Impact of Strategic Human Resource Management on the Performance of Firms:

A Study of Service Sector Firms in India

 

Synopsis

 

Name of student                                                          :           Ajit Kumar Nigam

Roll Number                                                                :           01614101

Programme                                                                  :           PhD (Psychology)

Department                                                                 :           HSS, IIT Guwahati

Name of Supervisor                                                     :           Dr. Nachiketa Tripathi

Month and Year of thesis submission                          :           December, 2008

In the present study an attempt has been made to find out the impact of Strategic Human Resource Management on the performance of firms. The literature review reported in the Chapter 1, is briefly given below:

 

Models of Human Resource Management:

 

            Various models of Human Resource Management are mentioned here.

            (i)         The System Model conceptualises HRM as a system where knowledge, skills and attitudes and their deployment are the inputs while productivity, satisfaction, turnover, etc. are the outputs and the human resource behaviour is seen as throughput. Firm’s strategy influences all the three stages of the system. This theory assigns two roles to HRM viz. competence management and behaviour management (Wright & McMahan, 1992).

            (ii)        The work of Arthur (1992, 1994) identifies two HR systems: control vs. commitment. The origin of this framework flows from McGregor’s Theory X and Theory Y models of management. Two approaches for rationalizing these two systems are behaviour models and agency theory.

            (iii)       Agency model has been applied to HRM. Agency relationship occurs whenever one partner in a transaction (the principal) delegate’s authority to another (agent) and the welfare of the principal is affected by the choices of the agent (Arrow, 1985; Berle & Means, 1932). The firm is a collection of ‘free agents’ who cooperate towards achieving organizational goals. The Agency theory explains ‘how and when’ these agents can be expected to cooperate.

            (iii)       Descriptive theories of HRM: In this group, experts from Harvard Business School (Huselid, 1993; Becker & Huselid, 1998) and Kochan, Katz and McKersie (1986) of MIT attempted to inter-relate broad areas of HRM and the broad outcomes and followed a systems approach. These models provide a broad classification of the content of HRM and of a range of outcomes; however they fail to provide any test of the relationship between HRM and performance.

            (iv)       Normative theories of HRM:  These theories give prescription in the form of ‘Best Practices’. Pfeffer (1994, 1995) and Guest (1987) listed practices that will yield higher performance. The central assumption in these theories is that if an integrated set of HRM practices is applied for achieving the normative goals of high commitment with high quality and flexibility, then higher worker performance will result.

(vi)             Strategic theories of HRM:  These theories are primarily concerned with the relationship between a range of possible external contingencies and HRM policy and practices. Hendry & Pettigrew (1990) identified and classified key environmental influences on HRM. They mapped the context (the external environment as well as within the organisation) and explored how HRM adapted to changes in context. The assumption was that good fit would lead to good performance.

 

Emergence of Strategic Human Resource Management (SHRM):

 

            Strategic Human Resource Management is a new area which finds its place from last two decades.

            Strategic HRM is about the relationship between HRM and strategic management in the organisation. Strategic Human Resource Management (SHRM) is the overall direction the organisation wishes to pursue in achieving its objectives through people. SHRM thus covers broad organisational concerns relating to structure, culture, management of change, organisational effectiveness, performance, competence, matching resources to future business requirements and employee development. The technical HRM or the traditional HRM concerns with the regulatory role and functions while the Strategic HRM involves designing and implementing set of internally consistent policies and practices which ensure that firm’s human capital contributes to the achievements of its business objectives (Baird & Meshoulam, 1988; Jackson & Schuler, 1995).

           

The Strategic Human Resource Management approach draws on three dominant modes of theorising.

 

(i)        Universalistic perspective:

            A “best practice” approach to SHRM researchers in this group identified practices, which are universally valid and yield results and improve performance (Delaney, Lewin & Inchniowski, 1989; Huselid, 1993, 1995; Osterman, 1994; Pfeffer, 1994; Terpstra & Rozell, 1993).

