HRM systems and firm performance: The mediation role of strategic orientation

Transcription

1 Asia Pac J Manag (2013) 30:53 72 DOI /s HRM systems and firm performance: The mediation role of strategic orientation Irene Hau-siu Chow & Stephen T. T. Teo & Irene K-H Chew Published online: 28 March 2012 # Springer Science+Business Media, LLC 2012 Abstract Prior research evidence of a set of internal fit human resource practices supports a positive human resource management (HRM) performance relationship. Yet we know very little about exactly what drives the HRM performance (also known as strategic HRM) relationship. In response to the call for suitable theories to explore the black box between HRM and firm performance, this study is designed to extend previous work by examining how the relationship between HRM and strategic orientation influences firm performance. Specifically, it examines the relationship between HRM systems, strategic orientation, and performance in a cross-section of 190 firms in Singapore. The research hypotheses were tested using multiple regression and LISREL. As predicted, there was an indirect effect between Inducement and Investment HRM systems and firm performance, such that the relationship was mediated by strategic orientation. In particular, Singaporean firms which implemented product and market differentiation strategies would mediate the HRM systems performance relationship. Implications for research and managerial practices are provided. Keywords Strategic orientation. HRM systems. Firm performance. Singapore Human capital is a determining factor and a major driver for success. The managing of human resource (HR) is essential for an organization to be more competitive, effective, and successful (Pfeffer, 1994). Increasing research efforts show that human I. H.-s. Chow Department of Management, The Chinese University of Hong Kong, Shatin, NT, Hong Kong irene@baf.msmail.cuhk.edu.hk S. T. T. Teo (*) AUT Business School, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand drstephen.teo@gmail.com I. K.-H. Chew Nanyang Technological University, 50 Nanyang Avenue, Singapore , Singapore joliana3@gmail.com

2 54 I.H.-s. Chow et al. resource management (HRM) systems must be clearly aligned with the organization s business strategy to improve the company s bottom line. A major theme is to pursue a strategy linking people for profit; that is, the HRM function adds value by linking HR practices to business strategy (Yeung & Berman, 1997). In the current paper, we follow the conventional definition of HRM system used in the literature (e.g., Chadwick, 2010; Huselid, 1995; Lepak, Liao, Chung, & Harden, 2006). A strategic approach to HRM is thus defined as [t]he pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals (Wright & McMahan, 1992: 298). This approach is known as strategic HRM (SHRM) in the literature. Precisely how human resources produce sustained competitive advantage and enhance organizational effectiveness is an important research area. We do not know what is really driving this relationship (e.g., Ahlstrom, 2012). In this paper we try to explore the mechanism through which HRM systems work to achieve higher performance. Thus, we will examine the mediating role of strategic orientation on the relationship between HRM systems and firm performance in a sample of Singaporean firms (e.g., Budhwar & Debrah, 2009). The research questions this paper will address are, first, what is the extent of strategic HRM adoption in Singapore? The second question seeks to examine the differential impact of three HRM systems on the performance of Singaporean firms. The final research question seeks to explore the mediation effect of strategic orientation on the HRM performance relationship. Drawing from industrial economics and the resource-based view (e.g., Wernerfelt, 1984), this study advances research by investigating the role of the mechanism underlying the HRM strategy performance link. From the resource-based view of the firm (Wernerfelt, 1984), HR can be treated as a source of sustained competitive advantage because the types of activities performed by employees add value to the firm. Distinctive competence, skills, and experience that an organization s workforce has is unique, rare, and not easily imitated or substituted (Barney, 1991). Informed by industrial economics, firms carefully craft their business strategies to pursue competitive advantage. Differentiation and cost leadership may be a potential source of competitive advantage and may ultimately enhance firm performance (Porter, 1980). The SHRM literature emphasizes the importance of the integration between HRM and strategy to attain superior performance (e.g., Lepak et al., 2006; Pfeffer, 1994; Wright & Snell, 1991). HR combined with strategic orientation should be better able to achieve strategic goals. In such case, HR systems and strategic orientation reinforce each other to create competitive advantage and ultimately lead to superior performance. Thus, we attempt to examine the joint effect by linking HR and strategic orientation to firm performance. The present study designates strategic orientation as a mediator of the HRM performance relationship. An organization s strategic orientation plays a critical role in linking HRM to performance. We know relatively little about the mediating mechanism in the HRM systems performance relationship. Few studies have attempted to verify the hypothetical mediation of this relationship, except Edelman, Brush, and Manolova (2005). The dynamic relations between HRM systems and firm performance must be further explored. In response to the criticism for ignoring the black box of the mediating variable between the HRM performance link, we posit that strategic orientation is the vehicle that transforms the value of human capital into superior performance. The

