HRM Practices in SMEs

Submitted to:

Ms. Asma Tabssam

Submitted by:

Safdar Rasool MB-10-22

Muhammad Azam MB-10-09
Muhammad Afazal MB-10-26
Muhammad Isameel MB-10-14
Saif Ullah MB-10-39

ABSTRACT
Human resource management (HRM) practices, support systems and
personnel profiles were examined in urban and rural enterprises. The
investigation is an exploratory descriptive study employing a discussion of the
results of a questionnaire. The authors' hypotheses are that urban and rural
small and medium sized enterprises (SMEs) would differ significantly in HRM
practices, support systems, and personnel profiles. Data were analyzed using
t-tests and chi-square tests, as appropriate, to detect statistically significant
differences between urban and rural SMEs. No interventions were performed;
data were self-reported responses to questions on a survey instrument. The
research findings suggest the authors' hypotheses are generally incorrect. The
results from the study may advance the concept that technology and
information availability have developed equity in HRM activities and functions
in both urban and rural enterprises. Moreover, rural firms are performing at a
higher level of sophistication and experience in HRM practices, support
systems and personnel profiles.

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 The definition of human resource management:
The function of human resource management (HRM) in large organizations
involves a wide range of activities, and crucial ones among them include deciding on
what staffing needs a firm has and whether to use Independent contractors or hire
employees to meet these needs, recruiting and training the best employees, ensuring
they are high performers, dealing with performance issues, and ensuring your
personnel and management practices conform to various regulations.
Activities also include management approaches, employee benefits and compensation,
employee records and personnel policies. Usually small businesses (for-profit or non
profit) have carried out these activities themselves because they can't yet afford part-
or full-time help.
INTRODUCTION:

A small business is a business that is privately owned and operated, with a small number
of employees and relatively low volume of sales. Small businesses are normally
privately owned corporations, partnerships, or sole proprietorships. The legal definition
of "small" varies by country and by industry. In the United States the Small Business
Administration establishes small business size standards on an industry-by-industry
basis, but generally specifies a small business as having fewer than 100 employees. In
the European Union, a small business generally has under 50 employees. However, in
Australia, a small business is defined by the Fair Work Act 2009 as one with fewer than
15 employees. By comparison, a medium sized business or mid-sized business has fewer
than 500 employees in the US, 250 in the European Union and fewer than 200 in
Australia.

In addition to number of employees, other methods used to classify small companies

include annual sales (turnover), value of assets and net profit (balance sheet), alone or in
a mixed definition. These criteria are followed by the European Union, for instance
(headcount, turnover and balance sheet totals). Small businesses are usually not
dominant in their field of operation.

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Small businesses are common in many countries, depending on the economic system in
operation. Typical examples include: convenience stores, other small shops (such as a
bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest
houses, photographers, small-scale manufacturing etc.

The smallest businesses, often located in private homes, are called micro businesses
(term used by international organizations such as the World Bank and the International
Finance Corporation) or SoHos. The term "mom and pop business" is a common
colloquial expression for a single-family operated business with few (or no) employees
other than the owners. When judged by the number of employees, the American and the
European definitions of a micro business are the same: under 10 employees. There is a
notable trend to further segment different-sized micro businesses; for instance, the term
Very Small Business is now being used to refer to businesses that are the smallest of the
smallest, such as those operated completely by one person or by 1-3 employees.

Advantages of small business

1. A small business can be started at a very low cost and on a part-time basis. Small
business is also well suited to internet marketing because it can easily serve
specialized niches, something that would have been more difficult prior to the internet
revolution which began in the late 1990s.

2. Adapting to change is crucial in business and particularly small business; not being
tied to any bureaucratic inertia, it is typically easier to respond to the marketplace
quickly.

3. Small business proprietors tend to be intimate with their customers and clients
which results in greater accountability and maturity.

4. Independence is another advantage of owning a small business. One survey of small

business owners showed that 38% of those who left their jobs at other companies said

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their main reason for leaving was that they wanted to be their own bosses. Freedom to
operate independently is a reward for small business owners.

5. Many people desire to make their own decisions, take their own risks, and reap the
rewards of their efforts. Small business owners have the satisfaction of making their
own decisions within the constraints imposed by economic and other environmental
factors. However, entrepreneurs have to work very long hours and understand that
ultimately their customers are their bosses.

