The Relationship Between Human Resource Management

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The relationship between human resource management practices, business

strategy and ﬁrm performance: Evidence from steel industry in Taiwan
Article in The International Journal of Human Resource Management · July 2010

DOI: 10.1080/09585192.2010.488428
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The relationship between human resource management practices, business

strategy and firm performance: evidence from steel industry in Taiwan
Feng-Hui Leea; Tzai-Zang Leeb; Wann-Yih Wua
a
Institute of International Management, National Cheng Kung University, Taiwan b Department of
Business Administration, Kun Shan University of Technology, Taiwan
Online publication date: 08 July 2010
To cite this Article Lee, Feng-Hui , Lee, Tzai-Zang and Wu, Wann-Yih(2010) 'The relationship between human resource
management practices, business strategy and firm performance: evidence from steel industry in Taiwan', The
International Journal of Human Resource Management, 21: 9, 1351 — 1372
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The International Journal of Human Resource Management,
Vol. 21, No. 9, July 2010, 1351–1372
The relationship between human resource management practices,

business strategy and firm performance: evidence from steel industry
in Taiwan
Feng-Hui Leea*, Tzai-Zang Leeb and Wann-Yih Wua
a
Institute of International Management, National Cheng Kung University, Taiwan; bDepartment of
Business Administration, Kun Shan University of Technology, Taiwan
The primary objective of this study is to investigate the relationship between human
resource management (HRM) practices, business strategy and firm performance.
We examined the following HRM practices: training and development; teamwork;
compensation/incentives; HR planning; performance appraisal; and employment security.
We surveyed 236 managers working at steel firms in Taiwan to explore their perceptions
Downloaded By: [Lee, Neil Feng-Hui] At: 14:42 8 July 2010
on the impact of HRM practices and business strategy on firm performance. The results of
this study are summarized as follows: (1) HRM practices will be positively related to firm
performance; (2) there is a close linkage between HRM practices and business strategy;
(3) business strategies will be positively related to firm performance; (4) integrating HRM
practices with business strategies will be positively related to firm performance.
Keywords: business strategy; firm performance; HRM practice
Introduction
Today’s market environment is dynamic and market stability today may become
uncertainty tomorrow. In an uncertain market, the intensity of competition increases from
time to time. Firms have been trying to defeat one another in order to be the last survivor
and are able to enjoy total benefits as the market leader. Facing this situation, managers
must keep their fingers on the pulse and be ready to respond to any sudden changes.
Moreover, they need to be sure that the resources and capabilities are available for next
steps and fights. Traditionally, product technology and process, accessible capital sources,
and so on, were essential to win the game; however, at present, these kinds of resources,
suggested by Pfeffer (1994), fail to fulfil their roles to defeat competitors. The decreased
vitality of those primitive resources has drawn practitioners and academics’ attentions to
explore other types of assets which can capture and retain competitive advantage and at the
same time, are not easily imitated and copied by competitors (Barney 1991). The question
of the kind of asset that can provide sustainability, competitive advantage, and superior
performance has been asked and discussed among managers and scholars over the past
decades. As a result, the finding of human resources as a valuable intangible asset of an
organization was the unequivocal answer to clarify all doubts on how organizations could
compete in the market, achieve superior performance, realize competitive advantage, and
improve organizational performance over a very long time, or possibly forever.
Nowadays, the whole world recognizes that human resources are vital to achieve
success in the most effective and efficient ways. Only a small number of firms are able
*Corresponding author. Email: niellee@ms34.hinet.net
ISSN 0958-5192 print/ISSN 1466-4399 online

q 2010 Taylor & Francis
DOI: 10.1080/09585192.2010.488428
http://www.informaworld.com
1352 F.-H. Lee et al.
to elicit the hidden power of human resources and bring them into use to become leaders in
the markets (Sang 2005). The first formal human resource function and department were
initiated since the 1920s (Ferris, Hochwater, Buckley, Cook and Frink 1999).
Traditionally, HRM function was considered by managers as a tool to deal with staff
function, record keeping and file maintaining for organizations. However, the HRM
function has evolved into being strategic partner, sharing ideas, perspective, and resources
with marketing, finance, and accounting departments (Schuler and MacMillan 1984;
Ulrich 1987; Dulebohn, Ferris and Stodd 1995; Barney and Wright 1998).
A number of researchers found a link to HRM practices with some influential variables
seeming to increase firm performance. For example, Youndt, Snell and Lepak (1996) found
that business strategy and HRM practices interaction is an important factor in organizational
effectiveness. Richard and Johnson (2001) conducted a study to understand the impact of
human resource diversity practices on firm performance. They employed business strategy
as a contingent factor and found that business strategy moderates the relationship between
human resource practices and firm performance. Chow (2006) mentioned that business
strategies paired up with appropriate HRM practices will have a positive effect on firm
performance. Therefore, the primary objective of this study is to investigate the impact of
integrating HRM practices with business strategy on firm performance.
The reason why we selected the steel industry to conduct our research is that the steel
industry has long been regarded as a symbol of national strength in many countries (ITIS
Program Office 2007). Moreover, both developed and developing countries have been
trying to boost this industry. Since the steel industry is closely related to economic stability
and national development, it can be considered as a national strategic industry (ITIS
Program Office 2007). Furthermore, the production value of the Taiwanese steel industry
was over US$29 in 2007 and will exceed US$34 billion within three years (ITIS Program
Office 2007). Within three years the Taiwanese steel industry will be the third largest
industry in production value in Taiwan (ITIS Program Office 2007). However, due to
serious oversupply of global steel production capacity and rapid growth of mainland
China’s steel industry, the Taiwanese steel industry has been become more and more
uncertain and competitive. Thus, this study concentrates on the Taiwanese steel industry to
identify how to improve and enhance the performance and competitiveness of this industry
by integrating and implementing HRM practices and business strategies.
Literature review and hypothesis development

HRM practices
The influence of HRM on organizational outcomes has become an important topic of
research starting in the 1990s. Laka-Mathebula (2004) has mentioned that HRM attaches
importance to the motivational aspect of organizational practices in the development and
best utilization of human potential. Thus, she defines HRM as an integrated strategy
and planned development process for effective utilization of human resources for the
achievement of organizational objectives. Mondy, Noe and Premeaux (2002) defined
HRM as the utilization of individuals to achieve organizational objectives. HRM involves
the development of an individual’s abilities and attitudes in such a way that the individual
is able to grow personally and contribute towards organizational interests. Noe,
Hollenbeck, Gerhart and Wright (2006) defined HRM as referring to the policies,
practices, and systems that influence employees’ behaviour, attitudes and performance.
However, the important thing is to define the boundary of HRM practices. Hornsby
and Kuratko (2003) defined HRM practices in five major areas: job analysis and
The International Journal of Human Resource Management 1353
description, recruiting and selection, training, performance appraisal and compensation.

