A FRAMEWORK: HR STRATEGY AND STRATEGIC MANAGEMENT THEORY
Understanding different strategic management perspectives is essential to the formation of a business strategy and an aligned HR strategy. Strategic management perspectives attempt to explain why the firm exists and what the sources of competitive advantage are.15 It is thus axiomatic that corporate strategy can vary based on different strategic management perspectives. For example, the traditional "strengths-weaknesses-opportunities-threats" model of firm performance suggests that firms can improve performance only when their strategies exploit opportunities or threats.16 Recognizing that there are different strategic management perspectives and that these may lead to different business strategies, it should be apparent that HR strategies can also vary so as to align with these business strategies. Consequently, strategic management perspectives bridge HR and business strategies. This raises the question of which strategic management perspective an organization should follow. The answer is not obvious since no one strategic management perspective dominates. A possible reason for this is that leaders of organizations have different beliefs or philosophies, and since adopting a perspective is a matter of choice, this will lead to different perspectives being chosen. Moreover, there is little guidance to help TMTs select a suitable strategic management perspective for their company.
Strategic management perspectives originated with two fundamental questions: why do firms exist, and how can a firm perform better than others? In distinguishing between the various answers to these questions, it is useful to focus on two relatively independent dimensions. The first reflects beliefs about the sources of survival of organizations and can be characterized by the question, "How can my company best survive?" Two schools of thought exist and reflect an internal and an external focus.17 During the early development of the field of strategic management, researchers argued that a firm's continued success depends primarily on its internal and unique competitive resources. Strategic management perspectives with an internal focus include the resource-based view (RBV) of the firm, the knowledge- and learning-based perspective, the dynamic capabilities (DC) perspective, and the strategic leadership perspective. The resource-based view perceives the firm as a unique bundle of idiosyncratic resources and capabilities, and that the primary task of management is to maximize value through the optimal deployment of existing resources and capabilities, while developing the firm's resource base for the future.18 The emerging knowledge- and learning-based view focuses upon knowledge as the strategically most important firm resource. It is thus an outgrowth of the resource-based view. Teece, Pisano and Shuen describe dynamic capabilities as another extension of the resource-based view of the firm.1 9 They define dynamic capabilities as the firm's ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments. The strategic leadership perspective argues that organizational outcomes (e.g., strategic choices and performance levels) are partially predicted by the background of management, with an emphasis on the role of upper echelons of management (i.e., TMT).20
Between the early development of the field in the 1960s and the rise of the RBV in the 1980s, the prevailing view was that success was largely a function of external factors, with industry structure and competitive position in the industry being the primary determinants of organizational success. Corresponding perspectives include the industrial organization (IO) economics perspective, the contingency perspective, and the strategic groups' perspective. The essence of the iO economics view is that a firm's performance in the marketplace depends critically on the characteristics of the industry environment in which it competes.21 The contingency approach highlights those periods of time when business strategies must be carefully reassessed, for example, during changes in the life cycle, when any of the other basic environmental characteristics of the industry change, or when a firm diversifies into product/market areas with economic characteristics significantly different from those of its core busi-nesses.22 Strategic groups, defined by Porter as a group of firms pursuing similar strategies, provide a means to classify firms within industries into groups based upon the strategies that they choose to execute.23
The second dimension reflects beliefs regarding the competitiveness of organizations and can be characterized by the question, "How can my company dominate others?" We argue that this is a function of either structure or process. In the field of organizational sociology, the conventional view of organizations is that they are arrangements of roles and relationships that emphasize structural features of the organizations. Scott and Davis24 argue that organizations codify, either more or less explicitly, how they do their work and how the parts of the organization relate to each other. They label this the formal organization, and it includes elements such as HR practices (including hiring and compensation policies), job design, and the overall organization structure. The organization structure groups together jobs into larger units such as teams and departments; thus structural features are elements of the formal organization. Not all aspects of the organization are, however, captured by the organization chart. The informal organization refers to the emergent characteristics of the organization that affect how the organization operates. This includes the organization's culture, norms, and values; social networks inside and outside the organization; power and politics; and the actions of leaders.
In contrast to structure, which we characterize as being visible and static, we characterize process as being invisible and dynamic. Whereas some TMTs may believe that their organizations dominate competitors as a result of well-established roles and responsibilities of employees and operating units, others may believe that it is the result of spontaneous interactions of employees and units. Although process takes place within an existing structure, we argue that the relative importance of structure and process can vary across organizations.
The framework for distinguishing strategic management perspectives is presented in Figure 7.1 and integrates the two dimensions (external/ internal, structure/process) of organizational survival and competitiveness. In the upper right-hand quadrant, the agency/transactions cost perspective is characterized by an internal survival focus and structure as the driver of competitiveness. Firms that develop a strategy based on this perspective survive and compete through formalized static rules (e.g., goals and policies) and well-established patterns of employee behavior without considering the external environment. In the upper left-hand quadrant, the IO economics perspective is characterized by a firm focusing on the external environment to assess its survival, and structure as the source of competitiveness. Firms adopting this perspective survive by understanding and exploiting the dynamics and advantages inherent in the industry in which they operate, and compete by having better structure than their competitors. Internally, they are likely to have organized rules and well-established patterns of employee behavior.
Figure 7.1. Framework for Selecting Strategic Management Theories
In the lower left-hand quadrant, the strategic group process perspective is characterized by a focus on the external environment with respect to survival, and process as the driver of competitiveness. Firms adopting this perspective again survive by virtue of leveraging their understanding of the industry in which they operate, and compete based on having dynamic processes that enable them to respond quickly to changes in the external environment. Finally, the dynamic capabilities perspective is characterized by an internal focus with regard to survival, and process as the driver of competitiveness. Firms adopting this perspective survive and compete through the internally dynamic changes and discretionary interactions among employees, which enable them to be innovative without considering the external environment.
Having adopted a perspective from the framework, top management should then adopt a corresponding HR strategy. This will reflect the answer to a third fundamental question in the field of strategic management: what is the role of top management in organizations? One of the key roles of the TMT is to create an HR strategy that facilitates and supports the chosen strategic management perspective. Next, we map out possible HR strategies consistent with each of the four strategic management perspectives.