High performance work systems and company performance
in small firms. An empirical analysis
Luigi Stirpe1, Celia Zarraga2, Mike Rigby3
Abstract
The study of the impact of Human Resource Management (HRM) on small firm performance
is a neglected area of research in the literature. This paper seeks to help to fill this gap by
examining the impact of High Performance Work Systems (HPWSs) on a number of indices
of company performance. The empirical study reported, carried out on a sample of 96
companies with between 10 and 100 employees, shows that the implementation of HPWSs is
positively related to company profitability, but not to productivity and labour turnover. These
findings make clear the importance of size of firm in the analysis of the impact of HPWSs on
company performance.
Key Words – human resource management, high performance work systems, small firms,
company performance
1. Introduction
In the last two decades there has been a significant increase in interest in HRM due
principally to the large body of empirical evidence which has displayed the positive impact of
the effective management of human resources on company performance (Schuler and
Jackson, 2005). The majority of the empirical research has sought to study the effect on
company performance of the so-called high commitment or high performance work practices
(Datta et al., 2005). These consist of a group of consistently applied human resource practices
designed to achieve greater employee commitment to the work process as well as higher
levels of productivity, as a result of which a company´s labour force can become a source of
sustainable competitive advantage (Pfeffer, 1995).
In the literature it is difficult to find a precise definition of HPWSs(Datta et al.,2005).
Nonetheless most empirical and theoretical work in the area usually include as high
performance practices comprehensive recruitment policies, careful selection, formal
performance evaluation, group incentives, multi-skilling, the incorporation of flexibility in job
design and focused communication practices with employees (Datta et al., 2005; Guthrie,
2001; Huselid, 1995; Pfeffer, 1995).
There is a considerable body of research on the impact of HPWSs providing substantial
evidence of their positive effect on company performance. In particular they have been shown
to be a powerful tool for improving labour force retention as well as for increasing
productivity and profitability (Combs et al., 2006). However, with the odd exception (e.g.
Sels et al., 2006; Way, 2002), most research has focused on the impact of HPWSs in large or
medium-sized companies, almost completely neglecting small firms (the definition of small
firm will be dealt with in section 3).
This gap is a reflection of the limited interest displayed by researchers in the
management of human resources in small firms (Heneman et al., 2000). The little research
1
Universidad Carlos III, Madrid
Universidad Carlos III, Madrid
3
Deputy Director, Centre for International Business Studies, London South Bank University
2
that exists tends to be descriptive, largely based on case studies. In general these suggest the
dominance in small firms of informal practices in the management of personnel. (Bacon and
Hoque, 2005; Heneman et al., 2000).
The lack of research on the role and impact of HPWSs in small firms is of some
significance at both a theoretical and practical level. At a theoretical level it prevents the
wider application of findings on the impact of HPWSs generated in larger firms. So, by
examining the impact of practices in small firms, one is helping to define the heuristic limits
of the theoretical claims which have been developed to date about the role and impact of
HPWSs. At the same time such research makes a contribution to the continuing debate about
how different small firms are and whether the management principles tried and tested in large
companies can be applied to small firms (Torrés y Julien, 2005).
At a practical level, the management of human resources in small firms is a key issue,
representing as it does, one of the main concerns of small firm managers (Flash Barometer,
2007). In addition, the level of investment needed can be a strong argument against
introducing HPWSs in small firms, if their benefits for company performance are not clear.
As a consequence research which establishes if these practices can help improve small firm
performance could be of considerable use at a practical level, particularly bearing in mind
that, in most western economies, small firms not only constitute the largest category of
company numerically but also make the largest contribution to GNP and employ a high
proportion of the labour force (Faems et al., 2005). For example, 99%of companies in the
European Union (EU) are small and medium sized enterprises (SMEs), and they employ two
thirds of the labour force in the private sector (Eurostat, 2006).
Accordingly our objective in this study is to examine the impact of HPWSs on different
measures of small firm performance. It study is presented in three parts. First there is a
consideration in more detail of relevant literature and the development of associated
hypotheses, secondly there is a presentation of the empirical analysis and finally there is a
discussion of the results obtained and indication of the most important conclusions.
