dq Question

Learning Objectives

After reading this chapter, you should be able to

• Identify the dimensions of strategic HR planning, including environmental scanning, labor mar- ket analysis and forecasting, internal analysis and forecasting, gap analysis, HR plan and strategy development, and HR strategy implementation and assessment

• Describe the strategic HR planning process and recognize its iterative nature

• Link strategic HR planning to the HRM process and to the organization’s strategic management and decision-making processes

• Apply strategic HR planning to various organizational challenges and to such managerial oppor- tunities and challenges as succession and career planning, mergers and acquisitions, outsourcing, and downsizing

• Assess and refine your skills as a strategic planner

• Recognize the financial value of strategic HR planning

Strategic HR Planning

2

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CHAPTER 2Section 2.1 The Big Picture: An Organization’s Strategic Planning Process

One of the important components of the strategic HRM process is planning for the human side of the organization’s operations. This planning requires accurate pro-jections of how many employees the organization will need to perform its future activities and operations efficiently. It is a disadvantage to have too many employees: it can drain the organization’s scarce financial resources, which may be needed for other important functions and uses. It can also result in less challenging and fulfilling jobs, which can lower employee morale. On the other hand, having insufficient employees can lead to employee burnout and compromise quality and customer service. Thus, effec- tive HR planning can be critical for organizational profitability; for efficiency and effec- tiveness; and for employee motivation, morale, retention, productivity, and performance quality. Numerous studies indicate that the role of HR planning is critical. HR planning includes forecasting future labor supply and demand in order to ensure that an organi- zation has access to the knowledge, skills, and abilities it needs at the right times these human capacities are needed. The main approaches to strategic HR planning are environ- mental scanning, labor market analysis and forecasting, internal analysis and forecasting, and gap analysis.

The purpose of this chapter is to introduce the strategic HR planning process and to link this process to the organization’s strategic management and decision-making processes. The first part of the chapter introduces the HRM function of strategic HR planning. The balance of the chapter then applies these concepts to various organizational and manage- rial opportunities and challenges. Examples include tackling changes in the political, eco- nomic, and sociocultural environment through initiatives such as succession and career planning, mergers and acquisitions, outsourcing, and downsizing.

2.1 The Big Picture: An Organization’s Strategic Planning Process

In general, a strategy is a systematic plan to achieve a goal. Strategy is an organization’s long-term plan for competing effectively in a specific market by meeting customers’ needs as well as stakeholders’ needs. Strategies operate at a number of levels within an organization, including corporate, business unit, and operational strategy (Dye, 2006).

1. Corporate strategy outlines the big picture—i.e., the goals and direction of the whole organization. Corporate goals and strategies tend to be broad and span several years (usually five to ten). A example of a corporate goal is increasing market share by 10%. Examples of corporate strategies to achieve kind of this goal include, but are not limited to, acquiring other businesses, developing new products, or even modifying current products.

2. Business unit strategies tend to focus more on a particular segment of business, such as a product or a group of related products or services, a market segment, a geographic location, a profit center, or a department. They also tend to have a shorter horizon (usually less than five years).

3. Operational goals and strategies focus on the organization’s short-term, day-to-day operations. They may include weekly production schedules, meeting delivery and payment due dates, workload distribution to individual employees, and so on.

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

A strategic plan is usually set by an organization to address its position in relation to its competitors. The strategic plan outlines the steps required for achieving organizational goals and objectives. A strategic plan serves as a foundation for the whole organization so that each person can have a clear understanding of the organiza- tional vision and know what is expected of him or her. More- over, this plan also assists man- agers in such processes as prob- lem solving, decision making, market planning, and design- ing business unit and opera- tional goals and strategies.

An organization’s ability to accomplish a given strategic plan depends heavily on hav- ing the right people in the right place at the right time, which is the responsibility of HRM. Thus, it is critical that HRM professionals be informed by and aligned with the organization’s strategic planning process. This information and alignment enable HRM professionals to manage employee-related matters at the workplace—including hiring, firing, offering compensation and benefit packages, performance management, safety and wellness, and training and development. HRM professionals should also be involved in the development of the overall organization’s strategy since they are responsible for determining what specific skills are available. They are also responsible for searching for, attracting, hiring, and retaining employees with those skills (Offstein, Gnyawali, & Cobb, 2005; Werbel & DeMarie, 2005). HRM also has an important role in allowing employees to contribute effectively to the overall success of the organi- zation. When HRM informs and is informed by the organization’s strategic planning process, it can therefore add value by improving the organization’s performance and effectiveness.

2.2 The Strategic HR Planning Process

HR planning is the process of managing an organization’s most valuable asset—its people—so that there are no shortages or surpluses of employees in the organiza-tion. HR planning helps managers deploy employees effectively, in a way that ensures that the best fit exists between employees and jobs, for the purpose of accom- plishing organizational goals and objectives. HR planning can be conducted strategically when it is connected to the organization’s strategic planning process—a process some- times called strategic human resources management (SHRM).

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Strategy is an approach that an organization chooses in order to achieve its goals.

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

The alignment of HR planning and organizational strategy can occur in two related stages: strategy formulation and strategy implementation. HR planning contributes to the formulation of organizational strategy by enhancing the ability of an organization to pursue the agreed-upon strategy, given the number and capabilities of its employees. HR planning also helps identify how an organization can create a competitive advan- tage and achieve its goals by utilizing available workforce talents and skills. After strat- egy formulation comes the implementation stage, during which resource-allocation decisions are made regarding an organization’s processes, structure, and human assets (Brown, 2001).

