world, provide a common bond for all employees regardless of their business segment, location, national language, or generation. All employees are familiar with the Five Principles and they influence their daily work. Mars believes that quality work is the first ingredient of quality brands and the source of the company s reputation for high standards. All associates are asked to take direct responsibility for results, to exercise initiative and judgment, and to make decisions as required. Mutuality refers to the company s belief that all business relationships should be measured by the degree to which mutual benefits are created. The actions of Mars should never be at the expense, economic or otherwise, of others. Efficiency is seen as a strength of the company. It allows the company to organize physical, financial, and human assets for maximum productivity. It also contributes to making and delivering products and services with the highest quality, lowest possible costs, and lowest consumption of resources. Finally, Mars cherishes the freedom of being a privately held company, which allows it to make decisions free of short-term earnings reports and to be financially answerable to no one. This gives management and employees the ability to experiment with ideas and take the time to develop talents for longer-term gains. Mars employees love the products they make but they also love the HR practices that help put the Five Principles into action. The turnover of non sales force employees is only 5%. What is responsible for the low turnover as well as $33 billion in global revenue in 2012? Perhaps one reason is that Mars has an egalitarian workplace with no fancy offices or special perks for managers. Employees are officially called associates but because of the unifying value of the Five Principles, they often refer to themselves as Martians. Most employees have to punch in at their worksite every day, even the company president. Employees who are late are docked 10% of their pay. Also, the principle of Responsibility means that all employees, not just managers, have a voice and are expected to put themselves in the position of the consumer. They are encouraged to speak up rather than ever provide an inferior product or service. CONTINUED 3

3 Mars does not offer stock options or company pensions or game rooms or private chefs for its employees. It does provide vending machines that provide employees with free candy, and chewing Wrigley s gum at meetings is encouraged. Perhaps another reason for the low turnover and high revenues is that employees have many career and development opportunities both within their current business and in new ones. All new employees attend The Essence of Mars training program which introduces and reinforces the Five Principles. Mars also has a corporate university (Mars University) which offers online and classroom-based courses in functional topics as well as on leadership skills. Forty percent of associates have participated in a program offered by Mars University. Also, many employees have mentors, even executives who learn about social media from younger employees. Mars insures that all employees regardless of background have the opportunity to grow and advance. For example, Mars was ranked #25 in the 2012 World s Best Multinational Workplaces list, the world s first global workplace excellence ranking by Great Place to Work, for its high percentage of women in executive and senior management positions. Or, maybe turnover is low and revenues are high because of the bonuses that employees can earn which range from 10 to 20% of their salaries if their team performs well. Contributing to employees motivation to earn their bonuses is the availability of performance data. Flat screens displays current financials including sales, earnings, cash flows, and factory efficiency. Mars also encourages community involvement, which gives employees opportunities to gain new insights and make meaningful contributions. The Mars Volunteer Initiative offers paid time off for associates to clean parks, teach courses, help pets find homes, work in medical clinics, and plant gardens. In 2012, employees devoted 50,000 hours to volunteering! The Mars Ambassadors is a select program in which employees spend six weeks working with Mars partners in developing areas of the world. In late 2012, seven Mars Drinks Associates traveled from all over the globe and met in Kenya. Their objective was to learn about the coffee farming process and about how Mars Drinks supports and improves the farming business through a partnership with Sustainable Management Services (SMS). During their week-long trip, that objective was met, and the experience became much more than a simple learning opportunity. As one Drinks Associate from France noted, I realized that selling or buying coffee in Europe can have great repercussions in third world countries. Sustainability is not just a marketing operation but is a way of living and needs to be sponsored by everyone. SOURCE: Based on D. Kaplan, Inside Mars, Fortune, February 4, 2013, p. 82; website for Mars Incorporated, accessed March 15, Competitiveness A company s ability to maintain and gain market share in its industry. Introduction Mars Incorporated illustrates the key role that human resource management (HRM) plays in determining the survival, effectiveness, and competitiveness of U.S. businesses. Competitiveness refers to a company s ability to maintain and gain market share in its industry. Mars human resource management practices are helping support the company s business strategy and provide services the customer values. The value of a product or service is determined by its quality and how closely the product fits customer needs. Competitiveness is related to company effectiveness, which is determined by whether the company satisfies the needs of stakeholders (groups affected by business practices). Important stakeholders include stockholders, who want a return on their investment; customers, who want a high-quality 4

4 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 5 Figure 1.1 Human Resource Management Practices Strategic HRM Analysis and design of work HR planning Recruiting Selection Training and development Compensation Performance management Employee relations Company Performance product or service; and employees, who desire interesting work and reasonable compensation for their services. The community, which wants the company to contribute to activities and projects and minimize pollution of the environment, is also an important stakeholder. Companies that do not meet stakeholders needs are unlikely to have a competitive advantage over other firms in their industry. Human resource management (HRM) refers to the policies, practices, and systems that influence employees behavior, attitudes, and performance. Many companies refer to HRM as involving people practices. Figure 1.1 emphasizes that there are several important HRM practices. The strategy underlying these practices needs to be considered to maximize their influence on company performance. As the figure shows, HRM practices include analyzing and designing work, determining human resource needs (HR planning), attracting potential employees (recruiting), choosing employees (selection), teaching employees how to perform their jobs and preparing them for the future (training and development), rewarding employees (compensation), evaluating their performance (performance management), and creating a positive work environment (employee relations). The HRM practices discussed in this chapter s opening highlighted how effective HRM practices support business goals and objectives. That is, effective HRM practices are strategic! Effective HRM has been shown to enhance company performance by contributing to employee and customer satisfaction, innovation, productivity, and development of a favorable reputation in the firm s community. 1 The potential role of HRM in company performance has only recently been recognized. We begin by discussing the roles and skills that a human resource management department and/or managers need for any company to be competitive. The second section of the chapter identifies the competitive challenges that U.S. companies currently face, which influence their ability to meet the needs of shareholders, customers, employees, and other stakeholders. We discuss how these competitive challenges are influencing HRM. The chapter concludes by highlighting the HRM practices covered in this book and the ways they help companies compete. Human Resource Management (HRM) Policies, practices, and systems that influence employees behavior, attitudes, and performance.

