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CHAPTER

2

STRATEGIC HR MANAGEMENT AND PLANNING

Learning Objectives

After you have read this chapter, you should be able to:

Explain strategic HR management and how it is linked to

organizational strategies.

Discuss two possible contributors to competitive

advantage and how HR contributes to each.

Describe how legal, political, cultural, and economic

factors affect global HR management.

Define HR planning, and outline the HR planning

process.

Describe the means for assessing the external and internal

environments of HR management.

Discuss several ways of managing a surplus and a

shortage of human resources.

Identify why HR metrics must consider both strategic and

operational HR measures.

CHAPTER 2: STRATEGIC HR MANAGEMENT AND PLANNING

Chapter Overview

Strategic human resource management is defined as the "use of employees to gain or keep a

competitive advantage resulting in greater organizational effectiveness.” There should be a

close linkage between organizational and HR strategies. Research has shown that HR best

practices make a difference to business outcomes. Operationalizing HR strategy, using HR as a

core competency, and understanding the organizational culture are explored as part of the


Chapter 2: Strategic HR Management and Planning

22

nature of strategy and HR management. Next, productivity, quality, and financial contributions

as competitive advantage are discussed.

Global competitiveness and strategic HR is influenced by the different types of global

organizations. Three phases of international interaction are importing and exporting,

multinational enterprises, and global organization. Global legal and political factors that

influence HR strategies are also identified. This section ends with a discussion of cultural and

economic factors that affect global HR management

The purposes of strategic HR planning and HR planning responsibilities are explored

including the special situations involved in HR planning in small businesses. The major steps

in the HR planning process are then identified. The next two sections look at the first two steps

in HR planning: scanning the external environment and internally assessing the organization’s

workforce. External scanning looks at government influences, economic conditions,

geographic and competitive concerns, and the composition of the nation’s workforce.

Analyzing the jobs that need to be done and the skills of people currently in the organization is

the next part of HR planning. Tools used in the internal assessment of the organization’s

workforce include auditing jobs and skills, developing an Organizational Capabilities

Inventory, and using a Skills Database.

At the heart of HR planning is the forecasting of HR demand and supply. Several forecasting

methods and different time frames are described. The results of the forecasts of the demand

and supply of human resources help to determine if there is a projected shortage or surplus of

workers and lead to the development and use of a strategic HR plan that should include

succession planning. Workforce realignment issues related to managing a human resource

surplus, using outplacement services, and managing a shortage of employees are then explored

as well as the issues involved in HR planning in mergers and acquisitions.

The chapter closes with the evaluation of HR effectiveness using HR metrics. The

development and use of HR metrics is explored and specific strategic HR effectiveness tools

such as return on investment (ROI), economic value added (EVA), the balanced scorecard,

benchmarking, and HR audits are discussed.

Chapter Outline and Instructor Notes

Suggested Content Coverage

The strategy an organization follows is its proposition for how to compete successfully and

thereby survive and grow. There are different approaches to strategy formation but regardless

of which specific strategy is chosen, an HR strategy to have the right people in the right place

at the right time will be necessary to make that overall strategy work. That is why it is

commonly argued that HR should have input into the organization’s overall strategy. To have



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input into overall strategy HR must move beyond the administrative and legally mandated

tasks and add value by improving the performance of the business. To add value to the human

capital, HR must have good measurements (metrics) about the HR side of the business

including core competencies, and capabilities of the organization.

I. NATURE OF STRATEGY AND HR MANAGEMENT

Strategic HR management refers to the use of employees to gain or keep a competitive

advantage resulting in greater organizational effectiveness. Figure 2-1 shows the factors that

affect strategic HR management. Consideration of HR issues should be part of the initial input

to the strategy formulation process. HR professionals should be doing environmental scanning

to know and pinpoint which skills are available and lead times to adjust to labor shortages or

surpluses. In summary, HR should be involved in implementing strategies that have HR effects

and consequences.

