Essay: Analysis of HRM issues at Festenal

Fastenal Technologies, Ltd. experiences are quite similar to many companies as they came through a comparatively stable age of the 1980’s and before, evolved continually through the ‘no two years are alike’ period of the 1990’s and were thrust into the ‘must have it all now’ age of a technologically enable new millennium.  While Fastenal’ products may be reflective of the latest in production and engineering, their human resource systems are simply ‘me-too’ in that they are not reflective of either the latest or the best in HR thinking.  While seeming harsh, it must be kept in mind that though it is a company of reasonable size (£20.8m in sales last year), it is a company that is very typical of most any company in that its focus is typically on outcomes such as sales.  When that metric is not satisfactory, the usual targets of attention are simply questions such as “how do we sell more” and the answer is sought in marketing, or “how can we cut expenses?”  In pursuit of lower expenses, the engineering is engaged to find ways to increase production efficiencies and the HR department is engaged as a driver of efficiency by way of fewer people doing more work or some other means to reduce people expenses such as pay or benefits reductions.

Though the issues that Fastenal is having may not be unique in the now global marketplace, the importance of perspective is to be emphasized… to the employees of Fastenal, their situation is unique and they are dependent of the leadership of Phil James and his management team to create solutions that work not just for the parent company, Global Engineering, but for them, as individual persons.  Key to any plan will be the specific environments that Fastenal is competing in now as well as the opportunities that their internal and external positioning allows them to take advantage of in the marketplace.

Human Resource

Seeking Sources of Sustainable Competitive Advantage

The idea of sustained competitive advantage is simply to deliver either a better quality of goods to the market than the competition, to deliver sufficient quality goods cheaper than the competition or by serving a specific customer segment especially well through a combination of product and services that add value to the consumer.  If a firm were able to do it, it would enjoy higher returns on employed capital assets than the competition, regardless of the industry, the economy or other factors.
In seeking for sources of sustainable competitive advantage, there are a number of potential sources yet all possess four qualifying characteristics (Dreher & Dougherty 2002, pp. 168-170):

1. Valuable – Without question, to be a source of competitive advantage, an asset must ‘earn its keep’ in that it should generate a positive rate of return.
2. Rare – Also importantly, an asset must be rare as without this qualifier, it would, by definition, not be a source of advantage over the competition as the competition would also possess it.
3. Inimitable – Similar to rare, the quality of ‘difficult to imitate’ must also exist.  If it were easy to provide a superior distribution system (one of Wal-Mart’s advantages), it would be copied and cease to provide a source of advantage.  Note, just because something is not easy to be copied does not mean that it cannot be done, rather, that it is done at a substantial cost or a major trade-off is incurred.
4. Nonsubstitutable – To achieve this, a firm must have a product or service that is not easily replaced by something else.  For example, it is very difficult to substitute good human judgment, empathy and humor that is found in excellent service with a machine.  Similarly, a machine could replace many aspects of repetitious human labor intensive jobs.

With these qualities in mind, the catchy corporate phrase, “our people are our greatest asset” takes on new meaning.   Each of the above qualities apply to the people that a company is steward over and the distinctive environment encompassing compensation, culture, policies, and practices are make up its human resource practices.  These practices are the systems that govern the process that ultimately control the outcomes of a firms greatest resource and source of its competitive advantage, its employees (Karami, Analoui & Cusworth 2004, p. 50; Dreher & Dougherty 2002, pp. 168-170).

Strengths, Weaknesses and Opportunities

A key strength of Fastenal is that it is in a position to recognize that its future is somewhat precarious.  Top managers such as Phil James and Catherine Forrester are not oblivious to pressures from both the parent company and the marketplace to somehow reinvent themselves to avoid being either closed or sold.  With continually narrowing margins evidenced by highly visible top-line measures, the fact that there is a problem is obvious to everyone that can read a financial summary report.
Additionally, a strength of the firm is that given they have already been through at least two changes in leadership and the resultant ‘imperatives for improvement’, much of the work in terms of having modern equipment that is capable of producing consistent high quality products in large quantities should not be overlooked.  To more fully appreciate this, consider the fact that this equipment and the intellectual capital acquired through years of its use would be difficult to replicate without incurring a very high cost.  In perspective, this must be viewed as one of the key components of having a source of “sustainable competitive advantage” in that it could only be duplicated at a considerable expense.