3 HRM systems and firm performance 55 present study proposes a mediation model the alignment between HRM and strategic orientation as a mediated relationship. This study is designed to extend previous work by examining how the relationship between HRM and strategies influence firm performance. It examines the mediating relationship between HRM, strategic orientation, and performance in a cross-section of 190 firms in Singapore. This investigation contributes to the current literature by drawing attention to the mediating role of strategic orientation. It sheds light on the black box that exists between HRM and firm performance. The findings from this study also contribute to a better understanding of the importance of strategic orientation as resource deployment mechanism. Aggregating HR practices into organizational-level systems addresses researchers theoretic interests in HRM s influence on organizational performance by placing HRM at the same level of analysis (see Bowen & Ostroff, 2004; Chow, 2005; Lawler, Chen, Wu, Bae, & Bai, 2011). Moreover, the HRM system-level approach simplifies a paper s theoretic exposition by reducing the many activities that occur within organizations sets of HR practices to a single construct, the HRM system. In practical terms, the HRM system-level approach replaces an assortment of independent variables with a single aggregated variable, which simplifies the stories being told in data analyses and preserves degrees of freedom in the small data sets whicharecommoninthisstreamofresearch. Chow s(2005) research into strategic HRM in China, Korea, and Malaysia concluded that various HR practices contributed to firm performance by different degrees and hence, there is a need for more research to clarify what HR practices are essential for a high-performance workplace in different research settings (see also Kim & Kang, 2012). Asian management scholars (see Lau, 2006) have advocated that future studies with contributions to Asian management should consider across three dimensions: the application of theory in a new context, the extension of theory in a new context, and the development of new theories and constructs (e.g., Bhagat, McDevitt, & McDevitt, 2010). The current study seeks to address this challenge by applying the HRM systems performance theoretical framework and the introduction of strategic orientation as a mediation effect of the HRM performance linkage. This approach addresses the first two dimensions of Lau s (2006) call for future research into Asian management. The following section starts with a brief review of the existing research on the relationship between HRM systems, strategic orientation, and firm performance. Based on the literature review, hypotheses are developed and tested with empirical data collected for this study. The paper concludes with a discussion of the managerial implications and future research directions. Theory and hypotheses The strategic perspective of HRM and the systems approach of designing HR practices are the two most dominant research approaches on the HRM firm performance linkage (Bowen & Ostroff, 2004). The SHRM literature has long emphasized the relationship between a firm s strategy and HR policies and practices. SHRM research focuses on evaluating the congruence among business strategies, HR policies, and organizational effectiveness (e.g., Dyer & Holder, 1988; Lawler et al., 2011). The value of HRM and its impact on organizational effectiveness may be magnified when HRM practices of an organization support the firm s ability to establish and maintain a match in internal and

4 56 I.H.-s. Chow et al. external demands. The philosophy of SHRM emphasizes the need to achieve coordination and integration between HRM systems with the business strategy and corporate goals (e.g., Becker & Huselid, 1998; Schuler & Jackson, 1987). Empirical evidence further suggest that the impact of HR practices on organizational performance may be further enhanced when these practices are matched or aligned with the competitive business strategy of the organization (Lawler et al., 2011; Wei & Lau, 2010). A distinguishing feature of SHRM research is an emphasis on HR systems, rather than individual HR practices, as a driver of organizational performance. The systems approach views HR practices as an internally coherent set, consistent with the firm s corporate strategy. Similarly, a high performance work system (HPWS) is defined as a system consisting of a set of complementary HR practices that can give a firm a competitive advantage. The HPWS literature reports a set of complementary HR practices that consistently lead to superior performance (see Huselid, 1995; Lepak, Taylor, Tekleab, Marrone, & Cohen, 2007). In high performing organizations, HRM is treated as a set of complementary practices aligned with the firm s goals and strategies. An internally consistent system of HR practices can influence organizational performance (Becker & Huselid, 1998; Lawler et al., 2011). Using industrial economics and the resource-based view, we hypothesize a positive and significant relationship between HR, strategies, and firm performance. We assert the importance of strategic orientation as a resource deployment mechanism. Carefully selected strategies serve as the mechanism through which HR influence firm performance. Strategic orientation is postulated as a mediating mechanism. Strategic orientation is more likely to transform human capital into superior firm performance. Thus, we hypothesize a mediation model. In the present study, strategic orientation mediates the relationship between HRM systems and firm performance. HRM systems and firm performance The most prevailing trend in research on the HRM and firm performance relationship has been to take a system view of HRM by considering the overall aggregation of HRM practices (e.g., Lawler et al., 2011; Lepak et al., 2006). These interrelated HRM systems or a set of coherent HR practices have enough strength to be specific to the organization or unique and not easily transferred/imitated (Barney, 1991). An example of these HRM systems is the three different HRM systems identified by Dyer and Holder (1988), that is, Investment, Involvement, and Inducement HRM systems. Inducement HRM, according to Dyer and Holder (1988), emphasizes the link between employee work effort and pay. Performance-based pay is used as an attempt to monitor and control employee performance. It has been demonstrated that incentives raise productivity and profitability and decrease the mobility of workers (Beer & Katz, 2003). The introduction of performance-related pay schemes has substantially improved firm performance. A recent study by Subramony, Krause, Norton, and Burns (2008) showed that competitive pay can be used as a form of inducement to enhance firm performance via employee s performance. Involvement HRM, based on industrial democracy and self-management work teams, requires more autonomy, greater task variety, and more effective use of knowledge and skill (Jones & Wright, 1992). Similar practices were identified by Guthrie, Spell, and Nyamori (2002) where they showed that these studies predicted

