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Chapter2_Strategichumanresourcemanagementandperformanceoutcomes.pdf

2 Strategic human resource management and performance outcomes

This chapter will explore the research that, over the past twenty-five years, has sought to examine the link between HR practices and performance.

One of the earliest frameworks for exploring the impact of HR practices on performance was the ‘Behavioral Perspective’ outlined by Schuler and Jackson (1987) and noted briefly in Chapter 1. Having its roots in con- tingency theory, this model was based on the assumption that the purpose of employment practices was to shape or control employee attitudes and behaviours. They suggested that (a) different competitive strategies require different employee ‘role behaviours’, and (b) different HR practices can elicit these different role behaviours. Thus, they suggested that employee role behaviour mediated the relationship between strategy and performance, and that HR practices were critical for producing the relevant behaviours. Also central to this model was the need for congruence across HRM prac- tices such that all worked towards producing the required set of behaviours.

The behavioural perspective also formed the conceptual basis for Miles and Snow’s (1978) exploration of HR practices associated with different organisational types. Having proposed three types, ‘defenders’, ‘prospec- tors’, and ‘analysers’ in an earlier paper (Miles and Snow 1978), they provided an analysis of the types of practices that would be appropriate for each of these types.

Another behavioural approach to explaining the relationship between HR practices and performance can be found using Social Exchange Theory (Blau 1986; Homans 1961). This theory originated as a way to explain how relationships develop between individuals, but was later expanded to explore the relationship between an organisation and its employees (Eisenberger et al. 1986). This more macro-level application suggests that when employ- ees perceive that the organisation is taking positive beneficial actions towards them, they will reciprocate in positive and beneficial ways toward the organisation. Consequently, a number of authors have suggested

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16 HR management and performance outcomes

that commitment-based HR practices demonstrate beneficial treatment of employees, which causes them to reciprocate by being more committed and productive, resulting in higher organisational performance (e.g., Chuang and Liao 2010; Messersmith et al., 2011; Sun et al. 2007; Takeuchi et al. 2011).

While these frameworks provide more detailed process explanations for the relationship between HR practice and performance, the Resource- based Theory (RBT) of the firm (Barney 1991; Wernerfelt 1984) provided a higher level explanation for why HR practices can impact firm performance. Barney (1991) noted that resources that are valuable, rare, inimitable, and non-substitutable can be a source of sustainable competitive advantage to a firm. Sustainable advantages accrue when a firm implements a value- creating strategy that competitors have ceased trying to imitate. While such an advantage is defined in terms of economic rents that can be distributed to, or among, a variety of stakeholders (e.g., shareholders, customers, employees, etc.; see Coff, 1999), the assumption within empirical research is that such advantages are observed in shareholder returns, and thus financial and market-based performance of firms.

Early on, debates arose about the extent to which HR practices could be viewed as sources of sustainable competitive advantage, with the debates focused on the inimitability of the practices. Wright et al. (1994) suggested that any HR practice could easily be imitated by competitors. However, Lado and Wilson (1994) argued that the system (as opposed to individual practices) could be unique, causally ambiguous, and synergistic in how it impacted firm competencies. Later, Barney and Wright (1998) similarly suggested that while competitors could imitate any one practice, they would find it difficult to imitate the system of practices. Consequently, the field has come to a consensus on the importance of HR practices and their poten- tial to at least aid in creating competitive advantage. This consensus has become so great, that one would be hard pressed to find any study of the relationship between HR practices and performance that does not at least pay lip service to the RBT as the overarching rationale for hypothesising a positive relationship.

The earliest conceptual and empirical research on HR practices began with explorations of the ‘determinants’ of the various practices. Miles and Snow (1978) were among the first to offer a framework for aligning HR practices with strategy. They argued that the different strategic types (defenders, etc.) required different approaches to how they managed people. They then provided an analysis showing the different HR practices associated with these strategic types, and provided company examples to illustrate these dif- ferences. Baird and Meshoulam (1988) examined the determinants of HR practices rather differently. Instead of examining business strategies, these

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HR management and performance outcomes 17

authors focused on different stages in organisational life-cycles, and provided a conceptual examination of how HR practices might become more sophisti- cated as firms moved into different stages. Lengnick-Hall and Lengnick-Hall (1988) developed a model juxtaposing organisational readiness and corporate growth potential to create a two-by-two matrix. They then hypothesised the different types of HR systems that would be associated with each.

