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Business Strategy, Human Resource Management,

  Labour Market Flexibility, and Competitive Advantage

              By Jo...
management’ ‘(HCM)’ (Wood, 1999; Wood and Albanese, 1995; Wood and de Menezes, 1998)

or ‘high-commitment practices’ (Huse...
The structure of the paper is as follows. The following section briefly surveys the literature;

we then outline the hypot...
Empirically, there has been little evidence that the impact of HRM is contingent upon

the approach taken to business stra...
effective. Focussing his analysis on one industry – UK hotels – Hoque finds strong evidence

that HRM is universally relev...
labour market flexibility (proxied by employment status, contract type, and lack of union

coverage) found that workers:

...
We surveyed a stratified sample of publicly quoted UK manufacturing and service sector firms

with more than 50 employees....
the sample were large and had more than one establishment/site, with activities often varying

significantly across these ...
manufacturing and twenty eight in services) yielded even higher correlation coefficients

(0.94 (p < .001); 0.96 (p < .001...
499 employees; and 500 or more employees (the omitted category is establishments with

    less than 49 employees);

•   t...
HYPOTHESES TESTED

Testing the Impact of External Fit

As suggested by Schuler and Jackson (1987) and Hoque (1999), HRM sh...
1. ‘low-HRM cost reducer’, using 10 or fewer HR practices: 28 establishments fall into

this category;

   2. ‘medium-HRM ...
12. ‘high-HRM other’, using 16 or more HR practices: 12 establishments fall into this

category.




      Hypothesis 2: T...
If a senior HR representative takes part in the company’s overall strategic decision

making and if the respondent reporte...
between the HRM measure and performance measures are positive, none of the relationships are

significant. It is likely th...
necessarily universally relevant, and that there is sufficient diversity within product markets for

alternative approache...
positive correlations between strategic HRM and all of the performance measures.

Interestingly, however, where non-strate...
If a ‘high road’ strategy is consciously chosen, then the costs of investing in HR practices can

be expected to be recoup...
Table 1. Labour Market Flexibility Variables




External Employment Flexibility Variables.                          Mean ...
Table 2. HRM Practices used in the Analysis
HRM Practice                                                                  ...
Table 3. The Relationship between HRM Practices, Labour Market
Flexibility, and Organizational Performance
Sales Growth
  ...
Table 4. HRM, Strategy, Flexibility, and Performance Outcomes


                                 Sales Growth       Labour...
Table 5. Internal Fit, Flexibility, and Performance Outcomes


                                       Sales          Labou...
Appendix: Sample Details

                                          Sample Establishments
                                ...
References
Appelbaum, E., Bailey, T., Berg, P. and Kalleberg, A.L. (2000). Manufacturing Advantage:

   Why High-Performan...
Huselid, M. and Becker, B. (1996). ‘Methodological Issues in Cross-Sectional and Panel

  Estimates of the Human Resource-...
Michie, J. and Sheehan-Quinn, M. (2001). ‘Labour Market Flexibility, Human Resource

  Management and Corporate Performanc...
Wood, S. and de Menezes, L. (1998). ‘High Commitment Management in the UK: Evidence

  from the Workplace Industrial Relat...
Endnotes




           29
1
                    Hoque (1999) closely follows Schuler and Jackson’s (1987) strategy typologies.

2
                  ...
8. If in doubt of a term during the interview, the individual was asked to refer to this glossary.

