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*AN INTEGRATED HUMAN RESOURCE MANAGEMENT FRAMEWORK FOR SMES Hamid Reza Qasemi (Student of PhD program in Public Management- Allameh Tabatabaee University) [email protected] Majid Zanjirdar (Islamic Azad University- Arak Branch) [email protected] Abstract Managing small and medium sized enterprises differs from large enterprises from different aspects. These are from aspects in which they do how manufacturing, investment, establishing, marketing, human resource management (HRM). HRM practices in SMEs do not follow certain manner or model, and it is performed some of the practices, it is not performed some others, or they have been applied without any regards to other aspects of HRM and lack of any defined relevance. In this paper, the purpose is description of different practice of HRM for SMEs in an integrated framework. In this framework HRM system, as a certain component and aligned with management of SME, helps to attain goals. For this purpose, at the first, it is reviewed conducted researches on HRM in SMEs, then it is determined research vacuums, and at the end, is offered an integrated HRM in SMEs. Key words: Small and medium sized enterprises/ SMEs/ Human resource management/ HRM/ Integrated Framework Introduction Human resource management (HRM) is an important sections of organizations that, consistently with other components of it, does various practices in context of HRM till creates comparative advantage for organizations. The large firms always have special attention to managing their intellectual and human capital, and because it, they invest a large amount investment on planning, training and development of their HR. A huge part of business firms of countries is constituted by small and medium sized enterprises (SMEs) and a high percent of countries GDP is related to performance these firms. In compare with large firms that have allocated to themselves almost all HRM researches and literatures, SMEs in HRM aspect, have a few share of related theories, models, and patterns. In one hand, because of varied number of SMEs and their role in developing entrepreneurship, and in other hand, increasingly important of intellectual and human capital and its role in creating comparative advantage, and also increase competition, it is necessary to study different HRM practices in these firms, and develop their patterns and manners. This paper attempts provide a comprehensive relatively framework in this direction so that, offers HRM practices in SMEs in a consistent system and in adapt with other organizational components of these firms. ١ 1. 2. 3. 4. Human Resource Management Management process includes five basic functions that are planning, organizing, staffing, leading, and controlling. HRM is the policies and practices involved in carrying out the people or human resource aspects of a management position, including recruiting, screening, training, rewarding, and appraising (Dessler, 2005). HRM is process of attracting, developing, and maintaining a talented and energetic workforce to support organizational mission, objectives, and strategies (Venkateshvara, 2006). In other definition, HRM can be defined as application of managerial principles, techniques and theories to attract, training, development and devoting human resource to achieve organizational goals with the most efficiency and effectiveness. On base of this definition, the manager as use as management knowledge for planning, operations, manufacturing, and marketing, he has to apply the knowledge on the most main organization resource, HR, and creates its comparative advantage. Then no management function is more important than the management of people. In Dessler's believes (2005), the manager job has different aspects of human resource: job analysis (determining job nature of each employee); planning for workforce needs and recruiting job candidates; selecting and hiring job candidates; orienting and training new employees (Mentors); managing wages and salaries (compensating employees); providing incentives and benefits; appraising performance ; communicating (interviewing, counseling, disciplining); training and developing managers; building employee commitment. The importance of HRM necessitates that managers act these aspects either themselves directly or set up HRM department in organization, and appoint an appropriate person as the HRM manager. HRM department has four basic functions in organization (DeCenzo & Robbins, 2005): Staffing: job analysis, human resource planning, recruitment, and selection are the main practices for attract and staffing competent HR. Training and development: this task includes orientation, employee training, employee development, and career development. Motivation: applying motivation theories and job design, performance appraisal, rewards and compensation, employee benefits are practices which act to purpose providing incentives for employees. Maintenance: in this function, there are some practices such as safety and health, communications, and labor relations. HRM functions are carried out in forms of different practices. The practices have a systematic trend that are started from staffing and continue to various forms of termination and included: job analysis, job design, human resource