The Relationship between HRM and Business Performance - Literature review Example

?The Relationship between HRM and Business Performance Introduction Human resource management includes multiple corresponding practices that are usually considered advanced to individual practices in persuading a firm’s performance. Human resource management practices like empowerment, motivation and skill-enhancement can favourably influence the performance within businesses. The individual practices that constitute human resource management support one another in enhancing certain workforce characteristics, which create combined synergistic effects that are substantially great, compared to the individual practices (Sels, Winne, Delmotte, Maes, Faems and Forrier, 2006). First, the review suggests that human resource practices have synergistic and performance enhancing influences when used in conjunction with empowerment-enhancing practices that boost employee responsibility and autonomy. Secondly, study attempts to explore the link between HRM and firm performance by studying frameworks that link HRM to financial performance despite the various studies that claim there is no link between HRM and Firm performance. The literature offers overview on research regarding HRM and Businesses performance and subsequently shows the relation between HRM and performance in organizations. Business strategy and the integration of HRM practices form an essential factor in organizational effectiveness because the use of business strategy as a contingent factor moderates the relation between human resources practices as el as firm performance. Therefore, business strategies paired together with proper HRM activities have positive influences on the firm’s performance. According to Ahmad and Schroeder(2003) and their counterparts Youndt and Snell(2004), the impact of HRM to organizational outcomes became an essential topic in early 1990s because it attaches significance to motivational aspects of organizational practices in developing and utilizing human capital. HRM involves development of people’s abilities and attitudes in way that the individual can develop personally and contribute toward the organization’s goals. According to Youndt and Snell(2004), other studies consider HRM practices to be pay and reward, recruitment and selection, training and development, health and safety as well as work expansion or reduction. However, various studies suggest that six essential HRM practices that are likely to positively influence a firm’s performance include training and development, teamwork, incentives, HR planning, performance appraisal as well as employment security (Sels, Winne, Delmotte, Maes, Faems and Forrier, 2006; Seibert,Silver and Randolph, 2004). According to Sels et al (2006), training and development involves the amount of formal training offered to employees, although organizations can offer extensive training, organizations also rely on acquired skills through selection and socialization. Training in businesses influence performance in two key ways the first one being, that training improves on the relevant skills, capabilities, and secondly training compliments employees’ satisfaction in their prevailing job and workplace. Teamwork in businesses contributes to business performance because it results in effective achievement, facilitates flow of ideas resulting in innovative solution and helps in saving administrative costs associated with paying specialists in order to watch people (Sels et al 2006). Incentives in businesses rely on performance and remain one of the usual means for organizations to enhance employee motivation through provision of performance-contingent incentive in order to align employee and shareholder interests. According to Chiang(2004), although compensation is categorised into financial and non-financial incentives, some incentives like pay incentives in form of bonuses and profit sharing or even indirect compensation like health insurance and vacation all influence the performance of firms. According to Gill and Meyer(2008), HR planning in enterprises involves forecasting personnel requirements, budget on selection staff, number of people involved in the selection as well as structured and standardised interviews. This is essential to enterprises because they have to predict the supply of labour necessary in meeting future demands. According Feng-Hui, Tzai-Zang and Wann-Yih(2010), performance appraisal helps in management to clarify and communicate organizational objectives as well as expectations to internal employees and aids them comprehend the capability of the workforce. Moreover, performance appraisal can be used in administrative activities that relate to employee’s work condition like promotion, termination and rewards, all of which influence performance in organizations. According to Chow (2006), employment security in HRM implies job security; therefore, employment security is an essential factor in determining work productivity in employees because the higher the degree of job security given to employees, the more the employees are committed to the organization and its objectives. As Bowen and Ostroff (2004) indicate, there are various comprehensive studies evaluating the link between HRM practices and performance in firms indicate that HRM practices like training, teamwork, benefits and performance appraisal have a huge influence on employee productivity. As well, workforce related programs that promote great improvement in quality and communication in an organization have the potential of helping in maintaining the achievements of robust HRM practices. According to Feng-Hui, Tzai-Zang and Wann-Yih, (2010), a well-trained workforce has the ability to aid business in gaining a market share since it is in a position to produce superior quality products that meet the expectations of customers.. Jayaram, Droge and Vickery (1999), state that within the contemporary business environment, HR forms an