[Link]/ijba International Journal of Business Administration Vol. 5, No.

2; 2014

Understanding the HRM-Performance Link: A Literature Review on the

HRM Strategy Formulation Process
Natalia García-Carbonell1, Fernando Martín-Alcázar1 & Gonzalo Sánchez-Gardey1
1
Business Management Department, University of Cádiz, Cádiz, Spain
Correspondence: Natalia García-Carbonell, Business Management Department, University of Cádiz, Cádiz, Spain.
E-mail: [Link]@[Link]

Received: January 12, 2014 Accepted: February 6, 2014 Online Published: March 2, 2014
doi:10.5430/ijba.v5n2p71 URL: [Link]

The research project described in this paper has been developed under the Research Group SEJ-449 from the
Andalusian Government (Andalusian Plan for R+D+I 2007-2013) and the Research Project ECO2011-26982, from
the Spanish Ministry for Science and Technology (Non-oriented Fundamental Research Projects Subprogram).

Abstract
Although most studies in strategic human resource management literature have deeply examined the relationship
between HRM and performance, extant literature has shown mixed and inconclusive results. In general, researchers
have usually focused on how organizations implement their HRM strategies, using the traditional ‘content
perspective’. In this sense, SHRM literature has paid less attention to the antecedents of these strategies and the
internal dynamic by which HRM systems are defined. Therefore, considering the importance of formulation
processes recognized in strategic process research, we propose an integrative model of study focused on the HRM
strategy formulation process. From this point of view, we also identify different contingent factors that may impact
this strategic process, trying to shed some more light on the complexity of this topic of research. Conclusions and
implications of the study will be also discussed.
Keywords: strategic human resource management, HR strategy formulation, process
1. Introduction: Justification and Objectives
Strategic human resources management (SHRM) emerges as a discipline focused on the strategic contribution of
human component in organizations. In the late 1970s, several studies have stressed the need to reorient traditional
human resource management (HRM) in order to understand human resources as a crucial element in organizational
success. Thus, this traditional view begins to undergo significant changes, focusing its interest on the strategic value
of human resources (Lengnick-Hall, Lengnick-Hall, Andrade, & Drake, 2009). Consequently, the HR function has a
more proactive role and a long-term orientation what implies some changes in top management teams’ and HR
managers’ roles. From this point of view, the literature has proposed new models of study that allow the analysis of
this strategic dimension. Therefore, SHRM discipline has increasingly incorporated theoretical arguments from
different fields of research to build models more complex and complete. However in spite of the rapid evolution of
the field, the relationship between HRM and performance still remains unclear. Reviews by Paauwe (2009),
Lengnick-Hall et al. (2009), Guest (2011) and Wright and McMahan (2011) demonstrate that there is a need for
more research on certain classic and unanswered issues to clearer understand the way HRM influences organizational
performance. To echo these calls from the literature this study presents a comprehensive review in an attempt to
clarify what we know about the way organizations design their HRM strategies. Then, adopting a ‘process model
focus’ instead of the traditional ‘content view’ (Bowen & Ostroff, 2004; Guest, 2011), we identify and classify
diverse influencing factors that may lead HRM systems fail. To do so, a theoretical model of study is proposed with
a twofold objective: (1) the description of the HRM strategy formulation process and, (2) the identification of
contingent factors that may influence on the formulation process.
The paper will be structure in four main sections. We firstly review the literature to define a standard HRM
formulation process, identifying key stages and involved actors. Adopting this approach, main influencing factors in

