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A Report on
Case Analysis: Lorenzo and Texas Air
1
Contents Page #
Case 3
Summary of the case 5
Answer to Question # 1 9
Answer to Question # 2 11
Answer to Question # 3 12
Answer to Question # 4 20
Extension 26
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LORENZO AND TEXAS AIR
Frank Lorenzo battled to keep his airline safe in the air and financially viable.
Lorenzo faced intense competition on most route systems severe problems with
Eastern’s strong unions and poor image. Texas Air typified the upheaval and change
that can occur in a firm as it battles to meet new challenge.
The now defunct Texas Air formed as a result of Frank Lorenzo taking a fairly small
airline, Texas international, to the big time through a series of aggressive mergers and
acquisitions during the mid- 198Os. Lorenzo acquired Continental, People Express,
Eastern, and Jet Capital Corporation (a holding company) as a result of deregulated
environment for air transport. Fares and routes were deregulated and thrown open to
competition. The result was drastic cuts in air fares, increases in air—passenger traffic
and routes, intense competition among carriers, and the creation of many new airlines.
In addition, large airlines have attempted to become larger in the market place in
order to have the power to acquire turning gates, agreements with travel agents, and
stronger promotion. Aggressive promotion techniques, such as frequent flyer
programs, have proliferated throughout the industry.
Effect on Human Resources-
The environmental changes have had a profound effect on HRM in the industry. The
key to survival has been to cut costs, and HR costs were primary targets for cutting.
Unions were busted where possible. For example, in 1983, Lorenzo placed
Continental his flagship carrier at the time, into bankruptcy, thus abrogating union
contracts he also adopted a two-tire wage system when employees hired after a
specified date were paid significantly less on a job than those already holding the job.
Flexibility also was a key watch-word. Flexible assignments of employees to jobs,
which was pioneered by Peoples Express, was adopted whole heartedly by Texas
Air .Baggage handlers collected tickets and vice versa, for example. Lorenzo was not
as successful, however, with Eastern Air. Safety, image, and labor problems ploughed
the carrier until its death.
- Finally Texas Air, like all other airlines, tried to increase the productivity of its
human resources by attempting to get more work and more hours of work out of each
employee at little increase, if any, in salary. Pilots and flight attendants flew
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dangerously close to or exceeded maximum flight-time standards. Maintenance
employees rushed job and cut corners to save time, raising questions of safety.
A New Ball Game
Deregulation and the resultant intense competition completely changed the legal and
competitive environment for air carriers. This provided a tremendous opportunity for
aggressive companies’ such as Texas Air. It also caused massive changes in the way
human resources were treated in the industry. Delta and Piedmont, carrier with no
unions, adjusted easily. Texas Air, with unions a Continental and Eastern, had a more
difficult time. Established work patterns and employment relationships change
slowly. Often, the environment changes faster than a firms ability to change human
resource policy and practice. Sometimes it takes an aggressive CEO suet as Lorenzo
to be a catalyst for changes in strategy, even though such changes are likely to cause
uncertainty and bitterness lifelong some employees.
Questions
1. What part of external environment changes the most for Texas Air? How did they
change?
2. Lorenzo had a reputation at Texas Air for being ruthless with employees in order to
cut costs. When is such harsh treatment justified? Do you feel it was justified in the
Texas Air case, given the change in the external environment for air transport?
Discuss your answer.
3. How would you judge whether Texas Air’s new HR policies under deregulation
were effective? What criteria would you use and why?
4. Do you agree that it takes an aggressive CEO such as Lorenzo to bring about real
change in a firms HR or could this be done by the firm’s HR unit? Explain.
4
Birth of the case:
Frank Lorenzo was chairman, president and chief executive officer of Texas Air
Corporation. He was also chairman, president and chief executive officer of
Continental Airlines, and chairman of Eastern Air Lines. Lorenzo is a graduate of
Columbia College and the Harvard Business School. Early in his career, Lorenzo was
associated with the financial departments of Trans World Airlines and Eastern Air
Lines, and in 1966 co-founded Lorenzo, Carney & Co. In 1969, Lorenzo co-founded
Jet Capital Corporation which had major interest in Texas Air.
With the passing of the Airline Deregulation Act of 1978 airline carriers were
provided with new freedoms to expand their route systems and the flexibility to
develop innovative pricing structures. This flexibility allowed the carrier to further
grow into new markets. However, deregulation brought about many unwanted hostile
takeovers and mergers. The move was on by many airlines to become giants in the
industry. Either be taken over or take over other air carriers. Unions were being
busted to cut personnel payrolls to increase profits. Non-union carriers like People
Express triggered airfare wars which cost the airline industry close to 100 million
dollars. Frank Lorenzo, owner of Texas International Airlines, took over People
Express, Continental Airlines , New York Air and Eastern Airlines in the early 1970's
and 1980's. Upon control of Continental, Lorenzo files for reorganization under the
bankruptcy laws. He then laid off his work force and brought in non-union workers
and restarted the airline. This move allowed him to cut union personnel wages in half
by bring in non-union workers. Lorenzo then slashed airfares causing an airfare war
throughout the industry. Airlines had great difficulty in keeping their doors open.
Many air carriers had to merge in order to survive. Lorenzo, with a desire to have
major control of air passenger industry, sought and gained control over Eastern
Airlines and Frontier Airlines. This move made Texas Airline one of the biggest
airlines in the country. The move by Lorenzo forced the merger of many air carriers in
order to remain viable. Air carriers could not compete with current airfares unless
they merged with other carriers. TWA acquired Ozark, Delta Airlines acquired
Western Airlines and Northwest acquired Republic Airlines.
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Lorenzo was not satisfied. Driven by profits, Lorenzo requested machinists of Eastern
Airlines to take a pay cut. However, the machinist union refused to do so. This
brought about a war between labor and management. The machinist union IAM
(International Association of Machinist and Aerospace Workers) called for a strike.
The strike brought about air passenger delay and the company began loosing millions
in daily revenues.
