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High-Performance organizations and macroeconomic performance

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  • 1. White PaperTo us, business is personal • www.kenexa.comHIGH PERFORMANCEORGANIZATIONS ANDMACROECONOMIC PERFORMANCEGlobal economies today face the challenges ofuncertainty and vulnerability. As the United Statesslowly recovers from the Great Recession, Europe isgrappling with financial turmoil, while emerging economiessuch as China, India and Brazil are cooling after an explosionof growth. In order to survive and gain competitiveadvantage in this volatile global environment, organizationalleaders need to understand not only the drivers of superiororganizational performance, but also the drivers of superiormacroeconomic performance. To that end, Kenexa, anIBM Company, has explored the characteristics of HighPerformance Organizations (HPO) and studied their effectson macroeconomic performance.Since the 1990s, HPOs have increasingly attracted interestfrom academia and the business world (Boxall & Macky, 2009).Whenorganizationsexecutehighperformancepractices,theyare more successful in a wide range of employee outcomessuch as job satisfaction and turnover intentions (Huselid,1995). HPOs also demonstrate superior organizationalperformance, in the form of stock market returns and laborproductivity (Combs, Liu, Hall, & Ketchen, 2006). It stands toreason that HPOs, by consistently producing better employeeand business outcomes, can positively impact the economyin which they operate. However, little research has analyzedthe effect of HPO drivers on macroeconomic performance.Further, a clearly articulated theoretical model that explainsthe mechanisms through which HPOs might affect theeconomic climate has yet to be presented. To remedy this,1Data are available at: http://www.imf.org/external/ns/cs.aspx?id=28 and http://www.conference-board.org/data/economydatabase/.we have presented a comprehensive model of HPOs andmacroeconomic performance, as well as provided empiricalsupport for the link between them.THE WORKTRENDSTMSURVEYOur analyses are based on data collected in 2011 from twodifferent sources:• Macroeconomic performance data were collectedfrom the World Economic Outlook of the InternationalMonetary Fund (IMF) and the Conference BoardEconomy Database1• HPO characteristics were assessed with Kenexa’sWorkTrendsTMsurveyThe WorkTrends survey has been administered annuallyor biannually since 1984. In 2011, the WorkTrends surveywas taken online by approximately 31,000 employees in 27different countries who work full-time for an organizationof 100 staff members or more. The survey asks employeesmore than 200 questions about their opinions and attitudes,manager and leadership behaviors, organizational practices,and demographic variables. WorkTrends data are unique,because they are a representative sample; a cross-sectionof workers across the globe. The global nature of thesedata allowed us to evaluate the link between country-level high performance organizational characteristics andmacroeconomic performance.High Performance Institute
  • 2. White Paper© 2012 Kenexa Corporation 2WHAT MAKES A HIGH PERFORMANCE ORGANIZATION?HPOs consistently deliver high quality products and services(Owen, Mundy, Guild, & Guild, 2001). They can be differentiated bytheir continually superior performance such as higher customersatisfaction, greater customer loyalty and higher productivity(Wiley, 2010). Our review of the literature suggested HPOs share thefollowing four fundamental characteristics: customer orientation,quality emphasis, innovation and effective leadership.Customer OrientationCustomerorientationisanorganization’sdispositiontocontinuouslydeliver superior value to its customers (Slater & Narver, 1994). InWorkTrends, we asked employees to evaluate customer orientationwith the following items on a five-point agreement scale:• Customer problems get corrected quickly• Our policies and procedures are designed to make it easy forcustomers to do business with us• We regularly use customer feedback to improve our workprocesses• Overall, customers are very satisfied with the products andservices they receive from my organizationEmpirical evidence supports the link between customer orientationand business performance. Organizations are more successfulwhen they embrace a customer-focused orientation (Narver, Alater,& MacLachlan, 2000). Appiah-Adu & Sing (1998), and Hartnell, Ou& Kinicki (2011) found customer orientation is positively related