Literature Review of Human Resource Management in SMEs

This chapter looks into the vast array of previously done researches and the conclusion that can be drawn from these. The literature review generally summarizes the existing literatures that are available on this topic.

Definition of Human Resources Management:

The Human Resources Management (HRM) function includes a variety of activities, which includes mainly the staffing needs of an organization such as determining whether to use independent contractors or hire employees to fill these needs, recruiting and training the best employees, ensuring they are high performers, dealing with performance issues, and ensuring that the personnel and management practices conform to various regulations (Rao, 2000). HRM also includes managing the approach to employee benefits and compensation, employee records and personnel policies. The main objective of the HR is the maintenance of better human relations in the organization by the development, application and evaluation of policies, procedures and programmes relating to human resources to optimize their contribution towards the realization of organizational objectives (Schuler, 1990).

The human resources are managed to divert and utilize their resources towards and for the accomplishment of organizational objectives. Therefore, basically the objectives of HRM are drawn from and to contribute to the accomplishment of the organizational objectives.

The objectives of HRM are as follows:

To create and utilize an able and motivated workforce, to accomplish the basic organizational goals.

To establish and maintain organizational structure and desirable working relationships among all the members of the organization.

To provide the organization with well-trained and well-motivated employees.

To create facilities and opportunities for individual or group development so as to match it with the growth of the organization.

To secure the integration of individual or groups within the organization by co-ordination of the individual and group goals with those of the organization.

To attain an effective utilization of human resources in the achievement of organizational goals.

To ensure effective utilization and maximum development of human resources.

To help the organization reach its goals.

To equip the employees with precision and clarity in transaction of business.

To inculcate the sense of team spirit, team work and inter-team collaboration.

The scope of HRM is very wide. It is categorized under three major aspects. They are,

Personnel aspect:

This is concerned with manpower planning, recruitment, selection, placement, transfer, promotion, training and development, layoff and retrenchment, remuneration, incentives, productivity etc.

Welfare aspect:

It deals with amenities of the institution such as canteens, crèches, rest and lunch rooms, housing, transport, medical assistance, education, health and safety, recreation facilities, etc.

Industrial relations aspect:

This includes staff-management relations, consultation, collective bargaining, grievance and disciplinary procedures, settlement of disputes, etc.

HRM practices in SMEs

Large organizations generally have a well defined HRM to run their business operations, however, in the case of small to medium enterprises, they cannot afford to outsource their HRM or spend a lot in training and developing their HRM practices. Furthermore human resources management in the small and medium enterprises have been less researched which has created a white spot in this area.

Previous researches have shown that in SMEs, traditional personnel activities are not used regularly. According to (Anderson, 1997), personnel training or planning and development initiatives were not seen. In the case of SMEs lots of intangible and tangible implications of an unresponsive HR can be observed in small businesses needs. To begin with, lack of consultation and follow-through between the two sides, seems to be working against mainstream arguments, claiming that SME’s are loosing out to larger companies in the competition for skills. However, even SMEs acknowledge that it is vital to recruit younger employees as they are a necessary precondition for innovation and they tend to make a bigger difference within the organization. In addition to this the accountability and legitimization of HR is undermined due to the lack of consultation among the SMEs and researches. Human resource management which is not very flexible or responsive or adaptive would in all probability discourage businesses from operating at their peak performance levels which in turn will have a negative impact on the business community at large. Hence it is imperative that this trend be broken in order to realize a healthy growth in SMEs and HR domain making it more efficient and viable.

The first findings of the survey indicate that diversity exists, in as much as different types of employees and managers are handling the HR-issues. Secondly there seems to be status differences across the SMEs when it comes to HR. These to finding support the argument, that a universalistic approach to HRM is not fruitful. A Situational or a Configurational approach seems to produce more understanding.

Agency theory and family firm

This theory primarily focuses on the managers and the owners of an organization. According to (Jensen, 1976), agency costs can be defined as the overall expenses occurred due to the monitoring activities of the owners, the owners bonding expenses and the residual losses. The steps that can be taken by an owner in order to bring the interests of the managers into alignment are stated in the compensation theory which in turn makes use of the agency theory (Welbourne, 1995). It was also stated by (Heneman, 2000), that the study of various HRM practices can make use of agency theory. According to (Steier, 2003), family based firms can make use of agency theory by monitoring the contracts and various other coordination’s between the managers and the owners and making such interactions more efficient and cost effective.

