Business Strategy, Human Resource Management, Labour
Market Flexibility, and Competitive Advantage
By Jonathan Michie, Birkbeck, University of London, and
Maura Sheehan, Graduate School of Management, University of Dallas *
Address for correspondence
Professor Jonathan Michie
School of Management and Organizational Psychology
Birkbeck, Malet Street, London WC1E 7HX
j.michie@bbk.ac.uk
Tel: +44 (0)20 7631 6761 (direct + voice mail), +44 (0)20 7631 6836/6767/6772 (office)
Mobile: +44 (0)7889 274951 (mobile)
Fax: + 44 (0)20 7631 6769 (work), +44 (0)1630 685154 (home)
Keywords: strategic human resource management, competitiveness, flexibility.
Abstract
We examine HRM and corporate performance in UK companies. Using original data
collected from manufacturing and service sector companies, we find that the relationship
between HRM and performance is dependent upon business strategy; and second, that
companies pursuing an HRM approach coupled with a quality-enhancer or innovation focus
within their business strategy perform best. We also find that HRM is more likely to
contribute to competitive success when introduced as an integrated package of practices.
* This work was funded by The Leverhulme Trust (grant F/112/AL) and 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 HRM practices in UK firms.
1
INTRODUCTION
A consensus has emerged among scholars and practitioners alike that there is a positive
relationship between the use of, on the one hand, ‘high commitment [Human Resource]
management’ ‘(HCM)’ (Wood, 1999; Wood and Albanese, 1995; Wood and de Menezes, 1998)
or ‘high-commitment practices’ (Huselid, 1995; Huselid and Becker, 1996) and, on the other
hand, corporate performance and organisational outcomes (see Appelbaum, et al., 2000 and
Osterman, 1999 for discussions of high-performance work organizations). Considerable debate
remains, however, over the nature and causes of these outcomes. It is generally agreed that a
better understanding of the interaction between business strategy and HRM will be key to
explaining these empirical outcomes. In particular, it is argued that HR practices that are
consistent with or support organizational strategy are more effective than those that are not
(Miles and Snow, 1984; Schuler and Jackson, 1987; Truss and Gratton, 1994). The literature,
however, on the link between strategy and HR practices, while widely developed theoretically,
remains underdeveloped empirically.
Labour market deregulation and flexibility are also 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 work practices and human resource
systems, on the one hand, and corporate performance on the other hand (Michie and SheehanQuinn, 2001; Arulampalam and Booth, 1998; Kleinknecht, 1998). This area, however, also
remains underdeveloped both theoretically and empirically.
2
This paper contributes to these gaps in the human resource literature by examining (1) the
link between strategy and HR practices; (2) the link between strategy and labour market
flexibility and (3) the moderating effect of strategy on the link between HR practices, the use
of flexible labour and corporate performance.
The structure of the paper is as follows. The following section briefly surveys the literature;
we then outline the hypotheses to be tested; we describe our data; we report the method of
analysis and variables used; and finally we present our results and conclude.
PREVIOUS RESEARCH
Links between Strategy and HR Management
Models of situational contingency or ‘micro’ models of HRM and strategy suggest that the
appropriateness, or effectiveness, of HRM will vary depending on organizational lifecycle or
the product market within which the organization is operating (Kochan and Barocci, 1985;
Miles and Snow, 1984; Schuler and Jackson, 1987; Tichey et al., 1982). Schuler and Jackson
(1987) and Schuler (1989) provide a detailed treatment of three competitive strategies
(innovation, quality-enhancement and cost-reduction) and the associated behaviours of
employees and HR practices that are considered to be instrumental in the implementation of
the strategies. The authors show that HRM will prove effective only where the firm
emphasizes the importance of either quality enhancement or innovation within its business
strategy. In organizations perusing a cost based strategy, the logical approach to HR strategy
would be to emphasize numerical flexibility and wage cost minimization. And as noted by
3
Hoque, “In such a situation, the values and goals imbued within HRM would be inconsistent
with the organization’s primary cost reduction goals” (1999: 421). Consistent with other
authors (Becker and Gerhart, 1996; Khatri, 2000; MacDuffie, 1995; Hoque, 1999; Huselid,
1995) we use the term external fit to refer to the ‘organizational logic’ argument that HR
strategy should be combined with business strategy, such that there should be a consistency
between the values and aims within each.
Empirically, there has been little evidence that the impact of HRM is contingent upon
the approach taken to business strategy (Huselid, 1995; Becker and Gerhart, 1996). Two recent
studies, however, find support for the contingency hypothesis. In his study of the UK hotel
industry Hoque finds a relationship between HRM and performance only among hotels
emphasizing quality enhancement and among hotels in the ‘other category’ and that HRM is
ineffective where strategy is characterized by cost control.1 He concludes that the analysis,
“…provides support for the contingency hypothesis that the effectiveness of HRM depends
upon its fit with strategy” (1999: 437). Khatri finds evidence of a strong link between the impact
of overall strategy on HR practices and of the moderating influence of overall strategy on the
relationship between HR practices and performance.2 The author emphasizes that, “The role of
strategy as a contingency factor is strengthened even more by the evidence that HR practices
unmatched with the appropriate organizational strategy could have a negative influence on
performance… In sum, we need to consider the overall organizational strategy before we
implement HR practices” (2000: 358).