Huselid (1995) defined HRM practices as employee recruitment and selection procedures,
compensation and performance management systems, employee involvement and
employee training. Jeffrey and Donald (2003) viewed HRM practices as job analysis,
recruitment, selection, compensation, benefits, incentive, performance appraisal and
training. Mondy et al. (2002) thought the practices of HRM include five basic functions,
including staffing, human resource development, compensation and benefits, safety and
health, employee and labour relations and so on. Pawan (2000) identified HRM practices
as pay and reward, recruitment and selection, training and development, health and safety,
and work expansion or reduction.
From the above discussion, this study suggests six key HRM practices that are likely to
be positively associated with firm performance, product quality, production cost, product
delivery, and production flexibility. The six HRM practices are: training and development,
teamwork, compensation/incentives, HR planning, performance appraisal, and employ-
ment security.
Training and development refers to the amount of formal training given to employees.
Organizations can provide extensive formal training or rely on acquiring skills through
selection and socialization. Training is targeted on skill development, whether technical,
clinical or soft skills such as team working, leadership and interviewing (Delery and Doty
1996). According to Harel and Tzafrir (1999), training can influence performance in two
ways: first, training improves relevant skills and abilities; and second, training increases
employees’ satisfaction with their current job and workplace. Training can consist of
on-job training, off-job training, formal training, skill training, cross-functional training,
team training, literacy training and so on (Gomer-Mejia, Balkin and Cardy 2004).
Teamwork refers to a group of employees created on purpose to carry out a particular
job or to solve problems. The idea of teamwork is people share knowledge, skill,
judgement, and ideas among one another to get better results (Sang 2005). According to
Pfeffer (1998), teamwork provides many advantages: (1) teamwork depends on peer-based
work rather than hierarchical, which leads to more effective achievement; (2) teamwork
facilitates flows of ideas from team members and finally, an innovative solution; and
(3) teamwork helps save the administrative costs arising from paying specialists to watch
people.
Compensation or incentive is contingent on performance (e.g., individual or group
incentive pay). One of the primary means organizations use to enhance employee
motivation is providing performance-contingent incentive compensation to align employee
and shareholder interests (Delaney and Huselid 1996). According to Gomer-Mejia et al.
(2004), there are three kinds of compensation plan: first is base-compensation (fixed pay to
employees). Second is pay incentives (bonuses and profit sharing). Third is indirect
compensation (health insurance, vacation, unemployment compensation). Normally,
compensation is based on two categories: financial incentives and non-financial incentives.
HR planning includes the forecasts of personnel requirements, the budget on selection
staff, the numbers of people involved in selection, and structured and standardized
interviews (Chang and Chen 2002). Firms need to predict the supply of labour required to
meet future demand. According to Sang (2005) and Schuler and MacMillan (1984), firms
have to take the following things into consideration: (1) What is the rate of availability of a
future workforce? (2) Are there enough potential young workers in the labour market, in
the next two years or five years? (3) What is the level of education of those potential
workers? (4) Do firms need to help invest in the educational system to help upgrade
education of the potential workers or not?
Performance appraisal is used to evaluate employee performance. The purpose of

performance appraisal is to improve goal setting and feedback processes in order that
employees can direct, correct and improve their performance. It can be based on results or
behavior. Considerable evidence shows that the extent and sophistication of appraisal are
linked to changes in individual performance (Fletcher and Williams 1985). According to
Sang (2005), performance appraisal helps the top level of management to clarify and
communicate organizational objectives and expectations to internal employees and helps
them understand the capability of its own workforce. Gomer-Mejia et al. (2004) have
mentioned that performance appraisal system can be used for administrative purposes
which are related to employee’s work conditions, including promotion, termination and
rewards. However, some scholars and managers argued that performance appraisal brings
demoralization to a workplace and low productive rate, and should be eliminated from
practices (Williams 1997). Thus, some firms adopt performance appraisal in a careful way.
Employment security means job security via workforce stabilization and employment
continuity policies (Browne 2000). Employment security is important to determine the
work productivity of employees and the higher degree of job security offered to
employees, the more commitment an organization receives from them (Sang 2005).
Business strategy
Business strategy can be defined as a set of decisions about the direction of a firm.
A strategy is an integrated and coordinated set of commitments and actions designed to
exploit core competencies and gain a competitive advantage (Liao 2005). Strategies are
purposeful and precede the taking of actions to which they apply (Slevin and Covin 1997).
Business-level strategy is designed to provide value to customers and gain a competitive
advantage by exploiting core competencies in specific, individual product markets
(Dess, Gupta, Hannart and Hill 1995). Thus, Liao (2005) has mentioned that a business-
level strategy reflects a firm’s belief about where and how it has an advantage over
its rivals.
The essence of strategy is to understand why organizations perform differently, and
how performance can be directed and controlled (Ketchen, Thomas and McDaniel 1996).
The literature on strategy is ‘vast and growing at an astonishing rate’ (Mintzberg,
Ahlstrand and Lampel 1998). However, there is no consensus on what strategy is and there
are many definitions. Strategy is frequently described as a deliberate set of actions to
achieve competitive advantage, and giving coherence and direction to the organization
(O’Regan, Ghobian and Sims 2005).
Business strategy implies a series of systematic and related decisions that give a
business a competitive advantage relative to other business (Schuler and Jackson 1987).
The concept of business strategy derives primarily from Porter’s (1985) classifications of
generic strategies: cost leadership, differentiation, and focus. Miles and Snow (1984) have
classified business strategies into three types: defender, prospector and analyser. Referring
to Porter’s strategy types, Schuler and Jackson (1987) have classified business strategies
slightly differently from those of Porter into three types: cost reduction, innovation and
quality enhancement. Many scholars (e.g., Beaumont 1993; Huang 2001) have employed
Schuler and Jackson’s approach, and this study also adopts this method of classification.
Cost-reduction strategy involves enhancing competitiveness by lowering the cost
of products or services. This strategy enhances production efficiency and reduces
expenditures by adopting new technology, enlarging the scale of production,
or re-engineering production processes, so that a business can sell its products or services
at a lower price in the market. Innovation strategy implies an emphasis on the development
of products or services that are unique or different from those of competitors. The
essence of quality enhancement strategy is to achieve success by offering a standard of
quality superior to that of other products or services (Huang 2001).
Firms adopting a cost-reduction strategy must strictly control and minimize expenses,
and struggle for greater economies of scale. Firms adopting an innovation strategy must
adapt to rapid market change and technological development. Firms adopting a
quality-enhancement strategy must make frequent changes or continuous improvement in
the production process in order to continuously upgrade their product quality.
Firm performance
A number of previous studies examined the impacts of HRM practices on different kinds
of firm performance, such as on productivity (Chen, Liaw and Lee. 2003), on efficiency
and employee turnover (Huselid 1995), on financial performance (Huselid, Jackson
and Schuler 1997), on customer satisfaction (Koys 2003), on turnover, absenteeism,
productivity and quality (Richard and Johnson 2001).

