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Performance, in the context of an organisation, is a broad concept that encompasses productivity, effectiveness, efficiency, and more recently, competitiveness. Linking Human Resource (HR) Strategies to organisational performance is a concept that Human Resource Management (HRM) theorists are consistently endeavouring to establish. Over the years, research into the contribution of good HR policy and the potential impact on improving organisational performance, has increased. In the 1990s, researchers began to develop a better understanding of the association between HRM and performance, particularly as "the impact of human resource management on performance has become the dominant research issue in the field" (Guest, 1997, p263 2.). More recently, (CITE Guest 2011, Boselie, Combs) ..............................................
The purpose of the essay is to critically evaluate the arguments surrounding the claim that HR Strategies hold the key to organisational performance.
A key research focus in the late twentieth century was to identify the relationship between HR strategies and organisational performance. Among others, Guest (1997) and Wood (1999b) have provided theoretical perspectives and empirical studies that relate to HRM and Organisational performance. Wood (1999a) suggests that if HR Strategies are to be paramount in organisational performance, a two way linkage of mutual influence must be present where the HR system should be coherent and complement the business strategy. To ensure this is implemented correctly, each strategy should be a fit between the coherent sets of HR practices and other business systems. The HR system adopted by the organisation should also be compatible with its environment and should be in line with the competitive strategy of the organisation. Once these objectives are achieved the assumption underpinning the practice of HRM is that people are the organisation's key resource and organisational performance largely depends on its employees. If an appropriate range of Strategic HR policies and processes are developed and implemented effectively, then HR should therefore have a substantial impact on an organisations performance. Appropriate HR strategies such as training and development; job security and satisfaction; employee commitment; superior pay and conditions; and quality initiatives are, as a bundle, key techniques that would promote a high performing culture. Similarly, from an organisational behavioural prospective, it is proposed that HR practices work to develop individual knowledge and skills, as well as employee attitudes and behaviours. If these characteristics are prevalent enough in the employee population, then the collective changes in human capital, attitudes and behaviours should be strong enough to influence organisational performance.
In examining the relationship between HRM and organisational performance, Hoque (1999) noted that HR strategies are more likely to contribute to competitive success where they are "introduced as an integrated and coherent package or bundle of practices" (Hoque, 1999, p419). The issue is that organisations do not always implement a bundled approach to HR strategies that would constitute part of an overarching policy, but would implement such an approach in an ad hoc and uncoordinated fashion. This may also point to line managers who are more concerned with the requirement to achieve immediate performance results contributing to an increasingly fragmented and less coherent execution. Some organisations may prefer short-term benefits, being less willing to sacrifice for the long term overall performance of HR strategies. Additionally, some organisations may prefer a more simplified, direct, immediate and quantifiable measure rather than academically preferred complex, long term, less quantifiable measure - an area where HR strategies would often fail.
Organisations favour financial and non-financial measures such as the measurement of profits and market share as preferred indicators of organisational success. The requirement to be continuously improving these factors may therefore become the pervading influence underlying many of the non-financial performance measures such as productivity, efficiency, reliability and flexibility. The performance measures used by an organisation may be in line with the stated business strategy, but at the same time, it may impose conflicting requirements on the employee.
Furthermore, the financial performance of an organisation can be identified as a key outcome to developing operational performance. The operational performance of an organisation is a function of process, technology and people. To ensure efficient and effective utilisation and collaboration of these resources, the people within the organisation would have to be educated with the required knowledge, skills and abilities. In turn, this would establish desirable competencies which are imperative in the operational effectiveness of an organisations performance. HR practices such as training and development, recruitment and selection, work atmosphere and consistent performance appraisals may enhance the competence of employees for higher performance and, ultimately, increased organisational financial performance.
Organisations have continually strived to understand the factors that contribute to success. One concept that organisations use to examine the role of HR is the resource-based view, which focuses on the organisational resources that can form the foundations of competitive advantage (Barney, 1995). Barney (1991) suggests there are three basic types of resources that can contribute to organisational performance; the first being physical capital resources such as an organisations plant and equipment. The second is capital resources such as structure, planning and HR systems, and finally, human capital resources that would include items such as skills, judgement, and the knowledge of an organisations employees. The resource based view is a commonly applied concept used to understand the role of HR in organisational performance. For example Wright, McMahan & McWilliams (1994) used the resource-based view to examine how a firm's HR can be a source of sustainable competitive advantage. Lado and Wilson (1994) explored the potential for HR practices to be a source of competitive advantage and Jackson and Schuler (1995) discussed the applications for the resource-based view within the application of HR.