Universal Relevancy of HRM
4
In contrast to the contingency approach outlined above which suggests that the effectiveness
of HRM is dependent upon its coupling with a quality-enhancer or innovator approach to
strategy, the universal relevance of HRM suggests that the coupling of the ‘HRM qualityenhancer’ and the ‘HRM innovator’ approaches should have the most positive correlations
with performance.3 As suggested by Guest (1987), Hoque (1999) and Walton (1985), the
universal relevance of HRM will depend to a large part upon the nature of the industry
product market. In very diverse product markets, where for example some firms will need to
emphasize product quality or customer satisfaction and other firms may need to focus on cost
control or price competition, there is no a priori reason why HRM should always prove
effective. Focussing his analysis on one industry – UK hotels – Hoque finds strong evidence
that HRM is universally relevant; among the hotels with an identifiable strategy, those
adopting an approach of service quality coupled with a high number of HRM practices
performed best.4
Internal Fit
Internal fit refers to the synergistic benefits resulting from the introduction of HRM as an
institutionally supported package of practices that are internally consistent and mutually
reinforce one another. To date there are varying degrees of empirical support for a
relationship between internal fit and performance (see e.g., Guest and Hoque, 1994; Huselid,
1995; Ichniowski et al., 1994; MacDuffie, 1995; Hoque, 1999; and Khatri, 2000).
Links between Labour Market Flexibility and Corporate Performance
5
Labour market deregulation has been regarded as playing a key role in the drive for a
competitive, flexible economy. The use of flexible work practices5 can result in savings on
wage costs (see Michie and Sheehan-Quinn, 2001 for further discussion). In addition, as
argued by Kleinknecht et al. ‘the decision 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, making job creation easier’ (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, p. 521)
6
In addition, if the time horizons of firms become shortened, the pursuit of what
economists would characterise as 'efficiency gains' may come to 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). The analysis presented below
is unique in that it not only examines the links between the use of flexible labour and
corporate performance but also examines its link to the strategy pursued by the firm.
THE DATA
We surveyed a stratified sample of publicly quoted UK manufacturing and service sector firms
with more than 50 employees. Two dimensions were used to stratify the sample: organisation
size and the primary sector of business activity. Five categories of organisation size were used –
those employing 50-99, 100-499, 500–999, 1000–9999, and 10,000 or more employees.
Thirteen sectors were identified (9 in manufacturing and 4 in services), using the 1992 UK
Standard Industrial Classification (SIC) codes. The EXTEL database was used to identify all
organisations with the above characteristics, which totalled 1280.6 Holding companies were
removed which reduced the ‘population’ to around 1000. The aim was to obtain a total quota of
33% of the ‘population’ and to achieve representation amongst the stratified sample cells.
A market research company was commissioned to conduct a telephone survey of the selected
companies. The following protocol was followed:
7

The name and fax number of the senior manager with HRM responsibilities was confirmed
by telephone.

This person was faxed a one page briefing on the objectives of the survey and the expected
length of the interview (around 30 minutes). Confidentiality of survey participants was
emphasised.

The day after faxing, the person was contacted to see if they would agree to the telephone
interview and if agreeable, a date and time for the interview was set. These individuals were
then faxed a ‘glossary’ of HR terminology, with alternative or variant names of many of the
practices, with examples relevant to both the manufacturing and service sectors.
Interviews
were
conducted
by
telephone
with
the
Director
of
Human
Resources/Personnel/Employee Relations of each company in 78% of cases. Where this person
was not available, an alternative senior person was interviewed.7 Most of the organisations in
the sample were large and had more than one establishment/site, with activities often varying
significantly across these sites. The interviewee was therefore asked to select the organisation’s
most typical establishment/site – that is, the site that most typified the organisation’s activities.
In total 934 individuals were asked to complete the survey. Of these, 559 declined, 19 agreed
but subsequently failed to complete the interview, and 369 interviews were completed
successfully. As a result of missing data, 365 of the total number of responses were usable - a
response rate of 39%. Sixty-six percent (242) of the sample is manufacturing establishments
while 34% (125) is service sector establishments.
8
METHODS OF ANALYSIS AND VARIABLES ANALYSED
Measurement of Performance
In contrast to many other studies, we use objective, rather than subjective measures of
performance. In addition, the data used in this analysis were collected at the establishment,
rather than at the company level. The performance data are averaged over a three year period,
which helps to reduce problems of simultaneity of one period explanatory variable measures.
We use three measures of performance: percentage change in total sales (sales growth),
percentage change in labour productivity, and percentage change in pre-tax profitability.
Logged values of each of the variables are used in the estimations.
To examine the representativeness of the establishment level data, confirmatory
performance measures at the organizational level were obtained from the EXTEL database for
the sample companies. For percentage change in total sales, the correlation between the two
sources was 0.77 (p < .05); for percentage change in labour productivity, the correlation was
0.84 (p < .01); and for percentage change in pre-tax profitability, the correlation was 0.68 (p <
.05). A duplication of the analysis for a subset of 76 single site organizations (48 in
manufacturing and twenty eight in services) yielded even higher correlation coefficients (0.94
(p < .001); 0.96 (p < .001) and 0.89 (p < .01), respectively). These results indicate that the
data obtained at the establishment levels closely reflects performance at the organizational
level, which is important, given our analysis of strategy which, of course, is normally
formulated at the organizational, or corporate headquarters level.
