Human Resources Management In Small and Medium Enterprises Essay

Introduction Competitive advantage to a firm accrues from the judicious employment of three basic types of resources, namely Physical Capital Resources, such as Finances, Plant and Equipment Organizational Capital Resources – Structure and systems in the organization Human Capital Resources, which include the skills, competencies, experience and intelligence of employees.[1] Human resources are among the most important resources that an organisation utilises and hence its importance to any organisation can be easily understood. Small-to-Medium Enterprises (SMEs) are no exception to this rule, although this aspect is frequently lost sight of. This paper examines the role and importance of Human Resources in SMEs, and compares SMEs from two different cultural backgrounds – Taiwan and the UK. Role of Human Resources in SMEs â€Å"The study of human resources management in SMEs needs to be strongly encouraged. CEO/founders in SMEs view human resource management decisions as very important to the growth of their enterprises†[2]   A study into the perception of important HR issues in small organizations showed that â€Å"top six issues were wage rates, availability of quality workers, government regulation, training, benefits, and job security†[3] The role of Human Resources in SMEs is to contribute meaningfully to organisational objectives in a flexible and demanding environment. Lack of strategic employee management is widely accepted as characteristic of small enterprises. Decision-making has been perceived to be of relatively short-term nature compared to larger organisations, making small enterprises more flexible and less conflict-prone. At the same time, this also means that the advantages of long-term planning such as greater efficiency and effectiveness are lost. On the human resources front, this means that such organisations tend to have reduced capability to attract, retain and motivate the best human resources. This becomes important in view of the fact that out of thousands of small businesses that are established every year, only a few manage to survive in the long-term. While long-term planning and HR strategy are not the only reasons for this, they are among the important reasons. Hence an examination of the HR function as a strategic part of business, and its relevance to long-term planning, is in order. In addition, the role of recruitment and selection, training, and performance management, are also relevant to any discussion on the role of human resources. Planning and Human Resources Management Strategic planning for the organisation needs to be linked to individual goals. In turn, this means that the job design should take into account the long-term objectives of the organisation. â€Å"A framework for strategic management incorporating HRM involves developing a mission statement that answers questions of what businesses the organisation is in; determining goals that are general and long term; and establishing objectives that are short term and measurable. It should also encompass a complete SWOT analysis that incorporates HRM as a functional unit of analysis.†[4] One of the essential requirements of Human Resources Planning is proper job design. Human resources planning involves the matching of the knowledge and skills that are likely to be required in future with those that it has or will have. Human Resources Planning will help the organisation to estimate critical resource requirements, plan training and development needs, and link individual goals to organizational objectives. Job design involves specifying the characteristics of the job and the requirements such as skills for performing these jobs. Job design will thus provide the framework for a host of HR planning activities that can be linked to organizational objectives.[5] Recruitment and Selection Once the plans of the organization are clear the next important issue that any organisation needs to address is to get the right staff to implement the plans. â€Å"Surveys indicate that about 25 per cent of small businesses view the lack of qualified workers as a threat to their expansion and very survival.†[6] The problem assumes particular importance in the case of small enterprises because they almost always have a problem in attracting and retaining the best talent. This is partly due to the fact that they are unable to compete with larger firms for quality staff, because it is impossible for them to match the rewards and prestige that come along with positions in larger firms. Additionally, smaller firms have a reputation for being oriented towards a ‘hire and fire’ culture. Training Once the plans are clear, and the recruitment of the right people has been completed, it becomes necessary to motivate the staff, as well as to enable them to perform their tasks efficiently. This requires periodic training of the employees. Training is important in the case of small enterprises because they are more prone to changing environments and higher attrition rates. This makes it necessary for people to be more flexible, and to be trained in all aspects of the business. While the need for training of staff is thus greater in the case of a small enterprise, it is also accompanied by greater constraints that make it more difficult for these organisations to implement training programmes. Small organisations face two constraints in t his respect: Their budget for training may be more limited, and they may lack the necessary resources to carry out such training It is more difficult for small enterprises to spare their people for training programmes. In spite of the above limitations, however, small enterprises need to concentrate more on training, as it is an investment that needs to be done. â€Å"It has been suggested that top performing companies are distinguished by their higher spending on training and development.