Strategic Human Resource Management — Italian Style

Italian firms made massive organizational changes during the 1980s with great success. American business scholars have attributed these successes to the propitious conjunction of technological and market factors, the virtues of flexible specialization, and the peculiarities of Italian industrial organization.1 However, less attention has been paid to the role played by human resource management (HRM). How did HRM contribute to successful strategies? Was strategic change supported by innovative employment systems?

Consider Fiat, the automobile manufacturer, which is probably the most celebrated and studied case of successful strategic change achieved in Italy during the 1980s.2 In the 1970s, Fiat faced net losses, a continuous decrease of market share in Italy and Europe, an outdated product line, manufacturing inefficiency, strikes, and absenteeism. A number of factors contributed to Fiat’s turnaround, including layoffs, employee retraining, concessions from unions, intensive investment in flexible automation technologies, and development of an entirely new product line based on innovative design criteria. New HRM policies played a significant role. In October of 1980, shop stewards, professionals, and middle managers staged what came to be called the “March of the 40,000,” in which they protested the strike that had shut down the firm for five weeks. At that point, the company began to develop new personnel policies for these employees, including merit-based promotions and career paths, incentive pay, and increased autonomy and responsibility for management teams. These new personnel policies not only satisfied the needs and expectations of professional and managerial employees, they also strengthened and unified management and built consensus about work organization, compensation, and mobility within the internal labor market. These changes were an integral part of the new strategy.

The Fiat case illustrates our argument: innovative HRM practices have played a major role in developing and implementing some firms’ strategic objectives. These new practices concern not only the traditional HRM issues, such as labor cost budgeting and control, absenteeism and turnover reduction, recruiting, training, and compensation; they may also take more radical forms, actually changing the objects and focus of HRM policies.

In this article, we will describe the relationship of HRM to strategy and give examples of innovative HRM practices in Italian companies (see Table 1). Finally, we will argue that, just as a new organizational paradigm is emerging that defines organizations as networks between markets and hierarchies3 and as socially embedded webs of relationships,4 a new HRM paradigm is emerging. Human resources will increasingly become concerned with the management of the whole network of an organization’s relationships, which constitute the vehicle of organizational knowledge development and maintenance.

HRM and Strategic Change

When managed well, human resource management is always instrumental to strategic change.5 It is the HRM department’s job to make sure that human resource policies support the company’s strategy. But few executives and managers recognize HRM as also constitutive of strategy. HRM is more than one department’s activities; it is a general management activity.6 Further, the design and operation of any single HRM policy and its precise alignment with strategic objectives are less important than the whole gestalt in which they function.7 Because HRM activities are inevitably performed simultaneously with all the other management activities, the nature of HRM is not functional, but multifunctional and interfunctional. Thus HRM decisions do not simply adapt to the organizational structure and processes, they also play a key role in defining structure and processes.

Consider, for instance, recruiting at Benetton, the successful Italian clothing company. Here the traditional process of analyzing a job and then selecting the candidate whose skills best match it is turned upside down. Candidates with high potential or unique expertise (e.g., designers, merchandisers, and technicians) are recruited and then their jobs are designed. In this way, the company harnesses strategic competencies that are scarce on the labor market.8

The strategic changes that are taking place in many companies today — globalization, downsizing, decentralization, flattening of organizations, and diversification — are having important consequences for human resources. More organizations are hiring temporary and part-time workers, contracting with external employers, and outsourcing parts of their business. The HRM domain is expanding.

