A STUDY OF HUMAN RESOURCES MANAGEMENT SCORECARD AS PREDICTOR OF COMPETITIVE ADVANTAGE OF INDUSTRIES

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1 A STUDY OF HUMAN RESOURCES MANAGEMENT SCORECARD AS PREDICTOR OF COMPETITIVE ADVANTAGE OF INDUSTRIES Dr. Sibram Nisonko (Ph.D) Associate Professor, ASM s IBMR,Chinchwad, PUNE ABSTRACT Human Resources Management(HRM) scorecard comprising of innovative practices, Talent Management systems, people empowerment, Service Differentiation, Emotionally connecting with people and employees, Good perception of employees through quality service, Development of good brand employees have been viewed as an essential weapon for organizations to compete in this competitive business environment. Particularly, Indian manufacturing firms strive to transform their business model from labor-intensive to knowledge-intensive ones. They aim to develop high value and innovative products, processes, and services, to sustain the competitiveness. This study examined the direct relationships between HRM systems (performance appraisal, career management, training, reward system, and recruitment), HRM services, attitudes and values and organizational innovation (product innovation, process innovation, and administrative innovation) along with its competitive capability. Data was drawn from a sample of 30 SME manufacturing firms in India. The correlation results showed that HRM practices generally have a positive effect on organizational competitive advantage and innovation. System of attracting talent through innovative recruitment practices, communicating employees on requirement of innovations, mentoring and guidance for high level of innovations at work, flexible organizational structure for facilitating innovations were found to be highly significant. A discussion of the findings, limitations, and implications are provided. KEY WORDS: Employee brand, Emotional connection with employees, HRM scorecard, Hr systems, Service differentiation, Talent management. INTRODUCTION: Michael Porter said in the context of globalization that an industry s profit potential is largely determined by the intensity of competitive rivalry within that industry. Porter identified five competitive forces that challenge an industry, namely, threat of new entrants, and bargaining power of suppliers, bargaining power of buyers, threat of substitute products and services and rivalry among competing firms. He identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage. The proper generic strategy will position the firm to leverage its strengths and defend against the adverse effects of the five forces. "Companies achieve competitive advantage through acts of innovation." In his model "innovation" is a critical element within the process of strategic decision-making. 1

2 Industries should innovate in order to survive. Innovations lead to positive economic performance. It is the corner stone of economic success. In any system of innovation, the constituency of participating individuals plays a large role in determining its strengths and weaknesses. There are divergent views as regard to importance of innovations and effective role of hr in innovations in industries. Not all HR departments and functionaries are innovators. Hr leaders in industries play diverse roles ranging from fault finders, scrutinizers, dictatorial administrator to managerial mentors.great innovating companies have great HR leaders. Strangely, there are many who opine that HR has no role in industrial innovations. The human resources within a company are the single most important ingredient in the implementation of these strategies. It follows quite naturally that the HR function must have an impact on the company s innovation capacity. The moot question is how HR can ensure success of these strategies. Today companies are shifting their attention from just survival strategy to growth strategy. Innovative corporate strategies like mergers, acquisitions, diversification, and outsourcing at a global level are the order of the day. As the world is becoming more competitive and unstable than ever before, manufacturing-based industries are seeking to gain competitive advantage at all cost and are turning to more innovative sources through HRM practices (Sparrow, Schuler, & Jackson, 1994). The role of HR in innovation is a supporting role. It is not a manager of innovations. Rather HR can best support the innovation agenda by sticking to its knitting and focusing on three key themes. 1 Strategic Human resources Management is critical in today's highly competitive business environment for enabling sustained competitive advantage of industries. Certain Human Resource (HR) systems, tools and practices can predict innovative behavior and significantly contribute to industrial innovations. HR SCORECARD Balanced scorecards are not new. Managers have always been accountable to investors, customers, and employees; however, as the use of these scorecards grows, the employee dimension must be accurately measured. Employee success in the balanced scorecard may be tracked through productivity, people, and process measures, each of which becomes a basis for tracking the impact of HR within the business. The measure of hr systems, hr competencies, satisfaction of stakeholders and hr focus on corporate strategies can document the outcome of HR practices.hr systems can be clustered into six domains staffing, training/development, appraisal, rewards, organization governance, and communication, each having significant impact on corporate success. 4 IMPACT OF HR PRACTICES ON FINANCIAL PERFORMANCE: The interest in quantifying the impact of HR practices on financial performance has led to a number of studies.on the basis of a mixed sample of industrial firms in Spain, Jiminez- Jiminez and Sanz-Valle (2005) demonstrated a link between performance appraisal systems, incentive based compensation, and internal career opportunities with innovation, speculating that it is the impact of the HRM practices on employee participation that provides opportunities for innovation. In a similar vein, Shipton et al. (2005) provided evidence that 2

