Learn about defining, measuring and reporting human capital, and how HR can use human capital information to drive performance
An approach to managing human resources, strategic human resource management supports long-term business goals and outcomes with a strategic framework. It focuses on longer-term resourcing issues within the context of an organisation's goals and the evolving nature of work, and informs other HR strategies, such as reward or performance, determining how they are integrated into the overall business strategy.
This factsheet looks at how the concept of strategic HRM has developed since the early 1990s and makes a distinction between strategy and strategic planning. It then looks at strategic HRM in relation to business strategy, human capital management and business performance.
Business strategy describes the way an organisation creates value through its business model, the purpose and objectives that govern the model’s operation, and the indicators used to describe the strategy’s success. As a result organisations should manage people within a planned and coherent framework that reflects the business strategy. This helps ensure that the various aspects of people management work together to develop the performance and behaviours necessary for creating and distributing value. It means understanding the requirements and interests of a range of organisational stakeholders (business owners, customers, shareholders, employees and wider society) and building an effective framework of sustainable relationships between them. In such a framework no stakeholder is viewed simply as an input in the organisational value chain, rather they are all contributors to and recipients of the shared-value created by the business activities.
But there’s no single HRM strategy that will deliver success in all cases. Organisations must define their own unique strategy according to their specific context, culture and objectives. This is where HR professionals are instrumental in applying their expertise to understanding organisational circumstances, and designing human capital value chains that reflect stakeholder demands. We are developing a new set of principles aimed to help the profession in developing strategic HR frameworks through our work on Profession for the Future.
What is strategic human resource management?
Strategic human resource management (strategic HRM) is an approach to managing human resources that supports long-term business goals and outcomes with a strategic framework. The approach focuses on longer-term people issues, matching resources to future needs, and macro-concerns about structure, quality, culture, values and commitment. It is necessarily dependent on the evolving nature of work itself, which is explored in our Megatrends series and our Profession for the Future work.
Strategic HRM: the key to improved business performance1 explains in detail the various definitions and approaches to HRM, strategy and strategic HRM. It states that strategic human resource management is a complex process that is constantly evolving and the subject of ongoing discussion by academics and other commentators. Its definition and relationships with other aspects of business planning and strategy are not absolute and opinions vary.
The issue of strategic HRM initially came to prominence around the early 1990s, at which time academics developed definitions of strategic HRM as:
- The undertaking of all those activities affecting the behaviour of individuals in their efforts to formulate and implement the strategic needs of business2.
- The pattern of planned human resource deployments and activities intended to enable the organisation to achieve its goals3.
Boxall and Purcell4 describe strategic HRM as being concerned with explaining how HRM influences organisational performance. They also argue that strategy is not the same as strategic planning because:
Strategic planning is the formal process that takes place, usually in larger organisations, defining how things will be done.
Strategy, by contrast, exists in all organisations (even if it’s not written down and articulated) and defines the organisation’s behaviour and how it attempts to cope with its environment.
Strategic HRM can encompass a number of individual HR strategies, for example:
- to deliver fair and equitable reward
- to improve employee performance
- to streamline organisational structure.
In themselves these strategies are not strategic HRM. Rather, strategic HRM is the overall framework that determines the shape and delivery of the individual strategies, systematically linking people with organisations by integrating HRM strategies into corporate strategies5 to deliver organisational value.
Strategic HRM and business strategy
A good business strategy is informed by people factors. This is driving demand for greater evaluation and reporting of human capital data (see below).
Most organisations today recognise that people are fundamental to sustainable value creation, which is why human capital is often referred to as a business’ 'most important asset'. Individuals’ knowledge, skills and abilities are assets which the organisation should invest in and leverage to create sustainable value for the organisation and its various stakeholders. The intangible value of an organisation relating to the people it employs is gaining recognition among accountants and investors, and its implications for long-term sustained performance is now generally accepted.
So it’s too simplistic to suggest that strategic human resource management stems from the organisation’s business strategy. The two must inform one another. The way in which people are managed, motivated and deployed, and the availability of skills and knowledge, should all shape the business strategy. It is now increasingly common to find business strategies that are inextricably linked with, and incorporated into, strategic HRM, defining the management of all resources within the organisation.
Individual HR strategies, however, may be shaped by the business strategy. So if the business strategy is about improving customer service this may be translated into discrete HR strategies involving the use of training plans or performance improvement plans.
Links with workforce planning
One important area of people strategy is workforce planning, which helps organisations meet their future skills needs and support their long-term business goals. There has recently been a renewed interest in this issue, largely driven by the realisation that in a fast-changing economy some degree of planning is vital to ensure the organisation is developing sufficient capacity to adapt to new trends and take advantage of emerging opportunities.
Workforce planning involves putting business strategy into action. It must therefore be an iterative process - feeding information upwards on the capability and capacity of the workforce to deliver - and acting on forecast need for skills and capabilities to take the organisation forward.
Strategic HRM and human capital management
The term human capital is used to describe people at work and their collective knowledge, skills, abilities and capacity to develop and innovate. Human capital management assumes that people are treated as assets rather than costs. It focuses on the importance of adopting an integrated and strategic approach to managing people, which is the concern of all stakeholders in an organisation, not just people management professionals.