(ii)       Contingency perspective:

            Contingency approach believes that HR policies must be consistent with other aspects of the organisation. HR practices if consistent with different strategic positions such practices will improve firm performance (Balkin & Gomez-Mejia, 1987; Begin, 1993; Gomez-Mejia & Balkin, 1992; Schuler & Jackson, 1987).

(iii)      Configurational perspective:

            This approach argued that Strategic HRM (SHRM) is concerned with the pattern of planned human resource deployment and activities intended to enable an organisation to achieve its goals. In order to be effective HR system, it must be both horizontally and vertically fit, where horizontal fit refers to internal consistency of the organisational HR policies and practices, and vertical fit refers to the congruence of HR system with other organisational characteristics viz. firm strategy, structure, culture etc.

 

Service Sector and HRM: Human Resource Management attains special importance in Service sector firms. In service sector industries excessive behaviour controls may become irrelevant or even detrimental to work performance. The type of activity requires the application of knowledge, intellectual skills, and strong internal motivation. It also renders many aspects of traditional models (command and control) weak or unable to explain this phenomenon. HRM activities are directly related to the most valuable assets of the organization and hence directly related to the ability of the organization to successfully achieve its goals (Harrigan & Dalmia, 1991; Stewart, 1991). The knowledge and the knowledge worker are not mere supporting units on the production line rather they are the ‘production line’. (Becker & Huselid, 1998; Guest, 1997; Warrick, 1990).

 

Some important studies: HR practices have significant impact on organisationally relevant performance measures (Huselid, 1995; Arther, 1994). The relationship between some HR practices and organisational performance are contingent on firm strategy (Delery & Doty, 1996). Those firms which used 7 best practices found 1% to 3% of variations in financial performance (Huselid, 1995). HRM will face ceiling effect in building competitive advantage, which comes from Strategic HRM and not from Technical HRM. The Technical HRM gives limited results in terms of better performance, whereas there is much more meaningful relationship between SHRM and the firms’ performance (Huselid, Jackson & Schuler, 1997). The research of Huselid (1995) used concept of high-performance work systems linked to organizational performance. Human Resource managers must therefore align some key organisational practices with business strategy for better performance (Jackson & Schuler, 1995).

 

 Researches in Indian context:  There is not much work in Indian context in this area. Some researchers have recently focused on Indian context and tried to see applicability of emerging theories in India (Balasubramanian, 1995; Budhwar & Sparrow, 1997; Sparrow & Budhwar, 1997; Ramaswamy & Schiphorst, 2000; Budhwar & Khatri, 2001). One of the conclusions drawn by the researchers is the context specific nature of HRM. It also showed that a shift is taking place in the pattern of HRM practices in Indian organisations from traditional administrative type to a more strategic and proactive type.

 

Other relevant variables:

 

             Study of Strategic HRM has to take in to account various other internal and external variables. Based on the literature review, following variables emerged as most relevant to this study:

 

Business Environment: A firm’s business environment is aggregate of all those factors which have impact or potential to have impact on its functioning (Thomson, 1967; Emery & Trist, 1965). The environment has been conceptualised mainly as the suppliers of resources, information, and market. Dess and Beard (1984) reduced these environmental factors into three categories munificence, dynamism and complexity.

 

Business Strategy:    Business strategy is the overall direction which firm adopts to achieve its objectives. “Business typologies” or the dimensional approach are the appropriate measures for business strategy where the focus is to understand the relationship with human resource management practices (Hambrick, 1980; Miller & Friesen, 1984; Venkatraman, 1989; Rumelt, 1974; Hofer & Schndel, 1978; Miles & Snow, 1978; Porter, 1980).