5 6 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage LO 1-1 Discuss the roles and activities of a company s human resource management function. What Responsibilities and Roles Do HR Departments Perform? Only recently have companies looked at HRM as a means to contribute to profitability, quality, and other business goals through enhancing and supporting business operations. Table 1.1 shows the responsibilities of human resource departments. How many HR professionals should a company employ? High performing small companies (fewer than 100 employees) have approximately 6 human resource staffers per 100 employees, while in high performing large companies with 50,000 employees or more the ratio is 1 HR staffer per 100 employees. 2 The HR department is solely responsible for outplacement, labor law compliance, record keeping, testing, unemployment compensation, and some aspects of benefits administration. The HR department is most likely to collaborate with other company functions on employment interviewing, performance management and discipline, and efforts to improve quality and productivity. Large companies are more likely than small ones to employ HR specialists, with benefits specialists being the most prevalent. Other common specializations include recruitment, compensation, and training and development. 3 Many different roles and responsibilities can be performed by the HR department depending on the size of the company, the characteristics of the workforce, the industry, and the value system of company management. The HR Table 1.1 Responsibilities of HR Departments FUNCTION RESPONSIBILITIES Analysis and design of work Job analysis, work analysis, job descriptions Recruitment and selection Recruiting, posting job descriptions, interviewing, testing, coordination use of temporary employees Training and development Orientation, skills training, development programs, career development Performance management Performance measures, preparation and administration of performance appraisals, feedback and coaching, discipline Compensation and benefits Wage and salary administration, incentive pay, insurance, vacation, retirement plans, profit sharing, health and wellness, stock plans Employee relations/labor relations Attitude surveys, employee handbooks, labor law compliance, relocation and outplacement services Personnel policies Policy creation, policy communications Employee data and information systems Record keeping, HR information systems, workforce analytics, social media, Intranet and Internet access Legal compliance Policies to ensure lawful behavior; safety inspections, accessibility accommodations, privacy policies, ethics Support for business strategy Human resource planning and forecasting, talent management, change management, organization development SOURCES: Based on Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, Edition, Human Resources Specialists, on the Internet at visited March 26, 2013; SHRM-BNA Survey no. 66, Policy and Practice Forum: Human Resource Activities, Budgets, and Staffs, , Bulletin to Management, Bureau of National Affairs Policy and Practice Series (Washington, DC: Bureau of National Affairs, June 28, 2001).

6 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 7 department may take full responsibility for human resource activities in some companies, whereas in others it may share the roles and responsibilities with managers of other departments such as finance, operations, or information technology. In some companies the HR department advises top-level management; in others the HR department may make decisions regarding staffing, training, and compensation after top managers have decided relevant business issues. One way to think about the roles and responsibilities of HR departments is to consider HR as a business within the company with three product lines. Figure 1.2 shows the three product lines of HR. The first product line, administrative services and transactions, is the traditional product that HR has historically provided. The newer HR products business partner services and the strategic partner role are the HR functions that top managers want HR to deliver. For example, at Move Inc., an online real estate company with around 1,000 employees, the chief financial officer and HR leaders work on annual business plans and budgeting, including decisions about merit pay increases. 4 HR used data to make a business case for not having annual merit increases rather than emphasizing that merit pay increases had to be given to employees because of past practice. At Ingersoll Rand, a company with 25,000 employees and operations in more than 60 countries, HR was transformed from just doing traditional HR work such as recruitment, benefits, training, and compensation into a team of consultants whose job was to work with managers to understand the issues and problems they faced in managing the company s human capital. 5 As consultants, HR focuses on identifying gaps or barriers preventing employees and managers from attaining business goals, finding ways to fill the gaps, and developing and delivering talent management solutions that include drawing from traditional HR responsibilities but in a problem-focused way. For example, Ingersoll-Rand s business strategy is to grow in emerging markets around the world. To be successful requires highly talented managers. HR is contributing to meeting the need for highly talented managers by using workforce planning to determine how many managers are needed and in what locations. HR Figure 1.2 HR as a Business with Three Product Lines Administrative Services and Transactions: Compensation, hiring, and staffing Emphasis: Resource efficiency and service quality Business Partner Services: Developing effective HR systems and helping implement business plans, talent management Emphasis: Knowing the business and exercising influence problem solving, designing effective systems to ensure needed competencies Strategic Partner: Contributing to business strategy based on considerations of human capital, business capabilities, readiness, and developing HR practices as strategic differentiators Emphasis: Knowledge of HR and of the business, competition, the market, and business strategies SOURCE: Adapted from Figure 1, HR Product Lines, in E. E. Lawler, From Human Resource Management to Organizational Effectiveness, Human Resource Management 44 (2005), pp

