Hrm and Business Performance. free essay sample

This essay will seek to explore the link between Human resource management and business performance. To be successful in this, a number of resources will be used. To get a sound basis, definitions of HRM and performance will first be made. Once definitions have been made, the essay can then explore the link. High performance work practices (HPWP) will be the main theory examined in this essay and others will be used to be able to provide a critical view. The models will include the AMO model also the best fit and best practice view will also be considered. A range of references will also be used to get the views from a range of studies these include Guest, Sels at el and Huselid. It is important to examine the link between HRM and business performance because more and more organisations are seeking out ways to gain competitive advantages over their competitors and one way of achieving this is to link HRM to performance. To critically explore the link between HRM and performance we first need to look at the concept of HRM. There is not one constant definition for HRM and those that exist encompass similar undertones but may have different approaches. Armstrong amp; Baron (2002) p. 3 define HRM as â€Å"a strategic and coherent approach to the management of organisation’s most valued assets the people working there who individually and collectively contribute to the achievement of its objectives†. Boxall amp; Purcell (2003) p. 1 simply define HRM as â€Å"the most popular term in the English-speaking world referring to the activities of management in the employment relationship†. In a HRM context there is no single definition that constitutes to explaining what performance actually means, Huselid concentrated on financial performances while MacDuffie measures productivity and quality. Without a general agreement on the definition of performance it makes the comparisons of any theories difficult. HRM does have impact on an organisations performance, in Patterson, West, Lawthom amp; Nickell’s (1997) study they found â€Å"Human resource management practices explained 19 per cent of the variation in profitability and 18 per cent of the variation in productivity† (Armstrong amp; Baron (2002) p. 12) which clearly show a strong link between HRM practices and performance. The reason why an increasing number of organisations are linking performance and HRM is because is can be rewarding for both the employee and the organisation â€Å"Employers are continually searching for more effective ways to manage labour to gain maximum organisational performance, while workers are keen to increase the benefits from employment, both in material terms and in opportunities for more interesting and stimulating work patterns. † (Marchington amp; Zagelmeyer (2005) p. ) Much of the research presented in this essay supports the view that there is definite link between HRM and performance, especially when looking at the practices the HR department implement, for example when analysing recruitment there is an importance on recruiting the right people in the right way to get the best people and minimise costs, which then contributes to a positive outcome on business performance â€Å"HRM is now often seen as the major factor differentiating between successful and u nsuccessful organisations, more important than technology or finance in achieving competitive advantage† (Marchington amp; Wilkinson (2005) p. ) Increasingly more organisations are using HRM to give them that competitive advantage they are often aiming for. Linking HRM to performance can attract a better workforce as the stronger performing organisations are likely to be more sought after by perspective employees. High performance work practices are a set of practices that can improve business performance regardless of the organisation, industry or strategy which lead it to being a universal practice, there is not one agreed definition but they basically are â€Å"the idea is that a particular set (or number) of HR practices has the potential to bring about improved organisational performance for all organisations† (Marchington amp; Wilkinson (2005) p. 2) rather than focus on individual HR policies to increase performance many researchers are exploring the idea of a bundle of HR policies to increase performance, â€Å"scholars of strategic human resource management (SHRM) have turned their attention during the last decade to a â€Å"bundle† of mutually reinforcing and synergistic HR practices that facilitate employee commitment and involvement† (Hsu, Chaing amp; Shih (2006) p. 32) the philosophy is that when a organisation concentrates on a bundle of polices the level of t he performance is increased when compared to an organisation that only adopts one HR policy. There a number of HR practices, the literature suggest â€Å"In total they are able to list 26 different practices, of which the top four are training and development, contingent pay and reward schemes, performance management (including appraisal) and careful recruitment and selection. † (Paauwe amp; Boselie (2005) p. 