2. Theoretical Framework and Hypotheses
Currently available empirical evidence would indicate that the introduction of
HPWSs could be particularly beneficial for small firms given the type of HR problems many
seem to experience. For example in a recent EU survey (Flash Barometer, 2007) 28% of small
firms indicated that they face problems in recruiting and retaining appropriately qualified
staff. Similar results can be found in North American research during the last decade
(Deshpande and Golhar,1994; Hornsby and Kurtatko,1990). Given that research has shown
that HPWSs can be an important tool for improving labour turnover rates, small firms could
benefit considerably from their introduction (Way, 2002). Similarly evidence suggests that
there is a high failure rate among small firms and that they have less than satisfactory levels
of productivity. (Faens et al., 2005; Mole et al., 2004). HPWSs could help here as well as
research has shown a strong relation between high performance practices and productivity and
company profitability (Combs et al., 2006).
As previously indicated there has been little research on the role and impact of
HPWSs in small firms. The two studies published to date have been located in the United
States (Way, 2002) and Belgium (Sels et al., 2006). In a US context HPWSs appear to help to
reduce labour turnover but have no impact on productivity (Way,2002) while the Belgian
study, on the contrary, identified a positive relation between HPWSs and productivity but no
impact on labour turnover (Sels et al.,2006).
2
In the interests of adding to the limited research in the area and facilitating
international comparison, this study addresses the issue in the UK, one of the European
countries in which HPWSs have become most established (Gooderham et al., 1999). The
results of our analysis can also be compared with those obtained from studies of the impact of
HPWSs in larger firms in the UK (e.g. Guest et al., 2003).
Although it would be wrong to consider the UK economy as one dominated by small
firms (particularly when compared with Southern Europe), their role is nonetheless important.
In practice, firms with less than 250 workers make up 94% of the total in the UK and they
employ 47% of the private sector labour force. In addition they are responsible for 47% of
private sector turnover (Small Business Service, 2005)
Most studies of HPWSs have measured their impact on company performance. For
example Dyer and Reeves (1995) have identified three types of variable likely to be affected
by HPWSs; human resource variables such as labour turnover, organizational variables such
as productivity and, finally, financial variables such as profitability. Most research up to now
has focused on some or all of these variables (Combs et al., 2006) and as a result they are the
ones used in this study.
We go on to develop the hypotheses of the study.
2.1HPWPs and Labour Turnover
Labour turnover can be a problem for any company, irrespective of size. It involves
both direct costs (e.g. recruiting new staff and training them) and indirect costs (e.g. the loss
of clients) (Dess and Shaw, 2001). However evidence suggests that labour turnover can be
particularly damaging for small firms, in part because of their limited financial resources (Sels
et al., 2006) but also because of the difficulties they face in attracting appropriately qualified
labour.
According to their advocates, HPWSs can be instrumental in creating a company
environment which increases worker satisfaction, motivation and commitment (Appelbaum et
al., 2000; Walton, 1985) resulting in a stronger, positive culture and therefore a lower level of
labour turnover (Guthrie,2001; Huselid, 1995). It is true that this particular impact of HPWSs
has never been demonstrated empirically (Ramsay et al., 2000). However, most studies of
larger firms tend to suggest a negative relationship between HPWSs and labour turnover (e.g.
Guest et al., 2003; Guthire, 2001; Huselid, 1995).
In the light of this evidence it would seem relevant to examine whether HPWSs also
have a positive effect on labour turnover in small firms. Thus:
Hypothesis I . In small firms there is a negative relationship between the implementation of
HPWSs and labour turnover.
