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Relationship between Business Strategy and Human Resource Management Practices in Private and Public Limited:1-221Relationship between business strategy and human resource management practices in private and public limited companies in MalaysiaKoon Vui Yee aJuhary Ali baTunku Abdul Rahman College,Kuala Lumpur, MalaysiabCollege of Business, Universiti Utara Malaysia, MalaysiaAbstractThis study examines the relationship between two business strategies (differentiation and low-cost) and six human resource management (HRM) practices (recruitment and selection, training and development, compensation, performance management, employment security, and work-life balance). Furthermore, an examination was conducted on the differences in such relationship between the Public and Private Limited companies in Malaysia. Structural equation modelling (SEM) was used to investigate the effect of business strategy on HRM practices and to determine the invariance effect of the two businesses ownership in the model. It is found that differentiation strategy stressed on all six HRM practiceswhile low-cost strategy emphasized four HRM practices only. The results also show that the effects of business strategy and HRM practices performed in Public Limited companies are only slightly different from the ones performed in Private Limited companies.Keywords: Human resource management practices, Business strategy, Organizationalperformance, Public and private companies, Malaysia, Structural equation modelling1. IntroductionThe influence of human resource management (HRM) practices on the overall performance of organizations has been one of the major research topics in the past decade. The results of this research showed a significant association between HRM practices and organization performance (e.g. Appelbaum, Bailey, Berg & Kallebergerg, 2000; Dyer & Reeves, 1995; Guest, 1997; Harel & Tzafrir, 1999; Takeuchi, Wakabayashi & Chen, 2003; Tsui & Wu, 2005). However, changes or trends that are emerging today such as globalization, changes in the nature of work, and technology affect human resource management to be more business oriented and strategically focused. Ulrich (1997) mentioned that HR managers should not only have administration skills and expertise but should also be championsof employees, change agents, and strategic partners of an organization. In this context, HRM practices can be a source of competitive advantageCorresponding Author: Mobile: 019-3096161 Email address: [email protected] to you by COREView metadata, citation and similar papers at core.ac.ukprovided by UUM Repository
2Journal of Business Management and Accounting, Vol. 1 (2) 2011: 1-22of the organization, especially when they are aligned with organization’s competitive business strategy (Begin, 1991; Cappelli & Singh, 1992; Jackson & Schuler, 1995). Despite the extant empirical evidence that HRM practices could bring positive effects on organizational performance, many organizations still adopt a passive approach to HRM practices (Dennis, Michael & Meredith Blackwell, 2002).Studies on HRM practices in Malaysian organizations are few (Osman, Ho & Galang, 2011). It has been found that Malaysian firms do not consider the importance of adopting good HRM practices (Chiah-Law, Stanley & Chris, 2003; Hassan, 2010; Rowley & Abdul-Rahman, 2007). Besides, firm size has been found to be an important predictor of HRM practices (Kotey & Slade, 2005; Ng & Maki, 1993; Osman et al., 2011; Wagar, 1998). Authors claimed thatmost of the HRM practices adopted by large firms were formal and complex. Therefore, it would be imperative to examine business strategy and HRM practices in various settings and how the relationship is moderated by firm size.Porter (1980)’s generic strategies are used to define business strategies. This study measures the existing HRM practices that are seldom used in other empirical research. By examining variations of HRM practices such as employment security and work-life balance to business level strategies, the alignment between this could discover similarities with Porter (1980)’s generic strategies. This methodology can further provide understanding of any systematic variations of HRM practices to different strategies of business.2. Theoretical background and hypotheses developmentAccording to Ferris, Hochwarter, Buckley, Harrel-Cook, and Frink (1999), strategic HRM models are divided into three perspectives which are universalistic, contingency and configurational. Universalistic perspective claims that availability of a set of HRM practices when combined effectively perform better than others that do not, therefore, suggesting that all organizations adopt these practices (e.g. Geringer, Frayne & Milliman, 2002; Truss, 2001). The contingency approach tries to link variations of HRM practices to specific organizational strategies (e.g. Hoque, 2000; Khatri, 2000). The configurational perspective refers to patterns of multiple, planned human resource practice deployment and activities are used to achieve the organization’s goal. This perspective also argues that HRM practices should look at the system rather than at individuals (Doty, Glick & Huber, 1993; Meyer, Tsui & Hinings, 1993p).The approach adopted in this study is strategic fit and the right adoption of HRM practices as it is vital in assisting business firms to improve their competitiveness and support managerial efficiency (Wright & Snell, 1998).
