How does HRM (human resource management) apply to small businesses and start ups?
HRM as a concept is one which is perhaps the most debated in terms of its empirical meaning or form. Keenoy (1999) likens HRM with a hologram, as HRM also changes its appearance as its image is moved around. A shift in the stance of HRM reveals “another facet, a darker depth, a different contour” (Price, 2007) In this essay, I will be examining HRM from a strategic point of view. I will firstly begin by discussing relevant theories from academic literature about HRM in general, providing a general summary of the early concepts of strategic HRM (SHRM). Following this, I will review specific literature on how HRM applies to entrepreneurship, startups and small businesses. I will also discuss literature related to special contingencies for our group project enterprise and specific literature on HRM relating to the tourism sector.
The two most influential types of SHRM models are the Harvard and Michigan models, which gained prominence in 1981. Storey (1989) calls these hard (Michigan) and soft (Harvard) models of HRM. The focus in hard HRM is on resources, emphasising the costs in terms of ‘headcounts’ and placing firm control in the hands of management. The role of management is to manage large numbers, disciplining the workforce by closely matching them with requirements via their bodies and behaviour (Price, 2007). According to Pieper (1990), the Michigan model consists of four components, selection, appraisal, rewards and development. In particular, Tichy et al (1982) regard HRM “as a contribution an implementation of strategy rather than to its design” (Pieper, 1990).
On the other hand, human aspects of HRM are emphasised in the soft models of SHRM, where people are led rather than managed and they are involved democratically in determining the outcome of objectives (Price, 2007). Pieper (1990) states that the Harvard approach is based on four key policy areas, employee influence, human resources flow, reward system and work systems. Stakeholders’ interests and situational factors shape these policy areas, for example, changes in shareholder activity and business strategy may trigger a change in the flow of human resources. HRM is therefore held as being responsible for the integrative harmonisation of the four policy areas and with corporate strategy.
Similarly, another influential model is Guest’s comparative model (Guest, 1997), which integrates HRM practices. The Guest model has seven categories instead of Harvard’s four, and they are broadly the same as Harvard’s categories. The Harvard system has human resource flow; the Guest model has manpower flow. Guest additionally adds three categories, which are policy formulation and management of change; employee appraisal, training and development; and communication systems (Cakar et al, 2003).
Huselid (2003) wrote that we know very little about the science and practice of HR in small firms, for example, how to develop a HR strategy in an organisation with limited resources and whether HR practices designed for larger firms work in smaller firms too (Mayson & Barrett, 2006). I will discuss three HRM practices in new enterprises: recruitment, compensation and training.
Cardon & Stevens (2004) explain that recruitment and staffing is the most examined topic in HR. They state that although most start-ups will not have formal HR departments, they all have implicit recruitment and HR policies (Aldrich & Von Glinow, 1991). Cardon & Stevens (2004) state that the main issue for small start-ups is limited financial and material resources (Hannan & Freeman, 1984). Firstly, new enterprises lack the resources to hire a highly trained HR professional (Arthur, 1995), which means the responsibility falls on general managers. However, due to the fact that recruiting strategies in such firms are sporadic or on an ad hoc basis (Heneman & Berkley, 1999), they refer to this process as “muddling through”. This leads to another problem, as job applicants might see such a contingent form of recruiting, which may undermine the enterprise’s legitimacy and their potential to hire good quality candidates (Williamson, 2000). This creates further problems for new enterprises who already have limited resources and are time constrained (Klass et al, 2000). Thus, Cardon & Stevens (2004) state that recruitment in small firms usually consists of convenient and inexpensive means that are directly controllable by the company e.g. direct applicants, referrals and newspaper ads (Heneman & Berkley, 1999).
There are many ways for small firms to address the challenges I have discussed above. One such approach is suggested by Williamson (2002), who states that in order to gain legitimacy, small firms have to adopt recruiting practices that are in line with industry norms e.g. imitating the standard forms of job advertisements and recruitment brochures may convey legitimacy to the applicant (Cardon & Stevens, 2004). Job fairs, especially those for graduate positions, may provide a large pool of applicants for small firms as well as helping them be aware of current trends in the industry (Buss, 1996). Cardon & Stevens (2004) also state that a firm does not necessarily have to imitate industry norms in order to acquire labour resources. They may adopt recruitment methods that are a radical departure from industry norms, this may be through having vague job descriptions, not using equity-based compensation (Alexander, 1999), being anti-bureaucratic, recruiting informally based on an empowered approach to work and limiting the size of the workforce (Cardon & Stevens, 2004).
Another approach is outsourcing through agencies (Cardon, 2003). Professional agencies can provide small firms with the skills of highly trained HR experts and HR services at a lower cost and saving more time than the firm could provide themselves. A final suggestion is for start-up firms to use the contacts from their founders to bring people in through personal and extended networks. Dubini & Aldrich (1991) describe a personal network as “consisting of all those persons with whom an entrepreneur has direct relations”. As Mayson & Barret state, such forms of informal recruitment are how the majority of the core staff are recruited in entrepreneurial firms. The founders in an organisation may use their contacts within university, family, co-workers and friends to build active intimate ties in order to bring them into the organisation.
