UNIVERSITY OF WALESMASTER OF BUSINESS ADMINISTRATION

Module: Managing the Human Resource

Company Case: Starbucks’ Human Resource Management Policies and the

Growth Challenge

Country: Jamaica

Question: In recent years, there has been much interest in the notion of ‘high commitment’ human resource management (HRM). Considering this premise provide a reasoned and academically underpinned account of the advantages of adopting such an approach and evaluate how closely Starbucks fits with this ‘high commitment’ model.

Student Number: STU26168

Deadline: January 15, 2012

Word Count: 4340

Tutor: Sarah Mollitt

Table of Contents

Background..................................................................................................................................................3

What is human resource management (HRM)?..........................................................................................4

High Commitment HRM.............................................................................................................................6

Benefits of High Commitment HRM...........................................................................................................8

Arguments against High Commitment HRM................................................................................................9

Starbucks and High Commitment HRM......................................................................................................9

Communication/information sharing...........................................................................................................9

Training and development.........................................................................................................................11

Rewards.....................................................................................................................................................12

Selective staffing or hiring........................................................................................................................13

Team work................................................................................................................................................14

Job security................................................................................................................................................15

Reduction of status/harmonization............................................................................................................17

Conclusion.................................................................................................................................................18

Bibliography ………………………………………………………………………………………………………………………………………….22

Table of FiguresFigure 1 Devanna et al.’s Matching Model of Strategic HRM......................................................................6

Figure 2 The Harvard Framework................................................................................................................7

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High commitment human resource management (HRM) considers human capital as a resource

whose value may be enhanced by increasing the commitment, functional flexibility, and quality

of these personnel. Over the past two decades several studies have been conducted around this

relatively new form of HRM. High commitment HRM has its beginnings in the Harvard

Framework model which spoke to best practices, an aspect which is interchangeable with high

commitment HRM. Starbucks realized early that one of their most valuable resources is their

employees and as declared in their mission statement, the company provides a great working

environment and treats each person with respect and dignity; aligning their human resource

management strategy closely with high commitment HRM. This has contributed to Starbucks’

success, the company has been identified as one of the best companies to work for in the United

States by Fortune Magazine and has seen loyal customers. Through the company’s approach it is

evident that the advantages of high commitment HRM can help drive growth of a company.

However, there are evident drawbacks, but through analysis of the model it becomes clear that

this model creates benefits for the company which uses it.

BackgroundIn a rapidly changing global economy, with the proliferation of e-commerce, mergers and

acquisitions and evolving products and markets, tremendous pressure has been placed on

organizations to make changes to the way their workforce is managed to meet the demands of the

evolving landscape. Organizations must rapidly adapt and match their everyday business

procedures to their long term strategic and operational goals in order to be successful. Managers

therefore need to respond to these changes by using available resources to create a competitive

advantage. Competitive advantages give a company an edge over its rivals to generate value for

the organization, in ways its competitors find difficult to match (Kotler and Keller 2009). 3

Scholars have argued that organizations should build sustainable competitive advantage as this is

harder for competitors to neutralize. Companies can no longer solely rely on traditional sources

of competitive advantage, such as economies of scale to succeed but rather on assets like human

resources, which has been widely accepted as an important source of competitive advantage

(Pfeffer 1994). The creation of competitive human resources involves the harnessing of each

employee’s full potential, producing productive workers, minimizing job dissatisfaction and

employee turnover.

What is human resource management (HRM)?

HRM is a distinctive approach to employment management and refers to the policies, practices,

and systems that influence employees’ behavior, attitudes, and performance. It seeks to achieve

competitive advantage through the strategic deployment of a highly committed and capable

workforce using a range of different practices and techniques (Storey 1995). HRM activities are

critical to conducting business and the decisions are of strategic importance and not solely the

responsibility of human resource personnel.

Finding the human capital to provide an organization with a sustained competitive advantage is

not just a matter of luck. It depends heavily on the management and human resources practices

of the firm.

In an attempt to classify HRM approaches Storey (1992) categorizes them as soft and hard.

Where the soft variants describe approaches aimed at enhancing the commitment, quality and

flexibility of employees, this is now popularly known as high commitment/best practices/high

performance model. The hard variants of human resources, otherwise known as strategic human

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resource management, places emphasis on strategies where human resources are deployed to

achieve business goals similarly to how businesses use raw material to achieve their goals.

Regardless of which method a company chooses there are some consistent activities which are

performed during human resource management. These include staffing, training and

development, performance appraisal, compensation, selection, recruiting, safety and health and

industrial relations.

