Strategy, human resource management and performance: Sharpening line of sight

This paper talks about how a company's strategy, its human resources (the people who work there), and its
performance are connected. It looks at how human resources can help a company be better than its competitors.
They suggest a model that shows how the company's strategy and the way it manages its people at different
levels (like the whole company, smaller groups, and individuals) should work together. They say that when
everything is aligned properly, it helps create what they call "human capital" (the skills and abilities of the
people) and "social capital" (how well people work together), which are both important for the company to do
well.
1. Introduction
The article highlights the importance of internal resources and human resources in gaining a competitive
advantage for firms. It discusses how previous research has emphasized the role of human resources in
achieving superior performance but notes that the exact mechanisms are not fully understood. (Internal
resources refer to the assets, capabilities, and competencies that a firm possesses within its organization. These
resources are typically under the control of the firm and can include tangible assets such as physical
infrastructure, technology, and financial resources, as well as intangible assets such as organizational culture,
intellectual property, and human resources. In the context of gaining a competitive advantage, internal resources
play a crucial role in enabling a firm to develop unique capabilities and strengths that differentiate it from
competitors and create value for customers. Human resources, specifically, refer to the knowledge, skills,
abilities, and motivation of the firm's workforce, which are essential for driving innovation, delivering high-
quality products or services, and ultimately achieving competitive success.)
The paper proposes a framework that ensures a clear connection between a company's strategy and its
implementation at all levels: organizational, group, and individual. It suggests expanding the concept of "line of
sight" to include group and organizational factors, aiming to better explain how HR practices contribute to the
creation of human and social capital.
The article reviews relevant literature on strategy and human resource management, focusing on the role of
human resources in creating competitive advantage. It uses the resource-based view (RBV) as a theoretical
foundation, suggesting that HR practices can create human and social capital leading to superior
performance.
Proposed Model
The proposed model illustrates how HR practices can align organizational, group, and individual activities with
the company's strategic goals, thereby enhancing organizational performance. It argues that organizational
performance will improve when organizational capabilities, group competencies, and employee skills are
aligned with strategic goals.
In conclusion, the paper suggests implications for future research and practice in understanding and
implementing strategies that effectively utilize human resources to achieve competitive advantage and superior
performance. It emphasizes the importance of aligning HR practices with strategic goals at all levels of the
organization.
2. Strategy and human resource management
The article explains strategy at three levels: corporate, business, and functional. It highlights Porter's industry
analysis model and generic strategies as influential concepts in understanding how firms compete and
coordinate various functional areas.
Porter's industry analysis model, also known as Porter's Five Forces, is a framework for understanding the
competitive forces that shape an industry's attractiveness and profitability. It identifies five key forces:
1. Threat of new entrants: How easy or difficult it is for new companies to enter the industry. High barriers
to entry, such as high initial investment or strong brand loyalty, make it harder for new competitors to enter.
2. Bargaining power of buyers: The ability of customers to negotiate prices and terms. If buyers have many
options or can easily switch to competitors, they have more power to demand lower prices or better quality.
3. Bargaining power of suppliers: The influence of suppliers on the industry. If there are few suppliers or
they offer unique products, they have more power to dictate prices or terms to companies in the industry.
4. Threat of substitute products or services: The availability of alternative products or services that can
fulfill the same need. If there are many substitutes available, it limits the pricing power of companies in the
industry.
5. Intensity of competitive rivalry: The level of competition among existing companies in the industry. High
rivalry, often due to many competitors or slow industry growth, can lead to price wars and reduced
profitability.
Importance of Human Resource Management (HRM)
Human resource management is crucial for effective strategy implementation. Porter recognized HRM as
essential for firms to achieve and sustain competitive advantage. The resource-based view (RBV) of the firm
emphasizes the strategic importance of human resources in creating sustainable competitive advantage.
RBV: RBV stands for Resource-Based View. It's a way of looking at a company's competitive advantage by
focusing on its internal resources rather than just external factors like market conditions or industry trends. The
RBV theory suggests that a firm's unique resources and capabilities, such as valuable skills, or brand reputation,
are what give it a sustainable competitive advantage. It's like saying that what's inside the company, like its
special talents or tools, is what really sets it apart from the competition.
Linking HRM to Strategy
The RBV suggests that a firm's competitive advantage stems from valuable, rare, and difficult-to-imitate
resources. Human resources and HRM practices, including organizational culture and learning, play a
significant role in sustaining competitive advantage. The article argues that HRM practices contribute
strategically to firms' ability to formulate and execute their strategies. (A sustainable competitive advantage is
something a company does better than its competitors over a long period of time. This advantage is
"sustainable" because it lasts for a while and is hard for others to copy or beat. It's what keeps a company ahead
in the game, even when others try to catch up.)
HRM in Different Contexts
The strategic importance of HRM practices becomes even more pronounced in scenarios such as mergers and
acquisitions or international expansions, especially when dealing with diverse cultures.