The United States Bankruptcy Court intervened after a creditor brought suit against
Eastern Airlines. The court very much aware of Lorenzo's labor practice, appointed
Martin Shugrue as temporary trustee over Eastern.
Eastern was unable to overcome its fiscal downfall and as a result was forced to close
its door. Many had accused Lorenzo of selling off assets and transferring Eastern's
aircrafts to Texas Air. Other accusations included depleting Eastern's pension fund.
Many felt Lorenzo was only interested in purchasing defunct air carriers in order to
strip the carriers of its assets. This was a major blow to Lorenzo's credibility in the
business community.
In the summer of 1991, Lorenzo sold off most of his investments with Continental
Airlines. This allowed Continental to further grow as a result of IAM and other
unions had kick up a storm. The Scandinavian airline that bought Continental also
insisted that Lorenzo leave, and sign a pact to stay out of the airline business for seven
years. But that didn't stop Lorenzo from trying to start up another small airline in
Baltimore, which he ironically wanted to call Friendship, in 1993. After a flurry of
union protest, the U.S. Department of Transportation denied Lorenzo's bid to establish
the airline, saying he was unfit to fly "in accord with the public interest."
Lorenzo headed Texas International when deregulation of the airline industry
enabled him to acquire faltering airlines throughout the 1980s.
After Congress passed the Airline Deregulation Act in 1978, airlines had the
freedom to expand their routes and to set their own prices without government
intervention.
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Many thought this would foster more competition and the consumer
would benefit from cheaper air fares. But deregulation also gave rise to a new
type of airline executive - one trained more in making business deals than in
navigating the skies. Perhaps the most controversial of this new breed was
‘Lorenzo’.
As head of Texas International, Lorenzo was interested in expanding his network
of air routes. Deregulation presented him with the ideal opportunity. Non-union
airlines like People's Express sprang up, offering drastically reduced air
fares - prices that the larger, unionized airlines couldn't compete with. As
airlines began faltering, Lorenzo systematically began acquiring the likes of
Continental Airlines, New York Air, Frontier Airlines, and Eastern Airlines.
Lorenzo's company soon became the nation's largest airline. Lorenzo often drew
ire for what his critics called harsh business practices.
After Lorenzo filed for bankruptcy at Continental, he was able to fire all
union employees. Airline employees protested his actions.
At Continental, Lorenzo was unable - some would say unwilling - to negotiate
any further with the airline's labor unions. Lorenzo filed for bankruptcy. The
move allowed him to fire union employees and restarts the airline with a non-
union staff. He cut wages in half and forced new rules requiring longer hours,
shorter breaks, and no guaranteed time off. The unions protested, but were
unable to have Lorenzo's actions overturned.
Lorenzo's cost-cutting measures did eventually help the airline get back on its
feet and starting making a profit. But some claim Lorenzo's harsh methods also
wreaked havoc. Employee morale was low and Continental's reputation suffered
from poor customer service. Critics charged that Lorenzo was only interested in
buying up struggling airlines in order to takeover their assets. His
credibility damaged, Lorenzo sold his investments in Continental Airlines.
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When Lorenzo acquired Eastern in 1986, he hoped he could employ similar
business strategies in order to turn the airline around. When Lorenzo asked
machinists to take a cut, the union refused. The union called for a strike,
crippling the airline and putting Eastern further in the hole.
Eastern's creditors sued causing a U.S. bankruptcy court to intervene. The
court eventually ruled Lorenzo was unfit to run the airline. Eastern was
permanently grounded in 1991. Two years later, Lorenzo tried to start another
airline, named Friendship, but the U.S. Department of Transportation denied his
attempt.
Challenges before Trade Unions due to Deregulation
More generally, in industrial relations terms, the challenge for trade unions has been
twofold. In the case of traditional carriers, unions have been concentrating on
negotiating acceptable terms and conditions for their members in those carriers
undergoing restructuring. Nevertheless, many carriers have modified terms and
conditions of employment for new employees, for example, employing new recruits
on fixed-term contracts or operating a two-tier pay system. The practice of
subcontracting has also increased, particularly in the case of ground handling and
catering operations.
In terms of the new low cost airlines, trade unions have been trying to recruit new
members and gain recognition for bargaining. However, they have faced hostility on
occasion, for example from the Irish carrier Ryan air, which does not recognize trade
unions.
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1. What part of external environment changes the most for Texas Air? How did
they change?
Political environment:
External environment which has changed the most for Texas Air is political
environment. This environment is composed of laws, government agencies, creditors
and pressure groups that influence and limit various organizations and individuals.
Sometimes these laws also create new opportunities for business.
LEGISLATION REGULATING BUSINESS legislation has three main purposes:
(1) to protect companies from unfair competition,
(2)to protect consumers from unfair business practices, and
(3)to protect the interests of society from unbridled business behavior.
A major purpose of business legislation and enforcement is to charge businesses with
the social costs created by their products or production processes. A central concern
about business legislation is: ‘At what point do the costs of regulation exceed the
benefits?’ The laws are not always administered fairly; regulators and enforcers may
be lax or overzealous. Although each new law may have a legitimate rationale, it may
have the unintended effect of sapping initiative and retarding economic growth.
Legislation affecting business has steadily increased over the years.
The environment changed with the implementation of Airlines Deregulation Act of
1978.
The United States Airline Deregulation Act of 1978 was a dramatic event in the
history of economic policy. It was the first thorough dismantling of a comprehensive
system of government control since the Supreme Court declared the National
Recovery Act unconstitutional in 1935. It also was part of a broader movement that,
with varying degrees of thoroughness, transformed such industries as trucking,
railroads, buses, cable television, stock exchange brokerage, oil and gas,
telecommunications, financial markets, and even local electric and gas utilities.
Most disinterested observers agree that airline deregulation has been a success. The
overwhelming majority of travelers have enjoyed the benefits that its proponents
expected. Deregulation also has given rise to a number of problems, including
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congestion and a limited reemergence of monopoly power and, with it, the
exploitation of a minority of customers. It would be a mistake, however, to regard
these developments merely as failures of deregulation: in important measure they are
manifestations of its success.
