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Strategic Human Resource Management in European Transition Economies: Building a Conceptual Model on the Case of Slovenia Nada Zupan and Robert Kase[1] Abstract: The general SHRM models explain the link between HR and company performance, however, due to several specific internal and external factors they have to be modified in order to be applied to companies in European transition economies (ETEs). By analysing the current state of HRM and the HR context in Slovenia, we develop a conceptual SHRM model for ETEs.
The model introduces a new specification of the HR context, emphasizing HR Facilitators, and an additional moderating construct the HR Power, to have more explanatory power for studying the HR-company performance link in ETEs. The paper also addresses the importance and issues relating to the empirical validation of the model in ETEs and suggests ways to further develop SHRM in these countries. Keywords: human resource management, conceptual model, transition economies, HR strategy, performance, Slovenia, Central and Eastern Europe.
Introduction Searching for ways to increase competitiveness is a dominant theme in the modern business world. With the acknowledgement that human resources can be one of the key contributors in this quest, the field of strategic human resources management (SHRM) has gained legitimacy and attention. The early writings on SHRM go back to the early 1980s and were dominated by US authors, such as Dyer (1984), Beer et al. (1984) and Fombrum et al. (1984).
Their efforts primarily aimed to explain the role of human resources in improving company performance and to design models of various contextual and HRM elements in establishing the HR-company performance link. In the 1990s the focus of US research shifted to which particular HRM processes and practices, and how they are actually integrated, add value and contribute to company performance (e. g. Wright and McMahan, 1992; Wright et al. , 1994; Huselid, 1995; MacDuffie, 1995; Becker and Gerhart, 1996; Delery and Doty, 1996; Youndt et al. 1996; Huselid et al. , 1997; Wright and Snell, 1998; Delery, 1998; Lepak and Snell, 1999; 2002; Wright et al. 2001). Early in the same decade, the European response from mostly UK authors raised the question of whether the US models could be applied in Europe, emphasising that European enterprises operate in a different contextual setting involving the stronger role of the state and trade unions as well as public sector enterprises, different cultures and traditions (e. g. Guest, 1990; 1991; Brewster, 1995).
Western European research in strategic HRM gained momentum towards the second half of the 1990s, mostly describing HR as it is embedded in various national contexts and thereby emphasising the firm-external perspective rather than the firm-internal perspective mostly found in the US research (e. g. Camuffo and Costa, 1993; Hiltrop, 1996; Tyson, 1995; Guest, 1997; Paauwe, 1996; Boxall and Purcell, 2000; Boselie et al, 2001; Camelo et al. , 2004; Cabral-Cardoso, 2004). Nevertheless, there is still an important part of Europe about which we know very little in terms of human resource management.
These are the so-called European transition economies (ETEs), meaning the Central and Eastern European countries that started their transition from centrally-planned (Soviet bloc) or labour-managed economies (ex Yugoslavia) to market economies at the start of the 1990s. We believe that knowledge about HRM in these transition countries is important for several reasons. ETE companies and their HRM operate in specific external and internal conditions due to the transition process, thus general SHRM models may not have sufficient explanatory power.
Eight of ETE countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) joined the European Union (EU) in May 2004 and will bring their diversity into common EU market and institutions, while many others aspire to join in the next phase. Further, ETEs cover a large geographical area and comprise a significant market, so they are important not only as trading and business partners but, due to their market potential, relatively low labour costs and skilled workforce, they are also attractive to foreign direct investment (Carstensen and Toubal, 2004).
Knowing more about HRM in ETEs would thus also facilitate the development of more effective business ventures. Recently, some ETEs (Bulgaria, Czech Republic, Estonia, Hungary, Poland, Slovenia, and Russia) were included in the CRANET research of comparative studies of European HRM, while four of them (Bulgaria, Czech Republic, Estonia, and Slovenia) have already received attention in the latest CRANET publication (Brewster et al. , 2004).
Thus, some systematic information on the development of the HRM function in these countries has become available. However, studies exploring the area of strategic HRM in ETEs are still very rare. Although at first glance there seems to be a lot of literature describing HRM in different ETEs (Jankowicz, 1998), a closer look reveals that most articles deal with case studies, focus on foreign MNC subsidiaries or draw conclusions from small and unrepresentative samples.
There are either general descriptions of HRM in specific ETEs such as the Czech Republic (Koubek and Brewster, 1995; Tung and Havlovic, 1996; Mills, 1998), Slovenia (Zupan, 1998), Hungary (Pearce, 1991; Bangert and Poor, 1993), Poland (Tung and Havlovic, 1996; Crow, 1998), Russia (Fey et al. , 1999; May et al. , 1998; Shekshnia, 1998), or a discussion of specific HR practices like selection, training and development, performance management, motivation, and compensation (e. g. Cakrt, 1993; Puffer, 1993; Vikhanski and Puffer, 1993; Kiriazov et al. 2000; Szalkowski and Jankowicz, 2004). On the other hand, only a few texts refer to strategic HRM issues (Garavan et al. , 1998; Jankowicz, 1998; Letiche, 1998; Fey et al. , 2000; Fey and Bjorkman, 2001; Weinstein and Obloy, 2002; Zupan and Ograjensek, 2004). We see this lack of a strategic perspective for HRM in ETEs as an opportunity for our contribution to improve understanding of HRM and its effects in ETEs, as well as to bring new or adapted concepts to the forefront of SHRM discussions in general.
We do not claim that ETEs are a completely homogenous group with regard to their HRM contexts and practices, but we believe there are enough similarities to allow a conceptual model of strategic HRM in ETEs to be developed. We will develop the model based on the analysis of HRM in Slovenia because two large research projects resulting in extensive reports on HRM and its context were carried out when analysing the transition period (Prasnikar, 1999; Svetlik and Ilic, 2004). Thus, we will be able to incorporate both contextual and firm perspectives.
By doing so, we will link the two prevailing paradigms in SHRM research, namely, the universalistic and contextualist (Brewster, 1999). The first one continues to search for ways to improve the way HR are managed within companies by finding general rules of enhancing the HR-performance link. The contextualist paradigm is less concerned with the final impact of HR on performance, but aims instead at understanding the difference in HRM that occurs due to the various contexts in which companies operate.
