THE IMPACT OF PARTICIPATIVE MANAGEMENT ON ORGANIZATIONAL PERFORMANCE AND EMPLOYEE

EFFECTIVENESS

Laura Chang Leng Yi

Bachelor of Finance (Honours) 2012

Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK

P.KHIDMAT MAKLUMAT AKADEMIK

111111111 Ili'fllll"11111000245043

THE IMPACT OF PARTICIPATIVE MANAGEMENT ON ORGANIZATIONAL

PERFORMANCE AND EMPLOYEE EFFECTIVENESS

by

LAURA CHANG LENG YI

This thesis is submitted in partial fulfilment of

the requirements for the degree of Bachelor of Finance with Honours

(Finance)

Faculty of Economics and Business

UNIVERSITI MALAYSIA SARAWAK 2012

IMPAK PENGURUSAN SECARA PENYERTAAN TERHADAP

PRESTASI ORGANISASI DAN KEBERKESANAN PEKERJA

oleh

LAURA CHANG LENG YI

Projek ini merupakan salah satu kerperluan untuk

Ijazah Sarjana Muda Kewangan dengan Kepujian

(Kewangan)

Faculti Ekonomi dan Perniagaan

UNlVERSITI MALAYSIA SARA W AK

2012

Statement of Originality

The work described in this Final Year Project, entitled

"The Impact of Participative Management on Organizational Performance and Employee Effectiveness"

is to the best of the author's knowledge that ofthe author except

where due reference is made.

(Date submitted) (LAURA CHANG LENG YI)

23806

Pengesahan Pelajar

Saya mengakui bahawa Projek Tahun Akhir bertajuk

"Impak Pengurusan Secara Penyertaan Ke Atas Prestasi Organisasi dan Keberkesanan Pekerja"

ini adalah hasil kerja saya sendiri kecuali nukilan, petikan, huraian dan ringkasan

yang tiap-tiap satunya telah saya nyatakan sumbemya.

(Tarikh penyerahan) (LAURA CHANG LENG YI)

23806

ABSTRACT

THE IMPACT OF PARTICIPATIVE MANAGEMENT ON ORGANIZATIONAL

PERFORMANCE AND EMPLOYEE EFFECTIVENESS

by

Laura Chang Leng Yi

This study focuses on investigating the impact of participative management on

organizational performance and employee effectiveness in Malaysian Small and Medium­

Sized Enterprises (SMEs). Participative management was represented by the five job

characteristics found in Job Characteristics Model (JCM) which are skill variety, task

identity, task significance, autonomy and task feedback. Specifically, this study aimed to

investigate the impact of each of the job characteristics on organizational performance and

participative management respectively with mentoring as a moderator. Twelve hypothesized

relationships were tested. Data were collected from a total of 250 employees in Malaysian

SMEs. Non-probability method was utilized to distribute well-structured questionnaires. The

empirical findings were limited to small samples from various business sectors. Data

coUected was analysed using SPSS Version 17.0 for Microsoft Windows and SmartPLS 2.0.

Confirmatory factor analysis, convergent validity, discriminant validity and reliability test

was executed to gauge the measurement model, and t-value utilized to assess structural

model. The results obtained were appealing as participatory techniques do not propel

participative management as having a positive impact on organizational performance where

as only skill variety and task significance have a positive impact on employee effectiveness.

Mentoring only moderates the relationship between participative management and employee

effectiveness. This study may be practical for executives to comprehend the scope of

participative management and its implications towards better strategic planning to achieve

organizational goals. While more research is being done in this area, this paper has

demonstrated the extend of participative management's impact on organizational

performance and employee effectiveness to both scholars and practitioners.

