Strategic Human Resource Management in Small Enterprises

Strategic HRM in Small Enterprises / 57

Strategic Human Resource Management in Small Enterprises MANJARI SINGH AND NEHARIKA VOHRA The need for strategic human resource management in small enterprises is discussed. Though small enterprises might wish to keep their human resource management practices informal, they will be able to increase their productivity if there is adequate human resource planning and integration of human resource strategies with business strategies. An illustrative case study is presented of a successful small enterprise which has a mix of formal and informal human resource management functions, and which has judiciously integrated its human resource strategies with its business strategies. Manjari Singh is Assistant Professor of Human Resource Management and Neharika Vohra is Associate Professor of Organisational Behaviour, Indian Institute of Management, Ahmedabad, India.

Strategic HRM Owner-managers and senior managers of small enterprises have often expressed that the main problems related to human resource management (HRM) in their enterprises are attracting talent, motivating employees and retaining key employees. They reason that small enterprises lack resources to advertise for positions, pay salaries in the range of large organisations and train employees. They face the additional problem of not having enough hierarchical layers to regularly promote employees. It has also been said that employees complain that they cannot learn much and find the job content monotonous. Hence owner-managers of such enterprises are hesitant to provide external and costly training to their employees because they fear that after such training, employees will either demand very high salaries or leave the organisation for better prospects. Human resource management in small enterprises has not got the attention it deserves from both researchers and entrepreneurs. In small enterprises, owner-managers are responsible for decisions related to human resources (Matlay, 1999). Their managerial style has a direct influence on The Journal of Entrepreneurship, 14, 1 (2005) Sage Publications New Delhi/Thousand Oaks/London DOI: 10.1177/097135570401400104

58 / Manjari Singh and Neharika Vohra

the HRM practices (Koch & de Kok, 1999). Owing to the small size of the organisation, the motivation and morale of each employee has a direct and visible influence on the productivity of the organisation. It has also been found that at a certain point, entrepreneurs are reluctant to give up control because of the belief that formalisation might take management of the enterprise beyond their capacity (MacMahon & Murphy, 1999) and out of their hands. However, lack of attention by owner-managers in developing and formalising HRM systems may create barriers to organisational growth. Small enterprises in general neither employ specialists for HRM (Kock & de Kok, 1999) nor do they have laid down HRM policies in place. In a recent study of eighty-nine small enterprises in India, Singh and Vohra (2004) found that only about 20 per cent of small enterprises had laid down policies for managing their human resources. Lack of a formal policy often leads to ad-hoc and uncoordinated management of human resources and loss of valuable time of the owner-manager in resolving similar/routine issues on a case-by-case basis. They also found an inverse relationship between the extent of involvement of the owner-manager in managing human resources and the existence of a formal HRM policy. Previous studies have also confirmed that small enterprises have predominantly informal HRM practices (Cassell, Nadin, Gray, & Clegg, 2002; de Kok, Uhlaner & Thurik, 2003; Marlow & Patton, 1993). Informal HRM systems serve many needs, such as the need to be flexible to respond quickly to market conditions (Hill & Stewart, 1999); the need to use informal practices for competitive advantage (Bacon, Ackers, Storey, & Coates, 1996); the need to cover up for the lack of resources either to develop their own developmental programmes or to search, evaluate and acquire the desired programmes (Nooteboom, 1993). Not only are HRM practices informal, they also lack strategic integration in small enterprises (Duberley & Walley, 1995; Hill & Stewart, 1999; Kerr & McDougall, 1999). Strategic integration of various HRM practices among themselves and with the business strategy of the organisation helps achieve the objectives of the organisation. It is important that HRM systems are aligned with the organisation’s goals and the vision of the owner-manager. The following case is an illustration of strategic integration of HRM systems in a small enterprise. C.K. Engineering Works: A Case of Effective HRM C.K. Engineering (CKE) Works is a proprietary firm established in 1986. The proprietor, Anantha Padmanabhachar, had earlier worked in a nationalised


