What is HR strategy? How is it different to strategic HR and the HR strategy formulation process?

While the importance of HR strategy is obvious, it is worth reviewing exactly what it is.
HR strategy refers to the process of clarifying the most important challenges, or “HR materialities” facing a company seeking to raise its corporate value, and drafting and documenting policies to realize solutions, from a HR perspective. In HR strategy, once a company has made clear its human capital investment targets, it is important to draft policies aimed at achieving those targets, and get buy in for them not only from HR, but from management as a whole.

There is another term, “strategic HR,” that resembles “HR strategy.” “Strategic HR” is shorthand for “strategic human resource management.” The term refers to overall measures aimed at making optimal use of presently available human resources using HR management and functions and systems available to HR, after having defined a personnel vision from corporate or business strategy. In other words, the difference with HR strategy is that the focus is on “utilizing and optimizing presently available human resources.”

There is no major difference between the targets the two approaches focus on in terms of them contributing to realizing corporate and business strategy and contributing to increasing corporate value. However, as the human resources inside companies and the resources of HR departments overseeing personnel are limited, HR strategy is the one for which there is greater need, if companies are to pursue transformation.

So, why has the focus turned back to HR strategy?
Some of the reasons include the following.

• Advances in digital technology
• Intensifying cross-industry competition
• Increased demands from stakeholders to combine the pursuit of profit with sustainability
• The decline in the labor force amidst an aging population
• A dearth of specialist personnel and next-generation leaders to drive innovation

With such changes in the environment, the leadership agendas of companies as a whole are changing, so there is a greater focus than ever on HR strategy.

According to a survey by Gartner, the highest priority challenge for global CEOs today is “growth” (see figure 1). What companies need in order to achieve growth is “business portfolio transformation.” To transform their business portfolios, companies need to pivot their business models, develop new businesses, fundamentally transform their profit structures and drive enhancements to their business management, rather than simply focusing on streamlining operations as they have to now.

Leading the way on such corporate growth are “technology” and “employees.” Thus, rather than the old approach of asking how to most efficiently optimize the human resources they already have, companies are faced with the need to draft HR strategies that maximize human capital on the level of each individual employee, and to utilize digital technology, then harness these as the driving force for realizing transformation.

Surveys have also revealed that institutional investors most focus on “investment in personnel.” * The reason is that it “reassures investors about the future prospects of the company,” showing that the idea that the value of human capital is directly tied to the value of the company itself has permeated the investor community.

*Secretariat of New Form of Capitalism Realization Headquarters, Cabinet Secretariat, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and Industry, “Basic Materials”, February 2022

Let’s go over the HR strategy formulation flow for drafting and executing a HR strategy in specifics. At ABeam Consulting, we recommend working through formulating a HR strategy in seven steps (see figure 3). Here we will present the process broken down into three major flows.

Identifying HR materialities is essential to formulating an HR strategy that commits to achieving targets. To identify materialities, companies need to clarify what sort of transformation of their future HR portfolio is needed, and along what axes they want to pursue transformation, then examine the materialities through backcasting (a method for figuring out what to do now by working backwards from the future). In some cases a company may face calls to transform the skills and abilities possessed by specific employees in the short to medium-term in line with a business portfolio transformation, while in other cases they may face calls to permanently transform their productivity or organizational culture.
In this process, all sorts of themes to consider could conceivably be raised. But the important thing is to ask, as we stated earlier, “what are the HR materialities contributing to increasing corporate value?” and “what are the challenges we should tackle as a priority?” This is also why it is important to have proper “axes” along which to perform HR transformation. We could even think of it as materialities being the gap between those axes and the status quo of the company.

ABeam Consulting recommends the use of its “Human Capital Management Storyboard” framework for formulating HR strategy (see figure 4).
The process begins by documenting the purpose and vision of the company as a whole on the top level, with this serving as the prerequisite for defining HR materialities. Companies then need to clarify their corporate aims from both long-term and short to medium-term points of view.
One part of this is the “sustainability goals” (long-term perspective) of realizing the corporate vision and maintaining business continuing and general competitive advantage.
The other part is business strategy (short to medium-term perspective). Companies need to cross reference their business strategy and drill down to find out what is the best HR portfolio in the here and now, and recognize the gap between that and the status quo.
Combining these two and thus enumerating your company’s personnel challenges is the workflow for identifying the most pressing HR materialities.

Having defined HR materialities, companies then need to establish quantitative indicators as “key goal indicators (KGIs).” Having goals means needing some way to measure their status. This is because without some measure for representing the solution to a challenge, you cannot properly evaluate the outcomes. Measures for these purposes are called KGIs. Therefore, clarifying what themes need to be addressed by referring back to KGIs and drafting execution plans that contribute to improve KGIs is the essence of drafting HR strategy.
We will go over specific examples of HR strategies later on.

After setting KGIs, we then proceed to looking at specific systems and measures for achieving them. In doing so, it is important to organize what needs to be done in what order, assign an order of priority to necessary measures, and perform selection and focus. We then also need to set key performance indicators (KPIs) for each measure to assess the state of execution of each measure that contributes to KGIs.
When considering measures, companies also need to keep in mind whether the measures are in line with the direction for fulfilling personnel requirements, as well as how those measures will contribute to employee key growth factors.
Examining these systems and measures is also not a one-and-done. Instead, companies need to reevaluate their effectiveness and relationships with HR materialities in light of KGIs and KPIs, and hone their measures by continuing, improving and cancelling, or by adding new systems and measures.

The following is a diagram showing the relationships between HR materialities and HR strategy/measures (see figure 5). It is important to chart this whole cycle as a story.

Now let’s go over a specific case where a company set “capturing and developing DX personnel” as its HR materiality (see figure 6). In this case, “HR portfolio fill rate” was set as the KGI. To examine the measures the company put in place, we will break down the elements for addressing their HR materialities and examine the measures per element.

For example, these measures include “defining the key personnel in DX-related departments,” “improving brand image in labor markets,” “improving post-hire retention rates” and “selection and training for DX.” The company also set KPIs, as well as yearly and 5-year medium to long-term targets for each measure, and used these to track progress. KPIs are indicators that can assess whether these measures are contributing to addressing HR materialities.

Finally, we would like to go over a case study where ABeam Consulting provided support to a client in formulating a HR strategy using a human capital management storyboard.

Resonac Holdings, born of a merger of Showa Denko and Showa Denko Materials in January 2023, clearly put forward the goal of realizing human capital management in the first integrated report it published as a new company. In line with the company’s portfolio strategy of becoming a “functional chemical manufacturer that can compete and co-create globally,” the company announced that its HR strategy would be to produce “co-creative talent” who would provide new functions in combination with technology using new ideas.

ABeam Consulting worked side by side with Resonac as a partner on the whole process from refining HR materialities and formulating a HR strategy based on a Human Capital Management Storyboard, to drafting and formulating an internal and external story, visualizing the value relations of human capital investment, and working on drafts of the integrated report to get buy in from internal and external parties (see figures 8 and 9).
Going forward, we are set to continue working with Resonac to shore up the progress of its human capital management, and to support them in planning and executing a series of specific measures put forward to address its HR materialities.
For details of the support we offered, please take a look at our case studies page.