Aspects of human resource management

Which aspects of human resource management appeal most to you as a possible career? Which aspects appeal the least?


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H. JOHN BERNARDIN Stewart Distinguished Professor, Florida Atlantic University

JOYCE E. A. RUSSELL Ralph J. Tyser Distinguished Teaching Fellow, The University of Maryland

Human Resource Management An Experiential Approach

Sixth Edition

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1 Strategic Human Resource Management in a Changing Environment

According to graphologist Paul Sassi, the fluidity of President Obama’s signature is a sign

of high intelligence, while its illegibility shows he is protecting his privacy. “He doesn’t

want you to know him too well.” Another handwriting expert concluded: “The large

letters in Obama’s signature show that he is ambitious, self-confident, and views himself

as a leader. . . . The fluid letter forms reveal that he can form a coalition, be diplomatic,

and get along with both sides of the aisle.” She added: “He’s the type of guy who could tell

you to go to hell and you’d enjoy the trip.” 1 In her assessment of Mitt Romney, grapholo-

gist Sheila Kurtz concluded that he is inclined to think quickly but impulsively, to dream

big, but don’t even think about telling him what to do. Kurtz describes President Obama as

“unclogged with preconceptions and prejudices,” with an ability to consider new ideas and

probe beneath the surface of issues. She also claims his handwriting also reveals that he is

unlikely to act on “raw or coerced impulse.” 2

When one of your authors shared these assessments with undergraduate human

resources classes, about 20 percent of students thought the evaluations were “dead on

accurate,” another 30 percent described the profiles as “mostly accurate,” about 25 percent



After reading this chapter, you should be able to

1. Describe the field of human resource management (HRM) and its potential

for creating and adding value within contemporary organizations.

2. Describe discrepancies between actual HRM practices and recommendations

for HRM practice based on scholarly research.

3. Describe the major activities of HRM.

4. Explain important trends relevant to HRM, including the increasing

globalization of the economy, changing technology, the role of regulations

and lawsuits, the changing demographics of the workforce, and the

growing body of research linking particular HRM practices to corporate


5. Emphasize the importance of measurement for effective and strategic HRM.

6. Understand what is meant by competitive advantage, and what the four

mechanisms are for offering and maintaining uniqueness.

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1 / Human Resource Management and the Environment

thought they were “completely inaccurate,” and about 25 percent had no opinion at all

on the accuracy of the profiles. Within the last group, however, about half of the students

expressed skepticism about assessing someone’s personality, intelligence, motivation, or

anything else important using the person’s handwriting. It is this group of students who

are “dead-on accurate.” Research clearly shows that handwriting is not a valid means of

assessing anything important (except your handwriting!).

The assessment of politicians is not the only application you will find of such invalid

assessment methods. Inc. magazine, one of the most popular magazines for U.S. small businesses, ran a story extolling the benefits of using graphology to hire managers. 3 The

article reported that the use of graphology was on the increase and that the method was

very effective for selecting managers and salespersons. Sound research in human resource

management (HRM) has determined that companies would do just about as well picking

names out of a hat to make personnel decisions. 4

Skilled HRM specialists help organizations with all activities related to staffing and maintain-

ing an effective workforce. Major HRM responsibilities include work design and job analysis,

training and development, recruiting, compensation, team building, performance management

and appraisal, and worker health and safety issues as well as identifying and developing valid

methods for selecting staff.

Research by academics who study and teach HRM is devoted to identifying the most

effective and efficient methods for meeting these HRM responsibilities. A key theme of

this book is that the most effective HRM programs, policies, and practices are those that are developed based on HRM research results. Another theme of this book is that contemporary HRM practice often ignores the sound research about policy, practice, or

people that is available to help make good decisions. Instead, organizations are apt to adopt

an HRM practice merely because competitors are using it (this was a main theme of the

Inc. article about graphology). One of your authors once had a conversation with a business owner who had hired his

145-person sales staff based on graphology reports (at $75 per report) and the answer to a

single question posed in an interview. When questioned about the validity of these meth-

ods, the business owner described one terrible salesman he had hired out of desperation in

a tight labor market despite a graphologist’s report that said the “small writing with little

slant indicated he may be too introverted for sales work.” This one example had stuck in

his mind as “proof” of graphology’s effectiveness. He lamented, “If only I had listened

to the handwriting expert. I wasted a bundle training the guy!” Those of us who teach

statistics refer to this type of “research” as a “man who” statistic in which a person enlists

a single case to support or refute a theory. For example, when you discuss the overwhelm-

ing evidence showing that smoking causes cancer, someone might offer the counterargu-

ment that “yea, but my aunt smoked three packs a day and lived to be 90.” An article in

the Washington Post reported that the Pilot Pen Company’s CEO Ronald Shaw was a big believer in graphology and would use it for all hiring decisions because the graphologist’s

profile based on his own handwriting showed that he was “sincere and intelligent and had

a lot of integrity.” 5 While (apparently) flattery will get you somewhere (or at least a good

consulting gig), graphology will not get you accurate or valid assessments of the personal

characteristics related to job performance (even the job of president). Needless to say, this

is not the way to do research on a procedure.

There are good ways to do research and good ways to assess the effects of programs, pro-

cedures, and activities of HRM. Sound measurement, followed by data-driven decision making, are keys to effective management. Remember the old adage: if it’s not measured, it’s not managed. Management needs to collect and validate information. This information can

be a major asset and in many cases, “the raw material of new products and services, smarter

decisions, competitive advantage for companies, and greater growth and productivity.” 6 A 2011

study led by MIT professor Erik Brynjolfsson showed that companies that adopted “data-driven

decision making” for major managerial decisions achieved productivity that was 5 to 6 percent

higher than what could be explained by other factors, including how much the companies in-

vested in technology. Data-driven decision making was defined not only by collecting sound

data on critical variables, but also whether the results of the data collection were then used

to make crucial decisions. The major distinction made in the study was determining whether

Major HRM responsibilities

Sound measurement is critical to effective HR

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managerial decisions were based mainly on “data and analysis” versus the more traditional

“experience and intuition.” 7

Graphology has been the subject of sound, data-based research to determine whether

diagnostics that derive from a person’s handwriting actually predicts whether a person is

going to be a competent manager and great salesperson (it doesn’t). As we discuss in detail

in Chapter 6, there are many methods that do an excellent job predicting performance.

Data-driven (and effective) HRM means decision makers (HR specialists and line managers)

are aware of these valid methods and then use them to make decisions.

Many HRM systems and activities are not subjected to systematic measurement and

analysis. In fact, many organizations do not assess either the short- or long-term con-

sequences of their HRM programs or activities. Another key theme of the book is that

measurement and data-driven decision making are key components to organizational effectiveness and competitive advantage. Good measurement and data-driven decisions, allied with business strategies, will help organizations identify and improve all of their

HRM activities and resultant decisions.

Stanford University professor Jeffrey Pfeffer considers measurement to be one of the keys

to competitive advantage. His book Competitive Advantage Through People cites measurement as one of the 16 HRM practices that contribute the most to competitive advantage. 8 Pfeffer’s

views were echoed and expanded in the popular text The Balanced Scorecard by Harvard professor Robert Kaplan and consultant David Norton. 9 Kaplan and Norton stress that “if com-

panies are to survive and prosper in information age competition, they must use measure-

ment and management systems derived from their strategies and capabilities” (p. 21). Their

“balanced scorecard” emphasizes much more management attention to “leading indicators” of

performance that predict the “lagging” financial performance measures. The “balance” reflects

the need to measure short- and long-term objectives, financial and nonfinancial measures,

lagging and leading indicators, and internal and external performance perspectives.

In their book The Workforce Scorecard, Professors Mark Huselid, Brian Becker, and Dick Beatty extend research on the “balanced scorecard” to a comprehensive management

and measurement system designed to maximize workforce potential. 10 These authors show

that the traditional financial performance measures such as return on equity, stock price,

and return on investment, the “lagging indicators,” can be predicted by the way companies

conduct their HR. HR practices are the “leading indicators” that predict subsequent finan-

cial performance measures. 11 Unfortunately, research indicates that only a small percent-

age of HRM programs or activities are subjected to critical, data-driven analysis. The good

news, however, is that the percentage is at least going up. Measurement and data-driven

decision making are essential for American organizations in the 21st century!

One study defined the vision of HRM for the 21st century. HRM activities must be

(1) responsive to a highly competitive marketplace and global business structures,

(2) closely linked to business strategic plans, (3) jointly conceived and implemented by line

and HR managers, and (4) focused on quality, customer service, productivity, employee

involvement, teamwork, and workforce flexibility. 12 In general, research shows that the

realization of this vision translates into greater organizational effectiveness.

Perhaps because of this body of research, the status of HRM is improving relative to

other potential sources of competitive advantage for an organization. Professor Pfeffer notes

that “traditional sources of success (e.g., speed to market, financial, technological) can still

provide competitive leverage, but to a lesser degree now than in the past, leaving organi-

zational culture and capabilities, derived from how people are managed, as comparatively

more vital.” 13 Research clearly indicates that certain HR practices can increase employ-

ees’ knowledge, skills, and abilities through more valid staffing and selection decisions,

serve to empower employees to leverage these superior characteristics for the benefit of

the organization, and to increase the motivation of these employees to do so. The results

of these practices are greater job satisfaction and organizational commitment, lower levels

of voluntary turnover among key personnel, and higher productivity. 14

You are likely to manage people at some point in your career. Research shows that the

extent to which you as a manager make data-driven, evidence-based HR decisions will

be a key to your effectiveness as a manager. 15 We believe that the knowledge and experi-

ences we provide here will prepare you to be an effective manager. We emphasize that the

The Balanced Scorecard

The Workforce Scorecard

Lagging and leading indicators

The vision of HRM for the 21st century

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most effective HRM programs, policies, and practices are those that derive from strong

research and data-driven decisions that are carefully aligned with the organization’s strate-

gic mission and objectives. All HRM activities should be evaluated in this context, using

“leading indicator” performance measures.

Keep mission in mind

WHAT IS HUMAN RESOURCE MANAGEMENT? The human resources of an organization consist of all people who perform its activities.

In a sense, all decisions that affect the workforce concern the organization’s HRM func-

tion. Human resource management concerns the personnel policies and managerial prac-

tices and systems that influence the workforce. Regardless of the size—or existence—of a

formal HRM or personnel department (many small businesses do not have a formal HRM

department), the activities involved in HRM are pervasive throughout the organization.

Line managers, for example, will spend more than 50 percent of their time involved in

human resource activities such as hiring, evaluating, motivating, disciplining, and schedul-

ing employees.

The effectiveness with which line management performs HRM functions with the tools,

data, and processes provided by HRM specialists is the key to competitive advantage

through HRM. This principle generalizes from very small businesses to the very largest

global enterprises. Dr. James Spina, former head of executive development at the Tribune

Company, really put things in perspective about the role of HRM. He said, “The HRM

focus should always be maintaining and, ideally, expanding the customer base while main-

taining and, ideally, maximizing profit. HRM has a whole lot to do with this focus regard-

less of the size of the business, or the products or services you are trying to sell.”

Those individuals classified within an HRM functional unit provide important products

and services for the organization. These products and services may include the provision

of, or recommendation for, systems or processes that facilitate organizational restructur-

ing, job design, personnel planning, recruitment, hiring, evaluating, training, developing,

promoting, compensating, and terminating personnel. A major goal of this book is to provide information and experiences that will improve the student’s future involve- ment and effectiveness in HRM activities.

A good way to think of an HR department is to view the department as a business

within the company. The HR business has three product lines: (1) administrative services

and transactions, which are made up of areas such as staffing and compensation; (2) busi-

ness partner services, which assist in implementing business plans and meeting objectives;

and (3) strategic partner, which contributes to the firm’s strategy based on human capital

considerations and developing HR practices to foster competitive advantage. 16 The most

common and traditional product line for HR is the first one: administrative services. How-

ever, the most effective (but less common) HR departments contribute significantly to the

other two lines as well.

While HR is capable of creating and sustaining competitive advantage, some would ar-

gue that HR, as it is practiced, is often more a weakness than a strength. One survey found

that only 40 percent of employees thought their companies were doing a good job retaining

high-quality workers, and only 41 percent thought performance evaluations were fair. A

mere 58 percent of respondents reported their job training as favorable. A majority said

they had few opportunities for advancement and they had little idea about how to advance

in the first place. Only about half of those surveyed below the managerial level believed

their companies took a genuine interest in their well-being. 17

Line managers and HRM

HRM and Corporate Performance

A growing body of research shows that progressive HRM practices can have a significant effect on corporate performance. Studies now document the relationship between specific HR practices and critical outcome measures such as corporate financial performance, pro-

ductivity, product and service quality, and cost control. 18 Many of the methods characterizing

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these so-called high-performance work systems or practices (HPWP) have been researched

and developed by the HRM academic community. Figure 1-1 presents a summary of this


HPWP are particular HR practices or characteristics designed to enhance employees’

competencies and productivity so that employees can be a reliable source of competitive

advantage. They have been called “coherent practices that enhance the skills of the work-

force, participation in decision making, and motivation to put forth discretionary effort.”