tooperational performance such as quality and service, new products’success, sales growth and return on investment.Quality EmphasisQuality emphasis is a set of organizational practices to ensure theconsistent production of high quality products and services (Powell,1995). We asked employees to rate quality emphasis by indicatingtheir level of agreement to the following items about where theywork:• We set clear performance standards for product/servicequality• Our improvement efforts result in both higher quality andlower costs• We are continually improving the quality of our productsand services• Day-to-day decisions demonstrate that quality andimprovement are top prioritiesLike customer orientation, empirical research has established thelink between quality emphasis and organizational performance(Juran, 1993; Powell, 1995).InnovationInnovation is the process of creating better or new products,processes, services, or ideas (Kimberly & Evanisko, 1981).We assessedinnovation with the following items:• Where I work, employees receive the support they need toimplement innovative ideas• When employees have good ideas, management makes useof them• Where I work, we act on promising new or innovative ideas• I feel free to try new things on my job, even though my effortsmay not succeedOrganizations that emphasize innovation gain more marketshare and are more profitable than less innovative organizations(Gopalakrishnan, 2000). This could be for two reasons. First, theknowledge contained in the innovations is not readily availableto competitors and thus protects profit margins, resulting insignificant financial benefits (Rumelt, 1987). Second, innovationhelps organizations develop products or services at a lower costthan their competitors (Afuah, 2003).Effective LeadershipAn organization’s success is fundamentally dependent upon theskills and actions of its leaders (Wiley, 2010), especially in highlycompetitive markets where organizations face the challengesof scarce opportunities and limited resources (Wasserman,Nohria, & Anand, 2001). The Leadership Effectiveness Index (LEI)was developed to measure employees’ perceptions of theirorganization’s senior leaders. Senior leaders are effective if theyare capable and trustworthy, inspire confidence, are committedto high quality products and services, and have communicated amotivating vision. We consider the following items when evaluatingemployee perceptions of leaders at their organization:• Senior management at my organization has the ability todeal with the challenges we face• I have confidence in my organization’s senior leaders• I trust the senior leaders of this organization• The senior leaders of my organization have communicated avision of the future that motivates meThe quality of executive leaders explains around 45 percent ofan organization’s performance, (Day & Lord, 1988) and effectiveleadership positively affects organizational performance outcomessuch as labor productivity, return on assets, and outputs of patents(Wang, Courtright, & Colbert, 2011).A MODEL OF HPOs AND MACROECONOMIC PERFORMANCEThe link between organizational characteristics and organizationalperformance has been studied extensively in the literature. However,
  • 3. White Paper© 2012 Kenexa Corporation 3few studies have looked beyond organizational-level outcomes andconsidered the broader effects of HPOs on the economy. HPOs havethe potential to influence macroeconomic performance via threemechanisms, each a major component of gross domestic product(GDP): consumption, investment and international trade.• Consumption: More successful firms contribute to increaseddemand for jobs. This in turn boosts households’ incomesand the overall aggregate demand• Investment: Successful firms are able to expand and investmore efficiently in research and development• International trade: As firms perform better and grow, theyhave the resources to expand their operations and explorenew markets, increasing overall exports.Figure 1 illustrates how HPOs may affect the national economy.FIGURE 1: ORGANIZATIONAL CHARACTERISTICS ANDMACROECONOMIC PERFORMANCETABLE 1. CORRELATIONS BETWEEN HPO CHARACTERISTICS ANDMACROECONOMIC PERFORMANCE2See the Appendix for a detailed explanation of the macroeconomic performance indicators used in this study.3Several authors suggest that RGDP per hour worked would be a more suitable measure of labor productivity. The reason is that labor legislations differ significantly acrosscountries. For example, according to the Conference Board data, the average annual hours