Brewster believes this second approach is more valid for the European setting because institutional factors play an important role with regard to HRM. We argue that for ETEs it is also very important to analyse the specific links between the use of resources (including HR) and company performance because most ETE companies are struggling to improve their competitiveness in order to catch up with their competitors from more developed countries.
Thus, there are two aims of this paper. By assessing the current state of HRM in ETEs we will follow the contextualist paradigm and try to find explanations of how and why HRM in ETEs, and particularly in Slovenia, differs from other European regions and the US. Our second aim is more in line with the universalistic paradigm of SHRM since we will try to design a conceptual model of SHRM for ETEs. This could also serve as a useful tool for improving company performance through HR.
We believe that combining both paradigms can bring valuable theoretical contributions to the field of SHRM as well as useful guidelines for HR policy-makers and HRM practitioners. Key Characteristics of European Transition Economies with Regard to HRM The beginning of the 1990s saw the collapse of both Soviet-type state socialism and workers’ self-management in Yugoslavia, in turn opening the door for the process of transition to open market economies.
Also, many independent countries (from ex Soviet and Yugoslav republics and former Czechoslovakia) emerged and had to adapt their political and economic systems to their new status. Therefore, most ETEs had to implement widespread and simultaneous changes to their political, social and economic systems. Although the approaches taken to change and the success rates have differed among ETEs, there are some common factors of the transition period. With regard to the transition to a market economy, three main and systematic developments can be described (Svejnar, 2000): 1) by establishing a market ystem and new firms economies now operate under a market mechanism (sometimes still imperfect, but functioning, especially in countries that recently joined the EU): most prices are free and reflect the relative scarcity of resources and new private firms are rapidly growing; 2) reorienting trade from East to West, thereby entering much more competitive markets; and 3) building the social security net through unemployment benefits and the broadly defined welfare system (welfare, pension and health care benefits), the system that in most countries (except Russia) prevented the emergence of major income inequality and poverty.
A tripartite system of managing industrial relations has emerged in most ETEs, involving the state, employers and trade unions developing social pacts on macroeconomic objectives, helping to promote social peace even though typically the main burden of economic restructuring was typically on wage earners (ILO, 1995). In general, the situation regarding industrial relations institutions and the power of labour is more favourable in those ETEs that joined the EU in May 2004 because they had to synchronise their institutional framework and practices with EU standards (Martin and Cristescu-Martin, 2003).
Elsewhere, organised labour remains weak under high levels of unemployment although it has been able to exert some political influence on the revisions of Labour Codes. Throughout the transition period, the main economic issues were privatisation and economic restructuring at both national and company levels. With regard to privatisation, several models can be described (Gray 1996; Svejnar 2000). For example, in Hungary, due to its large international debt most state-owned enterprises were quickly sold off to the highest bidder (mostly foreign investors).
In Czech Republic and Slovakia, state enterprises were privatised chiefly to outsiders through a voucher method. In Russia and Slovenia, on the other hand, a voucher method was also used but insiders held major stakes in the privatisation process. This issue of insider vs. outsider privatisation is important because research (Frydman et al. , 1999) suggests that the second approach leads to faster restructuring and improved performance. It is especially by acquiring resources from foreign investors as well as gaining access to assets and capabilities that transition companies can build an important competitive advantage (Fahy et al. 2003). The privatisation method also largely influenced corporate governance, but in most cases where ownership remained in the hands of domestic owners the power of managers and workers (insiders) is significant and neither the government nor the new (largely dispersed) private owners provide effective control (Svejnar, 2000). Economic restructuring was aimed at resolving several of the inefficiencies allowed by previous socialist systems such as over-employment due to full-employment policies, disregard of labour costs issues, the inefficient use of resources, and the protection of poor performers against bankruptcy (Aghion et al. 1996; Prasnikar et al. , 1994). In ETEs there are two distinct approaches to enterprise restructuring (Grosfeld and Roland, 1997): defensive (cost-related) and strategic (revenue-focused). Research findings suggest that, among investments, those in research and development, marketing, and HR development (especially the development of managers) are more important for effective restructuring than an investment in physical capital (Prasnikar et al. , 2000).
With regard to human resources, the need to move away from mostly administrative towards more strategic and business-oriented HRM has emerged. Although these days managers in transition economies mostly follow their global counterparts by claiming that people are their crucial source of competitiveness, there is little evidence that this shift in conceptual understanding has actually contributed to the development of HRM. Top managers were often preoccupied with the privatisation processes and thus did not pay sufficient attention to other business functions (Gray, 1996), including HRM.
While some changes in HR practices and HR roles during the past decade have emerged in ETEs and most countries have moved away from the old models, the extent and success of changes varies a lot (Hanel et al. , 1997; Brewster et al. , 2000). In general, we can observe that the strategic component of HRM has so far been poorly developed: consistent HR strategies are rarely designed, HR managers are often not members of top management and consequently do not get involved in managing strategic business issues, while HR practices supporting business needs are not effectively implemented (Garavan et al. 1998; Zupan, 1998). Yet, a more significant transformation of the HR function could be observed in foreign-owned companies which bring in their own HRM models and practices (Mills, 1998; Kiriazov et al. , 2000). In the foreign subsidiaries of MNCs, the reform of selection procedures, compensation and performance management systems are the first steps taken by HR departments. They are used as instruments of the management of change for shaping a new corporate culture (Taylor and Walley, 2002).
These Western HRM models are then often disseminated to the domestic sector through the foreign subsidiaries of MNCs and HR consulting services. They are accepted on a wide continuum that ranges from uncritically accepting them through misusing these practices for power and influence to strong resistance (Taylor and Walley, 2002). TThe result is immense differences in how HR practices are adopted both between and within industries in transition countries, especially when comparing the domestic and international sectors.
HR departments in the domestic sector of ETEs which had Soviet-type, centrally-planned state socialism were stigmatised by their previous role as state administrators. To guarantee discontinuation of such practices, HR departments were deliberately kept out of strategic decision-making in the early transition before they were thoroughly restructured and re-staffed (Soulsby and Clark, 1998). In addition, the lack of managerial skills and strategic insight has disabled HR specialists and especially line managers to develop strategic HRM.