2.2 HPWSs and Productivity
Although small firms are responsible for a considerable proportion of the GDP in most
European countries (Eurostat, 2006) , in general, their level of productivity is considered
unsatisfactory, particularly in comparison with larger companies (Mole et al., 2004).There are
a number of reasons for low productivity in small firms ranging from low levels of capital
investment to their difficulties in achieving economies of scale (Idson and Oi, 1999). As a
result of this problem and recognizing the importance of small firms for their national
economies, different governments in the EU have introduced programmes to help firms
improve their levels of productivity. The majority of these programmes have had fiscal
implications. For example, in the UK, the main approach has been to seek to reduce the tax
3
burden on small firms (Storey, 1997). To date, the measures adopted have not always been
effective and the productivity problem of small firms continues to be area meriting further
research (Mole et al., 2004)
HPWSS can play an important role in improving productivity. Most studies have found
a largely positive relationship between HPWSs and productivity, irrespective of sector
(services v manufacturing), of the productivity measure used (objective v subjective), of the
unit of analysis (workplace v company) and of the high performance practices included (Datta
et al., 2005; Guthrie, 2001; Huselid, 1995).
The existence of this relationship is normally explained by the capacity of HPWSs to
attract, motivate and develop a labour force capable of achieving higher levels of performance
(Becker and Huselid, 1998).
It therefore would seem logical to expect that HPWSs could play a useful role in helping
small firms to improve their productivity. Thus:
Hypothesis 2. In small firms there is a positive relationship between the implementation of
HPWSs and labour force productivity.
2.3. HPWSs and Profitability.
Research on medium sized and large companies has established a positive
relationship between the implementation of HPWSs and profitability. (Combs et al., 2006)
show that HPWSs can increase profitability in different ways. Appelbaum et al. (2000)
suggest that there are three principal avenues via which profitability can be increased. The
first - and most obvious – is through an increase in productivity. The second is through cost
reduction. HPWSs help to reduce the number of employees, particularly of supervisory and
support staff, because a better-trained and more involved workforce will also be more able to
work independently and flexibly. The reduction in the number of employees in turn reduces
labour costs. In addition a more efficient labour force will reduce raw material costs and the
need to carry stock which, in turn, will reduce the size of locale needed for production and
therefore rental and insurance costs. The third way of increasing profitability is through
increasing employee efficiency and so reducing costly interruptions to the production process,
enabling delivery schedules to be met.
Bearing in mind the importance of small firms for most western economies, it is
surprising there is so little research examining the impact of HPWSs on small firm
profitability. This is particularly so given that one of the main difficulties which small firms
face is that of raising finance (Flash Barometer,2007) which increasing their profitability
would facilitate (Sels et al., 2006). It would therefore seem particularly important to
understand the impact of HPWSs on small firm profitability and find out whether the
implementation of HPWSPs can increase the profitability of small firms, as in larger
companies. Thus:
Hypothesis 3. In small firms there is a positive relationship between the implementation of
HPWSs and company profitability
3. Methodology of the study.
4
3.1 The Population studied
Usually, in both academic and policy oriented literature, the number of employees is the
main criteria used to distinguish firms by size (Way, 2002).It is certainly the case that some
studies use criteria based on market share, management structure or ownership but an
important advantage of using number of employees is that it enables comparisons to be made
between sectors. However there does not exist a consensus on the labour force size of a small
firm. Institutions such as the EU define small firms as those with more than 10 and less than
50 employees (firms with less than 10 employees are categorized as micro-firms) (Eurostat,
2006) while in some academic studies firms with no more than 500 employees have been
defined as small (Golhar and Deshpande, 1997; Zheng et al., 2006).
In previous studies on HPWSs in small firms, some researchers have focused on
companies with between 20 and 100 employees (e.g. Way, 2002) while others have
concentrated on those with between 10 and 100 employees (e.g. Sels et al., 2006). This paper
adopts the latter approach, focusing on companies with more than 10 and less than 100
employees. This is the group of firms which has received least attention in studies of the
impact of HPWSs which have tended to concentrate on firms with more than 100 employees
(Faems et al., 2005).
3.2. Sample and Data Collection
This study uses data from the Workplace Employment Relations Survey, 2004 (WERS,
2004), a government-funded national survey whose objective is to provide representative data
about a wide range of employment practices in all sectors of the UK economy. As previously
pointed out, most research on human resource management in small firms has been
descriptive based on the case study method. Studies of this type can certainly help to reflect
the complexity of the management process in small firms but it is impossible to generalize
from their results. The use of data from WERS 2004 enables this problem to be overcome.