5 HRM systems and firm performance 57 firm performance. The Involvement HRM system builds around a relatively high proportion of professionals by structuring jobs to provide maximum challenge, participation, and autonomy. This was also found in Kwon, Bae, and Lawler s (2010) study where Involvement HR practices include performance-based pay and high pay, which are introduced to create a high commitment work environment. Two examples of an Investment HRM perspective of SHRM are exemplified by the human capital enhancing (see Snell & Dean, 1992; Zhu, Chew, & Spangler, 2005) and high performance (that is, the HPWS by Huselid, 1995) perspective of SHRM. HR practices within an Investment HRM system are aimed at placing an emphasis on employee development with extensive training and continuous learning (i.e., a human capital perspective). It seeks to development HR effectively through encouragement and support of personnel to develop their competence. Staffing policies are designed to attract highly qualified employees. Career management and counseling programs focus on long-term development. On the other hand, organizations adopting a high performance culture seek to implement HR practices which aim to enhance employees competencies, motivation, and performance via selective staffing, performance-contingent incentive compensation systems and management development and training activities (see the review by Becker & Huselid, 1998; Martin-Tapia, Aragon-Correa, & Guthrie, 2009). The relationship between a system of HR practices and firm performance has been widely researched. A growing body of literature has documented the positive relationship between HRM systems and firm performance (e.g., Bowen & Ostroff, 2004; Lawler et al., 2011). The extensive literature consistently shows that Involvement HR practices are associated with positive performance outcomes and higher financial success (Bae & Lawler, 2000). Levering and Moskowitz (1993) surveyed the 100 best companies to work for in the United States, and Lawler et al. s (1995) survey on Fortune 1000 companies found that those companies that made use of employee involvement reported significantly higher financial success. Empirical results from Singapore, Taiwan, and Korea support the notion that high commitment/involvement work systems or practices have a positive effect on organizational performance (Bae & Lawler, 2000; Khatri, 2000). Prior research evidence has shown that a set of internal fit HR practices should lead to positive outcomes (Huselid, 1995; Liao, Toya, Lepak, & Hong, 2009). We posit that Inducement HRM, Investment HRM, and Involvement HRM systems enhance organizational effectiveness. Hypothesis 1 (a) Inducement HRM, (b) Investment HRM, and (c) Involvement HRM systems will have a significant impact on firm performance. Strategic orientation and firm performance Zahra and Covin (1993) identified several business strategy dimensions which represent the fundamental strategic choices made by firms. The strategy dimensions include different strategic emphasis on differentiation, marketing intensity, cost leadership, and product line breadth. These dimensions are consistent with Porter s (1980) two generic strategies: that is, differentiation and cost leadership. Porter (1980) proposed differentiation and cost leadership as a source of competitive advantage, with a positive impact on performance. Hence, strategic orientation refers

6 58 I.H.-s. Chow et al. to the propensity of a firm to be opportunity seeking or problem avoiding, pursuing differentiation-based or cost-based strategies (Wright, Kroll, Pray, & Lado, 1995). Firms which adopt a specialty products strategy tend to have products with high margin and uniqueness targeted at a specific high price segment while those who pursue a commodity product strategy tend to be more non-unique and generally low margin. They strive to create more up-to-date and attractive unique products than their competitors, as compared to those which sell more generic products. Its focus will be competing based on quality, efficiency, design innovations, or style. The concept of specialty product is similar with the idea of differentiation as suggested by Porter (1980). Firms which adopt a marketing intensity strategy tend to vary in their strategic orientations. They can either view advertising as a primary and necessary revenuegenerating tool or build their business strategy around other competitive tactics (e.g., price promotion). Organizations which place greater emphasis in marketing differentiation tend to create a unique image for their products. Dess and Davis (1984) validated the concept of cost leadership as they found that firms which adopt this strategic orientation tend to focus on ways to reduce production costs, achieve high capacity utilization, offer competitive prices, and establish efficient operations in terms of raw materials procurement, internal production processes, and product distribution. Cost leadership orientation tends to focus on efficiency rather than new product development or brand image. The final dimension, product line breadth, highlights those firms which rely on a wide range of products and services to compete on the market place. Firms are flexible in the introduction of new products and services in order to meet customer demands. This implies that firms have to be more flexible and innovative in their organization and management systems. Conventional wisdom holds that strategic orientation provides a firm with a better understanding of its business environment and direction, which subsequently leads to enhanced firm performance. This assertion has been supported by several studies on the strategic orientation performance link using differentiation and relative cost position (Noble, Sinha, & Kumar, 2002; Voss & Voss, 2000; Zahra&Covin, 1993), especially the positive relationships between strategic orientation and performance outcomes. Strategic choice is a key factor for organization success (Zahra & Covin, 1993). Hypothesis 2 There is a significant relationship between an organization s strategic orientation and organizational performance outcomes. HRM systems and strategic orientation A recent development in SHRM is the concept of bundling HR practices as a coherent set in enhancing organizational performance (e.g., Lepak et al., 2007). In an earlier study, Chew and Chong (1999) showed that there was a direct relationship between HRM and the implementation of a strategic vision in Singaporean firms. Their research showed that HRM functions such as recruitment and selection, rewards and compensation, and training and development have a significant effect in the achievement of different visions. The finding provided support for Dyer and Holder s