These problems drive home the lesson that the dismantling of comprehensive
regulation should not be understood as synonymous with total government laissez-
faire. The principal failures over the last fifteen years have been failures on the part of
government to vigorously and imaginatively fulfill responsibilities that we, in
deregulating the industry, never intended it to abdicate.
With the implementation of this act:
1. Fares and routes were deregulated and thrown open to competition.
2. There was drastic cut in air fares , increase in air passenger traffic and route
3. Increase in competition among carriers and creation of many new airlines.
These changes in the external environment has made it mandatory for the airlines
1. To cut costs and HR costs were primary targets for cutting.
2. Unions were busted wherever possible.
3. Flexible assignments of employees to job.
4. To increase productivity of it human resources by attempting to get more work
and more hours of work out of each.
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2. Lorenzo had a reputation at Texas Air for being ruthless with employees in
order to cut costs. When is such harsh treatment justified? Do you feel it was in
he Texas Air case, given the change in the external environment for air
transport? Discuss our answer.
Answer:
With the increase in competition it is necessary for Texas air to cut cost, which can be
achieved only by abrogating unions. But as the union is very strong they have to take
certain actions. But while taking these actions, management should ensure that
appropriate strategy is adopted.
HRM APPROACH TO EMPLOYEE RELATIONS
It may be reiterated that in new economic environment, only those companies which
follow human resource development and welfare-oriented policies will have healthy
relations (Sodhi, 1994). The findings of a broad based study (Sodhi et al. 1994) in the
context of the worker participation and employee involvement support the argument
being advanced for the introduction of HRD policies. The key contrasting dimensions
of traditional industrial relations and HRM have been presented by Guest (1995) as
follows: TABLE (A)
Dimensions Industrial Relations HRMPsychological contract Compliance Commitment
Behavioral references Behavioral references Values & missionRelations Low trust, pluralist,
CollectiveHigh trust, unitarist,
Organization design Formal roles, hierarchy, Division of labor, Managerial control
Flexible roles, flat
structure, teamwork,
autonomy, self-control
Guest advocates that this model aims to support the achievement of the three
main sources of competitive advantage identified by Porter (1980), namely,
innovation, and quality & cost leadership. Innovation and quality strategies require
employee commitment while cost leadership strategies are believed by management
to be achievable only without a union. The logic of a market driven HRM strategy is
that where high organizational commitment is sought, unions are irrelevant.
Where cost advantage is the goal, unions and industry relations systems appear
to incur higher cost.
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3. How would you judge whether Texas Air’s new HR policies under
deregulation were effective? What criteria would you use and why?
Answer:
The HR policies of Texas Air under deregulation are:
1. To cut HR cost by abrogating Union contracts.
2. Two tier wage system was adopted, in which employees hired after a specific
date were paid significantly less on a job than those already holding the job.
3. Flexibility was a key watch word.
4. Flexible assignment of employees to job was adopted wholeheartedly by
Texas Air for e.g. baggage handlers collected tickets and vice versa.
5. The airline tried to increase the productivity of its human resources by
attempting to get more work and more hours of work out of each employee at
little increase if any in salary
6. Pilots and flight attendants flew dangerously close to or even exceeded
maximum federal flight time standards.
7. Maintenance employees rushed jobs and cut corners to save time, raising
questions on safety
MEASURING HRM
HR departments have long been criticized for not providing bottom-line results for the
organization. Although some have argued that such criticism is unwarranted and that
measuring HR’s impact is often unnecessary and sometimes detrimental (see A
Different Point of View), there has been increasing pressure on HR departments to
evaluate their return on investment. In order to show how HR contributes to overall
business success, the first requirement is to identify means of measuring HR’s
performance. A number of authors have suggested typologies of HR measurement
systems, and literally dozens of individual indices have been developed to measure
HR effectiveness. However, most of these typologies relate to four basic questions
about HRM:
1. What did the customers of the HR practice or those who have some stake in an
HR activity think of it?
2. Did the HR activity have a measurable impact?
3. If the HR activity did have an impact, then what was the bottom-line dollar
benefit to the organization?
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4. How do our HR activities compare with the HR activities of their (an issue of HR
benchmarking?)
Customer Reactions:
The customer/stakeholder approach to measuring HRM effectiveness involves
identifying those who have a stake in the activities of HR in the organization or are
direct users of HR products—such as managers, unions, customers, employees,
Suppliers or even company shareholders. These individuals are surveyed to assess
their perception of whether HR is supplying the right kinds of HR products, in the
right way, and at the right time. Jack Fitz-enz, in his 1995 book, How to Measure
Human Resources Management, suggests that it is important for HR to regularly
survey its customers to measure the level of satisfaction with each of the various
functions that HR performs (e g, payroll training, benefits) as well as the process by
which HR delivers its service It is also important for HR to understand the relative
importance of the various aspects of service delivery to each customer. Fit has
identified six measures of HR service delivery satisfaction. These factors, which are
presented in Table (a), are applicable to any form of customer service, be it HR
services or services one might receive in a hotel. The factors deal with basic issues
relating to the quality and speed of service as well as the ability of service providers to
anticipate (not simply react to) the needs of those they serve
HR Impact:
A wide variety of “impact” measures are being used in organizations. For example,
the results of a 1997 survey conducted by the Society of Human Resource
Management (SHRM) and CCH, Inc. identified a number of commonly used HR
assessment measures. Survey respondents indicated whether they used each of the
measures and how important they felt the measure was in assessing the over all
effectiveness of HR.
In order to properly evaluate the impact of HR programs, human resource units must
develop a strategic framework for assessing the effectiveness of their work. The
strategic objectives of organizational units should be identified, along with the human
resource activities needed to accomplish those objectives. For example, an
organizational unit may depend on the development of innovative products for its
market growth. The selection of R&D scientists, who can regularly achieve product
innovations, would be a key human resource activity needed for achieving market-
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growth objectives. If HR staff developed an “improved” selection interview intended
to increase the number of innovative R&D scientists hired, to extent to which the new
interview actually yielded a greater percentage of innovative scientists would be a
measure of HR program impact.
