Strategic Human Resource Management Enhances Organizational Performance in Both Good and Bad Economic Times

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Table of Contents

Introduction
Resource-based perspective
The Behavioural Perspective
Agency and transaction cost theory
Conclusion
Reference List

Introduction

Recent studies have attempted to give Human Resource Management (HRM) a wider perspective in what we can refer to as Strategic Human Resource Management (SHRM). Different scholars have provided varied definitions regarding SHRM.

These definitions attempt to focus on integrating HRM into strategic planning, activities affecting people in their attempts to execute the business strategic needs, and activities that managers and HR share in their attempts to solve both the business and individual problems. In this review, we shall define SHRM as an organised and careful management of human resources and activities aimed at enabling an organisation achieve its main objectives.

Based on the above definition, this paper attempts to respond to the statement, ‘Strategic Human Resource Management enhances organizational performance in both good and bad economic times’. Consequently, we shall use three theoretical approaches to indicate the relevant of SHRM and the above statement. These theories include resource-based view, behavioural, and agency or transaction cost perspective.

Resource-based perspective

This theory originated from the works of Penrose and other scholars in the field SHRM. This theory offers a competitive advantage view from the internal strategy of an organisation and its resources. In this approach, Barney defined a competitive advantage as “when a firm is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors” (Barney, 1991). Consequently, any an organisation can sustain its competitive advantage after all attempts to copy it have stopped.

The resourced-based approach looks at a competitive advantage from perspectives of immobility and heterogeneity in resources. Heterogeneity resources are mainly organisational capital such as physical, human and other capitals. Immobility means other firms are unable to get heterogeneity resources from other firms. This is unlike the traditional approach where the opposite happens.

Sustained competitive advantage can only exist under four conditions. These include organisational resources that are of positive value, the firm must possess unique resources, these resources must also possess imitable quality, and the competitions cannot substitute these resources with any other.

This is how firms use their resources to achieve sustained competitive advantage. In this context, resource-based perspective posits that no organisation has a capacity to buy sustained competitive advantage. This is because it exists in a rare form in the organisation.

Scholars have been exploring the idea that human resources can be a part of organisational, competitive advantage. Studies by MacMillan and Schuler focused on how organisations can exploit their human resources to create and sustain a competitive advantage. These authors present their model of a target and thrust matrix to show the relationship between competitive advantage and HRM.

The HR targets are mainly activities that include the organisation itself and all its relationships, such as suppliers, distributors, and customers among others. Thrust normally entails issues of efficiency or cost or seeks product differentiation opportunities.

Ulrich attempted to define competitive advantage from a human resource point of view. He took into account Porter’s model and added a distinctive competence, organisational culture and strategic unity to it. Ulrich further demonstrated how organisations can develop strategies that can result into a sustained competitive advantage. Ulrich established “there must be a focus on the relationship between human resources, strategies and competitive advantage” (Ulrich, 1991).

Studies by Ulrich have provided a practice-based approach to show that HRM strategies can provide a sustained competitive advantage. These theorists did not base their observations on resource-based approach. They concluded that HR was already a competitive advantage in itself. As Barney had noted, it is not easy to develop competitive; thus we must look at factors that may make HR have a sustained competitive advantage using a resource-based approach to SHRM.

Wright and other authors attempted to show a sustained competitive advantage using assumptions of distributed individuals’ ability. The authors focused on the four criteria and how human resources can attain them. First, human resources must offer value to the organisation to enable them serve the purpose of a sustained competitive advantage.

This means that organisations labour demand must require varied sets of skills (the demand for labour is a heterogeneous). At the same time, the supply of labour must also be heterogeneous.

This means that different people will possess sets of skills and different skills’ levels. These circumstances allow individuals to add their value to the organisation. We can estimate this value using some of the most recent formula from Boudreau and Berger, which takes into the human resources sales value in terms of dollars (Wright and McMahan, 1992).

Second, resources for creating a sustained competitive advantage must be rare. Wright and other scholars observe that people (human resources) with high ability levels are rare. This is because of general distribution ability. For a sustained competitive advantage, an organisation must ensure that it only hires workforce that possess the highest ability levels.

Here, the problems lie in selection processes, and whether an organisation can attract and retain workforce of the highest ability. An organisation can attain this by using competitive rewards systems and using a combination of selection methods.

Third, human resources must also possess inimitable quality so as to serve the purpose of competitive advantage. Wright and his fellow authors approached the concept of inimitability of competitive advantage by relying on historical situations, social complexity, and casual ambiguity that exist in human resource practices. Historical conditions are events that have influenced an organisation’s culture, practices, and policies.

When we cannot easily identify the casual source of a competitive advantage, then we are referring to casual ambiguity. Wright and other scholars observed that social complexity can only occur in situations such as teamwork and that competitions cannot duplicate these unique social establishments.

Hence, these conditions create a sustained competitive advantage. These observations have led Wright, and his fellow authors to conclude that the existence of a sustained competitive advantage in the above factors makes it impossible for any organisation to imitate.