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each stage will be examined to build the new model of analysis. Finally, conclusions, implications and future
research lines will be discussed.
2. Theoretical Background
2.1 The HRM Strategy Formulation Process: Main Characteristics and Involved Agents
The importance of the formulation stage process has been widely recognized in strategic process literature
(Hutzschenreuter & Kleindienst, 2006). Traditionally, this stage has been considered as the core step in strategic
decision making, establishing the main aspects for subsequent implementation (Lyles & Mitroff, 1980). Generally,
many SHRM works have examined HRM contents, but in last years, some scholars have stressed the importance of
analyzing the internal dynamic of HRM strategic processes (Bowen & Ostroff, 2004; Becker & Huselid, 2006; Guest,
2011).
Because of the complexity of this field of research, several theoretical frameworks and perspectives have been
combined to explain the HRM strategy formulation process. Nevertheless, in strategic literature most investigations
are in agreement over the definition of the strategic process concept. In this sense, early works have pointed out that
formulation is one of the stages in strategic decision making process which consists of identifying, analyzing and
deciding about relevant strategic issues in organizations (Dutton, Fahey, & Narayanan, 1983). Specifically, strategic
issues are considered as those events that can heavily impact organizational performance (Ansoff, 1980). Later
studies have completed this general definition, specifying a sequence of three actions: (1) environmental scanning, (2)
interpretation and, (3) strategic choice (Ford & Goia, 2000). Drawing on previous arguments, environmental
scanning is defined by Thomas et al. (1993) as those actions that allow top managers to gather selective information
from internal (Cowan, 1986) and external contexts (Milliken, 1990) based on their own perceptions (Pfeffer &
Salancik, 1978). In the HRM strategy formulation process, managers will extract sensitive information that could
have important impact on the HR area (Lundy, 1994; Wright, Snell, & Jacobsen, 2004; Krishnan & Singh, 2011). On
the other hand, interpretation actions are related to the way top managers understand and perceive relevant
information. In this respect, they usually categorize and label strategic issues in opportunities and threats (Jackson &
Dutton, 1988; Julian & Ofori-Dankwa, 2008). Considering the information they have selected and analyzed, top
managers will make a strategic choice (Mintzberg & Waters, 1985; Noble, 1999). As it can be concluded, these three
main steps are widely used in specific literature to explain formulation stage process (Figure 1). Considering this
process, it can be argued that if formulation stage included the similar steps in any cases, the process would be the
same in any organization. Nevertheless, as Wright et al. (2004) pointed out, this process is not universal. To reinforce
this argument, there is a dominant stream of research showing that SHRM processes have to be studied taking into
account contingent factors (Martín-Alcázar, Romero-Fernández & Sánchez-Gardey, 2005). Before starting with the
analysis of these factors, we will go into the formulation process in depth to specify some of the more important
characteristics embraced by the literature.

Figure 1. Traditional model of strategy formulation process

Source: Own elaboration
In the SHRM discipline, some researches have also contemplated a similar sequence of actions to describe the HRM
strategy formulation. Peery and Salem (1993) propose a model composed of four main activities: (1) strategic issue
identification, (2) strategic issue analysis, (3) strategy formulation and, (4) policy implementation. The three first
actions would be related to formulation stage as we have pointed out previously. In this case, the strategic issue
identification includes the environmental scanning. More specifically, the top management team analyzes the
external and internal context to identify relevant aspects that may affect the HR function. They also categorize
strategic issues based on their perceptions, considering the opportunity/threat classification. The second step, the
strategic issue analysis, is focused on generating different alternatives of actions, evaluating and choosing an
efficient alternative. The selected action has to be consistent with the previous analysis. Thirdly, the top management