Enhancing RBV with Strategic HRM
The article proposes making the RBV (Resource-Based View) framework even better by connecting HRM
(Human Resource Management) practices directly to how a company plans and carries out its strategies. Instead
of just seeing HRM practices as routine tasks, the article suggests seeing them as important tools that can help a
company do better than its competitors over a long time. This way, the article hopes to address criticisms that
the RBV framework is too obvious or doesn't really say anything new.
Understanding the Complexity
Research has extensively explored the connections between strategy, human resources, HR practices, and firm
performance. While studies suggest a positive impact of HRM practices on performance, the specific ways in
which these practices influence organizational outcomes remain unclear due to various factors such as
theoretical foundations, levels of analysis, and measurement methods.
Exploring Theoretical Perspectives
Different theoretical perspectives have been employed to understand the relationship between HRM practices
and performance.
 Some focus on developing human capital directly affecting performance outcomes
 Others emphasize the role of HRM practices in fostering social capital, which in turn enhances
performance.
Human Capital Perspective
Studies focusing on human capital suggest that specific HRM practices, such as recruitment, selection, and
employee development, contribute to organizational performance by enhancing employees' knowledge, skills,
and abilities. These practices create firm-specific human capital, which mediates the relationship between HRM
and performance.
Social Capital Perspective
Other studies highlight the role of HRM practices in developing social capital within the organization. Social
capital, which refers to relationships and interactions among people, is seen as crucial for achieving strategic
priorities and ultimately enhancing firm performance. HRM practices that promote a supportive organizational
culture and effective networking among employees contribute to the development of social capital.
Importance of Alignment
The article emphasizes the importance of aligning HRM practices with business strategy to achieve superior
performance. While both human capital and social capital are essential for success, aligning them with strategic
objectives is key. The challenge lies in connecting capable and motivated employees with strategic goals and
organizational processes.
Towards a Comprehensive Framework
To address these complexities, the article proposes a comprehensive framework that redefines the concept of
"line of sight" and presents a model for better aligning strategy and execution. This framework considers both
human and social capital as critical determinants of firm performance and highlights the need to integrate them
effectively with strategic objectives.
3. Line of Sight (LOS)
Line of sight (LOS) is about how well employees understand their company's goals and what they need to do to
help achieve those goals. It's like making sure everyone knows where the company is headed and how they fit
into the big picture. Imagine it as giving employees clear directions on how they can contribute to the
company's success.
Related Ideas
 LOS builds on other ideas like how well employees' values match the company's culture and whether their
goals align with their supervisors'. If employees understand and share the company's values and goals,
they're more likely to stay happy and committed.
 Another important idea is giving employees the chance to be part of important decisions and meaningful
work. When employees feel involved and have the skills and motivation to do their jobs well, they perform
better and feel more satisfied at work.
4. A model for sharpening line of sight
Defining Line of Sight (LOS)
Line of sight (LOS) means making sure that the organization's capabilities, culture, group skills, individual
knowledge, motivation, and opportunity all line up with each other and with the company's strategy. This
creates a strong foundation for success. In our model (shown in Fig. 2), the organization's strategy, including its
goals and action plans, drives everything.
Understanding the Model
Our model has three main levels: organizational, group, and individual. These levels are like building blocks,
with organizational capabilities and culture forming the base, and group competencies, individual skills,
motivation, and opportunity building on top. We see organizational capabilities, group competencies, and
individual skills as human capital, while organizational culture, group norms, and individual motivation and
opportunity are social capital. Human resource management (HRM) practices play a central role in shaping and
maintaining these levels.
Achieving Overall Firm
Performance
The performance of the
organization depends on
how well these three levels
are aligned with each other
and with the company's
strategic goals. The vertical
alignment ensures that
everyone is working towards
the same objectives, while
the horizontal alignment of
HRM practices, like
recruitment, training, and compensation, supports this effort. Our model assumes that the company's strategy is
influenced by its environment and that it's always adjusting to stay competitive. While the strategy influences
organizational, group, and individual activities, these activities also have an impact on the strategy itself. The
dotted feedback loop in the model shows that this process is dynamic and ongoing. We'll explore this idea
further later in the paper.
4.1 Organizational Capabilities / Culture
Organizational capabilities are like the building blocks of success, involving the ability to learn and adapt.
These capabilities, along with organizational culture, are crucial for firm performance. Organizational culture is
about shared values and beliefs that align with the company's goals.
Organizational capabilities refer to the collective abilities, resources, and systems within a company that enable
it to perform effectively and achieve its goals. These capabilities include skills, knowledge, processes,
technologies, and other resources that are unique to the organization and difficult for competitors to replicate.
Creating and Sustaining Organizational Culture
HRM practices play a key role in shaping organizational culture and capabilities. Practices like recruitment,
training, and compensation can influence employee behavior and attitudes, ultimately impacting organizational
outcomes. For example, high-performance work systems are linked to positive results like increased
productivity.