Given the importance of HRM to business success, it is no surprise that a significant amount of

research has been conducted as to ways in which organizations can better harness the potential of

employees. Early models that were influential in interpreting HRM are the Matching Model of

HRM developed by Devanna, Fombrum & Tichy from Michigan Business School and the

Harvard Framework from the Harvard School.

The Matching Model, as the name suggests, tries to find the best fit personnel for an

organization which is in line with its strategy. It asserts that, with the right personnel, everyone

will work cohesively towards the same goal. The key areas for developing appropriate human

resource policies regarding this model are; selection of the most suitable people to meet

organizational objectives, performance in the pursuit of these objectives, rewards for appropriate

performance and development of skills and knowledge required to meet the objectives.

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Figure 1 Devanna et al.’s Matching Model of Strategic HRM

The Harvard Framework recognizes the interest of various stakeholders, such as the customers, unions,

government and management as indicated in figure 2. The interests of these groups are fused to help

develop the organization’s HRM policies and business strategies. This model balances the integration of

hard and soft HRM which is called ‘best practice’ HRM. These set of practices are aimed at high

performance and high commitment; elements of these best practices are universally acceptable.

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Figure 2 The Harvard Framework

High Commitment HRM

High Commitment HRM, developed from the Harvard Framework model, has found great

reception in modern companies because of its focus on unearthing employees who are not only

good at what they do but are committed to the organization.

High Commitment HRM is assumed to be aimed at eliciting strong commitment to the

organization, so that behavior is primarily self-regulated rather than controlled by sanctions and

pressures external to the individual (Wood and Albanese 1995, pg 220).

It differs from the Harvard Framework model in that it encourages companies to bundle the best

practices that suit their organization. Additionally it is distinct from traditional approaches in the

self-regulated approach to sanctions. Different studies have utilized several mixes of these HRM

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practices and there is still not a definitive description as to which HRM practices should be

included in a “best practice” system. This paper however, will focus on the seven practices

identified by Jeffrey Pfeffer that are consistently considered to be strategic in nature. According

to Pfeffer, (1998) the best practice or high commitment HRM consists of the following HR

practices:

Employment security and internal labour markets

Selective hiring and sophisticated selection

Extensive training, learning and development

Employee involvement, information sharing and worker voice

Self-managed teams

High compensation contingent on performance

Reduction of status differentials/harmonization

The aim of these practices is to achieve skilled personnel, who are highly motivated and adopt

the organization’s objectives as their own by selecting, training and retaining the right

individuals.

Starbucks recognized early that motivated and committed employees are their most valuable

resource and hence adopted a human resource management style which is closely aligned with

High Commitment HRM. The human resource policies of the company are grounded in its

mission statement to "Provide a great work environment and treat each other with respect and

dignity". This shows their commitment to employees and as a result Starbucks has a high level of

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satisfaction in the workplace. The Starbucks experience is differentiated from competitors and it

has allowed the company to grow from strength to strength.

High Commitment HRM is grounded in social science principles, that is, by treating persons

fairly and with respect this will motivate them to reach their full potential. Over the last two

decades, much research has been conducted regarding High Commitment HRM and its link to

improved organization performance. A number of researchers have found substantial positive

evidence linking these practices to improved firm performance and have related it to a forming a

psychological contract. According to Rousseau (1989, pg. 123) a psychological contract

emerges when one party gives a contribution and believes that a promise of future benefits have

been made.

Benefits of High Commitment HRM

High commitment HRM aims at improving the workforce’s capabilities and motivation so that

they can outperform rivals and remain committed to the organization. Research has shown that

organizations with high commitment HRM practices display greater productivity, an improved

bottom line and efficiency, compared to organizations with control-based practices. Pferffer

(1998) and other researchers have suggested that these practices can release untapped reserves of

human resourcefulness by increasing employees' level of skills, commitment, motivation,

participation and involvement.

Training and development are central pillars in high commitment HRM this will cultivate well-

educated, trained, motivated and committed employees at all levels which will increase

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productivity. Also with selection criteria and reward systems which aim to attract and retain

high performers, it will lead to an effective workforce.

Arguments against High Commitment HRM

Whilst there is now a considerable amount of evidence to indicate that high commitment HRM

has a positive influence on business performance, other researchers have indicated some amount

of inadequacies in their research. They believe that there is not sufficient information linking this

model to the organization’s performance. Another drawback is the fact that researchers cannot

agree on the optimal number of best practices to be used in the model and hence those a

company needs to employ in order to get the best results.

