Business Strategy, Human Resources, Labour Market Flexibility, and Competitive Advantage
Jonathan Michie, School of Management and Organizational Psychology Birkbeck, University of London
[email protected] and Maura Sheehan Graduate School of Management University of Dallas
[email protected] Abstract This paper contributes to the strategic human resource management literature by testing the three main approaches – the universalistic, contingency and configurational – against an original database. Specifically, we examine: (1) the relationship between HR and organizational performance, (2) the links between strategy, HR and the use of flexible employment contracts, and (3) the moderating effects of strategy on the links between HR, flexible labour, and organizational performance. Using original data collected from manufacturing and service sector companies, we find positive relationships between HR policies and practices and performance; that the relationship between HR and performance is dependent upon business strategy; and that companies pursuing an integrated approach to HR coupled with an innovator/quality-enhancer focus within their business strategy perform best. The use of externally flexible labour reduces the effectiveness of HR, especially for those pursuing an innovator/quality enhancer approach. We also find that HR is more likely to contribute to competitive success when introduced strategically as part of an integrated and coherent package, or bundle. Keywords: strategic human resource management, competitiveness, flexibility.
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Acknowledgement This work was funded by The Leverhulme Trust (grant F/112/AL), the University of London Central Research Fund and the University of Dallas (Provost’s summer stipend award) to whom we are grateful. We are indebted to Dr Sharon Milner and Elaine McDonald for research assistance. We have benefited from discussing these issues with a number of colleagues, including Professor David Guest, Dr Neil Conway, Dr Linda Trenberth and Professor Paul Teague. A number of colleagues were generous in supplying copies of their own questionnaires and details of their results, in particular Dr Peter Berg and Dr Eileen Appelbaum; Dr Sandra Black and Professor Lisa Lynch; Professor Ichniowski; Professor Steve Nickell; and Professor Paul Osterman. Patrick Burns, Director of Advocacy for The Work Foundation provided invaluable advice on the use of HR practices in UK firms. We are also grateful for comments received from Rebecca Gumbrell-McCormick and Klaus Nielsen.
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INTRODUCTION A consensus has emerged on the positive relationship between the use of human resource policies and corporate performance (Appelbaum, et al., 2000; Becker and Gerhart, 1996; Guest et. al., 2000, 2003; Huselid and Becker, 1996; Huselid, 1995; Ichniowski et. al., 1997; 1994; MacDuffie, 1995; Osterman, 1999; 1994; Wood and Albanese, 1995; Wood and de Menezes, 1998; Wood, 1999). Debate remains over the nature and causes of these outcomes. It is generally agreed that a better understanding of the interaction between business strategy and HR will be key to explaining these empirical outcomes. In particular, it is argued that HR policies that are consistent with organizational strategy – strategic human resource management (SHRM) - are more effective (Miles and Snow, 1984; Schuler and Jackson, 1987; Truss and Gratton, 1994; Delery and Doty, 1996). The literature on the link between strategy and HR remains underdeveloped empirically. Moreover, there is debate over the relevance of three main theoretical frameworks: universalistic, contingency and configurational. Labour market deregulation and flexibility are regarded as key determinants of national competitiveness and successful corporate performance. A growing body of research has examined the relationships between firms’ use of flexible employment contracts and HR practices, on the one hand, and corporate performance on the other hand (Michie and Sheehan, 2003; Storey, et al., 2002; Michie and Sheehan-Quinn, 2001; Arulampalam and Booth, 1998; Kleinknecht, 1998; Kleinknecht, et al., 1998). This area also remains underdeveloped both theoretically and empirically. To contribute to these literatures, this paper examines: (1) the effects of HR policy on organizational performance, (2) the links between strategy, HR and the use of flexible employment contracts, and (3) the moderating effects of strategy on the links between HR, flexible labour, and organizational performance. The following section provides a theoretical overview of the links between strategy, HR, labour market flexibility and performance; we then outline the hypotheses to be tested, describe the sample, the method of analysis and variables used; and then present our results and conclude.
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THEORETICAL BACKGROUND The link between strategy and HR management Three theoretical perspectives dominate the SHRM literature: universalistic, contingency, and configurational. The universalistic perspective suggests there is a ‘best practice’ approach to SHRM, with a set of HR policies to be identified which will improve performance (Osterman, 1999, 1994; Pfeffer, 1994, 1998; Deleroy and Doty, 1996). These ‘best practice’ policies may be embodied in a variety of concrete and detailed HR techniques or practices; for example, there may be many techniques that will encourage sharing of information within an organization (Richardson and Thompson, 1999). The contingency approach argues that to be effective, an organization’s HR policies must be consistent with other aspects of the organization. The organization’s strategy is generally considered to be the primary contingency factor. Human resource policies and practices must be consistent with the organization’s strategy (Miles and Snow, 1978, 1984). Business performance will be improved when the right fit between business strategy and HR is achieved. The configurational approach differs from the universalistic and contingency theories by being guided by a holistic approach to inquiry and assuming the systems assumption of ‘equifinality’. ‘In general, configurational theories are concerned with how the pattern of multiple independent variables is related to a dependent variable rather than with how individual independent variables are related to the dependent variable’ (Delery and Doty, 1996: 804). Configurational SHRM is concerned with ‘the pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals’ (Wright and McMahan, 1992: 298). The configurational approach suggests that an organization must develop HR as a system so that both horizontal and vertical fit can be achieved.