7 HRM systems and firm performance 59 (1988) assertion that firms are likely to use Inducement HRM (built around incentives, performance-based pay) with a business strategy based on low cost. On the other hand, Investment HRM systems (built around extensive training and development on human capital) are consistent with a strategy based on differentiation as it requires its HR to deliver quality, unique features and good service. Involvement HRM (built around industrial democracy and self-management work teams) relies on an innovation strategy to provide continually differentiated products and services. Therefore, it is anticipated that different HRM systems would have a significant effect on strategic orientations. Hypothesis 3 There is a significant relationship between HRM systems and the implementation of strategic orientation. The mediating effect of strategic orientation Existing studies articulate the importance of linking HR to strategy to sustain competitive advantage (Pfeffer, 1994). The SHRM literature consistently shows that strategic orientation is complementary to HRM systems in achieving superior performance. HR strategy will be more effective by incorporating a strategic vision (Lepak, et al., 2006; Pfeffer, 1994; Wright & Snell, 1991). The HR department should play a more important role as a strategic partner. In order to take a strategic role, HR should capture and leverage strategic orientation of competitive advantage. Strategic orientation transmits HR systems into performance. Relatively few studies have been conducted on the mediating effect of strategic orientation on the HRM performance relationship (with the exception of Edelman et al., 2005). Mediators are explanatory variables that provide substantive interpretations of the underlying nature of the HRM performance relationship. An organization s strategic orientation, especially in relation to how strategies are being implemented, require input from HRM. Strategic choice is central to the strategic management paradigm (e.g., Zahra & Covin, 1993). Top management s values and attitudes guide the strategic planning and decision-making processes (Escribá-Esteve, Sánchez-Peinado, & Sánchez-Peinado, 2009; Lau, Yiu, Yeung, & Lu, 2008). There is evidence to suggest that HR systems that are complementary to the company s strategic goals create competitive advantage, and ultimately lead to superior performance (Pfeffer, 1994). Harris and Ogbonna (2001) found the relationship between SHRM and firm performance was mediated by market orientation. Given that market orientation is considered an aspect of strategic orientation, it follows that strategic orientation mediates the HRM firm performance link. Further, the impact of HRM systems on performance varies indirectly through the type of strategic orientation. In their empirical study, Edelman et al. (2005) examined the mediating role of business strategies in the linkage between resources (including HR) and firm performance. Their study showed that neither resources nor business strategies alone explain firm performance, but instead, HR together with strategy enhances firm performance. What this finding suggests, from a SHRM perspective, is that the implementation of a particular strategic orientation requires a specific mix of skills, knowledge, and abilities. Hence, the importance of the need to create a bundling of HR practices to deliver organizational outcomes is highlighted. We

8 60 I.H.-s. Chow et al. therefore expect strategic orientation to mediate the linkage between HRM and firm performance. Strategic orientation is more likely to guide and translate human capital to enhanced firm performance. Thus, it is logical to follow that strategic orientation mediates the relationship between HRM systems and performance outcomes. Hypothesis 4 Strategic orientation mediates the relationship between HRM systems and firm performance. In summary, the current study develops a path model of SHRM to examine the mediation role of an organization s strategic orientation in the HRM system firm performance relationship. The model is presented in Figure 1 and will be empirically tested on data collected from a sample of Singaporean firms. Methods Research setting Singapore is a small country with a total population of 4.58 million (as of June 2007). The total labor force is made up of 1.92 million people and the unemployment rate is around 3.1%. With a considerably small population, Singapore constantly has faced the problem of labor shortage throughout the years. The Singapore economy is very global. It is a major business hub in Asia and attracts a lot of MNCs. Diversity can be reflected in the different types of firm ownership on foreign vs. local firms. Singapore, being a small island, is subjected to great pressures internally (within the nation, for instance pressures from the government) and externally (outside the nation) for economic survival to go global. The small island state is particularly HRM Systems Strategic Orientation Performance Product/MkDiffer.68*** Cost/Efficiency.24** Inducement Involvement Investment -.81***.32***. 42** Firm Performance Note: Only statistically significant paths are shown. ** p <.01, *** p <.001. χ 2 = , df = 691, p =.0, RMSEA =.08, NFI =.94, CFI =.97. Figure 1 The mediation of strategic orientation on HRM systems firm performance relationship