Internet Research: HRM Guide

For a network of human resource and other Websites containing articles about strategic HRM, link

to the HRM Guide Website at: http://thomsonedu.com/management/mathis

(http://www.hrmguide.net )

A. Strategic Success with HR Practices – While the logic of having HR involved with

strategy seems clear enough, the implementation is not yet universal. The BNA notes such

HR Headline: Strategy Mistakes and HR Consequences at Automakers

GM originated the “job bank” idea and Ford and Chrysler followed suit. The job bank idea

originally was to help train or find jobs for UAW employees who would “otherwise be

permanently laid off” because of technology or greater productivity. Surplus employees

continued to receive full pay and benefits when they are no longer needed. They must

perform some company approved activity such as volunteer work, go back to school, or sit

in a room killing time for 8 hours a day. About 7.500 GM workers are in the job bank and

each person costs GM around $100,000 - $130,000.

Questions for Discussion:

1. Why do you think GM agreed to the “Job Bank” idea? Why do you think Ford and

Chrysler followed suit?

2. Do you think it would have been better for the automakers to just lay off a large

number of employees with a great deal of seniority? What would have been the

advantages and disadvantages of the “lay off” strategy?

3. Do you think a “Job Bank” idea such as this would ever be instituted in a nonunion

operation? Why or why not?

http://thomsonedu.com/management/mathis

http://www.hrmguide.net/



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finds as top management usually does not assess HR on its strategic contributions, about

half of organizations do not have an HR strategy, etc.

1. HR Best Practices – there is a lot of data that shows HR practices make a big

difference in business outcomes. Some of these recognized HR best practices include:

selective recruiting, training/cross training, high wages/incentives, promotion from

within, etc.

B. Operationalizing HR Strategy – Figure 2-2 highlights some common areas in need of HR

strategies. HR professionals can provide the perspective and expertise to successfully be a

part of the strategic planning process by understanding the business, focus on the key

business goals, know what to measure and prepare for the future.

C. Using Human Resources as a Core Competency - A core competency is a unique

capability that creates high value and differentiates the organization from its competition.

Figure 2-3 shows some possible areas where human resources may become part of a core

competency.

D. Organizational Culture – Organizational culture is a pattern of shared values and beliefs

giving members of an organization meaning and providing them with rules for behavior.

Managers must consider the culture of the organization because otherwise excellent

strategies can be negated by a culture that is incompatible with the strategies. Also the

organizational culture affects the attraction and retention of competent employees and

affects the way external forces are viewed. The culture affects service and quality,

organizational productivity, and financial results.

Internet Research: Organizational Culture Center

For an on-line resource center on issues related to organizational culture, link to the

Organizational Culture Center’s Web site at: http://thomsonedu.com/management/mathis.

(http://www.organizationalculturecenter.com )

II. HR AS ORGANIZATIONAL CONTRIBUTOR

Strategic HR management plays a significant role in the following: organizational productivity,

customer service and quality, and financial contributions.

A. Organizational Productivity - Productivity can be a competitive advantage because the

costs to produce goods and services are lower and lower prices can be charged.

Productivity is a measure of the quantity and quality of work done, considering the cost of

the resources used. A useful way of measuring HR productivity of human resources is to

consider unit labor cost, which is computed by dividing the average cost of workers by

their average levels of output.

http://thomsonedu.com/management/mathis

http://www.organizationalculturecenter.com/



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1. Improving Organizational Productivity - Productivity at the level of the organization

affects profitability and competitiveness in a for-profit organization, and total costs in a

not-for-profit organization. The human resources used for productivity are scrutinized

particularly closely. Figure 2-4 identifies several approaches to improving

organizational productivity:

Organizational restructuring

Re-designing work

Aligning HR activities

Outsourcing analyses

B. Customer Service and Quality Linked to HR Strategies – In addition to productivity,

organizational effectiveness is significantly affected by customer service and quality.

Overall, customer satisfaction has declined in the U.S. and other countries.

1. Quality - Delivering high quality service and/or products can significantly affect

organizational effectiveness. Many organizations have made various efforts to enhance

quality. Some attempts have worked better than others.

C. HR Effectiveness and Financial Performance –Effectiveness for organizations is the

extent to which goals have been met. Efficiency is the degree to which operations are

done in an economical manner. The return on investment (ROI) of human expenditures is

being examined closely by many firms. Two well known examples of firms that

determine the ROI of HR are Dow Chemical and First Tennessee National Bank. There

are many different ways and difficulties associated with measuring the financial

contributions of HR. Later in this chapter, HR metrics will highlight some HR

measurement approaches.