There are different ways to define firm performance according to different purposes of
studies. This study defines firm performance as operational performance. In recent years,
scholars argued a number of criteria of operational performance measures. Among them,
Skinner (1974) mentioned short and dependable delivery, superior quality, fast new product
development, volume flexibility and low cost. Wheelwright (1978) emphasized efficiency,
dependability, quality and flexibility. After the previous research, Wheelwright in
collaboration with Hayes agreed upon changing efficiency factor into cost (Hayes and
Wheelwright 1984). Schmenner (1982) and Hill (1989) have also contributed various
dimensions of operational performance measures such as cost, quality, delivery and
flexibility. Later, Leong, Snyder and Ward (1990) identified five main aspects: cost, quality,
delivery, flexibility and responsiveness. Vickery, Droge and Markland (1997) introduced
the rate of new product launching, so called ‘speed’, as another dimension of the measures.
Besides those scholars described above, there are more contributors to the operational
performance measures (Krajewski and Ritzman 1987; Ferdows and DeMeyer 1990;
Droge, Vickery and Markland, 1994; Youndt et al. 1996; Vokurka, O’Leary-Kelly and
Flores 1998). Youndt et al. (1996) suggested four dimensions: cost, quality, delivery,
delivery flexibility and scope flexibility. Delivery flexibility is the timing of the
introduction of new products and on-time delivery. Scope flexibility is about the variety of
things: adjusting product mix, handling non-standard orders and producing products in
small quantities (Jayaram, Droge and Vickery 1999).
Based on those previous researches, this study identifies four dimensions of operational
performance, which are commonly agreed upon in the academic field. The four dimensions
are: product quality, production cost, product delivery and production flexibility. Product
quality includes several dimensions such as product specifications (standard product),
product performance (product functions), product reliability, product serviceability
(reparability of service), product durability (product life) and so on (Kotler 2003; Hill and
Jones 2004). Low-cost production is the ability to reduce costs through efficient
operations, process technology and/or scale economies (Vickery et al. 1997). As for
product delivery, service organizations can differentiate from others by designing a fast
delivery network (Kotler 2003). Production flexibility is about the reduction of production
lead times and set-up times, the development of new processes for new products, and
offering workers a variety of tasks (Meyer, Nakane, Miller and Ferdows 1989).
HRM practices and firm performance

A number of theoretical and empirical studies have linked HRM practices to firm
performance. This study concentrates on operational performance and there is a number of
researches conducted on the relationship between HRM practices and operational
performance as follows.
Ahmad and Schroeder’s (2003) study attempted to generalize the efficacy of seven
HRM practices proposed by Pfeffer (1998) in the context of country and industry, focusing
primarily on the effects of these practices on operations. The seven HRM practices include
employment security, selective hiring, use of teams and decentralization, compensation/
incentive contingent on performance, extensive training, status differences, and sharing
information. The operational performance includes cost, quality, delivery, flexibility and
organizational commitment. Their findings provided overall support for the relationship
between the seven HRM practices and operational performance.
Chang and Chen (2002) conducted a comprehensive study to evaluate the links
between human resource management practices and firm performance of Taiwanese
high-tech firms in the Hsinchu science-based industrial park. They found that HRM
practices such as training and development, teamwork, benefits, human resource planning
and performance appraisal have significant effect on employee productivity. In addition,
benefits and human resource planning are negatively related to employee turnover.
Corbett and Harrison (1992) conducted a study on employee involvement and
manufacturing performance in New Zealand and Australia, and indicated that workforce-
related programmes that promoted great improvement in quality and communication
throughout an organization could help maintain this achievement. Additionally a
well-trained work force would help firms to gain the market share because such firms
would produce high quality of products, meeting customers’ expectation.
Huselid et al. (1997) studied the effect of HRM on corporate firm performance of 293
US firms. They divided HRM effectiveness into two types: the first type is HRM
effectiveness including compensation, recruitment and training, employee/industrial
relations, selection tests, appraisal and employee attitudes. The second type is strategic
HRM effectiveness including team work, employee participation and empowerment,
employee and manager communications, management and executive development.
Their study showed that there is positive link between strategic HRM effectiveness and
firm performance, but technical HRM effectiveness is not related to firm performance.
They concluded that there is a relationship between HRM effectiveness and productivity
of firms.
Ichniowski and Shaw (1999) conducted a research on international human resource
management issue by comparing performance between steel making firms in the US and
Japan implementing HRM practices. Their study showed that Japanese plants
implemented a greater number of HRM practices for example, problem-solving teams,
extensive orientation, career-long training, extensive information sharing, job rotation,
employment security and profit sharing, than the US counterparts. They noted that
Japanese steel firms were remarkably more productive than those in the US.
Jayaram et al. (1999) used top management commitment, communication of goals,
employee training, cross-function teams and other HRM practices to test the relationships
with quality, cost, flexibility and time. They pointed out that there are positive linkages
between individual HRM practices and operational performance.
Kuo (2004) conducted a study on the relationship between HRM practices, employee
commitment and operational performance in the healthcare institutions in Taiwan. Kuo
adopted 11 HRM practices including staffing selectivity, internal career opportunities, HR