The Changing HRM Domain

All the people who work for a company, whether they are internal or external, whether they contract with the company as individuals or through other entities, affect the implementation of the company’s strategy. Companies that don’t pay attention to external employees may be depriving themselves of full use of these resources. Worse, they may inadvertently encourage counterproductive behavior. Thus human resource management is highly important work, and its primary task is managing the network of complex contracts and relationships between workers and the organization. This is the new “creative” HRM paradigm.9

Within this new paradigm, human resource policies are aimed at acquiring necessary skills and inducing proper behavior despite the different relational modes and degree of attachment between a worker and the organization. Furthermore, human resource decisions vary depending on the physical proximity of the worker and the organization, the extent of administrative control the organization wields over the worker, and the duration of employment.10

Again, Benetton is a good example of the new paradigm. During the 1980s, Benetton grew exponentially. As is well known, the company’s competitive advantage has stemmed partially from its sophisticated information technology. For instance, distribution is managed from central headquarters in Ponzano Veneto via an international electronic data interchange network. As the company went international, it contracted with entrepreneurs to act as regional managers. These agents usually supervised and held an interest in a number of Benetton stores in a given area. The agents and the retail store owners held the local skills and information that formed the basis for Benetton’s global strategy.

Luciano Benetton himself assumed responsibility for managing the agents, recruiting them from among the store owners, evaluating their performance and potential, managing their mobility among geographical areas, and designing their incentive-compensation packages, although they were not direct Benetton employees.

Paolo Bernardi, a friend of the Benetton family, was among the first of the agents. After working with a Benetton store owner in the early 1980s, he became head of the corporation that supervises Benetton stores in the Boston, Minneapolis, and Seattle areas. He replaced Maurizio Degli Esposti, who opened seventy stores in New England in the early 1980s and, after experiencing troubles a few years later, was moved to a less crucial area.

The relationship between Luciano Benetton and the agents is personal and informal. Coordination and control are basically achieved through “clan” mechanisms, such as loyalty and shared culture, but the agents also have commission and profit-sharing incentives.

Luciano Benetton was heavily involved in human resource management. But many companies that use more external workers may be tempted to reduce their personnel management staffs, do without an HRM department, and turn over the task of managing and motivating employees to other organizations. We suggest, following Pfeffer, that this is not necessarily the best response.11 Contract work, quasi-employment relationships, and externalization of activities ask for innovative human resource policies and structures; they don’t eliminate the HRM problem.

New Skills

The broader conception of HRM imposes immense challenges for managers at all levels. They will have to develop new skills in hiring, developing, and retaining qualified free-lance and project workers. Danieli, a family-owned group based in northeast Italy, is an example of a company that has been forced to develop these skills.

In the early 1980s, Danieli was manufacturing electric arc furnaces (EAF) and continuous casting plants (CCP) under the marketing and manufacturing license of Asea, a Swedish company. In 1986, after Asea merged with Brown Boveri, Danieli seized the opportunity to develop some patents. It began to manufacture EAFs and CCPs on its own, with an emphasis on cost leadership. It rapidly seized a good share of the European market and made inroads into Eastern Europe.

The acquisition of key skills and knowledge was crucial to this endeavor. Top managers set up a series of contractual relationships with independent engineers and consulting firms. These included individuals and firms that had worked for Asea Brown Boveri and other companies. By offering higher than market-average compensation and flexible work organization (such as self-managed schedules), Danieli succeeded in recruiting and retaining these highly skilled professionals.

Today, a significant portion of Danieli’s teams in research and development (R&D), plant assembly and start-up, and other departments is composed of Italian and foreign nonemployed professionals, who are managed through contracts and other external cooperative arrangements. Danieli does not have a “modern” HRM department — it has only a few people for personnel administration — and does not implement any “state-of-the-art” HRM policies. Nevertheless, its innovative policies have played a key role in the company’s product and technology strategy.

Line managers especially must take on more personnel management activities in order to enhance flexibility and increase local problem-solving capacities. They must increasingly work across organizational boundaries. They must develop negotiating and communicating skills, reorganize work, grapple with make-or-buy decisions, and build an external social network on which the unit can rely to increase efficiency and flexibility.12

Stefanel, a clothing company in northeast Italy, is another company known for its recent successes.13 It grew from one shop in 1980 to 850 shops worldwide in 1990; diversified into non-knitwear clothing, sportswear, and sport shoes; and developed a diverse distribution system. In order to produce high-quality products efficiently, the company has used subcontractors extensively. An example shows how managerial roles can be defined in such an organization.

