Relevance of Fit Between HR Strategy and Business Strategy

Nadler and Tushman (1980) defined congruence or fit as “the degree to which the needs demands, goals, objectives and/or structure of one component are consistent with the needs, demands, goals, objectives, and/or structure of another component” (as cited in Boon, 2008).

Fit between HR Strategy and business strategy

According to U.S. Office of Personnel Management (1999), fit between HR strategy and business strategy means to integrate decisions about people with decisions about the results an organization is trying to obtain. To be able to achieve fit between HR strategy and business strategy, the HR Managers have to identify the real goals of the business, the business way, how to reach the goals and the real needs of the business from Human Resources (Luke, 2010). Some management tend to put the needs of their employees first, but this is not what the business usually asks for. Fit operates vertically and horizontally (Scribner et al, 2008). Vertical fit refers to the alignment of HR practices with the specific organizational context, and horizontal fit refers to the alignment of HR practices into a coherent system of practices that support one another (Delery, 1998).

Relevance of fit between business strategy and SHRM

The central debate about fit between HR strategy and business strategy is one of the most important to emerge in recent years (Helen Newell and Harry Scarbrough, 2002). It hinges on two broad approaches: the ‘universalistic’ and ‘contingency’ (Natalie Turner, n.d).

The universalistic perspective “best practice” argues that some HR practices are universally effective; regardless in which context they are implemented (Boom, 2008). These practices include items such as (Newell & Scarbrough, 2002), employment security, selective hiring, self-managed teams or team working, high pay contingent on company’s performance, extensive training, reduction of status differences, and sharing information (Pfeffer & Veiga, 1999). Pfeffer & Veiga believe that if these policies are followed, they would always result in organisational success. The universalistic theory is also based on the assumption that HR practices observed in high-performing firms can be transformed to other companies with the same results (Armstrong, 2009).

In contrast with universalistic thinking, contingency scholars argued that HR strategy would be more effective only when appropriately integrated with a specific organizational and environmental context (Chang & Huang 2005). This approach infers that the choice of HR strategy depends on the firm’s business strategy (Newell & Scarbrough, 2002). The approach is more akin to the idea of strategic fit because it claims that the optimal HR strategy choice depends on the unique characteristics of the individual organisation (Natalie Turner n.d), or the organisation’s strategy (Newell & Scarbrough, 2002). For instance, a cost-reduction business strategy would require a different set of HRM policies than a strategy based on innovation. “An HRM strategy to fit with cost reduction might require deskilling, management control and downward pressure on wages. In contrast, one aimed at innovation would be likely to foster employee skills, autonomy and competitive wages” (Newell & Scarbrough, 2002:28).

Other models have also emphasised the relevant of fit between HR strategy and business strategy. These include the Matching model, Life Cycle model, Harvard Model, and the behavioural perspective. The matching model argues that human resource strategies have a tight fit to the overall strategies of the business (Association of Business Executives, ABE; 2010). The basic premise of the life cycle model is that, as organisation grows and develops, human resource practices and procedures must change to meet it needs (Armstrong, 2009). Authors of Harvard model argue that any inconsistency between internal human resource management practices and competitive strategy is likely to lead to role conflict and ambiguity that can interfere with individual performance and organisational effectiveness (ABE, 2010). The behavioural perspective infers that firm’s business strategy must be matched with the specific HR policies and practices, which will elicit particular sets of employee attitudes and behaviours to foster success (Wang & Shyu, 2007).

Baron and Kreps (1999) also argue that besides the fit between the individual practices, the HR system should fit with the broader context of what the firm is trying to do, such as the external environment, the workforce, organization’s culture, organizational strategy, technology of production and organization of work. According to Boxall (1992), “HRM cannot be conceptualized as a stand-alone corporate issue. Strategically speaking it must flow from and be dependent upon the organization’s (market oriented) corporate strategy”.

Importance of fit between an organisation’s business strategy and its HR strategy Evidence have shown that to achieve superior organisation performance, there must be a distinct link between human resource strategies and organisations business strategies (ABE, 2010)

An excellent example of a company that has matched its business strategy to its human resource strategy is the Lincoln Electric Company in USA. A producer of electrodes and welding machinery, Lincoln is also a cost leader. Lincoln focuses on hiring individually motivated, high performers. These individuals have their compensation tightly linked to their output with laid-down minimum quality levels. A substantial portion of the company’s profits is also distributed to employees at the end of the year based on an individual merit rating that is computed from output, ideas and cooperation, dependability and quality. Lincoln’s innovative HR strategy enabled it to gain, by 1995, a market share of 36% in the otherwise fragmented US market for welding equipment and supplies. (Source: Krishnan, 2005).

Also, organisations are now using HR strategy to further strategic aims. For example, At Conventry Building Society, the strategic aim was to keep the business as it was – one of the few remaining mutual – but to reduce staff turnover. The society aligned its employee relations with its customer value, enshrined in the slogan “TLC not plc.” It switched from a traditional reward structure to a team-based pay and a benefits package called “TLC for staff” (Source: ABE, 2010).

Factors that determine fit between HR strategy and business strategy

Fit between HR strategy and business strategy is influenced by both external and internal factors. Some of these factors are discussed briefly below.

Technological changes: Technological advances alter jobs, create new skills, make occupations obsolete, and revise what employees need to lean and be trained to do (Ozutku & Ozturkler 2009).

Legislation/regulations: For example, the National minimum wage introduced by labour party in England had a significant effect on costs which has led to changes in employment practices in some industries and changes to personnel policies (ABE, 2010).

Employee knowledge and skills: Employees knowledge and skills directly affect the quality and performance of the HR system (Wright & Snell 1998). Arguably, more knowledgeable and skilful employees will have competencies to understand and enact a variety of HR practices, such as those designed for a firm’s specific strategy (Wei, 2006).

Culture: Several evidences have shown that culture plays a critical role in determining the right HR strategy to adopt. For example, when Lincoln Electric Company applied its HR strategy in ventures acquired outside the United States, it failed because of difference in culture both at societal and organisational levels (Krishnan, 2005).

Life cycle stages: Organizations go through evolutionary life cycles, and the stage in which an organization finds itself in an industry affects the HR strategies it should adopt (Armstrong, 2009).

Industry/sector characteristics: In analysing HR practices, classification of organisations as manufacturing and service firms is considered. This is because; different production processes necessitate different HR practices (Ozutku & Ozturkler 2009).