HR Challenges in Integrated and Diversified Business Entities

Human Resources (HR) functions of companies face major challenges today as businesses struggle to remain competitive and retain markets. Companies across sectors are facing the challenges of physical and financial performance. While certain industries may be considered to be relatively insulated from economic downturn, one cannot be complacent as the bottom of the meltdown is perhaps not tested yet. In any case, even in the best of the times being efficient and productive is the only way to have a competitive advantage in the market place.


From a positive side, companies which have a high level of integration or operate in multiple business segments seem to offer continued sustainability. Integrated companies are expected to be more cost competitive, and thus secure market share. For example, an automaker with capability to make its own castings and forgings has higher cost efficiencies. Diversified businesses are expected to demonstrate increased business potential in terms of catering to multiple segments at diverse price points. For example, a hotel chain which has a cluster of hotels from luxury to budget hotels has a greater probability of sustenance than a hotel with only luxury properties. A full-line automotive maker has better chances of growth than only a focused car maker or truck maker. In addition, diversified entities would have the capability to shuffle resources across businesses. At the same time, integration or diversification imposes great challenges in building and managing facility and organizational infrastructure in an environment of economic downturn.


In today’s environment, businesses whether integrated or diversified can grow only based on competitiveness. Competitiveness of a business or an organization is derived from a host of factors such as science & technology, facilities, people and finances. Competitiveness is essentially deriving greater value at lower cost. Organizations typically focus less on value and more on cost, in recessionary times. While such organizations would certainly survive and consolidate during the troubled times, they would be incapable of riding the wave of growth when the economies begin to boom again. The concept of competitiveness which focuses on both the elements of value and cost would ensure that the organizations become not only efficient and productive for today but also innovative and creative for the future.


Going forward, HR needs to be particularly conscious of its role in the game of competitiveness. In this context, HR needs to focus on four important challenges: (i) business, (ii) structure, (iii) talent and (iv) performance.


Business:


Integration of manufacturing lines is an enabler for achieving industry dominance with end-to-end connectivity. Diversification of product-market segments is a hedge against recession and an insulation against risk. Yet such strategies carry certain inherent challenges.


The challenge for integrated companies is that such companies run the risk of a significant disconnect between the asset base and turnover scale. Integrated businesses tend to accumulate assets relative to a narrow market base and hence would need to move from being asset-centric to being market or customer-centric, to ensure business profitability. Diversified businesses which are also fully integrated in each business segment would carry maximal asset risk which can be catered to only by maximization of each market opportunity.


The challenge for diversified entities is that any diversification strategy needs to be dynamic. In any good diversification business strategy, with time each business needs to move into the pre-cursor fundamental business thus strengthening the bottom of the business pyramid even as newer businesses enter the futuristic segments. This implies that existing businesses have to be grown and new businesses initiated at a rapid clip.


The common challenge relates to understanding and balancing the two factors that are cost related, both for integrated and diversified companies. One relates to the cost of doing a business and the other relates to the price at which a business can be done. Organizations with integrated or diversified businesses (more so if each of the businesses is a long gestation activity) have to bear huge pre-operative costs before such businesses generate revenues. Such asset-intensive or long-gestation businesses have a cost to operate and the companies should be prepared to bear it. The second relates to the price at which the business can be done. In the final count, a distinct value proposition (quality-cost balance) is required for each product or service offered by the company. Integrated companies face competition from firms which focus only on end-product manufacture and have competencies in outsourcing efficiently. Diversified companies face competition in each of their business segments from leaner and more competitive companies which are more efficient because of lower investments in the respective limited business horizons. Merely being integrated or diversified with world-class assets, may not support high levels of pricing.


There are three compelling lessons from the above in terms of business considerations. Integrated or diversified companies should enable businesses to be revenue and profit accretive as speedily as possible so that there is a virtuous sequence of consolidation and growth in businesses. Organization structure and talent space should be strengthened so that asset capabilities and market needs are closely aligned. Despite being a large corporation, each of the segments has to be appropriately lean, efficient and competitive on a stand alone basis, in respect of each manufacturing line or business segment.


Structure:


Organization structure is an instrument to translate strategy into performance. An organization structure has to be clearly delineated and dovetailed with the objectives of the business. An integrated company often suffers from a staid and rigid organization structure. A diversified company with a common ownership structure encounters several organizational dynamics, related to multiple business eco-systems. Several organization structures have been experimented from time to time such as product organization, geographical organization, functional organization, business organization and matrix organization in such entities. No individual structure, however, provides comprehensive solutions to all the requirements.


Dilemmas with reference to organization structure are common across companies, in terms of experimentation from time to time. A unique and almost genetic problem is one of overlapping structures and unclear responsibilities. While collective responsibility and accountability are important components of team functioning and delivery, individual clarity and focus are equally important to ensure focused and timely delivery, with due accountability.