9
Control Variables
(a)
Business strategy. We build on Schuler and Jackson’s (1987) business strategy
typologies. The classifications are based on both subjective responses to questions on strategy
and objective data. Companies were classified as having a cost based strategy if they reported
that their strategy focussed on cost minimization/reduction or price competition/reduction and
if they had a lower than average remuneration rate or if the proportion of their wage bill paid
to permanent, full-time employees had declined over the past five years (16.8% of
establishments). Firms were classified as having a quality based strategy if they reported that
their strategy focussed on quality enhancement and if they had achieved a recognized quality
award (48.2% of establishments). Firms were classified as having an innovator based strategy
if they reported being innovative as the primary focus of their strategy and if they had
introduced either a product or process innovation over the past three years (17.4% of
establishments). Seventeen percent of establishments did not meet any of these category
specification and fall into the ‘other’ category.
(b) Background variables. The following standard control variables were included in the
analysis:

establishment size (see Appendix for details on the distribution), with dummies for
establishments with up to 49 employees; 50–99 employees; 100–199 employees; 200–499
employees; and 500 or more employees (the omitted category is establishments with less
than 49 employees);
10

the age of the establishment (Age);

whether the establishment is UK or foreign owned (dForeign);

two sector dummies: manufacturing (dManuf) and services (dServ) (see Appendix); and

trade union recognition (20.1% of establishments).
(c) Labour market flexibility. In their analysis of the effect of labour market flexibility on firm
growth and innovation, Kleinknecht et al. (1997) categorise flexibility into two categories:
internal and external (these definitions are similar to Beatson’s (1995) definitions of flexibility
at the intensive and extensive margins, see above). The questions used in our survey on labour
market flexibility adopt a similar approach, as indicated in Table 1. However, the variables
associated with internal flexibility are grouped with HR practices. To make the analysis more
manageable, only the aggregate indicator of external flexibility – that is the number of
employees that are externally flexible as a percentage of total employees is used.
Insert Table 1 here
(d) HRM practices. The measures of HRM used to test the relationships outlined above are
based upon the HRM practices listed in Table 2. The practices cover the areas of recruitment
and selection, training, job design, communication techniques and consultation, quality issues,
pay systems and terms and conditions of employment. The mean number of practices used
within the sample are 15.6. The nature in which the independent HRM variables are constructed
is discussed below.
11
Insert Table 2 here
HYPOTHESES TESTED
Testing the Impact of External Fit
As suggested by Schuler and Jackson (1987) and Hoque (1999), HRM should prove effective
only within firms emphasizing a quality-enhancer or innovator approach to business strategy,
and should prove ineffective where the primary emphasis of strategy is on cost-cutting, or price
based competition. The sample establishments are split into the four business strategy
typologies outlined above. Following the approach adopted by Hoque (1999), the measure of
HRM used within this part of the analysis is cumulative, with each establishment being ranked
according to the extent to which they have adopted the 22 HRM practices discussed earlier. This
variable attempts to examine the relationship between the extent to which HRM practices have
been adopted and performance. By splitting the sample by strategy typologies, and then
regressing the aggregate HRM variable on each of the dependent outcome variables, we assess
the effectiveness of HRM in the context of ‘cost-reducer’, ‘quality-enhancer’, ‘innovator’ and
‘other’ business strategies.
Hypotheses 1: The effectiveness of HRM is contingent upon the approach to business
strategy that has been adopted.
12
Testing the Universal Relevance of HRM
To examine the universal relevance hypothesis, we investigate whether establishments that
adopt HRM coupled with a focus on quality and/or innovation have performance levels
superior to those achieved by other establishments.
This issue is tested as follows: having split the sample four ways to perform the
external fit tests described above, the sample is reclassified here to enable comparisons
between business categories. These categories are as follows:
1. ‘low-HRM cost reducer’, using 10 or fewer HR practices: 28 establishments fall into
this category;
2. ‘medium-HRM cost reducer’, using more than 10 but fewer than 16 HR practices: 22
establishments fall into this category;
3. ‘high-HRM cost-reducers’, using 16 or more HR practices: 11 establishments fall into
this category;
4. ‘low-HRM quality-enhancers’, using 10 or fewer HR practices: 25 establishments fall
into this category;
5. ‘medium-HRM quality-enhancers’, using more than 10 but fewer than 16 HR practices:
68 establishments fall into this category;
6. ‘high-HRM quality-enhancers’, using 16 or more HR practices: 83 establishments fall
into this category;
13
7. ‘low-HRM innovators’, using 10 or fewer HR practices: 10 establishments fall into this
category;
8. ‘medium-HRM innovators’, using more than 10 but fewer than 16 HR practices: 13
establishments fall into this category;
9. ‘high-HRM innovators’, using 16 or more HR practices: 41 establishments fall into this
category;
10. ‘low-HRM other’, using 10 or fewer HR practices: 31 establishments fall into this
category;
11. ‘medium-HRM other’, using more than 10 but fewer than 16 HR practices: 21
establishments fall into this category;
12. ‘high-HRM other’, using 16 or more HR practices: 12 establishments fall into this
category.