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team will formulate the concrete HRM strategy and the specific policies. Managers should define HRM policies to
face the new external demands.
On the other hand, Wright et al. (2004) also propose a study in which different dimensions of the HRM strategy
formulation are examined. In order to define the formulation process, these authors consider several stages: (1)
environmental scanning, (2) strategic issues identification, (3) critical human resources identification, (4) strategy
development and, (5) communication. When explaining the sequence of actions to develop the formulation process,
Wright et al. (2004) include explicitly two key aspects that are not showed in previous studies: the critical human
resources identification and the HR communication. Consequently, they propose a more complex and integrative
process. Secondly, another interesting conclusion explains that, although Wright et al. (2004) define an ideal process,
not all organizations carry out this process similarly. In fact, in some cases, this process does not take place explicitly.
As we mentioned above, diverse contingent factors should be considered in the HRM strategy formulation process to
understand this dynamic from a broad perspective. Once we have specified the formulation stage, the next step is to
describe its main characteristics and involved agents. To do so, we will define five main phases: (1) environmental
scanning, (2) strategic issue identification, (3) critical HR identification, (4) definition of the HR orientation and, (5)
HR communication.
2.1.1 Environmental Scanning
In this part of the HRM formulation process, top management teams have to analyze the environmental context
constantly to get relevant information and to adapt, maintain or change the current strategy (Floyd & Lane, 2000). In
this sense, Fredickson (1984) defined the concept strategic decision comprehensiveness as the extent to which
managers gather and process environmental information in strategic decision making. This argument shows that it is
crucial to gather information systematically and to analyze this information exhaustively (Forbes, 2007). From a
different point of view, Raes, Heijltjes, Glunk and Roe (2011) describe the scanning process as the detection of
discontinuities in the environment. This process refers to the activities by which top management teams and middle
managers interpret, analyse and filter information from the external context, adapting the current strategy to new
situations and demands. Diverse studies have shown that during the environmental scanning participation between
managers implies will be positive because they will be able to share more information from different points of view
(Rindova, 1999). Furthermore, both parts, top management teams and middle management incorporate their
perspectives and interpret information collaboratively. The literature has discussed that although comprehensive
analysis of the environment is extremely relevant, not always is efficient. It implies important costs in terms of time,
resources (Forbes, 2007), and in some unstable environments, a high degree of comprehensiveness will lead top
teams to handle with contradictory information (Hough & White, 2003). This stresses the importance of the intuitive
processes (Miller & Ireland, 2005; Elbanna & Child, 2007). In this line, Grant (2003) also argues that intuition will
increase creativity and flexibility in decision making process, what is needed in the strategy formulation, especially
in dynamic and changing environments. Thus, Khatri and Ng (2000) find that intuitive processes are positively
related to organizational performance in unstable environments and negatively in stable environments. Therefore,
some degree of intuition may be necessary in scanning environments to promote speed, agility and quality of
decisions (Burke & Miller, 1999). These arguments explain that, in certain contexts, there is a need to implement
extremely comprehensive processes to search for information (Miller, 2008). Both processes, intuitive and
exhaustive processes need to be combined.
2.1.2 Strategic Issues Identification
Following the strategic issue diagnosis literature, managers’ interpretation about environmental information is
critical for organization success, because it will have effects on alternatives and concrete actions (Dutton & Duncan,
1987). The way they classify strategic issues will clearly affect strategic responses (Chattopadhyay, Glick, & Huber,
2001). Works in this area have examined the opportunity/threat perspective that builds a theoretical model based on
rational normative theory (Julian & Ofori-Dankwa, 2008). In this case, authors emphasize that managers categorize
strategic issues in two main groups: opportunities or threats. In this categorization process, top managers will not
need much time or cognitive resources. In fact, Dutton (1993) pointed out categorization can become more automatic
depending on different aspects. Following these arguments, top managers could interpret information more
automatically if they faced a familiar issue, considering their past experiences. In some cases, issue urgency or
organizational past performance can promote or hinder the automatic interpretation. Nevertheless, more recent
studies, such as Julian & Ofori-Dawnka (2008), have studied this topic in depth by proposing an integrative model of