 

Organizational Structure: Organisational structure is created to coordinate work, distribute roles and design reporting systems. Formal rules and procedures lead to increased efficiency, low conflict and hence lower administrative cost (Rukert, Walker & Roerring, 1985). Burn and Stalker (1961) found that firms with highly formal procedure are mechanistic and those with lesser formal procedures are “organic”. Organic firm, less formalization helps developing rapid awareness and   response to competitive and market change and more effective information sharing with reduced time-lag between decision making and action (Miles & Snow, 1984).

 

Organisational Culture: Organisational culture is sum total of attitudes, beliefs, norms, assumptions etc. which are widely shared by the members of the organisation. The various theories basically fall in two camps or schools. First those who treat organisational culture as a variable, it is something that an organisation has (Schwartz & Davis, 1981; Deal & Kennedy, 1982; Peters & Waterman, 1982). Second view is that ‘Culture is something an organisation is’ (Schein, 1984; Morgan, 1980). Recent literature in organisational culture suggests strong interconnection between culture and organisational effectiveness, between culture and individual commitment, between culture and the preservation of institutional character and transmission of its norms and values (Senge, 1990).

 

Rationale for the present research:

 

            Firstly, there are gaps in this area of studies so far as taking other attributes of organisation, while linking HR practices with organisational performance is studied.  Secondly, there are very few studies that have tested emerging theories and approaches in Indian context as most of the studies are in western organisations. Thirdly, the methodologies adopted in many such studies are focused on HR practices as apparent in organisation rather then capturing the deep-rooted HR Strategy and its linkage with other dependent variables. Finally studies are primarily in manufacturing sector and not much work is available in wide spectrum of service sector industry where human resources is definitely more critical to the performance compared to manufacturing sector.  

 

            The main domain of study is therefore the Strategic Human Resource Management, evolving theories and its impact on performance of firms. Within this domain the other sub-domains studied are in the context of Business Environment, Business Strategy, Organisational Culture, and Structure of Organisation.

 

Research Questions:

  1. How Strategic HRM affects performance of firms in service sector?
  2. Whether extent of impact of Strategic HRM varies from sector to sector within service sector? Whether influence of strategic HRM is dependent upon the ownership? Is there any difference between Private sector and Public sector firms so far as impact of Strategic HRM on Performance is concerned?
  3. What is the relative impact of Strategic HRM vis a vis other critical internal and external variables like ‘Business Environment’, ‘Business Strategy’, ‘Organisational Structure’ and ‘Organisational Culture’ on firms’ Performance? 
  4. Which of the different streams of theory of Strategic HRM viz. ‘Universalistic’, ‘Contingency’ and ‘Congruence ’ are supported in the Indian context?
  5. Whether impact of Strategic HRM is dependent upon the type of Business Strategy and the intensity of focus of Business Strategy adopted by the firms?

 

Variables:

Independent Variables: Strategic Human Resource Management, Business Environment, Business Strategy, Organisational Culture and Organisational Structure

Dependent Variable: Performance (Performance is evaluated through Organisational Effectiveness and Preparedness for Change)

 

Hypotheses:

H1       Strategic HRM dimensions will show high positive relationship with effectiveness of the organisations.

H2       The best practices of HRM systems will have positive impact in all the industry segments and Public and Private sector firms.

H3       The relationship of SHRM and the performance will vary amongst the sub-sectors both in terms of the extent of impact and also in terms of the composition of factors of SHRM, which influence performance. It will be contingent upon the Business Strategy.

H4       The horizontal and vertical fit shall lead to better impact on performance. There will be different configurations, which will impact effectiveness in different Business Strategy scenarios.      

 

Framework of the study:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data collection and Methodology:

 

            Data was collected through two sets of questionnaires. Set one consisted of the instruments for collecting responses on Business Environment, Business Strategy, Organisational Structure and Preparedness to change. Response on this set was collected based on the Key Informants’ approach. Responses were obtained from top management and those who were most informed regarding these aspects. Set two consisted of instruments for collecting data for Organisational Culture, HR system orientation, HR capability and Effectiveness.