3 combining training, appraisal and induction influences different stages of the organizational learning cycle (i.e. creation, sharing and implementation of knowledge). Moreover, a study by Shipton et al. (2006) showed that not only do training, appraisal, and induction impact innovation, but that the influence of these practices may differ according to the types of innovation activities (i.e. exploitative vs. explorative). The contention that certain HRM practices impact different aspects of innovation has been conceptualized by de Leede and Looise (2005) and Jørgensen et al. (2008). These findings contribute substantially to our understanding of the relationship between HRM and innovation, but they are also limited by having been conducted exclusively in manufacturing firms. HR AND INNOVATIONS: Innovation, according to the Webster dictionary, is defined as the introduction of something new. It is the use of a new method or idea. Innovative organizations are constantly seeking for ways to improve on their methods, ideas or products in order to better the lots of their customers. Fundamentally, there are two distinctive types of organizational innovations, namely technological innovation, and administrative innovation (i.e. Chuang, 2005; Damanpour & Evan, 1984; Damanpour et al., 1989; Tan & Nasurdin, 2010). Chuang (2005) has further categorized technological innovation into secondary dimensions: product innovation and process innovation. Product innovation is a systematic work process which drawing upon existing knowledge gained from research and practical experiences directed towards the production of new materials, products and devices, including prototypes. On the other hand, process innovation is viewed as a creation of new process or improvement to existing process (Leonard & Waldman, 2007). Process innovation involves the implementation of a new significantly improved production or delivery method, which includes changes in techniques, equipment and/or software. Laursen and Mahnke (2001) provided one of the few empirical contributions: On the basis of survey data that suggest that large Danish companies in the manufacturing and services sectors following innovation and knowledge strategies tend to use new HRM practices that include interdisciplinary work groups, quality circles, planned job rotation, delegation of responsibility, integration of functions, performance related pay, and internal and external training. By design, more traditional HRM practices such as staffing and career development were not included in the study. Furthermore, while efforts were made by the authors to further refine the service sector data to depict the degree of knowledge-intensity; this was done according to their estimated potential to develop new products and services rather than the degree to which they built competitive advantage on knowledge. Human Resource Management (HRM) practices: Among the main approaches to develop HRM: universal or best practice approach (Huselid, 1995); strategic HRM practices approach (Delery & Doty, 1996); contingency approach (Dyer, 1985; Schuler, 1989); and configuration approach (Wright & McMahan, 1992), previous studies revealed that HRM practices, which were related to organizational innovation, mainly focused on universal or best practice approach. A review of the literature demonstrates five common practices that have been consistently associated with innovation, encompassing performance appraisal, career management, reward system, training, and recruitment (Gupta & Singhal, 1993; Jiménez-Jiménez & Sanz-Valle, 3

4 2005; Kydd & Oppenheim, 1990; Laursen & Foss, 2003; Shipton, Fay, West, Patterson & Birdi, 2005). Organization (Hiltrop, 1996). When firms develop and introduce new product, new process and/or new administrative practices, they require innovative and creative employees, who are flexible, risk taking, and tolerant of uncertainty and ambiguity (Chen & Huang, 2007). These employees are highly recognized in manufacturing industries as they contribute to firm on the basis of market responsiveness, product and process innovation. Therefore, it is important for a firm to implement supportive HRM practices that can motivate and stimulate employees to be innovative. For instance, performance appraisal increase employee commitment and satisfaction since employees are given chance to discuss about their work performance. This, in turn, will lead them to perform greater in innovative activities. In a similar vein, career management assist employees to attain their career goals and objectives. If employees are likely to feel satisfied with their career management, which in turn, lead to motivate them to perform in innovative activities (Delery & Doty, 1996). Training helps employee master knowledge, skill, and ability which would be contribute to innovation in terms of products, production processes, and management practices in daily operation (Schuler & Jackson, 1987). Hence, training develops the knowledge, skill, and ability of employees to perform effectively in their job that will lead to higher organizational innovation. Reward system provides financial reward, promotion and other recognition, in order to motivate employees to take risk, develop successful new products and generate newer ideas (Guptal & Singhal, 1993). Reward system encourages employee to become motivated, thereby increase their participation in contributing innovation ideas, which leading to high organizational innovation. Recruitment involves employing and obtaining appropriate and competent candidates through external sourcing (Sparrow, Schuler & Jaclson, 1994). Recruitment gives greater importance to be attached to fit between person and company culture. Hence, the high level of implementation of recruitment that attaches individual organizational fit is likely to result in high organizational innovation. KNOWLEDGE MANAGEMENT IMPACT ON INNOVATIONS Cheng Ling Tan and Aizzat Mohd Nasurdin examined the direct relationships between HRM practices (performance appraisal, career management, training, reward system, and recruitment) and organizational innovation (product innovation, process innovation, and administrative innovation) and the mediating role of KM effectiveness on the direct relationship. Data was drawn from a sample of 171 large manufacturing firms in Malaysia. The regression results showed that HRM practices generally have a positive effect on organizational innovation. 12 Sanjay Dugar(2009) argued that HR has a challenging role in mergers and acquisitions. Frymire(2006, p.11) opined that the biggest challenge today is not finding or hiring cheap workers, but rather hiring individuals with the brainpower (both natural and trained) and especially the ability to think creatively. 4