Research shows that “firm competitiveness can be enhanced by high-performance work

systems.” A summary of this research found that one standard deviation of improved

assessment on an HPWP measurement tool increased sales per employee in excess of

$15,000, an 8 percent gain in labor productivity. 19 A more recent review concluded that

“research in applied psychology and strategic human resource management clearly indi-

cates that investing in human capital can yield positive individual- as well as organization-

level performance outcomes.” 20

Recall the critical remarks earlier about graphology, or handwriting analysis. Validated

selection and promotion systems are related to higher productivity and reduced costs (see

Figure 1-1 ). The term validated means that the practice has actually been shown to (statistically) predict (or correlate with) something important. If you’re using a method to select managers or sales personnel, a “validated” method is a practice that research has

shown to actually predict managerial or sales success. In the field of HRM, there are highly

valid methods and procedures for predicting future employee performance based on the

assessed personal characteristics of job candidates.

Better training and development programs and team-based work configurations im-

prove performance and job satisfaction and decrease employee turnover. Particular incen-

tive and compensation systems also translate into higher productivity and performance.

The fair treatment of employees results in higher job satisfaction, which in turn facilitates

higher performance, lower employee turnover, reduced costs, and a lower likelihood of

successful union organizing.

Greater demands are now being made on HRM practitioners to respond to contempo-

rary trends in the business environment. Today, the most effective HRM functions are

conceptualized in a business capacity, constantly focusing on the strategy of the organiza-

tion and the core competencies of the organization. HRM specialists must show how they

can make a difference for the company’s bottom line and, if necessary, serve as “business

problem solvers.” Costs and efficiencies are necessary criteria for evaluating recommenda-

tions from research in HRM.

Many corporate strategy specialists maintain that the key to sustained competitive ad-

vantage is building and sustaining core competencies within the organization and main-

taining flexibility in order to react quickly to the changing global marketplace and the

advances in technology. One primary role of HRM practitioners should be to facilitate

these processes.

High-performance work systems


Focus on core competencies

■ Large number of highly qualified applicants for each strategic position. ■ The use of validated selection and promotion models/procedures. ■ Extensive training and development of new employees. ■ The use of formal performance appraisal and management. ■ The use of multisource (360 degree) performance appraisal and feedback. ■ Linkage of merit increases to formal appraisal processes. ■ Above-market compensation for key positions. ■ High percentage of entire workforce included in incentive systems. ■ High differential in pay between high and low performers. ■ High percentage of workforce working in self-managed, project-based work teams. ■ Low percentage of employees covered by union contract. ■ High percentage of managerial jobs filled from within.


Figure 1-1 Characteristics of High-Performance Work Practices (HPWP)

Source: Reprinted by permission of Harvard Business School Press. From The HR Scorecard, by B. Becker and M. Ulrich. Boston, MA, 2001. Copyright © 2001 by the Harvard Business School Publishing Corporation’ all rights reserved.

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While HRM executives and managers are more educated and professional than in the days

when they were simply in charge of personnel, the level of knowledge in practicing HRM

is another story. Many companies hire MBAs for HRM jobs even from programs where not

even a single HRM course may be required for the MBA. The 190,000-member Society

for Human Resource Management (SHRM, see ), which established the

Human Resource Certification Institute, formally recognizes human resource profession-

als who have demonstrated particular expertise in HR. As of 2011, over 108,000 certified

HR professionals in more than 70 countries have received and maintained HR credentials

through this respected institution.

HRM practitioners need to pay more attention to academic research. There is a great

deal of carefully crafted academic research that is highly relevant to HRM practice. This

research should help HR practitioners and line managers doing HR work to make more

data-driven decisions. Figure 1-2 presents a few examples of discrepancies between the

current state of HR practice and undisputed academic findings and recommendations. One

study showed the extent of this “knowledge gap.” 21 HR professionals were given a 35-item

test that assessed the extent of their HR knowledge (the same test you may have completed

as part of Critical Thinking Application 1-A). The test was based on findings from aca-

demic research, which would likely be covered in any basic HR course like this one. Items

were developed where there was little or no argument on the correct answer within the

academic community. The average grade for the nearly 1,000 HR professionals was “D.”

On numerous items, over 50 percent of the HR professionals got the answer wrong! More

recent research indicates that a “C” grade may be more appropriate for HR practitioners

today but it’s still fair to say that the “knowledge gap” persists. 22

Throughout the book, we intend to emphasize the most glaring discrepancies between the

way HRM is actually being practiced and what academic research has to say about particu-

lar practices. The failure on the part of HRM practitioners to be aware of and consider these

research findings can ultimately have a profound effect on an organization’s “bottom line.”


knowledge gap


Academic Research Findings HRM Practice


Quantitative analysis of recruitment sources using yield Less than 15% calculate yield ratios. Less than 28% know how. ratios can facilitate efficiencies in recruitment.


Realistic job previews can reduce turnover. Less than 20% of companies use RJPs in high-turnover jobs.

Weighted application blanks reduce turnover. Less than 35% know what a WAB is; less than 5% use WABs.

Structured and behavioral interviews are more valid. 40% of companies use structured interviews. Less than 50% use behavioral interviews.

Use actuarial model of prediction with multiple valid measures. Less than 5% use actuarial model.

Graphology is invalid and should not be used. Use is on the increase in the United States.


Do not use traits on rating forms. More than 60% still use traits.

Train raters (for accuracy, observation bias). Less than 30% train raters.

Make appraisal process important element of manager’s job. Less than 35% of managers are evaluated on their performance appraisal practices.


Merit-based systems should not be tied into a base salary. More than 75% tie merit pay into base pay.

Gain sharing is an effective PFP system. Less than 5% of companies use it where they could.

Figure 1-2 Sample of Discrepancies between Academic Research Findings and HRM Practices

Source: H. J. Bernardin (2011), “A Survey of Human Resource Practices: Discrepancies Between Research and HRM Practice.” Unpublished Manuscript.

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Although line management plays a critical role in the successful implementation and exe-

cution of HRM programs, these programs are typically developed, purchased, and adopted

because of recommendations by HRM specialists. For the small business with no formal

HR department, the person in charge of HR issues needs to be the HR expert.

Many HR activities such as payroll, recruitment, and preemployment screening are

now routinely outsourced to organizations that specialize in these areas. 23 The number of

consulting organizations specializing in HR activities has increased substantially in the last

10 years. There are now web-based HR products and services for almost every major functional area of HR. An organization’s HR specialist must have the necessary knowl- edge and skills to be able to either develop unique HR products or services or to identify

the best and most cost-effective of these HR products and services for a particular situation.

HRM professionals should possess up-to-date knowledge about the relative effective-

ness of the various programs and activities related to HR planning, training and devel-

opment, compensation, performance management, selection, information systems, equal

employment opportunity/diversity, labor relations, recruitment, and health and safety is-

sues. HRM professionals also should be capable of conducting their own research to evalu-

ate their programs and program alternatives. Unfortunately, evidence suggests that HR

professionals adopt many programs based either on effective marketing from the plethora

of vendors selling HR materials and programs or simply on what other companies are do-

ing. While some consideration may be given to the leading-indicator research described in

Figure 1-1 , greater weight is often given to slick marketing programs and simply doing what

others are doing. When “bottom-line” questions arise later on—as they inevitably do—HR

departments are caught off guard because costly and relatively ineffective programs have

been adopted. A careful study of programs with evaluative criteria linked to strategic goals

might reveal negligible or no impact. Again, if you don’t measure it, you can’t manage it.

Meta-analyses are now available to help HR managers make more informed decisions about methods for such critical HR practices as staffing, recruiting, performance appraisal, and com-

pensation. A meta-analysis is a statistical technique that statistically combines research findings across studies in order to reveal relationships among variables. There are now over 500 HR-related meta-analyses published in good, peer-reviewed journals. 24 (Many of the

correct answers from the study we cited earlier to illustrate the “knowledge gap” were de-

rived from a meta-analytic study and finding.) These studies are cited throughout the book

and often used to make “bottom-line” recommendations for an HR practice or method.

Many HR professionals are generally not well trained to ask the right questions, under-

stand scientific research, or conduct the appropriate study of a given HR program, practice,

or activity. One of your authors had a conversation with a VP of HR of a Fortune 500 company.

He had a Big-Ten MBA (but had taken no classes in HR) and was convinced that one

particular test was the best way to hire retail sales personnel. The basis for his position

was conversations with other poorly informed HRM MBAs who were using this same test

and “it seemed to work.” This is no way to evaluate a selection method. Another HR vice

president for a retailer adopted an expensive computerized testing program that the pub-

lisher claimed would reduce employee turnover by 50 percent. The VP did not request to

review the research that supported this claim and later admitted that although he ultimately

made the decision to adopt the test, he was unqualified to assess the test’s usefulness since

he could not even ask fundamental measurement questions that should be the focus of any

evaluation of such a product or service. In addition, although the retailer had been using

the test for over 2 years, it apparently never occurred to him to evaluate the extent to which

the test actually did reduce turnover in his own organization. The New London, Connecti-

cut, police department used an intelligence (also known as a cognitive or general mental

ability) test known as the Wonderlic to screen for officers but eliminated candidates if

their scores were too high. 25 The department’s argument was that more intelligent officers

would get bored on the job and thus quit. The department had no evidence to support this

theory; only the intuitive appeal of the argument. This is the kind of theory that should be

tested first either within an organization or by reviewing relevant scholarly research and by

considering the overall implications of such a policy. 26

One of the great values of academic research is the objective evaluation of activities

or programs using well-controlled experimental designs, which allow for unambiguous

What is meta-analysis?

Research should drive HRM practice

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assessments of effects. For example, Buros Mental Measurements Yearbook is a reference source that publishes evaluations of tests written by qualified academics who have no vested

interest in the tests themselves. Over 2,000 tests have been reviewed and the reviews can be

read and downloaded from the Buros website for $15 per test (

jsp/search.jsp ). Many HRM professionals who adopt tests do not know that this very useful

text (and website) even exists.

Buros Mental Measurements Yearbook

ORGANIZATIONAL DESIGN Human resource planning based on strategy Job analysis/work analysis Job design Information systems Downsizing/restructuring

STAFFING Recruiting/interviewing/hiring Affirmative action/diversity/EEO compliance Promotion/transfer/separation Outplacement services Employee selection/ promotion methods

PERFORMANCE MANAGEMENT AND APPRAISAL Management appraisal/management by objectives/strategy execution Productivity/enhancement programs Customer-focused performance appraisal Multirater systems (360°, 180°) Rater training programs

EMPLOYEE TRAINING AND ORGANIZATIONAL DEVELOPMENT Induction/orientation/ new employee socialization Management/supervisory development Global Leadership development Career planning/development Employee assistance/counseling programs Attitude surveys Training delivery options Diversity programs

REWARD SYSTEMS, BENEFITS, AND COMPLIANCE Compensation program design and management Compliance with Fair Labor Standards Act (and other compensation laws) Employee benefits management Health/medical services Pension/profit-sharing plans Unemployment compensation management Complaint/disciplinary procedures Employer/employee relations Labor relations/collective bargaining Safety programs Compliance with Occupational Safety and Health Act


Figure 1-3 presents a listing of some of the most commonly performed activities by HRM

professionals. These HRM activities fall under five major domains : (1) Organizational Design, (2) Staffing, (3) Performance Management and Appraisal, (4) Employee Training

and Organizational Development, and (5) Reward Systems, Benefits, and Compliance.


Figure 1-3 Major Activities of Human Resource Management

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Although most of the particular activities subsumed under these five domains are con-

ceptually independent, in practice they are not (and should not be). While we list EEO

compliance as part of the Staffing domain, the legal compliance issues could obviously

be listed in the “Compliance” domain. Many organizations pursue the various activities

within a particular domain as if these activities would have no implications for any of

the other domains. For example, the New London Police Department conceded that

their leaders (e.g., their captains, even the chief of police) were all selected from

within the organization but hadn’t considered the fact that not hiring more intelligent

officers at entry level might have a negative effect on the pool of candidates for mana-

gerial positions.

Jack Welch is one of the most highly regarded former CEOs and the author of several

best sellers on management. He has been a strong advocate of a performance appraisal

system known as forced ranking (or forced distribution). 27 With this approach, managers

are “forced” to put a fixed percentage of their employees into a small number of categories

such as “superior” or “needing improvement.” Probably because of Mr. Welch’s advocacy,

this method of performance appraisal became very popular in the 1990s with, it was esti-

mated, one in five of the largest U.S. companies adopting the method, including Microsoft,

Ford, Cisco, Capital One, and even the notorious (and bankrupt) Enron Corporation. One

unanticipated effect of the method was a plethora of lawsuits related to the method and a

decrease in employee morale and teamwork. 28

Many organizations have recently reduced or eliminated health care benefits and pen-

sion programs without due consideration of the impact of these revisions on staffing and

employee retention. In addition to considering the implications, and potential conse-

quences, of any particular HR domain activity on other HR domains, all domain activities

must be weighed in the context of the new global environment, current and anticipated tax

incentives, and contemporary HR laws, regulations, and legal interpretations. This very

tangled web is discussed shortly.

Acquiring human resource capability should begin with organizational design and anal-

ysis. Organizational design involves the arrangement of work tasks based on the interac- tion of people, technology, and the tasks to be performed in the context of the mission,

goals, objectives, and strategic plan of the organization. HRM activities such as human

resource planning, job and work analysis, organizational restructuring, job design, team

building, computerization, and technological interfaces also fall under this domain.