7
      For 73 compani...
simply involve product differentiation (minor design or presentation changes which leave the

    product technically unch...
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  1. 1. Business Strategy, Human Resource Management, Labour Market Flexibility, and Competitive Advantage By Jonathan Michie, Birkbeck, University of London, and Maura Sheehan, Graduate School of Management, University of Dallas* Address for correspondence Professor Jonathan Michie School of Management and Organizational Psychology Birkbeck, Malet Street, London WC1E 7HX j.michie@bbk.ac.uk Tel: +44 (0)20 7631 6761 (direct + voice mail), +44 (0)20 7631 6836/6767/6772 (office) Mobile: +44 (0)7889 274951 (mobile) Fax: + 44 (0)20 7631 6769 (work), +44 (0)1630 685154 (home) Keywords: strategic human resource management, competitiveness, flexibility. Abstract We examine HRM and corporate performance in UK companies. Using original data collected from manufacturing and service sector companies, we find that the relationship between HRM and performance is dependent upon business strategy; and second, that companies pursuing an HRM approach coupled with a quality-enhancer or innovation focus within their business strategy perform best. We also find that HRM is more likely to contribute to competitive success when introduced as an integrated package of practices. * This work was funded by The Leverhulme Trust (grant F/112/AL) and the University of London Central Research Fund and the University of Dallas (Provost’s summer stipend award) to whom we are grateful . We are indebted to Dr Sharon Milner and Elaine McDonald for research assistance. We have benefited from discussing these issues with a number of colleagues, including Professor David Guest, Dr Neil Conway, Dr Linda Trenberth and Professor Paul Teague. A number of colleagues were generous in supplying copies of their own questionnaires and details of their results, in particular Dr Peter Berg and Dr Eileen Appelbaum, Dr Sandra Black and Professor Lisa Lynch, Professor Ichniowski, Professor Steve Nickell, and Professor Paul Osterman. Patrick Burns, Director of Advocacy for The Work Foundation provided invaluable advice on the use of HRM practices in UK firms. INTRODUCTION A consensus has emerged among scholars and practitioners alike that there is a positive relationship between the use of, on the one hand, ‘high commitment [Human Resource] 1
  2. 2. management’ ‘(HCM)’ (Wood, 1999; Wood and Albanese, 1995; Wood and de Menezes, 1998) or ‘high-commitment practices’ (Huselid, 1995; Huselid and Becker, 1996) and, on the other hand, corporate performance and organisational outcomes (see Appelbaum, et al., 2000 and Osterman, 1999 for discussions of high-performance work organizations). Considerable debate remains, however, over the nature and causes of these outcomes. It is generally agreed that a better understanding of the interaction between business strategy and HRM will be key to explaining these empirical outcomes. In particular, it is argued that HR practices that are consistent with or support organizational strategy are more effective than those that are not (Miles and Snow, 1984; Schuler and Jackson, 1987; Truss and Gratton, 1994). The literature, however, on the link between strategy and HR practices, while widely developed theoretically, remains underdeveloped empirically. Labour market deregulation and flexibility are also regarded as key determinants of national competitiveness and successful corporate performance. A growing body of research has examined the relationships between firms’ use of flexible work practices and human resource systems, on the one hand, and corporate performance on the other hand (Michie and Sheehan- Quinn, 2001; Arulampalam and Booth, 1998; Kleinknecht, 1998). This area, however, also remains underdeveloped both theoretically and empirically. This paper contributes to these gaps in the human resource literature by examining (1) the link between strategy and HR practices; (2) the link between strategy and labour market flexibility and (3) the moderating effect of strategy on the link between HR practices, the use of flexible labour and corporate performance. 2
  3. 3. The structure of the paper is as follows. The following section briefly surveys the literature; we then outline the hypotheses to be tested; we describe our data; we report the method of analysis and variables used; and finally we present our results and conclude. PREVIOUS RESEARCH Links between Strategy and HR Management Models of situational contingency or ‘micro’ models of HRM and strategy suggest that the appropriateness, or effectiveness, of HRM will vary depending on organizational lifecycle or the product market within which the organization is operating (Kochan and Barocci, 1985; Miles and Snow, 1984; Schuler and Jackson, 1987; Tichey et al., 1982). Schuler and Jackson (1987) and Schuler (1989) provide a detailed treatment of three competitive strategies (innovation, quality-enhancement and cost-reduction) and the associated behaviours of employees and HR practices that are considered to be instrumental in the implementation of the strategies. The authors show that HRM will prove effective only where the firm emphasizes the importance of either quality enhancement or innovation within its business strategy. In organizations perusing a cost based strategy, the logical approach to HR strategy would be to emphasize numerical flexibility and wage cost minimization. And as noted by Hoque, “In such a situation, the values and goals imbued within HRM would be inconsistent with the organization’s primary cost reduction goals” (1999: 421). Consistent with other authors (Becker and Gerhart, 1996; Khatri, 2000; MacDuffie, 1995; Hoque, 1999; Huselid, 1995) we use the term external fit to refer to the ‘organizational logic’ argument that HR strategy should be combined with business strategy, such that there should be a consistency between the values and aims within each. 3
