Cost Cutting Strategies through HRM
The environment faced by organizations and their HRM professionals are challenging today. As a way of enhancing their operations, firms have adopted cost cutting strategies to survive the ever increasing competition while maintaining expected profit levels. This paper reports on some of the strategies that Woolworths Limited adopts to reduce costs without necessarily reducing the number of employees. Woolworths Limited is in this case an Australian-based retail company with a number of different businesses providing different services and goods including grocery and food, petrol, liquor, consumer electronics and general merchandise. The report shows that while the company operates in a rather competitive industry, it has mitigated the harsh conditions while emerging a key player in Australia. The HR related activities adopted by the company to reduce costs include pursuing business strategies designed to achieve economies of scale, reducing the cost of labor and logistics instead of downsizing, employee involvement and participation, collective-bargaining contracts and renegotiating salary schedules. Literature reviewed further showed that outsourcing non-core activities is another effective way of reducing costs. The report concluded HR approaches and strategies help companies to focus, mobilize and direct human resources activities on issues that will affect their businesses. The report recommended that Woolworths can further reduce its costs through linear incentive plans, relatively stable and explicit job descriptions, short-term and result oriented performance appraisals and minimizing training costs through group training compared to individual training.
The environment faced by organizations and their HRM professionals are challenging today. The demographics, political, cultural and economic changes in particular continue to alter the labor market. As a result, competing in a global market has shifted from trade and investment to the integration of management, operations and strategic alliances, which have significantly affected the requirements for developing globally competent employees (Hendry, 2012). Companies have also adopted cost cutting strategies to survive the ever increasing competition while maintaining the expected profit margins.
In most cases, the characteristics of a firm pursuing the cost-reduction strategy are overhead minimization, tight controls and pursuit of economies of scale (Hendry, 2012). The main aim of these measures is to increase productivity in terms of output cost per person. This can unfortunately mean reducing the number of employees and/or reducing wage levels. Whereas downsizing has been considered one of the strategies of reducing costs, it is possible for firms to mitigate costs without necessarily reducing the number of staff. This report hopes to investigate the HRM approaches and strategies used by Woolworths Limited in Australia to reduce costs without reducing the number of employees. Among other aspects, the report also hopes to find out if the company faces skills shortage and if it operates within the government and legal constraints in relation to its competitors. A conclusion and recommendations of the report are then offered.
Woolworths Limited is an Australian-based retail company with a number of different businesses providing different services and goods including grocery and food, petrol, liquor, consumer electronics and general merchandise (Woolworths Limited, 2012). Under Mr. Grant O’Brien as the CEO, the company generated total revenue of $ 55,526,800,000 in terms of sales and other sources of revenue in 2012 (Woolworths Limited, 2012). The company was also ranked 4th out of top 2000 companies in Australia. By virtue of its scale, size and business complexity, Woolworths is a significant player in the New Zealand and Australian economies. The company employs approximately 190,000 people, making it the largest private employer in Australia (Woolworths Limited, 2012).
According to Woolworths Limited (2007), safety concern, passions for retail, quality sensitivity, working hard and having fun are the precepts that keep Woolworths strong. This is in line with the company’s mission of delivering the right shopping experience to customers all the time. While Woolworth’s key approach is that of being cost effective while increasing efficiency, its vision is to offer superior products and services all the time through price strategies, fresh food strategies and HR related strategies. The firm’s objectives and strategies are shared by the entire business (Woolworths Limited, 2012).
Through legislative reforms, successive governments in Australia have reduced and weakened the significance and opportunities of the institutions, unions and tribunals in the Australian industrial relations system (Kaye, 2009). The Australian retail supermarket industry in which Woolworths operate is also characterized by direct government interference in trading hours, close observation of the business activities of the players, high overhead costs, moderate entry barriers and high bargaining powers of buyers as well as changing societal concerns, consumer demographics, lifestyles and attitude (Walters, 2006). On the other hand, the economic factors in Australia are crucial in the retail sector and therefore in the operations of Woolworths.
Consequently, Woolworths operates in an encouraging economy in the home country, which helps it to free from many problems. The economic prowess is also helpful to the company in determining the buying power of customers and the performance of the company in general. The workplace relations act of 1996 has also encouraged employers and their employees to negotiate directly on an individual basis (Woolworths Limited, 2012).
Ideally, Woolworths’ success may be attributed to the company’s knowledge of the surrounding environment. Woolworth’ success is also based on its ability to base various strategies, initiatives and decisions on the same environment (Woolworths Limited, 2007). The company’s consistent scanning of the environment has also enhanced its operations and the performance. While studying the forces affecting the profitability and effectiveness of the company, Woolworths has provided the best value for its customers.