worked per worker in France is 1,441 and in the U.S. 1,705. This would lead to misleadingconclusions. However, data on average annual hours worked per worker are only available for OECD countries so taking this indicator would reduce our sample size significantly.LeadershipEffectivenessCustomerOrientationQualityEmphasisInnovationHigherProductivityLower CostsFaster SalesGrowthHigher ProfitsJob GrowthHigher NationalIncome andConsumptionHigher Investmentand BusinessConfidenceIncreasingAggregateDemandOrganizationalCharacteristicsOrganizationalPerformanceMacroeconomicOutcomesGDPGrowthEconomic growthLabor ProductivityGrowthCustomer Orientation .41 .37Quality Emphasis .51 .46Innovation .55 .51LEI .48 .46FIGURE 2. IMPACT OF ORGANIZATIONAL CHARACTERISTICS ONECONOMIC GROWTH876543210LeadershipEffectivenessInnovation CustomerOrientationQuality EmphasisAverage of five top-scoring countries Average of five bottom-scoring countriesGDPPERCAPITAGROWTH(%)Note: All values are Pearson Product Moment correlations. N=27. Allcorrelations statistically significant at the p < .05 level.THE EMPIRICAL LINK BETWEEN HPOs AND MACROECONOMICPERFORMANCETo empirically assess the model presented in Figure 1, we aggregatedhighperformanceorganizationalpracticestothecountrylevelandthencorrelatedthemwithmacroeconomicperformance.Followingpreviousresearch, we defined macroeconomic performance with two indicators:economic growth and labor productivity.2Economic GrowthEconomic growth plays a crucial role in reducing poverty andincreasing countries’ living standards and therefore overall wealth(Barro and Sala-i-Martin, 1995). Economic growth is commonlymeasured with the growth rate of real gross domestic product(RGDP) per capita (Borensztein, Di Gregorio, & Lee, 1998; Mankiw,Romer, & Weil, 1992).Labor ProductivityLabor productivity is used by other economists to measuremacroeconomic performance (Hall & Jones, 1999). Laborproductivity is defined as RGDP per worker. It allows us to explorethe role played by the most important factor of production: labor, asit measures how much output is being generated by each worker.3Table 1 displays the results from our empirical analysis, which showsstatistically significant correlation coefficients between each HPOcharacteristics and each macroeconomic performance measureexamined. These results suggest improving certain organizationalcharacteristics may have a significant impact on an economy at anational level.Figure 2 and Figure 3 compare the macroeconomic performanceof the five top-scoring countries per HPO characteristics with thatof the five bottom-scoring countries. The top five countries showsignificantly higher GDP per capita growth and labor productivitygrowth than the bottom five countries for each characteristic. TheresultssuggestsignificantrelationshipsbetweenHPOcharacteristicsand macroeconomic performance.
  • 4. White Paper© 2012 Kenexa Corporation 4Table 2 shows the countries in our sample ranked by each HPOcharacteristic. The results reveal that emerging markets in Asia(India, China and Indonesia) consistently place in the top five acrossall HPO characteristics. These countries also show strong economicperformance over the last 10 years. On the other hand, Japan andItaly—the developed economies that have significantly sloweddown in recent years—are consistently located in the bottomfive on HPO characteristics. The U.S., which has recovered fromthe economic downturn slightly better than European countries,is in the top five for customer orientation only. Overall, our resultssuggest countries tend to perform better when there is a higherincidence of firms that are customer-orientated, place greateremphasis on quality, are more innovative, and have more effectivesenior leaders.The results demonstrated in Table 2 may be explained by thecharacteristics of emerging markets. According to The Centerfor Knowledge Societies, emerging markets are those “regions ofthe world that are experiencing rapid informationalization underconditions of limited or partial industrialization.” Emerging marketslie at the intersection of non-traditional user behavior, the rise ofnew user groups, and innovations in product technologies andplatforms, which provide tremendous opportunities for marketgrowth and innovation (The Center for Knowledge Societies).Compared to organizations in developed markets that havemature and relatively stable markets, the organizations in emergingmarkets are more likely to continuously improve their productsand cut costs through innovation to increase market share. Theseorganizations