With regards to the external environment, the most notable characteristic is that Fastenal is in a highly competitive industry.  By virtue of this, one would rightly reason that the market is highly price sensitive.  In attempts to control costs during the time period of the case study, there is a trend to outsource functions that are perceived to be non-strategic and can be provided more cost effectively by a 3rd party.  The traditional barriers of geography and even time are being transcended as company after company commissions manufacturing in Asia or other locales where labor is much cheaper.  As Phil is now overseeing the outsourcing of manufacturing, IT and portions of other departments, he is likely faced with questions of what value Fastenal actually provides that is not readily reproducible elsewhere for less.
In addition to the growing competitiveness of doing business globally, Fastenal has the mixed blessing of having one major customer, Ford.  This arrangement presents a substantial risk to Fastenal as their fortunes are to closely tied to one firm.  Though the case does not elaborate on other products and markets, in ‘the early days’ Fastenal made a wide variety of products that were utilized in different applications.  This history could play a role in helping to diversify the current operation by finding new needs and markets for existing products as well as products that Fastenal has the capability to bring to market.

One of Fastenal’s weaknesses seems to be that they have are not able to understand what they bring to the market that is any different that there competitors.  At no point in the case does any Fastenal clearly state how they bring added value to the customer.  This is an extremely important point in that there are widely recognized to be but three key value propositions.  These propositions do not detail what a company does but rather more importantly, how it goes to market.
According to many sources, there are essentially three means by which a firm competes in the marketplace.  With very few exceptions, a firm must pick from one of the following (Suutad 2000, p. 2; Porter 1980, p. 35):

1. Cost Leadership – The foremost goal of this strategy is to drive the costs out of business.  If a firm has functionally ‘good enough’ product and can bring to consumers at a lower price than the competition, market share will be won and supra-normal profits made.
2. Differentiation or Innovation – For firms that choose to focus on a product of a particular quality, they must still achieve some element of relative cost parity with the competition but the focus on the firm is not cost.  A firm that competes with this value proposition will be creating the products that other firms will ‘knock-off’ and offer at a lower cost to consumers months later.
3. Focus or Niche Product or Market – This proposition is similar to the above category but differs primarily in scope, either with regards to product or customer service or quality demands.

If a firm does not choose to attempt to be the best or at least very close in one of these disciplines, they will find themselves quite pulled at both ends and stuck in the middle at the same time.  In short, a failure to make a choice represents a deliberate choice to vigorously pursue mediocrity and thus they lose profits to firms who produce the same quality at a cheaper price as well as to firms who produced significantly better quality or service for the same only slightly more (Bosworth 2005, p. 105; Collis & Montgomery 1998, p. 55; Porter 1980, p. 41).

An additional internal weakness is that there seems to be very little in the way of linkages of human resource systems to business outcomes.  This is a common problem as it has not been until the last several years that human resources, as department, has begun to be seen as a strategic part of business.  Though Fastenal seems to have a competent HR person in Catherine Forrester, HR is more than a person and more than a department:  HR is more than the sum total of philosophies, policies, practices of how a company operates.  The contribution of HR as a strategic partner in the business begins with alignment.  Though potentially all encompassing, a simple example of an alignment problem would be a firm that espouses a customer intimacy value proposition yet whose salespersons are compensated solely on the basis of the “sale in front of you”.  In a business in which the life-time value of the customer is lauded, to create a compensation system that is in direct opposition to that is counterproductive the overall relational view of the customer.

Creating Linkages to Performance & Profitability

It is important to note that, at the outset, from the viewpoint of the contingency perspective of human resource systems, there is no ‘one right way’ that provides optimal results in all situations.  Rather, what is important are that the linkages to a firm’s strategy are clear and, as opposed to any particular individual practices is the ‘bundle’ of the system and the alignment and fit of the practices in consideration of the strategy (Liao 2003, pp. 297-298; Dreher & Dougherty 2002, p. 185).
Prior to creating specific recommendations for Fastenal, a clear strategy should first be articulated.  The strategy is the driver of the goals and this underscores the recommendation that Fastenal first must clearly articulate and communicate a strategy prior to attempting to implement new HR systems, policies or practices that could in fact be counter to the desired final outcomes (Becker, Huselid, & Ulrich 2001, pp. 138-139). Based on Fastenal’s company history, it would appear that “cost leader” would be the strategy of best fit and seems consistent with the current direction of both management and the parent company.  With this declaration, the company management should set clear goals and targets and, in discussions as to how to achieve these goals, they should be very reluctant to not let the employees take part.  These goals should not simply be externally directed but internally as well.  One means to achieve this goal while simultaneously getting buy in (and providing opportunity for naysayer’s to opt out) is to utilize a Balanced Scorecard.