Starbucks and High Commitment HRM

Starbucks utilizes this model and the seven criteria for high commitment HRM, indicated by

Pfeffer are evident within this company. They include firstly:

Communication/information sharing

Communication is one of the easiest and most effective ways to gain employee involvement in

the company as it enhances feelings of mutual trust and makes employees feel important to their

organizations (Lawler, 1986). Communication is a core management competency and key

management responsibility. Regularly top managers of Starbucks would randomly call or visit a

store to speak with the manger to say ‘thank you’ to the employees for their exemplary service.

A former CEO Jim Donald stated that “If any company doesn’t have the time to talk to the

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people on the front line, then you might as well close up, because it is not going anywhere’’

(Gretchen 2005).

Starbucks maintains a small company atmosphere and promotes open communication with their

employees. One communication tool used is conducting regular surveys to monitor employees’

feedback on the organization and its rewards program. Employee’s response in these surveys

have led to changes in the organizations’ polices, for instance in 1994 the company began

reimbursing mental health treatments after overwhelming support for it. The company also uses a

mission review program which allows employees to comment on decisions believed to be

inconsistent with the mission statement, within two weeks of the decision/comment. This can be

done either personally or through the company’s monthly report. Approximately 200 Mission

Review queries were made every month based on the case.

These programs instituted open communication and holistic information sharing within the

company creating a more positive work environment in which people feel they are listened to

and respected (McElroy 2001). This helps to convey a message to employees that they are

trusted.

Although the company promotes open communication it comes down hard on any union

activities and persons have lost their jobs for forming unions. A union is a complementary

vehicle for participative communication as the workers would have the chance to hear their

complaint openly and independently. In the early 2000s some employees reported that they

enjoyed working for the company but said due to their anti-union stance, it was not as people

friendly.

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Starbucks was able to achieve a level of effective communication with the implementation of

feedback processes which increased employee involvement, commitment and trust. However,

discouraging the formation of unions hinders a critical voice in the communication process.

Training and development

Having recruited the right personnel employers need to ensure that these persons remain at the

forefront of their field, not only in terms of professional expertise and product knowledge but

also in interpersonal relations. Gaertner and Nollen (1989) argued that training and development

represent an investment in employee performance, through the creation of an internal labour

supply to meet the organization's needs. Starbucks believes in people development and as a

result adopted an extensive training and development programme for every employee, which

includes product expertise, customer service, and well-developed interpersonal skills.

Professional baristas for Starbucks have to complete up to 24 hours of training which is called

‘First Impression’ before entering their assigned store. This training has a standardized

curriculum aimed at inculcating employees in the company’s philosophy and train them in

service principles. This develops a cadre of employees with organization specific skills which

are strongly linked to its core competencies. The employees appreciate the training programme

and reported that they feel valued and important when the company invests significantly to

prepare them for their jobs.

Wright and Gardner (2003) note that training and development is one of the most widely used

elements of high commitment HRM. Starbucks understands this concept and hence teaches

their employees ‘Star Skills’, which govern the company’s interpersonal relationships. Along

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with specific skills training Starbucks also holds sessions for management trainees and

encourage their employees to attend outside training programs. This not only enables a dynamic

workforce but also enables employees to take advantage of future career opportunities.

Training and development is one area in which a company can gain and maintain competitive

advantage. Starbucks’ HR philosophy is grounded in this, with its extensive training packages

which shows the company’s concern for its employees, which in turn will increase employees

identification with the company and promote the company potential workers.

Rewards

According to Rousseau and Greller (1994, p. 397), 'The most visible performance term in the

contract, from the employees' point of view, comes from the organization's incentive system and

the measurements that support it '.

Scholars have yet to agree whether rewards should be performance based or collective rewards

based. Some research has shown that employees prefer working for organizations that link pay to

performance. Starbucks’ reward system is based on package rather than pay only and this

includes health, dental, vision care and stock options for employees who work an average of 20

hours per week for over three months. This comprehensive package is available to part-time

workers, who make up majority of the workforce. This instills a sense of commitment in

employees, indicative in Starbucks’s employee turnover rate being 120 percent lower than the

average quick service restaurant business. (Michelli 2006)

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Pfeffer (1998) believes that there are two elements to this practice – higher than average

compensation and performance-related reward – although both send a signal to employees that

they deserve to be rewarded for superior contributions.

Although Starbucks has not revealed information about their present wage structure, independent

analysts estimated in 2005 that they paid amongst the highest in the industry. This above

average salary, cultivates committed employees and provide positive perceptions of being

valued.

