Summary of chapter 2-5 of Paauwe, J., & Farndale, E. (2017). Strategy, HRM, and performance: A contextual approach. Oxford University Press. (required readings for the oral exam).
Summary Chapter 2 until 5 : Strategy, HRM, and Performance - HR Seminar
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Tilburg University (UVT)
Master Human Resource Studies
Seminar Human Resource Studies (760815M12)
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1
CHAPTER 2
HRM & STRATEGY
2.1: Introduction
Does strategy matter?
If so, in what sense does it matter with respect to the linkage between HRM and performance?
2.2 What is strategy?
Strategy outlines an organization’s goals, including different performance indicators and the means to achieve those
goals. Especially in larger organizations, a distinction is made between corporate strategy & business strategy:
Corporate strategy Business strategy
Deals with the overarching strategy in large Most important for achieving competitive advantage as
corporations (such as multinational corporations this strategy is focused on a specific market, which
MNCs), which are composed of various business units requires different goals & resources in order to achieve
operating in different markets, each with their own competitive positioning.
business strategy.
HRM strategy = ‘the processes, decisions, and choices the organization makes regarding its human resources and
how they are organized’.
Generally, strategy is about fit between an organization and its environment, or developing a course of action for
achieving an organization’s purpose (De Wit & Meyer, 2010)
Most well-known & dominant perspective on strategy: the rational planned approach or classical approach.
A controlled and conscious process of thought directly derived from the notion of rational economic man,
for which the prime responsibility rests with the CEO, who is in charge of a fully-formulated, explicit, and
articulated decision-making process, in which there is a strict distinction between formulation and
implementation (Mintzberg, Ahlstrand & Lampel, 2009; Whittington, 2001).
Relies heavily on the readiness and capacity of managers to adopt profit-maximizing strategies through
rational long-term planning (Whittington, 2001).
Main characteristics of this approach strongly connotate with military strategy, which is where the vast
strategy literature finds its roots.
Early HRM work bears a striking resemblance to classical approach – the plea for strategic HRM implies:
o The use of planning;
o A coherent approach to the design and management of personnel systems based on an employment
policy and manpower strategy;
o HRM activities being matched to some explicit strategy;
o People of the organization being seen as a strategic resource for achieving competitive advantage.
Guises of the concept of strategy – the 5 P’s (Mintzberg, 1987):
- Strategy as a Plan (intended) – a direction, a guide, or course of action into the future, focused on looking
ahead;
- Strategy as a Pattern (realized) – consistency in behavior over time, focused on looking at the past;
- Strategy as a Ploy – a specific maneuver intended to outwit an opponent or competitor;
- Strategy as a Position – the way in which the organization positions its products/services in particular
markets in order to achieve a competitive advantage;
- Strategy as a Perspective – an organization’s fundamental way of doing things, including the way in which
the members of the organization perceive their environment & customers.
Three prescriptive schools of strategy (Meerveld, 2001):
,2
The underlying assumption of these 3 schools is that the environment is more or less stable and can be studied
objectively in order to distil changes and opportunities for strategy.
This kind of approach toward strategy & strategy development has been labeled an outside-in approach
(Stopford & Baden-Fuller, 1994).
The environment is the starting point for analysis and the subsequent development of appropriate strategic
responses in order to achieve the desired strategic positioning.
Summarizing table:
School Characteristic of Key player Environment Strategy Dominant
the process discipline
Design school Conception CEO Opportunities/ Explicit None
threats perspective
Planning school Formal planning Planners Stable and Explicit plan System theory/
controlled cybernetics
Positioning Analysis Analysts Can be analyzed Explicit generic Economics
school position
- The design school sees strategy formation as a deliberate process of conscious thought.
o SWOT analysis is part of this school.
- The planning school sees strategy as a formal process.
o Entails a stepwise approach to creating an all-encompassing strategy.
o More formalized & detailed version of the design school.
- The positioning school perceive strategy mainly from an industrial economics perspective.
o Competitive position of an organization in its industry/market is analyzed using economic models &
techniques.
o Porter (1980; 1985) made important contributions to this school:
Five forces for competitive analysis (threat of new entrants, bargaining power of suppliers,
bargaining power of buyers, threat of substitutes, competitive rivalry);
The value chain;
Generic strategies (differentiation, cost leadership, focus).
Six descriptive schools of strategy (Meerveld, 2001):
Summarizing table:
School Characteristic of Key player Environment Strategy Dominant
the process discipline
Entrepreneurial Vision Leader Can be Implicit None
school influenced perspective
Cognitive school Mental process Mind Hard to Mental Psychology
understand perspective
Learning school Emergent Everyone who Demanding Implicit patterns Psychology
learns
Power school Negotiation Everyone with Can be molded Positions, ploys Politics
power but difficult
Cultural school Collective Collectivistic Incidental Collective Anthropology
process perspective
Environmental Reactive process Environment, Dominant and Specific position Biology
school stakeholders deterministic
- The entrepreneurial school emphasizes the important role of a visionary leader who is actively engaged in
search for new opportunities in order to speed up the company’s growth.
- The cognitive school considers strategy formulation as a cognitive process that takes place in the mind of the
strategist.