Relationship between Business Strategy and Human Resource Management Practices in Private and Public Limited:1-2232.1The relationship between business strategy and human resource management practices A business competitive strategy is drawn mainly from Porter’s (1980, 1985) classifications of generic strategies: cost leadership, differentiation, and focus strategies. Miles and Snow (1984), on the other hand, classified business strategies into defender, prospector, and analyzer. They proposed each business strategy with corresponding HRMpractices. Unlike Porter’s generic strategy, Schuler and Jackson (1987) classified business competitive strategies into cost reduction, innovation, and quality enhancement. Besides, they also designated different types of employee behaviour and HRM practices to suit each business strategy.An organization could achieve its competitive strategy by implementing effective HRM practices. Dowling and Schuler (1990) classified HRM practices into strategies of utilization, facilitation, and accumulation, which are the three types of business strategy suggested by Schuler and Jackson (1987). Dyer and Holder (1988) categorized the combination of HRM practices and business strategies as inducement, investment, and involvement.According to contingency theory, HRM strategies should be in alignment with business competitive strategies to increase organizational performance (e.g. Miles & Snow, 1984; Porter, 1985; Schuler & Jackson, 1987). The “fit” concept refers to the interaction of HRM strategies and business strategies in ways that will help to retain and motivate employees.It is hypothesized that the strategic linkage between business strategy (that is differentiation and low-cost strategy) and HRM practices (that is recruitment and selection, training and development, compensation, performance management, employment security and work-life balance) would be significant. Therefore, it is hypothesized that:H1. There is a positive relationship between business strategy and HRM practices.2.2Differences between large firms and small firms in business strategy and HRM practices Most research on HRM practices have focused on large-scale organizations and found that different HRM systems or bundles of practices do contribute to organization’s performance such as employee retention, increased productivity, or even improved profitability (Arthur, 1994; Delery & Doty, 1996). However, only a few studies have looked at HRM practices in small medium enterprises (SMEs) and even fewer that focused on the relationship between HRM practices and performance (Heneman,
4Journal of Business Management and Accounting, Vol. 1 (2) 2011: 1-22Tansky & Camp, 2000; Vicki, Ann, Robert & Mary, 2001). There has been a debate on whether the HRM practices of large organizations could be applied to small firms. Such debate provide the basis for theoretical examinations of smaller firms (Chandler & McEvoy, 2000).HRM practices in small medium enterprises (SMEs) or small firm are not as developed and are less structured than in large enterprises (Hornsby & Kuratko, 2003; Kerr & McDougall, 1999). Overall, SMEs lack the expertise on HRM methods and techniques. Therefore, it is not clear whether HRM practices will result in good SME performance. This warrants an empirical investigation (Cardon & Stevens, 2004; Hornsby & Kuratko, 2003; Tansky & Heneman, 2003)Thus far, the theoretical arguments and previous studies seemed to be directed at large organization and thus proposed that large-sized organizations are more likely to adopt good, extensive, and complex HRM practices.Heneman and Berkley (1999) found that a greater percentage of large firms (50-99 employees vs. 20-49 employees) used more formalized and systematic recruitment and selection practices, more formalized compensation practices, and more specialized hiring inducements and hiring bonuses. De Kok & Uhlaner, (2001) study on 16 small Dutch firms (10-41 employees) also found company size to be associated with more formal HRM practices, including greater performance appraisal, and employer-based training. On the other hand, Hornsby and Kuratko (2003) found that HRM practices in SMEs of all sizes have been declining over the past decade, suggesting that there are differences between large firm and SME firms in terms of their HRM practices. The second hypothesis is developed to examine this.Based on the Department of Statistics survey in 2005, many SMEs in Malaysia are Private Limited Companies. The Malaysian Government defines SMEs as firms with not more than 150 full-time employees or with an annual sales turnover not exceeding RM25 million(SMIDEC, 2009). Large enterprises in Malaysia are recognized as Public Limited Companies because these companies can issue securities through an initial public offering, or raise capital by selling shares. A Public Limited Company is larger than medium-sized enterprises and has more than 150 employees in the manufacturing sector and more than 50 employees in the services sector (SMIDEC, 2009). Therefore, SME firms are categorized as Private Limited Companies and large firms categorized as Public Limited Companies in this study. The two types of business ownership i.e. Private Limited and Public Limited Company are proposed to act as a moderator between business strategy and HRM practices. Therefore, the second hypothesis proposed is as follows:H2. There is a significant difference in the relationship between business strategy andHRM practices depends on the types of business ownership
