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Summary Literature Organisational Behaviour
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Summary literature Organisational BehaviourWeek 1
Chapter 5: Strategy, HRM and performance: a contextual approach – Paauwe & Farndale
Introduction
The association between human resource management (HRM) and performance has become a ‘holy grail’ or
‘panacea’ promising to link a new way of thinking about how people are managed in organizations with
commensurate organized goals.
Huselid demonstrated a significant positive correlation between HR system sophistication and market value per
employee among a range of publicly quoted firms in the USA. After this, many studies followed that were
similar. Studies incorporate various combinations of HRM practices, and focus on both the individual and
organizational level of analysis. There have been published a great number of papers on the HRM-performance
relationship, demonstrating the prominence of the field among academics, consultants and practitioners across
the globe.
At the same time, there are many challenges still facing the field, such as missing elements; inappropriate
theorizing with respect to the HRM and performance concepts; and a lack of insight in the underlying
mechanisms and processes that explain why HRM practices and systems contribute to the performance.
Achievements to date
The roots of HRM in the USA came from two well-known models: Beer and colleagues’ Harvard model and
Fombrun, Tichy and Devanna’s Michigan school model. The first was more of a broader stakeholder model and
the last one was a more functional, managerial approach to HRM.
Paauwe presents an overview of the empirical studies that were subsequently published on the HRM-
performance link. As the field matured, review studies started to emerge, one of the first of which was Paauwe
and Richardson’s summarizing framework. This framework started to clarify the differences between HRM
outcomes and organizational outcomes. This raised one of the question inherent in the field at that time: the
need for greater conceptual clarity and theorizing in the HRM and performance relationship. By asking
questions about what everything meant, the black box problem arose. What are the mechanisms that help to
explain the link between HRM practices and policies on the one hand and organization performance on the
other.
Important points from linking HRM and performance:
The article will now focus on a few papers, which they believe help to summarize the achievements in the field
to date.
Boselie, Dietz and Boon focused in their study on strategic HRM empirical studies, including multiple HRM
practices and performance measures. HRM is conceptualized in terms of carefully designed combinations of
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,such practices geared towards improving organizational effectiveness and hence better performance
outcomes. They conclude that much – though by no means all – of the empirical HRM research in its systems
from has been found to matter (in a positive sense) for organizational performance.
Performance itself can be measured in multiple ways. Dyer and Reeves suggest three levels of outcomes:
- Financial
- Organizational
- HRM
Financial indicators can be influenced by a whole range of factors that have nothing to with employees and
their related skills or with the human capital pool. Productivity is the most common and popular variable
among the organization-level outcomes, followed by product and service quality. As far as employee attitudes
and behaviours are concerned, the most commonly used are employee turnover and absenteeism.
The study from Wall and Wood concludes that the evidence for an effect of HRM on performance is promising
but only circumstantial, due, for the most part, to inadequate research design. Overall, therefore, they
conclude that the existing evidence for a relationship between HRM and performance should be treated with
caution.
Combs and colleagues did a study to establish whether high performance work practices (HPWPs or WPWSs)
have a higher impact on performance than individual practices and if HPWSs are more effective in
manufacturing than in service settings. Their conclusion is: HPWPs impact on organizational performance is not
only statistically significant, but managerially relevant. They also established that HPWSs have a stronger effect
than individual HRM practices.
The study from Subramony was aimed at testing the value of bundling
HRM practices on the basis of their empowerment, motivation and skill-
enhancing effects. This approach to HRM relates to the AMO theory of
ability, motivation and opportunity, whereby the latter is defined by
Subramony as empowerment enhancing. Their study links HRM practices
and bundles with business outcomes. The conclusion is that the three
bundles have significant and positive relationships, with outcomes like
employee retention, operation performance and financial performance.
Moreover, the three bundles correlate more strongly with business
outcomes than their constituent practices, which confirms the conclusion
by Combs and colleagues, that bundles/systems have stronger effects than
individual HRM.
The last study is from Jiang and colleagues. They explore the mechanisms between HRM systems and both
proximal outcomes (human capital and motivation) and distal outcomes (turnover, operational performance
and financial performance). They conceptualize HRM practices in three distinct dimensions: skill-enhancing,
motivation-enhancing and opportunity-enhancing. Skill-enhancing implies strengthening human capital, and
motivation-enhancing HRM practices imply increasing the motivation of employees. These two sets are
selected as the most critical mediating factors. Their findings reveal that all three HRM dimensions have
significant and positive effects on human capital and motivation and that skill-enhancing HRM practices
explained the largest percentage of variance in human capital. Motivation-enhancing and opportunity-
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,enhancing HRM practices had a significantly stronger effect
on motivation that the skill-enhancing set of HRM practices,
as was expected. The authors also found that operational-
and employee-level outcomes had a mediating effect on the
relationship between HRM practices and financial
outcomes.
