Strategic Management of Human Capital Edward B. Yost Ph.D., SPHR September 1, 2008

1. Strategic Management of Human Capital Edward B. Yost Ph.D., SPHR September 1, 2008 Ohio University College of Business Executive Education

2. Bom dia Boa vinda a Ohio University Ohio University College of Business Executive Education

3. What is Strategic Success? • Delivering high value results to significant stakeholders Financial Success Operational Success Customer Success Workforce Success Ohio University College of Business Executive Education

4. What Companies are Most Successful? Name some companies that are consistently delivering strategic success to the stakeholders. Ohio University College of Business Executive Education

5. What determines strategic success in business? • Being in the right (growth) industry • Size • High Technology • Low cost • Global Reach • Strategic Intent Ohio University College of Business Executive Education

6. The “Right” Industry • The best returns are from “Growth” • In terms of returns to shareholders there is no evidence that this is true Ohio University College of Business Executive Education

7. Bigger is Better? • While there may be some truth to this it is far from universal • Only about 1% of returns on total capital and/or returns on net worth are explained by revenue • In some industries the relationship is negative • Big is nice but not very important Ohio University College of Business Executive Education

8. Is High Tech. the Answer? • Technology may not be an automatic route to Success • while some high tech organizations top the list it is lonely at the top and the staying power is questionable Ohio University College of Business Executive Education

9. Low Cost = High Returns? • Manifestation of cost control is “rightsizing” • The problem is that cost cutting ignores the other half of profit making - revenue. • Cost cutting is like the thrill show of jumping w/o a parachute -you can only do it once! • Cutting people cuts loyalty not a simple lay off and recall process. Ohio University College of Business Executive Education

10. Global is Good! Being Global doesn’t hurt but isn’t almost everybody? And… to be successful requires significant changes in all management systems Ohio University College of Business Executive Education

11. Defining the Business Strategy Strategy is: The central, integrated, externally oriented concept of how we will achieve our objectives. (Hambrick & Fredrickson) Ohio University College of Business Executive Education

12. Start with a Strategic Intent Looking for operational, financial customer, workforce success through… Betting on the incompetence of competitors Acquiring and utilizing the competencies of others Using existing resources & competencies differently Ohio University College of Business Executive Education

13. Strategy as a Process Strategic Intent Strategy Execution Emergent Strategies Strategic Success Ohio University College of Business Executive Education

14. What is “Strategic Competitive Advantage?” Any Enacted or Utilized Organizational Competency that: • Allows the organization to distinguish itself from competitors • Cannot be readily duplicated or imitated • Provides a positive economic benefit(s) Ohio University College of Business Executive Education

15. Organizational Competencies • Tangible and intangible resources and capabilities that enable the organization to: • develop, • choose and, • implement value enhancingSTRATEGIES. Ohio University College of Business Executive Education

16. 3 Basic Properties of Organizational Competencies • Potential to addVALUE (shareholder) • Utilize strengths/eliminate weaknesses and Exploit opportunities/neutralize threats • HETEROGENEOUS: • Very few firms have it or can provide it • NON-TRANSFERABLE • durable, immobile, hard to duplicate Ohio University College of Business Executive Education

17. Where do I Get this Stuff? • From a firms internal resource endowments • Buy or shared resources (M&A) • From resource deployments, systems and processes that cannot be imitated. • All of this is dependent on theworkforce to enhance the exploitation of these resources. Ohio University College of Business Executive Education

18. The Secret Revealed! What is the SECRET of obtaining a Strategic Competitive Advantage? • Simple: • Just do what everyone elseISN’T! Don’t imitate – INNOVATE! Ohio University College of Business Executive Education

19. Strategy execution requires active management PROCESSES that: • Focuses organizational attention on winning & motivate the people to seek the end through communicating the value of the target Ohio University College of Business Executive Education

20. Strategy execution requires active management PROCESSES that: • Provides for individual and team contributions with contingent and equitable recognition and rewards Ohio University College of Business Executive Education

21. Strategy execution requires active management PROCESSES that: • Sustains the level of commitment and enthusiasm by providing for new operational definitions of the target as circumstances change. Ohio University College of Business Executive Education

22. Strategy execution requires active management PROCESSES that: • Using the strategic intent consistently to guide and sustain resource allocation decisions Ohio University College of Business Executive Education

23. The Key to Strategy Execution Workforce Capabilities (Select & Develop Skills) Leadership & Workforce Behaviors to Strategy Execution Workforce Mindset and Culture = X Ohio University College of Business Executive Education

24. Strategy Execution Leadership & workforce behaviors Workforce Capabilities Workforce mindset & culture Right types of HR alignment Right HR Practices Human Capital Ohio University College of Business Executive Education

25. What is Human Capital? • Talents and abilities • Knowledge and skills • Social networks (capital) • Desire and visions Ohio University College of Business Executive Education

