The Impact of People Management Practices on Business Performance: A literature review

Transcription

1 Issues in People Management The Impact of People Management Practices on Business Performance: A literature review Dr Ray Richardson Marc Thompson Prelims.p /06/03, 15:33

2 Titles in the Issues series: Employee Motivation and the Psychological Contract Fairness at Work and the Psychological Contract How Dissatisfied and Insecure Are British Workers? A survey of surveys The Impact of People Management Practices on Business Performance The Impact of People Management Practices on Business Performance: A literature review The Impact of People Management Practices on Business Performance: Practical case studies Knowledge Management: A literature review Managing Learning for Added Value Performance Management through Capability The State of the Psychological Contract in Employment Workplace Learning, Culture and Performance These titles can be ordered from Plymbridge Distributors Tel: The Institute of Personnel and Development is the leading publisher of books and reports for personnel and training professionals, students, and all those concerned with the effective management and development of people at work. For full details of all our titles please contact the Publishing Department: tel fax publish@ipd.co.uk The catalogue of all IPD titles can be viewed on the IPD website: Prelims.p /06/03, 15:33

3 Issues in People Management The Impact of People Management Practices on Business Performance: A literature review Dr Ray Richardson London School of Economics Marc Thompson Templeton College University of Oxford INSTITUTE OF PERSONNEL AND DEVELOPMENT Prelims.p /06/03, 15:33

4 Institute of Personnel and Development 1999 First published 1999 All rights reserved. No part of this publication may be reproduced, stored in an information storage and retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written permission of the Institute of Personnel and Development, IPD House, Camp Road, London SW19 4UX Typeset by Paperweight Printed in Great Britain by Short Run Press, Exeter British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN INSTITUTE OF PERSONNEL AND DEVELOPMENT IPD House, Camp Road, London SW19 4UX Tel: Fax: Registered Charity No A company limited by guarantee. Registered in England No Registered office as above. Prelims.p /06/03, 15:33

5 - Contents - Preface Executive summary vii xi Chapter 1 The background to this report 1 Chapter 2 The theory of human resource strategy 3 Chapter 3 The empirical literature 17 Chapter 4 Practitioner perspectives 25 Chapter 5 Future research 30 Appendix 1 Detailed reviews of key texts 33 Appendix 2 Current and planned research on HR strategies and business performance in the UK 51 Appendix 3 Analysis of key empirical studies 53 References and further reading 75 Prelims.p /06/03, 15:33

6 Ray Richardson is Reader in Industrial Relations at the London School of Economics. He has taught and done extensive research for a number of years in the area of Human Resource Management. His recent research focus has been on performance related pay (for example the forthcoming IPD survey report no. 9, UK Performance Pay Trends) and HR strategies where, apart from the present report, he is working with Marc Thompson on a survey of HR strategies in the UK. Marc Thompson is Research Fellow at Templeton College, University of Oxford. His principal research interest is in strategic human resource management (SHRM). He is currently conducting a two year programme of work on high performance work systems in the UK aerospace industry (particularly the diffusion of lean production methods). Marc is also directing an ESRC research project that looks at the reward practices of innovative organisations in the knowledge sectors of the economy. He has been working with the IPD on human resource management and business performance issues for the last two years. -vi- Prelims.p /06/03, 15:33

7 Preface Angela Baron Institute of Personnel and Development There is a new and exciting area of research emerging which marks an important phase in the development of our understanding of the relationship between people management and organisational performance. Managers know that the way people are managed and developed affects the bottom line, but the difficulties of evaluation have, until now, limited the arguments that can be made in favour of more sophisticated, systemic approaches to people management. In the last few years the situation has begun to change, and a body of hard evidence is now emerging which demonstrates that the way people are managed is a crucial factor in predicting business performance. This report reviews the most significant literature currently available. It analyses the evidence in an objective, structured way identifying what we can be confident of, and where we need more data to prove the case. In particular, the researchers have studied the range of methodologies used and the way in which data have been analysed and interpreted to identify gaps in the research and hitherto unexplored sectors and industries. What we do know is that there is a range of independent studies conducted both in the UK and overseas which broadly demonstrates that good people management practices equate to better business performance. Indeed, by 1995 research by the IPD was able to present a model that indicated that when people management policies are integrated into a coherent philosophy and where this fits the business strategy, superior performance results. But, although the IPD has come further than ever before in proving the link between people management and development practices and business performance, the evidence is not yet complete. In particular, we need to develop a much better understanding of how this relationship works in practice. We need to understand the impact of context, both economic and geographical. We need to be confident that the methodology and analysis is robust enough to combat even the most sceptical, and we need to be able to understand it all within a coherent set of arguments and theory. As the professional body representing those concerned with the management of people, the Institute of Personnel and Development also needs to be able to support people managers engaging with these issues. We must establish frameworks within which they will be able to make informed and reliable choices on what to do and how to do it. We need to demonstrate to managers that there is a body of knowledge and understanding that can be applied in the real world and that will enable them to develop a people management strategy that will both fit with and drive their business strategy. -vii- Prelims.p /06/03, 15:33