5 CULTURE AND INNOVATIONS The importance of internal social networks and communities to drive innovation was highlighted in Lynda Gratton s 2007 book Hot Spots. A cooperative mindset and a pressing business need and or challenge were identified as the typical attributed that encourage innovations. The example she provided was the Nano Indian car of Tata. HR can make the necessary changes to executive roles and goals, political infrastructures, recruitment strategy, broad-based training, performance appraisals, awards and incentives, employee contribution and commitment, value systems, and so on. HR can build and foster the cultural and constitutional conditions such as a discretionary time allowance for innovation projects, maximum diversity in the composition of innovation teams, and rampant connection and conversation across the organization that serve as catalysts for breakthrough innovation. HR SCORECARD The balanced scorecard is a popular strategic management concept developed in 1992 by Drs. Robert S. Kaplan and David P. Norton of Harvard Business School. This management and measurement system enables organizations to clarify their vision and strategy and translate them into action. The goal is to tie business performance to organizational strategy by measuring results in four areas: financial performance, customer knowledge, internal business processes, and learning and growth. In recent years, variations of the balanced scorecard have been developed, focusing on different themes (e.g., the HR scorecard, leadership, diversity). HR should be looked at as a strategic asset.. HR scorecard is linked with the Balanced Scorecard. The HR Balanced Scorecard has made it possible for HR managers to understand how to align HR strategy with the overall business objectives. They are able to explain not only what they are tracking but also how they are performing on essential strategies for the business. Business environment and the objectives and strategies will continue to evolve, and HR managers will continue to be flexible and creative in supporting the changes. 11 The studies are eye openers on the strategic role of hr influencing on innovative behavior of employees. and in particulars its power of HYPOTHESIS: Drawing upon the arguments given in previous studies, thus, our main hypotheses are constructed as follows: H1: The HRM scorecard factors (performance appraisal, performance counseling, potential appraisal, career management, training, reward system, and recruitment,) will be positively related to the organization s competitive advantage factors like innovation (product innovation, process innovation and administrative innovation.). RESEARCH DESIGN: Samples Innovating companies are widely distributed in the state of Maharashtra.Many of these companies had found place among the most innovative companies in India as per the list published by Business Today and Monitor Group in These companies are in the areas 5

6 of Automobiles, Telecommunication, Pharmaceuticals and software companies. Hence, 50 MSE manufacturing firms located in Pimpri- Chinchwad-Chakan-Bhosari area were selected to be the samples of this study. The potential manufacturing firms were given the questionnaires. Overall, 30 useable questionnaires were returned and analyzed, representing a response rate of 60 percent. Method of analysis :HRM systems measured in this study comprised of 14 items.organizational innovation were measured using 3 items that included product innovation, process innovation and administrative innovation.the response format was based on a five - point Likert scale ranging from (1) very little extent to (5) very great extent. Above and beyond, the hypotheses of this study were tested using correlations and regression analysis was made to evaluate the weight ages that companies give on HR scorecard factors. Analysis and Interpretations: Hypothesis Testing: Correlations of the innovative ability and competitive advantage as dependent variable and predictive variables namely,, hr system to attract, identify and capture talent, hr communications on innovations as goal of each employee, system of giving weight age on innovative talents in potential appraisal and promotions, hr system for feedback, removing constraints and system for improving performance and counseling to avoid attrition, hr system for mentoring and guidance, compensation strategy to encourage employees for innovations, compensation strategy to encourage employees for innovations, recognition and rewards programmes, giving training on innovations, developing good brand employees, encouraging flexible organization structure for innovative contributions, hr being committed to people to produce technologically advanced products, providing opportunities of time and resources for innovations,empowering employees, showing humanistic approach in dealing with employees, service differentiation are shown in Table 1. TABLE.1: Correlation of Competitive Advantage with HR Scorecard variables. SL NO. TASKS/FUNCTIONS/S YSTEMS CORRELATIONS t-test 1 EMPLOYEES PERCEPTION OF COMPANY AS HAVING COMPITITIVE ADVANTAGE LIKE INNOVATIVE,BRAND IMAGE 6

