Effects of Strategic Human Resource
Alignment Mechanisms on Firm
Productivity in Belgian Medium-sized
and Large Enterprises
Tim De Feyter, Marie-Anne Guerry
HUB RESEARCH PAPER 2010/08
MAART 2010
only publishes short accounts of research (letters will not exceed 2000 words in length). For more information on the theoretical and empirical background, please contact:
tim.defeyter@hubrussel.be
E
FFECTS OF
S
TRATEGIC
H
UMAN
R
ESOURCE
A
LIGNMENT
M
ECHANISMS ON
F
IRM
P
RODUCTIVITY
IN
B
ELGIAN
M
EDIUM
-
SIZED AND
L
ARGE
E
NTERPRISES
Tim De Feyter 1*
and Marie-Anne Guerry 2**
1
Centre for Corporate Sustainability, Hogeschool-Universiteit Brussel, K.U.Leuven Association, Stormstraat 2, B-1000 Brussels, Belgium 2
Centre for Manpower Planning, MOSI, Vrije Universiteit Brussel, Pleinlaan 2, B-1050 Brussels, Belgium
Abstract
This article studies the relationships of different strategic human resource alignment mechanisms and firms’ productivity, by using data on 610 Belgian medium-sized and large enterprises. The results show that efforts to achieve a fit between strategic objectives and human resource practices are associated with higher productivity, regardless the alignment mode. Furthermore, it is found that organizational capacities to adapt to changing circumstances and employee remuneration are important components in understanding the link between strategic human resource fit mechanisms and firm productivity.
Keywords: Strategic HRM, Firm productivity, HR process
Introduction
It is well known that the fit between human resource (HR) practices and organization’s strategic objectives is one of the core elements in strategic human resource management (SHRM). Empirical research has shown that this vertical fit positively affects organizational performance (e.g. Wall and Wood, 2005). The linkage between HR practices and corporate performance can be attained by two vertical alignment mechanisms. The top-down approach suggests that suitable HR practices should be adopted, such that the necessary human capital is available, allowing the organization to execute its business plan and to fully exploit market opportunities. On the other hand, inspired by the resource-based view on a firm (Barney, 2000), recent theoretical work in
*
E-mail: tim.defeyter@hubrussel.be, Tel: +32 2 6098274, Fax: +32 2 2101619
**
Tim De Feyter and Marie-Anne Guerry 2
SHRM suggests that firms can gain a sustainable competitive advantage by selecting a competitive strategy that fully exploits firm’s available human capital. In this bottom-up approach, the focus of HR practices is on developing human capital that holds the potential of contributing to firm’s long-term performance.
Both vertical alignment mechanisms require strong HR efforts during the strategic planning process, but if organizations effectively achieve a fit between HR practices and organization strategy, they can be expected to increase added value and firm productivity. Most SHRM research implicitly assumes that effectively achieving vertical alignment is easier by the top-down approach than by the bottom-up approach (Khatri, 2000). However, since the late 1990s, some researchers question the phase in the strategic planning process in which HR should be considered and argue in favour of the bottom-up approach. If the firm is confronted with low HR flexibility to adapt human capital availability, it could be hard to change its internal HR system (Wright and Snell, 1998), which is raised as an argument against the top-down approach. Moreover, some researchers argue that the bottom-up approach results in better firm performance than the top-down approach (Brockbank, 1999).
In this article, we compare the associations of both vertical alignment mechanisms and firm productivity, considering the degree of flexibility which the company is confronted with during the strategic planning process. Besides HR flexibility, we also consider strategic flexibility. Indeed, the extent to which a company is able to redirect strategic decisions on its competitive position could in turn affect the success of the bottom-up approach.
Against this background, our study is focused on comparing the productivity of four different firm categories. Traditional planners (category I) are firms that do not strive for vertical alignment during the strategic planning process or lack vertical alignment consistent with the lack of strategic planning. Moderate planners on the other hand take either a top-down approach (category II) or a bottom-up approach (category III) to achieve a fit between HR practices and organization strategy. Finally, advanced planners (category IV) use both vertical alignment mechanisms.
Method
In this study, we collected data on 610 Belgian medium-sized and large enterprises with at least 50 employees, based on a survey among HR managers in 2006. The companies were selected from the Trends Top database. This database contains financial data of Belgium’s largest companies and is constructed based on published annual accounts. From this dataset, additional information on firms’ productivity was extracted, measured as the share of personnel costs in value added (PC/VA) and the value added per employee (VA/E).
