The relevance of

Strategic Human Resource Management (SHRM)

for the growing small business

Louise C. Johnston, M.A. (Dunelm)

This thesis is presented for the Degree of

Doctor of Philosophy of Management

The University of Western Australia

Graduate School of Management

2008
Abstract

The commercial developments of the late 20th and early 21st centuries have come to
signify profound and far-reaching change in the way that goods and services are
designed, produced, marketed and delivered to customers in the world’s
international and domestic markets. In order to respond to a more intensively
competitive trading environment that demands ever-increasing levels of product
quality, customer service, organisational efficiency and business performance, the
management of business entities has undergone fundamental alteration in form and
content. It is within this context that two traditionally disparate business disciplines
have emerged to play an important role in the new economic commercial order,
that of small business management and that of Strategic Human Resource
Management (SHRM).

Historically eclipsed by the large and powerful mass-producing corporations, the

small business sector has been more recently viewed as playing an increasingly
prominent part in the creation of national and regional prosperity within the
developed countries. The unprecedented interest in smaller firms and the desire to
see them fulfill their economic and social potential have resulted in legislative
reform and widespread initiatives by governments and other institutions designed
to support and protect the smaller operators in their commercial endeavours.

Similarly, in the post-industrial knowledge economy people have risen in

prominence over other organisational resources as a key source of competitive
commercial advantage. The role of intellectual capital in securing business success
has fuelled the development of management technology and methods designed to
enhance the contribution of human resources to business performance. Heralded
by many as the defining managerial approach for enterprises that wish to build
sustainable competitive advantage in the markets of today and the future, SHRM
has come to the fore as a means to re-evaluate the importance of human
contribution to business outcomes and guide management practice in leveraging
the latent potential of a company’s human assets.

A product of the managerial needs and environment of large companies, SHRM has
grown as a philosophy and tool that addresses the management of critical human
resource activity in supporting business goals. Consistent with the common
impression that small business operates without strategic management and the low
priority often thought to be afforded to workforce management by small firm
owner-managers, rarely has this type of approach been considered in relation to its
application or suitability within the smaller operation. This study seeks in the first
instance to examine the accuracy of these perceptions and to what extent if any,
the normative approach to the strategic management of people as might be found
in larger corporations, is in fact prevalent among smaller firms. In turn, the
potential relevance and capacity of the big business SHRM model to generate
improved performance outcomes for this type of business environment is explored,
in particular where small firms are experiencing growth and making the transition
to becoming larger and more complex entitles. Drawing on both primary data from
10 case studies in Western Australia and secondary data from the existent,
available literature on human resource management in small firms, the research
project investigates current understanding and knowledge about the strategic
management of small firms, and in particular its relationship with the management
of people.

The findings of the study indicate that perceptions about the presence of strategic
management within small firms are largely based on beliefs held about the nature
of strategy and how this is manifested in certain types of organisational behaviour
and activity. Challenging some of the popular views about the small business
sector, this thesis proposes that small firms manifest strategic behaviour in the way
that they manage their business and their human assets, but that this tends to
correspond only partially with the standard models found in larger firms and is
influenced by a range of key external and internal factors. In general, the
management of business strategy was found to possess low levels of structure and
formality, effectively merging into the collective activities associated with owning
and operating a small business. Similarly, when compared with the key elements
of a strategic human resource management framework constructed specifically for
this study, the data indicated that the strategic management of people is prevalent
in smaller firms but that this again represents only partial adoption of normative
models as commonly promoted for the larger business management context. It
was concluded that the theoretical principles and concepts of SHRM demonstrate
relevance for small companies on account of the status of the contemporary
external commercial environment in which they must compete as well as the range
of managerial benefits associated with strategic methodology and practice.
However, currently there exist no suitable models of practice with supporting
guidelines that respond to the unique contextual and operational needs and
experiences typical of smaller firm owner-managers.
List of contents

Page No.

Acknowledgements 1

Chapter 1: Introduction … … … … … … … 5

ƒ The research topic … … … … … … … 5

ƒ The commercial context … … … … … … … 6
o Strategic Human Resource Management (SHRM) … … 18
o The small business sector … … … … … 20
ƒ The value of juxtaposing SHRM with the small growing firm … … 22
ƒ Key assumptions … … … … … … … … 24
ƒ Research methodology design … … … … … … 26
o The research strategy … … … … … … 27
ƒ Detail of the research methodology … … … … … 28
o Textual analysis (Strategic Human Resource
Management) … … … … … … … 29
o Selection of materials … … … … … … 31
o Sources of material … … … … … … 31
o Categorisation of SHRM … … … … … … 32
o Literature review (Strategic Human Resource Management
in smaller firms) … … … … … … … 32
o Fieldwork … … … … … … … … 32
o Fieldwork process … … … … … … 34
o Selection of the case study participants … … … 34
o Research controls and parameters … … … … 35
o Interview process … … … … … … 36
o Principal analytical phase … … … … … 38
ƒ Scope, limitations and weaknesses … … … … … 39
o Question of cross-cultural application … … … … 39
o Access to data … … … … … … … 40
o Number of research participants … … … … 41
o Categorisation of organisations according to
employment numbers … … … … … … 42
ƒ Structure of the areas of examination … … … … … 42
ƒ Thesis outline … … … … … … … … 43
ƒ Definition of terms … … … … … … … 46

Chapter 2: Historical developments in the management of

human resources … … … … … … 51

ƒ Early trends in personnel management … … … … … 51

ƒ Late 20th century developments … … … … … … 55
ƒ New approaches to management … … … … … 57
ƒ Organisational culture … … … … … … … 59
o Culture in the knowledge economy … … … … 61
o The values-driven corporation … … … … … 62
ƒ The transition to Human Resource Management (HRM) … … 63
ƒ Linking strategy with Human Resource Management … … … 67
o The management of strategy … … … … … 68
o The concept of alignment … … … … … 70
o Early theoretical models … … … … … … 72
ƒ Emergence of SHRM as a management discipline … … … 75
ƒ The value of Strategic Human Resource Management … … … 76
o Support for the business strategy … … … … 77
o Optimising business opportunities and performance … … 77
o Waste reduction … … … … … … … 79
o Mobilising the organisation … … … … … 82

Chapter 3: The essence of Strategic Human Resource

Management … … … … … … 85

• Defining Strategic Human Resource Management … … … 85

• The flavour of Strategic Human Resource Management … … 86
• The principal elements of Strategic Human Resource
Management … … … … … … … … 89
• Element 1 - A management philosophy (the recognition of people as
a valuable business resource) … … … … … 90
• Element 2 – Planning for the management of people (analysis of
human resource management options and making associated
decisions) … … … … … … … … 95
o Theory of strategy formulation … … … … 96
o Rational approach to human resource management
formulation … … … … … … … 98
o Strategy formulation applied methodology … … … 101
o Drivers of strategic decisions … … … … 103
• Documented strategy … … … … … … 106
• Element 3 - Linking human resource management with organisation
and business goals … … … …. … … … 107
o Theoretical concept of alignment … … … … 107
o Vertical fit … … … … … … … 109
o Horizontal fit … … … … … … … 110
o Temporal fit … … … … … … … 111
o Problems with fit … … … … … … 112
o Applied approach to alignment … … … … 114
o Functional alignment … … … … … … 114
o People-related business issues … … … … 117
o Competency-based approach … … … … 118
• Element 4 – The use of Human Resource Management (HRM)
technology to support the implementation of business strategy … 120
o Defining HRM technology … … … … … 120
o HRM as a source of competitive advantage … … … 121
o Best Practice School … … … … … … 122
• The strategy debate … … … … … … … 125
• Concluding note … … … … … … … 127

Chapter 4: Adoption of Strategic Human Resource

Management … … … … … … 129

• Take-up of SHRM … … … … … … … 129

o Empirical research … … … … … … 130
o Research constraints in identifying adoption … … … 133
o Theory versus practice … … … … … … 135
• Predictors of adoption … … … … … … 137
o Role of human resource management professionals … … 137
o Low status of the HR function … … … … … 138
o Changing status of the human resource management
professional … … … … … … … 139
o Strategic human resource management work … … … 141
 o Competency profile of the new human resource management
professional … … … … … … … 144
o SHRM competency frameworks … … … … … 147
o The role of the Chief Executive Officer … … … … 149
o Line management support and capability … … … 151
o Articulated business strategy … … … … … 155
o Labour intensive/high-tech industries, large corporations
and reporting structures … … … … … … 155
o Turbulent business environments … … … … 156
o Human resource management tools and technology … … 157
o Organisational politics … … … … … … 158
o Management of change … … … … … … 159

Chapter 5: Significance of the small business sector … … 161

• Growth in prominence of smaller firms … … … … 161

o Generators of economic prosperity … … … … 163
o Relative size of the small business sector … … … 167
o Sources of public influence … … … … … 169
o Important source of employment … … … … 170
o Role in the marketplace … … … … … 173
o Industrial restructuring … … … … … 176
o Size as an organisational asset … … … … 177
o Leveraging off downsizing … … … … … 178
o Reduced industrial conflict … … … … … 179
o Social acceptability … … … … … … 180
• Drivers of support for small firms … … … … … 180
• Challenges facing the small operation … … … … 185
o Early demise of small firms … … … … … 185
o Factors in early demise … … … … … 186
o Demands of the market … … … … … 188
o Management of finances … … … … … 189
o Fixed costs of running a business … … … … 189
o Business compliance and administration … … … 190
o Constraints of employment legislation … … … 190
o Shortage of management resources and skills … … 191
• Addressing the difficulties facing small operators … … … 192
• Concerns relating to small business policy … … … … 195

Chapter 6: Growth in the small firm … … … … … 197

• Defining “growth” … … … … … … … 197

• Importance of growth … … … … … … 200
• The growth process … … … … … … … 202
• Theories of growth … … … … … … … 204
o Examples of growth models … … … … … 205
• Factors influencing small business growth … … … … 210
• Role of the owner-manager in the growth process … … … 212
o Relationship between growth and owner-managers … 213
o Owner-manager capability as a factor in growth … … 216
o Building skills in small business growth … … … 217
• Activities associated with a growth strategy … … … 220
o Financial issues associated with growth … … … 221
o Building organisational and operational infrastructure … 222
o Building human infrastructure … … … … 223
o Creating a management team … … … … 226
 o Building human resource management support
and infrastructure … … … … … … 227
• The social implications of growth … … … … … 229
• Impact of growth on owner-managers … … … … 230
• The strategic dimension of small business growth … … … 232
o Debate on the existence of strategic activity in small firms 234
o Support for strategic management in small firms … … 237

Chapter 7: Critical review of the literature on human resource

management in small firms … … … … 241

• Purpose of the literature review … … … … … 241

• Limited sources … … … … … … … 241
• Obscure body of literature … … … … … … 244
• Focus on large organisations… … … … … … 244
• Various types of literature … … … … … … 246
• Limited amount of research … … … … … … 247
o Examples of empirical studies … … … … 248
o Examples of micro studies … … … … … 250
o Conceptual and theoretical literature … … … 251
o Prescriptive and educational literature … … … 254
• Challenges for research … … … … … … 256
o Breadth of the field … … … … … … 256
o Soundness of methodology … … … … … 257
o Selection of research topics … … … … … 258
o Problems with size classifications … … … … 259
o Problems with discipline-based terminology … … 260
o Selection of research methods … … … … 261
o Researcher objectivity … … … … … 266
o Discipline-based prejudices … … … … … 269
o Personal agendas and ideologies … … … … 275
• Concluding remarks … … … … … … … 277

Chapter 8: Human resource management in small firms … … 279

• The large versus the small organisation … … … … 279

o General differences between large and small firms … 280
• Divergence and commonality in human resource management
practice … … … … … … … … 283
o Diversity of small businesses … … … … 285
o Significance of the owner-manager … … … … 286
• Formalisation in small firm human resource management … 289
o Prevalence of formalisation … … … … … 289
o The value of formalisation for small firms … … … 291
• Characteristics of management practice … … … … 296
o Sourcing and hiring … … … … … … 296
o Employment conditions in small firms … … … 299
o Benefits of small firm employment … … … … 304
o Pay and benefits … … … … … … 309
o Training and development … … … … … 311

Chapter 9: Study findings (literature review) … … … 315

ƒ Introduction … … … … … … … … 315
ƒ Perceptions about human resource strategy in small firms … 316
ƒ Perceived absence of human resource strategy in small firms … 317
ƒ Perception of limited adoption of human resource strategy in
small firms … … … … … … … … 319
ƒ Ambivalence about the prevalence of human resource
strategy in small firms … … … … … … 320
ƒ Support for the strategic management of human resources in
small firms … … … … … … … … 322
ƒ Perceived prevalence of human resource strategy in small firms … 326
ƒ Indicators of human resource strategy in small firms
(empirical studies) … … … … … … … 329
o Element 1 – A management philosophy
(the recognition of people as a valuable business resource) … 329
o Element 2 – Planning for the management of people
(analysis of human resource management options and making
associated decisions) … … … … … … 334
o Element 3 – Linking human resource management with
organisation and business goals … … … … … 337
o Element 4 – Use of Human Resource Management (HRM)
technology to support the implementation of business strategy 341

Chapter 10: Research findings (case study profiles) … … 347

ƒ Choice of participants … … … … … … 347

ƒ Overview of the owner-manager participants … … … 349
o Personal characteristics … … … … … … 350
o Educational backgrounds … … … … … … 350
o Work history … … … … … … … 351
o Levels of owner-management experience … … … 351
ƒ Overview of the case study companies … … … … 351
o Company products and services … … … … … 351
o Location of the business operation … … … … 352
o Size of the business … … … … … … 352
o Financial status … … … … … … … 352
ƒ Table - Overview of the case study companies … … … 353
o Lifecycle stage of the business … … … … … 354
o Expectation of further growth … … … … … 354
o Management infrastructure … … … … … 354
ƒ Description of the case study participants … … … … 355
o The Engineering Manufacturer (Case 1) … … … 355
o The Commercial Interiors Manufacturer (Case 2) … … 357
o The Information Technologist (Case 3) … … … … 359
o The Foodwholesaler (Case 4) … … … … … 361
o The Architect (Case 5) … … … … … … 363
o The Engineering Contractor (Case 6) … … … … 365
o The Food Producer (Case 7) … … … … … 367
o The Engineering Services Provider (Case 8) … … … 369
o The Retailer (Case 9) … … … … … … 371
o The Driller (Case 10) … … … … … … 373
ƒ General case study observations … … … … … 375

Chapter 11: Research findings (case studies) … … … 378

ƒ Element 1 – A management philosophy (the recognition of people

as a valuable business resource) … … … … … 378
ƒ Element 2 – Planning for the management of people (analysis of
human resource management options and making associated decisions) 392
ƒ Element 3 – Linking human resource management with organisation
and business goals … … … … … … … 401
ƒ Element 4 – Use of Human Resource Management (HRM) technology
to support the implementation of business strategy … … … 419

Chapter 12: Research summary, interpretation and conclusions … 424

ƒ Research methodology … … … … … … … 424

ƒ Significant influencers … … … … … … … 425
ƒ The contextual status … … … … … … … 427
o The commercial environment … … … … … 427
o The small business environment … … … … … 428
o The knowledge economy and social trends … … … … 430
o Strategic Human Resource Management (SHRM) … … … 432
o The four elements of SHRM … … … … … … 432
ƒ The potential for SHRM in small business… … … … … 435
ƒ SHRM adoption in large corporations … … … … … 438
ƒ Research findings (prevalence of SHRM in small business) … … 441
o Management literature (SHRM in small business) … … … 441
o Case studies (SHRM in small business) … … … … 444
o Prevalence of SHRM in small firms – summary of findings … 453
ƒ Interpretative commentary … … … … … … 454
o The issue of strategy … … … … … … … 455
o The growth dimension … … … … … … 456
ƒ Relevance of SHRM for small growing firms… … … … … 460
o Current management practice … … … … … 460
o Relevance of the theoretical principles of SHRM … … … 461
o Transfer of SHRM principles to small businesses … … … 463
o External drivers for the adoption of SHRM … … … … 466
ƒ Key extrapolations … … … … … … … 468
ƒ Concluding comments … … … … … … … 469
ƒ Recommendations … … … … … … … 472

Appendix A: Letter of invitation requesting company participation

in the fieldwork studies … … … … … 475

Bibliography … … … … … … … … 477
Acknowledgements

The origins of this research project extend back to the mid-1990s, to a time when I
was based in Western Australia working for a large and highly profitable subsidiary
of a prominent global mining corporation in the area of organisational development.
Assigned to a new role with responsibility for developing human resource
management policies that would describe how the company intended to approach
the management of its employees, this represented in theory, a task of some
importance for the company. Several years earlier the company had discarded its
policy manual as part of a then fashionable attempt to rid itself of bureaucratic
constraints and inflexibilities in the work culture. As such, there existed no written
documentation to guide and assist managers with people management decisions.
With the passage of time, it was realised that the company could not operate
effectively without at least some policies in place and as such those previously
jettisoned were to be revamped and reintroduced into the business.

In the process of identifying those policies the business needed and reflecting on
what they ought to contain, a number of major constraints began to emerge. In
the first instance, the company’s human resource management strategy was not
clear. Nor was there any available information about the company’s overall
business strategy. Without understanding what the business wanted to achieve
and how it was intending to utilise its workforce to accomplish the goals of the
corporation, it was impossible to identify the content of their people management
policies. Gradually, it became clear that the answer to this quandary rested with
the organisation’s leaders. Supporting policy needed to be a product of senior
managements plan to leverage the company’s human resources to achieve the
corporate goals. Once clarified, alignment through specified management activities
and practices could be identified, which then would be spelt out within the policy
documents.

However, as a mid-level employee relatively isolated from the management team of

a large organisation with no easy access to influential individuals in a position to
offer some clarity, the task was doomed to failure. It became increasingly evident
that without the resources or associated authority needed to implement
management policy, it did not matter how brilliant or insightful my second-guessed
documents might be, they would remain on the shelf forever gathering dust. The
general sense of professional impotence and failure to make a meaningful
contribution to this company triggered the beginning of a long-term nagging
curiosity about the mechanisms required for successful people management in a
business context. This research project represents a major phase in a largely

1
circuitous journey of discovery and to some extent clarification of the reasons for
my gloomy experience in those early years as a human resource management
specialist.

Although not without its moments of despair commonly experienced by those who
undertake a doctoral project and endure the loneliness of the long-distance thesis
writer, it has been a privilege to be a student at this time and no shortage of
individuals have contributed to making it an interesting, sometimes inspiring and
fruitful venture. They must and will be duly acknowledged. This thesis has been
influenced by a wide range of personal experiences and interactions with different
organisations and their members who have contributed substantially to the focus
and nature of the final product. These include work experience as a human
resource management practitioner and consultant for small local firms as well as
large international companies both within Australia and overseas, contact with
employees and managers at different organisational levels, the management of a
small consulting business for a brief period, and being a regular participant at
management conferences and professional development events at home and
abroad.

First and foremost, I would like to extend my profound appreciation to my

supervisor Dr. Tim Mazzarol, Associate Professor at the University of Western
Australia’s Graduate School of Management, who is also the Director of CEMI (the
university’s Centre for Entrepreneurial Management and Innovation). His
exceptional ability to provide the essential motivational pressure to move the work
forward while demonstrating appreciation, and hence patience, for the demands of
combining doctoral work with a full-time career, has been a constant source of
sustenance and much needed support. I would also like to thank him for sharing
his passion for the subject, for demanding rigorous standards, for giving generously
of his time whenever it was needed and for kindly understanding my propensity to
want to try things my way.

I would like to thank Curtin University of Technology in Western Australia, where

this project was initiated. Professor Lawson Savery at the Curtin Business School
opened the door of opportunity for me, provided much welcomed financial
assistance and quickly persuaded me that small businesses were a much more
interesting subject than large businesses and generally in more need of attention.
The staff at the university library worked tirelessly in the early stages at procuring
necessary research material from around the globe and Jo Boycott, the Research
Student Coordinator, was a frequent source of administrational support and
assistance. I would also like to acknowledge the Executive Director of the Small

2
Business Unit at the Curtin Business School, Tim Atterton, who lent essential texts
and gave me the opportunity to participate in part of the Small Business Unit’s
Growth Program. Early in the research process particularly useful assistance was
provided by Miles Peddar, a research officer at Perth’s Small Business Development
Corporation (SBDC) who provided documentation on government activities relating
to the management of the small business sector and who arranged access to the
Corporation’s library. Also helpful was participation in the SBDC’s course for
aspiring small business owner-managers which offered many illuminating tips and
pointers. More recently, the Graduate School of Management at the University of
Western Australia graciously accepted the application to transfer at mid-point in my
studies subsequent to the relocation of my supervisor, and I thank the School for
facilitating the closing phases of this work.

I would like to make a special mention of those small business owner-managers

who were prepared to give up a portion of time in their strenuous management
schedules to participate in the case studies. Exposure to these individuals and their
companies offered significant insights into the world of the entrepreneur, small
business owner-management and small growing firms, providing an enhanced
sense of the atmosphere of these organisations and bringing much of the theory to
life. Those who shared their experiences included Domenic Canci, Alan Carter, Rob
Dewar, Christine Foster, Michael Hartfield, Colin Heitman, Steve Pretzel, Cedric
Smith, Richard Tweedie and Leanne Wesche.

Opportunities for gaining insights into the world of small, developing businesses
were also provided by the Western Australian firm Atsource Organics, where I
assisted with developing the business plan for this recent start-up enterprise
attempting to take its innovatory composting invention to market. A consulting
assignment with Glenmont Properties in Perth also provided an ideal opportunity to
experience first-hand the teething problems of a successful, rapidly growing small
firm.

The Australian Human Resources Institute (AHRI) has played an important role
over the years in assisting my personal development in the diverse and challenging
field of people management. In particular, I would like to thank Jo Mithen, the
former Executive Director, for arranging my attendance at the 10th World Congress
on Human Resource Management in Rio de Janeiro, where amongst other notables
in the field, there was the opportunity to hear speak Ricardo Semler of SEMCO
fame and Jac Fitz-enz from the Saratoga Institute. Thanks also go to my
colleagues on the Western Australian AHRI Council, in particular Chris Jeffery and
John Burgess during whose presidencies I was continually encouraged to contribute

3
to the HR community in various ways, and to the latter for permitting me to be an
assessor of the small business submission for the 2004 AHRI Awards in Excellence
for Human Resource Management.

It is often said that the greatest learnings are experiential, coming from direct
personal exposure on-the-job. In this respect, I must acknowledge the role of
Phillip Jackson, Director of Baker Hughes Australia, who made available not only
considerable opportunities for professional self-development at an applied level, but
also generous resources to pursue areas of personal interest related to this field of
study. It has been a certain luxury to be regularly sponsored to attend conferences
and events in the field of business and people management and to take a close-up
look at many contemporary leading thinkers and writers associated with prominent
international institutions, including Gary Hamel, Alistair Mant, Dexter Dunphy,
Wayne Cascio, Hugh MacKay, Ron Cacioppe, Christopher Bartlett, Kjell Nordstrom,
Geoffrey Blainey, Wayne Brockbank, Dominique Heau, Dave Ulrich and Roger
Collins. Many of these individuals have been a source of information or inspiration,
or both, for this research project. Thanks must also go to John Weaver, Honorary
Research Fellow at the Graduate School of Management, for his editorial work on
my thesis.

Finally I would like to express appreciation to a number of people who have helped
me personally along the way, with encouragement, sound advice, guidance, useful
material or as talented role models. These include Alan Bandt (Bandt Gatter &
Asscs.), Renu Burr (Graduate School of Management, UWA), Terry Adams
(Australian Mines & Metals Assoc.), Clinton Rodda (UMS Group Australia), Steve
Bowler (People Solutions), Sophia Letvchenkova, Ann David, Abbas Fardad and last
but never least Clare Jones.

4
Chapter 1

Introduction

ƒ The research topic

This research project is concerned with examining the relevance of Strategic

Human Resource Management (SHRM) for the growing small business. The
objective of the study is to bring together two separate and discrete fields of
business management, that of the principles and application of the discipline
concerned with the strategic management of people in organisations and that of
organisational growth and development within the smaller commercial entity. In
doing so, these two disciplines are analysed with a view to determining whether
Strategic Human Resource Management might be applied to make a positive
contribution to the business activities and performance of the growing small firm.

In some quarters, it is thought that SHRM has little or no relevance for smaller
firms, regardless of whether the business is embarking upon growth or not. Some
believe that SHRM, being a product of the large corporate environment, has no role
to play in the small business due to the unique dynamics and innate characteristics
that differentiate the large and the small organisation. Indeed, it is not unusual to
hear the view expressed that small firms are far too busy to spend time on
strategic issues, let alone those pertaining to the management of their people. The
focus for many small firms is thought to be predominantly, if not entirely,
operational and short-term in nature. These suppositions have given rise to the
further assumption that owner-managers fail to develop their skills in human
resource management practice and hence adopt a strategic approach to the
management of their people because they believe that activities of this type offer
little or no value to their business. This study examines the accuracy of and
reasons behind these perceptions, and the value of promoting a strategic approach
to workforce management as an essential part of a growing firm’s managerial
activity, particularly in light of the commonly perceived benefits of enhanced
business performance and competitiveness said to be associated with SHRM. An
investigation will be conducted to determine the prevalence of SHRM in smaller
firms and in turn its potential relevance for these types of companies. In effect,
two key questions are addressed:

¾ Are growing small firms strategic in their approach to the management

of their human resources? - and if not,

5
 ¾ Should growing small firms adopt a strategic approach to the
management of their human resources?

Drawing on the existent body of information and knowledge as well as the

experiences and perceptions of small business operators, the study seeks to
provide greater clarity about the nature of workforce management in the growing
small company. It will investigate the issues and problems relating to the
management of people facing owner-managers in their efforts to build successful
enterprises, as well as the uniqueness of the smaller business work environment in
this respect. As a research exercise, the process will also bring together in one
place much of the dispersed information and perceptions about the management of
people in smaller firms, an activity that has not yet been undertaken in any
substantial way. In so doing, it is intended that there will emerge a significant and
original contribution to furthering understanding about the management of people
in smaller companies that are embarking on growth activity and insights will be
gleaned into how this might be more effective.

As two distinctly specialised areas of business management, the field of Strategic

Human Resource Management and the field of small business management both
represent in their own right and as a combined focus, important topics of study for
a number of reasons. An overview of the broader commercial environment will
provide some context as well as qualification for these assertions.

o The commercial context

The turn of the twenty first century has witnessed profound change in the
commercial arena with dramatic developments occurring in the way goods and
services are produced, traded and delivered throughout local and international
communities. In comparison with 50 years ago, where businesses operated in
relatively predictable, stable and controllable environments, ideas developed
gradually and progress was usually incremental and steady, this is no longer the
case. The contemporary trading environment in which business corporations must
operate - whether they be large or small, is characterised by rapid and turbulent
change, much complexity, uncertainty and movement in the markets for products
and services, greater diversity in business issues and operations, shorter product
lifecycles, more demanding and discerning customers and greater investor
expectations (Pralahad 1990; Montgomery & Porter 1991; Hamel 2000).

6
The rise of globalisation

A notable contributor to the changing face of commercial life has been the
emergence of globalisation where the marketplace has taken on a trans-national
dimension permitting greater collaboration between international business
operations. Fewer border restrictions, greater speed and ease of travel,
sophisticated international communication systems, increased access to information
and the dismantling of trade barriers have served to create greater business
opportunities throughout the world. Trade is no longer limited by geography and
the physical location of a company is not important. Universal goods and services
can be produced at any viable location and delivered to any destination around the
globe. Every country has become a potential source of materials and labour
(Montgomery & Porter 1991; Coates 1997; Kraut & Korman 1999; Lin 2004).

Simultaneously the political context has become increasingly pluralistic with varied
configurations defining governance structures and changing leaderships driving
diverse agendas and ideological objectives. Trading activity increasingly takes
place in and around national and political upheaval and dislocation, altering state
boundaries, the fragmentation of countries, and recurring regional strife (Kraut &
Korman 1999). Globalisation has resulted in greater economic interdependence
with cycles in one country impacting on the performance of others. On both an
international and national level, firms must contend with unreliable trading
environments impacted by recessions and booms, inflation, fluctuating foreign
exchange rates, budget deficits and variable levels of consumer confidence and
disposable income (Anthony, Perrewe & Kacmar 1996; Kraut & Korman 1999).

Freedom to trade is also increasingly constrained by governments and merging

regional groups assuming greater positions of influence over trading practices,
import taxes, quotas and embargos. International protectionism determining
business activity has both grown in some quarters and declined in others (Greer
1995; Garratt 1995; Kraut & Korman 1999). External regulatory control over
business activities has become more prominent, with growth in legislation and
litigation increasingly impacting on the management of companies. Corporate
governance, business ethics, as well as the environmental and social responsibilities
of the business community have assumed a greater importance for business leaders
(Kraut & Korman; Ulrich & Brockbank 2005).

From an industrial perspective, the developed countries have witnessed the decline
of the traditional manufacturing sector, once a source of considerable economic and
social prosperity, being replaced by the rise of the information and services sectors.

7
Large-scale manufacturing has been mostly sidelined to the developing countries
that are favoured for their ability to provide large populations of cost-efficient
labour, while small-scale manufacturing has been reconfigured to accommodate the
increasing demand for customisation and specialist goods and services often
drawing on high-tech design and manufacturing applications to create sophisticated
products (Ulrich & Brockbank 2005). The service sector has created new jobs and
generated new forms of wealth in areas such as tourism, entertainment and leisure,
consultancy, finance, education, health services and communication, as well as
smaller scale community-based activities such as delivery, gardening, cleaning,
waste management and domestic services (Kraut & Korman 1999). Other
industrial sectors have undergone transformation through rationalisation of their
core business or the effects of mergers and divestitures. A blurring in the
demarcation of some traditional industries has also occurred, where companies
have expanded their operation to offer a range of complimentary services or
alternatively become increasingly specialised by offering just one component within
the broader sector (Kraut & Korman 1999).

The advance of technology

A significant development for business has come from the extraordinary advances
in technology, which have given rise to what has been labelled the “cyber age” or
“information era” (Greer 1995; Anthony, Perrewe & Kacmar 1996; Coates 1997;
Rothwell, Prescott & Taylor 1998; Kraut & Korman 1999; Lin 2004). The post-
industrial world has entered a new global dimension comprising far-reaching
interactive communication systems and networks. Vast amounts of stored and
retrievable information/data that are continually expanding are accessible to
everyone regardless of whom or where they are (Kraut & Korman 1999; Lin 2004).
In addition, technological developments in the fields of robotics, miniaturisation,
satellite telecommunications, lasers, transportation, solidstate circuits,
superconductivity, genetic engineering, biochemistry, fibre optics, artificial
intelligence, production and process technology, automation and many others, have
contributed not only to the creation of new industries but also had a fundamental
impact on the way traditional industries design and deliver their products and
services (Greer 1995; Anthony, Perrewe & Kacmar 1996; Kraut & Korman 1999).
Continual technological innovation considered by many to be the key to future
commercial growth and prosperity through its ability to penetrate new markets and
customer segments, has resulted in increased market volatility and a growing cycle
of pressure to generate new and better products and services. As such, firms must
be aware of changes, not only in their own immediate field but also in others that
might impact on their industrial sector and commercial activities, and in turn keep

8
up with the corresponding developments. Within companies, technological
advancements have meant a significant reduction in much traditional labour-
intensive activity replaced by more efficient and cost-effective automated
machinery or electronic capability (Fombrun, Tichy & Devanna 1984; Rothwell,
Prescott & Taylor 1998; Lin 2004).

Trends in consumerism and social change

In recent decades customer requirements and expectations have grown. Advances

in technology and greater access to information by the general populace, combined
with the increasingly prosperous middle-classes of the developed countries, have
created intensely consumerist societies where purchasers are more knowledgeable
and discerning about the markets and what they are buying. Hence, there is
demand for improved goods and services, for greater choice, for lower prices and
quicker delivery, as well as more reassurance about the quality, reliability and
safety of products (Hamel 2002; Kaplan & Norton 2004).

Significant shifts in demographics are also changing the social context in which
businesses operate, impacting on the availability of people as well as alteration in
approach to the management of labour resources (Walker 1992; Anthony, Perrewe
& Kacmar 1996). Factors such as increased migration and the international
mobility of people, declining birth rates coupled with an ageing workforce, the
growth of female participation in the workplace particularly in traditionally male-
dominated sectors, the rise in divorce rates, single parents and dual-career families
have all had implications for companies needing to attract and build critical
business expertise and skills. A shortage of young, skilled workers is expected to
assume crisis proportions in the coming decades (Coates 1997; Devanna, Fombrun
& Tichy 1981; Thite 2004; Ulrich & Brockbank 2005). In addition, increased life
expectancy and improvements in the standard of living have contributed to changes
in expectation in employees’ desires and needs within the employment relationship
(Cascio 1995; Greer 1995; Tyson 1995b). Changing values about working life such
as an emphasis on achieving a work-life balance, greater individualism and
expectations about higher quality jobs that can provide interesting and meaningful
work, with greater levels of responsibility, authority and autonomy, have altered
the relationship between the employer and the employed. Higher levels of
education have also led to workers seeking more involvement and participation in
key decision-making activity, as well as opportunities to develop themselves in their
chosen career (Miles et al. 1978; Devanna, Fombrun & Tichy 1981; Walker 1992;
Greer 1995; Anthony, Perrewe & Kacmar 1996; Davenport 1999; Sofo 1999; Thite
2004).

9
Change has also occurred in the management of customer and supplier
relationships. Companies routinely examine their operational capacity to determine
how products and services can be delivered more quickly and cheaply to customers
(Ulrich 1998a). An emphasis on providing total customer solutions and added
value, building customer retention and satisfaction, extending the provision of
service with customer education, after-sales support and being the preferred
supplier has grown (Ulrich 1998a; Walker 1999; Kaplan & Norton 2004). Moreover,
traditional business relationships have undergone major transformation, with more
complex associations and increased reliance on partnerships, international alliances,
joint venture, vendors and subcontractors (Montgomery & Porter 1991; Kraut &
Korman 1999; Ulrich & Brockbank 2005).

New management systems

In order to respond to developments in the external environment that are

impacting business activity, major transformations have become a regular feature
of the internal, organisational management of companies (Miles et al. 1978,
Prahalad & Hamel 1990; Montgomery & Porter 1991; Drucker 1992; Ghoshal &
Bartlett 2000; Hamel 2002). In the former industrial age of mass, standardised
production the internal focus for many large corporations was on organisational
control, structure and measurement, ensuring that the business operation was as
mechanistically predictable and consistent as possible. The goal was to achieve
efficiencies and precision in quality, to make incremental improvements to existing
approaches and operating models, while extracting maximum capacity out of the
company’s capital assets. Firms were often encumbered with bureaucratic systems
and risk-limiting processes, which constrained the capacity for innovation or
creative expansionary development. There was often complacency about
customers and their needs and expectations. However, in order to remain
commercially competitive companies have had to adapt their approach to
accommodate the new commercial order and become increasingly clever about how
they position themselves both in the market and in terms of the management of
business resources (Miles et al. 1978, Prahalad & Hamel 1990; Drucker 1992; Sofo
1999; Ghoshal & Bartlett 2000; Hamel 2002).

In the search for sources of sustainable competitive advantage at a time of broad

environmental change, a reassessment of the corporate management strategy and
the fundamental principles that comprise the way in which business is conducted
has for many become imperative (Prahalad & Hamel 1990; Montgomery & Porter
1991; Ghoshal & Bartlett 2000). Many firms have reappraised key factors such as

10
the purpose and objectives of their business, the nature of the internal culture of
the enterprise, the existing financial and marketing structures as well as general
management practice across the spectrum of managerial fields (Greenley 1986;
Hamel & Prahalad 1989; Hamel 2000). Some companies have turned their focus to
new areas including research, innovative product development and more original
marketing strategies (Lin 2004). Today, there is greater emphasis on investment
decisions, on assessing the changing needs and preferences of customers, the
composition of the product mix and reviewing pricing units relative to market
levels. Where certain product lines are no longer competitive these are rapidly
discarded and new products are continually being primed for the market (Greenley
1986; Hamel & Prahalad 1989; Montgomery & Porter 1991; Hamel 2000). Firms
are compelled to be more creative in the way they think about their competitive
approach and the business model they will apply to support this, the way in which
they will position and draw on organisational resources, the structure of their
business, the work required and its design and methods, as well as the technology
available to support operational infrastructure. New types of management
technology and tools have been developed and adopted to support the evolving
business requirements with the goal of eliminating waste, improving productivity
through more efficient logistics and processes, reducing cycles times, enhancing
quality as well as increasing responsiveness and flexibility in order to customise,
redefine or improve product lines (Pralahad & Hamel 1990; Montgomery & Porter
1991; Greer 1995; Porter 1996).

The importance of human capital

Central to these profound changes has been a growing realisation that the primary
organisational resource determining commercial success may be the company’s
workforce or human resources (Gratton 2000; Becker, Huselid & Ulrich 2001). The
requirement to build high performance companies with the capacity to create new
markets, to respond quickly and effectively to changes in existing ones and to
develop and deliver innovative products to customers with high expectations about
quality, cost and service, necessitates the availability of a highly competent, flexible
and motivated group of people to do this work (Greer 1995; Lundy & Cowling 1996;
Ulrich 1998a). As Ulrich (1997, p. viii) has commented:

“The increased pace of change required by technology, globalisation,

profitable growth and customer demands places workforce competence and
organizational capabilities at center stage”.

Traditionally, competitive advantage for many firms derived from a wide range of
non-human factors, such as the accessibility and good management of financial

11
resources, the possession of capital and physical assets like plant, equipment and
land, perceptive strategic positioning of the company in the marketplace,
economies of scale through mass production, superior technology, patent
protection, regulated markets, and modest improvements in the design and
delivery of products and services (Wright, Rowland & Ferris 1990; Becker & Huselid
1999).

The human requirement in early industrial production systems was that of common
labour, where employee contribution was predominantly physical in nature, relying
on muscular strength and stamina. Being only operationally significant, the
workforce was engaged in the routine and repetitive delivery of basic products and
services. Labour, generally viewed as an extension of production activity and
expected to adapt to the associated processes, was usually in abundant supply and
not considered of primary strategic importance (McGregor 1988; Hallett 1989;
Greer 1995). With advances in technology, companies would frequently seek to
control or reduce the high costs associated with human employment (sometimes
the single largest operating expense) by substituting mechanised systems of
production (Wright, Rowland & Ferris 1994; Becker & Gerhart 1996). Often human
resource requirements were not factored into a firm’s strategy planning activity,
being left until after the event, indicating that they were not regarded as an
important consideration by those engaged in a company’s strategic activities
(Angle, Manz & Van de Ven 1985).

With the advent of the post-industrial economy, there has emerged a growing
recognition of the value of human contribution to business activities and the need
for organisations to leverage the potential of this resource for commercial benefit
(Walker 1992; Tokesky & Kornides 1994; Dyer & Reeves 1995; Greer 1995;
Gratton 1999; Becker, Huselid & Ulrich 2001). As productivity has become less
concerned with the manufacture of items that rely on a combination of natural
resources or raw materials and the possession of trained skill and experience in
manipulating tools of a particular trade or craft and more focused on the delivery of
“smart” products or complex, knowledge-intensive services, people as an
organisational resource acquire a position of much greater prominence (Thite
2004). Where commercial success is determined by the knowledge, skills and
abilities of the human intellect, and as theoretical knowledge and the learned
capacity to accumulate and manipulate new information emerge as the key factors
for competitive advantage, human beings become the critical operational input
(Handy 1995; Hendry 1995; Becker & Huselid 1999).

12
The knowledge worker

Unlike in the traditional employment relationship where hands and not brains
constituted human value, it also became apparent that the people who were most
knowledgeable about a firm’s products and services were those engaged in
producing them and were going to be the ones best suited to undertake much of
the new “knowledge work” needed by companies (Thomson & Strickland 1998;
Ulrich & Brockbank 2005). This has resulted in workers assuming greater levels of
not only strategic business significance but also broader roles encompassing greater
organisational and operational responsibility. Hence, manual work has been
replaced by activities such as planning, scheduling, maintenance, trouble shooting
and quality, undertaking research and developing knowledge about markets,
customers and technology (McGregor 1988; Becker & Gerhart 1996).

Where traditional job occupations once emphasised an employee’s role in the

production process, these are now increasingly classified and grouped according to
the specialist knowledge and skill requirements of the work (McGregor 1988; Tyson
1995b; Becker, Huselid & Ulrich 2001). The implication for the management of this
resource as a means to enhance productivity and generate value for shareholders is
an increased dependence on the knowledge, skills and abilities of trained human
intellect. Hence labour, as a business commodity and organisational resource has
evolved into a strategic asset with strategic implications for management. Rather
than focusing exclusively on the cost of people as a business resource, attention
has turned to identifying how human resources can add or create value for the
business (Becker & Gerhart 1996; Kaplan & Norton 2004). Overall, this business
resource has become increasingly more intellectually competent and trained, more
varied in its representation and hence less easy to replace (McGregor 1988; Ehrlich
1997; Sofo 1999).

Evidence of the acknowledgement of the value and importance of people as a

business resource is widely found in contemporary management literature. Many
support the view that people are the key source of sustained competitive advantage
for business today (Hendry 1995; Rothwell, Prescott & Taylor 1998; Barney &
Wright 1998; Davenport 1999; Gratton et al. 1999). Industrialists, business gurus,
management consultants, academics and professional practitioners seem to have
reached a consensus on this resource of the future. “People are our most
important asset” has been the mantra of the management community for some
years now, finding its way into boardrooms, annual reports and the jargon of
fashion-conscious executives (Devanna, Fombrun & Tichy 1981; Buller 1988;
Walker 1992; Gratton 2000, p. 76).

13
Gubman (1998, p. 292) refers to the “era of talent”, commenting that “today,
talent is the fundamental resource in business”. Similarly, Handy (1995, p. 23)
emphasised intellectual endeavour as the source of sustainability in the emergent
global economy noting that “focused intelligence, the ability to acquire and apply
knowledge and know-how, is the new source of wealth”. CEOs of Fortune 500
companies also express these sentiments. Jack Welch, former CEO of General
Electric is quoted as saying that “the day we screw up the people thing, this
company is over”, and following on from Handy’s (1995) poignant comment about
Microsoft’s only factory asset being the imagination of its workers, Bill Gates
declared that if they were to “take [their] 20 best people away…. Microsoft would
become an unimportant company” (Amernic 2004, p. 33).

Various attempts to clarify the emergent commercial value of people resources

have emphasised the fact that strategic business issues are usually inextricably
linked to and impacted by people issues (Walker 1994; Becker, Huselid & Ulrich
2001). Beer et al. (1985) were compelled to make the point that most strategic
business decisions will have repercussions for the people of the organisation citing
simple examples such as: a growth strategy will create pressure for a workforce
that must respond to increased levels of production, the introduction of new
technology will demand the upgrading of the skills of its intended users, and the
relocation of a plant may impact negatively on employee morale. Human
contribution is critical because it is the company’s human resources who not only
develop a firm’s business strategy but also carry out and determine the success of
its implementation. Without people there is effectively no business. Moreover, all
other components of organisational life remain inert and functionless until they are
activated by people and given some purpose. Hence, people are not just the
defining organisational resource, people and the organisation of which they are a
part and in which they work are effectively the same thing (Cooke & Armstrong
1990; Cascio 1995; Fitz-enz 1997).

The emerging commercial value of people has been highlighted by Kaplan and
Norton (2004) amongst others, who note that more than 75 percent of company
value is now found in intangible assets such as knowledge and information (i.e.
emanating from people), with net book value assets representing less than 25
percent of market value (Becker, Huselid & Ulrich 2001). This recognition of the
strategic significance of human resources for business has resulted in a higher
premium being placed on people as organisational resources and a gradual
alteration in the way labour is collectively viewed and managed (Thite 2004). In
many companies, employees have gone from being viewed as burdensome costs to

14
investments or assets with the potential to enhance the value of the enterprise
(Wright, McMahan & McWilliams 1994; Greer 1995; Delery & Doty 1996; Becker,
Huselid & Ulrich 2001). Gubman (1998) observes that there has been a move
away from shareholder value as being the primary focus for many firms and that
greater investment is now being directed towards employees in the form of salaries
and benefits. There is also a growing perception among stock analysts, pension-
funds and investors that companies demonstrating high levels of competence in the
management of their employees are likely to be stronger investments and hence
will take this dimension of a company into consideration when determining their
investment strategies.

The emergence of Knowledge Management

The concept of labour has undergone a transition from being a resource of

comparatively low organisational status into one that is a much more highly prized
commodity or asset, frequently referred to as “intellectual capital”, “human capital”
or “knowledge capital”. Ulrich (1997, p. 12) has described intellectual capital as
“the collective insights, knowledge and commitment of employees within an
organization”. Rothwell, Prescott & Taylor (1998, p. 180) explain knowledge capital
in terms of “the sum of information and thinking generated by the human resource
in the organization”, and “the collective economic value of an organization’s
workforce”. Highlighting the broader, more complex dimensions, the concept is
further explained as:

“….the collective experience of an organization’s workforce called

institutional memory (what people remember about what the organization
has done in the past); the current mix of know-how available to the
organization, known as the talent pool (who is available to meet the
organization’s current challenges); and the future prospects of the
organization’s workforce to come up with innovative solutions to problems,
known as creativity (how well people in the organization are positioned to
come up with break through ideas to address past, present or future
problems faced by the organization)” (Rothwell, Prescott & Taylor 1998, p.
180).

Acknowledgement of the important role of human beings in the ability to achieve

competitive advantage has led to the emergence of a new managerial discipline;
that of Knowledge Management (Sofo 1999; Davenport 1999). Knowledge
Management has been described as the:

“Creation, distribution, validation and utilization of explicit and tacit

knowledge at…. the individual, group, organisational and community level
through…. the harnessing of people, processes and technology for…..the
benefit of those involved and affected by it” (Thite 2004, p. 8).

15
One way the basic concept of knowledge management has been explained is that
enterprises compete on the basis of competence and as it is people with their
capability who determine the uniqueness and desirability of products, the way that
organisations manage their people will then determine the organisation’s ultimate
level of success (Sofo 1999; Thite 2004). Competencies as embodied in people are
recognised as corporate resources to be deployed and allocated according to
strategic needs and objectives (Pralahad & Hamel 1990). Consequently, companies
are encouraged to apply themselves to the task of identifying how they can make
this connection most effectively (Davenport 1999).

In order to promote innovatory behaviour among employees, it is recognised that

firms must provide the types of work environment where this is most likely to occur
(Miles et al. 1978; Sofo 1999). Drucker et al. (1997) has described the challenge
for today’s business managers in terms of determining:

“….how to lead the organizations that create and nurture knowledge, how to
set our machines aside and rely on instinct and judgment, and to maintain,
as individuals and organizations, our ability to learn” (quoted by Thite 2004,
p. 24)

The Learning Organisation

These activities have been linked to the concept of the Learning Organisation
(Senge 1992; Ulrich 1998a; Denton 1998). Senge’s (1992) seminal work, The fifth
discipline: the art & practice of the learning organization, described the features of
a learning organisation in terms of a place….:

“….where people continually expand their capacity to create the results they
truly desire, where new and expansive patterns of thinking are nurtured,
where collective aspiration is set free, and where people are continually
learning how to learn together” (Senge 1992, p. 3).

Within the learning organisation the task of management is to facilitate individual

and group learning and by so doing unlock the potential for innovation and creative
activity that exists in the minds of the people who work for the firm (Lin 2004).
This implies the adoption of strategies that persuade people to share their
capabilities and contribute their discretionary effort (Sofo 1999; Davenport 1999;
Ghoshal & Bartlett 2000). Davenport (1999) proposed that employees should now
be viewed as investors in the business; contributing their effort, knowledge, skills
and creativity while expecting a return on this personal investment. If companies
view their people as assets he argues, the focus of attention should be on how the
company can increase its investment in this resource. As the “chief engine of

16
prosperity”, he suggests that it is the workers who now own the corporation and its
wealth. In effect, the traditional balance of power has begun to alter with the
exchange of value reflecting a move towards a form of partnership between
employer and employee (Davenport 1999, p. 4; Bartlett & Ghoshall 2003).

Many firms routinely undertake studies to analyse the way in which they manage
their workforce, with a view to identifying how they can best utilise their human
capital and implement management practices that will deliver the best results from
these assets. Consideration is given to the methods and principles used to attract,
select, compensate, develop, reward, motivate, appraise and retain the workforce
(Rothwell, Prescott & Taylor 1998; Becker, Huselid & Ulrich 2001). There is greater
focus on those core competencies that are central to customer requirements, how
best to build and leverage the necessary people-based capability and the
implications of losing and having to replace the essential skill base (Pralahad &
Hamel 1990; Ulrich 1998a; Becker, Huselid & Ulrich 2001).

One outcome is that companies are under pressure to provide training and
retraining in specialist technical skills to ensure that they possess sufficient
knowledgeable experts needed to fulfill operational requirements, to determine the
appropriateness of technological developments, and in turn to implement
associated systems and redesign work to maximise the corresponding benefits
(Pralahad & Hamel 1990; Ulrich 1998a). In addition, associated with the
management of knowledge is the mastering of its illusive and intangible nature,
coming to terms with the absence of exclusive ownership of the asset by the
company, as well as managing the complex maintenance requirements of the
carriers of this intellectual commodity. Increasingly, the goal for companies has
been to create work environments that drive workforce alignment with business
goals and their contribution to the development of the organisation though removal
of unnecessary regimentation, restrictions and penalties traditionally found in
labour management (Ulrich 1997a; Ghoshal & Bartlett 2000; Davenport 1999).

Further consequences include the suggestion that organisational structures and

systems should be redesigned according to socio-technical principles that
accommodate the nature and needs of people resources, not just the tasks in which
they are engaged (Cappelli & Crocker-Hefter 1996; Thite 2004). There is support
for an overhaul of the strategic planning processes within companies so that these
are redesigned to recognise and recalibrated to measure the value of human as well
as financial resources (Bartlett & Ghoshal 2003). In some quarters a fundamental
paradigmatic shift is proposed; that companies should no longer be viewed as
economic institutions but rather as social institutions (Cappelli & Crocker-Hefter

17
1996; Ghoshal & Bartlett 1997; Gratton 2000). Ghoshal and Barlett (2000) refer to
a new “moral contract” between employer and employee that places greater
emphasis on the creation of constructive, mutually beneficial and rewarding
working environments that address workforce expectations, needs and preferences.

Efforts to survive and prosper in the new commercial order combined with the
increasing strategic significance of people as organisational resources, have
propelled the development of a diverse range of management tools and techniques
designed to assist the business community achieve optimal utilisation and results.
The requirement to address the effective management of human resources has
resulted in the emergence of a new managerial discipline, that of Strategic Human
Resource Management, commonly referred to as Strategic HR and denoted as
SHRM (Fombrun et al. 1984; Ferris et al. 1999; Kraut & Korman 1999).

o Strategic Human Resource Management (SHRM)

Strategic Human Resource Management is arguably the most important and

dramatic development in the area of theoretical and applied management of people
in recent times (Ulrich 1997a; Baron & Kreps 1999). As a contemporary
management discipline, SHRM has increasingly attracted the interest and attention
of many prominent international management thinkers of the day and is currently
at the forefront of research activity and business focus. A consequence of this is a
continual flow of literature addressing associated developments and new ideas,
emanating from many of the key publishing houses and academic locations
throughout the developed countries. SHRM is a product of its time, achieving
prominence through its ability to respond to the extraordinary developments that
have come to characterise the changed world in which business and organisational
life now takes place. It reflects a revolutionary transformation in the way that
many corporations view their human assets and draw on continuously evolving
managerial technology and practice to optimise the contribution of this critical
business resource (Ulrich 1997a; Bamberger & Meshoulam 2000).

As with many management trends and developments, it is difficult to pinpoint

precisely when SHRM first appeared as a managerial concept and achieved
prominence in organisations as an applied business tool. There is evidence to
suggest that the underlying philosophy and associated managerial concepts started
to emerge noticeably in the United States in the late 1970s. Certainly much of the
early, most original work on the subject was published during the 1980s
(Armstrong 1992b; Lundy & Cowling 1996; Tyson 1997; Ulrich 1998b; Ferris et al.
1999). Initially, there was relatively little clarity and understanding about the

18
discipline and its purpose, and few companies recognised SHRM as a specific
management approach. This is reflected in the published work of the time which
tended to be rather simplistic and experimental in nature. However, it was during
the 1990s that SHRM started to become institutionalised by large corporations, with
its vocabulary becoming commonplace in management language and consultants
being engaged to develop models and methodology (Ulrich 1998b). SHRM is now
taught in universities, jobs are advertised under its banner and the term is
increasingly in common usage among human resource management professionals,
business writers and commentators alike. Those working in companies as human
resource management specialists are finding themselves more frequently engaged
in the strategic management of people and having to develop new skills to support
the much-expanded dimensions of this approach (Wright & McMahan 1992; Ulrich
1998b).

Since the 1980s, an abundance of highly eclectic literature has been generated on
the subject. Coming from a range of countries, this literature reflects the dramatic
rise in interest and associated attention both from academic researchers and within
the business community itself (Mabey et al. 1998). Its international and
professional diversity has contributed to tremendous variation in the way the
subject has been defined, approached and studied, and in many instances
intertwined with other disciplines and associated organisational areas and
managerial issues. The body of literature is broad in scope including many texts
that are highly prescriptive, providing guidance and instruction about how SHRM
should be practiced, while others are more descriptive, giving examples and
illustrations of organisations that have undergone adoption and implementation.

There is a notable contrast between work undertaken within academic

environments and that produced by writers more interested in workplace
application. Work undertaken in an academic environment tends towards the
conceptual, theoretical and abstract, where the purpose is to develop theory,
connections and coherence around the subject, in contrast to that work with a more
practical, accessible and relevant approach focusing on the realities of
organisational life. In essence, SHRM has developed as both a theoretical,
academic discipline and as an applied management tool or methodology for the
contemporary business environment, each drawing on the other as a source of
understanding, clarification and progression (Wright & McMahan 1992; Mabey,
Salaman & Storey 1998).

Stimulated by the broad and profound environmental changes, over the past 25
years or so SHRM has become an increasingly prominent field of study and a

19
mainstream management philosophy-cum-tool adopted by many large and well-
known corporations. Its emergence represents a major expansion and new focus
for the discipline concerned with the management of human resources in
organisations. Viewed by many as critical for business success in the twenty first
century, it is often heralded as the defining managerial approach for any enterprise
that wishes to remain a relevant and enduring player in the commercial world of
today and into the future (Lundy & Cowling 1996; Ulrich 1998b).

o The small business sector

As with SHRM, a considerable growth of interest in the management of small

enterprises began to emerge in the later decades of the twentieth century,
representing a unique development for this sector. Small firms started to assume
an unprecedented economic, political and social importance within the context of
contemporary commercial history. Again influenced by both major global and local
developments and events within the international and regional communities in
many of the developed countries, small business management has evolved as an
individual and highly differentiated business discipline, witnessing a significant
flourishing of associated interest and activity in the form of research, education,
services, literature and specialist publications, as well as widespread debate and
public discussion at all levels of society (Storey 1994; Kuratko & Hodgetts 1995;
Karpin 1995; Commonwealth of Australia 1997).

A number of factors have been identified as playing a role in elevating the status of
the small business community. Possibly the most significant has been the
perception that small and medium-sized firms have the potential to make a
significant contribution to addressing the pervasive economic problems experienced
by many of the developed countries over the past few decades. Some of these
problems have been linked to gruelling recessions, inflationary instability, mass
unemployment and uncompetitive business performance particularly among larger
enterprise. Small firms, as diverse and abundant commercial entities, have been
increasingly heralded as an alternative, a saving force for nations experiencing
deteriorating socio-economic conditions by offering the potential to build wealth and
prosperity on a local and international level (Stanworth & Gray 1991; Storey 1994;
Kuratko & Hodgetts 1995; Karpin 1995).

In addition, significant developments in the markets for goods and services, such as
the trend towards greater product customisation and specialisation, the expansion
of the services, information and innovation-intensive high-tech sectors, as well as
the decline in industrial mass production have opened up opportunities previously

20
beyond the reach of the smaller operator (Curran, Stanworth & Watkins 1986;
Robinson & Pearce 1994). The requirement to respond quickly and flexibly to
changes in market demand and expectation has been increasingly associated with
the small business sector, where companies possess less complex and congested
internal infrastructure and hence face fewer organisational obstacles than big
business operations. Social factors have also contributed to the rise in small
business fortune. These include the opportunity to absorb the victims of labour
downsizing initiatives that continue to pervade larger corporations, a growing
recognition of the value of creating productive workplaces that promote cultures of
loyalty and commitment commonly associated with the smaller firm workplace, as
well as changing perceptions about the respectability of the sector and the self-
employed entrepreneur. It is in this way that key environmental developments
have propelled the small business sector onto centre stage where it now finds itself
playing a more prominent and valued role in both the broader business community
and society at large (Karpin 1995; Commonwealth of Australia 1997).

The capacity to make a greater commercial and economic contribution in an

increasingly competitive business environment has stimulated focus on the
dynamics of the small business operation and its management and the factors that
enhance or impede company performance. The process of building understanding
about these companies has led to the realisation that not only is small firm business
management a particularly challenging activity but that these companies struggle
to survive and grow successfully. Of particular interest have been the factors that
influence survival among smaller firms and their progression towards becoming
larger business concerns (Commonwealth of Australia 1990; Karpin 1995;
Commonwealth of Australia 1997).

One of the key issues identified by researchers and those engaged with the small
business community in general is that the experience of growing a small enterprise
is associated with greater focus on the management of business strategy (Gibb &
Scott 1985; Pleitner 1989; DUBS 1990a). Studies have shown that the growth
experience invariably requires firms to develop greater clarity about their longer-
term direction and objectives and how these will be achieved. Owner-managers
find themselves increasingly preoccupied with the broader more macro dimensions
of the business, considering the goals of the company and assessing growth
potential in light of the market in which they are operating and the infrastructure
necessary to support a more diversified or larger product base (Churchill & Lewis
1983; Neil 1986). Moreover, growing firms are found to undergo significant
changes, both in terms of their internal operation and their interface with the
external environment. The enterprise is likely to encounter increased operational

21
activity, more diverse logistical issues, higher levels of organisational complexity
and greater demands from its customer base. The business relationships with
customers, suppliers, financiers, landlords, agents and in some cases members of
the owner-manager’s family may alter in light of imminent developments within the
company. Consideration is required in establishing internal infrastructure to
accommodate and support these changes and to introduce methods and
mechanisms that provide adequate efficiency, quality and control (Gibb & Scott
1985; Barber, Metcalfe & Porteous 1989; Bosworth & Jacobs 1989; DUBS 1990a).
Additional resources may be needed which means establishing how these are to be
sourced and financed and in turn incorporated into the overall scheme of the
existing operation. Particularly critical is the management of the growing
workforce, involving the acquisition of appropriate skills, addressing the needs and
expectations of a more diverse group, as well as building a cohesive work team
able to deliver on business outputs (Scase & Goffee 1987; Barber, Metcalfe &
Porteous 1989).

Ordinarily, owner-managers of small companies assume multiple roles, concerned

with personally managing and handling the routine and daily activities of the core
business operation and the range of necessary support functions. They control
most, if not all, aspects of running a small, centralised business. However, to
continue to focus exclusively on the day-to-day business and the immediate
operational activity and issues of the firm when faced with the prospect of growth,
may undermine or limit the firm’s potential as it moves into an expanded business
environment. It is recognised that the process of growth can represent a major
adjustment for owner-managers, often requiring significant change to the way the
business has been managed previously and as such, can be a time when the firm’s
viability and capacity to survive into the future are particularly at risk. The
challenge for owner-managers is to identify how to manage the numerous evolving
areas of the business so that these are best structured to meet the growth
objectives (Churchill & Lewis 1983; Scase & Goffee 1987; Bosworth & Jacobs 1989;
Merz & Sauber 1995).

ƒ The value of juxtaposing SHRM with the small growing firm

Two factors point to the value of exploring the relationship between human
resource management strategy and smaller firms. The first relates to the external
changes taking place in the commercial environment with greater reliance on
human capital as a key source of competitive advantage. The advent of the
knowledge economy, where commercial competitiveness emanates from the ability

22
to respond swiftly to rapid developments in product design and their mode of
production, has increased the value of people as primary contributors. As people
represent a common resource for both large and small companies regardless of
their size, firms are faced with considering the role that human resources will play
in supporting their business activities and determining performance outcomes.
Large and small companies face the common task of mobilising a committed and
capable team of people who will be instrumental in building and implementing
business strategy. The imperative for firms to attract, retain, develop and make
effective use of key human resources in their business implies a dedicated focus on
this area of business management, as well as value in exploring available
managerial technology that can support and improve these processes (Hendry,
Arthur & Jones 1995).

Secondly, the task of growing a business successfully is associated with the ability
to manage the internal dynamics of a larger workforce and the socio-behaviourial
developments that occur in companies as part of the growth experience. The
increased dependence on the workforce as an organisational resource demands
more of the owner-manager’s attention. This is particularly cogent where growth
implies a diversification of the workforce or a notable increase in the firm’s
headcount. The growth experience may involve different types of people to
undertake previously unneeded roles or roles formerly assumed by the owner-
manager. As with other business resources, owner-managers need to consider the
human resources required to support the growing business and how these should
be managed in order to facilitate and support the transition most effectively. In
addition, assistance in the form of professional and/or managerial staff will start to
become important. Changes in approach from managing just a few individuals to
managing larger teams and to delegating managerial and operational
responsibilities also start to occur (Marlow & Patton 1993). Where new and
different types of employees are introduced into the business, a new structure to
accommodate an enlarged team and manage the associated cultural and
organisational dynamics is required. The capacity to manage an evolving workforce
demographic necessitates the introduction of effective business systems; new work
patterns and altered leadership styles that ensure people as an organisational
resource are supported and positioned to help the business achieve its goals. As
leaders of the team, owner-managers are accountable for finding ways to achieve
this successfully.

While understanding about the strategic management of human resources in large

companies has markedly progressed in recent decades and is supported by
management tools designed to assist managers in the strategy formulation and

23
implementation process, much less is known about the way in which owner-
managers in the growing small business sector approach the management of their
people (Ritchie 1993; Heneman & Berkley 1999; Katz et al. 2000; Kaman et al.
2001; Tansky & Heneman 2003; Cardon & Stevens 2004). Despite the generally
accepted importance of small firms, in comparison with management practice in
large companies this sector has received less attention from researchers. Human
resource management in the small business sector has tended to receive only
superficial and cursory attention in the past (Ritchie 1993; Heneman & Berkley
1999). Many standard small business texts invariably include little more than
passing reference and there is limited assistance to guide the prospective
entrepreneur. Frameworks for considering the people dimension are fragmented,
drawing on theories of human behaviour and management practice developed for
the large business environment, often considered inappropriate for the smaller firm.
As Katz et al. (2000) indicate the combination of the two has so far been largely
overlooked. Little is known about the way in which small firms approach their
strategic people issues and whether the approach increasingly adopted by large
companies might be applicable and able to assist the smaller growing operation
(Katz et al. 2000; Heneman, Tansky & Camp 2000; Kaman et al. 2001; Tansky &
Heneman 2003; Cardon & Stevens 2004). In bringing together these two fields of
management, it is intended to expand and progress current knowledge and
understanding about the people management needs of growing small firms in their
efforts to become larger, successful commercial entities and in particular
investigate the potential of the SHRM methodology used by larger corporations to
address the growing demands of human capital management.

ƒ Key assumptions

A number of assumptions are associated with this research project. Some of these
emanate from popular understanding and beliefs about a range of both
environmental and organisational factors that constitute the circumstances and
ways in which companies operate, while others stem from the manner in which it is
generally thought and promoted, although not always proven, successful companies
are managed. Certain areas of business management suffer from a lack of
theoretical clarity and empirical certainty, possessing many anomalies and
paradoxes. They attract no shortage of varying and evolving views about how
companies should manage their affairs such that their commercial potential is
fulfilled and their contribution as economic as well as social entities is optimised.
Dealing here with two relatively immature management disciplines, the foundations
on which this study is based is not without its gaps. As such there has been

24
reliance on prevailing conventional wisdom in these fields as well as on
contemporary ideas yet to be grounded in hard empirical data.

The first assumption is that with the advent of growth small firms need to adopt a
more strategic approach to their business due to the increased organisational
complexity that usually accompanies the growth process. While in the early stages
of the development of a business, it may be sufficient to apply simple managerial
tools and technology to assist with directing and controlling the operation, relying
on a notepad, sharp pencil and a good memory. With growth, it is generally
believed that owner-managers must make an active transition into a more strategic
mindset in terms of how they manage their business and that they will require
education and tools to assist with this process. In order to achieve desired growth
or respond in a systematic way to growth opportunities that present themselves,
while ensuring that the daily business activity remains on track, owner-managers
may benefit from business planning techniques and methodology that can help to
guide the growth process and provide a useful framework for associated analysis
and decision-making. The management of strategy in large corporations has long
been a source of debate in terms of how it should be approached and ultimately its
ability to deliver sustained competitive advantage (Chaharbaghi & Lynch 1999).

Consistent with gradual developments in the business environment, methodology

for tackling the strategic management of markets, products and resources has
evolved but it remains a contentious issue with regard to its ability to translate
managerial activity in this area into significant commercial returns. Nevertheless,
examination of the tools available for strategic planning and implementation
indicate that there may be some benefits, not only for large companies faced with
demanding commercial environments and complex business structures, but also for
smaller growing firms that are beginning to acquire some of the features of the
bigger corporation (Gibb & Scott 1985; Flamholtz 1986; DUBS 1990b; Sandberg,
Robinson & Pearce 2001).

Stemming from this first assumption is the second, which incorporates the notion
that the adoption of a strategic approach to the management of human resources
in small growing organisations is likely to be of benefit in terms of delivering
improved business performance. In the early stages of this research, based on a
largely superficial understanding about the nature and purpose of SHRM it appeared
that there was likely to be relevance in this approach for all companies, regardless
of their size. It is reasonable to say that at the most fundamental level commercial
entities possess certain common characteristics, undergo similar types of
experience and face similar problems and obstacles. For example, macro

25
developments such as changes in government economic policy, or the sudden lack
of availability of a particular raw material, or quantum leaps forward in an area of
manufacturing technology, or the widespread decline in skilled young people within
the labour market, will have similar implications for large and small firms alike. In
other words, some areas of business management are generic to all commercial
operations and the presence of people as a principal organisational resource as well
as the need to efficiently and effectively manage this asset, exists as one of these.
Hence, if there is evidence to suggest that large companies are undergoing
fundamental changes in their approach to the management of this resource, it
might transpire that there will be some value in investigating the reasons for this
and identifying what lessons there might be for the smaller operators (Penrose
1959; Robbins & Barnwell 1994; Holliday 1995).

The third assumption relates to the stage in a small company’s organisational

growth at which a strategic managerial approach should optimally occur. There
exists literature that describes the experience of growing small firms as they face
higher levels of operational complexity and the consequential introduction of more
formalised systems and structures. This is a pattern of behaviour that is generally
associated with organisational growth among these types of firms (Churchill &
Lewis 1983; Scott & Bruce 1987; Moran 1998; Greiner 1998). However, it is not
clear at which point in the developmental process a transition in managerial
perspective and approach does or should occur. As will be shown later, studies
have referred to the building of human resource management functional
departments, the hiring of technically specialist and managerial staff, the
documenting of company human resource management policies and even attempts
at implementing cultural change programmes. However, no consistent information
is available that indicates the defining event or stage of the development process
that activities of a strategic type are more likely to happen. Some have assumed
that these changes may be in part linked to the growth in workforce numbers,
probably at some point in the early stages of having become a medium-sized
company (i.e. between 20 and 199 employees) (Barber, Metcalfe & Porteous 1989;
Storey 1994; Kauffman 1997).

ƒ Research methodology design

At the time of embarking upon this research project, there existed an expectation
that the general area of focus for the study would be grounded in and supported by
an established body of information and knowledge. It was anticipated that the two
distinct management disciplines under investigation, that is the field of Strategic

26
Human Resource Management and the field of small business management (and in
particular the component aspects of growth and human resource management
within small firms), would be areas that were already well researched and
documented. However, as the study evolved it became apparent that these two
disciplines were very different in these respects. SHRM has received much
attention from the business and academic communities in recent times resulting in
a vast body of literature comprising the extensive development of theoretical and
applied knowledge about the subject. In contrast, the literature dealing with the
subject of small business management, and in particular that covering the area of
human resource management within this domain remains much more limited,
having undergone only relatively superficial development in terms of its theoretical
foundations and offering only rudimentary insights into applied practice within an
operational context (Katz et al. 2000).

Consequently, this study has faced several distinct challenges. In the case of
SHRM, it has been necessary to explore a considerable quantity and variety of
sources of information and be selective in determining those that are likely to
contribute value to the study. In contrast, in the case of the practice of human
resource management in small firms, both growing and steady-state, the task has
been to work with a body of knowledge that is limited in scope, still superficial and
unsubstantial in its content, and where the available empirical research suffers from
many gaps and inconsistencies that might be reasonable to expect in a relatively
immature discipline (Katz et al. 2000). These factors have contributed significantly
to the way in which the study has been approached and the eventual design of the
research strategy.

o The research strategy

The process of identifying the research strategy considered two key factors; the
first being the absence of sound and tested theory governing the research
questions and the second relating to the limitations inherent in collecting data in
the subjective and complex areas of human perception, attitude and behaviour.
These factors indicated the appropriate application of the inductive investigative
method, or development of grounded theory, whereby data are gathered and
observations are made from which patterns are identified that serve to generate a
generalised theory or model, in effect from the ground up. This approach results in
the generation of probabilistic explanations or generalisable inferences about
occurring trends emerging from the research process supported by both experience
and associated knowledge as provided by the literature (Sekaran 1992; Black
1999; Creswell 2003; Bryman 2004).

27
Emerging from the review of the literature on human resource management
practice in small businesses and the associated assumptions that emerged,
propositions were developed as the focus of the investigative process:

¾ P1. That there is a positive association between the adoption of a strategic

approach to the management of human resources and small firms
experiencing business growth;

¾ P2. That small firms manifest similar strategic human resource management
issues to large corporations and hence require aides and methods to address
these;

¾ P3. That the theoretical and applied discipline of Strategic Human Resource
Management demonstrates relevance not only for large organisations but
also for small growing organisations.

o Detail of the research methodology

The research design was structured around four principal activities.

The first task entailed conducting a detailed textual analysis of the literature
addressing the field of SHRM. The objective was to acquire information that would
provide an understanding of the nature and purpose of this management discipline.

The second task consisted of undertaking a critical review of the literature covering
the topic of human resource management in small firms, in particular as it relates
to the strategic management of the workforce, to identify the current status of this
body of knowledge and the associated perspectives held by researchers and
theorists in this field.

Task three involved a fieldwork research exercise, in which multiple case studies
were carried out for the purpose of providing insights into the human resource
management practices of a group of small, medium-sized companies that have
undergone recent organisational growth and made the transition from being small
business operations into slightly larger commercial enterprises.

The fourth task involved the process of taking the concept of SHRM with its various
component parts (as undertaken in the first phase), and examining the information
supplied by the respondent owner-managers about their approach to the

28
management of their employees, together with the evidence in the literature on
human resource management practice in smaller firms (as acquired in phase two
and three), in order to analyse the presence of relationships and connections
between the two. The results of this interpretative synthesis led to a set of
inferences and subsequent conclusions.

Step 1: Step 2: Step 3:

Define SHRM Review literature on Conduct case studies on small,
framework SHRM in small firms medium-sized firms’ approach to
human resource management

Step 4: Step 5:
Compare components of SHRM with Compare components of SHRM with
findings from literature review management approach in small firms

Step 6:
Analysis and interpretation of findings

Step 7:
Generation of conclusions and recommendations

Detailed clarification on the nature and choice of this overall approach follows
below.

ƒ Textual analysis (Strategic Human Resource Management)

Unfortunately for both the researcher and professional practitioners in general, the
definitive work on SHRM in which the clarity of purpose and optimal approach are
finally presented in a neat and comprehensive framework, has not yet been written.
Nor would it appear that such a work is imminent. The reasons for this are
numerous. SHRM is evolving gradually and is continuously being developed. As a
contemporary managerial discipline, it has emerged from and become integrated
with many other fields of management that have themselves been developed either
earlier, concurrently or subsequently. It is not easy to identify precisely its
historical progression as a discipline concerned with the management of people in
organisations, and in particular its relationship with its operational predecessor
Human Resource Management (HRM). In some instances, HRM has been regarded

29
as the forerunner to SHRM, in others as a parallel development and even as the
same thing (Legge 1994; Hendry 1995; Mabey, Salaman & Storey 1998).

There exists neither consensus about how SHRM should be defined, nor a fully
encompassing yet succinct definition. It comprises a range of different component
parts, offering writers and researchers with many points of entry and areas of
exploration. In an effort to determine where it fits within the full scope and variety
of management as a business and organisational activity, it becomes evident that
there are multiple interfaces and connections between SHRM and other managerial
disciplines (e.g. strategic business planning, organisational development,
intellectual capital management, industrial relations, cultural change and quality
management). The boundaries between these fields are often unclear, particularly
where researchers have interwoven the various disciplines in pursuit of
relationships and connections. As such, where there is little demarcation between
one field and another, SHRM potentially evolves into a very large field of study
(Wright & McMahan 1992; Tyson 1995b; Bamberger & Meshoulam 2000).

Further technical obstacles emanate from the fact that the discipline incorporates
consideration of a range of human roles and relationships from both socio-political
and structural perspectives that can be difficult to describe and quantify in specific
terms. SHRM assumes not only a highly conceptual and abstract quality being
concerned with intangible and metaphysical matters such as philosophy, cultural
dimensions and organisational configurations, but also elements of methodology
that are distinctly practical and intended for application in the workplace.
Additionally, SHRM presents difficulties with regard to its associated management
terminology and concepts, with contributors to this field adopting a certain license
in their use of language leading in some instances to confusion and ambiguity
(Wright & McMahan 1992; Dyer & Reeves 1995; Bamberger & Meshoulam 2000).

The consequence of studying a discipline of such complexity, variability and

inconsistency that also lacks a well-defined framework with which to work has been
the need to explore many related avenues and achieve some success with
unraveling the web of associated and related elements. If we are to consider the
relevance of SHRM for smaller companies, the process must commence with a
degree of clarity about and commitment to what is meant by the term SHRM. To
resolve this problem it was necessary to model a coherent representational
structure that reflects and rationalises the essence of the discipline, which only then
could be used to venture into the small business environment. A considerable and
unanticipated proportion of the research activity was devoted to this end. The
result has been an interpretation of the development of current understanding of

30
the nature and purpose of SHRM, and the dedication of several chapters of the
thesis to a synthesis of this work (Strauss & Corbin 1998).

o Selection of materials

Where voluminous quantities of literature are available for review within a research
project, a process of selection must inevitably occur with the aim of being as
thorough as possible. Decisions were made about which would be the most
pertinent, useful and important SHRM texts. The study has not attempted to be
exhaustive in its coverage, but to be adequately representative and achieve at least
a reasonable critical mass. Texts were selected based on their prominence within
the body of management literature (i.e. frequently referenced, discussed,
applauded or referred to), their role as instigators of new or developing
management trends, their historical significance, their ability to provide reasonable
breadth of representation in terms of subject matter and ideas, and their trans-
national representation. Selections were also made based on their pedigree in
terms of emanating from quality publishers and institutions (such as Jossey-Bass
and the Harvard Business Press) and less distinguished sources such as the
international and local Press, popular management journals, as well as practicing
organisations wherever the latter were available.

o Sources of material

To obtain the required materials, extensive searches were undertaken in the

university libraries of Western Australia and the available university databases,
Proquest/ABI-Inform proving to be particularly useful. References were sought
using bibliographies found in mainstream business management texts. Information
on SHRM has also been gleaned from international and national general and human
resource management conferences, from professional training courses and
seminars in this field, personal experiences gained over time as a practicing
professional, as well as numerous discussions with a wide range of individuals from
many business environments. While acknowledging that the possession of prior
knowledge and experience in this field by the researcher might potentially
undermine the objectivity and neutrality with which the study needs to be
approached, having a reasonable grasp of many of the issues under investigation
undoubtedly contributes a greater depth of appreciation and understanding to the
process and outcome (Patton 1991).

31
o Categorisation of SHRM

This collected body of information was sorted and categorised according to the
principal themes and properties inherent in the concept and practice of SHRM, with
each of the main elements being subsequently explored and expanded. The
outcome is a structured framework comprising the essential elements of SHRM.
This was used as the basis for determining its presence in smaller firms as might be
confirmed in the empirical research and descriptive texts, as well as in the
companies that participated in the fieldwork (Strauss & Corbin 1998).

o Literature review (Strategic Human Resource Management in smaller firms)

The second stage of the data gathering process consisted of searching within the
existent body of literature on human resource management in small firms for
information that would provide insights into the nature of the sector’s approach to
both strategic and people management issues. Evidence was sought to gauge
whether small businesses possess a purely operational orientation in these areas.
In addition, data were collected pertaining to the opinions and perspectives of
researchers and writers themselves on the strategic behaviour of smaller firms.
Information was sought through the Curtin University library databases and in
particular Proquest/ABI-Inform, through recommendations and referrals to relevant
sources, as well as likely providers such as government agencies, the Internet,
small business professional bodies, and the Small Business Development
Corporation in Perth, Western Australia. Through these sources pertinent
information was extracted which was then coded thematically in preparation for
analysis against the SHRM framework constructed for this purpose (Yin 1994).

o Fieldwork

The purpose of the fieldwork was to gather information about the way in which a
group of owner-managers of small, medium-sized companies approach the
management of their human resources. More specifically evidence was sought to
determine whether owner-managers demonstrated an engagement in strategic
behaviour and activity when managing their workforce and the issues associated
with this.

A qualitative-naturalistic approach within the context of a case study methodology

was employed for this part of the research (Yin 1994). The fieldwork comprised 10
case studies of small, medium-sized companies located in Western Australia; that is
organisations that had grown from being small firms and employed sufficient

32
numbers of employees to be officially categorised as in the early stages of being a
medium-sized (20-199) company.

Yin (1994, p. 13) describes a case study as “an empirical enquiry that investigates
a contemporary phenomenon within its real-life context, especially when the
boundaries between phenomena are not clearly evident”. There are a number of
advantages inherent in the qualitative multiple case study approach. Patton (1991,
p. 54) states that:

“Case studies…. become particularly useful where one needs to understand

some special people, particular problem, or unique situation in great depth,
and where one can identify cases rich in information – rich in the sense that
a great deal can be learned from a few exemplars of the phenomenon in
question”.

Case studies, it is suggested are particularly useful for a social-behavioural enquiry

where interest is focused as much on what happens as to what is the cause of the
happening. Case studies permit a more individualised outcome and assist with
capturing differences in unique variation or in one experience from another. They
recognise the pluralistic nature of the subject matter. Direct quotations will reveal
a respondent’s depth of emotion and the ways in which they have organised their
environment, as well as providing insights into people’s thoughts about what is
happening around them (Patton 1991). The case study approach has been
described in terms of a process of discovery that can provide a picture or slice of
life about how people behave, feel, believe, and what they know and are concerned
about (Strauss & Corbin 1998). The objective is to gather data on multiple aspects
of the subject under study in order to assemble a comprehensive picture of the
social dynamic of the particular situation.

Moreover, Strauss and Corbin (1998, pp. 4, 11) have commented that the
qualitative method is “one way of gathering knowledge about the social world….
qualitative methods can be used to explore substantive areas about which little is
known or about which much is known to gain novel understandings”. It is a useful
instrument when the researcher needs to probe more deeply into areas of particular
interest that arise, to gain a sense of what might be the priorities for the
respondent, as well as to permit a spontaneity in the data gathering process that
might elicit unexpected and useful insights. The flexibility and intimacy of the case
study method facilitates the sensitivity that a study of this nature demands
(Strauss & Corbin 1998). Here, the objective is to uncover the management
practices within these companies, a process that their owner-managers might find
confronting or threatening. Details will emerge about their personal management
style and abilities, as well as information about their value systems and general

33
philosophy pertaining to their relationships with the people who are involved in
running the business. An interactive approach enables a relationship to be formed
with the respondents, building a level of trust so that private matters can be shared
with greater confidence and ease. Furthermore, the qualitative approach implies
that more attention can be given to the situational setting and context, to
interdependencies, complexities, idiosyncrasies and nuance (Strauss & Corbin
1998).

Additionally, in contrast to the quantitative approach, qualitative research permits

greater in-depth and detailed study without being constrained by predetermined
categories of analysis or imposing pre-existing expectations and prior assumptions
on the object under scrutiny. While this approach typically produces a wealth of
information and increases understanding about the people and situations studied it
is acknowledged that its reduced capacity for generalisation is a disadvantage
(Strauss & Corbin 1998; Patton 1991).

o Fieldwork process

The process of conducting the fieldwork comprised a series of tasks. This included
the identification of a suitable and accessible group of respondents, initiating
contact with these individuals, preparation for the interviews, arranging and
carrying out the interviews, and finally transcribing the recorded interviews into a
format that could be used for analysis.

o Selection of the case study participants

The participants in the case studies were randomly selected from students who had
attended or were in the process of attending the Small Business Unit Growth
Program at the Curtin University of Technology in Western Australia.

The Growth Program is a university-based industry outreach course designed for

owner-managers of growth-oriented small and medium-sized enterprises. The
Program anticipates that participants are wishing to embrace change in their
businesses and adopt new ideas as they are preparing for long-term growth. The
course is structured around 16 one-day interactive workshops conducted over 12
months, with a maximum of 16 participants enrolled in each Program. To
participate in the course the students are expected to be owner-managers of
companies that have been established for five years and preferably employ more
than 10 staff. Much of the content of the Program draws on the teaching methods
and concepts developed over a period of approximately 20 years by the Small

34
Business Centre at the University of Durham in the United Kingdom (Curtin
University Small Business Unit undated[b]). Further details on the relevance of this
student group are provided in Chapter 10 covering the case study profiles.

o Research controls and parameters

The following parameters and research controls were established.

The unit of analysis was the owner-manager of the company. This was determined
by the fact that the owner-manager is invariably the most central, key decision-
maker in a small business and is the source from which the principal socio-cultural
dynamics of the company emanate. In the role of leader, the owner-manager
effectively establishes the tone for the business, how it will operate, who will
participate, the conduct of relationships and the expectations surrounding the
behaviour of the participating members of the small team (Moran 1998; Culkin &
Smith 2000).

Although the owner-manager represents the most pertinent source of information,

this choice of respondent presented a certain challenge for the study. Many
aspects of strategic management are cerebral in nature, involving mental activities
such as planning, analysing, decision-making etc, and as such are not easy to
observe. To determine the extent and nature of these activities, there is reliance
on the ability and willingness of the respondent to report these types of activities
coherently and truthfully. In a sense, the information is obtained second-hand and
judgments must be made about the levels of associated filtering and reliability.

The size of the sample group (10) was determined by balancing the need to acquire
a reasonable breadth of representation for a useful study, the availability of a
sufficient number of companies that conformed to the control variables, and the
time and resources needed to carry out interviews of sufficient substance.

The firms were selected from a subsection (20-50 employees) of the medium-sized
business category (20-199 employees). The decision to subdivide the business
classification was made on the basis that firms in the 20-50 FTE range represent
those more likely to be in the critical stage of experiencing or having recently
experienced workforce growth. The impact of this experience was considered less
dramatic and hence less memorable for larger medium-sized firms. It was
important for respondents to have clear recollections of their experience with
growth or to be in a position to describe their current experience of the growth
phenomenon. As such, the firms were required to have had experienced significant

35
business growth within the past five years or to be in a growth phase at the time of
the study.

Logistical considerations dictated that all firms selected for the study should be
based and operate exclusively in Western Australia. The firms selected represent a
range of industry sectors. Firms were not targeted based on their industry because
the study sought to achieve breadth of representation rather than commonality and
it was believed unlikely that a sufficient number of small firms could be found that
would meet a specific industry-type criteria.

o Interview process

Having identified a group of companies that conformed to the criteria established

for participation, letters were dispatched to each owner-manager inviting him/her
to participate in the study (see Appendix A). The nature and purpose of the study,
the relevance for the small business community and how the data would be
collected was explained and confidentiality around any information that they
provided was assured. (This confidentiality has been maintained within the thesis
itself, by referring to participating owner-managers in terms of the type of
commercial activity in which they engage, e.g. the “Engineering Manufacturer”, the
“Food Producer”, etc.). In addition, specific and related personal details about the
researcher were kept to a minimum at both the initial contact stage and during the
interviews, so that any pre-conceived notions about what the researcher might
want to hear would be reduced. Follow-up telephone calls were then made to
establish their interest in joining the study and to arrange interview times and
places.

In preparation for the interviews, lists of broad topic areas were compiled to assist
the interviewer cover a reasonably consistent and sequential range of issues. The
list was designed to elicit information about the owner-managers’ approach to the
management of their workforce that would be most likely to reveal the presence or
absence of any of the concepts, issues, beliefs and activities associated with their
approach to human resource management. Topic areas included the role of people
and their contribution to the organisation, the business planning activities
particularly in relation to the company’s human resources, the firm’s approach to
the management of people and important people-management issues and
concerns, as well as the use of HRM technology and tools. In general the purpose
was to acquire data about the respondents’ activities, experiences, feelings,
knowledge and perceptions pertaining to these aspects of the management of their
business without overly directing the discussion and influencing or prompting any

36
specific response. A range of additional information about the owner-managers
and their business was gathered to build a picture of the respondents as unique
individuals and to understand the broader context in which their businesses
operate. As such, details were sought about the owner-managers’ age,
background, education and working life, as well as the company they own and
manage including turnover, age, products, size, growth, management structure,
lifecycle and goals (Patton 1991). Furthermore, the decision to avoid specific
management terminology or jargon, with which the participants may not have been
familiar or may have led to inconsistencies in application, implied the use of general
open-ended questions in simple, layperson’s language (Gibb & Davies 1992).

In view of the breadth of the subject matter, it was anticipated that respondents
would steer their responses to particular areas of interest or concern, and that
issues would emerge spontaneously. The intention was to achieve a degree of
informality in the process, a conversational style where questions could be asked in
the natural course of the meeting. Although it was recognised that some degree of
rigour would be lost by this method of investigation the need to gain the
participants’ trust so that they would be open, frank and expansive in their
responses indicated the need for flexibility and sharing some control over the
process. In some cases, additional questions would be asked where an issue
merited further probing or clarification. However, it was expected that respondents
might be reluctant to provide information on certain issues and decided that any
reticence would be respected. As such, it was decided that respondents would not
be pressured for further information where doing so implied an unnatural or
awkward progression in the discussion or where topics had been addressed in some
other way (Gibb & Davies 1992).

As prescribed by the grounded theory methodology, the original fieldwork research

design intended to triangulate by means of conducting two interviews with each
participant, with the second meeting providing opportunity for further probing,
clarification and feedback on the initial findings (Punch 1998). However, it became
apparent during and after the first meeting that most of the participants were
unlikely to agree to a second session. The difficulties associated with securing the
initial interviews (attributed to factors such as the reluctance to give the time
required and variable levels of interest in the project), as well as indicators that
some of the participants had said all that they wished to say on the subject within
the first meeting, deterred attempts to secure a second interview. While the
methodology was compromised in this respect, the breadth of information that was
collected during the interviews was deemed sufficient to meet the research
purposes (Yin 1994; Punch 1998).

37
The interviews were conducted in the fourth quarter of 2001. These took place at
the respondents’ business premises in all but two cases, (where the owner-
managers expressed a preference to visit the researcher’s home office), so that
they would feel more relaxed and a picture of the physical environment of their
business could be gleaned (Yin 1994).

Each interview was taped, transcribed and edited to remove extraneous information
and noise. The pertinent data were extracted from the final transcript, which were
then coded thematically for analysis against the SHRM structural framework (Yin
1994).

o Principal analytical phase

The principal analytical phase was designed to take each of the elements from the
SHRM framework and (a) compare each element with the information procured
through the literature review of human resource management in smaller firms, and
(b) match each element with the statements provided in the data gathered during
the fieldwork.

The information provided by the respondents during the fieldwork was subjected to
a line-by-line microanalysis to identify the principal themes, issues and
connections. The data were then conceptualised and the outcomes coded into the
key themes and relevant sub-categories. These were then compared across each
of the individual participants to identify the occurrence of any variations or
patterns.

Assessment was made of any apparent causal conditions and influences, whether
any pattern or linkages could be made with the contextual information provided by
the owner-managers about themselves or the nature of their businesses, and
whether events or themes demonstrated relational characteristics, with one
influencing another. Consideration was given to the respondents’ association of
ideas, the length of their responses, as well as the coverage and completeness of
the ideas shared. Their ability to understand the questions and provide useful
responses was assessed. Inconsistencies, ambiguities and peculiarities, as well as
changes in intensity and tone of feeling were noted. The willingness of the owner-
managers to participate in the study was assessed in light of the quality of data
gathered. The length of discussion on particular topics, and the degree to which
the respondents appeared open and forthright, and could offer plausible information
was reviewed. Consideration was also given to any evidence of the respondents’

38
responses containing elements of contradiction and bias that might impinge on the
credibility of the information provided. The strong personal association of the
owner-managers with their business, where the business effectively represents an
extension of the owner-manager’s personality, was borne in mind throughout the
process, as this was considered likely to impact on the objectivity and accuracy of
the responses given (Gibb & Davies 1992; Culkin & Smith 2000). An overall
assessment of the research design was undertaken following the interview process
to identify whether the right questions were asked and whether they were
sufficiently probing. The results that emerged from this process and the
subsequent interpretations are described in Chapter 12, which covers the detailed
analysis of the findings.

ƒ Scope, limitations and weaknesses

The scope of this research has been defined by several factors; including the
availability of financial and time resources, the ability to access relevant materials
and information and the capacity to identify and engage a suitable and willing
sample group for the fieldwork. During the course of the project, minor
adjustments were made in the focus and structure of the research in order to
accommodate some the associated, unanticipated constraints. Inevitably, during
the course of the research, a number of issues emerged, of both greater and lesser
importance, that exposes certain weaknesses in the rigour of the research.

o Question of cross-cultural application

The majority of literature on the subject of management has and continues to

emanate from the United States. Many of the world’s prominent and influential
thinkers and writers in the field of management theory and practice reside in a
spectrum of North American institutions. As such, the historical, social and political
context that drives developments in the field of management is imbued with
American culture, values and influences. Moreover, management practice in
Australia is strongly influenced by and closely follows many of the key trends in
American corporations. This fact raises the question of whether North American
management theory has appropriate, useful or even desirable application for
countries and cultures in other parts of the world. This study examines for the
most part a body of literature emanating from North America that has been
probably the strongest driver for contemporary ideas and understanding about the
management of people in commercial enterprises. In doing so, it assumes, perhaps
erroneously, that the American-centric sources are the most valid and meaningful

39
for the purpose. Although the reliance on this particular body of literature is not
unique, in that much of the management literature from around the developed
world derives from and draws on the principles and trends emerging from the USA,
nevertheless acknowledgement is made here of an inherent cultural bias and its
inevitable influence on the findings of the study.

o Access to data

Following on from the issue of cultural bias are some limitations presented first by
language and secondly by the accessibility of information and data. Despite claims
that the world in which we now live and work is global in nature, that is to say,
there exists unprecedented access to many aspects of trans-national life that were
previously unknown, protected or hidden by natural or artificial barriers, the nature
of academic research is not without its limitations. Some might believe that when
research is conducted it will assume a previously unattainable global dimension,
given the facilities and communication systems available; but this is not entirely the
case. Research is constrained by the extent to which information can be gathered
from parts of the world where the language used to communicate this information
is known. A talented linguist may venture into literature published in other
languages and deal with these demands effectively. However the consequences of
remaining in just one linguistic context means that research on a topic that has
global relevance or connectivity is that it is reduced in its scope and potential. In
the case of this study, it is apparent there is a strong global dimension to the
subject under examination, for many millions of smaller firms are busy managing
their human resources around the world, yet potential sources of useful information
from other regions such as Japan, Germany, and the Asian and Scandanavian
clusters of nations, could not be tapped.

The second factor relates to the more specific limitations presented by the
resources that facilitate access to material. A key means to source data is through
the university or public library system, or alternatively through controlled databases
available on-line through the Internet. Today, many libraries provide access to
extensive databases of national and international catalogues and articles, which
offer considerable capacity for research purposes; the researcher is nonetheless
restricted by the decisions of others to provide general access to relevant systems
and a determination about which particular material should be transferred into one
of a range of different types of systems. A particular incident that occurred during
this study was the withdrawal of a number of critical management texts from public
access through the international database systems (e.g. articles in early editions of
the Harvard Business Review); due to changes in the United States’ copyright

40
legislation where the issue of the management of royalties on intellectual property
was being addressed. These types of barriers to electronically stored material, the
downsizing of library stacks and the unrealistic costs associated with large-scale
inter-library loans (where unsighted texts may not actually prove to be useful),
implied that various documents were known and sought, but were frustratingly
beyond reach.

It was also apparent that certain types of important information and knowledge are
not readily available through the conventional sources. In the case of strategic
human resource management, it was surprisingly difficult to obtain current models
or tools for applied organisational usage. Experience indicates that this intellectual
property often remains in the hands of management consultants many of whom
have designed materials or developed ideas for use in their own businesses, or it
remains within the confines of companies that have taken advantage of consultancy
services and their associated work. As such, many best practice methods are not
publicly available and where these are located and access can be arranged, this is
invariably in exchange for a substantial consultancy fee. While the impact of these
constraints on this research project is judged small, the absence of reference to
leading edge material might reasonably be considered a weakness of the work.

o Number of research participants

One of the criticisms of the research in the field of small business management,
and in particular in the area of human resource management within these
companies, might be that the size of sample groups is too small. Relative to the
vast stock of active small trading entities in the community, traditionally studies
have tended to focus on only a tiny portion of these, either individual companies or
just a limited number of firms, and on discrete geographic regions or specific
industries. Not unexpectedly, no national or international studies were found in the
course of the research. The reasons for this will be highlighted in the chapter
addressing the body of literature on human resource management in the small
business sector, but the consequences of drawing on small numbers of firms for
observation implies that there are limitations in their ability to furnish broad
insights into or understanding about a commercial sector that is very large and very
diverse in its make-up. Achieving reasonable levels of generalisability is difficult.
In the case of this study, such a problem was encountered stemming from not only
the logistical obstacles in securing an appropriate group of participants but also the
absence of resources available to conduct a study on a much larger scale. While it
is hoped that commercial or government bodies and institutions might contribute
the required funds for future studies in this field, in this instance, it was necessary

41
to restrict the size of the participating group and hence achieve only marginal
insights into the subject under scrutiny rather than much greater levels of certainty
about the representation of the findings.

o Categorisation of organisations according to employment numbers

The desired goal of this research is to arrive at conclusions deemed to reflect a

reasonable level of generalisation about the subject matter, and hence can claim to
have progressed a particular field of knowledge. However, studies dealing with the
issue of organisational size face certain obstacles. As will be shown in the
definitions provided below, where organisations are differentiated according to the
artificially imposed definition of size, being the number people employed by the
organisation, this can lead to the potentially misleading assumption that the
different categories of size are in some way significant in relation to other aspects
of the organisation. Where discussion is focused on organisations that are termed
“small”, the option is to assume that this is either a precise reference to companies
that sit within some formal definition of small (e.g. from 5 to 19 employees), or
that this refers to a general group of companies that could not be reasonably
described as large and hence are simply described as small. While on the one hand
it is necessary to provide differentiation between companies where they manifest
different features or behaviours, to do this based on headcount numbers assumes
firstly that headcount is the primary distinguishing variable which we know is not
the case and secondly where uncertainty exists that this is the critical differentiator,
the tendency is to group these companies in a common basket regardless. In this
way, there is ambiguity and a lack of rigor surrounding the exact group or type of
company being addressed. There is no obvious solution to this issue yet, and in the
absence of any other appropriate terminology to describe firms possessing
characteristics generally associated with a small business, this anomaly remains
within the thesis (see Torres & Julien 2005 for useful discussion on this topic).

ƒ Structure of the areas of examination

During the course of this research, it became apparent that the field of SHRM and
the field of small business management are by nature very extensive. This is
evident not only in terms of their many component parts which are related and
interact with each other in many complex ways, but also in the way in which they
connect and overlap with other management disciplines. As such, for the purposes
of the study, it has not been possible to simply drill down directly to the core topic
and achieve an immediate focus. It has been necessary to build a much broader

42
picture of the contextual variables in which these two disciplines sit. For example,
it is not possible to discuss the subject of the strategic management of people
within organisations without first clarifying the relationship of SHRM to the field of
strategic business management. Similarly, it is not realistic to investigate the
management of human resources in small firms without highlighting the nature of
the unique managerial role of the owner-manager within the small business
context. Consequently, there has been an extensive process of creating a
contextual framework inside which rough boundaries mark the points of interface
between the various managerial fields and their component parts.

In order to present material that is amorphous in nature, in a logical and accessible

way, the thesis has been divided into two parts; the first dealing with the subject of
Strategic Human Resource Management and the second covering information
pertinent to the field of growing small firms. The concluding chapters of the work
synthesise the contextual material as it relates to the prevalence of SHRM and in
turn its relevance for small, growing firms.

ƒ Thesis outline

This thesis is structured around 12 chapters. Chapter 1 is concerned with stating

the principal objectives and area of study, and the key questions to be addressed
by the research exercise. The chapter clarifies the reasons why the topic is
important, its significance for the contemporary business management environment
and hence a valid area for investigation, as well as the rationale behind the
structure of the thesis. By way of an introduction, an overview of the broader
commercial environment is provided, highlighting the key contextual elements that
have influenced the development of Strategic Human Resource Management and
the factors leading to the rise in prominence of the small business sector. A
number of assumptions are explained providing insights into some of the context of
the subject matter. The chapter provides a detailed description of the methodology
used to approach the study and the processes involved in addressing each section.
The scope, limitations and weaknesses inherent in the both the subject matter and
the thesis specifically are presented. Chapter 1 articulates three hypothetical
Propositions, being the focus of the investigative analytic process. The chapter also
includes a comprehensive list of definitions of specialist terms that occur throughout
the work, how these terms are used, and some explanatory information about
these.

43
Chapter 2 focuses on the evolution and historical developments in the practice of
human resource management, in particular the recent transition to the knowledge
economy and emergence of learning organisations, as well as the implications for
the management of people resources. The more recent emergence of SHRM within
this environment is covered and contextual issues relating to its development are
highlighted. Its role as a means to achieve competitive advantage within the
context of business strategy through the effective management of a company’s
human resources is also clarified. The chapter also highlights the main benefits of
SHRM as a management philosophy and tool.

As gleaned from a range of literature and business environments, Chapter 3

investigates the nature of SHRM and the variety of definitions that have emerged
during its development. It introduces each of the key elements of SHRM and each
is explored in depth from a theoretical and applied perspective. The difficulties and
consequences associated with the various elements are discussed. The relationship
between SHRM and business strategy is clarified, demonstrating how these two
activities are connected in practical application. The process of formulating
business and human resource management strategy is described. Examples of
human resource management strategies are included. The closing paragraph
presents the key elements of the SHRM framework.

Chapter 4 discusses the extent to which SHRM has been adopted within large
corporations and the difficulties experienced in tracking these activities. In
addition, an extensive range of factors that have been found to play a role in
influencing the take-up of SHRM are presented and discussed.

Turning to the small business environment, Chapter 5 describes the rise in

significance in recent decades of small firms, highlighting a number of areas in
which the sector has become more prominent. The chapter discusses the breadth
of challenges that small firms face in their efforts to sustain and build successful
businesses and the types of support provided by governments and other national
and local organisations and bodies to help them do this.

Chapter 6 investigates the nature of growth in small firms, why this has become an
important issue, what is meant by growth, various theories that explain small
business development and how growth occurs. The chapter covers the role of the
owner-manager in business growth, as well as the operational activities associated
with the process of growth, and the implications for owner-managers in terms of
their role and focus in preparation for, and at the time of, growth.

44
A “critique” of the literature on human resource management in small firms is
provided in Chapter 7. The aim of this chapter is to provide an interpretative
assessment of the status and value of the literature on this subject and the diverse
range of literature dealing with the management of people in small firms. Also
included are the different types of research challenges that human resource
management in small firms presents and a perspective on the validity of this body
of literature as a source of useful information for this particular thesis.

Chapter 8 explores the management of people in small firms and what is known
about how this is approached, the associated managerial activities and the role of
the owner-manager as the principal management decision-maker. The workforce
management issues that are unique to this sector are examined, as well as the
differences between small and large companies in their approach to human
resource management and the reasons for discrepancies in this area.

The research methodology encompasses a two-pronged approach – analysis of the

literature as a source of data on the prevalence of SHRM in smaller firms and a
fieldwork study comprising 10 case studies also for this purpose. Chapter 9
presents the findings of the investigation into the prevalence of a strategic
approach to human resource management in small firms, as found in the empirical
and descriptive literature, when matched with the specifically designed framework
of Strategic Human Resource Management.

A group of 10 small, medium-sized businesses located in Western Australia

participated in the fieldwork study designed to gather data pertaining to the
management of human resources in their companies. Chapter 10 is concerned with
clarifying the choice of participants for the fieldwork study, providing information
about the owner-managers who were the principal unit of analysis and providers of
the data, as well as presenting details of their companies and associated
management characteristics. The objective is to describe the context in which
these companies operate and provide a picture of the owner-managers of these
companies. It is an opportunity to view the participants as a collective of smaller,
medium-sized companies and at the same time as unique, individual business
entities.

Chapter 11 describes the findings of the fieldwork studies. This covers the
management of the companies and their workforces, as well as the views, ideas
and experiences of the owner-managers relating to this area of business
management. Matched against the four elements of Strategic Human Resource

45
Management, the chapter presents detailed information about the way in which the
case study companies approach the management of their people resources.

Chapter 12 provides a summary of the research, the interpretations and the

conclusions. Specifically, it addresses the research questions posed about the
prevalence of SHRM in small, growing firms and in turn its relevance. The chapter
includes comment on the methodological constraints affecting the study, the
inferences drawn from the data analysis and the overall extrapolations. The
chapter responds to the key Propositions identified at the beginning of the study
and assesses the extent to which the study shows them to reflect current
understanding by the research community and within the small business
community itself. Recommendations are made pertaining to the areas of research
needed to take this field of study into the future.

A copy of the letter of invitation sent to the fieldwork participants requesting their
participation in the study is included in Appendix A. Finally, a listing of the relevant
references consulted in the course of the research is provided in the Bibliography.

ƒ Definition of terms

The language and terminology used in the field of management generally, and
human resource management in particular, are both rich and varied. They can also
be a source of ambiguity where clarification around definition is omitted, terms are
misunderstood or there is simply an undisciplined approach to the way language is
used to communicate ideas and concepts (Barber, Metcalfe & Porteous 1989;
Brown, Hamilton & Medoff 1990; Gibb & Davies 1992; Chapman 1999; Matlay
1999; Brewster 1999; Katz et al. 2000). Certain terminology has been sufficiently
controversial in recent times to motivate specialists in this field to address the
anomalies in academic papers and management texts. In an attempt to avoid
falling into a similar trap, a list of the principal terms with some explanatory
information about how these have been used in the following chapters is included
below. Minor liberties have been required here with regard to the commitment to
particular definitions, in particular where there is an absence of consensus about
their usage within the professional community and academic discipline (Katz et al.
2000).

¾ ‘Strategic Human Resource Management’; ‘SHRM’; ‘human resource

strategy’; ‘strategic HR’

46
Terminology that relates specifically to the strategic management of human
resources in organisations will be addressed in detail in Chapter 3.

¾ ‘human resource management’; ‘personnel management’; ‘people

management’

These terms describe the notion of the general management of people

employed by an organisation, such as a business, for carrying out the work of
the enterprise. Here the terms are used synonymously and applied
interchangeably to avoid overly frequent repetition and enhance ease of
reading. Generally speaking, “personnel management” is considered archaic,
while “human resource management” and “people management” are viewed as
suitably contemporary and progressive.

¾ ‘human resources’; ‘employees’; ‘personnel’; ‘staff’; ‘workforce’; ‘labour’

These terms refer collectively to those people who employed by a company or

other organisation, to fulfill its purpose through work activity. Again, the terms
are used interchangeably for ease of reading.

¾ ‘organisation’

A term referring to a consciously coordinated social unit composed of two or

more people that functions to achieve a common goal or set of goals.

¾ ‘business’, ‘trading entity’, ‘enterprise’, ‘corporation’; ‘company’

These terms are applied interchangeably to commercial enterprises engaged in

the manufacture and delivery of products and/or services to the market.

¾ ‘owner-manager’

This term refers to a person who independently owns and operates a business,
contributing most, if not all, the operating capital and holding or sharing the
main decision-making responsibility for the business.

¾ ‘SME’

Acronym for Small and Medium-sized Enterprise, commonly used in the

literature to refer collectively to smaller as opposed to larger companies.

47
¾ ‘small business’; ‘medium-sized business’; ‘large [or] big business’

Small, medium and large-sized businesses are defined variously in different

countries and in different sectors (Storey 1994). One of the most common
factors used to differentiate a business according to its size, is that of the
number of people the enterprise employs. However, a small business in the
United States may be categorised as an organisation with up to 500 employees,
whereas in New Zealand, smallness assumes different proportions as the vast
majority of firms employ 50 staff or less.

For the purposes of this study, a simplified version of the classification system
devised by the Australian Bureau of Statistics (ABS 2000) is used, which
determines size in terms of Full Time Equivalent (FTE), or the number of
employees that comprise the equivalent number of full-time positions:

‰ Micro : employing less than 5 people

‰ Small : employing at least 5 people but no more than 19
‰ Medium: employing at least 20 people but no more than 199
‰ Large : employing 200 people or more

¾ ‘human resource management function/department’

Refers to an individual or group of individuals within an organisation, who are

functionally structured to hold designated work-related responsibilities
associated with the management of the workforce, or people employed by the
organisation.

¾ ‘human resource management technology’

Refers to the generic body of knowledge as reflected in the full spectrum of

principles and approaches organisations use for the purpose of managing,
directing, influencing and controlling their employees. This term has been
coined for the purposes of this study as an alternative to ‘HRM’ (see below),
which possesses certain distracting connotations.

¾ ‘HRM’ (abbreviation for Human Resource Management)

The acronym HRM is commonly used in the academic and professional

community to refer to both the theoretical and applied discipline of the

48
management of people in organisations, including the management technology
and tools that derive from and support this discipline. However, there is no
consistency or common agreement about what is actually incorporated within
the concept of HRM. This lays the term open to interpretation and as such
professional licence has been exercised concluding that HRM comprises the
totality of known and potential managerial philosophies, principles and practices
including policies, systems and programmes that are used in the management
of people within an organisational context. In effect, it is the theoretical and
practical “toolkit” from which organisations will select those tools deemed
appropriate and useful in the individual and collective management of the
people who work for the organisation (see Wright & McMahan 1992 for
comment).

The absence of a sound rationale for, as well as general lack of agreement

about, the specific contents of this toolkit suggest that any people-related
management activity might be placed under this umbrella. The concept is
effectively unbounded because its components are limited only by a subjective
perception about what is suitable for inclusion. In this way, it is proposed that
any managerial theory or practice intended for use and/or is actually used in the
management of people may be considered as a component of HRM.

‰ ‘Human resource management philosophy’ refers to any principles

and/or beliefs that are held about the way in which the management of
people within organisations should be approached. Underpinned by
individual and/or group ideology, values and attitudes, different
philosophies of management result in different types of employment
relationships (or psychological contracts), and will be reflected in
different managerial styles. Management philosophy will influence
expectations about the nature of the employment relationship with, and
the behaviours of, the members of the organisation.

‰ ‘Human resource management policy’ (sometimes captured in document

form) refers to an organisation’s position on or approach to any aspect of
the way its human resources are to be managed. This includes the
objectives of a particular position or approach, clarification of the reasons
behind the position or approach, scope of application within the
organisation, guidelines for associated actions and behaviours, and the
allocation of accountabilities. The (human resource management) policy
may also include or be accompanied by a description of any system or
procedure to be used to support the position or approach.

49
‰ ‘Human resource management practice/tool’ is a descriptor for a
particular method or way in which an organisation approaches the
management of its employees.

‰ ‘Human resource management programme’ refers to a particular

management activity in the form of a benefit, an initiative or a service,
that has been introduced into the organisation as part of the company’s
approach to the management of its employees.

50
Chapter 2

Historical developments in the management of human

resources

Over the past century the management of people in organisations has undergone
many changes, prompted by evolving environmental circumstances, developments
in business needs as well as advances in the behavioural and social sciences
reflecting growing understanding about effective management practice (Butler,
Ferris & Napier 1991; Lundy & Cowling 1996; Ehrlick 1997). An increased
escalation in change became particularly evident in the last quarter of the twentieth
century responding to the emergent transformation occurring in the commercial
environment and the wider social context in general. In the early 1990s the
Director General of the United Kingdom’s Institute of Personnel and Development,
the official body representing human resource management practitioners in that
country, reported to its members:

“We are at the time when people are the critical distinguishing feature
between organisations. And the effectiveness with which people are trained
and developed, motivated and managed is the single most controllable
dimension available to managers” (Armstrong 1994, p. 147).

This statement succinctly summarises the fundamental message that that has been
conveyed to the business community and to those individuals working as specialists
in the field of human resource management over the past 25 or so years. It
encompasses the two principal issues that face the modern enterprise; the
criticality of people to competitive business success and the potential to make a
difference to corporate performance through wise, skilled and thoughtful
management practice. This chapter highlights some of the key historical
developments in the theory and practice of people management in commercial
entities that have led up to and influenced the arrival of SHRM as a key
contemporary managerial philosophy and applied management tool.

ƒ Early trends in personnel management

Throughout the history of mankind there has been a need to manage people
whenever individuals came together in groups to achieve common goals. Whether
for the purpose of sustaining a basic livelihood or conducting military campaigns or
engaging in leisure pursuits, the organisation of collective human endeavour has
been a routine activity (Thite 2004). Within a commercial context, the emphasis on

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directing and controlling people became particularly pronounced at the time of the
Industrial Revolution with the growth of monolithic business enterprises in which
large numbers of workers were needed to operate complex, mechanised systems of
production. The management of people represented just one of many managerial
tasks that required the business owner’s attention and with the passage of time this
has increasingly become a more technical and sophisticated aspect of commercial
life. The management of people in organisations since that early industrial period
reflects a history of continuous innovation and adaptation, witnessing the
progressive development and introduction of new practices and techniques
designed to accommodate environmental change and evolving business
requirements (Butler, Ferris & Napier 1991; Ferris et al. 1999; Bamberger &
Meshoulam 2000).