6. Several organizations also provide help for the small business sector, such as the
Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.

Problems faced by small businesses:

1. Small businesses often face a variety of problems related to their size. A frequent
cause of bankruptcy is undercapitalization. This is often a result of poor planning
rather than economic conditions - it is common rule of thumb that the entrepreneur
should have access to a sum of money at least equal to the projected revenue for the
first year of business in addition to his anticipated expenses. For example, if the
prospective owner thinks that he will generate $100,000 in revenues in the first year
with $150,000 in start-up expenses, then he should have no less than $250,000
available. Failure to provide this level of funding for the company could leave the
owner liable for all of the company's debt should he end up in bankruptcy court, under
the theory of undercapitalization.

2. In addition to ensuring that the business has enough capital, the small business
owner must also be mindful of contribution margin (sales minus variable costs). To
break even, the business must be able to reach a level of sales where the contribution
margin equals fixed costs. When they first start out, many small business owners
under price their products to a point where even at their maximum capacity, it would
be impossible to break even. Cost controls or price increases often resolve this
problem.
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3. In the United States, some of the largest concerns of small business owners are
insurance costs (such as liability and health), rising energy costs and taxes. In the
United Kingdom and Australia, small business owners tend to be more concerned with
excessive governmental red tape.

4. Another problem for many small businesses is termed the 'Entrepreneurial Myth' or
E-Myth. The mythic assumption is that an expert in a given technical field will also be
expert at running that kind of business. Additional business management skills are
needed to keep a business running smoothly.

HRM in SMEs - deficient or different:

The most stable insight of empirical investigations into the characteristics of Human
Resource Management (HRM) in SMEs compared to larger organizations seems to be
an observable lesser degree of institutionalization and formalization regarding HRM
procedures and activities (Behrends/Martin 2006; Cassell/Nadin/ Gray/Clegg 2002).
As such smaller companies often do not have a separate HR-department (or
designated HR-experts) at their disposal, nor do they usually apply many of the
elaborated HRinstruments (Behrends 2002 and 2004). Instead, HR-related activities
are often limited to a mere processing of administrative tasks (such as pay-rolls etc.);
while more strategic matters (if at all) are usually taken care of rather en passant" by
senior management. But does this apparently inattentive treatment of HR-related tasks
by many SMEs necessarily reveal a management deficit? When taking a closer look at
the relevant literature we can find basically two - fundamentally different -
interpretations (or even: "interpretative paradigms") concerning the linkage between
organizational size and HRM.
The "deficit model"

Many publications tend to construe the observable absence of (formal) HRM in small
and medium-size enterprises as a severe management deficit". Thus they stress the
need for stronger regulation of HR-related activities by implementing standardized

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tools and structures. However, this line of argumentation is obviously underpinned by
a notion that regards the highly differentiated HRM-systems of large corporations as
the one best way and therefore as a desirable ideal for SMEs as well. Often already
through their empirical design, the respective studies are mainly focused on exploring
the degree of proliferation of those modern HRM-practices usually found in large
corporations. As a consequence, this view may only inadequately account for the
specific structural realities in SMEs and thus lets this type or organizations nearly
inevitably appear to be unprofessional and deficient (Curran/Blackburn 2001).
The "equivalence model"

In contrast to the "deficit model" a second perspective on explaining size-dependent

differences concerning HRM - the so called "equivalence model" - is informed by the
consideration that there is no one best way for handling the challenges of HRM.
Building on a functionalistic understanding of organizations, this research perspective
emphasizes the fact that certain indispensable HR-functions have to be fulfilled in any
given social system in order to secure its long-term survival (Martin 2001). But as
there usually exists a wider range of alternative options for handling these elementary
functional requirements (so called functional equivalents), the suitability or
appropriateness of an organization's particular approach towards HRM can not be
assessed generally but only against the backdrop of its specific context and action
requirements (Bartscher-Finzer/Martin 2006; Behrends/Martin 2006). So instead of a
priori taking a "large corporations"-research perspective the equivalence model is
basically open to the existence of rather different ways of coping with fundamental
HR-related challenges.

PRACTICES IN SMALL AND MEDIUM ENTERPRISES.

