“Visit any two SMEs. Compare and contrast their HRD practices” Under the guidance of Mr. Jatinder Singh A Project Report Submitted in partial fulfillment of the requirements for the award of the degree of
Master of Business Administration
This is to certify to that Project at “Visit any two SMEs. Compare and contrast their HRD practices”
Submitted in partial Fulfillment of the requirement for the award of the degree of
Master of Business Administration
I would like to acknowledge and thank from the deepest portion of my heart to all the people who were help me to complete this Project. To start with I would like to thank my institute, Rai Business School for providing me this opportunity. I would like to thank my mentor here Mr. Jatinder Singh who gave me his valuable inputs so that I could start my interns from the right direction. Last but not the least; I would like to thank my parents and teachers for supporting me to achieve this level.
I would like to thank all those people who have given their precious time for this Project.
I hereby declare that project conducted at “Visit any two SMEs. Compare and contrast their HRD practices” Under the guidance of Mr. Jatinder Singh Submitted in Partial fulfillment of the requirements for the degree of
MASTER OF BUSINESS ADMINISTRATION (Industry Integrated)
RAI BISINESS SCHOOL, NEW DELHI
Is my original work and the same has not been Submitted for the award of any other Degree/ Diploma or other similar titles or prizes.
Place: New Delhi Date:
Introduction: A qualitative assessment is used to identify and describe the "gaps" between concerns entrepreneurs have about human resource management issues in growing small and medium-sized enterprises (SMEs) and the topics emphasized in the research literature on human resource practices in SMEs. Survey data from 156 young entrepreneurs, focus group data from 173 CEO/founders of fast-growth entrepreneurial firms, and 129 research articles were reviewed. Results revealed gaps and omissions in the literature, including the importance to entrepreneurs of developing high-potential employees that can perform multiple roles under various stages of organizational growth and the matching of people to the organizational culture. Recommended perspectives for future research are identified. Small and medium-sized enterprises (SMEs) are vital to the U.S. economy. For example, of the 5,369,068 companies in the U.S. in 1995, 99.7% had fewer than 500 employees and 78.8% had fewer than 10 employees (USSBA, 1997). Even in larger firms (i.e., 500+ employees) entrepreneurial units (e.g., new product development teams) can be loosely construed as small businesses. Given the importance of SME employees to the U.S. economy, it is disheartening to note that scant attention in the SME research literature is given to the study of human resource management practices. No matter where you look, in surveys (e.g., Hornsby & Kuratko, 1990), in reviews of the literature (e.g., Good, 1998), and in empirical studies (Heneman & Berkley, 1999), scholars are lamenting the dearth of information about human resource management practices in SMEs. An equally important concern is the apparent mismatch between practitioner concerns regarding human resource practices and academic research. For example, a recent survey of 641 small business entrepreneurs identified labor shortages as their number one concern (National Federation of Independent Business, 1998). However, only a handful of research studies have ever been conducted on recruiting practices in SMEs (Heneman & Berkley, 1999). By comparison, literally hundreds of studies have been conducted on recruiting practices in large wellestablished organizations (Heneman, Heneman, & Judge, 1997). The lack of information about human resources in SMEs is problematic for theory, research, and practice. Current human resource theory is often developed and tested in large organizations. As a result, little is known about the extent to
which the theory extends to smaller entrepreneurial organizations. This is problematic given that a critical component of sound theory is the delineation of those circumstances, such as organizational size and structure, that serve as boundary conditions to the theory (Klimoski, 1991; Miner, 1980; Personnel Psychology, 1993). In research, the size of the employer is with limited exceptions (e.g., executive compensation), often omitted in the study of human resource management practices. When size is used, it is most often only considered as a control variable. Given the observed differences in human resource practice effectiveness between employers of varying size (e.g., Deshpande & Golhar, 1994), it is clear that more attention should be given to the interaction between firm size and human resource practices. This is very difficult, however, absent sound theory and information on human resource practices in SMEs. Because the theory, for the most part, does not extend to SMEs, the research that is used to test the theory and the limited insight derived from the research may not be relevant to the needs of practitioners. That is, human resource theory and the research being conducted may not be congruent with the actual human resource issues challenging SME practitioners in the field. Moreover, practitioners may be unaware of practical issues that they should be conscious of that can be identified and explained through academic research. The purpose of the present research is to identify the "gaps" or areas of unanswered questions that exist between the current literature on human resource practices in SMEs and the human resource issues perceived to be important by the entrepreneurial leaders of SMEs. Where "gaps" or areas of unanswered questions exist, the study offers future research perspectives that may be useful for outlining an approach to filling these "gaps" in the knowledge base. The goal is to provide descriptive information that can be used by those developing theory, those conducting research, and those managing SMEs. Three descriptive databases were developed to examine the differences in the importance of specific topics in human resource management between CEO/founders of SMEs and scholars. Each database is described briefly followed by a discussion of the descriptive data collected. SUMMARY OF DESCRIPTIVE DATA COLLECTED:
To discern the importance of various human resource management issues, the research involved an in-depth qualitative assessment of a variety of management issues including human resource management practices that challenge the creation and growth of SMEs. Two separate, but related, studies were employed for this purpose. In 1997 and 1998, the Kauffman Center for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation conducted a series of in-depth focus groups with CEO/founders of high-growth SMEs. The purpose of the gatherings was to discuss the issues and circumstances in high-growth circumstances that entrepreneurs recognized as "defining transitions" in the life of their firms. Once identified, each transitional event was discussed in great depth to ascertain how the situation was successfully managed. A total of 173 CEO/founders participated in the gatherings. To be eligible to participate, an entrepreneur had to be the founder and current CEO of the firm. The firm had to have annual revenues in excess of $3 million. Annual growth rates had to exceed 30% per year in revenues for the most recent three years and/or 20% per year in the number of full-time employees. According to national statistics (Birch, Hagerty & Parsons, 1995; Kirchoff, 1995), these criteria assured that the participating entrepreneurs were leaders of firms in the top 1% of fastest-growing SMEs in the U.S. The participants represented firms in most major industry categories (i.e., manufacturing, services, retail, wholesale, financial/real estate, construction, and transportation) and several high-technology sectors. The firms ranged in age from 2 to 48 years, with a mean of 14 years. Average annual revenues were $20 million and the average number of full-time employees was 80. Approximately 35% of the participating entrepreneurs had start ed more than one business. The focus groups were conducted in accordance with the methodological procedures outlined by Krueger (1988). Trained moderators conducted the focus groups around a series of prepared questions that were designed to prompt the entrepreneurs to recall specific transitions in the growth and development of their firm. The issues identified provide a base line of evidence for the types of issues that define transitional moments for fast-growth SMEs and the manner in which entrepreneurial leaders manage these transitions. In particular, several of the focus groups concentrated on the core human resource management issues that define transitions for growing organizations. As such, the human resource management transitions discussed provide a significant framework from which to study the role of human resources in SMEs.
The focus groups were recorded and content analysis was performed on the computerized transcripts according to the methods specified by Abrahamson & Park (1994). Each transcript was reviewed and each human resource management concept was coded according to the categories used by the Society for Human Resource Management (SHRM) and the Human Resource Certification Institute to define the body of knowledge in human resources (Brown & Fyock, 1995). The coding categories and the counts for each category are listed in Table 1. As shown in column 1 of Table 1, staffing, compensation, and reward issues seem to be of most relevance to CEO/founders of high growth SMEs. To confirm the results from the focus groups, the Kauffman Center conducted a survey in 1998 of the learning needs of young, growth-oriented entrepreneurs. The survey was distributed to the approximately 1,100 U.S. members of the Young Entrepreneurs Organization (YEO). The entrepreneurs were asked to indicate the most important areas for which they and their organizations required additional learning. Two independent raters coded the openended responses across 50 categories. Participation in the survey was voluntary. A total of 156 usable responses were collected for an overall response rate of approximately 14%. Of the respondents, 73% were in organizations with 50 or fewer employees, 16% were in organizations with 100-199 employees, and 11% were in organizations with 200 or more employees. Female entrepreneurs accounted for 13% of the respondents. Tests for significant differences between respondents and non-respondents and between respondents and the U.S. membership of YEO found no significant differences in terms of size of the firm, age of the firm, age of founding entrepreneur, and primary industry. From the survey responses depicted in Table 2, it is evident that young entrepreneurial leaders of SMEs are actively seeking additional knowledge about human resource management issues. Human resource management issues were referenced in a number of ways ranging from the most frequently cited category, "employees," to specific human resource functions like "recruitment" and "compensation." If all of the counts for human resource management topics are added together (i.e., employees, recruitment, retention, motivation, training, rewarding, compensation, negotiations), human resource management issues are mentioned a total of 69 times, or 17% of the responses. Interestingly, in another part of the learning needs survey, the most frequently mentioned area of personal need listed by the young entrepreneurs was "work/life balance," and it was mentioned by 24% of the respondents. These results indicate that human resource