7 8 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage is working with managers to identify the competencies, skills, and knowledge needed by high performing company managers. The competencies and skills profiles are used to evaluate potential country managerial job candidates from outside the company as well as to develop plans for current employees who have the potential to become country managers. Shared service model A way to organize the HR function that includes centers of expertise, service centers, and business partners. Self-service Giving employees online access to HR information. Outsourcing The practice of having another company provide services. Strategic Role of the HRM Function The amount of time that the HRM function devotes to administrative tasks is decreasing, and its roles as a strategic business partner, change agent, and employee advocate are increasing. 6 HR managers face two important challenges: shifting their focus from current operations to strategies for the future 7 and preparing non-hr managers to develop and implement human resource practices (recall the role of HR in Mars success from the chapter-opening story). To ensure that human resources contributes to the company s competitive advantage many HR departments are organized on the basis of a shared service model. The shared service model can help control costs and improve the business relevance and timeliness of HR practices. A shared service model is a way to organize the HR function that includes centers of expertise or excellence, service centers, and business partners. 8 Centers of expertise or excellence include HR specialists in areas such as staffing or training who provide their services companywide. Service centers are a central place for administrative and transactional tasks such as enrolling in training programs or changing benefits that employees and managers can access online. Business partners are HR staff members who work with businessunit managers on strategic issues such as creating new compensation plans or development programs for preparing high-level managers. We will discuss the shared service model is more detail in Chapter 16. The role of HRM in administration is decreasing as technology is used for many administrative purposes, such as managing employee records and allowing employees to get information about and enroll in training, benefits, and other programs. The availability of the Internet has decreased the HRM role in maintaining records and providing self-service to employees. 9 Self-service refers to giving employees online access to, or apps which provide, information about HR issues such as training, benefits, compensation, and contracts; enrolling online in programs and services; and completing online attitude surveys. Companies that use the services of ADP can download a free mobile app that enables employees to access their payroll and benefits information. 10 Employees can use the app to fill out their time sheet or look up their retirement plan contributions and balance. The app can also be used by companies to deliver news to employees or offer a directory with contact information. Watson Pharmaceuticals has developed an app for its corporate university, allowing pharmaceutical representatives to access training videos and product knowledge from their iphones. 11 Many companies are also contracting with human resource service providers to conduct important but administrative human resource functions such as payroll processing, as well as to provide expertise in strategically important practice areas such as recruiting. Outsourcing refers to the practice of having another company (a vendor, third party or consultant) provide services.

8 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 9 The most commonly outsourced activities include those related to benefits administration (e.g., flexible spending accounts, health plan eligibility status), relocation, and payroll. The major reasons that company executives choose to outsource human resource practices include cost savings, increased ability to recruit and manage talent, improved HR service quality, and protection of the company from potential lawsuits by standardizing processes such as selection and recruitment. 12 ADP, Hewitt, IBM, and Accenture are examples of leading outsource providers. Goodyear Tire and Rubber Company reenergized its recruitment and hiring practices through outsourcing recruiting practices. 13 The recruiting outsource provider worked with the company to understand its culture, history, and its employees recruitment experiences. The recruiting outsourcing service provider was able to help Goodyear streamline the recruiting process through providing hiring managers with online access to create new job requisitions, providing interview feedback, scheduling interviews, generating customized job offer letters, and gaining a real-time perspective on job candidates progress in the recruitment process. Goodyear recognized several benefits from outsourcing recruitment including improving the timeliness of job offers, diversity and quality of new hires, and reducing turnover. Traditionally, the HRM department (also known as Personnel or Employee Relations ) was primarily an administrative expert and employee advocate. The department took care of employee problems, made sure employees were paid correctly, administered labor contracts, and avoided legal problems. The HRM department ensured that employee-related issues did not interfere with the manufacturing or sales of products or services. Human resource management was primarily reactive; that is, human resource issues were a concern only if they directly affected the business. That still remains the case in many companies that have yet to recognize the competitive value of human resource management, or among HR professionals who lack the competencies and skills or understanding needed to anticipate problems and contribute to the business strategy. However, other companies believe that HRM is important for business success and therefore have expanded the role of HRM as a change agent and strategic partner. A discussion group of company HR directors and academic thought- leaders reported that increasingly HR is expected to lead efforts focused on talent management and performance management. 14 Also, HR should take the lead in helping companies attract, develop, and retain talent in order to create the global workforces that companies need to be successful. HR professionals have to be able to use and analyze data to make a business case for ideas and problem solutions. In many companies top HR managers report directly to the CEO, president, or board of directors to answer questions about how people strategies drive value for the company. For example, at Yahoo the executive vice president of people and development s goal is to help turn around the company. 15 One of her jobs is to help integrate employees from small firms that Yahoo acquires to bring in top engineering talent and software developers. Acquisition of small start-up companies and their talent is part of Yahoo CEO Marissa Mayer s plan to revitalize the company. Another job is to fix Yahoo s compensation structure that motivated top employees to leave the company for its competitors.