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categorization called “FUI framework” in which three main attributes of strategic issues –favorability, urgency,
influence– will be analyzed.
2.1.3 Critical Human Resources Identification
From an internal point of view, managers have to consider and analyze internal information to complete the HRM
strategy formulation process (Lundy, 1994; Wright et al., 2004; Chen & Chang, 2010). Human capital heterogeneity
in organizations makes necessary to differentiate between core employees and their contribution to organisational
performance and those workers who support the main activity of the firm. Diverse researches suggest that
competitive advantages have gone from being supported in some generic resources to depend on idiosyncratic
capabilities created from key competencies of employees (Soderquist, Papalexandris, Ioannou & Prastacos, 2010).
According to this, during general strategy formulation process, an internal analysis of core competences is developed.
Top managers may assess critical human resources and competences considering “uniqueness” and “strategic value”
criteria (Lepak & Snell, 1999, 2002). By doing so, top management teams will be able to assess human assets and
competences that organization posses to face new external challenges. We adopt this stage as a mediating process
between issue identification and system design phases. This internal analysis and the environmental scanning
explained above, complement each other to enrich the HRM strategy formulation process. Recent studies are
considering middle managers role in providing top managers with relevant information about diverse functional
areas (Raes et al., 2011). Therefore, HR department and HR manager implication will be crucial aspects in this
internal focus (Ulrich, Brockbank & Johnson, 2009).
2.1.4 Definition of the HRM Orientation
Once top teams have developed previous stages, the next step is to define specific HR policies and practices
according to the information about competences. SHRM literature has shown that several HR configurations could
coexist depending on diverse types of human capital existing in organizations (Lepak & Snell, 1999, 2002). This
means that firms will internally develop necessary competences and, simultaneously, they can purchase other skills
in the labour market, depending on its needs. In this stage, the literature considers particularly relevant three main
factors in the literature: (1) HRM system flexibility, which explains the ability to reconfigure established HR policies,
(2) HR manager participation in strategic decision making and, (3) influence of industrial relations (labour regulation
and trade unions influence).
2.1.5 HR Communication
The last step in the HRM strategy formulation is related to the communication of the new set of policies and
practices. In this sense, Wright et al. (2004) stress the importance of line managers in translating HR messages once
they have received the information from the strategic apex. In some cases, communication is also considered as a
mechanism to show the importance or involvement of the HR function in organizations. Nevertheless, results
evidence that, in general, top management teams communicate the strategy to the line managers using hard copies. In
this respect, specialized literature has pointed out that informal HR strategies and inaccessible documents lead to
ambiguous perceptions of the role HR function in organizations (Wright et al., 2004; Stanton, Bartram & Leggat,
2010). Recently, Stanton et al. (2010) have explored how SHRM is understood, interpreted and communicated across
the management hierarchy. Results show that the role played by the CEO is determinant to provide HR legitimacy
and leadership, as well as to reach agreement between top management team members on HR role. Furthermore, top
management teams need to transmit consistent information about HR strategy throughout the hierarchy to get an
efficient HR implementation. Then, messages sent by top managers can be inconsistent and ambiguous, reflecting a
lack of legitimacy and agreement among team members. Therefore, one of the first indicators to include defining the
construct will be the presentation of the HR information and the accessibility for the entire organization. Also, we
will consider the implication of top managers and line managers to transmit coherent messages (Den Hertog, Iterson
& Mari, 2010) and the existence of available and efficient channels of communication (Stanton et al., 2010).

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Figure 2. The five-stage HRM strategy formulation process

Source: Own elaboration
3. Influencing Factors in HRM Strategy Formulation Stage
HRM strategy formulation process is usually affected by different internal and external factors. Because of the
complexity of the formulation dynamic, we will follow the strategic fit literature to explain the antecedents of HRM
strategies and the top management team literature to deepen the influence of team composition on the process
described. The first dimension, antecedents, will include environmental factors, strategic factors and organizational
factors. These factors are completely coherent with contingent and contextual SHRM literature (Martín-Alcázar et al.,
2005). The second dimension, TMT composition, will include the analysis of both, demographic and human capital
characteristics. With this analysis, we try to present a broad framework that include potential variables to explain
deeper the way HRM contributes to organizational success.
3.1 Antecedents
Environmental factors: drawing on strategic literature, aspects such as labour market, economic situation or social
environment may affect the HRM strategy design (Lundy, 1994). Other authors have stressed the importance of the
competence, new technologies, or government regulations (Jackson & Schuler, 1995; Mello, 2001). In addition, from
a macro-social point of view (Brewster, 1993, 1995, 1999), HRM strategies will be also explained considering their
effects on social, institutional and political environment. Boon, Paauwe, Boselie and Den Hartog (2009) have shown
diverse factors such as government, professional associations, trade unions, works councils and employees also
influence how to manage human resources.
Strategic factors: focusing on these factors, business strategy is one of the most studied variables. Miles and Snow
(1984) also analyze the link between specific business strategies and certain human resource policies. Similarly,
Devanna, Fombrun and Tichy (1984) have discussed a theoretical framework about the analysis organizational and
external factor that could determine organizations’ survival. In their contribution, these authors define the HR
function as a crucial mechanism to carry out the business strategy. Therefore, the alignment between formal
organizational structure and HRM systems is needed. In a similar vein, Schuler and Jackson (1987) have argued that
depending on the business strategy, HR practices should have a different orientation, assuming assume the coherence
between organizational objectives and the HR strategy orientation (McMahan et al., 1999). In 1985, Golden and
Ramanujam tried to go a step further into this issue, and showed different links between business and human
resource strategies: (1) the administrative role of HR function, (2) one-way link between business strategy and HR
strategy (Delery & Doty, 1996; Devanna et al., 1984; Schuler & Walker, 1990), (3) a bidirectional and reciprocal
relationship between both strategies and (4) a whole integration of HR function in the strategic process.
Organizational factors: there is an important stream of research that considers organizational factors in the HRM
strategy formulation process. For instance, size, technology, level of innovation or structure (Jackson, Schuler &
Rivero, 1989; Jackson & Schuler, 1995) or internal political relationships (Balkin & Bannister, 1993) may influence
the nature of the HRM strategy. Moreover, organizational culture and the role played by HR managers will be
determinant factors in the HRM strategy formulation. In this respect, Wei and Lau (2005) and Wei, Liu, Zhang and
Chiu (2008) show that organizational culture influences the way top managers perceive human resources in
organizations. This argument starts from the premise of organizational culture reflects top manager values and
beliefs (Bowen & Ostroff, 2004). Due to the fact that they are main actors in facing strategic decisions, these values
and beliefs are reflected in their choices (Hambrick & Mason, 1984; Hambrick, 2007). According to this,
organizational culture and HRM strategy could be linked and the first (culture) can be antecedent of the second one
(HRM strategy) (Wei et al., 2008). Therefore, it is crucial to consider how top management teams perceive HR value
and the effect of these perceptions on formulation process (Carmeli & Schaubroeck, 2005). Secondly, related to the