indispensable input for organizational efficiency because effective management of HR plays a crucial role in performance and success of organizations. Wright, Gardner, Moynihan and Allen(2005), state that in the era of heightened competition, effective HRM is no longer contended with simple execution of a set of standard practices because there is constant need to develop and implement fresh HR practices in order to remain competitive. Strategy is an essential means of survival when faced with the dynamic nature of the competitive environments because it acts as a form of organizational adaptation that is propelled by various external factors. Because a strategic concept articulates an organization’s strength and weakness as well as threats and opportunities faced by the organization, it can be articulated properly in business planning. Therefore, according to Erickson and Dyer(2005), strategy in this context involves choices regarding the way organization’s marketplace actions are developed to attain competitive advantage. Erickson and Dyer (2005), indicate that an organization’s strategy has to be appropriate for its resources, environmental circumstances as well as essential objectives. The process of coming up with a valid strategy involves matching a company’s strategic advantage to the business environment the business faces with the goal of putting the business in a position that allows it to carry out its mission efficiently. From the perspective of systems approach, research has moved from individual HRM methods and performance to an overall focus on the HRM systems and organization performance. The various functional systems of HRM are socially complex; therefore, very difficult to imitate in an easy manner. Nevertheless, HRM systems help in creation of organizational value, which makes it possible to develop it as a source of competitive advantage for a firm. Moreover, Lado and Wilson (1994), establish that within SHRM, HR systems can result in competitive advantage once SHRM has the characteristics such as valuable, rare, inimitable and lacking substitutes. According to Dong et al (2008), business strategies are created to achieve a firm’s mission or objective and different objectives and missions require different strategies and after formulation of strategies, HRM practices are engaged to support chosen competitive strategy. According to Subramony, Krause, Norton and Burns, (2008), currently large number of studies show evidence that individual HRM practices together with internally consistent systems in HRM practices can affect an organization’s performance. Moreover, empirical studies show that the influence of HRM practices in organizational performance can further be enhanced when HRM strategies are aligned with competitive business strategy of an organization. The logic in this perspective is that HRM practices have to develop employee skills, knowledge and motivation in order for them to behave in a manner that supports implementation of certain business strategy. Therefore, as Dong et al (2008) states, high performance necessitates development of HRM policy that aligns the business strategy with the HRM system. The prevailing development in research regarding HRM and business performance relations has been considered through a system view that aggregates HRM practices. According to Dong et al (2008) and Chang and Chen (2002), the logic in this proposition is that a firm’s performance will be increased by HRM practices that support one another and that have mutually strengthening effects on employee’s involvement in the organization’s performance. Hence, several scholars like Dong et al (2008) and their counter parts Chang and Chen (2002), agree that contingency factor like business strategy moderate the relation between HRM and performance of an organization. Nevertheless, it is clear employees provide the basic source of competitive advantage, while quality of HRM remains essential influencing in management of people and firm performance. According to Sun, Aryee and Law(2007), the underlying logic permeating the field is that HR activities can result in development of skilled workforce that engages in functional behaviour for the company, which forms a source of competitive advantage that in return results in high operating performance. Wright, Snell and Dyer (2005), state that successful organizations enact HRM practices that facilitate them to endure as reliable members of the industry as well as generate a form of competitive advantage. As started by Gilmore and Williams(2013), there are various approaches that attempt to link strategy, business, performance and HRM policies and practices; however, there are three well-known approaches and they include best-fit, best-practice and RBV models. The best-fit approach is of the view that various forms of HRM practices are suitable for different forms of business conditions. Therefore, the approach maintains that there is a connection between HRM practices and competitive advantage although HRM activity is depended upon the certain circumstances within each business. However, according to Armstrong and Baron (2002), this approach has several limitations among them being that the approach lacks sophistication with regard to the way it evaluates competitive advantage. Moreover, the approach seems to ignore employee interests in pursuing economic performance and at times, it fails to recognise the need to align employee interests with the firm. Gilmore and Williams (2013), indicates advocates of the approach point out the economic benefits offered by the approach to companies that adopt the integrated systems of high-performance work practices. However, this approach has its limitation in that organizations across the globe are confronted by different challenges in managing relations with legislation, national and sector cultures. According to Price and Price (2011), the resource-based view (RBV) is strengthened by the idea that humans as well