Human Resources in Health Care

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can see, two of the three classes of resources (organizational and human) are directly tied to the human resource management function. As Chapter 1 pointed out, the role of human resource management is to ensure that a company’s human resources provide a competitive advantage. Chapter 1 also pointed out some of the major competitive challenges that companies face today. These challenges require companies to take a proactive, strategic approach in the marketplace.

To be maximally effective, the HRM function must be integrally involved in the company’s strategic management process.2 This means that human resource managers should (1) have input into the strategic plan, both in terms of people-related issues and in terms of the ability of the human resource pool to implement particular strategic alternatives; (2) have specific knowledge of the organization’s strategic goals; (3) know what types of employee skills, behaviors, and attitudes are needed to support the strategic plan; and (4) develop programs to ensure that employees have those skills, behaviors, and attitudes.

We begin this chapter by discussing the concepts of business models and strategy and by depicting the strategic management process. Then, we discuss the levels of integration between the HRM function and the strategic management process in strategy formulation. Next, we explore the role of culture and talent as critical levers in the strategy implementation process. Then we review some of the more common strategic models and, within the context of these models, discuss the various types of employee skills, behaviors, and attitudes, and the ways HRM practices aid in implementing the strategic plan. Finally, we discuss the role of HR in creating competitive advantage.

What Is a Business Model? A business model is a story of how the firm will create value for customers and, more important, how it will do so profitably. We often hear or read of companies that have “transformed their business model” in one way or another, but what that means is not always clear. To understand this, we need to grasp a few basic accounting concepts.

First, fixed costs are generally considered the costs that are incurred regardless of the number of units produced. For instance, if you are producing widgets in a factory, you have the rent you pay for the factory, depreciation of the machines, the utilities, the property taxes, and so on. In addition, you generally have a set number of employees who work a set number of hours with a specified level of benefits, and although you might be able to vary these over time, on a regular basis you pay the same total labor costs whether your factory runs at 70% capacity or 95% capacity.

Second, you have a number of variable costs, which are those costs that vary directly with the units produced. For instance, all of the materials that go into the widget might cost a total of $10, which means that you have to charge at least $10 per widget, or you cannot even cover the variable costs of production.

Third is the concept of “contribution margins,” or margins. Margins are the difference between what you charge for your product and the variable costs of that product. They are

Source: Video produced for the Center for Executive Succession in the Darla Moore School of Business at the University of South Carolina by Coal Powered Filmworks

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called contribution margins because they are what contributes to your ability to cover your fixed costs. So, for instance, if you charged $15 for each widget, your contribution margin would be $5 ($15 price – $10 variable cost).

Fourth, the gross margin is the total amount of margin you made and is calculated as the number of units sold times the contribution margin. If you sold 1,000,000 units, your gross margin would then be $5,000,000. Did you make a profit? That depends. Profit refers to what is left after you have paid your variable costs and your fixed costs. If your gross margin was $5,000,000, and your fixed costs were $6,000,000, then you lost $1,000,000.

GM’S ATTEMPT TO SURVIVE Let’s look at how a business model plays out with the recent challenges faced by General Motors (GM). Critics of GM talk about the fact that GM has higher labor costs than its foreign competitors. This is true, but misleading. GM’s average hourly wage for its existing workforce is reasonably competitive. However, the two aspects that make GM uncompetitive are its benefit costs (in particular, health care) and, most important, the cost of its legacy workforce.

A legacy workforce describes the former workers (i.e., those no longer working for the company) to whom the firm still owes financial obligations. GM and the United Automobile Workers (UAW) union have negotiated contracts over the years that provide substantial retirement benefits for former GM workers. In particular, retired GM workers have defined benefit plans that guarantee a certain percentage of their final (preretirement) salary as a pension payment as long as they live; in addition, the company pays for their health insurance. The contract specifies that workers are entitled to retire at full pension after 30 years of service.