are also more likely to put a strong emphasis onquality and customer services to earn new customers’ acceptance.The organizational leaders in emerging markets are more likelyto demonstrate strong leadership capabilities in dealing with fastchanging situations. As a result, organizations in emerging marketsshow rapid financial growth, contributing to outstanding overalleconomic performance. TABLE 2. COUNTRIES RANKED BY HPO CHARACTERISTICSInnovationTop 5India 69Indonesia 56China 55Qatar 53Turkey 53Bottom 5Japan 27Italy 35Finland 36Spain 37South Korea 40Customer OrientationTop 5India 82Indonesia 76Switzerland 72China 72United States 71Bottom 5Japan 43Argentina 56Italy 58Spain 60South Korea 62Quality EmphasisTop 5India 80China 69Indonesia 69South Africa 69Saudi Arabia 67Bottom 5Japan 47Italy 54Argentina 54France 56Spain 56Leader EffectivenessTop 5India 74Qatar 60Indonesia 59Netherlands 59China 58Bottom 5Japan 31Argentina 40Finland 41Italy 41France 42Note: Percent favorable values are presented.FIGURE 3. IMPACT OF ORGANIZATIONAL CHARACTERISTICS ONLABOR PRODUCTIVITY GROWTH876543210LeadershipEffectivenessInnovation CustomerOrientationQuality EmphasisAverage of five top-scoring countries Average of five bottom-scoring countries
  • 5. White Paper© 2012 Kenexa Corporation 5CONCLUSIONThe literature linking HPO characteristics and firm performance isextensive. However, few studies have discussed the effects of HPOson macroeconomic performance. Also lacking is a theory thatexplains the relationship between organizational characteristicsand macroeconomic performance. To fill this gap, we developeda detailed model of HPO and macroeconomic performance, andthen empirically assessed the model using a global survey across 27countries. Results indicated countries enjoy higher economic andlabor productivity growth rates when they are filled with companiesthat engage in HPO practices, such as customer orientation, qualityemphasis, innovation, and leadership effectiveness. This is likelybecause HPOs yield better organizational performance, such ashigher profits and lower costs. On the aggregate, this contributesto higher consumption, investment, and international trade at thecountry level, which in turn feeds macroeconomic performance.Our findings suggest characteristics that enable firms to gain andsustain superior business results also enhance macroeconomicperformance. The implications of this conclusion are instructiveto organizational leaders at the company and country levels. HPOpractices help leaders cultivate better firm performance, givingthem a competitive advantage in the current uncertain globalenvironment. Further, given our results linking organizational andnational performance, policy makers have an interest in supportingfirm performance to help the national economy.Organizational leaders and policy makers can improve their firm’sand their country’s performance by emulating HPOs:• Organizations can focus on customer orientation byseeking and sharing information about customers’needsand expectations, delivering customer service training, andrecognizing excellent service (Schneider & Bowen, 1995).• Organizations can emphasize quality by setting clearand measurable standards for product and service andintroducing quality assurance systems.• Practices that promote innovation can be implemented,such as setting up a fail-safe environment, encouragingparticipative decision-making and idea sharing, andrewarding creative problem-solving and idea development.• Organizations can select effective leaders by using the rightassessment tools or and improving current leaders’skills byproviding opportunities for training and development.This study is one of the first of its kind. Being exploratory, futureresearch on the topic is suggested. Specifically, studies that expandthe sample to include more countries or multiple years would bevery valuable. Also, future research could empirically evaluatethe mediating role of job growth, consumption, and the othereconomic phenomena hypothesized in Figure 1.REFERENCESAfuah, A. (2003). Innovation Management (2nd Edition). Oxford University Press.New York.Appiah-Adu, K., & Singh, S. (1998). Customer orientation and performance: Astudy of SMEs. Management Decision, 36, 385 – 394.Barro, R., & X. Sala-i-Martin (1995), “Economic growth,” McGraw-Hill, Cambridge,MA.Borensztein, E., J. de Gregorio, & J-W. Lee (1998). How does foreign directinvestment affect economic growth. Journal of International Economics, 45, 115-135.Boxall, P., & Macky, K. (2009). Research