Following these conceptual examinations, the earliest research empiri- cally explored the determinants, rather than the outcomes, of HR practices. For instance, Snell (1992) was among the first to explore the determinants of HR practices at the organisational level of analysis. He viewed HR prac- tices as control mechanisms (input, e.g., selection and throughput, using for example, behavioural appraisal; and output, using for example, results- based appraisal) and found that the use of these aspects of HR practices were associated with administrative information and strategic context. Snell and Dean (1992) explored the link between integrated manufacturing and HR practices. They measured integrated manufacturing in terms of the use of advanced manufacturing technology (AMT), just-in-time inventory con- trol (JIT), and total quality management (TQM). They suggested that such manufacturing technologies required upskilling of the workforce to be able to effectively utilise the technologies. Thus, they expected that their use would be associated with more selective staffing practices, comprehensive training, developmental performance appraisal, and equitable rewards. They generally found support for these hypotheses among operations and quality-control staff, but not among production control employees. Finally, Arthur (1992) examined how strategy impacted HR practices in a sample of steel mini-mills. Using cluster analysis he identified six different clusters of mini-mills similar in their profile of HR practices. He then collapsed them into two types: ‘cost-reducers’ and ‘commitment maximisers’. This was consistent with Walton’s (1985) view of firms using control or com- mitment approaches, and Arthur’s (1994) later use of this nomenclature. He found that mini-mills emphasising manufacturing few products in large quantities tended toward the use of a cost-reducer/control HR system, while those stressing more flexible manufacturing were more likely to use a commitment-maximiser HR system.

Research redirection: HR practices and performance Following the initial inquiries into the determinants of HR practices, the field then began to shift to exploring the consequences, particularly their impact on firm performance. This research progressed in three stages as described below.

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18 HR management and performance outcomes

Stage 1: demonstrating the relationship between HR practices and performance

Exploring the determinants of HR practices, while useful, did not accom- plish the goal of showing that HR mattered. However, that soon changed. Huselid’s (1995) seminal study provided the empirical foundation for HR advocates to argue that HR can have a profound impact on organisational performance. Using a sample from the Russell 3000, Huselid surveyed Chief HR Officers regarding their use of thirteen, what he termed, ‘High Performance Work Practices’. (These can be seen as the component ele- ments of the much vaunted ‘High Performance Work Systems’ (HPWS)). He then regressed the firm’s financial performance (both Tobin’s Q and Gross Rate of Return on Assets) on these practices and found significant results. However, the basis for the study’s immediate popularity stemmed from the fact that he provided point estimates of the value of HR practices. In fact, he concluded that a one standard deviation increase in the use of HPWS were associated with a per employee increase in market value of $18,641, an increase of $27,044 in sales, and an increased profit of $3,814. Needless to say, HR practitioners jumped on these results to tout their importance, and HR academics quickly set out to conduct similar studies.

Appearing somewhat simultaneously with the Huselid (1995) study, were three other studies that captured the imagination of the field by dem- onstrating empirical linkages between HR practices and performance. First, Arthur (1994) used the data from his previously discussed study to exam- ine how the HR systems might differentially impact outcomes. His results showed that, compared to mini-mills using commitment-based HR systems, those using control systems displayed lower productivity, higher scrap rates, and higher employee turnover. MacDuffie (1995) examined how bundles of organisational systems impact performance in a manufacturing environ- ment. Using data from automobile assembly plants, he demonstrated that those using a combination of ‘high commitment’ HR systems and low inventory and repair buffers consistently outperformed those using mass production systems in terms of both quality and productivity. Delery and Doty (1996) tested the relationship between HR practices and performance in a sample of banks. Distinguishing among universalistic, contingency, and configurational approaches, they found the most support for a universalistic (a consistent set of practices across all firms) model in terms of explaining performance variance.

Needless to say, these four studies appearing within a two-year time frame sparked a plethora of further studies examining the relationship between HR practices and performance. For instance, Youndt et al. (1996) followed up the original Snell and Dean (1992) study by surveying

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HR management and performance outcomes 19

the companies regarding a number of performance measures. They found that an HR system focused on enhancing human capital was related to employee productivity, machine efficiency, and customer alignment, but that this relationship was predominantly observed with a quality manu- facturing strategy.

But demonstrating a clear link is by no means easy. Based on an empiri- cal study of HR and firm performance in Finland, it was found that the link between HR practices and firm performance was highly equivocal; the stage in the economic cycle was found to play a much more direct part in explain- ing firm performance (Lahteenmaki et al. 1986).

Stage 2: exploring the black box

As the research base showing a positive relationship between HR practices and performance grew, one thing was missing: an empirical exploration of how these practices impacted performance. Wright et al. (2005) described this problem as the failure to explain the black box between practices and performance. Their call, along with others, began to spark an increase in studies that explored the mediating mechanisms between these two variables.