†[7] Performance Management Performance Management â€Å"includes work and job design, reward structures, the selection of people for work, the training of these employees, assessment of work performance and policies associated with rewarding and improving performance.†[8] Performance Appraisals are an important part of Performance Management and are useful in improving performance, assist HR planning, and identify development needs and potential for promotion. Small businesses, in general, lack a formal performance appraisal system. The disadvantages of not using structured and formal appraisal systems are that appraisals, and the consequent rewards, are often subjective, and may promote greater dissatisfaction. Consequently, appraisal systems and Performance Management play an important role in determining the alignment of HR planning with organisational goals, and ensuring that a proper climate is available for the achievement of the objectives. â€Å"In developing formal performance appraisal systems, small businesses not only are able to ensure that performance management may become strategically aligned with organisational goals, but also increase accountability, decrease under-utilisation of human resources, address concerns of productivity, and decrease employees’ concerns about fairness and accuracy.†[9] In addition, the salaries and rewards that are offered as part of the employment and the management of diversity within the workforce are important considerations for any organisation. These have a greater significance in the case of small organisations. As can be seen from the above, the role of Human Resources management in small organisations is an important one that needs to be well understood and implemented with care. One interesting extension to the role of HR management in small to medium industries is the use of Balanced Score Cards, which are normally viewed as the exclusive tool of large industries. The Balanced Score Cards approach shifts the focus to long-term growth, and includes measures of operational efficiency, customer satisfaction and employee related measures. The Balanced Score Card method thus includes a part of HR Management to assess the overall performance of the organisation. In a case study that included three SME organisations, Gumbus and Lussier present some interesting conclusions that have significance for the HR function in SME companies. The cases also serve to highlight the importance of HR in SME companies and the link between performance and HR. One of the three companies cited in the case is Futura Industries, an international company based in Clearfield, UT with 230 employees. It has over 50 years of experience in aluminium extrusion, finishing, fabrication, machining and design. The company believes that the two competitive weapons that put them ahead of competition are â€Å"their ability to hire and retain the best people and their devotion to the customer.† Futura’s President, Susan Johnson’s belief that committed and loyal employees make the difference has led the company into using the Balanced Score Card method. In the words of Ms. Johnson, the company â€Å"had all the financial metrics, lots of customer measures, and got ISO accredited three years ago †¦ but it is our employees that differentiate us from all other extrusion companies.†[10] A Comparison of SMEs in the UK and Taiwan A study by Lin found that successful SMEs in Taiwan place greater emphasis on soft skills and attitudes rather than on hard skills. He infers that SMEs in Taiwan seemed to have a better grasp of its human resources.   â€Å"Whenever SMEs modernize equipment, alter production processes, revise compensation policies, and engage in other reorganisation activities, they take pains to handle employees’ responses and feelings with special care and invest heavily in skills development.â€Å"[11] According to Hu, the Human resource scenario in Taiwan is characterised by abundance of entrepreneurs and availability of high quality professionals. Hu traces this to the importance laid on education by Chinese, and the large-scale injection of high quality human resource into the island in the aftermath of the retreat into, and subsequent withdrawal from, Taiwan of the KMT government. In addition, the Taiwanese population has inherited from its ancestors the qualities of â€Å"hard working, brotherhood, strong family ties, competition, and similar attributes that form the basis for strong family businesses.