Stefanel’s director for knitwear manufacturing manages three relationships: with the subcontractors —small, specialized, and often family businesses; with R&D and marketing people; and with operations middle managers and supervisors. With subcontractors, he plays a crucial role in managing both the informal and formal (contractual) aspects of the relationships. Recruitment and evaluation of subcontractors are often based on personal information and “tacit knowledge” (e.g., trust, family relationships, word-of-mouth, and reputation). Some of the subcontracting owners and managers are former Stefanel employees. He must also have intensive, daily contact with the R&D and marketing people in order to reduce lead times. Formal meetings and informal contact assure the efficient flow of information to and from operations middle managers.

Because the director of manufacturing is so autonomous, his performance appraisals are linked, not to a single efficiency parameter, but to a comprehensive evaluation of his contribution to the manufacturing of the clothing collections. Since his role has changed to include boundary-spanning activities, how he himself is managed must also change. Consequently, there is a kind of second-order effect for innovative HRM.

As line managers take on contract design and enforcement, development of informal agreements, group leadership, and new interfunctional relationships, HRM departments should change their own roles regarding recruitment, training, and compensation. For instance, Zanussi, Italy’s largest consumer durables producer, has taken a proactive approach to recruitment since it diversified. Instead of recruiting when job vacancies appear, Zanussi’s corporate-level HRM department systematically monitors the college graduate labor market through permanent recruiting programs. The costs of these programs are more than outweighed by turnover cost reductions and increased effectiveness.

At Pirelli, a manufacturer of tires, cables, and other products, the HRM department at headquarters develops individualized career paths for talented college graduates who will work in its international operations. In 1989, only about 30 percent of Pirelli’s employees worked in Italy and only about 35 percent of its managers were Italian. The other managers included non-Italian Europeans (29 percent), South Americans (19 percent), and Asian and North Americans (13 percent).

Differentiation of Policies

Traditionally, human resource departments develop policies and apply them uniformly to employees as a group. They may segment the workforce by such criteria as age, educational background, business background, or seniority, but policies are only marginally adjusted. This is done for a number of reasons, not least of which is to exploit economies of scale. The new paradigm suggests a shift from this one-dimensional approach to a multidimensional approach.14 Such an approach would be characterized by increasing differentiation of policies, tailored to the specific needs of individuals or groups.

In Italy, the first sign of these changes was the decline of collective bargaining and the emergence of employment systems and internal labor markets based on individual and group-centered transactions. Such changes usually took place in firms characterized by a decline of union membership and activity and by a strong entrepreneurial and managerial thrust, such as those in the metal and automotive industries (e.g., Fiat). These changes did not consist only in a shift toward a managerial unilateralism model of the internal labor market (ILM), but also in a different concept of the relationships between the firm and at least some of its employees.15 An ILM model based on managerial unilateralism implies that managers (particularly human resource managers) tend to design, implement, and, in some cases, force work-rule changes, emphasizing individual (not collective or union mediated) transactions, communication, involvement, and loyalty of each worker to the firm. Underlying this ILM model, there is often the implicit attempt to delegitimize the union at the firm level.

As we discussed above, Fiat’s strategic change implied a new HRM focus on innovative policies toward middle managers. Generally, the function of middle managers is crucial in creating and realizing a new strategic vision.16 Middle managers put the new strategies presented by top management into action and develop operative plans; they are the drivers of strategic change. Consistent HRM policies have to be tailored to the needs and distinctive characteristics of middle managers in order to allow them to be the “linking pins” of the organization.17

Professionals are another key group. In Italian firms, and most likely in firms worldwide, professionals exhibit significant cultural and attitudinal differences from those of the other workers; they tend to identify more with their profession or technology than with the employing organization.18 Policies targeted at them will be useless unless they take into account these differences.