9 HRM systems and firm performance 61 volatile to changes in the global economy. It adjusted well throughout the several critical crises during the last decade (such as the 1997 Asian financial crisis, 1997 Avian (Bird) Flu, and the 2003 SARS epidemic) and sets a good sample for other developing countries. Some commentators attributed the strategic policy mechanisms of the Singapore government for the quick recovery of Singapore from the crises. The Singapore government has been quick to formulate and respond by implementing a number of initiatives to vitalize the republic. For instance, the Manpower 21 blueprint in Singapore was used to emphasize the importance of HR and intangible assets as the forefront of public policy-making to insulate the nation against external economic uncertainties (Bae, Chen, Wan, Lawler, & Walumbwa, 2003: 1318). This example accentuates the need for the government and business firms to adopt a strategic approach to HRM. Sampling procedures and participants The analysis in this study deals with performance and HR practices at the organization level. A random selection of 2,000 companies was taken from the Kompass Directory of Companies. This particular sampling strategy has been used by others such as Huselid (1995) and Budhwar (2000). The target organizations are Singapore companies with a HR department. As such, only organizations with more than 40 employees were selected for our survey. This is to ensure that they have a functional HR department and will be able to answer our questions appropriately. Of the selection, 1,450 companies met the sampling criteria. We sent out a package which contained an invitation letter and a questionnaire to the most senior executive responsible for HRM in the organization. We asked the respondents about the HR practices adopted by their organization for managing their core employee groups and the strategic orientations of their organization. The aim was to provide an empirical understanding of the type of HR practices and the extent of strategic orientations. In the current study, we asked the respondents about the adoption of the HRM measures in relation to their core employee groups. Other SHRM scholars have also framed their research in a similar manner where they asked HR managers as key respondents as these individuals are most likely in a position to understand how employees across different groups are managed (Lepak et al., 2007: 232). Similar to the definition of core employee groups used by Lepak et al. (2007), core employees are those individuals who are considered by their organization to have a direct contribution to the organization s products or services. We received a total of 190 questionnaires at the end of the data collection, representing a response rate of 13%. 1 As the respondents were randomly selected from the business directory, they came from a diverse range of industry sectors, such as manufacturing (16%), construction (14%), electronic and IT (10%), and pharmaceutical (8%). Most of the senior HR executives participated on the senior executives committee (55.3%). Further analysis of the data showed that our sample comprised of 97 large multinational corporations, 58 local small- and medium-sized enterprises, and 35 public and non-profit sector organizations. Objective performance data were 1 The typical response rate for such surveys in Singapore is between 10% and 15%.

10 62 I.H.-s. Chow et al. also collected from those organizations which publish annual reports. Our sample included public and non-profit sector organizations and small- and medium-sized enterprises which did not have published financial data. Measures HRM systems We adopted items relating to the functional aspects of HRM from the literature (e.g., Delery & Doty, 1996; Snell & Dean, 1992) to operationalize HRM systems. Based on the research by Delery and Doty (1996) and Snell and Dean (1992), the grouping of HRM measures was identified and verified empirically. Factor analysis yielded three types of HRM system which accounted for a total of 70.4% of the variance explained. The factor structure of these HRM systems is given in Table 1. The results from empirical classification essentially correspond to the theoretical prediction of Investment, Inducement, and Involvement HRM systems. Involvement HRM was measured by six items (α 0.91, sample includes employees are allowed to participate and make many decisions ). Inducement HRM consisted of Table 1 Factor structure of HRM systems. HR Practices Inducement Involvement Investment Very difficult to dismiss employee Job security almost guaranteed Employees allowed to make many decisions Employees asked to participate in decisions How many people provide input to the performance evaluation of each employee? How many people are involved in the selection decision? Emphasis placed on paying employees what they would be paid in similar jobs in other organizations Employees are paid what they are worth compared to others in the organization The pay levels relative to other organizations Differences in pay across members reflects differences in individual contributions The wages in this organization are very competitive for this industry Pay is closely tied to individual performance How wide is the range in pay across members in this organization? Priority is placed on training employees How formal or structured is the training process? % of people have received training in this past year Hours of formal training for a typical member per year Different kinds of training programs are available for employees Eigen value % variance explained

