Relationship Between Entrepreneur Human Capital and HR
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1.2 The research topic
In modern economies the majority of firms are small firms, and these firms make a considerable contribution to the development of the socio-economic and political infrastructure (Matlay, 2002). Unfortunately, small firms also have a high failure rate. Fifty to eighty percent fail during the first five years of existence (Baumback, 1988). One of the main reasons for this high failure rate appears to be a lack of emphasis on the management of human resources in small firms (McEvoy, 1984).
A range of studies indicate that effective management of human resources is one of the most critical challenges small firms face (e.g., Mazzarol, 2003; Deshpande and Golhar, 1994; Marlow and Patton, 1993; Hornsby and Kuratko, 1990). Especially as it relates to the management of HR issues. Managerial incompetence in handling HR issues is a major source of small firm failure (Dun and Bradstreet, 2001; Baron, 2003; Hornsby and Kuratko, 2003), and the way entrepreneurs handle HR issues in an early stage severely impacts downstream success of business (Cardon and Stevens, 2004). However, Cardon and Stevens (2004) did a literature review on HRM in small and emerging firms and concluded that despite the importance of HR issues to small and emerging firms our understanding about these issues is limited. While we have begun to understand when small firms experience varying levels of HR issues (e.g., Kotter and Sathe, 1978; Rutherford et al, 2003), and what these issues are (e.g., Horsnby and Kuratko, 2003), literature lacks much of the theory necessary to understand the role the entrepreneur plays with regard to HR issues in small firms. Given that entrepreneurs play a dominant role in determining how human resources are managed in small firms (Matlay, 2002; Klaas and Klimchak, 2006), it is likely that certain personal characteristics of entrepreneurs play a more significant role in determining HR issues in small firms. Surprisingly, this relationship has received very little attention in literature.
This research study will address this gap in literature by focusing on the relationship between human capital characteristics of the entrepreneur and HR issues in small firms. Particularly, the relationship between prior education and experience of the entrepreneur and HR issues in small firms. Education and experience are generally regarded as key factors influencing small firm survival and development (Storey, 1994), and a range of studies show they are positively related to small firm performance (e.g., XXX). Given that HR issues are the main cause of small firm failure (Dun and Bradstreet, 2001; Baron, 2003; Hornsby and Kuratko, 2003), and that they have a strong negative effect on small firm performance (Cardon and Stevens, 2004), this could imply that somehow education and experience are related to HR issues in small firms. Since we do not know if that is the case, this research study will make a first attempt at getting a better understanding about this relationship.
1.3 The research objective
According to Saunders et al. (2003, p.96-98) a research study can be done either to explore, describe or explain a particular phenomenon. They argue that exploratory research is done to seek new insight into a phenomenon, to ask questions and to approach a phenomenon in a new way, that descriptive research is done to get an accurate description of events, situations or persons, and that explanatory research is done to explain the cause and effect relationship between given variables. Malhotra (1996, p.99) argues that in some cases more than one research type (exploratory, descriptive or explanatory) is used in a single study to achieve the objectives.
This research study will be of an exploratory nature, as there have been few (if any) attempts in literature at getting a better understanding about the relationship between human capital of the entrepreneur and HR issues in small firms. The objective of this research study is to more precisely define the variables that are in play in this relationship, by making a very first attempt at developing a conceptual framework linking human capital characteristics (education and experience) of the entrepreneur to HR issues in small firms.
1.4 Contribution to the literature
The contribution of this research study to the literature is threefold. First, by focusing on HRM in small firms, this research study focuses on a neglected group of firms and responds to several appeals for more research at the intersection of the human resource management and entrepreneurship fields (e.g., Barret and Mayson, 2006; Baron, 2003; Katz et al, 2000; Heneman and Tansky, 2000). Second, by looking at the role human capital of the entrepreneur plays in determining HR issues in small firms, this research study offers a new and different perspective on HR issues in small firms. Last, by making a very first attempt at developing a conceptual framework linking human capital of the entrepreneur to HR issues in small firms, this research study provides a foundation and stimulus for future research into the links between human capital of the entrepreneur and HR issues in small firms.
1.5 Key concepts
Bygrave and Hofer (1991, p. 15) argue that “good science has to begin with good definitions”, and Marlow (2006) states that “if basic concepts are not clarified or defined, then it becomes extremely difficult to develop coherent and comparable research endeavors that build understanding of a particular field of study”. Therefore key concepts will briefly be explained and defined in order to make sure that the reader fully understands the topics under investigation in this research study.
Storey (1994, p.8) states: “there is no single, uniformly acceptable, definition of a small firm”, and defining the small firm seems to be complex and somewhat problematic (Wilkinson, 1999). First, there is the issue of size. There is no consensus as to what is actually meant by “small” with regard to the number of employees in this category. In literature the number of employees in firms classified as small range anywhere from 1 to 500 employees depending upon the study. The same problem exists with various statistical agencies across the world. CBS (Dutch statistics) defines firms having less than 100 employees as small, whereas in the European union Eurostat uses a threshold of 250 employees, and the Small Business Administration in the United States even defines firms with having less than 500 employees as small (Flanagan and Deshpande, 1996).
Second, there is also the issue of heterogeneity. Wilkinson (1999) argues that the danger of defining small firms lies in the assumption that there is a homogenous small firm sector and that all small firms within it have similar characteristics. He argues that while size may be a factor, it alone is not sufficient to explain patterns of employment relations, because a variety of influences (both internal and external) explain behavior (Wilkinson, 1999). This is in line with the view of Hornsby and Kuratko (2006). They argue that it is not a case of small versus large firms, as there are small established firms, small start-up firms, and small high growth firms, and these firms vary in ownership based on family ownership, ownership by founder, and some type of privately held stock ownership. Cardon and Stevens (2004) argue that co-joining small firms all into one overall category is problematic as the management needs of established and emerging firms, or firms with 1, 10, 50, 250, and 500 employees are significantly different from each other. This makes summarizing and providing generalizations of research findings in literature on small firms somewhat problematic.