HR planning and organizational strategic planning should not be treated as separate activ- ities: they must have a mutual relationship for their integration to be valuable. Similarly, HR planning should be guided by organizational goals and strategies and should inform each and every one of those processes; the various HRM processes can then be conducted effectively. The strategic HR planning process, as a component of strategic HRM, is sum- marized in Figure 2.1. The six factors of the strategic HR planning process are discussed in detail in this section:

1. environmental scanning 2. labor market analysis and forecasting 3. internal analysis and forecasting 4. gap analysis 5. developing HR plans and strategies 6. HR strategy implementation and assessment

1. Environmental scanning

As part of the HR planning process, environmental scanning refers to identifying and examining the organization’s external environment in order to anticipate and identify positive or negative factors that might influence the organization. Positive factors include any prospects that the market offers the organization. On the other hand, negative fac- tors include anything that might pose a threat to the organization’s growth or prosperity. Both positive and negative factors are of extreme significance to the strategic HR plans that drive the entire organization. The more effectively HR managers scan the environ- ment and accurately understand the external factors surrounding the organization, the more effective their decision-making process will become. Combined with effective deci- sion making, early scanning and problem detection ultimately result in the organization’s transforming problems into opportunities.

Environmental scanning has a direct impact on HR decisions as each organization strives to select the best candidates for the job from the same labor market. This striving is a source of aggressive competition with other organizations in similar business fields. Some of the factors that form an organization’s environment include governmental influences, economic conditions, geographic characteristics, competitive forces, and variations in workforce patterns. All the following factors must be carefully considered and examined before an organization undergoes any strategic planning:

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

Figure 2.1: The strategic HR planning process

Developing HR plans and strategies

Gap analysis

HR strategy implementation and assessment

Labor market analysis and forecasting

Internal analysis and forecasting

Environmental scanning

Strategic HR

planning

Job analysis and job design

Attraction and recruitment of

talent

Selection and job fit

Performance appraisal/

management

Training and development

Compensation

Benefits and benefit

administration

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

• Government laws and regulations directly impact the labor market, and therefore impact HR professionals in their decision-making process. Tax legislation, pen- sion plans, social security, retirement plans and funding options, tax benefits, and other policies, regulations, and laws are all prominent examples of governmental factors that must be considered in the HR planning process (Geissler, 2005).

• Economic conditions surrounding the organization have a similar impact on the process of HR strategic planning and goal-setting. Economic factors include pros- perity and recession cycles, inflation, and interest-rate fluctuations. These factors directly affect the unemployment rate and hence qualified candidates’ availabil- ity for fulfilling the required jobs (Mandel, 2006).

• Geographic characteristics refer to variations in population over certain areas due to changing migration patterns, which reflect on the availability of labor in these areas and therefore on the HR planning and decision-making process. Competi- tion is also related to geographic location. The introduction of new competition in a particular geographical location can change the entire HR strategic plan of the organization as it limits the supply of labor in this particular region.

• Variations in workforce patterns can also affect the availability of certain skill sets in the market. These variations must therefore be closely monitored to yield bet- ter strategic decisions. Some of the factors that create or influence labor patterns in a particular field or specialization are the aging of the workforce; considerable shifts in diversity; work-life balance concerns, especially for female workers; and the availability of outsourcing options to other countries or regions.

In the context of HRM, the outcome of effective environmental scanning is a starting point of a process commonly referred to as a SWOT analy- sis. SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal to the organization, while opportunities and threats are external fac- tors. The external focus of environmental scanning facilitates the analysis of those external opportu- nities and threats within the organization’s legal, economic, geographic, and social environments.

2. Labor market analysis and forecasting

Two key factors for organizational survival and growth are acquiring and retaining a competent workforce to carry out the organization’s opera- tions effectively and efficiently, thereby provid- ing the organization with a competitive edge. For this reason, HR planners must exert every possible effort to analyze the market—forecast- ing and correctly identifying the organizational labor needs for future expansion prospects and projected market demands.

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Government laws and regulations impact the labor market in a variety of ways that HR planning must take into account.

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

There are two methods to forecast labor demand: qualitative and quantitative forecasts. Each method has its advantages and disadvantages. However, a combination of the two is often preferred for an effective forecasting process. The qualitative method can be either centralized or decentralized. As the name implies, the centralized approach focuses on the present business status of one unit or function within the organization and then projects or generalizes its staffing needs and requirements to the rest of the organization. On the other hand, the decentralized approach allows the functional management of each unit to formulate its own staffing needs. Then different requirements are eventually combined to build an overall forecast of the organizational staffing needs, which in turn are integrated into the strategic HR planning process.

In contrast, the quantitative method uses past trends and market patterns to forecast the future. This technique is also known as trend analysis. Some of the factors used in the extrapolation process are production rate, revenue, and number of employees for each product. Six main steps govern a successful past–future trend analysis:

1. HR identifies the right business criteria that directly relate to the size of the labor force.

2. A historical graph is created from the influ- ential business criteria versus the size of the labor force, further iso- lating the relationship.

3. The annual average output is calculated for every employee.

4. The trend is deter- mined, based on the previous analysis.

5. Any required adjust- ments are incorporated into the trend, taking into consideration past and future factors.

6. The final step is to expand the trend to the targeted future year (DeLuca, 1988).

Other quantitative techniques include regression analyses that use past information and relate it to success metrics within the organization for future projections.

3. Internal analysis and forecasting

Internal analysis and forecasting refers to HRM attempts to identify future tasks that the organization will need to perform and match with the skill sets of its currently available employees, so that they can fulfill strategic plans and future objectives. This analysis can

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HR managers attempt to identify future tasks that will need to be performed by the organization in order to fulfill strategic plans and future objectives.

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

eventually become integral for the strengths component and weaknesses component of the organization’s SWOT analysis, described earlier. This analysis has two steps:

1. In order to forecast future required functions, HR’s initial step is to conduct an audit of the functions and tasks currently performed within the organization. Most of the audit information can be obtained from current staff members and company documents.

2. The next step is to conduct audits on available employees and their potential capa- bilities and skills.

From these two steps, HR can determine future recruiting and selection requirements as they compare the current workforce capabilities with the future forecasted tasks and responsibilities (McGraw, 2006).