  4. 4. Empirically, there has been little evidence that the impact of HRM is contingent upon the approach taken to business strategy (Huselid, 1995; Becker and Gerhart, 1996). Two recent studies, however, find support for the contingency hypothesis. In his study of the UK hotel industry Hoque finds a relationship between HRM and performance only among hotels emphasizing quality enhancement and among hotels in the ‘other category’ and that HRM is ineffective where strategy is characterized by cost control.1 He concludes that the analysis, “… provides support for the contingency hypothesis that the effectiveness of HRM depends upon its fit with strategy” (1999: 437). Khatri finds evidence of a strong link between the impact of overall strategy on HR practices and of the moderating influence of overall strategy on the relationship between HR practices and performance.2 The author emphasizes that, “The role of strategy as a contingency factor is strengthened even more by the evidence that HR practices unmatched with the appropriate organizational strategy could have a negative influence on performance… In sum, we need to consider the overall organizational strategy before we implement HR practices” (2000: 358). Universal Relevancy of HRM In contrast to the contingency approach outlined above which suggests that the effectiveness of HRM is dependent upon its coupling with a quality-enhancer or innovator approach to strategy, the universal relevance of HRM suggests that the coupling of the ‘HRM quality- enhancer’ and the ‘HRM innovator’ approaches should have the most positive correlations with performance.3 As suggested by Guest (1987), Hoque (1999) and Walton (1985), the universal relevance of HRM will depend to a large part upon the nature of the industry product market. In very diverse product markets, where for example some firms will need to emphasize product quality or customer satisfaction and other firms may need to focus on cost control or price competition, there is no a priori reason why HRM should always prove 4
  5. 5. effective. Focussing his analysis on one industry – UK hotels – Hoque finds strong evidence that HRM is universally relevant; among the hotels with an identifiable strategy, those adopting an approach of service quality coupled with a high number of HRM practices performed best.4 Internal Fit Internal fit refers to the synergistic benefits resulting from the introduction of HRM as an institutionally supported package of practices that are internally consistent and mutually reinforce one another. To date there are varying degrees of empirical support for a relationship between internal fit and performance (see e.g., Guest and Hoque, 1994; Huselid, 1995; Ichniowski et al., 1994; MacDuffie, 1995; Hoque, 1999; and Khatri, 2000). Links between Labour Market Flexibility and Corporate Performance Labour market deregulation has been regarded as playing a key role in the drive for a competitive, flexible economy. The use of flexible work practices5 can result in savings on wage costs (see Michie and Sheehan-Quinn, 2001 for further discussion). In addition, as argued by Kleinknecht et al. ‘the decision to hire new workers is taken more easily if workers can be fired more flexibly under adverse circumstances. In this way, part of the entrepreneurial risk is shifted to employees, making job creation easier’ (1997: 2). On the other hand it has been suggested that the sort of labour market deregulation pursued in Britain over the 1980s and 1990s may risk being detrimental to long-run economic performance by leading to a neglect or undervaluing of assets and processes such as training and innovative activity, which are vital to long-term development and economic progress (Michie and Wilkinson, 1995; Kitson and Michie, 1996). Research using the British Household Panel Survey 1991-95 that investigated the link between skills acquisition and 5
  6. 6. labour market flexibility (proxied by employment status, contract type, and lack of union coverage) found that workers: ...on short-term employment contracts, who are working part-time, or are not covered by a union collective agreement, are significantly less likely to be involved in any work-related training to improve or increase their skills. These findings suggest that there is a trade-off between expanding the more marginal forms of employment, and expanding the proportion of the workforce getting work-related training. (Arulampalam and Booth, 1998, p. 521) In addition, if the time horizons of firms become shortened, the pursuit of what economists would characterise as 'efficiency gains' may come to dominate other sorts of gains to be had from innovation and technological progress. This becomes problematic if the pursuit of short-term efficiency gains reduces the potential of the system for economic progress (Kleinknecht, 1998; Michie and Prendergast, 1998). The analysis presented below is unique in that it not only examines the links between the use of flexible labour and corporate performance but also examines its link to the strategy pursued by the firm. THE DATA 6
  7. 7. We surveyed a stratified sample of publicly quoted UK manufacturing and service sector firms with more than 50 employees. Two dimensions were used to stratify the sample: organisation size and the primary sector of business activity. Five categories of organisation size were used – those employing 50-99, 100-499, 500–999, 1000–9999, and 10,000 or more employees. Thirteen sectors were identified (9 in manufacturing and 4 in services), using the 1992 UK Standard Industrial Classification (SIC) codes. The EXTEL database was used to identify all organisations with the above characteristics, which totalled 1280.6 Holding companies were removed which reduced the ‘population’ to around 1000. The aim was to obtain a total quota of 33% of the ‘population’ and to achieve representation amongst the stratified sample cells. A market research company was commissioned to conduct a telephone survey of the selected companies. The following protocol was followed: • The name and fax number of the senior manager with HRM responsibilities was confirmed by telephone. • This person was faxed a one page briefing on the objectives of the survey and the expected length of the interview (around 30 minutes). Confidentiality of survey participants was emphasised. • The day after faxing, the person was contacted to see if they would agree to the telephone interview and if agreeable, a date and time for the interview was set. These individuals were then faxed a ‘glossary’ of HR terminology, with alternative or variant names of many of the practices, with examples relevant to both the manufacturing and service sectors. Interviews were conducted by telephone with the Director of Human Resources/Personnel/Employee Relations of each company in 78% of cases. Where this person was not available, an alternative senior person was interviewed. 7 Most of the organisations in 7
