strategic hr orientation and firm performance in india

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Strategic HR orientation and firm performance in IndiaKuldeep Singha Faculty of HRM, Indian Institute of Management, Indore 452 012, India (tel: +91 731 321112 to 321 115; fax: +91 731 321 050; e-mail: [email protected]).Published online: 24 Jun 2010.

To cite this article: Kuldeep Singh (2003): Strategic HR orientation and firm performance in India, The International Journalof Human Resource Management, 14:4, 530-543

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Strategic HR orientation and firmperformance in India

Kuldeep Singh

Abstract This study tests the relationship between strategic HR orientation and firmperformance. The study has been conducted to add to the growing empirical evidence inthis field. The study has been carried out in the Indian setting, where the importance ofhuman resources has gained currency in the last decade. Results show that there isa significant relationship between strategic HR orientation and firm performance.

Keywords Strategic HR orientation; HR in India; Firm performance.

One of the dominant approaches in the field of human resource management during the lastten years has been to build evidence that links human resource practices with the broaderaspects of firm performance (Schuler and MacMillan, 1984; Schuler and Jackson, 1987;Purcell, 1989, 1995; Storey, 1992; Dyer and Reeves, 1995; Huselid, 1995; Purcell, 1995;Becker et al., 1997; Delery, 1998; Pfeffer, 1998; Wright and Snell, 1998; Gratton et al.,1999, 2000; Guest, Michie, Sheehan and Conway, 2000; Storey, 2001). These studies havebeen useful in generating awareness of the links between human resource management andstrategic management, as also in offering insights into the rationale for the linkage.Consistent with the recent work in the field, the present study attempts to generate moreevidence for the growing body of research in the field of strategic human resourcemanagement. The key contribution of this study lies in providing evidence from adeveloping economy like India where the role of human resource management as a keydriver of business performance has gained currency in the late 1990s.

Problem statement and purpose of study

The roots of the personnel function in India can be traced back to the early 1920s whenthe Tata group implemented employee welfare measures like provident funds and leaverules. The Trade Union Act of 1926 gave formal recognition to the worker unions. TheRoyal Commission of 1932 recommended the appointment of Labour Officers. Afterindependence, the Factories Act of 1948 outlined the welfare measures for workers, asalso the roles and responsibilities of Labour Welfare Officers. All these developments laidthe foundation of the personnel function in India (Balasubramanian, 1994, 1995). In the1950s, two professional bodies, namely, the Indian Institute of Personnel Management(IIPM) and the National Institute of Labour Management (NILM), were set up. In the1960s, the scope of the personnel function began to expand beyond the welfare aspects,with the three areas of labour welfare, industrial relations and personnel administrationdeveloping as the constituent roles of the emerging profession (Venkata Ratnam andShrivastava, 1991). In the 1970s, the focus of the personnel function shifted towards

Int. J. of Human Resource Management 14:4 June 2003 530–543

Prof. Kuldeep Singh, Faculty of HRM, Indian Institute of Management, Indore 452 012, India(tel: +91 731 321 112 to 321 115; fax: +91 731 321 050; e-mail: [email protected]).

The International Journal of Human Resource ManagementISSN 0958-5192 print/ISSN 1466-4399 online © 2003 Taylor & Francis Ltd

http://www.tandf.co.uk/journalsDOI: 10.1080/0958519032000057574

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greater organizational efficiency and effectiveness issues. In the 1980s, issues like humanresource management (HRM) and human resource development (HRD) started invadingthe domain of the personnel function. The setting up of two professional bodies, theNational Human Resource Development Network (NHRDN) in 1985 and the Academy ofHuman Resource Development (AHRD) in 1990, further augmented the evolution of thepersonnel function. These two bodies accelerated the shift of the personnel functiontowards the human resource management and development orientation. Firms across thecountry responded by adopting HRM/HRD nomenclature for their personnel functionand appointed professionals to head these functions.