Even if pro forma HR strategies are designed they do not fit business strategies well, for these have mainly been dealing with business restructuring and downsizing, while adequate HR activities are rarely implemented (Kiriazov et al. , 2000; Uhlenbruck et al. , 2003). Thus, we may conclude that, in many ETE companies with a majority of domestic ownership, centralised and administrative HR practices prevail. Another reason for this slow transformation is also found in the lack of HRM tradition and systems prior to the transition, which has been recognized as an obstacle to HRM development (Jennings et al. 1995). For the Soviet-block ETEs, all important HRM issues (e. g. compensation, manpower planning and staffing) in the previous system were determined by the state and often discussed in the political arena (Prokopenko, 1994). The head of an HR department in state-owned enterprises was mostly involved with staffing issues. The main goal was to ensure that workers, especially those holding important jobs, had a proper political background. At the operational level, tasks were merely administrative in their nature, strictly following the legislation and imposed guidelines.
The Yugoslav system was more market-oriented and opened towards the West (Prasnikar and Svejnar, 1988). It also gave the company level more freedom to make decisions and thus management was slowly evolving and throughout the pre-transition period it became better developed than in other socialist countries. With regard to HRM beside administrative and legal issues, some professional topics were emerging such as job design, job safety, job evaluation, selection, training and development.
Of course, most attention had to be paid to those issues emphasised by the personnel policy guidelines at the state/political party levels. Although the HR function gained some importance, in reality the administrative role at the company level still prevailed (Brekic, 1983). From the above discussion we may conclude that after more than a decade of transition efforts, the future challenges for ETEs relate to their struggle for sustainable economic growth. In this respect, the issues of human capital development and deployment are becoming crucial (Svejnar, 2000).
At the company level, this means that the HRM agenda has to shift towards developing HR and improving the link between HR and company performance. We believe that for this shift to happen there needs to be an overall development of HRM knowledge for ETEs, from which policy-makers and HRM practitioners can draw useful ideas. Before presenting a conceptual model of strategic HRM in ETEs, which may yet be one of the contributions to developing this HRM body of knowledge, we examine the Slovenian HRM situation in more detail.
HRM in Slovenia Slovenia is an ex-Yugoslav republic that gained its independence in June 1991. Slovenia with its two million inhabitants was the most developed Yugoslav republic, with the others achieving from 10% up to 65% of Slovenian GDP per capita while, due to its position in the north-west of the former country, it developed many business ties with Western Europe even prior to the transition period (Gligorov, 2004: 27).
In May 2004 Slovenia joined the EU and with its GDP per capita at 70% of the EU average, it remains the most developed country in the region of Central and Eastern Europe (Inotai and Stanovnik, 2004). The HRM context during the transition period The whole process of Slovenia’s transition from a Yugoslav republic to an EU member-state is explained in great detail in a recent book by Mrak et al. (2004). Here, we will briefly summarise the main contextual characteristics, especially as they pertain to HRM.
In general, there are three key features of the Slovenian transition process: 1) Slovenia chose a gradual approach to transition which gives economic agents more room to adapt and thus they are able to better absorb the changes, a strategy that seemed to work for Slovenia (as the economic indicators suggest); 2) as a new independent state, Slovenia moved from a regional to a national economy so many important transition tasks were not related to economic issues but to those crucial for creating a sovereign state (e. . national currency, customs system, diplomatic network); and 3) the legacy of former Yugoslavia with a strong tradition of a quasi-market system, with relatively independent enterprise management structures and workers’ self-management giving workers an important role in enterprise decision-making influenced transition processes and institutions. For example, Slovenia opted for the strong role of insiders (managers and employees) in the privatisation process.
This has led to a dispersed ownership structure of Slovenian enterprises and the very low involvement of foreign capital in privatisation. Therefore, in many companies the effects of ’employeeism’ could be observed, whereby an important proportion of added value goes to wages and other income forms rather than investment (Prasnikar et al. , 2000). Transition has also brought major changes to the labour market. Due to the more liberal labour legislation enterprises were allowed to lay off redundant workers (but had to pay relatively high levels of severance pay).
Mass downsizing together with company closures increased the numbers of the registered unemployed from 35,000 in 1990, to 138,000 in 1994 and then, due to new job creation and lower job destruction rates, registered unemployment dropped to 103,000 in 2001 or, using the ILO’s measure, the unemployment rate in 2001 was 5. 9% (Vodopivec, 2004). The average gross monthly wage in 2003 was around EUR 1,083 (Statistical Office of the Republic of Slovenia, September 2004). Further, Slovenia introduced mandatory minimum wages in 1995, with their level remaining relatively stable at around 40% of the average wage.
Finally, high taxes on labour have been imposed (the tax wedge of 48% here being defined as the sum of social security contributions and personal income taxes as a proportion of total labour costs) and, compared to other ETEs, both job security and labour costs in Slovenia are relatively high which, in turn, reduces the labour market’s flexibility. With regard to the industrial relations system and institutions, similarly to other ETEs, Slovenia has put in place a tripartite model of social dialogue and collective bargaining at both national and industry levels.
The role of trade unions had to change as well, for today they have to fight for employee protection, wages and employee rights, things that were more or less guaranteed in the previous system of socialist self-management. Unionisation levels in Slovenia are still relatively high, especially compared to some Western European countries, although there has been a significant drop in trade union membership from 58,6% in 1994 to 42,8% in 1999, with a steady decline of 2 percentage points per year since 1995 (Stanojevic, 2000).
In addition, due to 1993 Codetermination Act employees have the right to participate in company decision-making through the worker’s council and employee representation on supervisory boards. Some major changes in labour legislation were brought by the Slovenian Labour Relations Law of 1991, and some additional labour legislation adopted in 1994. Beside establishing managers as the main decision-makers with regard to HR issues, the most visible area of change was ’employee termination’.
Some new reasons for terminating an employment contract were added: incompetence, refusal to perform assigned tasks and, most importantly, redundancy due to operational, technological or organisational company circumstances. In 2002 a new Labour Law was passed, which enhances the contractual (emphasising the employment contract) and individual nature of the employment relationship, enforces only minimal standards of the (individual) employment relationship leaving any higher standards to be determined by means of a collective agreement, and introduces more flexibility into the employment relationship.