As a national retailer however, Woolworths is subjected to a number of state and Commonwealth regulations. In all terms, the company commits itself to complying with all applicable laws while working for its people, systems and processes. Nevertheless, most of the set regulations overlap while creating some setbacks especially when operating within regulations set by Commonwealth and other territories and States. Similarly, the regulations set by Commonwealth regulations seem tailored to impose significant burdens which do not appear to be outweighed by the policy objectives put in place by the set regulations (Deloitte, 2009).
In addition, environmental sustainability has become an issue of concern in the recent years for Woolworths and other companies. The impact of the current extreme weather conditions has elicited the thoughts of the effects that climate change will have on many businesses including those being operated under the Woolworths Limited. It is also fair to note that New Zealand and Australian retailers have lagged behind other similar companies in Europe and the United Kingdom. This calls for the company’s responsibility to understand and manage its impact while giving the management an opportunity to achieve lasting and beneficial change that extends beyond its own operations (Deloitte, 2009).
When companies are pushed hard, cutting the number of employees often become an open strategy of reducing operational costs in order to survive. On the other hand, downsizing comes with hidden costs including lower morale, increased staff turnover and reduced effort which in turn reduce productivity and lower commitment. Unlike other firms, Woolworths Limited pursues business strategies designed to achieve economies of scale and reduce the cost of labor and logistics instead of downsizing (Grugulis & Bozkurt, 2011). In doing so, the company mirrors a global trend in reducing the cost of service transactions by adjusting staffing levels as tightly as possible to fluctuations in customer flows.
Employee involvement and participation is another strategy that Woolworths adopts to reduce costs (Woolworths Limited, 2012). Today, employees are among the key stakeholders for the development of any company strategies or programs. A major first step in mission, values, vision and strategy development is to understand the key concerns, priorities and perspectives of all key stakeholders, and especially employees. In Woolworths, employee engagement has been acknowledged as a key driver of shareholder value.
The company further believes that strategic fit, synergy and integration are the key concepts for effective firms. The managers achieve this by ensuring that there is a fit between the coherent sets of human resource practices and other systems within the firm. The human resource systems are also aligned with the business and competitive strategies of the organization. It is also clear that the human resource system adopted by Woolworths is compatible with its operating environment (Woolworths Limited, 2007). In the end, the human resource models created a mutual relationship between human resource policies, strategies, practices and performance.
Thirdly, for Woolworths, employees are considered a valuable asset and not a liability. Instead of reducing the number of employees, the company opts to reduce expenses/costs through developing collective-bargaining contracts carefully or renegotiating salary schedules. The company also reviews and standardizes remunerations and other employees’ benefit programs hence reducing extra costs. The continued success and growth of the company also depends on the ability of the firm to understand and respond to the challenges of changing and uncertain world. By understanding and managing risks, the company provides greater confidence and certainty for all its stakeholders including employees (Woolworths Limited, 2012).
Simplifying the review process is another strategy adopted by the company to reduce costs without reducing the number of employees. In order to achieve this, human resource department streamlines and simplifies the compensation and merit review processes to allow managers to focus more on operational and strategic issues such as developing the skills of their staff (Gandolfi, 2008). The company also adopts a well-developed staffing strategy that identifies the skills and staffing levels that are really needed in order to implement the organization’s strategies. The firm is in this case able to define realistic cost reduction targets that least affect its ability to meet its future long-term objectives.
Over the past decades, the company has also successfully pursued cost reduction business strategies that aim at improving the supply chain to reduce handling costs and transport while minimizing stock holdings and improving the number of products at all times. Instead of sending employees home to reduce the costs, the company has consistently engaged in negotiating with suppliers and reducing the tax take and cutting bad debts. Its main objectives is to have a renewed focus on innovating for its customers while optimizing the business for the shareholders to achieve growth and performance improvement from a strong and stable base (Kaye, 2009). The brand has also integrated some of the existing suppliers vertically by producing its own inputs as a way of increasing market power while responding to the private level trend.
