Effect of Business Strategy on the External Competitive Policies and Techniques of a Company - Essay Example

According to Robert Grant (2005), “When the external environment is in a state of flux, the firm itself, in terms of its bundle of resources and capabilities, maybe a much more stable basis on which to define its identity”. To meet volatile customer preferences and needs, established businesses worldwide are focusing more on strengthening their internal resources and capabilities rather than just following the market trends.
However, competitive advantage cannot be gained through individual resources only. The resources collectively form organizational capability, which is the basis for establishing a sustainable competitive strategy. Though not visible on the organization’s balance sheet, the company’s compensation system is considered one of the key players in formulating business strategies. The compensation policies and techniques as a component of human resource systems are instrumental in determining and utilizing the strategic position of organizations in a competitive environment. Apart from other distinctive resources and capabilities, utilizing compensation tactics as part of accomplishing a competitive edge is profitable and helps in achieving a high-level approach to innovativeness and creativity.
According to Reich (1998), companies must be able to “attract and keep talented people” to ensure sustainable growth. He further adds that “companies today are not just experimenting with how they approach the competitive marketplace of goods and services; they are also experimenting with how they approach the competitive marketplace of talent”. The inability of a company to attract and keep employees depends mostly on its policies of the compensation system. It is important to note that inadequate business strategies may affect the pay-for-performance programs adversely. For instance, a decade ago, the compensation package developed by TechCo placed it at the 95th percentile. The company believed that upfront costs will probably be recovered in form of a lower turnover. However, instead of delivering lower turnover, it increased turnover significantly due to misalignment of the compensation system with business strategy. Analysis of TechCo’s business model revealed that the company was rewarding compensation for autonomy and innovation instead of the required speed, consistency, and efficiency.
A firm’s strategic objectives would be best achieved if the compensation techniques and policies are directing individual efforts towards the effective implementation of a business strategy. However, the strategic perspective on compensation practices varies across as well as within organizations. For instance, some organizations follow compensation policies based on market trends, while others offer unique incentive schemes to attract the best. A differentiation between individual and group-based compensation practices is also observed in many organizations. Some organizations also keep compensation policies and structure confidential to retain their competitive advantage. Most of them are successful only because of being able to maintain a balance between strategic targets, strategic thrusts, reward systems, and human resource development. The dynamic market trends require organizations to think about overbuilding effective business strategies in their respective market environments.
Organizational conditions and environmental pressures both directly and indirectly affect the formulation of a business strategy. Consequently, such factors greatly influence compensation systems too. As the overall performance of an organization depends on its employee behaviors, the business strategy also affects the competitive policies and techniques of its total compensation system. According to Milkovich (1988), “a strategic perspective on compensation focuses on the patterns of compensation decisions that are critical to the performance of the organization. Such decisions, in all likelihood, vary by employee groups within organizations”. However, all of the compensation decisions are not involved while formulating a business strategy. For instance, strategic compensation policies do not include adopting a job evaluation plan or deciding the particular use of the merit increase grid.
Identification of high performers contributing to the achievement of desired outcomes is critical for making strategic compensation decisions. Compensation to both high and low performers equally in group evaluations affects the overall performance negatively. Therefore, companies often tend to build strategic compensation designs around these issues. The employees derive compensation that in turn drives business strategy and culture. The compilation of a strategic business plan identical to peers and competitors seldom creates a sustainable competitive advantage. Thus, effective compensation policies and techniques should be distinctive according to the firm’s economic conditions and environmental variables.
The role and impact of compensation strategy in an organization’s overall performance cannot be neglected. However, the business strategy itself has strong effects on the policies and techniques of a company’s total compensation system. Apart from the executives, all employees contribute to the organization's success. If the pay-for-performance structure is properly extended to all of the deserving members, compensation systems are likely to deliver far greater returns and establish different competitive positions in the same market environments.