High performance work practices and human resource management effectiveness: substitutes

The human resource management literature has implicitZv treated high performance work practices (HPWPs) and human resources management (HRM) efJectiveness as substitutesfor one another with respect to their relationship with .firm per.ft)rmance. We contend that HPWPs and HRM effectiveness act both as substitutes and as complements. Main effects reveal that only human resource management effectiveness affects market perfiHmance and that HPWPs affect innovation. However, interacting HPWPs with HRM effectiveness positively relates to both market performance and innovation in support of our hypothesis. The results suggest that effective HRM can offset HPWP :,. expense and that HPWPs can enhance the flexibility ofeffective HRM systems. High perfonnance work practices (HPWPs), through significant investment in employees, have been touted as a way to make organizations more flexible and effective. Often HPWPs are viewed as an alternative to traditional productions systems that are finnly rooted in Fredrick Taylor's scientific management and subsequent Fordist principles. However, we contend that having effective human resource structures (HRM effectiveness) can enhance the return on HPWPs because HPWPs require a heavy investment in human capital, that is lost if the firm cannot attract and retain quality employees. Conversely, effective HRM systems can benefit from the innovative capabilities of HPWP that enhance the organization's ability to adapt and change. Hence, we address the question, "Are HPWPs and effective HRM systems complements or substitutes?" We empirically test this question using data from the banking industry. First, we review the literature that supports these predictions. 134 Journal ofBusiness Strategies Literature Review and Hypotheses Vol. 21, No.2 High Performance Work Practices No one has consistently defined, or even uniformly named HPWPs (Baker, 1999; Becker & Gerhart, 1996; Delaney & Goddard, 1997; Wood, 1999). They have been called "high performance work systems," "alternate work practices," and "f1exible work practices" (Delaney & Goddard, 2001). Despite the name variances, many of these programs share common elements including rigorous recruitment and selection procedures, incentives based upon performance, and extensive training programs focused on the needs ofthe business (Becker, Huselid, Pickhus, & Spratt, 1997). Essentially HPWPs require heavy investment in human capital that is intended to enhance employee skills, knowledge, motivation, and flexibility with the expectation that the employer is providing employees the ability and the opportunity to provide input into workplace decisions (Van Buren, & Werner, 1996). Companies expect this empowerment to enable employees to adapt quickly and readily to rapidly changing product and labor market conditions, and to improve operational efficiency and firm performance (Becker & Huselid, 1998; Cappelli & Neumark, 1999). Although high performance work practices (HPWPs) have often been touted as being good for both employers and employees, these practices require significant investments in human capital via training, coordination of initiatives, and time for managerial and employee input. Because of the large investment in human capital, the value of these practices may be lost if the investment is not offset by increased efficiency and effectiveness. Among others, Cappelli and Neumark's (1999) review of the literature (Delaney & Goddard, 2001; Kling, 1995; U.S. Department ofLabor, 1993) suggests, on average, that HPWPs are associated with increased productivity. However, Cappelli and Neumark (1999) caution that by examining only productivity effects, researchers ignore the cost side ofthe equation. Despite this caution, numerous other studies also find a strong relationship between HPWPs and firm performance studies that do consider both the costs and the benefits of HPWPs (Huselid, 1995; MacDuffie (1995). Baker (1999: 28) concludes after extensively reviewing the literature, "The association ofvarious practices with strong financial performance has been firmly established by a stream of relatively solid research." Delaney and Goddard's (2001) review also ascertained that most research, with two exceptions, also finds an association between HPWPs and finn performance. Interestingly, the Cappelli and Neumark's (1999) study was one of two that found the costs did not offset the benefits but they concluded that the effects were neutral (neither positive nor negative for the employer). For our purposes, we use a perceptual measure of performance on four dimensions: marketing, sales growth, profitability, and market share. In sum, the bulk of the evidence is that HPWPs are associated with increased firm performance. Thus, we hypothesize: Fall 2004 Richard & Johnson: High Performance Work Practices 135 Hypothesis 1: More extensive use o/High Performance Work Practices will be positively associated with