9) Examples of high performance work practices can encompass extensive training, recruitment which is based on recruiting a quality workforce who is eager to learn and develop, strong communication and appraisals, however, the exact nature of the HPWP would be designed to suit the organisation so we can call the practices ‘idiosyncratic’. One of the focal points of the HPWP approach is that it is considered to be universally applicable, this approach is also similar to the best practice form of linking HR to performance. The universalistic perspective states that a fixed set of best practices can create surplus value in various business contexts. †(Sels et al (2003) p. 5) Other theories may take a contingency approach â€Å"Contingency approaches, by contrast, start with the assumption that the selection of a combination of HRM practices is determined by the strategy used. † (Sels et al (2003) p. ) this approach looks at the external environment which include the market it exists in, it differs from the best practice approach and focuses on the best fit approach and so looks at fitting HR policies into the situation of the individual employer. HPWP can be argued to fit in the hard HRM category as they are designed to increase performance, efficiency and profitability where-as soft HRM focuses on social an d ethical reasons. HPWP can take the best parts from all the approaches for example they can fit into best fit approach as they both rely on different HR policies to produce high results. The link between HRM and performance can also be put in practice by examining the best fit or the best practice approach. The best practice approach â€Å"identifies a set of HR policies that, it is argued, is associated with improved performance in all types of organisation and, by implication, for all types of employees† while the best fit â€Å"argues that performance is maximised when the HR policies adopted are consistent with the business strategy. † (Kinnie et al (2005) p. ) These approaches argue that they will have the same effect on all the employees in the organisation that it’s introduced in, which could pose doubts due to employees in organisations not being in a homogenous group. The application of best practice HRM being universal fits in with high performance work practices â€Å"all things being equal, the use of High Performance Work Practices and a good internal fit should lead to positive outcomes for all types of firms† (Huselid 1995 p . 644 cited in Marchington amp; Wilkinson (2005) p. 95) Many of the researchers use the AMO model (Appelbaum et al 2000) to investigate the link between HRM and performance, the AMO model argues that for people to perform better the following must be adhered to, people must â€Å"have the ability and necessary knowledge and skills, including how to work with other people (A), be motivated to work and want to do it well (M), be given the opportunity to deploy their skills both in the job and more broadly contributing to work group and organisation success (O)† (Marchington amp; Wilkinson (2005) p. 0) High performance work practices can satisfy the ‘ability’ criteria as they focus on developing employees through self management and decentralised decision making, this gives the employees a chance to gain the ability to gain knowledge and skills. HPWP satisfy the motivation area by having constant performance measures in place that provide a clear strategy to measure people’s progress and they satisfy the opportunit y criteria by having continuing training and learning in all areas of the job. On the other hand it could also be argued that HPWP do not satisfy the AMO model because it is unlikely that organisations are going to tailor their practices to suit the model but more likely to tailor practices to their needs. If the latter is the case then in Purcell’s view then HPWP are unlikely to be successful as workers need to have their abilities, motivation and opportunities to perform well. Guest’s theory (expectancy theory) looks at linking HRM to performance by having a core set of HRM practices that can influence intrinsic motivation, form a positive psychological contract and form a flexible workforce. The model takes a unitarist view on linking performance and HRM. Guest (1999) believes that â€Å"the psychological contract may be a key intervening variable in explaining the link between such HR practices and employee outcomes such as job satisfaction, perceived job security and motivation. † (Legge (2005) p. 32) A limitation to the link between performance and HRM goes back to the actual definition of HRM â€Å"it is easy to find slippage in its use, especially when critics are comparing the apparent rhetoric of ‘high commitment’ HRM with the so-called reality of life in organisations that manage by fear and cost-cutting† (Marchington amp; Wilkinson (2005) p. 4) â€Å"Without a clearly delineated theoretical model of HPWS and their effects on performance, scholars cannot adequately validate the efficacy of such practices, let alone providing useful suggestions to practitioners. (Hsu, Chaing amp; Shih (2006) p. 741) Researchers