and theory on high-performancework systems: progressing the high-involvement stream. Human ResourceManagement Journal, 19, 3-23.Combs, J., Liu, Y., Hall, A., & Ketchen, D. (2006). How much do high-performancework practices matter? Personnel Psychology, 59, 501-528.Day, D. V. & Lord, R. G. (1988). Executive leadership and organizationalperformance: suggestions for a new theory and methodology. Journal ofManagement, 14, 453-464.Dollar, D., & Kraay, A. (2002). Growth is Good for the Poor. Journal of EconomicGrowth, 7, 195-225.Gopalakrishnan, S. (2000). Unraveling the links between dimensions ofinnovation and organizational performance. The Journal of High TechnologyManagement Research, 11, 137-153.Hall, R., & Jones, C. (1999). Why Do Some Countries Produce So Much MoreOutput Per Worker Than Others? The Quarterly Journal of Economics, 114, 1, 83-116.Hartnell, C. A, Ou, A. Y, & Kinicki, A. (2011). Organizational culture andorganizational effectiveness: A meta- analytic investigation of the competingvalues framework’s theoretical suppositions. Journal of Applied Psychology, 96,677-694.Huselid, M. (1995). The Impact of Human Resource Management Practices onTurnover, Productivity, and corporate financial performance. The Academy ofManagement Journal, 38, 635-672.Juran, J. (1993, July). Made in U.S.A.: A renaissance in quality. Harvard BusinessReview, 42-50.Kimberly, J. R., & Evanisko, M. (1981). Organizational innovation: The influenceof individual, organizational and contextual factors. Academy of ManagementJournal, 24, 689-713.Mankiw, G, D. Romer & D.Weil (1992). A Contribution to the Empirics of EconomicGrowth. Quarterly Journal of Economics, 107, 407-437.Narver, J. C., Slater, S.F., & MacLachlan, D. L. (2000). Total market orientation onbusiness profitability. Journal of Marketing, 54, 20-35.Owen, K., Mundy, R., Guild, W., & Guild, R. (2001). Creating and sustaining the highperformance organization. Managing Service Quality, 11, 10 – 21.Powell, T. (1995). Total quality management as competitive advantage: A reviewand empirical study. Strategic Management Journal, 16, 15-37.Ravallion, M. (2001), Growth, Inequality and Poverty: Looking Beyond Averages.World Development, 29, 1803-1815.Rumelt, R. P. (1987). Theory, strategy, and entrepreneurship. D. Teece (Ed.), Thecompetitive challenge, 137-158. Cambridge: Ballinger.Schneider, B., & Bowen, D. (1995). Winning the service game. Boston: HarvardBusiness School Press.
  • 6. White Paper© 2012 Kenexa Corporation 6Slater, S. F., & Narver, J. C. (1994). Does competitive environment moderate themarket orientation-performance relationship? Journal of Marketing, 58, 46-55.The Center for Knowledge Societies. (2008). The emerging economy report.Retrieved from http://www.emergingeconomyreport.com.Wang, G., Oh, I., Courtright, S. H., & Colbert, A. E., (2011). Transformationalleadership and performance across criteria and levels: A meta-analytic reviewof 25 years of research. Group Organization Management, 36, 223-270.Wasserman, N., Nohria, N., & Anand, B. (2001). When Does Leadership Matter?The Contingent Opportunities View of CEO Leadership. Strategy Unit, HarvardUniversity, Working Paper No. 02-04.Wiley, J. W. (2010). Driving success through performance excellence and employeeengagement. Kenexa High Performance Institute. APPENDIX: MACROECONOMIC INDICATOR DEFINITIONSEconomic GrowthEconomic growth (EG) is one of the main determinants of a country’sstandard of living and one of the main instruments for poverty alleviation(Ravallion, 2001; Dollar & Kraay, 2002). EG is commonly measured as thegrowth rate of real gross domestic product (RGDP) per capita. GDP per capitais the total market value of all final goods and services produced in a countryin a given period of time divided by the average (or mid-year) population forthe same period.Labor ProductivityAnother indicator to measure a country’s economic performance is laborproductivity. Labor productivity is commonly measured as real grossdomestic product divided by the number of people employed during thatperiod.Real and Nominal GDP per CapitaGDPpercapitaiscommonlyreportedinnominalandrealterms.NominalGDPper capita is expressed in current market prices and therefore incorporateschanges in prices. Real GDP per capita is GDP per capita evaluated at themarket prices of some base year and accounts for real changes in quantitiesproduced over time. When comparing GDP per capita figures from oneperiod to another, it is desirable to use real GDP per capita. For an illustrativeexample, consider the following table