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HR representation in the organization, we will refer to the role of HR managers in formulation stage, as a mean to
express how important HRM is to achieve strategic objectives. In this sense, studies in this area have analyzed the
role played by HR managers in strategic decision-making, stressing the importance of his/her participation (Ulrich et
al., 2009). Specifically, these studies emphasize that HR managers should contribute to formulation stage, but his /
her contribution will be relevant depending on specific HR skills (Lawson & Limbrick, 1996).
When top managers design their HRM strategies considering the influence of these factors, the SHRM literature
traditionally defines this alignment as the vertical fit. However, not only this vertical fit is required to define a
consistent HRM strategy, but the coherence between HR practices (horizontal fit) need to be also considered when
specifying the set of HR actions Both conditions need to be met to assure that HRM is able to affect organizational
performance.
3.2 Top Management Team Composition
Prior research paid special attention to the influence of top teams demographic characteristics in strategic decisions
(Hambrick & Mason, 1984). These authors argued that observable attributes could be valid and reliable indicators of
managers’ experiences, values, skills and information sources (Jehn, Northcraft & Neale, 1999; Joshi & Roh, 2009).
The way in which managers interpret the environment and strategic issues is conditioned by their characteristics and
it strongly influences the interpretation of information, determining decision-making process (Finkelstein &
Hambrick, 1996). Subsequently, several authors have conducted studies based on the Upper Echelon theory proposed
by Hambrick and Mason (Hope-Pelled, Eisenhardt & Xin, 1999; Carmeli & Schaubroeck, 2005; Tuggle, Schnatterly
& Johnson, 2010). These works have included certain demographic variables, reaching very different conclusions
and, in some cases, contradictory results. Such inconclusive evidence is due to the limitations arisen from the use of
demographic attributes as approximations of the underlying characteristics of individuals (Hambrick & Mason, 1984;
Forbes & Milliken, 1999; Nielsen, 2010).
Given these arguments, our study proposes to go a step further in Hambrick and Mason’s (1984) assumptions. In this
sense, while the Upper Echelon theory focuses mainly on the analysis of demographic characteristics, this research
establishes as a starting point this limitation, and we will define different characteristics, both demographic and
human capital, which will be included in the theoretical model.
In order to define top team demographic composition, we will take into consideration Lawrence (1997) and
Hope-Pelled et al.’s (1999) arguments. These authors distinguish between two different categories of attributes
which can determine teams characteristics: (1) immutable attributes, including aspects such as age, gender and
nationality and (2) background traits, considering education level, tenure, functional background and educational
background.
Given these two sets of observable characteristics, we will focus on three aspects of human capital. Following
Milliken and Martins (1996) and more recently, Gallén (1997, 2006), human capital composition can be explained
referring to cognitive styles because of its importance to describe how top executives perceive and process
information. Secondly, as Lin (2001) points out, individual values will also explain human capital traits. Finally, our
proposal includes certain managerial skills related to HRM decisions. Considering these characteristics we complete
the human capital construct with some particular skills and abilities of decision-makers (Snell & Dean, 1992; Lepak
& Snell, 1999). These skills can show us the competence profile of the managers (specialists-generalists) (Kang &
Snell, 2009). All these demographic and unobservable variables will affect the HRM formulation process in different
ways.
4. Conclusions, Implications and Future Research Lines
Drawing on the literature review, we can conclude that, despite the strategic importance of the HR function is clear
in extant literature, more research is need to clarify the internal dynamic of the HRM formulation. In this way, we
can better understand the reasons why human resources are considered in different ways in organizations. As
discussed, this fact can be explained by the importance of diverse contingent factors that have impact on this
strategic process and how they are interpreted and analyzed by top managers and HR executives. To go a step further
in these processes we follow traditional arguments that propose three main actions in strategy formulation stage:
environmental scanning, interpretation and strategic choice or response. To apply these arguments to the HR area, we
complete Wright et al.’s (2004) HRM formulation definition. Nevertheless, an exhaustive analysis of this sequence
of actions requires deeper study of the contingent factors that affect this strategic process. To do so, we base on the
fit perspective to describe some factors that will determine the HRM strategy. In this sense, we have defined the
main variables related to environment, strategic factors and organizational determinants. Moreover, we also
introduce some arguments from top management team composition to describe those relevant demographic and
human capital attributes for HRM formulation processes. As a result of this literature review we propose an
integrative model for HRM strategy formulation process (Figure 3). With this model we contribute to the extant

