Unpacking the black box: understanding the relationship between strategy, HRM practices, innovation and organizational performance

• Published date: 01 April 2016
• Date: 01 April 2016
• Author: James Chowhan
• DOI: http://doi.org/10.1111/1748-8583.12097

Unpacking the black box: understanding the

relationship between strategy, HRM practices,

innovation and organizational performance

James Chowhan,DeGroote School of Business, McMasterUniversity

Human Resource Management Journal, Vol 26,no 2, 2016, pages 112–133

The links between HRM practices and organizational performance have received considerable research

attention as significant contributors to sustained competitive advantage. However, the processes that link

HRM practices and organizational performance are not fully understood. This study examines the

relationshipsbetween skill-enhancing, motivation-enhancing and opportunity-enhancingbundles of practices,

innovation and organizational performance, and looks at the mediating effect of innovation over time at the

workplace level. The results indicate that the temporal pathway from skill-enhancing practices to innovation

to organizational performanceis positive and significanteven after controlling for reverse causality.Strategic

activity is also explored and is found to be a significant moderator. This is an indication of the importance of

aligning strategy with HRM practices and innovation to achieve improved organizational performance

outcomes.

Contact: James Chowhan, DeGroote School of Business, McMaster University, 1280 Main Street

West, Hamilton,Ontario, Canada, L8S 4M4. Email:chowhan@mcmaster.ca

Keywords: high-performance work systems; innovation; organizational performance; skill;

empowerment;motivation

INTRODUCTION

One of the main problems facing organizations is not just how to remain locally or

regionally competitive but how to remain or become globally competitive. Owners,

managers, employees, policymakers and more broadly society, all have a stake in

maintaininga competitive advantage inthe global economy.One of the main options available

is to continue to focus on improvements in human capital and innovation as sources of

competitive advantage (Bae et al., 2003; Jenkins et al., 2011). A growing interest among

managers and policymakers in the relationship between human capital and improved

innovation, as the main sources of maintaining a competitive advantage, leads to the main

research question of this study: do skill-enhancing, motivation-enhancing and opportunity-

enhancing bundles of human resource practices lead to innovation and subsequent higher

levels of organizational performance when strategic activities are in alignment or are these

relationships universal across strategies?

Underlying most of the macro-level HRM research is the implicit assumption that the

HRM practices themselves do not directly lead to or cause organizational performance.

Instead, there is an assumption that this relationship is mediated by a pathway that includes

effects on human capital and employee behaviour, for example (Delery, 1998: 290, 303). The

nature of the transmission mechanism is receiving increasing interest in the literature. Initial

research has referred to the transmission pathways as the ‘black box’(Becker and Huselid,

1998a: 96–97, 2006: 899–902, 908; Messersmith and Guthrie, 2010). Studies are beginning to

explore elements of the transmission pathways from HRM practices to organizational

performance, including employee outcomes (e.g. attitude, behaviours, human capital and

112 HUMAN RESOURCEMANAGEMENT JOURNAL, VOL26, NO 2, 2016

©2016 John Wiley& Sons Ltd.

Please cite thisarticle in press as: Chowhan,J. (2016) ‘Unpacking the black box:understanding the relationshipbetween strategy, HRM practices,

innovationand organizationalperformance’HumanResourceManagement Journal26: 2, 112–133

doi: 10.1111/1748-8583.12097

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employee motivation) and organizationaloperational outcomes (e.g. innovation, productivity

and customer ser vice) (Takeuchi et al., 2007; Liao et al., 2009; Messersmith et al., 2011; Jiang

et al., 2012b; Kehoe and Wright, 2013).

Exploring therelationship between HRM practicesand organizational performance and the

transmissionpathways is rooted in the knowledgethat human resources canbe developed into

a source of sustained competitive advantage by understanding the value that more able

employees, given opportunity to act and appropriately motivated can contribute to the

organization (Wright et al., 2001). These conditions can be created by organizations through

recruiting and hiring appropriately, providing job-related training, effective motivation and

by creating opportunities for employees to contribute and participate and, more broadly, can

be created via the adoption of HRM practices.

HRM research that focuses on high-performance work systems (HPWS) tends to

emphasize a systems approach as opposed to isolating the importance of particular

practices (e.g. Huselid 1995). Often, the use of indexes of systems of HRM practices implies

that ‘more is better’, and by implementing the system, it will universally result in improved

performance (Becker and Huselid, 1998a: 65). A focus on systems has meant that clear

prescriptions outlining what practices to use under particular strategies and contexts are

not available to the practitioner. This has contributed to the systems approach critique –

it is not clear whether some practices have universal performance benefits in all contexts

or whether others only produce benefits in particular contexts or under specific strategies

(Cappelli and Neumark, 2001: 743; Kaufman, 2010: 288).

This study addresses the universality critique (i.e. more is better) by taking a sub-bundle

approach, where skill-enhancing, motivation-enhancing and opportunity-enhancing sub-

bundles of practices are of interest. Exploring the relationship between HRM practices and

outcomes can be approached in several ways: (a) individual practices, (b) focus on sets of

practices and complementarities for particular bundles (i.e. a sub-bundle approach) (Wright

and Boswell, 2002: 253; Subramony, 2009) and(c) a systems approach that takes practices that

pertain to individualemployees to generate an organizational measure by combiningpractices

additively, multiplicatively (MacDuffie, 1995; de Menezesand Wood, 2006) or through the use

of other composition models (Chan, 1998).

Similar in spirit to Guest et al. (2004), which uses a sequential tree analysis to identify a

more parsimonious set of practices that are associated with outcomes, the current study

uses a parsimonious sub-bundle approach to isolate the effects of bundles on outcomes

to produce a better understanding of which bundles are associated with higher (or lower)

innovation and organizational performance outcomes. Thus, this study separates out skill-

enhancing, motivation-enhancing and opportunity-enhancing bundles of practices to enable

an investigation of key factors affecting the innovation and organizational performance

relationship. Further, strategic activities are included as a moderator of both the sub-bundles

and innovation relationship and the innovation and organizational performance relationship.

This framework builds on work by Jiang et al. (2012b) that draws upon the HRM ability–

motivation–opportunity model,which suggests that characteristicssummarized by these three

essential components can lead to improved organizational performance when employee

ability, motivation and opportunity are enhanced (Appelbaum et al., 2000; Boxall and Macky,

2009). This more nuanced approach enables the heterogeneity across contexts to be better

understood.

Studies that focuson HPWS have also tended to use cross-sectional data andhave generally

not been able to appropriately make conclusions with regardto causality and could only make

statements about associations between HPWS and performance (Wright et al., 2005: 416).

James Chowhan

HUMAN RESOURCEMANAGEMENT JOURNAL, VOL26, NO 2, 2016 113

©2016 John Wiley& Sons Ltd.