III. GLOBAL COMPETITIVENESS AND STRATEGIC HR

A. Types of Global Organizations – As organizations broaden their operations worldwide;

organizations may pass through three stages: importing/exporting, multinational

enterprises, and global organizations.

1. Importing and Exporting – Importing and exporting is the first phase of international

interaction and refers to the buying and selling of goods and services with

organizations in other countries. Generally, HR activities are not affected except for

travel policies for those going abroad.

2. Multi-National Enterprises (MNE) – A multi-national enterprise (MNE) is an

organization with operating units located in foreign countries. The HR professionals in

the parent organization must become knowledgeable about the laws and regulations in

each country in which the MNE operates.



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3. Global Organization – A global organization is one having corporate units in a

number of countries integrated to operate worldwide. In truly global organizations, HR

management moves people, especially key managers and executives, throughout the

world. A global mindset is important. A global HR mindset means looking at HR

issues from a global perspective, using ideas and resources throughout the world, and

ensuring openness to other cultures and ideas.

Internet Research: Organization for Economic Cooperation and Development

(OECD)

The OECD is an organization of 30 member countries who work to influence economic and social

policies. Visit their site at http://thomsonedu.com/management/mathis (www.oecd.org)

B. Global Legal and Political Factors – The nature and stability of political systems vary

from country to country. Legal systems also vary from country to country, and therefore

HR-related laws vary in character and stability. As a result, it is critical that HR

professionals conduct a comprehensive political and law review before beginning

operations in a country including the role and nature of labor unions.

C. Global Cultural Factors – Culture is composed of the societal forces affecting the values,

beliefs, and actions of a distinct group of people. One widely used way to classify

cultures was developed by Geert Hofstede, a Dutch scholar and researcher. He defined

five dimensions useful in identifying and comparing culture: inequality in power,

individualism/group orientation, masculinity/femininity, structured/unstructured, and

long term/short term orientation.

D. Global Economic Factors –Economic systems vary with different countries. In many

developed countries, especially in Europe, employment restrictions and wage levels are

high. Figure 2-5 shows the differences in manufacturing unit labor costs in various

countries. As a result of these differences many U.S. and European firms are moving

jobs to lower-wage countries, such as Romania, China, and Thailand. Various advocacy

groups have accused some global firms of being “sweatshop employers.”

IV. HUMAN RESOURCE PLANNING

Human resource (HR) planning is the process of analyzing and identifying the need for and

availability of human resources so that the organization can meet its objectives. The focus of

HR planning is to have the right number of human resources, with the right capabilities, at the

right times, and in the right places. HR planning requires knowledge of expansions or

reductions in operations and any technological changes that may affect the organization.

Internet Research: Human Resource Planning Society

This Website contains a Knowledge Resource Center for building a strategic HR function. Link to

their site at: http://thomsonedu.com/management/mathis (http://www.hrps.org)

http://thomsonedu/Mathis

http://www.oecd.org/


http://www.hrps.org)/



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A. HR Planning Responsibilities – In most organizations that do HR planning, the top HR

executive and subordinate staff specialists have most of the responsibilities for this

planning. However, as Figure 2-6 indicates, other managers must provide information for

the HR specialists to analyze.

B. Small Businesses and HR Planning – Even though the owner/manager of a small business

knows on a daily basis what is happening and what should be done, HR planning is still

important. Perhaps the most difficult areas for planning in a small business are family

matters and succession. Difficulties in HR management can arise when a business passes

from one generation to another. A clearly defined succession plan helps eliminate such

difficulties.

C. HR Planning Process – As shown in Figure 2-7, the process begins with the consideration

of organizational objectives and strategies, assesses HR needs and supply, develops

forecasts for needs (demand) and supply, compares the two sets of forecasts for

mismatches in both the short run and long run, and develops HR strategies and specific

plans to provide overall direction and management of HR activities.

V. SCANNING THE EXTERNAL ENVIRONMENT

A major component of strategic planning is the scanning of the external environment.