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literature in two ways: (1) we propose an HRM review from the ‘process’ perspective to explain HRM/performance
relationship, following recent calls from the literature (Guest, 2011). In this line, we provide researchers and
managers with a process model in which we have identified necessary steps to design the HRM strategy efficiently in
organizations. With this, we also offer to managers a practical and systematic vision about how to create an efficient
HRM strategy, establishing main steps and recommendations, (2) we also present a wide and complete theoretical
model in which determinant contingent factors are included, allowing researchers and practitioners to have a clear
vision about what needs to be carefully considered in HRM strategy formulation processes.
Although the model has not been tested empirically yet, we stress some relevant implications for managers. Firstly,
we assume that, in reality, the HRM formulation process is more complicated than we expected. However, our
analysis allows us to provide managers with a useful and clear guide about how to face HRM processes. One of the
advantages of our theoretical model is that the standard HRM formulation process can be applied in both, large and
small companies. It also offers interesting recommendations about those aspects that need to be considered in each
HRM stages. For instance, the importance of implementing comprehensive and intuitive processes in the
environmental scanning, the application of ‘uniqueness’ and ‘strategic value’ criteria to identify core employees or
considerations to achieve an efficient HR communication (written and accessible documents, managers implication,
appropriated information channels, etc). With the definition of the HRM formulation processes, managers will be
able to analyse and assess their skills and reinforce them to develop each HRM stage. Moreover, it could be useful
for managers to predict problems derived from the HRM strategy in advance. Secondly, managers can seize the
analysis of contingent factors so as to focus on relevant elements, allowing more rapid and efficient HRM processes.
Nevertheless, the following limitations need to be considered when interpreting the conclusions and implications of
the theoretical model. It is important to mention that, although we have proposed a universal and linear sequence of
actions, in real situations, the HRM strategy formulation may be a dynamic and cyclical process. Additionally, not all
contingent factors will have the same weight in different organizations. We also highlight that the model follows a
broad perspective, therefore more theoretical refinement is required. Consequently, interesting conclusions and
professionals implications may arise from empirical analysis in future research. Perhaps, to conduct the empirical
analysis, the model might be divided in different parts to conduct a deeper analysis of the HRM formulation process
and the influence of certain determinants in each stage. In this sense, some HRM processes, as the vertical and
horizontal fit (Samnani & Singh, 2013) or internal communication processes (Kidron, Tzafrir, Meshulam & Iverson,
2013) required to be examined deeper.

HRM formulation
process

Environmental Scanning
Antecedents
Strategic Issue
Interpretation
Organizational Context
Definition of the HR Organizational
Environmental factors
orientation Performance

Critical HR identification
Strategic factors

HR communication

TMT composition

Demographic variables

Human capital variables

Figure 3. An integrative model for HRM strategy formulation process

Source: Own elaboration

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