8 Work and research programme To improve the evidence available and develop our understanding of this area, the IPD has embarked on an ambitious programme of work. This programme includes new research, collaborative work and consultation among members and other interested agencies and individuals. The programme is, therefore, multi-faceted and aimed at all levels of our profession as well as the wider business and economic communities. However, there is one overall research hypothesis that is guiding the entire programme of work: that a coherent framework can be developed within which organisations can make informed choices about which people management practices and combinations of practices are most likely to lead to better performance. The IPD programme of work has its origins in the mid-1990s. From the research available then, including the extensive work carried out at Cranfield School of Management, it was apparent that little was known about the causal links between people management and business performance. The studies that are currently in progress should add to this understanding, but there is a need to develop a theory of causality and to identify a form or forms of evaluation to determine how and why certain practices make a difference. In 1997 the IPD commissioned the Institute of Work Psychology at Sheffield University to analyse the individual elements of management activity and measure their contribution to performance. The results are based on data collected as part of a ten year longitudinal study ( ) examining market environment, organisational characteristics and managerial practices in over 100 UK manufacturing companies. This study forms part of the Sheffield Effectiveness Programme. The findings are remarkable. They show decisively that people management practices exert an extremely powerful influence on performance; more powerful than all the other practices hitherto believed to be the most important, such as business strategy, technology and research and development. These results are supported by work carried out in the USA by Mark Huselid and others, which demonstrates a consistent positive relationship between people management practice and current and subsequent performance. In addition to the survey data available, a wealth of best practice evidence is beginning to emerge. Both David Ulrich and Jeffrey Pfeffer put forward frameworks to analyse the role that the personnel function needs to adopt to help deliver organisational excellence. Their evidence has been refined from observations over a number of years in many different organisations and from the literature that already exists. The Institute is tapping into this evidence to inform our research programme, and for the 1999 IPD National Conference programme and consultation purposes. In 1998 we commissioned this report from Marc Thompson and Ray Richardson to help us in developing our plan of action. We asked them to review the available evidence from an academic standpoint, identifying the strengths and weaknesses. We hoped from this process to be able to develop a way forward that would enable us not only to contribute to and develop the academic debate but to bring the views of practitioners and academic researchers together in a meaningful and useful dialogue. -viii- Prelims.p /06/03, 15:33

9 An action plan for the future A number of initiatives have already resulted from this strategy A group of senior people management practitioners, together representing 12 per cent of the UK workforce, met in February This group confirmed that while the practitioner community is aware of the evidence that is becoming available, it needs hard proof and accessible tools to enable it to apply it in the workplace. It also confirmed that the research evidence must recognise the impact of market forces on the choices that organisations are able to make if is to achieve any credibility in the business community. In particular, the group emphasised the need to develop mechanisms to integrate people management with strategy, and equip personnel practitioners with the necessary competencies to manage in a climate of uncertainty. Feedback from other practitioner groups indicates that practitioners are both able and willing to take a lead in this area in the further development of our programme. In particular, there is a strong belief that practitioners must be proactive in the development of diagnostic tools and engage in meaningful dialogue with academics if any of the academic efforts are to have real impact and benefit in the day to day process of managing business. Of course, the IPD is catering for the needs of a number of different audiences. These range from practitioners who want advice on the design and choice of practices, to business leaders who need definitive evidence and explicit understanding to adopt strategies that will both achieve higher business performance and satisfy the needs of all the stakeholders in their business employees, shareholders and customers. The Institute has therefore developed a plan of action designed to build upon the achievements to date in this field of research, which we believe represents a major breakthrough in the understanding of the value of good people management. We intend to focus out efforts on two major areas: extending and developing the data and supporting the development of a theory to underpin the evidence that exists in this area developing understanding of the process or processes by which people management practices have an impact on business performance and by which policy intention is turned into action. In addition it is vital that our programme of work ensures that the debate is carried out among as wide a group as possible. It is not just the people management specialists who have a stake in this field, but everyone concerned to develop business success. We also need to engage the business leaders and those responsible for shaping the competitiveness agenda. In addition, there is an urgent need to develop better ways of accessing the considerable body of academic research that already exists and using it as a basis for developing usable tools for managers. Without this, much valuable work will be wasted simply because managers have no means by which to apply it in their own business situation. The literature search has itself thrown up a number of issues. It is evident that although there may be some guiding principles, it is unlikely that there will ever be one way to business success that will work in all organisations in all circumstances. Organisations need to develop strategies, which are rooted in their particular environment and business position. This report provides a critical focus -ix- Prelims.p /06/03, 15:33