Today’s business environment in the Indian context, after initiation of economicreforms in 1991, requires that the HR function plays a strategic role. After the recentliberalization of economic policies, the increased level of competition by overseas firmshas put a lot of pressure on the human resource function in domestic firms to prepare anddevelop their employees, so that these firms are able to compete with overseas firms inskills, efficiency and effectiveness (Krishna and Monappa, 1994; Venkata Ratnam, 1995;Budhwar and Sparrow, 1997; Sparrow and Budhwar, 1997). The inclination of firmswhich have come under pressure from economic liberalization has been to look for ananswer to human resource development rather than to human resource management(Ramaswamy and Schiphorst, 2000). Studies undertaken in India have shown a very lowto moderate relationship between human resource management practices and firmperformance (Singh, 1999). However, no empirical work has been carried out in theIndian context to study the impact of a strategic HR orientation on firm performance. Itis in this context that the present study was undertaken to gain an understanding of thestrategic orientation of HR prevalent in Indian firms as well as its relationship with firmperformance. Further, it would be of interest to Western firms to know what is happeningin India in the HR field as they find India an attractive place to invest in because of itshuge domestic market (Datt and Sundharam, 1999).

Theoretical framework

Strategic human resources management has emerged as a dominant area of researchamong scholars and practitioners in different parts of the world. This is apparent from therecent literature on international human resource management (e.g. Schuler et al., 1993),as well as from recent reviews of the trends in the US (Dyer and Kochan, 1995; Schulerand Jackson, 1999), Canada (Betcherman et al., 1994) and the UK (Lundy, 1994; Trussand Grattan, 1994; Guest, 1997; Patterson et al., 2000). The argument that better humanresource planning is the basis of superior business performance has received supportfrom various angles, even from authors whose overall work reflects a critical attitude tostrategic human resource management (SHRM) (Mueller, 1996). It has become a widelyheld premise that people provide organizations with an important resource of sustainablecompetitive advantage (Prahalad and Hamel, 1990; Pfeffer, 1994; Wright et al., 1994)and that the effective management of human capital, not just physical capital, may be theultimate determinant of organizational performance (Adler, 1988; Reich, 1991). Ferriset al. (1990) found that construction firms with higher levels of strategic, including HR,planning have achieved higher organizational performance (see also Ferris et al., 1984;Cook and Ferris, 1986). Nkomo’s (1987) study did not find significant differencesbetween the performance of firms using formal human resource planning and firms thatdid not. Delaney et al. (1988) surveyed US firms but could not establish a strongstatistical correlation between HR programmes supported by senior management andfirm performance. Abowd (1990) found that the degree to which compensation for

Singh: Strategic HR orientation and firm performance in India 531

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532 The International Journal of Human Resource Management

managers was based on an organization’s performance was significantly related to futureperformance.

Gerhart and Milkovich (1990) found that pay mix, i.e. pay structure having a fixedcomponent and a performance-linked variable component, was related to organizationalperformance. Leonard (1990) found that organizations having long-term incentive plansfor their executives had larger increases in return on equity over a four-year period thanother organizations. Further, the studies show that comprehensive selection and trainingactivities are frequently correlated with both productivity and organization performance(Russell et al., 1985; Kleiner et al., 1987; Terpstra and Rozell, 1993; US Department ofLabor, 1993). Huselid (1993, 1995) identified a link between the organizational leveloutcomes and groups of high-performance work practices.

Snell (1991) found that the effect of input control, behaviour control and outputcontrol on sales growth and return on assets (ROA) was contingent on the clarity of thecause-effect relationship and standards of performance. Delaney and Huselid (1996)found positive associations between human resource management practices, like trainingand staffing selectivity, and perceptual performance measures. Further studies havereported significant correlation between strategic HR effectiveness and employeeproductivity, cash flow and market value (Huselid et al., 1997; Barnes and Huselid, 2000).

In summary, the studies conducted so far indicate a varying degree of relationshipbetween HR practices and firm performance, ranging from no relationship at all to lowto moderate relationship (Arthur, 1994; Osterman, 1994; Huselid, 1995; Ichniowski et al.,1995; MacDuffie, 1995; Drago, 1996). However, all the studies have been undertaken inUS settings and elsewhere, and, to add validity to this growing stream of research, moresuch studies in diverse settings like India need to be conducted. Further, as firms areentering a more dynamic world of international business and as the globalization ofworld markets continues apace, comparative issues appear to be gaining momentum(Brewster et al., 1996; Budhwar and Debrah, 2001). For example, the recent developmentsin developing nations (such as liberalization of economies by China, India, the LatinAmerican countries, and Eastern and Central Europe) have brought about a need to learnabout the pattern of HRM system(s) pertinent to various regions of the world (Budhwar,2000). These developments strongly suggest the need for more cross-national HRMstudies, especially in emerging markets (Clark et al., 1999; Budhwar and Debrah, 2001).Hence the present study was undertaken to find out the linkages between strategic HRorientation and firm performance in the Indian context.

