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To many people the self-important-sounding phrase 'Human Resource Management (HRM)' just means a fancy or pretentious re-labeling of what used to be called 'Personnel Management'. But to many managers and management theorists it is vital to the survival and success of organizations in, what Peter Drucker (1993) called, 'the knowledge-based economy'.
Strategic HRM shares an intimate relationship with the corporate strategy and structure of an organisation which was first clearly identified by Alfred Chandler:
"A company's strategy in time determined its structureâ€¦the common dominator of structure and strategy, and thereby the organization's business performance, has been the allocation of the enterprise's human resources to market demand." (Chandler, 1962/1991; p.383)
The aim of this essay is to discuss, with reference to theory and practice, the causal links between Strategic Human Resource Management (SHRM) and business performance - an issue that has dominated both academic and practitioner debate for over two decades.
We will first discuss the three main approaches which focus on how SHRM has a positive effect on organizational performance: the Best Practice (Universalist) approach, the Best Fit (Contingency) approach and the Resource Based View (Strategic Choice). The essay will discuss the 'Best-Practice' models given by Pfeffer (1994) and Huselid (1995). This will be followed by the 'Best-Fit' models of 'Strategy and HRM' presented by Schuler and Jackson (1987) and Miles and Snow (1984). Furthermore, the third approach, Resource Based View (RBV), will be discussed with a reference to the Harvard Business Model of HRM. The essay will also go on to critically discuss the problems associated with each of these approaches in practice.
The cause and effect of the Best-Practice, Best-Fit and RBV approaches will simultaneously be elaborated using organizational examples from Lincoln Electric, Hewlett Packard, two Australian Banks and a study on multi-industry sample of 164 New Zealand based firms. This will take into account the practical considerations for strategic HRM.
Finally, the essay will conclude with the findings from the theoretical aspects and practical examples of the SHRM-Performance causal links discussed earlier.
The Causal Link between HRM and Business Performance - Theory versus Practice
The yearning of human resource practitioners to demonstrate the significance of their contribution for the rest of the organization has an extensive history. Peter Drucker (1954) expressed that "personnel" managers are persistently worried about "their inability to prove that they are making a contribution to the enterprise," (p. 275). Recently this has even been echoed by Tom Stewart, who describes that Human Resource leaders are "unable to describe their contribution to value addition except in trendy, unquantifiable and wannabe terms . . ." (Stewart, 1996, p. 105).
In reaction to these long-standing and repeated criticisms of HR not being able to add value to organizations, the last decade has witnessed a mushrooming of research attempts to demonstrate that strategic HR practices result in superior business performance. We will now move on to discuss the three approaches focusing on the positive effects of SHRM on business performance.
The Best Practice Approach
The Universalist Best-practice approach of HRM asserts that regardless of context or internal factors there is one best way of managing human resources which, if applied, will lead to better organizational performance. Pfeffer's and Huselid's models are examples of this approach. Pfeffer listed sixteen HR practices (which were later consolidated to seven) that would lead to, what he termed, 'competitive advantage through people'. Similarly, Huselid's (1995) revolutionary large-scale study of US manufacturing companies, across a range of industries and firm sizes, reported evidence that the use of specified High Performance Work Practices (HPWPs) was reflected in better firm performance as measured by reduced employee turnover, increased productivity and enhanced corporate financial performance.
This positive correlation of HPWPs to firm performance can be better highlighted by the following study, by James P. Guthrie (2001), which associates one of the HPWPs - Employee Retention to firm productivity based on a sample of 164 firms competing in New Zealand.
The findings in the study are particularly supportive of the generalizability of Arthur's (1994) study of the U.S. steel mini-mill industry. Like Arthur, James found that turnover and employment practices interact to affect firm productivity; employee retention is especially critical when investments in HPWPs are relatively high. The results of Arthur (1994) and of James's study suggest that use of HPWPs may have implications for the effect of employee turnover on firm productivity; turnover is adversely associated with productivity when the use of these practices is high and, conversely, turnover is positively associated with productivity when use of these practices is low. The figure below indicates the same:
Effects of High-Involvement Work Practices and Employee Retention on Firm Productivity
Source: James P. Guthrie (2001; p.9)
However, even within the best practices approach, researchers have much to learn about what constitutes High Performance Strategy. Studies of the so-called 'high performance work practices' vary significantly as to the practices included and even as to whether a practice is positively or negatively related to a firm's performance. For example, Arthur's (1994) high performance employment system lays low emphasis on variable pay whereas the one proposed by Huselid (1994) and MacDuffie (1995) lay significant emphasis on variable pay. Similarly, HR practices such as internal promotions and providing access to employee grievance procedures have been termed as high performance work practices by Huselid. Other studies, for example that of Arthur, term these practices as a part of more 'rigid' HR systems associated with less productive unionized environments. Becker (1995) categorized these two practices as "bureaucratic HR" and argued that they have a significantly negative effect on a firm's economic performance.
