Links between strategic HRM and business performance

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The search for causal links between strategic HRM and business performance has dominated both academic and practitioner debate for over two decades (Purcell & Kinnie 2008: 533). Discuss, with reference to theory and practice.

In the 1990s, research literature in the organisational sciences has been dominated by the question of whether HRM practices make a difference to company performance. There is now a considerable body of work proposing that high quality people management can provide firms with a source of competitive advantage that it is difficult for competitors to imitate. It is the management of human capital, rather than physical capital, that is seen as the most important determinant of company performance. Indeed, some studies in the United States have demonstrated a relationship between HRM and performance (eg Huselid, 1995; MacDuffie, 1995).

However, the research described here is a progression from previous HRM and performance research in three ways.

First, we did not rely on postal questionnaires to gather data on HRM practices, but instead employed face-to-face in-depth interviews with senior management. The validity of the data was further enhanced by the collation of formalised documentation from senior managers, so that responses about the existence of practices relating to, for example, appraisal systems or training and development could be validated. Also, the researchers toured the company site observing practices and procedures in action, and talking to employees about their experiences.

Second, we also assessed other company practices (eg quality emphasis, investment in computerised technology) to investigate their differential impact on company performance when compared to HRM practices.

Third, we know of no other work in the UK that relates HRM practices to company financial performance.

Although, there are differences across commentators as to what constitutes 'good' HRM practices, many writers (eg Bailey, 1993; Guest, 1997; Huselid, 1995) have argued that HRM practices can improve company performance by:

• increasing employee skills and abilities

• promoting positive attitudes and increasing motivation

• providing employees with expanded responsibilities so that they can make full use of their skills and abilities.

The three causal routes from HRM to performance described above provide a basis for determining 'good' or 'high performance' HRM practices. HRM practices can influence employee skills through the use of valid selection methods to hire appropriately skilled employees and through comprehensive training to develop current employees.

Examples of HRM practices that may encourage the development of a committed and motivated workforce include the use of performance-related pay or high levels of basic pay. We might also expect that more positive employee attitudes will result from a policy of harmonisation (reduction of differences in terms and conditions between managers and workers, such as a shift from hourly to salaried

compensation) and from employee involvement (such as through extensive communication to all employees and the use of quality improvement teams).

Finally, firms can make full use of a skilled and motivated workforce by promoting job designs which provide enriched jobs for employees in terms of variety, skill flexibility and increased autonomy, whereby employees have responsibility for such activities as problem solving, maintenance, scheduling and quality assurance. The use of work teams may also positively affect productivity.

The HRM practices examined in this study are shown in Table 1 and broadly reflect the high performance practices discussed in the research literature. The practices were assessed through in-depth interviews with senior management using a semistructured interview schedule, supported by relevant documentation and tours of the workplace.

(Table 1: Pg 25)

Many writers (eg, Huselid, 1995; MacDuffie, 1995) have argued that it makes sense to assess systems of HRM practices rather than focus on individual practices. The logic behind this proposition is that firm performance will be enhanced by systems of practices that support each other and that have a mutually reinforcing effect on employee contributions to company performance. For example, the effectiveness of a comprehensive training programme may be increased when combined with appraisals to assess employee performance and target development needs. Using the statistical technique of factor analysis, we tested whether any of the HRM practices were interrelated to the extent that they appear to be measuring the same underlying dimension and therefore could be grouped together. The analysis revealed that the following practices converged to reveal underlying dimensions:

1 Selection, induction, training and use of appraisals represented one factor which we termed 'acquisition and development of employee skills'.

2 Skill flexibility, job responsibility, job variety and use of formal teams were also interrelated and we termed this factor 'job design'.

In subsequent regression analyses we therefore used the composite measures of job design and acquisition and development of employee skills, rather than the individual practices comprising these dimensions.

Figure 5 shows the results of the regression analysis relating HRM practices to change in profitability and productivity in the companies in the study.

(Figure 5: Pg 26)

The results reveal that HRM practices taken together accounted for 19 per cent of the variation between companies in change in profitability (ie, subsequent profitability controlling for prior profitability). This is statistically significant.

• When we examine change in productivity, HRM practices together account for 18 per cent of the variation between companies in the change in productivity over the time period of our study.

This is a clear demonstration of the link between the management of people and the performance of companies.

Figures 6 and 7 opposite show which particular HRM factors predict change in company profitability and productivity.

• The results reveal that acquisition and development of skills (selection, induction, training and appraisal) and job design (job variety and responsibility, skill flexibility and teamworking) are significant predictors of both change in profitability and change in productivity.

(Figure 6 & 7: Pg 28)