In aiming for organisational performance utilising human resources, the VRIO framework can be applied. The VRIO framework can be defined as Value, Rareness, Imitability and Organisation, (Barney 1995). The first notion within this framework - value - can be explained through the concept of how HR can either increase revenue and/or reduce costs in an organisation. Expenses such as recruitment fees can be averted or decreased if HR can identify processes that would achieve a rewarding outcome in recruiting talented individuals into the organisation. On the opposite side of the spectrum, HR may be tasked with increasing revenues, which is a completely foreign exercise as HR is normally associated with cost centres and being an expense to the organisation. Schneider and Bowen (1985) hypothesized that HR practices would be related to employee attitudes which would consequently be related to customer satisfaction. In one particular study, they had conducted on a serious on banks across the United States; significant associations were observed between HR practices and customer reports of the quality of service they received. Tornow and Wiley (1991) found that employee attitudes such as job satisfaction were related to measures of organisational performance, supporting the concept that employee satisfaction is linked to service quality and HR practices are important determinants of employee satisfaction.
The notion of rareness in an organisation is dependent on the employees that work within the organisation. Most organisations view the labour pool for particular jobs as relatively homogenous. Within any labour pool, however, differences exist across individuals in terms of their job-related skills and abilities. Wright (1994) suggested that if an assumption exists across organisations that the labour pool is homogeneous, there would be tremendous potential to exploit the rare characteristics of those employees for a competitive advantage. Therefore the question of rareness would lie with how a HR Manager would develop and extract these rare characteristics from employees to gain a competitive advantage.
The concept of Imitability can be defined by the rare characteristics an organisation would foster that cannot be easily imitated by its competitors. These characteristics may have been developed throughout the history of the organisation, defining its unique culture and representation in the business community. Solidifying the unique culture and history of an organisation in regards to organisational performance may require HR practices such as an extensive recruitment and selection process specifically using techniques such as psychological profiling. This technique would assist in distinguishing outstanding candidates and then empowering employees to foster the culture engaged by the organisation. Individuals that can exemplify the organisations unique culture would serve as a source of competitive advantage because they have the potential to create value, are rare and are virtually impossible to imitate.
Within the VRIO framework, the notion of Organisation refers to the competitive advantage that is gained from having the systems and processes in place to exploit the potential competitive advantages from an organisations employee. This concept focuses on the systems in place rather than the single HR practices. Wright and Snell (1991) suggest that Strategic HR Management requires coordinated HR activities across the various departments within an organisation. HR practices such as recruitment and selection, training and development, performance management and remuneration delivered in a coherent and bundled approach would be key to delivering organisational performance, but only if the organisation can coordinate and therefore capitalise on these resources.
The VRIO framework presents how strategic HR can provide the key to organisational performance, although there are a number of suggestions that could hinder its success. The first suggestion is that the HR function manages the set of resources (e.g culture, teamwork, employee commitment) that are most likely the sources of sustained competitive advantage. Therefore, the importance of HR in understanding the value of strategically partnering with the organisation to achieve a competitive advantage is vital. The ultimate objective for HR is to provide an organisation with resources that are rare, valuable and cannot be easily imitated by other organisations; this would entail developing employees who are skilled and motivated to deliver high quality services and managing the culture of the organisation to encourage team work and trust. This requires the HR function to focus on developing a coherent system of HR practices that would support these objectives.
An important aspect would be the need for an entirely new approach in the mindset regarding the role of HR in an organisation. Pucik (1997) suggests that, "paradoxically, in spite of the value adding opportunities for HR's contribution to competitive advantage driven by the demands of businesses in many companies the HR function is still perceived not as a full partner". Top management commitment and HR initiatives must be led by the head of the organisation; they must be incorporated throughout the entire company which can be quite challenging. Sheehan (2003) propose that line management commitment is an integral component of increasing the strategic importance of HR initiatives. It is the dependence on line managers in "bringing HR polices to life" and aligning perceptions of HRM policies with employee attitudes and behaviour (Purcell 2003). Boxall and Purcell (2003) suggest that an organisation's performance is a function of a line managers' ability (they can do the job because they possess the necessary skills); opportunity (the work environment provides the necessary support and avenues for expression) and motivation (they will do the job because they want to). It is the critical role that line managers have in the contribution of the HR strategies to organisational performance that must be influenced for HR to be successful to instil a high performance, high involvement employee culture.
Increasingly, organisations are confronted with the pressures of decreasing costs on the basis of existing technology and resources whilst targeting improvements in productivity, efficiency and quality service. As the business environment has grown to become highly unstable and heavily competitive in all industries, any business operation or function which does not add value will not be successful in strategically partnering with the organisation. It is therefore paramount for HR to play a strategic role in any organisation for it to be successful and to drive a high performance culture. Amongst other things, functional flexibility through investment in training, employee involvement and commitment and job satisfaction should be seen as central to a sustained organisational performance. It was Porter (1985) who recognised that the unique talents among employees, including flexibility, innovation, superior performance, high productivity and personal customer service are ways employees provide a critical ingredient in developing an organisations competitive advantage.
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