Strategic human resource management (SHRM) practices effect on performance
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Strategic human resource management practices:effect on performance Beatrice Akong’o DimbaFaculty of Commerce,Strathmore University,Nairobi,KenyaAbstractPurpose –Strategic human resource management (SHRM)practices are used by large foreign multinational companies to improve their performance.The purpose of this paper is to establish the direct or indirect relationship between SHRM practices and firm performance.Design/methodology/approach –SHRM practices are conceptualized as independent variables measured through a bundle of distinct anizational performance as a dependent variable is measured using constructs of image,interpersonal relations,and product quality.The model is tested with data from 50large foreign multinational companies operating in Kenya.Findings –Results of this paper show that the SHRM practices that best predict firm performance are training and development and compensation systems.The relationship between the use of SHRM practices and firm performance does not hold across the five bundles of what are considered as “high performance work practices”.This paper also assumes that the relationship between SHRM practices and firm performance is indirect through motivation.Research limitations/implications –Cross-sectional data from 50large manufacturing companies in Kenya are used,and it would be interesting to test this model for more industries and countries.Practical implications –Results of this paper have shown that the SHRM practices that best predict firm performance are training and development and compensation systems.Originality/value –To the best of the author’s knowledge,this is the first large-scale empirical paper of the influence of SHRM practices on firm performance,using data from large foreign manufacturing companies operating in Kenya.Keywords Human resource strategies,Organizational performance,Multinational companies,Developing countries,Working practices,KenyaPaper type Research paper1.Introduction Most studies show that strategic human resource management (SHRM)practices lead to performance (Katou and Budhwar,2006,2007;Pfeffer,1994).Consequently,the universal use of “best practice bundle”of human resource (HR)practices such as recruitment,training,staff appraisals,and compensation systems can directly and indirectly improve organizational performance.However,the key criticism of this relationship is that sound theoretical development explains how such SHRM practices operate is absent (Aycan et al.,2007;Gerhart,2005;Katou and Budhwar,2007).Most of the organizations on which studies have been carried out were large manufacturing companies,particularly in USA and UK (Arthur,1994),although,a few investigations have been initiated in other parts of the world,especially in developing countries such as China and Slovenia (Katou and Budhwar,2007)and some of the studies have shown similar results.This study advanced a conceptual model linking the variables of interest in large foreign manufacturing multinational companies (MNCs)operating in Kenya.The linkageThe current issue and full text archive of this journal is available at/2040-0705.htmAJEMS1,2128African Journal of Economic andManagement StudiesVol.1No.2,2010pp.128-137q Emerald Group Publishing Limited2040-0705DOI 10.1108/20400701011073455includes both the direct relationship between SHRM practices and firm performance and also the indirect relationship mediated by employee motivation (Mendonca and Kanungo,1994)(Figure 1).2.Literature reviewIn Kenya foreign manufacturing MNCs are large companies (World Bank,2007)because they have a workforce of 100and above (World Bank,2007).There are 50large foreign manufacturing MNCs in Kenya (Kenya Association of Manufacturers,2007),most of which are located in large urban areas (Kenya Association of Manufacturers,2007;Kenya Industrial and Research Development Institute,2005).Firms located in Nairobi have a higher export inclination than firms located elsewhere.This study uses the number of employees to determine company size.The informal manufacturing sector which employs more than 85percent of the manufacturing workforce tends to be smaller,younger,owner-managed,and less productive (National Development Plan,2002-2008;World Bank,2007).The MNCs owned by foreigners and other larger firms,mainly owned by Asian Kenyans,enjoy higher market power,are more specialized,and have better access to credit.The MNCs are better able than small companies to appreciate the value of human capital (Youndt et al.,1996).They have also invested heavily in production innovations such as advanced manufacturing technology and machinery.Furthermore,they are in a position to contribute to the economic growth of development in developing countries because they can transfer and adopt cross-border “best practices”(World Bank,2007).Traditionally,both