planning, recruitment, selection, training and development, compensation, job evaluation, performance appraisal, safety and health, labor relations, discipline, and termination. The mentioned practices can be place in a systematic flow as shown in figure (1). ٢ Figure (1): HRM System Input Output Retain Process 1. Job analysis 6. Training & Development 2. Job design 7. Compensation 3. HRP 8. Job assessment 4. Recruitment 9. Performance Appraisal 5. Selection 10. Wealth & safety 12. Termination: - Retirement Transfer Resignation Dismissal Death Discharge & … 11. Labor relations Feedback Small and Medium-sized enterprises (SMEs): Today, SMEs are an important part of every country's economy. Although these firms have characteristics that differ from large firms, but nobody can unseen their role in innovation, entrepreneurship, and profitability. The most important indicator of distinguishing SMEs from large one is number of employees. Of course there are some contradictory views on this case but in general the firms with up 50 employees are small enterprises, and firms with 50 through 250 employees, are medium sized enterprises (McCartan, 2001). A SME needs three plans: strategic plan, marketing plan, and business plan (Howe & Bradcovich, 1995). In business plan, it should be consider three important aspects of operation, human resources, and finance. In SMEs, it is rate of entrepreneurship very high so that their concerns generally consider with entrepreneurship concerns. Entrepreneurship can has had origin in physical resources, experience, or knowledge. Also it can create by individual, group, or organization. Types and states of entrepreneurship come from combination of entrepreneurship origin and entrepreneur and can be indicate in figure (2). ٣ Figure (2) Types of entrepreneurship in SMEs Entrepreneur Individual Group Organization Origin Physical Resources Entrepreneurship based on individual resources Entrepreneurship based on group resources Entrepreneurship based on organizational resources Experience Entrepreneurship based on individual experience Entrepreneurship based on group experience Entrepreneurship based on organizational experience Knowledge Entrepreneurship based on individual knowledge Entrepreneurship based on group knowledge Entrepreneurship based on organizational knowledge In SMEs talented, creative, and skilled people identified as source of ideas for creating, producing, and distributing products. SMEs are an example of knowledge based economy in which intellectual property (IP) is the main enterprise asset, and this asset is dependent to knowledge of key people in the firm (Nordicity Group, 2004). In these enterprises, employees should be able play multiple roles, and act in different organizational growth stages (Camp, 2000). In SMEs it can identifiable some main areas that are: entrepreneurship, investment, HR, related industry, finance, management (managerial knowledge), and marketing areas. On this base, structure of a SME is constituted of components such as purchasing, HRM, maintenance, finance affairs, engineering, top management, quality, and operational employees (Stapelton, 2001). The needed resources of a SME are impacted by two factors of technology and size. Combination of these factors can make multiple states that indicate relation between the factors to needed resources of the enterprise (Honig, 2001). In figure (3) the modes are shown. Environment always is changing and followed by technology and size of firms, then the needed resources change during time. ٤ Figure (3) The needed resources of SMEs in a transitional environment High Owner’s Formal Education Financial Capital Enhanced Organizational Expertise Owner’s Practical Experience Financial Capital Limited Organizational Expertise Opportunistic High Technology High Profit Craftsman Low Technology Low Profits Low Small Large HRM Practices in SMEs Why HRM scholars have been far from research on SMEs? Why entrepreneurship researchers have avoided to do research on HRM issues? Perhaps the reason, for most of the scholars, HRM is assumed a large firms phenomenon. If it is asked every manager to define HRM, more likely he or she will speak about bureaucracy, policies, procedures, and reports. Moreover, most of the HR researchers traditionally have gained their data and information from a HRM department, but SMEs don't have HRM department then there is a great dilemma for people training using traditional paradigms of HRM. In spite of this, there are many similarities between SMEs and large firms in sense of HRM practices. According Mills and Lavells (2006), although HRM practices, support systems and personnel profiles in SMEs are different from large firms but access to information technology has developed equality of practices and function of HR in SMEs. According to conducted researches, SMEs components include HR, marketing, finance, infrastructure, technology and innovation, and rules (Borisov, 2007). Also the most important SMEs indicators are HR productivity, liabilities, and profitability (Maniolova, 2006). Two indicators of liabilities and profitability depend on HR productivity. The firm's size has a positive relation with HRM department, and being a business plan has positive effect on formalization of HRM practices, and being a HRM department in SMEs has positive