To conclude we can confirm that HRM practices, be they
individual or bundled in a system, are at least to some
extent, related to firm performance.
Challenges in HRM and performance research
Despite all of the evidence showed above, many
commentators remain skeptical of both HRM as concept
and of the HRM and performance link. Some make the argument that: empirical evidence for the existence of
an HRM-performance link is inconclusive, a statistical association in, and of itself, constitutes neither a theory
nor an explanation.
Levels of analysis
A common problem, particularly in earlier HRM and performance research, has been confusing the levels of
analysis in a study. There should be two levels of analysis; at the individual level and/or organizational level.
Another important rule is to not confuse measuring HRM in terms of individual practices or bundles/systems of
practices.
Boselie, Dietz and Boon conclude that the three most commonly used theories are: Contingency theory, the
resource-based view (RBV) and the AMO framework. Contingency theory and RBV are both at the
organizational level and the AMO framework focuses on the importance of taking into account variables at the
individual level, in addition to the organizational level.
Contingency theory and RBV are mainly focused on the performance effects of HRM from a business
perspective, whereas the AMO framework has its foundations in industrial and organizational psychology and
can be applied both at the individual level of analysis as well as the organizational level.
Wright and Boswell have contributed to this debate by distinguishing between macro (strategic, organization-
level) and micro (individual-level) HRM research.
The difference between intended, enacted, and experiences is critical to understanding the HRM and
performance link. In the exploration of the HRM and performance relationship, it’s important not to forget
about the employees!
In this figure you can see some of the linkages between
HRM and organizational performance through
employee-related pathways.
According to Guest there are a few following phases n
HRM and performance research:
- The beginnings Conceptual frameworks
linking strategy to HRM
- Empiricism
- Backlash and reflection
- Conceptual refinement
- Bringing the worker centre-stage
- Growing sophistication
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, Causal order
The issue of causality is a recurring theme as most empirical papers exploring the relationship between HRM
and performance are based on cross-sectional research. This can only represent an association rather than
testing causality.
Unravelling the mysteries of the ‘black box’
A black box can be defined as ‘an unclear mechanism going on between the input and the output of a
relationship’. If we want to say something about the HRM performance relationship and the black box that
occurs in-between, we must distinguish between micro, meso and macro levels of analysis.
The micro level of HRM is related to the fields of organizational behaviour and industrial and organizational
psychology, and is focused on the individual employee and his or her attitudes and behaviours. The meso level
of HRM examines the impact of HRM practices at the organizational level, whilst the macro level is concerned
with issues outside the organization and the influence of this external context.
Black box 1: Context/societal level of analysis
Organizations form an integral part of society, and, as such, the HRM decisions taken inside organizations are
influenced by events at the (macro) organizational, industry, national and international level. It’s thus
important to understand the societal context of the organization when trying to unravel the HRM and
performance relationship. Theories that explain processes at this level of analysis include; institutional theory,
the five-forces theory and the contextually based theory of the firm. Paauwe developed the contextually based
human resource theory (CBHRT), which depicts different dimensions and forces. The CBHRT combines both
strategic management theories as well as a more institutional perspective.
Black box 2: Connecting societal and organizational levels of analysis
At the organizational (meso) level of analysis, common theories used to explore the HRM-performance
relationship include the RBC of the firm, AMO theory, strategic climate theory and human capital theory. It’s
problematic however, to specify these theories as operating purely on organizational level as they often make
the connection either between macro and meso level (RBV, strategic balance theory) or between the meso and
micro level (strategic climate theory, human capital theory, AMO theory).
Black box 3: Connecting organizational and individual levels of analysis
At the individual level of analysis, many theories are available to explain the HRM-performance relationship.
This level is particularly focused on sending HRM signals towards employees that will affect them in such a way
that they are willing to display ‘desired’ attitudes and behaviours and subsequent HRM outcomes in return.
Black box 4: Individual level of analysis
At this individual level of analysis, we rely on the field of organizational behaviour as an important source of
inspiration for unravelling the underlying mechanisms in the HRM-performance relationship. The black box
concerns the processes occurring in the human mind that could be affected by HRM practices. Clues to how
this works can be found in theories such as organizational justice theory, attribution theory, psychological
contact theory, the ‘broaden and build’ theory and social contagion theory. These explain the part of the
relationship that occurs between the attitude of an employee and the HRM outcomes. There are many
employee and organizational factors that can ultimately affect the HRM-performance relationship.
Black box 5: Connecting the individual level to the organizational level
This part of the HRM-performance relationship is the least explored to date. Relational coordination theory can
be applied at the micro and meso levels of analysis and at any point in between. Another example is the agency
theory. We can conclude that the black box between HRM and performance will never be solved by applying
any individual theory: it will always depend on the level of analysis and the kind of linkages being explored.
HPWSs: Balancing performance and well-being?
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