Hypothesis 2: The level of performance is dependent on the approach taken to HRM
and to business strategy; ‘high-HRM quality-enhancer’ and ‘high-HRM innovators’
outperform the other categories within the sample?8
Given the diverse product markets in which the firms in our sample operate, evidence of the
universal relevance of HRM would be very significant.
14
Testing the Importance of Internal Fit
The final hypothesis examines the importance of introducing HRM as a synergistic package
of mutually supporting practices. According to bundling theory, establishments that adopt a
wide range of HRM practices, and those introducing their HRM practices as a coherent,
institutionally supported synergistic package should outperform establishments within which
HRM has been introduced in an ad hoc manner. To test this, a trichotomous variable was
constructed as follows:
(a) ‘strategic HRM’ establishments: above-average (16 or more) usage of HRM
strategically integrated with each other: 141 (46.3%) fall into this category;
(b) ‘non-strategic’ HRM establishments (16 or more) usage of HRM practices, which are
not strategically integrated: 53 (17.3%) fall into this category;
(c) ‘low-HRM’ establishments (fewer than 16) usage of HRM practices: 110 (36.5%) fall
into this category.
If a senior HR representative takes part in the company’s overall strategic decision
making and if the respondent reported that HR policies are deliberately integrated with each
other, the establishment is categorized as having ‘strategically integrated’ its HRM practices
in the typologies above.
Hypothesis 3: Firms that introduce HRM techniques within an institutionally supported,
coherent package outperform those that introduce similar numbers of HRM practices
but in an ad hoc manner and not as part of an overall policy or strategy.
15
If internal fit is important, the ‘strategic HRM’ establishments should outperform the other
establishments within the sample.
RESULTS
Hypothesis 1: Effects of HRM on Performance is Contingent upon Strategy
Table 3 examines the relationship between HRM and performance outcomes and provides
strong evidence for Hypothesis 1, that the effectiveness of HRM is dependent upon the
achievement of external fit.
Insert Table 3 here
It can be seen that across the sample as a whole, there is a strong positive relationship
between the extent to which HRM is used and all three of the performance measures. However,
for the cost-reducer firms, this positive relationship disappears for sales and labour productivity
and is negative (although insignificantly so) for financial performance. For quality enhancer and
innovator establishments the HRM measure correlates positively and significantly with all
performance measures. For establishments in the ‘other’ category, while the correlations
between the HRM measure and performance measures are positive, none of the relationships are
significant. It is likely that this reflects the ambiguities within such establishments. The use of
externally flexible labour (interacted with HRM usage) reduces the positive correlation found
between HRM and the performance measures.
16
These results give support to the external fit hypothesis, that the effectiveness of HRM is
strongly dependent upon the business strategy pursued. As hypothesized, there is no evidence
that the adoption of HRM leads to improved performance where establishments emphasize cost
control within their business strategies. In contrast, the evidence presented shows that where
HRM is coupled with strategies that emphasize quality-enhancement and innovation,
performance is positively affected. Reliance on externally flexible labour offsets, to some
extent, the positive association between HRM and performance. This is not surprising. While
‘external flexibility’ may include some examples of what might be termed ‘high road’ practices,
consistent with investing in progressive HR practices – for example where skilled employees
choose to work on fixed-term contracts – much of this type of ‘labour flexibility’ will be of the
‘low road’, hire-and-fire type. Reliance on this type of externally flexible labour is usually
associated with the sort of cost control that we found led to HRM practices having no positive
effect on performance.
Hypothesis 2: Universal Relevance of HRM
This section examines whether establishments that adopt ‘high-HRM quality-enhancer and high
HRM innovator’ approaches are the best performing establishments within the sample. Such a
finding would suggest that HRM coupled with an emphasis on either quality or innovativeness
holds universal relevance for firms. In contrast, if ‘low-HRM cost-reducer’ establishments are
performing equally effectively, the implication will be that a high-HRM approach is not
necessarily universally relevant, and that there is sufficient diversity within product markets for
alternative approaches to business strategy and HRM to prove equally effective.
17
Insert Table 4
The results in Tables 4 suggest that the ‘high-HRM quality enhancers and innovators’ are the
highest performing establishments in terms of labour productivity and financial performance
within the sample (Hypothesis 2). The exception to this universalism however appears in
relation to sales growth, where ‘high-HRM cost reducers’ and ‘high-HRM other’ (where the
signs are positive but not significant). This may reflect the fact that it is relatively easy for firms
to increase sales growth compared to the other performance measures. Moreover, increased
sales growth will not necessarily improve financial performance, especially if the price of the
product or service is reduced in order to secure the increased volume. It is also important to
recognize that where universalism does not hold, it is in the context of ‘high’ HRM usage which
may thereby offset, at least in part, the potential negative effects of cost based and ambiguous
strategies.