ABSTRAK

IMPAK PENGURUSAN SECARA PENYERTAAN KE A TAS PRESTASI

ORGANISASI DAN KEBERKESANAN PEKERJA

oleh

Laura Chang Leng Yi

Kajian ini memberi tumpuan kepada penyiasatan tentang impak pengurusan secara

penyertaan ke atas prestasi organisasi dan keberkesanan pekerja dalam perusahaan Industri

Kecil dan Sederhana (IKS) di Malaysia . Pengurusan secara penyertaan diwakili oleh lima

sifat kerja yang tersenarai dalam Model Sifat Kerja iaitu kepelbagaian kemahiran, identiti

tugas, kepentingan tugas, autonomi, dan maklum balas kerja. Justeru, kajian ini khususnya

bertujuan untuk menyiasat impak setiap sifat kerja tersebut ke atas prestasi organisasi dan

pengurusan penyertaan dengan pembimbing sebagai moderator. Dua belas hubungan

hipotesis telah diuji . Data dikumpul daripada 250 pekerja dari IKS Malaysia. Kaedah bukan­

keberangkalian diguna untuk mengedar borang soal selidik. Keputusan empirical terhad

kepada sampel kecil dari pelbagai sektor pemiagaan. SPSS Version 17.0 for Microsoft

Windows dan SmartPLS 2.0 digunakan untuk mengana'lisa data yang terkumpul. Ujian seperti

analisis factor konfirmatori , kesahihan konverger, kesahihan diskriminan dan

kebolehpercayaan dilakukan untuk mengukur model pengukuran dan nilai-t digunakan untuk

meni lai model berstruktur. Didapati bahawa keputusan yang diperolehi adalah menarlik

kerana penyertaan pekerja tidak memberi impak yang positif ke atas prestasi organisasi tetapi

sebaliknya hanya kepelbagaiaan kemahiran dan kepentingan tugas memberi impak yang

positif ke atas keberkesanan pekerja. Pembimbing hanya berfungsi sebagai moderator dalam

hubungan antara pengurusan secara penyertaan dan keberkesanan pekerja. Kajian ini boleh

menjadi praktikal untuk eksekutif bagi memahami skop dan imphkasi pengurusan secara

penyertaan terhadap perancangan strategik untuk mencapai matlamat organisasi . Dalam pada

itu, ban yak kajian telah dijalankan berkaitan dengan tajuk ini, kajian ini juga telah

menunjukkan takat impak prestasi organisasi dan keberkesanan pekerja kepada ilmuan dan

pengamal.

ACKNOWLEUGEMENTS

During the course of this research many have helped and guided me along the way.

Without them, this paper would have never come to a completion.

To begin, I would like to thank Dr. Lo May Chiun, my most inspiring lecturer and

supervisor who humbly and patiently guided and advised me through. From her vast

experience in producing research papers, my knowledge of research and thesis writing

expanded. She always motivates and inspires me to go beyond what 1 am able to do. My

gratitude also goes to all the time spent on ensuring my paper would be the best. Indeed, there

is no way I can repay her for all her sacrifice and heartfelt encouragements. It will always be

my honour to be under her guidance.

My heartfelt gratitude also extends to Universiti Malaysia Sarawak for the

opportuni ty to venture into this course especially to Prof. Dr. Shazali Abu Mansor (Dean of

Faculty of Economics and Business), Prof. Dr. Abu Hassan Md Isa (Final Year Project

coordinator of Faculty of Economics and Business), all lecturers and staff involved for being

so accommodating. It was through their guidance that I could comprehend and complete the

work upon my shoulder.

To the employees from the medium-sized manufacturing sectors of different business

sectors who have so kindly spent their quality time in responding to the long and detailed

questionnaires during the course of data collection.

My family has always been the backbone of my journey in this university. My dad,

Peter Chang and mum, Sheila Chang have given their 'love, prayers, moral and financial

support through the course of this research . Not forgetting my siblings, Sarah Chang and

Kevin Chang for their endless support. I am grateful for them.

I also want to thank friends who have always been by my side physically or morally

through the good and hard times of this research. Ng Soo Ki, Kelly Usit, Tan Seow Lin, Teoh

Ker Li, EI ie Fong and Mah Jih Jing. They have all been great advisers and helpers. Their

friendship to me is priceless.

My special appreciation goes to Ms Winnie Wong and Ms Lau King Nim for sharing

their experience in producing an undergraduate thesis and so willingly spending their time to

guide and correct my work. Their kindness inspired me to continuously pursue this research

despite certain failures.

Finally and most importantly, I want to thank my God for always being faithful and

my source of strength. It is my great joy to dedicate this piece of work to all the people

mentioned above. Truly, no man walks alone.