scholars and multinational companies’managers have assumed the universality of management (Hodgetts and Luthans,2000).Hence,MNCs have a tendency to take the management concepts and techniques that work at home into other countries.Even though African countries have received a share of multinational companies’investments,MNCs operating in developing countries face challenges in implementing Western SHRM practices (Mamman and Adeoye,2007).In this regard,the universality of SHRM practices,specifically,recruitment,training,staff appraisals,and compensation systems to improve organizational performance,needs further testing:H1.A positive relationship exists between SHRM practices and firm performance.In an effort to address the lack of explanation of sound theoretical developments in the area of SHRM-performance,scholars have proposed to consider intermediate linkages between SHRM practices and organizational performance (Ferris et al.,1998).Specifically,motivation has been suggested as an intermediate linkage (Gerhart,2005;Dimba and K’Obonyo,2009).Thus,SHRM practices do not lead directly to organizationalFigure 1.Conceptual modelNote: Conceptual model showing direct and indirect relationships betweenSHRM practices and firm performance SHRM practices 129performance.Rather,they influence employee motivation,and it is this resource thatultimately leads to performance.However,only a few researchers (Fey et al.,2000;Guest,2001;Huselid,1995;Katou and Budhwar,2007)have measured employee motivation and addressed its importance in relations to this linkage:H2.Employee motivation mediates the relationship between SHRM practices andfirm performance.H3.Motivation has effect on performance.3.MethodologyA multi-method empirical approach involving both surveys and interviews was used to obtain the relationship between SHRM practices,employees’motivation and firm performance.This triangulation approach of survey and interviews provided an opportunity to develop a broad-based understanding of the relationships among the key variables used in the study.The study used the questionnaire developed by Huselid (1995)to collect data.Huselid’s instrument contains measures for SHRM practices,motivation and performance.Huselid’s instrument had also been used in the USA in nearly 1,000large firms.Some previous studies (Bae et al.,1998),using similar scales to measure HR practices,found Cronbach’s alpha reliability coefficients of 0.70in four areas of HR practices,i.e.recruitment and selection,training and development,participation,and rewards,while other studies (Delaney and Huselid,1996)reported alpha coefficients of between 0.70and 0.91for different HR practices.Regarding the level of the importance of motivation about the employees’job and the organization they worked for,Delaney and Huselid (1996),in particular,found positive relationships between SHRM practices,motivation and performance.The current study undertook a cross-sectional survey of MNCs to determine specific parameters across the respondents.The target population for this study was defined as large foreign multinational manufacturing companies operating in Kenya,which were members of KAM.Since the population was small,the study took a complete survey of the 50large foreign MNCs.The respondents were the specialist HR managers,line managers (marketing managers and production managers),and three employees who were not in a management position –one from each of the functional departments represented by the three managers.Employees are most affected by the way their immediate manager treats them,as this determines their day-to-day experience (Richardson and Thompson,1999).Hence,it is necessary to know how they interpret SHRM practices (Easterby-Smith et al.,1991;Hall,2004;Kamoche,2001).On the other hand,managers (and not the lower cadre)usually formulate business strategies.Consequently,inclusion of other non-HR managers as respondents was expected to reduce response bias by obtaining alternative perspectives (Youndt et al.,1996).On the basis of the responses to the questionnaire,the researcher selected a sample of six MNCs for the interviews.The six MNCs were chosen by a simple random method from the 27companies that had responded to the questionnaire.4.Analysis resultsA.Quantitative dataThe hypotheses were tested using Pearson’s product moment correlation and simple regression analyses.Table I shows that among the SHRM practices,training and AJEMS 1,2130development(r¼0.4,at p,0.01)had the strongest positive correlation between SHRM practices and performance.Next were the compensation systems(r¼0.3,at p,0.01)and performance appraisal(r¼0.2,at p,0.01),and lastly,flexible work arrangements(r¼0.3,at p,0.05).Firm performance was not correlated with recruitment and selection(r¼0).This implies that if there was(at all)a link between these SHRM practices and performance,it was indirect through another variable which was not part of this study.The