Hypothesis 3: The Importance of Internal Fit
This analysis examines whether establishments that appear to have introduced their HRM
practices as a strategically integrated package of mutually supporting practices outperform
establishments that have introduced their practices in a more ad hoc manner.
Insert Table 5 here
The results in Table 5 show that ‘strategic HRM’ establishments outperform the ‘lowHRM’ establishments across all of the performance measures (Hypothesis 3). In contrast, the
‘non-strategic HRM’ firms do not outperform the ‘low-HRM’ establishments significantly for
18
any of the measures. A higher dependence on externally flexible labour weakens the positive
correlations between strategic HRM and all of the performance measures. Interestingly,
however, where non-strategic HRM is present, the use of externally flexible labour actually
strengthens the correlation (although the relationship is not significant) between the
performance measures. In other words, external flexibility may help to offset the lack of
strategic HRM in these establishments. Overall, these results suggest that, when firms do
introduce HRM practices, the returns on HRM are much greater where they are introduced as
part of an institutionally supported and coherent package.
CONCLUSION
Investing in ‘progressive’ HR practices can clearly pay dividends in terms of corporate
performance. However, the results reported in this paper suggest that the degree to which this is
true – in statistical terms, the size and significance of the effect – will vary according to a range
of factors. One of these factors is the strategy that the firm adopts. Broadly, it may be pursuing a
‘high road’ strategy of investing in progressive HR practices that will be expected to lead to a
greater degree of commitment and motivation amongst the workforce, as well as to both an
increased ability and greater opportunities to work more productively. Hence the HR investment
will lead to improved productivity and profitability. Alternatively, the firm may choose a ‘low
road’, cost-cutting strategy. This may include putting employees onto short-term contracts
and/or part-time working, and accepting a greater degree of labour turnover. In this case we
would not expect to find a high level of investment in HR. And if such HR practices were to be
pursued, they would be unlikely to lead to improved outcomes. There is thus no automatic or
19
general link from HR practices to outcomes; it will depend, in part at least, on the strategy being
pursued.
If a ‘high road’ strategy is consciously chosen, then the costs of investing in HR practices can
be expected to be recouped through improved performance. However, for this to happen
requires the HR practices to lead not just to higher levels of commitment and motivation
amongst staff, it is also necessary for this to be matched firstly by the skills to work more
productively, and also by the opportunities to put those skills and motivation to good effect. For
these three factors to be present – motivation, skills and opportunities – requires HR practices to
be pursued as coherent ‘packages’, and to be combined with appropriate organizational design.
20
Table 1. Labour Market Flexibility Variables
External Employment Flexibility Variables.
Mean
No. of valid
cases (n = 365)
percentage of total employees:
0.22
354
a. Number of part-time employees as a percentage of total:
0.21
364
0.19
361
0.28
354
External flexibility:
Number of employees that are externally flexible as a
b. Number of employees on temporary contracts as a
percentage of total employees:
c. Number of employees on fixed-term, casual, or seasonal
contracts as a percentage of total employees:
Note: The results for external flexibility are similar to those reported by the 1998
WERS survey. See Milward, et al., 2000, pp. 43-49.
21
Table 2. HRM Practices used in the Analysis
HRM Practice
Recruitment and Selection
a. Use of at least one of the following selection methods: psychometric
testing; personality/attitudinal tests; work sample; aptitude tests.
b. Trainability as a major selection criteria
c. Use of realistic job previews during recruitment and selection
Incentive Pay and Appraisal
a. A merit element in the pay of staff at all levels
b. Formal appraisal of the majority of non-managerial staff on a regular
basis (at least annually)
Training
a. Formal induction programme for new employees
b. The majority (> 50%) of non-managerial employees received formal offthe-job training in the past 12 months
c. Investor in People (IIP) Status
Job Design
a. Redistribution of tasks amongst non-managerial employees over the
past 3 years.
b. Extent to which non-managerial employees have variety in their work
(‘moderate’ – ‘entirely’).
c. Work organized around team-working for the majority of employees
Quality Issues
a. Production/service staff have quality responsibilities
b. A majority of employees (> 50%) are involved in quality circles or
quality/continuous improvement teams
Communication and Consultation
a. A system of regular, planned team briefings involving senior
management during which time work stops
b. Joint Consultative Committees (JCCs)
c. All staff are informed about the market position and competitive
pressures faced by the establishment and/or company
d. All staff are informed about the strategic objectives and targets for the
establishment and/or company
Terms and Conditions
a. Harmonized terms and conditions between management and nonmanagement staff
b. Internal promotion the norm for appointments above the basic level
c. Written policy of guaranteed job security or non-compulsory
redundancies amongst permanent staff
d. Written commitment to a goal of long-term employment security
amongst permanent staff.