7 2 HR HAS SYSTEM TO ATTRACT,IDENTIFY AND CAPTURE TALENT 3 COMMUNICATES INNOVATIONS AS GOAL OF EACH EMPLOYEE 4 GIVES WEIGHTAGE ON INNOVATIVE TALENTS IN POTENTIAL APPRAISAL AND PROMOTIONS 5 HR HAS SYSTEM FOR FEEDBACK, REMOVES CONTRAINTS AND PROVIDES IN IMPROVING PERFORMANCE AND COUNSELLING TO AVOID ATTRITION 6 HR HAS SYSTEM FOR MENTORING AND GUIDANCE significant at significant at NS 0.27 N.S 0.39 significant at.05 7 COMPENSATION STRATEGY ENCOURAGE EMPLOYEES INNOVATIONS TO FOR 0.74 significant at.01 8 RECOGNITION AND REWARDS PROGRAMMES 9 GIVES TRAINING ON INNOVATIONS,DEVE LOPS GOOD BRAND EMPLOYEES NS NS 7

8 10 ENCOURAGE FLEXIBLE ORGANIZATION STRUCTURE INNOVATIVE CONTRIBUTIONS FOR 11 COMMITTED TO PEOPLE TO PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS significant at significant at PROVIDE OPPORTUNITIES TIME RESOURCES INNOVATIONS,EMPOWERING EMPLOYEES OF AND FOR NS 13 SHOWS HUMANISTIC APPROACH IN DEALING WITH EMPLOYEES,SERVICE DIFFERENTIATION NS NOTE: NS-NOT SIGNIFICANT As shown in table1, 6 out of 12 correlations are statistically significant. Correlations among HRM score card dimensions with Company s competitive advantage and innovations, ranged from r = 0.39 (p < 0.05) to r = (p < 0.01). System of attracting talent through innovative recruitment practices, communicating employees on requirement of innovations, mentoring and guidance for high level of innovations at work, flexible organizational structure for facilitating innovations were found to be highly significant. However, correlations of giving weight age on innovative talents in potential appraisal and promotions,hr s system for feedback, removing constraints and providing systems in improving performance and counseling to avoid attrition, recognition and rewards programmes, giving training on innovations, developing good brand employees, providing opportunities of time and resources for innovations,empowering employees, showing humanistic approach in dealing with employees, service differentiation are not significant with company s competitive advantage. A multiple regression analysis was conducted to find the weight ages of predicting 8

9 variable. The results are portrayed below : Regression Variables Entered Model Variables Entered 1 A10, A2, A9, A6, A5, A8 Variables Removed Method. Enter a. All requested variables entered. b. Dependent Variable: D1 Model Summary Model R R Square Adjusted Square a R Std. Error of the Estimate a. Predictors: (Constant), A10, A2, A9, A6, A5, A8 ANOVA b Sum of Model Squares df Mean Square F Sig. 1 Regression a Residual Total a. Predictors: (Constant), A10, A2, A9, A6, A5, A8 b. Dependent Variable: D1 Coefficients a Unstandardized Coefficients Standardized Coefficients Model B Std. Error Beta t Sig. 9

