Strategic Human Resource Management and Performance

1 The Link between Strategic Human Resource Management and Performance Introduction In the vulnerable competitive environment of today arising from globalization, innovation of products and powerful suppliers and customers, organizations are threatened if they do not in turn maintain a competitive edge. People who comprise an organization, also called the human resource, are regarded as the most important resource the organization can pride itself in. HRM aims at ensuring the organization obtains and retains the skilled workforce it badly requires. In the field of HRM, strategic human resources management (SHRM) is a transformation in itself to place the organization at a competitive advantage (Bowen & Ostroff 2004). The core point in SHRM is to establish congruence between the strategic goals of the entire organization and the human resource policies. It is a futuristic approach that is focused on long term performance of the human resource. It is general consensus that SHRM practices do not directly lead to a firm’s performance. It is argued rather that what it does is to influence organisational resources like human capital and employee behavior so that these behaviors lead to performance (Wright, Dunford, & Snell 2001). There comes a need to develop a model that develops the linkage between SHRM and performance.

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2 Some scholars argue that motivation is the mechanism through which SHRM influences a firm’s performance. However looking at motivation alone is not practical as motivation is a result of other aspects like recruitment, training and development, compensation, appraisal systems, and even the work arrangements. This impact can give the organization a competitive advantage. This essay aims to determine whether SHRM is responsible for not only performance but ‘high’ performance in the firm.

Literature review Strategic HRM and competitive advantage Business strategies come in after a careful analysis of strengths, weaknesses, opportunities and threats (SWOT analysis). This involves scanning of the firm’s environment to identify the imminent threats and opportunities as well as looking at the internal capabilities and what the organization has in terms of resources. While doing this, human resource is taken as a rare resource (Wright, Dunford, & Snell 2001). Once this has been accomplished, flexible timetables are set and a cooperation culture is set. The specific plans that have been laid are now implemented while holding people responsible for the results. It is important at this point to develop methods of evaluating success of decisions made.

When a business understands its competitive strategy, it is able to know what goods or services it will provide. It is also able to keep lowering costs or improving quality. The business should be able to understand the changes that are happening in the environment around it which is critical for SHRM. At this point, SHRM will be able to determine the demographics of how many workers with specific needed skills will be available in times to come (Harris & Ogbonna 2001). The internal strengths in the HR perspective include such aspects as ability to attract and

3 retain top quality employees while the converse is a weakness and will give the firm a competitive disadvantage.

The contingency approach to SHRM It is a situational based approach to the management of human resources. Unlike the universalistic approach, the contingency approach struggles to match the HR practices with competitive strategies of the entire firm. It focuses on cost leadership as opposed to differentiation. SHRM prescribes specific relevant behavior requisite to do work. Some organizations have an internal labor orientation and they therefore struggle to keep long term relationships with employees preferring long term contracts or permanent basis (Guest 2002).

Those organizations that seek to match their competitive strategies with human resource strategies have been observed to do better. The contingency approach does well in giving the organization a vertical fit which can be described as aligning HR strategies with the business strategies. Since the current organisational changes like globalization are situational changes, the contingency approach fits the best. It will play a major role in the transformation of the HR from that of specialization in certain functional units of the firm to having a flexible perspective (Boxall 1991). It will also transform the organisational structure in HR from the traditional one to SHRM, the key issue being is to decentralize or centralize the human resources function.

Finally, it will need to enhance administrative efficiency through improvement of its efficiency, development of centralized human resources in the entire firm, and rethinking how to provide value to the firm. In conclusion, the contingency approach tries to seek how it can help the firm be successful now and in future given the arising and unexpected changes in the environment (Harris & Ogbonna 2001).

Strategic planning and personnel practices

4 If incentives or motivation of employees has to be successful, it should first be linked to a goal. The organization must apply some needs evaluation and human resource development strategies that are aligned to its vision and mission (Bowen & Ostroff 2004). These two mean that a comparison of the organisational goals and the individual needs of the employees need to be aligned to achieve satisfaction and lead to high productivity. Strategic human resources management just like any other strategic management tries to answer these questions: What is?

What should be? How to get there?