relation with formalization of HRM practices (Jan, 2003). According to Jan (2003), there are four intermediary variables that can impact on formalization of HRM practices in SMEs: the demand for HR, the supply of financial resources, the expectations and requirements from external stakeholders, and the CEO's perceived value of HRM practices. These variables are affected by contextual determinants of SMEs, and provide an appropriate ground for HRM practices in SMEs. In figure (4) is shown relation between the variables with others. ٥ On Jan's believes (2003), there is a different between HRM context and its contents. HRM context contains role, definition, organization, and outputs, and includes being a HRM department or HRM manager, while HRM contents work flows, reward systems, and labor relation. Formalization of HRM practices can be as HRM contents. Figure (4) A model of contextual determinants of HRM practices within SMEs Contextual Determinants -Firm size - Business plan - Export - Franchise - Family business -Unionization Intermediary Variables -Requirement from expectations of external stakeholders -Demand for HR - Supply of financial Resources -Perceived value of HRM practices By the CEO HRM department Formal HRM practices One of the main challenges of HRM in SMEs is balance between formal policies and informal culture of these firms. Since HRM formalization is a very qualitative issue, until now, it has not been done any quantitative analysis about it (Nguyen, 2004). According to Coetzer (2006), HRM practices in SMEs are formed affecting some factors such as workplace culture, resources paucity, and distinguish in characteristics of SMEs. In SMEs, HRM practices are multiple and divers. In Coetzer study, it is determined several HRM practices in SMEs that are: attracting an effective workforce, recruitment and selection, training, and performance appraisal. In 2000 in USA is conducted a study on 156 SMES that was suggested recruitment, selection, maintenance, motivation, training, development and career, compensation, benefits, labor relations, safety and health practices for HRM in SMEs (Fall, 2000). In other studies, are mentioned some HRM practices such as compensation and benefits, complaint and policies, recruitment replacements, employees' assurance, employees' management, wages and salary, recruitment and selection, termination, and job analysis. Andersen (2003) in his study found seven main HRM practices for SMEs. He suggests that HRM structure and practices in SMEs are including seven main types that are shown in figure (5). ٦ Figure (5) HR structure and some practices in SMEs Explicit strategy and policy HRresponsible Employment condition fixed through Commitment Career Few or non Bookkeeper (accountant) Owner / CEO Organization Out of the Company Some Executive secretary Bargaining Organization In and out of company Some Chief accountant Bargaining Profession and Organization Out of the company Many Managing director Owner /CEO Profession In and out of the company Some HR manager Owner / bargaining Profession Out of the company Some Manager (production) Bargaining Company In and out of the company None Owner Owner bargaining Company ? Also Venkateshvara (2006) describes seven HRM practices for SMEs. According to him, HRM practices include human resources planning, systematic recruitment and selection, training and development, job analysis, performance appraisal, growth plans and strategies, and managerial techniques such as continuous improvement, total quality management, and benchmarking. Integrated HRM framework Effective HRM practices in a new knowledge-base economy gain increasingly important because companies face to a dual challenge about need to highly trained employees while shortage of qualified HR. This challenge is more general for SMEs, and then it is more sensible to support HRM practices more than past. HRM practices in SMEs are quantitatively and qualitatively different from HRM practices in large one. Growing SMEs need to development of their HRM practices, because they should apply a more professional approach to managing people as increasing in their size ( Venkateshvara, 2006). But this difference isn't in kind of HRM practices but it is in quality of application of them. In SMEs, it is identifiable HR and jobs types. The most important these jobs are knowledgeable jobs, managerial jobs, data and information jobs, service jobs, and commodity jobs. In knowledgeable jobs, knowledge workers are active, in managerial jobs, owners and managers operate, in information jobs, technicians and clerks play roles, in service jobs, servants work, and in commodity jobs, machinery workers act as operators. Therefore it can assume HRM as system approach that, according figure (1), has different practices, and can be divided into input practices, maintenance process, and output practices. ٧ According to what is described and what is reviewed through the study in HRM area in SMEs, it can be design an integrated and consisted framework in which place the most HRM practices prevalent. This framework must have some characteristics: 1. It should be made on a systematic approach. 2. It should describe the type of relation between HRM and other components of the firm. 3. It should have a strategic perspective. 