Academy of Strategic Management Journal, Annual, 2006 by Morsheda Hassan, Abdalla Hagen, Ivan Daigs
ABSTRACT
This pioneer study investigates strategic human resource management practices (employment security, selective hiring, self-managed teams and decentralization, comparatively high compensation contingent on organizational performance, extensive training and development programs, reduction of status differences, and sharing information) that treat a firm's human resources as valuable assets. Subsequently, this study investigates the relationship between these human resources management practices and a firm's labor productivity. The results of this study revealed a positive and significant relationship between five strategic human resources management practices (job security, selective hiring, self-managed teams and decentralization, extensive training and development programs, and comparatively high compensation contingent on organizational performance) and the company's labor productivity. While reduction of status differences has positive and insignificant relationship with the company's labor productivity, sharing information has a positive and marginal relationship with the company's labor productivity.
INTRODUCTION
Over the past decade, several studies (e.g., Cascio, 1991; Arthur, 1994; Huselid, 1995; Delery & Doty, 1996; Pfeffer, 1998; Hagen, Udeh, & Hassan, 2001; Bahattacharya & Doty, 2005) conducted within and across many industries demonstrate that enormous economic returns were obtained through the implementation of high commitment management practices. Furthermore, much of this research serves to validate earlier writing on participative management and employee involvement. Despite these research results, trends in actual management practice are, in many instances, moving in a direction opposite to what this growing body of evidence prescribes. Moreover, this disjuncture between knowledge and management practice is occurring at the same time that organizations, confronted with a very competitive environment, are looking for some magic solutions that will provide sustained success, at least over some reasonable period of time (Pfeffer, 1998; Lepak & Snell, 200; Koyes, 2001; Zollo & Winter, 2002).
Rather than putting their human resources first (Miller & Lee, 2001), many organizations have sought means to competitive challenges in places that have not been very productive. Such organizations treat their businesses as portfolios of assets to be bought and sold in an effort to find the right competitive niche, downsizing and outsourcing in a risky attempt to shrink or transact their way to profit, and doing other things that weaken or destroy their organizational culture in order to minimize labor costs (Pfeffer & Veiga, 1999). This pioneer study claims that the way an organization manages its human resources is a real and enduring source of competitive advantage. To support this claim, this study examines the relationship between the suggested strategic human resource management practices and labor productivity.
CORROBORATIVE EVIDENCE
CEOs frequently say, "Don't just give me anecdotes specifically selected to make some point; show me the evidence!" Fortunately, there is a substantial and rapidly expanding body of evidence that speaks to the strong connection between how firms manage their human resources and the economic results achieved. This evidence is drawn from studies of 5-year survival rates of initial public offerings; studies of profitability and stock price in large samples of companies from multiple industries; and detailed research on the automobile, apparel, semiconductor, steel manufacturing, oil refining, and service industries. It shows that substantial gains can be obtained by implementing high performance management practices (Pfeffer, 1998; Ellinger et al., 2002).
According to an award-winning study of high performance work practices of 968 firms representing all major industries, a one standard deviation increase in the use of such practices is associated with a 7.05 percent decrease in turnover and, on a per employee basis, $27,044 more in sales and $18,641 and $3,814 more in market value and profits, respectively (Huselid, 1995). That is an $18,000 increase in stock market value per employee. A subsequent study conducted on 702 firms in 1996 found even larger economic benefits: A one standard deviation improvement in the human resources system was associated with an increase in shareholder wealth of $41,000 per employee, about a 14 percent market value premium (Huselid & Becker, 1997). These results are not unique to firms operating in the United States. Similar results were obtained in a study of more than one hundred German companies operating in ten industrial sectors. The study found a strong link between investing in employees and stock market performance. Companies place workers at the core of their strategies produce higher long-term returns to shareholders than their peers (Bilmes, Wetzker, & Xhonneux, 1997).
One of the clearest demonstrations of the causal effect of management practices on performance comes from a study of five-year survival rate of 136 non-financial companies that initiated their public offering in the U.S. stock market in 1988. By 1993, only 60 percent of these companies were still in existence. The empirical analysis demonstrated that with other factors such as the company's size, industry, and even profits statistically controlled, both the value that a company placed on human resources (such as whether the company cited employees as a source of competitive advantage) and how the company rewarded people (such as stock options for all employees and profit sharing) were significantly related to the probability of survival. Moreover, the results were substantively important. The difference in survival probability for firms is one standard deviation above and one standard deviation below the mean (in the upper 16 percent and the lower 16 percent of all firms in the sample) on valuing human resource was almost 20 percent. The difference in survival, depending on where the firm scored on rewards, was even more dramatic, with a difference in five-year survival probability of 42 percent between firms in the upper and lower tails of the distribution (Welbourne & Andrews, 1996).
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