Journal of Global Strategic Management | V. 1 | N. 1 | 2007 ...isma.info/uploads/files/097-relationships-between-human...RELATIONSHIPS BETWEEN HUMAN RESOURCE MANAGEMENT PRACTICES,

ABSTRACTWhile there has been growing interest concerning therelationship between human resource (HR) practices,firm strategy and firm performance, limited researchattention has been paid providing empirical evidencein support of them. This study investigates the rela-tionships between HR practices, human resourcesmanagement (HRM) - firm strategy fit and the firmperformance of 63 small and medium sized firmslocated around Kocaeli and Gebze from both theoret-ical and empirical perspective. The findings indicate astrong relationship between different HR practicesand HRM-firm strategy fit and firm performance.Further, the results provide support for the assertionthat HR-firm strategy fit can significantly assist a firmin improving performance. Therefore, empirical sup-port is obtained for the efforts at aligning HRM prac-tices with firm strategy and firm performance.

INTRODUCTIONGlobal rivalry, shorter product life cycles, and unsta-ble product and market environments have contributedto a new business world that offers some interestingchallenges and opportunities to organizations.Established competitive mechanisms have becomeless useful response, and therefore firms continuouslyseek for newer sources of competitive advantage, oneof the most important being human resource manage-ment (HRM) (Jayaram et alL.,1999:1; Terpstra, 1994:13). Survival and success of organizations increasing-ly depend on their ability to build highly skilled workforces and to release the full potential of their humanresources. Accordingly, within the last two decades,there have been a variety of important developmentsin the literature concerning the issues pertaining to themanagement of people and significant attention hasbeen directed towards HRM practices (Haris andOgbonna, 2001:158). HR practitioners have becomebusy with indicating the value of the HRM, mostlythrough showing its impact on firm performance(Rogers and Wright, 1998: 311).

Studies linking strategy and HRM generally emphasizepeople-related activities that companies perform. Thisinvolves an essential assumption that all HR practices

(recruitment, development, etc.) share the same basiccharacter and play a similar kind of role in relation tostrategic management (Luoma, 2000: 771). EffectiveHRM strategy systematically organizes all individualHRM measures to directly influence employee attitudeand behavior in a way that leads business to achieve itscompetitive strategy. (Huang, 2001: 134).

In view of the fact that the goals and necessities ofeach of the competitive strategy types are different,the management of the human resources of the firmshould be in line with the firm's overall strategy. Thismeans that HRM carries the promise that if people areregarded and managed as strategic resources, the firmcan obtain a competitive advantage and thus achievesuperior performance (Heijltjesa and Witteloostuijn,2003: 33). Accordingly, there has been a variety ofstudies in the literature concerning the nature of therelationship between business strategy, humanresource management and firm performance (Kelliherand Perret, 2001: 421).

Although the literature suggests that the link betweenHR practices and firm performance is quite positive, itis nevertheless not necessarily a direct relationship(Lau and Ngo, 2004). Regarding which HR practicesare relevant, the literature often focuses on bundles ofHR practices as determinants of firm performance.(Wright et all., 1997; Lepak et all., 2005).

In this study the effects of five groups of HR practiceson firm performance are analyzed. The bundle of HRpractices is: selective hiring, use of teams and decen-tralization, incentive on performance, training andsharing information. These HR practices are adoptedfrom the study by Ahmad and Schroeder (2003). Firmperformance scale measures overall organizationalperformance including market share, growth and suc-cess. The effects of the HR practices on HRM-firmstrategy fit (alignment) are also analyzed on the study.

THEORETICALBACKGROUNDHuman Resource ManagementFrom a strategic perspective, resource-based view

RELATIONSHIPS BETWEEN HUMAN RESOURCEMANAGEMENT PRACTICES, BUSINESS STRATE-

GY FIT AND FIRM PERFORMANCEOya Erdil & Ay e Günsel

Gebze Institute of Technology, Turkey

Journal of Global Strategic Management | V. 1 | N. 1 | 2007-June | isma.info | 97-107 | DOI: 10.20460/JGSM.2007118718

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(RBW), suggests that resource advantage of valuableknowledge, unique skill sets, and decision-makingcapability result in a firm's competitive advantagewithin the market place (Offstein et all., 2005). TheRBW was originally proposed to shift from an organi-zational product perspective to a resource perspectiveto better explain strategic management of business.This approach assumes that resources exist heteroge-neously among firms and there is a significant cost forthe transfer of resources. These two characteristicslead to competitive advantage (Gowen III and Tallon,2005).