To take just one example, the development and implementation of customized HRM policies for R&D professionals are undoubtedly crucial to strategic change. In the current climate of technological transition, scientific knowledge and technical competencies often represent the foundation of competitive advantage.19

Consider Italtel, a large, partially state-owned telecommunications company, which was in serious trouble in 1981.20 Financial performance was at an all-time low. On total sales of 703 billion lira, net losses amounted to 269 billion lira, and total debts were 827 billion lira.

Marisa Bellisario was appointed CEO, and she immediately changed the whole top management team and began a comprehensive turnaround. The new strategy included decentralization and reorganization of activities into business units; downsizing of manufacturing and staff units (the number of employees was reduced from 30,000 in 1980 to 19,000 in 1985); and a new product focus on electronics and information technologies. Aided by favorable market conditions, Italtel returned to a profitable status earlier than forecasted, in 1983.

HRM played a key role in the restructuring. Bellisario took direct control of the HRM department and reorganized it to be consistent with the two major strategic thrusts: (1) downsizing and labor cost control in each subsidiary and business unit and (2) human resource development. In 1982, the department put new performance evaluation policies into place. But as growth, innovation, and internationalization became the major competitive challenges, these plans had to be revised to account for the specific needs of the different types of employees. In R&D, distinct career paths were devised for managers, scientists, and technicians. Research jobs and roles were reduced and redefined. New parameters were developed to appraise the skill potential of professionals that were quite different from those used to evaluate managerial potential. Likewise, recruiting and selection criteria, as well as promotion and compensation policies, were redesigned to address the distinction between professionals and managers. HRM policies toward distribution and sales people, both independent agents and employees, have also changed, particularly in industries like clothing, footwear, computers, banking and financial services, and insurance products.

In the last decade, IBM Italy has penetrated the personal computer market by taking a more market-oriented approach, customizing products and services that were once standardized.21 In tandem with other decentralization efforts, it developed a two-level structure for sales, marketing, and services, consisting of 300 agents and 4,500 subordinates. A major challenge for realizing its new strategy has been developing the necessary skills among its salespeople and recruiting and retaining new skilled workers.

Traditionally, agents and salespeople were technology experts. IBM Italy’s new strategy required these employees to be information systems consultants, providing increasingly complex services. Their jobs were becoming less technical, more interfunctional.

At the same time, the labor market was experiencing, and continues to experience, a shortage of graduates in economic, technical, and scientific disciplines (IBM Italy has hired 2,000 such graduates in the last five years). Retaining recruits is difficult because a flat structure provides fewer opportunities for advancement. Compensation policies and career paths have to be carefully developed when a company has such a concentration of young, highly skilled people.

IBM Italy addressed these problems with a massive and intensive training program for new and existing employees and a large number of transfers. From 1986 to 1988, 650 people (particularly support staff ) moved from other functions to the sales, marketing, and service divisions. Approximately 3,000 out of the 14,000 IBM Italy employees were forced to change their jobs during those three years.22

The IBM Italy story is similar to those of many Japanese companies, such as Mazda. The salesforce, as the interface of the firm with the market, has a multi-faceted function: developing the market base, selling, gathering information about competitors, learning from customers, and working with marketing, R&D, and operations. A number of strategies (e.g., downstream vertical integration, diversification, and market penetration) require new, customized HRM policies for these people. Most of all, incentive schemes must account for the peculiarities of the business and the kind of relationship or contract the salespeople have with the firm. Internal mobility rules (e.g., job rotations and career ladders) should also support the marketing strategy.

Remodeled Structure

Organizations have responded to these changing HRM tasks by rethinking the way they organize the HRM function. In some cases, HRM remains highly centralized. In other cases, human resource decision making is decentralized, spread horizontally throughout the company.23 Italtel and Danieli are examples of the former; Stefanel is an example of the latter. Personnel management services can also be contracted out to external consultants. This can reduce departmental fixed costs, enhance organizational flexibility, and keep companies “lean.” However, it can also result in loss of control.