9 10 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage Consider the role of HR at VF Corporation. 16 The CEO of VF Corporation, a global clothing business including Nautica, Lee, and Wrangler brands, understands that he needs strong finances, winning brands, and talent to drive business growth. HR s role is to develop talent, focusing on the top management group of 1,500 people. The company conducts senior talent assessment reviews two times each year. These reviews include meeting with the company s operating committee, the vice president for human resources, business leaders, and the head of HR for each business unit. Top managers are each individually reviewed to discuss their strengths and weaknesses, how to improve them, and their possibilities for career advancement. This is critical for the company to prepare and have ready the necessary management talent necessary to meet two key growth drivers for the company: global expansion and aggressive acquisitions of other businesses. Also, the vice president for human resources plays a key role in developing the time frame for expansion and preparing managers for international positions. In addition, the vice president for human resources plays an important role in helping understand the available talent in companies targeted for acquisition as well as taking steps to retain talented employees in the acquired company needed to support the brand. The vice president for human resources also is responsible for gathering information about changes in business expectations and growth projects from the vice presidents for human resources at the business unit level and communicating that information to the CEO. Table 1.2 provides several questions that managers can use to determine if HRM is playing a strategic role in the business. If these questions have not been considered, it is highly unlikely that (1) the company is prepared to deal with competitive challenges or (2) human resources are being strategically used to help a company gain a competitive advantage. The bottom line for evaluating the relationship between human resource management and the business strategy is to consider this question: What is HR doing to ensure that the right people with the right skills are doing the right things in the jobs that are important for the execution of the business strategy? 17 We will discuss strategic human resource management in more detail in Chapter 2. Why have HRM roles changed? Managers see HRM as the most important lever for companies to gain a competitive advantage over both domestic and Table 1.2 Questions to Ask: Are Human Resources Playing a Strategic Role in the Business? 1. What is HR doing to provide value-added services to internal clients? 2. Do the actions of HR support and align with business priorities? 3. How are you measuring the effectiveness of HR? 4. How can we reinvest in employees? 5. What HR strategy will we use to get the business from point A to point B? 6. From an HR perspective, what should we be doing to improve our marketplace position? 7. What s the best change we can make to prepare for the future? 8. Do we react to business problems or anticipate them in advance? SOURCES: Based on A. Halcrow, Survey Shows HR in Transition, Workforce, June 1988, p. 74; P. Wright, Human Resource Strategy: Adapting to the Age of Globalization (Alexandria, VA: Society for Human Resource Management Foundation, 2008); J. Mundy, Be a Strategic Performance Consultant, HR Magazine, March 2013, pp

10 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 11 foreign competitors. We believe this is because HRM practices are directly related to companies success in meeting competitive challenges. These challenges and their implications for HRM are discussed later in the chapter. DEMONSTRATING THE STRATEGIC VALUE OF HR: HR ANALYTICS AND EVIDENCE-BASED HR For HR to contribute to business goals there is increasing recognition that it is necessary to use data to answer questions such as Which practices are effective? Which practices are cost effective? and to project the outcomes of changes in practices on employees attitudes, behavior, and company profits and costs. This helps show that time and money invested in HR programs are worthwhile and HR is as important to the business as finance, marketing, and accounting! Evidence-based HR refers to the demonstration that human resources practices have a positive influence on the company s bottom or key stakeholders (employees, customers, community, shareholders). Evidence-based HR requires the use of HR or workforce analytics. HR or workforce analytics refers to the practice of using quantitative methods and scientific methods to analyze data (sometimes called Big Data) from human resource databases, corporate financial statements, employee surveys, and other data sources to make evidence-based human resource decisions and show that HR practices influence the organization s bottom line including profits and costs. 18 For example, consider how Catalyst IT Services is using and analyzing Big Data. 19 Catalyst IT Services, a technology outsourcing company that assembles teams for programming jobs, predicts that it will screen more than 10,000 job candidates this year. Traditional recruiting methods take too long and the subjective hiring choices of managers often result in new employees who perform poorly or are dissatisfied and leave the company because their skills don t match the job. As a result, Catalyst now asks job candidates to complete an online assessment that collects information about the candidate. The assessment might give a math problem to a job candidate, who is not expected to know how to answer it. However, Catalyst is interested in how much time the applicant spends on the question (do they answer quickly, skip it, or review it later?) as an indicator of how they will deal with challenges. Analyzing the assessment data can help show what attributes candidates have that fit in specific situations such as a job requiring a careful, methodological approach to be successful. As a result of the use of analytics, turnover at Catalyst is only 15% per year compared to more than 30% for its U.S. competitors. Because evidence-based HR and analytics are important for showing the value of HR practices and how they contribute to business strategy and goals, throughout each chapter of the book we provide examples of companies use of workforce analytics to make evidenced-based HR decisions or to evaluate HR practices. Evidence-Based HR Demonstrating that human resource practices have a positive influence on the company s bottom line or key stakeholders (employees, customers, community, shareholders). HR or Workforce Analytics The practice of using data from HR databases and other data sources to make evidence-based human resource decisions. THE HRM PROFESSION: POSITIONS AND JOBS There are many different types of jobs in the HRM profession. Table 1.3 shows various HRM positions and their salaries. A survey conducted by the Society of Human Resource Management to better understand what HR professionals

11 12 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage Table 1.3 Median Salaries for HRM Positions POSITION SALARY Top HR Executive $170,784 Management Development Manager 108,106 Health and Safety Manager 94,422 HR Manager 87,781 Employee Benefits Manager 87,493 Campus Recruiter 59,371 Entry-level HRIS Specialist 49,605 HR Generalist 49,254 Entry-level Employee Training Specialist 46,504 Compensation Analyst 55,001 Mid-level Labor Relations Specialist 70,035 SOURCE: Based on data from Salary Wizard, accessed March 26, do found that the primary activities of HR professionals are performing the HR generalist role (providing a wide range of HR services), with fewer involved in other activities such as the HR function at the executive level of the company, training and development, HR consulting, and administrative activities. 20 Projections suggest that overall employment in human resource related positions is expected to grow by 21 percent between 2010 and 2020, much faster than the occupational average. 21 Salaries for HR professionals vary according to position, level of experience, training, location, and firm size. As you can see from Table 1.3, some positions involve work in specialized areas of HRM like recruiting, training, or labor and industrial relations. HR generalists usually make between $31,000 and $80,000 depending on their experience and education level. HR generalists perform a wide range of activities including recruiting, selection, training, labor relations, and benefits administration. HR specialists work in one specific functional area such as training or compensation. Although HR generalists tend to be found in smaller companies, many mid- to large-size companies employ HR generalists at the plant or business levels and HR specialists at the corporate, product, or regional levels. Most HR professionals chose HR as a career because they found HR appealing as a career, they wanted to work with people, or they were asked by chance to perform HR tasks and responsibilities. 22 EDUCATION AND EXPERIENCE A college degree is held by the vast majority of HRM professionals, many of whom also have completed postgraduate work. Business typically is the field of study (human resources or industrial relations), although some HRM professionals have degrees in the social sciences (economics or psychology), the humanities, or law. Those who have completed graduate work have master s degrees in HR management, business management, industrial organizational psychology or a similar field. This is important because to be successful in HR, you need to speak the same language as the other business functions. You have to have credibility as a business leader, which means understanding business