  8. 8. the sample were large and had more than one establishment/site, with activities often varying significantly across these sites. The interviewee was therefore asked to select the organisation’s most typical establishment/site – that is, the site that most typified the organisation’s activities. In total 934 individuals were asked to complete the survey. Of these, 559 declined, 19 agreed but subsequently failed to complete the interview, and 369 interviews were completed successfully. As a result of missing data, 365 of the total number of responses were usable - a response rate of 39%. Sixty-six percent (242) of the sample is manufacturing establishments while 34% (125) is service sector establishments. METHODS OF ANALYSIS AND VARIABLES ANALYSED Measurement of Performance In contrast to many other studies, we use objective, rather than subjective measures of performance. In addition, the data used in this analysis were collected at the establishment, rather than at the company level. The performance data are averaged over a three year period, which helps to reduce problems of simultaneity of one period explanatory variable measures. We use three measures of performance: percentage change in total sales (sales growth), percentage change in labour productivity, and percentage change in pre-tax profitability. Logged values of each of the variables are used in the estimations. To examine the representativeness of the establishment level data, confirmatory performance measures at the organizational level were obtained from the EXTEL database for the sample companies. For percentage change in total sales, the correlation between the two sources was 0.77 (p < .05); for percentage change in labour productivity, the correlation was 0.84 (p < .01); and for percentage change in pre-tax profitability, the correlation was 0.68 (p < .05). A duplication of the analysis for a subset of 76 single site organizations (48 in 8
  9. 9. manufacturing and twenty eight in services) yielded even higher correlation coefficients (0.94 (p < .001); 0.96 (p < .001) and 0.89 (p < .01), respectively). These results indicate that the data obtained at the establishment levels closely reflects performance at the organizational level, which is important, given our analysis of strategy which, of course, is normally formulated at the organizational, or corporate headquarters level. Control Variables (a) Business strategy. We build on Schuler and Jackson’s (1987) business strategy typologies. The classifications are based on both subjective responses to questions on strategy and objective data. Companies were classified as having a cost based strategy if they reported that their strategy focussed on cost minimization/reduction or price competition/reduction and if they had a lower than average remuneration rate or if the proportion of their wage bill paid to permanent, full-time employees had declined over the past five years (16.8% of establishments). Firms were classified as having a quality based strategy if they reported that their strategy focussed on quality enhancement and if they had achieved a recognized quality award (48.2% of establishments). Firms were classified as having an innovator based strategy if they reported being innovative as the primary focus of their strategy and if they had introduced either a product or process innovation over the past three years (17.4% of establishments). Seventeen percent of establishments did not meet any of these category specification and fall into the ‘other’ category. (b) Background variables. The following standard control variables were included in the analysis: • establishment size (see Appendix for details on the distribution), with dummies for establishments with up to 49 employees; 50–99 employees; 100–199 employees; 200– 9
  10. 10. 499 employees; and 500 or more employees (the omitted category is establishments with less than 49 employees); • the age of the establishment (Age); • whether the establishment is UK or foreign owned (dForeign); • two sector dummies: manufacturing (dManuf) and services (dServ) (see Appendix); and • trade union recognition (20.1% of establishments). (c) Labour market flexibility. In their analysis of the effect of labour market flexibility on firm growth and innovation, Kleinknecht et al. (1997) categorise flexibility into two categories: internal and external (these definitions are similar to Beatson’s (1995) definitions of flexibility at the intensive and extensive margins, see above). The questions used in our survey on labour market flexibility adopt a similar approach, as indicated in Table 1. However, the variables associated with internal flexibility are grouped with HR practices. To make the analysis more manageable, only the aggregate indicator of external flexibility – that is the number of employees that are externally flexible as a percentage of total employees is used. Insert Table 1 here (d) HRM practices. The measures of HRM used to test the relationships outlined above are based upon the HRM practices listed in Table 2. The practices cover the areas of recruitment and selection, training, job design, communication techniques and consultation, quality issues, pay systems and terms and conditions of employment. The mean number of practices used with- in the sample are 15.6. The nature in which the independent HRM variables are constructed is discussed below. Insert Table 2 here 10
  11. 11. HYPOTHESES TESTED Testing the Impact of External Fit As suggested by Schuler and Jackson (1987) and Hoque (1999), HRM should prove effective only within firms emphasizing a quality-enhancer or innovator approach to business strategy, and should prove ineffective where the primary emphasis of strategy is on cost-cutting, or price based competition. The sample establishments are split into the four business strategy typologies outlined above. Following the approach adopted by Hoque (1999), the measure of HRM used within this part of the analysis is cumulative, with each establishment being ranked according to the extent to which they have adopted the 22 HRM practices discussed earlier. This variable at- tempts to examine the relationship between the extent to which HRM practices have been adop- ted and performance. By splitting the sample by strategy typologies, and then regressing the ag- gregate HRM variable on each of the dependent outcome variables, we assess the effectiveness of HRM in the context of ‘cost-reducer’, ‘quality-enhancer’, ‘innovator’ and ‘other’ business strategies. Hypotheses 1: The effectiveness of HRM is contingent upon the approach to business strategy that has been adopted. Testing the Universal Relevance of HRM To examine the universal relevance hypothesis, we investigate whether establishments that adopt HRM coupled with a focus on quality and/or innovation have performance levels superior to those achieved by other establishments. This issue is tested as follows: having split the sample four ways to perform the external fit tests described above, the sample is reclassified here to enable comparisons between business categories. These categories are as follows: 11