†[12] According to McKenna & Beech, the following values characterise the Asian HR scene[13]: Politeness and courtesy Emphasis on personal relationship Not losing face Harmony- avoidance of open conflict Predominance of group interests over individual interests Discipline and respect for authority and for elders Normative, rather than externally imposed control Trust and mutual help in business relationships Centralisation and authoritarianism As against the above, the HR scenario in Europe is characterised by the following features[14]: Pluralism as against unitarism Collectivism and social orientation instead of individualism, with the emphasis being on national, rather than individual, interests Legal framework: firing is more difficult Social Partnership: Employment security, protection of workers’ rights, and representation of workforce through trade unions. Social Responsibility: Concern for environment and other social obligations Tolerance for diversity Recognition of complexity and ambiguity. The characteristics enumerated under Asian values represent the Taiwanese scene, and the scenario in Europe is representative of the UK. From the above, it can be seen that the SMEs in Taiwan are formed with reliance on individual assistance, based on respect for authority, with trust and mutual relationships as the supporting factor. In the UK, and other European countries, it is the legal framework that gives the necessary assurance and support to the business rather than trust. In Taiwan authority is enforced, and followed, because it is natural to the culture. In the UK, the legal aspects are augmented by collective bargaining with a recognized trade union to achieve this purpose. Taiwanese take great care to handle employees’ feelings appropriately whenever major decisions need to be taken. This is replaced by collective bargaining and more formal communication in the UK. SMEs predominate in Taiwan, whereas larger firms represent the more prevalent form of business in the UK. SMEs constituted 99.43 percent of Taiwan’s total manufacturing firms in 1954, the highest level ever recorded; 95.26 percent in 1976, the lowest; and 98.07 percent in 1996. Among them, the smallest firms, employing fewer than 10 persons, accounted for 90 percent of all firms in the manufacturing sector in the 1950s.[15] On the other hand, SMEs generate roughly one quarter of the GDP of the UK. The generation of employment by SMEs varies from sector to sector, the highest being in the construction sector with 84% of the employment being generated by this sector. The SME sector, which was declining up to 1970, picked up momentum thereafter, and showed a rising trend till 1994. Since 1994, the number has remained constant.[16] As can be seen from these figures, the SME sector is less dominant in the UK than in Taiwan. Why Human Resources are important in firms â€Å"The resource-based view of organisations explains variations in firm performance by variations in firms’ human resources and capabilities†[17] Firms can gain competitive advantage by generating specific knowledge and skills that are difficult to imitate. This can be achieved through human capital development. The importance of Human Resource Development in small firms is thus self-evident – they help the firms to succeed by being competitive. In a study of more than 100 small enterprises in two towns from Germany, Rauch et al found that â€Å"human resources are essentially important and an optimal utilization of skills and knowledge increases small business growth.† [18] In order to harness this important resource and ensure it gives the best returns, an organisation needs to select its employees with care. â€Å"It is expected that as firms grow, the skills and abilities required to perform various functions and activities no longer would be available from the familiar and informal recruitment sources preferred by the owner-manager†[19] Apart from recruitment, other functions such as Training and Development, Performance Appraisal, and formal procedures and documentation help the organisation in improving efficiency. According to Kotey and Slade, â€Å"Benefits of formal HRM practices include meeting legal requirements, maintaining records in support of decisions in the event of litigation, treating employees fairly, and increasing efficiency.† [20] A study by Kotey and Slade involving more than 1300 small firms in Australia showed that as firms grow they tend to introduce formal HR practices and procedures. In the words of the authors, â€Å"While the analyses show that a significant percentage of SMEs implement formal HRM practices with growth, HRM remains informal in the majority of firms, particularly in small firms. It could be that implementation of formal HR structures and procedures necessary to support growth differentiates successful from unsuccessful SMEs.†[21] In a small organisation, people need to be more flexible and undertake a greater variety of jobs. This needs both motivation and skills. In turn, many employees may get better exposure and greater opportunities to learn and shoulder higher responsibilities in a small firm. All of these underline the importance of Human Resources Management in organisations, particularly small firms. The HRM model is â€Å"composed of policies that promote mutual goals, influence, respect, rewards and responsibility between employees in the organisation.