(Randoy, 2003), use this logic to assert that family firms may use more informal HRM practices to reduce costs and improve profitability. (Pollak, 1985) describes the potential advantages in the family owned firm: incentives to act in the long-term interests of the family, effective monitoring of work activities, and selfless rationalities inherent in family grouping and loyalty to the family.

However, it has to be noted that there are situations in which a family member may not perform well, in which case the owners may be hesitant to take action against them for fear of damaging family relations. Hence (Schulze, 2003) describes this problem as an altruistic one because such behavior on the part of the owner may lead to their family members within the organization to shirk their duties. According to (Schulze, 2003), a positive relationship among the family based firms and their monitoring systems and performance may not always be due to increased agency costs.

The likelihood of family based firms to choose proper HRM policies is quite low mainly due to the owner’s expectations and familial obligations which influence their choice in choosing the right HRM policy. Moreover, family ownership is associated with a desire to remain independent and keep full control over the organization (Blais, 1990); (Bacon, 1996). Previous researches like (Koch, 1999) and case studies have indicated that employers generally tend to associate professional HRM practices with a loss of control over the employee, which would provide an additional explanation for a direct negative effect of family ownership and management on professional HRM practices.

HRM and Resource based view

(Wright, 1992), in their research reviewed a number of theoretical perspectives and proposed a resource based view in which they gave a rationale on how organizations human resources could provide a potential source of sustainable competitive advantage. The implications of resource based view on human resource management were provided by (Cappelli, 1992). They stated that a number of human resources models assume two things:

A few business strategies demand a unique set of behaviors and attitudes from employees.

A few HR policies produce a unique set of responses from employees.

Furthermore, they also stated that a lot of business strategy makers have assumed, even though empirical research seems to imply the opposite, that it is easier to rearrange complementary assets/resources given a choice of strategy than it is to rearrange strategy given a set of assets/resource. However, soon after another article was published that contradicted the potential for human resource practices to be a major source of competitive advantage (Wright P. M., 1994). They argued that in applying the concepts of value, rareness, inimitability, and substitutability, the HR practices could not form the basis for sustainable competitive advantage since any individual HR practice could be easily copied by competitors. Instead they proposed that the pool of skilled workers within an organization had more potential to sustain a viable competitive advantage. According to (Lado, 1994), a system of HR practices would be impossible to duplicate mainly because of all its intricate complexities and interdependencies among the practices and in fact this point is well accepted within the current HRM paradigm (Snell, 1996).

(Boxall, 1996), developed the resource based view of HRM and stated that the advantage of human resources depends up on the ability of the firm to hire potentially talented and skilled workers and the ability to develop employees and teams in such a way as to create an organization capable of learning within and across industry cycles. (Boxall, 1998) then expanded upon this basic model presenting a more comprehensive model of strategic HRM. He argued that one major task of organizations is the management of mutuality (i.e., alignment of interests) in order to create a talented and committed workforce. It is the successful accomplishment of this task that results in a human capital advantage.

A basic premise of human capital theory is that firms do not own it; individuals do. Firms may have access to valuable human capital, but either through the poor design of work or the mismanagement of people, may not adequately deploy it to achieve strategic impact. For example, (MacDuffie, 1995) focuses on the concept of discretionary behavior. Discretionary behavior recognizes that even within prescribed organizational roles, employees exhibit discretion that may have either positive or negative consequences to the firm.

HRM practices in family owned and managed firms

The differences that generally exist between the family and non family businesses have been extensively reported by a number of researches such as (Ward, 1987); (Leach, 1990). A large number of SMEs in UK are actually family based entities and yet (Cromie, 1995) and (Cunn, 1995) argue that more research is needed into the UK’s family businesses. Such researches are being done in places like the US. For example, research done by (Desmon, 1991), who undertook a detailed analysis of family businesses and reviewed a number of publications and literatures, has shown that only 4% out of the total 202 citations reviewed dealt with the development of human resources through training and education.

According to (Gersick, 1997), family businesses consider this a sensitive area because they are usually criticized for engaging in nepotism and then failing to provide management training for the family members concerned. Such businesses may be forced to employ, promote or end unemployment for close or extended members of their family. It also leads to excess pressure on the shoulders of the business owner to deal in an objective manner with their family members. The necessary starting point for these family businesses is to focus on their current HRM practices to identify any weaknesses that may exist. The most common reason for loss of productivity in family owned businesses is the lack of proper human resource management. Non family businesses run more efficiently because their main focus is on developing their organization and they do not have to deal with any obstacles or distractions in the form of family members.