Recruitment
The process of recruitment involves identifying adequate numbers of suitably skilled
and competent persons to apply for the position that has become available within the

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organisation (Cook 1998). Other authors have suggested that it is to draw a group of
appropriately qualified people who want to apply for employment vacancies that
exists (Crompton, Morrissey and Nankervis 2002). Small business, it is suggested,
have lacked the formality found in the recruitment processes that are carry out by big
business(Carroll, Marchington, Earnshaw and Taylor 1999). This of course is the
result of the fact that recruitment for larger organisations that have specific HR staff
and departments to deal with such matters must employ formal strategies to maintain
control. On the other hand, it is apparent that in the family owned and managed small
business, restraints of time and money may contribute to the lack of formal process
involved in the attraction of possible new employees to the business. Notwithstanding
this, small business must “attract” a sufficient number of employees from which to
select and retain employees within the same competitive environment as large
business. Attracting the appropriate employee is the first phase in establishing the
relationship between employer and employee. From this, is it possible to identify what
characteristics of the small business recruitment processes contribute to effective
attraction out comes. Having briefly reviewed recruitment, attention is now turned to
staff selection.
Selection:
Selection of staff from those attracted through the recruitment process can often be a
more complex experience. The selection process can include activities such as
checking references, interviewing in order to obtain an appropriate match between the
vacancy and the possible new employee (Worthington 1992). Other selection activities
can include testing the employee’s abilities to see if they meet the organisations needs.
Cook (1998) recognized that it is important that the candidate selected must be the
person who can most effectively contribute to the businesses goals.
Small business owners are repeatedly forced to have a reactive recruitment and
selection process due to financial and time constraints (Carlson, Upton and Seaman
2006). Holliday (1995) suggests that often lack of understanding of the requirements
of the position impede successful recruitment outcomes. The selection process can be

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enhanced however through the establishment of a good “fit” between the employee
and employer this can contribute to the matching process of the relationship. The
prospective employee employer match at this early stage of the association can form
the basis for a bond for “attraction” which can develop and will enhance long term
economic goals of both parties. Staff orientation is now briefly reviewed.
Orientation:
Orientation must be conducted as soon as possible after the employee commences
work within the business. Orientation and induction of new employees has a focus
toward “Building the relationship”, that is the employer developing a relationship with
the employee, based on the “attraction” that had been established in the recruitment
and selection phases. Holton (1996) confirms that orientation is “the most common
type of training provided by organisations” and forms part of a socialization for new
employees.
Orientation has been defined as the “introduction of new employees to their job, their
colleagues and the organisation” (Stone 2005). This definition confirms the
importance of building on the “attraction” of the recruitment and selection process
through the rapid development of the initial employee relationship orientation with not
only the other employees but also their relationships within the organisation. An
orientation process that is soundly planned can have the intended effect of improved
productivity as well as retention levels (Brown 2005). The effect of the family-like
relationships found in the small business environment can enhance the new
employee’s orientation and ability to rapidly adapt and fit into the organisation.
Provision of important information as part of the orientation process such as business
guidelines, regulations and rules can significantly reduce the possibility of mistakes
that can lead to stressful situations. Mentoring and coaching programs established
during the orientation process can enhance the relationship match established in the
selection process. More experienced employees can enhance the development of
relationships by ensuring the new employee understands the relationships necessary to
attain goals and desired performance outcomes.

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Support of new members of staff through encouragement and involvement can
enhance the relationship past the orientation process toward a long-term relationship
of continual employee involvement (Kram 1985). Staff involvement is enhanced by
staff development.
Development & continued employee involvement;
The initial orientation provides the new employee with foundation on which his or her
relationship will develop within the organisation, large or small. The importance of
the fulfilment of promises made during the recruitment, selection and orientation
phases will in turn have a major impact upon the development of the long-term
relationship between employee and employer. Employee satisfaction which can be
attained through the development and involvement within the organisation leads to
long-term retention and in tern rewards and profitability for the employer. Employees
must feel that the promises made are being met by the employer.
Small firms, it is suggested by (Storey 1994), modify their management style toward
the employees and the contributions they can make to the organisation. It is evident
therefore that in small business the impact on each member of staff has a much greater
level of significance than in larger organisations. Chell (1997) found that by
increasing their focus on the relationship with employees, owner/managers of small
business developed more effective performance levels.
Training and development, which frequently in small business takes the form of on-
the job training, due to the reduced cost factors in comparison to off-the-job training,
can contribute to meeting the promises established during the recruitment, selection
and orientation phases (Harris, DeSimone and Randy 1994). The added benefit of on-
the-job training is that it develops and enhances relationships at a more personal level
and this in turn cultivates and deepening level of trust between employer and
employee within the smaller business. On-the-job training develops the expertise of
the trainer and trainee alike, enriching a sense of long-term attachment that creates
reductions in turnover.