With regard to enterprise restructuring, the evidence shows that Slovenian privatised enterprises have undertaken limited defensive restructuring and relatively successful strategic restructuring compared to other ETEs (Domadenik and Prasnikar, 2004). At the forefront of restructuring efforts was a group of leading, internationally well-positioned Slovenian companies, involving many modern managerial practices and approaches being successfully implemented. On the other hand, many enterprises (especially from more domestically-oriented industries) have lagged behind in their adjustment to the new open-market system.
Overall, we may conclude that the Slovenian transition was relatively successful compared to other ETEs (Svejnar, 2002), but we must note here that Slovenia’s initial conditions were much better in terms of economic development and better developed managerial and market know-how. However, as described in the book by Mrak et al. (2004) many challenges remain, mostly related to the curtailing of inflation, institutional reforms of the pension and health care systems, doing away with the imperfections of capital and labour markets, and further restructuring of the corporate and private sectors (e. . ownership consolidation and effective corporate governance). The Current State of HRM in Slovenia As indicated in the introduction, we have had the opportunity to explore the Slovenian HRM situation in detail, since at the end of the 1990s we took part in a data-abundant research project conducted by a group of researchers at the Faculty of Economics in Ljubljana called the ‘Behaviour of Slovenian Enterprises during the Period of Transition to a Market Economy’ (short BSET Research).
During the 1996-1998 period 112 large and medium-sized companies, which were socially-owned and had to go through the privatisation process, participated in the research. Companies in the sample employed about 10% of the total Slovenian workforce. Data was collected for different areas (e. g. corporate governance, business strategy, marketing, finance, HR), with the functional managers in each company providing the data.
The questionnaire regarding the HR function was filled in by the HR manager, while questions pertaining to the company strategy were answered by the general manager. The advantage of the sample is that it does not only include extremes (either success stories or failures), as most often described in case studies, but instead includes a set of companies with various degrees of success in transforming their business. We may therefore make some generalisations with regard to the overall state of HRM development.
Beside the questionnaires, we also conducted several interviews to collect in-depth information about particular issues. The analysis of our data confirms that in general Slovenian companies have not been very successful in transforming their HRM function towards a more strategic partner role as described, for example, by Ulrich (1997). The research has shown that in practice we can find several models of HRM which differ with regard to the complexity of the HR activities involved and the overall strategic orientation of the function.
Similar to the findings of Monks (1992) for Ireland, our data suggest that we can observe conservative or administrative models, as well as more professional and strategic HRM models, with the latter mostly being seen in those companies mainly competing in international markets (Zupan and Ograjensek, 2004). In our sample, about half of the companies reported that they have a written statement of their HR strategy, which is not very different from other European countries in about the same time period (Table 1).
But a closer look reveals that such an HR strategy was usually just a small part (e. g. half a page of data with manpower projections) of the business strategy. INSERT TABLE 1 ABOUT HERE Further, HR managers in our research reported that they have little impact on strategic business decisions and only one-third of them are organisationally positioned as members of top management (lower numbers than in most European countries, as seen in Table 1).
With regard to the power of the HR department it is also important to mention that in Slovenia the number of HR specialists per 100 employees is only 0. 29, which is much lower than in other European countries. Thus, it is probably not surprising that most of the time HR strategies are poorly formulated and HRM activities do not support business needs (Dmitrovic and Zupan, 2001). This claim is confirmed in the research report based on CRANET data analysis (Svetlik and Ilic, 2004).
They found that Slovenia falls into a Central-South European cluster (together with Germany, Austria, Spain, Czech Republic, Italy and Portugal), characterised by a non-intensive model of HRM: companies operate in a relatively stable and rigid environment, with the internal labour market being important, the number and sophistication of HR activities being low compared to the European average, HR development and training is neglected, HR departments are professionally weak and line-managers do not consider their role in HRM as one of their priorities.
If we look at the main HR activities such as employment, training and compensation, some overall conclusions can be made. As we can observe in Table 2, cutting the number of employees has not resulted in any significant improvements in the education levels of employees or managers. New, more flexible forms of employment have not yet been established, while contract work is mainly used as a safety measure for new employment because of the difficult contract termination procedures involved once employees ere fully employed by a company. INSERT TABLE 2 ABOUT HERE
According to some of the data (number of participants and hours of education) the training of the employees appears to be quite satisfactory (Table 3). On the other hand, the fact remains that this training is mostly reactive (filling in gaps in knowledge) and not proactive (learning for the future); also the effectiveness of training is rarely measured. Thus, training does not prepare companies for the challenges of the future. We can therefore expect the knowledge gap between developed and most transition companies to widen. INSERT TABLE 3 ABOUT HERE
Deviations from common trends in the developed countries are biggest with regard to compensation, which is in a state of utter disorder. Not only is the labour market inefficient (huge differences in salaries between enterprises, not justified by the business results). An even bigger cause of discomfort is the fact that fixed elements comprised about 90% of the salaries throughout the period. Managers even tend to have less variable salaries than the other employees (the largest variable part is for production workers), which is against the usual practice.
The reasons here can be found in the fact that the tax legislation is not supportive of any long-term incentive plans and also that the performance of production employees seems easier to measure. Throughout the analysis of the reasons why HRM in general and strategic HRM in particular are not better developed, several issues pertaining to the low power of HR managers and staff have been revealed in both our research and that of Svetlik and Ilic (2004). In most cases, we can find a poor HR knowledge base within companies.
Less than half of HR managers have more than a high school education and most received none or little HR training during their formal education and not much thereafter. It is also very typical that HR managers have little work experience outside the HR function in the company, which leaves them with limited business knowledge. We have already pointed out the low number of HR professionals; in addition, we can also observe the feminisation of the HR profession since 90% of HR managers are women, what possibly affects their power (similar observations were made for Poland (Crow, 1998)).