results in Table I are consistent with those in Table III where training and development and compensation systems have a significant effect on performance. Training and development and compensation systems alone explain up to20percent of variance infirm performance(R2¼0.2).It is evident in Table II,that a unit increase in training and development,holding compensation systems constant,results in a30percent change(increase)in organizational performance;whereas a20percent increase in performance is achieved with every additional unit in compensation,holding training and development constant.Thesefindings lead to acceptance of the hypothesis that there is a positive relationship between SHRM practices andfirm performance.Tables II and IIIfirst show that all the strategic HR practices,except recruitment and selection,are positively and significantly correlated with motivation.This suggests that the use of best HR practices in training and development,performance appraisal,compensation andflexible work arrangements has a significant positive influence on employees’motivation.In Table II,motivation alone accounts for10percent(R2¼0.1)of variation infirm performance.Similarly,Table II shows that the best predictors offirm performance as far as SHRM practices were concerned are training and development and compensation systems.These two SHRM practices alone explain up to20percent of variance infirm performance(R2¼0.2).Consequently,motivation and SHRM practices account for 30percent offirm performance.This implies that for every unit increase in motivation, SHRM practices rRecruitment and hiring0 Training and development0.4** Performance appraisal0.2** Compensation systems0.3** Flexible work arrangements0.3* Notes:Significance at:*a,0.05and**a,0.01;n¼161Table I. Results of the correlationanalysis for the relationship betweenSHRM practices andorganizationalperformanceVariable b t-value a-value SHRM practicesTraining and development0.3 4.0,0.01 Compensation systems0.2 2.3,0.01 R2¼0.2Motivation0.3 3.3,0.01 R2¼0.1Table II. Results of the regression analysis of the effect ofSHRM practicesand motivationon organizationalperformance SHRM practices131there is a corresponding 30percent increase in firm performance.Also,as shown by thevalue of R 2,10percent of variation in firm performance is attributable to motivation.Thus,the hypothesis that motivation affects firm performance is accepted.B.Qualitative dataThis section analyzed the findings of the interviews with heads of HR,marketing and production departments,and employees from six firms as a follow-up on issues arising from the questionnaire responses that required clarification from additional data.The interviews expanded the information furnished on the questionnaire on SHRM practices,motivation,and firm performance.Minitab for regression,statistical data analysis software,was used to convert qualitative data to quantitative data.Table IV below explains the relationship between motivation and organizational performance.Presented in Table IV are reports from the six companies on organizational performance measured by quality of goods,company image,and interpersonal relations.Employees were asked to choose one organizational characteristic that encouraged or motivated them to contribute to the success of their organization.These characteristics consisted of quality of goods,company image,and interpersonal relations.SHRM practicesr Recruitment and hiring0Training and development0.4**Performance appraisal0.5*Compensation systems0.5**Flexible work arrangements0.3*Notes:Significance at:*a ,0.05and **a ,0.01;n ¼161Table III.Correlations between SHRM practices and motivationVariablesn ¼24Organizational performanceFrequency (%)1.Quality of goods(a)The organization is trying hard to produce goods which are competitive0(0.00)(b)Goods are of superior quality compared to competitors24(100)(c)Others0(0.00)Totaln ¼24(100)pany image(a)The image stands out among competitors23(95.83)(b)Company image does not stand out but is not so poor compared to otherorganizations0(0.00)(c)Others1(4.17)Totaln ¼24(100)3.Interpersonal relations(a)Work environment is not conducive to good interaction among employees0(0.00)(b)People relate well in the organization24(100)(c)Others0(0.00)Total n ¼24(100)Table IV.Relationship between motivation and organizational performanceAJEMS 1,2132Starting with quality of goods,if the employees chose(b)“Goods are of superior quality compared to competitors”;this would be interpreted to mean that what increased their motivation was the perception that theirfirm produced goods of superior quality.As far as company image is concerned,if the choice in variable2(Table IV)was(a)“The image stands out among competitors”,the interpretation was that the employees were encouraged or motivated to help in achievement offirm goals because they perceived their company image stood out among its rivals.Finally,in variable3(Table IV),if their