It therefore becomes a rational assessment of situation and creation of a roadmap to getting to the desired point. It therefore focuses on the future and in so doing becomes a star to guide the organisational development step by step. Strategic human resource planning comes in at a point now where the individual efforts have to be concentrated into a team effort that is objective based (Boxall 1991).

During the struggle to achieve organisational goals, there arise some shortages in staffing, knowledge, cohesion, and other aspects that would help the human resource to achieve these ends. SHRM helps to alleviate such hurdles before they are reached through proper determination of the requisite HR needs, extensive training and refresher courses and conflict resolution (Guest 2002). Other areas that SHRM will handle are result oriented performance appraisal, employment security, employee participation and performance based remuneration.

These are just some of the SHRM practices that will give the organization a competitive edge.

The standard backdrop in which organizations are operating today is that of rapid environment change, innovations, and globalization (Wright, Dunford & Snell 2001). Customer and investor demands are on the same hand a force not to be ignored. HR has therefore stopped specializing in the traditional category of roles like training, staffing, appraisal, and

5 compensation. On the new arena there are some strategic priorities that have come along. These include flexible workforce, formation and implementation of team based job designs, quality improvement and empowerment of the employees.

SHRM Practices Strategic selection The performance of staff depends on its quality, which is a product of how it was selected. SHRM evaluates the long term needs of the firm and determines the exact qualities they will need in the human resources who will fill each position. SHRM is capable of doing this by determining the core competencies in an individual who will perform those tasks. Deficiencies in the selection process can lead to gross losses in the performance of the organization. Most companies regard technical competence and previous work experience as the most crucial aspect of a job candidate. Interpersonal skills are also accorded priority since they are directly related to personality and attitude which is a key to success of any individual (Boxall 1991).

The practices and theories applied by the managers of each organization are not predetermined but are often dictated by several factors like type of organization, its size, the level of education of its workforce, the culture of the people in it and many other relevant factors. In general, human resource approach used seeks to meet mainly the needs of the organization and those of its people (Wright, Dunford & Snell 2001). In the latest major research, there is an ongoing research project by Sophie De Winne and Prof. Dr Luc Sels on HRM and firm performance and funded by the Fund for Scientific Research. The project is ongoing and is an analysis of effect of intensive HRM on company performance. They are working to test if application of HRM best practices strengthens financial performance, whether individual SHRM practices have a great influence on company performance, and the nature and

6 intensity of SHRM effects on financial performance is influenced by contingency factors (Ulrich 2008).

Formal training systems Even though most employees get to work with the requisite skills to do that job, they still require training to be able to fit in the organization and contribute meaningfully to the entire team. Training is giving of employees the skills they need to excel in the current job demands.

Employee training is done for the purpose of acquiring more skills that will help save time, money or gain a competitive advantage. It can either be on-site or off-site. On-site training takes place within the precincts of the organization (Pfeffer & Jeffrey 1994) and often involves more experienced employees of the organization. Off-site training takes place outside the boundaries of the organization and often involves experts who are not part of the organization.

The main function of the supervisor is to develop the human resource he is supervising.

This can also be viewed as part of training. Technical unit managers should be made aware that they hold coaching responsibilities (Harris & Ogbonna 2001).

Internal career ladder This is very important in order to get the attention of the human resource focused towards the long term service to the organization. It gives meaning to individuals investing in productivity improvements alongside training (Bowen & Ostroff 2004). The common career ladder progression comes in form of promotion. Promotion is the advancement of an employee’s rank or position in a hierarchical structure to take up a job that has a higher salary, job title and often responsibilities. It is given to those employees who have shown merit and commitment in the organisational tasks.

Results oriented performance appraisal

7 Objective performance appraisal helps in making judgment regarding promotion, demotion, retention, remuneration and transfers. It also helps to identify training needs of the employee. One important thing HR managers should remember is that the evaluation areas must be related to the work they are doing. The HR department should prepare a checklist of questions that form the guideline of any evaluation so that all employees are evaluated on the same basis (Boxal 1991). Scholars have always identified a positive relationship between result performance appraisal and the performance of the organization.

Employee security This relates to giving of employees the human dignity they deserve. It includes such aspects as safety devices and job security. Where there is job security, employees are able to give the job attention as opposed to worrying about their job. This is usually looked at in the light of what kind of engagement the employer and employee are in. Long term contracts give a psychological satisfaction enabling people to focus on work (Osterman 1994).