Dollar Value of HR Programs:
The third issue in assessing HR practices relates to the monetary costs and benefits of
HR activities—the dollar value of HR programs.
Wayne Cascio, in Costing Human Resources: The Financial Impact of Behavior in
Organizations, describes more direct ways to assess HR cost-benefit I the first step,
obviously, is to figure out how much some undesirable HR-situation in the
organization is costing. For example, Cascio suggests that the cost of employee
absenteeism can be assigned a dollar value using the following formula:
Costs of absenteeism = [lost to absenteeism x (average of wage per hour per
absent employee + average of benefits per hour per absent employee)] +
(Total supervisory hours lost due to absenteeism x average hourly wage of super
visors) + All other incidental costs resulting from absenteeism (such as extra
Wages paid to, temporary workers to replace the absent employee or wages paid
in overtime to employees who have to work extra time because of the absent
employee)
Using formulas similar to Cascio’s, some researchers have suggested that for
employees earning $15,000 per year, the average cost of absenteeism per employee-
day is around $ Suppose that a firm has a 3 percent absenteeism rate, which means
that each employee is absent about 7.8 days per year. If there are fifty employees
earning $15,000, then the firm can expect these employees to have a total of about
390 days of absenteeism per year. At $207.48 per day, this level of absenteeism
would cost the firm $80,917.20!
Once the firm knows what absenteeism is costing, the next step becomes one of
estimating the costs of the HR program developed to fix the problem. Suppose, for
example, that the firm decides to implement an incentive program to reduce
absenteeism. Workers who have a perfect attendance record each week have their
names placed into a “lotto draw” in which one person wins $50. At the end of the
year, each employee is given a lotto ticket—one for each week of perfect attendance.
These tickets are then placed into a large drum. Three names are drawn randomly
14
from the drum, with the first person receiving $1000, the second $500, and the third
$250. The costs of this program would include the following:
• 52 weeks x $50 weekly prizes $2600
• Materials used in the drawings such as tickets, drum, and so forth = $250
• Administrative time associated with running the program; for example, one person
earning $100 per day (wage + benefits) working the equivalent of two
days each month x 12 months $2400
• Other overhead costs estimated at 30 percent of the program administrator’s salary =
$720
The total cost of the program would be $5970. If this program resulted in a 20 percent
decrease in absenteeism, the benefit gained from the program would be 20 percent x
$80,917.20 = $16,183.44. Subtracting the cost of running the incentive program
would result in total savings to the firm of $10,213.44!
The preceding absenteeism example seems relatively simple and straight for ward.
Unfortunately, assessing the dollar costs and benefits of HR practices is not always so
easy. Despite the difficulty, the pressures of a more competitive business environment
will increasingly place HR practitioners in the position of having to justify the
bottom-line impact of their practices on the organization. We will not go into great
detail on the costing of HR programs here; rather, most chapters in the remainder of
this book will include a section that describes some of the methods and formulas that
may be used to assess the costs and benefits of HR pro grams discussed in that
particular chapter.
Combining Customer Reaction, HR Impact, and Dollar Value:
An Eastman Kodak Example
Eastman Kodak provides an excellent example of a firm that assesses HR using
variety of measures. Kodak developed three clusters of measures for use in as the
impact and value of HR programs. Examples of these are described below:
Cluster 1: Internal operational measures (how well HR does what it does)
• Cycle time of HR practices (how long it takes to develop and run programs)
• Quality and cost of practices
• Result measures, such as acceptances versus offers in hiring
• HR client satisfaction measures
• Measures such as the ratio of HR expenses to total operating expenses of company
15
Cluster 2: Internal strategic measures (how well HR practices serve strategic
important initiatives in the organization)
• Leadership diversity in terms of race, gender, and so forth
• 360-degree measures of leadership competency
• Percentage of employees with documented development plans
• Number of hours devoted to development by employees
• Results of development activities assessed using four levels of training ev tion
• Clarity of performance expectations and adequacy of performance feedback
Cluster 3: External strategic measures (to assess how well HR practices satisfy
customers and shareholders)
• Incremental sales and earnings
• Changes in customer satisfaction and commitment
The two critical elements of the Kodak system are that (1) it uses vane measures of
customer reactions, HR impact, and dollar value and (2) it approve the measurement
of HR effectiveness from different strategic perspectives.
Benchmarking HR Practices
As we indicated earlier, the fourth aspect of measuring the effectiveness of programs
is through HR benchmarking. Benchmarking is important because determine the
true competitive advantage of HR. an organization must assist HR practices not only
against some internal standard but also against the HR practices of key competitors
and firms that exemplify HR excellence. Benchmarking is a generic term that can be
defined as “a comparison with selected Performa indicators from different
organizations, typically in the same industry, or comparable organizations that are
considered to be ‘best in class.’ “70 Benchmarking has been conducted on a wide
variety of organizational practices, often related to production methods or technology,
but for the remainder of this section, we will use the term only as it applies to the
comparison and evaluation of HR practices.
There are several different types of benchmarking. Internal benchmarking occurs
when a firm compares practices in one part of the organization against those in other
internal units. For example, work and safety practices in a firm’s operations in the
southwestern United States might be compared with those in its New England
operations. Competitive benchmarking is conducted against external competitors in
the same markets. Firm A might compare itself with four of its competitors in terms
of its employee turnover rate, ratio of HR staff to production employees, and
16
percentage of total operating budget spent on employee train Generic HR
benchmarking involves the comparison of HR processes that are the same, regardless
of industry. Sheraton Hotels could compare aspects of its HR practices with the HR
practices at Ford Motor Company, IBM, Lucent Technologies, and Bond University.