The twentieth century witnessed a gradual burgeoning of many different forms of

theoretical and applied developments in people management. These included
movements whose ideas were the result of work by thinkers and researchers
usually within an academic context and new trends in management practice
occurring in the daily running of commercial enterprise. They also included the
emergence of new management philosophies and ideology, areas of particular
managerial interest prompted by advances in knowledge and understanding about
sound people management techniques, as well as the activities of the specialist
internal organisational departments concerned with the daily routine of supporting
and maintaining the workforce. Theory and application have moved forward at an
increasing pace, although these have not always occurred simultaneously with one
automatically influencing the other at any one point in time. A considerable
quantity of research and much diversity in ideas have been generated by those
interested in both the economic success of the business community and the
experience of people as participants in organisations engaged in commercial activity
(Lundy & Cowling 1996; Ulrich 1997a; Ferris et al. 1999).

In Western countries the history of the formal management of people in large

commercial enterprise is generally viewed as being not much more than a century
old, stemming from the business and organisational challenges that featured in the
industrial life of the period (Rothwell, Prescott & Taylor 1998; Ferris et al. 1999).
In the United States the adoption of a functional specialisation for personnel
management for example, dates back to the early twentieth century with the
introduction of welfare secretaries whose role was to find solutions to the growing
problem of worker inefficiency and unrest (Kraut & Korman 1999). In the United
Kingdom, the origins were somewhat different being initiated by the Quaker family
businesses that were concerned with the humane treatment of workers in the often

52
harsh and degrading conditions of heavy industry. Benevolent and socially focused
business owners introduced benefits such as holidays, meals at work, health clinics
as well as control over the use of child labour (Ferris et al. 1999; Bamberger &
Meshoulam 2000). Generally, the role of management had been to acquire and
train the required labour in its tasks and to resolve workforce issues and disruption
by whatever means were available (Miles & Snow 1994). The focus for many
companies was the establishment of functional specialisation and standardisation in
organisational systems so that large operational structures could deliver limited
lines of products as efficiently as possible. The early work of the Scientific
Management movement for example was concerned with looking at improving work
methods to support these types of industrial needs. Initially activities in the
personnel department, where one existed, were centred on employee welfare
matters and carrying out routine employment-related duties for the company,
including record keeping, counselling, labour control and discipline, and the
arranging of social events (Anthony, Perrewe & Kacmar 1996; Bamberger &
Meshoulam 2000).

Around the 1930s, the Human Relations movement emerged whose focus was the
social and behavioural dynamics of organisational life. The interests of this group
were centred on management issues such as industrial relations, employee morale,
work satisfaction, due process and labour-management collaboration. The human
dimension of corporate life was examined, in particular socio-psychological needs
such as recognition, inclusion, ownership and a sense of belonging (Miles et al.
1978; Butler, Ferris & Napier 1991; Bamberger & Meshoulam 2000). Drawing on
the relatively nascent behavioural sciences of psychology, sociology, biology and
other disciplines, research was geared towards exploring organisations as whole
entities and the impact of commercial life on those individuals who comprised the
labour component. In response to an increasingly competitive business
environment, companies gradually began to focus on rationalising their internal
systems and operational approach, assessing and evaluating job design and
exploring ways to manage the performance of the workforce. The 1960s and 1970s
saw the arrival of the Organisational Development movement where attention was
given to the operational effectiveness of organisations; in particular, ways to
improve their internal processes and the nature of human behaviour and
performance in group environments. This coincided with the rise of the Civil Rights
Movement in the United States, which led to the introduction of legislated labour
rights, workforce protections and an emphasis on employee welfare matters. With
the passage of time, the managerial discipline continued to expand to include an
ever-widening range of employment issues and interests (Armstrong 1992a;
Anthony, Perrewe & Kacmar 1996; Bamberger & Meshoulam 2000).

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In the early 1990s the United States’ Department of Labour defined the functional
work of personnel management in terms of:

“….careful and extensive systems for recruitment, selection and training,

formal systems for sharing information with individuals who work in the
organization, clear job design, local-level participation procedures,
monitoring of attitudes, performance appraisals, properly functioning
grievance procedures, promotion and compensation systems that provide for
recognition and financial rewarding of high-performing members of the
workforce” (Brewster 1999, p. 360)

Largely of a transactional, administrative nature the personnel department was

required to manage and assist with activities relating to the different stages of the
employment lifecycle. These included staff recruitment and selection, manpower
planning, induction, time and motion studies, job design and evaluation, training
and development, compensation and benefits, performance management, labour
and employee relations and contract terminations (Beer et al. 1985; Ulrich 1998a).
As the discipline grew more technical and the tasks increased, so certain expertise
was increasingly needed to support departmental functions that would be
structured into specialist subsections, with individuals or groups focusing on
particular areas of workforce management. With the progressive introduction of
employment legislation governing the way in which companies were required to
manage their relationship with the workforce, functional specialists also started to
assume a compliance role ensuring that regulatory responsibilities were carried out
in various areas. Equal employment opportunity, affirmative action and
occupational health and safety were notable areas of concern (Devanna, Fombrun &
Tichy 1981; Rothwell, Prescott & Taylor 1998; Anthony 1996; Bamberger &
Meshoulam 2000).

Responding to a host of business and social developments in more recent years, the
personnel function became concerned with newly emerging issues. These included
company down-sizing, the management of outplacement services for retrenched
employees, recruitment for and retraining in needed skills, managing the cost of
expensive benefits such as health care and workers compensation, resolving
litigation cases resulting from claims of unfair dismissal and contravention of
employment regulation, as well as the development of management policy and
procedure (Ulrich 1998a). In addition, this era is noted for a growing awareness
and consideration of concerns of a social nature. The value of accommodating
balance in employees’ work and personal lives, providing opportunities to use and
develop individual capability, the question of job security, designing safe working
environments, recognising rights to privacy, promoting fair and adequate

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compensation, and the provision of socially beneficial and responsible work received
growing attention (Butler, Ferris & Napier 1991). In turn, there was considerable
variation in the type and scope of activities of companies in their response to the
changing focus of people management, driven by varying business needs,
managerial expertise and available company resources. Factors that influenced this
included the nature and size of the company, the industrial environment, the
leadership skills and knowledge of management teams, the history and ownership
of companies, current fashions in management practice, the presence of applicable
government legislation and regulation, as well as the contemporary political and
economic circumstances and trends governing the broader commercial environment
(Nankervis, Compton & McCarthy 1996; Ferris et al. 1999).

While there is little mention in the human resource management literature about
the historical contribution of executive leaders and senior management teams to
directing employment policy and engaging in decision-making on workforce
management, the evolving role of the personnel function during this period is well
documented. Overall, the traditional role of the personnel function continued to be
one of helping organisations achieve order, stability and to a limited extent the
appropriate control of people-related overheads. This reflected the consistent
operational requirement of securing continuous production at the lowest possible
cost. Practitioners were expected to provide routine, transactional services to a
range of organisational stakeholders including job applicants, employees and
management, as well as offering technical advice and counselling on people
management issues and ensuring the varied needs of these diverse groups were
met (Rothwell, Prescott & Taylor 1998).

ƒ Late twentieth century developments

By the 1980s, a growing number of theorists, researchers and members of the

business community were becoming increasingly convinced that the management
of people in organisations needed to assume a more strategic dimension and
perspective (Tyson 1997). Pressure to achieve and sustain competitive advantage
in a turbulent and more demanding commercial context that emphasised cost
reduction, high quality, sophisticated products and higher levels of productivity,
contributed to the realisation that the talent, effort and commitment of employees
were fast becoming key contributors to financial performance and business success.
The advent of the knowledge economy, the rising prominence of the information,
high-tech and services industries, as well as trends in product diversification and
customisation, pointed to a central role for people resources. Encroaching

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competition from unexpected sources also forced companies to look for more
efficient and effective ways to strategically manage their resources (Wright,
Rowland & Ferris 1991; Walker 1992). A connection was made between the
effectiveness of the implementation of business strategy and the way that people
were managed during this stage of the strategic process. It was no longer
sufficient for companies to view people management simply in terms of operational
activity dealing with the basic acquisition, maintenance and departure of their
human resources (Stone 1995). As such, many companies began to revisit their
traditional management approaches, methods and practices with a view to building
greater alignment with the external environment. Inevitably, much debate ensued
about how people could and should be more effectively managed in the knowledge-
based post-industrial economy (Walker 1992; Hendry 1995; Bamberger &
Meshoulam 2000).

Recent decades have witnessed the emergence of a wide variety of ideas and views
about the effective management of people that have led to the introduction in many
firms of radically different types of management practice. Typically, organisations
and the people that populate them are increasingly viewed in more holistic terms,
as part of open systems comprising complex and interconnected parts. The
management of people has assumed a much broader, macro perspective as
understanding about the significance of their contribution to commercial endeavour
has grown. Consideration of the role that people play in successful businesses and
the way in which the firms operate in order to achieve desired outcomes has
become more prevalent (Saul 1987; Lundy & Cowling 1996; Ulrich 1998a).
Moreover, people are increasingly viewed as a source of sustained competitive
advantage; regarded as an important business asset in which the importance of
corporate investment is recognised (Greer 1995). Greater attention is also given to
the more effective and efficient utilisation of people as key inputs into the business
performance equation, to the value and significance of the knowledge worker and
to the socio-psychological nature of people with inherent and variable needs,
aspirations and motivations in both individual and collective forms (Armstrong
1992b; Gratton 2000).

It is evident that for many companies survival in the new commercial order implied
a fundamental rethink about the way that organisational life and its participants
should be managed (Gratton et al. 1999). The need to respond to a radically
altered business context has presented companies with new types of people-related
decisions. Questions are asked about how work and jobs in organisations should be
organised, the extent to which responsibilities should be devolved to various
organisational levels, the type of psychological contract that employers should hold

56
with the workforce, and whether this should differentiate between employee groups
or be consistent across the company. The types and amount of control that should
be exercised over labour resources, as well as levels of appropriate financial
investment in a firm’s human capital, have increasingly appeared on the executive
agenda. A hard question for many has been about how this new understanding
could be most effectively translated into practice within the context of daily
business life (Hendry 1995; Boxall & Purcell 2003). As early pioneers in the
promotion of the new management order, Tichy, Fombrun and Devanna (1982)
commented:

“The long-run competitiveness of American industry will require considerably

more sophisticated approaches to the human resource input that deal with
its strategic role in organizational performance…. and the strategic human
resource concepts and tools needed are fundamentally different from the
stock in trade of the traditional personnel administrator” (quoted by
Armstrong 1992a, p. 14).

ƒ New approaches to management

In recent years, many companies have begun to discard some of the traditional
managerial methods and tools, and adopt substantially different techniques in order
to achieve their business goals (Johnson 1992; Gratton et al. 1999; Boxall & Purcell
2003). Driven by the need to improve organisational efficiency and mobilise
knowledge capital, significant alteration has been made to business structures,
assessment of the management of work and its outputs conducted, and the
reconfiguration of operational processes and tasks associated with different types of
jobs implemented. Companies have become flatter with fewer hierarchical levels
intended to enhance communication and organisational integration. Policies and
procedures have been jettisoned in order to reduce unnecessary constraints in
workforce activities and encourage human responsiveness, innovation and creative
behaviour (Johnson 1992; Walker 1992; Lundy & Cowling 1996). There is greater
emphasis on building social networks and improving relationships both internally
between colleagues and workers, and with customers external to the business.
Integration of mental and manual work has become more prevalent, with team-
based structures combining specialists and operational workers working together on
projects, delivering products and services, and resolving problems. Companies
have adopted new approaches to the development of their human resources,
strategically addressing the type and level of skills the business will need to
compete successfully in particular markets and their embedment as organisational
competencies (Pralahad & Hamel 1990; Lundy & Cowling 1996). New management
practices have been introduced to encourage and motivate holders of knowledge

57
capital to realise their inherent value through opportunities for greater individual
initiative and experimentation in the workplace (Saul 1987; Boxall & Purcell 2003).
Moreover, greater emphasis on creating flexibility in the internal structures,
cultures and systems of organisations has occurred, so that companies are
sufficiently adaptable to changing market conditions. This is manifested in the
development of flexible jobs with fewer boundaries and more multi-tasking, greater
variation in employment contracts and their associated terms and conditions, more
focus on outputs rather than inputs thus giving workers more opportunity to
determine the best course of action and increased flexibility around schedules and
working hours (Armstrong 1992b; Walker 1992; Coates 1997; Ghoshal & Barlett
2000).

In order to elicit the type of response needed from human assets many companies
have acknowledged the importance of making fundamental changes to the type of
psychological contract that they traditionally held with their workforce. The
approach of previous eras where management’s control of workforce behaviour was
of paramount importance is no longer considered so appropriate. To harness the
discretionary effort and loyalty of workers in a knowledge economy, it is recognised
that companies need to build commitment to organisational goals and activities.
The fundamental relationship between employer and employee has altered so that
the objectives and goals of both parties are more consistently aligned. Replacing
labour conflict and disharmony is the promotion of relationships based on a
mutuality that responds to the economic needs of the business on the one hand
and the human needs of people who work in a social organisation on the other
(Walker 1992; Weiss 1999; Ghoshal & Barlett 2000).

Hence, one of the key emerging tasks for management teams is the mustering of
the physical, social and emotional engagement of employees, addressing the health
of the business from the perspective of workforce morale and commitment (Saul
1987; Armstrong 1992b; Boxall & Purcell 2003). Consequently, many companies
have dismantled the rigid structures and compliance processes designed to control
and restrict employee behaviour and activities. Methods have been sought to
address issues such as job satisfaction, ownership and motivation. Contemporary
business needs have created a form of industrial democracy where much greater
openness, trust, respect and collaboration are accepted and encouraged. Authority
and responsibility are more decentralised resulting in greater employee
participation in decision-making and influencing business outcomes (Lundy &
Cowling 1996). The balance of power between management and worker has
altered substantially. There is greater equality in the employment relationship as
pressure to concede resources and other types of human demands and

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expectations has grown. As Armstrong (1992b) noted, firms are looking to build a
climate of consent. These trends represent the beginning of a blurring in distinction
between management and workers, as the work experience for many today
consists of unprecedented levels of discretion and autonomy in determining how
tasks will be performed. Inevitably, current management terminology, with terms
such as “high commitment work practices”, “worker participation”, “employee
involvement” and “empowerment” reflects the direction of the new social order
(Butler, Ferris & Napier 1991; Armstrong 1992a; Johnson 1992; Lundy & Cowling
1996; Boxall & Purcell 2003).

ƒ Organisational culture

These types of issues facing the business community and promulgated by theorists
and management gurus, have prompted widespread interest in the culture of
organisations and the role that culture plays in influencing business performance.
Originating in the 1970s as a theoretical concept and developing into a popular
management activity in the 1980s, many supported the notion of actively building
and managing organisational culture to the benefit commercial enterprise (Schein
1992; Schuler et al. 1992; Ulrich 1998a; Thompson & Strickland 1998). A trend in
cultural change programmes at this time was influenced by the perception that the
commercial success of Japanese industry was due to the distinctive workforce
management techniques used by companies in Japan (Miller 1993; Porter 1996). It
was thought that where attention and resources are channeled towards moulding
and maintaining an appropriate type of culture, the impact on business
performance and outcomes would be positive (Gubman 1998; Barker & Coy 2004).

A common view persists that companies with so-called strong or healthy

organisational cultures outperform those whose cultures are less visible and
defined. This is achieved through providing members with purposeful and shared
meaning, a sense of stability, clarity about their contribution and a strong sense of
the identity of the group to which they belong (Deshpande & Parasurman 1986;
Schein 1992; Thompson & Strickland 1998; Johnson 1992). It suggested that
where corporate culture is aligned with and supports the company strategy, this
represents a strong contribution to business performance (Aryee 1991; Ulrich
1998a; Bartlett & Ghoshal 2003; Ulrich & Brockbank 2005). Conversely, poor
alignment and an inadequately supportive culture present obstacles to the
achievement of business goals. The role of culture in business performance has
been especially highlighted in the case of corporate mergers and acquisitions,
where the meshing of two or more incompatible cultures fails to achieve the desired

59
synergies and subsequent commercial benefits (Barker & Coy 2004; Thite 2004;
Thomson & Strickland 1998).

There are numerous definitions of organisational culture, some of which have been
borrowed from the related, broader disciplines of anthropology and sociology, while
others reflect the uniqueness of the commercial environment. Culture has been
described as the “personality of the organisation”, and “the glue or invisible mortar
that holds the entity together” (Barker & Coy 2004, p. viii). Kaplan & Norton
(2004, p. 281) describe culture as reflecting “the predominant attitudes and
behaviours that characterize the functioning of a group or organization”. Culture is
said to consist of the unique philosophy of the group comprising the shared
ideology and values that guide behaviour towards and among stakeholders, and
which is communicated through policies, systems and other activities to
participating members. The values define what is considered important in human
interaction and the standards to which participants are expected to conform (Schein
1992; Johnson 1992). Culture encompasses the common language of the group,
the boundaries and rules for inclusion and exclusion, the distribution of power, the
defining and allocating of rewards and punishment and the norms for intimacy
among members. Culture is also said to comprise abstract concepts such as the
climate of the company, mental models and habits in the way of thinking about
things and the history of the group’s shared experiences. Culture is reflected in
the structural design of a company, the systems and processes either present or
absent, the practice of rites and rituals, the physical environment in which people
work, the telling of stories, legends and myths about people and events, as well as
formal statements by the organisation about its philosophy, values and creed
(Schein 1992; Johnson 1992; Thompson & Strickland 1998).

Culture is thought to emanate from the vision and values of an organisation’s

leader (or leaders), because it is with this person that the power and influence to
regulate and drive behaviour resides (Schein 1992, Johnson 1992; Barker & Coy
2004). Its origins are believed to stem from the beliefs, values and assumptions of
the corporation’s founders, or sometimes from subsequent leaders and new
members who leave their mark on the group, as well as the learning experiences
that take place as the company evolves. Schein (1992, p. 12) explained the
evolutionary development of culture in terms of:

“…. a pattern of shared basic assumptions that the group learned as it solves
its problems of external adaption and internal integration, that has worked
well enough to be considered valid and, therefore, to be taught to new
members as the correct way to perceive, think, and feel in relation to those
problems”.

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Schein proposes that firms with strong, clearly identifiable cultures are created by
entrepreneurs with a powerful vision of how a joint group of people can deliver a
particular product or service to the marketplace.

o Culture in the knowledge economy

The question of culture has broad implications for the knowledge economy, where
the key components of this economy are individuals working together in small or
large groups within a commercial context. Where the accumulation and application
of knowledge is considered imperative for business success, one would expect to
find a learning culture that possesses a shared belief in the value of acquiring
knowledge and where members of the organisation are pro-active in this
acquisition. It implies that knowledge does not reside in any one method or
emanate from any one source, and that desired outcomes may be achieved through
many different and equally acceptable means. Innovation for example, is
considered a cultural issue because it is the management practices driven by the
cultural context that will determine the ability to create environments that
encourage experimentation and creative risk-taking (Lin 2004). It is suggested
that in a learning culture leaders would need to hold positive beliefs about human
nature, that it is intrinsically good, trustworthy, deserving and acceptable in all its
complexity and flaws. A negative perspective is likely to generate mistrust and
cynicism leading to bureaucratic rigidity and the tendency to assert excessive
authority and control, all considered counterproductive to the task of leveraging
human capital (Schein 1992).

It is usually the leadership team that develops a corporation’s business strategy.

Consequently, this is the environment from which the company’s culture will be
driven or emerge (Schein 1992). Where the strategic business requirements of a
company necessitate the building of a learning organisation for example, the role of
management will be to develop a learning culture through the application of
management practices that stimulate and support learning behaviours and activity.
Designing these practices will engage employees intellectually and emotionally,
promote collective identity and commitment to the organisation’s learning and
knowledge-management objectives (Senge 1992; Ghoshal & Bartlett 1997).
Having identified the principal business philosophy whose underlying beliefs and
values about knowledge and learning provide the foundation on which the company
operates, the emergent business model creates the framework for managing the
organisation. In turn, this model then provides clarity about the initiatives and
practices that will drive the collective knowledge-enhancing activities and behaviour

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of the group in the desired direction. It is in this way that theorists have suggested
the link or alignment between strategy and culture will occur (Schein 1992; Barker
& Coy 2004; Ghoshal & Bartlett 2000; Ulrich & Brockbank 2005).

o The values-driven corporation

Strong and enduring companies are often associated with organisations whose
cultures espouse living values, reflecting moral-based management practices as
well as socially desirable standards of human behaviour and interaction (Buller
1988; Semler 1993; Thite 2004; Ulrich & Brockbank 2005). Thite (2004) explains
the importance of the link between values-driven companies and successful
business outcomes in the knowledge economy in terms of building the essential
elements of trust and cooperation between management and critical people
resources. He proposes that:

“Since voluntary co-operation is the only way to unlock the tacit knowledge,
it is obvious that only organizations that are known as trustworthy and fair
can persuade knowledge workers to share their experience and promote
innovation….to recruit and retain the best talent, organizations not only need
to be high performing but also seen to be of high character, credibility and
integrity and value[s] driven” (Thite 2004, p. 55).

Gubman (1998) has suggested that high-performing companies promote a number

of key core values, including customer focus, operational excellence, with people
treating each other fairly, as well as having respect for individual dignity and
providing employees with satisfying work. Thite (2004, p. 273) believes that the
key to successful people management is the:

“….practice [of] a sound management philosophy that respects human

dignity and diversity, is committed to the growth of people, believes in the
value of people’s contribution and involves them in decision-making, and
shares its wealth equitably and fairly”.

McCowan et al. (1999) identified Herman Miller Inc, one of the world’s largest
manufacturers of office furniture with sales of US$1.5 billion, as an illustration of a
company whose management philosophy has played a key role in creating its
culture and determining an appropriate management model. Having had a history
of leaders with strong religious beliefs, the firm is described as being values-driven,
emphasising cooperation, respect and dignity among its employees and
encouraging employee participation and ownership in various ways. Programmes
such as open-book management, the sharing of financial success, sponsoring
scholarships and collaborating with local schools demonstrate a commitment to the
social and communal dimension of their business activities. Similarly, Anita

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Roddick of the UK-based beauty products retail company The Body Shop described
her management philosophy in terms of:

“In The Body Shop the twin ideals of love and care touch everything we do:
how we view our responsibilities, how we treat our staff, how we educate
and communicate, how we relate to the community and the environment”
(Roddick 1992, p. 141).

Roddick (1992) explains that a constant focus on profits and shampoo is dreary and
that her focus has been on creating the electricity and passion that bonds people to
the company, making employees feel they are doing something of importance that
grabs their imagination. This ability to balance and synchronise commercial
realities with human motivational needs is reflected in Sir Richard Branson’s (of
Virgin fame) statement explaining the logic behind his “people first” philosophy:

“Our people are the heart and soul of all of our businesses and they come
first whenever we make decisions. If our people are happy, then they will
work harder to keep customers happier. Happy customers will stay with you
and that means good returns. Good returns keep shareholders happy”
(Human Capital 2000, p. 10).

Ghoshal and Bartlett (2000) have described this approach as the creation of “trust-
based cultures” where transparency, equity and respect form the basis and extend
into all areas of business activity.

ƒ The transition to Human Resource Management (HRM)

Around the end of the 1970s, the term “HRM” began to appear in the literature on
people management, reflecting the growing emphasis on employees as a significant
organisational resource and implying a yet further widening in the scope of
practitioners’ functional boundaries (Lundy & Cowling 1996). At this time, the term
Personnel Management prevailed when referring to the operational management of
people in organisations and initially HRM assumed a similarly operational and
technical focus. As Beer et al. (1985, p. 1) noted, HRM involves:

“….all management decisions and actions that affect the nature of the
relationship between the organization and employees – its human
resources”.

The growth in focus on people prompted wide-spread developments in the

management discipline, with the creation of journals containing the new HRM label,
university chairs and departments designated as “HR”, study courses in the field of
human resource management (notably the introduction of an HRM programme into

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the syllabus at Harvard Business School in the early 1980s) and the increasing
acceptance of the terms “human resources” and “HRM” in companies and general
management jargon. In addition, discussion on the management of people began
to reflect the start of a convergence of operational concepts and appellations, with
strategic themes and associated language; in effect representing the beginning of a
gradual emergence of a new management movement out of a former (Blyton &
Turnbull 1992; Nankervis & Compton 1994; Lundy & Cowling 1996).

The significant shift in focus and the evolutionary nature of this transition resulted
in no small amount of confusion for the human resource management community
of the time. Much debate ensued about whether the discipline had actually
undergone any transformation, whether personnel management and human
resource management was in fact one and the same thing. This feature continues
today as clarity around the new terminology and associated set of activities is still
sought (Blyton & Turnbull 1992; Delery & Doty 1996; Mabey, Salaman & Storey
1998; Brewster 1999; Ferris et al. 1999). Storey (1993) for example, attempted to
identify the distinction between the evolving management trends by listing what he
believed to be 27 points of difference between HRM on the one hand and Personnel
or Industrial Relations on the other (Lundy & Cowling 1996). Academics and
practitioners used the terms in different ways to refer to different types of
management approaches and generally could not agree on whether HRM was a
map, a model, a theory or something else (Guest 1991; Noon 1992; Legge 1994;
Hendry 1995; Brewster 1999).

Influenced by rightist social and political developments occurring within the United
Kingdom during the 1980s, a preoccupation with the idea of a “soft” and a “hard”
approach to human resource management appeared (Harrison 1993). This
suggested that perhaps the new HRM represented a cold and calculating method of
systematically extracting maximum economic return from employees regardless of
the social implications. Grumblings occurred in some quarters about the new label,
suggesting that the impersonal term “human resources” created the impression
that people were viewed merely as capitalist commodities (Armstrong 1992a;
Legge 1994; Tyson 1995b). Nevertheless, while some believed that HRM was
fundamentally the same as personnel management, others were convinced that
human resource management, regardless of its appellation, had assumed a new
strategic dimension (Blyton & Turnbull 1992). Guest (1991, p. 152) for example,
determined that:

“….compared with personnel management, HRM is a more central, senior-

management-driven strategic activity”.

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In describing the historical trends in people management during this era, there has
been a tendency to portray these management developments in terms of a tidy,
linear process where one particular movement underwent a smooth transition to
the next (Nkomo 1980; Mabey, Salaman & Storey 1998; Schuler & Jackson 1999).
Frequently condensed into three neat phases labelled Personnel Management,
Human Resource Management (HRM) and Strategic Human Resource Management
(SHRM), the suggestion that each stage can be distinguished by different
component themes or activities and makes a neat transition from a technical
operational discipline to a strategic management concern is misleading. From both
a theoretical and an applied perspective, this field of management resists being so
neatly categorised. While it is clear that human resource management practice has
undergone broad identifiable trends that can be associated with particular historical
eras, the work of many functional departments in companies has evolved in a much
less systematic way. The nature of this evolution has been the result of an
assortment of factors, stemming from the external environment in which the
company operates as well as from a range of internal variables (Lundy & Cowling
1996).

Today, it is possible to identify companies that engage successfully in management

practices considered applicable to much earlier periods and where there has not
been an inclination to explore more recent developments in theoretical and applied
management practice. Other companies retain many traditional practices and
methods while at the same time are involved in leading edge activity such as the
building of strategic alignment and organisational capability. Others have
abandoned or outsourced much of the routine but essential transactional
administrative work associated with the old-style personnel department. The
review of recent historical trends in people management indicates that neither
companies nor the academic community have conformed to any one prescribed
formula or followed any fixed set of rules in relation to the management of people.
Practices are reflected in the form of fluctuating trends that vary over time and
from company to company. As such, there remains a certain discrepancy between
the published theoretical discussion and what actually take place within an
organisational context. This variation in management activity that has always
existed among firms is also likely to continue to be a feature of the new strategic
order, as initiatives and activities are increasingly aligned with particular business
strategies, companies’ corresponding needs and unique set of circumstances (Tyson
1995b; Lundy & Cowling 1996; Schuler 1999; Ulrich & Brockbank 2005).

This confusion in the historical development of the discipline has also been evident
in and possibly driven by some of the technical personnel management literature of

65
the period. For example, in recognition of the emergent strategic direction of the
field, texts that had traditionally been structured according to the functional
operational activities of the human resource management department such as a
chapter on recruitment, a chapter on industrial relations and a chapter on training
and development, started to appear with the insertion of the adjectival prefix
“strategic”. Hence, operational activity that had previously been labelled as
recruitment suddenly became labelled “strategic recruitment”. Those activities that
had previously been referred to as industrial relations became known as “strategic
industrial relations” and so forth. In effect, the tendency to categorise in this way
simply reflected the gradual transitions and trends in which certain approaches
were emerging or assuming greater levels of importance in both the academic and
business community at the time (Wright & McMahan 1992; Armstrong & Long
1994; Lundy & Cowling 1996).

The ambiguity that has been part of what appeared to be the emergence of a
strategic discipline out of operational-level people management practice is also
reflected in a number of works by leading commentators of the time (Legge 1994;
Hendry 1995; Mabey, Salaman & Storey 1998). For example, Beer et al.’s (1985)
attempts to clarify the nature of human resource management work indicated that
the discipline was starting to be viewed as a strategic field and as such his
definition of HRM incorporates some of principal themes that were to become
components of the emerging strategic approach to the management of people, i.e.
SHRM (see underlined – researcher emphasis):

“With the help of HRM specialists, general managers must then create the
HRM policies and system that will make it possible for managers at all levels
of the organization to attract, select, promote, reward, utilize, develop, and
keep and/or terminate employees consistent with business requirements,
employee needs, and standards of fairness. In short, HRM is the
development of all aspects of an organizational context so that they will
encourage and even direct managerial behaviour with regard to people”
(Beer et al. 1985, p. 4).

The assignment of strategic concepts to the operational management practice label

is also evident in Armstrong’s (1992a, p. 6) definition of HRM:

“….a strategic and coherent approach to the management of an

organization’s most valued assets – the people working there, who
individually and collectively contribute to the achievement of its objectives
for sustainable competitive advantage”.

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ƒ Linking strategy with Human Resource Management

As highlighted in the previous chapter, during the 1960s and 1970s strategic
planning emerged as a means to tackle the increasingly turbulent commercial
environment (Ansoff 1988). At this time, there was generally little mention of the
role of human resources within the strategic debate; the focus was predominantly
concerned with other types of resources and the company’s competitive market
environment (Nkomo 1980; Boxall & Purcell 2003). A study by Mills in 1985, of
200 United States firms with sales in excess of US$50 million found that 60 percent
of these companies did not engage in any personnel-related planning activities
(Butler, Ferris & (Schellenberg) Cook 1988). While some companies developed
relatively sophisticated, computer-based systems for manpower planning that
focused exclusively on the numbers needed to fill organisational charts, for most
there was comparatively little time spent on the broader management of human
resources (Zabriskie & Huellmantel 1989; Walker 1992). From the limited practice
of manpower planning involving the analysis of current and projected stocks of
human capital, companies began to expand the range of planning activities to
address broader and longer-term issues beyond simply meeting required numerical
levels of labour (Nkomo 1988). Recognition of the importance of people as a
commercial resource indicated that workforce management and how this was
approached was becoming a more complex managerial field (Huselid 1993; Lundy &
Cowling 1996; Stone 1998).

Prominent theorists began to promote the need to elevate people management into
the strategic domain and generally adopt a more encompassing and holistic
approach to the management of human resources. As Lundy & Cowling (1996)
noted the new term Strategic Human Resource Management implied the
management of people within a strategic context. Hence, there began a gradual
process of integration in which these two managerial disciplines started to merge,
resulting in a change of focus with new theoretical and practical dimensions
(Schuler et al. 1992; Wright & McMahan 1992; Ulrich 1998a; Ferris et al. 1999). In
effect, it is possible to observe how the broader strategic approach to people
management has evolved in part from traditional manpower planning activities; the
latter becoming just one component of the enlarged discipline (Nkomo 1988;
Huselid 1993; Greer 1995). Cappelli and Singh (1992) explain that thinking about
human resources in a strategic context paralleled and was driven by the
developments in strategic business management, resulting in an eventual
convergence in their contribution to each other’s development and role in business
performance.

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o The management of strategy

In the latter half of the twentieth century various theories were proposed and
debated about the correct approach to managing business strategy in light of the
broad environmental developments (Ansoff 1988; Montgomery & Porter 1991;
Aaker 1995; Proctor 1997). The focus in the early 1900s had been on budgeting
and operational control. Initially, the discipline was concerned with effective
market management, the management of financial resources through budgeting
and reducing deviation through monitoring and controlling the manner of
production. In the 1950s, Ansoff pioneered long-range planning as a means to
manage greater commercial complexity and anticipated growth. Coming to
prominence in the 1960s and 1970s, strategic planning emerged as a business tool
designed to help companies respond more effectively to the growing commercial
turbulence and environmental upheaval. It also featured greater focus on
relationships with customers, business positioning relative to market competition
and projections on sales and costs in anticipation of growth, (Ansoff 1988; Johnson
1992; Miller 1993; Aaker 1995). Based on the belief that action could be taken in
the present that would permit greater control over the future, the role of strategy
was to determine the direction and desired destination of the business, as well as
set out the proposed objectives and tactics designed to achieve this. Moreover, the
general assumption was that future trends would reflect those of the past (Greenley
1986; Miller 1993). The methodology of strategy invariably permitted a systematic
gathering of market data that would be dispatched to top management for
decisions about the company’s intended course of action. Once completed the
strategy would be communicated through the organisational hierarchy for
implementation (Aaker 1995; Garratt 1995). More recently, a culmination of these
approaches combined with a trend towards strategic market management has
permitted increasingly short-term and responsive approaches to accommodate
rapid change in the marketplace (Aaker 1995)

In 1962, the pioneering guru Alfred Chandler summarised strategy as:

“….the determination of basic long-term goals and objectives of an

enterprise, and the adoption of courses of action and the allocation of
resources necessary for carrying out these goals” (quoted by Pfeffer 1991,
p. 75).

More abstractly, Mintzberg (1987) suggested that strategy could be viewed as a

ploy in the form of a manoeuvre intended to outwit an opponent or competitor or
the way in which a group perceives the world as an intangible concept existing in

68
the minds of interested parties. Thompson and Strickland (1998, p. 2) described a
company’s business strategy in terms of:

“….the ‘game plan’ management has for positioning the company in its
chosen market area, competing successfully, pleasing customers and
achieving good business performance”.

Walker (1992, p. 1) quotes Richard Pascale’s perspective on this concept:

“Strategy is defined as all the things necessary for the successful functioning
of an organization as an adaptive mechanism”

Strategic activity consists of making managerial choices about competitive

alternatives, a commitment to specific markets and products, as well as to the
appropriate types of operating activities (Mintzberg 1987a; Aaker 1995). The
process of strategic planning facilitates the analysis of multiple factors that
determine the route to anticipated business success. In turn, the implementation
of strategy involves building organisational capability, the development of budgets
that direct resources to internal activities needed to achieve goals, the introduction
of strategy-supporting policies, procedures, information and communication
systems, as well as creating a work culture conducive to achieving intended
business objectives (Aaker 1995; Thomson & Strickland 1998).

Essentially, the process of strategic planning provides companies with a conceptual

framework around which to establish a sense of long-term purpose. Prompting
forward thinking, it incorporates analysis and subsequent awareness of the
obstacles or threats to business success and the sources of opportunity, as well as
offering a rationale for the management of its various resources and company
expenditure (Johnson 1992; Miller 1993; Collins & Porras 1994; Acker 1995). This
technique facilitates the capacity to match the external environmental variables
with the internal organisational conditions so these can be realigned to support and
efficiently reinforce each other (Greenley 1986). In addition, business planning
serves to unify decisions and required actions so that these can then be
communicated and effectively sold to the critical members of the organisation
whose role it is to carry them out. Overall, the framework provides the analytical
context in which disciplined consideration can be given to the critical business
factors of markets, products, competitors, pricing, customers, resources,
technology, marketing, production and distribution, and the feasibility of any
particular managerial initiatives in relation to these variables. In turn the process
offers clues and insights into the optimal business structures, processes, interfaces
and relationships, and how these might impact on and be configured to support the

69
business strategy (Acker 1985; Greenley 1986; Thomson & Strickland 1998).
Synchronicity between business goals, the external market environment and the
approach to tasks needed to accomplish these goals is the optimal outcome (Miller
1993; Thomson & Strickland 1998).

Despite a tendency to dismiss the formal process of business planning as outmoded

and no longer relevant in a particularly volatile and unpredictable commercial
context, many of the benefits associated with this technique reflect continued
relevance in spite of contemporary environmental developments. It has been
suggested that the need for strategic activity is now greater than ever, precisely
because of this increased market turbulence and complex nature of the
environment in which business must be transacted (Pfeiffer 1991; Rothwell,
Prescott & Taylor 1998).

o The concept of alignment

During the 1980s, the concept of “alignment” as a theoretical management model

gained currency. The underlying logic indicates that where a company’s strategies,
structures, systems and policies are integrated and strongly reinforce each other,
the result will be improved levels of business performance (Miles et al. 1978; Ferris
& Curtin 1985; Walker 1992). Driven by the dominant school of systems thinking,
various systemic possibilities were explored, linking different parts of the
organisational operation, the corporate strategy and elements of internal
infrastructure and management practice (Mintzberg 1973; Senge 1992; Collins
1994; Hendry 1995). Hendry (1995) refers to the added benefit that organisational
structure should fit with strategy in order to ensure efficient and effective
relationships between systems and processes. Some proposed that corporations
should aim for one fully integrated, aligned and coherent business model or
approach, in which the mutuality and reinforcement of each part of the system are
highly apparent and functional (Walker 1992; Pfeffer 1998; Kaplan & Norton 2004).
Michael Porter (1996) commented that strategic fit is fundamental for competitive
advantage because it is harder for rivals to copy a uniquely constructed pattern of
interlocking activities than to imitate a particular sales-force approach, copy a
process technology or duplicate a set of product features. Anthony, Perrewe and
Kacmar (1996, p. 14) explained this concept as follows:

“Key behind overall strategic management is to coordinate all the company

resources…. in such a way that everything a company does contributes to
carrying out its strategy. If all the resources are integrated within an overall
appropriate strategy, additional value to the company is generated by
effective combination of integrated forces”.

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Building on Alfred Chandler’s (1962) notion that structure should follow strategy,
Galbraith and Nathanson (1978) proposed more specifically that personnel systems
should be adopted to match the requirements of strategy and structure (Cappelli &
Singh 1992). Studies from the early 1980s describe human resource management
strategy as the process of developing a match between specific strategic or
organisational conditions and specific aspects of the personnel processes or skill
base (Lengnick-Hall & Lengnick-Hall 1988). Consistent with the approach to
broader business strategy, it was suggested that human resource management
strategy should also be developed as a complete integrated system, so that each of
its component parts matched and supported one another (Eisenstat 1996; Barney &
Wright 1998; Becker et al. 1999). Delery (1996, p. 812) supported this notion with
the comment that “the organization must adopt the one ideal type of employment
system to be consistent with the organization’s strategy”. As early thinkers in this
field, Devanna, Formbrun and Tichy (1981, p. 58) stated that:

“…. human resources must be meshed with other critical organizational

resources such as money, technology, space and information…. the key to
the organization’s effective functioning is not to be found in the
characteristics of each component…. but in how they fit together in a
system. The more compatible – or the better the “fit” among – the people,
the tasks, structures and processes, the more effective the human resources
organization is likely to be ….”.

Frombrun, Tichy and Devanna (1984) suggested that the primary managerial task
was to align formal strategy with the human resource management system so that
the latter would drive human effort towards the achievement of the strategic
business objectives. They focused on how the processes of employee selection,
performance, appraisal, rewards and development as well as culture could
contribute to accomplishing desired business outcomes. Similarly, Kaplan and
Norton (2004) have emphasised that the value of human capital depends on its
alignment with strategy, in the sense of serving the purpose of the business.

A holistic approach to the development of strategy removes the misalignment that

occurs when practices are developed piecemeal over time with no regard for their
impact on other parts of the organisation’s systemic infrastructure (Armstrong &
Long 1994; Pfeffer 1998; Gratton et al. 1999). Where strategies are developed in
isolation from each other, the associated management practices are likely to be
disjointed and potentially counterproductive (Mintzberg 1973). Beer et al. (1985,
p. 681) highlighted the isolationist tradition of personnel management:

“Existing HRM practice [was] all too frequently a hodge-podge of policies

based on little more than outmoded habits, current fads, patched-up
responses to former crises, and pet ideas of specialists”.

71
While many writers describe human resource management strategy in terms of its
role in “supporting” business strategy, suggesting that it is a secondary or lower-
order activity, writers such as Legge (1989) emphasized the view that people
strategies should not simply be “passively integrated” with business strategy in
terms of flowing on or being something separate, but viewed as an “integral part of
the strategy in the sense that they underlie and facilitate the pursuit of a desired
strategy” (quoted by Armstrong 1992a, p. 48). This perspective has become
increasingly prevalent in the management of human resource strategy, with focus
on people as organisational resources and their participation in all associated
business activity. Hence, central to the activity of adopting a strategic approach to
the management of people has emerged the concept of a consciously rational
match between the business strategy of the company and the strategies developed
to manage people as organisational resources. The objective is to achieve what is
described as a “fit” between the company’s goals and the way in which people are
managed in order to support the achievement of these goals (Walker 1992).

o Early theoretical models

The emphasis on linking and aligning business strategy and human resource
management generated a range of theories and models designed to demonstrate
how this linkage can be achieved. Early theorists explored the possibility of
standardising the process of fit by proposing the linking of certain types of business
strategies to particular human resource strategies. It was thought that as different
businesses pursue a limited range of competitive strategies, a defined range of
human resource management strategies would be needed to support them. These
involved at least three generic classes of fit, including human resource practices,
employee skills and employee behaviours. A range of writers including early
pioneers like Schuler and Jackson (1987b), Tichy, Fombrun and Devanna (1982)
and Miles and Snow (1984), suggested that specific business strategies require
correspondingly specific types of behaviours from employees and as such, human
resource strategies should be chosen based on their ability to elicit, control and
reinforce these behaviours needed to implement strategy. Schuler and Jackson
(1987b), following Porter’s 1985 competitive advantage model highlighting three
main strategic business positions adopted by companies (innovation, quality and
cost leadership), linked this set of strategies to defined employee behaviours. For
example, an innovation strategy was said to require employees that are creative in
their behaviour, long-term focused, relatively co-operative and interdependent,
only moderately concerned about quality, process and results, and show a capacity
for taking risks, as well as tolerating ambiguity and the unpredictable. Employees

72
supporting or aligned with a quality strategy would need to demonstrate behaviours
that are relatively repetitive and predictable, focused on the long or medium-term,
moderately co-operative and interdependent, highly concerned with quality and
process, low risk-taking and committed to the goals of the organisation (Schuler &
Jackson 1987b).

In addition, they proposed that organisations should implement management

practices designed to encourage the required behaviours. For example, an
innovation strategy would require jobs that create close interaction and
coordination among groups of individuals. It would also focus on performance
appraisals that emphasise long-term group-based achievements, provide
opportunities for employees to develop skills that could be used in a variety of
positions, compensation stressing internal rather than external equity, lower pay
rates but freedom to choose a mix of remuneration components, and broad career
paths. A quality strategy would be characterised by jobs having relatively fixed and
explicit job descriptions, high levels of employee participation in decisions relevant
to immediate work conditions and the work itself, a mix of individual and group
criteria for performance appraisals that are short-term and results oriented,
relatively egalitarian treatment of employees and some guarantee of employment
security, as well as extensive and continuous training and development (Schuler &
Jackson 1987b).

Another approach described by Meals and Rogers (1986) and Baird and Meshoulam
(1988) was the creation of alignment between consistently generic human resource
management practices and an organisation’s stage of development. Baird and
Meshoulam (1988) suggested that human resource management strategies are
most effective when their level of sophistication matches that of the company as it
passes through the various stages of growth. Where a firm is viewed as moving
though the life cycle of birth, maturity and decline, with corresponding levels of
internal complexity and size, different strategies become applicable. For example,
at the initiation stage it is proposed that a company should focus on a range of
basic management activities such as salary administration, hiring and termination,
and personnel record-keeping. As the firm progresses so its focus should turn to
effectively sourcing and training employees and becoming more adept at managing
employee benefits and establishing related systems. Later stages emphasise the
need to focus on the managing and measuring of performance, ultimately arriving
at the point where human resource management becomes strategically integrated
into the business, the responsibility of everyone in the company and is clearly
linked both functionally across the organisation as well as within the strategic
business environment.

73
The importance of making the right match between the human resources strategies
or practices and the stage of development is also related to the wastage that is
incurred in the event of non-alignment. Where a management initiative is
implemented that is too sophisticated, beyond the capacity of the company to use
or even management’s ability to understand, or the company is disinclined to
adopt, then the initiative becomes redundant and fails in its task as a strategic tool.
As the authors noted, the adoption of complex management technology in a
company ill prepared and insufficiently developed to deal with the implications is
“like trying to kill a fly with a sledge hammer”. What is required is alignment; i.e. a
fly swatter (Baird & Meshoulam 1984, p. 8). It is also noteworthy that the authors
make a distinction between organisational size and the stage of organisational
development. While it might be assumed that large firms (in terms of employee
numbers) have more sophisticated practices and use more complex management
technology, this is not necessarily the case. In some instances, smaller firms may
be more advanced in their human resource management practices, while larger
companies may contend with relatively simple management tools and techniques
(Baird & Meshoulam 1984).

For example, a manufacturing firm that operates in a high cost competitive

environment where efficiencies in the core operation constitute the market
advantage, would be expected to develop management approaches that encourage
cost savings efforts by the workforce and the control of expenses associated with
labour costs. A professional services company that depends on having a reliable
supply of technical experts to service its clients is likely to focus on attracting and
retaining high calibre employees through competitive remuneration packages and
career development opportunities. However, it is also recognised that many
businesses pursue a range of different business strategies and that these will
require degrees of variation in terms of the types of human resource strategies that
need to be implemented to support them. With the growing diversity in the make-
up of organisations the need to customise management practice to accommodate
this multiplicity of business goals has to be considered (Beer 1985, Hendry 1995;
Ferris et al. 1999).

The principles and theoretical rationale behind the way these linkages have been
constructed is evident and they provide useful insights into the various attempts to
secure appropriate connections between management practice and business
strategy. However, it is acknowledged that early models of this type are too
narrow and simplistic to be practically applied, encompassing only limited generic
business strategies and only a few human resource management practices.

74
Nevertheless, they represent the early stages of understanding about the concept
of alignment and continue to reflect current thinking about strategy formulation
(see for example Kaplan and Norton 2004).

In this way SHRM started to emerge from a logical yet unanticipated confluence of
many of the contemporary management themes and issues of the time: strategic
management, business planning, organisational culture and development, and
human resource management theory and practice (Butler, Ferris & Napier 1991;
Weiss 1999). The advent of SHRM implied a fundamental shift in focus from
viewing the management of people exclusively in functional terms, limited to those
activities carried out by the traditional personnel departments. Whereas in the past
the discrete tasks that comprised the management of the employment lifecycle,
whether hiring, appraising or terminating, constituted the point of entry for
approaching people management, these activities began to be subsumed into a
much wider managerial perspective concerned with their relationship to achieving
particular organisational outcomes (Weiss 1999). Hence, we also see that the
utility of HRM management technology has been transferred to the management of
human contribution to business strategy, still relevant for daily management needs
but also comprising the foundation from which appropriate human resource
strategies with their corresponding policies, practices and programmes are drawn
(Walker 1990; Wright, Rowland & Ferris 1991; Cappelli & Singh 1992; Armstrong
1992a).

ƒ Emergence of SHRM as a management discipline

Originating in late 1970s in the United States as a theoretical concept, the 1980s
witnessed the gradual progression of SHRM into a management discipline of some
substance and as an applied managerial tool incorporated into daily business
activity. In the last few years, the field appears to have reached a plateau in terms
of the development of its theoretical structure and composition. While still in the
process of having its principles developed and models of practice refined, a
reasonable and generally more sophisticated body of knowledge and understanding
now exists about its general purpose and application (Ferris et al. 1999; Bamberger
& Meshoulam 2000).

Studies of organisations that have adopted SHRM as part of their management

approach, often claiming to have derived positive business results, are more widely
available although it is evident that many are still coming to terms with what
represents a radically different approach to the management of people in many

75
business contexts. Although the more recent literature on the subject indicates
that the field has moved beyond the building of the initial underlying principles of a
discrete discipline and is focusing more on understanding its complexities and
relationships within the broader strategic business and organisational context,
SHRM has not advanced in a systematic, logical and linear fashion that facilitates
understanding and easy absorption of its basic concepts. Unlike management tools
which suddenly become popular and then are either abandoned or quickly
subsumed into mainstream management practice, the evolution of SHRM has
occurred slowly over an extended period of time. As such, it remains in some
respects a relative immature field in both its theory and practice. Although there
has been significant growth of interest in the subject, the generation of an
abundance of literature from various countries, as well as the regular feature of the
SHRM label and its associated terminology in the popular and specialist Press, the
nature of its spread into organisational life also appears to have been neither fast
nor particularly dramatic (Lundy & Cowling 1996; Bamberger & Meshoulam 2000).

Despite a lengthy gestation and considerable efforts to promote SHRM as a panacea

for poor business performance and lack of competitiveness in a hugely altered and
rapidly changing commercial environment, it remains in its infancy being a
contentious subject that is often poorly understood by the management community
for whom it is intended. While this appears to be partly due to confusion
emanating from the abstract and conceptually demanding nature of the field, a key
factor that has contributed to its illusiveness is the diversity of individuals who have
contributed to its development. There is much inconsistency in opinion and
perspective with regard to SHRM and how it should approached, what it includes
and excludes and in the terminology used to describe its nature and functionality.
Efforts by academics and the business community alike continue to explore the
theoretical principles on which to build this management discipline. As we stand,
there exists a broad, somewhat fragmented and occasionally contradictory or
inconsistent body of knowledge that continues to generate questions and anomalies
and remains in need of more overall definitive synthesis (Tyson 1995b; Gratton et
al. 1999; Schuler 1999; Bamberger & Meshoulam 2000).

ƒ The value of Strategic Human Resource Management

The literature reports that the benefits of adopting a strategic approach to the
management of human resources are numerous, with proponents offering an array
of promising incentives including competitive advantage, greater profitability,
enhanced product quality and customer satisfaction, improved organisational

76
performance and internal efficiencies, higher levels of employee morale and even
business survival. Before proceeding to define SHRM and to identify its component
parts, some clarification of the advantages of this business philosophy and
methodology is required (Schuler & Jackson 1999; Gratton 2000; Ulrich &
Brockbank 2005).

o Support for the business strategy

First, a strategic approach to the management of people means that companies are
able to utilise their human resources effectively and efficiently to develop and
implement the business strategy (Ulrich 1992). SHRM enables the company to
directly focus on and give increased leverage to the contribution that people will
make to the achievement of business goals. As key participants in the activities
needed to achieve strategic goals, the company can ensure that it has sufficient
types, numbers and mixes of people possessing the relevant skills in order to carry
out the associated work. The company can establish how these resources are
managed, both collectively and individually within the context of a management
system, so that appropriate levels of effort and types of behaviours are directed
towards those tasks necessary to accomplish the desired business objectives.
Having established the most appropriate management model or approach, the
company is able to implement human resource management strategies that serve
as supporting infrastructure within this business model. Moreover, strategic
consideration of human resources implies that both individuals and groups can be
structurally configured within the organisation so that they are best positioned to
collectively deliver on the business outputs (Walker 1994). Lundy and Cowling
(1996) have effectively described SHRM in terms of the human means to
commercial ends.

o Optimising business performance and opportunities

The process of strategically managing human resources increases the capacity to

cope not only with the immediate and visible needs and demands of the business
operation but also to respond effectively and efficiently in the future, especially
when environmental change occurs (Walker 1992). By integrating human
considerations into strategic planning activity, firms increase the level of control
they possess over their business environment because the company has taken
action to ensure its critical people resources are most optimally primed and
positioned to respond. The SHRM framework provides companies with a
methodology that can assist the organisation in taking pre-emptive advantage of
business opportunities as well as reactively tackling competitive threats through the

77
appropriate allocation of supporting resources, infrastructure and competency
development. Companies can explore and assess on the one hand the business
potential that people can offer through their individual and collective knowledge and
skills, such as the possibility of moving into new markets or developing new product
lines, while on the other hand determine how to manage those organisational
factors that might impede the achievement of business goals. These might include
a lack of essential skills, the inability to learn new jobs and tasks, union or labour
resistance to changes in business strategy, or a deficit of financial and technological
resources (Collins 1987; Butler, Ferris & Napier 1991; Walker 1994).

Ulrich (1992) for example, cites the case of the American Harley Davidson company
(of motorbike fame), which when faced with increased competitive forces in the
marketplace and associated financial pressures on its business, needed to change
its strategic direction in order to remain a viable player. A change in business
strategy implied a different organisational approach and as such various human
resource management strategies were implemented to this end. These initiatives
included introducing a new staffing criterion when selecting candidates for
employment in the business so that the company could acquire different types of
workforce attributes and qualities needed for the new business environment. The
company provided training programmes to help employees acquire new sets of
skills to support the change in work focus required by the business strategy.
Employee incentive schemes were adopted, designed to encourage improved levels
of customer service and the company carried out various communication initiatives
to explain the altered business requirements to the workforce and how they needed
to make adjustments to support these. Clearly defined human resource
management strategies were identified and implemented, designed to increase the
company’s capacity to make the essential strategic adjustment. As such, the SHRM
approach facilitates the matching of people strategies to business strategies,
helping management teams to identify and implement those initiatives most likely
to help the business succeed (Ulrich 1992).

It is evident that companies that fail to make the linkage between the potential of
their human resources and their business strategies through effective planning may
find themselves unable to achieve desired business goals and take up market
opportunities that present themselves. Gardiner (1925) gave a useful military
analogy to illustrate the ensuing chaos likely to emerge from failure to consider the
many implications and coordinate the dimensions of a strategic objective:

“To attempt to operate…. without careful planning would be very much like
the case of the General who masses his forces to an attack without knowing

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 where the enemy is located, equips his soldiers with baseball bats to meet
artillery fire, and then gives the order for each man to follow his own ideas
as to the best way to win the battle” (quoted by Butler, Ferris & Napier
1991, p. 61).

Mills (1985) cites several examples of firms that failed to anticipate personnel
requirements and found that they were unable to respond effectively to emergent
business possibilities. He refers to the case of the United States’ giant General
Electric that found itself with a surplus of 30,000 electromechanical engineers at a
time when a change in strategy meant that it actually needed electronic engineers.
A Brazilian aluminium enterprise embarking on the construction of a new
computerised smelter incurred large unanticipated financial outlays because the
company had not factored in the need to adapt the plant to accommodate the
inadequate skill levels in the local labour market. Similarly, a large defence
company was forced to drain some of its divisions of experienced managers when
faced with the prospect of a lucrative government contract. Boxall (1994) refers to
a large service company where workers refused to comply with changes in rostering
patterns and overtime rates that comprised part of a new business strategy
proposed by senior management. Lack of consideration for the people implications
of this change in strategic direction and a failure to pre-empt the possible
consequences of decisions to make improvements in the internal operating systems
that impact on people by taking action to constructively manage this resistance,
potentially undermines their success. When viewed as a key component of any
strategic business venture, the process of planning for labour management at both
the broad macro and micro level is an essential part of ensuring that a company is
able to move forward as business opportunities emerge or requirements dictate.
Conversely, failing to plan and prepare for real and potential opportunities may
present risks for firms that are not adequately resourced or structurally positioned
to take advantage of these opportunities (Boxall 1994).

o Waste reduction

With greater pressure on companies to improve their use of available resources,

there has been greater awareness of the historically inefficient use of people as
organisational assets (Walker 1992; Chatzkel 2004). This manifests itself in under-
utilised workers, lack of trust between management and labour, resistance to
change, antagonistic labour relations and restrictive work practices that result in
diminished productivity levels. To disregard people resources and their impact on
business performance is to deny the company the benefits of a resource that is
recognised as substantially untapped (Wright, Rowland & Ferris 1990; Greer 1995).
The failure by management to assume control over this expensive collective

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resource, in some instances an organisation’s single largest cost, and leverage the
potential that it offers implies considerable wastage through loss or depletion of not
only valuable human contribution but also the associated costs incurred by
disenfranchised employees (Greer 1995; Becker & Gerhart 1996; Weiss 1999). As
has been pointed out by a number of commentators the tendency for many
companies to continue to devote energy to extracting further value from other
business resources already squeezed to the limit, is a futile and unnecessary
exercise. This is especially so when a source of immense commercial possibility
resides in a readily available form that is often significantly sub-functional (Wright,
Rowland & Ferris 1990). Russ’ (1982) comment that “human resources are
probably the last great cost that is relatively unmanaged” reflects the wasteful
reality that has been prevalent in the history of many companies due to neglect or
poor management of people, especially where this resource represents a large
proportion of the cost of doing business (quoted by Lengnick-Hall & Lengnick-Hall
1982, p. 32). The SHRM methodology responds to this problem by helping
companies to structure the optimal usage of people resources on the one hand and
reduce wastage associated with sub-optimal usage on the other (Greer 1995).

In addition, by actively meshing the management of people with other business

resources and hence working with a fuller and more accurate picture of their total
resource composition, companies are able to make decisions and take actions
based on a more accurate assessment of their actual resource potential (Lengnick-
Hall & Lengnick-Hall 1988). Butler, Ferris and Napier (1991) emphasised the
importance of having complete functional representation in the strategic
management process in order to gain the fullest picture of the varied organisational
and business issues. The inclusion or integration of human resource dimensions
into the strategic equation prompts wider thinking about the company as a
complete business system and offers a broader range of solutions for complex
organisational problems. It ensures that the critical people resources are factored
into the setting of goals and the assessment of implementation capabilities
(Lengnick-Hall & Lengnick-Hall 1988; Schuler & Walker 1990). It is suggested that
the planning component of SHRM, where attention is given to analysing the
environmental and organisational context in which the business operates and the
way these that factors relate to the management of people, produces better
business decisions. A non-integrated or isolationist approach to managing
disparate parts of the business is likely to diffuse organisational benefit from efforts
because not only are synergies of integration lost but one part of the business will
not be aware of what the other is doing, and these activities may in effect, be in
direct opposition (Baird & Meshoulam 1984; Beer et al. 1985). Where strategic
direction is absent, the workforce lacks focus in terms of individual and collective

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goals and priorities and may in fact work on areas that are unnecessary.
Furthermore, where financial resources are directed in a more strategically focused
way towards those aspects of people management that are likely to reap benefits,
the associated advantages are doubly enhanced by the removal of inappropriate or
non-essential expenditure (Baird & Meshoulam 1984; Weiss 1999).

Wastage can also occur when companies fail to maximise the benefits of the human
resource management technology available to them and align these methods with
the needs of the business (Pfeffer 1998). For example, employee compensation
and incentive schemes that are not linked to and do not reinforce the skills and
behaviours required to optimise business performance, lose much of their inherent
value as management tools. The considerable financial resources associated with
the implementation and maintenance of these types of systems are wasted
whenever the connection with business objectives is broken. In effect, the systems
are no longer strategically significant. It is not unusual to find companies that
make extensive use of fashionable human resource management tools but which
are not aligned with the goals of the organisation. Systems that are inconsistent
with corporate objectives, such as compensation structures for senior executives in
the form of stock options that drive short-term focus or reward programmes that
are not advantageous or economically beneficial for employees and hence motivate
contribution to the effort of the enterprise, are clearly counterproductive (Baird &
Meshoulam 1988; Ulrich 1997a; Thomson & Strickland 1998; Hamel 2000). As
Thomson and Strickland (1998, p. 329) rightly remark “it is folly to reward one
outcome in hope of getting another outcome”. While not all management
technology may be appropriate for all organisations or business circumstances,
management teams have at their disposal a considerable compendium of tools
designed to build and maintain employee performance and optimise the general
management of the workforce. Where companies are not familiar with these
techniques or believe that expertise of this type is best left to an often peripheral or
marginalised human resources management department, opportunities for
enhancing business outomes are lost (Pfeffer 1998).

A common example of this deficiency is in the area of training and development

(Berry 1990; Pfeffer 1998). Training and development are key components in
building and maintaining the necessary skills levels to effectively deliver products
and services to customers. Garavan (1991) notes that is not uncommon for senior
managers to lack understanding about the benefits of training and development,
not having had personal experience in and exposure to contemporary training
methods. Often senior managers themselves are not included in training initiatives
and developmental programmes. Traditionally monies spent in this area have been

81
viewed as unwelcome costs and not investments, and at times of financial crisis,
this area of the organisation is frequently among the first to be cut. Garavan
suggests that many managers are simply too busy to consider the benefits of
development opportunities and frequently regard this business activity as low
value, irrelevant or even threatening. However, as companies become increasingly
focused on those competencies that distinguish the organisation from its
competitors, it is apparent that a change in perspective is imperative. For many
there is a need to reconsider how management interventions of this type can
contribute and make the critical difference to business performance (Berry 1990).
For those firms that have recognised the potential to create competitive advantage
through highly skilled and capable people, training and development has emerged
and used as a strategic lever. Furthermore, at a time when employees are
demonstrating an increasing interest in personal growth and enthusiasm for
developmental opportunities, the provision of training and skill-acquisition options
offers another string to the bow of motivational incentives and greater capacity to
position the organisation as an employer of choice (Garavan 1991).

o Mobilising the organisation

A strategic approach to the management of people also enables companies to

construct a business system that creates clarity of organisational purpose and
facilitates the alignment of managerial decision-making with this purpose (Gubman
1998). The value of this clarity stems from its ability to elicit support and
commitment from the workforce and reduce levels of organisational ambiguity and
confusion. The business planning process of identifying the corporate business
philosophy, the company objectives as well as the business and organisational
strategies of the company and in turn how human resources will be managed within
this context, enables the firm to build a fully integrated business system in which
the component parts are linked and aligned in a purposeful way. It provides the
opportunity to establish and more importantly communicate a unifying rationale
behind the way in which decisions are made and the reasons for the way things are
done. A contextual framework is created in which people have the opportunity to
determine their role in the collective effort, the extent to which they accept and
support the corporate mission and ultimately what the nature of their individual
participation will be. The need of human beings to make sense of the world in
which they live and work, and to understand its underlying meaning and logic,
suggests that organisations are well served by a business system that is
transparently consistent and clear about the way in which its processes and
practices are constructed and related. The absence of clarity about goals and
responsibilities is thought to be demoralising with leaders less able to provide

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coherent direction and effective guidance to their teams (Ulrich 1998a; Weiss
1999). In contrast, organisational systems that manifest these qualities for their
users are considered more likely to generate greater communal acceptance and
confidence in the tasks at hand (Ulrich 1992; Kaplan & Norton 2004; Ulrich &
Brockbank 2005).

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84
Chapter 3

The essence of Strategic Human Resource Management

Within the context of this research project, the search for a suitably comprehensive
definitional framework around which the various aspects of Strategic Human
Resource Management (SHRM) are structured and clearly reflects their relationship
was not successful, and in its absence attempts to create one also presented
difficulties. The literature on SHRM only occasionally refers to this technical
problem, leaving a range of unresolved issues that are often skirted around or put
to one side. In order to overcome this obstacle, a model of SHRM was developed in
which the principal elements generally recognised as central to the concepts and
associated practice are located. By targeting what emerged as the cornerstones of
this discipline it was possible to construct a substantially coherent representation of
SHRM. This chapter explores the content of the framework and detail behind each
of the elements that were applied to the research analysis described later in the
thesis.

ƒ Defining Strategic Human Resource Management

SHRM is a challenging management discipline, in particular when it comes to

defining what is meant by this term. Encumbered by much abstraction, variation
and exceptions to the rule, SHRM resists being placed neatly into a fully formed
body of knowledge and theoretical management context where consistent
terminology is used to refer to the same concepts and there is constancy of
thinking and approach towards the subject (Dyer & Reeves 1995; Brewster 1999).
Accepting that these characteristics may be in part an inevitable by-product of a
managerial field that has developed only very gradually in relatively recent times,
Niehaus (1995, p. 53) nevertheless refers to the not uncommon perspective that
SHRM is “theoretically impoverished”. Similarly, Mabey, Salaman and Storey
(1998, p. 10) have commented that “it might…..be concluded that the field of SHRM
is unhelpfully confused and chaotic”. This view presumably stems from the
limitations of scientific analysis leading to explanatory models, the disparate views
on how the subject can be defined and the absence of a single, comprehensive and
generally accepted practical model as well as the lack of clarity about the
parameters that define the point of interface with other managerial disciplines
(Wright & McMahan 1992; Tyson 1995b). In some respects, SHRM is an illusive
concept that both the academic and the business community are still trying to pin

85
down. As such, the process of identifying the key components that make up the
theory and application of SHRM is in some parts still thwarted by aspects that deny
satisfactory clarification or easy closure (Miller 1989; Cooke & Armstrong 1990;
Lundy & Cowling 1996).

In the initial stages of its development theorists attempted to provide reasonably

concise definitions of SHRM. This seems to have become much less common as the
complexity and lack of consensus about its composition escape simple and full
encapsulation in a few short sentences. While within the body of the literature the
various definitions collectively touch upon the numerous elements of the field, in
their stand-alone form they are too narrow to provide a sufficiently precise or fully
comprehensive representation. Rather than having arrived at a consolidation of the
various components of SHRM into a single generally acceptable definition, many of
the more recent attempts appear simply as a rework of others’ efforts in this area.
It is only within the more expanded, descriptive writing that common unifying
themes start to emerge and where a sense of the more complete picture is
obtained (Cooke & Armstrong 1990; Brewster 1999).

ƒ The flavour of Strategic Human Resource Management

It might be easy to dismiss the historical contributions to fashioning a definition of

SHRM due to the inability of these definitions to offer the ultimate universal and
authorised statement that is all-encompassing in scope. Nevertheless, these
versions provide some value, not only in their longitudinal perspective on the
development of the field and the variety of angles from which writers have viewed
the subject, but also as useful initial access to or flavour of, the diversity of
underlying ideas and activities associated with the discipline. A selection of typical
examples drawn from prominent writers in the field has been included below to
illustrate this feature with some of the key themes underlined. For example:

“Human resources strategic planning is a process designed to prepare

the organization for the future and ensure that decisions regarding the
use of people contribute to the achievement of organizational
objectives” (Nkomo 1980, p. 74).

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“….’strategic human resource management’ encompasses those
decisions and actions which concern the management of employees at
all levels in the business and which are directed towards creating and
sustaining competitive advantage” (Miller 1989, p. 51).

“….a set of process and activities jointly shared by human resources and
line managers to solve people-related business issues” (Schuler &
Walker 1990, p. 7).

SHRM is the “….the pattern of planned HR deployments and activities

intended to enable a firm to achieve its goals” (Wright & McMahan
1992, p. 298).

“Strategic human resource management is concerned with those

decisions which have a major and long-term effect on the employment
and development of people in the organization and on the relationships
which exist between its management and staff. An HR strategy will
express the intentions of the enterprise about how it should manage its
people” (Armstrong & Long 1992a, p. 47).

“Strategic HRM can be defined as the overall and coherent long-term

planning and shorter term management, control and monitoring of an
organization’s human resources so as to gain from them the maximum
added value and to best position them to achieve the organization’s
corporate goals and mission” (Harrison 1993, p. 36).

“Conceptually, SHRM refers to HR management practices that are

intended first to influence and then to help execute the firm’s strategic
business plan” (Huselid 1993, p. 37).

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“Strategic HRM can be regarded as a general approach to the strategic
management of human resources in accordance with the intentions of
the organisation on the future direction it wants to take” (Armstrong &
Long 1994, p. 39).

“Strategic human resource management is concerned with the

development and implementation of people strategies which are
integrated with corporate strategies and ensure that the culture, values
and structure of the organization, and the quality, motivation and
commitment of its members contribute fully to the achievement of its
goals” (Armstrong & Long 1994, p. x).

“In the broadest terms strategic HRM is concerned with the people
implications of top management’s visions of the future of the
organization and the mission it is there to fulfil. HR strategies, like
those of all other functions, are there to support the realization of the
vision and mission of the organization and the achievement of its goals”
(Armstrong 1994, p. 88).

“The field of Strategic Human Resource Management (Strategic HRM)

focuses specifically on the role of human resources in improving firm
performance and competitive advantage” (Snell & Wright 1997, p. 3).

“….the goal of strategic human resource management is the collective

application of such resources to meet an organization’s strategic
requirements and objectives” (Greer 1995, p. 106).

“Human resource strategy may be defined as the philosophies, policies

and practices which management adopt in order to achieve business-
related people management objectives” (Tyson 1997, p. 2).

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 “You have a workforce strategy when you take a planned approach to
acquiring, developing and retaining talent” (Gubman 1998, p. 76).

“The development and implementation of an overall plan that seeks to

gain and sustain competitive advantage by managing…. human assets
through an integrated, synergistic set of HR practices that both
complements and promotes the overall business strategy” (Kaufman
2001, p. 506-7).

“The fundamental priority of HR strategy in a firm is to secure and

maintain the kind of human resources that are necessary for the firm’s
viability” (Boxall & Purcell 2003, p. 185).

ƒ The principal elements of Strategic Human Resource Management

During the course of this research, four main elements emerged as being
consistently recurring themes or components of the discipline designated as
representing a strategic approach to the management of people in commercial
organisations. These are discussed below:

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

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ƒ Element 1 – A management philosophy (the recognition of people as a valuable
business resource)

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

Although rarely described in such terms, SHRM is in the broadest and most generic
sense a management philosophy (Tyson 1995b). Implicit in the concept of SHRM is
the belief that people as an organisational resource represent a, if not the most,
valuable and useful asset available for the purpose of achieving business objectives
and possibly the only source of long-term competitive advantage (Hendry &
Pettigrew 1986; Wright & McMahan 1992; Dyer 1993; Hendry, Arthur & Jones
1995; Mabey, Salaman & Storey 1998; Becker & Huselid 1999). Armstrong and
Long (1994, pp. 183, 53) have described SHRM in terms of “an attitude of mind”,
explaining that:

“The fundamental concept of strategic HRM is based on the assumption

[researcher emphasis] that human resource strategy can contribute to the
business strategy. The validity of the concept depends on the extent to
which it is believed that people add value and should be treated as a
strategic resource”.

Similarly, Mabey, Salaman and Storey (1998, p. 1) propose that:

“The idea of [S]HRM…. is based on the notion that people management can
be a key source of sustained competitive advantage. This contention or
belief is, in turn, based on four main precepts: first that people can ‘make a
difference’ because in the final analysis it is human capability and
commitment which distinguish successful organizations from the rest….”

By extension, SHRM incorporates the notion that the application of human resource
management, or the way in which people are managed within an organisation,
plays a critical part in determining company performance. Tokesky and Kornides
(1994, p. 115) highlighted this when commenting that:

“Strategic Human Resource Management (SHRM) is the idea [researcher

emphasis] that human resources management can be used to gain or
enhance a competitive business advantage”.

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Schuler and Jackson (1999, p. xiv) have also noted that:

“Strategic human resource management,…is based upon recognition that

organizations can be more effective if their human resources are managed
with human resource policies and practices that deliver the right number of
people with the appropriate behaviours, the needed competencies and the
feasible levels of motivation to the organization”.

This recognition of the commercial value of people and their management implies
that human assets should be included and considered in all aspects of managerial
activity and emphasises the availability of and relationship with management
technology to support this proposition (Hendry & Pettigrew 1986; Huselid 1993;
Mabey, Salaman & Storey 1998).

For some decades now, the mantra “people are our most important assets” has
made the rounds of many companies and there has been extensive promotional
activity in support of this concept both within organisations and in the broader
community at large (Devanna, Fombrun & Tichy 1981; Buller 1988; Gratton 2000).
However, it is less evident what those who express this belief mean or what is
actually being proposed when sentiments of this type are declared. To espouse the
view that people are commercially or even strategically significant is not likely to be
new for many. To state the importance of managing the social infrastructure of
organisations would seem a reasonable suggestion. But the SHRM discipline
suggests that the critical issue is the way in which such a philosophy translates into
activity and behaviour within the corporate environment (Walker 1992; Barney &
Wright 1998; Pfeffer 1998; Gratton 2000).

At the most basic level, there is no dispute with the fact that people as commercial
resources participate in, contribute to and influence business activity at all levels
and in all areas of organisational life. The role of human resources is central to the
development and implementation of business strategy. Without human
involvement, organisations cease to exist (Buller 1988; Fitz-Enz 1990; Johnson
1992; Hendry, Arthur & Jones 1995; Beer 1997). More broadly, the contemporary
commercial context that is driven by rapidly changing technology indicates that
competitive advantage is increasingly derived from human contribution to the
development of products and services, and the processes by which these are made
and delivered. Most notable has been the growing importance of industry sectors
whose function is to provide information, services and high-tech products and
where the product itself is frequently the person who either creates and/or delivers
it. This implies high levels of reliance on human expertise, experience and
innovation. SHRM is grounded in the evident realities of economics where people
as an organisational resource have risen to play a critical role in driving and

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securing business performance (Buller 1988; Fitz-Enz 1990; Beer 1997; Davenport
1999; Ghoshal & Bartlett 2000).

As has been shown, the traditional marginalisation or limited focus on the latent
potential of human capability has been reversed for many companies. This has
come through various forms of environmental pressure that demand improved
business performance from enhanced, pro-active strategic utilisation of available
organisational resources and, specifically in response to the knowledge economy,
key sources of intellectual capital. Where focus is on the bottom line, business
indicators increasingly reflect the elevated status of people resources over other
forms of production inputs and a corresponding need to give priority to more
efficient and effective management of this area of the business. SHRM is distinctly
pragmatic and disciplined in its approach, being goal-focused with clearly
articulated outcomes, concerned with the economics of efficient and effective
management practice, productivity, cost and waste minimization, measurement and
other hard realities of business life (Hallett 1989). SHRM also involves a certain
unquestioning acceptance of the importance or value of human assets whether or
not empirical or quantifiable evidence exists to substantiate this proposition. The
measurement of human contribution to business outcomes is often difficult to
demonstrate. Management practice does not always generate the desired result for
companies and some aspects struggle with finding acceptance in the absence of
science-based or visibly causal evidence that manifests its validity and hence value.
In sum, to assume a strategic position on the management of people is to
acknowledge the heightened role and particular relevance of people resources in
today’s commercial context and to be concerned with the pragmatic identification
and appropriation of optimal value from this particular business resource
(Armstrong & Long 1994; Anthony, Perrew & Kacmar 1996; Ulrich 1997a).

At the same time, SHRM comprises a humanist dimension that focuses on people,
on the nature of the human condition and experience. It reflects an ideology that
holds human beings in high esteem and attributes importance to their welfare, their
well-being, to their pursuit of happiness and fulfillment, and to their rights and
entitlements within the social order. SHRM is frequently linked with promoting
morally positive relationships between people in companies, where individuals come
together in constructive and cohesive social groups to achieve mutually beneficial
goals. The management literature of this period indicates that for many proponents
of SHRM the motivation is strongly ideological, imbued with humanist principles and
social values that seek the humane and compassionate treatment of people in
institutions and encourage ethical and other worthy forms of human interaction and
behaviour. Those interested in SHRM are invariably concerned with the state of the

92
human spirit, the condition of the material world in which people are required to
live and the experience of individuals who must engage in order to survive. There
emanates the sense of a utopian search for the universal improvement and
betterment of humanity, one that extends beyond the ordinary business of
commercial exchange (Drucker 1992; Roddick 1992; Boxall 1994; Collins & Porras
1994; Beer 1997; Ulrich 1997a; Davenport 1999; Gubman 1998, Thite 2004).

The values-based proposition translates into applied organisational terms through

the HRM technology, where operational practices promote and reinforce concepts
such as fairness and equity, individual rights and entitlements, protection and care
of the sick and injured, the meritocratic and egalitarian treatment of people, the
opportunity for self-determination, self-improvement as well as to be heard.
However, there are no commonly agreed indicators or measures to determine
whether a company values its people. The concept is particularly nebulous and far-
reaching in its possibilities. Attempts have been made by writers to clarify the
essence of this concept in terms of specific management methods and behaviours.
Pfeffer (1998) for example, has suggested that a “people-based strategy” focuses
on so-called high performance management practices such as job security,
provision of training, the reduction of status differentiators and sharing information
about business performance. Thite (2004) refers to the common promotion of
ethical practices and treatment of people, the provision of employment security, the
adoption of long-term business horizons to accommodate both the reality of
commercial needs and associated human development, supporting fair play and the
equitable treatment of people, meeting expectations, fulfilling promises and
generally demonstrating behaviour that indicates people are valued. As described
in the previous chapter, companies applauded for their managerial initiatives
generally focus on two related dimensions; that of eliciting and leveraging human
knowledge and intellect, and the design of work environments that respond to
human needs and preferences, with the latter intended to support and contribute to
the former. While exposed to the scorn of cynics with accusations of more of the
“warm and fuzzy” stuff from “HR”, there is also support of a much broader socio-
political type for removing the traces of exploitative or degrading practices
associated with earlier generations of management. These special interests
coincide conveniently with recent trends in labour expectations of the employment
relationship and understanding about the contributors to effective human
performance within a business context (Gratton 2000).

Hence, SHRM emerges as a management philosophy of apparent contradictions,

promoting a strongly utilitarian and commercially pragmatic approach to people
management while emphasising the benefits of instilling greater humanity into

93
corporate life. However, in practical terms it is not unusual to find that what is
desirable is not always needed and what is needed is not always desired, and
herein lies one of the anomalies of this discipline. For example, for a company
where the production and delivery of goods and services requires low levels of
human skill, ones that are quickly and easily acquired and if necessary easily
replaced, it is to be expected that the emphasis on investment in labour might be
less. The nature of the work does not justify high levels of capital expenditure or
other types of investment in order for the workforce to remain an effective and
enduring organisational resource. Workers employed to pack boxes in a factory
with little prospect of promotion to more complex or demanding tasks and
responsibilities are less likely to be viewed as a strategic resource, or receive
priority and investment from the business in which they work. In the case of
industries faced with rapidly changing markets or developments in sophisticated
technology affecting the ability of the business to remain competitive, there is
greater motivation for ensuring that labour resources are sufficiently trained and
motivated to assist the company in maintaining or building its market share
(Gratton 2000).

This inherent socio-economic dichotomy could be usefully viewed in terms of a

continuum. For some the management philosophy might be rationally engineered
with an entirely commercial, bottom-line focus, while for others their approach
might stem from a more ideological and humanistic foundation where improved
commercial performance is seen more as a desirable by-product of investing in
people and addressing the social dimensions of organisational life. For others that
fall somewhere in the middle, the best approach may be a balanced combination of
both because they are perceived as inter-related and mutually beneficial. The
literature provides many examples of efforts to convince the business community of
a correlation between the strategic management of people and a positive impact on
financial performance while promoting the benefits to be derived from humanist
values-based organisational cultures. Companies vary in the extent to which they
accept the principles as both acceptable and compatible, and manage their
companies accordingly. There are also those whose beliefs and attitudes are
different and find the combination of these principles less palatable (Goss 1991;
Mabey, Salaman & Storey 1998; Kaplan & Norton 2004). Overall, the management
philosophy of SHRM manifests concern with addressing and potentially reconciling
the tension between commercial rationalism being the view that capitalist
corporations are entities with purely economic priorities, with the social role of
commerce as a human activity that has consequences for society and humanity in
the broadest sense (Hendry 1995; Tyson 1995b).

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ƒ Element 2 – Planning for the management of people (analysis of human
resource management options and making associated decisions)

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

The second element of SHRM comprises the managerial activity of planning for the
management of an organisation’s human resources. Here companies incorporate
the human resource dimension when considering the company’s present and future
direction, the relevant labour needs and its associated management (Hendry &
Pettigrew 1986; Nkomo 1980; Anthony, Perrewe & Kacmar 1996). Nkomo (1980,
p. 74) states that:

“Human resources strategic planning is a process designed to prepare the

organization for the future and to ensure that decisions regarding the use of
people contribute to the achievement of organizational goals”.

Implicit in the concept of planning is the assumption that in order to take action,
there must be a preliminary process during which a need to take action is
identified, options for action are assessed and decisions are made regarding which
option to pursue. It is at this point then that the chosen actions will be
implemented in the business (Hendry & Pettigrew 1986; Nkomo 1980; Anthony,
Perrewe & Kacmar 1996). Stace (1987, p. 59) has described this process in terms
of:

“An approach involving analysis of the strategic thrust of the corporation,

or of particular business units/divisions, and the implementation of
differential HRM policies [sic] to assist in achieving the desired strategy”.

The term “planning” often assumes broader connotations elsewhere, but here we
are concerned with the process of strategy formulation and the subsequent
identification or choice of people management strategies. (In some quarters, what
is often and rather confusingly referred to as “planning” encompasses the separate
managerial domains of preparing for the implementation of the strategy and the
associated management of change during the implementation process). Within the
model created for this research project, planning as an element of the discipline of

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SHRM focuses on the former, i.e. what companies propose to do and why, rather
than the latter, i.e. how and when (Dyer 1983; Fombrun, Tichy & Devanna 1984;
Hendry 1995).

As with other aspects of SHRM, there exists both commonality and diversity in the
proposed approach to the formulation or development of human resource
management strategy. For example, the planning process may be conducted in
isolation from the business strategy team, or in an interactive parallel or it may be
a fully integrated activity with human resource management professionals joining
other members of the strategy and/or executive team. Associated work may be
conducted once a year, or several times a year, or as part of a continuous process
throughout the year. The literature generates ambiguity in its terminology and a
lack of consensus regarding the various components of the planning activity as well
the order in which these should be addressed. Guidelines on when or how
decisions should be made within the strategy team or who should be a member of
the team are not consistent. What is consistent are various recommended
principles and themes that manifest an underlying logical progression of considering
business requirements, making people-related business decisions about managerial
actions and then taking the chosen actions (Orpen 1993).

o Theory of strategy formulation

In the same way that there has been considerable debate on the appropriate way
to approach the construction or development of business strategy, so this
discussion has filtered through into the context of strategic human resource
management (Miller 1989; Tyson 1997b; Thompson & Strickland 1998). There
exist two schools of thought whose ideas about the design and realities of strategy
formulation are significantly different. These include the rational planning approach
and the emergent or incremental perspective. One school believes that strategy
should be developed by means of a so-called rational, structured and systematic
planning process in which key strategic decisions are made. Others suggest that
strategy occurs through a spontaneous and on-going incremental process in which
managers rely upon their experience and intuition to take action as and when a
business need arises and in accordance with contextual changes (Miller 1989; Aaker
1995; Thompson & Strickland 1998). The term “rational” derives from the
assumption that strategies are formulated on the basis of logic, rigorous analysis,
merit and technical appropriateness (Mintzberg 1987; Armstrong 1992a;
Bamberger & Meshoulam 2000). This formal methodology enables the senior team
to draw together business and organisational knowledge and understanding for

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review, debate and confirmation, thereby enabling the setting of explicit goals and
priorities (Tyson 1997b; Thompson & Strickland 1998).

With regard to emergent strategy, Mintzberg (1973; 1987b) posited that it is not
possible to work out everything in advance and the determination of courses of
action will come as part of a continuous, evolving process. This is particularly
pertinent in a complex, dynamic environment whose nature is highly unpredictable
(Miller 1993; Johnson 1992). Strategic decisions may be made without the benefit
of complete information or knowledge concerning the circumstances and manifest a
more intuitive, iterative and even incomplete dimension (Mintzberg 1987b; Johnson
1992; Hendry 1995). It is also recognised that strategies will occur periodically and
interactively rather than all at one time (Cooke & Armstrong 1990; Tyson 1997b).
They are not necessarily based on a visible logic or apparent technical merit or
necessarily emanate from the exclusive domain of the executive management
team. A wider range of unanticipated environmental factors may in fact contribute
to the strategic outcomes (Bamberger & Meshoulam 2000). This approach to
business decision-making accommodates the view that many aspects of
organisational life cannot be quantified or measured, nor that they can necessarily
be addressed at any fixed point in time such as at an annual planning session or a
monthly management meeting. In effect, strategic clarity and associated decisions
are found to emerge with time and driven by experience, reflection, cognitive
connections, as well as an understanding of the particular set of business and
organisational circumstances. They rely on instinct about what is right or
appropriate for the situation, and may be acted upon only when circumstances lend
themselves most favourably (Mintzberg 1973; Mintzberg 1987b; Miller 1993;
Johnson 1992; Lundy & Cowling 1996). In this vein, it has even been suggested
that strategy is sometimes a product of management action rather than the
reverse, with a particular course of action being justified through the identification
of a strategy that it appears to support (Anthony, Perrewe & Kacmar 1996).

While the formal approach to the development of strategy prevails as the dominant
theoretical model, some theorists have been concerned with defending the benefits
of the emergent approach, suggesting that the rigidity of the formal planning
process denies the potential gains of widespread involvement of other stakeholders
who might bring innovatory ideas and proposals to the table (Walker 1992;
Armstrong 1994). Moreover, while the rational planning process is often depicted
in the literature as being a tidy linear process, consisting of a progression through a
number of pre-defined components, it is evident from the way that many
companies organise their strategic planning activities, this is not necessarily so
streamlined or methodical as the theory portrays. Although the relative advantages

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and disadvantages have been debated at some length in the recent literature, it has
been suggested that in reality firms tend to use a combination of these methods
(Mintzberg 1973; Walker 1992; Armstrong 1994; Greer 1995).

o Rational approach to human resource management strategy formulation

Reflecting the preceding inter-relationship with business strategy and subsequent

connection with strategy implementation, the following planning model outlines a
common basic process for the formulation of human resource management strategy
(reconstructed from Armstrong 1994, p. 175; Walker 1992; Green 1995; Lundy &
Cowling 1996; Anthony, Perrewe & Kacmar 1996):

Identify corporate mission/vision

Identify business goals

Analysis of Critical success Analysis of

Internal environment factors external environment

Select business strategy

Identify human resource goals

Analysis of Critical success Analysis of

Internal HR environment factors external HR environment

Select HR strategy

Plan HR strategy implementation

Implement HR strategy

The structured approach to business strategy formulation manifests itself in the

form of a formal process in which a company’s destination and the journey it will
take to reach that destination are mapped out. This usually involves the creation of
a mission statement that clarifies the organisation’s purpose, why it exists and how
it will compete, as well as a vision statement that portrays a picture of the future
and the long-term direction of the business. It includes identifying the company’s

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strategic objectives and goals, reflecting the markets in which the company will
compete subject to the environmental conditions and its internal capabilities
(Mintzberg 1973; Aaker 1995; Thompson & Strickland 1998; Kaplan & Norton
2004). In undertaking this activity companies identify where and how they intend
to compete, and the goods or services that will be traded within that market niche.
A process of analysis is undertaken during which the firm’s strengths, weaknesses,
threats and opportunities are clarified and reviewed. Consideration is given to
identifying changes in the commercial environment and how these will impact on
the business. The planning team will consider competitor trends and activities,
customer needs and preferences, as well as issues relating to pricing, quality,
distribution, service and costs (Garratt 1995; Aaker 1995; Thompson & Strickland
1998). In some instances, companies will define an organisational philosophy that
highlights its core values, social responsibilities and operating principles (Pfeiffer
1991; Greer 1995; Lundy & Cowling 1996). Work may also be conducted on
organisational design, the structure of the business, its size, managerial spans,
levels of authorities and responsibilities, standardisation and flexibility of practice,
as well as the systems of control and coordination (Tokesky & Kornides 1994). An
assessment is made of the range of available and required business resources, such
as financial assets, plant and equipment, operational infrastructure, information and
technology, as well as people and their associated skills. Decisions will be made
about how the various organisational resources will be positioned and allocated to
achieve the objectives (Aaker 1995; Thompson & Strickland 1998). The objective
for the management team based on consideration of the many varied aspects of the
business is to define the overall corporate direction, the key objectives and the
broad strategies that will be implemented designed to achieve these goals. Hence,
the rational planning approach provides a business framework and the
organisational context in which the optimal utilisation of all business resources can
be determined. It is through this method that the management of people as an
organisational resource is linked into or connected with the requirements of the
business strategy (Cappelli & Singh 1992; Lundy & Cowling 1996; Tyson 1997).

Formal human resource management strategic planning, whose principles have

evolved from and are linked into the classical approach described above, consists of
a similar process involving analysis and decision-making during which human
resource strategies are selected. The way in which human resource management
strategies are developed will depend on the extent to which these strategies are
conducted as part of the macro business planning process. However, it is
frequently the formulated business strategies that provide the basis and set the
parameters for the identification of the human resource management strategy
(Brewster & Smith 1990). Once the overall business strategies have been

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identified, the human resource management implications are then considered, to
determine whether the business strategy is in fact feasible from a human resource
perspective and if not, what interventions would be necessary to overcome any
obstacles (Orpen 1993; Anthony, Perrewe & Karcmar 1996; Greer 1995).

To do this a similar analysis is conducted; setting goals, identifying the internal and
external strengths, weaknesses, opportunities and threats, but on this occasion
relating to the firm’s human assets. The external environmental analysis includes
reviewing specific people and employment-related trends and forces that might
impact on the business and its proposed strategy, be they in the broader realm of
the political, economic and social/demographic context, or more local issues such
as the legal/regulatory context and the labour market (Nkomo 1988; Walker 1992;
Greer 1995; Stone 1998). The exercise might also include benchmarking other
companies in the same and different industries to obtain insights into and
confirmation about effective management technology and human resource
management practices (Ulrich 1997a; Rothwell 1998). Orpen (1993) suggests that
the internal analysis could be conducted at two levels, surveying different
dimensions of the business in relation to its workforce. A macro analysis might
include a review of variables such as the company’s climate, its structure, the state
of its supervisory practices, and levels of employee absenteeism and turnover. A
micro level analysis would concentrate on individual variables such as employee
numbers, work attributes, job attitudes, as well as present and potential
performance. Factors of this type are reviewed in light of the outcomes from the
macro strategic plan.

The strategy team may then identify the required people resources, the mix of skills
needed for both the present and to support any new strategies. Gratton et al.
(1999) proposed that a gap analysis should be conducted to assess the current
capability of the workforce and the capabilities required to achieve business
objectives and in turn clarify what needs to be done to close this gap. Where a
functional-based approach is adopted the required linkages between the functional
human resource management systems and the strategic business goals will be
identified and how these will be implemented, as for example, recruitment and
selection (aligning of new hires to business needs), performance management
(aligning individual targets to reflect business goals), compensation (aligning pay
and benefits with business goals), short-term training (building skills to achieve
short-term business goals) and long-term training (building leadership
competencies for the future) (Gratton et al. 1999).

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The human resource management strategy formulation process may also include an
assessment of the internal human resource management department’s ability to
deliver on the implementation of the strategy. This might include assessing the
existing availability of the function’s infrastructure such as its systems and policies
required to carry this out, the technical expertise required to design and implement
new systems and tools, and the cost to the business of pursuing a particular
strategic approach (Rothwell, Prescott & Taylor 1998).

The process concludes with an assessment of the emerging strategic human

resource management options and the selection of the most appropriate approach.
In order to implement the chosen strategies, strategists will select from the
spectrum of management technology and tools, that is the HRM toolkit, those
systems, policies, practices and programmes deemed appropriate for the task
(Hendry 1995; Lundy & Cowling 1996; Bamberger & Meshoulam 2000). Overall the
objective is to acquire a comprehensive picture of the status and condition of the
workforce, its current capacity to support continuing or changing business
strategies and determining how these can be most effectively put into operation
(Schuler & Walker 1990).

o Strategy formulation applied methodology

No standard tool or universally used method for managers faced with the task of
linking their business strategy with the human resource management strategy is
available. It does not even appear possible to purchase a textbook on strategic
human resource management and find within its covers a generic procedural model
that might usefully assist a company chart its way through the process without
considerable adaptation (Orpen 1993). Research experience indicates that some of
the most advanced and useful tools are those developed by management
consultants who provide facilitation services to companies in this area and as such
remain their personal intellectual property and hence are not readily accessible. To
a large extent the onus has been on companies to custom build human resource
management planning tools that meet their unique managerial style, business
needs and strategic preferences. A number of early model-cum-tools exist whose
value resides in showing the different ways in which the issue of linkage can be
managed, but as tools for practical application they are often incomplete and overly
simplistic (Hendry 1995). For example, Cooke and Armstrong (1990, p. 33
adapted) refer to a model that proposed management teams should work through a
set of matching questions as follows:

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 Strategic business planning
What business are we in?
Where are we going?
What are our strengths,
weaknesses, opportunities and
threats?
What are the main strategic
issues facing the business?
What are the critical success
factors which will determine how
well we achieve our mission?
Strategic HR planning
What sort of people do we need in
the business?
What sort of organization (ie.
people and culture) do we need to
get there?
To what extent are those strengths
and weaknesses related to our
human resource capability? What
opportunities have we got to
develop and motivate our staff?
What are the threats in areas such
as skills shortages and retention of
key staff?
To what extent do these issues
involve organization and HR
considerations?
How far will business success be
helped or hindered by the quality,
motivation, commitment and
attitudes of our employees?

Tokesky and Kornides (1994, p. 116) provide a more extensive list of issues that
might be incorporated and addressed as part of the planning process:

o Does the organization’s culture support the long-term business

strategy?
o How can a positive culture best be used to gain a business
advantage?
o Is the organization’s structure consistent with the business
strategy?
o Are training. succession planning, recruiting and a rewards system
helping to build an effective management team?
o Are management performance systems properly focused … are
incentives supportive of and relevant to business objectives?
o Are work-force human resources systems effective? Are selection,
training, compensation and benefits, performance measures and
communication working as intended and supporting the business
strategy?

Another basic model is a functional matrix, whereby specific business strategies are
matched against specific human resource management functional activities. Here
for example, the executive team addresses the implications for the company’s
recruitment activity in light of a proposed marketing strategy or the types of
training that might be needed as a consequence of a change in product, and so
forth (adapted from Cooke 1990, p. 33):

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 Marketing Product Xxx
strategy strategy
Recruitment
Training
Performance
Xxx
Xxx

A more recent model (the Improved Business Results with People Model)
recommended for practical application by the American consultancy firm of Hewitt
Associates manifests many of the key components of strategy formulation (adapted
from Gubman 1998). This comprises an eight-step analytical methodology covering
the following areas:

Business Identifying the desired business outcomes and

results strategies to get there
strategies
Business Identifying the firm’s unique capabilities, strengths
capabilities and weaknesses in its structures, finances,
processes, systems, tools and methods
People Identifying what is needed from people, culture for
requirements success, psychological contract, competencies,
behaviours
Employee Identifying employee priorities; personal needs,
requirements preferences and goals in the employment
relationship
Workforce Identifying plans for acquiring, developing,
strategies deploying and retaining people
Management Identifying way in which workforce strategies will be
practices implemented; staffing, learning, performing,
rewarding
Business Identifying how people, groups and leadership
interactions interact within and without the organisation
Balanced Monitoring the progress of the business strategy and
measurements effectiveness of the people supporting the strategy
with balanced measures

o Drivers of strategic decisions

An important aspect of strategic planning decision-making is the presence of a

range factors that drive and influence how particular strategies are selected (Wright
& McMahan 1992). Theoretical work addressing the alignment of human resource
management practices with business strategy often presumes that companies have
a wide variety of choice of strategies that they can select and implement, as if
companies work with a clean slate without the burden of contextual or
environmental constraints, historical precedents or aspects of business practice that
are already locked in place. Models portray the simple notion of goals to be
achieved and decisions to be made to achieve these. Many of the early simpler
models reflect a predominantly static and mechanistic solution to business issues

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that are in fact highly organic, evolutionary and often resistant to control or
influence. In reality, companies are faced with a considerable range of obstacles
and constraints when making their strategic choices (Beer et al 1985; Orpen 1993;
Ferris et al. 1999).

One factor influencing the choice of strategies is the wide range of stakeholders
who have an interest or say in how the company will be managed (Cooke 1992).
These might include shareholders, senior executives, employees, the government,
the local community, union bodies etc (Wright & McMahan 1992). Further, as
Tyson (1997) explains, a considerable range of contextual or environmental
variables may also facilitate or hinder the arrival at a particular choice. These
include the company’s market share and size, the type of goods and/or services
provided, the state of its technology, general investment policies, regulatory
intervention in the employment relationship, as well as the organisation’s decision-
making conventions and processes. The management philosophy of the executive
team will also influence the selection of human resource management strategies.
Where there are explicit or implicit beliefs about how the business should be
managed and how the workforce will be treated and utilised, these will drive
strategic decisions. Where personal or group value systems are less strong, it is
suggested that the range of possible strategies is likely to be broader, emanating
from a wider consensus of views or based on a different set of related variables
(Beer et al. 1995). Another determinant will be the state of the labour market
relative to the industry or sector in which the company operates. The availability of
resources and the ability to attract and retain critical specialist skills implies a
positive correlation with the decision to provide attractive employment terms such
as competitive salaries, job security and development opportunities (Beer et al.
1985). It is also noted that the way in which a company’s operational facilities,
technology and equipment are physically arranged and structured for the purpose
of production will impact decisions. In operational environments where the
requirement is to work with complex and sophisticated equipment and/or
machinery, the configuration of the work design and associated management
practices are likely to be influenced by the engineers and technicians who are
responsible for this area of the production process. While the behavioural scientists
and personnel management community may recognise the benefits of designing
work methods so that their repetitive or unappealing aspects are reduced or
eradicated, the inclination to be socially accommodating will be weighed against the
pressures on the configuration of technical demands and efficient productivity (Beer
et al. 1985).

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Moreover, where unions hold significant leverage within the employer-employee
relationship for example, and are in a position to demand the adoption of certain
employment-related conditions or benefits, or conversely to abandon practices
deemed undesirable, the flexibility of the management team to retain breadth of
strategic choice is clearly diminished. Decisions relating to the distribution of
compensation, transfers, promotions and work scheduling are traditional areas of
union influence and interest. In this instance, companies may even opt to counter
this constraint by adopting strategies to reduce this power base or eradicate third-
party involvement by offering higher salaries to non-union workers as well as focus
on activities that are more likely to align employees’ interests with those of the
company. This might involve the introduction of grievance procedures, employee
consultation and empowerment, flexible conditions and so forth (Beer et al. 1985).
As Cooke (1992) notes strategic decisions are generally influenced by the politics of
organisational life and associated with the bargaining and trading off on costs and
benefits between one interest group and another.

Socio-cultural factors have also been identified as important contributors to

strategy formulation. The practice of human resource management varies from
company to company being a product of the social and cultural environment in
which it operates. Some of the characteristics of the approaches adopted by
companies are related to the national character of the surrounding populace and its
social systems, and some have been shaped by unique historical experiences,
political events or the social development of a particular society. Others stem from
less obvious sources such as the geography of the environment, the demographics,
the availability of resources, the evolution of the surrounding institutions and the
collective experience of the community. Similarly, different nations and regions of
the world are governed by different legislation and control over the management of
people within commercial entities. Some countries maintain highly prescriptive
guidelines and requirements for workforce management, usually supported by the
political party in power at the time. It is clear that these types of considerations
have the potential to play a greater or lesser role in determining the ultimate
strategic outcomes and can result in proposed options being either presented or
removed from the executive agenda (Beer et al. 1985).

More tenuously, strategies are also thought to be a product of the cultural values
and beliefs held by the original founders of companies, particularly where these
early entrepreneurs were clearly consistent in their efforts to embed certain
management practices and approaches. Where this has occurred it is believed that
certain cultures will be more pervasive and potentially more enduring (Beer et al.
1985). Similarly, Cappelli and Crocker-Hefter (1996) suggested that strategic

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decision-making is influenced by the period when the company was formed,
because it is at this time that the foundations were laid for the way in which the
organisation’s management would subsequently proceed and in this way become
ingrained with the passing of time. For instance, UPS was founded in 1907 during
the era of Scientific Management, Federal Express was founded in 1971 when job
enrichment and work reform programmes were popular, and Sears was established
in 1886 in an era when companies were dominated by top-down command-and-
control systems of work, and consequently, they contend that the legacy of these
origins can be identified in today’s corporations. They conclude that there is likely
to be considerable difficulty in changing age-old, ingrained management practices
and it might actually be easier to change the business strategy rather than change
the organisational culture or management practices themselves (Cappelli &
Crocker-Hefter 1996; Pfeffer 1998).

o Documented strategy

A particular point of contention that emerges in the literature on strategy is

whether or not strategic plans need to be captured in a written form. It has been
suggested that if a company’s strategy is not documented it does not really justify
the label strategy because without a document it remains an illusive idea that is
susceptible to change, variable interpretation and is less likely to be communicated
to those who need to know its contents (Mintzberg 1973; Johnson 1992). Brewster
and Smith (1990) suggested that written plans are more likely to translate into
specific initiatives and outcomes. They also noted that based on a study by Price
Waterhouse and Cranfield School of Management in the UK, the larger the company
the more likely there will be a written plan. Underpinning this preference is also
the suspicion that an absent plan represents an absent strategy and hence a
company is defaulting on its executive managerial responsibilities. Some have
refuted this view, such as Armstrong (1994, p. 186) who asserted that it does not
“matter a bit whether or not the strategy (or whatever it is called) has been written
down or has emerged in the form of a clear understanding of the broad intentions
of management”. His research indicated that there was no discernible difference in
terms of clarity of purpose, mutual understanding among the executive team of the
direction in which the company would go, the extent to which business and people
strategies were integrated, or the ability of companies to convert plans into
effective action, between companies that documented and those that did not.
While this issue remains a moot point, there is a body of opinion that strongly
favours documented plans which should include the human resource management
strategy components (Cooke 1992).

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ƒ Element 3 – Linking human resource management with organisation and
business goals

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

SHRM is concerned with the relationship between the strategic management of the
company and the organisation’s pool of human resources, specifically the role that
people play in helping to achieve business goals. Hence a central concept in a
strategic approach to people management is the alignment of human resource
management strategy (the way in which the company proposes to manage its
workforce) with the business strategy (what the company wishes to achieve as a
commercial entity), so that human contribution to this business purpose is
optimised (Walker 1992). Central to the linkage proposition is the concept of
support, that people and the management systems by which they are managed
exist to support or facilitate the implementation of the firm’s competitive strategy
(Wright & Snell 1989; Cooke 1992). As Armstrong (1994, p. 114) commented:

“the integration of HR and business strategies is seen by some

commentators as a [sic] main distinguishing feature of strategic HRM”.

It is based on the assumption that business objectives are more likely to be

accomplished where people resources are collectively and individually focused and
enabled for this purpose. As a management tool, SHRM provides both a conceptual
and practical mechanism to drive the creation of this critical connection between
the business and its people (Devanna, Fombrun & Tichy 1981; Guest 1991;
Armstrong 1994; Becker & Gerhart 1996; Pfeffer 1998).

o Theoretical concept of alignment

Within this context the concept of alignment, or “fit” as it is frequently described, is

concerned with transforming the management of people into a strategic activity.
Fit emanates from the systemic perspective of organisational dynamics that regards
the interconnection between disparate parts of an organisation as critical to its
effective management (Mintzberg 1973; Baird & Meshoulam 1988; Collins 1994;

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Porter 1996). In the search for keys to business success, the notion of fit has
emerged as a major theme and theorists have consequently explored numerous
permutations; fit between strategy and the external environment, between strategy
and customers, between strategy and structure, budget, policy, capabilities, culture
and so forth (Thomson & Strickland 1998; Boxall & Purcell 2003). The ability to
achieve alignment (or congruency, consistency and coherence being other ways of
describing the concept) is of paramount importance. It has been proposed that
business outcomes are more likely to be successful where strategy, infrastructure,
technology, culture, management systems, workforce characteristics and activities
in general are configured so that they are integrated and mutually supporting
(Walker 1992; Porter 1996; Snell & Wright 1997; Tyson 1997b). Moreover, the
tighter the fit between the variables, the more powerful the execution of the
strategy is thought to become, in turn increasing the likelihood of achieving
business objectives (Harrison 1993; Thompson & Strickland 1998). None of these
elements is believed to be the sole contributor to business success, rather high
levels of performance are thought to derive from the design of each element as part
of an interconnected whole. The desired “tight” fight is said to occur where the
executive team possesses a clear and shared understanding about the strategic
direction of the business and the way in which the supporting resources (such as
people) and infrastructure will contribute to this desired business objective (Collins
1987). Without fit, financial resources, time and energy are wasted. If strategic
planning and organisational development are implemented without the necessary
skills and information for example, the effort is unlikely to see any reward.
Similarly if organisational information is developed beyond the scope of managerial
ability, it is rendered useless. Hence the need for a clear and logical vision that can
guide the development and implementation of each policy and practice (Baird &
Meshoulam 1988). Becker et al. (1999) have described this concept in terms of
achieving a clear line of fire from strategy to market value through people, using a
human resource management system that generates employee behaviours that are
focused on key business priorities which in turn drive profit and growth. In creating
this connection a critical question to be posed by the management team in the
pursuit of fit is that of “why”: why is the company choosing to take a particular
action or adopt a particular strategy. This question serves to clarify the rationale
behind the corporate approach or a particular business decision and hence ensure
that proposed actions will address the issues (such as a strategic need) for which
they are intended (Beer et al. 1995; Ulrich 1997a).

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o Vertical fit

Within the SHRM framework it is considered important to match the organisation’s

people management strategies and their associated management practices with the
business strategy, as well as to create operational linkage and integration between
the various human resource management strategies and practices horizontally
across the organisation. Where this vertical and horizontal connection is achieved
these relationships are referred to in terms of alignment or “fit” (Collins 1987;
Delery & Doty 1996; Gratton et al. 1999).

The term vertical fit describes a business strategy that is supported by a human
resource management strategy, or viewed from the other way round, where the
human resource management strategy is aligned with the company’s business
strategy (Devanna, Fombrun & Tichy 1981; Schuler 1982; Storey 1985; Guest
1987; Schuler & Jackson 1987). This implies that the company has chosen a
particular business direction and has organised, positioned and managed its human
resources in a way that is likely to support the achievement of selected business
goals. Fit occurs where there is a causal connection between the way in which the
organisation manages its people resources (i.e. the human resource management
strategy) and the perceived capacity of the human resource management strategy
to facilitate the achievement of specific strategic business objectives (Beer et al.
1985). The term vertical fit refers to the linking of strategic people management
decisions made by the senior executive team, with the strategic initiatives intended
to influence activity throughout the various organisational levels. As Gratton
(1999, p. 172) explains, the aim is to arrive at “an explicit complementary
relationship” between the business strategy and the management of people.

It should be emphasised that not all business strategies and in turn human
resource management strategies, are necessarily focused externally on how the
company will compete in the marketplace. Companies also pursue organisational
strategies that are concerned with making change to the internal infrastructure or
environment, as for example to the culture of the company. Internally and
externally focused people strategies may be implemented in parallel (Pfeffer 1998).
This concept may also be viewed as a linear progression through the value chain
whereby customers drive business decisions that in turn drive organisational or
cultural management decisions. An example is provided by Artis, Becker and
Huselid (1999) who describe the relatively recent activities at the US corporation
Lucent Technologies, a global leader in the design, development and manufacture
of communications systems, software and products, employing some 130,000
personnel. Externally, Lucent had been attempting to grow rapidly in markets

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outside their traditional area of strength and hence their human resource
management strategy was concerned with acquiring new types of workforce talent
and building up the skill-base to support the new competitive direction. Internally,
Lucent had embarked upon a cultural change programme designed to dismantle a
negative “entitlement” culture where poor performance went unchallenged and
bonuses were awarded to everyone regardless of effort or ability. In its place the
company decided to introduce a management approach that included systems to
assess and reward employees according to their performance. This dual or two-
tiered approach to SHRM demonstrates the requirement to position people both as
sources of competitive strength within the market or trading context as well as
strategically effective and productive resources within the organisational
environment.

o Horizontal fit

In addition to vertical fit, SHRM is concerned with addressing the concept of

horizontal fit. Horizontal fit implies that in managing the strategic environment of
human resources, a company should create alignment between the company’s
various human resource management systems and practices across the
organisation. The objective is to align each independent system so that they
mutually reinforce and support each other. Where the theoretical proposition
requires that an organisation should posses a fully integrated management
framework (comprising an associated set of management systems and practices)
designed to support key business priorities, this construct requires an
understanding of the web of cause-and-effect relationships within the total system,
the impact of each part on the others and the consequences of intervening in any
discrete part of the system (Delery & Doty 1996; Pfeffer 1998; Ulrich & Brockbank
2005).

For example, where a performance management system generates data on

employee development needs, provides the inputs for decisions within the
performance-related pay system and highlights potential for succession planning
activities, the required integration is achieved. Where high levels of customer
service are critical to the achievement of business goals, the adoption of a
customer-focused human resource management strategy comprising training in
customer service, rewarding for customer service and managing employee
performance so that individuals are focused on customer service, the horizontal
linkage occurs (Pfeffer 1998; Gratton et al. 1999).

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This holistic and integrated approach is considered important for several reasons.
When management practices are aligned and mutually supporting, it is believed
that better performance outcomes are achieved. The synergistic relationship
generates a coherency and consistency in management practice, as well as
providing the foundation for more rational decision-making (Snell & Wright 1997;
Wright & McMahan 1999). The ability to make reasoned objective decisions about
employee development needs for example, or how much performance-related pay
to award, relies on information generated by a supporting and interlinked
performance management system. Pfeffer (1998) illustrates this point by noting
that an increase in a firm’s training activities is unlikely to be of benefit unless
changes are made to the work environment that permit those recipients of training
to make use of the knowledge they have acquired. Similarly, if a company
implements an employee loyalty programme while carrying out cost-cutting
workforce redundancy activities and offering only temporary short-term
employment contracts, there exists ambiguity (and hence misalignment) in the
message that is being communicated to employees. Where the workforce is
encouraged to think long-term but is rewarded and promoted for delivering short-
term financial targets, or directed to attend closely to customer needs but is then
penalised for the time taken to do this, alignment is clearly absent. Horizontal
alignment is promoted for its ability to create a logical, integrated management
framework that sends a consistent message to the workforce about how the firm
approaches the management of its business and the relational nature of the
systems in which the workforce is expected to participate (Armstrong 1992; Pfeffer
1998; Gratton 1999).