Objective of study and method

The main objective of the present study was to ascertain the relationship betweenstrategic HR orientation and firm performance in the Indian setting. The various variablesused to measure these two constructs are described as follows.

Strategic HR orientation

Though there are many HR practices which may have an impact on the firm performance,for the purpose of present study, HR practices related to manpower planning, recruitmentand selection, evaluation, compensation, employee training and staffing were selected.The selection of these HR practices was based on the literature support as well as theirprevalence in Indian firms as indicated during the pilot study.

In this study, I defined strategic HR orientation as ‘the alignment of HR planning,selection, evaluating, compensating, developing, and staffing practices with the businessstrategies of the firm’. Firms that develop a strong strategic HR orientation will make use

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of a bundle of HR practices to transform employees as the basis of sustainable competitiveadvantage (Lam and White, 1998). The process of creating sustainable competitiveadvantage has been cited recently by theorists of strategic management to describe howfirms can trace their successes to their internal stock of resources (Prahalad and Hamel,1990; Barney, 1991; Bartlett and Ghoshal, 2002). Viewed from this perspective, humanresources are treated on a par with technological or physical resources in terms of havingthe same strategic potential. This strategic perspective has led Wright and his colleaguesto urge organizations to focus on the serial steps of recruitment, compensation and trainingin order to attract and develop competent employees (Wright and Snell, 1991, 1998;Wright and McMahan, 1992; Becker et al., 1997).

Following the above approach, the existence of a formal written human resources planis identified as the first critical strategy that strategic HR-oriented firms will employ, as theexistence of a written HR plan based on the strategic business plan of the firm will helpthe firm in anticipating and planning for the acquisition of strategic competencies. Mereplanning will not work unless efforts are made to acquire those strategic competencies.Therefore, strategic HR-oriented firms will use selection practices to ‘locate relevantcompetencies and attract them to the organization’ (Wright and Snell, 1991; Bartlett andGhoshal, 2002). Simply having competent employees will not ensure high performanceunless a system to evaluate the working of those competencies is in place. Therefore,strategic HRM-oriented firms will employ a performance evaluation system linked tostrategic goals. Competent employees are not necessarily loyal. To retain competentemployees, firms will be required to have a competitive level of compensation and fringebenefits (Balkin and Gomez-Mejia, 1990; Gerhart and Milkovich, 1990, Gomez-Mejia,1992; Bloom and Milkovich, 1998). Thus, firms will use strategic objective-linkedcompensation systems to improve employee retention and firm performance. However, tosustain high performance, a firm needs further developmental investments to maintain thelevel of superior HR competence (Magnum, Magnum and Hansen, 1990; Bartel, 1994).Therefore, a firm, in order to sustain high performance, needs to employ strategic goal-based employee training. Finally, firms can sustain high performance despite compellingeconomic and technological pressures if the workforce can respond quickly, easily andcheaply to changes (Atkinson, 1985; Terpstra and Rozell, 1993). Therefore, strategic HR-oriented firms need deployment of staffing patterns based on the strategic needs.

Firm performance

In conducting studies of corporate performance, researchers of strategic managementhave recommended using multiple measures of corporate performance (Venkatraman andRamanujam, 1986). Consequently, three measures of corporate performance were usedin this study. The first measure was return on assets. A firm’s return on assets is anindicator of accounting profitability. It was computed by dividing the operating incomeby total assets in 1993. The second measure used was growth in sales. It was computedby averaging out annual growth in sales between 1995 and 1998. This measure indicateshow well customers accept the firm’s products or services. The third measure used wasprice-cost margin. Price-cost margin was calculated by dividing profit beforedepreciation, interest and taxes (PBDIT) by net sales and calculating the average for theperiod 1995 to 1998 to take care of the variations.

