Many studies attempt to establish the linkage between business strategies and human resources strategies necessary in making the business strategies a success. The linkages fall into two categories: the micro perspective and the macro perspective. Under the micro perspective, the linkages between the human resource strategy and business strategy depend on the different career systems. Mainstream HRM adopts this perspective in tracing connections between individual HR policies and business strategies.
Under the macro perspective, Porter identified two generic strategies: the differentiation strategy and the overall cost leadership strategy. Under the cost leadership strategy, a company takes a low-cost position and aims to get above average returns in spite of the strong competition facing the company. Under this strategy, the staff’s job descriptions revolve around setting up tight cost controls, enforcing strict rules, making numerous reports, and establishing incentives depending on quantitative methods for the employees. Differentiation strategy, on the other hand, entails differentiating an organization’s goods and services from those of its competitors. Under this strategy, a company offers non-price, unique and distinctive products, which enables it to earn customer loyalty. The job descriptions under this strategy entail putting importance on coordination, setting up incentive-based qualitative methods, maintaining technological, and quality leadership.
The macro and micro approaches linking HRM and strategy fail to plainly recognize the assumptions that govern their formulation. The first assumption is that the mix and selection of HR practices depend on the strategy a company adopts, which depends on environmental constraints like competitors and government regulations, among others. And the second assumption is that the companies that achieve a tighter fit between HRM practices, strategy practices, and aligning environmental constraints perform better than the companies that do not.
While establishing HRM policies, a company needs to strike a balance between standardization and differentiation. For instance, while a multinational company may want to standardize the practices between the parent companies and the subsidiaries, the environment surrounding the subsidiaries may force HR to modify the local operations to fit into the environment, like complying with local regulations, labor unions, and worker skill levels. The pressure facing multinationals as they attempt to align their internal practices with the external environment has a significant impact on developing human resource practices. In the discussion that follows, the study aims to show how a multinational company makes business strategies and how such strategies affect the human resource strategy employed by such companies.
The Environment-Business Strategy Match
One way of analyzing the external environment is to spot the nature of international competition facing the industry in which a firm operates. There are two main forms of industry competition. The first one is the multi domestic industry, where the competition within one country is fundamentally autonomous of competition in other countries. For example, the competition in soft drinks in one country does not affect the competition in soft drinks in other countries. The second form is the global industry, where competition in one country is dependent on competition in another country. For instance, the competition in the petroleum industry in one country affects competition in all the other countries.
In light of these two types of competition, there are varying demands for coordination, which in turn influences the kind of HR practices a multinational chooses. The company, therefore, can choose either a cost leadership strategy or a product leadership strategy. A while ago, companies would only choose one strategy, and being the middle was an indication of the weakest strategy a company could choose. However, with time, multinational companies realized that they could make a strike between the two strategies and enjoy the benefits of both. Nevertheless, this does not always entail equal weighting of the strategies. A company may get inclined to one strategy more than the other.
Companies pursuing a cost leadership strategy in a multi-domestic competition industry generate high stress levels in their parent-subsidiary relationship. This strategy demands standardization of operations across the company, but the multinational nature of the industry requires the company to change and adapt to the local environment so as to compete effectively. On the other hand, companies pursuing this strategy in a global competitive industry face the pressure for internal consistence and low stress levels to change to the local environment.
Pursuing a differentiation strategy in a domestic competitive strategy leads to low stress levels in parent-subsidiary. This is because differentiation strategy requires providing unique products and services to customers, while the global nature of the industry demands conforming to the local conditions. However, companies pursuing differentiation in global competitive industry offers the companies a wide range of freedom in consistency requirements.
Regardless of the competition environment a multinational operates in, the cost leadership strategy emphasizes more on internal consistency than the differentiation strategy. At the same time, the localization pressure facing multi-domestic competitive environment renders it harder for multinational companies to attain consistency than in a globally competitive industry.
The business strategy-HRM Strategy Match
Performance of a multinational largely depends on the ability of a company to align its internal operations in a way that enables it to match the local environments. The human resource functions are considerably decentralized with the parent company dealing with the expatriates and international assignments matters only. Consequently, multinationals must design ways of incorporating the subsidiary’s business strategy when choosing which strategy the entire company will undertake.
At the subsidiary level, the need for internal consistency can be defined as the level of assimilation with the parent company necessary for success. For instance, the strong pressures for internal consistency for multinational companies pursuing the cost leadership strategy result in a high integration with the parent company. The companies pursuing a differentiation strategy in environments considered to be in multi-domestic industries, on the other hand, are less integrated with the parent companies.
Human resource strategies
This framework predicts that when a firm is matching with the external environment, its performance is will most likely be higher than in the company which does not match the environment. However, consistency between the strategy and the external environment is just the first step, and it does not directly predict the company’s performance. Rather, the application of the strategy through implementing of functional policies, including the HRM strategies, determines the overall performance of the company.
The human resources strategies can be categorized into three different types: the utilizer strategy, the accumulator strategy, and the facilitator strategy. The utilizer strategy makes use of the human resources as efficiently as possible, achieved by employing and discharging depending on the short-term needs of the company and matching specific task requirements to employee skills. An accumulator strategy is the strategy which builds up the HR through acquiring of staffs with latent, large potential and developing that potential over time in a way consistent with the needs of the company. The facilitator strategy, on the other hand, focuses on new knowledge and creation of new knowledge. It aims at developing the human resource of a company effectively through acquiring multi-talented staffs, encouraging and supporting the staffs to develop skills and knowledge, which they believe, are significant on their own. Companies making use of cost leadership and differentiation strategies would adopt a facilitator strategy, where the company develops the existing staffs while at the same time seeking new knowledge to help in improving and developing unique products for customers.
The appropriate strategy for a subsidiary is determined by assessing the extent of intersection of the subsidiary’s strategies with the level of integration with the parent company. A utilizer strategy is best for a cost leadership strategy since it entails acquisition and dismissal of personnel depending on the needs of the company. This allows flexibility and easy integration of the company with its parent. However, with the increased pressure for localization, this strategy increasingly becomes ineffective. An accumulator strategy is effective under the differentiation strategy, because it provides a pool of employees that HR can tap as needed. This would, however, be effective in an environment with minimum integration with the parent company since the increased integration would result in exercising tighter controls.
This case study offers companies with the information necessary in linking the micro and the macro perspectives and on how multinational companies link human resources strategies with the business strategies. It offers the circumstances under which a multinational can adopt a cost leadership strategy and when it should adopt a differentiation strategy. However, it places great importance on the need to merge the two strategies to enjoy maximum benefits. It also offers a guideline that governs how a company can choose a human resource strategy, depending on the business strategy in use. The ability of the company to tie business strategies to the HRM strategies determines the overall performance of the company. However, while choosing which strategy to employ, the subsidiaries should still strive to integrate with the parent company to ensure achievement of the entire company. This is because the increased globalization results in an amplified need and desire for increased consistency and coordination between the subsidiary and the parent.