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Is HRM a worthwhile investment for an SME Essay

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Updated: May 3rd, 2019


Organizations’ management teams are increasingly appreciating the importance of human capital in an effort to improve their organizations’ competitive advantage (Kok 2003). This has led to an increment in the number of studies being conducted with regard to best practices of managing human resources.

There has also been increased recognition of the purpose of small and medium enterprises (SMEs) in the modern economies. This realization illustrates that, there is a point of convergence between human resource management and small medium enterprises. Human resource management [HRM] deals with management of a firm’s workforce (Kok 2003). It is composed of a set of different but interrelated processes, activities, and functions that are aimed at attracting, developing, and retaining an organization’s workforce.

Some of the activities undertaken in HRM include employee recruitment, selection and formulation of effective appraisal and compensation scheme. Through HRM, organizations can develop and retain talented and energetic workforces that can contribute towards attainment of the formulated organizational strategies, missions, goals and objectives (Transky & Heneman 2006).

Additionally, integration of HRM practices and policies can significantly contribute towards a firm improving its performance. However, integration of HRM in SMEs is relatively low (Cooper & Burke 2011).

Previous studies reveal that, most SMEs do not make optimal use of HRM practices in their operations (Bacon, & Hoque 2005). Some of these studies assert that, most SMEs tend to operate in a more flexible and informal manner compared to large enterprises. For example, Kok (2003) is of the opinion that, a firm’s size is directly related with its incidence towards HRM practices such as training and planning.

However, small firms are less likely to invest in training for their employees, performance appraisal, and recruitment practices probably due to limited capital and revenues. HRM in SMEs is mostly characterized by administrative tasks whereas the more strategic matters are not perceived with the weight that they deserve.

A study conducted by Hendry and others in 1991 reveals that, SMEs perceive investing in HRM as an additional undertaking beyond the level that is necessary to sustain their operations; a luxury that can only be afforded if the firm makes substantial profits (Kok 2003). However, considering the environmental uncertainty facing firms today, it is paramount for SMEs to evaluate their operational practices in order to remain competitive and HRM optimization is slowly becoming indispensable.

In addition to being characterized as being informal, management teams of SMEs are also considered to be less specialized compared to large enterprises. Employees of SMEs tend to perform different tasks compared to large enterprises, which means that the level of specialization is relatively low.

This aspect is well illustrated by a qualitative study conducted by Berkley and Heneman in 1999. The study took into account a random test on 117 SMEs whose human resource base was less than 100 employees. Findings of the study showed that, 15 of the SMEs considered had a human resource management department (Kok 2003).

There is growing evidence that HRM practices tend to be sophisticated especially for SMEs. On the basis of the above analysis, it is evident that there is a significant level of deficiency with regard to HRM in SMEs. This paper is aimed at critically evaluating whether it is worthwhile for SMEs invest in HRM.

Analysis of the trend of HRM

Previous studies conducted have shown that, development of an effective workforce and organizational culture is one of the ways through which organizations can develop their competitive advantage. Firm and employee culture are considered to be some of the most fundamental aspects in the success of SMES.

An example of such culture includes operating in a social responsible manner (Mankelow 2008). As a result, it is quite unprofessional for SMEs to continue underutilizing their human capital (Cooper & Burke 2011). HRM has over the past decade become one of the most crucial aspects that both small and large organizations have to consider. There are a number of reasons that have contributed to this shift. Some of these reasons are explained in the paper.

Currently, the business environment is increasingly becoming knowledge based. This means that firms are considering knowledge as an important source of competitive advantage. This has arisen from the high rate of globalization that is being experienced today (Knowles, Diamantis & El-Mourhabi 2004).

As a result of globalization, most economies are eliminating trade barriers thus presenting a challenge to firms through increased competition (Tsui & Lai 2009). Therefore, it is paramount for organizational management teams to consider ways of enhancing their organization’s performances (Cooper & Burke 2011).

With the development of the education sector in different economies, the workforce is becoming more and more educated. There has also been considerable growth with regard to employees’ expectations on working environment and quality work. Additionally, staff shortages have made firms experience intense competition for human capital. As a result, SMEs are reconsidering on the best practices that they can retain their talented workforce (Cooper & Burke 2011).