However, despite the fact that there is no uniformity of approach to defining the small firm, for this research study a practical definition of a small firm is needed. Therefore a small firm is defined as: “a privately held firm with fewer than 100 employees in which the entrepreneur is responsible for the day-to-day management and decision making in the firm”.
There is an ongoing debate in literature about the differences and similarities between owner-managers and entrepreneurs. According to Carland et al. (1984) the critical factor that distinguishes entrepreneurs from owner-managers is innovation. They argue that entrepreneurs are characterized by a preference for creating activity, manifested by some innovative combination of resources for profit, and that owner-managers establish and manage a business for the principal purpose of furthering personal goals. In line with this Freel and Robson (2004) state that entrepreneurs initiate change with the aim of challenging the status quo whilst maximizing profit and generating new employment, and that owner-managers focus on firm durability and sustainability, limiting operational reach of the firm, either because of market constraints or by personal choice (Freel and Robson, 2004 as cited in Marlow, 2006).
However, this research study will make no distinction between an “owner-manager” or an “entrepreneur”. The most important characteristic for this research study is the dominant role the individual plays in the firm, and not whether the individual is engaged in innovative activities or not. Given that both terms represent an individual generally solely responsible for the day-to-day management and decision making in the firm (Cooper et al, 1994), this research study will treat them the same, but uses the term ‘entrepreneur' to address this individual.
This research study defines the entrepreneur as: “an individual who independently owns a small firm and is responsible for the day-to-day management and decision making in the firm”.
Human capital can be explained as the skills and knowledge gained by a worker through education and experience. Human capital theory (Becker, 1964) is based on the idea that people acquire individual resources to increase or enhance their productivity, and that these acquisitions are related to prior education or training, as well as prior work experiences (Brush and Manolova, 2004). In this research study the focus is on human capital of the entrepreneur and how it influences the day-to-day management and decision making in the firm.
In this research study education is defined as: “formal college education, together with received specialized training”. Training is defined as: “…the process by which managers acquire the knowledge and skills related to their work requirements by formal, structured or guided means” (Deloitte, Haskins, and Sells, 1989, p.3).
According to Lee and Tsang (2001) experience consists of three main components; entrepreneurial, industrial and managerial. Entrepreneurial experience refers to “the number of previous new venture involvements and the level of the management role played in such ventures” (Stuart and Abetti, 1990, p. 151 as cited in Lee and Tsang, 2001). Industrial experience refers to experience in the industry the firm is in, and managerial experience is the total experience in management regardless of the industry (Lee and Tsang, 2001). However, for this research study experience will not be divided into three components. In this research study experience is defined as: “accumulated knowledge of practical matters in the past” (Wikipedia).
Human resource management (HRM)
Storey (2001) states there is considerable confusion among researchers whether HRM “…is a generic term, simply denoting any approach to employment management…(or) as one specific and arguably minority form of approach to employment management” (Storey, 2001 as cited in Marlow, 2006). This confusion becomes clear from the many explanations and definitions of HRM in literature. For example, Bratton and Gold define HRM as “the part of the management process that specializes in the management of people in work organizations. HRM emphasizes that employees are critical to achieving sustainable competitive advantage, that human resources practices need to be integrated with the corporate strategy, and that human resource specialists help organizational controllers to meet both efficiency and equity objectives” (Bratton and Gold, 1999). Armstrong defines HRM as “ the strategic and coherent approach to the management of an organization's most valued assets - the people working there who individually and collectively contribute to the achievement of the objectives of the business” (Armstrong, 2006). Boselie states HRM “involves management decisions related to policies and practices which together shape the employment relationship and are aimed at achieving individual, organizational, and societal goals” (Boselie, 2002). And last, Schermerhorn (2001) defines HRM as “the process of attracting, developing, and maintaining a talented and energetic workforce to support organizational mission, objectives, and strategies”.
In this research study HRM is considered a generic term, simply denoting any approach to the management of employees, and therefore a practical definition of human resource management is needed. Schermerhorn's definition of HRM is the most practical, and fits best with the informal, flexible, and ad hoc approaches associated with HRM in small firms. Therefore HRM is defined as: “the process of attracting, developing, and maintaining a talented and energetic workforce to support organizational mission, objectives, and strategies” (Schermerhorn, 2001, p2400).
HRM activities and HRM issues
Rutherford et al. ( 2003) argue that in literature the distinction between HRM issues and activities is not always clear. Therefore it is important to define what is meant by HRM issues and what is meant by HRM activities. Rutherford et al. (2003) define HRM issues as “people-related issues or concerns perceived by the entrepreneur or managers in the firm” and HRM activities as “specific human resource management practices used by the firm”. They explain the difference by saying: “HRM activities are (formal) practices that are put in place to deal with HRM issues” (Rutherford et al, 2003). Guest et al. (2004) make a further distinction within HRM activities between HR practices and HR techniques. They argue that for every HR practice (e.g., “recruitment”), there are several different techniques (e.g., “newspaper ads”, “online ads”, “head hunters” etc.), or for example (e.g., “selection”), and (e.g., “interviews”, “assessment centers” etc.).
This research study follows the definitions of HRM activities and issues by Rutherford et al. (2003), and acknowledges the distinction within HRM activities between HR practices and HR techniques as described by Guest et al. (2004).
1.5 Main research question and sub questions
In order to be able to complete the research objective as stated in paragraph 1.3, the main research question and several sub questions have been formulated.
The main research question states:
How is human capital of the entrepreneur related to HR issues in small firms?
In order to be able to answer the main research question, several sub questions have been formulated:
- How do HR practices and techniques differ between entrepreneurs with varying levels of human capital?
- How do HR issues differ between entrepreneurs with varying levels of human capital?
- How does the perceived importance of HRM and HRM issues differ between entrepreneurs with varying levels of human capital?