The RBW`s main assumption holds that onlyresources that are valuable, rare, inimitable and sus-tainable are capable of generating superior perform-ance. Such resources are considered to be strategic andintangible assets in addition to reputation and tangibleassets (Galbreath, 2005; Fahy, 2002). Accordingly,within the last two decades, there have been numerousimportant developments in the literature coping withissues concerning the management of humanresources (Haris and Ogbonna,158);and researchershave suggested that the human resources function isan organizational resource that can, and should, con-tribute to the firm level competitive advantage andvalue creation (Rochling et all, 2005). Therefore, froma resource based view, an appropriate HR system cre-ates and develops organizational capabilities thatbecome sources of competitive advantage (Lou andNgo, 2004).

Intensive competition, shorter product life cycles andvolatile product and market environments have con-tributed to the complexity faced by businesses. Thesechanges in global economic environment which isemerging will present some interesting challenges andopportunities to organizations. Some organizationswill go under, some will continue to exist and somewill not only continue but flourish. As a result, firmsconstantly search for newer sources of competitiveadvantage, one of the most important being humanresource management (HRM) that has the potential toimprove and sustain organizational performance anddetermine the organization's fate (Jayaram, 1991;Terpstra, 1994: 13)

Recent academic research has attempted to demon-strate the impact of HRM on firm performance and therelationship between the practices and firm outcomesis discussed best in the strategic human resource man-agement literature (Pfeifer, 1998, Rogers and Wright,1998). Early studies linked individual HR practicessuch as training, selection, performance appraisal andcompensation to firm financial performance

(Milkovich, 1992; Huselid, 1995, Guest, 1997).Traditional HRM factors alone are no longer sufficientin maintaining firm strategy. Even though HR depart-ments have historically been bureaucratic functionswithin organizations, its role has been focused on pur-suing more flexible and creative means to deliverservices in constantly changing environments (Lepaket al., 2005). HR professionals are increasinglyexpected to become much more responsive, efficient,and ultimately make a strategic contribution to theircompany.

Designing and integrating human resources systems isone of the ways to ensure the creation of value for cus-tomers and sustain organizational effectiveness. Thenotion of best practices in human resource manage-ment has received a lot of attention in recent years. Ithas been suggested that there is a universal set ofhuman resource best practices that can maintain afirm's performance (Lau and Ngo, 2004). There isgrowing evidence that corporate HRM practices areassociated with high (financial) performance and canencourage employee behavior and attitudes towardsstrengthening the competitive strategy of an organiza-tion (Hiltrop, 1996). Due to external and internalforces, various contingencies can be found which putidentifying "best practice" into question. However,today's more effective HR managers look for informa-tion and ideas on best practices and they ignore para-doxes that mask the truth about best practice. One ofthe three paradoxes identified by Fitzen (1997) is theexpectation of managers to find simple solutions totoday's complex business problems. The second para-dox is that the visible program is neither generalizablenor a best practice. In most cases, follow-up studiesshow that the practice was not repeatable with thesame or better results. Final paradox is the irony ofseeking enlightenment about the future from studyingthe past. For instance, some HR practices are relatedto financial outcomes while some others may relatemore to staff turnover (Lau and Ngo, 2004).

Another question is whether diverse HRM practiceswill result with different effects on organizational per-formance. For example, Lieberman et al. found thatJapanese auto producers achieved higher productivityafter they had adopted better HRM methods.Likewise, Kelly and London (1989) pointed out thatthe essential role played by HRM methods in Taiwan,Korea, Singapore, and Thailand had supported theglobal competitiveness of these countries. As well,some scholars pointed out that the adoption of differ-ent HRM methods resulted with different effects onorganizational performance (Huang. 2001:133).


