Human resources and SME performance in services: empirical evidence from the UK

Abstract

We investigate the relationship between human resources (HR) and superior firm performance, as well as the role of business strategy as a key mediating factor, for small- and medium-sized enterprises (SMEs) in the UK Tourism Hospitality and Leisure (THL) sector. Our results suggest that high-performing SMEs in the THL sector are managed by more experienced entrepreneurs. We also find that more profitable SMEs combine a highly skilled workforce with technological and know-how-based firm differentiation strategies, and/or product differentiation strategies, which are based on quality of service and personal attention to customers, alongside generous compensation and attention to employee development.

Keywords:

• business strategy
• human capital
• organisation commitment to employees
• profitability
• service SMEs

Notes

1. We find that not all employees are receiving formal training as in family businesses or in micro-businesses in general, many employees learn the job ‘by doing’ and others receive non-formal training by more senior and experienced staff.

2. Note that some of the items heavily loaded on OCE1 and OCE3 are indirectly linked with these constructs. For example, clear communication of HR may indicate the presence of (formal or informal) communication systems, which are linked to staff development (Way 2002). Management's perception of HR importance is also expected to be correlated with staff development as evidence from SMEs surveys suggest that businesses are more likely to offer training to staff, the more important they consider employees for achieving business goals (Small Business Service 2001). Moreover, the average wage, the impact of the minimum wage and the staff turnover are all expected to be correlated with the shape of the wage distribution within the firm, which reflects strongly the fairness of compensation. In particular, average wage is an important feature of the wage distribution. The impact of the minimum wage is expected to capture the share of employees in the firm paid below the minimum wage and thus provides a sketch of the bottom part of the firm's wage distribution (Draca et al. 2008). Staff turnover in the small business sector is associated with the level of compensation (Storey 2002) and the opportunities for wage progression (Holtman and Idson 1991).

3. Except perhaps of Porter's focus strategy, unfortunately our questionnaire does not include questions directly related to focus. However, again the four strategy factors may also collectively pick up variation across businesses in the intensity they pursue a ‘focus’ strategy.

4. We do not include interactions of manager's human capital with value capture strategies because the intensity of pursuing a value capture strategy reflects manager's education and experience. As suggested by Azhdar, Farhad and Nada Korak (2006) managerial human capital attributes, such as education and experience, are formed prior to the choice of strategy and thus are fundamental determinants of this choice.

5. In the first stage of Heckman's two-step method we estimated a probit model with dependent variable a binary indicator taking the value 1 if the firm is participating in DTI business support programmes and 0 otherwise. As independent variables in the probit model were included variables that are likely to be associated with the decision of a business to participate in business support programmes as size, industry, ownership type and region. The sample used in the first stage is a mixed sample that includes all businesses participating in DTI programmes but also all THL SMEs from FAME that do not receive business support. In the second stage we run a linear regression of the PCM model in the DTI sample only, including also as an independent variable a selection bias control (the inverse Mill's ratio) estimated by the first stage (Wooldridge 2002).

6. Note that, as shown in Table 1, OCE1 is weakly correlated with the share of qualified/trained employees in the firm, which suggests that these two variables measure different aspects of HR, which can further explain the difference in their complementarities with value capture strategies.