HR managers are rarely involved in the process of formulating business strategy and the lack of business information also leads to a poor link with business needs. Additional reasons why HRM is not more developed in Slovenian transitional companies can be found in both the history of the HRM function’s development as well as in the problems relating to the transition to an open-market economy. We have already seen that in the previous system the personnel function was regarded mostly as an administrative and not a managerial one. Hence, managers as well as HR staff lack the knowledge and experience to deal with the current HRM challenges.
Responsibilities regarding human resources are unclear and HRM departments are often poorly organised. On the other hand, managers at all levels also lack the skills and knowledge to support decentralised HRM. In addition, HRM discipline is poorly developed both as an academic and professional field so it is not easy to acquire knowledge or get good consulting on HR issues. For example, only recently has HRM become part of the curriculum in business schools while there are just two university programmes that specialise in HRM. As Mrak et al. 2004) describe, the process of transition to a market economy has diverted the attention of managers to issues of privatisation and hard factors related to enterprise restructuring (e. g. financial resources, technology), thereby often leaving HR issues left behind except for the constant pressure to lower labour costs. With the need to balance out the various stakeholders’ interests within the Slovenian industrial relations framework, there has generally been little room to develop a more professional and strategic approach to HRM. The Conceptual Model of SHRM in ETEs
Given the previously described state of HRM in ETEs, we may conclude that, although people are becoming widely recognised as a source of competitive advantage, the actual transformation of the HR function shows a significant gap between the rhetoric and actual practice. The administrative approach to HRM prevails over the strategic one and, as a consequence, people often remain just a potential source of competitiveness that is not effectively utilised. We may argue that there are still many reserves with regard to attaining the long-term competitiveness and high performance of companies in ETEs.
We believe that one important way of improving this situation is to design a useful conceptual SHRM model for ETEs because the general SHRM models may neglect some of the key features affecting the HR-company performance link that are specific to the context of ETEs. This model should not only be conceptually well designed but also empirically tested to reveal the strength and casual relationship between the key SHRM constructs. Such a model could then serve as a framework for both learning and acting to bolster the strategic component of HRM in ETEs.
In our opinion, any attempt to develop a conceptual model of SHRM for ETEs should satisfy three basic conditions: 1) it should be built on theoretical and empirical findings in the SHRM field in general to improve the model’s validity and enable its comparability; 2) it should include specific constructs and variables that have been revealed through empirical findings as having an important impact on SHRM in ETEs to have more explanatory power; and 3) it should be both rigorous and simple enough in order to be successfully empirically tested.
To date, many general conceptual SHRM models studying the HR-company performance link have been developed. They have been classified as ‘best practice’ models (Pfeffer, 1994; 1998; Purcell, 1999) or high performance working systems (Appelbaum and Batt, 1994), and ‘best fit’ models (Miles and Snow, 1984; Wright and McMahan, 1992; Youndt et al, 1996; Delery, 1998; Wright and Snell, 1998). Delery and Doty (1996) further divide the best fit models up into those emphasising contingency perspective and on those following a configurational approach. ..
Contingency models are either very narrow and focus on a single contextual variable such as business strategy (Schuler and Jackson, 1987) or a firm’s capital intensity (Richard and Brown Johnson, 2001), or very broad and enter numerous contextual variables into the model (Jackson and Schuler, 1995; Tayeb, 1995). In discussing the available types of conceptual SHRM models, Brewster (1995) suggested a broader contextual approach for European countries due to the limited autonomy of a typical European organisation in HR-related issues and the large number of external contingencies.
In addition, he argues for improved explanatory power and applicability of contextual models to ETEs (Brewster, 1999). Frequently, conceptual SHRM models assume linear relationships between the constructs of the model (Boselie et al. , 2001). As an example, the SHRM model proposed by Becker et al. (1997) suggests that business and strategic initiatives are the basis for designing HRM systems, thus affecting employee skills and motivation as well as job design and work structures.
These systems result in creativity, productivity and discretionary effort that lead to improved organisational performance. In our opinion, such simple linear models neglect some moderating variables that are important for ETEs and consequently they omit certain causality links. Therefore, the SHRM model for ETEs should include the core constructs reported in the SHRM literature (Paauwe and Richardson, 2001): the HR context, HR activities, HR outcomes and company performance, but should also introduce moderating variables specific to the ETE setting.
Further, the majority of models derived from this basic linear framework remain static and ignore lagged variables (or the implementation to benefit lag), which can distort the relationship between HRM and company performance (Huselid and Becker, 1996). The internal validity of such static SHRM models is threatened because certain effects of HRM on firm performance can be long-term. Also, since so far the causality issue has not been properly empirically resolved (Gerhart, 1999; Wright and Gardner, 2003), there remains the question of reverse causality (i. . high performing companies invest more in HRM activities and therefore develop more complex HR activities) in the general SHRM model. The need to analyse not just the strength but also the causality of the HRM-company performance relationship should lead to the development of longitudinal research designs for studying HRM in ETEs as well. Finally, one of the criticisms in the SHRM literature is that conceptual and empirical models are outnumbered by normative models (Truss and Gratton, 1994).
Even conceptual SHRM models often remain prescriptive, more useful for academic discussions compared to their practical ability to convert models into effective execution. Considering the current state of SHRM in ETEs and the growing need to develop the field in these countries SHRM models should have different characteristics. They should be positive and show the appropriate actions to be taken in order to accelerate the development of the SHRM field among managers, HR professionals and academia. Presentation of the Conceptual SHRM Model for ETEs
Building on the definition of SHRM by Wright and McMahan (1992) and general SHRM models, our model for ETEs includes all core constructs reported in the literature on the horizontal axis (see Figure 1). Namely, the HR Context shapes HR Strategy Development and Execution (usually joined together as HRM activities), which results in HR Outcomes and, finally, Company Performance. The model considers all relevant links between these constructs including reverse causality links originating in the constructs Company Performance and HR Outcomes.
At the same time, the specifics of the ETEs setting are incorporated in the model by: 1) emphasising particular dimensions of the HR context; 2) using ETE-specific variables within constructs; 3) adding a moderating construct; and 4) the special arrangement of some causal links in the model. The model incorporates various dimensions of a broadly defined HR Context: External HR Context, HR Facilitators, Internal HR Context and Non-HR Factors. The Internal HR Context directly affects HR Strategy Development, HR Strategy Execution and HR Power.