bank. CKE Works manufactures precision components for earth-moving equipments. Bharat Earth Movers Limited, Wipro Fluid Power Limited and government ordnance factories are among its major customers. The sales turnover was Rs 8.5 million in the year 2002. To increase its credibility in the product market, CKE Works applied for the ISO 9000 certification in April 2002. The organisation expected to double its turnover by adding new customers as well as getting more orders from its current customers in the coming years. Staff There were fourteen employees in the organisation including those at the managerial level (see Figure 1 for the organisation structure). Besides Mr Padmanabhachar, there were two managers (one for internal operations and one for external transactions), one supervisor, one secretary, six skilled workers and four semi-skilled workers. Only the Supervisor (Machine Shop) was related to the proprietor. There being no occupant for the position of Supervisor (Quality Control), this task was the responsibility of the proprietor and all the other employees. Though the organisation structure was based mainly on the machines on the shop-floor, there was flexibility in deploying employees for each position. The workforce was multi-skilled and the positions were staffed according to the requirements of the jobs given by the customers. For full capacity utilisation at any given time there could have been a maximum of six machinists, four operators, two semiskilled operators and three helpers in the Grading Shop, and four machinists, three operators, two semi-skilled operators, and two helpers in the Turning Shop. Skilled workers filled the positions of machinists and operators. Semi-skilled workers filled the positions of semi-skilled operators and helpers. The secretary to Mr Padmanabhachar, Ms Noori, had been with CKE Works since its inception and was the only woman employee in the organisation. Over the years she had developed in her role as secretary and was filling in as a receptionist, second line manager, public relations incharge, information manager, and the management representative for the ISO 9000 certification. She was well-versed with all the tasks in the organisation, including technical and operational details of various machines on the shop-floor. There was no formal HR policy in the organisation. The proprietor mainly handled HR functions and his aim was to make employees productive by making them feel that they were a part of the organisation. All HR practices were performance-oriented with ample scope for development. Also, the layout of the factory was such that almost the entire work area was visible to the proprietor from where he sat. Much of the organisational and job-level


information was communicated orally. Manager (Operations) handled most of the communication in the organisation. FIGURE 1 Organisation Structure

The following employee data were maintained in the organisation on a regular basis: 1. 2. 3. 4.

Personal details and salary, Job details, Performance details, and Character and conduct.

Mr Padmanabhachar mainly utilised his personal contact with other fellow entrepreneurs in the neighbouring area for hiring new employees. Occasionally, hiring was also done through outside agencies and the Employment Exchange. At the time of hiring, priority was given to a thorough background check of character, followed by assessment of skills and verification of experience. Human resource forecasting was based on projected requirements which depended on the orders received from the customers for the coming months.


Roles and responsibilities of the employees were allocated on the basis of the nature of jobs, relationship with the owner-employer, and their skills, capabilities and competencies, sincerity, and trustworthiness. Though job descriptions were written down, they were changed to accommodate each new job. Performance was appraised on a monthly basis. The data on rejection rate per month was used as an index of performance as well as for taking corrective actions. Warnings were issued to those employees who performed below expectation. A maximum of three such warnings were given to an employee, and at the fourth instance of below expectation performance the employee was dismissed. Those employees whose performance was satisfactory were either orally told so or were not called upon to discuss their job performance. Absence of discussion was an indication of satisfactory performance. The going rate in the industry and the Minimum Wages Act formed the basis of employee remuneration. In addition, expenses were reimbursed for children’s school fees and books, and for family medical expenses. Employees were also given paid holidays. As a matter of policy, damages during the course of work were not charged from employees. Besides remuneration, CKE Works had also established a policy of rewarding good performance through annual increments, bonuses, and a one-off monetary incentive. There was also an attendance bonus of Rs 200 for not taking any leave in a month. Despite training costs being considered avoidable by most small enterprises, CKE Works had a properly devised training strategy. With the objective of ensuring that all employees were capable of discharging their responsibilities to the satisfaction of customers, they were imparted infactory job related training by experts working in large organisations (typically their own customers). The Manager (Operations) oversaw the training activity. It was mandated that training would be imparted on topics such as: l l l l