10 for understanding more about the important relationship between the management of people and business performance. We do not intend or expect to achieve all of our aims and objectives alone. We shall take every opportunity within our work programme to operate in partnership with other agencies and interested organisations. We also do not want to reinvent the wheel, and are consulting as widely as possible to be aware of all the initiatives that are taking place under this broad heading of people management and business performance. In particular, we intend to look at some of the sectors that, hitherto, have been untouched by the research that has been carried out. Despite the multi-faceted approach we are taking, the aim is singular: to demonstrate unequivocally that better people management makes the critical difference to organisational performance. -x- Prelims.p /06/03, 15:33

11 Executive Summary This report summarises some of the key themes emerging from an on-going review of the theoretical and empirical work in the area of people management strategies and business performance. There are in the region of 30 empirical studies that have sought to address the relationship between HR practices and business performance. This research field has been pioneered in the USA and the bulk of the articles report on studies conducted in North America. However, there are also a growing number of UKbased programmes of work. The published research generally reports positive statistical relationships between the greater adoption of HR practices and business performance. In a review of some of the better research in this area, Pfeffer (1998) cites evidence that HR practices can raise shareholder value (ie stock market value) by between $20,000 and $40,000 per employee. A study by Huselid and Becker (1995) suggested that market value per employee was strongly correlated with the sophistication of the HR practices adopted. In other words, businesses got above average returns when they used a broader range of practices for more employees and also integrated these practices within the business. In the UK, researchers at Sheffield University (Patterson et al, 1997), while unable to put a market-value on the business impact, found that changes in profitability among a panel of over 60 small to medium sized single-site manufacturing businesses was significantly correlated with the adoption of certain HR practices. Thompson (1998) reporting findings from an establishment-level survey of the aerospace industry found that firms reporting higher levels of value-added per employee used HR practices for a greater proportion of their employees and were also more likely to have a board-level personnel director. As the work in the area has developed, researchers have begun to delineate three broad perspectives on the way in which HR practices contribute to business performance: 1 Best practice one set of HR practices can be identified which when implemented will raise business performance 2 Contingency business performance will be improved only when the right fit between business strategy and HR practices is achieved 3 Bundles specific combinations of HR practices can be identified which generate higher business performance but these combinations will vary by organisational context. Overall more positive effects have been ascribed to the best practices perspective. However, the claims that a universal best practice HR strategy has been identified are premature. It is unlikely that adopting a specified set of HR policies is the high road to organisational success. Even the large amount of empirical work that has been done has not identified all the general components such a set of policies would contain. However, this is not to say that the best practice literature is without -xi- Prelims.p /06/03, 15:33

12 interest and they give a checklist of policy combinations which organisations should actively consider adopting. Virtually all the statistical analysis defines and measures strategy by a statistical procedure rather than a principled argument. There is a need to start to identify strategies by their intrinsic theoretical and real world properties. We need to move away from a concentration on the analysis of two end points and pay more attention to the intervening steps, for example looking at what mediates the two variables strategy and performance. We need to understand why particular combinations of policies might work and what discretion managers might have within their ability to affect these mediating variables. How something is done is often more important than what is done, and we need to pay much more attention to how clusters of HR polices are adopted and implemented as well as to the specific contexts in which policy innovation is attempted. A good deal of the research work in this area has progressed with very little engagement with the practitioners who are important customers for this research and whose behaviour is the most likely to be influenced by convincing research findings. If this situation continues, the studies may not provide enough policy precision and little guidance for personnel and development managers on the content and form of strategy. It is clear that there is a need for process-based research which can also lead to the development of learning tools that can help practitioners make better decisions about personnel and development investments. -xii- Prelims.p /06/03, 15:33

