Intelligent impact assessment of HRM to the shareholder value Intelligent impact assessment of HRM to the shareholder value George Xirogiannis a,*, Panagiotis Chytas b,1, Michael Glykas c,2, George Valiris b,1 a University of Piraeus, Department of Informatics, 80, Karaoli and Dimitriou Street, 185 34 Piraeus, Greece b University of Aegean, Department of Business Administration, 8, Michalon Street, Chios 82 100, Greece c University of Aegean, Department of Financial and Management Engineering, 31, Fostini Street, Chios 82 100, Greece Abstract Despite the extensive research in human capital management and performance measurement, intelligent treasoning mechanisms, which integrate human resource (HR) practices into strategic-level shareholder decisions, are still emerging. This paper discusses a novel approach of designing a decision-modeling tool, which assesses the impact of contemporary human resource management (HRM) prac- tices to the shareholder value and satisfaction. The underlying research addresses the problem of establishing HRM interrelationships in order to drive the overall business performance from the shareholder value perspective. The proposed methodology tool utilizes the fuzzy causal characteristics of fuzzy cognitive maps (FCMs) to generate a hierarchical and dynamic network of interconnected HR perfor- mance drivers. The intelligent computing characteristics of FCMs are also employed to establish a dynamic feedback and bi-directional alignment of HRM practices and strategic improvement. Finally, this research provides a practical insight on the applicability of soft approaches in capturing and illustrating the effect of HRM practices. � 2007 Elsevier Ltd. All rights reserved. Keywords: Fuzzy cognitive maps; HR performance; Decision support; Strategic planning 1. Introduction Enterprises are evolving in turbulent and equivocal envi- ronments (e.g. Drucker, 1993; Grove, 1999; Kellys, 1998). This requires enterprises to be alert and watchful for the detection of weak signals (e.g. Ansoff, 1975) or discontinu- ities of emerging threats and to initiate further probing based on such detection (Walls et al., 1992). Enterprises today face critical business challenges (Ulrich, 1998) like globalization, profitability through growth, technology integration, intellectual capital management, continuous change, etc. Such challenges require organizations to build new capabilities, but it is not always apparent who should be responsible for developing those capabilities. Perhaps, everyone and no one, but in any case this is a unique HR’s opportunity to play a leadership role in enabling organizations to meet such competitive challenges. Ensur- ing that human resource (HR) strategies are in place to deal with these challenges is increasingly recognized as critical to success (Leopold et al., 1999). Human resource management (HRM) in the literature has been considered a second- or third-order strategy, lar- gely related to implementation rather than shareholder level decision-making. The process of HR strategy formu- lation and evaluation had not been widely conceptualized until recently. Moreover, the impact of HRM practices to the shareholder strategic value is not modeled adequately, despite the utilization of sophisticated performance evalua- tion mechanisms at the employee level. The evidence that HR issues are fundamental to business is compelling at the level of unit labor costs, but whether they are funda- mental to the strategy process remained highly question- able until recent years (Ritson, 1999). This can be attributed to the fact that contemporary performance eval- uation mechanisms focus on analyzing the operational 0957-4174/$ - see front matter � 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.eswa.2007.08.103 * Corresponding author. Tel.: +30 210 4142000; fax: +30 210 4142328. E-mail addresses: georgex@unipi.gr (G. Xirogiannis), p.chytas@chios. aegean.gr (P. Chytas), mglikas@aegean.gr (M. Glykas), gval@aegean.gr (G. Valiris). 1 Tel.: +30 22710 35000; fax: +30 22710 35099. 2 Tel.: +30 22710 35400; fax: +30 22710 35499. www.elsevier.com/locate/eswa Available online at www.sciencedirect.com Expert Systems with Applications 35 (2008) 2017–2031 Expert Systems with Applications mailto:georgex@unipi.gr mailto:p.chytas@chios. aegean.gr mailto:p.chytas@chios. aegean.gr mailto:mglikas@aegean.gr mailto:gval@aegean.gr effectiveness of the human capital rather than addressing the issue of strategic alignment. This paper addresses the problem of designing a novel modeling methodology tool to act as an intelligent decision support mechanism for evaluating the impact of HRM practices to the shareholder value and satisfaction. This attempt focuses on bridging the gap between the opera- tional characteristics of HRM practices and the strategic decisions at the shareholder level. The proposed methodol- ogy tool utilizes the fuzzy causal characteristics of fuzzy cognitive maps (FCMs) to generate a hierarchical and dynamic network of interconnected HR performance driv- ers. By using FCMs, the proposed novel mechanism simu- lates the operational efficiency of HR models with imprecise relationships and quantifies the impact of HRM activities to the overall