This generous reward package and policy by Starbucks, though beneficial to the employees,

started to reflect negatively on the company financially. By the early 2000s the company’s

human resource costs were more than its advertising costs. This led to an increase in the cost for

it beverages by the mid-2000s.

Starbucks is well aware of the benefits of having employees that are well rewarded so much so

they were willing to ask customers to pay more for their products to support this. Therefore the

company must see great need to have such a system to risk losing customers at its expense.

Selective staffing or hiring

Recruiting and hiring the right people provides the added competitive edge for an organization,

Starbucks took great care in selecting the right people and made the effort to retain them

consequently building its human capital advantage. The company recruitment motto is “to have

the right people hiring the right people”. Increasingly, companies are looking for applicants

who possess a range of social, interpersonal, adaptability, dependability, trainability and team 14

working skills in addition to technical ability to form the core of their organization. Starbucks is

no different as they often express interest in these qualities in job postings. This allows

prospective employees to quickly eliminate themselves from the process if necessary. This

selective hiring practice sends a clear message to employees that people matter. Studies have

shown a positive relationship between the use of selective practices and organizational

profitability.

Selective hiring can also affect the recruiting process negatively, as it focuses on how well new

recruits might fit the organizational culture. This can lead to some groups being excluded from

the employment process. Selective hiring can eventually lead to homogenous employees, which

can potentially be problematic if the organization demands initiative and diversity, and

counterproductive if the business needs and markets change. This is a potential drawback for

Starbucks.

Team work

Team work is an essential feature of modern HR practices and one of the key attributes that

companies look for when selecting employees. Studies have shown that employees who work in

teams generally report higher levels of satisfaction than their counterparts working under more

‘traditional’ regimes. Working in teams has shown to also empower workers, enrich their lives,

and make a major contribution to the success of the company. Starbucks formed self managed

teams in the early 2000s in an effort to bring about more empowerment to their workers, as the

team members were encouraged to take over daily management of the team. The implementation

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of these mutually created decisions, will have a motivational effect on the team and consequently

a positive effect on the organization.

Starbucks encourages and empowers employees to offer ideas and become involved in

teamwork. This is essential for the company as an increase in employees’ involvement in the

company give them access to information and decrease ambiguity, which will in turn provides

commitment and motivational benefits and increase the company’s performance (Healy and

McKay 2000). Some of the company’s most successful innovations were ideas from the

employees. One of the most popular Starbucks employee innovations is the Frappuccino drink.

Some researchers posit a less optimistic perspective on self-managed teams. They have

suggested that these teams are intrusive and difficult to implement in practice, and that they serve

to focus on the strengths of the organization rather than improving on the weak areas.

According to Pfeffer (1998) team work is seen as a route to better decision making and the

achievement of more creative solutions. This was evident in Starbucks’ HR policies as they

regularly empowered their employees to form self managed teams and create innovation which

contribute to the development of the company.

Job security

Job security is a corner stone of high commitment HRM practice, though scholars have yet to

define the measurement of it. It refers to a psychological state where the workers expect future

job continuity within an organization. They are limits to this however, as it does not mean that

you will stay in the job for life nor does it prevent the dismissal of employees who fail to

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perform at the required standard. What it does mean is that job reductions will be avoided

wherever possible. Pfeffer (1998) maintained that it is unrealistic to ask employees to offer their

ideas, hard work and commitment without some expectation of employment security and

concern for their future careers.

Pfeffer (1998, p183) believes that compulsory lay-offs and downsizing undermine employment

security, and sees the following as alternatives: (1) proportionately reducing work hours to

‘spread the pain’ of reduced employment costs across the entire workforce; (2) reducing

wages to reduce the labour costs; (3) freezing recruitment to prevent overstaffing; and (4)

putting production workers into sales to build up demand.

Starbucks does not explicitly guarantee job security but the structure and design of the

organization gives their employees’ piece of mind that lay-offs are the last option. Since most of

Starbucks’ staff are part-time employees, rather than downsizing, it is easier for Starbucks to

reduce working hours.

Their benefits and HR programme are rooted in the company’s former CEO Howard Schultz’s

philosophy, which is “treat people like family and they will be loyal and give their all”.

Starbucks offers an excellent work/life balance programme that proposes flexibility between

work tasks and personal endeavors.

The company’s health costs are now low, as the workforce is young and relatively healthy. It is

apparent however, that the longer the employees stay with the company health costs will

increase, putting an additional strain on the company’s enormous human resource budget.