Environmental scanning is the process of studying the environment of the organization to

pinpoint opportunities and threats. Environmental factors -- government, economic

conditions, geographic and competition issues, and workforce changes -- all must be part of

environmental scanning.

A. Government Influences – have become more important through the years as more laws

and administrative rulings from regulatory agencies have emerged to affect employment

practices. Effective planning for employment, therefore, requires knowledgeable

individuals to cope with the many legal requirements. An organization must consider a

wide variety of government policies, regulations, and laws during the HR planning

process.

B. Economic Conditions – The general business cycle of recessions and economic booms

affects HR planning. Factors such as interest rates, inflation, and economic growth affect

the availability of workers and should figure into organizational and HR plans and

objectives. At lower unemployment rates, many job seekers are often less employable due

to their inadequate job skills and education. However, as unemployment rates increase,

the number of qualified people looking for work increases, making it easier to fill jobs.

C. Geographic and Competitive Concerns - have become more significant factors in HR

planning as a result of shifts in population growth and other demographic indicators. Net

migration into a particular region is important. For example, the population of U.S. cities



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in the South, Southwest, and West has grown rapidly in the past decade and provided a

ready source of labor. The wages of direct competitors and the impact of international

competition can all influence the labor market and must be considered as part of

environmental scanning.

D. Workforce Composition - Changes in the composition of the workforce, combined with

the use of different work patterns, have created workplaces and organizations that are

notably different from those of a decade ago. When scanning the workforce, it is

important to consider aging of the workforce, growing diversity of workers, women

workers and work/life balancing concerns, availability of “contingent workers,” and

outsourcing possibilities.

VI. ASSESSING THE INTERNAL WORKFORCE

Analyzing the jobs that will need to be done and the skills of people currently available to do

them is the next part of HR planning. The needs of the organization must be compared against

the available labor supply. A good example is found in Best Practices.

A. Jobs and Skills Audit – An audit requires a comprehensive review of jobs and skills in the

organization. This internal assessment provides a basis for forecasting what jobs will be

done in the future. Planners need information to answer questions such as the following:

What jobs now exist?

How many individuals are performing each job?

What are the reporting relationships of jobs?

HR Best Practices: Mattel Assesses Its Management

Mattel had success in the past but had followed a growth by acquisition strategy and it

failed. A new CEO was brought in to provide a global turnaround strategy. It dumped its

unprofitable businesses and developed the management team that remained as a key

strategy to the HR turnaround necessary to change the company’s fortunes. Mattel launched

a set of leadership programs and included topics such as global business growth and the

most critical strategic issues facing the company. It also initiated its first performance-

management system, succession management, and career opportunities systems. In 5 years

the company increased value by about $5 billion.


1. Why do you think global management alignment with corporate strategies and goals

resulted in innovative products and reduced costs?

2. What do you think would be the most important elements of the external environment

for a company like Mattel? Give your rationale.

3. What HR best practices were included in Mattel’s turnaround strategy?



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How essential is each job?

What jobs will be needed to implement the organizational strategy?

What are the characteristics of anticipated jobs?

B. Organizational Capabilities Inventory - provides a detailed audit of current employees

and their capabilities. By utilizing different databases it is possible to identify the

employees’ knowledge, skills, and abilities (KSAs). This information is then used to

determine long-range needs for recruiting, selection, and HR development.

C. Using a Skills Database - This inventory often consists of individual employee

demographics, career progression, and performance data. The information in the data

bank may affect the employee’s career. Therefore, the data and their use must meet the

standards of job-relatedness and non-discrimination. The information should be available

only to those who have specific use for it. Managers can develop profiles from this data

revealing the strengths and deficiencies of the organization’s current workforce. Specific

areas that might be profiled are categories of special expertise, retirement patterns,

turnover, mobility restrictions, and specialized job qualifications. Issues using a skills

database are included in HR On-the-Job: Discovering What Works with a “Skills

Database.”

VII. FORECASTING HR SUPPLY AND DEMAND

Forecasting uses information from the past and present to identify expected future conditions.

A. Forecasting Methods and Periods – Forecasting methods may be either judgmental or

mathematical methods. They range from a manager's best guess to a rigorous and complex

computer simulation. Despite the availability of sophisticated techniques, forecasting is

still a combination of quantitative method and subjective judgment. The facts must be

evaluated and weighted by knowledgeable individuals, such as managers and HR experts.