At Lotto, a sports shoes manufacturer located in northeast Italy, there is no HRM department. Accounting and control people take care of personnel administration, while HRM activities are systematically contracted out. Top managers or even line managers ask for customized HRM services (recruiting, training, job design, compensation and incentive plans) from local, national, or even multinational management consulting firms. Contracting out seems to work very well, given the corporate culture (a family-owned and managed business with centralized decision making), the strategy and organizational context (a fast-growing, international business based on local core competencies and worldwide subcontracting), and the skill requirements (job vacancies filled through external recruiting, and frequent turnover of low-level jobs).

Let’s look more closely at how one company tied its HRM structure to its strategy. In 1980, Fidia, a pharmaceutical company, began to specialize in modulation pharmacology drugs.24 These drugs are for the treatment of brain-related diseases and are based on biological, rather than chemical, research. The company’s new strategy included (1) an intensive research effort (25 percent of sales); (2) a strong international presence; and (3) a strong and visible company image. In less than a decade, Fidia reached a market leadership position in selected niches of the pharmaceutical industry with such products as Cronassial and Sygen.

Given that Fidia needed access to the best of the world’s researchers and scientists and that it needed a strong international reputation and unified company image, its human resource management was centralized at the highest level. CEO Francesco Della Valle cultivated and maintained informal, personal relationships with Rita Levi Montalcini, the Nobel Prize winner on whose discoveries most of Fidia’s products are based (e.g., the Ngf protein); Gerald Edelman, another Nobel Prize winner; Erminio Costa, director of the Fidia-Georgetown Institute for the Neurosciences in Washington, D.C.; and Cesare Fieschi, director of the neurology clinic at the University of Rome.

Although this is centralization and top-level management taken to its extreme, certainly many companies may find it useful for top managers to become involved in recruiting, development, compensation design, and performance and potential appraisal. The difficulty in this approach is transforming the personal knowledge of top managers into organizational knowledge. In March 1991, Della Valle resigned over disputes with Fidia’s president and started a new biotech research business in less than two months. Companies whose core competencies rest in the relationships between top managers and key workers obviously risk losing everything when they lose the top managers.

New Internal Labor Market Models

The traditional “industrial model” of the internal labor market is characterized by low-level ports of entry for new employees, narrow and rigid job or skill classifications (such as those determined by national-level collective bargaining), compensation based on an evaluation of job tasks, seniority-based career ladders, and strong union influence.25 Throughout the 1970s, labor law constraints and union influence caused the implementation of an industrial model of the internal labor market for all workers. For instance, the Inquadramento Unico is a grid on which both white- and blue-collar jobs were classified.

Most of the firms discussed here realized that strategic changes made it necessary to depart from this industrial model, and they developed a variety of internal labor market models consistent with their strategic evolutionary pattern. A common model in high-tech and dynamic industries is the “salaried model,” which combines a more flexible and personalized set of administrative procedures with greater commitment to employment security.26 In this model — implemented at Italtel and Zanussi — job descriptions are broader and subject to revision, job ladders and promotion sequences are more flexible, and personal considerations play a greater role in wage setting. Compensation is more attached to personal skills, the labor market, and performance than to jobs as impersonal entities. Employment security is facilitated by horizontal mobility, which is not perceived as a threat by employees.

Other organizations, especially banks, insurance companies, and other service businesses, adopted the “core-periphery model.”27 This model implies the creation of a core workforce, organized according to the salaried model, and a peripheral workforce, consisting of self-employed people, temporaries, part-timers, and apprentices. In the 1980s, self-employed and independent workers became a significant number of the total workers in Italy, at higher relative levels than in any other developed country except Japan. (Also, the total number of active firms soared from 197,127 in 1982 to 3,803,789 in 1989; about 80 percent of these were family-owned and -operated businesses.) This peripheral workforce provides firms with a buffer during economic downturns and technological changes.

Unlike other companies, Pirelli adopted a “competitive model,” based more on market mechanisms than on internal administrative procedures.28 A competitive model includes an internal labor market in which entries occur at many different hierarchical levels, promotions and internal mobility are based on merit, potential, and relative performance, market considerations play a conspicuous role in setting compensation levels, incentives are based on performance appraisal and results, and turnover is relatively higher than in the salaried model.