12 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 13 fundamentals such as how the company makes money and who the competition and customers are. This is necessary to build a business case for HR activities. Professional certification in HRM is less common than membership in professional associations. A well-rounded educational background will likely serve a person well in an HRM position. As one HR professional noted, One of the biggest misconceptions is that it is all warm and fuzzy communications with the workers. Or that it is creative and involved in making a more congenial atmosphere for people at work. Actually it is both of those some of the time, but most of the time it is a big mountain of paperwork which calls on a myriad of skills besides the people type. It is law, accounting, philosophy, and logic as well as psychology, spirituality, tolerance, and humility. 23 COMPETENCIES AND BEHAVIORS HR professionals need to have the nine competencies shown in Figure 1.3. These are the most recent competencies developed by the Society for Human Resource Management (SHRM). SHRM developed the competencies based on a literature review, input from over 1,200 HR professionals, and a survey of over 32,000 respondents. 24 The full version of the competency model, which can be found on the SHRM website ( ), provides more detailed information on each competency, behaviors, and standards for proficiency for HR professionals at entry, mid, senior, and executive career stages. Demonstrating these competencies can help HR professionals show managers that they are capable of helping the HR function create value, contribute to the business strategy, and shape the company culture. They also help the HR department effectively and efficiently provide the three HR products discussed earlier and shown in Figure 1.2. These competencies and behaviors show that although the level of expertise required may vary by career level, all HR professionals need to have a working knowledge of strategic business management, human resource planning, development, compensation and benefits, risk management (safety, quality, etc.), labor relations, HR technology, evidence-based decision making, and global human resources. HR professionals need to be able to interact and coach employees and managers, yet engage in ethical practice through maintaining confidentiality and acting with integrity. Many top-level managers and HR professionals believe that the best way to develop competencies of the future effective professionals needed in HR is to train employees or put them into experiences that help them understand the business and HR s role in contributing to it. Consider how Google and Southwest Airlines are developing the right mix of HR skills and experience to best contribute to the business. 25 At Google, approximately one-third of the HR team s employees have HR backgrounds and expertise in specialty skill areas such as employment law, compensation, and benefits. Another one-third have little or no human resource experience and were recruited from consulting firms or within Google s engineering or sales functions. The final one-third is a workforce analytics group with employees who have doctorates in finance, statistics, and organizational psychology. Each group has its strengths. For example, HR staff who have limited HR experience are very skilled in problem solving and how the company works outside HR. To capitalize on the unique perspectives and skills that each group brings to working on human resource issues, the vice president of global people operations encourages interactions and knowledge

13 14 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage Figure 1.3 Competencies and Example Behaviors for HR Professionals Example behaviors: Demonstrates a capacity for understanding the business operations and functions within the organization, understands organizational metrics and their relationship to business success. Business Acumen Ability to understand business functions and metrics within the organization and industry Example behaviors: Remains current on relevant laws, legal rulings, and regulations; develops and utilizes best practices Human Resource Technical Expertise and Practice The ability to apply the principles of human resource management to contribute to the success of the business Relationship Management The ability to manage interactions with and between others with the specific goal of providing service and organizational success Example behaviors: Provides customer service to organizational stakeholders, insures alignment within HR when delivering services and information to the organization Example behaviors: Gathers critical information, makes sound decisions based on evaluation of available information Critical Evaluation Skill in interpreting information to determine return on investment and organizational impact in making recommendations and business decisions Competencies for HR Professionals Consultation Provide guidance to stakeholders such as employees and leaders seeking expert advice on a variety of circumstances and situations Example behaviors: Serves as a workforce and people management expert, develops consultative and coaching skills Example behaviors: Maintains confidentiality, acts with personal, professional, and behavioral integrity Ethical Practice Integration of core values, integrity, and accountability throughout all organizational and business practices Global and Cultural Effectiveness Managing human resources both within and across boundaries Communications The ability to effectively exchange and create a free flow of information with and among various stakeholders at all levels of the organization to produce meaningful outcomes Organizational Leadership and Navigation The ability to direct initiatives and processes within the organization and gain buy-in from stakeholders Example behaviors: Fosters collaboration, exhibits behaviors consistent with and conforming to the organization culture Example behaviors: Example behaviors: Embraces inclusion, Provides constructive feedback works effectively with effectively, helps managers diverse cultures and communicate not just on HR populations issues SOURCE: Based on SHRM Elements for HR Success, Society for Human Resource Management, 2012, accessed from March 21, sharing among the entire group of team members. Google develops human resources or key people operations staff through a year-long training program that includes HR specialist training, a business curriculum, and development of skills related to working with clients, communicating with senior executives, and solving business problems. The training is designed for HR employees with at least two years of experience and is taught by People Operations department employees. Google recruits top MBA program graduates, enticing them to consider HR because the opportunity to influence change in the company is greater than is common in other specialty areas and career advancement is faster. Southwest Airlines was concerned that its HR function had become too distant from the company s business units. To develop a stronger team of HR generalists and get them to be valued partners and consultants to operations,