HR forecasting should be done over three planning periods: short range, intermediate and

long ranges. The most common planning period is short-range, and covers a period of six

months to a year. Intermediate-range plans usually project one to five years into the future,

and long-range plans extend beyond five years.



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B. Forecasting the Demand for Human Resources - can be calculated on an organization-

wide basis and/or on the basis of the needs of individual units in the organization. One

approach to demand forecasting considers specific openings that are likely to occur and

uses that as the basis for planning. Based on this analysis, decision rules (or “fill rates’)

are developed for each job or level. For example, a bank might determine that 50% of

branch supervisor openings will be filled through promotions from customer service

tellers, 25% through promotions from personal bankers, and 25% from new hires.

C. Forecasting the Supply of Human Resources – involves determining the availability of

human resources taking into consideration both external and internal supply. Although

internal supply is easier to calculate, it is important to compute the external supply as

well.

1. External Supply - of potential employees available to the organization can be

estimated by considering many factors. These include net migration in/out of the

locality, individuals entering/leaving the workforce, individuals graduating from

educational institutions, changes in the workforce composition, economic forecasts,

technological developments, actions of competitors, governmental actions, and

factors affecting persons entering and leaving the workforce.

2. Internal Supply - Figure 2-8 shows how the internal supply can be calculated by

taking into consideration that employees may move from their current jobs into

HR On-the-Job: Discovering What Works with a “Skills Database”

Skills databases are an increasingly popular tool employers use to trace employee talent.

The finished product can be queried to fill jobs or analyzed to identify strengths and

weaknesses of an organization. It is a great concept and seems to work for some firms such

as Dell but difficult to operationalize in many firms. When systems rely on managers to

enter employee information the manager may fail to do so or withhold information that

might result in losing a good employee to another manager. If employees are responsible

for entering information and managers review the information, often overworked managers

just rubberstamp what employees enter. Also, software can identify employees with certain

credentials but harder to gauge the necessary “soft skills” required for managerial jobs.


1. Do you think developing a skills database is worth the expense? Why or why not?

2. How could a company include “soft skills” information about their employees in

their skills database? Explain

3. How could a company get its managers to enter the appropriate employee

information or get managers to seriously review employee information in the skills

database? Explain



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others through promotions, lateral moves, and terminations. Also, it considers that

the internal supply is influenced by training and development programs, transfer and

promotion policies, and retirement policies, among other factors. Data from

replacement charts and succession planning efforts are used to identify potential

personnel changes, possible backup candidates, and keep track of attrition

(resignations, retirements) for each department.

3. Succession Planning – Succession planning is a process of identifying a longer-term

plan for the orderly replacement of key employees. One common flaw in succession

planning is that too often it is limited to key executives.

VIII. WORKFORCE REALIGNMENT

With all the data collected and forecasts done, an organizational plan can be developed. The

plan can be extremely sophisticated or rudimentary. The ultimate purpose of the plan is to

enable managers to match the available supply of labor with the forecasted demand based on

the strategies of the organization. Organizations may be dealing with shortages and/or

surpluses of employees.

A. Managing a Human Resources Surplus – A surplus of workers can be managed in a

variety of ways but the actions are often difficult because workforce reductions ultimately

are necessary.

1. Workforce Reductions and the WARN Act – In this era of mergers, acquisitions, and

downsizing, many workers have been laid off or had their jobs eliminated due to

closing of selected offices, plants, and operations. To provide employees sufficient

notice, the Worker Adjustment and Retraining Notification (WARN) Act was passed.

This federal law requires a 60-day notice before a layoff or facility closing involving

more than 50 employees. However, part-time employees working fewer than 20 hours

per week do not count toward the 50 employees. Also, seasonal employees do not have

to receive WARN notification. The WARN Act also imposes stiff fines on employers

who do not give the required notice.

2. Workforce Downsizing - This has been called downsizing, rightsizing, reduction in

force (RIF), and many other terms, but it usually means cutting employees.