Impact of strategic HR orientation on firm performance

Does strategic HR orientation have an impact on firm performance? Yes, for at least twocompelling reasons. The first is in the form of the cost advantage enjoyed by strategic


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HR-oriented firms due to reduction in employee absenteeism and turnover rates.Employee absenteeism or frequent quitting entails higher costs for firms. The annual costof unscheduled absence has been estimated to range from $250 to $500 per employee(Cascio, 1995). In the case of turnover, the firm incurs additional cost in terms ofadvertising and hiring to fill the vacant position. Thus, there will be an increase inreplacement costs in terms of additional recruiting and training (Cascio, 1995). Thesereplacement costs can be minimized if firms incorporate HRD activities into theirstrategic business plans so that they can rely more on existing employees to fill vacantpositions (Friedman and LeVino, 1984).

The second reason is that the strategic HR-oriented firm will lay greater emphasis onthe development of their employees due to a stronger emphasis on the recruitment,training and compensation of employees. The development of employees into a highlycompetent workforce has been argued to produce competitive advantages that are morevaluable and also more difficult to imitate (Pfeffer, 1994). Therefore, a strong strategicorientation may result in significant economic benefits to the firms (Gatewood and Field,1994; Cascio, 1995).

Research methodology

Sample

The database for the current study was drawn from firms listed in the BT (BusinessToday) 500 Indian firms. This listing was selected for three reasons. One, all the firmsrepresenting major domestic industries in India, ranging through automobiles and autocomponents, cement, iron and steel, hotels, chemicals, consumer durables, consumernon-durables, engineering, financial services, info-tech, pharmaceuticals, paper andpower and so on, are listed in it. Two, it may be helpful in generalizing findings of thestudy across a broad spectrum of firms. Three, this database regarding Indian firms is theonly authentic source available for undertaking such a type of study.

Criterion for selection

A firm was included in the sample if its name figured consecutively for three years in the1995, 1996 and 1997 BT 500 listing. A firm is included in the listing for three years if ithas performed consistently on parameters like profits, growth, quality of people, etc.

Respondents

The questionnaire had to be filled by the person heading the HR function in the company,most often a director (HR) or a president (HR) or a vice president (HR).

Overall response rate

The above procedure generated responses from eighty-four firms, out of a sample size of359 firms and, thus, the overall response rate was 23.40 per cent (Table 4 in the Appendixprovides details). The survey was administered using the total design method (Dillman,1978). The response rate compares favourably with the earlier studies undertaken in thisfield (Schuster, 1986; Delaney et al., 1989; Guest and Peccei, 1994; Youndt et al., 1996;Harel and Tzafrir, 1999).

Measurement and sources of data

The study used multiple sources to collect data on strategic HR orientation and firmperformance.


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Strategic HR orientation The data on strategic HR orientation were collected usinga survey technique. Based on the BT database, senior HR executives (director orpresident) were contacted in 1998. The survey was administered using the total designmethod, which involves pretests, pilot tests, pre-notification letters, first-round mail, firstfollow-up letters, second-round mail and second follow-up letters.

As defined previously, strategic HR orientation was conceptualized as the alignment ofHR planning, selection, evaluating, compensating, developing and staffing practices withthe business strategies of the firm. Therefore, the six variables used to measure strategicHR orientation included manpower planning, recruitment and selection, evaluation,compensation, training and staffing. Each of these variables had three items and there wasa total of eighteen items in the questionnaire. The respondents were asked to evaluate afirm’s strategic HR orientation on these items (on a six-point scale). For questionnairedetails, please refer to the Appendix.

The values of Cronbach’s alpha (� � .67) and interclass correlation (rwg � .51)indicated that the scale had achieved acceptable levels of inter-item and inter-raterreliability (James, 1982; Glick, 1985; Judd et al., 1991). As the convergence level wasvery high, the items were averaged to compute individual respondent ratings, and thenmeans were computed to measure strategic HR orientation for each firm and, finally, themeans were averaged out to compute the strategic HR orientation index (SHROI).

Corporate performance The sources of data for the firm performance measures werefirm’s annual reports, Business Today (BT) 500 database and the Centre for MonitoringIndian Economy (CMIE) database.