14 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 15 managers, and other internal customers, Southwest Airlines retrained and relocated HR specialists into the field. Southwest recognizes that to deal with the fast pace of change in the airline industry HR generalists need to have a continuous improvement philosophy, business savvy, and both interpersonal and strategic skills. The primary professional organization for HRM is the Society for Human Resource Management (SHRM). SHRM is the world s largest human resource management association with more than 250,000 professional and student members throughout the world. If you are interested in HR, you should join SHRM! SHRM provides education and information services, conferences and seminars, government and media representation, and online services and publications (such as HR Magazine and free videos and reports from the SHRM Foundation). You can visit SHRM s website to see their services at Competitive Challenges Influencing Human Resource Management Three competitive challenges that companies now face will increase the importance of human resource management practices: the challenge of sustainability, the global challenge, and the technology challenge. These challenges are shown in Figure 1.4. Competing through Sustainability Provide a return to shareholders Provide high-quality products, services, and work experience for employees Increased value placed on intangible assets and human capital Social and environmental responsibility Adapt to changing characteristics and expectations of the labor force Legal and ethical issues Effectively use new work arrangements Competing through Globalization Expand into foreign markets Prepare employees to work in foreign locations Competing through Technology Change employees and managers work roles Create high-performance work systems through integrating technology and social systems Development of e-commerce and e-hrm Use of social networking tools Development of HR dashboards and use of HR analytics in problem solving Figure 1.4 Competitive Challenges Influencing U.S. Companies U.S. Business Competitiveness

15 16 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage As you will see in the following discussion, these competitive challenges are directly linked to the HR challenges that companies are facing including developing, attracting, and retaining talented employees, finding employees with the necessary skills, and breaking down cultural barriers to create a global company. 26 Sustainability A company s ability to meet its needs without sacrificing the ability of future generations to meet their needs. Stakeholders The various interest groups who have relationships with, and consequently, whose interests are tied to the organization (e.g., employees, suppliers, customers, shareholders, community). LO 1-2 Discuss the implications of the economy, the makeup of the labor force, and ethics for company sustainability. THE SUSTAINABILITY CHALLENGE Traditionally, sustainability has been viewed as one aspect of corporate social responsibility related to the impact of the business on the environment. 27 However, we take a broader view of sustainability. Sustainability refers to the company s ability to meet its needs without sacrificing the ability of future generations to meet their needs. 28 Organizations pursuing a sustainable strategy pursue the triple bottom line : economic, social, and environmental benefits. Company success is based on how well the company meets the needs of its stakeholders. Stakeholders refers to shareholders, the community, customers, employees, and all of the other parties that have an interest in seeing that the company succeeds. Sustainability includes the ability to deal with economic and social changes, practice environmental responsibility, engage in responsible and ethical business practices, provide high-quality products and services, and put in place methods to determine if the company is meeting stakeholders needs; that is, HR systems that create the skills, motivation, values, and culture that help the company achieve its triple bottom line and insure the long-term benefits for the organizations stakeholders. The economy has important implications for human resource management. Some key statistics about the economy and the workforce are shown in Table 1.4. These include the structure of the economy, the development and spread of social networking, and growth in professional and service occupations. Growth in these occupations means that skill demands for jobs have changed, with knowledge becoming more valuable. Not only have skill demands changed, but remaining competitive in a global economy requires demanding work hours and changes in traditional employment patterns. The creation of new jobs, aging employees leaving the workforce, slow population growth, and a lack of employees who have the skills needed to perform the high-demand jobs means that companies need to give more attention to HR practices that influence attracting and retaining employees. The Economy The recession experienced in the United States between 2007 and the summer of 2009 was one of the worst ever with the unemployment rate reaching over 10 percent in October Although many experts believe that falling back into another recession is unlikely, the recovery of the U.S. economy since the recession of 2009 can be characterized as slow and choppy. This is due to several reasons. Positive signs for the economy include the unemployment rate which, at around 7.7%, is at its lowest level in four years. The Dow Jones Industrial Average reached a record in March 2013, and encouraging signs suggest growth in the gross domestic product (GDP), the total of all goods and services produced. 30 If GDP growth occurs it will be due to recovery in the