Organizational and work design issues are almost always the first ones that should

be addressed whenever significant change is necessary because of new strategies and/or

objectives, changing economic conditions, new or improved technologies, new opportuni-

ties, potential advantages or disadvantages, or serious internal problems. Design issues and

activities usually (and should) drive other HR domains such as selection, training, perfor-

mance management, and compensation. The recent economic downturn has provided an

opportunity for a serious evaluation of an organization’s strategy, its objectives, and its

competitive position. There are clearly effective and ineffective approaches and activities

within this organizational design.

Corporate downsizing, outsourcing/offshoring, and reengineering efforts often begin

with human resource planning in the context of personnel needs, new technology or equip-

ment, a strategic plan, and an analysis of how the work is performed, how jobs and work

units relate to one another, and, of course, cost analysis. These decisions can be critical for

the long-term survival of a struggling company. Research shows that layoffs designed to

derive a short-term “cost savings” may foster an increase in market value in the short run

but that investors often lose all of this value plus considerably more. 29 The major activities

that define the organization design domain, such as planning, work analysis, downsizing,

and restructuring, are covered in Chapters 4 and 5.

Work analysis is a major component of the organization design domain. The identifi-

cation of the critical knowledge, skills, and abilities necessary to achieve organizational

objectives may be the most important of these activities. Effective staffing programs help

recruit and retain the personnel who possess these characteristics.

After the organization is structured and work and jobs are clearly defined in terms of

performance objectives and the necessary knowledge, skills, and abilities for achieving

Organizational design activities usually first

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1 / Human Resource Management and the Environment

them, positions must then be staffed. Recruitment, employee orientation, selection, pro-

motion, and termination are among the functions that fit into the HR staffing domain. Of the HR activities within this domain, selection and termination are probably the two

most likely affected by the legal environment. The laws, regulations, and litigation are

discussed in Chapter 3. Chapter 6 covers the critical area of selection. Termination is dis-

cussed in Chapters 7 and 12.

The performance management domain includes assessments of individual, unit, or other aggregated levels of performance to measure and improve work performance. Chap-

ter 7 deals with these subjects, which, like staffing and selection, are also the focus of nu-

merous lawsuits. A lawsuit can occur if the organization maintains that an employee was

terminated, not promoted, or not given a merit raise because of performance, and the em-

ployee believes that the negative personnel action was because of his or her gender, race,

religion, age, disability, or some other personal characteristic. An employee also can claim

an unlawful discharge based on an alleged contract or implied contract violation and even

make a claim for preemptive retaliation. Obviously, merit-based or incentive pay systems

require accurate measures of employee performance.

Employee training and organizational development programs involve the organi- zational investments in establishing, fostering, and maintaining employee skills based

on organizational and employee needs. Activities include specialized training for jobs or

management functions, career development, and self-directed learning. Chapters 8 and 9

cover these vital areas.

Reward systems, benefits, and compliance have to do with any type of reward or benefit that may be available to employees. Cash compensation, fringe benefits, merit pay,

profit sharing, health care, parental leave programs, vacation and sick leave, and pension

programs are among the critical areas within this domain. These activities are regulated

by a myriad of compliance requirements at the federal, state, and municipal levels. Recent

years have seen a dramatic increase in the number and size of class action lawsuits brought

under the federal Fair Labor Standards Act (FLSA) with charges of unpaid work time and

overtime wages. These HR activities and the major laws and regulations are covered in

Chapters 10 and 11.

This domain also concerns managing employment relationships, labor relations law

and compliance, and procedures designed to maintain good working relationships between

employees and employers. This may include the negotiation of collective bargaining agree-

ments, which require employers to negotiate with unionized workers over the conditions

of employment. These areas and the major relevant laws and regulations are covered in

Chapters 12 and 13.

Finally, employee health and safety issues are also subsumed under this domain and

include compliance with laws and regulations, especially the federal Occupational Safety and Health Act ( OSHA ), which is concerned with the work environment and the effects of health and safety policy and practice on workers and the “bottom line.” Our focus is on

health and safety policy as a leading indicator of HR effectiveness. This area is explored

in Chapter 14.

As we have said, there is an increasing realization (and evidence!) that the manner in which

organizations conduct their HR activities can help create and sustain organizational effec-

tiveness and a competitive advantage. The contemporary trends and challenges in the busi-

ness environment necessitate that even greater attention be given to the human resources

of an organization. Let us examine these trends next and relate each to particular HRM

activities. Figure 1-4 presents a summary of major trends.

The most significant trend is the increasing globalization of the economy and a grow-

ing competitive work environment with a premium on product and service quality and

low overhead. One of the most important factors affecting globalization and the growth of

transnational corporations is the goal of reducing the cost of production since labor costs


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are quite significant for U.S. companies. But as we discuss in Chapter 2, market-seeking

behavior is now as important a motivator of globalization as the search for low-cost


Another major trend is the unpredictable but inevitable power of technology to transform

HRM. There is a need to be more flexible today because of the incredible pace of change in

markets and technology. HRM can facilitate this flexibility. The growth and proliferation

of lawsuits related to HR practice and changes in workforce characteristics also have had

a big impact on HRM. So is the fact that many in the workforce are ill-equipped with the

necessary knowledge, skills and abilities, and job requirements to do their jobs well.

TREND 1: THE INCREASED GLOBALIZATION OF THE ECONOMY Opportunity for global workforce and labor cost reduction Increasing global competition for U.S. products and services Opportunity for expansion that presents global challenges for HR

TREND 2: TECHNOLOGICAL CHANGES, CHALLENGES, AND OPPORTUNITIES Great opportunities presented by web-based systems New threats: privacy, confidentiality, intellectual property

TREND 3: INCREASE IN LITIGATION AND REGULATION RELATED TO HRM Federal, state, and municipal legislation and lawsuits on the increase Wrongful discharge; negligent hiring, retention, referral

TREND 4: CHANGING CHARACTERISTICS OF THE WORKFORCE Growing workforce diversity, which complicates HRM Labor shortages for key competencies/aging workforce/Millennials rising


Figure 1-4 Major Trends Affecting HRM

Trend 1: The Increased Globalization of the Economy

In his bestseller The World Is Flat: A Brief History of the Twenty-First Century , Thomas Friedman described the next phase of globalization. 30 An Indian software executive told

him how the world’s economic playing field is being leveled. So-called barriers to entry

are being destroyed. A company (or even an individual) can compete (or collaborate) from

almost anywhere in the world. Over 1,000,000 American tax returns were prepared in India

in 2011. Says Jerry Rao, Indian entrepreneur, “Any activity where we can digitize and de-

compose the value chain, and move the work around, will get moved around. Some people

will say, ‘Yes, but you can’t serve me a steak.’ True, but I can take the reservation for your

table sitting anywhere in the world.” Rao’s recent projects include a partnership with an

Israeli company that can transmit MRI and CAT scans through the Internet so Americans

can get a second opinion very quickly (and relatively cheaply). There is no question that

the increasing globalization of most of the world’s economies will affect HRM. It is pre-

dicted that most of the largest U.S. companies will soon employ more workers in countries

other than the United States, and that the growth for most major corporations will derive

from offshore operations. With technological advances, one of the strongest trends is the

development of a worldwide labor market for U.S. companies. In their quest for greater

efficiencies and reduced costs, American companies can now look globally to get work

done. While this opportunity stands to decrease the cost of labor, the process of HRM

can be more complicated. Of course, U.S. workers will resist this trend through union and

political activity.

The rise in oil prices and the cost of transportation have recently caused some “reverse

globalization” in the form of some jobs returning to the United States, especially in 2011.

In 2000 when oil was $20 a barrel, it cost $3,000 to ship one container of furniture from

Shanghai to New York. In 2012, the estimated cost of the same container is $8,800. The

long-suffering furniture manufacturing business in North Carolina is making a comeback.

DESA, a company that makes heaters to keep football players warm, is moving all of its

production back to Kentucky from China. Carrier Battery is coming back to Ohio. “Cheap

labor in China doesn’t help you when you gotta pay so much to bring the goods over,” says

economist Jeff Rubin.

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1 / Human Resource Management and the Environment

Nevertheless, most U.S. companies still see great potential for labor cost reductions

by looking overseas and a hesitance to hire U.S. workers unless it is absolutely necessary.

Despite high profits in recent years, American companies have been very reluctant to hire ad-

ditional workers in the United States. In 2012, with unemployment between 8 and 9 percent,

the belief was that skilled American workers were getting more expensive while capital

equipment was getting less expensive. This combination, along with tax advantages for

equipment, has encouraged companies to spend money on machines and technology rather

than people. “I want to have as few people touching our products as possible,” said Dan

Mishek, a managing director of Vista Technologies in Minnesota. “Everything should be as

automated as it can be. We just can’t afford to compete with countries like China on labor

costs, especially when workers are getting even more expensive.” 31

But outsourcing can bring new problems along with the cheap labor. It’s been over

15 years since some of the biggest companies in the world, because of political and con-

sumer pressure, began their efforts to eliminate the “sweatshop” labor conditions that

were pervasive across Asia. Yet, worker abuse is well documented in many Chinese fac-

tories that supply U.S. companies. Chinese companies providing goods and services for

Walmart, Disney, and Dell have been accused of routinely shortchanging their employees

on wages, withholding health benefits, and exposing their workers to dangerous machinery

and harmful chemicals like lead and mercury. Walmart, the world’s biggest retailer, has a

multibillion sourcing portfolio that supplies the goods it sells in stores mostly from China.

According to the Institute for Global Labour & Human Rights, two nongovernmental or-

ganizations recently documented incidents of abuse and labor violations, including child

labor, at 15 factories that produce or supply goods for Walmart. “At Wal-Mart, Christmas

ornaments are cheap, and so are the lives of the young workers in China who make them,”

the National Labor Committee report said. 32

Globalization creates greater competition and fosters more concern over productivity

and cost control. One important reason for the recent increased interest in HRM is the per-

ceived connection between HRM expertise and productivity. Most of corporate America

now knows that competing in an increasingly global environment requires constant vigi-

lance over costs and productivity and customer satisfaction. A smaller but growing per-

centage of managers recognize the importance of human resources in dealing with many

of these issues. Indeed, a great deal of the most recent corporate downsizing can be linked

to technological improvement and corresponding estimates of productivity improvements

with HR interacting with the technological changes. But with the rising costs of labor in

the United States, many companies are continuing to look for technology to replace work-

ers whose jobs are relatively routine. Says Harvard economist Claudia Goldin, “If you’re

doing something that can be written down in a programmatic, algorithmic manner, you’re

going to be substituted for quickly.” 33 Bank of America, American Express, Coca-Cola,

and General Electric are among the many large U.S. companies that have successfully fol-

lowed a formula of cutting personnel costs while investing in automated equipment, more

efficient facilities, and other technologies.

U.S. exports now generate about one in six American jobs, an increase of over 20 per-

cent in just 10 years. McDonald’s opened its first non-U.S. restaurant in Canada in 1967.

By 2011 its total sales outside of the United States contributed to over 50 percent of the

operating income of the firm. Two-thirds of McDonald’s new restaurants are now opened

outside the United States each year. While McDonald’s has moved more quickly than most

U.S. firms, many other U.S. firms are now expanding rapidly in both new countries and

new markets. The majority of new restaurants opened by Burger King and KFC are now

in international markets. The majority of new stores opened by Walmart are now opened

outside the United States.

Another response to increasing global competition is restructuring/downsizing, as men-

tioned earlier. Coca-Cola, Ford, Sears, AT&T, CBS, DuPont, GM, Kodak, Xerox, and

IBM are among the many corporate behemoths that have reduced their workforces by more

than 10 percent in the last decade. Many HRM specialists are experts in organizational re-

structuring and change procedures. They have expertise in downsizing and outsourcing op-

tions that can reduce labor costs. They may also conduct outplacement counseling for those

who are displaced or assist in developing new staffing plans as a result of the restructuring.

Labor cost reductions

More concern over productivity

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As described in more detail in later chapters, HRM specialists are also asked to help in

legal defenses against allegations of discrimination related to corporate downsizing. Law-

suits related to downsizing are quite common. In an attempt to compete more effectively

against Geico and Progressive, Allstate Insurance converted all of its 15,200-member

sales force to independent contractors. To continue as contractors, the agents had to sign a

waiver that they would not sue Allstate for discrimination. The result was an age discrimi-

nation lawsuit brought by terminated employees and the government which was settled for

$4.5 million in 2009. Labor law can impose constraints on organizations trying to cut costs

through changes in labor policies.

The second trend is the rate of change in technology. More organizations are now evaluat-

ing their human resources and labor costs in the context of available technologies based

on the theory that products and services can be delivered more effectively (and efficiently)

through an optimal combination of people, software, and equipment, thus increasing pro-

ductivity. Instead of speaking to a customer service representative at Bank of America

(BOA) to discuss your account, you now routinely interact with an automated system

via the Internet or an automated teller machine (ATM) or through an 800 number. The

program is designed to handle almost any problem about which you might inquire. With

the automated system, BOA was able to shed customer service representatives and reduce

labor costs. As more people use their automated services and ATMs, there is less need for

supervision. Customers, as a result, pay less in service charges. As these automated sys-

tems have evolved, some customers are satisfied with the automated service, even though

they are not dealing with an actual person. HRM specialists participate in the development

and execution of user testing programs to assess the design of the automated interface.