1.6 Conceptual model
Although this is an exploratory research study, some variables have been identified in literature that could play a significant role in explaining the relationship between human capital of the entrepreneur and HR issues in small firms. These variables are shown in this preliminary conceptual model
This research study builds upon ‘upper echelon' theory and ‘human capital' theory to explore the relationship between human capital characteristics of the entrepreneur and HRM issues in small firms. Upper echelon theory (Hambrick and Mayson, 1984) states that everything that goes on in a firm is a reflection of its top managers. It found that the nature of managerial processes and organizational outcomes are partially predicted by managerial background characteristics of its top managers. While originally applied to large firms, this theory seems to be even more applicable to small firms, given that small firms are generally build around the entrepreneur who is often primarily responsible for management and decision-making in small firms (Cooper et al, 1994). Therefore the entrepreneur can be seen as the upper echelon in small firms. Human capital theory (Becker, 1964) states that people acquire individual resources to increase or enhance their productivity, and that these acquisitions are related to prior education or training, as well as prior work experiences (Brush and Manolova, 2004).
Cooper et al. (1994) argue that education is presumably related to knowledge, skills, problem-solving ability, discipline, motivation, and self-confidence, and it enables owner-managers to cope with problems and thereby be more successful. In line with this Lee and Tsang (2001) argue that in general education has a positive effect on the growth of the firm, because education equips an individual with the analytical and technical skills essential to managing a business. Furthermore, according to Cooper et al. (1994) owner-managers who have started or managed a firm prior to launching the current firm would perform better. They argue that prior experience would better prepare them for the wide variety of problems confronting new firms. Within small firms human capital theory is concerned with the knowledge and capabilities of entrepreneurs acquired through education and experience, which influences the way these firms are managed. With regard to HRM in small firm, prior studies indicate that human capital characteristics impact the nature of HR practices and techniques in small firms (e.g., Mazzarol, 2003; Maes et al, 2004; De Winne and Sels, 2006).
Link A - B
The presumed direct link between human capital and HRM issues is based on findings by Tocher and Rutherford (2009). They found that entrepreneurs with more human capital (higher educated and experienced) were more likely to perceive HRM issues as their firms' most critical concern. Whether these firms actually experienced HRM issues or that it was only the perception of the entrepreneur remains unclear. However, given that results in this research study come from the individual lived experiences of entrepreneurs, their perception of HRM issues in their firm must be regarded as ‘the truth', and therefore a direct link might exist.
Link A - B - C
Based on the link A - B, it might be the case that entrepreneurs perceive that they have a lot of HRM issues, and that as a result they implement more HRM practices and techniques (reactive).
Link A - C - B
There is evidence that human capital characteristics of the entrepreneur impacts the nature of HR policy and practice within small firms (Mazzarol, 2003; Maes et al, 2004; De Winne and Sels, 2006). It might also be expected that human capital equips entrepreneurs with knowledge about a range of HRM practices and techniques, which they will put in place in order to avoid or overcome HRM issues. It is expected that more use of HRM practices and techniques leads to less HRM issues.
Link A - D - C - B
It is expected that more human capital makes entrepreneurs more aware of the value and importance of HRM and HRM issues to small firms. If entrepreneurs acknowledge the importance of both HRM and HRM issues to their firm, it is expected that they will put more emphasis on HRM and implement a range of HRM practices and techniques pro-active rather than reactive in order to avoid HRM issues. This is expected to lead to less HRM issues.
This exploratory research study uses a two-tailed multiple case study method design. Cases were divided into two groups of extremes. One group with two cases of highly educated and experienced entrepreneurs, and one group with two cases of low educated entrepreneurs with limited or no experience. This two-tailed multiple-case study method makes it possible to use direct replication of findings within the two groups, and also to find possible contrasting situations between the two groups. For this research study interviews are chosen to acquire case study evidence, following the general interview approach by Patton (2002). In this approach topics and issues to be covered are specified in advance in an outline form, and the interviewer decides the sequence and wording of questions in the course of the interview.
For this research study I have taken several steps before I started doing case studies in order to be well prepared. The steps taken were:
- Extensive literature review on the topics under investigation
- Two interviews with entrepreneurship experts to get a better understanding about the research topics from a practitioner point of view
- The design of a case study protocol
- Conducting a pilot case study
A total of four entrepreneurs (two in each group of extremes) actively involved in running their business were selected via non-probability sampling using the REACH database. The entrepreneurs were first contacted via a generic email, and later after being selected by telephone to make the appointment. The interviews were held face-to-face at the offices of the entrepreneurs, at convenient times, in silent and comfortable rooms. The interviews were tape recorded. In order to be able to triangulate data, I also interviewed an expert on human resource management and human resource issues in small firms. The interview was held in exactly the same way as with the entrepreneurs.
1.8 Thesis outline
In order to be able to answer the main research question, the sub questions, and to meet the objective of this research study, this research study will first look at relevant literature and theories in chapter two. In chapter three the methodology used in this research study will be presented and explained. Chapter four shows the results and within case analyses of the four case studies and of the interview with the expert. In chapter five these results will be analyzed using cross case analyses. And finally chapter 6 will contain the conclusion, limitations, and implications of this research study
2. literature review
There is an abundance of literature on HRM in general. Therefore it would be impossible to do a complete literature review on HRM within the time constraints given for this research study. Since the real issue discussed in this research study is the relationship between human capital of the entrepreneur and HR issues in small firms, only prior research that is relevant from this standpoint will be discussed. It must be noted that due to definitional problems in literature on both small firms and HRM, providing generalizations of research findings is somewhat problematic. However, given that all researchers in the field are confronted with these definitional problems, I follow the approach of D'Amboise and Muldowney (1988). They reviewed all studies and papers in which the author “claimed” to be writing about small firms or any variation thereof (e.g., entrepreneurial firm, SME). In this review of the literature, I do the same.