The unit of analysis employed in the WERS survey is the workplace, defined as the
activities of an employer in one location e.g. the branch of a bank, a factory, a head office.
The WERS Cross Section Management Questionnaire is completed through face to face
interviews with the manager responsible for human resources at the workplace. The
interviews took place between February 2004 and April 2005. A separate WERS
questionnaire made available data on the financial results of the workplaces surveyed for
2003. Via these two questionnaires WERS provided the data necessary to test our hypotheses.
The data of the Cross Section Management Survey enabled us to identify 292 private
sector firms with more than 10 and less than 100 employees, excluding workplaces which
were part of a larger organization (and which could benefit from the economies of scale
associated with the implementation of HPWSs (Ferris et al., 1998)). However not all of the
292 firms identified replied to the questionnaire on financial performance, reflecting the
general difficulties of obtaining data from small firms (Heneman et al., 2000; Wijewardena
and Tibbits, 1999). As a result we could only use 96 companies, 32.9% of the initial sample
of small firms and the study had a sampling error of 10%.
3.3. High Performance Work Systems
Previous researchers on HPWSs have recommended using a unitary index of high
performance practices (Becker and Huselid,1998) and, given the lack of agreement about
which practices to include (Becker and Gerhart,1996), have argued that one should be guided
5
by the approach taken in previous studies (Becker and Huselid,1998). Following this advice
we constructed a unitary index of 9 practices based on taking an average of those used in the
literature. These practices are: careful selection (Datta et al., 2005; Huselid, 1995; Sels et al.,
2006; Way, 2002), formal performance appraisal (Datta et al., 2005; Huselid, 1995),
performance related pay (Huselid, 1995; Sels et al., 2006), group incentives (Datta et al.,
2005; Guthrie, 2001; Huselid, 1995; Sels et al., 2006; Way, 2002), multi-skilling (Datta et al.,
2005; Guthrie, 2001; Pfeffer, 1995), job rotation(Datta et al., 2005; Guthrie, 2001; Pfeffer,
1995; Way, 2002), quality circles (Datta et al., 2005; Guthrie, 2001; Huselid, 1995; Way,
2002), team working (Datta et al., 2005; Guthrie, 2001; Pfeffer, 1995; Way, 2002) and
disclosure of information (Datta et al., 2005; Guthrie, 2001; Huselid, 1995; Pfeffer, 1995) (α
= 0,63). The number of practices used is taken to determine the degree to which a HPWS has
been implemented in each firm. The values of the variable HPWS go from 0-when none of
the practices have been used- to 1 – when all 9 practices have been implemented in relation to
all staff in the company (see Table 1 for the details of each practice).
3.4 Dependent variables
The dependent variables used in the study are: labour turnover, productivity and
profitability (Table 1):
Labour Turnover
The study focuses on voluntary turnover where employees leave a company of their free will
(and therefore where the company loses competent workers who could still be useful to it).
This variable has been measured in terms of the percentage of workers who have left the
company voluntarily during the previous year (Sels et al., 2006; Way, 2002)
Productivity
The productivity of a company reflects its ability to produce goods and services given
a specific amount of labour, capital, materials, time, space, and knowledge or any
combination of these factors (Lindsay,2004). As in the case of previous studies (e.g. Datta et
al., 2005; Guthrie, 2001; Huselid, 1995) this variable has been measured as the logarithm of
the ratio of firm sales to number of employees.
Profitability
The ratio used for profitability is that of gross profits to fixed assets. This ratio
compares profits with capital employed
3.5 Control Variables
Five control variables were included in the analyses: capital intensity, trade union
presence, age of firm, firm size, and sector (see Table 1).
Capital intensity. This was introduced because the degree of capital intensity can have an
important influence on productivity (Datt et., 2005).This variableis measured as the logarithm
of the ratio of fixed assets to number of employees (Huselid,1995)
6
Trade union presence. Union presence has been included as a control variable because trade
unions can affect our dependent variables (Freeman and Medoff, 1984).This variable has been
measured via the creation of dummy codes representing two categories. The value zero is for
those firms where there are no union members or, if there are members, the union is not
recognized for collective bargaining. The value 1 is for those firms where a union is
recognized for collective bargaining. This form of measurement assumes that only in those
cases where unions are recognized for negotiating purposes are they likely to be able to
exercise influence over company policy (Kelly, 1996).