Today, with the assistance of HR, more companies are evaluating the role of orga-

nizational structure, technology, and human resources with the goal of providing more

and higher-quality products and services to the customer at a lower price. This pricing

reduction is at least partially achieved by controlling the cost of labor while not losing the

focus on meeting customer definitions of quality. Of course, the ultimate goal of for-profit

organizations is to maximize profit margins while sustaining (or improving) perceived

customer value. HR has a great deal to offer in this endeavor.

While the potential is there, HR specialists are often ignored. Technological advances

and offshoring are, of course, related. One survey found that only 35 percent of respondents

reported that HR was involved in the offshoring process from an early stage, although HR

does typically play a major role in restructuring the organization’s workforce as a result

of offshoring. Says Jennifer Schramm, manager of workplace trends and forecasting at the

Society of Human Resource Management (, “with human capital increasingly

seen as the main factor in competitive advantage at both national and organizational levels,

increasing productivity through effective human resource management will be crucial. In

this sense, HR’s role in boosting productivity through human capital and workplace cul-

ture, even as the scope of the workplace extends across the globe and spans very different

cultures, will continue to grow.” 34

Technology is revolutionizing many HRM activities as electronic HRM (e-HRM) and

automated human resource management systems have allowed HR to focus on the more

strategic aspects of HR while making HR services more efficient. Virtually all organiza-

tions now use some of the many software packages to aid all HR domains. Most HR activi-

ties and outcome data are tracked electronically, such as recruitment, hiring data, turnover,

performance appraisals, and training. Managers from different departments, states, or even

countries now readily access the HR system and update employment files. Software pack-

ages are easily customized to fit a specific organization’s HR activities. Employees from

around the world now work together in virtual teams. Organizations can post job openings

online and get a pool of qualified candidates in minutes. Some of these candidates can

be tested and interviewed the same day (or hour) they apply. Of course, employees can

now access personal information about their health care benefits or their 401k retirement

investments. There is no question that e-HRM has increased HR efficiency for many HR


35 percent HR involvement in offshoring

Trend 2: Technological Changes, Challenges, and Opportunities

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Technology is also helping HR do things more effectively. Take the performance man-

agement and appraisal domain. Process tracing software is now available and used by

many technology-oriented companies in order to track the interactions and contributions

of individual workers. For example, Microsoft uses data from this software to identify pro-

gramming “sparkplugs” (those who originate an idea), the “super-connectors” (those who

build on an idea), and the “bottlenecks” (those who hold things up). They then use these

results to reward contributions and to plan future assignments. IBM uses similar software

to identify employees to be “fast-tracked” into managerial and other leadership roles based

on their contributions to group projects.

The advent of new technology has created a variety of concerns for management.

Employee privacy and intellectual property rights are increasingly cited as major concerns.

With computer attacks occurring worldwide, ensuring confidentiality of employee data is

a growing concern, and the liability of an organization in the event of security breaches is

still unclear. 35

Protecting intellectual property is vital for all organizations, especially emerging tech-

nology and research and development organizations. As a result, organizations are devel-

oping electronic communication policies that clearly outline permitted electronic activities,

uses of employer systems, and monitoring of employees’ files such as e-mail. Many com-

panies have banned cellular cameras and instant messaging because of the increased risk

of intellectual property theft.

Although still rare, the following scenario is already here for some companies: A man-

ager or supervisor gets authorization to hire someone. The manager goes into a “node”

on the Internet and completes a job analysis for the new position that establishes critical

information regarding the job, including the necessary knowledge, ability, skills, and other

critical characteristics. The job description is then used to conduct a “key word” computer

search of a potential applicant pool in order to match the requirement of the job with

the standardized résumés in the database. Out pops a number of potential candidates for the

job. The manager then immediately sends out the job vacancy announcement to all of the

potential candidates in the database through electronic mail. Interested candidates respond

back via e-mail. The manager then selects the “short list” of candidates to compete for the

job based on a quantitative analysis of the résumés.

The same job analysis information could also be used to construct or retrieve job-related

tests or questions for an employment interview. The manager might even have a web cam-

era and could conduct the testing and “face-to-face” interviewing of the candidates as soon

as the contact is made (assuming the candidate also has access to a camera-based com-

puter). This process of going from describing the job to actually interviewing candidates

could take less than a day. HR is playing a key role in getting these systems up and running.

Virtually all of the most successful high-tech companies today rely more and more on

the Internet for fast, convenient, and efficient recruiting of their core personnel. The trend

line for other sectors of the U.S. economy is strong in this same direction. Even the CIA

and the FBI do recruiting on the Internet (try if you’d like to be a spy).

Technology and privacy

21st century staffing

Trend 3: Increase in Litigation and Regulation Related to HRM

Another important trend affecting the status of HRM is the increase in the number of regula-

tions and lawsuits related to personnel decisions. As predicted by one sarcastic statistician,

by the year 2013, there will be more lawyers in this country than people. While this is obvi-

ously a joke, there is no question that the proliferation and creativity of lawyers have helped

to foster our highly litigious society. There is no sign of this activity letting up in the near

term. In fact, federal lawsuits charging violations of labor laws have increased faster (up over

125 percent since 1991) than any other area of civil rights legislation. Jury awards have got-

ten much bigger in recent years. In 2010, 32 percent of judgments against companies related

to HR were $1 million or more. In 1994, the percentage of such awards was only 7 percent.

In general, HRM-related laws and regulations reflect societal responses to economic,

social, technical, or political issues. For example, the Civil Rights Act of 1964, which

prohibits job discrimination on the basis of race, sex, color, religion, or national origin,

was passed primarily in response to the great differences in economic outcomes for blacks

Civil Rights Act

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compared to whites. The 2008 Genetic Information Nondiscrimination Act was designed

to address concerns that job seekers or workers could be denied employment opportuni-

ties due to a predisposition for a genetic disorder. A recent amendment to the Americans

with Disabilities Act (ADA) is probably responsible for the increase in ADA lawsuits

since 2010.

Other examples that have increased regulatory activity are new state laws regarding

corporate acquisitions and mergers, laws protecting Americans with disabilities and gays

and lesbians from employment discrimination, regulations regarding family leave benefits,

and mandated sick leave.

Organizations are bound by a plethora of federal, state, and local laws, regulations,

executive orders, and rules that have an impact on virtually every type of personnel deci-

sion. There are health and safety regulations, laws regarding employee pensions and other

compensation programs, plant closures, mergers and acquisitions, new immigration laws,

and a growing number of equal opportunity laws and guidelines. Today’s HRM profes-

sionals and line managers must be familiar with the ADEA, OFCCP, OSHA, EEOC, ADA,

WARN, FLSA, GINA, NLRA, and ERISA—among many other acronyms. Organizations

must also monitor the fate of the Patient Protection and Affordable Care Act ( PPACA ), a federal statute signed into law by President Barack Obama on March 23, 2010. The

constitutionality of the law has been challenged and may have already been decided by the

Supreme Court.

Each of these laws represents a major regulatory effort. There is also some indication

that regulation will increase in the years ahead in the form of new EEO legislation related

to fair pay, union organizing, and sexual orientation protection.

While illegal immigration has been recognized as a serious national problem, Congress

has been unable to amend the 1986 Immigration Reform and Control Act or to pass new legislation. However, the states have been very busy proposing or enacting hundreds of

bills addressing illegal workers. According to the National Conference of State Legislatures,

between 2009 and 2011, there were 222 laws enacted and 131 resolutions in 48 states. 36

It appears that, due to some of these laws, businesses in various states can lose their licenses

to do business if they are found to have intentionally or knowingly hired an “unauthorized

alien” as a worker.

Organizations spend considerable time and expense in order to comply with labor laws

and regulations and/or to defend against allegations regarding violations. Line managers

who do not understand the implications of their actions in the context of these laws can cost

a company dearly. Line managers may also be personally liable. Employers and managers

now face huge fines, the possible loss of business licenses, and even criminal prosecution

because of violations of new laws related to employing illegal immigrants.

Sometimes companies learn the hard way about the complexities of labor laws. Novartis

Pharmaceuticals lost a sex discrimination case in 2010 and a jury awarded the plaintiffs

$253 million. Drivers in FedEx’s Ground division claimed to have been improperly clas-

sified as independent contractors (the case was settled). IBM also settled a lawsuit brought

on behalf of 32,000 technical and support workers for $65 million who claimed they were

entitled to overtime pay in violation of the Fair Labor Standards Act. 37 In fact, class action lawsuits brought under the Fair Labor Standards Act for overtime-related issues

have increased significantly in recent years. 38 Citigroup/Salomon Smith Barney settled a

similar suit for $98 million. Abercrombie and Fitch recently settled a race discrimination

lawsuit for $40 million and now conducts its staffing under strict court-imposed scrutiny.

Texaco and Coca-Cola settled similar lawsuits for over $165 million each. Baker and

McKenzie, the largest law firm in the United States, was assessed $3.5 million in punitive

damages for sexual harassment committed by one partner at the firm. The EEOC settled

a similar suit with Honda of America for $6 million. Westinghouse Electric Corporation

agreed to a $35 million settlement in an age discrimination suit involving 4,000 employ-

ees affected by the company’s reorganization. Ford recently agreed to a $10.6 million

settlement in an age discrimination case. Morgan Stanley settled a sex discrimination case

for $54 million. Wal-Mart Stores, Inc. remained mired in a numerous sex discrimination

lawsuits over pay and promotions as this book went to press.

Genetic Information Nondiscrimination Act

Illegal immigration

Examples of HR lawsuits

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Several trends regarding the future of the American workforce underscore the challenges to

and the importance of the human resource function. Compared to 10 years ago, American

workers are more ethnically diverse, more educated, more cynical toward work and orga-

nizations, getting older, and, for a growing number, becoming less prepared to handle the

challenges of work today. The composition of the workforce is changing drastically, and

these changes are affecting HRM policies and practices.

Increasing diversity creates the need for more diverse HRM systems and practices

and increases the probability of litigation. It is estimated that by 2016 the U.S. workforce

will be 80 percent white, 12 percent African American, 5 percent Asian, and 3 percent

from other groups (including multiple racial groups). 39 Hispanics, African Americans, and

Asians are also projected to increase at a higher proportional rate than white non-Hispanics.

A greater proportion of women and minorities have entered the workforce since 2005 and

have moved into previously white male–dominated positions, including managers, law-

yers, accountants, medical doctors, and professors. Nearly 90 percent of the job growth

in the first part of the 21st century came from women, immigrants, African Americans,

and people of Hispanic or Asian origin. In addition, there are more dual-career couples

in the labor force. The “typical” U.S. worker in the past was a male—often white—who

was a member of a single-earner household. Fewer than 20 percent of today’s employees

fit this description. In May 2008, an estimated 11.6 percent of the U.S. population was

foreign born. Asians and Hispanics are the fastest growing groups in the labor force and

this is projected to continue to 2016. About half of the youngest 100 million Americans are

immigrants. 40

Two other trends will surely make HR more challenging in the years ahead: the rate of

“Baby-Boomer” retirements and a growing rate of Generation Yers (or Millennials) entering

the workforce. It is estimated that by 2014 there will be almost 63 million Millennials (people

born between 1977 and 1994) in the workforce, while the number of Baby Boomers in the

workplace will decline to less than 48 million. Some Baby Boomers believe that the Face-

book Generation (yet another name for Millennials) are less industrious, less hard working,

and less virtuous than the older generations. 41 Don Tapscott, author of Grown Up Digital: How the Net Generation Is Changing Your World, says that younger workers prefer to work in teams. 42 Managers (and even professors) have been known to complain about Millennials

frequently checking Facebook and Twitter or working with their ear buds in. Millennials are

more likely than Baby Boomers to believe that taking breaks for fun at work makes people

more, not less, productive. Such a theory is generally not accepted by older bosses and

co-workers. 43

By 2030, Americans 65 and older will make up about 20 percent of the total popu-

lation of the country. This will involve very large government entitlement costs in the

form of Social Security, Medicare, and Medicaid contributions. However, there is some

indication that enough Baby Boomers have remained in the workforce to make up for any

shortfall of workers and to a limited extent reduced a portion of the staggering projected

government unfunded obligations. Unfortunately, this trend has probably aggravated a

generational conflict. Because of the larger numbers of workers who are over the age of

40, age discrimination litigation has increased; moreover, a recent Supreme Court age

discrimination ruling (to be discussed in Chapter 3) changed the burden of proof needed to

prove age discrimination and may have already increased the amount of litigation. Also,

the workforce under the age of 40 is expected to acquire more family responsibilities. The

Generation Xers, the “sandwich generation,” those workers born between the Boomer gen-

eration and Generation Y, are to be expected to juggle both child care and especially elder

care demands as the Boomers live longer. Currently, many Boomers are juggling many of

these responsibilities. All of these issues will be of concern to HRM practitioners and line

managers in the years to come.

As a result of these changes in workforce composition, many organizations are imple-

menting programs on diversity, flexible work arrangements, more responsive training pro-

grams, child and elder care arrangements, and career development strategies so that work

and nonwork responsibilities can be more easily integrated. Building and sustaining a

quality workforce from this diversity is a great challenge for HR.