These three internal labor market models still address only the firm’s own employees. Some firms have developed more radical models that bring external employees into the “internal” market model. IBM Italy, for example, has a salaried model for most of the operations, R&D, and administrative staff, but has a core-periphery model (with a salaried component) for its marketing and sales people. At the same time, it also provides a number of HRM services to its suppliers, including development programs, such as technical and managerial training.

In many cases, Italian firms manage external employees by gaining control of a part of their environment and redefining their organizational boundaries. Luciano Benetton’s policies for recruiting and developing agents and franchisees are a good example.

Another example is provided by Gruppo Finanziario Tessile (GFT), a large garment manufacturer in Turin.29 During the 1980s, GFT accomplished a comprehensive strategic change by switching from production of primarily low- and middle-priced, medium-quality products to manufacture of upscale, higher-quality and higher-priced garments. This strategic change, designed and engineered by owner Marco Rivetti, resulted in a portfolio of business strategies in different niches of the clothing industry.

In order to get access to the product-design knowhow necessary to realize some of these product strategies, GFT collaborated with external stylists and designers, recruiting them according to the characteristics of the different businesses. Rivetti used his personal relationships to facilitate licensing agreements and partnerships with Italian designers such as Giorgio Armani, Valentino, and Louis Feraud.

Mixed project teams, composed of the designers’ collaborators and of jointly selected GFT employees, developed the product lines and collections. GFT managers recruited these team members and managed the work groups, balancing the designers’ creativity with market and manufacturing needs. In the late 1980s, GFT applied this approach to foreign stylists as it entered a number of foreign markets.

Implications

Innovative practices in the management of human resources contributed to the success of Italian firms during the 1980s by means of:

• a broader definition of the skills and behaviors that can be activated and controlled in order to achieve a sustainable competitive advantage;
• a multidimensional approach to human resources, whereby customized policies were applied to strategic personnel segments; and
• a new concept of the employment system or internal labor market.

These points imply the close link between the management of human resources and the firm’s strategy of control and dominance in the environment. Recent theories have conceived of the firm as an evolving and socially embedded nexus of treaties and informal relationships,30 where organizational knowledge circulates and is transferred through personal relationships by means of sets of rules and incentives.31 Because human relationships always underlie economic transactions, the management of human resources is crucial to strategy development and implementation.

An important distinction is made between those relationships that are hierarchical (employer-employee) and those that are bilateral (employer-employer or employer-independent worker), whether these are formal contractual relationships or informal.32 HRM policies for hierarchical relationships are changing, as we have discussed, and they are expanding to cover bilateral relationships. In these bilateral relationships, an HRM department might recruit and select franchisees, evaluate external researchers and consultants, train the workers of a subcontractor or dealer, and compensate independent agents and suppliers.

Given these trends, HRM departments will probably be less focused on productivity enhancement in the future. More time and effort will be dedicated to developing new skills, such as designing and enforcing complex contracts, managing informal and implicit relationships, customizing policies, and transforming personal knowledge into organizational knowledge. HRM departments will provide creative and innovative support to managers at all levels, most crucially to those in top and decentralized positions.

New Frontiers for HRM

The trends that emerged in Italy during the 1980s in terms of the labor market, labor relations, and institutional settings did not seem to follow the evolutionary pattern often implicit in most HRM textbooks. We argue that these original and peculiar employment systems are not necessarily “advanced” or sophisticated HRM policies (as the U.S. business literature defines them). Rather, they are consistent with the emergence of hybrid organizational forms and with specific types of interactions between firms and their environments. This view of HRM as constitutive of strategic change entails a new “creative” role for both HRM departments and other managers.33

As the management of human resources becomes more complex, as it spreads throughout the organization and becomes despecialized, the primary task that emerges for HRM research is to develop innovative interpretative frameworks that are contextualized in the relevant national, local, and business environments.