Fourth, any resource that creates a sustained competitive advantage can never have a substitute. The individuals must constitute a sustained competitive advantage. This implies that even if the competition introduce a new technology (the organisation can easily acquire the same technology from vendors) that enhances its human resources output, then the organisation can simply buy that technology and restore its highest levels of human resources; thus creating its sustained competitive advantage.

The Behavioural Perspective

Studies have established that Behavioural Perspective is the most popular approach in understanding the concept of SHRM. This approach emanated from contingency theory of the US. Behavioural Perspective focuses on the behaviour of employees as the point of connection between an organisational performance and its strategy. It posits that the main reason for HR practices and policies is to invoke and manage workers’ behaviour and attitude.

These experts observe that behaviour and attitude that can offer benefits to the organisation differ significantly. They depend on the organisational strategy and characteristics. This means the HRM practices must identify and reinforce these positive behaviour and attitude to enhance an organisational performance. The strategy for identifying such behaviour must be specific to SHRM.

Schuler and Jackson have attempted to show the connection that exists between HR practices and competitive strategies. These scholars adopted from the point of view of Porter’s model. They looked into costs reduction, innovation, and improvement of quality in performance. They acknowledged that there are ways of showing the connection between competitive strategies and practices of the HRM so as to enable prediction, modification, study, and refinement of HRM practices and strategies in given situations (Schuler and Jackson, 1987).

Schuler and Jackson argued that employees’ behaviours have fundamental roles in the implementation of an organisation’s competitive strategies. They also noted that the roles differed depending given scopes. For instance, the role behaviour existed in extreme opposites. In other words, we may have a high risk taking behaviours as well as low risk taking, rigid and inflexible behaviour among the workforce.

Based on these observations, they argued that innovation strategies must rely on high levels of innovative, cooperation, focus, quality concern, and risk taking behaviour among employees. On the other hand, cost reduction strategies looked at the opposite of the above factor, such as short-term focus, low risk taking approaches, autonomy, and repetitive activities among others.

Schuler and Jackson also emphasised the need to have an agreement in the existing HRM policies, and practices across the organisation. They also highlighted that HRM practices offered several varieties of choices from which management and employees could choose the best practices, and role behaviours that enhanced organisational, competitive strategies aims. Likewise, organisation had to align its HRM practices with each other to support strategic goals (Schuler and Jackson, 1987).

Schuler noted that strategic management must differentiate elements of HRM, such as philosophy, processes, programmes, policies, and practices. Schuler observe that the above factors reflect the goals, culture, and values of the organisation and roles of the HR, but the specific HR practices influence the behaviour and motivation levels of workforces.

This may affect the demonstration of the needed role behaviour for the purpose of enhancing competitive strategies. Schuler further shows the need to ensure that HRM activities must be in congruence to each other so as to enhance the organisational, strategic requirements.

Miles and Snow have also offered their views on behavioural perspective to creating the fundamental behaviour in for enhancing competitive strategy in the organisation. They looked at strategies like “defenders, prospectors, and analysers with reference to the different types of HR practices needed” (Miles and Snow, 1984).

Miles and Snow demonstrated that HR practices vary depending on strategies. This also depends on the different behaviour and skills employees require to enable them implement a given strategy.

We must note that the above models pay no attention to skills, knowledge or abilities of the workforce. Instead, they only dwell on role behaviours of the employees. The models take the approach of what an organisation needs from employees a part from their technical, knowledge, and abilities for a certain job.

This theory also tends to focus on the internal environment of the firm. However, it does not ignore the prevailing external industry conditions as it relies mainly on the available, processed materials. This point relies on the assumption of “role behaviour as the main connection between strategy and their effective results or achievements” (Schuler and Jackson, 1987).

Critics have argued that behavioural perspective has three implications with regard to supporting strategic competitiveness in the organisation. First, the theory specifically addresses the hypothesised role behaviours that varied strategies may need. Consequently, we can put the validity of these assumptions to test, but so far, no research as established the validity of these relationships.

Second, studies have not specifically focused on a given role behaviour and HR practices that enhance strategies in the organisation. This is because HR practices and role behaviours in employees may be related to each other. Thus, determining specific role behaviour and HR policy and their effectiveness in eliciting behaviour may be the best approach in SHRM.

However, this is an area that needs further investigation. Third, Walker and Bechet observe “the assumption of the behavioural perspective is that strategies lead to HRM practices that provoke employee role behaviours that lead to several of outcomes that provide benefits to the firm” (Walker and Bechet 1991).

In addition, they also noted other positive outcomes from HR best practices with the exception of the organisational achievement. These included SHRM benefits related to productivity, reduced accident rates, low labour costs, and positive attitude among others. The challenge with this perspective is that there are no existing data to suggest that role behaviour enhances positive organisational results.

Therefore, we can put the theory to test to ascertain that some organisational performances occur due to different strategies. At the same time, we can also attempt to establish that there is a link between performances and strategies, and they depend on different factors such employees’ role behaviours, and HRM practices (Wright and McMahan, 1992).

Agency and transaction cost theory

Jones note that study of transactions as gained popularity as a way of controlling employees’ behaviour from HRM perspective (Jones, 1984). The agency and transaction cost theory model looks at the issues of human transaction from the area of economics and finance.