2.1 HRM in small firms
While there is an abundance of literature on HRM, the majority is based on HRM in large firms (Wilkinson, 1999). Heneman et al. (2000) reviewed over 400 articles on HRM and found that between 1984 and 1999 only129 empirical studies focused specifically on HRM in smaller firms. Only 17 of these studies applied quantitative methods to analyze results. According to them “the literature appears to be rich in prescriptions, limited in sound descriptive surveys, and sparse in analytical research”. Similarly, Hornsby and Kuratko (2003) found that “in spite of the considerable volume and diversity of HRM research, relatively little is understood regarding the HRM-related needs, practices, behaviors, and outcomes of smaller ventures”. More recently, DeKok and Den Hartog (2006) stated that even though research on HRM in small firms has increased lately, the majority of researchers still tends to ignore small firms. Heneman et al. (2000) argue that “the deficiency of research regarding HRM in small firms is problematic for theory, research, and practice”.
When looking at literature on HRM in small firms, it seems that for long it has polarized into the ‘small is beautiful' or ‘bleak house' perspective (Wilkinson, 1999). According to Wilkinson (1999) the ‘small is beautiful' scenario facilitates close and harmonious working relationships with good communication, greater flexibility, and low levels of conflict, and in the ‘bleak house' scenario firms are dictatorially run with employees suffering from poor working conditions (Wilkinson, 1999). However, according to Ram (1991, as cited in Wilkinson, 1999) “workplace relations in SME's may be ‘complex, informal and contradictory' rather than simply either harmonious or autocratic”. Indeed, by now we know that “small firms are complex, varied, and influenced by a range of factors” (Loan-Clarke et al. 1999; Carrol et al. 1999; Wagar, 1998; Mazzarol, 2003, as cited in Kotey and Sheridan, 2004).
A number of studies indicate that small firms are characterized by informal, flexible and ad hoc approaches to HRM. Barret et al. (2007) explain this by saying: “the practices used to recruit, select, manage and appraise employees' performance are not written down (for example, a list of skills and qualifications for each job), regularly applied (for example, yearly performance reviews) or guaranteed they take place (for example, employer sponsored training)”. For example, Hornsby and Kuratko (1990) studied 247 smaller firms in order to establish the progress in developing HRM practices and policies in small firms. They found that firms with less than 50 employees had very little formal HRM practices in place, and similar HRM practices were found in firms with 50 to 100 employees and firms with 100 to 150 employees. A little over a decade later Hornsby and Kuratko (2003) did a replication and an extension of their 1990 study and found evidence that suggests that human resource management practices in small firms in all three size categories has generally stagnated and even regressed in some areas over the decade. Similarly, Kotey and Slade (2005) conducted a survey of 371 small growing firms in Australia in order to establish the rate of adoption of formal HRM practices with increasing firm size. Their results showed that micro and small firms are indeed characterized by informal HRM practices, but the adoption of formal HRM practices increased with firm size with a move toward formal practices early in the growth process.
In contrast, there are also studies showing there is a greater level of sophistication of HRM practices in small firms than would be expected. However, it must be noted that these results are often derived from case studies with very small samples. For example, De Kok and Uhlaner (2001) studied 16 firms with between 10 and 41 employees and found that some of these firms used HRM practices that were more formal than expected. In line with this Duberley and Walley (1995) did a comparative case-study with sixteen organizations in the United Kingdom to study the extent to which HRM has been adopted in small firms. Although the majority of the studied firms (13) did not adopt a strategic approach towards HRM with an integrated set of policies related to corporate strategy, they found that three of the firms did indeed approximate quite closely to the model of strategic HRM.
Barret et al. (2007) state that while an informal and ad hoc approach to HRM may work for some small firms, in periods of growth the sustainability of that approach can be problematic. In line with this Arthur (1995) states that if growth is to be sustained, formal HRM practices and policies are necessary to cope with the increasing complexity as a result of greater number of employees. A study by Kotey and Slade (2005) on the rate of adoption of formal human resource management practices in 371 small growing firms in Australia indicated a move toward hierarchical structures, an increase in documentation, and more administrative processes as the firm grew. Similar results were found by Barret and Mayson (2007) when they conducted a survey of 600 small Australian firms. Their analysis showed that growth-oriented small firms were more likely to use formal HRM practices than non-growth small firms. Roberts, Sawbridge, and Bamber (1992, as cited in Wilkinson, 1999) explain this by saying: “when a firm employs more than 20 staff, the limits of informality become apparent: informal networks of recruitment dry up; informal styles of management communication are stretched; and ad hoc responses to personnel issues create problems”. In line with this Jennings and Beaver (1997, as cited in Bartram, 2005) state that when the entrepreneur becomes over-extended because the firm has grown above a certain size, the management of human resources needs to be professionalized and delegated.
However, there are also researchers like Wilkinson (1999) and Welbourne and Cyr (1999) who state that putting an emphasis on formal rules and procedures in small firms is outdated, because entrepreneurs operate in an environment where they have to make rapid decisions in order to be able to respond to market changes. They argue that ‘bureaucratic' HRM may reduce flexibility and increase firm inertia. Similarly, Hill and Stewart (1999, as cited in De Kok, 2003) argue that small firms should be more flexible and informal to be able to cope with higher levels of environmental uncertainty.
2.2 HRM activities in small firms
According to Barret and Mayson (2007) the most commonly found HRM activities in small firms reflect operational needs and pragmatic concerns. For example, record keeping, staffing activities (recruitment and selection), and to a lesser extent motivation and retention activities (compensation and reward practices). Cassel et al. (2002) conducted an empirical study on HRM activities in small and medium sized enterprises (SMEs), and found that there is a considerable diversity amongst SMEs in relation to their use of HR practices and techniques. They stated it appeared that “key managers within SMEs, rather than taking a coherent, strategy based approach to the implementation of HRM, are taking a more ‘pick and mix' contingency approach”. “Which practices are chosen, and the extent to which they are used and formalized is based on a number of characteristics about the SME and the current business climate within which they find themselves” (Cassel et. Al, 2002).