It has also been suggested by some theorists that certain configurational designs,
or pre-defined “bundles” and “clusters” of human resource management practices
provide the optimal business management model. While various researchers have
studied horizontal bundling, and the possibility of an ideal grouping of practices or
number of ideal groupings has been put forward, no consensus has been reached
with regard to the best configurations or why particular configurations might lead to
enhanced business results (Dyer & Reeves, 1995; Youndt et al. 1996; Delery &
Doty 1996; Ferris et al. 1999).

o Temporal fit

A less commonly discussed dimension of fit is that of a “temporal” linkage (Gratton

et al. 1999; Kaplan & Norton 2004). Temporal fit emphasises and is concerned
with addressing the long-term human resource management needs of the
organisation. Gratton (1999) suggests that it is necessary to develop a long-term

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strategic vision for the management of human resources because the time required
to develop, implement and derive benefit from many people-related management
initiatives is much longer than that of other resources. By way of example, she
notes that it might take 10 to 15 years to develop an effective executive
management team and that a reward system designed to support a set of
workforce competencies or a training programme intended to build skills in new
technology might take several years to generate benefit. Likewise, the introduction
of a major cultural change initiative that requires a refocusing of the skills and
behaviours of the workforce will not produce the desired outcomes overnight. The
implementation process requires time, as does the process of obtaining the
necessary feedback that will determine if interventions have been successful.
Hence it is proposed that SHRM planning activity should include both long and
short-term components, covering a range of areas including goals, measures,
rewards, training and development, as well as leadership and organisational
development (Greer 1995; Snell & Wright 1997; Gratton et al. 1999).

o Problems with fit

While the theoretical concept of fit manifests a compelling logic, a number of

writers have highlighted a range of practical constraints associated with the
achievement of organisational alignment (Meals & Rogers 1986; Pfeffer 1998). For
example, it is noted that companies often pursue multiple business strategies and
have to cater for diverse employee groups that require different forms of
management. This suggests that a management system or model incorporating
just one set of management practices is unlikely to meet all the needs of a single
company. The requirement to accommodate multiple business strategies in one
organisation or a diverse employee composition is likely to result in a lack of
uniformity or standardisation in management practice, and this is certainly to be
found in many firms. There may be circumstances where the achievement of a
neat and seemingly ideal integration may not necessarily be appropriate or even
possible (Armstrong & Long 1994). Meal and Rogers (1986) suggested that human
resource management systems and practices should be consistent with individual
strategies even if this implies considerable variation across the organisation. In
other words, the nature of the alignment is with a specific strategy rather than with
the organisation as a whole. For example, where a particular product is part of a
growth industry, requiring the business to respond with investment, risk-taking and
pursuit of market share, individuals who are engaged in supporting this strategy
need to adopt different behaviours and possess different skills to those working in a
business unit where products are in mature or ageing markets, and the focus is on
achieving a maximum return on the historical investment in these product lines.

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Hence, the management practices applied to each of these groups needs to be
different (Lengnick-Hall & Lengnick-Hall 1988).

In addition, an assumption exists that the objective is to achieve the tightest fit, or
the best fit possible, implying that the greater the level of apparent integration, the
better the organisational and business outcome. However, in acknowledging the
need for today’s businesses to respond flexibly to rapidly changing trading
environments it is noted that a tight fit may not necessarily be appropriate, for this
may create internal rigidity and hence inhibit responsiveness (Pfeffer 1995; Becker
& Gerhart 1996; Gratton et al. 1999). Lengnick-Hall and Lengnick-Hall (1988)
noted that organisational fit is likely to be counterproductive when a company is
undergoing change and requires higher levels of flexibility in order to make that
change. Certainly where fit and flexibility are viewed as sitting at opposite ends of
a continuum, the achievement of fit may not meet the needs of a dynamic or
turbulent business environment. However, Snell and Wright (1997) concluded that
fit and flexibility are not mutually exclusive; having fit does not imply a company is
inflexible. They contend that flexibility is a characteristic of the company that
enables it to achieve a state of fit. As such, the purpose of SHRM is to develop
human resource management strategies that can swiftly change in nature or
direction in accordance with changes occurring at the time. In a stable and
predictable environment flexibility is less important but in a volatile business
environment more flexibility is required and to achieve the state of “fit” the task is
to develop human resource management strategies that facilitate the needed
organisational flexibility (Harrison 1993; Snell & Wright 1997).

Other concerns about the concept of tight fit in organisational alignment include the
disadvantages associated with workforce homogeneity. In the process of ensuring
that the firm recruits and selects those candidates that demonstrate characteristics
consistent with the strategic requirements of the business, it is possible to pass
over candidates who can contribute benefit through being different in their ideas,
approach and experience. The alignment proposition potentially negates the
requirement for human diversity considered important for creative and innovatory
work (Becker & Gerhart 1996; Thite 2004). Moreover, Lengnick-Hall and Lengnick-
Hall (1988) noted that models of strategic alignment have focused solely on making
a unilateral connection between strategy and people, that is the building of
behaviours and job roles that support the strategy rather than the other way round.
This approach assumes that the relationship between people and strategy is
unidirectional, that people as organisational resources do not have an impact on the
development or implementation of strategy and companies can operate without
adequate consideration for human needs and preferences.

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The view that a lack of organisation fit is automatically associated with sub-optimal
performance or inefficiencies and hence reduced competitive capacity, has also
prompted debate. It is evident that many companies operate quite successfully
with high levels of systemic misalignment. As such, the question to be addressed
then is how much inefficiency is any business prepared to accept or is able to
tolerate before performance is reduced to unacceptable levels (Cappelli & Singh
1992). Furthermore, it is recognised that organisations grow over time and
develop their systems and methods gradually as part of this progression. A
company that already has well-established systems or is prone to resist major
disruption to its traditional mode of operation may not provide an easy environment
for management attempts to return to the drawing board and reengineer a
significant part of its internal infrastructure (Meals & Rogers 1986; Dyer & Reeves
1995; Pfeffer 1998).

o Applied approach to alignment

Companies have approached the process of aligning the management of people

with organisation and business goals in a variety of ways. No consensus of opinion
exists about how this should occur or what all the different components of this
managerial activity should comprise. Some approaches overlap in their
methodology, with others discarding components as deemed appropriate. Each
different type of general approach reflects a progressive although not necessarily
chronological transition, from either the technical management discipline of HRM
and its functional owners in the personnel department, the various schools of
organisational development, or from the general realm of management and
business theory and practice, into a macro managerial discipline being virtually
uncoupled from its operational roots. Breaking from the past this aspect of people
management now sits for many companies within the most senior domain of
strategic business management being the responsibility of the corporation’s
executive management team.

o Functional alignment

Today, a common approach to creating alignment that evolves from its technical
operational origins is the process of connecting the strategic goals of the business
with each of the main functional people management activities and practices. For
example, where defined business objectives require the input of a certain mix of
skills, the activity of strategic recruitment is to source and hire those people
possessing the necessary competencies so that they may be put to work on

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achieving the corporate goals (Thite 2004). A strategic approach to recruitment
incorporates not only the activities associated with sourcing, assessing and offering
jobs to attractive candidates, but the wider implications of the overall requirement
for organisational resources, the needs of today and in the future, how will these be
met, the status of personnel attrition and supply and demand, how certain
occupational positions and their incumbents will contribute to the achievement of
long and short-term business goals, and the implications of internal movement
generated by promotions and transfers (Butler, Ferris & Napier 1991; Lundy &
Cowling 1996). Consideration may be given to building greater corporate capability
and ensuring recruits fit with the socio-cultural context of the firm and support the
overall business direction. Analysis of existing competencies held within the
organisation and reviewing the state of the labour market would be required. Part
of this activity might include succession planning, identifying how the company’s
human resources will be acquired or developed to fill future positions and roles in
the company that will emerge with the evolving business needs and the inevitability
of workforce turnover. Moreover, there is likely to be a focus on the establishment
and maintenance of information systems that can provide reliably useful data on
workforce demographics, as well as on costs and how sourcing and hiring activities
can be conducted in an effective and cost-efficient way (Butler, Ferris & Napier
1991; Walker 1992; Lundy & Cowling 1996).

Similarly, the process of translating the functional task of employee compensation

into a strategic activity implies not only identifying rates of pay and ensuring that
employees receive their entitlements, but also determining how compensation as a
managerial dimension can support the business strategy (Ulrich & Brockbank
2005). Ideally, as Thite (2004, p. 192) points out:

“…. considering the high cost of personnel, reward strategies aim to get
strategic value out of investment in people.”

In contrast with the common approach to remuneration, being the exchange of

monies or benefits for services with little or no obvious connection to business
goals, a strategic approach implies the harnessing of remuneration as a strategic
tool (Meals & Rogers 1986; Lundy & Cowling 1996; Pfeffer 1998). Still prevalent in
many companies is the practice of compensating on the basis of factors that are not
directly aligned with business requirements such as market rates of pay, the cost of
living, the desire for internal parity, perceptions about organisational status, length
of service, and the pursuit of tax minimisation opportunities. In many cases,
remuneration is determined according to the negotiation skills of both of the parties
involved in establishing an agreed rate of pay (Lundy & Cowling 1996; Pfeffer

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1998). A strategic approach to remuneration implies the recognition that the
building of a linkage between compensation structures and organisational
objectives provides the opportunity to not only pay people for their services but
also align them with the company’s goals. Through appropriately structured
remuneration systems that reward on the basis of achievement of specific goals, of
demonstrating behaviours that are likely to facilitate the achievement of these
goals, of differentiation between high performers and not-so-high performers, and
of compliance with certain organisational standards, companies are able to assume
greater control over the contribution of their workforce (Ulrich & Brockbank 2005).
Strategic remuneration provides the opportunity to communicate what is required
and expected of people, how they should go about delivering on these requirements
and expectations, and the nature of the reward if they are successful. Failure by
companies to build this alignment is evidently a source of waste, as an opportunity
to drive and influence individual and collective focus and behaviour is lost.
Moreover, it is recognised that the strategic management of remuneration provides
additional organisational leverage relating to the ability to attract applicants to the
company, to retain critical human competencies and to motivate workers towards
greater effort and application (Fombrun, Tichy & Devanna 1984; Walker 1992;
Lundy & Cowling 1996).

The Marriott Corporation, a global hotel and services chain with approximately
220,000 people worldwide (pre-1992), provides a useful example of this function-
based approach. The company established its strategic intent to be the provider of
choice for a selected niche of potential customers. It was recognised that in order
to achieve this goal it was necessary to become an employer of choice so that the
firm could attract sufficient numbers of staff that would promote the type of
reputation and offer the standard of service expected from the Marriott brand.
Without the capacity to attract and retain high quality service staff, the company
would not be able to maintain its market position or achieve the desired business
growth. In consequence, the company implemented a human resource
management strategy in which the various components were designed to attract
and retain the necessary calibre of staff for the business. For example, the decision
was taken to broaden the restrictively limited pool of potential applicants by
including mature-aged workers and younger people in the recruitment trawl. To
retain key workers the company identified several ways to increase employee
motivation and ensure the organisation was an attractive place to work. A career
structure was designed and implemented that provided opportunities for personal
growth and employees with aspirations of progressing with the company. In
addition, in order to promote the importance of service delivery, teams and
individuals were given higher levels of operational discretion in decision-making and

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the management of customers, as well as a reward system that encouraged the
types of behaviours needed to achieve the desired service standards (Ulrich 1992).

o People-related business issues

Another proposed approach, similar to functional alignment, is the process of

identifying “people-related business issues” and determining the strategies that will
address these issues (Meals & Rogers 1986; Schuler & Walker 1990; Walker 1992;
Hendry 1995; Ulrich 1998a). This approach focuses on those business issues such
as opportunities or problems (i.e. constraints) that stem from, are influenced by, or
impact on human resources. Here the task is to understand the causal effects that
contribute to specific outcomes both positive and negative, to identify the human
variable in the associated dynamic and to determine those actions that can be
taken to respond most effectively. According to Fitz-enz (1990) strategic human
resource management is concerned with universal business issues such as
performance, quality, cost control, operating in a global market, responding to
environmental change, development of customer focus, building capable people
resources, organisational design, and addressing human dimensions such as
motivation, commitment and loyalty. Other types of “issues” that have been
identified are poor productivity levels, financial constraints, technological
developments, inefficiencies, business growth, and innovation (Cascio 1995).
Walker (1990) highlighted people management concerns including introducing new
products and technology, reskilling the workforce, reducing personnel costs and
avoiding litigation cases. These are examples of generic activities in which
companies engage or concerns they routinely face in the course of managing their
business and play to a greater or lesser extent an important part in determining
business performance. To address these issues managers will select appropriate
management strategies or tools that are likely to either assist in the necessary
change process or alternatively provide some form of resolution (Walker 1990;
Schuler & Walker 1990).

For example, where a company is losing market share the requirement is to identify
the human cause in the decline in business and implement management initiatives
that reverse this trend. Similarly, where a manufacturing process is consistently
unable to generate faultless products, the task is to assess the reasons for the poor
quality standards and to then make adjustment or implement some form of
corrective action to address this performance problem. This may involve
investigating whether the equipment is at fault, whether the process is poorly
designed, whether employees are careless or insufficiently skilled, or whether the
problem consists of a number of inter-related variables of this type. Once clarified

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the company is able to take action to address the problem. These actions include
purchasing more sophisticated equipment and providing training to staff on the use
of this equipment, or the restructuring of job tasks and the redirecting of workers
to carry out this work, or introducing programmes to improve worker morale;
whatever is appropriate. Similarly, loss of revenue in a supermarket chain might
be the result of stocking items that do not meet customer preferences, and hence
company buyers might need to acquire greater consumer awareness and be trained
in purchasing product groups that meet these preferences more closely (Meals &
Rogers 1986; Walker 1992; Ulrich 1998a). To illustrate this concept further, Cooke
(1992b adapted) provides some examples of linking strategic human resource
management initiatives to defined business issues:

Business issue HR strategic response

Acquisition and merger Integration of company A, B and C’s
of companies A and B, management teams
with C
Capital investment in Build skills base and develop job design to
new product technology accommodate new technology
Closure of facility x and Plan and implement relocation process, with
relocate to another consideration of change in job
facility numbers/types

¾ Plan and implement retrenchment

programme
¾ Identify structural implications
¾ Identify personal impact on relocating
employees (commuting/families etc)

o Competency-based approach

One approach to creating strategic fit that has received wide attention in the
literature and has been actively adopted by organisations is that of competence
management, or linking specific employee-held competencies to the business
strategy (Lengnick-Hall & Lengnick-Hall 1988; Wright & McMahan 1992; Snell &
Wright 1997; Pfeffer 1998). Here the assumption is that rather than trying to take
control of an unpredictable commercial environment, competitive advantage could
emerge from managing internal capability – that is from the inside out. Prahalad
and Hamel (1990) developed the notion that competitive advantage could be
derived from an organisation’s core competencies, that it was possible to build
unique and distinct long-terms skills within a company that will secure competitive
business advantage. They describe core competencies as:

“the collective learning in the organization, especially how to coordinate

diverse production skills and integrate multiple streams of technology
(Prahalad & Hamel 1990, p. 82).

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Competence management therefore, is concerned with building strategically
significant skill sets within the organisation that are needed to carry out those
present and future activities likely to result in the achievement of business goals
(Ulrich 1998a). The implications for the management team are the identification of
human resource skill requirements for achieving organisational goals (Hendry 1995;
Pfeffer 1998). This involves specifying the work and activities that people
undertake in the organisation, determining the essential knowledge, skills,
experience and behaviours considered necessary to do this work effectively which
then leads to establishing how people will be structured in the company and
managed to carry out the work. The next stage involves ascertaining how the
company will find and attract (from outside the organisation) or develop (from
inside the organisation) the necessary number of individuals possessing the
required combination of knowledge, skills and experience. A third area of focus is
the need for the company to maintain, motivate and retain this critical body of
competence as an organisational resource. These tasks represent the company’s
strategic management of its human resources. In carrying out this work companies
may make use of selection tests that can identify the presence in a candidate of
clearly defined skills, of developmental training in key areas, of reward and
recognition programmes for those seeking to build and apply certain skills, and of
procedures to dispatch employees whose skill base no longer matches that required
(Kaplan & Norton 2004). In addition, Ulrich and Brockbank (2005) view
competency management as specifying what is needed to improve performance,
predicting performance standards in complex jobs, matching individuals with jobs
and measuring performance on the job.

Within the general competency framework, the appropriateness of matching the

style and skill base of senior managers to particular business strategies has also
been explored. For example, firms pursuing a cost leadership business strategy
might select leaders with strong cost control and accounting skills, whereas firms
following a product differentiation strategy would be more likely to choose
managers with strong marketing or product development capabilities (Foulkes
1986; Huselid 1993; Hendry 1995). Gubman (1998) also recommends the
alignment of the leadership style of managers to the company’s strategy,
suggesting that firms focusing on customers and the provision of service should
secure managers who have strong relationship-building abilities, while firms with a
strong operational focus should be managed by individuals interested in technical
methods. Firms concerned with the development of original product lines should
promote managers who have special visionary abilities.

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ƒ Element 4 – The use of Human Resource Management (HRM) technology to
support the implementation of business strategy

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

An important part of SHRM is the considered deployment of human resource

management tools and technology as important levers to manage people, as well
as build human capability and commitment to the company’s strategic goals. The
HRM technology emerges in importance during the implementation phase providing
the potential to direct, control and fashion desired organisational and business
outcomes and performance (Armstrong 1992b). Boxall and Purcell (2003) express
the view that management strategy should be strongly focused on the post-
planning organisational behaviour, that is in the implementation of the human
resource management strategy and its associated activities. They believe that
operational management and the ability to apply HRM technology is equally as
important as strategy formulation work, because if the company is unfamiliar with
or unable to activate the tools needed to implement the strategy, the strategy is
destined to fail. Armstrong (1994) describes the relationship of HRM management
practices with that of human resource management strategy in terms of their
capacity to provide the people of the organisation with an overall sense of direction
and purpose:

“….help[ing] them to understand where they are going, how they are going
to get there, why certain things are happening, and most importantly, the
contribution they are expected to make towards securing the organisation’s
future” (Armstrong 1994, p 185).

o Defining HRM technology

As has been highlighted in the chapter describing the evolution of human resource
management, efforts to define what is meant by the term “HRM” have been
consistently thwarted. Studies that have been concerned with assessing the use of
HRM within companies have invariably drawn on extensive arbitrarily compiled lists
of methods and activities that might reasonably be accepted as commonly found in

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many large organisations. Wiesner and McDonald (2001, pp 38-40) for example,
identified 73 “HR practices” covering the range of functional specialisations,
including recruitment, selection, training and development, performance appraisal,
compensation, employment relations and human resource management policies.
While these lists may have many features in common, they also possess
considerable variation. It can only be concluded that there are no firm rules
dictating what constitutes HRM and that it might be acceptable to assign this term
to any activity that relates to the management of people. Hence for the purposes
of this study, HRM has been designated as the totality of known and potential
managerial philosophies, principles and practices, including policies, systems and
programmes that are used in the management of people within an organisational
context. Any limits or boundaries to the components of each of these categories
remain the subjective opinion of whoever chooses to use the term. What might be
considered a human resource management “policy” or “practice” by one is not
necessarily considered as such by another (Guest 1991; Noon 1992; Mabey,
Salaman & Storey 1998)

o HRM as a source of competitive advantage

Within the context of strategic human resource management there is a further

dimension to be considered. Numerous studies have been undertaken and debate
continues about whether the human resource management (HRM) technology is in
itself a strategic source of competitive advantage (Huselid 1995; Youndt et al.
1996; Yeung & Berman 1997; Meshoulam & Bamberger 2000). Early authorities
Schuler and MacMillan (1988) promoted the notion that human resource
management practices can be a source of competitive advantage for companies.
More recently however, Howes (1995) expressed the view that the systems and
practices commonly used by companies do not represent a critical differential for
organisational effectiveness, noting that many are long-standing without having
undergone significant change. According to the resource-based perspective, where
organisational resources have to be rare and difficult to imitate to give competitive
advantage, human resource management practices are neither (Barney & Wright
1998). These tools of the trade are readily available in the many standard
textbooks on human resource management to any company prepared to take the
time learn about and invest in them. Moreover, while human resource
management technology might be necessary to compete in the market, in effect a
hygiene factor, it is unlikely that in the form of individual tools they would provide a
form of competitive edge. However, where specific human resource management
practices are applied to shape the human capital base in a strategic manner, to
attract and retain key people-embodied competencies, to enhance performance in

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line with business priorities and to provide opportunities for contribution to business
activity, their influence and ability to impact business outcomes is more evident
(Bamberger & Meshoulam 2000; Becker, Huselid & Ulrich 2001). There is a strong
argument that a well-designed amalgamation of tools and methods can contribute
to the creation of a powerful organisational system that would be not only be
operationally effective but also difficult if not impossible for competitors to
duplicate. In general, agreement about the role of this technology in optimising the
construction and implementation of business strategy as well as providing a
foundation, a framework and techniques for this purpose, is consistent (Wright,
McMahan & McWilliams 1994; Barney & Wright 1998; Gubman 1998; Becker,
Huselid & Ulrich 2001).

o The Best Practice School

While the concept of alignment between business strategy and human resource
management strategy prevails as a dominant theme in SHRM, not all writers
interested in the strategic management of human capital have focused on or
necessarily promote the alignment approach. The universalistic perspective or Best
Practice school of thought contends that certain human resource management
approaches (sometimes referred to as high performance work practices) are more
effective than others and that all organisations should adopt these in order to be
successful (Delery & Doty 1996; Huselid 1995; Youndt et al. 1996; Tyson 1997;
Ferris et al. 1999; Brewster 1999). Pfeffer’s (1998) research identified a number of
practices that he claimed should form part of any company’s approach to managing
its people including: employment security, selective hiring of new personnel, self-
managed teams and decentralised decision-making, high levels of compensation
contingent on organisational performance, extensive training, reduced status
distinctions and barriers, as well as extensive sharing of financial and performance
information throughout the organisation. Delaney et al. (1989) identified 10
practices covering selection, performance appraisal, incentive compensation, job
design, grievance procedures, information sharing, attitude assessment and labour-
management participation (Ferris et al. 1999). Similarly Osterman (1994)
promoted the use of innovative work practices such a teamwork, job rotation,
quality circles and Total Quality Management (TQM) as part of the Best Practice
management repertoire (Delery & Doty 1996).

Frequently cited is a study conducted by Huselid whose results were published in

1995. This work investigated the extent to which a sample of firms possessed a
high performance human resource management system comprising defined
managerial practices and methods. The results claimed that where these were

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present higher levels of business performance could be statistically detected. The
researcher estimated that a single standard deviation improvement in quality of this
system represented a change in market value of US$15-16 per employee - for a
firm carrying 10,000 employees this implies an increased market value of half a
billion dollars (Huselid 1995). The study concluded that an appropriately designed
and deployed human resource management work system constituted a significant
economic asset. A more recent study by the global consulting firm Watson Wyatt
Worldwide claimed to have identified 30 practices associated with achieving an
increase of up to 30% of shareholder value. These included management areas
such as recruitment, rewards and accountability, collegial and flexible work
practices, communications, integrity, and prudent use of resources. While no
information is provided pertaining to their methodology it was confidently declared
that:

“We now know positive financial outcomes will follow effective human
resource practices. This is revolutionary because it’s the first time anyone
has been able to demonstrate that improved human capital management
drives higher shareholder returns” (Armernic 2004, p. 32).

Although usually discussed within the context of the strategic management of

human resources, the universalistic approach effectively moves the focus away
from identifying the specific strategic needs of the business to a more general
debate about the relative merits of a particular practice or initiative and its ability to
impact on performance. In effect, it represents a return to the traditional
operational preoccupations of the functional discipline that are concerned with
technical management tools and methods (Ulrich 1997a). Cappelli and Crocker-
Hefter (1996) concede that it is to be expected that certain well-regarded practices
will consistently emerge in the research because commonality is likely to be found
where companies are pursuing common or similar strategies. Where there are a
finite range of strategic possibilities, companies will draw on a limited number of
management practices; overlap will inevitably occur. Moreover, some practices
could be reasonably argued as possessing universally desirable principles and
relevance for achieving effective management outcomes (Boxall & Purcell 2003).
However, Delery and Doty (1996) comment that although there has been a growing
consensus about the value of certain techniques, such as the provision of career
opportunities, formal training systems, appraisal measures, profit sharing,
employment security, job definition and voice mechanisms as ways to improve
managerial input, these cannot necessarily be regarded as strategically significant
in all situations through the absence of strategic linkage with business goals or the
limited scope of their impact on the performance of the business (Boxall & Purcell
2003).

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A key criticism of the Best Practice approach is that in order for a particular practice
to be useful it is contingent upon the presence of other organisational factors. This
issue has been noted earlier when discussing the notion of fit. There is little value
in decentralising organisational decision-making if those supposedly empowered to
make decisions are not supplied with the necessary data, skills and information to
make effective decisions. While the Best Practice approach can be seen as a logical
progression for organisations wishing to pursue what might be claimed to be
leading-edge or at least up-to-date methods that in themselves have some
technical managerial merit, there are those who believe that failure to distinguish
between different business contexts and in turn design an internally integrated and
tailored human resource management system, is to miss the point (Delery & Doty
1996; Becker & Huselid 1999). It is apparent that not all practices have relevance
or benefit for all business circumstances or will necessarily be accepted in all
organisations. Management practices will be dictated by a range of circumstantial
factors and variables.

Cappelli & Singh (1992) provided a useful illustration in their contrasting example
of a high quality restaurant that offers above market wages to minimise turnover of
staff and acquire superior customer service performance from their employees,
while a fast-food outlet it is unlikely to obtain any commercial benefit from offering
higher wages or expecting higher standards of service performance. The maximum
potential for revenue in a fast-food outlet is limited by the low-price market niche in
which the business competes and this can only be sustained by maintaining a lower
wage service team requiring only basic service competence where turnover is not a
critical issue. Cappelli & Crocker-Hefter (1996) argued that although the concept of
Best Practices delivering superior management performance has achieved
considerable popularity in the recent literature, the fact that these practices are
easily transferable and can be copied by other companies indicates that they are
not able to offer any form of competitive advantage. They proposed that on the
contrary, it would be unique and distinctive management practices tailored
specifically to the competence requirement of a particular business that would be
more likely to generate the desired competitive edge. Furthermore, it is possible
that some HRM practices may in fact be impractical or difficult to implement due to
environmental constraints. Ferris et al. (1999) note that the presence of a highly
hierarchical and bureaucratic structure is likely to place constraints on efforts to
implement a participative managerial approach, the ingrained structural processes
and conventions being a well established feature of workforce and management
expectations and behaviour, and hence resistant to the imposition of an initiative
that would effectively undermine the status quo.

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Despite his positive findings relating to Best Practices Huselid (1995) conceded that
the Best Practice approach and the best fit approach can in fact work together. He
notes that most firms will benefit from using many of the common or Best Practice
tools such as formal selection testing methods, but that the results will be used to
select very different types of people depending on the requirements of the
competitive strategy. In other words, companies are not forced to choose between
these two approaches; rather both have relevance and applicability. Similarly,
Gubman (1998) notes that practices can only be deemed “best” if and when they
are aligned to a company’s strategic style. Hence the task for strategy
development is ensuring that strategic fit actually occurs and determining which
practices are the most useful and appropriate within the alignment framework
(Youndt et al.1996; Boxall & Purcell 2003; Ulrich & Brockbank 2005)

ƒ The strategy debate

One issue that presents a source of confusion for some SHRM theorists, but is
perhaps less of a concern for practitioners in the field, relates to the determination
of whether a particular human resource management initiative is or is not
“strategic”. Boxall and Purcell (2003) have argued that strategic human resource
management is concerned with the strategic choices associated with the use of
labour in firms and those likely to impact on company performance. As such, they
conclude that the introduction of a job evaluation scheme for example would not
constitute a human resource management strategy; rather it exists as a
management tool from the HRM toolkit. Where SHRM is defined as the alignment
and integration of human resource management strategies with business
objectives, this assumes that it will be possible to demonstrate in some generally
acceptable form, the nature of that alignment and implicit causal relationship; how
the practice will impact positively on the achievement of the business goals (Kaplan
& Norton 2004).

However, uncertainty arises from the fact that it is often difficult to identify or
prove this connection because many management practices are intangible, and
their application and impact can be clouded by any number of different dynamic
variables (Kaplan & Norton 2004). Many practitioners whose primary focus is
implementation are not necessarily knowledgeable about whether a particular
approach has been convincingly or empirically substantiated as being a sound or
effective management technique, or knowing where and in what form the
supporting evidence resides. The sceptics might argue that if it is not possible to

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demonstrate the cause and effect of a particular practice, the requisite strategic
linkage has not been made and hence the practice ceases to be strategically
significant. In reality, companies implement many human resource management
initiatives without checking their credentials or seeking proof of their ability to
enhance business performance, and yet this is still regarded as a strategic approach
to people management. The commitment to certain strategic initiatives is in effect,
one of blind faith in what can be a fashionable management practice at the time,
the product of a pattern of successful outcomes for the company or for other
companies, or the result of intuitive beliefs about what may or may not be
appropriate methods for managing people in organisations.

As discussed within the first element of SHRM, this phenomenon is particularly

evident in companies that hold a values-based philosophy or pursue a humanist
management approach whereby managerial activity is pro-actively concerned with
issues of morality, behavioural standards and the welfare of people in the
organisation. Reports on the human resource management practices of giant
United States corporations like Hewlett-Packard (Laabs 1993) and Colgate-
Palmolive (Anfuso 1995) indicate that these companies dedicate considerable time
and resources to implementing strategies designed to inspire a sense of loyalty,
commitment and inclusiveness among their workers and transmit the message that
moral qualities such as honesty, respect, compassion and care for others are
important. Here it is evident that it is not always necessary to provide scientifically
based evidence to support managerial actions, there being acceptance that certain
management approaches are more likely to lead to certain human responses.
While a business-wide approach of this type could reasonably be labelled as
“strategic” from a managerial perspective, interestingly, it fails the test of definition
(e.g. see Harris, Huselid & Becker 1999).

Walker (1992; 1994) identifies a trap into which those responsible for developing
human resource management strategy frequently fall; that is the selection of so-
called “strategies” so broad and general that they could apply to any organisation.
In effect, due to their failure to support the specific business goals of the particular
organisation, they fail the essential alignment test. Strategy statements that
commit to, for example, “improving the utilisation of human resources”, or
“enhancing the capabilities of people”, or “building a diverse workforce” or
“introducing a targeted-selection approach to the recruitment process”, cannot be
deemed to be strategic for while they may be potentially important, useful or even
regarded as essential for the organisation, they do not articulate the specific
connection with the unique goals of the company or indicate differentiation from the
activities of other organisations (Kaplan & Norton 2004). To accept a strategy as

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strategic is to understand why and in what way it is strategic. Otherwise,
“enhancing the capabilities of people” remains no more than a commendable goal
with no visible bearing on the business for which it is intended. Numerous
examples of this problem can be found in companies’ documented strategic plans,
as both executives and human resource management professionals continue to
come to terms with this complex and conceptually demanding managerial discipline
– for example, see CRS (1998) and HRM Consulting 1998 (Walker 1992; 1994; Kirn
et al. 1999).

ƒ Concluding note

This study has identified four key themes that consistently emerge as the principal
components of the theoretical frameworks and applied practice of SHRM. These
include:

o Element 1: A management philosophy (the recognition of people as a

valuable business resource)

o Element 2: Planning for the management of people (analysis of human

resource management options and making associated decisions)

o Element 3: Linking human resource management with organisation and

business goals

o Element 4: The use of human resource management (HRM) technology

to support the implementation of business strategy

These four elements will be used to represent the concept of Strategic Human
Resource Management in the assessment of the prevalence and relevance of this
managerial field for growing small firms.

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128
Chapter 4

Adoption of Strategic Human Resource Management

The process of exploring the emergence of SHRM as a historical phenomenon and

understanding the context in which its relevance has become apparent, raises a
pertinent question about the extent to which the business community is currently
responding to the concept of a strategically managed approach to people and the
level to which the concepts and tools have been integrated into standard business
practice. It has already been noted that while the discipline per se is not new and
that much of the debate and many of the recurring ideas and components of SHRM
can be found in literature published several decades ago, there is evidence to
suggest that both the development of theory and the ability to assimilate this
demanding management discipline continues to elude many senior managers
(Bartlett & Ghoshal 2003; Ulrich & Brockbank 2005). In addition, the implications
for those specialist professionals focused primarily on the management of people in
companies are sufficiently profound to suggest that the time for engagement at a
strategic level for many may for various reasons, not have yet arrived (Ulrich &
Brockbank 2005). To understand the relevance of this discipline for the broader
business community it is important to understand the wider complement of issues
that have a bearing on its likely adoption, which is the objective of this chapter.

ƒ Take-up of SHRM

While it is evident that a strategic approach to the management of human

resources has become an important area of focus for management theorists and
others interested in the management of people generally, it is not clear the extent
to which the business community has responded to the promotional efforts of this
movement. There is however, a general sense that companies are increasingly
moving in this direction and incorporating its tenets into management activity.
Writing in 1998 Pfeffer noted that few companies had implemented a fully
comprehensive approach to SHRM. However, there is a reasonable amount of
anecdotal evidence to suggest that many organisations are seeking to actively
manage their intellectual capital and apply the SHRM methodology to achieve
greater levels of strategic integration. The empirical research has been found to be
less reliable for a range of reasons, relating to the validity of data interpretation,
the nature of the data collection methodology, semantic issues as well as limitations
on the scope of the studies. A notable but not uncommon example of the difficulty

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of acquiring accurate and useful data was the experience of one researcher who
found respondents that indicated positively when questioned about the adoption of
SHRM in their organisation but were then unable to provide evidence or
substantiate this claim. This discovery, variously attributed to a desire to be
regarded as fashionable, to hide perceived inadequacies or to differences in the
interpretation of SHRM terminology, suggests that claims to be on-board with the
latest management trend need to be treated with caution (Armstrong 1994;
Gratton et al. 1999).

o Empirical research

A study carried out in the early 1990s by Michael Armstrong reported the results of
interviews held with a group of senior managers and their human resource
management directors in 10 UK companies relating to their strategic human
resource management activities. The findings indicated that while there was
considerable variety in the way that the companies approached the management of
their people, it appeared that the efforts of the sample did demonstrate an
intention to achieve greater organisational effectiveness through improved
alignment of people issues and business issues. The study claimed to detect
certain common trends commonly associated with the adoption of SHRM including a
strong visionary leader, a well-articulated vision and values, a clearly expressed
business strategy, defined critical success factors, a cohesive top management
team and a human resource management professional who plays an active role in
the business as well as in operational personnel matters. However in conjunction
with other studies that were undertaken in the 1980s and early 1990s by Storey
(1993), Guest and Hogue (1994) and Tyson and Witcher (1994), which Armstrong
reviewed as part of his work, it is apparent that the transition to a full strategic
approach had not yet occurred by that time (Armstrong 1994).

Since 1985 the Australian Graduate School of Management at the University of New
South Wales and CCH Australia Limited have jointly conducted surveys of human
resource management practices in Australia and New Zealand. The findings of a
survey conducted in 1998 concluded that increasing numbers of organisations were
including human resource management issues in their corporate business planning
activities, that there was evidence of greater understanding about how the
contribution of the workforce contributes to sustainable competitive advantage, and
generally the respondents’ approach to HRM over the previous five years was
considered to be “more characteristically strategic in focus and substance” (CCH
1999, pp. 82-200).

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Towards the end of the 1990s, Gratton and her team in the United Kingdom
reviewed the management practices of a range of prominent British companies in
the search for evidence of SHRM. They found no evidence of a fully integrated
approach despite a general recognition of the value of matching human resource
management practices with business needs. As such, they concluded that there
existed a disjoint between the rhetoric of the theory as promoted in the
management literature and the reality of practice within companies themselves. An
array of obstacles was found to impede this process. Particularly noteworthy were
the boundaries that human resource management executives experienced around
their freedom to initiate activity in this direction, constrained by the administrative
heritage of the firm and the difficulties associated with catering to diverse
workforce groups. The structural complexity of the companies interviewed were
found to present problems. The highly siloed departmental configurations implied
employees were not surprisingly more preoccupied with departmental concerns,
and the variation in business strategies and contrasting organisational values
served to dilute strategic efforts. A common complaint among many human
resource management professionals that emerged in this particular study was the
business emphasis on short-term financial returns that undermined the potential to
direct resources to longer-term projects and activities. Moreover, the study found
that political agendas were contributing factors to non-adoption as well as the
extent to which leaders of the organisation were esteemed and respected (Gratton
et al. 1999). Gratton’s team suggested that take-up in countries such as the USA,
the UK and Australia is less than the literature in this field would suggest. They
noted that studies show an incomplete, even messy, adoption with companies
presenting characteristics of both traditional management practice and the new
order. They also comment on discrepancies between what is proposed and what is
actually implemented, indicating a disconnection between efforts to tackle this
approach yet a shortfall in implementing the strategies. Overall, the research
showed no evidence of organisations having adopted a clearly articulated business
strategy and guiding management philosophy, with a supporting human resource
management strategy that translated into a mutually supporting set of initiatives
being implemented across the business (Gratton et al. 1999).

Another study carried out in the United States during the 1990s that investigated
the management practices of 115 Small Business Units from 89 Fortune 500
manufacturing firms found human resource management and strategic planning
processes in most of the firms surveyed. The study revealed that the human
resource management departmental function was viewed as important in the
implementation of business strategy but not as important as other functions that
directly contribute to the development, production or sale of products. Human

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resource management executives were regarded as valuable members of the top
management team and line management was involved in human resource
management policy-making and participated in policy development affecting senior
management. It was found that the integration of human resource management
and the strategy process was not unexpectedly associated with improved short-
term organisational performance. Nevertheless, the study concluded that SHRM
had become a reality in many leading US companies (Martell & Carroll 1995).

Interest in studying SHRM has also grown within the business community in the
Asia-Pacific region. Huang (1998) undertook a study of 315 cross-sectoral
international firms in Taiwan to determine the degree of strategic human resource
management take-up. His results claimed that 44 percent of respondents’ human
resource management practices were closely linked to a business strategy with line
managers fully involved in human resource management, and that there was a
close integration between the human resource management function and other
business functions. Forty four percent were described as being on a transitional
path towards attaining a strategic orientation while 12 percent were found to have
a purely operational approach to human resource management. An additional
finding was that a greater proportion of the larger firms (companies with an
average headcount of 868 employees) had adopted a strategic approach to people
management than smaller ones. Interestingly, this particular finding contrasts with
the findings of Gratton et al.’s (1999) UK study which suggested that SHRM
adoption was more difficult in large firms because of the higher levels of
organisational complexity and diversity, as well as greater variation in goals,
interpretation, players, information, values and structures. They concluded that
largeness contributed to greater insularity with each part of the business being
more focused on its own departmental issues than the broader organisational ones.

Possibly the most recent and significant examination of the status of people
management practice in many firms today is the on-going longitudinal study being
conducted at the University of Michigan in the United States. The interpretation of
the findings of this research which focuses primarily on the competencies required
by human resource management professionals and draws on data provided by
more than 28,000 participants has been captured in Ulrich and Brockbank’s (2005)
publication The HR value proposition and indicates a strong trend in this direction
among US firms.

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o Research constraints in identifying adoption

More recently, a batch of case studies investigating the prevalence of SHRM in a

number of prominent United States companies, including Sears and Praxair, was
published in the Human Resource Management journal by a group of leading
researchers in the field (Kirn et al. 1999; Harris et al. 1999). These case studies
illustrate in some depth the wide range of human resource management initiatives
that have been adopted by companies and the types of management philosophies
on which people-related decisions are based. However, while the articles describing
this research include a brief introduction about the strategic business direction of
each company, the linkage with the human resource management strategies that
were described is not explicit. While this may have been the intention of the
writers, possibly for the purpose of assuring confidentiality about the business
activities of the companies studied, it reinforces a general impression that the focus
for many experts in SHRM continues to be on generic Best Practice approaches
currently in vogue, rather than on the establishment of a direct linkage between
business needs and corresponding human resource management interventions. In
effect, these articles reflect the limitations of the approach advocated by the Best
Practice School, where the preoccupation is with “what” organisations are doing and
“how much”, rather than addressing the fundamental question that SHRM
demands: that of “why” and in what way business strategy is supported (Ulrich
1997a).

It is possible that the enthusiasm associated with a new and exciting management
discipline prompts those working in the field to over-report or exaggerate research
findings. A study that reflects this proclivity is one undertaken in 1996 by HRM
Consulting, a Queensland-based human resource management consulting firm. As
part of an initiative to report to the wider community the strategic activities of
institutions in Australia, the firm invited a number of organisations to submit
applications demonstrating Best Practice in human resource management strategic
planning, for which an award would be made. The initial findings indicated that 72
percent of the respondents had a human resource management strategic plan, but
that their planning horizon tended to be short-term in focus and contained only
rudimentary or no environmental analysis, as well as no performance targets or
accountabilities. Respondents reported five factors to be critical to the success or
failure of their plans. These included linkage between organisation and human
resource management objectives, executive commitment and involvement in the
development of the plan, line management commitment and involvement, the
quality of the company and the human management department’s planning
processes and the availability of resources to support the plan (i.e. competent

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human resource management staff, a computer-based HRIS etc.). However, on
closer examination of the submissions it was evident that with the exception of one
university entrant where the linkages were weak but more or less visible, none of
the applicants demonstrated any connection between the business strategy and
their human resource management initiatives. It is possible that this failure to
demonstrate the relationship between the business strategy and the people
strategy was a product of poor responses by the participants or was lost in the
transference of the data to the report, or again was edited at some point to protect
the confidentiality of the organisations concerned. Nevertheless, the result
effectively defeated the purpose of the study and served unintentionally to convey
the impression that even prominent organisations aspiring to be strategic were not
yet on track with SHRM (HRM Consulting 1998). A further consideration as Tyson
(1995b) points out is the fact that to acknowledge a company does not have a
strategy for managing its people is effectively to admit rather embarrassingly, that
the management of people is left to chance.

In contrast, more promising examples of companies engaged in the strategic

management of their people have been provided by Lundy and Cowling (1996).
Their case studies of a group of large UK corporations manifest clear linkage and
alignment with business goals. One of these describes a period of British Airways’
history when the Board of Directors recognised that without a radical
transformation in many aspects of its operation, liquidation of the company was a
real possibility. Faced with massive financial losses, overstaffed following a merger
with another company whose management structure and culture conflicted with
those of BA, the presence of heavily restrictive unionisation, bureaucratic systems
and a low focus on customers, the strategic goal for the business was a major
turnaround for survival. Initiatives to avert the looming disaster consisted of the
implementation of profound change in the organisational culture both in terms of
how employees would be managed internally and in the way the company would
approach the delivery of service to customers. Consequently, the top management
team was replaced. Service staff were provided with training to improve their
attitudes towards customers, to lift standards of customer care and also to build
their own self-esteem. Ownership for business performance was encouraged
through empowering staff with access to information and new authorities at the
customer interface. Training was provided to managers, professionals and support
staff in skills such as team building and setting performance objectives. A pay for
performance system was introduced, with appraisals providing the link to
appropriate rewards. In addition the company started a staff newspaper British
Airways News to improve communication across the business. Although British
Airways is now facing different competitive challenges, the transformation that

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occurred astonished the flying British public at the time and is attributed to the
survival of the company (Lundy & Cowling 1996).

Another example that demonstrates evident linkages between practice and goals is
the case of the UK car manufacturing firm Rover, which in the mid-1990s was
owned by BMW. Again the survival of the corporation was under threat due to the
withdrawal of British government financial sponsorship and low productivity
stemming from a lack of competitiveness, low quality vehicles, outmoded and
inefficient production methods, poor industrial work practices and hostile worker-
management relations (Lundy & Cowling 1996). As with British Airways, the
company recognised the need for a major overhaul and embarked on a cultural
change programme to tackle the range of problems. The purpose was to create a
shared vision of the future of the company and achieve buy-in from the workforce
to support that vision. The programme focused on the introduction of leaner
production methods supported by a continuous improvement quality management
approach. Training was provided to improve customer focus, both internally and
externally and individuals whose management style conflicted with the new regime
were removed. A management training programme was implemented, delivered by
Warwick University and greater emphasis was placed on education and skill
acquisition. The company introduced a team-based structure, abandoned
demarcation practices and abolished the clocking-in system for the workforce.
Employees were given broader responsibilities including quality, routine
maintenance, housekeeping, plant and office layout, control of tools and materials,
job rotation, cost control and providing training for each other. To achieve these
changes the company offered its workforce a deal. In exchange for a pay rise
sweetener, workers would transfer to single status contracts, support the team
structure, operate with full flexibility, sign up to a new procedural agreement and
accept more marginalised trade union involvement (Lundy & Cowling 1996).

o Theory versus practice

An interesting dimension in the question of take-up of SHRM is the proposition that

many companies engage to a greater or lesser extent in the strategic management
of their workforce, as part of a spontaneous intuitive response to the needs of their
business. But it is not one that they would necessarily describe in the technical
management terminology of the formal discipline (Armstrong 1994). In other
words, a company might manifest strategic behaviour in the management of its
people but this may not be the result of a conscious decision to adopt SHRM or
necessarily conform to all the prescribed components of the theoretical discipline.
There is both anecdotal and visible evidence to suggest that many firms engage

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strategically in the management of their people and this is neither articulated as
such nor driven by the theoretical models. In effect, without experience of business
life and relying solely on the academic and other literature in this field, it would be
easy to gain the impression that most companies substantially neglect the strategic
management of their workforce (Armstrong 1994).

One such example is a Perth-based, family-owned footwear retail company with

some 1,000 employees serving in city and suburban outlets in most of the major
Australian centres. Without recourse to the services of a functional human resource
management department or extensive formal planning activity, the management
team of this company recognises the strategic importance of its people, has
identified the nature of this strategic contribution and has implemented human
resource management strategies that support and reinforce the business
objectives. While the specific details of the business strategy are not widely
communicated and as such it is not clear whether the firm intends to become the
country’s largest footwear retailer, or specialists in children’s shoes, or the best-
known carrier of fashion brands, the role of the workforce is manifestly clear and
routinely communicated: to sell as many pairs of shoes as possible. To this end the
company provides its sales staff with comprehensive training in sophisticated selling
techniques, provides a career structure for those employees who wish to work their
way up to being a store manager and opportunities to work in larger stores through
regular rotation arrangements. It also holds elaborate reward ceremonies for the
month’s most successful sales stores and individuals. Relying on cost-effective
word-of-mouth referrals and simple notices posted on the front of the store,
recruitment of the predominantly teenage and mature-aged applicants is conducted
informally out the back of the store and the criteria for sales staff selection is good
personal presentation, articulate, energetic and a sunny, out-going personality.
The high labour costs and small margins of the retail sector dictate that employees
are paid at the minimum Award rate and vigorous negotiation with the union is
required to keep wages down. To off-set the low pay the company provides all its
staff with six tokens per year that enable them to purchase footwear from the firm
at a 45% reduction on the usual retail price and employees are encouraged to wear
company products to work. In this example it is evident that the company’s
approach has been developed in order to match the requirements and
circumstances of the business. The overall business system reflects the economic
realities of the marketplace, the consideration of the needs and motivations of the
workforce, as well as an internal organisational configuration that is logical, aligned
and consistently reinforcing (Johnston 2000).

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ƒ Predictors of adoption

A diverse range of factors have been identified as being influencers or determinants

in the extent to which companies adopt a strategic approach to the management of
people. In many instances these are similar or identical to those which influence
and drive strategic choice and cover a broad spectrum of organisational areas
including structures, reporting lines, distribution of power, individual and group
agendas, stakeholders, relationships, skills and experience, group and personal
values, industry sector and business needs, as well as proficiency in the
management of organisational change (Golden & Ramanujam 1985; Buller 1988;
Armstrong 1994; Bamberger & Meshoulam 2000;).

o Role of human resource management professionals

In recent years, much has been written about the role of the human resource
management professional (Foulkes 1986; Schuler 1990a; Hendry 1995; Ulrich,
Losey & Lake 1997; Ulrich & Brockbank 2005). In general, internal human
resource management departments have been ill-prepared for the arrival of a role
in the strategic management of companies. Traditionally, the human resource
management function has been structured and grown according to developments in
technical management specialisations and activities and in such a way that the
focus of practitioners within these insular silos was usually on process rather than
output, on their activities rather than what they delivered to the business (Ulrich
1997a; Ulrich & Brockbank 2005). Attention was paid to the efficient running of the
function’s internal system with little concern for the bottom-line or the bigger
business picture. Often there was little if any working knowledge of the company’s
strategy or business goals (Rothwell, Prescott & Taylor 1998). People-related
business issues such as the management of costs, quality and skill shortages were
not usually placed at the door of the personnel management specialist. In large
bureaucratic organisations the personnel function was usually viewed and
structured as an activity apart from what was considered to be the serious work of
producing and delivering goods and services. Those practitioners working in these
departments were frequently excluded from the process of important business
decision-making unlike their colleagues in finance, marketing and production whose
presence at the executive table was a routine occurrence (Rothwell, Prescott &
Taylor 1998; Ulrich 1997a). In this environment, the strategic process consisted of
the translation by line management of corporate strategy into organisational
priorities. The role of the human resource management function was to ensure that
the operational systems of recruitment, training and compensation supported these
(Bartlett & Ghoshal 2003).

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Moreover, the human resource management function was often constrained by
organisational norms that stressed control rather than encouraging pro-activity, an
experience not uncommon in other functional departments where a conservative,
bureaucratic structure prevailed (Butler, Ferris & Napier 1991). Whatever expertise
existed within the company that might have contributed usefully to people-related
management issues was largely neglected. This lack of functional integration within
organisations has also tended to precipitate strained relationships with line
management, in part due to the ambivalence of the role of these two groups in the
responsibility for workforce management. It has also stemmed from the function’s
regulatory or so-called policing work and a common perception of its ignorance
about the core business and associated priorities (Ulrich 1998a). In this way,
personnel departments were invariably left to their own devices to design and
implement reactive and piecemeal policies and programmes, often reflecting
fashionable trends or Best Practice developments from within their own discipline
(Lundy & Cowling 1996; Ulrich & Brockbank 2005).

A notable example of this tendency has been where training and development
specialists build up extensive education facilities that deliver wide-ranging
programmes in which the learning derived has no obvious connection or
contribution to the achievement of company goals or the building of specific
business-related competencies (Hendry 1995; Lundy & Cowling 1996). Digressions
of this type were reflected in the offering of non-essential training opportunities to
employees often based on the conviction that it was good to know more or as a
reward for performing well on the job (Ulrich 1998a). As a consequence of this
fragmented approach to organisational management the achievement of strategic
leverage of a company’s human assets was as much a consequence of luck or
commonsense than of organisational design (Meals & Rogers 1980; Berry 1990).
While many departments have been innovative and pro-active in the development
of their human resource management technical methods and companies have in
turn benefited from these contributions, the isolated nature of this work has often
meant that its value was frequently dismissed or overlooked and full support for
business strategy has been absent (Hendry 1995; Lundy & Cowling 1996; Ulrich &
Brockbank 2005).

o Low status of the HR function

Criticism of the human resource management function and concerns about its
ability to survive have been enduring themes in the management literature for
some years, thought by Armstrong (1994, pp. 136-7) to have been initiated back in

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the 1950s by Peter Drucker’s rhetorical question “is personnel management
bankrupt?”. The debate prevails with articles routinely appearing from leading
human resource management academics and management commentators,
reflecting the transitional nature of the discipline and the new role that
professionals are expected to play to shape and influence their futures (Thite
2004). Collins’ more recent article (2004) Will the future of HR whither away?,
reflects both concern that this occupational group has contributed little to
determining its destiny and the recurring rally-call to join the pro-SHRM
constituency and be an active participant in the movement to draw human resource
management into the fold of strategic business management (Butler, Ferris &
Napier 1991; Lundy & Cowling 1996; Ulrich 1998a).

Stemming from its welfare origins and exclusive focus on people issues rather than
on other areas of business, the human resource management function has also
been criticised for pushing a social rather than a business agenda. Concern is
expressed about the promotion of employee programmes or benefits without
demonstrating how these activities contribute to organisational performance and
have value for the company, or apply in light of the unique business goals, culture,
politics and personalities (Lundy & Cowling 1996; Rothwell, Prescott & Taylor 1998;
Ulrich 1998a). A tendency to be overly concerned with being a good employer and
a preoccupation with rules and procedures that hinder and block action have also
been highlighted as being among these departments’ failings. As Ferris et al.
(1999, pp. 408-9) explained:

“…. the HRM professional…. was largely seen as a compassionate confidante

to employees,…. one who carried the watermelon to the company picnic,
and visited the sick, lame and lazy”.

In general, the function has not tended to attract much respect from its internal
customers or colleagues, nor acquired high levels of professional credibility as a
management field or discipline (Lundy & Cowling 1996; Rothwell, Prescott & Taylor
1998; Tebbel 1999; Ulrich & Brockbank 2005).

o Changing status of the human resource management profession

The dramatic developments taking place in the commercial environment and

associated rise in prominence of people as a critical organisational resource imply
correspondingly profound changes for those specialist professionals working in the
area of human resource management (Zabriskie & Huellmantel 1989; Ulrich, Losey
& Lake 1997; Ulrich 1998a). In the same way that the functional department of
human resources has traditionally been of peripheral importance to organisational

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life with its inhabitants experiencing corresponding marginalisation, the increasing
centrality of people to business performance has meant a rise in prominence of
both the departmental function and its work (Schuler 1990a; Ulrich & Brockbank
2005). To support the growing focus on the strategic implications of human
resource management, senior managers are increasingly turning to the functional
specialists for help (Ulrich 1998a; Thite 2004). The gradual change in status of this
departmental group is reflected in the conclusion of a study of 3,000 people in 12
countries conducted jointly by IBM and Towers Perrin in 1992:

“Human resources is being transformed from a specialised, stand-alone

function to a broad corporate competency in which HR and line managers
build partnerships to gain competitive advantage and achieve overall
business goals” (quoted by Armstrong 1994, p. 145)

Lengnick-Hall and Lengnick-Hall (1990, p. 136) suggested that the aim of the
human resource management function should now be defined in terms of “the
maximisation of corporate profits through the better use and management of
people”. More recently, Brockbank (1999, p. 337) noted that “HR’s centrality to
business has never been so pronounced” and that there is much anecdotal evidence
indicating the growing importance of the human resource management functions
and their practitioners. He reports that the number of firms in which human
resource management executives report to CEOs has increased, that CEOs in high
performing companies are giving much greater attention to people issues and that
improvement in business performance is increasingly attributed to contributions
from the human resource management function. He also remarks on the significant
growth in the membership of the American Society of Human Resource
Management (120,000) and that the Human Resource Planning Society underwent
a 50 percent increase in its membership between 1992 and 1997 (Brockbank
1999).

There is general agreement that human resource management professionals need

to become part of the top management team and serve as full business partners
contributing on an equal basis with other senior managers and sharing
responsibility for the performance of the business (Ulrich 1997a). In some
companies this has occurred with a corresponding alteration in the way that
functional human resource management departments are structured. For example,
a centralisation of those aspects of people management considered of strategic
importance to the business has enabled greater control to be exercised over specific
areas and activities. In addition, the cost-saving benefits of consolidating personnel
administration activities have led to the creation of centralised service or call
centres to deal with more routine operational employment matters and in many

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companies greater responsibility for the management of people has been passed on
to line managers (Down 1997; Ulrich 1997a).

A 1989 study undertaken by Price Waterhouse and the United Kingdom’s Cranfield
business school in which levels of participation in the development of business
strategy by senior human resource management professionals in a range of
European countries was examined, indicated that there was a gradual
transformation in this area of managerial work. An increase in contribution at this
level was beginning to take place. In the United Kingdom half the respondents
claimed to be involved from the outset of the strategic process and 31 percent
indicated involvement at a later consultative stage. Levels of participation were
also found to be higher in European countries such as France and Sweden
(Brewster & Smith 1990).

This increased focus on business and macro organisational issues and diminishing
preoccupation with the technical tools of the human resource management trade
are reflected in an AHRI/CEDA study report:

“In partnering with line management to achieve profitable and sustainable

organisations, and to improve workforce competence, the senior HR
practitioners of Australia are expected to make significant contributions to
business strategy founded on a broad grasp of the whole business
environment. They are also expected to communicate with stakeholders at
all levels of the business and influence outcomes across the organisation,
including the expectations of customers. In short they are expected to talk
the language of business” (AHRI/CEDA 2003, p. 6).

In essence, the task for professionals in the new business environment is said to be
“the contribution to competitive success through improving the organization and
management of a firm’s human resources” (Eisentat 1996, p. 12).

o Strategic human resource management work

A fully strategic human resource management function is said to contribute to the

development of the business strategy, as well as identifying and facilitating the
implementation of initiatives and programmes designed to support the business
goals and address organisational issues (Walker 1992; Rothwell, Prescott & Taylor
1998; Ulrich 1998a; Ulrich & Brockbank 2005). These might include efforts to
contain the cost of workforce remuneration and benefits, designing compensation
programmes that improve the linkage between pay and performance, reducing
waste through the identification and elimination of poor management practices,
implementing programmes that boost productivity through employee consultation

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and involvement, building relationships with union bodies or exploring ways to
imbed and stimulate innovation and creativity (Ulrich & Brockbank 2005). Other
key activities might include helping the management team to understand the
implications of strategic business decisions and potential workforce constraints, the
creation of environments where jobs can be done better and attract high calibre
employees, assessing the performance requirements to reach strategic goals and
how these can be met, as well as reviewing and improving levels of organisational
commitment (Stone 1998). Strategic participation also involves the need to gather
and analyse information about the business, predict the implications and impact of
this information for and on the people in the organisation, and identify those
interventions needed to stimulate human action and behaviours that will in turn
create value for the business (CCH 1999; Beer 1999).

In the strategic environment, the work for the human resource management
professional is described as being significantly more reflective. Time should be
spent thinking about the business, experiencing and absorbing the environment and
cultural context of the organisation, as well as assessing the potential of ideas and
opportunities as they arise. The role is envisioned as one of a shaper and
influencer, facilitating and encouraging individual and collective behaviour through
a range of management technologies and approaches (Ulrich 1998a; Ulrich &
Brockbank 2005). Collins (1987, p. 10) described the work of the human resource
management function in terms of:

“….contributing to the development, implementation and evaluation of

influence processes, to shape individual and collective employee behaviour
and outputs that contribute to the attainment of [the] organisation’s
objectives”.

Ferris et al. (1999, p. 409) proposed that:

“To truly be a strategic business partner, professionals must anticipate and

articulate both the key HRM opportunities and challenges, and step up as
the internal expert to proactively enact (not simply react to) their
environment, embrace and lead change, and demonstrate how HRM is,
indeed, the source of sustained competitive advantage”.

The need to deliver outputs on a daily basis and to appear busily engaged in some
detailed project is no longer deemed appropriate. The mental perspective has lifted
from the operationally and tangibly mundane to one that is broad, multi-faceted,
creative and concerned with matters both conceptual and abstract. The focus has
undergone a full-blown shift from the resolution of micro people problems to the
resolution of macro business problems of a people-related nature. This partnership
or seat at the executive table implies attendance at management meetings even

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when there are no specific human resource matters on the agenda (Collins 1987;
Armstrong 1994; Becker & Huselid 1999). A frequently cited example of the role of
the human resource management professional is Ulrich’s (1997a) model that
identifies four principal areas. These are categorised as “strategic partner” (to align
and execute human resource strategy and business strategy); “administrative
expert” (to reengineer and build an efficient organisational infrastructure);
“employee champion” (to facilitate employee commitment and capability, and to
listen and respond to employee needs and concerns); and lastly “change agent” (to
facilitate the creation of a renewed business through organisational change).

The emphasis has also changed with regard to the type of technical work in which
human resource management professionals are expected to engage. For example,
measurement is growing as a relatively new human resource management activity,
with the attachment of both quantitative and qualitative measures to performance
goals and outcomes (Ulrich 1997a). The need to justify investment in effort and
costs associated with human resource management initiatives and provide evidence
in the form of theoretical models or research in this field is considered to be an
increasingly important component of human resource management work. There is
a requirement to demonstrate how the leveraging of people can impact on
performance, highlighting the lost opportunities through failure to invest in people
and conversely illustrating the benefits of focusing more acutely on the human
dimension of an implementation programme. The human resource management
community is also increasingly recognising the improved techniques available to
them to do this. Among the leaders in measurement is Jac Fitz-enz at the Saratoga
Institute in the United States whose work focuses on the design of measures and
associated methods for calculating direct and indirect human costs (Butler, Ferris &
Napier 1991; Cascio 1995; Yeung & Berman 1997). Specific micro measures such
as profit per employee, sales value per employee, costs per employee, employee
turnover and absenteeism, overall employment costs, incidents of accidents and
compensation claims, workforce salaries and benefits, hours spent on the
settlement of grievances and industrial disputes, the ratio of technical human
resource management staff to employees, the costs associated with recruitment
interviewing and advertising, as well as days spent on training and development,
are required to be more routinely calculated for factoring into business analysis and
planning. Ways to assess the costs associated with less easily quantifiable factors
such as employee morale, internal customer satisfaction, complaints, speed of
response, backlogs of work, behaviour change and perceptions of success, comprise
another level of challenge for those engaged in this specialist area. Tracking of the
ratio of suggestions to employee numbers and the number of viable proposals that
emanate from team initiatives is also proposed (Armstrong 1994).

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In light of the increased focus on human capital, Gubman (1998) emphasises the
need for growing proficiency in the measurement of employee development in
areas such as innovation, adaptability, leadership, knowledge acquisition,
organisational learning, as well as tracking the causal effects of particular human
resource management strategies to specific business outcomes. To join the
business community where the language is numerical, the challenge for the
profession is to clarify the return on investment in people in a way that is accessible
and palatable to management teams accustomed to figures, mathematical formulae
and statistical trends (Armstrong 1994; Fitz-enz 1997; Ulrich 1997a).

While many aspects of the function’s technical work will remain similar or even the
same as that undertaken prior to the advent of SHRM, the difference emanates
from the fact that it is driven by clearly articulated business needs and reasons,
being viewed as part of a much broader environmental and organisational
contribution. From being a micro-system processing unit the human resource
management function is in many companies reinventing itself as a consultancy-
style team assigned to work on people-related business issues and build
management infrastructure and organisational cultures that can contribute to
creating sustained competitive advantage (Walker 1994; Lundy & Cowling 1996;
Ulrich 1997a; Ulrich & Brockbank 2005).

o Competency profile of the new human resource management professional

While the transition for management teams to accommodate people issues into
planning activities might not be so great, for the professional human resource
management community the move to linking its activities to the company’s
business goals represents a profound change in focus (Brewster & Smith 1990;
Schuler 1990a; Rothwell, Prescott & Taylor 1998). Although it is recognised that
few practitioners have had the experience or opportunity to develop the skills
required to step up to the executive table where strategic management activity
takes place, there has been considerable pressure on those holding senior human
resource management positions to be pro-active in the acquisition and practice of
these (Ulrich 1997a; Thite 2004). Human resource professionals are increasingly
expected to adopt a different mindset by viewing themselves primarily as business
managers, by working closely with the senior business leaders and being closely
aligned with the interests of the business as part of the management team. In
order to partner and participate in discussion and debate on strategic management
matters with a degree of skill and confidence comparable with that of other senior
functional specialists, human resource management professionals are encouraged
to seek ways to obtain the necessary business knowledge and professional style

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(Schuler 1990a; Ulrich 1997a; CCH 1999; Weiss 1999). Armstrong (1989)
expressed the view that:

“Personnel Directors who remain in their corner nursing their knowledge of

the behavioural sciences, industrial relations tactics and personnel
techniques, while other Directors get on with running the business, cannot
make a fully effective contribution to achieving the company’s goals for
growth, competitive gain and improvement of bottom-line performance. It
is not enough for Personnel Directors just to understand the business and its
strategy; their role must be built into the fabric of the business” (quoted by
Brewster & Smith 1990, p. 37).

In effect, human resource management professionals require significantly different

sets of competencies to those needed by practitioners of earlier times (Ulrich
1997a; Ulrich & Brockbank 2005).

Within the strategic environment professionals must possess a broad, macro

perspective and understanding of the company and industry in which they work.
This includes the core business and its operation, the markets, products and
services, and the infrastructure that delivers these, as well as its customers,
competitors and distribution of market share (Boxall 1994; Rothwell, Prescott &
Taylor 1998; Ulrich 1998a). Familiarity with the firm’s commercial indicators such
as revenue and profitability, costs constraints and significant factors affecting the
productivity of the business, is considered essential (Armstrong 1994). Internally,
knowledge of the other management functions and their associated technology,
such as strategic management, financial management, marketing and operations, is
considered important as well as the possession of experience in a range of different
types of organisations and as managers in line roles. The focus of strategic human
resource management work is said to necessitate a strong engagement in the core
business operation and the provision of specific, tailored solutions in the form of
management initiatives to address internal business problems and issues. It is the
appreciation of the wider business context that provides the strategic framework in
which those organisational and people management initiatives and interventions
that are most likely to help achieve the desired business outcomes can be identified
by the functional specialists (Schuler 1990a; Weiss 1999).

Part of the competency profile also includes proficiency as a technical human

resource management generalist, having a broad working knowledge of both
theoretical and applied aspects of this specialist discipline. This implies keeping
abreast of current developments in human resource management tools and
technology (Walker 1992; Ulrich & Brockbank 2005). Ulrich (1997a) suggests that
there is now a greater need for knowledge about management theory and being

145
able to explain to non-specialists how particular interventions can contribute to
business performance in a positive way. Broad knowledge and experience with
managing the employment lifecycle, the processes of recruitment and selection,
compensation and benefits, performance management, training and development,
and employment compliance represent fundamental components in the human
resource management professional’s technical portfolio (Ulrich 1998a). Moreover,
the ability to creatively design, develop and implement human resource
management systems, to be an effective planner and evaluator, and to posses
knowledge of the principles and benefits of other related management disciplines
such as organisational development, are emphasised as being critical for this role
(Harrison 1993; Rothwell, Prescott & Taylor 1998; Ulrich 1997a).

Interpersonal and social skills are considered paramount in the new role. The
competent professional is described as an advocate, a change agent, an effective
manager and team leader, capable of dealing with senior executives, external
consultants, suppliers and subordinate staff within the human resource
management function. This involves being an effective organisational facilitator
and coach, with the ability to help management teams and individuals build
knowledge and improve their skills in the field of people management (Thite 2004;
Ulrich & Brockbank 2005). Inevitably, a strong, mutually supporting relationship
must be established and maintained with the Chief Executive who will be the
sponsor of strategic human resource management initiatives and programmes,
providing direction to the management team and allocating the necessary
resources. Human resource management professionals are continually urged to be
pro-active in building a new profile for themselves by finding out what their CEO
considers to be important to the future success of the business, to provide evidence
to the organisation about how the functional department contributes to the firm’s
performance and initiating new modes of operating and relating to the business
(Beer 1997; Tebbel 1999). Human resource management professionals are
expected to be skilled networkers, to build relationships with key individuals across
the organisation and in the various business units (Harrison 1993). As such,
success in this role today is likely to emanate from individuals who are comfortable
with the prospect of taking risks and coping with conflict and who possess the
ability to assert themselves with confidence to an audience generally unaccustomed
to this type of approach. To engage effectively in the strategic environment is said
to demand high levels of political acumen and emotional intelligence, the capacity
to balance the interests of diverse stakeholders, as well as the possession of
effective social skills in order to collaborate, advise, consult and generally gain the
respect and support of people at all levels of the organisation (Harrison 1993; Beer
1997; Ulrich 1997a; Rothwell, Prescott & Taylor 1998).

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o SHRM competency frameworks

Attempts to clarify the profile and competency framework of the new human
resource management strategist have been made by various professional
institutions and bodies in different countries (Rothwell, Prescott & Taylor 1998;
Keen 2004). For example, the American Society for Human Resource Management
published a competency framework in Washington DC in 1990 outlining the
standards of excellence for human resource executives in which 26 general
competencies were identified. The Institute for Personnel Management (IPM) in
New Zealand has also developed a list of competencies designed to assist with the
development of human resource management professionals. Specific areas of
competence included knowledge of the business (environment, industry and
organisation); skills in management (people, resources, operations, information and
general management); professional/technical knowledge and skills (managing a
human resource management function, planning and staffing, training and
development, employee relations and industrial relations, remuneration and
benefits, safety, health and welfare, systems and information management); and
personal skills (communication, decision-making, group process, leadership,
negotiations, problem-solving and building relationships) (CCH 1999b). Within
Australia the most comprehensive framework developed reflects the values,
systems and practices expected from professionals who are actively engaged in
providing a strategic service. Issued by the Australian Institute of Human
Resources as part of its annual Awards for Excellence in People Management
competition, the framework lists 30 criteria (AHRI 2004).

For example, it is expected that the company (in which the professional is working)
publishes its corporate goals and objectives in a plan that reflects the human
resource management function’s strategic contribution to the organisation’s future
and communicates its business values through internal and external ethical
behaviour. A system for dealing fairly and openly with ethical issues and
grievances should be in place which promotes an open and transparent culture
when dealing with employee or management issues. There is an expectation that
the human resource management function will challenge the company’s thinking
and accepted practices when dealing with employment issues and promotes and
models behaviours that are consistent with generally accepted management
principles and standards (AHRI 2004).

The human resource management function must be able to demonstrate its

contribution to business outcomes and also be viewed as making a strategic
contribution to the company. The linkage between employee input, customer

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satisfaction and financial outputs should be evident. High scores are achieved
where human resource management work is evidently concerned with the
identification and initiation of solutions to business problems that are barriers to its
goals and where practitioners approach the organisation from a systemic
perspective, considering the long-term consequences of taking a particular course
of action. The senior human resource management executive should be a member
of the management team, be involved with the process of planning and
communicating significant corporate change initiatives to employees, and be
someone whose input is sought by other senior executives on strategic business
issues (AHRI 2004).

According to the competency framework, human resource management executives

are also expected to influence the CEO’s leadership style and thinking about how
people in the company should be managed. High scores are awarded to human
resource management functions that can show that workforce competence and
commitment have improved due to their efforts, that a performance system has
been implemented that includes feedback and development plans for employees,
that a succession plan has been implemented and that they have improved the
company’s capacity to become an employer of choice. The focus of human
resource management work is expected to extend across the organisation in order
to harness the synergistic benefits of an integrated approach. Employee concerns
and issues are also important and hence feedback will be routinely gathered about
these by the human resource management team which is then addressed
appropriately. Human resource professionals are required to show that they
effectively manage external stakeholders, such as unions and have systems in
place to deal with external factors that may impinge on business activity. Lastly, a
structure or process for disseminating people management knowledge throughout
the organisation is required as well as the ability to deliver “quality” human
resource management services to the line functions. Overall, the significance of this
framework is that in contrast with previous competitions, the emphasis has clearly
expanded from human resource management technical operational activities to
strategic business-related human resource management outputs (AHRI 2004).

It is evident from the abundant literature on the role of human resource

management professionals that the prospect of an emergent strategic dimension to
their work is a source of much excitement and optimism in and around the
academic and business community (Ulrich 1998a). Becker and Huselid (1999, p.
287) enthused that “the field of HRM is ‘coming of age’ as the end of the
millennium approaches”. Although the work of many professionals has changed
substantially in recent years and their contribution is being increasingly sought for

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strategic activities and participation, it is also apparent that this transition is not an
automatic or universal experience and there has been much scepticism expressed
about the ability of many to make such a quantum leap into the strategic domain.
However, failure to do so suggests that human resource management specialists
are unlikely to be able to assist companies with the strategic management of their
people (Bartlett & Ghoshal 2003).

o The role of the Chief Executive Officer

Acknowledgement of the centrality of the role of the CEO (or General Manager or
Director of a Business Unit), in SHRM has been relatively slow to emerge and rarely
appears in the literature as a key point of focus. Few texts were found that aim to
provide business leaders with comprehensive practical instruction on the strategic
management of people in their company (see for example Greer 1997; Baron &
Krepps 1999). Beer et al.’s (1985) text Human resource management: a General
Manager’s perspective appears to one of only a few that directly stresses the
requirement of the senior executive to accept responsibility for building corporate
strategy in alignment with the management of people (Davidson 1996; Beer 1997).

This important oversight would appear to be partly due to the fact that SHRM has
evolved to a large extent within and out of the discrete functional discipline of
human resource management, rather than as a management discipline of concern
to all holding managerial and in particular, executive responsibilities. As such,
SHRM has usually been regarded as a contemporary human resource management
concept owned by the human resource management profession and community.
The literature on the subject of SHRM is invariably targeted at a specialist audience
concerned solely with the management of people in organisations, in line with the
conventional functional/departmental paradigm, rather than at a generic readership
concerned with general business management of which people are a part. SHRM is
rarely positioned as a mainstream or core business management competence that
well-informed managers from non-human resource management fields should know
about. Despite being touted as a critical strategic management issue of relevance
to all areas of business, SHRM continues to be perceived by many as belonging to
the human resource management function. This is particularly apparent in the
considerable literature where human resource management professionals are
exhorted to promote and drive this management approach throughout the business
community as well as within their own organisations (Cooke 1990; Ulrich 1997b).

As is reflected in the terminology of SHRM, the discipline comprises strategic

business management theory and methodology concerned with the integrated

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totality of organisational management, and hence requires the ownership and
committed participation of the full management team. While the senior human
resource management executive as a member of the general management team
may have a key role in seeking support and educating colleagues and in facilitating
the process and coordinating the implementation, as a discrete function the human
resources department alone is powerless to drive strategic thinking, analysis and
decision-making on the business-wide management of people (Davidson 1996;
Tebbell 1999). As Walker (1986) pointed out human resource management
professionals require input from CEOs on the direction of the business and the
expectations of the departmental function. The authority and influence of the
corporation’s most senior executive are arguably among the defining factors that
determine the likelihood of adopting an organisational approach of this dimension
and scale. As has been pointed out, without the leadership and commitment of the
CEO, SHRM remains a textbook concept (Hendry 1995; Ulrich & Brockbank 2005).
Mills (1985, p. 99) commented that:

“Companies that engage in people planning do it because their top

executives are convinced that it gives them a competitive edge in the
marketplace”.

Hence, it is more likely to be embraced when driven by the senior team than by the
human resource management function. Some have placed this responsibility more
broadly within the realm of the whole management team:

“The extent to which human resource management is a strategic activity in

an organization is mainly dependent upon the philosophy, values and
commitment of top management” (Harrison 1993, p. 37).

Regardless of the enthusiasm with which commentators urge the human resource
management community to rise to the challenge, the nature of the discipline is
inherently strategic and as such can only be realised by those responsible for the
business strategy. In effect, CEOs are increasingly in the spotlight to provide
leadership and direction for the management team in sponsoring and directing the
firm’s approach to the strategic management of its people (Golden & Ramanujam
1985; Beer 1997; Weiss 1999).

Research focusing on the role and expectations of CEOs with regard to the new
business environment indicates that support for and recognition of the value of a
strategically managed human resource management approach are becoming more
common (Walker 1992; Truss 1996). An early example of this is a study conducted
in the USA by Towers, Perrin, Forster and Crosby and the American Productivity
Center where the CEOs of 71 major corporations were interviewed about their

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perceptions and expectations of various staff functions. According to the
respondents, they regarded the human resources management function as being
one of the most important and one to which they looked for help in forging a
competitive edge for the business. The key components of this role identified by
the CEOs included having an understanding of the changing needs of the business,
acting as strong leaders, generating ideas for improving the management of
people, helping the firm develop its talent to meet the changing demands, initiating
approaches for cost management and productivity improvement in the people-
intensive aspects of the business as well as shaping the corporate values and
culture (Walker 1986; Tebbel 1999).

o Line management support and capability

In order to tackle strategic issues relating to the management of human capital,

there is a requirement that the executive management team, and by extension
managers in general, have the knowledge and capability to manage themselves and
the business strategically, as well as support people management initiatives
designed to assist the achievement of business objectives (Tyson 1997b; Ulrich
1998a; Tebbel 1999; Becker & Huselid 1999). Bartlett & Ghoshal (2003) expressed
the belief that a major barrier to change of this type are the outmoded notions that
management teams hold about business strategy. They describe this deficit in
terms of managers trying to “implement third-generation strategies through
second-generation organisations with first-generation management” (Bartlett &
Ghoshal 2003, p. 13). The evolution of business strategy is portrayed as having
gone through a transition from a focus on competing for products and markets to
competing for resources and competencies and finally to competing for talent.
They propose that the emphasis for the new century is on visions and values,
flexibility and innovation, front-line entrepreneurship and experimentation, with the
key strategic resource being human and intellectual capital. This is the business
context in which creative managerial solutions must be sought and to find these
presumes a perspective that is radically altered, particularly in relation to the
accompanying methods employed. Reliance on previous strategic models that were
applicable to previous commercial contexts is not considered appropriate to meet
the competitive pressures of today’s markets (Bartlett & Ghoshal 2003).

The suggestion that the capability of business managers may not be keeping pace
with the requirements of a changing commercial environment is a recurring theme
in the management literature. The Karpin Report published in Australia indicated
the critical need for leadership and management development if the nation is to
compete effectively in the new global marketplace (Karpin 1995). The legacy of

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bureaucratic and hierarchical organisational structures where strategic activity has
been conducted within the confines of the Board Room and by the senior
management team is that many managers tend to demonstrate an action-oriented
business style, having had little preparation or training in the more reflective,
analytical work of strategic management. Describing planning as a process which
occurs after strategic thinking, Garratt (1995) concurs with Greer (1995) who
expressed the not uncommon view that planning (and the associated thinking
work) is an activity that managers are neither inclined to do nor one in which they
are particularly skilled; their concerns being focused on finding solutions to more
immediate operational problems.

During more stable and less competitively intense times, business managers have
focused primarily on the functional aspects of commercial activity, concentrating on
short-term horizons and operational tasks associated with maintaining, stabilising
and controlling the delivery of core products and services. The transition into more
strategic activity requires a transition in mindset, a broadening of perspective and
interest. For example, there is a need to be able to visualise the business and its
activities as a whole, the systemic relationships and interconnectivity between the
various parts. Strategic activity necessitates the ability to move between long and
short-term horizons, to engage in planning, to recognise and assess the
opportunities and constraints both inside and outside the business, as well as
conceptualise the outcomes of a chosen route and any associated activities or
actions (Collins 1986).

Linked to the issue of capability is the extent to which senior and line managers are
adequately familiar with, or educated and experienced in the SHRM theoretical
principles and applied methodologies. It is often presumed that this competency
should reside exclusively within the firm’s senior human resource management
professional who facilitates the management team through the people management
issues in the same way that the financial controller provides strategic guidance and
advice to the business on finance and accounting matters. However, to participate
and contribute effectively implies the need for some understanding of the concepts,
the associated models and tools, and general management practice. In such
instances, reasonable knowledge and skills development in a range of people
management areas are needed for managers. The literature also emphasises that
managers need to grasp the concept that the so-called soft, intangible issues such
as culture change and intellectual capital are key contributors to business success
(Butler, Ferris & Napier; 1991; Pfeffer 1998; Ulrich 1998a).

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The fact that SHRM suffers from considerable variation in terms of its theory and
application suggests that it is not likely to be a knowledge base that is easily
acquired or a subject that is particularly easy to teach. While reasonably consistent
models are available reflecting a form of unified understanding and perspective on
the subject, a question mark is raised over the depth and breadth of knowledge,
particularly of an applied type, that would emerge should a random group of
managers or even human resource specialists in the field be tested. The limited
training and development opportunities available in educational institutions to date
would also indicate that general knowledge is likely to be quite low. Given that
members of the human resource management profession itself are trailing in this
managerial specialisation, it might be unrealistic to expect that line managers
would be any more advanced (Beer 1997).

The question of competency, or lack of knowledge and skills in applied SHRM, might
also account for the fact that some researchers have identified degrees of adoption,
or partial assimilation of the theoretical and applied elements. For example, the
issue of vertical alignment appears a relatively simple concept, a question of
identifying a business need and determining the means to meet that need. Many
examples are available of companies having successfully matched goals and
implemented the human means to arrive at these goals. However, where the
optimal strategic approach implies the development of a fully integrated business
system where all aspects of the system are linked and aligned, there would appear
to be fewer organisations that have achieved this outcome (Pfeffer 1998).

An additional factor influencing the likelihood of adoption is the expectations senior

management has of the human resource management department (Ulrich &
Brockbank 2005). Where human resource management activities are perceived by
executives and line managers as a necessary burden or not of central importance,
there will inevitably be less support for or interest in initiatives in this area of the
business. Where the function itself is viewed as in some way insufficiently capable
or skilled, or is simply dismissed on account of its traditional low level of
participation and contribution to strategic matters, the task of building a common
commitment and focus is much greater. In such instances, the role of the CEO or
leader of the executive team becomes more critical in influencing and driving
strategic activity and the associated management practice (Golden & Ramanujam
1985; Ulrich & Brockbank 2005).

Various commentators have observed that companies differ in the extent to which
they integrate the human resource management function into the activities of the
strategic planning team and hence influence the nature of the outcomes through

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this managerial prerogative. This has been modelled as a basic theoretical
continuum, extending from low or zero levels of integration at one end and full
integration at the other (Golden & Ramanujam 1985; Fulmer 1989; Butler, Ferris &
Napier 1991). A zero level of integration indicates that the company does not
engage in any strategic management activity with regard to its people.
Management activity is almost exclusively operational in content. Where low levels
of integration occur, human resource management activity is concerned with
internal administrative matters and only makes occasional reference to broader
business concerns. In this instance, there is a unilateral link between the
formulation of business strategy and the development of supporting human
resource management strategies. The business strategy is developed without
consultation with the human resource management function or consideration for
the people-related implications, and is effectively cascaded down through the
organisation so that appropriate responses can be identified. Human resource
management strategy is developed independently of the overall business plan, the
contribution of human assets to the firm’s broader purpose is not considered and no
support for the strategy is sought from the human resource management function.
As might be expected, a low level of integration is considered undesirable and is
judged to be a reflection of poor management practice (Golden & Ramanujam
1985).

Moving along the continuum a greater level of integration occurs, comprising a two-
way relationship between the strategic planning activity and the formulation of
human resource management planning activity. Human resource management
strategies are developed separately from the business strategy but in parallel.
Information is shared between the two through an iterative loop about the direction
of the business with each group commenting and providing feedback on each
other’s plan and their inter-relationship. In this context, there is some recognition
by the strategic planning team that business plans affect and are affected by the
firm’s human assets. The ultimate level of integration is characterised by a fully
interactive, interdependent relationship between the strategic business planners
and the human resource management team, with the latter being included in all
strategic work and management decisions on an equal footing with other functional
departments. The development of human resource management strategy becomes
an integral and synergistic part of the process and linked into the broader business
issues. In some cases members of the human resource management team may
provide direction for the business strategy, such as through the identification of
potential opportunities stemming from existing organisational capability. A high
level of functional integration of this type is considered to be the most desirable

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approach and to reflect optimal best practice for organisations (Golden &
Ramanujam 1985; Bamberger & Meshoulam 2000; Boxall & Purcell 2003).

o Articulated business strategy

As has been noted earlier, the ability to adopt a fully comprehensive and integrated
strategic approach to human resource management is predicated on the existence
of a clearly articulated business strategy with which to align and integrate human
resource management practice. The level of sophistication associated with a
company’s overall business planning activity is considered to have an important
impact on the adoption and in turn the effective implementation of strategic people
initiatives (Butler, Ferris & Napier 1991; Huselid 1993; Pfeffer 1998). Without a
coherent business philosophy and identifiable goals for the company the task of
identifying the appropriate people management response and supporting initiatives
becomes problematic. The ability to achieve strategic alignment where it is not
evident what comprises the elements to be aligned inevitably reduces the degree to
which this strategic connection can be made (Armstrong & Long 1994; Pfeffer
1998). Many companies do not engage in extensive strategic planning activity and
communicate these to organisational stakeholders, leaving the business to evolve
according to the fluctuations of market supply and demand. Some choose to keep
the activities and decisions of the senior management team confidential (Armstrong
& Long 1994; Gratton 1999). In many companies executives are not always
familiar with the organisation’s official approach to the management of its people,
where one exists, and are often unaware of specific strategies or policies. While
not all human resource strategies must necessarily emanate from a formal strategic
business planning exercise and may evolve according to the emergent paradigm,
there remains a requirement to understand the general direction of the business
and to have a mechanism in place that enables this information to be conveyed to
those responsible for developing and implementing human resource management
strategy (Pfeffer 1998).

o Labour-intensive/high-tech industries, large corporations and reporting

structures

The fact that a strategic approach to the management of human resources has
been found more likely to occur in labour-intensive organisations, where there are
large numbers of employees and where employee costs are high relative to the
company’s overall operating costs, has been referred to previously. Where
employees are the main components of production such as in the service sector or
where there is a need for specialist or technically sophisticated skills and expertise

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incorporating high levels of technologically advanced research, development and
application the pressure to direct attention to this aspect of the business is
evidently greater (Golden & Ramanujam 1985; Buller 1988; Huselid 1993).

The size of a company is also considered to be a factor in the adoption of SHRM. A

study by Price Waterhouse and the Cranfield School of Management in the UK found
a positive correlation between organisational size in terms of company headcount
and the presence of a strategy for managing human resources. Larger companies
more frequently had a dedicated human resource management function and the
corresponding people management expertise to drive and support this strategic
work (Thite 2004). It was concluded that the larger the company the more likely
the strategy would be written down, implying that it would have greater
organisational credibility and better chance of implementation. Moreover, it was
more likely that there would be human resource management professionals
represented on the Board or at an equivalent senior level to support this work. Also
observed was that organisational size correlated positively with adoption due to the
availability of financial capital to make investment in people resources and
corresponding programmes and practices. Access to financial capital or cash
surpluses is more likely to be prevalent in large enterprise rather than in the
smaller operation (Brewster & Smith 1990; Huselid 1993; Bamberger & Meshoulam
2000).

In addition, the structure of a company and the way in which it distributes power
and authority are thought to be indicators of adoption of SHRM. Companies that
are structured into autonomous business units and push control out to these
smaller, independent operations have greater capacity for achieving higher levels of
focus on the management of people and integrating business needs with human
contribution and management practice. Furthermore, where the human resource
management function is structured so that the senior human resource management
executive reports directly to the company’s CEO, the generally accepted sponsor of
SHRM, or other senior executives, the connection between the strategic business
environment and the area with specific responsibilities for the management of
people is thought to be greater and more likely to drive strategic alignment (Golden
& Ramanujam 1985).

o Turbulent business environments

A connection between the adoption of SHRM and the presence of a turbulent

business environment has also been suggested (Buller 1988; Huselid 1993;
Armstrong 1994). Where corporations are faced with dramatic change in the form

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of business growth or decline are facing increased competition in the marketplace
or are undergoing major events such as mergers, acquisitions or divestitures,
concern with the strategic management of human resources is thought more likely
to occur. Similarly, where a company is undergoing a transition in terms of its size,
or is moving from one stage of a product life cycle to another, or is experiencing
change in business volume, market size or product mixes, focus on the human
involvement in these developments becomes more imperative. The introduction of
new technology that radically alters the production process or involves a transition
to automation inevitably has a significant impact on the workforce and necessitates
consideration and subsequent action by management governing how these business
changes are to be handled. Other types of business stressors that will prompt
strategic intervention by management include changes to labour force
demographics, particularly where there are skills shortages with potential to impact
the ability to produce and deliver goods and services, internal reorganisation such
as office relocations or plant closures or cultural change requirements, or the
presence of a particularly active trade union capable of disrupting production (Dyer
1983; Golden & Ramanujam 1985; Buller 1988; Anthony, Perrewe & Kacmar
1996).

o Human resource management tools and technology

Success with the adoption of SHRM is also considered to be dependent on

familiarity with, access to and use of the appropriate human resource management
technology and methods. This includes not only the traditional approaches
associated with staffing, compensation, appraisals, welfare, communication and so
forth but also more contemporary tools such as computer-based systems and
software such as those needed to carry out the collection and analysis of external
and internal information (Nankervis, Compton & McCarthy 1996). In order to
conduct workforce planning and forecasting for a large workforce for example,
computer technology able to construct simulations, provide methods for tracking
and design models for the extraction of scenario-based information are needed
(Greer 1995). Similarly, the availability of a comprehensive Human Resource
Information System (HRIS) is critical for large companies if analysts are to
accumulate easily accessible profiles of the workforce or individual employees and
manipulate statistics on occupational roles, work experience, educational levels and
training undertaken (Tokesky & Kornides 1994; Bamberger & Meshoulam 2000;
Thite 2004).

The presence of a well structured operational human resource management system

is deemed important for supporting business strategy, as this infrastructure will

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contain policies, systems, procedures, progammes and general management
practices underpinning the routine management of the company’s human assets.
While concerns have been expressed about the validity and effectiveness of some of
the human resource management technology, most visibly in recent times being
the way firms tackle performance management, these tools nevertheless represent
the current methods available to the business community and will be drawn upon to
support human resource management strategy (Lundy & Cowling 1996; Beer 1997;
Weiss 1999). In general, the overall level of knowledge and applied dexterity that
the human resource team can demonstrate in its technical proficiency in human
resource management methods and practice will influence the acceptance and
support of strategic people management across the organisation, as well as the
extent to which implementation is going to be successful (Golden & Ramanujam
1985).

o Organisational politics

The prevalence of organisational politics and the role that these play in critical
business decisions have the potential to influence a company’s take-up of SHRM
(Wright & McMahan 1992; Robbins & Barnwell 1994; Ulrich & Brockbank 2005). As
Kramar (1992) noted it cannot be assumed that a company’s management
operates as a united body in supporting a particular business approach or that all
parties involved will have the same interests or agendas in this respect.
Management teams frequently comprise competing groups in power relationships
that evolve and change within the institutional structure. She suggests that macro
organisational initiatives of this type may be surrounded by factional parties
interested to a greater or lesser extent in maintaining their bases of power,
influence and control through key resources and information. Where the
introduction of a strategic approach to people management indicates a conflict with
these interests, there is potential for resistance (Wright & McMahan 1992; Galpin &
Murray 1997).

The rise in prominence of human resource management within the strategic

environment implies the redirection and refocus of organisational attention and
financial resources. While finance, production and marketing may once have been
the priority or centre of business focus, investment in people and their activities
may be resentfully perceived as displacing or undermining other functional groups.
Where those in positions of power have a vested interested in avoiding
accountability and preferring to maintain a loose and generally ambiguous state of
affairs, a strong coalition of resistance to developments of this type may emerge
(Ulrich 1998a; Bamberger & Meshoulam 2000). Those with a vested interested in

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maintaining existing structures and practices may be less supportive of activities
that eventuate in change to these (Galpin & Murray 1997). Lengnick-Hall &
Lengnick-Hall (1988) suggested that the appearance of human resource
management issues on the business agenda could even contribute to a range of
undesirable and stress-inducing implications for different organisational
stakeholders. These implications stem from increased complexity in decision-
making and information overload, the requirement to personally acquire new
managerial competencies, commitments to expensive organisational change and
management programmes incompatible with industry conditions and standards, or
pressure to provide employees with job security and work practices that may cause
the firm to become less competitive over time.

Also to be factored into the adoption equation is the degree to which SHRM is
promoted or driven by those with a particular interest in its actual take-up and
ultimate success (Bamberger & Meshoulam 2000). Constituency-based theories
suggest that the practice of SHRM may make its way into companies as result of
the efforts of the human resource management team or professionals who wish to
acquire more organisational influence, respect and power by joining the senior
ranks and acquiring greater functional investment. Similarly, support for strategic
developments may be promoted by researchers in the field or consultants in
practice who are eager to lift the status of their discipline or build their consultancy
client base (Ulrich & Brockbank 2005). The same proposition might be applied to
business leaders who are influenced by what appears to be a useful management
trend or one that has been adopted successfully by competitors or other notable
companies. The need to appear legitimate or competent or professional in the eyes
of critical stakeholders may put pressure to bear on the uptake of this route
(Bamberger & Meshoulam 2000).

o Management of change

Stemming from the dramatic developments taking place within most commercial
environments, organisational change has become a major business issue.
Numerous texts are devoted to assisting corporations understand the associated
dynamics of change and how to overcome resistance and hurdles to
implementation. A key competence that has been associated with the both the
decision to adopt SHRM and its eventual level of success is the ability to manage
organisational change effectively (Walker 1992; Ulrich 1998a). Where companies
are operating in rapidly altering markets or experiencing pressure to realign the
internal configuration of the organisation, change is an inevitable consequence. As
the strategic business direction changes so adjustment may need to be made to the

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supporting human resource management strategy. In these circumstances both
project and change management skills will need to be applied to facilitate the
required transition, redesigning and rebuilding the systemic infrastructure and
assisting with the socio-psychological dynamics of adjustment (Walker 1992; Ulrich
1998a). Ulrich (1997) proposes that the role of the new professionals should
encompass aligning change with objectives, creating a shared mindset to achieve
change effectively, using a consistent organisational model, and following through
on the completion of a change process. Gratton’s study (1999) in the UK found
that while there was a recognition among human resource directors for the need to
build alignment between business objectives and human resource management
practice, they experienced considerable organisational resistance to proposed
changes to the deeply entrenched structure and modes of operation that were part
of the heritage of the firm. The study observed that large bureaucratic
organisations that had built up strong cultures and well-defined and accepted
policies and practices encountered what has been termed by various researchers as
organisational or structural inertia (Walker 1992; Wright & McMahan 1992; Snell &
Wright 1997; Pfeffer 1998). Inevitably, the process of dismantling or discontinuing
existing practices can encounter pockets of dissention where there is unwillingness
or inability to accept or adapt to a new environment and/or a different set of rules.
The desire to retain the status quo then manifests itself in counter behaviours such
as the hoarding of information, defensive postures on the existing systems and
operating methods, the manipulation of agendas, padding budgetary requirements,
garnering the support of like-minded die-hards or simply passive resistance through
inactivity (Greer 1995).

An additional consequence of change in the firm’s human resource management

strategy is that employees may face significant alteration in the nature of their
employment relationship with the company. Existing policies, programmes and
practices that have set the tone and standards of this relationship and from which
benefit may have been derived are no longer applicable. The degree to which the
management team is sufficiently confident and can limit the pain associated with
organisational change thereby minimising damage to stakeholder and employee
commitment and loyalty, will influence decisions to pursue a particular strategy and
determine the ability to move forward in a new direction (Schuler 1987).

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Chapter 5

Significance of the small business sector

The unprecedented and often dramatic political, economic and social trends that
have constituted an increasing part of life in the latter half of the 20th century have
had a profound effect on the business environment, particularly among the world’s
developed nations. But it has not only been the large firms that have experienced
the impact of these far-reaching developments leading to major alterations in the
way that business and trading now takes place. Small firms have also been swept
up in the frequently tumultuous challenges of the times (Stanworth & Gray 1991;
Karpin 1995). Small businesses have always been prolific in regional and urban
communities with small business operators and traders being key figures in the
local provision of goods and services. However, the importance of this sector within
the industrialised countries and the corresponding attention that it has received
have become much more pronounced in recent decades (Rainnie & Scott 1986;
Rainnie 1989; Barber Metcalfe & Porteous 1989; Storey 1994; Hendry, Arthur &
Jones 1995; Ram 1999).

ƒ Growth in prominence of smaller firms

The rise in prominence of the smaller firm has progressed slightly differently from
country to country, being driven and influenced by a range of specifically local
environmental factors and occurring with varied momentum. However, overall
there emerges a reasonably consistent pattern in terms of how this sector has been
viewed and the associated developments that have taken place (Storey 1994).

Up until the latter half of the 20th century, the small business sector in the
developed countries was generally regarded as in a state of decline (Scase & Goffee
1987; Rainnie 1989; Stanworth & Gray 1991; Hendry, Arthur & Jones 1995; ABS
1999). Its economic significance was considered only marginal and as such small
firms did not receive much public attention in comparison with their larger
corporate counterparts (Storey 1994). Governments, the Press and academic
interests were usually more focused on the big business sector and in particular on
those firms quoted on the Stock Exchange and contributed in a visibly significant
way to private sector output and key economic indicators (Storey 1994).

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Although modern economies have been dominated by a comparatively small
number of corporate giants their power and influence has been considerable, such
that these could and have been used to determine prices, lobby governments and
in many instances control market forces (Scase & Goffee 1987; Stanworth & Gray
1991; Hendry, Arthur & Jones 1995). The legacy of the industrial revolution where
many businesses grew into mass-producing monoliths, coupled with the surge in
consumer demand particularly noticeable in the post-World War II period has
meant that the activities of the large enterprises remained at the forefront of
general attention and were seen as the principal players in generating national
economic growth and prosperity (Scase & Goffee 1987; Ansoff 1988; Rainnie 1989;
Stanworth & Gray 1991).

Part of the historical marginalisation of the small business sector was linked to high
levels of government intervention in the economy characterised by close
collaboration between the State and corporations and an inability on the part of
small businesses to achieve economies of scale available to big business (Rainnie
1989; Stanworth & Gray 1991). The State would often protect the larger corporate
players through trade regulation and restrictions. The more modest, community-
based operators were dismissed for being smaller and in some way, lesser versions
of the successful larger firms (Rainnie 1989; Marlow & Patton 1993). They were
often viewed as technologically backward, inadequately organised and managed by
contemporary standards, or simply business failures that lacked the efficiencies and
productivity needed to grow. Their inability to achieve the necessary long
production runs, to support specialist departments for marketing and product
design, to implement the latest equipment and to attract well-qualified managers,
consigned them to the bottom of the commercial heap (Rainnie 1989; Stanworth &
Gray 1991). In general, small firms were not considered to be important players in
meeting the needs of modern, developed nations and supporting efforts to build
strong and prosperous societies (Rainnie 1989; Stanworth & Gray 1991). As the
producers of the majority of private sector output, large companies were seen as
the ones that mattered (Scase & Goffee 1987; Ansoff 1988; Brown, Hamilton &
Medoff 1990).

However, developments around the world have prompted a reversal in this trend of
exclusive reliance on the large business sector for industrial leadership and
economic prosperity (Scase & Goffee 1987; Rainnie 1989; Barber, Metcalfe &
Porteous 1989; Stanworth & Gray 1991). Governments have faced the mounting
pressures of economic decline and stagnation that became increasingly prevalent in
many of the developed nations towards the end of the last century. Many of the
traditional global macro-economic strategies were failing and governments needed

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to find ways to avert the emerging crises particularly those that were manifesting
themselves in mass unemployment and threatened to dismantle the national and
social infrastructure (Hull & Hjern 1987; Rainnie 1989; Stanworth & Gray 1991;
Hendry, Arthur & Jones 1995). Large companies in the Western world also found
that they were increasingly uncompetitive in their local and international markets.
Japan, for example, was surging forward in a range of business fields such as
innovation, product development, internal efficiencies and general management
practice (Pacale & Athos 1981). Faced with rapid advances in technology, profound
and widespread environmental changes and an inability to adapt to these quickly
and effectively meant that large firms could not respond adequately to the rapidly
altering arena of production and trade. The large enterprises were increasingly
perceived as complex unmanageable entities, unresponsive to changing customer
needs and new demands, and stemming from their monopolistic status and ability
to manipulate environmental and market forces, even untrustworthy. In sum, big
business was increasingly viewed as failing to deliver on the requirements of the
newly emerging global economy (Rainnie & Scott 1986; Scase & Goffee 1987;
Rainnie 1989; Brown, Hamilton & Medoff 1990; Stanworth & Gray 1991; Hendry,
Arthur & Jones 1995).

o Generators of economic prosperity

Since the end of World War II small firms have been increasingly promoted as
being an important part of competitive free market economies with a role to play in
reversing the endemic economic decline, in supporting more efficient and
productive management of local and international markets and in bringing about a
range of social improvements as a consequence. Regeneration of the small
business sector was increasingly viewed as necessary if ailing economies were to be
revitalised (Brown, Hamilton & Medoff 1990; Marlow & Patton 1993; Storey 1994;
Holliday 1995). Consequently, governments started to focus on the small business
sector as a means to resolve their economic problems (Hull & Hjern 1987; Rainnie
1989; Barber, Metcalfe & Porteous 1989; Marlow & Patton 1993; Storey 1994).
The United States and the United Kingdom were among those at the forefront of
exploring the possibilities and potential of this previously neglected commercial
group (Rainnie 1989; Stanworth & Gray 1991). In 1985 Jimmy Carter and Gerald
Ford stated:

“Few areas in our national life are as important to our economic health and
well-being as small business. Small enterprises represent the economic
backbone of communities across the country, the major source of job
creation in the United States, and a vital source of the innovation, new
products and services which drive our economy…. Far from a national

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 abstraction, small business to each of us represents the very heart of
economic opportunity in America and a linchpin of our social and economic
cohesion” (quoted by Brown, Hamilton & Medoff 1990, p. 88)

Similar sentiments were expressed by Sir Keith Joseph in the early 1980s at a
Commons debate in the UK on small business and the self-employed:

“We are debating a very important subject – nothing less than the prospects
for the prosperity of the country and the solidarity of our liberties…. The
vitality of our economy, the vitality of the country as a whole, and the
vitality of individual towns and cities depend not upon large establishments,
but upon the untidy, undergrowth of small constantly adaptive, competing
businesses…. There is a close link between economic, social cultural and
political liberties, and at the heart of that link is the small businessman and
the self-employed” (Rainnie 1989, p. 18 quoting Ritchie 1984, p. 14).

At this time, new business ventures were being developed at great pace and in the
United States entrepreneurs like Steven Jobs of Apple Computer became celebrities
for their creative talents and willingness to take considerable commercial risks
(Kuratko & Hodgetts 1995). As founders of a range of high-tech industries,
entrepreneurs were applauded for being the new generation of business leaders
and their companies were viewed as powerhouses for looking at new concepts and
ideas (Rainnie 1989; Brown, Hamilton & Medoff 1990). Kuratko and Hodgetts
(1995, p. v) commented that:

“The United States has developed into an entrepreneurial economy, and the
creation of new ventures is at the center of the activity.… Entrepreneurs
have become the heroes of economic development and contemporary
enterprises”.

Politicians in both the USA and the UK were instrumental in heralding the so-called
arrival of small business and stressing the nature of these valuable business
entities, not only in economic terms but also in a range of social areas. Some
emphasised distinctly socially oriented benefits suggesting that small firms might
provide an answer to the problem of dilapidated inner cities, providing a
regeneration of these centres of decline and poverty, while creating resurgence in
the regional economies (Rainnie 1989; Marlow & Patton 1993; Storey 1994).
Supporters of the small business sector declared in the media that small firms
should be bought into the fold of mainstream business activity and take a central
position in the development of economic strategy. It was no longer thought
possible to discuss public policy without understanding the role which small firms
played in the economy as a whole or to ignore the sector by leaving it to those with
vested interests in small firms alone (Stanworth & Gray 1991; Storey 1994).

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In the UK, enthusiasm for the small business sector and its ability to contribute in a
positive way to national economic development emerged from many groups.
Government bodies, the media, academics and other authorities and commentators
fueled support for what became an almost national campaign (Storey 1994; Bacon
et al. 1996). During the Thatcher era (1979 onwards) considerable attention was
focused on the small business sector by the British government and politicians were
particularly vociferous in their claims about the benefits of small enterprise and its
ability to save the country from further financial deterioration and ultimate
economic atrophy (Rainnie & Scott 1989; Stanworth & Gray 1991; Marlow & Patton
1993). In July 1986 London’s Financial Times newspaper proclaimed:

“Future prosperity will be fed by an enterprise culture which will breed

successive generations of entrepreneurs. They will drive the economy on,
pulling together their resources to use them more efficiently, creating new
products, new markets and new firms” (quoted by Rainnie & Scott 1989, p.
1).

In stark contrast to what was the depressing reality of the time, the entrepreneurial
scene and its promise of economic reprieve was enthusiastically lauded as
“dynamic, efficient, competitive and perhaps most important, a new source of
jobs”, held up as the “….dynamic saviour of a moribund economy” (Rainnie 1989, p.
1). In effect, as Rainnie (1989, p. 1) commented “small firms have come in from
the cold”.

The need to understand or justify the promotion of small firms stimulated

considerable research and examination into the importance of this sector, and the
reasons why and how it could be of value in the broadest socio-economic way.
Clarification was also required relating to the significant growth in the stock of small
firms during this period and the reasons for the change in perception about their
social and economic importance. Key areas of focus for researchers have been the
identification of the number of jobs created by the small business sector, the
quality of these jobs, the growth of self-employment and the role of small firms in
the local labour market (Atkinson & Storey 1994b; Atkinson & Meager 1994; Parker
2002).

A range of theories and factors emerged over time, accompanied by much debate,
explaining the principal causal contributors to the emerging importance of small
firms. Two important pieces of research were carried out in the USA and the UK
which although controversial in terms of their reliability and findings, served to
stimulate widespread discussion about the role and contribution of the small
business, and which became catalysts for promoting the rise in prominence of the
smaller firm. Research conducted in America by David Birch at MIT, which claimed

165
to have found that small firms less than five years old with 20 or less employees
had generated 66 percent of all net new jobs between 1969 and 1976, provoked
much interest (Hull & Hjern 1987; Brown, Hamilton & Medoff 1990; Atkinson &
Storey 1994a; Storey 1994; Bacon et al. 1996). Similarly, the Bolton Report
became an oft-quoted and influential body of work after concluding in 1971 that the
health of the British economy rested on the ability to generate large numbers of
new businesses and to stimulate the growth of these to the extent that they would
be in a position to replace many of the large corporations as important industrial
and economic concerns (Rainnie & Scott 1986; Rainnie 1989; Stanworth & Gray
1991; Storey 1994). To remain reliant on many of the large businesses that
currently dominated their industries was thought to be a recipe for disaster. The
Report (1982) stated that:

“We believe that the health of the economy requires the birth of new
enterprise in substantial numbers and the growth of some to a position from
which they are able to challenge and supplant the existing leaders of
industry. We fear that an economy totally dominated by large firms could
not for long avoid ossification and decay…. This ‘seedbed’ function,
therefore, appears to be a vital contribution of the small firms sector to the
long-run health of the economy. We cannot assume that the ordinary
working of market forces will necessarily preserve a small firm sector large
enough to perform this function in the future” (quoted by Stanworth & Gray
1991, p.1).

“Perhaps the most important and alarming realisation which emerged during
the course of our inquiry was the sublime state of indifference, in the United
Kingdom generally, to so vital a sector of the economy.… All one can say
with certainty is that the larger and more virile the small firm sector is in an
economy, the faster the rate of growth that economies seem to achieve”
(quoted by Rainnie 1989, p. 15).

Research of this type was frequently used to substantiate and reinforce the view
that small firms should succeed large corporations as the vehicle for generating
economic recovery and moving business practice into a new economic and
industrial era (Rainnie 1989; Stanworth & Gray 1991).

Prompted by the emerging globalisation of trade and similar problems with under-
performing economies, debate on the role and potential contribution of the small
business sector began to occur in other developed nations including Australia.
Following the Liberal-Conservative government taking office in 1996 under Prime
Minister John Howard, public policy for small business was regarded as an
increasingly important issue and was one that appeared clearly on the
administration’s agenda. Two inquiries were commissioned to review the state of
Australian industry, headed by David Mortimer and Ashley Goldsworth (Parker
2002). These studies found that the sector accounted for 70 percent of job growth

166
over a 10-year period and contributed about 30 percent to GDP, serving to
stimulate and focus the development of Australian government small business
policy. The findings also reinforced the pervailing view that “a healthy small
business sector is vital to the Australian economy” (Holmes, Butler & Lennon
1995a; Parker 2002; Department of Industry, Tourism and Resources 2003, p. 1).
In 1997 Prime Minister John Howard and his ministerial team published a lengthy
Statement addressing many of the issues and concerns of the small business
sector, declaring:

“Small business is the engine room of the Australian economy, a vital source
of enterprise, innovation and jobs…. As Australia’s largest employer and
main source of employment growth in recent years, the economic health of
the small business sector is critical to the well being of the Australian
economy” (Commonwealth of Australia 1997, pp. iii, 1).

Premier Geoff Gallop’s Western Australian State Government adopted a similar

position on the small business sector, reflected in a statement of commitment:

“Labour believes a strong and vibrant small business sector is vital to the
Western Australian economy. Small business contributes innovation,
employment and economic growth to the State. It is the backbone of the
State’s economy. Proprietors and investors prepared to invest time, energy
and resources in business opportunities need to be assured the State
Government will implement policies that encourage growth and
investment….. Government has a key role in providing an environment in
which small business can prosper” (SBDC 2001b, pp. 1, 4).

o Relative size of the small business sector

Not only do small firms constitute by far the largest portion of active trading
entities, but the stock of active smaller businesses also grew significantly in the
latter half of the 20th century (Storey 1994; ABS 2000; Small Business Service
2001). Small firms have risen in importance in part because it has actually been
acknowledged that they comprise the largest sector, that their number has
markedly although not always consistently increased over a number of decades,
and for this reason they represent a sector of sufficiently significant and notable
size as to merit attention (Rainne 1989; Brown, Hamilton & Medoff 1990). In
addition, small firms comprise by far the largest body of employers among the
stock of active commercial entities (Commonwealth of Australia 1990; Small
Business Service 2001; Small Business Administration 2001). By association the
ability of these numerous business entities to contribute to economic growth and
GDP is, in recent decades, increasingly thought to be considerable. In addition,
they have acted to reduce the burden of unemployment (Storey 1994). Australian
government statistics indicated that between 1994-5 small businesses accounted

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for as much as 32 percent of goods and services sold nationally and that their role
had become particularly significant in areas such as construction, manufacturing,
retail, property and the business services sector (Commonwealth of Australia
1997).

Drawing on data supplied by the US Small Business Administration (SBA) in 1996,

Heneman and Berkley (1999, p. 53) described small firms as “dominating” the
business landscape with only two percent of organisations having more than one
hundred employees and as being “the fastest growing segment of the US economy
[while accounting] for all new jobs created in 1995”. In 1998, the United States
Bureau of the Census indicated that there were 21.3 million employer and non-
employer firms and of those, only 16,000 had 500 or more employees and about
100,000 had 100 or more employees. The remainder of employment occurred in
small firms with fewer than 100 employees. Of the 108.1 million (private sector
non-farm) workers, firms with fewer than 500 employees provided jobs for 55.1
million people and firms with fewer than 100 employees employed 39.7 million
(Small Business Administration 2001). Bearing in mind that US small firms are
larger than in other countries in terms of their employee numbers, statistical data
from the SBA reported that small businesses represented more than 99 percent of
all employers, employed 51 percent of the private sector workers and represented
nearly all the self-employed who comprised seven percent of the civilian workforce.
These smaller operations were said to be responsible for generating 75 percent of
net new jobs and contributing 51 percent of the private sector output while
representing 96 percent of all exporters of goods. The 1998 annual payroll
expenditure for small firms was recorded at about US$1.5 trillion (SBA 2001).