market performance. Nicholson, Rees, and Brooks-Rooney (1990) argue that human resources have an important role to play in facilitating innovation. HPWPs are focused upon such objectives as enabling people to think for themselves and to manage their own work (Lawler, 1986; Pfeffer, 1994). High performance work practices can increase innovation by: decentralizing management in order to allow employees to discover and use knowledge; encouraging team practices that allow learning to grow through increased multi-disciplinary knowledge; and putting that knowledge to good use (Laursen, 2002). That thinking is consistent with the seminal work ofBurns and Stalker (1961) who argued that the more organic the organizational form the more it stimulates organizational innovation. HPWPs systematically try to create organic organizations by moving decision-making downward. Laursen (2002) presents evidence that supports this contention. If the organizational objective is efficiency, more effective HRM systems are likely to increase firm performance, because HRM effectiveness focuses on building better production or service-delivery systems. In contrast, when a firm pursues innovative activities they are more likely to benefit from HPWPs since they move the level of decision making downward, making the organization better able to respond to environmental changes. Recent banking innovations have been associated with the ability to collect fees, and so we operationally define innovation as the proportion of non-interest income to total income. Hypothesis 2: More extensive use ofHigh Performance Work Practices will be positively associated with increased organizational innovation. Human Resource Management Effectiveness Pfeffer (t 994) argues that sustained competitive advantage emerges from effective human resource management. Huselid, Jackson, and Schuler (1997) define HRM effectiveness as "the delivery of high-quality technical and strategic HRM activities." Operationally, we define HRM effectiveness as human resource management satisfaction with various human resource activities. These notions of effectiveness are premised on the fact that it is difficult to implement HRM policies and practices successfully. The general assumption of the HPWPs literature is that firms implement these practices in a holistic, meaningful, and effective manner. However, as noted by Kling (1995) many firms implement these practices in a piecemeal fashion, which means that their efficacy is eroded by inconsistency and a lack of supporting HRM systems. Further, firms may adopt HRM practices for institutional reasons in contrast to adopting and implementing practices to provide a potent organizational force (Huselid, et al., 1997). Russo and Fouts (1997) note, for example, that what matters is how a firm employs its organizational capabilities and its ability to manage human resources because 136 Journal ofBusiness Strategies Vol. 21, No.2 resources or practices do not produce on their own. Further eroding firm effectiveness is an organizational environment confronting typical problems of turnover, absenteeism, and other workplace dysfunctions -particularly given the high level of investment in human capital that is required. Thus, HPWPs are by no means synonymous with effective HRM systems. Traditional HRM systems, predicated on an efficiency objective, offer stable procedures and protocols with set processes for dealing with routine employment problems such as absenteeism, discipline, and discharge. As noted by Perrow (1986, p. 4), "Bureaucracies are set up to deal with stable routine tasks; that is the basis of organization efficiency." Traditional HRM systems establish rules and procedures that promote consistency and fairness throughout the organization. Thus, an effective HRM system should enhance the firm's ability to attract and retain qualified employees and promote efficiency. However, effective HRM practices most likely lack the flexibility of HPWPs. lfthe firm is pursuing an innovation objective, then effective HRM practices may interfere with this goal by focusing on routines and rules that do not provide an environment conducive for stimulating innovation. Further, organizations that are structured to deal with stable routine tasks are less able to adapt to uncertain, dynamic environments. Consequently, we expect that: Hypothesis 3: Perceived human resource effectiveness will be positively associated with market perjhrmance. Hypothesis 4: Perceived human resource effectiveness will be negative(v associated with innovation. The Interaction of HPWPs and HRM Effectiveness Many organizations today face complex environments. Lawler (1986) notes that firms' management strategies must adjust and conform to the existing business environment. The present business environment demands that firms respond to change and, at the same time, promote efficiency. Thus, firms that can combine effectiveness and flexibility objectives may be in the optimal strategic position whether they are purs