Downsizing has worked for some firm, but it doesn’t generate additional revenue. It

only generates lower costs in the short term. If companies cannibalize human resources

they need to grow and innovate, disruption follows for some time. Also, downsizing

can hurt productivity by leaving “surviving” employees overburdened and

demoralized. Several methods can be used when downsizing must occur: attrition,

early retirement buyouts, and layoffs are the most common.



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3. Attrition and Hiring Freezes – Attrition occurs when individuals who quit, die, or retire

are not replaced. Unless turnover is high, however, attrition will eliminate only a small

number of employees in the short run. Employers may use a method that combines

attrition with a freeze on hiring.

4. Voluntary Separation Approaches – are ways that organizations downsize by

encouraging employees to volunteer to leave by offering additional severance and

benefit payments. One widely used volunteer program is the use of early retirement

buyouts to encourage senior workers to leave organizations early. As an incentive,

employers make additional payments to employees so that they will not be penalized

too much economically until their pensions and Social Security benefits take effect.

One negative result for employers is having the “wrong” employees accept the plan.

Care must be exercised to make sure that the early retirements are truly voluntary to

avoid age discrimination suits.

5. Layoffs - occur when employees are placed on unpaid leaves of absence subject to

recall if business improves. Layoffs may be an appropriate downsizing strategy if there

is a temporary downturn in an industry. However, careful planning of layoffs is

essential and care must be taken to avoid age and other types of discrimination charges.

Companies have no legal obligation to provide a financial cushion to laid-off

employees; however, many do. The most common formula is one week’s pay for every

year of employment. Under COBRA displaced workers can retain their medical group

coverage for up to 18 months, and up to 36 months for dependents, if they pay the

premiums themselves.

B. Outplacement Services – are services provided by the employer to displaced

employees to give them support and assistance. It is most often used with those

involuntarily removed because of performance problems or elimination of jobs.

Outplacement services typically include personal career counseling, resume

preparation and typing services, interviewing workshops, and referral assistance.

These services are generally provided by outside firms that specialize in outplacement

assistance. Figure 2-9 shows that five factors should be considered to make down

sizing more effective.

C. Managing a Shortage of Employees – seems simple enough – simply hire more.

However there are consequences of adding full-time benefited employees in cost and

flexibility. There are other options: overtime, contingent workers, bring back recent

retirees, outsource work, and reduce turnover.



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IX. HR PLANNING IN MERGERS AND ACQUISITIONS

Internet Research: Mercer Human Resource Consulting

The on-line Knowledge Center contains articles on human resource planning in mergers and

acquisitions. Link to their Web site at: http://thomsonedu.com/management/mathis

(http://www.mercerhr.com/knowledgecenter )

Experience with the failure of M&As shows clearly that organizations have to ensure that

different organizational cultures mesh. Cultural compatibility is the extent to which such

factors as decision-making styles, levels of teamwork, information-sharing philosophies, the

formality of the two organizations, etc. are similar. To address these concerns, HR

professionals should be involved before, during, and after M&As. Significant time must be

spent identifying the cultural differences, how they are to be addressed, and ways to integrate

managers and employees from both entities.

A. Revising the Structure - A common result of most mergers and acquisitions (M&As) is

an excess of employees once the firms have been combined. A critical part of M&As is

being sure that employee downsizing is handled legally and effectively.

1. Key Factors in Cultural Fit – degree of internal integration, autonomy,

adaptability, employers trust, and diversity.

2. Merging HR Activities – Another key role played by HR in both firms is how HR

activities in each organization are to be melded. Compensation, benefits,

performance appraisal systems, employee relations policies, and compatibility of

databases and information systems are examples of issues that must be considered.

X. MEASURING EFFECTIVENESS USING HR METRICS

The notion that one cannot really measure what the HR function does is not true. The main

“customers” for HR services are other departments, managers, and employees. If HR cannot

effectively and efficiently deliver its services to these customers, HR loses its credibility. HR

professionals must measure and report the results of HR activities to the organization.

A. Developing and Using HR Metrics – HR metrics are specific measures tied to HR

performance indicators. A metric can be developed to measure what happens in HR based

on costs, quantity, quality, timeliness, and other designated data. Figure 2-10 provides

examples of strategic and operational HR metrics. Much of what typically has been

measured by HR has focused on internal HR expenditures and effectiveness. However, a

broader strategic perspective is also needed.