LIST OF TABLES

Table 2.1: Theories of Job Satisfaction .....................................................31

Table 2.2: Definitions in Terms of Annual Sales Turnover

and Full Time Employees ....................................................... 37

Table 2.3: Foundational Premises of Social Exchange Theory ..........................42

Table 3.1 : Development of Questions for Each Variable ..... .. ...................... .. . 57

Table 4.1: Demographic Profile of Employees............................................76

Table 4.2: Loading and Cross Loading Table ........................ .. ............... .... 80

Table 4.3: Result of Measurement ModeL ...... .. ........ .. ...............................81

Table 4.4: Summary of Measurement Table.; ............................................ .83

Table 4.5: Discriminant of Model Constructs ..... " ...... '" .... . ........................ 84

Table 4.6: Result of Reliability Test.. .......................................................85

Table 4.7: Results of Communality and Redundancy ................................... .86

Table 4.8: Correlations Test. .................. . ............. .. .......................... . ... 92

Table 4.9: Path coefficients and hypothesis testing ........ . ............. ... ..............90

XVI

LIST OF FIGURES

Figure 2.1 : Framework of Impact of Participative Management on

Organizational Perfonnance and Employee Effectiveness

in Malaysia .......... ... ...................................................46

Figure 4.1 : Research Model ... ..... . .. ... .......... ... . . . . .... .... ..... ........ .. , ... 77

Figure 4.2: Research Model with beta values ...... . ....... .... ..... ... ............. 87

Figure 4.3: Research model with t-value ........ . ............ .. . ......... ....... . .... 91

xvii

I Pusat Khidmat Maldumat Akademik UNIVERSm MALAYSIA SARAWAK

T ABLE OF CONTENTS

LIST OF TABLES..........................................................................................................xvi

LIST OF FIGURES ...............................................................................xvii

CHAPTER ONE: INTRODUCTION

1.1 Background...................................................................................... 1

1.1.1 The Malaysian Scenario ... . ............................................... . .........5

1.2 Problem Statement. .............. . .................................... . .........................6

1.3 Research Objectives .............................................................................7

1.4 Research Questions ................................................................... . ......... 8

1.5 Definition of Key Terms ....................................................................... 9

1.6 Significance of the Study ...................................................................... 9

1.7 Scope of the Study .............................................................................. 10

1.8 Organization of the Chapters .................................................................. 11

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction..................................... . ..................................... . .......... 12

2.2 Definition of Models .. " ....... . . . .. . .. . .. . .. .... .. . ....... . ...... ....... .. . .. . .. . .. ... . .. . ... i 2

2.3 Organizational Performance ........................ . ................. .. ................. . ..... 13

2.3.1 Return on Assets ..................................................................... 15

2.3.2 Return on Sales ............................................................. '" ...... 16

2.3.3 Sales Growth ............................... . .......................................... 16

2.4 Participative Management. ...................................................................... 17

Xli

2.4.1 Skill Variety ....... .. ........ .. ............ . ................. .. ...................... 21

2.4.2 Task Identity ........................................................................ 22

2.4.3 Task Significance ................. . .................... ... ................ ....... ... 23

2.4.4 Autonomy............................................................................. 24

2.4.5 Task Feedback ... . .... . .................. ... ................... . ....... . . .. ......... . 26

2.5 Employee Effectiveness .............................. . ............ .. .. .. ..... . ................. 27

2.5.1 Job Perfonnance ....................... ... ........ . ......... .. ......... . ......... . ... 29

2.5.2 Job Satisfaction ...... .. ......... .. . . .. ...... ........... . .. . .......................... 30

2.5.3 Job Retention .. .. ........... . ............................ . ........ . . .... ....... . .... . 32

2.6 Mentoring .......... .. ......................... . .................................................. 33

2.7 Small Medium Enterprises (SMEs) ...... .. ........ ... ........ . ................... . ....... ... 35

2.8 Underlying Theory ... . ......................................................................... 37

2.8.1 Resource Based Theory ............................... ....... ............. .. ....... 38

2.8.2 Social Exchange Theory ................. .... ... . ... . .......... . .......... ... ...... .40

2.9 Theoretical Framework....................................................................... .43

2.9.1 Gap in the Literature ............................................................... 44

2.9.2 Justification of Theoretical Framework .......................... . ............... 44

2.9.3 Description of Variables ........... .. .............................................. 44

2.10 Development of Hypothesis .................................................. .. ............. 46

2.11 Summary. . ...................................................................................... 51

CHAPTER THREE: DATA AND METHODOLOGY

3.1 Introduction ... ......... . ..... . .............. . ... . ................ ... ................ .... ........ 52

3.2 Research Site ... ..... ................................. ... ................. . .............. ....... . 52

3.3 Research Design, Sample and Procedure ................ . ......... .. ........ ... ........ ... . 53

3.3 .1 Data Collection Procedure ..... ..... .. . ................................ ... ........ .. 54