Increasing diversity

The Millennials

Trend 4: Changing Characteristics of the Workforce

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While increasing diversity translates into a greater probability of EEO legal actions,

many experts also argue that the diversity of the workforce should approximate the popu-

lation demographics so that an organization can be more responsive to the needs of the

population. As a result, today, most large U.S. companies include increasing the diversity

of their workforce as one of their strategic objectives. As we discuss in later chapters, the

diversity goals of corporations can have an impact on individuals who do not meet the

diversity criteria (e.g., older workers and job applicants).

Millennials are not only more racially and ethnically diverse than Boomers or Xers, they

are also more comfortable working in a diverse environment. Although there isn’t strong

research on this subject to date, it is thus likely that the Millennial generation might help

run things a little more smoothly as organizations get more and more diverse. Figure 1-5

presents a descriptive summary of the 75-million-strong Millennials.

Diversity and legal implications

Summary of Trend Effects

All of these trends are having a profound effect on the way HR is conducted. The changing

demographics and cultural diversity of the workforce, the increased number of lawsuits and

regulations, and the growing demands on American workers in the context of a paramount


■ Born between 1977 and 1994

■ Kids of the Baby Boomers

■ Largest generation (75 million) after the Boomers

■ 38 percent of Millennials identify themselves as “nonwhite”

■ Well educated


■ Techno savvy

■ Connected 24/7

■ Independent

■ Self-reliant

■ Global/civic minded

■ Green

■ Diverse

■ Entrepreneurial

■ Life-style centered

■ Less religious


■ Most “hovered over” generation

■ 9/11

■ Wars in Iraq, Afghanistan

■ Corporate scandal and greed

■ Emerging nations (China, India, South Korea)

■ Immigration issues/growing diversity


■ Adaptable/comfortable with change

■ Impatient/demanding/efficient

■ More interested in corporate social performance and responsibility

■ Want to produce something that makes a difference

■ Thrive on flexibility and space to explore

■ Require an explanation

■ Like feedback/guidance


Figure 1-5 Who Are the Millennials? (aka: GenY, GenWHY, Nexers, Boomlets, Netizens, GenNext)

Source: Adapted from Zemke, R., Rainess, C., and Filipezak, B. (2000). Generations at Work. (New York: AMACOM).

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1 / Human Resource Management and the Environment

need to improve U.S. productivity and establish a competitive edge all create a situation that

will challenge HRM professionals and line management. Yet through better coordination

with organizational planning and strategy, human resources can be used to create and sus-

tain an organization’s advantage in an increasingly competitive and challenging economy.

Being innovative and responsive to changing business environments requires great flex-

ibility. The trend toward the “elastic” company is clearly affecting the HR function, too.

As more companies focus on their core competencies—essentially, what they do best and

what is the essence of their business—they outsource other work, use temporary or leased

employees or independent contractors to perform services or work on specific projects

even at the professional level, and replace personnel with new technology. These so-called

modular companies such as Apple, Nike, and Dell Computers have been very successful

because they have reliable vendors and suppliers and, most important, hot products. HR

consultants have been instrumental in helping companies discover their core competencies

and then developing optimal and efficient work designs and HR strategies. HR depart-

ments themselves are clearly not exempt from this trend toward outsourcing. The result has

been a proliferation of consulting firms that compete for HR-related projects and programs

previously performed within the company. Consulting is now a thriving business for HRM.

Outsourcing trends, along with a myriad of Internet, software, and consulting options,

have reduced the size of many HR departments and have the potential for making them

more efficient and more effective. How lean can you get in HR? Nucor, a steel company with

6,000 employees, has an HR staff of four at its headquarters. Most of the HR work is farmed

out to HR consultants. Some experts argue that the most efficient and perhaps most effective

HRM departments select the best and least costly outside contractors for HRM products and

services, make certain that these products or services are being used properly, and then evalu-

ate and adapt these products and services to ensure they are working effectively and efficiently.

This trend toward outsourcing some of the personnel function supports the thesis of

many experts that the HRM functions must be very lean in structure so that companies can

react quickly to the changing world. Many HRM departments now assess the need for any

expense, personnel included, in the context of the primary functions of the organization

and its competitive strategy. So, if companies can maintain a leaner and more cost-effective

structure by outsourcing, where will that leave the HR department in the future? One

survey found that 91 percent of companies have taken steps to outsource one or more HR

function. 44 Most employers indicated that they plan to expand HR outsourcing to include

training and development, payroll, recruiting, health care, and global mobility.

Keith Hammonds, executive editor of Fast Company, predicts that companies will “farm out pretty much everything HR does. The happy rhetoric from the HR world says this is all

for the best: Outsourcing the administrative minutiae, after all, would allow human resources

professionals to focus on more important stuff that’s central to the business. You know, being

strategic partners.” 45 Hammonds argues that most HR people are not equipped to take on this

more important, strategic responsibility because they don’t know enough about the business.

There is no question that intense and growing competition has placed greater pressure

on organizations to be more adaptive and to carefully examine all of their costs. Edward

Lawler, a prominent management author and consultant, states, “All staff departments are

being asked to justify their cost structures on a competitive basis . . . head-count compari-

sons are being made by corporations to check the ratio of employees to members of the HR

department.” 46 In Human Resources Business Process Outsourcing, Lawler and colleagues illustrate how outsourcing can be a very effective and efficient approach to HR and give

HR managers new opportunities to make a more important contribution to a company’s

bottom-line and overall strategy. They present a template for analyzing an HR depart-

ment’s value, value added, and cost-to-serve.

Whether an organization is facing increasing international competition or simply more

intense pressure to improve the bottom line, HR has a great opportunity to help meet the

firm’s challenges as a business partner. Lawler sees the most pressing need in the area of

corporate strategy. “The HR function must become a partner in developing an organiza-

tion’s strategic plan, for human resources are a key consideration in determining strategies

that are both practical and feasible.” 47 This HR partnership must evolve out of the major

activities of the HR function. A key to this partnership is good, strategic measurement.

HR Outsourcing

91 percent of companies have outsourced one HR activity

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1. Identify critical and carefully defined outcome measures related to strategic objectives.

2. Translate the measures into specific actions and accountabilities.

3. Develop and communicate detailed descriptions of what is expected. Determine how (or if) improvements can be facilitated.

4. Identify high and low performing employees. Establish differentiated incentive systems.

5. Develop supporting HR management and measurement systems of selection, formal performance appraisal, promotion, development, and termination practices.

6. Specify the roles of leadership, the workforce, and HR in strategy execution.


Perspective challenge—Does management fully understand how workforce behaviors affect strategy execution?

Metrics challenge—Has the organization identified and collected the right measures of success?

Execution challenge—Does management have access to the data and the motivation to use the data in decision making?


Figure 1-6 Steps and Challenges for Developing a Workforce Scorecard

Source: Adapted from M. A. Huselid, B. E. Becker, and R. W. Beatty, The Workforce Scorecard: Managing Human Capital to Execute Strategy (Boston: Harvard Business School Press, 2005).

In their book The Workforce Scorecard: Managing Human Capital to Execute Strategy, Professors Mark Huselid, Brian Becker, and Dick Beatty argue that of all the controllable

factors that can affect organizational performance, a workforce that can execute strategy is the most critical and underperforming asset in most organizations. 48 Measurement is front and center in their prescription for a more effective workforce.

They outline three challenges that organizations must take on to maximize workforce po-

tential in order to meet strategic objectives: (1) view the workforce in terms of contribution

rather than cost; (2) use measurement as a tool for differentiating contributions to strategic

impact; and (3) hold line and HR management responsible for getting the workforce to

execute strategy.

Their measurement strategy calls for the development of a “workforce scorecard” that

evolves from six general steps an organization needs to take. Figure 1-6 summarizes this

process: (1) identify critical and carefully defined outcome measures that really matter;

(2) translate the measures into specific actions and accountabilities; (3) give employees

detailed descriptions of what is expected and how improvements can be facilitated;

(4) identify high and low performing employees and establish differentiated incentive

systems; (5) develop supporting HR management and measurement systems; and (6) specify

the roles of leadership, the workforce, and HR in strategy execution.

Huselid, Becker, and Beatty propose three challenges for successful workforce measure-

ment and management (see Figure 1-6 ). The “perspective” challenge asks whether manage-

ment fully understands how workforce behaviors affect strategy execution. The “metrics”

challenge asks whether they have identified and collected the right measures of success.

Finally, the “execution” challenge asks whether managers have the access, capability, and

motivation to use the measurement data to communicate strategy and monitor progress.

Human resource activities, practices, and research typically focus on a relatively small

number of criteria or outcome measures. These measures can be fine-tuned on the quality

of their measurement and the extent to which they are related to customer satisfaction and

then long-term profitability and growth. Much of the research in HRM and many of the

criteria used to assess management practices focus on employee satisfaction. Figure 1-7

presents a simple model that illustrates why there is (and should be) such a focus. Through-

out the book, many studies are referenced that establish some relationship between an

HR practice or HR policy or employee characteristics (e.g., employee job satisfaction)

and one or more “bottom-line” criteria such as corporate profit or customer satisfaction.

Three challenges

Perspective challenge

Metrics challenge

Execution challenge

Employee satisfaction and corporate performance


The Workforce Scorecard

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For example, in an excellent study of the relationship between employee attitudes and

corporate performance measures in almost 8,000 business units and 36 companies, strong

and reliable correlations were found between unit-level employee job satisfaction and

job engagement and critical business-unit outcomes, including profit. “Engagement” in

this study had to do with, among other things, the level of employee satisfaction regard-

ing working conditions, recognition and encouragement for good work, opportunities to

perform well, and commitment to quality. The authors estimated that those business units

in the top quartile on the job engagement scale had, on average, from $80,000 to $120,000

higher monthly revenues or sales.49

Can HRM practices facilitate higher engagement? Absolutely! It is clear that changes in

HRM practices that serve to increase employee satisfaction and engagement can increase

critical business-unit outcomes. Many HR experts now say that the emphasis in corporate

America is no longer on “happy” workers who will stay with the company forever. Rather,

the new mantra is to retain employees who are “productive” and “engaged.” Pay and bo-

nuses are thus more driven by performance measures instead of seniority. “It’s an, ‘If you

give, you’ll get’ model,” says David Ulrich, professor at the University of Michigan busi-

ness school. “That’s kind of the productive contract.” 50

Of course, many experts maintain that these simple “this for that” arrangements may

have contributed to the most recent U.S. economic woes. Countrywide Financial rewarded

its brokers for closing mortgages with questionable borrowers and its CEO Angelo Mozillo

got over $10 million in bonuses in one year as a direct result of these bad mortgages.

Borrowers began to default on the mortgages in droves in that same year, the stock of the

company collapsed, and Countrywide was saved by Bank of America with considerable

financial help from the federal government. Over 11,000 employees lost their jobs. Unfor-

tunately, Countrywide is but one of many examples of companies rewarding employees

for behaviors and outcomes that may be beneficial to these employees and their bosses in

the short term but toxic for the company in the not too distant future. Corporate bankrupt-

cies have been at record levels since 2008. Some of the most costly (e.g., Lehman Broth-

ers, Washington Mutual) can clearly be linked to deeply flawed “pay for performance”


We should also be interested in how the various measurement criteria relate to one

another. One recent meta-analysis has established a strong relationship between em- ployee job satisfaction and customer satisfaction. 51 Employees with higher levels of job satisfaction were more likely to deliver superior customer service. Obviously, managers will

want to know how more satisfied employees can be found or developed. Your authors know

one CEO who was highly critical of HR academic research because it focused so much

attention on variables like “job satisfaction” and employee “engagement.” He referred

to these variables as “softies” and argued that they were not relevant to “bottom-line”

financial variables. In fact, an abundant literature now exists that documents such “soft-

ies” as indeed being strong predictors of bottom-line accounting and financial measures

of organizational performance. One key to effective HR policy and practice is measuring

these “softies” and understanding how they do relate to critical bottom-line measures like

The costs of bad reward systems

Employees attitudes, performance, and turnover

Effective Management


Employee Satisfaction

Customer Satisfaction

Long-Term Profitability

& Growth

Drives Drives







Figure 1-7 The Chain of Relationships Linking Management Practices to Employee Satisfaction, Customer Satisfaction, and Long-Term Profitability and Growth

Source: Cascio W. (2005). “From Business Partner to Driving Business Success: The Next Step in the Evolution of HR Management,” Human Resource Management 44, p. 162. Reprinted with permission of John Wiley & Sons.

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performance, costs, profit, and customer satisfaction. Of course, taking action to improve

on these metrics is essential.

Organizations should certainly strive to satisfy their employees with good pay, good

supervision, and good, stimulating work. But the model presented in Figure 1-7 also helps

keep measures of employee job satisfaction and engagement in perspective. Employee

satisfaction is related to customer satisfaction. So is cost. Customers are particularly im-

pressed with low cost. Walmart does so well not because its employees are especially

happy but because its products are on average 14 percent cheaper than its competitors’.

Your authors would be a lot happier if our university salaries were doubled! You’d prob-

ably be unhappy if your tuition was raised.

The key is linking measurement and the resultant data to strategic goals. “Thinking

strategically means understanding whether the measurement system you are considering

will provide you with the kinds of information that will help you manage the HR function

strategically.” 52 This linkage creates the connection between leading indicators and lagging

indicators. Let us turn to illustrations of recent HRM activities directed at these criteria.