13 Chapter 1 The background to this report In his book, The Human Equation, Jeffrey Pfeffer argues that the way in which organisations treat their employees is at the heart of their success (Pfeffer, 1998). Pfeffer is highly prescriptive. He claims that virtually all organisations, commercial and non-profit organisations alike, will be more successful if they follow a particular Human Resource strategy, comprising a specified number of people management policies. He supports this position with a wealth of anecdotes and illustrative cases but, in contrast to other books in this mode, his message is also firmly grounded in a growing number of well-thought-out research studies which use heavyweight statistical analysis. For example, he quotes Huselid, who looked at a large sample of firms from across the whole of the US economy and concluded that the heavy use of a number of specified HR practices was associated with a level of sales revenue that was on average $27,000 per year per employee. The corresponding increase in shareholder value was put at $18,500, while the increase in profits was estimated at nearly $4,000 per year per employee (Huselid, 1995). Subsequent and more refined studies by Huselid suggest that the gains are even larger. These are very impressive numbers but they are not unique. Other studies by a variety of authors, whether in automobiles, steel, clothing, oil refining or in the service sector, point to similarly impressive outcomes, usually measured by productivity gains. So, Pfeffer claims, there is powerful evidence to suggest that deploying certain high performance management practices makes bottom line sense. Findings like these excite both the academic and the practitioner, and they promise to move the personnel or HR function away from being seen as a peripheral administrative activity and put it at the centre of the organisation s activities. The key purpose of this report, therefore, is to look hard and critically at the body of academic work that underpins Pfeffer s analysis. Like him, we see these studies as having very important implications. They stimulate thought, they cannot be lightly dismissed, and they point to something that deserves sustained attention. Where we differ from Pfeffer is that we do not see them as being quite so authoritative a basis for firm and detailed prescription. The studies have their weaknesses and these should not be underestimated. They are neither absolutely conclusive nor do they address all the relevant issues. So this report explores both the strengths and the frailties of the research to see where we stand at present. As a prologue, and to provide a context for what is to come, we set down a little more detail from Pfeffer. He concludes that a set of seven people management policies seem to characterize most if not all of the systems producing profits through people (p.64). He specifies these policies as: an emphasis on providing employment security putting in a lot of resources to recruit the right people in the first place an extensive use of self-managed teams and decentralisation -1- Chap1.p /06/03, 15:30

14 wage levels that are high and are strongly linked to organisational performance a high expenditure on training attention being paid to reducing status differentials a willingness to share information. Pfeffer s HR strategy then becomes, at its core, these seven people management policies, each of which may be embodied in a variety of concrete and detailed people management practices (eg there are many techniques that might encourage the sharing of information within an organisation). Pfeffer does not suggest that the practices have to be the same in every organisation. Even so, however, his conclusions go some way beyond the academic research. First, the empirical support for each of the seven policies is of variable strength it is clearer for some than for others. Second, there is even less agreement on the merits of the different practices that might be used to achieve any one policy for example, are all methods of linking pay to organisational performance equally effective? Third, not all of the studies he relies on include all of the seven policies when they relate HR strategies to business performance. This means that the empirical support for Pfeffer s particular combination of policies is less secure than he implies. Many modern managers will agree that his seven policies are worth taking seriously, though some may also feel that he has omitted some important candidates. And Pfeffer is to be applauded for making his case so clearly and with such enthusiasm. Nevertheless, matters have not been resolved as completely as his advocacy claims. The management literature has seen too many prescriptions which seem persuasive, but turn out to be premature or misleading or simplistic. More caution, and more knowledge about the underlying scientific work, is appropriate at this stage. Chapter 2 discusses the meaning of HR strategies and considers the theory underpinning this area of research. Chapter 3 looks at the available empirical evidence and reviews the problems and issues with this body of evidence. Chapter 4 reports the key themes from practitioner consultations and their implications for the future research agenda. Finally, Chapter 5 pulls together the main findings from the research review, identifies the main research gaps and suggests where IPD resources might be best allocated. -2- Chap1.p /06/03, 15:30

15 Chapter 2 The theory of human resource strategy Strategy in general This report is concerned with the effectiveness of human resource strategies, so an obvious first step in a theory section is to discuss what, in general terms, an HR strategy is. Having done this one can then turn to the theoretical issues raised when assessing the effectiveness of the human resource strategies. Defining strategy is no easy matter. For the purposes of this report, however, a strategy, whether an HR strategy or any other kind of management strategy, must have two key elements: there must be strategic objectives (ie things the strategy is supposed to achieve), and there must be a plan of action (ie the means by which it is proposed that the objectives will be met). However desirable it may be to have a strategy, it is not an automatic passport to organisational success. Strategies can be good or bad. A bad strategy would either specify inappropriate or inconsistent objectives, or propose a plan of action that was seriously deficient. A strategy is often taken to imply a long-term perspective. This is often, but not quite always, true. It might be entirely sensible for an organisation knowingly to pursue a short-term strategy, or indeed simultaneously to have both a short-term and a long-term strategy that were not identical. A further quality a strategy is often thought to have is breadth. In some sense, it reflects the whole rather than part of the picture. What this means is that, to be a success, the plan of action should somehow capture all, or nearly all, of the different elements of the situation. Organisations do not necessarily have strategies, certainly not in any well-defined or explicit form; or they may have a strategy for one part of their activities but not for all of them. They may, for example, have articulated some form of overall business strategy but not have developed the corresponding strategies for each of the functional areas of management, such as people management. Finally, it is probably true that most organisations arrive at their strategies in a somewhat haphazard way. It is misleading to suggest that senior managers typically engage in a process of thinking through all their objectives and then calmly, rationally and comprehensively go through all the policy options before judiciously choosing the optimal set. On the contrary, most organisations operate on a piecemeal basis, responding to sudden emergent pressures, and are subject to a variety of powerful internal political pressures which contribute to inconsistencies among their policy choices. Most of the literature in the area of human resource strategies ignores the actual process by which the strategies are formed and concentrates instead on the chosen policies and practices. This is an important gap. -3- Chap2.p /06/03, 15:30