This might have seemed sustainable when the projections were that GM would continue growing its sales and margins. However, since the 1970s, foreign competitors have been eating away at GM’s market share to the extent that GM’s former 50% of the market has shrunk to closer to 20%. Since the 2008 economic crisis, the market itself has been shrinking, leaving GM with a decreasing percentage of a decreasing market. For instance, in December of 2005, GM sold 26% of the cars in the global market, but by 2015 that market share had shrunk to 11.2%.3 Thus, in addition to the legacy workforce, GM had a significant number of plants with thousands of employees that were completely unnecessary, given the volume of cars GM can produce and sell.4

If you look at Figure 2.1, you’ll see that the solid lines represent the old GM business model, which was based on projections that GM would be able to sell 4 million units at a reasonably high margin, and thus completely cover its fixed costs to make a strong profit. However, the reality was that its products didn’t sell at the higher prices, so to try to sell 4 million vehicles, GM offered discounts, which cut into its margins. When GM ended up selling only 3.5 million vehicles, and those were sold at a lower margin, the company could not cover its fixed costs, resulting in a $9 billion loss in 2008 (this is illustrated by the dotted blue line in the figure). So, when GM refers to the “redesigned business model,” what it is referring to is a significant reduction in fixed costs (through closing plants and cutting workers) to get the fixed-cost base low enough (the dotted brown line) to remain profitable while selling fewer cars at lower margins (again, the dotted blue line).

Figure 2.1 An Illustration of a Business Model for GM

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One can easily see how, given the large component that labor costs are to most companies, reference to business models almost inevitably leads to discussions of labor costs. These can be the high cost associated with current unionized employees in developed countries within North America or Europe or, in some cases, the high costs associated with a legacy workforce. For instance, the Big Three automakers have huge numbers of retired or laid-off workers for whom they still have the liability of paying pensions and health care benefits. This is a significant component of their fixed-cost base, which makes it difficult for them to compete with other automakers that either have fewer retirees to cover or have no comparable costs because their home governments provide pensions and health care. In fact, this changing business model at GM has driven it to locate more manufacturing outside of the United States.

What Is Strategic Management? LO 2-1 Describe the differences between strategy formulation and strategy implementation.

Many authors have noted that in today’s competitive market, organizations must engage in strategic planning to survive and prosper. Strategy comes from the Greek word strategos, which has its roots in military language. It refers to a general’s grand design behind a war or battle. In fact, Webster’s New American Dictionary defines strategy as the “skillful employment and coordination of tactics” and as “artful planning and management.”

Strategic management is a process, an approach to addressing the competitive challenges an organization faces. It can be thought of as managing the “pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole.”5 These strategies can be either the generic approach to competing or the specific adjustments and actions taken to deal with a particular situation.

First, business organizations engage in generic strategies that often fit into some strategic type. One example is “cost, differentiation, or focus.”6 Another is “defender, analyzer, prospector, or reactor.”7 Different organizations within the same industry often have different generic strategies. These generic strategy types describe the consistent way the company attempts to position itself relative to competitors.

However, a generic strategy is only a small part of strategic management. The second aspect of strategic management is the process of developing strategies for achieving the company’s goals in light of its current environment. Thus, business organizations engage in generic strategies, but they also make choices about such things as how to scare off competitors, how to keep competitors weaker, how to react to and influence pending legislation, how to deal with various stakeholders and special interest groups, how to lower production costs, how to raise revenues, what technology to implement, and how many and what types of people to employ. Each of these decisions may present competitive challenges that have to be considered.

Strategic management is more than a collection of strategic types. It is a process for analyzing a company’s competitive situation, developing the company’s strategic goals, and devising a plan of action and allocation of resources (human, organizational, and physical) that will increase the likelihood of achieving those goals. This kind of strategic approach should be emphasized in human resource management. HR managers should be trained to identify the competitive issues the company faces with regard to human resources and think strategically about how to respond.

Strategic human resource management (SHRM) can be thought of as “the pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals.”8 For example, many firms have developed integrated manufacturing systems such as advanced manufacturing technology, just-in-time inventory control, and total quality management in an effort to increase their competitive position. However, these systems must be run by people. SHRM in these cases entails assessing the employee skills required to run these systems and engaging in HRM practices, such as selection and training, that develop these skills in employees.9 To take a strategic approach to HRM, we must first understand the role of HRM in the strategic management process.

Strategic human resource management (SHRM) A pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals.