10 1 (Constant) A A A A A A a. Dependent Variable: D1 The result shows that the maximum coefficient of was carried by compensation strategy to encourage employees for innovations. FINDINGS : System of attracting talent through innovative recruitment practices, communicating employees on requirement of innovations, mentoring and guidance for high level of innovations at work, flexible organizational structure for facilitating innovations were found to be highly significant. What is surprising is that companies under survey did not consider potential of employees as significant. They also did not give priority to removing work constraints. Organizational management were found to be conservative in sparing time and resources.training on innovations,rewards and recognitions and such other humanistic approaches were anathema to the tough minded production oriented companies in the study. SUGGESTIONS: 1. Time is as precious for production as towards innovations. Providing a well designed scheme for freedom of time and resources may be considered under HR scorecard. Innovations definitely require more time and freedom.this freedom can also motivate talented workers. With proper facility employees they can solve problems of innovations. 2. Removing constrains and providing support is a management responsibility for innovations. Tight control may prove costly in this area. 3. Managers should encourage employees to acquire, share, and apply their knowledge in order to achieve the competitive goals. Developmental efforts for employees will lead to better administrative innovations. 4. Companies may install an internal innovation network an on-line system where innovators post ideas and progress, and receive feedback and ratings from other innovators inside the organization. 5. They may use review panels and internal conferences to evaluate the progress of different research teams 6. Crafting jobs that provide freedom, autonomy and time to explore their ideas; 10

11 providing these individuals with material and staff resources to pursue their own ideas in addition to the important current business-directed research. 7. Offering non-managerial (or technical) career tracks that still have visibility and stature within the organization. 8. Hosting internal forums/conferences where employees are invited to learn about future business needs and emerging technologies. 9. Establishing internal business plan competitions and funding winning ideas. 10. Building innovation networks where people share ideas, engage in ongoing projects, problem-solving and providing feedback. 11. The HR team should work with other parts of the organization to create the best message and delivery to fill the candidate pipeline with the best people. HR must train managers on the best practices for creating employee and job profiles that can be used to properly screen candidates. Managers need help in constructing the process of interviewing and assessing candidates. One area is lack of interview skills of most managers. HR should provide coach to managers in the basics of situation-based interview techniques and candidate evaluation around the metrics of aptitude, attitude, and achievement. 12. The right rewards system provides a powerful tool for reinforcing commitment, directing employee professional growth, and shaping the corporate culture. Few companies are measuring the right things when it comes to promoting the development of innovation -workers. HR managers should take a hard look at how they are trying to develop these critical resources. 13. The cost of losing a key employee is very high. So, it must be a primary objective to retain the top performers in the organization. This of course suggests that HR needs to work with managers to have a system that identifies who are the key people in the organization and where are the risks. With that information, the company can then consider what tools and actions are needed to mitigate these personnel risks proactively. LIMITATIONS: This study encounters several limitations. First, our data was cross-sectional which constrains our ability to make causal inferences. In particular, certain HRM factors such as career management, reward system, recruitment may not have immediate effect. Hence, a more appropriate method would be to conduct a longitudinal study. Second, this study is limited to manufacturing companies located in a limited area of Pune. The findings obtained may not be generalized to other samples across other regions. Future research could be duplicated with larger sample from different regions within the same industry, which would improve the generality of the findings. 11

12 Third, this study was confined to manufacturing industries. Future research in this area may be expanded to service sectors, in order to generalize the results reported here. References 1. Frymire, 2006 The Economist p Elements of Successful Organizations: Achieving Strong Leadership, Smart Management, and an Engaged Workforce from the Workforce Institute at Kronos Dave Ulrich, Measuring human resources: An overview of practice And a prescription for results. 5. New Working Group Plugs HR into the Innovation Equation, LR school, Cornell University, August HR Challenges in Mergers and Acquisitions, 5 June 2009,Sanjay Dugar 7. Science and Social Research (CSSR), 2010 International Conference, 5-7 Dec. 2010, Abdullah, Nor Hazana,Faculty of Technology Management, Business,and Entrepreneurship, UTHM, Batu Pahat, Johor, Malaysia,Wahab, Eta ; Shamsuddin, Alina,Page(s): Floor Slagter, HR practices as predictors for knowledge sharing and innovative behavior: a focus on age,int. J. of Human Resources Development and Management, 2009 Vol.9, No.2/3, pp Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter,The Competitive Advantage of Nations, The HR Scorecard: Linking People, Strategy, and Performance, Brian E. Becker,David Ulrich, Mark A. Huselid,2001,Harvard Business Press. 11. The HR Scorecard, Meghna Haridas, Cheng Ling Tan and Aizzat Mohd Nasurdin, Human Resource Management Practices and Organizational Innovation: Assessing the Mediating Role of Knowledge Management Effectiveness. 13.Sanjay Dugar, HR Challenges in Mergers and Acquisitions, Posted 5 June :15pm 12