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Strategy equals people: HR policies pay off

Greater profits? More market value? Don’t thank technology – three leading studies reveal how HR policies alone brought financial and motivational success to top companies.

BY DOUG REID

 Human resources policies and procedures have made the strategic difference at thousands of companies, resulting in greater profits and an increased market value per employee. That’s the conclusion of three major research teams, including one that studied HR’s impact on business performance at nearly 3,000 firms for more than a dozen years.

In fact, if the average company improved its human resources system by 33 per cent, shareholder value would increase by about 20 per cent, say Mark

 The researchers compared firms based on 40 separate characteristics; 24 relate directly to human resources policies, such as employee selection, appraisal and compensation, and another 16 measure how well other indicators, such as knowledge management and business performance measurement – what the authors call High Performance Work Systems (HPWS) -- are integrated and implemented.

Strategic HR demands seven-step process
Across industries and markets, Huselid and his team discovered that a one-standard deviation (or change to 84th percentile from average) increase in HPWS effectiveness yields a $3,814 increase in profits and $18,614 in market value per employee. (The deviation means above 84 out of 100 others.)

They describe a seven-step process on how to imbed HR systems within a firm's overall strategy: an HR scorecard. This evaluation method creates the foundation and structure for HR's strategic influence, with an emphasis on how to align the system as a whole. In the view of these researchers, human resources leaders must do the following to increase the effectiveness of HR as a strategic function:

1.  Clearly define the business strategy;
2.  Build a business case for HR as a strategic asset;
3.  Create a strategy map (with leading and lagging indicators, and tangibles and intangibles);

Workplace culture spawns competitive edge
In a different study, researchers found that a supportive, motivational workplace culture gave exceptional companies their competitive edge, resulting in substantially increased profits. Led by Jim Collins, author of Good to Great: Why Some Companies Make the Leap ... and Others Don't, this team asked two simple questions regarding strategic performance:

1. Are there companies that can defy gravity and transform long-term average results into sustained superior results?
2. If so, are there universal distinguishing characteristics that cause a company to elevate from adequate to great?

  Among top companies, the researchers discovered many common traits reflecting purpose and honesty that challenge the conventional wisdom on corporate success. They used stringent measures to examine 1,435 large organizations, looking for those whose performance improved substantially over time. They identified 11 exceptional companies, including Walgreens, Gillette and Wells Fargo, that generated cumulative stock returns that surpassed the general market by an average of seven times for each of 15 consecutive years. 

The transition to greater success for these firms did not require a high-profile CEO, cutting-edge technology, innovative change management or even a finely honed business strategy. Instead, workplace culture drove these extraordinary companies to excellence; they all shared a culture that rigorously discovered and nourished disciplined people to think and act in a

• Strong leadership that reflected ambition for the company, rather than for self-interest, combined with uncompromising professional diligence and resolve;
• Selection of the right people before selection of the right plan;
• Adherence to rigorous honesty, needed to confront the sometimes unpleasant reality of their situation but without losing faith;
• An unwavering focus on delivering the core value that the company provides;
• A culture of entrepreneurship and discipline;
• Use of technology as an accelerator, not a driver, to facilitate strategic execution; and
• A relentless build-up of goal-directed momentum by the whole organization.

Select HR practices give shareholders more value

In yet another study, researchers Bruce Pfau and Ira Kay at Watson Wyatt International presented the following evidence: organizations that implement and coordinate a select set of HR practices can achieve up to 47 per cent higher shareholder value than similar companies that do not. The co-authors of The Human Capital Edge: 21 People Management Practices Your Company Must Implement (or Avoid) to Maximize Shareholder Value grouped HR practices with the greatest impact on performance into five categories:

• Recruitment and retention excellence;
• A total reward and accountability orientation;
• Establishment of a collegial, flexible workplace;
• Communication integrity between management and employees; and
• Implementation of focused HR service technology.

Pfau and Kay conclude that a true, pay-for-performance environment is a must to increase shareholder value. This requires full accountability, where individual actions cause predictable consequences. Rewards must be synchronized, creating opportunities for all employees to excel. Furthermore, three-year returns to shareholders are significantly higher at companies with a strong trust and confidence in senior leadership compared to those with lower trust and confidence levels.

Hence, data from three large-scale, comprehensive research programs makes remarkably similar conclusions: human resources practices are essential to determine corporate success. All three studies found that every positive difference in a company’s success comes from human resources. Only the sustained, focused and aligned efforts of employees provide enduring strategic advantage over time. In simple terms: Strategy equals people.

Doug Reid is an executive development consultant with John Fleury & Associates in Vancouver.
Contact: Doug@fleuryassociates.com

Sidebar

All HR is strategic: a philosophical perspective

Assets aren’t everything – only human effort provides the true value that ensures survival.

BY DOUG REID

Ever stop to consider that all human resources policies and practices are necessarily strategic? To put it more radically: Human effort is the only strategic force of an organization.  

Strategy is about survival. It’s what any normal person would do if he or she could predict the future. For instance, if you knew tomorrow's winning lottery number, obviously you would pick that number. In business, if you knew exactly what people will want in the future, you would deliver it because that would maximize your chances of survival. 

To assess the impact of human effort, try this simple exercise. Go to your workplace after hours when everything's shut down. Ask yourself: "What value is in production right now?" The answer is worse than none -- it's negative. Even when idle, your company's assets relentlessly eat up cash through taxes, insurance, interest payments and the like. 

In other words, assets do not produce value, they consume it – or, at least, help it decay.  Only assets that engage people, from communication and ideas to staffed equipment, create value. Therefore, all human resource practices are implicitly strategic: only human effort can produce value that provides the best chance for survival. The more efficiently that people – employees, employers, suppliers and buyers -- can coordinate and aim their efforts, the greater the payback for everyone.

But what about traditional sources of strategic advantage such as location, logistics, brand and such? They are all survival responses, uniquely human

Reprinted from PeopleTalk Magazine Winter 2003 (V6, N4)

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