shareholder satisfaction model. This research builds on contemporary HRM experience to establish a ‘‘soft computing’’ approach on how to inter- relate HRM activities and shareholder value. The FCM approach does not pose as a substitute of traditional HRM operations nor does it offer an alternative to HR performance evaluation. It presents an intelligent deci- sion-making framework for strategic-level HRM based on scenario building and ex ante impact assessment. Primarily, the proposed model targets the principle directors and stakeholders of HRM projects (e.g. HR department, change management leaders, business strategy leaders, etc) assisting them to reason effectively about the status of strategic-level performance metrics, given the (actual or hypothetical) implementation of a set of HR practice changes. However, the holistic nature of the pro- posed model may couple effectively with other strategic performance evaluation systems. Given the demand for effective shareholder positioning, such a succinct mecha- nism of conveying the essential dynamics of HR practices is believed to be useful for anyone contemplating or under- taking a strategy formulation exercise. Nevertheless, the explanatory nature of the mechanism can prove to be use- ful in a wider educational setting. As far as the contribution to decision-making is con- cerned, the application of FCMs as an intelligent modeler of HR knowledge is believed to be novel. Moreover, this paper extends typical FCM algorithms in order to adapt to the distributed nature of typical HR activities. Also, this research adopts a new qualitative approach to interpret fuzzy linguistic variables to weight and concept values in order to support further the soft computing characteristics of the tool. It is the belief of this paper that the fuzzy rea- soning capabilities enhance considerably the usefulness of the proposed mechanism while reducing the effort of iden- tifying quantitative impact measurements. As far as the added value of this research is concerned, the proposed methodology offers an alternative approach to HRM based on shareholder value analysis and modeling. Preliminary experiments indicate that the proposed approach can be effective and realistic, without employing detailed quantita- tive calculations. This paper consists of six sections. Section 2 presents a short literature overview. Section 3 presents an overview of the proposed system, Section 4 discusses the new approach to HRM modeling and Section 5 discusses the major advan- tages of the proposed tool. Finally, Section 6 concludes this paper and briefly discuses future research activities. 2. Literature overview 2.1. Contemporary HRM As firms become increasingly aware that people are among their most valuable strategic assets, they are reap- praising the way in which they manage their human capital. The emphasis is shifting from personnel management to the wider, strategic concept of human resource manage- ment in which human resource policies and activities, including training and development, are linked closely to business strategy. HR specialists who wish to develop a strategic approach to people management must establish credibility with top management as the key figures to achieve successful results (Handy et al., 1989). Strategic human resource management addresses a num- ber of key issues. Typical examples (loosely adapted from Baker, 1999) include internal integration of personnel pol- icies, their external integration with overall strategy, line management responsibility for HR implementation, indi- vidual rather than collective employee relations, HR com- mitment, HR initiatives, the managerial role of ‘‘enabler’’, ‘‘empowerer’’, and ‘‘facilitator’’, etc. Following a resource-based view of an enterprise, firms can develop sustainable competitive advantage by creating value in a way that is rare and difficult for competitors to imitate (Baker, 1999). Although traditional sources of com- petitive advantage such as natural resources, technology, economies of scale, value creation, and so forth, the resource-based argument is that these sources are increas- ingly easy to imitate, especially in comparison to a complex social structure such as an employment system. If that is so, HR strategies may be an important source of sustainable competitive advantage (Lado & Wilson, 1994). But one may ask how HR management can deliver orga- nizational excellence and competitive advantage. Accord- ing to Ulrich (1997) there are four ways to do so: • HR management could become a partner with senior and line managers in strategy execution, helping to move planning from the conference room to the marketplace. • HR management could become an expert in the way work is organized and executed, delivering administra- tive efficiency to ensure that costs are reduced while quality is maintained. • HR management could become a champion for employ- ees, vigorously representing their concerns to senior management and at the same time working to increase employee contribution; that is, employees’ commitment to the organization and their ability to deliver results. 2018 G. Xirogiannis et al. / Expert Systems with Applications 35 (2008) 2017–2031 https://isiarticles.com/article/23187