16 The meaning and content of HR strategies In line with what has already been said, an HR strategy must specify HR objectives and have an associated plan of HR action. The objectives of an HR strategy could be expressed in a very general way, perhaps as being precisely the same as the organisation s overall objectives. The dominant overall objective for commercial organisations is usually taken to be the maximisation of profits or shareholder value. This is sometimes stated explicitly and sometimes left implicit, in which case a firm s mission statement may express its business objectives in such terms as becoming the leader in its industry, or delivering an innovative and high quality product range. The presumption is that these other objectives are the concrete way in which the firm believes that it can maximise shareholder value. Non-commercial organisations, such as NHS trusts or government agencies, often have more trouble in specifying their overall objectives in a satisfactory way. They may specify them as a range of service targets, subject perhaps to staying within a pre-assigned budget. These service targets can sometimes cause difficulties because they can be in conflict with one another; they will usually, for example, be competing for the same limited budget, which implies trade-offs between the individual targets. But, after some thought, the trade-offs can be prioritised and overall targets can usually be expressed in a meaningful way. Important as it is to specify overall business objectives, it is necessary to go further when fixing the objectives of an HR strategy. Functional management areas like HR need their own more precise, more specific and more focused objectives. This is illustrated in approaches such as the Balanced Scorecard (see, for example, Kaplan and Norton, 1996), which seek to identify the important concrete implications for the activities and processes of the business that stem from shareholder objectives or mission statements. These complementary objectives should, of course, be consistent with overall objectives, but they need to be spelled out separately. The objectives of HR strategy To illustrate this point, one may envisage a chain or sequence of connections, see Figure 1. A commercial firm wanting to increase its profits (its ultimate objective ) will see that one way to achieve this is to reduce its unit labour costs (a production objective ); one way to reduce unit labour costs is to increase employee productivity (a behavioural objective ); one way to increase employee productivity is to make employees more competent (a generic HR objective ); one way to increase employee competence is to improve existing training programmes (an HR policy); one way to improve the training programme is to bring in professional trainers and make the process more formal and systematic (an HR practice, part of the firm s action plan). So we have a possible sequence: More formal training arrangements better training enhanced competence improved labour productivity lower unit labour costs higher profits. The HR objective could be expressed as being any one of higher profits, lower unit labour costs, higher productivity, or enhanced competence. They are all objectives but they exist at different levels of generality. -4- Chap2.p /06/03, 15:30

17 Table 1 HR objectives at four different levels Generic objectives Behavioural objectives Production objectives Ultimate objectives Competence Productivity Unit labour costs Profits Motivation Quality consciousness Quality levels Correct manning levels Working smart Quit rates Table 1 implies that there are many possible chains or sequences. It suggests that there may be three generic objectives of human resource policies, all referring to the organisation s workforce. All organisations want the right number of employees, the right mix of employee competencies, and the right set of motivations from their workforce. Of course, different organisations seek different numbers of employees, and different bundles of competencies, and different types of motivation, and an important part of a successful HR strategy is bound to be the correct identification of these three elements. The extent to which an organisation achieves its generic objectives will influence how well it achieves its various behavioural objectives. All three generic objectives, for example, will directly affect productivity levels. But firms are not interested purely in output per employee; they increasingly want their employees to pay close attention to quality standards, or to act in an innovative or creative way, or to co-operate and share valuable information with one another; and they will also normally want their employees (or, at least, their effective employees) to stay with the firm rather than leave. Organisations will think that such aspects of employee behaviour are influenced by employee competence and by the extent to which employees are motivated to pursue a variety of behaviours. So the extent to which desired behaviour is achieved will turn heavily on the extent to which an organisation succeeds in reaching its generic HR objectives. The extent to which the behavioural objectives are reached will influence the success the firm has in attaining its production objectives. It is no longer adequate to think of firms being interested solely in unit labour costs, important as these are for competitive advantage. Real and perceived product quality levels are also important. In this respect, much of the service sector is in a distinctive situation because its employees frequently interact directly with customers, so that product quality inherently becomes a matter of direct employee performance (with little or no possibility of subsequent rectification ). Achieving the firm s ultimate objective, eg profits, will obviously depend on the degree to which its production objectives are reached. Low unit labour costs lead directly to profits via higher profit margins; they can also lead indirectly to higher profits by allowing the firm to cut its product prices and increase its market share. Similarly, high quality levels may allow prices to be raised, thereby raising profit -5- Chap2.p /06/03, 15:30

