Strategic Human Resource Management

Kmart is rightly considered as one of the most successful examples of strategic and operational management improvements in Australian business. Much has been written and said about the way Kmart changed its approaches to customer service, sustainability, and staff operation. Kmart New Zealand is currently owned by Wesfarmers, a huge business conglomerate listed on the Australian stock exchange, whose principal business objective is to benefit shareholders and provide them with satisfactory returns. Kmart New Zealand has become famous for the miraculous improvements it underwent over the last two years: dramatic changes in HRM procedures and operational management have moved the entire company onto a new quality level of performance. As of today, Kmart is facing promising growth prospects and a number of human resource challenges. All these can be successfully overcome, if the company creates a balanced picture of staff management priorities, resources, and motivation/ training opportunities to hire, develop, and retain talented employees.

Week One: Balanced Scorecard and Managing Kmart

Kmart exemplifies a sophisticated business venture, with clearly defined strategic objectives and a well-developed business growth strategy. To provide shareholders with satisfactory returns is the company’s main strategic objective. Kmart New Zealand must and is expected to meet a set of specific net income improvement targets; the key target of interest is to achieve and sustain an improvement on net income, from the same period last year. On their side, store managers must do their best to let their stores achieve the desired sales targets – each store has a particular sales growth target and must improve sales from the same period last year. This being said, Kmart was extremely successful in improving its strategic performance, and store managers and sales staff work hard to make their and their company’s dream come true. In the meantime, the goals set by the company raise several important questions. At the very basic level, it does not seem that Kmart has a systematic, comprehensible strategy to support its stores in the long-run.  Kaplan and Norton (1996) write that “the emphasis most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation” (p.75). Undoubtedly, the sales and net income improvement targets which Kmart stores must achieve have little to do with the company’s long-term strategic vision. The company’s staff lacks a clear long-term strategic insight: for the most of their time, they are focused on working towards improving net income and sales from the same period last year. Moreover, these are financial measures which lack the so-called “human” dimension (Schein, 1980). In spite of the possibilities which sales and net income improvements provide, the role played by the staff remains unclear. Wesfarmers’ annual report emphasizes the importance of customer service and business sustainability but provides little information of what the company holds for its employees. At the end, what can growth in sales and net income bring to employees, except for financial bonuses?

At this stage of development, as the company is gradually moving from the renewal to the growth stage of its strategic plan, using a balanced scorecard approach could benefit the entire company, including its staff. With vast improvements achieved over the last two years, there is still much room for strategic changes. The benefits of implementing the balanced scorecard approach cannot be overestimated: first and foremost, balanced scorecard makes possible to translate the company’s objectives into specific targets for each employee (Kaplan & Norton, 1996). Second, it is through the balanced scorecard that employees can articulate their own objectives and behaviors, which are consistent with the company’s strategic and operational goals (Kaplan & Norton, 1996). Third, the balanced scorecard facilitates congruence between employee behaviors and achievements and employee rewards (Kaplan & Norton, 1996). Eventually, the balanced scorecard holds a promise to expand the company’s strategic outlook, and include a set of non-financial goals/ measurements for its employees. Most probably, these are the non-financial measures that will enhance the quality and efficiency of the company’s motivational moves in the long run.

Week Two: Ability and Motivation at Kmart

That Kmart passed a long way to better employee performance cannot be denied. Through the years, the company relied on ad-hoc recruitment strategies and, for this reason, could utilize employee performance potential to the fullest. The ‘what great looks like’ HRM plan had to (a) allow for assessing employee abilities and skills; (b) choose and hire those employees which had skills and knowledge required to work for the benefit of Kmart; and (c) create an individual development for each employees, to enhance their workplace and management skills. The assessment process comprised the elements of self-assessment and supervisor evaluation. As a result, Kmart, on the one hand, has resulted in an unprecedented 55% of turnover among store managers and an unbelievable 48% turnover among sales managers. Kmart claims that staff turnover was both voluntary and involuntary, but the quality of performance across all sales units has improved substantially. In this context, high turnover rates deserve particular attention and represent an area of professional and management concern for Kmart.