The Balanced Scorecard is a framework by which the historically reported desired financial outcomes in combination with leading indicators of performance and corporate strategy are viewed “on the same page”.  The scorecard operates through four levels of business “perspectives” as outlined below (Kaplan & Norton 1996, pp. 25-29, 63):

1. Financial – This ‘top-level’ view contains metrics essentially the same as that of current financial reports.
2. Customer – This perspective seeks to capture key indices of how a company is performing with regards to customer satisfaction, loyalty, acquisition and profitability.
3. Internal Business Processes – This area of the scorecard keeps front and center measures that are key reflections on the quality and quantity of internal processes such as defects-per-million, errors per 1000 orders, % preventative maintenance done and other measures that are central to indicating how well a company does business.
4. Learning & Growth – This perspective is the essence of HR systems.  Going beyond such indicators as turnover, metrics in this area attempt to capture employee motivation, effectiveness and efficiency.

Each of these perspectives is linked to the achievement of the next.  For example, the learning and growth metrics are selected because they will drive the results of the internal business processes.  These in turn drive customer metrics and subsequently the customer perspective drives the financial results.  Thus, the most important feature of the scorecard is not that it captures four distinct areas but rather that it attempts to adequately capture one organization with a series of perspectives that are clearly linked and articulated to overall bottom-line results.  These perspectives contain metrics that, one the overall corporate strategy has been set, they not just “inform” but actually “drive” the execution of firm strategy (Weiss & Finn 2005, p. 33).  These results are indicated on the company’s has a strategy-driven ‘dashboard’ that readily display key performance data for all aspects of the company.

Final Admonitions & Conclusion

In addition to defining a clear ‘go to market’ strategy and creating a process whereby this is effectively communicated throughout the organization, the additional overarching consideration of the employees themselves should never be far from thought.  As the process of implementing a Balanced Scorecard is a very top-down in orientation, the results may be very different from the Fastenal that employees have been accustomed.  In most cases, it is the organizations perspective that reigns yet one cannot overlook the perspectives of the organization’s so-called greatest asset… by doing so, one effectively denies that they are indeed such as asset.  The concept that refers to a party’s expectations and unwritten assumptions about the nature of the employment relationship is termed the ‘psychological contract’ (Herriot, Manning, & Kidd 1997, p. 151; CIPD 2003).  During periods of change, this implicit contract can be violated eventually resulting in decreased organizational performance as employees respond in kind to perceived trust and fairness in the relationship as well as the process by which these perceived outcomes occurred (Herriot, Manning, & Kidd 1997, p. 152; CIPD 2003).
In managing this process, the psychological contract plays an important role as the ‘new’ company must have committed, competent employees to actually execute strategy.  To manage this change process, the following 10-steps are suggested as a guide to manage this top-driven process in a means that allows the ‘top’ and ‘bottom’ to meet in the middle (Dessler 2003, pp. 219-220):

1. Establish a sense of urgency
2. Mobilize commitment and involve others
3. Create a guiding coalition of influential people
4. Develop a shared vision
5. Communicate the vision
6. Help employees make changes
7. Generate and celebrate short-term wins
8. Consolidate gains to provide intermediate reinforcement of progress
9. Anchor ‘new’ ways into the company culture
10. Monitor, measure and adjust the vision as needed.

This transformation of HR from a tactical administrational function whose primary measures of success were lagging indicators of efficiency to a strategic element of business that can also leverage effectiveness metrics is the essence of what strategic human resource systems are designed to achieve.  By leading and appropriate managing people through change, Fastenal will be soundly internally positioned for whatever changes the external environment brings.

Works Consulted

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Bosworth, D. ( 2005).  Determinants of Enterprise Performance.  Manchester University Press:  Manchester, United Kingdom.

CIPD (Chartered Institute of Personnel and Development).  (2003, May).  “Managing the Psychological Contract”.  CIPD website.  www.cipd.co.uk/subjects/empreltns/psycntrct/psycontr.htm?IsSrchRes=1. Accessed November 20, 2005.

Collis, D. and C. Montgomery.  (1998).  Corporate Strategy: A Resource-Based Approach.  McGraw-Hill Irwin: Boston, Massachusetts.

Dessler, D. (2003).  Human Resource Management, 9th edition.  Prentice-Hall: Upper Saddle River, New Jersey.

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Kaplan, R. and D. Norton.  (1996).   The Balanced Scorecard:  Translating Strategy into Action.  Harvard Business School Press: Boston, Massachusetts.

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Liao, Y.  (2003).  “Business Strategy and Performance:  The role of human resource management control”.  Personnel Review, (34), 3, pp. 294-309.

Porter, M.  (1980).  Competitive Strategy:  Techniques for Analyzing Industries and Competitors.  The Free Press: New York, New York.

Suutari, R. (2000, February).  “The Quest for Competitive Advantage”.  CMA Management, (74), 1, p. 16.

Weiss, D. and R. Finn.  (2005).  “HR Metrics that Count:  Aligning Human Capital Management to Business Results”.  Human Resource Planning, (28), 1, pp. 33-38.