Regardless of which type of benchmarking is conducted, the process is essentially the
same. The firm must first understand its own performance by developing measures of
customer reactions, HR impact, or dollar value (for example, like those shown in
Table 2.8). The firm must then decide exactly what to benchmark, since more aspects
of HR performance may be measurable than need to be bench- marked. Measures that
are obtainable in the comparison firms or business units should be identified and then
prioritized relative to their overall strategic importance to the role of HR in the
company. An overall plan for the program should be developed, including the
allocation of sufficient resources for the project and the establishment of a clear
project calendar. The next step is to identify firms (or in the case of internal
benchmarking, parts of the firm) that will be in the study, persuade them to
participate, and then collect data. Analyzing the data collected involves looking for
“gaps” between your firm’s (unit’s) practices and those of other firms (units) in the
study. Recommendations on how to close these gaps should be made and then
implemented.
The number of different indices of HR performance that can be benchmarked is
almost limitless. Table 2.8 provides only a few examples. What benchmark in dices
should be used will depend on the specific strategy and circumstances of the firm
involved. However, in the United States, twenty-five HR measurement “national
standards” were developed in 1984 by the Saratoga Institute. A review of these
twenty-five measures would be useful for any firm contemplating an HR
benchmarking process. Additionally, throughout the remainder of this book, we will
identify relevant benchmark indices associated with HR practices discussed in many
chapters.
IS STRATEGIC HRM REALLY WORTH ALL THE TROUBLE?
Because of the magnitude of the differences between the traditional personnel
perspective and strategic HRM, it is not surprising that many organizations have yet
to make the leap into SHRM. There are a variety of reasons why the transformation
from traditional HRM to SHRM is not made. The adoption of SHRM requires a
17
highly competent and persistent SHRM leader as well as committed and supportive
top management. Many firms simply do not have this type of HR leader or top
management support. Political forces within the organization, accompanied by
competing coalitions with different self-interests, m preclude the adoption of many
SHRM practices. For example, HR systems could help achieve particular
organizational objectives may not be supported b unions. Also, firms that are not
labor-intensive may be less likely to make the e fort to move to a strategic HR
orientation, since human resources are perceived make up a relatively small portion of
the organization’s potential competitive advantage.
Firms experiencing very stressful business conditions (either rapid expansion or
sudden decline) often feel that they are “up to their ears in alligators” and d not have
the time or resources to invest in an HRM transformation. Unfortunately for many of
these firms, the lack of attention to HR issues may be one of the p many factors
contributing to their business stress. For example, firms undergoing downsizing often
cut HR staff, since they are viewed as nonessential to the co business. However, after
downsizing, employees often need extensive training manage expanded jobs and the
selection of any new staff becomes particularly critical. Thus, at a time when HR
services are most needed, they are often reduce Additionally, highly decentralized
organizations made up of autonomous business units may view the move to a
corporate-wide, relatively unitary model of SRHM both unfeasible and potentially
undesirable.
The traditional role that HR has played in many organizations may have established a
vicious cycle that makes the transition to SHRM extremely difficult. U less HR
managers are involved directly in the process of strategy formulation, an attempt by
senior management to link HR activities with business strategy simply creates a cycle
in which HR cannot implement the HR components of the strategy effectively, which
causes HR to lose credibility with non-HR managers, thus further isolating HR from
the strategic planning process, making it increasingly cult to implement strategy and
so forth.
Transforming traditional HR into strategic HRM is a complex and time consuming
process. Top managers and HR practitioners are right in question the overall value of
the SHRM transformation process. Just as we can evaluate the effectiveness of a
single HR practice, we also must examine the issue of whether strategic HRM is
really “worth all the trouble.”
18
There is evidence that HR practices do have a direct bottom-line effect on
organizational profitability.
In a 1997 study, Mark Huselid and his colleagues assessed the level of “technical”
and “strategic” effectiveness in 293 U.S. firms. Firm performance al was measured
based on share price, net sales per employee, and gross rate of r turn on assets. The
results of the study indicated that an increase of one standard deviation in overall HR
effectiveness was associated with (5.2 percent increase• per-employee sales volume
valued at $44,380, a 16.3 percent increase in cash fib valued at $9,673 per employee,
and a 6 percent increase in market value valued $8,882 per employee. These findings
were consistent with the results of an earlier study of 968 U.S. firms in which Huselid
found that “high-performance work practices” were also related to increased levels of
sales, profits, and market value well as a 7.05 percent decrease in employee turnover.
Other findings also suggest that improved HR practices resulting from a
transformation to a strategy HR perspective can have a bottom-line impact. For
example, Sears found that for every 5 percent improvement in employee attitudes
(resulting from various H initiatives), customer retention rates increased by 1.3
percent and profits by ( percent Research like Huselid’s on the financial impact of HR
practices remains suggestive rather than conclusive. However, if these results are
combined with d. like that collected by the Hackett Group on HR costs in best versus
typical I units and the practical dollar-saving experiences of firms like ERTL
(discussed earlier in the chapter), there seems to be a strong case for promoting the ii
ment of HR activities as a means of affecting the financial results of many
organizations. The business environment that has caused organizations to focus on
human resources as a potentially enduring source of competitive advantage is likely
continue for many years. To the extent that HR practitioners become more r at
measuring aspects of customer reactions, HR program impact, and the c value of HR
practices and at comparing their own HR practices with those of L best competitors,
the importance of strategic human resource management likely to continue to grow.
Is strategic human resource management really ‘all the trouble? The answer is almost
certainly yes.
19
4. Do you agree that it takes an aggressive CEO such as Lorenzo to bring about
real change in a firms HR or could this be done by the firm’s HR unit? Explain.
Answer:
No, it is not agreeable that it takes an aggressive CEO such as Lorenzo to bring about
real change in a firms HR. This can be verified by the following document.
Bleeding the Assets, Blaming the Unions
In the three years since Texas Air's chairman, Frank Lorenzo, has been at the helm of
Eastern Airlines, he has waged war against the carrier's unions. Lorenzo has never
disguised his intent to break Eastern's unions, using tactics he mastered in breaking
Continental's union three years earlier.