16 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 17 Table 1.4 Highlights of Employment Projections Total employment will rise from 2010 to 2020 from million to million. The fastest job growth is expected in health care, personal care, and community and social services occupations. Today, 92% of U.S. jobs are nonagriculture wage and salary jobs; 12.5% of the jobs are in goodsproducing industries (mining, construction, manufacturing) and 79.7% are in service-providing industries. The distribution of jobs across industries is projected to be similar in million job openings will result from the need to replace workers who permanently leave an occupation, creating opportunities in every occupation, even those where employment is declining and no growth is expected. Today, approximately 43% of jobs require a high school degree for entry, 16% a Bachelor s degree. The median age of the labor force will increase to 42.8 years old, the highest ever. The labor force is expected to increase by 10.5 million in the next decade reaching million in SOURCE: D. Sommers and J. Franklin, Overview of Projections to 2020, Monthly Labor Review, January 2012, pp. 3 20; C. Lockard and M. Wolf, Occupation Employment Projections to 2020, Monthly Labor Review, January 2012, pp ; M. Toossi, Labor Force Projections to 2020: A More Slowly Growing Workforce, Monthly Labor Review, January 2012, pp ; R. Henderson, Industry Employment and Output Projections to 2020, Monthly Labor Review, January 2012, pp housing market, increased consumer confidence, business investment in workers and capital such as plant, equipment, and technology, and expansion of exports of U.S. goods to other countries. 31 Less optimistic signs are that many employers are delaying hiring, millions of Americans are still finding it difficult to get a job, and the long-term unemployment rate remains high. Many workers including college graduates are underemployed, doing jobs that require less than their level of education. 32 The number of job openings has increased to levels not seen since before the financial crisis but jobs are staying unfilled longer than before pre financial crisis levels. Some of this may be due to the mismatch between the skills required by the jobs and skills held by the unemployed but it also is due to employers waiting to fill job openings due to uncertainties until there are higher levels of economic growth and agreement on federal fiscal policies. 33 For example, in January 2013, 12.3 million U.S. workers wanting a job could not find one. The rate of long-term employment, around 3 percent, is still three times the average and for over 30 consecutive months more unemployed workers stopped looking for a job than found one. Long-term unemployment might shrink if the economy grows and the U.S. gets further out of the recession. Long-term unemployment is difficult to predict even if new jobs are created because employers may have eliminated some jobs during the recession through replacing workers with automation or combining job responsibilities. Unfortunately, the economic recovery will likely remains slow for some time and could stop entirely if a solution is not found for the debt crisis in European countries as well as the huge budget deficit in the United States. There are several implications of this economic period for human resource management. Despite the reduction in number of layoffs, hiring remains slow as many companies are finding ways to increase productivity and efficiency without having to add new employees. Also, companies are waiting for product and

17 18 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage service demand to improve and if and when it does they will first call back laidoff employees and restore pay cuts and benefits such as paid holidays before hiring new employees. For example, Honeywell International, which makes products for aviation, automobiles, and residential and commercial heat systems has only been hiring two employees for every four who leave the company.34 Honeywell plans to slow its hiring until the U.S. GDP grows from its current rate to close to 3%. Like other large U.S. companies, profits have been increasing faster than sales. Honeywell has increased profits through cutting costs, charging higher prices for its products, or reducing employees. Also, Honeywell plans to raise its profit margin through increasing sales from international markets such as the Middle East and China where growth rates are higher. Since 2009 Honeywell has added 10,000 jobs globally while eliminating 2000 positions in the United States. Many HR departments are helping companies recover from the recession and preparing them to be well-positioned as business conditions improve. For example, Capital One asks its managers to determine current workloads and staffing needs. 35 HR projects changes in the workforce based on this information. This has allowed Capital One to forecast labor needs with more precision, helping the company avoid hiring new employees only to potentially have to lay them off. During the recession, Philips Electronics cut its training budget but continued to offer its Inspire program for high-potential employees, emphasizing business strategy and personal leadership topics. 36 Philips believes that investing in leadership development will better position the company to retain top talent and meet demands for managerial talent as business grows and the economy recovers. Also, companies are under pressure to increase employee productivity to alleviate higher costs such as health care. 37 To control costs and increase the effectiveness of the U.S. health care system, President Obama signed the Patient Protection and Affordable Care Act. However, provisions of this act are now just being implemented. Companies are uncertain as to the implications of the act for their health care costs, and continue to look for ways to cut costs, including reducing employee and retiree health care benefits and pension contributions and increasing the employee contribution to pay for these benefits. Employers including Sears Holding Corporation and Darden Restaurants Inc., owner of Olive Garden and Red Lobster restaurant chains, are giving employees a monetary allocation to use toward health benefits. 38 This allows them to decide to pay more monthly premiums for more expensive plans or choose cheaper ones which have higher deductibles for certain services, requiring them to pay more out-of-pocket fees. Many employees are willing to choose lower-priced plans that require them to pay more out of their pockets for health care. We discuss what companies are doing to offset health care and pension costs in Chapter 13, Employee Benefits. HR programs and the HR function are under pressure to relate to the business strategy and show a return on investment. Customer focus needs to be included in all HRM practices. New technology means that administrative and transactional HR activities will be delivered via technology, creating less need for HR professionals to provide these activities. The aging workforce combined with reduced immigration because of security concerns may lead employers to

18 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 19 focus more on retraining employees or encouraging older, skilled workers to delay retirement or work part-time. 39 Table 1.4 highlights employment projections. Our discussion of employment projections is based on the work done by the U.S. Bureau of Labor Statistics. 40 Population is the most important factor in determining the size and composition of the labor force. The size of the labor force will increase but less than levels experienced over the previous 10 years. The median age of the workforce will be the highest ever. Because the U.S. population is expected to become increasingly diverse so is the workforce. Immigration is expected to add 1.5 million persons every year from to the U.S. population. As a result every race and ethnicity will grow from but the share of nonwhite Hispanics is expected to decline (we discuss the diversity and aging of the workforce in more detail later in this chapter). The importance of the service sector in the U.S. economy is emphasized by considering industry and occupational employment rates and future projections. Almost 80% of jobs are in the service sector. Currently, the largest percentage of jobs are found in health care and social assistance, leisure and hospitality, state and local government, professional and business services, and retail trade. The service-providing sector is expected to have the most job growth from with the number of wage and salary workers increasing from million to million. Health care and social assistance sector and the professional and business services sector will add more than one-third of new jobs and will account for almost 25% of total employment by Table 1.5 provides examples of the largest percentage growth in jobs from Overall, the occupations with the largest increase in jobs include health care support and personal care, community and social services, construction and extraction, and computer and mathematical occupations. The fastest growing jobs in these occupations include jobs such as personal care aids (provide services such as cooking meals), home health aids (provide services such as administering medicines), veterinary technologist and technicians, software developers, marriage and family therapists, and brick masons. Ten of the fastest 30 growing occupations are from either the health care practitioner and technical occupations group or the health care support occupations group. The growth of these occupations is likely due to increased demand for health care from the aging U.S. population s health care demands. In the case of the growth of the construction and extraction occupations some of it is due to the recovery of jobs lost during the recession as well as the growth in new jobs. There are several occupational groups that are projected to experience declines in jobs. Farmers, ranchers, and agricultural managers will lose over 96,000 jobs, more than any other occupation, as technological improvements and consolidation in the food industry reduce the numbers of workers needed. Textile, apparel, and furnishings occupations will experience declines due to increased imports of furniture, shoes, and clothing. Occupations and jobs related to the postal service are also expected to decline as the U.S. Postal Service continues to cut costs. Education plays an important role in meeting occupational or job requirements and in employee earnings. Job growth will be faster for occupations that need some type of post-secondary education. Across all occupations the