HR Outcomes are specified as a mediator between HR Strategy Execution and Company Performance, while HR Power moderates the effectiveness of HR Strategy Development and HR Strategy Execution. Finally, HR Outcomes-HR Power and Company Performance-Internal HR Context relationships are predicted as recursive links. INSERT FIGURE 1 ABOUT HERE The HR Context is split into four constructs: the Internal HR Context, the External HR Context, HR Facilitators and Non-HR Factors to help lay emphasis on important contextual issues in ETEs.
By HR Facilitators we understand all the support (knowledge, information and financial resources) from various sources (e. g. government, academia, professionals) that facilitates the development of the HRM field in general and company practices. Similarly, we divided Non-HR Factors (e. g. product or services development, introducing a new technology to operations) from the internal organisational context to enable us to control for the effect of other functional areas within the organisation on HR Outcomes and Company Performance.
Whereas the External HR Context and HR Facilitators mostly have indirect effects on other constructs in the model, the Internal HR Context and Non-HR Factors have both direct and indirect effects. Apart from the improved explanatory power in ETEs, this specification of the HR Context enables us to discover problematic areas in the HR Context and to take appropriate action. With regard to variables within the constructs External HR Context and Internal HR Context we build on contextual variables reported in the literature (Jackson and Schuler, 1995) and add ETE-specific variables.
Further, within the constructs External HR Context and HR Facilitators we also introduce variables that have been discussed as determinants of the HRM institutional setting (Paauwe and Boselie, 2003), and emphasise those reported to be important for ETEs. Labour legislation, labour market characteristics, trade unions role and collective bargaining, macro-economic conditions (e. g. growth/recession, size of the grey sector) and taxation system, the extent of foreign direct investment, culture and tradition, are possibly the most important variables shaping the External HR Context.
Based on our analysis of the state of HRM in ETEs (and particularly in Slovenia), HR Facilitators are emphasised in the model as important factors for the development of SHRM in ETEs. They include factors such as the creation of an HR knowledge base, the availability of information resources (e. g. HR research and education, transfer of HR knowledge to organisations, professional associations and networking, access to the HR literature), the availability of HR services (HR training programmes, HR consulting, HR employment agencies etc. ), and government policies and programmes (e. g. ction programmes regarding specific HR issues, financial support for company HR programmes). Within the Internal HR Context, company size, ownership, corporate governance type, business strategy, relative competitive position (e. g. business up or down-turn, availability of resources), capital intensity, technology, organisational structure, life cycle stage, employee characteristics, and corporate culture and values could all be meaningful variables. Measures of external and internal contexts have mostly been defined for use as exogenous controlling variables when testing the conceptual model empirically.
Namely, the External HR Context and HR Facilitators variables control for differences between ETEs, while the Internal HR Context and Non-HR Factors control for differences between companies. The next pair of constructs HR Strategy Development and HR Strategy Execution explains the effectiveness of strategic HRM. General SHRM models seem to differentiate between intended and emergent HR strategies (Dyer, 1985), intended and actual HR practices (Wright and Snell, 1998) or intended HR strategy and realised HR interventions (Truss and Gratton, 1994).
Drawing from the description of the current state of SHRM in ETEs reported above, these discrepancies are also very obvious in ETEs. It is somewhat implicit in general SHRM models that the intended HR strategy reflects business needs. We believe that in ETEs this may not be the case due to the poor strategic integration of HRM. Thus, also the quality of the intended HR strategy becomes an important issue. Then we presume that even when a good quality HR strategy is designed in ETEs its execution is often weak.
This discrepancy between HR Strategy Development and HR Strategy Execution could be labelled the HR strategic gap. The HR Strategy Development construct could be described by the presence of an HR strategy, strategic fit (e. g. type of linkage as suggested by Golden and Ramanujam (1985)) or the appropriateness of an HR strategy according to business strategy, type of HR strategy, intended HR practices bundles, and time and resources spent by managers and HR specialists on HR strategy development.
On the other hand, the share of strategic plans executed, the rhetoric/de facto ratio of strategic HR planning, extent and quality of emergent HR practices bundles, and some composite measure of HR strategy effectiveness and efficiency could be used as measures of HR Strategy Execution. An additional construct labelled HR Power has been introduced to the general SHRM model as a moderating variable because the empirical findings from ETEs described above suggest that the low power base of both managers dealing with HR issues and HR specialists is an important reason for transition companies’ failure to implement SHRM.
The issue of power and influence of HRM is not new (Galang and Ferris, 1997; Russ et al. , 1998) although it is often neglected in the SHRM literature. Commonly, the notion of power and HRM is presented through a focus on the position of HR on the board (Purcell, 1994; Kelley and Gennard, 1996) through the role and status of the HR function, the HR department (Truss et al. , 2002; Bowen et al. , 2002) and the HR manager (Ulrich, 1997) or through the HR role and competence (Sparrow and Hiltrop, 1997).
The construct HR Power in our model is even broader in the sense that it tackles the issues of the HR power base in general and considers all HR actors of an organisation: the HR specialist, line managers, top managers and to some extent even trade unions and employee representatives because they play an important role as codeterminators in some HR-related decision making, especially in collective dismissals and compensation system designs.
The construct HR Power is related to both the presence and quality of HR strategy development (i. e. the ability to establish the fit between business and HR strategy) and to the efficiency and effectiveness of strategy execution. HR Power could be assessed through the following variables: HR competencies for both managers (top and line) and HR specialists, the status and role of HR manager and HR department (e. g. n HR manager as a member of the top management team, formal authority, access to business information, the interpretation of labour legislation to top management, the department’s position in organisational structure), positioning of HR strategy in comparison to other functional strategies, HRM reputation, resources allocated to the HR function (e. g. financial resources, number of HR specialists), the HR information system, and stakeholders’ support of HR (especially important during organisational restructuring, which is often the first stage of restructuring firms in ETEs).