Having discussed recruitment, I will now talk about compensation. Cardon & Stevens (2004) state that compensation is a component that significantly affects recruitment and retention of start-ups because if they cannot be competitive in their wages or salaries then they will struggle to recruit or retain critical skills needed for growth or survival. As Graham et al (2002) mentions, compensation can signal desired entrepreneurial activities and signal legitimacy to external stakeholders. I will discuss three components of compensation: pay mix, pay structure and pay raises. The pay mix refers to the proportion of salary (Cardon & Stevens, 2004). The pay mix in start-ups is likely to contain performance-related incentives and stock-related awards as opposed to non-entrepreneurial firms because entrepreneurial firms are less programmable, the jobs are more fluid, there are fewer resources to monitor performance and employees have a short tenure (Graham et al, 2002).
The pay mix can be short-term or long-term. Short-term pay in entrepreneurial firms includes profit sharing and stock sharing. These can be motivational in small start-ups rather than larger organisations because workers can directly influence organisational outcomes (Heneman & Tansky, 2002) if they meet specific targets. This also has an indirect positive effect on teamwork as profit sharing is offered to all employees (Balkin & Logan, 1988), so in effect encouraging individuals to be more team orientated at work. Long-term incentives may include equity ownership, such as stock ownership or long-term investment plans. This is supposed to solve problems of agency where the worker has a vested financial interest and is less likely to behave opportunistically and more towards making the venture profitable (Cardon & Stevens, 2004).
Pay structure refers to the hierarchy of pay rates in the organisation (Cardon & Stevens, 2004). As small firms usually have a flat organisational structure with fewer layers of line managers, employees are usually treated in an egalitarian way (Graham et al, 2002). Compensation does not indicate a person’s position in a hierarchy or their status in entrepreneurial firms. Pay raises also differ as automatic raises with a rise in the corporate ladder are not affordable to small firms (Balkin & Logan, 1988). Entrepreneurial firms instead tend to use lump sum salary increases e.g. bonuses for those who meet certain individual performance criteria (Cardon & Stevens, 2004).
Mayson & Barrett (2006) state that training is another important HRM issue for many small firms. However, due to the nature of entrepreneurial firms, they are less likely to be provided. There are two reasons for this, firstly it is due to ignorance of the benefits of training and secondly because the cost may be too high for start-ups (Storey & Westhead, 1987). Fitting in with the concept of ‘muddling through’, informal on-the-job training may be more likely to occur than formal training (Kotey & Sheridan, 2001). This, however, shows that training still occurs in small entrepreneurial firms, as was shown by Bacon & Hoque (2005). They stated that small firms spend £5.8 billion on training each year. Informal training, however, is not as a disadvantage, as many small firms pride themselves on providing workers with hands-on highly interactive learning opportunities (Rollag, 2002). Training in a typical formalised system with large bureaucratic environment may actually hinder employee satisfaction and growth. Furthermore, Cardon & Stevens (2004) quoting the Bureau of Labour Statistics show than 70% of workplace learning is not formal and does not depend on the size of the organisation (Bishop, 2003).
However, research also suggests that training consistently (meaning a formal system of training) can have a positive impact on a worker’s productivity (Guzzo et al, 1985) but due to a lack of resources, small organisations may not be able to carry out such formal practices. As Cardon & Stevens (2004) suggest, small organisations can use trade unions, short college seminars and in-house training rather than a formal system. Banks et al (1987) suggests that most small firms offer some form of educational assistance programme (at least 87% of small businesses), which shows how important training is for entrepreneurial firms.
In applying HR practices in start-ups to the tourism industry, there is a general reflection of the literature above. They suffer from legitimacy problems as most of the tourism sector consists of small and medium-sized enterprises and therefore the HR practices are not “standardized, lack a professional approach, vision, clear career path, secured & long-term employment, growth opportunities, learning and development” (Srivastava, 2008). Applying the literature above to AdVENTURE and tourism in the Balkans, we are likely to be “muddling through” in regards to our recruitment as it is to be based on sourcing personnel through personal and extended networks by using our contacts within the Balkans. This will allow us to recruit people who already have some form of connection to the industry. By using personal networks, we can find the exact skills we are looking for without necessarily spending a large amount on formal HR methods of recruitment. Our compensation, as stated by the literature, is also likely to contain a large mix of performance related incentives and profit-sharing, with modest salaries offered to those we cannot incentivise through bonuses.
To conclude, HR strategies are essential to start-ups in order to survive and grow. However, many of the activities undertaken by start-ups are more informal or on an ad-hoc basis in comparison to their larger counterparts. This works for start-ups as formal practices of recruitment, selection, training, development and performance management are not feasible for entrepreneurial firms who are bound by limited resources and experience. Finally, when considering HR practices in entrepreneurial firms, it is especially important to remember that they must not be isolated but rather fit in with the company’s overall strategy, and therefore it should be congruent with the marketing, product/service and the financial situation of the company.
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