What does high turnover imply? Turnover literally implies that Kmart sent 48% of its sales staff and 55% of its store managers to work somewhere else, be it a place in another Kmart’s division or an outside company. This, in turns, implies that Kmart adopted a new, different vision of recruiting/ hiring processes and chose to rely on new employees. Surely, Kmart tried to use and balance its limited resources more creatively (Boxall & Purcell, 2008; Shaw, Duffy & Lockhart, 2005). Since types and levels of employee ability vary enormously among individuals, Kmart chose to sacrifice some of its workers, in order to inhale some fresh breathe into its strategic performance. Kmart has finally realized the crucial role of quality recruitment and selection for HR (Anonymous). Nonetheless, two important questions remain unanswered.

First, how did it happen that Kmart missed a complementary opportunity and training for the pool of its employees? Certainly, even companies with a vast internal labor potential need a regular inflow of talents from the outside (Boxall & Purcell, 2008). Yet, as ‘make’ cannot be a full, reliable alternative to ‘buy’, so cannot ‘buy’ be a total alternative to ‘make’ (Boxall & Purcell, 2008). All companies, irrespective of the field and type of business they currently operate in, can always gain from encouraging training and learning in the workplace (Boxall & Purcell, 2008). With this in mind, Kmart could either expose its workers to new professional experiences or suggest that the employees who failed the assessment tests tied themselves to high performers, to learn and acquire skills they needed to keep their jobs (Aldag & Brief, 1979; Boxall & Purcell, 2008). Kmart claims that soft skills appeared to be the most problematic aspect of employee performance within the company; a broad company-based program could allow for closing the soft skills gap among employees.

Second, was Kmart objective and consistent while assessing employee abilities and skills? Ability is an extremely complex and sophisticated concept, which encompasses a range of skills, knowledge, physical and mental health factors, as well as formal education, training, and professional experiences (Blumberg & Pringle, 1982). Abilities are internal, but they are influenced by a broad range of environmental factors. The current body of literature indicates that a variety of environmental factors beyond individual control greatly affect the way employees utilize their professional potential (Blumberg & Pringle, 1982). These may include but are not limited to the actions of significant others and the context in which employees operate (Blumberg & Pringle, 1982). Furthermore, ability is integrally linked to motivation, which means that even the most capable employees cannot perform successfully, if they are not motivated (Boxall & Purcell, 2008). For example, Kmart motivates part-time employees by giving the best ones more hours at work; as a result, those who do not perform well have little incentives to improve their performance. Kmart does not seem to offer any training opportunities to those, who do not perform well, leaving them few chances to improve their functions and skills. It is high time Kmart realized the importance and complexity of the ability-motivation-context association (Boxall & Purcell, 2008). It is also high time HR became one of the company’s top strategic priorities, with financial goals closely aligned with the quality of employee performance, rewards, and training opportunities.

Week Three: How Worker Attitudes Affect Performance

Worker attitudes are believed to be an important factor of employee motivation and performance (Boxall & Purcell, 2008). Moreover, how workers treat their jobs and obligations further predetermines the rates of employee retention and turnover within the company (Boxall & Purcell, 2008). Kmart seems to have been successful in evaluating employee beliefs about their own performance: both the basic assessment of capabilities and skills and annual performance appraisal systems are based on employee self-evaluation and self-reports. Nevertheless, the rates of employee turnover during the period of strategic changes at Kmart have been surprisingly high. Even if Kmart claims to give away its employees to other divisions or Wesfarmers companies, high employee turnover always comes at a cost. Unless otherwise possible, companies should strive to retain their employees and invest additional resources in training and development, to build and sustain employee commitment.