Age of firm. Age of firm has been included to allow for the impact of experience and learning
curve advantages on productivity (Guthrie, 2001) (1= less than 10 years, 4= more than 50
years).
Firm size. Although our analysis concentrates on a group of firms already defined by labour
force size (those with more than 10 and less than 100 employees), size of firm has been
included as a control variable because the bigger the internal labour market, the more
opportunities will exist for the internal workforce and therefore the lower may be the
voluntary labour turnover (Sels et al., 2006). Firm size has been measured as the logarithm of
the number of employees
Sector. Dummy codes representing two broad categories, the industrial and service sectors,
were created. The industrial sector consisted of 26 firms (27%of the sample) and the service
sector of 70 firms (73% of the sample). The fact that 73% of the firms in the sample were
located in the service sector reflects accurately the economic structure of the UK where 67%
of firms belong to the service sector (Labour Force Survey, 2005).
.
Table 1: Definitions of the variables in the study and practices
Definition
A) Variables
High Performance Work System
The extent of implementation of 9 high performance
practices: careful selection, formal performance
appraisal, performance related pay, group incentives,
multi-skilling, job rotation, quality circles, team
working and disclosure of information.
Productivity
Ratio of sales to number of employees
Labour turnover
% of employees who have voluntarily left the firm
during the previous year.
Profitability
Ratio of gross profits to fixed assets
Capital intensity
Ratio of fixed assets to number of employees
Trade union presence
Dummy: 0 = No union presence (no union members
among employees or, if there are, the union is not
recognized for collective bargaining purposes.); 1 =
Union presence (there are union members and the
7
union is recognized for collective bargaining
purposes)
Age of firm
1 = less than 10 years; 4 = more than 50 years
Firm size
Logarithm of the number of employees ???
B. The Practices forming a High
Performance Work System
Careful selection
The use of personality/ attitude and/or performance /
competency tests.
Formal performance appraisal
% of non managerial staff who have their
performance formally appraised
Performance related pay
Dummy: 0 = the pay of non-managerial staff not
linked to performance appraisal; 1 = the pay of nonmanagerial staff is linked to performance appraisal
Group incentives
% of non-managerial staff who have received profit
related pay during the past year.
Multi-skilling
% of the largest occupational group formally trained
to do jobs different to their own.
Job rotation
% of the largest occupational group in the firm who,
at least once a week, actually do jobs different to
their own.
Quality circles
% of non-managerial staff involved in quality circles.
Team working
% of the largest occupational group in the firm who
work in autonomous teams
Disclosure of information
Employees are informed about the investment plans
of the firm and/or its financial position and/or its
staffing plans.
Source: the authors
4. Results and analysis
Table 2 shows the means, standard deviations and zero order correlations among all
study variables.
8
Table 2: Descriptive statistics and correlations.
Mean
s.d.
1
2
3
4
5
6
1. HPWS
0.28
.16
2. Labour turnover
15.94
17.82
.052
3. Productivity (a)
4.23
1.11
.001
.143
4. Profitability
2.78
17.30
.242*
.191
.400**
5. Capital intensity
3.18
1.46
-.179
-.026
-.003
-.283**
6. Union presence
.18
0.38
.103
-.206*
-.226
-.072
.023
7. Firm size
3.3
0.67
.008
-.181
.027
-.087
-.029
.115
8. Age of firm
2.24
1.01
-.219*
-.197
-.027
-.129
.391**
.160
7
.170
N = 96
Notes: * The correlation is significant at 0.05 level (all two tailed tests); ** The correlation is
significant at 0.01 level (all two tailed tests); (a)Natural logarithm of firm sales to number of
employees
The implementation of HPWSs among the small firms in our sample is very limited.
The average implementation is 0.28 (s.d.= 0.16) as against a possible maximum of 1. This
finding is consistent not only with research carried out in other countries (e.g. Sels et al.,
2006; Way, 2002) but also with the UK study of Bryson et al ,(2007) which found a more
extensive use of HPWSs in larger firms.