The development and execution of the HR strategy result in HR Outcomes. This construct has been included in empirical investigations of general SHRM models with measures such as absenteeism, turnover and individual/group performance (Dyer and Reeves, 1995), dismissals, social climate, employee involvement, trust, loyalty (Paauwe and Richardson, 1997), employee satisfaction and commitment, employee motivation (Boselie et. l, 2001), and organisational climate (Bowen and Ostroff, 2004) mediating effects between HRM activities and company performance. In ETEs we could measure HR Outcomes according to the attainment of universalistic HR goals suggested by Boxall and Purcell (2003). They suggest multiple tiers for HR goal-setting because of the embeddedness of HR goals in each other. Recognising multiple layers in the attainment of HR goals, we could develop layered measures for HR Outcomes.
We rely on Boxall and Purcell and develop universalistic dimensions of HR Outcomes: labour productivity, short- and long-term organisational flexibility and social legitimacy. By adopting this approach we will be able to compare the HR Outcomes of companies in various ETEs with differing business and HR strategies. However, when estimating the measures of these three dimensions the specific features of different transition countries should be taken into consideration and measures developed accordingly.
Also, some otherwise typical HR Outcomes measures such as turnover and employee satisfaction may be problematic in ETEs and have to be introduced into the model carefully. Turnover, for example, may not be a relevant measure in conditions of relatively high unemployment or low workforce mobility, which are often present in transition economies (Vodopivec, 2004; Svejnar, 2002); in these circumstances turnover becomes low and does not reflect internal HR dysfunctions properly.
Therefore, we suggest the following measures of HR Outcomes: labour productivity, generalised and mutual trust in organisation, work organisation efficiency, relative employee satisfaction (comparisons over time or benchmarking against other companies), absenteeism, learning capabilities and flexibility, relative labour costs, and commitment. In general SHRM models company performance is usually measured by some profit or market-value related measures.
So far, researchers have been more eager to use market-based measures of financial performance because accounting-based profitability indicators seem to be subject to numerous biases (Huselid, 1995; Huselid et al. , 1997). While similar observations could be made for accounting measures in ETEs, their shallow capital markets with relatively low liquidity (Koke and Schroder, 2003) also cast doubt on market-based measures. Even the maximisation of a company’s market value as the ultimate goal can be doubted and it has already been empirically rejected for the case of Slovenia (Mramor and Valentincic, 2001).
Further, inefficient capital markets, different taxation systems and accounting practices make the comparability of profit and market-value related measures between companies in ETEs quite low. In addition, static company performance measures are less appropriate for companies in ETEs, since frequently it is the relative performance over time that is more important, especially when an organisation is in recovery (often the case in ETEs after downsizing or restructuring).
Finally, using only accounting and market-value related measures such as company performance indicators is too narrow to estimate a company’s long-run viability, which than calls for performance measures concerning more stakeholders (Rouse and Putterill, 2003). Therefore, we propose a more balanced set of measures including both static and dynamic indicators of a company’s performance. The construct Company Performance could thus be measured by various robust financial and market-value indicators (Dyer and Reeves, 1995; Huselid et al. 1997; Truss, 2001; Guest et al. , 2003) like ROA, EBIT per employee, ROI, Tobin’s q, value added per employee, market value of the company, market to book (value) ratio, and by non-financial measures of corporate performance such as customer satisfaction, product/service quality, relative competitive position, development of new products/services, and company reputation. All of these measures should also be included as differentials (e. g. growth/decline of value added per employee, change in product/service quality etc).
Issues Regarding the Empirical Testing of the Conceptual SHRM Model for Transition Economies The next important step in developing of a proactive and action-oriented conceptual model of SHRM for ETEs is empirical testing in order to find the best explanatory variables within the constructs and establish the links between them. We have suggested several variables describing each construct based on previous research findings. The question remains, however, which of them are to be included in the empirical model.
The researchers would thus need to understand each variable and its relationship with other variables, which could be achieved through the process of structural equation modelling (Bollen, 1989). Since we stressed the importance of introducing lagged variables, the result of empirical testing should be a fitting dynamic structural model based on panel data. The model could then serve as a basis for identifying those variables and corresponding time lags that have an important impact on company performance and, as such, must be in the centre of practitioners’ attention in order to improve their company’s performance.
Supporting this research strategy, Wright and Gardner (2003) argue that the potential to add complexity through adding constructs, dimensions and variables explaining the HRM-company performance link is virtually infinite and a better question is not how many, but which, constructs and variables to include in the model to make it useful for theoretical and empirical purposes at the same time.
The problem is that while new elements in the model may increase the conceptual understanding of the relationship(s), the complexity makes it difficult to conduct empirical tests of the model because data are both difficult to obtain and to analyse because the model remains underdefined. The way we have defined the conceptual SHRM model for ETEs makes multilevel empirical analysis almost unavoidable because the measures we suggest originate from multiple levels of analysis.
Consistent with the default level of analysis in the SHRM field (Wright and Boswell, 2002) the data from national, industry, organisational, and employee levels should be carefully translated (aggregated or disaggregated) to the organisational level. Where data translation causes unsolvable problems, a partial empirical investigation of the model should be performed. For example, the model can be used to investigate SHRM within a single ETE where most of the external contextual variables fall off.
More generally, one advantage of our model is that, by reducing the model (fixing certain (especially contextual) variables), the focus of investigation of the empirical model can be customised to suit current research questions. For example, Kase and Zupan (2004) performed an analysis of HRM for Slovenian manufacturing companies with downsizing strategies. Usually there are just one-level measures within a construct, but multiple levels can be observed for some constructs in the model.
Although the analysis of such a construct demands more effort, it can also provide benefits for research, as the case of HR Outcomes demonstrates. By aggregating employee- and group-based measures of the HR Outcomes construct to the organisational level, we can obtain a more realistic estimate of reality. Namely, the disconnection between the rhetoric about HRM of a single respondent from an HR department (organisational level data) and the reality actually experienced by employees (individual level data) may be significant (Truss, 2001).
The issue of data availability is a real concern for ETEs. As Carlin et al. (1995) and Mills (1998) noted, HRM research in ETEs is mostly anecdotal or descriptive due to the lack of empirical evidence or because of its inadequacy. Non-existent or poorly developed HR information systems do not provide sufficient quantitative data to enable rigorous systematic research. Existing databases mostly contain mostly administrative records with a low information value and few performance related data.