Employee participation Unlike voice in a political scene, voice in an organization focuses on advocacy for reform. It helps when employees have a voice and are able to express opinions that can be heeded to in the organization. This gives motivation to the employee and at the same time adds to the meaningful knowledge base of the organization (Pfeffer & Jeffrey 1994).

Performance based compensation Strategic human resources management acknowledges that decisions relative to compensation should be tailored to attract, retain, and motivate employees. It is common for organizations to fear for the financial implications if it guarantees a set pay or benefits package.

In order to solve these other reward schemes do exist like bonuses, annuities, and other awards.

8 They are linked to the performance rating based on an objective appraisal. Rewards may be given terminally after achieving set and agreed behavior or randomly. Since they are meant to reinforce or encourage good organisational behavior, rewards should be given in a manner that even other employees become motivated to achieve similar or higher attributes. Rewards must only be given to employees whose performance or conduct is exemplary (Kamoche 1994).

Motivation of employees Whichever approach of HRM the manager uses, he should keep in mind that human beings are social beings and work best in a socially friendly environment. This means that apart from looking at the individual and organizational needs, there is need to address the organizational environment. Motivation of employees in the form of incentives, fringe benefits, and other benefits will be vital in making them keep focused on achieving high standards of the organizational goals (Pfeffer & Jeffrey 1994).

Rewards that come along with objective appraisals are the most key in performance.

Rewards even when not material or not related to work ladder will be a crucial area human resource managers need to emphasize on. Humans are social beings who like to be appreciated and no matter what form of appreciation, there is always a positive impact (Paauwe & Boselie 2009).

The strategic role of human resource management HRM has in the past been facing a tough time trying to justify its position in organizations. The introduction of SHRM came with HR’s role of supporting business strategy.

It brought with it a transformation, the first one being that people are an important asset of the firm who can be systematically managed. The second was to build a knowledge base with the

9 emphasis that other than coordinating policies and practices of the employees, the aligning of the HR practices with the organizational needs was the thing of value about those practices (Kamoche 1994).

The strategic roles of SHRM include: 

Contributing to achievement of set goals and survival of the company.



Successful implementation of the firm’s business strategies

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Sustain a competitive advantage

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Improve cooperation between HR managers and line management

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Increment of the practical strategic options at the company’s disposal

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Take part in strategic planning of the entire organization.

In fact, SHRM became popular due to its promise to increase the effectiveness of the organization through development of HR strategies that were better aligned to the business strategies (Porter & Michael 1985).

SHRM and performance SHRM is the pre-planned pattern or the organization’s human resource deployment and all the activities that are directed towards enabling the organization to meet organisational aims.

Another way of looking at it is that it is represented by the extent to which core decision making and the participation that is undertaken by the HRM departments and how the organization’s human resource contributes to the common business goals (Harris & Ogbonna 2001).

A consistent idea in the assumptions of the SHRM theory is that it is linked to performance. Since it is agreeable that SHRM is linked to performance, what then is the extent to which this contribution goes? It is argued that some HR practices are better than others and since SHRM is involved in the selection of these practices, it is directly linked to the good

10 performance that comes with those practices. A better view and understanding of SHRM role and its linkage with performance can be achieved through increment of the theoretical development on top of the available empirical evidence (Kamoche 1994).

The early simplistic theories that link HR to performance were based on distant indicators of financial performance. Rather, the central thinking in the modern linkage between the two is that the attitudes and behavior of employees at individual level results to the aggregated level behavior outcomes like labour productivity and turnover which in turn translate to the firm-level outcomes.

Performance outcomes of SHRM can thus be measured or be directly observed through financial outcomes like profits, market share and sales, organisational outcomes like productivity, efficiency and quality and also on HR related outcomes like attitude and behavior impacts (Arthur 1992). The most common measure is profit followed by sales. This does not always reflect the HRM impact as other factor both internal and external can influence these. For instance smart policies to manage working capital, a favorable economy, and other external factors can contribute to better performance. The measure of SHRM impact therefore needs to be more related to HR, like attitudes and behaviors (Edwards & Wright 2001).