19 20 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage Table 1.5 Examples of the Occupations with the Largest Growth in Jobs OCCUPATION EMPLOYMENT CHANGE NUMBER (IN THOUSANDS) PERCENT MOST SIGNIFICANT EDUCATION OR TRAINING Personal care aides Less than high school Home health aides Less than high school Biomedical engineers Bachelor s degree Helpers: brick masons, block Less than high school masons, stone masons Helpers: carpenters Less than high school Veterinary technologists and Associate s degree technicians Reinforcing iron and rebar workers 9 49 High school diploma or equivalent Physical therapist assistants Associate s degree Helpers: pipe fitters, plumbers Meeting, convention event planners High school diploma or equivalent Bachelor s degree SOURCE: Based on C. Lockard and M. Wolf, Occupation Employment Projections to 2020, Monthly Labor Review, January 2012, pp greatest growth is expected in those requiring a Master s degree. For the 30 fastest growing occupations, a Bachelor s or graduate degree is needed for 12 of the occupations, 5 require an associate s degree, and 13 need a high school diploma or less. However, those that require a high school diploma may also require additional training such as an apprenticeship for construction occupations such as brickmasons, stonemasons, and reinforcing iron workers. Today, the median annual wage for jobs with less than high school was estimated to be approximately $20,000 compared to $34,000 for those with a high school diploma, $44,000 for those with some college, $61,000 for an associate s degree, $63,000 for a Bachelor s degree and $87,000 for a doctorate degree. The discrepancy in earnings by degree is expected to remain the same in the future. The future U.S. labor market will be both a knowledge economy and a service economy. 41 There will be many high-education professional and managerial jobs and low-education service jobs. High-tech manufacturing jobs will require specialized skills such as blue print reading, repair, troubleshooting, operations of computerized machines, and understanding how to improve quality and productivity on the factory floor. Boundaries between knowledge and service work are blurring, creating technoservice occupations that combine service technology and software application. Software application engineers, technical support, engineering, and scientific consulting jobs work directly with customers, and customers influence the product design process.

20 CHAPTER 1 Human Resource Management: Gaining a Competitive Advantage 21 Despite the availability of unemployed and underemployed workers and new high school and college graduates, companies are having a difficult time finding employees with the right skills. Several studies illustrate the skill deficit companies are experiencing. 42 A study by the Business Roundtable found that 62% of employers report they are having difficulty finding qualified job applicants to fill job openings. More than half indicated that at least 16% of their workforce has skills gaps that adversely affect productivity. Similarly a study by a consortium of Society for Human Resource Management, American Society for Training and Development, The Conference Board, and Corporate Voices for Working Families found that regardless of their education level only half the companies surveyed rated new employees as adequately prepared for work. Companies greatest basic skills needs were in reading, writing, and math. Many employers also feel that they are having a difficult time finding employees with the right soft skills such as work ethic, teamwork, and communications that they believe are more important for success on the job than job-specific or hard skills such as blueprint reading or writing. Interpersonal skills, the ability to learn, creativity, and problem solving are especially important in the service economy because employees have responsibility for the final product or service provided. The skills shortage is worldwide. Bill Gates and other business leaders have expressed concerns about the comparatively low numbers of U.S. students in the science and engineering fields and the low numbers of U.S. engineering graduates compared to countries such as Korea. 43 Due to migration, educational systems that have inconsistent quality, or declining birthrates, countries in developing economies such as India and Russia, as well as Japan and Western Europe are experiencing difficulties in finding workers for the skilled trades, sales, technicians, engineers, and managers. 44 Skill deficits are not limited to any one business sector, size of company industry, or job. Companies such as Broseh and Aegis Sciences Corporation are either training their employees or working in partnerships with schools to help develop the skills that employees need. 45 Broseh and 20 other manufacturers partnered with Tarrant Community College to create a nine-week course. The course teaches blueprint and gauge reading, math skills, work ethics, and computer numeric control to develop machinists who use machines to help form metal parts. The companies donated machinery so the students can get handson experience. All of the machinists who completed the program have been hired. Aegis Sciences Corporation with 580 employees conducts drug- screening services and forensic testing. Scientist and lab technician positions remain unfilled because the company cannot find enough experienced employees for those jobs. As a result, Aegis Sciences is hiring and training recent chemistry graduates who lack experience working at a professional lab with high standards for quality control and consistency. The graduates are trained in needed skills such as how to extract materials from blood or urine and analyze the drug content of the samples. Increased Value Placed on Intangible Assets and Human Capital. Today more and more companies are interested in using intangible assets and human capital as a way to gain an advantage over competitors. A company s value includes three types of assets that are critical for the company to provide goods and services: financial assets (cash and securities), physical assets (property, plant, equipment),

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