4. Gap analysis

Gap analysis comes after conducting an environmental scan as well as external and inter- nal labor analyses—the gap analysis is based on the scan’s and analyses’ results. The pur- pose for the gap analysis is to determine the discrepancy between the current status of an organization and its desired future status. Accordingly, the purpose of a workforce gap analysis is to analyze the difference or the gap by comparing the current workforce level of proficiency against the level of proficiency required and identified by an organization for each of its core competencies.

A workforce gap analysis is based on many types of information, including information produced by the environmental scan; labor market analysis and forecasting; internal analysis and forecasting; strengths, weaknesses, opportunities, and threats (SWOT); and demographics analysis. A workforce gap analysis also depends on where the organization wants to be in the future. Thus, it relies on information regarding the competencies and proficiency levels an organization requires to achieve its goals.

After an organization assesses the gaps, it develops a strategy to help it close workforce gaps and achieve its vision and objectives. Some examples of gap-closing strategies are suc- cession planning, knowledge transfer, and training and professional development. There are many important considerations in the choice of an appropriate gap-closing strategy, including economic factors, workforce and resources availability, and leadership (“Gap analysis,” 2011). Gap-closing strategies are discussed in detail in the following section.

5. Developing HR plans and strategies

HR professionals develop plans and strategies based on the results produced by the gap- analysis process. As mentioned above, the purpose of these plans is to close existing gaps by matching available labor supply with the expected demand through workforce realign- ment—enabling organizations to accomplish their goals.

Whether the analysis reveals an HR shortage or a surplus, various approaches can be pur- sued to deal with each type of discrepancy. For example, HR professionals can tackle an HR shortage by hiring more employees, using overtime, outsourcing work, introducing

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

initiatives that can reduce absenteeism or turnover, adding temporary or part-time work- ers, or reinstating recent retirees (Koene & Riemsdijk, 2005; Weatherly, 2005). Each option has significant implications on costs, revenues, employee morale, and organizational cul- ture—all of which should be taken into consideration.

On the other hand, an HR surplus can be addressed through workforce reduction and downsizing, attrition and hiring freezes, voluntary separation programs, or layoff prac- tices. Regardless of the method used, employers should make sure that they treat dis- placed workers with dignity and respect. This can be accomplished through offering outplacement services such as personal career counseling, interviewing workshops, and referral assistance. It is worth mentioning that outplacement services are considered one of the most effective factors toward smoother workforce reductions.

Workforce reduction practices can be a result of job eliminations due to the closing of offices, plants, or operations. According to the Worker Adjustment and Retraining Notification (WARN) Act, organizations are obligated to provide employees with a 60-day advance noti- fication of layoffs or plant closings. However, this does not apply to employers with fewer than 50 employees, nor does it apply to part-time or seasonal workers (Ditelberg, 2002).

Workforce downsizing is the process of reducing the workforce through eliminating jobs, which cuts costs and improves efficiency. Downsizing can take several forms, including attrition, early retirement buyouts, and layoffs. Downsizing may be a good option as a short- term solution for lowering costs. However, it can have such disadvantages as the overbur-

dening of surviving employees and the loss of their trust and commitment, which can reduce productivity. Organizational reputation can also be compromised, leading to potential long-term losses in shareholder value (Cascio, 2002).

Attrition refers to reducing the number of employees by not replacing the ones who leave. As mentioned earlier, attrition can be another form of downsizing, though it does not include the need for layoffs. When combined, attrition and hiring freezes constitute a feasible long-term solution for HR surpluses.

Voluntary separation programs are also a form of downsizing. In this approach, employers offer senior employees severance and benefits payments, such as early retirement buyouts, to persuade them to retire or leave early. Voluntary

separation programs are another viable approach to reducing workforce size without hav- ing to lay off or fire employees. However, the economic downturn and significant losses of value in 401K and other retirement-saving portfolios will likely discourage many workers from retiring early unless the offered severance packages are substantial.

Layoffs can be either permanent employment termination or temporary employment sus- pension, in which employees can go back to work when the business improves. Although

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Downsizing is one way to lower costs, but it may lead to a loss of employee trust or compromise an organization’s reputation.

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CHAPTER 2Section 2.2 The Strategic HR Planning Process

firms are not obliged to offer severance packages to laid-off workers, some employers do. When organizations plan for layoffs, they must take great care to avoid any types of dis- crimination that violate equal employment opportunity laws. These laws are discussed in detail in chapters 4 and 5.

6. HR strategy implementation and assessment

After an organization goes through the analysis process, it will likely end up with a range of possibilities to choose from. At this point, input from line managers, employ- ees, customers, and other stakeholders may add to the number of viable options an organization has.

The choice of HR strategy will depend on many factors that can also be used as guide- lines for its implementation and criteria for its assessment. These factors include imple- mentation costs and relationship with the organization’s strategic plan, as well as how it will affect other significant organizational performance criteria. HR strategies have to be assessed and evaluated in the context of corporate, business unit, and operational strate- gies so that it is possible to determine the effectiveness of such strategies as well as HR’s contribution to an organization’s success. After all, HR planning’s major goal is the identi- fication of the ideal number of workers an organization needs to be able to meet the needs of internal as well as external customers.

HR performance and effectiveness are also referred to as HR metrics. Some of the meth- ods used to measure and assess HR metrics include return on investment (ROI), economic value added (EVA), the balanced scorecard, benchmarking, and HR audit. These HR met- rics can be used to assess the efficiency and effectiveness of HR functions by measuring a number of factors—including cost per hires, HR expenses, training ROI, absenteeism and turnover rates, and “softer” dimensions such as employee satisfaction and engagement. In addition, these metrics can also gauge how well HR functions are developing orga- nizational competencies—for example by measuring the revenue factor or defects rate (Lawler, Levenson, & Boudreau, 2004; Lockwood, 2006).

ROI is a financial measure that evaluates the efficiency of an investment. It can be used to measure the costs of HR activities, which are considered investments, and the length of time needed for these activities to pay off. ROI can be measured by determining the actual and prospective costs and benefits, then dividing the total value of benefits by the total value of costs.