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As mentioned above, there have been many studiesregarding the best practice issue in the literature.Successful firms create a bundle of employee prac-tices to reinforce the organizations` strategic position(Enz, Signaw, 2000). Among many others Hiltrop(1999), in his research asked the HR managers andpersonnel officers in 319 companies in westernEurope about HR policies and practices of their firmand found out that employment security, opportunitiesfor training and development, recruitment and selec-tion from within, career development and teamwork,participation and proactive personnel planning as themost important practices. In fact the role of HR is toacquire, develop, manage, motivate and gain the com-mitment of the employees. The focal point is how todetermine the best practice in various HR-related deci-sions (Baruch, 1998). In a comprehensive study onbest practices in the lodging industry Enz and Signaw(2000) examined five categories of HR best practices;i-) leader development, ii-) training and knowledgebuilding, iii-) employee empowerment, iv-) employeerecognition and v-) cost management. In a similarfashion, Jayaram (1999: 5) states that the broad rangeof human resource management practices affectingperformance can be classified into five major topics: i-) Top management commitment; ii-) Communicationof goals; iii) Employee training; iv) Cross functionalteams; and v) General HRM practices. This classifica-tion implies that human resource management prac-tices can be analyzed using the five broad groupings ofpractices (Jayaram, 1999:5). On the other hand Pfeffer(1998) has proposed seven HRM practices that areexpected to enhance organizational performance. Thepractices offered by Pfeffer (1998: 96) are:

1) Employment security2) Selective hiring of new personnel3) Self-managed teams and decentralization of deci

sion making as the basic principles of organizational design.

4) Comparatively high compensation contingent onorganizational performance

5) Extensive training6) Reduced status distinctions and barriers, including

dress, language, office arrangements, and wage differences across levels

7) Extensive sharing of financial and performanceinformation throughout the organization. (Ahmadand Schroeder: 19).

In knowledge based competitive economy, the adop-tion of appropriate HRM practices is important toensure effective strategy implementation. HRM prac-tices create procedures that constitute the building ofemployees` knowledge and skills throughout the

organization to promote valued and unique organiza-tional competencies which support competitive advan-tage (Werbel and DeMarie, 2005). Strategic humanresource management has become a more central issueto management literature from empirical researchview linking HRM practices with firm performanceand profitability (Delaney and Huselid, 1996; Huselid,1995; Becker and Gerhart, 1996). Several researchershave attempted to create such categories. For instance,Huselid (1995), Jackson and Schuler (1997) suggestedthat HR practices are strategic or technical in nature.Another classification outlined three domains of HR -operational, relational and transformational. As notedby Wright and colleagues (1997), HR practices may beviewed as transactional, traditional or transformation-al. Viewed in combination HR practices can be rangedfrom being transactional (administrative) to transfor-mational (strategic) in nature (Lepak et al., 2005).

HRM and Business StrategyThere is a close connection between human resourcesmanagement and firm strategy, which in turn refers tothe business environment and organizational develop-ment. (Grundy, 1997: 474-475). It is widely acceptedthat a company's human resource management (HRM)practices should be matching to the strategy of thewhole company. Although nobody disagrees with theimportance of such a correlation, the deeper nature ofthis relationship takes remarkably little attention(Luoma, 2000: 769). HRM implies that if people areconsidered and managed as valuable strategicresources, the firm can achieve a competitive advan-tage and as a consequence demonstrate superior per-formance (Pfeffer, 1998). This means that the manage-ment of human resources should be corresponding tothe firm strategy, as the goals and prerequisites of eachof the strategy profiles are different (Heijltjesa andWitteloostuijn: 2003: 33).

The assumption of a close link between business strat-egy and HRM methods is based on contingency theo-ry. This theory underlines that HRM methods areselected in accordance with the type of competitivestrategy adopted by a business (Huang, 2001; Lepak etal., 2005) It assumes that companies that coordinatetheir business strategy and HRM activities achievebetter performance than companies that do not. Sincethe HR function is transforming its focus from man-agement of human resources to the maintenance oforganizational effectiveness, organizational capabili-ties are deeply rooted in human resource capabilities;HR is best positioned to deliver these outcomes. Herethe contingency approach is considered to be usefulbecause a set of organizational capabilities that leadsto effectiveness is likely to depend on a host of orga-


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nizational, strategic, and environmental characteristics(Roehling et al., 2005).

In accordance with theoretical explanations, the pro-posed relationships between HRM practices, HRM-firm strategy fit and firm performance are shown infig. 1.