It has been well documented that in the UK the number of small and medium-sized
firms grew significantly in the 1980s, with an associated increase in jobs. Figures
from the UK government’s Small Business Service indicate that in 2000 there
existed 3.7 million businesses, 99 percent of which had less than 50 employees and
provided 45 percent of the country’s non-government employment. Of the 3.7
million businesses, 25,000 were medium-sized (50-249 employees) and less than
7,000 were large (having 250 employees or more). While the most significant
increase was in micro businesses (less than 10 employees) and in the number of
one-person companies, growth continued steadily in the small firm sector between
1995 and 2000 (Small Business Service 2001).

Similar trends are to be found within the Australian context. For example, statistics
from the Australian Bureau of Statistics estimated that there were 1,051,500 small
private sector companies in Australia in 1998-9 representing 95 percent of all

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private sector businesses. These small firms employed almost 3.4 million people or
48 percent of all private sector employment, and between 1983-4 and 1998-9 total
small business employment increased by 58.9 percent and the number of small
firms increased by 71.4 percent. Between 1993 and 2003 the number of small
firms operating overall grew by an average of 3.5 percent each year and it is
estimated that the small business sector activity contributes approximately 30
percent to Australia’s Gross Domestic Product (ABS 2000). In Western Australia,
the Small Business Development Corporation (SBDC) reported 116,300 small
businesses for 2001, accounting for 96.7 percent of all private sector firms in the
State. A total of 356,600 people were in the small business workforce, and the
State witnessed an increase of 7.2 percent in the number of persons employed by
small businesses between the period 1998/9 and 1999/00 (SBDC 2001a). Not
included in these figures from different countries is the existence of a growing
number of large business entities that are linked with and oversee more or less
autonomous sub-divisions or business units assuming many of the structural
characteristics of a smaller company.

While it is recognised that the number of small companies in operation is very large
and quite disproportionate to the quantity of larger corporations, exact figures on
active small firms generally remain contentious (Storey 1994). The number of
small firms that operate at any one point in time is not precisely known despite
efforts made by government agencies to gather and maintain official statistics on
these organisations. The collection of accurate information on small firm activity is
partly complicated by the fact that no universal agreement exists regarding the
definition of a small business; this varies across different industries and in different
countries. Historical studies geared to counting the number of firms in operation
have not always been comprehensive and some have been only rough estimations.
In addition, many small firms do not register their existence; some are exempt
from registration on the grounds of size, while others have such a short lifespan
that they completely miss being included in the statistical collection of firms in
operation. Although there is sufficient information about small firm activity to
corroborate their extensive numbers and to identify a distinctive trend in their
increasing presence, precise figures remain illusive and only estimates can be
made. Nevertheless, small businesses comprise the bulk of enterprises operating
at any one time (ABS 2000; SBS 2001; SBA 2001).

o Sources of public influence

Linked to the issue of numbers of small enterprises is the fact that being a sector
comprising some millions of constituents (owning, managing and working therein) it

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represents a considerable body of political, economic and social influence in society
at large (Brown, Hamilton & Medoff 1990; Storey 1994). Small firms make up a
sizeable voting block in every community across all countries. The capacity to join
forces and influence public policy and political decisions that impact on the interests
of local people is considerable and one that governments can ill-afford to ignore.
Describing the situation in the United States, Brown, Hamilton & Medoff (1990)
explain that the pressure of this power can manifest itself and be asserted in a
number of ways. For example, coalitions of small firms from the same or different
industries will contribute to political campaigns and lobby political representatives
on particular causes. Interest groups representing small firms and union bodies
actively engage in lobbying on behalf of the sector. Occasionally where there are
common interests at stake large companies will draw on their small business
suppliers for support on certain issues. Moreover, the traditional underdog image
of the small business community and general growth in popularity of the smaller
firms has meant that the voting public and the Press frequently support and view
the concerns of this sector more favourably. To disregard this group of constituents
is to risk alienating large numbers of prominent, wealthy and influential citizens
(Brown, Hamilton & Medoff 1990). The significance of the critical mass of small
firms and the impact of their associated activities are reflected in an article
published in the Wall Street Journal in 1981 that stated:

“In Congress, big corporations have nowhere near the political clout of many
groups of small businesses…. Far from directing the political current of our
time, big business will probably be the last to get the word” (quoted by
Brown, Hamilton & Medoff 1990, p. 75).

o Important source of employment

The sheer magnitude of the numbers of small firms has been linked with greater
job opportunities that such organisations might be able to offer and as such, small
firms have been regarded for some time as a possibility in providing the answer to
widespread unemployment (Hull & Hjern 1987; Storey 1994; Rainnie 1989; Brown,
Hamilton & Medoff 1990; Atkinson & Storey 1994b). Faced with chronic growth in
unemployment and varying degrees of associated social hardship and disintegration
within local communities, governments of some of the developed nations began to
direct attention to building a connection between small firms and employment in an
attempt to resolve this problem (Rainnie 1989; Stanworth & Gray 1991; Storey
1994). Research studies supported by statistical data started to appear,
demonstrating the considerable growth in small firms highlighting their capacity to
generate employment opportunities and generally alleviate the onerous burden of
the jobless and occupationally redundant (Hull & Hjern 1987; Barber, Metcalfe &

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Porteous 1989; Stanworth & Gray 1991; Storey 1994; Brown, Hamilton & Medoff
1990). A UK research project carried out in 1985 by the Small Business Research
Trust for example, reported that companies employing less than 100 people had
created more than half of the new jobs between 1971 and 1981 (Rainnie 1989
referencing Bannock 1985). In 1984, the UK Prime Minister Margaret Thatcher
declared that:

“This government believes in small business…. because small firms are

indispensable to the creation of jobs and wealth” (quoted by Rainnie 1989,
p. 17).

Similarly, Kuratko and Hodgetts (1995) expressed a popular American view of the
time that new business formations were the critical foundation for any net increase
in US employment. Following studies undertaken in Australia in the mid-1990s, the
Federal government likewise reaffirmed the significance of the small business sector
for the country’s employment needs:

“As Australia’s largest employer and main source of employment growth in

recent years, the economic health of the small business sector is critical to
the well being of the Australian economy (Commonwealth of Australia 1997,
p. 1).

According to the Karpin Report published in 1995, papers issued by the National
Board of Employment, Education and Training indicated that Australian small firms
had been the source of almost all, net private sector employment growth since
early 1991. The Report stated that:

“Given the significant role that the small firm sector plays in providing
employment, it is inherently important that viable small firms survive and
prosper” (Holmes, Butler & Lennon 1995a, p. 277).

Douglas (2001) reports that almost all new jobs created in Australia have been the
product of small and medium-sized enterprises engaging in entrepreneurial type
activity and in turn creating employment opportunities in the process of pursuing
this area of business potential. In consequence, small firms have been targeted
and promoted within the context of government public policy as a source of job-
generation opportunities. It was proposed for example, that small firms could be a
source of economic sustenance for those moving out of paid employment or
unemployment into self-employment and an increase in the establishment of small
firms could make a valuable contribution to employment creation through the
provision of job opportunities to others (Parker 2002).

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While official statistics from the USA, the UK, Europe and Australia demonstrate
that small firms are indeed providers of significant amounts of employment, there
has nonetheless been considerable debate surrounding the ability of small firms to
contribute significantly to providing a solution to unemployment, particularly on a
macro economic level (Hull & Hjern 1987; Rainnie 1989; Storey 1994; Atkinson &
Storey 1994a; Gibb 2000). Some have asserted that small businesses have had
little or no role in creating job opportunities and that figures which have been used
to counter this view are in fact erroneous. Brown, Hamilton & Medoff (1990) for
example, commented that a widespread misconception about small businesses in
the US is that they generate the vast majority of jobs and are therefore the key to
economic growth. Their research claimed to find that there was proportionately no
difference between small business employment activity in the 1950s and in the
1980s. Various studies have attempted to verify the findings of David Birch, but
none have successfully confirmed this data as being a reliable indicator of the
potential of small firms to generate such promising employment opportunities and
in turn benefits for the economy as a whole (Storey 1994). Hull and Hjern (1987)
concluded from their investigations that on balance younger small and medium-
sized firms were able to outperform older and larger companies in creating work
prospects but that it was still difficult to draw firm conclusions about how great this
could be. Moreover, various studies have shown that start-up ventures and micro
firms have been particularly vibrant and it has been suggested that it is only these
tiny companies that are likely to be the main contributors to any significant
employment creation (Atkinson & Storey 1994b; Gibb 2000).

Furthermore, the optimistic perception of small firms as potential sources of

employment has been explained in terms of job creation just appearing to be
considerable (Rainnie 1989; Brown, Hamilton & Medoff 1990). As large firms trim
output during a recessionary climate and dismantle jobs on a wide scale the smaller
operators pick up large business cast-offs. It is not so much that small firms
contribute more job openings, but as larger firms withdraw from certain areas of
the market, the small companies fill these gaps. When these two trends are viewed
alongside each other small firm job-generation capacity looks less impressive
(Rainnie 1989). Brown, Hamilton and Medoff (1990) pointed out that if new
businesses account for more than 100 percent of the net increase in employment
and new firms rarely start out with more than 100 employees, then it is inevitable
that small companies will account for a disproportionate share of new jobs.

There has also been concern that research findings and manifestos promoting the
job-generation potential of small companies have not always factored the high
mortality rates of these enterprises and the consequent job losses. The tendency

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of small firms to cease trading during their early years is commonly known and
unless statistical data are able to track the churning effect of the associated
creation and demise of jobs the ability to predict quantities is greatly reduced.
While a range of benefits accruing from a healthy small business sector, such as the
contribution to innovatory activity and the provision of employment opportunities
for young and inexperienced workers has been generally accepted, the case for
favouring small businesses for their employment generation capability has been
viewed as oversold (Rainnie 1989; Brown, Hamilton & Medoff 1990; Robinson &
Pearce 1994). Nevertheless, driven perhaps by desperation and few other apparent
options, governments have accepted whatever the employment limitations might
be and have remained committed to a strategy of support that has endured to a
greater or lesser extent with the passage of time.

o Role in the marketplace

On a macro level, the emerging prominence of the small business sector has also
been attributed to major developments that have occurred in both the manner of
production as well as the types of products and services increasingly being
delivered to the marketplace (Barber, Metcalfe & Porteous 1989). The movement
away from the post-World War II trend of grand scale manufacturing and
distribution of standardised products, and the subsequent general decline in these
mass markets has played a part (Scase & Goffee 1987; Stanworth & Gray 1991).
Combined with greater consumer wealth within the industrialised countries,
changing patterns of demand for certain specialist products have created niche
markets in which more customised goods and services are provided (Brown,
Hamilton & Medoff 1990; Hendry, Arthur & Jones 1995). It is recognised that many
industries are not accessible to the smaller firm, in particular large-scale
manufacturing which requires considerable outlays on operational infrastructure
such as plant and equipment. Examples of these would be petrochemicals,
automobiles and the production of steel. These sectors do not provide realistic
opportunities for the budding entrepreneur and big business is unlikely to encounter
competition or threat from the small-scale operator in these industrial sectors
(Scase & Goffee 1987; Commonwealth of Australia 1990). However, the
infrastructure of the smaller business has emerged as more ideally suited to meet
the requirements of manufacture and trade in these specialist markets that cannot
be filled competitively by the large-scale operators (Brown, Hamilton & Medoff
1990; Stanworth & Gray 1991; Storey 1994).

Small firms have responded to areas of the market that combine well with the small
business mode of operation in their ability to deliver limited, specialist lines and to

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change direction quickly and flexibly according to fickle, individualistic and varying
customer demands. Faster turnaround, the ability to use flexible production
technology and generate small batches of differentiated products, the maintenance
of low inventories and the emergence of loose organic-style organisational
structures rather than cumbersome bureaucratic configurations, have become
features associated with the successful smaller operation in the new trading
environment (Commonwealth of Australia 1990; Brown, Hamilton & Medoff 1990;
Stanworth & Gray 1991; Storey 1994; Hendry, Arthur & Jones 1995; Holliday
1995). Small companies have been found to achieve a growing dominance in areas
such as small-scale component manufacturing, in parts of the high-tech market
such as scientific instruments and electronics, and in consumer products offered
through the retail sector such as furniture, domestic items and fashion (Hull &
Hjern 1987). Small firms are regarded as well placed to play a role in the
distribution of large business outputs, particularly on behalf of manufacturers and
wholesalers whose customer base extends out to the non-metropolitan and rural
communities, or alternatively as suppliers of discrete parts or raw materials to the
larger operators. Not only does the sector fill niche markets that are in effect too
small for large corporations but it also plays an important role as suppliers to large
corporations (Hull & Hjern 1987; Robinson & Pearce 1994). The report by the
Commonwealth of Australia (1990) noted that small and large businesses play a
complementary role in the economic environment, that one cannot actually survive
without the other. Giant car manufacturers like General Motors and the UK clothes
retailer Marks & Spencer for example, rely on tens of thousands of smaller
companies to support their core business (Scase & Goffee 1987; Rainnie 1989;
Meredith 1993; Robinson & Pearce 1994). Small firms also play a role in providing
healthy competition for larger ones leading to improvements in products, quality
and pricing (Stanworth & Grey 1991; Meredith 1993; Commonwealth of Australia
1990).

Moreover, the growth in the information and service industries that is primarily
reliant on individual or small group human input rather than the use of heavy duty
plant and equipment have been found to align more closely with the small firm
profile (Scase & Goffee 1987; Hull & Hjern 1987; Stanworth & Gray 1991; Meredith
1993; Storey 1994; Karpin 1995). Although small firms have always been
dominant in the labour-intensive service sector (for example, figures show that nine
out of ten small firms were located in the service sector in the UK in 1991), the
decline of the traditionally dominant manufacturing sector and concurrent growth of
a range of service industries (representing an increase of 53 percent between 1977
and 1987 in the UK) resulted in further expansion by smaller entities filling this
niche in the marketplace (Storey 1994). In Western Australia the four top industry

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sectors for small business growth between 1998/99 and 1999/00 were the
wholesale trade (21.1%), the retail trade (11.6%), cultural and recreational
services (7.9%) and education (7.7%). Over the longer-term (1983/4-1999/00),
the four industry sectors experiencing the greatest average annual rate of growth
were property and business services (8.0%), education (7.6%), health and
community services (6.1%) and construction (5.4%) (SBDC 2001).

Growth in prosperity and disposable wealth in the developed nations has generated
many service opportunities in a range of areas such as domestic and community
services, health, maintenance, transportation, security, entertainment, leisure,
tourism and travel, and eating out (SBDC 2005). These industries have low
barriers for entry for the smaller operator and present varied opportunities for
many aspiring entrepreneurs and small business owners. The nature of the service
sector and the fact that consumption takes place at the point of purchase, imply
that small firms can reside easily within local communities and provide better
services in close proximity to their customers (Commonwealth of Australia 1990).
Areas of the service sector such as finance, property, insurance as well as other
activities that are professional, managerial or technical in nature have also become
increasingly prevalent. In this way, the expansion of service-related products has
been linked to the creation of more business opportunities for both start-ups and
growing concerns (SBDC 2005).

Small firms have also been increasingly contributing to export markets, sourcing
overseas customers and business networks that support economic growth, GDP and
the national balance of payments. In the mid-1990s, 11 percent of small firms
exported a proportion of their output and this trend was expected to grow. In the
manufacturing sector, this figure was found to be at 19 percent with increases
predicted for the future (Commonwealth of Australia 1997). Some have expressed
the view that the small business sector should be encouraged to have an
increasingly greater role in the development and marketing of new products and
services. Small firms are commonly credited with being strong sources of creativity
and innovation, particularly in the area of new, leading-edge technologies (Curran,
Stanworth & Watkins 1986; Rainnie & Scott 1989; Brown, Hamilton & Medoff 1990;
Barber, Stanworth & Gray 1991; Robinson & Pearce 1994; Matthews 2002).
Rothwell, Prescott & Taylor (1998) for example, refer to the initial emergence of the
semi-conductor industry in California that stemmed from the establishment of small
firms able to grow very rapidly. Storey (1994) commented that what distinguishes
the small firm from the large firm is the ability of small firms to provide products
and services that are marginally different and to take on innovative challenges.
They have less rigid bureaucracy and ingrained commitment to existing product

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lines and organisational practices and they respond more easily to customer needs
and associated opportunities, as well as possessing more efficient internal
communication (Rainnie 1989). There has been much support for small firms in
their innovatory activities, although it is recognised that there exists critical
inhibitors to engaging in experimental leading-edge work. These are a scarcity of
capital, exposure from the associated costs, limitations on time, talent and
organisational infrastructure, as well as the additional burden of carrying staff
whose dedicated role is that of research and development, particularly where these
are not making an immediate contribution to the bottom-line performance of the
business (Rainnie 1989; Hamel 2000; Douglas 2001). Overall, there is a general
recognition that “a healthy small business sector preserves some very desirable
economic features” (Commonwealth of Australia 1990, p. 43).

o Industrial restructuring

Changes in the internal operational practices of large firms in recent times have
also resulted in a range of business opportunities for the smaller firms. This is
prompted in part by competitive pressure and the desire to achieve business
efficiencies through cost minimisation (Hull & Hjern 1987; Scase & Goffee 1987;
Stanworth & Gray 1991). Whether in the form of divestment of non-core business
activity, subcontracting and outsourcing product lines or part of product lines or the
processing components of a final product, strategies of this type have opened the
door for the small supplier who is interested in offering a discrete product or service
to a large customer (Stanworth & Gray 1991; Robinson & Pearce 1994). The
nature of this fragmentation within large companies and the subsequent
restructuring of the production and delivery of products and services has been
diverse, including the decentralisation of production in which large plants are
broken up but retained under the same ownership as well as the casting-off of
specialist lines into smaller plants and creating new subsidiary companies
(Stanworth & Gray 1991).

In addition, there has been a trend towards the detachment of products or services
from a particular firm but maintaining the revenue links in the form of licences or
franchises (Scase & Goffee 1987; Stanworth & Gray 1991). Other subtle variations
on this include the rescinding of units of production and innovation, while retaining
market-related control and the power to repurchase the units if desired. In
general, there has been a significant increase in subcontracting activity, the
disposal of subsidiaries and the subsequent buying-in of services and production
previously handled in-house. These activities have been effectively absorbed by
many of the smaller specialist operators. A perception of enhanced performance

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possibilities by the small firm together with a general trend in contraction of the
average size of firms suggest that larger firms may have identified their size as
being a factor of strategic weakness and are actively seeking to be smaller,
devolved and decentralised. This has manifested itself in a greater number of small
business units and autonomous profit centers within or associated with a larger
organisational entity (Stanworth & Gray 1991; Storey 1994).

o Size as an organisational asset

The proposed reduced reliance on large corporations and the parallel growth in
number and prominence of smaller firms have also been attributed to an enhanced
perception about the superior performance potential by the smaller operation
(Schumacher 1973; Hull & Hjern 1987; Arthur & Hendry 1990; Stanworth & Gray
1991; Atkinson & Storey 1994b). Small firms have been noted to have distinct
operational advantages over the large corporations even though it might be
unrealistic to claim that smaller firms can outperform their larger counterparts
(Hendry, Arthur & Jones 1995). This is most evident in the popular view that
smaller firms are likely to be more successful because they are more customer-
focused. Smallness is found to produce much closer relationships with those to
whom goods and services are being provided. Manager and product line units have
also been found to have a greater interface and more immediate contact with their
customers (Commonwealth of Australia 1990; Greer 1995; Hamel 2000). A
growing trend is enhanced relationships between customers and suppliers. This
occurs where the supplier attains preferred status and is involved in a long-term
collaborative relationship with the customer based on mutual dependency and co-
operation. The supplier is also increasingly involved in product design and offering
features such as just-in-time delivery reflecting the greater emphasis on customer
focus and a need to build these connections effectively (Atkinson & Storey 1994b;
Hendry, Arthur & Jones 1995). In large firms where there are more staff, more
levels of management and longer lines of authority the ability to communicate
effectively and make decisions quickly are reduced. Hamel (2000) suggests that
smaller firms typically exhibit faster decision-making and better communication,
and that a function of growth is a greater reliance on more impersonal forms of
communication, such as emails and memos. The ability to be flexible and respond
quickly to changing customer and market needs also suggests that small firms are
better protected from the impact of fluctuations in demand (Hull & Hjern 1987).
Moreover, it is observed that large companies often have capital tied up in older
technologies and processes, and can be reluctant to switch until the prior
investment has fully depreciated or is no longer commercially tenable
(Commonwealth of Australia 1990; Stanworth & Gray 1991; Douglas 2001).

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Even large companies have increasingly begun to recognise the benefits of the
smaller organisational configuration, restructuring themselves into independent or
semi-autonomous small business units (SBUs) (Schumacher 1973; Atkinson &
Storey 1994a; Handy 1995; Greer 1995). Richard Branson of Virgin for example
has commented that in order to remain vibrant and innovatory “we don’t run an
empire, we run a lot of small companies” (Hamel 2000, p. 278). The management
of people is also simplified within the smaller unit configuration. Smaller work
groups may generate less conflict because there is less diversity within the group
and among the agendas and goals of the individual members (Robbins & Barnwell
1994). Large groups reduce levels of intimacy between people as it is not possible
to know everybody who works in particular location or become particularly involved
with them. Schumacher (1973) explained the benefits of small organisations in
terms of their ability to offer convenience, humanity and manageability. Gubman
(1998) notes that Microsoft’s operating units are limited to 35 people so that
personal associations develop and there is onus on individuals to assume greater
responsibility for their work and its quality without the paternalism that pervades
hierarchical structures. Handy (1995, p. 102) summarised his perspective on the
benefits of smaller operating units as follows:

“Small units are faster, more focused, more friendly and more fun…. small
units can get closer to the customer…. they can be less bureaucratic and
more personal. Most of us fish prefer a smaller pond. In smaller groups
there is more chance to be yourself….”.

o Leveraging off down-sizing

Industrial restructuring whereby many larger enterprises have limited their focus to
core business activities coupled with the introduction of increasingly sophisticated
labour-replacing technology, have led to extensive downsizing activity in recent
decades. In many firms layers of management have been abolished and significant
reductions in internal jobs previously in place to carry out the work have occurred
(Storey 1994). A huge migration of skilled workers has consequently made its way
into the labour market. In many instances, retrenched employees have opted to
start their own companies in the form of consultancies that specialise in their
former field or set up businesses in an area of particular personal interest.
Historically, entry into self-employment has been associated with economic
recession and monies provided as part of the redundancy payouts have often
realised capital for ventures that might ordinarily have been out of reach (Scase &
Goffee 1987; Tyson 1885b). There are many examples of services that were once
performed within the firm, being effectively offered back to the organisation on an

178
external basis even by former employees. The need for many retrenched
employers to secure work in an environment of fewer job opportunities has led to
increases in the number of self-employed and absorption of some of this surplus
into the small business sector (Scase & Goffee 1987; Rainnie 1989; Stanworth &
Gray 1991; Storey 1994).

o Reduced industrial conflict

Other benefits that have been identified as likely to emerge as a result of a reduced
reliance on the corporate giants include improved business productivity stemming
from the reduction of industrial labour conflict (Rainnie & Scott 1986; Rainnie 1989;
Brown, Hamilton & Medoff 1990; Storey 1994). Poor management practices within
larger business entities have been highlighted, as for example in the UK in the
1970s, as being responsible for disruptive industrial activity, undermining business
performance, and in turn the economy as a whole (Rainnie 1989). Unencumbered
by vast bureaucratic organisational structures with complex political agendas and
the constraints of union intervention, as well as the difficulties caused by poor
communication across large and often diversified workforces, small companies have
been seen to offer more functional and productive work settings (Storey 1994).
Working life in the small company is frequently portrayed as more harmonious and
family-like, where good relationships exist between management and employees,
and there are higher levels of cooperation and support among the members
(Rainnie & Scott 1986; Rainnie 1989; Storey 1994). Small groups are credited with
being more conducive to building loyalty, commitment and maintaining more fluid
operating structures and work arrangements. Where the numbers of employees is
high, communication between managers and the workforce becomes more difficult
due to the formalisation of management practice and the physical distance that
separates individuals (Rainnie 1989). Control is also reduced in large corporations,
as managers are less in touch with what is happening on the factory floor or at the
coalface, providing easier pickings for union representatives who envisage a role in
the employment relationship. The idea that small firms are the solution to
industrial problems, strikes and work-stoppages has had particular relevance in
those countries with deep-rooted industrial relations problems, characterised by
confrontational workplaces and heavily authoritarian management practices. It has
been suggested that the trend in structural reconfiguration from large to small may
have been driven in part by the desire to reassert control over the labour
environment and counter the influence of powerful union bodies supported by large
numbers of unified disgruntled workers. In contrast to the harsh and dehumanising
experience of working in large organisations, it was thought that small firms might
be able to contribute generally to the development of more socially constructive

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and hence productive working environments (Rainnie & Scott 1986; Rainnie 1989;
Storey 1994).

o Social acceptability

The growth in numbers and a more positive perception of small firms have also
been attributed to a general change in societal attitudes about their role and value
in the community (Brown, Hamilton & Medoff 1990; Stanworth & Gray 1991). A
general preference for more small firms and less reliance on the bigger firms have
emerged to a greater or lesser extent in different countries. Americans are known
for their mistrust of big business and an almost propagandist-style promotion was
launched in the UK by the Thatcher government during the 1980s as part of its
commitment to the new “enterprise culture”, featuring reduced dependency on
paternalistic institutions and the so-called “nanny state” (Rainnie 1989; Brown,
Hamilton & Medoff 1990; Stanworth & Gray 1991; Storey 1994). While motivated
by economic reasons, government support for the small business sector in the UK
assumed a distinctly political and ideological character, representing a transition
from the socialist left to the capitalist right and encouraging corresponding social
values such as self-reliance, personal responsibility, hard work and independence.
This approach to the small business issue was consistent with the broader social
and economic goals of the government at the time, which was focusing on
privatisation, deregulation, competitive restructuring and the reduction of the
power of organised labour. Moreover, a recent sociological phenomenon has been
observed, being a transition from holding in high regard only those individuals
possessing impressive positions and titles in reputable firms and believing that
working for oneself is in some way inferior, to regarding small business owners as
dynamic and worthy individuals who are “making a go of it” (Brown, Hamilton &
Medoff 1990; Douglas 2001). In effect, the increased enthusiasm directed towards
entrepreneurial activity and the considerable potential that small firms have been
thought to be able to offer in resolving economic and social problems, have
conspired to create a certain glamorous aura around entrepreneurship, to the
extent that there exists “….widespread folklore that entrepreneurs are special
people who can walk on water, do not perspire, and so on” (Douglas 2001, p. 192).

ƒ Drivers of support for small firms

Optimistic that they had found the answer to their dilemma, governments became
increasingly prepared to acknowledge and promote the importance of the small
business sector and to intervene with the provision of support and assistance to

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help small firms survive and grow (Hull & Hjern 1987; Rainnie 1989; Storey 1994;
Stanworth & Gray 1991; Holliday 1995; Parker 2002). Successive governments in
countries such as the USA, the UK, Japan, Germany and Australia began to take
action in a range of areas designed to promote new firm formation and small
business growth. This has emerged in the form of a wide range of legislation,
policies and programmes, encompassing financial assistance, publicity, education,
services offering information and advice as well as reforms in business regulation
and compliance (Stanworth & Gray 1991; Holliday 1995; Commonwealth of
Australia 1997; Parker 2002).

Traditionally most government initiatives and legislation have been developed with
large firms in mind and the small business was expected to fit into generic policy
frameworks accordingly (Brown, Hamilton & Medoff 1990; Commonwealth of
Australia 1990). There do exist examples of government intervention intended to
help small firms compete prior to this period. The populist movement in the USA in
the 1890s movements looked to protect the modest trader from a hostile market
environment and also in 1953 when Congress created the Small Business
Administration whose goals were “to aid, counsel, assist and protect, insofar as is
possible, the interests of small business” (Brown, Hamilton & Medoff 1990, p. 6).
However, recognising the need to strengthen the role of this sector and address the
obstacles restricting small business performance, the latter half of the twentieth
century witnessed a dramatic growth in the enactment of different types of
legislation and a surge in the provision of aid intended to increase small firm
competitive capacity (Storey 1994; Kuratko & Hodgetts 1995; Commonwealth of
Australia 1997). Changes in policy gradually gained momentum initially in the USA,
with Japan and Germany following suit during the 1950s and 1960s and then in UK
in the 1970s after the publication of the Bolton Report (Stanworth & Gray 1991;
Storey 1994).

In the United Kingdom for example, the last two decades of the twentieth century
saw a particularly dramatic change in the direction of public policy. First the Labour
Party and then the Conservative Party strongly promoted the concept of
entrepreneurialism and developed programmes designed to build what was
popularly termed an enterprise culture (Rainnie 1989; Stanworth & Gray 1991;
Storey 1994). British government policy for small business incorporated a range of
objectives, including increasing employment, lifting the number of firm births,
encouraging the faster growth of small firms, as well as creating competitiveness in
markets and generating wealth through more efficient market management and the
use of technology. Initiatives were put in place in local communities with the aim
of developing a culture of enterprise among young people in schools and colleges.

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Beginning in the early 1970s, this exercise gained momentum in the 1980s and
resulted in the development of a national curriculum and a growing focus placed on
the development of industry and business awareness. The government introduced
elements of business management into college curricula, conducted experiments in
building business partnerships and providing work experience in the small firm
context for teachers and students (Stanworth & Gray 1991; Gibb 2000). Policy was
geared towards implementing support structures for enterprising business
opportunists and creating networks that provided assistance and education. Loan
finance schemes were introduced making it easier for smaller firms to access lines
of credit and investment capital (Stanworth & Gray 1991). It has been estimated
that the UK government implemented over two hundred policy measures between
1979 and 1991 at a cost of some 16 billion UK pounds. This considerable
investment was estimated to have reached UK pounds 500 million per annum by
1983 (Rainnie 1989).

Across the water in Europe during the 1980s, the European Community (EC) was
also making changes in this area and pursuing new small business policy
objectives. The combined nations were concerned about the role of small and
medium-sized firms in generating market competition, the diversification of
products in the marketplace and consistent with its neighbour, the reduction of
unemployment. Documentation from the EC indicates recognition at this time of
the broader role and importance of the smaller operator in the supply chain, in
supporting the large business community, as well as being distributors, wholesalers
and retailers of the outputs of large firms. The EC became actively concerned with
trying to ensure that small firms interests were widely represented, with
encouraging trading and creating opportunities in marketing, as well as being an
institutional repository for information about small business in the member
countries (Storey 1994).

Both State and Federal governments in Australia have acknowledged for some time
the economic and social importance of the small business sector. Since the 1960s
sustained interest by most major parties and the government has resulted in
initiatives and legislation, as well as the provision of a range of resources and
assistance (Meredith 1993; Commonwealth of Australia 1997; Parker 2002).
Clarifying its role, the government Department of Industry, Tourism and Resources
(2005) states:

“A healthy small business sector is vital to the Australian economy,

accounting for 58 percent of private sector jobs growth and generating an
estimated 30 percent of Australia’s economic production. The Department

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 helps small business to grow and prosper by providing advice and assistance
programs”.

Located within this Federal Department, the Office of Small Business (OSB) is the
focal point for the development and consideration of small business policy issues
within the government. It is responsible for promoting and maintaining links across
the Commonwealth departments and agencies charged with implementing various
elements of government plans for the sector. Among its key objectives are the
provision of policy advice and support to portfolio ministers on small business
issues, building effective links with small firms and their representative
organisations, as well as fostering an understanding of the critical factors
influencing growth of small firms and the sector in general. In addition, the OSB
provides assistance to small business by monitoring regulatory practice and helping
agencies responsible for regulation to produce their Annual Regulatory Plans
outlining recent and planned changes and advising firms of imminent changes that
may impact on their business (Department of Industry, Tourism and Resources
2005).

At a local level, as an agency of the State Government of Western Australia, the

Small Business Development Corporation (SBDC) aims to represent the small
business community and provide various forms of assistance and service to local
and regional small business operators (SBDC 2005). The agency describes its role
as a broker, facilitator, advocate and catalyst for the development of small business
and its vision to be the driving force in the realisation of small businesses as major
contributors to the State’s economy. The agency commits to championing the
cause of small business, as well as developing programmes and services to meet
the needs of small business development (SBDC 2005). The goals of the
Corporation are to provide assistance in the pursuit of small business opportunities,
remove barriers and impediments to business growth, improve business skills in the
small business sector, foster an enterprise culture and emphasise the value and
success of small business, as well as facilitate regional small business development.
Included in its free services are the Business Enterprise Centres located in city and
country areas that provide practical business assistance, referrals to specialist
advisers such as accountants and lawyers, help with dealing with government
departments and regulations, as well as business information and workshops, and
general problem-solving support (SBDC 2000). Part of these services includes a
fact sheet for owner-managers of smaller companies. These sheets contain
information about the responsibilities of employers, relevant legislation, tips for
effective people management practice, useful contact details of service and support
organisations and reference materials relating to a range of employment areas

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(SBDC 1998). Local government authorities also actively support the small
business community in various ways, in some cases offering inducements to attract
new business to a particular location or region of the country (Meredith 1993;
Parker 2002).

In order to plan and implement appropriate government policy and community-

based interventions it has been necessary to understand much more about the
small business environment, and the nature of smaller enterprise development and
growth (Barber, Metcalfe & Porteous 1989). The broad trend to accommodate
these aspirations has consequently witnessed a burgeoning of activity relating to
the small business sector in many countries. These include the establishment of
government agencies, consultancy and service organisations, university
departments, literature and journals covering the management of small and
medium-sized firms, qualifications in small business management, as well as
associations and clubs for small business owners (Gibb 2000; Huselid 2003). In the
United States for example, networks of state commerce departments, trade and
professional associations, the National Chamber of Commerce, as well as coalitions
of advocates for smaller firms and new ventures have emerged to focus on the
interests of smaller operators (Kuratko & Hodgetts 1995). Private sector
organisations focus on providing services to the small business sector, including
assistance with starting, buying or improving a company, developing benchmarking
guides for firms to compare performance and making a range of information
resources available to this market. An example is the Entrepreneur Business
Centre, located in Perth (EBC 1999).

Kuratko and Hodgetts (1995) reported that education in entrepreneurship had

become one of the “hottest” topics at American business and engineering schools
and that by the early 1990s the number of schools teaching a new-venture or
similar courses had grown from just a handful 15 years prior to over 500. In effect,
the small and medium-sized business sector has gradually begun to receive
previously unprecedented attention at an international and national level from
researchers, policy-makers and other interested parties (see also Huselid 2003).
This attention been concerned with determining how the small business sector
should be tackled, the nature of appropriate national and local policy, and the
associated infrastructure and interventions that could provide appropriate support
(Rainnie 1989). This broad trend is reflected in Kuratko and Hogketts general
comments that:

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 “The entrepreneurial spirit may be universal, judging by the enormous
growth of interest in entrepreneurship around the world in the past few
years” (1995, p. 13).

ƒ Challenges facing the small operation

While many may have believed that the key to economic revitalisation had been
secured, growth in knowledge and information at this time about the nature and
performance of the small business sector indicated that such an outcome was by no
means guaranteed. Despite the fact that small firms were expected to bring a
change in fortune for the industrialised nations, it was increasingly recognised that
this particular commercial sector experiences unique types of business and
operational challenges. A range of factors has been found to influence and
determine the ability of small firms to compete effectively in their chosen markets
(Barber, Metcalfe & Porteous 1989; Commonwealth of Australia 1990; Stanworth &
Gray 1991). Numerous studies and collected data have shown small firms to be
particularly vulnerable as discrete trading entities, having typically to overcome an
array of external and internal as well as real and perceived obstacles, in their
efforts to survive and be successful. Some of these difficulties are common to all
commercial enterprises while others are found to be unique to the smaller
operations. Moreover, research has consistently highlighted the absence of a level
playing field where the small business sector is concerned, with small firms facing
areas of particular disadvantage when compared with larger corporations (Karpin
1995; Heneman & Berkley 1999). Efforts to address these often complex and far-
reaching problems by governments and other interested parties have been equally
extensive, prompting on-going, widespread debate and often discord about the
most appropriate approach to resolving areas of concern (Commonwealth of
Australia 1990; Karpin 1995; Commonwealth of Australia 1997).

o Early demise of small firms

For all small firms there is a pervasive threat of early failure and demise. Many
thousands of small firms start up each year but their success rate is not high
(Stanworth & Curran 1986; Hull & Hjern 1987; Rainnie 1989; Barber, Metcalfe &
Porteous 1989; Commonwealth of Australia 1990; Meredith 1993; Storey 1994;
Ennis 1999). According to Robbins and Barnwell (1994), it is invariably the
smallest and weakest companies that close their doors first. Storey (1994)
considered the fundamental characteristic that differentiates large and small
businesses other than their size, is the higher probability that small firms will cease
to trade. He reported that empirical studies have consistently shown that smaller

185
firms have higher failure rates than larger firms and that this is now a unanimously
held view among authorities in the field. Experts have come to understand that
small businesses are more vulnerable than larger firms because exposure to
business failure is greatest in the early years of formation. Younger firms are found
to fail more often than older ones and small firms are more likely to fail than larger
ones (Rainnie 1989; Stanworth & Gray 1991; Storey 1994). Reflecting the findings
of a longitudinal study on small firm demise, statistics suggest that these
companies have only a 27 percent probability of survival in the first five years of
formation and that this dips to eight percent over a 10-year period (Commonwealth
of Australia 1990).

The acute vulnerability of the smaller firm has been widely discussed in recent
years, based to some extent on the proposition that the small business is at a
comparative disadvantage to larger firms and that without assistance or support
they decline faster and grow less rapidly (Hull & Hjern 1987; Stanworth & Gray
1991; Holliday 1995). The sector has been criticised for its inability to address
those impediments that threaten the ability to improve levels of output and
productivity, and survive the early phases of establishment (Hull & Hjern 1987).
While the odds in favour of survival for the smaller operators are usually seen as
low, Gibb (2000) has interpreted this as not necessarily a disaster. He notes that a
high rate of business failure could be viewed as a natural and even acceptable part
of the cycle of commercial life, and while it would seem prudent to contrive to
minimise this, its occurrence may not be the calamity often ascribed. Certain
benefits are realised from the death of a business, such as the shifting of resources
from an environment of low return to high return and the gaining of valuable
experience for those wanting to continue to participate in the sector. Where the
nature of corporate existence is viewed as a continually dynamic, changing and
acceptably hazardous process, the enduring pattern of rapid start-up followed by
shutdown presents a slightly less gloomy picture (Commonwealth of Australia
1990; Gibb 2000). Nevertheless, small business survival exists as a key macro and
micro objective and one of the most important influences on the ability of these
companies to survive is thought to be the degree to which they can grow within a
short period after start-up (Storey 1994).

o Factors in early demise

Many studies have been conducted in an effort to understand the high rate and
nature of small firm mortality (Clark 1986; Hull & Hjern 1987; Barber, Mecalfe &
Porteous 1989; Storey 1994). Although certain patterns in the types of difficulties
small firms face have emerged, it may be any combination of these that can lead or

186
contribute to closure (Barber, Metcalfe & Porteous 1989). Particular problems areas
identified are market competition, the high cost of doing business, a lack of
financial and other resources, the absence of economies of scale and the
disproportionate costs associated with compliance and regulation (Rainnie 1989;
Barber, Metcalfe & Porteous 1989). Also included is a deficit of business
management knowledge and skills by owner-managers (Clark 1986; Hull & Hjern
1987; Storey 1994; Karpin 1995; Commonwealth of Australia 1997; Gibb 2000).

Studies by Storey (1994) identified a number of generic factors found to play a part
in the sustainability of a small firm, including the size and age of the company, the
structure of its ownership, the sector in which it operates, the past performance of
the company, the external macroeconomic conditions, the management of
employees and internal infrastructure, the location of the company and the
prevalence of State subsidies. He refers to early research conducted by Berryman
(1983) and Argenti (1976), who found that small entrepreneurial firms generally
reflect the personalities of the individuals who create them and that obstacles to
success derive from that individual’s personal characteristics. They concluded that
failure emanated from business leaders who were unwilling to take advice
particularly from expert and qualified sources, who had little formal education and
engaged in little reading and who were reluctant to innovate or introduce change
(Holliday 1995).

Meredith (1993) reported that research investigations in many countries have

concluded that poor management is the major factor leading to the failure of small
companies. Various studies have attributed success or failure to specific owner-
manager characteristics such as age, gender, work experience, educational
qualifications and family background. For example, business success was thought
to be positively correlated with owner-managers who had prior business ownership,
prior managerial experience, experience of unemployment, time spent working in a
large firm and in a similar industry, as well as training in business management.
Prior business ownership may make owners more aware of the problems of
ownership, give them an opportunity to learn the lessons of previous mistakes and
carry forward the experience of managing others. Experience of unemployment
might provide a stimulus to make individuals more determined that the business
does not fail through fear of having to return to the state and stigma of
unemployment. Work experience in the same sector would be expected to be
positively associated with survival because the owner-manager is likely to have an
understanding of the norms and practices of that sector. Similarly, work in a large
firm may also provide a breadth of managerial skill and experience, although this
may have been acquired in a narrow specialised field rather than cover the diversity

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of disciplines associated with small business ownership and management. Survival
is thought to be more likely where there is greater availability and use of family
networks for financial support and advice, and where the owner-manager comes
from a family with a history in business. Higher levels of education are also
thought to provide better chances of success because owner-managers have a
greater knowledge base to draw on in the management of their business affairs
(Curran & Stanworth 1986a; Commonwealth of Australia 1990; Storey 1994).

o Demands of the market

It has been observed that many hopeful entrepreneurs starting and operating a
small business concern lack the essential requirements of successful ownership and
management (Commonwealth of Australia 1990). Often a new venture commences
with an idealised and romantic notion about a particular product or service offered,
with little forethought given as to how it will get to market successfully. As with
any company, small firms must understand the competitive environment in which
they are trading by responding to the strategic positioning of competitors to ensure
market share is captured and retained. To do this firms must not only possess a
product or service that is marketable and knowledge about that particular market,
but also the ability to manage the product and service within the chain of supplier
and customer relationships. Inexperienced owner-managers may have little
understanding about the technical requirements of designing and developing a
product or service and an overly optimistic estimation of the funds required to
establish and run a small business. Some fail to undertake research and planning
to determine the market strategy, or appreciate the importance of the reliability,
quality and safety of the product or service they are delivering to the market. Poor
timing of the entry into the marketplace, a misjudged distribution strategy, lack of
clarity about the exact area of business in which the small firm is competing, and
an over-reliance on one or only a small number of customers can lead to premature
demise (Barber, Metcalfe & Porteous 1989; Storey 1994; Holliday 1995).

Small firms face problems with the competitive and sometimes monopolistic
practices of larger companies, the black economy, with unreliable providers of raw
materials and too few customers who do not pay their bills on time (Commonwealth
of Australia 1990; Stanworth & Gray 1991; Storey 1994). Not unexpectedly poor
products, product development issues, operational and quality control problems,
low sales, inadequate management of inventory, resources and suppliers, as well as
ineffective marketing and promotion have been found to contribute to many young
firms shutting up shop at an early stage (Barber, Metcalfe & Porteous 1989; Storey
1994).

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o Management of finances

Particularly common are the difficulties owner-managers encounter with the

management of their finances, whether this is maintaining sufficient control over
liquidity and cash flow, unrealistic extension of credit to customers, failure to
service business debts or the use of inappropriate or inadequate financial structures
and systems (Meredith 1993; Kuratko & Hodgetts 1995; Barber, Metcalfe &
Porteous 1989; DUBS 1990). Referring to an Australian study of small firms by
Williams in 1986, Fuller and Forsyth (1994) note that almost one third of these
companies failed due to their inability to manage their financial resources. Sound
financial management in small firms is based on the ability to balance revenue with
operating expenses and cash received with cash outgoings, a task with which many
owner-managers often struggle. It is not unusual for smaller firms to encounter
problems with having inadequate working capital and cash flow, and maintaining
excessive and unrealistic levels of debt. Conversely, there are also dangers
associated with the acquisition of large amounts of debt too early in the firm’s
development and in failing to reinvest back into the business during upturns in
business and times of healthy profit. In addition, small firms generally experience
greater difficult getting necessary finance in the form of investment capital due to
perceptions of higher levels of risk by financiers and investors in the face of little
collateral security (Commonwealth of Australia 1990). The evaluation, monitoring
and control costs of making a loan to or investing in a new or small business are
much higher in relative terms and constitute greater levels of risk for banks or
other investment providers. Being associated with high levels of risk also means
that the cost of any finance made available and the corresponding interest rates is
often higher (Commonwealth of Australia 1990; Stanworth & Gray 1991). Owner-
managers may also lack information about the different types of sources that are
available to provide financial support (Stanworth & Gray 1991; Storey 1994).

o Fixed costs of running a business

In comparison with larger corporations, small firms are disadvantaged due to the
fixed cost of doing business (Scase & Goffee 1987; Stanworth & Gray 1991; Storey
1994). A significant proportion of business activity and infrastructure will cost the
same regardless of the size of the firm. Their ability to compete in the market is
undermined by the absence of economies of scale and the fixed costs associated
with operating a business, such as the collection and analysis of market
information, the acquisition of finance in capital markets, complying with
government regulation and other operational requirements. Moreover, because

189
margins are lower in small firms and they are usually more labour intensive in
comparison with larger firms, there is relatively greater pressure to use capital
more efficiently (Rainnie 1989; Stanworth & Gray 1991; Storey 1994; Parker
2002). With lower levels of turnover, small firms have less revenue over which to
spread these costs (Stanworth & Gray 1991; Parker 2002). Moreover, small firms
may not have access to discounts that can be acquired through bulk-buy
arrangements (Storey 1994).

o Business compliance and administration

Concern has also grown about the negative impact of government compliance and
administration requirements on the small business community. The introduction of
regulation governing business practice without due regard for its affect on small
firms has resulted in a disproportionate burden being placed on the smaller
operators (Scase & Goffee 1987; Barber, Metcalfe & Porteous 1989; Commonwealth
of Australia 1997; Parker 2002). Administration, paperwork, and the requirement
to provide statistical information add significantly to the workload of the smaller
operator. Small firms invariably lack the resources that enable the hiring of others
to do this work, so the owner-manager is obliged to devote time to activities that
detract from the management and operation of the actual business itself.
Regulation sometimes causes smaller operators to raise their prices in order to
absorb the various costs, which in turn reduces their ability to be competitive. The
fixed cost of compliance has to be borne regardless of the size of the business.
Governments have been encouraged to consider the wider less immediately obvious
implications of their actions in this respect and to develop policy that creates a
fairer trading environment with less onerous compliance tasks and responsibilities
for smaller firms (Brown, Hamilton & Medoff 1990; Kuratko & Hodgetts 1995;
Commonwealth of Australia 1997; Parker 2002).

o Constraints of employment legislation

One particularly contentious issue in Australia is the employment legislation

regulating the management of labour in commercial entities (Soon & Hughes 1999).
At the time of writing, employment legislation that regulates how firms manage the
workforce exposes the smaller operator to a range of penalties and depletion of
resources in the form of time, money and business opportunities. A persistent
source of frustration for the small business sector is that of the regulation
associated with the termination of employment contracts, or dismissal of
employees. The intention of the legislation to minimise the occurrence of unfair
and unreasonable employment terminations is frequently at odds with the capacity

190
of smaller firms to handle the procedural complexity and cost of compliance in this
area. As such, small businesses are often reluctant to take on staff in order to
avoid exposure in this aspect of their operation. It is argued that if this punitive
environment were removed or at least minimised, then small firms would be in a
stronger position to assume their role in the creation of employment opportunities
(Greer 1995; Parker 2002; Soon & Hughes 2003).

o Shortage of management resources and skills

The role of the owner-manager in a small firm is unique in that it comprises all the
tasks and responsibilities required to run a business that in a larger company are
shared by a greater number of people. Not surprisingly, time is one of the scarcest
resources in small firms (DUBS 1990b; Kinnie 1999). The tasks of owner-managers
are highly diverse covering a considerable range of managerial, operational and
administrative areas including sales, marketing, orders, stock, quality, income,
debtors and creditors, banks, expenditure, book-keeping, legal compliance,
premises, mail, employees, security and so forth. Not only do most small firms
operate on a lean budget and invariably struggle with small margins when
balancing their revenue with the cost of doing business, but they must also come to
terms with significant deficits in other types of resources, such as staff to help them
manage and operate the business and support in the form of business management
expertise. Owner-managers are obliged not only to fit all these demands into their
lengthy working week but also to determine and focus on the right priorities so that
their business runs smoothly and disasters are averted (DUBS 1990b; Gibb &
Davies 1992).

Unlike in large corporations where the General Manager will have a range of
reporting specialists responsible for planning, finance, sales and operations and is
not personally required to be a specialist in any of these fields, this diversity of skill
is required in the smaller operation where there will be few, if any, specialist in-
house resources (Barber, Metcalfe & Porteous 1989; DUBS 1990b; Stanworth &
Gray 1991). It is well established that owner-managers of small firms frequently
lack the specialised management knowledge and skills that are available within
larger corporations (Commonwealth of Australia 1990; Karpin 1995). In most
cases small firms do not maintain professional advisers on their payroll; the cost of
employing financial personnel or other functional and technical specialists is often
prohibitive in the early stages of development (Barber, Metcalfe & Porteous 1989).
However, it is also unlikely that the full complement of knowledge and skills
required to cope with the multitude of tasks and issues related to small business
management will be found in only one person and yet this shortfall must somehow

191
be managed. The owner-manager must manage alone, drawing occasionally on
external suppliers of expertise as when these are needed and are affordable
(Barber, Metcalfe & Porteous 1989; Commonwealth of Australia 1990; Kinnie 1999;
Heneman & Berkley 1999).

ƒ Addressing the difficulties facing small operators

Despite a pessimistic outlook for many small business operations, the commitment
to building vibrant economies has fueled a determination by various nations to help
this sector overcome its many handicaps and tackle what Stanworth and Gray
(1991, p. 40) referred to as the “wall of problems”. Over several decades, a range
of initiatives has been debated under Australian governmental direction with the
intent of addressing these perceived exposures and obstacles to survival and
growth. They encompass financial injections into the community, reductions in
business charges, fees, bureaucracy, red tape and paperwork, limiting intrusive
regulation and discriminatory practice, improved consultation with the sector on
issues affecting them, as well as the provision of information and educational
services (Clark 1986; Commonwealth of Australia 1997; Parker 2002; Department
of Industry, Tourism and Resources 2005).

In September 1987 a committee was appointed by the Minister for Science,

Customs and Small Business to investigate the unique problems that small firms
face. This committee addressed the regulations under which business is governed,
the impact of government policies in areas such as taxation, superannuation,
training, marketing, access to information and advice, and industrial relations, as
well as the impact of government policy when compared with larger companies
(Commonwealth of Australia 1990). The objective of this study was two-fold:

“To provide the right environment in which small businesses can be

established and flourish [and] to assist in developing internationally
competitive firms. (This includes initiatives to upgrade the competence of
the small and medium sized enterprises in areas such as business planning,
new product and process design, adoption of new technology, quality
management and human resource management” (Commonwealth of
Australia 1990, p. 20)

A statement released in July 2004 titled Committed to Small Business issued by the
Prime Minister and ministers responsible for the small business portfolio outlined a
range of initiatives designed to improve the operating environment of this sector
(see Department of Industry, Tourism and Resources 2005). Examples of
interventions proposed and/or introduced during the tenure of the current Federal

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Government have included the provision of a financial assistance package in the
form of A$60 million over four years through the Small Business Assistance
Programme and particularly pertinent to Australia’s recent drought problems,
monetary assistance to be made available through the Small Business Interest Rate
Relief (SBIRR) Program (Department of Industry, Tourism and Resources 2003).
To reduce the negative impact of limiting or short sighted government reforms, the
Small Business Deregulation Task Force was established to review the compliance
and paper burden imposed on small business, particularly in the area of taxation.
Widespread complaint of the complex and unwieldy tax system for business has
prompted reviews as to how this burden can be minimised and more fairly
administered (Commonwealth of Australia 1997; Parker 2002).

When Federal government departments introduce new regulation, they are now
required to produce Regulation Impact Statements incorporating the implications of
the regulation on the small business sector. Government agencies are required to
adopt maximum payment terms not exceeding thirty days from the receipt of
invoices to ensure that suppliers (small and large) are paid in a timely manner.
Efforts to ensure that small firms can more easily access government contracts
have also been made with the result that small and medium-sized firms secured
22.4 percent (80,000 contracts) reported in 2000-1 worth in excess of A$3.5 billion
(Department of Industry, Tourism and Resources 2003). Other areas highlighted
for attention have been the provision of improved structures for training and
apprenticeship schemes, initiatives to simplify the interface with government by
reducing licence and registration forms, renewals and annual reports, to create
greater consistency across government departments and the different jurisdictions
when providing services to the sector, to encourage financial intermediaries to
assume equity partnerships in this sector and to ease restrictions on raising
investment capital (Commonwealth of Australia 1997; Parker 2002).

Efforts to address the professional skills of owner-managers have led to the

establishment of educational services and programmes. Privately and publicly
funded schemes offer enterprise training designed to equip owner-managers with
knowledge, skills and information needed to start and develop a successful business
(Commonwealth of Australia 1990; Holmes, Butler & Lennon 1995b). These have
become available through a range of institutions across the country, including
colleges of Advanced Education, TAFE, MBA courses with small business
management components, the Small Business Development Corporation and
university departments such as those at the University of Western Australia and the
Curtin University of Technology on the west coast (Holmes, Butler & Lennon 1995b;
Parker 2002; Department of Industry, Tourism and Resources 2003).

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More recently, in the Federal arena, the Coalition’s 2004 return to power presented
an opportunity to pursue widespread changes to the workplace relations laws
(Parker 2002; Belling & Burke 2004). The Government’s majority in the Senate
opened the way for the acceptance of the suite of reforms already presented to the
electorate during the previous three parliaments. These reforms support small
business under its policy Flexibility and productivity in the workplace; the key to
jobs. It was anticipated that key reforms would include greater flexibility in work
arrangements, including full exemption from unfair dismissal laws, protection from
redundancy payments and a legislated requirement that the Australian Industrial
Relations Commission (AIRC) have specific regard to the particular circumstances of
smaller employers in the management of jobs, wages and employment conditions.
Principally for the benefit of small business, existing Commonwealth legislation
would be amended to ensure freedom of contract is protected and promoted. The
Office of the Employment Advocate (OEA) was allocated A$2 million for the specific
purpose of increasing the take-up of union-excluding Australian Workplace
Agreements. In addition, the reform programme provided Commonwealth funding
for a pilot scheme that would give small firms access to alternative mediation
services that are lower in cost and more informal than the Commission (Belling &
Burke 2004).

In general, the Australian Government’s commitment to smaller business has been

focused on encouraging more innovative and entrepreneurial management and
trying to improve the business environment in which small firms operate (Karpin
1995; Parker 2002; Department of Industry, Tourism and Resources 2003).
Initiatives have been designed to encourage budding entrepreneurs to explore the
possibilities of business owner-management and helping operators along the way
as their business grows. Key to small firm policy has been that small and large
businesses should be able to operate and compete under the same, or at least
similar conditions, and receive the assistance required for the fulfillment of that
expectation (Commonwealth of Australia 1997). Government has attempted to
address ways to remove unintended discrimination and disadvantage experienced
by the small firm operator, creating a more level playing field so that desired
growth can eventuate. Attention has been given to overcoming instances of market
failure of particular relevance to small firms and where possible enhancing the
overall competitiveness of the sector, as well as to the development of skills
required for effective small business ownership and management. While measures
have been introduced to provide support and assistance to Australian small firms,
these have however relied more on the provision of financial resources
administered through central government agencies somewhat distanced from the

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end users, with little provision of institutional infrastructure or grass roots level
coordination. This is in line with a general strategy of reduced government
involvement in business and market affairs (Howard 1997; Parker 2002;
Department of Industry, Tourism and Resources 2003).

ƒ Concerns relating to small business policy

While commitment to the small business community has endured over time to a
greater or lesser extent and the number of reforms has escalated and undergone
different stages of simplification, repackaging and local focus, these have been
subject to criticism relating to their effectiveness, applicability and sufficiency
(Rainnie 1989; Storey 1994; Forman 1996; McMahon 1998; Gibb 2000; Parker
2002). Concerns have been expressed about the fact that many of the initiatives
are not comprehensive and remain fragmented, failing to be integrated into an
overall economic policy (Stanworth & Gray 1991; Storey 1994). Changes in policy
have frequently been made in response to pressure from small firm lobby groups
and changes in the macro economic and/or business context. Perhaps more
significantly, critics have been concerned about the fact that it is not clear whether
government interventions and investment actually solve the problems for which
they are intended. The complex nature of economic infrastructure and its dynamics
make it difficult to gauge and measure in a meaningful way, or to make transparent
the causal connections, the extent to which initiatives have been appropriate or
achieved their objective (Rainnie 1989; Brown, Hamilton & Medoff 1990; Stanworth
& Gray 1991; Storey 1994; McMahon 1998).

There has also been issue with the appropriateness of government intervention in
light of trends in broader economic theory and associated practice at this time.
Although there has been support for the view that the domination of the trading
environment by large enterprises is not a desirable situation; that it is necessary to
break some of the monopolistic practices by creating genuine competition in the
marketplace, public policy that positively discriminates and favours the small
business sector remains a contentious issue (Stanworth & Gray 1991). Some of the
debate relates to the appropriateness of government intervention at a time when
the current stance is building free markets and allowing competition to emerge
naturally in an unregulated environment without artificial controls. As Atkinson and
Storey (1994b) pointed out, it has not been unequivocally demonstrated that
government policy helps small firms to grow, that by removing resources from
other sectors to promote the small business sector the economic outcome is the
most desirable one, or that the assistance provided to these firms actually reduces
the levels of unemployment (Brown, Hamilton & Medoff 1990; Gibb 2000).

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What is apparent is that while there has been a proliferation of explanations for the
growth of the small business sector, the causal factors remain complex, often
inextricably interwoven and a matter of speculation. It is not clear whether the
greater numbers and prominence of small firms have contributed to generating
changes in the business community or whether the growth of this sector is
conversely a result of a dramatically changing broader business context (Stanworth
& Gray 1991). Among the critics on small business policy has been Gibb whose
article SME policy, academic research and the growth of ignorance, mythical
concepts, myths, assumptions, rituals and confusions, challenges some of the
contemporary theories and views about the small business community. Gibb
(2000) asserts that policy-makers and academics have been responsible for
disseminating erroneous and negative assumptions about the small business sector.
He criticises the poor understanding and overly simplistic generalisations made by
commentators about the management of small firms, examples of which include the
reasons for business failure, the view that providing training to small firms has no
value because of their likelihood of demise and the suggestion that owner-
managers are generally a low-calibre bunch unable to keep their businesses afloat.
Gibb’s stimulating analysis reflects the fact there is much still to be discovered
about the world of the small business and its inhabitants, and that so far, attempts
to leverage the perceived potential of this sector (whether political, economic or
social in motivation) have been and continue to be based as much on intuition and
speculation as on sound scientific evidence. It is generally accepted that those
factors that define the position of small firms are extremely variable and complex,
such that it has been difficult to measure and arrive at clear aggregate conclusions.
Nevertheless, the basic philosophy and sustained approach to this sector has been
that whatever can reasonably be done to support and aid the smaller firms should
be done (Gibb & Davies 1992; Holliday 1995; Gibb 2000; Parker 2002).

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Chapter 6

The nature of growth in the small firm

For some decades now, the subject of growth within the small and medium-sized
business has received attention by researchers and policy-makers from many of the
developed countries around the world (Curran, Stanworth & Watkins 1986;
McMahon 1998). Consequently, there exists a substantial academic and popular
literature specifically dedicated to this aspect of organisational activity within the
smaller commercial entity. The importance attributed to growth in small firms has
been emphasised to the extent that the subject has developed over time into a field
of study in its own right and for scholars and specialists in the field of management
of smaller companies, the issue of growth has become a common topic of interest
and concern (Curran, Stanworth & Watkins 1986). For those with a desire to see
the small business community thrive and fulfill its broader socio-economic potential,
organisational growth and development is invariably one of the defining
considerations. For many experts in this field their purpose has been to identify
those features, which distinguish “steady-state” or non-growth companies from
those which make the journey to becoming larger entities (McMahon 1998). There
are concerns that the building of knowledge in this discipline has not been
consistently cumulative and that there is still much to be explored and discovered
about the nature of small business growth. The breadth of the associated research
activity and debate has nevertheless resulted in a better understanding of the
factors that influence the internal development of a small business and the growth
process in general (Curran, Stanworth & Watkins 1986; McMahon 1998).

ƒ Defining “growth”

It is first necessary to clarify some aspects of the terminology and its definition
relating to this subject, thereby avoiding the possibility of any semantic confusion.
It is important to note that the generic term “small business growth” (as well as the
general use of the word “growth” within the literature on small firms) possesses
two separate dimensions with regard to meaning and application. The first
dimension encompasses the concept of the increasing or growing number of small
firms that are actively trading in the marketplace at any point in time. The second
dimension refers to the internal organisational development and change within
individual firms, being single, unique entities operating within the broader small

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business sector. This chapter focuses on the latter category, reviewing the
experience of growth within the context of the single small business operation.

The term “small business growth” as applied to the internal development of smaller
companies is often bandied about in a manner that suggests a good understanding
of what is meant by this phenomenon in a small firm. However, a general
examination of the literature on this subject indicates that there exists much
complexity associated with its application, which at times creates problems for the
development of associated theory and understanding. On a superficial level, the
term brings to mind increased trading activity, larger numbers of customers, a
bigger operation and taking on more employees. It denotes a picture of greater
productivity where gainfully employed people are busily engaged in delivering
useful and desirable products and services to the community and reaping the
rewards of their efforts. Closer investigation reveals that there are in fact many
factors incorporated in both the theoretical concept of small business growth on the
one hand and the practical realities related to a growing enterprise on the other
(Barber, Metcalfe & Porteous 1989).

The Chambers 20th Century Dictionary (Kirkpatrick 1985, p. 554) defines the verb
“to grow”, from which the noun “growth” is derived, as “…. to become enlarged by
a natural process: to advance towards maturity: to increase in size: to develop: to
become greater in any way: to extend: to pass from one state to another”. In
addition, the term “growth” is said to possess some additional connotations,
including “gradual increase”, “progress”, “development” and “increase in value”.
Although the nature of these definitions assume both tangible and intangible
qualities when used to describe a particular object or concept and when considered
individually incorporate very disparate features, it might be agreed that these
reflect the wide variety of experiences that comprise small business growth.

Growing firms have been associated with many activities, including developing new
products and/or markets, creating a marketing function, establishing new customer
and supplier relationships, exploiting niches in the market, engaging in innovation,
undertaking research and development, using external service providers or
investment capital, expanding capital assets, networking, working on strategic
planning and business development, building teams, experimenting with new
technology, restructuring the business, being entrepreneurial and even owner-
managers being able to take more leisure time. Growth can also be about
structural changes as in the opening of parallel business units or branches, by way
of backward or forward vertical integration and through mergers and acquisitions

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that offer broader business opportunities (Penrose 1963; Bosworth & Jacobs 1989;
Barber, Metcalfe & Porteous 1989; DUBS 1990b).

There is no firm agreement among stakeholders about what is meant by the term
“small business growth” (Gibb 2000). It is variously taken to refer to:

“historical growth, business with potential, businesses wishing to grow,

businesses facing step change, businesses in a growth pole, businesses in a
cluster (associated frequently with technology), businesses with ambition,
businesses actively seeking assistance and businesses trying to export”
(Gibb 2000, p. 6).

Gibb also proposes that the so-called “growth company” has been attributed some
incorrect characteristics. For example, growing firms are usually considered to be
active firms and not start-up firms. Steady-state firms engaged in routine business
activity are not usually regarded as dynamic or undergoing high degrees of change,
and organisational growth must be closely associated with high-tech activity.
Defining small business growth is also complicated by the fact that growth is found
to occur in an organic manner in that one or a number of factors could be said to
have grown, (e.g. greater revenue and more employees), and that these growth
factors may then contribute to creating other unforeseen internal changes such as
greater complexity and new (i.e. more) organisational systems (Bosworth & Jacobs
1989; Storey 1994; Davila 2005).

Being rather illusive, the term “small business growth” has and could be used to
pertain to any reasonable event or set of circumstances that reflects smaller trading
entities going though phases of change that are associated with any connotation
generally applied to the notion of growth. However, as has been pointed out, the
application of the term is likely to be determined by the way in which a particular
company’s activities and performance are measured. There are many ways in
which growth can be measured, such as profit, net worth of the business, turnover,
numbers of people employed, capital employed, market share, customer base,
product range, and productivity levels (DUBS 1990b). This relativity is reflected in
the fact that growth in a firm might be viewed as less significant or impressive
where for example, the overall market in which it competes is also growing rapidly
(Barber, Metcalfe & Porteous 1989; Gibb 2000). Similarly, a small operation that
previously did not employ staff and then hires one new person might be viewed as
having grown substantially in percentage terms (DUBS 1990a). In effect, it is
difficult to afford the term “small business growth” a precise definition due to the
multiplicity of factors comprising the growth process and the fact that small firms
evolve in many different ways and experience change in both tangible and

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intangible forms (Storey 1994). DUBS (1990, p. 8) propose that growth is simply
about “getting from one place at one point of time to a different place at some time
in the future”.

ƒ Importance of growth

Growth in small firms is considered important because it is associated with positive

outcomes such as a more vibrant economy, healthy businesses, employment
opportunities, prosperity for the community and individuals, social benefits like
reduced crime, better living conditions and even a contented populace. It is
assumed that small business growth is a good and desirable phenomenon and that
if small firms were more adept at tackling impediments to their growth these types
of objectives could be accomplished (Hull & Hjern 1987; Barber, Metcalfe &
Porteous 1989). It has been established that the failure rate among small,
particularly young, firms is very high (Brown, Hamilton & Medoff 1990; Storey
1994; Greiner 1998). The argument presented by growth-enthusiasts is that if
firms in this sector could survive those early days of high exposure and
vulnerability, and develop some of the resources and infrastructure characteristic of
larger firms that provide some protection from uncertainty and crises, their chances
of remaining viable entities would increase (Hull & Hjern 1987; Storey 1994;
Robbins & Barnwell 1994; Greiner 1998; Ennis 1999). The economic, social and
employment benefits accruing from the growth of firms are significant. The fact
that a high proportion of firms cease to trade while still relatively young and the
majority of small firms tend to remain small even though they may survive for
many years, means that only a relatively small number of firms move towards
becoming medium-sized (Hull & Hjern 1987; Barber, Metcalfe & Porteous 1989;
Greiner 1998). Hence, as rapidly growing firms constitute only a small portion of
the small firm population their role in supporting the economy and creating
employment opportunities is regarded as even more significant (Curran, Stanworth
& Watkins 1986; Barber, Metcalfe & Porteous 1989; Storey 1994).

As highlighted in Chapter 6, business growth is regarded as important because

growing firms are thought to have the potential to become major providers of new
job opportunities within the community (Hull & Hjern 1987; Storey 1994; Rainnie
1989; Atkinson & Storey 1994b). Small growing firms are also important for other
small and large organisations and businesses by supplying and purchasing within in
the trading chain, products and services needed and produced by these firms
(Scase & Goffee 1987; Meredith 1993; Robinson & Pearce 1994). In particular,
they have been found to generate sources of income and employment for

200
specialists such as accountants, management consultants and financial institutions
that offer professional expertise and specific products such as loans and various
forms of equity capital. Periods of business growth have been identified generally
as times when expanding companies will make greater use of and invest more in
external resources to support this transition (Storey 1994).

However, while the phenomenon of growth is heralded as a positive and a much

sought-after objective for the small business sector, the assumption that its
occurrence will lead automatically to an overall betterment of all factors related to
the company can sometimes be erroneous (Barber, Metcalfe & Porteous 1989;
Holliday 1995). Where growth implies a dramatic change of direction for the
business, such as the launch into a very different type of product or service where
there is highly technical specialisation associated with its delivery, or a major
geographic relocation for the operation, or the introduction of sophisticated,
leading-edge labour-saving technology, the implications for some aspects of the
company and its associated environment may be profoundly negative. As Hull and
Hjern (1987) point out, organisational growth does not always imply more jobs or
even constancy of jobs that are currently in place in the business. It is sometimes
necessary to lose jobs in order to develop the growing business. The nature of the
expansion may mean that new and different types of skills are required and
consequently, some employees will need to be replaced. Similarly, growth may
imply the abandonment of certain customers and suppliers, as well as certain
physical aspects of the operation such as plant, equipment and technology. This all
has an impact both on individuals who have some type of relationship or connection
with the firm as well as in the form of a ripple effect on the broader environment in
which the firm is operating (Barber, Metcalfe & Porteous 1989).

Moreover, an increase in business turnover may not necessarily result in enhanced

company profitability. The absorption of greater amounts of financial resources
needed for investment in support of a growth initiative can lead to various
organisational stresses including cash-flow deficits and compromising other areas of
the business that require funds. While some aspects of the company may be
perceived as “growing” and this “growth” is seen to be a positive occurrence, not all
areas of the firm will necessarily grow in unison or mutually support each other in
achieving the desired outcome. At times, growth can generate conflict, where one
area of the business demands that another is sacrificed in order to accomplish the
overall intended result.

Furthermore, organisational growth for the small operator can represent a high-risk
strategy, which if not managed with skill and appropriate judgment can result in

201
disaster (Holliday 1995). While the successful expansion of a business is likely to
be a desirable outcome, the process of growth from small to not-so-small is known
to be fraught with difficulties that can impede achievement of this objective, even
leading to the demise of the company in its entirety. With closer investigation it
becomes apparent that organisational growth for the small business is a
controversial issue and far from being a simple and straightforward strategy. As
such, rigorous and detailed analysis by owner-managers of the potential risks and
benefits prior to commencement of a growth strategy is found to be prudent and
may not necessarily reflect the growth proposition in a particularly positive light
(Barber, Metcalfe & Porteous 1989).

ƒ The growth process

The nature of growth signifies a moving, evolutionary process, implying that the
firm is in neither a static nor stationery state. Circumstances will determine
whether organisational growth is slow or fast, and whether it occurs in a dramatic
or subtle manner. The issue of definition aside, it is difficult to identify when a
company is entering or going through a growth phase. Establishing when and
where growth begins is problematic. For example, does activity by the owner-
manager to pursue more trading opportunities constitute the beginning of a growth
phase - what if this search for increased business does not then materialise? Does
this negate what might have previously described as a growth strategy? Could
growth be said to occur where the firm is taking on more employees but the
business performance indicators such as turnover, revenue and profit, are down at
that time? Does the transition into a smaller but more financially lucrative market
signify a growth strategy or a regressive strategy?

In effect, the advent of growth appears to be more easily identifiable in retrospect,

where organisational changes can be viewed as a general manifestation of patterns
of growth-type behaviour. This might include the signing of a new contract, the
purchase of a new piece of equipment or the arrival of new staff. Sometimes,
growth will be associated with an organisational crisis (Scott & Bruce 1987). The
company may experience greater levels of internal disorganisation, insufficient
availability of supplies, an increasingly unmanageable workload for a workforce that
seems to be in strife, customers experiencing unusual delays in their orders and
paperwork mounting uncontrollably in the office. Where business growth occurs
rapidly, organisational problems are likely to emerge at a faster rate and with
greater intensity (Penrose 1963; Flamholtz 1986).

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Growth theorists have suggested that business demise among growing firms is
invariably linked to the traumatic, or “revolutionary” occurrences that take place as
the growing company passes through various stages of organisational development.
At the time of this change those in charge fail to make the necessary changes that
are critical to the firm’s survival (Greiner 1972; Hull & Hjern 1987). Having arrived
at the evocatively named “growth wall”, the company effectively finds itself at a
watershed (Barber 1987; Kuratko & Hodgetts 1995; Kauffman 1997b). There are
various options for the company: to actively remain in or regress to a place of
safety and familiarity where the business feels under control and more manageable,
to continue in the state of crisis without tackling the emerging problems and hence
jeopardise the survival of the company through inaction or to overcome the hurdles
by making the necessary adaptive changes and introducing management
infrastructure that enables the firm to cope (Flamholtz 1986; Scott & Bruce 1987;
Barber, Metcalfe & Porteous 1989; Roberts 1999).

Greiner (1972) comments that the critical task for management in each period of
growth or turbulence, is to find a new set of organisational practices that will
become the basis for going forward and managing the next period of evolutionary
growth. In this way, it is apparent that owner-managers of growing companies are
likely to be under greater pressure than those in steady-state, because of this need
to monitor and where possible plan for and anticipate the changes both within their
business and in the external market environment so that appropriate realignment
and adjustments can be made at regular intervals (Flamholtz 1986; Barber 1987).

The growth process necessitates a conscious determination and commitment by the

firm’s decision-makers about the direction and manner in which the company will
proceed. Inevitably, in order to manage any transition most effectively it is
understood that there is a need to recognise the actual point at which adjustments
are required within the firm’s operational structure to ensure the business is
balanced and appropriately supported (Flamholtz 1986). This may not be obvious
to the owner-manager who is close to the business and will be working hard to
maintain business momentum, particularly where the firm appears to be doing well.
A surge in the number of customers, escalating turnover, new orders and a fully
utilised workforce are factors that are unlikely to signal that change is needed,
rather to the contrary. Occurrences of this type that frequently emerge during the
growth experience are more likely to suggest that the company has found the
correct formula for success and should be continuing along the same path (Greiner
1972; Roberts 1999).

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ƒ Theories of growth

Research has been undertaken in recent years to explore the nature and associated
difficulties of organisational growth, particularly among smaller firms (Penrose
1963; Bosworth & Jacobs 1989; Gibb & Davies 1992; McMahon 1998). Approached
from many different angles, this has generated a range of diverse theories and
models attempting to explain how growth occurs. Most prominent among the
different schools of thought to be found are the static equilibrium theories, the
stochastic models, the strategic management perspectives, organisational
development models and the growth-cycle stage models, although other
movements and variations exist, some of which overlap (Penrose 1963; Stanworth
& Curran 1986; Gibb & Davies 1992; McMahon 1998; Ennis 1999).

McMahon (1998) refers to static equilibrium theories derived from the field of
industrial economics that focus on the attainment of economies of scale within a
business and the minimisation of long-run unit costs. These models are criticised
for being insufficiently concerned with the dynamics of growth and over-
emphasising the large firm as the ultimate and ideal outcome of growth, there
being no perceived limit as to the size a business can become. Stochastic models
have been developed in the field of pure economics and conclude that because so
many factors affect growth there can be no one dominant theory. Strategic
management perspectives focus on the dimension of achieving growth, exploring
the way the owner-manager handles the business at the time of expansion, the
types of strategies and policies that are formulated and are then translated into
actions that support the growth strategy. Here theorists are concerned with the
role of the owner-manager and how this individual perceives the business. The
personal characteristics of the owner-manager are central, with his/her desires for
the firm and the perceptions surrounding the possible opportunities available or
threats the business might face, being the focal point (Gibb & Davies 1992).
McMahon (1998) suggests that the industrial economics and stochastic theories
have been useful but are limited by their emphasis on rationalistic and mechanistic
features, without regard for the social and behavioural dimension of business
development, while the strategic management perspective he suggests may be
flawed because of doubts relating to the actual existence of strategic activity in
smaller firms.

Organisational development in small firms has also been investigated (Gibb &
Davies 1992). Mount, Zinger and Forsyth (1993) focused on the infra-structural
changes that take place as small firms grow. Aspects such as the organisational
structure, increased functional complexity, additional management layers, changes

204
to work and production arrangements, methods of management and the skill
composition of the workforce are examined. Flamholtz (1986) and Roberts (1999)
have discussed growth in terms of companies making a transition from an
“entrepreneurial management” style to a “professional management” style,
effectively becoming a different type of organisation. While the small firm is
characterised by few formal systems and low levels of structure, delegation and
regimentation, operating spontaneously according to the demands of the trading
environment, larger firms acquire more elements of standardisation, process,
control and decentralisation in order to accommodate greater organisational
complexity (Flamholtz 1986; McMahon 1998; Davila 2005).

In addition, the idea of the small business being fundamentally a social entity has
been considered. Stanworth and Curran (1986) proposed that the essence of the
small business is contained in the meaning and actions of those who participate in
its activities, whether from within or from the outside. Events related to the firm
and its development is seen as socially generated, sustained and changed. Hence,
the occurrence of growth in the small firm will be a product of the goals and desires
for the company as developed and shaped by the members and the subsequent
actions that are taken by the parties concerned to achieve these. Penrose (1959,
p. 2) commented that “all the evidence we have indicates that the growth of a firm
is connected with attempts of a particular group of human beings to do
something;….’. Where this hypothesis is accepted and the critical role of each
owner-manager in making uniquely individual business-related decisions is
acknowledged, it is surmised that owing to the immense diversity in owner-
managers and their associated motivations, there can be no one single pattern of
growth (Penrose 1963; Stanworth & Curran 1986a).

o Examples of growth models

Despite the variety of business issues that emerge during the growth process firms
tend to experience some common problems at similar stages of their development
(Churchill & Lewis 1983; Greiner 1998). An early pioneer in research on small
business growth was Flamholtz (1986) who suggested four stages of organisational
development in small firms that he termed “new venture”, “expansion”,
“professionalisation” and “consolidation”. These stages are matched with the
estimated revenue and the corresponding focus for the firm’s activities, being the
market and product, the internal resources, the management systems and
organisation’s culture respectively (Gibb & Davies 1992).

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According to Flamholtz (1986), a firm categorised as being in an entrepreneurial
management mode is a centralised entity, small enough that its owner-manager
comprehends and supervises all its functional parts and is able to make appropriate
decisions for all aspects of the business. Here there is little need for formal
systems, procedures or structure because the business is small enough to be
monitored and controlled directly by the owner-manager. It may remain unclear as
to what systems the business needs at this time in order to manage the operation
most effectively. A company at the professional management stage is larger,
where one individual is unable to make all the necessary decisions and these are
consequently delegated to other staff and employees, usually holding mid-level
management positions. At this stage, the firm has built formal control systems, as
the owner-manager is no longer able to make the considerable number of decisions
that are now needed to operate the business. These systems are designed to
provide guidelines and parameters for the organisation’s members and ensure that
the desired outcomes in terms of quantity and quality are achieved (Kuratko &
Hodgetts 1995).

Growth or life cycle models as they are usually called present small business
expansion in terms of the company undergoing a transition through a series of
phases or stages (Penrose 1963; Gibb & Davies 1992; McMahon 1998). This
perspective has generated an extensive range of models with subtle variations and
different emphases. The concept of the growth model assumes a cyclical, biological
metaphor, where organisations are born, grow, decline and finally die (Penrose
1963; McMahon 1998). Scott and Bruce (1987) illustrate this developmental
process by drawing a comparison with the lifecycle of products that are viewed as
progressing through stages of growth and popularity and are ultimately
discontinued. With organisational growth, at each stage of the company’s
development the business will acquire new characteristics and features. Similarly,
the company finds itself requiring different types of management and attention, and
possessing different strengths and weaknesses. A variety of stage models have
emerged over time, illustrating the individual stages through which the firm is said
to pass; typically these are three or four, sometimes as many as ten (Stanworth &
Curran 1986a). In general terms, the dominant perspective has comprised the
highlighting of three principle areas of progress, the first being focus on the
individual owner-manager who has an idea for a product or service and sets up a
business to deliver this, the second incorporating a reduction in the direct
involvement and control of the owner-manager and the division of management
tasks among others, and the third consisting of the arrival of the company at some
form of maturity and stability, where the internal infrastructure assumes a more
rationalised and bureaucratic form and increasingly resembles larger organisations.

206
In this paradigm, the final stage is usually characterised by features such as the
introduction of a Board of Directors, the activities of the firm assuming a strategic
dimension with greater focus on a range of management, production and marketing
techniques, as well as a recognition of the need to build systematic working
relations with other institutions in the broader community (Gibb & Davies 1992;
Robbins & Barnwell 1994; Kuratko & Hodgetts 1995).

The Enterprise Life-Cycle Model developed by Hanks et al. (1993) illustrates in

more detail possible components of organisational growth in small firms (McMahon
1998). This model comprises four main stages of an organisation’s life: start-up,
expansion, maturity and diversification. During the start-up phase, for example,
the firm is young, small, has a simple, centralised organisational structure with
about two levels, operates informally with low functional specialisation and is
primarily focused on product development. Annual mean growth sales revenue and
employment are estimated at 91 percent and 29 percent respectively. At the
expansion stage, the company is older, larger, has a more complex organisational
structure with at least three levels. It has begun to adopt some functional
specialisation and the trading focus is on product commercialisation. Annual mean
sales revenue and employment growth are at 297 percent and 94 percent
respectively. At maturity, the firm is larger but not necessarily older, has a
complex organisational structure with about four levels, is increasingly formalised in
its management practices and functional specialisation. Annual mean sales revenue
and employment growth are at 99 percent and 28 percent respectively.
Acknowledging that not all firms may proceed in a methodical, linear fashion
through the stages, the model includes two other intervening stages. Between
start-up and expansion, there are older, larger firms that remain structured like
start-ups, but there is no growth in employment and their annual mean sales
revenue growth is estimated at a low 34 percent. This type of company has
disengaged from the growth process after establishing a viable operation at a
relatively small size. The cap on its growth may be the result of a conscious
decision by the owner-manager to remain small or it may reflect the limited
capacity of the small niche market in which it operates. The second intervening
stage occurs between expansion and maturity. Firms at this stage are slightly
larger than those in the expansion stage and generally older. They are typically
less complex than expansion stage firms. The annual mean sales growth revenue
and employment growth is estimated to be 44 percent and 4 percent respectively.
As such, the company has disengaged from the growth process after successfully
expanding to a modest size after start-up. Sufficiently large and financially healthy
to survive, the company is also well established in its particular product market
(McMahon 1998).

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Churchill and Lewis (1983) attempted to clarify the stages of organisational growth
among smaller firms in terms of the range of common hurdles that are encountered
at similar stages of development. They identify five stages, including “existence”,
“survival”, “success”, “take-off” and “maturity”. In the initial stage, the challenge
for a small business is to find customers and deliver products. The firm is
supported by a simple organisational structure, has minimal or no formal systems
and is operated almost exclusively by the owner-manager. The goal for the
company is to survive. The second stage finds the company with sufficient
numbers of customer that can be satisfied by the products they receive. The
organisational structure remains simple, sometimes with a few employees who take
instructions directly from the owner-manager. The internal systems remain few in
number. However, the firm is likely to begin to experience difficulties with
managing its cash flow and the focus for the owner-manager is how the financial
aspects can be most effectively managed. It is possible at this stage that the
company may grow in size and profitability. On arriving at the “success” phase, the
decision to remain small or to expand presents itself. The option to grow implies
that the firm will need functional managers to undertake certain tasks and
appointments are likely to be made in the areas of finance, production and
marketing. Planning begins to occur for the operational budgets, resources are
sought and cash flow is likely to be good. Internal systems are implemented to
support the growth activity and the owner-manager begins to move away from the
business to focus on the growth activity because there are now other individuals
available to operate the business. The focus for the firm is on the maintenance of
the basic business and developing the management team to run the company
(Churchill & Lewis 1983).

At “take-off”, the owner-manager is preoccupied with funding the growth initiative,

keeping control of cash flow and coping with higher levels of debt. The company
has become more decentralised, tasks are increasingly delegated and it may be
partially structured into functional divisions. The organisational systems become
greater in number and are gradually refined. Operational and strategic planning is
carried out, possibly involving some of the management team. While the owner-
manager remains the dominant figure in the company, the role is increasingly
separate and at this point the option to abandon the firm and sell out may be
considered. The final stage of “maturity” is concerned with focusing on
consolidation of the company, controlling the financial gains achieved through
business growth while attempting to retain the advantages of the smaller
organisation in the form of flexibility, responsiveness and creativity. The company
will be decentralised in structure, with sufficient staff and resources to carry out

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detailed operational and strategic planning, and possessing extensive, well-
developed systems. The owner-manager and the business are likely to have
completed their journey towards financial and operational separation. It is
acknowledged that demise or ossification can occur at any stage of the process,
particularly where the larger business ceases its innovatory activity or loses the
capacity to make necessary change (Churchill & Lewis 1983).

While the life cycle models offer an appealing explanation of what happens during
growth or expansion there are those who have still to be convinced that small firms
are actually similar to organic entities in that they are born, grow and eventually
die. The seminal work by Penrose (1963) The theory of the growth of the firm,
rejected attempts to understand firm growth using biological analogies. Penrose
(1963) suggested that rather than stages of growth, business expansion was in fact
chaotic and reactive in nature and that developmental changes are not orderly or
sequential, rather they comprise surges of activity that result in a changed state of
affairs. Similarly, Miller and Friesen (1984) were of the view that although life
cycles may be internally coherent they are very different from one another and not
connected in any pre-determined sequence. Rather than being linear, they propose
that firms are more likely to move through definable patterns of behaviour relating
to their strategy, structure or environment. These may emerge for any number of
reasons and could give rise to a small number of common configurations including
recurring strategy scenarios, organisational configurations or developmental and/or
transitional sequences. This interpretation suggests the value of exploring patterns
of growth within the context of functional activity, where the consistent common
denominators among firms will better enable the identification of trends and themes
in small firm growth behaviour.

Storey (1994) concurred with the doubts about the validity of growth models. He
commented that while it seems possible to identify growth characteristics and
detect certain patterns, there is no one uniform path along which a business travels
when it grows that can be clearly tracked and as such, growth is clearly a random
process. Many different aspects of the business infrastructure will alter in the
course of growth, but these may not take place in a systematic and predictable
fashion as implied by the models. Storey’s review of the empirical studies in this
field led him to conclude that some patterns in the way small companies grow can
be detected but that these do not always necessarily occur. While the growth
model provides a reasonably consistent picture of the likely trends that might
eventuate during the growth process, a prescribed list of events and features such
as these possess, could be misleading. The variables associated with growth can
be both unique to each company, with any combination of factors playing a

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correspondingly unique part in determining the nature of its evolution, as well as
common to companies tracking a similar path. While the concerns about the
degree to which the models accurately mirror the progression of growth activity
would appear reasonable, it has been acknowledged that they are not without merit
through their ability to provide a useful conceptualisation of some of the typical
trends (McMahon 1998).

ƒ Factors influencing small business growth

Researchers have found that the small business sector faces a range of both
external and internal factors that influence the capacity and desire of its members
to grow into larger commercial concerns (Hull & Hjern 1987; Barber, Metcalfe &
Porteous 1989; DUBS 1990b). Storey (1994) proposed 35 factors that potentially
play a part in the decision by an owner-manager of a small firm to undertake a
growth strategy and the likelihood of a successful business outcome. Categorised
into three areas these include the entrepreneur/resources, the firm and the
strategy. In the entrepreneur/resources category, variables include: motivation,
unemployment, education, and management experience, number of founders, prior
self-employment, family history, social marginality, functional skills, training, age,
prior business failure, prior sector experience and gender. Factors relating to the
firm include its age, sector, legal form, location, size and ownership. Relating to
strategy, variables include: workforce training, management training, external
equity, technological sophistication, market positioning, market adjustments,
planning, new products, management recruitment, State support, customer
concentration, competition, information and advice, and exporting.

Churchill and Lewis (1983) identified eight similar variables that have been found to
impact on small firm growth including financial, personnel, systems and business
resources, the owner’s personal goals and abilities, as well as willingness to
delegate and the possession of strategic skills. Barber, Metcalfe and Porteous
(1989, p. 13) suggested that growth in small firms:

“….lies in the interaction between the inherent motivation and capabilities of

the firms themselves and the external environment in which they must
endeavour to survive and prosper”.

Studies by Barber, Metcalfe and Porteous (1989) indicated that there would be a
natural economic size in which a business can be competitive and hence determine
its potential for growth. This is due to the fact a company trades within a
specialised niche market or sells products to a geographically limited area (Penrose

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1963). Market structures and the opportunities that these provide will contribute to
the nature and extent of growth. In some instances small firms may not have the
opportunity to grow even if the owner-manager is keen to broaden the company’s
trading base. Growth may be limited by having too few available customers and
being focused on a small or narrow market niche that cannot generate the
necessary returns (Barber, Metcalfe & Porteous 1989; Hendry, Arthur & Jones
1995; DUBS 1990b; Holliday 1995). A key characteristic of small firms is their high
dependence upon either a single customer or a small number of customers. Such
heavy dependence presents risk, for failures in these relationships can decimate a
significant portion of the business overnight (DUBS 1990b; Holliday 1995).

Difficulties associated with developing the technology and infrastructure in line with
market requirements are needed to support a larger or more diversified business
portfolio and may impede growth activity (DUBS 1990b). Although small firms are
acknowledged for the role they play in the early stages of developing new
technology or products, the economies of scale needed for production, cost of initial
research and development, and the logistical demands of sourcing and securing
international markets may be prohibitive and effectively transfer the competitive
advantage over to larger firms. The ability to build the necessary managerial
infrastructure to support a more diverse and large firm is considered critical to a
successful growth strategy (Flamholtz 1986). Sometimes growth opportunities are
secured through mergers or collaborative arrangements between firms, effectively
joining forces with the competition and by so doing creating expanded market
possibilities with access to larger numbers of potential customers (Barber, Metcalfe
& Porteous 1989). A saturated market, low-level requirements for a particular
product or service and logistical constraints relating to the physical environment
can also play a part in determining growth openings and sustainability. The
smallness of the company may restrict its entry into markets through its inability to
achieve the economies of scale of larger competitors. Relationships with customers
have to be built sometimes in new and unproven markets (Thomson & Strickland
1998).

The geographic location of the business may be a factor that influences

performance and its capacity to grow. Small firms generally operate within close
proximity to their target customers and hence the site of the business will be a
critical factor in its ability to generate additional business. Small firms may also be
competing in different ways with other small and not-so-small businesses in the
locality for customers, employees and suppliers. Moreover, contracts with key
suppliers may require renegotiation and new suppliers may need to be found.
Difficulties may be encountered acquiring sufficient raw materials of the correct

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type. Other factors, such as the degree of segmentation in the market, the
presence of anti-competitive practices by big business, the market strength of well-
established larger firms, the existence of superior or lower-priced products and the
extent to which there is potential for creating related niches, as well as the
influence of external political, economic, social and legal conditions, can all
determine the capacity for business growth or lack of it (Scase & Goffee 1980;
Bosworth & Jacobs 1989; DUBS 1990b). Owner-managers express concerns about
their ability to generate sufficient turnover in order to provide full employment and
pay the salaries of their workers. Difficulties with finding, motivating and retaining
quality employees, as well as with workforce flexibility, have also been found to
constrain efforts to achieve business growth (Scase & Goffee 1980; Bosworth &
Jacobs 1989; DUBS 1990b; Mazzarol 2003). Concerns about the prospect of
dealing with union intervention should the firm acquire greater numbers of
employees and the restrictions and complications associated with employment
legislation may also be deterrents in the perceived attractiveness of business
growth (Scase & Goffee 1987; Bosworth & Jacob 1989; Soon & Hughes 2003).

ƒ Role of the owner-manager in the growth process

One factor that has been identified as being a key determinant in the growth of
small firms is the collective goals, interests and concerns of the company’s owner-
manager (Penrose 1963; Curran, Stanworth & Watkins 1986; Bosworth & Jacobs
1989; Barber, Metcalfe & Porteous 1989; DUBS 1990b; Hendry, Arthur & Jones
1995). Small business growth may be triggered by either internal or external
factors, or a combination of these. In some instances growth is propelled by the
owner-manager who wishes to grow the company in a particular way and who will
actively seek business and introduce internal changes into the firm that will
facilitate the achievement of this growth (Barber, Metcalfe & Porteous 1989). In
other circumstances growth can be market-driven with new customers turning up
on the door, repeat business occurring and the small business operator rushing
reactively to keep up with demand. Whatever the nature of the opportunities in the
marketplace, the motivations of the owner-manager are critical in the decision to
grow or not (Penrose 1959; Curran, Stanworth & Watkins 1986; Barber, Metcalfe &
Porteous 1989; Storey 1994; DUBS 1990b). Even when an exciting business
opportunity presents itself, the owner-manager will ultimately have to determine
the nature of the company’s response to this. The growth-hungry entrepreneur
may possess any number of reasons for wanting to build the business including the
promise of greater monetary rewards, perceptions of status, power and prestige,
the challenge of competing in larger and more diverse markets, even the desire to
build a personal empire (Curran, Stanworth & Watkins 1986; Bosworth & Jacobs

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1989; Barber, Metcalfe & Porteous 1989; DUBS 1990b). However, what has
emerged as a striking feature among smaller firms is that in many instances small
business operators do not want their firm to grow or change (Hull & Hjern 1987;
Storey 1994). Research into owner-manager motivation has frequently indicated
that growth is simply not an objective or a part of their plan for the company. Not
all owner-managers view the progression of the life of the firm as one of continuous
or even phased expansion and development (Gibb & Davies 1992; McMahon 1998;
Ennis 1999). As Curran, Stanworth and Watkins (1986) commented substantial
growth within the small business sector has been found to be a rather exceptional
occurrence.

o Relationship between growth and owner-managers

It is evident that the decision to grow a business is inextricably linked to the

personal objectives and interests of the owner which may not be easily identified or
separated, and may even change over time. While the company remains small, the
owner-manager and the firm’s goals are largely the same (Bosworth & Jacobs
1989; Marlow & Patton 1993; DUBS 1990b; Gibb & Davies 1992; Culkin & Smith
2000). Various studies have been undertaken in an effort to understand the
motivations of small business owners, which are found to have a direct bearing on
the decision to grow a business (Barber, Metcalfe & Porteous 1989). This has been
associated with the development of “personality-dominated” theories about the
nature of entrepreneurs and small firm operators, and the classifying of
entrepreneurial behaviour into typologies reflecting particular characteristics and/or
values (Penrose 1963; Curran & Stanworth 1986a; Gibb & Davies 1992; Kuratko &
Hodgetts 1995). As such, owner-managers have been variously portrayed as great
risk-takers, as imaginative and creative innovators, as bearers of uncertainty and
as dynamic individuals with considerable energy (Curran & Stanworth 1986a;
Kuratko & Hodgetts 1995). More generic categorisation has produced labels such
as “the all-rounder”, “the pioneer”, “the organiser” and “the routiner”, inevitably
leading to stereotypes of this group of business people through generalised
assumptions about their personalities and constitutions. Extensive studies have
reviewed owner-managers’ need for achievement, their perception of control, the
propensity for risk-taking, the desire for independence, and the attraction of
innovation. While insights have been gained from this type of psychological
investigation, it is evident that the factors playing a part in determining whether a
growth strategy is initiated or not, are highly diverse and resist easy categorisation.
Small firms and the owner-managers who establish and build them have been
found to be distinctly heterogeneous in their nature and make-up (Curran &

213
Stanworth 1986a; Stanworth & Gray 1991; Gibb & Davies 1992; Kuratko &
Hodgetts 1995; Moran 1998; Culkin & Smith 2000).

A range of motivators are found to drive small business owner-managers to build

their companies including the desire to make more money, to explore new
opportunities, to fulfill personal ambitions, to establish independence, to keep out
the competition as well as achieve economies of scale (Bosworth & Jacobs 1989;
DUBS 1990b). However, it is also recognised that growth is a challenging
proposition for most small firms and that the considerable number of variables
owner-managers face that impact on the ability of a company to grow are highly
diverse and complex (Churchill & Lewis 1983; DUBS 1990a). For many small firms
that opt to maintain their existing size this may be on account of the fact that
owner-managers lack entrepreneurial drive and are content to remain small and
focused on what they know best and with that which they are most comfortable
(Penrose 1963; Scase & Goffee 1987; Bosworth & Jacobs 1989; Storey 1994; Gibb
2000). In this instance, the focus for the company is on the maintenance of the
status quo, with only minor, incremental changes as these are deemed necessary
or expedient. Many small firms struggle to survive while they are small, the added
complexity and work associated with growth appearing less than desirable and in
some cases even unrealistic (McLarty 1998; Gibb & Davies 1992).

Owner-managers may also prefer to rest on their laurels and enjoy the benefits
that the firm has so far accrued for them (Penrose 1963). Some may prefer the
informality and relative freedoms of the small business environment, preferring to
avoid the more structured and formal approach of larger entities (Bosworth &
Jacobs 1989; Gibb & Davies 1992; Kickul 1996). Moreover, for many small
business owners there are considerable personal costs in developing a growing
business (Bosworth & Jacobs 1989). Business turnover may be unreliable and
generate uncertain income for the owner-manager and his/her family. Sacrifices
often have to be made by the family members, with the life of the business and life
at home being intertwined and family members neglected because of the heavy
workload and the long, strenuous hours that the business demands (Bosworth &
Jacobs 1989; Kuratko & Hodgetts 1995). Family businesses, where more than one
member is involved, present their own types of difficulties; particularly where there
are no children willing or able to inherit the business or where feuds occur between
the various family members. Some may fear the prospect of dealing with more
advanced technology lacking the skills to assess the business requirements in this
area or feel uncomfortable taking on skilled staff who know more about the industry
or business management in general. Moreover, owner-managers may hold the
perception that growth, particularly where this is fast, leads to a higher risk of

214
failure and this is a chance that they are not prepared to take (Penrose 1963;
Barber, Metcalfe & Porteous 1989; Bosworth & Jacobs 1989; McLarty 1998; Ennis
1999).

There are many reasons why the relationship between owners and their small
companies will be closer than that between shareholders and a large firm. The
dedication and commitment associated with the successful management of a small
enterprise consumes a large proportion of the owner’s time, interest, energy and
personal resources (Gibb & Davies 1992). There can exist a passionate, possessive
attachment to the company that may result in reluctance to take risks on the firm’s
behalf, sometimes at great personal cost, such as acquiring crippling levels of debt
in order to retain ownership and survive. Key is the fact that the bond between
owner-managers and their companies is greatly reinforced by the role these
individuals play in the initial creation of the business and who since that time are
fully autonomous in determining how every aspect will operate, the markets in
which it will compete and the nature of its progress and evolution. Reluctance to
release a position of authority and control over an enterprise into which so much
personal time and energy have been channelled may not have great appeal
(Curran, Stanworth & Watkins 1986; Rainne 1986; Scase & Goffee 1987; Bosworth
& Jacobs 1989; Barber, Metcalfe & Porteous 1989).

In effect, many small business owners seek only to obtain a basic level of income
from their business activities rather than aiming to maximise sales and profits in
every available direction. They prefer to remain modest “trundlers”, not aspiring to
great ambitions or dreaming about impressive wealth and achievement (Curran &
Stanworth 1986a; Scase & Goffee 1987; Bosworth & Jacobs 1989; McLarty 1998;
Storey 1994, p. 119; Ennis 1999). It is acknowledged that growing a business
often represents an enormous personal endeavour, involving considerable mental
and physical exertion and the need to overcome a wide array of obstacles and
setbacks. Flamholtz (1986, p. 17) likened small business management to:

“….navigating unchartered waters in a leaky row boat with an inexperienced

crew while surrounded by a school of sharks”.

However, it has been suggested that to consciously adopt a no-growth strategy

may not be an entirely easy decision for some owner-managers. Western culture
possesses a strong growth ideology within the commercial business environment
and the success of an organisation is often judged on its ability to grow. The size of
a company is invariably positively correlated with a perception of fitness for the
future (Curran & Stanworth 1986a; Robbins & Barnwell 1994). Anthony, Perrewe

215
and Kacmar (1996) posit that most companies wish to grow, citing a study of 358
large corporations that demonstrated a 54.3 percent commitment to pursuing a
growth strategy. However, a study on attitudes towards business growth in small
firms undertaken in the United Kingdom found that owner-managers tended to
support the abstract notion of growth but in a way that suggested lip service was
being paid to an idealised concept. Little evidence was found of a strong
commitment to this objective and the types of reasons given for not wishing to
pursue a growth strategy were thought to be trivial and unlikely. What emerges
from the research is that the motivations, interests and concerns of the owner-
manager have a major influence on and are inextricably linked to the firm’s
ultimate destiny. Any number of factors may determine whether the company
embarks on the path to becoming a larger business or a medium-sized company
and that the decision to do so can occur at any time and also be reversed at any
time. However, without the desire on the part of the owner-manager to proceed in
this direction the company does not grow (Scase & Goffee 1987; Barber, Metcalfe &
Porteous 1989; Bosworth & Jacobs 1989; Storey 1994).

o Owner-manager capability as a factor in growth

A second factor correlating positively with successful business growth relates to the
perceived and actual capabilities of owner-managers (Bosworth & Jacobs 1989;
Barber, Metcalfe & Porteous 1989; Stanworth & Gray 1991; Gibb & Davies 1992;
Karpin 1995). The ability to expand and develop a small enterprise into a larger
business requires a hugely diverse body of knowledge and skills that is now
reasonably well defined. Owing to the specialist nature and considerable breadth of
activities in which owner-managers must engage in order to build a company, a
wide range of complementary competencies must be possessed or accessed in
some form to carry out the associated tasks (DUBS 1990b). Storey (1994)
suggests that owner-managers who have high levels of confidence in their ability to
tackle the challenges and tasks associated with managing a growing company may
be more successful in their efforts. Nevertheless, many owner-managers fail to
train themselves in the various business management disciplines. Owner-managers
are often criticised for not taking advantage of the available facilities and services
to assist in the growth process or for failing to seek out help from others through
consultants, service providers, local networks or personal connections possessing
the necessary expertise (Scase & Goffee 1987; Hull & Hjern 1987; Bosworth &
Jacobs 1989; Stanworth & Gray 1991; Gibb 2000).

Despite the fact an owner-manager may be faced with a chronic shortage of

knowledgeable resources, there can be a resistance to or hesitation in seeking

216
outside public assistance and even a tendency to be hostile or suspicious about
what is seen as interference in company affairs. Often small business owners are
viewed as insular because of their preference to rely on their own experience and
abilities to get them through (Hull & Hjern 1987; Gibb & Davies 1992). Studies
examining the skill levels of small firm owner-managers have concluded that they
often possess only a low level of management ability as well as insufficient business
experience. In some cases, owner-managers may wish to grow the business but
are deterred or doomed to failure because they lack the knowledge and capacity to
achieve this goal (Hull & Hjern 1987; Bosworth & Jacobs 1989; Stanworth & Curran
1986a). There is a general consensus that few owner-managers begin their
entrepreneurial careers with adequate levels of knowledge and competence in the
necessary areas and in the same way that operators of small steady-state firms are
often criticised for lacking the essential basic business skills, so the skill sets
needed for effective growth are also seen as in short supply (Barber, Metcalfe &
Porteous 1989; Bosworth & Jacobs 1989; Fuller & Forsyth 1994; Holmes, Butler &
Lennon 1995a).

o Building skills in small business growth

Numerous studies have been conducted on the subject of small business education
and training. The Wiltshire Report (1971), the first Australian inquiry into small
firms proposed that “means be found to communicate with and stimulate small
business managers to seek knowledge and training”. It was felt necessary to
address the reluctance of owner-managers to equip themselves for the tasks
associated with small business management and growth opportunities. The report
commented that “there [were] many problems to be overcome in gaining effective
participation by a significant proportion of small business executives in such
training activities” (quoted by Holmes, Butler & Lennon 1995a, p. 286). Another
study, the Bedall Report (1990) came to similar conclusions commenting that “a
major factor inhibiting the success of a small business is the lack of managerial
skills of the owner/manager” (quoted by Holmes, Butler & Lennon 1995a, p. 286).
Bosworth and Jacobs (1989, p. 32) noted that “the capacity of the top controller….
or management team…. forms the ultimate limit to the rate of sustainable growth”.
It is a logical extension that small business growth supporters should support the
proposition that successful business growth and effective organisational
development are more likely to occur when training to acquire the associated
managerial skills is undertaken (Hull & Hjern 1987; Bosworth & Jacobs 1989;
Commonwealth of Australia 1990; DUBS 1990a).

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The limitations faced by owner-managers in terms of their personal capabilities and
business resources are widely recommended as being addressed through greater
use of networks and external, specialist service providers, especially where
programmes and interventions are designed and adapted to meet the specific
needs of individual operators (Hull & Hjern 1987; Barber, Metcalfe & Porteous
1989; Holmes, Butler & Lennon 1995b; Gibb 2000). While many experts view the
barriers to organisational growth as considerable, Hull and Hjern (1987) suggested
that many of the associated obstacles faced by small firm operators are in theory
easily resolvable. Outcomes will be determined by the way in which the owner-
manager is skilled and able to manage these problems and the quality of judgments
that are made about how they should be tackled. Success in managing small
business growth is said to stem from good management practice, planning,
technical capability, managerial experience and leadership (DUBS 1990a). Scase
and Goffee (1987) recommended that small business operators should actively
develop their range of general business skills whether they be in strategic areas
such as business planning, viability analysis, commercial bargaining and
negotiations, raising finance and financial management, the development of
management and information systems as well as market research, or in tactical,
operational areas for application in the operational areas of production and delivery
of goods and/or services. Preparation for the entrepreneurial lifestyle from a
psychological perspective is also considered to be beneficial, in particular where this
encompasses building awareness of the pressures on owner-managers to undergo
significant personal behaviourial changes as well as alteration in the focus of their
attention in terms of management priorities (Scase & Goffee 1987; DUBS 1990a;
Wyer & Mason 1998).

Owner-manager understanding of the nature of organisational growth and

management of change are regarded as important, in particular the transition from
one stage to another and the various “thresholds” that are passed through on this
journey (Barber, Metcalfe & Porteous 1989; Atkinson & Meager 1994). The ability
to adjust and adapt effectively when change occurs particularly when this is rapid,
(whether relating to customers, regulation, suppliers, technology or any other
significant aspect of the business infrastructure), has been identified as a critical
competence for the smaller operator. Development of strategies for coping with
balancing a multitude of conflicting variables and handling the ambiguity arising out
of greater organisational complexity is recommended (Ritchie 1993; Kuratko &
Hogketts 1995; Davila 2005). With the absorption of greater numbers of personnel
into expanding companies, the development of knowledge and skills in the area of
organisational behaviour, psychology and human resource management are also
regarded as relevant. Although a shortfall in necessary skills may be less

218
problematic where owner-managers have prior managerial experience, such as that
acquired in a former job, there are many that must cope without this advantage
and are encouraged to actively seek ways to build at least a minimum range of
skills (Bosworth & Jacobs 1989; Storey 1994).

While studies have indicated that rapidly growing firms are more likely to take
advantage of learning opportunities than those in steady-state, various reasons
emerge as potential inhibitors for smaller firms (Barber, Metcalf & Porteous 1989;
Bosworth & Jacobs 1989; Holmes, Butler & Lennon 1995a). For example, training
and development activities are often considered by owner-managers to be of little
benefit and they prefer to take advice more informally from individuals whose
opinions and ideas are respected. Owner-managers have expressed concerns
about taking time away from the running of the business and the prohibitive cost of
fees for relevant courses (Bosworth & Jacobs 1989; Holmes, Butler & Lennon
1995). Some are dubious about the usefulness of mainstream courses available in
training institutions, viewing them as too generalised and theoretical, as well as
failing to accommodate the specific needs of their own business. Moreover, the
benefits of embarking on training and development programmes are not always
apparent to the smaller operator, especially where there has been only limited or
poor personal experience of a structured learning environment. Some may not be
aware of the availability of training programmes or where to find the information
about these should they be interested in pursuing education in business
management (Hull & Hjern 1987; Boswoth & Jacobs 1989; Commonwealth of
Australia 1990; Holmes, Butler & Lennon 1995a).

However, the tendency to resist skill development is associated with unnecessary

business risk, poor management and operational practices, undermining company
performance and even contributing to premature demise (Bosworth & Jacobs
1989). Storey (1994) suggested that there is a better chance of success and
survival where the business is managed, if not owned, by a group of people rather
than just by an individual due to the breadth of business knowledge and skills
needed for effective growth management. In order to address some of these areas
of concern courses have been specifically designed for the smaller operator, such as
the Durham University Small Business Growth Programme that aims to provide
small firms with an opportunity to explore strategic issues, to evaluate the strength
of their position as it relates to growth and to develop critical strategic
competencies (DUBS 1990b). The literature strongly reinforces the view that
owner-managers can reap considerable benefits from both formal and informal
developmental opportunities as well as from interaction with the outside world and
other individuals engaged in some related aspect of their business (Hull & Hjern

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1987; Bosworth & Jacobs 1989; Barber, Metcalf & Porteous 1989; Holmes, Butler &
Lennon 1995a).

ƒ Activities associated with a growth strategy

When the objective of small business growth is typically concerned with more
trading activity and higher levels of turnover, resulting in greater revenue and
ideally improved profit margins, owner-managers will focus on identifying and
securing outlets for the proposed increase in production levels. Growth of this type
can come in a number of forms, including selling more of the same product to
existing customers or to a larger number of customers, or diversifying the firm’s
product range and selling additional goods or services to existing customers or
finding new customers for the new portfolio of products (Flamholtz 1986; Barber,
Metcalfe & Porteous 1989; DUBS 1990b; Napuk 1996).

To achieve growth in these areas owner-managers require extensive knowledge

and information about the industry and sector in which they operating, the share of
the market in which they are currently and/or are proposing to trade, and the
status of its technology (Barber, Metcalfe & Porteous 1989; Bosworth & Jacobs
1989; Storey 1994; Kuratko & Hodgetts 1995). There is a need to make informed
assessments of the commercial environment in relation to competitors and the
nature of their competitive success (Flamholtz 1986; Kuratko & Hodgetts 1995).
This includes assessing customer requirements, identifying the geographic coverage
and distribution channels, forecasting sales and identifying marketing and pricing
strategies (Flamholtz 1986; Barber, Metcalfe & Porteous 1989; Kuratko & Hodgetts
1995; Napuk 1996). It is important that there is an awareness of the customer
base, the implications of entering a certain niche in the market and thereafter
targeting those that appear most favourable. Market positioning plays an important
role in facilitating business growth and may incorporate complex and varied
dimensions (Flamholtz 1986; Storey 1994; Kuratko & Hodgetts 1995; Napuk 1996).