11 HRM systems and firm performance 63 seven items (α 0.92, sample item includes differences in pay across members reflect differences in individual contributions ). Investment HRM was assessed by five items (α 0.90, sample includes priority is placed on training employees ). Following the current practices in the research on SHRM (e.g., Huselid, 1995; Lepak et al., 2007), the HR practices were summed to form three aggregated indices reflecting the three HRM systems. Strategic orientations We adopted the 16-item scales from Zahra and Covin (1993) to operationalize the dimensions of strategic orientations. Following Zahra and Covin (1993), we asked the respondents to indicate on a seven-point Likert scale how they rate their firm in comparison with their competitors in terms of different strategic orientations. These items were factor analyzed using principal factor with varimax rotation method resulting in two factors, representing the product/market differentiation and cost/ efficiency, explaining a total of 68.51% of the variance (see Table 2). Differentiation emphasizes specialty products and marketing intensity (11 items, α 0.95). Sample items include uniqueness of products and emphasis on building strong brand identification. Cost/efficiency consisted of five items (α 0.90). Sample items include level of capacity utilization and finding ways to reduce cost of products. Firm performance This scale was comprised of subject performance measures. Following Huselid (1995), we adopted subjective measurements of firm performance in this study, namely, perceived organizational and market performance (Delaney & Huselid, 1996). Perceived organizational performance includes seven items Table 2 Factor structure of strategic orientation. Product/Market Differentiation Cost/Efficiency Uniqueness of products Targeting a clearly defined segment Offering products suitable for high price segments Intensity of marketing efforts Emphasis on building strong brand identification Offering a broad line of products Range of product mix Offering specialty products Intensity of advertising Quality of products Development of new products Level of capacity utilization Level of operating efficiency Efficiency in securing raw materials Emphasis on finding ways to reduce cost of production Efficiency of distribution channels Eigen value % variance explained

12 64 I.H.-s. Chow et al. pertaining to the organization s performance in comparison to their competing organizations (α 0.96). Control variables Firm characteristics, such as size, union, industry, and ownership structure, are determinants of firm performance. Larger and foreign owned organizations are more likely to use better-developed or sophisticated HR practices. Firms with superior resources will be able to formulate and implement unique and innovative strategies. Ownership structure (measured by foreign 0 1 vs. local 0 0) is another characteristic that can influence HRM and performance function. Industry was coded as 1 for manufacturing and 0 for service. HRM system could be more conducive in service industries than labor-intensive manufacturing industries. Firm size (log), industry, union, and ownership types were controlled for the prediction of organizational performance. The present study assumes that common method variance exists (Richardson, Simmering, & Sturman, 2009: 766) as most of our data were collected from the same source, using the same methodology. We undertook several procedures to control for common method variance error. We ensure that our survey items on HR practices, for instance, comprise of micro-organizational practices as these practices are relatively free of effect-size inflation (Martin-Tapia et al., 2009). We then subject all of the items in the model to an exploratory factor analysis for Harman s ex post one factor test (Podsakoff, Mackenzie, & Podsakoff, 2003) as the items in the questionnaire were generated from the literature. The analysis showed that there were eight factors which explained 71.6% of variance. It provided some assurance that common method variance is not a major issue in the current study. To further control for the effect of common method bias, objective financial performance data were also collected (Wright et al., 2005) from published annual reports. This is also, in part, to ensure that data collected from a single source may have resulted in an implicit theory effect, stemming primarily from respondents mental model that good organizational performance must be linked with the usage or effectiveness of HR practices (Gardner & Wright, 2009). As half of our respondents were from the public and non-profit sector and smalland medium-sized enterprises, there were no publicly available financial performance data for these organizations. Hence, we have to rely on perceptual measures of performance indicators in the analysis. It is common for the adoption of subjective performance data for public and non-profit organizations (Teo & Rodwell, 2007) and small- and medium-sized enterprises (Wolff & Pett, 2006). Consistent with the literature (Dess & Robinson, 1984; Wall et al., 2004), our analysis also showed a strong correlation between perceived organizational performance and financial performance (r 0.90, p <.01) for private sector organizations. Results Table 3 presents the descriptive statistics and correlations. Most of the variables of interest are strongly correlated. Industry is the only variable that shows no significant correlation with other variables. Given the high correlation among predictor variables, multicollinearity may be a problem affecting the signs and significance of the