EVA is a measure of organizational financial performance. It is calculated by deducting the cost of capital from the operating profit. Basically, the cost of capital is the sharehold- ers’ required return. Thus, in order for an organization to create wealth for its sharehold- ers, it must add value: the cost of capital. To maximize shareholder value, EVA can be used to assess HR investments in their own right or in comparison to alternative investments.

The balanced scorecard also measures an organization’s financial performance. However, it also measures other strategic performance factors—such as internal business processes, customer service, and learning and growth. The purpose of the balanced scorecard is to align organizational activities, including HR, with strategic objectives.

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CHAPTER 2Section 2.3 Linking Strategic HR Planning to the HRM Process

Benchmarking refers to comparing organizational performance metrics against those of other organizations. This comparison can be applied to the HR department as well, by comparing performance measures with those of other HR departments in other organiza- tions across various strategic HRM processes. This process can also be done within the same department by comparing the current departmental ratios and measures with those of previ- ous years (Cornell, 2005; Reich- held & Rogers, 2005).

An HR audit is a tool for orga- nizations to diagnose the current status of HRM through assess- ing HR policies and the degree to which they fit organizational strategies. HR policies are as- sessed by evaluating the organi- zational impact of HR activities in each of the HR areas, which include staffing, compensation, performance management, and training and development. Through the assessment of HR activities, organizations are able to detect areas for improvement (Olalla & Castillo, 2002).

2.3 Linking Strategic HR Planning to the HRM Process

As was mentioned in previous sections, HR acts as a partner in the organization’s strategic planning process, which involves setting the organizational mission, vision, goals, and strategies. The organization’s strategic planning process then guides the HR planning process, including conducting the environmental analysis and analyzing and forecasting supply and demand for internal and external labor. Based on the analysis results, HR is now able to assess the current status of the organization and for- mulate the strategies needed to move the organization from its current status to its future desired one. These strategies are then implemented, evaluated, and assessed against the overall organizational strategic plan for the purpose of measuring their contribution to the organization’s overall success.

As shown in Figure 2.1 and discussed in chapter 1, the strategic HRM process entails job analysis and design, recruitment, selection, performance appraisal, training and develop- ment, compensation, and benefits administration. To improve organizational performance, each of these functions should be thoroughly linked with HR planning. For example, the governmental influences, economic conditions, geographic characteristics, competitive forces, and variations in workforce patterns can be identified in the environmental scan- ning stage of HR planning. These factors can then directly inform the design of compensa- tion and benefits packages to attract and retain the right employees. Along with gap analy- sis, internal and external labor supply and demand can be analyzed and forecast—directly informing job analysis and design, recruitment, selection, training, and development. This process secures critical workforce competencies and optimizes the organization’s skill set.

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An HR audit is an organizational tool for assessing HR policies and evaluating the organizational impact of HR activities.

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CHAPTER 2Section 2.3 Linking Strategic HR Planning to the HRM Process

A MOMENT IN THE LIFE OF AN HR MANAGER ”Are you a strategic HR planner?”

Strategic HR planning can be challenging in many ways; three ways particularly stand out. First, the lack of information can sometimes make environmental scanning; internal and external labor sup- ply and demand analysis; and strategy formulation, implementation, and assessment seem like a shot in the dark. This is not to say that HR managers cannot find the information they need to make decisions. On the contrary, there is an overabundance of information, but there’s rarely an accurate, systematic way to assess its accuracy or relevance.

Second, strategic HR planning involves a significant amount of uncertainty: even if you assume you have all the information you need (which is rarely the case), the information will likely be irrelevant or obsolete by the time you incorporate it into your strategic plan because of the external and inter- nal environment’s rate of change. In that respect, HR planning often resembles a leap of faith rather than a science.

Third, because of the two challenges above, many managers view strategic HR planning as an art that is learned through years of experience. They approach this critical aspect of their jobs using their intuition or gut feeling. As you can imagine, any systematic approach to strategic planning often meets resistance. Some of that resistance is because of a genuine belief that HR’s theoretically “cleaner” approaches do not really work in real life. However, at many times, resistance emerges because of fear that one’s experience will become dispensable or obsolete, to perceptions of loss of power and control, and to consequent unwillingness to collaborate and share information.

Strategic HR planning informs and is informed by the organizational strategic planning process; therefore, the challenges outlined above can hinder the strategic HRM process. Most strategic HRM initiatives have a relatively long lead time. For example, to hire and retain the best and most relevant talent, HR planners need time to analyze the market and the environment, design jobs and compensation packages, recruit, select, and train. HR planning becomes deficient when the orga- nization’s decision makers do not have a clear strategic plan and important decisions are not well informed and are made too hastily. HR then has to simply respond to the communicated needs of various departments for staff, without having adequate time to strategically plan how to fill those openings with the best possible candidates or consider other options such as training or resolving performance deficiencies in existing staff.

Both in HR and in other organizational functions, lack of information, uncertainty, and resistance to systematic and collaborative approaches can hinder strategic planning. In turn, deficient strategic planning reduces HR’s ability to assess or compare the value of its various initiatives. For example,

In turn, various HRM processes can provide valuable feedback for subsequent cycles of HR planning. For example, performance appraisal results can be used to improve the quality of HR planning. If employees appear to be performing below expectations, this appearance may indicate that additional staffing, training, or motivation should be incor- porated in the next HR planning cycle. Unsuccessful training may signal a larger gap in competencies and skills than originally anticipated, which may make it necessary to expe- dite hiring of the requisite capabilities, rather than attempting to develop them internally. Overall, HR planning can be integrated within the strategic HRM process, and in turn within the organizational strategic processes. This integration can help the organization achieve its goals and objectives by enhancing employee work quality, efficiency, produc- tivity, and the levels of commitment, satisfaction, and loyalty.