The importance of HRM in both large and SMEs is also being enhanced by the demographic changes occurring within the labour market. One of the demographic changes being witnessed arises from the fact that the workforce is becoming aged. As a result, it has become essential for SMEs to consider incorporating performance incentives and training and development initiatives in order to maximize on their employees’ working capacity.

Organizations are also experiencing a significant transformation with regard to clients and customer expectations. As a result of customers and clients becoming more knowledgeable, they are demanding effective, efficient and high quality services and products (Cooper & Burke 2011). Analysis of the changes occurring within the business environment reveals that, it is critical for businesses to consider ways of improving their competitive advantage through integration of HRM practices in their management practices.

Theoretical frameworks formulated to explain the importance of HRM in SMEs

A number of theories have been advanced to explicate the relevance of SMEs investing in HRM. One of the theoretical explanations is universalistic in nature. The theory is based on HRM best practices (Cooper & Burke 2011). Through integration of HRM best practices, SMEs can attain considerable improvement in their performance. One of the ways through which this can be attained is by incorporating the concept of employee training and development (Jolly 2003).

Findings of a study conducted in 2002 on the perspective of employee development in SMEs revealed that, training and development is an indispensable component in a firm’s effort to attain the desired growth. This arises from the fact that training and development contributes towards increased productivity within an organization’s workforce. Increase in productivity arises from the fact that employees perceive a higher opportunity for growth within such an organization.

Training and development also enhances the employees’ level of motivation. Despite the benefits associated with training and development, some parties are of the view that training and development can result into increased employee turnover as a result of poaching (Jolly 2003). However, for training to be successful in SMEs, management teams should ensure that it is well imbedded within the firm’s workplace, informal and flexible.

The theory also asserts that incorporation of HRM by SMEs would result in adoption of performance based pay. According to Longenecker (2006), it is paramount for SMEs to acknowledge the importance of formulating a compensation plan that will contribute towards attraction and retention of well-qualified personnel.

One of the ways through which SMEs can achieve this goal is through incorporation of HRM best practices. Some of the elements that they should consider when formulating the compensation plan include competitive salary and wage levels, and financial incentives that will improve employee productivity. One of the financial incentives that are most effective in SMEs includes sharing profits. This arises from the fact that it is possible for SMEs to assess individual performance (Longenecker 2006).

The second theoretical framework is behavioural in nature. The theory asserts that human resource management practices and policies have a significant influence on employees’ behaviour, for example, through organizational commitment, employee creativity and work engagement. These aspects consequently affect productivity, profitability and performance (Cooper & Burke 2011).

The third theoretical framework is economic in nature. This arises from the fact that significant cost is incurred in the process of adopting formal HR practices. According to Phillips (2005), acquisition and maintenance of a strong workforce is quite expensive.

There are numerous cost categories that are involved in the development of a strong workforce. Some of these are related to recruitment, selection, indoctrination, initial training, formulation of competitive compensation and reward systems, socialization and exit costs. This can be a challenge especially to SMEs compared to large enterprises.

How HRM is worthwhile investing by SMEs

There are a number of reasons that illustrate why it is worthwhile for SMEs to invest in HRM. For example, through incorporation of effective training programs, SMES can be able to derive more value from their workforces. This arises from the fact that the business will be able to effectively address the most pertinent issues facing its operation.

Investing in HRM can also improve the employees’ attitude towards work. One of the ways through which this change of attitude is attained is by integrating effective leadership measures (Cooper & Burke 2011). Findings of a study conducted in the US on leadership training revealed that revenues of firms that incorporate leadership training grow with a margin of more than 25% compared to their training cost (Cooper & Burke 2011). This well illustrates the fact that training can result in improvement of SMEs financial performance.

Additionally, investing in HRM can significantly improve the performance of SMEs through improved employee engagement. There are a number of ways through which organizations can achieve this; some of these include ensuring that the employees have a comprehensive understanding of their performance expectations. Additionally, SMEs should ensure that employees have sufficient resources to support successful completion of tasks.

By investing in HRM, SMEs can be able to contribute towards staff development, improve on employee input, in addition to compelling the employees to be focused towards attainment of organizational goals and mission. Integration of HRM in SMEs can also contribute towards development of a strong workplace culture.

Work within the modern economy is becoming more and more demanding (Ulrich 1997). For example, organizations are demanding more from their employees with few resources.

