HRMG801 Strategic Human Resource Management 7.5.

2014
Petra Saarinen (14839681)

Strategic Human Resource Management –

Link to Organisational Performance

Introducing the Topic: Vindicating Fundamentals of Strategic Human Resource Management

This paper aims to justify the relevance of Strategic Human Resource Management (SHRM) against
such claims: “The concept of Strategic Human Resource Management (SHRM) is fatally flawed,
based on an outdated understanding of strategy, a mistaken assumption that HR can impact on
business outcomes, and an erroneous view that employees are a resource!”

In order to disqualify such propositions, the essay starts by explaining the specific objectives of
SHRM by linking them to the grand objective of the discipline – improved organizational
performance. Subsequently, it demonstrates how bundles of HR practices affect both proximal and
distant organizational outcomes. Also the current understanding on strategy is discussed, and it is
proven to be in line with SHRM theories. Finally, the resource-based view (RBV), representing the
contemporary approach to SHRM, is validated.

Objectives and Impact of Strategic Human Resource Management

To begin with, already the fundamental economic principles support the importance of HRM; in
order for firms to generate return on investment and survive in the markets they must have the
required technology, know-how, and manufacturing processes to produce goods or services (Boxall
& Purcell, 2011). In other words, regardless of the industry, firms need to establish cost-effective
systems for managing work and people their production calls for (Godard, 2001). Accordingly,
SHRM is accountable for building a workforce that is effective, skilled, and motivated to perform in
lined with strategy at an affordable cost (Boxall & Purcell, 2011).

Furthermore, in order to sustain productivity in changing environment, firms should adjust their
labour needs and costs to market demands (Boxall & Purcell, 2001). Several SHRM practices
support this flexibility goal; for instance, optimizing the number of factory workers or ensuring
pioneering skills of R&D team to proactively lead market changes (Boxall & Purcell, 2001).

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In addition to the cost-effective and flexible labour objectives, gaining social legitimacy and
adjusting appropriate managerial power represent socio-political objectives, which are determined
based on society’s requirements. In other words, firms are pressured to conform to social values.
Interestingly, research has also confirmed a link between responsible Human Resource
Management and better organisational performance (Arnaud & Wasieleski, 2012; Hilliard, 2013)
highlighting the importance of responsible management.

The previously discussed objectives stand for critical and rather unavoidable elements for
businesses. They indicate that Human Resource Management is a central business function that
contributes to business outcomes. Nevertheless, the business potential of SHRM is fully understood
when its primary goal, improved organisational performance, is realized (Lee & Bang, 2012). The
reason for this is that Strategic Human Resource Management aims primarily at developing human
resource based competitive advantage, which differentiates it from traditional HR (Harris,
McMahan & Wrigh, 2012; Wan-Jing & Huang, 2005).

Human resource advantage refers to unique superior capability of the workforce (Boxall & Purcell,
2011). It includes both human capital, which stands for talent and capabilities of individuals, and
social capital, which refers to collaborative cross-functional processes (Boxall & Purcell, 2011).
Additionally, due to its intangible nature, this type of competitive advantage is difficult to copy,
which underlines its business potential (Lee & Bang, 2012; Harris et al., 2012).

Different Outcomes of Strategic Human Resource Management

When SHRM is accused of being unable to impact on business outcomes, it should first be clarified
what is meant by business outcomes of HR. Jiang, Lepak, Hu, and Baer (2012) explain that
outcomes occur in different levels: Proximal organisational outcomes are HR outcomes, such as,
employee skills and motivation, whereas distant outcomes embrace voluntary turnover, operational
outcomes, and financial outcomes.

Moreover, the authors argue that the outcomes occur in sequence (Jiang et al., 2012). Firstly, HR
practices generate HR outcomes referring to for example individuals’ skills, motivation or
behaviour. Secondly, HR outcomes mediate how the practices influence on operational outcomes
like productivity, product quality, and innovation. Thirdly, these outcomes affect financial
outcomes either directly or indirectly (Jiang et al., 2012).