To test our hypotheses three hierarchical regression analyses were used. In each of
them the independent variables were repeated (thecontrol variables and the HPWS). The
independent variable in each case was one of the measures of company performance; labour
turnover, productivity and profitability). Table 3 summarizes the results.
According to hypothesis 1, for small UK firms there should be a negative
relationship between HPWSs and labour turnover. The results (Table3, Models 1 and 2) show
a negative relationship between HPWSs and labour turnover but the lack of statistical
significance means that the hypothesis is not supported. It is worth commenting on the
negative impact of age of firm on labour turnover which is consistent with other research
(Sels et al., 2006; Way, 2002).
According to hypothesis 2, there should be a positive relationship between HPWSs
and productivity. The results (Table 3, Models 3 and 4) do not support the hypothesis. As in
the case of hypothesis 1, the relationship between the variables is as hypothesized but it is not
statistically significant. Of the control variables, only trade union presence has a significant
relationship with productivity. Unionized firms have a lower level of productivity which is
consistent with the findings found in the labour relations literature (Freeman and Medoff,
1984)
Finally, according to hypothesis 3, there should be a positive relationship between
HPWSs and company profitability. The results (Table 3, Models 5 and 6) completely confirm
this hypothesis showing a positive relationship, which is statistically significant (p<05). In
9
addition, as might be expected given our definition of the variables, the results suggest a
negative relationship between capital intensity and profitability. No other significant
relationship was identified between the control variables and our dependent variable.
Therefore our results refute hypotheses 1 and 2 and confirm hypothesis 3.
10
Table 3: Regression analysis results
Variables
Variables
Labour T/O Productivity
Model 1 and 2 Model 3 and 4
Β
B
B
β
Profitability
Model 5 and 6
Β
B
Step 1
Capital intensity
.04
.039
-.011 -.002
-.284** -.265*8
Union presence
-.139 -.138
-.251** -.260**
-.051 -.083
Size of firm
-.081 -.081
.029 .025
-.075 -.089
Age of firm
-.228**
-.230
.058 .134
-.001 .04
Services a
.256**
.257**
.-.129 -.143
.067 .017
Step 2
HPWSs
ΔR2
R2 Adjusted
-.007
.149 .000
.10 .09
Change in F
3.052**
a. Sector of reference: Industry
* p < .10
** p < .05
*** p < .01
n = 96
.005
.062
.211**
.071 .003
.096 .039
.014
.045 .076
.006
1.252 .003
1.894 3.973
5. Discussion
Our analysis of the relationship between the use of HPWSs and company performance in a
sample of small UK firms has produced results, which are largely consistent with those of similar
research in other countries.
As was the case with Sels et al. (2006) no significant relationship was found between the use of
HPWSs and labour turnover, contrary to research in the UK on larger firms which did identify a
negative relationship between HPWSs and labour turnover. This difference can be explained by the
tendency for small firms in the UK to offer pay levels and general conditions of employment which are
11
less attractive than those offered by larger firms (Arrowsmith et al.,2003; McNabb and Whitfield, 2000).
The latter normally offer higher salaries and fringe benefits as well as greater job security (Mcnabb and
Whitfield, 2000). Possibly the use of HPWSs is not sufficient to compensate for these differences and
prevent employees from leaving for higher rewards elsewhere.
Following Way (2002), our study was unable to establish a positive relationship between the
application of HPWSs and productivity in small firms. This is also consistent with the finding of Guest
et al. (2003) in their research on larger UK firms. It is however relevant to bear in mind that our measure
of productivity was the logarithm of the ratio of firm sales to number of employees. This measure
primarily tells us if sales per employee increase as a result of the implementation of HPWSs but other
measures of productivity which could also be important. Even if the application of HPWSs has no
impact on sales, it could positively influence other factors in small firms e.g. efficiency, quality.All
things being equal in terms of sales and number of employees, in firms where HPWSs have been
introduced, it is possible that the products/services might be generated more efficiently (e.g in less time)
and be of higher quality (e.g. have less faults) (Appelbaum et al.,2000; Arthur,1994; MacDuffie,1995).