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CHAPTER 2Section 2.3 Linking Strategic HR Planning to the HRM Process

managers of various functions may be unwilling to get on board with the performance appraisal system and provide accurate performance ratings. How can HR then assess the quality of the candidates hired from a particular source, a par- ticular procedure, or the effi- cacy of the training interven- tions implemented? Similarly, if HR resists the use of metrics, how can senior management compare investments in HR initiatives to alternative invest- ments competing for the same resources—such as invest- ments in buildings, machinery, equipment, or technology?

These challenges are described in more detail in the next section. However, by now you are prob- ably wondering, “Is strategic planning even possible under these types of circumstances?” The answer is a resounding “Yes.” While there is significant uncertainty in the process, there are a few good rules to follow. Most of them were described earlier, but the exercises below should help you reinforce those concepts.

WEB LINKS

Edinburgh Business School Strategic Planning Quiz: http://www.ebsglobal.net/ programmes/strategic-planning-quiz

This exercise gives you the opportunity to make a typical strategic HR decision: hiring a new CEO. This decision involves determining the right skill set for the position and then dealing with uncer- tainty or lack of information.

Holding Firm to Ethics (Westcott & Freedman, 2009): http://www.hreonline.com/HRE/ story.jsp?storyId=240869275

This article highlights the integral role of HR in preparing expatriates to deal with ethical dilemmas as they tackle global assignments. As you read this article, consider how you, as someone who is now more knowledgeable about strategic HR planning, would anticipate the types of challenges expatriates are likely to face and how you would prepare them these challenges.

Develop a Human Resources Department Business Plan: http://humanresources.about .com/od/humanresourcesstrategic/qt/Human-Resources-Department-Business-Plan.htm

This how-to guide provides a wealth of practical information and resources for strategic HR planning.

Colorblind/The Image Bank/Getty Images

Many managers view strategic planning as an art that is learned through years of experience.

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

2.4 Opportunities, Challenges, and Recent Developments

In this section, you will learn to apply strategic HR planning to various organizational challenges and to such managerial opportunities and challenges as succession and career planning, mergers and acquisitions, outsourcing, and downsizing. Political, economic, and sociocultural dynamics

Political dynamics can have a direct impact on HR planning. Many countries have unsta- ble political and legal systems; accordingly, their HR-related laws governing wages, employee privacy, workplace safety, or labor unions are different from those in the United States. When an organization plans operations in other countries, HR has an important role in conducting accurate political analysis, forecasting political trends, and helping the organization conform to the different political and legal environments (Stolz, 2006).

Economic dynamics also represent a challenge to HR professionals. Due to the current economic downturn, organizations are trying to cut costs through layoffs and hiring freezes, reducing or suspending employee training and program development, cutting salaries, or eliminating pay raises (to name just a few methods). These actions can further exacerbate the challenges HR faces in creating and implementing effective plans to hire the right people and motivate and retain employees (Wyatt, 2009).

Sociocultural dynamics are also one of the challenges employers have to face, since these dynamics have an effect on the workforce. For example, there are an increasing number of immigrants and percentage of minorities in the United States In addition, the fact that some minority groups have higher birthrates than Caucasian Americans further contributes to the increase in the percentage of minorities. It’s worth noting that Caucasian Americans are now outnumbered by minorities in California, Texas, New Mexico, Hawaii, and Wash-

ington, D.C. Employers now face the challenges of skilled and unskilled labor shortages due to there being more restric- tions on immigrants (“Minor- ity report,” 2011; Toossi, 2004). Furthermore, the increase in the number of immigrants has led to an increase in cultural diversity. Thus, employers now face the challenge of develop- ing and managing multicul- tural organizations.

Cultural changes also affect how employees view work- related issues, such as dealing with work assignments and different styles of leadership. HR professionals must keep in

John Feingersh/Iconica/Getty Images

Managing sociocultural dynamics amongst employees is a task faced by HR professionals.

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

mind all these differences in attitudes and beliefs when they develop policies and proce- dures as part of the HR planning process.

Age distribution is another factor affecting the workforce. Baby boomers are expected to retire soon. Accordingly, employers will face the challenge of replacing those experienced and skilled workers with a younger generation of employees. To further exacerbate the chal- lenge, these younger workers are generally less educated. U.S. workers’ levels and quality of education are expected to decline, which may render the United States less prepared for global competition. On the other hand, as mentioned earlier, there is the possibility that some of the baby boomers may stay in the workforce because of financial needs (Labbe, 2007).

Gender distribution is another demographic change affecting the workforce. The percent- age of women in the workforce has been increasing in the past few years; they now rep- resent nearly half of the labor market. In addition, female educational attainment has also increased: women now constitute more than half of college graduates. A great num- ber of women in the labor force are also the main income earners in their households or contribute significantly in dual-income households. The rising numbers of single-parent households and dual-career couples has promoted the need for employers to incorporate family-friendly policies in their strategic planning to help solve the challenge of balanc- ing work and family. Examples include benefits such as flexible work hours, childcare services, and paid family leave. Moreover, attracting, motivating, and retaining their best talent requires employers to ensure that women are treated fairly in career advancement and compensation (Schramm, 2006).

Employees’ expectations have also changed. Due to increased awareness of work-related rights, employees expect to be offered equal employment opportunities as well as equal treatment for men and women, a safe workplace, and privacy protection, to name just a few expectations. Additionally, employees now demand that organizations provide jobs conducive to work-life balance and fulfillment at work. Employers should be able to adapt to these changes by developing policies and procedures that are mutually beneficial to both organizations and workers (Iverson, 2000).

Technology and computer-based HR planning

Technology grows extensively and on daily basis, and it is being integrated into all aspects of life. It has significantly impacted the way organizations do business and has given them access to boundless information. Technology has also made it possible for workers not to be limited by location or time: workers can now work from anywhere in the world, at any time. The advancement of technology has created the need for more knowledge work- ers—individuals who have the ability to interpret, analyze, and develop knowledge. This advance has led to the emergence of new roles and responsibilities. Organizations now offer knowledge-based training; with the help of technology, it is now possible to create virtual learning environments and provide training for individuals all over the world (Goldsmith, 2008; Syedain, 2008).