,3
o Strategies emerge as perspectives (frames, mental maps, schemes) that shape how people deal with
inputs from the environment.
o These inputs are subject to many distorting filters before they are decoded by cognitive maps.
o Bounded rationality (Simon, 1947; 1957).
- The learning school views strategy as a stepwise incremental process.
o Starting point for this school relates back to Lindblom (1959), with his disjointed incrementalism
(science of ‘muddling through’).
o Change and direction are the result of mutual adjustment between the different actors involved and
between outside events and internal decisions.
o Strategy-making is a collective learning process over time, in which it is hard to distinguish between
formulation & implementation.
o Contributions:
Logical incrementalism (Quinn, 1980);
Single & double loop learning (Argyris & Schön, 1978);
The fifth discipline (Senge, 1990);
Dynamic capabilities (Prahalad & Hamel, 1990).
- The power/political school regards the formation of strategy as a bargaining process between power blocks
both inside the organization & between organizations.
o Emphasizes the use of power & politics to negotiate strategies that favor particular interests.
- The cultural school considers strategy formulation as a process of social interactions, based on the beliefs &
shared understandings of the members of an organization.
o The resulting perspective is reflected in the patterns by which deeply embedded resources
(capabilities) are protected and used for achieving competitive advantage.
- The environmental school focuses on the environment as the central actor to the strategy-making process.
o Organization must respond to the forces of the environment, otherwise it will be ‘selected out’.
o Has its roots in contingency theory. Gained popularity through Hannan & Freeman’s writings on
population ecology of organizations using a biological analogy (1977).
The configurational school is an approach to synthesize the previous 9 schools. This school emphasizes that there is
no one best way of organizing and strategy formulation, but specific circumstances will make a certain configuration
of context, strategy, structure, and process effective (see 2.4).
2.3: Implications for HRM and performance
Insights from the schools about the relationship between strategy, HRM, and performance:
- There is no universally agreed best way of strategy formulation & organizing, including with regard to
shaping HRM policies.
o Field of strategic management is characterized by different streams & approaches;
o This plurality highlights the importance of taking multiple factors into account.
2.3.1 The role of the entrepreneur
Entrepreneur often the founder & owner of the company.
Likely plays an important role in shaping HRM policies & creating related culture.
Lack of explicit HRM practices (often the case in small companies) creates space for flexibility but leaves
room for favoritism.
2.3.2. Cognitive/framing processes
- Due to bounded rationality, cognitive processes distort filters & (de)coding processes, resulting in differences
in the mental maps of the participants involved, which in turn may give rise to divergent opinions on how to
shape HRM strategies, policies, and practices.
2.3.3 Incrementalism/learning
, 4
- Due to the different parties involved (both inside & outside the organizational boundaries), formulating HRM
strategy can be considered an emergent & stepwise process with feedback loops, making it increasingly
difficult to understand cause & effect linkages and to distinguish formulation and implementation.
2.3.4 Power & resources
- Power position & resources of parties involved are often neglected in research.
- Power position & resources that can be mobilized to enforce demands are crucial in shaping both collective
bargaining agreement CBA outcomes & HRM policies.
2.3.5 Culture/ideology
- The way in which collective perspectives & intentions develop over time will likely affect:
o HRM policies;
o The ways in which the effectiveness of HRM and individual employees are perceived by other
members of the organization;
o The degree to which related values and perceptions are shared (process theory – Bowen & Ostroff,
2004; attribution theory – Nishii, Lepak, & Schneider, 2008; organizational climate – Schneider,
Ehrhart, & Macey, 2013)
2.3.6 Environmental & institutional forces
- Environmental forces, stemming from trade unions, tripartite (govts, employers’ federations, trade unions) &
bipartite consultative bodies at the national level, and guidelines can have large impact on an organization’s
HR strategy & policies.
o These forces are sources of societal pressure to which management must react in order to achieve
legitimacy & not be selected out.
2.4: In search of synthesis
Three modes of strategy synthesis:
The ‘boundary’ school The ‘dynamic’ school The ‘configurational’ school
Questions Where to draw the With whom & how do What are the
boundary? firms compete? contingencies?
How to manage across the How do they sustain their Which strategy
divide? competitive advantage configurations are
over time? effective?
Base - Agency theory (economics/ - Resource-based theory of - Social sciences;
disciplines/ psychology); the firm (economics); - History;
theories - Transaction costs theory; - Entrepreneurship - Equilibrium models
- Industrial organization; (economics); (biology);
- Control theory (sociology); - Innovation theories - Catastrophe theories
- Decision-making theories (organization theory); (mathematics).
(psychology). - Learning theories
(organizational behavior).
Problem- - The strategy sourcing - The roots of - Archetypes (Miller &
solving tools process (Venkatesan, competitiveness (Prahalad Friesen, 1980);
1992); & Hamel, 1990); - Strategic types (Miles &
- Porter’s value chain (Porter, - The capability matrix Snow, 1978);
1992). (Schoemaker, 1992). - FAR method (Volberda,
1998).
New - Strategizing; - Coevolution of capabilities - Conceptually derived
directions - Joint value creation; & competition; typology;
- Building trust; - Managerial dimensions of - Empirically based
- Learning across boundaries. dynamic capabilities. taxonomies;
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