Clarity about product features and range must be determined, the necessary
technology to deliver at the required levels of quantity and quality, and the costs
associated with delivery (Kuratko & Hodgetts 1995; Napuk 1996). Moreover, the
company requires adequate internal infrastructure and resource bases in the form
of finance, people and plant/equipment in order to pursue expanded business
opportunities (Flamholtz 1986; Curran & Stanworth 1986a; Barber, Metcalfe &
Porteous 1989). DUBS (1990a) have developed a five-point model to assess
organisational capability for embarking upon a growth strategy focusing on the

220
firm’s resource base, experience base, control base, ideas base and leadership
base. Against these criteria, a company can rate its level of readiness to undertake
new or more business activities.

o Financial issues associated with growth

In the financial domain, the growth company invariably encounters shifts in its
capital structure in order to position itself to accommodate greater business activity
(Hull & Hjern 1987; Barber, Metcalfe & Porteous 1989; Storey 1994). While the
firm must continue to deal with the on-going financial management requirements
that are central to all small firm activity; accounts, taxation, cash-flow, financial
reporting, debtors, creditors and so forth, the growing business environment
presents an additional set of financial challenges. The need to raise financial
resources for specific capital investments implies focus on sourcing suitable
investors and developing business plans to convince interested parties to invest
funds at a price and under conditions on which the borrower and lender can both
agree (Bosworth & Jacobs 1989; Barber, Metcalfe & Porteous 1989; Kuratko &
Hodgetts 1995). Consideration will need to be given to the cost of marketing and
product development, the organisational infrastructure such as plant, equipment,
facilities and personnel needed to support the growth activity, as well as the
availability and expense of overdraft facilities. Attention must be given to the
required adjustments in gearing ratios and liquidity flows, as the ability to manage
these competently are critical for the company’s on-going viability. The effective
management of increasingly complex budgets also becomes more critical
(Flamholtz 1986; Storey 1994; Kuratko & Hodgetts 1995).

Studies have indicated that rapid growth of small firms occurs more often in limited
companies than in sole proprietorships or partnerships (Storey 1994). This has
been explained by the fact that corporate status is governed by limited liability
implying reduced levels of investment risk. Consequently, these types of firms are
viewed as more credible and reliable by investors (Storey 1994). The difficulty in
acquiring financial resources is widely documented in the literature. Success is said
to increase with an understanding of the structure of financial institutions and
venture capitalists’ investment approach and being able to work with this
(Stanworth & Gray 1991; Storey 1994; Holliday 1995). While there are different
ways for owner-managers to finance business growth, a key decision will be
accepting outsider investment in return for part ownership of the business. Some
owner-managers are opposed to selling their equity and sharing ownership either
with financial institutions or with other individuals, preferring to rely on short-term
debt financing arrangements. Reluctance to lose partial possession or control of

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the business may constrain growth though a lack of necessary capital resources
(Hull & Hjern 1987; Bosworth & Jacobs 1989; Barber, Metcalfe & Porteous 1989;
Stanworth & Gray 1991; Gibb 2000).

o Building organisational and operational infrastructure

The advent of increased trading implies higher levels of production activity and in
turn, greater internal organisational activity. Depending on the nature, extent and
pace of the growth, the company’s internal engine can become more complex and
demand more organisational and operational infrastructure (Churchill & Lewis 1983;
Flamholtz 1986; Bosworth & Jacobs 1989; Davila 2005). Where the potential for
growth appears promising, owner-managers come under pressure to build the
company’s internal capability to support the additional trading activity and deliver
on product requirements through the implementation of systems for planning,
organising, developing and controlling the many aspects of the business and its
operation (Bosworth & Jacobs 1989; DUBS 1990b; Davila 2005). A consequence of
effective growth is an increase in more standardised and formal management
systems and methods that can support a larger, more diverse organisation (Barber,
Metcalfe & Porteous 1989; Bosworth & Jacobs 1989; Kuratko & Hodgetts 1995).

Expanding a business may involve the acquisition and introduction of new plant,
equipment and technology, as well as the design of new systems of production and
work structures (Flamholtz 1986; Hull & Hjern 1987; Barber, Metcalfe & Porteous
1989). Diversification may require restructured operational and management
systems that enable the different aspects of the business to run smoothly and be
controlled (Flamholtz 1986; Bosworth & Jacobs 1989; Barber, Metcalfe & Porteous
1989). The company’s distribution and after-sale service processes may need to be
reviewed and possibly reconfigured. Relationships with suppliers and processes for
accommodating the anticipated growth in supply may necessitate altered logistical
arrangements. On-going attention to the level of reliability and quality of the
products and services delivered is required (DUBS 1990b). Increases in output can
result in the need to locate and establish larger affordable premises and/or more
suitable operating facilities, causing the firm’s physical dimensions to extend over a
greater geographical area. In this event, the existing informal systems of
communication are likely to need to be replaced by more structured mechanisms
that can serve to channel information to more distant decision-makers in the
company and ensure the quick and efficient management of the extending tentacles
of the business (Barber, Metcalfe & Porteous 1989; Bosworth & Jacobs 1989;
Kauffman 1997b; Ennis 1999).

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In some instances, existing infrastructure and systems will need to be dismantled
so that new ones can be introduced to accommodate the changes in business
activity. Moreover, in the transition from one business size and structure to one
that is larger the company will encounter additional complexity generated by the
requirement to simultaneously manage the current business and organisational
structure while integrating existing operating systems with the new structure so
that customers do not experience delays or disruption (Flamholtz 1986; Davila
2005). Important for the expansion process is the availability and use of
appropriate information systems so the health and performance of the business can
be monitored and controlled as the company grows (Barber, Metcalfe & Porteous
1989; Ennis 1999).

The need to monitor, coordinate and control more activity by more people means
that there is also an increased workload, as more information must be handled and
greater numbers of decisions made (Davila 2005; Kotey & Slade 2005). In moving
from a small organisational size to a larger one, firms will inevitably choose
between many different types of internal structural configurations according to the
perceived needs of the business and by implication will acquire different forms and
intensity of control (Barber, Metcalfe & Porteous 1989; Kotey & Slade 2005).
Moreover, small firm growth is associated with the development of formal
organisational systems and policies to guide the management of the staff who
support and run the business. Greater emphasis on the need to control individual
and group behaviour, introduce effective people management tools and methods,
maintain documentation to support managerial decisions, and generally
“professionalise” the company’s management methods, becomes more apparent
with the process growth (Flamholtz 1986; Strickland & Thomson 1998; Kaman et
al. 2001). It is not clear at what stage of growth greater formalisation of
organisational infrastructure is most optimal, but ideally advanced planning is
undertaken to ensure that the overall internal transformation is achieved efficiently
without undue fallout or wastage (Baird & Meshoulam 1984; Storey 1994; Ennis
1999; Kotey & Slade 2005).

o Building human infrastructure

With business growth, owner-managers come under pressure to find ways to cope
with the demands of operating a firm that has grown larger in many of its
dimensions and the subsequent strain stemming from greater quantities of work
(Barber, Metcalfe & Porteous 1989). In order to support the growth and
diversification in the changing workload it is usually necessary to hire people.
There are no clear guidelines for small firms about when they need to start to

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acquire greater numbers of staff. This is a judgment that owner-managers make
based on the perceived increase in pressure on the expanding business activity on
either themselves and/or on the workforce (Arthur 1995). New recruits will fill
either duplicate positions in the company or the newly created managerial,
technical, operational and administrative support roles (Barber, Metcalfe & Porteous
1989).

The importance of delegation becomes more evident with growth and a

preparedness to step back and release many of the detailed tasks to others is
widely recognised (Stanworth & Curran 1986a; Scase & Goffee 1987; Barber,
Metcalfe & Porteous 1989; Ennis 1999). Failure by owner-managers to seek
assistance from others may lead to personal exhaustion and ultimately undermine
the company’s performance (Kauffman 1997b). With growth, firms require a
supportive and competent team of people in order to deliver on commitments to
the expanded customer base. Successful growth will be predicated on the
availability of suitable labour with appropriate expertise, the ability of the company
to attract and retain these resources once located and in turn the development of
an integrated and functionally effective team. Newcomers will play a part in
building on the foundations laid by the owner-manager and developing the cultural
norms and behaviours that will define the evolving nature of the company (Scase &
Goffee 1987; Schein 1992; Robbins & Barnwell 1994; Mazzarol 2003).

Clearly, recruitment is only likely to occur when there is a strong probability of

increased productivity leading to greater profitability and the firm can offer
sufficient work to justify the associated costs. However, in some instances owner-
managers will forego growth and additional profits because of the employment of
extra labour involved (Scase & Goffee 1987). For many owner-managers the
recruitment of staff in the form of managers and other types of staff presents an
unacceptably high increase in their workload and demands on their personal
managerial abilities. For some there is a perception of loss of control over the
business (Stanworth & Curran 1986a). Other people will now be involved, taking
decisions and helping to operate and manage the company, effectively reducing the
autonomy and freedom of the owner-manager. The owner-manager may be
resistant to giving outsiders authority and control over what is possessively viewed
as a precious personal project or going concern (Stanworth & Curran 1986a;
Barber, Metcalfe & Porteous 1989; Bosworth & Jacobs 1989; DUBS 1990b; Wyer &
Mason 1998). There may be a desire to hand over the strenuous workload but also
anxiety associated with sharing decisions with others and their ability to carry out
tasks in the way the owner-manager would wish. This may result in reluctance to
add new staff or establish clear lines of responsibility, resulting in ambiguity and

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power struggles. Conflict may occur between the owner-manager and managerial
staff, who as newcomers have expectations of a certain degree of autonomy in
fulfilling their leadership and supervisory role (Scase & Goffee 1987). Despite the
weakening of the internal links during growth, some owner-managers have
reported that it is important they continue to work in the core business alongside
their employees in order to maintain the respect of their staff and control aspects of
output and productivity. Some express the view that it is important that their
employees regard them as competent and observe their routine participation in the
“real” work of the business (Scase & Goffee 1987).

Decisions to take on more staff as part of a growth initiative are also influenced by
other factors. Some small business owner-managers see themselves as technical
specialists or operational trades’ people, providing a particular product or service
about which they are knowledgeable and in which they are particularly skilled.
They may enjoy the activities associated with producing and delivering particular
goods and services, exercising technical skills and using their expertise in this area.
The transition from technical specialist to a manager or leader of others usually
implies abandoning areas of work where they are highly competent and feel
confident (Scase & Goffee 1987). Moreover, inexperienced owner-managers may
lack the confidence to assume a role with greater managerial and leadership
content, preferring to do the work of the business rather than run the business and
manage others who carry out the operational work (Scase & Goffee 1987). Studies
have shown that some owner-managers resist hiring more staff because they have
had bad experiences with managing personnel and wish to avoid a recurrence of
this. Others experience a loss of their personal independence and freedom. Some
have an unwanted sense of responsibility for those they employ, including concerns
about finding sufficient work and ensuring that jobs and income are not lost (Scase
& Goffee 1987; Bosworth & Jacobs 1989; Barber, Metcalfe & Porteous 1989).

In some cases, in order to avoid the demands and stresses associated with
managing employment, owner-managers resort to self-employed contractors or
labour hire and employee leasing firms to source the workforce requirements to
support their business (Byrne 1985; Scase & Goffee 1987). In this way, jobs are
completed according to pre-negotiated rates with minimal direct impact for the
company in the form of compliance with employment legislation, labour relations
and administration. However, the outsourcing arrangement can also present
difficulties such as where there is a limited availability of sub-contractors. The
absence of a direct employment relationship reduces their ability to exercise the
same degree of control over those who carry out the work. When considering the
growth option owner-managers have to decide whether to expand the business

225
through employing or subcontracting more labour and increasing the levels of
profitability to support this resource, or to remain small without the involvement of
others and continue to run the business as a sole, or micro-team operation (Scase
& Goffee 1987).

o Creating a management team

Owner-managers of growth firms are propelled towards the development of a

management team to oversee specific functional areas of the business and the staff
who will work in them (Flamholtz 1986; Barber, Metcalfe & Porteous 1989;
Stanworth & Gray 1991; Atkinson & Meager 1994; Kotey & Slade 2005). The need
to have a formal management corps in place to control the workforce and its
activities is not so pressing when the company is small. The owner-manager will
know and work closely with the employees in a close-knit environment. This
proximity permits easy monitoring of activities and behaviour. With growth, owner-
managers can find that they have less time to spend with and on the team, and
fewer opportunities to guide and observe work and performance on the job (Storey
1994; Roberts 1999; Ennis 1999).

Depending on the speed of growth, there comes a need to put in place various
management positions and delegate responsibilities. Initially these are likely to be
financial and production managers who are focused on managing the core business
(Ardichvili et al. 1998; Wilkinson 1999). Gradually, as the business grows the
owner-manager may choose to supplement these with specialist support managers
and supervisors, structured into divisional units such as marketing, research and
development, quality control, information technology and human resource
management. While there appears to be no hard and fast rules determining the
appropriate time to introduce a management team, studies have indicated that
managerial appointments often start to be made when firms reach a size of
between about 10 and 20 workers, at which point the owner-manager is no longer
the exclusive maker of managerial decisions (Storey 1994; Kauffman 1997).
According to Storey (1994), by the time the company reaches 100 employees,
owner-managers have usually assembled a small body of functional managers and
supervisors and many of the managerial responsibilities have been devolved to
these individuals. With over 100 employees, firms have generally made a complete
transition to a clearly defined and well-established management structure.

The management team will be recruited either from the external labour market, or
developed from within using existing employees who make the transition from
being a team member to a team leader. Inevitably, those who assume key

226
managerial positions need to be assimilated and inducted into the company, as well
as provided with training in all the relevant operational aspects of the business.
The success of a new management team will be influenced by the combined ability
of owner-managers to identify individuals are competent to take on the managerial
role as well as the former’s capacity and willingness to delegate responsibilities
effectively (Scase & Goffee 1987; Storey 1994; Atkinson & Meager 1994; Wilkinson
1999; Klaas, McClendon & Gainey 2000). Where the owner-manager passes over
to others critical areas of the business that were previously his/her exclusive
domain there will be a heightened requirement for these individuals to be
considered capable and trustworthy (Scase & Goffee 1987; Bosworth & Jacobs
1989).

In large organisations although it is not uncommon for relationships between

employees and management to be strained, the functional tasks of the business
can still be accomplished. In small firms the ability to work together in a
constructive way is thought to be far more critical. The span of control and
influence held by managers in large entities is usually small relative to the size of
the organisation; the larger the firm the greater the degree of management
specialisation. Problems stemming from one particular area of the business are
less likely to disrupt the company as a whole. In small firms, managers hold a
proportionately broader span of control and influence and hence can expose and
even pose a threat to the business to a much greater degree. As Finney (1987),
Gubman (1998) and others have noted, with fewer individuals contributing to the
business, each one becomes proportionately more important to the enterprise as a
whole. However, the danger for the smaller operator who is keen to protect the
firm may be a tendency to hire and promote employees into managerial positions
based on good interpersonal relationships, without addressing the required level of
knowledge and skills. As such, achieving the fine balance between capability and
personal fit among the management team constitutes another challenge in the
growth process (Ennis 1999).

o Building human resource management support and infrastructure

While firms are relatively small, the expressed need and corresponding introduction
of human resource management specialists are found to be low (Bosworth & Jacobs
1989; Ritchie 1993; Arthur 1995; Heneman & Berkley 1999). With business
expansion the need to build more internally efficient infrastructure emerges. This
implies not only the acquisition of human resource management expertise and the
assimilation of this role into the routine people management tasks, but also the
longer-term development of the functional human resource management structure

227
along with more formal managerial systems, processes and policies that will
support the management of this organisational resource (Flamholtz 1986; Arthur
1995; Heneman & Berkley 1999; Klass, McClendon & Gainey 2000; Patterson
2002). Mazzarol (2003) notes that the faster a company grows the more likely it is
going to experience difficulties with the management of the workforce, highlighting
the value of seeking support in this key area. The formalisation associated with
business growth, manifests itself in the need to introduce human resource
management tools and methods to support the functional activities. As such, the
use of application forms for recruitment, job descriptions, pay scales, training
programmes and reference checking procedures start to become more prevalent
(Atkinson & Meager 1994).

Caudron’s (1993) article reporting of interviews with human resource managers

from a group of small, growing firms in the United States provides useful insights
into some aspects of this area of organisational development. For example,
respondents indicated that there was no right or wrong time to begin the process of
building a human resource management function. This depended on the type of
business and its particular needs, the resources that are available to invest in the
function, company activities and the particular interests, goals and expertise of
senior managers. For example, where a business is growing very rapidly and hiring
large numbers of staff, the focus is likely to be predominantly on recruitment and
developing the systems to do this effectively. Some firms had introduced a human
resources manager relatively late in the growth process, at a headcount of 250,
while another firm had established a human resource management function on the
day of its conception in order to provide a professionally managed support service
for the high calibre candidates being recruited (Caudron 1993).

Finney (1987) notes that a full-time professional to support a small, growing

business could be reasonably justified when a firm reaches between 100 to 250
staff but also concedes that regardless of size, problems relating to the
management people are always present. Arthur (1995) reports that a common
human resource manager-to-staff ratio is 1.5 per 100 for companies with fewer
than 250 employees, 1.2 per 100 for companies with between 250 and 499
employees and 0.7 per 100 for firms with over 1,000 employees. Inevitably, the
smaller the company and the earlier the arrival of specialist support, the greater
the proportional cost. With an increase in employee numbers, the cost ratio
becomes less.

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ƒ The social implications of growth

Having determined that growth is the desired direction for the business, owner-
managers are faced with a new set of tasks. In preparation for the arrival of help
there is a need to create an organisation structure, identify reporting lines and
responsibilities and locate appropriate workers for identified positions (Flamholtz
1986; Scase & Goffee 1987; Barber, Metcalfe & Porteous 1989; Roberts 1999).
New recruits have to be inducted into the company and shown how things are
done. It may be necessary to provide training to those individuals filling new roles.
Owner-managers may need to deal with emerging tensions or conflict, as the
growing workforce is required to adjust to new ways of thinking about their work
and how it should be done. With more players, there is pressure to instill a sense
of small team cohesion, reinforced by cooperative behaviours and mutual support
amongst the members (Klaas, McClendon & Gainey 2000). Higher levels of
communication will be required so that the larger group is clear about the business
direction and how they should proceed. Individual concerns and anxiety may erupt
which will test the leadership and coaching skills of the owner-manager, who will be
called upon to pacify, reassure and resolve people-related problems. It is through
the building of the relationships with newcomers that the organisation’s culture
starts to emerge and the leadership style of the owner-manager will play a key role
in moulding and embedding the behaviours that define the character of the
company as it moves forward (Garavan 1991; Schein 1992; Robbin & Barnwell
1994).

With the advent of growth the relationship between owner-managers and their
employees undergoes a significant transition. With greater emphasis on the firm’s
growth process, owner-managers find they becomes less involved in the daily
activities of the company and hence increasingly distant from the workforce (Scase
& Goffee 1987; Bosworth & Jacobs 1989; Brown, Hamilton & Medoff 1990).
Owner-managers often find that the culture of the firm starts to change and that
the increase in staff numbers makes it difficult to sustain close relationships and the
same friendly atmosphere as before (Stanworth & Curran 1986a; Bacon et al.
1996; Matlay 1999). Studies on this aspect of small business growth have shown
that many owner-managers are keen to maintain the close-knit, informal culture
within the company, preferring a relaxed environment where there are strong,
personal relationships (Ritchie 1993; Holliday 1995). Small teams are more likely
to share similar goals for the enterprise and develop strong bonds through working
together in close proximity. Many small firm operators are often more familiar with
this type of informal and relaxed working ambiance, particularly those who have
not worked in the impersonal environments commonly found in larger

229
organisations. They are keen to maintain the “family” atmosphere and the social
benefits derived from having a small team. Moreover, excessive use of rules and a
directive command-and-control style of management are not thought to be
conducive to creating a productive and committed work group (Flamholtz 1986;
Scase & Goffee 1987; Bosworth & Jacobs 1989; Ritchie 1993; Holliday 1995; Bacon
et al 1996).

However, the expansion of the workforce can erode and even destroy these close
relationships because a larger group prevents the owner-manager engaging and
working alongside the team on a routine basis (Scase & Goffee 1987). Owner-
managers can experience a sense of marginalisation in their own company, having
to deal with the arrival of outsiders, applying new systems and rules, and
witnessing the decline of formerly close personal relationships in the workplace
(Stanworth & Curran 1986a; Bacon et al. 1996; Rutherford, Buller & McMullen
2003). Employees may also experience a sense of loss with the arrival of others,
receiving less attention than before, adjusting to different social dynamics and
viewing their former position and “partnership” in the enterprise as having been
usurped. It is possible that existing employees will find that the previous levels of
responsibility and trust they held are reduced. Resentment may be experienced
with the introduction of formal procedures and new sets of rules designed to control
the expanding numbers of employees and reduce the arbitrariness of management
practice (Scase & Goffee 1987; Ritchie 1993; Holliday 1995; Boxall & Purcell 2003).

In addition, it is noted that employee expectations relating to their employment

with the company may increase, creating pressure on owner-managers to provide
better terms, conditions and opportunities (Ritchie 1993; Boxall & Purcell 2003).
Overall, it could be expected that the upheaval associated with growth might
potentially lead to a decline in motivation and commitment to the company,
impacting negatively on productivity levels and the general cohesion of the group.
The emphasis on social integration in smaller firms combined with the anticipation
of potential disruption to what may feel like a successful and harmonious team may
play an important part in the decision by owner-managers to grow the business
(Scase & Goffee 1987).

ƒ Impact of growth on owner-managers

As can be surmised from the extensive array of activities that are associated with
the process of growing a small enterprise, this experience is known to involve a
significant personal transformation for owner-managers (Barber, Metcalfe &

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Porteous 1989; Roberts 1999; Ennis 1999). The literature on small business
management frequently refers to the transition from a technical, operational
mindset to a strategic perspective – that is, to work “on” the business as opposed
to “in” the business, as well as the need to mobilise the company’s small team to
drive and support the intended business developments (Hendry, Arthur & Jones
1995). The changes inherent in the process of growth impact on owner-managers
in terms of the nature of their role in the company, the focus, activities and
priorities of these individuals, including the types of perspectives and behaviours
needed to be successful. Owner-managers encounter considerable pressure to
undergo personal change, to adapt to dramatic developments in their business
lives. From being a company “doer” the owner-manager must also become a
company “thinker” (Barber, Metcalf & Porteous 1989; DUBS 1990a; Ennis 1999).
Quoting De Vries (1980), Ritchie highlights some of problematic issues that can be
associated with this process:

“Although the entrepreneur in the initial stage of growth might have the
ability to inspire his subordinates, the mere fact of growth has complicated
this process. His aversion to structure, his preference for personalized
relationships, and his reluctance to accept constructive criticism make
growth and its implicit need for more sophisticated infra and superstructure
and greater decentralization, increasingly difficult to handle. Hoarding of
information, inconsistencies in day-to-day interpretation of company
policies, playing of favourites, and refusal to let people know where they
really stand does not contribute to an efficient and effective organization”
(Ritchie 1993, p. 126).

During the early stages of a company’s development, success is derived from

owner-managers’ own abilities and talents, to create, produce and sell a particular
product or service. With growth, results must be achieved through others rather
than just through their own efforts in the form of collaboration with their employee
team (Hendry, Arthur & Jones 1995; Wyer & Mason 1998). Inevitably, situations
will emerge that are different to those in the previous steady-state operating mode,
and owner-managers need to be able to resolve problems or find resources that can
tackle these effectively. This implies having to consider the prospect of opening the
doors of the business to others, whether in the form of employees, advisers,
consultants or partners, and beginning to view the company as belonging to a more
public collective rather than to just one individual. Moreover, it is increasingly the
capabilities of the firm’s employees that support and then supplant the owner-
manager which start to become more important. As such, the owner-manager’s
role evolves into one of a leader who is engaged in facilitating and coaching,
creating the environment and providing the resources that will enable others to
carry out their tasks (Pickle & Abrahamson 1990; DUBS 1990a; Kuratko & Hodgetts
1995).

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Kuratko and Hodgetts (1995) identified a range of skills that become important as
the leadership role becomes more significant. These include understanding the
relationships between different tasks in the business, supervising and controlling
the activities of others through the provision of directions, providing suggestions
and encouragement, listening and working well with others, helping and recognising
when others need assistance, giving useful feedback as well as accepting this from
others, dealing with conflict, selecting and developing employees, and rewarding
members of the small team. Hard decisions may also need to be made regarding
the on-going suitability of certain employees as the business grows and changes
(Kauffman 1997b; Roberts 1999).

It may happen at this time of expansion that some of the entrepreneurial

atmosphere of the firm, concerned with the creative ideas that contributed to the
establishment of the business originally, is lost (Stanworth & Curran 1986a). The
generation of innovative product and marketing ideas may no longer be of
paramount importance. With growth, the focus turns to capitalising on business
opportunities and establishing control of the business by putting in place
infrastructure that will assist in the transformation of these opportunities into
efficient bottom-line returns. The original source of ideas, the owner-manager,
may consequently become less of a focal point in the business as these ideas are
finally realised and systematised into some form of tangible profit-generating
output. It is at this point that owner-managers are said to face some hard
decisions; to abandon their entrepreneurial-type interests and activities and focus
on building the consolidating infrastructure, or to withdraw from the leadership role
and direct management of the firm so that an individual with appropriate
managerial talents and interest can take on the work (Stanworth & Curran 1986a;
Davila 2005). The prospect of these types of adjustments coupled with an
impending sense of loss may serve as to deter the pursuit of greater rewards
associated with growing the business and building a larger company (Greiner 1972;
Stanworth 1986; Kuratko & Hodgetts 1995).

ƒ The strategic dimension of small business growth

With the advent of growth, the outlook and scope of vision of the owner-manager
by necessity increases exponentially (Ennis 1999). Preoccupation with developing
new trading opportunities and building supporting organisational infrastructure
implies an increase in the number and variety of both the internal and external
factors that impact on the business. Owner-managers move into an environment

232
that demands decisions about a greater number of business issues and viewing the
company and its goals with a wider, more holistic mindset (DUBS 1990b; McMahon
1998). A broader awareness of the business environment and the role that the firm
will play within this context become increasingly critical, as well as the ability to
assess the overall impact of any particular changes that are planned (Flamholtz
1986; Kuratko & Hodgetts 1995; DUBS 1990b).

When committed to a steady-state mode, owner-managers tend to focus on

running their core business. Priority is given to the relatively routine matter of
producing and delivering goods or services. If the commercial environment is
reasonably stable there is less immediate pressure to spend time on macro
strategic matters, such as the future of the business, developments in the
marketplace and planning for change and development (Flamholtz 1986; DUBS
1990b). The experience the owner-manager has acquired since starting to run the
small firm has grown with time and there is familiarity with the nature of the
business and what needs to be done to stay afloat. Predictable patterns of
behaviour have begun to emerge in the different operational areas and the types of
problems that arise, whether related to production, delivery, compliance, quality
and so forth. These can be addressed by drawing on earlier experience and hence
with relative ease and confidence. Embarking upon a growth strategy often entails
entering unfamiliar terrain, having implications for both the role and the activities of
the owner-manager and the ability to manage change effectively (Gibb & Scott
1985; DUBS 1990a; Kuratko & Hodgetts 1995).

In order to manage the implications of growth it is recommended that owner-

managers assume a more strategic approach to their business (Gibb & Scott 1985;
Pickle & Abrahamson 1990; Gibb & Davies 1992; Robinson & Pearce 1994; Kuratko
& Hodgetts 1995; Rue & Ibrahim 1998). This means adopting some of the features
of larger corporation management practice, such as developing their environmental
awareness, undertaking structured, longer-term planning and taking time away
from operational tasks to reflect on the direction of the business and the activities
necessary for achieving growth goals (Gibb & Scott 1985; Robinson & Pearce
1994). However, proponents of this new order are less clear about the stage in the
growth process that this transition should occur. Kuratko and Hodgetts (1995)
have suggested that this depends on the type of industry in which the company is
competing, the complexity of the business venture and the associated speed of
change. It is thought that perceptions relating to having sufficient time and
resources to engage in strategic work, as well as the extent to which owner-
managers are prepared to share their plans and have the ability to undertake the
associated reflection are likely to influence this. It is also suggested that the

233
owner-manager’s capacity to deal with greater amounts of complexity is likely to
play an important part in determining how and when this change of focus starts to
take place (Churchill & Lewis 1983).

o Debate on the prevalence of strategic activity in small firms

It has been shown that while there exists division in opinion about the nature and
form of strategy, the management of a company’s strategy is generally associated
with two types of approach (Mintzberg 1973; Gibb & Scott 1985; Thompson &
Strickland 1998; Porter 1991). The first is a methodical planning process in which
the long-term goals and objectives of the firm are identified, followed by the means
by which these are to be achieved. The second approach comprises more periodic
ad hoc engagement in strategic activity, usually triggered by changes that
necessitate a review of the appropriateness of the current business direction and
approach intended to achieve company goals. Irrespective of whether the
management of strategy follows a structured and systematic process or occurs in a
spontaneous and flexible way, or a combination of these, the defining issue is said
to be the quality of the strategic thinking and the skill with which strategies are
ultimately implemented (Johnson 1992; Thompson & Strickland 1998).

Although constrained by the lack of agreed definition, some note that smaller firms
do not generally adopt a strategic approach to their business, particularly in the
form of systematic business planning or a model that is consistent with that found
and/or promoted for larger corporations (Gibb & Davies 1992). This perspective is
often critical that the small firm approach to business management is largely short-
term, tactical and reactive, lacking in procedure and structure (Gibb & Scott 1985;
Butler, Ferris & Napier 1991; Gibb & Davies 1992; Robinson & Pearce 1994;
Kuratko & Hodgetts 1995; Ennis 1999; Chapman 1999). In some instances the
assumption that small firms are not strategic derives from reports indicating the
absence of a formal strategic business planning process that can be evidenced in a
published document outlining the company’s approach going forward (DUBS 1990b;
Gibb & Davies 1992; Kuratko & Hodgetts 1995). Chapman (1999) has suggested
that the small business management approach is characterised by patterns of
behaviour rather than coherent strategy.

The purported lack of strategic activity has been explained in several ways. It is
posited that small firms possess less complexity and hence there is little benefit to
be derived from a formal strategic analysis and planning process (Storey 1994;
Kuratko & Hodgetts 1995; Glen & Weerawaradena 1996). The owner-manager is
able to view the business, the market and general environment as a whole and

234
understands the overall operational dynamics. Decisions relating to the
implementation of comparatively small-scale change can be made without the more
formal approach that larger and more complex business infrastructure demands.
Another reason given is that small firm owner-managers lack understanding about
the importance of strategic management and hence fail to equip themselves with
business skills of a strategic type. As this activity is not valued, it is a skill that
owner-managers are unlikely to acquire or practice (Kuratko & Hodgetts 1995; Glen
& Weerawaradena 1996). It has been suggested that owner-managers may
actually fear the idea of strategic planning, due to their lack of knowledge about
this area of management, a sense of losing control and flexibility through
committing to a specific plan, or their preference to be secretive about their
intentions for the company, not trusting others with this information (Robinson &
Pearce 1994; Glen & Weerawaradena 1996; Kuratko & Hodgetts 1995; Ennis
1999). A scarcity of time and the perception of unreasonably high costs stemming
from lost business opportunity, as well as the difficulty associated with taking
people away from the “real” work are also cited as reasons for the absence of
formal strategy development (DUBS 1990a; Gibb & Davies 1992; Robinson &
Pearce 1994; Matthews & Scott 1995; Glen & Weerawaradena 1996).

Not all are convinced of the relevance of strategic planning for the smaller firm.
Certain commentators have criticised the promotion of strategic management for
smaller firms as being an erroneous attempt to apply big business practices where
these may not be relevant (Gibb & Scott 1985; Greenley 1986; Ritchie 1993;
Robinson & Pearce 1994; Zimmerer & Scarborough 1994; Wyer & Mason 1998).
Moreover, Ennis (1999) argued that irrespective of organisational size, strategic
planning tends to be an incomplete activity through lack of time and capacity to
handle the amount of data involved, the ability to generate only a few realistic
strategic options and failure to follow up on the subsequent implementation. As
such, he casts doubts on the value of the methodology itself and concludes that
planning many steps ahead may in fact be wasted effort. In his view the disparity
between the theoretical methodology and the reality of business life is likely to be
even greater within the context of the smaller firm (Ennis 1999). DUBS (1990b)
were of the view that the absence of a documented plan is not an indicator of the
lack of a coherent approach to managing strategy in smaller firms.

However other sources dispute this alleged reticence of the smaller operator and
claim that owner-managers engage in certain types of strategic activity, but that
this is less systematic and formal although no less deliberate (Gibb & Davies 1992;
Butler, Ferris & Napier 1991; Robinson & Pearce 1994; Kuratko & Hodgetts 1995;
Ennis 1999). Not all are of the opinion that non-conformance with big business

235
methodology necessarily indicates the lack of strategy (DUBS 1990b; Robinson &
Pearce 1994). Ritchie (1993, p. 117) for example comments:

“The relative absence of highly formalized competitive analyses, mission

statements, corporate objectives, long-term corporate plans, and such like
does not necessarily mean they have no action strategy”.

Similarly, Boxall and Purcell (2003, p. 28) have stated that:

“….the formality of strategic planning is unusual in small business…. Does

this mean these firms have no strategy? Certainly not. It is possible to find
strategy in every business because it’s embedded in the important choices
the managers and staff of the firm make about what to do and how to do it”.

Matthews and Scott (1995) observed that strategic planning occurs with varying
degrees of “sophistication”, with some firms having structured strategic plans or
structured operational plans, while others possess intuitive plans or simply
unstructured plans. Robinson and Pearce (1994, p.129) noted that rather than
approach strategy in a structured way in which planning is a key component, small
firms engage in “strategic thinking”. Moreover, it is noted that small firm planning
is likely to take place around specific projects rather than encompassing the whole
business (Gibb & Scott 1985; Matthews & Scott 1995). Ansoff’s (1988) discussion
on strategy expresses the view that strategic management is not actually a product
of organisational size:

“Regardless of how large or small the firm, strategic decisions deal with a
choice of resource commitment among alternatives …. The objective is to
produce a resource-allocation pattern which will offer the best potential for
meeting the firm’s needs” (Ansoff 1988, p. 6).

However, similarities in approach among small and large businesses have been
found. Research studies have shown owner-managers who actively reflect on the
future of their company, the business goals and those actions that will be needed to
achieve them (DUBS 1990b; Robinson & Pearce 1994; Glen & Weerawardena
1996). It is evident that consideration is given to the achievability of these goals,
the barriers and dangers for the business should they be pursued, and the nature of
the rewards if the firm is successful. To a greater or lesser extent, owner-
managers will engage in assessing what a particular strategy will mean for the
existing business; how it will be affected, what equipment, technology or plant will
be needed and what the changes will mean for the people in the company
(Matthews & Scott 1995; Kuratko & Hodgetts 1995). Research into market
conditions is likely to be an informal activity, with tips being picked up here and
there in their travels, through personal contacts in the industry and keeping an ear

236
to the ground, or at clubs where owner-managers of similar types of business come
together to socialise and share experiences. The process of reflecting on the
business, the mulling over of ideas, possibilities, problems and solutions takes place
on a periodic and spontaneous basis, with insights and inspiration sometimes
occurring unexpectedly (Gibb & Scott 1985; DUBS 1990b; Meredith 1993; Rue &
Ibrahim 1998).

Gibb and Scott (1985) explain that strategising of this type is about on-going
learning where clarification comes retrospectively rather than in anticipation.
Owner-managers describe their approach as something that occurs in the form of
either an isolated mental activity, with plans and ideas turned over “in my head”, or
in the form of a casual chat or a coffee with partners and family members or others
involved or familiar with the business (Flamholtz 1986; Glen & Weerawaradena
1996; Wyer & Mason 1998; Kerr & McDougall 1999). Despite general support for
documented plans, it is suggested that the absence of a formal plan is not a
negative indicator of a firm’s capability or necessarily impinges on its chances of
success (Gibb & Scott 1985; Storey 1994).

o Support for strategic management in small firms

While smaller firms may cope adequately without formal planning, there
nevertheless exists support in favour of encouraging higher levels of strategic
activity and the acquisition of the associated business skills (Gibb & Scott 1985;
Pickle & Abrahamson 1990; Gibb & Davies 1992; Robinson & Pearce 1994; Kuratko
& Hodgetts 1995; Rue & Ibrahim 1998). Articles in academic publications and
practitioner-oriented journals have repeatedly stressed the value of strategic
planning for small firms and the consequences of failing to do so (Greenley 1986;
Hull & Hjern 1987; Zimmerer & Scarborough 1994; Rue & Ibrahim 1998).

The benefits said to be associated with strategic management and using a planning
tool are numerous (Kuratko & Hodgetts 1995). The view of DUBS (1990a) is that
where business growth is coordinated in a systematic and informed way the
chances of success increase. Although it has not been established conclusively that
formal, or informal, planning correlates more positively with greater business
success, the use of some form of planning mechanism that identifies specific
longer-term goals and supporting strategies is widely considered to be associated
with enhanced performance and profitability in growing firms (DUBS 1990b; Storey
1994; Zimmerer & Scarborough 1994; Rue & Ibrahim 1998). This support for more
structured strategic planning in smaller firms is particularly noticeable, although not
exclusively so, when it is linked to the ability to effectively manage small business

237
growth or where firms are undergoing significant change (Gibb & Scott 1985;
Robinson & Pearce 1994).

With growth comes increased complexity and greater amounts of information that
must be processed by the owner-manager. Strategic activity assists managers with
simplifying and ordering their complex world (Gratton et al. 1999; Davila 2005). It
is evident that growing small firms will reach a stage where increased levels of
complexity exceed the owner-manager’s capacity to manage the company
effectively. Psychological experiments have demonstrated that the span of
judgment and immediate human memory is impacted by the limited capacity of the
human brain to receive, process and remember information. These studies found
that on average, as the units of informational input increase to more than seven
plus or minus two, the incidence of errors rise resulting in mental confusion (see
Miller 1956; Russell 1979). From this it might be inferred that a more structured
approach to management provides a useful tool with which to capture and mentally
organise the multitude of variables that the larger enterprise presents (Gibb & Scott
1985; Pickle & Abrahamson 1990; Robinson & Pearce 1994; Rue & Ibrahim 1998).

Other benefits have been identified for smaller firms in placing greater structure
around their management activity (Fry 1992, Kuratko & Hodgetts 1995; DUBS
1990a; Napuk 1996). Churchill and Lewis (1983) note that “planning” enables
firms to identify and understand the business context in which they operate, to
recognise the firm’s stage of development and determine the degree of readiness
needed to embark on any growth initiative. Strategic planning directs the focus of
the company’s decision-makers onto the broader issues of business direction and
the future of the company. It can also assist owner-managers with the
development of their vision for the business and translate ideas and thoughts into
specific actions. Problems and constraints associated with growth initiatives are
more likely to be anticipated where there exists a structure to direct managerial
thinking and analysis. Underpinning the concept of strategic planning is the notion
that greater control can be exerted over the operating context and hence owner-
managers have greater capacity to influence business outcomes. Planning may
contribute to cost savings and fewer cash-flow problems, more efficient resource
allocation, more timely and accurate information and forecasts, faster decision-
making, improved employee morale, the opportunity to share and explores
alternatives, an improved competitive position and increased sales, as well as
reduced feelings of uncertainty about the business and its future (Pickle &
Abrahamson 1990; Kuratko & Hodgetts 1995; Rue & Ibrahim 1998). Furthermore,
the planning process provides a framework in which agreement and consistency can
be established among the key players about how the firm’s future, reducing internal

238
politics and disagreement among partners about objectives and how these will be
achieved. Greater unity of focus and consistency of action in the company can be
gained and decision-making around the optimal allocation of limited resources can
be given more efficient and methodical attention (Zimmerer & Scarborough 1994;
Kuratko & Hodgetts 1995; Thompson & Strickland 1998). Where the plan is
documented, owner-managers can use this tool to measure performance against
targets and to review achievements as implementation takes affect (Rue & Ibrahim
1998).

Zimmerer and Scarborough (1994) suggest that it is not necessary for smaller firms
to undertake elaborate, detailed planning exercises that do not furnish an easily
useable tool. Simple plans are sufficient (DUBS 1990b). As such, Napuk (1996)
recommends that a basic planning exercise is sufficient for a company to identify
how it arrived at the present, the next destination and what needs to be done to
make the necessary journey. The type of industry in which the small firm operates
is said to determine the optimal planning horizon. Low-growth activity particularly
in smaller firms may only require a very short horizon; the actual period is
considered less critical – what is important is that the business is locked into a
specified timeframe (Robinson & Pearce 1994; Johnson 1992; Napuk 1996). A plan
that is documented is also recommended (Gibb & Davies 1992).

In sum, a management team that possesses a realistic perspective of its business

context and the capacity of the firm’s internal infrastructure and resources is
thought to be in a stronger position than one that does not. Greater strategic
orientation reflected in a defined focus and broad commercial awareness is linked
with improved business outcomes and better growth potential (DUBS 1990b; Fry
1992; Gibb & Davies 1992; Robinson & Pearce 1994; Kuratko & Hodgetts 1995;
Napuk 1996).

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Chapter 7

Critical review of the literature on human resource

management in small firms

Consistent with the growing interest and consequent increase in research in the
general management of small companies in recent years, there has been a parallel,
if rather more modest, rise in academic and other institutional investigation into the
area of human resource management in the smaller firm. This chapter is primarily
concerned with reviewing the status of this literature, thereby clarifying the extent
of its value as a means to provide information and understanding about the subject
of this study. It is also intended to provide some clarity pertaining to the way in
which small firms have been studied by the research community and the impact of
this on the emergence of perceptions about the nature and behaviour of these
smaller organisations. The findings of the critical review will not only throw further
illumination on the research topic in general but will also have a significant bearing
on the conclusions of the study.

ƒ Purpose of the literature review

Conventional research methodology requires that in order to determine the status

of existent knowledge about a particular subject, an extensive review be conducted
of the available literature on the subject. Such a review assumes that the body of
literature on a subject represents the principal source of sound, current and
accessible information and that ideally it will be reasonably comprehensive in what
it can provide the researcher. There is no doubt that literature in whatever form
can provide a means to access knowledge about a certain field or discipline. The
effectiveness of this medium relies on the efforts of experts and specialists to have
transferred what is discovered into a documented form. This form is then available
to others through mechanisms that are considered most likely to produce valid,
correct and hence useful information. As such, the value of this literature will
always be tempered by the extent, nature and quality of the conversion of raw data
into meaningful and useful knowledge.

ƒ Limited sources

Although the existence of a relatively immature field of study, such as the

management of human resources in small firms, presents a plethora of exciting

241
opportunities to investigate many unexplored avenues, it also creates a number of
problems stemming from gaps in the existent knowledge (Heneman & Berkley
1999; Heneman, Tansky & Camp 2000; Tansky & Heneman 2003; Cardon &
Stevens 2004). For example, in reviewing the literature it is easy to overlook the
fact that much more knowledge and understanding will actually exist, in effect “out
there” within the environment of the subject under investigation, where it remains
uncollected and unanalysed. In the case of a relatively immature discipline or
where there has been only limited interest from researchers in a particular field or
where data is difficult to acquire, as has been the case with the management of
human resources in smaller firms, the fact that there still remains a considerable
untapped source of knowledge about the subject, cannot be dismissed (Hornsby &
Kuratko 1990).

It is not uncommon for writers on the subject of human resource management in

small firms to lament the dearth of research in this field and as a result, what is
known and communicated about the subject (Heneman, Tansky & Camp 2000; Katz
et al. 2000; Huselid 2003; Cardon & Stevens 2004). Ritchie (1993, p. 112) noted a
general absence of interest and attention from both parties:

“Smaller firms have rarely figured highly upon most professional human
resource agendas. By the same token, human resources have rarely figured
highly upon such firms’ managerial agendas either”.

In any discipline where this is the case, there are implications for research that
draws and relies on a frugal supply of information as the basis for advancing
knowledge because it may be incomplete, unrepresentative or lacking the inter-
relational aspects of the broader context or perspective. Conclusions may be drawn
that are misguided or even erroneous because the foundations on which they are
based and from which they have been progressed are not fully developed.
Moreover, the absence of sufficient quantities of supporting data from which to
develop new areas of research appears ironically to create a greater reliance on the
little that is actually available. This is demonstrated by a high propensity to cross-
reference only a few key works and draw on earlier, possibly obsolete, works as the
basis for supporting a particular thesis. While the researcher must inevitably work
with whatever data is available, the relative immaturity of this particular discipline
implies there is a need to exercise due caution when reviewing the findings and
subsequent interpretation of any research studies (Hornsby & Kuratko 1990).

In the course of attempting to locate material on human resource management in

small companies and in turn reviewing the literature that specifically focuses on this
theme, it became apparent that what is available is relatively limited. This is

242
particularly noticeable when compared to the diverse and vast quantity of literature
dealing with the topic of managing people in large organisations (Hornsby &
Kuratko 1990; Arthur 1995; Heneman & Berkley 1999; Wilkinson 1999). Back in
1986 (p. 33) Curran and Stanworth referred to the level of knowledge about small
and medium enterprise employees in terms of “the invisible workforce”. More
recently, Heneman, Tansky and Camp (2000) sought to conduct an extensive
review and categorisation of the research published on human resource
management issues in small and medium-sized enterprises. This work was U.S.
based and drew on Welsch and Klandt’s (1997) bibliography as well as several
manual and electronic searches. It was able to locate only 403 articles gathered
from an assortment of books, journals, magazines and conference proceedings.
Nankervis, Compton and Savery (2002, p. 260) have also commented on the
scarcity of research undertaken in this field:

“Little empirical evidence has been produced on HRM strategies and

practices in small and medium enterprises (SMEs) or on the opinions of their
Chief Executive Officers”.

In some respects this relatively modest body of work is surprising in view of the
sheer number of small business entities in operation when compared with their
larger counterparts and the many millions of people whom they employ and
manage, but less so when considering the traditional anonymity of the sector
(Heneman, Tansky & Camp 2000). The relatively limited amount of research and
published material may be in part a product of the difficulties associated with
accessing small companies and finding owner-managers who are prepared to give
some of their time in order to participate in a study (Holliday 1995). These same
managers may also not consider human resource management issues of sufficient
importance to their company (Duberley & Walley 1995). Wilkinson (1999) claimed
that students of industrial relations in the UK found this field of study less
attractive, giving small and medium enterprises “a wide berth” because of the
association of the small business sector with rightist Thatcherism and non-
unionism. It is also possible that the subject could be less attractive to university
researchers because in order to gain academic tenure they may need to publish
their work in mainstream professional journals that devote little attention to human
resource management in small firms. A further explanation is that many journals
may be reluctant to publish qualitative studies, possibly due to the printed space
they consume or the traditional preference for quantitative research methods
(Heneman, Tansky & Camp 2000).

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ƒ Obscure body of literature

The collective body of literature on human resource management in small firms is

insubstantial, fragmented and does not reveal the field as an established academic
or professional discipline in its own right (Katz et al. 2000). In contrast, the
general management literature on the subject of human resource management in
large organisations is neatly categorised with its place on the library shelf and in
effect possesses an academic, even institutionalised environment of its own. It is
also recognised among professionals and academics as a field of increasingly high
standing. As for the small sector, this particular area of management remains very
much obscured. Where it is considered at all, it is relegated to being a sub-
component of the general small business management discipline. A systematic
trawl through a well-stocked bookshop, a range of electronic databases or a
reputable library may produce a considerable selection of substantial texts and
varied references on the generic subject of small business management. These
texts cover the spectrum of managerial topics and provide quantities of advice and
information on areas such as finance, production, marketing, planning, research
and quality control, as well as the general concept of entrepreneurship. However,
in many of these texts a glaring omission is a chapter or even a reference to the
management of people in the smaller firms. The absence of a satisfactorily
comprehensive and representative text or body of work on the management of
personnel in small firms implies that many literary sources are dispersed and
difficult to locate. Those that do exist tend to appear in unexpected places; a brief
paragraph in a weighty textbook, a website discovered by chance, the odd
newspaper article, or a specialist human resource management journal offering a
one-off review on the small business sector.

ƒ Focus on large organisations

In addition, it is evident and also widely acknowledged that the management

literature dealing with the topic of human resources within business is concerned
predominantly with the context of “big” organisations (Arthur 1995; Duberley &
Walley 1995; Heneman & Berkley 1998). These reflect the typical experience,
needs and management technology of commercial entities with “large” numbers of
employees, irrespective of how the size of these organisations is defined (Hornsby
& Kuratko 1990; Arthur 1995; Katz et al. 2000; Heneman, Tansky & Camp 2000).
Heneman and Berkley (1998, p. 2) commented that:

244
 “There is a decidedly large-organisation ‘bias’ in the description and
evaluation of HRM systems that has characterised research for decades
…..consequently little is known about how small businesses actually practice
HRM or how effective their HRM practices are in attracting, motivating and
retaining employees”.

It is interesting to observe that such texts do not categorically exclude the smaller
entity from their target readership. The literature does not overtly discriminate in
defining its audience or organisational relevance by stating this and nor would this
be correct or appropriate, as many of the experiences, needs and management
technologies are well understood to have application and relevance for the smaller
firm. Indeed, as will be demonstrated there is much commonality among large and
small organisations with regard to the management of human resources and
regardless of the size of an organisation it is the management of groups of people
within a formal organisational context that represents a consistent common
denominator. However, this exclusion is to be found in the fact that they do not
address those elements of human resource management experience and practice
that are known to be unique and specific to the smaller organisation. It would
appear as if small companies as a collective group have simply been overlooked or
are not considered as sufficiently important to warrant inclusion.

Alternatively, the silent although seemingly unintentional disregard of these

organisations might imply that small and large companies are believed or assumed
to be the same in terms of their management experiences and needs (Robinson &
Pearce 1994; Culkin & Smith 2000; Harney & Dundon 2006). The consequence of
this is that the literature on the management of people appears to fall awkwardly
into two broadly delineated categories; one that focuses on general human
resource management in the large organisation, whose content may or may not
have relevance for the small firm but does not make reference to the fact, and
another which tackles the subject within the small firm context but which may also
to a greater or lesser extent overlap in its content with that to be found in the big
business general management texts. This bodes potentially confusing and even
problematic for the undiscerning reader who is expecting clarity pertaining to
content but not ambiguity surrounding the structuring of the subject matter, and
who may not always be able to determine whether a particular text does or does
not have relevance for the smaller organisation.

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ƒ Various types of literature

The task of teasing out the literature dedicated specifically to the management of
human resources in small organisations has generated three main types. The first
consists of empirical research and studies of a qualitative and quantitative nature,
comprising descriptions of data and information gathered from small companies
about the way they approach the management of their human resources, together
with some interpretation about the meaning and implications of their findings. Most
of these studies emanate from within some academic context or government
agency, affiliate or institute part of whose activities include applied and theoretical
research in specialist areas. Notable contributors are researchers from universities
and colleges in the United States, the United Kingdom and to a lesser extent other
countries such as Australia, Canada, Holland, New Zealand and Germany. This
work is undertaken by scholars and specialists, or other individuals connected with
the field in some way such as management consultants, journalists, small business
activists and public servants assuming varying degrees of expertise and authority.
Heneman, Tansky and Camp (2000) commented that the majority of work in this
field has come from the United States, with little attention paid to the subject in
other countries. While this may be a reasonable assessment, the extent of access
and point of entry to international research databases as well as the degree to
which research in languages other than English has been included may need to be
considered.

The second type of literature consists of conceptual works, usually textbooks for the
use of students or articles appearing in industry or management journals of
academic or popular origin, in the form of discussion about various aspects of
human resource management in smaller companies, occasionally including
comment about the utility of a particular tool or managerial approach. Empirical
studies and discursive articles are to be found in a diverse range of general
management publications. These emanate from different countries and include the
Harvard Business Review (US), the European Management Journal (UK) and the
Journal of Applied Management Studies (UK), or in periodicals specifically
concerned with the small business sector like the Journal of Small Business
Management and Entrepreneurial Behaviour & Research. Alternatively, publications
are linked to a particular professional discipline such as the Journal of Occupational
and Organisational Psychology, Personnel Administrator and the International
Journal of Human Resource Management, or from a particular business industry like
the Practical Accountant and the Journal of Property Management. In Australia,
articles covering research and debate about personnel management in small firms
appear periodically in the mainstream human resource management journals

246
(“mainstream” meaning predominantly having relevance for large organisations),
HRMonthly and the Asia-Pacific Journal of Human Resources, both published by the
national professional organisation; the Australian Human Resources Institute
(AHRI), as well as on the Institute’s website.

The third type of material comprises prescriptive documents, published in a diverse

range of media, including articles, how-to handbooks and guides, and on the
Internet, which give practical advice, instruction and tips to the small business
owner-manager or other curious reader about how to approach this area of
managing a small business in an efficient, effective and compliant way.

ƒ Limited amount of research

Consistent with the general trend in the field of small business management, the
amount of research conducted into human resource management practice in small
firms making its way into an easily accessible and published form is comparatively
small. Although the field of study concerned with human resource management in
smaller firms cannot be described as particularly young, research and investigation
into this area has been carried out sporadically in discrete corners for some
decades. Yet it still remains immature in terms of the range and depth of
accumulated knowledge. Human resource management theory and associated
practice are usually developed and tested within large organisations, and little is
known about the relevance of this theory and practice for the small business
operation (Katz et al. 2000; Tansky & Heneman 2003; Huselid 2003; Cardon &
Stevens 2004).

For the most part, the studies in this field incorporate the use of quantitative
analytical statistics. These generally involve hypotheses testing and to a much
lesser extent, qualitative case studies involving meetings and interviews with small
business managers, or forums in which views and ideas are discussed and reported,
and which in some instances include some analysis of the findings. The studies are
generally micro in size, in that they focus on proportionately small samples of small
businesses usually located in close geographic proximity to each other and often in
the same industry, although some studies draw on a collection of different industry
groups, while others seek to make comparisons between groups of different
industrial sectors. The samples of small businesses from which data is gathered
are rarely more than several hundred, are often less than a hundred and
sometimes may even be just a handful. In addition, the studies tend to focus in
many instances on investigating just one particular aspect of human resource

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management practice, such as recruitment, industrial relations, remuneration, or
alternatively a limited group of related issues, such as for example different
employee attraction and retention techniques.

o Examples of empirical studies

Typical examples of studies in small firms include work by Wiesner and McDonald
(2001) who investigated a range of human resource management practices in 1435
Australian small and medium-sized enterprises. Claiming to be the only Australian
survey to-date seeking to establish a national profile, this study examines the
“bleak house” perspective of the small business sector, stemming from its
reputation for antiquated and draconian employment methods and practices, in
effect the “sweatshop” scenario. Information was collected from firms with
between 20 and 200 employees on a range of key areas. These include
recruitment and selection, training and development, training sources, performance
appraisal practices, compensation, employee relations practices, as well as human
resource management policies. The question set included a broad span of
questions on 73 different personnel practices, such as the use of reference checks,
job descriptions, psychological tests, performance rating scales, pay based on skill
acquisition, employee share schemes, open-book policies and the occurrence of
regular formal meetings with unions.

In the United States Kaman et al. (2001) surveyed 283 small service firms (from
the business, health, legal, engineering, accounting, research and management
sectors) having 100 or fewer employees. They examined the correlation between
organisational growth and the increase in implementation of human resource
management practices, with particular focus on the use of 28 tools deemed to be
“good” practice. In 1998 Gadenne published the findings of a study of 369 owner-
managers from the retail, service and manufacturing industries in Queensland,
Australia. They gathered information about the human resource management
practices that contributed to successful financial performance, including reward and
disciplinary systems, staff training, assessing staff satisfaction and performance, as
well as encouraging constructive criticism from employees and involving employees
in decision-making. In another Australian study, Nankervis, Compton and Savery
(2002) surveyed 119 small firm Chief Executive Officers from a range of industries
including manufacturing, retail, construction, wholesale trade, transport and
storage, mining, finance and insurance, as well as the recreational and cultural
services sectors. By means of a questionnaire comprising 30 questions they
collected data on the companies’ organisational details, their business strategies
and plans, the role of the human resource management function and where present

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the human resources manager, as well as their approach to certain personnel-
related activities.

McEvoy (1984) who interviewed 84 small firms in a US Midwest metropolitan area

also reviewed employment practices. He supplemented this study with the
distribution of questionnaires requesting further information from the person
responsible for personnel management at each company about the management
team’s approach. Kitching (1996) conducted a postal survey in the United
Kingdom, covering 233 firms from a range of industry sectors, exploring human
resource management practices in the areas of personnel management systems,
attitudes towards contemporary personnel management practices and the level of
consistency between attitudes and application in this area. A UK-based study
conducted by Ram (1999) investigated the approach used by a group of small firms
in the professional services sector to the management of their personnel. This
review comprised 90 face-to-face, structured and unstructured interviews with
employees from three companies regarding management practices (recruitment,
selection criteria, pay and performance, and patterns of supervision), and involved
attending company meetings and scrutinising a range of company documents such
as internal memos, consultancy reports and contract tenders.

Gilbert and Jones (2000) also explored employment methods and activities,
reviewing 80 small firms in New Zealand. A study by De Kok (2001) examined the
relationship between environmental variables and the presence of human resource
management practices in 16 small Dutch companies. Duberley and Walley (1995)
carried out case studies in 16 British small and medium-sized manufacturing firms
investigating the extent to which they had adopted HRM. Similarly, Golhar and
Deshpande (1997) looked at various human resource management activities in
large and small manufacturing firms in Canada. Another Canadian study comes
from Wagar (1998) who conducted a mail survey of 991 Atlantic Canadian small
businesses, eliciting responses to 10 management practices. In Western Australia,
Mazzarol (2003) explored the human resource management needs, constraints and
hurdles encountered by four small firms undergoing business growth, with
particular emphasis on team-building, delegation and coaching. Hornsby and
Kuratko (1990) distributed questionnaires to 247 small firms in the U.S. Mid-West
to gather insights into the types of personnel practices found in these
organisations, including job analyses and job descriptions, recruiting and selection
techniques, compensation and benefit provisions, training activity and the use of
performance appraisals.

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o Examples of micro studies

Examples of studies focusing on specific management practices include an

investigation into the role of the psychological contract between small business
owners and their employees conducted by Kickul (2001). They sampled 151 small
firms in the USA and reviewed the types of promises made and communicated by
the company with respect to promotion, compensation, opportunities and
responsibilities, skill development, job security and general advancement prospects
in order to attract and retain personnel. Matlay (1999) reports on a three-year
comparative study including 32 case studies in the United Kingdom using a
telephone survey to extract information about the nature of employee relations and
the different styles of labour management prevalent in these businesses. Marlow
(1997) explored the area of employee relations and the way in which 28 small
manufacturing and services companies dealt with disputes and grievances.

An example of a micro case study using the semi-structured interview approach is

Fuller-Love and Scapen’s (1997) review of the impact of the implementation of a
performance-related pay initiative in a small UK shipyard company. McLarty (1999)
investigated the value of small and medium-sized firms targeting graduates
through the Internet as a means to secure good quality applicants and build
internal competencies. This research involved holding interviews with 38 companies
and 206 graduate students.

Bryson (1999) studied the impact of employee involvement (EI) on firm

performance within 564 private sector companies in the UK and Atkinson and
Meager (1994) reviewed the way in which British small firms recruit workers and
the extent to which they use outside resources to help them with their recruiting
activity. A US survey of 117 small firms conducted by Heneman and Berkley
(1999) examined the application attraction practices and their linkage to
employment retention rates. Robinson and MacDonald (1995) reviewed flexible
work practices in 300 manufacturing, distribution and services companies, located
in the county of Northamptonshire, England and Kotey and Sheridan (2001)
surveyed by mail 442 small businesses in Queensland on their personnel practices,
with a view to determining whether gender plays a role in how owner-managers
approach the management of their people. In 1999, Freel sampled 245 West
Midland (UK) manufacturers to examine the perceptions of these businesses about
skill requirements and resources necessary to improve levels of innovation. Smith
(1991) examined the prevalence of job satisfaction among older workers in 56
small firms, with particular focus on how to meet the needs and expectations of
mature-aged employees in the small and medium-sized business context.

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Particularly revealing studies on human resource management activities in this
sector include work conducted by the American Kauffman Centre for
Entrepreneurial Leadership in the late 1990s. There, in-depth focus groups,
attended by some 170 Chief Executive Officers or founders of the nation’s alleged
top one percent of high growth small and medium-sized enterprises discussed a
range of issues and experiences relating to the management of people in their
organisations. In particular, they discussed how they approached this aspect of
their business and their general philosophy about effective people management.
The reports of these sessions include direct quotations from the participants and
hence generate a diverse range of issues, concerns and challenges faced by owner-
managers of smaller firms.

o Conceptual and theoretical literature

Fewer in number are the works of a conceptual and theoretical nature incorporating
debate about various human resource management practices and methods in small
firms. These are to be found in a wide range of textbooks, academic and popular
journals, newspapers and magazines, as well as on the Internet, some of which are
aimed at the student or operator of small businesses while others aim at a much
more diverse readership or public interested generally in business management
issues. Many of the works of a conceptual nature combine discussion about human
resource management issues with giving associated advice about how to be
effective in the management of the workforce. Examples of this type of literature
include contributions from Aaron and Shore (1990) who discuss the importance of
having effective selection processes when hiring staff. Another article dealing with
the recruitment process by Robinson (1981) provides a procedure for identifying
job content and its application for employee selection in the small firm context.
Williamson (2000) attempts to develop a practical model to assist small businesses
manage their recruitment activity more effectively. An early article by McMurry
(1973) discusses the reasons why small businesses have difficulty with managing
their workforce. This includes six areas of knowledge considered by the author to
be important for owner-managers wishing to avoid personnel problems; including
knowing how to hire people, recognising the importance of knowing how to train
people, understanding the principles of employee compensation, and wage and
salary administration, understanding the need for giving employees periodic
appraisals and having good internal communication with the workforce, as well as
recognising the criticality of being a skillful leader.

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The need for more training and development activity in small firms, a popular
theme occurring in the literature, is emphasised by Clark (1986) whose explores
the development of a national education and training policy in Australia for smaller
enterprises. This paper analyses many different types of educational services, as
well as existing schemes, studies and proposals. Kerr and McDougall (1999)
emphasise the value of human resource development (HRD) and highlight the
motivations of owner-managers in providing training for their employees. Usry and
Mosier’s (1991) article on the hazards and liabilities stemming from poor hiring,
training and supervisory practices, contains suggestions for implementing effective
personnel management practices to avoid unnecessary lawsuits, and Soon and
Hughes (1999) outline the regulatory constraints that discourage recruitment within
the small business sector and hence contribute to its lack of growth. The benefits
of flexible work practices, such as part-time work, job sharing, flexi-time,
compressed work weeks and telecommuting are discussed by Sommer and Malins
(1991).

A series of articles by Denny (2000), Brotherton (2000) and Occhiogrosso (1998)

encourage small enterprises in America to outsource their functional human
resource management activities to professional employer organisations (PEO).
Such organisations would be responsible for looking after the majority of the
responsibilities relating to the employment relationship (such as administration and
payroll) and permit the smaller firms access to the type and level of expertise and
professionalism more common in the larger business context. The outsourcing
concept also emerges in Traynor and Pesek’s (1987) presentation of the
advantages and disadvantages of employee leasing; where companies absolve
themselves of the responsibilities of being employers and use labour hire
companies to source the people resources needed to carry out the work of their
business. The authors provide tips on the issues owner-managers should consider
when choosing a leasing firm and how to manage this supplier relationship. For
companies that have made a commitment to become conventional employers
Patterson (2002) presents the issues impacting small firms wishing to build an
internal human resources management department.

Non-academic, journalistic-style articles appear from time to time in magazines and

newspapers such as Oliver’s (1998) brief report in the London published magazine
Management Today describing a survey conducted by the British Chamber of
Commerce on small firms in which direct quotations from participants on the
difficulties they experience competing with the higher rates of pay offered by large
companies. It includes examples of the creative approaches small firms might
adopt to make their organisations attractive places to work, like paying employees

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to go on holiday with their spouse, handing out bottles of champagne and
sponsoring employees on study visits or conferences. A more informal style of
writing on the topic is found in magazine articles and the national and local Press.
An example of this is a section on “small business” in The Australian newspaper
(21st May 2002) in which the CEO of the Victorian Employers Chamber of
Commerce offers basic, practical advice to small firms about the importance and
nature of sound recruiting practices.

In contrast, more substantial scholarly works from leading academics and

commentators include edited collections by Atkinson and Storey (1994). This work
analyses the dynamic relationship between small firms and the labour market in the
UK. Curran, Stanworth and Watkins (1986) paper, in Atkinson and Storey (1994),
focuses on the social environment within small firms and also included is Rainnie
and Scott’s review and analysis of the historical and contemporary status of
employee relations in smaller organisations. These works draw on a range of
international, government, academic and other institutional research and data
including statistical and qualitative studies, and provide broader, in-depth
assessments of trends and models from diverse sources. Barber, Metcalfe and
Porteous’s (1989) book on the barriers to growth in small firms incorporates a
chapter on the state of the labour market and the constraints faced by this sector
regarding employment of personnel. Marlow and Patton’s (1993) article on
managing the employment relationship in small firms provides an extensive
analysis of the existing research and debate on this subject, while reflecting on the
implications of the assimilation of HRM as an appropriate approach to workforce
management.

Scase and Goffee (1987) provide a chapter on the problems facing owner-
managers in their management of the workforce as part of a general analysis of the
small business environment in their book The real world of the small business
owner. In Australia the Karpin Report (1995), primarily concerned with the state of
the nation’s business management skills, includes an in-depth assessment of the
provision of education in leadership to small business owners, the training needs of
this sector, and the difficulties and constraints associated with trying to up-skill
individuals owning and managing entrepreneurial firms. A frequently referenced
text is Brown, Hamilton and Medoff’s (1990) analysis of the differences between
small and large companies in relation to the management of labour and the greater
capacity of the latter to generate employment opportunities. Examples of
particularly erudite work are Storey’s (1994) text Understanding the small business
sector that includes a section on employment issues and the interface between
small firms and the labour market in the UK. This text also includes information on

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the quality of small firm employment in areas of wages, benefits, job satisfaction,
training, working hours, unionisation and industrial disputes. Stanworth and Gray’s
(1991) analysis of the Bolton Report 20 years after its initial publication includes a
chapter assessing the changing status of employment and employment relations in
smaller enterprises.

o Prescriptive and educational literature

In addition, there are general study texts designed for use by college or business
students, usually extensive in their coverage of the different aspects of small
business management. These include brief chapters or short sections dedicated to
personnel management theory and applied practice (Goss 1995; Goss 1996). A
typical example is Small business management by Pickles and Abrahamson (1990),
which incorporates a chapter entitled “management strategy and employee
relations”. This text provides an eclectic mixture of abbreviated descriptions of
various management theory and different aspects of human and organisational
psychology, including the work on motivation by Douglas McGregor, Frederick
Herzberg and David McClelland and Abraham Maslow’s hierarchy of needs. There
are also potted highlights and tools relating to different leadership styles, employee
morale, progressive disciplinary processes and the theory of communication
designed to guide the small business operator. Dollinger’s (1999) semi-academic
instruction manual on entrepreneurship also includes several short paragraphs in
which small firm operators are encouraged to state the firm’s basic philosophy
concerning human resources and management. The text includes a small selection
of questions on personnel management issues which companies are encouraged to
consider. For example, how will the firm manage and contain health-care and
insurance costs, what are the strategies for employee and management
development and training, what factors dictate the criteria for promotion, and so
forth. Likewise, a couple of token, rather uninformative references to “human
resource strategies” appear in Fry’s (1993) study text Entrepreneurship: a planning
approach.

An assorted selection of information and advice for the small business environment
in the form of guides for effective management is also to be found in many
academic and general management textbooks, popular management publications,
journals and magazines, newspapers, institutional training materials and
information sheets, as well as on the Internet. This emerging kaleidoscopic genre
aims to assist owner-managers not only with many of the practical, day-to-day
requirements of managing a workforce and how to avoid some of the usual pitfalls
and problems, but also to provide information about many of the philosophical

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views and issues encapsulated in management theory and contemporary
managerial practice. Typical articles include Gatewood and Feild’s (1987) work on
how to build a basic step-by-step tool for hiring staff in order to achieve consistency
in the selection process. This article covers the conducting of job analyses,
identifying worker characteristics required to perform job tasks and the
development of selection tools and devices to measure these characteristics such as
training and experience forms, interviews and work sample tests.

Fairfield-Sonn’s (1987) article provides instructions for compiling a training and

development plan relevant for the small business environment and Becker (1974)
offers small firms advice on how to make use of external consultants to assist in the
management of human resources. Cohen (1998) provides small business training
managers with useful tips about how to overcome the restrictions on time, space,
money, staff and even lack of owner-manager support when trying to implement
effective training and development opportunities for employees, including the use
of volunteer trainers, seeking out freebies and holding brown-bag lunches.

A chapter in Kuriloff, Hemphill and Cloud’s (1993) student textbook How to start
and manage a small business, includes a broad range of recommendations on how
to manage human resources in small firms. This text tackles particular aspects of
the employment relationship such as the need for human resource management
policy, how to find and hire staff, testing methods for interviews, assessing
performance, coping with contract terminations, using different types of training
methods, as well as techniques for developing managers and handling unions.

Overton’s (2001) handbook entitled Human resources made simple, claims to

target both novice small business operators and general human resource
management professionals wishing to study and learn the basics of this field and to
act as a prompt for those aspiring to write their own company human resources
manual. This volume includes a largely unstructured mixture of management
theory, and organisational and human psychology. The text has snippets of advice
and information on personnel management practices, tools, activities and
regulation and covers a range of managerial areas including human resource
planning and development, recruitment, induction and integration, organisational
behaviour, leadership and motivation, training and evaluation, as well as a selection
of case studies used as illustrations.

Another type of guide is Dorai, Hope and Porter’s (1997) booklet on human
resource management in small firms, designed to enable Australian students to
undertake distance learning in this field as part of an accredited TAFE course.

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Ostensibly a study workbook, the chapters take the student through some of the
principal areas of human resource management: Australian equal employment
opportunity legislation, superannuation requirements, induction, recruitment and
selection, staff planning, and general trends in human resource management
practice and activities. Typical of the pop management literature is Gerber’s (1995)
classic American best-seller The e-myth revisited: why most small businesses don’t
work and what to do about it, which provides a lively insight into the author’s
philosophy and views on practical people management and organisational practices
in smaller companies. The book also has tips for the successful management of
people in this type of business environment.

ƒ Challenges for research

During the course of this study it became apparent that undertaking research in the
area of human resource management in small firms presents a number of
challenges. The associated issues play an important role in influencing the quality
of available knowledge about this field (Gibb & Davies 1992).

o Breadth of the field

First, as a discrete and defined discipline human resource management is very

large (Katz et al. 2000). Theoretically covering all aspects of the relationship
between employers and employees, it comprises a considerable range of
component parts, which can be broken down into sub-parts large enough to be
considered disciplines in their own right. For example, one sub-component of
human resource management would be recruitment, which comprises elements
such as the theory and philosophy behind recruitment practice, the nature of
recruitment activity and associated tasks, as well as an extensive range of
technology, tools and methods to aid and enhance the recruitment process.
Another category would be occupational health and safety, incorporating legislative
and regulatory standards, organisational systems and tools designed to reduce risks
and prevent accidents, as well as routine tasks and activities related to the
management of this aspect of the business. These types of sub-components of the
parent discipline consist of large bodies of knowledge and are sufficiently
substantial to generate their own literature and even possess a range of associated
areas of applied activity. Examples of this are the existence of recruitment
agencies who provide this activity as a service to other organisations and
institutions who offer support to companies in the management of their safety
programmes.

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In addition, the global stock of small firms in operation is immense, comprising
many millions of organisations around the world. This vast group of trading entities
is highly diverse in terms of the industries in which they compete, the social,
cultural and historical contexts in which they operate, the political, economic and
legislative structures by which they are regulated, as well as their varied internal
business configurations and production environments (Ritchie 1993). The
implication of the presence of such breadth of disciplinary content as well as the
great numbers and associated diversity of these companies is that it is often
logistically impossible for research studies to cover the subject matter in much
depth or include large representative samples from which to gather substantial data
and in turn arrive at meaningful conclusions.

A consequence of these two features is that researchers are invariably obliged to

select only discrete topics from the total management discipline for investigation,
which can then only be partially explored, and at the same time gather their
information from a disproportionately small sample group. This requirement to
limit the size and scope of studies means that the picture of managerial behaviour
and activity within a relatively tiny number of small firms is less than complete.
Where this occurs studies tend to be inadequate in terms of contributing data that
can be used to draw well-substantiated and representative conclusions about the
small business sector as a whole. Additionally, this raises questions about the
value of attempting to study a sector that is clearly heterogeneous in its make-up
and hence less likely to generate meaningful patterns of data (see Culkin & Smith
2000).

o Soundness of methodology

As the purpose of research is the drawing of conclusions from data gathered, the
structural composition of the research process demands that studies provide some
interpretation of the information collected. This inevitably creates pressure to
generate interesting or informative conclusions regardless of whether these may
have satisfactorily emerged from the study or not. There is a tendency in a number
of the studies reviewed for this research project to provide broad, generalised but
potentially misleading conclusions about a particular aspect of small business
management which is presented as having been legitimately and correctly derived
from their findings (Holliday 1995).

This is particularly evident where there is a direct or implicit claim to have

discovered a behaviour or activity that has representational value for all small

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firms. An example of this is Golhar and Deshpande’s (1997) comparison of the
human resource management practices in small and large Canadian manufacturing
firms. Based on a mere 143 responses from one industry group, the study arrives
at the conclusion that:

“….many HRM practices of small and large Canadian firms are similar. Thus,
it is possible that small firms have realised the effectiveness of sound
personnel policies and are now making a concerted effort to address
personnel problems” (Golhar & Deshpande, 1997, p. 38).

While as assumptions about management practices in small Canadian firms these

statements may appear reasonable, the study does not generate sufficient evidence
to support and arrive at this deduction.

Often, it is not possible to embrace and incorporate the considerable diversity

present in the subject matter and its inherent complexity, this being an irksome
feature of the two fields (human resource management and small business
management) in question. It is not always clear whether this methodological
weakness is a product of poor analysis of the research topic in the early stages or a
reluctance to acknowledge that the task is in fact greater than it is considered wise
to admit. Nevertheless, generalised conclusions are often drawn and presented
about small firm behaviour and activity, suggesting in the final analysis that they
are in fact homogenous in nature and composition. In consequence, these types of
studies may be vulnerable to the criticism of contributing potentially misleading
information to the body of knowledge about small business management practice
and must be considered accordingly (Gibb 2000).

o Selection of research topics

The ability of researchers to make realistic and sound choices about the subject of
their research has been found to be particularly critical. To undertake projects that
are overly broad and ambitious in their scope or are unlikely to produce any
meaningful results due to the absence of solid, understandable or credible
measures pertaining to the relationship between the key components of subject
matter can result in suspect and even implausible conclusions.

In the literature review, a number of studies have been found to encounter

problems of this type. Bryson (1999) for example, attempted to identify the impact
of employee involvement on small firms’ financial performance. This topic presents
various tricky conceptual and practical hurdles but these remain unacknowledged.
First, there is no provision of a satisfactory way to measure what is termed but not

258
defined as “employee involvement”. This task would by itself be ambitious, there
being no standard consensus about what is meant by the abstract concept of
employee involvement. Moreover, assuming that its characteristics within an
organisational or managerial context could be pinned down, it is not clear how
meaningful or realistic measures could be obtained. Secondly, the study does not
provide a clearly articulated measure for the financial performance of the target
companies (also a controversial and potentially difficult exercise in light of the many
ways companies approach and structure their financial accounting activities).
Lastly, there is no evidence of the analysis having effectively made the connection
between a vague, abstract and qualitative concept (i.e. employee involvement) and
a precise, quantitative value (i.e. financial performance). It is reasonable to wish to
understand and clarify how the use of certain management techniques facilitate
human behaviour in organisations in a way that generates enhanced business
performance. However, the identification of the connection between human
contribution and business performance is arguably one of the most challenging and
pressing tasks for the human resource management community today and despite
certain claims to the contrary no widely recognised formula has been developed
that permits this. Despite the fact that the two variables explored in the study are
conceptually remote and there is limited understanding about their connectivity, the
conclusions are nevertheless presented in a way that suggests this bridge has in
fact been crossed (Kaplan & Norton 2004).

o Problems with size classifications

As highlighted in the research methodology, another obstacle that emerges in

research projects investigating small firms is the issue of terminology as it relates
to organisational size. It is acknowledged that there is a lack of consistency in the
way companies are categorised according to size (i.e. number of employees) and
what is deemed to be a large business as opposed to a small or medium-sized one
(Scott & Bruce 1987; Barber, Metcalfe & Porteous 1989; Stanworth & Gray 1991;
Holliday 1995; Katz et al. 2000; ABS 2000). The standard, official and widely used
definitions of size vary in different countries and across different industries. As
Storey (1994) notes there is no single, commonly accepted definition of a small
firm. However, where research is focused on clarifying aspects of organisational life
based on size, it would be reasonable to expect that some clarity about the
definition of size be provided. In effect, this represents the significance of
differentiation.

Much of the literature in this field makes indiscriminate use of the imprecise terms
“small”, “large” and sometimes “SME” (small and medium enterprises), in

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describing the subject of study, with little if any attempt to provide clarity about
what is meant by “small” and “large”, and as such exactly which type, (i.e. size) of
organisation is being referred to (Barber, Metcalfe & Porteous 1989; Brown,
Hamilton & Medoff 1990; Gibb & Davies 1992; Chapman 1999; Matlay 1999; Katz
et al. 2000; Cardon & Stevens 2004). Where studies or discussion on the subject
of small firms fail to lock in these parameters, the outcome is a vague picture of
firms simply having either “many” employees or alternatively just a “few”.

While it is easy to attribute this tendency to avoid definition to a case of laxity,

there is difficulty in differentiating the full range of features that can be described
as being completely or even partially representative of either a small or a large
organisation. This is particularly evident in the research on growing organisations
where companies are making the transition from being small to medium-sized, or
medium-sized to large. A considerable amount of overlap has been found to occur,
with large organisations possessing many of the features usually associated with
small entities, and small entities displaying characteristics that are often considered
consistent with larger organisations. The need to describe different types of
organisational behaviour that are generally but not always, found to be a product of
size has contributed to the development of a form of loose linguistic categorisation
that does not always reflect the reality. The consequence of this is a propensity to
make generalised statements about the nature of small as distinct from large
organisations that may or may not be fully correct (Stanworth & Gray 1991; see
also Culkin & Smith 2000).

o Problems with discipline-based terminology

Also referred to previously, the application of human resource management

terminology is an area found to generate some concerns in relation to the research
and subsequent literature in this field. It is not general practice for researchers
when writing about their research to provide definitions for the management terms
used when referring to concepts or practices that are explored in the studies.
Sample respondents participating in research projects are invariably presented with
questions requiring answers about their use of certain human resource
management methods, tools and practices for which no clarity of definition is
provided. For example where a study investigates the use of “high-commitment
work practices” in small firms, owner-managers may encounter difficulties with
determining what precisely is meant by “high-commitment work practices” (Kaman
et al. 2001). While discipline specialists and practicing professionals will possess
some common understanding about this term, it is less likely that many small
business owners will be as familiar with this type of language or terminology.

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Terms such as job evaluation, empowerment, multi-tasking, self-managed teams,
360 degree feedback, open-door policy and assessment centres, which are part of
the common vocabulary of the larger, technically-proficient organisation, may be
outside the range of experience and exposure of the small business operator (Gibb
& Davies 1992; Katz et al. 2000).

Another example, of particular relevance to this study and one that will be explored
in more depth in the following chapters, is the failure to provide specific definitions
for the terms “strategy” and “policy”. This is particularly noticeable where writers
use these terms interchangeably to describe organisational activity relating to the
practice of human resource management. In some instances, the implementation
of a management programme or initiative is described as a “strategy”, while in
others it may be described as a “policy” (see for example Thatcher 1998; Mazzarol
2003). In general, this lack of linguistic precision is not significant; these terms
serve merely to indicate the occurrence of a particular managerial activity or
position, and the intended meaning is usually evident. It is only when there is a
need to define and distinguish strategic behaviour from so-called operational
management practice in the small business context, as is the case with this study,
that the terminological ambiguity can generate some degree of confusion. To
obtain through research acceptably accurate levels of information pertaining to the
use of a particular item of management technology, the process requires some
degree of clarification about its actual nature and the indicators that demonstrate
its application in the work environment. Where research reporting makes liberal
use of specialised management jargon and terms, and assumes that not only
respondents but also other beneficiaries of the research will be familiar with the
concepts and activities they comprise, it is possible that a mismatch between use
and comprehension will occur (Gibb & Davies 1992; Katz et al. 2000).

o Selection of research methods

Where it is accepted that knowledge and understanding about a subject are derived
from observation and the active collection of pertinent information (i.e. research), it
follows that literature of a conceptual and prescriptive nature is the product of
empirical study. Without having first observed the subject, it is not possible to
debate and discuss a topic or provide others with relevant instruction. Hence, the
key to progressing knowledge and communicating this to others is the quality of the
collection and analysis of the original data. The ability to collect useful data relies
largely on the application of appropriate collection methodology and the capacity of
the collector to remain as impartial and objective as possible at each stage of the
research process. With regard to the data gathering activity and subsequent

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analysis in the area of human resource management in small firms, there would
appear to be some areas of potential weakness.

It is evident that the dominant research method used for studying small businesses
has been the quantitative approach. Researchers apply a mathematically based
framework with which to gather data from samples; to amalgamate and synthesize
this information according to a formula and to generate numerical findings
representing patterns of individual or group behaviour (Black 1999; Bryman 2004).
These numerically generated patterns are then used to draw conclusions deemed to
reflect to an acceptable level the reality of the subject under investigation.
However, where reductionist, quantitative data-collection techniques are used to
gather information that is predominantly qualitative in nature, that embraces multi-
faceted activity and complex behaviour of a human type which is concerned with
and subject to respondents’ perceptions, values and interpretation, a question is
raised about the appropriateness of this methodology as the optimal means to
extract valid and useful information (Holliday 1995; Bryman 2004). The
quantitative approach to research in the social sciences can place artificial
constraints around the research subject, narrowing the field of vision and scope to
a small number and range of measures. Responses are limited to a negative or
positive assertion, or in some instances to variable degrees of imprecise assertion
(e.g. never, occasionally, often and always) (Hendry, Arthur & Jones 1995; Black
1999; Bryman 2004).

For example, Kaman et al.’s (2001) study on bureaucratic and high-commitment

work practices entailed the distribution of a survey to respondents asking them to
rate the extent to which their firms currently used each practice on a scale from 0
(“not at all”) to 6 (“extensively”) with a “don’t know” response option. In addition,
they were asked to rate on a 7-point scale ranging from “not at all” to “extremely
serious” the extent to which their firms were concerned about attracting and
motivating employees. Here the quantitative approach not only limited the study to
simply gathering a list of organisational tasks and activities reporting what owner-
managers do in their business or believe to be a problem, but also resulted in
restrictive boundaries around relevant qualitative aspects that could be a beneficial
or even an essential part of the response.

Wagar’s (1998) study of human resource management practices in 991 Canadian

small firms suffers from a similar methodological deficiency. Chief Executive
Officers were asked about their use of 10 specific management activities. These
include formal performance appraisals, orientations for new employees, provision of
pension plans, provision of an Employee Assistance Programme, job sharing, a

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documented sexual harassment policy, a policy of sharing business information, the
use of a TQM programme, the use of employee attitude surveys and the presence
of a human resource management/industrial relations department. The
participants had the opportunity to respond in the affirmative or the negative. In
studies of this type, respondents are denied the opportunity to provide detailed
clarification and explanation about the subtle but potentially significant shades of
both qualitative and quantitative variation in the nature of their activities, as well as
to reveal unanticipated associations and insights into pertinent causal relationships
and other associated dynamics. The ability to impart information on the variability
of these activities is important because this variability, whether in a large or small
organisation, is a fundamental feature of the subject under investigation. With
respect to Wagar’s study, one might ask: what constitutes a human resources
management/industrial relations department? Does the company accountant’s
office where the payroll is processed constitute a human resource
management/industrial relations department, or the sole female employee who
carries out the quality certification process but who listens to and is good at
resolving employees’ problems. Or could an individual holding the title Human
Resources Manager but who spends most of the time helping out in procurement
qualify? What about a team of two personnel administrators who sit in the back
office sorting job applications and checking references, or the presence of a
dedicated functional office where trained and experienced specialists handle the
majority of personnel-related tasks and matters, and are routinely referred to for
assistance with personnel issues? Different organisations maintain different
management structures, distributing the roles, responsibilities and authorities of
their functional activities according to no pre-determined or specified formula.
However, while presumably structured to meet the company’s perceived needs,
each configuration will create its own unique impact on the organisation and on its
capacity to manage the business. Where the collection of information about why or
how or when companies do these managerial tasks and activities and who in the
organisation actually does them is excluded, the usefulness of the exercise is
considerably diminished.

Moreover, research of this type rarely assesses the effectiveness or usefulness of

these activities for the company. What remains is a catalogue of activities that may
to a greater or lesser extent be part of a company’s managerial scope. Not much
substantive and useful information would appear be gleaned about small firm
management practice where findings are expressed in general terms. An example
of this is provided in Kaman et al.’s 2001 study, (pp. 5-6) where they comment
that “high commitment practices were utilised more than bureaucratic practices,
with means ranging from M = 4.0 to M = 5.0. The most extensively used practice

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was realistically describing the job to prospective employees, with a mean of 5.0 on
the 6-point scale. The next most used practice was flexibility in scheduling (M =
4.5), although this decreased significantly (r = .19, p<= .01) as firm size
increased” (Kaman et al. 2001, pp. 5-6). Similarly, Wagar’s Canadian study where
only superficial quantitative information was collected was only able to deduce that
“x” number of CEOs “believe” they have an HR/IR department and “y” number
“believe” they do not. As such, the value of the research in contributing to
furthering understanding about the dynamics of small firm activities is effectively
limited to providing a contextually barren snapshot picture of what simply occurs
within the smaller companies (Kitching 1996).

Furthermore, research studies that make use of collection instruments and tools
such as telephone interviews and postal surveys as a means to elicit information
about multi-dimensional subjects possessing levels of complexity and variation are
problematic (Kitching 1996). It is likely that studies that invite participation by
owner-managers of small companies that appear on professional databases, in
telephone directories or who are members of small business associations, will not
necessarily achieve a balanced representation of the sector population.
Respondents will inevitably self-select with respect to their willingness to
contribute. Some may be more interested in personnel management or more
sophisticated in terms of their use of management technology in this field. Also,
the associated distancing of the researcher from the respondent and his/her
business environment, being a feature of these methods, means that the study
does not factor the wider context from which the information is generated nor its
inter-relatedness with the environment being investigated. There is little
understanding communicated about the respondent’s motivations and the meanings
given to particular actions or behaviours. Nor can the intimate daily workings of
the business be viewed and assessed. The researcher cannot directly observe and
witness the behaviours and activities of the business in motion and must rely on
respondents to share information that is truthful and accurate. Moreover,
respondents may communicate what they perceive to be important but which is not
actually practiced in their business (Wiesner & McDonald 2001). The fact that
researchers occasionally describe the data that they have gathered in terms of “the
respondent claims to ….” would seem indicative of the lingering concerns
surrounding the accuracy of the information provided by research participants.

The question of honesty among respondents has been raised occasionally in the
literature, where incidents of under-claiming with regard to their problems and
failings or over-claiming with regard to their activities and achievements were
suspected (Gibb & Davies 1992). Concerns have been expressed about the

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sensitivity and reluctance of owner-managers who for various reasons are unwilling
to reveal details or provide correct information about their managerial style or
organisational activities. This tendency has been attributed to owner-managers’
reluctance to appear in some way unprofessional or less than competent, or
alternatively not taking the trouble to give thoughtful and considered responses to
survey questions. These tools create degrees of remoteness and separation
between the researcher and the subject under investigation, and rely on what is
reported and filtered rather than on what is more reliably observed (Gibb & Davies
1992; Kitching 1996; Ennis 1999).

A further aspect that undermines the building of knowledge about smaller firms is
the fact that research studies in this area rarely seek information from employees
of small organisations (Hendry, Arthur & Jones 1995; Kitching 1996).
Investigations are frequently directed towards the owner-manager, the Chief
Executive Officer and/or the senior management team. Where the subject of the
study is that of the management of companies, it is to be expected that the focus
will be primarily on the management team whose job is to be concerned with
management issues. However, where the gathering of data is limited to one
organisational source, and in many instances from only one individual representing
a unique business, the eventual findings may not be representative, particularly
where there is a proclivity to present the company in a positive light. It is very
possible that a business owner may present a different interpretation or possess a
different picture about what is happening in his/her company, compared with the
perceptions held by uninhibited employee groups who are asked to share their
understanding about the management of the company (Heneman, Tansky & Camp
2001).

In contrast to the arguably less illuminating quantitative research, the more rare
examples of qualitative case studies and group forums provide a far richer insight
into how small business operators approach the management their employees
(Kitching 1994). Studies undertaken by the Kauffman Center (1997a; 1997b;
1998a; 1998b; 1999), Scase and Goffee (1987), Fuller, Love & Scapens (1997) and
Ram (1999) provide modest but revealing insights into the nature of the
employment relationship in small companies; the social atmosphere within the
smaller organisation, the importance of individuals in the collective effort, the
amount of time and effort absorbed by the management of staff, the immediacy of
the relationship between the owner-manager and his/her employees, and the micro
often family-like team environment. Through direct quotations and descriptive
analysis, these works provide detailed, intimate and life-like pictures of what the
role of employer entails for a small commercial operation, the range of issues,

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concerns and challenges faced on a daily basis in the workplace as well as the
complexities and ambiguities inherent in these relationships. This is reflected in an
experience related by one participant in the Kauffman (1998a, p. 9) forums while
working in his father’s company:

“When I first started out, a supervisor left and my father panicked because
he didn’t have anyone to replace him. My father got him to come back but
the employee acted like he was doing us a favour. It was a very vulnerable
position to be in. I learned that I needed to understand everyone’s job in
the company. I felt anyone who could hold a job over my head could do a
lot of damage to the company, so my brother and I learned every single
aspect of the company”.

The case-study approach provides insights into the highly individual ways that
different owner-managers approach this dimension of their business, how they view
their experiences and cope with the emotional demands and struggles that
comprise the management of people in small organisations. A particular revelation
for example, was the ability among some respondents to articulate the purpose and
value of various management tools, an unexpected outcome in light of the popular
perception that small business managers often possess low levels of management
acumen. Another participant from the Kauffman (1998a, p. 9) forums shared his
understanding of the recruitment process; its fundamental objectives and how
these are best achieved:

“Hiring is a lot like romance. You have to figure out the essence of the
person you want to hire, what drives them. Assuming there is a fit between
what you want and what they provide, you have to lay out the vision, let
them see how they are ideally suited to do the best they are going to do in
life working for your company”.

In sum, where the methodology permits the respondent to share information and
express ideas freely without the limitations of a strictly mechanistic framework for
analysis, the outcome is a fuller and more balanced picture of the managerial
experience within this organisational context. The fact that this type of qualitative
research has rarely been pursued means that the literature is bereft of much useful
information and understanding about the nature of people management in small
companies.

o Researcher objectivity

An additional concern relates to the extent to which researchers and publishers of

work on small business human resource management are able to achieve
reasonable levels of personal neutrality and objectivity about their subject. While
there are examples of studies and texts that present in a balanced and unbiased

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manner, there are also many that with varying degrees of subtlety evidently reflect
the interests, perceptions, preferences and subjective values of their author or
authors. Particularly noticeable is the presence of a demarcation in the different
disciplines addressed within the literature, such as where the interface between
small business management and a specific area of human resource management
occurs. It is often possible to identify where a researcher whose background and
field of specialisation sits within a specific area of the human resource management
discipline aims to make a connection between his/her own area of disciplinary
expertise and the small business management context. For example, a human
resource management generalist familiar with large organisations may undertake
research into the general management of personnel in small firms, or a specialist in
the area of industrial relations within big business might seek to investigate the
nature of industrial relations in the small business environment.

Where there is limited knowledge about or sensitivity for the small firm
environment, a cross-disciplinary misalignment can occur manifesting a skewed
portrayal of small business needs and behaviours. In some instances, it seems as if
the writer has described a particular management practice commonly found in large
organisations and simply dropped in the words “small business” at appropriate
places such as in the title, the introduction and the conclusion. This promotes the
impression that what is to be found or is relevant in large companies is also to be
found and will be of relevance in small companies (see Culkin & Smith 2000;
Harney & Dundon 2006).

A range of examples where the subject matter under investigation has been
inappropriately positioned as a phenomenon peculiar to the small business is
highlighted. Cutcher-Gershenfeld, McHugh and Power (1996) reviewed enterprise
bargaining in small firms while Kickul (2001) discusses the psychological contract
between employers and employees. Fairfield-Sonn’s (1987) formula for building a
training and development programme is cast in the same light. Darling’s (1990)
article on team building in small firms and Goss’s (1995) typologies of management
styles manifest a similar approach. Goss’s (1995) review of different types of
management control strategies in small firms attempts to build a typology
comprising four approaches that he labels “fraternalism”, “paternalism”,
“benevolent autocracy” and “sweating”. These categories comprise the features of
four different approaches that small business managers seemed to adopt in their
relationships with employees. However, on closer examination it is clear that these
typologies are also found in and are representative of management styles in many
larger organisations and it is difficult to see how a size-based differentiation or
uniqueness can be claimed. In consequence, within the context of the study it is

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the management subject itself that tends to emerge as being the topic of discussion
rather than the environment to which it is being applied, i.e. the small company.

In some instances, this tendency for generalisation may not present a problem
where the managerial subject content is equally applicable to large and small
organisations. For example, Arthur’s (1995) volume Managing human resources in
small and mid-sized companies partially falls into this category, covering generic
employment areas that are relevant to all companies regardless of their size, such
as employment legislation, the employment lifecycle, testing, compensation,
performance management, benefits and administration, employee relations,
training and development and so forth. However, in others the lack of recognition
or consideration of the features and contextual influences that are unique to small
organisations undermines the analysis resulting in misconstrued conclusions. In
some instances, there has not been sufficient exploration of the differences
between large and small organisations, so that studies dealing with size as the key
differentiator are able to clearly capture this.

Related to this inter-disciplinary tension is the occurrence of studies concerned with

some strenuously theoretical or abstract aspect of organisational or human
resource management juxtaposed with the small business context such that the
work as a whole presents as both obscure and doubtful in its value and utility. This
is evident in Williamson’s (2000) article that endeavours to highlight the relevance
of institutional pressures and the potential benefits of strategic isomorphism in the
context of small business recruitment. Another example of this theoretical
incompatibility and incongruence between management disciplines is found in King,
Solomon and Fernald’s (2001) attempt to analyse the growth problems faced by
small family businesses using Elliot Jacques’ stratified systems theory as a model to
examine the strategic human resource issues. Little clarity emerges about what
these works are attempting to achieve or how they contribute usefully to furthering
understanding about management in small firms.

Furthermore, writers and researchers who emanate from or represent a particular

academic or professional field often reveal their discipline-based origins in this
particular body of literature. Publications have been found to reflect elements of
prejudice, bias or unsubstantiated assumption. As might be expected, many of the
writers on human resource management in small firms are authorities in the
established, mainstream field of human resource management, as opposed to being
experts in the field of small business management. Evidence of this emerges not
only in their fluency with the terminology and contemporary issues affecting the
management of people in general and the extensive lists of standard human

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resource management references to be found in bibliographies that are pertinent to
large organisations, but also in their attitudes towards and subsequent treatment of
the small business sector. There is a tendency to employ human resource
management terminology and jargon that originates from and belongs to academic
and professionally high-powered management circles, when describing the smaller
business environment. On occasion, this can be jarringly incongruent with the
practical, nuts-and-bolts layman’s language commonly found in the small business
environment.

Moreover, the use of this type of language appears to distort or ill-reflect the
subject matter portrayed or discussed. There is an underlying assumption that the
contemporary human resource management issues that are on the agenda of many
larger organisations today automatically have relevance for the smaller operation
(Culkin & Smith 2000; Harney & Dundon 2006). An example of this can be found
in Nankervis, Compton and Savery’s (2002, p. 266) article on the views of Chief
Executive Officers regarding the human resource management function in their
business, where it is stated that the objective of their research questionnaire was to
explore whether “HR specialists are in fact change agents strategically positioned in
their organisations”. While this might be a legitimate research objective, both the
fact that it uses terminology belonging to, and addresses issues of immediate
interest and concern for, contemporary big business human resource management
theorists and practitioners, and that the human resource management function is
usually either non-existent in small firms or has a predominantly operational role,
demonstrates a certain level of disconnect with the particular subject matter being
investigated.

o Discipline-based prejudices

It is often from the mainstream human resource management establishment that

criticism is leveled at small business operators with regard to their failure to adopt
contemporary and allegedly essential human resource management practices within
their companies. An underlying assumption exists that larger organisations are the
leaders and bastions of good management practice and for this reason, they must
be more efficient, more effective and more likely to perform successfully (Hendry,
Arthur & Jones 1995; Brewster 1999; Bartram 2005). They are applauded for their
adoption of what is promoted as being the latest best practice trends and tools in
human resource management, implying somewhat contentiously that these have
provided the answers to the needs of people management in large organisations.
Despite the fact that many millions of small firms survive with limited take-up of
the technology as is suggested by the literature, and some even develop into highly

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prosperous and successful businesses, the sector is still considered lacking for not
having absorbed some if not all the tools found in larger organisations or promoted
by interested parties. The tendency to manifest what appears to be a form of
discipline-based snobbery is most poignantly evident in several recent articles.

The first is Wiesner and McDonald’s (2001) article Bleak house or bright prospect?:
human resource management in Australian SMEs. This study is concerned with
investigating the nature of the approach adopted by a group of small business
owner-managers to the management of human resources in their companies. More
specifically, the research objective was to determine whether the approach is
reflective of either an antiquated Dickensian-type approach (hence the term Bleak
House, attributed here to Sisson (1993)), being authoritarian, excluding and
exploitative in nature and which has been historically a popular perception of small
firms in some circles, or a modern, humanistic approach (hence the term Bright
Prospect), being supportive, embracing and more egalitarian, as promoted by
contemporary management theorists. The supposedly modern approach
incorporates consideration for the social dimensions of the workplace including
human needs and preferences, as well as implies the adoption of management tools
normally associated with large organisation human resource management practice.

Acceptance that small firms can be polarised into two distinct categories depending
on whether a particular range of management tools are used (bleak house implying
unfashionable, non-HRM prescribed and undesirable, and bright prospect implying
up-to-the-mark, conformist and worthy), is flawed on several counts. Besides
contributing to the reinforcement of a suspect form of stereotyping about small
companies, this approach assigns unqualified value to a group of unclearly defined
management practices as well as misplaced value judgments to the managerial
behaviour of these firms. While the “bleak house/bright prospect” approach to the
subject matter has some evocative appeal and reflects relevant concerns and
previous debate about small firm management, its emotive and mildly patronising
style reflects a not uncommon proclivity to denigrate the sector for non-
conformance with allegedly state-of-the-art management theory and practice.
Ultimately, the results of this study showed that small firms have at least “a
moderate affinity for the ‘bright prospect’ rather than Sisson’s ‘bleak house’
scenario” and the researchers flippantly conclude that “while the neighbourhood
clearly has individual establishments that are examples of both extremes it is
neither a slum nor an elite suburb” (Wiesner & McDonald 2001, p. 49).

Another example comes from Nankervis, Compton & Savery’s (2002) article that
laments the fact small businesses fail to use the fashionable nomenclature for the

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human resource management specialists in their organisations despite a decade or
more of common usage in “mainstream” community. The article states:

“Only a minority of respondents have practitioners with an HRM title…. more

than 15 percent are focused on ‘industrial relations’ and almost 13 percent
are still called ‘personnel managers” (Nankervis, Compton & Savery 2002, p.
269).

This apparent criticism suggests that not only should small firms possess a
dedicated person responsible for this management function which is generally
known to be a rarity for a range of legitimate reasons, but also that the job title
given to those individuals who have varying degrees of responsibility for the
management of people in small firms must be in some way significant or important
for their business success. Other examples of concern that small firms are outside
the fold of the mainstream discipline come from Chapman (1999, p. 75) who
commented:

‘It would be unfortunate indeed if small firm employee relations came to be

seen as occupying a separate niche; obeying different laws from the wider
field”,

and from Marlow (1997, p. 147) who denounces small businesses because:

“There is a parochial interpretation and implementation of HRM theory and

practice which focuses on flexibility to maximise productivity, with no
ambition to engage with flexible specialisation ….or implement sophisticated
training to enable multi-skilling”.

This type of subtle negativity towards smaller firms manifests itself in Duberley and
Walley’s (1995, p. 905) work whose response to the failure of a group of small
firms to adopt several human resource management practices prompted the
dismissive comment that “on the whole, it would appear pragmatism remained the
order of the day in many companies”, as well as in McEvoy’s (1984, p. 1)
conclusions about recruitment and selection methods in his small firm study,
describing these as “routine and unimaginative”. Overall, a general sense emerges
from the literature that within parts of the human resource management
community there are some who are disdainful of small firm efforts to manage their
workforces and believe that owner-managers “need to pay more attention to what
the academics have to say” (Heneman, Tansky & Camp 2001, p. 20).

Where small firms are found to be successful in their management approach,

employing techniques and tools that serve them well but might be considered
diluted versions of conventional practice or even outside the realm of normally

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acceptable practice, it would not be unreasonable to challenge the proposition that
all mainstream, big business management practices are a universal necessity. As
Kaman et al. (2001) have commented it is noteworthy that researchers in this field
do not attempt to measure the effectiveness of large organisation management
practices when they actually occur in the small firm context. Although
contemporary human resource management practice may have much relevance
and value for the smaller firm, and that with appropriate education and assistance
owner-managers may come to make greater use of the technology available and
experience improved business performance, there is little evidence in the literature
of much understanding about how this might most effectively occur.

There appears to be limited reflection by supporters of a blanket approach to the

adoption of large business practices for small firms, on the broader implications of
different organisational contexts. It could be said that insufficient consideration has
been given to whether these approaches and practices are in fact relevant,
necessary, useful, affordable, manageable and so forth. In general, the
requirement of any business to achieve a critical balance between the commercial
financial pressures and the injection of resources and technology to achieve
enhanced levels of performance within a context that is continually in a state of flux
is largely disregarded. The problematic proposition by many writers and
researchers remains; that small firms would be more successful if they were to
implement those accepted and established management practices and methods
that are to be found in larger companies (Wilkinson 1999; Culkin & Smith 2000;
Bartram 2005; Barrett & Mayson 2006).

The general assumptions about the appropriateness of the prescribed human

resource management practices for all organisational circumstances are further
undermined by the occasionally simplistic way in which some of the literature
tackles the subject of human resource management. For example, Nankervis,
Compton and Savery’s (2002) study demonstrates support for the view that to be
optimally effective small organisations should have a human resources manager.
The manager should provide strategic support to the management of the business
in the attainment of organisational objectives through more effective utilisation of
people, a goal strongly promoted by the human resource management communities
for professionals within the large business context. This is presented as a
reasonable cut-and-dried proposition about which no doubt is raised regarding its
relevance and appropriateness in small firms. However, there is little exploration or
development of the many complex issues pertaining to the strategic role of human
resource management professionals that are needed to support and provide context
around this proposition.

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As in large organisations, achieving a strategic role for human resource
management specialists in small firms is predicated on a wide range of factors.
These factors include having sufficient levels of complexity and change to warrant a
strategic contribution from a specialist, the permitting of specialists by owner-
managers to participate in the strategic work of the business and in those areas
that have a significant impact on performance, the particular requirements for
labour management as determined by the industry sector, as well as the ability to
find and afford specialists who are sufficiently competent and willing to work at
both basic operational tasks as well as at a strategic level (Namkervis, Compton &
Savery 2002; Michelson & Kramar 2003). It is also possible that there will not be
adequate work in a small company to justify the creation of more than one position.
As with any professional or technical discipline, where there is misalignment in the
skill and interest levels of specialist providers with organisational needs, the
potential value of these services is not likely to emerge.

Moreover, the tendency to underestimate the complex nature of some management

tools and to portray the adoption of these as a simple task for small firms occurs
periodically in the literature. The toolbox of human resource management
technology provides companies with many hundreds of methods and instruments
designed to optimise the management of the workforce, and the natural
expectation of their advocates is that firms wishing to maximise the potential of
their people will automatically implement these (Lee 1990; Goss 1996). In fact,
the reality is neither simple nor straightforward. The practice of psychological
profiling and testing for example is widely used by large companies as part of their
recruitment and selection processes. There is general agreement that effective use
of these tools requires a reasonable level of understanding about how they work,
what they can achieve, and how they should be used, but not however about their
ability to achieve acceptable recruitment outcomes. Testing can be expensive,
time-consuming and requires the assistance of an accredited and skilled
administrator, such as a trained psychologist. Their promotion within the small
business environment, without adequate clarification and explanation about how
they work and can be used, the implications in terms of time, resources and cost,
as well as balanced information pertaining to their known inherent advantages and
disadvantages, would not appear to serve potential customers well. Small firms
may incur unnecessary wastage through the adoption of management practices
they do not fully understand and ultimately find are not particularly useful or
appropriate for their needs. What has emerged in some of the literature is that
those seeking to encourage small firms to investigate the large business human
resource management technology fail to present and explain what are in some

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cases complex and sophisticated tools in a way that ensures accessibility by non-
specialists and effectively portray the tool in a way that potential users are given
sufficient information to make reasonably informed assessments about their value
(Lee 1990; see Culkin & Smith 2000).

The difficulties associated with introducing a specialist technology or complex

discipline to a user group that may not be adequately prepared or able to assimilate
its content with ease, manifests itself in the way some of the guides and texts on
human resource management for small business operators are written and
presented. There exists a common perception that the small business sector is
populated by owner-managers who are less well-educated and less capable than
other types of business executives. This may explain the reason for some guides
being written in a simplistic style, using terms and expressions redolent of a junior
high-school textbook, dealing with the subject matter in a superficial and
sometimes flippant manner, and even published in large size print. While many of
these texts offer what is in essence some valuable theoretical information and
practical advice aimed at improving the skills of owner-managers, questions are
raised with respect to the validity of the assumptions about the level of their
readership and the impact of any literature that adopts an elementary approach to
a complex and highly technical subject (Goss 1995).

For example Overton’s (2001) guide to small business human resource

management, the only one of its type found in Perth’s Small Business Development
Corporation bookshop, approaches the subject matter in a minimalist manner,
including cartoons and various humorous asides, suggesting that the author has
little expectation that the reader will have much interest in or capacity to absorb
the demanding technicalities of this field. Overton’s (2001, p. 9) advice to owner-
managers on their remuneration strategy is: “don’t pay peanuts unless you want
monkeys”. Moreover, the content of some of this advice is at best dubious. For
example, owner-managers are encouraged to study the physical gestures and
mannerisms of job candidates during the interview process and are informed that if
the applicants’ mouths are open, this should be interpreted as the candidate being
in a state of shock or intense concentration, or if they walk rapidly with swinging
arms then they can be assumed to be cocky and goal-oriented (Overton 2001).

This “HR for Dummies” approach to offering counsel to the inexperienced business
operator may represent a legitimate attempt to connect with a readership
possessing limited literacy skills or who may not have the time or interest to
acquire a more informed understanding of this discipline and its supporting
theoretical foundations. However, there must be inevitable concerns about the

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potential to cause considerable confusion among the unwary, particularly where
information is under- or misrepresented, or borrows poorly understood concepts
from the milieu of pop-psychology. There may be a valid argument for seeking to
inform and educate the uninitiated through basic and easily accessible means, but
to reduce the subject matter to its lowest common denominator by ridiculing,
paring down or omitting essential associated detail would appear to be unhelpfully
misleading and undermine its educative value (Goss 1995; Goss 1996; Overton
2001).

o Personal agendas and ideologies

Occasionally the political and philosophical leanings or interests of writers on the

subject of human resource management in small firms emerge in the literature.
This is reflected in the literary or linguistic style of their work, the chosen subject
matter or in the types of findings and conclusions arrived at about a particular
topic. Inevitably this inclination by the researcher or writer to intrude into the
subject matter, whether wittingly or not, serves to colour the content of their work
and in turn to raise concern about the level of its objectivity and ultimate
credibility. A simple example of this is found in Robinson and MacDonald’s (1995,
p. 3) remarks about flexible work practices in small firms:

“A flexible workforce within many SMEs is synonymous with a workforce that

is cheap, passive, compliant and disposable…. developments in flexible
working arrangements mask an extension in managerial prerogative
generally and in this area specifically, designed to control labour costs and
reinforce a spiral of low pay and exploitation for both men and women.”

While there may be some circumstances in which the writers’ statements here
reflect a reality, the presentation of these views and opinions convey elements of
subjectivity and judgment that do not serve to reinforce the argument. Contextual
evidence to support the statements is lacking. The use of generalised assertions
about the motivational practices of small companies that are evidently not reflective
of all or perhaps even many, demonstrates degrees of inaccurate or loose
reporting. The choice of negative, value-laden language to describe the small
business workforce: “cheap, passive, compliant and disposable”, as well as the
accusatory terms used to describe the alleged underhand behaviour of owner-
managers: “mask”, “managerial prerogative”, “exploitation”, reflect judgment-laden
views about the subject matter.