18 margins; equally, they may directly increase market share through customer perception of better value for money. So, to summarise, the objectives of an HR strategy can, with equal validity, be expressed at any one of four different levels of generality, ranging from the generic to the ultimate. If they are expressed at a relatively general level, however, the accompanying strategic plan of action should also reflect the prior sequence of intermediate objectives, as well as the choice of HR policies. So, for example, if the HR strategy s objective is expressed as emphasising quality standards, the route by which this is to be achieved should be specified from specific HR policies through generic and behavioural objectives. The HR strategy s plan of action The HR plan of action is the set of things the organisation intends to do in its attempt to achieve its HR objectives. Most obviously and centrally it includes the various HR policies and practices the organisation chooses to adopt. But, and this is of great theoretical importance, it goes significantly wider than that. Policy intentions are not always translated into action. This means that the way in which policy is implemented must also be recognised as part of the plan of action (and, hence, of the strategy). In addition, and lying behind the set of HR policies, there is some reasoning linking the policies and practices to the objectives; how are they seen to work, and why do they have the effects they are supposed to have? So the action plan reflects a lot more than the formally adopted HR policies. In fact, most researchers in this field measure the firm s plan of action purely by its choice of HR practices; indeed, that is typically how they represent the HR strategy itself (ie different HR objectives are very often ignored). In other words, researchers tend to focus exclusively on the combination of individual HR practices that a firm does or does not adopt; it is a particular combination of practices which assigns the firm to one strategy category or another; the specification of strategic objectives, the problems of policy implementation, and the nature of the arguments that might link policies to objectives are usually not explored in any depth. Huselid, for example, in a very widely quoted study (Huselid, 1995) develops two complex measures of so-called high performance work practices which are, in essence, his index of the firm s HR stance, or strategy. As Table 2 shows, the first measure, Employee skills and organizational structures, is a conglomeration of nine HR practices; the second, Employee motivation, is a set of four such policies, rules or practices. Huselid has also, however, made some attempt to capture implementation by asking about coverage or intensity of use (eg in his formulation what proportion of the workforce is covered by?). This is not a full measure of implementation. It should capture how widely a firm s practices are targeted but it will certainly not capture such matters as the manner in which they are deployed, eg whether they are pursued by managers with consistency, equity, vigour and belief. -6- Chap2.p /06/03, 15:30

19 Table 2 An attempt to measure HR strategy Employee skills and organisational structures 01 What is the proportion of the workforce who are included in a formal information sharing program? 02 What is the proportion of the workforce whose job has been subjected to a formal job analysis? 03 What proportion of non-entry level jobs have been filled from within in recent years? 04 What is the proportion of the workforce who are administered attitude surveys on a regular basis? 05 What is the proportion of the workforce who participate in QWL programs, QCs and/or labor-management participation teams? 06 What is the proportion of the workforce who have access to profit sharing/gain sharing plans? 07 What is the average number of hours of training received by the typical employee over the last 12 months? 08 What is the proportion of the workforce who have access to formal grievance procedures and/or a complaint resolution system? 09 What proportion of the workforce is administered an employment test prior to hiring? Employee motivation 10 What is the proportion of the workforce whose performance appraisals are used to determine their compensation? 11 What proportion of the workforce receives formal performance appraisals? 12 Which of the following promotion rules do you use most often? (a) merit or performance rating alone; (b) seniority only if merit is equal; (c) seniority among employees who meet a minimum effort requirement; (d) seniority. 13 For the five positions that your firm hires most frequently, how many qualified applicants do you have per position (on average)? Huselid (1995) Huselid s approach identifies firms that are more or less heavy users of (some) high-performance work practices. In this case, therefore, only one HR strategy is articulated and explored; firms are arranged on a continuum which ranges from heavy users of high performance practices to those who make no use of them at all. A different way of specifying HR strategies comes from concentrating on the links between the set of HR policies and the three generic objectives, ie how and why HR policies might allow the organisation to achieve its three generic objectives. Some years ago, Walton (1985) compared two different styles of managing people. He talked about a control approach and a commitment approach. Both approaches have active practices in each of the standard HR policy areas, ie all organisations have to make selection decisions, training decisions, work design decisions, etc. But, for Walton, the detailed choice of practices within each of these areas were different for the two HR approaches. What he was essentially distinguishing were two very different underlying employment relationships (these might also be called different psychological contracts or different implicit contracts). -7- Chap2.p /06/03, 15:30