Mean
No. of valid
cases
(n = 365)
0.264
362
0.683
0.552
357
358
0.605
360
0.623
361
0.73
364
0.487
0.547
363
364
0.489
352
0.532
0.623
358
360
0.734
362
0.482
361
0.793
0.415
364
363
0.689
362
0.734
362
0.689
0.634
361
364
0.152
363
0.091
363
22
Table 3. The Relationship between HRM Practices, Labour Market
Flexibility, and Organizational Performance
Sales Growth
All Firms
Cost-reducers
Innovators
Others
0.098 (1.138)
0.075 (1.076)
0.067 (1.113)
0.024 (0.438)
-0.167 (2.665)**
-0.215 (2.234)*
0.003 (0.062)
-0.156 (2.076)*
-0.129 (1.100)
-0.069 (1.123)
Qualityenhancers
0.135 (2.316)**
0.123 (2.118)*
-0.058 (1.113)
-0.089 (1.342)
0.213 (2.267)*
0.228 (2.327)**
0.115 (1.145)
0.197 (1.772)
0.156 (1.223)
-0.067 (1.356)
HRM
HRM * External flex
d50 – 99 employees
d100 – 199 employees
d200 – 499 employees
d500+ employees
Age
dForeign
Union Recognition
dManuf
0.126 (2.825)***
0.103 (2.265)**
-0.225 (1.632)
-0.221 (1.963)*
-0.113 (1.234)
0.252 (2.452)***
0.006 (1.113)
0.184 (1.989)*
-0.167 (1.732)
-0.056 (1.156)
0.158 (2.567)***
0.136 (2.135)**
0.120 (1.067)
-0.096 (1.123)
-0.102 (1.223)
0.233 (2.223)***
-0.127 (1.976)*
0.156 (1.886)*
0.145 (1.665)
0.158 (1.823)*
0.076 (1.003)
0.052 (0.536)
0.103 (1.043)
0.145 (1.129)
0.076 (1.067)
0.192 (1.145)
0.007 (0.467)
0.192 (2.113)*
-0.163 (1.654)
-0.045 (1.056)
n
Pseudo R2
364
0.156
60
0.123
176
0.138
63
0.119
61
0.115
All Firms
Cost-reducers
Innovators
Others
HRM
HRM * External flex
d50 – 99 employees
d100 – 199 employees
d200 – 499 employees
d500+ employees
Age
dForeign
Union Recognition
dManuf
0.189 (2.991)***
0.154 (2.251)**
0.117 (1.227)
0.198 (1.554)
0.156 (1.146)
-0.195 (2.403)***
0.015 (1.002)
0.221 (2.113)*
-0.172 (1.665)
0.078 (1.123)
0.102 (1.100)
-0.093 (1.123)
0.054 (1.117)
0.033 (0.449)
-0.129 (1.332)
-0.182 (2.112)*
0.007 (0.058)
0.087 (1.223)
-0.189 (1.226)
0.112 (1.103)
Qualityenhancers
0.126 (2.267)**
0.119 (1.932)*
-0.022 (1.001)
-0.066 (1.225)
0.227 (2.123)*
0.238 (2.426)**
0.005 (0.765)
0.178 (1.550)
0.112 (0.384)
0.115 (1.118)
0.234 (2.876)***
0.202 (2.209)**
-0.118 (1.123)
-0.100 (0.107)
-0.042 (0.289)
0.267 (2.118)*
-0.112 (1.382)
0.123 (1.956)*
0.152 (1.434)
0.116 (1.076)
0.128 (1.345)
0.112 (1.259)
0.007 (0.765)
0.106 (1.197)
0.055 (1.110)
-0.206 (1.232)
0.056 (0.827)
0.177 (1.219)
-0.065 (1.113)
0.089 (1.116)
n
Pseudo R2
364
0.165
60
0.130
176
0.125
64
0.115
62
0.107
All Firms
Cost-reducers
Innovators
Others
HRM
HRM * External flex
d50 – 99 employees
d100 – 199 employees
d200 – 499 employees
d500+ employees
Age
dForeign
Union Recognition
dManuf
0.143 (3.221)***
0.105 (2.551)**
0.123 (1.334)
0.205 (1.678)
0.134 (1.223)
0.204 (2.333)***
0.123 (1.113)
0.186 (2.383)**
-0.153 (1.432)
-0.075 (0.887)
-0.093 (1.003)
-0.132 (1.223)
0.047 (1.062)
0.027 (0.33`)
0.104 (1.192)
0.124 (1.028)
0.013 (0.066)
0.105 (1.382)
-0.165 (1.079)
-0.004 (0.103)
Qualityenhancers
0.176 (3.331)**
0.166 (3.115)***
-0.114 (1.123)
-0.043 (1.116)
0.219 (2.256)*
0.251 (2.737)***
0.018 (0.589)
0.228 (2.118)*
0.007 (0.067)
0.125 (1.382)
0.134 (2.754)***
0.113 (2.207)**
-0.123 (1.289)
-0.176 (1.134)
0.218 (1.876)*
0.222 (2.209)*
-0.107 (1.234)
0.157 (2.103)*
0.066 (1.348)
0.111 (1.279)
0.116 (1.067)
0.109 (1.008)
0.100 (0.892)
0.056 (1.107)
0.128 (1.223)
0.256 (2.532)**
0.102 (1.003)
0.145 (1.332)
0.085 (1.009)
-0.176 (1.225)
n
Pseudo R2
359
0.178
60
0.128
175
0.154
63
0.122
61
0.119
Labour Productivity
Financial Performance
Notes: Ordered probit analysis. Coefficients given (t statistics in brackets): *** significant at
1%; ** significant at 5%; * significant at 10%.