So, for example, Cappelli and Neumark (2001) conducted an interesting study examining the costs and benefits of HPWS. They found that these practices transfer power to employees and result in higher wages, but only weakly impacted productivity. Given the higher wages, they found that there was no effect on labour efficiency in terms of the output per dollar spent on labour. Way (2002) found similar results in a sample of small busi- nesses. His results showed that HR practices were associated with lower workforce turnover, but not with labour productivity.

In a study of call centres, Batt (2002) found that HPWS were negatively related to quit rates and positively related to sales growth and that the impact of HPWS on sales growth was mediated by quit rates. Takeuchi et al. (2007), relying on the resource-based view of the firm and social exchange theory, hypothesised that HPWS raise human capital and social exchange within a firm, and that the human capital and social exchange should be related to establishment performance. Using a sample of Japanese business establish- ments, they found that human capital and social exchange mediated the relationship between HR practices and establishment performance.

In an extensive meta-analysis, Jiang et al. (2012) explored human capi- tal and employee motivation as mediators of the relationships between HR practices and voluntary turnover, operational performance, and financial performance. They found that the skill-enhancing HR practices relation- ship with financial performance was partially mediated by human capital,

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20 HR management and performance outcomes

employee motivation, turnover, and operational outcomes, but that the motivation- and opportunity-enhancing practices relationship with perfor- mance was fully mediated by these variables.

In what Schuler et al. (2014) refer to as ‘targeting practices’, a number of studies began to emerge which examined HR practices developed spe- cifically to encourage certain behaviours. For example, Collins and Clark (2003) examined HR practices for top managers. They explored how HR practices that encouraged networking were related to how much top manag- ers networked internally within the firm and externally with others outside the firm. They found that HR practices encouraging networking were related to sales growth and stock growth, and that these relationships were medi- ated by networking behaviour. Similar efforts have explored HR practices targeted at HR flexibility (Chang et al. 2013), customer service (Chuang and Liao 2010) and knowledge intensive teamwork (Chuang et al. 2016).

Stage 3: process models of the relationship between HR practices and performance

While the mediation research has demonstrated a number of potential mediat- ing variables, a more recent development is the emergence of process models of the relationship. One of the earliest models was proposed by Truss and Gratton (1994). Building on the previous work of Dyer (1985) they distinguished between ‘Planned HR Practices’ and ‘Implemented HR Practices’. They noted that some practices could emerge, not as a result of a planning process, and con- versely, some practices that are planned may never be implemented.

Bowen and Ostroff (2004) provided another foundational contribution to process models of Strategic HRM through their development of a construct they termed HR ‘system strength’. Those authors used communication the- ory to examine how HR systems could strongly or weakly communicate the intended messages aimed at managing employee behaviour. They argued that climate serves as the critical multilevel mediating construct between HRM practices and performance. They stated,

We propose that HRM content and process must be integrated effec- tively in order for prescriptive models of strategic HRM actually to link to firm performance. By process, we refer to how the HRM system can be designed and administered effectively by defining metafeatures of an overall HRM system that can create strong situations in the form of shared meaning about the content that might ultimately lead to organi- zational performance.

(Bowen and Ostroff, 2004, p. 206)

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HR management and performance outcomes 21

They argued that the strength of HR system can be described as the extent to which the system induces conformity. Consequently, they described the features of an HR system that could create strong situations as having dis- tinctiveness, consistency, and consensus.

Building and expanding on these basic ideas, Wright and Nishii (2013) and Nishii and Wright (2008) proposed a more thorough process model. This recognises that the basic relationship between HR practices and performance requires a number of individual-level processes. They, like Truss and Gratton (1994), distinguished between the ‘intended HR prac- tices’ and ‘actual HR practices’. However, they further recognised that the actual practices are implemented by managers, and thus, there could be significant variance in the practices across managers, and even across employees with the same manager. Thus, the actual HR practices are most accurately described at the individual level of analysis. The next stage in the process entailed clarifying the ‘Perceived HR Practices’. Even if a supervisor treats two employees the exact same way, it can be perceived differently by each. The concept of ‘Employee Reactions’ described the affective, cognitive, and behavioural reactions of employees to the prac- tices they perceived. Finally, how all employees coordinate, integrate, and align their behaviours determines the performance at the unit level. Thus, their process model starts at the unit level, goes down to the individual level, and then comes back up to the unit level.