4. It should consider differences between SME and large one. In other hand, the SMEs structure mainly includes sales, HRM, maintenance (engineering and technical affairs), financing and investment, and manufacturing and operations. Maintenance section is responsible for balancing in and out of the firm and takes some practices such as planning, organizing, and leading to attain it. Financing and investment section undertakes the important task of budgeting and fund allocation for support of entrepreneurship areas. Manufacturing and operations is responsible for operationalize entrepreneurship aspects, and it is doing marketing practices and market research in frame of sale section. All of the HR aspects include formal and informal ones are do in HRM section. Here is what should be need for make an integrated HRM framework: 1. Determining the main and important HRM practices in a SME according to size, technology level, type of activity, and amount of capital. 2. Relating these practices to the main components of SME structure such as maintenance, financing, HRM, manufacturing, and sale sections. 3. Adapting HRM practices and the main components to environment based on a strategic view. According to contents above in the paper, there are several executive manners for each HRM practices in SMEs that are mentioned in following: 1. Recruitment and selection. This practice is applied in tow levels; managerial and operational levels. In operational level, the main recruitment source is word of mouth (Slade, 2005). It is used other sources as increasing firm size such as government recruiter agencies, newspaper advertisements, and professional and technical schools. SMEs managers prefer to select who are fully known. In managerial level, it is rarely used sources such as the government recruiter agencies and schools. Interview is dominant method in selection in operational level. The most of SMEs consider candidates characteristics and qualifications, and previous experience and employers. In managerial level, it is used some techniques for selection such as interview, assessing conditions and characteristics of candidates, and reference. Therefore the main used techniques for selection are informal interviews, doing work samples by candidates, matching person to organization instead of matching to job, and using people during an experiment period ( Coetzer, 2006). 2. Compensation and employees welfare. The employees' welfare level in SMEs is very low so that the complaint is high, and even many employers are unaware about employment rights of their employees. Compensation includes more direct payments, and doesn’t include many indirect payments. It is more attend to pay wage than salary. Regards this, the conducted studies ( Kongtip, 2007) show that it is provided welfare facilities such as cafeteria and place for food, medical service and so on. 3. Training and development. Researches (Jack, 2006) show that the SMEs's employees receive training very lower than their peer in large firms. Training in SMEs is rarely planned and usually plans in contingent. Training methods in managerial level is in general on-the-job and as increasing firm size, it is increasingly focus on external training for managers. Generally, in SMEs kinds of training are on- ٨ the-job, training at home, partnership training, government-funded training, and job rotation. Employees' development generally includes training and performance appraisal. HR development needs in SMEs (Barker, 1998) are exploring business opportunities, evaluating business ideas, and protecting ideas and intellectual property; marketing basics, market research, sales forecasting, and business promotions; business finance, equity financing, long term and short term debt financing, and alternative sources of financing; planning fundamentals, preparing a cash flow forecast, and preparing a business plan; and basic government regulations for getting started, taxes, becoming an employer and basic start up tasks. A study of entrepreneurs in Canada resulted in the following list of entrepreneurial-managerial competency requirements: positioning / adapting competencies, represented by a clear business vision; sales planning and promotion; interpersonal skills, leadership in climate setting, communication, delegation and coaching; management and decisionmaking; cognitive ability and information processing; background knowledge of industry and business connections; financial capabilities, cash management and control; technical capabilities; entrepreneurship; and innovation. Direction of HRD in SMEs must be toward lifelong learning. Lifelong learning is a continuous process which stimulates and empowers individuals to acquire all the knowledge and skills they will require throughout their lifetimes, and to apply them with confidence and creativity. 4. Performance appraisal. According to Karden & Sstivens (Jack, 2006), it was found that have not done any study on performance appraisal in SMEs. Also there is very low trust on performance appraisal systems. Therefore, performance appraisal in these firms is more applied through observation and correct errors (Slade, 2005). In operational level, it is used rating scales very much, and some mangers evaluate performance through compare between employees. In some SMEs, as increasing in size, it is assessed performance by peer and self evaluation. 