planning, training, employment security, job descriptions, team working, incentive
compensation, performance appraisal, employee participation and employee communi-
cation. Kuo concluded that each HRM practice has a different degree of influence on
operational performance. Among these 11 HRM practices, Kuo concluded that
employment security, team working and incentive compensation are regarded as three
of the main practices for impacting operational performance.
MacDuffie (1995) conducted a research of 62 automotive assembly plants to identify
the effect of HRM bundles on operational performance and suggested that innovative
HRM bundles affected operational performance.
Sang (2005) conducted a study trying to find out the effects of HRM practices on
business performance (operational performance and overall firm performance) in
Cambodia and Taiwan. Sang (2005) selected nine HRM practices (HR planning, staffing,
incentives, appraisal, training, teamwork, employee participation, status differences and
employment security) to explore the relationships with the perception of firm performance
(non-financial and financial performance). Meanwhile, Sang also tested the nine HRM
practices to observe impacts on four operational performance contents: product quality,

product cost, product delivery and production flexibility. The results of Sang’s study
showed that HR planning, staffing, incentives, appraisal, training, teamwork and employee
participation positively influence employee productivity. Moreover, a positive
relationship between HRM practices and operational performance was also confirmed.
According to the researches outlined above we can see that operational performance
can be improved by HRM practices. Since this study concentrates on the steel industry, it
is necessary to narrow the focus towards HRM practices that are adopted in this particular
manufacturing industry. From the above literature review, this study adopts six key HRM
practices that are likely to be positively associated with operational performance which
includes product quality, production cost, product delivery and production flexibility.
The six HRM practices are training and development, teamwork, compensation/incen-
tives, HR planning, performance appraisal and employment security.
Based on the above discussions, this study constructs the first hypothesis to test the
relationship between HRM practices and firm performance:
Hypothesis 1: HRM practices will be positively related to perceived firm performance.
HRM practices and business strategy

The strategic perspective of HRM examines the fit between various HRM practices and the
company’s business strategies (Delery 1998). Baird and Meshoulam (1988) indicated that
when adopting their HRM practices, firms must take into account the desirability of fit
between these practices and firm strategy. Furthermore, Wright and Sherman (1999) noted
that one of the main goals of strategic human resource management is to ensure that HRM
is integrated with the strategic needs of firms in order to gain competitive advantage. Liao
(2005) pointed out that strategic human resource management (SHRM) researchers have
established a broader perspective that is oriented toward managing the workforce since
SHRM was introduced. Since then, the behavioural perspective has emerged as the
predominate paradigm for research (e.g. Fisher 1989; Schuler 1989; Snell 1992).
According to behavioural perspective, HRM practices should be linked to business
strategy. Nowadays, there is a growing number of empirical studies that support this
perspective (Schuler and Jackson 1989).
On the other hand, according to contingency theory, a close link exists between
business strategy and HRM practices. This theory also holds that HRM practices are
determined by the type of business strategy that a firm follows. Moreover, it assumes that
the companies that closely coordinate their business strategy and HRM practices achieve
better performance than the companies that do not (Huang 2001). At the present time,
there is an extensive research exploring the links between business strategy and HRM
practices (Bird and Beechler 1995; Huselid 1995; MacDuffie 1995; Delery and Doty 1996;
Huang 2001).
Based on the above statement, this study therefore proposes a second hypothesis:
Hypothesis 2: There is a close linkage between business strategies and HRM practices.
Business strategy and firm performance

The relationship between business strategy and firm performance has concerned
researchers for a number of years (Brews and Hunt 1999). O’Regan et al. (2005) argued
that strategy is frequently described as a deliberate set of actions to achieve competitive
advantage that gives coherence and direction to an organization.

Cheng (2003) conducted a research on nine recreation resorts in the Kenting Area in
Taiwan. Cheng found that there is a close relationship between business strategy and
firm performance. According to Cheng’s analysis outcome, business strategy and firm
performance have a positive interaction. Different business strategies will influence the
results of firm performance. Chiang (2004) conducted a study to examine the impacts of
business strategies (including differentiation strategy, cost leadership strategy and focus
strategy) and compensation strategy on organizational performance using data for 108
Taiwanese companies listed on the Taiwan Stock Exchange and over-the-counter market.
The study addressed certain business strategies that have significantly positive impacts on
organizational performance. Lee (2000) conducted an empirical study of the relationship
between business type, strategy and performance of Chinese medicine industry in Taiwan.
Lee found that business strategy will impact the internal structure of organization and
organizational performance.
However, there are few empirical researches investigating the relationship between
business strategy and firm performance in manufacturing industry and even less
addressing the steel industry.
Based on the above discussion, in order to have an in-depth understanding of the
correlation between business strategy and firm performance in the steel industry, this study
proposes the third hypothesis.
Hypothesis 3: Business strategies will be positively related to perceived firm
performance
HRM practices, business strategy and firm performance

Scholars, such as Delery and Doty (1996), have suggested that a good fit between HRM
strategies and the business strategy of the firm tends to lead to superior outcomes. In other
words, when the company’s HRM practices support firm strategy, superior performance is
expected. Other examples such as Bird and Beechler (1995) examined linkages between
business strategy and human resource management strategy of Japanese subsidiaries in the
US. They investigated whether or not fit between a subsidiary’s business strategy and its
HRM strategy is associated with higher performance. The result showed that subsidiaries
with matched strategies perform better than unmatched ones in terms of HRM-related
performance measures. Japanese subsidiaries with a business strategy/HRM strategy
match are also more likely to experience better firm performance versus competitor than
unmatched ones. Chow (2006) mentioned that business strategies paired up with
appropriate HRM practices will have a positive effect on firm performance. Martell, Gupta
and Carroll (1996) have mentioned that considerable emphasis has been put on the
importance of integrating HRM practices and business strategy for firm performance.
Richard and Johnson (2001) conducted a study to understand the impact of human
resource diversity practices on firm performance. They employed business strategy as a
contingent factor and found that business strategy moderates the relationship between
human resource practices and firm performance. Youndt et al. (1996) indicated that
business strategy and HRM practices interaction is an important factor in organizational
effectiveness.
Based on the above statement, this study therefore proposes a fourth hypothesis:
Hypothesis 4: Integrating HRM practices with business strategies will be positively
related to perceived firm performance.
Methodology
Research model
See Figure 1 for the research model.
Questionnaire design, sampling plan and procedure