20 There are more than two possible employment relationships. Chadwick and Cappelli (1998a) talk about Contract and Investment relationships. At its core, their Contract relationship involves the employer first seeking to hire people who are already more or less fully competent to do the range of tasks they are asked to perform, so that large training expenditures are not required; the employer then seeks to motivate them to perform up to their potential by some kind of performance-related reward system. This particular implicit contract is seen to operate at arms length. The relationship is predicated largely on professionalism and the provision of rewards for performance that both parties find appropriate; in this scenario there is no premium on the employee generating complex attitudes, such as loyalty to the organisation. Chadwick and Cappelli s Investment system, by contrast, is based on an attempt to foster among employees a sense of common destiny with the firm over the long term. HR policies are therefore selected in an attempt to boost employee involvement, enrich jobs and develop new skills. The second column of Table 3 suggests that employment relationships can vary on many dimensions. They might, for example, be long term or short term; they might be predicated on the development of high commitment, or loyalty, or they might not; they might place a premium on encouraging what is sometimes called organisation citizenship behaviour (eg encouraging people to go voluntarily beyond their job descriptions and engage in valuable extra-role behaviour), or not; they might rest on the belief that the motivation to perform well is merely a matter of designing the appropriate reward system, or they might think that task is far more complex. Table 3 The nature of the employment relationship possible links between HR policies and objectives HR policy areas Selection Training Work design Promotion arrangements Contractual status Reward system Employee involvement Interest representation Communications The nature of the employment relationship Long/short term Commitment or loyalty seen to be important/unimportant OCB seen to be important/ unimportant Competence hired in, or developed in house Trust seen as important/ unimportant Generic objectives Competence Motivation Correct manning levels -8- Chap2.p /06/03, 15:30

21 So an HR strategy can be defined as an attempt to develop a specified employment relationship through the choice of particular HR practices. A firm wishing to attack a problem of motivation by basing much of its HR strategy on high levels of employee commitment to the firm must first address the prior question of which HR practices are likely to achieve employee commitment. It might therefore shape its selection policies differently, perhaps by putting more resources into identifying which applicants are likely to have a disposition to be committed; or it might rely on an internal labour market in order to encourage a sense that it is offering greater job security; or it might adjust its reward system towards group performance-related pay; or it might develop complex communications practices in order to make employees feel fully part of the firm. This approach to thinking about strategy puts a premium on exploring the ways in which particular HR practices are likely to create a relationship which, in turn, delivers what we have called the generic HR objectives of competence and motivation. It implies that, to understand an HR strategy, it is necessary to know not only the particular practices the firm adopts but also something about the nature of the employment relationship it is trying to generate. What is crucial here is the surprisingly complex idea of employee motivation. Employee competence is certainly an important generic HR objective for all organisations, because without it little can be achieved. But the more ambiguous or mysterious objective is motivation. For example, changing the England football manager seems sometimes to have a startling impact on the team s performance, even though more or less the same players are involved. The issue of fit A key idea in the strategy literature is fit. A set of HR policies is often said to constitute an HR strategy if and only if two forms of fit are achieved. First, the different HR policies must fit together sufficiently (have internal fit ); second, the HR policies must fit, or be congruent with, the firm s policy choices outside the area of HR (have external fit ). The notion of internal fit emphasises the interdependency between individual HR policies and practices. Such fit exists if the use of one HR policy enhances the effectiveness of the others. For example, relying on filling vacancies largely by internal promotion is unlikely to be effective unless the firm also has complementary training and development policies that have been well thought out; the two policies support one another and fit together. If a particular policy works to reduce the effectiveness of the others there will be inconsistency and negative internal fit. More specifically, effectiveness is to be understood as enhancing either the competence or motivation levels of the workforce. So synergy will be achieved (ie internal fit will exist) if the joint impact of a set of HR policies on competence or motivation exceeds the sum of their individual impacts on competence or motivation. What this implies in turn is that the classification of HR strategies, at least as far as internal fit is concerned, might rest on a theory of what motivates employees. It is no accident that some modern writing talks about high commitment management, ie the HR strategy that rests on the notion that it is employee commitment that acts as the motivational glue that binds many of the different policy elements -9- Chap2.p /06/03, 15:30