Although there is no generally excepted list of HR practices and techniques used by smaller firms, attempts have been made to identify practices and techniques commonly used in smaller firms. For example, McEvoy (1984) studied small business personnel practices in 84 small businesses with 25 to 250 employees located near a Midwest metropolitan area. A thirty-six item questionnaire was administered and filled in by an interviewer interviewing the person responsible for HRM in the firm. The questions focused on the usage of HRM practices like HRM structures, policy and planning, staffing, performance evaluation, employee motivation, job satisfaction and turnover, and compensation and unionization. Important findings relevant for this research study are that when firms reached an average of 73 employees the management of human resources shifted from one person (often the entrepreneur) to a newly formed separate personnel department. About 80% of the firms sampled used written personnel policies (but the areas of coverage varied significantly between the firms), and over one-third of all respondents did not maintain written job descriptions for most jobs. Furthermore recruitment and selection strategies were found to be ‘unimaginative'. The use of interviews and application blanks accounted for 90% of the most frequently used selection techniques, and the use of newspaper advertisements and walk-ins accounted for almost 60% of the most frequently used recruitment techniques. With regard to performance evaluation, almost 75% reported having a formal appraisal system. The use of ‘objective measures of productivity' was the most cited performance evaluation technique. However, almost 50% of the firms indicated they did not use the results to either provide feedback or to discuss compensation matters. The three most frequently used motivation strategies were reinforcement and recognition for a job done well (38%), pay raises (19%), and job security (12%). Interesting to see is that in only 8% of the cases employee pay was directly related to productivity, and that in only 9% of the cases the use of challenging jobs was used to motivate employees. The pay policies and structures were found to be informal. Not even one-third indicated the use of a formal salary survey to ensure their pay policies were competitive, and one-third used a formal job evaluation system to assure that their internal pay system was honest.
Similarly, more recently Hornsby and Kuratko (2003) did a study on HRM practices and techniques in 262 U.S. small businesses. They used a surveying methodology similar to McEvoy (1984), and divided firms into three size categories (1-50, 51-100, and 101- 150 employees), and HRM activities into eight major areas (job analyses, recruitment, selection, compensation, benefits, incentive plans, performance appraisal, and training). Respondents were asked to indicate on a 20-item questionnaire whether or not they performed a specific HRM practice and technique. For each practice and technique was established what percentage of firms used them. When looking at results of the firms with 1 - 50 employees, the most important findings for this research study are that the most commonly found recruitment techniques were referrals (73%), walk-ins (57%), and newspaper ads (44%), and that interviews (90%), reference checks (80%), and application blanks (73%) were the most commonly found selection techniques. Training happened predominantly on-the-job (93%) or via the use of coaching (67%), and performance appraisal and compensation practices were used far less often than any other of the practices. When used, compensation techniques were based on market rate (36%) or experience/seniority (27%), and performance appraisal on narrative essay (33%) and goal setting (31%). For firms with 51 - 100 employees the most important findings for this research study are that the most commonly found recruitment techniques were referrals (73%), newspaper ads (65%), and walk-ins (64%), and that interviews (97%), application blanks (90%), and reference checks (88%), were the most commonly found selection techniques. Training happened predominantly on-the-job (96%) or via the use of coaching (70%). Performance appraisal was done mostly via the use of a rating scale (59%), and compensation practices were based on market rate (38%) or experience/seniority (32%).
2.3 HRM issues in small firms
Mazzarol (2003) states that when a firm grows the entrepreneur must begin to increase his staff and learn how to develop and implement HRM practices and policies. He argues that the complexity of HRM deepens when the firms' employee numbers increase and the faster the firm grows the more likely it will experience HR issues. These issues are of the upmost importance for small firms. Managerial incompetence in handling HR issues is a major source of small firm failure (Dun and Bradstreet, 2001; Baron, 2003; Hornsby and Kuratko, 2003), and the way owner-managers handle HR issues in an early stage severely impacts downstream success of business (Cardon and Stevens, 2004). However, Cardon and Stevens (2004) did a literature review on HRM in small and emerging firms and concluded that despite the importance of HR issues to small and emerging firms our understanding about these issues is limited.
Attempts have been made to identify types of HRM issues in small firms. For example, Hornsby and Kuratko (2003) investigated HRM practices and techniques in 262 small U.S businesses, and also asked entrepreneurs what they saw as the most important HRM issues they were confronted with. They found that for the smallest firms (1 -50 employees) the five most important issues were availability of quality workers, benefits, training, competitive wages, and government regulations. For firms with 51 -100 employees benefits, retention, availability of quality workers, childcare, and flexible scheduling were reported as their biggest concern, and for firms with 101 - 150 employees indicated that availability of quality workers, benefits, government regulations, attendance, retention, and wages were their biggest concern.
There were also attempts at identifying when in the life-cycle of the firm HRM issues would occur. For example, Rutherford et al. (2003) did a study on human resource management problems over the life-cycle of small to medium-sized firms. Their study used a sample of 2903 small to medium-sized firms in order to examine the manner in which HR problems vary over the organizational life-cycle. They grouped HR problems into three categories: hiring, development, and retention. Their research indicated HR problems vary across stages defined by growth and also size. They found that the training problems were the highest in high-growth firms and the lowest in low-growth firms. They also found that compensation problems were the highest in moderate-growth firms and lowest in high-growth firms. Furthermore, they found that recruiting problems were the highest in no-growth firms and lowest in low-growth firms. Similarly, Howard (2001) studied HRM issues as small firms grow in a sample of 36 small firms with between 1 - 150 employees. He found that rushing to meet deadlines due to changes in personnel, a need for more workers, general staffing, and training workers were major HRM issues.
Last, Kotter and Sathe (1978) studied HRM issues in twelve fast growing firms. They identified issues caused by the need for rapid decisions, by rapidly expanding job demands, by large recruiting and training demands, by constant change, and by constant strain on resources. For example, they found that in fast growing firms people are severely strained and stress levels are high which results in frustrated or burnt out people who will slow down or leave the firm. They also found that formal and informal structures have difficulty coping with the demands placed on them, which results in in-effective or slow decision making and that important but non-urgent tasks are ignored. Last, they found that numerous people at all levels were over their heads in their jobs, or not yet up to speed in their jobs, which results in rewards (money, promotions, etc) that do not meet expectations (Kotter and Sathe, 1978).