management issues are of significant professional and personal concern to young entrepreneurs and they are actively seeking new information about these topics. The study followed with an exhaustive review and categorization of the research published on human resource issues in SMEs. The researchers used Welsch & Klandt's (1997) extensive bibliography and several manual and electronic searches to identify the body of literature to be reviewed. A total of 403 articles were identified from a variety of sources including books, magazines, journals, and conference proceedings. Five trained, independent raters read, abstracted, and coded the abstracts of all 403 articles. In order to compare the results with the results from the focus groups of entrepreneurs, the research abstracts were also coded according to the categories identified by the SHRM and the Human Resource Certification Institute. Results of the research classification are listed in column 2 of Table 1. A complete bibliography of the works consulted is available upon request. A total of 129 articles that explicitly addressed human resource management issues in SMEs were analyzed separately according to the same procedures (five independent raters read, abstracted, and coded approximately 25 articles each according to the thematic framework provided). These results are listed in column 3 of Table 1. Most of the articles can be characterized primarily as 'thought' pieces and descriptive case studies. Of the 129 articles (32% of the 403 articles reviewed) explicitly addressing human resource topics in SMEs, only 17 (15%) used analytical statistics to test specific hypotheses. The topics, journals, and authors for these 17 articles are summarized in Table 3. Relative to all other topics in the classification scheme, staffing and compensation issues are the most frequently covered in the literature. "Gaps" between the topics that entrepreneurs are highly interested in or think are important and the topics covered in the research literature were identified by comparing the three "percentage" columns in Table 1 and by comparing Table 2 with the percentage columns in Table 1. The underlying assumption is that if the published research adequately addresses the human resource management issues that entrepreneurs are concerned about, the percentages would be similar across samples. It can be assumed that the research has adequately addressed or perhaps over emphasized those topics where the percentage of articles is greater than the percentage of focus group responses. Those topics where the percentage of articles is substantially lower than the percentage of focus group responses, however, represent future research opportunities.
Relative to one another, staffing issues appear to be emphasized less in the literature than they are of interest or importance to the entrepreneurs. Compensation, on the other hand, seems to be emphasized in the literature at about the same level as which entrepreneurs expressed a concern or need for information. Before interpreting these findings, however, one caveat is in order. These topics surfaced in the context of focus group discussions regarding growth in SMEs. While this is an important goal for many SMEs, it is not the only goal and it is not one pursued by all SMEs. Had the focus groups been in the context of goals other than growth, the answers may have been different. However, to the extent that growth is an important goal to many SMEs, we feel that the results are important. Exhibit 1 lists in summarized fashion the comments expressed by the CEO/founder focus group participants regarding staffing practices. A review of the staffing counts indicates that CEO/founders of SMEs are very concerned about competencies of employees and matching these competencies with organizational rather than job requirements. Competencies referred to usually comprise beliefs, values, and interests rather than basic knowledge, skills, and abilities. Matching is referred to in the sense of aligning applicant competencies with organizational values and culture rather than aligning basic knowledge, skills, and abilities with minimum qualifications for the job. Exhibit 2 lists by respondent the comments covered in the focus groups under the compensation/rewards category. A review of Exhibit 2 indicates that CEO/founders view compensation in a very broad context. More than just money, compensation, in their view, includes recognition, quality of life, learning, and psychological characteristics of work. This list contrasts with traditional compensation topics that are much more technique focused (e.g., job descriptions, job evaluations, market surveys). The coding scheme used to group topics into categories (see Tables 1 and 2) omitted some additional variables believed to be important by CEO/founders. One set of concepts shown in Exhibit 3 focused on culture of the organization. The other set of concepts appeared more oriented toward learning and growth and is labeled as such in Exhibit 4. Learning and growth concepts include the need to develop high-potential employees who can perform multiple roles during growth periods of the SME. DISCUSSION OF DESCRIPTIVE DATA COLLECTED:
One issue addressed in our descriptive databases is the extent to which young entrepreneurs view human resource issues as being important. Survey results indicated that human resource issues are of significant importance to entrepreneurs in SMEs at both professional and personal levels. Although this finding is bounded by the type of sample used and the single-item measures used, the importance of human resource management issues in SMEs has been confirmed in other surveys as well (e.g., National Federation of Independent Business, 1998). One important implication here is that the study of human resource issues is likely to be well received by entrepreneurial decision makers in SMEs. Another implication stems from the unexpected finding that a primary personal challenge faced by young entrepreneurs is work/life balance. Relatively little attention has been devoted to systematic research on "work/life balance," specifically for the entrepreneurial leaders of SMEs. Upon closer examination of the concepts expressed by CEO/founders in the focus groups, an interesting implication emerged. Growth-oriented CEO/founders do not seem to be concerned with traditional human resource management practices. That is, they did not express much concern about techniques such as interviewing methods in staffing or job evaluation procedures in compensation. These traditional human resource topics focus on matching the knowledge, skills, and ability of the person to the job requirements. Concern was instead expressed about matching characteristics of the person other than knowledge, skills, and abilities to the values and culture of the organization. By comparison to traditional human resource management practices, the focus here is on matching the person to the organization. For staffing practices, the issue of the person-organization match has been raised in other contexts as well (Bowen, Ledford, & Nathan, 1991; Kristof, 1996). With this approach, the focus is on selecting someone who fits with the organizational culture, who is able to perform new duties as they are added to the current job, who is able to handle multiple jobs as needed, and who has the ability to take on future jobs as they arise in the organization (Heneman et al., 1997). In order to achieve these objectives, research on staffing in SMEs will need to examine the validity, utility, and adverse impact of selection methods not frequently used in SMEs including personality tests (Barrick & Mount, 1991) and person-organization profile comparisons (O'Reilly, Chatman, & Caldwell, 1991). While these techniques focus on the "person" side of person-organization fit, research attention will also need to be given to the "organization" side. That is, the organizational criteria used to validate person-based selection me thods may need to be refocused as well (e.g., performance vs. career growth).
Growth models of SMEs (Churchill & Lewis, 1983; Flamholtz, 1995; Hanks, Watson, Jansen, & Chandler, 1993), should be particularly useful in identifying relevant criteria. Much of the literature on the management of growth has looked at stage models. The more recent focus, however, has been on how entrepreneurs manage through growth transitions. This literature has focused on the role of resources (e.g., human, financial, technological, and social) and how resources can be effectively configured to manage the growth process (Greene, Brush, & Brown, 1997; Hart, Greene, & Brush, 1997). This literature appears to suggest that the needs and procedures for staffing may vary across growth stages and that there may be different values emphasized at different stages of growth along with a core set of values at all points on the growth continuum. The concepts that surfaced regarding compensation practices viewed compensation from a total rewards perspective (Parus, 1999). That is, compensation encompasses psychological rewards, learning opportunities, and recognition in addition to monetary rewards in the forms of base pay and incentives. Based on case studies (e.g., Nelson, 1994), it appears that smaller organizations are more likely to view compensation from a total rewards perspective than are larger companies. Many of these reward programs are very idiosyncratic to particular organizations and therefore may be a source of competitive advantage because they may be difficult to replicate (Barney, 1986). More research is needed on compensation from a total rewards perspective and SMEs may be an excellent place to study these approaches. In order to do so, research should look at the synergy (i.e., interactions) between reward program components. Also, theoretical guidance can be drawn from the field of organizational behavior with theories such as t he job characteristic theory of work design (Hackman & Oldham, 1976). Another issue addressed with the descriptive databases was the level of coverage of human resource management in SMEs in the published literature. The literature appears to be rich in prescriptions, limited in sound descriptive surveys, and sparse in analytical research. This finding is troublesome given the importance of SMEs to the economy and the opportunity SMEs provide to test topics (e.g., synergy between total rewards components) that are less likely to be found in large organizations. Our hope is that human resource scholars will become interested in the tremendous opportunities available after reading the articles in this special issue. We hope that current compensation and staffing researchers will continue to conduct research on these practices in SMEs. Clearly their efforts are likely to be appreciated by CEO/founders of SMEs. The orientation offered by compensation and staffing researchers will need to change in directions previously described. These changes in direction will, however, be consis tent with changes in other
