Growth and HRM

Vincent Giuca and Professor Rowena Barrett 

Growth firms are important contributors to economic prosperity. Much of this contribution comes from new enterprises or start-ups with an emphasis on employment growth. These are the ones David Birch has called ‘gazelles’ or David Storey has called ‘fliers’. Tags like these mean they attract the attention: Consultants focus on how to increase value of growing firms; the media like to construct lists of top growth firms; and academics want to understand, amongst other things, what drives growth and how firms can grow in a sustainable way.

But despite this interest, as Per Davidsson and Johan Wiklund (two leading entrepreneurship researchers), argue “knowledge about what facilitates and hinders growth is still scattered and limited”. This is mainly a result of business growth being affected by a variety of internal and external factors and therefore any ‘theory’ would have to deal with the characteristics of the entrepreneur, the firm and the corporate strategy.

Our interest in business growth is in the role played by human resources and the performance effects which can accumulate through effective human resource management (HRM). There are two approaches to understanding growth which highlight the importance of human resources and effective HRM. The first approach is based on modelling the organisational lifecycle and managing the challenges that occur in the transitions between different stages of the firm’s lifecycle. Essentially the thinking here is that at different stages of the firm’s development, different HRM issues will be paramount and need to be overcome if the transition is to be successful. For example, studies suggest that at the firm’s start-up stage the key HRM problem revolves around recruitment – getting the right people in – while growth puts an emphasis on implementing systems, departmentalisation and building functional specialisations. The emphasis therefore shifts to ensuring that the right people are retained and HRM focuses on employee development, compensation and reward.

The second approach that highlights the role of HRM in contributing to growth draws on the work conducted under the rubric of the Resource Based View (RBV) of the firm. At the heart of the RBV is the view that the physical, organizational or human resources of a firm may be a source of competitive advantage if they meet certain conditions. In the case of human resources, the firm’s stock of employees’ skills and knowledge, must be valuable to the organization, rare – that is not found in competitor organizations, difficult for competitors to imitate and organized to exploit the particular resource to achieve the organization’s objectives. Many writers use the RBV to understand the role of HRM in achieving superior organizational performance by adding value through the attraction, retention and deployment of human resources. However it must be noted that sustained competitive advantage is derived, not from HRM practices themselves but the way they are developed and integrated to achieve strategic objectives: it is management’s ability to configure HRM to fit with business strategy in ways which are firm-specific and therefore rare and inimitable that leads to competitive advantage. Despite this there is still much to understand about how growth oriented firms can benefit from investing in human resources and what kind of HRM practices and programs are most likely to be critical for their success.

So what are the HRM issues for growth firms? Growth often entails increasing numbers of people who bring increasing complexity to organisation and management. Fast-growth firms can have considerable recruitment and training needs but they are under significant cost pressures. As a result of these financial pressures managers may use opportunistic hiring practices that rely on social and business networks and which emphasize person-organisation fit and trust, rather than skills, when hiring. Such practices, while easy to use and convenient, can significantly restrict the pool of potential employees as well as the array, depth and scope of skills and abilities to be brought into the firm, and this may ultimately hold the organisation back.

While it is important to get recruitment and selection right at the firm’s early stage of organisational development, Matt Rutherford, Paul Buller and Patrick McMullen’s study of 2,903 small to medium sized firms, identified that fast-growth firms were more likely than low-growth firms to experience problems with training. This, they argue can be because the owner-manager/entrepreneur is unable to oversee the training of all staff. As a result they need to consider formalising processes and developing operational and managerial systems as well as other types of organisational infrastructure which may reduce dependence on the owner-manager/entrepreneur, freeing them up from ‘doing’ and enabling them time for strategic thinking. While dependence may not be entirely eliminated as varying degrees of tacit knowledge, skills and abilities are not easily documented or transferred, formalisation and the development of systems can nonetheless provide a platform from which sustainable growth can occur. As Tony Davila has argued, “an informal approach to the coordination and control of organizational activities becomes harder (and costlier) as the organization grows and formalizing these management activities becomes vital for future growth” (2005: 243).

This is not an argument for formality over informality as both can (and do) co-exist within organisations. Instead it is an acknowledgment that as the workforce grows and more specialist roles are required there is pressure on management to provide more structure and define areas of responsibility increases. But too much formality, say in how jobs are described and structures implemented, could stifle employee innovation by placing boundaries around work activities and responsibilities. This may serve to constrain initiatives for new and complementary behaviours in a fast changing work setting mean employees are unable to use their initiative to support the business overall.

In growth firms there may well be a tension between too much and too little formalisation of HRM policies and practices. But the point is that fast-growth can strain internal organisational resources and systems which, in turn, can put pressure on managers and employees to react to the fast changing landscape. As such managing fast-growth firms requires the management of change. Formalising HRM policies and practices can help to ensure that personnel issues are thought through more thoroughly than would otherwise be the case and that there is greater consistency in the application of HRM processes and outcomes that could otherwise be sources of demotivation and disputation. Carefully thought through HRM processes and practices can be beneficial to organisations experiencing growth: how well the changing landscape is navigated will determine whether jobs remain, the opportunities people have in those jobs and the magnitude of returns that will be generated for all those engaged in the enterprise.

Vincent Giuca is a PhD student at Monash University in Melbourne Australia and is being co-supervised by Professor Rowena Barrett (De Montfort University) and Dr Susan Mayson (Monash University).  

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