as technological possessions cannot be constantly changed in order to maximise market position. Therefore, organizational strategy is formed by identifying and creating core competencies of the workforce, which means that the focus is on personal attributes brought to the enterprise by the employees and using them to promote sustained competitive advantage. Unlike the best-fit approach, RBV is an inside-out model since it focuses on the organization’s internal resources and the various factors that enable an organization to be viable in the market place. Moreover, Price and Price (2011) indicate that the resources have to be priceless and exceptional, worth something competitive, very difficult to imitate and most of irreplaceable. However, this approach also has its limitation because it downplays the importance of the wide environment because organizations exist in environments; therefore, resources are not ends in themselves. On the other hand, opponents of on the link between HRM and performance argue performance appraisal results in demoralisation within the workplace and decreases the rate of productivity, thus, it ought to be eliminated in HRM practices as started by Feng-Hui, Tzai-Zang and Wann-Yih (2010). Moreover, benefits as well as HR planning are negatively associated with employee turnover. The study reveals that most studies regarding HRM and organizational achievement have been carried out in developed nations. Establishing a measurable link between HRM and business performance is hard and problematic because it is unclear as which HRM inputs result in given outputs (). Moreover, although investigations into the issue are happening in developing nations, many of the studies examining the relation between HRM and organizational performance were carried out in USA and UK. Therefore, it remains to be established how ideas developed in this area can be transferred. According to Crook, Combs et al (2011), since resource-based theory mainly focuses on long-term or sustainable advantages, human capital may provide explanation for sustained advantages because valuable and rare as well as hard to imitate characteristics develop with time. For instance, According to Gilmore and Williams (2013), best practice approach in linking performance to HRM, shows an increased interest in the notion that performance improvements arise when companies use certain set of employment practices. However, there may be temporary components that are not captured unless the study takes long term consideration of the relationship between human capital and performance. According to Azmi (2011), SHRM (strategic human resource management) study lacks important findings that link strategy to HRM. Hence, cross-sectional studies may not enable a researcher to fully record the full utility of human capital and the way if impacts on performance with time. Because unknown number of businesses in any cross-sectional can potentially drag the period such studies underestimate the general impact of human capital in firm performance. However, longitudinal designs are in better position to capture results of human capital on performance of business because the firms are not likely to be trapped in a period where programs introduced by the human capital are yet to impact on performance. Scarbrough and Carter (2000), argued that to be proficient and attain high performance, a strong match must exist between HRM systems and strategic orientation in a firm. Moreover, Sang(2005), and his counterpart Gerhart et al, (2005) argued that a great deal of extra quantitative evidence that support HRM-performance link as well as investigations into various contexts need to be carried out. Micro analytic perspectives have been criticised due to their simplicity in explaining the way certain isolated HRM systems are connected to organizational performance. Hence, the relation between human capital and performance is strong among studies performed using longitudinal data compared to those carried out using cross-sectional data (Crook, Combs, Todd, Woehr, & Ketchen., 2011). Conclusion Throughout the literature review the approach has been consideration of practices applicable in all organizations across all sectors and geographical locations and the view holds that certain ‘bundles’ of HRM practices contribute to improved employee attitudes that result in high levels of performance. Through this approach, high performance seems to be tailored to an organization’s certain situation in order to achieve maximum performance. The relationship between HRM and performance is in the essence shown by HR practices that influence HR outcomes that lead to low absence and labour turnover while increasing productivity and quality, which consequently results in increased sales and profitability. The study shows that internally consistent HRM system positively influences an organization’s performance because when business strategies are paired with appropriate HRM practices, they positively influence the performance of businesses. The main goal of strategic HRM is to ensure that HRM gets integrated with the strategy and the strategic desires of a firm in an attempt to gain competitive advantage. The study suggests that business strategy and HRM practices interaction as essential factors in an organizational effectiveness. Organizational performance is considered to be because of HR practices and possibly influenced by proximal measures of effectiveness in HRM. Various models show that HR practices affect performance in part through influence on employee perception, attitude and behaviour. However, although the cross-sectional studies indicate a connection between HRM and performance, there is need for further empirical study on the subject. 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Does Human Capital Matter? A Meta-Analysis of the Relationship Between Human Capital and Firm Performance. Journal Of Applied Psychology, 96(3), 443-456. doi:10.1037/a0022147 Read More