Reading and interpretation of engineering drawing Proper use of instruments and gauges Awareness of quality systems and their roles Knowledge and skill in handling machines and equipment to get desired result on products

There were ample opportunities for deserving employees for career development within the organisation. Employees could be promoted to


higher positions by improving their curremt skill levels or acquiring new skills despite their insufficient formal education or level of entry into the organisation. Another unique feature of career growth was that employees who showed extraordinary capabilities and had achieved maximum growth within the organisation were given loans to become independent suppliers to the organisation. These individuals were supported in many ways to establish a successful enterprise of their own. For example, the proprietor helped them in getting more orders through his own network. However, supporting employees to become intrapreneurs was done only in exceptional cases. Employee grievances or interpersonal conflict were first referred to the Manager (Operations) and not the proprietor. Mr Padmanabhachar intervened only when the Manager was unable to solve the problem. Whenever a key employee decided to leave, the proprietor informally discussed the reasons for exit with him. According to Mr Padmanabhachar, customer satisfaction was the most important parameter to assess the success of an organisation. He considered his organisation to be highly successful in this regard. When probed further, he put forward the following three factors as important contributors to the success of his organisation: l l l

Customer satisfaction through assured quality Networking with local industries Employee management

Customer Satisfaction through Assured Quality The nature of the business required that the work be done as per precise customer specifications. The quality policy of the organisation was: ‘To achieve total customer satisfaction, to deliver defect free components, and to strive to upgrade quality continuously’. As mentioned earlier there was no permanent occupant for the position of Supervisor (Quality Control). Quality was the responsibility of every employee in the organisation from top to bottom. The organisation’s commitment towards high quality standards was also reflected in its progress in the ISO 9000 certification process. A feather in the cap of CKE Works was the award of ‘Best Achievement for Quality and Supply’ by Wipro Fluid Power Limited. This award was for Wipro suppliers and was based on twenty-six criteria that Wipro considered important. Networking with Local Industries The proprietor was an active member of the Peenya Industrial Association, Bangalore, and a member


of the umbrella group, Karnataka Small Scale Industries Association (KASSIA). Both associations were very active in championing the cause of small-scale industries among government institutions and banks. The associations provided an opportunity to meet with fellow entrepreneurs and discuss both day-to-day and long-term issues. Mr Padmanabhachar was an honorary consultant to eighty small industries and banks in the Peenya Industrial Estate. Banks called upon him for his recommendations prior to sanctioning loans to other small industries. He also helped neighbouring small industries with issues such as staffing and solving labour and related problems. This networking added to his credibility and also helped him in identifying good employees for his own organisation. There were also benefits such as getting advance information on issues or problems that were likely to hamper the functioning of CKE Works. Employee Management The proprietor believed that it was very important to keep employees satisfied and provide good working conditions. According to him, the nature of the workforce was changing and exploitative practices could not sustain a productive workforce. He believed in taking care of both professional and personal needs of his employees and in not exploiting the loopholes in the Factories Act. Learning the Case of CKE Works The case on CKE Works may be analysed on two fronts: the extent of formalisation of HRM functions, and the strategic integration of the HRM practices. Fomalisation of HRM Functions Formalisation refers to having a conventionally recognised structure or a set of rules. HRM practices might be formalised on two parameters: periodicity and process. The various HRM functions and the extent of formalisation are tabulated in Table 1. Analysis of the table reveals that periodicity of all HRM functions suit the requirement of the organisation. For example, HR planning and goalsetting is carried out at the start of every job order because every job order is unique. The periodicity for recruitment and selection is not fixed but the process is clearly defined and is followed to enable hiring the best available people for the enterprise at the time they are needed. The performance management function and the reward system are fixed and formal,


whereas training and development are tailored to the needs of the individual and the job. A judicious mix of formal and informal HR functions TABLE 1 Extent of Formalisation of HRM Functions HRM Function HR planning

Analysing available skills and capabilities Analysing job

Recruitment and selection Performance management

Goal setting

Feedback and counselling

Exit

Process

At the start of every job order

Informally done by the supervisor

At the start of every job order

Formal with job description as the output Clearly defined and rigorously followed Based on job description Formal and objective (based on rejection rate) Oral and fixed