Rainnie’s (1989) book entitled Industrial relations in small firms: small isn’t
beautiful, provides an extreme but useful example of the political nature of some of

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these works, demonstrating the extent to which writers can become excessively
involved in the subject matter, to their personal detriment and that of the work
itself. This text deals with the state of debate on the social and economic role and
importance of small firms in the UK, particularly in relation to the ability of the
sector to generate employment opportunities and the quality of the jobs that these
small firms will provide their employees. The two principal areas of contention for
the author are that contrary to the opinion of many eminent public figures and
institutions small firms will not provide the solution to the country’s ailing economy
and that secondly small firms are erroneously portrayed as sources of attractive,
well-paid and interesting jobs for the unemployed. Rather than being the pleasant
and harmonious work environments as promoted through the media, the author
refers to instances of extreme social disadvantage and hardship among workers
employed within small companies and argues that the sector is responsible for
perpetuating highly exploitative and degrading places of work, where pay levels are
low, conditions are unsafe and unsanitary, the rights of the workers are denied or
disregarded and there is limited bargaining power within the employment
relationship. The small business sector is accused of targeting minority groups and
the socially and economically disenfranchised as a desirable source of labour,
because of the associated lack of power and influence these groups will have in any
industrial relations context.

Undeniably a compelling, lively and well-developed commentary on this subject, the

author’s personal political agenda and social values are nevertheless particularly
evident and intrusive. What appears to be a well-researched and argued
proposition that offers a rich and illuminating insight into the state of UK industrial
relations in the 1990s, suffers from a failure to present a balanced perspective of
the sector or at least acknowledge the possibility of an alternative more positive
state of affairs among small firms, as well as from the excessively emotional style
in which the material is presented. Littered with political terminology and
references to a number of politically controversial figures: e.g. capitalism, Social-
Darwinism, Margaret Thatcher, Hegel, Marxism, the Tory Party, the political-right
and even Prince Charles, the unapologetically sarcastic, angry, almost distressed
tone of the writing with its liberal use of superlatives and exclamation marks
smacks more of a propaganda broadsheet than a methodical, objective and
rationally debated analysis. Provocative expressions such as “utterly
misunderstood”, “every right to complain”, “hardly over-generous”, “flatly
contradicts”, “contented in their poverty”, and “protect and encourage the small
furry animals [i.e. small companies]” reflect a dark mood and condemnation of the
sector. The work’s concluding comments: “we have then [researcher’s italics] a
mounting body of evidence pointing to the fact that small is brutal, not beautiful”

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clearly indicate not only a vested personal interest but also insufficient distance
from the study at hand necessary to earn the status of contributing a reputable
piece of writing (Rainnie 1989, p. 16).

ƒ Concluding remarks

In summary, the review of the literature on small business human resource

management indicates that over an extended period of time a range of individuals
from a variety of countries have made efforts to progress the levels of knowledge
about this field. It reflects the beginnings of the process of assembling extensive
quantities of previously untapped information covering a diverse range of business
contexts and managerial disciplines, thereby providing valuable insights into how
many owner-managers tackle their responsibilities as employers and draw on their
people as a critical organisational resource. However, as a collective body of
literature, it remains incomplete in its ability to provide a comprehensive picture
about the subject and more importantly to weave what is known about its many
component parts into a coherent body of knowledge. Faced with numerous
methodological, logistical, linguistic and conceptual hurdles it is inevitable that the
quality of the work undertaken by researchers is very variable and for this reason,
much of what is said to be “known” is best treated at this stage as hypothetical
rather than fact.

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Chapter 8

Human resource management in small firms

The process of critiquing the literature dealing with human resource management
practice in small firms revealed that while a certain amount of research and
investigative work have been conducted in this area there still remains many gaps
in the associated knowledge (McMurry 1973; Rainnie 1989; Duberley & Walley
1995; Robinson & MacDonald 1995; Kaman et al. 2001; Tansky & Heneman 2003;
Cardon & Stevens 2004). The diversity of the small business sector has not yet
been adequately addressed, nor would it seem have researchers gathered and
analysed sufficient information in a way that facilitates the creation of models of
behaviour that can then be used to develop broad and fully integrated policy and
supporting, managerial infrastructure of benefit to the sector in general (Arthur
1995). Despite the relative immaturity of this discipline, having received limited
attention and assessment and compounded by the methodological obstacles
researchers encounter, it is evident that a reasonable quantity of information is
available about how owner-managers of small firms approach the management of
people in their organisations. There are sufficient numbers of small trading entities
within the community to provide both casual and probing observers many insights
into what takes place inside the offices, warehouses, factories and shops of these
companies, as well as opportunities to gain a general sense of what might be the
common small business experience. Over time certain trends and patterns have
been observed in small business activity and behaviour that represent part of, if
not, the foundation on which further knowledge can be developed. While an open
mind should be maintained when considering the findings of the many of the formal
research studies, which tend towards speculation, much of the collected data is
adequate for gaining a general although still superficial picture. In effect, some
degree of consistency and commonality has begun to emerge across the sector,
reinforcing many of the prevailing impressions and views about the small business
approach, while challenging others. This chapter is concerned with highlighting the
general trends in human resource management practice in small firms, as viewed
from an operational perspective, as they are currently understood.

ƒ The large versus the small organisation

The literature dealing with the topic of management of human resources in small
companies tends to approach the subject from two particular angles. The first is in

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the form of a general comparison between the features that constitute the
differences between large and small organisations, while the second consists of
assessment of the extent to which small companies adopt particular management
practices that are found in larger companies (Arthur 1995). As has been mentioned
earlier, these types of analysis are often accompanied by interpretation or
judgment on the part of the researcher about whether particular methods identified
in small organisations are appropriate, have value or are simply a good or bad
thing. Much more rarely do studies approach the subject matter in isolation from
the influence of the large corporations with a concerted effort to view small
organisations as unique entities quite different in nature and composition, thereby
assessing their activities and behaviours in terms of their meaning for an
environment that may be a world apart. Moreover, there has been little attention
given to the heterogeneity of these organisations in a way that reflects both the
commonality of their experience as well as the ways in which internal and external
variables contribute to different managerial experiences and needs. The tendency
to bring along the baggage of the dominant human resource management discipline
implies that study in this field has led to a tendency to place value judgments on
the subject matter, roughly equating to a paradigmatic formula of: big business =
HRM = positive versus small business = non-HRM = negative (Marlow & Patton
1993; Brewster 1999; Tansky & Heneman 2003; Kotey & Slade 2005; Harney &
Dundon 2006).

Where the often unquantified concept of organisational size however, that is “large”
and “small”, is the defining criteria for assessment, this poses three key questions:
are the workforce management practices in large organisations different to those in
small organisations, and if so, in what way are they different and what might be the
reasons for this difference?

o General differences between large and small firms

The number of people that a company employs is most often the way in which
organisations are categorised in terms of their size. Hence where this is the case,
at the most basic level difference is to be found in the fact that large organisations
employ greater numbers of employees than small organisations. Organisational
size may also, but not necessarily reflect a wide range of other differentiating
variables; numbers of customers and suppliers, productivity levels, revenue and
profit, the number of product and/or service lines, as well as the amount of
operational infrastructure such as plant, facilities and equipment. Generally
speaking, it would be expected that these are greater in large companies.

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With regard to their interface with the external environment, smaller firms are
usually less visible, less prominent in the public eye and less likely to be involved in
or have such an impact on the broader community in which they are located and
operate. Moreover, small firms are found to have less capacity than larger
companies: capacity to compete and dominate markets, to influence the political
and economic environment, to access the same range and number of resources,
and to carry organisational surplus (Arthur & Hendry 1990). Large firms are found
to have better market connections, greater economies of scale and accumulation of
experience (Penrose 1959; Robbins & Barnwell 1994; Holliday 1995). In
comparison with large enterprises, small firms are usually leaner, more limited and
constrained in their activity, and experience fewer business options and choices.
They tend to possess fewer resources and funds. As for the internal dynamics of
the smaller organisation, marked differences have also been found to occur. A
number of characteristics have been identified which distinguish the internal
mechanics of smaller organisations from those in larger ones. These play an
important part in and influence the way in which owner-managers approach the
management of the people that work in the company. While these features are not
polarised in the sense that all large firms will present a particular set and all small
firms will demonstrate a contrasted or absent set, in general small firms are found
to present lower levels of vertical and horizontal differentiation in their organisation,
less specialisation, complexity and decentralisation, and lower levels of spatial
differentiation and formalisation (Arthur & Hendry 1990; Robbins & Barnwell 1994;
Kotey & Slade 2005).

Levels of vertical differentiation, referring to the depth of an organisation or the

number of layers it possesses, are low in small firms being an inevitable
consequence of their smallness, there being the need for only a small number of
employees to carry out the correspondingly small number of operational tasks
required to support the trading activity. A small firm will usually start out with just
one organisational layer, comprising the owner-manager who is also the firm’s
principal and only worker. But when growth precipitates the hiring of others the
structure will evolve into two or more hierarchical layers comprising the owner-
manager and his/her employees where the latter report directly to the former
(Robbins & Barnwell 1994; Kotey & Slade 2005).

Traditionally in large organisations, structures have been predominantly pyramid in

shape comprising many hierarchical levels where each level reports to a level
above, with fewer numbers of employees at the top and more employees at the
bottom. Where this occurs there will be greater physical distance between those in
the leadership ranks and those on the front-line. Linked to this is the fact that low

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levels of vertical differentiation in small firms influence the extent to which they
manifest greater levels of centralisation, that is the degree to which decision-
making is concentrated at a single, central point in the organisation. In contrast to
larger organisations where decision-making is being increasingly devolved at this
time, small firms manifest greater centralised control, held predominantly by the
owner-manager but also by any supporting management team (Barber, Metcalfe &
Porteous 1989; Atkinson & Meager 1994; Matlay 1999). Fewer levels in the
management hierarchical structure and fewer overall labour resources imply that
either the employer (i.e. owner-manager) and/or his/her direct reports (i.e. the
employees) must carry out the many tasks required in the running of the business.
As such, it is common to find that owner-managers will have considerable
involvement in the diverse routine activities of the business, effectively working
alongside his/her team, while still maintaining the majority of control over most, if
not all of the company’s managerial decision-making. The capacity to decentralise,
or push down through the organisation, many of the managerial and operational
activities is, through the absence of available resources, more limited (Robbins et
al. 1994).

Horizontal differentiation reflects the degree to which an organisation segregates its

activities into specialist departments (Arthur & Hendry 1990; Robbins et al. 1994).
In smaller organisations functional demarcation or silos are less prevalent because
the small volume of work does not necessitate a group of any size to assume
dedicated responsibility in the form of a department to oversee a particular aspect
of the business. The small operation may maintain no formal structure at all, with
its employees engaged in a wide range of business activities, depending on the
need and their levels of skill and ability. Alternatively, where an organisational
structure is established by the owner-manager, each functional area may comprise
just one individual, such as the operations manager who oversees and may even
carry out all aspects of the production of the company’s goods or services, or the
accountant who undertakes all the tasks associated with the managing the
company’s finances. The need to draw on only small numbers of people to carry
out the full compliment of activities required to operate and manage a business
implies that those employed by a small company are more likely to be engaged in a
broader span of work, rather than being specialists contributing a particular type of
expertise within a clearly defined functional area (Robbins et al. 1994; Kotey &
Slade 2005).

Spatial differentiation, referring to the degree to which the physical location of a

company’s facilities and personnel are geographically dispersed and impacts on the
ability to control and coordinate the firm’s activities, is usually lower among small

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firms. Small firms are less likely to possess more than one operating premise or
have employees engaged in company work occurring at any great distance from the
main business site (Robbins et al. 1994). A further point of distinction between
small and large organisations is that of formalisation, which refers to the
professionalism of the organisation’s management practices and is found to be
greater in large organisations. Formalisation encompasses the presence or use of
various types of management tools and techniques designed to optimise and
control the way that both managerial and operational work is carried out. It is
within the context of these various organisational characteristics that human
resource management practice in small firms needs to be viewed (Robbins et al.
1994).

ƒ Divergence and commonality in human resource management practice

Despite the considerable emphasis placed on the differences between small and
large companies, there are a number of basic people management elements
common across organisations that are not optional if an employment relationship is
to be realised and sustained. A common factor is that in companies that employ at
least one worker in addition to the owner-manager, a contractual relationship must
exist that includes as a minimum, the exchange of services for some form of
financial compensation. It is also a fact that that at some future date the
relationship will end. At the most basic level, the elements of the employment life
cycle comprise the activities that are common to both large and small
organisations. Hence, all employers engage in a set of clearly established
activities; namely the sourcing, recruiting, selecting, inducting, directing,
controlling, assessing, compensating and disengaging of human resources. In
support of these activities there are a range of administrative responsibilities and
requirements (Meredith 1993; Arthur 1995; Nankervis, Compton & McCarthy 1996;
Dorai, Hope & Porter 1997).

Beyond this point, management practice in small and large organisations begins to
diverge as two particular elements come into play: first the manner in which an
organisation chooses to approach these core tasks and secondly the extent to which
an organisation will or must expand its basic portfolio of managerial activity outside
these core tasks into other areas (Arthur 1995). In both cases, organisations
possess degrees of perceived and actual discretion and a wide range of options in
terms of how these activities can be carried out. Key decision-makers will assess
the different types of management approach available to them and these will be
defined by their personal knowledge and preferences, as well as perceptions about

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the business context in which they are operating (Meredith 1993; Arthur 1995).
For example, a company will determine the best source of suitable personnel to join
or support the business, the preferred method of assessing candidates’ capabilities
and suitability for the work and the company, the amount of compensation that
must be offered to persuade candidates to accept the position, the necessary
actions required to introduce new recruits into the organisation and to establish
them as productive members of the group. Decisions will be made about the best
method for assessing and if necessary making adjustments to employees’ work
performance, for controlling the actions and behaviour of employees within the
workplace, and finally the way in which the relationship should be concluded,
depending on which party initiates the eventual separation (Pickle & Abrahamson
1990; Arthur 1995; Nankervis, Compton & McCarthy 1996; Dorai, Hope & Porter
1997).

In addition to the routine processes involved in the establishment and on-going

maintenance of the employment relationship, both large and small organisations
will encounter management challenges reflecting the unique demands and nature of
this particular organisational resource. As such, decisions will need to be made
about how to deal with employee relations within the company and where relevant
disciplinary matters, as well as to the industrial relations context as they pertain to
the external environment in which the company is operating (Pickle & Abrahamson
1990; Arthur 1995; Nankervis, Compton & McCarthy 1996; Dorai, Hope & Porter
1997).

The industrial relations environment, frequently beyond the company’s immediate

sphere of influence, will intrude into the business in the form of regulatory
legislation, obligatory requirements for contracting labour, minimum conditions of
employment, trade unions and external monitoring bodies whose role is to
encourage the application of standards and conditions within the place of work.
Covering areas such as occupational health and safety, equal employment
opportunity, affirmative action, workers compensation, superannuation entitlements
and the termination of employment, business owners and managers are again
faced with determining the level and form of their response to these responsibilities
and obligations on behalf of the organisation (Arthur 1995; Nankervis, Compton &
McCarthy 1996; Dorai, Hope & Porter 1997).

Internally attention must be given on the one hand to the resolution of conflict,
unrest, insubordination, low morale and poor performance and on the other hand to
matters of individual and group motivation, loyalty, commitment and work ethic
(Pickle & Abrahamson 1990). While all being factors that sit in a reasonably

284
consistent managerial context and regulatory framework, these issues nevertheless
possess considerable scope for individual interpretation and context specific
application within an organisation. Over and above the routine managerial tasks
that require prompt and daily attention, all companies possess levels of discretion
in the option to engage in organisational development activity intended to improve
their internal infrastructure and operating culture, as well as achieve better
business outcomes. This area of management provides unlimited scope for
individual and group creativity, constrained only by the imagination of those in
charge and their perception of any business and organisational limitations.
Consequently, considerable diversity exists in this area of management practice,
within both large and small companies (Arthur 1995; Nankervis, Compton &
McCarthy 1996; Dorai, Hope & Porter 1997).

o Diversity of small businesses

The tendency to categorise businesses into large, medium or small suggests that
size exists as the key or most significant differentiator and implies that there will be
considerable commonality among members of each size grouping and greater
difference between the size categories. As Ritchie (1993) has pointed out smaller
firms manifest considerable heterogeneity in their make-up and mode of operation
and depending on whether they are entrepreneurial firms, family firms, new micro
firms, growing founder firms, franchise firms, professional partnership firms or even
cooperative/community firms, determines how the management of the business is
approached in light of their unique circumstances (Gibb & Davies 1992; Kotey &
Sheridan 2001; Kotey & Slade 2005).

A key differentiator between large and small corporations that is often overlooked
in the small business literature is the fact that a considerable proportion of small
companies are family businesses (Kuratko & Hodgetts 1995; Culkin & Smith 2000).
Where a small firm is exclusively or predominantly owned, managed and operated
by members of a single or extended family many aspects of the social dynamics
and associated infrastructure may be significantly different (Meredith 1993;
Kauffman 1997b; Wilkinson 1999; King, Solomon & Fernald 2001). Although
owners of family businesses may possess greater freedom in their ability to control
and manage the firm in that they are independent of partners and associates from
outside the family group, the presence of relatives in the business equation
presents different business constraints.

For example, it is suggested that family businesses may be more productive, more
willing to sacrifice short-term profit for long-term gains may achieve greater levels

285
of operating flexibility and convey to both financiers and customers an image of
long-term stability and reliability (Kuratko & Hodgetts 1995). However, family
businesses are also more likely to conduct their business with inadequate
organisational structures (Meredith 1993; Kuratko & Hodgetts 1995; Reid et al.
2000). This may result in confusing role responsibilities and greater tolerance
displayed toward poor performance by members who might otherwise be moved on
from the business. Engaging in nepotistic behaviour and discriminatory
management practices that favour family over non-family may also be more
common. Internal disputes and squabbling about the distribution of profits and
other benefits may occur or the hiring of non-professional or insufficiently skilled
employees or facing dissension emanating from succession and other power
struggles may become apparent (Arthur & Hendry 1990; Kuratko & Hodgetts 1995;
Reid et al. 2000; King, Solomon & Fernald 2001). Reid et al. (2000) refer to the
difficulties owner-managers of small firms experience when trying to deal
objectively with family members while having to resist family pressures due to the
dual nature of the relationship that is both transactional and emotional in content.
The family-based ideology deeply entrenched in many small firms has suggested
that management models for small business may be quite different to those in large
corporations and that to examine small firms from a large corporation perspective
is as a result, not correct (Scase & Goffee 1987; Meredith 1993; Reid et al. 2000).

o Significance of the owner-manager

A further aspect of differentiation between large and small firms is the role of the
owner-manager and the influence of this central figure on how the business will be
managed (Arthur & Hendry 1990; Hendry, Arthur & Jones 1995; Wyer & Mason
1998; Kerr & McDougall 1999; Matlay 1999; Kaman et al. 2001). It is well
established that the principal decision-maker in the small business context is the
owner-manager of the company. At the outset the small firm is managed, operated
and controlled by one individual who is the figurehead of the enterprise and is
autonomous in terms of determining the company’s functionality and business
direction. This autonomy permits considerable freedom and discretion in
management practice but also it implies that all associated decisions often remain
squarely on the shoulders of only one individual (Duberley & Walley 1995; Holliday
1995; Ram 1999; Culkin & Smith 2000). It is only with the acquisition of partners,
shareholders or other operational managers, usually associated with advent of
business growth, that the decision-making isolation of the owner-manager reduces
with other parties participating in the process through consultation and the sharing
of knowledge and advice (Matlay 1999; Culkin & Smith 2000; Kaman et al. 2001).
This responsibility has considerable implications for the company influencing its

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performance as well as the type of social environment it will become as a context
for work and human interaction. Decisions regarding the way in which people
resources are managed will be a combination of owner-managers levels of
knowledge and skill, the degree of familiarity with management trends and
technology, their personality reflected through the values and perceptions they hold
about people in general, their previous experience as a leader of people, as well as
their view of the environment in which they are working and their overall objectives
for the company (Arthur & Hendry 1990; Wyer & Mason 1994; Duberley & Walley
1995; Matlay 1999; Wilkinson 1999; Culkin & Smith 2000; Kaman et al. 2001;
Bartram 2005).

There is concern that owner-managers have little knowledge or understanding of

the discipline-based human resource management theory and are largely isolated
from environments in which to glean ideas or learn about contemporary
management practice. However, evidence has emerged that many are familiar with
and apply some of the tools from the HRM toolkit (Bacon et al. 1996; Marlow 1997;
Kauffman 1999; Kaman et al. 2001; Matthews 2002). It is speculated that where
this knowledge exists it is likely to have been acquired through experience in large
organisations or from employees who have spent time in other companies.
Alternatively, it may be a product of the general widespread professional
development of management practice and increase in associated knowledge and
education across the board, as well as exposure to the popular management
literature. There is also a perception that many small firms struggle with the
management of their human resources, that this dimension of the business is
especially time-consuming, complex and unpredictable, weighing heavily among
their varied managerial tasks and responsibilities (McMurry & Robert 1973;
Deshpande & Golhar 1994; Arthur 1995). Encounters with owner-managers have
frequently reinforced this view as being accurately reflective of the small business
experience (see for example Kauffman 1997a; 1997b; 1998a; Matlay 1999; Gilbert
& Jones 2000; Mazzarol 2003).

However, despite findings that owner-managers view the management of their

people as important, research studies consistently point to the low levels of training
that are undertaken by owner-managers to provide themselves with knowledge and
skills in the area of human resource management. Concerns have been expressed
that this contributes to a lack of awareness not only of their rights, responsibilities
and obligations as an employer, but also of managerial tools and approaches that
can assist with the management of this resource and enhance the company’s
overall performance (Rocha & Khan 1985; Heneman, Tansky & Camp 2000; Kotey
& Sheridan 2001).

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The combination of training-averse operators with the complex, multi-faceted
demands of people management has led to assumptions that small business owners
do not place value on human resource management practice, particularly of the
type found in larger companies (Ritchie 1993; Golhar & Deshpande 1997; Gilbert &
Jones 2000). In the absence of knowledge or experience of the many tools and
techniques used in larger organisations owner-managers are found to rely to a
large extent on their intuition and commonsense to cope with this aspect of their
business. It is to be expected that owner-managers will find effective methods for
managing their employees with which they are most comfortable, ones that are
both time and resource efficient, but these often contrast significantly with some of
the labour-intensive and more time-consuming activities found in larger companies
(Fairfield-Sonn 1987; Atkinson & Meager 1994; Arthur 1995; Kotey & Sheridan
2001).

Furthermore, despite a general deficit in expertise it is consistently reported that

many small companies fail to seek out human resource management expertise
either by introducing an internal specialist or a consultant from outside the
company (Becker 1974; Rocha & Khan 1985; Finney 1987; Ritchie 1993; Marlow &
Patton 1993; Atkinson & Meager 1994; Duberley & Walley 1995; De Cenzo &
Robbins 1996; Matlay 1999; Klaas, McClendon & Gainey 2000; Kotey & Sheridan
2001). Wiesner and McDonald’s (2001) Australian study found that among 1,435
small and medium-sized firms 31 percent employed a dedicated human resource
manager. In smaller firms, it is often the company finance manager, accountant or
an administration officer who is assigned responsibility for undertaking the
rudimentary administrational activities relating to the management of personnel,
such as ensuring compliance with relevant legislation, checking references,
administering payroll, benefits and claims, and other general record-keeping (De
Cenzo & Robbins 1996; Chapman 1999; Klaas, McClendon & Gainey 2000). Critical
decisions relating to the recruitment and retention of personnel, including the
developmental and cultural dimensions of the work environment invariably remain
the domain of the owner-manager (Duberley & Walley 1995; Oliver 1998;
Calvasima, Calvasina & Calvasima 1999; Ram 1999). As Gilbert and Jones (2000)
have noted assistance is usually sought only when recognition emerges of a
pressing need for professional or technical expertise outside the routine
requirements of managing the business.

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ƒ Formalisation in small firm human resource management

The literature on human resource management activities in small firms focuses

mainly on managerial practices that are labeled with the term “formalisation”
(Hornsby & Kuratko 1990; Arthur & Hendry 1990; Goss 1995; 1990; Kitching 1996;
Kaman et al. 2001; Davila 2005; Kotey & Slade 2005). The term formalisation is
used as a synonym for those managerial tools and techniques that are generally
portrayed as consistent with large business human resource management practice
(see for example Gilbert & Jones 2000; Katz et al. 2000; Kotey & Sheridan 2005).
Management tools and techniques of this “formal” type typically include policies,
practices, systems, procedures and programmes, with an assortment of supporting
documentation such as job descriptions and job specifications, employment
contracts, written performance evaluations, employee handbooks, codes of
conduct, employment references, job application forms, vacation schedules and so
forth. It is through these so-called formal mechanisms that large companies
communicate their standards, values and expectations relating to the employment
relationship. It is also through these tools that employees come to understand
what they can expect from the company for which they are working (Robbins &
Barnwell 1994; Duberley & Walley 1995; Chapman 1999; Kaman et al. 2001; Kotey
& Slade 2005).

o Prevalence of formalisation

Research studies have shown that in general the smaller the organisation the less
use is made of these formal tools and approaches for management purposes. As
such, the nature of the small business work environment is variously described as
free-flowing and flexible, possessing few rules and regulations, lacking the
constraints that inhibit the interchange of ideas and manifesting few structural
controls (Scase & Goffee 1987; Kaman et al. 2001; Kotey & Slade 2005; Bartram
2005). Management decisions and actions are found to be responsive to the
moment, being opportunistic and ad hoc, a “seat of the pants” type of approach,
rather than being driven by procedure, precedence or methods more prevalent in
larger firms (Duberley & Walley 1995). Relationships between owner-managers
and their staff are frequently described as being relaxed, open, spontaneous and
more intimate, unencumbered by formalisation and the associated effects (Scase &
Goffee 1987; Arthur & Hendry 1990; Bacon et al. 1996; Gilbert & Jones 2000).

As small companies grow they are found to draw to a greater extent on the
technology that is more commonly found to be standard practice among larger
enterprises (Barber, Metcalf & Porteous 1989; Duberley & Walley 1995; Kitching

289
1996; Davila 2005; Sels et al. 2006). Formalisation, or the use of tools and
managerial approaches designed to control organisational activity and behaviour,
has generally been found to be a product of organisational size (Richie 1993; Davila
2005; Kotey & Sheridan 2001; Kotey & Slade 2005). As organisations become
larger the occurrence of systemisation increases due to the enhanced efficiencies
and greater need for organisational control over increasing amounts of business
and operational activity. The growth in number of operational tasks, the
increasingly repetitious nature of certain activities, as well as the desire to achieve
more consistency, equity and quality in output require methods to address these
objectives. Moreover, unnecessary wastage of time and resources can be
accommodated by the application of formalised methods and managerial aides
(Hornsby & Kuratko 1990; Robbins & Barnwell 1994; De Kok & Uhlaner 2001;
Davila 2005). This phenomenon has been described in terms of companies
responding to “problems’ that start to occur as a consequence of the growth
process (Rutherford, Buller & McMullen 2003).

It is not apparent at what point or stage in the growth of an organisation that the
relevance and usefulness of these tools and methods begins to emerge. Some very
large organisations do not automatically adopt and implement a full or even partial
range of these as a matter of course (Robbins & Barnwell 1994). Storey (1994)
has suggested that the threshold of transition to greater use of managerial
formalisation is likely to be at the point when an organisation has acquired between
10 and 50 employees, being the stage at which many organisations have
experienced a visible business need to make changes to their managerial approach.
Hendry, Arthur and Jones (1995) viewed increased complexity as occurring at
distinct points in an organisation’s development, with the arrival of the first
employee, at between 8-10 employees, at 20-25 employees and again at 100-400
employees. Davila’s (2005) research identified factors such as the age and size of
the company, the arrival of a new CEO and the involvement of venture capitalists
as being significant drivers in the acquisition of formal human resource
management practices. What is clear is that the passage to becoming a larger
organisation tends to be accompanied by a transformation to increased levels of
professionalism, where previously informal practice is gradually dispensed with or
modified in favour of greater use of formal, structured managerial systems and
processes (Atkinson & Meager 1994; Kitching 1996).

Some research studies that have examined the extent to which large organisation-
type management practices occur in small firms suggest that there is evidence of
varying degrees of adoption and application (Matlay 1999; Brand & Bax 2002;
Kotey & Slade 2005; Bartram 2005). A study by Kitching (1996) of 233 small firms

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in the UK found that there was a marked preference among respondents in favour
of informal systems of people management and most respondents confirmed that
they did not have formal systems for carrying out a range of specified management
activities. Similarly, Gilbert and Jones (2000) found little evidence of formal HRM-
type management practices in their study of New Zealand small businesses. Nor
did they find any indication that these methods were particularly desired, missed or
felt to be relevant to the needs of the small group environment. The researchers
were left with the impression that the owner-managers relied on their own abilities
as competent managers of people to tackle this aspect of their business (Gilbert &
Jones 2000).

In contrast, other studies have reported that small firms are increasingly
experimenting with a diverse range of the large company tools and approaches,
and are in some instances could be described as partially adopting HRM, or
adoption in a diluted form (Duberley & Walley 1995; Marlow 1997; Wilkinson 1999;
Kaman et al. 2001). For example, Bacon et al.’s (1998) study of 560 small
companies in the United Kingdom reported that not only were these firms adopting
the “new management agenda” practices but that these were also sustained over
time and produced positive outcomes for the firms concerned. While the
researchers concede that there were significant cases of over-claiming by
respondents and that some of the activities they selected for examination in the
study are doubtful in terms of their ability to reflect a transition to a typical large
organisation management approach, firms were nevertheless found to be
experimenting with a range of methods more usually associated with larger
companies. These included cultural change programmes, devolved management,
teamwork, job flexibility, performance appraisals, quality task forces, mission
statements, harmonised terms and conditions of employment, psychometric testing
and structural delayering. Overall, considerable variation has been found in terms
of the methods and tools used by small firms. It is difficult to determine whether
management practices in small firms have changed in recent decades with limited
historical research available in this area, but observers have expressed the view
that small firm management practice is gradually becoming more highly developed
in this respect (Hornby & Kuratko 1990; Kaman et al. 2001).

o The value of formalisation for small firms

A number of writers have attempted to explain the reasons for the variability in the
take-up of the HRM technology and there has been debate surrounding the need for
small firms to adopt many of the large organisation human resource management
practices (Robinson & Pearce 1994; Gilbert & Jones 2000; Davila 2005; Sels et al.

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2006). The absence of prescribed HRM methods in small firms is said to contribute
to problems such as low levels of productivity and morale, as well as employee
turnover. Sels et al. (2006) refer to research conducted by Dun and Bradshaw
(2001) that indicated managerial incompetence, particularly in the area of human
resource management, was the main cause of business failure. Formal systems
and routines liberate management attention from the repetition of managerial tasks
and provide mechanisms for control (Davila 2005; Kotey & Slade 2005). Efficiency,
consistency and equity have been cited as benefits of HRM formalisation particularly
with the increase in employee numbers (Kotey & Slade 2005; Davila 2005).
Formalised systems also enable companies to manage their organisational
knowledge more effectively (Davila 2005). Hornsby and Kuratko (1990) noted that
the effective development and improvement of people management practices
becomes more important as small firms grow and expand. Without the introduction
of formalisation into management practice and administration, the coordination and
control of company activities can become more difficult and costly (Miner 1973;
Davila 2005). Failure to adopt big business people management practices has been
viewed as a deficiency in small business operators, with criticism leveled for their
failure to apply best practices. Their approach to the management of their people
is considered primitive or backward and concern is expressed that they give little
consideration to the relationship between people management and business
outcomes (Kaman et al. 2001; Nankervis, Compton & Savery 2002; Bartram 2005).
The suggestion is that without the benefits of these tools as well as a broader
understanding of the concepts comprising the HRM philosophies, principles and
practice, small firms are not only less effective in their business performance but
they are also failing to do their best by their employees (Marlow 1997).

There is no apparent consensus about the usefulness of large company

management practices for smaller organisations. Certainly there is evidence that
many in the broader business community are in favour of small firms adopting tools
and methods that are standard fare in the larger more technically developed
companies (Kuriloff, Hemphill & Cloud 1993; Kaman et al. 2001; Kotey & Slade
2005). However, so far little analysis has been undertaken to assess the relative
merits of large organisation approaches to workforce management for the smaller
business context and limited consideration given to the relevance and
appropriateness of the contents of today’s HRM toolbox (Stanworth & Curran
1986a; Kitching 1996; Culkin & Smith 2000; Harney & Dundon 2006). It has been
proposed that “sophisticated” management practices may not necessarily be
appropriate or have relevance for the smaller business environment (Arthur &
Hendry 1990; Marlow & Patton 1993; Gilbert & Jones 2000; Culkin & Smith 2000;
Davila 2005; Kotey & Slade 2005; Harney & Dundon 2006). The tendency to

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assume that more complex or advanced practice apply or should be applied
consistently to all firms regardless of their size, effectively grouping the needs of
commercial entities as homogeneous in nature, has been increasingly challenged in
the literature (Kitching 1996; Heneman, Tansky & Camp 2000). Some are of the
view that the management requirements of small firms need to be different
because of the nature of small organisation dynamics and the type of workforces
that are to be found in these smaller entities. Other studies have indicated a lack
of time, financial resources and human resource management experts (Miner 1973;
Finney 1987; Sels et al. 2006). Some have suggested that the approach to human
resource management in small businesses is unique and that contemporary
management theory and practice, even in a refined form, cannot be applied directly
to the small firm context (Ritchie 1993; Jennings & Beaver 1997 referenced by
Wiesner & McDonald 2001; Gilbert & Jones 2000; Davila 2005; Sels et al. 2006).

It is now well established that small firms are complex, varied entities influenced by
a wide range of factors and not simply scaled-down or embryonic big businesses
(Ritchie 1993; Robinson & Pearce 1994; Mclarty 1999; Culkin & Smith 2000; Kotey
& Sheridan 2001; Tansky & Heneman 2003; Kotey & Slade 2005; Harney & Dundon
2006). As Wiesner and McDonald (2001, p. 44) emphasise, “small business is not a
little big business”. It may not be correct to assume that a transfer of management
practices will automatically translate into enhanced company performance. Kitching
(1996) proposed that the absence of formality reflects differences in the nature of
the employment relationship in small firms that are driven by a culture of inter- and
mutual dependency. The nature of this dynamic is thought to eliminate the need or
desire to build formality and implement standardised management processes. He
explains that relationships are effectively sustained in a spontaneous manner,
where individuals come together to achieve common goals and reap associated
rewards, and therefore artificial structures are not required to bind them together.
Where small companies operate on the basis of informal, close-knit relationships as
well as the maintenance of constructive, cohesive social interaction, even at the
most basic level the introduction of more formal, impersonal mechanisms into the
relationship is seen as unnecessary. It potentially undermines the inherent
discretionary trust and goodwill between employer and employee. The benefit of
sustaining human connections based on friendship or cordial association is
diminished with non-essential reminders that the relationship is conditional and
fundamentally transactional in nature. This perspective emerges in some of the
research studies where owner-managers demonstrate unequivocal recognition for
the importance of building and maintaining strong bonds at all levels with the
group, and nurturing the family-like atmosphere in which people are happy to work
(Scase & Goffee 1987). As such, the adoption of tools that are in essence optional

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for companies is less likely to occur unless there is pressure to make changes in
this direction or there emerges a perception that these tools will create value for
the company (Goss 1995; Holliday 1995; Goss 1996; Kitching 1996; Kauffman
1999; Wilkinson 1999).

It is also evident that the low levels of formal management methods in small firms
and the increasingly popular people-focused management programmes found in
large firms, are a product of the associated cost involved (Miner 1987; Rocha &
Khan 1985). To proceed in this direction involves investment in the time, staff,
expertise and financial resources required for their design, development,
implementation and on-going maintenance. Large businesses in contrast possess a
number of advantages in their pursuit of more effective management practice.
They usually have managers with better levels of managerial skill and experience at
their disposal able to assist in the facilitation and implementation of managerial
interventions. They are supported by human resource management specialists
skilled in systems and policy design work and knowledgeable about a range of
different types of business approaches and techniques, as well as other internal
infrastructure within the organisation. In addition, they are able to achieve
economies of scale due to the employment of greater numbers of staff, hence
reducing the unit costs per worker (Bryson 1999). This financial factor is further
exacerbated by the propensity for many small-scale operators to rely on their
workforce to carry out the work of the business instead of investing in advanced
labour-saving technology and equipment. Consequently a situation of higher
salaries, wages and employee on-costs is perpetuated, where labour consumes a
comparatively higher proportion of the overall operating budget (Kotey & Sheridan
2001).

Initiatives and programmes such as day-care facilities, flexible hours,

telecommuting, elimination of paperwork and involving employees in strategic
planning, (Cowan 1990) or the creation of opportunities for making decisions,
giving more time off, the payment of college tuition for children and employee
assistance programmes, (Finney 1987) have been proposed as a way for small
firms to retain key staff. These assume that there are sufficient resources available
to dedicate to these ventures. To provide such benefits requires expertise on how
these could be achieved and managed, the necessary levels of competence among
employees, as well as adequate operational slack to permit staff to be focused on
activities other than the principal tasks for which they were employed. The cost of
adopting so-called sophisticated management practices in many small firms that
are invariably lean is often prohibitive. While examples of creative, low-budget
initiatives within the often cash-strapped small business sector are to be found, the

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monetary issue contrasts with larger enterprises and implies fewer choices in terms
of what is possible and achievable (Rocha & Khan 1985; Kinnie 1999).

Not all commentators are of the opinion that the low levels of adoption of large
business management practices are necessarily a cause for concern (Gilbert &
Jones 2000; Kaman et al. 2001; Davila 2005; Kotey & Slade 2005). Wilkinson
(1999) for example, remarks that in recent years competitive pressure on
companies in conjunction with highly volatile and changeable markets have
emphasised the need for higher levels of responsiveness, flexibility and adaptation.
These features are more likely to occur where internal infrastructure is relatively
free of bureaucratic systems or constraining patterns of established behaviour.
Growing trends within large companies demonstrate an awareness of the need to
disencumber themselves from procedural rigidity and standardised management
practices characteristic of the time when the commercial environment was more
preoccupied with achieving operational efficiencies through process control and
mechanistic measurement. In an era when the emphasis is turning increasingly to
seeking differentiation and innovation derived from the effective mobilisation of
human capital, companies are contemplating the prospect of creating structures
and internal dynamics not dissimilar to those found in the smaller business
environment. It has been suggested that large organisations may be able to reap
valuable learning from the informal nature of small business personnel
management practice (Ritchie 1993; Gilbert & Jones 2000; Kaman et al. 2001).
Kaman et al. (2001) have suggested that in the small business environment, it is
possible that human resource management practice represents a form of
competitive advantage (compare with Chapter 3 for discussion on Best Practice
within the large corporation context).

Interestingly, the organisational characteristics and social dynamics of the smaller

firm are posited as being well suited to the introduction of management initiatives.
This is due to the enhanced levels of communication that exist between employer
and employee in structures that are flatter and facilitate more direct interface. The
workforce in small firms is likely to be more accustomed to flexible work
arrangements and adjusting to changing market requirements. Moreover, the
impact of any implementation activity is likely to be more evident and to take effect
much quicker (Marlow & Patton 1993; Bacon et al. 1996). The introduction of new
management practices may also have more meaning, visible relevance and
authenticity for employees than many of the impersonal programmes that are
rolled out in larger companies. Rather than view the conventional methods that are
developed in and emanate from large organisations as the only possibilities,

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managerial methods in small firms are considered by some to have potential to
contribute to the broader body of knowledge and applied practice for this reason
(Bacon et al. 1996; Sels et al. 2006). Gilbert and Jones (2000) commented that in
view of the fact large companies find the implementation and maintenance of many
human resource management initiatives difficult, it would seem both unlikely and
undesirable that small firms would or should follow suit.

Further contributing factors to the decision to adopt professional management

techniques and methods are found to stem from pressure on small firms to comply
with legislated industrial and quality requirements as well as by customers who
demand certain managerial standards and practices from their suppliers. These
types of external influences encourage owner-managers to seek out the associated
knowledge in order to comply with stakeholder-driven expectations about required
or desired human resource management practice (Marlow & Patton 1993; Kitching
1996; Kerr & McDougall 1999; Kinnie 1999).

ƒ Characteristics of management practice

As highlighted in the previous chapter, research has been undertaken in some of

the key areas of human resource management in small firms, including the
functional areas of sourcing and recruitment, compensation and benefits, industrial
relations, performance management, training and development, and succession
planning. The considerable breadth of the human resource management discipline
means that studies in this field have made only limited and rather superficial
inroads to what is still a sparse body of knowledge. Nevertheless, valuable findings
about the differences between large and small firm people management practice
have begun to emerge.

o Sourcing and hiring

In order to operate a small business, owner-managers must source and hire

personnel (Arthur 1995). Unless the firm is going through a period of dramatic
growth, recruiting will be a rare occurrence. Stable companies will require new
resources only at the time one of the team members leaves. The flow of intake and
leavers is invariably small and unpredictable. Unable to maintain resource surplus,
small firms will usually add to their headcount only when this can be justified by
anticipated diversification or increases in business activity, supported by revenue to
absorb the extra cost of the labour (Scase & Goffee 1987; Atkinson 1994; Atkinson
& Meager 1994). The decision to hire more employees assumes greater

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significance for small firms, not only because each single hire has greater impact on
the company, being a proportionately large addition to the company relative to the
size of its current workforce but also because a poor choice can have widespread
ramifications for the company both financially and socially (Gatewood & Feild 1987;
Atkinson & Meager 1994).

To the small business owner/manager, the degree of risk in hiring new staff, the
reluctance to assume more responsibility for increasing numbers of people and the
potential for expanding costs may even result in the identification and availability of
a suitable individual being a precondition for a vacancy to be declared (Meredith
1993; Atkinson 1994). Decisions to employ greater numbers may also be
influenced by the extent to which the owner-manager views the increase in
headcount as a potential threat to his/her personal autonomy and ability to
maintain control over the business. In many instances the preferred approach may
include longer working hours for the team already in place and a “we’ll-get-by-as-
best-we-can attitude” on the part of the owner-manager (Atkinson 1994; Atkinson
& Meager 1994; Matlay 1999; Ram 1999).

In common with large organisations, the small business is faced with determining
the range of knowledge, skills and experience required to fulfill the work of the role,
as well as the kind of person needed – the “right type”, who will fit into the
business and the existent team (Ritchie 1993; Atkinson 1994; Atkinson & Meager
1994; Ram 1999; Wilkinson 1999; Kotey & Sheridan 2001; Kotey & Slade 2005).
Moreover, consideration is given to locating potential candidates and how to attract
them to the position. The task of sourcing suitable applicants to replace departed
employees, to fill the position of another employee who is moving on to another job
in the firm or to inject new blood and greater numbers into the company, usually
requires a foray into the local labour market. This is often undertaken by small
companies putting out the word among the owner-manager’s or employees’
contacts that there is a vacancy and asking around to ascertain the availability of
any potentially interested candidates (Atkinson 1994; Atkinson & Meager 1994).

The external environment is where firms will seek out individuals who are able to
support greater business capacity and/or enhance the organisation’s capability.
Rather than draw on the services of expensive recruitment agencies, newspaper
advertising, the Internet, unions or educational institutions, which may cause
delays in the process, small firms tend to source personnel from the immediate,
local environment in which the business is operating (Bosworth 1989; Meredith
1993; Atkinson 1994; Tansky & Heneman 2003). It is less common to seek out
unknown strangers through the national or international labour market networks.

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It is usually only with significant organisational growth that the net will be cast over
a much wider territory (Arthur & Hendry 1990; Atkinson 1994; Holliday 1995).
Personal recommendations are found to be highly valued and frequently candidates
will emerge from among the owner-manager’s family members, personal friends
and other non-work social contacts (Atkinson 1994; Atkinson & Meager 1994;
Bryson 1999; Matlay 1999).

Various studies in the United Kingdom and the United States have indicated that
there is a tendency among small firms to source and hire personnel with specific
characteristics (Rainnie 1989; Barber, Metcalfe & Porteous 1989; Arthur & Hendry
1990; Atkinson & Storey 1994b; Wyer & Mason 1998). For example, Brown,
Hamilton and Medoff (1990) reported that in comparison with large firms small
companies are more likely to employ individuals with lower levels of education, who
are either younger than average or older than average, as well as females, ethnic
minorities and part-timers. Examination of the age structure of small businesses in
both these countries has reflected a propensity to hire younger workers (16-24
years) and older, mature-aged workers (65+ years). Workers in their prime were
more likely to be absorbed by larger companies (Barber, Metcalfe & Porteous 1989;
Storey 1994). This demographic has been explained by some in terms of a low cost
strategy that keeps employment expenses to a minimum and one that targets
disadvantaged groups that are less likely to be disruptive in the workplace (Rainnie
1989; Bosworth & Jacobs 1989).

Atkinson & Storey (1994) suggested that this type of recruitment targeting could
partly explain the frequent complaints from owner-managers about the difficulty
they encounter in finding the necessary skills for their business and the
unsatisfactorily low quality of labour that is available in the marketplace. However
these hiring trends would not appear to be consistent across the whole sector.
Exceptions are to be found in the small professional firms, such as accountants,
lawyers and architects, as well as in the leading-edge technology companies, the
nature of whose business necessitates high levels of education and expertise
among the workforce (Arthur & Hendry 1990).

Typically the hiring process is informal in nature (Marlow & Patton 1993; Atkinson &
Meager 1994; Matlay 1999; Ram 1999; Gilbert & Jones 2000; Kotey & Sheridan
2001). Due to the rarity of the need to acquire new staff small firms are unlikely to
have formalised this aspect of their business into a standardised procedure or
process. The assessment of suitability will often be conducted by way of an
unstructured meeting or discussions between the owner-manager and a prospective
candidate. The candidate is unlikely to be required to complete application forms,

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may not receive a job description or be provided with a documented employment
contract. Small firms are less likely to make use of formal recruitment and
selection techniques such as interview panels, competency and personality testing
or medical checks. The establishment of the employment relationship will be casual
in nature, a verbal agreement comprising mutual understanding about the
exchange of services for agreed compensation. Small firms have been found to
place more emphasis on new hires’ ability to fit into the team environment of the
company, than on levels of qualification, skill or experience (Kitching 1994;
Wilkinson 1999; Kotey & Sheridan 2001). The close proximity and intimacy of the
working relationships within small firms are viewed as having a critical impact on
the internal climate and social environment, which in turn affect the ability of the
owner-manager to control and sustain a productive and cohesive group. Hence,
the need to select recruits with a good fit is regarded as particularly important
(Atkinson & Meager 1994; Atkinson & Storey 1994; Matlay 1999; Ram 1999;
Wilkinson 1999; Gilbert & Jones 2000).

o Employment conditions in small firms

Much of the debate on small business management practice has centred on the
issue of the quality of jobs and the nature of the employment experience for the
individuals who work for these companies. Contrasting views have emerged in the
literature over time, with some claiming that small firms are contributors to
substandard and less than satisfactory working terms and conditions for the
workforce, while others have been of the opinion that small firms offer much more
favourable and attractive work environments than is the case in the larger
enterprises (Rainnie 1989; Atkinson 1994; Atkinson & Storey 1994b; Bacon et al.
1996; Ritchie 1993; Wilkinson 1999; Ram 1999). Although emerging from within
the context of the recent rise in popularity of the small business sector in the
closing decades of the twentieth century, analysis of this issue has revealed the
presence of much earlier historical influences (Rainnie & Scott 1986; Brown,
Hamilton & Medoff 1990; Marlow 1997).

Various factors have played a role in influencing working conditions. Gradual

improvements in working conditions in the post-industrial age have generally
occurred. These have been driven by legislation and regulatory protection, the
humanist school of thought advocating labour-friendly management practice,
increases in personal wealth and education, as well as changed expectations about
the relationship between management and worker. However, the industrial
revolution and the associated mistreatment of labour during this era represented
the beginning of an enduring perception that the transactional nature of the

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employment contract is inherently unbalanced, degrading and exploitative (Rainnie
& Scott 1986; Boxall & Purcell 2003). The visible presence of inferior employment
conditions within many smaller companies reinforced the view that this sector has
been and continues to be guilty of perpetuating social inequalities and
disadvantage. This is most evident in the focus on examples of the extreme
“sweat-shop” or “bleak house” type of small business operation, where scant
consideration is given to the needs, welfare or preferences of workers and there is
little regard for more socially conscious management practice as promoted by the
dominant human resource management discipline (Rainnie & Scott 1986; Ritchie
1993; Marlow 1997; Bacon et al. 1998; Chapman 1999; Wilkinson 1999; Kotey &
Sheridan 2001; Boxall & Purcell 2003). Ritchie (1993, p. 112) highlights this
negative perception of smaller firms when commenting that:

“….they could often appear more like personal fiefdoms, paternalistic

homesteads, back street workshops, temporary employment stopgaps,
oppressive sweatshops, and generally less desirable workplaces”.

Ritchie (1993) mentions a range of shortcomings in small business management

practice including a general unpredictability associated with this aspect of
organisational life, an indifference towards the development of people and low
levels of training, the use of few procedures, a lack of awareness of relevant
legislation and an unhealthy preoccupation with hiring people that suit the owner-
manager rather than meet the needs of the business.

Although no clear description of the Dickensian, “bleak house” company is found in

the literature and the loose application suggests any practice repellent to the
human resource management establishment, a number of associated features
emerge. The bleak house or “bad and ugly” scenario might encompass
organisations that are run in a dictatorial and authoritarian manner, where pay and
benefits are low (presumably below average market rates), working conditions are
harsh and the management of employee health and safety is substandard, union
involvement is absent, and there is little participation by employees in contributing
to the management of the business (Marlow 1997; Wilkinson 1999). The frequent
absence of trade union representation of small firm workers has been considered to
be indicative of capitalist exploitation or a diminishment of workers’ rights and
protections (Rainnie & Scott 1986; Rainnie 1989; Marlow & Patton 1993).

It is evident from interviews that many owner-managers are averse to admitting

union representatives onto their sites (Storey 1994). They report that there is no
need for third party involvement because they maintain close relationships with
their employees, that disputes can be and are settled satisfactorily within the

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confines of the business between the parties concerned without resorting to formal
grievance procedures or the assistance of outside arbitration (Rainnie & Scott 1986;
Rainnie 1989; Storey 1994; Marlow & Patton 1993; Marlow 1997; Matlay 1999).

This point of view appears to be fuelled by the owner-centric nature of small

business where a small firm is usually an extension of the owner-manager’s
personality and individual creative efforts (Rainnie & Scott 1986; Culkin & Smith
2000). The heightened protectiveness and even territorialism displayed by some
owner-managers towards their companies may imply that they are less prepared to
have their management prerogative challenged; that is the right to determine what
is good for the business and what is good for the employees who work for the
business (Rainnie & Scott 1986; Wilkinson 1999). This unitarism in the
employment relationship has been explained as reflecting the considerable personal
investment made by the owner-manager without whom there would be no jobs in
the first place. This view also suggests that there would be little room for
disagreements and should these occur they are likely to be settled by termination
of the employment contract (Scase & Goffee 1987; Storey 1994; Wilkinson 1999).

In fact, owner-managers’ perceptions of their employment relations environment

have often been found to manifest themselves in terms of a harmonious team, just
occasionally upset by problems stemming from employees with the wrong attitude,
who don’t fit in and make trouble. In many cases it would appear that the
existence and potential involvement of unions represents a lurking although often
unrealised fear for small firms. Unlike in large companies where teams of industrial
relations specialists may be employed exclusively to handle the potential and actual
influences of externally led operational disruption, for small firms this consequence
of being an employer is likely to be negligible (Rainnie & Scott 1986; Brown,
Hamilton & Medoff 1990; Stanworth & Gray 1991; Marlow 1997).

What has also emerged is that the small business sector may not be particularly
attractive to union bodies, the former comprising only small groups in highly
dispersed locations which present poor pickings due to the logistics and costs
involved in accessing them (Rainnie & Scott 1986; Scase & Goffee 1987; Bosworth
& Jacobs 1989; Brown, Hamilton & Medoff 1990; Stanworth & Gray 1991; Arthur
1995; Wilkinson 1999). Small firms do not easily accommodate the need of unions
to have a paid-up critical mass. A further deterrent may exist in the fact that there
will be less kudos for unions that pursue relationships with less politically and
industrially prominent organisations (Brown, Hamilton & Medoff 1990; Marlow &
Patton 1993). Small firms may be less fertile in terms of employee interest in
membership. At a point in industrial history when union popularity is particularly

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low, militant industrial activity may actually possess less appeal for the typical small
business workforce comprising minority groups unfamiliar with and unskilled in
demanding better working conditions. It has also been remarked that historically
the pursuits of the predominantly blue-collar male union representative are poorly
aligned with the interests of much of the female workforce where females constitute
a significant proportion of the small firm labour population. The social and political
needs and agendas of these two groups are seen as having little in common
(Rainnie & Scott 1986).

Another explanation for the low levels of industrial dispute of the kind found in
larger companies has been the suggestion that employees in small firms are aware
of vulnerability of the firm as a viable commercial entity and that their continued
employment will be contingent upon the ability of the business to survive the
already diverse range of obstacles encountered in the normal course of operation.
Linked to this may be an acknowledgement that should the company fail for some
reason and is forced to liquidate, there will be the inevitable loss of jobs and even
uncertainty about the availability of redundancy settlements. In other words, to a
far greater extent it is in the interests of the workforce to help and support the
small business wherever possible and limit disruptive activity to extreme
circumstances that genuinely warrant activity of this nature (Arthur & Hendry 1990;
Marlow & Patton 1993; Bryson 1999).

These types of factors have been posited as reasons for the rare occurrence of the
type of conflict or unrest common in many large companies, with disputes
escalating and in some cases even leading to violent battles often underpinned by
strong political and ideological motives. Due to these differences in focus and
organisational dynamics within small firms, Scase and Goffee (1987) have
suggested that internal conflict is more likely to be expressed in the form of
turnover, insubordination, slow-downs and lateness for work, rather than in union
action and strikes. Nevertheless, it remains unclear whether low levels of
unionisation and fewer counts of industrial unrest are automatically indicative of
higher levels of organisational harmony and individual job satisfaction among small
firm employees (Rainnie & Scott 1986; Oliver 1998; Wilkinson 1999).

Rainnie (1989) and Goss (1991) have argued that the approaches adopted by small
firms to the management of their employment relations are a consequence of the
production and trading context in which they operate as well as the level of
personal engagement required of the workforce in order to produce and sell
particular goods or services. Rainnie (1989) for example, suggested that employee
relations environments are determined by sectoral economies of production,

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relating to the position the firm holds relative to the types of customers served.
The manufacturing of clothing, where the relationship is based on high levels of
dependency, is an easy market to enter. It requires only basic production
technology and hence represents a highly competitive environment in which to
secure contracts with retailers. Here the industry must reduce prices to a
minimum. To survive small business suppliers are pushed to minimize the
operational costs and derive maximum capacity from their resources, including
their labour. In addition, where their raw materials come mainly from large firms,
such as the producers of textiles, the small manufacturer is squeezed in the middle
having to contend with larger scale competitors who may be able to more easily
absorb higher prices for these items and negotiate bulk-buy discounts. Thus the
infamous sweatshop scenario is in part a consequence of meager capacity in a
particular system of production that influences investment in the terms and
conditions of workers (Rainnie 1989; Goss 1991).

Similarly, Goss’s (1991) typology of organisational control suggests that the nature
of the employment relationship is determined by the balance of power emanating
from the degree to which the employer is reliant on the skills and associated level
of performance by the employee. To illustrate this he proposes that where
dependence by the company on the abilities and discretionary input of the
workforce is high the resultant management approach is likely to be more
egalitarian and fraternal. The relationship with the workforce is viewed more in
terms of a partnership with the concomitant levels of respect and distribution of the
financial returns on invested effort. This was found to be the case in Ram’s (1999)
study of employment relations in small professional service and management
consultancy firms. Where the nature of the dependence is not so pronounced but
still requires employees to identify with the organisation’s goals, a more
paternalistic style of management is thought to occur. The third type manifests a
further diminishing of the levels of dependence and a corresponding increase in
autocratic, although still benign behaviour by the business owner or manager.
However, there is still some capacity in the system for some assertion of
independence and personal control by the employee. The ultimate imbalance
occurs when the power of the employer is dominant, a product of low dependence
on a low-skilled and easily replaceable workforce resulting in poor terms and
conditions of employment. In this instance, the need to control the labour costs is
more critical to the business than the need to maintain good labour relations
through better pay and benefits (Goss 1991).

Other aspects are identified as contributing to the perception that small firms are
less attractive employers than larger companies, including the exclusion of smaller

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firms from certain regulatory protections (Brown, Hamilton & Medoff 1990). The
small business community in some countries is exempt from certain regulation that
governs the employment relationship and provides rights and protections for
workers. It is also suggested that authorities may be more lax about enforcing
employment obligations within small companies and that they attract less onerous
fines for non-compliance. As such, small business employees are considered to be
more vulnerable or disadvantaged in the employment relationship as they may miss
out on basic rights such as a minimum wage and other entitlements (Brown,
Hamilton & Medoff 1990). The debate on the appropriateness of maintaining two
sets of employment conditions for the business community, where small firms are
partially protected from the risks and exposures associated with hiring people at the
expense of certain types of employment protections for small business employees
continues to divide opinion (Brown, Hamilton & Medoff 1990). Furthermore, small
firms are considered less attractive employers because their high mortality rates
create less stable employment, the potential for rapid obsolescence of particular
skills held by small numbers of workers particularly at a time of business change,
and the low levels of training and development that are provided to employees
(Brown, Hamilton & Medoff 1990; Arthur & Hendry 1990; Bosworth & Jacobs 1989).

o Benefits of small firm employment

In marked contrast with the “bleak house” school of thought is the more recently
emerged perception of the small business sector as a bastion of that which is good
and desirable in the contemporary world of work (Curran & Stanworth 1986a;
Ritchie 1993; Hendry, Arthur & Jones 1995; Wilkinson 1999). Small firms have
been increasingly portrayed as havens of communal productivity, where motivated
and committed employees work in intimate, harmonious and friendly groups
redolent of successful and happy family life (Curran & Stanworth 1986a; Scase &
Goffee 1987; Rainnie 1989; Ritchie 1993; Hendry, Arthur & Jones 1995; Matlay
1999; Ram 1999; Wilkinson 1999). Unlike the social climate in many large
organisations, where employees often describe their employment experience as
impersonal, isolating and constrained by rigid bureaucracy and distant,
authoritative management, where attention must be paid to currying favour and
avoiding career-limiting behaviour, the small firm is seen as an environment in
which workers can “escape many of the deprivations experienced.… in large
enterprise” (Curran & Stanworth 1986b, p. 25; Matlay 1999).

The closer and more regular physical proximity of employees working together in a
small team, suggest that there would be more frequent communication and
interaction and hence greater opportunity for building positive social cohesion. The

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opportunity and motivation to develop strong relationships, both between peers and
with management can occur on a daily basis (Ritchie 1993; Bacon et al. 1996;
Matlay 1999; Wilkinson 1999; Ram 1999). It is suggested that the size of these
companies and the prominent role of the owner-manager makes the smaller
operation more amenable to the development of a unifying culture and cohesive
work environment (Rainnie 1989; Harrison 1993).

Furthermore, particularly troublesome areas of the employment relationship such

as the management of performance can be handled constructively through the
continuous building of trust between people whose lives are more deeply integrated
and shared (Curran & Stanworth 1986b; Gilbert & Jones 2000; Matlay 1999).
Unlike in large organisations where employees may be remote both physically and
emotionally from their manager, the small company owner-manager is able to
observe and appraise the performance of the team and provide real-time, frequent
feedback as duties and tasks are carried out. The regimented and often punitive
process characteristic of the large company performance management system is
deemed irrelevant in a context where appraisal of the job can take place informally
“every six minutes rather than every six months” (Curran & Stanworth 1986a;
Gilbert & Jones 2000, p. 64; Matlay 1999).

The origins of this reinterpretation of the nature of working life in small firms have
been primarily the growth in popularity of the sector since the 1960s and early
1970s and the growth in research into the social behaviour of small firms
(Schumacher 1973; Rainnie & Scott 1986; Curran & Stanworth 1986a). Influenced
by a broad range of parallel environmental developments small firms were swept
along with the optimism of the times and became increasingly viewed as potential
models of progressive systems of contemporary management. These include
general improvements in working conditions for many workers in developed
countries, the growing need for solutions to mass labour unrest within industry, the
continuous introduction of more legislated and regulatory workplace protections,
the emergence of a middle-class possessing greater prosperity, education and living
conditions, as well as developments in understanding by the social-psychologists
about organisational and human behaviour (Schumacher 1973). Evidence emerged
to support the view that both the inherent and the contemporary social needs of
people could not be satisfied in large-scale bureaucratic environments that lead to
individual alienation and stultify human motivation for work and achievement
(Rainnie & Scott 1986; Curran & Stanworth 1986b).

Among the earliest and most influential propagators of the “small is beautiful”
school of thought, (a phrase coined by Schumacher in his 1973 work Small is

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beautiful: a study of economics as if people mattered) was John Bolton who led the
Labour government-initiated UK Committee of Inquiry on Small Firms in 1969 and
reported its findings to an equally committed Conservative government two years
later. With respect to the quality of employment that small firms could offer, the
Report stated:

“In many aspects the small firm provides a better environment for the
employee than is possible in most large firms. Although physical working
conditions may sometimes be inferior in small firms, most people prefer to
work in small groups where communication presents few problems. The
employee in a small firm can more easily see the relation between what he
is doing and the objectives and performance of the firm as a whole. Where
management is more direct and flexible, working rules can be varied to suit
the individual. Each employee is also likely to have a more varied role with
a chance to participate in several kinds of work ….no doubt mainly as a
result ….turnover of staff in small firms is very low and strikes and other
kinds of industrial dispute are relatively infrequent. The fact that small firms
offer lower earnings than larger firms suggest that the convenient location
and generally the non-material satisfactions of working in them more than
outweigh any financial sacrifice involved” (Stanworth & Gray 1991, p. 190
quoting the Bolton Report 1971, p. 21).

Other studies from the UK, including projects by the Acton Society Trust published
in 1953 and 1957 and work by published by Revans in 1956 and 1958 arrived at
similar conclusions; that employers and employees in small firms were advantaged
through their ability to achieve closer interpersonal relations, higher morale and
lower levels of absenteeism (Stanworth & Gray 1991). Research conducted by
Ingham in the late 1960s proposed that employees in small firms possess non-
economic orientations, putting little emphasis on monetary rewards and preferring
the intrinsic benefits that the smaller companies are seen as better equipped to
offer, such as interesting work, participation with superiors and satisfying social
relations (Rainnie & Scott 1986; Curran & Stanworth 1986a; Rainnie 1989). As
such, he concluded that employees self-select themselves to work in environments
that are most consistent with their own values and attitudes towards the place of
work. Those placing greater value on economic rewards will choose to work for
organisations, i.e. large companies that are more able to meet these monetary
needs and expectations (Curran & Stanworth 1986b; Stanworth & Gray 1991;
Atkinson & Storey 1994).

Rainnie and Scott (1986) contributed an insightful sociological essay highlighting

various contextual cultural and historical forces that had contributed to this
revolutionary view of small firms as the answer to the industrial dehumanisation of
work and low levels of national productivity. In particular, they report that the
small commercial entity was seen as embodying the potential for realising the
values of an emerging social movement promoting an idyllic return to more natural

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ways of living and carrying out work. As such, commercial activity should be
conducted on a smaller scale similar to the craft and trades communities prevalent
in the pre-industrial agrarian era. This implied a shifting of the base of power to
the individual and creating self-sufficient, empowered workers who could take pride
in their efforts through having greater control over the way goods and services are
produced and traded. The pervasive theme of family associated with small firms is
said to derive from a tradition of viewing small work collectives as family groups,
which in many cases they were, where the leader of the group is an idealised
benevolent father figure (Rainnie & Scott 1986; see also Schumacher 1973).

The essay also highlights the growing tendency to romanticise the world of the
small firms; the portrayal of the owner-manager as a heroic entrepreneur leading
his band of trusting, faithful followers in pursuit of worthy goals being both powerful
and compelling. It is also one that contrasts sharply with the grey, monolithic
enterprises controlled by the privileged capitalist classes that were centres of
industrial conflict. What was emerging was a sense that it was the actual size of
the organisation, that is to say the largeness of corporations, that contributed to
dysfunctional and disruptive human behaviour and that these companies were
simply not conducive to achieving optimal levels of productivity and getting the best
out of people (Schumacher 1973; Curran & Stanworth 1986a; Rainnie & Scott
1986; Scase & Goffee 1987). Inevitably, there have been counter arguments about
what were viewed as naïve and simplistic interpretations of life in small firms, as
well as criticism for the dubious conclusions of associated research and the
excessive enthusiasm of the supporters of the small business bandwagon
(Stanworth & Gray 1991; Storey 1994). Although there is no consensus on this
issue, there remains a belief that small companies are more desirable places to
work because they offer their employees a quality of working life not commonly
found in the larger corporations (Schumacher 1973; Curran & Stanworth 1986a;
Bacon et al. 1996).

Researchers have identified a range of factors to substantiate the proposition that

small firm workplaces are more attractive and provide better quality jobs when
compared with large companies. These include organisational structures that are
more conducive to cohesive and cooperative team work, better communication
between peers and between management and the workforce (Curran & Stanworth
1986a; Wilkinson 1999), greater scope for individualism and flexibility with regard
to organisational rules (Scase & Goffee 1987; Rainnie 1989), a transparency of
effort in relation to performance and contribution to the success of the business
(Marlow & Patton 1993; Wilkinson 1999), a greater diversity and discretional
responsibility in work roles and more varied types of working experience (Heneman

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& Berkley 1999), a more prominent voice in the decision-making processes and
among the firm’s management group, a stronger sense of identifying with and
belonging to the company, as well as fewer occurrences of confrontation and
conflict in the workplace (Curran & Stanworth 1986b; Brown, Hamilton & Medoff
1990; Atkinson & Meager 1994; Oliver 1998; Bryson 1999).

The smaller organisational configuration is seen as able to address the needs of the
individual as opposed to those of the collective and to respond effectively to the
human desire for a psychological rather than transactional contract with the
employer (Schumacher 1973; Rainnie 1989). In some studies, owner-managers
have indicated that they view their employees as friends, or that their relationship
with their workforce is similar to that of a marriage in which an emotional bond is
established. The sense of a close-knit group is frequently present (Curran &
Stanworth 1986b; Storey 1994). Wilkinson (1999, p. n/a) comments that “small
firms are saturated with the ideology of the family”. As such the nature of human
interaction in small firms is often reported or described as being friendly, caring,
trusting, as well as mutually satisfying and supportive (Curran & Stanworth 1986a;
Scase & Goffee 1987; Storey 1994; Holliday 1995; Bryson 1999; Kinnie 1999).

While the smaller operation may be able to achieve higher levels of human
connectivity within its walls, this will depend on the way in which each party in the
relationship views the behaviour and actions of the other and believes that the
expectations and promises made at the time the contract was entered into are
being met (Wilkinson 1999). These factors will influence the durability and success
of what is often perceived as a form of partnership. Counterproductive however,
may be the intimacy of relationships in small firms leading to favouritism and
nepotistic behaviour on the part of owner-managers (Kaman et al. 2001). It is
possible that the distant and impersonal nature of relationships within big
companies and the use of performance management systems designed to focus on
the requirements of the functional role rather than the personality of the
incumbent, mean that managers are perceived as more objective in their
judgments and dealings with their workers. Hence, the requirement for leaders of
small firms to be effective managers is likely to be different to those of managers
leading teams in larger companies where there are other types of expectations from
the relationship (Kotey & Sheridan 2001).

So far, the socio-psychological dynamics of the small firm are not fully understood.
It is not known whether for example, the harmonious team environment is a
product of owner-managers’ personal value system where the moral imperative is
to build and be part of an organisation that nurtures positive relations between its

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members, or whether it is a calculated commercial strategy motivated by economic
necessity and personal financial gain (Scase & Goffee 1987; Marlow & Patton 1993;
Mazzarol 2003). While understanding about these issues continues to grow, small
firms are found that foster the goodwill of their people and encourage a sense of
identification with the communal group. As the Kauffman (1997a; 1998a; 1999)
studies revealed, small firms make use of the physical proximity of their workers to
reinforce emotional closeness through initiatives that respond to the human
inclination to socialise within the group. Activities that support employee sharing,
interacting and connecting with one another as well as partaking in common
activity both industrious and leisurely in nature are encouraged. Collective efforts
are recognised and rewarded through initiatives and social events, such as
employee-of-the-month programmes, Christmas gifts, family days, picnics, trips to
attending sporting events, parties and activity evenings, financial loans and
personal advice, as well as barbeques at the end of the week, evenings at the pub
or finishing early on Friday afternoons (Scase & Goffee 1987; Oliver 1998;
Kauffman 1999).

o Pay and benefits

Another area of the employment relationship in small firms that has received
attention by researchers and has been cited as evidence of the bleak-house
tradition is the comparatively low levels of compensation in the form of
salaries/wages and fringe benefits that are paid to workers (Rainnie 1989; Finney
1987, Hendry, Arthur & Jones 1995; Wilkinson 1999). Brown, Hamilton and Medoff
(1990) undertook an extensive review of the pay rates, fringe benefits and other
employee programmes in the United States. This study identified a significant and
consistent discrepancy between the level of pay and fringe benefits provided to
employees in small firms when compared with larger organisations. With regard to
levels of monetary compensation, the study indicated that the differential in some
cases could be 35% percent. Small business workers were also generally found to
be in receipt of fewer benefits such as vacation time off, sick leave, life insurance,
pensions, bonus opportunities, short and long-term disability support, savings
plans, profit-sharing schemes, company cars and cafeterias (Brown, Hamilton &
Medoff 1990).

Atkinson and Storey (1994b) refer to other studies carried out in the United States
by Kruse (1992) and by Idson (1990), both of whom found evidence to suggest
that wages were higher in the larger firms. Pockets of research in the United
Kingdom have found a similar trend with small firms coming in below the large
businesses in terms of the value of the remuneration packages offered to their

309
workforce (Rainnie 1989; Ram 1999). Findings of this type have led researchers to
conclude that in conjunction with other aspects of employment disadvantage such
as exclusions from areas of the legislation designed to protect employee rights and
conditions and higher levels of job insecurity, overall the quality of jobs provided by
small firms is lower than in large firms (Arthur & Hendry 1990; Brown, Hamilton &
Medoff 1990; Atkinson & Storey 1994b).

However, as with other areas of employment practice in small firms this pattern of
lower compensation has not emerged consistently across the sector, suggesting this
is not a phenomenon unique to small firms nor one that can automatically be
claimed to represent differentiation between the two groups (Curran & Stanworth
1986a). Work undertaken by Scott, Roberts, Holroyd and Sawbridge (1989),
referred to by Atkinson and Storey (1994), found that levels of pay varied
considerably across different industry sectors and that while the aggregated data
suggested that in general small firms do not pay high wages compared with larger
firms, studies indicated that this was not universally true. This was also found to
be the case by Storey (1994) who referred to studies where both workers and
owner-managers of high-tech service companies indicated that the pay and
conditions in their firms were as good or even better than in other firms, including
the larger ones (Ram 1999). As Brown, Hamilton & Medoff (1990) note, many
small businesses are highly prosperous and are generators of substantial wealth for
their owners and staff as for example in the professional service firms of lawyers,
accountants, management consultants, architects etc.

Some commentators have explained the discrepancy in rates of pay and variety of
employee benefits and programmes in terms of small firms lacking the financial
capacity to compete with large companies (Gibb & Davies 1992). Unlike larger
businesses, resource-constrained small firms are unable to achieve equivalent
economies of scale. Their ability to purchase employee benefits, in particular on a
sufficient scale to achieve reasonable discounts, is limited. Small firms encounter
higher per unit costs for schemes such as healthcare programmes, childcare
facilities and the like. This is compounded by the fact that most small firms lack
the supporting infrastructure needed to administer a diversity of programmes and
benefits and are less likely to possess the in-house knowledge about what schemes
might be available and could be introduced (Brown, Hamilton & Medoff 1990).

Other variables have also been explored as possible explanations for this trend in
differential compensation. Brown, Hamilton & Medoff (1990) for example
suggested that large businesses are more likely to utilise more technically
sophisticated and leading edge systems and methods of production. In order to

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operate these there will be a requirement for higher levels and greater variety of
skills and hence those who are hired to work in these firms will need to possess the
necessary education, skills and experience. To attract and retain high calibre
workers, companies are obliged to offer compensation packages that reflect the
quality of the service received. Combined with growing shortages of skilled labour
and declining numbers of younger people available in the workforce, the pressure
on smaller firms to be more competitive in the labour market is growing (Boxall &
Purcell 2003).

Rainnie (1989) explained the patterns of lower pay rates as an elaborate strategy
by owner-managers designed to achieve greater levels of control, cooperation and
reliability in the labour relationship through the hiring of marginalised or
economically disadvantaged social groups. The levels of labour dependence on the
company are greater and hence lead to lower levels of industrial conflict. Moreover,
he points out that the higher pay rates found in large organisations may in some
instances represent a union-avoidance strategy, where inflated, above-market rates
are offered in exchange for non-participation in union activity and hence limiting
industrial unrest to internal dialogue directly between management and workforce.
In general, the pervasive informality of smaller firms suggests there will be less
certainty surrounding the levels of remuneration a prospective employee can expect
to receive (Brown, Hamilton & Medoff 1990; Matlay 1999).

Larger companies are more likely to pay market rates, be more prepared to pay for
particular skills and to seek internal parity among employees engaged in similar
roles. Small firm pay is more likely to be linked to the performance of the company
and hence the capacity to pay, as well as the subjective perception of the value of
the employee as a current or potential contributor to this. It is less common
among small firms to find fixed and predictable remuneration structures or
systematically regular pay reviews and increases, the latter occurring in an ad hoc
manner according to the discretion of the owner-manager (Ram 1999; Matlay
1999).

o Training and development

The area of training and development in small companies has received greater
scrutiny by a diverse range of individuals as well as public and private institutions.
It is routinely highlighted as representing a significant source of differentiation in
approach when compared with large companies (Goss 1992; Holmes, Butler &
Lennon 1995a; Kerr & McDougall 1999; Matlay 1999). The literature dealing with
the issue of the development of workforce skills consistently reports that the

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provision of training and learning opportunities for small firm workers tends to be
lower and more limited in its variety and scope (Bosworth 1989; Brown, Hamilton &
Medoff 1990; Arthur & Hendry 1990; Goss & Jones 1992; Holmes, Butler & Lennon
1995b; Fuller & Forsyth 1994; Freel 1999; Wilkinson 1999).

An interesting discovery in the course of sourcing material for this study was that
despite the amount of attention paid to this subject by researchers, no examples of
qualitative studies exploring the approach and delivery of training that could
illustrate how small firms tackle skills development were found. There is a shortage
of information about how owner-managers arrive at the decision to provide training
and development for their workers, how this is integrated and structured around
the daily business activity when it occurs, what specific methods are used for
different types of jobs, whether skill acquisition is measured, followed-up and
reinforced, and whether they perceive their approach to be adequate and
successful. Insights into the type of developmental infrastructure owner-managers
believe could help them to address this aspect of their business most effectively are
limited. Rather, the focal point for most investigation and debate on this topic is
the failure of small firms to provide greater amounts of training for their employees
and detailed analysis of why this occurs. As such, a lot more is known about what
small firms don’t do in this respect and why, than what they do in fact do and how
(Clark 1986; Holmes, Butler & Lennon 1995b; Freel 1999; Kerr & McDougall 1999).

One of the more extensive analytical studies undertaken in Australia in recent years
on small firm training and development is the Karpin Report (1995), which included
the small business sector as part of a broader investigation into the on-going and
future management needs and competencies of the nation. In the process of
emphasising the pressing need to realign the way in which the national stock of
skilled people (in particular of the commercially innovatory type) is built and
disseminated, the report provided an extensive and diverse list of reasons for the
small business sector’s poor record of training provision. Consistent with other
studies, these included the prohibitive costs, a shortage of time and opportunity to
attend courses, a perception by owner-managers of training having little relevance
and immediate value to their business, a reticence to seek external assistance, a
view that conventional training methods and the overly theoretical and generalised
nature of the content matter is inappropriate, a fear of the loss of investment due
to high staff turnover or inter-competitor poaching, and a lack of knowledge about
available development programmes (Bosworth 1989; Fuller & Forsyth 1994;
Holmes, Butler & Lennon 1995b; Duberley & Walley 1995; Ardichvili et at. 1998;
Cohen 1998; Kerr & McDougall 1999; Matlay 1999; Freel 1999; Kotey & Slade
2005). To meet skills and competency needs owner-managers are found to either

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purchase specialist expertise from the external labour market or to opt for available
methods that are cheap or free, time-effective, easily accessible and flexible as
demand dictates. These will usually be in-house and on-the-job, of immediate and
direct relevance to the particular business and provided by trusted individuals with
whom a certain rapport can be established (Goss 1992; Marlow & Patton 1993;
Atkinson & Meager 1994; Fuller & Forsyth 1994; Duberley & Walley 1995; Kotey &
Slade 2005).

The general issue of workforce development takes on a substantially different

character and dynamic within the small firm context. This has been apparent for
example, in the preference among some owner-managers to build on their
employees’ existing skills rather than provide opportunities for acquiring new ones,
as well as focusing more on the internal transfer of existing skills to others within
the company as opposed to creating opportunities for employees to develop as
individuals independent of the needs and goals of the company. Also rarely
mentioned is the fact that education broadens outlook and creates expectations,
factors that may present exposure for companies which due to their small size are
unable to provide career opportunities, promotions, a variety of learning
experiences or solutions to personal growth aspirations (Atkinson & Meager 1994;
Duberley & Walley 1995; Hendry, Arthur & Jones 1995; Gilbert & Jones 2000).
Goss (1992) recommended that training should be more flexible, relevant and time-
effective, in effect accommodate the individuality of smaller companies and their
specific needs.

A presumption among some commentators is that small firms should not only be
employers but also educators, from which there would be benefit for the company
as well as for broader society (Goss 1992; Hendry, Arthur & Jones 1995; Kerr &
McDougall 1999). Fuller and Forsyth (1994) reported that the main sources of
national productivity growth in Australia will be technological developments,
increases in capital intensity, and improvements in labour efficiency and economies
of scale. Education and training are seen as the key to productivity performance
having an impact on the quality, depth and flexibility of workforce skills that
support business investment in new technologies and systems of production. In
contrast however, there is increased emphasis on the strategic alignment of
training and development to clearly defined business and organisational objectives,
thereby removing non-value adding expenditure and implying greater
circumspection in corporate investment in this area (Kerr & McDougall 1999). In
other words, there is ambivalence about the role of commercial entities as centres
of education. It is likely that small businesses would lean toward the latter in light

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of the breadth of other challenges they face, as well as the cost and resource
constraints with which owner-managers usually have to contend.

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Chapter 9

Study findings (literature review)

ƒ Introduction

The purpose of this chapter is to present the findings of the investigation into the
prevalence of a strategic approach to human resource management when matched
against a specifically designed model of SHRM as might reflect large business
management practice, but in this instance within the context of smaller firms. It
was against the following four elements of the SHRM framework that evidence was
sought to identify any indications of a complete or partial application of the SHRM
philosophy and tool within the existent small firm research literature and other
general commentaries:

¾ Element 1: A management philosophy (the recognition of people

as a valuable business resource)

¾ Element 2: Planning for the management of people (analysis of

human resource management options and making
associated decisions)

¾ Element 3: Linking human resource management with organisation

and business goals

¾ Element 4: The use of Human Resource Management (HRM)

technology to support the implementation of business
strategy

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

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ƒ Perceptions about human resource strategy in small firms

As the discussion from the preceding chapter has shown, the literature of an
empirical, conceptual or prescriptive type that can provide useful and informative
data about human resource management practice in smaller firms is limited. Texts
and sources covering human resource management are few in both number and
substance. During this study only a few were found during this study that claimed
or appeared to address the specific subject of strategic human resource
management in smaller firms. Nevertheless, it is within the literature on the
broader but inter-related field of people management in the small business
environment that information was found relating to the particular issue of human
resource strategy, albeit sparse and fragmented. These sources provide useful
insights into what is and is not known and understood about the research question.

During the course of this research project only two discursive texts were identified
whose objective was to bring together the discrete disciplines of strategic human
resource management and the smaller business sector, namely Ritchie’s (1993)
article and Hendry, Arthur and Jones’ (1995) work. In addition, only a handful of
articles were found that either claimed explicitly to be concerned with reporting the
findings of research on the subject of strategic human resource management in
small firms or included prescriptive guidance about strategic management practice,
being titled in a way that reflected this. These included Miner (1973), Fairfield-
Sonn (1987), Hannan, Burton and Bacon (1996), Chapman (1999), Nankervis,
Compton and Savery (2002), Brand and Bax (2002), Matthews (2002) and Singh
and Vohra (2005).

Some years ago Arthur and Hendry (1990, p. 234) noted that there were few
empirical studies on “the links between HRM and business unit strategy” and this
still appears to be the case. Such an outcome was expected as it reflected the
presumed limited research on workforce management practice within small firms
particularly with a strategic focus and confirmed the opportunity to make a
contribution in the form of a research project.

The shortage of research studies dealing with human resource management

practice in smaller firms and in particular focusing on the issue of strategy, initially
suggested that SHRM or any form of strategic activity relating to people
management was not likely to be present within the smaller sector. However, a
variety of positions and views on the way in which smaller firms approach the
management of human resources from writers and researchers in this field were
discovered. These can be categorised as follows:

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 Small firms ….

A. Are not strategic ….

B. Should be strategic ….
C. Are not all strategic ….. …. in their management of people
D. Might be strategic ….
E. Are strategic in all cases ….

There are those who believe that small firms do not generally engage in strategic
activity relating to the management of their people and convey an acceptance that
this is to be expected for a range of reasons (McEvoy 1984; Ritchie 1993; Wilkinson
1999; Wyer & Mason 1998; Wagar 1998; Johnson 2000; Nankervis, Compton &
Savery 2002; Bartram 2005; Kitching 1996). There are also those who believe that
small firms are not usually strategic but in their discussion about this subject imply
or indicate that they should be (Duberley & Walley 1995; Wiesner & McDonald
2001; Kerr & McDougall 1999; Gilbert & Jones 2000; Deshpande & Golhar 1994;
Rindt 1975; Atkinson 1994; Flanagan & Deshpande 1996; Curtain 1995; Arthur &
Hendry 1990; Fairfield-Sonn 1987; Fry 1993; Dollinger 1999; Smith 1991;
Ardichvili et al. 1998; Kickul 2001; Patterson 2002; Miner 1975; Ritchie 1993).
Moreover, there are those who are undecided and waver between discussing small
firms in what might be considered strategic terms while questioning either implicitly
or explicitly its actual presence (Duberley & Walley 1995; Kinnie unpublished;
Robinson & McDonald 1995; Chapman 1999). A further category are those who
either support the proposition that small firms are strategic or simply imply that
this is the case, without expressing the need to question whether or not it should
be the case (Kaman, McCarthy & Gulbro 2001; Stanworth & Gray 1991; Roberts
1999; Hendry, Arthur & Jones 1995; Matlay 1991; Kauffman 1997a; Wilkinson
1999; Golhar & Deshpande 1997; Kinnie unpublished; Mazzarol 2003; Gerber
1995). In this vein, an unexpected number of angles on the question of the
strategic management of people in the smaller business sector emerged.

o Perceived absence of human resource strategy in small firms

Empirical research on human resource management in small firms has in some

instances given researchers a reason to believe that these organisations are not
generally strategic in the management of their workforce.

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For example, Ritchie (1993) refers to work by Scott et al. (1989) who had
highlighted the absence of planning for the management of people in small firms.
They observed that management’s approach was not usually formulated in a
conscious, structured way and that “informal routinization” played a large part.
They found little evidence of planning or of attempts to avoid or pre-empt potential
problems in labour management (Ritchie 1993, p. 120).

Wyer and Mason (1998) doubted the presence of a strategic approach to workforce
management in smaller firms that resemble large business practice. They
questioned the feasibility of finding integrated, organisationally consistent and
mutually reinforcing policies in all areas of their personnel management.

Ritchie (1993) made mention of unpredictable management practices and

indifference towards the development of human resources in small firms. Based on
research observations Wilkinson (1999, p. 206 on) noted that smaller firms “hardly
contemplate formalizing their working strategies, still less integrating human
resource development plans into them”. Wilkinson attributed this observation
partly to the lack of resources and the absence of specialist personnel. It was also
suggested that small firms did not view the management of their people as a
technical area that required specialist support. This study also concluded that there
is general acceptance that small businesses do not place a high priority on the
management of human resources.

Conclusions about the deficit of strategic people management were also the
outcome of Bartram’s (2005, p. 137) work which refers to the Australian Workplace
Relations (AWIRS) survey of 138 small businesses conducted in 1995 that
concluded that these types of firms were “less likely to develop a formal
organisational strategy”. Although the article fails to clarify its use of strategic
terminology, from this Bartram (2005, p. 139) surmised that although these
organisations were “dabbling” in HRM practices, there was little evidence to suggest
that they were practicing “normative strategic HRM”.

The view that small firms do not adopt a strategic approach to the management of
their people was also found in works by Johnson (2000) and Nankervis, Compton
and Savery (2002). Both of these studies based in New Zealand and Australia
respectively, indicated their assumption that small firms are not strategic because
they do not generally have an in-house human resource management department
or an in-house professional specialist. Johnson’s (2000) study examined “strategic
HR” and “HR Best Practice” in New Zealand companies and intentionally excluded

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small firms from the sample group based on the belief that without a departmental
function there would no SHRM.

Similarly, Nankervis, Compton and Savery (2002) concluded that their sample of
small firms were not strategic in the management of people because human
resource management professionals were not involved in the strategic decision-
making. This study found that the majority of CEOs perceived the human resource
management functional role to be essentially administrative, or at least
“accommodative with respect to the integration of HRM and business strategies”
(Nankervis, Compton & Savery 2002, p. 271). In view of what is understood about
owner-managers’ propensity to retain a hold on people management issues and
decisions leaving the acquisition of professional support at late as possible in the
growth process, this finding would be consistent. However it also presumed that
strategic activity occurs only where a specialist professional is present and owner-
managers and other members of the management team do not engage in any form
of strategic activity themselves.

Similarly, the study of people management practices by Gilbert and Jones (2000, p.
62) covering 80 small firms in New Zealand concluded that few of the respondents
could be described as having an “HR strategy”. Where there was some indication of
strategic activity, this tended to focus on financial and marketing considerations.

Harney and Dundon’s (2006) study of human resource management practices in

Ireland led them to conclude that small firms do not have a formalised human
resource management strategy. Furthermore, Wager’s (1998) study led to the
conclusion that it was unusual for small firms to engage in strategic employee
management with the goal of achieving competitive advantage.

o Perception of limited adoption of human resource strategy in small firms

Some researchers have indicated their understanding that the strategic

management of people does occur within this sector, but that this is something of a
rare occurrence. For example, Duberley and Walley (1995) studied the presence of
HRM in a group of small and medium-sized businesses in the United Kingdom,
evidently searching for indications of the strategic management of people in these
organisations. They reported that only three companies “approximate quite closely
to the model of strategic HRM”. In effect, very few of the organisations adopted a
strategic approach towards HRM or had an integrated set of policies related to the
proposed business strategy (Duberley & Walley 1995, p. 891). They noted that
policies and people-related decisions were rarely seen as central to the corporate

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plan, where one existed, and only a few had implemented cultural, structural or
other personnel strategies. The findings of this study suggested that decisions
relating to the management of people tended to be reactive, piecemeal, or “bolt-
on” activities. Human resource management issues were dealt with through “quick
fixes” in response to perceived immediate problems.

Similarly, this variation in management practice across the sector was found in the
Australian study of human resource management conducted by Wiesner and
McDonald (2001). They reported that although 92 per cent said they had identified
specific goals and objectives as part of their strategic business plan, only 47
percent indicated they had altered practices in order to achieve the goals and
objectives included. The researchers interpreted this finding as a lack of strategy
relating to workforce management.

Further to a study of the training and development activities of seven Scottish small
and medium-sized enterprises, Kerr and McDougall (1999) commented that while
many companies of this size engaged in training and development only a small
minority located this area of management strategically within the company plans.
It was not evident to the researchers why some smaller firms approached the
development of their people strategically, ensuring that their learning activities
were integrated with their business strategy and identifying and responding to
learning needs in light of the corporate plan, while others did not.

Kitching’s (1996) study of 233 UK firms with less than 50 employees investigated
six dimensions of human management practice including “strategic integration” and
“human resource planning”. Kitching (1996) noted that much of the literature
concerning human resource practice in small firms concludes that there is an
absence of personnel policies, limited planning and little strategic integration of
people management practices. In this instance, he found that responses to a
postal survey indicated “favourable” responses with the exception of human
resource management planning.

o Ambivalence about the presence of human resource strategy in small firms

For some writers and commentators, associating the concept of strategy with small
firms was found to present a quandary. Certain confusion exists about what
actually constitutes “strategy”, particularly when the large corporation paradigm is
considered the normative approach. Possibly due to mental associations of large
corporations pursuing grand scale strategy or an expectation that strategy is the
product of structured planning activity, it is evident that some writers have

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difficulty in viewing small firm activity as strategic. Occasionally, there is not only
an avoidance of the term “strategy” to describe behaviour that could be reasonably
construed as strategic in nature but also denial of its presence while actually
exhibiting examples of such.

For example, while Duberley and Walley’s (1995) article asserts the distinct
absence of a strategic orientation among a group of small firms studied, the
material they provide from their research indicates the presence of strategic
behaviour by the firms. They found companies reporting that their competitive
approach was concerned with “getting the most out of” their workforce, ensuring
that costs were minimised by reducing headcount and associated expenditure, and
structuring their labour management into a part-time configuration. While the
design and implementation of these approaches (or strategies) may not have been
consistent with the formal strategic planning methodology found in large
corporations or sit comfortably with the requirements of a politically correct
approach to labour utilisation, they nevertheless demonstrate evidence of strategic
choices being made about key organisational resources in line with perceived
business needs and imperatives.

Similarly, Kinnie’s (unpublished) work on employee relations reflects this dilemma.

In the process of describing the activities of a case study firm Kinnie states
categorically that the company did not have a human resource management
strategy. However, a lengthy description is then provided of a range of business
factors that contributed to the firm making various critical (i.e. strategic) choices
relating to the management of the workforce. Although the company had several
strengths there were a number of key issues that had been addressed. Some
customers had sought a partnership with the company and wanted the company to
be more customer focused and innovative. In operational terms they sought
reduced lead times, improved delivery accuracy and more cooperation by sharing
the expense of new product development. Consequently, the firm was pressured
into making significant changes in work organisation as well as workforce
management. The study reports the implementation of a cultural change
programme where employees were trained to place greater emphasis on customer
satisfaction and addressing customer problems. Employees were given broader
responsibilities and directed towards greater efforts in the area of quality. In turn,
the firm had to consider what might be appropriate remuneration and pay
structures in light of the new responsibilities and expectations. Moreover, the
company introduced a shift in its recruitment policy that included employing
temporary workers to provide greater numerical flexibility. In effect, this example
provides a useful illustration of strategic alignment by highlighting the dynamic and

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structural connectivity between management practices and the need for achieving
horizontal alignment through cross organisational integration.

This ambiguity also emerges in Robinson and McDonald’s (1995) description of a

study of flexible work practices in small firms. Initially they report an absence of
strategic decision-making pertaining to the management of the workforce but
subsequently provide an example of linking a workforce construction decision with a
business issue, in this instance employing part time staff as a response to supply
and demand factors, as well as a desire to reduce labour costs. Inconsistency is
evident in Chapman’s (1999) work, which comments on the managerial behaviour
of small and large corporations and their ability to be strategic in the management
of people. He noted that the question of whether large firms can truly be said to
have an employee relations strategy has even been questioned. He queries
whether it is reasonable to compare small firms, who are unlikely to have the time
or resources to devote to long-term planning, to larger companies where strategic
planning has been described as “misguided, self-interested, half-hearted, short-
term and inchoate” (quoting Storey 1986, p. 49). He disputes the presence of
strategy for people management in the smaller firm and suggests that smaller
enterprises might be viewed as just muddling through based on custom, trial and
error, and a short-term adaptation to problems that occur. Losing conviction on
this position however, he points out that small firm owner-managers are likely to be
in a stronger position than larger companies when tackling strategy, through being
more aware of all the aspects of their business including issues relating to their
employees. Despite giving his article the title Managerial control strategies in small
firms, Chapman concludes “it is meaningless to talk in terms of strategies in
relationship to small firms” (1999, p. 75).

o Support for the strategic management of human resources in small firms

While some writers and researchers may perceive a shortfall in the adoption of
strategic people management in small firms, there are also those commentators
who urge small firms to address this deficit. As such, they provide some, albeit
limited, clarification about why this should be done and how.

Support for a strategic approach to people management can be observed in

commentators and observers explanations about the importance of human
resources for small firms. In their review of existent knowledge about human
resource management in smaller firms, Cardon and Stevens (2004) are evidently
supportive of a strategic approach to managing people. Deshpande and Golhar
(1994) expressed the view that in order to be successful in a global market small

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firms need a highly skilled and satisfied workforce that can produce quality goods at
low cost. They explain that in order to develop such a workforce it is necessary to
implement an appropriate human resource management strategy.

An early advocate of strategy for people was Rindt (1975) who discussed small firm
difficulties with personnel management and the various types of external
management assistance that can support the smaller operator. He acknowledges
that small firms need to make a clear linkage between their strategic business goals
and the kind of people they need to accomplish these. In a similar vein, Atkinson
(1994) highlighted the criticality of people resources to an organisation and the
need to align these resources clearly with the commercial focus of the company.
Successful business performance is a product of employers being able to obtain the
right quantity and quality of labour. The right kind of labour will vary between
firms, depending on the type of business in which they are engaged. Flanagan and
Deshpande (1996) commented that small businesses tend to be more labour
intensive than their larger counterparts are and as such it is likely that human
resources will be particularly important in the small business context. Likewise,
research by Curtain (1995) indicated that the growth and development of some
small firms could be curtailed by their failure to assess and address skill
deficiencies, particularly among those companies operating in high-tech industries
that are heavily reliant on knowledge workers. He concluded that the shortfall
found in his study was due to a lack of attention paid to longer-term human
resource strategies.

Arthur and Hendry (1990) highlighted the need to focus on the strategic dimensions
and associated practices of workforce management. They referred to the high
proportion of new jobs created in the small business sector that are service
oriented in nature, such as in professional work, hospitals and catering. They
recommend an acknowledgement of the distinct character of service jobs and the
introduction of strategies and policies that facilitate a service climate and culture
among the people who work in these areas.

In their discussion paper on human resource management and the emergent

strategy of small to medium-sized business units, Arthur and Hendry (1990) also
touched on the principal factors that influence what they term as human resource
management “practice”. They present a model demonstrating how these factors
affect “HRM” and how “HRM” in turn interacts with broader small business unit
activity to create emergent strategy. While supporting a strategic approach to
people management, the authors concluded that the determination of strategy and

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the contribution of HRM activity to business strategy appeared to be “a substantially
reactive process….” (Arthur & Hendry 1990, p. 246).

The importance of alignment between business goals and management initiatives,

and the acknowledgement of managerial choices is also highlighted in Fairfield-
Sonn’s (1987) article, A strategic process model for small business training and
development. The author notes that the value of this model to managers in small
and mid-size organisations is the highlighting of key choice points in the decision-
making process and providing an aid to managers when deciding whether or not
training and development activities are likely to lead to competitive advantage for
their company.

Support for small firm people strategy is also found in instructional textbooks.
Fry’s (1993) guide for entrepreneurs and small business owners includes a short
paragraph headed Human resource strategies in which readers are advised of the
importance of adopting a holistic strategic approach to workforce management.
The author states that new ventures should have a “definitive personnel strategy”.
This strategy provides the information that guides the owner-manager towards the
right type of employees, how they should be hired, the appropriate promotion
system and correct rates of pay. Fry emphasises the role of the human resource
strategy in influencing the longer-term strategy of the venture and explains that
fundamental decisions like hiring only trained workers or promoting exclusively
from within represent strategic decisions.

Similar guidance is provided in Dollinger’s (1999) study text that encourages

entrepreneurs to focus on developing a strategy for their people. A range of
strategic issues are raised for owner-managers to consider such as the philosophy
of the firm, the preferred type of supervision, the role of unions and their approach
to collective bargaining. Readers are encouraged to consider their “strategy for
employee compensation, profit sharing and employee ownership” (Dollinger 1999,
p. 47).

Further to a study undertaken in the United States where information was gathered
from a group of 56 small businesses, Smith (1991) discussed the workforce issues
facing small companies and how these companies could approach the critical matter
of attracting and retaining suitable employees. Smith notes that small business
owners have to cope with tight markets, rising costs, uncertain sources of supply
and increased regulation. Small businesses are generally more labour intensive
than larger firms and compete with them from the common market pool. However,
smaller firms are less able to offer the comprehensive benefit packages,

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competitive salaries, job security and attractive advancement opportunities found in
larger corporations. Alternative means to attract and retain personnel involve
providing other incentives such as part-time work, day-care support and
transportation, if they are to compete in a tight labour market. Smith’s (1991)
analysis not only encourages small firms to be strategic but also explores some of
the types of strategic choices available to them in light of their perceived
constraints and limitations. The article concludes with the proposition that in
addition to less costly initiatives small firms should consider targeting older workers
to meet their labour requirements, as the needs and aspirations of this
demographic are likely to be more aligned with the capacities of the smaller firm.

Focusing on the developmental needs of smaller growing firms, Ardichvili et al.

(1998) make a case for strategic training inputs at the various stages of
organisational growth. Where a company is relatively stable in terms of
maintaining a reliable customer base, turnover and position in the market, and has
little expectation of growth or major change, there will be less apparent pressure to
build labour capability. The existing supply will meet the immediate needs.
However, in the event of a transition from the usual informal methods of small
business operation to those involving greater formality, there is a requirement to
assimilate new and greater numbers of employees into the company who can carry
out the firm’s functional tasks to a professional standard. There is a need to
provide more firm-specific information and expertise in a diverse range of functional
areas, whether they are accounting, production, service delivery, distribution,
purchasing or IT systems. As specialist fields with increasing levels of technical
sophistication and infrastructure, they argue that small firms are under the same
pressure as their larger counterparts to equip their workforce with skills and
expertise to be equally effective and innovative in these key areas (Goss 1992;
Ardichvili et al. 1998).

Kickul’s (2001) article exploring the employee attraction and retention “practices” in
small firms observes that one of the many challenges is maintaining a positive
employment relationship. This study investigated the role of the psychological
contract and the types of promises made and communicated by small firms to
attract and retain their employees. The types of inducements used to attract and
retain employees with key expertise are explored. These included various
employment benefits, opportunities for promotion and advancement, increasing job
responsibilities, opportunities for personal growth and developing new skills, as well
as pay and bonuses tied to performance. The researcher concludes that small firms
should consider “the psychological contract to be a critical component of the human

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resource strategy in building a sustainable competitive advantage” (Kickul 2001, p.
333).

Patterson’s (2002) article emphasised the organisational benefit of having a

strategic approach to the management of their people. For example, the work
claims that employees who possess clarity about the firm’s approach to the
management of its human resources will be less concerned about issues such as
inconsistent organisational structures and less other attractive features of the
smaller business work context. Ritchie (1993) who highlighted the lack of
homogeneity among small firms and their managerial practices, advises small
business human resource management practitioners to approach the needs of these
firms strategically. He recommends less attention be paid to the minutiae of
management practices and greater focus on the way in which people management
can be effectively integrated to meet the firm’s particular needs.

o Perceived prevalence of human resource strategy in small firms

While the literature concerned with the subject of managing people strategically in
small firms small, it is evident that some writers regard smaller companies as
managerially strategic both in terms of their general business and of their people
specifically. This is apparent not only from the use of the terminology of strategy in
their work but also from illustrations of management activity and behaviour
provided by research studies.

Brand & Bax (2002, p. 3) for example, have commented that:

“…considerable support exists for the argument that HRM is a strategic

factor in many small firms (although mostly not institutionalised)”.

Kaman, McCarthy and Gulbro’s (2001, p. 9) study found examples of both

alignment of people management with key business issues as well as application of
HRM technology to support that alignment. They observed that many firms were
using Best Practice and these practices were linked to important business
outcomes.

In their review of the status and understanding about the economic and social role
of small firms 20 years after the publication of the Bolton Report, Stanworth and
Gray (1991) referred to the growth in knowledge about the strategic management
of people in this sector. They noted that understanding of employer-employee
relations in the small enterprise had developed considerably as researchers had
provided an increasingly complex and subtle analysis of how employers’ labour

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strategies were patterned and how employees in small firms reacted to their
employment circumstances.

In his instructional guide on small business management, Fry (1993, P. 97) clarifies
the nature of strategic human resource management:

“The human resources or personnel strategy tells the entrepreneur what

kind of employees to hire, how to hire them, what kind of promotion system
to use, and how to pay them. The personnel strategy relates to decisions
that affect the long-range strategy of the venture. Hiring only trained
workers rather than untrained workers is a strategic decision. Promoting
exclusively from within is a strategic decision ….”

Discussing changes that small firms need to make in the area of internal control
and their people management as they grow into larger operations Roberts (1999)
presented a strategic perspective on small firm management practice. Roberts
described small firm behaviour as strategic in nature, both in relation to the
external competitive marketplace as well as in terms of its internal organisation,
regardless of whether the strategy was implicit or explicit.

Hendry, Arthur and Jones (1995) held the view that all firms could be described as
strategic in terms of possessing a particular approach to obtaining essential skills.
However, the approach applied to managing this supply may be implicit and
imbedded in routine recruitment practices.

Other writers have also demonstrated their understanding that even the smallest
firms are strategic in the management of their people. For example, Matlay (1999,
p. 285 on) refers to a research study focusing on industrial employees relations in
micro businesses where case studies were conducted in order to detail the main
“strategies and approaches that owner/managers adopted in relation to their
human resource needs”

The Kauffman report (1997a) that describes discussion forums held with small firm
entrepreneurs in the United States reflect the perception that the strategic
management of human resources is a standard part of the sector’s management
portfolio. In this instance, the report commented on the feedback describing the
participants’ approach to sourcing people for their business. The report
summarised that this discussion “led to some very interesting and diverse solution
strategies for finding employees that [were] a good fit for the company” (Kauffman
1997a, p. 2)

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The reports from the Kauffman forums provide insights and information about
many of the management issues that small firms face. These included finding and
competing for good employees, selling the attractions of the firm, being able to
afford good people and keeping staff long-term. They also cover the need for
implementing initiatives to drive performance and build individual and team
commitment, and for dealing with the industrial relations context and expectations
relating to working conditions. Participants in these forums contributed a range of
solutions and ideas about how small firms could approach these issues by means of
different management methods and practices. Conscious linkages between
management practice and business needs and benefits can be discerned in the
specific comments made by the entrepreneurs:

“I overcompensate my branch on base salary so [strategic link] they

wouldn’t dream of working elsewhere” (Kauffman 1998b, p. 9).

“We recently took away sick pay because [strategic link] we felt it wasn’t
benefiting our operation” (Kauffman 1998b, p. 8).

The recognition that small firms make strategic choices in their management of
people is reflected in Wilkinson’s (1999, p. 206 on) discussion paper on employee
relations. He commented that given the decline in multi-employer bargaining and
the labour market deregulation, it could be argued that owner-managers’ potential
for “strategic choice” in managing human resources has increased.

Golhar and Despande (1997) also indicated their understanding of the strategic
nature of management activity in smaller firms. In a survey of HRM practices in
143 large and small firms located in the Canadian province of Ontario covering a
range of industries, they noted that although some firms in both groups used
“strategies aimed at reinforcing workforce characteristics reported as important,
others did not” (Golhar & Deshpande 1997, p. 30).

Kinnie’s (unpublished) descriptions of case studies examining the decision-making

processes influencing the management of human resources in small and medium-
sized firms indicate recognition of strategic behaviour by these enterprises. Albeit
with some loose handling of the terminology, the researcher highlighted some of
the variables found to be determinants in making strategic decisions about people.
Kinnie noted that managers in SMEs might be assumed to have the opportunity to
determine their human resource management practices in a way that best suits
their own circumstances taking into account labour, product and financial markets.
When analysing the external environment there is strong evidence of pressures
from the supply chain which strongly inhibit this exercise of strategic choice.

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Similarly, Mazzarol (2003) demonstrates an acknowledgement of the strategic
requirement for small firms in their people management with advice about how to
prepare for the transition into a growth environment. In presenting a model for
understanding the dynamics of human resource management in small growing
firms, he suggests that it is first necessary to build the foundations of the firm’s
human resource management infrastructure, termed a “basic HR policy”, before
growth should be considered. Once in place this infrastructure provides the basis
on which firms can move into a strategic mindset with regard to the management
of the business in general, with people being a key dimension of this. He
commented that this foundation enables the owner-manager to develop a “cohesive
strategic HRM plan” for the business in advance of any growth (Mazzarol 2003, p.
29).

The importance of the strategic management of people in small firms is also

referred to in Gerber’s (1995) classic management text in which chapter 16 is
dedicated to discussing “your people strategy”. Gerber evidently believed that
small firms are strategic in their management of people and he provides various
pearls of wisdom about how this should be done. There is emphasis on setting
standards, motivating people through participatory leadership, reinforcing individual
and group goals, building the organisational culture and addressing social
dimensions, such as ensuring work is valued and fun. In a similar vein to Fitz-enz
(1997), Gerber (1995) emphasises the centrality of human contribution to small
companies through the work they do.

ƒ Indicators of human resource strategy in small firms (empirical studies)

No examples were found during this research project of studies that were
specifically concerned with addressing the prevalence of (a valid model of) SHRM in
smaller firms and hence could categorically support or reject the general notion of a
strategic approach to people management comparable with that of larger
corporations. However, where human resource management strategy is viewed as
consisting of four separate, inter-connected elements against which data can be
compared, examples of a partial adoption of the normative approach were found in
the empirical research literature.

o Element 1 – A management philosophy (the recognition of people as a valuable

business resource).

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 Management Philosophy

Planning for people HR management alignment

Use of HRM technology

This study has proposed that Strategic Human Resource Management (SHRM) is, in
its broadest and most generic sense, a management philosophy. It is the belief or
recognition that people as an organisational resource represent a, if not the, most
valuable and useful asset available for the purpose of achieving business objectives
and possibly the only source of long-term competitive advantage. It is thought that
companies that hold this perspective are more likely to view people resources as
strategic assets and in turn focus the time, attention and investment that a
resource of this level of criticality to the business necessitates.

As indicated earlier in the thesis, the task of measuring the value that is placed on
people relative to their contribution to the performance of a company is particularly
difficult, being substantially judgment-laden and nebulous in nature. What some
might regard as the appropriate “recognition” of people in a business context might
not be the case for others. This aspect of the strategic model will include many
different forms of “recognition” as manifested in various types of management
approaches. The determination of whether these forms of recognition are
appropriate or effective will be individual and strongly subjective, although some
commonality of perspective and approach is likely to be found.

On reviewing the research literature, it became evident that there was no particular
niche where studies investigating the concept of recognition within the context of
small business management would sit. The field of employee or industrial relations
emerged as a possible source of information as well as studies investigating the
social conditions of the workplace. Within this study, fragmentary indicators were
found across the broader context of the small business human resource
management literature.

In the search for evidence of this “philosophy of recognition” within smaller firms, it
was necessary to identify what recognition might entail within this particular
context. Two main qualities emerged from the broader management literature.
The first includes some form of implicit or explicit acknowledgement of the value of
people as key contributors to the commercial success of the enterprise. The second

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consists of demonstration of a positive perspective on the nature of human beings
that in turn engenders corresponding managerial treatment of a humanist type. At
the most fundamental level, it might be suggested that “recognition” is present
where a company’s leaders verbally assert the importance of the contribution of
their workforce or where there exists evidence of time, attention and funds being
invested in this particular resource. Evidence might be found where companies
seek to address and accommodate the human needs and expectations of workers,
in workplace symbols or the provision of non-essential services and facilities for the
benefit or even enjoyment of employees. Where human resources are factored into
business planning activities or where particular management technology and tools
are adopted to improve the effectiveness or contribution of this resource, this could
also be regarded as aligned with the philosophy of recognition.

The recognition of people within a business context and the corresponding way in
which companies approach the management of this resource is evidently
substantially grounded in ideological value systems about the human condition and
the role of people within the broader societal context. In the previous chapter,
reference was made to the historical debate on whether small firms are purveyors
of exploitative management practices or sources of employment that free workers
from the impersonal bureaucracies found in larger corporations. Frequently cited
examples of these polarised positions are work by Rainnie and Scott, in particular
their (1987) article, followed by Rainnie’s (1989) review of industrial relations in
small companies that concluded “small isn’t beautiful” and the Bolton Report (1971)
which received a mixed reception following its glowing portrayal of working life in
the smaller firm.

A further dimension to be considered when reviewing the literature is the social

ideology prevalent in the mainstream HRM academic discipline. The HRM discipline
promotes humanist values and associated behaviours regarded as both appropriate
and acceptable in contemporary management practice. These then feed into the
strategic dimension of management activity and become the foundation on which
strategic decisions should be aligned. Hence, it is within this paradigm that
indicators of “recognition” are sought.

The research found various studies addressing this social dimension of small firm
management activity that indicated applicable conformance. For example, further
to a survey of 560 small companies’ human resource management practices
conducted in Leicestershire (UK), Bacon et al. (1996) concluded that it was
inappropriate to categorise all small firm practice as negative in terms of the value
afforded to people and that the work experience in a smaller company offered a

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range of positive aspects. Similarly, Wiesner and McDonald’s (2001) study of
Australian small and medium sized enterprises reported moderate levels of HRM
technology which they interpreted as evidence of this sector demonstrating positive
and hence suitably pro-labour management practice in relation to the workforce.
Marlow’s (1997) pilot study of labour relations in 28 small firms in the UK was more
ambivalent as to the quality of employment conditions due to the absence of many
of the standard large corporation human resource management practices, in
particular grievance procedures and union representation. Similar concerns were
expressed in Marlow and Patton’s (1993) research study of 40 small and medium
sized companies in the Midlands (UK) on managing the employment relationship in
the smaller firm.

Recognition of the importance of human resources at the time of organisational

growth was found among the case studies Mazzarol (2003) conducted in Western
Australia. In this instance, the participant companies had found that the sourcing,
retaining and motivating of skilled staff to be major obstacles in their efforts to
grow the business and that a shift in the mindset of the owner-managers and their
managerial approach had been necessary. Of particular note was the requirement
to invest in the business skill capability through the provision of training in the area
of rapidly developing technology (Mazzarol 2003). The importance of investment in
the development of skills to support business requirements was also recognised by
the Australian small businesses studied by Matthews (2002). Rocha and Khan’s
(1985) study of decision-making in small firms found owner-managers receptive to
the notion that people are critical to their business and play a significant role in
business performance. Acceptance of suggestions about how this resource might
be more effectively managed was however more moderate.