But Lorenzo failed to consider that the unions had also learned from the Continental
experience. And Lorenzo's strong-arm tactics with the union may end in a permanent
grounding of the entire Eastern fleet.
Pre-Lorenzo, labor relations at Eastern were not always antagonistic. In 1983, Eastern
Airlines introduced an innovative plan to restructure labor-management relations:
workers at the company were given 25 percent control of the carrier's stock; access to
the company's financial records; and a role in corporate planning. In return for these
concessions by Eastern's management, Eastern's workers agreed to large wage cuts.
For a brief period, cooperation and profits increased and grievances subsided. But this
progressive experiment was short-lived.
Lorenzo prepared for war against the unions, installing the same executives who had
helped him dismantle Continental's unions in his top management positions at
Eastern. He unilaterally withdrew the contractual rights that Eastern's unions had won
in 1983, including union access to company records and workers' role in management
decisions.
Lorenzo's moves sent a new message to workers at Eastern: cooperation is over.
Almost immediately following the take-over, he began to transfer or sell Eastern's
most lucrative assets. In response to these actions, the International Association of
20
Mechanics and Aerospace Workers (IAM) tried, with outside investors, to organize a
take-over of Eastern. "We are in the midst of an all-out war," said IAM's Charles
Bryan in September 1986. Subsequent events would bear this out.
A Costly Battle
Lorenzo's war on labor sent Eastern into a financial tailspin. Analysts now doubt that
the company will ever recover, even if the labor-management battle subsides. A sharp
drop in passenger volume due to safety concerns compounded the labor problems, and
the need to reduce operating costs forced further downsizing.
Eastern's operating cash-flow, according to one industry analyst, dropped from over
$400 million in 1987 to under $200 million in early 1989. Eastern incurred a deficit of
over $450 million last year and had racked up $2.5 billion in debt even before the
current strike began. Interest rates have remained high, making the large debt even
more onerous. This has led to still more downsizing and borrowing to cover operating
costs.
At the same time, however, Lorenzo has developed Eastern's parent company, Texas
Air Corp., into a veritable air transport empire; but not without both racking up huge
debts and alienating mechanics, flight attendants, pilots and other workers. Texas Air
Corp. now comprises Continental, Eastern, Frontier Airline, New York Air and
People's Express, along with its holdings in real estate. By 1986, the company had
amassed just under $5 billion in long-term debt, representing an alarming 90 percent
of its total capital.
In 1987, Eastern Airlines Inc. scheduled air service between 77 metropolitan areas in
the United States and Canada, to 20 cities in the Caribbean, and 16 cities in Central
and South America. The company's primary airport operations are in Atlanta, New
York, Miami, Kansas City, Philadelphia and San Juan, Puerto Rico. Its market share
in terms of passengers in 1988 stood at 34 percent in Miami, 27 percent in New York
(La Guardia) and 32 percent in Atlanta. Even before the strike brought its operations
to a virtual stand-still, Eastern had reduced its total number of flights by more than 20
percent in the last year. In 1988, the company carried between 80,000 and 100,000
21
passengers a day to 113 cities and, was still the largest carrier serving New York's La
Guardia, Boston's Logan and Miami's International Airports.
At the end of 1987, Eastern had a fleet of planes made up of 53 wide body and 231
narrow body aircraft. By early 1989, however, Eastern had sold 34 of those planes, al-
most 12 percent of the total. Even before the announced sale of the Eastern Shuttle,
pilots were protesting the proposed sale of 43 aircraft. Knowing that fewer planes and
fewer flights translate to fewer jobs, the pilots are pushing Lorenzo to guarantee the
size of Eastern's fleet. The company had 32,481 employees as of December 31, 1987.
The number had fallen, even pre-strike, as many left in frustration or were fired; and
on March 6, 1989, Eastern fired 5,000 more workers, citing the strike as the cause.
The current dispute is one between the machinists, who are represented by the IAM,
and Lorenzo. The IAM represents about 8,500 employees at Eastern. Pilots and flight
attendants are represented by other unions. The current strike is over Lorenzo's
demands for deep wage cuts. Initially Lorenzo proposed cuts as high as 60 percent but
he has since reduced the proposal to a 40 percent cut, which would save the company
$125 million a year. Eastern wants to bring wages in line with its non-union carrier,
Continental. It claims it has been losing $70 million a year during the 1980s and those
workers and pilots need to make major pay concessions to salvage the company. In
1987, Eastern's president, Phil Bakes, said that labor costs had to be cut by $490
million in that year alone to make the company profitable. He wanted $265 million in
cuts to come from workers represented by the IAM and $114 million from the pilots.
President Bakes warned that further downsizing would occur if the workers and pilots
did not make the concessions.
Lack of safety procedures and the continual demands for deeper pay cuts have forced
many pilots to leave in disgust. Since the Texas Air takeover, more than 750 pilots
have resigned from Eastern. According to the IAM, 500 left in one year alone.
Lorenzo initially proposed a 12 percent pay cut for the pilots. He later modified this
stance, partially due to the exodus of pilots. His hope was that by settling with the
Airline Pilots Association (ALPA), he would be able to use them as a wedge against a
strike by the machinists. Two years ago the unions agreed to a 20 percent wage cut.
But the company's financial health has continued to decline. Workers say further
22
wage cuts will not get at the heart of the carrier's problem, which they say has much
more to do with management than labor.
The union believes that Lorenzo has slowly under-mined their bargaining position by
transferring the carrier's most lucrative assets to non-union airlines. He authorized the
sale of Eastern's System One Direct Access Inc. (SODA) to Texas Air in April 1987.
The SODA system provides reservation services to the travel industry. Be-fore selling
SODA, Eastern reaped the profits from this growing system, and now Texas Air
enjoys this revenue. Texas Air also now charges Eastern for the use of the system.