There has also been a decline in employment security, which is making the employees to reconsider their commitment and contribution to their employers (Ulrich 1997). However, incorporation of HRM by SMEs can significantly improve their performance in a number of ways. For example, HRM contributes towards development of an enabling environment for employees to work in.

One of the reasons why organizations are experiencing a challenge with regard to employee turnover relates to the current global economic changes. Employees are constantly faced with the challenge of ensuring that they provide for their families. To achieve this, employees are considering improving their competitive edge within the labour market. To achieve this, employees are considering going back to school.

The employees work demands coupled with their desire to enhance their competitiveness in the labour market are leading to increased stress levels amongst the employees. This arises from the fact that the employees are not able to balance between work and life. Occurrence of such a phenomenon would have adverse effects on the employees productivity and hence the organization’s performance and competitive advantage (Williamson, Lewis & Massey 2011).

Some of the HR practices that organization management teams should consider in order to deal with this challenge include incorporation of work-life balance and stress management policies (Williamson, Lewis & Massey 2011). Effective formulation and implementation of work-life balance can be beneficial to SMEs through achievement of a healthier and happier life for the employees.

One of the ways through which management teams of SMEs can achieve this formulation is by integrating effective HR policies; for example, flexible career options and working hours (Cooper & Burke 2011). Integration of such strategies can significantly improve the employees level of satisfaction and hence their productivity.

Considering the competitive nature of the labour market, it is paramount for SMEs to ensure that they acquire a strong workforce (Michalski 2011). This can only be attained by ensuring an effective employee recruitment process. However, most SMEs do not consider investing their time and money towards developing their human capital. As a result, they do not have a formal employee recruitment process.

Recruitment of a strong workforce in SMEs is also hindered by the fact that they are not well connected in the labour market (Cooper & Burke 2011). Additionally, most SMEs tend to suffer image problem amongst job seekers. To improve on their ability of recruiting a strong work workforce, it is paramount for SMEs to be concerned on becoming more legitimate. To deal with this challenge, it is crucial for SMEs to consider investing in a comprehensive recruitment process.

Through recruitment, an organization can attract a wide range of workforce to select from. SMEs should consider several issues in order to attract high-quality job applicants. For example, they should invest in initiatives aimed at making their organizations recognizable amongst job applicants (Hartman & Spiro 2005).

SMEs should also invest in developing human resource policies such as those used by large enterprises. This can be attained by outsourcing HR consultants to aid in the formulation and implementation of the policies. Such investment in HRM would have significant influence in SMEs’ operational efficiency.

The recruitment process is followed by selection of the most qualified staff which is a relatively complex process (Harney & Dundon 2006). Due to time and financial constraints, most SMEs conduct reactive selection and recruitment process. Additionally, a substantial proportion of SMEs do not have sufficient understanding on the requirements of a position intended to be filled. However, to ensure that they develop a strong workforce, it is critical for SMEs to invest in HRM practices such as employee selection and recruitment.

Upon acquiring a strong workforce, it is paramount for management teams of SMEs to consider on the most effective ways of motivating and retaining employees. This arises from the fact that underperforming employees can be a threat to the success of SMEs. HRM provides a solution on the best practices of employee motivation. These strategies range from monetary to non-monetary benefits. Some of the non-monetary benefits include recognition of employee performance and promotions.

To deal with underperforming employees, SME managers should ensure that they maintain constant communication with such employees in order to indicate what the firm expects of them.

Currently, SMEs can achieve this more effectively and efficiently considering the growth in information communication technology; for example, by using emerging social communication networks such as Twitter and video conferencing. This means that SMEs should invest in the current technology. Maintaining communication within an organization can significantly contribute towards development of a strong bond between employees and the management team (Cooper & Burke 2011).

SMEs, which have incorporated HRM in their operation, are able to deal with changes occurring in the business environment. This capacity to handle change easily is made possible by the fact that HRM enables organizations to undertake comprehensive human resource planning. As a result, they are able to evaluate and anticipate their current and future human resource needs. Therefore, investing in HRM can enable SMEs to be proactive in dealing with environment changes rather than being reactive.


The above analysis makes it evident that, SMEs do not pay much emphasis on HRM compared to large organizations. For example, studies conducted reveal that only a few SMEs have a functional human resource department. This means that, human resource activities are conducted more informally.