HR flexibility was assessed with an additive 4-item index measuring the extent to which traditional HR practices for adjusting the internal human capital availability (recruitment, training, promotion and redundancies) can be successfully realized before the period for which the personnel requirements are determined. Strategic flexibility is
operationalized as an additive 4-items index grounded in work by Gerwin (1993). The respondents were asked to assess the extent to which four structural firm characteristics (financial resources, know-how, technical and managerial capacity) hinder short-term adjustments to strategic choices.
Since the objective of this article is to compare the relations of vertical fit mechanisms and firm productivity, we used several items in the questionnaire to assign companies to one of the four considered firm categories. First, strategic planning efforts are measured by a dummy variable, which is based on the question whether or not the company develops a strategic plan that includes the future objectives of the company and the way they try to achieve them. Firms who said that they do not do this were assigned to the category of traditional planners. Second, to assign the other firms in our sample, we performed a deductive two-step cluster analysis (Ketchen and Shook, 1996) based on two variables indicating the level of top-down and bottom-up efforts during the strategic planning process. Eight items in the questionnaire were used to construct an additive index for both vertical alignment mechanisms. While the level of top-down efforts was measured by the degree in which firm’s HR practices are determined by its competitive position and previous strategic decisions (e.g. competitive strategy), the level of bottom-up efforts was measured by the degree in which the internal HR system (e.g. available human capital, competencies and experience) influences the future strategic decisions. Finally, the categorization procedure resulted in a subdivision of the sample in traditional planners (n=237), moderate top-down planners (n=133), moderate bottom-up planners (n=108) and advanced planners (n=80).
Analysis of covariance (ANCOVA) was conducted to determine whether the four planning modes differed in terms of productivity, after the effect of the strategic planning dummy and the effect of firm size (number of employees), capital intensity and industry characteristics (munificence, dynamism and complexity) as covariates was removed. Capital intensity was measured as the tangible fixed assets divided by the number of employees, industry munificence and dynamism was calculated by the procedure suggested by Keats and Hitt (1988) and industry complexity was calculated by using the MINL formula (Schmalensee, 1977).
Results and discussion
Table 1 shows the estimated average productivity for each of the four firm categories. Consistent with previous research, the results show a significant association between vertical alignment and productivity. More specifically, traditional planners have a higher PC/VA and a lower VA/E than moderate and advanced planners. The results do not show a significant difference in productivity between moderate top-down and moderate bottom-up planners. This is not in line with the statement by some researchers that the bottom-up approach is superior to the top-down approach (in terms of firm performance). In comparing the productivity for moderate and advanced planners no significant difference in PC/VA can be shown and VA/E is significantly higher for advanced than for moderate planners. In the relationship between HRM and financial performance,
Tim De Feyter and Marie-Anne Guerry 4
because added value serves at compensating firms’ personnel costs, VA/E is considered to be a mediator between vertical alignment and PC/VA. In similar circumstances, there exists a strong relationship between PC/VA and VA/E. The average personnel cost per employee however is significantly higher (+12.13%) for advanced than for bottom-up moderate planners. This explains why, in comparison with moderate planners, advanced planners in terms of VA/E seem to benefit from combining both vertical alignment modes, but not in terms of PC/VA. Consequently, assuming a strong relationship between pay, staff qualifications and employee value for the firm, one could attribute the average productivity effect of advanced planners to their staff qualifications instead of their vertical alignment efforts. However, the results are robust to the inclusion of personnel cost per employee as control variable in the ANCOVA model.
Table 1. Estimated productivity per planning mode
Traditional planners Moderate top-down planners Moderate bottom-up planners Advanced planners PC/VA * 76.99 74.40a 74.10a 74.97a VA/E (in euros) ‡ 64 630 69 550b 67 750b 76 210
Notes: * R²=0.326. ‡ R²=0.247.
Means with the same alphabetical letter in each row are not significantly different from each other (α=0.05). Controlled for industry characteristics, strategic planning efforts, firm size and capital intensity (productivity is estimated at total sample means for the control variables).