COMPONENTS OF THE STRATEGIC MANAGEMENT PROCESS

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LO 2-2 List the components of the strategic management process.

The strategic management process has two distinct yet interdependent phases: strategy formulation and strategy implementation. During strategy formulation, the strategic planning groups decide on a strategic direction by defining the company’s mission and goals, its external opportunities and threats, and its internal strengths and weaknesses. They then generate various strategic alternatives and compare those alternatives’ ability to achieve the company’s mission and goals. During strategy implementation, the organization follows through on the chosen strategy. This consists of structuring the organization, allocating resources, ensuring that the firm has skilled employees in place, and developing reward systems that align employee behavior with the organization’s strategic goals. Both of these strategic management phases must be performed effectively. This process does not happen sequentially. As we will discuss later with regard to emergent strategies, this process entails a constant cycling of information and decision making. Figure 2.2 presents the strategic management process.

Strategy formulation The process of deciding on a strategic direction by defining a company’s mission and goals, its external opportunities and threats, and its internal strengths and weaknesses.

Strategy implementation The process of devising structures and allocating resources to enact the strategy a company has chosen.

In recent years organizations have recognized that the success of the strategic management process depends largely on the extent to which the HRM function is involved.10

LINKAGE BETWEEN HRM AND THE STRATEGIC MANAGEMENT PROCESS The strategic choice really consists of answering questions about competition—that is, how the firm will compete to achieve its mission and goals. These decisions consist of addressing the issues of where to compete, how to compete, and with what to compete, which are described in Figure 2.3.

Figure 2.2 A Model of the Strategic Management Process

Figure 2.3 Strategy—Decisions about Competition

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Although these decisions are all important, strategic decision makers often pay less attention to the “with what will we compete” issue, resulting in poor strategic decisions. For example, PepsiCo in the 1980s acquired the fast-food chains of Kentucky Fried Chicken, Taco Bell, and Pizza Hut (“where to compete” decisions) in an effort to increase its customer base. However, it failed to adequately recognize the differences between its existing workforce (mostly professionals) and that of the fast-food industry (lower-skilled people and high schoolers) as well as its ability to manage such a workforce. This was one reason that PepsiCo, in 1998, spun off the fast-food chains. In essence, it had made a decision about where to compete without fully understanding what resources would be needed to compete in that market.

Boeing illustrates how failing to address the “with what” issue resulted in problems in its “how to compete” decisions. When the aerospace firm’s consumer products division entered into a price war with Airbus Industrie, it was forced to move away from its traditional customer service strategy toward emphasizing cost reduction.11 The strategy was a success on the sales end as Boeing received large numbers of orders for aircraft from firms such as Delta, Continental, Southwest, and Singapore Airlines. However, it had recently gone through a large workforce reduction (thus, it didn’t have enough people to fill the orders) and did not have the production technology to enable the necessary increase in productivity. The result of this failure to address “with what will we compete” in making a decision about how to compete resulted in the firm’s inability to meet delivery deadlines and the ensuing penalties it had to pay to its customers. The end result is that after all the travails, for the first time in the history of the industry, Airbus sold more planes than Boeing in 2003. Luckily, Boeing was able to overcome this stumble, in large part because of a number of stumbles on the part of its chief rival, Airbus. However, Boeing has faced difficulties as its new Dreamliner was grounded because of fires starting in the wiring.

ROLE OF HRM IN STRATEGY FORMULATION LO 2-3 Discuss the role of the HRM function in strategy formulation.

As the preceding examples illustrate, often the “with what will we compete” question presents ideal avenues for HRM to influence the strategic management process. This might be through either limiting strategic options or forcing thoughtfulness among the executive team regarding how and at what cost the firm might gain or develop the human resources (people) necessary for such a strategy to be successful. For example, HRM executives at PepsiCo could have noted that the firm had no expertise in managing the workforce of fast-food restaurants. The limiting role would have been for these executives to argue against the acquisition because of this lack of resources. Alternatively, they might have influenced the decision by educating top executives as to the costs (of hiring, training, and so on) associated with gaining people who had the right skills to manage such a workforce.