choice was(b)“People relate well in the organization”,the interpretation was that the employees perceived people interacted well in their organization and that is what increased their motivation to help with performance achievement.Of those interviewed,24(100percent)indicated that they were motivated to contribute to organizational achievement because they perceived that their organization produced products of superior quality when compared to those of competitors.This implies that the employees perceived their companies’products to be ahead of those of the competitors.Similar responses are given for interpersonal relations,24(100percent). In this case,the employees’perception was that people interacted with each other very well in these MNCs and this was the cause for their motivation.As far as company image is concerned,23(95.83percent)were motivated to contribute to performance because they believed that the image of their organization stood out among its competitors.Only a negligible minority gave other reasons relating employees’motivation with organizational performance,1(4.20percent).In short,the results in Table IV indicate that there is a perceived link between high motivation and high performance.Qualitative data,although solely descriptive,confirmedfirst that the MNCs made use of SHRM practices to achieve their goals,meaning that there is a positive relationship between SHRM practices and organizational performance.Second,the data supported the assumption from quantitative data analysis,that the relationship between SHRM practices andfirm performance was both direct and indirect through motivation and,consequently,motivation influencesfirm performance.5.Major conclusions and recommendations for further researchAt a general level,the results on SHRM-firm performance were largely consistent with results obtained in studies of SHRM practices andfirm performance conducted in other geographical settings.However,the applicability of Western nations’models of SHRM practices in MNCs operating in developing countries is questionable because the relationship between the use of SHRM practices andfirm performance did not hold across thefive bundles of what were considered as“high performance work practices”in the context of Western developed nations’models of SHRM.It is recommended that future studies focus on more than thefive bundles to give a wider scope of practices.A wider scope is necessary because it could,for instance,help MNCs to avoid practices that conflict with traditional ways of doing things in the host country.Though the study suggests that SHRM practices should focus on more than thefive bundles used in this research,sound theoretical development that explains how such SHRM practices operate should be established.This study suggests a longitudinal design to look at SHRM practices,motivation and performance over time to examine the sequential and reciprocal relationship among these aspects of organizations.SHRM practices133References Arthur,J.B.(1994),“Effects of human resource systems on manufacturing performance and turnover”,The Academy of Management Journal ,Vol.37No.3,pp.670-87.Aycan,Z.,Al-Hamadi,A.B.,Davis,A.and Budhwar,P.(2007),“Cultural orientations and preference for HRM policies and practices:the case of Oman”,International Journal of Human Resource Management ,Vol.18No.1,pp.11-32.Bae,J.,Chen,S.and Lawler,J.(1998),“Variations in HRM in Asian countries:MNC home countryand host country effects”,International Journal of Human Resource Management ,Vol.9No.4,pp.653-70.Delaney,J.T.and Huselid,M.A.(1996),“The impact of human resource management 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Her administrative work with the Central Bank in Kenya and her later work with the EU in Kenya have given her a very mature mind,which allows her to bring mature reflection to all aspects of HR management and to her present research interests.She can draw on her general reading to support her capability and competency resources.She is well-read,and has an informed world view of HR management,and international business management.Her competency and capabilities have distilled for her a special interest in HR management and in particular the relationship between strategic HR management andfirm performances,especially in foreign multinational companies; but also in indigenous Kenyanfirms.Her capability to participate and contribute to HR management stems from a sharp intellect demonstrated by her recent publications in the area of firm performance and HR management.Her competence has been amply demonstrated by progressing from a basic BSc qualification in Business Administration(cum laude)from the US African University,to an MBA degree and to graduate in2010with a PhD in HR Management. Beatrice Akong’o Dimba can be contacted at:bdimba@ SHRM practices137To purchase reprints of this article please e-mail:reprints@ Or visit our web site for further details:/reprints。