Subsequently, the impact of strategic and HR flexibility on productivity within each of the four planning modes is explored. Interaction terms between flexibility and firm category are therefore added to the ANCOVA model. Table 2 shows for each of the four firm categories the expected productivity difference that high flexibility makes in comparison with low flexibility, with high (low) flexibility being more than (less than or equal to) the total sample mean on the flexibility scales. The results confirm the expectation about the positive association between HR flexibility and the effectiveness of the moderate top-down mechanism. However, since this negative association is also present for moderate bottom-up planners, this does not confirm the proposition made in previous research that in a context of low HR flexibility the bottom-up approach is a better alternative than the top-down approach. Moreover, an additional comparison of the effects of both vertical alignment approaches indicates that in case of a lack of HR flexibility the bottom-up approach has no significant better impact on productivity than the top-down approach.
Furthermore, we expected an influence of strategic flexibility on the effectiveness of the bottom-up approach. The findings support this proposition. First, as can be seen from Table 2, moderate bottom-up planning strengthens the positive association between strategic flexibility and firm productivity. Second, moderate top-down planners on the other hand seem not to benefit from strategic flexibility. Their vertical alignment mechanism even significantly reduces the positive impact of strategic flexibility on
VA/E. In addition, a comparison of the effects of both vertical alignment approaches shows that with low strategic flexibility the top-down approach has a better impact on VA/E (+8.01%) than the bottom-up mechanism, but incorporates no significant improvement of PC/VA.
Table 2. Paired comparison of estimated productivity within four different planning modes
Traditional planners Moderate top-down planners Moderate bottom-up planners Advanced planners PC/VA
High vs. low HR flexibility -1.75% -5.18%* -5.77%* 0.73% High vs. low strategic flexibility -2.93%** -0.67% -5.04%* -3.62% VA/E (in euros)
High vs. low HR flexibility -4.02% 2.60%* 8.86%** -6.99% High vs. low strategic flexibility 12.58%** 3.19%* 27.35%** -3.26%**
Notes: Significance test for interaction effects (only for moderate and advanced planners) and main effects of flexibility. The reported estimated change in productivity includes both main and interaction effects. Controlled for industry characteristics, strategic planning efforts, firm size and capital intensity (productivity is estimated at total sample means for the control variables).
** p<0.01 * p<0.05.
Based on the theoretical propositions, low strategic flexibility implies that the bottom-up approach is less effective than the top-down approach, while low HR flexibility makes it hard to reach a fit by the top-down mechanism. For advanced planners, unless strategic as well as HR flexibility is low, because they use both mechanisms, the productivity would suffer neither from low strategic flexibility nor from low HR flexibility. Despite the results on the effect of low HR flexibility on the productivity of moderate bottom-up planners, these propositions are supported by the results for advanced planners in Table 2. This contradiction can be explained by the implicit underlying assumption about the positive impact of the bottom-up approach. This alignment mechanism is proposed to have an impact on productivity, because it allows the firm to exploit the strengths of its human resources. Obviously, this implies that those human resources hold the potential to contribute to the development of a competitive advantage. Nowadays, in a turbulent economic environment, HR strengths are found in employee skills and behaviour that are focused on innovation and quality improvement. Contrary to the top-down approach which responds to turbulence in the economic environment by quickly and flexibly translating strategic change into HR capabilities, the bottom-up approach relies on innovative HR capabilities which provide a unique market position. It is well known that high-commitment HR practices support the development of those HR strengths, what relies much less on continuously changing HR practices. Lopez-Cabrales et al. (2009) however have shown that employee’s knowledge and skills serve as a mediator in the relation between high-commitment HR practices and innovative activities. As discussed above, the results indicate that employees of advanced planners on average have much more knowledge and skills than employees of moderate planners. This could explain why in case of a lack of HR flexibility advanced planners,
Tim De Feyter and Marie-Anne Guerry 6
unlike moderate bottom-up planners, successfully achieve a fit between strategic objectives and firm’s available human capital, resulting in a productivity improvement.
Conclusions
Using survey data and published financial data, we examined the association between strategic HR alignment mechanisms and firm productivity. The results show that vertical fit efforts during the strategic planning process are related to better productivity, regardless the vertical fit mode. The findings indicate that the effectiveness of bottom-up and top-down alignment is hampered by respectively low strategic flexibility and HR flexibility. In such circumstances, the fit modes seem to be valuable alternatives for each other given that the firm succeeds in developing strong human capital. This would successfully increase added value per employee, but this surplus serves at compensating the additional firms’ personnel costs.
References
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