contexts for the study of human resources and most importantly, are likely to be valued by SMEs. It should also be noted that our descriptive database indicates that there is at least one topic where CEO/founders of SMEs need to pay more attention to what academics have to say. Human resource strategy was shown to be a topic in which CEO/founders did not place much importance, while the literature review showed that it is extensively covered in SME publications. Clearly there is a need for CEO/founders to be made aware of the interests and valuable work in the human resource strategy area. For example, the work of Huselid (1995) has shown the economic impact of human resource strategy on the firm, and the work of Welbourne (1997) has direct relevance to SMEs. Our analysis reveals that there are gaps of knowledge on both sides, and perhaps additional mechanisms need to be developed for the two sides to exchange their knowledge. FUTURE RESEARCH PERSPECTIVES: At a theoretical level, staffing research needs to adopt new perspectives in order to serve the needs of SMEs. New perspectives are needed to further develop the concept of person-organization fit as it relates to SMEs. Several perspectives hold promise and will be reviewed as to their relevance to SME staffing practices. Role theory has been receiving renewed attention in the human resource literature (Ilgen & Hollenbeck, 1992), and roles would seem to characterize how work is organized in SMEs where role flexibility was identified as an important concern. Welbourne, Johnson, and Erez (1998) show how specific roles relate to multiple dimensions of performance. Specific roles examined include job, career, innovation, and team. Added to this list of roles in SMEs might be others such as family, in family-owned SMEs, and growth in prospering SMEs. Role expectations for family and growth may conflict with the role expectations for the job. That is, the family and growth role expectations may require extra role behaviors that conflict with day-to-day job expectations. As with compensation, SMEs would seem to be an excellent location to study and test role theory given the multiple role expectations of CEO/founders mentioned in the four groups. Agency theory has been used extensively in compensation theory to explain the steps that owners (i.e., 'principals') can take to bring the interests of managers (i.e., 'agents') into alignment (e.g., Welbourne & Gomez-Mejia, 1995). While compensation is certainly one critical approach to alignment, staffing practices may be another avenue. Concepts raised by the CEO/founders suggest that they are looking for managers and employees with values similar to their own. These values
could be selected into the organization in addition to trying to create them with rewards once people are already positioned in the organization. Competency models (e.g., Spencer & Spencer, 1993) often look at attitudes, beliefs, and values of employees as selection criteria. This human resource technology could be integrated with the agency theory perspective. The focus group data from CEO/founders seems to suggest that they are seeking employees who 'fit' with the current culture, but who are 'flexible' enough to adapt to the future culture of the organization. Wright and Snell (1998) recently developed a framework to begin to unify fit and flexibility in human resource decision making. Selection decisions for the SME may need to be a two-stage process whereby employees possess two sets of competencies. One set of competencies would ensure that the employee fits with the current director of the SME. Another set of competencies (e.g., flexibility) would guarantee that the employee can adapt to future directions of the organization. The team perspective may be useful as well in that small organizations may function together as a team. That is, the entire organization may be a team. An important concept here that may guide staffing and compensation systems development in SMEs is "team mental models" (Heneman & von Hippel, 1995; Klimoski & Jones, 1995; Klimoski & Mohammed, 1995). Team mental models consist of the shared set of values and beliefs held by team members regarding the effective operation of the team. These models can either be implicit or explicit. At Saturn, for example, they are explicit and in the form of a written document for team members. Models such as these may implicitly guide selection decisions or may be developed for formal use by SMEs as a source of selection criteria. Several CEO/founders mentioned the high cost of selection errors and how they wish they had been aware of the costs prior to making an incorrect selection decision. Not only is the impact of selection decisions important to SMEs, but so too are other human resource decisions. Both hard and soft criteria can be used to assess human resource interventions in SMEs. For example, using hard criteria, Welbourne and Wright (1998) looked at the impact of human resource activities on stock prices in initial public offerings. Using soft criteria, Heneman, Eskew, and Fox (1998) measured the impact of a new compensation system in terms of employee pay satisfaction before and after the development of a new compensation plan for a small employer. Undoubtedly, an assessment of the impact of human resource decisions on actual outcomes would be helpful to CEO/founders.