The Role of Organizational Citizenship Behavior (OCB)
Organizational citizenship behavior, or OCB, refers to extra efforts employees put in voluntarily. When
employees go above and beyond, it's often because they share the company's goals and values. This collective
behavior contributes to the organization's culture and performance.
Aligning Strategy with Organizational Capabilities
For a company to succeed, its strategy must match its organizational capabilities and culture. For instance, if a
company aims to excel in innovation and quality, it needs structures and processes that support these goals.
HRM practices should be designed to align with the strategic direction of the company.
HRM practices that support and reinforce organizational capabilities and culture, in line with the company's
strategy, lead to improved performance. This means HRM should focus on creating an environment where
employees can thrive and contribute effectively to the company's goals.
Proposition 1. HRM practices that generate, reinforce, and sustain organizational capabilities and culture,
aligned with strategy, lead to increased performance
4.2 Group level competencies/norms:
In organizations, groups of employees share specific skills and ways of working together. Job analysis, which
identifies the tasks and skills needed for a job, has expanded to include broader competencies essential for
flexible teamwork.
Defining Competencies: Competencies go beyond technical skills, encompassing qualities like communication
and adaptability. These competencies are crucial for building both human and social capital within the
organization.
Group Norms: Groups also operate based on shared rules of behavior, known as group norms. These norms
influence individual and group performance, impacting outcomes like organizational citizenship behavior
(OCB) and group effectiveness.
Creating Competitive Advantage: Competencies and norms unique to a firm's groups can be a source of
competitive advantage if they're valuable, rare, and hard to copy. HRM practices play a role in nurturing and
sustaining these competencies and norms, aligning them with the company's strategy.
Strategic Importance of Employee Groups :Not all employee groups are equally strategic. Some possess
capabilities crucial for achieving strategic goals, while others may not. HRM investments should prioritize
groups with capabilities that add unique value to the organization.
Aligning Expectations: Clear alignment of employee expectations with strategic goals is crucial. When
employees understand how their actions contribute to strategic objectives, they're more likely to perform
effectively, regardless of their role within the organization.
Proposition 2. HRM practices that generate, reinforce and sustain job-specific, group competencies and norms,
aligned with strategy, lead to increased group performance.
Proposition 2a. HRM practices that align group competencies and norms with strategy lead to increased
organizational performance when group performance is appropriately aggregated.
4.3. Individual KSAs/motivation/opportunity
At the individual level, employees need the right skills, motivation, and opportunities to contribute effectively
to the organization's strategic goals. This level is where strategy is put into action through employees' behaviors.
Action Alignment: Action alignment involves ensuring that employees have the necessary skills (Knowledge,
Skills, and Abilities - KSAs) and the chance to apply them to their work effectively. HRM practices can support
this by providing clear communication of strategic objectives and fostering employee participation.
Interest Alignment
Interest alignment means aligning employees' interests with the organization's goals. This requires both
extrinsic (e.g., rewards) and intrinsic (e.g., meaningful work) motivators. HRM practices like performance
appraisal and compensation play a crucial role in motivating employees and holding them accountable.
Balancing Extrinsic and Intrinsic Motivation
While external rewards can motivate, solely relying on them may not be effective in the long run. Employees
also need intrinsic satisfaction from their work, feeling that what they do is meaningful and contributes to
important goals.
Creating Intrinsic Motivation
Organizational leaders and HRM practices can enhance intrinsic motivation by emphasizing the meaningfulness
of employees' work and fostering a culture where employees feel empowered to contribute to shared goals. This
approach aligns with frameworks like Organizational Citizenship Behavior (OCB) and the Ability-Motivation-
Opportunity (AMO) model.
Overall, ensuring that employees have the skills, motivation, and opportunities to contribute to strategic
objectives is crucial for organizational success.
Proposition 3. HRM practices that generate, reinforce and sustain individual KSAs, motivation, and
opportunity, aligned with strategy, lead to increased individual performance.
Proposition 3a. HRM practices that align individual KSAs, motivation, and opportunity with strategy lead to
increased group and/or organizational performance when individual performance is appropriately aggregated.
4.4 Measuring Performance
Measuring performance in line with our model is challenging due to its multi-level nature. At the firm level,
traditional accounting measures and broad-based outcomes like quality and productivity are used. Group and
individual performance can also be assessed, but attributing their impact to HRM practices requires careful
analysis.
Challenges in Measuring Performance
Establishing causal connections between HRM practices and performance outcomes is difficult, especially
across different levels of analysis. Developing effective metrics and employing longitudinal designs are crucial
for better understanding these relationships.
HRM Practices and Line of Sight
HRM practices play a crucial role in ensuring alignment between organizational goals and employee actions.
Recruitment, training, performance appraisal, and compensation practices must be closely linked with the firm's
strategy and consistent with each other. This alignment fosters the development of human and social capital
necessary for executing strategic priorities.
Proposition 4. HRM practices that generate, reinforce and sustain organizational capabilities/culture, job-
specific group competencies/ norms, and individual KSAs/motivation/opportunity, all aligned with strategy and
with one another, lead to increased organizational performance.