13 HRM systems and firm performance 65 regression coefficients. To check whether this is a serious problem in our specified regression equation, we calculated the Variance Inflation Factors (VIF) statistics for the equation. VIF scores were below 4.2, indicating that multicollinearity is not a serious problem (Kleinbaum, Kupper, & Muller, 1988). Hierarchical multiple regression analysis was conducted to examine the relative effects of HRM systems and strategic orientation on perceived performance measure. Regression results are given in Table 4. First, the control variables were entered, organizational size (β 0.34, p <.001) and ownership (β 0.29, p <.001) showed highly significant effects on performance measure. 2 Next, the three HRM systems and two strategic orientations were entered in steps 2 and 3 separately. Results revealed that Investment HRM and Inducement HRM were significant predictors of organizational performance while Involvement HRM was not significant. Contrary to the literature, Involvement HRM did not have direct impact on enhancing firm performance. Hypotheses 1b and 1c were accepted. Cost/Efficiency had a negative effect while Differentiation orientation exerted a significant positive impact on firm performance, lending support for Hypothesis 2. We followed Baron and Kenny s (1986) procedures for assessing the mediating role of strategic orientation. First, HRM systems (the independent variables) should be significantly related to strategic orientation (the mediator variable). The result of the regression analysis shows that Investment HRM (β 0.25, p <.001) and Inducement HRM (β 0.50, p <.001) significantly contributed to the prediction of Differentiation (Model 6). In Model 7, Involvement HRM showed significant negative association (β 0.68, p <.001) while Investment HRM showed significant positive relationship with Cost/Efficiency (β 0.31, p <.01). Second, the independent variable should be related to the dependent variable. Investment HRM and Inducement HRM were found to have a strong and significant effect on firm performance as given in Model 2 of Table 3. Third, the mediating variable should be related to the dependent variable. As shown in Model 3, Cost/ Efficiency is negatively associated with firm performance (β 0.09, p <.05) while Differentiation is positively related to firm performance (β 0.84, p <.001). The mediator of Cost/Efficiency was not significant as shown in Model 4. With both the independent variables and the mediator (Differentiation) included in the equation, the β coefficients for Investment HRM became non-significant (full mediation) while Inducement HRM maintains significant but substantially reduced (partial mediation) as shown in Model 5. The results support the mediated relationship between HRM systems and firm performance. In the mediation model, Differentiation (mediator) accounted for a highly significant proportion of the variance in explaining the HRM performance relationship. This provides further evidence of the mediating role of strategic orientation (Differentiation) in the HRM performance link. Hypothesis 4 was confirmed. We used Sobel s test to cross-check the results of the mediated effects. The Sobel test results revealed that the indirect effects of Investment HRM (z , p <.001) and Inducement HRM (z , p <.001) on firm performance through differentiation were indeed highly significant. We used simultaneous equations modeling to test the influence of strategic orientation on the HRM systems firm performance relationship. The path results from 2 Foreign firms scored significantly higher in all three HRM systems and two business strategies.

14 66 I.H.-s. Chow et al. Table 3 Descriptive statistics and correlations among variables. Mean S.D Perceived organizational performance Size (log) *** 3. Union ***.23*** 4. Industry (manufacturing vs. service) Foreign vs. local ownership ***.33***.38***.16* 6. Involvement HRM ***.17*.20**.08.30*** 7. Investment HRM ***.48***.21** ***.61*** 8. Inducement HRM ***.41***.28***.01.48***.66***.74*** 9. Cost/Efficiency ***.06.20**.05.16*.53***.18*.30*** 1. Differentiation ***.50***.28***.05.48***.60***.76***.82***.19** p <.10, * p <.05, ** p <.01, *** p <.001.

15 HRM systems and firm performance 67 Table 4 Results of hierarchical regression analyses. Dependent Variables Firm Performance Differentiation Cost Model Controls Size (log).34***.14**.02.14*.03.17***.02 Union Industry * (manufacturing vs. service) Ownership.29*** (foreign vs. local) HRM systems Involvement *** Investment.20**.20*.04.25***.31** Inducement.45***.49***.17*.50***.06 Strategic orientation Cost/Efficiency.09*.02 Differentiation.83***.65*** ΔR 2.30***.35***.44***.00.10***.37***.30*** F 18.66*** 45.20*** 83.01*** 39.34*** 64.26*** 78.47*** 13.36*** p <.10, * p <.05, ** p <.01, *** p <.001. LISREL analysis are depicted in Figure 1. The results showed acceptable fit to the data (χ , df 0 691, p 0.0, RMSEA 0.08, NFI 0.94, CFI 0.97), thus rendering support to the overall validity of the structural model. Significant paths are indicated by bold lines. Inducement HRM and Investment HRM had significant effects on Product/Market Differentiation while Involvement HRM and Investment HRM had significant effects on Cost/Efficiency strategic orientation. Discussion The main purpose of this study was to examine the HRM systems strategic orientation firm performance link. We examined the impact of HRM systems on firm performance through different strategic orientation. Findings from the regression analysis confirmed the direct relations on the HRM system performance and strategic orientation performance relationships. Inducement HRM and Investment HRM systems are more appropriate for Singaporean firms while Involvement HRM system has no direct effect in enhancing firm performance. While differentiation strategy exerts highly significant impact on firm performance, cost-efficient strategy had a negative effect. We found support for the mediating role of differentiation on Investment HRM and Involvement HRM in Singaporean firms. Our study showed that Singapore is not a low cost center; instead, its status as a global business hub means that firms in the country tend to adopt differentiation orientation for ongoing performance. Strategic orientation as a mechanism for HR