Not formal

Appraisal

Reward System Training and development Career planning

Periodicity

At the start of every job order Monthly

As and when poor performance occurs Fixed Not fixed Not fixed As and when key employee leaves

Fixed Focused and job-related Owner-manager driven Oral and only for key employees

gets the best out of the employees. It allows Mr Padmanabhachar to have the flexibility where needed and the routine to avoid wasting time on established procedures. Strategic Integration of HRM Practices To be able to draw a conclusion on whether the HRM practices at CKE Works are integrated with the business strategy or not, we follow a twostep process. HR strategies (a set of objectives guiding human resource policies within an organisation) are considered to be a mediating link between HRM practices and business strategy. We examine whether HRM practices are based on HR strategies and whether HR strategies are integrated with business strategy.


HR Strategies in CKE Works The first step is to examine whether the HRM practices at CKE Works are based on clear-cut HR strategies. Analysis of the HRM practices (listed in the Appendix) shows that most of them can be categorised into three main HR strategies: l

l l

Performance-oriented HRM systems (a set of policies and procedures working together as a mechanism for a specific HR function, e.g., Performance Management System, Reward System, etc.), employee loyalty, and multi-skilling.

Performance-oriented HRM Systems. Table 2 shows performance-oriented characteristics of each of the main HRM systems at CKE Works such as HR planning, job description, employee data, recruitment, role allocation, performance appraisal, reward system, training, and exit. Reward systems are performance-oriented including bonus for ‘no absence’ from work. TABLE 2 Performance-oriented Characteristics of HRM Systems HRM Systems

Performance-oriented Characteristics

HR planning

Number of positions are more than the number of employees. Staffing based on job requirements. Written clearly but changes with each order. Properly and regularly maintained. Hiring is mainly based on personal contacts. Priority is given to a thorough background check of character, followed by assessment of skills and verification of prior experience. No incompetent relative is employed. Based on the nature of the job, relationship with the owner-employer, skills, capabilities and competencies, sincerity, and trustworthiness. Performance appraisal on a monthly basis using data on rejection rates. Based only on performance. Attendance bonus of Rs 200. Career development within (as well as outside) the organisation. Focused training by experts working in large organisations (typically their own customers). Clear and job-related training objectives. Maximum of three warnings and fired at the fourth instance.

Job description Employee data Recruitment

Role allocation

Performance appraisal Reward system

Training

Exit


Employee Loyalty. The owner-manager believes that to build a consistently productive workforce he needs to take good care of the employees and ensure employee loyalty. The following practices in CKE Works help to ensure employee loyalty: l l l l

l l

no exploitation of workers, taking care of children’s education and family medical expenses, career growth within the organisation, finding external opportunities for those who have peaked their careers within the organisation, a clear grievance handling system, and performance-oriented HR practices with ample scope for employee development.

Multi-skilling. In a small organisation focused on a limited product range and high quality, it is advantageous not to have an overly high level of specialisation. Multi-skilling of the workforce helps in career growth of the employees, relieves monotony and ensures that no employee becomes indispensable. Linking HR Strategies to Business Strategy The next and most pertinent issue to this discussion is whether HR strategies are aligned with the business strategy of CKE Works. Strategic HRM in a small enterprise would mean that the core objectives of various HRM systems are linked to the business objectives of the organisation and that there is an alignment of objectives of various HRM systems. This means that there is a vertical linkage between HRM systems and business strategy, and a horizontal linkage among HRM systems (Truss & Gratton, 1994). For determining whether HRM at CKE Works is strategic, it is first important to identify the firm’s business strategy. These are the three main tenets of the business strategy (italicised below) of CKE Works. Business Strategy To ensure customer loyalty by providing customer satisfaction through consistently high quality standards. At CKE Works the three HR strategies are geared towards ensuring high quality standards, which in turn are expected to keep the customer satisfied and stay on with the enterprise.