  12. 12. 1. ‘low-HRM cost reducer’, using 10 or fewer HR practices: 28 establishments fall into this category; 2. ‘medium-HRM cost reducer’, using more than 10 but fewer than 16 HR practices: 22 establishments fall into this category; 3. ‘high-HRM cost-reducers’, using 16 or more HR practices: 11 establishments fall into this category; 4. ‘low-HRM quality-enhancers’, using 10 or fewer HR practices: 25 establishments fall into this category; 5. ‘medium-HRM quality-enhancers’, using more than 10 but fewer than 16 HR practices: 68 establishments fall into this category; 6. ‘high-HRM quality-enhancers’, using 16 or more HR practices: 83 establishments fall into this category; 7. ‘low-HRM innovators’, using 10 or fewer HR practices: 10 establishments fall into this category; 8. ‘medium-HRM innovators’, using more than 10 but fewer than 16 HR practices: 13 establishments fall into this category; 9. ‘high-HRM innovators’, using 16 or more HR practices: 41 establishments fall into this category; 10. ‘low-HRM other’, using 10 or fewer HR practices: 31 establishments fall into this category; 11. ‘medium-HRM other’, using more than 10 but fewer than 16 HR practices: 21 establishments fall into this category; 12
  13. 13. 12. ‘high-HRM other’, using 16 or more HR practices: 12 establishments fall into this category. Hypothesis 2: The level of performance is dependent on the approach taken to HRM and to business strategy; ‘high-HRM quality-enhancer’ and ‘high-HRM innovators’ outperform the other categories within the sample?8 Given the diverse product markets in which the firms in our sample operate, evidence of the universal relevance of HRM would be very significant. Testing the Importance of Internal Fit The final hypothesis examines the importance of introducing HRM as a synergistic package of mutually supporting practices. According to bundling theory, establishments that adopt a wide range of HRM practices, and those introducing their HRM practices as a coherent, institutionally supported synergistic package should outperform establishments within which HRM has been introduced in an ad hoc manner. To test this, a trichotomous variable was constructed as follows: (a) ‘strategic HRM’ establishments: above-average (16 or more) usage of HRM strategically integrated with each other: 141 (46.3%) fall into this category; (b) ‘non-strategic’ HRM establishments (16 or more) usage of HRM practices, which are not strategically integrated: 53 (17.3%) fall into this category; (c) ‘low-HRM’ establishments (fewer than 16) usage of HRM practices: 110 (36.5%) fall into this category. 13
  14. 14. If a senior HR representative takes part in the company’s overall strategic decision making and if the respondent reported that HR policies are deliberately integrated with each other, the establishment is categorized as having ‘strategically integrated’ its HRM practices in the typologies above. Hypothesis 3: Firms that introduce HRM techniques within an institutionally supported, coherent package outperform those that introduce similar numbers of HRM practices but in an ad hoc manner and not as part of an overall policy or strategy. If internal fit is important, the ‘strategic HRM’ establishments should outperform the other establishments within the sample. RESULTS Hypothesis 1: Effects of HRM on Performance is Contingent upon Strategy Table 3 examines the relationship between HRM and performance outcomes and provides strong evidence for Hypothesis 1, that the effectiveness of HRM is dependent upon the achievement of external fit. Insert Table 3 here It can be seen that across the sample as a whole, there is a strong positive relationship between the extent to which HRM is used and all three of the performance measures. However, for the cost-reducer firms, this positive relationship disappears for sales and labour productivity and is negative (although insignificantly so) for financial performance. For quality enhancer and innovator establishments the HRM measure correlates positively and significantly with all performance measures. For establishments in the ‘other’ category, while the correlations 14
  15. 15. between the HRM measure and performance measures are positive, none of the relationships are significant. It is likely that this reflects the ambiguities within such establishments. The use of externally flexible labour (interacted with HRM usage) reduces the positive correlation found between HRM and the performance measures. These results give support to the external fit hypothesis, that the effectiveness of HRM is strongly dependent upon the business strategy pursued. As hypothesized, there is no evidence that the adoption of HRM leads to improved performance where establishments emphasize cost control within their business strategies. In contrast, the evidence presented shows that where HRM is coupled with strategies that emphasize quality-enhancement and innovation, performance is positively affected. Reliance on externally flexible labour offsets, to some extent, the positive association between HRM and performance. This is not surprising. While ‘external flexibility’ may include some examples of what might be termed ‘high road’ practices, consistent with investing in progressive HR practices – for example where skilled employees choose to work on fixed-term contracts – much of this type of ‘labour flexibility’ will be of the ‘low road’, hire-and-fire type. Reliance on this type of externally flexible labour is usually associated with the sort of cost control that we found led to HRM practices having no positive effect on performance. Hypothesis 2: Universal Relevance of HRM This section examines whether establishments that adopt ‘high-HRM quality-enhancer and high HRM innovator’ approaches are the best performing establishments within the sample. Such a finding would suggest that HRM coupled with an emphasis on either quality or innovativeness holds universal relevance for firms. In contrast, if ‘low-HRM cost-reducer’ establishments are performing equally effectively, the implication will be that a high-HRM approach is not 15
  16. 16. necessarily universally relevant, and that there is sufficient diversity within product markets for alternative approaches to business strategy and HRM to prove equally effective. Insert Table 4 The results in Tables 4 suggest that the ‘high-HRM quality enhancers and innovators’ are the highest performing establishments in terms of labour productivity and financial performance within the sample (Hypothesis 2). The exception to this universalism however appears in relation to sales growth, where ‘high-HRM cost reducers’ and ‘high-HRM other’ (where the signs are positive but not significant). This may reflect the fact that it is relatively easy for firms to increase sales growth compared to the other performance measures. Moreover, increased sales growth will not necessarily improve financial performance, especially if the price of the product or service is reduced in order to secure the increased volume. It is also important to recognize that where universalism does not hold, it is in the context of ‘high’ HRM usage which may thereby offset, at least in part, the potential negative effects of cost based and ambiguous strategies. Hypothesis 3: The Importance of Internal Fit This analysis examines whether establishments that appear to have introduced their HRM practices as a strategically integrated package of mutually supporting practices outperform establishments that have introduced their practices in a more ad hoc manner. Insert Table 5 here The results in Table 5 show that ‘strategic HRM’ establishments outperform the ‘low- HRM’ establishments across all of the performance measures (Hypothesis 3). In contrast, the ‘non-strategic HRM’ firms do not outperform the ‘low-HRM’ establishments significantly for any of the measures. A higher dependence on externally flexible labour weakens the 16