Information technology has its effect on HRM as well. Human resources information sys- tems (HRIS) are HR database applications that provide accurate HR-related data; these systems are used increasingly often. These systems can be used to automate and manage

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

processes related to human resources such as payroll, performance and training plan- ning, measurement, assessment, and management. HRIS can help organizations lower administrative costs, enhance productivity, decrease response time, and also improve HR decision-making quality, efficiency, and effectiveness. HRIS brings enormous benefits to businesses; the benefit with the biggest impact is that HRIS frees HR professionals to focus more on organizational strategic goals and spend less time on routine tasks and data problems that are necessary but perhaps less important. HRIS assists in information provision for decision making by serving two purposes:

• Administrative efficiency can be achieved through lower database processing time and less HR paperwork and documenta- tion; hence, more duties can be handled concurrently.

• Effective strategic planning is better deci- sion making based on enhancing HR managers’ access to facts, rather than managers relying on intuition and per- sonal perception (Roberts, 2006).

Turnover and retention

Having high turnover rates can cause organizations serious financial problems. In addi- tion, the number of qualified and productive workers has decreased, and the relative demand for them has increased accordingly. This change is why HR professionals take turnover seriously, diligently analyze its causes and assess its effects, and dedicate signifi- cant effort and resources to finding ways to increase retention rates.

One key employer characteristic greatly affects turnover rates: the question of how effec- tively organizations communicate their goals and objectives to managers and employees so that these people can be held accountable for achieving outcomes. It is also essential to provide managers and employees with the required tools and resources that will enable them to execute their tasks effectively (Florida & Goodnight, 2005). Furthermore, an orga- nization’s positive and unique culture has an important role in decreasing employee turnover (Hymowitz, 2006). Offering stable and secure jobs, flexible work options, opportunities for career advancement and personal development, rewards, competitive compensation and benefits, and work-life balance programs are, of course, also among the factors that increase retention rates and thus reduce employee turnover (Welch, 2006).

Succession planning

Succession planning refers to the process of scanning and monitoring influential work- force contributors within an organization in order to identify suitable future replacements and hence preserve the human assets and wealth of the organization. Succession planning

AbleStock.com/Thinkstock

By automating processes such as payroll, HR information systems can help to decrease administrative costs and allow HR professionals to focus more on strategic goals.

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

is extremely significant for any organization’s survival. Factors such as an aging work- force or fluctuations in supply and demand of a certain type of expertise must be care- fully considered by HR in the succession planning process. Succession planning must be considered by HR for all levels of the organization rather than only top executives, since some lower-level positions may be of equal importance to the organization’s prosperity.

To be deemed effective, a succession planning process must consider two very important factors: prospective successors’ number and capabilities (Rothwell, 2010). There are five main steps that HR managers undergo for succession planning:

1. recognize all weak areas within the organization that require development 2. help managers and executives determine the future job skill sets needed to carry

out the organization’s strategic plans and objectives 3. identify employees who are capable of performing the current duties and respon-

sibilities that require future replacements 4. share all aspects of the succession planning process with employees 5. constantly monitor and update the succession planning process to ensure its

maturity and successful execution

The fifth and final step is more or less a support step (Fegley, 2006).

Career planning

The word career refers to the personally experienced behaviors, attitudes, and viewpoints of an individual, and mainly relates to work activities over the person’s life (Hall, 1976). The term career comprises two major components: an internal and an external component. The internal component of a career is more personalized, and it mainly relates to how an individual regards or considers his or her own career. The external component highlights the actual sequence of job positions an individual has occupied throughout his or her work career (Hall, 1987).

Career planning is a term for the method through which individuals map and pursue their career goals and objectives. Effective career planning is composed of two very important aspects: the individual and the organizational. The individual aspect of career planning requires an employee to examine his or her own talents, capabilities, likes, dislikes, ethics, values, strengths, limita- tions, and all the available options and chances. This consideration makes it possible to formu- late career plans and create relevant and effective career goals and objectives.

The organizational aspect of career planning includes such areas as striving to identify future organizational job requirements, defining and building career plans, and evaluating personnel.

iStock/Thinkstock

Career planning enables individuals to map and pursue career goals and objectives

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

The organizational aspect of career planning also includes providing training to help equip the workforce for future tasks and endeavors, aligning organizational requirements with workforce capabilities, and creating audits and implementing effective career sys- tems for the organization.

Recently, the relative contributions of employers and employees to career planning have significantly changed, resulting in a new psychological employment contract. This psy- chological contract consists of unwritten rules and expectations regarding the relation- ship and exchange between employers and employees. The contract has shifted away from a model in which employees expected lifelong employment and retirement ben- efits in exchange for their loyalty and devotion of their full careers to one organization. The new model moves instead toward “career resiliency”: career-resilient employees take responsibility for their own careers and for continuously learning and reinventing them- selves to ensure that their skills continue to be marketable and useful for their current and future employers. The relationship between employers and employees becomes more flexible in that it is only sustained as long as it is mutually beneficial. In that sense, it is mostly employees who are in charge of strategically managing their careers (Robinson, Kraatz, & Rousseau, 1994; Waterman, Waterman, & Collard, 1994).

Mergers and acquisitions

Mergers occur when two organizations combine their resources and unify their goals and objectives to become a single entity. Acquisitions are the initiative taken by one organi- zation to own another organization. Mergers and acquisitions often have the benefit of creating a stronger organization with a better competitive edge and a larger market share.

HR has a major role to play to ensure that a merger or an acquisition is effectively and smoothly carried out. Organizations undergoing mergers or acquisitions often experience conflicts as a result of cultural differences. Careful cultural compatibility analysis is of fun- damental importance before, during, and after a healthy merger. A successful merger will require a great deal of time and effort spent identifying and addressing cultural differences, as well as developing methods to integrate managers and employees from both organiza- tions. HR must exert every possible effort to solve such cultural issues through effectively planning and executing training programs—familiarizing employees with the new culture to assist in proactively mitigating conflicts. HRM’s early identification and resolution of merger and acquisition challenges is a key element of a successful merger (Donoghue, 2006).