16 68 I.H.-s. Chow et al. deployment serves as the link in the HRM systems performance relationship. Senior executives should further develop strategic orientation as a guide to improve their performance. Consistent with Chew and Chong (1999), our findings showed that an organization s strategic orientation mediated the HRM performance relationship. In particular, we found that Inducement and Investment HRM systems affect firm performance both directly and indirectly through strategic orientation. The empirical results supported the mediating role of differentiation on the HRM performance relationship. Product/market differentiation was far more important in driving firm performance than low cost. This finding shows that senior management have to consider the mediation effect of strategic orientation when implementing strategic HRM. Further examination of the composition of the HR practices categorized as Inducement and Investment HRM systems showed that the practices were consistent with the those practices which demonstrate the philosophy of high performance (e.g., Huselid, 1995; Lawler et al., 2011) and human capital enhancing HRM (e.g., Snell & Dean, 1992; Zhu et al., 2005). These practices were found to predict organizational performance outcomes. On the other hand, the items composing Involvement HRM system reflect those which are more commitment-based and contrary to the literature; these did not impact on performance outcomes (see Table 1). This finding suggests that firms in Singapore embraced a performance and human capital approach to effectively manage their employees, similar to other studies conducted in Singapore (e.g., Zhu et al., 2005). Results from this study suggest that strategic orientation is an important mediator. HR executives should include strategic orientation to enhance the explanation of HR system to organizational performance and consider the impact of strategic orientation on achievement of organizational performance. The results from our study offer some practical implications for other global challenges looming on the horizon. For instance, as a result of globalization, challenges occurring in the region and/or globally may have significant consequences on the management of Singaporean organizations. The Monetary Authority of Singapore (2007) identified a number of issues in relation to contingency planning, which have significant HRM implications (e.g., strategies to deal with absenteeism, disaster recovery plan, talent management, etc.). These strategies would require the HRM function to participate in the strategic decision-making processes as a business partner to line managers. It would draw upon competencies such as those identified by Selmer and Chiu (2004) which include change agent, organizational knowledge, and crisis management skills. These three sets of HR competencies are similar to those identified by Ulrich (1997) and are considered as core capabilities required by HR professionals in order to be value adding to line managers. As demonstrated in the current study, this competency is crucial in the context of value adding and contributing to the formulation of strategies in the context of business volatility. Limitations and future research implications While our results contributed to the literature on the importance of the HRM function when firms were experiencing financial crises, our findings should be interpreted

17 HRM systems and firm performance 69 with caution. The present study relied on data provided by a single respondent using a single measurement tool (such as survey), we have to acknowledge that the findings could be affected by common method variance. This particular research design may besubjectedtocommonmethodbiasandimplicit theory. Consistent with the literature, we used several tests to examine the effect of common method bias on our findings. Both Harmon s One Factor test (Podsakoff & Organ, 1986) and the collection of objective performance indicator were used to provide confidence that common method variance is of no major concern in the present study. Our results may only be applicable to Singaporean firms which have a HRM function and are of a certain size. A longitudinal study of the impact of HRM on the subjective and objective performance of employees and firm outcomes should be carried out. This type of study could be conducted to investigate the impact of the organizational life cycle on HRM adoption. In addition, the primary aim of the present study is to develop a mediating model which explains how Singaporean senior executives view HRM adoption; hence, these individuals were deemed to be knowledgeable of the phenomenon in question. Together with tests on firm size and the tests conducted to check for the effect of common method variance, gave additional reassurance that our findings were not affected negatively by common method variance (Podsakoff et al., 2003; Richardson et al., 2009). Findings from the present study offer both theoretical and practical implications for academics and practitioners alike. Our study contributes to the literature by providing empirical support to the mediating role of a firm s strategic orientation in the relationship between HRM systems and firm performance. Theoretically it helps to develop an alternative view of conceptualization in analyzing the conventional strategic HRM research. From the theoretical perspective, these findings can help to better understand how strategic orientation may affect the HRM performance relationship. Strategic orientation not only affects performance directly but also serves as a mediator on the HRM performance link. Conclusion In conclusion, the current study provided confirmation that senior executives in Singapore actively ensure the adoption of SHRM. It is hoped that the current study provided additional empirical evidence on how Singaporean companies, both foreign and local owned, managed their human capital. We applied the HRM systems performance theoretical framework and introduced strategic orientation as a mediation effect of the HRM performance linkage. Strategic orientation (differentiation) was found to partially mediate the relationship between HRM systems (Investment and Inducement) and firm performance. References Ahlstrom, D On the types of papers the Asia Pacific Journal of Management generally publishes. Asia Pacific Journal of Management, 29(1): 1 7.

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