Future research would do well to explore these possibilities.
Our analysis did find a positive and statistically significant relationship between the use of
HPWSs and profitability. Given the importance of profitability if small firms are to attract resources
such as external finance (Sels et al., 2006) our research stresses the value of small firms introducing
HPWSs. This finding is consistent with those of previous studies on companies with more 100
employees (e.g. Huselid, 1995)and of studies on smaller firms in other countries (e.g. Sels et al., 2006).
Previous research has indicated that HPWSs can improve profitability in various ways. One of
these is by improving productivity. However there are other possible mediating factors (Appelbaum et
al., 2000; Huselid, 1995). Given the failure of our research to establish a relationship between HPWSs
and productivity, it is suggested that in the case of small firms the positive effect of HPWSs on
profitability is likely to be as a result of their impact on costs, in a number of ways. Research has shown
that HPWSs reduce materials wastage (and therefore costs) in the production process (Appelbaum et al.,
2000; Arthur, 1994). They would appear to reduce the need to carry stock (Applebaum et al., 2000;
MacDuffie, 1995). It has also been suggested that they reduce the costs of supervision (Appelbaum et
al., 2000; Walton, 1985) and that, by improving the employment relations climate, they reduce the level
of conflict and its associated costs (Katz et al., 1985). Other ways in which HPWSs could have a
positive impact upon profitability are by reducing the level of absenteeism , reducing labour costs
through workforce flexibility (Appelbaum et al., 2000), increasing the level of innovation (Maes and
Sels, 2006), improving delivery times (Appelbaum et al., 2000; Sels et al., 2006) and increasing
customer satisfaction and loyalty (Rogg et al., 2001).
It is argued, therefore, that the positive relationship which this study has found between HPWSs
and profitability is because of their impact on costs through one or more of these effects. This needs to
be confirmed empirically. In any case, given their proven impact upon profitability, HPWSs can clearly
provide small firms with a possible source of competitive advantage.
6. Conclusions, limitations and future research
This study has established a positive and significant relationship between the
implementation of HPWSs and company profitability in a sample of UK small firms,
thus suggesting the desirability of introducing HPWSs in this type of firm.
However it is important to acknowledge several limitations of the study.
First, only a small sample of firms was used (n= 96). The findings need to be
confirmed by replicating the study on a bigger sample of firms. Another limitation is
that because the data used was cross sectional it was not possible to observe the
impact of HPWSs over time. For this purpose a longitudinal study is recommended.
12
In addition, our study only included UK firms and therefore one would need to be
careful in generalizing our findings to other countries. Contextual factors can
influence the relationship between HPWSs and company performance in a number of
different ways (Guest et al., 2003). Therefore although our findings have many
similarities with studies carried out in other countries (e.g. Sels et al., 2006; Way,
2002) there are also differences. This would suggest the need for more research on the
impact of particular institutional and market contexts. Such factors may be
responsible for the different effects associated with human resource management in
different countries (Brewster, 2007).
Notwithstanding these limitations, it is argued that this study has made a
useful theoretical and practical contribution. From a theoretical perspective it has
added to the limited literature on the impact of HPWSs on small firm performance.
From a practical perspective the research has provided a useful point of reference for
small firms seeking to improve their performance and for those public institutions in
the UK with a role in helping them to do this (Bacon and Hoque, 2005; Mole et al.,
2004, Patton et al., 2000; Storey, 1997). In recent years the management of human
resources has been recognized as an area of weakness in the management of small
firms in the UK, which has inhibited their growth and development. The use of
HPWSs has been advocated by the relevant institutions (Small Business Service,
2002). The present study can lend weight to their efforts.
Acknowledgements
The authors thank all the UK institutions involved in the development of the
Workplace Employment Relations Survey 2004: Department of Trade and Industry,
Economic and Social Research Council, Advisory, Conciliation and Arbitration
Service and the Policy Studies Institute. We also thank the Data Archive at the
University of Essex for providing access to the data. The survey was conducted by the
National Centre for Social Research in the name of the sponsors. None of the above
organizations is responsible for the analysis and interpretation of the data presented in
this article.
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