It is noteworthy that employee turnover can be equally beneficial and harmful to organizations (Siebert & Zubanov, 2009). When Wesfarmers’ annual report emphasizes the crucial role of ‘great people, great company’, high turnover rates immediately reduce the validity of this claim. High turnover rates can essentially mean two things: first, employees hold mostly negative attitudes toward the company and do not want to work for it (voluntary), or the company itself does not value its employees (involuntary). In case of Kmart, employee turnover was both voluntary and involuntary, simultaneously imposing additional, unnecessary costs on the company. On the one hand, high turnover rates imply that the company is losing its human capital (Peters & O’Connor, 1980; Siebert & Zubanov, 2009). This is particularly the problem of voluntary turnover, and losing the staff that have training and skills provided by the company may cause a variety of irreversible consequences to the company (Siebert & Zubanov, 2009). Second, companies facing high turnover rates lose ‘star’, productive workers (Siebert & Zubanov, 2009). Kmart’s HR manager based his decisions on the results of one, and only one employee assessment, and the risks that some of the most valuable workers have been lost are still high. Nonetheless, even if Kmart has lost some of its valuable staff, these failures have been offset by the benefits brought by employee turnover, including improved employee-job fit and reducing the organization’s trained incapacity (Siebert & Zubanov, 2009). The current Kmart’s HRM system is characterized by well-weighed selection and recruitment processes, which dampen the negativity of labor turnover (Siebert & Zubanov, 2009).

Now, as the company seems to have dismissed and transferred everyone who did not fit in the company’s strategy and environment, the main question is what Kmart should do to (1) retain new and existing employees and (2) avoid future performance failures. First, HR managers at Kmart must estimate the optimal level of employee turnover (Siebert & Zubanov, 2009). Second, HR professionals at Kmart must learn how to measure employee attitudes toward work, organization, policies, and employment practices (Boxall, Macky & Rasmussen, 2003). This is possible if HR managers are committed to regular measurement and analysis (Boxall et al, 2003). Whether or not the current system of performance appraisal at Kmart can fulfill this function is difficult to define; most probably, the organization will have to review and adjust its individual performance review processes, to ensure greater employee participation in employment decisions and job design (Boxall et al, 2003). Whatever the cost of these changes, they will pay back their dividends through reduced turnover, lower recruitment and retention costs, and a better understanding of employee attitudes toward the work they are doing at Kmart.

Week Four: Performance Appraisals

Whether or not formal performance evaluation benefits organizations is a continued debate. With all its benefits, no performance appraisal system is without controversy. While many large and small companies were able to implement productive performance appraisal models, many others have experienced continuous disappointment because of lack of success with their performance appraisal systems (Marsball & Wood, 2000; Pearce & Porter, 1986). Nonetheless, organizations should not give up their attempts to develop and implement productive performance appraisal systems. There is no lack of research on performance appraisals (Fletcher, 2001; Klein & Snell, 1994; Marsball & Wood, 2000), and organizations, including Kmart, have ample opportunities to reconsider their own appraisal systems and improve them. What Kmart has to do is to (a) clarify the goal of performance appraisal for itself and its employees; (b) develop a clearer politics of performance appraisal; and (c) close the gap between performance appraisal and rewards.

Why organizations implement formal appraisal systems depends on numerous factors. The goals of implementing formal performance appraisal systems vary across companies. These may include but are not limited to alignment and performance pay, development and accountability, succession and voice (Boxall et al, 2003). The main problem of managers is in that many of them have only some vague understanding of performance appraisal and its goals: Kmart itself does not seem to have a comprehensive and clear performance appraisal mission. In case of Kmart, the goal of performance appraisal is most probably that of alignment: the company strives to re-evaluate the degree to which employees meet the desired standards of behavior and conduct and the way these affect the organization’s strategic success. This is actually what Kmart’s HR managers try to achieve – a novel performance management system which exemplifies a strategic congruence of employee and organizational performance (Fletcher, 2001). Yet, as the organization is entering the ‘growth’ stage of its strategy, its formal appraisal system is still lacking formality and clear politics. The latter suggests that performance appraisal system must fit into the organization’s culture and be supported by it (Longenecker, 1987). Assessing employee performance on an annual basis can never suffice to bring the organization to the desired strategic end. Performance appraisals should be further supplemented by top management and training support (Longenecker, 1987). Thus, Kmart must shift its goal emphasis from alignment to development, succession, voice, and pay performance (Boxall et al, 2003). Top managers should not and must not avoid the formal performance appraisal process: like sales and store managers, top executives and HR managers need formal appraisal of their performance, to make sure that ‘everyone is involved’ (Longenecker, 1987). In their turn, employees need to understand why regular performance appraisals are needed – formal performance appraisals are always about politics, especially in large organizations, and employees must understand that no organization can escape the influence of politics on performance appraisal. Eventually, executives and HR managers must create and serve role models to be followed by the staff, and it is through effective performance appraisals that the company can meet this objective.