Questionnaire design
The questionnaire of this study is consisted of three constructs: ‘HRM practices’ (total 25
items) from Delery and Doty (1996), Ahmad and Schroeder (2003), Chang and Chen
(2002) and Martell et al. (1996), ‘business strategy’ (total 10 items) from Huang (2001)
and Shih and Chiang (2005), and ‘firm performance’ (total six items): product quality from
HRM practices
H1
• Training and development
Firm performance
• Teamwork H2 H3
• Compensation/incentives
• HR planning Business strategy
• Performance appraisal H4
• Employment security • Cost reduction
• Innovation
Note: SEM was used to test • Quality enhancement
H1--H4.
MANOVA
Firm characteristics
• Employee number
• Firm age
Figure 1. Research model of this study.

Notes: Hypothesis 4 (H4): Integrating HRM practices with business strategy will be positively related
to firm performance; SEM ¼ Structure Equation Model; MANOVA: Multiple Analysis of Variance.
Dean and Snell (1996); production cost from Butler and Leong (2000) and Meyer et al.
(1989); product delivery from Christiansen, Berry, Bruun and Ward (2003) and Butler and
Leong (2000); and production flexibility from Dean and Snell (1996). Thus, a 41-item
survey questionnaire was developed to obtain the responses from managers in the
Taiwanese steel industry about their opinions on various research variables. Respondents
were asked to rate their opinions on a 5-point Likert-type scale questionnaire. The items
ranged from 1 (strongly disagree) to 5 (strongly agree) for HRM practices and business
strategy or 1 (very low) to 5 (very high) for firm performance. The entire questionnaire is
shown in Box 1 in the Appendix.
Sampling plan and procedure

A sampling plan was developed to ensure that appropriate respondents were included in
this study. This study selected managers working at Taiwanese steel industry as samples.
This study applied the following formula suggested by Bowerman, O’Connell and Orris
(2004) to calculate the sample size:
N ¼ pð1 2 pÞ½za=2 4 B2
Where, N equals to the sample size which this study needs, Za/2 equals to the confidence
level, and B equals to the error tolerance. This study used p equals to 0.5 as Bowerman
et al. suggested to acquire a normal distribution, Za/2 equals to 1.96 by setting confidence
interval to be 0.05, and error bond or error tolerance to be 0.07. Therefore, the sample size
which this study needs is 196. With regard to the population firms, this study selected 196
public and private steel firms from the Top 1000 Manufacturing Firms List provided by
Common Wealth Magazine in Taiwan (2007). In this study, the estimated response rate
was 40% and three questionnaires were distributed to each steel firm. Therefore, a total
588 questionnaires were distributed.
The questionnaires were gathered between February 2008 and June 2008 with 252
being collected. Of the total, 16 were unusable due to incomplete data. This resulted in 236
usable questionnaires and a response rate of 40.1%.
Characteristics of sample firms and respondents

The characteristics of the research population are shown in Tables 1 and 2.
Table 1. Characteristics of sample firms (196 firms).

Characteristics Categories Frequency Percentage (%)
Firm age ,5 years 13 6.6
6 – 10 years 40 20.4
11 – 15 years 66 33.7
16 – 20 years 62 31.6
.21 years 15 7.7
Employee number , 300 118 60.2
301– 500 31 15.8
501– 700 21 10.7
701– 900 15 7.7
. 901 11 5.6
Table 2. Characteristics of respondents (236 respondents).
Characteristics Categories Frequency Percentage (%)

Age ,30 years old 5 2.1
31 – 40 years old 123 52.1
41 – 50 years old 80 33.9
51 – 60 years old 28 11.9
Seniority ,5 years 9 3.8
6 – 10 years 54 22.9
11 – 15 years 74 31.4
16 – 20 years 64 27.1
.21 years 35 14.8
Department Production 74 31.4
Maintenance 36 15.3
Management & Marketing 82 34.6
Technology 32 13.6
Others 12 5.1
Education level High school or below 37 15.7
Junior college 86 36.4

University/college 94 39.8
Graduate school 19 8.1
Measurement method
Purification and reliability of the measurement variables
To purify the measurement scales and identify their dimensionality, principal component
factor analysis with varimax rotation was applied to condense the collected data into
certain factors. After factor analysis has been done, item-to-total correlation and internal
consistency analysis (Cronbach’s alpha) were testified to confirm the reliability of each
research factor. In this study, measurement items with a factor loading greater than 0.6
were selected as the member of a specific factor. Furthermore, items with a low correlation
(e.g., lower than 0.5) will be deleted from further analysis. Moreover, according to
Robinson and Shaver (1973), if the a is greater than 0.7, it means that it has high reliability
and if a is smaller than 0.3, then it implies that it has low reliability. In this study,
measurement items with a smaller than 0.7 were deleted from further analysis.
Firm characteristics’ impact on various dimensions

MANOVA was employed to identify the impact of firm characteristics on various
dimensions. The SPSS 16.0 package software was used to analyse the data. The operated
firm characteristic variables include employee number and firm age. The dependent
variables include the constructs of HRM practices, business strategy and firm performance.
The hypotheses testing