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Having identified trust as a factor, the next section outlines the importance of trust in
relationships.
Retention through development of trust:
Retention can be enhanced through training and development as well as through the
matching of employee, employer and organisational needs and meeting promises and
expectations established initially within the relationship (Kram 1985). Trust is
however something that can only be attained with a sound understanding of the wants
and needs of the employee. Trust is established when a willingness is established and
a reliance develops between both employer and employee. Behaviours reflect within
the relationship a belief that the employee feels no uncertainty within the relationship
with the employer and the employer likewise feels no vulnerability toward the
reliance that he or she places within the relationship with the employee. Employees
have career expectations that need to be met. If these expectations are not achieved,
this can cause dissatisfaction and lead to employees seeking work elsewhere (Herriot
1989).
HRM IN SMALL AND MIDDLE SCALE INDUSTRIES:

Small-scale enterprises are important for modern economy and it is widely recognized
that they contribute to employment growth. About 99% of all European companies are
small and medium sized and they provide 66% of all working places. Over the last
decade, enterprises with less than 10 employees provided more new jobs than bigger
companies. Surprisingly, personnel management of small businesses is widely ignored
in popular textbooks as well as in empirical research .However, employee
effectiveness might be even more important in small companies compared to bigger
companies. A weakness of small enterprises is their low labour productivity combined
with lower than average wages .Improving Company’s effectiveness through
rationalization is hardly possible in small companies because of weak financial
resources and a limited number of employees. While task differentiation is low in
small enterprises, individual employees have to work in various areas. Consequently,

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the employees and an optimal utilization of their knowledge, capacities, and
motivation are essential for small-scale business success. Human resource
management (HRM) involves practices that ensure that employees’ collective
knowledge, skills, and abilities contribute to business outcomes .The traditional
conceptualization of HRM focused on managing, measuring, and controlling
organization’s workforces. Tactical or technical .HRM includes selection testing,
training, performance measurement and administration of benefits. Huselid et al
identified empirically a second dimension of HRM activities: strategic HRM includes
employee participation and empowerment, communication, team based work design,
and development of managers of the organization. Arthur (1994) identified two types
of human resource systems similar to those found by Huselid et al (1997):
Commitment and control. The human resource system that is based on commitment is
focusing on the psychological links between organizational and employee goals. It is
associated with higher involvement in managerial decision, participation, providing
training and rewards. A human resources system that is based on control focuses on
directly monitoring and rewarding employee behaviour or the specific outcomes of
that behaviour (Arthur, 1994).

The theoretical literature suggests that HRM practices increase productivity by

increasing employees’ skills and motivation. Moreover, HRM practices contribute to
business objectives through strategic innovation or technical competence. Recent
empirical studies on larger companies supported the basic assumptions of HRM
theory (Arthur, 1994; Huselid, 1995; Huselid et al., 1997). However, does this theory
apply to small-scale enterprises as well? HRM also carries costs and they might
neutralize the positive effects of HRM in small-scale enterprises. HRM is an
investment, and thus, it costs time and/or money. The current performance of
employees may even be decreasing because of the time spent on training. Moreover,
HRM can only have effects when employees stay in the company for a certain period
of time. Otherwise the company suffers a loss because of the investments in HRM.