According to Jim Conley of the IAM, the system, which was sold for $100 million,
had a market value two and a half to five times greater than the price paid. Conley
points out that Eastern now puts $130 million a year into "the coffers of Texas Air" to
pay for its use of the SODA system that it formerly owned.
He says that Lorenzo has also transferred air gates and many other assets to Texas Air
in his struggle to de-unionize Eastern and pay off debts. IAM blocked the transfer of
6,000 ramp service positions to a subsidiary of Texas Air. That transfer would have
allowed Lorenzo to use more non-union labor.
When Eastern sells or transfers planes to Texas Air, Continental or another one of its
subsidiaries, union labor gets replaced by lower paid non-union labor. Pilots cite the
transfer of Eastern's London and Mexico City flights to Continental as a case in point.
And many such transfers have been attempted: Texas Air has petitioned the
Department of Transportation to transfer routes to Continental that Eastern acquired
in 1986.
According to Moodys Transportation Manual, Lorenzo has been building liquidity to
protect Eastern in the event of a strike. In March 1988, for instance, the company
issued $200 million worth of notes to increase liquidity and generate cash.
Management hoped, says Moodys, that such financial liquidity would "enable it to
continue operations during a strike or other job actions." The planned sale of the
Eastern Shuttle was also generally viewed as an attempt to generate cash reserves to
pay creditors and maintain profitability in the event of a strike. When Eastern's pilots
decided to honor and join the mechanics' picket lines, they effectively crushed such
hopes.
23
In addition to the transfers and sales of assets within his empire to raise cash-flow,
Lorenzo has attempted to sell some of Eastern's assets to buyers outside of Texas Air
Corp. Last year, Eastern announced the proposed sale of its shuttle to Donald Trump,
for a price of $365 million. The deal will not be final, however, until it has been
approved by government regulators, and Trump has expressed reservations about
consummating the deal before the labor dispute is resolved. The airline's unions had
blocked earlier attempts to sell the shuttle. According to the IAM, the attempts were a
part of management's effort to wring greater concessions from the unions.
It is not just the unions who see such transfers as threats to worker strength and union
operations. Aviation Week & Space Technology, an industry trade publication, noted
last year that "each step taken by the Texas Air parent toward the reduction of
Eastern's size and scope has put increasing pressures on the subsidiary's unions to
agree to cost concessions."
While the company cites high labor costs as the motivation for down-sizing, others
see it differently. Greg Tarpinian, director of the Labor Research Association based in
New York City, says that wages at Eastern are lower than those at other carriers.
Remarkably few news accounts make this point, says IAM's Conley. The leading
daily newspapers in the United States have editorialized against the union position,
but often state it incorrectly. Conley says that "all major airlines made record profits
last year except Eastern and Continental. So it is clear that it is not a workforce
problem, but a management one."
Tarpinian says that Lorenzo turned the company into a "cash cow" which he would
milk of all its profits. He says Lorenzo "bought Eastern to dismantle it" and thereby
eliminate the competition that Eastern presented to his Texas Air Corp. Another of
Lorenzo's goals, according to Tarpinian, was to force the IAM into wildcat strikes in
order to eventually overturn the Railway Labor Act, which permits secondary
boycotts in the transportation sector. Reagan and Bush have both sought the
elimination of this secondary boycott provision in labor law. And, in the face of recent
threats from the IAM, the Bush administration has publicly stated that it will seek
prohibitive legislation if the union tries to enact secondary boycotts.
24
In the two years before the strike, Lorenzo fired over 900 workers including shop
stewards and union officers, says Tarpinian. "He has instituted terror on the job. There
is horror story after horror story," says Conley of the machinists. It was never
Lorenzo's intention, he adds, to build a company. "Lorenzo has transferred assets,
liter-ally stolen them [referring to selling them at wildly under-valued prices to Texas
Air or other subsidiaries]. It is bankruptcy by design."
This should be done by the firm’s HR unit because HR units can better analyze,
diagnose & plan the action.
Analyze:• What’s happening?• What’s good and not so good about it?• What are the issues?• What are the problems?• What’s the business need?
Diagnose:• Why do these issues exist?• What are the causes of the problems?• What factors are influencing the situations (competition, environmental, political etc.)?
Conclusions & Recommendations:• What are our conclusions from the analysis/diagnosis?• What alternative strategies are available?• Which alternative is recommended and why?
Action Planning:• What actions do we need to take to implement the proposals? What problems may we meet and how will we overcome them?• Who takes the action and when?
Resource Planning:• What resources will we need (money, people, time)?• How will we obtain these resources?• How do we convince management that these resources are required?
Benefits:• What are the benefits to the organization of implementing these proposals?• How do they benefit individual employees?• How do they satisfy the business needs?
25
The Sequence of HR strategic FormulationSource : Handbook of Strategic HRM ,Michael Armstrong
Extension:
‘MAJOR ORGANIZATIONAL APPROACHES TO
COMPETITIVENESS’
As an extension to the subject, we will discuss some major thrusts in this area before
turning to a consideration of some more specific techniques. The first is business
process improvement or reengineering. The second is total quality management.
The third is a comprehensive form of employee involvement called the high-
involvement organization (HIO).
Business Process Improvement (Reengineering):
Generally attributed to IBM, business process improvement is a set of practices for
regularly examining and improving the processes that go on in an organization. A
“process” is a repeated set of activities, often carried out in sequence by several
departments, that adds value and produces measurable outputs. Examples include
billing, distribution, materials management, and procurement. In a traditional
approach to quality, each department involved in a process would try to do its portion
of the activity more quickly and accurately, but the entire process from start to finish
is unlikely to be critically evaluated or redesigned. Thus very dated, inefficient
systems might be tweaked into becoming fastest—but still dated and inefficient—
systems.