Similarly, Guest and Bos-Nehles (2014) developed a model of HR prac- tice implementation. They described four stages to implementation. In the first stage, HR managers and senior executives (including the CEO) make the decision to implement HR practices. In the second stage, HR managers consider the cultural and regulatory constraints to decide on the quality of the HR practices that can be implemented. The third stage concerns how line managers and/or senior managers actually implement the HR practices. Finally, the extent to which line managers accurately use the practices deals with the line management quality of implementation.

Thus, these process models primarily recognise the fact that the ways through which HRM practices can influence performance requires examin- ing processes at multiple levels of analysis. They also correctly note that what an organisation intends to do according to its HR strategy may diverge greatly from what actually happens and how employees experience HR practices (Nishii et al. 2008).

Having described some of the theories, the more impactful empirical research, and the process models linking HR practices to performance, we now turn our attention to answering the two critical questions. What do we now know about this relationship, and what do we still not know?

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22 HR management and performance outcomes

What do we know about the relationship between HR practices and performance? Given the extensive literature on HR practices, one would expect that there would be a number of consistent findings. A more accurate description of this literature, however, is that there are indeed quite a number of findings, but few very consistent ones.

There is a positive relationship between the use of HR practices and unit performance

One almost unarguable finding across the hundreds of research studies conducted examining the link between HR practices and performance is that a positive relationship exists between these two variables. Combs et al. (2006) identified ninety-two studies with an overall N of over 19,000 that fit their criterion to meta-analyse the relationship between HR practices and performance. Using a conservative estimate, they suggested a mean cor- relation of .20 between HPWS and performance. They noted that while this number may not seem large, ‘it is much larger than what is found among other organisation-level phenomena where long-held organisational perfor- mance hypotheses either do not stand up to the evidence. . .or are much smaller than predicted by theory. . .’ (p. 517).

The positive relationship between HR practices and performance transcends country boundaries

Hofstede (1993) has strongly influenced management thinking based on his research on country cultures. He originally described four dimensions of culture: individualism-collectivism, masculine-feminine, uncertainty avoidance and power distance, and he later added the dimension of long-term- short-term orientation. For decades, authors suggested that US-originated HR systems, such as High Performance Work Systems, would not work or at least not work as well in certain country cultures. However, Gerhart and Fang (2005) were among the first to question what they termed the ‘cultural constraint’ hypothesis which suggests that the effectiveness of HR practices are constrained by country cultures. They noted the conditions that had to be true in order for the cultural constraint hypothesis to hold, and presented preliminary data suggesting that these conditions likely did not hold. Then, in a meta-analysis using 156 effect sizes and over 35,000 firms, Rabl et al. (2014) found (a) an overall mean correlations of .28, (b) that the relation- ship between HPWS and performance was positive in every country, and

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HR management and performance outcomes 23

(c) that the relationship was actually stronger in countries that the cultural constraint hypothesis would suggest would result in weaker relationships.

Bundling of HR practices matters in the relationship with performance

MacDuffie (1995) was one of the first researchers to introduce the concept of ‘bundling’. He actually described the importance of bundling a set of HR practices with corresponding production system characteristics, but many translated his bundling concept to examining bundles of HR practices. In the Combs et al. (2011) meta-analysis described below, they demonstrate that the effect of a system of HR practices is greater than the effect of indi- vidual HR practices. In fact, the average correlations between individual HR practices and performance was only .14 compared to the .28 estimate for the systems of HR practices as noted above.

What do we still not know about the relationship between HR practices and performance? While the above conclusions seem almost unarguable given the significant body of research that exists, a number of unanswered questions remain.

Which practices?

While research has clearly demonstrated the positive relationship between HR practices and performance, one critical question remains unanswered: which practices? As early as Becker and Gerhart’s (1996) introduction to the Academy of Management Journal’s special issue, we see complaints about the lack of consistency in the HR practices measured across the studies comprising that issue. They noted no single practice was part of each paper, and only one, training, appeared in all but one paper. This problem has not gone away. Posthuma et al. (2013) analysed 193 peer-reviewed articles and identified 61 specific HR practices that had been measured. However, they bemoaned the fact that there was very little consistency in the practices that have been measured across these studies. Similarly, Langevin-Heavey et al. (2013) found little agreement on the specific practices that have been used in studying the relationship between HR practices and performance.

Recently, Su and his colleagues have called for expanding the list of practices used in this research. They noted that since the early distinc- tion between commitment- and control-oriented practices (Arthur 1994),

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24 HR management and performance outcomes

HPWS research has focused almost entirely on commitment-oriented practices, In two studies, Su and his colleagues (Su and Wright 2012; Su et al. 2018) have found that adding control-oriented practices increases the amount of performance variance explained beyond that of just the commitment-oriented practices.