Another dimension is the fact that many owner-managers prefer to retain control
over the management of their people and are reluctant to relinquish this
responsibility to others. While the arrival of financial and operations managers
relatively early in the growth process is commonplace, owner-managers are found
to resist the introduction of human resource management specialists or delegating
people-related decisions to others (Finney 1987; Marlow & Patton 1993; Arthur
1995). Researchers such as Matlay (1999) have construed this tendency as a
reflection of the heightened importance owner-managers attribute to the effective
management of people in small firms. In other words, the centrality of people to
the small business operation implies that this is an area of business management
considered to be particularly vulnerable or sensitive and one in which the owner-
manager cannot permit mistakes to occur due to the involvement of others.

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In the 1999 Kauffman report that recorded discussions on the way in which
entrepreneurs built so-called “awesome” organisations, various forms of recognition
of and investment in people were apparent. For example, the reports conveyed the
participants’ understanding that building an effective business was about attracting
and retaining talented people. They reflected both the centrality and criticality of
human input into business activity and that their operating style must be flexible
and focused on customers and their needs. The business owner participants
mentioned the need to communicate and model the vision and values of the
company in order to create a culture that leads to high performance. They
emphasised the importance of finding ways to build strong work teams where
employees supported the vision and committed to its achievement through
individual and group effort. They also mentioned the value of providing an
environment of growth, learning and fun for people while they are at work. All
these elements require an investment of time and other company resources.

The Kauffman studies also documented comments made by entrepreneurs and

small business operators about the importance of the role and contribution of
particular individuals who worked in their businesses. The value afforded to these
employees and the reliance by owner-managers on members of the small team
were reflected in various participants’ comments:

“My key people are the ones who can replace what I’ve been doing over the
years so I can do what is needed to grow the company” (Kauffman 1998b,
p. 4).

“Once our entire sales staff walked out on us…. We learned how much we
depended upon our service people” (Kauffman 1999, p. 12).

The demands on owner-managers associated with the employment relationship,

such as building productive teams, managing individual personalities and
developing relationships, as well as providing guidance and direction so that work is
accomplished according to schedule and consistent with customer requirements, is
reflected in Scase and Goffee’s (1987) interviews with small firm managers.
Although the study focuses on the managerial “problems” of business owners and
hence largely reflects negative attitudes about the workforce and its management,
the diverse experiences among the participants nevertheless highlighted the
criticality of managing people effectively so that the operational needs of the
business are met as well as the complexity of the associated decision-making. The
study reported an awareness of the value of cultivating shared values and goals
and demonstrated that management initiatives to achieve these ends had been
introduced into their companies. Providing caring support to employees on a

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personal basis was also considered by some to be an important part of the
leadership role (Scase & Goffee 1987).

Ram (1999) and Matlay (1999) explored employment relations in small firms and
both concluded that it was not possible to generalise about the management
approach of this sector. Styles of management were found not only to be highly
individual from company to company and a product of the owner-manager’s
preferred approach, but also determined by the type of small firm concerned. For
example, Ram’s (1999) study of small professional service firms indicated a cultural
environment strongly based on collegial relationships, indicating partnerships of
joint endeavour where the need or desire to assert control over others within the
social environment was much less significant than in other types of organisations.

Examples in/of empirical studies

Element 1

Primary Sub-construct Author(s) Date

construct
Management ƒ Importance of people Rocha & Khan 1985
philosophy in business
ƒ Job satisfaction Curran & Stanworth 1986a
ƒ Role of people Scase & Goffee 1987
ƒ Employment Marlow & Patton 1993
relationship
ƒ HRM vs. Bleak House Bacon et al. 1996
ƒ Employment Marlow 1997
environment
ƒ Centrality of people Kauffman 1997b
ƒ Recognition of people Kauffman 1998b
ƒ Employment relations Ram 1999
ƒ Employee relations Matlay 1999
ƒ HRM vs. Bleak House Wiesner & McDonald 2001
ƒ Investment in people Matthews 2002
ƒ Recognition of Mazzarol 2003
impact/need for
investment

o Element 2 – Planning for the management of people (analysis of human

resource management options and making associated decisions)

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

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Within the methodology of strategic management, planning plays a key role. It is
concerned with addressing the present and future direction of the company and the
organisational infrastructure that will support the achievement of business goals.
During planning, consideration is given to available resources and how these can
best be managed and deployed, as well as the sourcing of additional resources
where these are needed. The process involves analytical thinking and the selection
of options, effectively making decisions on proposed courses of action. Ideally
planning will focus on all areas of the business and their inter-relationships
(Mintzberg 1995; Thompson & Strickland 1998).

As an academic discipline, strategic management in small businesses has been

increasingly investigated (Robinson & Pearce 1994). However, there is no
indication that any substantial examination of the process of planning specifically
for people resources, as a sub-element of broader business planning activity, has
been undertaken. Within the body of literature that focuses primarily on human
resource management in smaller firms, which serves as the parameters of this
study, few examples of empirical research were found that examined the area of
strategic planning for people in line with the normative approach and hence
provided indicators that small firms do in fact engage in this type of activity. As
discussed earlier, general references by researchers to strategic planning invariably
focus on attempts to identify the existence of formal, large corporation-style
planning activities. These usually arrive at the conclusion that this type of activity
is not part of the small business managerial mode of operation (Kitching 1996;
Wilkinson 1999). In support of their study findings where none of the small
companies reviewed possessed any written plans, Wyer and Mason (1998)
challenged the perception of any benefit to be derived from long-term, rational
analytical planning within the smaller business, including for the management of
people. They suggested that strategic development emerges through dialogical
processes leading to experimental concrete actions. The ability to address
organisational change and cope with uncertainty is more concerned with efforts to
be increasingly sensitised to the external environment rather than concerted
attempts to develop planning skills.

Understanding the way in which small firms approach planning appears to be

limited to a recognition that the large corporation models are rarely to be found
within these companies. It is also noteworthy that there appears to be little
investigation into the nature of this type of informal planning, which in the absence
of formal planning must be assumed the approach adopted in smaller firms
(Robinson & Pearce 1994).

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Fragmentary references were found in Marlow’s (1997) study of 28 small firms in
the United Kingdom covering the manufacturing/services sectors and having 40
employees or more. This study investigated owner-managers’ planning activities,
in particular relating to planning for the management of people. Marlow found that
all the owner-managers agreed that a strategic approach to management was
essential for business survival and growth and that employee management was a
critical activity in constructing such a strategy. However, none had a formal
strategic approach, either documented or in the process of development. The
researcher concluded that strategy was undertaken in an “instinctive manner
reminiscent of what Mintzberg (1994) describes as the ‘intuitive approach’” (Marlow
1997, p. 147).

Although small firm strategic planning may not conform to models of practice found
in many larger corporations, there is evidence indicating that small firms engage in
some of the key behavioural aspects ordinarily associated with the concept of
business activity of planning. For example, Scase and Goffee’s (1987) interviews
with owner-managers manifested signs of thought processes and analysis normally
associated with planning activity. Here business operators were found to consider
their management options as these related to the people working in their
organisation, the future needs of the company and how workforce or individual
contributors on the team might meet these. Similarly, participants in the Kauffman
forums appeared reflective in their approach to people management, in a way that
might be construed as consistent with discussion and decision-making processes
found among planning groups in larger enterprises. The requirement to assess
options and make managerial choices is evident:

“Timing is critical because key positions today aren’t necessarily key

positions a year from now. You have to know when to bring people on
board and what kind of skills they need to have to meet current and future
needs” (Kauffman 1998b, p. 6).

“We have bought a lot of our key people from the bottom up. We’ve been
able to do that because we haven’t grown very fast. But as we position
ourselves for new growth, we will need to bring in some new blood”
(Kauffman 1998b, p. 7).

Caudron’s (1993) report on the development of the human resource management

function in smaller enterprises provided examples of companies planning for their
workforce needs by putting in place management infrastructure such as a human
resources department to support this organisational resource.

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 Examples in/of empirical studies
Element 2

Primary Sub-construct Author(s) Date

construct
Planning for people ƒ Considering Scase & Goffee 1987
workforce issues
ƒ HR functional Caudron 1993
infrastructure
ƒ Workforce planning Kitching 1994
ƒ Need and value of Kauffman 1997b
workforce planning
ƒ Strategic planning Wyer & Mason 1998
for people
ƒ Considering the Kauffman 1999
future people
requirements
ƒ Decision-making Culkin & Smith 2000
processes
ƒ Planning for Mazzarol 2003
business growth

o Element 3 – Linking human resource management with organisation and

business goals

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

Linking the management of human resources with organisation and business goals
implies that there is a decision-making process or mechanism by which company
leaders identify business needs or goals and take people-related managerial actions
to address or support these. However, it has been shown that small firms tend not
to engage in the activity of formal planning where this alignment may take place
and yet owner-managers are continuously making decisions about the management
of the people in their business. So, in the absence of Element 2, i.e. planning for
people, the question is how can or does alignment and linkage actually occur.
Without a formal planning context, does small firm human resource management
actually support company business goals, strategy and needs?

It is given that owner-managers must sustain their company as a viable or growing

business and identify appropriate actions and expenditure associated with the
employment of people. There may be for example, a requirement to invest in
employees’ skills so that performance levels rise to meet customer expectations.
Small business owners need to provide terms and conditions of employment that

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attract and retain motivated workers prepared to deliver on customer
requirements. These business realities imply consideration (i.e. some form of
planning) on the part of the owner-manager to determine how they will be
achieved.

What this study found was that the process of planning for people (Element 2) and
making the corresponding linkages (Element 3) as might occur in large enterprise,
merges into a single activity in smaller firms. This consists of a two-phase
problem/solution decision-making process that incorporates aligning human
resource management practice with business objectives. In effect, planning and
aligning occur but planners may conduct this process informally. Planning and
alignment occurs as an intenal cerebral exercise, happening periodically as the need
is perceived, sometimes without the assistance of others and presumably with
variable degrees of skill and application. For the external observer, the link
between management activity and company goals can only be surmised from the
evidential logic of the associated managerial decisions or when the links in this
strategic chain are explicitly clarified by the decision-maker. As Ritchie (1993)
notes, it is can be difficult to observe the strategy behind the person.

The potentially tenuous nature of the alignment argument can be illustrated as

follows. An owner-manager might introduce an employee social club and justify
this benefit in terms keeping the workforce “happy”. By drawing out the
justification for having a “happy” workforce, the rationale might be that “happy”
employees result in higher workforce retention rates and improved performance on
the job, and ultimately in better business outcomes. However, without the benefit
of entering the decision-maker’s head, it can only be presumed that the majority of
decisions made by owner-manages are expected to of benefit to their business.
While mistakes might be made or ill-considered actions taken that might not be in
the interests of the business, it is reasonable to predict that without at least some
business-supporting or aligned decisions the company would eventually fail. It is
reasonable to assume that in general, most management initiatives will be taken
because there is a belief by the owner-manager that these are likely to have a
positive outcome for the firm. Indeed, why would there be an investment of the
company’s resources and the owner-managers’ time in human assets and their
management, if there were no perceived benefit for the business. This appears
particularly pertinent for smaller firms that need to control their cash flow and
investment expenditure carefully as well as avoid unnecessary wastage wherever
possible (see Culkin & Smith 2000; Harney & Dundon 2006).

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Numerous examples of the strategic alignment of people with business objectives in
small firms were found in the literature. For example, Matthews’ (2002) article
describes a study of 150 innovative firms involved in commercialising Australian
technology and exhibiting market growth. Here the researcher describes a range of
human resource management strategies adopted to support the business activities.
The article lists some of the methods (read: strategies) used by these firms to
identify a specific calibre of staff required for high-tech industry. These included
various types of investment made in training and development for staff, the use of
compensation strategies such as profit share schemes, as well as encouraging
various types of behaviours among their employees, such as the pursuit of
continuous learning. The research summary notes that the drivers of these people
management strategies were the CEOs and the senior management teams. These
leaders had reported the criticality of the initiatives in light of the need to respond
to a highly competitive environment, to attend assiduously to the issue of quality
and to remain at the leading edge of their industry field. Matthews also found that
these management practices were driven by the existence of a “war for talent”, to
attract and retain good staff able to work productively together in a project
management environment. Although the article does not explicitly state the
strategic linkage between these practices and the business objectives of each of the
organisations studied, the examples nevertheless meet the strategic plausibility
test.

Mazzarol’s (2003) study of four small growing firms in Western Australia also
provided examples of owner-managers making strategic choices and building
alignment. In this instance, the drivers emanated from a personal management
philosophy, the type of culture desired for the business and mechanisms needed to
control organisational and operational activities. In addition, owner-managers were
concerned with attracting and retaining essential staff:

“The owner of AIRCON viewed his employees as critical to the achievement

of his vision…. The owner…. actively encouraged employee participation in
quality improvement initiatives. Faced with a rapidly expanding business
the owner found he was under constant pressure to complete tasks on time
and within specification…. To create a positive environment the owner
developed a team-based framework for his employees…. Managing his
people involved a combination of motivation and reward, coupled with a
relentless drive for high commitment. Financial rewards within the company
were higher than average with many employees earning substantial bonuses
for enhance work performance…. For those staff that did not perform there
were no financial rewards…. To encourage team spirit the owner arranged
for his employees to go away to a hotel resort venue for a weekend. He
deliberately avoided the creation of a bureaucracy and did not have special
parking bays for managers and staff…. The AIRCON company was also
investing substantially in training” (Mazzarol 2003, pp. 34-35).

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In another case study, the requirements of the business were found to be the
primary motivator for management decisions. He reported that human resource
management issues within the firm were closely linked to technology. The
company was faced with continually investing in the latest product equipment and
this frequently required new staff or the re-training of existing employees.

Another example is Kitching’s (1996) study of the approach of a group of small

firms to workforce construction which provided evidence of linking the recruitment
of their human resource requirements (skills, traits and personality etc.) directly to
the specific needs of the service delivery of the business. Kitching (1996, pp. 109,
117) reported on the hiring activities of two owner-managers of a restaurant and a
pub who respectively commented that “experience of work is far more important
than qualifications, especially in catering”, and “personality….that’s about it.
Someone who’s lively, friendly, outward-going. That’s so important in customer
relationships really, in this particular industry”.

Alignment between owner-managers’ philosophical values and beliefs about

effective management practice and perceived business requirements was evident in
a study conducted by Bacon et al. (1996). One case study described a family-
owned transport and haulage company that had passed from the founder to his
son, the latter having made significant changes to the culture of the business and
introduced a more paternalistic, people-centred management approach. Two of the
company’s managers had been sent on management training programmes as a
result of the decision to make changes to the organisational culture.

While Kerr and McDougall’s (1999) study of a small group of SMEs in Scotland led
them to conclude that a strategic approach to the management of their workforce
was not adopted for the most part, they found discrete examples of both vertical
and horizontal alignment occurring. In one company they found a formal link
between the business plan and employee performance targets which were also
linked into a performance appraisal system. In another, they found evidence of
routine performance appraisals driving the provision of skills development where a
shortfall had been identified. In the case of the latter, this connection was
considered by the authors to be additionally strategic as the company concerned
indicated that training was viewed as an investment in the business.

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 Examples in/of empirical studies
Element 3

Primary Sub-construct Author(s) Date

construct
HR management ƒ Matching people with Scase & Goffee 1987
alignment business needs
ƒ Linking people management Kinnie 1992
with market forces
ƒ People management needs Wright 1993
for an international strategy
ƒ To meet situational Robinson & McDonald 1995
pressures - need to reduce
costs
ƒ Implicit in the association of Hendry, Arthur & Jones 1995
actions and perceived
business needs
ƒ Workforce construction in Kitching 1996
line with business needs
ƒ Meeting business needs Golhar & Deshpande 1997
ƒ Retaining and motivating Kauffman 1998
staff
ƒ Linking business growth Ardichvili et al. 1998
with training
ƒ Strategic people issues Kauffman 1999
ƒ Addressing business needs Matlay 1999
ƒ Systemic alignment Kerr & McDougall 1999
ƒ Linking TQM strategy with Chandler & McEvoy 2000
training and group-based
compensation
ƒ Alignment of HR practices Wiesner & McDonald 2001
with management
philosophy
ƒ Role of HR function in Nankervis, Compton & 2002
strategic issues Savery
ƒ Linking HR practices with Matthews 2002
business goals
ƒ Positioning people for Mazzarol 2003
growth

o Element 4 – Use of Human Resource Management (HRM) technology to support

the implementation of business strategy

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

Research investigation into the adoption of HRM technology by smaller companies

was found to be limited in most cases to the utilisation of particular tools without
venturing into the strategic application of the toolbox contents. Hence, we know
which tools are used and within sample group parameters how many are using
them, but understanding about the reasons for adoption remains low. What these

341
companies do is clear, but not why. While it is possible that many companies apply
HRM to the strategic management of people in their support of strategic business or
organisation objectives, this cannot be taken for granted based on the limited scope
of existing empirical studies. However, neither can it be dismissed in the absence
of research evidence. Tools are available to facilitate the management of people in
their support of business strategy and general observation would suggest that some
application of these occurs. Hence, there is value in exploring HRM take-up for
potential insights into the strategic dimension.

Considerable variation has been found in the extent to which small companies
adopt the human resource management technology and tools commonly associated
with large businesses. It is believed that the smaller the company the less likely
the company will draw on the so-called formal tools and more sophisticated
management practices. Heneman, Tansky and Camp’s (2000) review of the
research literature on human resource management in smaller firms suggested that
many owner-managers of small and medium-sized businesses are not particularly
interested in what they described as “traditional” human resource management
practices. Similarly, Gilbert and Jones’ (2000, p. 61) study of 80 small firms in New
Zealand confirmed their general expectation that “small businesses do not, by and
large, operate formal HRM policies and procedures”.

In the absence of any wholesale adoption of this technology small firms rely on so-
called informal methods for the purposes of managing their people. While there are
those who believe that small firms would do better to increase their utilisation of
formal methods particularly to support organisational growth, there is no shortage
of studies claiming that smaller firms are actually partial and in many instances
extensive adopters of many of the tools and techniques available. Moreover, there
are also examples of innovative management practices in use that are not always
found in larger firms (Kauffman 1998a; Mazzarol 2003).

Kaman, McCarthy and Gulbro (2001) explored the prevalence of 28 HRM practices
that they considered to be “good practice” (i.e. HRM) for all employers, in 283
multi-sector firms having 100 or fewer employees. They found evidence of a range
of “mainstream” management practices including the use of formal selection
processes, job descriptions, documented procedures and guidelines for job tasks,
formal induction procedures, formal performance appraisals, disciplinary
procedures, meetings and employee handbooks. They also found the provision of
training, rewards and incentives programmes, and opportunities for feedback and
employee suggestions. The study indicated that the larger firms (49-100
employees) in the sample used “bureaucratic” or formal HRM practices to a greater

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extent than the smaller ones and concluded that the presence of HRM practices was
more a product of concern with motivating employees and high rates of
absenteeism, than organisational size.

Wiesner and McDonald’s (2001) Australian study of 237 small and medium-sized
firms’ adoption of a pre-defined list of 73 human resource management practices
relating to recruitment, selection, training and development, performance appraisal,
compensation, employee relations and policies of the type mostly required by
legislation, found a 70 percent take-up rate of 36 of the 73 practices. The study
concluded that these firms demonstrated “a moderate adoption of standard HR
practices” (Wiesner & McDonald 2001, p. 37).

Similarly, Marlow’s (1997) study of 28 small firms in the United Kingdom found
evidence that small firms were aware of the people management technology
available to them and noted that they could identify similarities in the way in which
HRM is used in larger firms.

Work by Kotey and Sheridan (2001) on the role of owner-manager gender in

determining small firm people management practices also found evidence of a wide
range of large firm methods. The researchers acknowledged the tendency to
categorise the management tools of small firms as “simple” or informal and not in
line with larger organisations. However, they found evidence of many practices
considered prominent in the HRM toolkit. These included the use of Press
advertising, employment agencies and educational institutions for hiring purposes,
the requirement for submission of application letters by applicants, as well as the
use of application forms, interviews, reference checking, medical exams and
employment letters and contracts. Companies were found to provide inductions for
new hires, internal and external training courses, and job rotation opportunities.
Performance appraisals were in use, with feedback provided to employees and poor
performers being moved on. Communication was addressed through meetings and
employees were encouraged to participate in decision-making processes. The firms
were also found to maintain some formal documentation in the form of policies and
personnel records.

Likewise, the Kauffman reports (1997; 1998a; 1999) highlighted a range of

management methods and practices adopted by entrepreneurial firms including
those relating to hiring practices, compensation, performance incentives, teamwork
and creating productive work environments. Smaller business practices included
holding meetings to share the company vision and customer experiences,
distributing internal newsletters to employees, holding company conferences and

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social functions, as well as using the Internet to communicate information to
employees. Companies were engaged in communicating expected values and
standards of behaviour, sharing financial data, setting goals and rewarding good
performance, using recognition programmes and giving feedback to employees,
assisting with career development, as well as increasing levels of responsibility and
celebrating accomplishments. Other motivational techniques were highlighted,
such as providing bonus and profit share schemes and designing motivational
activities that encouraged learning and the enjoyment of work. Reference was also
made to the use of psychological tools to enhance team performance and the
introduction of family-friendly and flexible work practices.

Other evidence of small firm adoption of HRM technology can be found in works by
Golhar and Despande in the United States and Canada published in 1994 and 1997,
whose studies reported that many HRM practices in small and large firms are
similar. Bacon et al.’s (1996) study found an unexpected range of human resource
management practices in use and concluded that so-called progressive employee
relations management now represents a key feature in the small business
managerial portfolio. Goss and Jones’ (1992) work found evidence of small firms
providing different types of training, including on-the-job, vocational and technical,
as well as developmental and innovative (such as in leadership and communication
skills). Mazzarol’s (2003) interviews with four small growing businesses in Western
Australia also identified a range of human resource management practices that
reflect those found in larger firms. These included communicating the vision and
expectations to employees, building structures that enhance teamwork,
implementing initiatives to drive and make cultural change, providing social events,
paying for performance, training and developing staff, the use of policies such as
for the management of drugs and alcohol, probationary periods after hiring staff,
job descriptions, interviews with pre-set questions, application forms and resumes,
psychological testing and reference checking. A further example is Reid et al.’s
(2000) comparative study of “HRM” practices in 219 family and non-family
businesses in Northern Ireland that found evidence of various practices including
record-keeping on workforce profiles, newspaper advertising, reference checking,
performance appraisal systems (notably linked to remuneration strategies), bonus
schemes and pay-for-performance systems, as well as the provision of training.

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 Examples in/of empirical studies
Element 4

Primary construct Sub-construct Author(s) Date

Use of HRM • Personnel practices McEvoy 1983
technology
• Compensation & Amba-Rao & Pendse 1985
maintenance
practices
• HRM practices Finney 1987
• HR practices Hornsby & Kuratko 1990
• Salaries & benefits Brown, Hamilton & Medoff 1990
• HR practices Smith 1991
• Provision of Goss & Jones 1992
training
• Relevance of HRM Ritchie 1993
• Managing the Marlow & Patton 1993
employment
relationship
• Recruitment & Atkinson & Meager 1994
resourcing
practices
• Training needs Fuller & Forsaith 1994
• Use of HRM Deshpande & Golhar 1994
practices
• HRM adoption Duberley & Walley 1995
• Flexible work Robinson & MacDonald 1995
practices
• HRM practices Bacon et al. 1996
• HRM practices after Flanagan & Deshpande 1996
union elections
• Performance- Fuller-Love & Scapens 1997
related pay
• HRM practices Golhar & Deshpande 1997
• Attraction & Kauffman 1997b
retention practices
• HR practices Wagar 1998
• Attraction, Kauffman 1998
recruitment &
retention
• Compensation Kauffman 1998b
• HR practices Gadenne 1998
influence on firm
performance
• Connection Bryson 1999
between employee
involvement & firm
performance
• Attraction and Heneman & Berkley 1999
retention practices
• Employee relations Kinnie unpub
• HR techniques Kauffman 1999
• Skills development McClarty 1999
• HR practices Ram 1999
• Human resources Kerr & McDougall 1999
development
• Training needs Freel 1999
• HR practices Heneman, Tansky & Camp 2000
• HR practices in Gilbert & Jones 2000
New Zealand
• HR practices Reid et al. 2000
• Indicators of HRM De Kok 2001
practice
• HRM & gender Kotey & Sheridan 2001
• Bureaucratic & Kaman et al. 2001
high commitment
practices
• HR practices Matthews 2002
• HR practices Cassell et al. 2002
• HR methods Mazzarol 2003
• HR practices Cardon & Stevens 2004

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 (listing of studies)
• HRM in Australia Bartram 2005
• Formalising HR Davila 2005
practices
• Formal HRM in Kotey & Slade 2005
growing small
businesses
• HR practices Harney & Dundon 2006

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Chapter 10

Research findings (case study profiles)

A group of 10 small, medium-sized businesses located in Western Australia

participated in the fieldwork study designed to gather data pertaining to the
management of human resources in their companies. This chapter is concerned
with commenting further on the choice of participants for the fieldwork study and
providing information about the owner-managers who were the principle unit of
analysis and providers of the data. In addition, details of their companies and
associated management characteristics are described. This provides the context in
which these companies operated and insights into the type of owner-managers who
were engaged in their operation. Moreover, it permits them to be viewed as a
collective group of smaller, medium-sized companies as well as separate and
unique business entities.

ƒ Choice of participants

All the respondents in the fieldwork study had either completed or were in the
process of completing a management development programme for small business
owner managers, run by the Curtin University of Technology in Western Australia.
The objectives of the course were the development of students’ strategic planning
and management skills, achievement of greater strategic awareness of the future of
their business, improved understanding of the current position of their business and
its potential for growth, improvement in the financial management and
performance of the business, as well as the enhancement of the students’ ability to
manage their daily business operations. The course is structured around six key
areas including understanding the growth process, developing a firm basis for
growth, planning for business growth, financial management skills, marketing
management skills and management and leadership skills. In addition, the
students are provided with 30 hours of individual mentoring from an experienced
business counsellor (Curtin University Small Business Unit, undated[b]).

One of the early modules in the Program covers the topic of strategic business
management. Its content is explained as follows (Curtin University Small Business
Unit, undated[a] p. 9):

“Planning: A Strategic Approach: “Strategic awareness involves knowing

‘where you are now’ and the potential for growth and change. Thus, both

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 the present performance and the current potential in relation to expressed
objectives are highly significant. Also crucial is an awareness of the external
factors that impinge most significantly upon the business, and the key
factors for success within the firm. The concept of planning is almost
certainly understood very differently by different people. To say that small
businesses do not ‘plan’ is a simplification of reality. Planning in the sense it
is applied during the Growth Program is about developing strategies for the
whole business – it is about thinking strategically and communicating and
sharing strategies with those who need to know. The process of planning,
whether short or long term, involves identifying goals, questioning
assumptions, and evaluating strategies and potential decisions”.

In addition, four of the programme sessions are specifically dedicated to “people

issues”, including HR – Leadership, HR – Communication, HR – Coaching and HR –
Practices and Procedures. The student handouts describe the contents of these
sessions as follows (Curtin University Small Business Unit, undated[a] pp. 4-5):

“HR – Leadership: As small businesses grow…. owner-manager[s] often find

their style of management needs to change. Many of them have a great
reluctance to let go of their authority. The main issues covered in the day
on leadership are about the owner-managers’ attitudes towards and
expectations of other people and the way in which their own role needs to
change. The central theme is how leadership can be exercised”.

“HR – Coaching: How does an owner-manager stand back and let go? This
workshop focuses on delegation and motivation of staff to perform in their
roles”.

“HR – Communication: There is no point in having learnt many of the skills

that the program offers including the core philosophy of the business if the
message cannot be communicated to the stakeholders of the business. This
workshop focuses on enhancing communication skills, building rapport,
negotiation skills and team building”.

“HR – Procedures and Policies: This workshop focuses on the importance of

getting the right people into the right jobs, recruitment and dismissal, and
the purposes and processes of job analysis, job descriptions and their link to
salary/wage settlement, training and development”.

As discussed in the chapter on the research methodology, there were various

reasons behind the decision to target participants in this particular programme,
rather than from the wider smaller business community. First, it was assumed that
this group, having demonstrated a pro-active interest in growing their businesses
by signing up for the course, would be more likely to be interested in participating
in a study of this type. This was particularly important in view of the well-known
difficulties associated with persuading pressured and time-hungry small business
operators to give their attention to matters outside their immediate business
concerns. Secondly, the participants either had experience with growth within their
own organisation or at least were likely to have given consideration to what growth
might entail for them. Thirdly, the group conformed in terms of their size and

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levels of internal development with those companies generally recognised as likely
to have begun the process of assuming a more strategic approach to the
management of their business, or were at a stage where a more strategic mindset
was becoming increasingly imperative.

With respect to the validity of the selection of participants, it is has also been noted
that these respondents might be considered as “primed” for the study in a way that
a more random selection of owner-managers from the general community would
not due to their attendance on the Growth Program. However, working from a
common perception that small companies are not strategic in orientation and the
empirical research has not yet shown that this is incorrect, it was thought that
collectively the owner-managers who had attended the course would have been
more likely to have given at least some consideration to the strategic dimensions of
managing their workforce and hence would be able to offer more substantial
information than a group which had not. As such, it cannot be claimed that the
sample group is representative of the general small business community. Indeed,
the group could be described as exceptional in that the owner-managers involved
have opted to develop their skills, generally accepted as an uncommon occurrence
and that they represent a small portion of the sector that has successfully survived
the perils of smallness, growing into successful medium-sized firms.

ƒ Overview of the owner-manager participants

The 10 companies included in this study are representative of a range of industry

sectors or related sub-sectors, including manufacturing, professional and trades
services, wholesale and retail, food production, and architectural and primary
resources services. For purposes of identification, each owner-manager as the
principal representative of each company has been designated an epithet that
reflects the type of product or service his/her business offers to the market. As
such, they are referred to as:

¾ The Engineering Manufacturer (Case 1)

¾ The Commercial Interiors Manufacturer (Case 2)
¾ The Information Technologist (Case 3)
¾ The Food Wholesaler (Case 4)
¾ The Architect (Case 5)
¾ The Engineering Contractor (Case 6)
¾ The Food Producer (Case 7)
¾ The Engineering Services Provider (Case 8)

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 ¾ The Retailer (Case 9)
¾ The Driller (Case 10)

In accordance with the methodological control requirements, the 10 respondents

interviewed held an owner-cum-managerial role in their respective enterprise, in
that they were the sole owner or had at least a major financial stake in the
business being a partner of the owner. They were also actively involved at the
most senior level in the management of the operation.

In the case of the engineering services firm, the retired owner’s son was
interviewed, who jointly with his brother held responsibility for managing the firm
indicating his expectation to inherit and thereby assume ownership of the firm, and
to continue to manage the business in the future. The architectural firm was jointly
owned by three partners, one of whom was interviewed. Several respondents,
including the Engineering Manufacturer, the Information Technologist and the
Driller operated their businesses with their spouses, partners or siblings playing a
key role in the operation or having equal partnership status. The Commercial
Interiors Manufacture, the Food Wholesaler, the Retailer and the Food Producer
were the sole owners of their businesses and operated independently of other
significant decision-makers.

o Personal characteristics

All of the respondents were mature individuals whose ages ranged from 30 to 65
years of age. Of the 10 ten respondents, eight were male and two were female.
All the owner-managers interviewed were of Caucasian origin and Australian
citizens. Two had been born overseas, one in East Africa and another in the United
Kingdom, but both of these had been raised in Australia.

o Educational backgrounds

Six of the 10 respondents had completed Year Twelve at High School, five had
continued their education with some vocational or technical training either as an
apprentice or at a TAFE college or similar, and one respondent had acquired two
university degrees in commerce and economics. Two respondents had left school
at an early age. Apart from the Small Business Growth Program, none of the
participants had pursued any other substantial formal business management
education.

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o Work history

The work backgrounds of the respondents in both the professional and the trades
services industries indicated a trend in having made the transition from being an
employed individual with a specialist skill to a small business owner-manager
engaged in providing a similar product or service. Exceptions to this were the Food
Producer and the Retailer whose decision to move into a particular business
environment was more opportunistic and signified a branching out into unfamiliar
territory.

o Level of owner-management experience

All respondents demonstrated significant periods of experience as owner-managers

of the small, medium-sized businesses they owned and managed, and in some
instances they had held senior roles in other companies.

Owner-manager Years of experience as the owner-manager

Engineering Manufacturer 6 years

Commercial Interiors Manufacturer 7 years with previous small business experience
Information Technologist 10 years with earlier experience as a director in
other companies
Food Wholesaler 25 years
Architect 14 years
Engineering Contractor 4 years
Food Producer 4.5 years with previous experience in small
marketing and catering businesses
Engineering Services Provider 5 years
Retailer 14 years
Driller 15 years

ƒ Overview of the case study companies

o Company products and services

The companies selected for this study were highly diverse in terms of the types of
product and/or services they provided and they represented a variety of industry
sectors. The principal products and services included the design and manufacture
of hydraulic manifolds, the building of commercial interiors, the development of
computer websites, the wholesale of fruit and vegetables, the architectural design
of buildings for the health sector, the fabrication of pipes for the oil, gas and water
industries, the growing, harvesting and distribution of organically produced
vegetables, the hire of crane labour and equipment together with concrete sawing

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and drilling services, the retail of industrial work clothing and footwear, and the
provision of labour services and equipment to the mining industry.

o Location of the business operation

All the firms included in the study operated in Perth, Western Australia, although
some had branches or site operations in regional locations.

o Size of the business

All the firms studied had reached the medium-sized enterprise category in that they
employed at least 20 staff and no more than 199. The majority of the businesses
operated with a workforce of between 20 and 30 employees, hence being
representative of companies at the smaller end of the medium-sized category.
Some of respondents indicated historical variations in the size of their workforces
that they attributed to fluctuations in business needs and market trends at the
time. While the use of labour hire workers does not technically represent an
employment relationship, the Engineering Contractor drew extensively on these
types of services and viewed this labour resource in terms of his own workforce.

o Financial status

All the respondents reported positive profitability and annual turnovers ranging
from A$2.36 million to A$10 million. While some respondents referred to financial
struggles and cost control issues they had experienced in the early days of their
business, the general impression was that this was an area they no longer
considered as presenting major concerns provided it was continually monitored and
properly managed.

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 Table - Overview of case study companies

Case Case Case Case Case Case Case Case Case Case
1 2 3 4 5 6 7 8 9 10

Industry Manufact. Manufact. Information Food Professional Engineering Food Engineering Retail Mining
sector engineering Technology wholesale services production contrctng. Services

Main Design and Commercial Consult./ Fruit Architect. Piping Sprouts, Crane, saw, Industrial Drilling
products/ manufact. interiors devment. and planning, fabrications legumes, drilling – Work equipment/
services of hydraulic of vegetables advice and - oil, gas & beans, labour & clothing/ labour for
manifolds websites design water tomatoes, plant hire Footwear sample
croutons extraction

Age of 10 years 52 years 13 years 28 years 53 years 19 years 17 years 30 years 17 years 22 years
business

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Size of 20 22 45 20 27 35-60 24 30-40 23 50
workforce permanent permanent permanent permanent permanent (majority full/part fulltime permanent permanent
fulltime fulltime fulltime fulltime fulltime labour hire) time and plus few fulltime
casuals casuals casuals

Annual A$2.36 A$4 A$4.2 A$10 A$3-4 A$7 A$2.5 A$5 A$7.5 A$6
turnover million million Million million million million million million million million

Estimated 33% “quite small 90% 35% 50% 45% 25% 25% 10% 30%
operating/ compared
labour with
costs ratio turnover”
o Life cycle stage of the business

Most respondents considered their firm to be in the early stages of its life cycle.
However, some of these had reached a plateau in terms of having established a
strong customer base and effective internal control and management systems.
While some of the businesses were clearly not young, as for example the Food
Wholesaler who had been operating for 25 years and the Commercial Interiors
Manufacturer whose business had been in operation for 48 years (though not with
the same owner-manager), the perception of the life cycle stage appeared to be
linked to the plans the current owner-manager had for the future of the business.

o Expectation of further growth

As with the perceptions about the stage of their firm’s life cycle, the anticipation of
growth for the future was linked closely with the owner-managers’ plans for their
business. In some instances, the owner-managers indicated that they had plans to
grow the business but the extent to which this would materialise depended very
much on the market.

o Management infrastructure

All the firms included in the study had arrived at the stage where they maintained a
small infrastructure of managers and/or supervisors to help manage and support
the business. These individuals held a variety of support and line management
roles. With the exception of the Food Wholesaler, whose only support was his son
who indicated an intention to continue to be involved in and control most aspects of
the business, all the owner-managers demonstrated a high level of reliance on
these key senior individuals. There was a preparedness to delegate responsibility
as well as allow autonomy in many of the business decisions.

While some of these senior positions were described as being “management” roles,
in many instances the incumbents were actually engaged in operational tasks and
did not necessarily have staff reporting to them. The distinction between
“management” and “operational” staff was not always clear, suggesting that due to
the need for more help at the senior level, the firms had gradually integrated a

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number of additional staff who were expected to undertake a range of tasks as well
as assume some managerial-type responsibilities. This did not necessarily include
the management of other staff. During the interviews recognition of the need to
delegate responsibilities and the associated workload when running a medium-sized
business emerged and they appeared comfortable with the idea of seeking the
support that colleagues and partners could provide. The growth of the business
and subsequent arrival of other senior partners was found in some cases to be a
catalyst for the owner-managers to distance themselves from the daily operation of
their business and facilitate a transition to more strategic activities.

ƒ Description of the case study participants

o The Engineering Manufacturer (Case 1)

The Engineering Manufacturer was a middle-aged Caucasian male in his early

forties born in East Africa but who has lived in Australian since he was 13 years old.
His wife and family lived in Perth and his wife supported the business with
administrative and basic accounting tasks. The company premises were located in
a light industrial suburb of Perth and consisted of small offices and work yards
behind the building. The owner-manager had completed his high school education,
but had no other formal qualifications. The Growth Program was the first time he
had ventured back to education. He expressed an interest in pursuing an MBA at
some point. He had worked for many years as a mechanical engineer in the
hydraulics industry and it was this experience that allowed him to take over a
business focusing on the design and manufacture of hydraulic manifolds. He had
had no previous experience as an owner-manager. Indicating his passion for the
business, he reported that he worked 12-hour days plus Saturdays and that most
of his time was spent dealing with customers.

At the time of interview the company had been established for about 10 years and
had doubled in size following the owner-manager taking it over some 6 years ago.
The annual turnover was reported as A$2.35 million. Company growth to date of
the interview had been driven by the existing customer group and was highly
reactive. There were difficulties keeping up with customer demand and controlling

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the production process. In terms of the firm’s life cycle, the owner-manager
viewed the company as young although it had reached a level of consolidation and
acquired a reliable customer base. Significant changes have had to be made in the
way the company approached manifold production and there has been greater
focus on quality and on developments in the technology.

The company operated with 20 fulltime permanent staff. There was no in-house
human resource management support and no trade union presence. The owner-
manager was the sole decision-maker in the firm but he had been looking at
building his management infrastructure. Having attempted to introduce
management positions previously with little success, he had embarked on the
recruitment of three new people to provide him with assistance, including a
production manager, a marketing manager and a customer support/design
manager.

Some business growth was anticipated in the future, possibly some diversification
within existing targeted markets. The company was interested in exploring the oil
and gas industry, although the core business was to remain in manifolds. The goal
was to try and sustain a level of turnover but increase gross margins. Essentially
the owner-manager had realised a good financial income for him and his family and
consequently aimed to be debt-free and have a comfortable life-style derived from
the financial success of the company.

Engineering Manufacturer

Industry sector Manufacturing (engineering)

Main products/services Design and manufacture of hydraulic

manifolds
Age of business 10 years

Location of business Perth, Western Australia

Size of workforce 20 permanent full-time

Annual turnover A$2.36 million

Operating/labour costs ratio 33%

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 Stage in company lifecycle Young, recently plateaued

Nature of previous growth Driven by existing customer base

Speed of previous growth Doubled in size since inception

Anticipated future growth Some growth

Number and roles of managers 1 owner-manager (planning 3 new

management positions – production,
marketing and customer support/design)
In-house HR management support None

Decision-maker on workforce issues Owner-manager

Trade union presence None

Length of time as owner-manager of 10 years

firm
Age and gender of owner-manager 42, male

Prior experience as an owner- None

manager
Owner-manager background Caucasian, born in East Africa, lived in
Western Australia since aged 13
Work background of owner-manager Mechanical engineer in hydraulics industry

Educational background of owner- Year 12 High School, no formal

manager qualifications, SBU Growth Program

o The Commercial Interiors Manufacturer (Case 2)

The commercial interiors company designed, constructed and installed furniture and
other infrastructure for business offices and commercial facilities. It was a long-
established business starting up in 1953 having had one previous owner. At the
time of interview the firm was based in an industrial suburb of Perth and the
business facilities comprised a group of small offices located over a workshop and
yard. Annual turnover was reported as A$4 million.

The owner-manager of the company was a former tradesman who had completed
high school and then attended a TAFE course as part of his apprenticeship. Born in
the United Kingdom he came to Australia in 1956. The first five years of ownership
he shared with a partner, after which he assumed control as the principal owner-
manager. Similar with the other case study participants, he indicated that he

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worked long hours, 12 hours per day and six days per week, and that his
commitment to the business had destroyed his marriage.

Business growth in the first years of ownership was described as phenomenal, from
A$1 million to A$3 million in 18 months. The owner-manager attributed this
success to a willingness to do anything for the customer even when resources were
in short supply. This had resulted in building up a strong customer base with
frequent repeat business. While he used to get out the tools and give his workers a
hand, he found that the business had grown too large for him to be involved in the
operational area. The business was supported by a small management team
comprising a financial manager, a project manager, both of whom held a 10
percent interest in the firm, as well as a production and assistant project manager.
The team was described as being very cohesive, working together successfully,
despite initial reservations by the owner-manager about taking on other senior
people. Trade unions were represented on site but no formal meetings were held
with them and there was no human resource management support.

While the Commercial Interiors Manufacturer expressed an interest in a starting a

gyprock company, he did not have ambitious plans for the future and was more
concerned with consolidating the business and focusing on the day-to-day running.
He noted that business had dropped off in the preceding 12 months. He noted that
the market was more competitive than when he had started out and added that the
firm did not advertise.

Commercial Interiors Manufacturer

Industry sector Manufacturing

Main products/services Commercial interiors

Age of business 52 years

Location of business Perth, Western Australia

Size of workforce 22

Annual turnover A$4 million

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 Operating/labour costs ratio “Quite small compared with turnover”

Stage in company lifecycle Declining

Nature of previous growth “Prepared to do anything, good customer

Speed of previous growth
Anticipated future growth
base, repeat business”
“Phenomenal in first 2 years”, from less
than A$1 million to A$3 million in 18
months
Starting a gyprock company

Number and roles of managers 1 Financial, 1 Projects, 1 Production and

Assistant Project Manager (each hold 10%
interest in company)
In-house HR management support None

Decision-maker on workforce issues Mainly owner-manager, some discussion

with managers
Trade union presence Some contact on site, no meeting

Length of time as owner-manager of 10 years (first 5 years with a partner)

firm
Age and gender of owner-manager 56, male

Prior experience as an owner- Yes

manager
Owner-manager background English, came to Australia in 1956

Work background of owner-manager Trades

Educational background of owner- Finished High School, attended TAFE

manager course, SBU Growth Program

o The Information Technologist (Case 3)

Operating out of well-appointed offices in the up-and-coming area of East Perth,

the information technology business had been established some 10 years prior to
the interview. Focusing on the development of websites for customers, the
business was described as an early entrant into the multi-media market swept
along by exceptional industry growth that had resulted in a considerable expansion
of product lines. Enthusiastically described as a rising star with heaps of potential,
the owner-manager indicated an A$4.2 million annual turnover, with A$2.9 million
the preceding year and A$1.8 million the year before that. Supported by six Board
Directors and three managers, including a multi-functional human resource
manager, the business operated with strong engagement by all members of the

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senior team. There was no trade union presence. The company supported 45
fulltime permanent employees, although the number had been significantly greater
in the previous year. Increases in numbers had necessitated several moves to new
premises.

A male in his mid-40s, the owner-manager had a history in advertising and

marketing, with a specialisation in computer media strategies and had been a
Director of other companies. He had attended a technical college in order to
acquire an advertising certificate and had read prolifically in a range of
management areas. Passionate about his business and always wanting to own his
own firm, he indicated that in the early days there had been a requirement to work
7 days a week, but that with growth and the development of internal infrastructure
he could now leave the office early enough to have some quality time with his
daughter. The business only demanded a couple of hours at the weekend and
occasionally he came to the office on Saturdays. The Information Technologist
described himself as undergoing a continuous process of unburdening himself of
many operational activities so that he could focus on the development of the
business, spending more than 80 percent of his time in this area. He was also
engaged in trying to bring on other leaders so that they could become effective in
such a role. While he was still involved in projects and was occasionally called on
to sort out problems, most of his time was spent improving systems, working with
line managers and looking at developing areas of the business. Problem areas had
included the management of cash flow and keeping abreast of developments in the
technology.

Information Technologist

Industry sector Information Technology

Main products/services Consulting/Development of websites

Age of business 13 years

Location of business Perth, Western Australia

Size of workforce 45

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 Annual turnover A$4.2 million

Operating/labour costs ratio 90%

Stage in company lifecycle Rising star, young, heaps of potential

Nature of previous growth Early entrant into market, industry growth

Speed of previous growth
Anticipated future growth
Number and roles of managers
swept business along, expansion of
products, strengthening management
team
In 2002 A$4.2 million, from A$2.9 the
previous year, from A$1.8 million the
previous year
Doing better, elsewhere, explore niche
opportunities globally
6 Directors on Board, plus 3 managers

In-house HR management support Yes

Decision-maker on workforce issues Yes, joint with HR manager and Directors

Trade union presence None

Length of time as owner-manager of 13 years

firm
Age and gender of owner-manager Mid 40s, male

Prior experience as an owner- No (Director of other companies)

manager
Owner-manager background Caucasian, Australian

Work background of owner-manager Advertising, marketing, computer media

strategies
Educational background of owner- High School, Technical College for
manager advertising certificate, SBU Growth
Program

o The Food Wholesaler (Case 4)

The Food Wholesaler was a 65-year old male who had owned and managed his fruit
and vegetable business for 25 years. Based in an extensive market complex
incorporating 23 wholesalers in a Perth suburb, he operated out of a small suite of
offices that looked out over a warehouse/yard. It is in this yard that deliveries of
fruit and vegetables arrived from the farms to be on-sold to retailers in the
metropolitan area. Finishing school at 15 years old and having had no formal
education since that time, the owner-manager held as assortment of jobs including

361
lawn mowing, office work, milkman, professional footballer and running fruit and
vegetable stores, but no formal education. The Growth Program was found to be
useful inasmuch as it reinforced the importance of many of his existing business
techniques and activities.

Supported by the owner’s son who was earmarked to succeed his father, the
company had 20 permanent full-time workers who assisted with handling the
produce and making the sales in the yard. Annual turnover was A$10 million. Most
of the owner-manager’s time was spent working on the floor with the salesmen,
sometimes doing the selling if they were absent, as well as coaching his people.

The business had grown steadily over the years, taking about 5 years to get firmly
established. Growth for the following 10 years had been very rapid and then
stagnated for a while. The key to success had been in sourcing better quality
products, a policy of no customer being too big or too small and treating people
honestly. Activities over the years had included improving packaging, overcoming
problems with bad debt and building and improving internal systems. The company
had become mature business and had a stable customer base. The owner-manager
retained exclusive managerial control over his business but his son was very much
involved in the managerial decision-making process. He anticipated that his
business would grow incrementally at approximately 10 percent per annum but that
he would continue to operate in a very similar vein as he has done in the past. His
goal was to be debt-free and to continue to lift the company’s internal efficiency.

Food Wholesaler

Industry sector Food wholesale

Main products/services Fruit and vegetables

Age of business 28 years

Location of business Perth, Western Australia

Size of workforce 20 permanent full-time

Annual turnover A$10 million

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 Operating/labour costs ratio 35%

Stage in company lifecycle Stabilised, mature

Nature of previous growth Sourcing better quality products, policy of

no customer too big or too small
Speed of previous growth Steady, 5 years to get established, 10
years fast growth, stagnant for a while
Anticipated future growth 10% per annum

Number and roles of managers Owner-manager and son

In-house HR management support None

Decision-maker on workforce issues Yes, consults with son

Trade union presence None

Length of time as owner-manager of 28

firm
Age and gender of owner-manager 68, male

Prior experience as an owner- Fruit and vegetable retail stores

manager
Owner-manager background Caucasian, Australian

Work background of owner-manager Lawn mowing contractor, office job,

professional footballer, milkman, fruit and
vegetable stores
Educational background of owner- Finished school at 15 years old, SBU
manager Growth Program

o The Architect (Case 5)

The architect had a background in public sector, specifically in the area of health.
His company provided planning advice and architectural design for physical
redevelopment mainly for the Perth health services. Situated in the up-market
suburb of South Perth, the firm was established in 1953 and was operated by three
Directors who also functioned as project team managers. The architect himself had
been involved as a joint owner-manager for 14 years and had no previous
experience operating a small business. The Growth Program did not offer him a
great deal and he felt that it was better suited to owner-managers without any
previous management training or experience. He worked regular business hours,
dividing his time between managing the business (10 hours per week) and carrying

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out the consulting activities. The architectural business operated with a flat
structure supported by 27 permanent fulltime employees but this headcount had
been larger in the past. The firm did not use an in-house human resource
management professional believing the size of the company as insufficient to merit
one. Interaction with trade unions was not significant.

The company had grown steadily achieving a consolidated market position and
good reputation, and relied on consistent repeat business. Annual turnover was
A$3-4 million. Productivity was monitored closely and efforts had been made to
analyse and improve internal operating systems. Greater standardisation of
processes had been needed and there was better knowledge about the cost and
time drivers. The Architect indicated that his business was at a particularly critical
stage in determining its future due to the fact that the senior partners were getting
on in age and hence likely to be withdrawing their involvement in the business. A
decision was needed as whether to expand the business in line with trends in the
industry or become a smaller boutique provider.

Architect

Industry sector Professional services (architecture)

Main products/services Planning advice and architectural design

for physical redevelopment
Age of business 53 years

Location of business Perth, Western Australia

Size of workforce 27 permanent full-time

Annual turnover A$3-4 million

Operating/labour costs ratio 50%

Stage in company lifecycle Matured, plateaued, in danger of decline

Nature of previous growth
Speed of previous growth
with “ageing” Directors
Consolidated market position and
reputation, expertise driven by market,
repeat business
Steady

Anticipated future growth Decision needed about expanding or

becoming a smaller boutique provider

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 Number and roles of managers 3 Directors who operate as project team
managers
In-house HR management support None

Decision-maker on workforce issues Consultative decision-making with project

managers
Trade union presence Not significant

Length of time as owner-manager of 17 years

firm

Age and gender of owner-manager 47, male

Prior experience as an owner- None

manager

Owner-manager background Caucasian, Australian

Work background of owner-manager Public sector – health

Educational background of owner- Economics and commerce degrees, SBU

manager Growth Program

o The Engineering Contractor (Case 6)

Having made his way up from being a fitter, an apprentice boilermaker, an

estimator and then a boilermaker, the Engineering Contractor owned 65 percent of
his business that was shared with two partners. A 39 year-old male, who worked
for the company before buying in, the owner-manager had had no previous
experience in a leadership role and his formal education was limited to high school.
He estimated that he spent about 50-60 hours per week on the business. Most of
his time was focused on estimating and general management tasks.

As part of the engineering industrial sector, the company fabricated piping for the
oil, gas and water industries. The company facilities were located south of Perth
city in a light and heavy industrial belt on the coast. The Engineering Contractor
operated with a quality and safety manager as well as two project managers. The
workforce was predominantly sourced through labour hire companies and the
headcount varied from month to month depending on the availability of contracts
and associated work. He estimated that the firm drew on any where between 35
and 60 workers at one time. Most of the workers were trades people, in particular

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boilermakers and crane-drivers. Decisions about the management of the company
were made jointly with the other owners. There was no trade union representation
on the site and the company operated without any specialist human resource
management expertise.

Business growth had been steady and the business was described as being in early
maturity in terms of its lifecycle. Annual turnover was reported as A$7 miillion.
Internally the focus had been on implementing quality management systems
(ISO2002) and driving the gross profit margins higher. Acquisition of business had
been mostly opportunistic. Feedback from the Growth Program indicated that the
firm’s financial structure was in good condition and the company did not have to
deal with slow payers or debtors. The company had employed a fulltime
accountant several years previously and the accounts were in good shape.

Although the company was planning for a 30 percent increase in turnover due to oil
and gas industry initiatives, the precarious nature of the business meant that it was
also possible that he might easily lose the company.

Engineering Contractor

Industry sector Engineering

Main products/services Piping fabricator for oil, gas and water

industries
Age of business 19 years

Location of business Perth, Western Australia

Size of workforce 35-60 (varies from month to month)

Annual turnover A$7 million

Operating/labour costs ratio 45%

Stage in company lifecycle Early maturity

Nature of previous growth Quality management systems (ISO2002),

restructured, driving gross profit margins
higher, opportunistic
Speed of previous growth Steady

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 Anticipated future growth
Number and roles of managers
In-house HR management support
In oil and gas industry, 30% increase
turnover targets in coming 2-3 years
Managing Director, Accountant, Quality
and Safety Manager, 2 Project Managers,
Supervisors
None

Decision-maker on workforce issues Owner-manager, jointly with other

owners
Trade union presence None

Length of time as owner-manager of 7 years (owns 65% of business)

firm

Age and gender of owner-manager 39, male

Prior experience as an owner- None

manager

Owner-manager background Caucasian, Australian

Work background of owner-manager Worked for the company previous, fitter,

boilermaker, estimator
Educational background of owner- High School, apprentice boilermaker, SBU
manager Growth Program

o The Food Producer (Case 7)

Located in a modern factory/office site outside Perth’s satellite town of Fremantle,

the Food Producer and her team were engaged in producing 50 varieties of sprouts,
legumes, mung beans, croutons and tomatoes in an assortment of packaging
primarily for local consumption. The Food Producer was a female in her late 30s
who had owned and operated this company for four and a half years. Starting her
career as a secretary and in insurance broking, she then bought into the company
which was some 14 years old at the time of the interview. Leaving school after
Year 10 her education had been limited to a secretarial course, a diploma in
insurance administration and various assorted short courses. Highly committed to
her business concern, she claimed to spend 80 hours per week, 7 days a week on
supervising deliveries, customer service, managing staff and the daily operation, as
well as the company financials and cash flow.

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To assist in running the organic food factory that operated with 24 full and part
time staff, most of whom were casuals, the Food Producer had acquired a quality
and production manager and a dispatch sales manager. On the factory floor there
was a foreman and a supervisor in charge of production. The owner-manager was
the sole decision-maker in the business and there was no internal specialist human
resource management support. Trade unions were not represented in this
business. She drew on recruitment agencies and any available free government
services to help manage her people.

The Food Producer described the growth of her business as having been very rapid,
with a 20-fold turnover increase in four years. Initial personal financial sacrifices
were needed to support the business in the early years as the exceptional speed of
growth discouraged investment from the banks. The customer base had expanded
through marketing efforts, diversification of product lines and customer demand.
This was facilitated through growing the number of support staff and moving to
new premises. Annual turnover was A$2.5 million. While the business was
relatively young in some respects, in certain markets it was mature and well
established. The Food Producer indicated her intention to continue to achieve
significant growth in the coming few years, possibly doubling or tripling her
turnover. After that her plan was to sell the business.

Food Producer

Industry sector Food Producer

Main products/services 50 varieties of sprouts, legumes, mung

beans, croutons, tomatoes in assorted
packaging
Age of business 17 years

Location of business Perth, Western Australia

Size of workforce 24 full and part time, majority casuals

Annual turnover A$2.5 million

Operating/labour costs ratio 25%

Stage in company lifecycle Young, matured in some markets

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 Nature of previous growth
Speed of previous growth
Customer base, exporting, via marketing,
product diversification, customer demand,
support staff, new premises, increased
market share
Rapid – 20 fold in 4 years

Anticipated future growth Double turnover

Number and roles of managers 1 Quality and Production, 1 Foreman, 1

Team Supervisor, 1 Dispatch Sales
In-house HR management support None; uses recruitment agencies, free
government services
Decision-maker on workforce issues Yes

Trade union presence None

Length of time as owner-manager of 7.5 years

firm

Age and gender of owner-manager Late 30s, female

Prior experience as an owner- Direct marketing and catering businesses

manager

Owner-manager background Caucasian, Australian

Work background of owner-manager Secretary, insurance broking

Educational background of owner- Year 10 High School, secretarial course,

manager Diploma in Insurance Administration,
assorted short courses, SBU Growth
Program

o The Engineering Services Provider (Case 8)

The engineering services company was a family business that provided crane hire,
concrete sawing and drilling services, and associated maintenance services to
heavy industry operators in Kwinana, south of the city of Perth and other regional
locations including Bunbury and Karratha. Established in 1974 the company was
managed by two brothers supported by their semi-retired father.

One of the brothers who was interviewed for this study was a 30-year old male
whose education included completing Year 12 at high school followed by a TAFE
college course. He spent several years working in other construction companies
before joining his father’s firm five years previously. His knowledge as an owner-

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manager had been acquired on the job. Fully involved in all aspects of the business
he indicated that his working week typically consisted of 70-100 hours, six days a
week, spent on the day-to-day running of the company, coordinating sales, and
sorting out the “small stuff”.

Described as still a young company but with a solid customer base, the company
had doubled in size in the preceding five years, equating to an approximate 25
percent across the board annual increase in capital, turnover, personnel and assets.
A range of factors had contributed to the growth of the business including becoming
better at what the company does, reducing slippage, increasing capacity, improving
technology and equipment, expanding into broader markets and pressure to be
competitive. Annual turnover was at A$5 million. Being service-intensive the
challenges for the company lay in the core business of coordinating the combined
needs and expectations of workers, equipment and clients.

The business was supported by 30-40 employees, who were a combination of

fulltime permanent staff and casuals. The company maintained a senior team of
three managers, two executive managers that included the interviewee and a
general manager. The management of the workforce was undertaken by the
managers without any reliance on a specialist other than a part-time administrator
who processed the payroll and screened applicants for jobs. There was trade union
representation at the work site and the company maintained a positive working
relationship with the Shop Steward. The owner-manager anticipated that the
company probably had 5 more years of growth before it reached its maximum
potential.

Engineering Services Provider

Industry sector Engineering contractors

Main products/services Crane hire, concrete sawing and drilling,

maintenance, labour hire, plant hire
Age of business 30 years

Location of business Kwinana, Bunbury, Karratha, Perth in

Western Australia
Size of workforce 30-40 (fluctuates) mainly full time and
casuals

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 Annual turnover A$5 million

Operating/labour costs ratio 25%

Stage in company lifecycle Young, solid customer base

Nature of previous growth Better at what they do, reduced slippage,

Speed of previous growth
Anticipated future growth
increased capacity, improved technology
and equipment, sourced better operators,
expansion into commercial markets
Doubled in five years, 25% per annum;
capital, turnover, personnel, assets
5 years more growth

Number and roles of managers 2 Executive Managers (brothers), General

In-house HR management support
Decision-maker on workforce issues
Manager
Person does 2.5 days per week for
payroll, administration and screening job
applicants, use recruitment agencies
Three managers jointly

Trade union presence Yes, Shop Steward, good relationship

Length of time as owner-manager of 8 years (retired owner’s son)

firm
Age and gender of owner-manager 30, male

Prior experience as an owner- None

manager
Owner-manager background Caucasian, Australian

Work background of owner-manager Construction supervisor in other firms

Educational background of owner- Year 12 High School, TAFE, SBU Growth

manager Program

o The Retailer (Case 9)

An Australian male in his mid-40s, the Retailer owned and operated seven retail
establishments across the central and suburban districts of the city of Perth,
specialising in industrial work clothing and footwear. Working with his brother who
held a 20 percent share in the company, the business had been established for 14
years and achieved an annual turnover of A$7.5 million. Having completed his Year
12 education and started but never completed both a teaching and a business
degree, he had won a sponsorship to attend the Small Business Growth Program.

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His early work experience included driving a truck and working in an alumina
company.

While the demands of building the business required long working hours in the
early days (80-90 hours per week), consolidation and support from others
permitted a 50-hour working week although he worked on Saturdays in the busy
season. Most of his time was taken up with managing his properties, choosing and
pricing products, processing the payroll and advertising. Although considered to be
still a young business, the company was stable and had reached a plateau in its
development. The business had grown steadily over the years, initially 50 percent
per year achieved through the opening of new outlets. The Retailer was supported
by largely autonomous store managers who oversaw the running of each outlet,
hence permitting the owner-manager to focus on others issues and be present only
once a week at any one location. He also carried an operations manager and a
warehouse manager. He employed 23 permanent fulltime staff and a few casuals.
Being reliant on his staff to turnover the stock most of the business difficulties were
centred around the management of people. However, there was no internal human
resource management support and no involvement by a trade union.

Personal considerations played an important part in the Retailer’s plans for his
business. Having built a lucrative business that was rewarding him well for
hardships and the hard work in the early years, he did not anticipate any major
expansions. Although opportunities to operate on a national scale had risen from
time to time and he expected to add product lines, he expressed the need for
caution about staying focused and being in touch with the core business, as well as
his desire to spend more time with his family.

Retailer

Industry sector Retail

Main products/services Industrial work clothing and footwear

Age of business 17 years

Location of business 7 stores in Perth

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 Size of workforce 23 permanent and a few casuals

Annual turnover A$7.5 million

Operating/labour costs ratio 10%

Stage in company lifecycle Young, stable and beginning to plateau

Nature of previous growth Opening more stores

Speed of previous growth Steady growth, initially 50% per year

Anticipated future growth Increased turnover from new products

Number and roles of managers 1 operations manager, 1 warehouse

manager and 7 store managers
In-house HR management support None

Decision-maker on workforce issues Yes

Trade union presence None

Length of time as owner-manager of 17 years (80% ownership, 20% owned by

firm brother)
Age and gender of owner-manager 45, male

Prior experience as an owner- None

manager
Owner-manager background Caucasian, Australian

Work background of owner-manager Truck driving, alumina company

Educational background of owner- Year 12 High School, teaching and

manager business degrees (not completed)

o The Driller (Case 10)

The drilling business was a male-female partnership whose company was

established 19 years prior to the interview. The female partner who was
interviewed for this study was in her mid-40s and came from New South Wales.
She left school when she was 13 years old and had no educational qualifications.
To address a perceived shortfall in their combined business management
knowledge and experience, she recently sampled a course at the University of
Western Australia but found this to be too academic. Subsequently, she decided to
join the Growth Program at Curtin University.

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Working with BHP as a field assistant she had met her business and life partner,
and subsequently joined him in their current enterprise some 15 years previously.
The company provided drilling services to the mining industry in the form of
equipment and expertise required to carry out sample extractions. Based in Perth
the company also had sites in the mining region of north-west Australia. Annual
turnover was posted at A$6 million. The Driller described their activities in terms of
an all-consuming 24-hour business, 7-days per week, but a source of pleasure and
satisfaction.

The business was described as very volatile in nature, subject to the fluctuations of
the mining industry and hence heavily customer-driven. The company had
increased in size by one third the preceding year, taking on more equipment and
staff. Still young with considerable growth potential, capacity for expansion would
be determined by customer demand and activities. The business operated with 50
fulltime employees, of which 35 were drillers, driller assistants and trainees. Back-
up for the core operation was provided by a business and administration support
manager, an operations manager, operations support and an administrator.
Decisions were make collectively by the two partners and their management team.
The company had no in-house human resource management specialist but was
using an external consultant to develop job descriptions, accountabilities and key
performance indicators. There was no union presence.

The general goals of the business were to achieve a bigger net profit margin, invest
in the development of the workers and lift operating standards. The partners were
developing a business plan to reflect the future direction of the company and
identifying the strategic initiatives that would enable them to achieve their goals.

Driller

Industry sector Mining services

Main products/services Drilling equipment/labour for sample

extraction
Age of business 22 years

Location of business Perth and north-west Australia

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 Size of workforce 50 full time (35 field staff – drillers, driller
assistants and trainees)
Annual turnover A$6 million

Operating/labour costs ratio 30%

Stage in company lifecycle Young, potential to grow depending on

customers’ industry
Nature of previous growth Equipment, staff, customer demand

Speed of previous growth Volatile, fluctuating, one year up by one

Anticipated future growth
Number and roles of managers
In-house HR management support
Decision-maker on workforce issues
third
Bigger net profit margin, develop the
people, higher standards
1 business and administration support
manager, 1 operations manager
Currently using a consultant to redefine
job descriptions, accountabilities, Key
Performance Indicators), in-house payroll
Yes, consults with others in the business

Trade union presence None

Length of time as owner-manager of 18 years as joint partner with owner-

firm manager
Age and gender of owner-manager 46, female

Prior experience as an owner- None

manager
Owner-manager background Caucasian, Australian

Work background of owner-manager Worked with BHP as field assistant, field

operator, accountant, labourer
Educational background of owner- Left school at aged 13 years
manager

ƒ General case study observations

The participants in this study were an eclectic group, representing different age
groups, socio-economic backgrounds, levels of education and business experience,
as well as gender. The common denominator that linked the participants was their
role as owners and managers of commercial organisations of relatively similar size.
While some of the respondents were initially reluctant to participate in the study,
requiring some tactful persuasion, during the interviews they presented as co-
operative, open and forthright sources of information. They were generally willing
to share details about their lives, their businesses and their management

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experiences in a manner that suggested the information they were providing was
an accurate and truthful reflection of their activities and how they perceived them.
Several of the owner-managers were somewhat abrupt in their responses and
indicated their unwillingness to respond to further probing or expand on a particular
subject. It was not evident whether this was due to a feeling that the questions
were tackling areas about which they felt sensitive or whether they had simply tired
of the discussion. While some of the respondents appeared slightly apprehensive
and even nervous during the meetings, there was no sense that what they said was
intentionally distorted or designed to be misleading. Their ability to provide data in
a succinct and coherent manner varied considerably, with digressions from the
topic and incomplete sentences being commonplace. However, overall they were
able to convey their meaning in a credible and comprehensible way.

Collectively, the respondent group contributed information that suggested it would

be reasonable to describe them as successful entrepreneurs or smaller medium-
sized business owner-managers who were highly committed to and involved in their
companies and had played a key role in the building of profitable and enduring
businesses. All the owner-managers in the study reported positive financial
positions for their business, an optimism about their firm’s capacity to survive into
the future in spite of operating in some cases in high-risk and uncertain markets,
as well as a confidence in their ability to control the infrastructure of their internal
operations. However, for most of the respondents these achievements did not
appear to be the result of being complacent about the management of their
business. Most conceded that their firms could benefit from a range of
improvements. It was asserted that continued effort and energy, with a
preparedness to experiment and take risks, would be required to achieve these.

Most of the respondents had been involved with their business for some years and
had gathered a breadth of small business management experience during that
time. For some the process of growth had been turbulent, with owner-managers
and their families having to endure and overcome financial hardship, fluctuations in
profitability and obstacles associated with the daily management of the business.
However, their desire to succeed coupled with energy and practical creativity, as
well as the resolution to bounce back from setbacks, appeared to have enabled

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them to find solutions to their problems and overcome many obstacles that
presented themselves along the journey.

The development of the businesses was also found to be linked to each owner-
manager’s on-going personal learning and capability, and their ability to continue to
acquire knowledge and information, calculating how he/she would take the next
step. This was a factor that the respondents were readily able to acknowledge.
While not all the respondents were hoping to achieve greater growth, most
indicated that potential for growth existed and that any intention to exploit this
would be linked to their personal goals and aspirations. While the respondents
were found to possess highly variable levels of formal education, a pro-active
commitment had been made to attend the Growth Program in order to acquire
further knowledge and skills in small and medium-sized business management.

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Chapter 11

Research findings (case studies)

In researching the human resource management activities of smaller, growing

businesses, primary data was gathered from a group of 10 small, medium-sized
firms. In response to questions pertaining to the management of their human
resources, each of the owner-managers that participated in the fieldwork study
provided information about the management of their company and its workforce, as
well as sharing their views, ideas and experience about this area of business
management in general. This chapter presents the findings as matched against the
four principal components identified as the core elements of Strategic Human
Resource Management.

o Element 1: A management philosophy (the recognition of people as a valuable

business resource)

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

Verbal acknowledgement of role of people assets

On being asked to share their thoughts about the role that people play in their
business the owner-managers articulated in various ways, to a lesser or greater
extent, a positive recognition of the value or contribution that the workforce makes
to company performance and achieving business goals. Not surprisingly, their
responses reflected the view that without people effectively there would be no
business. People were seen as being intrinsic to its very existence.

The Engineering Manufacturer commented that:

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 “People are the business really. Without the people I can’t produce
manifolds, I can’t sell, design, manufacturer and ship. Key people in key
areas are very important, as are people further down the line”.

The Information Technologist was equally clear about the value of people for his
business. He explained that:

“They are the business. That’s basically all there is to it. We’ve got
processes and procedures and an accumulation of intellectual property. But
the interface with our clients is people; the machinery that develops our
products is people. It’s a people business”.

Some of the owner-managers confirmed the criticality of people for the business
and the importance of getting this aspect of their business “right”. An acute
example of this was found in the case of the Engineering Contractor who relied
heavily on his estimator to make a balanced and accurate quote for a new contract
and then on key trades people to perform their tasks within strict deadlines and
budgets. Where the estimator fails to achieve his objective the company may not
win the contract and the company, which operated with only a small customer
base, would lose revenue and be significantly undermined in terms of its
sustainability as a viable operation. Similarly where trades people extended the
timeframes on work or incurred more costs than had been originally budgeted, the
firm’s profitability was proportionately reduced or even lost. The success and even
survival of the firm was highly dependent upon these key human inputs into the
business process. As a result the Engineering Contractor noted that he relied on
“quality people across the board”. He concluded that “there’s lots of issues
surrounding employing people…. to do it effectively is really, really important”. The
Architect also stressed the need for having the appropriate skills and behaviours,
commenting that “where we don’t have the right team it can be a disaster”.

Other owner-managers were more circumscribed in expressing their recognition of

the human contribution to business success. When describing the factors that may
impinge on the management of the workforce the Engineering Manufacturer
indicated that his customers came first in all matters. He stated:

“What the customer wants the customer gets. The customer is more
important than the employee. That is definitely the case”.

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Nevertheless, reflecting on some of the problems he had faced while building his
business he noted that “I have learnt the importance of people”. Similarly, the
Commercial Interiors Manufacturer explained his perspective:

“I have always said I will never admit…. I will never rely on one person. No-
one’s [indispensable]. There’s always someone out there that can take your
place. Having said that I think I’ve got one of the best teams in Perth and I
wouldn’t want to lose them. They’ve been loyal to me and I hope I’ve
returned their loyalty financially…. Without them I’m nowhere”.

The Food Producer’s comments suggested that people were important insofar as
they met her immediate business requirements; it did not matter so much who
they were as long as they were available:

“I used to take it very personally and devastated if people used to leave. If

some leave that’s okay…. it wouldn’t be devastating. There aren’t any
particular skills that we can’t find”.

While the Driller acknowledged that her company needed the particular attributes
that employees bring:

“Their technical ability is critical, ability to communicate with the clients,

they need to be a team player. The company couldn’t operate without
them”.

She viewed the value of people from a much broader perspective, beyond the
immediate boundaries of her business, stating that:

“Well, people are what it’s all about. My thinking tells me if you can develop
your people then as a community everyone benefits, everything flows on”.

The notion of human value also emerged where a company’s employees

represented the defining business asset due to their intellectual capital. This was
evident in the Information Technologist’s strategic decision to employ staff on a
full-time, permanent basis rather than use contractors. In contrast with many
information technology operators in the marketplace who contract out projects and
hence fail to derive long-term benefit from the experience gained by these
contractors, the company provides secure employment for its staff with the
intention of building the inherent capital value of the company.

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Owner-manager control of human resource management

An indicator of the importance of human resource management for these firms

emerged in the fact that all 10 respondents indicated that they personally assume
responsibility for workforce management decisions and that this was not an area of
their business that they choose to delegate to others. Nevertheless as small
medium-sized companies with some management infrastructure in place, the
presence of other senior managers permitted some sharing of ideas and decisions.
The common approach was found to be a partially consensual one in which the
owner-managers relied on their senior colleagues and partners to provide input and
help in finding solutions to problems. In the absence of other senior staff, such as
in the case of the Engineering Manufacturing and to a lesser extent with the Food
Wholesaler who both operated without a formal management structure, important
workforce decisions were predominantly the domain of the owner-manager. Even
where a person had been specifically employed by the business to assist with
aspects of workforce management, major decisions remained centralised and under
the control of the owner-manager.

The Engineering Manufacturer indicated that although he was considering acquiring

the services of a human resource management specialist, he intended to manage
this aspect of his business himself and was developing his personal skills for this
purpose. One owner-manager who felt sufficiently confident to delegate this
responsibility to others in the organisation was the Information Technologist. He
indicated that he was gradually moving away from direct involvement in many of
the people-related issues and that others were now permitted to take the final
decision on junior appointments. He only involved himself in the senior
appointments. He indicated that he found it a satisfying experience to have people
in his business that he could trust with important decisions such as hiring new staff.
The Food Producer indicated that she wished she felt sufficiently confident about
delegating many of the human resource management decisions to her production
manager due to the intense pressure of work on herself and the need to focus on
other operational matters.

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Owner-manager experience of managing human resources

In reporting that workforce management and human resource issues represent a

critical aspect of their business some of the owner-managers commented that they
also found it a frustratingly difficult aspect of their managerial responsibilities. The
Engineering Manufacturer commented that “my most difficult task is the human
relations, the staff…. I just need the recipe” and that this is the one area of his
business about which he is least satisfied. He confided that this was linked to his
personal passion for the business and that his people did not demonstrate the same
levels of ownership. He commented that “I have been known to say that if I could
get a bunch of robots down there I would”. Similar feelings were expressed by the
Engineering Contractor who stated that:

“When it comes to employing people, it’s probably the single most difficult
aspect of operating a business like this, all sorts of trouble comes with it. If
there’s any one area that’s caused us grief over the years it’s employing
people. We know our job, we know our industry, we know how to do our
work and make money, we know how to structure things, but employing
people, it’s an endless road of obstacles”.

He added that “I wouldn’t be the only person in small business that feels like that
especially when you’re employing large numbers”.

When questioned about difficulties his company had experienced during the growth
of the firm the Engineering Services Provider commented that “personnel is always
a problem”, specifically referring to difficulties with poor performance from
employees in managerial roles. He declared that:

“Some days…. you want to bang your head against a brick wall. The main
cause of that is some employee has done something…. fixing other people’s
stuff-ups…. it’s very hard work”.

The Driller talked about the difficulties her company had faced during the gradual
expansion of the business, noting that “human resources would be the biggest
[one]”. Similarly, the Retailer lamented the fact that:

“If you talk to any person in business and say what is the one thing that
gives them the most grief: it’s human resources. How do you get good

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 people…. how do you keep them. Trying to motivate them to do their job
properly…. every employer has the same problem”.

The demands of managing a workforce were highlighted by the Retailer who

commented that this was the main area in his business where things went wrong
and needed his attention. The actions or lack of them on the part of the staff were
sources of disruption to the daily operation and it was his job to sort them out.
Likewise, the Food Producer noted:

“Today it’s very demanding meeting employees’ needs. They have no idea
how hard it is to run a small business, the risks we take, giving up a lot of
our life…. the attitude they take”.

While the Driller acknowledged that her company could not operate without the
workforce and that they and their accompanying skills were essential to the
business, she did not appear to view her workforce management responsibilities as
especially onerous and was not able to identify any major concerns that her firm
was facing in this regard. Nevertheless, her view was that the business could
improve in the ways workforce-related matters were managed. This was the
intention of herself and her partner as they moved forward.

Limited in-house professional management support

Consistent with other research studies in this area, despite the fact that owner-
managers emphasised the importance of people and effective human resource
management practice, only two out of the 10 respondents had a member of staff
whose role was concerned with workforce management issues. Moreover, it was
evident that these positions were regarded as junior administrative-type roles and
that their incumbents were unlikely to play a particularly influential part in major or
critical human resource management decisions.

The Information Technologist had hired a human resources manager at a time

when the firm was undertaking a large amount of recruitment and the company
was experiencing difficulty in finding the right staff. The decision to employ a
human resources manager had been taken when the company had 35 employees
and the owner-manager commented that he believed that this was quite early for a
growing small business. As the market had slowed down and the company was not

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hiring new staff, the human resource manager’s responsibilities had diversified to
include a range of other miscellaneous tasks, including coordinating the internal
and external training, managing the company’s facilities and the social club, and
driving an ISO series quality management project. In the case of the engineering
services firm, the human resources “person” was part-time and his responsibilities
were limited to managing the company’s payroll and screening potential applicants.

While the Engineering Manufacturer indicated that workforce management was an

area of his business that needs some attention, he nevertheless felt that his
company was not large enough to have a permanent human resource management
specialist, but could see the benefit of having someone working part-time. The
Architect reported that his firm did not employ a human resources specialist, as he
believed that the size of the firm did not justify such a position. Similarly, both the
Engineering Contractor and the Engineering Services Provider indicated that
although there was a fair amount of administrative work associated with the
management of their workers, such as undertaking reference checking, and
organising medicals and inductions, they did not believe there was a requirement
for a specialist human resource management person on their team. He commented
that he would like to improve people management systems but that this was not a
high priority. Although the Food Producer was not of the view that she needed
additional specialist assistance, she was able to identify areas in which such an
individual would be able to help her and provide some input.

Limited use of external support

While most of the respondents had identified external bodies that could assist with
labour-related issues, there appeared to be a strong self-reliance to manage their
own problems and seek the best outcomes from the ideas and insights of their own
people. The Engineering Contractor reported that when workforce problems occur
in his company, the senior team managed these. They sit and discuss the issues
amongst themselves. He indicated that the company drew on the Chamber of
Commerce & Industry for help occasionally but that had only been in recent times,
as the Chamber’s fees had been beyond their budget in the past. A similar
approach was taken by the Commercial Interiors Manufacturer who explained that
his team preferred to talk among themselves and “keep things in-house”.

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A number of respondents however, indicated that they used a variety of different
services and resources from time to time to help them with workforce issues. For
example, the Engineering Manufacturer held a membership with Chamber of
Commerce & Industry that provides a hotline service to answer employment-
related questions and he also drew on the expertise of a professional recruitment
agency to help with staff selection activities. The Commercial Interiors
Manufacturer used the Master Builders Association to help with matters such as
regulation, wages and safety. The Food Wholesaler was an active member of
several food wholesale associations where small business owners met to discuss
business issues and share information. Some of the respondents reported that
they would share ideas and problems with other small business owners, but this did
not appear to be a frequent practice.

The Engineering Contractor mentioned that occasionally he had resorted to contacts

in his particular industry, such as previous work colleagues. These contacts had
been instrumental in providing him with information about the possibility of
restructuring his employment arrangements by using a labour hire company. This
had alleviated major and potentially untenable financial and administrative
burdens. Reflecting back on the growth of her business, the Driller indicated that
she would have drawn on external resources much more if she had had her time
again. However, she was doubtful whether the necessary resources or tools would
have been available at that time. She also commented that it was necessary for an
owner-manager to be mentally receptive when taking on the services of an
outsider, such as a consultant; otherwise the benefits of this adviser were not likely
to be properly utilised. In general, the senior people in her company sat together
and resolved problems among themselves. She acknowledged that it would be
useful to have a network of contacts but felt that her personality and that of her
partner were not well suited to building these sorts of relationships.

Limited take-up of management education

Previous research has identified a consistent trend that despite the implicit and
articulated value accorded to the effective management of human resources,
sometimes in the face of complex and persistent workforce problems, owner-

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managers are frequently reluctant to equip themselves or seek outside assistance
in managing this aspect of their business. This study would appear to reinforce the
existing general perspective that owner-managers are willing to acknowledge the
importance of effective workforce management but for a variety of reasons were
reticent to explore avenues that might relieve associated pressures or contribute
positively to enhancing business performance. The Information Technologist and
the Retailer were found to be the only respondents who had sought to educate
themselves about people management practice through journals and various texts.
Several owner-managers commented that their ability to become proficient leaders
of people had been largely due to experience and that they find they continually
learn and make improvements as they go forward. In general, there was a sense
that collectively the respondents relied a great deal on their own commonsense,
creativity and personal resources to manage the human dimension of their
businesses rather than seek help from further afield.

In addition to verbally acknowledging the value of people as an organisational

resource, this recognition was reflected in many of the management initiatives and
activities in which these companies claimed to engage. This was found most
notably in the methods used to attract and retain people with the skills and abilities
necessary to support the business and deliver on customer needs and expectations.

Finding and attracting essential staff

In most cases, the respondents reported a reasonably stable workforce, or at least

stable relative to the type of industries in which they operated. Nevertheless,
building a core workforce possessing the critical competencies needed to deliver
products and services to customers and ensuring that they continued to do so by
remaining with the company, were found to represent significant considerations for
the owner-managers.

The companies that operated in highly technical or specialist environments for

example, reported greater difficulty in sourcing good candidates and expressed the
belief that they had to be particularly creative in how they approached this. For
example, the Information Technologist described a variety of strategies he
employed to build the firm’s reputation and attract people to the business, such as

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developing relationships with universities and sponsoring end-of-year prizes, as
well as talking to people in the marketplace. The Architect found that his industry
presented specific types of problems when trying to source applicants with the right
skills and experience. He explained that in order to be successful in an
architectural practice it was necessary to have both technical and project
management skills, but that the latter were not usually provided to young
architects during their training. Moreover, he felt that the architects themselves
often demonstrate little interest in acquiring them. He indicated that the firm
would be in a stronger position if it could ensure it selected those appropriately
motivated individuals during the recruitment stage. Describing another feature of
his industry, the Architect also believed that part of the difficulty with sourcing
suitable candidates was that architects tend to be sedentary types and it was often
difficult to entice them to move to Perth to join the company. This was further
exacerbated by a perception that Perth is geographically remote and not a desirable
work location.

The Engineering Contractor also faced certain difficulties when sourcing staff for his
business. His ability to find good quality trades people was heavily impacted by the
degree of activity in his and related industries at the time. He explained that
previous downturns in the industry had created a shortage of skilled workers,
particularly as a result of a reduction in the number of apprenticeships available
where trades people receive their initial training. He anticipated that as the market
picked up his company would have further problems finding the right staff due to
the shortage of skills in the industry, and as a result there would be a need to
review staff wages in order to be competitive and keep the limited pool of people
from taking jobs elsewhere that paid higher rates. However, he was pleased to
note that the lull in the market in previous years, which had resulted in the
company reducing wages by 10 percent, had produced virtually no visible workforce
attrition for his own company.

The Commercial Interiors Manufacturer reported difficulties in finding high calibre

trades people also, indicating that the company’s high standards and precision work
put off many candidates who de-selected themselves when they saw the level at
which they were expected to work. Maintaining an informal database of contacts in
the industry was helpful for the Engineering Services Provider. He would frequently

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target individuals with a proven track record, keeping in touch with how they were
faring in other companies, and occasionally approaching these individuals when the
company was taking on new staff.

In contrast, the firms that employed workers with low level skill requirements
reported that there was an abundance of labour in the market, and they could take
their pick accordingly. The Food Wholesaler mentioned that it was usual for job
seekers to approach him for work and so he maintained a list of names in the event
a vacancy came up. The Food Producer reported that she had no difficulty finding
staff. Her business was characterised by a transient, low-skilled working population
and there were always people looking for the type of work she could offer.

The Retailer described the history of hiring in his business, starting in the early
days when their approach had been to place a sign on the shop counter inviting
people to apply for a position and they would take on anyone who seemed to fit the
work requirement. Finding that this approach was not always reliable in terms of
getting good people, the company started to use a recruitment agency in the city.
While the owner-manager had been impressed with the process and interview
techniques, he still found that he did not always get good people. His conclusion
had been that it was usually impossible tell whether a new recruit would turn out
well and that he would just have to try them out. As such, new hires always
underwent a trial period. Over time the Retailer found that he could start to attach
a particular profile to his most successful shop assistants; that of middle-aged
females with children. The work requires individuals with high levels of skill in
customer service and the ability to cope with the particular type of customers who
come into his (industrial clothing and footwear) stores, often industrial workers who
are not always polite or agreeable. In the past he found his younger staff, in
particular the females were not always focused on the job and would get overly
upset by troublesome or rude customers. Mature females who had experienced the
rigours of raising families emerged as the best performers in his business and as
such these were the people he targeted for positions in the firm.

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Retention of valuable employees

Likewise, the retention of critical skills, particularly where these were in short
supply, was found to present a significant managerial challenge for some of the
owner-managers who used a variety of ways to reduce this type of risk to their
business. Some respondents demonstrated a certain pride in the fact that they had
an almost static workforce and were able to provide a workplace where people
wanted to be. For several respondents, including the Engineering Contractor and
the Information Technologist, the long-term retention of key staff was considered
essential if the company was going to achieve sustainable growth. The former
stated that:

“It’s important to maintain a steady group of people together for a long

period of time [so] you’ll realise better growth”.

The Information Technologist was proud to report that his firm had never lost a
staff member to a competitor that it did not actually want to lose and that most of
those who had left had gone traveling and simply ended up working elsewhere.
Many of them had gone onto bigger markets and been successful in their careers.
His belief was that those who left the firm looked back fondly on their time with the
company having appreciated the family-like environment. Similarly, the Food
Wholesaler showed satisfaction that two staff members had worked for him for over
20 years. He indicated that building up long-term relationships with the growers
(i.e. the suppliers) and creating loyalty through good relations between the staff
and the up-line and down-line parties, represented a critical success factor his
business.

Regardless of the perceived value and availability of good workers, considerable

efforts were made to make their companies attractive places to work and so be
able to retain employees. The Information Technologist listed a range of initiatives
designed to attract and retain quality information technology specialists, including
operating from luxurious, modern offices in the newly developed area of East Perth
and providing a work environment that was highly responsive to individual needs
on both a personal and professional level. He explained that:

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 “It’s a competitive marketplace for people…. the things we promise people
are that they will be involved in every aspect of our business. We are open
about the financials, how things are going. People are encouraged to take
an interest. We take a genuine interest in their career development. We
deal with people fairly”.

During performance reviews employees are asked if they enjoy the work that they
are doing and what obstacles prevent them from achieving their career goals. Low
levels of turnover were considered to be indicators that these strategies were
successful.

The Engineering Manufacturer indicated that in order to keep skilled staff in what is
a small and competitive industry, he opted to pay higher than average rates of pay,
usually 25 percent above the Award rate. Similarly, the Retailer positions his
remuneration above the market rate in order to retain people. He commented
that:

“If my shop assistants are good, after six months of doing a good job I’ll pay
30 or 40 bucks above the rate because it’s hard to find good people and it’ll
cost you to replace them”.

While the Architect mentioned that the industry in which he worked pays very low
salaries to employees, he has not found staff attrition a problem. He did not feel
that architects were restive types and that job security and continuity were as
important to them as high levels of pay. Nevertheless he explained that the
company did have a retention strategy that pays above the industry rates in most
circumstances and that most of the staff had received a five percent increase the
previous year. He commented that “we don’t run a social welfare organisation
[but] we have to be prepared to reward people”. In contrast, paying high levels of
remuneration was not considered essential for attracting and retaining good
performers to the information technology company. This respondent reported that
he had never paid above the industry rates and that his staff was probably paid on
the low side. He felt that by developing a good market reputation, being a dynamic
forward-thinking company and being seen to be a good employer, he was able to
attract the right calibre of staff that were prepared to accept less than they might
secure elsewhere.

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The Food Producer reported that the repetitive, low-skilled and “boring” work
required within the factory environment was matched with the more transient type
of labour prepared to take this menial work which in turn resulted in fairly high
levels of turnover. She was resigned to the relatively short retention expectancy
period as being an inevitable consequence of the type of industry in which she
operated, commenting “I have a theory that packing sprouts has an 18-month shelf
life; they’ve had enough”. Despite the relative high turnover however, she claimed
to go to a considerable effort to make the factory a more attractive and comfortable
place to work.

Both the Engineering Manufacturer and the Driller reported problems with their
staff being poached by other firms. The Driller acknowledged that her company
was not actively addressing this issue and conceded that the firm could probably do
more in this respect. She had seen some improvement in recent years and hoped
that the company’s drive to provide training and developmental opportunities for
the staff would be an incentive for them. The slow-down in attrition was attributed
to the fact that the company was “better organised” and employees are in a
stronger position to get to know the firm and understand its value. She did
indicate however that the company monitors attrition rates on an annual basis and
that they had a clear picture as to the reasons why people left the company. They
also carried out feedback surveys to determine how the employees felt about
working for the company.

Various owner-managers including the Commercial Interiors Manufacturer, the Food

Wholesaler and the Engineering Services Provider, indicated the importance of
maintaining good relations with people who leave the company and move on to
other positions. This was thought to impact on the reputation of the company and
the possibility of rehiring these people down the road. The Commercial Interiors
Manufacturer indicated that if members of staff wanted to leave, it was accepted
with good grace. The terminating employee was told that if they had any problems
and they wanted to come back they should give him a call.

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 Summary of Findings
Case study pattern-match with Element 1 (Management philosophy)

¾ Perception that the workforce is fundamentally indispensable – without labour

there is no production
¾ Recognition that the product derives from the intellectual capital which
resides in the workforce
¾ Acknowledgement that human judgement and expertise represent critical
production inputs
¾ Expression of appreciation of staff loyalty and contribution
¾ Evidence of the personal sense of loss experienced with staff attrition
¾ Recognition of the criticality of technical and interpersonal skills
¾ Recognition of the contribution that firms make to the broader community
through the management of people
¾ Examples of pro-active, creative management initiatives to attract and retain
key capabilities
¾ Low levels, if any, of in-house professional human resource management
expertise
¾ Low levels, if any, of formal human resource management education take-up
by owner-managers
¾ Responsibility for labour management rests with the owner-manager
¾ Experience of the complexity and demands of managing the workforce

o Element 2: Planning for the management of people (analysis of human resource

management options and making associated decisions)

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

It has been established that a key component of strategic management is the

process of business planning; that is identifying goals and objectives for the
company and determining the required resources and their management in order to
support these goals and objectives. As an organisational resource, the company’s
human assets comprise one strand that links into this process. It manifests in a
sub-activity that identifies the human resource requirement for the business and
how this resource should be managed to support the achievement of goals. The

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strategy model assumes that there exists clarity about the goals of the business
having emerged from some form of business planning activity, either of a
structured or informal type, so that future requirements and responses can be
identified.

Low or zero levels of formal business planning

In this study, while business planning was generally acknowledged by the owner-
managers as a relevant activity and something in which they sometimes engaged,
it was rarely part of a formalised or structured process. Some of the respondents
possessed documented business plans outlining their future intentions and goals for
the company and how they were planning to achieve these, as in the case of the
Information Technologist and the Food Producer. However, they did not follow a
highly formalised business planning process. The Information Technologist
reported that a very high percentage of his time is spent on business planning but
that most of his planning work happened outside the office environment, usually
assisted by his wife who up until the birth of their child had been involved in
building the business. He explained that much of his thinking and discussion about
the future of the business took place at home or in the car on his way to work,
concluding with the comment that “life is one big board meeting”. The Food
Producer reported that she had a business plan that she regularly revised and
updated. Her business plan was routinely constructed with help and significant
input from university students.

The Driller indicated that her company was in the process of putting a business plan
together and that this aspect had been given an increasing amount of attention by
herself and her partner in recent times. The motivation for doing this was that the
company had arrived at the stage where some choices about the future were
needed and the owner-managers felt that it was a natural progression to be
planning where the business was going to go. Participation in the Growth Program
had helped her achieve some clarity about this process. An important part of this
planning activity included investigating how the business could become more
socially responsible and contribute further to the community in which it operated.

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The Engineering Contractor also reported that he was working on his business plan.
He mentioned a variety of outcomes that would result from its completion,
including a restructured organisation, clarity for his people about where the
business was going, what was expected of them as part of that process, as well as
the capacity to sustain current levels of business while increasing his gross margin.

Transition towards strategic activity by the respondents

Higher levels of engagement in the strategic management of the business as a

consequence of organisational growth also varied across the respondent group.
This was determined in part by the ability to find others with whom to share their
responsibilities. The Information Technologist, who demonstrated a high level of
awareness of the need for personal managerial change with the advent of growth,
explained that as a small business owner he had been very much involved with the
daily operation and building the business, but he now assumed a predominantly
strategic role and focused on his job as a leader. The management team was being
assigned greater responsibilities and learning to become leaders themselves. His
role had become one of a coach who provided guidance and direction to the other
leaders in the business.

The Food Producer had also arrived at the stage where the need to focus on the
strategic management of the business had become imperative and hence the
delegation of operational responsibilities to others. However, her experience had
been more difficult, finding that in order to acquire sufficient time for this work she
had to also delegate her workload to others. She found that those who showed
some potential in a team environment did not necessarily make goods leaders and
that this was not something she could train them to do well. She concluded that
leadership was a natural ability and as such she would look elsewhere for
competent managers that possessed this quality. The Engineering Services
Provider had had similar experiences in his company where trades personnel had
shown enthusiasm for becoming supervisors and team leaders, but when given the
opportunity had failed to assume the required leadership responsibilities preferring
to return to their operational function as part of the team. The difficulty associated
with identifying suitable successors, or reliable and trustworthy staff to whom

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responsibilities could be passed, constrained the owner-managers from making the
transition from being purely operational to more strategic business managers.

The commonly found reluctance to delegate operational tasks at a time of

expansion and focus on the broader issues and the future was experienced by the
Engineering Manufacturer who explained that previously he had felt the need to be
involved in everything. He believed that he had limited the growth of the firm
through his perception that he was the only one who could manage things
effectively, and it would have been better if he had distanced himself from the
business, identified the appropriate people to run the operation and given them a
sense of ownership and freedom to make decisions.

More significantly, not all the owner-managers saw the value of spending much
time on strategic issues particular where there was no expectation of major
business growth or where dramatic changes in market conditions were not
anticipated. The Food Wholesaler saw his role as being more supervisory and
operational, working directly in the business and closely alongside his staff. While
he claimed to spend a significant amount of time planning for his business, this was
not a formal process and generally he did not spend a great deal of time in his
office away from the operation. His focus was largely on the daily operation, selling
produce, dealing with customers, talking to suppliers and generally organising his
people.

Evidence of informal business planning

Where informal or emergent planning is considered to be the process of thinking

about and reflecting on the management of the business, reviewing choices of
action and acting on these in a spontaneous way as required, the case studies
presented behaviour of this type. For most of the owner-managers it was evident
that business planning comprises a random and flexible activity, with future
business requirements and activities being worked out as they went along. Despite
the absence of a formal process that generated a documented plan, some
respondents felt that they were quite clear in their minds about where their
business was going and how they were moving forward to achieve their goals.

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The Food Wholesaler did not have a formal business plan, although he was able to
clearly articulate his intentions for the future of the business and how he was going
to get there. He commented that he “just plans ahead all the time”. He stated
that the goal for his company was to become debt-free and then self-sustaining in
the most efficient way possible. He anticipated a 10 percent increase in trading
activity and possibly some more product diversification. Strawberries were proving
to be a big hit.

The Architect reported that his firm had a clearly understood business plan but it
was not written down. He felt that it was impractical to spend time in documenting
details as understanding about the contents were shared and understood by the
partners. Moreover, with short operating horizons, in his case three months, and
the frequently occurring changes it was not deemed practical to keep redrafting the
document.

Similarly, the Engineering Contractor reported that his company did not have a
documented business plan, explaining that “it’s in my head” and “everyone around
here knows [it]”. He indicated that the plan was well discussed, that key people
had been involved in discussions for several years and that they had “done their
homework”. When asked how far ahead the business could realistically plan he
indicated that four weeks was the furthest horizon. In fact, the uncertainty
surrounding the business and the marketplace in which he operated was so great
that he believed it was very possible that the company might have no employees at
all by the end of the week. The small customer base, the large dollar amounts
involved in the delivery of a single product and the general economic uncertainty all
contributed to a high risk business environment that could negatively impact on the
company at any time.

This more ad hoc approach to developing business plans was also evident in the
Engineering Manufacturer’s response, who described the activity as one which he
did outside the office environment, mostly at the family’s holiday house. He found
it difficult to quantify the amount of time he spent on planning but commented that
the business “is his life” and that he was always thinking about it. For the most
part his planning process comprised thinking through business issues; however he
thought that he needed to become better at formal planning activity.

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The Engineering Services Provider commented that his business did have a plan,
but that he had not seen it for a while, not “since last Christmas”, and that the firm
tended to be reactive, picking up on business opportunities whenever it could,
suggesting that the plan was not used as a managerial tool for guiding the
business.

When questioned about the use of planning in the past to support the earlier
growth of their businesses, the responses were again in the negative.

The Commercial Interiors Manufacturer described his previous business growth in

terms of a natural progression, one where business opportunities had presented
themselves without requiring pro-active marketing or planning activity. The
company had responded energetically to the opportunities that had cropped up at
the time.

While the Information Technologist now spent a significant amount of his time on
business planning, he explained that in the early days of business growth he did
not do any formal planning. Rather there had been a strong vision of what he
wanted to achieve and that vision shaped the subsequent operational decisions and
choices needed to help achieve it. His approach had been highly opportunistic. He
too had found that the speed at which his business was travelling meant that it was
essential that he stayed focused on the immediate, operational needs of the
company.

Zero formal planning for people

Consistent with the low levels of formal general business planning that emerged
among these companies, there were no reports of formal planning for the specific
requirements and management of people, where these were integrated with the
business needs in any apparently structured way. The Engineering Manufacturer
expressed some regret about his failure to have planned for the human resource
management dimension of his business, particularly when it was growing, as he
now found that this was a factor holding his business back. He indicated that his
focus had always been on the technical and production issues, maintaining quality

397
levels and coping with the stress of increased customer demand. At the time he
had resisted drawing on the support of others to help him cope with the greater
load. As a result he viewed the management of his workforce as an area of his
business that required a lot of attention.

Emanating from the semantic confusion inherent in the term “planning”, there was
a tendency for the owner-managers to respond to questions on their approach to
planning for people simply in terms of headcount numbers, rather than the broader
dimensions of human resource management and the general management of
people as a collective resource. (This will be addressed further in the following
section with Element 3, covering the alignment of management practice with
business goals).

The Information Technologist was the closest in terms of formally including people
in the company’s business planning activity, reporting that his firm did not have a
long-term strategic plan for managing people but as the company did its general
business planning labour resource requirements were identified at the time. His
comments indicated that this was related purely to skill requirements and numbers
of employees, i.e. manpower planning, needed to support the business, rather than
the company’s general approach to human resource management.

The Driller also indicated that her company engaged in planning for people, i.e.
manpower planning, but that the process did not include any formal tool or
mechanism to arrive at the outcomes. She explained that:

“We work out who…. we need, what extra people for administration…. we
need, how are we’re going to remunerate them, the cost to the business”.

She believed that it would be more efficient to have a tool to assist with this
activity because it is not always possible to remember all the aspects involved.
However, as part of improvements to the management of her business, the Driller
indicated the intention to link the company’s human resource management
practices to the future development of the business. Her plan would include
looking at how the business could improve the skills of workers where there would
be benefits for the business and investigating ways for people to be more
innovative and challenged in their work.

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The Engineering Services Provider commented that although his company did not
have a plan it did try to prepare itself for the future in terms of bringing on board
skilled workers to meet on-going needs and developing talented employees in-
house.

Where there was little expectation of significant business growth and hence no
need to add more staff the owner-managers were not focused to any great extent,
from a headcount or skills acquisition perspective, on future staffing needs for the
business. For example, in growing his Food Wholesale business the owner-
manager did not believe that there would be significant increases in his workforce
requirements and indicated that should this occur he would be involved in a gradual
process of bringing in and developing new staff as and when they were required.

Rationale for informal headcount planning

Generally the approach to planning for people (in terms of labour headcount
requirements) was informal and reactive for several reasons. In some cases, the
speed of change of the particular industry in which the firm operates and the
unpredictable nature of the marketplace were cited. The Engineering Contractor,
whose business environment is highly unpredictable and whose small customer
base might cancel its contracts at short notice, described his management of labour
as being very volatile where employees came and went with great rapidity. When a
contract is secured the company examines its labour requirements and sources
them as necessary. Fortunately, the types of skills and experience the company
needs are readily available in the marketplace and as such, the owner-manager
believed that there was no requirement to plan ahead or anticipate these well in
advance.

Similarly, the Engineering Services Provider reported that his company operated
within very short time horizons, usually as little as two weeks and beyond that it
was not clear what the labour requirements would be. Inevitably, the inability to
anticipate requirements meant that occasionally the firm was caught short and that
it had to source and meet its staffing needs as best it could. The Commercial

399
Interiors Manufacturer confirmed that planning for headcount requirements was not
a part of his firm’s management activity:

“Not until the time. We have our core. We will never turn a job down
because we don’t have the people. If we need someone, we have to make
that happen”.

When describing her experience with business growth the Food Producer reported
that she had not undergone any formal people planning activities, attributing this to
the fact that she had not envisioned the growth that eventuated and the workforce
requirements that were associated with this. The growth of the business was rapid
and incremental, resulting in a reactive response to the operational needs of the
moment, and this had not presented occasion or time for the reflective activity
associated with formal planning in general, and people planning specifically. Easy
access to suitable labour was also found to reduce the pressure to plan ahead:

“The labour is something that can come and go, it’s very day-to-day. If we
grow they [the employees] can do more. It’s very much fly by your pants.
We can grow without more people. It will probably require some thinking
but it’s not beneficial to do it now”.

Summary of Findings
Case study pattern-match with Element 2 (Planning for people)

¾ No evidence of formal business planning (with one exception)

¾ Evidence of some informal business planning
¾ No evidence of formal human resource management planning
¾ Evidence of some informal manpower or human resource management
planning
¾ Indicators of conscious progression away from exclusively operational focus
towards strategic management in some Cases
¾ View that planning is only relevant at times of growth or change
¾ Evidence of reluctance to delegate responsibilities/tasks in some Cases
¾ View that rapid market changes thwarted effectiveness of long-term planning
¾ Claims of control over the future of the business without use of a formal
planning tool
¾ Recognition of the value of a planning tool to assist with managing
complexity in one Case
¾ Indication that the value of manpower planning was determined by business-
specific circumstances

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o Element 3: Linking human resource management with organisation and
business goals

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

In the absence of formal strategic business planning, a managerial process in which

the linking of goals and resources is able to occur, the question arises about
whether companies align their goals and objectives with the way they manage their
people. Without a business plan in which it is possible to view the company’s goals
and the corresponding management initiatives designed to help achieve these
goals, it is difficult to locate this connection. In this study, there were no explicit
statements to this effect. With the exception of the Information Technologist, there
was no indication that the management teams articulate that “these are our
business goals; how should we manage our people so that they will help us achieve
them”. Based on this outcome, it might be inferred that the owner-managers’
goals are viewed by them as separate and distinct from the management of people
resources or that this is not a consideration for them or simply regarded as not
related.

However, the case studies provide substantial evidence to indicate that in the
absence of formal planning activity, aligning the management of people with
business and organisational goals occurs as part of an informal, spontaneous and in
some cases on-going approach to reviewing and decision-making on human
resource management issues in light of pressing business and organisational needs.
Within the context of these case studies, strategic alignment could not be described
as tight, in the sense that there is always a conscious articulation of the connection
or an observable document that reflects the rationale behind management
initiatives. However, the types of activities in which these companies engage
reflect an inherent logic and reasonable causal connection. In form, strategic
linkage is a product of a gradual and sometimes chaotic process of adaptive

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managerial learning in which knowledge and information are acquired and applied
to daily situations and events, and that adjustments are made as deemed
necessary or appropriate for the business at the time.

To accept the alignment premise in this instance is to recognise that for a business
to achieve its objectives, the company must attract and retain the necessary
number and types of people willing and able to deliver the products or services that
will meet customer needs. Hence, the search for alignment is to be found in those
activities likely to assist in the achievement of this goal. The general requirement
to attract and retain capable and motivated workers has been addressed within
Element 1 (where the value of human assets is illustrated through the initiatives
and efforts made by the companies for this purpose) and as such will not be
repeated here for the purposes of illustration. However, other areas of
management were considered important by the respondents to ensure that their
people resources were able to deliver on customer requirements, such as the
management of performance, as it relates to coaching, motivation and delegation.
The provision of training and development opportunities, so that the workforce was
sufficiently skilled to meet the business needs, was also important. In addition, the
management of business costs associated with the compensation of labour, and the
management of occupational safety and health, and its relationship with workers
compensation, were found to be critical issues due to their potential to have a
substantial impact on the business and its viability.

Managing performance

The requirement to meet customer needs and expectations implies that the
performance of the workforce responsible for delivering on customer expectations
that in turn contributes to the achievement of business goals, has to be managed.
The owner-managers indicated the importance of managing employee performance
and spoke at length about how they approach this and their associated
experiences.

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Coaching and directing staff

Recurring during the interviews when discussing performance management was the
stated need to provide employees with continual direction, encouragement,
clarification, explanation and feedback about their work. Coaching and guiding
staff was considered by the owner-managers to be an important part of their role.
The Food Producer for example, commented that as each problem occurs she
discusses it with her production manager and shows him/her how she wants it dealt
with. In this way the manager learns how to approach things as they come up and
is able to respond in a way that suits her needs. Similarly, the Food Wholesaler
stressed the importance of giving clear and specific instructions with regard to
tasks to be carried out by the staff. He believed that it was not sufficient simply to
ask an employee to undertake a task; it was necessary to provide detailed
information about how the task should be done and the required standard. He
reported that involvement in managing and improving the performance of his
people was a major part of his working day. To acknowledge effort and
achievement he runs a workplace competition whereby the three top performers
are awarded a gold, silver and bronze medal.

The need to monitor performance was discussed by the Commercial Interiors

Manufacturer who found that he could not always rely on his workforce to carry out
the work to the required standard and that he and his partner needed to be
involved to show the workers what was expected. His hope was that he would be
able to train his team about the levels of quality needed for certain jobs and that
they would eventually manage this aspect for themselves, without the company
having to employ a quality control officer. The Engineering Services Provider
highlighted a number of ways in which he was able to monitor performance,
including receiving feedback on employee performance not only from his own
observations but also from customers and the employees’ peer group. It was not
uncommon for customers to ask that a particular contractor not be sent to them
again, or for an employee to complain about the work standards of a colleague and
request not to be teamed with this person in the future. When complaints came in
the owner-manager was involved in discussions with the poor performer and would
sometimes attend the worksite to observe the employee’s performance for himself.
Where an employee was clearly unable to perform the work according to

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expectation, it was usual for the employment relationship to be terminated.
However, the owner-manager indicated that employees were given the benefit of
the doubt and it usually involved two or three complaints before this type of action
was taken.

The Retailer found that the need to be constantly providing direction and correcting
employees’ performance a particularly arduous and time-consuming part of his
work, a chore that frequently tested his patience. Sometimes his staff made
mistakes, became lazy and did not follow the required procedures, although the
problems were usually not serious enough to warrant dismissal:

“As long as they are courteous to the customer, you’ve got to try and guide
them and give them an opportunity. You can’t get rid of them every time.
If you have complaints from customers, or things in the till [i.e. stealing],
you can’t tolerate that…. hopefully if you persist with them”.

Similarly, frustration about poor levels of performance and in particular

accountability were mentioned by the Commercial Interiors Manufacturer, who had
experienced difficulties with trades people coming late and being absent, and
apprentices who failed to make the grade. The Food Producer noted that her
factory workers needed “to be continually pushed…. they’re not particularly
consistent”.

The Engineering Contractor felt that it was necessary to achieve an appropriate

balance in managing workplace performance. He commented that workforce
morale and well being can be compromised if the emphasis on performance was too
great. While he thought that productivity in his business could sometimes be better
he was not prepared to push harder at the risk of losing that balance. He
commented that on the shop floor it was the supervisor’s responsibility to keep an
eye on performance, to chase up people who were not getting on with the job but
also to allow them a break occasionally.

Performance measurement

Only the Information Technologist had implemented a formal performance

management system that incorporates a formal feedback process. An individual’s
performance is reviewed three months after starting with the firm, and then every

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six months after that, with the employee receiving input about his/her progress.
This respondent reported that he had experienced problems with poor performers
in the past:

“We had people who were not performing… We gave them too many
chances. We ended up with people who weren’t doing their job properly,
causing problems for other staff, costing the company a lot of money and
putting at risk the relationship with important clients”.

He explained that initially he had not been very assertive in managing performance
but had come to understand that problems relating to poor performance could not
be ignored and allowed to continue. As a result, the company responds promptly to
poor performance, and although individuals who under-perform are given the
opportunity to improve failure to do so results in removal from the firm.

Informal performance measurement was found to be more problematic in some

firms than others, notably those companies engaged in delivering customised
products and services. For example, the Engineering Contractor whose business
was engaged in the manufacture of one-off industrial pipelines according to defined
specifications found difficulty comparing one project with another and hence
gauging the performance of individuals on each project. He commented that
“understanding their capabilities and getting a fair day’s work…. it’s a hard one to
measure”.

Several owner-managers acknowledged that the performance of their staff could be

limited or negatively impacted by the systems or technology associated with the
work, and as such unless the firm was prepared to address these technical issues it
was not likely that significant performance improvement would occur among the
users. On being asked about the productivity of his people the Architect indicated
his recognition of the interface between social and technical systems that influence
performance outcomes:

“[There are] various aspects to productivity, we monitor this closely. They

are more systems issues. Standardisation is something we’re trying to
introduce, making sure processes are in place. [We’re] better equipped now
in understanding the cost time drivers, and trying to do something about it.
There’s been a fair amount of analysis of our operating systems”.