†[22] These policies are promoted by practices such as team working, aligning performance objectives with organisational goals, and a flat organisation structure, all of which can be achieved only through a proper Human Resources Management in the organisation. Survey Research findings have confirmed the theoretical position with the conclusion that good HR systems is a source of competitive advantage. One study has shown that higher performance in a number of areas is correlated to good HR systems and practices. Companies that had significantly higher ratings on their HR practices also reported better market value, higher accounting profits, higher growth rates, better sales per employee, and lower employee turnover. Another study has found that newly started companies had a better survival rate if they had good HR practices. The probability of survival was found to vary by as much as 42% between the firms with the best HR practices and rewards, and those with the worst. Yet another study found that performance of the organisation was strongly linked with practices such as acquisition and development of skilled people, better job design, better autonomy, and positive employee attitude. All these studies clearly show that good HR could positively impact organisational performance practices, highlighting the importance of Human Resources in an organisation. Apart from improving performance good HR practices result in lower costs, while poor practices increase the costs to the organization. One of the contributing factors for this is the cost of employee turnover. â€Å"Interviewing and training recruits has significant out-of-pocket costs for the employer.† Replacing an employee involves expenses for Separation, Replacement, and Training. [23] Employee turnover costs can be divided into three major elements: Separation costs: These are the costs that are directly incurred when an employee leaves the firm, and include such costs as exit interviews, administrative and paperwork costs, disbursement of separation benefits, and revenues lost due to shortage of staff. Replacement Costs: These represent the cost of replacing the employee who has left and include the costs of advertising, sourcing, interviewing and selection. Training Costs: These are the costs that the company incurs for training and induction of a new employee. Apart from the actual expenditure on these activities, the costs of loss of efficiency in the initial stages, and the time lost during the training period should also be considered. Thus employee turnover could represent a fairly high cost to the organisation. Employee turnover can be classified into avoidable and unavoidable turnover. Most of the avoidable turnover results from lack of proper HR initiatives.[24] How Good/Bad employees affect the firm â€Å"A good employee is possibly the most valuable asset a small firm or SME can possess; a bad one could ruin the enterprise.†[25] Any firm, and more importantly a small firm, can ill afford to have people who do not perform. Robert Townsend, a noted Management expert was once asked the secret behind his ability to take over loss making firms, and changing them into profitable ones. The reply that he gave will be of interest to anyone asking how good or bad employees make or mar the firm. Mr. Townsend identified three factors that contributed to his success: Releasing the potential of employees so that they could perform at much higher levels by the practice of appropriate management styles Identifying people within the organisation who were blocking progress and preventing others from performing, and either changing their ways, or dismissing them Identifying people who had the ability and drive to take the company to greater heights, and promoting them. It can be seen that this highly successful Management practitioner reduced success to three simple rules, namely, eliminating deadwood, promoting and encouraging those with potential and creating the right climate in the company. This clearly shows that apart from creating the right environment, the most important requirement for success is the quality of people. Good people could transform a loss making company into a profitable one.[26] â€Å"Whether a firm is small or large, it’s only as good as its staff.†[27] This can be easily understood because the employees of the organisation make the vital difference between good and poor performance in every area. Apart from the demonstrated effect that this has on the firm’s performance, which has been cited earlier, this also stands to reason. A company depends on coordinated working by its employees towards a common goal to achieve its objectives. In order to meet these objectives, the organisation has to do what it does well. In other words, the competence of its employees should be good if it wants to achieve results. Secondly, the soft skills of the employees are important to achieve internal teamwork as well as to nurture customers with excellent performance and service. Thirdly, the employees of the company need to work efficiently if it is to have a healthy bottom line. All these objectives can be achieved only with good employees who know their job and possess the necessary hard skills, have the necessary soft skills, and are committed to the company’s success. In other words, a company needs good employees who have the right levels of knowledge, skills and attitudes. Conclusion Human Resources Management in Small-to-medium industries has been gaining a lot of attention lately. There