2.4 HRM and the entrepreneur
In small firms it is generally the entrepreneur who is solely responsible for the management of human resources (Matlay, 2002; Klaas and Klimchak, 2006). Often because small firms cannot justify full-time HR professionals due to limited size and resources (Klaas et al, 2000), and also because many entrepreneurs do not perceive HRM in small firms as a very sophisticated process requiring specialists (Pearson et al, 2005; Matlay, 1999). While being small, this task will not present much of a problem for most entrepreneurs. However, Mazzarol (2003) states that when a firm grows and its number of employees increase the complexity of HRM deepens. He argues that managing issues such as recruitment and selection, staff promotion and retention, wages and salary negotiations, compliance with government employment, tax and insurance regulations and training and development all can severely tax the average entrepreneur (Mazzarol, 2003). Given that entrepreneurs are already resource and time constrained (Klaas et al, 2000, as cited in Cardon and Stevens, 2004), and that HRM often interferes with other managerial responsibilities that are perceived as being more important because they are directly related to revenue production (Cook, 1999, as cited in Cardon and Stevens, 2004), one can imagine that most entrepreneurs do not put much emphasis on the management of human resources in small firms. Instead of taking a structured approach to HRM, most entrepreneurs seem to have the tendency to “muddle through” (Williamson, 2000, as cited in Cardon and Stevens, 2004), and the management of human resources is often determined by the day-to-day behavior and decisions of the entrepreneur (Klaas and Klimchak, 2006).
Various studies have tried to explain the use of HRM in small firms by looking at the entrepreneur. For example, Baron et al. (1996) studied the origin and evolution
of HRM in emerging firms. Their research drew on qualitative and quantitative data describing 100 Bay Area high technology firms within their first decade. Their results suggested that entrepreneurs had so called ‘blueprints' for HRM. By using multivariate statistical analyses they found that the entrepreneurs' employment model shaped the subsequent adoption and timing of various HRM practices and policies over the first decade.
Others like Klaas and Klimchak (2006) have suggested that HRM is linked to managerial style and personal characteristics of entrepreneurs. In fact, a number of studies show positive relationships between certain characteristics of entrepreneurs and HRM in small firms. For example, drawing evidence from four case studies with entrepreneurs of small firms with between 13 and 120 employees, Mazzaral (2003) found that entrepreneurs' personal characteristics (e.g., management style, level of education and experience, and personality style) impact the nature of HR policy and practice. Similarly, De Winne and Sels (2006) studied the impact of upper echelon human capital on innovation in start-ups. They held a survey among 637 start-ups on various themes (e.g., upper echelon human capital, ownership structure, strategy and market orientation and management practices in a wide range of functional areas), and found that the entrepreneurs' human capital (education and experience) was indirectly related to innovation via the use of HRM practices. It seemed that higher levels of education and experience of the entrepreneur resulted in the use of more HRM practices, which in turn had a positive effect on employees' innovativeness. Another study by Maes et al. (2004) focused on the influence of entrepreneurs' human capital on various management practices and small firm profitability. They found that human capital characteristics (experience and level of education of the entrepreneur) contributed to higher profitability in small construction firms in Belgium. They also found that human capital characteristics not only influence profitability directly, but also indirectly via the adoption of certain management practices including HRM practices.
2.5 Perceived importance HRM by entrepreneurs
Research by Shonesy and Gulbro (1995) and later by Gulbro and Tucker (1996) on the perceived importance of HRM practices by entrepreneurs showed that small firm entrepreneurs were generally not aware of the value of HRM practices to their firm. In contrast, an earlier study by McEvoy (1984) indicated that entrepreneurs did seem to acknowledge the importance of HRM for small firm development and survival. However, their study also revealed that in practice functional aspects such as finance, marketing, and production all have precedence over HRM. Indeed, “often founders spend more time worrying about the scalability of their phone system or IT platform rather than the scalability of their culture and practice of managing workers” (Baron and Hannan, 2002, as cited in Cardon and Stevens, 2004). “This occurs even when that same founder would declare with great passion and sincerity that ‘people are the ultimate source of competitive advantage in my business'” (Baron and Hannan, 2002, p. 30, as cited in Cardon and Stevens, 2004). This is in line with the view of Deshpande and Golhar (1994, as cited in Benmore and Palmer, 1996) who stress that “…what is perceived as important by managers may not actually be practiced by them”. Cooper et al. (1997, as cited in Tocher and Rutherford, 2009) explain this phenomenon by saying that entrepreneurs do not tend to focus on administrative issues such as HRM, unless they perceive such issues as critically important to the firm. Due to resource constraints entrepreneurs must prioritize problems based on the severity of that problem, and ignore the less critical ones (Jawahar and McLaughlin, 2001, as cited in Tocher and Rutherford, 2009). However, given that research by Hess (1987) showed that small firm entrepreneurs ranked HRM management as the second most important management activity next to general management, and that research by Tocher and Rutherford (2009) indicated that of their sample of nearly 1700 entrepreneurs over 21% indicated that HRM issues were their most critical concern, one would expect that entrepreneurs would put more emphasis on HRM in small firms.
The following chapter explains how the research for this research study was conducted.
3.1 Research design
The objective of this exploratory research study is to get a better understanding about the relationship between human capital of the entrepreneur and HR issues in small firms. To achieve this objective and to make sure that evidence is collected, presented, and analyzed in a correct and fair way, a research design is constructed. Yin (2009) argues that “in the most elementary sense, the design is the logical sequence that connects the empirical data to a study's initial research questions and, ultimately, to its conclusions. Colloquially, a research design is a logical plan for getting from here to there, where here may be defined as the initial set of questions to be answered, and there is some set of conclusions” (Yin, 2009).