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Rewards practices in High commitment HRM asserts that employees will remain committed if

their future employment is secure. Although a company cannot guaranteed job security,

especially in economically turbulent times, Starbucks has designed systems that will make

employees comfortable about working at the company.

Reduction of status/harmonization

This is a symbolic manifestation of social equalities in HR practices. It conveys a message to

workers of lower grade that they are a valuable asset to the company and deserve to be treated in

a similar way to the senior managers. This practice is widely seen as a way to encourage

employees to offer ideas and participate in decision making and encourages and supports team

work and flexibility. It exists in the form of employee share schemes, welfare facilities/fringe

benefits, a family-friendly policy or an all-employee share ownership.

Starbucks’ HR polices employ this strategy. The company is guided by several values and

principles to include equality this is evident in their policy where all employers are referred to as

‘partners’. This indicates that they contribute equally to the progress of the company. Starbucks

also does not capitalize job titles in an effort to indicate that no one person within the company is

more important that the other. The company also has family friendly policies such as the

‘working solution’ which addresses the personal needs of employees by providing the required

assistance as the need arises.

Extending employee share ownership to the workforce as a whole is a further way in which

status differences can be reduced. Pfeffer (1998, p38) argues that ‘employee ownership,

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effectively implemented, can align the interests of employees with those of shareholders by

making employees shareholders too’. Starbucks started the ‘Bean Stock’ Plan in 1991 where

stock options were given to all categories of workers, including part-time workers. It is intended

in investing in employees and creating ownership across the company which is aimed at creating

vested interest in the company. This programme was seen as key to Starbuck’s success in

retaining workers and building loyalty.

Reduction of status/harmonization are symbolic gestures by the organization that allow the

employees to be treated in a similar manner. This is a core part of Starbucks’ HR policy which

allows the company to recruit, retain and build loyalty throughout the work force. The company

refers to all employees as partners along with this, they have a family friendly working

environment and also an employee share ownership programme.

Conclusion

Given the enormous changes occurring in today's highly competitive business world, human

resource management must zone in to attract, motivate and retain employees. This is a critical

task for all managers as human resources has been shown as a source of competitive advantage

for an organization. It is therefore, important for all organizations to find ways to understand

their employees’ values, attitude and behavior while maintaining a positive working

environment. Two distinct approaches of HRM would arise; hard/strategic which calls for

matching HRM polices to the goals and objectives of an organization and soft/high commitment

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which speaks to employees being treated as a valuable resource whose value may be enhanced

by increasing their commitment and functional flexibility.

High commitment HRM is a specific bundle of HR policies and practices that are grounded in

social science and convey to employees that the organization is committed to them, cares about

their well-being and trust them. This creates a psychological contract fulfillment and

consequently they respond with an increase in emotional attachment to the organization. It has

shown to enhance effectiveness in organizations and to retain talented employees. Starbucks

understand that human resources is a fundamental cog in their business; and investing in them is

critical to its success. They practice high commitment HRM which are grounded in their guiding

principles of “providing a great working environment” and “treat each other with respect and

dignity”.

Starbucks attracts and retains their employees due to the high level of satisfaction they receive on

the job. With a well designed work/life balance the employees are motivated and remain

committed for a longer-than-normal period of time. To increase employees’ passion they offer

an extensive level of training to deliver high levels of customer service. There is an open

communication process between the mangers and the employees who are all given a chance to

contribute to and influence decisions that affect their working lives. All employees were given

shares in the company and are referred to as partners which are expected to work together to

meet the demands of the customers. The organizations’ reward policy is extensive and contains

both monetary and non monetary benefits which signal to the employees that they deserved to

compensated for their contribution. David Pace, an executive vice president at the company said

“we’re not giving these benefits to our employees because we are a successful company. We are

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successful because we are giving to our people” (Gretchen 2005). This epitomizes the company’s

HR policy and they have created a competitive advantage by cultivating a workforce that is

knowledgeable and passionate.

However, as we have also seen, digging beneath the surface, implies that some of these ‘best

practices’ may have negative repercussions on the company. By early the 2000s the high human

resource cost was negatively affecting the company’s financials. This led to an increase in the

cost of its beverages. The company also has a no union policy and this silences one of the

greatest voice of independent communication for employees.

According to Guest (1987) an effective HRM strategy facilitates the development of a workforce

that meets the requirements of a competitive business strategy by more fully harnessing

employee potential to achieve organizational goals and missions. Starbucks has achieved this

successfully with their high commitment model with only a few minor drawbacks.

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