Abrar Ahmad Bhatti HRM MBA

WEEK: 01
AN INVESTMENT PERSPECTIVE OF HRM (VALUATION OF HUMAN ASSET)

E ffective organizations are increasingly realizing that of the varied factors that contribute to performance, the human
element is clearly the most critical. Regardless of the size or nature of an organization, the activities it undertakes, and the
environment in which it operates, its success is determined by the decisions its employees make and the behaviors in which
they engage. Managers at all levels in organizations are becoming increasingly aware that a critical source of competitive
advantage often comes not from having the most inventive product design or service, the best marketing strategy, state-of-
the-art technology, or the most knowledge financial management but from having the appropriate systems for attracting,
motivating, and managing the organizations’ human resources (HR).

Adopting a strategic view of HR, in large part, involves considering employees as human “assets” and developing
appropriate policies and programs as investments in these assets to increase their value to the organization and the
marketplace. Effective organizations realize that their employees do have value, much as the organization’s physical and
capital assets have value. Exhibit 1.1 illustrates some of the value employees bring to an organization.

Adopting an Investment Perspective

In considering whether to undertake the expense of a new training program, for example, an organization needs to consider not only the out-of-
pocket costs for the training but also the related opportunity costs, such as lost time on the job, and weigh these costs against the potential benefits of the
training, such as enhanced performance, potential increased loyalty, and motivation. The training also needs to be assessed relative to risk because the
enhanced marketability of employees makes them more desirable to competitors. Similarly, in considering compensation programs as an investment, an
organization needs to consider what it is “investing” in when it pays someone (knowledge, commitment, new ideas, retention of employees from
competitors). The potential return on the organization’s financial outlay in compensation will determine whether its compensation system is a viable
investment strategy.
 Abrar Ahmad Bhatti HRM MBA

VALUATION OF ASSETS:
Five major kinds of assets or capital that organizations can influence to aid in performance and add value to operations are financial assets/capital,
physical assets/capital, market assets/capital, operational assets/capital, and human assets/capital, as shown in Exhibit 1.2. Financial assets/capital
include equity, securities and investments, and accounts receivable. Physical assets/capital include plant, land, equipment, and raw materials. Market
assets/capital include goodwill, branding, customer loyalty, distribution networks, product lines and patents, trademarks, and copyrights. Operational
assets/capital include management practices, the structure of work, and the use of technology. Human assets/capital include employee education levels,
knowledge, skills, competencies, work habits and motivation, and relationships with coworkers, customers, suppliers, regulators, and lenders.

Dyer and Reeves attempted to define what can be called the HR “value chain.” They argued that performance could be measured via four different sets
of outcomes: employee, organizational, financial and accounting, and market-based. More importantly, they proposed that these sets of outcomes had a
sequential cause-and-effect relationship, as indicated in Exhibit 1.3. Each outcome fueled success in a subsequent outcome, establishing a causal link
between HR practices and an organization’s market value.

HR METRICS:
The Society for Human Resource Management has identified a number of common metrics for measuring the performance and value of human
capital, a number of which are presented in Exhibit 1.4. These are measures that can easily be translated into bottom-line measures of performance as well
as compared to industry benchmarks. Exhibit 1.5 provides examples of how five of these metrics that are often regarded as the most prominent measures
of human capital management can be calculated and utilized.
 Abrar Ahmad Bhatti HRM MBA

FACTORS INFLUENCING AN ORGANIZATION’S INVESTMENT ORIENTATION:

 Abrar Ahmad Bhatti HRM MBA
The extent to which an organization can be characterized as investment-oriented may be revealed through answers to the following questions:
• Does the organization see its people as being central to its mission/strategy?
• Do the company’s mission statement and strategic objectives, both company-wide and within individual business units, espouse the value of or even
mention human assets and their roles in achieving goals?
• More importantly, does the management philosophy of the organization encourage the development of any strategy to prevent the depreciation of its
human assets or are they considered replicable and amortizable, like physical assets?

Senior management values and actions determine organizational investment in assets. It is critical to understand how the organization’s strategy mandates
the investment in particular assets relative to others. Whether management values its people is a critical factor in its willingness to invest in them.

The second factor is attitude toward risk. The most fundamental lesson in financial management is that a trade-off exists between risk and return. Higher-
risk investments are generally expected to have a greater potential return; lower-risk, safer investments are generally expected to have a more modest
return. For example, in financial markets, bonds are considered less-risky investments than stocks but have a limited, fixed return. Stocks, on the other
hand, are considered higher-risk investments but have no limit as to their potential return.

The third factor is the nature of the skills needed by employees. Certain organizations require employees to develop and utilize very specialized skills that
might not be applicable in another organization; another employer might have employees utilize and develop skills that
are highly marketable. For example, if an employer has a custom-made information system to handle administrative HR functions, employees using that
system might not transfer those skills to another employer. However, if an employer uses a popular software program for which there is high demand for
skilled employees among competitors, the investment in employees becomes more risky.

The fourth factor affecting the investment orientation is the “utilitarian” mentality of the organization. Organizations that take a utilitarian, or “bottom
line,” perspective evaluate investments by using utility analysis, also known as cost-benefit analysis. Here, the costs of any investment are weighted
against its benefits to determine whether the prospective investment is either profitable or, more commonly,
achieves the target rate of return the organization has set for its investments. A highly utilitarian approach attempts to quantify all costs and benefits. For
example, rather than just considering direct cash expenditures, this approach would also consider the cost for the time involved to develop and administer
an innovative performance measurement system (by considering how much people are being paid for the time involved in the process), the cost of having
larger applicant pools (by considering how much longer it would take to screen applicants), and the cost of employing more extensive employee selection
procedures (again, by considering time and its monetary value).

The final factor impacting an organization’s willingness to invest in its people is the availability of cost-effective outsourcing. An investment-oriented
approach to managing an organization will attempt to determine whether its investments produce a sustainable competitive advantage over time. When
specialists who may perform certain functions much more efficiently exist outside an organization, any internal programs will be challenged and have to
be evaluated relative to such a standard. This is true for virtually any organizational function, including customer service, accounting, manufacturing, and
HR management functions.

HR professionals can be strong catalysts in influencing the extent to which an organization’s leaders truly understand the inherent value of its people. It
has been argued that those in the HR profession have an ethical obligation and bear responsibility for leadership in this regard.

WEEK: 02
CHALLENGES IN SHRM (STRATEGIC CHALLENGES IN HRM)
 Abrar Ahmad Bhatti HRM MBA
Meaning:
 Strategy is a term that comes from the Greek strategia, meaning "generalship." In the military, strategy often refers to
organizing troops into position before the enemy is actually engaged

What is SHRM:
 Strategic human resource management has been defined as ‘the linking of human resources with strategic goals and
objectives in order to improve business performance and develop innovative organizational culture that foster innovation
and flexibility.
 “To be competitive, organizations in many industries must have highly skilled. Knowledgeable workers. They must also have a
relatively stable labour force since employee turnover works directly against obtaining the kind of coordination and
organizational learning that leads to fast response and high-quality products and services” - Edward Lawler

Aims of SHRM:
Long-term Objectives: Profitability, Return on investment, Competitive position, Technological leadership, Productivity, Employee
relations, Public responsibility, Employee development.

Short-term objectives: Detailed work planning, Emphasis on technical, qualifications and skills, Emphasis on job-specific, training,
Emphasis on job-based pay, Use of performance appraisal as a control device, Team-based training.
Abrar Ahmad Bhatti HRM MBA
Abrar Ahmad Bhatti HRM MBA