Human Resource Management, TQM, and Firm Performance in Small and Medium-Size Enterprises

By Chandler, Gaylen N.; McEvoy, Glenn M. | Entrepreneurship: Theory and Practice, Fall 2000 | Go to article overview
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Human Resource Management, TQM, and Firm Performance in Small and Medium-Size Enterprises


Chandler, Gaylen N., McEvoy, Glenn M., Entrepreneurship: Theory and Practice


This study analyzes the moderating effect of two key human resource practices on the relationship between organizational strategy and firm performance. In a sample of 66 small to medium-sized manufacturing firms we found that a total quality management strategy was most effective when supported by significant training and group-based incentive compensation. This result is discussed in light of the current debate in the field about "best practice" versus "fit" models of human resource management and business strategy.

The academic literature has lagged far behind practitioner interest in Total Quality Management (TQM) as a competitive strategy. Most of the present literature in TQM is prescriptive and without empirical foundation (Dean & Bowen, 1994). Despite the numerous TQM "failures" reported in the literature (Pilkington, 1998; Reger, Gustafson, DeMarie, & Mullane, 1994), most large corporations--and many small ones--have programs that incorporate at least some of the productivity and quality principles associated with TQM (Chandler, Hanks, McEvoy, & Beckstead, 1994; Lawler, Mohrman, & Ledford, 1992). These programs focus on customer responsiveness, product improvement, and cost savings, thus defining a differentiation business-level strategy based on high quality and low cost (Hill, 1988). Human resource practices are a key in the implementation of these strategic initiatives. However, there is some conflict in the existing prescriptive literature regarding which human resource practices are most beneficial. For exam ple, Deming (1986) claims that goal setting and incentive compensation systems are dysfunctional in a company practicing TQM. While others (Wyatt 1991) claim that incentive compensation is an important part of the implementation process.

Combined with a paucity of research documenting the adoption and implementation of productivity and quality programs, published research indicates that effective management of human resources is one of the most crucial problems faced by small firms (Deshopande & Golhar, 1994; Hornsby & Kuratko, 1990). With the exception of only a few studies (e.g. Welbourne & Andrews, 1996), there is an acute shortage of research identifying and validating human resource practices in small firms, and even less research focusing on the relationship between strategy, human resource practices, and small firm performance. In fact, even among larger firms only recently has research begun to document the relationship between HR practices and organizational performance (e.g., Delaney & Huselid, 1996; Delery & Doty, 1996; Huselid, 1995; Olson & Schwab, 1997; Pfeffer, 1998; Yeung, 1997; Youndt, Snell, Dean, & Lepak, 1996). Most of the studies seeking to investigate the human resource/performance relationship use large companies as re search sites. The typical research practice is to send questionnaires to HR departments at corporate headquarters. The weakness with this approach is that HR practices may vary considerably across different locations and this variability will likely confound the establishment of a genuine linkage between HR practices and firm performance (Becker & Gerhart, 1996). Welbourne and Andrews (1996, p. 893) suggested that smaller organizations presented a "unique opportunity for studying human resource management" and its relation to firm performance.

The purpose of the present research is to examine the general hypothesis that effective organizations adapt their HR practices to fit their strategies. Specifically, we examine the performance of small and medium-sized enterprises adopting various levels of a TQM strategy and test the moderating effect of the amount of training and the use of group-based incentive systems. We overcome some of the limitations in previous studies by drawing our sample from single-location organizations small enough to suggest a consistent set of HR practices throughout each firm.

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