Frito-Lay had a problem with job vacancies in key positions, which it believed had

a direct effect on sales. A training and development program was instituted through its

HRM division to cross-train workers for several jobs in an effort to reduce downtime from

employee vacancies and provide more opportunities for employees to move up. The down-

time could be operationally defined in terms of dollars, and the training program saved the

company $250,000 in the first year.

AMC Theaters developed a battery of applicant tests to identify individuals most likely

to perform more effectively and to stay with the company longer. The reduction in turn-

over saved the company over a half million dollars in 5 years. Owens-Corning Fiberglas

trained all of its managers in statistical quality analysis as a part of its total quality man-

agement program. Trainees were made accountable for improving the quality at Owens-

Corning and the program worked. Reduction of rejected materials saved over a million

dollars. John Hancock Insurance installed a new managerial pay-for-performance system

in order to increase regional sales and decrease employee turnover. J. Walter Thompson

developed a new incentive system to promote creative advertising ideas from its consumer

research and accounting units. RJR Nabisco replaced a fixed-rate commission with a new

compensation system for its advertisers, which linked ad agency compensation to the

success of the campaign. Concerned about the quality of one managerial level, Office

Depot developed a managerial assessment center to select its district managers. It then

determined the extent to which the quality of management improved as a function of the

new screening method.

Turnover is a serious problem for many service industries and especially fast-food.

Many consultants just write it off as part of the business. David Brandon, CEO of Domi-

no’s Pizza, did a study inside Domino’s, the results of which surprised his top management

team. 53 He found that the most important factor related to the success (or failure) of any

individual store was not marketing, or packaging, or neighborhood demographics. It was

the quality of the store manager. Store managers had a great deal to do with employee

turnover, and turnover had a great deal to do with store profit. Domino’s calculated that

it costs the company $2,500 each time an hourly employee quits and $20,000 each time a

store manager quits. Mr. Brandon focused on reducing the 158 percent turnover rate among

all employees. Domino’s implemented a new and more valid test for selecting managers

and hourly personnel, installed new computerized systems for tracking and monitoring

employee performance and output, and developed a much more focused pay-for-performance

system for all managers. As of 2011, the program was a great success by all counts.

Turnover continues to be low compared to its competitors, store profit was up, and the

stock price was doing well. Brandon clearly showed how important HRM is to the bottom

line. Attracting and keeping good employees, measuring and monitoring performance,

and rewarding strategically important outcomes are all keys. Obviously, all of this has to

translate into good (and cheap) pizza. Long-term profitability and growth are driven by

customer satisfaction, and that’s mainly a function of the quality and cost of the products

and services. Research clearly shows that HRM practice and employee satisfaction are in

the “chain of relationships.”

Linking measurement to strategic goals

Customer satisfaction and profitability

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In the past, HRM interventions were rarely linked to financial measures or cost figures

in order to show a reliable financial benefit. This inability to link such HRM practices to

the “big picture” might explain why personnel departments in the past have had so little

clout. While marketing departments were reporting the bottom-line impact of a new mar-

keting strategy in terms of market share or sales volume, personnel could only show that

absenteeism or turnover was reduced by some percentage, rarely assessing the relationship

between these reductions and a specific financial benefit. Stanford professor Jeffrey

Pfeffer summed it up: “In a world in which financial results are measured, a failure to mea-

sure human resource policy and practice implementation dooms this to second-class status,

oversight neglect, and potential failure. The feedback from the measurements is essential to

refine and further develop implementation ideas as well as to learn how well the practices

are actually achieving their intended results.” 54

Developing clear criteria linked to strategic goals is critical for managerial success and

should be a major driver of HR policy. Some experts argue that HR specialists should

“quarterback” the development and administration of a “management by measurement”

system, ensuring that all functional business units are subscribing to the guidelines for

sound, strategic measurement. Allowing business units to develop and administer “leading-

indicator” measures can result in the measurement of criteria more closely linked to

making that unit (and particular managers) look good rather than the strategic goals of the

unit. By contrast HR can help with sound measurement. A terrific example of this type

of measurement system is the “Productivity Measurement and Enhancement System” or

(ProMES). 55 The purpose of ProMES is to measure performance at a unit level closely

aligned with organizational objectives. The performance measurement system is devel-

oped by employees and management, and quantitative feedback measures are used to help

personnel improve performance. ProMES is a great example of a measurement system

where the data drive HR actions.

But what is sound measurement? One HR executive laid the groundwork with this defi-

nition: “The most effective employees are those who provide the highest possible quantity

and quality of a product or service at the lowest cost and in the most timely fashion, with a

maximum of positive impact on co-workers, organizational units, and the client/customer

population.” This statement of effectiveness also applies to particular HR programs, prod-

ucts, and services and all functional business units. In evaluating an outsourced recruiting

effort, an HR VP provided the following criterion for evaluation: “Give me a large pool

of highly qualified candidates, give me this list as quickly as possible, and don’t charge

me much when you’re doing it.” The details of the measurement system (e.g., the quantity

and quality of products/services) must be linked to strategic goals. These measurement

details are critical. As stated earlier, many problems at companies in the last few years can

be attributed to faulty incentive systems that met short-term goals and created long-term

disasters. So, the measurement system must be compatible with the long-range strategic

objectives of an organization.

The most effective organizations get down to specifics about all important criteria,

and these are directly linked to key objectives or desired outcomes for the organization.

This prescription applies to HR as for any other business function. Wayne Keegan, VP of

HR for toymaker ERTL in Dyersville, Iowa, clearly represented the bottom line for HR:

“HR managers should strive to quantify all facets of HR to determine what works and what

doesn’t.” 56

What works and doesn’t work should focus on the “big picture.” The most effec-

tive organizations are driven by measurement strategies perhaps conceptualized by HR

specialists and applied to HR functions but, more important, applied throughout the

workforce. HR can (and should) help senior management develop and focus on key

workforce measures that derive from organizational strategy. The most effective or-

ganizations develop a set of “top tier” measurement tools that reflect and integrate the

company’s strategic goals. As Mark Huselid and his colleagues put it, “There should be

no gap between what is measured and what is managed.” Linking workforce success at

the individual and unit level to the most critical business outcomes is a key to competi-

tive advantage. Linking these outcomes to long-term measures of success is the key to

long-term advantage and survival.

Management by measurement

Most effective employees

Quantify all aspects of HR

Develop key workforce measures

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Customer Value and Corporate Social Responsibility (CSR)

Competitive advantage occurs if customers perceive that they receive more value from

their transaction with an organization than from its competitors. Ensuring that customers

receive value from transacting with a business requires that all employees be focused on

understanding customer needs and expectations. This can occur if customer data are used

in the designing of products or service processes and customer value is used as the major

criterion of interest. Some companies conduct value chain analysis that is designed to as-

sess the amount of added value produced by each position, program, activity, and unit in

the organization. The value chain analysis can be used to refocus the organization on its

core competencies and the requirements of the customer base.

Customers not only perceive but also actually realize value from Walmart in the form

of price. The products and services are available in convenient stores, and average prices

are about 14 percent lower than its competitors’. While there are many reasons Walmart

can price goods lower than competitors (e.g., economies of scale, price control pressures

on suppliers, technology on products bought and sold, cheaper imports), low labor cost

is certainly one factor. Sales clerks earn less at Walmart compared to most other workers

doing essentially the same work for competitors. Walmart also uses proprietary analytical

software that is instrumental for controlling labor costs. Walmart compiles and uses its

historical store data to make very accurate predictions regarding specific employee needs

for its stores by the hour and day. This labor scheduling software facilitates an efficient use

of personnel and sharply reduces the need for overtime scheduling. Health care benefits are

also estimated to be 15 percent less than coverage for workers within the same industry.

Walmart’s strategy to be a price leader and its obsession with cost control have the po-

tential for trouble. The company has been mired in various labor-related lawsuits in recent

years, all of which may be related to controlling costs. Walmart paid a huge fine in 2005

for contracting with a company that employed illegal aliens, has been sued numerous times

for violating labor laws, including firing people for union organizing efforts, and has been

found guilty of violating the Fair Labor Standards Act regarding overtime. While it is the largest employer in the United States, the proportional rate of complaints related to its

HR practices is high.

Value to Abercrombie and Fitch is related to creating and sustaining an image for its

young customers. A&F went for an all-American look and it certainly worked. It is the

largest teen retailer in the United States with over 600 stores and over a billion dollars in

revenues. Its clothes are certainly not cheaper than competitors.’ A&F is clearly promoting

image as a part of its definition of value. But just like Walmart’s cost control/price strategy,

A&F’s “image” strategy created big trouble for the company. In a discrimination lawsuit

settled for $40 million, A&F was accused of favoring white job applicants and employees.

A&F agreed to change some of its marketing strategy as a part of the settlement.

Competitive advantage refers to the ability of an organization to formulate strategies that

place it in a favorable position relative to other companies in the industry. Two major

principles describe the extent to which a business has a competitive advantage. These two

principles are perceived customer value and uniqueness.


Customer Value

The notion of customer value is more complicated than it may seem. Many customers

seek out products and services partially due to the reputation of the organization selling

the product or service rather than due to the price of the product or service. One of the

reasons companies (and politicians) wrap themselves around the Olympics every 4 years is

that they believe that the basic sense of American pride and excellence that goes with the

Olympics tends to rub off onto the company. Research in marketing shows that perceptions

of product quality are positively affected by affiliation with the Olympics and Olympic

heroes. Thus, at least the theory is that customer value is affected by this connection.

Likewise, the reputation of a company’s environmental policies affects the decision

making of a growing number of consumers. Concerns about global warming, the price of

gasoline and energy, and air pollution have prompted many companies to offer incentives C o p

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to employees to encourage them to buy fuel-efficient vehicles that emit less carbon diox-

ide. As the companies go “Green,” they report improvements in employee retention and

increases in job applications, especially among Millenials. These are two HR metrics that

have been linked to subsequent improvements in the bottom line.

Most companies with a connection to manufacturing facilities abroad are very con-

cerned about pitiful labor conditions and child labor issues at these international facilities.

When Kathy Lee Gifford was accused of exploiting child labor in Honduran clothing

plants, some consumers avoided her line of clothing. Nike was accused by the chairman

of the Made in the USA Foundation of using child labor in Indonesia to make its athletic

shoes. Nike’s business was affected to the extent that consumers consider these allegations

when they buy sneakers. Jesse Jackson launched a boycott against Mitsubishi to “encour-

age” the company to put more women and minorities in executive positions.

American companies spend millions and hire thousands of foreign plant auditors to

inspect offshore plants, and there is no doubt that worker conditions have improved since

the 1990s. But many bad factories remain and Asian suppliers regularly outsource to other

suppliers, who may in turn outsource to yet another operation, creating a supply chain that

is difficult to follow.

Some companies obviously believe that their reputation for corporate social and envi-

ronmental responsibility figures into the complicated calculation of value. There is evi-

dence that companies are under increasing pressure to behave in a socially responsible

manner. While there are a variety of definitions of corporate social/environmental perfor-

mance (CSP), there is debate over the extent to which (or whether) a positive image of CSP

is related to corporate financial performance. Research seems to suggest that “corporate virtue in the form of social responsibility and, to a lesser extent, environmental re- sponsibility is likely to pay off.” 58 Perhaps Walmart already knew this. Have you noticed the many ads on TV informing the public about its many good deeds and how nice it is to

its employees and its environment?

CSP has spawned socially responsible investing, or SRI, which enables investors to buy

into companies with favorable CSP reputations. Mutual funds such as Calvert World Val-

ues, AXA Enterprise Global, and Henderson GlobalCare Growth invest only in companies

that pass CSP muster. It is estimated that one out of every eight dollars invested by profes-

sional money managers is invested based on corporate CSP. 59 So, who are these socially

responsible companies that dominate SRI? Among the well-known companies most likely

to be part of an SRI mutual fund are Canon, Toyota, and Sony (Japan), Nokia (Finland),

SAP (Germany), and in the United States, Cisco Systems, Coca-Cola, Johnson & Johnson,

Microsoft, and Procter and Gamble.

There is a related and growing “corporate sustainability movement.” “Sustainability”

has to do with a company’s ability to make a profit while not sacrificing the resources of

its people, the community, and the planet. Many executives now claim that sustainability

can improve the company’s financial performance. A survey of executives indicated that

the greatest benefits of sustainability programs are improving public opinion, improving

customer relations, and attracting and retaining talent. Over 75 percent of the participating

executives anticipated more investment in environmental programs. 60

Many college students are now involved in tracking the manufacturing process for their

school paraphernalia. The United Students Against Sweatshops ( ) is an

organization of students from over 200 universities affiliated with the Worker’s Rights

Consortium (WRC). The WRC conducts investigations of manufacturing plants, issues

reports, and initiates boycotts against certain university products such as hats or T-shirts if

plants do not meet its standards for wages and safety. This movement is growing and has

already had some major successes.

Many consumers use “Newman’s Own” products (from the late actor Paul Newman)

not only because they like the products but because all profits are donated to “educational

and charitable purposes.” (Go to Sure, Newman’s Sockarooni spa-

ghetti sauce is tasty. But does the taste account for all of the customer value when the sauce

typically costs more than other sauces? Customer value can be complicated. Jesse Jackson

and Burger King were well aware of this when Burger King agreed to special financing

Companies go “Green”

CSP and investment

Corporate “Sustainability”

The Worker’s Rights Consortium

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and support for minority-owned franchises. Most people do not live and die for a Whopper.