not only use different definitions of HPWP but also measure the outcomes in different ways â€Å"Dyer and Reeves (1995), proposed four possible types of measurement for organizational performance: 1) HR outcomes (turnover, absenteeism, job satisfaction), 2) organizational outcomes (productivity, quality, service), 3) financial accounting outcomes (ROA, profitability), and 4) capital market outcomes, (stock price, growth, returns). † (Rogers and Wright (1998) p. ) most of the strategic research that exists focuses on organisational outcomes this leads to inconsistent results and so makes it less favourable for practitioners to use. Also, because the bundles that organisations use are tailored to the organisation it is very hard to measure and compare the results however â€Å"the process of linking environmental contingencies with HRM practices may vary across firms, but the tools firms use to effectively manage such links are likely to be consistent† (Mabey, Salaman and Storey (1998) p. 08) so it’s not the actual practices that researchers and organisations should analyse but the way such organisations manage the links. Nearly All the literature that examines the link between HRM and performance arise the issue of the black box â€Å"Even if an association is found between high commitment HRM and performance, questions remain about directions of causality and about the processes that underpin and drive these linkages† (Marchington amp; Wilkinson (2005) p. 1), the black box is where the literature/researchers are unable to explain what the actual link is between performance and HRM â€Å"A primary issue in the development of appropriate conceptual models for research in this area is which variables should be included in making the step from HRM to firm performance† ((Paauwe and Farndale, 2005). cited in Hailey, Farndale, Truss (2005) p. 50) To understand and develop the link the between it is important to be able to measure the impact of HRM when concerned with performance. One way of measuring performance is by looking at the outcomes a business experience once performance theories have been put in place â€Å"performance outcomes can be understood in terms of internal outcomes† (Armstrong amp; Baron (2002) p. 106) these internal outcomes can consist of labour turnover, productivity, quality and employee relations, an external outcome would be the financial performance. â€Å"Based on the overview by Boselie et a1 (2005), we can conclude that financial measures are represented in half of all articles (104) included in their analysis. † (Paauwe amp; Boselie (2005) p. 1) This is supported by Legge (2005) who notes that because much of the research takes place at a corporate level, financial measures of performance are not only favoured but they are also easier to measure than human outcomes. Measuring via financial performance can usually take the form of profit or level of sales; however, this measurement poses implications especially when it comes to examining the full effect of HR policies. For example, an organisation may introduce a strong marketing strategy which increases sales performance but has little do with any HR practices, and so any HR practices involved at the time may be disregarded. Measuring performance by examining the financial route can often lead to positive financial outcomes but negative human outcomes â€Å"The damage caused by these negative aspects can be related to the longer-term damage to the financial performance of the organisation† (Hailey, Farndale, Truss (2005) p. 64) therefore not only can an a business solely rely on financial results but must also allow time for the real results to surface, looking at the results in the short term can be misleading and ignoring the human factor can mean employees commitment and motivation is hindered in the long run. Guest et al (2003) p. 93 agree with this way of measuring performance â€Å"it can be argued that financial performance lies at the distant end of the casual chain, and that outcome measures more closely linked to HRM might be more appropriate†. When implementing HPWP, the issue of costs cannot be neglected â€Å"investing in HPWP is only justified if it pays off in the long termà ¢â‚¬  (Sels et al (2006) p. 320) getting a HPWP right is going to demand a number of costs especially during the implementation stage and so an organisation has to have the funds to not only implement HPWP but also to keep the practices running for a sufficient amount of time. This poses an issue for the research as we are likely to only receive positive results from those organisations that have the money to implement HPWP. It also goes against the view of HPWP being universal, they cannot be universal if the lower funded businesses cannot afford to implement them, however, Sels et al (2006) p. 337 found that in smaller businesses â€Å"despite the lack of effect on the share of personnel costs in value added, we did find a positive total effect on profitability. † When looking at the issue of costs (along with ways of measuring) we cannot only look at financial costs we must also examine human