RESEARCHMETHODOLOGYAND FINDINGSData and MeasuresThe aim of this study is to demonstrate the relation-ships between the HRM practices, HRM-firm strategyfit and firm performance. In order to empiricallyinvestigate these relationships, small and mediumsized firms located around Gebze were surveyed. Thestudy is based on the administration of using the doc-uments obtained from Gebze Chamber of Commerceand Kocaeli Chamber of Industry, 300 firms among1000 were identified as the sample group of theresearch because of their availableness. Tools such ase-mail, letter and face to face interviews were used forgathering data. One middle manager from each com-pany had received the survey. Therefore, the samplingframe for the study was a list of 300 manufacturingand service firms among which a total of 63 question-naires has been returned. All constructs were meas-ured with already existing and reliable scales. Allitems were measured on a seven point Likert-typescale where 1=strongly disagree and 7=strongly agree.Data is evaluated through SPSS 9.0. The relationshipsbetween the variables are tested using correlation, reli-

ability, regression and factor analyses. The mean ageof the participants was 33.27 (s.d. =5.58); the propor-tion of women, 9,8%, and married 69,5%. Of the par-ticipants, %61 had university education and %17 hadmaster education. 75,78% of the respondents werefrom manufacturing industry; 24,22% of the partici-pants were from service industry.

HRM -Firm Strategy Fit: HRM -firm strategy fitwas measured with a five-item scale developed andvalidated by Huselid (1997). The measure covers thedegree of fitness between the firm strategy and HRMpractices.

Firm Performance: The scale used to measure firmperformance is based on Choi and Lee`s (2003) modelconsisting of six items. Overall firm performance wasmeasured with items including success, market share,growth, innovativeness, profit and firm size.

HRM PracticesSelective hiringUse of teams anddecentralizationCompensation/ incentive contingent on performanceExtensive trainingSharing information

Firm PerformanceSuccessMarket shareGrowthProfitInnovativenessSize

Figure 1 Strategic Fit Model

HRM - FirmStrategy

Fig. 1. Research model


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AnalysisSince the scales were used with a new sample, 46items were submitted to exploratory factor analysis. Aprincipal component analyses and scree plot indicatedthat 11 factors should be retained (eigenvaluesabove1.0). The best fit of data was obtained with aprincipal factor analysis with varimax rotation.

TABLE 5 ITEMS EMERGED IN THE MISSION STATEMENTS OFSOCIALLY RESPONSIBLE COMPANIES

HRM PRACT CES

Table 1. HR practices used in the study adopted from Ahmad and Schroeder (2003) Team activities was measured using

Scales

Selective hiring Manufacturing and Manufacturing and human resourceshuman fit was measured using six items adoptedresources fit from Ahmad and Schroeder`s (2003) study.

Behavior and Behavior and attitude was measured usingattitude three items adopted from Ahmad and

Schroeder`s (2003) study.

Use of teams and Team activities Team activities was measured usingdecentralization five items adopted fromAhmad and


Interaction Interaction facilitation was measured usingfacilitation three items adopted from Ahmad and


Compensation/ incentive Incentives to meet Incentives to meet objectives was measuredcontingent on performance objectives using three items adopted from Ahmad and


Extensive training Training on Training on job skills was measured usingjob skills three items adopted from Ahmad

and Schroeder`s (2003) study.

Training in Training in multiple functions wasmultiple functions measured using four items adopted from

Ahmad and Schroeder`s (2003) study.

Sharing information Communication Communication of strategy wasof strategy measured using four items adopted from


Feedback Feedback on performance was measuredon performance using four items adopted from



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The results of factor analysis reveal factor structuresconsistent with expectations. Specifically HR prac-tices fall into five distinct factors. The first reflectswhat may be referred to one of the traditional HRpractices, selective hiring, including manufacturing fitand human resource fit, and behavior and attitude subdimensions. Manufacturing and human resources wasmeasured with six items and the internal consistencyof this factor was 0, 9531 (alpha). Factor 2 which isbehavior and attitude dimension, includes three itemswith internal consistency reliability coefficient (alpha)of 0,6708. The internal consistency estimate of allother four HR practices and their components were allat acceptable levels: team activities (five items)alpha= 0.8611; interaction facilitation (three items)alpha= 0.9197; incentives to meet objectives (threeitems) alpha= 0,7789; training on job skills (threeitems) alpha= 0,8916; training in multiple functions(four items) alpha= 0,7179; communication of strate-gy (four items) alpha= 0,8445; feedback on perform-ance (four items) alpha= 0,8125; HRM- firm strategyfit (five items) alpha= 0,9435.Mean values, standard deviations and inter-correla-tions were summarized in Table 3. Cronbach`s Alphavalues were shown using parentheses on the cross ofthe table. On a bivariate level, firm performance waspositively related to manufacturing and humanresources fit, behavior and attitude, team activities ,interaction facilitation, training on job skills, trainingin multiple functions, communication of strategy andHRM-firm strategy fit. Similarly, HRM- firm strategyfit was positively related to manufacturing and humanresources fit, behavior and attitude, team activities,interaction facilitation, training on job skills, trainingin multiple functions, communication of strategy.