Business process improvement became extremely popular during the 1990’s and is
often called reengineering is defined as “the fundamental rethinking and radical
redesign of business processes to bring about dramatic improvements in
performance.” The focus is on a major change that greatly lines an entire work
process rather than making minor incremental example of a process is order
fulfillment. The several steps in receiving and fi an order (such as order taking,
verifying the customer’s ability to pay, r’ goods from a warehouse, packing them, and
shipping them) are often split a several departments (sales, accounts, warehouse). As
26
work is handed from one group to the other, delays and errors occur and unnecessary
paperwork required. Reengineering cuts out unnecessary steps and breaks down
barrier between departments.
In reengineering, someone is assigned responsibility for the whole manager works
with a cross-functional team to assess the state of the process develop new ways to
perform it better. Statistical quality measurement and techniques may be used, and
small-scale experiments with new processes tried. The process is then redesigned and
further improvements made on the basis of experience. One example of a successful
implementation of this approach involved accounts payable at Ford Motor Company.
After benchmarking its accounts function against Mazda Motor Corporation, Ford
realized that its employee headcount in this function was probably five times what it
should have been. By helping employees to perform the same tasks faster, only a 20
percent reduction in staff would be possible. But by redesigning the entire system for
keeping track of orders, deliveries, and invoices, the company dramatically simplified
the process. Before the changes, clerks had to check and match fourteen items on
three forms paying an invoice; they spent much of their time trying to unravel
mismatches. Now only three items have to be matched, and a computer system does
the matching automatically and prepares the check. The function requires 75 percent
fewer people and errors have been reduced substantially.’
Some companies in both the United States and Europe have received enormous
benefits from well-executed reengineering efforts. American Express saved over $1
billion per year, while Progressive Insurance greatly reduced claims processing time,
increased customer satisfaction, and increased revenue per employee by more than 70
percent. However, for every success story, there is also a failure—probably due to
misunderstanding what reengineering is all about, poor leadership, or resistance to
change. In some cases, the rhetoric of reengineering has been used as a pretext to
greatly reduce employee headcount. If processes have not really been streamlined,
fewer employees are left to struggle with a still- inefficient process.
Total Quality Management:
Total quality management (TQM) ideas began to gain increasing acceptance in the
United States in the mid-1980s. By 1993, 76 percent of Fortune 1000 firms had
adopted total quality management for at least part of their work force. By 1997, 57
percent of a representative sample of establishments in the United States said they had
27
adopted TQM for at least half of their work force. TQM first became popular in
manufacturing organizations, but it has also been widely adopted in service sectors.
While the phrase TQM is starting to go out of vogue, its fundamental principles have
become routine and widely accepted business essentials.
TQM ideas have been most clearly enunciated by experts such as Philip Crosby,
Joseph Juran, W. Edwards Deming, Armand J. Feigenbaum, and Genichi Taguchi.
These ideas were adopted and mastered by the Japanese and only later spread to
American companies.
Quality is the most important focus of attention in TQM. Doing high-quality work the
first time improves productivity and reduces the costs of inspection and rework.
Employees are encouraged, both individually and in quality circle teams, to make
frequent suggestions on how the work process or quality can be improved. Great leaps
forward are viewed as resulting from many small steps toward continuous
improvement. The term kaizen (Japanese for “continuous small improvements”) is
widely used in American organizations.
TQM organizations try to be strongly customer-focused. Typically, employees are
trained to identify their customers—the people who depend on the employees’ output.
These can be either internal customers or external purchasers of the organization’s
product or service. The needs of these customers are assessed; then employees make
an effort to meet their customers’ needs fully, the first time, every time. TQM
organizations may also work closely with suppliers to ensure high- quality input and
perhaps to allow for just-in-time delivery of materials. Statistical process control
methods are used to detect variances from the sired standard, allowing for prompt
correction and prevention of further def from the same cause. There is heavy
emphasis on measurement, and many employees in TQM organizations are trained in
statistical methods. Most workplaces feature charts, which are updated daily, showing
trends in quality indicators. Many organizations have had good results from
implementing TQM. Others have found that adopting the tools, techniques, and
meetings without gaining employee acceptable and internalization of quality goals is
fairly ineffective. Critical to the success of TQM is the adoption of a quality culture in
the organization when the culture remains unchanged, TQM may produce fewer
positive than promised. See A Different Point of View for more on this issue.
High-Involvement/High-Performance Human Resource Systems:
28
As long ago as 1985, a shift in the basic paradigm of managing employees
foreshadowed by R. E. Walton in the Harvard Business Review. He forecasted
correctly, that organizations would increasingly turn from a supervision- control-
oriented strategy for managing employees to one based on self-con1ro employee
commitment. Edward Lawler pointed out that a control-oriented approach, in which
employees add limited value product by applying simple and standardized skills, is
only feasible in a low wage environment. In developed countries, where wages are
higher, employees only cover their costs by adding value with their heads as well as
their hand work systems and human resource practices must be designed to enable
and motivate this greater contribution.
The terms high-involvement organization (HIO) and high-performance work systems
have been used to describe a bundle of human resource practices designed to produce
superior outcomes in terms of organizational learning, customer satisfaction,
flexibility, quality, morale, and overall effectiveness. High involvement organizations
share power, information, knowledge, and rewards with employees. Power is shared
downward by various mechanisms for obtaining employee input into decisions. These
may include quality circles or other forms of work- improvement teams, suggestion
systems, job enrichment that gives employees more responsibility for broader work
tasks, and self-directed work teams. Decision making is often decentralized and
delegated to the lowest level possible, with employees and teazps taking responsibility
for decisions that would ordinarily be the province of management. Another
manifestation of shared power is “symbolic egalitarianism.” This means reducing
visible power and status differences between levels of employees and management.
All employees may be called “associates” or “members,” everyone may dress in the
same way, and there are no perquisites like reserved parking places or executive
dining rooms.
References:-
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1) Human Resource Management ----- by Biswajeet Pattanayak
2) Marketing Management--------------- by Philip Kotler
3) Bleeding the Assets, Blaming the Unions----- by John Summa
4) HRM by--- Cynthia D.Fisher; Lyle F.Schoenfeldt; James B.Shah
5) AvStop Magazine Online (for Frank Lorenzo’s History)
30
