Strategic Human Resource Management in Small & Medium Enterprises’s
Small and medium-sized enterprises (SMEs) are very important to all economies and the majority of businesses in the UK fall into this category. According to the Department for Business Innovation & Skills (BIS; formerly known as the Department for Business, Enterprise & Regulatory Reform, BERR), SMEs accounted for more than half of the employment (59.4%) and turnover (50.1%) in the UK in 2008 (BIS, 2009). Varying definitions of SMEs are used in practice but the European Commission (2003) offers a more exacting definition as outlined below.
- Micro: < 10 employees; turnover ≤ €2 million; balance sheet ≤ €2 million.
- Small: < 50 employees; turnover ≤ €10 million; balance sheet ≤ €10 million.
- Medium: < 250 employees; turnover ≤ €50 million; balance sheet ≤ €43 million.
In the UK, the government collects data on SMEs in two categories: small firms (less then 50 employees) and medium firms (50-249 employees). Statistics for 2007 published by the BIS Small Business Service (SBS) Statistics Unit show that out of 4.8 million private sector businesses in the UK, 99.9% fell into these two categories.
Research on economic activity has focused large on publicly traded firms, but most UK firms are SMEs and, therefore, understanding the factors that have an impact on these firms is crucial to the health of the economy. Of the many management issues that firms have to tackle, Human Resource Management (HRM) is a central concern within all firms, including SMEs. However, there is evidence, as is presented in the first section of this paper, showing that research on Strategic HRM (SHRM) has been mainly focused on large organisations, as in so many other areas of management.
The central argument in this paper is that the lack of research on HRM and SHRM in SMEs is problematic for both an academic and practical perspective because the little that is known about how HRM practices and strategies are undertaken in SMEs and large firms indicates that HRM and SHRM should be applied and theorised differently according to the organisation’s size. The second substantive section of this paper presents evidence from the theoretical and empirical literature that shows that while SMEs tend to treat HRM and SHRM more informally than large firms, some SMEs are still very sophisticated in how they deal with their human resources. The final section evaluates the evidence and presents arguments to support the argument that HRM practices and strategies should be applied and theorised differently for SMEs.
Does the SHRM Literature Focus Mainly on Large Organisations?
Armstrong (2006: 3) defines HRM as ‘a strategic and coherent approach to the management of an organisation’s most valued assets: the people working there who individually and collectively contribute to the achievement of its objectives.’ According to Purcell (2001: 64), ‘[t]he underlying assumption of strategic human resource management is managing people in such a way as to help the firm gain a competitive advantage over its competitors.’ Huselid et al. (1997:171) agree, claiming that SHRM…involves designing and implementing a set of internally consistent policies and practices that ensure a firm’s human capital (employees’ collective knowledge, skills, and abilities) contributes to the achievement of its business objectives.
So while HRM relates to the practices employed, a strategy is a general framework that provides a perspective for selecting specific policies and procedures.
Just a brief glimpse at the HRM literature in general, and the SHRM literature specifically, allows one to conclude that the majority of the literature focuses on large firms. In introducing the Special Issue on SMEs in the Human Resource Management journal, Huselid (2003) argues that the contribution of HRM to the increasing interest in SMEs has been limited. He argued:
…we actually know very little about the science and practice of HR in [SMEs]. For example, how do we develop and implement an HR strategy in a smaller organisation where resources are quite limited? Do the HR policies and practices designed for larger firms work in smaller firms too? How can we retain and develop talent in such an environment? (p. 297).
Other researchers have asked similar questions and lamented the lack of attention given to SMEs within the HRM literature. For example, Cassell et al. (2002) note that HRM theorists continue to pay most attention to large firms although their economic significance has declined over recent decades and Nolan (2002: 88) argue:
The tendency of management theory to emphasise large firms gives a distorted picture of the industrial landscape, masking the fundamental importance of small enterprises as a source of employment and as contributors to a dynamic economy.
Evidence of the predominant emphasis on large firms is provided by Williamson (2001), who reviewed three important academic journals published in America (Personnel Psychology, Journal of Applied Psychology, and Academy of Management Review) over the decade between 1988 and 1998 and reported that only seven articles out of a total 207 articles published that focused on recruitment, selection, HR, and hiring issues were specifically about SMEs or included SMEs in their sample. This means that two hundred studies were published on HRM practices in large firms in just these three journals in the decade. This would suggest that much less is known about SMEs and HRM or the degree to which the theories of SHRM extend to SMEs. Evidence of this gap was provided by Heneman et al. (2000), who reported that there were gaps between what HRM researchers emphasised and the HRM issues that concerned small business owners. They therefore concluded that academic research was not aligned with practitioner concerns regarding HR practices.