Hypothesis 1, 2, 3 and 4 were tested by Structure Equation Model (SEM). SEM
encompasses an entire family of models known by names, among them covariance
structure analysis, latent variable analysis, confirmatory factor analysis and often simply
LISREL analysis. SEM can also be used as a means of estimating other multivariate
models, including regression, principal components, canonical correlation and MANOVA.
The Amos 7.0 package software was used to analyse the relationships in the entire research
model to find out the relationships among variables in this model. The criteria of chi-square
divided by degree of freedom, GFI, AGFI, NFI, CFI, RMR and RMSEA were used to
evaluate the overall goodness of fit of the model. Five criteria in this study were used to test
the fit of this model and they are from Wu (2005) and Hair, Black, Babin, Anderson and
Tatham (2006). The first one is the ratio of chi-square/degree of freedom. If chi-square/d.f.
is less than 3, it is considered as a good fit to the data. The second, third and fourth criteria
are the GFI (goodness-of-fit index), AGFI (adjusted goodness-of-fit index) and NFI
(normed fit index). The values of those three indices should be greater than 0.9. The fifth
one is the CFI (comparative fit index), which should be greater than 0.95. The sixth is the
RMR (root-mean-square residual). The smaller the RMR is, the better the fit of the model.
A value of less than 0.05 indicates a close fit. And the last index is the RMSEA (root mean
square error of approximation). The RMSEA is acceptable when the value is less than 0.08.
Results
Factor analysis and reliability testing results
To verify the dimensionality and reliability of the research constructs in this study, several
purification processes, including factor analysis, correlation analysis and internal
consistency analysis (Cronbach’s alpha) were conducted. Factor analysis was first
employed to identify the dimensionality of each research construct, to select questionnaire
items with high factor loadings, and to compare these selected items with items suggested
theoretically. Item-to-total correlation and coefficient alpha were assessed to identify the
internal consistency and reliability of the construct. Latent roots (eigen values), scree test
and other criteria were used to determine the number of dimensions to be extracted from
the principal component factor analysis. The selected criteria are: factor loading . 0.6,
eigen value . 1, accumulatively explained variance . 0.6, item-to-total correlation . 0.5,
and coefficient alpha (a) . 0.7 (Wu 2005).
Tables 3 to 5 present the results of factor loadings for measurements of human resource
management practices, business strategy and firm performance. The three tables show that
a total of 38 variables (except for PA2, PA4 and ES4 which have low loading scores) have
significantly high loading scores (higher than 0.6). The internal consistencies of all three
constructs are also presented. It is shown that those variables within a factor tend to have a
high coefficient of item-to-total correlation (higher than 0.5) that suggests a high degree of
internal consistency for each dimension. In addition, Cronbach’s alpha for the factors
exceeds the generally accepted guideline of 0.7 (Wu 2005), which further confirms the
reliability of the measurement items.
Firm characteristics’ impact on various dimensions results

Table 6 is the summary of the firm characteristics’ impact on various dimensions by using
MANOVA. The table shows that firm age affects the level of HRM practices (F ¼ 6.095,
p ¼ 0.001), business strategy (F ¼ 5.166, p ¼ 0.002), and firm performance (F ¼ 4.714,
p ¼ 0.003). Among the groups of firm age under 6–10 years old, those firms acquire the
highest level of HRM practices (Mean ¼ 3.622), business strategy (Mean ¼ 4.015), and firm
performance (Mean ¼ 3.793). The employee numbers also affect the level of HRM practices
(F ¼ 4.783, p ¼ 0.001), business strategy (F ¼ 6.057, p ¼ 0.000), and firm performance
(F ¼ 6.001, p ¼ 0.000). Among the groups of employee, those firms with more than 901
employee acquire the highest level of HRM practices (Mean ¼ 3.486), business strategy
(Mean ¼ 3.950), and firm performance (Mean ¼ 3.689).
Table 3. Results of reliability tests on human resource management practices.
Research Factor Eigen Acc. expl. Item-to-total

Factor items loading value variance (%) correlation Cronbach’s a
Training and TD1 0.875 2.880 71.989 0.759 0.870
development (TDF) TD3 0.872 0.754
TD4 0.862 0.736
TD2 0.782 0.634
Teamwork (TWF) TW2 0.903 3.121 78.023 0.819 0.906
TW4 0.890 0.798
TW1 0.872 0.770
TW3 0.868 0.766
Compensation/ CI2 0.922 3.309 82.736 0.857 0.930
incentives (CIF) CI3 0.921 0.854
CI1 0.898 0.818
CI4 0.897 0.817
HR planning HRP3 0.875 2.842 71.050 0.759 0.863
(HRPF) HRP2 0.863 0.739
HRP1 0.853 0.726

HRP4 0.777 0.625
Performance PA1 0.879 2.111 70.372 0.694 0.788
appraisal (PAF) PA3 0.851 0.642
PA5 0.784 0.553
Employment ES3 0.901 2.250 75.014 0.753 0.833
security (ESF) ES1 0.878 0.710
ES2 0.817 0.619
Table 4. Results of reliability tests on business strategy.

Cost reduction CR3 0.876 2.879 71.966 0.766 0.870
(CRF) CR1 0.858 0.734
CR2 0.840 0.710
CR4 0.817 0.679
Innovation IV2 0.894 3.105 77.627 0.804 0.904
(IVF) IV1 0.892 0.799
IV4 0.873 0.773
IV3 0.864 0.759
Quality QE2 0.946 1.790 89.524 0.790 0.883
enhancement (QEF) QE1 0.946 0.790
The hypotheses testing results

Table 7 shows the criteria of the proposed model and the results of variables in this study.
From Table 7, all the indices are supported in this study and they represent a good fit.
Table 8 and Figure 2 exhibit the structural coefficients for the model. All coefficients
of the path are significant (C.R. is greater than 1.96). The result is shown that: HRM
practices are positively related to firm performance (g ¼ 0.198); there is a close linkage
between HRM practices and business strategies (b ¼ 0.841); and business strategies are
positively related to business performance (b ¼ 0.636).
Regarding the relationships between factors and dimensions, the coefficients are
all at significant level. For the dimension of HRM practices, the coefficients
Table 5. Results of reliability tests on firm performance.

Firm FP2 0.881 4.069 67.819 0.815 0.904
performance FP3 0.852 0.778
(FPF) FP4 0.849 0.773
FP1 0.816 0.729
FP5 0.786 0.689
FP6 0.750 0.649
Table 6. Summary of the firm characteristics’ impact on various dimensions.