Relationship between Business Strategy and Human Resource Management Practices inPrivate and Public Limited:1-225Figure 1 proposes the hypothesized structural model for the study. It consists of two independent variables (differentiation strategy and low-cost strategy) and six dependent variables (recruitment and selection, compensation, performance management, training and development, work-life balance, and employment security).H1HUMAN RESOURCEBUSINESSMANAGEMENT (HRM)STRATEGYPRACTICESDifferentiationH2Recruitment & SelectionLow-CostCompensationPerformance ManagementTraining & DevelopmentWork-Life BalanceTYPES OF BUSINESSEmployment SecurityOWNERSHIPPublic LimitedPrivate LimitedFigure 1. Conceptual framework and associated hypotheses3. Methodology and data analysisAs the unit of analysis in this study was firm, 100 Public Limited and 100 Private Limited companies were selected using convenience sampling. These companies were chosen from The Official Business Directory of SMI Association Malaysia (2009), Malaysian Employer Federation, Federation of Malaysian Manufacturers and Bursa Malaysia. Companies with HR department or Personnel Department were the criteria used to define the population set.There were two types of respondents. The first type of respondents was employees from non-human resource (HR) departments. They were required to provide information on business strategy and HRM practices in their company. The second group of respondents was individuals identified as the human resource manager. The respondents were expected to have knowledge pertaining to business strategy as well as HRM practices within the organization, and, hence were expected to be able to answer the questions. The data provided by two different types of respondents were used to assess the reliability measurement of business strategy and HRM practices. Researchers have suggested that using multiple respondents to measure organizational level constructs is preferable because these responses can be used as a reliability check for strategy
6Journal of Business Management and Accounting, Vol. 1 (2) 2011: 1-22identification (Schuler & Jackson, 1987; Zajac & Shortell, 1989). Responses from 61.5% of the HR managers (123 responses) and 64.2% (642 responses) of the non-HR employees were collected using mail and hand-in survey method. Mail surveys provide a large geographically dispersed population to be studied at a relatively low-cost and help in testing measurement scales (Davis & Consenza, 1988). Students of Advanced Diploma of Business Studies (majoring in Business Administration) from Tunku Abdul Rahman College gave their assistance in this study by contacting and distributing the questionnaires to the selected respondents.A questionnaire consisting of 10 business strategy items and 46 HRM practice items adapted from past studies of Dess and Davis (1984) and Guest, Conway, and Dewe (2004) respectively, were used. Both instruments used a six-point Likert format. Reliability and validity of the Dess and Davis (1984) scale havebeen determined through its application in research (Inhofe, 1992; Lynch, Scott & John, 2000). This study used two generic business strategies: low-cost and differentiation as researchers found competitive strategy tend to depict as a continuum with “pure” cost leadership on one end, and “pure” differentiation on the other (Huang, 2001; Martell, Gupta & Carroll, 1996). In this study, six out of twenty-six HRM practices of Guest et al. (2004) were used to measure the construct of HRM practices. The top fourof the general categories selected were training and development, compensation, recruitment and selection, and performance management (including appraisal). These four practices were selected because these might represent the main objectives of most conceptualizations of a strategic’ HRM program (Batt, 2002). Some of other cited core elements of strategic HRM notably employment security and work-life balance were to be examined as these practices were rather less in empirical research (Boselie, Dietz & Boon, 2005).All valid responses obtained from the HR managers and non-HR employees were coded into SPSS Version 14 and analyzed using AMOS Version 16.0. During the data cleaning and screening for accuracy for data, outliers, normality and multicollinearity,no HR manager cases were deleted. However, 22 cases from non-HR employees were deleted because they were incomplete. Another 49 cases were deleted because the Mahalanobis distance values were higher than 2value (2= 137.208; n=90, p