            Data was collected from 25 firms belonging to three segments of service sector viz. Transportation (11 firms), Finance (5 firms) and IT enabled (9 firms). These firms were also both from Public sector (19 firms) and Private sector (6 firms). In all 98 valid responses were obtained on set one and 750 valid responses on set two.  

 

Measures:

 

            Business Environment was measured through instrument designed by Tan and Litschert (1994). Following 6 dimensions were measured - Impact, Munificence, Predictability, Extent of change, Number of factors and Difference. The reliability coefficients for the above factors ranged from 0.70 to 0.84.

            Business Strategy was measured through measures as adopted by Venkatraman (1989). However the measure used in this study had modifications as suggested by Tan and Litschert (1994). Data was collected through a 15 items instrument. The factor analysis of this measure (N=98) resulted in 3 factors Futurity, Analysis and Proactive. The reliability coefficients for the above factors ranged between 0.78 and 0.83.

            Organisational Structure was measured by using 9 items instrument as designed by Jennings and Seaman (1994). The factor analysis of this measure (N=98) resulted in 3 factors Formalisation, Complexity, and Stratification. The reliability coefficients for the above factors ranged between 0.50 and 0.65.

            Preparedness for Change was measured through an instrument with 10 items which was developed for measuring Preparedness for Change. Factor analysis of this measure (N=98) resulted in 2 factors viz.  Radar Capability and Skill Upgradation with reliability coefficient (Cronbach Alpha) as 0.86 and 0.59 respectively.

            Organisational Culture was measured as per the dimensions identified by Hofstede (2001). In the present study Hofstede’s questionnaire which was used by him for studying national cultural differences has been used. The cultural dimensions which Hofstede used were Uncertainty avoidance (UAI), Power distance (PDI), Individualism vs. Collectivism (IDV), Masculinity vs. Femininity (MAS) and Long term orientation (LTO). Calculation of the dimensions of Culture were carried out using the formulae as used by Hofstede

            Strategic HRM was measured by using measurement used by Delery and Doty (1996), to capture HR system orientation. Strategic HRM is also measured in the form of HR capability of the organisation. For this purpose the questionnaire used by Huselid, Jackson and Schuler (1997) was administered.

            From the factor analysis of this measure (N=750), 4 factors emerged viz. Participative Decision Making, Internal Orientation, Job Security and Objective Performance Appraisal. The alpha coefficient for these factors ranged between 0.61 and 0.80.

            Four dimensions emerged from the factor analysis (N=750) of the questionnaire on HR capabilities viz. Strategic HRM, Technical HRM, Technical HR Capability and Strategic HR capability. The Alpha coefficient of these dimensions ranged between 0.80 and 0.91.

            Organisational Effectiveness was measured through the questionnaire developed by Mott (1972), which consists of 8 items and comprise of dimensions like quality, quantity, efficiency, flexibility and adaptability.

 

Analysis:

 

            Following analyses were conducted: Analyses were carried out at the Intra-Industry wise, Inter-Industry wise (Transport, Finance and IT enabled sectors), Ownership (public and private) and Overall level.

            (i)         ANOVA was carried out for seeing the differences, at all the levels mentioned above.

            (ii)        Correlation analysis was used for establishing the relationship between different variables at all the levels as mentioned above.

            (iii)       Multiple Regression analysis was used for establishing relative impact on the dependent variables.

            (iv)       Multiple Regressions for the variables of set two was also conducted by dividing firms into High Business Strategy and Low Business Strategy based on composite score on the basis of set one.

            (iii)       Multiple Regression analysis for the variables of set two by dividing firms into separate groups of High score and low score on all the three dimensions of the Business strategy in set one.

 

Findings and contributions:

 

            Following major findings emerged from the results of the above-mentioned analysis of data.

 

All the factors of the Strategic HRM showed high correlation with the dimensions of effectiveness. This supports hypothesis H 1.