Apart from the above mentioned theoretical problems, there are also methodological problems associated with this approach. Even though this approach demonstrates a causal link between the HR policies and business performance, the direction of causation is left obscured. Moreover, the measures of the impact of HR practices on a firm's performance, and the way data should be collected, analyzed and presented remain unclear.
It can be argued that, to have a generalized best-practice effect it is more likely to be in the architecture of a system. In other words, there may be a best HR system architecture, and whatever the bundles of policies implemented in the firm, the individual practices must be aligned with one another and with the HR system in order to have an effect on performance. In this regard, the best practice and contingency hypothesis are not conflicting - they just operate at different levels of HR systems. A case study from Lincoln Electric and Hewlett Packard reflect this interpretation (Milgrom and Roberts, 1995). The study exhibits that both the companies have dramatically different HR practices but arguably similar HR architectures. For example, the design and implementation of their pay and selection systems are quite different but both link pay to desired behavioral and performance outcomes and both effectively select and retain their human resource which fits their cultures.
This leads us to infer that best practice may have one implication for HR managers and another for researchers.
The Best Fit Approach
The Contingent Best-fit school of thought suggests that certain HRM policies and practices work best with particular company strategies (or in some cases specified strategy-structure combinations). Examples are Miles and Snow (1984) and Schuler and Jackson (1987).
Schuler and Jackson identified and explicitly linked a set of twelve HR behavioral characteristics to Porter's generic competitive strategies (Porter, 1980) of cost leadership, differentiation and market focus. Miles and Snow, on the other hand, identified four organizational archetypes, namely, the Defender, the Reactor, the Analyzer and the Prospector and examined the sorts of HRM activities associated with these strategic types. They argued that the adoption of different HRM practices and policies adopted for different organizational types will affect a firm's performance. For example, Defenders are organizations which are successful in their current business and their HR strategies aim to 'make' rather than 'buy' the talent they need, since they can afford it with their deep pockets. Conversely, Prospectors are termed as 'Poachers' and they tend to 'buy in' the personnel they require.
Having said this, we will now have a look at a case study by Yvette Blount et al (2005) which describes how two Australian banks, one large (Lawson Bank), the other small (Australian Union Bank), have linked their e-commerce strategies to their respective business strategies, and how their different HRM practices helped them utilize their e-commerce capabilities to achieve a competitive advantage.
The study reveals that both AUB and Lawson Bank operate in a different but overlapping market. Interestingly, both the banks have gained competitive advantage after successfully implementing e-commerce but both have considerably different HR policies and practices.
On one hand, where AUB follows a traditional "personnel" approach based on employee commitment, values and belonging, Lawson's HRM is closely linked with its business strategies and it has taken a more pro-active approach since e-commerce technologies have been introduced. Also, Lawson follows a more sophisticated recruitment and retention procedure, and a much more formal appraisal procedure linked to employee's high-performance as compared to ad-hoc practices of AUB. Furthermore, Lawson adopts extensive training and development programs (both in-house and externally certified) whereas AUB just concentrates primarily on job-training complemented by some computer-based training.
Thus, above study supports the contingency view which reveals that certain HR practices, when linked with the business strategy and external market factors, deliver high performance in specific organizational contexts.
After these influential models of Miles & Snow and Schuler & Jackson came out, a wide range of studies have revealed similar positive relationships between strategic HR practices and organizational performance. For illustration, MacDuffie (1995) established, with respect to a sample of global auto assembly plants, that "bundles" of HR practices relate to a firm's efficiency and quality. Delery and Doty (1996) found noteworthy relationships between HR practices and accounting profits amongst a sample of banks.