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This sequence between SHRM practices and firm performance has been acknowledged by various
researchers (Dimba, 2010; Uysal, 2013; Harris et al., 2012). Additionally, empirical research has
demonstrated how the nature of different outcomes range from increase in commitment (Whitener,
2001) to decreased turnover (Guthrie, 2001) and better financial outcomes (Huselid, 1995). Some
studies suggest that from different HR outcomes motivation has the strongest link to firm
performance (Dimba, 2010) whereas others weight the value of human capital (Harris et al., 2012).

Jiang et al. (2012) introduce an insightful practical theory to understand how specific SHRM
practices can influence organisational outcomes. The authors suggest that employee performance is
a result of three key components: ability, motivation, and opportunity to perform (AMO theory).
Since business performance depends on employee performance, SHRM practices should influence
the three components (Jiang et al., 2012). Furthermore, as already explained, such practices leads to
increased motivation and human capital, then operational outcomes and decreased turnover, and
finally, financial outcomes.

To clarify the reason behind the theory in layman’s terms: When an employee with low skills is for
example trained, his or her competencies are directly increased (human capital). This increase in
human capital allows the person to produce higher quality work or work faster, which leads to
better productivity (operational outcomes). Higher productivity, in turn, has strong link to financial
outcomes (profit).

Human Resource Management possesses number of practices to increase individual performance:

HR planning, training, couching, compensation, career planning, health and security, and personnel
management (Uysal, 2013). However, to support the fundamental performance enhancing objective
of SHRM, practices must be designed according to business objectives (Brauns, 2013).
Consequently, SHRM designs sophisticated bundles of HR practices that are aligned with the
strategy – sometimes named as high-performance work systems (HPWS) (Lee & Bang, 2012) or
high-involvement work systems (HIWS) (Boxall & Macky, 2009). High-performance work systems
in SHRM can be seen to present the best micro models of HR practices (Boxall & Purcell, 2011).
However, since HPWS and HIWS thinking recognises also the importance of firms’ distinctive
strategies, it can be interpreted to integrate both “best practice” and “best fit” thinking, in other
words, aspects from both universal and contingency theories.

To conclude this chapter; SHRM is not simply a key business function that primarily manages
people and work, but merely a cluster of comprehensive HR systems that affect the different parts
of the business. Furthermore, both empirical and theoretical evidence links SHRM to employee

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behaviour, and consequently, to organizational performance. For that reason it can be vigorously
argued that Human Resource Management can influence business outcomes, therefore, justifying
the relevance of SHRM.

Contemporary Understanding of Strategy – Highlighting Agility and Actual Behaviour

Based on the previous discussion on sequence of outcomes, it can be argued that if employees act
consistent with organizational goals, their effort enhance business performance (Jiang et al., 2012).
Therefore, bundles of HR practices (i.e. HIWSs) should aim at influencing individual behaviour in a
way that complements a firm’s strategic goals.

Since strategy is a central concept in SHRM, it is important that the discipline has an accurate
understanding of its essence. In his book “Rethinking Strategic HR” Sullivan (2004) argues that in
order to be strategic, HR practices need to have broad impact, focus on future needs, create
competitive advantage, and impact on revenue as well as other corporate goals.

Hence the discussion in the previous section indicates that SHRM is able to create competitive
advantage, influence on revenue, and have a broad impact. Furthermore, since successful HR
initiatives impact for example quality and productivity goals in manufacturing (Jiang et al., 2012), it
can be argued to support also other corporate goals. Additionally, the flexibility goal of HR
represents the focus on future organisational needs (Boxall & Purcell, 2012). Therefore, according
to Sullivan’s (2004) definition, Strategic Human Resource Management truly is strategic.

As already explained, SHRM aims to align HR initiatives to competitive strategy. This is defined as
vertical fit according to contingency theory (Krishnan & Singh, 2011). The broad characterization
of competitive strategies is typically based on Porter’s analysis; therefore it suggests that firms
should choose between cost-leadership and differentiation (Boxall & Purcell, 2011). Horizontal fit,
in turn, proposes that HR initiatives should be strategically linked to each other in order to achieve
systemic effects (Krishnan & Singh, 2011).