More recently, Cardon and Stevens (2004) noted that researchers had some understanding of issues such as recruitment, compensation, and motivation in SMEs but still lacked both theory and empirical evidence in a lot of other areas, such as training, performance management, promotion, organisational change management, and labour relations. This brief discussion allows one to conclude that HRM as a field of study is mainly focused on large firms. Evidence also shows that this neglect of SMEs is even more acute in studies on SHRM in particular because where there has been attention to HR issues in SMEs, ‘empirical concern has been with the content rather than the process of small firms’ HRM systems’ (Mayson and Barrett, 2006: 447). This means that researchers tend to examine the actual practices rather than looking at HR strategies.
Why is this the case? Hendry et al. (1995) argue that there are two main reasons that management researchers fail to focus on SMEs. The first reason is that many researchers think that SMEs are not as important as large firms and the second reason is that many researchers hold up large firms as ‘best practice’ from which SMEs should learn. Another detrimental inference is that SMEs are simply microcosms of larger organisations (Cassell et al., 2002). Are these inferences valid? Are SMEs simply microcosms of larger organisations? The next section attempts to tackle these questions by presenting some evidence on HR practice and strategy in SMEs.
Empirical Evidence on HRM in SMEs
This section is, of necessity, brief and tackles two main questions: What HR practices are used by SMEs? And, to what degree do SMEs adopt a strategic approach on HRM? In terms of HR practices, Schuler and MacMillan (1984) argue that there are four key HRM practices and these are examined here: employee resourcing, appraisal and compensation, employee training and development, and employee relations, including the union-management relationship. In terms of employee resourcing, this repeatedly comes up as a very important issue for SMEs as it has been argued that SMEs tend to have few employees and so every single employee has an important role to play in the survival and development of the business (Brand and Bax, 2002). However, for several reasons, recruiting new employees is one of the most challenging issues SMEs face (Kickul, 2001, Williamson, 2000). In line with this, Heneman et al. (2000) and Bacon and Hoque (2005) report that time and again SMEs’ ability to successfully recruit employees is rated by owners as one of the key factors influencing organisational success.
The ways SMEs use to recruit may contribute to this. Many firms tend to depend on social networks to fill vacancies, especially at start-up, but as SMEs grow they use up the supply of suitable family and friends, compelling firms to recruit outside of these networks to fill vacancies (Williamson, 2000), which may be expensive (the process) and require firms to make themselves more attractive (such as through increased compensation). Another important issue here is the fact that turnover tends to be a big problem in SMEs and that it is often the better trained and highly skilled employees who tend to leave the firm (Brand and Bax, 2002). This may be related to compensation in these organisations as jobs in SMEs generally provide lower employee benefits, although workers tend to be compensated by a better working atmosphere (Brand and Bax, 2002). Several of these features can be seen in the hospitality and tourism industries in which there is a predominance of SMEs. In this industry remuneration is traditionally low, which often leads to high turnover and a limited labour catchment area, which, in turn, undermines the ability to attract and retain quality workers (Hjalager and Andersen, 2001).
In terms of training and development, Nolan (2002) notes that small hotels tend to have informal, job-specific training focused on solving immediate problems instead of long-term development of its human resources. This is in line with Cassell et al.’s (2002) conclusion that HR in small businesses tends to be reactive and focused on whatever issue is pressing at the time. With regard to career development, Brand and Bax (2002) note that SMEs tend to offer less opportunity for career development and de Kock and Uhlaner (2001) found that smaller firms were less likely to have employer-based training programmes and less regular performance appraisal.
In relation to labour/employee relations, SMEs tend to have informal working relationships (Kickul, 2001), and tend to be resistant to legal and employment regulations (Bacon and Hoque, 2005). This is in line with Cully et al. (1998) who reported that small sites which are part of larger organisations tended to have more formal employment relations procedures than stand-alone SMEs. They also reported that SMEs generally did not have internal HR expertise or the more advanced forms of HR systems such as family-friendly working practices or performance-based pay systems.