costs. While these human costs undoubtedly roll over onto financial costs they are still an issue on their own. As HPWP are a new area of research, there are still many managers who will be wary of them and even if they are implemented some managers may lack enthusiasm, the whole issue of dealing with change in an organisation is an entirely different essay but essentially all the negatives that occur with change could occur with HPWP, which include absenteeism, lack of motivation and a general resistance â€Å"From an economic point of view, assessments of the cost-generating nature of HPWP – human (e. . higher absenteeism through Stress) or non-human (e. g. the impact of a new training provider on the cost structure) – may reveal potential efficiency gains. † (Sels et al (2006) p. 324) Reservations not only exist in the link between HRM and performance but also the on the concept of HRM itself. â€Å"The HRM rhetoric presents it as an all-or-nothing process that is i deal for all organisations, despite the evidence that different business environment require different approaches† Armstrong amp; Baron (2002) p. 16) To put HRM into practice an organisation requires â€Å"high levels of determination and competence at all levels of management, and a strong and effective HR function staffed by business-orientated people† (Armstrong amp; Baron (2002) p. 16) In strong and traditional cultures it is sometimes hard to introduce HR policies especially the newer and developing concepts, as they are already entrapped in their idea of what is right. Organisations may find it hard to get the full support of all staff when introducing a new HR policy and because HR is constantly developing some organisations may find it hard to keep up with the pace, if this is the case then it gets harder to measure the results of HRM, it also poses doubts for any newer research that may be uncovered in the future. â€Å"However, the existing research on HPWS suffers two significant drawbacks, namely causality between HPWS and performance, and a lack of consensus as to the constituents of HPWS practices. † (Hsu, Chaing amp; Shih (2006) p. 46) Higher performing organisations can invest more capital into HPWP and therefore this can tend to skew the results and this type of causation is often disregarded in some research and so this is one of limitations in the link between HRM and performance â€Å"if higher-performing firms are systematically more likely to adopt High Performance Work Practices, then contemporaneous estimates of the impact of these practices on firm performance will be overstated† (Mabey, Salaman amp; Storey (1998) p. 106) When examining the issues of HPWP in the workplace it is vital to look at what they implicate for the people in the workplace. If we look at Britain we can see that the work ethic is very strong and so the possibility of organisations implementing HPWS is high, however, this implementation can have positive and negative connotations. White et al (2003) note negative impacts of HPWP p. 177 â€Å"Specifically, it seems plausible that high-commitment or high-performance management practices will have a negative impact on the private lives of workers, to the extent that they are designed to evince greater discretionary effort in pursuit of the organisations goals. HPWP are likely to be intense and so in long run can impact on labour turnover and absenteeism. On the other hand HPWP are designed to develop employees and so the form of development it encourages, should go some way in enhancing an employee’s intrinsic and extrinsic needs. HPWP can satisfy intrinsic needs on the basis of work satisfaction and commitment to the job and can satisfy extrinsic needs by supplying employees with the skills they nee d to develop. This essay has concentrated on looking at one area of linking HRM to business performance, and this has been high performance work practices. There is no doubt in the literature about there being an actual link but there are doubts concerning defining the terms, the black box issue and the bias views some of the research may present, â€Å"survey respondents generally self-select into samples, selectivity or response bias may also affect results† (Mabey, Salaman and Storey (1998) p. 106). One disheartening statement concerning HPWP is how Legge (2005) p. 1 notes in Grittleman’s (1998) survey how out of teamwork, TQM, quality circles, peer reviews, employee involvement in decisions and job rotation, that â€Å"58 per cent of firms had none of these practices, earlier in the essay Paauwe amp; Boselie (2005) noted common HR practices used in the workforce (training and development, contingent pay and reward schemes, performance management (including appraisal) and careful recruitment and selection) these practices are not in the Grittleman’s list which could show that when it comes to HPWP these top four are most likely to be in the bundle. Some of the issues that exist with HPWP are concerned with the research itself and its validity. As some of the research cross references industries it is difficult to separate the different industry effects.