Outsourcing has also been considered an important business approach and a competitive advantage by ensuring that goods and services are offered more efficiently and effectively by external suppliers (Cicek & Ozer, 2011). Outsourcing in this case gives firms an opportunity to focus on their own core competencies by reallocating diminishing resources in order to strengthen the performance of strong services or products. In line with other activities, Outsourcing in HR may be in terms of transferring some activities including benefits administration and payroll system to external providers. Other activities including training recruitment and other HR activities may also be outsourced. To some extent, outsourcing of some of the HR activities has some benefits to the firm. On the other hand, while outsourcing has tactfully been used to reduce costs and offer cheap labor, companies opt to consider other modern strategies that enhance flexibility, productivity, innovation and speed in developing business applications and access to new technologies and skills. Instead of using outsourcing as the part of cost reducing strategy, Woolworths adopts the latter strategies including productivity, flexibility and innovation to enhance efficiency and reduce unwarranted costs.
In effective HRM, the attitude that people are a variable cost is replaced by the view that people are a source and that as a social capital, they can be developed to contribute to competitive advantage. It is also largely accepted that competitive advantage is gained through well-educated and trained, motivated and committed employees at all levels. According to Deloitte (2009), the economic performance of most Asian countries is connected with their high level of investment in training and education. Other countries including Australia place human resource development at the center of their national strategic plans.
Ideally, companies that have developed staffing strategies have a good understanding of the capabilities and staffing levels that will be required in the future (Kaye, 2009). Bearing this in mind, the organization can achieve its headcount reduction targets in ways that least affect its future viability. In order to be successful in cutting costs, a firm should target and focus its reduction and minimize reductions in those areas that are most closely aligned with strategy implementation. For Woolworths, a well-developed staffing strategy identifies the skills and staffing levels that are really needed in order to implement the organization strategies. Once these are known, the company is able to define realistic cost reduction targets that least affect its ability to meet its future objectives.
While it is the business strategy that defines a company’s profitability, growth and development and its future, strategies related to HR help the company to focus, mobilize and direct human resources activities on issues that will affect the business. Woolworth’s performance clearly shows that the firms that persistently and consistently manage their cost structures are the ones that will stand as achievers. HRM can in this case reduce unwarranted costs by reducing significant operational costs.
Woolworths maintains that effectiveness of the company is enhanced through improved HR activities and selection of working business strategies (Kaye, 2009). It achieves this through pursuing strategies that seek to place itself in an advantageous position from which to compete, hence helping it to differentiate itself from the competitors. The company’s consideration of HR activities has proved to be a source of competitive advantage. The company illustrates that a set of internally consistent human resource tandems, collective skills, knowledge and abilities contribute to the achievement of an organization’s business objectives. Consequently, high performance work practices improve sales, profits and market value while decreasing turnover.
While some companies have not yet embraced expected principles of HRM, a new set of assumptions and principles are required. The models tying HR resources should in this case offer proactive and systematic-wide intervention, while connecting HRM too cultural change and strategic planning (Kaye, 2009). Among other strategies, Woolworths has been able to reduce its HR related costs by defining what is core. The core activities including payroll, HR administration, business planning, employee and industrial relations, management and people risk management can in this case be delivered in a more efficient and streamlined manner. Non-core activities including recruitment and learning can on the other hand be produced on a flexible basis as and when required.
During an economic recession, firms must carefully consider their options and assess the applicability and feasibility of cost-reduction alternatives before deciding to reduce the number of employees. Whereas Woolworths has adopted successful strategies in reducing employee turnover and downsizing, other options can also be explored to reduce costs.
Among other cost reducing strategies, Woolworths can consider a linear incentive plan for a specific period of time. The incentive plan for employees should in this case be structured in a way that will align objectives of each employee with that of company performance. The costs of this plan should not on the other hand be exaggerated to hurt other operations.
Woolworths can also include the use of relatively stable and explicit job descriptions that leave little room for ambiguity. This will ensure that all employees are well utilized to increase productivity while reducing redundancy.
The HRM should also adopt short-term, result oriented performance appraisals, narrowly designed jobs and defined career paths that encourage expertise, specialization and efficiency. This strategy enhances productivity and efficiency while increasing profits.
Considering that Woolworths uses a lot of funds in training and development, the funds used in these programs should be reduced to a manageable level. This would involve close monitoring of market levels for use in making compensation decisions and considering minimum levels of employee training and development. These practices maximize efficiency by providing means of management to monitor and control closely the activities of employees.
The company can also streamline its processes while optimizing its technology. The operating costs can in this case be reduced through driving policy and process standardization while increasing the use of existing technology platforms.
The human resource department should also focus on building strong working relationships based on the company’s expectations and the goals set If the HR policy in Australia and Woolworths in particular is to contribute to the organization’s bottom line, selection, recruitment, performance appraisal, training and research and development ought to be consistent, integrated and strategically focused.
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