Internet Research: HR Metrics

For an on-line database of HR metrics information, link to their Web site at:

http://thomsonedu.com/management/mathis (http://www.hrmetrics.org )


http://www.mercerhr.com/knowledgecenter


http://www.hrmetrics.org/



34

B. Measures of Strategic HR Effectiveness – For HR to fulfill its strategic role, HR metrics

that reflect organizational strategies must be used. Some of the more prevalent of these

measures compare full-time equivalents (FTE) to organizational measures. An FTE is a

measure equal to one person working full-time for a year. Figure 2-11 shows a

comparison across industries of revenue and income per FTE.

1. Return on Investment (ROI) – A widely used financial measure that can be

applied to the cost of HR activities is return on investment (ROI), which is a

calculation showing the value of expenditures for HR activities. It can also be

used to show how long it will take for the activities to pay for themselves. To

conduct ROI analyses, three stages occur: identify all potential/actual costs,

identify the potential/actual benefits, and calculate the ROI.

2. Economic Value Added (EVA) - Another measure used is economic value added

(EVA) which is a firm’s net operating profit after the cost of capital is deducted. Cost

of capital is the minimum rate of return demanded by shareholders, so when a

company is making more than that, it is creating wealth for the shareholders.

3. HR and the Balanced Scorecard –The balanced scorecard stresses measurement of

organizational strategy performance using four categories: financial, internal business

processes, customer, and learning and growth perspectives. Organizational measures in

each of these areas are calculated to determine if the organization is progressing toward

its strategic objectives.

C. HR Measurement and Benchmarking – One approach to assessing HR effectiveness is

benchmarking, which compares specific measures of performance against data on those

measures in other organizations. HR professionals compare their data to those from

outside sources, including individual companies, industry sources, and professional

associations. For measuring HR itself, one useful source is data gathered each year by

SHRM and the Bureau of National Affairs.

D. HR Audit - One general means for assessing HR effectiveness is through an HR audit,

similar to a financial audit. An HR audit is a formal research effort that evaluates the

current state of HR management in an organization. These audits attempt to evaluate how

well HR activities in each of the HR areas (staffing, compensation, health and safety, etc.)

have been performed, so that management can identify areas for improvement.

Internet Research: HR Audit, Inc.

HR Audit, Inc. provides functional and strategic audits. Visit their Web site at:

http://thomsonedu.com/management/mathis (www.hraudit.com )


http://www.hraudit.com/



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REVIEW AND APPLICATION QUESTIONS

1. Discuss how cultural factors, both globally and inside organizations, must be

addressed as part of strategic HR management.

Culture is composed of the societal forces affecting the values, beliefs, and actions of a distinct

group of people. Significant cultural differences often exist within companies. Getting

individuals from different religious, ethnic, or tribal backgrounds to work together is often

difficult. However, cultural factors must be addressed as part of strategic management because

if these factors are not recognized and dealt with there will be a lot of conflict in the

organization which will negatively influence the organization’s ability to meet its strategic

goals. Not dealing with global cultural factors could result in an organization not being

successful in foreign markets because they don’t produce or market products that are

acceptable to the local consumers. Not dealing with cultural differences inside the organization

can result in turnover to those individuals that do not feel valued because of their cultural

differences.

2. What steps can HR professionals take to overcome the view that what HR

accomplishes is not measurable?

Steps that HR professionals could take to overcome the view that what HR does is not

measurable would include beginning to use HR metrics and share these metrics with upper

management and other operating managers. One health insurance organization actually

produces an annual report of HR activities and includes HR metrics for all of HR’s functions:

staffing, training, compensation, benefits, employee relations, etc. This annual report is sent to

upper management, board members, and other operating managers. It is also important that the

leadership of the HR function constantly ask about the metrics, measurements, and cost/benefit

analyses when HR activities are discussed with subordinates and other HR staff members.

3. As a newly hired HR manager for a medical clinic with 20 physicians and 100

employees, you want to identify and develop some HR metrics. Using the metrics

discussed at www.saratogainstitute.com and other Web sources that you find identify

five specific metrics and discuss why those measures could be useful.

http://www.saratogainstitute.com/



36

1. Human Capital ROI

Revenue - (Operating Expense

- [Compensation cost + Benefit

cost])

÷

(Compensation cost + Benefit

cost)

Return on investment ratio for

employees. Did organization

get a return on their

investment? Analyze causes of

positive/negative ROI metric.