that displays the hypothetical nominaland real GDP per capita in the UK for 2009 and 2010.The table shows that UK’s GDP per capita in nominal terms increased by 72.1percent between 2009 and 2010 (from £5,000 to £8,607). However, pricesalso increased by 50 percent during the same period (from £10 to £15). Tomeaningfully compare UK’s 2010 GDP per capita to its 2009 GDP per capita,we multiply the 2010 total quantity of final goods and services producedby the market price in 2009. Then we divide this figure by the populationin 2010. We define this as 2010 GDP per capita at 2009 constant prices orsimply 2010 real GDP per capita. The 2010 real GDP per capita equals £5,738((35,000 million × 10) / (61 million)). Using real GDP per capita, we obtain amore realistic growth rate of 14.7 percent (from £5,000 to £5,738), and not72.1 percent, as it appeared with nominal data.The Purchasing Power Parity (PPP) TermReal GDP is commonly expressed in U.S. dollars using the market exchangerate or the purchasing power parity (PPP) conversion rate. When wecompare real GDP across countries, the PPP is a more precise measure thanthe market exchange rate because it takes into account both the relativedifferences of costs of living and the inflation rates between two differentcountries. Taking the market exchange rates would distort real differences inincome and would produce misleading conclusions. The purchasing powerparity (PPP) between two countries is the rate at which the currency of onecountry needs to be converted into that of a second country to ensurethat a given amount of the first country’s currency will purchase the samevolume of goods and services in the second country as it does in the first.The IMF and the World Bank commonly express PPP as local currency perU.S. dollar. To facilitate price comparisons across countries, the InternationalComparisons Program (ICP) was established by the United Nations and theUniversity of Pennsylvania. PPPs generated by the ICP are based on a globalsurvey of prices.4The PPP rate is provided by the World Economic Outlook.To calculate the GDP per capita in PPP terms we use the following formula:For an illustrative example, suppose that the salary in 2010 of John, aneconomist, is 50,000 U.S. Dollars and the market exchange rate reported byYahoo! Finance is 10 Mexican pesos per U.S. dollar. If we use this exchangerate, this would imply that John’s salary corresponds to the salary of 500,000Mexican pesos earned by Michael in Mexico. We assume that in the sameperiod a BMW cost 250,000 Mexican pesos in Mexico but only 15,000 U.S.Dollars in the United States given its technological advantage with respectto Mexico and its higher standard of living. While John can buy three BMWsin the U.S., Michael can only buy two given his salary in Mexico. Therefore,although they earn the same nominal salary, their standards of living aredifferent given the differences in the costs of living. The PPP rate converterconsiders these discrepancies and in this specific case would be 16.66Mexican pesos per U.S. Dollar (250,000/15,000) and not 10. So in PPP termsMichael’s salary in the U.S. would be 30,000 U.S. dollars (500,000/16.67).Note that two countries with the same currency (Germany and Francefor example) may have different PPP rates because these countries havedifferent inflation rates and different standards of living.TABLE 3: HYPOTHETICAL NOMINAL AND REAL GDP PER CAPITA IN THE UK FOR2009 AND 2010Total Quantityof Final Goodsand ServicesProduced(Millions)MarketPrices PopulationNominalGDP perCapitaReal GDPper Capita(Base Year2009)2009 30,000 £10 60.0 £5,000 £5,0002010 35,000 £15 61.0 £8,607 £5,738ABOUT KENEXA, AN IBM COMPANYTo us, business has always been personal—and it’s alwaysbeen about making the workforce smarter, which is why we’reproud to be the platform for a Smarter Workforce. We look atit from two angles—empowering people and transformingbusiness. Our tools enable businesses to attract and keep thebest people, develop their skills, cultivate new leaders andcapitalize on their collective intelligence by applying humaninsights, social tools and workforce analytics to transform theway they work. We provide deep insight and experience inemployee engagement, talent management and leadershipdevelopment mixed with the world’s best technology andsocial platforms, giving us the unique ability to build aSmarter Workforce.Real GDP per capita in national currencyImplied PPP conversion rate4Source: http://www.imf.org/external/pubs/ft/fandd/2007/03/basics.html.Real GDP per capita at PPP =