HR has the primary responsibility in designing and implementing an organization structure that enables a company achieve its business objectives through a robust business strategy and coordinated execution. The structure also has to recognize the desirable aspects of an organization’s positive culture and also integrate the desirable needs of performance competitiveness.


Given the long value chains that integrated companies have or multiple business segments that diversified companies operate in, structures that enable integrated business responsibility, often called P&L responsibility, or at least integrated resource management, could help companies achieve the business imperatives. In order to guard against excessive individualization of businesses, such business-centric organizations have to be integrated under a group ambit through appropriate mechanisms such as a corporate centre, leadership council or executive board.


Talent:


Building of cost-effective talent pools is a major challenge in a recessionary environment. The problem increases exponentially in diversified companies. In the past, companies have been able to attract and retain talent on the basis of opportunity and compensation. In some cases, positive culture and professional empowerment have been additional points of attraction. In today’s market, value propositions need to be more discriminating. The enduring talent model that meets the requirements of all economic cycles is paradoxically internally focused.


One needs to refer to the scores of books on Toyota’s legendary organizational capabilities to realize that an unrelenting focus on systems and people has been at the core of Toyota’s success. The Toyota Production System has been accepted as the global benchmark for efficiency in automobile manufacture as it delivers consistent quality at competitive prices. The system demands high capability to operate which in turn demands highly skilled human resource base. Toyota does (and most Japanese companies do) a few things differently. In recruitment stage, specification of people-quality is translated to actual selection of people with high quality. During the training period and in the early years, continuous product and process exposure is provided to employees while regular job redeployment and job rotation are practised in mid-career stages. Business systems are designed in a manner that requires high capability while continuous training of people to better their own benchmarks. Toyota thus integrates every conceivable facet of talent management with a focus on operational excellence through people skills.


Generically, in a typical Japanese corporation, conceptual and analytical processes are standardized in the organization as an intrinsic core capability. Whether it is a legal department or a research department, and whether it is a technical department or a business department, the employees are trained to analyze and solve problems in a particular framework which follows the essential sequence. (i) definition of the problem, (ii) analysis of causes, (iii) development of solutions, (iv) evaluation of alternatives, (v) prioritization and selection of solutions and (vi) evolution of consensus on the chosen solutions. Probably, this unique thinking emanates from the way pedagogy is practiced at the school and college levels in Japan and from the unique participative and consensual culture of the Japanese society. This peculiarity of Japan however should not be an alibi for not following such methodology. Reputed international consulting organizations such as McKinsey also owe their success to the above methodology, at least in terms of the first five points. It is probably time that HR in companies thought about enhancing the conceptual and analytical capability of the employee base individually and as a whole.


Performance:


Individuals in organizations exist to generate revenues and profits for the company. Some creatively identify opportunities, some execute creditably for the opportunities and some review the opportunity-performance relationship. Some contribute by saving costs and some contribute by building value. Together the organization must tick to execute a sustainable business model that optimizes revenues and profits for the short term as well as for the long term.


Here again, much research has gone into the ideal way to measure the performance of an organization, its sub-units and individuals. From annual performance appraisals to 360 degrees assessment centres no system has been wholly satisfactory. Short term results and individual comfort factors continue to influence how performance is captured, interpreted and rewarded. Very often individual performance and corporate performance on one hand and as well as short term performance and long term viability lack alignment. In this context, the Balanced Score Card (BSC) methodology pioneered by Robert Kaplan and David Norton has been widely recognized as capable of integrating all factors of performance such as efforts and results covering both the short term and long term. It also focuses on aspects which are almost always missed out (for eg., process capability and learning interest). It also uniquely quantifies even apparently qualitative and conceptual factors.


With the economy and business environment having undergone a major change, corporate strategies and objectives also require matching changes to remain competitive. Also, quite apart from operations and facilities, corporate functions and shared services also require their own scorecards. In a typical company, one can conceptualize hundreds of initiatives covering multiple domains spanning the four BSC dimensions of Financial, Customer, Internal Business Process and Learning & Development. It is indeed a full-time responsibility for a business and execution savvy team to do justice to the BSC initiative, particularly in a diversified company, which has to cater to multiple business characteristics and talent needs.


HR has major challenges from a business perspective in the current turbulent times, more so in highly integrated and / or diversified entities. There are several strategic and operational perspectives that are relevant for HR to effectively fulfill its role in such entities. Fundamentally, HR would need to be an integral component of all key business processes, given the complexities of business management in such entities. HR’s contribution to business competitiveness would be immensely enhanced by itself being an organizational role model of understanding and enabling business competitiveness.

Posted by Dr CB Rao on May 31, 2009