Finally, to what extent do SMEs adopt a strategic approach on HRM? While it often seems that SMEs do not adopt HR strategies, it has been reported that SME managers tended to be aware of and adopt new management ideas to a large degree (Bacon et al., 1996). In reviewing the results of a survey undertaken in the UK, Storey (1995: 20) noted that new HR practices were undertaken in large firms more than in SMEs, because ‘the larger organisations had more expertise at their disposal, and the relevance of some of the initiatives (such a delayering or harmonisation of conditions) was clearly tied to size.’ However, it is important to note that he also found that SMEs were more successful in sustaining certain initiatives than large firms. Based on this, Storey (1995) concluded that that SMEs seem prepared to try new practices and indeed their success rate appears to be above average. However, other researchers have argued that SMEs may lack the capability to develop HRM practices (Bacon and Hoque, 2005).
Overall, it seems that SMEs tend to use informal HR systems, but these systems may still be sophisticated (Mayson and Barrett, 2006, Kickul, 2001, Bacon et al., 1996). Indeed, it has been argued that informality provides SMEs with an advantage, as research has shown that informality works well and gives good productivity results in firms with less than twenty employees (Mayson and Barrett, 2006). This indicates that the emphasis of HR practices should be on ‘best fit,’ meaning that informality should be used by small firms if this particularly suits their context. Still, Zheng et al. (2006) recently explored the impact of four high performance/high commitment HRM practices (performance-based pay, participatory decision-making, free market selection, and performance evaluation) on performance in 74 Chinese SMEs. Their results support the notion prevalent in the HR literature that the adoption of high performance/high commitment HRM practices generates better HRM outcomes, which then contribute positively to the firm’s performance (Pfeffer, 1998, Wood and de Menezes, 1998).
This important finding may indicate to some that the same strategies that work for large firms could work for small firms, but Zheng et al. (2006) found that not all HRM practices and the way they impacted the business led to improved SME performance. What they found in studying these Chinese SMEs was that high levels of employee commitment was the most important HRM outcome for enhancing performance. This means that SMEs can practice ‘commitment maximising’ HR (Arthur, 1992) without necessarily adopting the high performance model expounded in the literature. For example, as noted above, SMEs tend to provide workers with a better working atmosphere than do large firms and this can be an element used to maximise organisational commitment (Brand and Bax, 2002).
It is also important to note that ‘[i]t is not possible for HRM to be both one set of practices and strategic’ (Purcell, 2001: 60, emphasis added). This is because every firm cannot adopt the best practice model and simultaneously differentiate itself from its competitors, in the same way that there is no one best marketing strategy for every firm. Indeed, if marketing and operations, technology and information systems vary among firms, how can one best HRM strategy mesh with different strategies? Thus, Purcell (2001) concludes that the way management seeks to manage HR is a matter of choice, not something determined by markets and technology, but that the choices are constrained; they are not limitless. So, rather than formalise processes to meet ‘best practices,’ decisions about HR policies should not stem from a set of a priori notions about good professional personnel practice (Zheng et al., 2006), but ‘should take their cue from an explicit alignment of the competitive environment, business strategy, and HRM strategy’ (Storey, 2001: 6-7). Does that mean that HRM practices should be applied/theorised according to organisational size? This is tackled in the final section.
Discussion and Conclusion
SMEs are very important to all economies, and the majority of businesses in the UK fall into this categorisation. However, research in management is biased in that it focuses on large firms (Cassell et al., 2002, Williamson, 2001, Heneman et al., 2000, Hendry et al., 1995), and studies on SHRM in particular are no different (Mayson and Barrett, 2006, Cardon and Stevens, 2004). This paper argues that this is problematic and that more research is needed on HRM and SHRM in small firms because HRM practices and strategies should be applied/theorised according to organisational size. The little that is known about how HRM practices and strategies are undertaken in SMEs and large firm indicates that firm size does affect how HR is undertaken. From a theoretical perspective, it has been argued that large firms and SMEs cannot be assumed to operate in the same way (Cassell et al., 2002). For example, Welsh and White (1981: 18) state:
We would argue… that the very size of a small business creates a special condition – which can be referred to as resource poverty – that distinguishes them from their larger counterparts and requires some very different management approaches. Resource poverty results because of various conditions unique to smaller companies (emphasis in original).
This is in line with Williamson’s (2000) research in which he uses institutional theory to develop a model of SME recruitment strategies, arguing that institut