There are a number of reasons that explain this trend. Some of the reasons range from lack of knowledge on HRM by management teams of SMEs to the high cost involved in implementing HRM. However, changes occurring within the business environment such as globalization have increasingly made SMEs to reconsider the role of HRM in an effort to survive in the challenging business environment.

Despite this, the above analysis underscores the importance of HRM in SMEs. For example, despite investing in HRM policies and practices being costly to SMEs with regard to financial and time requirements compared to large organizations, there are numerous benefits that SMEs can achieve. Incorporation of HRM practices can contribute towards improvement of SMEs’ competitive advantage in a number of ways.

For example, by investing in training and development, SMEs can improve the employees working efficiency and effectiveness. Additionally, organizations that invest in training and development are more efficient with improving employee satisfaction. This arises from the fact that the employees develop a perception that the organization has an interest in their heart.

This will consequently culminate in improvement of their productivity and hence their performance. Considering the dynamic nature of the business environment, it has become necessary for SMEs to shift their operations towards becoming knowledge-based to be competitive. This can only be achieved if SMEs undertake sufficient training and development.

By investing in employee recruitment and selection, there is a high probability of SMEs developing a strong human resource base. The resultant effect is that the firm’s competitiveness will be enhanced. Additionally, if effectively formulated and implemented, investing in HRM practices and policies can result in the creation of an enabling working environment.

This argument holds because HRM advocates for firms to incorporate strategies, which will contribute towards a high level of employee satisfaction. Some of these strategies relate to ensuring that the employees are well remunerated and their performance recognized by conducting sufficient performance appraisals.

Investing in HRM increases the probability of SMEs to achieve their goals and objectives. One of the ways through which this scenario is made possible arises from the fact that HRM advocates for effective management of employees; for example, by integrating the concept of teamwork.

Effective organizational leadership also plays a critical role with regard to enhancing cohesiveness in an organization. Considering the contribution of HRM towards organizational success, it is vital for SMEs to incorporate the best HRM policies and practices, because as explicated in this paper, HRM is a worthwhile investment for SMEs.

Reference List

Bacon, N & Hoque, K 2005, ‘HRM in the SME sector: valuable employees and coercive networks’, International Journal of Human Resource Management, vol. 16 no. 11, pp. 1976-1999.

Cooper, C & Burke, R 2011, Human resource management in small business: Achieving peak performance, Edward Elgar, Cheltenham.

Harney, B & Dundon, T 2006, ‘Capturing complexity: Developing an integrated approach to analyzing HRM in SMEs’, Human Resource Management Journal, vol. 16 no.1, pp. 48 – 73.

Hartman, K & Spiro, R 2005, Recapturing store image in customer-based store equity: A construct conceptualization, Indiana University, Indiana.

Jolly, A 2003, Skills and Training Directory: A Complete Sourcebook of Best Practice and Training Providers, Kogan Page, London.

Knowles, T, Diamantis, D & El-Mourhabi, J 2004, The globalization of tourism and hospitality, Thomson, London.

Kok, J 2003, Human resource management within small and medium-sized enterprises, Rozenberg Publishers, Amsterdam.

Longenecker, J 2006, Small business management: An entrepreneurial emphasis, Thomson, Ohio.

Mankelow, G 2008, ‘Social responsibility paradox of small business human resource management,’ International Journal of Human Resource Management, vol. 19 no. 12, pp. 2171-2181.

Michalski, A 2011, Human resource controlling in small and medium enterprises: Components and possible approaches, Berlin, GRIN Verlag.

Phillips, J 2005, Investing in your company’s human capital: Strategies to avoid spending too little or too much, AMACOM, New York.

Transky, J & Heneman, R 2006, Human resource strategies for the high growth entrepreneurial firm, Information Age Publishing, Greenwich.

Tsui, A & Lai, K 2009, Professional practices of human resource management in Hong Kong: Linking HRM to organizational success, Hong Kong University, Hong Kong.

Ulrich, D 1997, Human resource champions: The next agenda for adding value and delivering results, Harvard Business School, Boston.

Williamson, A, Lewis, K & Massey, C 2011, Work-life balance in small business: The impact of firm and family milestone, Wellington, New Zealand Centre for SME Research.

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