Control variables

In order to control the influence of external factors, dummy variables for size, age,research and development (R&D) expenditure and unionization were used. The selectionof these control variables was made after HRM literature review (Freeman and Medoff,1984; Lewis, 1986; Huselid, 1995). The control variable for age was in the form ofnumber of years the firm has been operating in India. Another control variable used wasthe size of the firm, in the form of natural logarithm of the number of the employeesworking in the firm. The level of firm performance may be affected by the intensity ofresearch efforts that characterize each industry (see Dess et al., 1990). This industrycharacteristic was measured by averaging the ratio of R&D expenses and sales of thesampled firms in each of the industries. Finally, unionization or union density wasanother control variable used in the study.

Results

Table 1 provides the descriptive statistical information (e.g. means, standard deviationsand correlations) for all measures. Table 2 shows the results for multiple regressionanalysis of the relationship between strategic HR orientation and firm performance.

The data in Table 2 indicate that the beta coefficients of several factors in the regres-sion equation are statistically significant. For example, age ( p � .001) and unionization( p � .01) have a significant relationship with sales growth. Similarly, R&D expenditurehas a strong relationship with return on assets and price cost margin (p � .01). Thefindings also indicate that, after controlling for firm variations and industry effects,the strategic HR orientation index is strongly related to return on assets and also to othermeasures of firm performance.


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Tabl

e 1

Des

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30.9

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0.33

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0.13

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–5

Age

18.5

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0.07

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23**

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0.07

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0.03

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0.12

0.18

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0.14

–8

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R

3.73

1.55

0.27

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; ***

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.

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Therefore, the results of this study strongly support the research question as there aresignificant financial returns accruing to the firms that used strategy-linked humanresource planning, selection, performance evaluation, compensation, training andstaffing practices. Thus, through the use of strategy-based HR policies and practices,firms create a more competent and committed workforce, which in turn provides a sourceof sustainable competitive advantage. Overall, the results indicate that strategicalignment of HR policies and practices with business plans helps to sustain the level ofcompetence that is created by firms’ HR practices.

Discussion and conclusion

The purpose of this study was to investigate the relationship between the strategic HRorientation and firm performance in the Indian context. Strategic HR orientation wasdefined as the alignment of HR planning, selection, performance evaluation,compensation, development, staffing practices with the business strategies of the firm.The research premise of the study was that strategic HR-oriented firms would performbetter by making use of a low-cost sustainable competitive advantage. The data onstrategic HR orientation were obtained from Indian firms belonging to nineteenmanufacturing and service industries. The findings have shown that the firms withan emphasis on strategic HR orientation performed significantly better than the firms witha lower emphasis. This indicates that financial pay-offs will be higher if firms strategicallyalign and invest in their human resources. The significant relationships shown by thisstudy between strategic HR orientation and firm performance are consistent withinstitutional theory and the resource-based view of the firm (Tolbert and Zucker, 1983;Baron et al., 1988; Barney, 1991; Wright, McMahan and McWilliams, 1994).

However, the findings should be interpreted carefully, as there are number oflimitations which also represent opportunities for future research. One such limitation is

Table 2 Multiple regression analysis of the relationship between strategic HR orientation and firmperformance

Independent variables Dependent variables

Return on assets Sales growth Price cost margin

1 Size – 0.09 0.17 0.07(– 0.13) (0.09) (0.12)

2 Age – 0.04 – 2.01 – 0.81(– 0.31) (– 4.52**) (– 1.83*)

3 Unionization – 0.02 – 1.94 – 0.87(– 0.29) (– 4.01**) (– 1.81*)

4 R&D expenditure – 144.02 – 143.37 – 198.34(– 2.53**) (– 1.03) (– 2.79**)

5 Strategic HR orientation index 3.87 9.74 4.24(2.01*) (2.13**) (2.14*)

Intercept – 0.02 51.47 – 0.04(– 0.002) (1.99*) (2.24*)

Adjusted R2 0.23 0.27 0.03F ratio 4.95*** 5.29*** 1.41N 84 84 84

NoteT values in parentheses. One-tailed tests. *p � 0.05; **p � 0.01; ***p � 0.001.