Nevertheless, the present view on SHRM understands that HR practices should not only be aligned
with strategies but they should also contribute to strategy formulation (Krishnan & Singh, 2011).
Furthermore, it has been recently emphasized that although horizontal and vertical fit are useful
theoretical concepts, organisations should aim at creating exclusive fit (Boxall & Purcell, 2011).
This concept is explained further in the next capter that addresses resource-based view of the firm.

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Additionally, the current view on Strategic Management emphasises constant change and flexibility
(Krishnan & Singh, 2011) but realizes the need for appropriate planning (Brauns, 2013). Thus,
integrating both emergent and planned aspects in strategy work characterize contemporary view on
strategy. Brauns (2013) supports this proposition and defines strategies as “directional plans that
guide management actions in the pursuit of opportunities”. In other words, strategies should guide
organisational actions but still be agile and open for opportunities.

Although plans are a key part of strategy work, the current understanding on strategy has developed
towards a slightly different approach – behaviour emphasis. Strategy is believed to be embedded in
the important choices employees make (Boxall & Purcell, 2011). Thus, a firm’s strategy is the set of
strategic choices that can be identified from its actions. Specifically, it represents ways to deal with
strategic problems and to ensure viability as well as sustained advantage. Furthermore, the strategic
choice view stresses both ends and means, in other words, goals and their actual implementation
(Boxall & Purcell, 2011).

The strategy-as-practice (SAP) paradigm, which is acknowledged particularly in Europe (Rouleau,

2013; Vaara, 2013), embodies similar focus on decisions and actual behaviour. According to SAP,
strategy can be roughly defined as something that people do, instead of something that a firm has
(Rouleau, 2013). Vaara (2013) agrees with this definition and explains that strategy-as-practice
examines the social and organisational practices guiding strategy making. Hence, SAP underlines
institutionalised processes in strategy work.

The theories of Strategic Human Resource Management go well together with contemporary
understanding of strategy. Obviously they both aim at improved business performance, but most
importantly, they embrace a rather practical and behaviour centred view. In fact, this understanding
of strategy even increases the importance of SHRM. The reason for this is that strategy is embodied
in actual behaviours and choices of employees (Boxall & Purcell, 2011), which can be impacted
with SHRM (Jiang et al., 2012). Therefore, in practice SHRM ensures that employee behaviour
support organisational goals.

Additionally, by fostering participation and commitment SHRM enables firms to design the strategy
according to bottom-up insights and comprehensive knowledge of different business units. This
facilitates market monitoring and adapting to the dynamic environment.

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Human Capital – Significant Intangible Resource behind Competitive Advantage

Strategic Human Resource Management has adopted a resource-based view of the firm (RBV). It
proposes that valuable, rare, inimitable, and non-substitutable resources build competitive
advantage (Barney, 1991). Therefore, a bundle of top-notch resources lead to superior firm
performance. The nature of resources can be divided into two: physical (e.g. machinery, financial
resources) and human (e.g. people’s knowledge, skills and, abilities) (Barney, 1991).

Consequently, as mentioned in the claim against SHRM, current SHRM views people as intangible
resources. This can be straightforwardly justified. Drawing from the definition of resources;
employees’ capabilities are productive factors required in accomplishing activities and outcomes
(www.businessdictionary.com). Thus, employees’ knowledge, skills, and abilities give means to
accomplish tasks, which is why human capital can be viewed as resource.

Furthermore, according to Barney’s (1991) widely accepted characterisation of competitive

resources, people can be viewed as key resources in creating competitive advantage. Firstly,
employees are valuable; an employee with high capabilities perform better (Harris et al., 2012), in
other words, deliver superior competitive results (Boxall & Purcell, 2011). Secondly, employees
with high human capital are rare; companies might have difficulties in recruiting the best
individuals (Harris et al., 2012). Thirdly, human resources are inimitable (hard to copy) as the
knowledge and skills of an employee are built over time and they are often specific to the
organisational context (Harris et al., 2012; Boxall & Purcell, 2011). Fourthly, human resources are
non-substitutable as it would be infeasible to replace employees in a business unit without
significantly decreasing its performance (Boxall & Purcell, 2011).