3.4 Research Questionnaire .. .. ............................. .. ............... .. .. . ................. 54

Xlll

3.4.1 Structure of Questionnaire.. " .............................................. ....... 55

3.5 Measures.. .... ...... . .... . ....................................................................... 57

3.5.1 Organizational Performance ................. . ............. . .................. . .... 58

3.5.2 Participative Management. ..................................... ................... 59

3.5.3 Mentoring... . ..... . .............................................. '" ......... ........ 61

3.5.4 Employee Effectiveness ..................................... . ... . .................. 62

3.6 Pilot Study . .... ................................................................................. .63

3.7 Statistical Analysis ..............................................................................64

3.7.1 Descriptive Statistic .......................... . ...... . ...... . .........................64

3.7.2 Factor Analysis ...... . .. .. ................................. . ........................ ...64

3.7.3 Reliability Analysis ........................... . .............. . ... . ...... ........... . . 65

3.7.4 Factor Independence Analysis ..... ....... . ............... . ............. . ...........66

3.7.5 Partial Least Squares ................ .............................................. . ... 66

3.8 Summary..... .......................................................... . ......................... 72

CHAPTER FOUR: RESULTS

4.1 Introduction................................................ . ...... . ............................. 73

4.2 Demographic Profile .......................................................... . ..................73

4.3 Goodnes of Measures ....... . . . ...... . ............. . ............... . ........................ ... 77

4.3. 1 Measurement Model Results ...................................... . ... . ................78

4.3.1.1 Loading and Cross Loading .......................... . ... . ............... 78

4.3.1.2 Convergent Validity .....................................................81

4.3.1.3 t-value ....................... . ........................... . ............... . . 82

4.3.1.4 Discriminant Validity ................................................... 83

4.3.1.5 Reliability Test. ........ . ............... . .................................84

XIV

4.3.1.6 Communality and Redundancy.... .... .... . ............ . ............. 85

4.3 .1.7 Global Fit (GoF) ............................... .. ........................86

.4 Restatement of Research Hypotheses ......................................................... 88

4.5 Intecorrelations among Study Variables ...................................................... 88

4.6 Assessment of the Structural Model ...........................................................88

4.6.1 Hypothesis Testing .......... . .. . .... . ..................................................90

4.7 Findings of Hypothesis Testing ............................................................... 89

4.8 Summary.................. . ............................ .......................................... .91

CHAPTER FIVE: DISCUSSION AND CONCLUSION

5.1 Introduction..................................... . .. ........ . .................... .. ...............93

5.2 Backdrop..........................................................................................93

5.3 Discussion...... .. ... .... ...................................... .. ......... ... .................... .. 94

5.4 Implications........................................................... " .. .. ..... ..... ........... . 1 02

5.4.1 Theoretical Implications ............................................................... 102

5.4.2 Practical Implications .................. . ........................................... . ... l 04

5.5 Strengths and Potential Limitations ............................................................ 106

5.6 Directions for Future Research ............ . .... . .......... .' ........................ " ...... . ... 107

5.7 Conclusion...................... . ....................... . ............ ....... .. ................. . .. 1 09

REFERENCES................. ,........................................................ '" .......... 110

APPENDIX A

APPENDIXB

xv

CHAPTER ONE

INTRODUCTION

1.1 Background

In the 1990s, the leaders in the working world have been working towards

developing people-oriented behaviour. Organizations in various countries such as

America, Japan and Taiwan have begun to implement Participative Management into

their governance. This method of management received great attention as it has been

proven that it brings more benefit than harm to subordinates and also to relationships

between subordinates and managers.