According to Yin (2009) the form of the research questions - in terms of “who”, “what”, “where”, “how”, and “why” - provide an important clue regarding the most relevant research method to be used. Since all of the research questions in this research study are “how” questions, according to Yin (2009) it is most likely that for this research study the case study method is most appropriate. However, Yin (2009) states there are two more conditions important for the case study method. That is that the researcher does not need control over behavioral events and that the research focuses on contemporary events. Since this research study focuses on the relationship between human capital of the entrepreneur and HR issues in small firms (a contemporary event), and there is no need for me as a researcher to be able to manipulate or control these behavioral events, this research study meets Yin's three criteria for the case study method. Verschuren en Doorewaard (2007) argue that especially the case study method provides beginning researchers with interesting possibilities, because this type of research is easy to keep within manageable proportions, the researcher needs relatively little methodological knowledge and training to be able to get meaningful results, and the case study method is applicable in almost all situations. Also, Cassel et al. (2002) state that there is a clear rationale for using in-depth case studies as a way of providing what is happening in small firms. They argue that the use of quantitative data is of relative little value given the diverse and heterogenic nature of small firms. This makes the case study method the appropriate research method for this research study.
Case studies can be explained as intensive studies of a single unit in order to understand a larger class of similar units. Yin (2009) defines the case study as “an empirical inquiry that investigates a contemporary phenomenon within its real life context; especially when the boundaries between phenomenon and context are not clearly evident”. Sekaran (2003) states that case studies involve in-depth contextual analysis of similar situations in other organizations, where the nature and definition of the problem happen to be the same as experienced in the current situation. Before continuing, it is important to define what the “unit of analysis” is in this research study. For this research the unit of analysis are entrepreneurs. More specifically, the entrepreneurs' experiences dealing with HRM and HRM issues in their firms. Yin (2009) argues that since it is impossible to cover “everything” about the individual, a researcher needs to use research questions to help identify relevant information to be collected about the individual. These research questions have been formulated and can be found in chapter one of this research study.
When doing case studies, the choice has to be made whether a single-case study method or a multiple-case study method will be used. According to Yin (2009) the evidence from multiple-case studies is often considered more compelling, and the overall study is therefore regarded as being more robust. He also states that more than one case study gives the researcher the possibility of direct replication. He argues that analytic conclusions independently arising from two cases will be more powerful than those coming from a single case alone. Therefore this research study uses the multiple-case study method.
Yin (2009) also states that it is possible to ( instead of replication) deliberately select two cases offering contrasting situations. He argues that if the subsequent findings support the hypothesized contrast, the results represent a strong start toward theoretical replication - again vastly strengthening research findings compared to those from a single case alone. Since the objective of this research study is to get a better understanding about the relationship between human capital of the entrepreneur and HR issues in small firms, cases were divided into two groups of extremes. One group with two cases of high educated and/or experienced entrepreneurs, and one group with two cases of low educated and inexperienced entrepreneurs. This two-tailed multiple-case study method makes it possible to use direct replication of findings within the two groups (as advised by Yin), and also to find possible contrasting situations between the two groups. Making this a very strong research design (Yin, 2009).
3.2 Research data collection method
According to Yin (2009) case study evidence can come from six sources: documents, archival records, interviews, direct observation, participant-observation, and physical artifacts. For this research study interviews are chosen to acquire case study evidence. Interviews make it possible to ask respondents about the facts of the matter as well as their opinions about events, it gives the researcher the ability to focus directly on case study topics, and it provides perceived causal inferences and explanations (Yin, 2009).
Patton (2002, pp. 349) identifies three general categories of qualitative interviews:
- The informal conversational interview - “Questions emerge from the immediate context and are asked in the natural course of things; there is no predetermination of question topics or wording”
- The general interview guide approach - “Topics and issues to be covered are specified in advance, in outline form; interviewer decides sequence and wording of questions in the course of the interview”
- The standardized open-ended interview - “The exact wording and sequence of questions are determined in advance. All interviewees are asked the same basic questions in the same order. Questions are worded in a completely open-ended format”
(source: Patton, 2002, pp. 349)
For this research study the “general interview guide approach” identified by Patton is chosen. According to Patton (2002) the strengths of this approach are that the outline increases the comprehensiveness of the data and makes data collection somewhat systematic for each respondent, the logical gaps in data can be anticipated and closed, and interviews remain fairly conversational and situational. Since this research study uses the multiple-case study method, making data collection somewhat systematic for each case is essential in order to be able to do direct replication within each of the two groups as well as compare results between the two groups. Furthermore, the fairly conversational and situational interviews give the respondents freedom of movement in answering questions and explaining their experiences and opinions, while I as a researcher maintain control over the topics and timeframe.
3.3 Limitations and weaknesses data collection method
Although interviews are the method of choice to gather data for this research study, interviews also have their weaknesses. Yin (2009) mentions bias due to poorly articulated questions, response bias, and inaccuracies due to poor recall and reflexivity (interviewee gives what interviewer wants to hear). Furthermore, Marshall and Rossman (2006) argue that: “interviews involve personal interaction; cooperation is essential. Interviewees may be unwilling or may be uncomfortable sharing all that the interviewer hopes to explore, or they may be unaware of recurring patterns in their lives. The interviewer may not ask questions that evoke long narratives from participants because of a lack of expertise or familiarity with the local language or because of a lack of skill. By the same token, she may not properly comprehend responses to the questions or various elements of the conversation” (Marshall and Rossman, 2006).
In order to overcome these weaknesses and limitations I have taken several steps before I started doing case studies in order to be well prepared. These steps are explained in paragraph 3.4.
Marshall and Rossman (2006) also argue that translating interviews from one language into another could cause problems. They argue that the most important issues with translating the spoken or written words are “the processes and procedures that the researcher/translator has used to construct meaning through multiple transpositions of the spoken or written word from one language into another” (Marshall and Rossman, 2006).
For this research study interviews are held in Dutch. However, the research study is in English. Including the used quotes. This means that I have translated findings from one language into another. Although my native language is Dutch, I am also fluent in the English language. This helps to some extent to ensure accuracy and subtlety in the translation.