Internal and External Fit 2
Horizontal fit implies there must be internal consistency of the organization’s HR practices –as HR ‘bundles’ or ‘systems’. Internal fit emphasises the interdependency between individual HR practices, with the use of one HR practice enhancing the effectiveness of others - a synergy between practices. Vertical fit refers to the consistency of the organization’s HR system with other organizational characteristics such as the firm’s strategy. External fit suggests that HR practices must ‘fit’, or be congruent with, the firm’s policy choices outside the area of HR. The presence of these two fits implies that specific combinations of HR practices can be identified which improve performance, but these combinations will vary by organizational context (eg firm strategy). Different notions of ‘fit’ underlie the three theoretical perspectives in the literature. The universalistic approach suggests that only internal fit matters, i.e., that ‘best practice’ policies work in all contexts albeit with variation in terms of the actual HR techniques used. The contingency perspective suggests that to be effective an organisation’s HR practices must be consistent with other organisational factors primarily its strategy (i.e., that there should be external fit). The configurational perspective suggests that improved performance will only occur when ‘vertical’ or external fit and ‘horizontal’ or internal fit are implemented. Competitive Strategies Porter describes competitive advantage as the ‘essence of competitive strategy’ and proposes three strategies that organizations can use to achieve this advantage: innovation, quality enhancement, and cost reduction. Schuler and Jackson (1987) link these three strategies with the associated behaviours of employees and HR practices that a firm should adopt. They argue that HR practices will prove effective only where the firm emphasizes the importance of either quality enhancement or innovation within its business strategy. In organizations pursuing a cost based strategy, the logical approach to HR strategy would be to emphasize numerical flexibility and wage cost minimization: ‘In such a situation, the values and goals imbued within HR would be consistent with the organization’s primary cost reduction 3
goals’ (Hoque, 1999: 421). Labour Market Flexibility and Corporate Performance Labour market deregulation has been regarded as playing a key role in the drive for a competitive, flexible economy. On the one hand, the use of flexible work practices can result in savings on wage costs. Firstly, work may be hired and paid for only if there is work to be done (for example, during temporary production peaks). And secondly because ‘flexible’ workers on average earn less than comparable tenured workers and are not entitled to the benefits tenured workers receive. In addition, ‘the decisions to hire new workers is taken more easily if workers can be fired more flexibly under adverse circumstances. In this way, part of the entrepreneurial risk is shifted to employees thus making job creation easier’ (Kleinknecht, et al., 1997: 2). On the other hand it has been suggested that the sort of labour market deregulation pursued in Britain over the 1980s and 1990s may risk being detrimental to long-run economic performance by leading to a neglect or undervaluing of assets and processes such as training and innovative activity, which are vital to long-term development and economic progress (Michie and Wilkinson, 1995; Kitson and Michie, 1996). Research using the British Household Panel Survey 1991-95 that investigated the link between skills acquisition and labour market flexibility (proxied by employment status, contract type, and lack of union coverage) found that workers: ...on short-term employment contracts, who are working part-time, or are not covered by a union collective agreement, are significantly less likely to be involved in any work-related training to improve or increase their skills. These findings suggest that there is a trade-off between expanding the more marginal forms of employment, and expanding the proportion of the workforce getting work-related training. (Arulampalam and Booth, 1998: 521). In addition, if the time horizons of firms become shortened, the pursuit of what economists would characterise as 'efficiency gains' may come to 4
dominate other sorts of gains to be had from innovation and technological progress. This becomes problematic if the pursuit of short-term efficiency gains reduces the potential of the system for economic progress (Kleinknecht, 1998; Michie and Prendergast, 1998). At the firm level there are three principal means of securing flexibility: numerical, functional, and wage or reward flexibility. Numerical flexibility is the ability of firms to vary the amount of labour employed, by making use of part-time, temporary and seasonal employees, short fixed-term contracts, agency labour, freelance work, and homework or outwork. The use of this type of labour is also commonly referred to as ‘flexible employment contracts’ or contingent labour. Functional flexibility is the ability of firms to vary the amount and type of labour they use without resorting to the external labour market, and is accomplished primarily by having a labour force that is able to carry out a wide range of tasks – that is, the ability to move workers from one task to another. Wage or reward flexibility is having payment systems in place that encourage and reward improved performance (for example, performancerelated pay). Since functional and reward flexibility are subsumed in HR policies and practices, the effects of using contingent labour, or flexible employment contracts, is the focus of our flexibility analysis. We expect to find a relationship between the type of competitive strategy a firm is pursuing and the use of flexible employment contracts. In other words, the use of flexible employment will be contingent upon the organization’s competitive strategy. We expect firms that are pursuing a costbased strategy to be more likely to use flexible labour compared to firms pursuing an ‘innovator/quality-enhancer’ approach. We found a significantly positive correlation between pursuing a cost-based strategy and the use of flexible labour contracts (r = 0.63 at the p