Most of the research on recruitment in SMEs looks at it from the perspective of the employer. Another useful perspective is to look at recruitment from the perspective of the applicant (Rynes, 1993). Knowing something about applicant reactions to recruitment policies and procedures provides important insights as to why applicants select organizations. These insights would have important implications for how SMEs can best design recruitment systems to best attract qualified applicants. Very little attention appears to have been given to the human resource management practices of SMEs in countries outside the U.S. One potential avenue is to look at how SMEs manage human resources in other countries. Other countries could be a source of information to fill our gaps in knowledge in the U.S. In taking an international perspective, care would need to be taken to ensure that what works in one culture applies to another culture. Even with differences, however, there are cultures similar to the U.S. (e.g., Switzerland) that need to be investigated further in terms of their human resource practices in SMEs. Research in the field of human resources has started to focus on "bundles" of human resource management practices that are not linked as much conceptually as they are connected in practice (Huselid, 1995; MacDuffie, 1995; Tsui, 1987). These "bundles" of human resource management practices have been shown to be related to such organizational results as reduced turnover (Arthur, 1994), higher productivity (Arthur, 1994; MacDuffie, 1995), and greater financial performance (Huselid, 1995). This concept may be more applicable to the way 5MB owners/managers view the issue of people. In our descriptive database, CEO/founders did not describe effective human resource practice from the perspective of traditional human resource "functions" (e.g., staffing, compensation). Instead, they viewed effective human resources as a flow of interrelated activities starting with the right person-organization fit, being able to attract that person, and reward him or her for motivation and retention purposes. As noted by Barney and Wright (1998), the challenge for human resource management is to develop systems of practice that create synergistic effects rather than to develop independent sets of best practice. Given the orientation of CEO/founders in our database, SMEs may be an excellent place to study synergistic human resource management practices. CONCLUSION The study of human resources management in SMEs needs to be strongly encouraged. CEO/founders in SMEs view human resource management decisions
as very important to the growth of their enterprises, and new venture growth is very important to our nation's economy. New directions are being developed in human resource management which appear to directly address the concerns of CEO/founders in SMEs. We issue a challenge to human resource scholars to do more with SMEs. The attention paid to date has been scant and this is disappointing. Ultimately if we are to have robust theories of managing human resources in organizations, then the theories need to apply to large businesses, but also to SMEs, where the majority of jobs reside. An important issue raised by one of the reviewers is why so little attention has been paid to human resource management practices in SMEs. We believe that there have been several obstacles to conducting the recommended types of research. One reason is the difficulty in gathering data. SMEs may be reluctant to participate in academic studies because of the potential time away from the business required or because they do not view human resource management practices as a source of improved business performance. Another reason may be the publication process itself. In order to gain tenure, researchers in human resources are required to publish in "mainstream" academic journals that devote almost no attention to human resource management issues in SMEs. Also, the small samples that reside in SMEs may preclude the use of quantitive data analysis. Although not unheard of, qualitative studies in small companies are very difficult to publish in mainstream journals. We are optimistic that more human resource management scholars may be attracted to doing research in SMEs. One reason for our optimism is the increasing recognition that in-depth case studies play an important role in the study of effective human resource practice (Barney & Wright, 1998). Another reason is that increasingly human resource management practices are being studied across organizations (e.g., Huselid, 1995; Welbourne, 1997) rather than within organizations. As a result, the sample size issue is no longer a concern. It is our belief that well-crafted studies within SMEs and surveys of employer practices across SMEs will be valuable additions to the strategic human resource management literature that is becoming so popular in the mainstream journals. Reference: Robert L. Heneman is Professor of Management and Human Resources in the Fisher College of Business at Ohio State University. Judith W. Tansky is visiting Associate Professor of Management and Human Resources in the Fisher College of Business at Ohio State University.
S. Michael Camp is the Director of Research at the Kauffman Center for Entrepreneurial Leadership at the Ewing-Marion Kauffman Foundation, Kansas City, Missouri.