26. Human Capital Markets • Various levels of value • Appreciates and depreciates • Traded in markets and regulated • Individually owned but collectively realized Ohio University College of Business Executive Education

27. Human Capital Defined The collective sum of the attributes, life experience, knowledge, inventiveness, energy, and enthusiasm that its people choose to invest in their work.Weatherly 2003 Ohio University College of Business Executive Education

28. Human Capital and The Bottom Line • To create value through the HR requires a fundamental change in managing human capital. • The firm’s human assets have a value that corresponds to the present value of future net cash flows and are derived from the skills, motivation and adaptability of the firm’s workforce. Ohio University College of Business Executive Education

29. Why a HUMAN CAPITAL ORIENTED STRATEGY? Because…... The organization can leverage people with capital to achieve a higher return for owners Ohio University College of Business Executive Education

30. The Power Of HR Share Holder Returns Capital Human Resource Systems Ohio University College of Business Executive Education

31. The Power Of HR Share Holder Returns Human Resource Systems Capital Ohio University College of Business Executive Education

32. So What is Important? Successful organizations understand the importance of implementation, not just strategy, and moreover, recognize the critical role of human capital in the process” “People are the Strategy” - and to be successful organizations need to manage human resource systems Ohio University College of Business Executive Education

33. Why are people important? • Provide a basis for a sustained competitive advantage • Things like financial structure operational processes and technology can be easily copied or purchased Ohio University College of Business Executive Education

34. How Human Capital Helps • Workforce behaviors are the only way to achieve strategic outcomes like: • World class customer service • New product development • Cost controls • You name some more… Ohio University College of Business Executive Education

35. Human Capital is Invisible • Unlike conventional assets human capital does not appear on the balance sheet. • It is vested in the human resources often in the form of intellectual and social capital. • It is developed, utilized, and sustained through the management practices. • Being invisible it is harder to duplicate. Ohio University College of Business Executive Education

36. Basics of an HR System • More than the traditional functional components of HR. • Staffing, Training, Appraisal and Rewards are still important functions but… • They must be managed as a system; designed to produce employee behaviors that focus on key business priorities and drive profits, growth, and market value. Ohio University College of Business Executive Education

37. High Performance Work Systems • HPWS are generally firm specific and designed around the needs of the firm. • HPWS requires a strategic collaboration between traditional HR and CEO. • Requires alignment with the broad strategic infrastructure of the firm. • Must contain opportunity to participate, incentives, and skills Ohio University College of Business Executive Education

38. HPWS & The Employment Relationship • Any intervention, and especially transformational interventions, that alter the Employment Contract • Economic • Psychological • Social Ohio University College of Business Executive Education

39. HPWS --- Pfeffer’s 7 • Employment Security • Selective Hiring • Self Managed Teams • High and Contingent Compensation • Extensive Training • Reduced Status Distinctions • Extensive Information Sharing Ohio University College of Business Executive Education

40. A True HPW System • Goes beyond the cost center to a market base measurement. • Today’s HR interventions directly impact present value of tomorrow’s cash flows. • One estimate of impact of HPWS is $15,000 to $60,000 increase of market value per employee. Ohio University College of Business Executive Education

41. Human Capital Index In a Watson Wyatt study companies that scored higher on HCI delivered significantly higher Total Return to Shareholders over a five year period. Ohio University College of Business Executive Education

42. Practices That Lead to High Performance Organizations *Impact on Market Value Recruiting & Retention Excellence 7.9% *based on 1 standard deviation improvement Ohio University College of Business Executive Education

43. Practices That Lead to High Performance Organizations Impact on Market Value Total Rewards & Accountability 16.5 % *based on 1 standard deviation improvement Ohio University College of Business Executive Education

44. Practices That Lead to High Performance Organizations Impact on Market Value Collegial, Flexible Workplace 9.0% *based on 1 standard deviation improvement Ohio University College of Business Executive Education

45. Practices That Lead to High Performance Organizations Impact on Market Value Communication Integrity 7.1% *based on 1 standard deviation improvement Ohio University College of Business Executive Education

46. Obtaining Strategic Success Financial Success Operational Success Customer Success • All are LAGGING indicators of strategic success Ohio University College of Business Executive Education

47. Obtaining Strategic Success Staffing Training Assessing Performance Rewards • All are LEADING indicators of Strategy Execution Ohio University College of Business Executive Education

48. Staffing • Buying Human Capital • A procurement function • An inventory management and valuation function • Matches human capital resources to needs • Provides for retention and divesting of human capital Ohio University College of Business Executive Education

49. Training & Development • Creating Human Capital • Matching competencies and skills to strategic needs • Capturing, maintaining, allocating and protecting knowledge • Preparing for the future Ohio University College of Business Executive Education

50. AssessingPerformance • Measuring the critical behaviors that support strategic success • Evaluates the effectiveness of staffing • Identifies training & development needs • Evaluates the effectiveness of training & development • Provides a basis for allocation of rewards Ohio University College of Business Executive Education