Further, in ETEs large scale HR benchmarking analyses containing information from more than one ETE that could provide background for research in the SHRM field are rarely available or are underexplored. Therefore, companies that can provide data are usually to be found as units in samples of SHRM research. Such sampling and data sourcing is obviously biased and does not allow generalisations. The problem of the availability of quantitative data and possibility of the reduced reliability of questionnaires puts systematic quantitative research into question.
Namely, even in the US the low interrater reliability of questionnaires in HRM research is reported and multiple respondents are suggested to improve questionnaire’s reliability (Gerhart et al. , 2000). According to the history of HR departments in ETEs in the pre-transition period and the level of generalised trust in these countries, the mistrust of respondents in ETEs could lead to the even lower reliability of measures in questionnaires. In addition, the low share of companies that adopt SHRM in ETEs seems to support alternative research designs.
In-depth multiple case studies are reported to be the best methodological alternative, as Fey and Bjorkman (2001) suggest for Russia. Being aware of these problems and alternatives we still believe that systematic quantitative research design offers some important advantages for establishing knowledge about SHRM in European transition economies, which justify the effort of conducting such research. Firstly, a large-scale balanced sample, consisting of companies that adopt SHRM and companies that do not adopt it, provides control units and strengthens the controlling variables.
Secondly, large samples rich in quantitative data are needed to be able to apply structural equation modelling. Further, quantitative research designs allow the numerical empirical validation of propositions. Namely, verification of the HRM-company performance relationship for ETEs has until recently (Fey et al. , 2000; Fey and Bjorkman, 2001; Buck et al. , 2003) only been anecdotal. Quantitative verification is very important in ETEs since usually the lack of such support of arguments diminishes the importance of HR departments, HRM in organisations and the evolving field of SHRM in general.
Finally, systematic quantitative design can gradually evolve into longitudinal research design, which would enable us to test the causality and reverse causality of the HRM-company performance relationship, which has not yet been sufficiently researched. To conclude, for the empirical validation of the model, two questions should be answered. Firstly, are the measures in the model correct and complete for ETEs? Secondly, can we determine and empirically verify the causality of the SHRM model for ETEs?
If the measures are complete and causality is verifiable, then we can determine which timeframe is most appropriate for studying the HRM-company performance relationship. Only then can the model be used as a tool for improving company performance and enhancing the development of SHRM in ETEs. Conclusion Within the SHRM field there are many efforts to develop theory and relevant models in order to explain the HR-company performance link. Most of these efforts come from scholars from the developed Western countries.
Yet less is known about how these theories and models apply to transition economies. Based on general SHRM models, our analysis of the context and current state of HRM in ETEs, we build on both universalistic and contextual paradigms (Brewster, 1999) to develop a conceptual SHRM model for ETEs. In comparison to general models of SHRM, the model introduces a new specification of the HR context and an additional moderating construct HR Power to have more explanatory power in ETEs.
HR Power was defined as a moderating construct affecting both the quality of HR strategy design as well as the effectiveness of HR strategy execution, while HR context was split into External HR Context, HR Facilitators, Non-HR Factors and Internal HR Context to identify the crucial dimensions in the context which affect the HR-company performance link. In addition, we proposed specific variables that could best explain specific constructs in the ETE setting. Apart from the notion that general SHRM models have to be modified to be able to better explain SHRM in ETEs, we depict some other contributions of this model to the general one.
We believe that additional moderators can improve the understanding of any conceptual SHRM models. Therefore, by studying moderating constructs in the general SHRM model we could improve the insight into the black box. In addition, various specifications of context could improve the applicability of the general model to different settings. Finally, the way we defined the strategic gap for HR provides background for doubting the frequently implicit assumption of appropriate business and HR strategy which sometimes lies behind general models as well.
With these characteristics, we believe that our model may serve well as a framework for conducting research in the field of SHRM in ETEs on one hand, and as a framework used by practitioners in order to design HR strategy and implement activities to improve the HR-company performance link. Nevertheless, finding the right balance between model’s complexity (number and content of variables explaining each construct) and the viability of empirical testing (availability of data and proper analysis) may still be a considerable challenge.
Also, the level of generalisation may be limited, because despite the many similarities among ETEs, there are also country-specific issues that need to be taken into account and one model may simply not be sufficient for doing so. Being aware of these limitations, we suggest several issues for further research. Firstly, research should try to empirically validate the model in country-specific and comparative research designs. In the beginning, both research designs should focus on finding variables with the greatest explanatory power to diminish the complexity of the empirical models.
Also, they should determine which dimensions in the HR Context are more important for the HR-company performance link and study the nature of these relationships (direct, indirect effects). While the conceptual SHRM model for ETEs leaves enough flexibility to conduct a valid country-specific research in a specific ETE, a more cautious approach should be taken for comparative studies due to its greater complexity. Next, conceptual SHRM model for ETEs could be compared with models for other transition countries (e. g. Asia) and other regional HRM models in Europe (e. . northern Europe model, south European model). These research issues are very important for ETEs because, in order to have a positive impact on their SHRM development, the proposed model needs to be empirically validated. Only then it may shed light on which HR approaches, policies, practices and interventions prove useful for boosting company performance, and in which context. In addition, by building a large database through systematic longitudinal research design we could trace the progress in the fields of HRM and SHRM and perform HR benchmarking.
Participation in the research project would probably encourage companies to establish or improve their HRIS and HR metric systems. Finally, research should help determine which industries and what sorts of businesses can benefit from adopting SHRM, where it is not cost-effective and where alternative solutions could bring about better results (Boxall and Purcell, 2003: 8-10). For practitioners, future HRM challenges in ETEs may not differ a lot from those in the developed countries. This is especially true for those more developed ETEs that joined the European Union in May 2004.
Nevertheless, the context in which ETE companies have to cope with these challenges certainly does differ from those in the developed countries and sometimes this presents an obstacle to HRM development. Therefore, it would be particularly important to systematically improve what we have called the HR Facilitators at the country level and even across ETEs that have to deal with similar HR issues. This would be even more important for those less developed ETEs as they could develop their policies and actions based on the positive experiences of other ETEs.
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