However, the correlation results indicate that, there isno direct relationship between incentives to meetobjectives, feedback on performance and HRM-firmstrategy fit, and firm performance

Regression AnalysesIn the regression analysis shown in Table 4, we inves-tigated the influences of HRM practices together onHRM-firm strategy fit. The regression model is signif-icant as a whole (F=14.432,: p< 0, 01) ; it explains%19,3 of the change of HRM-firm strategy fit. Thefindings indicate that manufacturing and humanresources fit, behavior and attitude, team activities ,interaction facilitation, ,training on job skills havepositive and significant effects on HRM-firm strategyfit. However, incentives to meet objectives, training inmultiple functions, communication of strategy andfeedback on performance were found to have negative

Table 4. Regression results for HRM practices andHRM-firm strategy fit.

Manufacturing and human resources fit ,683** ,003Behavior and attitude ,302** ,000Team activities ,431** ,000Interaction facilitation ,798** ,000Incentives to meet objectives -,274** ,000

Training on job skills ,885** ,000Training in multiple functions -,539** ,000Communication of strategy -,269** ,000Feedback on performance -,034** ,000Dependent variable: HRM-Firm Strategy Fit, R2= 0.193 , F= 14.432

INDEPENDENT VARIABLES ß Sig

**: p< 0, 01, *: p< 0,05


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effects on HRM-firm strategy fit. Amongst all prac-tices, the impact of training on job skills on HRM-firmstrategy fit was the highest one; it is followed by inter-action facilitation and manufacturing and humanresources fit.

In the regression analysis shown in Table 5, we inves-tigated the influences of HRM practices together onoverall firm performance. The regression model issignificant as a whole (F=18,84 : p< 0, 01) ; itexplains %35 of the change of firm performance.These results provide empirical evidence that HRMstrategies are related with firm performance. The find-ings indicate that manufacturing and human resourcesfit, behavior and attitude and training in multiple func-tions have positive and significant effects on firmstrategy. However, interaction facilitation and incen-tives to meet objectives were found to have negativeeffects on firm performance. Moreover, there was nosignificant relationship between training on job skills,communication of strategy, feedback on performanceand firm performance. Amongst all practices, theimpact of manufacturing and human resources fit onfirm performance was the highest one.

In the regression analysis shown in Table 6, we inves-tigated the influences of HRM-firm strategy fit onfirm performance. The regression model is significantas a whole (F= 34,49: p< 0, 01) ; it explains %48 ofthe change of firm performance. HRM-firm strategyfit is associated positively and significantly with firmperformance.

DISCUSSION ANDCONCLUSIONSOur findings related to the direct effect between HRMpractices and firm performance is consistent with theresults from prior research (eg. Ahmad and Schroeder,2003). Selective hiring which is the combination ofboth manufacturing and human resource fit andbehavior and attitude plays a significant role inenhancing organizational performance. Selectionplays a critical role in implementing firm strategy andis designed to employ people with desired skills andbehaviors needed to match a work with context andimprove performance (Werbel and DeMarie, 2005).

Previous studies identified training efforts as one ofthe primary factors to improve organizational per-formance (Lau and Ngo, 2004; Wimbush, 2005). Thefinding that there is a strong link between training inmultiple functions and organizational performance isworthy of further exploration. However the findingthat training on job skills dimension is not found to berelated to firm performance in the regression analysisfor the sample firms in the survey implies the need forfurther research with larger samples. The aim of train-ing and development is to provide information andsupport that enables employees to overcome job-relat-ed difficulties and achieve job performance (Weberand DeMarie, 2005) and organizational performanceas a whole (Valle et all., 2000).

