Business strategy, human resources, labour market flexibility and competitive advantage

Abstract

This paper contributes to the strategic human resource management literature by testing the three main approaches – the universalistic (‘best practice’), contingency and configurational – against an original database. Specifically, we examine: (1) the relationship between HR and firm performance, (2) the links between strategy, HR and the use of flexible employment contracts and (3) the moderating effects of strategy on the links between HR, flexible labour and firm performance.

2  While there appears to be empirical support for these ‘core’ HR strategies having a positive effect on performance, each of these policies ‘may be embodied in a variety of concrete and detailed people management practices’ (Richardson and Thompson, 1999 :2).

Using original data collected from manufacturing and service-sector companies, we find positive relationships between HR policies and practices and performance; that the relationship between HR and performance is dependent upon business strategy; and that companies pursuing an integrated approach to HR coupled with an innovator/quality-enhancer focus within their business strategy perform best. The use of external flexible labour reduces the effectiveness of HR, especially for those pursuing an innovator/quality-enhancer approach.

Keywords:

• Strategic human resource management
• competitiveness
• flexibility

Acknowledgements

This work was funded by The Leverhulme Trust (grant F/112/AL), 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 the participants of the 7th Conference on International Human Resource Management, Limerick, Ireland. 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, then Director of Advocacy for The Work Foundation (currently Chief Executive of Job Ownership) provided invaluable advice on the use of HR practices in UK firms.

Notes

2  While there appears to be empirical support for these ‘core’ HR strategies having a positive effect on performance, each of these policies ‘may be embodied in a variety of concrete and detailed people management practices’ (Richardson and Thompson, 1999 :2).

3  The EXTEL database is a company/organization-level database whereas our study is of establishments. Large organizations can have many quite small establishments. The EXTEL database is biased towards larger, publicly quoted organizations and those in the manufacturing sector. For example, almost 50 per cent of the sample organizations' primary activity was in manufacturing whereas only 18 per cent of private-sector establishments in the UK Workplace and Employee Relations Survey (WERS) sample were engaged in manufacturing.

4  These results are available from the authors on request.

5  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).

6  Labour productivity was computed as the log of gross sales divided by the total number of employees. Profit was calculated as the pre-tax financial value of sales less cost, per employee.

7  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’.

8  These results are available from the authors on request.

1  The terms HRM, HR, and HR policies, practices and techniques are often used interchangeably in the literature, often in the same article. This creates much confusion. In this article HR ‘policy’ refers to what Pfeffer calls the people management policies that ‘seem to characterize most if not all of the systems producing profits through people’ (1998:64). He identifies these policies as: an emphasis on providing employment security; putting a lot of resources to recruit the right people in the first place; an extensive use of self-managed teams and decentralization; wage levels that are high and are strongly linked to organizational performance; a high expenditure on training; attention being paid to reducing staffing differentials; a willingness to share information. The policies are achieved by implementing various HR ‘practices’ or ‘techniques’, such as using realistic job previews during recruitment and selection or using joint consultative committees to increase employee participation and voice. In other words, HR policy is constructed from using HR techniques and practices. The term ‘HR’ includes both policy and techniques/practices. To be consistent with the literature, when referring to the general strategic HR literature, we use the term strategic human resource management (SHRM).