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Thus, the benefits of HRM must exceed costs invested in HRM. Since small-scale
enterprises have limited financial resources it is very well possible that large
investments in HRM do not pay off. With respect to small-scale enterprises, the
literature on personnel issues is more conceptual than empirical/ data based (Hornsby
& Kuratko, 1990). However, a few studies have analyzed whether HRM practices
were used in small firms.Golhar and Deshpande (1997) found that many HRM
practices of small and large manufacturing firm were similar. However, bigger firms
used external sources of recruitment, written tests, and panel interviews more
frequently. In small firms, employee’s ability to inspect their own work was more
important than in large firms. Similarly, Hornsby and Kuratko (1990) found that the
perceived concern over the most important future human resource issues is not
affected by firm size. However, larger companies (up to 150 employees) used
questionnaires, application blanks, benefits, and performance appraisal more
frequently than small businesses (1–50 employees). The authors concluded that
“personnel practices of smaller firms are much more sophisticated than the literature
leads one to believe” (p. 16). However, the more interesting question is whether HRM
practices affect small business success positively. To our knowledge, there are no
studies about the relationship between HRM and success of small-scale enterprises.
Welbourne and Andrews (1996) found that HRM predicted long-term survival of mid-
sized initial public offering firms. The literature on larger companies also suggests that
there is a positive relationship between HRM and success (Arthur, 1994; Huselid,
1995). Therefore, our first hypothesis is: Hypothesis 1: HRM practices have positive
effects on small-scale business success. Human resources do not just have to be
developed but there is, of course, already a certain amount of human capital in each
firm consisting of the human capital of employees and of the owner. Human capital
consists of skills, knowledge and experience that help in the tasks of getting one’s
work done. General human capital consists of aspects, which are not specifically
related to a particular job, for example years of schooling, years of work experience
Specific human capital must be adapted to a specific task or a specific firm. Specific

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human capital of business owners consists of self-employment experience, industry
specific experience, leadership experience, and self-employed parents (Bruederl et al.,
1992). Theoretically, human capital acts as a resource to the small firm. It makes
business owners/employees more efficient in doing their work, which results in
business success. A second mechanism of human capital is due to selection effects.
For example, people with higher human capital had higher earnings prior to self-
employment, and therefore, can set up larger and better financed businesses (Bruederl
etal., 1992). Several studies on small-scale business owners supported the basic
assumptions of human capital theory (see reviews by Cooper & Gimeno-Gascon,
1992; Rauch & Frese, 2000). While entrepreneurship research was frequently
concerned with human capital of business founders/owners, the human capital of
employees of small enterprises has been widely ignored. However, the theoretical
assumptions of human capital theory should hold for employees as well. Thus, the
human capital of employees makes the employee more efficient in their daily work
and this should, in turn, affect business success. Human capital of business owners has
a positive effect on business success Human capital of employees has positive effects
on small business success. While the positive relationship between human capital of
business owners and success is well established the relationship is no high enough to
make human capital the decisive factor for business success. Analyzing seven studies
Quantitatively, Rauch and Frese (2000) found an average correlation of .09 between
human capital and small business success. Given the small effect of human capital on
business success, it may be useful to look whether human capital impacts on the effect
of HRM on success. With respect to HRM, human capital of business owners is
important because better educated people are expected to be more receptive to new
ideas and novel ways of leading people (Sagie, 1997, p. 401), to be able to consider
recommendations of employees, to communicate specific goals and objectives, and to
use better strategies in leading employees. Therefore, HRM is more effective when
business owners have high human capital.

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Moreover, employees’ human capital should also be a moderator of the relationship
between HRM and success for two reasons: First, employees with a high level of
education can effectively contribute to decision making and goal setting (Sagie, 1997).
Second, HRM provides a tool to increase firm-specific skills that are not available in
the labour market. Better educated and qualified employees should be able to increase
their firm specific skills and knowledge quicker and more easily than less educated
and qualified employees. Therefore, human capital of employees moderates the effect
of HRM on success. Drawing on the above rationale. Human capital of business
owners moderates the effect of HRM on business success. Human capital of
employees is a moderator in the relationship between HRM and business success.

Human Resource Management within small and medium-sized firms

Human resources are recognised as one of the main sources of economic growth. The
management of these resources (HRM) is therefore an important issue. However,
while roughly half of all employees are employed in small and medium-sized
enterprises, scientific studies on HRM are to a large extent limited to large enterprises.
This thesis is an attempt to increase our understanding of how small and medium-
sized enterprises manage their employees. The thesis examines main determinants of
HRM practices within small and medium-sized enterprises, and how certain
differences in HRM practices may affect an enterprise's performance and size

Conclusion
The purpose of this paper has been to provide some evidence regarding the SMEs’
managerial practices and problems. With respect to the practices, the findings suggest
that SMEs are generally not aware and most likely will not utilize the various
managerial practices. Among the managerial problems, it seems that the problems
tend to revolve around high product cost, high overhead cost, undedicated employees,
difficulty of finding good workers, and SMEs faces stiff price competition.

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