Lack of integration with other policies is one of the main cornerstones in the development and implementation of formal performance appraisals (Boxall & Purcell, 2008). Despite its experience and input, Kmart failed to escape this gap. Although organizational and employee performance is always contextual (Borman & Motowidlo, 1993), the importance of the performance appraisal-reward congruence is equally important for everyone. Kmart rewards its sales staff and store managers for increasing the company’s net sales and net profit annually; simultaneously, the organization appraises the degree to which employees have been able to meet the purpose of their performance and the desired set of professional behaviors in the workplace. The link between these behaviors and the financial goal of profitability and increased sales remains extremely vague. Moreover, the entire strategy of performance appraisal keeps employees torn between the way they behave in the workplace and the way they work to increase sales and net profits. How to use these behaviors to achieve better profits and sales is not clear. Employees are being assessed for one thing but strive for totally another purpose (Morgeson, Mumford & Campion, 2005). The question is what Kmart can do to raise the validity of performance appraisal results. The answer is simple:

to make more use of 360 degree feedback as a way of measuring behavioral outputs relating to contextual performance, and to combine this with personality-type questionnaires to contribute to the assessment of basic styles and tendencies that can be addressed in a more developmental context. (Fletcher, 2001, p.476)

This is one of the best ways Kmart can enhance the quality of its performance appraisal processes and, more importantly, guarantee that employees do not cross the boundaries of appropriate professional behaviors as they are striving to achieve their strategic goals.

Week Five: How Do We Improve Performance

It goes without saying that measuring performance and analyzing worker experiences are just part of what organizations must do to improve employee performance. As previously discussed, the “ability-motivation-organizational conditions (AMO)” model holds a promise to facilitate performance improvements within organizations. This model is not the sole instrument of performance improvements among employees. Basically, organizations must have skills and knowledge to set clear, measurable, and achievable goals (Seijts & Latham, 2001) and provide timely feedback (Kruger & Dunning, 1999). The more specific the goal the more likely employees are to achieve them (Seijts & Latham, 2001). As of today, Kmart has two specific goals to be met by employees: (a) to achieve higher net profits; and (b) to increase net sales. These are distal or short-term goals, which mark the final point of employee efforts and professional strivings (Seijts & Latham, 2001). What about proximal, short-term goals? Neither Kmart’s case study nor Wesfarmers’ annual report says a word about them. Yet, according to Seijts & Latham (2001), proximal (short-term) goals make possible to reconstruct distal goals into smaller, achievable tactical objectives. Proximal goals also allow employees to assess their progress on a regular basis (Seijts & Latham, 2001).