23
Table 4. HRM, Strategy, Flexibility, and Performance Outcomes
Sales Growth
Labour
Productivity
Financial
Performance
‘Low-HRM cost reducers’
-0.315 (2.422)**
-0.662 (3.876)***
-0.224 (1.904)*
‘Medium-HRM cost reducers’
-0.223 (1.382)
-0.477 (2.557)**
-0.113 (1.662)
‘High-HRM cost reducers’
0.136 (1.206)
-0.187 (1.333)
-0.105 (1.107)
‘Low-HRM quality enhancers’
-0.207 (1.123)
-0.324 (1.283)
-0.457 (2.483)**
‘Medium-HRM quality enhancers’
-0.119 (1.100)
-0.229 (1.007)
-0.336 (1.813)*
‘Low-HRM innovators’
-0.121 (1.007)
-0.189 (1.082)
-0.526 (2.959)***
‘Medium-HRM innovators’
-0.105 (1.288)
-0.087 (0.976)
-0.332 (2.286)**
‘Low-HRM others’
-0.312 (2.383)**
-0.886 (3.664)***
-0.256 (1.632)
‘Medium-HRM others’
-0.221 (1.765)
-0.176 (1.223)
-0.101 (1.013)
‘High-HRM others’
0.123 (1.064)
-0.107 (1.022)
-0.088 (0.659)
d50 – 99 employees
-0.134 (1.056)
0.125 (1.043)
-0.182 (2.005)*
d100 – 199 employees
-0.228 (1.754)
0.138 (1.156)
0.126 (1.256)
d200 – 499 employees
0.156 (1.661)
0.277 (1.966)*
0.344 (2.245)**
d500+ employees
0.226 (1.997)*
-0.214 (1.877)*
0.350 (2.488)**
Age
0.014 (0.076)
-0.033 (1.003)
-0.023 (1.134)
dForeign
0.382 (2.356)**
0.447 (2.636)***
0.358 (2.307)**
Union Recognition
-0.082 (1.005)
0.162 (1.543)
0.123 (1.327)
dManuf
-0.116 (1.045)
0.128 (1.116)
-0.097 (1.003)
n
364
364
359
Pseudo R2
0.124
0.150
0.144
Note: See Table 3. Omitted Category = ‘High-HRM quality-enhancers’ and ‘High-HRM innovators’.
24
Table 5. Internal Fit, Flexibility, and Performance Outcomes
Sales
Growth
Labour
Productivity
Financial
Performance
n
0.536
(2.887)***
0.456
(2.554)**
0.115
(1.266)
0.134
(1.703)
-0.103
(1.023)
-0.172
(1.635)
0.121
(1.226)
0.205
(1.766)
0.010
(0.081)
0.323
(2.141)*
-0.070
(1.012)
-0.115
(1.042)
364
0.775
(3.345)***
0.663
(2.441)**
0.125
(1.456)
0.187
(1.636)
0.117
(1.132)
0.130
(1.132)
0.205
(1.803)*
-0.209
(1.812)*
-0.045
(0.099)
0.376
(2.291)**
0.177
(1.668)
0.119
(1.007)
364
0.802
(3.554)***
0.653
(2.346)**
0.144
(1.234)
0.163
(1.357)
-0.160
(1.102)
0.105
(1.177)
0.322
(2.117)*
0.267
(2.200)*
-0.033
(1.141)
0.342
(2.318)**
0.104
(1.296)
-0.086
(0.953)
359
Pseudo R2
0.104
0.102
0.112
‘Strategic HRM’
‘Strategic HRM’ * External flex
‘Non-strategic HRM’
‘Non-strategic HRM’ * External flex
d50 – 99 employees
d100 – 199 employees
d200 – 499 employees
d500+ employees
Age
dForeign
Union Recognition
dManuf
Notes: See Table 3.
‘Strategic HRM’ = above average no. of HR practices used and establishment has a formal
HR strategy.
‘Non-strategic HRM’ = above average no. of HR practices used but establishment does but
have a formal HR strategy.
25
Omitted category = below-average no. of HR practices used (‘low-HRM’).
26
Appendix: Sample Details
Sample Establishments
Count %
Manufacturing:
Establishment Size:
Under 50
50 – 99
100 – 199
200 – 499
500+
41
46
51
62
42
Total
242 100.0
Industrial Activity:
Food and Drink
Textiles and Clothing
Wood, wood products, paper & printing
Chemicals
Metals and fabrication
Industrial and Commercial Machinery
Electronic and Electrical Equipment
Transportation Equipment
Other Manufacturing
33
23
45
21
30
31
29
14
16
Total
242 100.0
16.9
19.0
21.1
25.6
17.4
13.6
9.5
18.6
8.7
12.4
12.8
12.0
5.8
6.6
Services:
Establishment Size:
Under 50
50 – 99
100 – 199
200 – 499
500+
Total
Industrial Activity:
Hotels and Restaurants
Wholesale and Retail
Financial
Other Business Services
Total
46
14
18
16
31
36.8
11.2
14.4
12.8
24.8
125 100.0
31
39
23
32
24.8
31.2
18.4
25.6
125 100.0
Note: To preserve the robustness of the results, only two dummy variables – dManuf and
dServ – are used in the estimations. Given the relatively small cell sample sizes for each
industry, when the results were run using a higher degree of industry disaggregation, these
coefficients were not significant.