Resource-based view of the firm provides significant contribution to the contemporary

understanding on Human Resource Management. Firstly, it supports the organisational performance
goal of SHRM as individuals with better skills, knowledge, and abilities improve firm performance
(Harris et al., 2012). Secondly, it suggests that human capital has greater potential to create
competitive advantage as it represents intangible resource, and thus, being more difficult to copy
(Harris et al., 2012). Thirdly, resource-based view aims at creating long-term advantage because it
suggests that firm specific human capabilities as well as distinctive corporate culture should be
build over time (Boxall & Purcell, 2011).

Anyhow, I believe that RBV’s ability to disconnect but still combine insights from both universal
and contingency school of thoughts characterizes its biggest contribution of SHRM. Consequently,

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RBV proposes that firms are heterogeneous and consists of unique bundles of resources (Boxall &
Purcell, 2011). In other words, BRV aims to establish inimitable clusters of human and physical
resources that exclusively fit to the environment and lead to superior performance (Jiang et al.,
2012; Boxall & Purcell, 2011). Therefore, it does not assume that market position and competitive
strategy would straightforwardly determine HR strategy or that there would be best practices every
company should adopt. Rather it emphasizes internal competencies of the company (Boxall &
Purcell, 2011) including both human and social capital (Jiang et al., 2012; Harris et al., 2012).

Although some researches focus strictly on human capital and succeed in indicating a link between
firm performance and employees’ high skills, knowledge and abilities (Harris et al., 2012), I believe
that the behavioural perspective could be further emphasized in RBV studies. This argument
follows both the current view on strategy and Porter’s criticism towards RBV; resources are not
valuable themselves but because they allow firms to perform activities, which may lead to
competitive advantage (as cited in Boxall & Purcell, 2011). Consequently, organisations should
make sure that their resources are appropriately and efficiently utilized.

Hence, in addition to fostering human capital, SHRM processes should encourage motivation and
build social capital. This would presumably foster productive and collaborative organisational
culture, which has been shown to generate sustainable competitive advantage (Seong, 2011) given
that each business unit is under the influence of culture (Boxall & Purcell, 2011). To sum up the
chapter, employees and specifically their human capital can be definitely viewed as resource, but in
order to get comprehensive insights in SHRM, the performance of these resources should be
highlighted.

Concluding Remarks: SHRM Turns Intangible Resources into Organisational Performance

The previous discussion has demonstrated how the concept of Strategic Human Resource
Management (SHRM) is far from being fatally flawed. Rather it is a core business function that has
major potential to create competitive advantage. Its practices motivate employees, enhance their
human capital, and build social capital, which boost organisational performance. Furthermore, it
supports both designing and implementing strategies. It creates agility and flexibility for change,
and sustains long-term success.

However, it would be naïve to argue that the theories and practical implications of SHRM would be
universally absolute. Like any other discipline it continues to evolve and its views change.

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Therefore, criticism is warmly welcomed. SHRM research for example struggles in drawing
generalized conclusions as different societies, industries, and organisations provide context specific
findings.

For example, the RBV appear to provide the most applicable insights for firms that compete
primarily with human capital, such as, high tech consulting companies. Therefore, firms operating
for instance in manufacturing and competing primarily with price are left to wonder whether human
capital advantage can be a relevant goal for them. RBV poses also other questions for multifaceted
companies: Who are the critical employees of the company? Is it possible to divide the people and
HR strategies for them, without damaging the culture?

Moreover, it seems that the discipline has not yet reached a comprehensive agreement on
fundamental theoretical underpinnings. Specifically, the links between “best practices”, “best fit”,
HPWS, HIWS, and RBV are not always consistent between researchers.

Anyhow, proposing that SHRM would be fatally flawed is based on false evidence, which has been
demonstrated in the previous chapters. In sum, SHRM can have a significant impact on business
outcomes, it holds contemporary views on strategy, and its fundamental resource-based view (RBV)
is valid while also making a considerable contribution to the discipline.

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