Use analysis as opportunity to

optimize investment with HR

practices such as recruitment,

motivation, training and

development.

2. Turnover costs Cost to terminate + Cost per

hire+ Vacancy Cost +

Learning curve loss

Factors (i.e. knowledge, skills,

and abilities) and costs

incurred when an employee

leaves your company.

3. Turnover Rate [# of separations during mo.

÷

Ave. # of employees during

mo.]

x 100

This measures the rate for

which employees leave a

company. Is there a trend? Has

metric increased/decreased?

4. Absence Rate

4. Absence Rate

[(# days absent in month)

÷

(Ave. # of employees during

mo.) x (# of workdays)]

x 100

Measures absenteeism.

Determine if your company

has an absenteeism problem.

Analyze why and how to

address issue. Analyze further

for effectiveness of attendance

policy and effectiveness of

management in applying

policy.

5. Cost Per Hire (Advertising + Agency Fees +

Employee Referrals + Travel

cost of applicants and staff +

Relocation costs + Recruiter

pay and benefits)

÷

Number of Hires

Costs involved with a new

hire. Can be used as a

measurement to show any

substantial improvements to

savings in

recruitment/retention costs.

Determine what your

recruiting function can do to

increase savings/reduce costs,

etc.



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CASE – XEROX FOCUSES ON HR

Questions

1. Discuss the challenges faced by HR management when significant staff cutbacks

occur and how they should be addressed.

When companies cannibalize the human resources needed to grow and innovate, disruption

follows for some time. Downsizing can hurt productivity by leaving “surviving” employees

overburdened and demoralized. Survivors need information about why the actions had to be

taken and what the future holds for them personally. The more employees are involved in the

restructuring, the more likely the transition is to be smoother. HR professionals and managers,

too, find downsizing stressful and may react negatively to having to be the bearers of bad

news. The most common methods used when downsizing must occur include attrition and

hiring freezes, early retirement buyouts, and layoffs. Voluntary separation programs appeal to

employers because they can reduce payroll costs significantly over time. Using such programs

is also viewed as a more humane way to reduce staff than terminating long-service, loyal

employees. One drawback is that some employees the company wishes would stay, as well as

those it wishes would leave, can take advantage of a buyout. Employers must also comply with

WARN and other laws. It is often recommended that employers should provide outplacement

services to give displaced employees support and assistance.

2. Use of technology, employee retention, and HR development have been at the core of

HR becoming more strategic at Xerox. Why have those areas been so key?

These areas have been key because they illustrate to employees that Xerox is committed to

professional development and continuous learning for its employees. These efforts should also

help Xerox employees perform at a higher level to continue its rebound. Focusing on employee

retention and HR development helps Xerox reduce its turnover which is an expensive cost.

Using the results of the employee surveys will also assure that Xerox is actually providing the

types of programs that lead to employee retention. It is very important when downsizing has

occurred that the organization emphasize keeping its high-potential employees and managers.

SUPPLEMENTAL CASE: “Where Do You Find the Bodies?”

This case identifies problems associated with HR planning and recruiting in a tight labor

market. (For the case, go to http://thomsonedu.com/management/mathis)

Questions

1. How does this case illustrate the lack of HR planning?



38

2. What approaches could be used to recruit mechanics?

Comments

The situation described in Boomtown is very typical in several parts of the western United

States. Unfortunately there are no easy solutions that Milt can adopt. He might try recruiting

mechanics from economically depressed areas elsewhere and Milt might design an incentive

system for use with shop personnel. Another alternative is to start renting space in the center

for individuals to work on their own vehicles. Also, Milt and his boss must convince

headquarters that there must be greater flexibility available to the managers in Boomtown. In

summary, the case emphasizes the need for planning, flexibility, and creativity in dealing with

personnel problems, and the fact that organizations are truly affected by environmental forces.

strategic hr management and planning€¦ · at the heart of hr planning is the forecasting of hr...

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