3.4 Preparation to collect case study evidence
According to Yin (2009) good preparation for case studies is necessary in order to be able to do good case study research. Therefore for this research study I have taken several steps before I started doing case studies in order to be well prepared. First, in order to have a firm grasp of the issues being studied for this research study, a literature review was conducted. Yin (2009) states that the literature review is a means to an end and not an end itself. He argues that a literature review is a necessary tool to review previous research in order to be able to develop sharper and more insightful questions about the research topic. I used the literature review to get a better understanding about the topics under investigation, to design a theoretical framework for the variables in the preliminary conceptual framework, and to formulate research questions. Second, because my knowledge about the research topics in this research study came primarily from literature study, and it is suggested by Heneman et al. (2000) that “there are substantial gaps between what owner-managers of small firms identify as critical to their HR management, and what is published in academic research”, I conducted two interviews with entrepreneurship experts of two growth incubators sponsored by the government (Syntens and Port4Growth). These interviews helped me to get a better understanding about the research topics from a practitioner point of view, and to be able to ask the right questions and to properly respond to questions or various elements of the conversation during the interview with entrepreneurs. Third, a case study protocol was designed. Yin (2009) states that the protocol is a major way of increasing reliability of case study research and is intended to guide the researcher in carrying out the data collection. He argues that the protocol contains the questionnaire, but also the procedures and general rules to be followed which is essential if you are doing a multiple-case study. See appendix X. Fourth, as advised by Yin (2009), a pilot case study was conducted with a company called FitForMe in order to help me improve my interview skills and to refine my data collection plans with respect to both the content of the data and the procedures to be followed. Information gathered in the pilot case study was used parallel with my ongoing review of the literature, therefore the final research design was informed by prevailing theories and by empirical observations as advised by Yin (2009).
3.5 Collecting case study evidence
For this research study a total of four entrepreneurs actively involved in running their businesses were interviewed (see appendix X). These entrepreneurs were divided into two groups. One group with two highly educated and experienced entrepreneurs, and one group with two inexperienced and low educated entrepreneurs. The entrepreneurs were selected via non-probability sampling. Non-probability sampling does not involve random selection and is often used by social scientists (Nachmias & Nachmias, 2000). I used the REACH database to find and select entrepreneurs of firms with a maximum 50 employees, active in the business-to-business sector, offering IT or website solutions. The entrepreneurs were first contacted via a generic email, in which I explained the purpose of this research study and asked them for their cooperation. Because two groups of extremes are used in this research study (highly experienced and educated versus inexperienced and low educated entrepreneurs), responses had to be filtered in order to select the right cases. After having selected the right cases, the entrepreneurs were contacted by telephone to make the appointment for the interviews.
The interviews were held face-to-face at the offices of the entrepreneurs at convenient times in silent and comfortable rooms as suggested by (Malhotra, 1996, p.167). In order to be able to fully concentrate on the interviews without having to stop constantly to write important things down, a recording device was used to record the interviews. According to Yin (2009) recording the interview provides a more accurate rendition of an interview than any other method. He does argue however that a recording device should not be used when (a) an interviewee refuses permission or appears uncomfortable in its presence, (b) there is no specific plan for transcribing or systematically listening to the contents of the electronic record, (c) the investigator is clumsy enough with mechanical devices that the recording creates distractions during the interview itself, or (d) the investigator thinks that the recording device is a substitute for “listening” closely throughout the course of an interview. For this research study all interviewed entrepreneurs gave their permission to record the interview, there was a specific plan to systematically listen to the contents of the electronic record as can be found in the interview protocol, I used an easy to use recording device in order to avoid distractions during the interview, and even though I used a recording device I kept listening closely during the whole interview. The interviews lasted each around an hour, and the entrepreneurs were thanked with a token of my appreciation (a bottle of good wine).
According to Yin (2009) case study findings or conclusions are likely to be more convincing and accurate if it is based on several different sources of information, following a corroboratory mode. This process is called triangulation of data. Yin (2009) argues that with triangulation the potential problems of construct validity can also be addressed because the multiple sources of evidence essentially provide multiple measures of the same phenomenon. Therefore, for this research study I also interviewed an expert on human resource management and human resource issues in small firms. This expert leads a company specialized in human resource management solutions for small firms and offered me a view from another angle on the topics of this research study. The interview was held exactly the same as with the entrepreneurs.
3.6 Quality of the research design
According to Yin (2009) the research design is supposed to represent a logical set of statements, and the quality of the design can be judged according to certain logical tests. He states there are four tests common to all social science methods. They are: construct validity, internal validity, external validity and reliability. Since according to Yin (2009) internal validity is inapplicable to exploratory research studies, only construct validity, external validity and reliability will be discussed.
Yin (2009) argues that to meet the construct validity, the researcher must be sure to cover two steps; (1) define change in terms of specific concepts (and relate them to the original objectives of the study), and (2) identify operational measures that match the concepts (preferably citing published studies that make the same matches). For this research study the change to be studied is:
- The influence of human capital of the entrepreneur on HR issues in small firms
Yin (2009) argues there are a number of tactics available to increase construct validity when doing case studies. The first tactic used in this research study is the use of multiple sources of evidence. Literature review, interviews with 4 entrepreneurs, and an interview with an expert on HRM and HR issues in small firms are used as different sources of evidence. The use of multiple sources of evidence is also known as data triangulation. The second tactic used the establishment of a chain of evidence. This can be achieved by linking (interview) questions, to data that is collected, and eventually to the conclusions drawn at the end of this research study. In appendix X interview questions and collected data are shown (KODANI), and in the
closing chapter these findings are brought together to conclusions.
Yin (2009) argues that external validity deals with the problem of knowing whether research findings are generalizable beyond the immediate case study. He argues that case studies rely on analytic generalization whereas for example survey research relies on statistical generalization. He states that in analytical generalization the researcher is striving to generalize a particular set of results to some broader theory. He also argues that the generalization is not automatic, as a theory must be
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