Even though there are several organizational examples exhibiting the strength of these models, their shortcomings cannot be overlooked either. One of the major disadvantages associated with the best-fit approach is that while practices meet strategies, the HR practices are too slow to change with respect to the changing business environment and hence organizations might face a problem of treating employees consistently over time when HR policy changes. (Baron & Kreps 1999; Boxall & Purcell 2003)
Resource Based View
Boxall and Purcell (2006) are probably right to hold that neither the best-fit nor the best-practice approach is correct in entirety. Their solution - which seems sensible in principle - is to think in terms of (a) some underlying generic human resource managerial processes that are universal and which can be applied to any organization regardless of the context; while there is also (b) a 'surface layer' of policies and practices in any organization which are influenced by contingent factors.
Here we will introduce the third theoretical approach focusing on the relationship between SHRM and organizational performance - the Resource Based View (RBV), a view that is implied in the Harvard Business Model (HBM) of HRM given by Beer et al (1984).
Before explaining the approach further, it is vital to understand in brief the primary intention of the model which provides a framework for general managers to understand and apply HRM in their organizations.
The Harvard Business model (HBM) of HRM
Source: Beer et al (1984; p.16 'Map of the HRM territory')
The central issue here is performance - managing human resources to achieve positive HR outcomes in terms of committed workforce, working in harmony with the objectives of the organization and achieving competence and cost-effectiveness. These outcomes in turn lead to positive long-term consequences: firstly organizational effectiveness, but also individual and society's well-being.
The RBV is founded on grounds of the HBM, which emphasizes on policy choice. This implies that the managers of an organization can make choices in HRM and these may be influenced by contingent factors and prior decisions, but are not determined by either. In other words, managers have at least some discretion in their HR policies. The choice made will have outcomes and long-term consequences both of which may feed back into policy choices, and, in the longer term, also into the stakeholder interests and situational factors.
The empirical studies, e.g. those cited by DTI/CIPD, 2005, - certainly imply that the optimum selection of HPWPs for any organization is influenced by, and dependent on, the business strategy, and that both are the consequence of managers' making choices.
As an example, the case study on Hewlett-Packard (HP) (Truss, 2001) can better explain the concept here. Keenoy (1999, p. 5) describes HP as an example of those companies that "became icons of the potential future promised by the discouse(s) of HRMism". What was found in HP was that, although the formal policies revolved around the idea of measuring and rewarding individuals' work performance against targets that were closely related to the company's objectives, informally it was the visibility and networking that counted if people wanted to further their careers. It was found that there was a gap between company rhetoric and employee perceptions. In other words, the study pointed out the difference between the espoused and actual HR policies in use at HP.
A critical view of the studies establishing the HR-Performance causal link
It is important to note that while these studies have been useful for demonstrating the potential value created through HR practices, they have revealed very little regarding the processes through which this value is created (Wright and Gardner, 2003). Some authors have referred to this as the `black box' problem, noting that the conceptual development of the mediating mechanisms through which HRM has an impact on profitability has thus far eluded empirical testing (e.g. Purcell et al, 2003).
In addition, the vast majority of studies examining the relationship between HR practices and firm performance have been entirely cross-sectional in their design. Again, while providing useful information, such designs are somewhat problematic. In essence, cross-sectional designs rule out making any causal inferences regarding the direction of the relationship. So, while we may believe the HR practices are driving firm performance, we cannot preclude that the reverse might actually be the case.
It has been found that, having realized the importance human resources, organizations increasingly focus on aligning their structure and corporate strategy with their HR framework. This has led to a focus on linkage between strategic HRM and business performance.
From the above discussion of theories and organizational examples, we found that the link between SHRM and business performance has mixed evidences, but many studies exhibit a positive correlation between the two. Also, these evidences usually emphasize the importance of HPWPs such as recruitment, employee retention and performance rewards but the substance of these claims and how their results are derived need to be examined.
There are some strengths and weaknesses associated with each approach of SHRM and business performance. Apart from the individual problems associated with each of the approaches (as discussed in previous sections), the common problems across all the models are: a difference in the between policy and practice i.e. intention and implementation, varying impacts on performance due to different approaches to HRM and the cost of HRM practices. The practical implications, associated with establishing a causal link between strategic HRM and organizational performance, are profound and firms need to focus on developing their HR structure in line with the corporate structure. Having said all, paradox and contradiction have always been and are still inevitable features of HRM.