Consumers’ knowledge regarding Burger King’s policy toward minorities could affect

their fast-food decisions.

So, an organization’s CSR and CSP reputation regarding its corporate ethics, environmental

positions, profamily policies, or affirmative action/diversity practices can go into the “customer

value” assessment. For years, Dow Chemical in Midland, Michigan, had a negative reputation

on college campuses because of its production of napalm, a chemical agent used in the Vietnam

War. Dow had a terrible time recruiting chemists and other vital professionals because of this

one product. Dow launched a public relations campaign to enhance its reputation. It focused

its advertising on the many agricultural products that it produced and marketed. The result was

a profound improvement in Dow’s ability to recruit on college campuses. Obviously, Dow’s

ability to recruit and retain the best chemists was vital to its competitiveness.

While consumers undoubtedly place greater weight on the quality of the product or

service, there is no question that “customer value” can also include intangible variables

such as corporate responsibility, environmental impacts, diversity policies, and being on

the right side of political issues. Activist consumer groups, by calling attention to corporate

greed, may foster more social responsibility by simply affecting the complicated variable

of the customer value equation. There is also evidence that Gen Y Americans are more

sensitive to CSR and CSP issues, especially environmental concerns, and that this Mil-

lennial generation is more likely to buy from (and invest in) companies with strong CSP

reputations and more inclined to work for such companies.

One hot issue related to the complicated equation of “customer value” is the way a

company treats its employees. The reputation of a company regarding how it treats its

employees can also affect the size of the pool of candidates for any job within the orga-

nization. Organizations work hard to make the list of the “most admired” companies for

which to work because it does help attract more qualified workers. Apple, the most ad-

mired company on Fortune magazine’s list in 2011, received over 500 applicants for each key position it filled in 2010. Recall that the ratio of the number of qualified applicants to

the number of key positions is a “high-performance work practice” and is thus related to

corporate financial success (see again Figure 1-1 ).

At SAS, a North Carolina computer software company with over 10,000 employees, it

all started with free M&Ms every Wednesday. The SAS HR strategy is clearly designed

to attract the best programmers and to keep the SAS workforce happy. The strategy has

worked. SAS sold over a billion dollars of analytical software to retailers like Victoria’s

Secret and the U.S. military in 1 year. SAS has never had a losing year and has never laid

off a single employee! Says Jim Goodnight, the founder of the company, “If employees are

happy, they make the customers happy. If they make the customers happy, they make me

happy.” SAS is always ranked high in Fortune magazine’s list of best companies to work for (it ranked 1st in 2011 and 3rd in 2012). SAS offers a myriad of benefits you don’t find

at many companies. It has a Work/Life Center made up of social workers who help SAS

employees solve life’s problems like elder care and college selection for SAS kids. They’ll

even have someone pick up and deliver your dry cleaning! Says Jeff Chambers, director

of HR, “We do all these things because it makes good business sense,” saving staff time.

SAS claims a turnover rate differential of 5 percent at SAS versus 20 percent at competi-

tors (true even in the heat of the 90s’ dot-com craze!). That savings in turnover at SAS is

estimated at $60–70 million annually. While some companies treat employees as costs or

necessities, Jim Goodnight regards his SAS employees as the best investments he ever

made. “Ninety-five percent of my assets drive out the front gate every evening. It’s my job

to bring them back.” Google has adopted this HR philosophy with low turnover rates as

one consequence.

There is hard and growing evidence that treating employees well will translate into bet-

ter financial performance. One study found that positive employee relations served as an

“intangible and enduring asset and . . . a source of sustained competitive advantage at the

firm level.” 61 The study found that companies that made the “100 Best Companies to Work

for in America” list had much more positive employee attitudes toward work and a signifi-

cant financial performance advantage over competitors. The advantage is self-sustaining.

Once companies make the list, the quality and quantity of their applicants for key positions

Customer value indicated “intangibles”

“Most admired” companies

SAS: 5 percent turnover rate

The “Best Companies” and corporate performance

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1 / Human Resource Management and the Environment

go up and thus the quality of their new hires improves! Among the companies that have

been on the list for years are Google, Boston Consulting Group, Whole Foods, Publix

Super Markets, Cisco Systems, JM Family Enterprises, J.M. Smucker, Nordstrom, and

Ernst and Young. Perceived customer value is the principal source of competitive advan-

tage. While it mainly derives from the actual product or service, it derives indirectly from

an organization’s reputation.

Maintaining Uniqueness

The second principle of competitive advantage derives from offering a product or service

that your competitor cannot easily imitate or copy. For example, if you open a restaurant

and serve hamburgers, and a competitor moves in next to you and also serves hamburgers

that taste, cost, and are prepared just like yours, unless you quickly offer something unique

in your restaurant, you may lose a large part of your business to your competitor. Your res-

taurant needs to have something that is unique to continue to attract customers. Competi-

tive advantage comes to a business when it adds value to customers through some form of

uniqueness. One of your authors works in Boca Raton, Florida, one of the great resort areas

of the world (and a golfer’s paradise). This location enables his university to attract (and

retain) top faculty from around the world—clearly a competitive (and unique) advantage.



EXAMPLES: WAL-MART, University of Phoenix











Figure 1-8 The Four Mechanisms for Offering and Maintaining Uniqueness

Sources of Uniqueness The key to any business’s sustained competitive advantage is to ensure that uniqueness lasts over time. Three traditional mechanisms exist to offer customers uniqueness. A fourth

is often a necessary condition to take advantage of one (or more) of the other three. The

four mechanisms for offering uniqueness are described next and summarized in Figure 1-8 .

First, financial or economic capability derives from an advantage related to costs; when a business is able to produce or provide a good or service more cheaply than competitors.

If in your hamburger restaurant, you have received a financial gift from family or friends

to build the restaurant, without repayment of the gift, you may be able to charge less for

your product than a competitor who borrowed money from a bank or financial institu-

tion. Your cheaper-priced hamburger would then become a source of uniqueness that cus-

tomers value. Toyota and Honda still do not have anywhere near the retired employees’

“legacy” costs that Ford and GM still have (even after GM’s bankruptcy). Like BMW and

Mercedes, they also have a huge advantage in relative employee health care costs.

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The question of what is unique about a product or service is almost always asked and

answered in the context of the usually overriding “cost” question. Walmart’s source of

uniqueness is rather simple: It has what we want and it’s cheaper! For most people and

for almost any product or service, the assessment of the product or service is done in the

context of price or cost, at both a relative and an absolute level.

The second source of uniqueness comes from having strategic or product capability . That is, a business needs to offer a product or service that differentiates it from other

products or services. The iPod is a clear example. One early reviewer of the iPod took a

look at the $400 initial price tag and suggested that the name might be an acronym for

“Idiots Price Our Devices”! But despite its pricey introduction, the iPod overwhelmed the

other MP3 players and acquired what pop star Moby referred to as an “insidious revolu-

tionary quality . . . it becomes a part of your life so quickly that you can’t remember what

it was like beforehand.” Apple has had the same success with the iPhone. Now that’s

uniqueness! In the hamburger wars, fast-food restaurants have attempted to offer unique

products and services to attract customers. Salad bars, taco bars, kiddie meals, and $30

breakfasts with giant mice named Mickey and Minnie are all examples of restaurants at-

tempting to make their product unique and appealing to customers. The possession of a

patent for a critical drug is an advantage for a pharmaceutical company.

A third source of uniqueness for a business is a technological or operational capability . That is, a business can have a distinctive way of building or delivering its product or service.

In the hamburger restaurant, the different methods of preparing the hamburgers may distin-

guish restaurants from each other (broiled versus flame-grilled). Customers may prefer one

technological (cooking) process over another, and thus continue to patronize one restaurant.

In more complex businesses, technological capability may include research and develop-

ment, engineering, computer systems and/or software, and manufacturing facilities. Micro-

soft has thrived in this area by getting consumers to purchase and get comfortable with one

of its products so they are more attracted to future products related to their technological

capability. Google is a great example of unique technological and operational capability.

A fourth source of uniqueness aiding a company in seeking competitive advantage is

organizational capability . Organizational capability represents the business’s ability to manage organizational systems and people in order to match customer and strategic needs.

In a complex, dynamic, uncertain, and turbulent environment (e.g., changing customers,

technology, suppliers, relevant laws and regulations), organizational capability derives

from the organization’s flexibility, adaptiveness, and responsiveness. In a restaurant, or-

ganizational capability may be derived from having employees who ensure that when

customers enter the restaurant, their customer requirements, their needs, are better met than

when the customers go to a competitor’s restaurant. That is, employees will want to ensure

that customers are served promptly and pleasantly, and that the food is well prepared.

The implications for human resource management should be clear. HR systems need to be put in place that maximize organizational capability and exploit all other po- tential sources of uniqueness. Organizations with serious problems on the organizational capability side of the ledger can fail to exploit other potential sources of competitive ad-

vantage. The cultural problems after the merger of Chrysler and Daimler-Benz are a good

illustration of this interaction. Despite a solid financial situation and unique technological

advantages, the company never gained synergy as DaimlerChrysler and eventually split up.

With increased globalization and the need for strategic alliances, organizational capa-

bility is a key to sustained competitive advantage as companies expand their businesses

around the world. Take McDonald’s as one example of a successful global expansion

with a need for strategic alliances. McDonald’s has restaurants in over 115 countries, and

expansion to some areas of the world poses special challenges. Its marketing determined

that it could sell the Big Macs in Saudi Arabia. Here’s the line-up for the Saudi Big Mac:

two all beef patties from Spain, the special sauce from the United States, lettuce from

Holland, cheese from New Zealand, pickles from the United States, onions and sesame

seeds from Mexico, the bun from Saudi wheat, sugar and oil from Brazil, and the packag-

ing from Germany. Organizational capability enables McDonald’s to pull this integration

off, and the result is a highly popular and profitable product. Globalization will neces-

sitate more of these challenging arrangements. HR will have a lot to do with success

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1 / Human Resource Management and the Environment

through enhanced organizational capability, as HR systems help determine how smart

people are recruited, hired, trained, motivated, treated, evaluated, paid, and integrated

into the organization.

Research shows that organizational capability influenced by particular HR activi- ties is a reliable predictor of corporate financial performance. 62 HR activities and pro- cesses such as those characterizing “leading-indicator” high-performance work practices

illustrate organizational capability as a source of competitive advantage. The ability to

attract and retain individuals with the skills to establish and maintain potential sources of

uniqueness should be a key metric in any “management by measurement” system.

SUMMARY Human resource management is to some extent concerned with any organizational deci-

sion that has an impact on the workforce or the potential workforce. The trends described

in Chapter 1 underscore the importance of HR to meet the challenges of the 21st century.

While there is typically a human resource or personnel department in medium-sized to

large corporations, line management is still primarily responsible for the application of

HRM policies and practices. There are critical competencies for general management and

HRM professionals. An organization needs both competent personnel trained in HRM

and motivated managers who recognize the importance of HRM activities and will ap-

ply the best procedures in the recommended manner. HR managers are more likely to

convince line managers of the value of HR programs by focusing on “leading-indicator”

measurements, which can be linked to the lagging financial indicators that are more clearly

understood by management. Sometimes, personnel/HR functions are perceived by line

managers to be out of step with the real bottom-line outcome measures for the organiza-

tion. Therefore, the most effective human resource departments are those in which HRM

policy and activities are established and measured in the context of the mission and strate-

gic objectives of the organization. HRM should assist management in the difficult task of

integrating and coordinating the interests of the various organizational constituencies, with

the ultimate aim being to enhance the organization’s competitive position by focusing on

meeting or exceeding customer requirements and expanding the customer base.

Competitive advantage is the key to success for most businesses. To attain competitive

advantage, businesses need to add (and sustain) value for customers and offer unique-

ness. Four capabilities provide a business’s uniqueness: financial, strategic or product,

technological or operational, and organizational. To sustain competitive advantage, orga-

nizational capability should be emphasized, ideally in the context of the other sources of

uniqueness. Organizational capability derives from a business’s HRM practices.

The view of HRM outlined in this chapter provides a foundation for integrating HRM

activities into the organization’s mission and goals. HRM professionals should be actively

involved in building more competitive organizations through the HRM domains. One

necessary competency for both line managers and HRM professionals is an understand-

ing of the growing impact of globalization on HR policy and practice. This critical area is

explored in the next chapter.

Organizational capability and corporate performance

Line management is responsible for application of HRM policy

HRM policy and strategic objectives

Discussion Questions 1. Describe the changing status of HRM. What factors have led to these changes?

2. How do productivity concerns influence organizational policies and procedures regarding HRM activities?

3. Describe the major HRM activities conducted in an organization. Provide an example of each from an organization with which you are familiar.

4. What impact should the composition of the workforce have on HRM practices or activities? What future trends do you see that will influence HRM activities?

Why is the growing cultural diversity of the workforce a management



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1 / Strategic Human Resource Management in a Changing Environment

5. Why is the support of line management critical to the effective functioning of HRM practices in an organization? Provide some suggestions to ensure that this

support is maintained.