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The Commercial Interiors Manufacturer commented that significant increases in
productivity could only be obtained if his company invested in more sophisticated
equipment, and he preferred to contract out particular aspects of the work to other
firms that already have the equipment rather than go to the expense of purchasing
this for his own company. Benchmarking was recommended as a tool by the
Engineering Services Provider who stressed the value of being aware of outputs and
measuring how much an employee could achieve under a certain set of
circumstances. Drawing on this data permitted the company to take on “tight” jobs
and know that these could be achieved according to schedule.

The degree of complexity involved in product or service delivery was also found to
be a factor in determining levels of performance and the ability of the owner-
manager to control this aspect of the business. The Engineering Services Provider
operated a business that delivers equipment and labour to wide variety of industrial
sites located south of Perth. The logistics of coordinating this work, so that the
best operator and the best equipment were sent to the right customer, required
having an in-depth knowledge of the customer’s particular needs, the history of the
employee and his performance levels and skill, as well as the technical capability of
the equipment to be used. In some instances, only one particular employee and
one particular piece of equipment were acceptable to the customer, so the logistics
involved could become highly complex trying to ensure both these are in the right
place at the right time. The respondent also described a further dimension to the
service delivery of the firm, that of the ability of the worker to develop and
maintain a good inter-personal relationship with the customer. To succeed in this
type of business it was not sufficient to have people who are just skilled in driving a
crane or working on a piece of equipment. As such, it was necessary to focus on
the social skills of the workforce and frequently counsel individuals about this
aspect of their work.

Performance motivators

The owner-managers described a range of tools and methods that they used to
motivate their people and improve levels of productivity. The use of performance
targets as a tool to drive performance was evident in several firms. Performance
goals had been established for staff in the engineering manufacturing firm

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according so that they have something to work towards. The Information
Technologist had Key Performance Indicators for the staff and billable ratios that
the production staff was expected to achieve. This company also spent time
ensuring that there was a good alignment between individuals and the type of work
that they liked doing and were suited for. The Food Producer maintained a
productivity board on her factory floor that is updated during the course of the
working day, so that staff engaged in packing the produce can see how they are
doing and occasionally aim for stretch targets. She indicated that in her company
they’re “always looking for new things to keep production up”.

The experience of the respondents with financial incentives had been mixed. The
Engineering Manufacturer for example had given monetary rewards to staff in the
expectation that this would improve performance, only to find that performance
levels actually declined. The Retailer had experimented for a while with a bonus
scheme which had generated some enthusiasm among his staff, with stores
telephoning each other find out how the others were faring. However, he had
dispensed with the scheme finding that it did not meet their needs; there were too
many variables over which the employees did not have control that created a
perception of unfairness. He had also arrived at the conclusion that his customers
were not looking for a highly assertive and polished level of service in his stores,
simply polite attention. So this factor defeated the object of running a motivational
scheme that encouraged people to be more than just an attentive and courteous
assistant.

In an effort to encourage employees engaged in laborious and repetitive work, the

Food Producer used various motivational techniques such as having a “sprouter of
the week” competition where the most productive employee could win 50 dollars.
Having initially experimented with paying time and a half to employees who were
prepared to work on Saturdays, the drilling company decided to move to a
performance-based system that provided employees with bonuses for the extra
metres they drill.

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Training and development

The owner-managers’ provision of training and development opportunities to

employees were found to be on an as-needs basis, being closely linked to the
perceived requirements of the business and as these related to the associated
industrial context.

In order to continue to provide clients with leading-edge products and services

while operating in a rapidly advancing industry, the Information Technologist
emphasised the importance of providing his employees with every possible
opportunity to develop their skills and knowledge:

“Training is an important issue because the industry is changing so rapidly.

There is little opportunity for external training that is relevant so we have to
work internally to keep everyone at the same level of understanding”.

He explained the business justification as follows:

“There needs to be time devoted to R&D, and to formal and informal training
so that we are continuing to give the leading edge advice to the clients. This
is all about short-term profitability with long-term sustainable growth.
Without this we wouldn’t have the ability to build our own products and
know they are potentially the best in the world”.

The company provided developmental opportunities through lunchtime

presentations, informal mentoring programmes with the directors and giving the
employees time to explore their own fields of interest and specialisation. While he
recognised that this represented a major cost to his business, reducing the number
of billable hours per employee, he believed that this was an inevitable and
acceptable cost in light of the industry in which he operated.

The drilling company also demonstrated a high level of commitment to providing

training and development opportunities to its staff. Although a recent initiative and
one that corresponded with the increasingly strategic perspective of the owner-
managers, the company had begun to send employees on train-the-trainer and

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front-line management courses in order to give them “a much better skills base to
run the machines like it was their own business”. The company was also
encouraging staff to pursue educational opportunities and advancement through
national programmes and universities.

The importance of skills development was also confirmed by the Architect who
reported that his firm gave the staff opportunities to acquire new technical skills.
He stressed the need to provide both internal and external opportunities,
particularly as recruits rarely arrived in the company possessing the necessary
range of competencies. Without the requisite skills on a project team any
assignments that the firm might be working on could be problematic. He
commented:

“There isn’t a lot of investment in staff in the industry. We think people

should just miraculously be able to do many things. We try to make sure
people are exposed to things….”

However, his view was that not all the employees demonstrated high levels of
interest in undergoing more training; estimating that only five percent aspired to
improve and that most just want to do their job, get reasonably well paid and go
home.

The engineering services company demonstrated a positive and pro-active

approach to skill development and training. The owner-manager indicated that
employees were involved with bringing in state-of-the-art technology and
equipment into the company, attending manufacturers’ training days and looking at
how the equipment could be most effectively utilised. The company supported
crane drivers who wanted to acquire their certificates by allowing them to practice
on the equipment. Occasionally the firm requested a driver to acquire a ticket and
the company picked up the cost. This company also reported a recent initiative
where they had asked all their employees to enrol in a TAFE course of their choice
that the company would pay for. The motivation for this had been a combination of
trying to build skills in general and improving morale among the staff specifically.
While most of the employees had signed up for courses, it had been found that
many did not actually attend.

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However, not all owner-managers viewed training and development as an
imperative for their business. The Engineering Manufacturer reported that this was
a mistake that he had made during the growth of his business. Training had been
neglected and that this was now an issue that demanded his early attention. He
repeatedly referred to the need to identify appropriate training and development
initiatives and the fact that deficiencies in quality had resulted due to the low levels
of focus on this aspect of the business. He indicated his preparedness to bear the
costs, financial and time, involved in this up-skilling process.

The Engineering Contractor, whose core labour component consisted of skilled

trades people, reported that there were few opportunities for skill development for
his employees. For the tradesperson to perform effectively it was necessary to
have already acquired proficiency and experience in the area of specialisation.
Having acquired this level of expertise there was no business requirement to
develop that individual any further. There was no expectation that they would
progress through the company or assume greater responsibilities or work in other
functional areas. Very occasionally a trade’s person might be promoted to a
supervisory level if he/she demonstrated an interest or showed potential, but this
was exceptional. If an employee wanted to diversify into other technical fields
he/she would need to work in another company where that area of specialisation
was needed. While training and development programmes were not seen as
necessary, the owner-manager reported that he encouraged and paid for
employees to acquire specific certificates such as crane drivers’ and scaffolds
tickets, or attend courses such as first aid and safety management.

Similarly, in the business environments where the nature of the work was of low
complexity, high repetition and requiring low levels of human skill, other than
providing staff with the basic proficiency to do the specific job for which they were
hired, owner-managers perceived little relevance for any other developmental
activities. The Food Wholesaler summarised this perspective in terms of:

“They start as a labourer, then work up as a forklift driver and then a

salesman. That’s as far as they are going to go in a family business like
this”.

In this company, opportunities for learning were derived from working with others
and being shown the methods pertinent to the work of the business.

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In the early days of the Retailer’s business, the owner-manager provided his staff
with training courses, particularly in the area of customer service. What became
apparent to him was that his exploration around the training available and actual
provision of training for his people was as much about skilling himself up so that he
could train his own workers as it was about providing his people with skills. Over
time he found that he had personally acquired sufficient knowledge and proficiency
to be able to provide the training himself. He noted that “it’s not rocket science,
it’s not technical”. He also found that it was quite adequate to send a new recruit
out to learn alongside a more experienced staff member. The demands of the work
were not seen as sufficiently great as to merit any additional training.

Managing the employment relationship

Actively managing the employment relationship was also found to receive the
attention of the owner-managers in their efforts to create and sustain high levels of
performance and productivity. In this area it was evident that most of the
respondents held well developed opinions and ideas on their general approach to
people management and they were able to provide examples of their managerial
initiatives in support of their assertions about effective management of the
psychological contract.

The interviews elicited a range of views pertaining to the type of relationship a

company should have with its employees. Some of the owner-managers talked at
length about what they believed to be appropriate leadership styles and the
importance of building a positive working environment for their staff. In some
instances this included certain management techniques or practices that were
considered to be useful, while for others the focus was based on a more
behaviouralist and values-based approach to the nature of inter-personal
relationships between the owner-manager and his/her staff.

Culture and values

The importance of observing certain types of values and demonstrating adherence

to these values through organisational and leadership behaviour was emphasised

411
by several owner-managers. The Information Technologist for example discussed
the notion of organisational culture and the benefit of developing strategies
designed to build a positive and in turn productive work environment. Influenced
by his previous experience in other organisations and the scope of his knowledge
acquired through reading management literature, he actively works towards
creating a strong corporate culture with an open and fun environment where people
enjoyed working and felt cared for. The owner-manager noted that in contrast with
some of the other larger information technology companies, the firm took a
genuine interest in its employees’ careers and their development, and that
discussions were routinely held with staff about their plans and prospects. He
indicated his belief that employees were treated fairly and explained that family-
friendly policies were in place that allowed staff with children to work flexible hours.

A strongly paternalistic culture was evident in the Food Wholesaler’s business,

where the owner-manager assumed an almost fatherly role in guiding and directing
the young men and women who worked for him. He had an involvement in their
lives that extended beyond the immediate boundaries of the company’s business.
This respondent described instances where he had counselled delinquent or
intoxicated staff members about appropriate behaviour, explaining to them the
need to be responsible and not to comprise their families by putting their jobs at
risk through “silly” behaviour. An element of paternalism also emerged in this
firm’s remuneration practices, where staff were paid above the minimum wage
because he felt they were “worth more” than the market rate and younger staff got
a special increase on their birthday up until their 21st year. The Food Wholesaler
indicated that he managed his employees as he liked to be managed himself; with
emphasis on showing courtesy for others and avoiding being arrogant in his
relationship with people in the workplace.

The Food Producer demonstrated a values-based approach to the management of

her business and also to the broader community in which she operated. She
explained that she had always had some disabled people among her employees,
which she felt was an important experience for their more physically-able
colleagues. Similarly, the Driller commented that it was necessary to genuinely
care for the people, to be honest about how you felt about things while permitting
the employees the same privilege. Dealing with people fairly was considered to be

412
important by the owner-manager of the architectural firm. He associated fair
treatment of employees in his company with having lower levels of industrial or
employee relations incidents.

Building team spirit

The existence of a good relationship between the staff and the owner-manager and
the need to work continually to build and reinforce that bond was emphasised by a
number of respondents. The Commercial Interiors Manufacturer felt that if he is
loyal to his people they will reciprocate in kind, “you only get out of people what
you put in”. He recommended a constructive relationship, where people are taken
“at face value”, are treated honestly and are not overly criticised when the boss is
not happy with their performance or decisions. The Commercial Interiors
Manufacturer described his relationship with his people as open, frank and not
overly intrusive. Several owner-managers thought that the recognition of the
diverse nature of people was important for business success. The Food Wholesaler
indicated a strong bond between himself and his employees, explaining that they
would come and share with him things that they had done and were pleased about,
and that he would get invited to go along to sporting events, such as the cricket,
and be included as one of the boys. He stressed the importance of knowing the
people who worked for the firm, of developing an understanding of their strengths
and weaknesses, and taking an active role in building on these and addressing
them where necessary. The Food Wholesaler commented that:

“I try to be pleasant; I always have a smile on my face. I certainly give

them a lot of encouragement and if they do something well I show I’m
pleased”.

Similarly, the Engineering Manufacturer expressed the belief that it was important
to “understand” people and their reactions to certain situations. The Engineering
Services Provider described his relationship with his staff as “good”, one where staff
could approach him and where he took the time to talk to people on the shop floor.
He added that it was important to be polite and courteous with employees. The
Driller explained that while the predominantly male environment in which she
worked meant that the workers inevitably bonded more closely with her business

413
partner than with her. She commented that “he’s one of the boys and has a drink
with them”, while with her they are just respectful.

Despite their beliefs about building constructive working relationships with their
people, several respondents were found to be struggling with this aspect of
managing the business. The Engineering Manufacturer commented that his
relationship with his staff had changed in recent years. Indicating that he had
experienced difficulties with his workforce, he explained that his passion and
impatience had driven his relationships with people in the company and that this
had not been a particularly productive approach. To change this he had developed
a more tolerant and measured way of interacting with his employees, having learnt
to reflect more carefully on the impact of his behaviour.

The Engineering Services Provider indicated that his (young) age was an issue in
managing the employees in his company, many of whom are older than him. He
found that they did not always listen to what he says and sometimes try to take
advantage. Despite this he still tries to lead by example and connect with them on
a personal level by having a beer with them.

The drilling company owner-managers were found to have experienced problems

with leadership, with the Driller explaining that her partner was highly technically
competent “like a professor”, but that he found himself to be removed from those
workers who supported him in the field. Frustration was common when staff could
not understand what he expected from them and he needed to explain things
several times. Their solution to this problem had been to find an intermediary, or
middle level manager, who was able to “interpret” his requirements for the
workers.

Minimising the “divide” between the owner-manager and the employees was also
repeatedly stressed by the Retailer. He was highly conscious of the difference
between himself and his staff in terms of status, motivation and financial income.
In an attempt to reduce the barriers that might exist, when doing his rounds of the
stores he makes a point of taking his old van instead of the expensive four-wheel
drive vehicle. He spends time talking and having a joke with the staff, and tries to
avoid being overly critical of how things are being managed in the store.

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Addressing expectations and social needs

Changes in workforce expectations and treatment were also acknowledged by some

of the owner-managers. The Engineering Services Provider raised the issue of
leadership style, describing the approach used in former times by his father and
uncle as being very command-and-control. He commented that this was not the
approach they used in the company today, although sometimes he felt that it would
be much easier if it were. Now there is much more scope for employees to try out
their own ways and emphasised that it is important for people to think for
themselves and be able to solve problems without relying all the time on
management to do this for them. He recognised that the volume of employees
(40) meant that it was not possible to oversee everyone and be involved in
everyone’s work.

Building a sense of ownership and empowering people to contribute their skill and
abilities to the business were also considered to be important management
activities. The Wholesaler encouraged involvement in key business and operational
decisions in order to motivate his team and generate a sense of inclusiveness.
Holding fortnightly meetings with his sales staff and occasionally with other staff
members provides an opportunity for sharing issues relating to the management of
the business and for staff to contribute to this. He explained that if he does not
agree with their ideas or input the team talks through a particular matter to come
to the best solution. He commented that he listens very carefully to his staff and
that they have a big input into the company’s decision-making processes. The
Food Producer also pursued an inclusive leadership style, holding regular team
meetings with her managers and factory workers to discuss staffing and related
issues. She also works alongside her people on the factory floor, remarking that
“they love it when they see [me] down there working. I go and pack with them for
several hours”.

Participation in decisions about how work is carried out was found in the
Engineering Services Provider’s firm. He commented:

“We do give the operators the chance to do things the way they want to;
there’s lots of ways to skin a cat. They don’t like it if you tell them that they

415
 have to do it this way. We’re not cavemen. We need people out there that
can think for themselves”.

The Engineering Manufacturer commented that:

“Money’s important but they’ve got to have job satisfaction, to have some
fun. If we can get all those elements it’s [a] recipe for success. People are
looking for more than [money] from a job”.

Although not always clear whether social activities and benefits were intended to
address the need for performance motivation or maintaining high morale, or a
combination of both, management initiatives in this area were commonplace. In
the Food Producer’s company, employees are pampered by a visiting masseur and
encouraged to feel part of the team through invitations to barbecues and sausage
sizzles on Fridays. She indicated that she spends a lot of time thinking of different
ways to keep up morale and encourage her people. Talking to employees routinely
about whether they are enjoying their jobs, particularly during the early stages of
their employment was another method. She explained that the staff is encouraged
to talk about this at meetings and there was a notice board on which staff could
post problems or concerns. She felt that she could easily spot if people are
unhappy and would usually invite them in for a chat.

The Food Wholesaler holds a football tipping game for his employees in the football
season with the winner getting all the proceeds. Christmas parties, drinks events
and barbeques were a common occurrence in the respondent companies. The
Engineering Services Provider commented that:

“We found that if employees have a social on a weekly basis, play sport,
play darts, it’s better for us. They have time to release, away from work
and family. We look at their hobbies when we recruit”.

Working alongside their staff and getting to know them on a personal basis was
found to provide insights into and opportunity for gauging the level of employee
performance, commitment and satisfaction.

416
Managing employment costs

The need for smaller firms to be vigilant in their control of costs and expenditure
due to the lean margins on which they frequently operate is well understood.
Moreover, costs associated with employment and the maintenance of the workforce
often represents a high proportion of a company’s operating budget. This was
found to be a major concern for several respondents and to have a direct impact on
the way in which they approached particular aspects of their human resource
management.

Both the Information Technologist and the Architect indicated that controlling the
cost of employee salaries and benefits represented a challenging aspect of
management focus for their businesses. The latter commented that “you can only
pay what you can afford”. The costs associated with high staff turnover were
referred to by the Engineering Services Provider who recognised that it was
important to recruit the right staff in the first place and where possible avoid
terminating contracts. The investment in staff, such as in training and the multiple
inductions for the various work sites required by the industry in which he operated,
provided a strong motivator for the company to ensure that the relationship
between the employee and the company was successful.

The Engineering Contractor explained that various events had occurred which had
led his company to pursue a more distanced relationship with the labour he used in
the business. The increasingly high cost of workers compensation insurance and
the experience of having compensation claims made by staff members had become
an untenable financial burden for the firm. Taking advice from a business contact,
the decision to outsource the workforce requirement to a labour hire company
meant that premiums for workers compensation were considerably reduced and the
company was released from payroll, administration and other activities associated
with the employment of people. In addition, this arrangement enabled the
company to hire and fire staff very rapidly with no unfair dismissal complications
and has effectively reduced the overall employment costs. The respondent outlined
the benefits as follows:

417
 “People work for us based on the amount of work we’ve got. If there’s no
work they’re gone in an hour. They’ve got a ratified Workplace Agreement
to enable flexibility. We don’t get lumbered with this unfair dismissal crap.
We’re sick and tired of the unfair dismissal…. costs us time and money and it
was becoming commonplace. It is far more economical because it takes the
headaches away, plus a lot of your costs are paid weekly. Your cash flow is
regulated and easier to manage”.

Due to the escalating costs associated with compulsory workers compensation

insurance premiums and the pressure of occupational health and safety
management requirements, some owner-managers indicated that they found this
aspect of employment to be a significant financial and managerial burden. The
Engineering Contractor commented:

“Workers comp, safety management…. is the most important issue

surrounding employing people. Huge costs attached to good safety
management, the way the laws heading. You have to do everything in your
power to protect yourself and your employees. These are areas needing
attention”.

He appreciated the government’s role in driving greater protections for health and
safety of workers and that companies like his own were expected to comply. He
concluded:

“Better preventative maintenance environment…. we could get left

behind…. You have to spend a lot of time on safety management
systems…. to make yourself attractive to the insurance firms”.

For the Food Producer, workers compensation was rated as her number one
“people issue”. She passionately summed up her perspective and experience in the
following terms:

“We’ve had some really bad, dodgy claims. People looking for the payouts
and an easy way out. The rehab specialists come in. They can resign from
the job and still be on the payroll; it’s just a nightmare. Workers comp has
gone from A$2,000 to A$65,000. Staff don’t put any value on that. I go to
enormous lengths. We provide training, exercises to get them warmed up,
correct lifting charts, every expert possible coming in. We’re in a high risk
environment because of the type of people we employ. They’re strugglers,
they live from week to week. They’re trying to exploit the system. I’ve got
one at the moment I can’t even bear to think about”.

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 Summary of Findings
Case study pattern-match with Element 3 (HR management alignment)

¾ Evidence of human resource management initiatives designed to address and

respond to perceived organisation and business needs
¾ Indicators of managing workforce performance (direction, monitor and
feedback)
¾ Indicators of rewarding workforce performance
¾ Indicators of motivating workforce performance
¾ Provision of training and development aligned with business-specific
circumstances and need
¾ Awareness of the role of the leader (impact and responsibilities) and the need
to manage the psychological contract
¾ Focus on team building (e.g. promotion of autonomy, ownership, self-esteem,
communication, cooperation, loyalty, enjoyment at work and good relations)
¾ Active management of labour-related costs

o Element 4: The use of Human Resource Management (HRM) technology to

support the implementation of business strategy

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

During the interviews, information was sought relating to the respondents’ use of
human resource management (HRM) technology and tools, as are commonly found
in larger companies. HRM has been described for the purposes of this study, as the
totality of managerial principles and activities, including management philosophies,
policies, systems, practices and programmes, used in the management of people
within an organisational context. Essentially, HRM technology encompasses the
tools of the trade for those engaged in the management of people both at an
operational and strategic level. In the absence of a satisfactorily definitive list of
HRM technology, it is has not been possible to make a direct and comprehensive
comparison between the contents of the HRM toolkit and their prevalence in the
small businesses in this study. Nevertheless, evidence was found to indicate that

419
the respondents made use of a range of management tools that are commonplace
in larger business operations.

Discussion about the use of HRM technology was minimal during the interviews as
this was not found to be an area of particular interest or concern to the
respondents. They were willing to provide some superficial information relating to
the tools they used but interestingly, unlike in larger corporations where the focus
has been and continues to be heavily focused on the operational management
technology, discussion centred more on the broader strategic issues of productivity,
performance and attracting and retaining key competencies. While this may have
been a product of limited exposure to and knowledge about the range of tools
available, a sense that these have low priority in the overall scheme of managing
the business emerged. When struggling to keep customers satisfied or machinery
operational, it is understandable that designing application forms or following up on
pre-employment medical tests would not be a primary concern.

The respondents were found to use a variety of recruitment methods when hiring
staff for the business, including private employment agencies, referrals,
government employment agencies, head-hunting and walk-ins. Some companies
used contractors and labour hire companies to support their labour needs.
Difficulties with poor hiring decisions had propelled the Engineering Manufacturer to
seek assistance from a recruitment agency. The Architect reported that his
company advertised nationally and State-wide when seeking new staff. No mention
was made of radio or television advertising, Internet recruitment, magazines,
university recruiting services or professional associations as sources of labour.

Some respondents reported having job descriptions and application forms to assist
with the selection process. The Engineering Contractor reported that he kept job
descriptions for the employees on the shop floor. The Engineering Manufacturer
indicated that his business required job descriptions so “that people know what
they are supposed to do clearly”. There was no indication of any formal job
analysis or formal selection procedures. Several owner-managers, including the
Engineering Manufacturer and the Engineering Contractor mentioned that they
check references. Pre-employment medicals tests were used by the Engineering
Contractor. The Engineering Contractor reported that his firm occasionally tested

420
for skills, in particular with the welders. In the case of the Food Producer’s firm
employees assisted the owner-manager in the selection decisions and all new hires
were taken on as casuals as part of a probationary period. The Engineering
Services Provider also hired casual people initially who transferred to permanent
staff once they had successfully performed during the three-month probationary
period. The architectural firm reported having employment contracts for the staff
and a job procurement form. The Engineering Contractor indicated that his
company provided an induction programme.

Although all the companies interviewed provided their employees with training,
either in-house or by external providers, there was no indication of the
maintenance of a training budget. Formal and informal coaching occurred in all the
companies studied. Only the Information Technologist had introduced a formal
performance management system into his company. There was no indication that
this included any form of rating system, but targets are included and feedback on
performance is given. The other firms approached performance management on an
informal basis but it was evident that there was method associated with this
informality.

A range of compensation practices were found among the companies. Levels of

pay and benefits were determined by market rates, Award classifications, bonus
and incentive programmes, annual bonuses, skills acquisition, and the perception of
performance levels and value of individuals to the business by the owner-manager.
The Architect indicated that his company reviewed salaries once a year and as with
several other respondents mentioned that their practice was generally to pay over
the market rate. Meetings with unions occurred in some companies. Meetings
were also held for staff to discuss employment and operational issues. However,
industrial relations and employee relations problems were generally dealt with
informally on an as-needs basis. The Food Producer reported that she holds team
meetings on a weekly basis to discuss staff issues and concerns.

Three owner-managers reported having some documented staff policies and

procedures, including the Engineering Services Provider, the Engineering Contractor
and the Food Producer. All three indicated that the development of this
documentation had been driven by the need to comply with the accreditation

421
requirements of their quality assurance programmes, such as the ISO series, or
other industry regulation. The Engineering Services Provider made reference to
having an “HR protocol” but it was not clear what this comprised. There was no
evidence of the respondents having developed documented policies on harassment,
equal employment opportunity or affirmative action. The Engineering Contractor
indicated that he had a full safety management system accredited for [ISO] 9002.

An exception to the generally minimal interest shown in documenting management

systems and policies was the Food Producer who demonstrated an energetic
enthusiasm for this aspect of her business and reported that her company
maintains “thousands” of documented forms, procedures and policies, including
manuals covering areas such safety, training, recruitment trial dates, fire drills,
medical and emergency information. While many of these were a requirement of
the food production standards regulation, in general she found the documentation
useful in her daily managerial activities. Similarly, the Engineering Contractor
reported that he had numerous management systems and documented policies in
place, including job descriptions and safety management procedures, and that he
was working to increase these.

Some of the owner-managers referred to the importance of having good general

management systems to support their business. The Engineering Contractor
commented that he believed it was imperative that a company had good systems in
place, particularly at the initial stage of the employment relationship, such as for
recruitment and selection. He explained that this enabled everyone to know what
they were supposed to do. In his own business, he felt that efficiency could be
improved if the company were to maintain a database of labour records, of people
who had previously worked for the company and whom the company would like to
employ again.

In contrast, the Retailer reported that in general he resisted documenting a lot of

procedures and information, in part to avoid becoming overloaded with
bureaucratic detail but also to ensure that his workers had some discretion in how
they did their work. He did not believe that there was value in giving his staff
“instructions about how to open the fridge door”. He was familiar with companies
that had achieved quality accreditation and remarked that the level of

422
documentation that they are required to maintain seemed excessive and
unnecessary. Similarly, the Architect commented that “we’re not an overly
formalised business, maybe to our detriment”. He expressed ambivalence about
the need to have a formal approach to the management of people, commenting
that their mode of operating is “submerged in [the] culture”.

Summary of Findings
Case study pattern-match with Element 4 (Use of HRM technology)

¾ Evidence of some awareness and application of standard HRM operational

tools and technology
¾ Evidence of technology applied to support strategic activity, such as in the
processes of attracting and retaining business critical skills, improving
operational performance and addressing workforce needs and expectations
(as illustrated in the review of Elements 1 and 3)

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Chapter 12

Research summary, interpretation and conclusions

This research study has sought to place the management discipline of Strategic
Human Resource Management (SHRM) within the context of the small, growing
business. In so doing, it was intended to investigate the prevalence of SHRM
among companies in this sector and in turn consider the potential relevance and
capacity of SHRM to contribute to enhanced performance outcomes for the smaller
enterprise embarking on business growth. By drawing on both primary and
secondary data, the study has addressed two key questions: (i) is there evidence
that SHRM is present in small firm management practice and if not, (ii) should
small firms adopt a strategic approach to the management of their human
resources on account of its ability to support effective organisational growth.

ƒ Research methodology

The initial review of the literature indicated an opportunity to explore current

understanding and perspectives relating to the management of people in smaller
enterprises, in particular the relationship between human resource management
and business strategy. The review revealed three particular areas of both interest
and contention that in turn generated a set of propositions. This concluding
chapter responds to the following propositions:

¾ P1. That there is a positive association between the adoption of a

strategic approach to the management of human resources and small
firms experiencing business growth;

¾ P2. That small firms manifest similar strategic human resource

management issues to large corporations and hence require aides and
methods to address these;

¾ P3. That the theoretical and applied discipline of Strategic Human

Resource Management demonstrates relevance not only for large
organisations but also for small growing organisations.

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The absence of sound and tested theory governing the research questions and the
limitations inherent in the complex and subjective areas of human behaviour,
perception and attitude pointed to the appropriate application of the inductive
investigative research method. As such, extensive data was gathered and
observations made that were designed to generate a probable and potentially
generalisable theory (Sekaran 1992; Black 1999; Creswell 2003; Bryman 2004).

Designed around four key tasks, the research process included defining SHRM,
building a representational framework of SHRM and developing an understanding of
the nature of its application as a product of the larger corporation. The second task
involved the identification and examination of the descriptive and empirical
literature covering the current status of the management of human resources in
smaller enterprises. In addition, a set of 10 case studies were conducted to
investigate how small growing companies approach the management of their
workforce and in turn determine if their approach was consistent with the
observations and findings of other researchers and commentators. The fourth
stage of the research analysis comprised the process of matching the elements of
the SHRM framework against the information extracted from both the literature and
the fieldwork to determine the prevalence of strategic behaviour in small firm
people management practice. The findings from this analytical exercise led to
conclusions relating to the relevance of this management discipline for the smaller
growing enterprise.

ƒ Significant influencers

Before proceeding to the research interpretation, it is necessary to comment on

several factors that came to play a central part in determining both the
methodology employed for the research investigation and the arrival at the
subsequent conclusions.

At the start of the study, it was anticipated that the discrete management
disciplines of Strategic Human Resource Management and small business
management would be well-developed fields of study supported by empirical
research and theoretical frameworks providing reasonable understanding and

425
clarity about the topic in question. However, what emerged was that despite the
growing interest and research in both these fields over recent decades, they still
remain relatively immature in terms of the extent to which their size, diversity and
complexity has been fully embraced and explained. As illustrated in Chapter 7, it
was necessary to work with data that was not always able to answer critical
questions in a coherent or comprehensible way. This meant identifying and
overcoming gaps wherever this was possible. This feature of the material implied
that acceptance of the research interpretations must be tempered by
acknowledging the road to more complete understanding about many aspects of
these management fields continues. In effect, work that represents the early
stages of the knowledge building process will inevitably be more experimental and
speculative in nature.

A second factor related to the use of management terminology to describe and

explain concepts and activities that occur within a business context. It was not
expected that the language of business management would manifest such
ambiguity and imprecision (Katz et al. 2000). One of the recurring challenges
encountered throughout this study has been the issue of semantic definition, most
notably how the term “Strategic Human Resource Management” or SHRM is
defined. In other words, what does it mean when we talk about the strategic
management of people in a commercial context? The absence of a consistent or
fully encompassing definition of SHRM or a single methodology that could be used
as the basis for exploring its presence within the smaller business context required
the development of a framework that created a coherent structure, reflecting the
key components of this management discipline. While the creation of an acceptable
framework was possible and hence applied to this purpose, it is noted that such an
approach lacks the informed scrutiny of experts in this discipline and risks
challenging what might be regarded as conventional wisdom about the subject
(Dyer & Reeves 1995; Mabey, Salaman & Storey 1998; Brewster 1999).

Difficulties were also encountered with other management terminology, including

terms such as “strategy”, “planning”, “HRM”, and “policy”, concepts that are central
to the research questions. The variable application of these terms created
obstacles when exploring the literature, including dangers of misinterpretation and
presuming meaning that may not have been intended. For example, theorists have

426
debated the business discipline of strategic management for some years, being
divided in their views about the nature of strategy and the respective merits of the
rational, structured planning approach versus the occurrence of informal, emergent
strategy. It is not always clear what is meant when the term “strategy” is used,
what is involved in the process of being “strategic” or accepted as the rules of
“strategic management”. A key factor in the discussion about the prevalence of
strategy in small firms and the management of their people is the ambivalence
surrounding what is and is not deemed “strategic”. Consequently, it has been
necessary to acknowledge these semantic and conceptual anomalies and suggest
that the research findings and resultant conclusions be considered in light of the
associated limitations.

ƒ The contextual status

The research study commenced with an exploration of the broad commercial

environment to understand the external context in which the small business sector
currently operates and extant knowledge about the nature of small business
management, in particular relating to that of human resources. In addition, the
study focused on the environmental developments that have played a key role in
the emerging theoretical discipline of SHRM as well as the status of its practical
application. The purpose was to gain insight into those factors that might influence
and play a role in determining the prevalence and in turn relevance of SHRM for the
smaller commercial sector.

o The commercial environment

The contemporary management literature revealed that in recent decades profound

changes have occurred in the commercial arena with dramatic developments in the
way that goods and services are produced, traded and delivered throughout local
and international communities. Trade in today’s commercial context is
characterised by rapid and turbulent change as well as greater levels of complexity,
uncertainty and movement in the marketplace. There is greater diversity in the
way enterprises approach business issues and manage their internal operations.
Customers are more demanding and discerning and investors have increased
expectations about the return on their investment (Pralahad 1990; Rothwell,

427
Prescott & Taylor 1998; Hamel 2002; Kaplan & Norton 2004). The business world
is now faced with the arrival of globalisation and the internationalisation of
commercial markets. There is increasingly complex political infrastructure with
evolving methods of governance influenced by varied agendas and ideology.
Enterprises have been released from many regulated markets while experiencing
the constraints of increasing corporate responsibility (Ulrich 1997a; Kraut & Korman
1999; Lin 2004). The developed countries have undergone the decline of the
manufacturing sector being replaced by the rise of the information and services
sectors (Ulrich & Brockbank 2005). Advances in technology have led to the
emergence of the information era and the associated speed of technological
innovation has driven increased market volatility and pressure to develop new and
better products and services (Greer 1995; Kraut & Korman 1990; Lin 2004).
Changes in social demographics have also influenced consumer demand, customer
profiles and the availability of labour resources (Greer 1995; Davenport 1999).
Innovation and flexibility in the management of business strategy combined with
greater creativity in and responsiveness to the development, marketing, production
and delivery of products and services now demand higher levels of attention in
order for firms to remain competitive. Consequently, there is pressure on
companies to reconsider the management of their organisations and in turn adapt
to accommodate the emergent commercial order (Prahalad & Hamel 1990; Drucker
1992; Ghoshal & Bartlett 2000; Hamel 2002).

o The small business environment

Also evident in this era of commercial change is the growth of the small business
sector as an increasingly important player in national and international markets for
goods and services (Storey 1994; Karpin 1995; Hendry, Arthur & Jones 1995).
Considered in many circles to be key contributors to building and sustaining
national economies and addressing social problems such as unemployment and
poverty, the vast and growing numbers of small enterprises have been welcomed
for their potential to respond to contemporary needs (Rainnie 1989; Marlow &
Patton 1993; Storey 1994; ABS 2000). The small business sector has been viewed
as a solution for economic malaise through increased contribution to GDP, a
growing role in export markets and as providers of employment in labour markets
shrunken by sophisticated technology, industrial outsourcing and subsequent

428
corporate downsizing (Stanworth & Gray 1991; Storey 1994; Commonwealth of
Australia 1997; Douglas 2001). Smaller enterprise has also found new niche
markets as a result of changing patterns of demand for specialist and customised
products and services. The nature of small firm infrastructure provides
opportunities to deliver limited lines and respond quickly to changeable and varying
customer demand, to play a role in the distribution of larger company output and
generally exploit areas of the market suited to small-scale production
(Commonwealth of Australia 1990; Meredith 1993; Hendry, Arthur & Jones 1995).
The sector is promoted as a source of new commercial concepts and innovative
products and services, as well as suited to the requirements of the information and
service sectors due to their customer proximity and the intensity of customer
relationships in these areas (Scase & Goffee 1987; Stanworth & Gray 1991;
Meredith 1993; Kuratko & Hodgetts 1995; SBDC 2005). Pressure from competition
has heightened the need for greater productivity and hence improvements in the
industrial relations environment. The smaller commercial configuration is thought
to provide more harmonious work environments and promote greater loyalty
among workers (Schumacher 1973; Atkinson & Storey 1994b; Gubman 1998). In
effect, many factors have contributed to strengthening the position of small
enterprise as an economically and socially significant sector, resulting in extensive
investment and attention at international, national and local levels.

From the contemporary developments described, it would be reasonable to

extrapolate that corporations, regardless of their size, encounter similar types of
opportunities and threats to their competitive position. Pervasive political,
economic and social trends suggest a common need to identify those of relevance,
requiring necessary adaptation, in order to maintain business alignment with the
external environment (Stanworth & Curran 1991; Storey 1994; Karpin 1995).
While there will be firms that are impacted by specific micro changes in their locale
or industrial cluster for example, there will also be degrees of commonality across
all commercial enterprise. Overall, we can infer that companies large and small
alike conduct business in what has become a rapidly changing and unpredictable
context demanding increased levels of attention and managerial acumen from
corporate leaders.

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 Inference 1

‰ That small and large business enterprise operates within a commercial

context that presents substantially common environmental elements
requiring variable levels of response and adaptation in order to be
competitive.

o The knowledge economy and social trends

A major area of commonality that exists for companies is the advent of the
knowledge economy and its relationship with widespread social and demographic
trends. A prominent feature of the contemporary business environment has been
the growth in importance of human capital. Recognition of the value of human
contribution to business activity and the criticality of leveraging this resource
potential for commercial benefit has grown (Walker 1992; Tokesky & Kornides
1994; Dyer & Reeves 1995; Gratton 1999). The need to build high performance
companies where increasingly sophisticated products and complex, knowledge
intensive services can be delivered, implies the availability of a competent and
motivated workforce. Where knowledge workers contribute intellect and critical
abilities rather than physical capacity, they acquire an enhanced position of
strategic importance (Hendry 1995; Ehrlich 1997; Becker & Huselid 1999).
Consequently, consideration of the value of knowledge workers and their
contribution to business performance now assumes a higher priority within business
enterprise (Greer 1995; Lundy & Cowling 1996; Ulrich 1998a).

In addition, the effective management of people has become a major factor in a

commercial environment that increasingly relies on intellectual capital and human
capability to build productive organisations and sustain competitive advantage in
the marketplace. With the emergence of human capital as a key competitive
resource, the ability to attract and retain a skilled and motivated workforce is a
priority. The current business climate emphasises both the need to draw on the
creative talents of people and to minimise unnecessary inefficiencies and wastage,
in particular those linked to poor or sub-standard people management practices.
The wealth of literature in this field indicates that considerable investigation has
occurred to understand the implications of managing knowledge workers and their
role in developing and implementing business strategy (Walker 1994; Wright

430
McMahan & McWilliams 1994; Greer 1995; Ulrich 1997a; Gubman 1998). The
concept of competing on the basis of organisational competence has influenced
exploration into the nature of human development, innovation and motivation, as
well as those means that encourage the application of individual capability and
discretionary effort inherent in the workforce (Prahalad & Hamel 1990; Senge
1992; Drucker 1997; Rothwell, Prescott & Taylor 1998; Davenport 1999; Bartlett &
Ghoshal 2000). The need to create work environments that drive both individual
and collective workforce alignment with business goals consistently emerges in the
management literature of this period (Ulrich 1997a; Ghoshal & Bartlett 2000;
Davenport 1999). Similarly, the methods and principles applied to the selection,
compensation, development and appraisal of the workforce as a means to manage
business strategy and stimulate human potential in all areas of organisational life
have undergone scrutiny and revision (Rothwell, Prescott & Taylor 1998).

Furthermore, significant shifts in demographics have changed the social context in

which businesses operate, influencing the availability of labour as well as altering
managerial practice and views about optimal approaches to people management.
Factors such as increased migration and the international mobility of people,
declining birth rates coupled with the ageing workforce, the growth of female
participation in the workplace particularly in traditionally male-dominated sectors,
the rise in divorce rates, single parents and dual-career families have all had
implications for companies needing to attract and build critical business expertise
and skills. There is a growing shortage of young, skilled workers entering the
labour market (Greer 1995; Thite 2004; Ulrich & Brockbank 2005). Increased life
expectancy and improvements in education and standards of living have changed
expectations about the nature of the employment relationship (Cascio 1995; Greer
1995; Tyson 1995b). The emphasis on achieving greater work-life balance as well
as growth in individualism and demands for higher quality jobs that provide
interesting and meaningful work with greater levels of responsibility, authority and
autonomy, have altered the relationship between the employer and the employed.
Workers are seeking more involvement and participation in key decision-making
activities as well as opportunities to develop in chosen careers (Greer 1995;
Davenport 1999; Thite 2004).

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 Inference 2

‰ That small and large enterprise is impacted by the advent of the knowledge
economy and changes in the social structure, indicating potential benefits to
be derived from organisational and managerial adaptation

o Strategic Human Resource Management (SHRM)

It is within this commercial context that a new managerial discipline, that of

Strategic Human Resource Management, has emerged (Fombrun et al. 1984; Ferris
et al. 1999; Kraut & Korman 1999). Efforts to survive and prosper in the new
commercial order combined with the increasing strategic significance of people as
organisational resources, have propelled the development of management theories,
tools and techniques designed to assist corporations achieve optimal performance
outcomes. In tracing the historical development of human resource management
practice as described in Chapter 2, it is evident that SHRM has developed in
response to the human management issues facing today’s business environment.
SHRM has emerged with a role to facilitate the re-evaluation of the relative
importance of people as business assets and a source of competitive advantage,
while providing management methodology to drive optimal human contribution to
company performance and commercial outcomes. As a business philosophy and
applied management tool, SHRM assists with focusing corporate leadership on the
effective sourcing and managing of limited supplies of skills and expertise in
competitive markets that are demanding continuously higher levels of productivity
and innovation (Ulrich 1997a; Mabey et al. 1998; Baron & Krepps 1999; Bamberger
& Meshoulam 2000).

o The four elements of SHRM

Management Philosophy

Planning for people HR management alignment

Use of HRM technology

432
The literature review of SHRM indicated a broad and complex managerial discipline
comprising four inter-related elements. SHRM presents in the first instance as a
management philosophy in which people as organisational resources are regarded
as key assets in the achievement of business objectives and possibly the only
source of long-term competitive advantage (Hendry & Pettigrew 1986; Wright &
McMahan 1992; Tyson 1995b; Becker & Huselid 1999). At the core of this concept
is the notion that competitive advantage is derived from the quality of human
contribution to the development of products and services, as well as the processes
by which these are made and delivered. SHRM highlights the fact that people as an
organisational resource participate in, contribute to and influence business activity
and outcomes at all levels and in all areas of business life. People are central to the
development, implementation and eventual success or failure of business strategy
(Fitz-Enz 1990; Beer 1997). Moreover, SHRM is concerned with rectifying
management practice that has historically failed to optimise human potential and
thereby reap full commercial benefit from this available resource. Seeking to
balance humanist value systems with economic rationalism, adherents of SHRM
propose that optimal business performance correlates directly with the skilled and
considered management of this organisational resource at the most strategic levels
(Huselid 1993; Armstrong & Long 1994; Gratton 2000; Kaplan & Norton 2004).

The second element of SHRM comprises the activity of planning for people; that is
incorporating the human resource dimension when considering the company’s
future direction, relevant labour needs and its associated management (Hendry &
Pettigrew 1986; Nkomo 1980; Anthony, Perrewe & Kacmar 1996). The planning
process can be structured and systematic, supported by procedural tools that direct
the thinking of strategists progressively across the full range of strategic business
issues, including the role of people in the organisation. Alternatively, the process
can be evolutionary with consideration being given to the human resource
requirements of the company on an as-needed, on-going basis. Strategic planning
for people may also consist of a combination of these approaches. In effect,
planning for people focuses leaders pro-actively on future workforce requirements,
on “what” action the company will take to address these and “why”, relative to
organisational needs and in light of a defined business strategy (Mintzberg 1987b;
Walker 1992; Thompson & Strickland 1998; Bamberger & Meshoulam 2000).

433
Closely linked to the process of planning for people is the third element of SHRM,
the alignment of human resource management practice with organisation and
business goals. This is concerned with determining the “how” and “when” of people
management. Element 3 focuses on the nature of the role that people play in
achieving corporate objectives and the way they will be managed so this is fulfilled.
Central to the linkage or alignment proposition is the concept of support, with
people and the system by which they are managed facilitating the implementation
of the firm’s competitive strategy (Wright & Snell 1989; Cooke 1992). Systems
theory proposes that organisations are most effective where elements such as
strategy, infrastructure, technology, culture, management systems, workforce
characteristics and organisational activities in general are configured to integrate
and mutually assist and support each other (Walker 1992; Porter 1996; Snell &
Wright 1997; Tyson 1997b).

This study has discussed how the lack of congruence or fit between the vertical,
horizontal and temporal elements of the human resource management system
implies organisational inconsistency and wastage (Baird & Meshoulam 1988; Ulrich
1997a; Becker et al. 1999; Gratton et al. 1999). An understanding of the web of
cause-and-effect relationships within the total system is critical for alignment, the
impact of one part on another and the consequences of intervening in any part of
the system (Delery & Doty 1996; Pfeffer 1998; Ulrich & Brockbank 2005). Various
approaches to achieving alignment have been examined here including functional
alignment (i.e. connecting business strategy with functional human resource
management activities), people-related business issues (i.e. resolving the human
element of business problems or using the management of people to enhance
business opportunities), and the competency-based approach (i.e. linking skills and
expertise with business requirements) (Meals & Rogers 1986; Prahalad & Hamel
1990; Walker 1992; Lundy & Cowling 1996; Kaplan & Norton 2004).

The fourth element is the deployment of human resource management (HRM)

technology to support the implementation of business strategy (Armstrong 1992b).
For the purposes of this study, HRM technology is defined as the totality of known
and potential managerial philosophies, principles and practices, including policies,
systems and programmes that are used in the management of people within an
organisational context. Within the context of SHRM, HRM technology consists of

434
the tools of the people management trade that can be applied to building the
human capability and commitment needed to achieve the company’s strategic goals
(Armstrong 1992b; Lundy & Cowling 1996; Mabey, Salaman & Storey 1998; Boxall
& Purcell 2003).

Inference 3

‰ That Strategic Human Resource Management (SHRM) as a theoretical

business philosophy and managerial tool manifests the ability to assist
commercial enterprises in the strategic management of their human
resources

ƒ The potential for SHRM in small business

In researching the prevalence of SHRM in small, growing firms an initial question

was whether in fact it was to be expected that a strategic approach to human
resource management would be found in the smaller business environment.
Considering some of the common perceptions about this sector and the various
indicators of adoption, the answer was probably not. As has been shown, the
theoretical and applied discipline of SHRM continues to develop and there are still
concerns about its ability to address effectively the needs of the larger business
environment (Dyer & Reeves 1995; Mabey, Salaman & Storey 1998. Models for
application often fall short of the actual needs of companies and are not so readily
accessible. SHRM remains poorly understood by many in the business community.
Management education in this field is only starting to penetrate the working lives of
human resource management professionals and senior teams in upper echelons of
company structures (Tyson 1995b; Lundy & Cowling 1996; Schuler 1999;
Bamberger & Meshoulam 2000). As with strategic business management, SHRM is
typically understood to be for use in large companies having developed with the
needs of the larger corporation in mind. These factors did not bode well for the
likelihood of finding SHRM within the smaller sector where operators are often less
well informed about management technology and resourced from a business and
organisational perspective.

The limited research undertaken in the field of SHRM in small firms also suggested
that this topic might well be a non-starter, lacking in relevance or significance and

435
thereby explaining the deficit of attention it has received. This study found that
there are those who do not view small firms as strategic in their behaviour,
believing that this type of activity has little application or interest for the smaller
operation. This perspective claims that strategic management only becomes
necessary with the advent of business or organisational growth as well as with
increased levels of managerial professionalism and knowledge associated with the
larger entity (Gibb & Scott 1985; DUBS 1990b; Gibb & Davies 1992; Storey 1994).
Some writers note that smaller firms do not maintain the organisational
infrastructure considered necessary to support strategic activity comparable with
that found in the larger counterpart, lacking the required strategic leadership and
structured business processes. The literature also indicates that owner-managers
are often reluctant planners who resist the formality of structured management
tools and methods and are often unprepared to share the details of their business
activities (Robinson & Pearce 1994; Kuratko & Hodgetts 1995; Matthew & Scott
1995). Moreover, the normative strategic model requires that strategy
development emerge from the executive level with implementation descending
through the organisational structure. The lack of structured hierarchical levels
within the smaller, organic configuration constrains easy application of the
conventional top-down format.

As the research investigation progressed, an extensive range of positive and

negative indicators with the potential to influence the interest and capacity of
smaller firms to adopt SHRM, were found amongst the literature. For example, the
owner-manager of the small firm is likely to play a similar role to that of the CEO of
a large company, driving the corporate management philosophy, rationale and
processes of SHRM. However, unless a small firm owner-manager has the benefit
of education in strategic management or experience of the larger business
environment, possession of skills and interest in the development of workforce
strategy is less likely. Smaller firms tend to have fewer experienced managerial
resources at their disposal to assist with the development and implementation of
strategy, as well as less supporting organisational infrastructure. In the smaller
firm there is less capacity to invest time and resources, such as for the purpose of
developing and implementing strategies, as well as achieving the economies of
scale that make investment more viable in larger companies. Although the
requirement for human capital to support business performance and development

436
may be recognised by the smaller enterprise, the growing contemporary skills and
manpower shortages imply greater competition and less choice in the labour
market. We have seen that many small firms possess limited financial resources in
which to invest in their people. This is often reflected in lower salaries and wages,
fewer employment benefits, less attractive work environments and facilities, lower
levels of formal training and development, fewer career advancement opportunities,
and less employment security. These characteristics of the small business
experience may in fact drive a conservative approach to company management
that prefers to avoid the uncertainty of the future and seeks to minimise the
problems of the present.

However, smaller firms may encounter fewer political obstacles because fewer
stakeholders are involved in the strategic decision-making processes. For the same
reason, there may be less resistance to proposed strategies and the associated
organisational activity. Younger, smaller firms will not be encumbered with the
legacy of a human resource management function where technical practitioners are
viewed as inadequately skilled and hence excluded from key business decisions
(Lundy & Cowling 1996; Rothwell, Prescott & Taylor 1998; Ulrich 1997a; Ulrich &
Brockbank 2005). In addition, the closer inter-personal relationships often
associated with small businesses might suggest that the proximity of an in-house
human resource management specialist, whose role is to influence and provide
assistance to the management team on people issues, might be more effective than
in a larger firm. Also considered are the proportionately fewer strategic initiatives
likely to be proposed in the smaller enterprise and hence the task of implementing
strategy will be less onerous.

Less organisational complexity stemming from the smaller scale operation suggests
a simpler strategic management process and the outlay of fewer resources. In
terms of the financial investment for a smaller firm, the application of SHRM with
the purpose of developing people strategies might be less costly, contained by the
smaller scale of the business. There would be fewer participants in both the
development and implementation phases. Tracking and monitoring strategic
developments would also be less onerous in the smaller less complex operation. A
further element of advantage would be the ability of the owner-manager to oversee
and understand the inter-relatedness of the business, enabling the identification of

437
strategic issues more easily and how associated actions will impact various parts of
the company. The proximity of workers and managers also provides better
opportunity for sharing understanding about the nature of change and why this is
occurring. It is possible that smaller and/or younger companies would be free from
incidence of structural inertia where stakeholders are reluctant to abandon long-
established and entrenched management practices. The occurrence of strategic
fragmentation due to a broad diversity of political agendas among multiple
stakeholders may also be less significant (Wright & McMahan 1992; Ulrich &
Brockbank 2005).

However, preparedness by smaller firms to address strategic people issues may be

impeded by the perceived risks associated with change or limitations in the
strategic options available. Preference for maintaining the status quo or steady-
state environment by operators exposed to risks in the business environment or
stemming from the viability of the smaller operation has already been mentioned.
Organisational risk also exists where small companies are without formal
management systems, documented operating procedures or databases as might
contain customer information, with this critical firm-specific knowledge residing
“within” the workforce or with individuals. If employees leave the company, this
knowledge also leaves. In effect, until the company’s unique and intangible
business property is captured this essential asset can be easily lost. In comparison
with large corporations where company knowledge is spread across greater
numbers and organisational infrastructure to capture corporate knowledge is
usually more developed, the smaller enterprise is faced with fewer individuals
embodying its total knowledge base (Becker & Gerhart 1996; Gubman 1998; Ulrich
& Brockbank 2005).

ƒ SHRM adoption in large corporations

SHRM encompasses a range of attractive features designed to support and facilitate

improved levels of human resource management and hence business performance.
However, a key question is the extent to which this tool or approach has been
adopted and applied within large commercial enterprises? Where assimilation has
been slow or non-existent there is value in understanding the reasons for this

438
reticence and in turn considering the implications of these reasons for the smaller
enterprise. In attempting to clarify this question, two particular findings emerged.

First, the literature review indicated that while there remains a significant
population in the business community that has not embraced the new management
concepts and technology (Bartlett & Ghoshal 2003; Ulrich & Brockbank 2005), there
are also strong indications of a growing trend towards a more strategic approach to
the management of people (Pfeffer 1998; Huang 1998; Gratton et al. 1999; CCH
1999; Ulrich & Brockbank 2005). Studies have highlighted some of the difficulties
associated with adoption such as resistance to change, constraints faced by human
resource management specialists, fragmented organisations with different values as
well as entrenched cultures and administrative structures (Butler, Ferris & Napier
1991; Gratton et al. 1999). However, it is evident that some corporations manage
their people by way of a partial or fragmented adoption of SHRM and that in doing
so the prescribed theoretical methods and associated terminology are not
necessarily applied and used. There is also evidence both anecdotal and observed
that the development of human resource management strategy in the larger
corporation can successfully emerge over time as the product of a logical response
to organisational and business circumstances, but still lacking the conformity or
tidiness of application presented in the theory (for example see Armstrong 1994;
Johnston 2000).

Secondly, a variety of factors were found to be potential influencers in the adoption

of SHRM. For example, it is proposed that adoption is predicated on the support,
ownership and commitment of a senior executive (or team) that provides
leadership and direction in the management of the firm’s human resources (Golden
& Ramanujam 1985; Walker 1986; Beer 1997; Greer 1997; Baron & Krepps 1999).
Skilled and supportive executives and line managers who understand the concepts
of SHRM and possess the ability to contribute to implementation are a prerequisite
(Karpin 1995; Greer 1997; Tyson 1997b; Ulrich 1998a; Tebbel 1999; Bartlett &
Ghoshal 2003). Other stakeholder support and/or resistance, such as from
shareholders and unions for example, may play a part in determining latitude for
the development of strategic initiatives and levels of investment in the workforce
(Wright & McMahon 1992; Galpin & Muray 1997). SHRM theory indicates that there
is a requirement for an articulated and shared strategy so that the alignment of a

439
human resource management strategy with the business strategy can be achieved
(Butler, Ferris & Napier, Huselid 1993; Pfeffer 1995). Studies have shown that
specific industrial and organisational circumstances are more likely to reveal a
strategic approach to workforce management such as labour-intensive firms where
associated costs are significant as well as larger companies possessing well-
developed internal infrastructure to support managerial interventions. Businesses
undergoing external and/or internal change and disruption where the workforce is
substantially impacted or may influence outcomes are associated with more
strategic levels of labour management (Golden & Ramanujam 1985; Brewster &
Smith 1990; Huselid 1993; Bamberger & Meshoulam 2000). Competency among
human resource management professionals within organisations is also considered
a key variable. Specialists who are knowledgeable and well trained in the technical
facets of human resource management as well as the strategic dimensions of the
SHRM role may influence the adoption of SHRM and affect associated levels of
success (Walker 1992; Hendry 1995; Lundy & Cowling 1996; Beer 1999; Ulrich &
Brockbank 2005). Moreover, the condition of the functional human resource
management department is said to be an indicative factor. Where there exists a
well-organised and efficient human resource management system supported by
HRM technology able to support strategy implementation effectively, adoption is
thought more likely to occur (Tokesky & Kornides 1994; Nankervis, Compton &
McCarthy 1996; Lundy & Cowling 1996; Beer 1997; Weiss 1999; Bamberger &
Meshoulam 2000). Furthermore, capability in implementing organisational change
has been highlighted as a critical dimension in the process of building support for
and implementing human resource management strategy (Walker 1992; Wright &
McMahon 1992; Greer 1995; Ulrich 1997a).

Inference 4

‰ That small and large enterprises encounter variable organisational and

workforce management factors that may influence the adoption of SHRM and
impact the level of success

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ƒ Research findings (prevalence of SHRM in small business)

To determine the prevalence of SHRM in small business, this study examined both
the literature on the management of human resources in small firms and the
management practices of 10 small, medium-sized companies with growth
experience. Where relevant data was available this was analysed and pattern
matched against the four elements of the SHRM framework.

o Management literature (SHRM in small business)

This study sought to locate and examine both empirical studies and descriptive
literature that was concerned with or could provide insights into the subject of the
strategic management of human resources in small firms. As discussed in Chapter
9, no empirical studies investigating the prevalence of SHRM (as a formal
managerial discipline or model) in small firms were found. However, both comment
and examples emerged in the more general studies on human resource
management in smaller firms relating to the issue of strategy. While an eclectic
and unexpected number of sources of this type came to light, these were largely
superficial in content and in many cases limited to a passing reference.
Information was invariably located within the context of work dealing with another
related managerial discipline or where the purpose of the work had a different
focus. The question of strategy in small firm human resource management
invariably appeared as a small and less significant afterthought or appendage.
Nevertheless, it was evident that writers and commentators have given some
consideration to the strategic management of people in smaller firms. The nature
of their discussion focuses primarily on the question of whether or not smaller firms
are actually strategic in the way they approach workforce management. Views are
distinctly divided and reflect a range of perspectives.

In support of the view that small firms lack a strategic approach to human resource
management, some writers cite examples of non-conformance with the generally
understood concepts and practices associated with SHRM (Johnson 2000; Gilbert &
Jones 2000; Nankervis, Compton & Savery 2002; Bartram 2005). Statements to
the effect that workforce issues are not a high priority in smaller firms and that
small companies do not leverage their human resources for competitive advantage

441
were found (Ritchie 1993; Wagner 1998, Wilkinson 1999). Failure to align human
resource management initiatives with articulated business objectives or to integrate
(horizontally) the systems and policies of the organisation or to apply workforce
management technology were also considered evidence of non-conformance
(Duberley & Walley 1995; Kitching 1996; Wyer & Mason 1998; Gilbert & Jones
2000; Kerr & McDougall 1999). The frequent absence of human resource
management specialists in smaller firms is considered another indicator that
strategy for people is likely to be absent (Johnson 2000; Nankervis, Compton &
Savery 2002). The absence of planning for or pre-empting people-related business
issues has also been cited as an illustration of the lack of strategy (Ritchie 1993;
Duberley & Walley 1995; Wilkinson 1999).

Others have suggested that if management practice in small firms does not
resemble the way that larger corporations tackle human resource strategy, then
smaller firms could not be considered strategic (Ritchie 1993; Wyer & Mason 1998;
Gilbert & Jones 2000; Bartram 2005). This is variously explained in terms of a low
requirement to undertake formal planning, the lack of specialist human resource
management support, the short-term horizons of small firm business operations, as
well as a shortage of resources and the lack of time and energy to invest in this
area of the business (Ritchie 1993; Chapman 1999; Johnson 2000; Nankervis,
Compton & Savey 2002). While drawn from research observations, this perspective
appears to relate in part to the fact that strategy and the discipline of strategic
management are more commonly associated with large enterprises. Its
connotations are grand in scale, encompassing important decisions with far-
reaching consequences as well as large amounts of financial resources. Because
smaller firms are small in scale, with decisions affecting limited numbers of people
and expenditure and resources more modest, these conditions negate the relevance
of strategic management or at least the right to claim this label. This raises the
question at what point do small firms become sufficiently large in size to be
deemed strategic in their behaviour and activities? In essence, the debate centres
on whether strategic management is considered exclusively the domain of large
corporations, being a product of organisational size and drawing on formal and
structured methodology.

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Not all researchers are convinced of the complete absence of strategic activity in
smaller firms, with ambivalence and even confusion emanating from the debate. A
report of a micro study on small firm management practice has claimed that while
some firms are strategic others are not, but the reasons for this discrepancy are
not understood (Duberley & Walley 1995). Moreover, partial application of some of
the elements of the SHRM framework came to light in some studies but there was
uncertainty about whether this sufficiently resembled large corporate models to
qualify (Duberley & Walley 1995; Kitching 1996; Kerr & McDougall 1999; Weisner &
McDonald 2001). Difficulties with the definition of the term “strategy” among the
researchers were evident, impeding their ability to commit to a position on this
issue (Kinnie unpublished; Duberley & Walley 1995; Robinson & McDonald 1995;
Chapman 1999).

At the other end of the spectrum are those who view small firms as strategic
entities regardless of the way in which they approach the management of their
business or the methods they employ (DUBS 1990b; Ritchie 1993; Matthews &
Scott 1995; Boxall & Purcell 2003). Reference is made to the concept of “strategic
thinking” and the acceptability of unstructured strategy (Armstrong 1994; Robinson
& Pearce 1994; Mintzberg 1994; Matthews & Scott 1995). For these, strategy
exists as an inherent part of any commercial activity without necessarily being
explicit or attached to a specific methodology. Hence, with the strategy debate
lacking relevance, in these cases owner-managers of small businesses are
portrayed as concerned with strategically significant people issues and determining
how they should be addressed (Hendry, Arthur & Jones 1995; Kauffman 1997a;
Golhar & Deshpande 1997; Roberts 1999; Mazzarol 2003).

Despite the lack of studies focusing specifically on the application of SHRM as a

comprehensive management tool, some of the SHRM framework elements were
found in small firm management practice. These are reported in studies concerned
with the more general practice of human resources management. Here, some
examples of smaller firms addressing the management of their employees in light
of individual and organisational needs emerged, with alignment and values based
management practices occurring (e.g. Scase & Goffee 1987; Kitching 1996;
Kauffman 1999; Matthews 2002; Mazzarol 2003). However, formal business
planning and planning for people were found to be activities in which small firms

443
rarely engaged (e.g. Kitching 1996; Wyer & Mason 1998; Wilkinson 1999). In
contrast, there are a range of studies that have indicated degrees of awareness and
the adoption of a range of HRM technology and tools in smaller firms, which in
some cases were used for strategic purposes (e.g. Marlow 1997; Kauffman 1997,
1998a, 1999; Kaman, McCarthy & Gulbro 2001; Wiesner & McDonald 2001; Kotey
& Sheridan 2001).

Inference 5

‰ That there exists ambivalence among contemporary writers as to the

prevalence of strategy in the management of human resources among small
firms

o Case studies (SHRM in small business)

In contrast to the literature, the case studies furnished more substantial

information that could assist in determining the prevalence of SHRM in smaller
firms. Based on the SHRM framework designed for this study, the investigative
process sought evidence of each of the framework components and an indication of
the integration of these into a coherent strategic approach to workforce
management. Hence, evidence was sought of the recognition of the value of
people as an organisational resource, engagement in planning for the management
of people resources, building alignment between business and organisational goals
and human resource management initiatives and drawing on the contents of the
HRM toolkit for methods and practices to support business strategy
implementation.

No evidence was found in the case studies of a fully integrated strategic approach
to the management of people where the key elements of the framework were
consciously engineered to form a complete human resource management business
system. Nor was there any significant use of the terminology of SHRM theory when
describing workforce management practice that reflected familiarity with the
concepts and structure of the SHRM framework. Several owner-managers used
certain general management terms, such as “strategy” and “planning”, but these

444
were not employed in such a way that indicated knowledge of the framework
elements or their role within the context of people management. However, when
each of the individual components of the SHRM framework were examined
alongside the interview material, variable degrees of conformity and application
were found. It is noteworthy that this is consistent with findings in many large
corporations and reflects the state of play within the broader business community
in general.

Element 1 - Management philosophy

From a research perspective, the substantially value-laden and nebulous nature of

the SHRM element of recognition was found to be problematic with regard to
obtaining suitable measurement and hence commitment to a position of
qualification for compliance. The multitude of forms in which recognition might be
manifest is not only highly subjective but may also remain unarticulated, immersed
in the fabric of the organisational culture and leadership style. As such, the
interpretation of the findings was based on the assumption that a consensus on
what might be considered reasonably representative of the concept is achievable.

The case studies indicated recognition of the importance and value of the people
who worked for them, this being confirmed verbally in the context of the
interviews. Numerous examples were also cited of investment in time, effort and
financial resources for the purposes of promoting workforce capability ability and
commitment to supporting business objectives, as well as accommodating the
diverse human needs of the team. The respondents were unanimous in the view
that their people were an essential part of the business but also one that presented
some of the more difficult organisational challenges, particularly in light of the
onerous associated costs and their criticality for business success.

No cases of the so-called “sweat-shop” scenario were found, nor was there any
sense that the workforce was viewed as a commodity for exploitation by an
authoritarian captain of industry. Some viewed this aspect of managing their
business as a routine part of the managerial experience, while others appeared to
resent its encroachment on their time and energy as if it were something apart
from the true business of delivering products and services. Despite the fact that

445
some of the respondents struggled with people management issues, expressing
frustration and even resentment about the demands of this area of the business,
there was no suggestion that employees were not treated with respect or dignity.
Rather, an impression of moderate altruism and the desire to build a small
communal group engaged in successful activity was gleaned. It was found that the
companies had not arrived at the stage where they believed they could benefit
significantly from the help of a human resource management specialist. A desire to
maintain control of this particular aspect of the business was evident, contrasting
with the reliance on managers responsible for other functional areas and activities.
This factor suggested that people resources were perceived as particularly central
to the business operation, the management of which owner-managers preferred to
keep close. This preference to maintain control over the management of people is
consistent with the findings of other observers of small business activities (Ritchie
1993; Atkinson & Meager 1994; De Cenzo & Robbins 1996; Gilbert & Jones 2000;
Wiesner & McDonald 2001).

Despite limited exposure to mainstream sources of knowledge in this field, the

respondents demonstrated an awareness of many of the strategic people
management issues associated with building a productive and high performing
workforce, how to position this resource to support their business and some of the
types of managerial interventions that could help them do this. Most of the
respondents spoke of contemporary workforce management trends relating to skills
shortages, changing employee expectations, competition for labour, employment
compliance requirements and the implication of these for their own companies.
Although the respondents were not always able to articulate the broader origins or
dynamics of these issues, most appeared to have grasped their essence and could
easily relate them to their own business environment. There was evidence that
strategic issues relating to attracting and retaining key competencies were widely
considered and understood, and in most cases, activity was in progress to ensure
that this business requirement was being addressed.

In the case studies the owner-managers’ approach to the management of their

human resources was found to combine commercial pragmatism with
accommodating individual and social dimensions of organisational life. For
example, the reality of financial management and the importance of controlling

446
costs were at the forefront of managerial thinking. The ratio of employment costs
varied considerably across the case studies, with one firm reporting 10 percent and
another reporting 90 percent. While this suggests that the area of labour cost
management would be of greater concern in some firms than others, all the
respondents stressed the need to manage this area of their business effectively.
Several of the respondents offered examples of workforce-related expenses and
associated costs, which drew significantly on company reserves and which in some
cases were perceived as a major threat to the firm’s viability. Owner-managers
described a range of approaches that they had used or were in the process of using
to minimise the potential negative impact of unsustainable workforce costs.

At the same time, it was observed that the management philosophies held by the
respondents and their approach to workforce management corresponded with the
current trend in humanist management promoted for enterprise in general. A focus
on organisational culture and internal dynamics, addressing the social and
psychological dimensions of employee needs, preferences and expectations, as well
as giving consideration to providing interesting and stimulating work were typical
themes that emerged. Initiatives were implemented to convey the message that
“the company cares” about the welfare of staff and wanted employees to feel
valued, included and enthusiastic about their association with the organisation. The
respondents indicated a willingness to accept individualism, to consider the needs
and aspirations of workers, while permitting within the bounds of reasonableness
flexibility in workplace practices. Various motivational strategies were reported,
designed to build cohesive team environments where employees were encouraged
to apply themselves and make an emotional commitment to the business.

Although some of the owner-managers experienced difficulty with relinquishing

control of the business to their people, some had come to recognise the importance
of letting others share the load with the on-set of growth. Several respondents
described in some length how they encouraged a collaborative approach, provided
some autonomy in work and business-related decisions and encouraged employees
to contribute ideas to the daily routine of running the business. Owner-managers
expressed their desire to have employees who were happy in their work, who
possessed a sense of ownership for their contribution to the business, even to the
extent that they might almost view the business as their own. A commonly held

447
belief among the respondents was the need to build and continually maintain a
constructive working relationship between themselves and their employees,
believing that this was productive for the business. Their approach to people
management could be described as consistent with advocates of a supportive and
nurturing style that encourages workplace collaboration, enjoyment and
empowerment. Moreover, it was evident that some of the respondents understood
the value of communicating with their people about the direction of the business
and providing clarity about their role in the organisation.

Overall, recognition of the value and contribution of people as a key organisational

resource rated highly among the case study participants insofar as the measures or
manifestations of this are deemed acceptable. This represented a significant
finding particularly when the issue of recognition and in turn attraction and
retention strategies is transferred to the context of large corporations and the
ability of CEOs to articulate their strategies for key people resources is questioned.
What can be surmised is that while many small businesses may not adhere to the
value systems inherent in SHRM, there also exist small companies where
conformance occurs. This research demonstrates that the categorisation of smaller
firms as purveyors of poor management practice and lacking the strategic socio-
psychological awareness deemed essential for current commercial effectiveness is
not fully representative. The research indicates both recognition by small firm
operators of the criticality of human contribution to business outcomes and how, as
leaders they applied a diverse range of managerial methods and techniques to
achieve desired performance levels.

Inference 6

‰ That recognition of the value of human contribution to business performance

exists in small firms with variation in form, scope and intensity

Element 2 - Planning for people

The second element, planning for people, emerged as the weakest application of
the SHRM elements, insofar as the concept of planning is deemed to incorporate a

448
formal and structured process or methodology. While the case studies manifested
evidence of strategic analysis and in turn the implementation of strategies to either
support business development or remove obstacles to effective performance, there
was no sign of formal methodology to drive this activity. With the exception of the
Information Technologist, whose interests and experience included management
theory and who claimed to work to a structured plan, the case study companies
operated in a predominantly reactive mode, responding to the needs of the
business as these arose.

While formal planning was not part of the owner-managers’ activities and only a
few claimed to be experimenting with planning at the time of this research, it was
apparent that all the owner-managers were active informal planners. This included
reflecting on the business direction and the positioning of resources to achieve their
goals. Timeframes were not necessarily long nor were their plans particularly
dramatic. All the owner-managers were able to describe their business goals and
where their business was heading, even if their ambitions were quite modest, such
as maintaining current customer levels or improving internal management systems.
The respondents were able to identify business potential and limitations, and had a
picture of what was happening in the external environment. Planning was
spontaneous and periodically occurring, addressing variable time horizons
depending on the needs of the business and the focus and priorities of the owner-
manager. Having built the business and been involved historically in the daily
operation, the owner-managers possessed a good knowledge of their company’s
internal infrastructure, had ideas for improvements and had identified changes
needed for the business to continue to be successful. The decision to take a
particular action or implement a certain strategy was prompted by catalysts that
prompted action by the owner-manager or management team. Actions were taken
based on the realisation of a problem and the need to find a solution. Aspects of
the business operation such as labour and its management would usually be
addressed on an as-needs basis. This was deemed to be effective and sufficient for
their purposes.

During the early growth of their businesses, none of the respondents had
undertaken any formal or long-term planning that had resulted in a coherent
business plan to assist with the process of expansion or growth. This applied

449
equally to general business planning and to planning for people. Nevertheless, the
firms had grown and flourished, indicating that formal planning had not been a key
factor in their success or capacity to survive the perils associated with young or
small companies. It was not possible to assess to what extent if any, the absence
of structured planning had undermined or inhibited previous business performance
or growth. Nor was there a strong indication that they intended to adopt a more
formal approach to planning for their people resources in particular as they went
forward.

The case study data indicated that operational management and strategic
management as distinguished in the large business paradigm effectively exists as a
single problem-solution process in the smaller configuration. This approach is
similar to the “people-related business issues” model of strategic human resource
management described by writers such as Meals and Rogers (1986), Schuler and
Walker (1990) and Hendry (1995). Specifically with regard to human resource
management, there is no active distinction made between the strategic and
operational management of people. Moreover, the boundaries of associated
managerial activity are determined by the management decision-makers and not
according to a pre-defined framework and timeframe methodology (see Culkin &
Smith 2000; Harney & Dundon 2006).

Inference 7

‰ That small firm planning for people tends to be informal and ad hoc,
responding to the short-term business direction and needs rather than a
formal structured process concerned with longer-term goals and strategies

Element 3 – HR management alignment

Linking the management of human resources with organisation and business goals
implies that there is a decision-making process or mechanism by which company
leaders identify business needs or goals and take people-related managerial actions
to address or support these. As noted above, the literature indicated that small
firms do not tend to engage in formal planning for the purposes of identifying their

450
workforce needs or approach to managing their people. This was confirmed by all
the case study owner-managers. Yet, we know that owner-managers are
continuously made decisions about the management of the human resources in
their business. As discussed under Element 2, in smaller firms planning for people
and making the corresponding linkages were found to occur as a combined activity,
although not necessarily event.

The pressure or requirement for alignment would seem to be very high. The fact
that small firms are generally faced with tighter budgets and less scope for
business error suggests less latitude for misalignment in the form of redundancy or
waste. Wastage is also likely to be more noticeable in the smaller configuration. It
might even be speculated that those small firms which survive the handicaps
associated with youth, would demonstrate relatively greater managerial efficiency
than larger firms in their utilisation of financial and other resources, because the
limitations they face oblige them to do so. It is not uncommon for large
corporations to maintain or carry organisational infrastructure that is not actively
managed and provides no apparent value to the goals and objectives of the
business. This lack of alignment and the associated organisational wastage, a
product of size, company age or poor managerial control infrastructure, is likely to
be untenable for small business operatives and probably incomprehensible to their
owner-managers. While there are sometimes difficulties for the external observer
in identifying these linkages, there is a strong case for suggesting that the majority
of management initiatives will be taken because owner-managers believe they are
likely to have a positive outcome for the firm. However, this also presumes that
small business decision-making is substantially rational in nature, involving
reasonable causal correlations (see Culkin & Smith 2000; Harney & Dundon 2006).

Based on the above premise as well as reports from the case studies describing the
rationale behind management decisions and activities, this research found evidence
that alignment of human resource management practice with business and
organisational needs/goals occurs within small firms. However, this connectivity
takes place outside the boundaries of a formal process and is effectively more
illusive due to internalisation by the decision-maker.

451
 Inference 8

‰ That alignment between business or organisation goals and human resource

management practice occurs in small firms but in the absence of formal,
articulated or documented strategy, levels of “fit” and consistency are difficult
to determine

Element 4 – Use of HRM Technology

The question of the application of HRM technology and tools by smaller companies
generated two issues. The first was concerned with the extent to which small firms
are knowledgeable about and apply the technology within their business. The
second issue was concerned with whether HRM technology was not only used for
operational management activities but also had a strategic functionality. To
conform to the SHRM framework, evidence is required of the application of HRM for
strategic purposes.

Consistent with numerous other studies, the general adoption by the case study
companies of the methods used by large corporations under the banner of HRM was
found to be variable (Kauffman 1997, 1998a, 1999; Golhar & Deshpande 1997;
Gilbert & Jones 2000; Heneman, Tansky & Camp 2000; Kaman, McCarthy & Gulbro
2001; Wiesner & McDonald 2001). As described in Chapter 2, the HRM toolkit is
extensive but we know that businesses can operate effectively if not efficiently,
without necessarily drawing on all the contents. As such, application carries
degrees of discretion. In the case studies, some owner-managers claimed to use
the tools quite extensively and provided examples of such, while others felt that
they were not likely to add value to their management activities. Although several
respondents strongly emphasised the benefits of having management systems in
place as mechanisms for control, opinion was divided as to the extent of the
usefulness of many of the other tools. It was clear that for some the adoption of
HRM tools had been driven by legislated or regulatory requirement, various
industrial standards or quality management programmes. In effect, there were
commercially pragmatic reasons for applying large business management practices,
rather than because they were currently in fashion or driven by human resource
management functional convention. However, an opportunity to test the extent of

452
their knowledge of HRM technology was beyond the scope of this study. As such, it
is not possible to say whether the limited usage was the result of informed
assessments of available technology and subsequent dismissal for lack of relevance
or whether this was due to a lack of owner-manager knowledge about HRM
practices, their associated benefits and methods of application.

One observation was the general lack of interest among the case study participants
in discussing human resource management methodology and tools. Employment
issues seen as effecting business performance were of more concern. As
mentioned under Element 1, the case study companies described a range of
methods and practices used as part of efforts to address issues such as attraction
and retention, skill requirements, high performance teamwork, as well as
motivation and organisational commitment. Examples of strategic application
where business requirements and goals had influenced management’s use of HRM
technology were in evidence.

Inference 9

‰ That small firms draw on a variable range of HRM technology to support their
management of human resources and address strategic issues

o Prevalence of SHRM in small firms - summary of findings

SHRM Element Trends

Management philosophy (commercial asset + human asset)

1 = positive and negative indicators

Planning for people = formal planning negative indicators,

2 informal planning positive indicators

HR management alignment = positive (not always explicit)

3 indicators

Use of HRM technology = positive (not always explicit)

4 indicators

Application of Negative
all Elements
combined

453
ƒ Interpretative commentary

o The issue of strategy

In light of the above findings and their bearing on the research questions, the issue
of strategy merits some further comment. Where the concept of strategic
management is seen as reflecting that found in some large companies; with the
structured, collective creation of multiple business goals, determining appropriate
tactics for competing in a range of different markets with diverse product lines and
allocating numerous resources to achieve business objectives, then it is evident
that this not does reflect the operating circumstances of smaller firms. In small
firms, the business leaders are few in number, the company is focused on fewer
markets and product lines and the resources available for allocation in support of
commercial objectives are usually more limited. Overall, the scale on which there
is a need to build business and organisational unity of direction and action is
smaller. It follows that the nature of strategy and the way it will be approached by
smaller firms is likely to be different to that in larger firms.

Where the concept of strategy is seen as the management of those aspects of the
business and its internal organisation that are sufficiently important or influential as
to impact on the ability to survive, prosper and achieve goals, strategic
management might be considered as present in all extant, actively managed firms
regardless of their size. Storey (1994, p. 144) has defined strategy in small firms
as simply “the actions which are taken by the small business owner once in
business”. Here, the concept of strategy in small firms is associated with the
proximity and influence of actions taken to achieve the goals of the business, even
where these goals might be as fundamental as trying to stay afloat. As such, it is
reasonable to surmise that certain business decisions will assume an importance
that is not so critical in the context of the larger corporation.

From a theoretical perspective, a human resource management practice or

intervention becomes strategic when its deployment is perceived as having a direct
impact on organisational or business performance. For example, in a small
business the decision to introduce flexible working conditions where workers can
attend the workplace at times that more conveniently suit their personal

454
circumstances or accommodate their family commitments, is more likely to be
strategically significant than in a larger company. If having a flexible employment
arrangement means the ability to retain the firm’s best salesperson, particularly
where this person is the only salesperson or one of a very small group of
salespeople, the decision assumes a high level of importance for the company.
Where the number of salespeople is few, loss of a capable and motivated worker
will have a proportionately greater negative impact on the business.

As Fry (1993) noted, the strategic significance of particular decisions and

associated interventions by owner-managers lies in the extent to which they affect
the on-going performance or viability of the business. Decisions that would be
categorised as operational within the large company context may be strategically
critical in the smaller environment. In other words, much of what is termed
operational management practice that takes place in large companies may equate
to strategic management practice in the smaller enterprise. By extension, it is
worth considering the notion that small firm management and the associated focus
of owner-managers might be more strategic than in larger organisations. As has
been shown, this is explained in terms of the degree of impact that the scope of
owner-manager decision-making has on business performance and outcomes (see
Culkin & Smith 2000).

Where it is accepted that strategic management is implicit in the achievement of

business survival and success and that all companies operate in unique
circumstances, it is reasonable to expect that strategy will be tackled differently.
Both the research literature and the case studies provide a range of valid reasons
for owner-managers in the smaller business context approaching and believing that
they can manage their operation effectively without the use of structured planning
activity and a documented business plan. These include the uncertainty associated
with the future direction or potential of the business, the shorter-term trading
horizons of the smaller enterprise and the capacity of the owner-manager to
maintain control over the business without needing to resort to structures and
processes to do this. Also cited are lower levels of complexity in the smaller
operation, the need to maintain high levels of flexibility and responsiveness to
market demands and where the owner-manager is a solitary leader the absence of
others internally with whom to share plans and ideas about the future management

455
of the business. A lack of knowledge and skills in the area of formal strategic
management may not necessarily be the only factors driving informality in
approach (DUBS 1990a; Gibb & Davies 1992; Robinson & Peace 1994; Storey
1994; Kuratko & Hodgetts 1995).

This study indicated that the consideration of strategic direction, resources and
needs of the business as well as the subsequent decisions taken to address these
need not necessarily be the product of highly systematic analysis or a methodical,
externalised process. As Mintzberg (1994) explained many business decisions are
made based on instinct, sensing that a particular direction or a particular action is
the right thing to do in any given set of circumstances. Effective decision-making
and consequential action-taking are not always the result of the prescribed
theoretical constructs from the rationalist school concerned with control, format and
consistency, but the product of human effort to solve practical problems or remove
obstacles that threaten or hinder progress in a particular direction. In addition,
solutions to strategic business problems can emerge from any part of the company,
occurring within the business system in a random fashion as time permits and
needs dictate (see Culkin & Smith 2000).

Open to dispute is the notion that formally structured strategic management is an

exclusively large corporation phenomenon and an approach that smaller firms
should necessarily emulate. Many large corporations are reactive in their
management of strategic issues and manifest variable degrees of success in their
attempts to control and systematise their business affairs. In effect, there appears
little doubt about the strategicality of both large and small enterprises. Of more
significance is the relevance of the available methods or technology to help them
manage strategy more effectively (See Culkin & Smith 2000).

o The growth dimension

It was not the intention of this research project to test the growth variable as a
contributor to greater strategic engagement stemming from business or
organisational growth. Had this been the case, a longitudinal study where the
progressive behaviours of the case study companies over time could be observed
would have been the appropriate methodology. Rather, growth has served as an

456
input variable based on the assumption that it is the growth environment that
triggers strategy. The objective was to focus the research examination on smaller
companies that also happened to be operating in the context of growth, either
presently, previously or in the near future. Nevertheless, while company size was
the primary factor, growth is an important variable that requires comment in light
of the research findings.

As was highlighted in Chapter 6, the prevailing convention is to discuss growth in

terms of organisational size where companies make the transition from a particular
headcount to a larger headcount. In addition, the occurrence of strategic behaviour
is commonly believed to be a consequence of making the transition from the
“small” business size category roughly speaking, to a larger business size or at
least within the medium-sized category. The management literature suggests that
with growth comes greater requirement to address broader, longer-term business
issues, an exponential increase in levels of operational complexity and a host of
required adaptations to the internal configuration of the business, as well as greater
reliance on the growing numbers of people who work for the company. The value
of a formal approach to strategic management emerges through its ability to create
greater structure, control and efficiency around the business system, implying
benefit particularly where there is expectation of a growth trajectory or an altered
future to be considered. Conversely, the theory suggests that failure to address
the strategic management of the business implies risking the achievement of
business objectives and goals, loss of control over the organisation as well as
undermining operational and ultimately its commercial potential. Lack of activity in
this area is equivalent to abandoning the company to the forces of fortune.
However, the literature provides less information about how or exactly when the
transition to a strategic mode occurs for those growing firms that might follow this
path. It is not clear whether this is the product of a dramatic event or crisis in the
way that Greiner (1998) suggests or another type of influence, and whether this
occurs abruptly or manifests as a gradual, evolutionary process.

The fundamental proposition that “small-becomes-larger-becomes-strategic”,

assumes that smaller firms are not managed strategically and so, are without
strategy. Where small companies are viewed as bereft of strategy and strategy is
considered a product of growth and only present when formal methodology is

457
applied, then this research would indicate that companies falling into the smaller
medium-sized business bracket are not sufficiently large to be deemed strategic.
This would be confirmed by finding that the companies were not suffering from any
of the symptoms associated with growth from a small operation to a small,
medium-sized concern. With the exception of the Food Producer whose approach
was noticeably meticulous and was having difficulty passing on responsibilities to
others, none showed signs of floundering due to the growing workload or losing
control of their operation because of increased complexity. No information was
provided by the companies that suggested organisational size had become a major
problem or that disconnect existed between the size of the business and the
expectations of the owner-managers about their role and ability to manage.

However, where it is accepted that strategy exists as an inherent feature of all

companies intending to stay in business, then it can be argued that the case study
owner-managers’ activities were consistent with this paradigm. Specifically
regarding the management of people, the case studies provided evidence of
activities and behaviour that were not only strategic in nature but also substantially
consistent with the prescribed theory of SHRM. The case studies demonstrated a
view of the future and planning for associated goals, awareness of their commercial
environment as well as engagement in operational and organisational alignment.
Use of function specific technology, in this case pertaining to human resource
management, was applied for the purposes of driving business performance. All
the participants were focused on a range of activities intended to improve
organisational infrastructure or achieve a longer-term commercial purpose.
Reliance on external forms of assistance and guidance was also present insofar as
this was considered necessary. Attendance on the Growth Program might be
viewed as another indicator of a commitment to building on existing strategic
capability.

A finding of this type questions the view that strategy develops solely as a product
of growth. Meals and Rogers (1986) and Baird and Meshoulam (1988) suggested
that management practice should reflect stages of organisational development
rather than organisational size. Baird and Meshoulam (1988) also noted that some
small firms exhibit more sophisticated management practice than that found in
many larger corporations. In other words, the application of management

458
technology may not necessarily correlate with company size and hence be a
product of a transition from smaller to larger. It is reasonable to expect that
companies may become more adept at the way they manage strategic issues over
time and that some may acquire management technology to help them with this
work. However, the paradigm that explains the presence of strategic management
strictly in terms of a linear transition from zero strategic activity to the application
of a comprehensive management model on reaching a particular organisational size
neglects the possibility that there are other variables at play. Moreover, it is too
simplistic to suggest that strategy is absent one day and then appears in
organisational life the next (see Cardon & Stevens 2004).

It might be more useful to view the evolution of management practice in large and
small business environments according to the perceived and actual needs of the
enterprises, the creative abilities of those who work in them to solve problems and
the assistance they have received from interested parties in developing technology
and management practice. Small and large business management practice could
be said to reflect differences (types S and L) as determined by contextual variables
with S and L sometimes overlapping or even borrowing from one another, rather
than being purely linear in their development with non-take-up (0) transforming
into take-up (1) at some unclear point in organisational or business growth. This
perspective better explains the presence of certain types of management practice in
smaller firms that could be described as innovative or particularly applicable for
their needs, but are not common in their larger counterparts. However, it is
reasonable to question whether small firm owner-managers take sufficient
advantage of the extensive range of technology available, thereby adding to
internal efficiencies and effectiveness provided by the discipline-based principles
and general practice of human resource management. At this stage however, there
is still much to understand about the relationship between growth and strategy and
the case studies did not provide further insights.

Inference 10

‰ That the management concepts of “strategy” and “growth” are substantially

complex and multi-dimensional as to obscure the full nature of their role and
functionality in relation to the research questions

459
ƒ Relevance of SHRM for small growing firms

From the investigation into both the literature on small firm human resource
management and the management practice of a group of small, medium-sized
companies, this study found that there is evidence of the relevance of SHRM for
small growing firms.

o Current management practice in small firms

In the first instance, the primary and secondary data indicated that although small
firms do not generally subscribe to the strategic management of human resources
as a formal discipline through the application of associated methodology and
terminology, the principal four elements of the SHRM framework form part of their
portfolio of activities and practice. Relevance for the small business sector is
extrapolated from the presence of SHRM principles and practices to be found in
reports of small company management practice as well as the case study firms.
Both these sources provide examples of recognition of the role of the workforce in
business performance and success, the consideration given to current and future
labour needs, the matching of people management practices with perceived
business and organisation requirements, and the application of supporting HRM
technology. While these activities may not be structured according to a particular
management model or packaged in a neat framework as the theory prescribes, the
purpose and outcomes remain the same. The absence of a fully comprehensive
approach to SHRM, one that has been engineered for optimal balance and
integration was found to be generally consistent with current management practice
in many larger corporations and which may in fact be the consequence of a
theoretical ideal that neither small nor large organisations will attain. Whether this
is due to the recent emergence of SHRM or failings in its utility, such an outcome
reinforces the perspective that untidy informality is the normative approach and
that adherence to a prescribed, externally formulated methodology is more
exceptional. Without the benefit of education in the area of strategic management,
there nevertheless exist small firms that find their way to applying the principles of
this area of strategic management as part of their instinctive operational approach.
However, the limited scope of the available research in this field and the modest

460
size of the case study group imply that these findings cannot automatically be
described as fully representative of the broader small business community.

Inference 11

‰ That the substantial application of the elements of SHRM to be found in

successful small firms suggests an existing useful functionality and hence
relevance

o Relevance of the theoretical principles of SHRM

The investigation into the principles of the theoretical management discipline of

Strategic Human Resource Management revealed a management approach with the
capability to support and assist corporate leaders in addressing contemporary
people management requirements. SHRM accommodates business needs through
the provision of a philosophical foundation aligned with environmental trends and
practical tools to drive business performance and outcomes. The benefits
associated with SHRM include providing support for the development and
implementation of business strategy, optimizing business performance and
opportunities through anticipation of immediate and future needs, leveraging
resources to meet business needs, creating clarity and unity of direction and
purpose, as well as eliciting commitment for company objectives (Lengnick-Hall &
Lengnick-Hall 1988; Wright, Rowland & Ferris 1990; Butler, Ferris & Napier 1991;
Walker 1994; Lundy & Cowling 1996; Schuler & Jackson 1999; Ulrich & Brockbank
2005). SHRM seeks to prioritise people as a critical business resource, to maximise
the organisation’s long and short-term use of human assets through aligning
management initiatives with business goals, and to encourage the adoption of tried
and tested management technology to support the achievement of corporate
objectives.

It is also apparent that SHRM is inadvertently playing a corrective role in large

business management practice that has often afforded low status to people as
business assets leading to the sub-optimal use of human skill and ability.
Moreover, where companies have grown so unwieldy in their internal infrastructure
as to generate significant wastage, the strategic application of alignment assists

461
with the elimination of non-value adding activity and expenditure. Proponents cite
competitive advantage, enhanced profitability, improved product quality and
customer service, higher levels of organisational performance, internal efficiencies,
improved employee morale and even business survival for enlightened adopters.
Overall, SHRM offers a conceptual and practical formula by which corporations can
address the contemporary requirement for improved models and methods of people
management. While still in its formative stages, this approach to people
management represents the leading business application available for driving
greater corporate responsiveness to commercial realities and would appear to offer
a much-needed framework for corporate use (Tyson 1995b; Gratton et al. 1999;
Schuler 1999; Bamberger & Meshoulam 2000).

Management technology is designed to assist companies with their operational

activities, thereby enhancing performance. Specifically, the strategic management
technology provides an opportunity to gain greater clarity and control over
commercial activities. In the same way that the strategic business planning models
offer a roadmap, so it is within this context that an appropriate SHRM model might
be appended or integrated to provide direction and guidance specifically relating to
the management of small business human resources. The alleged benefits
associated with SHRM, such as enhanced business performance, improved
workforce morale, greater organisational and cost control, reduction of waste and
so forth, are common concerns to small and large companies alike. In an
environment where people resources are increasingly scarce, expensive and
demanding in their maintenance and management requirements, the business
community across the board requires solutions to this universal issue. In light of
the many forms of commercial disadvantage faced by the small business operator,
there is a strong argument in favour of small firms drawing on whatever form of
assistance or methods they can identify and secure for themselves. It is concluded
that the SHRM conceptual model presents a useful and appropriate tool for smaller
firms in the same way it has relevance for larger corporations.

Inference 12

‰ That large and small organisations experience certain common organisational

and operational needs relating to the management of human resources that
SHRM can help to address

462
o Transfer of SHRM theory to small businesses

Many of the cited benefits of SHRM address the types of problems that are
associated with organisational size and the difficulties of managing complex
business entities with large numbers of employees. These challenges include
communicating effectively across large, geographically dispersed divisions,
managing human performance where managers are absent and maintaining morale
where the recognition of individual effort is lost within the collective effort.
Problems with building strong and productive teams where stakeholders have
varying political and social agendas, as well as accommodating individual needs and
preferences when these conflict with the commercial efficiencies of consistency and
standardisation are common in large firms. Moreover, large corporations operate in
labour markets whose participants are often highly aware of their value,
entitlements, bargaining power and the ability of employers to pay. SHRM offers a
means to address some of these issues by facilitating clarity of purpose, unity of
effort, a more rational and efficient use of resources, greater consistency and the
meritocratic treatment of people, as well as some degree of internal preparedness
or control in the face of a turbulent and unpredictable external environment as this
relates to people resources. While attractive benefits for the larger operation, the
question is how do they address the business needs of the smaller operation?

In general, small firms do not face many of the managerial problems found in large
companies. Smaller scale operations indicate that communication is likely to be
easier which helps in providing greater clarity about the purpose of the business.
Small firm teams may reap the benefits associated with workforce proximity and
the experience of sharing common goals. Individual value and contribution are
more noticeable. The task of managing performance can be facilitated
spontaneously without recourse to an alienating formal system. The link between
pay, individual performance and company performance is likely to more transparent
to both employer and employee. Expectations around employment conditions in
smaller firms may be more modest and many may perceive small firms as offering
unique opportunities and satisfying work experiences. Nevertheless, as is
confirmed by the case study investigation, there remains common managerial
experience in large and small companies.

463
The literature suggests that as small firms grow into more complex entities with
greater numbers of people working within them, changes to the social dynamic and
the operational infrastructure as well as the priorities of those in managerial roles,
greater strategic agility is required (Greiner 1972; Flamholtz 1986; Scott & Bruce
1987). Where reactivity may suffice in simple organisational configurations, firms
must adapt their approach and address the evolving needs of human capital from
both an organisational and a human resource management perspective. Planning
for skill requirements, building organisational and work structures, the maintenance
and support of larger numbers of people, as well as the creation of cohesive and
productive work cultures become more pressing. Often it is the capabilities and
commitment of the existent workforce that will enable growth to be considered as a
possibility in the first place and these individuals will be included in the plans for
the future. It is also through their individual and collaborative efforts that the
rewards associated with growth will be realised. Business growth and effective
people management become inextricably linked. Hence, understanding about the
management of people within organisations and the knowledge of and ability to use
the tools and techniques available for this purpose indicates the value of exploring
the SHRM environment and its possibilities. In addition, the opportunity to obtain a
sense of greater control of the management of this area of the business may offset
or help to alleviate many of concerns that small business operators express about
increasing the size of their operation, particular where these relate to increased
responsibilities and issues associated with the management of human resources.

It was evident from the case studies that the respondent owner-managers had built
their small operations into profitable and successful small, medium-sized
companies. Survival and success had both been possible without the use of the
more structured approach adopted by larger corporations. This then questions
whether such firms could have achieved even better performance or at least
reduced some of the obstacles of building a small business if a management
strategy had been more formally developed at an early stage through adoption of
large business management tools and technology. Similarly, as these firms
continue to proceed along their anticipated growth trajectories, should they be
availing themselves of more sophisticated tools with which to ease the transition to
larger enterprises. Having found evidence of activity and behaviour among the
companies studied that might be deemed strategic in nature, a question mark

464
remains nevertheless over the extent to which owner-managers optimise their
ability to be effective managers of strategy. For example, could small firms benefit
from developing a clearer or tighter alignment between managerial interventions
and business objectives? Would the use of a more structured planning tool assist
with achieving a more balanced and comprehensive integration of business
resources? Should these companies draw more extensively on the HRM technology
that is available for the management of human resources?

There would appear to be value for small firm operators in developing their
understanding of the heightened role of human capital in business performance as
well as the socio-psychological trends in the employment relationship. Greater
externalisation of the planning and alignment processes through a disciplined and
structured approach, whereby the management of the business is collectively
shared and input sought from other knowledgeable parties, would enhance the
quality of decision-making and provide a broader range of managerial options for
the smaller operator. The activity of planning facilitates the creation of order and
assists with focusing the mind when tackling complex issues. Similarly, the concept
of alignment helps to generate a consistency of purpose, guiding management
activities and behaviour towards logical decisions that are internally coherent and
supportive. The HRM tools and technology of the human resource management
discipline are extensive, well established and in many instances simple and easy to
use. They serve to direct, fashion and control human behaviour, emphasising
appropriate effort and focus in light of defined business goals and needs. Overall, a
structured and systematic approach to managing people resources is likely to
provide owner-managers with greater clarity about the most effective and efficient
way to approach the management of their people resources.

In effect, where all firms are deemed to be strategic in nature, the discussion
focuses on the quality of management practice and the possibility of obtaining
higher levels of improved business performance through more masterful handling of
the strategic principles and tools. It might be surmised that the tendency to make-
do with what is known and familiar, and meets the immediate needs of the
company may reduce the effectiveness of those companies considering significant
growth and expansion of their business, where the needs are starting to change.

465
 Inference 13

‰ That while the general principles of SHRM may manifest relevance for small
firms, the fact that organisation size is an active dynamic in the management
of human resources suggests that management models need to
accommodate the points of difference

o External drivers for adoption of SHRM

This study has shown that the commercial context in which small business currently
operates is one where significant external change prevails in areas that have a
potential to impact business performance. It follows that there is benefit in
adapting to these changes in order to remain aligned and hence competitive in the
marketplace. Successful adaptation is likely to stem from attentiveness to what the
future may hold for the business and its ability to operate, as well the capacity to
anticipate change or alternatively respond to environmental developments as they
occur. Sustainable competitiveness will be determined by many different factors
but a state of organisational readiness through the promotion internally of
innovative behaviour and maximizing the potential of limited available resources
can reinforce this position. The emergence of intellectual capital as a key business
resource suggests the value, if not criticality of identifying methods that optimise
the effective management of people. This fact of business life indicates the
appropriate and beneficial investment of organisational time and energy. Katz et
al. (2000, p. 7) capture this relevance for the small business community with the
comment that:

“At a time of unparalleled technological development, it is the human

resources that paradoxically spell success or failure for all firms, and
especially entrepreneurial ones”.

In the same way that strategic management assists large firms obtain clarity of
purpose and objectives, understand the broader competitive context and build
organisational infrastructure to support goals while positioning available resources
most optimally, so these benefits are perceived as relevant to the smaller
operation. Reference has been made to management texts designed to guide
aspiring entrepreneurs towards the successful operation of a small business that
support the notion that people resources should be managed in a so-called

466
professional or strategic way, drawing on management tools to assist with this (Fry
1993; Dollinger 1999). It is recognised that the demands of the contemporary
commercial environment indicate that small firms, like their larger counterparts,
need to address the management of this critical resource in order to meet the
changing and highly competitive demands of the knowledge economy. Hence, the
small business sector is urged to consider strategies for attracting and retaining
essential personnel. The consequences of failing to address strategic people
management issues, such as losing key resources through poor management
practice or being unable to deliver on customer needs and expectations due to skills
shortages, have already been highlighted (Heneman & Berkley 1999).

As discussed in Chapter 8, relative to larger corporations, small firms are not in a

strong position to attract and retain skilled and motivated people (Klass, McClendon
& Gainey 2000). This aspect of commercial disadvantage indicates substantial
value in exploring both methods and solutions to address the shortfall. There is
concern that the sector may be selling itself short by failing to address this
dimension of its managerial portfolio and that greater use of public and private
services dedicated to educating owner-managers should be encouraged. While
many companies may be able to survive and achieve adequate levels of business
performance with only a minimum of investment in their workforce, all
organisations regardless of their size are faced with the unrelenting growth in
technological complexity and specialisation governing both products and their
manufacture. Also of concern is determining at some point how they can respond
in order to remain a viable operator in an intensely competitive marketplace.

Inference 14

‰ That the current external environment in which small firms operate demands
increasing responsiveness in developing effective human resource
management and the technology to achieve this

467
ƒ Key extrapolations

Key extrapolations

That small and large business enterprise operates within a commercial

1 context that presents substantially common environmental elements
requiring variable levels of response and adaptation in order to be
competitive.
That small and large enterprise is impacted by the advent of the
2 knowledge economy and changes in the social structure, indicating
potential benefits to be derived from organisational and managerial
adaptation.
That Strategic Human Resource Management (SHRM) as a theoretical
3 business philosophy and managerial tool manifests the ability to assist
commercial enterprises in the strategic management of their human
resources.
That small and large enterprise encounter variable organisational and
4 workforce management factors that may influence the adoption of
SHRM and impact the level of success.
That there exists ambivalence among contemporary writers as to the
5 prevalence of strategy in the management of human resources among
small firms.
That recognition of the value of human contribution to business
6 performance exists in small firms with variation in form, scope and
intensity.
That small firm planning for people tends to be informal and ad hoc,
7 responding to the short-term business direction and needs rather than a
formal structured process concerned with longer-term goals and
strategies.
That alignment between business or organisation goals and human
8 resource management practice occurs in small firms but in the absence
of formal, articulated or documented strategy, levels of “fit” and
consistency are difficult to determine.
That small firms draw on a variable range of HRM technology to support
9 their management of human resources and address strategic issues.

That the management concepts of “strategy” and “growth” are

10 substantially complex and multi-dimensional as to obscure the full
nature of their role and functionality in relation to the research
questions.
That the substantial application of the elements of SHRM to be found in
11 successful small firms suggests an existing useful functionality and
hence relevance.
That large and small organisations experience certain common
12 organisational and operational needs relating to the management of
human resources that SHRM can help to address.
That while the general principles of SHRM may manifest relevance for
13 small firms, the fact that organisation size is an active dynamic in the
management of human resources suggests that management models
need to accommodate the points of difference.

468
 That the current external environment in which small firms operate
14 demands increasing responsiveness in developing effective human
resource management and the technology to achieve this.

ƒ Concluding comments

In an age of change and upheaval in many aspects of commercial life, there are
many indications that the small business sector will continue to play an important
role in the economies and societies of the developed countries. The extent to which
these companies maintain or grow their contribution will depend on their ability
cope with and adjust to the demands of the global economy and the way in which
goods and services are designed, produced and delivered to customers. There is
no doubt that the commercial field on which the sector will continue to play will not
be a level one but at the same time some of the issues facing small firms will be
similar to those of large corporations with whom they must also compete. It has
been shown that the advent of the knowledge economy where people are a key
performance variable presents a common challenge for both small and large
enterprises. There is general concern within the small business community and
among those who are interested in seeing this sector fulfill its potential as a source
of economic and social prosperity that there is insufficient or inappropriate support
available in order to succeed in this objective. The sheer number of small firms and
their inherent diversity present considerable obstacles for those attempting to
identify how limited resources should and can be channeled most effectively.

SHRM supports the management of corporations by providing a disciplined

approach to the management of key people resources. It drives workforce
management towards achieving business goals, the use of managerial technology
to support the implementation of strategy as well as the improvement of
operational standards and organisational practices. This business management
philosophy and tool demonstrates relevance for small firms in its ability to drive the
recognition of people as key contributors to business performance, to prompt the
inclusion of the human dimension into business planning, to clarify a united
purpose and hence an efficient rationale for managerial decision-making and
investment in people resources as well as encourage the application of appropriate
HRM technology with the potential to enhance managerial practice and facilitate

469
group and individual performance (Baron 2003). SHRM manifests a compelling
logic and for want of an alternative could be described as the obvious way to
manage a business. Hence, this thesis infers that the theoretical components of
SHRM would all seem to be relevant for the smaller, growing operation.

However, while the principles associated with SHRM would seem to demonstrate
considerable relevance, practical application is another matter. What is needed is a
management mechanism or framework that addresses the unique requirements of
the small business experience, and recognises and responds specifically to the
elements of differentiation (Ritchie 1993; Wyer & Mason 1998; Kerr & McDougall
1999). As Robinson and Pearce (1994) have indicated, small firms require practical
models that are designed and structured to accommodate the specific needs of the
smaller configuration with the contextual requirements and variables that small
firms present in mind. The availability of a basic practical framework to guide and
aid strategic thinking and action is likely to be useful for owner-managers who are
keen to expand and grow their operation in the face of greater diversity and
complexity. Speculatively, this would include a working model that is sufficiently
comprehensive to require the minimum adaptation for application and links into a
strategic model for small business management thereby highlighting the broader
connections and relationships. The model needs to respond to the heterogeneity of
small firms while being constructed in a simple and easily understandable format.
Manifesting the dynamic elements, an additional benefit would be the capacity to
assist and guide the analytical and implementation processes. Support in the form
of guidelines and pointers for application that are accessible to the layperson who
possesses limited management and specialist human resource management
training or exposure would respond more closely to the needs of the time-pressed,
insular or isolated small business owner-manager. They need appropriate balance
in their comprehensiveness while remaining sufficiently straightforward and
accessible to users.

In the specific case of human resource management in smaller firms, the process of
developing technology might do well to start with an assessment of the
environment for which this is intended, rather than the approach that has been
dominant in the past of assuming an automatic transfer of large corporation models
to the smaller operation. While various attempts have been made to fashion

470
practical frameworks for use by this sector, none have so far emerged that present
as sufficiently well designed to meet this need. Many of the HRM tools and
techniques could provide a range of benefits, yet it is not obvious where the time-
pressed, resource-strapped business owner should go to find these. There is also a
shortage of quality literature dealing with human resource management in small
firms and there appears to have been few attempts so far to amalgamate existent
knowledge and understanding about the people management needs of the smaller
company in a format that is practical, easily accessible and simple to apply or adapt
(Barber, Metcalf & Porteous 1989; DUBS 1990b; Storey 1994; Holmes, Butler &
Lennon 1995a; Huselid 2003; Cardon & Stevens 2004).

In chapter 4, the fact that the successful adoption and application of the SHRM
principles and methods is subject to numerous pre-conditions was discussed. The
nature of these constraints suggests the requirement for educational infrastructure
and sources of information capable of supporting owner-managers. Factors such as
the ability to manage change (Walker 1992, Ulrich 1998a), understanding about
the benefits and dynamics of the SHRM model (Bamberger & Meshoulam 2000;
Ulrich & Brockbank 2005), the levels and types of HRM technology required to
support strategy (Lundy & Cowling 1996; Weiss 1999) and the availability of
expertise about the theoretical and applied strategic management of people
(Bamberger & Meshoulam 2000; Bartlett & Ghoshal 2003) represent potential
stumbling blocks. The absence of a communicated business strategy with which to
build alignment and management linkage must also be addressed (Butler, Ferris &
Napier 1991, Armstrong & Long 1994; Pfeffer 1998).

In order to ensure that the essential supply of labour is captured and sustained as a
productive resource, business owner-managers need to know how to do this. As
with the management of all other organisational resources, the possession of
knowledge and information about how best to manage human resources would
seem imperative. Without understanding about the nature of this resource, the
conditions under which it operates most effectively, as well as the mechanisms that
can enhance performance and contribution to business outcomes, owner-managers
are at a distinct disadvantage. The dearth of education and information in this area
of business management and the absence of user-friendly procedures or
instructional guides and tools able to direct owner-managers is a significant

471
impediment. Studies indicate that owner-managers have an insular propensity to
avoid seeking external assistance with the management of their business, often
failing to educate themselves adequately in many areas of business management,
including people management. In the early years of firm formation, they rarely
maintain in-house professional expertise in the form of a human resource
management specialist. Moreover, it is often not until these firms become
substantially larger that the capacity to afford the services of a reputable
management consulting firm or the hiring of a professional service provider
becomes possible. Concerns have been expressed about the availability and
suitability of training opportunities for owner-managers in this sector. No
programmes of substance were found that address either the strategic
management of people or operational human resource management practice within
the small firm sector. Owner-managers are frequently without experience of the
people management technology that exists in larger companies, technology that in
many cases is simple to use and cheap to implement. It is in the areas of
education and information about effective people management, as well as through
the development of people management tools that small firms are most likely to
obtain the assistance they need.

ƒ Recommendations

This thesis concurs with existing research and demonstrates the need to
understand a great deal more about the business challenges facing small firms in
light of both developments in the broader commercial context and the variables and
dynamics that comprise their internal organisation (Tansky & Heneman 2003).
Greater clarity is required about the nature of labour management in steady state
as well as growing small firms. The differences and commonality between human
resource management practice in small and large companies should be further
investigated to determine the degree and levels of cross application and relevance.
This would serve as the basis for creating models of practice to address those
unique circumstances and types of environment found in companies belonging to
the smaller sector. All the elements of SHRM have manifested themselves as
complex managerial issues in their own right, with broad implications for all
companies regardless of their size. The changing perceptions about the value of

472
human capital, the principles and methodologies associated with business planning,
the process of alignment and the value of HRM technology all present areas that
require further examination in terms of what they mean for the smaller enterprise.
The task of designing suitable learning opportunities and imbuing smaller business
operators with an understanding of the value of these knowledge and skills as
derived through education and experience, particularly where this relates to the
management of people also demands attention. Beyond the scope of providing
detailed solutions to these expansive issues, this study has nevertheless furthered
the process by exploring some of the key areas and found that the journey to more
complete knowledge will be longer than anticipated.

473
474
Appendix A

Letter of invitation requesting company participation in the

fieldwork studies

Date

Name
Address

Dear ,

SMALL BUSINESS RESEARCH PROJECT – INVITATION TO PARTICIPATE

I am writing to invite you to participate in a research study I am undertaking as a

post-graduate student at the Curtin University Business School under the guidance
of Dr. Tim Mazzarol.

The study is investigating how small enterprises approach the management of

people during the transition from being a small to a medium-sized business. It is
hoped that the findings will provide information that can eventually be used to build
a management tool to help small growing firms in the community manage their
employees more effectively at this critical time.

As a student on the Small Business Unit Growth Program and a medium-sized

business owner-manager, you have been randomly selected as one of ten potential
participants.

Your participation would involve an interview with myself at your office, in which we
would discuss your experience in managing staff in a growing business. All
information provided would be kept confidential.

We believe that this is an excellent opportunity for growing companies to explore

the management of people in their business and to help similar firms in what is
often regarded as a difficult area of their operation.

I would very much appreciate your support in this study and will call you in several
days to determine your interest.

Yours sincerely,

Louise Johnston

475
476
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