22 together. We might therefore define one HR strategy as consisting of those HR policies that are thought to enhance performance by enhancing employee commitment. Other HR strategies might focus on enhancing motivation through different transmission mechanisms. So one theoretical basis for specifying different HR strategies might be management s view of the relevant motivational glues. The notions of fit can also be explored through the contribution of Delery and Doty (1996) who argue that there are three dominant modes of theorising that characterise current empirical endeavours. They term the modes, the universalistic, the contingency and the configurational and the underlying argument refers to the importance of different notions of fit. Researchers adopting a universalist perspective work from the presumption that a specified set of HR practices will always produce superior results. This best practice approach is most clearly demonstrated in the works of Pfeffer (1994, 1998) and Osterman (1994). Although Pfeffer has not undertaken empirical work in this area, his reviews of existing work in the field have led him to conclude that certain specific practices when adopted will lead to higher business performance, whatever the accompanying circumstances. Interestingly, his list of practices has changed over time. In 1994 he suggested that there were 16 practices that would raise performance, whereas by 1998 he had reduced this list to seven practices (similar to the number explored by Delery and Doty, 1996, see below). Once again, this was justified on the grounds of the growing body of empirical evidence. This approach is basically saying that only internal fit matters, ie that best practices work in all contexts. The contingency perspective builds on the well-established field of contingency theory, which argues that performance is optimised when there is fit between an organisation s structure and its strategy. In the field of HR this framework has been used to argue that an organisation s set of HR practices must be consistent with other organisational factors if it is to be effective (i.e. that there should be external fit). This perspective has often looked at specific areas of HR such as reward practices (see Gomez-Mejia and Balkin, 1992) and examined how they vary in relation to different types of business strategy as well as how they influence a firm s performance. Perhaps the best example of this genre of studies is the work by Schuler and Jackson (1987), which developed the Miles and Snow typology of competitive product strategy to suggest how different market strategies should shape the nature and range of HR practices that a firm should adopt. This configurational mode of theorising draws heavily on developments in the organisational theory and strategic management literatures. In the words of Delery and Doty (1996) configurational theories are concerned with how the pattern of multiple independent variables is related to a dependent variable rather than how individual independent variables are related to the dependent variable (their emphasis). Another way to state this is to claim a strategy s success turns on combining vertical or external fit and horizontal or internal fit. This has consolidated the potential importance of bundles of HR practices, and MacDuffie (1995), Arthur (1992) and Ichniowski et al (1997) have all explored the extent to which combinations of practices can be determined and whether organisational performance is related to the adoption of such bundles. They extend this work by suggesting that certain ideal types of employment system can be identified that have characteristics that differentiate them from each other. The two systems -10- Chap2.p /06/03, 15:30

23 they identify are the market-type system and the internal system. Both of these systems, it is argued, will deliver higher levels of performance but a firm that is stuck in the middle will by definition have lower levels of performance. Therefore, a firm that has bundles of HR practices that most closely fit one or other of the ideal type systems should have a higher level of performance, providing it also achieves high levels of fit with competitive strategy. Delery and Doty argue that each of these three theoretical perspectives is valuable and that empirical work needs to be clear as to which framework is being deployed. Ideally, they would like to see researchers apply the three frameworks in order to evaluate their power. In their own empirical work (carried out in the US banking sector, and looking at one occupational group) they found the strongest support for the universalistic model. Final thoughts The argument so far is that it is difficult to develop a satisfactory taxonomy or classification of HR strategies. It is certainly not theoretically adequate simply to list different combinations of HR practices. This is in part because there is an astronomical number of possible combinations of practices. 1 So the mere counting of HR practices is not an adequate basis for defining an HR strategy. A simple list of different combinations of practices is also inadequate because the specification of interesting strategic choices requires a convincing rationale of how and why a particular combination of practices generates internal and external fit. The difficulty here, as so many writers emphasise, is that we are sadly short of such a rationale. Guest and Hoque, for example, were faced with the problem of assigning the firms in their sample to different strategic categories based on whether they had certain combinations of 23 HRM practices; they recognised that some of these practices might be more important than others, but they concluded that we know of no theoretical basis on which to determine this, so they treated each of them as equally important (Guest and Hoque, 1994, p.6). MacDuffie observed that every HR practice has a complex role and that there is no clear conceptual basis for separating practices affecting motivation from those affecting skill (MacDuffie, 1995, p.203). Even worse, the motivational impact of many individual HR policies remains to be established. This last point is very well illustrated in Wright and McMahan s (1992) discussion of the role of performance or incentive pay in characterising HR strategies which, as they note, shows some of the dangers arising from a lack of theoretical care when designing empirical research. They start by claiming that there is no theory that can help researchers understand the role of incentive pay in HR strategy and business performance research this is perhaps too sweeping. But a lack of theoretical rigour leads to (some forms of) incentive pay being seen in some studies as central to high commitment or innovative HR systems, and in others as integral to control systems (ie low-skill, low-trust systems). An adequate theory might indicate that a certain form of incentive pay is more likely to form part of a control type system, whereas another type of incentive pay scheme would be part of a commitment system. However, it is also possible that incentive pay schemes may be rewarding different behaviours and outcomes. For example, an incentive pay scheme tied to innovation might be more appropriate for a business pursuing a differentiation strategy, whereas a scheme tied to cost savings might -11- Chap2.p /06/03, 15:30