In addition to the specific practices, there is little consensus on the approach to aggregating the practices. Since the Huselid (1995) study, virtually all research has simply added the items together to compute an overall scale (or used factor analysis and added up the sub-scales). However, recent research based on the Ability, Motivation, and Opportunity (AMO) perspective has suggested that HPWS really contain three subcomponents: ability-enhancing, motivation-enhancing, and opportunity-enhancing subscales. For instance, Gardner et al. (2011) noted that ability-enhancing practices were actually positively related to turnover, while motivation- and opportunity-enhancing practices were negatively related.

More exhaustively, the Jiang et al. (2012) meta-analysis segmented HR practices into three sub-components: ability, motivation, and opportunity- enhancing practices. They found that skill-enhancing practices were more strongly related to human capital and less strongly related to employee motivation than were motivation and opportunity-enhancing practices. They noted:

The findings of the differential relationships between the dimensions of HR systems and organizational outcomes also offer methodologi- cal implications for strategic HRM research. First, if all three dimen- sions of HR systems have unique effects on organizational outcomes, failure to include any dimension may compromise the overall impact of HR systems on organizational outcomes or at least lead to inaccu- rate results.. . . Relatedly, the results indicate that the three-dimensional model fit the data slightly better than the model combining the three HR dimensions into a unidimensional HPWS element.

(p. 1278)

Which direction does the causal arrow point?

While the positive relationship between HR practices and performance seems virtually unarguable at this point in the field’s evolution, what remains unclear is whether increasing HR practices causes higher perfor- mance or high performance encourages firms to develop and implement more HR practices. Guest et al. (2003) examined the relationship between HR practices and performance among a sample of UK-based firms. They

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HR management and performance outcomes 25

found that while the positive relationship existed between the practice and performance, once they controlled for past performance, the relationship disappeared. Similarly, Wright et al. (2005) found that measures of HR practices were equally correlated with measures of past, present, and future performance, and that the correlations between HR practices and future performance were greatly reduced when controlling for past performance. These findings do not suggest that HR practices do not cause future perfor- mance; rather they only suggest that current research cannot prove which way the causal arrow points.

How much value can we expect from increasing HR practices?

Given the fact that the data does not prove a causal relationship of HR prac- tices on performance, this calls into question some of the point estimates of the value accrued from increasing them. For instance, Huselid and Becker (2000) stated, ‘Based on four national surveys and observations on more than 2,000 firms, our judgment is that the effect of a one standard deviation change in the HR system is 10–20% of a firm’s market value’ (p. 851).

Likewise, based on their meta-analytic results discussed above, Combs et al. (2006), when trying to argue for why the observed mean correlation of .20 is meaningful, state:

It means that 20% of the utility available from predicting performance differences among organizations is given by HPWPs. Increasing use of HPWPs by one standard deviation increases performance by .20 of a standard deviation. For example, Huselid (1995) reports means of 5.1 and 18.4% and standard deviations of 23 and 21.9% for gross ROA (i.e., returns plus non-cash items) and turnover, respectively. In this sample, a one standard deviation increase in the use of HPWPs trans- lates, on average, to a 4.6 percentage-point increase in gross ROA from 5.1 to 9.7 and a 4.4 percentage-point decrease in turnover from 18.4 to 14.0%. Thus, HPWPs’ impact on organizational performance is not only statistically significant, but managerially relevant.

(pp. 517–518)

Here again, we do not mean to dispute the relationship between HR prac- tices and performance, nor do we suggest that implementing HR practices should not lead to greater performance, all else being equal. However, we do suspect that there may be a dually causal relationship, where HR prac- tices may help increase performance, and that increased performance may then provide more money to invest in HR practices. But, in such a situation,

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26 HR management and performance outcomes

using the correlation or effect size reflects both of the causal forces, and thus overestimates the true impact of HR on performance. Thus, given that the causal arrow could point either way (or both), we caution that the point estimates of the value of increasing HR practices may be overly inflated.

Conclusion Research on the impact of HR practices on performance has grown to be one of the more frequently studied phenomena in the field of HR. This research has been conducted in cross-industry (e.g., Huselid 1995), within indus- try (e.g., Delery and Doty 1996; MacDuffie 1995), and within corporation (e.g., Wright et al. 2005) settings. In addition, it has been conducted across a large number of geographies. In the main, these studies have revealed a consistent finding of a positive relationship between HR practices and per- formance. In the next chapter we make a closer examination of the precise nature of the practices involved.

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