  17. 17. positive correlations between strategic HRM and all of the performance measures. Interestingly, however, where non-strategic HRM is present, the use of externally flexible labour actually strengthens the correlation (although the relationship is not significant) between the performance measures. In other words, external flexibility may help to offset the lack of strategic HRM in these establishments. Overall, these results suggest that, when firms do introduce HRM practices, the returns on HRM are much greater where they are introduced as part of an institutionally supported and coherent package. CONCLUSION Investing in ‘progressive’ HR practices can clearly pay dividends in terms of corporate performance. However, the results reported in this paper suggest that the degree to which this is true – in statistical terms, the size and significance of the effect – will vary according to a range of factors. One of these factors is the strategy that the firm adopts. Broadly, it may be pursuing a ‘high road’ strategy of investing in progressive HR practices that will be expected to lead to a greater degree of commitment and motivation amongst the workforce, as well as to both an increased ability and greater opportunities to work more productively. Hence the HR investment will lead to improved productivity and profitability. Alternatively, the firm may choose a ‘low road’, cost-cutting strategy. This may include putting employees onto short-term contracts and/or part-time working, and accepting a greater degree of labour turnover. In this case we would not expect to find a high level of investment in HR. And if such HR practices were to be pursued, they would be unlikely to lead to improved outcomes. There is thus no automatic or general link from HR practices to outcomes; it will depend, in part at least, on the strategy being pursued. 17
  18. 18. If a ‘high road’ strategy is consciously chosen, then the costs of investing in HR practices can be expected to be recouped through improved performance. However, for this to happen requires the HR practices to lead not just to higher levels of commitment and motivation amongst staff, it is also necessary for this to be matched firstly by the skills to work more productively, and also by the opportunities to put those skills and motivation to good effect. For these three factors to be present – motivation, skills and opportunities – requires HR practices to be pursued as coherent ‘packages’, and to be combined with appropriate organizational design. 18
  19. 19. Table 1. Labour Market Flexibility Variables External Employment Flexibility Variables. Mean No. of valid cases (n = 365) External flexibility: Number of employees that are externally flexible as a percentage of total employees: 0.22 354 a. Number of part-time employees as a percentage of total: 0.21 364 b. Number of employees on temporary contracts as a percentage of total employees: 0.19 361 c. Number of employees on fixed-term, casual, or seasonal contracts as a percentage of total employees: 0.28 354 Note: The results for external flexibility are similar to those reported by the 1998 WERS survey. See Milward, et al., 2000, pp. 43-49. 19
  20. 20. Table 2. HRM Practices used in the Analysis HRM Practice Mean No. of valid cases (n = 365) Recruitment and Selection a. Use of at least one of the following selection methods: psychometric 0.264 362 testing; personality/attitudinal tests; work sample; aptitude tests. b. Trainability as a major selection criteria 0.683 357 c. Use of realistic job previews during recruitment and selection 0.552 358 Incentive Pay and Appraisal a. A merit element in the pay of staff at all levels 0.605 360 b. Formal appraisal of the majority of non-managerial staff on a regular basis (at least annually) 0.623 361 Training a. Formal induction programme for new employees 0.73 364 b. The majority (> 50%) of non-managerial employees received formal off- the-job training in the past 12 months 0.487 363 c. Investor in People (IIP) Status 0.547 364 Job Design a. Redistribution of tasks amongst non-managerial employees over the past 3 years. 0.489 352 b. Extent to which non-managerial employees have variety in their work (‘moderate’ – ‘entirely’). 0.532 358 c. Work organized around team-working for the majority of employees 0.623 360 Quality Issues a. Production/service staff have quality responsibilities 0.734 362 b. A majority of employees (> 50%) are involved in quality circles or quality/continuous improvement teams 0.482 361 Communication and Consultation a. A system of regular, planned team briefings involving senior management during which time work stops 0.793 364 b. Joint Consultative Committees (JCCs) 0.415 363 c. All staff are informed about the market position and competitive pressures faced by the establishment and/or company 0.689 362 d. All staff are informed about the strategic objectives and targets for the establishment and/or company 0.734 362 Terms and Conditions a. Harmonized terms and conditions between management and non- management staff 0.689 361 b. Internal promotion the norm for appointments above the basic level 0.634 364 c. Written policy of guaranteed job security or non-compulsory redundancies amongst permanent staff 0.152 363 d. Written commitment to a goal of long-term employment security amongst permanent staff. 0.091 363 20