is increased awareness among many of the SME entrepreneurs themselves about the importance of good HR practices and policies. It has been shown that organisations having formal Human Resources practices grow faster, and are more profitable, than those that do not do so. A comparison between SMEs in two countries, namely Taiwan and the UK, shows that the SME sector is more predominant in Taiwan, which is characterized by a culture that lays greater emphasis on group working, respect for authority, and mutual trust. This is contrasted by the UK situation where the SME sector is les pervasive, and the HR climate is characterised by formal and legal supports, collectivism, and social responsibility. Although the two situations are quite different from each other, the importance of formal HR systems in the SME segment is being recognised in both cases, and seem to affect performance positively, irrespective of the background. Works Cited A Causal Analysis. Entrepreneurship: Theory and Practice, 29(6): 2005: 681+. Bennett, Roger. Small Business Survival: Strategies for Delivering Growth and Staying Profitable: Second Edition. London, Financial Times Management, 1998. Burns, Paul. Entrepreneurship and Small Business. New York, Palgrave, 2001. Griffith, Roger W and Hom, Peter W. Retaining Valued Employees. London, Sage Publications, 2001. Gumbus, Andra, and Robert N. Lussier. Entrepreneurs Use a Balanced Scorecard to Translate Strategy into Performance Measures. Journal of Small Business Management 44(3): 2006: 407+. Heneman, Robert L., Judith W. Tansky, and S. Michael Camp. Human Resource Management Practices in Small and Medium-Sized Enterprises: Unanswered Questions and Future Research Perspectives. Entrepreneurship: Theory and Practice, 25 (1): 2000: 11. Holbeche, Linda. Aligning Human Resources and Business Strategy. Oxford, Butterworth-Heinemann, 2001. HRD in Small Organizations, Edited by Graham Beaver & Jim Stewart. New York, Routledge, 2004. Hu, Ming-Wen. Many Small Antelopes Make a Dragon. Futures 35(4): 2003: 379+. Kotey, Bernice, and Peter Slade. Formal Human Resource Management Practices in Small Growing Firms. Journal of Small Business Management, 43 (1): 2005: 16+. Lin, Carol Yeh-Yun. Success Factors of Small- and Medium-Sized Enterprises in Taiwan: An Analysis of Cases. Journal of Small Business Management, 36(4): (1998): 43. McKenna, Eugene and Beech, Nic. Human Resource Management, A Concise Analysis. Essex, Pearson Education Limited, 2002 Megginson, David, Banfield, Paul, and Joy-Mathews, Jennifer. Human Resource Development. Kogan Page India Pvt. Ltd., New Delhi, 2001. Rauch, A., Frese, M., & Utsch, A. Effects of Human Capital and Long-Term Human Resources Development and Utilization on Employment Growth of Small-Scale Businesses: Satava, David. The A to Z of Keeping Staff: Few Firm Employees Leave without a Good Reason-Here’s How Not to Give Them One. Journal of Accountancy 195 (4): 2003: 67+. [1] L. Holbeche, Aligning Human Resources and Business Strategy, Oxford, Butterworth-Heinemann, 2001, pp.10-11. [2] R.L. Heneman, T.W. Judith and S. M. Camp. Human Resource Management Practices in Small and Medium-Sized Enterprises: Unanswered Questions and Future Research Perspectives. Entrepreneurship: Theory and Practice 25(1): (2000): p. 11 [3] HRD in Small Organizations, Edited by Graham Beaver & Jim Stewart, New York, Routledge, 2004, p. 81. [4] Ibid, p81 [5] Ibid [6] ibid, p82 [7] ibid, p 85 [8] ibid, p 89 [9] ibid, p 89 [10] A. Gumbus and R. N. Lussier. Entrepreneurs Use a Balanced Scorecard to Translate Strategy into Performance Measures, Journal of Small Business Management, 44(3): 2006: p.407. [11]C.Y. Lin. Success Factors of Small- and Medium-Sized Enterprises in Taiwan: An Analysis of Cases. Journal of Small Business Management, 36(4): (1998): p. 43. [12] M. Hu. Many Small Antelopes Make a Dragon, Futures, 35(4): 2003: p. 379. [13] E.McKenna and N. Beech. Human Resource Management, A Concise Analysis. Essex, Pearson Education Limited, 2002, pp.4-5. [14] ibid [15] M. Hu. P. 379. [16]   P.Burns. Entrepreneurship and Small Business. New York, Palgrave, 2001, p12. [17] A. Rauch, M. Frese & A. Utsch. Effects of Human Capital and Long-Term Human Resources Development and Utilization on Employment Growth of Small-Scale Businesses: A Causal Analysis. Entrepreneurship: Theory and Practice, 29(6): 2005: p681. [18] ibid [19] B.Kotey and P. Slade. Formal Human Resource Management Practices in Small Growing Firms. Journal of Small Business Management, 43(1): (2005): p.16. [20] ibid [21] ibid [22] E. McKenna and N. Beech, p34-35 [23] D. Satava. The A to Z of Keeping Staff: Few Firm Employees Leave without a Good Reason-Here’s How Not to Give Them One, Journal of Accountancy, 195(4 ): 2003: p. 67. [24] R. W. Griffith and P. W. Hom. Retaining Valued Employees, London, Sage Publications, 2001, p10 [25] R. Bennett. Small Business Survival: Strategies for Delivering Growth and Staying Profitable: Second Edition, London, Financial Times Management, 1998. [26] D. Megginson, P. Banfield and J. Joy-Mathews. Human Resource Development. Kogan Page India Pvt. Ltd., New Delhi, 2001, p. 82. [27] Satava, David. â€Å"The A to Z of Keeping Staff: Few Firm Employees Leave without a Good Reason-Here’s How Not to Give Them One.† Journal of Accountancy 195.4 (2003): 67+.