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the ‘static’ nature of the study, that is, the study is based on a one-time view of certainaspects of the firm rather than collection of data at different periods of time. Thus, futureresearch should be based on data collected at different periods of time to determine moreprecisely the relationship between strategic HR orientation and firm performance.Second, the data related to strategic HR orientation were collected from a single sourceand, therefore, rater bias might have set in. Future studies could use a multi-rater method,particularly collecting data from heads of other functions. Third, the generalization of thefindings should be limited to domestic firms in India. Future studies can solve thisproblem by covering more than one nation or including firms of a transnational nature.Fourth, another note of caution to be kept in mind while interpreting the results is that itcould be that firms with higher performance simply have more resources to devote totheir HR practices. Finally, the role of other contingency variables, such as organizationalculture, climate, political considerations (Ferris et al., 1998) and business strategy(Richard and Johnson, 1999), as mediators or moderators of relationship between strategicHR orientation and firm performance needs to be explored.

Despite the above limitations of the present study, there are certain implications forpractitioners. First, the role of HR is generally seen in ensuring that firms are able toattract, retain, motivate and develop the human resources according to current and futurerequirements. However, the findings of present study point out that HR can also help todevelop and sustain the competitive advantage. Second, the results show that firms canreap higher financial pay-offs by strategically aligning their HR policies and practices.This implies that the head of the HR function should be included at strategic decision-making level by top management of the firm like heads of other functions. This strategicrestructuring could then allow the HR director to help in selecting strategic alternativesso that HR strategies could be formulated to support organizational strategic choices(Hall, 1984). Third, the findings of the study may help the HR managers to argue theircase for securing resources required for creating strategic HR orientation in the firm.

Appendix

Table 3 Questionnaire details and items used for computing strategic HR orientation index(SHROI) along with descriptive statistics

S. No. Item Mean and SD* (n � 84)

1 Existence of a formal written HR plan based on the strategic needs 4.74 (.61)of the firm

2 Involvement of the HR head/official in the strategic business 4.62 (.54)planning process

3 Clear delineation of employee competencies required for the 5.01 (.64)implementation of chosen business strategy/ies

4 Extent to which required employee competencies are reflected 5.11 (.55)in recruitment and selection methods

5 Extent to which HR function is involved early in selection of 4.70 (.57)potential candidates

6 Existence and measurement of customer satisfaction of hiring 4.84 (.61)processes

7 Existence of evaluation practices that seeks out and rewards 5.12 (.68)knowledge management practices

8 Average change in performance appraisal over time 5.03 (.59)

(continued)

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References

Abowd, J.M. (1990) ‘Does Performance-Based Managerial Compensations Affect CorporatePerformance?’, Industrial and Labor Relations Review, 43: 52–73.

Adler, N.J. (1988) ‘Organizational Development in a Multinational Environment’, Journal ofApplied Behavioural Science, 349–65.

Table 4 Sample descriptive statistics (n � 84)

Industry wise classificationIndustry % of sample Industry % of sample

Inf. tech. and tele. 5 Paper 4Auto and auto components 6 Chemical 7Eng. and projects/const. 18 Utilities 2.5Sugar 2.5 Shipping 1Pharmaceutical 13 Steel and iron 8Textiles and yarn 8 Consumer goods 8Cement 1 Packaging 1Financial services 2.5 Diversified 5Hotel and hospitality 4 Diversified 5Aluminum 2.5

No. of organizations from manufacturing sector: 70 (83%)No. of organizations from service sector: 14 (17%)Mean: 3,282 employeesMinimum: 105 Maximum: 22,000

Table 3 (continued)

S. No. Item Mean and SD* (n � 84)

9 Existence of effective performance appraisal processes for 4.77 (.63)dealing with poor performers

10 Existence of compensation practice linked to firm’s goals 3.97 (.51)and objectives

11 Compensation practice that rewards strategically focused 4.37 (.58)competencies, motivations and employee behaviours

12 Compensation practice that attracts, retains and motivates 4.46 (.61)high performers

13 Existence of strategically needed employee development and 4.91 (.71)advancement opportunities

14 Existence of training methods tailored to employee competency 4.87 (.66)growth

15 HR function’s involvement in developing necessary strategic 5.14 (.55)leadership competencies

16 Existence of diversity of race and gender by job category 4.27 (.53)17 Existence of cross-functional teamwork 4.07 (.67)18 Existence of employees with experience outside their current 4.24 (.72)

job responsibility or function

Notes* Standard deviation values are in parentheses. Scale: To what an extent the firm is characterized by [questionnaire item]:1 � Not at all 3 � To a partial extent 5 � To a great extent2 � To a very little extent 4 � To a large extent 6 � To a very great extent

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strategic hr orientation and firm performance in india

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