Foreign Ownership: 293 (80.2%) of the sample firms were UK owned and 72 (19.7%) were
foreign owned.
27
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Endnotes
1
Hoque (1999) closely follows Schuler and Jackson’s (1987) strategy typologies.
2
Khatri (2000) uses Miles and Snows (1984) strategy typologies. Khatri’s analysis is
carried out on a sample of firms based in Singapore.
3
It is important to differentiate between the universal effects that HRM might have, and
the universal relevance of HRM as an approach. Universal effects of HRM suggest that
HRM effects performance irrespective of the business strategy adopted, which
contradicts the external fit hypothesis. In contrast, the universal relevance of HRM
suggests that the effectiveness of HRM may be contingent upon the type of business
strategy adopted. In other words, HRM may be most effective when coupled with a
quality-enhancer or innovator strategy and may be least effective when coupled with a
cost-based or non-coherent (‘other’) strategy. Thus, tests for the universal relevance of
HRM do not contradict the contingency arguments (see Hoque, 1999: 422).
4
Hoque argues, therefore, that, “…a ‘high-HRM quality-enhancer’ strategy would be the
key to competitive success within hotels of the nature under investigation here, with
there being little or no scope for a strategy based on cost reduction or price competition
to achieve comparable results” (1999: 439).
5.
For a detailed discussion and typology of flexible work practices see Beatson, 1995.
6. The EXTEL database is a company/organisation level database whereas our study is of
establishments. Large organisations can have many quite small establishments. The EXTEL
32
database is biased towards larger, publicly quoted organisations and those in the
manufacturing sector. For example, almost 50% of the sample organisation’s primary
activity was in manufacturing whereas only 18% of private sector establishments in the
WERS sample were engaged in manufacturing.
7. We spent a day during the first week of the interviews with the staff at the survey company
answering queries, listening to interviews and making suggestions in relation to prompting
and explanations of terminology, etc.
8. If in doubt of a term during the interview, the individual was asked to refer to this glossary.
9. For 73 companies, the HR person was unable to answer parts of the questionnaire (e.g.,
some of the questions about performance and innovation). In such cases, the name of the
most appropriate person in the company was obtained from the HR person and this person
was contacted. Completed questionnaires were obtained for 61 of such companies.
10. Namely, the Company Chairperson, Managing Director, Chief Executive, Manufacturing
Director, or Production Director. Since the data were collected primarily from a single
source that the potential for common-method variance must be taken into consideration. In
the context of HRM and performance, common-method variance problems are likely to
arise because of the phenomenon of higher performance ratings being reported by
respondents, especially when the respondent is a HR Director, who claim to have adopted a
wide range of HRM practices. This problem is reduced to some extent in this analysis in
terms of the performance variables since these are drawn the EXTEL database and therefore
33
objective rather than subjective evaluations of performance.
11. The definition of ‘establishment’/‘site’ in this study corresponds broadly with that of
‘workplace’ used in the Workplace and Employment Relations Survey (WERS):
‘workplaces are sub-sets of organisations, except where the workplace is the sole one in an
organisation and it is only here that the term ‘workplace’ and ‘organisation’ are
interchangeable’ (Cully, et al. 1999: 3-4). For detail of WERS see the December 2000
special issue of the British Journal of Industrial Relations (Volume 38, number 4).
12. Labour productivity is computed as the log of total sales/number of total employees.
13.
The definition of a product innovation was as follows: ‘a new or significantly improved
manufactured or service product which is introduced to the market and requires changes
in knowledge or skills, routines, competence, equipment, or engineering practices to
make the new product. Changes which are purely aesthetic (such as changes in colour or
decoration) or which simply involve product differentiation (minor design or
presentation changes which leave the product technically unchanged) are NOT to be
classified as product innovations.’ The definition of process innovation was as follows:
‘a new or significantly improved production, delivery or distribution method and which
requires changes in knowledge or skills, routines, competence, equipment, or
engineering practices to introduce the new process’.
14. Seventy-nine percent of the sample establishments were multi-site. Thus, in almost all
cases establishment size will vary from organisation size.
34
15. Trade union recognition is used rather than trade union presence, since presence does
not necessarily imply recognition. Recognition is a key indicator of a formal role for a
trade union (see Guest, et al., 2000 for further discussion).
16. Future research will compare performance outcomes between ‘high-RM qualityenhancers’ and ‘high-HRM innovators’.
17. Hypotheses concerning the relationship between the adoption of HRM and performance
is difficult for establishments in the ‘other’ category. The ambiguity of such a strategy
may be what Porter (1985: 16-17) describes as ‘stuck in the middle’ (see Hoque, 1999:
427, for further discussion).
18. This approach follows closely that of Hoque (1999), with cost-reducer establishments
being dropped from this section, as there is little evidence of an HRM-performance
relationship within these establishments.
19. This series of dummies outlined above enables this hypothesis to be tested. By holding 6
and 9 constant we can test whether the ‘high-HRM quality-enhancer’ and ‘high-HRM
innovators’ outperform the other categories.
35