Dependent
Group Mean Duncan variables F-value p-value
Firm age 6 – 10 years old 3.622 (435,2) HRM practices 6.095 0.001
11 – 15 years old 3.290

16 – 20 years old 3.086
. 21 years old 3.330
Firm age 6 – 10 years old 4.015 (453,2) Business strategy 5.166 0.002
11 – 15 years old 3.687
16 – 20 years old 3.498
Firm age 6 – 10 years old 3.793 (354,2) Firm performance 4.714 0.003
11 – 15 years old 3.377
16 – 20 years old 3.387
Employee numbers , 300 2.953 (1,3425) HRM practices 4.783 0.001
301– 500 3.372
501– 700 3.322
701– 900 3.372
. 901 3.486
Employee numbers , 300 3.279 (134,342,25) Business strategy 6.057 0.000
301– 500 3.785
501– 700 3.595
701– 900 3.600
. 901 3.950
Employee , 300 3.131 (14,42,235) Firm performance 6.001 0.000
numbers 301– 500 3.470
501– 700 3.621
701– 900 3.322
. 901 3.689
of compensation/incentives (l ¼ 0.871), training and development (l ¼ 0.774), teamwork

(l ¼ 0.826), HR planning (l ¼ 0.829), performance appraisal (l ¼ 0.703) and employee
security (l ¼ 0.585) are all significant. For the dimension of business strategy, the
coefficients of innovation (l ¼ 0.932), cost reduction (l ¼ 0.784) and quality enhancement
(l ¼ 0.833) are all significant. From the above results, we further conclude that integrating
HRM practices with business strategies is positively related to firm performance.
Discussion and conclusions

From the above results, we have the following conclusions:
Table 7. The standard coefficients and model fit statistics.
Fit statistics Conceptual model Criterion Reference

Chi-square/d.f. 2.132 ,¼ 3 Wu (2005) & Hair et al. (2006)
GFI 0.948 . 0.9
AGFI 0.907 . 0.9
NFI 0.961 . 0.9
CFI 0.979 . 0.95
RMR 0.021 , 0.05
RMSEA 0.069 , 0.08
Table 8. Path analysis for the constructs of this study.

Relations Coefficients C.R.
Variables HRM practices Compensation/incentives 0.871* A
Training and development 0.774* 14.538
Teamwork 0.826* 16.156

HR planning 0.829* 16.233
Performance appraisal 0.703* 12.452
Employment security 0.585* 8.765
Business strategy Innovation 0.932* A
Cost reduction 0.784* 16.145
Quality enhancement 0.833* 18.247
Path HRM practices ! Firm performance 0.198* 2.064
HRM practices $ Business strategy 0.841* 8.823
Business strategy ! Firm performance 0.636* 6.470
Notes: 1. *: C.R. (critical ratio) .1.96; using a significant level of 0.05, critical ratios that exceed 1.96 would be
considered significant. 2. A: the parameter compared by others is set as 1; therefore, there is no C.R. It is
determined as significant. 3. The coefficients are standardized value.
Training and
development
0.774*
Teamwork
0.826*
HR planning
0.829* HRM 0.198* Firm
Performance practices performance
0.703*
appraisal
0.585* 0.844* Business 0.636*
Employment
security strategy
Compensation/ 0.784* 0.833* 0.932*

0.871*
incentives
Quality
Cost reduction Innovation
enhancement
Figure 2. Structure equation model of this study.

Notes: * C.R. (critical ratio) .1.96; using a significant level of 0.05, critical ratios that exceed 1.96
would be considered significant.
All six HRM practices help improve firm performance. Thus, Hypothesis 1 is
supported. The results found in this analysis are consistent with the previous studies, such
as Ahmad and Schroeder (2003) who concluded that all seven HRM practices influence
operational performance. Corbett and Harrison (1992) found that workforce related
programmes promoted great improvement in quality. Huselid et al. (1997) concluded that
there is positive link between strategic HRM effectiveness and firm performance.
Ichniowski and Shaw (1999) found that firms implementing HRM practices were more
productive than those that did not implement them. Jayaram et al. (1999) found that there
are positive linkages between individual HRM practices and operational performance.
Kuo (2004) noted that employment security, team working, and incentive compensation
impact operational and quality performance. MacDuffie (1995) indicated that innovative
HRM bundles affect operational performance. Sang (2005) identified that HR planning,
incentives, appraisal, training and teamwork influence operational performance.
All six HRM practices have a close relationship with three business strategies
including cost reduction, innovation and quality enhancement. Therefore, Hypothesis 2 is
supported and this result is congruent with other previous studies such as Baird and
Meshoulam (1988) who indicated that when adopting their HRM practices, firms must take
into account the desirability of fit between these practices and firm strategy. Delery (1998)
also mentioned that the strategic perspective of HRM examines the fit between various
HRM practices and the company’s business strategies. Schuler and Jackson (1987)
described that there is a close relationship between HR and business strategy.
Business strategies do substantially and positively relate to firm performance.
Therefore, Hypothesis 3 is supported. The result is consistent with previous studies, such
as Cheng (2003) who concluded that there is a significant relationship between business
strategy and firm performance. According to Cheng’s analysis outcome, business strategy
and firm performance have a positive interaction. Cheng suggested that different business
strategies will influence the results of firm performance. Chiang (2004) mentioned that
business strategies have significantly positive impacts on organizational performance.
Lee (2000) found that business strategy will impact the internal structure of an
organization and organizational performance.
All six HRM practices integrated with three business strategies will be positively
related to firm performance. Therefore, Hypothesis 4 is supported. The results found in this
analysis are consistent with the previous studies, such as Bird and Beechler (1995) who
explored linkages between business strategy and human resource management strategy
and found that matching business strategy and HRM strategy results in higher firm
performance. Chow (2006) mentioned that business strategies paired up with appropriate
HRM practices will have a positive effect on firm performance. Huselid (1995) found that
the organization’s strategy moderated the effect of HRM practices on firm performance.
Martell et al. (1996) emphasized the importance of integrating HRM practices and
business strategy for firm performance. Richard and Johnson (2001) conducted a study to
understand the impact of human resource diversity practices on firm performance.
They employed the business strategies as a contingent factor and concluded that business
strategy moderates the relationship between human resource practices and
business performance. Wright and Sherman (1999) noted that one of the main goals of
strategic human resource management is to ensure that HRM is integrated with the
strategy and the strategic needs of firms in order to gain competitive advantage. Youndt
et al. (1996) suggested that business strategy and HRM practices interaction is an
important factor in organizational effectiveness.
Limitations
This research has several limitations. First, the survey questionnaire did not consist of
sufficient items to explore the relationships between HRM practices, business strategy and
firm performance. The questionnaire only included some items extracted from previous
studies. Therefore, the results of this study may be biased. Second, this study merely
focused on the viewpoint of the managers working at steel firms. It means that investigating
the relationships between HRM practices, business strategy and firm performance are only
based on the perception of respondents. Third, this study only selected six out of a wide
range of possible HRM practices. Finally, this study only focused on the Taiwanese steel
industry the results may differ from other industries in Taiwan or other countries.
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Appendix
Box 1. The questionnaire
Human Resource Management Practices (HRMPF)
I. Training and development (TDF)
1. Extensive training programs are provided for individuals in their jobs at your firm. TD1
2. Employees in their jobs will normally go through training programs every few years at your firm. TD2
3. There are formal training programs to teach new hires the skills they need to perform their job at your firm. TD3
4. Formal training programs are offered to employees in order to increase their promotability at your firm. TD4
II. Teamwork (TWF)
1. During problem solving sessions, your firm makes an effort to get all team members’ opinions and ideas before making a decision. TW1
2. Your firm forms teams to solve problems and in the past 3 years many problems have been solved through small group sessions. TW2
3. Problem solving teams have helped improve manufacturing processes at your firm. TW3
4. Employee teams are encouraged to try to solve their problems as much as possible at your firm. TW4
III. Compensation/Incentives (CIF)
1. Incentive system at your firm encourages employees to pursue company objective. CI1
2. Incentive system at your firm is fair at rewarding people who accomplish a company objective. CI2
3. Incentive system at your firm encourages people to reach company goals. CI3
4. Incentive system at your firm really recognizes people who contribute the most to the company. CI4
IV. HR planning (HRPF)
1. Your firm forecasts personnel requirements. HRP1
2. Your firm spends amount of money on selecting staff. HRP2
3. There are number of people involved in selection at your firm. HRP3
4. Your firm conducts structured and standardized interviews. HRP4
V. Performance appraisal (PAF)
1. Your firm frequently does formal appraisals. PA1
2. Your firm frequently does informal appraisals. PA2
3. Your firm uses objective data for appraisals. PA3
4. Your firm uses subjective data for appraisals. PA4
5. Your firm utilizes the appraisal results. PA5
The International Journal of Human Resource Management
VI. Employment security (ESF)