5. Safety and health. In SMEs, safety and health management includes to make healthy facilities such as medical tools and facilities, social security, social assurance, annual medical tests, healthy clinic, life and accidents assurance, fire fighting requirements, and electrical safety management, workplace hazards control , and industrial hazards control (Kongtip, 2007). 6. Labor relations. The main practices which apply in frame of labor relations in SMEs are unionization, employees' representation, government interventions, and collective bargaining on pay conditions and employment conditions (EIRO, 2000). 7. Human resource planning. Human resource planning in SMEs is more provided in form of succession planning. Research findings (Motwani, 2006) show that regardless attention to their size, it is important for them to create a formal plan for succession, communicate to successor, and provide training to incumbent CEO. For SMEs, the first priority of selection is successor who has a high level of sales and having marketing skills. There are not certain researches about other HRM practices in SMEs. HR practices impact on organizational strategy and organization performance (Chandler, 2000). For example, a total quality strategy has the most effectiveness when is supported by training and group incentives. Then, it is necessary to fit between HRM and SMEs. There are different kinds of HRM fit in tow dimensions; internal and external environment, and criterion specific and free (Zheng, 1999). Internal environment includes strengths and weaknesses, and external environment includes opportunities and threats. Also specific criterion includes certain conditions ٩ and limitations on SMEs, and free criterion shows not being any economic limitations and monopolies. The firms tend to setting business strategies in respond to many changes driven from business environment and HRM strategy and practice is set to achieve the goals such as profitability and market advantages. Each element of HRM is integrated to adapt the pattern which attains to business needs. Because HRM practices in SMEs are informal, ad hoc, and opportunistic (Venkateshwara, 2006). The forms of fit HRM in SMEs is shown in figure (6). Figure (6) Forms of fit HRM in SMEs Criterion Specific Criterion free Internal Fit to ideal form of practices Fit as a gestalt Fit as bundles External Fit as strategic interaction Fit as contingency Contextual determinants HRM system Structural factors Business factors of external environment Now we can draw the integrated HRM framework in SMEs as figure (7). Figure (7) the integrated HRM framework in SMEs Firm size Business plan Input practices Finance & investment Export Franchise Maintenance practices Maintenance practices Family business Unionization Output practices Manufacture & operations Marketing & sales As shown in the figure, an integrated framework has four main sections that are: 1. Contextual determinants of RHM. These factors determine quality, numbers, and formalize of HRM practices in SMEs. Being the large size of the firm, exist of a certain business plan in the firm; take direction toward export in production, supported by government, no family business and unionization, are developer aspects ١٠ and formalizer of HRM practices in SMEs. Being the smaller size, don't being a certain business plan, don't have being direct towards expert, don't being a franchise, being family business, and no unionization, are constrainer factors for HRM practices. 2. Structural factors. This section is included of structural parts and elements of SME. That states preliminary forming of a firm by budgeting and investment. This investment is continued by maintenance practices such as planning, organizing, and leading, and leads to forming operations and producing product, and then the product is purchased through studying market. 3. HRM system. HRM system includes HRM practices that fit to structural elements during to do them, and systematically determines, designs, and plans the needed jobs. It is during the HRM system to find and to employ competent people, to provide required training, to compensate of employees, to evaluate their performance, to provide safety and health, and to attend to work relations so that links the elements together. 4. External factors of business environment. HRM should play the main role in internal and external fit of a firm. Internal fitness is did between HRM and structural factors, and external fitness is did between HRM and external factors of business environment. In fact, HRM system is adaptability's bridge of between internal and external environment of a SME. Conclusion Although application of HRM practices in SMEs includes some difficulties, but it can be growth factor of these firms. Some of these difficulties are misunderstanding real concept of HRM by owner-manager, not being enough knowledge about HRM, being informal and unstructured relations. An integrated HRM framework can solve these problems. Of course, it is needed to show the real efficiency of the framework, but what is followed by the framework is to create a consisted and structured approach to HRM in SMEs and to pay attention of HR scholars to conduct researches in this area. 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