Business Strategy, Human Resources, Labour Market Flexibility and Competitive Advantage

Jonathan Michie

Birmingham Business School, Birmingham

Maura Sheehan

Graduate School of Management, University of Dallas

A broad consensus has emerged on the positive relationship between the use of human resource policies and corporate performance. It is argued that HR policies that are consistent with the firm’s strategy – strategic human resource management (SHRM) – are more effective (Miles and Snow et al 1984). In addition, labour market deregulation and flexibility are regarded as key determinants of national competitiveness and successful corporate performance. This paper examines:

a) The effects of HR policy on firm performance

b) The links between strategy, HR and the use of flexible employment contracts

c) The moderating effects of strategy on the links between HR, flexible labour and performance

The link between strategy and HR management

a)      best practice (universalistic perspective) – may be embodied in a variety of concrete and detailed HR techniques or practices that will encourage sharing of information within the organization

b)      The contingency approach argues that to be effective, HR policies and practices must be consistent with the strategy being implemented (Miles and Snow 1978, 1984. Guthrie et al., 2002). Business performance will be improved when there is consistency (fit) between business strategy and HR policies.

c)      The configurational approach differs from the “best practice” and contingency theories by being guided by a holistic approach to inquiry and adopting the systems assumption of “equifinality” configurational SHRM is concerned with the “pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals” (Wright and McMahan, 1992: 298). The configurational approach suggests that the firm must develop HR as a system so that both horizontal and vertical consistency can be achieved. The configurational perspective suggests that improved performance will occur only when “vertical” or external consistency and “horizontal” or internal consistency are achieved.

Competitive Strategies

Porter describes competitive advantage as the “essence of competitive strategy” and proposes three strategies that companies can use to this advantage: innovation, quality enhancement and cost reduction. In companies pursuing a cost based strategy, the logical approach to HR strategy would be to emphasize numerical flexibility and wage cost minimization. In such situation, the values and goals imbued within HR would be consistent with the organization’s primary cost reduction goals (Hogue, 1999: 421)

Labour market flexibility and corporate performance

Labour market deregulation has been regarded as playing a key role in the drive for a competitive, flexible economy. On the one hand, the use of flexible work practices can result in savings on wage costs. First, work may be hired and paid for only if there is work to be done. Second, “flexible” workers on average earn less than comparable tenured workers and are not entitled to the benefits of that tenured workers receive, in addition, “the decisions to hire new workers is taken more easily if workers can be fired more flexibly under the adverse circumstances. In this way, part of the entrepreneurial risk is shifted to employees thus making job creation easier (Kleinknecht et al., 1997:2)

In addition, if the time horizons of firms become shortened, the pursuit of what economists would characterize as “efficiency gains” may come to dominate other sorts of gains to be had from innovation and technological progress. This becomes problematic if the pursuit of short-term efficiency gains reduces the potential of the system for economic progress (Kleinknecht, 1998; Michie and Prendergast, 1998).

For firm-level analysis, such flexible work practices are often placed into the following broad areas:

1. Numerical flexibility – is the ability of firms to vary the amount of labour employed, by making use of part-time, temporary and seasonal employees, short-term contracts, agency labour, freelance work and homework or out work. The use of this type of labour is commonly referred to as “flexible employment contracts or contingent labour.
2. Functional flexibility – the ability to move workers from one task to another.
3. Wage or reward flexibility – having payment systems in place that encourage and reward improved performance (for example, performance-related pay.

Whether or not a firm use the types of flexible practices outlined is likely to reflect a strategic decision made by management. In other words, the use of flexible employment is likely related to – contingent upon – the firm’s competitive strategy. In particular, firms that are pursuing a cost-based strategy will be more likely to use flexible labour compared to firms pursuing an “innovator/quality –enhancer approach.

Conclusion

One of the aims of managers who invest in “progressive” HR practices will be to achieve improved corporate performance. If successful, the costs of such policies can, of course be recouped. A pertinent question then tends to be what sort of strategy their firm should be pursuing. Additionally, how much should be invested in HR practices. The degree to which the adoption of HR practices will indeed improve corporate performance – in statistical terms, the size and significance of the effect – will vary according to a range of factors one being the strategy that the firm adopts. It may pursue “high road” strategy of investing in progressive HR practices in order to motivate the workforce, to enhance their technical abilities and to provide opportunities for them to work more productively. In such situations, HR investment will be positively correlated with productivity and profitability

Alternatively, the firm may choose a low road, cost cutting strategy. For firms pursuing this type of strategies, it is unlikely that there will be a high level of investment in HR. in addition, where such HR practices are pursued, while there is evidence of “best practice” – meaning that investment in HR in general, especially in a number of policies, is correlated with performance - such investments are less likely to be more correlated with statistically significantly improved outcomes than in the case of for firms pursuing quality and innovation strategies.

There is a reason to believe that the costs of investing in HR practices will be recouped through improved performance. However, for this to happen requires not just that the HR practices lead to higher levels of commitment and motivation among staff, it is also necessary for this to be matched, first by the skills to work more productively and, also, by the opportunities to put those skills and motivation to good effect. For these three factors to be present – motivation, skills and opportunities – HR practices must be pursued as coherent packages, and combined with appropriate work organization. The decisions from HR should be consistent and coherent. And second, where investment in HR practices is appropriate, the degree to which this investment will pay dividends depends in part on an appropriate bundling of such practices.