This theory focuses on both the environmental, and sets of associated human factors that may explain why organisations tend to internalise transactions to enable them reduce costs that result from transactions. This method is different from open market transaction.

Simon notes that the approach focuses on “bounded rationality and opportunism as the two human factors that serve as main obstacles to human exchange” (Simon, 1957). In this context, bounded rationality shows that people depend on limited processing limits of information. Williamson put opportunism in the context that people “tend to act with self-interest and guile in pursuing their own goals” (Williamson, 1975).

Bounded rationality and opportunism may not be problems in themselves. However, when we introduce environmental factors on uncertainty and some transactional exchange relationships, then they create transaction and agency costs. The combination of uncertainty and bounded rationality creates a condition in which costs are high.

At the same time, it may also be impossible to show all the future occurrences and specify them, including possible and appropriate responses to all situations.

Opportunism has no extensive consequences given that there is a competitive exchange contact in large numbers. Opportunism can turn risky and costly if significant numbers of exchange relationships are parts of it in exchanges. It can be “costly and risky in short-term deals”.

Transaction costs results from “monitoring, negotiating, evaluation, and enforcing exchanges among parties” (Jensen and Meckling, 1976). These costs result in attempts of making exchange efficient. However, increase in transaction costs force firms to internalise their exchange processes.

In this situation, an agency problem may rise. Jensen and Meckling note “agency problem results when a firm needs services from another firm in a condition where uncertainty exists, and both firms will behave self-interestedly” (Jensen and Meckling, 1976). In this process, agency costs will result in an attempt to formulate an efficient exchange among these firms. Scholars have used this agency and transaction cost theory to study diversification, internalization, and restructuring in firms.

The agency and transaction cost theory attempts to show controls in an organisation for competitive strategies. This makes it affect HRM practices during design stages. The central idea behind transaction cost theory is that most workers have tendencies to reduce their outputs and depend on the contribution of team members (free-ride) in cases where there are no incentives to motivate them.

Such workers may only become active if the job conditions allow them to show their unique abilities and skills and at the same time, benefit from such abilities and skills. In this case, the group performance may depend on control conditions used on employees’ behaviour.

In this case, SHRM must ensure that there is a measurement for outstanding performances and establish adequate reward systems for such employees. This is a way through which an organisation can channel and formulate policies to align its employees’ behaviours to match strategic aims of the organisation.

Conclusion

The importance of human resources in the HRM discipline is not in doubt. In fact, the interest in SHRM has grown significantly because of the awareness that employees can provide value to the organisational process. Consequently, the statement ‘Strategic Human Resource Management enhances organizational performance in both good and bad economic times’ remain true, a least according to the above theories.

However, some theorists have noted that the field of SHRM lacks sufficient empirical data to show that HRM policies and practices have enhanced organisational performance. Experts in this field have responded, and there is a growing evidence to support such claims. This is because the available empirical studies are consistent with theories and models about the SHRM and performance.

This proves that HRM policies and practices affect the performance of organisations significantly. HRM policies and practices can identify and encourage the behaviours in employees that organisations need for improved performances. These will support and enhance sustainability of organisational competitive strategies.

Given this existing circumstances, the solution for enhanced competitive strategies is in strategic integration. This implies that an organisation has to align organisational goals, business strategies, HRM policies and practices and employees’ behaviours.

This ensures that line managers will also adopt the same approach, and support strategic, competitive strategy of an organisation. Thus, implementing these policies and practices is crucial to the success of the organisation in terms of creating a competitive strategy using employees and its other resources.

There must also be sufficient leadership and supporting organisational culture so that the team helps the organisation achieve its main objectives. Thus, HR practices must be superior to create superior performances. The role of SHRM in organisations will increase significantly if such supports are available.

Reference List

Barney, J. 1991, ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17, pp. 99-120.

Jensen, M. & Meckling, W. 1976, ‘Theory of the firm: Managerial behavior, agency costs, and ownership structure’, Journal of Financial Economics, vol. 3, pp. 305-360.

Jones, G. 1984, ‘Task visibility, free riding, and shirking: Explaining the effect of structure and technology on employee behaviors’, Academy of management Review, vol. 9, pp. 684-695.

Miles, R. & Snow, C. 1984, ‘Designing strategic human resources systems’, Organizational Dynamics, vol. 1, no. 4, pp. 36-52.

Schuler, R. & Jackson, S. 1987, ‘Linking competitive strategies with human resource management practices’, Academy of Management Executive, vol. 1, pp. 207-219.

Simon, H. 1957, Administrative behavior, 2nd ed, Macmillan, New York.

Ulrich, D. 1991, Using human resources for competitive advantage, Jossey-Bass, San Francisco, CA.

Walker, J. & Bechet, T. 1991, Defining effectiveness and efficiency measures in the context of human resource strategy, Plenum Press, New York.

Williamson, O. 1975, Markets and hierarchies, Free Press, New York.

Wright, P. & McMahan, G. 1992, ‘Theoretical perspectives for strategic human resource management’, Journal of Management, vol. 18, no. 295, pp. 1-16.

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