In addition to conflict resolution, HRM also has the responsibility of identifying and clas- sifying organizational structural changes, integrating employee benefits, and balancing the workforce among the organizations undergoing the merger. HR must strategically con- solidate various HR functions and processes across the two organizations undergoing the merger or acquisition. For example, it may be necessary to eliminate duplicate positions and to redesign jobs, departments, and the organizational structure for optimal information and work flow and for maximum efficiency and effectiveness. It may be necessary to integrate employee compensation, benefits, and performance appraisal systems. HRIS interfaces may also need to be reconfigured. The ultimate goal of HR must be to bring employees together in order to achieve the two organizations’ common goals and objectives.

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

Outsourcing

Outsourcing is a process that organizations use to contract some of their activities, duties, and responsibilities to outside sources. These outside sources include third- party service providers, consulting firms, or vendors. Outsourcing has grown exten- sively over the past decade. This change can be directly attributed to the rapid growth of the Internet, which has greatly facilitated the communication process between organizations.

Outsourcing brings many advantages to an organization. For instance, outsourcing allows organizations to obtain high-quality professional expertise in such specialized fields as accounting at a much lower cost than hiring and retaining internal experts. Outsourcing allows organizations to cut their overhead costs, thereby becoming more profitable and competi- tive in the market. Over the past decade, HR has cut as many costs as possible by outsourcing most activities that can be allocated to outside service providers (Gainey, Klaas, & Moore, 2002; Pelham, 2002).

Outsourcing also has its disadvantages: for example, job losses in the United States are one of the drawbacks of outsourcing. During the last decade, nearly three million jobs have been out- sourced to such countries as China and India. Besides the impact on the U.S. economy of this shifting of jobs, there are also numerous ethical concerns regarding employment conditions at the countries to which the jobs are moved. For example, some organizations outsource jobs to countries where minimum wages or workers’ safety standards are too low, nonexistent, or not enforced. Some organizations have been accused of making their workers work very long hours in suboptimal conditions (e.g., suboptimal temperature, noise, or pollution), or of hiring children and adolescents. These and other problems have promoted the emphasis on corporate social responsibility (CSR) in HRM. CSR encourages companies to be socially responsible and have a positive impact on the people and communities that are influenced by their activities (Lockwood, 2004).

It is critical for strategic HR planning to distinguish activities that are peripheral to the organization’s core competencies from activities that represent the organization’s main sources of competitive advantage. The former activities are viable candidates for out- sourcing if cost or time efficiencies can be realized. Outsourcing peripheral activities and functions can free up resources to reallocate to the organization’s core activities. How- ever, outsourcing core activities can jeopardize the organization’s long-term survival and competitiveness.

Hemera/Thinkstock

Outsourcing allows organizations to contract some of their activities to professionals with expertise in specialized fields worldwide.

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

Downsizing

Due to the economic crisis, the rising costs of employee healthcare, and many other fac- tors, companies are trying to find ways to lower labor costs and be more productive so they can sustain their competitiveness. Downsizing and restructuring are two approaches toward achieving these goals. Cost reduction is the most prominent driving force behind downsizing; it has become a widespread tool to help companies adapt to environmental and economic changes. Downsizing through layoffs has increased by approximately 55% between 2000 and 2009 (“Extended mass,” 2010).

Even though cutting costs through downsizing might sound appealing to some organiza- tions, downsizing can carry many costs. Some are tangible and may include severance pay, compensations for accumulated vacation time or sick days, and legal costs associated with possible lawsuits from displaced employees. There are also the costs associated with recruiting, selecting, and training new employees when the organization recovers and is ready to expand its operations again. This expansion is usually at a later date, although many organizations may downsize and concurrently hire new employees with different skill sets or at the lower end of the pay scale.

Other intangible costs of downsizing include lack of trust within the organization between the remaining workforce and management; further costs are lack of loyalty, motivation, and workforce satisfaction as employees feel expendable and less secure. These intangible costs can lead to lower productivity, as well as suppression of innovation as employees develop a fear of attempting anything new that might jeopardize their jobs (Koretz, 2000; Miller, 2001).

There are advantages to avoiding downsizing: for example, employers get a more dedi- cated and productive workforce, and they gain high customer satisfaction and a recruit- ing edge. HR can achieve a better approach to downsizing by treating employees as they should be treated: as human assets. Some companies achieve this aim through training and reassigning employees for other positions within the organization, rather than laying them off when their current positions are to be eliminated (Amundson, Borgen, Jordan, & Erlebach, 2004). Other companies resort to temporary reductions in pay or working hours or resort to attrition and hiring freezes. Restructuring is another approach compa- nies embrace to reduce all types of costs, and it can be internal, financial, or technological. Mergers and acquisitions, reductions of managerial layers, and closing down facilities are all forms of corporate restructuring. When downsizing is inevitable, among the methods that have been shown to be effective are providing displaced employees with education, retraining opportunities, and outplacement services such as personal career counseling, interviewing workshops, and referral assistance.

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CHAPTER 2Section 2.4 Opportunities, Challenges, and Recent Developments

EYE ON THE GOAL ”Is strategic HR planning worth your while?”

While many organizations are sold on the idea that strategic HRM adds value, a much smaller per- centage acts on that belief (see the “Eye on the Goal” feature in chapter 1 for a more detailed dis- cussion of this point). However, HR is sometimes to blame for the doubts and suspicions that organi- zational decision makers have about the contributions of human assets to the bottom line. The fol- lowing article analyzes the common mistakes that HR often makes, and it offers important insights on ways for the HR profession to redefine itself and its contributions to organizational success and effectiveness. As you will see, strategic HR planning is at the core of the much-needed changes and developments in this new HR paradigm.