In order to maintain high quality standards, employees’ competence and commitment is very important. The HR strategy of performance-oriented HRM systems and the multi-skilling at CKE Works play a key role in enhancing employees’ competence. Staffing is based on job requirements, ensuring that jobs are well within the ability of the employees. Job-related expectations from employees are unambiguous because job descriptions are written clearly for each order. The performance of each employee is assessed individually and rewarded accordingly. The criterion for appraising performance is the rejection rate, thus making quality a vital component of performance management system. Multi-skilling and focused training also facilitates development of employees. The HR strategy of ensuring employee loyalty contributes to higher organisational commitment. Loyal employees also feel motivated to work harder, not only for self-development but also for the sake of their organisation. This strategy emphasises the close relationship between owner-manager and employees. The closeness assures the employees that they can depend on him in times of need. This leads to lower costs in terms of losing employees and also higher quality of work because the employees are well-versed with the job and quality standards. Costs of training new employees are also reduced. Thus it is argued that irrespective of whether the owner-manager has five or fifty employees, has fancy HRM practices or not, linking the practices to well-thought-out HR strategies which are designed to serve the business strategy is important. Mismatch between various practices can lead to problems, and practices that are not appropriately suited to the business context would wreak havoc. Figure 2 represents the alignment of business strategy and HRM systems and the alignment of various systems with each other. HR planning, as per the identified HR needs, should be based on business strategy. HR planning is the process of analysing jobs as well as skills and capabilities available in the organisation. It provides direct inputs to three systems: recruitment and selection, training and development and exit. Analysing jobs helps in identifying competencies required in the short-term and long-term. In case competencies are not readily available within the organisation, recruitment and selection of new employees can take place. If planning reveals that upgradation of employee skills and capabilities are required, training and development can be considered. An exit policy is required to tackle redundant skills and capabilities in the organisation. Selection tools are to be appropriate to required skills and capabilities identified through HR planning and on-job specifications.

68 / Manjari Singh and Neharika Vohra FIGURE 2 Aligning Strategy and HRM Systems

Performance management system is central to the overall HR system in any organisation. It has three main steps: goal-setting, performance appraisal and feedback and counselling. It not only appraises the employees of their performance, but also identifies their training needs and career aspirations. Employees should be rewarded on the basis of their performance and thus the reward system needs to be linked to performance management system. Similarly, the system should incorporate an exit policy based on benchmarks for poor performance. Conclusion This paper emphasises the importance of designing HRM systems to match the requirements of a business. Even though the processes at CKE Works are simple, they well match and adequately meet the business requirements of a small enterprise. The systems are fair and personal. The procedures are standardised though informal. The employees are pushed


but cared for. All of this helps to make employees productive, quality conscious and loyal to the organisation. This could be an important lesson for owner-managers of small enterprises. They could still be in-charge and yet be free from daily routine activities. Appendix A comprehensive list of HR practices at C.K. Engineering Works l l l l l l l l l l l l l l l l l l l l l l l l l l l l l

Well-developed but flexible organisational structure. Quality is responsibility of each employee. Multi-skilled workforce. There is no formal HR policy in the organisation. The owner-manager aims to increase productivity by making employees feel that they are a part of the organisation. HR practices are geared towards employee performance. There is a scope for employee development. Delegation of HR function by the proprietor. Overall supervision by the owner-manager facilitated by the layout of the factory. Largely oral communication. Well-maintained employee data. At the time of hiring, character of the applicant is given more importance than skills and prior experience. Monthly manpower forecasting based on orders received from customers. Job descriptions are written and changed to accommodate each new job. Regular and objective performance appraisals. Appropriate accountability of work. Controls in place for non-performers. Fair remuneration. Relevant perks. Rewards for good performance. Attendance bonus for reducing absenteeism. Training to enhance customer satisfaction. Job-related training typically by customers. Career development within the organisation by improving current skill level or acquiring new skills. Supporting exceptional employees to become entrepreneurs. Mechanisms to handle employee grievances or interpersonal conflicts. Informal discussion when a key employee is leaving. Active networking by the owner-manager helps in getting good employees and advance information. No exploitative practices.


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