Participative Management is a kind of management style In which

subordinates share a significant degree of decision-making power with their

superiors (Robbins, 1991 :243). Subordinates are empowered to make decisions and

be involved in the organization's process of decision making. In this process

employees ' involvement may differ such as problem solving, goal setting, direct

involvement in work decisions, representation on policy-making bodies and

selecting new co-workers (Cotton et at , 1988). On the financial part, profit sharing

and stock ownership are also participative management patterns. This definition was

used by a research done on Taiwanese firms which were applying US methods of

participative management. Thorough research found participative schemes in

Taiwanese firms showing lower turnover rates and absenteeism rates (Huang, 1997).

Participation was defined as 'opportunity to influence decisions', and is seen as

surrounding both structures and processes of power sharing. A participative system

I

is one in which opportunities are broadly pooled among all organization members

(Ryan, 2000). With the wide encompassment of power, conflict of interest and

meeting a consensus have to be considered as this can take away much of time

resources.

Participative Management are approaches that 'move one or more of the

following further down in the organization; infonnation, knowledge, rewards and

power (Lawler, 1986). Examples of such are presenting employees with the business

plans, teaching employees to be more involved in business with the right techniques

and skills, and providing a platfonn for employees to speak out their suggestions and

opinions about a certain change or move in the finn. Teaching employees would

mean mentoring them on how to participate in activities that will affect decisions

made in the organization which will lead to better effectiveness as an employee and

improved organizational perfonnance. Mentoring will play its role as mediator in

this research assuming it helps in the finn's implementation of Participative

Management. As stated in the research by Lo & Ramayah (2011), mentoring plays

an important role in influencing subordinates. Also, ,that a proper mentoring system

brings greater retention, better charted careers, greater leadership competency, and

most importantly has ready leaders available at the right time. Hence, the extent to

which mentoring would playa role in participative management is analysed.

By empowering employees with a certain degree of trust in decision making,

employees would induce a degree of commitment to task - over the long run - that

hierarchical direction could not consistently inspire (Lovrich, 1986). Employees

would thoroughly understand the organizational goals and their relationship to those

goals and its impact towards the organization. Employees would sense his or her

2

contribution to the work that directly affects organizational perfonnance as well as

lead to better job perfonnance and satisfaction. Being knowledgeable about the

decisions in the organization enables employees to work to their full potential in

their most effective way. The use of strict hierarchical controls as a means of

organizational management seems "unnatural" at best and perhaps even dangerously

subversive to democratic nonns and the maintenance of democratic civic virtues

(Hummel.,1982). This hardly occurs in organizations placing much weight on

democracy in its governance and social practice emphasizing fairness with equality.

Skill variety, Task Identity, Task Significance, Autonomy and Task Feedback are

elements in participative management practice which brings forth a sense of fairness

and distinctiveness in employees (Lovrich, 1986).

While perfonning their jobs employees would often think about the changes

and improvements they can make to their tasks and processes, e.g. manufacturing. A

poll of a cross-section of people in industry, conducted by Gallup for the U.S.

Chamber of Commerce, showed that employees put deep thought about means to

improve their company's perfonnance especially while perfonning the certain task

and said they would work more efficiently if they were involved in the decisions

affecting their job. Psychologically, people always want to know why they perfonn a

certain task or duty having a rationale behind it. As employees work every day in the

same field and perfonning the same task they would want to know more about the

job they are assigned to accomplish and why management makes certain decisions

which affect their jobs. Not only on the individual level but by empowering

employees through participative management they know how they as individuals

work groups can be me more productive. Additionally, previous research by Baiman

3

and Evans (1983), viewed participative management as a negotiation process

whereby each individual chooses his or her own negotiation strategy based on his or

her own infonnation. Employees hold a certain amount of private infonnation and by

negotiating; managers would be able to obtain necessary infonnation to better

improve decision making considering different aspects of the organization especially

those that directly affect financial perfonnance. In situations where the employee

holds more infonnation than the manager a participation-based management control

system allows the subordinate to reveal or communicate some of his private

information which may then be incorporated into the finn's perfonnance for optimal

value.