1. Employees in their jobs can expect to stay at your firm for as long as they wish. ES1
2. It is very difficult to dismiss an employee from his/her job at your firm. ES2
3. Job security is almost guaranteed to employees in their jobs at your firm. ES3
4. If your firm were facing economic problems, employees in their jobs would be the last to get cut. ES4
1371
Appendix – continued
1372
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Business Strategy (BSF)
I. Cost Reduction Strategy (CRF)
1. Your firm aims at lowering cost and promoting efficiency. CR1
2. Your firm implements strict control of cost. CR2
3. Your firm emphasizes efficient way of operation. CR3
4. Your firm simplifies and standardizes operating process. CR4
II. Innovation Strategy (IVF)
1. Your firm aims at innovation and responsiveness. IV1
2. Your firm emphasizes marketing ability as well as product development and design. IV2
3. Your firm highlights responsiveness to customers’ demands. IV3
4. Your firm is constantly seeking new business opportunities. IV4
III. Quality Enhancement Strategy (QEF)
1. Your firm emphasizes product quality via the use of quality circles or work improvement teams. QE1
2. Your firm emphasizes continuous improvement of products to secure a long-term competitive edge. QE2
Firm Performance (FPF)
1. Your firm’s ability to increase its non-defective rate for its products. (product quality) FP1
2. Your firm’s ability to keep consistency of its product quality. (product quality) FP2
3. Your firm’s ability to reduce its costs of product inspection, inventory, products, and overhead. (production cost) FP3
4. Your firm’s ability to reduce delivery time, lead time, and cycle time for its products. (product delivery) FP4
F.-H. Lee et al.
5. Your firm’s ability to adjust its changes in product mix quickly. (production flexibility) FP5
6. Your firm’s ability to change its capacity quickly. (production flexibility) FP6

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The relationship between human resource management practices, business

Article in The International Journal of Human Resource Management · July 2010

Feng-Hui Lee Wann-Yih Wu

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The relationship between human resource management practices, business

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The relationship between human resource management practices,

*Corresponding author. Email: niellee@ms34.hinet.net

ISSN 0958-5192 print/ISSN 1466-4399 online

Literature review and hypothesis development

description, recruiting and selection, training, performance appraisal and compensation.

Performance appraisal is used to evaluate employee performance. The purpose of

productivity and quality (Richard and Johnson 2001).

HRM practices and firm performance

adopted 11 HRM practices including staffing selectivity, internal career opportunities, HR

practices to observe impacts on four operational performance contents: product quality,

HRM practices and business strategy

Business strategy and firm performance

advantage that gives coherence and direction to an organization.

HRM practices, business strategy and firm performance

related to perceived firm performance.

Questionnaire design, sampling plan and procedure

Figure 1. Research model of this study.

Sampling plan and procedure

N ¼ pð1 2 pÞ½za=2 4 B2

Characteristics of sample firms and respondents

Table 1. Characteristics of sample firms (196 firms).

Table 2. Characteristics of respondents (236 respondents).

Characteristics Categories Frequency Percentage (%)

Junior college 86 36.4

Firm characteristics’ impact on various dimensions

The hypotheses testing

Firm characteristics’ impact on various dimensions results

Table 3. Results of reliability tests on human resource management practices.

Research Factor Eigen Acc. expl. Item-to-total

HRP1 0.853 0.726

Table 4. Results of reliability tests on business strategy.

The hypotheses testing results

Table 5. Results of reliability tests on firm performance.

Research Factor Eigen Acc. expl. Item-to-total

Table 6. Summary of the firm characteristics’ impact on various dimensions.

11 – 15 years old 3.290

of compensation/incentives (l ¼ 0.871), training and development (l ¼ 0.774), teamwork

Discussion and conclusions

Table 7. The standard coefficients and model fit statistics.

Fit statistics Conceptual model Criterion Reference

Table 8. Path analysis for the constructs of this study.

Teamwork 0.826* 16.156

Compensation/ 0.784* 0.833* 0.932*

Figure 2. Structure equation model of this study.

Operations Management, 21, 1, 19 – 34.

Ferdows, K., and DeMeyer, A. (1990), ‘Lasting Improvements in Manufacturing Performance:

Control,’ Personnel Review, 34, 3, 294–309.

Business Horizons, 21, 1, 57 – 66.

VI. Employment security (ESF)

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