The current system of performance appraisal at Kmart includes elements of self-assessment, which allow the staff to evaluate performance goals they set for themselves and their appropriateness in the given organizational context. However, the place and significance of the feedback element are difficult to understand (Seijts & Latham, 2001). As the overall management capability of the organization’s staff remains poor, many dismal goals can seem too far removed and, for this reason, to difficult to attain (Seijts & Latham, 2001). The company’s emphasis on self-assessment is associated with the major strategic difficulties, which prevent employees from recognizing their own incompetence (Kruger & Dunning, 1999). The significance of multi-source 360 degree feedback has been widely documented, but even relevant and timely feedback cannot ensure continuous performance improvements at Kmart. Brett and Atwater (2001) and Atwater and Brett (2006) write that employees can react negatively and feel discouraged by negative feedback, if the latter is not followed by support and training opportunities provided to employees. Kmart must establish and maintain a clear proximal goal-distal goal-performance feedback-training line, which will slowly lead employees toward their strategic goals. This is the way Kmart can give its employees better chances to improve their performance and meet the organization’s expectations. Again, top managers, executives, and store managers’ performance appraisal and feedback skills have to be assessed, to identify training gaps and let managers enhance the entire organization’s management capability.

Week Six: Reward Practices at Kmart

Pay systems have long been considered an essential element of organizations’ performance management systems. Pay systems are also believed to be an important instrument of employee motivation. It is no wonder that executives and other company stakeholders perceive payment policies as an important strategic business decision (Guthrie, 2007). In any company, including Kmart, payment decisions usually cause far-reaching effects on employee and organizational performance. Payment can be equally beneficial and detrimental to employees’ intrinsic motivation (Guthrie, 2007). When designed properly, payment systems can reduce the rates of turnover and enhance retention within organizations (Lawler, 2008). Kmart claims that the current reward structure keeps employees incentivized. However, as previously mentioned, the gap between rewards and employee behaviors continues to persist. Furthermore, Kmart continues to rely on a traditional, point-factor system of pay, which ties rewards and remuneration to the job employees perform (Guthrie, 2007). Sales staff and store managers are offered different sets of pay and benefit options, which also imply that the internal value of sales staff and store manager jobs is different (Guthrie, 2007). As in other traditional pay systems, large bonuses and pay increases usually occur as a function of moving up the career ladder and organizational professional hierarchy (Guthrie, 2001; Guthrie, 2007).

Lawler (1986) writes that the typical point-factor system begins with the detailed job description, which includes working conditions and problem-solving ability, accountability, and knowledge needed. Great people for great company are those, who possess knowledge, skills, and experience to accomplish their workplace goals. Unfortunately, the discussed system of payment is not perfect. Lawler (1986) points to the difficulty faced by HR managers, as they are trying to include all responsibilities and skills required for each particular job. HR managers must weigh all compensable factors by their relative importance (Kilgour, 2008). Moreover, point-factor pay systems are mostly impersonal, which means that many employees may feel demotivated to achieve better performance. This is probably why Kmart decided to offer all sales staff and store managers unlimited rewards for performance improvements. Again, performance improvements alone cannot move the staff in their way to better performance; Kmart must invest considerable resources in enhancing management capacity, teach managers and HR professionals to set proximal goals, offer training and education opportunities to employees, and provide regular performance feedback. The company has passed a long way toward performance improvement, but it is still too early to say that Kmart has done everything needed to achieve sustained progress in employee and organizational performance.

Final Thoughts

The company pays considerable attention to the way employees are coping with their obligations and tasks. Throughout the past two years, HR managers have redesigned the entire system of employee relations and have developed a new model of performance management to be implemented at Kmart. The company believes that employees are incentivized and have everything needed to achieve the organization’s strategic goals. New performance appraisal systems, new payment and reward systems, and other are believed to enhance employee performance short- and long-term. ‘Great company, great people’ is one of the central mottos of the company’s strategic success. However, the Wesfarmers conglomerate is still too far from excellence in its performance management systems. The corporation’s annual report is devoted to the discussion of profitability, sales, customer service, and sustainability – everything but human resources. The role and contribution of employees to Wesfarmers and Kmart’s strategic success is persistently overlooked. What ‘great company, great people’ means for employees and how Wesfarmers values its staff is difficult to understand. It is imperative that the company re-designs its approaches and employee management values, to ensure that the staff is treated as the most valuable asset and not merely as the source of competencies and skills required to meet the company’s strategic goals.