  21. 21. Table 3. The Relationship between HRM Practices, Labour Market Flexibility, and Organizational Performance Sales Growth All Firms Cost-reducers Quality- Innovators Others enhancers HRM 0.126 (2.825)*** 0.098 (1.138) 0.135 (2.316)** 0.158 (2.567)*** 0.076 (1.003) HRM * External flex 0.103 (2.265)** 0.075 (1.076) 0.123 (2.118)* 0.136 (2.135)** 0.052 (0.536) d50 – 99 employees -0.225 (1.632) 0.067 (1.113) -0.058 (1.113) 0.120 (1.067) 0.103 (1.043) d100 – 199 employees -0.221 (1.963)* 0.024 (0.438) -0.089 (1.342) -0.096 (1.123) 0.145 (1.129) d200 – 499 employees -0.113 (1.234) -0.167 (2.665)** 0.213 (2.267)* -0.102 (1.223) 0.076 (1.067) d500+ employees 0.252 (2.452)*** -0.215 (2.234)* 0.228 (2.327)** 0.233 (2.223)*** 0.192 (1.145) Age 0.006 (1.113) 0.003 (0.062) 0.115 (1.145) -0.127 (1.976)* 0.007 (0.467) dForeign 0.184 (1.989)* -0.156 (2.076)* 0.197 (1.772) 0.156 (1.886)* 0.192 (2.113)* Union Recognition -0.167 (1.732) -0.129 (1.100) 0.156 (1.223) 0.145 (1.665) -0.163 (1.654) dManuf -0.056 (1.156) -0.069 (1.123) -0.067 (1.356) 0.158 (1.823)* -0.045 (1.056) n 364 60 176 63 61 Pseudo R2 0.156 0.123 0.138 0.119 0.115 Labour Productivity All Firms Cost-reducers Quality- Innovators Others enhancers HRM 0.189 (2.991)*** 0.102 (1.100) 0.126 (2.267)** 0.234 (2.876)*** 0.128 (1.345) HRM * External flex 0.154 (2.251)** -0.093 (1.123) 0.119 (1.932)* 0.202 (2.209)** 0.112 (1.259) d50 – 99 employees 0.117 (1.227) 0.054 (1.117) -0.022 (1.001) -0.118 (1.123) 0.007 (0.765) d100 – 199 employees 0.198 (1.554) 0.033 (0.449) -0.066 (1.225) -0.100 (0.107) 0.106 (1.197) d200 – 499 employees 0.156 (1.146) -0.129 (1.332) 0.227 (2.123)* -0.042 (0.289) 0.055 (1.110) d500+ employees -0.195 (2.403)*** -0.182 (2.112)* 0.238 (2.426)** 0.267 (2.118)* -0.206 (1.232) Age 0.015 (1.002) 0.007 (0.058) 0.005 (0.765) -0.112 (1.382) 0.056 (0.827) dForeign 0.221 (2.113)* 0.087 (1.223) 0.178 (1.550) 0.123 (1.956)* 0.177 (1.219) Union Recognition -0.172 (1.665) -0.189 (1.226) 0.112 (0.384) 0.152 (1.434) -0.065 (1.113) dManuf 0.078 (1.123) 0.112 (1.103) 0.115 (1.118) 0.116 (1.076) 0.089 (1.116) n 364 60 176 64 62 Pseudo R2 0.165 0.130 0.125 0.115 0.107 Financial Performance All Firms Cost-reducers Quality- Innovators Others enhancers HRM 0.143 (3.221)*** -0.093 (1.003) 0.176 (3.331)** 0.134 (2.754)*** 0.116 (1.067) HRM * External flex 0.105 (2.551)** -0.132 (1.223) 0.166 (3.115)*** 0.113 (2.207)** 0.109 (1.008) d50 – 99 employees 0.123 (1.334) 0.047 (1.062) -0.114 (1.123) -0.123 (1.289) 0.100 (0.892) d100 – 199 employees 0.205 (1.678) 0.027 (0.33`) -0.043 (1.116) -0.176 (1.134) 0.056 (1.107) d200 – 499 employees 0.134 (1.223) 0.104 (1.192) 0.219 (2.256)* 0.218 (1.876)* 0.128 (1.223) d500+ employees 0.204 (2.333)*** 0.124 (1.028) 0.251 (2.737)*** 0.222 (2.209)* 0.256 (2.532)** Age 0.123 (1.113) 0.013 (0.066) 0.018 (0.589) -0.107 (1.234) 0.102 (1.003) dForeign 0.186 (2.383)** 0.105 (1.382) 0.228 (2.118)* 0.157 (2.103)* 0.145 (1.332) Union Recognition -0.153 (1.432) -0.165 (1.079) 0.007 (0.067) 0.066 (1.348) 0.085 (1.009) dManuf -0.075 (0.887) -0.004 (0.103) 0.125 (1.382) 0.111 (1.279) -0.176 (1.225) n 359 60 175 63 61 Pseudo R2 0.178 0.128 0.154 0.122 0.119 Notes: Ordered probit analysis. Coefficients given (t statistics in brackets): *** significant at 1%; ** significant at 5%; * significant at 10%. 21
  22. 22. Table 4. HRM, Strategy, Flexibility, and Performance Outcomes Sales Growth Labour Financial Productivity Performance ‘Low-HRM cost reducers’ -0.315 (2.422)** -0.662 (3.876)*** -0.224 (1.904)* ‘Medium-HRM cost reducers’ -0.223 (1.382) -0.477 (2.557)** -0.113 (1.662) ‘High-HRM cost reducers’ 0.136 (1.206) -0.187 (1.333) -0.105 (1.107) ‘Low-HRM quality enhancers’ -0.207 (1.123) -0.324 (1.283) -0.457 (2.483)** ‘Medium-HRM quality enhancers’ -0.119 (1.100) -0.229 (1.007) -0.336 (1.813)* ‘Low-HRM innovators’ -0.121 (1.007) -0.189 (1.082) -0.526 (2.959)*** ‘Medium-HRM innovators’ -0.105 (1.288) -0.087 (0.976) -0.332 (2.286)** ‘Low-HRM others’ -0.312 (2.383)** -0.886 (3.664)*** -0.256 (1.632) ‘Medium-HRM others’ -0.221 (1.765) -0.176 (1.223) -0.101 (1.013) ‘High-HRM others’ 0.123 (1.064) -0.107 (1.022) -0.088 (0.659) d50 – 99 employees -0.134 (1.056) 0.125 (1.043) -0.182 (2.005)* d100 – 199 employees -0.228 (1.754) 0.138 (1.156) 0.126 (1.256) d200 – 499 employees 0.156 (1.661) 0.277 (1.966)* 0.344 (2.245)** d500+ employees 0.226 (1.997)* -0.214 (1.877)* 0.350 (2.488)** Age 0.014 (0.076) -0.033 (1.003) -0.023 (1.134) dForeign 0.382 (2.356)** 0.447 (2.636)*** 0.358 (2.307)** Union Recognition -0.082 (1.005) 0.162 (1.543) 0.123 (1.327) dManuf -0.116 (1.045) 0.128 (1.116) -0.097 (1.003) n 364 364 359 Pseudo R2 0.124 0.150 0.144 Note: See Table 3. Omitted Category = ‘High-HRM quality-enhancers’ and ‘High-HRM innovators’. 22
  23. 23. Table 5. Internal Fit, Flexibility, and Performance Outcomes Sales Labour Financial Growth Productivity Performance ‘Strategic HRM’ 0.536 0.775 0.802 (3.554)*** (2.887)*** (3.345)*** 0.653 ‘Strategic HRM’ * External flex 0.456 0.663 (2.346)** (2.554)** (2.441)** 0.144 ‘Non-strategic HRM’ 0.115 0.125 (1.234) (1.266) (1.456) 0.163 ‘Non-strategic HRM’ * External flex 0.134 0.187 (1.357) (1.703) (1.636) -0.160 d50 – 99 employees -0.103 0.117 (1.102) (1.023) (1.132) 0.105 d100 – 199 employees -0.172 0.130 (1.177) (1.635) (1.132) 0.322 d200 – 499 employees 0.121 0.205 (2.117)* (1.226) (1.803)* 0.267 d500+ employees 0.205 -0.209 (2.200)* (1.766) (1.812)* -0.033 Age 0.010 -0.045 (1.141) (0.081) (0.099) 0.342 dForeign 0.323 0.376 (2.318)** (2.141)* (2.291)** 0.104 Union Recognition -0.070 0.177 (1.296) (1.012) (1.668) -0.086 dManuf -0.115 0.119 (0.953) (1.042) (1.007) 359 n 364 364 0.112 2 Pseudo R 0.104 0.102 Notes: See Table 3. ‘Strategic HRM’ = above average no. of HR practices used and establishment has a formal HR strategy. ‘Non-strategic HRM’ = above average no. of HR practices used but establishment does but have a formal HR strategy. Omitted category = below-average no. of HR practices used (‘low-HRM’). 23
  24. 24. Appendix: Sample Details Sample Establishments Count % Manufacturing: Establishment Size: Under 50 41 16.9 50 – 99 46 19.0 100 – 199 51 21.1 200 – 499 62 25.6 500+ 42 17.4 Total 242 100.0 Industrial Activity: Food and Drink 33 13.6 Textiles and Clothing 23 9.5 Wood, wood products, paper & printing 45 18.6 Chemicals 21 8.7 Metals and fabrication 30 12.4 Industrial and Commercial Machinery 31 12.8 Electronic and Electrical Equipment 29 12.0 Transportation Equipment 14 5.8 Other Manufacturing 16 6.6 Total 242 100.0 Services: Establishment Size: Under 50 46 36.8 50 – 99 14 11.2 100 – 199 18 14.4 200 – 499 16 12.8 500+ 31 24.8 Total 125 100.0 Industrial Activity: Hotels and Restaurants 31 24.8 Wholesale and Retail 39 31.2 Financial 23 18.4 Other Business Services 32 25.6 Total 125 100.0 Note: To preserve the robustness of the results, only two dummy variables – dManuf and dServ – are used in the estimations. Given the relatively small cell sample sizes for each industry, when the results were run using a higher degree of industry disaggregation, these coefficients were not significant. Foreign Ownership: 293 (80.2%) of the sample firms were UK owned and 72 (19.7%) were foreign owned. 24