The finding that the use of teams and decentralizationis significantly but negatively related to firm perform-ance indicates inconsistent result with previousresearch. It is not easy to attribute a simple explana-tion to these findings. Team activities within the firmsin the sample need to be improved further for betterperformance. Research on innovativeness suggeststhat team-based work is closely linked to innovativeperformance (Lau and Ngo, 2004). Our findingregarding non-existence of association between teamwork and firm performance would be explained by theoverall performance measurement used in the study.Nevertheless, in their study, Lau and Ngo (2004)found that team development and performance-basedreward were not significantly related to innovationoutcome which is inconsistent with the previousresearch.

In terms of communication of strategy and feedbackon performance which are sub dimensions of sharinginformation, results indicate that there exists no signif-icant relationships between communication of strategyand firm performance. These empirical findings arecontrary to the tendencies suggested by the literature.

Table 5. Regression results for the effects of HRMpractices and HRM-firm strategy fit

Manufacturing and human resources fit ,361** ,000

Behavior and attitude 080** ,000Team activities ,833 ,258Interaction facilitation ,398* ,000Incentives to meet objectives -,008* ,013Training on job skills ,212 ,910Training in multiple functions ,017* ,043

Communication of strategy ,051 ,906Feedback on performance -,701 ,559Dependent variable: Firm performance, R2= 0.356 , F= 18,84


**: p< 0, 01, *: p< 0,05

Table 6. Regression results for the effects ofHRM-firm strategy fit on firm performance

HRM-Firm Strategy Fit ,688** ,000

Dependent variable: Firm performance, R2= 0.474 , F= 34,49


**: p< 0, 01, *: p< 0,05


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These empirical findings may be summarized as thefollowing: first, that there are significant relationshipsbetween the selection and firm performance, and train-ing and firm performance. These two traditional HRpractices therefore are significantly related to firmperformance. However, use of teams and incentives tomeet objectives negatively effect firm performance forthe firms in the sample. Lastly, there exists no relation-ship between sharing information and firm perform-ance.

In the research model, the association between HRM-firm strategy fit (alignment) and firm performance isalso investigated. The findings reveal that there existsa positive relationship between HRM-firm strategy fitand firm performance. The findings regarding regres-sion model exploring the effects of HR practices onHRM-firm strategy fit imply that there exist signifi-cant links between all five HR practices and HRM-firm strategy fit. The mediating effect of HRM-firmstrategy fit should be investigated for larger samples inorder to interpret its contribution on the relationshipbetween HR practices and firm performance.

Future DirectionsIt should be pointed out that the restricted sample sizeas well as the manner in which it has been selectedrepresents a limitation for this study. On the otherhand, the attempt to clarify linkages between HR prac-tices and organizational performance reflects animportant area for ongoing research. There still existsquestions regarding which HR practices diffuse morereadily and why?. The importance of systematicallyaligning HR practices and organizational success andstrategy hasn't been well established empirically(Bowen et all., 2002). Ideally, future studies wouldinclude data on firm performance to allow an assess-ment of the effectiveness of various strategy-HR prac-tice bundles linkages. It may be useful for future HRMresearch to examine how different dimensions ofHRM systems impact different outcomes.

Managerial ImplicationsThe findings that selectively hiring positively effectsorganizational performance is considered as a signifi-cant practical insight for managers. Staffing and selec-tion continues to be an area of significant interest(Wimbush, 2005). Recruitment and selection methodsfor effective hiring decisions are considered to beimportant for managers. High performing organiza-tions tend to spend more time on training especially oncommunication and team skills (Lau, Ngo, 2004). Thefinding that there exists a positive link between train-ing and firm performance is consistent with the human

capital perspective. Therefore, we suggest that man-agers should develop training-focused HR practices toachieve competitive advantage.

Altogether the findings of this and other studies onissues related to human resource management providetheoretical and empirical evidence that HR practicescan help organizations enhance organizational per-formance.


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Journal of Global Strategic Management | V. 1 | N. 1 | 2007 ...isma.info/uploads/files/097-relationships-between-human...RELATIONSHIPS BETWEEN HUMAN RESOURCE MANAGEMENT PRACTICES,