WEB LINK

A New Paradigm for HR (Pilenzo, 2009): http://www.hrm-hrd.com/Article/top/ Analytical_HR_topic.pdf

Discussion Questions

1. What is the current predominant paradigm for HR?

2. What are the strengths and weaknesses of the current paradigm?

3. How is the role of HR currently perceived by the majority of HR professionals?

4. How is the role of HR currently perceived by senior management?

5. What is the new paradigm for HR?

6. How can this new paradigm help organizations realize a human-based competitive advantage?

7. What are some practical steps for HR to transform itself and enhance its contributions to orga- nizational success and effectiveness?

8. What are some of the expected challenges in this transformation toward a new HR paradigm?

9. Corporate examples are provided in the above articles; locate several others through your own research and professional experience. Use these examples to design an HR department’s role in an organization, including HR’s meaningful contribution to strategic goals and planning pro- cesses. You may narrow the scope of the organization down to a specific industry, market, or geographic location of interest to you. You may also make assumptions as long as you clarify them explicitly.

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CHAPTER 2Summary

Chapter Summary

• Planning for the human side of the organization’s operations is an important component of the strategic HRM process. This planning requires accurate pro- jections of the number of employees the organization will need for the efficient performance of its future activities and operations.

• Strategic HR planning should be linked to the organization’s overall strategic planning process.

• The strategic HR planning process includes environmental scanning, labor market analysis and forecasting, internal analysis and forecasting, gap analy- sis, developing HR plans and strategies, and HR strategy implementation and assessment.

• Numerous organizational decisions require accurate, disciplined, and iterative HR planning—including downsizing, restructuring, outsourcing, career and suc- cession planning, and mergers and acquisitions.

• Because HR planning relies on environmental changes and labor-market fluctua- tions, it is subject to political, economic, sociocultural, and technological changes.

Key Terms

acquisitions: An initiative taken by one organization to own another organization.

attrition: Reducing the number of employees by not replacing the ones who leave.

balanced scorecard: An HR metric that balances financial with other strategic perfor- mance factors such as internal business processes, customer service, learning, and growth.

benchmarking: Comparing organizational performance metrics against those of other organizations.

career planning: The method through which individuals map and pursue their career goals and objectives.

downsizing: The process of reducing the workforce through eliminating jobs in order to cut costs and improve efficiency.

economic value added (EVA): A measure of organizational financial performance calcu- lated by deducting the cost of capital from the operating profit.

environmental scanning: A stage of the HR planning process that emphasizes identify- ing, examining, or anticipating positive or negative factors in the external environment that might influence the organization.

gap analysis: HR planning that determines the discrepancy between the current work- force quantity and level of proficiency against the quantity and level required and identi- fied by an organization through environmental scanning, labor market analysis and fore- casting, and internal analysis and forecasting.

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CHAPTER 2Key Terms

HR audit: A tool for organizations to diagnose the current status of HRM through assess- ing HR policies and the degree to which they fit organizational strategies.

HR metrics: Quantitative measures that can be used for assessing the efficiency and effec- tiveness of HR functions through tracking critical HR-related factors.

HR planning: The process of managing an organization’s most valuable asset—its peo- ple—so that there are no shortages or surpluses of employees in the organization.

human resources information systems (HRIS): HR database applications that provide accurate HR-related data.

internal analysis and forecasting: HR planning that aims to identify future tasks that the organization will need to perform, to match these tasks with the skill sets of the organiza- tion’s currently available employees, and to fulfill strategic plans and future objectives.

knowledge workers: Individuals who have the ability to interpret, analyze, and develop knowledge.

layoffs: Either permanent employment termination or temporary employment suspen- sion, in which employees can go back to work when the business improves.

mergers: Two organizations combining their resources and unifying their goals and objec- tives to become a single entity.

outsourcing: Contracting some of an organization’s activities to third-party service pro- viders, consulting firms, or vendors.

psychological contract: Unwritten rules and expectations regarding the relationship and exchange between employers and employees.

return on investment (ROI): A financial measure that evaluates the efficiency of an invest- ment by determining the actual and prospective costs and benefits over time.

strategic plan: A plan that outlines the steps required for achieving organizational goals and objectives, serves as a foundation for the whole organization so that each person can have a clear understanding of the organizational vision and know what is expected of him or her, and assists managers in such processes as problem solving, decision making, market planning, and designing business unit and operational goals and strategies.

strategy: A long-term plan designed by an organization to compete effectively in a specific market by meeting customers’ as well as stakeholders’ needs.

succession planning: The process of scanning and monitoring influential workforce con- tributors within an organization in order to identify suitable future replacements—hence preserving the human assets and wealth of the organization.

SWOT analysis: An analysis of the internal strengths and weaknesses, as well as the exter- nal opportunities and threats, in an organization’s environment.

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CHAPTER 2Critical Thinking Questions

voluntary separation programs: Programs offering senior employees severance and ben- efits payments such as early retirement buyouts, in order to persuade them to retire or leave early.

Worker Adjustment and Retraining Notification (WARN) Act: A set of laws that obliges organizations to provide employees with a 60-day advance notification of layoffs or plant closings. It does not apply to employers with fewer than 50 employees or part-time or seasonal workers.

workforce reduction: Job eliminations due to the closing down of certain offices, plants, or operations. Reduction can also be caused by automation, economic slowdown, political unrest, and other factors that render the benefits of a larger workforce lower than the cost of retaining it.

Critical Thinking Questions

1. When facing a worker surplus, what methods do you think an organization should rely on first in order to reduce workforce size?

2. Conduct a SWOT analysis for your own organizations. How do you see these factors affecting HR?

3. Discuss the strengths and limitations of traditional HR metrics, such as cost- per-hire, turnover rates, HR expenses, etc. When could these metrics not tell the “whole story”?

4. How could the processes or decisions made in one area of HR, such as selection, affect other areas, such as training or compensation? What does this suggest about how an organization should craft its HR strategy?

5. Typically, the negatives to outsourcing are talked about in the media. What are positive outcomes to outsourcing, both from an organizational and societal perspective?

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