6. Why does the number of qualified applicants for each strategic position relate to corporate effectiveness? How can HRM enhance this applicant pool?

7. What are the sources of uniqueness that can aid a company seeking competitive advantage?

8. Explain how Ford and GM still have a competitive disadvantage related to

financial capability. How does Walmart have an advantage?

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2 The Role of Globalization in HR Policy and Practice *

In Chapter 1, we described the importance of aligning human resource (HR) programs with

the business strategy. This means that as organizations change, HR policies and programs

must adapt as well. One of the major challenges facing businesses today is the increasing

globalization of the world economy and competition.

Thomas Friedman’s critically acclaimed book on globalization, The World Is Flat: A Brief History of the Twenty-First Century , describes the next phase of globalization. 1 Technological and political forces have facilitated a global, web-based “playing field” that

allows for multiple types of collaboration regardless of geography, distance, and even lan-

guage. Since 1980, worldwide imports and exports, foreign direct investment, and national

levels of gross domestic product (GDP) have increased dramatically, 2 particularly follow-

ing the fall of communism in the late 1980s in all but a few countries (e.g., China, Vietnam,

North Korea, Laos, and Cuba). As discussed in Chapter 1, significant growth in global

technology, infrastructure, and communication has helped to facilitate such growth. Other

factors contributing to increases over the past two decades include the opening of global

economies to foreign investment in Russia, China, and India, along with other emerging

markets in Asia, the Middle East, and South America and notable changes in the composi-

tion and location of the skilled global labor force.



After reading this chapter, you should be able to

1. Describe the different ways companies may engage in international


2. Explain the different international business strategies.

3. Explain how international human resource management (IHRM) differs

from traditional, domestic HRM.

4. Understand the different IHRM strategies.

5. Describe the trends relating to international job assignments.

6. Understand the issues and trends relating to the development of globally

competent business leaders.

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*Contributed by Stephanie J. Thomason and Christine M. Hagan.

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Explosive growth has occurred in foreign direct investment (FDI). FDI involves the control

of the productive assets of a company through its ownership by a foreign company or for-

eign individuals. One expert indicates that about 63,000 companies worldwide have FDIs. 3

The largest flows of FDI occur between the developed nations of Western Europe, North

America, and Japan, yet over the past two decades, the growth of FDI flows in developing

and transition (formerly communist) economies has been extraordinary. 4 India and China

provide good examples of countries that have become increasingly attractive to invest-

ment. Each country is home to over 1 billion people and each has opened its doors to FDI.

In India, inward FDI increased from $79 million in 1980 to $34 billion in 2009, while in

China, inward FDI increased from $57 million in 1980 to $95 billion in 2009. 5

Rapid growth is sometimes unsustainable growth, however, as evidenced by the stock

market collapse of the late 1990s and the real estate collapse and resultant global financial

crisis of 2008. The financial crisis, often referred to as the Great Recession, has affected

trade and investment in virtually all regions of the world. 6 As a result, FDI inflows declined

in both developed and developing countries in 2008 and 2009. 7 Yet the cyclical nature and

resiliency of our global economy suggest that a recovery is likely, as evidenced by annual

increases in 2010 of numerous financial markets. 8

Changes in the composition and location of the skilled global labor force has led to the

creation of offshore professional and operations centers, regardless of where the final work

product is ultimately marketed. Many U.S. and European software manufacturers now

have facilities in India to take advantage of the high concentration of computer skills in

that country and the low cost of labor. Traditionally, business facilities were strategically

located in order to be close to suppliers or customers and/or within trade alliance borders.

Today, however, the use of private satellite links, e-mail, fax machines, and the World

Wide Web has made workers from all over the world very accessible. Even customer ser-

vice facilities are being located overseas, particularly when there is a sufficient supply of

productive workers who are willing to work for relatively low pay.

Changes in technology, infrastructure, and communication have fueled increases in

global recruitment and staffing. Technology now even allows a great deal of service work

to move offshore where labor costs are less than in the United States. Workers can (and do)

telecommute across continents. As a consumer, you may be unaware that your X-rays may

be read by someone in India, that your software is repaired by specialists in Ireland, that

your airline reservations were booked with a customer service representative in Jamaica,

or that your insurance claims were processed in the Philippines.

Why are so many organizations today under pressure to expand their business interests

beyond their national boundaries? Major reasons include access to additional resources

(including skilled workers), lower costs, economies of scale, favorable regulations and tax

systems, direct access to new and growing markets, and the ability to customize products

to local tastes and styles. In addition, the rise of regional trade alliances (such as NAFTA

and the European Union) is another important reason organizations have increasingly

internationalized. Later in this chapter, we will describe some of the problems associated

with the rise of regional trade alliances, such as the “banana wars” and Mexico’s “screw-

driver factories.”

Multinational organizations headquartered in the United States have an increasing and

substantial global presence. As examples, Starbucks purchases a large share of worldwide

coffee production, McDonald’s controls a major share of worldwide beef and chicken

production, Wal-Mart is the world’s largest retailer, and Home Depot is the largest single

purchaser of wood and wood products. 9 Of Coca-Cola’s 92,000 employees worldwide,

over 87 percent are non-U.S. personnel. 10 Coke has six largely autonomous regional groups

(North America, Latin America, Europe, Africa, Asia, and the Pacific) and sells its prod-

ucts in over 200 countries. 11 In addition, it has established a global service staff of 500

people who are trained to go anywhere in the world to offer advice and expertise concern-

ing operational and customer service problems. These team members are paid U.S. wages,

even though many of them are not from the United States. 12

Global expansion presents great challenges for HRM, however. When McDonald’s en-

tered into a joint venture with the Moscow city council, the company placed a help-wanted

ad and received about 27,000 Russian applicants for its 605 positions. It sent six Russian

Foreign Direct Investment

Offshore centers

Global recruitment

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managers to its Hamburger University outside Chicago, Illinois, for 6 months of training

and another 30 managers for several months of training in Canada and Europe. 13 It also

needed to overcome significant problems obtaining high-quality supplies, most of which

were perishable. Ultimately, McDonald’s opened a $40 million food-processing center

about 45 minutes from its first Moscow restaurant. 14

The majority of Fortune 500 companies are now multinational in that some portion

of their business (and profits) is derived from overseas operations. 15 Many of the larg-

est, most prestigious U.S. companies, including IBM, Exxon, GE, and Microsoft, derive

more than half of their revenues from overseas business. Furthermore, more firms from

an increasing number of developing countries are multinational. The number of devel-

oping country multinational firms in the Fortune 500 list rose from 29 in 1998 to 45

in 2005. 16

With the immense market potential overseas, particularly in Asia, this figure is likely

to get even higher for many U.S. corporations. It is estimated that by 2020, the six largest

world economies will be the United States plus five Asian economies: China, Japan, India,

Indonesia, and a united Korea. Along with this success will come great demand for products

and services for the new middle classes in these countries. In 2000, about one-third of the

sales of Fortune 500 companies came from outside the United States. 17

Of course, global expansion is not reserved for U.S. companies. Many organizations

headquartered in Europe and Asia have expanded their global reach over the last decade

or so. In fact, chances are better than ever that you may work for a foreign corporation in

your own community. Consider that nearly 80 percent of all Honda and Acura vehicles

sold in America are built in one of Honda’s six manufacturing facilities in the United

States. Today, Honda employs over 25,000 people in all 50 U.S. states. 18 Furthermore,

more than 100,000 workers are employed in authorized Honda automobile, motorcycle,

or power-equipment dealerships in the United States. 19 In the last 10 years, more than

200 German businesses established direct investments in North and South Carolina alone.

Most Mercedes and BMW cars driven in the United States are now assembled in the

United States. Nokia, the cell phone giant with headquarters in Finland, employs 123,000

workers worldwide, over 80 percent of whom are outside of Finland. 20 The Roche Group,

the Swiss pharmaceutical giant, has 88 percent of its workforce outside Switzerland. 21

Today, an estimated 4.9 million U.S. citizens work in U.S. affiliations of foreign-owned

corporations. 22

In addition, your company is now more likely than ever before to have some type of

business partnership with a foreign corporation. Earlier we mentioned that McDonald’s

opened its first restaurant in Russia through a joint venture with the Moscow city council.

Businessland, one of the largest U.S. dealers of personal computers, moved into Japan

with the help of Japan’s four largest electronics firms. There are estimates that over 80

percent of U.S. businesses could successfully market their products or services overseas

provided that they have the required knowledge of foreign markets. 23 Since U.S. markets

are regarded as mature or “soft” in many product lines, international markets appear to of-

fer potential for substantial growth. Today, over 95 percent of the world’s population lives

outside of the United States. 24 That’s a lot of Coke, Big Macs, and Starbucks’ coffees!

Furthermore, many Americans choose to live overseas. According to the Association of

Americans Resident Overseas (2011), 5.08 million Americans (excluding military) are

living in 160+ countries around the world. While many are retired, those who choose to

work overseas are subject to double taxation and certain pension-related disadvantages. 25

Companies employing workers abroad often provide benefits to offset these disadvan-

tages. Even if you don’t ever work for a foreign-owned firm, or for a U.S. firm with sig-

nificant foreign investments, experts tell us that all organizations today are affected by the

global economy. Even small businesses are using foreign-made materials or equipment,

are competing with foreign firms, and are selling their products and services in foreign

markets. 26

As we discussed in Chapter 1, this inevitable globalization of the world’s business

presents challenges and opportunities for human resources professionals. The purpose of

this chapter is to describe and discuss the implications of this increasing globalization for

HR activities.

Business partnership

80 percent of Honda and Acuras are built in the U.S.

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W I L L I S , K A S S A N D R A 2 1 6 1 T S




1 / Human Resource Management and the Environment

HOW DO COMPANIES ENGAGE IN INTERNATIONAL COMMERCE? Organizations conduct international business in a variety of ways. Each of these forms

of international commerce has implications for human resource strategies and tactics. An

effective HR professional recognizes the range of choices that each of these international

business forms (or combinations of these forms) offers. In this section, we will review the

different ways firms may internationalize. Then we will describe some of the ways that HR

practices may facilitate and advance these business goals.

When a firm simply wants to sell its products and services in foreign marketplaces, it

may choose to export . Most companies that export do so in order to increase sales and rev- enues. For some companies, particularly companies with high research and development

costs, exporting is necessary to spread these costs over a larger sales volume. Companies

may also export to relieve excess capacity. Some companies export as a form of diversifi-

cation because they are concerned that their domestic markets may be maturing. Finally,

some companies export because they believe that they lack the necessary knowledge to

directly do business effectively on foreign shores. In this case, exporting may be the first

step toward a more aggressive international strategy. Baskin-Robbins followed this ap-

proach with its entry into Russia. In 1990, it began shipping ice cream to that country

from its company-owned plants in Texas and Canada. Over the next 5 years, the company

opened 74 retail outlets with Russian partners, carefully observing the likes and dislikes of

local consumers. Finally, in 1995, Baskin-Robbins opened its first, full-service ice cream

plant in Moscow. 27 Companies that choose to export may directly sell their products in a

foreign market, or they may do business through third parties that specialize in facilitating

importing and exporting, called intermediaries . There is little risk in exporting: relatively low investment is involved and a decision to

withdraw from a market can be made and executed very quickly. Exporting, however, has

several disadvantages, including the high cost of transportation and the difficulty of finding

good distributors. Tariffs and quotas are also major problems when goods or services enter

a country that is part of a regional pact or a free-trade area. For example, products created

within the European Union (EU) move from country to country within the Union tariff-

free. The same products and services imported from countries outside the Union typically

pay tariffs upon entry. This increases the cost of the product and often places “outside”

organizations at a competitive disadvantage. The banana trade provides an interesting

example. During the 1990s, when Caribbean bananas were exported to EU countries, they

were subject to tariffs and quotas. However, bananas grown in Martinique and Guadeloupe

were not subject to these tariffs because those particular islands were still provinces of

France and, therefore, enjoyed insider status within the EU. 28 The wars were officially

ended by treaty in 2001. 29

Similarly, extensive rules were required in order to regulate so-called screwdriver

plants in Mexico. Capitalizing on Mexico’s membership in the North American Free Trade

Agreement (NAFTA), companies in other parts of the world were shipping virtually fin-

ished goods to plants in Mexico where, typically, a screwdriver was the only tool needed

to complete the assembly. Then, the exporting country would assert that the product had

been “manufactured” in Mexico and, therefore, would qualify for favorable tariff treatment

within NAFTA. Since most of these goods ended up in the United States and Canada, these

NAFTA members were particularly worried about the loss of tariff revenues and the loss

of jobs to non-NAFTA countries whose goods might qualify for treatment as though they

had been created within the NAFTA region. As a result, NAFTA contains complex rules of

origin that specify how much and what type of assembly qualifies an item as having actu-

ally been produced within the NAFTA area. For example, NAFTA’s rules of origin specify

that for U.S. imports of Mexican peanuts or peanut products to qualify, 100 percent of the

peanuts must be Mexican-grown. The same applies for U.S. exports of peanuts to Mexico

(i.e., 100 percent of the U.S. peanuts must be U.S.-grown). 30 Similarly, to protect textile in-

dustry jobs, clothing and other textile products must use North American–produced fibers

in order to benefit from NAFTA’s preferential tariff treatment.

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