A firm’s strategic management decision-making process usually takes place at its top levels, with a strategic planning group consisting of the chief executive officer, the chief financial officer, the president, and various vice presidents. However, each component of the process involves people-related business issues. Therefore, the HRM function needs to be involved in each of those components. One recent study of 115 strategic business units within Fortune 500 corporations found that 49 to 69% of the companies had some link between HRM and the strategic planning process.12 However, the level of linkage varied, and it is important to understand these different levels.

Four levels of integration seem to exist between the HRM function and the strategic management function: administrative linkage, one-way linkage, two-way linkage, and integrative linkage.13 These levels of linkage will be discussed in relation to the different components of strategic management. The linkages are illustrated in Figure 2.4.

Figure 2.4 Linkages of Strategic Planning and HRM

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Administrative Linkage LO 2-4 Describe the linkages between HRM and strategy formulation.

In administrative linkage (the lowest level of integration), the HRM function’s attention is focused on day-to-day activities. The HRM executive has no time or opportunity to take a strategic outlook toward HRM issues. The company’s strategic business planning function exists without any input from the HRM department. Thus, in this level of integration, the HRM department is completely divorced from any component of the strategic management process in both strategy formulation and strategy implementation. The department simply engages in administrative work unrelated to the company’s core business needs.

One-Way Linkage In one-way linkage, the firm’s strategic business planning function develops the strategic plan and then informs the HRM function of the plan. Early in the history of SHRM, people believed this level of integration constituted strategic HRM—that is, the role of the HRM function is to design systems and/or programs that implement the strategic plan. Although one-way linkage does recognize the importance of human resources in implementing the strategic plan, it precludes the company from considering human resource issues while formulating the strategic plan. This level of integration often leads to strategic plans that the company cannot successfully implement.

Two-Way Linkage Two-way linkage allows for consideration of human resource issues during the strategy formulation process. This integration occurs in three sequential steps. First, the strategic planning team informs the HRM function of the various strategies the company is considering. Then HRM executives analyze the human resource implications of the various strategies, presenting the results of this analysis to the strategic planning team. Finally, after the strategic decision has been made, the strategic plan is passed on to the HRM executive, who develops programs to implement it. The strategic planning function and the HRM function are interdependent in two-way linkage.

Integrative Linkage Integrative linkage is dynamic and multifaceted, based on continuing rather than sequential interaction. In most cases the HRM executive is an integral member of the senior management team. Rather than using an iterative process of information exchange, companies with integrative linkage have their HRM functions built in to the strategy formulation and implementation processes. It is this role that we will discuss throughout the rest of this chapter.

Thus, in strategic HRM, the HRM function is involved in both strategy formulation and strategy implementation. The HRM executive gives strategic planners information about the company’s human resource capabilities, and these capabilities are usually a direct function of the HRM practices.14 This information about human resource capabilities helps top managers choose the best strategy because they can consider how well each strategic alternative would be implemented. Once the strategic choice has been determined, the role of HRM changes to the development and alignment of HRM practices that will give the company employees having the necessary skills to implement the strategy.15 In addition, HRM practices must be designed to elicit actions from employees in the company.16 One recent study found that strategic HR functions were positively

SOURCE: Adapted from K. Golden and V. Ramanujam, “Between a Dream and a Nightmare: On the Integration of the Human Resource Function and the Strategic Business Planning Process,” Human Resource Management 24 (1985), pp. 429–51.

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related to firm performance, but only when those firms had structures and systems in place to leverage the input of their employees.17 In the next two sections of this chapter, we show how HRM can provide a competitive advantage in the strategic management process.

Strategy Formulation Five major components of the strategic management process are relevant to strategy formulation.18 These components are depicted in Figure 2.5. The first component is the organization’s mission. The mission is a statement of the organization’s reason for being; it usually specifies the customers served, the needs satisfied and/or the values received by the customers, and the technology used. The mission statement is often accompanied by a statement of a company’s vision and/or values. For example, Table 2.1 illustrates the mission and values of Merck & Co., Inc.

Figure 2.5 Strategy Formulation

SOURCE: Adapted from K. Golden and V. Ramanujam, “Between a Dream and a Nightmare,” Human Resource Management 24