The HR management team is hence the link of the employee and performance relationship. For SHRM to be suitably linked to the performance, both content and process must be integrated effectively. That is, the practices adopted (content) and the design must be aligned to the strategic goals of the organization for it to have meaningful contribution to the organizational performance (Porter & Michael 1985). For SHRM practices to be successful in contributing in performance, they must be visible, understandable, have legitimate authority, and be relevant. Visibility is the degree to which the practices are readily observable.

11 Understandability is the lack of ambiguity in the SHRM practice content and so ease of comprehension. Legitimacy of authority is that which enables the employees to submit performance expectations as formally sanctioned behaviors. In relevance, the individuals must be able to perceive the situation as relevant to the goal they are trying to achieve (Bowen & Ostroff 2004).

A summary model of SHRM-Performance linkage It is now apparent that SHRM is a major contributor of high organisational performance.

The measure to which it has contributed to high performance is not directly determined by financial outcomes though it is a distant indicator (Harris & Ogbonna 2001). The channel through which SHRM contributes to this performance can be summarized as follows:

Progression of SHRM impact from left to right Strategy of SHRM

SHRM practices

SHRM outcomes

Behavior outcomes

Performanc e outcomes

Financial outcomes

Differentiat ion or innovation

Selection Training Appraisal Rewards Job design Involveme nt Status and security

Commitment

Effort or motivation

High productivity Quality innovations

Profit

Focus on quality Cost reduction

Quality Flexibility

Cooperation Involvement Organisation al citizenship

Low Absence Labor turnover Conflict Customer complaints

ROI

12

From this model, it is apparent that the parameter through which you can measure the impact of SHRM is not a direct one but rather a sequential one. At any of these stages, you can tell that SHRM is efficient if there is a smooth flow.

Conclusion It can be concluded here, now that training, employee participation, result oriented appraisals and employment security are of critical importance in SHRM and that they are universalistic SHRM approaches. They have a positive relationship with a firm’s performance. A firm that emphasizes on these can benefit immensely in the eventual productivity (Wright, Dunford & Snell 2001). If human resource aspects were the only aspect of an organization, it would be easier to determine with precision what extent SHRM contributes to organisational performance. It can however not be concluded that ‘high’ performance is a result of SHRM alone. It is dependent on a number of factors which when combined with a strategically managed human resource produces exemplary results.

13 List of References Arthur, B., 1992. The link between business strategy and industrial relations system in American steel minimills. Industrial and Labour Relations Review, 45, 488-506 Bowen, D., & Ostroff, C., 2004. Understanding HRM-firm performance linkages: the role of the “strength of the HRM system”. Academy of Management Review, 29(2), 203-221.

Boxall, P., 1991. The strategic HRM debate and the resource-based view or the firm. Human Resource Management Journal, 6(3), 59-75 Edwards, P., & Wright, M., 2001. High-involvement work systems and performance outcomes: the strength of variable, contingent and context-bound relationships. International Journal of Human Resource Management, 12(4) 568-585.

Guest, D., 2002. Human resource management, corporate performance and employee wellbeing: building the worker into HRM. The Journal of Industrial Relations, 44(3), 335-358.

Harris, L., & Ogbonna, E., 2001. Strategic human resource management, market orientation, and organizational performance. Journal of Business Research, 51,157-166 Kamoche, K., 1994. A critique and a proposed reformulation of SHRM. Human Resource Management, 4(4):29 - 43.

Osterman, P., 1994. How common is workplace transformation and who adopts it? Industrial Labor Review, 47,173 - 88 Paauwe, J., & Boselie, P., 2002. Challenging (strategic) human resource management theory: integration of resource-based approaches and new institutionalism. Erasmus Research Institute of Management (ERIM), Rotterdam School of Management.

Pfeffer, G., & Jeffrey, R., 1994. Competitive advantage through people: unleashing the power of workforce. Harvard Business School.

14 Porter, G., & Michael, E., 1985. Competitive advantage, creating and sustaining superior performance. New York, NY: The Free Press.

Wright, P., Dunford, B., & Snell, S., 2001. Human resources and the resource based view of the firm. Journal of Management, 27, 701-721