  25. 25. References Appelbaum, E., Bailey, T., Berg, P. and Kalleberg, A.L. (2000). Manufacturing Advantage: Why High-Performance Work Systems Pay Off. Ithaca, NY: Cornell University Press. Arulampalam, W. and Booth, A. (1998). ‘Training and Labour Market Flexibility: Is there a Trade-off?’. British Journal of Industrial Relations, vol. 36, no. 4, pp. 521-536. Beatson, M. (1995). Labour Market Flexibility, Research Series No. 48. Sheffield: Employment Department. Becker, B. and Gerhart, D (1996). ‘The impact of human resource management on organizational performance: progress and prospects’. Academy of Management Journal, vol. 39: 779-801. Cully, M., O’Reilly, A., Woodland, S., Dix, J. (1999). The 1998 Workplace Employee Relations Survey: First Findings. London: HMSO. Guest, D. (1987). ‘Human Resource Management and Industrial Relations’. Journal of Management Studies, vol. 24(5): 503-21. Guest, D. and Hoque, K. (1994). ‘The good, the bad and the ugly: employee relations in new non-union workplaces’, Journal of Management Studies, vol. 31. Hoque, K. (1999). ‘Human Resource Management and Performance in the UK Hotel Industry’. British Journal of Industrial Relations, vol. 37, no. 3, pp. 419-443. Huselid, M. (1995). ‘The Impact of Human Resource Management on Turnover, Productivity and Corporate Financial Performance’. Academy of Management Journal, vol. 38, pp. 635 – 672. 25
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  29. 29. Endnotes 29
  30. 30. 1 Hoque (1999) closely follows Schuler and Jackson’s (1987) strategy typologies. 2 Khatri (2000) uses Miles and Snows (1984) strategy typologies. Khatri’s analysis is carried out on a sample of firms based in Singapore. 3 It is important to differentiate between the universal effects that HRM might have, and the universal relevance of HRM as an approach. Universal effects of HRM suggest that HRM effects performance irrespective of the business strategy adopted, which contradicts the external fit hypothesis. In contrast, the universal relevance of HRM suggests that the effectiveness of HRM may be contingent upon the type of business strategy adopted. In other words, HRM may be most effective when coupled with a quality-enhancer or innovator strategy and may be least effective when coupled with a cost-based or non-coherent (‘other’) strategy. Thus, tests for the universal relevance of HRM do not contradict the contingency arguments (see Hoque, 1999: 422). 4 Hoque argues, therefore, that, “…a ‘high-HRM quality-enhancer’ strategy would be the key to competitive success within hotels of the nature under investigation here, with there being little or no scope for a strategy based on cost reduction or price competition to achieve comparable results” (1999: 439). 5 5. For a detailed discussion and typology of flexible work practices see Beatson, 1995. 6 The EXTEL database is a company/organisation level database whereas our study is of establishments. Large organisations can have many quite small establishments. The EXTEL database is biased towards larger, publicly quoted organisations and those in the manufacturing sector. For example, almost 50% of the sample organisation’s primary activity was in manufacturing whereas only 18% of private sector establishments in the WERS sample were engaged in manufacturing. 7. We spent a day during the first week of the interviews with the staff at the survey company answering queries, listening to interviews and making suggestions in relation to prompting and explanations of terminology, etc.
  31. 31. 8. If in doubt of a term during the interview, the individual was asked to refer to this glossary. 7 For 73 companies, the HR person was unable to answer parts of the questionnaire (e.g., some of the questions about performance and innovation). In such cases, the name of the most appropriate person in the company was obtained from the HR person and this person was contacted. Completed questionnaires were obtained for 61 of such companies. 10. Namely, the Company Chairperson, Managing Director, Chief Executive, Manufacturing Director, or Production Director. Since the data were collected primarily from a single source that the potential for common-method variance must be taken into consideration. In the context of HRM and performance, common-method variance problems are likely to arise because of the phenomenon of higher performance ratings being reported by respondents, especially when the respondent is a HR Director, who claim to have adopted a wide range of HRM practices. This problem is reduced to some extent in this analysis in terms of the performance variables since these are drawn the EXTEL database and therefore objective rather than subjective evaluations of performance. 11. The definition of ‘establishment’/‘site’ in this study corresponds broadly with that of ‘workplace’ used in the Workplace and Employment Relations Survey (WERS): ‘workplaces are sub-sets of organisations, except where the workplace is the sole one in an organisation and it is only here that the term ‘workplace’ and ‘organisation’ are interchangeable’ (Cully, et al. 1999: 3-4). For detail of WERS see the December 2000 special issue of the British Journal of Industrial Relations (Volume 38, number 4). 12. Labour productivity is computed as the log of total sales/number of total employees. 13. The definition of a product innovation was as follows: ‘a new or significantly improved manufactured or service product which is introduced to the market and requires changes in knowledge or skills, routines, competence, equipment, or engineering practices to make the new product. Changes which are purely aesthetic (such as changes in colour or decoration) or which
  32. 32. simply involve product differentiation (minor design or presentation changes which leave the product technically unchanged) are NOT to be classified as product innovations.’ The definition of process innovation was as follows: ‘a new or significantly improved production, delivery or distribution method and which requires changes in knowledge or skills, routines, competence, equipment, or engineering practices to introduce the new process’. 14. Seventy-nine percent of the sample establishments were multi-site. Thus, in almost all cases establishment size will vary from organisation size. 15. Trade union recognition is used rather than trade union presence, since presence does not necessarily imply recognition. Recognition is a key indicator of a formal role for a trade union (see Guest, et al., 2000 for further discussion). 16. Future research will compare performance outcomes between ‘high-RM quality-enhancers’ and ‘high-HRM innovators’. 17. Hypotheses concerning the relationship between the adoption of HRM and performance is difficult for establishments in the ‘other’ category. The ambiguity of such a strategy may be what Porter (1985: 16-17) describes as ‘stuck in the middle’ (see Hoque, 1999: 427, for further discussion). 18. This approach follows closely that of Hoque (1999), with cost-reducer establishments being dropped from this section, as there is little evidence of an HRM-performance relationship within these establishments. 8 This series of dummies outlined above enables this hypothesis to be tested. By holding 6 and 9 constant we can test whether the ‘high-HRM quality-enhancer’ and ‘high-HRM innovators’ outperform the other categories.

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