 

Emerging theories of Strategic Human Resource Management have shown three broad approaches viz. Universalistic, Contingency and Configurational approach. Recent studies in this area of work have substantiated universalistic approach. As already reported earlier most of these studies are in the western context and in manufacturing sectors. In the present study the results do not substantiate this approach. The sub-systems of HRM which have been found to universally applicable in earlier studies have not been found universally applicable in the three industries or in Public and Private sector firms in the present study. Thus the hypothesis H2 is not supported by this study.

 

            The contingency theory of Strategic HRM has however been found to be substantiated in the present study. In other words the impact of Strategic HRM is contingent upon the Business Strategy. The alignment of Strategic HRM and the Business strategy lead to higher effectiveness of firms. The impact of Strategic HRM was also found to be contingent upon the intensity of Business Strategy. For high score Business strategy firms, having highly focussed business strategy Participative Decision Making is more significant while in case of the low score Business strategy firms, where intensity of business strategy or the focus business strategy is low, Strategic HRM is strongest predictor. Similarly for different Business strategy type group of firms different predictors emerged as the strongest predictors. For Futurity and Proactive firms Technical HR capability and for Analysis firms Participative decision making are the strongest predictor. These results prove that contingency theory is established in the present study. Thus the hypothesis H3 is supported by this study.   

 

            The configurational approach of Strategic HRM theory posits that configuration or the system of internally consistent and externally aligned HRM systems or vertically as well as horizontally fit HRM systems will lead to higher impact on the performance of firms. In the present study also it is established that the impact of Strategic HRM. For different Business strategy group of firms different configuration of Strategic HRM and capability emerged as strongest predictor for the effectiveness. These configurations are also contingent upon the business strategy of firms. These configurations have been discussed in detail in Chapter 3 which supports configurational approach of the theory. This supports the hypothesis H4.

 

            At methodological level this study has contributed by developing an instrument for measuring Preparedness for Change for the organisations. This instrument has 10 items. Factor analysis of this measure (N=98) resulted in 2 factors viz. (1) Radar Capability and (2) Skill Upgradation with Reliability Coefficient (Cronbach alpha) for these factors as 0.86 and 0.59 respectively.

 

            In addition to the above, other findings, which may have very high level of practical relevance for industry as well as contribution to the academic field, are listed below:

1.         Small and Medium Enterprises (SMEs) and start-up firms may draw benefit by adopting relevant system of HRM to get high performance and competitiveness. As the findings revealed that at low strategy level there is high impact of SHRM. Generally such firms ignore Strategic HRM in initial stages of their growth and are led by Technology like in IT sector.

2.         Objective Performance Appraisal system has negative impact in Futurity type of organisations on effectiveness.  It has great implication for Futurity firms. Objective Performance of Appraisal may assess based on past performance whereas in Futurity type of firms Potential evaluation may be more relevant.

3.         The Organisational structure’s dimensions have negative impact in most of the situations wherever they are significant. Organisational structure need to be made less complex, stratified and simpler to channelise potential of Human Resources and to make processes simpler for enhancing effectiveness.

4.         The job security dimensions of HR system orientation have negative relationship in all situations wherever it is significant.

5.         For High score Business strategy firms impact of Strategic HRM is low while for Low score Business strategy firms impact of Strategic HRM is high. High Business Strategy firms need participative decision making to get the strategy implemented.

6.         The Strategic HRM policies need to be dynamic and contingent upon the business strategy to attain maximum impact on the effectiveness and competitiveness.  

7.         The SHRM configurations emerging from this study may make organisations in such sectors competitive and can apply Strategic HRM in most cost effective manner.

 

Direction for Future Research:

 

            This study has only set direction to test emerging theories in different countries and sectors. The future research may focus on the configurational systems of Strategic HRM which are relevant to other segments of industry also focus on the impact of Strategic HRM on performance in other countries having different cultures and to further test the universalistic approach Strategic HRM theories. The emerging implications for industry need to be tested further.