As for the effect of participative management on organizational perfonnance,

Lebas (1995) mentioned that measuring perfonnance and managing performance are

interactive and cannot be separated. By separating the two, the results gain from a

study of the impact would be inaccurate. While organizational perfonnance is an

indicator which measures how well an enterprise achieves their objectives

(Venkatraman and Ramanujam, 1986), the concept of effectiveness is a ratio

indicating that the two entities of effectiveness and efficiency are needed when

defining and measuring effectiveness of a finn. Looking at the traditional view,

organisational perfonnance is commonly referred to as financial perfonnance where

considerations of budgets, assets, operations, products, services, markets and human

resources are critical in detennining the overall bottom-line of an organisation

(Dixon, 1999; Thurbin, 1994; Smith, 1999). However, Yeo (2003) in his research on

the tangibles and intangibles of organisational perfonnance found that there is a need

to look into infonnal or alternative measures associated with learning. The

4

Pusat Khidmat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK

alternatives are such in this paper of finding the impact of job performance, job

satisfaction and job retention. Therefore, this paper will seek to find the impact on

the infonnal which is employee effectiveness and formal defined by organisational

performance.

1.1.1 The Malaysian Scenario

Malaysia is a country with high power distance such that people do accept

inequality in power among institutions. Participative Management has proven to be

harder to implement in countries with higher power distance such as China (Huang

& Van de Vilert, 2003). Therefore, from this research it can be concluded that

Participative Management faces tougher execution in Malaysian organizations,

specifically Small Medium Enterprises (SMEs) and privately owned manufacturing

firms. There has been unknown research on the weight and effect of Participative

Management in Malaysia, however past leadership studies have found that

Malaysian leaders lead in a more participative and consultative style (Govindan,

20(0).

In another paper, it is reported that empowerment and its real impact on

divergent formal and non formal sectors do not ~xist (Raquib, Anantharaman, Eze &

Murad, 20 10). Globalization however has caused aggressive Asian countries to

embrace changes for better organizational performance. Malaysia falls in this

category as one of the fast growing nations in the Asian continent (Dodson, 2008).

Therefore, this research serves to find the impact of participative management with

the moderating effect of mentoring on employee effectiveness to enhance

5

management in Malaysian based firms. While past research have found Malaysian

leaders to be participative and consultative (Govindan, 2000), this research will

prove as to whether participative styles improve job performance, satisfaction and

retention. Moreover, a discovery of whether the impact of participative styles on

financial and non-financial factors with the moderating effect of mentoring was

conducted.

1.2 Problem Statement

Past studies have proven that Participative Management contributed towards

better performance less employee turnover in Northern Mexico production facilities

(Pelled & Hill, 1997). In this study, employee effectiveness is measured by Job

Satisfaction, Job Performance and Job Retention. Hence, less employee turnover

means better job retention in the organization. Also, individuals who were highly

committed to their organization and have higher job satisfaction would have less

thought of leaving the organization (Iverson and Buttigieg, 1999). "Organization of

work' and "decision making" on the other hand were found by Denison (1984) to be

significantly correlated and predictive with short term financial performance. Raising

from the past researchers it is essential that the elements of employee effectiveness

are well maintained through participative management. This research on the other

hand will serve to prove the level of impact of participative management on

employee effectiveness and organizational performance. A study by Correa and

Caon (2002), found that traditional corporate performance measurement which seeks

to find the impact on return on assets and return on sales, etc. are insufficient for

6

decision making by executives since they did not reflect the level in which the

organization is being able to meet strategic goals. The financial performance will be

measured through organizational performance with Return on Sales, Return on

Assets and Sales Growth as its variables. Employees who are aware and made part of

the decision making in the firm's financial performance would be motivated and

detennined to contribute to the growth of the firm. Therefore to fully understand the

impact a thorough research has to be made into Malaysian firms.

1.3 Research Objectives

This research will be conducted with the following objectives:

a) To investigate the impact of participative management on employee

effectiveness and organizational performance.

b) To investigate the impact of skill variety on employee effectiveness and

organizational performance.

c) To investigate the impact of task identity on employee effectiveness and

organizational performance.

d) To investigate the impact of task significance on employee effectiveness and

organizational performance.

e) To investigate the impact of autonomy on employee effectiveness and

organizational performance.

f) To investigate the impact of task feedback on employee effectiveness and

organizational performance.

7