Human capital management can complement and strengthen strategic HRM by:
drawing attention to the significance of ‘management through measurement’ - the aim being to establish a clear line of sight between HR interventions and organisational success
providing guidance on what to measure, how to measure and how to report on the outcomes of measurement
underlining the importance of using the measurements to prove that superior people management is delivering superior results and to indicate the direction that HR strategy should follow
reinforcing attention on the need to base HRM strategies and processes on the requirement to create value through people and thus further the achievement of organisational goals
defining the link between HRM and business strategy
strengthening the HRM belief that people are assets rather than costs
emphasising the role of HR specialists as business partners.
Strategic HRM can be seen as the means through which human capital is converted into organisational value. Human capital evaluation is useful in that it provides information about the current and potential capabilities of human capital to inform the development of strategy. Business success will be achieved if the organisation is successful in managing this human capital to achieve this potential and embed it in products and services that have a market value. So strategic HRM could then be viewed as the defining framework within which these evaluation, reporting and management processes take place and which ensures that they are iterative and mutually reinforcing.
Find out more by reading our recent research Human capital analytics and reporting: exploring theory and evidence.
Strategic HRM and business performance
Since around the mid-1990s, the CIPD and other organisations have been gathering evidence of the impact of people management practices on business performance. Much emphasis has been placed on the importance of ‘fit’. In other words, HR interventions should align with both each other and other organisational strategies for maximum impact. The main areas of practice agreed to have an impact on performance are around job design and skills development.
The ‘people and performance model’ generated from CIPD-sponsored work at Bath University and described in our Understanding the people and performance link: unlocking the black box report, emphasised the importance of individual HR strategies that must fit with each other and operate within a strategic framework that incorporates both people and business issues.
Our research has also found that individual HR practices alone do not drive enhanced business performance. They can create ‘human capital’ or a set of individuals who are highly-skilled, but this will only feed through into higher levels of business performance if these individuals have positive relationships with their managers in a supportive environment with strong values. All these factors will promote ‘discretionary behaviour’, that is, the willingness of the individual to perform above the minimum necessary or give extra effort. It is this discretionary behaviour that makes the difference to organisational performance. Hence strategic HRM should take account of the need to engage individuals within the organisation to effectively drive business performance.
- ARMSTRONG, M and BARON, A. (2002) Strategic HRM: the key to improved business performance. Developing practice. London: Chartered Institute of Personnel and Development.
- SCHULER, R.S. (1992) Strategic human resource management: linking people with the needs of the business. Organizational Dynamics. Vol 21, No 1. pp18-32.
- WRIGHT, P.M. and MCMAHAN, G.C. (1992) Theoretical perspectives for SHRM. Journal of Management. March. pp215-247.
- BOXALL, P. and PURCELL, J. (2003) Strategy and human resource management. Basingstoke: Palgrave Macmillan.
- ASTON CENTRE FOR HUMAN RESOURCES (2008) Strategic human resource management: building research-based practice. London: Chartered Institute of Personnel and Development.
ARMSTRONG, M. (2016) Armstrong's handbook of strategic human resource management. 6th ed. London: Kogan Page.
FARNHAM, D. (2015) Human resource management in context. 4th ed. London: Chartered Institute of Personnel and Development.
KEW, J. and STREDWICK, J. (2016) Human resource management in a business context. 3rd ed. London: Chartered Institute of Personnel and Development.
MCGEE, R. and RENNIE, A. (2009) HR strategy. CIPD Toolkit. London: Chartered Institute of Personnel and Development.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
CASCIO, W.F. (2015) Strategic HRM: too important for an insular approach. Human Resource Management. Vol 54, No 3, May/June. pp423-426.
JIANG, K,. LEPAK, D. and TAKEUCHI, R. (2013) Where do we go from here? New perspectives on the black box in strategic human resource management research. Journal of Management Studies. Vol 50, No 8, December. pp1448-1480.
KRAMAR, R. (2014) Beyond strategic human resource management: is sustainable human resource management the next approach? International Journal of Human Resource Management. Vol 25, No 8, April. pp1069-1089.
REILLY, P. (2012) The practice of strategy. Strategic HR Review. Vol 11, No 3, pp129-135.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Edward Houghton.
Edward Houghton: Senior Adviser for Human Capital & Governance
Edward Houghton is the CIPD's Senior Adviser for Human Capital and Governance. Since joining the institute in 2013 he has been responsible for leading the organisation's human capital research work stream exploring various aspects of human capital management, theory and practice; including the measurement and evaluation of the skills and knowledge of the workforce. He has a particular interest in the role of human capital in driving economic productivity, innovation and corporate social responsibility. Recent publications have included “A duty to care? Evidence of the importance of organisational culture to effective governance and leadership” for the Financial Reporting Council’s Culture Coalition, and “A new approach to line manager mental well-being training in banks” an independent evaluation of the Bank Workers Charity and Mind partnership to deliver mental health awareness training in the UK financial services sector.
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